From the book 66 part 1 unit 4 Flashcards
weak vs strong vs semi strong
weak-fundamental anal and insider
The weak form of the EMH states that all market information has already been incorporated into the current stock price. Therefore, having that information is of no help in predicting movements in the market.
semi- insider
strong- random walk
he strong form of EMH maintains that there is no information, public or private, that can assist an investor in achieving consistently superior investment returns.
If a client who holds a convertible preferred stock believes the company may go bankrupt within the next 3 years, what would you advise the client to do with the stock?
In the event of bankruptcy, all debt holders have priority over equity holders in claims on the assets of the corporation in liquidation. The safest alternative is to sell the stock. Buying puts on the underlying common stock would be an effective hedge, but with a 3-year wait, the position would have to be renewed several times because the usual option only has a life of 9 months; this would lead to increased transaction costs.
An investor would have to pay the alternative minimum tax when
A taxpayer must pay the alternative minimum tax in any year that it exceeds regular tax liability.
Section 404(c) of ERISA deals with
To comply with Section 404(c) of ERISA,
Under ERISA Section 404(c), plan participants must be able to reallocate plan assets
fiduciary responsibilities
the plan must offer at least 3 different investment choices, including a stable value option, an income option, and a conservative growth option
once every 3 months
A distribution from an IRA taken in equal annual amounts over the owner’s life is
not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs.
In a qualified plan, if the employer makes all the contributions, the employee’s cost basis is
zero
The 457 plan allows participants to
withdraw funds at any time, not just after age 59½, without incurring the 10% tax penalty. Income taxes would, of course, be due, but no penalty.
An investment policy statement would likely include
expected returns of the recommended strategy and the expected range of these returns
recommended allocations among differing asset classes
strategies used for selecting specific stocks in the equity portion of the portfolio
the definition of prudent investor as expressed in the Uniform Prudent Investor Act of 1994
requires reasonable care, skill, and caution.
Most loans from a 401(k) plan are required to be repaid within
5 years
The investment policy statement would include information on how
the investment performance of the plan is measured as well as the investment parameters to be followed by the portfolio managers
.
determination for meeting future cash flow needs
Contributions to a Keogh must be based on
self employment income
Under IRS rules, if part of your retirement plan assets includes company stock, taking that as a distribution (not rolling it over into an IRA) subjects the cost basis to
ordinary income tax and any unrealized appreciation is taxed as long-term capital gain when sold.
The contribution limit has to be aggregated when participating in both
a 401(k) and a 403(b)
The 457 plan is a
nonqualified deferred compensation plan for municipal employees, as well as for independent contractors performing services for those entities.
The document that gives the Administrator the right to process complaints against a registrant is known as
consent to service of process
Customer assets held in custody by an investment adviser must be
segregated, and the adviser must send a statement every 3 months.
Charging an unreasonable commission (or markup or markdown) is a
prohibited practice, but it is not considered fraud.
If you want to sell, the dealer will pay you
his bid price.
rules regarding exempt and nonexempt securities in discretionary accounts
Once a discretionary account has been properly documented, the agent handling the account can trade exempt and nonexempt securities.
The total return of a mutual fund is equal to
the return attained by reinvestment of all dividend and capital gains distributions
If an investor holds stock for 12 months or less and has no other transactions, any gain on the sale of the stock is taxed at the same rate as
ordinary income
Why are “country” funds organized as closed-end funds?
Because it is often difficult to liquidate the foreign securities to get their value into the U.S.
the term covered account applies to
individuals
A positive NPV means the security is available for a price
With a negative NPV, the price is
With a zero NPV
below its present value—it is a good buy.
too high
accurately priced
How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940?
annually
which of the following statements is TRUE concerning variable life separate account valuation?
Unit values are computed daily and cash values are computed monthly.
The sale of a life insurance policy in the secondary market by a terminally ill individual is known as
viatical settlement
terms found in modern port theory
feasible set
capm
efficient set
A variable life insurance plan may charge a maximum sales charge of
9% over a period not to exceed 20 years.
Formula methods of investing that involve selling equities in rising markets and buying them in falling markets would include
constant dollar plan
constant ratio plan
In both a constant dollar plan and a constant ratio plan, the goal is to maintain a balance between equity and debt securities in the portfolio.
It is unlawful for an investment adviser, registered or required to be registered in a state, to have custody of client funds or securities unless the investment adviser
notifies the Administrator promptly in writing on Form ADV that the investment adviser has or may have custody.
A bond portfolio manager who anticipates periods of rising interest rates should
decrease the duration of a bond portfolio to minimize the price decline.
The risk/return pyramid where the bottom is lowest risk and the “point” is the highest, generally places commodities
at the top
npv rule
remember, under that rule, dividing 72 by the interest rate tells you the number of years it will take for a deposit to double.
An adviser who has control of or discretionary power over client assets or who charges fees of more than $500 six or more months in advance is required to
disclose any condition that might affect its ability to carry out contractual obligations to its clients. Any adviser is also required to disclose almost any legal or disciplinary proceeding that would involve its integrity.
Consent of the client before completion of a trade made between the firm and a client must be made when
an investment adviser will be acting in the capacity of a principal
block trade how many shares
10000
Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation?
60000
Under the provisions of the Securities Exchange Act of 1934, the SEC may suspend trading on a national exchange by notifying
president of the united states
A client needs funds for an unexpected medical emergency. If the client takes out a loan against the cash value of his life insurance policy and does not pay it back, the insurance company can do which of the following?
Reduce the death benefit when the client dies
Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio?
time weighted return
Duration is
a measure of a bond’s price sensitivity with respect to a change in interest rates
fall under the jurisdiction of the Administrator of each of those states.
Activities that originate in a state, are directed into a state, or are accepted in a state
Uniform Securities Act any lawsuit for recovery of damages must commence within
3 years of occurrence or 2 years of discovery, whichever occurs first
It is deemed to be an assignment whenever
a majority interest in an adviser changes hands. Pledging a client’s contract is considered to be an assignmen
Differences between static and interactive content on social media include
Static content requires preapproval. Interactive content can be reused by others and can be commented on by others.
delivery requirements for brochure
balance sheet
must deliver to client or prospective client 48 hours before or at the time of the investment advisory contract
under state law the client has 5 days to rescind right if they havent been provided brochure in 48 hours(not federal)
if any changes annually, you must deliver ether brochure or a summary of material changes in 120 days after fiscal year
if no changes then no brochure
fed advisor-if you require (prepayment of more then 1200 for 6 months or more)
state-500 for state registered,
then you must include a balance sheet with a brochure
also if you have custody of funds you need to do this also
in brochure must disclose disiplinary action in last 10 years if includes 2500 fine
no brochure to investment company
same for impersonal advice
Third-party solicitors must provide a copy of
there brochure also
Only when acting in an ______ capacity is there a requirement to obtain client consent when selling out of inventory.
advisory
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.
are Agents allowed to correct execution orders in their customer’s accounts
no the firms must
There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are:
commissions;
markups and markdowns; and
advisory fees for those firms that are also registered as investment advisers.
Only state-registered investment advisory firms are required to notify the appropriate state Administrator when
employment is terminated or begun.
It is unethical to borrow money or securities from a client, unless the client is
a broker-dealer, a bank or other financial institution in the business of loaning money, or an affiliated person of the adviser.
NASAA’s custody rules require that an investment adviser who does NOT maintain custody must return certificates that are mistakenly sent within
3 days
Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an investment adviser would be permitted to maintain custody of customer cash and/or securities if
notification was given to the Administrator and custody was not prohibited by that state’s rules
Loaning money to a client is prohibited unless the investment adviser is
a financial institution engaged in the business of loaning funds or the client is an affiliate of the IA.
One way in which the use of discretionary authority differs between agents and IARs is that
agents may never exercise discretion without prior written authority. IARs must receive the written consent no later than 10 business days after the first discretionary transaction in the account.
sharing in profits and losses finra vs nasa
nasa you can and finra you cant
Under federal (and state) law, in order to qualify for a performance-based compensation program, the client must have
either $1 million in assets managed by the adviser or a net worth in excess of $2.1 million.
The SEC’s pay-to-play rule
prohibits investment advisers from receiving compensation for advisory services to a government entity (any agency, authority, or instrumentality of a state or political subdivision), for 2 years after the advisory firm or any covered employee makes a political contribution to a public official or candidate who is or would be in a position to influence the award of investment advisory business by public retirement funds.
Investment advisers many only lend money to
persons affiliated with the firm (as the IAR is) or if the adviser is in the money-lending business.
1940 custody of a client’s funds or securities
Advisers who have custody must segregate client securities and funds and keep them in a safe place. Client funds must be deposited in bank accounts containing only the client’s funds, and unless using a qualified custodian, the adviser must be named as agent or trustee. The adviser is required to report quarterly with a written, itemized statement indicating the funds and/or securities in the adviser’s possession and all transactions in the account. Annually, the adviser must arrange for an independent audit of the client’s account and the results must be forwarded to the SEC. Thus, the adviser reports every 3 months
Under the NASAA Model Rule on Custody Requirements for Investment Advisers
ubmit to a surprise audit of client accounts by an independent accountant each year
provide an audited balance sheet to the Administrator each year and include a balance sheet with his disclosure statement (brochure) to all prospective clients
When a third-party solicitor engaged by an investment adviser makes contact with a potential client, that client must
in writing, the receipt of the brochures of both the adviser and the solicitor. There must be a written agreement between the adviser and the solicitor, but the client has nothing to do with that.
Under the NASAA Model Rule on Custody Requirements for Investment Advisers, if an investment adviser has custody of customer funds and securities, how often must the adviser send the customer a statement of account activity?
Quarterly
whole life
prem sche
death benefit
cash value
accounts
fixed
guarenteed
guarenteed
general
variable life
prem sche
death benefit
cash value
accounts
fixed
min guar
no guar
gen and sep
variable universal life
prem sche
death benefit
cash value
accounts
flex
no guarentee
no guarentee
sep only
Which of the following is most likely to affect the amount of interest credited on an index annuity?
participation rate determines return
ariable life insurance offers a unique conversion policy.
Anytime during the first 24 months after policy issue, the policy may be exchanged for a whole life policy (or some similar form of permanent insurance if the company doesn’t offer whole life) using the age and medical condition at issue, regardless of the insured’s current health. However, the face amount cannot be changed from its original amount.
At any given age, ______________insurance always carries the lowest premium
At any given age, term insurance always carries the lowest premium
According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of
24 months
Duration measures a bond’s price volatility by
weighting the length of time it takes for a bond’s cash flow to pay for itself. If 2 bonds with differing coupon rates have identical maturities, the one with the lower coupon has the longer duration.
Normally, registration of persons becomes effective at noon of the 30th day following filing. If the Administrator requires the filing of amendments,
the clock starts over again with the filing of those amendments.
In relation to clients making testimonials about IA. As long as this note was posted without any knowledge of the IA (or IAR), there is no problem. However, once the IA (or IAR) finds out about it,
a request must be made to remove it.
A broker-dealer is defined as
a person in the business of effectuating securities transactions for its own account or the account of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser.
An individual who believes in the EMH will likely invest in
index funds
he CAPM assumes that the optimal portfolio should be the one
with the highest Sharpe ratio of all possible portfolios.
State-registered investment advisers maintaining discretion over client accounts must maintain a minimum net worth of
Any advisory firm whose net worth falls below required minimums is required to
$10,000.
to send notice to the Administrator no later than the close of business on the day following discovery. This notice must be followed up no later than the next business day with a complete financial report to the Administrator.
With few exceptions, the accounting records, correspondence, and advertising of investment advisers must be kept for a minimum of
5 years after the end of the year in which they were created, the first 2 years in the firm’s principal office (on premises).
The rule allows covered employees to make contributions of up to
350 per official or candidate per election in which they can vote, or $150 for other elections
