Final Exam 1 Flashcards
A client is interested in trading actively, purchasing on margin, and having broad exposure to the U.S. equity market. Which of the following investments is the LEAST suitable? QID: 1506687Mark For Review A An S&P 500 Index mutual fund B An S&P 500 Index ETF C A DJIA Index ETF D A closed-end fund
An S&P 500 Index mutual fund
Open-end investment company (mutual fund) shares are not appropriate for short-term trading, do not trade on an exchange, and cannot be purchased on margin. On the other hand, most ETFs and closed-end fund shares trade on an exchange and allow the use of margin and short selling.
Which of the following statements about barbell strategies is NOT TRUE?
QID: 1506689Mark For Review
A
The strategy consists of purchasing bonds with both short and long maturities, but no intermediate-term securities are included
B
The short-term bonds will provide for quick cash to purchase new bonds upon maturity
C
A barbell strategy is used to take advantage of potential interest-rate changes
D
Gains from the short-term maturities will offset losses in the long-term maturities
Gains from the short-term maturities will offset losses in the long-term maturities
A barbell strategy consists of buying short-term and long-term bonds, but not intermediate-term bonds. The purchase of long-term bonds allows an investor to capture higher long-term interest rates. The short-term bond provides the opportunity to invest elsewhere if the bond market takes a downturn. There is no guarantee that any money made on the short end of the strategy will offset losses that could occur on the long end of the barbell.
Registration by coordination would most likely be used to register what type of offering? QID: 1506943Mark For Review A A new issue of mutual fund shares B An initial public offering C A new issue of shares listed on Nasdaq D An intrastate offering
An initial public offering
An investment adviser must record the personal securities transactions that are effected by its officers, directors, partners, and employees by no later than:
QID: 1506683Mark For Review
A
The day of the trade
B
Monthly
C
30 days after the end of the calendar quarter
D
Within 90 days of the adviser’s fiscal year
30 days after the end of the calendar quarter
In which TWO of the following ways do exchange-traded funds (ETFs) differ from mutual funds?
ETF share prices may change throughout the trading day
ETF share prices are determined at the close of the market each day
ETF shares may be sold short
When ETF shares are purchased, buyers pay a sales charge
QID: 1507535Mark For Review
A
I and II
B
I and III
C
II and III
D
II and IV
I and III
Under the Uniform Securities Act, an Administrator who requires the posting of a surety bond MAY: Accept cash Accept securities Use discretion as to whether the type of securities and the amount of the deposit are appropriate Disallow the deposit of cash or securities instead of a bond QID: 1506680Mark For Review A I only B I, II, and III only C I, II, and IV only D I, II, III, and IV
I, II, and III only
The state Administrator may accept a deposit of cash or securities in lieu of a surety bond. The Administrator may determine the type of securities acceptable for deposit but may not altogether disallow deposits of securities in lieu of a bond.
Bob is a business manager for professional athletes. As manager, he negotiates their contracts, pays their bills, and provides them with tax advice. When trying to minimize their tax liabilities, Bob will periodically provide advice relating to securities. He considers this advice to be incidental to the business management service he provides. According to the Investment Advisers Act, would Bob be considered an investment adviser?
QID: 1507221Mark For Review
A
No, the Act specifically excludes persons who provide financial services to athletes and entertainers
B
No, since the investment advice is incidental to the business management service provided
C
Yes, if Bob receives special compensation for the investment advice that he gives his clients
D
Yes, SEC Release 1092 states that the Advisers Act applies to people who provide investment advice to athletes and entertainers
Yes, SEC Release 1092 states that the Advisers Act applies to people who provide investment advice to athletes and entertainers
SEC Release 1092 states that sports and entertainment representatives who provide investment advice to their clients are investment advisers and subject to the Investment Advisers Act. The fact that the question refers to Bob as a business manager rather than a sports representative is not relevant.
Advice that is incidental to a professional’s services is limited to lawyers, accountants, teachers, and engineers. Entertainment and sports representatives who provide securities-related advice for compensation may not claim an exclusion from the definition of investment adviser.
If an adviser wanted to determine a company's ability to pay debts that would be maturing in one year, the adviser would be most interested in the: QID: 1507198Mark For Review A Current ratio B Acid-test ratio C Inventory turnover D Debt-to-equity ratio
Current ratio
The current ratio is a comparison of current assets to current liabilities for a one-year period. The acid-test ratio excludes inventories and usually is for a one- to three-month period.
When must the Administrator be notified if an agent's employment is terminated by his broker-dealer? QID: 1507210Mark For Review A 10 days prior to the termination B Within 10 days of the termination C Within 60 days of the termination D Promptly
Promptly
Upon termination, both the agent and the broker-dealer must promptly notify the Administrator. If the agent is subsequently employed by another broker-dealer, both the new employer and the agent must also promptly notify the Administrator. All registered persons are considered in violation if they fail to report employment termination to the Administrator within 30 days (which is what the Uniform Securities Act considers prompt notification).
An agent of a broker-dealer publishes a Web page that discusses the benefits of dollar cost averaging and why investors should invest with long-term goals in mind. If a customer in a state where the agent is not registered reads the Web site, which of the following legends must be on the Web site in order to take advantage of the safe harbor rule and not register in the state?
The agent will only conduct business in the state if registered or exempted.
Follow-ups will be handled only by agents who are registered or exempt.
Internet advertising is exempt from state regulation and subject to SEC review.
The rule number of the safe harbor being used is disclosed.
QID: 1506696Mark For Review
A
I and II only
B
I, II, and IV only
C
III only
D
IV only
I and II only
According to NASAA’s interpretive order concerning broker-dealers, investment advisers, broker-dealer agents, and investment adviser representatives, for the general dissemination of information on products and services, when advertising on the Internet an agent must include a legend in which it is clearly stated that (1) A broker-dealer agent or investment adviser representative in question may transact business in the state only if first registered, excluded, or exempted from state registration requirements. (2) Follow-up, or individualized responses to persons in this state by a broker-dealer agent or investment adviser representative that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with state registration requirements, or an applicable exemption or exclusion. The SEC is not the only entity that regulates Internet advertising, and there is no requirement to disclose rule numbers.
Kyle and Christina have been friends since high school. Christina is an agent of a broker-dealer, while Kyle is a wealthy musician. Together they open a joint brokerage account. They each deposit $30,000 and agree to split any profits equally. What are the regulations for this arrangement?
QID: 1507539Mark For Review
A
It is acceptable as long as Kyle agrees to it in writing and releases Christina from all liability
B
It is acceptable if Kyle, Christina, and Christina’s broker-dealer agree to it in writing
C
It is acceptable if Kyle and Christina’s broker-dealer agree to it in writing; however, since Christina is an agent, she does not need to agree in writing
D
This arrangement is never acceptable
It is acceptable if Kyle, Christina, and Christina’s broker-dealer agree to it in writing
In order to share in a customer’s account, an agent must obtain permission from her employer and the customer. Since the agent will be investing, she is also considered a customer and will also be required to give permission. Additionally, profits and losses must be shared proportionately, based on the amounts both parties contribute to the account.
The following persons would be allowed to trade the account of an incapacitated individual, EXCEPT: QID: 1506935Mark For Review A A joint tenant B A court-appointed conservator C A relative named in a living will D The holder of a durable power of attorney
A relative named in a living will
A living will is related to medical decisions that may need to be made in the event of an individual’s incapacity. All the other choices would allow the individual to trade in the account of an incapacitated person, providing proper documentation is provided. A durable power of attorney gives someone the authority to make financial and healthcare decisions on another’s behalf should that person become incapacitated.
Who is permitted to participate in a tax-sheltered annuity established under Internal Revenue Code Section 403(b)?
QID: 1507227Mark For Review
A
An employee of a school district
B
Only self-employed individuals
C
Any employee of a corporation who meets the eligibility standards
D
Any employee who participates in a nonqualified retirement plan
An employee of a school district
Susan is a high-ranking official in the Comptroller’s Office of Zanzibar Securities. Her title is Executive Vice President. Under the Uniform Securities Act, Susan is:
QID: 1506682Mark For Review
A
An agent since all officers of a securities firm are considered agents
B
Not considered an agent since she is not involved in sales or trading
C
Considered an agent but would not need to pass a qualifying exam
D
Not an agent but could accept unsolicited orders
Not considered an agent since she is not involved in sales or trading
According to the Investment Advisers Act of 1940, when must an access person submit a transaction report?
QID: 1507548Mark For Review
A
No later than 10 days after the end of the calendar quarter in which the transaction was effected
B
Promptly
C
No later than 30 days after the end of each calendar quarter
D
Within 90 days of the end of the adviser’s fiscal year
No later than 30 days after the end of each calendar quarter
The Investment Advisers Act of 1940 requires an access person of an adviser to report his personal securities transactions by no later than 30 days after the end of each calendar quarter. On the other hand, the Uniform Securities Act requires an adviser to maintain a record of all personal securities transactions by no later than 10 days after the end of the calendar quarter.
If an agent participates in a joint account with a client, the agent may: QID: 1506688Mark For Review A Withdraw sale proceeds B Follow the client's instructions only C Share disproportionately in any gains or losses D Initiate transactions in the account
Initiate transactions in the account
If an agent has a joint account with a client, she may share in the gains and losses proportionately, and initiate transactions. However, any distribution will be made payable to all parties in a joint account unless the joint owners consent.
A corporation has current assets of $150,000 and current liabilities of $75,000. The corporation uses cash to pay $35,000 in current liabilities. Which of the following statements is TRUE? QID: 1507230Mark For Review A The current ratio increases B Working capital increases C Bond interest coverage probably increases D Stockholders' equity increases
The current ratio increases
The disadvantages of hedge funds for investors include all of the following choices, EXCEPT: QID: 1506953Mark For Review A Lack of liquidity B Lack of transparency C Sophisticated investment strategies D Complicated tax structures
Sophisticated investment strategies
Some of the disadvantages of hedge funds are illiquidity, less transparency than other investments, and more complicated tax structures. An advantage of hedge funds for most investors is that they engage in sophisticated investment strategies.
Under the Uniform Securities Act, which of the following sales is considered a non-issuer transaction?
QID: 1506932Mark For Review
A
The sale of an outstanding security on the New York Stock Exchange
B
A primary offering being sold by a broker-dealer
C
The sale of a security being executed by an agent of the issuer
D
The sale of a new issue through a private placement
The sale of an outstanding security on the New York Stock Exchange
A non-issuer transaction (secondary market trade) involves any purchase or sale of a security whereby the issuer does not directly or indirectly derive a benefit. A stock trade that occurs on the New York Stock Exchange is an example of a non-issuer transaction. All of the other answer choices represent issuer transactions (i.e., the proceeds of the offering are for the issuer’s benefit).
When considering the tax consequences of trading securities within a trust, the trustee should examine:
QID: 1507554Mark For Review
A
Other taxable income that is generated by the trust
B
The taxable assets of the trustee
C
The taxable assets of the grantor
D
The taxable income of the beneficiary of the trust
Other taxable income that is generated by the trust
A trust is managed for the benefit of the beneficiary; however, any income that is generated by the trust is taxable to the trust. For that reason, an examination of the tax consequences of a trust must focus on the income derived by the trust, not the income derived by the trustee or beneficiary. Although the income that beneficiaries receive from the trust and/or from other assets may be taxable, it is irrelevant for purposes of determining the tax consequence of the trust itself.
An adviser is constructing a bond portfolio for a client whose goals are stable income and return of principal. The adviser determines that the appropriate benchmark to compare this portfolio’s performance is the Wheyman Intermediate-term Government Bond Index. Which of the following statements is NOT TRUE regarding this decision?
QID: 1507532Mark For Review
A
Choosing this index implies that mortgage-backed securities are not a large part of the portfolio.
B
This portfolio should have low levels of risk to match the benchmark.
C
The client’s goals of stable income and return of principal are not guaranteed by the choice of this benchmark.
D
Any returns of this portfolio that exceed the performance of the benchmark are measured by the beta of the portfolio.
Any returns of this portfolio that exceed the performance of the benchmark are measured by the beta of the portfolio.
When constructing a portfolio, an adviser typically starts by considering the securities in the benchmark and will then determine what additional securities may add value to the portfolio. The benchmark indicates not only the types of securities that should be included in the portfolio, but also the types that should be ignored. In this example, the choice of a government bond index as the benchmark for the client’s portfolio is indicative of the fact that the portfolio should not include a large percentage of securities that have a high degree of risk. Since the benchmark is an intermediate-term government bond index, it is expected that it will offer a low return that is in line with the low level of risk that is typically associated with government bonds. Since a benchmark is simply a measuring stick for comparison purposes, choosing this benchmark does not guarantee that the goals will be met and it does not protect against bad investment decisions or market fluctuation. The beta of a portfolio is actually used to compare its volatility to the volatility of the market; it does not measure excess returns above a benchmark (which is measured by alpha). Another important point is that beta is not a measure to be used for fixed-income portfolios.
