TEST 3 Flashcards
According to the Securities Exchange Act of 1934, which of the following items would be required on an order ticket for a securities transaction?
The account number The designation of the IA, if the order is entered by an IA on behalf of a client The price of the security at the time the order is entered The terms and conditions of the order [A] I, II, III, IV [B] I, III, IV [C] I, II, IV [D] I & IV only
[C] I, II, IV
All choices offered would be required on an order ticket except that you would NOT need the price of the security at the time the order is entered.
The “designation of the IA” would be a reference to how the IA is functioning and could include discretionary status, whether the order was solicited/unsolicited, and whether or not the IA is acting in a principal or agency capacity on the trade.
A new broker-dealer firm has just opened its doors. The firm has an office located in California, but intends to do all of its business online. The firm does not have clients outside of California at this time, but intends to do business in any state where clients may be interested in the online platform. With the regulations of the Uniform Securities Act in mind, which of the following statements about this scenario are TRUE?
Since the firm intends to do all of its business online, it will be required to register with the SEC only.
The firm will be required to register with the SEC and with any states in which it transacts business with clients.
The firm’s website is considered advertising, and copies of the current version as well as prior versions of the site must be maintained and stored according to regulations.
If the firm’s website is limited to order executions only, the website will not be considered advertising.
[A] I and III
[B] II and III
[C] I and IV
[D] II and IV
[B] II and III
According to the Uniform Securities Act, regardless of whether business is conducted via the internet, telephone, or in person, broker-dealers must be registered in states where they conduct business. This includes a customer transacting business through an online platform in a particular state. This firm would be required to register with the SEC as well as with any states in which it does business or directs advertising.
Websites are considered to be a form of advertising according to the Uniform Securities Act. For this reason, a copy of the current version of the website as well as prior versions and material changes must be maintained by the broker-dealer. Such records may be stored electronically, but in such a case, they must not be in a format that can be altered, they must be readily accessible, they must be able to be copied as needed, and duplicate copies must be stored in separate locations.
State Administrators have certain authority regarding the establishment of requirements related to net capital and registration of broker-dealers. Which best describes this authority?
[A] Administrators must establish minimum capital requirements that are greater to those of the SEC.
[B] Administrators can act in the public interest, establishing appropriate minimum net capital requirements for broker-dealers.
[C] Administrators can only enforce the minimum net capital requirements of the SEC.
[D] Administrators have no authority to establish or enforce net capital requirements of broker-dealers.
[C] Administrators can only enforce the minimum net capital requirements of the SEC.
Remember that Federal law always preempts state law and that states can never require more than what is required at the Federal level (SEC). The Administrator has discretion as to whether or not to enforce the SEC requirements on net capital but does NOT have the discretion to establish minimum thresholds. The Administrator does have authority, but that authority is limited in scope.
For example, say the SEC has a $25,000 minimum net capital requirement for a particular type of firm. A State Administrator has the authority to require $25,000 minimum net capital or not require it at the State Level, but the State Administrator is not permitted to create a minimum net capital that is lower than $25,000 or higher than $25,000 at the State Level.
Which of the following is NOT a shared characteristic between common stock and preferred stock?
[A] The Board of Directors must declare dividends, which are always voluntary.
[B] A reduced tax rate can be achieved on capital gains by holding for one year and one day or longer.
[C] Changes in market value of shares is primarily driven by company performance.
[D] Dividends are taxed as ordinary income and can be qualified when certain criteria are met.
[C] Changes in market value of shares is primarily driven by company performance.
Though the market price of both types of stock can be affected by company performance, the performance of common stock is more heavily driven by company performance, while the market price of preferred stock is more commonly driven by changes to interest rates and dividend rates on similar preferred stocks.
An Investment Adviser employs several IAR’s. The IA is required to maintain a copy of which of the following with regard to its IAR’s?
[A] Securities screening and background checks that were performed on each IAR
[B] A copy of their driver’s license
[C] The initial application completed by each IAR
[D] A copy of each IAR’s fingerprints obtained from a police department
[C] The initial application completed by each IAR
Recordkeeping regulations require the IA to retain a copy of each IAR’s initial application for registration.
The definition of an issuer found in the Uniform Securities Act includes all of the following EXCEPT:
[A] A business entity that is involved in the sale of oil and natural gas certificates of interest.
[B] A county that sells bonds to finance a new fairgrounds.
[C] A direct participation program that sells interests in a real estate limited partnership.
[D] A state that sells bonds to finance state-wide transportation.
[A] A business entity that is involved in the sale of oil and natural gas certificates of interest.
In the Uniform Securities Act, any entity that is involved in the sale of certificates of interest or participation in oil, gas, or mining titles or leases is excluded from the definition of issuer for purposes of the Act.
Generally, if stock prices are rising and such moves are above the moving averages for that stock’s price over the past measured period it would be a signal to a technical analyst to do which of the following?
[A] Buy the stock
[B] Sell the stock
[C] Hold the stock
[D] Sell the stock short
[A] Buy the stock
Although there are many components to Moving Averages, generally if stock prices are increasing and are exceeding that stocks moving averages of past measured periods (60 days, 90 days, 200 days), it would be a signal to “buy” the stock for a technical analyst.
According to the Uniform Securities Act, which of the following is true regarding proceedings conducted by the administrator:
[A] The Administrator may issue a separate order to revoke an exemption.
[B] An order is issued to revoke an exemption is made retroactively.
[C] The burden of proving an exemption is on the administrator.
[D] Before issuing a summary report to deny an exemption, the administrator must provide the report to all parties.
[A] The Administrator may issue a separate order to revoke an exemption.
Administrators can issue separate orders to revoke an exemption if it is deemed to be in the public’s interest but the Administrator cannot make such revocations retroactive. The burden of proving an exemption is placed on the person claiming it, not on the Administrator.
Of the following individuals who are employed by a federal-covered adviser, which individual would be required to register as an IAR in a state?
[A] A person who manages 20 pension plans and 2 individuals as clients
[B] A person advising 5 mutual funds and managing individual retirement accounts for 8 relatives
[C] A person advising 10 mutual funds and 6 individuals, 4 of whom are officers of the investment adviser
[D] An individual whose sole function is writing a column for the IA’s weekly newsletter about upcoming IPOs
[B] A person advising 5 mutual funds and managing individual retirement accounts for 8 relatives
If an IA or IAR has more than 5 clients in a state, the IAR must register in that state. Institutional investors and officers of the IA are disregarded when counting clients. This rule generally applies only to IA’s but in USA, Section 201 end notes, IARs were added to this exemption.
While employed, Sally had purchased shares of a mutual fund with an aggressive growth investment objective. Sally has decided to retire this year and wants to change the investment objective to moderate growth and income. The IAR managing the account recommends an appropriate fund within the same family of funds. What fees, if any, should Sally be aware of when making this change?
[A] There are no fees provided she makes this change with the same IAR.
[B] Redemption Fees
[C] Exchange Fees
[D] Sales Loads
[C] Exchange Fees
When mutual fund investors want to change investment objectives, they will most likely have to exchange those shares for shares with the desired investment objective. Most companies offering mutual funds will allow an investor to exchange their shares for shares of a different fund in the same family of funds. By staying in the same family of funds, investors would avoid purchase fees, redemption fees, and sales loads.
However, there will likely be a fee associated with exchanging one type of fund for another fund within the same family and these fees are called “Exchange Fees.”
An investor is looking at investing in smaller corporations. In considering several, one “S” corporation has stood out as a seemingly good investment choice. Which of the following would NOT be benefits of an “S” corporation?
With an “S” corporation, investors have limited liability.
With an “S” corporation, the number of investors and type of investor is limited.
With an “S” corporation, income is passed through directly to investors who pay taxes only once.
With an “S” corporation, transferability of
shares can be restricted.
[A] I and III only
[B] II and IV only
[C] I, II, and IV only
[D] II, III, and IV only
[B] II and IV only
Limitations on investors and restriction of transferability are not benefits of an “S” corporation to an investor. “S” corporations are typically limited to 100 shareholders, all of whom must be domestic. As well, transferability of shares is sometimes limited by buy/sell agreements, which require shareholders to offer their shares to other shareholders prior to selling to an outside party. This can restrict or limit easy transferability.
“S” corporations offer limited liability to shareholders, which is a benefit. They also have pass-through taxation, where the business entity does not pay taxes prior to the distribution of gains. This means that shareholders pay capital gains taxes on the gains of the company only once, which is a benefit of an “S” corporation over a “C” corporation.
To enter into an investment advisory contract with a client permitting performance based fees, the IA must disclose all of the following EXCEPT:
[A] the period of time that will be used to measure investment performance
[B] the nature of the benchmark index that will be used for comparison.
[C] that a performance based fee may create an incentive for the IA to take greater risks
[D] that the IA may not be compensated for both realized capital gains and unrealized capital appreciation in the same portfolio
[D] that the IA may not be compensated for both realized capital gains and unrealized capital appreciation in the same portfolio
NASAA regulations do not expressly prohibit compensation based on realized capital gains AND unrealized capital appreciation in the same portfolio. However the rules do require full disclosure. Here, the statement in answer “D” prohibits both, which is incorrect, so this is not a disclosure that must be made.”
Steve owns a Sub-Chapter S Corporation and is one of the major shareholders in the corporation. The company has had a good year and has realized capital gains which will be distributed to all shareholders. How will these distributions be reported by the shareholders when they file their tax returns?
[A] Ordinary income
[B] Earned income
[C] Shareholder Capital Gains
[D] Dividend income
[C] Shareholder Capital Gains
When a Sub-Chapter S Corporation has realized capital gains, those gains are distributed to the shareholder as Shareholder Capital Gains. The S-Corporation does not pay taxes, and gains are “passed through” to shareholders.
Mike owns his own small investment advisory firm where he is the only adviser. He unfortunately suffers a stroke and ends up in the hospital in a medically induced coma. During this time, several clients cannot reach him and contact the Administrator. The Administrator, after a reasonable effort to contact Mike, also fails to reach Mike, but finds a note on the door of Mike’s office from his wife that explains the situation. Trying to assess the situation, the Administrator visits the hospital where he finds Mike is in a medically induced coma still. All of the following are within the Administrator’s authority at this time EXCEPT?
[A] The Administrator can cancel or suspend the firm’s registration due to inability of customers to contact the IA after a reasonable effort.
[B] The Administrator can cancel or suspend the firm’s registration due to Mike’s current inability to handle customer accounts.
[C] The Administrator cannot cancel Mike’s registrations and must wait to see what the outcome is of Mike’s health situation.
[D] The Administrator can cancel or suspend the firm’s registration because at this time Mike’s firm has essentially ceased operating.
[C] The Administrator cannot cancel Mike’s registrations and must wait to see what the outcome is of Mike’s health situation.
Choices A, B & D are reasons why registration may be canceled. Choice “C” is incorrect since the Administrator would have the authority to cancel or suspend the firm’s registration.
XYZ is currently trading at $40. An investor who is long 1,000 XYZ shares believes the shares will trade lower within the next six months. Which option strategy best protects the investor’s long position?
[A] Sell 10 XYZ calls
[B] Buy an XYZ put
[C] Sell an XYZ call
[D] Buy 10 XYZ puts
[D] Buy 10 XYZ puts
