Laws, Regulations and Guidelines, Including Prohibitions on Unethical Business Practices
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following is (are) required to register as an investment adviser in a particular state?
A) II only.
B) I only.
C) II and IV.
D) I, II, III and IV.
A) II only.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, only advisers who manage client assets that total less than $100 million are required to register with the state Administrators. Those who manage client assets of at least $110 million or advise registered investment companies are required to register with the SEC and are exempted from state registration. The pension consultant in this question would not be required to register with the state because those who act as pension consultants and have at least $200 million in assets under management have the option to register with the SEC. There is a corridor between $100 and $110 million in which the adviser also has a choice of state or federal registration.
Reference: 3.4 in the License Exam Manual
Which of the following statements is TRUE regarding the civil liability provisions of the Securities Act of 1933?
A) If the registration statement contains misrepresentations that were made deliberately, criminal penalties, in addition to civil ones, may be levied.
B) Purchasers may waive their rights to suit under the civil liability provisions if done so by the purchase contract.
C) The statute of limitations for civil suits is three years from the date of discovery.
D) Only those who actually signed the registration statement are exposed to potential liability.
A) If the registration statement contains misrepresentations that were made deliberately, criminal penalties, in addition to civil ones, may be levied.
Under federal law, civil suits must be filed within one year of the date of discovery of the improper action or three years after the sale, whichever comes sooner. Purchasers may not waive their rights under the act for any provision. Although those who signed are liable, there is a list of others who also might be, including members of the board of directors, legal counsel, accountants, etc.
Reference: 1.4.6 in the License Exam Manual
When a broker-dealer acts in the capacity of a principal in a trade, the firm has acted
A) as an agent
B) for the benefit of the client
C) as a contra-party to the trade
D) in an unethical manner
C) as a contra-party to the trade
In every trade, there are 2 principals—the buyer and the seller. If the broker-dealer is one of the principals (either buyer or seller), the firm is the contra-party to the other side of the trade.
Reference: 2.3.1.4 in the License Exam Manual
When does a customer have to receive the OCC Options Disclosure Document?
A)Within 5 business days of the first options trade
B) Within 15 days of account approval by the firm's designated options supervisor
C) With the confirmation of the first options transaction
D) Before accepting the customer’s first order to trade options covered by the ODD
D)Before accepting the customer’s first order to trade options covered by the ODD
When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document entitled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer’s options account or accepts the customer’s first order to trade the listed options covered by the ODD.
Reference: 9.0 in the License Exam Manual
For an individual earning $150,000 per year, which of the following would be the highest rate?
A) The marginal tax rate
B) The effective tax rate
C) The qualifying dividend tax rate
D) The median tax rate
A) The marginal tax rate
Because we have a progressive income tax system (the higher the taxable income, the higher the tax rate), the marginal tax rate, which represents the tax on the last dollar received, is the highest rate one will pay.
Reference: 17.1.9 in the License Exam Manual
Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must
A) send a copy of its brochure within 7 days of receiving a request from a client
B) send a copy of its brochure to all clients within 90 days of the end of its fiscal year
C) send a copy of its brochure to all clients within 60 days of the end of its fiscal year
D) send a copy of its brochure to all clients within 120 days of the end of its fiscal year
D) send a copy of its brochure to all clients within 120 days of the end of its fiscal year
Whether a state or federal covered investment advisers, a copy of the IA's brochure, assuming there have been material changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year.
Reference: 3.10.3.1 in the License Exam Manual
In conjunction with the offering of securities, an issuer furnishes a portion of the offering to a promoter for a consideration substantially different from the public offering price. According to the USA, the Administrator:
A) must stop the offering.
B) may require that the promoter's securities be deposited in escrow and that the proceeds from the sale of the registered security in his state be impounded until the issuer receives a specified amount from the sale of the security in his state.
C) must require that the promoter's securities be escrowed for a period not exceeding three years.
D) must require that the promoter's securities be escrowed for a period not exceeding one year.
B) may require that the promoter's securities be deposited in escrow and that the proceeds from the sale of the registered security in his state be impounded until the issuer receives a specified amount from the sale of the security in his state.
When a promoter of a public offering receives issuer shares for less than the public offering price, the Administrator of a state's securities department may require that the promoter's securities be escrowed until the issuer receives a specified amount from the sale of the security in his state.
Reference: 2.9.1.3 in the License Exam Manual
Under the Uniform Securities Act, each of the following statements regarding a sale, an offer, or an offer and sale is true EXCEPT:
A) any security given or delivered, with or as a bonus for any purchase of securities, is considered to have been offered and sold for value.
B) a purported gift of assessable stock is considered to involve an offer and sale.
C) a bona fide pledge is considered an offer and sale.
D) every sale or offer of a warrant or stock right to purchase or subscribe to another security, is considered to include an offer of the other security.
C) a bona fide pledge is considered an offer and sale.
The term "sale" does not include a bona fide pledge. It does, however, include securities given as a bonus with a purchase and gifts of assessable stock because the owner of the stock may be called on to produce additional money. Sales of rights or warrants are considered sales of the underlying security.
Reference: 2.12.1 in the License Exam Manual
Over the past 5 years, a stock has had returns of +16%, +5%, -4%, +12% and +8%. The mid-range value of this stock's returns is:
A) +8.2%.
B) +6.0%.
C) +9.0%.
D) +7.4%.
B) +6.0%.
Each of the following is a defined contribution plan EXCEPT:
A) a stock option plan.
B) a profit-sharing plan (qualified).
C) a money-purchase pension plan.
D) a 401(k) plan.
A) a stock option plan.
Money-purchase pension plans, 401(k) plans, and qualified profit-sharing plans are all examples of defined contribution plans.
Reference: 20.4.2 in the License Exam Manual
Under the Investment Advisers Act of 1940, if an investment adviser's sales literature describes an investment system, the description must include:
A) I and III.
B) I, II and III.
C) II only.
D) II and III.
C) II only.
References to charts, tables, formulas, or other devices used to forecast securities prices without setting forth difficulties or limitations in their use is prohibited. It is not necessary to indicate how long the system has been used or its performance history. However, nothing prevents this information from being included. The question asks only what must be included.
Reference: 3.13 in the License Exam Manual
An issuer wishing to comply with Regulation D of the Securities Act of 1933 must file a Form D with the SEC:
A) no later than the time of the first sale.
B) no later than 30 days after the first sale.
C) no less than 20 days prior to the first expected date of sale.
D) no later than 15 days after the first sale.
D) no later than 15 days after the first sale.
Issuers wishing to avail themselves of the private placement exemption offered under Regulation D of the Securities Act of 1933 must file a Form D with the SEC no later than 15 days after the first sale.
Reference: 1.5.2 in the License Exam Manual
Under the Uniform Securities Act, a civil suit to recover damages may not be brought by an advisory client if
A) II and III
B) I and II
C) I, II and III
D) I only
D) I only
The statute of limitations for civil cases is 2 years after discovery or 3 years after the event, whichever is sooner. The death of neither the adviser nor the client removes a cause of action for civil liability, and clients may not waive an adviser's compliance with the rules.
Reference: 2.15.1.1 in the License Exam Manual
Which type of contract obligates both parties to act?
A) I, II, and III
B) I and IV
C) I and II
D) II and III
C) I and II
It is only in the case of forward and futures contracts that both parties are obligated to fulfill the terms of the contract. Only the seller of an option contract is obligated and, in the case of a warrant, it is the issuer of the warrant who is obligated to deliver the underlying shares if the owner exercises.
Reference: 9.1.2 in the License Exam Manual
John Jones dies in June, 2014, leaving the proceeds of his $400,000 life insurance policy to his wife. When computing his gross estate
A) only half is included in the gross estate because of the marital deduction
B) none is included because the estate is less than $5.34 million
C) all $400,000 is included
D) none is included because the beneficiary is his wife
C) all $400,000 is included
All of a deceased person's assets are included in the gross estate. Whether or not an asset is subject to estate tax is a different story and not part of this question. One way to have removed the policy from the gross estate would have been by using an ILIT.
Reference: 17.5.1.1 in the License Exam Manual
There are a number of requirements placed upon investment advisers found in both the Uniform Securities Act and NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. Which two of the following are included in those requirements?
A) I and IV
B) I and II
C) II and III
D) III and IV
D) III and IV
The USA requires all initial and renewal investment advisory contracts to be in writing. If a specific securities report or recommendation has been prepared by someone other than the adviser, disclosure must be made to clients. When an adviser acts as an agent or principal in a trade involving an advisory client, it is only oral consent that must be obtained prior to the completion of the transaction. Brochures must be delivered no later than the time of entering into the contract.
Reference: 3.17 in the License Exam Manual
Among the many exempt transactions under the Uniform Securities Act are the private placement and the preorganization certificate or subscription. While these two exemptions have several requirements in common, they have which of the following differences?
A) I and III
B) II and III
C) II and IV
D) I and IV
B) II and III
No money changes hands in the sale of a preorganization certificate or subscription, while the seller receives payment in the case of a private placement. The state will consider a private placement an exempt transaction if it is anticipated that individual (noninstitutional) investors are purchasing for investment only, not immediate resale. No holding restrictions are placed on preorganization certificates. Only in the case of a sale of a private placement to an institutional client is it permissible to pay commissions. Finally, choice I has it backwards. When referring to retail (noninstitutional) investors, there is a limit to the number of offers (10), while in the preorganization certificate, the number of sales(subscribers) is limited to 10 regardless of whether they are retail or institutional.
Reference: 2.8.2 in the License Exam Manual
Which of the following statements concerning transactions exempt from registration under the Uniform Securities Act is TRUE?
A) The Administrator may require that a security be registered and a prospectus delivered in an exempt transaction.
B) A security sold under an exempt transaction must be registered.
C) The antifraud provisions of the Uniform Securities Act apply to exempt transactions.
D) An unregistered, nonexempt security may be lawfully sold in a nonexempt transaction.
C) The antifraud provisions of the Uniform Securities Act apply to exempt transactions.
The antifraud provisions of the act are always applicable, even if the securities or the transaction are exempt from the registration provisions of the act. Fraud is a crime, and no criminal acts are exempt from the law. If a security is nonexempt, it is required to be registered before sale. The term "exempt transaction" means that a determination of whether the security is registered or is exempt from registration is not necessary to do the transaction. Exempt transactions avoid the necessity of registration and prospectus delivery.
Reference: 2.8.2 in the License Exam Manual
An investment adviser is analyzing 4 bonds of similar quality for a client. Bond A has a coupon of 6%, matures in 12 years, and is currently priced at 50. Bond B has a coupon of 8%, matures in 9 years, and is currently priced at 50. Bond C has a coupon of 4%, matures in 18 years, and is priced at 45. Bond D has a coupon of 12%, matures in 6 years, and is priced at 50. Based on NPV, which of these bonds represents the better value?
A) Bond A
B) Bond C
C) Bond D
D) Bond B
B) Bond C
Because you don’t have the proper calculator to do a real PV calculation, NASAA expects you to use the rule of 72. Remember, under that rule, dividing 72 by the interest rate tells you the number of years it will take for a deposit to double. Or, if you divide 72 by the number of years, it will tell you the interest rate required for a present deposit to double. Finally, a positive NPV is when you can buy the bond for less than its present value. So, let’s look at all 4 choices. Bond A, at 6%, takes 12 years to double. That’s exactly the time to maturity, so the PV of this bond should be approximately $500 (a quote of 50). The same is true of bonds B and D—their PV should be approximately $500 (72 ÷ 8% = 9 years; 72 ÷ 12% = 6). Because their price is the same as the PV, the NPV is zero. However, with bond C, 72 divided by 4% equals 18 years, so this bond also has a PV of approximately $500 (50), but it can be purchased for less than that: 45 ($450). Therefore, with an NPV of $50, bond C is the best value.
Reference: 12.1.1 in the License Exam Manual
A customer purchases stock for $40 per share and holds it for one year, selling it for $50 per share exactly 12 months after the date of purchase. Four quarterly qualifying dividends of $.50 were paid during the year. If the customer's tax bracket is 30%, what is the after-tax rate of return?
A) 17.5%.
B) 21.75%.
C) 21%.
D) 18.40%.
B) 21.75%.
The customer's return on the stock includes the $10 per share short-term capital gain ($50 − $40) plus the $2 qualifying dividend (quarterly dividend of $.50 × 4). After-tax rate of return is found by computing the total after-tax earnings. Short-term gains are taxed at the same rate as ordinary income, and qualifying dividends are taxed at a maximum rate of 15% (except for very high income earners - not tested). The tax on the $10 gain is $3, and the tax on the $2 dividend is $.30. The investor's total return is the $12 total minus the $3.30 in taxes, or $8.70; $8.70 divided by the original investment of $40 results in an after-tax return of 21.75%.
Reference: 19.2.5 in the License Exam Manual
An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients:
A) when informed by the Administrator that the representative's registration is effective.
B) within 48 hours.
C) immediately.
D) when informed by the investment adviser that the representative's registration is effective.
D) when informed by the investment adviser that the representative's registration is effective.
Passing the exams does not automatically give one an effective investment adviser representative's license. Notice is received by the investment adviser from the appropriate state and/or federal authorities and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual.
Reference: 2.4.4 in the License Exam Manual
A registered broker-dealer is under common control with a registered investment adviser. An individual who is an agent of the broker-dealer and an investment adviser representative of the adviser has a client with $250,000 under an asset management program. This individual calls the client and suggests the purchase of 500 shares of RMBM common stock as an appropriate addition to the portfolio. The broker-dealer is a market maker in RMBM, and the sale will be made as a principal, a fact that is disclosed to the client on the trade confirmation. In this situation, the registered person has acted:
A) lawfully in that the disclosure of capacity was made on the confirmation.
B) unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity.
C) unlawfully in that any stock the broker-dealer is a market maker in is probably not suitable for a managed money client.
D) lawfully in that disclosure of capacity is not necessary when executing trades in managed accounts.
B) unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity.
The rules regarding investment advisers and account trading are much stricter than those for broker-dealers because of the fiduciary responsibility of the adviser. Any action that results in a transaction in which the firm or an affiliate acts in either a principal or agent capacity requires the adviser to provide written disclosure of that fact to the client and obtain approval from the client prior to completion of the transaction.
Reference: 3.12.3.1 in the License Exam Manual
Registration of an investment adviser automatically confers registration on:
A) I, II, and III.
B) I and III.
C) I only.
D) I, II, III and IV.
C) I only.
Under Section 202(a) of the Uniform Securities Act, registration of an investment adviser automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions. This only applies to those individuals who are listed on the firm’s Form ADV Part 1, so we’re limited to officers, partners, directors or anyone else doing that type of job, regardless of what this IA has chosen to use as the title.
Reference: 3.7.1 in the License Exam Manual
A speculator, believing that a drought in the Midwest will lead to a weak corn crop, would probably
A) take a long position in corn futures
B) take a short position in corn futures
C) take a long position in orange juice futures
D) take a long position in corn forwards
A) take a long position in corn futures
A weak corn crop means a shortage in the supply. That will lead to an increase in prices. When one is speculating that prices will go up, the best position is a long one. So, why not the long forwards? Those who purchase forwards contracts anticipate accepting delivery of the asset. This individual is merely speculating and has no interest in taking physical possession of the commodity and paying for transportation, silage, and insurance until the commodity is sold. If the person in the question had been a user of corn (a cereal maker, for example), then the forward contract would have been a better choice.
Reference: 9.2.2 in the License Exam Manual
To comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must:
A) I and IV.
B) I and III.
C) II and IV.
D) II and III.
C) II and IV.
To comply with the safe harbor provisions of ERISA's Section 404(c), the plan trustee must allow each participant control over her investments and furnish her with full performance and risk information. The rule only mandates a minimum of 3 alternatives and quarterly changes.
Reference: 20.4.1.4 in the License Exam Manual