STC - Test 5
A top-down approach to investing would generally include all the following, EXCEPT : 1. An analysis of a specific company's past stock price 2. An analysis of specific companies within an industry sector 3. An analysis of various industry sectors 4. An analysis of economic trends
1. An analysis of a specific company's past stock price Analyzing the past stock price of a specific company is typical with doing technical analysis. However, when doing a top-down analysis, the first step is to identify economic trends, then identify specific sectors or industries that may benefit from that trend. Lastly, identify specific companies within a sector that may be affected by a specific economic trend.
Which of the following terms is NOT specifically defined under the Uniform Securities Act? 1. Broker-dealer representative 2. Investment adviser representative 3. Broker-dealer 4. Investment adviser
1. Broker-dealer representative An agent is defined as a person who is employed by a broker-dealer or issuer to sell securities. There is no mention of the term broker-dealer representative. An investment adviser representative is a person employed by an investment adviser who provides investment advice.
A wrap account would likely be MOST suitable for a client who: 1. Executes several securities transactions per week 2. Wants to minimize the taxes generated in the account 3. Employs a buy-and-hold strategy 4. Often conducts his own research and trades actively
1. Executes several securities transactions per week
Which of the following securities are NOT direct obligations of the U.S. government? 1. Fannie Mae and Freddie Mac securities 2. T-bonds and Treasury Cash Management Bills 3. T-bills and T-notes 4. Ginnie Mae securities and TIPS
1. Fannie Mae and Freddie Mac securities Government sponsored entities, such as Freddie Mac and Fannie Mae, are not backed by the full faith and credit of the U.S. government. Instead, their securities represent the loans of agencies that were created by the U.S. government. Ginnie Mae is an exception because its securities are backed by the U.S. government. In this question, all of the other debt instruments are direct obligations of the U.S. Treasury.
Under the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all electronic communications and their amendments must be maintained by the adviser for how long if distributed directly or indirectly and to how many persons? 1. Five years if sent to two or more persons 2. The life of the firm if sent to thirty-five or more persons 3. Three years if sent to ten or more persons 4. Three years if sent to two or more persons
1. Five years if sent to two or more persons According to NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all investment adviser records must be maintained for not less than five years, the first two years in the principal office of the adviser, including those made by electronic media (Web sites, e-mail, etc.) if directly or indirectly sent to two or more persons.
An equity-indexed annuity is a type of: 1. Fixed annuity that offers the potential for greater returns 2. Fixed annuity that tracks the performance of a designated mutual fund 3. Variable annuity that tracks the S&P 500 Index 4. Variable annuity that tracks the DJIA
1. Fixed annuity that offers the potential for greater returns An equity-indexed annuity is a type of fixed (non-variable) annuity; therefore, SEC registration is not required for these contracts. The owner receives a guaranteed minimum rate of return, but has significant upside potential since the annuity's return is tied to a benchmark index (e.g., the S&P 500 Index. If the index underperforms, the investor will simply receive the minimum rate. On the other hand, if the index performs well, the investor will receive the indexed return based on contractual provisions.
An IAR who holds full discretionary authority over a customer's account may: I. Buy or sell securities in the account without consulting the customer II. Receive a fee for using her discretion in trading the account III. Withdraw money from the account IV. Borrow assets from the customer's account 1. I and III only 2. II and IV only 3. I only 4. I and II only
1. I and III only An IAR who has been granted full discretionary authority over a customer's account may buy or sell securities in the account without consulting the customer and may withdraw money from the customer's account. However, even if an IAR has been granted discretionary authority, she may not receive a fee for using her discretion in trading the customer's account and may not borrow the client's assets.
Bill is an agent of a broker-dealer and, after a hearing is held, he has been found guilty of selling securities that were not properly registered. As a consequence, the Administrator may take all of the following actions, EXCEPT: I. Seize Bill's personal property II. Revoke Bill's registration III. Bar Bill's registration IV. Impose a prison sentence on Bill that cannot exceed five years 1. I and IV only 2. I and II only 3. II and III only 4. I only
1. I and IV only The key to this question is that it is essentially asking about what an Administrator CANNOT do to Bill. The Administrator cannot seize his personal property and it cannot impose a prison sentence on him. However, the powers of the Administrator do include denying, suspending, barring, or revoking a person's registration.
A partner of an investment adviser may put all of the following information on her business card, EXCEPT the designation: 1. IAR 2. MBA 3. CPA 4. CFP
1. IAR The initials IAR (investment adviser representative) may not be used. The abbreviation could signify that the individual has met some type of regulatory qualification. The use of the designation IAR is improper since it is not a designation approved by any professional organization. An IAR only needs to file with the state Administrator.
A soon-to-be-registered agent may take which of the following actions? I. Accept unsolicited orders II. Invite prospective clients to seminars III. Provide research reports to other agents for use with their clients IV. Cold-call potential clients and provide quotes 1. II and III only 2. I and II 3. I, II and IV only 4. I, II and III only
1. II and III only A broker-dealer may not allow an unregistered individual to act as an agent unless the agent is exempt. The soon-to-be-registered agent in this scenario may not accept orders, solicited or unsolicited, be compensated based on sales, or cold-call clients. Inviting clients to seminars and providing research to other agents are not considered activities associated with an agent.
A client who recently retired, received a $100,000 lump-sum payout from his company's pension plan. His objective is to receive fixed monthly payments starting immediately. As the IA, you may recommend a(n): 1. Immediate, fixed annuity 2. Deferred, fixed annuity 3. Deferred, variable annuity 4. Immediate, variable annuity
1. Immediate, fixed annuity In an immediate annuity, payments begin after one payment period. For instance, if the client chose a monthly payout, the first payment will be made after one month. By choosing a fixed annuity, the insurance company guarantees the payouts, whereas with a variable annuity, payments are unpredictable.
Which of the following is NOT included in a customer's adjusted gross income (AGI)? 1. Interest received from municipal bonds 2. Dividends received from stock 3. Salary, tips, and bonus 4. Interest received from corporate bonds
1. Interest received from municipal bonds A client's federal adjusted gross income (AGI) consists of her taxable income. Examples of taxable income include a client's salary, tips, bonuses, dividends, and corporate bond interest. However, municipal bond interest is tax-free and not included in person's AGI.
If TopJob Advisers has limited discretionary authority over client funds, it is required to: 1. Prepare a balance sheet only if the majority of the firm's clients are qualified pension plans 2. Prepare a balance sheet and file it with the Administrator 3. Prepare an audited balance sheet and provide its books and records to be spot checked by the Administrator, but only if 72 hours' advance notice is provided 4. Prepare a balance sheet that is audited by an independent CPA and file it with the Administrator
2. Prepare a balance sheet and file it with the Administrator If a registered investment adviser has discretionary authority over client funds or securities, it is required to file a balance sheet; however, the balance sheet is not required to be audited. An audited balance sheet is required to be created and filed if an adviser has custody or full discretion.
Which of the following is NOT TRUE regarding the characteristics of a real estate investment trust (REIT)? 1. At least 90% of the income from a REIT must be derived from investing in real property 2. At least 75% of the income from a REIT must be distributed to investors each year 3. Any investment losses from a REIT are not passed through to investors 4. If sold to the public, the shares of a REIT must be registered with the SEC 1. III and IV only 2. II and III only 3. I and II only 4. I only
3. I and II only REITs are required to generate at least 75% of their income from investing in real property—not 90%. Also, REITs are required to distribute at least 90% of their income to its shareholders each year—not 75%. For those REITs that are sold to the public, they must be registered with the SEC under the Securities Act of 1933. If a REIT incurs a loss, it is retained by the REIT and not passed through to the shareholders.
In which TWO of the following circumstances will dollar cost averaging result in an average cost per share that is always less than the average price per share? I. The price of the stock has fluctuated over a given period. II. A fixed number of shares is purchased regularly. III. A fixed-dollar amount is invested regularly. IV. A constant-dollar plan is maintained. 1. I and II 2. II and III 3. I and III 4. III and IV
3. I and III The average cost per share will be less than the average price per share when the price of the stock has fluctuated over a given period and a fixed-dollar amount is invested regularly.
A customer's investment policy statement may contain which of the following? I. Expectations related to the markets II. Analysis of risks and rewards III. Asset allocation models 1. I and II only 2. I only 3. I, II and III 4. II and III only
3. I, II and III A customer's investment policy, which details how the customer's money is to be managed, may include all of these items.
Which TWO of the following statements are TRUE of the dividend discount model? I. The model is only used for large cap stocks II. It is used to determine a stock's value by predicting future dividends and discounting them back to present value III. If the value determined by the model is higher than the stock's current value, then it is undervalued IV. If the value determined by the model is higher than the stock's current value, then it is overvalued 1. II and IV 2. I and IV 3. II and III 4. I and III
3. II and III The dividend discount model (DDM) is a procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The basic idea is that if the value that is determined by the DDM is higher than the current value of the shares, then the stock is undervalued.
Under the Uniform Securities Act, which of the following statements are NOT TRUE concerning an Administrator taking disciplinary action against a person? I. There must be written findings of fact and conclusions of law. II. The Administrator may take action against a person with or without the opportunity for a hearing. III. The Administrator does not need to provide the person with prior written notice. IV. The Administrator's order may be appealed if the person files a petition in court within 90 days. 1. I, II, III and IV 2. I and IV only 3. II, III and IV only 4. II and III only
3. II, III and IV only The Administrator must provide a person with prior written notice, an opportunity for a hearing, and written findings of fact and conclusions of law when taking disciplinary action against a person. The Administrator's order may be appealed if the person files a petition in state court within 60 days.
Under the Uniform Securities Act, all the following are considered to meet the definition of agent, EXCEPT: I. A sales representative of a broker-dealer who sells only securities that are covered under a federal exemption II. An assistant to a sales agent who accepts orders when the agent is unavailable III. A subsidiary of a bank that is registered as a broker-dealer and sells non-exempt securities to the public IV. A broker-dealer that sells only exempt securities within the state 1. II and IV only 2. I and II only 3. III and IV only 4. I and IV only
3. III and IV only By definition, a sales representative of a broker-dealer is an agent. This is true regardless of whether the securities being sold are covered under a federal exemption. Also, a sales assistant is considered an agent if she is authorized to accept client orders. Choices (III) and (IV) describe activities involving the broker-dealer (firm) and not an agent
If a wealthy client dies, what should the client's investment adviser do? 1. Find out if the estate is taxable and the amount due 2. Determine the investment objectives of the beneficiaries 3. Identify the beneficiaries 4. Make a liquidity determination
3. Identify the beneficiaries When a client dies, an investment adviser should identify the beneficiaries of the estate. Once the beneficiaries have been identified, the adviser should then gather information so that it's able to provide suitable advice.
Paul and Todd are starting their own business. They are trying to decide whether to organize this new business as a partnership or an S Corporation. What are some of the advantages of an S Corporation compared to a partnership? 1. More transparency 2. Fewer start-up costs 3. Limited liability 4. Favorable tax treatment
3. Limited liability In a partnership, the general partners are liable for the partnership's debts. (Limited partners are not liable; however, there's no indication in the question stem that either Paul or Todd is a limited partner.) In an S Corporation, the owners are not liable for any of the company's debts. Instead, they have only limited liability. Both the S Corporation and LP are pass-through entities and receive favorable federal tax treatment. For these entities, all losses and profits are passed through to the owners.
Which of the following statements is FALSE concerning variable life insurance policies? 1. The policyholders assume the investment risk 2. All death benefits and cash values will fluctuate 3. Premiums must be deposited into the insurance company's general account 4. They are defined as securities
3. Premiums must be deposited into the insurance company's general account For variable life insurance policies, all premiums are deposited in a separate account, rather than the insurance company's general account. Variable life insurance policies are considered securities and investment risk is assumed by the policyholders.
What's a swap? 1. The difference between Treasury bond yields and bonds of a different issuer with similar maturities 2. A trust that's owned by a large number of small investors and contains a basket of equity securities 3. A bond that's issued by a financial services company with a rate of return that's linked to other securities 4. A contract between two parties to exchange a sequence of cash flows, one of which has a fluctuating value for a predetermined period
4. A contract between two parties to exchange a sequence of cash flows, one of which has a fluctuating value for a predetermined period A swap is a form of derivative whereby two parties agree to exchange two different cash flows. One of the cash flows is fixed and the other will vary based on interest rates, foreign currency prices, or even other securities (e.g., stocks or bonds). Similar to forward contracts, swaps are typically traded over-the-counter (not on an exchange).
Under the Uniform Securities Act, which of the following would be considered an investment adviser? 1. An accountant who provides occasional advice as part of his practice 2. The publisher of a periodical that has general circulation 3. A savings institution 4. A person who receives compensation for providing investment advice related to bank stock prices
4. A person who receives compensation for providing investment advice related to bank stock prices The Uniform Securities Act provides a list of exemptions from the investment adviser definition. Exemptions include a bank or savings institution, a professional (lawyer, engineer, accountant, or teacher) whose advice is incidental to his profession, a broker-dealer whose advice is incidental to its business as a broker or dealer, and a bona fide publisher. No specific exemption is available for an individual who provides advice regarding securities issued by banks, so he would most likely be considered an investment adviser.
Which of the following is NOT a required element of a trust? 1. A settlor's intention to create the trust 2. Specific subject matter 3. Trustee 4. An attorney
4. An attorney A trust always consists of several elements. The first is the settlor's intention to create the trust. This could be done through a written or oral trust agreement. In addition, all trusts require a subject matter, which is often referred to as the "trust res" or corpus. In many trusts, the subject of the trust is a financial asset, real estate, or money that the settlor wants to give to the beneficiary. The last two elements of a trust are the trustee to act as a fiduciary and the beneficiary who will benefit from the trust. Although attorneys often write trust agreements, a trust can be created without an attorney.
The Administrator may require the filing of advertisements related to which of the following securities? 1. An insurance company's guaranteed investment contract 2. Mutual fund shares 3. Common stock offered to existing shareholders 4. An oil lease certificate of interest
4. An oil lease certificate of interest A certificate of interest is a security regulated by the Administrator along with its advertising. Advertisements sent to existing stockholders, as well as those related to investments issued by an insurance company, are exempt from filing. Also, mutual fund advertising is regulated by FINRA, not by a state Administrator.
A limited partnership sells an asset for a capital gain in the current year; however, the gain is distributed to the partners in the following year. What is the tax consequence of the gain? 1. As ordinary income in the year it is distributed to the partners 2. As ordinary income in the year it is distributed to the partnership 3. As passive income the year realized by the partnership 4. As a capital gain in the year it is realized by the partnership
4. As a capital gain in the year it is realized by the partnership The key to this question is to recognize that there is only one answer that recognizes the result as a capital gain. Any capital gains that are realized by the partnership are taxed to the partners in the year in which the gain is incurred, not when the distribution is made to the partners. When a partnership generates income, a tax liability is created for the partners in the year in which it is generated. All sources of partnership income are reported to the partners on Schedule K-1. Capital gains can be classified as either short-term or long-term.
A common investment strategy is dollar cost averaging. The objective of using this method of investment is the: 1. Average cost of securities purchased is more than the average price of the securities purchased over a short period 2. Average cost of the securities will be equal to the average price of the securities over a long period 3. Average price of securities purchased is less than the average cost of the securities over a long period 4. Average price of the securities purchased will be more than the average cost of the securities over a long period
4. Average price of the securities purchased will be more than the average cost of the securities over a long period Dollar cost averaging involves investing the same amount of money, in the same securities, over a long period. The objective is that the average cost of the securities purchased should be less than the average price of the securities over that period, though a profit is not a guarantee.
Which of the following is the BEST feature of a variable annuity? 1. It provides investors with an opportunity to invest in equities and defer the taxes until annuitization or liquidation 2. It provides investors with a guaranteed payment every month 3. It provides tax-free income to investors at retirement 4. It provides additional benefits when placed inside of qualified retirement accounts
1. It provides investors with an opportunity to invest in equities and defer the taxes until annuitization or liquidation The primary reason that investors purchase variable annuities is the ability to buy into a portfolio of securities and to defer the payment of taxes on any appreciation. Investors are taxed only when the annuity is surrendered, liquidated, or annuitized. Variable annuities do not provide tax-free income or guaranteed performance. Although investors may purchase a variable annuity in a qualified account, they will not receive additional tax benefits. Since an annuity is an insurance product, it may provide a death benefit and a life payout option.
According to the Uniform Securities Act, when do all broker-dealer registrations expire? 1. On December 31 2. When all offices in the state are closed 3. On the anniversary date of their original registration filing 4. When the broker-dealer no longer has any clients in the state
1. On December 31 Under the Uniform Securities Act, all registrations expire annually on December 31. Thereafter, they must be renewed by the firm.
A broker-dealer that acts as a market maker will: 1. Charge less than 10% in fees 2. Add a commission to the transaction value 3. Add a sales charge to the Net Asset Value 4. Charge a markup when selling or a markdown when buying
4. Charge a markup when selling or a markdown when buying When a broker-dealer acts as a market maker, the firm does not charge a commission. Instead, a market maker either buys for or sells from its own inventory and charges a markup or a markdown. The market maker will mark up from the offer price (asked) when it sells the securities and it will mark down from the bid price when it buys the securities.
If a portfolio manager is focused on keeping a client's assigned asset allocation properly balanced over the long term, she is using a: 1. Strategic asset allocation strategy 2. Risk management approach of laddering 3. Rebalancing approach 4. Tactical asset allocation strategy
1. Strategic asset allocation strategy Strategic asset allocation attempts to maintain the assigned allocation over a long period and is more passive in nature than a tactical asset allocation strategy. Portfolio rebalancing does not describe a strategy; instead, it is the adjustment of a portfolio in preparation for an investment strategy. Laddering is considered diversifying a bond portfolio by staggering the maturity dates of the bonds in an attempt to manage interest-rate risk.
Which of the following is a disadvantage of a non-qualified deferred compensation plan? 1. Plan benefits are not taxed until the employee receives them. 2. Plans don't impose contribution limits. 3. Employees are guaranteed an above market return. 4. Deferred compensation is not deductible to the employer.
4. Deferred compensation is not deductible to the employer. Non-qualified deferred compensation plans allow employees to wait to receive a part of their compensation (e.g., salary, bonus, etc.) in the current year. The employee is not required to pay taxes on their deferred income immediately; instead, they pay taxes when they're paid, often in retirement (i.e., the income is tax-deferred). Unlike the employer match in a qualified plan, employers are not permitted to deduct the deferred income.
An investment adviser is evaluating several bonds on behalf of a client. One measure of a bond's price sensitivity is its: 1. Coupon rate 2. Expected return 3. Maturity 4. Duration
4. Duration The best measure of a bond's price sensitivity to small changes in interest rates is its duration.
Doug's portfolio is currently allocated in the following manner: 60% stocks, 30% bonds, and 10% cash. However, Doug believes that significant correction is imminent in the stock market since the Federal Reserve Board is going to raise interest rates. Doug decides to change his allocation to 30% stocks, 30% bonds and 40% cash. Doug's reallocation decision is an example of which of the following types of investing? 1. Tactical asset allocation 2. Strategic asset allocation 3. Efficient frontier 4. Buy-and-hold
1. Tactical asset allocation This is an example of tactical asset allocation. Tactical asset allocation involves changing the balance in a portfolio (shifting the percentages so one asset class is more or less heavily represented) in anticipation of changing market or economic conditions. In contrast, strategic asset allocation assumes that the markets are efficient and it is impossible to time the market in this fashion.
An investor is evaluating whether she should add a municipal bond or corporate bond to her portfolio. The bonds have the same maturity, the same coupon payment, and are trading for roughly the same price. Which bond will add greater value to the investor's portfolio? 1. The municipal bond 2. It depends on the other securities in the investor's portfolio 3. The bonds will add the same value 4. The corporate bond
1. The municipal bond If two bonds have the same maturity, pay the same rate of interest, and have the same price, the municipal bond is better. Since municipal bond interest is not taxed and corporate bond interest is taxable, with everything else being equal, the municipal bond's return will be higher after taxes are incorporated.
Which one of the following statements regarding variable annuities is NOT TRUE? 1. Investors may invest in various asset classes inside of a variable annuity 2. On average, variable annuities have lower fees and expenses than mutual funds 3. Variable annuity earnings are taxable upon withdrawal 4. The payout option may not be changed once the contract has been annuitized
2. On average, variable annuities have lower fees and expenses than mutual funds Variable annuities have additional expenses that are not found in a mutual fund and as a result are more expensive. These fees known as mortality and expense fees, (a risk charge) pay for insurance guarantees that are automatically included in the annuity. Once a contract has been annuitized you generally may not change the payout option. Investors may invest in various asset classes within a variable annuity. The earnings from the various asset classes grow tax-deferred, and are taxable upon withdrawal.
An investment company has entered into a contract with an investment adviser. The investment adviser seeks to have an exculpatory provision included in the contract. According to the Investment Advisers Act of 1940, which of the following statements is TRUE? 1. In order for an exculpatory provision to be allowed, the SEC would need to approve the contract 2. The contract is valid only when exculpatory provisions are included 3. A majority of shareholders would need to approve the exculpatory provisions of the contract 4. Exculpatory provisions are prohibited in any contract
4. Exculpatory provisions are prohibited in any contract An exculpatory provision is prohibited in any contract entered into by an investment adviser and its clients. This is true even if the client is an investment company. An exculpatory provision protects officers and directors from liability from acts of willful misfeasance, bad faith, gross negligence, or reckless disregard of their duties. Any contract that includes such a provision would be void.
A project manager is evaluating a project and determines that she needs an internal rate of return of 10%. Currently, the project has a positive net present value (NPV). Based on this information, the project's estimated internal rate of return (IRR) must be: 1. Impossible to determine based on the information provided 2. Equal to 10% 3. Lower than 10% 4. Greater than 10%
4. Greater than 10% When using the net present value calculation to determine if a project is a viable investment, a required minimum rate of return is established. In order for it to be viable, the cash contributed to the project plus the required rate of return need to be paid out of the project. If the NPV is positive, then the rate of return earned on the project is greater than required. However, if the NPV is negative, then the rate of return earned on the project is less than required.
All of the following are characteristics of futures contracts, EXCEPT: I. Most of the contract's terms are set by the buyer and the seller II. The amount of the commodity being traded is standardized III. Prices are negotiated between the buyer and the seller IV. The buyer of a futures contract cannot be forced to take delivery 1. II and III only 2. I only 3. I and II only 4. I and IV only
4. I and IV only A futures contract is an agreement to buy or sell a specific amount of a commodity or financial instrument. Most of the contract's terms, such as the size of the contract, the point of delivery, the delivery month, and the grade of the underlying security or commodity are set by the exchange on which it trades. Although futures contracts may be offset, they differ from options because the buyer of futures contract may be forced to take delivery.
When comparing variable annuities to fixed annuities, investment risk is assumed by the: I. Investor in a variable annuity II. Annuity company in a variable annuity III. Investor in a fixed annuity IV. Annuity company in a fixed annuity 1. I and III only 2. II and IV only 3. II and III only 4. I and IV only
4. I and IV only In a fixed annuity, the annuity company guarantees a fixed monthly payment. The company, therefore, must invest the monies and assume the investment risk. In a variable annuity, the annuity company makes no guarantee. The company will invest the investor's money and the investor's annuity benefits will depend on the value of the investments. The investor, therefore, assumes the investment risk.
According to the Uniform Securities Act, if an investment adviser is registered in, and has an office in, a particular state, it must: I. File any required financial statements with the Administrator II. Maintain books and records as required by the Administrator III. File an updated Form ADV with the Administrator for any material changes to its business IV. Schedule annual inspections with the Administrator 1. I, II, III and IV 2. I and II only 3. II and III only 4. I, II and III only
4. I, II and III only Investment advisers initially register with the Administrator by filing Form ADV. If the adviser experiences any material changes to its business, an updated Form ADV must be filed. The Administrator also requires advisers to file financial statements and to maintain certain books and records. While the Administrator may subpoena books and records at any time, it does not inspect advisers on a specific schedule.
Which of the following forms would a publicly traded corporation typically file with the SEC during its lifetime? I. SEC Form 1092 II. Form 10-K III. Form 8-K IV. Form 10-Q 1. I, II and III only 2. I and III only 3. I, II, III and IV 4. II, III and IV only
4. II, III and IV only Publicly traded companies disclose their annual financial reports on Form 10-K and quarterly reports on Form 10-Q. Public companies must also report certain material corporate events on a more current basis. Form 8-K is the current report companies must file with the SEC to announce major events that shareholders should be informed about. SEC Release 1092 was published by the SEC to provide guidance to investment advisers.
An adviser recommending a limited partnership should discuss all of the following risks with the client, EXCEPT: 1. Regulatory changes 2. Loss of capital 3. Lack of liquidity 4. Inflation
4. Inflation The potential investment risks associated with limited partnerships include illiquidity, potential loss of capital, and changes in the regulatory or tax environment. Inflation, however, is not usually a risk associated with these investments. Indeed, one of the advantages of limited partnerships is that they may provide a hedge against inflation by allowing people to invest in real estate or commodities, the price of which tends to increase along with inflation.
In an effort to diversify his portfolio, a client purchases a large amount of land in a rural area to be used for future development. Which of the following statements concerning this investment is TRUE? 1. It carries a large amount of inflationary and financial risk 2. It would have no effect on the investor's portfolio diversification 3. It carries a large amount of market risk and business risk 4. It carries a larger-than-average amount of liquidity risk based on whether the land may be resold
4. It carries a larger-than-average amount of liquidity risk based on whether the land may be resold The only true statement is that the real estate investment will carry a large amount of liquidity risk. Real estate investments do not have business or financial risk. Undeveloped land tends to perform well against inflation. Rural locations may also offer real estate investors some diversification against the concentrations made in urban settings.
Which of the following is NOT a type of systematic risk? 1. Inflation risk 2. Market risk 3. Interest-rate risk 4. Liquidity risk
4. Liquidity risk Liquidity risk is an example of unsystematic or diversifiable risk. Systematic risk is one that affects all asset classes in the same manner. Examples of systematic risk include market risk, interest-rate risk, and inflation risk. If there is an overall decline in the stock market, it will cause stock prices to go down (market risk). If market interest rates rise, it will cause bond prices to decline (interest-rate risk). And finally, an increase in the rate of inflation will generally cause the overall bond market to decline.
All of the following risks are considered types of unsystematic risk, EXCEPT: 1. Political risk 2. Business risk 3. Credit risk 4. Market risk
4. Market risk Remember, market risk is a form of systematic risk and cannot be avoided by securities investors. For example, if the overall stock market is declining, this will negatively affect all of the stocks in the market. Conversely, unsystematic risk is able to be reduced through appropriate diversification.
Bob Bender is an investment adviser representative for Bender Investments, a firm founded by his great grandfather several decades ago. Over the years, he has held several positions with the firm. In which of the following job capacities would Bob NOT have been required to register as an IAR? 1. Managing portfolios for a select group of clients who are old family friends 2. Supervising representatives employed by Bender 3. Negotiating investment advisory contracts with institutions 4. Preparing tax documentation for some of Bender's customers
4. Preparing tax documentation for some of Bender's customers Investment adviser representatives (IARs) are defined as employees of investment advisers (IAs) who negotiate the sales of advisory services, manage client portfolios, make recommendations regarding securities, or manage other employees involved in any of these functions. Bob would have been exempt from registration in his tax preparation role, since this would have been considered a clerical function.
Which of the following statements is TRUE regarding REITs? 1. At least 90% of a REIT's gross income must come from real property. 2. Income from a mortgage REIT is primarily derived from rental income. 3. REITs pass through both gains and losses. 4. REITs only pass through income.
4. REITs only pass through income. Real estate investment trusts (REITs) are essentially exchange-traded real estate portfolios. In order to qualify as a REIT, at least 75% of the gross income must be derived from real property. Mortgage REITs primarily lend money to commercial developers so they're able to buy, build, or operate commercial real estate. Similar to limited partnerships, REITs pass through income; however, unlike partnerships, they don't pass through losses.
Which of the following investments by a fiduciary MOST likely violates prudent investor standards? 1. Investing 5% of a portfolio in foreign government bonds 2. Allocating assets in a portfolio over 10 uncorrelated asset classes 3. Writing covered calls against the common stock in a portfolio 4. Recommending that 100% of a client's retirement assets be invested in employer stock
4. Recommending that 100% of a client's retirement assets be invested in employer stock Prudent investor standards explicitly recognize the need for diversification. Investing 100% of a portfolio in employer stock would expose a client to both business and asset concentration risk and most likely not increase her expected rate of return.
Emily has two accounts with a financial services firm. One is a managed account in which an investment adviser has been granted discretionary authority. Emily also has a nondiscretionary IRA that is 100% invested in equity securities. The minimum IRA distribution must be made today. If the customer is unavailable, what action should the investment adviser take? 1. Send a check from the firm's account to the customer, and sell the required shares when the customer can be contacted 2. Liquidate enough shares in the IRA to generate enough cash for the distribution 3. Liquidate shares in the managed account and transfer the funds to the IRA 4. Take no action until the customer can be contacted
4. Take no action until the customer can be contacted The customer has two separate accounts: a managed account in which the adviser has been granted discretion, and the IRA that is nondiscretionary. The distribution must be made from the IRA, but since the customer cannot be contacted, no action may be taken.
Which of the following statements is TRUE concerning a federal covered security? 1. The Administrator may not bring enforcement action if fraud is involved 2. The Administrator may not require the issuer to file a consent to service of process 3. The Administrator may subject the issuer to a state review 4. The Administrator may require the issuer to pay a filing fee
4. The Administrator may require the issuer to pay a filing fee The Uniform Securities Act sets limits on the powers of the Administrator concerning federal covered securities. The Administrator may require: the payment of a filing fee, the filing of a consent to service of process, the filing of certain documentation previously filed with the SEC. The Administrator may bring enforcement action if fraud or deceit is used in the sale of a security. The Administrator may not subject the issuer to a state review. This occurs when a state has the authority to allow or disallow a security to be offered in a state and is sometimes referred to as a merit review.
According to the recordkeeping requirements for IAs, if a client trade is executed, which of the following items is NOT required to be included on the order memorandum? 1. The person who placed the order 2. The person who recommended the transaction 3. The date on which the order was entered 4. The time that the order was executed
4. The time that the order was executed According to the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, the order memoranda (order ticket) should show the terms and conditions of the order, instructions, modification, or cancellation, the person connected with the IA who recommended the transaction, and the person who placed the order.
A client of an IAR is 35 years old and single with three children, ages 7, 9, and 12. She has 15 years remaining on her home mortgage. She would like to ensure her children will be able to attend college and that the mortgage will be paid off in the event of her death. She does not currently have a great deal of discretionary income. Which of the following would be most suitable for the IAR to recommend? 1. A whole life policy with a 15-year term rider 2. A 15-year term life insurance policy 3. A universal life policy with increased premiums after 15 years 4. A whole life policy, cancelable after 15 years
2. A 15-year term life insurance policy Based on the client's future obligations and lack of discretionary income, term life offers the least expensive policy for the period she needs it for. A whole life policy charges higher premiums. A whole life policy with a term rider would be even more expensive, and the same is true of universal life.
Which of the following choices is not considered a security? 1. American Depositary Receipts 2. A Treasury bond futures contract 3. A variable annuity set up as a retirement plan 4. Call options on a gold futures contract
2. A Treasury bond futures contract Under the Uniform Securitiess Act, futures contracts are not securities. However, options on commodity futures contracts are considered securities. Variable products (annuities and life insurance policies) and ADRs are also defined as securities.
A married couple received $50,000 of cash as a wedding gift and intend to use the money as a down payment on a new home. They anticipate closing on the new home within six months. Which of the following investments is the MOST suitable? 1. A diversified portfolio of blue chip stocks 2. A money-market mutual fund 3. A one-year bank-insured CD 4. Index ETF
2. A money-market mutual fund Since a money-market mutual fund is a very conservative and liquid investment, it's the best choices for this couple. A stock portfolio and ETF that's based on an index will expose the couple to market risk and are therefore unsuitable due to their short time horizon and capital preservation need. A bank-insured CD is conservative, but it's not liquid. With the CD, the couple would be required to redeem it early and be subject to a penalty.
Al Jackson has $20,000 to invest and would like to hold a diversified portfolio of stocks, bonds, and money-market instruments. He would like to change the percentage invested in each of these categories as the financial markets change. However, he does not believe he will have the time to monitor the markets and make adjustments to his portfolio. The type of mutual fund that would be MOST suitable for Mr. Jackson is a(n): 1. Bond index fund 2. Asset allocation fund 3. Option income fund 4. Stock index fund
2. Asset allocation fund Asset allocation funds hold diversified portfolios of stocks, bonds, and money-market instruments. The fund manager from time to time shifts the percentage of the portfolio invested in each of these categories as market conditions warrant, often according to computer models.
A durable power of attorney: 1. Generally may not be revoked by the grantor 2. Gives a person the authority to manage the grantor's finances even if the grantor becomes incapacitated 3. Is automatically revoked if the grantor is adjudicated incompetent 4. May take the place of a will in many states
2. Gives a person the authority to manage the grantor's finances even if the grantor becomes incapacitated A durable power of attorney gives a person the power to manage the grantor's financial affairs even if the grantor becomes incapacitated. Conversely, a regular (standard) power of attorney terminates if the grantor becomes incapacitated. A registered representative (RR) must have durable power of attorney in order to exercise discretion in the event his client becomes incapacitated.
The "Blue Sky" laws provide for: I. State registration of broker-dealers and agents II. State registration of investment advisers and investment adviser representatives III. Federal registration of broker-dealers and agents IV. Federal registration of investment advisers and investment adviser representatives 1. I, II, III and IV 2. I and II only 3. III and IV only 4. I and III only
2. I and II only The "Blue Sky" laws are state securities laws which provide for the registration of broker-dealers, agents, investment advisers, and investment adviser representatives. These laws also provide for the registration of securities that are to be issued in a state.
Moral Financial Planning Services is a small investment adviser whose main office is located in Kennebunkport, Maine. It has two retail clients in Maine and six retail clients that live in Vermont. It also has 10 clients located in New Hampshire (four individuals and six institutions). Its most important client is the Haley Trust Company, which is located in Hyannis Port, Massachusetts. Moral Financial just opened a small satellite office there in order to better service this client. Moral must register as an investment adviser in which of the following states? I. Maine II. Massachusetts III. New Hampshire IV. Vermont 1. I and II only 2. I, II and IV only 3. I and III only 4. III and IV only
2. I, II and IV only Moral must register in Maine and Massachusetts since a firm must register in any state in which it maintains an office regardless of the number of clients it has. Moral must also register in every state in which it has more than five retail clients—it has six retail clients in Vermont. It does not need to register in New Hampshire since only four of its clients there are retail investors—the other six are institutions and the firm does not maintain an office in that state.
An investment adviser representative (IAR) who works for a federal covered investment adviser has engaged in trading that was considered excessive in regard to both the size and frequency of the trades. According to NASAA's model rule, who is responsible in this situation? 1. The rules would only apply to the IAR 2. The rules would apply to both the IAR and IA 3. The rules would only apply to the IA 4. The IA would not be responsible since the SEC is the only regulator with jurisdiction over the adviser's activities
2. The rules would apply to both the IAR and IA NASAA's Model Rule on Unethical Business Practices applies to all investment advisers and investment adviser representatives. Even though a firm may be a federal covered adviser, it does not receive a safe harbor from the antifraud provisions of the Uniform Securities Act.
An individual has set up 529 plans for each of her grandchildren. What's the most that she may contribute to each child's plan without incurring gift taxes? 1. $16,000 annually or $80,000 at one time 2. $6,000 annually 3. $2,000 annually or $10,000 at one time 4. $2,000 annually
1. $16,000 annually or $80,000 at one time An individual may take advantage of the annual gift tax exclusion and contribute $16,000 per year to each of her grandchildren's 529 plans. Alternatively, she may choose to aggregate five years' worth of contributions into one large $80,000 contribution (5 x $16,000). If she chooses to contribute $80,000 at one time, she cannot make any additional contributions for five years without incurring gift taxes.
Ellis purchases an equity-indexed annuity contract that guarantees a 5% return with a 10% interest-rate cap. The index to which the funds are tied falls in value by 2% this year. What return does Ellis receive? 1. 5% 2. 3% 3. 8% 4. -2%
1. 5% In an equity-indexed annuity, the owner receives a guaranteed minimum interest rate with potential upside based on the performance of the designated index. If the return on this index is less than the guaranteed rate, the owner receives the minimum. If the index return is greater than the guarantee, the owner receives the greater return up to the capped maximum. In this case, the index earned -2%, so the client receives the guaranteed maximum 5% rate.
According to the Uniform Securities Act, which of the following investment adviser representatives (IARs) is considered to have custody of customer funds? 1. An IAR who has been hired by a customer to act as the trustee for the customer's account 2. An IAR who receives a customer's permission to place trades in her account 3. An IAR who receives a customer check in the mail that is made payable to a broker-dealer 4. An IAR who also acts as an agent for a broker-dealer and earns commissions
1. An IAR who has been hired by a customer to act as the trustee for the customer's account Trustees are responsible for the care, custody, and control of the assets of another person. An IAR who acts as a trustee has check-writing privileges in his customer's account and is considered to have custody of the customer's assets. If an IAR receives a customer check that's made payable to a third party, he avoids any custody issues by returning it to the customer within three business days. Simply having discretionary authority to make investment decisions (i.e., having limited discretion) does not meet the threshold for custody.
Last year, your firm recommended an IPO to a customer. He was given a red herring at the time of the recommendation and gave you an indication of interest for an $8,000 investment. When the issue became effective, you completed the sale, but his final prospectus was lost in the mail. Over the past year, the stock has steadily declined in value. Two weeks ago, the customer called you and said he wants his money back because you sold him a new issue without benefit of a prospectus. His request is currently under review by your legal department. In the newspaper this morning, you see the customer's obituary. How will this matter be disposed of? 1. The request will continue to be processed since a cause of action survives the death of the person making the claim 2. The request will be canceled since the customer has passed away 3. The request will be denied since there is no one to pay in this cause of action 4. The request will be forwarded to the state Administrator for disposition
1. The request will continue to be processed since a cause of action survives the death of the person making the claim Under the provisions of the Uniform Securities Act, every cause of action survives the death of any person who might have been a plaintiff or defendant.
A client with a net worth of $2,500,000 has $300,000 in funds managed by an investment adviser. The investment adviser normally charges 1% of the assets under management but will waive the fee if the performance of a client's account does not attain a certain level of capital appreciation. According to the Investment Advisers Act, which of the following statements is TRUE? 1. This provision is allowed if the client signs the contract 2. This practice is prohibited 3. Only a control person of the investment adviser may approve the arrangement 4. Only the SEC may approve the arrangement
1. This provision is allowed if the client signs the contract This case is an example of a contingent fee, which generally includes any arrangement in which the adviser's fee depends on attaining a specific level of capital gains or appreciation (or avoiding capital losses or depreciation). The SEC considers contingent fees a type of performance fee, which are generally prohibited in advisory contracts. Exceptions include contracts for clients who have at least $1,000,000 under management with the adviser, or clients who have a net worth in excess of $2,000,000. Since the client has a net worth of $2,500,000, she would qualify for this exception.
Mr. Brown is a client who must fulfill a $300,000 obligation in two years. He currently has the $300,000 and would like your advice as to how to invest these funds temporarily. Which of the following securities is most suitable? 1. U.S. government securities maturing in two years 2. High-grade, blue-chip equity securities 3. AAA municipal bonds with a 15-year average maturity 4. High-quality corporate debenture bonds maturing in two years
1. U.S. government securities maturing in two years U.S. government securities are the safest investment. In two years when the securities mature, Mr. Brown is assured of having his $300,000 to fulfill his obligation. The other choices are incorrect even though they are high-quality securities. There is no guarantee that the price of these securities will be at the same level two years after they have been purchased. Since debentures are unsecured bonds, the government securities would be safer and, therefore, more appropriate.
All of the following statements are NOT TRUE, EXCEPT: 1. Variable life, as with whole life, has fixed premiums paid at fixed intervals 2. Variable life, as with universal life, gives the policyholder the flexibility to change the death benefit and the premium payments 3. Universal life, as with variable life, gives the policyholder flexibility in changing how the cash value is invested 4. Variable life, as with whole life, has fixed premiums and a fixed death benefit
1. Variable life, as with whole life, has fixed premiums paid at fixed intervals While universal life allows the policy owner to change the premiums and/or the death benefit, variable life has fixed premiums and a fixed minimum death benefit. The actual death benefit on a variable life policy is not changed by a decision of the policyholder but, instead, as a result of growth in the subaccounts. Universal life has a minimum interest rate and an actual rate that could be higher, but it is determined by the insurance company, not the policyholder. Variable life and whole life are the same in having fixed premiums paid at fixed intervals.
An investment adviser's client base is limited to insurance companies. If the adviser has its only office in State A, with whom must it register? 1. With State A under the Uniform Securities Act, but not with the SEC under the Investment Advisers Act of 1940 2. With the SEC under the Investment Advisers Act of 1940 and notice file with State A 3. With the SEC under the Investment Advisers Act of 1940 and with State A using the coordination method under the Uniform Securities Act 4. With the SEC under the Investment Advisers Act of 1940 only
1. With State A under the Uniform Securities Act, but not with the SEC under the Investment Advisers Act of 1940 In this example, since the investment adviser is dealing exclusively with insurance companies, it is exempt from registration under the Investment Advisers Act of 1940. However, the IA would likely be required to register in State A because it has an office there.
According to the Uniform Securities Act, which of the following choices would meet the definition of a broker-dealer in State A? 1. Woodwyle Incorporated, a broker-dealer located in State B that conducts transactions for a customer who has moved to State A 2. A person located in State A, who is in the business of providing advice relating to securities 3. An agent located in State A, who effects securities transactions for his own account or the account of others 4. The trust department of the Merchants Bank located in State A
1. Woodwyle Incorporated, a broker-dealer located in State B that conducts transactions for a customer who has moved to State A Woodwyle is defined as a broker-dealer and must be registered in the state to conduct business with existing customers who have moved to the state. An agent not registered in the state has 60 days to obtain registration in the state, provided the broker-dealer is registered in the state, the agent is registered in at least one state, and is not disqualified from registration in the state.
An agent of a broker-dealer publishes a Web page that discusses the benefits of dollar cost averaging and why investors should invest with long-term goals in mind. If a customer in a state where the agent is not registered explores the Web site, which TWO of the following legends must be on the Web site in order to take advantage of the safe harbor rule and not register in the state? I. The agent will only conduct business in the state if registered or exempted. II. Follow-ups will only be handled by agents who are registered or exempt. III. Internet advertising is exempt from state regulation and subject to SEC review. IV. The rule number of the safe harbor is being disclosed. 1. III and IV 2. II and III 3. I and II 4. I and IV
2. II and III According to NASAA's interpretive order concerning broker-dealers, investment advisers, broker-dealer agents, and investment adviser representatives for general dissemination of information on products and services, when advertising on the Internet, an agent must include a legend that clearly states that (1) the BD agent or IA rep in question may only transact business in this state if first registered, excluded, or exempted from state registration requirements, and (2) follow-ups, or individualized responses to persons in this state by a BD agent or IA rep that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with state registration requirements, or an applicable exemption or exclusion.
Under the Uniform Securities Act, the sale of limited partnership interests to a bank is exempt from: I. The antifraud provisions II. The registration requirements III. The filing requirement for advertisements 1. I only 2. II and III only 3. I, II and III 4. II only
2. II and III only Any sale of securities to an institution (e.g., a bank) is considered an exempt transaction under the USA. This exempts the securities from registration and any related advertising from being filed with the Administrator. However, no person, security, or transaction is exempt from the antifraud provisions of the Uniform Securities Act.
When an investment adviser makes recommendations to clients, which TWO of the following factors should be considered? I. The client's educational background II. The client's attitude and values about investing III. The client's professional experience IV. The client's investment experience 1. II and III 2. II and IV 3. I and III 4. I and IV
2. II and IV Investment advisers should consider all of the relevant information about a customer when they make specific investment recommendations. Of the choices given, the two most important factors are the customer's investment experience and the customer's attitudes and values about investing (e.g., risk tolerance and social standards, such as whether the client is opposed to investing in tobacco stocks). On the other hand, the customer's educational background and professional experience (work history) are not as important.
Currently, the price of gold is increasing as the price of Treasury bills is declining. These two assets are considered: 1. Perfectly correlated 2. Negatively correlated 3. Uncorrelated 4. Slightly correlated
2. Negatively correlated When two investments are moving in the opposite direction, they are said to be negatively correlated. Those that move in the same direction are correlated. Those that show no pattern of correlation are uncorrelated.
An individual lives in New Jersey and is opening a 529 college savings plan that's sponsored by the state of Montana for his daughter's benefit. His initial contribution is $80,000. Which of the following statements is TRUE? 1. Any earnings generated in the account will be taxed at the daughter's tax rate. 2. Neither the investor nor his daughter will be liable for gift taxes on the $80,000 contribution. 3. The investor is required to pay federal gift taxes on the $80,000, since the amount exceeds the annual gift exclusion. 4. The investor is able to deduct the $80,000 from his state income taxes.
2. Neither the investor nor his daughter will be liable for gift taxes on the $80,000 contribution. The individual may contribute up to $80,000 at one time to his daughter's 529 plan without incurring federal gift taxes. The IRS allows donors to aggregate five years' worth of gifts under the annual gift exclusion ($16,000) into one lump-sum contribution (5 x $16,000). Some states do allow donors to deduct a portion of the contributions made to 529 plans from their state income taxes, but only if the donor contributes to a plan that's sponsored by his home state.
According to the Investment Advisers Act of 1940, access persons must submit their personal security holdings reports by: 1. Promptly upon becoming an access person; then at least monthly thereafter 2. No later than 10 days after becoming an access person; then at least every 12 months thereafter 3. No later than 45 days after becoming an access person; then at least monthly thereafter 4. No later than 30 days after becoming as access person; then at least monthly thereafter
2. No later than 10 days after becoming an access person; then at least every 12 months thereafter They are required to submit their personal securities holdings reports no later than 10 days after becoming an access person; then at least once every 12 months thereafter. Personal security transactions by an access person must be reported no later than 30 days after the end of each calendar quarter.
Sharpshooter Investments (a broker-dealer) has submitted its registration paperwork to the state Administrator. According to the Uniform Securities Act, its registration will become effective at: 1. Midnight on the 30th day after filing 2. Noon on the 30th day after filing 3. Noon on the 10th day after filing 4. Noon on the 20th day after filing
2. Noon on the 30th day after filing Assuming a broker-dealer applicant has submitted all required documentation, its registration becomes effective at noon on the 30th day after filing with the state. The Administrator does have the power to grant an earlier effective date, and may defer the effective date until the 30th day after the filing of any amendment to the initial application.
When an investment adviser representative is recommending that a client investment in various mutual funds, she may recommend an emerging markets fund as a means of: 1. Reducing the risk of various fund holdings 2. Obtaining diversification through investments in a single country or a group of developing countries 3. Guaranteeing higher returns in comparison to other mutual funds 4. Reducing taxes, since the fund's earnings are not subject to U.S. taxes
2. Obtaining diversification through investments in a single country or a group of developing countries An emerging markets fund invests in companies which are located in countries that are moving out of their economic development phase and into a more growth-oriented stage. Although investing in an emerging markets fund provides for diversification, it does not guarantee higher returns as compared to other mutual funds. These funds present both a high degree of risk and volatility.
An IA that has been given the authority to direct the trades in a client's brokerage account opens an account for the client with a broker-dealer. The broker-dealer offers the IA an incentive of additional compensation tied to the volume of transactions executed in the account. Due to the potential incentive, what action must the IA take? 1. No action is required since including incentives is an acceptable practice 2. Prior to offering any advice, it must disclose all compensation and incentives to the client 3. It must contact the client and let him choose his own broker-dealer 4. It must disclose any incentives earned and the number of trades effected annually
2. Prior to offering any advice, it must disclose all compensation and incentives to the client An investment adviser must disclose all potential conflicts of interest to a client. Once a conflict of interest has been disclosed, the client must provide written consent for the IA to proceed. There is no requirement for an IA to disclose the total number of trades in the account. Ultimately, receiving compensation based on the volume of trades effected creates an incentive for the IA to execute an excessive and unnecessary number of trades for its clients.
Hi-Growth Investments is a state-registered investment adviser that has increased the number of its branch offices and expanded its product line due to the recent acquisition of Static Advisers, a smaller regional boutique investment advisory firm. Hi-Growth must inform the Administrator of any amendments to its registration statement: 1. Within 10 business days of the end of the month in which the acquisition occurred 2. Promptly 3. The earlier of 60 days after the acquisition, or the anniversary date of the Hi-Growth's acquisition 4. Within 48 hours of the closing of the acquisition
2. Promptly The Administrator must be informed promptly of any material change in the registration of either the firm or an individual employed by the firm.
The plan documents of a qualified retirement plan require that the investment manager purchase securities issued by the plan's sponsor. These are securities that a prudent investor clearly would not purchase. What is the only course of action that the investment adviser may take in order to avoid violating the fiduciary responsibility provisions of ERISA? 1. Appeal to the Department of Labor for an individual exemption from the prohibited transaction rules 2. Refuse to purchase the securities 3. Purchase only a small amount of the securities 4. Purchase the securities
2. Refuse to purchase the securities ERISA states that a fiduciary must follow the terms of the plan documents unless these documents are inconsistent with ERISA. In this case, purchasing these securities would violate the prudent expert standard of ERISA. Thus, the plan documents are in conflict with ERISA and the investment adviser should not follow them. An adviser that did purchase the securities could be held liable for violating a fiduciary duty.
Two individuals are separately registered as agents for unaffiliated broker-dealers in State B. They have been friends since childhood and have both been contacted by a former high school classmate who is looking to open an account. Unsure of who should take on the new client, they agree to split commissions equally regardless of which firm is chosen. How would NASAA view this arrangement? 1. Splitting commissions between agents is always prohibited 2. Since the agents work for unaffiliated broker-dealers, the arrangement is prohibited 3. Provided both of the broker-dealers approved of the arrangement, it would be acceptable 4. Provided the client was given the proper disclosures, it would be acceptable
2. Since the agents work for unaffiliated broker-dealers, the arrangement is prohibited Splitting commissions with another agent is acceptable provided both agents work for the same firm (or affiliated firms) and are registered in the same state. In this question, since the agents work for unaffiliated firms, it would be an unacceptable practice.
An investment adviser's application for registration indicates that it will base its investment decisions on non-financial criteria, including psychic readings. According to the Uniform Securities Act, which of the following statements BEST describes the Administrator's power? 1. The Administrator may act in the public's best interest and deny the registration. 2. The Administrator may deny or postpone a registration only for the reasons that are specified in the law. 3. The Administrator must review the track record of the applicant in order to determine the feasibility of this criteria for investing. 4. The Administrator should encourage the adviser to use alternative methods of analysis and grant registration if there is a reasonable basis for this methodology
2. The Administrator may deny or postpone a registration only for the reasons that are specified in the law. The state Administrator may only cite reasons that are found in state law to disqualify a person from registration (e.g., a felony conviction, violation of commodities laws, misleading statements, etc.). The law does not make reference to the specific analytical methods that IAs may use to determine their investment decisions. Instead, an Administrator's requirement is for investment advisers to disclose the methods that they will use.
All of the following are found on a customer's confirmation statement for a bond, EXCEPT: 1. The date of the transaction 2. The bond's yield-to-maturity at the time it was originally issued 3. Whether the bond is callable 4. The bond's purchase price
2. The bond's yield-to-maturity at the time it was originally issued Customer confirmation statements for bonds must include the investor's purchase price, the date of the transaction, whether the bond is callable, and the investor's yield-to-maturity. Please note that the bond's yield-to-maturity at the time it was originally issued is irrelevant and is not required to be included on the confirmation statement.
Under the Uniform Securities Act, which of the following persons is required to register as an investment adviser? 1. A bank's trust department that provides fee-based investment advice 2. The publisher of a financial periodical that responds to each subscriber with personalized investment advice 3. An accountant who provides investment advice that is incidental to her tax practice 4. A federal covered adviser
2. The publisher of a financial periodical that responds to each subscriber with personalized investment advice Federal covered advisers and trust companies are not subject to registration under the Uniform Securities Act. Lawyers, accountants, teachers, engineers, and publishers are also exempt provided their securities advice is incidental and not timed and tailored to a specific client. Of the choices given, the publisher is providing tailored investment advice and is therefore subject to registration.
Mr. Smith holds a portfolio of blue-chip stocks that have appreciated in value. To generate additional current income from his holdings, Mr. Smith would: 1. Buy puts 2. Buy calls 3. Write covered calls 4. Write covered puts
3. Write covered calls By selling (writing) options, Mr. Smith would receive the option premiums, thus generating income. Since he currently owns a portfolio of stocks, he would write calls covered by the long stock in the portfolio.
Quandry Financial Corporation is an investment advisory firm with three partners and ten associates. All of the partners have earned a CFP (Certified Financial Planner) designation. The associates are attending CFP classes, but have not yet earned the designation. Quandry has published an advertisement that states, "All of our partners have completed the CFP certification program." Which of the following statements is TRUE? 1. This is acceptable since the content of adviser advertisements is not regulated 2. This is acceptable since the statement is literally true 3. This is unethical since it implies that all of the firm's employees are CFPs, which is misleading 4. This is unethical since investment advisers may not advertise their qualifications
2. This is acceptable since the statement is literally true Under NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers, it is unethical to misrepresent the qualifications of the adviser or any employee. Advisers must consider how the wording of their ads will be interpreted by the public and how it could be misleading. Since the advertisement states that the partners, not all employees, have earned their CFP certification, this is acceptable since the statement is true.
Which of the following choices would NOT meet the definition of an exempt transaction? 1. An unsolicited nonissuer transaction with a retail investor 2. Transactions between an issuer and retail investors 3. A transaction executed by a bona fide pledgee 4. A transaction by a trustee involved in a bankruptcy
2. Transactions between an issuer and retail investors Any transactions by trustees involved in a bankruptcy--sheriffs, marshals, guardians, and other fiduciaries are considered exempt transactions. Unsolicited nonissuer transactions whether with retail or institutional investors and transactions executed by a bona fide pledgee are also considered exempt transactions. However, transactions between issuers and retail investors are not exempt from registration. A transaction between an issuer and underwriter would be an exempt transaction.
If information in an adviser's brochure becomes materially inaccurate, the adviser must file a(n): 1. Updating amendment within 90 days 2. Updating amendment promptly 3. Annual amendment of Part 2 4. Updating amendment within 120 days
2. Updating amendment promptly Any materially inaccurate information in the brochure must be corrected by filing an updating amendment promptly by substituting pages in ADV Part 2 or affixing a sticker. Part 2 is filed by a state-registered adviser with the Administrator. For a federal covered adviser, Part 2 is not filed with the SEC, but retained on file.
All of the following statements are TRUE regarding the activities of investment advisers, EXCEPT: 1. Advisers must disclose conflicts of interest to clients or abstain from the action or situation creating the conflict 2. When an adviser has been paid a fee to create a financial plan, the adviser must create the plan without consulting other professionals 3. When in a position to direct client trades, advisers should choose a broker-dealer that can provide the best execution 4. Advisers should not represent third-party research as their own
2. When an adviser has been paid a fee to create a financial plan, the adviser must create the plan without consulting other professionals There are situations in which an investment adviser should use the services of other professionals in formulating advice for a client. For example, IAs who do not have the training or experience to deal with tax issues should seek help from experts, such as accountants or tax attorneys.
A portfolio has an alpha of 0%, a beta of 1.0, and an actual return of 12%. What would the alpha of the portfolio be if the beta was 0.9 and the actual return was 10.6%? 1. -1.40% 2. 0.00% 3. -0.20% 4. 1.40%
3. -0.20% Alpha is the difference between the portfolio's actual return (which is given) and expected return. The expected return can be determined by using the Capital Asset Pricing Model (CAPM). Since this question doesn't provide a risk-free rate, the calculation of expected return is simply beta multiplied by the market return (Expected Return = Beta x Market Return)
According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is: 1. 10 or more 2. More than 10 3. 10 or fewer 4. Less than 10
3. 10 or fewer An investment adviser is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is 10 or fewer. Therefore, if an IA distributes communication to more than 10 persons, it is not required to maintain a record of names and addresses of the persons to whom it was sent. The belief is that it may be too burdensome for an IA to maintain an extensive list of the names and addresses if the communication is sent to more than 10 persons. As a reminder, any communication that is sent to two or more persons is considered advertising.
Which of the following is NOT TRUE regarding a viatical settlement contract? 1. The inability to accurately calculate the actual life expectancy of the insured 2. If the insured lives longer than expected, the investor is required to pay the premiums to keep the policy in force 3. An investment in a viatical settlement contract is considered to be liquid 4. The rate of return cannot be determined before the insured dies
3. An investment in a viatical settlement contract is considered to be liquid With a viatical settlement contract, if the insured lives beyond life expectancy, the investor is required to continue to pay the insurance premiums. Since the death of the insured is ultimately unpredictable, the future financial commitment is unknown. A viatical settlement contract is not a liquid investment as there is not a secondary market for such investments.
Over the past 10 years, the annual percentage returns for a mutual fund have been 7%, 8%, -9%, 8%, -4%, 5%, 6%, 8%, 10%, and 12%. What is the range of returns? 1. 7.5 2. 5.1 3. 8 4. 21
4. 21 The range of a data set is the difference between the lowest and highest number. When the data points are arranged from the lowest to the highest, it becomes clear that the range is 21 (from -9 to +12)
Which of the following statements is NOT TRUE concerning the registration requirements of securities professionals? 1. Investment advisers with no place of business in a state and whose only clients are institutional investors in a state need not register 2. Investment advisers with no place of business in a state and a limited number of noninstitutional clients need not register 3. Broker-dealers with no place of business in a state who limit their agents to selling exempt securities in a state need not register 4. Broker-dealers with no place of business in a state and a limited number of noninstitutional clients in a state must register
3. Broker-dealers with no place of business in a state who limit their agents to selling exempt securities in a state need not register There is no exemption from registration for broker-dealers that have no place of business in a state and who limit their agent's activities to selling exempt securities. It is the securities that are exempt, not the agents selling those securities. Investment advisers that have no place of business in a state may still do business in that state without registering provided they limit their advice to institutional clients or no more than five noninstitutional clients in that state. There is no de minimis exemption for broker-dealers that have no place of business in a state and a limited number of noninstitutional clients.
Two years ago, in her personal account, a portfolio manager invested in, and continues to hold, stock that was issued through a private placement. Today, the company is going public and she recommends that same company's stock to her clients. The portfolio manager has just: 1. Violated FINRA's new issue rule 2. Engaged in insider trading 3. Created a conflict of interest 4. Commingled customer cash
3. Created a conflict of interest In this situation, the portfolio manager has created a conflict of interest. If her clients buy the initial public offering (IPO) stock, the offering will be successful, which would allow her to cash out the investment she had acquired through the private placement. None of the other violations apply in this situation.
All of the following are characteristics of forward contracts, EXCEPT: 1. The amount and type of the delivered commodity are negotiable 2. The contracts cannot be offset 3. Delivery and settlement of the contracts occurs immediately 4. The contracts are negotiated off of an exchange
3. Delivery and settlement of the contracts occurs immediately A forward contract is an agreement to buy and sell commodities at a future time and place. Forwards are over-the-counter contracts that will be negotiated off of a futures exchange. All aspects of the contract are negotiated between the buyer and seller, including the price, type of commodity, and amount, as well as the time and place of delivery.
According to modern views about investing, fiduciaries should be most concerned about which of the following objectives when making investment decisions? 1. Ensuring that the client's capital is preserved for heirs 2. Developing a properly diversified portfolio consisting of securities that will minimize the risk exposure to clients 3. Developing an investment policy that accords with the client's goals and risk tolerance 4. Making certain that the client avoids the purchase of non-investment-grade debt instruments and equities that are nonlisted, non-Nasdaq issues
3. Developing an investment policy that accords with the client's goals and risk tolerance Modern views of fiduciary responsibility in investing place less emphasis on preservation of capital and more emphasis on risk management (not complete avoidance), appropriate diversification, and development of an investment policy that is consistent with client goals. Fiduciaries are no longer limited to investing in certain classes of assets as they were under the legal list approach.
Jerry is a successful divorce attorney in your community. Based on a favor you did for him involving one of his cases, he offers to send brokerage business to your firm but asks that you provide him with duplicate confirmations and statements on all clients he refers. What is the best practice in this situation? 1. You may send the duplicate confirmations as long as each customer gives you verbal permission and has previously signed a Regulation SP avoidance waiver (Reg. SP-AW) 2. You may send duplicate confirmations as long as this activity is approved by your firm's chief compliance officer and your supervising branch manager 3. Duplicate statements may not be sent unless you obtain written consent from each client 4. You must refuse the business since sending duplicate confirmations through the U.S. mail is a violation of numerous federal securities laws
3. Duplicate statements may not be sent unless you obtain written consent from each client As a general rule, an adviser may share account information only with the customer's written consent. Advisers may, however, be required to provide information if legally bound to do so, e.g., as a result of a court order or an official request by a governmental authority such as the IRS. The Reg. SP Avoidance Waiver is a fictitious document.
Which of the following is NOT TRUE regarding exchange-traded notes (ETNs)? 1. ETNs may be sold short 2. At maturity, ETN investors receive the value of the underlying asset 3. ETNs are forms of secured debt instruments that have no credit risk 4. The return on ETNs is linked to the performance of an index, commodity, or currency
3. ETNs are forms of secured debt instruments that have no credit risk An investment in an ETN may be risky since it is an unsecured debt instrument. An ETN's performance is linked to an underlying index, commodity, or currency. Although ETNs do not pay interest, any gains on the underlying instruments are paid at maturity. ETNs can be purchased on margin and are able to be sold short.
According to the Investment Advisers Act, in order to register as an investment adviser with the SEC, which of the following choices is required? 1. File Part 1 of Form ADV 2. File Part 1 of Form ADV and produce a surety bond 3. File Part 1 and Part 2 of Form ADV 4. File a consent to service of process, pay a fee, and individually register all employees
3. File Part 1 and Part 2 of Form ADV In order to register as an investment adviser with the SEC, the applicant must file Part 1 and Part 2 of Form ADV with the SEC. Individual registration of employees with the SEC is not required.
Who pays the income taxes in a revocable trust? 1. Beneficiary 2. Trustee 3. Grantor 4. Trust
3. Grantor Revocable trusts can be amended or revoked by the creator (i.e., grantor) at any time. Since the grantor has control over the assets in the trust, any income generated by the trust during the grantor's life is taxable to the grantor.
A client has his portfolio invested in a number of different equity securities in the energy, manufacturing, and technology sectors. His investment adviser representative wants to help him reduce his systematic risk. Which of the following types of securities would the IAR most likely discuss with the client? 1. Securities which have a positive correlation with the securities that are currently in his portfolio, such as S&P 500 Exchange-Traded Funds. 2. Securities which have a positive correlation with the securities that are currently in his portfolio, such as debt instruments. 3. Securities which have a negative correlation with the securities that are currently in his portfolio, such as debt instruments. 4. Securities which have a negative correlation with the securities that are currently in his portfolio, such as S&P 500 Index Exchange-Traded Funds.
3. Securities which have a negative correlation with the securities that are currently in his portfolio, such as debt instruments. In order to minimize systematic (market) risk, the Modern Portfolio Theory states that an investor should have different asset classes in his portfolio that have a negative correlation. When securities are negatively correlated, their prices have a tendency to move in opposite directions, such as the movement of common stocks relative to debt instruments.
To help a friend who needs to raise capital to start a new business, an agent markets his friend's limited partnership interests to some of his brokerage clients. The agent collects a commission from the sale of the interests, but has not told his broker-dealer about the sales. The agent's actions are best described as: 1. Churning in customers' accounts 2. Selling unregistered securities 3. Selling away 4. Unauthorized trading in customers' accounts
3. Selling away Selling away is defined as an agent executing trades without the knowledge of his broker-dealer. Selling away most often occurs when an agent deals in a private placement outside his normal course of business. Participating in a private placement is acceptable provided the agent's employer is given notice.
If a portfolio manager has a diversified portfolio of large-cap stocks, it would use index options to reduce which of the following risks? 1. Interest-rate risk 2. Timing risk 3. Systematic risk 4. Nonsystematic risk
3. Systematic risk If a portfolio manager wants to hedge a diversified stock portfolio from systematic (market) risk, it could buy puts or sell call options on the index. If the market declines as a whole, the puts would provide the best hedge by becoming more valuable and would offset the risk. In the event the overall market declines, the call options would provide only limited protection through the collection of the premium on the expiring call options.
As it relates to viatical investments, which of the following is NOT required to register under the USA? 1. The agents who sells the investment 2. The viatical investment 3. The insured 4. The broker-dealer that offers the investment
3. The insured Viatical investments are considered securities and must be registered in the states in which they are sold. Also, the broker-dealers and agents who sell them must be registered in these states.
According to federal law, which of the following would best describe what happens when a security is federal covered? 1. The security becomes a suitable pension plan investment 2. The security is considered AAA-rated 3. The issuer must register the security with the SEC only 4. The Administrator has a diminished authority to review the security during an offering in the state
3. The issuer must register the security with the SEC only Federal covered securities are registered with, and regulated by, the SEC. A state Administrator does not have authority over any offering documents related to federal covered securities. Remember, federal covered securities are subject to business risk and are not automatically considered safe or investment-grade.
All of the following statements are TRUE regarding forward contracts, EXCEPT: 1. They have counter-party risk 2. They are often used to hedge against currency or exchange-rate risk 3. They are standardized and traded on an exchange 4. The buyer is obligated to accept delivery of the underlying commodity at a specified time and price
3. They are standardized and traded on an exchange Unlike futures contracts, forwards are not standardized agreements and they are not exchange-traded. Since forwards are not exchange-traded, the exchange does not guarantee against counter-party failure. Forward contracts are not readily transferable. In other words, to assign the contract to a third party, both the buyer and seller would need to agree on the assignment.
An investment adviser representative acts as portfolio manager for her advisory firm's retirement fund. In addition, she acts as portfolio manager for two other pension funds that are clients of her firm. She has an opportunity to purchase a small amount of a new issue suitable for her firm's pension fund, as well as the clients' pension funds. Under what circumstances may she place the stock in her own firm's pension account rather than her clients' accounts? 1. If the number of shares involved is an insubstantial amount as defined under FINRA rules 2. If her advisory firm's ADV Part 2 states that this might happen 3. Under no circumstances 4. If she discloses this transaction to her clients
3. Under no circumstances While there are many circumstances in which a conflict of interest can be handled by disclosing it to clients, some conflicts are so serious that disclosure does not cure them. This is an example of such a situation. The SEC has sanctioned investment advisers severely for these types of allocations.
Five years ago, a registered representative sold a variable annuity to a 65-year-old client. The annuity carries a seven-year surrender fee. The client made a lump-sum investment of $100,000 into a growth-oriented separate account which has grown to $150,000. The RR expects a major market correction in the near future and recommends that the client conduct a 1035 Exchange into a fixed annuity. The RR explains to the client that the surrender fee will be less than the anticipated decrease in account value. This recommendation is: 1. Suitable, since the surrender fees have been disclosed to the client. 2. Suitable, since the RR is acting in the client's best interests. 3. Unsuitable, since there is no benefit in surrendering the annuity due to the other investment options that are available in the separate account. 4. Unsuitable, since the market correction will have little consequence over the short-term.
3. Unsuitable, since there is no benefit in surrendering the annuity due to the other investment options that are available in the separate account. A 1035 Exchange permits the direct transfer of funds in a life insurance policy, endowment policy, or annuity into another policy, without creating a taxable event. However, incurring a surrender fee and then signing a new, long-term contract is not an appropriate recommendation. Since the separate account of a variable annuity will offer numerous investment objectives, the client could move her investment to another offering within the separate account without incurring surrender charges.
