Set 1

Question 1

Exclusions from Requirement to Register as a Broker Dealer in-State

Answer 1

• Agents not included unless engaging in “private securities transactions”
• Banks
• S&L instituciones
• issuers unless selling securities of other issuers
• BD but no physical location in state and only customers are institutions

Question 2

Broker Dealer Definiton

Answer 2

• A person that engages in the business of effecting securities transactions for his own account, or the account of others
• All securities transactions must be known to, recorded in the books of, and supervised by the broker dealer

Question 3

CAPM

Answer 3

-Capital Asset Pricing Model, finds the expected rate of return on an investment based on the investment generating the risk free rate of return plus a risk premium

• Must earn risk free rate of return to be worthwhile, exceeding beta
• minimum benchmark is 90 day t bill rate

Question 4

Prospectus for non exempt new issue

Answer 4

1. Cannot be marked up, cannot be highlighted, cannot be altered in any way, cannot be abstracted

Reason is that it would alter legal work making it noncompliant with SEC regulations

• advertisements and promo material cannot be attached because this is a legal disclosure
  2. Must be sent to customer no later than confirmation, which is entry into the contract

Question 5

Fundamental vs technical analysis

Answer 5

Fundamental analysis is of the company itself, while technical looks at market trends

Fundamental eg balance sheet, management trends, etc

Once fundamental analysis is complete, technical analysis comes in to determine when to buy

Question 6

NASAA rules on correspondence

Answer 6

It all must be kept for 5 years, including instant and text messages, if personal and business phone are same, all messages must be kept regardless

Note that federal law differs, only requires 3 years

Question 7

Equity indexed annuity

Answer 7

Annuity payments are based on the performance of an index, there are caps and floors and participation rates

Floor is typically 1%

8% of 9%

Question 8

Oversubscribed issue

Answer 8

Issuer/ underwriter cannot buy himself and ride up market spike when demand is high, prohibited practice

Question 9

Estate tax

Answer 9

First 11m 200k excluded from estate tax

-deductions first, funeral costs, outstanding expenses, income tax, all deducted from estate, then you looks at 11m figure, if less no tax

Question 10

Inadvertent sale of unregistered nonexempt security

Answer 10

—Tender offer for original cost plus 6% interest rate, Plus attorney’s fees

—if already sold at loss, remedy is to make whole, including loss

—note that interest and dividend income offsets damages

Question 11

Block trading

Answer 11

10,000, sweeping action for unexecuted trades

Question 12

Forward contracts v futures

Answer 12

Forward contracts are custom, and may not be offset without permission

Futures contracts are standardized, easy to trade, listed, easier to offset

Question 13

Discounted fees

Answer 13

Permissible as long as disclosed in form ADV Part 2A

Question 14

Regulatory risk/ legislative risk

Answer 14

Tax law change

Question 15

IAR change in employment

Answer 15

Firm must notify state admin promptly, however if IAR learns this did not happen, IAR must inform admin

Question 16

Investment advisor rep/ broker dealer relations

Answer 16

Must disclose to customer if IAR receives compensation for working with a particular broker dealer

BUT

does not have to use the broker dealer of the customer’s liking

Question 17

Modern portfolio theory

Answer 17

Assumes there is an efficient frontier

Question 18

Advisory contracts

Answer 18

No hedge contracts no exculpatory contracts e.g. binding mediation

Question 19

Gifted securities

Answer 19

Appreciated gifted securities assume the donor’s holding period and the donor’s cost basis

Inherited securities assume a new cost basis which is the market value at date of death

Question 20

Duration

Answer 20

“I am interested in enduring this exam for as little time as possible”

Duration is the weighted average time it takes to receive a bond’s cash flows

Interest rate and duration are inversely related, thus a zero coupon has the highest duration

Time to repayment is literal

Bonds with a short duration are the least interest rate sensitive

High coupon bonds have the shortest duration, and are the least interest rate sensitive

Question 21

529 v UTMA

Answer 21

Neither is deductible, and only 529 allows for a rollover

529 grows tax deferred and must be used for higher education expenses except for 10k a year which can be applied to lower education

UTMA is taxable every year and can be used for any purpose

Question 22

401k v 403b

Answer 22

Same, cap is $19,500, both operate via salary reduction/ deferral

401k can be invested in individual stocks while 403b cannot

Question 23

Registration

Answer 23

1. Filing

Only available to seasoned companies that have already registered with the SEC

Effective 5 days after filing

2. Coordination

Coordinates state registration with a current federal registration

3. Qualification

Must be used in oil and gas