Exam 5 Flashcards
Investment advisory contracts must conform with all of the following requirements except which?
A. The contract must be in writing
B. The fee cannot be based upon capital gains
C. The contract cannot provide for assignments to a third-party without customer approval
D. The fee cannot be based upon the value of assets under management
The correct answer is D
It is standard practice for advisory contracts to be set fee based upon an annual percentage of all assets under management. Such fees cannot be based on capital gains in the account, the contract must be in writing, and the contract cannot be assigned it to a third-party without customer approval
For bonds trading at a discount, rank the yield measures from lowest to highest Yield to maturity Nominal yield Current yield Yield to call
When a bond is trading at a discount the stated or nominal-year-old will be the lowest. The current yield will be higher since it is based on the discounted at market price not par value. The yield to maturity will be the next highest, since it includes the portion of the discount earned annually as part of the annual return in addition to the interest received. Yield to call will be the highest
Which of the following statements concerning taxation of 401(k) plans are true?
A. Distributions are fully taxable in the year they are received
B. Investment earnings are taxable to employees annually
C. Employee salary deferrals avoid income taxed in the year contributed
D. Employer contributions are taxable to employees in the year contributed
The correct answers are a and C
All of the following securities are exempt from registration under the uniform securities act except A. Foreign government bonds B. Municipal bonds C. Railroad common stock D. Canadian common stock
The correct answer is D
Foreign government securities are exempt foreign stocks however are nonexempt and must be registered with the state
An advisor the charges a performance fee to clients must disclose that such a fee arrangement:
A. Will give the advisor increased compensation based on realized and unrealized appreciation of the customers securities
B. Better aligns the customers interests with those of the investment advisor
C. Is only permitted if the customer signs a liability waiver in the advisory contract
D. Negates the fiduciary duty that the advisor has to the customer
The correct answer is a
The investment advisor act of 1940 allows performance fees to be charged if a customer is wealthy this means over $1 million of assets with the firm or $2 million of net worth. However such performance fees can give the advisor the incentive to take on higher levels of risk in order to increase portfolio return
Under NASAA rules, a customer must sign and return the margin agreement:
A. Promptly after the initial transaction in the account
B. Prior to settlement of the first trade in the account
C. Within one day of the first transaction in the account
D. Within three days of the first transaction in the account
The correct answer is a
NAS AAA wording states that the signed margin agreement must be obtained promptly after the first transaction in the account. In contrast Finrock requires that the margin agreement be signed and returned prior to settlement of the first transaction in the account. Since this is a NASAA question the answer is their rule
All of the following are excluded from the definition of an investment advisor under the investment advisors act of 1940 except which?
Teacher, engineer, lawyer, actuaries
The correct answer is actuaries
Excluded from the definition of an investment advisor under the investment advisor act of 1940 our lawyers, accountants, engineers and teachers, whose performance of advisory services is incidental to their regular professional practice, and who do not charge separately for advice
Under the uniform securities act, copies of the order memoranda maintained by investment advisors must contain all of the following except which?
A. Person connected with the investment advisor who recommended the transaction to the client
B. Date of order entry
C. Time of order execution
D. Person who placed the order
Correct answer is C
Order ticket information required for investment advisors is different than that required for broker-dealers. The investment advisor rights in order and sends it to a broker dealer or bank for execution. The investment advisor must keep a record of the order as it was sent, the investment advisor does not keep the record of the actual execution of the order, this is the responsibility of the executing broker-dealer
A registered investment advisor plans on offering options strategies as part of his services. For this added investment strategy he will charge 6/10 of a percent of assets monthly. This information is added to the registered investment advisor’s disclosure statement and he tells all of his clients of the fees orally seminars. Each of his clients signs an agreement regarding signs an agreement regarding the options and strategies and fees. Which statement is true?
A. The actions taken by the registered investment advisor are permitted because the fees charged to clients do not exceed 10% annually
B. The actions taken by the registered investment advisor are prohibited because options strategies are prohibited in managed accounts in less they conform to ERISA standards
C. THE ACTIONS TAKEN BY THE REGISTERED INVESTMENT ADVISOR ARE PERMITTED BECAUSE CLIENTS GOT FULL DISCLOSURE OF ALL STRATEGIES AND FEES AND AGREED TO SUCH IN WRITING
The correct answer is C
Which of the following can accompany the delivery of a prospectus for a new issue offering to a customer?
An advertisement for that issue, a discount coupon for that issue, a tombstone for that issue
The correct answer is only a tombstone for that issue
Customer that buys a nonexempt new issue must be delivered a prospectus at or prior to the time of:
A. Being solicited to purchase the new issue
B. Entering into the contract to purchase the new issue
C. Completion of the purchase of the new issue
D. Settlement of the purchase of the new issue
The correct answer is B
A person who renders investment advice relating solely to municipal securities is:
A. Exempted from the definition of an investment advisor, and is not required to register under the act
B. Defined as a broker dealer and must register under the act
C. Defined as an agent and is required to register under the act
D. Defined as an investment advisor and must register under the act
The correct answer is D
A person who gives investment vice relating solely to municipal securities is not exempted from registering as an investment advisor understate law. Please note however that a person who gives advice solely about US government guaranteed securities is excluded from the definition of an investment advisor under the investment advisor act of 1940. This is another type of federal covered advisor for which there is no state registration
If a state registered investment advisor except $500 or more of advisory fees, six months or more in advance of rendering services:
A. It is considered to have discretion over client accounts
B. It is considered to have taken custody of client funds
C. It must give the customer the right to full refund within 30 days of contract signing
D. It has committed a fraudulent and unethical act
Correct answer is B
