series 66 trouble with review
The Alternative Minimum Tax is targeted at: I high-income taxpayers II low-income taxpayers III with a low level of tax deductions IV with a high level of tax deductions
I IV
A registered agent that oversees discretionary accounts for many clients has been trading the accounts with increasing frequency. It is unlikely that the agent would be accused of "churning" these accounts if: A. each transaction is approved by the branch manager promptly B. these are wrap accounts charging a flat annual fee I C. the transactions are suitable for the customers D. the securities being traded are exempt
"Churning" is the excessive trading of a customer's account in order to generate commission income for the representative. Flat fee "wrap" accounts that "wrap" all services into a single annual fee take away the incentive to churn. Even if the transactions are suitable for the customer, excessive trading to generate commissions is still an unethical practice. And it makes no difference if the securities involved are exempt or non-exempt; churning of any account with any security is an unethical practice.
A Registered Investment Adviser has a client with $200,000 in a 2% savings account. The RIA recommends leaving $50,000 in the account and placing $150,000 in an equity fund expected to yield 10% for the year. The client rejects the proposal. The opportunity cost of the decision is:
$12,000 Explanation: The Registered Investment Adviser is recommending that $150,000 be moved from a savings account yielding 2% to an equity fund yielding 10%. The opportunity cost of not doing this is the 8% lower yield (10% - 2%) on the $150,000 that would be shifted = 8% x $150,000 = $12,000.
Taking custody FEDERAL RULES
- if adviser takes custody of client funds, they must: segregate the customers funds from those of the adviser. note it is permitted for one customers funds and securities to be "commingled" with those of other customers hence and "omnibus account" - maintain customer accounts with a qualified custodian in the name of the IA a trustee for the customer - notify the customer in writing of custodians name, address, and manner in which funds or securities are handled. any change in this requires prompt notice to the customer - send to each customer, at least quarterly, an itemized account statement. this can be sent by either custodian or adviser -IF IA SENDS statement, I must arrange for a public accountant to audit the firm annually on a surprise basis. report of accountant must be filed ADV E with SEC within 30 days of exam - if IA is also a BD, then these rules dont apply since then BD is subject to federal law
Taking custody STATE RULES
-prohibited for IA to take custody if admin prohibits by rule or; if there is no rule, the adviser fails to notify the admin that he has or will take custody - if IA does decide to take custody NASSA requires that: must notify the admin in writing on form ADV that it has, or may have custody. - custody must be kept by a qualified custodian in a separate account under each client name; or in accounts that only contain client funds and securities, held in investment adviser name as trustee for the clients. -prompt notice must be given to the clients in writing of qualified custodians name, address, and the manner in which funds or securities are to be maintained. - client must receive quarterly account statements - annual or surprise audit of custodian, file copy of audit results with state within 30 days after audit - quaified custodians under NASSA- FDIC, BD's, registered futures comission merchants, foreign finance institutions holding customer assets. - taking custody includes- prepaid advisory fees of 500 or more, or an account that gives a FULL power of attorney. - inadverdent payments are not considered taking custody as long as returned within 3 busines days, same goes for check made out to a third party - annual update of form ADV within 90 days of fiscal year end. material changes= 30 days
Diversification of a portfolio among asset classes: A) increases the rate of return achieved over the investment time horizon B) reduces the rate of return achieved over the investment time horizon C) reduces the variability of the rate of return over the investment time horizon D) increases the variability of the rate of return over the investment time horizon
... C
A father gives a $10,000 gift of securities to his son; and a $10,000 gift of securities to his daughter. Which statement is TRUE? A. The father has no gift tax liability B. The father has gift tax liability on the gift to the son C. The father has gift tax liability on the gift to the daughter D. The father has gift tax liability on both gifts
...A.
On Monday, an investment adviser notices that the firm's net capital has fallen below the minimum requirement set by the State. The investment adviser MUST: A) transmit notice to the Administrator on Tuesday and submit its financial statement on Wednesday B) transmit notice to the Administrator on Tuesday and submit its financial statement on Friday C) transmit notice to the Administrator on Wednesday and submit its financial statement on Friday D) transmit notice to the Administrator on Friday and submit its financial statement on Monday
...A.
Which of the following is an accredited investor under Regulation D? A) A trust with over $5 million under management B) An individual with $2 million in securities C) An investment adviser with over $40 million under management D) A limited partnership with over $5 million to invest formed of individuals where each has a net worth of $500,000
...A.
A registered securities agent has been contacted by an independent venture capitalist to obtain customers for a private placement that he is forming. Which statement is TRUE? A) The agent is prohibited from directing customers to the venture capitalist B) The agent is permitted to direct customers to the venture capitalist without restriction C) The agent is permitted to direct customers to the venture capitalist with the permission of the Administrator D) The agent is permitted to direct customers to the venture capitalist if the agent has posted a surety bond
...A. he is selling away here, he cant do this at all
A client has purchased various insurance policies from different issuers. One policy gives $100,000 of coverage that expires in 5 years. Another gives $100,000 of coverage that expires in 10 years. A third policy also gives $100,000 of coverage and expires in 12 years. The customer has purchased: A) variable life policies B) term life policies C) whole life policies D) universal life policies
...B
The Administrator can require all of the following regarding federal covered securities offered in a State EXCEPT: A) notice filing for the issue in the State B) registration of the issue in the State C) filing of documents relating to the issue in the State D) payment of a filing fee in the State
...B
Under the provisions of the Uniform Securities Act, a "person" includes all of the following EXCEPT a(n): A) adult couple B) minor C) municipality D) corporation
...B
A client has a large position of 30-year Treasury Bonds is concerned that interest rates may start to rise. To protect against this, the customer could: A) go long a 30-year T-Bond futures contract B) go short a 30-year T-Bond futures contract C) buy 30-year T-Bond calls D) sell 30-year T-Bond puts
...B.
A customer signature is needed to open a: A) cash account B) margin account C) both of the above D) neither of the above
...B.
A registered agent that oversees discretionary accounts for many clients has been trading the accounts with increasing frequency. It is unlikely that the agent would be accused of "churning" these accounts if: A) each transaction is approved by the branch manager promptly B) these are wrap accounts charging a flat annual fee C) the transactions are suitable for the customers D) the securities being traded are exempt
...B.
An individual who is 25 years from retirement has $500,000 to invest today. He is risk tolerant and is looking to withdraw $80,000 per year once he retires. Which asset allocation is best for this client? A) 25% Stocks / 25% Bonds / 25% REITs / 25% Money Markets B) 50% Stocks / 40% Bonds/ 10% Cash C) 100% Bonds D) 100% Stocks
...B.
Life insurance companies developed variable life policies from the: A) term life policy B) whole life policy C) universal life policy D) fixed annuity
...B.
Which ratio is the BEST measure of a company's solvency? A) Current Ratio B) Quick Ratio C) Debt/Equity Ratio D) Price/Earnings Ratio
...B.
The Standard and Poor's 500 Index is: A) an average of 500 different stock prices B) capitalization weighted C) based on 500 mid-cap securities D) one-on-one weighted
...B. cap weighted
Dow Corning's stock price drops on the announcement of a recall of its silicone breast implants. This is an example of: A) regulatory risk B) business risk C) market risk D) interest rate risk
...B.This negative event is specific to Dow Corning's business - the product was defective and is being recalled, causing the company to lose revenue and also incur the cost of claims made by individuals harmed by the defective product. Note that this is not regulatory (legislative) risk, because this event did not happen because of a general law change or tax law change.
An investment adviser charges a 1% annual management fee to all clients. The adviser also says that if he does not produce a 20% annual return on the client's investment, he will refund the management fee. This action is: A) permitted because it has been offered to all clients B) permitted because the clients are not being charged an incentive fee C) prohibited because the adviser cannot make fee charges contingent on performance D) prohibited because the adviser cannot share in po
...C.
Under IRS guidelines, which of the following is earned income? A) Alimony B) Municipal bond interest C) Commissions D) Investment income
...C.
Under the Uniform Securities Act, if an investment adviser representative wishes to offer advisory services in a neighboring State: A) the investment adviser must be registered in the neighboring State B) the investment adviser representative must be registered in the neighboring State C) both the investment adviser and the investment adviser representative must be registered in the neighboring State D) neither the investment adviser nor the investment adviser representative must be registered in the neighboring State
...C.
Which statement is TRUE? A) The rate of return on an investment earned over a 9 month time frame would be more than the annualized rate of return on that investment B) The rate of return on an investment earned over a 2 year time frame would be less than the annualized rate of return on that investment C) The rate of return on an investment earned over a 3 month time frame would be less than the annualized rate of return on that investment D) The rate of return on an investment earned over a 3 year time frame would be less than the annualized rate of return on that investment
...C.
An agent moves from one broker-dealer to another. Notification of the change of employer must be made by the: A) agent only B) agent and new broker-dealer C) old broker-dealer and new broker-dealer D) agent, old broker-dealer and new broker-dealer
...D
An individual who represents an issuer in selling securities of that issuer to the issuer's employees; and who does not earn a commission for this work; is defined under the Uniform Securities Act as a(n): A) agent B) broker-dealer C) issuer D) none of the above
...D
Under NASAA rules, a complaint is defined as one received: I in a written letter II by e-mail III verbally over the telephone
...I II
Which of the following statements are TRUE regarding investments in a real estate limited partnership? I Real estate limited partnership investments are considered passive investments II Real estate limited partnership investments are illiquid III Tax deductible losses are obtained through depreciation deductions, while positive cash flow is generated IV When the real estate is sold, capital gains may be generated
...I II III IV
Which of the following statements are TRUE about Individual Retirement Accounts? I Contributions are allowed based solely upon personal service income II Contributions may be made if the individual is covered by another type of retirement plan III All contributions reduce the individual's taxable income IV To remain tax deferred, distributions from other retirement plans must be rolled over within 60 days
...I II IV
All of the following are examples of market manipulation EXCEPT: A) disseminating rumors B) churning C) painting the tape D) wash trades
...churning (market manip has to do with effecting the price of the security
A customer invests $100,000 in an Equity Indexed Annuity contract tied to the Standard and Poor's 500 Index. The contract has a 90% participation rate; a 15% cap and a 0% floor. Interest is credited to the contract under the annual reset method and is compounded annually. The performance of the Standard and Poor's Index over the next 3 years is: Year 1: + 20% Year 2: - 4.5% Year 3: + 10% At the end of year 3, the customer will have a principal balance of: A. $120,807 B. $123,959 C. $125,350 D. $132,000
0% floor dont even count in here
A corporation that has a market capitalization of $40,000,000,000 would be an appropriate investment for a: A. Micro Cap Mutual Fund B. Small Cap Mutual Fund C. Mid Cap Mutual Fund D. Large Cap Mutual Fund
D. 40 billion
tax form for trusts
1041
A stock is quoted as follows: Bid Ask 18.95 19.00 10 x 10 The spread for a round turn trade is: A) $5 B) $50 C) $500 D) $5,000
19-18.95= .050 X 1000= 50$
A Chinese Wall must be maintained by a broker-dealer between investment banking and which of the following departments? I Research II Trading III Retail Sales IV Mergers and Acquisitions
I II III
A member firm is negotiating with an issuer to underwrite an add-on common stock offering and a registration statement has not yet been filed. A research analyst at the firm has been following the company for the past 5 years and now wishes to change the broker-dealer's rating from "Hold" to "Buy." The member firm should A. issue the report in its normal fashion B. issue the report only to its best customers C. buy the stock in the market before issuing the report Correct D. not issue the report until at least 10 days after the effective date
40 for ipo, 10 for secondary or add on transactions
At the beginning of the year, a portfolio has a value of $400,000. 6 months later the portfolio is valued at $420,000. The annual percentage return on the portfolio is: A. 5% B. 10% C. 15% D. 20%
420,000/400,000= 5% X 2= 10%
An individual is a registered representative with a broker-dealer. With the broker-dealer's approval, when not working for the broker-dealer, this individual prepares financial plans at night, at no fee to the customer. The individual recommends that any transactions that result from the plan be effected through the broker-dealer, where the registered representative will earn a commission. Which statement is TRUE under the Uniform Securities Act? A. The registered representative is a statutory investment adviser that must register B. The broker-dealer is a statutory investment adviser that must register C. Both the registered representative and broker-dealer are statutory investment advisers that must register D. Neither the registered representative nor the broker-dealer are statutory investment advisers and need not register
A
The Efficient Market Theory states that: A) securities selection based on any type of analytical method is irrelevant B) fundamental analysis should be used to realize superior market returns C) technical analysis should be used to realize superior market returns D) fundamental and technical analysis should be used to realize superior market returns
A
To register as an investment adviser under the Investment Advisers Act of 1940, all of the following are required EXCEPT: A. payment of a filing fee B. filing of a Form ADV Part 1 C. filing of a Form ADV Part 2 Correct D. posting of a surety bond
D. SURETY BOND ONLY REQUIRED STATE LAW
All of the following individuals would be allowed to effect transactions in the account of a customer who is mentally incapacitated EXCEPT a(n): A. individual named in the customer's living will B. individual given a durable power of attorney C. conservator appointed by a court of law D. joint tenant that owns the account with the customer
A A "living" will appoints an individual to make only "end of life" medical decisions, not financial decisions. A durable power of attorney granted by the customer prior to his or her mental incapacitation appoints an individual to make decisions for the incapacitated customer, so this works. A court appointed conservator over the account is authorized to trade. If the account was held as joint tenants, the other party in the account is still authorized to trade.
An investment adviser representative has been reviewing the likelihood that an equity investment will produce the desired return. He has determined that the mean return on the investment is 20%, with a 15% standard deviation, and a 95% probability of occurrence. This means that he would expect the range of returns to be approximately: Correct A. 5.00% - 35.00% B. 17.00% - 21.10% C. 4.75% - 33.25% D. 16.15% - 20.05%
A.
All of the following orders must be retained as a record by broker-dealers EXCEPT: A. executed orders B. unexecuted orders C. canceled orders D. subscription orders
D. Subscription orders are from a rights offering, no need to retain this
A broker-dealer offers 4 summer passes to an amusement park to each of its agents who sell at least $10,000 of bonds during the month of June. This action: A. is allowed B. is not allowed C. may trigger a "pay to play" disclosure to customers D. may trigger a "soft dollar" disclosure to customers
A.
A private placement under the Uniform Securities Act is defined as an offer to: A. 10 persons or less in 12 months B. 35 persons or less in 12 months C. 10 persons or less in 18 months D. 35 persons or less in 18 months
A.
An investment adviser that has a $35,000 Net Worth requirement finds that its Net Worth is $33,500. The adviser: A. must notify the State Administrator by the close of business on the next business day and file a report of the adviser's financial condition the next day B. must deposit $1,500 as a Surety Bond with the State Administrator by the close of business the next business day C. must cease business operations until the deficiency is cured D. is not required to do anything since the deficit is less than 10% of the Net Worth requirement
A.
An investment strategy where a higher price is paid for a stock based upon expected returns is: A. growth investing B. value investing C. conservative investing D. passive investing
A.
If a corporation issues new stock at a price above par value, the excess above par is termed: A) surplus capital B) retained earnings C) earned surplus D) adjusted par value
A.
It can be expected that the Sharpe Ratio will: A. increase as the composition of the underlying portfolio is broadened B. decrease as the composition of the underlying portfolio is broadened C. remain unaffected as the composition of the underlying portfolio is broadened D. become more volatile as the composition of the underlying portfolio is broadened
A.
Money purchase retirement plans have: A. mandatory employer contributions B. optional employer contributions C. mandatory employee contributions D. optional employee contributions
A.
The formula for the real rate of return is: A) Rate of return - Rate of inflation B) Rate of return - Risk free rate of return C) Rate of inflation - Rate of return D) Risk free rate of return - Rate of return
A.
The use of dollar cost averaging over a long time frame results in a: A) lower average cost per share B) higher average cost per share C) lower market price per share D) higher market price per share
A.
Which of the following is NOT defined as a federal covered adviser? A. An adviser to insurance companies registered in the State B. An adviser to investment companies registered with the Securities and Exchange Commission C. An adviser that manages $100,000,000 or more of assets D. An adviser that gives advice solely about U.S. Government securities
A.
The disadvantage of owning a mutual fund that invests in common stocks is the risk of loss of: A) principal B) liquidity C) diversification D) income
A. Buying a mutual fund that invests in common stocks gives the benefit of diversification. Mutual fund shares can be redeemed daily, so liquidity is not an issue. Income from the investments in the fund flows through to the shareholders, so loss of income is not an issue either. However, market risk is still an issue. If the overall market falls, this fund's shares will fall as well. Thus, loss of principal is still a risk.
A customer invests $10,000 in Security A; $10,000 in Security B; and $10,000 in Security C. Security A pays an aggregate annual dividend of $200; Security B pays an annual aggregate dividend of $300 and Security C pays no annual dividend. Security A goes up 3% in value; Security B goes down 10% in value; and Security C goes up 2% in value. The customer's total return on investment is: A. 0% B. 2.66% C. 3.33% D. 6.00%
A. This question presents a lot of information, but once you cut through the "clutter," it is very easy. The customer received $200 in dividends from Security A and $300 in dividends from Security B = $500 total dividends received. Security A increased in value by $300; Security B decreased in value by $1,000 and Security C increased in value by $200, for a net capital loss of $500. Total return includes both dividends and capital gain (or loss). $500 dividends - $500 capital loss = 0 total return.
Regulation T allows a customer to pay for a securities purchase with all of the following EXCEPT: A. 100% cash deposit B. 50% cash and 50% credit C. 100% fully paid securities deposit D. Installment payments of 25% each
D. all the others are ways to pay, installments are prohibited.
Under the Investment Advisers Act of 1940, which of the following persons is exempt from registration with the SEC? A) An investment adviser whose only clients are insurance companies B) An investment adviser whose only clients are investment companies C) An investment adviser whose only clients are pension plans D) All of the above
A. Under the Investment Advisers Act of 1940, anyone who gives advice about securities only to insurance companies is exempt from registration. The "idea" is that an insurance company is a professional investor that will not tolerate being overcharged by an investment adviser, therefore such advisers are not required to register with the SEC. This exemption does not extend to persons who give advice to investment companies or pension plans (note that under State law, the adviser to pension plans would be exempt from State registration if it had no office in the State; and the investment adviser to investment companies would be excluded from State registration since it is a federal covered adviser).
Which statement is TRUE regarding a portfolio that has a "Beta" of 1? A. Changes in the value of the portfolio should be both in the same direction and the same velocity as price movements in the market B. Changes in the value of the portfolio should be at the same velocity as the market but should move in the opposite direction to price movements in the market C. Changes in the value of the portfolio should be in the same direction as price movements in the market, but the velocity should be greater than price movements in the market D. Changes in the value of the portfolio should be in the same direction as price movements in the market, but the velocity should be lower than price movements in the market
A. A portfolio with a "beta" coefficient of +1 is one that moves in both the same direction and same velocity as the market as a whole. A portfolio with a "beta" coefficient of +2 is one that moves in the same direction as the market as a whole, but which moves twice as fast as the market. A portfolio with a "beta" coefficient on -1 is one that moves at the same velocity as the market as a whole, but it moves in the opposite direction to the market. There are very few "negative" beta stocks - gold stocks being one of them. When the stock market "tanks," investors flee to safety - gold - so these stocks rise when the market falls, and vice-versa
A portfolio with a beta of +1 has: A. systematic risk B. non-systematic risk C. both systematic and non-systematic risk D. no risk
A. A portfolio with a beta of +1 is one that moves in the same direction and at the same rate as the market. Thus, this portfolio only has market risk - which is also known as systematic risk. This is the risk that cannot be diversified away.
An investment adviser will always be considered to have taken custody if the adviser: A. is the trustee for the client in a trust account B. has been given a power of attorney by the client permitting the adviser to trade the client's account C. has the authority to transfer client funds between different accounts of that client maintained at a custodian D. accepts payment for services rendered from clients
A. Advisers may either take custody of client funds; or they may not take custody of client funds. As a general rule, advisers that take custody must post a higher net worth, must send out quarterly account statements, must keep customer funds or securities at a qualified custodian, and must be audited annually. Generally, acting as a trustee means that the trustee is managing assets for a beneficiary, and in doing so, has taken "custody." Note that broker-dealers are not subject to this rule - it is only for investment advisers. There are other SEC rules covering custody of client assets for broker-dealers. Having power of attorney or discretionary authority over an account limited to trading only does not mean that an adviser is taking custody because the adviser does not have the ability to withdraw funds. Similarly, a power of attorney that permits an adviser to transfer funds between different accounts for the same client at the custodian is not taking custody because the adviser cannot withdraw funds. In contrast, if the power of attorney were to allow the adviser to withdraw checks from the client account, then the adviser would have custody.
If an agent opens a joint account with a customer, the agent is permitted to: A. place a trade in the account without having a written power of attorney from the customer B. withdraw funds from the account in the form of a check made payable to the agent's name C. share in investment gains in the account but not in investment losses D. effect transactions in the account only at the direction of the customer
A. An agent can open a joint account with a customer, as long as sharing is proportional to capital contributed and sharing occurs in both gain and loss. In addition, the employing firm must approve of the arrangement. Regarding the operation of any joint account, any single owner can enter a trade (this would be either the customer or agent, in this case). There is no requirement for joint agreement to accept a trade. Any single owner of a joint account can demand that a check be drawn, but checks must be drawn to full account name (this would be the names of both the agent and the customer, thus both would need to endorse the check in order to cash it).
A broker-dealer located in State A makes an offer of securities to a customer whose principal residence is in State B. The customer has temporarily moved to State C and has asked the post office in State B to forward the mail to the customer's address in State C. Which State Administrator(s) has (have) jurisdiction over the offer? A. State A only B. State A and State B only C. State A and State C only D. State B and State C only
A. Because the broker-dealer is located in State A, that State Administrator has jurisdiction. Normally, if an offer is received in a State (B in this case), then State B's Administrator would have jurisdiction. But the offer was never received in State B because it was forwarded by the post office on to State C. Thus, an offer was never made in State B and that State Administrator does not have jurisdiction. One would think that because the offer was ultimately received in State C, that it would have jurisdiction, but this is not the case either. In this situation, the Uniform Securities Act makes an exception. The issue here is that the broker-dealer had no idea that the mail was forwarded to State C and should not be subject to the law of State C on this offer. The intent is to make sure that an innocent broker-dealer is not "entrapped" by a State and made subject to that State's law when an offer of securities is forwarded into that State by a third party without the broker-dealer's knowledge.
f an issuer offers a Federal Covered security in a State, the State Administrator may: A. require the issuer to pay a filing fee in the State B. require the issuer to register the issue in the State C. deny the issuer the right to offer the security in the State if it is in the public good D. deny the issuer the right to offer the security in the State if the issuer has never offered securities in that State
A. Federal Covered Securities are registered at the Federal Level; they cannot be required to be registered in each State. This is intended to reduce the legislative burden on issuers, since duplicate registration is avoided. The major Federal Covered Securities are exchange listed securities and mutual fund shares. However, the State can require a "notice filing" in the State, along with a consent to service of process. And to file notice in the State, a fee must be paid (which is the reason why the States require "notice" filings) - the States like these fees!
If a representative that transacts business in a State terminates employment with a federal covered adviser: A) notice must be given to the Administrator by the representative only B) notice must be given to the Administrator by the federal covered adviser only C) notice must be given to the Administrator by both the federal covered adviser and the representative D) no notice is required to be given to the Administrator
A. If a representative of a federal covered adviser that transacts business in a State terminates employment, it is the responsibility of the representative to notify the State promptly. Remember that in this case, the advisory firm is not registered with the State; only the representative is registered with the State. Thus, it cannot be the responsibility of the advisory firm to notify the State since it is not registered there. Only the registered representative must notify the State since only the representative is registered in the State.
All of the following statements concerning a 403(b) plan are correct EXCEPT: A. contributions are determined by the employer's level of profits B. the plan may provide only for employee contributions C. employee contributions may be matched by employer contributions D. contributions may be invested in mutual funds or annuities
A. In essence, a 403(b) plan is equivalent to a 401(k) plan, with the difference being that 401(k) plans are established by for-profit companies while 403(b) plans are established by not-for-profit organizations. Contributions to 403(b) plans are not determined by the employer's level of profits because these are not-for-profit organizations! Some 403(b) plans provide only for employee contributions and other plans have matching contributions by the employer. This is the same as for 401(k) plans. While 401(k) plans can be invested in individual stocks and mutual funds, 403(b) plans cannot be invested in individual stocks. They can be invested in mutual funds and both fixed and variable annuities.
Criminal violations of the Uniform Securities Act are punishable by: A) $5,000 fine and 3 years in jail B) $10,000 fine and 3 years in jail C) $5,000 fine and 5 years in jail D) $10,000 fine and 5 years in jail
A. (NOTE under Federal its 10,000 and 5 years in jail)
A registered broker-dealer has an employee who is not registered as an agent in that State. The employee wishes to sell U.S. Government bonds in that State. Which statement is TRUE? A. The employee is prohibited from selling the U.S. Government bonds unless he is registered as an agent in that State B. The employee is permitted to sell U.S. Government bonds because the securities are exempt C. The employee is permitted to sell U.S. Government bonds because the transaction is exempt D. The employee is permitted to sell U.S. Government bonds only if no commissions or other "transaction based" compensation is paid
A. In order for the agent of a broker-dealer to be able to sell a security in that State, either he must be registered, or must fall under an exemption provided from registration. No exemption from State registration is provided to agents of broker-dealers that offer U.S. Government securities. This exemption is only available to agents of issuers that offer exempt securities, such as U.S. Governments, in a State. If this broker-dealer were exempt, then its agents would be exempt from registration. Since this question states that the broker-dealer is registered, we must assume that the broker-dealer is non-exempt; therefore its agents must be registered under the Act.
A NASDAQ stock is quoted at $34 Bid / $35 Ask. A trader that places a buy order will most likely be filled at: A) $35 B) $34 1/2 C) $34 D) $33 1/2
A. Market makers maintain a bid / ask quote in a security. Bid / Ask quotes are always from the standpoint of the dealer. The dealer is willing to sell at his "asking" price; and is willing to buy at his "bidding" price. The difference between the bid and ask is the spread - that is the market makers gross compensation for making a market in the security. Customers who wish to buy do so at the dealer's ask; customers who wish to sell do so at the dealer's bid. This customer who wishes to buy will do so at the dealer's ask price of $35- the price at which the dealer will sell the stock to the customer.
Under the Investment Advisers Act of 1940, all of the following are exempt or excluded from registration as investment advisers EXCEPT persons who give advice: A) to other investment advisers B) solely to insurance companies C) relating to obligations guaranteed as to principal and interest by the U.S. Government D) to customers within one State, where the investment adviser is a resident of that State; and advice is only rendered on securities not traded on a national exchange
A. The Investment Advisers Act of 1940 exempts from registration, an adviser that gives advice to insurance companies. It does not exempt an adviser who gives advice to investment companies (which is true under State law). The Investment Advisers Act of 1940 also exempts from registration advisers who only give advice on U.S. Government securities; and advisers who wholly operate within one State, trading securities only in that State. Because such an "intrastate adviser" does not conduct business across State lines, the SEC does not have jurisdiction. For the SEC to have jurisdiction over an adviser, the adviser must operate "interstate
An investment adviser representative obtains a list of all 263 members of the local Kiwanis Club and sends a coupon to 52 leads on the list, along with a letter, offering a 20% discount on services to new clients that are club members. Aside from retaining a copy of the letter, under the provisions of the Investment Advisers Act of 1940, the investment adviser MUST keep: A) a memorandum describing the list and the source of the list B) a record of the names and addresses of the persons to whom the offer was made C) the worksheets that estimate the net worth of leads and the standards used to determine which leads were to receive the offer D) a record of the names and addresses of all of the Kiwanis Club members on the list
A. The Investment Advisers Act of 1940, under Rule 204-2 on Recordkeeping, requires that if an investment adviser sends any notice, circular or other advertisement to more than 10 persons, the adviser is not required to keep a record of the names and addresses of the persons to whom it was sent. But if the notice is distributed to persons named on any list, the adviser must "retain, along with a copy of such notice, a memorandum describing the list and the source thereof."
A customer invests $1,000 over a 10-year time horizon. At the end of 10 years, the investment is worth $4,000. The non-compounded annual rate of return is: A. 30% B. 40% C. 300% D. 400%
A. The investment of $1,000 is worth $4,000 after 10 years. The return on investment is: $3,000 gain $1,000 investment = 300% earned over 10 years 300% 10 years = 30% annual non-compounded rate of return
Which of the following statements is true for BOTH college savings plans and UTMA accounts? A. Contributions are made with after-tax dollars B. Earnings accumulate on a tax deferred basis C. State tax benefits are available on distributed earnings used to pay for qualified education expenses D. Earnings are tax-free at the Federal level when used to pay for qualified education expenses
A. There is no tax deduction for contributions to UTMA (Uniform Transfers to Minors Act) accounts, nor for contributions to 529 accounts - all contributions are made with after-tax dollars. Earnings in 529 accounts build tax deferred; but in UTMA accounts, the earnings are taxed each year. If earnings in a UTMA account are used to pay for qualified education expenses, they are still taxed. Regarding State tax rules, 529 plan earnings are typically not taxed at the State level; UTMA account earnings, on the other hand, are taxable at the State level.
Which of the following is an accredited investor under Regulation D? A. A trust with over $5 million under management B. An individual with $2 million in securities C. An investment adviser with over $40 million under management D. A limited partnership with over $5 million to invest formed of individuals where each has a net worth of $500,000
A. This question is not immediately obvious! An individual with $2 million of securities does not mean that he or she has a net worth of $1,000,000 (the minimum requirement to be accredited). He or she may have a margin loan against the securities, with the loan amount in excess of $1,000,000! For an investment adviser to be "accredited," each of the customers whose monies are being invested in the private placement would need to be accredited, making Choice C wrong. For a limited partnership to be accredited, each of the limited partners must meet the minimum $1,000,000 net worth test. However, employee benefit plans and trusts that have over $5,000,000 under management are accredited investors under Regulation D!
"Small Dollar Offerings" are exempt transactions under the Securities Act of 1933 under the provisions of: A) Regulation A B) Regulation B C) Regulation C D) Regulation D
A. Under Regulation A - Small Dollar Offerings, an issuer can sell up to $5,000,000 of securities within a 12-month period and be exempt from registration. Full disclosure is accomplished through an "Offering Circular" that must be given to potential investors at least 48 hours prior to any confirmation of sale. The Offering Circular must be provided to all purchasers for a 90 day period following the effective date.
A first time offering of securities to be sold only to residents of a particular state is exempt from: A) federal registration B) state registration C) both federal and state registration D) the anti-fraud provisions of federal and state la
A. A first time offering of securities in a single state is exempt from Federal registration under Rule 147. However, the issue must still be registered in that State. Since this is a first time offering, registration by qualification would be used in the State. Also note that everything is subject to the anti-fraud provisions of both Federal and State law.
A customer has a free credit balance at a broker-dealer. The customer makes a verbal request over the phone that the broker-dealer pay the amount of the balance immediately, in check form. Which statement is TRUE? A. The request should be honored as given B. The broker-dealer cannot honor the request unless it is in writing C. The broker-dealer cannot honor the request unless the customer makes it in person D. The request cannot be honored since free credit balances are not payable to the customer
A. A free credit balance is an uninvested cash balance. The customer can request that the firm pay this amount at any time - there is no need for a written request. The firm must make the payment promptly to the customer, if a request is made.
A value investor seeks stocks that have: A) low P/E ratios B) high market capitalizations C) low dividend D) high price to book value per share ratios
A. A value investor is looking for "out-of-favor" stocks that typically have low Price/Earnings ratios; high dividend yields; low price to book value per share ratios; and low market capitalization because the share price is depressed. The theory is the market will recognize that this really is a good company, and the share price will rise -so at the current price, the stock is a "value."
All of the following business forms have an unlimited life EXCEPT: A) General partnership B) Limited liability company C) S corporation D) Sole proprietorship
A. All corporations have an unlimited life; a change in ownership does not dissolve the corporation. Also, sole proprietorships and limited liability companies have an unlimited life. Any partnership has a limited life; if there is not a fixed life stated in the partnership agreement; then the life of the partnership ends when the partnership composition changes. If a partner leaves, or a new partner is added; the old partnership is dissolved and a new partnership is formed.
A Registered Investment Adviser who is also a registered representative manages a client's account, charging the client both commissions on trades and an advisory fee. Which statement is TRUE? A) This is not unethical as long as disclosure is made to the client B) This is unethical because a client cannot be charged both commissions and advisory fees at the same time C) This is not unethical because a client can be charged both commissions and advisory fees at the same time D) This is not unethical as long as the total charges are fair and reasonable
A. An investment adviser that charges advisory fees to a client for recommending securities; and then charges commissions to that client on trades performed; would be engaging in an unethical practice if the adviser did NOT disclose the 2 sources of revenue. As long as disclosure is given to the customer (and the charges are fair), this is OK. The overriding theme here is that all charges to customers must be disclosed.
An investment adviser that takes custody MUST send quarterly account statements to which of the following? A) Customer mailing address B) Qualified custodian mailing address C) Investment adviser mailing address D) All of the above
A. An investment adviser that takes custody, under NASAA rules, must send quarterly account statements to customers, at the mailing address specified by the customer (an e-mail address is acceptable, as long as the adviser has proof of delivery of the e-mail).
The simplest way of investing in a mutual fund is: A. buy and hold B. indexing C. rebalancing D. dollar cost averaging
A. Dollar cost averaging is a more disciplined method of making mutual fund investments - but it required the investor to make periodic purchases of constant dollar amounts over a long time frame, so it is not as "simple" as just "buy and hold."
The CEO of ABC company is the trustee of that company's pension plan. The CEO calls the IAR that manages the plan assets and wants to sell shares from the plan assets to take out a loan. The loan proceeds will be used to pay for services rendered to the plan. What should the IAR do? A. The IAR should not sell the shares because the IAR is a fiduciary to the plan B. The IAR should wait until the loan is approved before taking any action C. The IAR should sell the shares because the CEO is the plan trustee D. The IAR should sell the shares because the proceeds of the loan will be used to pay for plan services
A. ERISA prohibits certain transactions between qualified plans and "interested persons" (trustees, fiduciaries, plan service providers, officers and directors of the company that sponsor the plan, etc.). These prohibited transactions include the: sale or lease of property to the plan; lending of money; furnishing of goods and services to the plan. The CEO cannot borrow money from the plan - the transaction is prohibited. Also note that if the CEO were a plan participant, the CEO could borrow money from his or her 401(k) on the same terms and conditions as any other plan participant - but this is not what the question is about!
The difference between a cash forward contract and a commodity futures contract is that the forward contract: A) is traded over-the-counter B) has a standardized delivery date C) deals with a specific quantity of the commodity D) has an acceptable deliverable grade of range of grades of the commodity
A. Futures contracts are standardized exchange traded contracts to deliver a commodity at a future date. The expiration/delivery date is standardized in the contract. The contract size is standardized, as is the minimum acceptable grade of the commodity to be delivered. The price of the contract is established by auction on the exchange, so it is not standardized. In contrast, a forward contract is NOT standardized. Rather, it is a custom-created contract between a buyer and seller for delivery of a specified commodity at a date in the future. All terms of a forward contract are negotiated, whereas the only thing negotiated in a futures contract is the price. Forward contracts are privately created and any trading (not likely) cannot occur on an exchange - rather, any trades would occur over-the-counter.
A Registered Investment Adviser (RIA) is formed and registers in the State on October 15th. The RIA would be required to re-register in the State by: A. December 31st of the year of registration B. January 1st of the year following the year of registration C. April 1st of the year following the year of registration D. January 1st of the second year following the year of registration
A. always december 31st makes no difference if he registered earlier in the year
An investment adviser has determined that ABCD stock would be an appropriate investment for his client, but only if the price falls from the current level of $50 per share to $35 per share. What MUST the adviser do prior to placing an order to buy ABCD stock for the client's account? Correct Answer A. Obtain verbal authority for that specific transaction B. Obtain verbal authority to exercise discretion over the account Incorrect Answer C. Obtain verbal authority to exercise discretion only over price and time of execution in the account D. Secure an appointment as trustee over the account to formalize the fiduciary relationship
A. If an adviser wishes to recommend a transaction to a customer, the customer must agree to do the transaction prior to execution (this assumes that the adviser does not have discretion). This is usually done verbally. Written authorization is needed only to take account instructions from someone other than that customer.
A company has quarterly earnings of $3.00 per share. At the end of the year, it retained $9.00 per share. The company's dividend payout ratio is: A. 25% B. 33% C. 66% D. 75%
A. If quarterly earnings were $3 per share, then annual earnings = $12. Since $9 per share was retained, then $3 was paid as dividends. The dividend payout ratio is $3 / $12 = 25%.
A registered securities agent has been contacted by an independent venture capitalist to obtain customers for a private placement that he is forming. Which statement is TRUE? A. The agent is prohibited from directing customers to the venture capitalist B. The agent is permitted to direct customers to the venture capitalist without restriction C. The agent is permitted to direct customers to the venture capitalist with the permission of the Administrator D. The agent is permitted to direct customers to the venture capitalist if the agent has posted a surety bond
A. If this agent were to direct his customers to the venture capitalist, he would be "selling away" from his firm - that is, putting his customers into a security that his firm doesn't know about in a transaction that the firm is not supervising. Such private securities transactions are a prohibited business practice under the Act. All trades effected by an agent must be recorded on the books of the broker-dealer and supervised by the broker-dealer.
If an investment yields 8% at the same time as inflation as measured by the CPI increases by 6%, the inflation-adjusted rate of return is: A) 2% B) 6% C) 8% D) 14%
A. Inflation-Adjusted return deducts the rate of inflation from the investment return, to approximate the "real rate of return." If an investment yields 8% when the inflation rate of 6%, the inflation adjusted rate of return is 2%.
f the composition of the ownership of a State registered investment adviser changes, the registrant: A. must file a correcting amendment with the Administrator promptly B. must update its books and records to reflect the ownership change C. must file a new registration application with the Administrator promptly D. is not required to take any action, unless requested by the Administrator
A. Prompt notice to the Administrator is required if there is a change of ownership of a broker-dealer or adviser. There is no requirement for a completely new registration application. An amendment to the existing registration will do the trick
An investor believes that interest rates will be flat or falling into the future; and that prices may deflate. The MOST appropriate investment is: A) Long term U.S. Government bonds B) Real estate C) Gold D) Large Capitalization stock
A. READ QUESTION RATES FALLING bond prices go up, by long term bonds!
The Efficient Market Theory states that: A. securities selection based on any type of analytical method is irrelevant B. fundamental analysis should be used to realize superior market returns C. technical analysis should be used to realize superior market returns D. fundamental and technical analysis should be used to realize superior market returns
A. The "Efficient Market" Theory holds that prices of securities in the market fully reflect all publicly available information, so that undervalued or overvalued securities should not exist. Thus, securities selection based on any type of analytical method is irrelevant.
The Administrator, by order, can deny any exemption from registration for all of the following EXCEPT a(n): A) municipal bond issued by another state, sold in the Administrator's state B) isolated non-issuer transaction C) transaction with a bank trust department D) private placement
A. The Administrator is permitted to modify the Uniform Securities Act in his or her State, and thus, can change any "exempt" transaction. However, the Administrator cannot change the exemption from registration given to the securities specified as exempt under the Act, such as U.S. Government or municipal bonds.
A company is formed with 120 shareholders and $20,000,000 of capital with the purpose of investing in securities. Which statement is TRUE? A. This company must be registered as an investment company under the 1940 Act B. This company must be registered with the Securities and Exchange Commission under the 1933 Act C. This company is exempt from registration under the Investment Company Act of 1940 D. This company is exempt from registration under the Securities Act of 1933
A. The Investment Company Act of 1940 requires the registration of investment companies that have 100 or more shareholders; and which have $100,000 or more initial capital.
Under SEC rules established by NSMIA, an individual that files a registration application will be denied if the applicant has: A. served 1 year or more in jail B. pleaded "no contest" to criminal charges C. been named in a civil lawsuit within the past year D. been fined $10,000 or more by a court of law for violations of securities statutes
A. The National Securities Markets Improvement Act includes a provision that keeps individuals that have served 1 year or more in jail and that have a criminal record from being registered as advisers with the SEC.
A trader would buy a security if the expected rate of return was greater than the: A. required rate of return B.average rate of return C. risk-free rate of return D. total rate of return
A. The RRR (Required Rate of Return) is the minimum return that an investment must offer in order for someone to decide to buy it.
A violation of the Uniform Securities Act will NOT occur if statements made about a security are: A. true, but omit non-material facts B. true, but omit material facts C. untrue, but include material facts D. untrue, but include non-material fact
A. Untrue statements are prohibited - it makes no difference if they contain material or non-material facts. True statements are the only ones that can be made, but remember that a true statement that omits material facts is not really true - it is deceptive and misleading.
The president of a bank wishes to sell the subordinated debentures of that bank to individual investors. Under the provisions of the Uniform Securities Act, the president: A. is excluded from the definition of an agent B. must register as an agent of the issuer to do so C. must register as a broker-dealer to do so D. may sell the issue, but cannot receive a commission on the sale unless he or she becomes registered
A. The Uniform Securities Act defines as an agent. Any individual who represents either a broker-dealer or issuer on effecting securities transaction. The Act excludes certain individuals who represent issuers from the definition of an "agent." These individuals are not required to register in the State. The exclusions for individuals representing issuers from being defined as an agent are: individuals who represent issuers in trades of specified exempt securities; individuals who represent issuers in exempt transactions; and individuals who represent issuers selling securities to the issuer's employees where no commissions are paid. The president of the bank comes under the first exclusion. The specified exempt securities are U.S. governments, agencies, municipals, Canadian government issues, bank issues, money market instruments, and money market instruments with no more than 9 months to maturity that are investment grade. Thus, this bank president is selling a specified exempt security because this is a bank issue and is excluded from being defined as an agent of the bank-issuer.
A B/D application is received by the State Administrator for a new broker-dealer subsidiary of a Swiss securities firm. The application includes the disclosure that the parent firm was suspended from membership on the Deutsche Bourse 6 years ago because of unauthorized trading by its Hong Kong branch. The State Administrator A) cannot deny registration based on the suspension that was imposed by a foreign regulator B) can deny registration based on the suspension by the foreign regulator C) must grant registration because the U.S. subsidiary is a legally separate entity from the parent company that is based in Switzerland D) can deny registration only if the actions of the parent company were a criminal offense
A. The Uniform Securities Act sets a 10 year statute of limitations for securities related violations as a cause for denial of registration. This is based on violations of U.S. law. It also includes a provision regarding violations of the law of a foreign jurisdiction. In this case, it sets a 5 year statute of limitations. (Why? - Who knows!) In this case, the suspension by the foreign regulator happened 6 years ago, so the State Administrator cannot deny registration based on the action taken by the foreign regulator. The wording includes willfully violating the law of a foreign jurisdiction governing any aspect of the securities or banking business within the past 5 years; or being the subject of an action by a foreign regulator in the past 5 years denying, revoking or suspending the right to engage in the securities business as a broker-dealer, investment adviser or agent.
A customer buys a 6.50% municipal bond at par in the State. The customer is in the 30% Federal Tax Bracket and the 10% State Tax Bracket. After considering taxes, the customer's yield will be: A) 6.50% B) 5.90% C) 4.60% D) 3.90%
A. The question is not explicit about whether the municipal bond was issued by the State in which the customer has his or her primary residence. But this should be assumed, based on the "nature" of the question. The interest earned on municipal bonds is exempt from Federal income tax; and also from State and Local income taxes when the bond is purchased by a resident of the State of issuance. So a municipal bond yielding 6.50% will not be taxable at the Federal or State level if purchased by a resident of the issuing State.
A customer buys a TIPS at par with a 3 1/2% coupon. Inflation stays at 4% over the life of the security. What is the inflation-adjusted yield? A) 3 1/2% B) 4% C) 7 1/2% D) This cannot be determined from the information presented
A. This one borders on being a trick question. Treasury Inflation Protection Securities (TIPS) give a fixed coupon rate (3 1/2% in this example), but they also adjust the principal value of the bond up each year for inflation (4% per year in this example). At maturity, the investor gets the inflated principal amount. The Total Return on this TIPS would be 3 1/2% annual income + 4% annual gain = 7 1/2%. However, this question asks for inflation-adjusted rate of return (real rate of return), which subtracts out the inflation rate. So the real rate of return is simply 3 1/2%. Also note that the coupon on a TIPS will always be the real rate of return.
A portfolio increases in value from $1,000,000 to $1,210,000 over 24 months. The annualized rate of return is: A. 10.00% B. 10.50% C. 11.00% D. 21.00%
A. This question is basically seeing if you understand the time value of money on an annualized basis (that is, compound interest). This investment grew from $1,000,000 to $1,210,000 over 24 months, or 2 years. The best way to do this is to try each choice given. The first choice is 10% - so multiply by a factor of 1.1 (1 is the original investment amount; .1 is the interest rate). $1,000,000 x 1.1 = $1,100,000 after the first year. $1,100,000 x 1.1 = $1,210,000 after the second year. Thus, this investment grew at a 10% annualized rate.
An investment adviser representative (IAR) has an oral agreement with a customer to provide advisory services and has given the new customer a glossy brochure describing the adviser's services, but has forgotten to give the customer Part 2 of Form ADV. Which statement is TRUE? A) The customer must receive the Form ADV Part 2 and then has 2 days to sign the agreement B) The customer must be given the Form ADV Part 2 at the time of signing the agreement C) The oral agreement is binding because the customer received the glossy brochure D) The customer must receive the Form ADV Part 2 and then has 5 days to sign the agreement
A. Under NASAA rules, customers must receive Part 2 of Form ADV (the "Brochure" and "Brochure Supplement") at least 2 business days prior to the completion of an oral or written contract to provide advisory services. As an alternate to this "2 day free look," the customer can be given the brochure at the time the contract is signed; but must have the right to rescind the contract within the next 5 days after examining the brochure. Note that the wording of the brochure delivery rule states that it applies to "oral or written" contracts and we know that NASAA requires that advisory contracts be written, so this appears to be inconsistent. The use of the term "oral" covers the scenario where a customer does not sign an advisory contract, but writes a check to the adviser - which legally means that there is now a contract!
Under the provisions of the Uniform Securities Act, if an investment adviser wishes to take custody of client funds, the RIA must: A. take out a surety bond B. have a minimum net worth of $2 million C. also be registered as a broker-dealer D. file a consent to service of process
A. Under State law, if an investment adviser will not take custody of a client's funds, there is no surety bond requirement. However, if the adviser will take custody, it must have a minimum net worth or minimum surety bond coverage of $35,000.
A customer buys a premium bond with 20 years to maturity that is callable at par at any time during its life. In which situation will the customer earn the lowest yield on the bond? A. If the bond is called in 5 years B. If the bond is called in 10 years C. If the bond is called in 15 years D. If the bond is redeemed by the issuer at maturity
A. any premium bind will give the lowest yield with the lowest call date! If a customer buys a bond at a premium, he or she is paying more than par for the bond. This will happen if market interest rates have dropped after the bond was issued or if the bond's credit quality improves after issuance. The premium is "lost" as the bond is held, since the bond is redeemed at par at maturity. The yield to maturity formula takes this into account by taking an annual deduction for the pro-rata loss of the premium - this is called the annual amortization of the bond premium. If the bond is called early, this loss in compressed into a shortened time frame, and this reduces the yield. Thus, any premium bond will give the lowest yield if it is called at the earliest call date.
Under the Uniform Securities Act, all of the following are allowed forms of investment adviser compensation, provided it is disclosed to customers, EXCEPT: A) a flat fee assessed only if the portfolio increases in value B) an hourly rate which includes the time it takes to get to the client's office and back C) a varying fee based upon a fixed percentage of assets under management D) a flat fee per year regardless of the portfolio size
A. because under STATE LAW= NO performance fees allowed
In order to establish a retirement financial plan to meets a customer's goals, the most important consideration is: A. capital needs B. investment objective C. current income level D. financial experience
A. capital needs A "capital needs analysis" determines the amount of capital that a person needs to have at retirement in order to meet their anticipated standard of living.
Which statement is TRUE about property held in a Joint Tenancy account? A. A contribution of more than 50% by one of the parties is essentially a gift to the other B. Each tenant has a specified ownership interest in the property in the account C. If an owner in a joint tenancy account dies, his or her ownership percentage will be transferred to his or her beneficiary D. Upon death of one of the tenants, the assets in account must be sold and the proceeds distributed to the survivor(s)
A. each person owns 100% of the assets. this does not go through probate or the deceased estate
An active portfolio manager generates a return of 17.50% on her equity portfolio that has a beta of 1.50. The expected return of the benchmark market index (beta of 1) is 10%. Assuming that the risk-free rate of return is zero, what is the alpha achieved by the manager? A. +2.50% B. -2.50% C. +7.50% D. -7.50%
A. first multiply the 1.5 beta X the 10% benchmark. subtract 17.50 - 15 and thats your answer
A customer sells 1 ABC Jul 40 Put at $6 when the market price of ABC is 38. The customer's maximum potential gain is: A. $600 B. $3,400 C. $4,000 D. unlimited
A. max gain for a seller of put or call is premium collected
Under the Uniform Securities Act, all of the following are allowed forms of investment adviser compensation, provided it is disclosed to customers, EXCEPT: A. a flat fee assessed only if the portfolio increases in value B. an hourly rate which includes the time it takes to get to the client's office and back C. a varying fee based upon a fixed percentage of assets under management D. a flat fee per year regardless of the portfolio size
A. performance fees are not allowed unless very special rules are met
A customer wishes to make an investment that provides liquidity, marketability and current income. The BEST recommendation is: A. Treasury Note B. Bank CD Incorrect Answer C. Preferred Stock D. Growth stock
A. preferred is a good choice, but treasury is better bc it is more liquid
If an agent terminates his employment with a broker-dealer, when must the agent and the broker-dealer notify the State Administrator? A. Promptly B. Within 5 days C. Within 10 days D. Within 30 days
A. promptly
Payments received by the owner of a tax qualified variable annuity are: A. 100% taxable as investment income B. only taxable to the extent of earnings above the holder's cost basis C. only taxable to the extent of the holder's cost basis D. non-taxable
A. remember if it is non qualified, original amount is not taxable just earnings above principal
When computing a company's market capitalization, which of the following is EXCLUDED? Correct A. Common stock owned in the company's treasury B. Common stock owned by the company's employees C. Common stock owned by the company's officers D. Common stock owned by the company's investor
A. rememeber take out treasury stock
An investment adviser representative has worked with a client and his spouse for 10 years and has an excellent relationship with the couple. The representative has been notified that the husband is unconscious and is in the hospital. The account has several open orders that have not yet been executed. What can the representative do regarding the disposition of these orders? A. Instructions can be taken from the customer's spouse B. Instructions can be taken from the customer's attorney C. Instructions can be taken from any relative of the customer that has knowledge of the customer's financial dealings D. Instructions regarding these open orders can be accepted from the customer's tax accountant
A> This one is a little vague, but here goes! In a customer account, instructions can only be taken from the customer (or customers in a joint account); or from any person to whom a written power of attorney has been granted by the customer. Just because an individual is that person's attorney does not mean that he or she has a power of attorney over that customer's account - such a power of attorney must be granted in writing by the customer. The question states that the adviser has "worked with the client and his spouse for 10 years" without mentioning whether the account is a joint account; an individual account; or an individual account where the wife has a power of attorney. But, because the representative has been working "with the client and his spouse" we can infer that is either a joint account or an individual account where the wife has a power of attorney. Thus the best choice offered is to accept orders from the wife. The other 3 choices have no plausible validity unless a written power of attorney has been granted by the customer.
The formula for Total Return is:
Dividend yield plus growth divided by original investment
Fixed income portfolios are subject to which of the following risks? I Credit risk II Purchasing power risk III Opportunity cost IV Interest rate risk
All of those including opportunity cost
For the past 5 years, an individual earning $20,000 per year, who was not covered by another retirement plan, has made annual contributions to an Individual Retirement Plan. That individual has changed jobs at the same salary and has been included in that company's qualified retirement plan. Which statement is TRUE? A. Annual contributions to the Individual Retirement Account must cease B. Annual contributions to the Individual Retirement Account can continue and are an adjustment to income each year C. Annual contributions to the Individual Retirement Account can continue but no adjustment to income is allowed D. The employee has 60 days to roll over the funds from the Individual Retirement Account to the qualified retirement plan in order to maintain tax-deferred status on the funds
Any individual, whether or not he is covered by another retirement plan, can make an annual contribution to an Individual Retirement Account. However, if that person's income is high (above $71,000 for an individual in 2015), the contribution is not tax deductible. This person makes $20,000 per year, so the IRA contribution is tax deductible.
A customer buys 200 shares of Ford at 68 and sells 2 Ford 70 Calls @ $3. The maximum potential loss is: A) $6,800 B) $13,000 C) $13,200 D) $13,800
B
The Uniform Securities Act authorizes the Administrator to waive the surety bond requirement for an investment adviser if the firm: A) has no disciplinary actions for the preceding 10 years B) maintains a high enough amount of net capital C) is also a registered broker-dealer D) is registered with the Securities and Exchange Commission
B
The efficient market theory states that: A. it is impossible to use technical trading tools to earn excess returns because current prices already reflect all available information in past price patterns B. current securities prices fully reflect all available information C. market prices are determined by the number of buyers and sellers present in the market D. future securities prices are determined by the discounted value of all dividends and growth that are expected in future years
B
The portfolio return measure that calculates a mean rate of return from a probability distribution of all potential rates of return is: A) Total return B) Expected return C) Internal rate of return D) Holding period return
B
An existing customer of an agent that is registered in State Z contacts the agent to inquire about selling 1,000 shares of ABCC Corp. - a thinly traded stock that is sometimes quoted in the Pink Sheets. The agent attempts to locate a buyer for the shares for the customer, but cannot find one. One week later, a new customer contacts the agent, asking him to buy 1,000 shares of ABCC Corp. The agent contacts the existing client to see if he is interested in selling these shares. This action is: A. a violation of the Uniform Securities Act B. considered to be an offer to buy made by the agent C. a conflict of interest that must be disclosed to the existing customer D. defined as a contract to sell the shares
B An "offer to purchase" is defined as every attempt to buy a security, or solicitation of an offer to sell a security, for value. The agent has contacted the existing client, to see if he is interested in selling the 1,000 shares that this new customer wishes to buy. Thus, the agent is making an offer to buy the securities from the existing customer.
f the Administrator summarily suspends a registration of an agent, all of the following statements are true EXCEPT: A. the Administrator must notify the agent promptly that the order has been entered B. the Administrator must obtain a court order prior to issuing its own order C. an opportunity for a hearing must be given within 15 days of written request D. the individual is prohibited from acting as an agent in that State
B The Administrator is permitted to summarily suspend a registration, which means that he or she can take this action without obtaining a court order. If the administrator does this, the agent must be notified promptly of the action and the reasons for the action; and the agent must be given the opportunity for a hearing within 15 days of the agent making a written request.
Under the provisions of the Uniform Securities Act, net capital requirements for broker-dealers must be kept in accordance with the provisions of the: A) Securities Act of 1933 B) Securities Exchange Act of 1934 C) Investment Advisers Act of 1940 D) Uniform Securities Act as adopted in that State
B (federal law supersedes state law)
A customer that buys a non-exempt new issue must be delivered a prospectus at, or prior to, the time of: A) being solicited to purchase the new issue B) entering into the contract to purchase the new issue C) completion of the purchase of the new issue D) settlement of the purchase of the new issue
B.
"High Risk Investment ='High' Return Investment" "Low Risk Investment ='Low' Return Investment" This is an example of: A. Efficient Market Theory B. Correlation C. Duration D. Monte Carlo Simulation
B.
A corporate 8K Report covering a material event must be filed with the SEC: A) 1 business day following the event B) 4 business days following the event C) 5 business days following the event D) 10 business days following the event
B.
A customer could be obligated to sell stock at a future date if the customer is the: A. buyer of a call B. seller of a call C. buyer of a put D. seller of a put
B.
A customer has $12,000 of capital losses and $4,000 of capital gains in a tax year. On that year's tax return, the investor has a: A. $3,000 capital loss deduction with no loss carryforward B. $3,000 capital loss deduction and a $5,000 loss carryforward C. $8,000 capital loss deduction with no loss carryforward D. $12,000 capital loss deduction
B.
A customer has brought a civil suit against an agent for violating the Uniform Securities Act. Two weeks before the court date, the agent dies. Which statement is TRUE? A. The civil suit is terminated upon the death of the defendant B. The civil suit survives the death of the defendant C. The civil suit must be settled within 60 days of the defendant's death D. The Administrator decides whether the suit is terminated or survives upon the defendant's death
B.
A customer, age 55, has a diversified portfolio of blue chip equity investments that pay a reliable cash dividend. The customer would like to retire at age 65. The customer has an expensive lifestyle, and even though he makes a good income, he uses the dividend income from his investments to pay his large monthly bills. The main problem that is evident here is that the: A. portfolio should be rebalanced to include a percentage allocation to fixed income securities because of the customer's age B. customer is unable to take advantage of the compounding effect of reinvesting dividends C. customer increases his tax liability by spending the dividends rather than reinvesting them D. customer needs to change his spending habits
B.
A solicitor for a Registered Investment Adviser is compensated by earning a percentage of the advisory fee. Which statement is TRUE? A) The solicitor is required to be registered with the SEC as either an investment adviser or an investment adviser representative to receive such a payment B) The solicitor is required to be registered in the State as either an investment adviser or an investment adviser representative to receive such a payment C) The solicitor must be registered with both the SEC and the State as either an investment adviser or an investment adviser representative to receive such a payment D) The solicitor is neither required to be registered with the SEC nor the State as an investment adviser or investment adviser representative to receive such a payment
B.
All of the following statements about the Securities Exchange Act of 1934 are true EXCEPT the: A. general provisions of the Act apply to non-exempt securities B. general provisions of the Act apply to exempt securities C. anti-fraud provisions of the Act apply to non-exempt securities D. anti-fraud provisions of the Act apply to exempt securities
B.
An individual sells the securities of a federal chartered bank. This individual will be EXCLUDED from the definition of an agent if the individual: A. is the employee of a broker-dealer B. is the employee of the bank C. only offers the securities to 5 or fewer investors D. only offers the securities in 5 or fewer states
B.
An individual who is 25 years from retirement has $500,000 to invest today. He is risk tolerant and is looking to withdraw $80,000 per year once he retires. Which asset allocation is best for this client? A. 25% Stocks / 25% Bonds / 25% REITs / 25% Money Markets B. 50% Stocks / 40% Bonds/ 10% Cash C. 100% Bonds D. 100% Stocks
B.
An investment adviser places large block trades for securities positions that are being purchased for its customers' accounts in order to lower its commission costs. The trades are often executed piecemeal, at different prices. The adviser, after being confirmed that the entire block has been filled, allocates the shares to its accounts. As a favor to its most valuable employees, the adviser allocates the shares purchased at the lowest prices to its employees' accounts; and then allocates the remaining shares to its customer accounts pro-rata. The adviser has disclosed its allocation method only to its employees. Which statement is TRUE? A) The investment adviser has breached its fiduciary duty to its customers because the block order must be executed at one price, not in pieces at differing prices B) The investment adviser has breached its fiduciary duty because it has not disclosed its method of allocating shares to its customers C) The investment adviser has not breached its fiduciary duty because it has disclosed its method of allocating shares to its employees D) The investment adviser has not breached its fiduciary duty to customers because it has obtained trade executions for customers at lower commission costs
B.
Dividends paid by a corporation that are reinvested in the purchase of additional shares are: A. not taxable until the shares are sold B. taxable at capital gains rates C. deposited directly to the owner's bank account D. taxable at ordinary income rates
B.
Instead of charging a customer a per trade commission charge, a broker-dealer wants to charge its customers that are active traders a flat monthly fee equal to 8% of the value of monthly trades. The broker-dealer identifies its active traders and tells them of the new arrangement. Which statement is TRUE? A) The fee arrangement is permitted because the customers were notified of the change B) The fee arrangement is prohibited because the monthly fee is excessive C) The fee arrangement is prohibited because broker-dealers are only permitted to charge commissions for trades performed D) The fee arrangement is permitted without restriction
B.
The formula V ='P' (1 + r)n is used to compute an investment's: A. present value B. future value C. internal rate of return D. standard deviation
B.
The maximum permitted annual contribution to a Coverdell Education Savings Account for a single beneficiary is: A. $2,000 in a single account B. $2,000 total in any number of accounts C. $4,000 in a single account D. $4,000 total in any number of accounts
B.
To exercise discretion in a customer account, the agent must first obtain: A. a verbal power of attorney from the customer B. a written power of attorney from the customer C. either a verbal or written power of attorney from the customer D. permission of the employing broker-dealer
B.
Under ERISA provisions, a pension fund manager that wishes to write naked call options: A. can only do so if explicitly allowed in the plan document B. can do so if the plan document allows for options transactions C. can do so without restriction D. is prohibited under ERISA requirements
B.
Which of the following options strategies provides a gain equal to the premium in a bear market? A. Long Call B. Short Call C. Long Put D. Short Put
B.
An agent of a broker-dealer is effecting non-exempt transactions through a private investment firm owned by his friend. The arrangement has been approved by the broker-dealer, who is not recording the transactions because they are being recorded on the books of the private investment firm. Why is the agent permitted to do this? A. The agent is permitted to do this because the securities involved are non-exempt B. The agent is permitted to do this because the broker-dealer gave approval C. The agent is permitted to do this because an agent is free to engage in securities transactions with any employer once that agent is licensed D. The agent is permitted to do this because the private investment firm is not subject to the provisions of the Investment Company Act of 1940
B. An agent is only associated with the broker-dealer with whom he or she is registered. If an agent were to sell securities through another firm, that agent is "selling away" from his or her firm. In order to "sell away," the agent must get permission of his or her firm and also would be required to register as an agent of the "private investment firm." This is so-called "dual registration" - though this is not addressed in the question. The other choices pretty much make no sense!
Which investment will generate passive income? A) General partnership B) Limited partnership C) Real estate investment trust D) Hedge fund
B. Passive income and losses are generated from real estate and direct participation program (limited partnership) investments. These are "tax shelter" vehicles and the tax code only permits such "passive losses" to be deducted against other passive income. Income from general partnerships is "earned" income. Income from REITs and hedge funds is "portfolio" income.
An Investment Adviser falls below the minimum net capital required by the State on Monday. The IA must notify the Administrator no later than: A. Tuesday of that week B. Wednesday of that week C. Thursday of that week D. 10 business days after the event
B. The NASAA model rule for investment adviser financial requirements (Rule 202(d)-1) states that "every adviser required to be registered in the State shall, by the close of business the next business day, notify the Administrator if such investment adviser's net worth is less than the minimum required." After transmitting such notice, each investment adviser shall file, by the close of business on the next business day, a report with the Administrator if its financial condition, including a: trial balance of all ledger accounts; statement of all client funds which are not segregated; compilation of the aggregate amount of client ledger debit balances; and statement as to the number of customer accounts. Since this IA's net capital fell below the minimum on Monday, notice to the Administrator must be given on Tuesday and the report filed on Wednesday.
A customer in the 28% tax bracket has $6,000 of capital gains and $10,000 of capital losses. How much unused loss is carried forward to the next tax year? A) 0 B) $1,000 C) $2,000 D) $3,000
B. The customer has a capital gain of $6,000 and a capital loss of $10,000 for a net capital loss of $4,000. Only $3,000 of net capital losses can be deducted in a tax year, so $1,000 of the loss is carried forward to the next tax year.
A potential client is 81 years old and has asked his representative for recommendations of speculative "Dot Com" stocks. The customer has a broadly diversified bond and high dividend paying stock portfolio that provides retirement income, in addition to the customer receiving social security. The customer is concerned that his purchasing power is decreasing and wishes to allocate an increased portion of his portfolio to aggressive growth stocks. The BEST recommendation for this customer is to: A) not allocate any of his portfolio to "Dot Com" stocks because they give no current income, which this customer needs B) allocate a portion of the customer's portfolio to "Dot Com" stocks that will not reduce the customer's retirement income below the amount needed for comfortable living C) allocate a portion of the customer's portfolio to "Dot Com" stocks as dictated by the customer, since he is making the investment decision D) tell the customer that aggressive growth stocks are not suitable for a person who is at such a late stage of life
B. This client is elderly, but is worried about the risk of inflation (purchasing power risk). A portion of the customer's portfolio could be reallocated to growth stocks to offset this risk, but only an amount that would not compromise the income needed by the customer to support his current living standard. This would likely result in a fairly small allocation. One could argue that such an elderly customer should not be holding any such stocks, but this customer is concerned about purchasing power risk and the only way to limit this is with investments in either growth stocks or TIPs (Treasury Inflation Protection Securities - which are not considered in this question).
A customer signature is needed to open a: A. cash account B. margin account C. both of the above D. neither of the above
B. There is no customer signature required on a new account form - this allows cash accounts to be opened over the phone, if a firm so desires. However, a customer signature is required on the hypothecation agreement needed to open a margin account - this is the legal pledge of securities in the account as collateral for the margin loan from the broker-dealer to the customer.
The Regulation T requirement to buy stock is 50% and the Minimum Maintenance Margin requirement is 25%. The "loan value" of the stock is: A) 25% B) 50% C) 75% D) 100%
B. The "loan value" of a security is the amount that may be borrowed when the position is purchased. If Regulation T requires a 50% deposit, then the remaining 50% can be borrowed from the broker to buy the stock. This is the "loan value". Maintenance margins are irrelevant when computing the "loan value" of a security.
Which of the following is prohibited in an advisory contract under NASAA rules? A. Custody Provision B. Liquidated Damages Provision C. Non-Assignment Provision D. Discretionary Authority Provision
B. A "liquidated damages provision" in an advisory contract would state that if the customer suffers a loss, the adviser is responsible. This is no different than a prohibited guarantee against loss and thus is not permitted. Advisory contracts can permit the adviser to take custody (unless that State prohibits this); must have a non-assignment provision, which means that the contract cannot be assigned to another investment adviser without customer consent; and can give the adviser discretion over the customer's account.
Which of the following persons is LEAST likely to be defined as an investment adviser? A. A Certified Public Accountant who makes recommendation to customers of portfolio allocations in their 401(k) accounts after preparing their tax returns B. The publisher of an investment newsletter specializing in making small cap stock recommendations that is distributed to paid subscribers monthly C. A lawyer who offers financial planning services only to its existing customers at a discounted rate as compared to the rate charge to the customers for legal services D. A financial planner that sets up a website that includes a retirement calculator that, based on customer input to a series of questions, creates a basic financial plan at no charge to the customer; the site includes advertisements placed by brokerage firms and insurance companies.
B. Choice C is clearly an investment adviser because the lawyer is separately charging for financial planning services. Choice D is also an investment adviser, because a financial plan is being created that is unique to each customer and the adviser is being paid for the advice (by the advertisers instead of the customers, but the law doesn't care about this distinction - the fact is the planner is being compensated). Choice A is a bit vague - it doesn't say if the CPA is separately charging for the recommendation, so this choice could go either way. Choice B is more clear - this is a newsletter that is not making recommendations based on specific client situations, so it is not an "investment adviser." It is the best of the choices offered.
An insurance company that sells an Equity Indexed Annuity (EIA) would use which method to credit the change in investment value? A. Breakeven B. Point-to-point C. Monte Carlo D. Moving average
B. EIAs base the annuity payments on the performance of a broad-based index, such as the S & P 500 Index. However, the return is capped and there is a minimum guaranteed return, regardless of the performance of the index. The most common methods of measuring index performance are the: Point-to-point method; Annual reset method; and High-water-mark method. Assume that a client buys an EIA that is based on a 7-year return. The "point-to-point" method compares the index value at purchase date to the value at the end date, 7 years later. Any value fluctuations that occur in-between the 2 measurement dates are irrelevant. Another common valuation method is the "annual reset" method, which would measure the return achieved each year over a 7-year life and add interest to the annuity based on the annual reset. The "high water mark" method looks at the index value yearly as of the anniversary date of purchase, and bases the interest added on the highest index value over the product life (7 years in our example) versus the value at the date of purchase.
Which statement about the taxation of 403(b) plans is TRUE? A) Employer matching contributions are deductible by the employer B) Employee salary deferrals reduce the employee's taxable income C) Early withdrawals due to death or disability are not subject to income tax D) Distributions after age 59 ½ are partially taxable and partly tax-free
B. Employee salary deferrals contributed to a 403(b) plan reduce the employee's taxable income for that year. Employer matching contributions are not deductible by the employer, because the employer is a non-profit organization. Early withdrawals (prior to age 59 1/2) due to death or disability are subject to income tax but avoid the 10% penalty tax. Distributions at any age are 100% taxable.
All of the following statements are true about registration of investment advisers EXCEPT: A. an adviser with no office in the State that limits its clientele to insurance and investment companies is exempt from registration B. an adviser that only renders advice on municipal securities is exempt C. broker-dealers can act as investment advisers without registering as such if any advice given is solely incidental to the business of the broker-dealer D. investment advisers must register with the State
B. There is no exemption from registration under state law for investment advisers that solely give advice on municipal securities - this adviser must register in the state. (Note, however, that if the firm only gives advice about U.S. Government securities, it is exempted from registration under both Federal and State law.)
A bank in a State is making an offering of its own securities, which are exempt, to the public. Which of the following would NOT be required to be registered as an agent in the State? A. An employee of a broker-dealer who is offering the securities to the public B. An employee of the bank who is offering the securities to the public C. An employee of a broker-dealer who is offering the securities only to institutional investors D. All of the choices above are not required to be registered
B. Even though the securities are exempt, an employee of a broker-dealer that offers the securities to the public must be registered in the State. An employee of an issuer (as opposed to an employee of a broker-dealer) is exempt from registration if the employee is selling specified exempt securities, which include bank securities. As illustrations for this exclusion, consider the following: An individual who represents Wells Fargo Bank (the issuer), selling certificates of deposit (an exempt issue) to the public, is not required to be State registered. An individual who represents Cowen and Co. (a broker-dealer), selling commercial paper to the public (an exempt issue), must be registered in the State (unless another exemption is available).
The BEST income tax filing status for a married couple where both are high earners and at least one has large personal deductions is: A. married filing jointly Correct B. married filing separately C. head of household D. single filing 2 returns
B. If there are 2 high earning spouses, then choosing "Married Filing Separately" typically results in a lower tax liability where 1 or both have large itemized deductions. This occurs because there are "add-backs" that reduce itemized deductions based on reported adjusted gross income, and this "add back" number is lower when income is split and reported separately. For married couples, where one spouse earns the majority of the income, the lowest tax liability generally results by choosing "Married Filing Jointly." This occurs because the higher income is "averaged down" when it is added to the lower income, where the joint amount is taxed at a lower joint tax bracket.
An investment adviser is looking to offer advisory services to new clients. Which statement is TRUE regarding delivery of Form ADV Parts 2A and 2B? A. They must be delivered only if the individual becomes a client of the investment adviser B. They must be delivered regardless of whether the individual becomes a client of the investment adviser C. They must be delivered only upon written request of the individual that is considering becoming a client D. They must be delivered only upon receiving a check for the initial investment amount from the client
B. NASAA requires that the investment adviser furnish the Brochure (Form ADV Part 2A) and the Brochure Supplement (Form ADV Part 2B) to an advisory client or a prospective advisory client. The Brochure and Supplement must be furnished: not less than 48 hours prior to entering into any advisory contract with such client or prospective client; or at the time of entering into the contract, the advisory client has the right to terminate the contract without penalty within 5 business days.
The portfolio construction most suitable for a pension fund seeking current income and safety of principal is: A. Treasury bonds, General Obligation bonds and covered call writing B. Treasury bonds, Corporate bonds and covered call writing C. Corporate bonds, Time deposits and naked call writing D. Treasury STRIPs, Corporate bonds and naked call writing
B. Selling naked calls is risky; selling covered calls is a conservative income strategy with limited loss. Therefore, the best choice must either be A or B. General obligation bonds are tax-free Municipal bonds that yield less than taxable investments, such as Treasury bonds or Corporate bonds. Since the pension plan is tax-deferred, investing in these lower yielding investments is inappropriate; they are only appropriate for customers that are currently in high tax brackets. Therefore, the best choice is B - a portfolio of Treasury bonds, Corporate bonds and covered call writing.
A Registered Investment Adviser is the beneficiary in the liquidation of a partnership investment that it made years ago and in settlement, receives the assets of an existing broker-dealer. As a result of this, the directors of the RIA: A. are required to register in the State as directors of the broker-dealer B. are not required to register in the State as directors of the broker-dealer, nor take qualification exams, as long as they are not involved in overseeing the sales or operations of the broker-dealer C. must register in the State as directors of the broker-dealer but are not required to take qualification exams D. are not required to register in the State as directors of the broker-dealer
B. The question is, typically, not very clear on what is going on here. What is happening is the RIA now owns a broker-dealer. We don't know if the broker-dealer is operating with its own officers; or whether it is just a dormant "shell." If it has its own officers, they would already have been registered with both FINRA and the State. If not, then the RIA that now owns the broker-dealer would have to appoint officers and register them in the State. It is not true that the directors of the RIA would be required to be registered in the State. Only those RIA directors that were appointed directors of the broker-dealer would be required to register (of course, this is not a choice!). Of the choices offered, Choice B is the best one. Only those directors of the RIA that are involved in overseeing the sales or operations of the broker-dealer must be registered in the State and must take the proper licensing exams.
A portfolio that is rebalanced annually is considered to be: A. Active B. Passive C. Fixed D. Strategic
B. The terms "active" and "passive" are most often used when looking at the management of a stock portfolio. An actively managed portfolio has its investments selected by a professional manager; whereas a passive portfolio has a composition that is matched to a market index. However, "active" and "passive" can also be used to refer to the frequency of portfolio rebalancing. A portfolio that is rebalanced once annually is said to be "passive;" a portfolio that is rebalanced more frequently or as market conditions move is said to be "active."
Which form(s) MUST be signed by the customer in order to open a margin account? A) New Account Form B) Hypothecation Agreement C) Loan Consent Agreement D) All of the above
B. There is no customer signature required on a new account form - this allows cash accounts to be opened over the phone, if a firm so desires. However, a customer signature is required on the hypothecation agreement - this is the legal pledge of securities in the account as collateral for the margin loan from the broker-dealer to the customer. There is no legal requirement for the customer to sign a loan consent agreement (where the customer agrees to permit the lending of the securities held in the account to someone else who wishes to effect a short sale). The customer can choose to sign the loan consent; or can choose not to sign.
Which of the following is prohibited in a margin account? A. Buying stocks without making full payment B. Selling short securities that cannot be borrowed by settlement C. Buying and selling the same security on the same day D. Depositing fully paid securities as collateral to buy other marginable securities
B. in a margin account, one does not pay in full; rather a percentage of the purchase price is deposited (the margin requirement); with the balance of the purchase amount lent to the customer by the broker-dealer. One can sell short securities in a margin account (that is the sale of borrowed shares). However, in order to do so, it must be determined that the securities to be sold short can be borrowed and delivered by settlement. If the securities cannot be borrowed and delivered by settlement, then a short sale would not be permitted. One can buy and then sell the same security on the same day in a margin account - this is called "day trading" and is permitted. Finally, one can deposit fully paid securities to a margin account, pledging them to the broker-dealer as collateral for a loan used to buy other securities.
All of the following information must be recorded on an order ticket EXCEPT: A. Customer name or account number B. Customer address C. Execution price and order size D. Identity of agent accepting the order
B. rior to entry of an order, the information required to be noted on the order ticket includes the customer name or account number; registered representative name or number; buy or sell; number of shares or bonds to be traded; description of the security to be traded and execution price. The time that the order was entered must be stamped on the order ticket (this can also be done electronically). There is no requirement for a customer address or customer social security number on an order ticket.
A customer has the choice of investing $20,000 in a risk free investment yielding 3% per year; or can invest the money in a growth mutual fund that has returned 10% per year over the past 3 years. What is the customer's annual opportunity cost if he or she chooses the risk free investment? A. $600 B. $1,400 C. $2,000 D. This cannot be determined from the information given
B. this customer has the choice of earning 3% per year risk free; or earning 10% per year by taking on a higher level of risk. If the customer chooses the risk free investment, the customer gives up 7% per year (the "opportunity cost" of the investment). 7% x $20,000 investment = $1,400 annual opportunity cost. Easy REMEMBER subract the two rates, then multiply percentage by the principal amount
All of the following statements are true about 401(k) plans EXCEPT the plan: A) must be established by the employer B) must be a defined benefit plan C) is typically funded by salary reduction employee contributions D) is a qualified plan under ERISA
B. 401(k) plans are employer sponsored qualified defined contribution plans. They are not defined benefit plans. 401(k) plans are different than other types of plans because the employee "chooses" to participate and decides the contribution to be made. Any contribution made is deducted from the employee's taxable income, so this is called a "salary reduction" plan. The actual percentage contribution is set by the employer, up to a maximum contribution of $18,000 in 2015. In addition, the employer can "match" employee contributions, usually up to 5% of the employee's salary
Which item is NOT included in a client's income statement? A. Interest received from corporate bond investments B. Depreciation of the customer's primary residence C. Dividends from mutual funds that are reinvested in additional share purchases D. Year-end bonus received from employer
B. A primary residence, at market value (which reflects asset appreciation or depreciation), is included on the client's balance sheet as an asset. The income statement of the client reflects income (wages, commissions, bonuses, dividends, interest on investments) and expenses (living expenses, taxes, interest paid on loans on a mortgage, insurance expenses, etc.). Note that a dividend received from a mutual fund investment is still income, even if it has been reinvested.
An application to register securities may be filed by all of the following EXCEPT a(n): A) Broker-Dealer B) Investment Adviser C) Issuer D) Officer of the company who is selling shares that are personally owned
B. Applications to register a security in a State cannot be filed by agents; nor can they be filed by investment advisers. They may only be filed by the issuer; or a broker-dealer acting for an issuer; or the person on whose behalf the offering is being made (for example, an officer of a company effecting a secondary distribution of a large block of shares that he or she holds can file a registration application).
A customer is considering the purchase of a corporate bond yielding 7%. The customer is in the 30% tax bracket. The equivalent yield on a municipal bond is: A. 2.10% B. 4.90% C. 7.00% I D. 10.00%
B. CONSIDERING CORPORATE, means he HAS MUNI MULTIPLY
All of the following are unethical practices under NASAA rules EXCEPT an: A. agent makes a blanket recommendation of the same security to all of his clients on a regular basis B. agent's assistant accepts a sell order from a customer without notifying the agent C. agent effects trades in customer discretionary accounts that are excessive in size, but not in frequency D. agent accepts a buy order in a customer account from another person that does not have a power of attorney from the customer
B. Choice A is a violation because there must be a suitability determination for each recommendation to a customer. Choice C is churning, which is a violation. Choice D is the violation of exceeding granted authority in a customer account - to accept orders from someone other than the customer, there must be a written power of attorney granted by that customer. Choice B is OK - the assistant can accept a sell order from a customer without notifying the agent (we must assume that the assistant is registered, otherwise he or she could not take customer orders).
What statement is TRUE regarding dollar cost averaging? A. If market prices remain constant, the plan will produce a lower average per share cost B. If market prices fluctuate, the plan will reduce the average per share cost C. The plan requires that, if prices rise, the investor must make smaller dollar purchases; while, if prices fall, the investor must make larger dollar purchases D. The plan requires that a customer maintain a constant dollar amount in equity securities, with any excess invested in debt instruments
B. Dollar-cost averaging requires that an investor make periodic payment (e.g., monthly) of a fixed dollar amount (e.g., $100 per month) to buy a given security. If the price of the security is fluctuating, the average cost per share will be lower than the simple mathematical average price of the shares over the same period. Dollar-cost averaging does not work if the price of the stock remains fixed. It does not protect against loss in a falling market nor does it guarantee a gain.
When performing a suitability determination, the customer informs you that she will not invest in any companies that produce or market tobacco or alcohol products. This is an example of: A. faith-based investing B. non-financial considerations C. investment strategy D. personal customer profiling
B. Ethical investing means that the customer uses his or her environmental, religious, or political views as the basis to include or exclude specific stocks or industries from his or her investment possibilities. This is a type of "non-financial" consideration when making recommendations to the customer.
A customer in Montana receives the Wall Street Journal, in which an offer of securities is made. The Wall Street Journal is not published in Montana, and has no office in Montana. Which statement is TRUE? A. An offer of securities has been made in Montana B. No offer of securities has been made in Montana C. An offer to sell has been made only to subscribers of the Journal D. An offer to sell has only been made to Montana residents if at least 50% of the paper's total circulation is in that State
B. For a newspaper offering to come under the jurisdiction of the State Administrator, it must be published in the State, and have at least 1/3 of its circulation in that State. The Wall Street Journal is published outside of Montana, so no offer of securities is being made in Montana.
Which of the following information MUST be included on a customer confirmation? I Whether the transaction was solicited or unsolicited II The exchange where the transaction was effected III The customer name and account number IV The price of execution
B. III IV Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The exchange where the trade was effected used to be required on the confirmation, but this is no longer the case because all markets are linked and trades must be done at the best price in a given market or routed to the better-priced market for execution. The customer name, account number, size of the trade, price of execution, and any commission charged must all be on the confirmation.
An individual who is a registered representative with a broker-dealer prepares financial plans for customers under the supervision of the broker-dealer and does not charge for the plans. The individual takes commissions on transactions that result from the implementation of the recommendations included in the plans. Under SEC Release IA-1092: A. both the individual and the broker-dealer must register with the SEC as an investment adviser representative and an investment adviser, respectively B. neither the individual nor the broker-dealer need register with the SEC as an investment adviser representative and an investment adviser, respectively C. the individual must register with the SEC as an investment adviser representative; the broker-dealer is not required to register with the SEC as an investment adviser D. the individual need not register with the SEC as an investment adviser representative; the broker-dealer is required to register with the SEC as an investment adviser
B. If a broker-dealer is registered with the SEC, and its representatives are registered with the SEC, and if the broker-dealer does not charge separately for advice, then it is excluded from the definition of an "investment adviser" and need not register as such with the SEC. However, if the broker-dealer were to charge separately for a financial plan, then it would have to register with the SEC as an investment adviser; and its sales persons would have to register as "investment adviser representatives".
A registered investment adviser often recommends real estate limited partnership investments to her wealthy clients. The RIA's personal financial statement and income are consistent with those of her wealthy clients, yet she never buys limited partnership units for her personal account. Which statement is TRUE? A. Her actions are proper, because investment advisers cannot take the same investment positions are their clients B. Her actions are inconsistent with the advice being given to her clients and this must be disclosed C. The adviser's securities transactions for her own account is personal information that is not disclosed D. The adviser has no fiduciary obligation to her clients because they are all wealthy and can "look out for themselves"
B. If an adviser makes a recommendation that is inconsistent with its investment practices, this is a conflict of interest that must be disclosed. Advisers are supposed to invest "alongside" their clients - they must take the same positions for the personal investment account that they recommend to their clients.
An individual who represents an issuer selling federally covered nationally traded securities: A. is not required to register as an agent in the State B. must register as an agent in the State if compensation is being paid for this activity C. must register as an agent in the State if the individual is not federally registered D. must register as an agent in the State
B. If an individual represents an issuer selling a security that must be SEC-registered and compensation is paid for this activity, then the individual must register in the State. Both "nationally traded securities" and investment company securities are "federal covered," but because they are non-exempt and are SEC-registered, this individual must be registered in the State to sell them. If the individual were representing the issuer selling exempt securities, such as Treasuries, Agencies and Municipals, then the individual is not defined as an agent. The exclusion from registration given to an individual who represents an issuer in transactions in specified "covered securities" only applies to private placements and to sales to qualified investors (wealthy investors)
A wealthy married couple with 3 adult children have a large estate. They intend to leave their estate to their children, but they both have a life expectancy of at least 15+ years. They are interested in establishing a trust that will minimize estate taxes upon death. The best recommendation would be a(n): A. revocable trust B. irrevocable trust C. testamentary trust D. blind trust
B. Irrevocable trusts reduce estate tax liability, as well as avoid probate
A 79-year old customer in the highest tax bracket with $1,000,000 to invest is risk averse. Which investment recommendation would be appropriate? A. Money market funds B. Municipal bonds C. A Dow Jones Industrial Average index fund D. Certificates of deposit
B. Since this customer is in the highest tax bracket, and appears to be wealthy (with $1,000,000 to invest), tax-free municipal bonds are the best recommendation.
Suits alleging criminal violations of the Uniform Securities Act must be brought within: A) 3 years B) 5 years C) 10 years D) 15 years
B. Suits alleging criminal violations of the Uniform Securities Act must be brought within 5 years of the occurrence of the alleged violation.
An IAR is preparing a financial plan for a young married couple with 2 small children. They both work and have sufficient income to pay their current bills, including the large mortgage on their house. They have a small emergency reserve and, after paying expenses, have an extra $500 per month that they can put towards investments. They currently have no life insurance, and if one dies, the remaining spouse would not have enough income to meet monthly expenses. The IAR recognizes that they need to buy insurance as part of the plan, but the IAR is not a licensed insurance agent in the State. Which statement is TRUE? A) The IAR is not permitted to tell the customers about any aspect of insurance because she is not a licensed insurance agent in the State B) The IAR cannot prepare a financial plan that includes life insurance needs unless another IAR licensed as an insurance agent in the State co-authors the plan C) The IAR must follow the "Don't Ask Don't Tell" rule in this situation; if the clients don't ask about life insurance coverage, she can't talk about it or include it in the plan D) The IAR can prepare a plan that includes life insurance, since life insurance is a security
B. Life insurance coverage is an important part of any financial plan. Since the IAR is not licensed to sell life insurance in the State, she is not qualified to make the appropriate recommendation. She must consult with a properly licensed insurance agent in the State to make an insurance recommendation (and only the licensed insurance agent can sell the couple the policy!).
Under NASAA rules, if a customer wishes to trade a margin account prior to returning the signed margin agreement, such an action is: A) prohibited B) permitted only if the customer returns the signed margin agreement promptly C) permitted only if the customer returns the signed margin agreement within 1 day of the first transaction in the account D) permitted only if the customer returns the signed margin agreement within 3 days of the first transaction in the account
B. NASAA wording states that the signed margin agreement must be obtained promptly after the first transaction in account. In contrast, FINRA requires that the margin agreement be signed and returned prior to settlement of the first transaction in the account. Since this is a NASAA question, the answer is their rule!
An Investment Adviser Representative (IAR) manages the assets of the ABC Corporation Profit Sharing Plan. The trustee of the plan contacts the IAR, explaining to the IAR that he wants a check drawn from the plan account to buy a building that ABC Corporation will occupy. The IAR should: A. refuse to issue the check B. refuse to issue the check because it is a breach of the IAR's fiduciary obligation C. issue the check D. tell the trustee that the check can only be issued if paperwork is provided showing that ABC Corporation has put up collateral equal to the amount of the check
B. One of the prohibited transactions under ERISA is the use of plan assets being used to buy real property owned by the corporation that sets up the plan. This is a form of "self-dealing" that is prohibited. Fiduciaries to plans include not only the trustee, but the IA and IAR as well. They are all prohibited from entering into a transaction if they know, or should have known, that the transaction is prohibited. Because the trustee told the IAR what the check withdrawal request was for, the IAR should have known that this is a prohibited transaction. While Choice A is "technically" a correct answer, Choice B is the better one because it gives the rationale behind why this is prohibited. And, yes, you could see something similar on the exam!
Past performance: A. may not be shown in an investment adviser advertisement B. may only be shown in an investment adviser advertisement if it reflects the deduction of advisory fees, brokerage commissions and any other expenses that a client would pay C. may only be shown in an investment adviser advertisement if a comparison is made to a relevant market index D. may only be made in an investment adviser advertisement if the advertisement is filed in advance with the SEC
B. Past performance may be shown in investment adviser advertising (it is testimonials that are prohibited). Results shown must deduct all expenses that a customer would incur. There is no requirement for a comparison to be made of results to a relevant market index; nor is there a requirement for the advertisement to be filed with the SEC.
Which of the following is defined as an investment adviser under the Investment Advisers Act of 1940? A. Dealers in U.S. minted gold coins B. Pension consultants C. Broker-dealers in securities D. Managed commodity fund advisers
B. SEC Release IA-1092 specifically includes pension consultants and advisers to professional athletes and entertainers as "investment advisers" that must register with the SEC (this action was taken because of past abuses by such advisers). A person who renders advice about U.S. minted gold coins is not rendering advice about a security, and hence is not defined as an investment adviser. Broker-dealers are excluded from the definition of an investment adviser, as long as they do not charge separately for such advice. Commodities are not securities, so a managed commodity fund adviser is not defined as an investment adviser. Again, to fall under the definition of an investment adviser, one must be rendering advice about securities.
Cash value of a universal life insurance policy is: A. premium payments plus cost of insurance B. premium payments minus cost of insurance plus interest C. premium payments, plus or minus growth or loss in the separate account, plus the cost of insurance D. premium payments, plus or minus growth or loss in the separate account, minus the cost of insurance
B. SLOW DOWN
An agent for a broker-dealer, both of which are registered in the State of Illinois, receives a telephone call from an existing customer who is on a layover in the airport in Atlanta, Georgia. The customer directs the agent to buy 1,000 shares of ABCD stock at the market. Which statement is TRUE? A) In order to accept this order, the agent must be registered in the State of Georgia only B) In order to accept this order, the agent must be registered in the State of Illinois only C) In order to accept this order, the agent must be registered in both the State of Georgia and the State of Illinois D) The agent can accept this order without needing registration in any jurisdiction because it was unsolicited
B. Since the agent and broker-dealer are physically located in Illinois, they must be registered in the State of Illinois. This is an existing customer who is calling from an airport in Georgia. There is no requirement for the agent or the broker-dealer to be registered in Georgia to take this order. If the State of Georgia inquired about this transaction, the agent and broker-dealer could claim the exemption available when an existing customer is temporarily located in another State
The Administrator can require the filing of sales literature related to which of the following transactions? A) An underwriter purchasing the stock of an issuer in a firm commitment underwriting B) A for-profit company issuing securities that are not exchange listed C) An investment company that is making purchases of listed stock in the secondary market D) An offer of bonds made by a State government that guarantees payment of interest and principal
B. The Administrator can require the filing of sales literature, unless the security, or transaction, is exempt. Transactions between an underwriter and an issuer are exempt; secondary market transactions of listed securities are exempt; and municipal securities are exempt. A corporation issuing securities that are not exchange listed is a non-exempt transaction where the securities must be registered, so the Administrator can require the filing of sales literature used in connection with the offer of these securities.
The Administrator is empowered to conduct an investigation: A. only upon the receipt of a complaint B. if it appears that a violation will occur or has occurred C. if the person being investigated is a resident of that State D. if the Securities and Exchange Commission so directs the Administrator
B. The Administrator is empowered, under the Uniform Securities Act, to conduct an investigation if it appears that a violation of the Act has occurred; or is about to occur. The Administrator can investigate anyone within that State; or anyone who has made an offer into that State from anywhere else.
If the Required Rate of Return (RRR) on a security is more than the Internal Rate of Return (IRR) on that security, then the: A. security should be purchased for investment B. security should not be purchased for investment C. security has a positive risk premium D. security has a negative risk premium
B. The RRR (Required Rate of Return) is the minimum return that an investment must offer in order for someone to decide to buy it. Assume that the RRR is 10%. If the security actually offers a return of 8% (the Internal Rate of Return, which is the same as the yield to maturity offered by the investment) then the purchase should not be made because the RRR (minimum required return) exceed the IRR (actual return).
The Uniform Securities Act empowers the State Administrator to conduct an investigation of an investment adviser if the: A) adviser has an office in the State B) act that gave cause to the investigation occurred in the State C) adviser has no office in the State, and the act that gave cause to the investigation occurred in another State D) the adviser has a telephone listing in the State
B. The State Administrator has jurisdiction over any offers of securities or advisory services that occur with the Administrator's State. There is no requirement for a physical presence in the State - if the adviser solicits or does business in the State, then the Administrator has jurisdiction.
A customer buys a 3-year maturity, 6% coupon bond at par. If market interest rates rise to 8%, then the bond's price will fall by: A. 2% B. 5% C. 10% D. 25%
B. The customer bought this 3-year bond at par with a coupon rate of 6%. If market interest rates rise to 8%, then the present value of the bond's cash flows will fall as follows: Year 1: $60 / 1.08 = $55.55 Year 2: $60 / (1.08)2 = $51.435 Year 3: $1060 / (1.08)3 = $841.64 Total Net Present Value = $55.55 + $51.435 + $841.64 = $948.625 The bond will fall in price by $51.375 from $1,000 par, for a fall of 5.1375%.
A customer in the 28% tax bracket has $5,000 of capital losses and $3,000 of capital gains. How much net capital loss is deductible from this year's tax return? A) $0 B) $2,000 C) $3,000 D) $5,000
B. The customer has a capital gain of $3,000 and a capital loss of $5,000, for a net capital loss of $2,000. The entire net $2,000 loss is deductible since it does not exceed the maximum $3,000 per year net capital loss deduction.
A customer has a gain on a long stock position that he wishes to protect. The appropriate order is a: A) buy stop order B) sell stop order C) sell limit order D) market order
B. The customer will "lose" the gain on a long stock position if the market begins to fall. To sell out the position in a falling market, the order must be a sell stop order (placed below the market). To sell out a long position in a rising market the order would be a sell limit order.
An Investment Adviser Representative engages in a policy of placing block trades for securities that he wishes to purchase, which are allocated to both the adviser's proprietary account and the adviser's customers' accounts. Which statement is TRUE? A) This is an unethical business practice under NASAA rules because advisers are not permitted to trade for their own proprietary accounts B) This is permitted if it leads to lower commission costs and higher potential rates of return C) This is an unethical business practice because the adviser is breaching his fiduciary duty to the customer D) This is permitted if the Administrator does not have a rule prohibiting the adviser from engaging in block trading
B. There is no prohibition on an adviser placing block trades for securities in order to lower execution costs. There is also no prohibition with allocating shares purchased between the adviser's proprietary account and customer accounts, as long as the allocation method is fair and reasonable, does not favor the adviser over the customers, and the allocation method is disclosed to the customers. This question only addresses the "lower" cost portion of the rule.
An investment adviser is ready to open an account for a new customer. In the advisory contract, the adviser has included a clause that the customer has 48 hours to rescind the contract. The adviser gives the customer the brochure, takes payment from the customer, but forgets to have the customer sign the contract. Which statement is TRUE? A. Even though the customer did not sign the contract, he or she still has 48 hours to rescind the contract B. Even though the customer did not sign the contract, he or she has 5 business days to rescind the contract Incorrect Answer C. The contract is null and void D. The contract is binding and the customer cannot rescind the contract
B. Under NASAA rules, the brochure is required to be delivered to clients no less than 48 hours prior to entering into a written or verbal contract to provide advisory services. As an alternative to the "2 day free look," the customer can be given the brochure at the time of contract signing, as long as the contract provides for a 5 business day period following signing where the customer can terminate without penalty. In this case, the customer was not given the brochure 48 hours prior to entering into the contract. By giving the adviser a check, the customer has "entered into a contract" to buy the advisory services. So this customer has 5 business days under NASAA rules to rescind the contract.
An 80-year old client lives on his social security payments that total $25,000 per year. 3 years ago, on the advice of the broker, he invested in a technology fund where he lost most of his assets. The remaining balance in his brokerage account is $17,000. The client has annual living expenses of $30,000 and a net worth of $128,000. The customer approaches a new broker to take over management of his account. The representative that receives the account should: A. do nothing B. sell the holding in the account and invest the proceeds in a more conservative fund within the same family of funds C. sell the holding in the account and invest the proceeds in a more conservative fund outside the family of funds D. sell the holding in the account and invest the proceeds in a more conservative fund that has a deferred sales charge
B. better to switch in the same family of funds due to lower sales charge
An investment adviser with $11 million under management has its main office in New York and a branch office in Connecticut. Which statement is TRUE? A) The investment adviser must register in the State of New York only B) The investment adviser must register in both the State of New York and the State of Connecticut C) The investment adviser must register with the SEC only D) The investment adviser must register in both the State of New York and State of Connecticut and must register with the SEC
B. both states where it will solicit or do business
Under the Uniform Securities Act, if the Administrator prohibits an investment adviser from taking custody of customer funds or securities, the investment adviser would be permitted to: A. buy securities for a customer using the investment adviser's monies, and then delay delivery of those securities to the customer B. buy securities for a customer who has given a limited power of attorney to the adviser using monies deposited by that customer to an account established by the adviser specifically for that purpose C. hold customer funds in accounts established and maintained by the adviser that have been segregated and properly identified D. accept a prepaid advisory fee of $500 from the client covering a period of up to 1 year
B. but remember under NASAA rules accepting 500 or more in prepaid fees constitutes taking custody
A fully diversified portfolio eliminates: A. market risk Correct B. non-systematic risk C. both market and non-systematic risk D. neither systematic nor non-systematic risk
B. cannot diversify market risk Non-systematic risk in a portfolio is the risk than can be diversified away. A fully diversified portfolio's price movements will mirror those of the market as a whole. Such a portfolio has a "beta" of 1.00. This portfolio has market risk only, also called "systematic" risk. This is the risk that cannot be diversified away (but one can hedge against a market downturn by buying puts). The portion of a portfolio "beta" that is more than 1.00 is the non-systematic risk component. This is inherent in a portfolio that is not fully diversified. Such a portfolio will rise faster than the overall market during market upswings; and will fall faster than the overall market during market downswings.
All of the following are examples of market manipulation EXCEPT: A. disseminating rumors B. churning C. painting the tape D. wash trades
B. market manipulation has to do with effecting the prices of securities, all of those do that except churning.
Investment advisers are prohibited from doing all of the following EXCEPT: A. Assigning a customer's contract without permission B. Charging a retainer fee C. Charging commissions on trades effected for the client D. Changing partnership management without notifying clients
B. nvestment advisers cannot assign (transfer) an advisory contract without the customer's permission. Charging commissions on trades effected for the client is prohibited since the adviser is compensated based on a percentage of assets under management. However, if the adviser has a separate broker-dealer, the broker-dealer entity can handle the trades and earn the commissions, as long as this conflict of interest is disclosed to the client when the contract is signed. Investment advisers are obligated to notify clients if the management of the investment adviser changes (when the investment adviser is structured as a partnership). There is no prohibition on an investment adviser charging a retainer fee.
The Administrator can subpoena the records of a broker-dealer or agent: A. only after a violation has occurred B. if he suspects that a violation has occurred C. only if written customer complaints are received by the Administrator D. only if criminal charges are being filed against that person
B. suspects
A firm is retained by a company that wishes to make acquisitions of other companies to act as a finder. The finder can be considered to be a broker-dealer: A. under no circumstances B. if it receives compensation contingent on the closing of a deal C. if it receives a flat fee for services rendered D. if it signs a written contract with the company
B."Finders" operate in a grey area, which may, or may not, require registration as a broker-dealer. First of all, if the acquisition transaction only involves the sale of assets, as opposed to the sale of securities, then there is no requirement to be registered as a broker-dealer. Second, if the finder receives a retainer fee or flat compensation, then the finder is not considered to be a broker-dealer. If the finder receives transaction-based compensation, such as compensation contingent of the closing of the deal, the finder can be considered to be a statutory broker-dealer that must register. This question is not clear as to whether the transaction involves the sale of assets or securities, but it always best to go with the choice that is the most restrictive!
An Investment Adviser falls below the minimum net capital required by the State on Monday. The IA must notify the Administrator no later than: A) Tuesday of that week B) Wednesday of that week C) Thursday of that week D) 10 business days after the event
B...
Which of the following is a "non-issuer" transaction? A. The sale of a new issue of bonds by a corporation B. The trade of 100 shares of stock on an exchange floor C. The sale of mutual fund shares to a customer D. The sale of Treasury Bills by the U.S. Government
BB.
An investment generates the following annual returns: Year 1: 7% Year 2: 4% Year 3: 2% Year 4: 10% Year 5: 8% The return of 7% is the:
median= middle number ASCENDING ORDER mode= number that occurs most often r
All of the following are defined as securities under the Uniform Securities Act EXCEPT: A) Warehouse receipts B) Preorganization certificates C) Whole life insurance policies D) Mortgage backed certificates
C
To qualify for the "de-minimis" exemption from registration under the Investment Advisers Act of 1940, an investment adviser is limited to having business communications with: A. a maximum of 5 clients in a 12 month period B. a maximum of 10 clients in a 12 month period C. a maximum of 15 clients in a 12 month period D. institutional investors and accredited investors only
C
Under the Investment Advisers Act of 1940, which statement is TRUE about the acceptance of prepaid advisory fees by an investment adviser? A) The fees must be refunded in full with interest if the contract is cancelled prematurely B) The fees cannot amount to more than 6 months' payment in advance C) Prepaid fees in excess of $1,200 require that the adviser's balance sheet be included in the "Brochure" D) Acceptance of a prepaid fee constitutes taking "custody" of customer funds
C
Which statement is TRUE about a joint account held as "Tenants in Common"? A. Tenants in Common joint account ownership only provides for equal account ownership for each tenant and is typical for a married couple B. If an owner of an account held as Tenants in Common dies, the deceased individual's ownership interest becomes the property of the remaining tenant(s), bypassing the deceased individual's estate and probate C. Each individual's ownership interest in a Tenants in Common account is freely transferable to another person D. The death of an individual owner in a Tenants in Common account terminates the joint account agreement and the remaining tenant(s) must sign a new joint account agreement to keep the account open
C
Required rate of return RRR
minimum return a person requires to make an investment
A hedge clause included in an advisory contract that permits the adviser to transfer the contract to another adviser without needing the customer's approval is: A) permitted under the Uniform Securities Act B) permitted under the Investment Advisers Act of 1940 C) a prohibited practice under NASAA rules D) prohibited unless the transfer is in the best interests of the customer
C.
A new client with no other investment assets has just come into an inheritance of $500,000 of ABCD stock, a blue chip company listed on the NYSE. As the adviser to this customer, your IMMEDIATE concern should be: A. whether the company is a candidate for delisting B. the possibility that the value of ABCD stock may decline sharply C. the lack of diversification of the customer's investment Incorrect Answer D. whether the customer paid any estate tax liability due
C.
A registered representative with a broker-dealer makes recommendations of securities to a customer, and charges a commission on each trade. Which statement is TRUE? A) This person must register with the State as an investment adviser representative B) This person must register with the State as an investment adviser C) This person is excluded from the definition of an investment adviser D) This person is defined as an investment adviser, but is exempt from registration
C -Broker-dealers and their registered representatives are excluded from the definition of an investment adviser as long as they do not charge separately for advisory services. Thus, a broker-dealer can charge a commission on each recommended trade and not be defined as an investment adviser that must register in the State (note however, that it must still register as a broker-dealer in that State).
A representative at a member firm is approached by a person outside that firm to sell promissory notes through that member's branch office. Which statement is TRUE? A) The representative is prohibited from selling the promissory notes B) The representative may only sell the promissory notes after receiving verbal permission of the member firm C) The representative may only sell the promissory notes after receiving written permission of the member firm D) The representative may sell the promissory notes without restriction
C If a representative were to sell these promissory notes offered by an outside individual, then the rep would be "selling away" from his firm - that is selling securities to a customer that are not being offered by that firm. This is a violation of NASAA rules (since the customer thinks he is buying the securities from the broker-dealer and not from some other person!). The only way that a representative can "sell away" is if the representative asks the firm's permission in writing; receives written permission of the firm; and the firm records the transaction on its books and records and supervises it as if it were its own transaction (like that would ever happen!).
A broker-dealer tells a customer that it is willing to buy a stock at $20 and is willing to sell that same stock at $21. This is an example of: A. the spread B. the inside market C. a bid-ask quote D. a representative quote
C.
A healthy husband and wife, ages 45 and 40 respectively, wish to start funding for retirement at age 65. What is the most appropriate time horizon for the portfolio? A. 5 years B. 10 years C. 35 years D. 65 years
C.
An agent of a broker-dealer has a customer that is a loan officer at ACME Savings and Loan. The agent is purchasing his first house and needs to get a mortgage. The agent only has 10% for a down payment and ACME Savings and Loan only gives mortgages with a 20% down payment. The loan officer wants to make sure that the loan is approved and offers to lend the agent the 10% extra needed for the down payment as a personal loan, as long as the agent agrees in writing that the loan will be repaid with interest within 10 years, plus if the house is sold during this time, the loan officer will get 10% of any gain on the house. This agreement is: A) permitted because the loan officer is sharing in profits if the house is sold in an amount that is proportional to the capital that he committed for the purchase of the house B) permitted because the loan officer is an existing customer of the agent C) prohibited because the agent is borrowing money from the customer D) permitted because the customer is a loan officer of a bank
C.
An investment adviser is recommending that a customer buy a security that the adviser will sell to the customer from its own portfolio. Which statement is TRUE? A. This is a "principal transaction" and is prohibited B. This is an "agency cross transaction" and is prohibited C. This is a "principal transaction" and is permitted only if the customer is informed of the circumstances and consents to the transaction D. This is an "agency cross transaction" and is permitted only if the customer is informed of the circumstances and consents to the transaction
C.
An investment adviser with no place of business in the State is exempt from registration if it renders advice solely to employee benefit plans with assets of at least: A. $100,000 B. $500,000 C. $1,000,000 D. $5,000,000
C.
Money purchase retirement plans limit the maximum annual contribution in 2015 to: A) $18,000 B) $5,500 plus an extra $1,000 catch up contribution for individuals age 50 or older C) 25% of income, capped at a maximum of $53,000 D) $2,000 per year per individual
C.
Tactical asset allocation requires that: A) a laddered equity portfolio be created B) a buy and hold strategy be employed C) more frequent trading be used to rebalance the portfolio D) neutral cash positions are dominant in the portfolio
C.
The method for computing return as shown in a mutual fund performance chart is: A) Internal Rate of Return B) Dollar Weighted Average Return C) Time Weighted Average Return D) Expected Rate of Return
C.
Under the Investment Advisers Act of 1940, which statement is TRUE about the acceptance of prepaid advisory fees by an investment adviser? A. The fees must be refunded in full with interest if the contract is cancelled prematurely B. The fees cannot amount to more than 6 months' payment in advance C. Prepaid fees in excess of $1,200 require that the adviser's balance sheet be included in the "Brochure" D. Acceptance of a prepaid fee constitutes taking "custody" of customer funds
C.
Which of the following investments has a known long-term internal rate of return? A) Low grade 7% corporate bond B) Investment grade 5% municipal bond C) Treasury STRIP D) GNMA Pass-Through Certificate
C.
Which statement is TRUE? A. The rate of return on an investment earned over a 9 month time frame would be more than the annualized rate of return on that investment B. The rate of return on an investment earned over a 2 year time frame would be less than the annualized rate of return on that investment C. The rate of return on an investment earned over a 3 month time frame would be less than the annualized rate of return on that investment D. The rate of return on an investment earned over a 3 year time frame would be less than the annualized rate of return on that investment
C.
A customer sells short 100 shares of ABC stock at 38 and buys 1 ABC Mar 40 Call @ 5. The maximum potential gain is: A. $3,300 B. $3,500 C. $4,200 D. unlimited
Cost of stock - premium
Who does NOT have to be registered in the State as an agent of a broker-dealer? A. A secretary that answers the phone and who takes orders B. A trading assistant who only accepts unsolicited customer orders C. A director of the company that is not involved in sales Incorrect Answer D. An officer of the company that oversees the firm's marketing
C. An agent is someone who is engaged in effecting securities transactions with the public. It makes no difference if the transaction is solicited or unsolicited. Thus, the individual in both Choices A and B must be registered. A director of the broker-dealer that is not involved in sales is not an agent and is not required to be registered in the State as such. Note, however, that this individual is still named as an officer on the firm's State registration. An officer or director who oversees marketing is engaged in selling securities to the public and must be registered as an agent in the State.
A Registered Investment Adviser has a retired client who wishes to put aside funds for the purchase of a car 5 years from now. Preservation of capital is important to this client. The RIA should recommend investments in: I Money market funds II Bank certificates of deposit III 5 Year Treasury Bonds IV 30 Year Treasury STRIPS
I II III
statute of limitations for civil suits
must be brought no later than 3 years after violation occured, no later than 2 years from discovery
Which of the following information would be found in a registration statement for a security that is going to be registered by qualification in a State? I Current equity and debt capital of the issuer II Description of issuer's business, product lines and competitive environment III Use of proceeds of the offering IV Offering terms
Current balance sheet and income statement; Business description; Use of proceeds of offering; Offering Terms; Legal Opinion; Accountant's Opinion.
The annual renewal filed with the SEC by an investment adviser is an amendment to: A. Form ADV Part 1 only B. Form ADV Part 2 only C. Form ADV Part 1 and Part 2 if there are any changes to the brochure D. Form ADV-W
C. form ADV Parts 1 and 2 (the "Brochure" - Part 2A - and "Brochure Supplement" - Part 2B) are filed for an investment adviser's initial registration with the SEC. The annual renewal registration is accomplished by filing an electronic amendment to Form ADV Part 1 and also Part 2 (the Brochure) if there are any changes. Form ADV-W is filed to withdraw from registration
An investment adviser has been in business for the past 10 years. During this time period, the adviser has produced average annual returns of 28% while the Standard and Poor's Index has increased by only 15% over this period. The adviser currently charges an annual fee equal to 3% of assets and wishes to raise it to 5% of assets. This action is: A. prohibited because annual advisory fees can only be increased at the same rate as general inflation as measured by the Consumer Price Index B. prohibited because advisory fees cannot be based on account performance C. permitted only if other advisers that provide similar services to customers are charging a 5% annual fee D. permitted without restriction because advisory fees are set by free market forces
C. NASAA requires that advisory fees be comparable to those charged by other advisers that provide similar services
If an investment adviser acquires a 5% or greater holding in a publicly held company, it MUST file a 13d report: A) only if the purchases were for its proprietary account and it intends to exercise control over that issuer B) only if the purchases were for its customer accounts and it intends to exercise control over that issuer C) if the purchases were for either its proprietary account or its customer accounts and it intends to exercise control over that issuer D) if the purchases were for either its proprietary account or its customer accounts and it intends to remain a passive investor
C. A 13d filing is required with the SEC if any one person (or an entity controlled by that person) acquires a 5% or greater holding in a publicly held company with the intention of exercising control (e.g., kicking out that company's existing management). The filing must be made within 10 business days of crossing the 5% threshold. An adviser "controls" purchases made in both its proprietary and customer accounts, so these are aggregated when determining if the 5% threshold is reached. 13G if doing above but want to remain passive
Which of the following persons would be defined as an "agent" under the Uniform Securities Act? A. April Showers, an administrative assistant in the Treasurer's Department at Rainwear Industries, who sells Rainwear common stock to Rainwear employees under Rainwear's ESOP B. John Q. Public, a municipal employee that accepts tender offers from the public for new issues of general obligation bonds being sold by New York City Correct C. Marvin Mercenary, the President of Capital Industries, who sells Capital Industries common stock to the public D. Ima Pigg, the Controller of PorkPie Products, who negotiates and sells a private placement of PorkPie stock to institutional investors
C. An "agent" is an individual who represents a broker-dealer or issuer in effecting securities transactions. Under this definition, the President of Capital Industries offering common stock to the public is defined as an agent. The Act specifically EXCLUDES from the definition of an agent, any individual who represents issuers in trading specified exempt securities. Thus, the employee of New York City offering its bonds is excluded from the definition. Also, the Act excludes from the definition of an "agent," any individual who represents an issuer offering securities issued in connection with Savings, Pension, Profit Sharing Plans, and Employee Stock Option Plans (ESOPs). The Act also EXCLUDES from the definition of an "agent," those individuals who represent issuers in "exempt transactions." These individuals do not have to be registered in the State. Generally, exempt transactions are trades that do not involve the public. Transactions with financial or institutional investors, as defined under the Act (including banks, financial institutions, trusts, insurance companies, investment companies, underwriters, and pension plans) are exempt because the investors are sophisticated, and are not deemed to require legislative protection.
An investment adviser has a fee structure that states: Assets Under Management Annual Fee 0 - $1,000,000 2.00% >$1,000,000 - $5,000,000 1.50% >$5,000,000 - $10,000,000 1.00% >$10,000,000 Negotiable With Client Which statement is TRUE about such an arrangement? A. This is prohibited under NASAA rules because it favor customers with more assets under management B. This is prohibited because advisers cannot have negotiable fees C. This is permitted as long as the negotiated fee is less than 1% D. This is permitted without restriction
C. An adviser cannot charge "unreasonable" fees. A fee structure that reduces the fee percentage for more assets under management is permitted and is reasonable. The adviser is also permitted to have negotiable fees, as long as they are reasonable and are consistently applied. Thus, the adviser could negotiate a fee lower than 1% for a customer that has $15,000,000 of assets to invest (it could not be more than 1%, since that would be charging the customer more than other customers that have a lower investment amount with the adviser.)
Two agents work at the same broker-dealer. One of them has just resigned to go into his family's pizza business. The two agents verbally agree that all of the departing agent's clients will go to the agent that remains at the firm. The agent staying at the firm has agreed to pay 25% of the commissions from these clients to the departed agent for the next 6 months. The branch manager has been told of this arrangement and has agreed to it. Which statement is TRUE? A. The arrangement is acceptable since all parties involved have full knowledge and are in agreement as to the terms B. This arrangement is acceptable because the branch manager has approved C. The arrangement is not acceptable because it is unethical D. This arrangement is not acceptable because it is not documented in writing
C. An agent of a broker-dealer must be registered to accept commissions. Once an agent leaves a broker-dealer, unless he or she affiliates with another broker-dealer, his or her registration is terminated. Unregistered individuals cannot receive commissions and cannot share in commissions. This agent is resigning to work in the family pizza parlor and will not be registered - so commissions cannot be paid to this person.
Acco Fund (a closed-end management company) has a current net asset value of $10.82 per share and has an ask price of $10.54. Which statement is TRUE regarding the relationship between Acco Fund's net asset value and ask price per share? A) The ask price is lower than the net asset value because fund redemptions are exceeding purchases B) The ask price is lower than the net asset value because of the redemption fee the fund charges its investors C) The ask price is lower than the net asset value because sellers exceed buyers on the exchange floor D) The ask price is lower than the net asset value because buyers exceed sellers on the exchange floor
C. Closed-end fund shares trade in the market like any other stock. They can trade at a discount to net asset value when investors become disenchanted with the fund. This will occur if the company gives an inferior return. In this case, sellers will exceed buyers. This pushes the market price lower than the net asset value. A similar thing happens to regular company stocks when they sell below book value.
A 4 1/2% $1,000 par bond is selling in the market for $900. What is the bond's current yield? A. 4 1/2% B. Between 4 1/2% and 5% C. 5% D. Over 5%
C. Current yield is: Annual Income / Market Price. Since this bond has a coupon rate of 4 1/2%, the annual income is 4.50% x $1,000 par = $45. Since the customer is paying $900 for the bond, the current yield is: $45 / $900 = 5%.
A 50-year old man becomes totally disabled. He wishes to take a lump sum distribution from his Individual Retirement Account to pay for medical and living expenses. Which statement is TRUE? A. The distribution is not subject to any tax B. The distribution is subject solely to a penalty tax of 10% C. The distribution is subject solely to regular income tax D. The distribution is subject to regular income tax plus a 10% penalty tax
C. Distributions from tax qualified pension plans such as IRAs, prior to age 59 1/2, are subject to regular tax plus a 10% penalty unless the person dies or is disabled, or to pay qualified higher education expenses or first time home purchase expenses. If a person is disabled, withdrawals prior to age 59 1/2 are subject to regular income tax; but are not subject to the 10% penalty tax.
Under the Uniform Securities Act, if an investment adviser representative wishes to offer advisory services in a neighboring State: A. the investment adviser must be registered in the neighboring State B. the investment adviser representative must be registered in the neighboring State C. both the investment adviser and the investment adviser representative must be registered in the neighboring State D. neither the investment adviser nor the investment adviser representative must be registered in the neighboring State
C. If an investment adviser representative wishes to offer advisory services in a neighboring State, both the investment adviser (the firm) and the representative must be registered in the neighboring State. (This question does not address the possibility that the IA is a Federal covered adviser, in which case, the IA would not register in the State - rather it would file notice in the State and the IARs of the Federal covered adviser would still be required to register in the State.)
Which of the following would NOT be considered to be fraudulent under the Uniform Securities Act? A) A seller of a security misstates a material fact about that issue to the potential buyer, but a trade does not result B) A seller of a security misstates a material fact about that issue to the potential buyer, and a trade results C) An uninterested third party, in connection with the sale of a security, misstates a material fact to the potential buyer, but a trade does not result D) An interested third party, in connection with the sale of a security, misstates a material fact to the potential buyer, and a trade results
C. Misstatements of material fact, made in connection with an offer to sell a security, are fraud. It makes no difference if a trade resulted from the offer. An uninterested third party has no financial incentive to make a misstatement of material fact in connection with the sale of a security, so this is not fraudulent. However, an "interested" third party does have a financial incentive to sell that security, so a misstatement of material fact made by that person in connection with the offer or sale of that security is fraudulent.
All of the following are included in the Form ADV filed with the SEC under the Investment Advisers Act of 1940 EXCEPT a list of the: A) officers of the advisory firm B) shareholders of the advisory firm C) customers of the advisory firm D) States in which the advisory firm is registered
C. The Form ADV Part 1 filed with the SEC includes the officers of the firm, the States in which the firm is registered, and if the firm is a partnership, a schedule of the partners' names is included; while if the firm is a stock company (privately held) a schedule of the shareholders in included. There is no listing of the customers of the adviser in the Form ADV. Note, however, the Part 2A, which constitutes the "Brochure" does include the type and approximate number of customers and the approximate value of assets under management.
A Federal Covered Adviser registered with the SEC holds a meeting with its employees and verbally warns them about the prohibited practice of trading ahead of large customer orders that are likely to have a market impact. The firm has not yet included this prohibition in its policies and procedures manual, but intends to do so in the near future. Which statement is TRUE? A. There is no violation of the Investment Advisers Act of 1940 "insider trading" rules because the employees participated in the meeting B. There is no violation of the Investment Advisers Act of 1940 because the firm intends to include "trading ahead" restrictions in the next version of its policies and procedures manual C. The Investment Advisers Act of 1940 has been violated because the firm did not have written policies and procedures covering "front running" by its employees D. There is no violation of the Investment Advisers Act of 1940 because "front running" is not covered by the Act
C. The Investment Advisers Act of 1940 requires that advisers have a written Code of Ethics that covers illegal practices on the part of its employees. The employees must sign that they received a copy of the Code. So, clearly, a verbal warning is not enough - the advisory firm must document the policy in writing.
All of the following would be considered to be "insiders" if they place a trade in a company's stock EXCEPT a(n): A. spouse of an officer of the company B. step-child of an officer of the company C. aunt of an officer of the company D. child of an officer of the company
C. The Securities Exchange Act of 1934 only defines a statutory insider as an "officer, director or 10% shareholder" of the company. In various court cases, the courts have extended the definition to anyone that is "controlled" or "influenced" by the insider. This would include the spouse of the insider; and the insider's children, unless they could demonstrate that they traded outside of that person's control. Of the choices, the aunt is the one that is farthest away from the insider and thus, the one least likely to be "controlled."
Customer privacy rules allow the disclosure of a specific customer's account information: A. under no circumstances B. to any third party that makes the request in writing C. to a third party as necessary to complete a transaction requested by that customer D. to any government agency that makes a request for information
C. The customer privacy rules do not permit firms to disclose specific customer account information to third parties - unless the customer authorizes this. Note that "aggregated" information does not fall under this policy, such as a firm disclosing average customer account balances. Information that must be disclosed by the firm to a third party in order to effect a transaction ordered by the customer, or to maintain or service a customer account, does not fall under the policy. Also, any request for information made by a court of law does not fall under the policy; nor do information requests made by regulators such as the SEC or FINRA. Choice D is incorrect because "any government agency" cannot request customer account information.
A client that is 80 years old comes into the agent's office and tells the agent that he must undergo a gall bladder operation. The client is worried about the amount of time that will be spent in the hospital to recover, and at his advanced age, is also worried about the chances of complications and possible death. The client has physical stock certificates in his home safe and asks the agent for assistance. The agent should: A. Drive the 80 year old customer to his house, pick up the securities, bring them back to the investment adviser's office and place them in the investment adviser's desk drawer for safekeeping B. Go to the customer's home and retrieve the securities and put them into a lock box at a local bank under the client's name C. Drive the 80 year old customer to his house, have the client retrieve the securities and put them into a lock box at a local bank under the client's name D. Refer the customer to the local police for assistance
C. The physical certificates cannot be taken by the representative, since then the firm would be deemed to be taking custody of the securities and would have to comply with all of the custody rules (safekeeping by a qualified independent custodian; quarterly account statements must be sent to customers; independent annual audit of the custodian, etc.). It would be acceptable for the representative to drive the customer to his home; have the customer retrieve the securities; and then drive the customer to a bank where the customer places them in a safe deposit box. In this scenario, the adviser is never taking custody. Choice D is also OK, but Choice C is the better answer.
A client buys a TIPS (Treasury Inflation Protection security) at 100. 4 years later, the security is sold at 117. During the 4-year time period, inflation averaged 3% per year. The customer's annual return on investment was: A) 1.00% B) 1.25% C) 4.00% D) 4.25%
C. The security was purchased at 100 and sold 4 years later at 117. The way to deal with this question is to "plug in" each of the choices given as interest rates and compound the amount for 4 years. 100 x 1.04 x 1.04 x 1.04 x 1.04 = 116.99 = 117 rounded. The inflation rate given in the question is not relevant.
Which statement is TRUE? A. All securities sold through a broker-dealer in a State must be registered in the state B. An agent may maintain his registration without being affiliated with a broker-dealer C. An agent's registration can never be revoked without an opportunity for a hearing D. A broker-dealer cannot also be registered as an investment adviser at the same time
C. The true statement is that a registration can never be revoked without the opportunity for a hearing. It is not true that all securities sold in a State must be registered - no registration is required if the securities are exempt, federal covered, or if they are sold in an exempt transaction. An agent must be affiliated with a broker-dealer to maintain his registration. If he leaves the broker-dealer and does not affiliate with another broker-dealer, the registration is terminated. A firm is permitted to register as both a broker-dealer and an investment adviser.
A Registered Investment Adviser has a client who has a joint account with his spouse. The client telephones and informs the RIA that he is secretly getting a divorce from his spouse, but that he wishes to continue to use the RIA's services. The RIA should: A. notify the spouse, in writing, that the RIA will no longer be providing services to her and suggest the name of another adviser B. explain to the client that the joint account must be closed Correct Answer C. open an individual account for the client D. freeze the account until the proper court papers are received
C. This question is pretty judgmental. Since the client is getting a divorce from his wife, with whom he has a joint account with the adviser, the division of the assets in the account will be settled in the divorce proceeding. The adviser should not take any action regarding the joint account until there is a resolution of the divorce issue; however, there is nothing stopping the adviser from opening an individual account for the client.
A Registered Investment Adviser has a client with the following stock positions: Cost basis Current market value ABC $8,000 $20,000 DEF $12,000 $30,000 PDQ $24,000 $30,000 XYZ $20,000 $40,000 All of these positions have been held for over 1 year. The customer needs to liquidate $20,000 of securities and wishes to pay the lowest capital gains tax. What should the customer do? A) Sell $20,000 of ABC B) Sell $20,000 of DEF C) Sell $20,000 of PDQ D) Sell $20,000 of XYZ
C. To incur the lowest capital gains tax, the customer must sell $20,000 of a position that has appreciated the least in percentage terms. If $20,000 of ABC is sold (the entire position); the cost basis is $8,000; and the taxable gain is $12,000. If $20,000 of DEF is sold (2/3 of the position); the cost basis is $8,000; and the taxable gain is $12,000. If $20,000 of PDQ is sold (2/3 of the position); the cost basis is $16,000; and the taxable gain is $4,000. Finally, if $20,000 of XYZ is sold (50% of the position); the cost basis is $10,000; and the taxable gain is $10,000. Thus, the sale of PDQ will result in the lowest tax bill.
Under Regulation S-P, customers must be given a privacy notice: A. prior to each recommendation B. prior to each trade execution C. prior to the first transaction D. with each statement of account
C. (at or prior) privacy notice must be presented to the customer at least annually thereafter.
Under the Investment Advisers Act of 1940, a person is exempt from registration as an investment adviser if he or she renders advice about securities to no more than: A) 5 persons within a 12 month period B) 10 persons within a 12 month period C) 15 persons within a 12 month period D) 25 persons within a 12 month period
C. 15 for FEDERAL LAW
An investment advisory contract can include a provision that allows: A) the RIA to assign the contract to another RIA without notification to the client B) payment of part of the appreciation of the account under management to the adviser as a fee C) payment of the adviser's management fees on a quarterly basis by direct deduction from the client's account D) the RIA to take custody of client funds without making disclosures to any other party
C. = taking custody but is the only choice allowed here
Which statement is TRUE about the use of index option strategies by managers of pension plans subject to ERISA requirements? A. Index option trades are permitted without restriction B. Index option trades are permitted only if the options are broad based and exchange traded C. Index option trades are permitted only if such transactions conform with the objectives stated in the plan document D. Index option trades are prohibited under ERISA legislation
C. A customer would sell put contracts because: A. the customer is bullish on the underlying security B. the customer is bearish on the underlying security C. the customer wishes to generate ordinary income D. the customer wishes to defer taxation of gains on the underlying stock
A "market maker", as defined under the Securities Exchange Act of 1934: A. effects securities trades for the account of others on an agency basis B. effects securities trades for the account of others on a principal basis C. effects trades with others out of his or her own account D. effects trades on a discretionary basis for the account of customers
C. A market maker is a firm that sells securities out of its own account or buys securities into its own account. Broker-dealers effect trades for the account of customers. Broker-dealers can effect trades either on an agency basis, where the firm acts as a middleman, charging a commission to the customer; or on a principal basis, where the firm sells a security from its inventory to the customer with a markup.
A bond is rated BBB by Standard and Poor's. The bond is: A) Highest Quality Investment Grade B) High Quality Investment Grade C) Lowest Quality Investment Grade D) Highest Level Speculative Grade
C. C,
Which statement is TRUE about re-registration of broker-dealers in the State? A) Broker-dealers are not required to re-register in the State B) Broker-dealers must re-register in the State annually, based upon their fiscal year end C) Broker-dealers must re-register in the State annually at calendar year end D) Broker-dealers must re-register in the State bi-annually at calendar year end
C. Calendar not fiscal
All of the following information is included in a (standardized) commodities futures contract EXCEPT the: A) exchange on which the contract is traded B) quantity of the commodity C) price of the commodity D) delivery date(s) of the commodity
C. Commodities futures contracts are "standardized," which makes them easier to trade. Each exchange has its own contract for a standard size (quantity) and quality of the commodity and there are standardized future delivery dates for the underlying commodity, if the contract is not closed by trading as of that date. What is not standardized is the price of the contract - this is determined between buyer and seller on the floor of the exchange.
A customer has placed an order to buy 1,000 shares of ABC stock at the closing market price. In order to get the customer a lower execution price, the agent places an order to sell 100,000 shares of ABC at the end of the day. This is known as: A) Front running B) Block trading C) Marking the close D) Unauthorized trading
C. Effecting securities transactions at the close of the market with the intent of manipulating the closing price is a prohibited practice known as "marking-the-close."
Under the Uniform Securities Act, all of the following transactions are exempt EXCEPT the sale of corporate bonds to a(n): A. savings and loan B. investment company C. customer in a solicited trade D. customer in an unsolicited trade
C. Exempt transactions under the Uniform Securities Act include trades of non-exempt securities (corporate bonds are non-exempt) with financial or institutional investors (such as Savings and Loans and Investment Companies). Unsolicited transactions are also exempt under the Act. Solicited trades, however, are non-exempt. Also remember that this exemption only applies to the registration of the securities involved. The agent must be registered (unless that agent qualifies for an exemption or exclusion), regardless of whether the securities involved are exempt or the transaction is exempt.
The Specialist (Designated Market Maker) on the floor of a stock exchange does all of the following EXCEPT: A. act as an auctioneer in the designated security when necessary to maintain an orderly market B. act as the buyer of last resort when no one else wants to buy on the floor and as the seller of last resort when no one else wants to sell C. provide general market commentary during the trading day for the designated security Incorrect Answer D. match orders of buyers and sellers that are routed to the exchange floor
C. do everything else mentioned except provide commentry
An Equity Indexed Annuity tied to the Standard and Poor's 500 Index is sold with a participation rate of 70%, a 10% cap and a 3% floor. In a year when the S&P 500 Index increases by 2%, the principal will be credited with a: A. 1.40% increase B. 2.00% increase C. 3.00% increase D. 10.00% increase
C. Features of EIAs are a "participation rate" along with a cap (maximum) interest rate and a floor (minimum) interest rate. While some contracts have a participation rate of 100%, most have a participation rate of somewhere between 70%-90%. In this example, the S&P 500 index increased by 2% this year, and with a 70% participation, 1.40% would be credited to the account. However, because of the 3% floor, this amount will be credited. The 10% cap is irrelevant here.
Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, all of the following are unethical business practices EXCEPT: A. extending credit to customers in excess of Federal Reserve or industry rules B. charging an excessive commission or mark-up to a customer C. charging a customer for clerical services performed D. commingling customer securities with an agent's securities
C. Firms are allowed to charge customers for clerical services such as safekeeping of securities. They are prohibited from lending money to customers in excess of legal limits; from charging excessive mark-ups to customers; and from commingling customer securities with an agent's securities.
What is the trading characteristic of a Fixed UIT? A. They trade on exchanges like any other stock B. They are securities which are redeemable with the sponsor C. The sponsor makes an OTC market in trust units D. The securities are illiquid and cannot be traded
C. Fixed Unit Investment Trusts are investment company securities that are initially sold with a prospectus at the POP. Thereafter, the sponsor makes a market in trust units, and will buy back trust units from investors that wish to get out of them. The sponsor will then resell these "used" trust units for their remaining value to other investors. Also note that in the prospectus, the wording covering this typically goes "the sponsor currently makes a market in trust units and intends to continue making a market in trust units, but is under no obligation to make a market in trust units."
A growth investor would consider a company's: A. Price / Earnings ratio B. Price / Book Value ratio C. Stock price appreciation rate D. Market share
C. Growth investors select investments based simply on growth in earnings or growth in market price; on the assumption that these will always be the best performing investments. Value investors invest in undervalued companies - as measured by low Price/Earnings ratios and low Price/Book Value ratios - that have good market prospects. Thus, they also consider product line, market share, management,
A company has quarterly earnings of $2.00 per share. At the end of the year, it retained $2.00 per share. The company's dividend payout ratio is: A. 25% B. 50% C. 75% D. 100%
C. If quarterly earnings were $2 per share, then annual earnings = $8. Since $2 per share was retained, then $6 was paid as dividends. The dividend payout ratio is $6 / $8 = 75%.
An investment adviser personally owns 10,000 shares of ABC stock. The investment adviser believes that ABC Corp. would be a good investment for one of his customers and transfers his ABC Corp. stock to that customer at the current market price. This action is: A) an exempt transaction under the Uniform Securities Act B) permitted since the adviser believes that it is in the best interests of the client C) an unethical business practice unless the conflict of interest was disclosed in advance to the client D) an unethical business practice because all securities sold to customers must be purchased in the public market
C. It is an unethical business practice for an investment adviser to sell the same security that he or she is recommending that the customer buy (or vice-versa). If the stock is such a good investment, why would the adviser be selling it? To do so, the conflict of interest must be disclosed in advance to the customer.
An IAR has been retained to manage the brokerage account of an estate. When examining the account statement, the IAR sees the following holdings: $9,000,000 ABC Corp. AA-rated long term bonds $1,000,000 XYZ Money Market Fund Over past year, the ABC bond position has appreciated by 30% due to falling interest rates. The IAR notes that the yield curve has steepened its positive slope and believes that the Federal Reserve will start tightening credit to reduce the risk of inflation. The BEST action for the IAR to take is to: A) do nothing because the account assets must be distributed to the heirs within 9 months B) sell the appreciated bond position and reinvest the proceeds in a growth mutual fund C) sell the appreciated bond position and reinvest the proceeds in the money market fund D) either hold or sell the appreciated bond position using the prudent investor rule as a guideline
C. MOST CONSERVATIVE One of the advantages built into estate taxes is that the assets are valued at market value as of date of death, and if there was any asset appreciation, this is not taxed as capital gains (this is called a "stepped up" basis). The goal of the IAR is to maximize investment returns using a time horizon of a maximum of 9 months (which is when estate tax is due). Because the IAR believes that interest rates will start rising, he or she should sell the appreciated long-term bond position (it has risen a lot!), locking in the gain without any capital gains tax due. Choice B is not good, because if the Fed tightens credit, then the equities market is likely to perform poorly. Choice D seems good and it also mentions "prudent man" - but the fact is that the greatly appreciated long-term bond position should not be held if the IAR believes that interest rates are going to rise. If the position were to be held untouched, it could lose a lot of its value in a falling market, and this is hardly the action that a "prudent man" would take.
Which investment offers the greatest protection against purchasing power risk? A) Long term U.S. government bonds B) Long term zero-coupon bonds C) Real estate investments D) Investment grade preferred stock
C. Of the choices given, real estate offers the best protection against purchasing power risk (inflation risk). When there is inflation, the prices of real assets tend to inflate as well, hence they give inflation protection.
An investment adviser has 3 managing partners and 3 investment adviser representatives. All of the partners have completed the Certified Financial Planner (CFP) program and received the designation. The 3 IARs have been enrolled in a CFP preparation course and are scheduled to take the next CFP exam. The IA publishes an advertisement that states: "All of our partners are Certified Financial Planners." This advertisement is: A. fraudulent and misleading B. unethical because an advertisement cannot include the qualifications of the firm's principals C. permitted since it is true D. permitted only after the IARs pass their CFP exams
C. Since the 3 partners of the firm all have their CFPs, this is a true statement and is not misleading. READ THE QUESTION SLOWLY
The definition of Net Present Value of an investment is: A. The sum of annual cash flows discounted by the cost of capital B. The sum of annual cash flows compounded by the cost of capital C. The sum of annual cash flows discounted by the cost of capital minus initial investment D. The sum of annual cash flows compounded by the cost of capital minus initial investment
C. Sum of annual cash flows discounted by cost of capital, minus original investment
Which of the following would NOT be included in short term emergency sources of cash? A. Credit card advances B. Margin loans from a broker-dealer C. Cash value of term life insurance D. Home equity line of credit
C. TERM HAS NO CASH VALUE
An individual that has not reached retirement age that has an IRA account dies, splitting the estate equally between his wife and his daughter. The wife has a 20-year life expectancy and the daughter has a 40-year life expectancy. What is the maximum period of time over which the assets held in the IRA can be distributed to the beneficiaries? A. 1 year B. 5 years C. 20 years D. 40 years
C. The IRS requires that when an IRA account is left to a beneficiary, as long as distributions have not commenced, the payout from the account must be made based on the life of the "designated beneficiary". This is the beneficiary with the shortest expected life; or alternatively, the distribution can be made over a 5-year period. Since this question asks for the longest period of time for the distribution, this would be 20 years - the life of the wife - who has a shorter expected life than the daughter.
Which of the following persons is EXCLUDED from the definition of a broker-dealer under the Uniform Securities Act? A. A person with no place of business in the State who solely effects exempt transactions for customers that reside in the State B. A person with no place of business in the State who solely effects transactions in federal covered securities in the State C. A person with no place of business in the State that effects underwriting transactions with other broker-dealers in the State D. A person with no place of business in the State who only effects securities transactions with accredited investors in the State
C. The Uniform Securities Act excludes from the definition of a broker-dealer, any person who has no place of business in the State and who transacts business exclusively with: issuers of securities involved in the transaction; or other broker-dealers; or banks, savings institutions, trust companies, insurance companies, investment companies, or pension plans. Basically, this provision states that an "out-of-state" broker-dealer that is not dealing with the public, will not have to register in the State. Choices A and B are broker-dealers that are dealing in either exempt transactions or federal covered securities. These are not excluded from the definition, since they can be dealing with the general public. Choice D is a broker-dealer that is only dealing with accredited investors (an individual with either $200,000 annual income or $1,000,000 net worth under Federal law). These persons are also considered to be the "public" - since these dollar limits are not that high. The broker-dealer with no place of business in the State that only deals with other broker-dealers in the State clearly meets the exclusion.
A hedge fund is a: A. management company as defined under the Investment Company Act of 1940 that is only open to accredited investors B. management company that has an objective of limiting risk by hedging its portfolio positions with derivatives C. private investment fund for sophisticated, accredited, investors D. private investment fund that can only invest in privately held companies
C. The best answer is C. A hedge fund is a private investment fund that uses sophisticated investment strategies and leverage to enhance returns but also takes on higher levels of risk. Hedge funds are typically limited to 99 investors so they do not have to register as investment companies under the Investment Company Act of 1940 (which states that registered investment companies are those that have at least 100 investors).
Three individuals wish to open a joint account as "tenants in common". If one of the individuals dies, which statement is TRUE? A. The account is liquidated and the proceeds divided into 3 equal parts, shared among the 2 survivors and the decedent's estate B. Trading must be halted in the account until the executor is named as the replacement for the decedent C. The 2 survivors continue as co-tenants in the account, along with the estate of the decedent D. The 2 survivors remain as joint tenants in the account; with the estate opening a separate account representing its interest
C. The best answer is C. When a joint account is opened as "tenants in common," each tenant specifies a percentage ownership interest. If one of the tenants dies, his share of the account belongs to his estate, and the estate assumes the position that the deceased person had in the account. The executor of the estate must present the proper papers to the brokerage firm before it is permitted to assume this position. There is no requirement to liquidate the account; nor to stop trading in the account, since each of the joint owners is separately authorized to trade that account.
Under the Prudent Investor Act, a fiduciary is: A. not permitted to delegate investment authority over trust assets B. obligated to make investments in securities that are rated "BBB" or better Correct C. obligated to maximize overall portfolio return consistent with the level of risk assumed D. required to register with the Administrator in the State where the trust is formed
C. The concept is that modern portfolio theory can be used to diversify assets and to achieve a greater return that justifies any extra "risk" assumed by the strategy - as long as the strategy is consistent with the investment objectives and needs of the beneficiaries. The fiduciary is judged by overall portfolio performance - not by the performance of each single investment. Since a higher level of expertise may be needed to manage trust assets in this manner, the Act allows the fiduciary to contract with an outside investment adviser to provide asset management. There is no requirement for the trust to be registered with the State Administrator - this is only required for broker-dealers, investment advisers, and their agents.
Donna Dixon posts a website offering to provide financial plans for individuals that complete an on-line questionnaire and submit it to her. For this, she charges a fee of $150 per plan. She receives responses from 32 individuals, receiving 8 responses from individuals who reside in 4 different States. Which statement is TRUE? A. Donna is not defined as an investment adviser because the compensation received per client is low enough to qualify for a "de minimis" exemption B. Donna must register with the SEC as a federal covered adviser C. Donna is defined as an investment adviser and is required to register in each State D. Donna is not defined as an investment adviser because she does not meet with clients
C. The de minimis exemption applies not to the fee received per client, but rather to advisers with no office in a State who solicit no more than 5 new clients in the State. Since she solicited 8 clients in each State, this will not work. She must register in each of the 4 States. She could not be a federal covered adviser because she is not doing business in 15 or more States and must also have at least $25 million of assets under management.
In 2015, a person gives a $100,000 gift to a neighbor. How much of the gift is taxable? A. 0 B. $14,000 C. $86,000 D. $100,000
C. first 14,000 is taxable so subtract 14,000 from 100,000
All of the following are defined as either a "sale" or an "offer to sell" common stock of an issuer EXCEPT: A. any offer to sell the common stock for value B. any solicitation of an offer to buy the common stock for value C. the gift of the common stock to an employee of the issuer D. the sale of a bond with detachable warrants to buy the common stock of that issuer
C. The definition of a "sale" is every contract of sale, contract to sell, or disposition of a security, or interest in a security, for value. The definition of an "offer to sell" is every attempt or offer to dispose of, or solicitation of an offer to buy a security. Thus, Choices A and B fit the definition. In addition, the sale or offer of a security that includes rights or warrants to buy another security is considered to be an offer or sale of the other security (Choice D correct). The gift of a security is NOT considered to be a sale, unless the security is assessable. Common stock is non-assessable, so this is simply a gift, not a sale.
A customer buys a 5 year construction loan note at $700. The note matures in 5 years at par. If the customer sells the note for $950 after holding it for 4 years, the customer's rate of return is approximately: A. 3.00% B. 5.00% C. 8.00% D. 10.00%
C. The easiest way to deal with this question is to plug in each of the 4 choices and get the result: Choice A: $700 x (1.03)4 = $787.85 after 4 years Choice B: $700 x (1.05)4 = $850.85 after 4 years Choice C: $700 x (1.08)4 = $952.34 after 4 years Choice D: $700 x (1.10)4 = $1,024.87 after 4 years mutiply the principal amount by each answer rate, whichever one is closest to what he sells it for is the answer.
The cost of money is known as the: A) marginal rate B) consumption rate C) interest rate D) opportunity cost
C. The interest rate charged on loans is the "cost" of money. The higher the interest rate, the higher the "cost" of borrowing money, and vice-versa.
All of the following are EXCLUDED from the definition of an investment adviser under the Uniform Securities Act EXCEPT a(n): A. federal covered adviser B. broker-dealer C. adviser with no place of business in the State whose only clients are broker-dealers D. investment adviser representative
C. The thing thats tricky here is that choice C is exempt from registration in the state, but not excluded from the definition of an IA
An agent of a broker-dealer is solicited by the general partner of an oil and gas income program being offered as a private placement only to accredited investors. The general partner explains that for each customer that the agent brings to the general partner, he will pay a finder's fee of 10% of the amount invested. The agent gets 20 copies of a full-color brochure from the general partner and distributes them to his largest customers for their consideration. Based on this information, you should be LEAST concerned about: A. a potential violation of Regulation D B. whether the investment is defined as a security C. the track record of the general partner D. the information disclosed in the brochure
C. Well, the immediate violation that is present here and NOT addressed in the choices is that the agent is "selling away from his firm." There is no mention that the firm knows what the agent is doing. The agent's customers think they are buying the partnership unit from the broker-dealer, when, in fact, they are not. Rather, the agent has made himself a "statutory broker-dealer" by doing this and is in violation of State law by not being registered as such in the State. However, based on the choices offered, this question really is about private placements under Regulation D of the Securities Act of 1933. First - Is the partnership a "security?" - which it sounds like it is, since the general partner is the manager and the limited partners are passive investors. Second, this is an offering only to accredited (wealthy investors), but there is no mention that the agent checked to see if the customers to whom he sent the brochures were accredited. Third, does the brochure give the disclosures required under Regulation D? These are all legal issues that must be looked at first (remember, this is a test largely written by securities attorneys). The track record of the general partner is a business issue, and while important, will never take precedence over legal issues in a test written by lawyers!
An agent of a broker-dealer handles large institutional accounts on a discretionary basis. One of the institutional customers calls and states that: "The ABCD stock position that you recommended has declined by 20% in the last week and we have lost $200,000 on the position. I want you to sell the stock at the price that we paid; otherwise we will pull the account." Which action may be taken by the agent? A) The agent should place an order to sell the ABCD position at the current market price and then change the trade confirmation to reflect the execution of the order at the breakeven price B) The agent should sell the ABCD position to another institutional customer at the breakeven price C) The agent should sell the ABCD position at the current market price and reinvest the proceeds in another stock that is likely to appreciate over the short term D) The agent should buy the ABCD position at the breakeven price from the institutional customer and then hold the position personally for future price appreciation
C. Yup, this customer lost money and he is ticked off! However, the agent cannot sell the stock at the original price paid (the "breakeven price") because this would constitute a prohibited "guarantee against loss." The agent can sell the stock at the market (realizing the loss for the institution) and reinvest the proceeds in another promising stock, hoping for a gain on that position.
A money market fund that charges .10% of annual management fees and .20% of annual 12b-1 fees: A. cannot be called "no-load" because the total of these fees exceeds .25% B. cannot be called "no-load" because such funds cannot charge 12b-1 fees Correct C. can be called "no load" D. can be called "low load"
C. all funds have management charges, separate from 12 b 1
All of the following terms are synonymous EXCEPT: A. agent B. broker C. dealer D. middleman
C. an agent is a broker who is a middleman in a transaction
Under the Investment Advisers Act of 1940, which of the following statements are TRUE regarding advisory contracts? I Advisory fees cannot be based upon capital gains in the account II Advisory fees for clients with at least $1,000,000 of assets under management; or $2,000,000 net worth; can have a fee that is partly based upon capital gains III Advisory contracts must be filed with the SEC if they allow for $1,200 or more of prepaid advisory fees, 6 or more months in advance of services rendered IV Advisory contracts cannot contain provisions that violate Federal law A. I and II only B. III and IV only C. I, II and IV D. I, II, III, IV
C. choice III doesnt count, if it said balance sheet it would
An Investment Adviser prepares a 4-color glossy brochure to be given to potential customers instead of the Form ADV Form Part 2A. The brochure includes all of the information found in the ADV Part 2A, but is much livelier in its presentation. An Investment Adviser Representative uses the brochure to solicit a new client, who signs a contract with the firm that includes a clause giving the customer 2 business days to back out of the contract without incurring any penalty. Which statement is TRUE under NASAA rules? A. This procedure complies with NASAA rules regarding the use and delivery of investment adviser brochures B. This procedure violates NASAA rules because only the Form ADV Part 2A can be delivered to customers C. This procedure violates NASAA rules because the customer must be given 5 business days to back out of the contract without penalty D. This procedure violates NASAA rules because a written receipt must be obtained from the customer indicating that the brochure was delivered
C. glossy brochure is ok, the issue here is they must be given 5 days
Which of the following is a conflict of interest for an affiliated person on the Board of Directors of a mutual fund? A. The affiliated person being compensated by the fund for being a member of the Board of Directors of the fund B. The affiliated person voting for choice of an investment manager for the fund C. The affiliated person being compensated by the broker-dealer that the fund uses to execute portfolio transactions D. The affiliated person voting on the implementation of a 12b-1 plan for the fund
C. he does all of the other choices, so c is the awkward one
Which of the following is NOT EXCLUDED from the definition of an "investment adviser"? A. Broker-dealer B. Trust company C. Insurance company D. Savings and loan
C. insurance and investment companies are not excluded, even though they are exempt
Which of the following annuity payment options will continue payments to another person for their life after the annuitant dies? A. Life Annuity B. Life Annuity with Period Certain C. Joint and Last Survivor Annuity D. Unit Refund Annuity
C. pay attention, after life of annutiant
A customer wishes to make an investment in growth mutual funds for an Individual Retirement Account. All of the following statements by an agent are prohibited EXCEPT: A. "The fund has averaged a 20% annual growth rate in the past and is guaranteed to produce the same growth rate in the future" B. "Last year, the fund paid out dividends of $1.00 per share and capital gains of $.50 per share, for a total income yield of $1.50" C. "The fund yielded 20% last year and is expected to yield the same this year, though the actual yield may be more or less" D. "The fund is registered with the SEC, which has approved of the fund's shares"
C. pay attention, remember capital gains are not paid out as income, only dividends
A married couple, both age 60, jointly earn $150,000. They expect to retire in 15 years, at which point they will start drawing funds from the IRA. They wish to make the maximum IRA contribution. The best recommendation is to tell them that they: A. earn too much to open an IRA B. should open a Traditional IRA and contribute $5,500 each C. should open a Roth IRA and contribute $6,500 each Incorrect Answer D. should open a Traditional IRA and contribute $6,500 each
C. phase out range is not applicable here, the phase out range is : 183,000- 193,000
For an investment advisory contract, which of the following is true or possible? A. Guaranteeing a client specific investment results B. Assigning a contract without client consent C. Sharing in the investment gains in a client account D. Signing a waiver that the client is not required to be notified of any future investment adviser conflicts of interest
C. possibly do this if (either a client with $1,000,000 of assets or $2,000,000 of net worth
A customer buys a TIPS at par with a 3 1/2% coupon. Inflation stays at 4% over the life of the security. What is the total return on the investment? A. 3 1/2% B. 4% C. 7 1/2% D. This cannot be determined from the information presented
C. remember with TIPS coupon stays the same, but principal amount increases and that is what customer gets
An individual that earns $210,000 per year and that is not covered by another qualified retirement plan would be permitted to: A. make a non-deductible contribution to a Roth IRA that was opened years ago B. make a deductible contribution to a new Roth IRA C. convert a Traditional IRA into a Roth IRA after paying taxes due Incorrect Answer D. convert a Roth IRA into a Traditional IRA after paying taxed due
C. there is no rule restricting high earners from converting, even though he is a high earner
An investor buys a $50,000, 10% corporate bond maturing in 2041 for $62,500. The bond is callable starting in the year 2016. What is the most appropriate measure for calculating yield? A. Total Return B. Current Yield C. Yield to Call D. Yield to Maturity
C. yield to call This investor is paying $62,500 for a 10% bond with a face value of $50,000. Thus, the investor is paying 25% more than par for the bond. Because of the premium, these bonds are currently yielding 8% ($100 annual interest received / $1250 purchase price per bond = 8%). This issuer would call these bonds, since the issuer is paying 10%; yet if the issuer were to sell new bonds in the current market, it would only have to pay 8%. This bond is very likely to be called, so using the call date is the appropriate time frame to be used to compute the yield on the bond.
The Standard and Poor's 500 Index is: A. an average of 500 different stock prices B. capitalization weighted C. based on 500 mid-cap securities D. one-on-one weighted
Cap weighted
types of asset classes
Cash/Money Market Instruments Investment Grade Bonds Non-Investment Grade Bonds Blue Chip Equities Speculative Equities Foreign Investments Real Estate Foreign Currencies Natural Resources Precious Metals Collectibles (Art/Coins, etc.)
Which statement is FALSE regarding registration and licensing requirement for broker-dealers and investment advisers in a State? A. A broker-dealer with no place of business in a State that solely offers securities to non-institutional customers must register B. A broker-dealer with no place of business in a State that solely offers municipal securities must register C. An investment adviser with no place of business in a State that only deals with institutional customers must register D. An investment adviser with no place of business in a State that offers its services to a limited number of non-institutional customers must register
Choice A is true - a broker-dealer with no place of business in a State that deals with non-institutional clients in the State (this means the general public) must be registered in the State. Choice B is true - a broker-dealer with no place of business in a State that solely offers exempt securities must also register, as must its agents. "Exempt" only means that the securities being offered are exempt from State registration - the broker-dealers and agents that sell exempt securities must still be registered in the State. Choice C is false - an investment adviser with no place of business in a State that only deals with institutional clients is EXEMPT from registration. If the adviser with no office in the State offers its services to the general public in the State, then it must register. Choice D is true - an adviser with no place of business in a State that offers its services to no more than 5 prospective customers in the State within a 12 month period is exempt from registering (the de minimis exemption).
An investment policy statement would NOT include: A) recommended allocations among differing asset classes B) expected returns of the recommended strategy and the expected range of these returns C) strategies used for selecting specific stocks in the equity portion of the portfolio D) disclosure of the fees that the adviser will earn for implementing the recommended strategy
D
An investor is considering making the purchase of a limited partnership unit that requires a $10,000 investment and the signing of a $40,000 recourse note. The partnership is being formed by the former executive of a wireless communications company who believes that there is a business opportunity in buying unused wireless bandwidth that the federal government may put up for auction and then reselling this capacity to wireless start-up companies. Because the auction dates have not yet been set, and the government has the right not to conduct the auctions, investors are guaranteed to be refunded their investment, less a 5% administration fee in such an event. If the auctions do occur, investors may have to wait for 12 months before the company will generate positive cash flow. Which statement is TRUE? A) This investment does not meet the definition of a security because of the refund clause and is not covered under the Uniform Securities Act B) The most important consideration for an investor is purchasing power risk C) This investment does not have regulatory risk because its assets are being purchased from the U.S. Government D) This investment has both regulatory risk and business risk
D
As a condition of registration, the Uniform Securities Act requires that broker-dealer records be kept on file for: A) 6 months B) 1 year C) 2 years D) for the time period prescribed by Federal law
D
The Sharpe ratio measures the: A) level of investment return relative to the dollar amount invested B) level of portfolio volatility relative to a benchmark portfolio C) risk adjusted rate of return relative to the risk free rate of return D) risk adjusted rate of return relative to portfolio volatility
D
An investment adviser is selling a Wrap Account where the assets are held in custody of the advisory firm. The Wrap Fee Brochure must include: I information on investment advisory fees II information on participation or interest in client transactions III the balance sheet of the investment adviser
I II III
Which statement is TRUE under NASAA rules? Within 120 days of fiscal year end, the customer must be given a copy of the: A) Form ADV Part 1 B) Form ADV Part 2 C) Form ADV Part 1 only if there are material changes D) Form ADV Part 2 only if there are material changes
D PART 2 ONLY, only if material changes
An agent is conducting securities activities on the premises of a bank Which statement is TRUE? A) This is an unethical practice B) This is permitted if the agent discloses orally to the customer that the products offered are not bank products; are not FDIC insured; and may lose value C) This is permitted if the agent discloses in writing to the customer that the products offered are not bank products; are not FDIC insured; and may lose value D) This is permitted if the agent discloses both orally and in writing to the customer that the products offered are not bank products; are not FDIC insured; and may lose value
D This is the "NOT-NOT-MAY" Rule. When a broker-dealer offers securities in a bank setting, it must be disclosed both verbally and in writing that securities are NOT bank products; that securities are NOT FDIC insured: and that they MAY lose value. In addition, the agent must attempt to get the customer to sign a statement that he or she understands this.
A Regulation A exemption from registration is available for new issue offerings that do not exceed: A) $10,000,000 within a 12 month period B) $15,000,000 within a 12 month period C) $25,000,000 within a 12 month period D) $50,000,000 within a 12 month period
D.
A customer holds a large portfolio of corporate bonds. The customer is worried about business (capital) risk. Which diversification strategy would be LEAST effective to minimize capital risk for this customer? A. Diversification among differing issuers in differing states B. Diversification among differing industries C. Diversification among differing maturities D. Diversification among differing coupon rates
D.
A customer who earns $80,000 per year is 35 years old, married to a non-working spouse, has a 5-year-old child, has no retirement savings and does not have a will. This customer receives $250,000 in a single stock as an inheritance from her deceased aunt. What is the first thing that the customer should do? A. Set up an IRA account to begin to fund her retirement B. Establish a will C. Pay any capital gains tax due on the stock position, if this cannot be avoided D. Diversify the stock position, because it should not be in a single stock holding
D.
A customer who is concerned with social and environmental issues would minimize which risk when making an investment decision? A. Market B. Opportunity C. Financial D. Regulatory
D.
A customer wishes to open a margin account at a broker-dealer. The customer provides all of the necessary information to open the account, but refuses to sign the margin agreement when the agent gives it to the customer. Which statement is the correct course of action to be taken? A. The firm should approve the opening of the account since the customer provided all of the necessary information B. The agent should have the customer sign a waiver, obviating the need for the customer to sign a margin agreement C. The agent should sign the customer's name to the margin agreement, since all of the necessary information has been provided by the customer D. The account cannot be opened because the customer did not sign the margin agreement
D.
A portfolio invested in actively managed funds that is rebalanced annually is considered to be: A. Active/Active B. Passive/Passive C. Active/Passive D. Passive/Active
D.
Administration of the Investment Advisers Act of 1940 is done by: A. FINRA B. CFTC C. NASAA D. SEC
D.
All of the following are exempt securities under the Uniform Securities Act EXCEPT: A. U.S. Government bonds B. Investment grade commercial paper maturing within 9 months C. Bank issues D. Corporate stocks
D.
All of the following are required to find the future value of an investment EXCEPT: A. projected growth rate B. investment time horizon C. present value of the investment D. anticipated interest rate volatility
D.
All of the following investments offer tax benefits EXCEPT: A. Municipal Bonds B. Variable Annuities C. Real Estate D. Index Funds
D.
All of the following orders must be retained as a record by broker-dealers EXCEPT: A) executed orders B) unexecuted orders C) canceled orders D) subscription orders
D.
An agent is employed by First Patriot Bank and Trust Company of Connecticut as a banking representative. The agent is registered in the State with a general securities license through First Patriot Securities, a separate operating subsidiary of First Patriot Holdings - the parent company of the bank. A retired couple that is making their monthly visit to the bank to deposit their social security checks asks the agent about the appropriateness of investing in either mutual funds or certificates of deposit. Which statement is TRUE regarding the actions that the agent may take when giving a response to these customers? A. In order to respond to these customers about either the suitability of investing in mutual funds or certificates of deposit, the agent must be registered in the State as an adviser representative B. The agent can give advice to the couple about investing in mutual funds since he or she has a general securities registration, but cannot give advice about investing in certificates of deposit C. The agent can give advice to the couple about investing in certificates of deposit, but cannot give advice about investing in mutual funds without being registered as an adviser representative in the State D. The agent may give advice to the couple about the suitability of investing in either mutual funds or certificates of deposit
D.
An investment adviser is considered to "take custody" of funds or securities from a customer if it: A) exercises discretionary authority by placing trades of securities for that customer B) accepts a check from the customer made payable to the fund custodian to buy a mutual fund C) accepts commissions for effecting trades for that customer's account through an affiliated broker-dealer D) is appointed as trustee for a customer's trust account under a legally binding trust document
D.
If a customer stops making payments on a whole life policy, all of the following are permitted EXCEPT: A) taking the cash value of the contract as a lump sum B) taking a reduced paid-up whole life policy C) using the equity to purchase a term life policy D) using the equity to purchase a non-participating policy
D.
If a distribution is taken from a Roth Individual Retirement Account after age 59 1/2: A. 100% of the distribution is taxed at the ordinary income tax rate B. 100% of the distribution is taxed at the long term capital gains rate Incorrect Answer C. part of the distribution is taxed at the ordinary income tax rate and part is taxed at the long term capital gains rate D. no tax is due on the distribution
D.
If an agent wishes to withdraw his registration, all of the following statements are true EXCEPT: A) both the agent and the broker-dealer must notify the Administrator B) notification to the Administrator of the withdrawal must be made promptly C) the withdrawal does not become effective for 30 days D) if there is a customer complaint, the Administrator retains jurisdiction over the agent for a period of 5 years from the withdrawal date
D.
Registration by qualification becomes effective: A) 5 days after filing B) 10 days after filing C) concurrent with the registration statement filed with the SEC becoming effective D) on a date set by the Administrator
D.
The Federal law that requires the registration with the SEC of management companies is the: A) Securities Act of 1933 B) Securities Exchange Act of 1934 C) Investment Advisers Act of 1940 D) Investment Company Act of 1940
D.
The sale of a call has all of the same characteristics as selling stock short EXCEPT: A. unlimited loss potential in a rising market B. limited gain potential in a falling market C. low liquidity risk if the position is to be liquidated D. no erosion of value as the position is held
D.
Under NASAA rules for State-registered advisers, transactions must be recorded in customer account records no later than: A) trade date B) settlement date C) 10 business days following the end of the month in which the transaction was effected D) 10 business days following the end of the quarter in which the transaction was effected
D.
Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the: A. adviser is also a bank located in that State B. adviser is also a broker-dealer registered in that State C. primary business of the adviser is recommending the brokerage services of another firm D. primary business of the adviser is the rendering of investment advice
D.
Under the Securities Exchange Act of 1934, all of the following issuers must report to the SEC EXCEPT: A. Corporations B. Investment Companies C. Master Limited Partnerships D. Municipalities
D.
What formula finds the "expected return" of an investment? A. Beta B. Duration C. Sharpe Ratio D. CAPM
D.
Which of the following is NOT a measure of volatility? A. Beta B. Correlation coefficient C. Standard deviation D. Interest rate
D.
Which statement is FALSE regarding Transfer on Death (TOD) account registration? A) An older person who registers a security "TOD" maintains full control over the asset until death B) Upon death, the security is excluded from the estate of the decedent and avoids probate C) This registration is designed for older customers D) This registration avoids estate tax upon death of the holder
D.
if a person disagrees with a final order of the Administrator, he or she must petition the appropriate court within how many days? A) 1 day B) 30 days C) 45 days D) 60 days
D.
A cyclical stock would be characterized by: I earnings variability due to changes in economic growth II no earnings variability due to changes in economic growth III a stock price that tends to move in the same direction of the market as a whole IV a stock price that tends to move in the opposite direction of the market as a whole
I III
Money purchase retirement plans: I are established by the employer II are established by the employee III require annual mandatory employer contributions IV require annual mandatory employee contributions
I III
Money purchase retirement plans: I are qualified plans under ERISA II are non-qualified plans under ERISA III must be funded annually by the employer IV are not required to be funded annually by the employer
I III
An employee is participating in a 403(b) plan, where 50% of contributions are paid by the employee and 50% of contributions are paid by the employer. The employee withdraws $5,000 at age 60. The withdrawal is: A. not taxable to the employee B. 50% taxable to the employee C. 50% taxable to the employer D. 100% taxable to the employee
D. both 403 b and 401k are tax deductible to the contributor, so if employee contributes, its him that can deduct
Commercial paper is an exempt security under the Securities Act of 1933 as long as its maturity does not exceed: A. 30 days B. 90 days C. 180 days D. 270 days
D. remember if it exceeds this number, it must be sold with a prospectus
A broker-dealer has a website that is continuously updated. Under NASAA rules, the broker-dealer is: A. not required to maintain copies of the superseded web pages B. not required to maintain copies of any of the web pages because record retention rules only apply to printed advertising C. required to maintain the current web pages only D. required to retain both the current and superseded web pages
D. Web pages are considered to be an item of advertising that a broker-dealer or investment adviser must retain as a record. If any updates are made to the website, the old version must be archived and be available for inspection or filing. The State usually requires such a filing in printed (not electronic) form - but either form can be requested by the State.
When making a recommendation of corporate commercial paper to a customer, which risk is the MOST important consideration? A. Inflation (purchasing power) risk B. Call risk C. Market risk D. Credit risk
D. commercial paper is short term so there is no inflation risk really credit all day
An investor buys a $30,000, 10% corporate bond maturing in 2041 for $24,000. The bond is callable starting in the year 2016. What is the most appropriate measure for calculating yield? A. Total Return B. Current Yield C. Yield to Call D. Yield to Maturity
D. - This investor is paying $24,000 for a 10% bond with a face value of $30,000. Thus, the investor is paying 20% less than par for the bond. Because of the discount, these bonds are currently yielding 12.5% ($100 annual interest received / $800 purchase price per bond = 12.5%). This issuer would not call these bonds, since the issuer is only paying 10%; yet if the issuer were to sell new bonds in the current market, it would have to pay 12.5%. This bond is not likely to be called, so using the call date is not the appropriate time frame. Rather, this bond will probably remain outstanding until its maturity, and this is the time frame that should be used to compute the yield on the bond.
Under the Uniform Securities Act, the registration of a broker-dealer may be revoked for all of the following reasons EXCEPT the firm does not: A) maintain required records B) file financial reports with the Administrator C) file advertising with the Administrator D) file customer complaints with the Administrator
D. A broker-dealer's registration may be revoked if the firm fails to maintain required records, fails to file financial reports with the Administrator or fails to file advertising with the Administrator, if required to do so. There is no requirement under the Uniform Securities Act for customer complaints to be filed with the Administrator.
A customer has made the following purchases of XYZ stock: Year 1: 300 shares @ $62 Year 2: 400 shares @ $66 Year 3: 100 shares @ $63 Year 4: 500 shares @ $69 Year 5: 200 shares @ $68 It is now Year 6 and the stock is trading at $70. The customer wishes to sell 1,000 shares. To minimize tax liability, the customer should use which tax valuation method for the shares that are sold? A) Last In First Out B) First In First Out C) Average Cost D) Specific Identification
D. A customer that has purchased stock over many years and that sells part of the position can choose to use "specific identification" to identify the specific shares being sold. In this case, the customer will lower his or her tax bill by choosing the highest cost shares. These would be the 500 shares purchased at $69 in Year 4; the 200 shares purchased at $68 in Year 5; and 300 of the 400 shares purchased at $66 in Year 2 as the 1,000 shares sold for $70. These are the highest cost shares and this will reduce the capital gain. If the customer does not use specific identification, the IRS mandates FIFO accounting for shares sold. Average cost accounting can only be used for mutual fund shares; not for individual stocks.
The executor of an estate has all of the following fiduciary obligations EXCEPT: A. Maintenance of records of transactions involving estate assets B. Filing of the will in probate court and filing of tax returns for the estate C. Payment of taxes due to State and Federal Governments D. Management of assets placed into trust by the decedent
D. A person that assumes responsibility for managing the assets of another (an estate in this case) is required to carry out his duties with utmost care. The executor must act in the best interests of the estate and must oversee all legal, accounting, investment, and other professionals that render services to the estate. The executor must keep accurate records and must make all appropriate tax filings and payments. The executor has no responsibility for management of assets that were placed into trust - this is the trustee's responsibility.
Which of the following is NOT defined as "portfolio income" under IRS guidelines? A. Dividends received from preferred stock holdings B. Interest income received from bond holdings C. Proceeds from the sale of securities in excess of the tax basis of those securities D. Distributive share of income from limited partnership holdings
D. Income from partnership interests is defined as "passive income" under IRS rules. Passive income can only be offset by passive losses. Portfolio income consists of dividends, interest, and net capital gains on securities (except for direct participation program interests, which are considered to be passive investments). Portfolio gains can only be offset against portfolio losses.
A Registered Investment Adviser is approached by the heirs of an estate to manage their newly received assets. The account would be substantial, but the adviser is concerned that the heirs might be overly litigious. The adviser wishes to limit his liability as a fiduciary to minimize this risk. Which statement is TRUE? A. The investment adviser can get a signed letter from the beneficiaries, relieving the adviser of his fiduciary obligation B. The investment adviser can subcontract out the management of the money to a subadviser, who will assume the fiduciary responsibility C. The investment adviser can petition a court of law to void the adviser's fiduciary standard D. The investment adviser cannot limit his fiduciary responsibility and liability
D. Inherent in the role of an investment adviser is the fiduciary standard - the adviser must always act in the best interests of the person being advised and assumes liability for breach of this fiduciary obligation.
An investor has $100,000 to invest. She allocates about half of her portfolio to the purchase of a municipal bond with 1 year to maturity that has a 4% coupon, paying $50,465 for the bond. The investor's approximate rate of return (current) is: A) 2.75% B) 3.00% C) 3.25% D) 4.00%
D. 4% This is easy. A 4% coupon on a $50,000 par value bond will yield $2,000 of annual income. $2,000 Annual Income / $50,465 Purchase Price = 3.96% Current Yield = 4.00% rounded.
A customer enters a bank branch where he has a savings account and is approached by the branch manager who asks: "Are you interested in earning a higher rate of return than we offer on our savings accounts? Let me introduce you to our securities representative." If the customer opens a securities account, which disclosure is NOT required to be made? A. Securities products are not insured by the Federal Deposit Insurance Corporation B. Securities products are not deposits or other obligations of the financial institution C. Securities products are subject to investment risks, including possible loss of principal D. Securities products are subject to taxation of income and capital gains
D. NOT NOT MAY RULE (may lose value or principal )
All of the following terms are synonymous EXCEPT: A. capital in excess of par B. capital surplus C. additional paid in capital D. retained earnings
D. Retained earnings represents accumulated earnings of a corporation that have not been paid out as dividends. Capital in Excess of Par, Capital Surplus, and Additional Paid In Capital all refer the same account. Any monies that are paid by shareholders that are in excess of the stated par value are credited to this account.
An Investment Adviser Representative (IAR) is helping a client structure a portfolio to pay for the higher education costs of their child. All of the following are items that should be considered in determining the amount of funding needed in the portfolio EXCEPT: A. Tuition cost B. Housing cost C. Anticipated inflation rate D. Parent's income level
D. The goal here is to fund a portfolio to pay for higher education expenses - for tuition, housing, board, books, computers, etc. The anticipated inflation rate is relevant to determine how much this will cost at the estimated future date that schooling will start. Once the amount needed is determined (which is what the question is asking), then how the funding will occur is the next question. This is where the parent's income is relevant.
The filing of an updated Form ADV with the SEC by a Federal Covered Adviser at fiscal year end is: A. only required if there are material changes in the content compared to the information included in the previous year's filing B. only required the adviser will, for the first time, take custody of client funds C. only required if the adviser was registered with a state in the preceding year Correct D. required for each Federal Covered Adviser without exception
D. The updated Form ADV must be filed each year with the SEC by Federal Covered Advisers - there are no exceptions. The filing is due within 90 days of fiscal year end.
All of the following are defined as investment advisers that are EXEMPT from registration in a State EXCEPT an adviser with no place of business in the State that: A. gives advice to no more than 5 clients in the State in the past 12 months B. gives advice solely to broker-dealers C. gives advice solely to registered investment companies Correct D. distributes financial reports not based on specific client situations
D. This is a very picky question that sees if you know the difference between an exclusion and an exemption. Exempt from registration as an investment adviser (meaning these are defined as investment advisers but they do not have to register in the State) is any person with no place of business in the State whose only clients are other advisers; federal covered advisers; broker-dealers; deposit taking institutions; insurance companies; investment companies; employee benefit plans with assets of at least $1,000,000; and governmental agencies. Also exempt from registration as an investment adviser is any person that has no place of business in the State that has 5 or fewer clients in the State in the past 12 months. Excluded from the definition of an investment adviser are investment adviser representatives; depository institutions; broker-dealers; professionals who only give incidental advice; publishers of general circulation periodicals that do not give investment advice about specific client situations; and federal covered advisers.
An agent of a broker-dealer, both of whom are located in State A, accepts an order from a customer located in State B where they have no offices. Who must register in State B? A. The broker-dealer B. The agent C. Neither the broker-dealer nor the agent D. Both the broker-dealer and the agen
D. This question isn't very clear, but here goes. We don't know if the customer located in State B is an existing customer that is vacationing in State B or a new customer in State B. So let's assume that he is a new customer. We also don't know if the broker-dealer is doing only a few transactions in State B, and qualifies for a "de minimis" exemption (and this is only offered by a minority of States), so let's assume that this also is not the case. The exemption given to "unsolicited customer transactions" only applies to the requirement for the securities to be registered in the State - it has nothing to do with the requirement that broker-dealers and agents that are doing business in the State must be registered in the State. So, the broker-dealer located in State A and its agent, even though they have no office in State B, are doing business in State B, and must register in State B.
Which of the following is NOT considered to be unethical under the Uniform Securities Act? A. Taking an order from the spouse of a customer who has an individual account, only when the customer is traveling and is out of the country Incorrect Answer B. Telling a customer that wishes to invest in a speculative stock that the agent believes to be unsuitable, that the prospects for the company are considerably more bearish than the agent believes C. Telling a customer to sell a security based on material negative non-public information that an agent has obtained, as long as the agent does not sell the stock for his or her personal account D. Executing a customer's order to buy at the market at the current ask price when the bid price is lower
D. Unless the customer has given spouse "discretion" to trade the account in writing, a verbal order cannot be taken from the spouse. An agent cannot misrepresent the prospects for a company - it makes no difference that the agent is trying to "discourage" the customer from making an "unsuitable" investment. Under the "tipper-tippee" insider trading doctrine, not only is a person that trades on material non-public information liable (the "tippee"); but the person who gave the tip (the "tipper" is the agent in this case) is also liable as well. Customer orders to buy are executed at the current ask price (the customer must buy from the dealer at the dealer's ask). Customer orders to sell are executed at the current bid (the customer must sell to the dealer at the dealer's bid). The bid price will always be lower than the ask price - this is the dealer's trading profit, known as the spread.
All of the following investment company terms are synonymous EXCEPT: A) Bid B) Redemption Price C) Net Asset Value D) Offering Price
D. bid, redeem, nav all associated with investment company shares
Which of the following are deductible from a taxable estate? A) Funeral and administrative expenses B) Claims against the estate and mortgages against real property owned by the estate C) State death taxes D) All of the above
D. A "taxable" estate is one that is valued over $5.43 million (in 2015 - the limit is adjusted for inflation annually). The executor files an estate tax Form 706 for estates where tax is due. When calculating the value of the estate that is taxable, the executor gets to deduct funeral and the executor's administrative expenses, as well as the cost of the estate attorney. Also deductible are any claims made against the estate (for example, unpaid bills) and mortgages on property owned by the estate. Finally, any state estate tax bill (certain states, like New York and California, have a high estate tax - about 10%) is deductible from the federally-taxable estate.
A customer places an order to sell 100 shares of ABC stock that he cannot deliver by settlement date. The order ticket should be marked: A. Sell - MKT B. Sell - GTC C. Sell - Long D. Sell - Short
D. A long sale is the sale of shares which the customer owns and will deliver on settlement date. A short sale is the sale of shares which the customer does not own. Therefore, in order to effect delivery on settlement date, the short seller must borrow the shares. In essence, a short seller is selling borrowed shares.
Surety bond coverage can be required by the Administrator as a condition of registration for all of the following EXCEPT: A. broker-dealers B. investment advisers C. agents D. issuers
D. A surety bond can be required as a condition of registration for the State registration of broker-dealers, their agents, and investment advisers who take custody. There is no surety bond requirement for issuers to register their securities in a State.
Which of the following securities can be registered by qualification in a State? A) Limited Partnership B) Fractional Interest in an Oil and Gas Program C) Certificate of Deposit for a security D) All of the above
D. ANY security can be done with this it is typically used for a company's initial public offering where there is no Federal SEC registration, so the State has no other information about the issuer and the issuer must "qualify" to have its securities registered in the State. In contrast, if an issuer is registering with the SEC, it can use the Federal SEC registration as its State registration document under "Registration by Coordination." If an issuer has previously registered securities with the SEC and State, it is a "seasoned issuer" and the State knows who the issuer is. Then the issuer can use the simpler method of Registration by Filing (Notification) in the State.
Under the Investment Company Act of 1940, an affiliated person may: A) borrow money from the fund B) borrow securities from the fund C) sell securities personally to the fund D) buy shares of the fund
D. Affiliated persons of investment companies (the officers, employees, and 5% shareholders of the fund) are prohibited from borrowing monies from the fund; from borrowing securities from the fund; or from buying securities personally from the fund's portfolio or selling securities personally to the fund's portfolio. In all of these instances, the affiliated person is in a position to effect such transactions at overly favorable terms - since there is no "arm's length." There is no prohibition on these persons buying the shares of the fund - in this case they buy at Net Asset Value (plus a sales charge, if any) - just like any other customer.
A customer calls his agent on Friday after the markets have closed and tells him to sell his position in XYZ stock when the market opens on Monday. The customer is holding the XYZ shares at his home, but is leaving tomorrow on a 2 week vacation. The customer asks the broker to come over to his house tonight to pick up the securities. Under the Uniform Securities Act, the agent should: A. have the customer execute a stock power before taking custody B. put the stock in his personal safe deposit box over the weekend C. tell the customer to wait until he returns from the vacation to execute the trade D. not take custody of the securities but should have the customer send the securities directly to the brokerage firm by registered mail or delivery service
D. Agents and broker-dealers are prohibited from commingling customer funds and securities with their own funds and securities. The agent cannot take these customer securities into his possession - this is a violation. He can have the customer send them directly to the broker-dealer for delivery on the sale, however.
Which of the following persons is required to register as an investment adviser under the Uniform Securities Act? A) An attorney who writes a legal opinion included in the registration statement filed with the State for a new non-exempt securities offering B) A broker-dealer who gives investment advice in the regular course of business executing transactions for customers C) An agent of a broker-dealer who gives investment advice as part of his or her regular duties and who charges a fee for such advice D) A broker-dealer that charges an annual flat fee to customers for both investment advice and portfolio trade executions
D. An attorney that renders a legal opinion is not giving advice about investing in securities - the opinion covers the validity and legality of the securities offering. A broker-dealer is not considered to be an investment adviser unless it charges separately for advice. If the broker-dealer's compensation comes solely from commissions, then the broker-dealer does not fall under the investment adviser definition. On the other hand, if a broker-dealer offers an account that charges a flat fee or a fee as a percentage of assets - this is a "wrap" account that is an advisory product and registration at the State level as an adviser is required (thus, Choice D would have to register in the State as an investment adviser). Regarding Choice C, be careful! Choice C defines an "investment adviser representative" that would have to register at the State level - it does not define an "investment adviser."
A Web site created by a broker-dealer will NOT be considered to be an offer of securities in a State as long as all of the following conditions are met EXCEPT the communication: A. is limited to "general" information B. does not attempt to effect securities transactions C. contains a legend that the broker-dealer can only effect business in that state if it is registered in the state D. is filed in advance of use with the state Administrator
D. As long as a web site is limited to "general" information and does not attempt to induce customers to effect securities transactions, then an "offer" is not being made in the State. In addition, the Web site must show a legend that the broker-dealer can only transact business in the State if it is first registered in that State. Finally, any follow-up "individualized" responses to customers involving securities transactions require that the broker-dealer and its agents be registered in the State. There is no requirement to file the Web site with the state Administrator in advance of use.
An agent of a broker-dealer recommends a security to a customer. The customer buys 1000 shares, paying the firm a commission. The stock reaches a new market high in two weeks. Under the Uniform Securities Act, which statement is TRUE? A. The firm can charge the customer a separate amount for investment advice B. The firm can increase the commission charged to the customer based on the excellent performance of the investment C. The agent can accept a large gift from the client for the advice D. The only compensation that can be accepted by the broker-dealer is the original commission charged
D. BD RULES The only fee that can be accepted is the original commission charged. It is prohibited to be paid based on the gains in a customer's account. A broker-dealer earns its fee for investment advice within the commission charged. It cannot charge a separate fee for investment advice, since this would be a "double charge" to the customer.
The common stock of ABC Corporation is listed on the American Stock Exchange (NYSE-MKT). Which of the following securities issued by ABC is EXEMPT under Uniform State Law? I Common Stock II Preferred Stock III Mortgage Bonds IV Warrants A. I only B. I and II only C. II and III only D. I, II, III, IV
D. BLUE CHIP EXEMPTION Under the "Blue Chip" exemption, if a common stock of an issuer has an exchange listing, it is exempt under the Act. In addition, all senior securities of that issuer are exempt (preferred stock and bonds), as well as rights and warrants of that issuer.
A customer wishes to sell shares of her S & P 500 Index Fund and use the sale proceeds to purchase a non-callable agency bond. Which risk is NOT associated with this transaction? A. Interest rate risk B. Inflation risk C. Opportunity cost risk D. Prepayment risk
D. BOND IS NOT CALLABLE= no prepayment if bond was callable= PREPAYMENT RISK The purchase of a fixed income bond means that the investment will have interest rate risk - if market interest rates rise, the price of the bond will fall. Any long-term fixed income investment has purchasing power (inflation risk). If prices are rising due to inflation, the fixed payments received over many years become less and less valuable because of inflation. Opportunity cost risk is the risk that making an alternative investment would have yielded a better return - this risk is inherent to any investment decision. There is no prepayment risk for a non-callable bond - the bond cannot be called (prepaid) early by the issuer if market interest rates fall. If the bond were callable, then this risk would be present.
Which statement concerning closed-end investment companies is TRUE? Shares are: A. issued continually to investors B. redeemed continually from investors C. redeemed at net asset value D. traded over-the-counter or on the stock exchanges
D. Closed-end management companies have a 1-time stock issuance; the books of the company are closed to new investment; and then the shares are listed and trade like any other stock. In contrast, shares of open-end companies are issued continually by the fund and are redeemable with the fund. They do not trade on the secondary market.
Which of the following is the easiest business to form? A. C Corporation B. S Corporation C. Limited Partnership Correct D. General Partnership
D. GP, LLC, SP easiest to form
A customer inherits 3,000,000 shares of ABC stock, a company listed on the NYSE which has 10,000,000 shares outstanding. The customer is not a director or officer of the company. Which of the following statement(s) is/are TRUE? I The customer is defined as an "insider" under the Securities Exchange Act of 1934 II The customer is prohibited from selling ABC stock short except for tax deferral purposes (short against the box) III If the customer trades ABC stock at a profit after having held the stock for less than 6 months, the gain is forfeited IV The customer must report trading activity to the SEC
D. I II III IV This person falls into the definition of an "insider" because he holds 10% or more (in this case he holds 30%) of the company's stock. Insiders cannot sell their stock short (except to short against the box at year-end for tax deferral reasons); they must forfeit any short swing profits derived from trading their own company's shares; and trading activity must be reported to the SEC. move decimal over when divide! thats why got it wrong
Which of the following statements concerning the taxation of 403(b) plans are TRUE? I Distributions must begin by the year after the employee turns age 59 ½ II There is a 10% penalty tax for failure to take the minimum required distribution III An early withdrawal based on life expectancy is not subject to penalty tax when the employee terminates employment after age 55 IV Employee contributions reduce the employee's taxable income
D. III IV The rules for taxation of 403(b) distributions are basically the same as for distributions from 401(k) plans. Employee contributions to a 403(b) plan reduce the employee's taxable income. Earnings build tax-deferred. When distributions commence, since none of the dollars in the plan have ever been taxed, the distribution amounts are 100% taxable as ordinary income. Early withdrawals prior to age 59 1/2 are subject to 10% penalty tax. However, there is a permitted exception when the employee terminates employment after age 55 and takes distribution payments over his or her life expectancy, then regular income tax is due on each payment, but there is no 10% penalty tax. Distributions must begin by the year after the employee turns age 70 ½. The penalty for not taking minimum required distributions is 50% of the amount of under-withdrawal, in addition to regular income tax on the actual amount withdrawn.
If an agent withdraws from employment from a broker-dealer, the withdrawal takes effect: A) promptly B) within 5 days C) within 10 days D) within 30 days
D. If an agent withdraws from registration, the withdrawal does not take effect for 30 days (or sooner, if the Administrator so permits).
A customer wants an equity investment with a required rate of return of 5% and wants to receive a yearly dividend payment of $2.50. To meet the customer's requirements, the security must cost: A. $12.50 B. $25.00 C. $37.50 D. $50.00
D. If the $2.50 dividend payment is divided by the required rate of return (5%), this give a per share price of $2.50/.05 = $50.00.
All of the following are unlawful activities under the Uniform Securities Act EXCEPT: A) making an untrue statement of material fact to a customer B) deliberately failing to follow a customer's instructions C) omitting to state material facts about a security or transaction to a customer D) soliciting customer orders for unregistered exempt securities
D. The Act prohibits the solicitation of customer orders for unregistered non-exempt securities. There is no prohibition on the solicitation of customer orders for unregistered exempt securities such as U.S. Governments and municipals. Making an untrue statement of material fact; deliberately failing to follow a customer's instructions; and omitting to state material facts about a security or transaction are all unlawful activities.
A trade confirmation for an Over-The-Counter Bulletin Board stock shows the following: "We sold to you 100 shares of XXXX @ $7 Net" In this transaction, the member firm acted as a(n): A) agent, and charges a commission in addition to the Net price B) agent, and charges a commission included in the Net price C) dealer, and charges a mark-up in addition to the Net price D) dealer, and charges a mark-up included in the Net price
D. In an over-the-counter principal transaction, the member firm sells a security out of its inventory to a customer who wishes to buy; or buys a security into its inventory from a customer who wishes to sell. In this transaction, the firm acts as a dealer, and marks-up the stock to the customer who wishes to buy; or marks-down the stock from the customer that wishes to sell. Mark-ups and mark-downs taken in over-the-counter principal transactions must be disclosed for NASDAQ stocks only. There is no requirement to disclose the amount of mark-up or mark-down taken in principal transactions in OTC non-NASDAQ securities such as those included in the Pink Sheets or OTCBB - the Over-the-Counter Bulletin Board.
A broker-dealer offers securities in a State which, upon the advice of legal counsel, the broker-dealer believed to be exempt from that State's registration requirement. The Administrator issues a stop order and denies the exemption to the issue. A customer who bought the issue brings suit in a court of law against the broker-dealer. Which statement is TRUE? A. The legal opinion offered by legal counsel shields the broker-dealer from any liability to purchasers of the issue B. The customer may bring suit against the legal counsel for rendering a defective opinion; but cannot bring suit against the broker-dealer C. The court will refer the case to the State Administrator for resolution D. The broker-dealer is liable despite the fact that it believed, in good faith, that it was making an offering exempt securities
D. Just because a legal opinion was obtained does not relieve the broker-dealer from liability. It made an offer of securities that should have been registered in the State. Note that the broker-dealer could take legal action against the lawyers that rendered the defective legal opinion.
An investor is considering making the purchase of a limited partnership unit that requires a $10,000 investment and the signing of a $40,000 recourse note. The partnership is being formed by the former executive of a wireless communications company who believes that there is a business opportunity in buying unused wireless bandwidth that the federal government may put up for auction and then reselling this capacity to wireless start-up companies. Because the auction dates have not yet been set, and the government has the right not to conduct the auctions, investors are guaranteed to be refunded their investment, less a 5% administration fee in such an event. If the auctions do occur, investors may have to wait for 12 months before the company will generate positive cash flow. Which statement is TRUE? A. This investment does not meet the definition of a security because of the refund clause and is not covered under the Uniform Securities Act B. The most important consideration for an investor is purchasing power risk C. This investment does not have regulatory risk because its assets are being purchased from the U.S. Government D. This investment has both regulatory risk and business risk
D. Limited partnerships are securities - it makes no difference if the business plan states that if the partnership cannot acquire the wireless spectrum assets at auction from the federal government, then the partnership is disbanded and the investors get their money back. Purchasing power risk really does not apply - it applies to long term fixed income investments. This investment does have regulatory risk - the auction may or may not occur at the decision of the federal government - that is regulatory risk. It also has business risk - this may be a lousy business idea!
Under NASAA rules for State-registered advisers, transactions must be recorded in customer account records no later than: A. trade date B. settlement date C. 10 business days following the end of the month in which the transaction was effected D. 10 business days following the end of the quarter in which the transaction was effected
D. NASAA rules for State-registered advisers require that customer account records be posted no later than 10 business days following the end of each calendar quarter. Again, note that this is very different than the requirement of Federal securities law that applies to broker-dealers and Federal covered advisers.
If the SEC suspends or revokes the registration of an investment adviser registered under the Investment Advisers Act of 1940: A. the action is binding and non-appealable B. the adviser can take the case to binding arbitration C. an appeal may be filed with the State Administrator within 60 days D. an appeal may be filed in Federal Court within 60 days
D. PAY ATTENTION= FEDERAl LAW
To determine the present value of an investment, which of the following is NOT considered? A. The interest rate to be used to discount the annual payments received B. The amount of cash expected to be generated each year by the investment C. The time horizon of the expected investment returns D. The required sum needed at the end of the investment's life
D. Present value takes the annual cash flows that are expected to be generated by an investment and discounts them at the market rate of interest to their "present value." Thus, the present value formula determines what those cash flows are worth today. In contrast, future value takes the cash flows generated by an investment and compounds them at the market rate of interest to their value at a set future date.
A customer buys a corporate bond with a 5% coupon priced to yield 9%. If the inflation rate is currently 3%, the customer's real rate of return on this investment is: A) 2% B) 3% C) 5% D) 6%
D. REAL RATE- INF
Which statement is NOT true about enforcement of the Investment Advisers Act of 1940? A. The SEC has the power to collect evidence, subpoena witnesses and to take oaths and affirmations B. The SEC can issue orders denying or revoking registration of an investment adviser C. Orders of the SEC may be appealed by filing a motion in the U.S. Court of Appeals D. The State Court in which the defendant is located has primary jurisdiction in both criminal and civil suits brought under the Act
D. Regarding the powers of the SEC, it can collect evidence, take oaths and subpoena witnesses; it can issue orders denying or revoking Federal registration (but not State registration, but once the SEC boots an adviser out, the State piles on and boots that guy out of State registration as well). An SEC order can be appealed to the U.S. Circuit Court of Appeals. Since the SEC is a Federal agency, any criminal prosecution comes under the Securities Exchange Act of 1934 and would be pursued in Federal court, not in State court.
Which statement is TRUE about the retention of Internet advertising by broker-dealers? A. There is no requirement to retain copies of Internet advertising B. Only the current web pages must be retained by the broker-dealer C. All web pages created and displayed within the past 2 years must be archived D. All web pages that have ever been created and displayed must be archived
D. The Administrator can request filing of all web pages that have ever been created - so they must be retained and archived! NO YEARLY RULE HERE
The Administrator will summarily cancel a broker-dealer's registration for all of the following reasons EXCEPT the licensee: A) is no longer in existence B) has ceased to do business as a broker-dealer C) has been adjudicated as mentally incompetent D) is the subject of a complaint alleging an unethical business practice
D. The Administrator will cancel a broker-dealer's or investment adviser's registration if the firm is no longer in existence; has ceased doing business; or if the owner of the firm has become incompetent (as determined by a court of law). In Choice D, an allegation of engaging in an unethical business practice has been made, but this has not yet been determined to be the case. Furthermore, an unethical business practice might involve something that is not a very serious offense, such as failing to properly maintain records. For such a violation, the Administrator might fine the firm and make them take corrective action, but their registration would not be canceled.
A sole proprietor, 60 years old, has been in business for many years and the business is doing very well. He would like to retire at age 70. He asks his IAR about the potential benefit of changing the business structure to a C Corporation or a General Partnership. In terms of a business advantage, the IAR could tell the sole proprietor that: A. corporate dividends are not taxed until retirement B. partnerships have an unlimited life C. ownership in a corporation can be transferred upon retirement D. corporate ownership will provide the owner with limited liability
D. The current ownership form is a sole proprietorship, which gives the owner unlimited liability. Changing to a general partnership does not change this - each general partner has unlimited liability. Changing to a C Corporation provides limited liability to the shareholders. Corporate dividends paid are taxable each year, so Choice A is incorrect. Every time there is a change in the composition of a general partnership (adding new partners; getting rid of partners), the partnership must be dissolved and reformed, so a partnership does not have an unlimited life (Choice B). Finally, ownership in a corporation can be freely transferred; and since a sole proprietor is the only owner, his or her 100% ownership interest can also be freely transferred. So Choice C is not an advantage of converting a sole proprietorship to a corporation.
All of the following are defined as "persons" under the Uniform Securities Act EXCEPT: A. individuals B. joint stock companies C. unincorporated organizations D. trusts where the interests of the beneficiaries are not evidenced by a security
D. The definition of a "person" under the Act includes individuals; joint stock companies; unincorporated organizations; and trusts where the interests of the beneficiaries are evidenced by a security. It is important to know who are defined as "persons," since these entities may then be further defined as "agents" (which can only be individuals), "broker-dealers" (which can be incorporated or unincorporated businesses); or "issuers" (which can be incorporated or unincorporated businesses, joint ventures, municipalities etc.).
An investment adviser that solely follows and recommends listed securities is: A. exempt from State registration B. exempt from Federal registration C. subject to State registration only D. subject to either State or Federal registration
D. There is no exemption from registration for an investment adviser that follows only listed securities, at either the State or Federal level. The adviser must be registered in the State if it manages assets of less than $100,000,000; and if the adviser manages assets of $100,000,000 or more, it must register with the SEC.
A customer that is 55 years old has 5 years until retirement and an expected life span of 75 years. An investment adviser that is constructing a portfolio for this customer should use what time horizon when considering appropriate investments? A. 5 years B. 10 years C. 15 years D. 20 years
D. This customer is age 55 and is expected to live until age 75. This 20-year time horizon is the appropriate basis for making investment recommendations to the client.
Which statement is NOT true regarding the role of the trustee? A. The trustee owes a duty to the beneficiaries to comply with the prudent investor rule B. The trustee must invest and manage trust assets solely in the interest of the beneficiaries C. If the trustee has 2 or more beneficiaries, the trustee must act impartially, taking into account any differing interests of the beneficiaries D. The trustee is prohibited from delegating investment and management functions to an agent unless the beneficiary approves
D. Trustees must act in the best interests of the beneficiaries of the trust and must conform to the "Prudent Man" rule. The trustee is permitted to delegate investment and management functions as he or she sees fit - there is no requirement for beneficiary approval.
An adviser is creating a financial plan for retirement using a capital needs approach. Which type of insurance policy would be recommended as part of the plan? A. Term life B. Whole Life C. Universal Life D. Variable Life
D. When recommending investments for capital needs 20 years down the road, an adviser will most likely recommend a variable life policy or variable annuity, since their expected growth is greater because the premiums are invested in a separate account holding an equity mutual fund. A regular insurance policy (term, whole, or universal life) invests premiums in the general account, where only very conservative investments (fixed income) are made.
The State Administrator is empowered to require the filing of advertising and sales literature relating to offers of which of the following? A. U.S. Government securities B. Municipal securities C. Agency securities D. Equity securities
D. all other choices are exempt from registration in the state so they cant require it. The Administrator can require filing of advertising and sales literature unless the security involved is exempt; or the security is offered in an exempt transaction; or the security involved is a federal covered security. An equity security, such as common stock or preferred stock in a corporation, is non-exempt. U.S. Governments municipals and agencies are exempt securities, so the Administrator cannot require the filing of advertising related to these issues.
A customer wishes to open an account to help pay for her 15-year old son's college education expenses. She is concerned that the son may not be "college material" and wants to be able to take the funds back if he does not attend college. She could do this with all of the following account types EXCEPT: A. Totten Trust B. 529 Plan C. Coverdell ESA D. Custodian Account
D. custodian account gifts are irrevocable
Under the Investment Advisers Act of 1940, records MUST be retained for: A) 1 year B) 2 years C) 3 years D) 5 years
D. federal LAW
Specialists (DMMs) on the New York Stock Exchange can perform all of the following functions EXCEPT: A. act as a market maker B. act as a broker's broker C. handle odd-lot transactions D. act as an underwriter
D. just remember, they cannot deal with the public! They are wholesale members of the NYSE who deal only with other retail member firms. Specialists act as market makers and broker's brokers.
All of the following terms relating to mortgage backed securities are synonymous EXCEPT: A. Call risk B. Contraction risk C. Prepayment risk D. Extension risk
D. key here is that extension risk happens when rates rise, all the other choices it happens when rates fall
The risk premium is the rate of return on an investment over the: A) holding period return B) stock dividend rate C) current yield D) money market return
D. money mkt is safest return here so use that
A customer has an individual account. Upon written request, the customer's account statements and confirmations may be sent to the: A. Agent B. Broker-dealer C. State Administrator D. None of the above
D. none of the above customer mail can only be sent to customers home adress or a designated post office by the customer
An order ticket for the purchase of stock does NOT contain: A. Quantity B. Time that the order is placed C. Fill price Correct D. Market price at the time that the order is placed
D. of course it contains the fill price, its the price at which the order was filled at
The Sharpe ratio is: A) Standard Deviation / Risk Adjusted Rate of Return B) Standard Deviation / Risk Free Rate of Return C) Risk Free Rate of Return / Standard Deviation D) Risk Adjusted Rate of Return / Standard Deviation
D. risk adjusted rate of return/ standard dev
In order to determine whether a direct participation program is a suitable investment for a customer, inquiry should be made into all of the following EXCEPT: A. the customer's need for tax deductions in future years B. the customer's ability to meet future assessments, if any C. existing investments held by the customer D. the customer's need for tax deductions in previous years
D. slow down!
All of the following securities are exempt from registration under the Uniform Securities Act EXCEPT: A. unlisted debentures of a company whose common stock is listed on the NASDAQ market B. equipment trust certificates issued by a railroad subject to ICC regulation C. common stock issued by savings and loans D. preferred stock issued by industrial corporations
D. the key word here is INDUSTRIAL
A person who renders advice on fixed annuities for a fee; and who then sells the annuities, charging a commission: A) must register as an investment adviser in that State B) must register as a broker-dealer in that State C) must register as an agent in that State D) is not required to register as a broker-dealer, investment adviser or agent
D. they are a state insurance product no registration needed
An investment adviser is considered to "take custody" of funds or securities from a customer if it: A) exercises discretionary authority by placing trades of securities for that customer B) accepts a check from the customer made payable to the fund custodian to buy a mutual fund C) accepts commissions for effecting trades for that customer's account through an affiliated broker-dealer D) receives quarterly management fees from the custodian by direct deduction with client consent
D.Taking custody means that the adviser is holding customer funds or securities or has access to customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition because it has the ability to withdraw money from the client's account.
A socially responsible customer would NOT invest in a(n): A. defense company B. food company C. drug company D. computer company
DEFENSE COMPANY/ tobacco/ alcohol
Market orders
DO NOT SPECIFY A PRICE
REMEMBER SWAP=
Derivatives
ABCD stock has a beta of +2. The expected market rate of return is 8% and the risk-free rate of return is 1%. The standard deviation of returns is 3%. Using the Capital Asset Pricing Model (CAPM), what is the expected rate of return for ABCD stock? A. 12% B. 14% C. 15% D. 16%
Expected - risk free= 7%= Risk premium= Beta X (expected market rate of return- risk free rate of return. risk premium= 2 X 7%= 14% - then take 14% add on 1%
qualified custodians include
FDIC insured deposit taking institutions; Registered broker-dealers holding customer assets; Registered futures commission merchants holding customer assets; and Foreign financial institutions holding financial assets for customers.
Which interest rate would be used to calculate the risk free rate of return? I A. Prime rate B. Call loan rate C. Fed Funds rate D. Eurodollar rate
Fed funds rate
Under the Uniform Securities Act, an investment adviser is prohibited from taking custody of a client's funds if the: I Administrator prohibits this by rule II firm fails to notify the Administrator that it has custody or may take custody III firm is registered as a broker-dealer as well as an investment adviser
I II
Which of the following individuals is defined as an "agent" under the Uniform Securities Act? I An individual who represents a broker-dealer selling exempt securities to the public II An individual who represents a broker-dealer selling securities listed on a national stock exchange III An individual who represents an issuer in an exempt transaction IV An individual who represents an issuer in a transaction with existing employees without accepting a commission
I II note (III IV are excluded from the definition of an agent)
A person who renders advice on variable annuities for a fee; and who then sells the annuities, charging a commission, MUST: I register as an investment adviser in that State II register as a broker-dealer in that State III register as an agent in that State
I II If a variable annuity is sold for a commission, then the firm must register as a broker-dealer as well.
A person who is in the business of giving advice about which of the following is defined as an "investment adviser" under SEC Release IA-770? I Stocks II Corporate bonds III Commodities IV Real Estate
I II To be defined as an investment adviser that must register with the SEC, one must be giving advice about securities. Stocks and bonds are securities. Commodities and real estate are not securities. If one gives advice about commodities or real estate, that person is NOT an investment adviser.
Which statements are TRUE about required notice to the Administrator? I When an agent begins or terminates a connection with a broker-dealer, the agent and broker-dealer must notify the Administrator promptly II When an agent begins or terminates those activities which make him or her an agent, the agent and broker-dealer must notify the Administrator promptly III When an agent begins or terminates a connection with a broker-dealer, the agent and broker-dealer must notify the Administrator within 30 days IV When an agent begins or terminates those activities which make him or her an agent, the agent and broker-dealer must notify the Administrator within 30 days
I II under state law= notify promptly
Which of the following are "preference" items included in the alternative minimum tax computation? I Excess intangible drilling costs II Excess depletion III Straight line depreciation IV Tax credits
I II (also excess depreciation) Excess intangible drilling cost deductions, excess depletion, and excess depreciation (amounts over straight line) are all tax preference items included in the Alternative Minimum Tax (AMT). Straight line depreciation is not included, nor are tax credits.
States are NOT permitted to require the registration of a person: I who is excluded from the definition of an investment adviser under the Investment Advisers Act of 1940 II who is registered with the Securities and Exchange Commission as an investment adviser III with no place of business in the State who gives investment advice to fewer than 6 clients who are residents of the state during the preceding 12 months
I II III
Under IA-1092, which of the following are defined as "giving advice about securities"? A person who: I advises on the selection of an investment adviser II prepares a list of securities that may be purchased without making specific recommendations III prepares an asset allocation plan that specifies percentage investments in stocks, bonds, real estate and insurance IV charts the price movements of stocks and distributes them to subscribers
I II III
Which of the following information is included on an applicant's registration application? I Business history of applicant II Financial condition of applicant III Conviction record of applicant
I II III
Under the Investment Advisers Act of 1940, which of the following are included in the Form ADV Part 1 filed with the SEC? I A list of the officers of the advisory firm II A list of the shareholders of the advisory firm III The States in which the advisory firm is registered
I II III The Form ADV Part 1 filed with the SEC includes the officers of the firm, the States in which the firm is registered, and if the firm is a partnership, a schedule of the partners' names is included; while if the firm is a stock company (privately held) a schedule of the shareholders in included.
Under the Uniform Securities Act, an offer or sale does NOT exist if the securities are: I being pledged as collateral for a loan II non-assessable and are given as a gift III exchanged for another type of security under a judicially approved reorganization
I II III A sale is defined as a contract to dispose of a security for value. The pledge of securities is not a "sale;" the gift of non-assessable securities is not a "sale;" and an exchange of one security for another under a judicially approved corporate reorganization is not considered a "sale."
Which of the following can be filed electronically? I Registration application information II Signature requirement III Payment of fees IV Answer to a subpoena
I II III All State registration information, including signature and fee payment, can be done electronically.
A corporate investor may exclude from taxation, part of: I dividends received from common stock investments II dividends received from preferred stock investments III dividends received from convertible preferred stock investments IV interest received from convertible bond investments
I II III Corporate investors may exclude 70% of dividends received (both common and preferred) from taxation. Interest income received is 100% taxable (unless it is tax free municipal interest income). Whether a security is convertible or not has no bearing on the dividend exclusion.
Which of the following come under the jurisdiction of the State Administrator? I A mailing of sales literature to a customer in that State II A mailing of sales literature to a customer in a neighboring State III A television broadcast from within that State, received in that State IV A television broadcast from a neighboring State, received in that State
I II III If an offer of securities is directed into a State, it comes under the jurisdiction of that State Administrator. Thus, Choices I and II clearly fall under the Administrator's jurisdiction. Regarding television broadcasts, the interpretation is that if the broadcast originates in the State; and is received in the State; then it falls under the jurisdiction of State Administrator in the receiving State. If the broadcast originates in another State; and is received in the State; then it does not fall under the jurisdiction of the State Administrator in the receiving State. Simplified, this means that only the Administrator in the State from which the broadcast originated has jurisdiction. Thus, Choice III is correct; and Choice IV is incorrect.
The Administrator may, by order, cancel the registration of a broker-dealer, agent, investment adviser, or investment adviser representative, if: I It is found that the registrant is no longer in existence or has ceased to do business II the registrant cannot be located after a reasonable search III the registrant is the subject of an adjudication of mental incompetence
I II III The State Administrator has the power to enter an order canceling the registration of any broker-dealer, agent, investment adviser or investment adviser representative if the Administrator finds that the registrant has gone out of business (they were supposed to notify the Administrator of this, anyway!); if the registrant has disappeared; or if the registrant is found to be insane (this would only apply to agents and IARs)! These are all pretty logical reasons for canceling that person's registration.
Under the Investment Advisers Act of 1940, a person is "in the business" of giving investment advice if he or she is compensated for which of the following? I Recommendations of securities II Analyses of securities III Reports about specific securities
I II III To be "in the business" of giving investment advice, this must be a regular activity of the firm or person; and the advice must be rendered about securities; and that person must be compensated for giving such advice. Investment advice includes recommendations, analyses, or reports about specific securities or specific categories.
A representative is making a presentation to a married couple, ages 77 and 81, about their need for continuing income as the expected life spans of the general population have increased. The representative is strongly recommending that the couple buy an equity indexed annuity (EIA). Which statements made by the representative would be misleading and fraudulent? I "EIAs guarantee a minimum rate of return that is equal to the Standard and Poor's 500 Index" II "I do not earn any commissions when I sell you an EIA" III "EIAs are tax qualified, allowing you to reduce your taxable income by deducting any contribution that you make" IV "EIAs provide a minimum guaranteed rate of return that is guaranteed by the issuing insurance company"
I II III insurance product so it isnt a security, but they earn a SALES CHARGE. also There is no deduction for contributions to the contract (these are non-qualified plans) making Choice III a misleading statement.
A research report on an issuer CANNOT be published by the underwriter of that issuer's securities for the time period encompassing: I 10 days following the effective date for an initial public offering II 40 days following the effective date for an initial public offering III 10 days following the effective date for a secondary offering IV 40 days following the effective date for a secondary offering
II III
Which of the following information is included in a (standardized) commodities futures contract? I Acceptable grades of the commodity II Quantity of the commodity III Delivery location of the commodity IV Price of the commodity
I II III Commodities futures contracts are "standardized," which makes them easier to trade. Each exchange has its own contract for a standard size (quantity) and quality of the commodity (the exchange sets the different varieties or grades that can be delivered at various price differentials to the contract price) and there are standardized future delivery dates for the underlying commodity, if the contract is not closed by trading as of that date. What is not standardized is the price of the contract - this is determined between buyer and seller on the floor of the exchange.
nsurers generally give a variable life insurance owner investment choices including which of the following investments? I Common stock funds II Bond funds III Money market funds
I II III ALL THREE
Disclosure of which of the following is made in a Form ADV Part 2 that is filed with the SEC under the Investment Advisers Act of 1940? I Description of how fees are assessed II Method of analysis used III Educational background of applicant IV Balance sheet of applicant if the firm takes custody of client funds or accepts $1,200 or more of prepaid advisory fees
I II III IV
The Investment Policy Statement for a qualified plan under ERISA will cover which of the following? I Specific assets classes in which the plan may invest II Asset allocation percentages for each asset class III Names and roles of trustee(s) and plan manager(s) IV Discussion of investment objective, needs, risk tolerance and investment time horizon
I II III IV
Under SEC Release IA-1092, which of the following would be required to register with the SEC as investment advisers? I A Certified Financial Planner who only provides general financial planning for a fee; but who does not take commissions on recommended transactions II An attorney who manages the business affairs of athletes for a fee III An accountant who manages the business affairs of entertainers for a fee IV An economist who gives advice to pension plans for a fee on the outlook for the securities markets
I II III IV
Under the Securities Exchange Act of 1934, member firms are responsible for which of the following? I Registering with the SEC II Maintaining minimum net capital requirements and reporting net capital to the SEC III Sending the member firm's financial statements to customers twice a year IV Being audited at least once a year
I II III IV
Under the Uniform Securities Act, a person who sells securities in violation of the Act has civil liability for: I principal amount of the security II commission costs to acquire the security III interest on the amount invested IV attorney's fees related to the recovery of assets
I II III IV
Which of the following information MUST be recorded on an order ticket? I Time of execution II Time of receipt III Account number IV Solicited or unsolicited
I II III IV
Which statements are TRUE about State registration of solicitors for investment advisers? I Officers of investment advisers that solicit advisory business in the State must be registered in the State II Employees of investment advisers that solicit advisory business in the State must be registered in the State III Independent contractors that solicit advisory business in the State must be registered in the State IV Non-affiliated persons that solicit advisory business in the State must be registered in the State
I II III IV
Under SEC Release IA-1092, which of the following are considered to be compensation to an investment adviser? I Prepaid advisory fees that will be refunded in part if the contract is canceled II Hourly advisory fees III Fixed advisory fees IV Commissions received on transactions that result from the implementation of a financial plan created for "free" by the adviser
I II III IV "Compensation" to an investment adviser can basically be received in any form - it includes fixed fees, hourly fees, fees based upon assets under management, prepaid fees; and any compensation received from anyone else in connection with that investment advice.
Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following practices are prohibited? I Guaranteeing a client against loss for non-exempt securities II Guaranteeing a client against loss for exempt securities III Borrowing money or securities from a customer IV Lending money or securities to a customer
I II III IV Agents may not personally guarantee a customer's account against loss, regardless of the securities being exempt or non-exempt. Borrowing money or securities from a customer; or lending money or securities to a customer; is a prohibited practice.
internet communications by agents of broker-dealers will NOT be considered to be offers of securities transactions in a State as long as the: I communication is limited to "general" information II agent's affiliation with the broker-dealer is prominently displayed III broker-dealer retains responsibility for the review and approval of the content IV agent does not exceed the scope of authority granted by the broker-dealer
I II III IV All of the choices are true in order for an Internet Communication by an agent not to be considered to be an offer of securities transactions in a State. The communication must be general in nature; the agent's affiliation with the broker-dealer must be prominently displayed; the broker-dealer must review and approve of the communication; and the agent cannot exceed the scope of authority granted by the broker-dealer in the communication. If these requirements are not met, then both the broker-dealer and the agent must be registered in each State where a customer receives the communication.
Which of the following are tax preference items included in the Alternative Minimum Tax? I Excess depreciation II Excess depletion III Excess intangible drilling costs IV Private purpose municipal interest income
I II III IV All of the items listed are "tax preference" items for the Alternative Minimum Tax (AMT) calculation - excess depreciation deductions above straight line; excess intangible drilling cost deductions (IDCs); excess depletion deductions; and non-essential use private purpose municipal interest income.
When comparing Roth IRAs to Traditional IRAs, which statements are TRUE? I Traditional IRA contributions can be deductible; Roth IRA contributions are never deductible II Traditional IRA contributions are never deductible; Roth IRA contributions can be deductible III After age 59 1/2, distributions from Traditional IRAs can be taxable; qualified distributions from Roth IRAs are never taxable IV After age 59 1/2, distributions from Traditional IRAs are never taxable; qualified distributions from Roth IRAs can be taxable
I III
Which of the following statement(s) is (are) TRUE regarding family limited partnerships? I The venture must have a legitimate business purpose other than tax avoidance II The partnership must have at least 1 general partner and 1 limited partner III Only general partners can assume a management role IV Any asset can be held in the partnership
I II III IV Family limited partnerships, like all partnerships, must have a least 1 general partner and 1 limited partner - but there is no stipulation on who must be the general and who must be the limited partner(s). The partnership cannot be formed just to avoid taxes - it must have a legitimate business purpose. Only a general partner can assume a management role - the limited partner(s) remain as passive investors. Finally, any assets can be held in the partnership - real estate is common - not just financial assets.
Under the Securities Act of 1933, omissions or misstatements of material fact in a registration statement can be considered to be fraudulent for the: I Officers of the issuer II Lawyers for the issuer III Accountants for the issuer IV Board of Directors of the issuer
I II III IV Fraud is fraud is fraud. Omissions or misstatements of material fact in a registration statement or prospectus for an issue registered under the Securities Act of 1933 can be fraud for everyone involved. The officers of the issuer and the members of the Board of Directors who sign the registration statement are liable; as are the accountants who certify the financial statements; as are the lawyers who prepare the legal filings.
Under the Investment Advisers Act of 1940, disclosure of which of the following is required to be made to customers? I Compensation paid to the adviser by the issuer for recommending that security II Compensation paid to the adviser by a broker-dealer for recommending the use of that firm to execute portfolio transactions III Compensation paid to the adviser by an insurance company for the recommendation of insurance products IV The ability of the customer to use any broker-dealer to execute recommended portfolio transactions
I II III IV If an investment adviser receives compensation from anyone other than the customer; related to the rendering of advisory services to that customer; this must be disclosed to the customer. Thus, Choices I, II and III are true. If the investment adviser recommends the use of a broker-dealer to effect recommended trades, (which it will do if the broker-dealer compensates the adviser for these trades); it must inform the customer that any broker-dealer can perform these transactions. The customer does not have to effect these trades through the broker-dealer favored by the investment adviser.
Which of the following are deductible from a taxable estate? I Funeral and administrative expenses II Claims against the estate III State death taxes IV Mortgages against real property owned by the estate
I II III IV A "taxable" estate is one that is valued over $5.43 million (in 2015 - the limit is adjusted for inflation annually). The executor files an estate tax Form 706 for estates where tax is due. When calculating the value of the estate that is taxable, the executor gets to deduct funeral and the executor's administrative expenses, as well as the cost of the estate attorney. Also deductible are any claims made against the estate (for example, unpaid bills) and mortgages on property owned by the estate. Finally, any state estate tax bill (certain states, like New York and California, have a high estate tax - about 10%) is deductible from the federally-taxable estate.
Which of the following are exempt issues under the Securities Act of 1933? I Government Bonds II Municipal Bonds III State Chartered Bank Issues IV Small Business Investment Companies
I II III IV all of them under the 33 act are exempt
Which risks are unique to mortgage backed securities? I Interest rate risk II Contraction risk III Credit risk IV Extension risk
I II III IV remember prepayment risk is when rates fall, when they rise extension risk
The wife of a customer who maintains an individual account with your firm telephones, and states that they are short of money, and that they will not be able to pay for the most recent securities purchase in the account. The securities have appreciated substantially since trade date, and the trade settles in 3 business days. The wife tells the agent to liquidate the position. Which actions by the agent are NOT allowed? I The agent may arrange for a loan to the customer of the money needed to purchase the securities II The trade may be canceled III The agent may sell the securities in the account; and may send the customer a check for the profit when that trade settles IV The agent may sell the securities in the account; but cannot send the customer a check for the profit until the original purchase is paid
I II III IVThe wife has no authority over the husband's individual account. The wife would only be permitted to effect transactions in the account; or draw checks from the account; if the husband had given the wife authorization to do so in writing. This is not the case, so the agent cannot follow the wife's instructions to liquidate the transaction. The agent cannot arrange for a loan to the customer - lending money to customers is prohibited under State law, making choice I prohibited. The trade cannot be canceled. All trades are binding on the customer, making choice II prohibited. The agent cannot sell the securities in the account at a profit. To do so would require that instructions be given directly by the husband to this effect; or the instructions would have to be given by someone with written trading authorization. Thus, choices III and IV are also prohibited.
Under the NASAA Statement of Policy on unethical practices, the release of customer information to which of the following would NOT be "unethical"? I Securities and Exchange Commission II Internal Revenue Service III Self-Regulatory Organizations IV Registered broker-dealers
I II III SRO(FINRA) so YES
Which of the following are NOT considered to be "churning"? I Exchanging income fund shares for growth fund shares for a customer who has a capital gains investment objective II Day trading by an agent with discretionary authority in a customer margin account where the customer has a speculative investment objective III Recommending trades in a customer account with the objective of producing commissions for the agent IV Swapping a municipal bond for another municipal bond to obtain a capital loss deduction
I II IV
Which of the following is (are) defined as a "broker-dealer" under the Uniform Securities Act? I A person who effects securities transactions for its own account II A person who effects securities transactions for the account(s) of others III An agent of a broker-dealer who effects securities transactions IV An agent of a broker-dealer who effects securities transactions that are not recorded on the books of the broker-dealer
I II IV
Which of the following are "asset classes"? I Jewelry II Collectibles III Real Estate IV Life Insurance
II III
Which actions taken regarding a universal variable life insurance policy could result in tax liability? I Cash surrender II Partial withdrawal III Loan of up to 95% IV Payout of death benefit
I II IV Proceeds distributed from a variable life insurance policy are taxable income if there is a distribution of benefits above the amount invested (tax basis) in the separate account. This would include a cash surrender (surrender of the entire policy for its current cash value, terminating the policy) or making a partial withdrawal from the policy. The payment of a death benefit from the policy, while not taxable income to the recipient, is included in the taxable estate of the deceased individual. If the aggregate value of the estate exceeds the estate tax exclusion, there will be estate tax liability. The only way to get cash out of a variable policy without a potential tax consequence is to borrow against the policy. In general, most "cash value" policies only permit a loan of up to 75% of cash value; but if the policy is fully paid, often the loan amount is raised to 95%.
The use of a third party solicitor by an Investment Adviser: I is permitted if there is a written agreement between the solicitor and investment adviser II is not permitted if the solicitor is subject to statutory disqualification as defined under the Investment Advisers Act of 1940 III requires that the solicitor be registered with the investment adviser as that firm's representative in that State IV requires that the solicitor be registered as either an investment adviser or an investment adviser representative in that State
I II IV A solicitor for an investment adviser does not have to be an employee of that advisory firm. For example, an investment adviser could retain an independent CPA to refer clients that could benefit from the adviser's services. To do so, there must be a written agreement between the solicitor (the CPA in this case) and the investment adviser. The adviser is prohibited from retaining a person as a solicitor if that person is subject to "statutory disqualification" under the Investment Adviser's Act of 1940 - which basically means that this person is likely to be a risk to investors. An individual is subject to such disqualification if he or she is under suspension or has been expelled by another regulator; if he or she has been enjoined in a court of law from being in the securities business; or if he or she has been convicted of a misdemeanor or felony involving securities or monies within the past 10 years. The solicitor does not have to be an employee of the adviser nor does he or she have to be registered as an adviser representative of that adviser. There are independent solicitors (such as CPAs) that refer clients to advisers for a referral fee. However, to act as a solicitor requires that the individual (the CPA in this case) either be registered in that State as an investment adviser (which the CPA can do by him- or herself) or be registered as an investment adviser representative (which could be done by that individual registering through any adviser registered in that State).
Under the Investment Adviser's Act of 1940, an investment adviser that advertises itself as a "fee only" adviser would be permitted to collect: I a fee charged for each hour of work performed for the client II a fee based on asset performance in that client's account for wealthy investors III 12b-1 fees from mutual funds recommended to that client IV a fee based on assets held under management in that client's account
I II IV Advisers that are "fee only" can charge hourly fees, fees based on a percentage of assets under management, and can charge performance fees - but only for wealthy investors (those with either at least $1,000,000 under management or a net worth of $2,000,000 as permitted under the Investment Advisers Act of 1940). An adviser that advertises itself as a "fee only" adviser cannot be compensated from the sale of products that it recommends. It cannot charge commissions on transactions, nor can it receive 12b-1 fees, which are basically annual commissions paid by a mutual fund to the broker-dealer or advisory firm that placed the customer into the fund. In both of these cases, the adviser has an incentive to either actively trade the customer's account in order to receive higher commissions or to place the customer only in those mutual funds that will pay 12b-1 fees to the adviser. A "fee only" adviser is supposed to be completely unbiased in its selection of securities for the customer and the frequency with which it trades the customer's account.
Under the Investment Advisers Act of 1940, if an investment adviser wishes to effect an agency cross transaction for a customer, which of the following statements are TRUE? I Agency cross transactions cannot have been recommended to both the buyer and seller by the investment adviser II Each client must be sent an annual statement identifying the total number of agency cross transactions effected; and the remuneration received by the adviser for these transactions III Each client must be sent a monthly account statement detailing activity in the account for that period IV To effect an agency cross transaction, written consent from the client must be obtained
I II IV If an investment adviser wishes to effect an agency cross transaction for a customer, it cannot have recommended the transaction to both the buyer and the seller. To effect the transaction, the adviser must obtain written consent of the customer; must disclose the remuneration that will be received from the transaction; and must send the customer an annual statement identifying the total number of agency cross transactions effected by the adviser and the remuneration received. There is no requirement to send monthly statements to customers.
An account is opened "joint tenants with rights of survivorship". Which of the following statements are TRUE? I If one party to the account dies, the other party wholly owns the account II Orders may be given by either party III Checks can be drawn in the name of either party IV Mail can be sent to either party
I II IV checks must be drawn in the name of both parties, not either. mail can be sent to either party
An Investment Adviser can give advice on: I NYSE listed securities II Options III Commodity futures IV Variable annuities
I II IV (commodities are not SECURITIES)
An agent of a broker-dealer puts up a website that promotes the benefits of dollar cost averaging, including the caveat that it is suitable for investors only if they can maintain their periodic payments regardless of economic conditions and that it requires a long-term investment time horizon. If the website is viewed by an individual in another State where both the broker-dealer and agent are not registered, which of the following disclosures are required on the site in order not to be in violation of the Uniform Securities Act in that State? I "The broker-dealer or agent may only transact business in the State if registered in the State or if exempted or excluded from registration" II "Follow ups or individualized responses to persons in the State that involve either effecting or attempting to effect transactions in securities will not be made absent compliance with State registration requirements or an applicable exemption or exclusion" III "The services being offered do not represent an offer to sell securities or a solicitation of an offer to buy the securities in the State unless the subject securities are registered or are subject to an applicable exclusion" IV "The Securities and Exchange Commission has not approved, nor has it disapproved of offering made in this advertisement"
I II only
In order for an investment adviser to charge a "performance fee" under the Investment Advisers Act of 1940, the customer must have: I at least $1,000,000 of assets to invest II a net worth of at least $1,000,000 III at least $2,000,000 of assets to invest IV a net worth of at least $2,000,000
I IV
Which of the following statements are TRUE regarding the actions of an investment adviser and its accounts? I The transfer of a customer account to another investment adviser due to the acquisition of the advisory firm must be approved by the customer of the acquired firm II The transfer of a customer account to another investment adviser due to the acquisition of the advisory firm does not have to be approved by the customer of the acquired firm III The transfer of a customer account due to the retirement of the investment adviser must be approved by the customer whose account is being transferred IV The transfer of a customer account due to the retirement of the investment adviser does not have to be approved by the customer whose account is being transferred
I III
Which statements are TRUE? I An investment adviser offering its services in a State must either be registered in that State or must be registered with the SEC as a Federal Covered adviser II An investment adviser offering its services in a State is not required to be registered in that State nor is it required to be registered with the SEC as a Federal Covered adviser III A third party solicitor for an investment adviser offering that adviser's services in a State must be registered as either an investment adviser or an adviser representative in that State IV A third party solicitor for an investment adviser offering that adviser's services in a State is not required to be registered as either an investment adviser or an adviser representative in that State
I III
an investment adviser directs its trades to a broker-dealer paying non-discounted rates. In return, the broker-dealer provides the adviser with proprietary investment analysis software that it has developed. This is: I a soft dollar arrangement II a quid pro quo arrangement III permitted under the Uniform Securities Act IV prohibited under the Uniform Securities Ac
I III An adviser may direct its portfolio trades to a brokerage firm that charges a higher commission (as opposed to the lowest-cost broker) in return for the adviser getting something of value from the broker-dealer, such as research reports, asset allocation software, stock screening software, etc. The "idea" is that the value of the broker-dealer "give-back" is much higher than the "extra commission" amount paid to the broker-dealer by the adviser and will enhance the adviser's investment returns, which will benefit the adviser's clients.
Which TWO of following investments offer tax benefits? I Municipal bonds II REITs III Real Estate IV Index Funds A. I and III B. I and IV C. II and III D. II and IV
I III Municipal bonds offer interest income that is free of federal income tax and free of state and local income taxes when purchased by a resident of that state. Thus, they offer a tax benefit. Direct investment in real estate permits the owner to deduct depreciation and mortgage interest cost, so this is a tax benefit. REITs and Index Funds do not allow for "flow-through" of loss deductions and they do not offer an exemption from federal income taxation on either interest or dividend income that is distributed to shareholders.
Which of the following statements are TRUE regarding the actions of an investment adviser and its accounts? I The transfer of a customer account to another investment adviser due to the acquisition of the advisory firm must be approved by the customer of the acquired firm II The transfer of a customer account to another investment adviser due to the acquisition of the advisory firm does not have to be approved by the customer of the acquired firm III The transfer of a customer account due to the retirement of the investment adviser must be approved by the customer whose account is being transferred IV The transfer of a customer account due to the retirement of the investment adviser does not have to be approved by the customer whose account is being transferred
I III The transfer of an investment adviser account to another investment adviser must be approved by the customer. If an investment adviser is "acquired" - its accounts are being transferred to another adviser and consent of each of the acquired adviser's clients is required. If the adviser is retiring and transferring his or her accounts to another firm - again, in this case, the clients must consent to the transfer.
Under the Investment Advisers Act of 1940, which of the following MUST be disclosed to customers by an investment adviser? I An investment adviser takes $1,750 of prepaid advisory fees, 9 months in advance of services rendered, is having financial difficulties II An investment adviser that does not take custody of client funds; have discretionary accounts; or accept prepaid advisory fees; is having financial difficulties III An investment adviser that takes $1,750 of prepaid advisory fees, 9 months in advance of services rendered, is the subject of a disciplinary or legal action IV An investment adviser that does not take custody of client funds; have discretionary accounts; or accept prepaid advisory fees; is the subject of a disciplinary or legal action
I III IV basically, if the adviser has taken custody it must be disclosed, and any legal action taken against any adviser must be disclosed, regardless of custody
Which statements are TRUE about the solicitor's brochure under the Investment Advisers Act of 1940? I It must disclose the specific dollar fee, or percentage of advisory fee paid by the customer, that the solicitor will earn for referring the customer II It can be incorporated into the investment adviser's brochure, so that only one document is provided to the customer III It must disclose that the solicitor will be compensated for referring the client to the investment adviser IV The customer must sign that he or she received the solicitor's brochure
I III IV (cannot be incorporated into a simplified brochure)
Which statements are TRUE regarding the taxation of capital gains? I A capital gain is considered to be short term if a position is liquidated at a profit after being held for 1 year or less II A capital gain is considered to be short term if a position is liquidated at a profit after being held for over 1 year III For investors in the maximum tax bracket, any short term capital gains will be taxed at the same tax rate as that bracket IV For investors in the maximum tax bracket, any short term capital gains will be taxed at a lower rate than that bracket
I III short term cap gains taxed at tax bracket rememebr!!
An investor holds shares of a stock that declares a 10% stock dividend. Which of the following statements are TRUE regarding the stock position after the dividend is paid? I The cost basis per share is adjusted II The cost basis per share remains the same III The distribution is taxable IV The distribution is not taxable
I IV
Hedge funds are: I managed II non-managed III registered IV non-registered
I IV
In a money purchase retirement plan, which statements are true? I Employer contributions are mandatory II Employer contributions are voluntary III Employees are permitted to make matching contributions IV Employees cannot make matching contributions
I IV
A broker-dealer has a place of business in State A does business exclusively in State A and is registered in the State. The broker-dealer has no office in State B and is contacted by a client in State B who wants to sell some securities that he inherited. State B does not have a de minimis rule for broker-dealers. The client is not interested in opening an account and only wants the broker-dealer to do this transaction and remit the proceeds to the customer. Which statements are TRUE? I In order to effect this transaction, the broker-dealer must be registered in State B II In order to effect this transaction, the broker-dealer is not required to be registered in State B III In order to effect this transaction, the securities involved must be registered in State B IV In order to effect this transaction, the securities involved are not required be registered in State B
I IV If a broker-dealer with no office in that State, effects an isolated non-recurring trade in that State in a 12 month period, the transaction is exempt, and the security is not required to be registered in that State. This is an "isolated non-issuer transaction." Note that the broker-dealer still must be registered in the State unless the broker-dealer has no office in the State and the broker-dealer qualifies for a "de minimis" exemption in the State. This State does not have a "de minimis" rule for out-of State broker-dealers, therefore the broker-dealer must be registered in State B to do the trade.
Under NASAA rules, an: I agent is permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed II agent is not permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed III investment adviser representative is permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed IV investment adviser representative is not permitted to share in the gain and loss of a customer account if a joint account is opened with the customer and sharing is proportional to capital contributed
I IV Investment advisers and their representatives are held to a fiduciary standard. If they are making investments personally, they are already investing alongside their clients. Because of this, IAs and IARs cannot share in the gain or loss of a customer account. If they are making personal investments, they must be the same as those made for clients, and all will experience the same gain or loss anyway! Note that this completely differs than the rule for broker-dealers and their agents, who are not held to a fiduciary standard.
Which of the following statements are TRUE regarding payouts from variable annuity contracts? I The payout is determined by the number of annuity units II The payout is determined by the number of accumulation units III When payout commences, unit value is fixed while the number of units varies IV When payout commences, unit value varies while the number of units is fixed
I IV. When payout is to commence from a variable annuity, the holder's accumulation units are converted into a fixed number of annuity units (based on mortality tables and payout option selected). The monthly payout is determined by taking that fixed number of annuity units times the unit value (which fluctuates as the value of the securities in the underlying separate account fluctuates).
To register an issue by filing, the issuer must be: I in business for the past 3 years II profitable for 2 of the past 3 years III in business for the past 5 years IV profitable for 2 of the past 5 years
I and II To qualify for registration by filing, an issuer must have been in business continuously for the past 3 years, and must have net earnings for 2 of the past 3 years.
Which of the following are taxable in the year of receipt? I Interest earned from investments II Cash dividends from investments III Stock dividends from investments IV Stock splits on investments
I and II cash divs and interest are taxable each year received, unless interest is exempt!!!
Which of the following actions taken by an investment adviser would require consent of the adviser's existing customers? I The investment adviser and its accounts are acquired by a larger, more prestigious firm II The investment adviser acquires a small firm and its accounts to enhance its geographic coverage III The investment adviser wishes to retire and transfer its accounts to another investment adviser
I and III The transfer of an investment adviser account to another investment adviser must be approved by the customer. If an investment adviser is "acquired" - its accounts are being transferred to another adviser and consent of each of the acquired adviser's clients is required (Choice I). On the other hand, if an investment adviser acquires another advisory firm (Choice II), it is the acquired firm's clients that must give consent. The acquiring firm's clients are not affected by such an action. In Choice III, the adviser is retiring and transferring his or her accounts to another firm - again, in this case, the clients must consent to the transfer.
Which of the following are defined as passive income? I Distributive share of income from a real estate limited partnership investment II Dividends received from a real estate investment trust investment III Interest received from a corporate debenture investment IV Proceeds from the sale of a partnership unit in excess of the tax basis of that unit
I only
Delivery of a prospectus is required if a: I new issue of corporate bonds is being offered to the public II trade in a corporate bond takes place in the secondary market III new issue of government bonds is being offered to the public IV trade of a government bond takes place in the secondary market
I only The best answer is A. Prospectus delivery is only required for new issues being sold in the primary market. Once a company is trading in the secondary market, it is reporting its results to the SEC and this information is publicly available. Thus, an investment decision can be made from this information and there is no longer a prospectus delivery requirement. There is no prospectus requirement for exempt securities - governments, agencies and municipals (because we trust that our government won't fleece us!).
Under the Uniform Securities Act, an agent may engage in which of the following transactions? I Performing investment advisory services for customers as long as they are solely incidental to his work as a broker and no fees are charged II Soliciting orders for non-exempt unregistered securities if he is registered in the State III Effecting transactions in a State where he is not registered, but where the broker-dealer is registered IV Effecting transactions in a State where the broker-dealer is not registered, but where he is registered
I only An agent can perform advisory services for clients as long as they are incidental to his work and no compensation is taken for the advisory work. Agents cannot solicit orders for unregistered non-exempt securities (but they can solicit orders for unregistered exempt securities such as U.S. Governments or Municipals). Agents cannot effect trades in a State where they are not registered; or where their broker-dealer is not registered.
Which of the following are characteristics of growth stocks? I Low dividend payout ratios II Low price to book value ratios III Low price-earnings ratios
I only Growth companies tend to have high Price/Earnings ratios; high Price/Book Value ratios; low dividend payout ratios; and high retained earnings ratios. Mature companies are just the opposite.
An investment adviser providing advice solely about municipal securities is subject to: I state registration II federal registration III state advertising filing requirements
I or II An investment adviser who provides advice solely about municipal securities is subject to either Federal or State registration, depending on the amount of assets the adviser has under management (note that this is not the case for an adviser that gives advice only about U.S. Government securities, where there is an exemption from Federal registration but not from State registration). There are no advertising filing requirements in a State for securities or transactions that are exempt; or for federal covered securities. Since municipals are exempt securities, the Administrator cannot impose an advertising filing requirement on offerings of these securities.
Which of the following information is on an order ticket? I Order size II Duration of order III Price of the transaction if it is a market order IV Name of security
I, II, IV if an order is market order, no price is shown, just mkt.
Which statements are TRUE about an issue that is registered in a State by Coordination? I The statutory cooling off period under the Securities Act of 1933 is 10 days II The statutory cooling off period under the Securities Act of 1933 is 20 days III The statutory cooling off period under the Uniform Securities Act is 10 days IV The statutory cooling off period under the Uniform Securities Act is 20 days
II III
Which statements are TRUE about protecting gains on stock positions? I A long call can be used to protect a gain on an appreciated long stock position II A long call can be used to protect a gain on an appreciated short stock position III A long put can be used to protect a gain on an appreciated long stock position IV A long put can be used to protect a gain on an appreciated short stock position
II III
Which statements are TRUE regarding the statute of limitations imposed under the Uniform Securities Act for actions that will cause denial of registration by the Administrator? I The statute of limitations for conviction of securities-related offenses that occurred in the U.S. is 5 years II The statute of limitations for conviction of securities-related offenses that occurred in the U.S. is 10 years III The statute of limitations for conviction of securities-related offenses that occurred in a foreign jurisdiction is 5 years IV The statute of limitations for conviction of securities-related offenses that occurred in a foreign jurisdiction is 10 years
II III
A customer that is long crude oil (a physical commodity): I can hedge by buying an oil futures contract II can hedge by selling an oil futures contract III typically plans on selling the crude oil at a future date in the cash market IV typically plans on selling the crude oil by making delivery on the contract delivery date
II III A short futures contract establishes a pre-set sale price for the oil at the future date. If the price of oil declines, the customer will take a loss on the long crude oil position, but would have an equal gain on the short futures contract. Less than 3% of futures contracts are ever settled by physical delivery. To make a physical delivery, the crude oil would have to be delivered to a facility specified by the clearing house - which could be thousands of miles away. Rather, the customer is much more likely to sell the oil locally at the market price and not incur the transportation costs.
Which of the following would NOT be included in Adjusted Gross Income on a tax return? I Social security payments II Municipal bond interest III Distributions from non-qualified retirement plans attributable to cost basis IV Distributions from mutual funds subject to Subchapter M
II III Adjusted gross income on a tax return includes all sources of taxable income, including wages, commissions, royalties, alimony, social security payments, pension plan payments (except for payments attributable to the cost basis in non-qualified plans), investment income (and this includes mutual fund distributions) and capital gains. Excluded from Adjusted Gross Income is municipal bond interest (which is not federally taxable) and retirement plan distribution amounts from non-qualified plans attributable to the cost basis (non-deductible investment dollars) in the plan.
Under NASAA's rules on Unethical Business Practices for Registered Investment Advisers and Investment Adviser Representatives, which of the following client information is permitted to be disclosed to a third party without first obtaining client consent? I Account information directed to be disclosed by the client's CPA in a written letter signed by the CPA II Aggregated and averaged account information that the adviser wants to use in an advertisement III Account information directed to be disclosed by the investment adviser by the State Administrator IV Account information directed to be disclosed by the investment adviser by the client's spouse
II III Customer privacy rules only cover information that can be linked to a specific client. Aggregated or averaged information is not private and can be disclosed at anytime, to anyone. Otherwise, customer account information can only be disclosed if the customer permits (not if the customer's spouse says so!); or if the request is made by a regulator (such as the State Administrator) or a court of law.
Which statements are TRUE about ERISA's fiduciary requirement? I The plan accountant is a fiduciary II The plan trustee is a fiduciary III The investment adviser is a fiduciary IV The plan actuary is a fiduciary
II III ERISA requires that a fiduciary be named in each plan document. The fiduciary is a person who exercises discretion or control over the plan. There can be multiple plan fiduciaries - for example, the plan trustee, investment adviser(s) and those individuals that exercise discretion in the administration of the plan, are all fiduciaries. The fiduciaries can only act in the best interests of the plan participants - the beneficiaries. Attorneys, accountants and actuaries are not plan fiduciaries when acting solely in their professional capacities - since they don't have discretion or control over plan assets.
Which of the following terms describe Equity-Indexed Annuities? I Investment product II Insurance product III Principal protected IV Not principal protected
II III Equity Indexed annuities are an insurance product and are currently not defined as a "security." They give a return tied to the performance of the Standard and Poor's 500 Index, but this is subject to an annual cap of typically 7-9%. Thus, in a year of sharply rising stock prices, they will not give the return of the index. However, they are protected in a falling market and guarantee a yearly minimum return of 1-3%. Thus, they will give a better return than the Standard and Poor's 500 Index when the market is falling sharply.
Which statements are TRUE regarding 457 plans? I They are established by for-profit corporations II They are established by government entities III They are qualified plans IV They are non-qualified plans A) I and III B) I and IV C) II and III D) II and IV
II IV A 457 plan is similar to 401(k) and 403(b) plans, except that it can only be established by government employers (and certain non-profit employers). These are non-qualified plans because they are discriminatory. They generally are only available, as an added benefit, to higher earning government employees. The maximum salary reduction contribution is the same for 457 plans as it is for 401(k) and 403(b) plans - $18,000 in 2015. The amount contributed is a salary reduction. Earnings build tax deferred. When distributions are taken, they are 100% taxable. A major difference is that there is no 10% penalty tax for early withdrawals from 457 plans.
Under ERISA Rule 404(c), a 401(k) plan fiduciary would be relieved from liability resulting from the plan participant's investment directions: I if each plan participant is notified that by exercising discretion over his or her account, he or she becomes the plan fiduciary II if each plan participant is notified that liability for directed investments is being transferred from the plan fiduciary to the plan participant III if the plan offers investment options consisting of a Fixed Income Fund, Growth Fund and a Capital Preservation Fund IV if the plan offers investment options consisting of a Government Bond Fund, Fixed Income Fund, Money Market Fund and a Capital Preservation Fund
II III Rule 404(c) permits a 401(k) plan to offer investment options to its participants. It requires that the plan sponsor offer at least 3 investment alternatives that are diversified; that have materially different risk and return characteristics; and that when combined with each other, tend to minimize risk through diversification (e.g., an equity fund, a fixed income fund, and a capital preservation fund). This is the case with Choice C. Choice D does not offer an equity fund. If the plan complies with Rule 404(c), the plan fiduciary cannot be sued for "breach of fiduciary duty" by the plan participants based upon the plan participant making poor choices among those offered (e.g., a young plan participant putting all of his or her money in a money market fund for a long time frame or an older plan participant putting all his money in a growth fund just before a bear market). However, the plan fiduciary can still be sued for breach of fiduciary duty if the investment choices offered are imprudently selected (e.g., they have very high expenses and poor performance, as compared to other funds of the same type). Note that each participant does not become his or her own fiduciary under the rule; there is still an independent fiduciary over the plan
Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following is (are) prohibited business practices? I Sharing commissions between a registered broker-dealer and an agent II Sharing gains in an account between an agent and a customer III Sharing inside information between an agent and a customer
II III Sharing gains in a customer account is prohibited unless very specific tests are met. To do this, a written agreement must be executed between the customer and the agent, and this must be approved by the broker-dealer. In addition, any sharing must be proportionate to the capital contributed. Sharing "inside information" is prohibited under Federal law. Sharing of commissions between a broker-dealer and an agent registered with that broker-dealer is the normal business practice in the industry, and is not prohibited.
A customer buys a $1,000 par Treasury Inflation Protection security with a 4% coupon and a 10 year maturity. If the inflation rate during the first year of the security's life is 5%, the: I coupon rate is adjusted to 9% II coupon rate remains at 4% III principal amount is adjusted to $1,050 IV principal amount remains at $1,000
II III Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. Thus, there is no purchasing power risk with these securities.
Upon discovering that a violation of the Uniform Securities Act has, or is about to occur, the Administrator is empowered to: I refer the matter to a disciplinary panel for disposition II issue a cease and desist order against such person III make a determination based upon findings of fact and conclusions of law
II III (no such thing as referring to a hearing panel)
Which of the following information MUST be recorded on an unexecuted order ticket where the trade has been canceled? I Time of execution II Time of receipt III Time of cancellation IV Solicited or unsolicited
II III IV
Which of the following would be defined as a "sale" or "offer" under the Uniform Securities Act? I A stock dividend given to existing shareholders II A bonus of stock that is given for completing a securities purchase III Stock warrants given to purchasers of a debt offering IV Subscription rights given to existing shareholders for a different class of securities than originally purchased
II III IV
Which of the following is (are) included in the computation of stockholder's equity? I Cash II Treasury Stock III Retained Earnings IV Additional Paid-In Capital
II III IV Common stockholder's equity consists of: Common at par + Capital in Excess of Par + Retained Earnings, reduced by any buy backs of that company's stock for its Treasury. Cash is not part of the computation.
Which of the following are included in the taxable income of a corporation? I Proceeds received from the issuance of common stock II Dividends received from domestic investments III Interest received from foreign investments IV Gain on the sale of a capital asset
II III IV Dividends received from any investments (domestic or foreign), and gains on any asset held for investment are taxable. Please note, however, that part of dividends received by corporate investors are subject to an exclusion from tax. Any interest income received (unless it is municipal interest income) is subject to Federal tax. The proceeds received by a corporation from issuing debt or stock are not taxable.
Which of the following information MUST be included on a customer confirmation? I Whether the transaction was solicited or unsolicited II Whether a payment for order flow was made III The customer name and account number IV The price of execution
II III IV PAYMENT FOR ORDER FLOW YES
Higher transaction costs associated with a security that is priced at equilibrium would tend to: I increase the market price of the security II decrease the market price of the security III increase trading volume of the security IV decrease trading volume of the security
II IV
Which of the following would be defined as an "agent" under the Uniform Securities Act? I A firm that only sells municipal securities of that State to residents of that State II A salesperson who only sells federal covered securities to residents of that State III A wholly owned subsidiary of a bank that is registered as a broker-dealer in the State IV A sales assistant who takes orders from clients when the agent is unavailable
II IV
Which statements are TRUE regarding Equity Indexed Annuities (EIAs)? I In a year of sharply rising stock prices, EIAs will match the positive return of the Standard & Poor's 500 Index II In a year of sharply rising stock prices, EIAs will not match the positive return of the Standard & Poor's 500 Index III In a year of sharply falling stock prices, EIAs will match the negative return of the Standard & Poor's 500 Index IV In a year of sharply falling stock prices, EIAs will not match the negative return of the Standard & Poor's 500 Index
II IV
A customer has previously signed a non-durable power of attorney giving his spouse power of attorney over his individual brokerage account. Which statements are TRUE? I The power of attorney continues upon the customer's death II The power of attorney ceases upon the customer's death III The power of attorney continues upon the customer's incapacitation IV The power of attorney ceases upon the customer's incapacitation
II IV A durable power of attorney continues in effect if the grantor is incapacitated. A non-durable power of attorney ceases if the grantor becomes incapacitated. Note, however, that any power of attorney ceases if the grantor dies (the power of attorney dies with the customer!) ANY POA ceases when CUSTOMER DIES
An investment adviser set up an investment plan for a client which included enough life insurance held in an irrevocable trust to fund the remainder of the plan if the client were to die prematurely. The client dies before fulfilling the investment plan. Which of the following statements are TRUE? I The life insurance proceeds are included in the client's taxable estate II The life insurance proceeds are not included in the client's taxable estate III The amount of insurance needed to fulfill the investment plan needs to be increased to cover any tax liability IV The amount of insurance needed to fulfill the investment plan doesn't need to be increased to cover any tax liability
II IV An "insurance approach" to a customer's capital needs analysis factors into the investment plan the fact that if the client dies prematurely, then the plan may not be fully funded and the client's beneficiaries may suffer as a result. In such a case, life insurance would be purchased in an amount to complete the funding of the plan if the client dies prematurely. If the insurance policy is owned by someone other than the decedent (e.g., owned by an irrevocable trust or by the spouse of the decedent), then the life insurance proceeds are not included in the decedent's gross estate. In such a case, the amount of insurance needed does not have to be increased to cover additional tax liability.
Delivery of the brochure under the "Brochure Rule" is required for which of the following? I Impersonal advisory services requiring payment of less than $500 annually II Prepaid advisory fees requiring payment in advance of $1,000 or more III Advisory contracts with investment companies IV Advisory contracts with pension plans
II IV Delivery of the "Brochure" to customers is not required for the sale of impersonal advisory services calling for no more than a $500 annual fee; or for the sale of advisory services to investment companies. Prepaid advisory fees requiring payment in excess of $500; or advisory contracts with anyone other than investment companies, requires the delivery of a brochure.
Which records MUST be retained in a state-registered investment adviser's principal office? I Financial reports II Customer securities positions III Investment adviser's bank statements IV Records of customer purchases and sales orders
II IV NASAA rules require that State-registered advisers keep, in their principal office, records of: customer purchases and sales; and customer securities positions (account statements).
Which statements are TRUE about mutual fund distributions that are automatically reinvested? I Dividend distributions that are automatically reinvested are not taxable until the shares are redeemed II Dividend distributions that are automatically reinvested are taxable in the year the distribution is made III Capital gains distributions that are automatically reinvested are not taxable until the shares are redeemed IV Capital gains distributions that are automatically reinvested are taxable in the year the distribution is made
II IV Whether a shareholder reinvests capital gains and dividends or does not reinvest, the shareholder must report them for income taxes.
A broker-dealer has a place of business in State A does business exclusively in State A and is registered in the State. The broker-dealer has no office in State B and is contacted by a client in State B who wants to sell some securities that he inherited. State B has a de minimis rule for broker-dealers. The client is not interested in opening an account and only wants the broker-dealer to do this transaction and remit the proceeds to the customer. Which statements are TRUE? I In order to effect this transaction, the broker-dealer must be registered in State B II In order to effect this transaction, the broker-dealer is not required to be registered in State B III In order to effect this transaction, the securities involved must be registered in State B IV In order to effect this transaction, the securities involved are not required be registered in State B
II IV (key is de minimis exemption applies here, so BD doesnt have to register, nor do the securities cuz it is a non recurring transaction
The anti-fraud provisions of the Uniform Securities Act would apply to the sale in the State of: I fixed annuities II variable annuities III whole life insurance IV variable life insurance
II IV (securities)!
An investment adviser has determined that it can register as a federal covered adviser. This means that the adviser: I solicits clients on behalf of other investment advisers II currently operates in at least 15 States III has at least $25,000,000 of assets under management IV provides financial planning to customers for compensation as a regular business
II and III MID SIZE Avisers The SEC then issued interpretations regarding so-called "mid-size" advisers, which are advisers with at least $25,000,000 under management. These are: Mid-size advisers that are not required to be registered in a State where they have their principal office must register with the SEC (there are a handful of States that do not require investment advisers to register and this forces them to register with the SEC and be regulated by someone!); Mid-size advisers that do business in 15 or more States can choose to register with the SEC rather than having to register with, and be regulated by, 15 or more States.
An investment adviser is opening that day's mail and receives a check from a customer for $5,000; however there is no payment due from the customer. The customer mailed the check in error. The same day, the investment adviser mails the check back to the customer. Under NASAA rules, the investment adviser: I is deemed to have taken custody of the customer's funds II has not taken custody of the customer's funds III must keep a record of the check received IV is not required to keep a record of the check received
II and III regardless must keep a record of the check
Forward contracts are: I standardized and exchange traded II non-standardized and OTC traded III can be easily offset with a closing trade IV cannot be easily offset with a closing trade
II and IV - The best answer is D. Forward contracts are custom contracts that are negotiated between buyer and seller. They are issued OTC and there is very limited trading - thus it may not be possible to do an offsetting trade with a forward contract. Forward contracts are not subject to federal regulation.
Which statements are TRUE regarding the 529 college savings plan established by State A? I Contributors must be residents of State A II Contributors may be residents of any State III The beneficiary may use the funds only to attend college in State A IV The beneficiary may use the funds to attend college in any State
II and IV A contributor can open a college savings plan in any State; and the beneficiary can use the funds to attend a college in any State. Note, however, that a tax deduction at the State level may not be available to the donor to another State's plan.
Under the Investment Advisers Act of 1940, copies of all advertising, notices and circulars must be retained: I if distributed to at least 1 person II if distributed to at least 10 people III for a minimum of 3 years IV for a minimum of 5 years
II and IV FEDERAL
ERISA regulations cover: I public sector retirement plans II private sector retirement plans III federal government employee retirement plans
II only private only
Which of the following violate the provisions of the Uniform Securities Act? I Failing to charge a markup to a customer in a principal transaction II Failing to charge a commission to a customer in an agency transaction III Improperly using inside information IV Failing to state every fact to a customer
III Failing to state "every" fact to a customer is not a violation; failing to state "material" facts is a violation of the Act. Failing to charge commissions or markups is not a violation - if you wish, you can earn nothing for handling customer transactions! Of course, using inside information is also a violation.
Which of the following securities is (are) NOT considered to have an issuer? I Collateral trust certificate II Equipment trust certificates III Fractional interests in oil and gas programs IV Certificates of interest in a gravel mining program
III IV
Which TWO of the following are tests for whether registration as an investment adviser is required under the Uniform Securities Act? I Whether the investment adviser has an office in that state II Whether the investment adviser is an individual III Whether the investment adviser accepts a fee for rendering advice IV Whether the investment adviser gives advice relating to the advisability of investing in securities
III IV An investment adviser with no office in a State, who has more than 5 customers in that State, must register - so having an office in a State does not determine whether that firm must register in the State as an investment adviser. An investment adviser can be any legal "person" which can be an individual, corporation, partnership, etc. - so whether the adviser is an individual has no bearing on registration in a State. The important determinants as to whether a person is defined as an investment adviser in a State are: Is this person giving advice about securities in the State? and Is this person being paid for rendering such advice?
Under the Securities Act of 1933, which statements is (are) TRUE regarding private placements of securities? I No commissions can be paid II No more than 10 prospective investors may be contacted III General advertising is prohibited
III only (FEDERAL LAW) Under the Uniform Securities Act, a private placement is an offering to no more than 10 persons, where no advertising is permitted; and no commissions can be paid for selling the issue. Note that the definition of a private placement under the Securities Act of 1933 is very different. Regulation D under the 1933 Act states that a private placement is an offering to a maximum of 35 non-accredited investors and an unlimited number of accredited investors. There is no prohibition against paying commissions for selling private placements under the 1933 Act. Similar to State law, Federal law also prohibits advertisements of private placements. (Note that an exception to the "no advertising" prohibition is given if an offering is only made to accredited investors - however, this is not mentioned in the question and cannot be assumed.)
Dollar Weighted Average Return is the same as: A) Annualized Rate of Return B) Internal Rate of Return C) Time Weighted Average Return D) Expected Rate of Return
IRR
The State Administrator is empowered to require the filing of advertising and sales literature relating to offers of which of the following? I U.S. Government securities II Municipal securities III Agency securities IV Equity securities
IV only The Administrator can require filing of advertising and sales literature unless the security involved is exempt; or the security is offered in an exempt transaction; or the security involved is a federal covered security. An equity security, such as common stock or preferred stock in a corporation, is non-exempt. U.S. Governments municipals and agencies are exempt securities, so the Administrator cannot require the filing of advertising related to these issues.
Two individuals are starting a business, where they expect to have losses in the first 3 years, after which the business is expected to be profitable. The BEST business form for these individuals is a: A.LLC
LLC A C corporation cannot flow through losses to the business owners, so that business form does not work. A sole proprietorship can only consist of 1 person, so that business form cannot work. So we are left with either a partnership or a limited liability company. If the term partnership is used, this means it is a "general" partnership (the specific wording "limited partnership" is used for limited partnerships). General partnerships allow for flow-through of gain and loss to the business partners, but each partner takes on unlimited liability. In contrast, either a limited partnership or an "LLC" - Limited Liability Company, allows for both flow-through and limits the liability of owners. So the better choice is a limited liability company, since it limits liability.
A company that has a market capitalization of between $1 billion and $4 billion is considered to be: A. Small Cap B. Mid Cap C. Large Cap D. Nano Cap
Micro-Cap: Any company whose outstanding market capitalization is less than $300,000,000 Small-Cap: Any company whose outstanding market capitalization is between $300,000,000 and $1,000,000,000 Mid-Cap: Any company whose outstanding market capitalization is between $1,000,000,000 and $5,000,000,000 Large-Cap: Any company whose outstanding market capitalization is over $5,000,000,000
2 years ago a woman leased a new car by putting $2,000 down and signing a 48 month lease at $500 per month. She has received a letter from the lease company saying that she can complete the lease right now by making a single $10,000 payment and keep the car for 2 more years; or she can finish the lease by making the remaining 24 monthly payments of $500. Assuming that this customer can earn 6% by investing in Treasury securities, and ignoring any tax consequences, to determine the best option, the method to be used is:
NPV
risk premium
any amount of the total average return that is more than the average return on a short term treasury (safe return)
A customer invests $2,000 in an investment that is expected to generate $100 in the first year, $200 in the second year, and $300 in the third year, at which time the original $2,000 investment will be returned. What is the Return on Investment (ROI)? A. 10% B. 20% C. 30% D. 60%
Return on Investment is a simple measure that takes an initial investment and shows how well it performs. The annual cash flows generated by the investment are averaged, and divided by the original investment amount. In this example, $2000 is invested. The investment is expected to generate cash flow of $100 in the first year, $200 in the second year, and $300 in the third year, at which point the $2,000 original investment will be returned. The average annual cash flow is $100 + $200 + $300 = $600/3 years = $200 per year. Since $2,000 was invested, the ROI is $200 / $2,000 = 10%.
An adviser with $106,000,000 of assets under management has its main offices in Illinois and branch offices in Wisconsin, Indiana, and Missouri. Which statement is TRUE regarding registration of the adviser?
SEC OR IL, MI, WI, IA -Any adviser with $100,000,000 or more of assets under management is a "federal covered adviser" that is only required to register with the SEC. The State cannot require registration of a federal covered adviser; but it can require a "notice" filing in the State along with payment of a fee. However, the SEC has issued an interpretation that advisers with $100-$110 million of assets have the option of registering with the SEC or with the states. Since this adviser falls into the $100-$110 million range, it has the choice of either becoming a Federal Covered Adviser or of registering in each State where it does business.
Stock specific risk is the same as: A. systematic risk Correct B. non-systematic risk C. credit risk D. non-credit risk
Specific security risk can be diversidied away, hence non systematic risk can be diversified away. systematic risk is market risk and cannot be diversified away
Two individuals sponsor golf tournaments to which they invite venture capitalists that seek to be matched with wealthy potential investors. The individuals sponsoring the event intend to collect a finder's fee paid by the venture capitalist if he or she receives funds from an investor that attended the golf tournament. Which statement is TRUE based on these facts?
The 2 individuals are defined as broker-dealers because they will receive compensation if an investor is matched to a venture capitalist
Which of the following is NOT required to be in an investment advisory contract under NASAA rules? A. The formula for computing the advisory fee B. A clause prohibiting the adviser from assigning the contract without customer consent C. A list of the states in which the adviser is registered D. Disclosure of whether the contract gives the adviser discretionary authority
The advisory contract, under NASAA rules, must include: Description of services provided; Term of contract; Formula for computing fees; Amount of prepaid fees to be returned if contract is terminated early; Assignment of the contract is not permitted unless the customer approves; Whether the contract grants discretionary authority to the adviser; and Disclosure that the fee for managing equity securities may be higher than the fee for managing debt securities.
Which of the following statements are TRUE when comparing a C corporation to an S corporation? I C corporations give the shareholders limited liability II S corporations give the shareholders limited liability III Income in a C corporation is taxable to the corporation IV Income in an S corporation is taxable to the corporation
The best answer is C. Both C and S corporations give limited liability. C corporations are taxable entities - net income is computed at the corporate level and taxes are paid on this income. S corporations are "flow through" vehicles, similar to partnerships. Any net income or loss "flows through" directly onto the shareholders' tax returns and is not taxed at the corporate level. Taxation only occurs at the investor level.
must be on an order confirmation
The customer name, account number, size of the trade, price of execution, and any commission charged must all be on the confirmation.
Efficient market hypothesis
Weak Form: States that historical patterns in stock prices are of no use in predicting future price movements. The use of technical analysis to create "trendlines" is therefore, useless. This version is not widely accepted. Semi-Strong Form: States that current securities prices reflect all publicly available information. Thus, the value of securities in the market reflects publicly distributed information, but does not reflect information known by "insiders." This is the most widely accepted version. Strong Form: States that current securities prices reflect all information, whether publicly available or not. Thus, information known by "insiders" that has not been publicly disseminated, is already reflected in a security's price. This version is also not widely accepted.
median
center number when put numbers in ascending order
tax benefits of real estate partnership all of those
Which of the following are major tax benefits of real estate limited partnerships? I The real estate can be depreciated, even if its market value is increasing II Non-recourse financing is included in the basis III Interest on loans is fully deductible IV Long term capital gains may be achieved when the real estate is sold
if sec sends deficiency letter
disclosure is not considered to be adequate
In January, 20XX a customer buys 100 shares of ABC stock at $30 per share and pays a $2 commission per share. The customer receives $1 in cash dividends during the year. The customer's cost basis in the stock is: A. $28 per share B. $30 per share C. $31 per share D. $32 per share
add comission, divs are irrelevant here
expected rate of return
assigns a probability percentage to each of a variety of investment outcomes and averages them
mean
average return
risk free rate of return
average return on the safest security
Under which of the following circumstances would a universal life insurance policy operate as term insurance? A) The policy's cash value is approximately one-half the death benefit B) The policy owner pays a cash premium equal to the required mortality and expense charges and has no cash value C) The policy owner requests the insurer to pay the policy's $500 level premium by reducing the policy's $2,500 cash value D) The policy's cash value increased by less than the $500 annual premium
b. Universal life combines elements of term life and whole life policies. The premium is broken down into an insurance element (the term component) and a savings element that is invested in the insurance company's general account (savings component). A universal life policy operates as term insurance when the policy owner pays a premium amount equal to the required mortality and expense charges (these are charges to cover the insurer's basic cost of providing the policy). There is no cash value buildup, so what the policy is providing is de facto term insurance for the face amount of coverage.
The sale of an "at the money" put is a
bull/ neutral strategy
Broker-dealer registration is required under: A) the Securities Act of 1933 B) Section 10 of the Securities Exchange Act of 1934 C) Section 15 of the Securities Exchange Act of 1934 D) the Investment Advisers Act of 1940
c. Section 15 of the Securities Exchange Act of 1934 covers broker-dealer rules, including registration.
An individual who represents an issuer in selling securities of that issuer to the issuer's employees; and who does not earn a commission for this work; is defined under the Uniform Securities Act as a(n): A. agent B. broker-dealer C. issuer D. none of the above
d. An agent is an individual who represents a broker-dealer selling any type of security - whether it is exempt or non-exempt. Individuals who represent issuers in trading exempt securities or in exempt transactions are not defined as agents. Thus, only an individual who represents an issuer selling non-exempt securities (for example, that issuer's common stock) to the public is defined as an agent. An individual who represents an issuer in a transaction with existing employees without taking a commission is engaging in an exempt transaction (since no commission is taken) and therefore is excluded from the definition of agent. The example here is an issuer-employee that works in the pension department of the company and who places employee purchases of company shares into employee 401(k) accounts. This person also does not fall under the definition of an agent; a broker-dealer; or an issuer; so the best choice is D, none of the above.
AGI
does not include muni interest or retirement plan distribution amounts from non-qualified plans attributable to the cost basis (non-deductible investment dollars) in the plan. . includes : divs, alimony, pension payments, foreign interest, mutual fund gains, investment gains.
An Investment Adviser wants to change its approach and management style, focusing more on growth funds and emerging company stocks and less on strategies that provide stable income. In order for the Investment Adviser to do this:
each customer must approve the change by signing a new advisory agreement
The portfolio return measure that calculates a mean rate of return from a probability distribution of all potential rates of return is:
expected return - Expected return assigns a probability percentage to each possible investment outcome (yield); multiplies that percentage by the yield; and then adds up the total. The result is the average (mean) expected yield.
• 13F-
filed by investment manager who excercises investment discression over 100,000,000 in equity securities, filed quarterly with SEC
Insurance cap problem 1: A customer invests $100,000 in an Equity Indexed Annuity contract tied to the Standard and Poor's 500 Index. The contract has a 90% participation rate; a 15% cap and a 3% floor. Interest is credited to the contract under the annual reset method using the simple interest method. The performance of the Standard and Poor's Index over the next 3 years is: Year 1: + 20% Year 2: - 5% Year 3: + 10% At the end of year 3, the customer will have a principal balance of: approximately:
first always multiply the participation rate X the year 1. if number is bigger than cap, use cap. if less than cap, use that number. do the same for year 2, and year 3. all multiplying the original principal amount by the number you get. add them up for the years accounted for and thats the answer. 127,000
An elderly client of a Registered Investment Adviser has gifted securities to his adult son at the end of each year, in an amount equal to the annual gift tax exclusion. The client has a stroke that has affected his ability to communicate and the RIA is approached by the adult son about continuing the annual giving of the gift. The RIA should: A) go ahead and continue giving the annual gift because this is in accordance with the prior practice in the account B) ask the son if he has a durable power of attorney granted by the father and obtain this prior to giving the annual gift C) follow the instructions in the client's will D) visit with the client and ask him whether he should give the gift, directing the client to squeeze his hand if the answer is "Yes"
in order for a will to be activated the client must be dead B. This client is incapacitated. If the client gave his son a durable power of attorney prior to the stroke, then the son is authorized to act on the father's behalf. (Remember that a durable power of attorney continues on the giver's mental incapacitation; while a non-durable power of attorney ceases upon the giver's mental incapacitation.) Otherwise, the RIA can do nothing. Choice C is wrong because the client is not dead! Choice D is simply amusing.
Total return formula
income(divs or interest)+growth ---------------------------------------------- initial investment amount
purchasing power risk =
inflation risk
An elderly mother's wedding ring was purchased many years ago for $3,000. The mother dies and wills the wedding ring to her daughter. On the date of death, the ring was valued at $5,000. Many years later, the daughter sells the ring for $7,500. What is the tax consequence to the daughter?
long term capital gain of $2500 Personal property that is sold for a profit is subject to capital gains tax - and instead of the favorable 15% rate given to long-term holding of securities (this increases to 20% for individuals earning over $400,000), the tax rate is 28%! When an asset is inherited, the cost basis to the recipient is the market value at the date of death. Thus, the cost basis is $5,000 (this is called a "stepped up" basis). Since the ring was sold for $7,500, there is a $2,500 long term capital gain.
The Securities Act of 1933 requires that new issues of securities be registered with the SEC if the:
mails, or other means of interstate commerce, are used to sell the securities. -The Securities Act of 1933 requires that any new issues that are offered "through the mails or other means of interstate commerce" must be registered (unless an exemption is available). Remember, the 1933 and 1934 Acts are Federal law; and the Federal government only has jurisdiction over offers and transactions that cross state lines (interstate).
standard deviation
measures how much a security's annual return varies as compared to its average (arithmetic mean) return, so it measures risk
sharpe ratio
measures incremental reward (risk adjusted rate of return) versus volatility
If the mails or other means of interstate commerce are used to offer securities, then the Securities Act of 1933 requires that:
non exempt securities be registered with the SEC. The Securities Act of 1933 regulates the new issue market and requires that non-exempt new issues be registered with the SEC and sold with a prospectus giving full disclosure to investors. The provisions of the 1933 Act do not apply to exempt securities, however. The Securities Exchange Act of 1934 is a broad ranging law to curb abuses in the trading (secondary) markets, and, among its many provisions, requires registration of broker-dealers that offer non-exempt securities to the public.
mode
number that occurs most often
All of the following are risks of investing in a Real Estate Limited Partnership (RELP) EXCEPT: A. Business risk B. Liquidity risk C. Regulatory risk D. Reinvestment risk
rein vestment risk.
An agent is aggrieved by an action of the Administrator summarily suspending that person's registration. The agent can:
request a hearing (not file claim in court)f the Administrator summarily suspends an agent's registration, the agent (who is not too happy about this!) can request a hearing in front of the Administrator.
A new customer calls a representative and says the following: "I own 1,000 shares of DEF stock, which is currently held at another broker-dealer. I want to sell the shares at the market." The representative accepts the order from the customer. The order ticket should be marked:
sell short due to the fact that they are held at another BD. onky use LONG when it is believed customer can make delivery. here they are held at another BD
An individual who previously worked as an agent at a broker-dealer leaves the employ of that firm and wishes to start his own broker-dealer as a sole proprietorship. In order to register in the State, the Administrator will require the filing of a(n):
statement of financial condition. Each applicant for initial registration as either an investment adviser or broker-dealer must file an original statement of financial condition (a balance sheet) with the Administrator, along with an oath or affirmation made by the applicant that the financial statement is true and current.
A registered representative is appointed as a trustee to manage the assets on behalf of a beneficiary. The State where the trust is established only permits investments in government guaranteed bonds or investment grade corporate bonds. The limitations placed on the investments made by the trustee are established by the:
states legal list -Each State usually has a "prudent man rule" that applies to fiduciaries that manage assets for beneficiaries. However, many States go beyond this and establish a "Legal List" of permitted investments for fiduciaries. The legal list typically consists of ultra-safe securities - generally U.S. Government bonds, government agency bonds, and AAA rated corporate and municipal securities.
ROI FORMULA - as long as ROI is greater than RRR, then investment would be made.
sum of all cashflows/ number of years ------------------------------------------------------- initial investment amount
sharpe ratio formula
total return- risk free rate of return -------------------------------------------------- portfolio standard deviation
13 D filing
under 34 act- requires anyone who becomes the owner of more than 5% of an SEC reporting, must file 13d with issuer, exchange where security is traded, FINRA. 10 business days
A customer buys 100 shares of XYZ at 51 and buys 1 XYZ Jan 50 Put @ $4. The maximum potential gain is: A. $400 B. $4,600 Incorrect Answer C. $5,500 Correct Answer D. unlimited
unlimitied since he is long stock, can go up forever
Registration by Filing (notification)
• 1. Filing (also known as notification) MOST DIFFICULT- this would be done (interstate) when an issuer wants its securities registered in more than one state. Only done by well established companies that have been in business for 3 years (36 months). Have to have a minimum of 500 shareholders. Have to have previously filed a registration statement with the SEC under 33 act. Have to have a net worth of 4 million dollars, pre tax income of 2 million in at least 2 of previous 3 years. It cannot have missed an interest payment on any debt, and it cannot have missed a dividend payment on preferred stock In the past year (ok to miss on common). Offering price has to be at least 5$ a share. When does the registration become effective? Same time as federal registration, as long as all proper documents have been filed with the state (admin) for 5 days
Registration by coordination
• 2. Coordination- (interstate)- registration used for a new company, one that has been in business for less than 3 years, may have not filed a registration statement. Most common form of registration this issuer has to file 3 copies of a current prospectus with the SEC. becomes EFFECTIVE- at same time as federal registration as long as proper documents have been filed with state admin for 10 days.
registration by qualification
• 3. Qualification- can be used in any state- (intra state) 1 state ONLY. This would be used when an issuer is not registering federally, state admin requires same documents as SEC requires. Becomes effective when determined by that state Admin
