Final Exam 2 Flashcards
All the following descriptions are TRUE of a closed-end management company, EXCEPT:
Shares are purchased at the current offering price
Shares are redeemable
Investors can purchase full and fractional shares
The company may issue only common stock
When making a purchase, a customer will pay a markup or a commission
QID: 1506884Mark For Review
A
I and V only
B
I, III, and V only
C
II, III, and IV only
D
II, III, and V only
II, III, and IV only
Shares of a closed-end fund are not redeemable instruments. The shares are usually traded in the open market on an exchange. The purchaser pays either a commission or a markup on both a purchase and a sale. A closed-end fund may issue common stock, preferred stock, or bonds. The fund may issue only full shares. Unlike a mutual fund, the closed-end management company may not issue fractional shares.
According to the efficient market hypothesis, which form of efficiency asserts that using technical analysis in identifying securities which may be undervalued is of no benefit? QID: 1507350Mark For Review A Weak-form efficiency B Semistrong-form efficiency C Strong-form efficiency D Passive-form efficiency
Weak-form efficiency
Weak-form efficiency asserts that all past market prices are fully reflected in security prices. In that technical analysis attempts to identify patterns in stock price movements in order to predict future price trends, weak-form efficiency believes fundamental analysis should be used in determining if a stock is over or under valued.
Semistrong-form efficiency asserts that security prices reflect all publically available information. Thus, analysis of any type does not necessarily result in superior returns as the information is available to investors.
Strong-form efficiency asserts that the price of a stock reflects all public and private information, thus no one can consistently outperform the market. Passive-form efficiency is not a form of efficiency.
Which of the following statements BEST describes the similarities between an S Corporation and a general partnership? QID: 1506866Mark For Review A Both provide limited personal liability B Both require full personal liability C Both do not provide flow-through of losses D Both provide flow-through of losses
Both provide flow-through of losses
Which of the following statements describes a strong form efficient market?
QID: 1506889Mark For Review
A
Past market prices and data are fully reflected in securities prices.
B
All public and private information is reflected in securities prices.
C
All public information, including historical data, is reflected in securities prices.
D
Market prices are rational and based on an assumption that investors will attempt to maximize their potential returns for the risk being assumed.
All public and private information is reflected in securities prices.
The Efficient Market Hypothesis (EMH) explains three different forms – strong, semi-strong, and weak form efficiency. In a weak form efficient market, all past prices and data are fully reflected in current prices. In a semi-strong form efficient market, all public data, including historical pricing, is reflected in current prices. In a strong form efficient market, both public and non-public (i.e., inside) information is reflected in current prices. The assumption that investors want to minimize risk and maximize returns is made in the Modern Portfolio Theory, not the Efficient Market Hypothesis.
The advantages of investing in a limited partnership include: QID: 1507357Mark For Review A The potential for assessments B Lack of control C The ability to limit risk D Tax losses that can reduce taxes on other portfolio income
The ability to limit risk
A limited partner is risking only the amount she invests in the partnership. The potential for assessments (demands for more money from investors) and the lack of control over the management of the venture are considered disadvantages of limited partnerships. Tax losses generated by the partnership are passed on to investors, but they may only be used to reduce income generated by other passive activities. They may not be used to reduce earned income (wages and salaries) or income from most other types of investments.
If Jane Brown annuitizes her nonqualified variable annuity, how will the series of payments be taxed?
QID: 1507333Mark For Review
A
LIFO
B
FIFO
C
Part of each payment is taxable earnings and part is a tax-free cost basis
D
All taxable earnings first, then all cost basis
Part of each payment is taxable earnings and part is a tax-free cost basis
An individual has a contract which offers guaranteed principal, tax-deferral, fixed premium, fixed benefit, and the insurance company bears the investment risk. What type of insurance contract is this? QID: 1506876Mark For Review A Equity-indexed B Variable C Annuity D Variable life
Annuity
Annuities, including fixed annuities, provide investors with a way to save for retirement. The annuitant pays an insurance company fixed premiums and, in exchange, receives a fixed rate of return (i.e., benefit). Because the rate of return is fixed, the insurance company assumes the investment risk. Taxes on an annuity are deferred until the annuitant withdraws (i.e., receives benefits).
When can an issuer use an omitting or summary prospectus?
QID: 1507330Mark For Review
A
With initial public offerings
B
With sales of investment company securities and variable contracts
C
With follow-on offerings of federal covered securities
D
With private placements
With sales of investment company securities and variable contracts
In most securities offerings, the prospectus is the only disclosure document that’s permitted. However, the SEC does permit the use of a summary or omitting prospectus when selling investment company securities and variable products. The summary prospectus is a shorter document, which summarizes the full prospectus. The disclosure document for a private placement is referred to as an offering memorandum or private placement memorandum.
`In order to determine the lump-sum amount that a person will need at retirement, what elements are required for an investment adviser to make the projection? Life expectancy Inflation rate Current cash flow Investment return QID: 1507095Mark For Review A I and II only B II and III only C I, II, and IV only D I, II, III, and IV
I, II, and IV only
The Investment Advisers Act of 1940 would consider an individual to be in the business of providing investment advice if:
QID: 1506877Mark For Review
A
On rare occasions, she renders advice that is incidental
B
She provides general advice on stocks, bonds, and tangible assets
C
She provides mutual fund timing and sector rotation advice to her clients
D
She provides advice in isolated instances as part of another service
She provides mutual fund timing and sector rotation advice to her clients
Investment advisers provide advice that is timed and tailored to each client. An investment adviser’s advice is not general, isolated, or occasionally offered. An adviser is considered in the business of providing advice when it holds itself out as an adviser or makes recommendations that are client-specific.
Which of the following actions by an agent of a broker-dealer is prohibited?
QID: 1507354Mark For Review
A
Providing advice to a customer about a specific security and then receiving a commission for executing the purchase transaction for the customer
B
Describing the features of a trust to a customer
C
Determining the type of joint account that a client should open
D
Providing advice to a customer regarding different potential investments to place in a custodial account
Determining the type of joint account that a client should open
An agent is in the business of representing a broker-dealer in effecting securities transactions for her firm’s account and the accounts of others. Providing a general description of the details and characteristics of brokerage products and accounts is acceptable. On the other hand, determining or suggesting the best type of account for a customer to open has legal ramifications and should be provided by an attorney.
When investing in a variable annuity, investors would be MOST concerned with which of the following risks? QID: 1507083Mark For Review A Legislative risk B Investment risk C Interest-rate risk D Mortality risk
Investment risk
In a variable annuity contract, an investor’s principal is invested in a separate account. The separate account contains a pool of securities that will fluctuate over time. A variable annuity client would be most concerned with the fact that the value of his investment will fluctuate due to changes in the overall market.
An 81-year-old father is establishing a bypass trust for his two adult children who are both in their 40s. His investment adviser is evaluating the risks and benefits of numerous investment vehicles. Which of the following choices is MOST appropriate investment in a bypass trust?
QID: 1507329Mark For Review
A
Government securities, since they preserve the value of the assets that will be passed to the beneficiaries
B
Growth stocks, since the beneficiaries will not need the funds for several years
C
Municipal securities, since the income that will be provided to the beneficiaries is tax-free
D
Bonds with short-term maturities due to the grantor’s age
Growth stocks, since the beneficiaries will not need the funds for several years
A Bypass Trust (or Credit Shelter Trust) is a type of irrevocable trust and is most commonly used to pass assets from parents to children at the time of the second parent’s death. The key to this specific question is to identify the ages of the beneficiaries. Since both children are in their 40s, a growth investment is the most appropriate. The focus must be on the beneficiaries, not the grantor.
If an investment adviser uses a social media site as a form of advertising, all records of its use must be maintained for at least: QID: 1507094Mark For Review A Two years B Three years C Five years D The life of the firm, plus three years
Five years
Modern Portfolio Theory (MPT) defines risk as the:
QID: 1507349Mark For Review
A
Possibility of loss of principal
B
Possibility that returns will be less than the rate of inflation
C
Slope of the regression line of portfolio returns versus the market
D
Variability of expected returns about the mean
Variability of expected returns about the meanIn MPT, risk is defined as the degree to which investment returns deviate from what was expected or predicted. It is usually measured by the standard deviation of expected returns about the mean (δ), although its square, variance (δ2), is sometimes used.
Which of the following choices is NOT a broker-dealer in State B?
An agent in State A who contacts a client in State B
A corporation that sells commercial paper every other week in State B
A broker-dealer registered in State A, where its only office is located, which has only insurance companies as clients in State B
A bank trust department that buys and sells securities for its customers
QID: 1507356Mark For Review
A
I only
B
III only
C
IV only
D
I, II, III, and IV
I, II, III, and IV
Agents, issuers, and banks are not broker-dealers. Also, a person with no place of business in a state, who deals only with institutional investors, is not a broker-dealer. (
Under what form of ownership may a husband and wife ensure that their property is not able to be attached by the creditors of either spouse? QID: 1506806Mark For Review A Tenants in common B A qualified domestic partnership order C Tenancy by the entirety D Joint tenants with right of survivorship
Tenancy by the entirety
Tenancy by the entirety, which is only available to married couples, allows spouses to own property as a single legal entity. With this form of ownership, a creditor of one spouse is unable to make a claim to the account’s assets. However, if the creditor has a claim against both spouses, it may make a claim to the assets.
The biggest disadvantage of investing in a growth mutual fund is the potential loss of: QID: 1507328Mark For Review A Diversification B Income C Liquidity D Principal
Principal
When an individual invests in a mutual fund that consists primarily of common stocks, his principal is at risk. As the market value of the mutual fund fluctuates over the life of the investment, the result may be a loss of the customer’s principal or investment.
Which of the following choices is an asset class? QID: 1507079Mark For Review A An S&P Index Fund B Diamonds C Baseball cards D Real estate
Real estate
An S&P Index Fund, diamonds, baseball cards, and real estate are all assets; however, real estate is the only one that represents an asset class. For example, a baseball card is an asset but the asset class to which it belongs is collectibles.
An agent of a broker-dealer has written an electronic marketing piece that recommends the purchase of a new investment company which is being offered by his firm. He wants to send it by e-mail to 40 non-institutional clients. If the product is suitable for each client who’s on the agent’s distribution list, which of the following statements is TRUE?
QID: 1506860Mark For Review
A
The content of the e-mail must be filed with the Administrator within 10 business days.
B
The content of the e-mail must be filed with the Administrator 10 business days before it’s sent.
C
The content of the e-mail is not required to be filed with the Administrator because the securities are federal covered.
D
Administrators never require the filing of sales literature or advertisements.
The content of the e-mail is not required to be filed with the Administrator because the securities are federal covered.
Advertisements, including standardized emails, are generally required to be filed with the state Administrator before they’re used. However, advertisements for exempt securities and securities that are sold in exempt transactions are not required to be filed. Since registered investment companies are federal covered and exempt from registration with the state Administrator, the agent’s email is not required to be filed.
What is the liability for loss for an investor in a limited partnership?
QID: 1506874Mark For Review
A
The amount determined by the general partner
B
The investor’s basis
C
The initial investment requirements
D
A percentage of liabilities allocated by the general partner
The investor’s basis
A limited partner’s liability when investing in a partnership is referred to as the investor’s basis. An investor’s basis consists of her initial investment plus any recourse loans (cosigned loans) or profits retained by the partnership that are not distributed. If a partner receives a cash distribution or loss, this would reduce her basis or capital at risk. The general partner may not arbitrarily assign liabilities to investors in a partnership.
KiddieLand is a company that operates several theme parks across the United States. Pilar would like to purchase 18 shares of KiddieLand stock for her newborn niece. Her broker-dealer charges a specified minimum ticket amount for small orders. Which of the following statements is TRUE?
QID: 1507351Mark For Review
A
Common stock is a suitable gift for children only if the company pays a dividend
B
The agent should disclose that the commissions charged for this transaction could be unusually large as a percentage of the market price
C
Pilar will need to obtain the custodian’s permission to purchase the stock
D
The agent will need to have Pilar’s written approval since the number of shares is less than 100
The agent should disclose that the commissions charged for this transaction could be unusually large as a percentage of the market price
It is considered fraudulent for a broker-dealer to fail to notify a client of larger-than-ordinary commissions or costs. Purchases or sales of a small amount of securities can often lead to larger-than-ordinary costs because of minimum charges assessed for transactions. This can lead to commissions that are large as a percentage of the purchase price. It is not illegal to assess such charges, but it is illegal not to inform the client about them. Charging a client an unreasonable commission is prohibited.
Rancho Rio Investments is a single-office investment advisory firm that is based in New Mexico and plans to expand its business to New Jersey. Under the Uniform Securities Act, in which TWO of the following situations is Rancho Rio NOT considered to be an IA in New Jersey?
The firm transacts business only with New Jersey broker-dealers
The firm transacts business in New Jersey, but only with a few employee benefit plans that contain assets under $500,000
The firm’s only business in New Jersey is with 10 or fewer non-institutional customers within a 12-month period
The firm’s only business in New Jersey is with a limited number of federal covered advisers
QID: 1507073Mark For Review
A
I and II only
B
I and IV only
C
II and III only
D
II and IV only
I and IV only
Under the Uniform Securities Act, any investment adviser that has no place of business in a given state and whose clients are banks, broker-dealers, investment advisers, and other institutions is exempt from registration in that state. Also, any IA that has no place of business in the state and deals with five or fewer retail customers who are residents of the state within a 12-month period is also exempt. Since this question makes no reference to Rancho Rio having an office in New Jersey, it may transact business with New Jersey institutional investors, such as broker-dealers (choice I) and investment advisers (choice IV), without being registered in New Jersey. To do business with an employee benefit plan in a state without being registered, the plan must have assets of $1 million or more.
A technology company’s stock is listed on an exchange and is also traded over-the-counter by a small number of market makers. The stock is considered by the Administrator to be a:
QID: 1507337Mark For Review
A
Non-exempt security and subject to registration by coordination
B
Federal covered security and not subject to registration with the Administrator
C
Federal covered security and subject to registration by qualification
D
Federal covered security and subject to notice filing with the Administrator
Federal covered security and not subject to registration with the Administrator
Securities that are listed on the NYSE, Nasdaq, or other national exchanges are considered federal covered securities and exempt from registration with the Administrator. This federal covered status applies regardless of where other trades may take place. Although notice filing does apply to certain federal covered securities, it does not apply to listed securities. Investment company securities and securities that are issued under Regulation D Rule 506 are considered federal covered securities (exempt from state registration), but subject to notice filing.
