Unit 1
Under the Uniform Securities Act, which of the following activities is an example of churning?
A) Following a practice of purchasing Class A shares of a mutual fund for a client, holding them for no more than one month, and liquidating and using the proceeds to purchase Class A shares of another mutual fund offered by a different underwriter.
B) A client engaging in day trading.
C) Bond swap.
D) Frequent purchases one day and sales of the same stock the next day to make changes in a client's portfolio in order to align with a customer's investment objectives.
A) Following a practice of purchasing Class A shares of a mutual fund for a client, holding them for no more than one month, and liquidating and using the proceeds to purchase Class A shares of another mutual fund offered by a different underwriter.
Churning is defined as excessive activity in a customer's account for the purpose of generating commissions. Because Class A mutual funds carry a front-end load and are considered long-term investment vehicles, frequent trades constitute churning. Frequent purchases one day and sales of the same stock the next day in order to align with a customer's investment objectives is not necessarily churning if it is done for the benefit of the customer. A bond swap is not churning; it is generally done for tax purposes. If the client is initiating the day trades, the agent is not the one doing the trading so no churning is taking place.
Reference: 2.11.3 in the License Exam Manual
The Securities Exchange Act of 1934 calls for the registration of many different entities involved in the securities business, such as exchanges and broker-dealers. The Act also requires registration of securities information processors such as
A) I and II
B) I and IV
C) II and III
D) III and IV
D) III and IV
Securities information processors (SIPs) collect and disseminate trading and pricing information. TV stations, such as CNBC, and newspapers, such as IBD, obtain information from SIPs and then rebroadcast or reprint it.
Reference: 1.6.2.5 in the License Exam Manual
Wealth Creation Advisers (WCA) is a federal covered investment adviser specializing in consulting to pension plans. WCA’s principal office is located in State L. The governor of State L is running for re-election. If WCA were to make a $350 contribution to the campaign, under the SEC’s pay-to-play rule,
A) WCA would be prohibited from receiving compensation for advisory services rendered to any agency of State L for 2 years
B) WCA’s contribution is within the de minimis limitation because their principal office is located in State L
C) WCA could be subject to disciplinary action
D) WCA would be prohibited from rendering any advisory services to any agency of State L for 2 years
A) WCA would be prohibited from receiving compensation for advisory services rendered to any agency of State L for 2 years
The SEC’s pay-to-play rule prohibits investment advisers from receiving compensation for advisory services to a government entity (any agency, authority, or instrumentality of a state or political subdivision), for 2 years after the advisory firm or any covered employee makes a political contribution to a public official or candidate who is or would be in a position to influence the award of investment advisory business by public retirement funds. Please note that the advisory relationship can continue, just without any compensation. The de minimis exemption of $350 applies to an individual, as long as that person is eligible to vote for the candidate ($150 if he is not), but it never applies to the firm.
Reference: 3.21.1 in the License Exam Manual
Many fixed income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk?
A) Baa rated municipal revenue bond.
B) Ba rated corporate mortgage bond.
C) Aa rated corporate debenture.
D)A rated general obligation municipal bond.
C) Aa rated corporate debenture.
A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk.
Reference: 13.2.2 in the License Exam Manual
A margin account that contains both long and short stock positions is known as
A) a hedged margin account
B) a mixed margin account
C) a long/short margin account
D) an opposition margin account
B) a mixed margin account
When a margin account contains both long and short positions, it is known as a mixed or combined margin account.
Reference: 18.2.1.5 in the License Exam Manual
Under the antifraud provisions of the Uniform Securities Act, agents are prohibited from all of these EXCEPT:
A) employing any device, scheme, or artifice to defraud.
B) failing to state nonmaterial facts.
C) engaging in any practice that the Administrator defines by rule as unethical.
D) engaging in any fraudulent or deceitful practice in the normal course of business.
B) failing to state nonmaterial facts.
Nonmaterial facts are those which do not impact an investor's decision making process. Omitting them would not be a fraudulent activity as would be the case if the facts were material.
Reference: 2.10.1.2 in the License Exam Manual
Under the Investment Advisers Act of 1940, it is legal for an investment adviser to:
A) I, II and III.
B) I and II.
C) I and III.
D) II and III.
C) I and III.
Rebating commissions on mutual fund sales is prohibited, but the adviser may reduce the client's fee or keep the commission; mutual funds, being new issues, are sold with a sales commission stated in the prospectus. This charge is the same for all purchasers and the law permits an adviser to state in the advisory agreement that any commissions earned on fixed price securities may be used to offset fees.
Reference: 2.10.10 in the License Exam Manual
According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is NOT true?
A) Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.
B) Advisers must send statements to clients no less frequently than annually that identify the total number of these transactions during the period and the total amount of commissions received.
C) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent.
D)These transactions are allowed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price.
C) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent.
An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commission received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.
Reference: 3.15 in the License Exam Manual
If interest rates decline sharply, which of the following bonds is likely to appreciate the most?
A) 15-year 7% bond trading at par
B) 15-year 8% bond trading on a 7.90 basis
C) 15-year zero coupon bond trading on a 7.80 basis
D)15-year 8% bond trading on an 8.10 basis
C) 15-year zero coupon bond trading on a 7.80 basis
Prices of zero-coupon bonds tend to be more volatile than prices of interest-bearing bonds because of their longer duration.
Reference: 5.3.3 in the License Exam Manual
A 457 plan could cover which of the following?
A) II and IV.
B) I and III.
C) II and III.
D) I and IV.
A) II and IV.
The 457 plan is a nonqualified deferred compensation plan for municipal employees as well as for independent contractors performing services for those entities.
Reference: 20.4.6 in the License Exam Manual
Disciplinary proceedings under the Uniform Securities Act require the Administrator to provide which of the following?
A) II and III.
B) I, II and III.
C) I and III.
D) I and II.
B) I, II and III.
In the event of a disciplinary action, an Administrator must provide appropriate prior notice, an opportunity for a hearing, and written findings of facts and conclusions of law. Even if an order is issued summarily (made effective upon issue without prior notice), a registrant must be notified upon issue of the order and must be given the opportunity to request a hearing.
Reference: 2.14.4.1 in the License Exam Manual
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may borrow money from which of the following clients?
A) II and III.
B) I, II, III and IV.
C) I and IV.
D) I, II and IV.
D) I, II and IV.
An adviser may only borrow from a client that is in the business of loaning money, such as a bank or broker-dealer, or a client that is affiliated with the adviser.
Reference: 2.11.25 in the License Exam Manual
Abel Kane is an agent for Garden City Securities, a broker-dealer registered with the SEC and all 50 states. It would be considered an unethical or dishonest business practice for Mr. Kane to
A) II and III
B) III and IV
C) I, II, and III
D) I and IV
A) II and III
This question is tricky. The key here is that agents have no responsibility for delivering customer securities. That is an obligation of the broker-dealer.
Reference: 2.11.1 in the License Exam Manual
For which of the following is there no active secondary market?
A) ETFs.
B) Options.
C) Forward contracts.
D) Futures contracts.
C) Forward contracts.
One of the disadvantages when investing in forward contracts is that there is no active secondary market. Because each contract is between one buyer and one seller and there is no standardization, no exchange trading is possible.
Reference: 9.2.1 in the License Exam Manual
ERISA rules require testing of 401(k) plans to determine whether they meet the definition of a top-heavy plan. A plan would be considered top heavy if:
A) the plan has a long vesting schedule.
B) the employer contributes more to the plan than the employees do.
C) the plan is disproportionately benefiting key employees.
D) the plan is disproportionately benefiting highly compensated employees.
C) the plan is disproportionately benefiting key employees.
A plan is considered top heavy when more than 60% of the plan assets are held in the accounts of employees meeting the definition of key employee.
Reference: 20.4.5 in the License Exam Manual
States may require a surety bond as a prerequisite to registration under the Uniform Securities Act for each of the following EXCEPT a(n):
A) broker-dealer.
B) agent.
C) state-registered investment adviser.
D) issuer.
D) issuer.
The common requirements are to pay filing fees, post a surety bond, and consent to service of process for all three of these designations. For broker-dealers and state-registered investment advisers, an additional net capital or net worth requirement has to be met.
Reference: 2.4 in the License Exam Manual
The most common way in which to distinguish whether social media content is static or interactive is
A) the ability for others to comment on it
B) the ability for others to like it
C) the ability for others to change it
D) the ability for others to link to it
C) the ability for others to change it
Static content can only be changed by the originator (or someone under that person's control).
Reference: 2.4.8.1* in the License Exam Manual
Which of the following has the power to close a stock exchange for up to 90 days?
A) The President of the United States.
B) The SEC.
C) The Administrator in the state where that stock exchange is located.
D) The President of that stock exchange.
B) The SEC.
The Securities Exchange Act of 1934 granted the SEC the power to close any registered stock exchange for up to 90 days. All that is required is notice to the President of the U.S.
Reference: 1.8 in the License Exam Manual
A client needs emergency cash for 30 days. All of the following are acceptable sources EXCEPT:
A) margin loan from a broker-dealer.
B) using credit card access checks.
C) term life insurance.
D) taking a premature distribution from an IRA.
C) term life insurance.
Term life insurance has no cash value. Withdrawals from an IRA incur no tax or penalty if 100% of the funds are replaced within 60 days.
Reference: 8.2.1 in the License Exam Manual
What is the proper course of action for the fiduciary of a trust that has a portfolio made up of 10% cash and 90% stock of one company that has recently experienced a 40% market gain?
A) Begin diversifying the equity portfolio
B) Increase the cash position to 25% by taking some of the profits off the table
C) The fiduciary can maintain the current allocation if ,while acting in the capacity of trustee, he believes it aligns with the goal of the trust
D) Use the cash to acquire more shares of the stock
C) The fiduciary can maintain the current allocation if ,while acting in the capacity of trustee, he believes it aligns with the goal of the trust
In virtually every trust question, the correct answer will be that the trustee (fiduciary) has to follow the terms of the trust and meet the trust’s goals and objectives.
Reference: 20.4.1.1 in the License Exam Manual
A registrant’s registration may be canceled by the Administrator:
A) if the Administrator is unable to locate the registrant.
B) upon the order of a court of competent jurisdiction.
C) as long as there is opportunity for a hearing.
D) when the registrant has been found in violation of the Uniform Securities Act.
A) if the Administrator is unable to locate the registrant.
Cancellation is non-punitive – nothing wrong was done. But, when the Administrator is unable to locate the registrant, or the registrant is declared mentally incompetent or is deceased, registration is canceled.
Reference: 2.14.5.2 in the License Exam Manual
Which of the following would not be an issuer?
A) A partnership selling partnership interests.
B) A corporation selling certificates of interest in a mining lease.
C) A governmental agency borrowing money for short-term needs.
D) An investment company.
B) A corporation selling certificates of interest in a mining lease.
Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer. Even though the choice does not indicate how the governmental agency is borrowing, we can assume they are issuing a short-term note.
Reference: 2.5.3 in the License Exam Manual
Under the Uniform Securities Act, the Administrator may NOT do which of the following?
A) Issue a cease and desist order without a prior hearing.
B) Require an agent to post a surety bond.
C) Cancel the registration of a broker-dealer when mailings are returned with no forwarding address.
D) Refuse to allow an Administrator from another state to investigate a broker-dealer in the state.
D) Refuse to allow an Administrator from another state to investigate a broker-dealer in the state.
Administrators cooperate with Administrators of other states in conducting investigations.
Reference: 2.4.5.1 in the License Exam Manual
The present value of a dollar:
A) is the amount of goods and services it will buy in the future at today's rate price level.
B) cannot be calculated without knowing the level of inflation.
C) is equal to its future value if the level of interest rates stays the same.
D) indicates how much must be invested today at a given interest rate, to equal a specific cash value in the future.
D) indicates how much must be invested today at a given interest rate, to equal a specific cash value in the future.
The present value of a dollar will indicate how much must be invested today at a given interest rate, to equal a cash amount required in the future.
Reference: 12.1.1.2 in the License Exam Manual
Which of the following concerning a money purchase pension plan are TRUE?
C) II and III.
A money purchase pension plan is a defined contribution plan established by the employer, thereby making the contributions mandatory. Employee participation by making voluntary contributions to the plan is optional. Employees who contribute to the plan usually contribute a percentage of their income.
Reference: 20.4.2 in the License Exam Manual