Exam 3 Flashcards
As an investment adviser, you would consider municipal bonds to be suitable investments for all of the following clients, EXCEPT a
Corporate Pension Plan
Regarding the taxation of an estate, what is true?
In a revocable trust, assets are included in the estate for federal estate tax purposes
An advantage of an irrevocable trust
Its assets are excluded from the estate for estate tax purposes
A customer recently purchased shares of an SEC-reporting issuer through a Reg D private placement. From the date of purchase, how long must the customer wait before being permitted to re-sell the shares?
Six months
According to the Investment Advisers Act, in order to register as an investment adviser with the SEC, which of the following choices is required?
File Part 1 and Part 2 of Form ADV
According to Reg T, if a client fails to pay for securities by the fifth business day following the trade date, the client’s account will be
Frozen for 90 days if an extension has not been granted by FINRA. During the 90 days, trades can be made if they are fully paid for in advance
A contract between two parties to exchange a sequence of cash flows, one of which has a fluctuating value for a predetermined period. It is a form of derivative - typically traded over-the-counter
A swap
If information contained in any document filed with the Administrator is, or becomes inaccurate in any material respect, the registrant must file
A correcting amendment, promptly
A stop order would NOT be used to
Receive a specific price when buying or selling
Which of the following is TRUE of a structured note?
It’s a bond issued by a financial services company which offers a rate of return that’s linked to other securities
Which of the following issuers is most likely to use registration by QUALIFICATION in order to register its securities?
A local company whose shares will be sold within the state
What are two examples of persons that are required to register as agents according to the USA?
- A life insurance salesperson who solicits sales in separate account products
- A branch manager of a brokerage firm who supervises several salespersons who are engaged in the sale of securities
According to the dividend discount model, when interest rates rise
The discount rate used in the model would rise, causing stock prices estimated by the model to fall
Attempts to estimate the true value of stock prices by calculating the present value of future dividend payments. The model also attempts to explain the reaction of stock prices to interest-rate changes.
Dividend discount model
When trading currencies, investors and financial institutions will buy and sell at the
Spot Rate
Under what form of ownership may a husband and wife ensure that their property is not able to be attached by the creditors of either spouse?
Tenancy by the entirety
Think prices will fall or are falling
Bearish traders/markets
Think prices will rise or are rising
Bullish traders/markets
Bond that is issued by a foreign government
Sovereign bond
A mathematical technique that uses randomly generated scenarios, known as simulations, to determine the probability of possible returns. It is a computer program that has been developed to give investors different tools to help them manage their portfolios.
Monte Carlo Theory
Value in the set that occurs most option
Mode
What is true regarding the purchaser of a call option?
The purchaser would benefit if the underlying stock increased
An investment adviser representative (IAR) has a client who’s very conservative. While discussing various investments, the client asks the IAR to assure her that she will not lose any money. Which of the following statements about this request is TRUE?
Assurances or guarantees against losses are prohibited
What is true regarding advertising rules for investment advisers?
Graphs that are used to determine which securities to buy or sell are considered advertisements
Carrie has three children and recently lost her husband. Her children each have two children of their own. If Carrie wants to set up a trust which allocates an equal share of her assets to each branch of her family, she should set it up as
A per stirpes trust
An investment adviser representative started talking with an elderly couple a few months ago. The couple has recently kept all of their funds in cash, but they’re worried about low investment yields and outliving their income. They decided to set up an advisory account and have given the investment adviser representative appropriate trading documentation. Under the Prudent Investor standard, which of the following recommendations is the MOST suitable for the couple?
A portfolio of exchange-traded funds (ETFs), corporate bonds, and large-cap equities
Yield - inflation rate
Inflation-adjusted rate of return, also referred to as the real interest rate
What is exempt from the gift tax?
Medical expenses, tuition and gifts to a spouse
What an investor foregoes by not taking an alternative course of action
Opportunity risk (cost)
An investor takes money out of a money-market fund earning 5% in order to invest in an emerging growth stock fund that offers the possibility of higher returns. However, the stock fund’s current yield is only 2%. The 3% difference in yields between the stock fund and the money-market fund is the investor’s
Opportunity cost
Buy and hold and systematic rebalancing are examples of passive approaches to asset allocation, and based on the theory known as
Efficient Market Hypothesis
Focuses on diversifying across various asset classes to enhance returns without significantly increasing risk
Model Portfolio Theory
Describes the relationship between risk and expected return
CAPM (Capital Asset Pricing Model)
The moving of investments from one industry sector into another in anticipation of a change in the economy
Sector rotation
What information may an issuer change by amending its registration statement after it receives an effective date?
The number of shares
If an adviser wants to evaluate a publicly traded firm’s ability to pay down its short-term debt, which ratio would be most appropriate?
Current Ratio
Measures liquidity including all debt-both short-term and long-term
Debt coverage ratio
Gifts that exceed the annual gift tax exclusion are
Taxable if the excess gift takes the donor over the lifetime gift tax exclusion
If a portfolio manager is rebalancing a client’s assets on a quarterly basis, this would be considered
A strategic asset allocation strategy
An asset allocation strategy that is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions
Tactical asset allocation strategy
If an advisory client is most concerned with minimizing her tax liability, common stocks may provide a greater benefit than corporate bonds because
Qualified cash dividends are taxed at a maximum rate that is less than the rate at which the interest on corporate bonds is taxed
Rank the following investments least to most risky:
Common stocks
Preferred stocks
US Govt securities
Limited partnerships
US Govt Securities
Preferred stocks
Common stocks
Limited partnerships
( (Ending Value - Beginning Value) + Dividends + Interest ) / Beginning Value
Total Return
According to the Uniform Securities Act, what is a conflict of interest?
An agent recommends the stock of the company that employs his spouse.
The value of a fund’s assets minus its liabilities divided by the number of shares outstanding equals
NAV
A reverse stock split creates a
Smaller number of shares
An aggressive growth portfolio would be suitable for an investor
Who is financially secure, has a high income level, and has a high tolerance for risk
If a client buys a futures contract and holds it to expiration, what is his obligation?
The buyer is obligated to take delivery of the underlying commodity
Which of the following statements is TRUE regarding general partnerships?
All the general partners have the authority to bind the partnership
When determining the risk premium on an investment, an investor would analyze the difference between
The total return and the risk-free rate of return
Which type of investment analysis uses daily moving average price data and pricing trends to make investment decisions?
Technical analysis
An agent represents a broker-dealer that is headquartered in State A, but has offices in numerous states. The Administrator of State B has revoked the broker-dealer’s registration, causing the firm to close that office. One of the agent’s clients has moved to State B and the agent wants to continue to do business with her. According to the Uniform Securities Act, what is TRUE?
This is not acceptable and neither the broker-dealer nor any of its agents may conduct business in State B.
According to NASAA Model Rule 502(c), regarding contents of investment advisory contracts, an advisory contract would include which of the following choices?
The term of the contract
An exculpatory clause waving compliance with the Investment Advisers Act of 1940
A nonassignment clause
A clause requiring the adviser to notify clients of any change in membership if the firm is a partnership
Ther term of the contract
A nonassignment clause
A clause requiring the adviser to notify the clients of any change in membership if the firm is a partnership
According to the Uniform Securities Act, is an agent of a broker-dealer required to provide its clients with disclosure of a material public fact about an issuer?
Yes, if the agent’s other comments to the customer could be considered misleading without the additional public information
As it relates to gift and estate taxes, what’s portability?
The ability for a surviving spouse to use the deceased spouse’s unused lifetime gift tax exclusion
What BEST describes a discounted cash flow (DCF) analysis that could lead to a recommendation to a client?
The calculation results in the present value of the future cash flows exceeding the current market value
An adviser’s conservative client prefers to invest in a small number of securities without worrying about the periodic ups and downs in their value. The client also wants to reduce the cost of trading. The IA may recommend which of the following strategies?
A buy-and-hold strategy
A client buys shares of a closed-end fund
In the secondary market
Regarding equity-indexed annuities, what is TRUE?
If the annuitant withdraws money before the surrender period is over, she’s required to pay a surrender fee.
Insurance products that are subject to many FINRA rules. Broker-dealers must always have adequate controls in place to supervise the sales activities of their RRs. Generally issued with both a floor and a cap
Equity-indexed annuities
A buy limit order can be executed at
The limit price or lower
Real estate limited partnerships
Pass through both income and losses
An individual who primarily invests in securities that have a low dividend payout ratio, a high level of retained earnings, and a high price-to-earnings ratio would be described as a
Growth investor
When comparing asset allocation strategies, passive and active strategies can be characterized in which TWO ways?
I. Some active strategies seek to restore the volatility of the portfolio to its original level if it deviates due to securities’ price movements.
Passive strategies are based on the premise that markets are inefficient.
Some passive strategies seek to restore the volatility of the portfolio to its original level if it deviates due to securities’ price movements.
Active strategies are based on the premise that markets are inefficient.
Some passive strategies seek to restore the volatility of the portfolio to its original level if it deviates due to securities’ price movements.
Active strategies are based on the premise that markets are inefficient.
What is not true regarding open-end and closed-end investment companies
Both open and closed-end funds have fixed capitalizations.
For disclosure purposes on Form ADV, a felony (as compared to a misdemeanor) is defined by all of the following choices, EXCEPT:
An offense that’s punishable by a prison sentence of at least one year
An offense that’s punishable by a fine of at least $1,000
An offense that’s punishable by a fine of at least $500
A general court martial
An offense that’s punishable by a fine of at least $500
ABC Corporation has issued cumulative, convertible preferred stock. The provisions of the new issue provide that:
Dividends must be paid on the preferred stock before any dividends may be paid on the common stock
Omitted dividends will accumulate and must be paid before any dividends may be paid on the common stock
ABC Corporation may call the stock at its par value
The stock may be converted into common stock at any time by the preferred stockholder
Dividends must be paid on the preferred stock before any dividends may be paid on the common stock
Omitted dividends will accumulate and must be paid before any dividends may be paid on the common stock
The stock may be converted into common stock at any time by the preferred stockholder
According to the Uniform Prudent Investor Act, what information must be provided to a fiduciary in order to ensure a customer’s goals are met?
The time that an individual can begin a strategy and when it needs to end
According to modern views about investing, fiduciaries should be most concerned about which of the following when making investment decisions?
Developing an investment policy that accords with the client’s goals and risk tolerance
A customer owns shares of restricted stock and now intends to sell them. If the proper forms are filed with the SEC, the customer may sell these shares
Over a 90-day period
If an investment adviser is currently advising a mutual fund, how must it be registered?
As a federal covered adviser with the SEC
What is true concerning family limited partnerships?
They must have a legitimate business purpose in order to receive the full potential tax benefits
During periods of deflation, the FRB will likely
Purchase securities in the open market
An agent of a broker-dealer is speaking with a customer at her office in New York. The customer informs her that he’s moving to a state in which the broker-dealer is not registered. So that he can continue his relationship with the firm, he indicates his plans to use his mother’s address in New York. What’s the appropriate next step?
Both the broker-dealer and the agent must register in the new state to continue to do business with the customer.
An investor has purchased a corn futures contract at $1.20 per bushel and the contract delivery size is 5,000 bushels. If the price of corn has fallen to $1.10 per bushel, what’s the client’s profit or loss?
$500 unrealized loss
When calculating an advisory fee, all of the following choices are not permitted when calculating an advisory fee, EXCEPT 2% of
The average daily value of the account over the last three months
For a new issuance of securities, when is a prospectus required to be delivered to purchasers?
For primary and, potentially, secondary market transactions
Under the recordkeeping requirements of the Investment Advisers Act of 1940, an advertisement must be kept if it’s
Sent to more than one person
An IA receives rebates from a broker-dealer for placing client orders with the broker-dealer. Such rebates may be used by the IA for all the following purposes, EXCEPT
Attending an industry seminar out of state
Paying the salary of a new assistant to help in processing customer orders
Acquiring research reports from the broker-dealer
Acquiring software to run Monte Carlo simulations
Paying the salary of a new assistant to help in processing customer orders
A cash forward contract is different from a futures contract because the cash forward contract is:
A personal transaction between the buyer and the seller
Not for a standard amount of the commodity, but rather for a specific amount and quality of the cash commodity
Not negotiated by open outcry in the trading pits and not subject to the rules of a futures exchange
A personal transaction between the buyer and the seller
Not for a standard amount of the commodity, but rather for a specific amount and quality of the cash commodity
Not negotiated by open outcry in the trading pits and not subject to the rules of a futures exchange
The benefit of creating an irrevocable trust is that
Assets will be excluded from the donor’s estate
An agent who is registered in State A contacts an individual investor in State B. The investor agrees to open an account and buy a security through the agent. If the broker-dealer is registered in State B, but the agent is not, the agent MAY
Not sell the security
The following are characteristics of what kind of trust?
Assets are often excluded from the grantor’s estate
The grantor may not benefit from the assets in the trust after they have been placed in the trust
The trust avoids probate
Irrevocable trust
Which of the following choices is a custodian’s primary goal under the Uniform Prudent Investor Act?
Investing with an eye toward the risk/reward profile of the entire account
Under the Uniform Prudent Investor Act, which choice BEST explains the level of care a trustee must exercise when managing a trust?
The objectives of the trust as a whole should be taken into consideration when making investment decisions
The intrinsic value of any derivative (warrant, option, or right) is equal to the security’s…
In-the-money amount
A warrant is in-the-money when the market value of the underlying security is ____ the strike price.
Above
Ann has two children, three and five. She wants to begin investing money for their college educations and consults an investment adviser representative. What would NOT be an appropriate recommendation?
A variable life insurance policy
What are the elements of a trust?
A settlor’s intention to create the trust, a specific subject matter, a trustee, and a beneficiary
You are interviewing prospective clients, Jack and Jill. They tell you they have approximately $10,000 to invest and would like to earn the type of returns that equity investments exhibit over the long term. However, they do not want their portfolio to be as volatile as the stock market. What would you tell them?
They cannot expect to earn the type of returns that equities produce over the long term without assuming a corresponding amount of risk
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63.
The trade was executed at
After the order was activated by the round-lot sale of 18.25, the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and would be the execution price.
All of the following are true about a zero-coupon corporate bond, EXCEPT:
It has no reinvestment risk
The bondholder receives all interest at maturity
The bondholder pays tax each year on the accretion
It would be a suitable investment for a customer who needs cash flow
It would be a suitable investment for a customer who needs cash flow
Who provides the ultimate credit of deferred compensation plan?
The employer
Schedule A of Form ADV is filed
By investment advisers that are applying for their initial registration
A U.S. manufacturer imports steel from Japan. The company manufactures the steel into parts and exports them for sale into Japan. The yen has recently devalued. All of the following items will decrease
Revenue, Operating profit margin, and Cost of goods sold
If an investment adviser makes material changes to its brochure, when does the adviser need to provide a summary of the changes to its clients?
At the adviser’s year-end registration renewal
Interest rates had been very high. During the past three years, rates have decreased dramatically. The present yield curve would MOST likely be:
Ascending
Positive
Inverted
Negative
Ascending
Positive
Positive, ascending, or upward-sloping yield curve
Normal yield curve
Under NASAA’s Statement of Policy on Unethical Business Practices of Investment Advisers, all of the following activities are considered violations, EXCEPT
Exercising discretion for 10 business days based on oral instructions
Charging a client an excessively high advisory fee
Following a conservative, risk-free approach in all client accounts
Indicating that the Administrator approves of a firm’s activities
Exercising discretion for 10 business days based on oral instructions
The acquisition cost of an asset less depreciation or amortization
Book value of an asset
What is the name of the process by which an investor calculates the sum of the present values of projected cash flows to determine the fair market value of an investment?
Discounted cash flows
An investor is long a 3x Bearish Inverse Leveraged Nasdaq 100 Index ETF. If the index declines by 10%, the value of the ETF will
Increase by 30%
Under the Uniform Securities Act, in the absence of fraud, when must action be taken for recovery on a transaction made in violation of a state registration provision?
Within three years of occurrence and two years of discovery, whichever comes first
An IA would like to change the method it uses to calculate the fees it charges for certain clients. The new fee would be performance-based and would be calculated over a specified period. According to the NASAA Model Rule, what is TRUE?
This type of fee arrangement is permitted for qualified clients
Which investment company’s shares are transacted at the current bid or asking price on an SEC-registered securities market?
A closed-end management company
What’s the unified tax credit for estate and gift taxes?
$12.92 million
What information may NOT be part of an investment adviser’s contract with its clients?
A hedge clause limiting adviser liability except in cases of gross negligence
Which of the following approaches to portfolio management is most closely associated with market timing?
Tactical asset allocation
Which of the following events results in statutory disqualification for an individual who’s attempting to become registered as an agent?
A revocation of an insurance license five years ago
All of the following statements are TRUE of covered call option writing, EXCEPT:
The writer can increase the overall yield on his portfolio
It is considered a conservative option strategy
The premium received guarantees the writer cannot have a loss on the underlying security
The writer will have a short-term capital gain if the option expires unexercised
The premium received guarantees the writer cannot have a loss on the underlying security
An advisory client is pessimistic and believes that the economy is about to go into a recession. He instructs his adviser to sell his holdings in housing and technology stocks and purchase utilities and consumer staples. This strategy is known as
Sector rotation
How long is an investment adviser (IA) required to keep the files of a client with whom it no longer does business?
Not less than five years from the end of the fiscal year in which the IA made the last entry
Imports into the United States have been falling dramatically, while exports have been rising. A major cause of this would be
The dollar declining relative to our trading partners’ currencies
Under Rule 147, securities sold within the borders of one state are exempt from
Federal registration
What’s the best way to hedge a long stock position?
Buy a put option
Shares of which type of investment company are redeemable?
An open-end management company
An agent can split commissions with
Another agent from her broker-dealer who has not provided services to the customer
Under the Uniform Securities Act, what persons is a broker-dealer in State B?
A broker-dealer that is registered in State A, where its only office is located, and has only three retail clients who are residents of State B
What are the precursors to inflation?
Demand pull
Maintaining a loose monetary policy
Low unemployment/High employment
Stock legends on restricted stocks typically require the owner to hold the shares for a minimum of
Six months
A client is an executive of a company that provides a 401(k) plan. He’s maximizing his 401(k) plan contributions, but wants to add a real estate investment to his portfolio. He calls his attorney about purchasing a second home that can be used for personal vacation and as a rental. He wants to use proceeds from his 401(k) plan to make the purchase. The client
May set up an LLC to buy the real estate
What is true regarding the use of futures contracts for hedging purposes?
A short hedge would be used to protect against falling prices
A long hedge would be used to protect against rising prices
Hedging is used by the producers or consumers of the underlying commodity
Which factor will cause variable annuity payments (contributions) to change from one client to another?
Profession
High-earning individuals can contribute more than lower earners. During the annuitization phase, the payout from an annuity is driven by the age and gender of the annuity owner
Which bonds would have the greatest sensitivity to changes in interest rates?
Bonds with a long duration
Bonds with a short duration
Bonds with a high coupon
Bonds with a low coupon
Bonds with a long duration
Bonds with a low coupon
The Uniform Securities Act considers which of the following to be an investment adviser representative (IAR)?
A CPA who gives occasional advice in connection with his tax service, but charges no additional fees
A clerical employee of an advisory firm that has a place of business in the state
A CPA with an office in a state who charges a fee for advice that is more than just incidental to his profession
An officer or director of a federal covered adviser who has clients in a state, but has no office in that state
A CPA with an office in a state who charges a fee for advice that is more than just incidental to his profession
A business with only one owner, who is responsible for all of the liabilities of the business and management decisions, is called a(n
Sole proprietorship
What type of insurance is referred to as ordinary, is permanent, offers fixed premiums, and also fixed benefits?
Whole life
In determining the standard deviation of a security, an analyst would look at all of the following information, EXCEPT the
Mean or average return of the security
One-year price target of the security
Level of dispersion of prices
Period of time to be analyzed
One-year price target of the security
If a bond has a long-term maturity and long duration, how will its price move if interest rates are falling?
The bond’s price will increase more than other bonds
If a corporation were to issue bonds with warrants attached, all the following characteristics would be a benefit to the corporation
The marketability of the bonds would improve
The issuance of warrants would not dilute shareholder ownership
The bonds could be issued with a lower interest rate
What is an example of a prohibited advisory fee?
Charging a fee of 5% on the highest value of the account each month
Special purpose acquisition companies (SPACs) are suitable for which type of investor?
A risk tolerant investor who is searching for large gains
According to dividend discount model, if a stock’s current market value is less than the stock’s present value, an investor should
Consider buying the investment
What does a stock’s beta measure?
A stock price’s covariance with the stock market
What communication must be filed with the Administrator?
A final prospectus for a security that’s registered using qualification
Which of the following statements is TRUE regarding the state securities Administrator?
The Administrator may issue an injunction against a registered agent of a broker-dealer
The Administrator may issue a cease-and-desist order to an agent of a broker-dealer without a hearing
For due cause, the Administrator, may enjoin, or legally block, an agent’s ability to conduct business in a particular state
The Administrator may arrest any registered employee of a broker-dealer
The Administrator may issue a cease-and-desist order to an agent of a broker-dealer without a hearing
Currently, the price of gold is increasing as the price of Treasury bills is declining. These two assets are considered
Negatively correlated
An investor purchases a bond that was quoted in terms of its yield-to-call. The best outcome for the investor is
Holding the bond until it matures
The members of the North American Securities Administrators Association (NASAA) include Administrators from all of the following jurisdictions, EXCEPT
The British Virgin Islands
Who are the members of the North American Securities Administrators Association (NASAA)?
Administrators from all 50 U.S. states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, the Canadian Provinces (states), and Mexico
What type of employer may establish a solo 401(k) plan?
A business with no employees
According to NASAA provisions, an investment adviser that maintains custody of a client’s funds must
Be subject to a surprise audit by an independent accountant
When is an investment adviser NOT required to provide a balance sheet to its clients?
When the adviser has discretionary control over a client’s funds or securities
When the adviser requires the prepayment of a $150 initial advisory fee
When the adviser requires the prepayment of a fee that is greater than $500, six months or more in advance of providing service
When the adviser has taken custody of the client’s funds or securities
When the adviser requires the prepayment of a $150 initial advisory fee
