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FP511 General Financial Planning Principles, Professional Conduct, and Regulation > Module 5 > Flashcards

Flashcards in Module 5 Deck (40)
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1

What are the thresholds for advisors to register with the SEC?

Small advisers. Those with less than $25 million of assets under management (AUM) are regulated by one or more states unless the state in which the adviser has its principal office and place of business has not enacted a statute regulating advisers.

Midsized advisers. Those with between $25 million and $100 million of AUM are regulated by one or more states if the adviser is registered with the state where it has its principal office and place of business and the adviser is subject to examination by that state authority.

Large advisers. Those with more than $100 million of AUM must register with the SEC (unless an exemption is available), and state adviser laws are preempted for these advisers. (Note that special transitional rules apply to advisers whose AUM fluctuates between $90 and $110 million.)

2

The Investment Advisers Act of 1940 provides three criteria for adviser registration, all of which must be met (remember ABC): „

(1) Providing ADVICE or issuing reports or analysis regarding securities
(2) Being in the BUSINESS of providing such services
(3) Being COMPENSATED for such services

3

What individuals are excluded from the definition of an investment adviser?

A lawyer, accountant, teacher, or engineer (LATE) whose performance of advisory services is solely incidental (as separately defined in the SEC regulations) to the practice of her profession

A broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation
„
A bank or bank holding company, as defined by the Investment Advisers Act of 1940
„
A publisher of a bona fide newspaper or financial publication of general or regular publication
„
A person whose advice is limited to securities issued and guaranteed by the U.S. government

4

The following are exempt from the requirement to register as an investment adviser: „

- An intrastate adviser (single-state adviser) for unlisted securities „
-An adviser whose only clients are insurance companies „
-Foreign private advisers „
-Charitable organizations and plans „
-Commodity trading advisers „
-Private fund advisers „
-Venture capital advisers „
-Advisers to Small Business Investment Companies (SBICs)

5

Which of the following are either excluded from the definition of an investment adviser or exempt from registration under the Investment Advisers Act of 1940?

I. Scott, a foreign private adviser
II. Michelle, whose only clients are insurance companies
III. Janice, who provides advice regarding venture capital only
IV. Carly, who advises his clients regarding securities issued and guaranteed by the U.S. government only

I, II, III, & IV

6

Which of these statements regarding securities and insurance regulation legislation are CORRECT?

I. The Securities Act of 1933 requires the registration of new issues of securities or issues in the primary market.
II. The Securities Investor Protection Act of 1970 is designed to protect individual investors from losses as a result of brokerage house bankruptcies.
III. The Investment Company Act of 1940 assures investor safety of investment value in companies engaged primarily in investing, reinvesting, and trading in securities.
IV. The Investment Advisers Act of 1940 requires that persons or firms advising others regarding securities must register with the Securities and Exchange Commission.

I, II, & IV

7

Which statement most accurately describes the McCarran-Ferguson Act of 1945?

A. Authorizes the SEC to regulate mutual funds and variable products
B. Insures investors against losses arising from the failure of a brokerage firm
C. Established the SEC as the primary regulatory body overseeing the sale and purchase of securities
D. Provides that insurance is to be regulated at the state level as long as the states’ regulation is adequate

D.

8

Which of these statements regarding securities and insurance regulation legislation are CORRECT?

I. The Securities Act of 1933 requires the registration of new issues of securities or issues in the primary market.
II. The Securities Investor Protection Act of 1970 is designed to protect individual investors from losses as a result of brokerage house bankruptcies.
III. The Investment Company Act of 1940 assures investor safety of investment value in companies engaged primarily in investing, reinvesting, and trading in securities.
IV. The Investment Advisers Act of 1940 requires that persons or firms advising others regarding securities must register with the Securities and Exchange Commission.

I, II, & IV

The answer is I, II, and IV. Investors are not assured of safety when investing and trading in securities.

9

Which statement most accurately describes the McCarran-Ferguson Act of 1945?

A. Authorizes the SEC to regulate mutual funds and variable products
B. Insures investors against losses arising from the failure of a brokerage firm
C. Established the SEC as the primary regulatory body overseeing the sale and purchase of securities
D. Provides that insurance is to be regulated at the state level as long as the states’ regulation is adequate

D.

The answer is provides that insurance is to be regulated at the state level as long as the states’ regulation is adequate. The McCarran-Ferguson Act of 1945 provides that the states will regulate insurance as long as their regulation is adequate. The Securities Investor Protection Act of 1970 established SIPC to protect investors against losses arising from the failure or bankruptcy of brokerage firms. The Investment Company Act of 1940 authorized the SEC to regulate mutual funds and variable products, and the Securities Exchange Act of 1934 established the SEC as the primary regulatory body overseeing the sale and purchase of securities.

10

Describe the Series 6.

This entitles the holder to sell all open-end investment companies (mutual funds), variable annuities, variable life insurance, and initially offered (not secondary) unit investment trusts.

11

Describe the Series 7.

This is the broadest license and entitles the holder to sell any security, including individual stocks and exchange-traded funds.

12

Describe the Series 24.

Any person actively engaged in managing a member’s securities or investment banking business (e.g., supervising, soliciting, and conducting business) or in training persons associated with the member must qualify by examination and register with FINRA as a general securities principal. A Series 7 or Series 62 qualification is a prerequisite for this license.

13

Describe the Series 63.

This is the Uniform Securities Agent State Law Examination. State securities laws require individuals to pass a qualification exam to sell securities within their states. Almost all states require individuals to pass the Series 63 exam as a condition of state registration.

14

Describe the Series 65.

This entitles the holder to provide investment advice to clients within the holder’s primary state of residence. Note that the CFP Board has entered into a reciprocity agreement with many state securities departments permitting a waiver of this examination if the individual is a CFP® certificant.

15

Describe the Series 66.

This is the Uniform Combined State Law Examination, which combines the Series 63 license requirements with the Series 65 license requirements. An individual who holds this license may provide investment advice (and sell securities) to any client in any state. Series 66 candidates must pass the Series 7 exam before they can qualify to register for their Series 66 exam.

16

Which of the following statements regarding FINRA are CORRECT?
I. It was established by the U.S. government.
II. It regulates financial planners who offer investment advice.
III. The applicant who seeks FINRA registration must be associate with a broker or dealer.
IV. The FINRA registration process requires individuals to take the SIE exam, which is an introductory exam that assesses a candidate’s knowledge of basic securities industry concepts.

III & IV

The answer is III and IV. Statement I is incorrect. FINRA is a self-regulatory organization that was established by the securities industry itself, not the government. However, it is under the purview of the government. Statement II is incorrect. FINRA regulates those involved in the sale of securities, while the SEC, in accordance with the Investment Advisers Act of 1940, regulates those who offer investment advice. Statements 3 and 4 are correct.

17

Athena is a Series 6 licensed registered representative. She also holds the appropriate state insurance licenses. Identify the financial product that Athena is NOT able to sell.

A. Variable annuities
B. Exchange-traded funds
C. Variable life insurance policies
D. Open-end investment companies

B.

18

National banks are subject to regulation by three independent federal agencies:

1. Office of the Comptroller of the Currency (OCC). This agency charters, supervises, and regulates national banks and federal branches of foreign banks located in the United States.

2. Federal Reserve Board. This group makes monetary policy, which is discussed in Module 7 of this course.

3. Federal Deposit Insurance Corporation (FDIC). The FDIC insures deposits in U.S. banks and savings and loan associations against bank failures.

19

Erin has the following assets. How much of her money is currently FDIC insured?

Traditional IRA (Oakdale Bank is custodian) - ERIN - $265,000

Savings account (Oakdale Bank) - ERIN - $175,000

Certificates of deposit (Oakdale Bank) - ERIN - $125,000

Money market mutual fund (Oakdale Bank Advisors) - ERIN - $80,000

Savings account (Oakdale Bank) - JOINT WITH FATHER - $40,000

Checking account (Oakdale Bank) - JOINT WITH SISTER - $25,000

The answer is $532,500. The amount currently insured by the FDIC for Erin is $532,500. FDIC insurance covers Erin’s traditional IRA up to the $250,000 limit for IRA. The coverage is $250,000 for the savings account owned solely by Erin and the CDs (the values total $300,000; however, the maximum FDIC coverage for assets with the same ownership is $250,000). Erin’s FDIC insurance covers 50% of the joint checking account ($12,500), and 50% of the joint savings account ($20,000). The money market mutual fund is not covered. ($250,000 + $250,000 + $12,500 + $20,000 = $532,500)

20

Credit Unions

Like banks, credit unions sponsor a number of financial products. Similar to bank loans, loans from credit unions are permitted for a number of purposes, including some commercial loans.

Earnings from loan interest and investments are allocated to the members in the form of dividends. Each credit union member may vote to elect the board of directors that is responsible for setting credit union guidelines and providing leadership.

The National Credit Union Share Insurance Fund (NCUSIF), an agency of the federal government, regulates credit unions unless the institution is chartered by a state where separate regulation is provided. Like bank deposits, deposits in a credit union are insured up to $250,000 per qualifying account.

Administered by the National Credit Union Administration, the NCUSIF is backed by the full faith and credit of the U.S. government. However, no federal tax dollars have been deposited into the fund.

21

Investment Banks

A business or municipal government that plans to issue securities usually works with an investment bank—a securities broker-dealer that underwrites new issues.

An investment bank’s functions may include the following: „

-Advising corporations on effective strategies to raise long-term capital
-Raising capital for issuers by distributing new securities
-Buying securities from issuers and reselling them to the public
-Distributing large blocks of stock to the public and institutions
-Helping issuers comply with securities laws

22

Brokerage Company

An intermediary that facilitates transactions involving sales of investments or real estate. Brokers are agents that arrange trades for clients and charge commissions.

Brokers, or agents, arrange trades between buyers and sellers. Dealers, or principals, buy and sell securities for their own accounts, often called position trading. When selling from their inventories, dealers charge their clients markups rather than commissions. A markup is the difference between the current interdealer offering price and the actual price charged to the client.

The SEC is the primary regulatory body overseeing the sale and purchase of securities; however, much of this responsibility has been delegated from the SEC to FINRA.

23

Insurance Company

Primarily engaged in the business of furnishing insurance protection to businesses and consumers.

Each state has its own department of insurance that regulates insurance companies in that state. National insurance programs, such as the National Flood Insurance Program, are exceptions.

24

Insurance Company

Primarily engaged in the business of furnishing insurance protection to businesses and consumers.

Each state has its own department of insurance that regulates insurance companies in that state. National insurance programs, such as the National Flood Insurance Program, are exceptions.

25

Mutual Fund Companies

A mutual fund company pools money from shareholders and invests the funds in various types of securities (e.g., stocks, bonds, and money market instruments) according to the funds’ prospectus. They are regulated by the SEC.

26

Savings and Loan Associations (Thrift Institutions)

The main purpose of a savings and loan association (S&L), also called a thrift institution, is to accept savings and provide home loans. S&Ls are not permitted to provide demand deposits (e.g., checking accounts); however, they can offer interest-bearing NOW accounts, which are similar to demand deposit accounts. All federal and many state-chartered S&Ls are regulated by the OCC.

27

Trust Company

A trust company is typically owned by one of three entities (i.e., an independent partnership, a bank, or a law firm), each of which specializes in managing estates and serving as the trustee for various types of trusts.

28

Trust Company

A trust company is typically owned by one of three entities (i.e., an independent partnership, a bank, or a law firm), each of which specializes in managing estates and serving as the trustee for various types of trusts.

29

Which of the following requires an individual to be registered as an investment adviser under the Investment Advisers Act of 1940?

I. The individual provides advice about securities.
II. The individual is in the business of providing advice about securities.
III. The individual receives compensation for providing advice.
IV. The individual is a CFP® practitioner.

I, II, & III

30

FINRA-licensed individuals:

I. Are issued a Central Registration Depository (CRD) number.
II. Must meet continuing education requirements, known as the firm element, through their broker/dealer each year.
III. Must meet additional continuing education requirements (known as the "regulatory element") at regular intervals.
IV. Must always maintain an active Series 7 license.

I, II, III

Only statement IV is incorrect. A Series 7 license is not always a requirement for financial service professionals. This license requirement would be dependent on the types of products that are being offered by the professional

31

Mason has decided to pursue a career selling financial products. He currently holds a Series 7 license and a state variable insurance license. In addition to the Series 63 registration required by his state, what other license(s) must he obtain to sell both variable life insurance and mutual funds?

A) Mason must FINRA Series 65 license.
B) Mason has the appropriate licenses to sell variable life insurance and mutual funds.
C) Mason must obtain a FINRA Series 6 license.
D) Mason must obtain a FINRA Series 24 license.

B) Mason has the appropriate licenses to sell variable life insurance and mutual funds.

The answer is Mason has the appropriate licenses to sell variable life insurance and mutual funds. Mason can sell both variable life insurance and mutual funds with his current licenses. He need not obtain a Series 6 license because his Series 7 license, along with his state variable insurance license, allows him to sell these products

32

Which of the following FINRA licenses entitles the holder to provide investment advice to clients within the holder's primary state of residence?

I. Series 7
II. Series 63
III. Series 65
IV. Series 66

The answer is III and IV. Individuals with Series 65 licenses can provide investment advice to clients within their primary states of residence. Series 66 registration entitles holders to not only provide advice within their primary states of residence, but in any state.

33

You have acquired the Financial Industry Regulatory Authority (FINRA) Series 6 and Series 63 licenses and are appropriately state insurance licensed. Which of the following are you permitted to sell?

I. Mutual funds
II. Variable life insurance
III. Individual stocks
IV. Options

The answer is I and II. Holding the FINRA Series 6 and Series 63 registrations and the appropriate insurance licenses qualifies an individual to sell mutual funds, variable life insurance, variable annuities, and initially offered unit investment trusts (UITs). A Series 7 license is required to sell individual stocks and options.

34

Olivia is a Financial Industry Regulatory Authority (FINRA) Series 6 licensed registered representative. Assuming she also holds the appropriate state insurance licenses, which of the following products can she sell?

I. Individual stocks
II. Variable annuities
III. Exchange-traded funds (ETFs)
IV. Open-end investment companies

The answer is II and IV. Olivia cannot sell individual stocks or exchange-traded funds holding only a FINRA Series 6 license. She needs a Series 7 license to sell these products. She can, however, sell variable annuities and open-end investment companies (mutual funds) because she holds a Series 6 license and the appropriate state insurance licenses (for variable annuities).

35

Doug has the following amounts on deposit at the same bank.

Account - Ownership - Balance

Savings account Doug $200,000
Traditional IRA Doug $300,000
Certificate of Deposit Joint with spouse $400,000

How much Federal Deposit Insurance Corporation (FDIC) insurance coverage does Doug have for his accounts at the bank?

The answer is $650,000. Each category of ownership (e.g., individual, joint, or retirement account) in the same institution is subject to a separate limit of $250,000. Doug has $200,000 of coverage on his individual savings account, $250,000 of coverage on the traditional IRA, and $200,000 of coverage on the joint account, for a total of $650,000.

36

All of the following types of accounts are covered by Federal Deposit Insurance Corporation (FDIC) insurance except

A) certificates of deposit.
B) savings accounts.
C) money market mutual funds.
D) checking accounts.

C. The answer is money market mutual funds. Money market deposit accounts, not money market mutual funds, are covered by FDIC insurance.

37

Savings and loan associations (S&Ls)

A) provide small business loans as a primary line of business.
B) are regulated by the Office of Comptroller of the Currency, if federally chartered.
C) are permitted to provide demand deposits.
D) are also known as trust companies.

B. The answer is are regulated by the Office of Comptroller of the Currency, if federally chartered. S&Ls are also known as thrift institutions, not trust companies. S&Ls are not permitted to provide demand deposits, such as checking accounts. However, they can offer interest-bearing NOW accounts, which are similar to demand deposit accounts. As a result of the Dodd-Frank Act, federal and many state-chartered S&Ls once regulated by the Office of Thrift Supervision are now regulated by the Office of the Comptroller of the Currency. The main purposes of S&Ls are to accept savings and provide home loans.

38

Which of the following statements regarding financial institutions is CORRECT?

I. A trust company is also known as a thrift institution.
II. A mutual fund company pools money from shareholders and invests the funds in various types of securities.
III. A credit union, owned by its members, is a financial institution that accepts deposits and makes loans.
IV. A brokerage company is an intermediary that facilitates transactions involving sales of investments or real estate.

The answer is II, III, and IV. A savings and loan association (S&L), not a trust company, is also called a thrift institution.

39

Which of the following statements regarding credit unions are CORRECT?

I Loans are typically offered at reduced interest rates.
II. Earnings from loan interest and investments are paid to members in the form of shares.
III. Deposits in a credit union are insured up to $100,000 per qualifying account by the National Credit Union Share Insurance Fund (NCUSIF).
IV. Each credit union member may use a vote to elect the board of directors.

The answer is I and IV. Statement 2 is not correct because earnings from loan interest and investments are paid to members in the form of dividends, not shares. Statement 3 is not correct because deposits in a credit union are insured up to $250,000 per qualifying account by the NCUSIF.

40

Which of the following statements regarding the National Credit Union Share Insurance Fund (NCUSIF) are CORRECT?

I. The NCUSIF insures member accounts of all federal credit unions.
II. The fund is administered by the National Credit Union Administration (NCUA).
III. The NCUSIF is backed by the full faith and credit of the U.S. government.
IV. Up to $500,000 of a member's account balances are insured by the NCUSIF.

The answer is I, II, and III. The NCUSIF insures member accounts of all federal and most state-chartered credit unions up to $250,000.