14: TYPES OF RISK AND DISCLOSURES (79)

Question 1

The risk that is associated with changes to federal, state, and local laws is ____

Answer 1

Legislative risk

Question 2

Name for type of risk of the political climate of a country changing dramatically

Answer 2

Political risk

Question 3

What is sovereign risk?

Answer 3

Sovereign risk is inherent in the bonds of foreign governments and is essentially the default risk associated with the foreign bond.

Question 4

Do temporary holds have to be reported to FINRA?

Answer 4

No

but detailed reports must be made and retained

Question 5

T/F: Purchasing power risk has to do with inflation

Answer 5

True

Question 6

T/F: The longer a fixed-income investment is held, the more vulnerable the investor is to purchasing power risk from inflation

Answer 6

True

Question 7

What kind of securities are most vurenable to purchasing power risk?

Answer 7

Debt securities and securities w/ a fixed rate of return

Question 8

T/F: Indexing is an active investment strategy

Answer 8

False

Indexing is a passive strategy that makes no attempt to anticipate market moves.

Question 9

Value investing

Answer 9

Buying securities at a discount to their book value

Question 10

Is dollar cost averaging an investment style?

Answer 10

No

Dollar cost averaging is a method of acquiring shares at a lower average cost over time and is not an investment style.

Question 11

What type of risk had to do with trading in and out of the market?

Answer 11

Timing risk

Question 12

Is interest rate and inflation risk more associated with fixed income or stocks?

Answer 12

Stocks

Question 13

Under the safe harbor provisions of Section 28(e), is a BD allowed to reimburse an investment advisor for meal expenses incurred while attending an investment seminar?

Answer 13

No

> Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934

Question 14

Under the safe harbor provisions of Section 28(e) of the Securities Exchange Act of 1934, can a BD pay an investment advisor for registration fees to attend an investment seminar?

Answer 14

Yes, can pay for registration fees for seminars

“Payment for seminars, research, and financial planning software are permissible under the safe harbor provisions of Section 28(e).”

Question 15

Under the safe harbor provisions of Section 28(e), would the following form of soft dollar compensation paid by a BD to an investment advisor be allowed: Payment for financial planning software

Answer 15

Yes

“Payment for seminars, research, and financial planning software are permissible under the safe harbor provisions of Section 28(e).”

Question 16

Are payments for travel expenses allowed under the safe harbor provisions of Section 28(e)

Answer 16

No

“Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934.”

Question 17

T/F: Payment for travel expenses, furniture, or equipment is allowable under Section 28(e) of the Securities Exchange Act of 1934.

Answer 17

False, not allowable

“Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934.”

Question 18

Suppose that an institutional investor pays a brokerage firm six cents per share in commissions. However, it might only cost three cents per share to perform the trade. The other three cents are known as “_____ “ used to pay for additional services provided by the brokerage

Answer 18

Soft dollars

Question 19

What are “soft dollars”?

Answer 19

KEY TAKEAWAYS
Soft dollars are commission payments to a brokerage firm that are used, in part, to pay for other services such as research.
Soft-dollar transactions are frequently criticized for lacking transparency and hiding abuses.
Soft dollars are sometimes defended as providing access to a greater variety of research.

Suppose that an institutional investor pays a brokerage firm six cents per share in commissions. However, it might only cost three cents per share to perform the trade. The other three cents are soft dollars used to pay for additional services provided by the brokerage. In exchange for paying these higher fees, the institutional investor might receive access to research.

Question 20

What is a good rule of thumb for determining if a soft dollar compensation item is allowable under the safe harbor provisions of Section28(e) of the SEA of 1934?

Answer 20

Whether or not benefits accrue directly to client

> If it benefits the client (i.e research software) usually allowed
If benefits do not accrue directly to client (i.e new cell phone for investment advisor) then usually not allowable

Question 21

Regarding soft dollar compensation, is payment for custodial services provided by the BD allowed?

Answer 21

Yes
The use of a client’s commission dollars to purchase a broker-dealer’s custodial services is an allowable soft-dollar compensation. It is an investment benefit that accrues directly to the client and not to the adviser.

Question 22

T/F: For accounts with owners age 65 or older, firms must try to obtain the name of a trusted contact person in the event of a red flag.

Answer 22

True

like if instructions are received to send all funds to unknown bank account overseas

Question 23

T/F: If a rep thinks a senior is being exploited, prompt notification to the appropriate supervisory person is not required

Answer 23

False, is required

Question 24

A senior official of an issuer learns that nonpublic information was disclosed to an institutional shareholder of the issuer and/or an analyst covering the issuer at a private meeting. To avoid violating Regulation FD, the issuer must do which of the following?

A)
Promptly disclose the information no later than 24 hours after discovery.
B)
Disclose the selective disclosure in its next SEC filing.
C)
Nothing need be done as long as no trading is done based on the selective disclosure.
D)
Obtain affidavits from those to whom the information was disclosed.

Answer 24

A) promptly disclose info in 24 hours

Explanation
Regulation FD prohibits selective disclosure to analysts and institutional shareholders. The disclosures must be made to all shareholders of the issuer. The SEC has agreed that public conference calls, press releases or press conferences, and webcasts are FD-compliant methods of public disclosure.

LO 14.b

Question 25

Does a corporation’s acceptance of a tender offer requires shareholder approval?

Answer 25

Yes

Requires approval

Question 26

T/F: Shareholder approval is normally required for actions that increase (or potentially increase) the number of shares outstanding, such as stock splits and the issuance of convertible bonds

Answer 26

True

Shareholder approval required

Question 27

A tender offer must be open for at least ___ business days after it begins

Answer 27

open for 20 business days
>if material changes made, must remain for at least 10 days after changes occurred

“A tender offer must remain open for at least 20 business days after it begins. However, tender offers are often not completed within 20 business days when their conditions are not satisfied within that initial period. Also, an offer must remain open for at least 10 business days after certain material changes.”

Question 28

Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within ____ business days of the announcement

Answer 28

10 business days
Target company has 10 business days

“Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within”

Question 29

T/F: Under Reg T, customer who buys stock has 4 business days from purchase to actually pay for the trade

Answer 29

True
>It’s two days after regular way settlement
>So T+2 then 2 more days
>If not paid by then broker can request an extension (though not required to)

Question 30

T/F: If customer doesn’t pay for stock within 4 business days the BD can request an extension (though not required to) and get the customer more time to pay

Answer 30

True
>If granted customer had additional time to pay
>If not granted, have to sell customer out at profit or loss

Question 31

Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within how many business days of the announcement?

A)
10
B)
15
C)
20
D)
5

Answer 31

A) 10 days

Explanation
Once a tender offer is announced, the target company, within 10 business days of the announcement, must provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken.

LO 14.b