Weighted Mock Exam #2
Which of the following statements correctly describe similarities between exchange-traded funds and closed-end investment companies? I. There are a limited number of outstanding shares. II. They are traded on registered stock exchanges. III. They trade at prices that are not dependent upon but close to their net asset value. IV. Investors pay commissions to purchase and liquidate their positions. A) II and III B) I and III C) II and IV D) I and IV
C) II and IV Both exchange-traded funds and closed-end investment companies are traded on exchanges; therefore, investors pay a commission when purchasing and liquidating shares. Only closed-end investment companies have a limited number of shares. Closed-end funds may trade at significant premiums or discounts from their NAV, while ETFs rarely stray far from NAV. U14LO8
One measure of a corporation's liquidation value is its book value per share. When performing this computation, the value of which of the following would normally be subtracted from the corporation's net worth? I. Cash II. Wages payable III. Patents IV. Preferred stock A) III and IV B) I and II C) I and IV D) II and III
A) III and IV The computation of book value per share is basically net tangible worth per share of common stock. Therefore, we subtract both the par value of the preferred stock and the value listed on the balance sheet for the intangible assets, such as patents. U10LO7
If an investor has $20,000 to invest, but requires $500 per month to pay for her mother's nursing home care, which of the following funds should you recommend? A) Money market B) Foreign stock C) Aggressive growth D) Biotechnology
A) Money market The client's monthly income requirements suggest that the money market fund, the most liquid and safest of the investments, is the most appropriate. U19LO6
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) loan value of securities C) initial margin requirements D) mixed margin accounts
A) maintenance margin 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). U22LO2
When claiming an exemption from the requirement to register under the USA, the burden of proof is on A) the party claiming the exemption B) the Administrator C) the investor D) the SEC
A) the party claiming the exemption As in all legal matters, the burden of proving that one is exempt from a requirement is placed upon the person claiming the exemption. U4LO3
Which of the following analyze corporate financial statements and trends in sales and income? A) Fundamentalists B) Market timers C) Technicians D) Chartists
A) Fundamentalists Fundamental analysts obtain information from corporate financial statements, as well as other relevant sources. Technical analysts review market charts, while fundamental analysts are concerned with the earnings ability of corporations derived from corporate financial statements. U12LO6
For which of the following is there no active secondary market? A) Futures contracts B) Options C) ETFs D) Forward contracts
A) Futures contracts One of the disadvantages when investing in forward contracts is that there is no active secondary market. Because each contract is between one buyer and one seller and there is no standardization, no exchange trading is possible. U16LO4
As a registered investment adviser, you have managed $10 million of a customer's funds for several years. The customer asks you to prepare a trust for his children, to transfer $3 million of his funds into the trust, and to trade the trust with the same objectives as the existing account. You should A) explain to the customer that trusts cannot be traded B) refer the customer to an attorney that can set up the trust C) tell the customer to contact a tax specialist D) prepare the trust, transfer funds, and begin investing
B) refer the customer to an attorney that can set up the trust The best choice is to have the customer contact a qualified attorney to set up a trust. U18LO4
In a qualified plan, if the employer makes all the contributions, the employee's cost basis is A) the value of the contributions B) the increase in value only C) zero D) one-half of the contributions made
C) zero Because the employee has not made any contributions, the cost basis is zero. In any qualified plan, if all of the contributions are in pre-tax dollars, the cost basis is zero no matter who contributes the money. U24LO2
Which of the following would probably NOT be an attractive investment during periods of rising inflation? A) Gold B) Oil stocks C) Real estate D) Corporate bonds
D) Corporate bonds Interest rates tend to increase with inflation. Rising interest rates cause the values of all fixed-income securities to decline. That is why bonds are not an attractive investment during periods of inflation. Values of real estate, gold, and natural resources tend to rise with inflation. U8LO4
The price of which of the following will fluctuate most with a change in interest rates? A) Common stock B) Money market instruments C) Short-term bonds D) Long-term bonds
D) Long-term bonds Long-term debt prices fluctuate more than short-term debt prices as interest rates rise and fall. U13LO10
Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment? A) Closed-end investment company B) Open-end investment company C) Hedge fund D) Unit investment trust (UIT)
A) Closed-end investment company A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market. U14LO3
A registered investment adviser has a fiduciary duty to disclose all real and potential conflicts of interest to clients. Which of the following are examples of conflicts that would require disclosure? I. A registered investment adviser spends about 25% of its time on investment advisory activities and the balance on managing rental real estate projects II. A registered investment adviser spends about 25% of its time supervising the activities of its investment adviser representatives III. An investment adviser representative, who is also an insurance agent, may decide to recommend a particular insurance product based on an incentive to sell the product IV. An investment adviser representative, who is also an agent with an unaffiliated broker-dealer, directs transactions to that firm A) I, III, and IV B) I and II C) III and IV D) II and IV
A) I, III, and IV There is nothing wrong with an investment adviser devoting time, even a majority of the time, to nonadvisory pursuits, as long as it is disclosed. Recommending products based on an incentive is fine as well, as long as disclosure is made. Finally, IARs can be agents of affiliated or nonaffiliated broker-dealers, but the existence of that relationship must be disclosed. One would hope that the investment adviser devotes enough time to supervising its IARs, but that is not something that is disclosed to clients. U6LO1
Which of the following forms of soft-dollar compensation paid by a broker-dealer to an investment adviser is NOT allowable under the safe harbor provisions of Section 28(e)? A) Reimbursement for travel expenses to attend an investment seminar B) Research reports C) Registration fees to attend an investment seminar D) Financial planning software
A) Reimbursement for travel expenses to attend an investment seminar Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934. Payment for seminars, research, and financial planning software are permissible under the safe harbor provisions of Section 28(e). U7LO1
The Administrator may, by rule, A) forbid investment advisers registered in that state from taking custody of client funds B) suspend the registration of a federal covered adviser because the contract did not meet the requirements for a state-sanctioned investment advisory contract C) allow an agent to waive provisions of the USA D) suspend federal law if the Administrator believes it to be in the public interest
A) forbid investment advisers registered in that state from taking custody of client funds The Administrator has considerable discretion to make rules or issue orders. Specifically, the USA allows the Administrator to prohibit custody by rule. However, the USA does not allow the Administrator to waive provisions of the USA, nor can the Administrator suspend federal law. The NSMIA took away the power of the states to regulate federal covered advisers except in the case of a violation of the antifraud statutes. U7LO2
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following must be included in an advisory contract? I. Whether the contract grants discretionary power to the adviser II. The term of the contract III. A clause preventing assignment without consent IV. The formula used for computing the fee A) I, II, and IV B) I, II, III, and IV C) II only D) I and II
B) I, II, III, and IV Written advisory contracts must disclose services provided; the term of the contract; the amount of the fee or the formula used to compute it; the amount of fee to be refunded, if any, if the advisory fee is prepaid and the contract is terminated; provisions as to whether the adviser has discretionary authority and to what extent; and provisions requiring consent of the client to assign the contract. U6LO4
Mark is a client of Gibraltar Investment Advisers. Gibraltar sells its investment advisory business to Alpha advisers. Which of the following best describes Mark's relationship to Alpha? A) Mark may not become a client of Alpha. B) Mark may become a client of Alpha if he chooses to do so. C) Mark is automatically a client of Alpha. D) The investment advisory contract Mark made with Gibraltar continues with Alpha.
B) Mark may become a client of Alpha if he chooses to do so. An investment advisory relationship may not be assigned without the consent of the client. The client may choose to enter into a contract with the new firm. The contract with the old firm becomes void when it sells its business. U6LO4
A manufacturer of soybean oil is concerned that the price of soybeans will increase over the next 6 months. The best strategy to employ would probably be A) a short hedge. B) a long hedge. C) a trimmed hedge. D) a neutral hedge.
B) a long hedge The concern is that the price will go up. Just as with options, when we are concerned that the price of something will go up, we go long that item. With options, it would be a long call; with futures it is simply hedging by going long (buying) the soybean futures. The soybean farmer who would be concerned about a decline in the price would go short soybean futures. U16LO4
The death benefit of a variable life policy must be calculated at least A) monthly B) weekly C) annually D) semiannually
C) annually The death benefit must be calculated annually and the cash value, monthly. U15LO7
A bond is selling at a premium over par value. Therefore, its A) none of the above B) nominal yield is less than its current yield C) current yield is less than its nominal yield D) yield to maturity is greater than its current yield
C) current yield is less than its nominal yield Any bond selling at a premium will yield less than the coupon rate (nominal yield). Conversely, of course, a bond trading at a discount will certainly yield more. Remember, there is an inverse relationship between bond prices and bond yields. U13LO10
Although all new accounts must be approved by a designated supervisor before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be A) an options account B) a discretionary account C) a margin account D) an IRA
A) an options account Because trading options (puts and calls) generally involve a higher degree of risk than stocks, bonds, or mutual funds, a designated supervisory person with knowledge about options must approve the account opening. U18LO2
When an investor's original value is subtracted from the ending value, and then has the income received over that time period added to it, which is then divided by the original cost, the result is A) holding period return B) internal rate of return C) annualized return D) expected return
A) holding period return This is the method of computing holding period return. U23LO2
One of the reasons why the discounted cash flow method of valuation is useful in assessing the value of fixed income instruments is A) the predictability of income B) the availability of ratings C) the known maturity date D) the priority of claim on earnings
A) the predictability of income Discounted cash flow evaluates the expected cash flow from an investment and then factors in the time value of money. Obviously, if there is no predictable cash flow (as there is with the interest payments on a bond), there are no reliable numbers to plug into the formula. U13LO12
An investment adviser hires 2 individuals to solicit new customers for the firm's wealth management service. Under the USA, A) each of them would have to register as an investment adviser B) registration as investment adviser representatives is required C) they may begin soliciting as soon as they have passed their licensing examinations D) soliciting is generally prohibited
B) registration as investment adviser representatives is required The definition of investment adviser representative includes individuals who solicit for the firm's advisory business. U2LO1
The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is A) reported as a separate line item on the balance sheet B) the net change in the cash position of the firm for the reporting period C) an integral part of the footnotes to the balance sheet required by generally accepted accounting principles D) reported as cash income on the income statement
B) the net change in the cash position of the firm for the reporting period The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows which is a separate financial statement. U9LO2
A bond analyst reports that there is currently an inverted yield curve. That would mean A) bonds with intermediate maturities have the highest yields. B) the closer the bond is to its maturity date, the lower the yield. C) the closer the bond is to its maturity date, the higher the yield. D) the further the bond is from its maturity date, the higher the yield.
C) the closer the bond is to its maturity date, the higher the yield. An inverted yield curve shows near-term maturities with higher yields than those of long-term maturities. Sometimes called a negative yield curve, it is usually an indication that interest rates are near a peak and the trend should soon reverse. U8LO4
ALFA Enterprises pays a quarterly dividend of $0.15 and has earnings per share of $2.40. Assuming that payout rate is continued, what is the dividend payout ratio? A) 6.25% B) 30% C) 14.4% D) 25%
D) 25% Earnings per share are typically calculated for a year. If the quarterly dividend rate of $0.15 is continued, that will be an annual payout of $0.60 ($0.15 × 4). So the annual dividend of $0.60 is divided by $2.40 to calculate what percentage of earnings is paid as a dividend; or rather, the dividend payout ratio (0.60 ÷ 2.40 = 25%). U10LO7
Debts that will come due more than 1 year after the date on the balance sheet are known as A) current liabilities B) accounts payable C) deferred charges D) fixed (or long-term) liabilities
D) fixed (or long-term) liabilities Debts that will come due more than 1 year after the date of the balance sheet are known as fixed (or long-term) liabilities. Current liabilities are debts that may come due within 1 year from the date on the balance sheet. U9LO1
A life insurance policy where the premium increases each time the policy is renewed while the face amount remains level is A) renewable level term B) decreasing term C) variable universal D) increasing term
A) renewable level term Level term insurance offers a fixed face amount over the life of the policy. If the policy is renewable, the owner has the ability to renew it for that same face amount and the new term, but at new, higher premiums as the insured's age increases. U15LO6
The discounted cash flow method is frequently used to assess the value of a bond. When making the DCF computation, it would NOT be necessary to know the bond's A) rating B) number of remaining interest payments C) nominal yield D) principal amount
A) rating As it is strictly a mathematical computation, a subjective item, such as the bond's rating, has no place in the computation. U13LO12
If an agent recommends the purchase of a technology company with an impressive growth record, but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has A) violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents B) committed a prohibited business practice by selling an unsuitable investment C) not committed a prohibited business practice D) not violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents because no untrue statements were made
A) violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents The agent has violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents by failing to inform the client of the potential downside in the sale of a security. U7LO4
An investment adviser sends a notice offering a research report she has recently prepared to a group of 25 new members of the local Lions Club. Under the NASAA Model Rule on recordkeeping for investment advisers, the firm must keep a copy of the notice along with A) the date the Administrator approved the research report B) a copy of the full roster of the local chapter C) the names of those members to whom the report was sent D) a memorandum describing the list and its source
D) a memorandum describing the list and its source If an investment adviser sends any notice, circular, or other advertisement offering any report, analysis, publication, or other investment advisory service to more than 10 persons, the investment adviser shall not be required to keep a record of the names and addresses of the persons to whom it was sent, except if the notice, circular, or advertisement is distributed to persons named on any list, then the investment adviser shall retain with the copy of the notice, circular, or advertisement a memorandum describing the list and its source. U1LO5
What is the maximum amount a taxpayer may contribute each year to a Coverdell Education Savings Account (ESA) for one student? A) $2,000.00 B) $100.00 C) $500.00 D) $1,000.00
A) $2,000.00 The most an individual may contribute to an ESA for one student is $2,000 per year. There is no limit on the number of students on whose behalf a taxpayer may contribute, however. A taxpayer with 5 grandchildren could contribute a total of $10,000 to 5 ESAs. U24LO6
Which of the following statements regarding corporate zero-coupon bonds is TRUE? A) They have lower price volatility than other bonds B) The discount is in lieu of periodic interest payments. C) Interest is paid semiannually. D) They are beneficial for investors in higher tax brackets
B) The discount is in lieu of periodic interest payments. The investor in a corporate zero-coupon bond receives the return in the form of growth of the principal amount over the bond's life. The bond is purchased at a deep discount and redeemed at par at maturity. That discount from par represents the interest that will be earned at maturity date. However, the discount is accreted annually and the investor pays taxes yearly on the imputed interest creating "phantom income." Zero-coupon bonds have greater, not lower price, volatility. U13LO8
Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract is NOT true? A) The renewal must be approved by either the majority vote of the board or a majority vote of the outstanding shares, as well as a majority vote of the noninterested members of the board. B) The renewal may be executed orally, provided it is done within 2 years of the initial contract. C) The contract must be terminable upon no more than 60 days' notice. D) The renewal must state the adviser's compensation.
B) The renewal may be executed orally, provided it is done within 2 years of the initial contract. When an investment company employs an outside investment advisory firm to manage its portfolio, the act requires a written contract setting forth the adviser's compensation. The contract is for 2 years initially and must be renewed annually thereafter. The contract must be initially approved by a majority vote of the outstanding shares and the noninterested members of the board of directors and annually renewed by either a majority vote of the board of directors or of the outstanding shares, as well as a majority vote of the noninterested members of the board. The contract must be terminable at any time, with a maximum of 60 days' notice and with no penalty, upon a majority vote of the board of directors or of the outstanding shares, and it must terminate automatically if assigned. U14LO1
If an investment adviser representative of a federal covered adviser that transacts business in a state terminates employment with that investment adviser, which of the following statements is TRUE? A) Both the representative and the investment adviser must notify the Administrator. B) The representative must notify the Administrator. C) No notice to the Administrator is required. D) The investment adviser must notify the Administrator.
B) The representative must notify the Administrator. It is the investment adviser representative's responsibility to notify the Administrator. The advisory firm is not registered with the state; only the representative is registered. U2LO3
Which of the following best describes thinly traded stocks? A) They usually have less volatile price swings than actively traded stocks. B) They are usually highly liquid and marketable. C) They are actively traded on an exchange and held by a large number of investors. D) They are either not actively traded on an exchange or not held by a large number of investors.
D) They are either not actively traded on an exchange or not held by a large number of investors. Thinly traded stocks are stocks that are not actively traded on an exchange or that are not held by a large number of investors. Because thinly traded stocks are usually less marketable and less liquid than actively traded stocks, the spread between their bid and ask prices tends to be considerably higher. They also tend to have more volatile price swings. U22LO5
Those investors wishing to examine a document that would probably give them the most information about an issuer's current and planned operations would seek out A) the balance sheet B) the Form 10-K C) the investor's brochure D) the annual report
D) the annual report The annual report to shareholders is going to contain not only a complete financial report of the prior year's operations but will also include statement from key personnel dealing with the company's future plans. The Form 10-K does not include discussion of future business plans - it is a report of "what has happened over the previous fiscal year." U9LO3
Growth companies tend to have all of the following characteristics EXCEPT A) potential investment return from capital gains rather than income B) high earnings retention ratio C) low P/E ratios D) low dividend payout ratios
C) low P/E ratios Growth companies have high P/E ratios and a low dividend payout ratio because they retain most if not all their earnings. Investors anticipating fast growth bid up prices so P/E ratios tend to be high. Growth companies retain most of their earnings to fund future growth. Investors select growth companies for capital gain potential, not for investment income. U20LO5
If a 41-year-old investor who earns $26,000 this year overcontributes to his IRA, how much will be subject to the 6% penalty? A) His original cost base B) There will be no penalty C) The amount by which he over contributed D) His original cost base plus the contribution
C) The amount by which he over contributed Any contribution in excess of the indexed maximum (and the earnings associated with the excess) is subject to a penalty of 6%. U24LO1
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 to all new clients B) if requested by a client, it must be sent within 5 days of the request C) it must be delivered not later than 48 hours after entering into an advisory agreement with a new client D) it is filed through the IARD system
D) it is filed through the IARD system 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. Annually, the Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempted. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state-registered. U6LO4
A popular tool used by analysts is discounted cash flow (DCF). Most use this tool to evaluate A) the present value of future cash flows to determine an appropriate current value. 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 future value of future cash flows to determine the value at a specified date in the future.
A) the present value of future cash flows to determine an appropriate current value. 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. U13LO12
When an open-end management investment company computes its net asset value per share, each of the following occurrences would have an impact EXCEPT A) a drop in the value of equity securities held in the fund's portfolio B) a greater value of shares being redeemed than purchased C) interest payments made on debt securities held in the fund's portfolio D) a capital gains distribution
B) a greater value of shares being redeemed than purchased Because shares are purchased and redeemed at NAV, net redemptions (this case) or net purchases have no effect on the net asset value of the fund's shares. However, receipt of cash in the form of interest payments causes assets to increase, while falling equity prices leads to a decrease. Distributions of capital gains (or dividends) represent a payment of cash, thus decreasing the number of assets on hand. U14LO3
Which of the following statements about dividends on common stock is NOT true? A) Dividends may be paid in cash, property, or stock B) Only those who are owners of the stock on the record date will receive dividends C) Dividends represent a pro rata distribution of corporate profits to shareholders D) Corporations are contractually obligated to pay dividends to their shareholders each year
D) Corporations are contractually obligated to pay dividends to their shareholders each year Dividends are the share of a corporation's profits that the corporation pays to shareholders as owners of the corporation. Dividends are not paid to shareholders automatically, and shareholders have no contractual right to receive dividends. Instead, dividends must be declared by the corporation's board of directors. The board of directors may elect to pay a dividend in cash, property, or stock. U12LO2
Which of the following statements regarding agent registration under the Uniform Securities Act is TRUE? I. In the absence of any action by the Administrator, the effective date of registration is noon of the 30th day. II. The Administrator may initiate a disciplinary action within 2 years of an agent's withdrawal of registration. III. The administrator may request the agent furnish a statement of assets and liabilities. IV. If, before the effective date of the registration, the Administrator requires amendments to the application, the registration will be considered to have first been filed upon the filing of those amendments. A) III and IV B) II and III C) I and II D) I and IV
D) I and IV Normally, registration of persons becomes effective at noon of the 30th day following filing. If the Administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Agents do not have financial requirements, and the Administrator has a maximum of 1 year after termination to initiate any actions. U3LO5
Which of the following persons must register as an investment adviser under the Uniform Securities Act? A) 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 B) 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 C) An investment adviser who only serves institutional clients and whose only office is in this state 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
C) An investment adviser who only serves institutional clients and whose only office is in this state 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. This means they are federal covered investment advisers, not required to register with the Administrator even with offices in the state. As long as there is an office in the state, unless the adviser is federal covered (as described in the previous sentence), there is no exemption from registration in that state. The IAR has exceeded the de minimis limits and would have to register in the state, but as an IAR, not as an IA. U1LO3
The Wrights live in Texas, where Maria Wright has had an extremely successful cattle business for a number of years. As a very generous person, how much money can Maria give to her spouse, a Canadian citizen, in 2019 without incurring gift tax consequences? A) Unlimited B) A limited amount because her spouse is not a U.S. citizen C) $100,000 D) $15,000
B) A limited amount because her spouse is not a U.S. citizen Under current tax regulations, there is a limit to the amount of a gift that may be made to a noncitizen spouse. For 2019, that limit is $155,000, (the amount is never tested). U21LO5
An investment adviser is approached by an investment company that has 25 investors. The company would like to employ an adviser to manage its account. The IA is willing to do so but proposes a compensation agreement that provides for a 20% share of the profits if performance exceeds a certain benchmark. In order for this to be acceptable, A) all the shareholders in the investment company must be qualified investors B) the investment company must have a net worth in excess of $2.1 million or at least $1 million in assets under management with the IA C) a majority of the shareholders in the investment company must be qualified investors D) the individual in charge of the investment company must be a qualified investor
B) the investment company must have net worth in excess of $2.1 million or at least $1 million in assets under management with the IA In 1987, NASAA followed the lead of the SEC and permitted performance-based compensation when the investor (or company) had at least $500,000 in AUM with the IA, or had a net worth in excess of $1 million. In 1998, the SEC raised the threshold to $750,000 and $1.5 million, respectively. Then, in July, 2011, the bar was raised again by the SEC to $1 million and $2 million. On April 15, 2013, NASAA caught up and the numbers were unified. Most recently, on August 16, 2016, the net worth requirement was raised to in excess of $2.1 million (the $1 million in AUM remained the same). By the way, this is not a registered investment company under the Investment Company Act of 1940—those need at least 100 investors. U7LO1
Your retired 72-year-old client still lives in the home he purchased 35 years ago for $40,000. It is currently valued at $700,000 and there is no mortgage. The client has almost $500,000 in his self-directed IRA rollover account. When determining suitable investments for this client, you would base your recommendations on the fact that I. the client is an accredited investor having a net worth in excess of $1 million II. a home equity loan could more than double the amount of funds available to invest III. as a retiree, any losses suffered cannot be made up from current income IV. the client's time horizon could be as long as 20 years A) II and III B) I and II C) I and IV D) III and IV
D) III and IV One of the risks facing senior investors who are retired is that unlike those still employed, loss of principal can be devastating. With today's medical advances, a 72-year-old can be looking at 15 to 20 additional years of life. Therefore, recommendations must be made to maximize the probability of the client's assets lasting that long. Effective with the Dodd-Frank Act of 2010, this investor is no longer accredited because the value of the primary residence must be excluded from the net worth computation. And, even if he were, eligibility does not equal suitability. U19LO5
Alex Alexander is planning on registering as an agent for a broker-dealer. Which of the following would be the least likely requirement for a successful application? A) Submitting fingerprints B) Paying the filing fees C) Filing an application for registration D) Taking and passing an examination
A) Submitting fingerprints Fingerprints are not a specific requirement of the Uniform Securities Act. U3LO5
LMN Manufacturing Company, listed on the NYSE, is an SEC reporting company. Each of the following would require the filing of a Form 8-K EXCEPT A) relocation of wholly owned subsidiary B) acquisition of a major asset C) a change in top management D) a change in external CPA firm engaged to perform the annual audit
A) relocation of wholly owned subsidiary The Form 8-K is used to report significant events that could affect the price of the company's stock. The SEC does not consider a relocation of a subsidiary to be of significant magnitude. U9LO3
Which of the following would NOT be of interest to a technical analyst? A) Advance/decline line B) P/E ratio C) Moving averages D) Volume
B) P/E ratio A technical analyst charts movement in market price and volume over a period of time. The price-to-earnings ratio is a tool used by fundamental analysts. U12LO6
Which of the following individuals may NOT open a joint account? A) Business colleagues B) Parent and a minor C) Three sisters D) Two spouses
B) Parent and a minor Any 2 or more persons can have a joint account, but a minor is specifically excluded from the definition of a person. U18LO2
A fundamental analyst would be most interested in which of the following? A) Resistance and support levels B) A P/E analysis of the stocks included in the Dow Jones Industrial Average C) The outstanding short interest in the market D) A 200-day moving average
B) A P/E analysis of the stocks included in the Dow Jones Industrial Average Fundamentalists look at P/E ratios; the other tools mentioned are technical. U12LO6
All of the following actions must be completed prior to customers entering their first option trade EXCEPT A) completion of the new account form B) delivery of the options disclosure document (ODD) C) receipt of a completed options agreement D) approval by a designated options supervisor
C) receipt of a completed options agreement Customers do not have to complete (sign) the options agreement prior to entering an order; under current rules, the agreement must be signed and returned by the customer within 15 days of account approval. U18LO2
A farmer entered into a forward contract to sell his produce at $2.25 per bushel. At the expiration date of the contract, the price was $2.00 per bushel. The farmer would receive A) $2.125 per contract B) a price negotiated between the buyer and the seller C) $2.00 D) $2.25
D) $2.25 The reason the farmer entered into this contract was to hedge against a drop in price. Because the strike price was higher than the market price at expiration, the farmer made a good deal, while the buyer of the contract lost. U16LO4
As a rule, loans from a 401(k) plan must be repaid within how many years? A) 15 B) 20 C) 10 D) 5
D) 5 Most loans from a 401(k) plan are required to be repaid within 5 years. This rule does not apply to loans taken for a home purchase. U24LO4
