Test Review #7
ABC Investment Company shares are trading at $13.80 on a per-share basis. The net asset value per share is $12.00. Which of the following conclusions correctly defines the relationship between trading price and NAV? A) The fund's shares are trading at a premium of 15% to the NAV. B) NAV per share is calculated as per-market demand and supply for the fund's shares. C) The value of $13.80 is calculated as total assets minus total liabilities divided by total outstanding shares. D) The fund's shares are trading at a discount of 15% to underlying NAV.
A
Under the USA, the least active review of registration documentation is performed by state Administrators before which of the following becomes effective? A) Notice filing B) Application C) Coordination D) Qualification
A
Which of the following is a characteristic of index investing? A) A portfolio that mirrors the performance of a specific market B) No guarantee of matching market returns C) A chance to achieve returns that beat the market D) Relatively high costs
A
If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk? A) Loss of principal B) Loss of diversification C) Changes in interest rates D) Loss of liquidity
A - A mutual fund with a portfolio of common stock is subject to market risk. If the market falls, the value of the fund's shares also fall, subjecting the owner to loss of principal.
Under federal law, which act regulates the activities of broker-dealers and associated persons? A) Securities Exchange Act of 1934 B) Trust Indenture Act of 1939 C) Uniform Securities Act D) Investment Company Act of 1940
A - The Securities Exchange Act of 1934 regulates the secondary market and its employees and firms.
The semi-strong form of the efficient market hypothesis (EMH) asserts that stock prices A) fully reflect all publicly-available information. B) don't reflect any information. C) fully reflect all historical price information. D) fully reflect all relevant information, including insider information.
A - The semi-strong form of the EMH states that security prices fully reflect all publicly-available information. This would include all historical information. The weak form relates to historical information only. The strong form relates to public and private (inside) information.
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, advertisements must comply with rules set out under the Investment Advisers Act of 1940. Those rules include A) a prohibition against reduced-fee introductory offers. B) requiring a written agreement between an investment adviser and a promoter who receives more than $1,000 over a 12-month period for endorsing the services of the adviser. C) a prohibition against showing the adviser's past performance. D) a requirement that a copy of all advertisements be sent to the SEC at the time they are disseminated to the public.
B
Under the Investment Advisers Act of 1940, for how many years must records be kept after the end of the fiscal year in which an entry was made? A) 1 year B) 5 years C) 2 years D) 10 years
B
Which of the following is NOT a characteristic of hedge funds? Hedge funds A) invest in private securities, real assets, derivatives, and structured products. B) offer managers high fixed fees. C) use leverage, short positions, and concentrated positions. D) are privately organized and generally unlisted.
B
As written in the Investment Advisers Act of 1940, a "person associated with an investment adviser" is any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser. Persons associated with an investment adviser whose functions are clerical or ministerial are not included in this definition. Based on that definition, all of the following would be associated persons EXCEPT A) a silent partner in an advisory firm organized as a general partnership. B) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser's research publications. C) an individual employed by an investment adviser to solicit new advisory clients, compensated at a rate of $500 for each new account. D) a senior officer of an investment adviser responsible for marketing the adviser's services as opposed to making investment advisory decisions.
B = Graphic design would be considered a clerical function. All of the other choices describe persons who meet the definition.
A client owns an investment-grade bond with a coupon of 5% that is priced to yield 6.7%. If similarly rated bonds are being issued today with coupons of 7%, it would be expected that the client's bond A) has a zero net present value B) will be selling at a premium over par C) has a negative net present value D) has a positive net present value
C
If interest rates are dropping, an investor with a maturing bond will be most concerned with A) a positive yield curve B) a negative yield curve C) the difficulty in finding another investment with a like yield D) the quality declining with the yield
C
A mutual fund would have net redemptions when A) the fund manager is selling more securities in the portfolio than are being purchased B) the fund increases its sales charge C) the number of shares being liquidated by investors exceeds those being purchased D) the fund is performing below the average of other funds with the same objectives
C - . When the dollar amount of shares being redeemed exceeds that of those being purchased, the result is net redemptions
Employee contributions to a 401(k) plan are subject to Social Security taxes federal unemployment taxes federal income tax withholding state income tax withholding A) III and IV B) I and III C) I and II D) II and IV
C - Employee contributions are excluded from taxable income at the time of contributions, which exempts them from income tax, but not from payroll taxes.
USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of A) FINRA B) the state with the most stringent financial requirements C) the SEC D) the state in which the principal office of the member is located
C - It may be assumed that a broker-dealer member of FINRA is also registered with the SEC
The powers of the Administrator include the ability to determine A) maximum net capital requirements for broker-dealers B) minimum net worth requirements for agents who exercise discretion C) minimum net worth requirements for investment advisers D) surety bond requirements for investment advisers who do not exercise discretion or maintain custody
C - The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. If the investment adviser does not exercise discretion (or maintain custody), no surety bond is required. Agents who exercise discretion may need a surety bond, but not a minimum net worth.
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) 5 years from the date of organization B) the lifetime of the firm C) 3 years after the dissolution D) 5 years after the dissolution
C - 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 3 years after dissolution.
A firm declares a $3.00 cash dividend to its shareholders. The firm has issued dividends of only $.07 per share for each of the last 15 quarters, and market analysts had anticipated a similar dividend this quarter. In an efficient market, one would expect A) no price change before or after the announcement. B) a price decrease after the announcement. C) a price increase before the announcement. D) a price change upon the announcement.
D
If a federal covered investment adviser wishes to sell his business to another advisory firm, which of the following statements is TRUE? A) The sale must be approved by the SEC. B) The sale must be approved by the Administrator. C) The sale must be approved by each customer of the selling adviser. D) No approvals are required.
D
Pontourny Advisory and Investment Services (PAIS) is a federal covered investment adviser. Its principal office is in State X. PAIS also maintains branch offices in States Y and Z. Brenda is the manager of the branch office in State Y. Some of the individuals being supervised by Brenda have clients in States X and Y, and others have clients in States Y and Z. Brenda must register as an IAR in A) States X and Y B) States Y and Z C) States X, Y, and Z D) State Y
D
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 premium than Bond A. D) Bond B will be selling at a greater discount than Bond A.
D - 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.
If the current risk-free rate is 5%, and the expected return on the market is 10%, what return can be expected from a security that has a beta of 1.5? A) 20% B) 15% C) 15.5% D) 12.5%
D - The formula for this is: risk-free rate plus the (difference between the market return and the RF) times the beta. In this question, those numbers are: 5% + [(10% - 5%) × 1.5] = 5% + (5% x 1.5) = 5% + 7.5% = 12.5%.
If a federal covered investment adviser intends to pay a third party solicitor to solicit clients for investment advisory services, which of the following must be TRUE? The solicitor must be a registered investment adviser representative with the state. The registered investment adviser must be properly registered as an investment adviser under the Investment Advisers Act of 1940. There must be a separate written agreement between the solicitor and the registered investment adviser. The agreement between the solicitor and the registered investment adviser is contained as part of the investment adviser's brochure. A) I and III B) II and IV C) I and IV D) II and III
D - Under federal regulations, if an investment adviser intends to pay a third party (nonemployee) solicitor to solicit clients for investment advisory services, the investment adviser must be properly registered with the SEC, there must be a written agreement between the investment adviser and the solicitor, and there can be no outstanding or pending orders or disciplinary actions against the solicitor involving finance or dishonesty.
The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if results do not reflect the deduction of fees actual market conditions during the referenced period are not disclosed the advertisement did not reflect performance for a minimum period of 3 years the advertisement did not disclose that it applied to only a specific group of clients A) II and IV B) I, II, III, and IV C) I and II D) I, II, and IV
D - advertising that reflects past performance must show a minimum period of 1 year, not 3 years.
Investing in which of the following would maximize after-tax income and diversify the portfolio for a high-tax-bracket investor? A) A unit investment trust whose portfolio consists of municipal bonds B) Short-term municipal notes C) GNMAs D) Preferred stock mutual fund
A
One of the terms defined in the Uniform Securities Act is "broker-dealer." Which of the following is NOT included in that definition? An individual employed by a corporate entity to open new customer accounts for the purpose of trading securities A business entity seeking to raise additional capital using the regulated securities markets A person whose primary function is buying securities for his own account and for the accounts of others A person whose primary function is providing advice on what assets belong in clients' investment portfolios A) I, II, and IV B) II and III C) I, II, III, and IV D) III and IV
A - A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the account of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser.
Although generally prohibited, there are conditions under which a state-registered investment adviser is permitted to charge performance-based fees. Which of the following meets the necessary criteria? A) Charging a performance-based fee to an individual who meets the definition of an accredited investor B) Charging a performance-based fee to an elderly client whose net worth, excluding the equity in the principal residence, is $2.3 million, with only $150,000 under the adviser's management C) Charging a performance-based fee to an aggressive entrepreneur whose net worth, excluding the equity in the principal residence, is $1.8 million and who has $500,000 under the adviser's management D) Charging a performance-based fee to an individual with a qualifying net worth in excess of $10 million without describing that there is an incentive for the adviser to take greater risks
B
An investment adviser's contract contains the following statement: "While GEMCO Advisers agrees to use its best efforts in the management of the portfolio, GEMCO shall not be responsible for errors in judgment or losses incurred on investments made in good faith, and its liability shall be limited expressly to losses resulting from fraud or malfeasance, or from violation of applicable law." Under the USA, this statement A) complies with the investment adviser's fiduciary liability B) is an improper waiver and makes the contract null and void C) clearly defines the parameters of the adviser's responsibilities D) offers protection to the client by limiting those acts for which the adviser can be sued
B
Among the differences between a Coverdell Education Savings Account and Section 529 plans are one has adjusted gross income limits, the other does not one has contribution limits set by federal law, the other by the individual state if the money is not used, money reverts back to the donor in one and to the beneficiary in the other A) I and III B) I, II, and III C) II and III D) I and II
B - If the money is not used for education, it reverts back to the donor in a 529 plan but to the beneficiary in a Coverdell.
An investment adviser to a private fund wishes to qualify for the exemption offered under the Uniform Securities Act when the fund has no more than 100 investors. In order to qualify, A) neither the private fund adviser nor any of its advisory affiliates have been convicted of a felony within the past 12 years B) every investor must have either at least $1.1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, in excess of $2.2 million C) the private fund adviser must have less than $110 million in private fund assets under management D) the fund's outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are individuals with at least $5 million in investments
B - The 100 or less investors is technically known as advising a 3(c)(1) issuer. In that case, all the investors must be qualified by meeting the net worth or assets managed by the adviser as stated.
All of the following would be prohibited practices under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers except A) charging fees that were higher than customary, but offering a performance guarantee to compensate for the higher fees B) maintaining custody of a customer's funds and securities without notification to the Administrator C) accepting an order from a client's spouse shortly after receiving a written trading authorization D) using an endorsement from an existing client in an advertisement.
C
Several years ago, an investor purchased an investment-grade bond with a 6% coupon. Today that bond is priced to yield 4.6% to maturity in 5 years. If the bond is called at par in one year, the bond's yield would be A) more than 4.6%. B) the coupon rate of 6% because it is called at par value. C) less than 4.6%. D) 4.6%.
C
Under the USA, each of the following is specifically excluded from the definition of a broker-dealer EXCEPT an A) agent B) issuer C) investment adviser D) international bank
C
Which of the following is a characteristic of the passive investment style? A) High portfolio turnover B) Income rather than growth objective C) Rebalancing D) Tactical management
C
A QDRO is a judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant. The QDRO must contain certain specific information as stated in whose regulations? A) NASAA B) ERISA C) IRS D) DOL
C - A QDRO is a judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant. The QDRO must contain certain specific information as stated in whose regulations? A) NASAA B) ERISA C) IRS D) DOL
Under ERISA, which of the following activities may a fiduciary employ for a corporate retirement plan? A) Charge a reasonable commission for the purchase of interests in a real estate partnership that the fiduciary owns. B) Lease office space to the plan. C) Employ third-party pension consultants to advise the plan on the purchase of complex financial instruments. D) Loan funds to the plan at favorable interest rates.
C - Employing third-party consultants to advise the plan on complex financial instruments is permissible, but parties in interest cannot engage in self-dealing under ERISA.
Which of the following securities would most likely be included in the portfolio of a mid-cap manager? ABC, $12 per share, 100,000,000 shares outstanding DEF, $150 per share, 8,000,000 shares outstanding GHI, $40 per share, 75,000,000 shares outstanding JKL, $70 per share, 200,000,000 shares outstanding A) ABC B) DEF C) GHI D) JKL
C - Mid-cap stocks are those with a market capitalization between $2 billion and $10 billion. GHI, with a market cap of $3 billion ($40 times 75 million), is the only company within that range.
The capital asset pricing model (CAPM) is most commonly used to determine an investor's A) holding period return B) time-weighted return C) expected return D) risk-adjusted return
C - The CAPM suggests that we can determine the expected return of any security (or portfolio) by using the following mathematical formula: Er = Rf + Beta(expected return on the market − Rf).
Abel Kane is an agent for Garden City Securities, a broker-dealer registered with the SEC and all 50 states. It would be considered an unethical or dishonest business practice for Kane to fail to make prompt delivery of certificates when requested by the customer fail to obtain written authorization for a discretionary account prior to the first trade in that account accept an order from a client's spouse without written trading authorization prior to receiving the order share commissions with another agent registered with Garden City Securities A) I and IV B) III and IV C) I, II, and III D) II and III
D
Protection of the investing public is one of the major objectives of the SEC. Much of the protection comes from the disclosure requirements enveloping the industry. Among the disclosure forms used is Form 13F. To come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over A) more than 10% of the outstanding voting securities of a reporting company B) a portfolio of at least $50 million C) a portfolio of at least $100 million D) a portfolio of at least $100 million of 13(f) securities
D - An institutional money manager, with at least $100 million in 13(f) securities under discretionary management, is required to file Form 13F. This form must be filed within 45 days of the end of the quarter.
Under the Uniform Securities Act, which of the following is NOT an offer or a sale? A) The sale of a warrant B) A gift of assessable stock C) A broker-dealer offering 10 shares of XYZ common stock as a free gift to any client who invests at least $10,000 in mutual funds D) 100 shares of ABC stock received in exchange for 200 shares of XYZ stock as a result of a corporate merger
D - In order for a sale to occur, there must be some financial consideration. In the case of the merger, shares are exchanged without any payment of funds. Any bonus offered in connection with a sale of another security is a sale. A gift of assessable stock is always considered a sale; gifts of nonassessable stock are not sales.
Under the Investment Company Act of 1940, the reporting requirements investment companies must comply with include filing a report with the SEC annually, or more frequently if required sending semiannual reports to shareholders notifying shareholders of changes in the portfolio as those changes occur A) I and III B) II and III C) I, II, and III D) I and II
D - Investment companies must file reports with the SEC at least annually (more frequently if required) and send at least semiannual reports to shareholders. They are not required to notify shareholders of changes in the portfolio as they occur.
A popular tool used by analysts is discounted cash flow (DCF). Most use this tool to evaluate A) the future value of future cash flows to determine the value at a specified date in the future. B) the present value of future cash flows to determine the value at a specified date in the future. C) the future value of present cash flows to determine an appropriate current value. D) the present value of future cash flows to determine an appropriate current value.
D - The principle behind a DCF computation is that an investment made currently is worth an amount equal to the sum of all the future cash flows expected to be received. These future cash flows are discounted to arrive at a fair value.
A wealthy individual has set up a GRAT. Should she die during the time the trust is active, how are the remaining assets in the trust taxed? A) No tax is due if the grantor should die during the term of the trust. B) The original value plus any appreciation is taxed as part of the grantor's estate. C) The original value plus any appreciation passes to the beneficiaries but is subject to gift tax. D) The original value plus any appreciation passes to the beneficiaries and is taxed as ordinary income.
B - One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3-10 years), the assets put in the GRAT, plus any appreciation, are included in her estate.
Your client who owns a DPP that generated a $10,000 passive loss for the year could A) deduct $3,000 against ordinary income and carry over the rest B) only deduct the passive loss against passive income C) deduct $10,000 against capital gains D) deduct $10,000 against ordinary income
B - Passive losses, such as those generated by limited partnership investments (DPPs), are only deductible against passive income.
You have a client who sold her $5 million whole life insurance policy through a life settlement broker. If she dies 2 years later, A) the new owner receives the $5 million death benefit. B) her estate can invoke the right of rescission and receive the policy proceeds minus the sale proceeds. C) the insurance company is not obligated to pay the death benefit because she no longer owns the policy. D) the insurance broker must return all commissions to the insurance company.
A - A life settlement contract involves the sale of a life insurance policy to a party other than the insured. In exchange for the payment, the new owner is entitled to the death benefit when the seller passes aw
Which of the following are nonissuer transactions? An investment manager purchases 100,000 shares of XYZ on the NYSE. An investment adviser sells a block of YYY Corp. shares to an overseas investor in a private transaction. The president of Dot.com, Inc., sells his personal shares of Dot.com on the NYSE. Dot.com purchases its own shares on the open market in order to place them in treasury. A) I, II, III, and IV B) I and II C) III and IV D) I only
A - A nonissuer transaction is a transaction in which the proceeds do not directly or indirectly go to the issuer, as in a secondary transaction.
The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if results do not reflect the deduction of fees actual market conditions during the referenced period are not disclosed the advertisement did not reflect performance for a minimum period of 3 years the advertisement did not disclose that it applied to only a specific group of clients A) I, II, and IV B) I and II C) II and IV D) I, II, III, and IV
A - Advertising that reflects past performance must show a minimum period of 1 year, not
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) the name, title, and telephone number of the individual supervising any listed person C) disciplinary information about material events within the past 10 years D) the fact that any listed person has no formal education after high school
A - It is compensation beyond that paid by the client (such as a sales award or other prize) that must be disclosed.
An investment adviser representative who makes extensive use of third-party research to formulate portfolio recommendations to clients A) need not disclose that fact to the clients B) must disclose that fact to the clients C) is in violation of his fiduciary responsibility as IARs may only use research provided by the firm D) must obtain consent of the clients to use third-party research
A - It is not necessary to disclose what sources an IAR uses as the basis for recommendations. If the third-party research is distributed to clients, proper attribution is required.
The general rules dealing with a broker-dealer extending credit for a customer to purchase securities are found in Regulation T of the Federal Reserve Board. However, Regulation T does NOT address A) maintenance margin B) initial margin requirements C) loan value of securities D) mixed margin accounts
A - Maintenance margin levels are set by the SROs, such as FINRA. They are currently 25% for long accounts and 30% for short accounts (you will not have to calculate these).
The present value of a dollar A) indicates how much needs to be invested today at a given interest rate to equal a specific cash value in the future B) cannot be calculated without knowing the level of inflation C) is the amount of goods and services the dollar will buy in the future at today's rate price level D) is equal to its future value if the level of interest rates stays the same
A - The present value of a dollar will indicate how much needs to be invested today at a given interest rate to equal a cash amount required in the future.
In order to compute an investor's real rate of return on a common stock holding, all of the following are necessary EXCEPT A) marginal tax bracket B) appreciation C) inflation rate D) dividends
A - The real rate of return is another term for inflation-adjusted return. It is the total return, which is appreciation plus income (dividends), which is then adjusted for the inflation rate as expressed by the CPI. Tax bracket is necessary to compute after-tax return.
A popular vehicle for saving for retirement is the variable annuity. An agent explaining the benefits of this product would probably be in violation of the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents by claiming that variable annuities offer A) the ability to exchange funds between subaccounts without incurring a tax liability under IRS Code Section 1035 B) lower overall expenses than a mutual fund with similar investment objectives C) the choice of a large number of different subaccounts with varying objectives D) tax deferral on earnings until withdrawn from the account
B - In general, variable annuity expenses are higher than those of a mutual fund with similar objectives. That doesn't mean the fund is good and the VA bad, it is that there are guarantees and other features offered by the VA that a fund does not have and they have to be paid for.
Keogh Plans are qualified plans intended for those with self-employment income and owner-employees of unincorporated businesses or professional practices filing a Form 1040 Schedule C with the IRS. Which of the following statements relating to Keogh Plans is NOT true? A) A participant in a Keogh Plan may also maintain an IRA. B) A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan. C) Owner-employee businesses and professional practices must show a gross profit in order to qualify for a tax-deductible contribution. D) The maximum allowable contribution to a Keogh Plan is substantially higher than that for an IRA.
B - Rollovers are permitted into an IRA regardless of any plans maintained. Tax-deductible contributions are not allowed unless there is potentially taxable income against which to deduct. Anyone with earned income may have an IRA, regardless of participation in another qualified plan, and the Keogh Plan contribution limits are much higher than those for an IRA.
The purpose of the Investment Advisers Act of 1940 is to provide A) minimum standards of performance for those registered as investment advisers B) standards at the federal level for the regulation of investment advisers C) standards among the various states for the regulation of investment advisers D) regulation for investment companies and their operations
B - The purpose of the Investment Advisers Act of 1940 is to provide federal standards for the regulation of investment advisers
Your customer, age 29, is seeking a long-term growth investment, is concerned about the loss of purchasing power as a result of inflation, and often complains about high commissions that reduce his investment returns. When he was in college, he took a few economics courses and firmly believes that securities analysts cannot consistently outperform the overall market. Which of the following mutual funds is the most suitable for the customer? A) ZB Asset Allocation Fund B) ATF Biotechnology Fund C) ARG Stock Index Fund D) NC Growth & Income Fund
C
One of your customers owns an index annuity. The percentage of the index's return the insurance company credits to the annuity is determined by A) the CDSC B) the cap rate C) the annuity reset rate D) the participation rate
D - PERCENTAGE -> PARTICIPATIOn
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) Beneficiary B) Trustee C) As the grantor, no other roles may be taken D) Trustee and beneficiary
D - Under trust law, the grantor of a trust, sometimes referred to as the settlor, may also be the beneficiary and the trustee.
John is a client of Greater Growth Opportunities, Inc. (GGOI), a state-registered investment adviser. Which of the following constitute(s) John giving the GGOI authority to trade his account? John tells his adviser representative over the telephone to buy 200 shares of a certain security and when to make the purchase. John tells his adviser representative to be on the lookout for securities that seem likely to fit his investment objectives. John gives his adviser representative a written discretionary authorization form to buy or sell securities for his account as she sees fit. A) I and III B) II only C) I, II, and III D) III only
A
Included among the powers of the Administrator is the ability to A) request the court to appoint a receiver to freeze the bank accounts of a broker-dealer who is the subject of an injunction B) arrest an agent who violates the USA C) deny the registration of a securities professional, if doing so is in the public interest D) sentence an investment adviser representative who has been convicted of fraud to a prison sentence, not to exceed 3 years
A - If a temporary or permanent injunction is issued against any securities professional, upon request of the Administrator, a receiver or conservator may be appointed over the defendant's assets. The Administrator cannot arrest but can seek a warrant. In order to deny a registration, not only must it be in the public interest, but there must be some other issue, such as insolvency, incomplete application, et cetera. Although the maximum prison sentence under the USA is 3 years, it is the courts that do the sentencing, not the Administrator.
An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be A) purchasing power risk B) interest rate risk C) reinvestment risk D) credit risk
B - STRIPS are 0 Coupon bonds, meaning they face the most interest rate risk
A client has been contributing to a periodic payment annuity for 20 years. The M&E charge is 1.25% per year. What happens to that charge when the client annuitizes at attained age 68? A) It continues B) It ceases C) It increases because the client's mortality risk is higher at the older age D) It continues but at a reduced rate
B - The M&E charge is for mortality and expenses. Once an annuity contract, fixed or variable, is annuitized, that charge no longer applies to the account. There may be an internally computed charge, but unlike the accumulation period, the charge is not broken out separately.
As the use of social media has mushroomed, most firms in the securities business have created and maintain websites. In addition to password-protected areas for existing clients, these websites generally have pages accessible to anyone. Which of the following statements could be on an investment adviser's website that would not be on that of a broker-dealer? A) A statement that the firm is registered with the SEC under the Securities Exchange Act of 1934 B) The content found on this website has been approved by the SEC C) The firm is a member of FINRA D) A statement that the firm is registered with the SEC under the Investment Advisers Act of 1940
D
One measure of an investor's total return is called holding period return. The computation includes both income and appreciation and is used for both debt and equity securities. An investor's holding period return would be less than the bond's yield to maturity if A) the investor purchased a put option on the bond B) the bond was called at a discount C) the coupons were reinvested at a rate below the yield to maturity D) the bond was redeemed at a premium
c - The calculation of yield to maturity assumes reinvestment of the bond's interest at the coupon rate. Therefore, if the investor was only able to do less than that, the holding period return would be decreased.
One measure of a corporation's liquidation value is its book value per share. When performing this computation, which of the following must be taken into consideration? Goodwill Long-term debt Retained earnings Par value of the preferred stock A) II and III B) I and II C) I, II, III, and IV D) II, III, and IV
C - The computation of book value per share is basically net tangible worth per share of common stock. Included in the net worth are all assets and liabilities (such as long-term debt), as well as the stockholders equity (par value of the preferred stock and par + paid in surplus of the common stock and retained earnings). Subtracted from this to get tangible book value would be the par value of the preferred stock and the value of intangible assets such as goodwill.
The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is NOT true? A) Even though these plans are generally under state control, the rollover rules are federal law. B) If there is a distribution of the assets, the rollover must be completed within 60 days. C) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. D) This may be done, but only if the entire account is rolled over.
D - Partial rollovers are permitted.
In reviewing prospectuses and registration statements, the SEC A) guarantees the adequacy of the disclosures made in a prospectus B) passes on the merits of a particular security covered by a registration statement C) certifies the accuracy of the disclosures made in a prospectus D) does not approve or disapprove of the issue
D - The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue.
Kapco Advisers, a federal covered investment adviser operating on a calendar-year basis, published a list of recommended securities in January 2015. A copy of this must be maintained until at least A) December 31, 2020 B) January 31, 2020 C) December 31, 2017 D) January 31, 2017
A - Investment adviser records, including copies of advertisements, must be kept for at least 5 years from the end of the fiscal year in which the record originated—in this case, 5 years from the end of 2015.
In order to be in compliance with the rules, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) purchasing shares directly from advisory clients B) engaging in an agency cross transaction C) directing securities transactions to an affiliated broker-dealer D) the trade is being executed by an officer or partner of the firm
A - In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent
Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A) an apartment building B) a growth stock C) a corporate bond D) an S&P 500 index fund
C - Investors receive interest income from corporate bonds. That income is fully taxable at ordinary income rates. Real estate ownership has certain tax benefits, such as depreciation and a deduction for operating expenses. Index funds are known for their high tax efficiency and investors in growth stocks anticipate long-term capital gains which are taxed at a lower rate than ordinary income.
Exceptional Results Advisers (ERA) has $15 billion in AUM and does not accept new clients who are unable to place at least $25 million under ERA's management. From time to time, ERA's clients ask for recommendations for friends or family who don't meet ERA's minimum investment level. In most cases, ERA recommends these prospects to Rational Investment Planning (RIP), a state-registered investment adviser, and receives a referral fee for each person who becomes a client of RIP. The practice A) would only be acceptable if the fee was used to reduce the referring client's advisory fees. B) is prohibited under any circumstance. C) would only be acceptable if the fee was nominal and not based on the size of the account. D) is acceptable because the referral fee is being paid to a registered investment adviser.
D - When a referral fee is paid to another registered firm, there is no problem. The only other requirement is that disclosure of this relationship and any additional cost possibly resulting from the referral fee must be made to each client who signs up with RIP as a result of the referral.
Which of the following would not be unlawful for an investment adviser under the Uniform Securities Act? A) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees B) An owner of a majority of the stock in the IA pledging that stock as collateral to a bank for a personal loan C) Failing to notify the Administrator that the adviser has custody of a client's securities or funds, even though the Administrator has no rule that prohibits such custody D) Signing an investment advisory contract that did not outline the compensation arrangements
A - Investment advisory contracts must outline compensation provisions and indicate the amount to be refunded, if any, if the contract is terminated. Nothing in the USA requires that there be a refund, only that the terms must be disclosed.
Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it A) did not send an annual brochure to its clients if there was no material change from the previous year B) sent a copy of Form ADV Part 1A and Part 1B within 120 days of the end of AT's fiscal year C) filed a brochure with the Administrator, noting that it was available to clients upon request D) sent a brochure within 150 days of the end of AT's fiscal year
A - The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If the adviser wishes to use Form ADV, it should use Part 2A and 2B.
Which of the following persons must register as an investment adviser under the Uniform Securities Act? A) An investment adviser who only serves institutional clients and whose only office is in this state B) An investment adviser whose advice is limited to securities issued or guaranteed by the U.S. government and who has 3 places of business in the state C) An investment adviser representative with no place of business in the state who has dealt with 7 retail clients during the most recent 12 month period D) An accountant who makes no pretense of providing investment advisory services but gives incidental advice to clients as a small part of accounting services provided
A - The Uniform Securities Act requires those defined as investment advisers to register with the state. Accountants are excluded when their advice is incidental to their profession and no additional compensation is charged. Advisers whose only advice is on securities issued or guaranteed by the government are excluded from the definition of investment adviser under the Investment Advisers Act of 1940.
An agent made written disclosure to his employing broker-dealer that he intends to execute a series of private securities transactions with individuals who do not have accounts with his broker-dealer. The agent did not acquire express written permission from the broker-dealer and did not receive compensation for executing the transactions, but did receive written acknowledgment of receipt of the agent's notice. In this case, the agent A) is guilty of selling away. B) performed a matched order. C) engaged in an agency cross transaction. D) is required to register as a broker-dealer.
A - When selling securities, agents are prohibited from enacting transactions that are not recorded on the broker-dealer's books unless the transactions are authorized in writing by the broker-dealer prior to execution. Failure to do this is known as selling away. Receipt of notification is not the same as authorization.
Hal and Amy are covered by a pension plan at Benson Industries, Inc., where they are both employed as executives. Their incomes total $300,000 per year, and they file a joint tax return. Which of the following best describes what they can do in a regular IRA program for the year 2021? A) They cannot have an IRA because they are covered by a pension plan. B) They may contribute $6,000 each, but they cannot take a deduction. C) They may make an $12,000 deductible contribution. D) They may each make a $6,000 deductible contribution.
B - They may each contribute to their own IRA and enjoy tax-deferred growth within their IRAs, but neither may take the $6,000 annual contribution as a deduction to taxable income on a tax return.
With regard to a state-registered investment adviser using Form ADV Part 2 as its brochure, it would be correct to state that A) it must be delivered not later than 48 hours after entering into an advisory agreement with a new client B) it must be delivered to all new clients C) it is filed through the IARD system D) if requested by a client, it must be sent within 5 days of the request
C - The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a 5-day penalty-free withdrawal right
Adell, a retiring social worker, has some money to invest. An agent suggests she look into investing in a private placement security that is raising money to build apartment buildings in Puerto Rico. According to the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents building projects are not appropriate for retirees who typically need immediate income private placements are not usually appropriate for retiring individuals because they are not liquid no rule has been violated because the customer has only been offered the product if the customer lives in Puerto Rico, the proposed investment may be suitable because there may be a ready market A) I and III B) II and IV C) I and II D) II and III
C - This is not a suitable recommendation for a social worker about to retire. Based on the information given, one would expect that her objectives would be income with a high degree of safety, yet this building project will give her neither. Additionally, the private placement suffers from a lack of liquidity, something that could be an important factor in Adell's future.
Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio? A) Discounted cash flow B) Dollar cost averaging C) Time-weighted return D) Dollar-weighted return
C - Time-weighted returns are used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals. Dollar-weighted return is more commonly used for evaluating investor performance.
Securities of which of the following issuers are exempt under the USA? National banks State banks Bank holding companies Federal savings and loan associations A) I, II, III, and IV B) I only C) I, II, and IV D) I and II
C - Under the USA, the registration exemption for bank-issued securities is justified by strict financial requirements imposed on banks by banking industry regulators such as the FDIC, the Comptroller of the Currency, and the Federal Reserve. Both federal and state banks and federal savings and loan associations are subject to such regulation. However, bank holding companies (as separate legal or corporate entities) are subject to state registration if not otherwise exempt. Thus, securities issued by bank holding companies are not exempt securities under the act.
A 74-year-old widower has been your client since his early 50s. He is a well-informed investor and has always seemed capable of understanding most investment concepts you have presented. At least twice a year, the 2 of you meet to evaluate his current financial situation and objectives. In your last meeting, it seemed to you that he was distracted and somewhat forgetful. It would be appropriate for you to do all of the following EXCEPT A) take detailed notes on future conversations and meetings with him B) inform your supervisor of your concerns about his memory loss C) ask him to invite a friend or family member to accompany him to appointments with you D) wait to see if there are further causes for concern about his capabilities
D - Taking action in advance could help protect you and your firm should a client subsequently indicate that he does not remember having agreed to a recommendation. Taking detailed notes can help verify what has been discussed in conversations or at meetings. Having others present may help to verify what has been discussed and agreed upon.
