66 Deck 1.0 Flashcards
In order to calculate an investor’s holding period return, it is necessary to know: I.value of the portfolio at the beginning of the period.
II.value of the portfolio at the end of the period.
III.income received during the period.
IV.capital appreciation or depreciation over the period.
1, 2 & 3; An investor’s holding period return is the total return received over the specified holding period. That return includes any income plus or minus any gain or loss. Once you know the original and ending value, you know the capital appreciation or depreciation.
Which of the following are features of Class C mutual fund shares? I.Typically charge no front-end load
II.Typically charge a front-end load
III.Typically impose lower CDSCs than Class B shares for a shorter period
IV.Typically convert to Class A shares after they are held for a defined period
1 &3; Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, since the level load never discontinues.
An investor who is long XYZ stock would consider going long an XYZ call to:
A) hedge the long position.
B)protect against an increase in the market price of XYZ stock.
C)obtain income from the premium.
D)protect against a decrease in the market price of XYZ stock.
2; Going long a call means that you have bought it. Only sellers of options generate income. If you wish to hedge your long stock position, you buy a put, not a call. That leaves us with two choices that are polar opposites. Good test taking skills teach us that, in almost all cases, when we see that, one of those must be the right answer. Buying a call is bullish. Forget the first part (you are long the stock). You would buy a call so that, if the price of the stock went up, you could exercise at the lower strike price of your call option.
The Securities Exchange Act of 1934 would consider it a fraudulent and prohibited business practice for an order ticket for a transaction in shares of a common stock to exclude all of the following EXCEPT:
A)an indication as to whether the order was solicited, unsolicited, or discretionary.
B)the customer’s name.
C)if a sale, whether long or short.
D)the account number.
2; Order tickets do not include the name of the customer. The account number is the appropriate identifier.
The USA exempts investment advisers from state registration who: I.have no place of business in the state and limit clientele to other investment advisers.
II.have no place of business in the state and limit clientele to banks and insurance companies.
III.is an out-of-state investment adviser and directed business communications to fewer than 12 clients in the state in the past 12-month period.
IV.have no place of business in the state and limit clientele to broker-dealers.
1, 2 & 4; An adviser is exempt from state registration if it has no place of business in the state and limits clientele to other investment advisers, banks and insurance companies, or broker-dealers. There is a de minimis exemption, but it is for no more than five (not 12) clients during a 12-month period.
The price-to-earnings ratio
A)is higher for value stocks than for growth stocks
B)reflects how liberal the company’s dividend policies are
C)indicates current cash flows
D)shows how much investors value the stock as a function of earnings to the company’s market price
4; The 2 components of the price-to-earnings ratio are the current market price and the earnings per common share. When a company has a high P/E ratio, it means that investors are placing greater value on expected growth in earnings. That is one of the reasons why growth stocks carry higher P/E ratios than do value stocks.
Which of the following pieces of customer information must an agent attempt to obtain when opening a new account? I.Emergency contact person
II.Financial condition
III.Investment objective
IV.Education
2 & 3; When opening a new account, the agent normally would request information about the customer’s financial condition, investment objectives, and other relevant personal information.
If a client in the 30% marginal income tax bracket can earn an after-tax rate of return of 7% when the estimated inflation rate during the holding period of an investment is 4%, the client’s real rate of return is:
A)less than 7%.
B)more than 7%.
C)7%.
D)10%.
1; Real return reduces nominal return by an inflation factor. Thus, the client’s real return must be less than 7%.
An individual has been employed by a broker-dealer to solicit new subscriptions for the firm’s free monthly stock market report. The individual is paid a salary plus bonus based on his success rate with signing up subscribers. Under the USA, this person would:
A)only be allowed to contact existing clients of the broker-dealer.
B)not have to be registered as an agent of the broker-dealer.
C)have to be registered as an investment adviser representative.
D)have to be registered as an agent of the broker-dealer.
2; Agents of broker-dealers are in the business of securities-related transactions on behalf of clients of the firm. A free market report is not a security, so this individual is not soliciting securities business.
When constructing a portfolio, one of the goals is to increase diversification. Which of the following pairs offers the most diversification?
A)U.S. equity securities and foreign equity securities.
B)Municipal GO bonds and long-term U.S. Treasury bonds.
C)Large-cap stock/blue-chip stock.
D)Corporate debentures/convertible bonds.
1; Diversification is generally accomplished by adding securities that don’t have a high degree of correlation. Large-cap and blue-chip are essentially the same thing. Most convertible bonds are debentures. Only in the case of domestic and international stocks will we find a low correlation.
Which of the following would NOT be included in the definition of a security under the Uniform Securities Act?
A)Whole life insurance policies issued by the Dividend Mutual Life Insurance Association of America.
B)Preferred stock in the Colonel Corn Processing Corporation.
C)Debentures issued by the XYZ Retirement Planning Company.
D)Common stock in the Shining Silver Mining Company.
1; Nonvariable contracts issued by insurance companies are not securities.
In the securities industry, when a person is acting in an agency capacity, the form of compensation received is
A)markup or markdown
B)commission
C)fees
D)account maintenance charges
2; Broker-dealers act in the capacity of brokers (agency); they earn commissions. When acting in the capacity of a dealer (principal), the compensation comes from markup or markdown. Compensation in the form of fees is most common for investment advisers.
A broker-dealer is NOT considered an investment adviser if the:
A)firm is registered under the Investment Advisers Act of 1940.
B)investment advisory services are incidental to the broker-dealer’s business and no special compensation is received.
C)firm’s investment advice is limited to 10 or fewer people.
D)firm has less than 15 advisory accounts totaling less than $1 million.
2; Excluded from the definition of investment adviser are financial institutions, publishers, investment adviser representatives, and certain professionals, including broker-dealers, whose advice is incidental to their profession and who are not compensated for it.
Which of the following may NOT be used to fund an individual retirement account (IRA)?
A)Bank accounts.
B)Life insurance.
C)Mutual funds.
D)Stocks.
2; There are many funding options available to investors who open an IRA. IRA contributions can be invested in stocks, mutual funds, bank accounts, and annuities. They cannot be invested in life insurance, however.
In an efficient market:
A)information is disseminated slowly.
B)any information that could affect a stock’s value is quickly reflected in its price.
C)investors have a good chance of beating the market.
D)it is fairly easy to predict major market swings.
2; An efficient market is one in which every individual can quickly obtain and use information about new events in the marketplace. Because information is disseminated quickly, any new information that could affect a stock’s value is quickly reflected in its price.
Included in the Investment Advisers Act of 1940 are a number of different recordkeeping requirements. Wealth Preservation Specialists is a covered adviser that is organized as a partnership. If the firm were to dissolve, partnership agreements must be kept for
A)five years after the dissolution
B)three years after the dissolution
C)five years from the date of organization
D)the lifetime of the firm
2; Both the Investment Company Act of 1940 (applicable here because this is a covered adviser) and the NASAA Model Rule on Recordkeeping require that investment advisers maintain certain records, such as partnership agreements and corporate articles of incorporation, for a period of no less than three years after dissolution.
Prohibited business practices under the Uniform Securities Act would include: I.failure to state material facts.
II.trading on inside information.
III.failing to forward a complaint letter to the agent’s supervisor.
IV.sharing commissions with an agent of a nonaffiliated broker-dealer.
1, 2, 3 & 4; Failure to state material facts and trading on inside information are prohibited business practices. Forwarding complaint letters to your supervisor is required; sharing commissions with an agent licensed with the same or affiliated broker-dealer, but not one with which there is no affiliation, is permitted.
Foster Advisers, based in New Jersey, manages $135 million in funds for New Jersey- based clients. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following statements best describes the registration requirement for Foster Advisers?
A)Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.
B)Foster Advisers is required to register with the Administrator of the New Jersey Department of Securities.
C)Foster Advisers is required to register as an adviser with the SEC and has no requirement to notify the Administrator of the New Jersey Department of Securities.
D)Foster Advisers is required to register with both the SEC and the Administrator of the New Jersey Department of Securities.
1; Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment advisers with $110 million or more in assets under management more must register with the SEC. These advisers are called federal covered advisers. Investment managers who manage less than $100 million must register with the state Administrator. Advisers with at least $100 million but less than $110 million of assets under management have the option to register with either their state Administrator or with the SEC. Once the $110 million level is reached, registration with the SEC is mandatory. With $135 million under management, Foster Advisers must register with the SEC. Foster Advisers is subject to the additional requirement of notifying the administrators of the securities departments of states in which it maintains offices or clients of its operations. At the state level, a notification fee (but not registration) is generally required. One aim of the NSMIA was to eliminate dual registration of investment advisers with the states and the SEC. Investment advisers are not required to register at both state and federal levels.
An investor purchases zero-coupon bonds issued by the U.S. Treasury due to mature in 18 years at $100,000. Which of the following might describe the primary reason for selecting that investment vehicle?I. The investor is 65 years old and needs the reliability of current income.
II. The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement.
III. The investor is 30 years old and has a newborn child and wishes to assure funds for a college education.
IV. The investor is 20 years old, has just received an inheritance, and wishes to shelter income for as long as possible.
2 & 3; Zero-coupon bonds maturing in 18 years would assure the 45-year-old of the face value at age 63. Being in an IRA, there would be no current taxation and, upon maturity, if desired, the funds could be distributed without the 10% penalty. Zero-coupon bonds are one way to guarantee funds for college education. However, with no current income, they would not be suitable for the 65-year-old and would not offer any tax shelter to the 20-year-old.
Transactions meeting certain conditions are exempt from the Uniform Securities Act’s registration and advertising filing requirements. Which of the following transactions does NOT meet those conditions to qualify as an exempt transaction?
A)A sale of securities by the executor of an estate.
B)An offer of a security for which a registration statement has been filed but has not yet become effective.
C)A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid.
D)The sale of U.S. government securities to a retail client’s IRA by a registered government securities dealer.
4; In the sale of U.S. government securities to a retail client, the security is exempt, but the transaction is not. Had the sale been to an institutional client, it would have been exempt. An offer is not a transaction.
Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include I.a charge when a client requests that a stock certificate be issued in his name
II.a commission charge when a client buys a security on a listed exchange
III.the interest charged by the firm on money owed by customers in their margin accounts
IV.fees for providing advisory services to high net worth individuals
1 & 3; If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1.commissions;
- markups and markdowns; and
- advisory fees for those firms that are also registered as investment advisers.
Which of the following statements regarding the properties of duration is NOT true?
A)Duration measures the effect of an interest rate change on the price of a bond or bond portfolio.
B)Duration is a weighted-average term-to-maturity of a bond’s cash flows.
C)Duration measures a bond’s price volatility by weighting the length of time it takes for a bond to pay for itself.
D)Duration measures the holding period return on a bond.
4; Duration does not measure the holding period return on a bond, it measures the effect of an interest rate change on the price of a bond or bond portfolio. Duration measures a bond’s price volatility by weighting the length of time it takes for a bond to pay for itself. Duration is also a weighted-average term-to-maturity of a bond’s cash flows.
Which of the following must be disclosed during a transaction recommendation under the Investment Advisers Act of 1940?
A)All facts in the prospectus
B)All facts needed to assess the risks of an investment.
C)All facts.
D)All material facts.
4; It is a violation of the act for any person willfully or knowingly to make untrue statements of a material fact or omit to state a material fact in connection with a securities recommendation by an adviser. A material misstatement is one that may have an effect on an issuer’s future financial prospects or the market value of its securities or may influence the decision of a customer.
A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable?
A)Treasury bonds
B)ETNs
C)ETFs
D)Insured bank CDs
2; The question describes an individual with a low risk tolerance, so the Treasury bonds and CDs would certainly be considered appropriate. Because ETNs are a debt security backed solely by a single issuer while an ETF based on a specific index of debt securities represents a large group of issuers, they are only suitable for those who can understand and take the risks involved.
Which of the following best describes the death benefit provision of a variable annuity?
A)Upon death, the proceeds pass to the beneficiary free of federal income tax.
B)if death should occur prior to age 59½, the 10% early withdrawal penalty does not apply.
C)Upon death, the beneficiary has a choice of settlement options.
D)The principal amount at death is the greater of the total of premium payments or the current market value.
4; The death benefit insures that the investor will never receive back less than the original amount contributed to the account. Unlike life insurance proceeds, with annuities, anything above the cost basis is taxed as ordinary income
A method of valuing an investment, particularly debt securities, by calculating what future cash returns will be worth at the time they are received, based on estimates of future inflation and interest rates is known as
A)discounted cash flow
B)net present value
C)dividend discount model
D)yield to maturity
1; This is the basic definition of discounted cash flow, a useful tool in determining the value of debt securities. The discount rate used is based on that estimate of future inflation (which impacts interest rates). Using this tool, we arrive at the estimated present value (PV) of the security. Once we know the PV we compare that to the actual market value to arrive at the net present value (NPV). The dividend discount model is only used with securities that pay dividends; debt securities pay interest. In the case of yield to maturity, rather than an estimated discount rate, the actual coupon rate is used.
A supervisor’s review of a client’s account indicates daily trading with rapid portfolio turnover. Under NASAA’s Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents, this would NOT be considered excessive trading activity (churning) if:
A)the client’s account shows a profit.
B)the client has approved each trade.
C)the client’s investment objective is quick return, the client has the financial resources necessary for such activity, and the agent uses a sophisticated technical program designed to cut losses and take profits quickly.
D)each security purchased is suitable for the client.
3; The Statement of Policy determines whether the trading is excessive by evaluating the client’s investment objectives, financial resources, and the character of the client’s account. While such trading activity is not suitable for everyone, there are some clients for whom such activity would be suitable. Having client approval for each trade does not necessarily eliminate the requirement to only make suitable recommendations, nor does it excuse excessive trading. A security may be a suitable purchase for a client, but not be suitable for rapid trading. To be sure, there is a greater likelihood of a churning case when the client has lost money, but there have been many cases where even when a profit has been made, churning has been the verdict.
A form of business structure that exposes all personal assets of the owner to creditors is the
A)LLC
B)C corporation
C)sole proprietorship
D)limited partnerships
3; One of the reasons why few large businesses are organized as sole proprietorships is the fact that all personal assets, not just those of the business, are placed at risk if the business fails. In each of the other choices, the maximum potential loss is the amount of the investment.
It is often said that the backbone of the over-the-counter market is the market-maker. A good description of a market maker would be:
A)a subscriber to the Nasdaq system.
B)an investment banker who participates in a firm underwriting.
C)a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market.
D)a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded on a listed exchange.
3; This is the basic definition of a market maker. Specialists perform essentially the same service on the listed exchanges.
Variable annuities:
A)may have 20 or more subaccount investment options
B)generally provide more security of principal than fixed annuities.
C)may invest only in money market mutual funds.
D)provide a guaranteed minimum annuity payout.
1; Some variable annuity separate accounts have 50 or more subaccounts to choose from. There are no guarantees as far as the amount of payout.
Which of the following retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements?
A)Keogh plan.
B)Defined benefit pension plan.
C)Payroll deduction plan.
D)Profit-sharing plan.
3; A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.
An agent’s former college roommate urges him to invest capital in his privately owned toy company, which has no plans to issue its securities to the general public (it intends to stay private). The agent and his spouse invest in the business but the agent neither recommends investment in the company to any of his customers, nor does he discuss this private investment with his firm. In this situation the agent has acted:
A)unlawfully, because the issuer had no intention to offer securities to the general public.
B)lawfully, because agents and their spouses are permitted to invest as desired when there is no conflict of interest.
C)unlawfully, because the transaction involved unregistered, nonexempt securities.
D)unlawfully, because the agent did not receive permission from the firm (broker-dealer) prior to entering the transaction.
2; The agent acted lawfully in all cases because there does not appear to be any conflict of interest.
Five years ago, an investor purchased an ABC Corporation BBB rated debenture with a coupon of 6% maturing in 2037. Currently, new BBB rated debentures with a maturing in 2037 are being issued with coupons of 7%. Based on the discounted cash flow method, one could say that the present value of the investor’s security is
A)negative
B)more than the par value
C)equal to the par value
D)less than the par value
4; The discounted cash flow method is just a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices. The discount rate here is the current market rate of 7%. Because this investor’s debenture is paying at a rate of 6%, its cash flow is less valuable than a 7% bond; therefore, it will sell at a discount (below par).
An investment adviser representative (IAR) prepares a comprehensive financial plan for a new client. Part of the plan includes detailed portfolio recommendations. Seeing a negative reaction from the client, it becomes obvious to the IAR that he is dealing with an ignorant person who is filled with many market misconceptions. It would be reasonable for the IAR to:
A)prepare a new portfolio that is more in line with what the customer has indicated he is comfortable with.
B)attempt to educate the client to correct those misconceptions, but leave the final decision up to the client.
C)tell the client he will make some changes, but keep the original portfolio because that really is in the client’s best interest.
D)drop the client.
2; All decisions are ultimately up to the client, but there is nothing wrong with the IAR attempting to educate the client, especially when it could lead to greater investment success.
When preparing an asset allocation program, all of these would be considered asset classes EXCEPT
A)equity securities
B)Brady bonds
C)cash or cash equivalents
D)debt securities
2; When describing an asset class, we are not looking at a specific security. IBM common stock is considered as an equity security—it is not an asset class by itself. Brady bonds are considered a debt security, but not an asset class. Brady bonds are issued by a developing country as a result of a restructuring of its defaulted bank debt. They are government obligations issued after the debtor nation negotiates with the creditor banks’ advisory committee to restructure loans that are no longer performing. The creditor banks exchange the nonperforming loans for various Brady bonds offered by the debtor government.
An elderly client explains to you that he is risk averse and wishes to find an investment that will provide him with preservation of capital. Which of the following might you recommend?
A)Long-term U.S. Government bonds.
B)Bank insured CDs.
C)An index fund.
D)Variable annuities.
2; Preservation of capital is almost always a sign that the client needs CDs. Sure, the U.S. Government bonds will pay back the principal when due, but, with long-term maturities, there will be plenty of interest rate risk that could affect the client if he needs the capital prior to maturity.
In general, one would prefer to purchase a bond when its current market price is
A)less than its present value
B)more than its present value
C)less than its future value
D)the same as its present value
1; When a bond can be purchased for less than its present value, it has a positive net present value (NPV). For example, if the present value of a bond is $600 and it can be purchased for $565, it has an NPV of $35 and should be an attractive investment. Every bond selling at a discount has a market price that is less than its future value (par), so that doesn’t tell us anything about its NPV.
All of the following statements regarding the Roth IRA are correct EXCEPT:
A)contributions are made with after-tax dollars.
B)one may contribute to both a Roth IRA and a traditional IRA, but the combined contribution may not exceed the annual limit of $5,500, or $6,500 if qualifying for the catch-up provisions.
C)individuals covered under qualified plans by their employers are not eligible to open a Roth IRA.
D)under certain circumstances, all funds withdrawn are free of federal income tax.
3; A Roth IRA may be opened by anyone with earned income as long as the individual falls within the earnings limits imposed by Congress.
Under the Investment Advisers Act of 1940, a person who falls within the definition of an investment adviser must register with the SEC unless the adviser’s only clients.
A)do not exceed 25 in number during the preceding 12 months.
B)are confined to employees of the federal government.
C)consist of individuals with net worth in excess of $5 million.
D)are insurance companies.
4; Among its exemptions, the Investment Advisers Act of 1940 grants an exemption from registration for those investment advisers whose only clients are insurance companies. The de minimis requirement only applies to foreign advisers.
Under the Uniform Securities Act, which of the following could be a cause for denial of a registration?
A)Conviction of a misdemeanor 7 years ago.
B)Conviction of a securities-related violation 12 years ago for which the prison sentence ended last month.
C)A revocation order by another state’s Administrator.
D)Lack of a degree from an accredited degree granting institution
3; When one’s registration has been revoked by another state’s Administrator, any other Administrator will deny registration in their state. The securities-related violation occurred more than 10 years ago, and the misdemeanor is only a problem if it is securities or money related.
Rank the following securities from the same issuer from most suitable to least suitable for a client whose primary objective is income. I.Cumulative preferred stock
II.Convertible preferred stock
III.Common stock
IV.Warrant
1, 2, 3 & 4 (in that order); For a client seeking income, preferred stock, especially one that is cumulative, would likely be the most suitable of the choices given. Convertible preferred stock generally pays a lower dividend rate than other preferreds because of the attraction of the convertibility. Although there are some categories of common stock, e.g., utility stocks, that pay liberal dividends, unless specifically mentioned, you can assume that preferred stock dividends are higher than those for common stock of the same issuer. Warrants never provide any income.
Because of failing economic conditions, Kapco Advisers, an adviser with slightly less than $120 million in assets under management, lays off a registered investment adviser representative. In this case, who would notify the state Administrator of the termination?
A)Both Kapco and the IAR.
B)The IAR.
C)The IAR’s new employer.
D)Kapco Advisers.
2; With over $110 million in assets under management, Kapco is a federal covered adviser. In that case, the IAR is the one who notifies the Administrator of being terminated.
Which of the following statements is (are) TRUE? I.A person with a place of business in the state who transacts business exclusively for the accounts of banks and savings institutions is not a broker-dealer under the Uniform Securities Act.
II.A person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 who offers investment advice to individual investors residing in this state, and has less than $25 million in assets under management, is subject to the jurisdiction of the state Administrator.
III.A person included in the definition of an investment adviser under the Investment Advisers Act of 1940, who manages funds on a regular basis as a business headquartered in a state, is subject to payment of filing fees required by the state Administrator.
IV.Broker-dealers who supply incidental investment advice and make securities recommendations to customers who pay commissions for the execution of their trades are not investment advisers subject to state or federal registration.
3& 4; A person who conducts business exclusively with banks and savings institutions is a broker-dealer under the USA if he has a place of business in the state. Had the person no place of business in the state and conducted business exclusively with banks and savings institutions, he would not be considered a broker-dealer subject to the regulatory control of the state Administrator. Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of state filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not investment advisers.
Obtaining all of the following complies with the regulations regarding customer identification programs (CIPs) EXCEPT
A)a PO Box, instead of a physical address, if it is the primary mailing address
B)name
C)taxpayer identification number
D)date of birth
1; A PO Box is never acceptable without a physical address.
Which of the following are regulated under the Securities Exchange Act of 1934? I.New issues.
II.Broker-dealers.
III.Transfer agents.
2 & 3; The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and the securities firms who do the trading. While the Securities Act of 1933 covers requirements relating to new issues, the Securities Exchange Act of 1934 covers almost everything else in the securities industry. Its greatest impact is on the securities firms and the people who sell securities (i.e., broker-dealers and their agents) in the secondary market. Of the choices listed, new issues would be regulated by the Securities Act of 1933.
A 75-year-old customer asks if it is possible to sell his $500,000 variable life insurance policy to a party other than the insurance company that issued the policy. If a sale occurs, known as a life settlement, which of the following would be a violation of industry rules?
A)Not requiring the insured to pass a physical exam prior to the sale
B)Disclosing that the buyer becomes responsible for all premiums while the insured is living
C)Quoting the price using an exclusive buyer that handles all the firm’s life settlements
D)Requiring the customer to relinquish all ownership rights to the policy
3; Because of the limited secondary market for life settlements, any firm that engages in these transactions should obtain several bids to ensure the customer receives a fair price for her policy.
An investment advisory firm advertises a stock picking system that helps investors choose the timing and selection of securities for purchase. Under the Investment Advisers Act of 1940, which of the following must be disclosed in the advertisement?I. The number of years the system has been used successfully.
II. The difficulty of using the system.
III. The limitations of the system.
2 & 3; The act prohibits reference to any formula, charting, or graphing device without disclosing the difficulties or limitations in their use. The number of years used is not required.
When a security registers by using coordination, under normal circumstances, the effective date is determined by the:
A)SEC.
B)underwriter.
C)Administrator.
D)issuer.
1; A security is registered by coordination when there is a simultaneous federal and state registration. Under normal circumstances, once the SEC has declared the registration effective, it is also effective in those states where the registration was coordinated.
Which of the following transactions on the NYSE in ABC common stock would meet the minimum size requirement to be considered a block trade?
A)10,000 shares
B)200,000 shares
C)$100,000 total market value
D)100,000 shares
1; A block trade is defined as at least 10,000 shares of stock or a trade with a total market value of at least $200,000.
When reading the prospectus for a fund, you notice that it states that the fund may make portfolio purchases on margin, take short positions, and use arbitrage techniques. This is most likely what type of fund?
A)Index.
B)Hedge.
C)Exchange traded.
D)Closed end.
2; Margin trading and selling short are techniques commonly found in hedge funds, rather than in open-end or closed-end management funds or ETFs.
In projecting future cash requirements, one of the tools is a capital needs analysis. When doing one, all of the following would be considered capital needs EXCEPT
A)a $20,000 loan for undergraduate school with a due date in six years
B)rolling over a 401(k) into an IRA
C)a home equity loan with a $15,000 balance
D)a $100,000 loan for law school with a due date in 10 years
2; A capital needs analysis attempts to determine money that would be needed in the event of an individual’s sudden passing. Included would be any outstanding debt obligations, regardless of when they are due (they will have to be paid off sometime). However, an asset, such as the 401(k), is not a need; it is something that will help meet the need.
One method security analysts use to define companies is by their market capitalization. How is a company with a market capitalization of $400,000,000 categorized?
A)Mid-cap.
B)Small-cap.
C)Micro-cap.
D)Large-cap.
2; The general consensus is that companies with a market capitalization between $300 million and $2 billion are considered small-cap. Less than that is micro-cap; larger is either mid-cap or large-cap.
Under the Investment Advisers Act of 1940, which of the following statements regarding an adviser’s registration is TRUE?
A)Registrations expire on December 31 of each year.
B)Registrations become effective in 30 days unless delayed by the SEC.
C)Withdrawal from registration is done on Form ADV-W and takes effect 45 days after filing.
D)If the adviser ceases to act as an adviser or goes out of business, the SEC will cancel the registration.
4; Under the Investment Advisers Act of 1940, registrations become effective 45 days after filing, unless delayed by the SEC, and remain effective until withdrawn by the adviser or canceled, suspended, or revoked by the SEC. The SEC will cancel a registration if the adviser is no longer in existence or in the business. Although the ADV-W is the form for withdrawal, it becomes effective upon acceptance by the IARD, provided however that the investment adviser’s registration continues for a period of 60 days after acceptance solely for the purpose of commencing a proceeding regarding any violation of the Act.
Which of the following individuals would be considered a noninterested person in a mutual fund?
A)A member of the board of directors who does not hold another position within the investment company.
B)A member of the board of directors who is also employed as the investment adviser.
C)A shareholder who owns 10% of the fund’s shares.
D)A person who holds a position with the fund’s underwriter.
1; The Investment Company Act of 1940 defines an interested person as someone employed by or has a material business relationship with the fund, its adviser, or underwriter. Someone who owns 5% or more of the outstanding shares (an affiliated person) is also considered “interested”. Merely sitting on the board does not make someone an interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person.
Which of the following are exempt transactions under the Uniform Securities Act? I.XYZ Company signs an agreement to sell 1 million shares of its stock to ABC broker-dealer, who will then act as an underwriter in marketing the shares to the public.
II.A non-issuer sale of securities listed on the Nasdaq Stock Market to several individual clients of the agent.
III.Mr. Jones sells 100 shares of an unregistered security he owns to his next–door neighbor for $1,000.
IV.A customer calls a registered agent and asks to buy 1,000 shares of SPHG, a company the representative is not familiar with, and the representative fills the order.
1, 3 & 4; Transactions between an issuer and an underwriter, isolated nonissuer transactions (Mr. Jones), and unsolicited nonissuer transactions (SPGH) are exempt under the Uniform Securities Act. Transactions in federal covered securities (listed on national exchanges or the Nasdaq Stock Market) are transactions in an exempt security, but, because the sales are being made to individual clients, the transactions might not be exempt.
The duties and responsibilities of a fiduciary are spelled out in
A)the Uniform Gift to Minors Act
B)the Uniform Prudent Investors Act of 1994
C)the Investment Advisers Act of 1940
D)the Summary Plan Document of the DOL
2; The UPIA is the legal guide for fiduciaries, who must act with skill and caution in the best interest of their clients.
If an agent has secured a signed statement from a customer that waives the customer’s right to sue for a transaction in violation of the USA, the agreement is:
A)legal but only in a criminal case.
B)legal but only in a civil case.
C)legal.
D)null and void.
4; The USA explicitly states that no provision of the act may be waived, whether the client consents to the waiver or not.
Under the Investment Advisers Act of 1940, an IA that uses a Website would be required to:I. maintain a copy of the screens used on their site in the firm’s advertising file.
II. place copies of new screens into the firm’s advertising file each time a change was made.
III. file copies of the Web design with the SEC.
IV. password protect the site to limit access to existing clients only.
1 & 2; A website is considered advertising, and the Investment Advisers Act of 1940 requires that a file copy be maintained of all advertisements that will be seen by 10 or more persons. Whenever the site is changed, it is considered new advertisement copy and must be placed into the firm’s advertising file. Advertisements are never filed with the SEC.
Which of the following are NOT considered money market instruments? I.American depositary receipts.
II.Commercial paper.
III.Corporate bonds.
IV.Jumbo (negotiable) certificates of deposit.
1 & 3; A money market instrument is a high-quality, short-term debt security with maturity of less than 1 year. American Depositary Receipts (ADRs) are equity, and corporate bonds are long-term debt instruments.
Securities issued by which of the following are exempt from the registration and disclosure requirements of the Uniform Securities Act (USA)?I. The United States or any territory.
II. A state or political subdivision of a state.
III. A common carrier (e.g., a railroad) regulated in respect to its rates and charges by the United States or a state.
IV. Banks and savings institutions.
1, 2 3 & 4; The Uniform Securities Act exempts all of the securities listed from registration and disclosure requirements. Banks and common carriers are under the regulatory supervision of other government agencies.
All of the following statements are consistent with the Uniform Securities Act EXCEPT:
A)any security may be registered with the state by the procedure known as registration by qualification.
B)a security for which a registration statement is filed under the Securities Act of 1933 may simultaneously register with the state by the procedure known as registration by coordination.
C)state Administrators do not require consent to service of process to be submitted with notice filings for covered securities.
D)state Administrators may require federal covered investment companies to file documents with the Administrator using a procedure known as notice filing.
3; The Administrator will require the filing of a consent to service of process with any securities registration. If required by the Administrator, notice filing is the procedure followed by federal covered securities. Any security may be registered by qualification, and coordination is the simultaneous registration with the SEC and the states.
Under the antifraud provisions of the Investment Advisers Act of 1940, an investment adviser must disclose to clients:
A)that the adviser has never been subject to disciplinary action or censure by the SEC.
B)the number of clients with whom the adviser does business.
C)the association between the investment adviser and the broker-dealer with whom the overall investment plan will be implemented.
D)that any transactions made on the adviser’s own account are consistent with the advice given to clients.
3; Advisers must disclose to clients any outside interest or potential conflicts of interest involved in their recommendations or transactions for those clients. Failure to disclose additional compensation related to the advisory function would be considered fraudulent. If an advisory firm is also a broker-dealer and will enjoy transaction-related compensation if the advisory client acts on the adviser’s recommendation, this must be disclosed in writing and the client must consent in writing. There is no requirement that an adviser disclose to its clients the number of its other clients. The adviser is required to disclose disciplinary actions taken by regulatory authorities, but not the absence of such actions. The adviser is not required to disclose its consistent transactions, but must make disclosure if its transactions are not consistent with the advice given.
Which of the following actions by an investment adviser representative would be an unethical practice under the Uniform Securities Act?
A)Telling a customer that the investment being recommended will be sold from the inventory of the investment representative’s firm.
B)An IAR with discretionary authority enters a buy order for a security when its price is rising.
C)Recommending securities that result in major losses in the customer’s account.
D)Splitting commissions with a customer service representative who is not registered but works for the same firm.
4; Commissions can be received only by those with the appropriate registrations. A nonregistered person cannot participate in transaction-based compensation.
A 68 year-old client of yours indicates that he is interested in changing the portfolio mix of his IRA to become largely invested in noninvestment grade bonds. You would probably infer from this that the client:
A)is now in a lower tax bracket.
B)has recently come into a large inheritance.
C)has insufficient retirement savings.
D)is risk averse.
3; Most studies have indicated that seniors with insufficient retirement savings attempt to compensate by being tempted to reach for higher yields to maximize retirement income without full consideration of the increased risk that comes along with the possibility of higher returns.
As a result of an SEC hearing, an investment adviser’s penalty is $5,000 and a 50-day suspension. If the IA wishes to appeal this verdict, a request for review must be filed:
A)with the U.S. Court of Appeals within 45 days of the order.
B)with the SEC within 45 days of the order.
C)with the Administrator within 60 days of the order.
D)with the U.S. Court of Appeals within 60 days of the order.
4; Under both federal and state laws, appeals must be filed within 60 days of the order. In the case of an SEC hearing, the appeal is filed with the U.S. Court of Appeals for the district in which the original hearing was held.
Under the Uniform Securities Act, an Administrator who believes a violation has occurred or is about to occur may:I. issue a cease and desist order without a prior hearing.
II. bring action to obtain an injunction and have a receiver appointed over the alleged violator’s accounts.
III. seek a court order requiring the alleged violator to make restitution to others.
1, 2 & 3; Administrators have the power to issue cease and desist orders, apply to a court for a temporary or permanent injunction, or apply to a court for restitution to investors or to have the court appoint a receiver for a violator’s assets. In issuing the cease and desist order, the Administrator may do so with prior notice and hearing or may issue the order summarily (without such notice and hearing).
Which of the following securities has an easily determinable internal rate of return?
A)6% Ginnie Mae
B)5% municipal bond
C)7% corporate bond
D)Zero-coupon bond
4; The only security that does not have reinvestment risk (the risk that periodic interest payments cannot be reinvested at the same yield as the bond providing the interest payments) is a zero-coupon bond such as Treasury STRIPS. With a zero-coupon bond, there are no periodic interest payments to reinvest, so a yield can be locked in. The interest rate that discounts the redemption price (par) to the discounted purchase price is the locked-in yield, which is the same as the internal rate of return, also referred to as the yield to maturity.
Exchange-trade notes (ETNs) are I.unsecured debt securities
II.unsecured equity securities
III.issued by financial institutions, such as banks
IV.insured by the FDIC
1 & 3; Exchange-traded notes are unsecured debt securities issued by financial institutions, such as banks. Their prices can be impacted by changes in the credit rating of the issuer, and they are not insured by the FDIC.
A broker-dealer provides HotScores, a portfolio analysis tool that allows clients to indicate their retirement goal. After disclosing age, current financial condition, and risk tolerance, those participating will receive a list of specific securities the customer could buy or sell to meet the investment goal. Which of the following is TRUE?
A)This would be considered an example of social media communication and therefore not specifically covered by NASAA as a recommendation.
B)This is not a recommendation, as the analysis tool is automated.
C)This would be regarded as making a recommendation.
D)This is not a recommendation, as the customer will receive a list or series of securities that the customer could buy or sell to meet the goal at a later date
3; An example of what the regulators have determined to be a recommendation would be if a broker-dealer provides a portfolio analysis tool that allows a customer to indicate an investment goal and input personalized information such as age, financial condition, and risk tolerance. The broker-dealer then sends the customer a list of specific securi¬ties the customer could buy or sell to meet the investment goal the customer has indicated.
Under the Securities Exchange Act of 1934, which body regulates the extension of credit for nonexempt securities?
A)The New York Stock Exchange.
B)The Comptroller of Currency.
C)The SEC.
D)The Federal Reserve Board.
4; The Securities Exchange Act of 1934 empowered the Federal Reserve Board (FRB) to set margin requirements and regulate the use of credit to purchase securities. The FRB determines what issues may be purchased on margin and what percentage of the purchase price must be deposited by the purchaser.
One of the reasons why the discounted cash flow method of valuation is useful in assessing the value of fixed income instruments is the:
A)predictability of income.
B)known maturity date.
C)availability of ratings.
D)priority of claim on earnings.
1; 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.
Which of the following are considered to be exempt issuers under the Uniform Securities Act? I.State of Georgia.
II.City of London, Ontario.
III.City of London, England.
IV.Kapco Income Fund, a hedge fund not registered with the SEC.
1 & 2; Any state or Canadian province, or political subdivision thereof, is considered an exempt issuer. Foreign governments with whom the United States has diplomatic relations, but not their political subdivisions, are considered exempt issuers. SEC-registered investment companies are non-exempt issuers under the USA. That is, the act does not include them in the list of exempt issuers. However, under the NSMIA, they are federal covered securities and, as such, do not register with the states other than filing a notice. All the more so, hedge funds that are NOT registered with the SEC would not be exempt issuers.
Under the Uniform Securities Act, one method of securities registration is Qualification. When that method is used, which of the following statements is CORRECT? I.The registration is valid for one year from the effective date.
II.The registration is valid for one year from the effective date unless the underwriter or issuer still has some unsold shares.
III.The registration is valid until the next December 31st.
IV.The registration statement may be amended to increase the number of shares in the offering as long as the public offering price and the underwriter’s compensation is not changed.
2 & 4; Under the USA, when a security is registered, the registration is valid for one year after the effective date. However, the act provides that if the issuer or underwriter still has unsold shares from the offering, the effective date may be extended so this is a more accurate choice. The act also allows the registration statement to be amended to allow for an increase in the number of shares to be offered as long as the public offering price and the underwriter’s compensation is not changed.
Under the Uniform Securities Act, the definition of an investment adviser does NOT include: I.investment adviser representatives.
II.lawyers and accountants whose investment advisory services are solely incidental to their practices.
III.broker-dealers who offer investment advice on an incidental basis without special compensation for the advice provided.
IV.federal covered investment advisers.
all of them; None of the above are included in the term “investment adviser” as used in the Uniform Securities Act. Federal covered advisers are regulated by the Securities Exchange Commission (SEC). The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits dual registration of investment advisers by federal and state authorities. If federal covered advisers were defined as investment advisers under the USA, then they would be subject to the same state registration procedures as local or state investment advisers.
Agatha has an account with her Aunt Sally that is registered as TIC. If Sally predeceases Agatha, the assets in the account go to
A)the person designated under the laws of escheat in her state
B)Agatha
C)Sally’s spouse
D)Sally’s estate
4; When an account is opened as tenants in common (TIC), upon the death of one of the cotenants, that individual’s share now becomes part of the deceased’s estate. It might be that Agatha or Sally’s spouse are beneficiaries named in Sally’s will, but we don’t know that
Flow-through is one of the features of
A)open-end investment companies
B)direct participation plans
C)variable annuities
D)REITs
2; Flow-through is the term commonly used to describe that any income or loss generated by a direct participation program “flows through” to the owner(s). In the case of a REIT, the only thing that passes through is income or gains, never losses.
Jill is an investment adviser representative with FairPlay Advisers, an SEC-registered investment advisory firm. At the recommendation of a close friend who is a client of Jill’s, Tom comes in for an interview and portfolio analysis. When examining Tom’s IRA, which of the following holdings would Jill feel the need to immediately review?
A)GHI Large-Cap Equity Index Fund
B)JKL Money Market Fund
C)DEF U.S. Government Bond Fund
D)ABC Municipal Bond Fund
4; Although not illegal, it is generally considered inappropriate to include tax-exempt securities, such as municipal bonds (whether individual bonds or in a fund), in a tax-deferred retirement plan.
If persons other than the original person entering the post can comment on social media, the content is considered
A)static
B)flexible
C)mobile
D)interactive
4; One of the characteristics of interactive content, as opposed to static content, is that persons other than the original author may make comments.
If a new client has $200,000 to invest and wants to retire in 15 years, which of the following client information is least necessary for an adviser to recommend a suitable investment program?
A)The amount of income he requires for his retirement years.
B)Tolerance toward risk.
C)The age of the client.
D)Current income and cash flow requirements.
4; While current income and cash flow requirements are ordinarily important considerations, in this question we are being asked about the investment of a lump sum, not periodic additional investments. The amount of income required will determine the types of investments and how they must be structured in order to achieve the retirement income desired. The client’s age is necessary to determine the time horizon. That is, if the client is currently 35 and wishes to retire at age 50, the money will have to last a lot longer than if we are dealing with a 55-year-old who wishes to retire in 15 years at 70. A client’s tolerance toward risk is among the most important non-financial considerations in determining investment suitability.
An investment adviser can avoid fiduciary responsibility:
A)under circumstances authorized by ERISA.
B)by executing orders in strict compliance with the discretionary agreement.
C)if the client waives the adviser’s fiduciary responsibility.
D)under no circumstances.
4; Under no circumstances can an investment adviser avoid fiduciary responsibility.
According to the Uniform Securities Act, which of the following would be considered exempt transactions?I. The sale of a unlisted corporate bond by an executor of an estate.
II. The gift of 100 shares of a NYSE-listed stock from a father to his minor child.
III. Preorganization certificates subscribed to by 14 institutional investors during a 12-month period for which no payment has been made.
IV. An unsolicited order from an individual client to purchase a nonexempt, unregistered security.
1 & 4; Fiduciary transactions and unsolicited orders, regardless of the security being purchased or sold, are always exempt transactions under the USA. Preorganization certificates are limited to a maximum of 10 subscribers, whether individuals or institutions. A gift of securities is not a sale, so no transaction has taken place.
A transactional exemption would be offered when a sale is made by:
A)an attorney as an incidental part of her legal practice.
B)an investment adviser.
C)a broker-dealer.
D)a sheriff.
4; Among the list of exempt transactions are sales made by a sheriff or marshal. It is possible that the attorney could be acting in the role of a fiduciary and, if so, the transaction would be exempt. From a test-taking standpoint, if you have to read something into an answer to make it correct, as we just did with the attorney, don’t do it; go for the straightforward choice.
An investor purchases 100 shares of a stock at $100 per share on January 1st. On the following July 1st, the shares are sold for $120 per share. The tax consequences are:
A)$2,000 long-term loss.
B)$2,000 short-term gain.
C)$2,000 long-term gain.
D)$2,000 short-term loss.
2; 100 shares sold for $120 per share that were purchased for $100 per share results in a capital gain of $2,000. Because the holding period did not exceed one year, the gain is considered short-term for tax purposes.
If 150 investors want to form a corporation to limit their financial liability to the amount of money they invest and do not want to be responsible for any debt that the corporation incurs, they would most likely form a(n):
A)general partnership.
B)S corporation.
C)proprietorship.
D)C corporation.
4; The investors would form a C corporation. The advantages of the C corporation are stockholders are not liable for corporate debt; it is easier to raise money by issuing stock; it is easier to transfer ownership; and unlike a partnership or proprietorship, a C corporation has a continuous life because it does not terminate on the death of shareholders, officers, or directors. An S corporation is limited to 100 investors.
Under the Uniform Securities Act, Laura Smith must register as an investment adviser representative unless she:
A)sells registered securities solely on a commission basis for a registered broker-dealer.
B)sells her financial planning business in order to become a full-time employee of AAA Investment Advisers, Inc., where she advises clients whose net worth exceeds $5 million.
C)opens a sole proprietorship in Virginia and offers investment advice for a fee on an ongoing basis to residents of Virginia whose combined assets under management total $35 million.
D)opens a financial planning business in which she is the sole owner and advises individual clients on the advisability of investing in securities.
1; Laura Smith, as an employee of AAA Investment Advisers, Inc., must register in the state as an investment adviser representative. As the sole owner of a financial planning practice and an investment advisory proprietorship, Laura must register as an investment adviser representative of her investment advisory firm. Please note that registration of the investment adviser entity automatically registers officers, partners, and so forth, as IARs. When Laura functions as a sales agent for a broker-dealer, she must register as an agent, not an investment adviser representative.
Under NASAA’s Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include which of the following? I.They must be renewed on an annual basis.
II.They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated.
III.They must prohibit assignment of the contract without the client’s consent.
2 & 3; There is no requirement that advisory contracts be renewed on an annual basis. Contracts can be written for any length agreed upon. Advisory contracts must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated and must prohibit assignment without the client’s consent.
In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account is
A)Passbook savings account
B)Totten trust
C)Demand deposit account (DDA)
D)Revocable trust
2; The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same.
Charley Dearborn is a CFP who is also registered as an IAR with a federal covered investment adviser. Charley’s primary focus is on developing comprehensive financial plans for his clients. After analyzing their financial situation, which of the following individuals would most likely receive a recommendation from Charley to purchase term life insurance?
A)A 75-year-old widow.
B)A 60-year-old spouse of a corporate executive.
C)A 35-year-old physician with 3 children.
D)A 25-year-old single associate professor at an Ivy League university.
3; The advantage of term life is that it provides large amounts of protection for a relatively low premium for those under ages 45-50. On the basis of the information given, the 35-year-old physician with three children would appear to have the greatest income replacement needs in the event of premature death. Although it is possible that the spouse of the corporate executive might need extensive life insurance for estate purposes, that need might not arise for many years and, at age 60, term insurance starts to get very expensive.
An investment adviser registered in 3 states allows its IARs to attach research reports, bulletins, and other information to emails sent to customers. File copies would not be required when these bulletins are sent to:
A)10 non-institutional clients
B)prospective customers.
C)persons connected with the investment adviser.
D)institutional clients.
3; Every investment adviser registered or required to be registered under the act must make and keep true, accurate, and current a file containing a copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication, including by electronic media, that the investment adviser circulates or distributes, directly or indirectly, to 2 or more persons (other than persons connected with the investment adviser).
Which of the following issues is most affected by credit risk?
A)debentures.
B)common stock.
C)corporate zero-coupon bonds.
D)preferred stock.
3; Credit risk is the risk of default, found only with debt instruments. Although debentures are issued strictly on the issuer’s credit rating, they have the advantage over any zero-coupon bond in that interest payments begin approximately six months after issuance while in a zero-coupon bond, nothing is paid until maturity date.
An issuer of federal covered securities, whose registration is effective under the Securities Act of 1933, would use which of the following procedures to permit the sale of its securities in a specific state?
A)Registration.
B)Qualification.
C)Coordination.
D)Notice filing.
4; Notice filing is the procedure by which federal covered securities, most commonly registered investment company securities, receive clearance for their securities to be sold in a specific state. No formal registration is required, but payment of fees and filing of certain documents may be.
