Series 65 - Wood

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USA investment act of 1940

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this piece of legislation clearly defines the responsibilities and limitations placed on open-end mutual funds, unit investment trusts and closed-end funds that offer investment products to the public. The

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Under the Securities Act of 1933

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the first major federal legislation to regulate the offer and sale of securities. Also called truth in securities act

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Guaranteed

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Under the USA, the term this term refers to a guarantee of interest, principal, or dividends by a party other than the issuer.

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Length of time an account has been open

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is not a dermining factor for excessive trading

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discounted cash flow

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A method of valuing an investment, particularly debt securities, by calculating what future cash returns will be worth at the time they are received, based on estimates of future inflation and interest rates .

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LLC

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is a company with tax consequences similar to a partnership.

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dividend payout ratio =

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dividends paid per share divided by earnings per share

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The formula for the Sharpe ratio is

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(actual rate of return minus the risk-free rate of return) divided by the standard deviation of the security. Beta is not a component.

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DPP

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A business venture designed to let investors participate directly in the cash flow and tax benefits of the underlying investment. Are generally passive investments that invest in real estate or energy-related ventures.

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Reit

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A REIT may not pass through losses to its investors, and it is not a limited partnership. Run by centralized management.

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DPP

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Run by centralized management. Cannot be easily traded in the secondary market.

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Investment Advisers Act of 1940

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defined the role and responsibilities of an investment advisor.

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Section 28(e)

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provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service.

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date derivative

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a special type of contract which derives its value from the performance of an underlying entity

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ADV Part 2A

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the brochure that investment advisers must deliver to clients; it describes the investment adviser's fees, educational background, investment policies, and types of investments made. The states in which the adviser is registered or intends to be registered in are not contained in ADV Part 2A. If the IA is registering with the SEC, on Part 1A, they list only the largest five offices (in terms of numbers of employees). If state registered, they list each state they will be registering in or are already registered in.

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Puts

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Gives the investor the right to sell stock at a set price (the strike price) for a period of time, and protects against losses below the strike price. Buying calls can protect a short stock position. If the customer is long stock, the purchase of calls on that security increases leverage and risk. Writing a put creates the obligation to buy more stock at the strike price, which increases downside risk.

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dividend discount model (DDM)

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calculates the present value of the future dividends that a company is expected to pay its shareholders. It uses that calculation to arrive at a projected market value of the common stock.

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consent to service of process

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Every applicant for registration and every issuer must file an irrevocable consent to service of process appointing the Administrator as attorney to receive service of any lawful process in any civil suit, action, or proceeding. It has the same legal effect as if the person had been served personally.

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Investment Advisers are

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Are required to notify the Administrator promptly. In the case of an investment adviser representative with a federal covered adviser, the representative is the only one responsible for notifying the Administrator because the firm has no relationship with the state.

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Forward contracts

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Are non-standardized and, as such, do not trade on any exchange.

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Exclusion Ration

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The portion of the return on investments that is income tax exempt. It represents a payback of initial investments rather than capital gains.

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mortgage-backed security

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such as a collateralized mortgage obligation (CMO), is most likely to experience reinvestment rate risk. As mortgages are paid off early and refinanced in the event of declining interest rates, the interim cash flows received from the obligation must be reinvested in lower yielding securities. This is the practical effect of prepayment risk.

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The Uniform Securities Act

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defines any individuals associated with an investment adviser as investment adviser representatives if they manage accounts or portfolios, determine securities recommendations, or supervise personnel engaged in the above activities, including any partner, officer, or director who offers advice concerning securities. Persons who manage client accounts or portfolios, determine securities recommendations, or supervise personnel engaged in the above activities are investment adviser representatives.

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Partnership

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Unlike a C corporation, operating income or losses of this flow through directly to the partners. There are several easy ways to dissolve a partnership.

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Inventory

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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.

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Unlawful

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for a person to transact business on behalf of a broker/dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent.

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working capital

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current assets minus current liabilities, is determined from numbers found on the balance sheet.

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favorable tax treatment

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is lost if the shares acquired through the ISO exercise are sold before one year from the date of exercise or two years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT.

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internal rate of return (IRR)

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A measurement of investment return that takes the time value of money into consideration is

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identified as securities in the Uniform Securities Act

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Collateral trust certificates, investment contracts, options, and option contracts, regardless of the underlying asset, and are subject to its provisions. Currencies are not securities, but options on currencies are.

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long

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An investor who is _________ XYZ stock would consider going long an XYZ call to: protect against an increase in the market price of XYZ stock.

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formula

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A client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal and your client is in a 28% marginal income tax bracket, which bond do you tell the client to purchase and why?

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formula

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If we compute the tax equivalent yield of the muni, we see that it is 6.6%, which is a higher return than the 6.25% on the corporate bond. The formula to get this starts by taking the investor's tax bracket and subtracting that from 100%. 100% - 28% = 72%. We then divide the muni coupon of 4.75% by the 72% and the result rounds off to 6.6%.

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Buy Stop Orders

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are entered above the current market value of the stock

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The investment policy statement (IPS)

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although not required under Department of Labor (DOL) rules, is generally found in corporate qualified plans, such as the defined benefit or defined contribution plan. Because the investor manages the IRA, there is no need to prepare an IPS for participants to review.

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offer

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An ___________ is made in an attempt to sell; a sale is the binding contract to sell a security for value. An ________ will not require a principal's approval, but a designated supervisory individual must approve all sales on the date the order is executed.

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In a short sale

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an investor sells securities she does not own. The investor must later purchase securities to cover the short sale. If the price of the securities drops before the sale must be covered, the investor profits. The investor realizes a loss, though, if the price of the securities goes up. Because borrowing is involved, all short sales must take place in margin accounts, never in a cash account.

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TIPS

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The semiannual interest of a _____________ bond is computed on the basis of the inflation-adjusted principal. Because the principal increases with the inflation rate, at the end of the 5-year term, it has grown to $1,219 ($1,000 × 102% ten times). Therefore, the final interest check is for $1,219 × 1.75% (remember it is a semiannual check).

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Reg T

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The original call for funds is the __________ or ___________. But, when the call is for additional money, it is known as maintenance margin. This generally occurs when the value of the collateral in the account has fallen sharply.

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Registration as an investment adviser

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will be denied to any party that has been convicted, within the 10-year period prior to application, of a violation of federal securities acts or the Commodity Exchange Act. Such statutory denial will also impact those enjoined under domestic or foreign court orders from engaging in the business of investing, presuming such orders were made in the 10-year period prior to the application date

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The discounted cash flow (DCF)

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for a fixed income security (bond) is a summary of the expected interest payments that has been adjusted to reflect the time value of money. With all other things being equal, the bond with the higher DCF is the better investment.

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An interested person

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is any person (including 2 or more persons acting together) who owns more than 5% of the outstanding equity securities of a registered issuer.

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Schedule 13 D

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Such persons are required to file reports of beneficial ownership on ___________with the issuer, the exchanges (if a listed security), and the SEC within 10 days of exceeding the 5% level

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Standard deviation

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considered to be the best indicator of a stock's volatility

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Adviser

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with no office in the state would be exempt from registration in the state if the adviser renders advice to no more than 5 noninstitutional clients (not 10) in a 12-month period. If an adviser has no office in the state, and renders advice solely to broker/dealers, insurance companies, banks, investment companies, governmental agencies, or employee benefit plans with assets of $1 million or more, the adviser is exempt from registration with the state. If the adviser manages assets of $110 million or more, the adviser would be required to register with the SEC, not the state.

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As a federal covered adviser registered with the SEC

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no state can enforce financial requirements. That is the only way to answer this correctly because, technically, the SEC has no financial requirements for IAs.

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The goal of MPT

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is to maximize the return for any given amount of risk.

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registered investment adviser

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may not use the title in any way to suggest or imply that the SEC sponsors or approves the adviser. The title in no way indicates that the adviser's abilities or qualifications have been approved. Because RIA is not an academic designation, it may not be used as such.

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Under the net present value (NPV) approach,

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an investment is acceptable only if the net present value of the expected returns is greater than the amount of the investment outlay. In other words, an investment is acceptable (it will add value) if the net present value is greater than zero. On the other other hand, if the NPV is negative (less than zero), it would not be acceptable (it will subtract value) and should not be undertaken.

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Brady bonds

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are issued to take over the debt of failing commercial loans in emerging economies. They are secured by collateral, often US Treasury zero-coupon bonds thereby making them more secure than direct issues of that country. This backing also increases the liquidity as there is a larger pool of potential investors. These benefits cause the yields to be lower – less risk, less reward.

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Purchasing powe

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r is the most important risk factor to an investor in long-term debt

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The kiddie tax

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applies to unearned income only such as that received in an UTMA account. Leaving IRA assets to a charity offers the same estate tax benefits as any other asset. Simple trusts must distribute income annually, and there is an unlimited marital estate tax deduction between spouses who are U.S. citizens.

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Notice Filing

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Every legal or natural person seeking registration or making a notice filing must supply a consent to service of process with their registration applications. For example, a federal covered investment company, while covered under federal law, need not register with the state administrator but must submit notice filings materials that include a consent to service of process. Once a state covered adviser is required to register in 15 or more states registration with the SEC as a federal covered adviser becomes available, but not here at only 12 Legal entities that pass through income or loss use the Form K-1 to indicate the amount of that income or loss attributable to the individual shareholder/member/partner. Sole proprietorships generally complete Schedule C of the individual Form 1040, and C corporations are taxed themselves by filing a Form

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1120

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(S corporations file a Form ________along with a K-1 for each shareholder).

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leading economic factory

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The stock market, which anticipates economy activity, is a __________________. Industrial production is a coincident, or current, economic indicator. CPI for services is a lagging indicator. GDP is not included in the Conference Board’s list of economic indicators.

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U.S. government agency debt

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is an obligation of the issuing agency. This causes agency debt to trade at slightly higher yields reflecting this greater risk. FNMA was created as a government agency but was spun off in 1968 and is now (because of the problems it had during mortgage meltdown of 2008-9), traded on the OTC Bulletin Board rather than the NYSE. GNMA pass-through certificates trade OTC. GNMAs are the only agency whose securities are direct US government obligations.

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Under the Uniform Securities Act,

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an issuer is any person who issues or proposes to issue a security. However, with respect to certificates of interest or participation in oil, gas, or mining titles or leases, there is not considered to be any issuer even though those certificates are included in the definition of "security". Examples of issuers are a municipality such as the city of Chicago, which issues tax-exempt highway improvement bonds; the AAA Manufacturing Company, which proposes to offer shares to the public even though it has not completed the offering; and the United States government, when it proposes to offer Treasury bonds

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Under the NSMIA,

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any security issued under the federal transaction exemption offered under Rule 506, either (b) or (c), is considered to be a federal covered security.

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Broker/dealer & agent

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Both the _____________ and the _________ must be registered in the state where business is to be transacted, unless they both qualify for an exemption from registration in that state (e.g. they have no place of business in the state and their only clients are institutions). At the time the broker/dealer is registered, officers, directors, or partners of the firm who act as agents will be automatically registered as agents

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the current market value must be lower than the sale price

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For a short sale to earn a profit, _________________________. An investor must buy the stock at a lower price to realize a profit. To protect denotes buying if the market starts to rise. Therefore, a buy stop would be entered above the current market value to protect the profit and trigger a purchase in the event the market starts to rise.

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Cancellation and withdrawal

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are nonpunitive methods of termination of a person's registration. Suspension, revocation, and denial are considered forms of punishment.

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withdrawals from a nonqualified annuity

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, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). In this case, the investor is taking a lump-sum distribution before reaching age 59-½ and must pay an additional 10% penalty on the taxable amount.

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Investment advisers organized as corporations

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are under no obligation to inform their clients of changes to shareholders. However, if an investment adviser is a partnership, clients must be notified of any change in the membership of the partnership. Keep in mind the distinction between notification and assignment. Investment partnerships must notify clients of any change in the partnership's membership, no matter how insignificant the partner's position in the firm. However, the death of a minority partner does not constitute an assignment (transfer) of the account although the information must be communicated to clients. A change in a majority interest in the partnership would be an assignment of the account that requires client consent.

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accredited investor

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The requirement for an ________________ under the private placement exemption is either a net worth, excluding the primary residence, in excess of $1 million, or annual income in excess of $200,000 in the last 2 years and the same or more income expected this year, or $300,000 for joint incomes.

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exempt

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Investment companies registered under the Investment Company Act of 1940 are ________________ from registration with the states under the NSMIA. However, most states require notice filing and the payment of fees. Federal credit union shares and railroad equipment trust certificates are exempt securities and intrastate issues would have to register using qualification.

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$1,000

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Bonds are quoted in percentages of ________ (par) (1% of $1,000 = $10). The proper quote would be 102; 102 is 102% of $1,000.

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SIP

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securities information processor

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person

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Any ________ engaged in the business of collecting, processing, or preparing for distribution or publication; or assisting, participating in, or coordinating the distribution or publication of information with respect to transactions in or quotations for any nonexempt security.

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securities information processor

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There is a second part to the definition and that is that a ________________ is also any person distributing or publishing (whether by means of a ticker tape, a communications network, a terminal display device, or otherwise) on a current and continuing basis, information with respect to such transactions or quotations.

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flow through

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is the term commonly used to describe that any income or loss generated by a direct participation program “flows through” to the owner(s). In the case of a REIT, the only thing that passes through is income or gains, never losses.

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stock and reit

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are negatively correlated, so the REIT's price should fall when the stock price rises. When securities are correlated they move in the same direction. Since the REIT and the stock were negatively correlated, a rise of 10% in the stock would be accompanied by a decline in the price of the REIT. ABC common stock and the XYZ real estate investment trust (REIT) have a correlation of -0.5. Assuming the stock rises in price by 10%, the REIT should:

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Treasury Inflation Protected Securities (TIPS)

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adjust the principal value each 6 months to account for the inflation rate. Therefore, the real rate of return will always be the coupon.

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investment adviser

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Usually, anyone who meets the federal definition of ________________ must be registered with the SEC. Some investment advisers are not excluded from the definition but are exempt from the registration requirements of the SEC. One example is an adviser whose clients are all residents of the state in which the adviser maintains its principal office who renders no advice on any exchange-listed security and does not give advice to any private funds. Advisers whose clients are limited to insurance companies are exempt from registration, as are foreign advisers who limit themselves to fewer than 15 clients a year (none of whom can be investment companies), do not advertise or hold themselves out to be investment advisers and have less than $25 million in AUM in the U.S. There is no exclusion for advisers whose only clients are banks.

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net worth

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The stockholders' equity, sometimes referred toas _____________, equals the difference between the company's assets and its liabilities (assets − liabilities = stockholders' equity). This formula is often restated as assets = liabilities + stockholders' equity.

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efficient-market hypothesis (EMH)

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asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.

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3 major versions of the hypothesis

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"weak", "semi-strong", and "strong". The weak form of the EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-strong form of the EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong form of the EMH additionally claims that prices instantly reflect even hidden or "insider" information.

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price-to-book value ratio

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is calculated by dividing the price per share by the stockholders' equity per share. This ratio shows the relationship between a company's stock price and the company's book value.

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security

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must be registered in any state in which a transaction occurs unless the security or transaction is exempt. Exempt securities include government securities, municipal securities, and securities issued by nonprofit organizations. Stocks listed for trading on a national securities exchange such as the NYSE, usually referred to as federal covered securities, or those equal to them, such as rights and warrants, are also exempt from the registration requirements of the state.

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Yield to maturity

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reflects the internal rate of return on a bond. Internal rate of return (IRR) equates the cost of an investment to the cash flows produced by that investment.

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Buy stop orders

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are placed above the market and as prices increase, the stops are hit creating additional buying.

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Mortgage-backed pass-through securities

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pass through interest and principal payments to their investors. The rate at which the cash flows are generated depends, among other things, on the rate at which the mortgages mature.

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An exculpatory

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(culpa meaning fault) provision is never acceptable in an investment advisory contract. Its purpose is to exclude officers and directors from liability for disregard of their duties. This might also be phrased as the client waiving his rights, and is also not permitted.

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A balance sheet,

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whether for an individual, a family, or a business, is a listing of assets and liabilities. Interest expense and salary go on the income statement. Accumulated depreciation is a balance sheet item, but only for a business.

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the alternative minimum tax.

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A tax, often described as a parallel tax to the regular federal income tax, that disallows certain deductions and exemptions

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Buy stop order

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go into effect when the price of the security reaches or exceeds the specified “stop” price. As such, they are commonly used by short sellers who either wish to protect a profit they’ve already made, or protect against a loss if the stock should go up. Buy stops can also be used by those wishing to acquire stock when it breaks through a resistance level. However, when one is already long the stock, turning in an order to buy more is not going to offer any protection.

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Retained earnings

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are increased to the extent that company profits (net income) are undistributed; in essence, retained. Capital surplus comes from original investors purchasing stock at a price in excess of stated or par value. Working capital is not a balance sheet account; it is a computation. When the dividend is declared, it becomes a current liability (dividends payable), but this question is asking for the portion of the income that is not going to be paid out.

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for favorable tax treatment

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In order for an ISO to qualify_________________, the shares acquired cannot be sold sooner than one year after exercise as long as that is at least two years after granting of the option. The shares were sold more than one year after exercise and the total time period exceeded two years.

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Eurodollar bonds

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are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the U.S., the issue is not registered with the SEC.

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The longer the maturity of a bond

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, the greater the interest rate risk. The 8s '30 on a 7.8% basis shows a bond with a 2030 maturity, which is the longest maturity (without a substantially higher coupon) of the choices available.

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Net Present Value or NPV

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compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a proposed investment is positive, it should be accepted. However, if NPV is negative, the investment should probably be rejected because cash flows will also be negative.

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A company’s gross margin

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is the profit from operations remaining after subtracting the cost of goods sold from the revenues (sales). It is frequently shown as a percentage derived from dividing the gross margin by the sales or revenues of the enterprise. Because interest is a fixed rather than operating expense, it is not included in the computation. You might also see this referred to as pre-tax margin.

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A feasible portfolio

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is defined as a portfolio that an investor can construct given the assets available. The feasible set is the collection of all feasible portfolios. Once we have the feasible set, we can select the efficient set (the most return for a given amount of risk, or the least risk for a given amount of return).

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Under the Investment Company Act of 1940

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, a vote of the majority of outstanding shares may approve borrowing money from a bank, changing the investment objectives of the fund, and deciding to cease to be an investment company. Shareholder approval is not necessary to authorize the fund to invest consistent with the fund's objectives.

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customers age

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The key here is to recognize that with DPPs, the _______________ is a relevant consideration in determining suitability. DPPs are long-term, illiquid, and high-risk investments. It is unlikely that DPPs would be suitable for a customer near retirement age, regardless of the customer's financial situation.

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When interest rates fall

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homeowners often refinance their homes to take advantage of lower interest rates, resulting in the existing mortgages being paid off early. Also, homeowners tend to sell their homes to upgrade to larger homes when mortgage interest rates (and monthly payments) are low. When interest rates rise, homeowners do not usually refinance, and housing turnover is reduced.

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agent

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The Uniform Securities Act defines an ___________ as any individual (other than a broker/dealer) who represents a broker/dealer in effecting securities transactions.

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The retirement of outstanding bonds means

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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.

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Monte Carlo analysis

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uses simulations to predict the probability of portfolio performance in light of multiple and uncertain variable conditions. Technical analysis focuses on price patterns. Fundamental analysis focuses on economic, industry, and business conditions. The efficient market hypothesis argues that analysis itself has little, if any, value.

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In a custodial account for a minor

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any adult, whether related or unrelated, can make gifts to an open UTMA account. However, all gifts are irrevocable.

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C corporations

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are taxable on the corporate level and then again to the shareholder when income is distributed in the form of dividends. Shareholders' liability is limited to the amount of their investment. The S corporation is limited to 100 shareholders. Trusts may own shares of both C and S corporations.

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Tactical asset allocation

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, which attempts to capitalize on short-term market swings, is a market timing strategy.

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interests

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Interests in a condominium complex that has a rental pool feature, U.S. Treasury bills, and limited partnership interests in oil and gas exploration programs are securities under the USA. The USA excludes certain financial instruments from the term "security" such as term and whole insurance policies, commodity futures contracts, and collectibles.

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llc

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is a form of business entity in which the shareholders (called members) are taxed individually at their respective tax rates as is the case in a partnership.

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specific risk

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risk that is unique to a business or an asset. Specifically, the risk of any asset is offset by the unique variability of the other assets in the portfolio. Systematic risk is risk that is undiversifiable and is caused by common macroeconomic variables

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not tax exempt

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The income from limited partnerships is not tax exempt. An investor, however, may use a tax loss from a partnership to offset the income from another passive investment. In limited partnerships the investor enjoys the advantages and disadvantages of owning a business without having to actually manage one. Limited partnerships are vulnerable to legislative changes that adversely impact ownership of such investments

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Keynesians

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advocate government intervention in the workings of the economy through increased government spending, which in turn increases aggregate demand.

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arithmetic mean

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Unless something else is specified, whenever the mean return is referenced, it is always the _______________ (the simple average).

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In adverse market conditions,

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not only do some investors stop putting money in, they liquidate their holdings. If new sales fall while liquidations rise, the effect could be net redemptions. The NAV is not affected by supply and demand and, if anything, the expense ratio would rise because some of the expenses would remain the same, but would be shared by fewer assets. Mutual funds do not receive the sales charges – they go to the underwriter

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federal covered advisor

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This question is referring to a federal covered adviser. The futures contracts are not securities, but, of course, the U.S. government securities are. However, the Investment Advisers Act of 1940 specifically excludes from the definition of "investment adviser" a person whose securities advice is confined to securities issued or guaranteed by the Treasury. The fact that this person is excluded under the Investment Advisers Act of 1940 makes that person federal covered under the NSMIA and not subject to state regulation as an investment adviser.

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VA

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plan may charge a maximum sales charge of 9% over a period not to exceed 20 years.

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Retained earnings

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are increased to the extent that company profits (net income) are undistributed; in essence, retained. Capital surplus comes from original investors purchasing stock at a price in excess of stated or par value. Working capital is not a balance sheet account; it is a computation. When the dividend is declared, it becomes a current liability (dividends payable), but this question is asking for the portion of the income that is not going to be paid out.

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fee schedule

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Item #5 on the Form ADV Part 2A asks about the adviser's _____________. The adviser can indicate what types of fees are charged and whether or not they are negotiable. In a manner similar to a mutual fund breakpoint, when a group, not formed for the purpose of investing, contracts with an investment adviser, the adviser may choose to consider it one very large client rather than several smaller ones. This will generally result in a reduction in the percentage charged.

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have management fees

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Only management companies, (open and closed end) ______________.

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95% of the time

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95% of the time, a stock will range within 2 standard deviations of its historical return. In this case, 2 times 6% means that the range will be down 12% from the historical 11% and up 12% from the historical 11%.

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anyone

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Usually, anyone who meets the federal definition of investment adviser must be registered with the SEC. Some investment advisers are not excluded from the definition but are exempt from the registration requirements of the SEC. One example is an adviser whose clients are all residents of the state in which the adviser maintains its principal office who renders no advice on any exchange-listed security and does not give advice to any private funds. Advisers whose clients are limited to insurance companies are exempt from registration, as are foreign advisers who limit themselves to fewer than 15 clients a year (none of whom can be investment companies), do not advertise or hold themselves out to be investment advisers and have less than $25 million in AUM in the U.S. There is no exclusion for advisers whose only clients are banks.

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Efficient market theory

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_______________ holds that securities are efficiently priced and therefore, it makes no sense to analyze particular stocks; or rather, picking stocks out of a hat is as effective as technical or fundamental analysis.

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S prop and S corps

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Sole proprietorships and S corporations have their income and losses pass through to the owners. Therefore, an account opened in the name of the business will create tax consequences for the owners. Regular, or C corporations, pay taxes on their earnings and, even though a Regulated investment company passes through at least 90% of its earnings to shareholders, the tax situation of each individual shareholder of the fund is of no consideration when making recommendations to the fund's portfolio manager.

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do not carry the direct backing of US treasury

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Agencies, with only a very few exceptions, GNMA being one, do not carry the direct backing of the U.S. Treasury. While they are quite safe, that lack of direct backing causes their yields to be somewhat higher. Agencies are never traded on the stock exchanges and their float is almost always smaller than Treasuries. Both are taxable on the federal level.

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statute of limitations

Back 119

The ____________ for civil liability is the earlier of 3 years after the date of the sale or 2 years after discovery of the violation. In this case, the earliest date is 3 years after the sale on September 1, 2012.

Front 120

advance/decline line

Back 120

The ___________, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline.

Front 121

civil liabilities

Back 121

The ______________provisions of the Uniform Securities Act provide for a statute of limitations equal to the sooner of 2 years from the date of discovery or 3 years from the date of the violation.

Front 122

purchaser of hedge funds

Back 122

Purchasers of hedge funds are usually required to be accredited investors. Hedge funds often have high liquidity risk due to the lock-up provision which can restrict an investor's ability to liquidate the position. An advantage of hedge funds is their ability to sell securities short during bear markets, adopt risky arbitrage strategies, and otherwise take direct steps to maximize returns in both up and down markets.

Front 123

over the counter

Back 123

The term ___________ means a trading location anywhere other than on an exchange.

Front 124

few years to college

Back 124

These clients cannot afford a downturn in the stock market between now and the time they want to send their children to college. An investment-grade bond fund will provide the income and safety required for accumulating additional funds for college expenses

Front 125

balance sheet

Back 125

basically lists what is owned (assets) and what is owed (liabilities). The difference between these two is the net worth or equity. Sales, expenses, and dividends are all found on the income statement.

Front 126

LLC

Back 126

If a businessowner's goal is ease in raising capital, the _______________ 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.

Front 127

sell

Back 127

If you want to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, the quote would have been the offer (ask) price. What does the 6% coupon and the 21 years to maturity have to do with the question? Nothing. Knowing that treasuries are quoted in 32nds has nothing to do with it either. Also, the price quote is below 100 so it is at a discount, but the better answer is bid price because the question is referring to the quote

Front 128

administrator

Back 128

An ______________ can, on a summary basis, suspend a pending registration but may not issue a stop order without a prior notice and an opportunity for a hearing. Cancellation is different from revocation and is not a result of disciplinary action; it occurs when a registrant no longer exists, ceases to do business, is declared mentally incompetent, or cannot be located.

Front 129

gift

Back 129

The ____________ of an assessable security, where the recipient may be required (assessed) to put up money, involves both an offer and a sale.

Front 130

S Corps

Back 130

_____________ must not have more than 100 stockholders and each stockholder must be a citizen or resident of the United States. The corporation can only have one class of stock, and no more than 25% of the corporation's income can come from passive activities. If you were not sure of this last fact, a useful test-taking technique is recognizing that all of the other choices are correct and there is no way to select them without this one.

Front 131

USA

Back 131

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.

Front 132

Exempt

Back 132

Any state or Canadian province, or political subdivision thereof, is considered an exempt issuer. Foreign governments with whom the United States has diplomatic relations, but not their political subdivisions, are considered exempt issuers. SEC-registered investment companies are non-exempt issuers under the USA. That is, the act does not include them in the list of exempt issuers. However, under the NSMIA, they are federal covered securities and, as such, do not register with the states other than filing a notice. All the more so, hedge funds that are NOT registered with the SEC would not be exempt issuers.

Front 133

accredited investor

Back 133

_______________can take different forms; an individual with a net worth, excluding the value of the primary residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past two years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501.

Front 134

adviser reports

Back 134

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.

Front 135

cease and desist

Back 135

If the Administrator suspects a prohibited action is about to take place, a ________________ order will be issued in an attempt to prevent that activity. Should the agent refuse to halt, then the Administrator will apply to the courts for an injunction. Suspension of registration takes place after a hearing, and the Administrator does not have the power to arrest anyone.

Front 136

settlor/grantor

Back 136

is the person who establishes the trust. The trustee administers the trust and could be the grantor but does not have to be.

Front 137

writing covered options

Back 137

Writing covered options is appropriate as long as it matches investment objectives. While writing covered calls is sometimes done to generate income, writing uncovered, or naked, calls is not appropriate for a pension plan because of the unlimited risk potential.

Front 138

client info

Back 138

Although there are regulations requiring that a securities professional obtain certain client information, such as the Social Security or tax ID number, that has nothing to do with the fiduciary responsibility to always act in the client's best interest. Advisers must make reasonable inquiry into the client's financial situation, investment objectives, and needs before making recommendations. Recommendations must be suitable in light of any other information known to the adviser.

Front 139

Form D

Back 139

Issuers wishing to avail themselves of the private placement exemption offered under Regulation D of the Securities Act of 1933 must file a _____________ with the SEC no later than 15 days after the first sale.

Front 140

250%

Back 140

Yes, it is always possible that in just a couple of days, this company’s stock may have increased by 250%, but there is nothing in the question to indicate that. Yes, thinly traded stocks tend to have wider spreads, but not like this

Front 141

specialist

Back 141

If the question had said the over-the-counter market, it would have been a market maker. A more correct answer would be the DMM (Designated Market Maker), but sometimes NASAA is slow to make changes.

Front 142

Buy stop orders

Back 142

go into effect when the price of the security reaches or exceeds the specified “stop” price. As such, they are commonly used by short sellers who either wish to protect a profit they’ve already made, or protect against a loss if the stock should go up. Buy stops can also be used by those wishing to acquire stock when it breaks through a resistance level. However, when one is already long the stock, turning in an order to buy more is not going to offer any protection.

Front 143

moving averages

Back 143

To avoid the volatility frequently present in stock price trends, analysts will frequently use ___________________. These averages reduce short-term distortions to a minimum.

Front 144

private placements

Back 144

are offers to no more than 10 noninstitutional persons in a 12-month period for investment purposes (not immediate resale), where no commissions are paid, directly or indirectly. Such transactions are exempt from registration requirements. The fraud provisions apply to any person involved with the purchase or sale of a security, whether registered or exempt, and the prospectus delivery requirements apply to registered securities. Please note that when it comes to institutional clients, there are no numerical limitations on offers, no required holding period, and no restrictions on payment of commissions.

Front 145

Internal rate of return (IRR)

Back 145

best measures investments with a known price and maturity. The internal rate of return is the discount rate that makes the future value of an investment equal to its present value. The yield to maturity on a bond is actually its internal rate of return.

Front 146

Rollover

Back 146

As with any rollover from a qualified plan to an IRA, there is no current tax, but withdrawals are taxed at ordinary income tax rates. This client would have saved had he taken advantage of the NUA (Net Unrealized Appreciation) approach. In that case, taking the company stock and putting it into a taxable account would have resulted in ordinary income tax on the $25,000 cost basis, and long term capital gain rates on the appreciation whenever the stock was sold.

Front 147

VA

Back 147

Premiums of variable life insurance policyholders are invested in the insurer's separate account. This allows the policyholder the opportunity (though there are no guarantees) to enjoy significant returns and substantially higher cash values than are obtainable through a whole life policy.

Front 148

NASAA's Statement of Policy

Back 148

____________ on Unethical and Dishonest Business Practices of Broker/Dealers and Agents permits commission sharing as long as the agents are properly registered with the same broker/dealer or one under common control. There is no requirement for the arrangement to be in writing and the customer has no say so in this matter.

Front 149

Accredited investors

Back 149

are financial institutions, wealthy persons meeting specific requirements, and (for a particular issue) persons involved in the management of the issuer.

Front 150

administrator

Back 150

The Administrator may deny or revoke the registration statement but must provide the applicant with an opportunity for a hearing within 15 days of a written request for such hearing.

Front 151

standard deviation

Back 151

is the statistic that indicates how much an investment's returns have fluctuated compared to its average returns over a given period of time. An investment with a high standard deviation tends to have a higher level of risk than an investment with a low standard deviation.

Front 152

investment adviser

Back 152

A person must register as an investment adviser if it wishes to engage in business as an adviser, unless a specific exemption or exclusion applies. If the adviser only manages investment companies, it is federal covered and, therefore, exempt from state registration, but that choice would suggest that that is the only way one could act as an investment adviser. The form of business can be anything from a sole proprietorship to a C corporation.

Front 153

Fundamentalists

Back 153

look at PE ratios; the other tools mentioned are technical = outstanding short interest in market, 200 day moving average, resistance and support levels.

Front 154

RMD

Back 154

The IRS requires that RMDs commence no later than April 1 of the year following the year that the owner turned 70-½ years old. She turned 70-½ on January 16, 2012. Therefore, distributions must commence by April 1, 2013.

Front 155

future worth

Back 155

method of valuing an investment, particularly debt securities, by calculating what future cash returns will be worth at the time they are received, based on estimates of future inflation and interest rates is known as

Front 156

Duration

Back 156

With approximately equal maturity dates, the bond with the lowest coupon will always have the longest duration. The longer the duration, the greater susceptibility to price changes due to fluctuations in interest rates.

Front 157

Real of return

Back 157

is computed by dividing the total return received by the cost and then subtracting the inflation rate. If there is no realized gain, it is simply the nominal return based on the income minus the inflation rate. The investor's tax bracket is needed to compute after-tax returns.

Front 158

Unit investment trusts

Back 158

issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed, it is not traded.

Front 159

coupon rates

Back 159

Coupon rates are not higher; they are lower because of the value of the conversion feature. The bondholders are creditors. If the stock price falls, the conversion feature will not influence the bond's price.

Front 160

present value

Back 160

is the amount deposited to meet a future goal based on an expected rate of return. If the return is higher than expected, the ending result will be greater (a good thing).

Front 161

Registration by qualification

Back 161

is effective when determined by the Administrator. Qualification is

Front 162

Not discretion

Back 162

Time and/or price are NOT

Front 163

state jurisdiction

Back 163

The state from which payment is made is not relevant in determining whether the Administrator of that state has jurisdiction.

Front 164

registration canceled

Back 164

Registration may be canceled by the Administrator if the registered individual has been judged mentally incompetent. Cancellation is a nonpunitive action of the Administrator.

Front 165

equity, debt, cash

Back 165

The general consensus is that the major classes, for purposes of an asset allocation program, are equity, debt, cash (or cash equivalents), real estate, and commodities. Large cap stock funds are not an asset class; they are a way to invest in the asset class known as equity. Derivatives, such as options, are not generally considered an asset class, and it is the actual commodity (precious metals, oil, and so forth), not a forward or futures contract, that is the asset class. Most agree that REITs are a proxy for real estate itself.

Front 166

investment companies

Back 166

must file audited reports with the SEC annually and send at least semiannual reports to shareholders. They are not required to notify shareholders of changes in the portfolio as they occur

Front 167

stock dividends

Back 167

(dividends paid as additional shares of stock rather than in cash), adjust the investor’s cost basis and don’t come into play until the stock is sold.

Front 168

price to book ratio

Back 168

is calculated by dividing the price per share by the stockholders' equity per share. This ratio shows the relationship between a company's stock price and the company's book value.

Front 169

fees based on capital gains

Back 169

Unless a specific exception is referred to in the question, fees based on a share of capital gains or appreciation in an account are prohibited. The other choices are acceptable fee structures. An adviser may charge commissions and fees as long as the fact is clearly disclosed.

Front 170

commission for performance

Back 170

A fee whose payment is contingent on investment results is always prohibited on the exam unless the question is looking for the exceptions. Hourly fees, fixed fees, and fees based on the percentage of assets under management are acceptable forms of compensation.

Front 171

formula

Back 171

The formula is the risk-free rate (.04) plus the product of the stock's beta (.8) and the difference between the expected return on the market and the risk-free rate(.20 - .04). In this case, it would be .04 + .8(.16) or .04 + .128 = .168

Front 172

formula

Back 172

To determine a taxable bond's after-tax rate of return, multiply the coupon rate by the compliment of the client's marginal federal income tax bracket. The client's tax bracket is .28, so the compliment is 100 − .28 = .72.

Front 173

institional investors

Back 173

include banks, insurance and investment companies, and certain employee benefit plans. Although each of these is included in the term "accredited investor", that term as used in federal law (the term is not found in the USA) also includes certain individuals, and they would never be considered institutional investors under the USA

Front 174

bottom up

Back 174

__________analysis starts by attempting to find superior performing companies, regardless of the industry. Those analysts believe that these companies will provide attractive returns even if they are in an industry sector that is in a negative position in the economic cycle.

Front 175

current yield

Back 175

is determined by dividing annual interest payment by the current market price of the bond ($50 ÷ $900 = 5.56%). Years to maturity is not a factor in calculating current yield.

Front 176

Coverdell Education

Back 176

Under current regulations, the maximum contribution to a __________ Savings Account is $2,000 annually

Front 177

Must attempt

Back 177

An agent _________ to obtain client financial information. The broker/dealer, through its principals, may decide whether to accept business from a client refusing to provide financial information. In the absence of financial information, neither the firm nor the agent has the means to determine client suitability. Thus, the firm may only accept unsolicited orders from this client

Front 178

90-day Treasury bill rate

Back 178

The interest rate used as the basis for a risk-free rate of return is the_____________. T-bills are U.S.-government guaranteed, the rate is short-term, and the market risk is minimal.

Front 179

read the question

Back 179

Given the fact the client liquidated his shares at a price of $55, we can conclude that he attained a 10% ($5 profit ÷ $50 initial investment) return based on capital appreciation of the stock. He also received dividends of $2 per share giving him an additional return of 4% ($2 ÷ $50). By adding these two percentages together, we can conclude that his total return is 14%, less an inflation rate of 3%, which would give a real rate of return of 11%.

Front 180

purchasing power

Back 180

Because debt instruments pay a nonvariable fixed percentage, an investor holding a bond paying 5% would lose ___________ over time if inflation were tracking at 6%.

Front 181

consent to service

Back 181

Every legal or natural person seeking registration or making a notice filing must supply a consent to service of process with their registration applications. For example, a federal covered investment company, while covered under federal law, need not register with the state administrator but must submit notice filings materials that include a consent to service of process. Once a state covered adviser is required to register in 15 or more states registration with the SEC as a federal covered adviser becomes available, but not here at only 12.

Front 182

working capital

Back 182

is computed by subtracting current liabilities from current assets. Using a current asset, like cash, to call in the bonds, reduces those assets with no corresponding reduction to current liabilities. Whenever a bond is called at a premium, net worth is reduced by that premium.

Front 183

term yield

Back 183

The _______ spread refers to the difference in yield between very high quality debt instruments, such as US government bonds, and those with lower ratings. The spread compensates for the additional risk. When investors perceive that the risk has lessened, they won’t demand as much in return from the lower rated instruments.

Front 184

coverdell

Back 184

may only be used by persons who fall within certain income limits-no such limits apply to the 529 plan. The Coverdell has contribution limits set by federal law; each state sets its own 529 limit. If the money is not used for education, it reverts back to the donor in a 529 plan but to the beneficiary in a Coverdell.

Front 185

USA

Back 185

Under the Uniform Securities Act, an issuer registering its securities with the Securities and Exchange Commission (SEC) in accordance with the procedures found in the Securities Act of 1933 shall use the documents it submits to the SEC in its concurrent registration with states in which it plans to offer its securities.

Front 186

stock splits

Back 186

the number of shares each shareholder holds increases. However, the value of each share decreases proportionately. The client experiences no effective change in the value of his ownership share

Front 187

Market Maker

Back 187

is a dealer who holds himself out as being willing to buy or sell a security at a quoted price on a regular and continuous basis

Front 188

the portfolio of a UIT is fixed

Back 188

______________, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.

Front 189

13 months

Back 189

An investor has only ___________ to meet a letter of intent commitment. Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had originally given the investor. This is accomplished by liquidating a sufficient number of shares to cover the additional sales charge to be imposed.

Front 190

Unregistered, nonexempt

Back 190

_____________ securities may legally be sold in exempt transactions. Private placement transactions may legally include the sale of unregistered, nonexempt securities because they are defined as exempt transactions under the Uniform Securities Act. A transaction qualifies as private placement when the offer is directed to 10 or fewer noninstitutional persons during a 12-month period and no commission is paid on sales to noninstitutional buyers.

Front 191

may not discuss

Back 191

Because the information in Chuck's research report will not be available for public distribution until after approval by the compliance department, he may not discuss the security to clients or prospects until the report is cleared.

Front 192

short sale

Back 192

, an investor sells securities she does not own. The investor must later purchase securities to cover the short sale. If the price of the securities drops before the sale must be covered, the investor profits. The investor realizes a loss, though, if the price of the securities goes up. Because borrowing is involved, all short sales must take place in margin accounts, never in a cash account.

Front 193

If a bond is trading at par

Back 193

, the nominal yield (coupon rate) = current yield = yield to maturity = yield to call. YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.

Front 194

Preferred stock

Back 194

is purchased primarily as an income security based on its fixed dividend. Therefore, any analysis would tend to place the ability of the issuer to meet that dividend paramount. Earnings per share and book value per share are computations relevant to common stock only.

Front 195

investment policy statemen

Back 195

An __________________t prepared for clients delineates the allocation percentages for each asset class and the expected returns from each class, and outlines strategies that may be used for timing the market and choosing specific investments within each class, but fees the adviser may earn are not included in the policy statement; they are disclosed separately.

Front 196

The Form ADV-E

Back 196

__________________ is used as the cover page for the annual surprise audit performed by the independent accountant on all IAs who maintain custody of customer assets.

Front 197

variable life

Back 197

Federal law requires that issuers of variable life insurance policies allow exchange of these policies for a permanent form of life insurance policy, issued by the same company for a period of no less than two years. The exchange must be made without additional evidence of insurability.

Front 198

90 days

Back 198

The annual updating amendment to Form ADV must be filed within ________ of the adviser's fiscal year end.

Front 199

28%

Back 199

Since your client is in the 28% tax bracket, he has to earn more than the 6% on a taxable bond for the yield to be equal to, or higher than, the tax-free bond. That number can easily be calculated because 72% of the taxable amount must be equal to or greater than the 6% return (6% ÷ 72% = 8.33%). The 8.33% is higher than the return on the other bonds listed, so the public purpose municipal bond would produce the highest retained return. This would be even more appropriate if the issue was tax exempt in the client's state.

Front 200

1

Back 200

Beta coefficients greater than _________ signify that the stock will fluctuate more than the market as a whole. In general, the higher the beta, the greater the risk. Such risk-taking is appropriate for investors who seek aggressive investment strategies.

Front 201

inflation

Back 201

By adjusting GDP for ____________, one can measure economic activity with less distortion. A constant dollar adjustment is made to remove the effects of inflation.

Front 202

brochure rule

Back 202

There are two exemptions from the _______________. The first is if the client is an investment company. The other is if the advice being rendered is impersonal and the charge is less than $500 ($500 as well under the USA) per year.

Front 203

NAV

Back 203

Because shares are purchased and redeemed at _____________, net redemptions (this case) or net purchases have no effect on the net asset value of the fund’s shares. However, receipt of cash in the form of interest payments causes assets to increase while falling equity prices leads to a decrease. Distributions of capital gains (or dividends), represents a payment of cash, thus decreasing the amount of assets on hand.

Front 204

Yield to maturity

Back 204

reflects the internal rate of return on a bond. Internal rate of return (IRR) equates the cost of an investment to the cash flows produced by that investment.

Front 205

Buy stop orders

Back 205

are usually entered to protect short sales. The stop would trigger the order when DMF reached 25.50 or higher.

Front 206

objectives of the trus

Back 206

Although not a common practice, _____________ in a trust account is permitted only if it is specifically provided for in the trust agreement.

Front 207

follow the design and objectives of the trust

Back 207

Although there certainly is a case for preservation of capital, reasonable income, and minimizing expenses, the most important consideration is tot.

Front 208

31-Dec

Back 208

The expiration date for the registration of agents, broker/dealers, investment advisers, and investment adviser representatives under the Uniform Securities Act is December 31. Note that the question asks for the expiration date under the Uniform Securities Act, which is __________________. Do not be confused by actual practice, which may vary in some states.

Front 209

The state securities Administrator

Back 209

has jurisdiction over investment advisers, broker/dealers, and any who are associated with those entities. Issuers don't register, it is their securities that do. The Administrator may have jurisdiction over securities offered for sale by a company in the Administrator's state and generally requires a consent to service of process for a securities registration.

Front 210

customer name and address

Back 210

This is one of those questions where the best way to find the answer is by determining what is NOT correct._______________ would never be on an order ticket and that knocks out three of the choices. The account number (not name), the execution price (once the order is completed), the time of entry and execution (or cancellation if it is a day order that is not executed) and the terms and conditions (limit, market, stop, etc.) are all on the order ticket.

Front 211

Under the Uniform Securities Act,

Back 211

an investment adviser is a person, corporation, partnership, or sole proprietorship who, in the regular course of business, advises others as to the advisability of selling securities. Harrison holds himself out as a financial planner and normally includes a section on investments in his plans. Furthermore, Harrison is compensated for his services-yet another standard of the definition, investment adviser. Under the USA, certain recognized professional designations are exempt from having to qualify by passing the licensing exam but not from registration.

Front 212

The Securities Exchange Act of 1934

Back 212

specifies that the Federal Reserve Board will have control over the issuance of credit when trading securities. The Securities Exchange Act of 1934 gives the SEC the power to make, amend, and rescind rules; issue cease and desist orders; administer oaths; conduct investigations; take evidence; and subpoena witnesses, books, and records. The Commission may seek temporary or permanent restraining orders (injunctions) from the courts, file civil suits, or refer evidence to the attorney general for criminal prosecution.

Front 213

retail prices

Back 213

The CPI does not measure the increase or decrease in the level of consumer prices with respect to the level of wholesales prices. The CPI only measures _______________; not whether wholesale prices are passed through to the consumer.

Front 214

federal registered investment advisers

Back 214

Although exempt from state registration, _______________________ must notice file and pay state filing fees (if required by the Administrator) to practice within a given state. Federal covered advisers do not come under the financial or recordkeeping requirements of the state, only the SEC.

Front 215

When a dividend is paid

Back 215

, total assets are decreased as are total liabilities. The liabilities were increased at declaration time and are now decreased to reflect the payout. The two accounts affected would be decrease cash and decrease dividend payable.