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49 Cards in this Set
- Front
- Back
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In order to determine whether a direct participation program is a suitable investment for a customer, inquiry should be made into all of the followingEXCEPT:
A. the customer's need for tax deductions in future years B. the customer's ability to meet future assessments, if any C. existing investments held by the customer D. the customer's need for tax deductions in previous years |
The best answer is D. An investor buys a limited partnership interest for tax benefits in future years. The investor's need for tax benefits in prior years is irrelevant. |
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If an adviser's registration filing is made electronically with the State, the requirement to affix a signature to an application is met by the applicant:
A. typing his or her name in the appropriate fields and submitting the filing electronically to IARD B. signing a separate written document in the presence of a notary public, evidenced by the notary's seal C. faxing an application that has been signed by the applicant in ink, with the same return fax phone number as that given on the application D. validating his or her identity by telephoning the State Securities Administrator's office and answering questions correctly |
The best answer is A. The States are attempting to streamline the registration process by requiring electronic registration filing and payment of fees. They don't want any more paper! Paper forms are only accepted for reasons of "hardship." Typing of one's name into the required field on the electronic form constitutes a proper filing. The electronic database for investment adviser filing at the State level is "IARD" - Investment Adviser Registration Depository. |
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Under the Uniform Securities Act, all of the following persons with no place of business in the State are EXEMPT from registration as an investment adviserEXCEPT advisers that:
A. deal solely with insurance companies B. deal solely with investment companies C. deal solely with broker-dealers D. have no more than 10 clients in the state in the preceding 12 months |
The best answer is D. Investment advisers that are exempt from registration include advisers with no place of business in the State who deal solely with other advisers, broker-dealers, insurance companies, investment companies, financial and institutional investors, and government agencies. Also, advisers with no place of business in the State that have no more than 5 clients in the state in the preceding 12 months are exempt. |
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Which of the following are required for registration as an investment adviserunder the Investment Advisers Act of 1940? I Payment of a filing fee II Filing of a Form ADV Part 1 III Filing of a Form ADV Part 2
A. II only B. I and II C. II and III D. I, II, III |
The best answer is D. To register as an investment adviser with the SEC, a Form ADV Part 1 and Part 2 must be filed, along with a non-refundable filing fee. |
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An investor in municipal bonds would be primarily concerned with which risk?
A. market risk B. business risk C. regulatory risk D. credit risk |
The best answer is C. Regulatory risk is the risk of law changes; primarily the risk of tax law changes. Since the interest income from municipal bonds is exempt from Federal income tax, the main risk associated with these securities is that the Federal government may attempt to tax their interest income (this has already happened with certain types of municipal bonds). Also note that these securities are subject to market risk and credit risk; but this is not the "primary" concern with these investments. |
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Which of the following are considered to be "compensation" to an investment adviser under the Investment Advisers Act of 1940? I Commissions paid to the investment adviser for executing recommended securities transactions II Commissions paid to the adviser on recommended insurance purchases III Payments made by the issuer to the adviser for recommending the issuer’s securities IV Profits on securities positions held by the adviser where the adviser recommended those securities to its customers
A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV |
The best answer is C. Advisers' compensation is defined broadly and includes payments received from the sale of advisory services; payments received for referring customers to other advisers or broker-dealers; commission payments received for executing customer portfolio trades through an affiliated broker-dealer; commission payments received for selling that customer non-securities products like insurance or real estate; and payments made by issuers to the adviser to recommend that issuer's securities (though this is illegal, it is still compensation to the adviser). Profits on securities positions held by the adviser are specifically excluded from adviser compensation. |
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Under the provisions of the Uniform Securities Act, all of the following statements are true about an investment adviser's initial registration EXCEPT:
A. if no denial order is in effect and no proceeding is pending, registration becomes effective at noon of the thirtieth day after an application is filed B. the Administrator may, by rule or order specify an earlier effective date than the thirtieth day after an application is filed C. the Administrator may, by order defer the effective date until noon of the thirtieth day after the filing of any amendment D. if no denial order is in effect and no proceeding is pending, the Administrator must give immediate effectiveness to the application if the registrant is transacting business in the state as a registered broker-dealer |
The best answer is D. The wording in the Uniform Securities Act is that: "If no denial order is in effect and no proceeding is pending, registration becomes effective at noon of the thirtieth day after an application is filed." It then goes on to say that: "The Administrator may by rule or order specify an earlier effective date and may by order defer the effective date until noon of the thirtieth day after the filing of any amendment." Choice D is a bunch of nonsense!
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Which statements are TRUE when a bond sells at a premium? I The nominal yield is less than the yield to maturity II The nominal yield is more than the yield to maturity III The current yield is less than the yield to maturity IV The current yield is more than the yield to maturity
A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D. This one is worded in a tricky manner. For premium bonds, the relationship of yields from highest to lowest is: * Nominal (Highest)* Current Yield * Yield To Maturity (Lowest) Therefore, nominal yield is higher than current yield (Choice II) and current yield is higher than yield to maturity (Choice IV). Yield to maturity is lowest for a premium bond because it reflects both the fact that the bond was purchased for more than par and that the premium will be lost over the life of the bond. Current yield only reflects the fact that the bond was purchased for more than par; it does not include the annual loss of the premium. Finally, nominal yield is the yield based on purchasing the bond at its original par value - it is the highest yield of the choices offered because it neither reflects the premium price nor the annual amortization of that premium. |
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Under IA-1092, an investment adviser is defined as a person who: I makes advice about securities his principal activity II makes advice about securities his regular activity III is compensated directly for services rendered IV is compensated directly or indirectly for services rendered
A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D. To be defined as an investment adviser under IA-1092, the rendering of advice must be a regular activity - it does not have to be the "principal" activity. To be defined as an adviser, this person must be compensated for rendering advice about securities - and compensation is very broadly defined as the receipt of anything of value - either directly or indirectly - for giving advice about investing in securities. |
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All of the following are considered to be compensation to an investment adviserEXCEPT:
A. commissions earned on recommended trades that are effected through a broker-dealer affiliate of the investment adviser B. markups earned on recommended trades that are effected through abroker-dealer affiliate of the investment adviser C. tax preparation fees that are paid to an advisory firm that is also a certified public accountant D. commissions earned on life insurance sales through an insurance company that is an affiliate of the investment adviser, that result from the implementation of an overall financial plan prepared by the investment adviser |
The best answer is C. Investment adviser compensation does not only include advisory fees paid to the adviser by the customer; it includes any related compensation that the investment adviser earns. Thus, commissions and markups earned by that adviser or an affiliate from executing recommended transactions are part of compensation; as would be commissions earned by the adviser or an affiliate on recommended insurance purchases. Tax preparation fees are not related to the giving of advice - so these are not compensation to the adviser for advisory services rendered. |
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Which statement is TRUE about the grantor of a trust?
A. The grantor can be the grantor only B. The grantor can be the trustee C. The grantor can be the beneficiary D. The grantor can be any of the above |
The best answer is D. The parties to a trust are the: Grantor: The person who owns property that is to be managed, controlled, protected and ultimately transferred to heirs by a trust. Trustee: The legal administrator of the trust and the holder to the title of the property of the trust Beneficiary:The individual(s) to receive benefits or income from the trust property and ultimately to receive the trust property itself. In a "living trust," the grantor holds all 3 positions. Living trusts are most often used to make sure that assets can be passed to heirs upon death without having to go through probate. The grantor is also the trustee, thus this individual maintains control over the trust assets. During the life of the grantor, the grantor is the trustee and also the beneficiary. When the grantor/trustee/beneficiary dies, then the assets are passed to the other named beneficiaries of the trust without going through probate court. |
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After successfully completing the Uniform State Law exam, an agent can solicit: I immediately II after registration has been granted by the Administrator III if the individual is affiliated with a broker-dealer IV if the individual has met minimum experience standards
A. I and III B. II and III C. I, II, IV D. II, III, IV |
The best answer is B. After passing the Uniform State Law exam, an agent can solicit when the registration becomes effective (not immediately). This occurs 30 days after the date the exam is passed, if no problems arise. To be registered as an agent, an individual must be affiliated with a broker-dealer. There is no experience requirement for an agent to be registered. |
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Under ERISA Rule 404(c), a 401(k) plan fiduciary would be relieved from liability resulting from the plan participant's investment directions:
A. under no circumstances B. if the investment choices offered are imprudently selected C. if the plan offers investment options consisting of a Fixed Income Fund, Growth Fund and a Capital Preservation Fund D. if the plan offers investment options consisting of a Government Bond Fund, Fixed Income Fund, Money Market Fund and a Capital Preservation Fund |
The best answer is C. Rule 404(c) permits a 401(k) plan to offer investment options to its participants. It requires that the plan sponsor offer at least 3 investment alternatives that are diversified; that have materially different risk and return characteristics; and that when combined with each other, tend to minimize risk through diversification (e.g., an equity fund, a fixed income fund, and a capital preservation fund). This is the case with Choice C. Choice D does not offer an equity fund.
If the plan complies with Rule 404(c), the plan fiduciary cannot be sued for "breach of fiduciary duty" by the plan participants based upon the plan participant making poor choices among those offered (e.g., a young plan participant putting all of his or her money in a money market fund for a long time frame or an older plan participant putting all his money in a growth fund just before a bear market). However, the plan fiduciary can still be sued for breach of fiduciary duty if the investment choices offered are imprudently selected (e.g., they have very high expenses and poor performance, as compared to other funds of the same type). |
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Which of the following annuity payment options will pay the estate of the annuitant if the full value of the account was not received?
A. Life Annuity B. Life Annuity with Period Certain C. Joint and Last Survivor Annuity D. Unit Refund Annuity |
The best answer is D. If the holder of a unit refund annuity dies before receiving the full investment value from the separate account, his estate gets a "refund" of the remaining value. |
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Which of the following is NOT considered to be a derivative?
A. Warrant B. Unit Investment Trust C. Credit Default Swap D. Option Contract |
The best answer is B. A derivative security has a value that is "derived" from another investment, but it is not a directly proportional piece of an investment, which is the case with an investment company product such as a unit investment trust. Options are derivative because their premium movement (price) is based on the price movements of the underlying security. A warrant is a long-term issuer created call option that can be attached to stock and bond offerings to make them more attractive.
A credit default swap (CDS) is a contract where the holder of a debt instrument makes a series of payments to a seller in return for a payoff if the credit quality of the issue deteriorates below a stated level. Thus, the contract becomes more valuable as an issuer's credit quality declines, since the seller is then obligated to make the payoff. CDSs are issued and traded OTC - there is no listed exchange for these. |
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A market maker in ABCD stock is currently quoting the stock in the OTCBB at: $42.00 Bid (500 shares); $43.00 Ask (1,000 shares) If the market maker receives a customer order to sell 800 shares of ABCD at $42.50, the market maker:
A. must update its quote to: $42.50 Bid (800 shares); $43.00 Ask (1,000 shares) B. must update its quote to: $42.00 Bid (500 shares); $42.50 Ask (800 shares) C. must send the order to a stock exchange floor for execution D. is not required to take any action |
The best answer is B. Customer limit orders that are better priced than the current quote must be displayed in the marketplace. This dealer is currently offering the stock at $43.00 - this is the price at which he is willing to sell up to 1,000 shares. Since this customer is willing to accept less to sell - $42.50 for up to 800 shares, the customer's offer must be displayed in the market.
Note that NYSE, AMEX (NYSE-MKT), and NASDAQ systems automatically comply with this rule - they require all orders to be electronically submitted where the exchange systems sequence and display them. So this rule really only applies to quotes for non-listed stocks placed in the OTCBB. |
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When comparing a "buy and hold" strategy to annual rebalancing of a portfolio consisting of 50% equities and 50% bonds, all of the following statements are true EXCEPT:
A. there are negative tax implications associated with annual rebalancing that do not exist with a buy and hold strategy B. the asset allocation percentages are likely to shift over time with a buy and hold strategy but will remain relatively constant over time if the portfolio is rebalanced annually C. transaction costs associated with a buy and hold strategy are lower than for a portfolio that is rebalanced annually D. market risk of the portfolio over its life is more consistent with a buy and hold strategy than with a portfolio that is rebalanced annually |
The best answer is D. There are costs associated with annual portfolio rebalancing. Commissions must be paid on the trades effected to rebalance the portfolio. If appreciated securities are sold, then capital gains taxes must be paid. If a customer just "Buys and Holds," these costs are not incurred. However, with a "Buy and Hold" strategy, as the asset values move and the percentages allocated to each asset class shift over time, the customer's relative risk exposure will move over time as well, since the portfolio is not being rebalanced. |
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An agent of a broker-dealer works on weekends building racing cars. The side business is so successful that the agent's customers wish to invest in the venture. The agent incorporates his racing car building business and sells each of his racing car buyers a 1% interest. Which statement is TRUE?
A. The agent has violated State law because the offering is not exempt in the State B. The agent has violated State law because the securities sales must be approved in writing, in advance, by the broker-dealer C. The agent has not violated State law because a 1% interest sold to each investor qualifies for a "de minimis" exemption D. The agent has not violated State law because private securities transactions are exempt |
The best answer is B. This agent of the broker-dealer is selling securities (interests in the racing car building venture) in transactions that are not known to his employing broker-dealer. This is a prohibited practice. To do so, the agent must give notice in writing to his employer, must receive the employer's written permission; and the broker-dealer must record the transactions on its books and records and supervise them as its own. Otherwise, the agent has become a "statutory broker-dealer" who should have registered with the State to sell the securities. |
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Disclosure of which of the following is made in a Form ADV Part 2 that is filed with the SEC under the Investment Advisers Act of 1940? I Description of how fees are assessed II Method of analysis used III Educational background of applicant IV Balance sheet of applicant if the firm takes custody of client funds or accepts $1,200 or more of prepaid advisory fees
A. I and II only B. III and IV only C. I, II and IV D. I, II, III, IV |
The best answer is D. The Form ADV Part 2 is broken down into Part 2A, which details the adviser's business, analytic methods, types of clients, assets under management, fees, conflicts of interest, etc. Part 2A must include a balance sheet of the firm if it will take custody of customer funds or securities; or will accept $1,200 or more of prepaid fees, 6 months or more in advance of services rendered. This is the "Brochure" that must be given to customers at, or prior to, entering into an advisory contract.
Part 2B is the "Brochure Supplement" that must be delivered to new customers at the same time as Part 2A. Part 2B details the educational and work background of the key personnel who set investment strategy or manage accounts. |
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Which of the following can be the beneficiary of a trust? I Grantor II Trustee III Beneficiary
A. I and II only B. III only C. II and III only D. I, II, III |
The best answer is D. The grantor that sets up a trust can make anyone a beneficiary. Thus, the grantor can name himself (or herself) as a beneficiary; and can name the trustee as a beneficiary as well. |
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Which of the following is an unethical business practice?
A. Publication of a tombstone announcement by a broker-dealer in the local newspaper on the effective date of a registered new issue offering managed by that broker-dealer B. Publication of a research report by a broker-dealer that shows the performance of prior recommendations made by that broker-dealer during the prior 12 months C. Publication of a report by an agent detailing the performance of transactions recommended by that agent over the prior 12 months D. Publication of a report by a broker-dealer written by an agent detailing the performance of transactions recommended by that agent over the prior 12 months |
The best answer is C. An agent cannot publish and distribute reports detailing the performance of recommended transactions. Broker-dealers, on the other hand, may do so, but the State Administrator can require the filing of these reports. |
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All of the following statements are true about registration of investment advisersEXCEPT:
A. an adviser with no office in the State that limits its clientele to insurance and investment companies is exempt from registration B. an adviser that only renders advice on municipal securities is exempt C. broker-dealers can act as investment advisers without registering as such if any advice given is solely incidental to the business of the broker-dealer D. investment advisers must register with the State |
The best answer is B. Investment advisers with no office in the State that limit their clientele to insurance companies and investment companies are exempt from registration because they are dealing with professionals - not the general public. Note that if an adviser is physically located in a State, then it still must register.
If a broker-dealer is registered as such with the state, then a second registration is not required for that firm to act in the capacity of an "investment adviser" - as long as such investment advice is solely incidental to the broker-dealer's business. This avoids the dual registration of these firms. Please note that if this firm were to actually sell investment advice, it would be required to register in the state as an investment adviser. Investment advisers must register in the state unless an exemption is available. |
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Under the Investment Advisers Act of 1940, when a Registered Investment Adviser is renewing its annual contract with customers, which is NOT required to be disclosed?
A. Business Address B. Fees C. History of RIA D. Type of clients |
The best answer is C. Under the Investment Advisers Act of 1940, upon entering into an advisory contract, the advisor must provide the customer with the "brochure" - which is Form ADV Part 2A. In addition, within 120 days of year end, the client must be sent a free updated brochure; or a summary of material changes that offers to provide the free updated brochure. The brochure includes: * Basic business contact information;* Material changes from previous year; * Description of the advisory firm and services offered including length of time in business; * Fees and compensation; * Types of clients; * Methods of analysis; * Disciplinary information; Code of ethics; * Brokerage practices; * Client referrals and compensation; * Custody, discretion, and voting of client securities; * IA financial information. |
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The fiduciary engaged in the administration of a trust finds that, under the directions of the trust document, there is a conflict of interest relating to a proposed investment. Under the provisions of the Prudent Investor Act, the fiduciary:
A. should do nothing and permit the investment to be made B. is permitted to allow the investment as long as it is made in accordance with the Prudent Investor rule C. should ask the settlor of the trust to amend the trust document by express provision, expanding or restricting the provisions of the trust document for this investment D. should not permit the investment, otherwise the fiduciary is subject to liability for breach of fiduciary responsibility |
The best answer is C. There can be different types of conflicts of interest regarding a trust investment. The trustee cannot "self-deal" - an example of such a conflict is the trustee borrowing money personally from the trust account. This is outright prohibited. The trustee is supposed to make investments to meet the needs of the account beneficiaries. There can be conflicts between the beneficiaries' needs - and the trustee is supposed to choose investments to best meet the needs of ALL of the beneficiaries. If the document does not give enough guidance for the investments that are permitted to meet these needs where there is such a conflict, then the trustee should go to the trust grantor or settlor for specific guidance on the permitted investments and the trust document must be amended for this. |
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Which of the following is NOT EXCLUDED from the definition of an "investment adviser"?
A. Broker-dealer B. Trust company C. Insurance company D. Savings and loan |
The best answer is C. Excluded from the definition of an investment adviser are: investment adviser representatives, broker-dealers, depository institutions (banks, trusts, savings and loans), professionals (lawyers, accountants, teachers, engineers) and newsletters that do not render advice based upon a specific client situation. Insurance companies and investment companies are not excluded from the definition (though they may be exempt from registration under certain circumstances). |
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An Investment Adviser wishes to refer its largest and most sophisticated customers to a third party market timer to maximize their investment returns. Which statement is TRUE?
A. The use of market timers is prohibited under the NASAA Statement of Policy B. Any arrangement between the IA and the market timing firm must be disclosed in the Form ADV Part 2A C. The arrangement between the IA and the market timing firm must be documented in a written contract D. The IA must review the performance of the market timing firm at least quarterly to evaluate its benefit to the referred customers |
The best answer is B. Market timing firms use technical factors to determine when to buy or sell securities (e.g., time the market). Advisers can use timing services to help manage their clients' money - the argument being that an early sell signal given by a timing service reduces losses in a bear market and an early buy signal increases gains in a bull market. However, the market timing firm often pays the adviser for client referrals - and this creates an inherent conflict of interest. (Did the adviser refer the client to the timing firm because it was in the client's best interest, or did the adviser refer the client to the timing firm for the payment?) The ADV Part 2A must detail any business relationships that the adviser has that could result in potential conflicts of interest - so the relationship between the adviser and the timing firm must be disclosed in the ADV Part 2A that is given to the customer. |
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NASAA has the power to set record retention rules for a Federal Covered Adviser that cover which of the following records? I Communications to 2 or more persons II E-mails to clients III Trial balances IV General ledger
A. I and II only B. III and IV only C. I and IV only D. None of the above |
The best answer is D. NASAA does not set rules for federal covered advisers - only the Investment Advisers Act of 1940 applies! NASAA rules for IAs only apply to State-registered advisers (those advisers with less than $100 million of assets under management). |
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Under the Uniform Securities Act, an investment adviser is prohibited from taking custody of a client's funds unless:
A. the Administrator has issued a rule that permits such an action B. the investment adviser gives 10 days' advance notice to the Administrator of such an action C. in the absence of a rule prohibiting custody, the adviser gives the Administrator notice that it may take custody D. the investment adviser is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 |
The best answer is C. Under Uniform Securities Law, an investment adviser is prohibited from taking custody of customer funds and securities if: * the Administrator prohibits this by rule; or* if there is no rule, the adviser fails to notify the Administrator that he has, or may take custody. Thus, the Administrator does not have to issue a rule permitting such action, making Choice A incorrect. Nor is there a requirement to give 10 day's advance notice of such action, making choice B incorrect. Choice C is correct - that adviser is prohibited from taking custody unless, in the absence of a rule prohibiting custody, the adviser gives the Administrator notice that it may take custody. Whether the adviser is registered with the Securities and Exchange Commission (under the Investment Advisers Act of 1940 - Federal law) has no bearing on State registration. Thus, Choice D is incorrect. |
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An Investment Adviser registered in the State has a limited number of IARs to cover various industry sectors. In order to increase its coverage of companies that are not in sectors assigned to its in-house analysts, it buys third party research reports, which it sends to its advisory clients on request. Which statement is TRUE?
A. Because the third party research reports are only provided on customer request, these are given an "unsolicited customer" exemption under NASAA rules B. Investment advisers are prohibited from using third party research reports C. The fact that the investment adviser did not produce the research report must be disclosed to any person that receives the report D. The report can be distributed to sophisticated institutional clients who understand the limitations of third party research reports and not to retail clients |
The best answer is C. Under the NASAA Statement of Policy on unethical practices, if a third party research report is given to customers, it must be disclosed that the adviser did not prepare the report. |
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Under the Uniform Securities Act, if an Investment Adviser limits its clientele to insurance companies, which statement is TRUE?
A. The investment adviser must register with the State of residence of the insurance company B. The investment adviser is exempt from registration in the state of residence of the insurance company as long as it is not physically located in that State C. An investment adviser dealing with insurance companies is never required to register within a State D. None of the above |
The best answer is B. Investment advisers with no place of business in a State that limit their clientele to insurance companies and investment companies are exempt from registration because they are dealing with professionals - not the general public. Note that if an adviser is physically located in a State, then it still must register. Investment advisers must register in the state unless an exemption is available. |
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Which of the following are major tax benefits of real estate limited partnerships? I The real estate can be depreciated, even if its market value is increasing II Non-recourse financing is included in the basis III Interest on loans is fully deductible IV Long term capital gains may be achieved when the real estate is sold
A. I and II only B. III and IV only C. I, III and IV D. I, II, III, IV |
The best answer is D. The major tax benefits of real estate programs include all of the choices. Once property is ready for occupancy, it can be depreciated over a straight line basis over a 27 1/2 year life (for residential property). Each year, a depreciation deduction is allowed, even if the market value of the property is rising. Non-recourse mortgage financing is included in the basis (real estate is exempt from the "at risk" rule) and increases overall deductions available to the partner. Interest on the mortgage is fully deductible. Finally, when the property is sold, there is the possibility of having a long term capital gain. |
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All of the following statements are true about Individual Retirement AccountsEXCEPT:
A. all contributions reduce the individual's taxable income B. contributions are allowed based solely upon personal service income C. contributions may be made if the individual is covered by another type of retirement plan D. to remain tax deferred, distributions from other retirement plans must be rolled over within 60 days |
The best answer is A. Contributions to IRAs are based solely upon personal service income; other income sources such as interest and dividends do not count. Contributions may be made, even if the individual is covered by another pension plan; however, they may not be tax deductible if the person's income is too high (making Choice A wrong). IRA "rollover" rules allow pension plan distributions rolled over into an IRA within 60 days to remain tax deferred. |
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All of the following statements are TRUE about broker-dealers under the Uniform Securities Act EXCEPT a broker-dealer:
A. that is registered in the State may also register as an investment adviser in the State B. is defined as a person who engages in securities transactions for customers or for its own account C. can be legally structured as a sole proprietorship, a partnership or a corporation D. is not required to register in a State unless it has an office in that State |
The best answer is D. Any broker-dealer that has an office in a State; or one that solicits in a State; must register in that State (making Choice D false). A broker-dealer can also register as an investment adviser in the State (which it must do if it offers "wrap" accounts - which States consider to be advisory products). A broker-dealer is a person (in the "legal" sense of the word) that effects securities transactions for customer accounts or for its own account. Broker-dealers can be structured as any legal business form allowed in the State. These business forms are sole proprietorships, partnerships, and corporations. |
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Past performance:
A. may not be shown in an investment adviser advertisement B. may only be shown in an investment adviser advertisement if it reflects the deduction of advisory fees, brokerage commissions and any other expenses that a client would pay C. may only be shown in an investment adviser advertisement if a comparison is made to a relevant market index D. may only be made in an investment adviser advertisement if the advertisement is filed in advance with the SEC |
The best answer is B. Past performance may be shown in investment adviser advertising (it is testimonials that are prohibited). Results shown must deduct all expenses that a customer would incur. There is no requirement for a comparison to be made of results to a relevant market index; nor is there a requirement for the advertisement to be filed with the SEC. |
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An investment adviser has placed an order with the underwriter for 250,000 shares of XYZ stock, a new company that will be listed on NASDAQ. The adviser will allocate this purchase to its largest discretionary accounts. This action is a(n):
A. breach of fiduciary duty B. front-running violation C. fair and reasonable practice D. insider trading violation |
The best answer is A. The SEC has initiated fraud charges against investment advisers based on their undisclosed trading practices. The typical procedure for handling trades executed in a single block is to allocate the securities equally among clients at a uniform price on a pro-rata basis. This is the typical disclosure made to clients. If the adviser favors one client over another in the allocation of the block, the adviser has violated its fiduciary duty to those customers that were not given a piece of the block. |
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If a registered investment adviser takes custody of client funds or securities and deposits them with a qualified custodian, which statement is NOT true?
A. The customer must be notified promptly in writing of the qualified custodian's name, address and the manner in which the securities are held B. The customer must be sent, at least quarterly, an account statement identifying all positions held and all transactions in the account during that period C. All client funds and securities positions must be verified at least annually by a certified public accountant on a surprise basis D. A written discretionary authority must be obtained from each client for whom funds are being held in custody |
The best answer is D. If an investment adviser wishes to take custody of client funds or securities: * It must notify the Administrator in writing on Form ADV that it has, or may have, custody;* Custody must be kept by a qualified custodian in a separate account under each client name; or in accounts that only contain client funds and securities, held in investment adviser name as trustee for the clients; * Prompt notice must be given to the clients in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained; * Account statements must be sent at least quarterly to clients; and * The qualified custodian must be audited on a surprise basis at least annually to verify all client funds and securities and the audit report must be filed with the Administrator by the investment adviser within 30 days of completion. Exercising discretion in an advisory account is a totally different idea. The adviser needs the written consent of the client to exercise discretion, but that adviser who has discretion may, or may not, take custody. |
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Which of the following is defined as an investment adviser under the Investment Advisers Act of 1940?
A. Dealers in U.S. minted gold coins B. Pension consultants C. Broker-dealers in securities D. Managed commodity fund advisers |
The best answer is B. SEC Release IA-1092 specifically includes pension consultants and advisers to professional athletes and entertainers as "investment advisers" that must register with the SEC (this action was taken because of past abuses by such advisers). A person who renders advice about U.S. minted gold coins is not rendering advice about a security, and hence is not defined as an investment adviser. Broker-dealers are excluded from the definition of an investment adviser, as long as they do not charge separately for such advice. Commodities are not securities, so a managed commodity fund adviser is not defined as an investment adviser. Again, to fall under the definition of an investment adviser, one must be rendering advice about securities. |
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Under the Securities Exchange Act of 1934, national securities exchangesMUST: I register with the SEC II have their rules approved by the SEC III enforce their own rules under SEC oversight
A. I only B. I and II C. II and III D. I, II, III
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The best answer is D. The Securities Exchange Act of 1934 requires that each national securities exchange register with the SEC. Such exchanges include the NYSE, AMEX(NYSE-MKT), CBOE, PHLX, etc. These exchanges become "self-regulatory organizations" under SEC oversight. They must have their rules approved by the SEC; and they enforce their own rules under SEC oversight. |
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Which of the following would be defined as a broker-dealer in State A?
A. The municipal bond department of a bank located in State A B. A person who gives advice about investing in securities in State A C. A broker-dealer located in State B who has an existing active customer who moves to State A D. An agent of a broker-dealer who effects trades in securities in State A |
The best answer is C. Banks are excluded from the definition of a broker-dealer, making Choice A incorrect. Choice B defines an investment adviser; nor a broker-dealer. Choice D defines an agent of a broker-dealer; not the broker-dealer itself.
Choice C gets at an interesting point. Because the customer has moved and is now located in another State (State A), and the customer is "active" -meaning the customer is trading securities, then the firm must be registered as a broker-dealer in State A (and the agent servicing the customer account must be registered in State A as well). |
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Under the Uniform Securities Act, an Investment Adviser CANNOT be required by the Administrator to:
A. post a surety bond, if the Adviser will not take custody of customer funds or securities B. furnish information to the Administrator, if this is in the public interest and for the protection of investors C. file an amended Form ADV Part 2 promptly if the filing becomes incomplete or inaccurate in any material respect D. retain customer records in the format required by the Administrator |
The best answer is A. The Administrator has the power to require an investment adviser to furnish information; retain records; and amend its Form ADV promptly (defined as within 30 days in most States) if any information in it becomes materially inaccurate. If an adviser takes custody, the Administrator can require the posting of a surety bond. If the Adviser does not take custody, the Administrator will not require the posting of a surety bond. |
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The Administrator may NOT deny effectiveness to a securities registration if: I the application contains incomplete statements of material fact II an officer of the issuer has previously filed for bankruptcy III the issuer's enterprise is illegal in the State IV the issuer's liabilities exceed assets
A. I and III only B. II and IV only C. I, III, and IV D. I, II, III, IV |
The best answer is B. Regarding a securities registration in the State, the registration application will be denied if it is incomplete in any material respect (Choice I), and will be denied if the issuer's business is illegal in that State (Choice III - e.g., while a Mustang Ranch stock offering is legal in Nevada, that type of enterprise -"ladies of the night" - is illegal in every other State).
This question asks about which reasons cannot be used by the Administrator to deny effectiveness to a securities registration. If an officer of an issuer has previously filed for bankruptcy (Choice II), this has no bearing on the issuer's securities registration - the Administrator cannot deny registration because of this. Also, there is no statute that requires that Administrator to deny effectiveness to a securities registration if the issuer's liabilities exceed its assets (Choice IV). Thus, this is also not a reason to deny effectiveness to a securities registration. Please note that this situation often occurs in securities offered pursuant to a bankruptcy reorganization. Prior to the securities offering, the issuer's liabilities will exceed its assets. After the offering is completed, more equity and cash is added to the business, so that now the business is solvent again. Also note that insolvency is a reason to deny registration to a broker-dealer, investment adviser or agent - so do not confuse this with an insolvent company's securities registration - which is permitted. |
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A business would be formed as an LLC primarily because of the:
A. ease of formation B. characteristic of limited liability C. benefit of lower tax rates D. characteristic of limited life |
The best answer is B. An "LLC" is a limited liability corporation. The principal benefit to the owners is that liability is limited in such a business form. |
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A 62-year old client makes her first withdrawal from a non-tax qualified annuity. This will result in:
A. capital gains taxed at capital gains rates B. ordinary income taxed at ordinary income tax rates that is subject to a penalty C. ordinary income taxed at ordinary income tax rates that is not subject to a penalty D. capital gains taxed at ordinary income tax rates |
The best answer is C. Distributions from non-tax qualified retirement plans are accounted for on a LIFO - Last-In; First-Out basis. The first item that went into the plan was the original non-tax deductible contribution. The next item than went into the plan was the reinvestment of dividends, interest, and capital gains over time - all of which have been building tax deferred. When distributions commence, the first dollars out of the plan are accounted for as the return of the "build-up" - which was never taxed. Thus, the first distributions out of the plan are 100% taxable at ordinary income tax rates. There is no penalty tax (10%) due as long as the money is taken out after reaching age 59 1/2, which is the case here. |
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Which of the following is MOST likely to fluctuate for an annuitant during the payout period of a fixed annuity?
A. Death benefit B. Benefit payments C. Investment return D. Purchasing power |
The best answer is D. With a fixed annuity, the investment return and benefit payments are guaranteed and fixed. During the payout period, there is no death benefit - the insurance company simply promises to make the fixed monthly payments until the annuitant dies. (Note that there can be a death benefit offered while the purchaser is making payments into the contract.) Because the benefit payments are fixed once the annuity payments start, the purchasing power of those fixed payments will fluctuate depending on the rate of inflation. |
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An investment adviser registered in State Y effects all of its portfolio transactions through a broker-dealer registered with the SEC and State Y. Regarding required filings from the broker-dealer in State Y, the Administrator of State Y:
A. can only require the same filings as it requires from the investment adviser that does its portfolio trades through that broker-dealer B. can only require the filing of the broker-dealer's reports that are filed with the SEC C. can require the filing of any records demanded by the Administrator of State Y D. cannot require the filing of any records because of the federal supremacy of the broker-dealer filings that are required with the SEC |
The best answer is B. Broker-dealers are registered federally with the SEC under the Securities Exchange Act of 1934 and, additionally, must register in each State where they have a physical presence or where they solicit securities business. As part of the National Securities Markets Improvements Act of 1996, it was made clear that because broker-dealers are regulated at the federal level, the States cannot require anything that is already required federally. Broker-dealer recordkeeping and reporting rules are set under Section 17 of the Securities Exchange Act of 1934 - so these rules prevail. All that the State can do is ask for a copy of any record or report that the broker-dealer keeps in accordance with the 1934 Act. |
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The executor of an estate has which of the following fiduciary obligations? I Maintenance of records of transactions involving estate assets II Filing of the will in probate court and filing of tax returns for the estate III Payment of taxes due to State and Federal Governments IV Distribution of assets to beneficiaries of the estate
A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV |
The best answer is D. A person that assumes responsibility for managing the assets of another (an estate in this case) is required to carry out his duties with utmost care. The executor must act in the best interests of the estate and must oversee all legal, accounting, investment, and other professionals that render services to the estate. The executor must keep accurate records and must make all appropriate tax filings and payments. Finally, the executor must distribute the remaining assets of the estate to the beneficiaries.
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A customer, age 65, is in the 30% tax bracket. The customer has a non-tax qualified variable annuity separate account to which he contributed $12,000 that has a current market value of $30,000. The customer takes a distribution of $10,000 from the account. The tax that will be due on this distribution is:
A. 0 B. $1,000 C. $3,000 D. $4,000 |
The best answer is C. Distributions from non-tax qualified variable annuity separate accounts are taxed on a LIFO (Last In First Out) basis. The original non-tax deductible contribution of $12,000 was the first in. The tax-deferred build up of $18,000 occurred second. When distributions are taken, the "build-up" portion comes out of the account first and is taxed at regular tax rates. After the build-up is depleted, the original investment of $12,000 comes out of the account and is not subject to tax. The customer is withdrawing $10,000 - which is all counted as "build-up" for tax purposes (last in - first out). This is taxable at 30% without any penalty tax due since the customer is older than 59 1/2. The total tax due is 30% of $10,000 = $3,000. |
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Under the Uniform Securities Act, registration of an investment adviser may be revoked for all of the following reasons EXCEPT:
A. the adviser's liabilities exceed its assets B. the adviser cannot meet obligations as they come due C. the adviser is declared insolvent D. a non-participatory shareholder in the adviser is declared insolvent |
The best answer is D. The Administrator can revoke a registration if an investment adviser becomes insolvent - meaning that the adviser cannot pay its bills as they come due. If a shareholder who does not participate in the management of the investment adviser becomes insolvent, this has no effect on the advisory firm's abilities to pay its bills. Thus, this is not a reason for the Administrator to revoke a registration. |
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If an individual, aged 69, takes a withdrawal from his IRA, which statement isTRUE?
A. The amount withdrawn is subject to regular income tax only B. The amount withdrawn is subject to a 10% penalty tax only C. The amount withdrawn is subject to regular income tax plus a 10% penalty tax D. The amount withdrawn is not subject to any tax |
The best answer is A. Before age 59 1/2, distributions from an IRA are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax. |
