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Flashcards in Exam 6 Deck (18):
0

Under the securities and exchange act of 1934, all of the following are defined as securities information processors except which?
A. NYSE TRF
B. NASDAQ TRF
C. PINK SHEETS
D. MSRB

The correct answer is D
Securities information processors collect and disseminated price quotes and transaction prices and non-exempt securities. Each exchange has a TRF this is a trade reporting facility that is a registered SIP.

1

An investment advisor Rep. quits her employment with a state registered advisor so that she can move to another state. She learns that the advisory firm with which she was employed did not notify the administrator of her termination. Which statement is true?
A. The IAR is not required to take any action
B. The IAR is required to notify the administrator of the termination
C. The IAR must file a consent to service of process with the administrator
D. The IAR must publicly disseminate the fact that she is no longer associated with the advisory firm in the state

The correct answer is B
If a representative of an investment advisor terminates employment the advisor must notify the administrator promptly. If the representative learns that the advisor has not given notice and the representative must do so promptly. Also note that this is different from the requirement for a federal covered advisor, where only the investment advisor Rep. must notify the state administrator

2

And independent investment advisor is talking to a brokerage firms research analyst about XYZ company. The analyst tells the advisor that she is going to issue a report stating that the company will miss its revenue projections. The adviser was planning to add the stock to her portfolio What should the advisor do?
A. The advisor cannot act on the information because it is inside information
B. The advisor must purchase the stock as planned
C. The advisor can change her mind about buying the stock
D. The advisor must report the conversation to the state administrator

The correct answer is C
The advisor only heard the opinion of the research analyst about the company, this is not considered inside information therefore the advisor can change her mind and decide not to purchase the stock

3

An investment advisor may be compensated with which of the following?
A. Wrap fees charged to consumers for all services rendered by the advisor
B. Soft dollars paid by Buy and executing broker to the advisor in return for trades sent to the broker by the advisor
C. 12 B – one fees paid by a mutual fund to the advisor based on annual net assets
D. Commissions paid to an affiliated broker-dealer on trades recommended by the advisor

READ THE FULL ANSWER

The correct answer is all of the above
Investment advisors can collect wrap fees. This is a flat annual fee covering all services rendered, including recommendations asset allocation in trade execution so all services are wrapped into a flat annual fee. They also can receive soft dollar compensation and 12 B-1 fees.

Investment advisors cannot take commissions on trades that they do, but they can direct their trades to an affiliated broker-dealer for execution. The affiliated broker-dealer is permitted to charge commissions. Also note that such an arrangement is a conflict of interest that must be disclosed to the customer at the time of entering into the advisory contract

4

An insurance company that sells and equity index annuity would use which method to credit the change in investment value?
A. Break even
B. Point to point
C. Monte Carlo
D. Moving average

The correct answer is B
EIAs base the annuity payments on the performance of a broad based index such as the S&P 500 index. However the return is capped and there is a minimum guaranteed return, regardless of the performance of the index. The most common methods of measuring index performance are point to point, annual reset method, and high watermark method.

Assume that a client buys and EIA that is based on a seven-year return. The point to point method compares the index value add purchase date to the value at the end date seven years later. Any value fluctuations that occur in between the two measurement dates are a relevant. Another common valuation method is the annual reset method, which would measure the return achieved each year over a seven-year Life and add interest to the annuity based on the annual reset. The high watermark method looks at the index values yearly as of the anniversary date of purchase, and bases the interest added on the highest index value over the product life seven years and our example versus the value at the date of purchase.

5

Which item is needed to determine tax filing status?
A. Marital status on the last day of the year
B. Qualification of tax preparer
C. Residency on the last day of the year
D. Nationality of tax filer

The correct answer is A
Because justin is an idiot and got it correct actually

6

A federal covered investment advisor registered under the investment advisors act of 1940 wants to include an exculpatory clause in the advisory contract. Which statement is true about this?
A. The clause is permitted because this is a federal covered advisor
B. The clause is permitted because it is beneficial to the client
C. The clause is prohibited and unenforceable under federal and state law
D. The clause is prohibited because it denies the advisor the right to pursue claims against the client

The correct answer is C
A Exculpatory clause seeks to limit the advisers liability for gross negligence or for acting in bad faith, and is not enforceable in a court of law. The advisor will always be liable for gross negligence, acting in bad faith or for violating any state or federal law. Writing a contract that the advisor is not liable for these is meaningless

7

If the beneficiary does not use the money contributed to a 529 plan for education, what will happen to the money?
A. It must be paid to the beneficiary at age 30
B. The beneficiary may be changed to another family member
C. Distributions will be subject to income tax and penalty

The correct answers are B and C
Unlike the Coverdell ESA funds in a 529 plan do not have an age requirement for distribution

8

Which of the following statements are true about recordkeeping requirements for communications sent to potential clients under the provisions of the investment advisors act of 1940
A. A record of the name and address of each person to whom the communication is sent must be retained
B. A record of the name and address of each person to whom the communication is sent is not required for communications sent to more than 10 persons
C. For communications sent to a list of individuals, in memorandum describing the list and it its source must be retained
D. Proof of mailing in the form of a postal receipt must be retained for each printed communication that is distributed

The correct answers are a B and C

9

The internal rate of return computation assumes that cash flows will be reinvested at what rate?
A. Real interest rate
B. Internal rate of return
C. Risk-free interest rate
D. Nominal interest rate

The correct answer is B
Internal rate of return is the true compound rate of return generated by an investment, basically the same as the yield to maturity. Implicit in the formula is that any cash flow is generated are reinvested at the IRR

10

An investment advisor registered in the state of California takes custody of client funds. The state has a minimum $35,000 net worth requirement. The investment advisor finds that it's net worth is $34,500. The advisor:
A. Is not required to do anything because the net worth deficiency is less than $1000
B. Must deposit $1000 as a Surty bond with the state administrator by the close of business the next business day
C. Must cease business operations until the deficiency is cured
D. Must notify the state administrator by the close of business on the next business day and file a report of the advisers financial condition the next day

The correct answer is D

11

Under the uniform securities act, and investment advisor is prohibited from taking custody of a clients funds unless:
A. The administrator has issued a rule that permits such an action
B. The investment advisor gives 10 days advance notice to the administrator of such an action
C. In the absence of a rule prohibiting custody, the advisor gives the administrator notice that it may take custody
D. The investment advisor is registered with the Securities and Exchange Commission under the investment advisors act of 1940

Correct answer is C

12

Under the NASAA statement of policy on unethical practices, an investment advisor may:
A. Accept a verbal order from a customer to sell a security position where the customer has not given the advisor trading authority
B. Accept a verbal order from a customer's spouse to sell a security position where the customer has not given the spouse trading authority
C. Open an account for a customer upon the verbal instruction of the customers spouse
D. Close an account for a customer upon the verbal instruction of the customers spouse

The best answer is a

13

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 correct answer is C

14

Which of the following would not be included in short-term emergency sources of cash?
A. Credit card advances
B. Margin loans from A broker-dealer
C. Cash value of term life insurance
D. Home equity line of credit

The correct answer is C
There is no cash value to term life insurance, only two whole life insurance so this is not a source of emergency cash

15

If an agent wishes to withdraw his registration, all of the following statements are true except which?
A. Both the agent and the broker-dealer must notify the administrator
B. Notification to the administrator of the withdrawal must be made promptly
C. The withdrawal does not become effective for 30 days
D. If there is a customer complaint, the administrator retains jurisdiction over the agent for a period of five years from the withdrawal date

The correct answer is D
If there is a customer complaint the administrator retains jurisdiction over the agent for a period of one year from the withdrawal date

16

The NASAA statement of policy regarding investment advisors that wish to exercise discretion in a customer account:
A. Requires that written power of attorney be obtained prior to the age and exercising discretion
B. Permits that the agent can exercise discretion for up to 10 days upon the verbal authorization of the customer, as long as written power of attorney is obtained by the end of the time.
C. Permits the agent to exercise discretion for up to 30 days upon the verbal authorization of the customer, as long as written power of attorney is obtained by the end of that time.

Correct answer is B
The NASAA statement of policy permits oral discretion to be exercised by an investment advisor for up to 10 days as long as the written power of attorney is obtained from the customer within 10 business days of exercising such oral discretion. Please note that if the investment advisor is also a registered broker-dealer, the rules of FINRA would not permit this, FINRA requires written power of attorney from the customer prior to exercising discretion

17

Buy and hold is an appropriate strategy when investing in what?
A. Common stocks
B. Mutual funds
C. Corporate bonds
D. Preferred stocks

The correct answer is B
Because mutual funds are managed by an investment advisor, they are designed to be a buy and hold investment. The fund manager is constantly deciding which securities positions to add to or subtract from, the portfolio to maximize returns. Therefore the investment is continually rebalanced