Series 65 missed questions Flashcards
Under the Investment Advisers Act of 1940, an investment adviser who has custody of clients’ funds and securities must..
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.
Registration of an issue become effective when ordered by the Administrator?
Qualification
The Administrator does not have the power to:
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..
Most common exempt transaction, unsolicited orders:
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.
If a businessowner’s goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate?
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.
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
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.
Under the Uniform Securities Act, the definition of a broker-dealer includes
A broker-dealer is defined as any person in the business of making trades in its own account or for the accounts of others.
U.S. Treasury bonds
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.
A bond analyst reports that there is currently an inverted yield curve. That would mean
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)
What is a Section 529 plan?
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.
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?
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%.
Dividend payout ratio is:
Dividends paid out of earnings made.
Gift tax
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
Oral approval authorizing a stated amount of a specified security is sufficient to place an order. For discretionary…
It must be in writing
One of the advantages of using a Section 529 plan rather than a Coverdell ESA to fund higher education is:
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.
Under the provisions of the Securities Exchange Act of 1934, the SEC may suspend trading on a national exchange by notifying
The president of the USA
Sales made under the provisions of Rule 506(b) of Regulation D must be reported on
Form D
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?
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)
For options
Call me up (price goes up), and put me down (price goes down).
Exempt means
Ok, an ok transaction. non-exempt think a not ok transaction
Disclosure of payment for order flow is required
on the trade confirmation.
Is The gift of an assessable security considered a sale?
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.
Securities not subject to state registration under the Uniform Securities Act?
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.
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?
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.
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.
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.
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.
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.
Holding companies are
Not included in ‘investment company’ definition
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.
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.
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.
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.
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.
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.
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.
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).
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.
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%.
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.
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.
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.
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
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.
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
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.
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.
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.
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.
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
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.
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.
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.
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.
