USA Flashcards

Question

``` The annual percentage returns on ABC over the last 9 years have been: 7, -6, -3, 8, 6, 5, 11, 13 and 8. What is the median return? 5.1 8 7 -6 to 13 ```

Answer 1

The median is the center point--the point on a data set where there are the same number of points above as below. In this question the median is 7. There are 4 points below (-6%, -3%, 5%, and 6%) and 4 points above (8%, 8%, 11%, and 13%). Choice (d), -6% to 13%, would represent the range.

Answer 2

B) Keogh Plans. Payroll deduction plans allow employees to purchase life insurance, mutual funds, and variable annuities through after-tax deductions from their paychecks. Employers may match employee contributions if they wish. The sales charges are often lower than the employees would pay if they purchased these products individually. Payroll deduction plans are nonqualified plans.

Answer 3

A) I and III The IRS defines earned income as compensation received for personal services actually rendered. Royalties and long-term disability benefits received prior to the minimum retirement age come under the IRS's definition. Dividends and Social Security are not considered earned income. They are still taxable, however

Answer 4

B) While fixed-income securities are subject to market, credit, and liquidity risks, the greatest risk in buying and holding fixed-income securities over long periods is that their rate of return will not exceed the rate of inflation. As the rate of inflation rises, it will cause a bond's real rate of return to be less than its internal rate of return

Answer 5

D) I, II, and IV only Alimony is deductible for tax purposes by the payer and taxable to the recipient. It is not taxed as earned income, but is taxed as unearned ordinary income.

Answer 6

A) The current account shows the results for the trade transactions completed in the current year. The capital account shows the inflows and outflows of capital in transactions involving property and financial assets. The net of the two accounts must be zero.

Answer 7

Under the provisions of the Investment Advisers Act of 1940, an investment adviser must provide clients with its balance sheet if it requires the prepayment of a fee in excess of $1,200, six months or more in advance of the service. At the state level, a balance sheet is provided for collecting/soliciting a prepaid fee of greater than $500, and also for maintaining custody or discretionary control of clients' assets. However, at the federal level, a balance sheet is provided only if the adviser is collecting/soliciting a prepaid fee of greater than $1,200

Answer 8

If you inherit a traditional IRA or any other tax-deferred retirement plan, a 401(k) or 403(b), from anyone other than your deceased spouse, you may NOT treat the inherited IRA as your own. But, as with the original owner, you will not owe tax on the assets in the IRA until you receive distributions. If the previous IRA owner dies before distributions have begun, the entire IRA must be distributed under one of the following two rules. Rule 1. By December 31 of the fifth year following the year of the owner's death Rule 2. Over the life of the designated beneficiary or over a period not extending beyond the life expectancy of the beneficiary

Answer 9

B) Alpha is the amount either above or below the expected return as indicated by the beta. If a security outperforms the expected return, it is said to have a positive alpha. If it underperforms the expected return, it has a negative alpha. With the market advancing 10%, the expected return for a security with a beta of 1.3 would be 13%. Since Freedmont Airlines only went up 12%, its actual return is 1% below the expected return. (7473

Answer 10

D) The biggest benefit of a universal life insurance policy is the flexibility of the death benefit. If policyowners need additional coverage, they may increase the death benefit. Similarly, they may lower the coverage if their insurance needs decrease. (67702)

Answer 11

C) Assets, liabilities and retained earnings are balance sheet items and are not represented on the income statement. Retained earnings are the funds that a company earned that it did not pay out in the form of cash dividends.

Answer 12

Under USA, The statute of limitations for criminal violations under the Act is five years. 5 yrs.

Answer 13

The net present value of an investment is a dollar amount, not a percentage rate of return. To find the net present value, advisers net all the expected cash outflows (such as the amount of the initial investment) against all the expected cash inflows (such as the income to be generated by the investment). Next, they discount the net amount by using a required minimum rate of return as a discount rate to determine the net present value of the investment in dollars. If the net present value of the investment is positive, the investment is considered to be worthwhile.

Answer 14

Explanation: D) A diversified portfolio of fixed income securities is subject to both inflation and interest rate risk. Inflation risk exists because the rate of inflation could exceed the fixed rate of return on the portfolio, which would result in a loss of purchasing power. Further, if interest rates in the economy go up, the portfolio could lose value, which is known as interest rate risk. However, since the portfolio is diversified, most business risk (or performance risk) is eliminated. Market risk cannot be avoided by diversification but is more common to stock portfolios rather than bond portfolios.

Answer 15

Explanation: B) Tax rules state that the partial withdrawal of annuity funds are taxed as interest first and principal last. Although the $5,000 withdrawal is less than the cost basis, the entire $5,000 is taxable as ordinary income and is subject to the IRS 10% premature distribution penalty since he or she is less than age 59 1/2.

Answer 16

Explanation: C) There are three exemptions from the registration requirement under the Advisors Act: advisors who render no advice on any exchange-listed security and whose clients are all in one state; advisors who do not hold themselves out as investment advisors and have fewer than 15 clients per year, none of whom are investment companies; and advisors whose only clients are insurance companies.

Answer 17

B) Affiliated persons may own investment company shares but they cannot purchase securities directly from the mutual fund's portfolio.

Answer 18

C) It is not a violation of the Securities Act of 1933 to disclose in the preliminary prospectus the pricing formula for investment company shares.

Answer 19

The current account shows the results for the trade transactions completed in the current year; while The capital account shows the inflows and outflows of capital in transactions involving property and financial assets

Answer 20

Any material changes in the IA's ADV would require that an amendment be filed with the SEC within 30 days. Nonmaterial changes in information in the ADV are amended within 90 days of the end of the IA's fiscal year. Under USA the IA must notified the administrator promptly!

Answer 21

A) I and II only Although partial surrenders of variable life insurance policies are first treated as a return of principal up to the amount of basis, variable annuities are subject to interest-first taxation. Only life insurance proceeds pass to beneficiaries tax-free. Beneficiaries of variable annuity contracts are taxed on the proceeds in the same manner as the annuitant.

Answer 22

B) I and IV If the U.S. dollar is in a decline against foreign currencies, U.S. goods will be less expensive to foreigners. This should lead to increased U.S. exports and decreasing imports into the U.S. Since the U.S. has a trade deficit, this would improve the balance of trade.

Answer 23

When an investment adviser sells securities directly to a client (i.e., principal trade), the firm must provide disclosure and obtain the client's consent before completing the transaction

Answer 24

D) The most likely the reason for the bond's price decline is that interest rates have risen. The risk of interest rates moving against a bond investor is referred to as interest-rate risk. Another possible explanation for the bond losing value is that its credit rating fell (credit risk).

Answer 25

B) ERISA The traditional state law standards for investing by fiduciaries were the prudent man standard and the more restrictive legal list. Today, many states have adopted a version of the Uniform Prudent Investor Act, which allows fiduciaries to take into account the concepts of Modern Portfolio Theory. ERISA is a federal law regulating qualified pension plans.

Answer 26

B) I and IV There are certain types of risk that are common to any investment. Market risk and opportunity risk would be among these generic risks. Market risk is the day-to-day price fluctuation of a security trading in the marketplace. Opportunity risk is the risk that a better investment decision could have been made after the completion of a purchase or sale. U.S. government bonds would not be subject to credit risk or currency risk, unless the investor had purchased them with foreign currency.

Answer 27

Will follow the pricing of debt instruments and not common stock. Pays a fixed dividend and is purchased by investors looking for income, not capital appreciation. Would most closely follow the pricing of long-term debt instruments.

Answer 28

I & IV Child support payments are not tax-deductible for the payer and not taxable for the recipient.

Answer 29

C) Partially taxable at ordinary rates and subject to a penalty. Anyone may purchase a nonqualified annuity and make nondeductible contributions (after-tax dollars). Withdrawals from a nonqualified annuity are taxable as ordinary income (not capital gains) in excess of the client's cost basis (original investment). The initial investment is considered return of principal and not subject to taxes. Since the client is less than age 59 1/2, she is also required to pay a 10% tax penalty.

Answer 30

Current yield measures the interest the investor receives from the bond compared to the price the investor paid for the bond and is calculated by dividing the annual interest payments by the purchase price. Current yield does not consider the price appreciation of a bond purchased at a discount or the price depreciation of a bond purchased at a premium.

Answer 31

B) A change in the fee structure does not necessitate an interim amendment be filed. Instead, the change in fees must be noted on the amended Part 2A that is filed within 90 days of the fiscal year. Disciplinary action or a change in an already disclosed disciplinary action would require an interim updating amendment be filed promptly.

Answer 32

choice (d). Current interest rates would not be a factor when considering a long-term investment objective. However, to determine how much the client must invest to achieve a future goal, choices (a) and (b) are necessary, as is choice (c), the current cost of living, which can be used to estimate an inflation rate.

Answer 33

C) File a certificate with the appropriate state or local official. The only way to create a limited partnership is by filing a certificate (or other document) with a state or local agency. A general partnership, in contrast, is created whenever two or more people agree to form a partnership. The agreement does not even need to be in writing.

Answer 34

D) The entire distribution will be taxable at ordinary income rates. This question discusses a nonqualified annuity. In a nonqualified annuity, the investment is made with after-tax dollars. When a client makes a single (irregular) withdrawal from a contract, the IRS requires that a last in, first out (LIFO) method be used when calculating tax liability. This means earnings (the last in) come out first. In this case, the $50,000 is taken out of the $180,000 of earnings and would be fully taxable as ordinary income. Annuities never generate long-term capital gains.

Answer 35

Any person challenging an SEC order has 60 days to file a petition

Answer 36

Senior officers are included if they are senior officers of the issuer. Institutional investors, such as insurance companies, are specified in the regulation. A person with annual income of $200,000, or net worth of $1 million, is also considered accredited

Answer 37

A testamentary trust may be used when a donor wishes to control trust assets during his lifetime. John's will, when executed, will direct the executor to fund the trust with assets contained within the estate. This process does not avoid probate or reduce a potential tax liability levied on the donor's estate

Answer 38

B) A statement that defines the length of time for which the services are contracted. An investment adviser's contract must be in writing and clearly disclose the specific length of time that it is in force. Provided customer consent is obtained, advisory contracts may be assigned to another advisory firm. Advisory contracts may not include a clause which attempts to limit an adviser's liability. Also, an adviser is prohibited from sharing in a client's capital gains unless the client is qualified and meets specific financial criteria.

Answer 39

C) It provides immediate access to the books and records. Using a form of electronic media storage is acceptable provided the records are readily accessible and copies may be created. Electronic records must also be nonerasable, nonrewritable, and tamper-evident.

Answer 40

D) Being taxed on the distribution as ordinary income, plus a 10% penalty on the amount withdrawn. If an individual purchases a variable annuity, it is not considered a tax-qualified plan. The contribution is not taxed upon withdrawal; however, any earnings withdrawn prior to age 59 1/2 are subject to a 10% penalty and ordinary income tax.

Answer 41

B) I and IV When the U.S. is running a balance of trade deficit, it is importing more than it is exporting. This means that, on balance, U.S. dollars will be used to purchase foreign currencies to pay for the net imports. This strengthens foreign currency and weakens the dollar. However, if the balance of trade deficit begins to grow smaller, there is relatively less demand for the foreign currency and the dollar will strengthen. A stronger dollar indicates stronger demand for U.S. financial assets, including bonds. Bond prices will rise and their yields will fall.

Answer 42

C) Part of each payment is taxable earnings and part is a tax-free cost basis. A nonqualified annuity has a cost basis consisting of the after-tax dollars invested, as well as earnings that are tax-deferred. If it is annuitized, the cost basis is returned in equal amounts in each payment. The rest of each payment is tax-deferred earnings that become taxable (as income) upon receipt.

Answer 43

C) Partially taxable at ordinary rates and subject to a penalty. Anyone may purchase a nonqualified annuity and make nondeductible contributions (after-tax dollars). Withdrawals from a nonqualified annuity are taxable as ordinary income (not capital gains) in excess of the client's cost basis (original investment). The initial investment is considered return of principal and not subject to taxes. Since the client is less than age 59 1/2, she is also required to pay a 10% tax penalty.

Answer 44

D) The dollar declining relative to our trading partners' currencies. Normally, if a country's currency is declining in value relative to the currencies of its trading partners, imports would fall and exports would rise. When a country's currency is in decline, its goods would fall in price relative to similar products imported from abroad. Falling interest rates in the U.S., choice (b), may not always have an effect on lowering the value of the dollar.

Answer 45

B) II and IV only. No single profession is specified in the definition of an accredited investor. Senior officers are included if they are senior officers of the issuer. Institutional investors, such as insurance companies, are specified in the regulation. A person with annual income of $200,000, or net worth of $1 million, is also considered accredited.

Answer 46

The expected rate of return is used to estimate or anticipate the performance of a portfolio by averaging all of the possible returns and the probability that they will occur.

Answer 47

D) I, III, and IV only While equity real estate investment trusts (REITs) invest directly in properties, mortgage REITs specialize in investing in mortgages and other real-estate related securities. Their profits are derived from the difference between the interest they pay on money they borrow and the interest they receive from their mortgage investments. In order to qualify for favorable tax treatment, all REITs must pay out 90% of their income to shareholders

Answer 48

B) Broker-dealers cannot exercise written discretion without the customer's written consent. Not-held orders are the one exception for broker-dealers. With not-held orders, a brokerage firm may determine the time and price of execution without a client's written authority. Investment advisers (but not broker-dealers) may accept verbal authority from a client, but only for up to 10 days. (67573)

Answer 49

A) A simplified employee pension plan would be the best choice given this criteria. As the name implies, a SEP plan is simpler to administer and set up than some other types of pension plans. The employer is not required to make fixed annual contributions to the employee's account. A Money Purchase plan, choice (b), does require an employer to make fixed annual contributions regardless of its cash flow. A 403(b) plan, choice (c), may be established only by certain tax-exempt organizations such as a public school system.

Answer 50

D) A partnership is easy to establish and operate, while corporations require more reporting and administration. Partnerships generally do not allow for the free transfer of shares and, if a partner manages the business enterprise, he may be liable for the debts of the partnership.

Answer 51

D) According to SEC Release 1092, if a registered representative of a broker-dealer is held out to the public as a financial planner, the exemption from registration as an investment adviser is valid, provided the following conditions are met. The broker-dealer does not charge a special fee for rendering investment advice. The broker-dealer does not maintain discretionary authorization over the account. The agent providing the advice is under the control and supervision of a broker-dealer.

Answer 52

D) NASAA's Statement of Policy on Unethical Business Practices provides that the entering into, or renewal of, an investment advisory contract would need to include disclosure of: All fees and services provided The term of the contract A formula for computing the advisory fee The amount of prepaid fees to be returned in the event of an early termination of the contract The fact that no assignment of the contract will be made without the consent of the client Whether the contract grants discretionary power to the adviser The fee for managing equity securities may be higher than for fixed-income securities Choice (II) is true since the contract may be assigned with the consent of the client. Choice (III) is not true since some amount of prepaid fees should be returned if the contract is terminated.

Answer 53

D) Limited partnerships provide a form of ownership in which there is undivided interest in equity that does not pay income taxes and passes its profits and losses through to its participants. There are no rules, however, regulating the number of limited and general partners that a limited partnership must contain.

Answer 54

D) This question discusses a nonqualified annuity. In a nonqualified annuity, the investment is made with after-tax dollars. When a client makes a single (irregular) withdrawal from a contract, the IRS requires that a last in, first out (LIFO) method be used when calculating tax liability. This means earnings (the last in) come out first. In this case, the $50,000 is taken out of the $180,000 of earnings and would be fully taxable as ordinary income. Annuities never generate long-term capital gains. (62345)

Answer 55

Value investing is a method of identifying securities that are undervalued based on company fundamentals. Value stocks tend to have low stock prices in relationship to their earnings, a higher dividend yield than their industry peers, and, typically, trade at a price closer to or at a discount to the book value than their competitors. Value investors believe that the most undervalued companies should rebound and outperform the market. This, of course, assumes that the company is financially sound

Answer 56

C) All the choices are applicable except choice (c). A misdemeanor is defined as an offense punishable by a sentence of less than a one-year imprisonment and/or a fine of less than $1,000, as well as a general court martial, which is a military term

Answer 57

D) The expected rate of return is used to estimate or anticipate the performance of a portfolio by averaging all of the possible returns and the probability that they will occur

Answer 58

B) The Contrarian style of investing is one that bets against market trends and does not adhere to the prevailing consensus opinion. This particular investment style usually focuses on companies that are out of the mainstream and that have low P/E ratios

Answer 59

Passive asset allocation strategies such as buy and hold are characterized by low transaction costs and minimal tax consequences. Systematic rebalancing, another passive strategy, alters the portfolio either monthly, quarterly, or annually to restore an original strategic asset allocation if market movements have changed it. Active asset allocation strategies look to change the portfolio allocation in anticipation of economic events

Answer 60

When an investment adviser analyzes the market by first evaluating individual companies, it is considered a bottom-up approach. Conversely, when an adviser begins by analyzing the performance of a sector as a whole, it is considered a top-down approach

Answer 61

While universal life allows the policy owner to change the premiums and/or the death benefit, variable life has fixed premiums and a fixed minimum death benefit. The actual death benefit on a variable life policy is not changed by a decision of the policyholder but, instead, as a result of growth in the subaccounts. Universal life has a minimum interest rate and an actual rate that could be higher, but it is determined by the insurance company, not the policyholder. Variable life and whole life are the same in having fixed premiums paid at fixed intervals

Answer 62

C) I and III only If you inherited the IRA from your deceased spouse, you may choose either the special spousal option, which allows a spouse to treat the IRA as his own or, alternatively, follow the rules for a person who inherits an IRA from someone other than his spouse. If you elect to be treated as the owner of the IRA account, all the normal rules apply to the IRA just as they would to an account you set up for yourself. This means distributions are subject to the required minimum distribution (RMD) as well as the ten percent penalty for early withdrawals--notwithstanding the normal exclusions for qualified medical and educational expenses and a first-time home purchase up to $10,000. If you elect alternatively to follow the rules for someone who inherits an IRA from a person other than his spouse then, as with the original owner, you will not owe tax on the assets in the IRA until you receive distributions. Under this method, if the previous IRA owner was over 70 1/2 and required to take withdrawals under the required minimum distribution (RMD), you must continue withdrawals using the previous distribution method, which is over the life expectancy of the original owner.

Answer 63

Time-weighted returns eliminate biases caused by the inflow or outflow of investor money. It is often used to compare the performance of money managers. On the other hand, dollar-weighted returns provide a better idea of how an individual investor has done over time by eliminating the biases caused by superior performance in one year or inferior performance in another

Answer 64

C) When the adviser requires the prepayment of a fee that is greater than $1,200, six months or more in advance of providing service Under the provisions of the Investment Advisers Act of 1940, an investment adviser must provide clients with its balance sheet if it requires the prepayment of a fee in excess of $1,200, six months or more in advance of the service. For questions regarding the requirement to send a balance sheet, it is important to identify whether it is referencing state or federal law. At the state level, a balance sheet is provided for collecting/soliciting a prepaid fee of greater than $500, and also for maintaining custody or discretionary control of clients' assets. However, at the federal level, a balance sheet is provided only if the adviser is collecting/soliciting a prepaid fee of greater than $1,200.

Answer 65

D) III and IV only A subsidiary of a bank, registered as a broker-dealer that sells nonexempt securities to the public A broker-dealer that sells only exempt securities within the state . A sales agent of a broker-dealer is by definition an agent. It does not matter whether the securities are covered under a federal exemption or not. If administrative personnel are authorized to take orders, they are agents. By definition, an agent is an individual and not a firm. Choices (III) and (IV) are both firms and not individuals

Answer 66

Persons who represent exempt issuers are not defined as an agent so there is no need for registration. Persons who represent non-exempt issuers in sales to the public are defined as agents and must be registered whether or not they receive compensation. Persons who represent non-exempt issuers in sales to existing employees are only defined as agents (and must be registered) if they receive compensation related to the transaction(s). Choice (c) is an example of an exempt transaction. In this case the person is not defined as an agent so no registration is required.

Answer 67

C) 30 days Any material changes in the IA's ADV would require that an amendment be filed with the SEC within 30 days. Nonmaterial changes in information in the ADV are amended within 90 days of the end of the IA's fiscal year.

Answer 68

D) None of the above. If the portfolio manager has investment discretion for more than $100 million of equity securities, he must file Form 13F with the SEC within 45 days of the end of quarter, if that is the value of his holdings as of the end of any month.

Answer 69

D) An investment in the common stock of a small-cap company has the greatest amount of capital appreciation potential but, it will not provide any income. Choices (b) and (c) will both provide the income but, neither has a high potential for capital appreciation. Choice (d), the convertible bond, will give the investor both. Since it is convertible at the investor's discretion into a fixed number of shares of common, it will have the growth potential of the underlying common stock but, because it is a bond, it will provide the income that the investor also wants

Answer 70

C) NAV The expense ratio is the percentage of a fund's assets that are used to pay its operating costs. A fund's operating costs include management fees paid to the fund's adviser, shareholder services, salaries, legal and accounting services, postage, printing, telephone service, and other costs--in short, the day-to-day operating expenses of the fund. These expenses are all deducted from the income that the fund earns. The expense ratio is determined by dividing total expenses by the average net assets in the portfolio.

Answer 71

D) The entire distribution will be taxable at ordinary income rates. This question discusses a nonqualified annuity. In a nonqualified annuity, the investment is made with after-tax dollars. When a client makes a single (irregular) withdrawal from a contract, the IRS requires that a last in, first out (LIFO) method be used when calculating tax liability. This means earnings (the last in) come out first. In this case, the $50,000 is taken out of the $180,000 of earnings and would be fully taxable as ordinary income. Annuities never generate long-term capital gains.

Answer 72

B) II and IV Any withdrawal of cash value from a life insurance policy is considered a return of premiums first, which would be tax-free. Withdrawals above the amount of premiums paid will be considered interest and, therefore, taxable as income. Policyholders usually prefer to borrow against their cash value, since this would be tax-free. The loan does not need to be repaid, but any amount still outstanding on the death of the insured will be subtracted from the death benefit

Answer 73

D) Protection against rising interest rates Real estate investment trusts offer investors a stable dividend based on the income produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange offering investors liquidity. Since investors usually purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income-earning securities become more attractive

Answer 74

C) Can be at a discount or premium to NAV, whereas the open-end fund can only have an asked price at or above the bid A closed-end investment company's shares pricing is based on supply and demand for the shares of the fund. Therefore, it can trade at either a discount or a premium to NAV. The shares of an open-end fund (mutual fund) are not traded on the open market and, therefore, the share price is based on NAV. If it is a no-load fund, the asked price will be the same as the bid (NAV) and if it is a loaded fund then the asked price will be above the NAV. It will be the NAV plus any applicable sales charge

Answer 75

D) Variable life, as with whole life, has fixed premiums paid at fixed intervals While universal life allows the policy owner to change the premiums and/or the death benefit, variable life has fixed premiums and a fixed minimum death benefit. The actual death benefit on a variable life policy is not changed by a decision of the policyholder but, instead, as a result of growth in the subaccounts. Universal life has a minimum interest rate and an actual rate that could be higher, but it is determined by the insurance company, not the policyholder. Variable life and whole life are the same in having fixed premiums paid at fixed intervals.

Answer 76

B) Very small companies High price-to-earnings ratios are often found in small, rapidly growing companies. Low margin businesses, such as supermarkets and discount retailers typically have low P/E ratios. Some capital intensive manufacturing businesses (e.g., autos) that have declining sales and profitability prospects would also be expected to have relatively low P/E ratios.

Answer 77

B) Gross profit from sales, divided by sales The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The higher this ratio, the better from an investor's point of view, because a company that has a higher gross profit margin than its competitors is more efficient. Investors would normally be willing to pay more for a company that has a higher efficiency rating than its competitors.

Answer 78

Using the Rule of 72 to approximate the compounded growth rate, 72 divided by the number of years it will take a sum of money to double will yield the growth rate. 72 divided by 8 years equals a 9% annual growth rate.

Answer 79

B) I and III only Dollar cost averaging produces a cost per bond that is less than the average of the prices at which the bonds were purchased, assuming there was some price fluctuation. This helps reduce timing risk in volatile markets. However, it does NOT guarantee a profit, since the eventual sale price of the bonds could be less than the investor's average cost

Answer 80

D) Decline The term selling at a basis is synonymous with yield to maturity. As interest rates decline, the price of existing bonds increases, so their yields decline.

Answer 81

The correct answer was: II and III. The minimum capitalization requirement for a new fund is $100,000 in net assets. A further restriction placed by the act is limiting one fund's holdings to a maximum of 3% of the voting shares of another fund. Because the shares of an open-end company are always considered a new issue, the shares may not be purchased on margin, but, as with other new issues, do have a loan value once owned at least 30 days. However, this restriction is part of the Securities Exchange Act of 1934, not the Investment Company Act of 1940.

Answer 82

C) RMDs may be deferred only from the plan sponsored by the current employer. The rule is that you can only defer RMDs in the plan of the employer where you are currently employed. For example, assume you retire from Company A and get a job with Company B, and both companies have a 401(k) plan. You can only defer RMDs from the Company B plan, because that is your current employer; you will have to take RMDs from the Company A plan. The same would be true if it were two different school systems with 403(b) plans.

Answer 83

B) each member of the investment committee or group that determines general investment advice to be given to clients. The business background of these key individuals must be included in Part 2B of Form ADV and in the disclosure brochure. The business background of other employees, affiliated broker/dealers, and institutional clients need not be included in the brochure.

Answer 84

C) the corporate form of business structure would be the easiest for ultimate transfer of ownership In general, the corporate form of business leads to the easiest transfer of ownership. Since Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. In the case of a partnership, even though Suzie would be the only partner, transfer is not as easy as with the sale of stock.

Answer 85

C) Defined benefit. In a defined benefit plan, the retiree receives a specified amount with the sponsor bearing the investment risk. Keogh plans are not corporate plans. In a defined contribution plan, the employee contributes a defined amount each period, bears the investment risk, and does not receive a defined amount upon retirement. TSAs are defined contribution plans, not defined benefit plans.

Answer 86

A) Capitalization An open-end investment company continuously offers for sale and stands ready to redeem a constantly changing number of shares; therefore, its capitalization is constantly changing. On the other hand, a closed-end investment company issues a fixed number of shares and does not redeem its own shares. Therefore, its capitalization is fixed.

Answer 87

C) Qualified variable annuity. The entire amount of the distribution from a qualified annuity will be subject to taxation at ordinary income rates. No tax is due on the Roth, and only the earnings on the nonqualified annuity or nondeductible IRA will be subject to tax.

Answer 88

B) 457 The 457 Plan allows participants to withdraw funds at any time, not just after age 59½, without incurring the 10% tax penalty. Income taxes would, of course, be due, but no penalty.

Answer 89

The measurement that compares a stock's price history to the movement of the total market index for the same period is beta. Standard deviation indicates how much an investment's returns have fluctuated from its average returns over a period of time, while R-squared measures whether an investment's returns tend to go up and down at the same time as the markets. Duration measures how sensitive a bond will be to small changes in interest rates.

Answer 90

D) they may contribute a specified percentage of his pay to a regular 401(k). In order to have matching contributions, participants in a Roth 401(k) plan must actually have two accounts – the Roth and a regular 401(k). The employer contributions are made on a tax deductible basis to the regular 401(k) and are fully taxable upon withdrawal.

Answer 91

A) II, III and IV. An IRA contribution can only be made by someone who has earned or otherwise eligible income. Earned income is defined as salary, wages, commissions, and tips. Alimony, (but not child support) is considered eligible income for an IRA. Individuals can contribute to an IRA even if they are covered by a corporate pension plan or Keogh plan. Although a contribution can be made, it may or may not be deductible depending on the individual's income. Dividends and capital gains are not considered earned income.

Answer 92

B) $6,500.00 All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. Reinvested capital gains are not part of a trust's DNI.

Answer 93

D) must keep copies of the LTFCI corporate charter for at least three years after LTFCI’s termination When an investment adviser ceases to exist, either through going out of business or being succeeded by another firm (as is the case here), articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor must be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. Although it is true the contracts have been assigned to the successor firm (Goldin and Sylver), the consent for that had to be obtained by LTFCI.

Answer 94

The correct answer was: I, II, III and IV. All of these are included in the filing requirements, even the prospectus.

Answer 95

The correct answer was: I, II, and IV A capital needs analysis is used to help determine the proper amount of life insurance that will provide for the family’s needs in the event of premature death of the primary breadwinner. The agent would factor in the client’s projected earnings until retirement and, in order to do that, would need to know the current age. In addition, to be sure to allow for enough to keep up with the rising cost of living, the projected inflation rate is needed. However, market volatility does not impact the analysis because the amount of the selected death benefit will remain constant, regardless of changes to the market.

Answer 96

The correct answer was: I and II. The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification of the President of the United States and may summarily suspend securities trading in a registered security listed on a stock exchange for up to 10 days. The SEC does not have the authority to suspend trading in exempt securities.

Answer 97

The correct answer was: I and III. Industry rules prohibit sales charges in excess of 8-½% on mutual fund purchases. However, in order to do so, shareholders must be given rights of accumulation and breakpoints must be available for larger purchases (generally starting at $10,000 or $15,000). There is no requirement to offer the exchange privilege.

Answer 98

The correct answer was: A distribution made in payment for higher education costs of Jason’s granddaughter. Jason can take a distribution from any of his IRAs without imposition of a tax penalty as long as it is made in payment of higher education costs (tuition, fees, books, supplies, and equipment) for his granddaughter. QDROs do not apply to IRAs. Separation from service will not affect Jason’s ability to take a distribution from his IRA. A distribution due to financial hardship is always subject to the early distribution penalty if the participant is not yet age 59½.

Answer 99

The correct answer was: I and IV. Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether the fund can trade on margin is not a function of the management contract.

Answer 100

The correct answer was: an anti-dilution clause. Most convertible securities are sold with anti-dilutive clauses that provide for an adjustment in the number of shares based upon stock splits or stock dividends.

Answer 101

The correct answer was: 33% of its assets in the common stock of a small-cap technology company. An investment company that has invested 33% of it assets in any issue, small-cap or not, exceeds the limits set in the 75-5-10 test. This test requires that 75% of the assets be invested in securities issued by companies other than the investment company (regardless of the type of companies) so that no more than 5% of total assets are invested in any one company, and no more than 10% of an outside corporation's voting securities are owned by the investment company. There are no restrictions on the other 25%, making it possible to have as much as 30% of the fund's assets in the securities of one issuer, but not 33%. In fact, with that "other 25%", a diversified company could, theoretically, own 100% of the voting stock of an issuer so owning 18% is no problem.

Answer 102

The correct answer was: I, III and IV CAPM assumes that investors will be looking at a return for taking systematic risk, hence holding diversified portfolios. One of the most important assumptions is that investors will be able to borrow/lend at the risk-free rate. Finally, CAPM assumes a perfect capital market, meaning that all securities are valued properly (their returns will plot to the [SML] security market line, and there are no tax or transaction costs). Income taxes are not a consideration, because not all investors are going to be in the same tax bracket.

Answer 103

The correct answer was: employees who leave the company prior to retirement would not receive benefits Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited. These plans are discriminatory and there is no current tax saving, hence the term “deferred”. As nonqualified plans, they do not have to comply with ERISA.

Answer 104

The correct answer was: The agent should remind the customer of the letter of intent that was signed 12 months ago. The letter of intent is not satisfied by the price appreciation of the shares. A letter of intent must be met with dollars invested within 13 months, so the customer needs to invest an additional $7,000 to fulfill the letter of intent. The agent should remind the customer of the intention to qualify for the reduced sales charge. The provisions of the LOI hold regardless of the price appreciation. Shares will not be liquidated until 13 months have lapsed.

Answer 105

The correct answer was: broker/dealer B offers a private placement to 15 regular public customers and closes the offering at the end of 30 days. Under the Uniform Securities Act, an unregistered private placement may be offered to no more than 10 prospective purchasers, with the exception of financial institutions and other broker/dealers. Transactions by executors, the sheriff, marshals, receivers, trustees, guardians, or conservators are exempt. Sales to financial institutions, such as mutual funds and insurance companies, are also exempt.

Answer 106

The correct answer was: contributions to SEPs are made with after-tax dollars. Employers make pretax contributions to SEP IRAs on behalf of their employees. The account is usually set up at a bank or other financial institution.

Answer 107

The correct answer was: request the court to appoint a receiver to freeze the bank accounts of a broker/dealer who is the subject of an injunction. If a temporary or permanent injunction is issued against any securities professional, upon request of the Administrator, a receiver or conservator may be appointed over the defendant's assets. The Administrator cannot arrest, but can seek a warrant. In order to deny a registration, not only must it be in the public interest, but there must be some other issue, such as insolvency, incomplete application, etc. Although the maximum prison sentence under the USA is three years, it is the courts that do the sentencing, not the Administrator

Answer 108

The correct answer was: She will pay income taxes on the full amount she withdraws each year. An inherited IRA will be subject to income taxes to the beneficiary at time of withdrawal, on the same terms as if it had been distributed to the original owner.

Answer 109

The correct answer was: zero. Because the employee has not made any contributions, the cost basis is zero. In any qualified plan, if all of the contributions are in pretax dollars, the cost basis is zero no matter who contributes the money.

Answer 110

The correct answer was: Roth IRA As long as the Roth has been opened a minimum of five years, once the investor has reached 59 ½, withdrawals are free of any tax. Generally, the most tax would be with the traditional IRA (assuming it was funded exclusively with pretax funds) and the 403(b). Because the non-qualified VA is funded with post-tax funds, a portion of the amount withdrawn might be the original principal and there is no tax due on that.

Answer 111

The correct answer: I and II. Both the bypass trust and the generation skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.25 million for 2013) to heirs other than the spouse, usually grandchildren in the case of the GST.

Answer 112

The correct answer: deferred compensation plans. Deferred compensation plans are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.

Answer 113

The correct answer: A limited liability company (LLC). If a businessowner's goal is ease in raising capital, the limited liability company (LLC) is preferable 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.

Answer 114

The correct answer: II and IV. S corporations are flow-through vehicles, so any earnings are taxable to shareholders, whether or not they are paid out as dividends. An S corporation may have no more than 100 shareholders and may issue only one class of stock so its ability to raise large amounts of capital is rather limited.

Answer 115

The correct answer: the cost of goods sold A company’s gross margin is the profit from operations remaining after subtracting the cost of goods sold from the revenues (sales). Because interest is a fixed rather than operating expense, it is not included in the computation.

Answer 116

The correct answer: I and III. A business organized as a sole proprietorship is basically nothing other than the owner himself. As a business, routine paperwork must be completed, but in this case, the tax reporting is on the owner's Schedule C of Form 1040.

Answer 117

The correct answer: governments drive national economies through taxation and government spending activities. Keynesian economics, so named for the noted British economist John Maynard Keynes, maintains that governments should manage the economy by adjusting levels of taxation and government spending. Monetarist economics maintains that the economy operates best when the Federal Reserve manages the money supply, not when the government stimulates economic activity through fiscal programs. Supply side economics states that reducing government and its claims on taxpayers' income is the best way to keep a nation's economy healthy. Free-market economists believe that government interference in business should be minimal in order for the invisible hand of the market to allocate goods and services in the most efficient manner.

Answer 118

D) holding period return. This is the method of computing holding period return.

Answer 119

A) The shares are sold at a current market price. A closed-end company issues a limited number of shares in a single offering to be sold by the underwriter at a set public offering price. Once the shares are sold, they trade on an exchange or OTC, where supply and demand in the market sets the trading price

Answer 120

A) Defined benefit. A retirement plan that establishes the retiree's payout in advance is a defined benefit plan

Answer 121

B) When the distribution is paid in equal annual amounts over the owner’s life. A distribution from an IRA taken in equal annual amounts over the owner’s life is not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs. The exception for qualified domestic relations orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs.

Answer 122

The correct answer was: 45 days. This is one of the differences between the Uniform Securities Act and the Investment Advisers Act of 1940. Registrations become effective at noon on the 30th day after filing under the Uniform Securities Act. They become effective 45 days after filing, unless delayed by the SEC, under the Investment Advisers Act of 1940.

Answer 123

under no conditions. Investment adviser representatives are not allowed to share in the capital appreciation or depreciation of their customers' accounts in the same manner as are agents.

Answer 124

A) A firm whose exclusive business is placing clients' assets into model portfolios. To use the term "investment counsel", two criteria must be met. First, the principal business of the adviser must be the rendering of investment advice. Second, the nature of the advice must meet the definition of investment supervisory service. That means giving continuous investment advice to clients based on their individual needs. That is frequently accomplished by selecting model portfolios most appropriate to the client's needs. The financial planner clearly is not principally in the business of offering investment advice because he describes his service as offering a wide range of services, of which advice is only a part. The exam frequently uses that wording to indicate that advice is not the principal activity. While the publisher's principal business activity may be offering advice, nothing about the description indicates that individual client accounts are being monitored

Answer 125

A) Retiring outstanding bonds. The retirement of outstanding bonds means that there will be no future interest payments made. Since a major component of cash flow is a company’s net income, this reduced expense would lead to increased income.

Answer 126

D) Decrease. The 7% payment is moved from a pre-tax deduction to an after-tax payment. This increases the amount of taxable income, thereby increasing the company's tax liability. The 7% payment remains the same. With an increased tax burden and everything else remaining the same, the EPS will decrease.

Answer 127

B) contingent deferred sales charge. Some mutual funds impose contingent deferred sales charges on investors who redeem their shares within a specified period after purchasing them. These fees are designed to encourage investors to leave their money in the fund for longer periods. Typically, the amount of the contingent deferred sales charge decreases the longer the investor owns the shares.

Answer 128

C) Proceed with the account, but make a supervisory person aware of this. Although it is true that there is no legal requirement for a client to sign acknowledging receipt of the brochure, if it is the adviser's practice, the account may proceed, but only with notice to the appropriate supervisory person.

Answer 129

A) inventory. Inventory is considered a current asset, not a fixed asset, because the company expects to convert its inventory into cash within a short period of time. The other choices are fixed assets and cannot be liquidated easily.

Answer 130

C) An accumulation annuity allows the investor to accumulate funds in a separate account prior to investment in an annuity. Accumulation does not refer to a purchase option. The pay-in period for an annuity is known as the accumulation stage. A single premium deferred annuity is an annuity with a lump-sum investment, with payment of benefits deferred until the annuitant elects to receive them. Periodic payment deferred annuities allow a person to make periodic payments over time. Immediate annuities allow an investor to deposit a lump sum with the insurance company payout of the annuitant's benefits starting immediately (usually within 60 days).

Answer 131

A) A registered dealer sells Canadian government securities to an individual client. Unsolicited, nonissuer transactions (customer calls the broker/dealer to order or sell a security) are exempt transactions, as are fiduciary transactions to liquidate estates or receiverships by guardians, executors, administrators, trustees or, conservators. Sales of securities that had been pledged as collateral for a defaulted loan are also exempt transactions. The sale of Canadian government securities by a registered dealer represents a security that is exempt under the Uniform Securities Act, but the transaction itself is not

Answer 132

The correct answer: Internal Revenue Service. Currency transactions in excess of $10,000 are reported on FinCEN Form 104 to the IRS in Detroit, Michigan. Effective April 1, 2013, Form 104 has been replaced with Form 112, an electronically filed form with the Department of the Treasury. There will never be a case where both the IRS and the Department of the Treasury will be answer choices – select whichever one appears.

Answer 133

The correct answer: only the investment adviser representative must notify the Administrator promptly. If you are working for a registered investment adviser within a specific state, that state securities administrator wants to know who you are. The problem becomes a question of who is responsible for notifying the State Securities Administrator of your employment. A federal registered investment adviser is exempt from registration at the state level and therefore has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the State Securities Administrator that you are working there as well as when you terminate.

Answer 134

The correct answers: they are taxed on a pro rata basis. The portion of the distribution that is nontaxable must be prorated with amounts that are taxable. For instance, if the individual contributed $2,000 in after-tax amounts and $8,000 in pretax amounts, a distribution of $5,000 would be prorated to include $1,000 after-tax and $4,000 in pretax assets.

Answer 135

The correct answer: II and IV. Anyone with earned income can open a traditional IRA. Deductibility of contributions may be disallowed if the individual is covered under a corporate plan and has earnings in excess of a certain level. Becky's salary exceeds the maximum permitted for a single person so her contributions would be made with after-tax dollars. In the case of a Roth, nothing is deductible, so it doesn't matter if you are covered at work. However, Becky's salary is far in excess of the maximum permitted for a single person to contribute to a Roth IRA.

Answer 136

The correct answer: defined benefit pension plan. A defined benefit pension plan is one that promises to pay employees a certain specified benefit at retirement. The modern trend is toward a defined contribution plan, in which the employer promises to make certain contributions to the plan each year, but does not commit to paying employees a specific benefit when they retire. A profit-sharing plan is a type of defined contribution pension plan.

Answer 137

The correct answer: II and III. A Roth IRA and Roth 401(k) are two separate items and maximum allowable contributions may be made to both. This is unlike the IRAs where one can maintain both, but the total contribution is the annual limit (currently $5,500 with a $1,000 catch-up). One of the things about a Roth 401(k) that is different from the Roth IRA is that RMDs must start at the same time as with traditional IRAs. Although one may participate in a Roth 401(k) without regard to AGI limits, that is not so with the Roth IRA.

Answer 138

The correct answer: Sales to earnings ratio. The sales to earnings ratio compares the net sales of the business to its earnings. Companies with a higher percentage of earnings from each dollar of sales are more profitable.

Answer 139

The correct answer: net redemptions. One of the main features of open-end investment management companies (mutual funds) is that there is a continuous offer of new shares and ready redemption of old ones. When redemptions exceed new purchases, the fund suffers from net redemptions.

Answer 140

Your answer, 15:01 The dividend information is irrelevant. The price-earnings ratio is the price of the stock ($75) divided by the earnings of the stock ($5), or 15:1.

Answer 141

The correct answer: Conversion of convertible bonds into common stocks. Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company. If bonds are converted, more common shares are issued and the shareholder's equity is diluted. A stock dividend or stock split does not change a stockholder's percentage of ownership. Refunding debts has no effect on stockholders.

Answer 142

The correct answer: preferred stock. Interest rate risk is predominately found with fixed income investments. Preferred stock with its fixed dividend, will be impacted by changes in the cost of money. Of course, you might challenge this answer claiming that if the ETF was based on a long-term bond index, that could certainly be the correct choice. But, unless specified, assume all ETFs are equity based.

Answer 143

The correct answer: Withdraw from SEC registration within 180 days of the adviser's fiscal year-end. If an adviser reports on its annual updating amendment that it has less than $90 million under management and it is not otherwise eligible to register with the SEC, it must withdraw from SEC registration within 180 days of the adviser's fiscal year-end by filing Form ADV-W. The adviser could consult the securities departments of states in which it maintains offices or conducts business to determine the appropriate state registration requirements.

Answer 144

The correct answer was: If followed, the employer is relieved of fiduciary liability for any unsatisfactory investment results experienced by the employee. The importance of ERISA Section 404(c) to an employer sponsoring a Section 401(k) plan with self-directed investment or earmarking provisions is the relief from fiduciary responsibility for unsatisfactory investment results experienced by the employee.

Answer 145

The correct answer: There is a minimum guaranteed death benefit in the variable life while no such minimum applies to a universal life policy. Universal life, including UVL, does not have a minimum guaranteed death benefit. There is no choice of separate account sub-accounts for universal life. Universal life is designed to benefit from periods of high interest rates, not falling ones.

Answer 146

The correct answer: the scheduled premium policy because the contract is issued with a minimum guaranteed face amount. A scheduled premium variable life contract is issued with a guaranteed minimum death benefit. If the individual is concerned about having the minimum guarantee, you should recommend the scheduled contract.

Answer 147

The correct answer was: assets. Assets belong on a balance sheet, they are not part of cash flow. Cash flow analysis for a family indicates the extent to which more money is coming in than is going out (or, unfortunately, sometimes the reverse). Salary is a reflection of money in, while expenses and taxes are money going out.

Answer 148

Your answer, Keynesian theory., was incorrect. The correct answer was: supply-side theory. Supply-side economics is the theory of Arthur Laffer, who believed that heavy taxing and government intervention have a negative effect on the economy.

Answer 149

The correct answer: Employee contributions grow tax deferred if they are invested in an annuity. Money invested in a nonqualified retirement plan will grow tax deferred if invested in a deferred annuity. Both employee and employer contributions to a nonqualified plan are not deductible; nonqualified plans are not subject to ERISA.

Answer 150

Answer: C The income and capital gains earned in the account are tax deferred until the funds are withdrawn. It is the Roth IRA that can have tax-free withdrawals.

Answer 151

Answer: B Keynesian economics, so named for the noted British economist John Maynard Keynes, maintains that governments should manage the economy by adjusting levels of taxation and government spending. Monetarist economics maintains that the economy operates best when the Federal Reserve manages the money supply, not when the government stimulates economic activity through fiscal programs. Supply side economics states that reducing government and its claims on taxpayers' income is the best way to keep a nation's economy healthy. Free-market economists believe that government interference in business should be minimal in order for the invisible hand of the market to allocate goods and services in the most efficient manner.