Series 65 missed questions Flashcards
1
Q
Under the Investment Advisers Act of 1940, an investment adviser who has custody of clients’ funds and securities must..
A
An adviser who has custody must (1) segregate client securities by client and keep them in a safe place (all clients must be notified in writing of the location of their securities and of any location changes); (2) deposit client funds in bank accounts that contain only the client’s funds, naming the adviser as agent or trustee for the client (the funds of all clients may be combined in one account, but complete records must be kept by the adviser; all clients must be notified in writing of the location of their funds and of any location changes); (3) report to clients at least every three months with a written, itemized statement indicating the funds and/or securities in the possession of the adviser and all transactions for the period; and (4) arrange for an unannounced examination (audit) by an independent public accountant at least annually, who will report the audit results to the SEC. The Investment Advisers Act of 1940 does not require surety bonds. The Uniform Securities Act requires surety bonds.
2
Q
Registration of an issue become effective when ordered by the Administrator?
A
Qualification
3
Q
The Administrator does not have the power to:
A
1) apply to a state court to compel a witness to comply with a subpoena.
2) publish information about an investment adviser’s violation of the USA.
3) make cease and desist orders without a prior hearing.
And more..
4
Q
Most common exempt transaction, unsolicited orders:
A
If a client requests the purchase of a security that an agent is prohibited from soliciting, the agent can accept the order and mark the order unsolicited. This is the most common of the exempt transactions.
5
Q
If a businessowner’s goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate?
A
If a businessowner’s goal is ease in raising capital, the limited liability company (LLC) is the best choice because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien.
6
Q
Under NASAA’s Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements regarding the distribution of reports prepared by third parties that are not affiliated with the adviser
A
An adviser is not prohibited from providing clients with reports prepared by others, but when this is done, the adviser must disclose the true source of the report. However, the disclosure requirement does not apply to the research an adviser uses in rendering investment advice.
7
Q
Under the Uniform Securities Act, the definition of a broker-dealer includes
A
A broker-dealer is defined as any person in the business of making trades in its own account or for the accounts of others.
8
Q
U.S. Treasury bonds
A
are guaranteed to pay interest and principal, but they do carry market risk, specifically interest rate risk. It is unethical to indicate to clients that Treasury securities are guaranteed against loss.
9
Q
A bond analyst reports that there is currently an inverted yield curve. That would mean
A
An inverted yield curve shows near-term maturities with higher yields than those of long-term maturities. Sometimes called a negative yield curve, it is usually an indication that interest rates are near a peak and the trend should soon reverse.
(this makes sense because a regular yield curve should show a better return for longer investments, and a shorter return for near-term investments)
10
Q
What is a Section 529 plan?
A
A Section 529 plan is a tax-advantaged savings plan designed to encourage saving for future education expenses, such as tuition, room and board, and other qualified costs at eligible educational institutions.
11
Q
An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated the position for $55 per share while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, the investor’s real rate of return is what?
A
The investor receives a total of $7 in return on this investment: $5 in capital gains (buy at $50 and sell at $55) plus $2 in dividend income. The return on this $50 investment is 14% ($7 ÷ $50) and when adjusted for 3% inflation, the investment’s real rate of return is 11%.
12
Q
Dividend payout ratio is:
A
Dividends paid out of earnings made.
13
Q
Gift tax
A
2024 Limit: For the year 2024, the annual gift tax exclusion is $17,000 per recipient. This means you can give up to $17,000 to any number of individuals each year without having to file a gift tax return or pay any gift tax.
Couples: Married couples can combine their annual exclusions to give up to $34,000 per recipient without incurring gift taxes if they choose to “split” gifts.
Under current tax regulations, there is a limit to the amount of a gift that may be made to a noncitizen spouse.
Lifetime Exemption: $13 million per individual (2024)
Married Couples: Can combine annual exclusions and lifetime exemptions
14
Q
Oral approval authorizing a stated amount of a specified security is sufficient to place an order. For discretionary…
A
It must be in writing
15
Q
One of the advantages of using a Section 529 plan rather than a Coverdell ESA to fund higher education is:
A
There is no age limit by which time the funds must be used. Unless the child is a special needs beneficiary, funds in a Coverdell ESA must be used by age 30. Contributions to neither program are tax deductible, and both plans allow changing the beneficiary to another member of the beneficiary’s family. Although the 529 plan is technically a municipal fund security, that is neither an advantage nor disadvantage to the investor.
16
Q
Under the provisions of the Securities Exchange Act of 1934, the SEC may suspend trading on a national exchange by notifying
A
The president of the USA
17
Q
Sales made under the provisions of Rule 506(b) of Regulation D must be reported on
A
Form D
18
Q
A client owns 300 shares of BACH common stock in a margin account. If there were to be a significant decline in the market price of the BACH, the client would likely receive a maintenance margin call. Why?
A
Because if you’re buying on debt, and the stock price drops, then you need to add money to the account to suffice for the debt you have. I.e. a maintenance margin call.
(Margin account is debt account to have stocks in. If you have 100k, want to invest 200k in stocks, you can buy on margin paying an interest rate - very risky)
19
Q
For options
A
Call me up (price goes up), and put me down (price goes down).
20
Q
Exempt means
A
Ok, an ok transaction. non-exempt think a not ok transaction
21
Q
Disclosure of payment for order flow is required
A
on the trade confirmation.
22
Q
Is The gift of an assessable security considered a sale?
A
Yes, The gift of an assessable security, where the recipient may be required (assessed) to put up money, involves both an offer and a sale.
23
Q
Securities not subject to state registration under the Uniform Securities Act?
A
Securities exempt under the USA include bank issues, savings and loan issues, and common carriers or public utilities regulated by the U.S. or Canadian federal government. Securities issued by bank holding companies that trade on SEC-regulated exchanges are federal covered securities and are not subject to state registration.
24
Q
Ian is a technical analyst who believes the market, as represented by the S&P 500 Index, is overbought. Over the next several months, there is a 12% correction. Which of the following strategies would have been successful for Ian?
A
Sell futures contracts on the S&P 500 Index
Ian was obviously bearish on the market. When something is overbought, it means it is overvalued due to excessive buying at unreasonably high prices. In this case, it is likely the market is primed for a correction (a reversal). The 12% correction proves him to have been correct. Selling a futures contract is taking a short position. Just as with selling stock short, the investor profits when the price of the underlying asset declines. Ian could have also profited by going long (buying) put options on the index. Selling puts and buying calls generate profit in a bullish market, not a bearish one.
25
Nonqualified plans
Do not provide a tax deduction to the employer until the employee receives the economic benefit as income at some point in the future. They are, however, more flexible because they do not have to comply with ERISA reporting and non-discrimination requirements.
26
One of your clients currently holds a long position (ownership) in DEF common stock. Which of the following types of orders is designed to offer the client protection against loss?
The risk to a long stock position is to the downside. The stock can, at least theoretically, fall to zero. To protect against a decline in the stock's price beyond the point the investor is willing to lose, it is wise to enter a sell stop order at that price. If the stock should fall to that price, the order is triggered, a market order is entered, and the stock is sold. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money.
27
Adam Samuels suffered a massive heart attack and died at the age of 62. As part of his estate, there is an IRA with a current value of $170,000. A review of the IRA documents reveals that Eve Samuels, his wife, is the primary beneficiary and their two children have been named as contingent beneficiaries. Eve is 50 years old and does not need the income from the IRA and would like to preserve the IRA for her children to inherit. Which of the following steps would you recommend Eve take?
Execute a rollover into an IRA in her name.
This is a highly complicated question, and there is room for disagreement. However, if a similar question was on your exam, the answer here is the one that NASAA would consider correct on its test. The key to this question is the word preserve. By executing a rollover into an IRA in her name, tax deferral of the assets continues, and under the SECURE ACT 2.0, RMDs are not required until after Eve turns 73. Thus, the assets are preserved for at least 20+ years. If she took the distribution, she would not have to pay the penalty tax, but there would be ordinary income tax due and this would not meet her objective of preservation of the IRA. If she disclaimed, the assets would then go to the children, but they would have to begin taking distributions over a 10-year period. Not a bad choice, but the assets are being distributed and taxed, not preserved. The benefit of rolling over into an inherited IRA (sometimes called a beneficiary IRA) instead of one in her own name is that she can begin taking distributions right now without the 10% penalty, even though she is only 50. However, the question stated that she did not need the income, and RMDs must begin at the time they would have been required for Adam, 12 years earlier than if she chooses to rollover into her own IRA.
28
Withdrawals from a nonqualified annuity for a 45 yr old:
taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). In this case, the investor is taking a lump-sum distribution before reaching age 59½ and must pay an additional 10% penalty on the taxable amount.
29
Holding companies are
Not included in 'investment company' definition
30
An investor is trying to decide whether to purchase $10,000 face amount of a U.S. Treasury bond or a highly rated corporate bond. The price of the Treasury bond is 102.20 while the price of the corporate bond is 99 3/8. If the investor decides to purchase the Treasuries, disregarding commissions, the price difference is
The first step is remembering that Treasuries are quoted in 32nds. That means that 102.20 is 102 and 20/32 which is 102 5/8. Subtract 99 3/8 from 102 5/8 to get 3 2/8 or 3 1/4. On a $1,000 bond, that is $32.50. Then, note that this investor is purchasing 10 bonds, so the difference in price is $32.50 times 10 or $325.
31
Technical analyst vs fundamental analyst
Technical analyst analyst charts price and volume over time.
Fundamental analyst charts the management tenure, price-to-book ratio, price-to-earnings ratio.
32
systematic and unsystematic risk is most accurate?
Total risk equals market risk plus company-specific risk.
Total risk equals systematic (market) risk plus unsystematic (company-specific) risk. Standard deviation is the tool that measures total risk. The unsystematic risk for a specific firm is not similar to the unsystematic risk for other firms in the same industry. Unsystematic risk is company-specific or unique risk, and when more stocks are added, the risk will change. The systematic risk of a portfolio can be changed up or down by adding high-beta or low-beta stocks.
33
Most accurate method of measuring GDP
Constant dollars are mathematically adjusted to remove the effects of inflation, so when economists compare the gross domestic product of one period with that of another, they measure economic activity rather than inflation.
34
example of positive margin?
The rate of return on the investment exceeds the interest cost on the borrowed money. Positive margin means that you were successful in your use of the leverage afforded by using margin (borrowed money). That means that the investor's total return exceeds the cost of the borrowed money. It is possible to actually sell the security for a price above its original purchase price, but not more than the total of the cost plus the interest. That would result in negative margin.
35
Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from
a corporate bond because investors receive interest income from corporate bonds. That income is fully taxable at ordinary income rates.
Real estate ownership has certain tax benefits, such as depreciation and a deduction for operating expenses.
Index funds are known for their high tax efficiency, and investors in growth stocks anticipate long-term capital gains, which are taxed at a lower rate than ordinary income.
36
Advisory contracts between an investment company and an outside adviser.
All contracts between an investment company and an outside adviser must be in writing and must contain certain provisions; these include that the contract may not be unilaterally assigned to another adviser.
The initial contract must be for two years and it is subject to annual renewal by a majority vote of the outstanding shares or the board of directors, as well as a majority of the directors who are considered to be non interested parties.
37
XYZ Corporation common stock has a market price of $45 per share and earnings per share of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings ratio of XYZ stock will be
15: Before the split, the stock had a P/E ratio of 15 ($45 per share ÷ $3). After the split, the price per share and the EPS drop in the same proportion, leaving the P/E ratio unchanged (new price = $15, new EPS = $1).
38
Municipal vs GO bonds
GO bonds are generally less risky than revenue bonds because they are backed by taxes rather than revenues.
GO debt is charged against the borrowing limits (similar to the credit limit on your credit cards). That is a benefit to the investor because that limit protects against the municipality getting into debt over its head.
It is the revenue bond that needs a feasibility study and collects user fees.
39
In order to qualify as a REIT,
A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its taxable income to investors, not 75%.
40
investment supervisory service as described
An investment supervisory service is an individualized service delivered to a specific client on a continual basis.
General nonspecific advice given across the board is deemed impersonal advisory services.
Only when an investment adviser provides investment supervisory service, and the adviser's principal business activity is the giving of advice, may the term investment counsel be used.
41
Under the Securities Act of 1933, commercial paper is exempt from the prospectus delivery requirements or registration, unless its maturity is more than how many months?
commercial paper must mature in nine months or less.
42
Under the Investment Company Act of 1940, which of the following qualify for a discount in a mutual fund's sales charge?
A husband and wife and all children under 21 qualify as a single person for the purposes of obtaining a quantity discount, as do corporations formed for a purpose other than obtaining such a discount and employee benefit plans. But other associations acting collectively, such as the members of an investment club, do not qualify as a single person for such a purpose. Discounts may also be made to directors, officers, partners, employees, or sales representatives of the fund, its investment adviser, or its principal underwriter.
43
The Uniform Securities Act provides an exemption from registration as an investment adviser for which of the following persons who have no place of business in the state?
USA BIIF
Advisers who deal exclusively with broker-dealers
Advisers who deal exclusively with insurance companies
Advisers who deal exclusively with registered investment companies
Advisers who have no more than five clients in that state in a 12-month period
44
Although there are others that may be used in construction of a portfolio, the primary asset classes used in asset class allocation include:
The three major asset categories used in allocation are bonds, cash and stock. Commodities, real estate and other tangible assets are sometimes used, but all models use the big three.
45
Which of the following measures the risk-reward trade-off?
The Sharpe ratio measures the return per unit of risk taken. It is computed by subtracting the risk-free return from the investment's actual return and dividing that figure by the security's standard deviation. The higher the Sharpe ratio is, the better the returns are per unit of risk taken.
Sharp ratio is a risk reward on anticipated return vs actual return and takes deviation into consideration
46
Form ADV-E
Think - even if you don't have it in your bank account, you have custody
The form is completed by an investment adviser who maintains custody of customer funds and/or securities.
The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser.
47
When a bank's reserve account is running low, it might choose to borrow from the Fed. When doing so, the bank will be charged
the discount rate.
48
variable annuity annuitant bears all of the following risks except
The insurance company issuing the variable annuity bears mortality risk, or the danger that some annuitants will live to surpass their average life expectancy. The primary risk to the investor in a variable annuity is market risk. Although variable annuities attempt to keep up with inflation, there is no assurance that the performance of the separate account, after expenses, will do so. To the extent that the selected subaccounts contain fixed income securities, there will also be interest rate risk.
49
Which of the following transactions are exempt?
XYZ Corp., a local manufacturing firm, sells its common stock to several local individual accredited investors on an infrequent or isolated basis.
Joe, an agent with ABC Securities, Inc., sells XYZ Corporation's 5-year fixed-income securities, rated AAA by Standard & Poor's, on a regular basis to selected members of his large retail client base.
Joe, an agent with ABC Securities, Inc., sells XYZ Corporation's securities to a high-net-worth client on an unsolicited basis.
Alexander had his sizable portfolio of stocks and bonds sold by the administrator of his estate upon his death.
Unsolicited secondary market transactions and those made by an estate's executor are exempt transactions; the net worth of the client is immaterial. While the AAA bonds may be an exempt security, soliciting regular transactions (unless with institutional buyers) is not an exempt transaction. XYZ Corp., a local manufacturing firm, is an issuer of the common stock. Had it been a nonissuer transaction on an isolated basis, the transaction would have been exempt; the accredited investor status of the clients is meaningless here.
50
Strategic vs tactical asset allocation portfolio style
Strategic is passive, tactical is active and takes current events into account - strategic is set it and forget it
51
If the dollar weakens
A rise in U.S. interest rates might strengthen the dollar since foreign investors would invest in U.S. dollar–denominated securities, thereby increasing the demand for dollars and causing the dollar to strengthen.
Dollar weakens, increase imports and exports would decrease.
52
What is consent to service of process?
Consent to service of process is a legal agreement in which a person or entity agrees to accept legal papers or court documents on behalf of another party, often in a specific jurisdiction, thereby allowing for legal proceedings to occur in that area.
It is supplied with the initial registration and remains on file permanently.
53
in a few words explain what is different between qualified vs non qualified plans in retirement
Qualified Plans:
Tax Benefits: Contributions are typically tax-deductible, and earnings grow tax-deferred.
Regulation: Must comply with ERISA (Employee Retirement Income Security Act) standards.
Contribution Limits: Have specific IRS-imposed contribution limits.
Examples: 401(k) plans, 403(b) plans, and traditional pension plans.
Non-Qualified Plans:
Tax Benefits: Contributions are generally not tax-deductible, but earnings may grow tax-deferred.
Regulation: Do not need to comply with ERISA standards.
Contribution Limits: Typically no IRS-imposed contribution limits.
Examples: Deferred compensation plans, executive bonus plans, and split-dollar life insurance plans.
54
What is a QDRO
A Qualified Domestic Relations Order (QDRO) is a legal document that allows the division of a retirement plan's assets, such as a 401(k) or pension, during a divorce or legal separation, ensuring that a portion of the participant's benefits is allocated to the spouse or other dependents.
55
An Administrator may deny or suspend a registration
The Administrator may restrict a registration on the basis of lack of training and knowledge, but not for a lack of experience alone. The Administrator may deny a registration if the applicant was convicted of a misdemeanor involving securities within the last 10 years. The Administrator may deny a registration if the applicant has been the subject of an adverse order entered by the Administrator of another state within the past 10 years. Registrations may be suspended if agents or investment adviser representatives are not properly supervised.
56
An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm,
Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would be required to register on either the state or federal level. The agent would now have to register as an IAR of the firm and, as such, would carry the additional fiduciary responsibility incurred in the advisory business.
57
Explain a call & a put -- covered call & covered put
Call Option: A financial contract giving the holder the right to buy an asset at a specified price within a set time period.
Put Option: A financial contract giving the holder the right to sell an asset at a specified price within a set time period.
Covered Call: A strategy where an investor owns the underlying stock and sells a call option against it to earn premium income, providing limited downside protection and potential profit if the stock price remains below the strike price.
Covered Put: A strategy where an investor shorts the underlying stock and sells a put option against it, aiming to generate premium income and benefit from a decline in the stock price, while limiting risk if the price rises above the strike price.
58
Covered call example
Covered Call Example
Scenario:
Stock Owned: 100 shares of Company XYZ
Current Stock Price: $50 per share
Call Option Sold: 1 XYZ 55 Call (one call option contract represents 100 shares)
Strike Price: $55
Premium Received: $2 per share
Process:
Purchase of Shares: You own 100 shares of Company XYZ at $50 per share, totaling $5,000.
Sell Call Option: You sell a call option with a strike price of $55, receiving a premium of $200 ($2 per share x 100 shares).
Possible Outcomes:
Stock Price Below $55 at Expiration:
The call option expires worthless.
You keep the premium of $200.
You still own the 100 shares of Company XYZ.
Stock Price Above $55 at Expiration:
The call option is exercised, and you sell your shares at $55 each.
You earn $5,500 from selling the shares.
You keep the premium of $200, making a total of $700 profit from the premium plus the $5 profit per share from selling at $55 instead of the $50 you originally paid.
Stock Price at $55 at Expiration:
The call option is exercised, and you sell your shares at $55 each.
You keep the premium of $200, making a total of $700 profit from the premium plus the $5 profit per share.
Summary:
The covered call strategy provides additional income from the option premium and potential stock gains but limits upside if the stock price significantly rises above the strike price.
59
What IA is exempt from registration due to investment act 1940 (FEDERAL LAW)
**Intrastate Adviser:
**
An adviser operates exclusively in Texas, advising only Texas residents, and does not advise on nationally listed securities. This adviser qualifies for the intrastate exemption.
**Adviser to Insurance Companies:
**
An adviser manages investment portfolios solely for insurance companies and thus is exempt under this specific provision.
**Foreign Private Adviser:
**
A UK-based adviser with 10 clients in the U.S. and $20 million in U.S.-based assets qualifies as a foreign private adviser and is exempt from registration.
Family Office:
**A family office **that manages investments for a single wealthy family, without advising external clients, falls under the family office exemption.
**Advisers to Private Funds:
**
**Charitable Organizations and Plans:
**Commodity Trading Advisers (CTAs):
**
**Small Advisers:** Advisers with fewer than 15 clients, no advertising, and who do not hold themselves out as investment advisers generally are exempt from federal registration, though they may still be subject to state regulations.
**Venture Capital Adviser:
**
An adviser managing a venture capital fund that invests in start-up companies can qualify for an exemption if it solely manages venture capital funds.
60
In the banking industry, the term POD refers to
Totten trust. The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same.
61
An investment adviser to a private fund wishes to qualify for the exemption offered under the Uniform Securities Act when the fund has no more than 100 investors. In order to qualify, what does the AUM or net worth need to be for individuals?
every investor must have either at least $1.1 million in assets managed by the investment adviser or a net worth, excluding the value of the primary residence, in excess of $2.2 million.
62
Similarities between exchange-traded funds and closed-end investment companies?
Traded on stock exchanges and investors pay a commission when purchasing and liquidating shares.
Both exchange-traded funds (ETFs) and closed-end investment companies are traded on exchanges; therefore, investors pay a commission when purchasing and liquidating shares. Only closed-end investment companies have a limited number of shares. Closed-end funds may trade at significant premiums or discounts from their NAV, while ETFs rarely stray far from the NAV.
63
Under which of the following circumstances can an Administrator initiate a suspension or revocation proceeding against a broker-dealer registered in the state?
An Administrator may initiate suspension proceedings against a broker-dealer on discovering that its
1. registration has been suspended in another state and
2. on conviction of a violation of the Securities Exchange Act of 1934.
The Administrator **may not initiate revocation proceedings against a broker-dealer later than one year after the broker-dealer has withdrawn its registration**.
The Administrator may not suspend or revoke a broker-dealer's registration at a subsequent time on the basis of facts known by the Administrator at the time of the initial application.
64
BFJ Corp.'s 5% convertible bond is trading at 120. The bond is convertible at $50. An investor buying the bond now and immediately converting into common stock would receive
20 shares - The conversion ratio always uses the par value ($1,000), never the current market price. With a par value of $1,000 and a conversion price of $50 per share, this bond is convertible into 20 shares ($1,000 / $50).
Remember, the number of shares in a conversion never changes. When the market price changes, the parity price changes, but that isn't relevant to this question.
65
Listed REIT vs Unlisted REIT
Listed REITs: Publicly traded, highly liquid, market-valued, accessible to all investors.
Unlisted REITs: Not publicly traded, less liquid, appraised valuation, targeted at institutional or specific investor groups.
Both listed and unlisted REITs provide exposure to real estate markets and income potential but differ significantly in
liquidity,
valuation,
investor access.
66
Minnie's Uncle Bob would like to contribute to his one-year-old niece's education expenses. He is able to contribute a maximum of $1,200 per year. There is no other family member in a position to make a contribution. If minimizing the taxes at withdrawal and low cost investing, such as index mutual funds, is the objective, which of the following would you recommend?
When you see contribution levels at $2,000 per year or less, that is a signal that Coverdell is the proper recommendation. Higher levels would be the 529 plan. There are no specific tax benefits to the UTMA.
67
During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from: the person appointed as administrator of the estate.
Why?
Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased.
Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power.
Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.
68
What is cumulative preferred stock:
When a preferred stock is cumulative, any prior-year dividends that have been skipped must be paid in full along with the current year's before a dividend payment may be made to common stockholders.
69
An investor would write a call option to obtain income. Why?
The writing (selling) of an option always generates premium income to the writer. If the call is exercised, the writer must sell the stock, so this is not a way to add to your portfolio. In general, option writers only realize short-term gains, not long-term gains. If the question had said this was a covered call, then the second best choice would have been to protect the long position (not the premium).
70
Your clients, a married couple, are trying to decide whether to open an account as joint tenants with right of survivorship or tenants by the entirety. You might point out to them that one of the differences to consider is that:
One of the unique characteristics of the joint by the entirety (JBE) account is that the consent of the other party is necessary in order for one of the parties to enter a trade. With a JTWROS account, either party can enter trades independently. Both JTWROS and JBE avoid probate and the JBE is limited to married couples only.
71
Under the Investment Advisers Act of 1940, an investment adviser who has custody of clients' funds and securities must
(1) segregate client securities by client and keep them in a safe place (all clients must be notified in writing of the location of their securities and of any location changes);
(2) deposit client funds in bank accounts that contain only the client's funds, naming the adviser as agent or trustee for the client (the funds of all clients may be combined in one account, but complete records must be kept by the adviser; all clients must be notified in writing of the location of their funds and of any location changes);
(3) report to clients at least every three months with a written, itemized statement indicating the funds and/or securities in the possession of the adviser and all transactions for the period; and
(4) arrange for an unannounced examination (audit) by an independent public accountant at least annually, who will report the audit results to the SEC. The Investment Advisers Act of 1940 does not require surety bonds. The Uniform Securities Act requires surety bonds.
72
Define broker dealer
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.
In the Uniform Securities Act, it specifically states: "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account.
"Broker-dealer" does not include (1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company.
Attorneys are excluded from the definition of investment adviser, as long as their advice is incidental to their legal practice, but that exclusion does not apply to the term "broker-dealer".
Even though credit unions engage in banking activity, they are not included in the exclusion. Being an investment adviser does not exclude a person from the need to register as a broker-dealer if that person is performing the functions of a BD.
73
When reviewing the prospectus of a mutual fund, you would be most likely to find a discussion of breakpoints dealing with which share class?
It is only Class A shares with their front-end load where a schedule of breakpoints is found in the prospectus. Class B and C shares have deferred sales charges, and Class R shares generally have no front-end or back-end loading.
74
A mutual fund would have net redemptions when
the number of shares being liquidated by investors exceeds those being purchased. One of the characteristics of an open-end investment company (mutual fund) is the ease of redeeming holdings. When the dollar amount of shares being redeemed exceeds that of those being purchased, the result is net redemptions. Although poor performance could lead to net redemptions, that is not always the case, so it is not always a true statement.
75
An Administrator may summarily deny or revoke a security's exemption
without a hearing if the issuer is given an opportunity for a hearing after the revocation.
An Administrator may summarily deny or revoke a security's exemption without a hearing if the issuer is given an opportunity for a hearing after the revocation.
Upon the entry of a summary order, the Administrator shall promptly notify all interested parties that it has been entered and of the reasons therefor and that within 15 days of the receipt of a written request the matter will be set down for hearing.
The issuer requesting an exemption must prove the exemption; this is not the responsibility of the Administrator. The Administrator cannot revoke exemptions of federal covered securities.
76
A widower wants to fund a Section 529 plan for his daughter. What is the maximum amount he may initially contribute in 2023 without having to pay gift taxes?
A special rule under Section 529 allows the donor to load front-end load contributions and avoid paying gift taxes. Five years' worth may be used under this method (5 × $17,000 = $85,000). If he remarries, his wife may also consent to gift split, thereby doubling this amount to $170,000. Please note: The annual exclusion was increased to $17,000 effective January 1, 2023.
77
Which term refers to the taxation, expenditures, and debt management of the federal government?
Fiscal Policy
78
Explain monetary policy
Monetary Policy: Central bank actions to control money supply and interest rates.
Interest Rates: Central bank adjusts these to influence borrowing and spending.
Open Market Operations: Buying/selling government bonds to regulate money supply.
Reserve Requirements: Determines how much banks must hold in reserve.
Discount Rate: Interest rate for bank loans from the central bank.
Quantitative Easing: Buying long-term assets to increase money supply.
Forward Guidance: Central bank signals future policy plans.
Expansionary: Lowers rates, increases money supply to boost economy.
Contractionary: Raises rates, reduces money supply to control inflation.
79
Explain safe harbor under 404(c)
The safe harbor under 404(c) provides protection for plan fiduciaries from liability for investment choices made by plan participants in a 401(k) plan, as long as the plan offers a broad range of investment options and meets certain disclosure and procedural requirements.
the portfolio selections must include at least 3 different asset classes, such as equity, debt, and cash equivalent. All equities or all debt won't qualify.
80
How are UIT & mutual funds similar
A UIT typically issues redeemable securities (or units), like a mutual fund, which means that the UIT will buy back an investor's units, at the investor's request, at their approximate net asset value. ETFs and CEFs are traded in the secondary markets, and investors sell their shares in the marketplace rather than redeeming them through the issuer. Face-amount certificates are not redeemable—the investor's funds are returned when the debt is paid off.
81
Explain Regulation D, Rule 506(b) - me as an investor now
Regulation D, Rule 506(b) allows private placements to raise unlimited capital from up to 35 non-accredited investors and an unlimited number of accredited investors, without general solicitation, provided that investors receive detailed disclosure documents.
82
505(c)?
It is Rule 506(c) that permits general solicitation and advertising and requires that all investors be accredited.
83
Characteristics of negotiable jumbo CDs
Negotiable jumbo CDs are issued for $100,000 to $1 million or more and trade in the secondary market. Most jumbo CDs are issued with maturities of one year or less. Being negotiable, there is no prepayment penalty. These CDs generally pay interest on a semiannual basis, not monthly.
84
A client owns an investment-grade bond with a coupon of 7%. If similarly rated bonds are being issued today with coupons of 5%, and the market is efficient, it would be expected that the client's bond has a zero net present value
With a discount rate of 5% (the discount rate in a present value computation is the current market interest rate), a debt instrument with a 7% coupon rate will be selling at a premium (interest rates down, prices up). If the market is efficiently pricing that bond, its market price should be equal to its present value, resulting in an NPV of zero.
85
A member of the investment banking department of ABC Securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make?
The exercise prices of stock rights are usually below the current market price of the underlying security at time of issue.
The exercise prices of warrants are usually above the current market price of the underlying security at time of issue.
Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value.
Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.
86
When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a different federal covered investment adviser in the state where the individual has an office,
only the investment adviser representative must notify the Administrator promptly.
(Broker dealer all 3, investment advisor just the rep)
86
for
86
If you overheard an analyst referring to an investment's indicative value, the discussion would most likely be about
The calculated value, called the indicative value or closing indicative value for ETNs, is calculated and published at the end of each day by the ETN issuer.
An Exchange-Traded Note (ETN) is a type of unsecured debt security that trades on an exchange and is designed to track the performance of a specific index or asset, such as commodities or currencies, with returns based on the index’s performance. ETNs are issued by financial institutions and may involve credit risk related to the issuer.
86
Which of the following statements relating to the general securities registration provisions of the Uniform Securities Act is most accurate?
The registration is valid for one year from the effective date, unless the underwriter or issuer still has some unsold shares.
Every registration statement is effective for one year from its effective date, or any longer period during which the security is being offered or distributed by any underwriter or broker-dealer who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution. Furthermore, a registration statement may be amended after its effective date so as to increase the securities specified to be offered and sold, if the public offering price and the underwriters' discounts and commissions are not changed from the respective amounts of which the Administrator was informed.
87
Many parents prefer to use a Section 529 plan over a Coverdell ESA to finance their child's education plans because
contribution limits are higher & there are no earnings limits
Contributions to a Coverdell ESA are limited to $2,000 per beneficiary per year while those to a Section 529 plan can be as high as $300,000 in some states. A married couple cannot make a Coverdell contribution if their income exceeds $220,000, while there is no earnings limit to contribute to a 529.
In neither case is the contribution tax deductible on the federal level (although the Section 529 plans may have tax advantages in some states). We are often asked about choice II. The question is asking about differences between the two plans and choice II is true for both of them.
88
Which of the following statements about preemptive rights are true?
Preemptive rights give shareholders the right to purchase, in direct proportion to the number of shares they already own, shares in new issues of stock before they are offered to the general public. This allows current shareholders to maintain their proportionate share of ownership in the corporation.
89
Which of the following securities is the least suitable recommendation for a qualified money purchase plan account?
Investment-grade municipal bond - Investment-grade municipal bonds bear low yields that are federally tax exempt. Because money in a qualified retirement plan account grows tax deferred regardless of the investment instrument, tax-exempt securities are unsuitable. In addition, when the money is withdrawn, it is taxable as ordinary income, so in effect, tax-free income has been converted into taxable income. Although the interest on Treasury bonds is exempt from state income tax, that rate is invariably considerably less than the federal income tax rate.
90
To comply with Section 404(c) of ERISA,
the plan must offer at least 3 different investment choices, such as a stable value option, an income option, and a conservative growth option
in additional features
- the plan must cover all full-time employees with at least 1 year of service who are 21 or older
- the plan fiduciary must act in accordance with the provisions of the retirement plan’s objectives and goals
- plan participant loans must be limited to 50% of vested assets or $50,000, whichever is less
91
A nonqualified, single premium variable annuity differs from a Keogh plan in that
all payouts are fully taxable in a Keogh plan
Earnings on investments made in both a Keogh plan and nonqualified annuity grow on a tax-deferred basis; they are not taxed until withdrawn. The cost basis in a Keogh plan is zero because contributions are tax deductible, but distributions are fully taxable upon receipt. However, in a nonqualified annuity, the cost basis is equal to the amount invested because the contributions are nondeductible; only the earnings portion of the distributions is taxable.
92
Which of the following statements describes a person who provides investment advice on a regular basis but does not charge fees, yet would be considered an adviser under Release IA-1092?
A financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space.
1 - advice
2 - economic benefit
If an individual is in the business of providing advice and receives any economic benefit, such benefit is considered compensation under Release IA-1092. Because the financial planner is in the business of giving advice to pension plans, actually provides that advice, and is compensated for it, he meets all three elements in the definition of an adviser.
93
The term investment adviser representative
The term investment adviser representative is quite broad and includes any partner, officer, or director of (or a person occupying a similar status or performing similar functions) or other individual employed by or associated with an investment adviser that is registered or required to be registered under the USA, or who has a place of business in this state and is employed by or associated with a federal covered adviser; and who does any of the following:
(1) makes any recommendations or otherwise renders advice regarding securities;
(2) manages accounts or portfolios of clients;
(3) determines which recommendations or advice regarding securities should be given;
(4) solicits, offers, or negotiates for the sale of or sells investment advisory services; or
(5) supervises employees who perform any of the foregoing.
94
Under the Uniform Securities Act, certain transactions are exempt from the sales literature and advertising filing requirements. Which of the following would be included in that category?
Any isolated, nonissuer transaction
Any sale to a financial institution
Any transaction by the executor of an estate
Any transaction between an issuer and underwriters
95
When the market interest rate is 8%, which of the following equally-rated bonds will have the potential for the greatest relative price volatility to changes in interest rates?
12% coupon bond with 12 years to maturity
The question is all about the effects of a bond's duration on its price volatility.
As the duration increases, so does the price volatility.
When comparing bonds, generally, a low coupon bond is more susceptible to price fluctuations than a high coupon bond and a long-term bond is more susceptible to price fluctuations than a short-term bond.
The bond with the lowest coupon (8%) and longest maturity (12 years) is subject to the greatest price volatility. The bond with the shortest duration, and least price volatility, would be the one with the highest coupon (12%) and the nearest maturity (6 years).
96
The Uniform Securities Act exempts all of the securities listed from registration and disclosure requirements. Banks and common carriers are under the regulatory supervision of other government agencies. Include the following:
- The United States or any territory
- A state or political subdivision of a state
- A common carrier (e.g., a railroad) regulated in respect to its rates and charges by the United States or a state
- Banks and savings institutions
97
Most liquid investment includes
Money market funds & come with check writing privelages
98
These are the two requirements for use of the term investment counsel:
1) principal business consists of rendering investment advice
2) substantial portion of its business involves investment supervisory services
99
Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? Remember that the ex-date is the first day on and after which a purchaser of a stock is not entitled to a previously declared dividend (cash or stock).
That means the owner of the stock on and after the ex-date is the one who receives the cash or, in this case, the additional stock. The payment of a stock dividend causes the number of shares owned to increase while the cost per share decreases. The total value of the position will always remain unchanged. Julie had 100 shares at $25 per share, or $2,500, and now has 125 shares × $20 = $2,500.
100
Institutional investors include:
banks, savings institutions, insurance and investment companies, and employee benefit plans.
Accredited investors are not institutional investors.
101
Gross margin equation
Revenue - COGS / revenue
Administrative costs and interest are not included in COGS.
102
Beta vs Alpha
Alpha is used to evaluate whether an investment outperformed a certain benchmark. Beta, on the other hand, measures how volatile an asset is compared to the overall market.
Betas larger than 1.0 indicate greater volatility - so if the beta were 1.5 and the index moved up or down 1%, the stock would have moved 1.5%, on average. Betas less than 1.0 indicate less volatility: if the stock had a beta of 0.5, it would have risen or fallen just half a percent as the index moved 1%.
1 ALPHA outperformed by 1%. 2 ALPHA outperformed benchmark by 2%
103
An agent working for a brokerage firm and his client both live in Illinois, and the agent makes an offer to the client by phone while the client is spending several weeks at his vacation home in California, which the client accepts. The client travels to Texas before returning home and sends payment for the security from there. He makes his payment by sending a check from a money market fund based in Ohio. The Administrators of which of the following states have authority over the sale?
Because the offer was made from Illinois to a person in California, the Administrators of both states have jurisdiction. The state from which payment was mailed and the state in which the checking account or money market fund is based are irrelevant for the purpose of determining an Administrator's jurisdiction.
104
Median Vs Mode
The median is the middle value (or midpoint) after all the data points have been arranged in value order as a list of numbers. The mode is the value that appears the most number of times in a data set.
105
Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is
selling at a premium.
A bond's NPV is most likely to be zero when its IRR is equal to the current market interest rate. In this case, that would be 6%. The only way for a bond with an 8% coupon to have a yield to maturity of 6% is if the bond is selling at a premium.
106
Acid Test Ratio
Current Assets - Inventory / Current Liabilities
107
Enterprise Passing Through Profit and Loss
DPP
108
What is arbritrage
the simultaneous buying of a commodity or seccurity in one marketplace and selling of the same commodity or security in another marketplace. It is not an illegal practice
109
Under the Uniform Securities Act, the Administrator has the power to deny or revoke exemptions for which of the following types of securities?
The Administrator may deny or revoke the exemption granted to a nonprofit organization or investment contracts issued by employee benefit plans. Any transaction exemption, except one relating to a federal covered security, may be revoked as well. However, there are certain security exemptions that the USA does not grant the Administrator the power to deny. Included in that list is any security issued or guaranteed by any bank organized under the laws of any state.
110
Under the Uniform Securities Act, which of the following statements is true about the authority of an Administrator?
In issuing a cease and desist order, the Administrator may provide prior notice and hearing or may issue the order without prior notice or hearing (summarily). There is no time period associated with the order.
111
An Administrator may summarily deny or revoke a security's exemption
without a hearing if the issuer is given an opportunity for a hearing after the revocation.
An Administrator may summarily deny or revoke a security's exemption without a hearing if the issuer is given an opportunity for a hearing after the revocation. Upon the entry of a summary order, the Administrator shall promptly notify all interested parties that it has been entered and of the reasons therefor and that within 15 days of the receipt of a written request the matter will be set down for hearing.
The issuer requesting an exemption must prove the exemption; this is not the responsibility of the Administrator. The Administrator cannot revoke exemptions of federal covered securities.
112
A widower wants to fund a Section 529 plan for his daughter. What is the maximum amount he may initially contribute in 2023 without having to pay gift taxes?
A special rule under Section 529 allows the donor to load front-end load contributions and avoid paying gift taxes. Five years' worth may be used under this method (5 × $17,000 = $85,000). If he remarries, his wife may also consent to gift split, thereby doubling this amount to $170,000. Please note: The annual exclusion was increased to $17,000 effective January 1, 2023.
113
A company currently has earnings of $4.00 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield?
The quarterly dividend is $0.50, so the annual dividend is $2.00; $2 ÷ $40 (market price) = 5% annual yield (current yield).
114
Under the Regulation D, Rule 506(b) private placement offering exemption
Rule 506(b) permits a maximum of 35 nonaccredited investors and an unlimited number of accredited investors. The questionnaire is used by the issuer to determine the status of the potential investor. It is Rule 506(c) that permits general solicitation and advertising and requires that all investors be accredited.
115
An investor has been following the price movements of ABC common stock and believes that the stock is positioned for a significant upward move in the very near term. If the investor's goal is capital gains, which of the following would be the most appropriate position for this investor to take?
Buy ABC call options
When an investor is expecting the price of a security to rise, we say that investor has a bullish outlook. Bulls buy call options, especially when the expected market move is anticipated shortly. Put options are purchased by investors who are of the belief that a stock's price will decline in the near term. Selling options is done for income (the premium), not for capital gains.
116
A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock will benefit by converting if the price of the common stock is
above $22.00 per share.
With a conversion price of $20 and a par value of $60, this preferred stock is convertible into three shares of the company's common stock. We divide the current price of the preferred ($66) by the three shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace.
117
When the market interest rate is 8%, which of the following equally-rated bonds will have the potential for the greatest relative price volatility to changes in interest rates?
The question is all about the effects of a bond's duration on its price volatility. As the duration increases, so does the price volatility. When comparing bonds, generally, a low coupon bond is more susceptible to price fluctuations than a high coupon bond and a long-term bond is more susceptible to price fluctuations than a short-term bond. The bond with the lowest coupon (8%) and longest maturity (12 years) is subject to the greatest price volatility. The bond with the shortest duration, and least price volatility, would be the one with the highest coupon (12%) and the nearest maturity (6 years).
118
Agent vs IAR
Agents act as an intermediary of selling between broker dealer & other party. IAR give financial advice and planning.
119
FinCEN Form 112 is what and who is it filed with?
Under Bank Secrecy Act regulations, financial institutions are required to report transactions in currency of more than $10,000 using FinCEN Form 112 (the currency transaction report, or CTR).
Filed w/
120
Feasible set vs efficient set
The feasible set of portfolios represents all portfolios that can be constructed from a given set of stocks. An efficient portfolio is one that offers: – the most return for a given amount of risk, or – the least risk for a give amount of return
120
121
Definition of a 'sale'
Definition of a 'offer'
Sale - Sales involve any contract or disposition for value;
Offer - solicitations and attempts to dispose are offers.
122
A client owns 300 shares of BACH common stock in a margin account. The stock was originally purchased at a price of $40 per share and the Reg. T call was met. If the BACH is now selling for $50 per share, disregarding interest charges, the client's equity is now
$9,000
Purchasing 300 shares at $40 per share is a total of $12,000. The Reg. T call of 50% requires a deposit of $6,000 with the remaining $6,000 the loan from the broker-dealer. If the market price of the shares increases to $50, the current market value of the account is $15,000. With a debit balance (the amount borrowed from the BD) of $6,000, the equity is $9,000. If you answered $3,000, you probably forgot the investor owned 300 shares, not 100.
123
Private placements are exempt under the USA
if they are offered to no more than 10 general public (retail) investors in a 12-month period. Otherwise, they are not exempt.
124
Some market makers, in an attempt to increase order flow, will pay other broker-dealers for routing customer orders to them. This is known as
Payment for order flow
Payment for order flow can be beneficial for small firms that cannot handle large numbers of orders. Pulling together lots of orders and sending them to another firm to be executed can help keep costs down. The market maker benefits from added share volume enabling it to compensate the firms directing the business its way
125
A TIPS bond with a par value of $1,000 has a coupon rate of 4%. During Years 1 and 2, the inflation rate has been 6%. What effect will this have on the TIPS 2½ years later?
$23.19
On a semiannual basis, the principal value of a TIPS is increased by that year's inflation rate.
A TIPS bond adjusts principal every six months based on the inflation rate.
With an annual inflation rate of 6%, each six months, the principal will increase by 3% compounded.
Because the question is asking about 2½ years later, there will be five periods (two each year plus the first half of the third year). Using the calculator at the testing center, you would enter the $1,000 initial par value and then multiply that by 103% five times to arrive at $1,159.27. Then, multiply that by the semiannual coupon rate (2%); the result is $23.19. In almost every case, the shortcut will work. That is, if it was not a TIPS bond, then the interest would simply be 2% of $1,000, or $20. That will always be one of the choices—you look for the one that is a bit higher.
126
OTC transaction with a quote from market maker
a quote of 35 − 35.25, 7 by 9.
What does this mean
the bid (35) and the ask (35.25) prices
7 by 9 means that the market maker is willing to buy up to 700 shares at the $35 bid and sell up to 900 shares at the $35.25 ask
127
An exchange specialist is
A specialist (more accurately a designated market maker - DMM, but NASAA may not use the current term on the exam) is a dealer on the NYSE who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks. A specialist must have sufficient capital to buy and sell from his own account in order to maintain a liquid and orderly market.
128
Of the major averages/indexes, the DJI is the only one which is
price weighted
129
XYZ stock has a beta of 0.92. The risk-free rate of return is 3% and the market's rate of return is 8%. Using the capital asset pricing model (CAPM), what is the expected rate of return of this stock?
Formula: = Risk-Free Rate of Return + Beta * (Market Rate of Return - Risk-Free Rate of Return).
.03 + .92(.08 - .03) = 0.0760, or 7.60%.
130
Capital asset pricing model (CAPM) formula
Cost of Equity = Risk-Free Rate of Return + Beta * (Market Rate of Return - Risk-Free Rate of Return).
131
If the return on Treasury bills is 3% and the equity risk premium is 4%, the expected equity returns should be
7%
132
