Final Exams Flashcards
Is an S corp or general partnership required to file articles of corporation?
A general partnership does not but an S corp must incorporate with the state
Does an S corp have flow through or pass through taxation?
They can choose.
Are excessively large commissions allowed?
Only if the order was unsolicited
How long is an agents registration in effect under the USA?
Until December 31 of the year granted
Does an s corp have limited liability?
Yes
What’s the best indicator of a successful mutual fund?
Tenure of the manager
Do a BD agents trades need to be approved?
Not necessarily beforehand but supervisor or principal must approve by EOD
What happens when assets remain the same but stockholders equity decreases
Total liabilities increase
What measure of risk does modern portfolio theory use?
Standard deviation
Fundamental analysis vs technical analysis m
Fundamental: Analyzing company’s financial statements
Technical: uses pricing trends and patterns
Are UGMAs UTMAs or 529s considered asset of the minor?
Yes for UTMAs and UGMAs
529s are owned by the donor
What would an administrator do if a BD was selling unregistered no exempt securities in non exempt transactions?
Require the BD to offer letters of rescission unless it was fraud
How long must provide prospectus from new issue? What about follow on?
25 from IPO
40 for follow on
Which calculation removes distortions caused by deposit and withdrawal of capital over time?
Time weighted return
Used to compare manager performance
are sell limit orders placed above or below the current market price? What about sell stop limits and sell stops?
Sell limit: Above; Would be executed only in a rising market
Sell stop limit: below; activated when trade at or below stop price but executed only if market subsequently goes up
Sell stop: at or below stop price then becomes market order
Are closed end funds load funds? What about open end?
Closed: Only if they don’t have underwriting fees, commissions or other offering expenses
Open: only if no front end, contingent deferred sales charge, or 12b-1 that exceeds 0.25%
Who does a hedge fund advisor register with
State is <$150M in assets
What is a LEAP?
A type of option contact with an expiration date longer than 9 months
Do investment advisory contracts need to be written?
Under the USA, yes.
Under the IA Act of 1940, no.
What happens to the spread between YTM and YTC when the price of a discount bond falls?
The spread increases and YTC rises
Both YTM and YTC rise, but short term yields always move more than long term which is why YTC rises more
A measure of non systematic risk
Alpha
Money market securities
Debt instruments with less than one year until maturity
Eg T bills, tax anticipation notes
Leading economic indicators
Average manufacturing workweek
Initial unemployment claims
New orders for consumer goods
Vendor performance
Plan and equipment orders
Building permits
Interest rate spreads
Stock prices
Money supply (M2)
Index of consumer expectations
Money rate risk
Interest rate risk
What does the writer of an index option do when it’s exercised?
Deposit cash equal to the difference between the strike price and value of the index
How long must BDs and IAs maintain records under the USA?
3 for BDs
5 for IAs
When can IAs accept discretionary orders? What about BDs?
IAs: For 10 days before receiving signed POA
BDs: not until signed POA
Do hedge funds register?
No because they qualify for regulation D (private investors) so no prospectus required
What is a clients loss if margin account falls 10% with a 50% exposure?
20%
Major benefit of master limited partnership
Exchange listing
Note: can only be formed by companies in real estate and natural resources (most are oil and gas)
When is a private placement considered an exempt transaction under the USA?
When soliciting to fewer than 10 retail investors in 12 months
Structured products
Securities created by financial institutions that customize returns and risks to fit the needs of specific investors
Credit risk because they’re unsecured bonds
Liquidity risk because not exchange traded
Least risk is regulatory
Under the securities act of 1933, a pooled investment fund is considered a federal covered security when it:
Registers with the SEC under the IC act of 1940
SPAC
Blank check company
Set up to buy other companies as a way to list on exchange
Dollar weighted return is referred to as
IRR
Represents the discount rate that will make PV of future cash flows equal the current market price
What form is filed annually with SEC to continue an IAs registration
Annual updating amendment
What makes an American style equity option a derivative security?
The fact that it’s value is based on the value of another asset
Note: it can only be exercised at any time prior to expiration whereas European can only be exercised on the last trading day prior to expiration
When do options expire
Third Friday of the expiration month
Working capital
Current assets - current liabilities
When can an agent borrow or lend to client
Client is Immediate family
Clint is financial institution
Client has a personal or business relationship with the agent it’s sue the brokerage relationship
If the client is another registered agent, they just be with the same BD
Who uses registration by coordination?
An IPO most commonly
Who manages the assets of a testamentary trust?
The trustee.
Ie not the donor because they’re dead by the time it’s a trust
What is the spread of a market?
Difference between highest bid and lowest ask price
Dividend discount model
Way to estimate share price by dividing future dividing by a discount, typically the company’s cost of equity
Ie
Dividend / discount rate
Same as PV of a perpetuity
Where is restricted stock registered?
No where. It’s covered under reg D (private placement)
Does an accountant have to register if they refer clients to an IAR and receive a referral fee for it?
In some states yes but under IA Act, no
May be considered a solicitor
In the dividend discount model, what happens to the discount rate and stock price when interest rates rise?
Discount rate rises
Stock price estimated falls
Can the administrator issue a cease and desist without a hearing?
Yes
Cannot issue an injunction or enjoin aka legally block someone from conducting business in the state
Do ads have to be filed with admin?
Not for exempt securities or exempt transactions (muni bonds, treasuries, registered investment companies)
If material changes are made to a brochure, when must a summary of changes be provided to clients?
At the year end registration renewal
ADV must be updated promptly within 30 days for material changes, but the summary is at renewal
How many people can an ad be sent to before it’s required to be kept?
<10
UIT
Type of investment company
Investors money is pooled and invested in securities
It is not a derivative
LEAP
Long term equity anticipation securities
Long term call or put options
Is a CMO a derivative?
Yes
According to Reg T, what happens if a client fails to pay for securities by the 5th biz day after a trade?
Account will be frozen for 90 days unless FINRA grants an extension
During frozen period, trading can occur but must be paid in advance
How is a general partnership formed?
By an agreement among partners
No specific state filing necessary
SWAP
derivative
two parties agree to exchange two different cash flows.
One of the cash flows is fixed and the other will vary based on interest rates, foreign currency prices, or even other securities (e.g., stocks or bonds).
Similar to forward contracts, swaps are typically traded over-the-counter (not on an exchange).
If an investment adviser is currently advising a mutual fund, how must it be registered?
As a federal covered advisor with the SEC because it’s advising an investment company
Registration by qualification
used for smaller issuers that are only selling securities to residents of one state (i.e., an intrastate offering).
When are performance based fees allowed under NASAA and IA Act of 1940?
Generally prohibited.
Exception:
qualified clients that have at least $1.1 million under management OR a net worth >$2.2 million.
Clients who are not U.S. residents
certain employees of the adviser
Interest rates had been very high. During the past three years, rates have decreased dramatically. The present yield curve would MOST likely be:
Ascending and positive due to rates declining over the past 3 years
When access person must submit personal security holdings
Within 10 days of becoming an access person and every 12 months thereafter
Consent to service of process
Used for receiving and processing noncriminal complaints
Required when registrants file for state registration
Best measure of managers performance
Time weighted return because it eliminates cash flows into the portfolio during the period
When is a record of security transactions required for an IA
Within 10 days of the quarter excluding direct obligations of the US government
Who maintains control over a charitable trusty?
The grantor
Can make decisions regarding how the money is spent while still getting a tax break
Bankers acceptance
Used to facilitate imports and exports
No FDIC insurance
Are solicitors for federal covered advisors required to register?
No. Advisor must be registered but not the solicitor
Who uses a K1?
LLCs
Limited partners
s corps
When is NAV of an ETF calculated?
Close of each trading day
An investor who maintains a large portfolio of debt securities anticipates a small change in interest rates. The investor would like to measure the effect that this change would have on the value of her portfolio. Which would BEST provide her with this information?
Duration as it is designed to compare the effect of small changes in interest rates on the value of securities with different coupons, maturities, and credit quality.
Layering
Blending of illicit money with legitimate money
The pricing of preferred stock will most closely follow the pricing of:
T bonds
ERAs
are advisers to private funds with less than $150 million in assets under management and advisers to venture capital funds.
What price are ETF shares bought and sold at?
The best available price on the exchange
NOT
NAV + sales charge, that’s what mutual funds are sold at
Can IAR take a loan from sister who is a client?
No
Who does IA register with if it has an investment company as a client?
SEC
What type of securities is typically sold with a markup?
Fixed income aka bonds
Broker usually charges a markup rather than commission
When can an omitting or summary prospectus be used?
With sales of investment company securities and variable contracts
What is the tax implication When a mutual fund distributes a capital gain?
It’s capital gains based on the fund’s holding period, NOT the shareholder’s holding period
ADV h e nr and w
ADV-E submitted to SEC if adviser has custody of client funds and securities. It is filed by an independent public accountant who has audited the adviser’s records.
ADV-H seeks an exemption for a temporary or continuing hardship.
ADV-NR is filed by a nonresident general partner or nonresident managing agent of a U.S. RIA.
ADV-W seeking a partial or full withdrawal from registration.
Tax form for trust
1041
a private equity fund manager is NOT required to register as an investment adviser if the fund exclusively accepts investments from:
Qualified clients:
are individuals with either a net worth of $2.2M+, or AUM of $1.1M+.
This is the same definition that’s used in the rule for charging performance-based fees.
agency cross trade
when an investment adviser acts as a broker for its client and for another person on the other side of the transaction.
not permitted if the investment adviser recommends the trade to both the buyer and the seller—one side must be unsolicited.
adviser must:
Provide a written disclosure of any potential conflicts
Obtain written, revocable client consent
Send the client a written confirmation which provides the date and details of the trade
At least annually, send each client a summary of the adviser’s agency cross activity
Frequency of preferred stock dividend and convertible bond interest
Preferred stock pays a dividend to shareholders on a quarterly basis. A convertible bond pays interest on a semiannual basis.
Form CRS
required to be documented when a new brokerage account is opened
provides information about the nature of a retail investor’s relationship with her broker-dealer or investment adviser in a simple and easy-to-understand format
Finders
individuals who attempt to find buyers for privately held firms that are selling securities in a private placement. Finders often work with larger investment banks to sell private placements.
Fulcrum fee
An advisory fee that increases and decreases proportionately with the investment performance of a client’s account, in relation to the investment record of an appropriate index of securities.
Supervised person
used in SEC regulations related to investment advisers (IAs) and includes the IA’s partners, officers, directors, and employees who provide investment advice.
Is a person effecting commodities transactions an agent under USA?
No because commodities are not securities
Certificate of incumbency vs DPOA
certificate of incumbency is a court-issued document that provides the legal authority of a court-appointed guardian to act on behalf of another person. The certificate serves as evidence that the listed person is authorized to act as a fiduciary for another person (the account holder) or any unincorporated entity (i.e., business, club, association, or organization).
durable power of attorney authorizes a person to manage the affairs of an individual who is in good health and remains in force if the individual is declared incompetent or becomes incapacitated.
Fund of funds - liquidity and cost compared to MF
Illiquid
Higher expenses
Flow through
Flows through the business to owners eg partnership
Pass through is taxed at business then passed to owners
Bypass trust
Bypass Trust (or Credit Shelter Trust) is a type of irrevocable trust and is most commonly used to pass assets from parents to children at the time of the second parent’s death. The investment focus must be on the beneficiaries, not the grantor.
When should a federal covered adviser (FCA) file an amendment to its registration?
Within 90 days after fiscal year end
iThis amendment to the ADV reaffirms eligibility information and updates the responses to any other items for which the information is no longer accurate
statute of limitations for criminal violations of the USA
5 years
