Simulated 1 Exam Missed Questions
Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A) $6,500 long-term capital gain. B) $6,000 long-term capital gain plus $500 short-term capital gain. C) $2,500 long-term capital gain plus $1,000 short-term capital gain. D) $4,000 long-term capital gain.
A) $6,500 long-term capital gain. Gifted stock carries the donor's cost basis. In this case, 100 shares at $10 per share is $1,000. The stock split means there are now 200 shares, but that doesn't change the total cost basis. When that stock is sold at $35 per shares, the proceeds of $7,000 exceed the cost basis by $6,000, all of which is long-term capital gain. Inherited stock receives a stepped-up basis. That is, the cost basis is at date of death. In this case, the cost per share is $30. When that 100 shares is sold at $35 per share, a $500 profit is realized. In one of the quirks in the Internal Revenue Code, stock received as an inheritance always has a long-term holding period, even when, as in this question, the actual holding period was short-term. Adding the $6,000 of gain from the gift and the $500 of gain from the inheritance gives a total of $6,500 long-term capital gain.
Hermon Industries is operating in a sector where the average prospective price-to-earnings ratio is currently eight times. If Hermon's earnings per share (EPS) are expected to be $0.30 per quarter, the implied value of a Hermon share is closest to A) $9.60. B) $2.40. C) $7.70. D) $8.00.
A) $9.60. The P/E ratio is the relationship between the market price and the annual earnings per share. Because this question stated the quarterly earnings, they must be multiplied by 4 to get to the $1.20 annual rate. Therefore, the shares should be selling at 8 × expected EPS = 8 × $1.20 = $9.60.
An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated the position for $55 per share while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, the investor's real rate of return is closest to: A) 11%. B) 1%. C) 14%. D) 4%.
A) 11%. The investor receives a total of $7 in return on this investment: $5 in capital gains and $2 in dividend income. The return on this $50 investment is 14%, and when adjusted for 3% inflation, the investment's real rate of return is 11%.
XYZ Corporation common stock has a market price of $45 per share and earnings per share of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings ratio of XYZ stock will be A) 15 B) 3 C) 45 D) 5
A) 15 Before the split, the stock had a P/E ratio of 15 ($45 per share ÷ $3). After the split, the price per share and the EPS drop in the same proportion, leaving the P/E ratio unchanged (new price = $15, new EPS = $1).
Affray Compassionate Finance Company (ACFC) is offering $100 million of 150-day commercial paper for sale in State L. The paper is available in minimum denominations of $100,000 and has been rated AA by a leading rating organization. Whom of the following would be required to register as an agent in State L in order to legally sell this security in the state? A) An agent of a broker-dealer registered in the state B) An employee of ACFC who receives a 1% commission on sales C) An investment adviser who recommends this security to clients D) None of these (Because this security is exempt from registration, offers and sales can be made without registration as an agent.)
A) An agent of a broker-dealer registered in the state Those individuals who represent broker-dealers registered in the state must register as agents in that state if they wish to sell securities to that state's residents. It makes no difference what kind of security it is or to whom the security is being sold. Yes, this is an exempt security (less than 270 days' maturity; minimum $50,000 denomination; rating in the top three grades), but that only means that the security does not have to register. An exclusion from the definition of agent is given to those who represent issuers of certain exempt securities. Commercial paper is one of the five cases where this exclusion applies, so ACFC's employee would not be defined as an agent. This is true even though compensation is being received. Investment advisers don't register as agents if all they do is give investment advice.
Under the Securities Act of 1933, which of these may be an accredited investor? A bank, insurance company, investment company, or employee benefit plan valued in excess of $5 million A wealthy person, in some cases Partners, officers, and directors of the issuer for a particular issue A) I, II, and III B) I and III C) I only D) II only
A) I, II, and III Accredited investors are financial institutions, wealthy persons meeting specific requirements, and (for a particular issue) persons involved in the management of the issuer.
An investment policy statement would likely include expected returns of the recommended strategy and the expected range of these returns recommended allocations among differing asset classes strategies used for selecting specific stocks in the equity portion of the portfolio disclosure of the fees that the adviser will earn for implementing the recommended strategy A) I, II, and III B) I and II C) I only D) II, III, and IV
A) I, II, and III An investment policy statement prepared for clients delineates the allocation percentages for each asset class and the expected returns from each class, and outlines strategies that may be used for timing the market and choosing specific investments within each class, but fees the adviser may earn are not included in the policy statement; they are disclosed separately.
Strategic Capital Asset Managers (SCAM) is preparing its Form ADV, Part 2B relating to certain individuals. On this form, SCAM must disclose all of the following information except A) compensation earned on dealings with clients. B) disciplinary information about material events within the past 10 years. C) the name, title, and telephone number of the individual supervising any listed person. D) the fact that any listed person has no formal education after high school.
A) compensation earned on dealings with clients. It is compensation beyond that paid by the client (such as a sales award or other prize) that must be disclosed.
Holly is an IAR with Remington, Fairchild, and Hume, a federal covered investment adviser. Holly's manager tells her that he will be busy for a couple of hours working on completing Form ADV-E. This tells Holly that her firm A) maintains custody of customer funds and securities. B) is reporting certain errors discovered by management. C) is undergoing a special evaluation by its clients. D) will be changing to state registration.
A) maintains custody of customer funds and securities.
One of the major changes incorporated into the Uniform Prudent Investors Act of 1994 was the ability of a trustee to delegate certain responsibilities to qualified third parties. However, a fiduciary would not be able to delegate A) the amount and timing of distributions B) which investment style to be used for managing the portfolio C) the ability to decide on the specific securities to be acquired D) the selection of different managers for different asset classes
A) the amount and timing of distributions The UPIA allows a fiduciary to delegate the investment decisions to a qualified third party. Determining distribution amounts and timing is not part of portfolio management and can only be done by the fiduciary (trustee).
Under the antifraud provisions of the Investment Advisers Act of 1940, an investment adviser must disclose to clients A) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented. B) that any transactions made on the adviser's own account are consistent with the advice given to clients. C) that the adviser has never been subject to disciplinary action or censure by the SEC. D) the number of clients with whom the adviser does business.
A) the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented. Advisers must disclose to clients any outside interests or potential conflicts of interest involved in their recommendations or transactions for those clients. Failure to disclose additional compensation related to the advisory function would be considered fraudulent. If an advisory firm is also a broker-dealer and will enjoy transaction-related compensation if the advisory client acts on the adviser's recommendation, this must be disclosed in writing and the client must consent. There is no requirement that an adviser disclose to its clients the number of its other clients. The adviser is required to disclose disciplinary actions taken by regulatory authorities but not the absence of such actions. The adviser is not required to disclose its consistent transactions but must make disclosure if its transactions are not consistent with the advice given.
If the return on Treasury bills is 3% and the equity risk premium is 4%, the expected equity returns should be A) 1% B) 4% C) 7% D) 12%
B) 4% The expected return on an equity investment is the risk-free (for example, T-bill) rate of return added to the equity risk premium (3% + 4% = 7%).
A registered representative presenting a variable life insurance policy proposal to a prospect must disclose which of the following about the insured's rights of exchange of the VLI policy? A) The insured may request that the insurance company exchange the VLI policy for a traditional whole life policy issued by the same company within 2 years. The insurance company retains the right to have medical examinations for underwriting purposes. B) Federal law requires the insurance company to allow the insured to exchange the VLI policy for a form of permanent life insurance issued by the same company for 2 years with no additional evidence of insurability. C) The insurance company will allow the insured to exchange the VLI policy for a traditional whole life policy within 45 days from the date of the application or 10 days from policy delivery, whichever is longer. D) Within the first 18 months, the insured may exchange the VLI policy for either a whole life or universal variable policy issued by the same company with no additional evidence of insurability.
B) Federal law requires the insurance company to allow the insured to exchange the VLI policy for a form of permanent life insurance issued by the same company for 2 years with no additional evidence of insurability. Federal law requires that issuers of variable life insurance policies allow exchange of these policies for a form of permanent life insurance, (usually whole life), issued by the same company for a period of no less than 2 years. The exchange must be made without additional evidence of insurability.
Under the Uniform Securities Act, it is required to file an application with the Administrator to become a registered broker-dealer in the state. Which of these are among the disclosures that must be made on that application? The form of business organization to be used by the firm Any felonies or certain misdemeanors on the records of partners or officers Business history of the principals of the firm Financial information about the firm A) I and III B) I, II, III, and IV C) I and II D) II, III, and IV
B) I, II, III, and IV Many disclosures have to be made, and this is just a partial list. This would be the same answer if the question asked about an investment adviser.
Which of the following risks most likely would be reduced as a result of the addition of tangible assets to an investor's portfolio? A) Nonsystematic B) Inflation C) Market D) Liquidity
B) Inflation An asset allocation model that includes tangible assets, such as real estate and commodities, tends to provide inflation protection. These assets may have limited liquidity.
Which of these has the SEC not enumerated as a specific item that must be included in written compliance manuals for investment advisers? A) The advisory firm must monitor the consistency of portfolios with guidelines established by clients, disclosures, and regulatory requirements. B) The advisory firm should indicate the educational requirements necessary for employment. C) The advisory firm should implement procedures for allocating investment opportunities such as best executions among clients. D) The advisory firm must review policies and procedures at least on an annual basis.
B) The advisory firm should indicate the educational requirements necessary for employment. Guidelines under SEC rules require (at a minimum) that the chief compliance officer of each federal covered investment adviser conduct an annual review of its compliance procedures. Among the duties of the compliance officer is to monitor the consistency of portfolios with guidelines established by clients, disclosures, and regulatory requirements. The firm should implement procedures for allocating investment opportunities such as best executions among clients. If the firm does have internal educational requirements, that would be found in its HR manual, not in its compliance manual.
A private company can become a public company through A) a buyout. B) a special purpose acquisition company C) a private placement. D) a liquidation
B) a special purpose acquisition company A SPAC raises money through an IPO. It then takes that money and purchases one or more private companies. The effect of this is that the formerly privately held company is now publicly traded through the shares of the SPAC. Private placements allow a private company to raise capital but not take it public. Buyouts can result in a public company going private. When a company liquidates, it no longer exists.
An investment adviser registered in State A decides it wishes to maintain custody of customer assets. As long as the securities laws of State A do not prohibit custody, the investment adviser would have to promptly notify A) the Administrator in a letter that it is going to maintain custody. B) the Administrator by filing an amended Form ADV that it is going to maintain custody. C) the SEC on Form ADV that it is going to maintain custody. D) the Administrator electronically (email) that it is going to maintain custody.
B) the Administrator by filing an amended Form ADV that it is going to maintain custody. The notification to the Administrator (as a state-registered IA—the SEC has nothing to do with this) must be made promptly by amending Form ADV.
An investment adviser representative of a federal covered investment adviser registers with A) FINRA. B) the Administrator. C) the SEC. D) NASAA.
B) the Administrator. Registration of IARs is done solely on the state level. IARs register with the Administrator of each state in which they are required to be registered.
Your client with $100,000 to invest is looking for maximum current income. Which of the following would offer the highest current return? A) $100,000 AA rated corporate bonds trading at par with a 6% coupon rate B) $100,000 of zero-coupon bonds with a yield to maturity of 6% C) $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity D) $200,000 of utility common stock paying a current dividend of 3.5%
C) $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity When you read the full question, including the answer choices, you can immediately disregard two of the four options. With $100,000 to invest, the answer cannot be to purchase $200,000 of anything. Maximizing current income excludes zero-coupon bonds because there is no current income. Now, to the correct choice. Why does a bond sell at a premium over par? Although there are exceptions, primarily it is because the coupon rate on that bond is higher than the current market interest rate. Therefore, with a higher coupon rate, the current income on the same amount of principal invested ($100,000 in our question) will always be higher for a bond selling at a premium. That is the KISS (Keep It Simple Student) answer. For those who want to delve further, here we go. For example, if current market interest rates are 6% (likely the case here because the AA rated bonds with a 6% coupon are trading at par), then a bond with a 7% coupon will be selling at a premium. The current yield on $100,000 of the 6% bonds would be $6,000 per year. If a bond's yield to maturity is 6% and it is selling at a premium, it must be that the coupon is higher than 6%. For example (and we're doing the math that you won't have to do), $93,000 par (93 times $1,000) value of bonds with a 7% coupon, selling at $100,000 (a premium over the $93,000), and maturing in 10 years has a YTM of 6%. Investing $100,000 into these bonds will result in current income of $6,510 per year ($93,000 par times the 7% coupon).
What is the maximum amount of Bitcoin that will ever be in circulation? A) 194,425 coins B) Indefinite number of coins C) 21,000,000 coins D) 21,000,000,000 coins
C) 21,000,000 coins Rationale: The maximum amount of Bitcoin that will ever be in circulation is 21 million coins. This is a feature of the Bitcoin protocol, which is designed to create a finite supply of the cryptocurrency, which will prevent inflation on BTC.
A company has two outstanding bond issues, both with a coupon rate of 8%. Bond A will mature in 2 years, while Bond B will mature in 15 years. If market interest rates were to increase to 10%, which of the following statements is correct? A) The company will attempt to postpone the maturity of Bond A. B) Both bonds will be selling at a premium. C) Bond B will be selling at a greater discount than Bond A. D) Bond B will be selling at a greater premium than Bond A.
C) Bond B will be selling at a greater discount than Bond A. An increase in interest rates in the marketplace will cause the price of a debt security to fall. The nearer the maturity, the shorter the duration, hence the less impact. Therefore, Bond B with a much longer maturity (and longer duration) will see its market price fall far more than Bond A.
Which of the following is a method for determining the internal rate of return to an investor based on cash flow in and out of the portfolio? A) Dollar cost averaging B) Discounted cash flow C) Dollar-weighted return D) Time-weighted return
C) Dollar-weighted return The dollar-weighted return measures the internal rate of return (IRR) of a portfolio's actual performance between 2 dates, including all cash inflow and outflows. Because of this, the IRR of a portfolio can be significantly affected by both the timing and the size of any contribution or distribution. Luck in the timing of the investor's inflows or outflows can drastically swing numbers one way or the other.
NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. As far as the topic of compensation is concerned, which of the following must be disclosed? Transaction-based compensation, such as commissions on recommended securities 12b-1 trails on no-load mutual funds in the client's portfolio Expenses reimbursed by third-party sources Compensation-sharing arrangements between the investment adviser and its representatives A) I, II, III, and IV B) I and III C) I ,II, and III D) III and IV
C) I ,II, and III All forms of compensation, whether direct or indirect, must be disclosed. However, the method by which an adviser pays its representatives is an internal matter and not for public disclosure.
A CERTIFIED FINANCIAL PLANNER™ who, while affiliated with a broker-dealer and an investment adviser, prepares comprehensive financial plans and whose only compensation is commissions generated from the purchase of recommended securities An insurance agent affiliated with the company's advisory division, who prepares comprehensive financial plans and receives compensation only on insurance products purchased by his clients A broker-dealer with extensive business in the state A mutual fund company with offices and clients in the state A) III and IV B) I, II, III, and IV C) I and II D) I only
C) I and II A CERTIFIED FINANCIAL PLANNER™ (CFP®) who prepares comprehensive (the exam could say detailed) financial plans and is compensated by the commissions earned when the customer purchases the recommended securities must register in the state as an investment adviser representative of the advisory firm. This is considered indirect compensation because the regulators take the stance that the CFP® would not go through the effort to prepare the plan (which contains securities advice) without receiving the compensation from the trades. Note that the CFP® is affiliated with both a broker-dealer and an investment adviser. That's how the CFP® can earn commissions on the securities sales. An insurance agent affiliated with an investment adviser, who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the USA.
A portfolio that is primarily invested in corporate bonds would be subject to credit risk interest rate risk opportunity cost purchasing power risk A) II and IV B) I and II C) I, II, III, and IV D) I, II, and IV
C) I, II, III, and IV Unless the security is a U.S. government bond, all bonds have credit risk. Including government bonds, they all fluctuate with changes in the interest rates and lose value due to inflation. Opportunity cost is the risk taken by choosing to invest in a lower-risk investment rather than attempt the higher returns that historically have been earned though investment in equities.
A corporation offering securities registered under the Act of 1933 may make which of the following statements? The SEC has passed on the merits of these securities as an investment. The SEC has released our securities for sale to the public. The SEC has passed on the accuracy of the information in our prospectus. The SEC has declared this prospectus effective. A) I and III B) II and III C) II and IV D) I and IV
C) II and IV When a security registers with the SEC, the date that sales are allowed is known as the effective date. The SEC neither approves nor disapproves an issue, nor does it pass on the accuracy or adequacy (completeness) of the information presented in a prospectus.
In which of the following situations has the investment adviser not violated the antifraud provisions of the Investment Advisers Act of 1940? A) George intends to implement a financial plan using only products available through a broker-dealer with whom he is associated but does not make this intention known to the client. B) Jane is affiliated with a broker-dealer but doesn't tell clients that the investment advice she renders is outside the scope of her employment with that broker-dealer. C) Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account. D) Ray's financial plan uses products available through a number of different broker-dealers. Ray intends to act as an agent of a broker-dealer with whom he is associated in implementing only a portion of the plan. He does not make this intention known.
C) Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account If advisers intend to implement a plan using only products available from a broker-dealer with which they are affiliated, this fact must be disclosed to clients. If advisers will act as agents of a broker-dealer with which they are affiliated in implementing any part of a plan, this fact must be disclosed. If the investment advice provided is outside the scope of their employment with the broker-dealer with which they are affiliated, this fact must be disclosed. However, advisers are required to disclose trades made for their own accounts only if those trades are designed to profit from the market impact of recommendations or are inconsistent with their advice. In this case, the transaction made for the adviser's own account is consistent with her advice.
Which of the following statements is not true of investment advisers under the Uniform Securities Act? A) Investment advice includes advice regarding the value of securities, as well as recommendations to buy or sell. B) A natural person may register as an investment adviser. C) Only written advice concerning investments is covered by the act. D) Compensation is a key factor in determining whether a person is required to register as an investment adviser.
C) Only written advice concerning investments is covered by the act. One of the three prongs defining an investment adviser under both state and federal law is the giving of investment advice. That advice can be in written or oral form. Any person, as defined in the USA, may register as an investment adviser. Even though we tend to think of the investment adviser as the company you will be working for, a significant percentage of state-registered investment advisory firms are sole proprietorships (one-person shops). Investment advice includes advice as to the value of securities, as well as recommendations to buy or sell. Compensation is another one of the three prongs in determining whether a person is defined as an investment adviser.
Which of the following activities by a registered agent of a broker-dealer would constitute a prohibited practice under the Uniform Securities Act? A) Informing a customer of a negative research report recently published on a stock that represents the client's largest holding B) Failing to disclose a nonmaterial fact C) Personally raising capital, without written authorization from the broker-dealer, for a new high-tech venture being run by the agent's former college roommate D) Refusing to lend money to clients
C) Personally raising capital, without written authorization from the broker-dealer, for a new high-tech venture being run by the agent's former college roommate By attempting to effect securities sales by circumventing his broker-dealer, the agent has committed the prohibited practice of a private securities transaction, referred to as selling away. Failure to disclose a material fact would be prohibited, but nonmaterial facts do not carry that burden. One would expect an agent to keep the client informed regarding news about securities held in the account, and agents would be expected to refuse to make loans to customers because that is a prohibited practice.
One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken? A) As the grantor, no other roles may be taken B) Trustee C) Trustee and beneficiary D) Beneficiary
C) Trustee and beneficiary Under trust law, the grantor of a trust, sometimes referred to as the settlor, may also be the beneficiary and the trustee.
The probable return is A) the one discount rate that equates the future value of an investment with its net present value B) the difference between an investment's present value and its cost C) an estimate of probable returns an investment may yield D) the worth of future income discounted to reflect what that income is worth today
C) an estimate of probable returns an investment may yield The probable return is the estimate of probable returns that an investment may yield when taking the sum of all probabilities.
John, a newly registered agent with a broker-dealer in Illinois, violated the Uniform Securities Act if he A) told his clients, against his better judgment, that past performance is no guarantee of future performance B) deliberately omitted the number of employees at a corporation making its first issue of securities to the public because he did not consider that fact relevant to the investor's decision making process C) knowingly sold revenue bonds as general obligation bonds because he wanted his best client to earn additional interest without taking on significantly higher risk D) mistakenly told a client that the dividend yield on a common stock selling at $75 per share was 5%, though he accurately indicated that the dividend payment was $.75 per quarter
C) knowingly sold revenue bonds as general obligation bonds because he wanted his best client to earn additional interest without taking on significantly higher risk Knowingly selling revenue bonds as general obligation bonds is a misstatement of material fact and therefore fraudulent. An agent, when making a sale to a client, need not include all facts, such as the number of employees. The agent must not deliberately fail to mention the material facts regarding the nature of the investment. For example, it is not fraud to make a mathematical mistake, such as inadvertently misquoting the dividend yield on a common stock as 5% when in fact it is 4%, while accurately indicating that the actual dividend payment is $.75 per quarter. An agent may never state that past performance is expected to be replicated.
Under the brochure rule of the Investment Advisers Act of 1940, each client must be A) delivered a written disclosure statement no later than 48 hours after signing the contract B) delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services. C) offered a written disclosure statement at least 48 hours before signing a contract. D) offered a written disclosure statement at the time of signing the contract
C) offered a written disclosure statement at least 48 hours before signing a contract. No agreement between an investment adviser and a client may commence without delivery of the written disclosure statement known as the adviser's brochure. Thereafter, SEC rules require that a brochure—or summary of material changes, if any—be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent.
All of the following are unethical business practices of investment advisers as determined by NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers except A) inducing trading in a customer's account that is excessive in frequency B) omitting material facts about the nature of the advisory services offered C) releasing confidential customer information because of a court subpoena D) exercising discretionary authority in a client's account within 15 business days of the account being opened without written authorization
C) releasing confidential customer information because of a court subpoena The investment adviser is required to release confidential information under a court subpoena; therefore, it is not a violation. Omitting material facts about the nature of advisory services offered or inducing excessive trading in a customer's account are considered unethical practices under the Model Rule. Finally, exercising any discretionary power in placing an order for the purchase or sale of securities for a client without obtaining written discretionary authority from the client within 10 business days (not 15) after the date of the first transaction placed pursuant to oral discretionary authority is unethical, unless the discretionary power relates solely to the price at which, or the time when, an order involving a definite amount of a specified security shall be executed, or both (the price and time exception).
Investment companies must send financial reports to shareholders A) monthly. B) annually. C) semiannually. D) quarterly.
C) semiannually. Investment company financial reports must be sent twice a year and must include a portfolio list, an income statement, a statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report.
An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) within 48 hours. B) when informed by the Administrator that the representative's registration is effective. C) when informed by the investment adviser that the representative's registration is effective. D) immediately.
C) when informed by the investment adviser that the representative's registration is effective. Passing the exams does not automatically give one an effective investment adviser representative's license. Notice is received by the investment adviser from the appropriate state and/or federal authorities, and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual.
Joan, who has a PhD in economics, has been employed as an agent by Gibraltar Securities for the past 15 years. Missing academic life, she resigns from the broker-dealer and accepts a position as an economics professor at a state university. Which, if any, party is required to notify the state securities Administrator of this change? A) Only Joan B) No party, because Joan's termination is voluntary and not for cause C) Only the securities firm D) Both Joan and the firm
D) Both Joan and the firm The license of an agent expires when she ceases to be employed by the broker-dealer or issuer for whom she was previously licensed. Both the agent and the former broker-dealer are required to notify the Administrator promptly.
An investment adviser cannot adequately advise a client without knowing the client's financial status. When determining that status, it is important to differentiate between financial and nonfinancial considerations. Which of the following would be considered a financial consideration rather than a nonfinancial one? A) Fact that both parents were smokers who died of lung cancer B) Client's marital status C) Client's membership in Greenpeace D) Client's stamp collection
D) Client's stamp collection Financial considerations are those which can be categorized as an asset or a liability (something that can be assigned monetary value). Although a stamp collection would not be considered a very liquid asset, it is nonetheless something of monetary value. The other choices are nonfinancial because you really can't put a number on them. The Greenpeace membership and the lung cancer deaths of the parents are likely indicators of certain investments that would probably not be suitable due to the values of the client.
Under the Uniform Securities Act, in which of the following circumstances may the Administrator take action against an advisory firm? Nine years ago, the Administrator of another state found that the president of the firm violated the securities laws of that other state. The firm has liabilities that exceed its assets. A minority shareholder with no management role in an investment adviser organized as a corporation cannot meet his financial obligations as they come due. A) II and III B) I, II, and III C) I only D) I and II
D) I and II Violation of another state's securities laws within the past 10 years by the president of the firm might be cause for action against an investment adviser. So is insolvency, defined as having liabilities in excess of one's assets or the inability to meet financial obligations as they come due. However, the personal financial situation of a minority, nonmanaging shareholder does not have a bearing on the financial situation of a corporate firm.
Fast Execution Services (FES), a registered broker-dealer, provides investment advice as an incidental part of its commission business. Madeleine, an agent registered with FES, charges for investment advice as a freelance investment adviser outside the scope of her employment at the firm. Which of the following statements are true? FES must register as an investment adviser. Madeleine must register as an investment adviser. Madeleine need not register as an investment adviser. FES need not register as an investment adviser. A) I and III B) I and II C) III and IV D) II and IV
D) II and IV Broker-dealers who offer advice as an incidental part of their commission business are not required to register as investment advisers. Because Madeleine provides investment advice outside the scope of her employment at the broker-dealer, she must be registered as an investment adviser. Why not an IAR? Because Madeleine is operating this as her own freelance business, she is, in essence, a sole proprietor investment adviser.
Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15? Sole proprietorship Single-member LLC Multiple-member LLC electing to be treated as a corporation S corporation A) I and II B) II, III, and IV C) I and IV D) III and IV
D) III and IV For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline. For C corporations, the due date is the 15th day of the 4th month following the close of the corporation's year; this date is April 15 for a calendar-year filer.
Which of the following statements with regards to net present value and internal rate of return is correct? A) If the net present value equals zero, then the internal rate of return is less than the required rate of return. B) If the net present value is less than zero, then the internal rate of return is greater than the required rate of return. C) If the net present value equals zero, then the internal rate of return is greater than the required rate of return. D) If the net present value is greater than zero, then the internal rate of return is greater than the required rate of return.
D) If the net present value is greater than zero, then the internal rate of return is greater than the required rate of return. Any time the net present value is greater than zero (a positive NPV), the internal rate of return is greater than the required rate of return and the investment should be made. If the net present value is zero, then the internal rate of return equals the required rate of return.
Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: 16 clients in State A 12 clients in State B 6 clients in State C 4 clients in State D Fred would have to register as an IAR in A) States A and C. B) States B and C. C) States A, B, and C. D) States A and D.
D) States A and D. In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there).
Which of the following would not be considered evidence of custody of a client's funds or securities? A) The client makes a partial purchase, and the broker-dealer holds the securities until full payment is made. B) Client funds and securities are kept at a qualified custodian. C) The adviser writes checks on the client's account to pay for the client's securities. D) The investment adviser has discretionary authority over the client's account.
D) The investment adviser has discretionary authority over the client's account. Custody means possession (even temporary possession) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement but does not include the acceptance by the adviser of prepaid advisory fees or discretionary authority.
A high-risk investment strategy is the short sale of stock. Each of the following is a method of offering some degree of protection except A) entering a buy stop order for the short stock. B) buying a call on the short stock. C) selling a put on the short stock. D) buying a put on the short stock.
D) buying a put on the short stock. The risk in selling a stock short is that the price of the stock will rise rather than fall. Those who purchase put options have the same market view as those who sell short—they will profit if the price of the security declines. Buying a put would be the equivalent of "doubling down" on your bet. The best way to hedge (protect) a short stock position is to purchase a call option on the security because that gives you a guaranteed "buy-back" price regardless of how high the stock's price rises. If you sell a put on the stock and the price rises, the put will expire and the seller will have the premium to partially offset any loss. If the short seller enters a buy stop order, once the price rises (or goes through) the stop price, a market order to buy the stock will be entered and the position will be closed out preventing any further loss.
If two agents of a broker-dealer agree to work together as partners to solicit business and they agree to split commissions, this practice is A) permitted, but only with the prior written consent of the affected clients. B) in violation of the Uniform Securities Act's prohibition against sharing in the profits of an account. C) permitted only if the broker-dealer's compliance department audits the partnership's financial performance. D) permitted.
D) permitted. There is nothing in the USA that prohibits agents registered with the same broker-dealer from forming a partnership to conduct business or solicit clients. Under the USA, the compliance department need not audit the financial performance of such an arrangement. It is considered an unethical business practice for agents who are not licensed with the same or affiliated broker-dealers to share commissions.
MaryBeth is the CEO of MBW Software Associates. MBW is having an offering of common stock to investors on an intrastate basis. Williamson has been telling potential investors that the registration of the stock indicates approval by the state. Under the Uniform Securities Act, she is committing misrepresentation of A) authorization. B) qualification. C) material information. D) registration.
D) registration.
A corporation issued a bond with a coupon of 6%, callable at 103. The bond matures in 2059. Current interest rates are 8%. It is most likely that A) the bond will go into default. B) the coupon will be increased. C) the bond will be called. D) the bond is selling at a discount.
D) the bond is selling at a discount. There is excess information in this question (a favorite trick of the test authors). We don't need to know the call price or the maturity date. We have a 6% bond when current market interest rates are 8%. The inverse relationship between interest rates and bond prices teaches us that this bond is going to be selling at a discount. Bonds are called when interest rates go down, not when they rise. The coupon on a bond is fixed.
Prosperity Asset Partners (PAP) is organized as a general partnership. PAP is registered in four states. All of the following statements regarding the investment adviser brochure rule of the Uniform Securities Act are true except A) the brochure rule permits advisers to deliver the disclosure brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within 5 business days. B) the disclosure brochure must contain essentially the same information as is contained in Form ADV, Part 2A and, if applicable, Part 2B. C) the disclosure brochure must be delivered no later than 48 hours before entering into an advisory contract for there to be no requirement to offer a 5-day refund right. D) the disclosure brochure must be signed by either an officer or a general partner of Prosperity Assets Partners.
D) the disclosure brochure must be signed by either an officer or a general partner of Prosperity Assets Partners. When an investment adviser's business structure is a general partner (as is the case with PAP), the brochure must be signed by a general partner; an officer's signature is not sufficient. If the firm is a corporation, then an officer's signature is acceptable. The investment adviser's disclosure brochure must contain the relevant information from Form ADV, Part 2A and, for those where it applies, Part 2B. The rule does permit advisers to deliver the brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within five business days; otherwise, the brochure must be delivered no later than 48 hours before entering into an advisory contract.
An investment advisory firm requires all new clients to complete a 4-page questionnaire before conducting the first meeting. This would be known as A) fulfilling the requirements of the CIP. B) the investment adviser's brochure. C) the client disclosure document. D) the information-gathering stage.
D) the information-gathering stage. The first step in any adviser's relationship with a client is information gathering. A popular way of doing this is by using a questionnaire.
The real interest rate of a fixed income investment is A) interest earned adjusted for the investment's premium or discount price B) interest earned after taxes C) the coupon interest payment D) the interest earned after inflation
D) the interest earned after inflation The real interest rate is the interest received minus the inflation rate.
A sudden decrease in market interest rates will have the effect of increasing the trading price of an existing bond because A) the future value of the bond's present cash flows increases B) lower interest rates will result in a higher rating for the bond C) a reduction in market interest rates generally signifies a stronger economy D) the present value of the bond's future cash flows increases
D) the present value of the bond's future cash flows increases Bond valuations using discounted cash flow take into consideration the present value of the bond's future cash flows. That is, the greater the value of the interest payments to be received in the future, the higher the price of the bond. When market interest rates decline, because the coupon rate of the existing bond is fixed, the present value of those interest payments increases, creating a higher value for the bond. This is just the technical way for explaining why bond prices go up when interest rates go down.
Included in the Investment Advisers Act of 1940 are a number of different recordkeeping requirements. Wealth Preservation Specialists is a covered adviser that is organized as a partnership. If the firm were to dissolve, partnership agreements must be kept for A) five years from the date of organization. B) five years after the dissolution. C) the lifetime of the firm. D) three years after the dissolution.
D) three years after the dissolution. Both the Investment Company Act of 1940 (applicable here because this is a covered adviser) and the NASAA Model Rule on Recordkeeping require that investment advisers maintain certain records, such as partnership agreements and corporate articles of incorporation, for a period of no less than three years after dissolution.
