Final Exam 4 Flashcards
(39 cards)
Under the Uniform Securities Act, which of the following statements is/are TRUE of exempt securities?
Any security that is exempt under the Uniform Securities Act is also exempt under federal regulations
Any security that is exempt under federal regulations is also exempt under the Uniform Securities Act
Certain federal covered securities are required to notice file with the state Administrator
All Canadian securities are exempt from registration
QID: 1507411Mark For Review
A
I and III only
B
II and IV only
C
III only
D
I, II, and IV only
III only
Certain federal covered securities are required to notice file with the State Administrator. The notice filing provision applies to investment company securities and securities that are distributed through a Regulation D Rule 506 offering. A security can be exempt under federal law, but not state law, and vice versa. Only securities that are issued by some form of Canadian government are exempt from registration; the exemption does not apply to offerings made by Canadian corporations.
Which bonds would have the greatest sensitivity to interest rate changes? Bonds with long durations Bonds with short durations Bonds with high coupons Bonds with low coupons QID: 1507159Mark For Review A I and III B I and IV C II and III D II and IV
I and IV
Duration is a measure (expressed in terms of years) of a bond’s price sensitivity to small changes in interest rates. The longer a bond’s duration, the greater its price sensitivity. Also, bonds with low coupons are more sensitive to interest changes than bonds with high coupons. Therefore, a change in rates will result in a greater percentage change in a bond’s value if it has a low coupon.
Sally is self-employed and has established a Keogh plan for her retirement. She has one full-time employee, Tom, who is 25 and has worked for her for 7 months. When is Tom eligible to participate in the Keogh plan? QID: 1506921Mark For Review A Immediately B In 5 months C In 17 months D Never, since he is not self-employed
In 5 months
Employees of self-employed persons with a Keogh plan must be covered by the plan if they have worked for the employer for one year and are at least 21.
On Tuesday, June 3, an IA discovers its net worth has fallen below the minimum requirement. When must the IA file a report of its financial condition with the Administrator? QID: 1506905Mark For Review A On Tuesday, June 3 B On Wednesday, June 4 C On Thursday, June 5 D On Friday, June 6
On Thursday, June 5
If an IA’s net worth is less than the required minimum, it must notify the Administrator by the close of the next business day (in this question, Wednesday, June 4). After notification is made, the IA must file a report of its financial condition by the next business (in this question, Thursday, June 5). Thereafter, the Administrator may require the IA to post a bond for the deficiency.
An employee of a federally chartered bank would like to sell mutual funds to the bank’s current customers. Which of the following statements is TRUE?
QID: 1507139Mark For Review
A
The bank employee is exempt from the definition of an agent in this situation
B
The bank employee is exempt if the securities are sold only to current customers
C
The bank employee needs to be registered as an agent
D
The bank employee is exempt because of a safe harbor rule
The bank employee needs to be registered as an agent
Bank employees who solicit the sale of securities are considered agents of broker-dealers. The sale of mutual funds, which are considered securities, would cause the employee to meet the statutory definition of an agent.
Paul wants to set up a pension plan for his small business but does not want to obligate the company to making set annual contributions, nor does he want a plan that will be complex or expensive to administer. Which plan would be the best choice for Paul's company? QID: 1507140Mark For Review A A SEP plan B A Money Purchase plan C A 403(b) plan D A Coverdell IRA
A SEP plan
A simplified employee pension (SEP) plan is the best choice given this criteria. As the name implies, a SEP plan is simpler to administer and set up than some other types of pension plans. The employer is not required to make fixed annual contributions to the employee’s account. A Money Purchase plan requires an employer to make fixed annual contributions regardless of its cash flow. A 403(b) plan may be established only by certain tax-exempt organizations and public school systems. A Coverdell is an education savings plan, not a pension plan.
While presenting a financial plan to a customer, an IAR talks about different types of risk. One of the primary risks mentioned by the IAR relates to the impact of current events, consumer confidence, and the general political climate. This risk is called: QID: 1506910Mark For Review A Inflation risk B Nonsystematic risk C Reinvestment risk D Market risk
Market risk
Of the choices available, market risk is the best fit. Market risk is the general risk of investing in a given market or economy. Inflation is a form of systematic risk that affects all bonds. Nonsystematic, inflation, and reinvestment risks are not broad enough to cover the events mentioned.
Under the Uniform Securities Act, an institutional investor:
QID: 1507398Mark For Review
A
Has more than $2.2 million of net worth
B
Has a minimum of $1.1 million under management with an investment adviser
C
May be designated as such by rule or order of the Administrator
D
Is any financial institution or trust
May be designated as such by rule or order of the Administrator
The best answer to this question is that, by rule or order, the Administrator has the power to designate a person as an institutional investor. A client with net worth of more than $2.2 million or a client with a minimum of $1.1 million under management with an investment adviser is defined as a qualified client, not necessarily an institutional investor. Both financial institutions and trusts may be considered institutional investors, but there’s a financial requirement that must be met.
An equity-indexed annuity is linked to the S&P 500 Index and has a spread of 2.5%. If the S&P returns 7.5% in one year, the annuity's rate of return will be: QID: 1506904Mark For Review A 2.5% B 5.0% C 7.5% D 10%
5.0%
Some equity-indexed annuities have a spread, margin, or asset fee. These represent the amount that will be deducted from the returns generated by the underlying index to determine the contract’s returns. If the annuity had a spread of 2.5% and its underlying index returned 7.5%, then the annuity would be credited with 5% that year (7.5% - 2.5% = 5%).
Which risk BEST measures the marketability of a security? QID: 1507395Mark For Review A Market risk B Liquidity risk C Business risk D Systematic risk
Liquidity risk
Marketability (also referred to as liquidity) represents how easy or hard it is to buy or sell a security. As a result, liquidity risk is the best measure of marketability. Market risk, which is a type of systematic risk, is the risk of loss due to a decline in the entire market. Business risk is a type of non-systematic risk and causes losses due to the poor performance of one business or company.
Closed-end fund shares:
QID: 1507405Mark For Review
A
Are marketable and have fixed capitalization
B
May only trade at their net asset value (NAV)
C
Can issue full or partial shares
D
Trade exclusively in the primary market and not on an exchange
Are marketable and have fixed capitalization
Closed-end funds typically issue a large number of shares at the time the fund is created. Thereafter, investors who want to sell their shares are required to sell them on an exchange because the fund will not redeem them directly. Since closed-end funds don’t regularly issue and redeem shares, their capitalization remains relatively fixed. Unlike mutual funds, closed-end don’t issue partial or factional shares.
Real estate limited partnerships: QID: 1506678Mark For Review A Pass through both income and losses B Are typically exchange-traded C Are subject to double taxation D Pass through only income
Pass through both income and losses
Real estate limited partnerships (RELPs), like all partnerships, pass through both income and losses to their partners. This tax treatment is preferential to C-Corporations which are subject to double taxation. RELPs are typically not listed on stock exchanges.
An individual forms a broker-dealer as a sole proprietorship. Which of the following actions are required by the Administrator? Filing Form BD Submitting a Consent to Service of Process Maintaining a minimum amount of net capital Paying a filing fee QID: 1507149Mark For Review A I, II, and IV only B II, III, and IV only C I only D I, II, III, and IV
I, II, III, and IV
Which of the following investments pass through both income and losses to investors? QID: 1507155Mark For Review A All SEC reporting companies B A real estate limited partnership C A regulated investment company D A real estate investment trust
A real estate limited partnership
A limited partnership is permitted to pass through both income and losses to its investors (partners). An SEC reporting company, a real estate investment trust, and a regulated investment company (e.g., a mutual fund) are able to pass through income, but are not able to pass through losses to its investors
Under the Investment Advisers Act of 1940, when is a firm’s registration required to be renewed?
QID: 1506673Mark For Review
A
Within 30 days of the calendar year-end
B
Within 90 days of the adviser’s fiscal year-end
C
Within 30 days of the adviser’s fiscal year-end
D
Within 90 days of the calendar year-end
Within 90 days of the adviser’s fiscal year-end
To measure the variability of returns on various investments, you would use which of the following metrics? QID: 1507427Mark For Review A CAPM B Standard duration C Correlation coefficient D Standard deviation
Standard deviation
Standard deviation is used to measure the variation of returns from the weighted mean return of a security. The greater the standard deviation, the greater the risk.
Which of the following accounts do NOT ease probate?
QID: 1507396Mark For Review
A
Account with a transfer on death designation
B
Joint tenants with right of survivorship account
C
Trust account
D
Joint tenants in common account
Joint tenants in common account
Joint tenants in common is a type of joint account that’s split upon the death of one of the owners. At death, the decedent’s portion of a joint tenants in common account will go into her estate. At that point, the probate process will determine the distribution of the assets. All of the other accounts/ designations in the question make the probate process quicker and easier.
Although an exempt reporting adviser (ERA) is not required to register, it must still satisfy which of the following requirements? QID: 1506930Mark For Review A File Form ADV Part 2 with the SEC B Notice file with the Administrator C Amend its ADV within 90 days if material information changes D Prepare an annual brochure
Notice file with the Administrator
Exempt reporting advisers are required to file Form ADV Part 1A with the SEC and must notice file with the Administrator. Any material information changes must be reported promptly. As is the case with other investment advisers, an ERA is required to amend its Form ADV within 90 days of its fiscal year end.
An agent of a broker-dealer is soliciting investors for a Regulation D offering. A non-accredited investor asks if he can invest less than the minimum required amount. Which of the following statements is TRUE?
QID: 1506902Mark For Review
A
The non-accredited investor can invest less than the minimum required amount.
B
The non-accredited investor cannot participate in a Regulation D offering.
C
The non-accredited investor must invest at least the minimum required amount.
D
Only accredited investors are able to avoid investing the minimum required amount.
The non-accredited investor must invest at least the minimum required amount.
Securities that are sold under Regulation D are not required to be registered if they’re sold to accredited investors and/or up to 35 non-accredited investors. If investors want to purchase securities being distributed through a Regulation D offering (regardless of whether the investors are accredited or non-accredited), they’re required to invest the minimum required amount that’s established by the broker-dealer selling the securities. Investors are not permitted to invest less than the minimum required amount.
Your client owns a portfolio of blue-chip equity securities and would like to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to: QID: 1507153Mark For Review A Write covered calls B Buy calls C Write covered puts D Buy puts
Write covered calls
The most conservative strategy for the investor to achieve his objective is to write covered calls. The call premium received will increase the yield on his portfolio of stocks because it will add to the income generated by the dividends received from the stock.
Which TWO of the following are TRUE regarding credit spreads?
Credit spreads represent the difference between the yields on various bonds and dividend paying stocks
Credit spreads represent the difference between yields on various bonds and Treasury securities
If a corporate bond yields 5.5% and a Treasury bond with a similar maturity yields 4.5% the credit spread is 2%
If a corporate bond yields 6% and a Treasury bond with a similar maturity yields 4.5% the credit spread is 1.5%
QID: 1506908Mark For Review
A
I and III
B
I and IV
C
II and III
D
II and IV
II and IV
A credit spread represents the difference in the yields of various bonds as compared to Treasury securities of similar maturities. If a corporate bond yields 6% and a Treasury bond with a similar maturity yields 4.5%, then the credit spread is 1.5%. Choice (III) is incorrect since the credit spread is 1% (the difference between 5.5% and 4.5%).
Regarding the possession of funds held by investment advisers (IAs), which of the following is FALSE?
QID: 1506907Mark For Review
A
Client notification must be made immediately regarding the location where the firm will hold the funds
B
Client funds may only be held in an account that is established for that specific purpose
C
Client funds may be held by a qualified custodian that has met certain standards
D
Clients must receive a statement at least annually that discloses certain details of the funds held by the firm
Clients must receive a statement at least annually that discloses certain details of the funds held by the firm
Client account statements are sent on a quarterly basis and must include the amount of funds in the firm’s possession, a list of securities held in custody, a record of transactions, and all fees charged. If a custodian holds the assets (i.e., not the IA), the IA must have a reasonable belief that the statements are being provided.
The term “layering” refers to:
QID: 1507145Mark For Review
A
The attainment of illicit funds
B
The blending of illicit money with legitimate money
C
The placement of illegal funds with a financial institution
D
The integration of laundered money back into the stream of commerce
The blending of illicit money with legitimate money
Layering is done to blend illegal funds with legal funds, then the funds are transferred between accounts to hide where the illegal funds were obtained. Once layering has occurred, money launderers will then integrate the illicit funds back into the stream of commerce (e.g., depositing in a bank account, spending it, etc.).
A broker-dealer is a syndicate member involved in a firm-commitment underwriting of a highly anticipated upcoming initial public offering (IPO). During the underwriting, the broker-dealer holds onto some of the shares in order to sell them at a later date since the shares are expected to rise in value. The broker-dealer’s conduct is:
QID: 1507156Mark For Review
A
Acceptable if the issuer approves of the trade
B
Unethical and prohibited under the Uniform Securities Act
C
Allowable only if the shares will be listed on a national exchange
D
Acceptable since the broker-dealer is accepting risk that the shares may fall in value
Unethical and prohibited under the Uniform Securities Act
This situation is known as withholding and is prohibited by both the Uniform Securities Act and the Securities Act of 1933. When a broker-dealer participates in a firm-commitment underwriting, it must sell the shares at the public offering price (POP) as soon as possible.
