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Series 66
| Question | Answer |
|---|---|
| What is Liquidation? | The process of redeeming mutual fund shares. Also called redemption. |
| What is Liquidity? | The convertibility of assets into cash. |
| What are long-term capital gains or losses? | Capital gain or loss from securities held for longer than 12 months. |
| What is making a market? | The position of a brokerage firm that buys and sells a particular over-the-counter stock for its own account at its own risk (taking the position). |
| What is the Maloney ACT? | An act of Congress passed in 1938 to amend the Securities Exchange ACT of 1934 by extending its provisions to the OTC market. It also provides for registration of a national securities association. |
| What is a Management Company? | Companies that actively buy, sell and trade the securities held in the company's portfolio according to a prescribed investment objective. May be open end, closed end, diversified or non-diversified. |
| What is a Keogh Plan (pronouced Keyhole)? | A qualified tax-deferred retirement plan for persons who are self-employed and unincorporated or who earn extra income through personal services aside from their regular employment. HR 10 plan. |
| What is the Legal Opinion of Counsel? | Regardless of the type of municipal bond issued, the bond must be accompanied by a legal opinion of counsel. The opinion of counsel affirms that the issue is a municipal issue and that interest is exempt from federal taxiation, among other items. |
| What is leverage financing? | Rasing capital through the sale of bonds. Leverage is the use of borrowed funds for investment. |
| What is a life annuity? | An annuity that ceases payments upon the death of the annuitant with no beneficiary. |
| What is life annuity with peroiod certain? | A life annuity with a guarantee that payments will continue for a set number of years. If the annuitant dies before the set period has expired, payments will be made to a beneficiary for its duration. |
| What are Listed Securities? | Securities that are traded on a national securities exchange such as the New York Stock Exchange. |
| What is Cumualtive Voting? | A type of shareholder voting in which the number of shares held is multiplied by the number of directors to be elected to determine the number of votes a shareholder may cast. He may allocate the votes for for one director. |
| What is a debenture (Unsecured Bond)? | Bond backed only by the good faith of the corporation. Repayment of the debt is based on the company's promise to repay. |
| What is a diversified fund? | A type of mutual fund that has most of tis assets invested in many types of securities, many issuers of a single type of security or both. |
| What is the definition of a diversified fund under the Investment Company ACT of 1940? | One where at least 75% of its assets are invested so that 5% of its total assets own no more than 10% of the total outstanding stock of any one company. |
| What is a dividend? | That portion of the earnings of a corporation declared by the board of directors to be paid to shareholders. Each shareholder receives a pro rata distribution based on his share ownership. |
| What is a dividend in a mutual fund? | A distrbution of net investment income, usually paid quarterly. |
| What is dollar cost averaging? | A method of investing that requires a specified number of dollars to be invested over consecutive periods. By investing the same dollar amount, when share prices are low, the investor will purchase more shares. When shares are priced high, fewer shares b |
| What happens during the a period of time during DCA? | The average cost per share may be lower than the average price. DCA does not guarantee a profit |
| What is due dilligence? | A duty of the underwriter to conduct an inquiry into the circumstances surrounding the issue of the security. The underwriter(s) or party charged with discovery must not negligent in its attempt to discover and disclose relevent facts affecting offer |
| What are economic and social risk? | The risk related to international developments and domestic events. |
| What are EE Savings Bonds? | Nonnegotiable government debt issued at a discount from face value. The difference between purchase price and the value of the bond upon redemption determines the interest rate. |
| How are EE bonds interest rates paid? | EE bonds pay a variable rate of interest linked to the rate paid on five-year Treasury secuirites. |
| What is the effective date? | The date the registration of an issue of securities becomes effective with the SEC. The underwriter confirms saless of the newly issued securities after this date. |
| What is an equipment Trust Certificate? | A bond backed by equipment such as airplanes or railroad cars. The title to the equipment is held by a trustee until the company pays off the bonds. |
| What is Equity? | Stock (common or preferred) is sold to individuals and institutions. In return for the money paid, the individual or institution receives an ownership interest in the corporation. |
| What is Participating Preferred Stock? | Preferred stock entitled to its preferred dividend and also to participate with the common stock in the balance of dividends declared. |
| What is the payable date? | The day on which the dividend is paid. |
| What is a Periodic Payment Plan? | The name used for a contractual plan in the Investment Company ACT of 1940 |
| What is a Plan Prospectus? | The prospectus offering the contractual plan. Both it and the prospectus of the underlying fund must be delivered to the prospect. |
| What is a point? | The unit that measures price fluctuations in the market. A point in stocks is $1 per share, in bonds 1% of the face value usually $10 1000 x 0.01 |
| What is a the POP? | Public offering price on a new issue as established in the prospectus. |
| What is a position? | Either the number of shares owned ( a long position) or owed ( a short positon) by an indvidual. A dealer will also take positions in specific securities to maintan an inventory to facillitate trading. |
| What is a Pre-emptive Right? | The right of the stockholder to maintain his proportionate share of the corporation by purchasing shares in a new issue in direct proportion to those already owned before the new issue is offered to the general public. |
| What is a right? | A coupon offered to existing shareholders allow them to keep the same percentage of ownership that the had before another public offering. A right is offered below current market value and often expries 30 days or less. |
| What is a primary distrubtion? | A distribution to the general public of a new issue of securities. A prospectus is required. |
| What is a deferred annutiy? | An annuity contact that repays principal and interest in the future. Interest earned during the accumulation (pay in) period is tax deferred. |
| What is a Red Herring Prospecutus? | A prelminary prospectus for information purposes. It cannot offer a security for sale. Also knownas a preliminary prospectus. |
| What is a redemption? | The return of a client's interest (net asset value) in a mutual fund. By law, redemption must occur within seven calendar days. |
| What is refunding? | A procedure in which issuer of bond retires the debt by using the proceeds received from the sale of another debt issue. |
| What is the declartion date? | The date on which the company declares an upcoming dividend. |
| What is a defensive startegy? | An investment method through which investors try to minimize the risk of losing principal. One example is the policy of making purchases and sales according to predetermined objectives without regard for market changes, such as dollar cost averaging. |
| What is a popular defensive policy? | Diversification of investment vehicles |
| How are bond's quoted? | Like stock prices, bond prices are also quoted in the financial press and business sections of most daily newspapers. Corporate bonds are quoted in eigths. Government bonds are quoted in 32nds. |
| What is face value for both government and corporate bonds? | $1000 quotes for both bonds are a percentage fo the bonds face value. |
| What is a discount? | The difference in price paid for a security and the security's face at issue or in the secondary market. |
| What is a discretionary account? | An account permitting a client to designate an individual such as a B/D or RR to exercise authroity over the selection, timing and amount of investment for the client. The triple AAA test activity, asset, amount. |
| What are the stipulations for a discretinary account? | Authorization must be in writing, the account must be approved and acceped by a principal of the B/D firm. |
| What is diversification? | The practice of spreading ones investments amoung the securities of different industries. |
| What is DERP? | Declaration, ex-date, record date and payable date. Gives the order in which dividends will be paid and an easy way to figure out how the ex-dividend date is calcluated 2 business days before the record date. |
| What is the Record Date? | The day on which the corporation determines the stockholders eligible for dividends. All stockholders of record on that date receive the dividend even though they may subsequently have sold their stock. |
| What is ratings? | Bonds are rated for saftey by various organizations such as Standard & Poors and Moody's. These firms rate the companies issuing bonds as to their ability to repay and make interest payments. Rating are from AAA, AA, A, BBB to C or D. Lower BBB junk |
| What is regulation T? | The Federal Reserve Board regulation that governs the amount of credit brokerage firms and dealers may extend to clients for the purchase of securities. Regulation T also governs cash accounts. |
| What is Reinvestment? | For mutual funds, distrbutions (dividends and gains) may be reinvested in the fund to purchase additional shares instead of being sent to shareholders. Reinvested distrubtions are subject to tax. |
| What is the Reinstatement Privilege? | Refers to the fund allowing an investor the privilege of withdrawing the money from the account in the event of an emergency and redepostiting the money without paying a second sales charge. |
| What is Regulation U? | The Federal Reserve Board regulation governing loans by banks to brokerage firms for the purpose of refinancing clients' margin accounts. |
| What is a Registration Statement? | Before securities can be offered to the public, they must be registered under the Securities Act of 1933. The statement that discloses all the pertinent information about the corporation that wants to make the offering is the registration statement. |
| What is Regular Way Delivery? | A type of delivery which allows three full business days following the trade date for the broker/dealer to deliver the securities and for the buyer to pay. Set by FINRA under the Uniform Practice Code. |
| Under Regulation T what is the date that payment is required? | A customer purchasing securities in a margin account must deposit the margin required by the end of the fifth business day following the trade date. In a cash account, securities purchased must be paid for by the fifth business day after transaction. |
| What is a regulated investment company? | An investment company qualifying under IRC Subchapter M, acting as a conduit for income distributions. If 90% of income is passed through to shareholders, the company is not subject to tax on the earnings. |
| What is Current dollars? | Actual dollar amounts. Not adjusted for inflation. |
| What is a current yield? | The yield of the security when bought or sold prior to maturity in the secondary market. Current yield relates current income to the security's current price. |
| What is a custodian? | The Investment Company Act of 1940 requires the fund's assets be held by an independent custodian. The custodian is responsible for the safekeeping of all securities and cash held by the fund. Commerical banks appointed by the directors are custodians |
| What is a dealer? | One who deals in securities as a principal, buying and selling for his own account. |
| What is preferred Stock? | An ownership interest in a company; issued with a fixed or stated dividend having a claim to company profits and assets prior to common stock. Although the dividend is fixed, the company is under no obligation to distrubute the dividend. |
| What is a preliminary prospectus or Red Herring? | The first prospectus that is distbuted during the cooling off period and that includes the essential facts about the forthcoming offering, except the underwriting spread, the final public offering price and the date the shares will be delivered. |
| What is a Premium bond? | A bond selling in an amount in excess of its face value. |
| What is the Prime Rate? | The interest rate a major bank charges their best industrial borrowers, set by the bank. |
| Who is a Principal? | Anyone who is actively engaged in the managment of an investment banking or securities business. This designation includes sole proprietors, officers,directors or partners of a company,or managers of officers or supervision. |
| When is a person acting in a Principal manner? | When a person assumes risk by actually buying securities from the issuer and reselling them; an investor's capital; or the face or par value of a bond. |
| What is a Prospectus? | The legal document that must be given to every investor who purchases registered securities in a primary offering. It describes the details of the company and the particular offering. |
| What is a proxy? | A power of attorney given by a stockholder to another authorizing the holder to vote in place of the stockholder. |
| What is a Public Offering Price? | The price at which mutual fund shares are sold to the public. In a load fund it equals the net asset vaule plus sales charge. |
| What is Purchasing Power Risk? | The risk that a certain amount of money will not purchase as much in the future as it does today. Also known as inflation risk. |
| What is a Qualified Retirment Plan? | Retirement plan that qualifies under The Employees Retirement Income Security ACT (ERISA) which generally allows contributions to be tax deductible. |
| How are stocks quoted? | Are quoted in dollars and cents. |
| What is Statutory Voting? | Each share of stock entitles a stockholder to one vote per director. |
| How are stock dvidend's different from cash dividends? | They are a dividend paid to common shareholders in the form of additional stock in the corporation rather than in cash. |
| What is straight Preferred Stock? | Preferred stock which loses its claim to dividends that are not paid. Also called non-cmulative preferred. |
| What is Subchapter M? | A part of the Internal Revenue Code setting out the tax treatment of a regulated investment company. |
| What is a subordinated debenture? | A debenutre junior to regular debentures in a corporate liquidation. |
| What is a syndicate? | A group of broker/dealers formed to handle the distribtuion and sale of an issuer's security. The syndicate formed typically has one firm managing the underwriting effort. Each member of the sydicate is then assigned the responsiblity for the sale. |
| What is a tax-deferred annuity or tax sheltered annuity? | An annuity program available to employees of certain non-profit organizations and public schol systems. A part of the employee's income is excluded from current taxation and used to purchase an annuity. The employee pays taxes when annuitized. |
| What are tenants in common? | A form of share ownership. Each owner has an undivided interest in the property but all the interests need not be equal. There is no right to survivorship. |
| What is the Third Market? | The trading of exchange-listed securities in the the OTC market. |
| What is a Tombstone announcment? | An advertisement that announces a securities offering. It indentifies the name of the issuer, the type of security, the underwriters and where additional information is available. |
| What is the trade date? | The day on which the terms of a transaction, such as price and quantity, are established. The transaction will be completed at settlement. |
| Who is the Transfter agent? | The person responsible for issuing and redeeming shares of the fund, custody of client's shares if certificates are not issued, sending distributions to clients of a fund. |
| What are Treasury Bills? | Short-term government debt sold at a discount from face value. T-Bills mature in periods of 4, 13, or 26 weeks. T-Bills do not pay periodic interest payments. |
| How is interest paid for Treasury Bills? | The interest income is the difference between purchase price and the face value of the bills at maturity. The bills are sold at auction, at which time the discount is determined. The bills do carry a stated interest rate. |
| What are Treasury Bonds? | Treasury bonds are long-term debt issued by the Treasury at face value. Bonds pay interest semi-annually and mature in a period of ten years or longer. |
| What are Treasury Notes? | Treasury notes are medium-term treasury debt sold at face value. Notes pay interest semi-annually and mature in one to ten years. |
| What is Treasury Stock? | Issued stock repurchased by the company and held by the company. While the stock is held in the company's treasury, it has no dividend or voting rights. |
| Who is an underwriter? | A broker/dealer in charge of selling securities. For mutual funds, the underwriter is the person or company in charge of distributing and selling the fund shares to the public. |
| What is the Uniform Gifts to Minor ACT UGMA also called the Uniform Transfer to Minors ACT UTMA? | A law adopted in most states that permits a directt gift to a minor without a trust or guardianship. The donor appoints a custodian to manage the gift until the minor reaches the legal age. There are certain tax rules for these accounts. |
| What is the Uniform Practice Code? | A FINRA code to make uniform the customs, practices and trading techniques amount members in the securities business, such as regular way settlement. |
| What is a unit? | The basis of valuation of an annuity, similar to a share of a mutual fund. |
| What is a Unit Investment Trust (UIT)? | Investment company that invests in a fixed portfolio of securities. Unit investment trusts provide for professional selection of the securities to be held by the trust, but once they are purchased, there is a generally no trading of the securities. |
| How are investors treated in regards to purchasing UIT's? | An investor will purchase units in the trust representing an undivided interest in the securities held. There is no management fee or board of directors. |
| What is a unit refund life annuity? | A life annuity that provides that a guaranteed number of units will be paid. If the annuitant dies before they are paid, the remaining units are paid to a beneficiary. |
| What is a unsecured bond? | A bond not secured by the pledge of some specfic asset of assets of the issuing corporation. Also know as a debenture. |
| What is a Variable Annuity? | Another form of annuity issued by life insurance companies. Like fixed annuites, variable annuties guarantee a payment for life once the contract is annutitized. The insurance company still accepts the mortality risk for the client. |
| What does a variable annuity not guarantee that a fixed annuity does? | Unlike fixed annuties, the variable annuity contract does not guarantee the amount of the annuity payment or the performance of the account. The annuitant accepts the investment risk, not the company. |
| What is a warrant? | Stock purchase option similar to rights because it allows the holder to purchase stock at a predetered price. Warrants are issued for long periods of time and are usually attached to bonds to make them easier to sell. |
| What is a wash sale? | The IRS will disallow a loss if the investor repurchases substantially identical securities within 30 days before or after the sale of security in which the loss was claimed. |
| What is a withdrawal plan? | Whereby a client may request the systematic withdrawal of his or her account periodically. Withdrawals may be based on fixed dollar amount, fixed number of shares, fixed percentage or fixed period of time. |
| How are withdrawal plans offered? | The plan in normally a free service offered by a mutual fund, but may not be guaranteed. |
| What is a yield to maturity? | Takes into account the discount or premium paid for the issue and averages the gain (or loss) with the stated interest payment to calculate a yield over a period of time. |
| What is the Securities Investor Protection Corporation? | A nonprofit membership corporation created by an act of Congress to protect clients of brokerage firms that are forced into bankruptcy. Membership is composed of all brokers and dealers registered under the Securites Exchange ACT of 1934. |
| What does SIPC provide? | SIPC provides customers o these firms up to $500,000 coverage for their cash and securities held by the firm (although coverage of cash is limited to $100,000). |
| What is convertible preferred stock? | Preferred stock that may be converted into common stock at the option of the holder. |
| How long and what is the cooling-off period? | Traditionally, the 20-day period between the filing date of a registration statment and the effective date of the the registration. Twenty days is the minimum period of time. In practice, this period varies in length. |
| What is a corpoartion? | A form of business organization in which the total worth of the organization is divided into shares of stock, each share representing a unit of ownership. By law, a corporation has certian rights and responsibtilities. Continuous life span. |
| What is the cost basis? | Money on which taxes have been paid. A return of cost basis is a return of capital and not subject to tax. |
| What is Cumulative Preferred? | Has the right to receive skipped or missed dividends. Dividends in arrears do not have to be paid; however; dividend distribtuions to common stockholders cannot be paid until any arrearage is paid. |
| What is Par Value? | An arbitrary dollar value assigned to each share of stock at the time of issuance. Also, the face value (prinicipal) amount of a bond, usually $1000. |
| What is Parity? | The intrinsic value of a convertible security in terms of the common stock into which it can be converted. Parity means equal. |
| What is Joint and Last Survior Life Annuity? | A life annuity with two annuitants. If one dies, payments continue during the lifetime of the survivor, although usually at a reduced rate. |
| What is Issued Stock? | That part of the authorized stock actually issued to stockholders. |
| What is the Investment Company Amendments ACT of 1970? | An amendment to the Investor Company ACT of 1940. It permits a registered investment company issuing periodic payment plan certificates (contractual plans) to choose one of two methods of deducting sales charges, either "spread" or "front-end" load. |
| What is the Investment Company ACT of 1940? | A piece of Congressional legislation enacted to regulate investment compaines. The act requires any investment company in interstate commerce to register with the SEC. |
| What is an Investment Company? | A company engaged primarily in the business of investing and trading securities. This includes face-amount certificate compaines, unit investment trusts and management compaines. |
| Who is an Investment Banker? | A broker/dealer that is hired by a corporation or government to raise capital by marketing new issues. Sometimes called the underwriter, sponser or distributor. |
| Who is an Investment Advisor? | Once hired, the advisor has the day-to-day responsibility of investing the cash and securities held in a mutual fund's portfolio. The advisor must adhere to the objective as stated in the fund's prospectus. |
| What is Interlocking Directorate? | The Investment Company ACT of 1940 requires that at least 2/3rds of the board of dirctors remains indepedent from the operations of the investment company. |
| Affiliated position in regards to Interlocking directorate? | The law/states that no more than 1/3rd of the directors may also hold affiliated postion within the fund (an affiliated position would be a director who is also the fund's investment advisor, custodian and so on). |
| What is Interest Rate Risk? | Risk that involves the competitive cost of money. This term is generally associtated with bond prices, but it applies to all investments. |
| Interest Rate Risk in Bonds? | In bonds, the price carries an interest risk because if bond prices rise, outstanding bonds will not remain competitive unless their yields and prices are adjusted to reflect the current market price. |
| Who is an insider? | According to the 1934 Act, directors, officers and principal stockholders of affiliated compaines. |
| What is inflation risk? | A direct investment risk. Uncertainty regarding the future purchasing power of investment dollars. Typical of fixed income investments. |
| What is an Industrial Development Bond? | A municipal issue, the proceeds from which a state or municipal authority uses to finance construction of industrial facilities to be leased or purchased by private compaines. |
| Who backs the credit of an Industrial Development Bond? | The bonds are backed by the credit of the private compaines and often are not considered an obligation of the issuing municipality. May not be tax exempt, depending upon their purpose. |
| What is an Indvidual Retirement Account? | An IRA Indvividual tax-deferred retirement plan available to anyone with earned income. |
| What is financial Risk? | A type of direct investment risk involving uncertainty about the prospects of the company that issued the security. Also known as the risk of default. |
| What is a Firm Commitment? | An underwriting commitment where the underwriter purchases the entire issue at a guaranteed specific price. The underwriter acts as a dealer and assumes the risk of resale. |
| What is a firm quote? | The acutal price at which a trading unit of the security may be bought or sold by dealers. The trading unit is 100 shares of stock or five bonds. |
| What is the first market? | The exchanges. The issuers whose securities qualify may have their secrities listed on the particular exchange, with trading in these securities conducted by aucution on the floor or each exchange. |
| What is a first Mortagage Bond? | A bond that has prior claim over all other security holders upon the assets of the corporation specified in the indenture. |
| What is a Fixed Annuity? | An annuity contract in which the insurance company makes fixed (guaranteed) dollar payments to the annuitant for the term of the contract (usually until he or she dies. The insurance company guarantees both earnings and principal amount. |
| What is a Fixed-Dollar-Option? | A withdrawal plan pay-out option under which the client receives a payment of a predetermined dollar amount for an undetermined period of time. |
| What is a Fixed-Percentage Option? | A withdrawal plan option under which the client receives a payment equal to the liquidated value of a set percentage of his mutual fund account. |
| What is an exchange privilege? | Right of an investor who has invested in one fund to transfer to another fund under the same managment without incurring an additional sales charge. The exchange is considered a sale and repurchase under the tax code. |
| What is an Exclusion Allowance? | The amount of money that the employer may withhold for the employee for the purchase of a (TSA) 403b tax-sheltered annuity. |
| What is the Ex-dividend date? | The date on and after which purchasers of a security are not entitled to a declared dividend. The price of the security is reduced by the amount of the dividend on the x-date.Two business days prior to the record date on stock. Determined by NYSE |
| What is an expense guarantee? | Part of a variable annuity contract that guarantees that the amount of the net annuity payment will not be reduced by increased operating expense of the company. |
| What are face-amount Certificate Companies? | Investment companies that issue certificates, usually purchases on an installment basis at a discount, that mature after a period of years for the face amount. |
| Who are the Federal Reserve Board? | A federal governmental body responsible for the country's monetary policy. |
| Who is a Fiduciary? | Any person legally appointed an authorized to represent and act in another person's behalf. A custodian of a minor's account is a fiduciary. |
| What is a final prospectus? | The prospectus delivered by an issuing corporation that includes the price of the securities, the delivery date and the underwritting spread. |
| What are fixed-shares option? | A withdrawal plan pay-out option under which the client receives a payment with the value from the liquidation of a set number of shares. |
| What is a fixed time option? | A withdrawal plan option providing for the liqudiation of the clients account by a set future time. Payments will vary. |
| What is forward pricing? | A process used in mutual funds of determining the net asset value of shares purchased and redeemed. The value is computed at the close of business of the New York Stock Exchange. This value applies to all purchases and redemptions made on that day. |
| What is the fourth market? | The name given to direct trading of securities between large investors. The Instituional Market. |
| What is a free-look letter (45-day letter)? | A letter to clients explaining the sales charge and operation of a contractual plan. The letter must be sent within 60 days of sale. During the free-look period, the client may terminate the plan without paying a sales charge. |
| What is a front-end load plan? | A contractual plan operating under the Investment Company Act of 1940. A sales charge of 50% of the money invested may be deducted in the first year. |
| What is a full faith and Credit Bond? | A general obligation municiple bond backed by taxes. |
| What is funded debt? | All long-term financing of a corporation; that is, all outstanding bonds maturing in five years or longer. |
| What is general obligation Bond? | Municpial bond backed by the general taxing power of the issuer. Payment of the obligation may be backed by a specific tax or just the issuer's general tax fund. |
| What is good delivery? | Delivery in which the securities are delivered in such form the ownership is clearly assigned from seller to buyer and can be easily transferred. |
| What does good delivery include? | Proper assignment, good condtion of the securities, proper number of units, at the proper time, not in the name of deceased perosn and with a permanent certificate, if available. |
| What is a growth fund? | A type of diversified common stock fund that has capital appreciaition as its primary goal. it invests in companines that reinvest most of their earnings for expansion, research or develelopment. |
| What are other chartictictices of growth funds? | Invest in common stocks for both current income and long-term growth of capital and income. Growth funds usually have very low yields. |
| What is hypothecation? | The pledging of client's securities as collateral for loans. Brokerage firms hypothecate clients' securities to finance their margin accounts. |
| What is an immediate annuity? | An annuity contract purchased for a lump sum (single premium) that starts to pay immediately following its purchase. |
| What is an income fund? | A type of mutual fund that seeks to provide a stable current income from investments by investing in securities that pay a higher-than-average return on investments. |
| What is Indication of Interest? | An investor's expression of conditional interest in buying a forthcoming securities issue after the investor has reviewed a preliminary prospectus. An indication of interest is not a commitment to buy. |
| What is a Repurchase Agreement? | A device for using government securities as collateral for a short term loan, a borrower will sell an investor the securities with the agreement that he will repurchase the securities a few days later at a set price, higher than the original selling price |
| What is a Revenue Bond? | Municipal bond issued to provided capital for the constrcution of a revenue-producing facility. The interst and principal payments are backed to the extent that the facility produces revenue to pay. Often used to finance toll roads, stadiums. |
| What is a right? | Rights, also called stock rights, are stock purchase options issued to existing stockholders only. The right is an option to purchase a company's new issue of stock at a predetermined price. |
| How are rights priced and how long are they issued for? | Less than the underlying stock current market price. The right is issued for a short period of time, 30 days with the option expiring after that time. Rights may be sold in the secondary market. |
| What are rights of accumulation? | The client may qualify for reduced loads at any time the aggregate value of shares previously purchased and the shares currently being purchased in the account is over a breakpoint. |
| How may the investment company base the quanity of shares for breakpoints? | The investment company may base the quantity of securities owned for the purpose of qualifying for breakpoints on the higher of current net asset value or the total of purchases made to date. |
| What is a round lot? | A fixed unit of trading (100 shares) |
| What are the rules of conduct? | Rules adopted by FINRA to guide members in the oberservance of "high standards of commerical honor and just and equitable practices of trade." A code of ethics. |
| What are sales charges? | With mutual funds, the amount added to the net asset value of mutual fund shares. The investor will pay the NAV plus the sales charge, which equal the offering price. |
| What is sales literature? | As defined by the SEC Statement of Policy, it includes any communication, other than advertising, used by an issuer, underwritter or dealer to induce the purchase of shares of an investment company or a variable annuity. A prospectus must be provided. |
| What is the secondary market? | Trading of stocks not listed on stock exchanges. These unlisted securities are traded over the counter (OTC). The OTC market is made up of a network of market makers, or dealers specializing in buying and selling in one or a number of the OTC securities. |
| What is a secured bond? | A bond secured by the pledge of some specific asset or assets of the issuing corporation. |
| What is the Securities ACT of 1933 (The ACT)? | A federal statute enforced by the Securities and Exchange Commission regulating interstate commerce in new securities offered for sale to the public. |
| Who is the Securities and Exchange Commission? | The Commission created by Congress to protect investors. This commission enforces the Securities Act of 1933, the Securities Exchange Act of 1934,the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisors Act of 1940 |
| What is a Sinking Fund? | Money set aside to retire an outstanding bond issue. |
| What is a Put Option and a Call Option? | The holder of an option has the right to buy or sell a security at a predetermined price for a period of time, 9 months. |
| What is the O-T-C Market? | The "market" for trading securities not listed on an exchange. Prices are determined by negotiation between buyer and seller. A negotiated market. |
| What is Outstanding (Stock)? | Once the stock is sold and in the hands of the public, the stock is outstanding. The total of a company's outstanding stock is equal to issued stock minus Treasury stock held by the company. |
| What are Joint Tenants in Common? | An ownership designation where two or more indvididuals may hold fractional interests in an undivided asset. At the death of one of the tenants, the decedent's interest passes to his or her heirs, not to the other tenants. |
| What is Joint Tenants with Right of Survivorship? | An ownership designation whereby the entire asset is owned by two or more individuals equally. At the death or one of the tenants, the decedent's interest passes to the survivors. |
| What is a Margin Sale? | A sale in the secondary market which a buyer provides only part of the purchase price of the securities. The rest is borrowed from the b/d who usually keeps the securities as collateral. |
| Who sets the percentage of the price for a margin sale? | The Federal Reserve Board sets the percentage of the price that the buyer must provide under Regulation T which is currently 50% |
| What is Market Risk? | A direct investment risk. Uncertainty about loss of capital due to changes in the market price of the security. |
| What is market value? | The price an investor will pay for each share of common stock at any given time. Market value is determined by the laws of supply and demand. |
| What is Marketability? | The ease with which a security can be bought or sold. |
| What is maturity? | The date on which a company is scheduled to repay the principal of a bond to the bondholder. |
| What is a money market? | A market for short-term debt issues. Money market instruments are forms of debt that mature in one year or less and are very liquid. Treasury bills make up a the bulk of trading in the money markets. |
| What is a Mortality Guarantee? | Part of a variable annuity contract under which the company agrees to continue annuity payments even if the annuitant lives longer than the mortality tables predicated. |
| What is a Mortgage Bond? | A bond secured by a mortgage or lien on the corporation's real property. |
| What is a municipal bond? | Bond issued by any district, authority or government (state, country, city, township and so on) other than the federal government. The debt, either notes or bonds, is issued at face value, paying a stated interest rate semi-annually. |
| What is exempt on a municipal bond under federal law? | Interest is federal income tax-free, but capital gains are taxable. |
| What are the FINRA bylaws? | The body of laws that describes how FINRA functions, defines its powers and determines the qualifications and registration requirements for brokers. |
| What is FINRA department of enforcement? | A committee appointed from among the members of the FINRA. Acts in accordance with the FINRA's Bylaws, Rules of Conduct and Code of Procedure to handle trade complaints. |
| What is NASDAQ? | The National Association of Securities Dealers Automated Quotation system, lists both the prices at which the OTC securities are bid and the offering price of dealer firms. |
| What is the National Association of Securities Dealers, INC (NASD)? | A self-regulatory body of the securities industry, established under the Maloney ACT, now known as FINRA, Financial Industry Regulatory Authority. |
| What is a Negotiable Certificate of Deposit? | A type of commercial money market instrument. Issued by banks in minimums of $100,000 units and bear a specified rate of interest. |
| What is the negotiated market? | The Over the Counter Market (OTC) |
| What is Net Asset Value? | Calculated by subtracting fund liabilities from fund assets. The net asset value is further defined by dividing the net value of the fund by the number of shares outstanding to equal the net value per share. |
| What is a New Issue? | A security being publicly sold for the first time. A prospectus is required. |
| What is a No-Load fund? | A mutual fund that does not impose a sales charge. |
| What is a Nominal Yield? | The percentage return stated on the face of a bond. It is fixed from the date of issue. Sometimes called the coupon rate. |
| What is the Offering Price? | The net asset value of a mutual fund plus the sales charge. |
| What is an Open-end Investment Company? | An investment company managed according to a specific investment objective that continuously offers and redeems its shares. |
| What is an Aggressive Investment Policy? | A policy concentrating on maximum return. Such a policy entails increased risks, such as buying on margin, using options or buying stocks with high beta factors. |
| What is all-or-none Underwriting? | One form of best-efforts underwriting. The underwriter agrees to sell all the shares (or a prescribed minimum) or none of them. This type of agreement may arise when the issuer requires at least a minimum amount of capital raised. |
| What happens if the minimum is not reached during an all-or-none underwriting? | If the minimum is not reached, the securities sold and the money raised are returned. Commissions will not be paid unless the offering is completed. |
| What is amortization? | Payment of a debt (principal) over a period of time in periodic installments. |
| What is an annuitant? | The annuity contract holder. |
| What is an annuity? | A contract between an insurance company and an individual. An annuity generally guarantees lifetime income to the person on whose life the contract is based in return for a lump-sum or a periodic payment to the insurance company. |
| What is an annuity unit? | The accounting measure to determine the amount of each payment to an annuitant during the pay-out period. |
| What is appreciation? | The increase in value of an asset. Sometimes called growth. |
| What is the ask price? | The price at which the dealer is willing to sell the stock to an investor or another dealer. |
| What is the assumed interest rate? | A base for illustrating payments from a variable annuity, the assumed interest rate is not a guarantee. Assumed interest rates offered by companies vary. Naturally, the higher the assumption, the higher the initial benefit and vice versa. |
| What is the importance of an assumed interest rate? | The importance of the assumed interest rate as a base for illustration rests with the fact that, once the AIR is selected, the account must earn that rate to maintain the initial benefit level. |
| What is the Auction Market? | A stock exchange where the securities are sold to the highest bidder. It is a two-way auction since some brokers are bidding to sell at the highest possible price while others are bidding to buy at the lowest possible price. The NYSE is an auction market |
| What is authorized stock? | Authorized stock is the maximum number of shares a corporation may issue under the terms of its charter. The number of shares authorized may be changed, with the approval of the stockholders. |
| What is a balanced fund? | A type of mutual fund whose stated investment policy is to have at all times some portion of its investment assets in bonds and stocks, creating a balance between the two types of securities. |
| What is a banker's acceptance? | Essentially a letter of credit from a bank guaranteeing payment of debt. Generally, banker's acceptances are used in the import and export business. They are short term, money market instruments. |
| What is a bear market? | A market in that prices of securities are falling or are expected to fall. |
| What is best-efforts underwriting? | Acting as agent for the issuer, the underwriter puts forth his or her best efforts to sell as many shares as possible. The issuer pays the underwriter a commission for those shares sold. |
| When does an underwriter have the liability for unsold shares? | In a firm-commitment agreement |
| What is the bid price? | The price at which a dealer is willing to buy stock from an individual or another dealer. |
| What are blue chip stocks? | The issues of normally strong, well-established companies that have demonstrated their ability to pay dividends in good times and bad times, such as General Motors. |
| What are Blue Sky Laws? | State securities laws |
| What is a bond? | Bonds represent the borrowing of money by a corporation or government. The bond is a legal obligation of the company or government to repay principal at the maturity of the bond. |
| Where are the terms and repayment found for bonds? | Terms of the repayment and any interest to be paid are stated in the indenture. |
| What is the par value of bonds? | Bonds are issued with a par value of $1000 representing the amount of money borrowed by the company. |
| How is interest paid by bonds? | The issuer promises to pay a percentage of the par value as interest on the borrowed funds. The interest rate is stated on the face of the bond at issue and is called the nominal or coupon rate. |
| What is a bond fund? | A type of mutual fund whose investment policy is to provide stable income with a minimum of capital risks. It may invest in corporate, government or municipal bonds. |
| What is a bond rating? | The quality of a bond issue as determined by independent bond rating services. AAA being of the highest quality. Both Moody's Investors Services and Standard & Poor's Corporation have such services. |
| What is a breakpoint? | The schedule of sales charge discounts offered by a mutual fund for a lump sum or cumulative investments. Eligibility requirements must be disclosed in the prospectus. |
| What is a breakpoint sale? | The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions so as to share in the higher sales charges applicable. This is a violation of the Rules of Fair Practice. |
| What is a broker? | The role of a brokerage firm when it acts as an agent for a customer and charges the customer a commission for its services. |
| What is a bull market? | A market in which prices of securities are moving higher or are expected to move higher. |
| What is a business day? | A day the New York Stock Exchange is open for business and trading. |
| What is a Call option? | An option to buy a specified number of shares of stock at a definite price within a specified period of time. |
| What is call price? | The price paid (usually a premium over the par value of the issue) for callable preferred stock or bonds redeemed by the issuer prior to maturity of the issue because interest rates have fallen. |
| What is a call provision (stock or bond)? | An issuing corporation retains the privilege of recalling (redeeming) its issues of equity or debt. The provision must be clearly stated on the face of the certificate at issue. |
| What is capital gain? | The long-term gain (selling price minus cost base) on an asset held for a period of longer than 12 months. Short-term gains (12 months or less) are taxed as ordinary income. |
| What is capital structure? | The amount of debt and/or equity issued by a corporation. |
| What are certificates of deposit? | Issued by most commercial banks, representing bank borrowing for a short period of time. |
| What is Churning? | Excessive trading in a customer's account. The term suggests that a the registered rep ignores the objectives and interest of clients and seeks only to increase commissions. Often done in discretionary accounts. Violation of FINRA Rules of Fair Conduct. |
| What is a closed-end investment company? | A management investment company operated in much the same manner as a conventional corporation. The closed-end fund will issue a fixed number of shares for sale (fixed capitalization). The shares may be of several classes. |
| How of shares bought and sold of a closed-end investment company? | Shares are bought and sold in the secondary marketplace; the fund does not offer to redeem shares. |
| What is an accumulation unit? | An accounting measurement that represents an annuity contract owner's proportionate unit of interest in a separate account (the portfolio) during the pay in period. |
| What is advertisement? | Any material designed for use by newspapers, magazines, radio, television, telephone recordings or any other public medium to solicit business. Advertising may not be sent to clients considering a new issue unless accompanied by a prospectus. |
| Who is an affiliated person? | As defined by the Investment Company Act of 1940, includes an investment advisor, officer, director, partner or employee of another person. |
| What is agency debt? | Debt obligations of agencies of the federal government. The debt is not a direct obligation of the US government although it is backed by the government. |
| What are the different forms of agency debt? | Agency debt can be in the form of notes or bonds issued at face value and carry a stated interest rate payable semi-annually. Often called "Indirect Debt." |
| What are Aggressive Growth Portfolios? | Portfolio characterized by high turnover of holdings; attempts to cash in on higher-risk rapid capital appreciation situations. Usually pays no dividends. |
| What is the Securities Exchange Act of 1934? | Federal legislation that established the Securities and Exchange Commission. It purpose is to provide regulation of securities exchanges and the over-the-counter market and to protect investors from unfair and inequitable practices. |
| What does the Securities Exchange ACT require? | Requires registration of broker/dealers and registration of representatives. |
| What is an Underwriting Spread? | The difference between the price the underwriter pays the issuer and the public offering price. Also known as the "load" or "sales charge." |
| What is Special Situation Portfolio? | Investment concentrated in little-known ventures involving high financial risk, with the hope of a high capital gain in a relatively short time. |
| What is a specialized portfolio? | Diversified investments concentrated in one industry, field or geographic area. Sometimes called a "sector" fund. |
| What is a spread? | The difference between the bid price and the asked price. |
| What is the Spread-load Plan? | A contractual plan operating under the Investment Company ACT amendments of 1970. The maximum sales charge allowable in any one year is 20% of the money invested. |
| What is Standby Underwriting? | The underwriter agrees to sell the shares not subscribed to by existing shareholders following a preemptive rights offering. The underwriter receives a fee for each share that is exercised. |
| What is a Statement of Intention? | Allows the investor to qualify for the reduced sales charge currently by promising to invest an amount qualifying for a breakpoint within 13 months from the date of the letter. |
| What type of agreement is the Statement of Intention? | The letter is a unilateral agreement; the client is not bound to the terms of the letter. It is also know as a Letter of Intent, LOI. |
| What is a Statement of Policy? | An SEC statement designed to establish standards for advertising and sales literature and practices in the sale of investment company products and variable annuities. |
| What is Net Investment Income? | Dividends are paid from net investment income of a mutual fund. Net investment income is the total dividends received from common and preferred stock held in the portfolio and all interest income received from bonds and other debt instruments. |
| What types of gains allow for Net Investment Income? | Any net short-term gains from trading securities is also added. The sum of dividends, interest and short-term gains is the gross investment income of the fund. |
| What types of fees does the fund subtract? | The fund will subtract expenses for operation (advisor's fee, custodial fee, utilities, salaries, accounting costs and so on). The result is net investment income. |
| How is a firm acting if they are trading for, or from, their own inventory? | Principal or dealer |
| How is a firm acting if it effects trades on behalf of its customers, without taking the other side of the trade? | Agent or broker |
| What type of annuity is considered a security, fixed or variable? | Variable |
| True or False: The Uniform Securities Act is exactly the same law in every state. | False. The USA is a model law, not the actual law of any state. |
| _______________________________ is an organization consisting of state Administrators. | The North American Securities Administrators Association (NASAA) is an organization consisting of state Administrators. |
| Identify 2 significant creations that are credited to the National Securities Markets Improvement Act (NSMIA). | Federal Covered Advisers and Federal Covered Securities |
| The _______________ is responsible for administering and enforcing the securities laws of the state. | The Administrator is responsible for administering and enforcing the securities laws of a state. |
| According to the USA, who is included under the term "person?" | Any legal entity, including individuals (clients/agents/IARs), B/Ds, IAs, issuers, corporations, and partnerships. |
| In state law, individuals representing B/Ds in effecting securities transactions are referred to as _____________________. | In state law, individuals representing B/Ds or issuers in effecting securities transactions are referred to as agents. |
| A securities firm that executes trades for its own account of others is deemed a _____________. | A securities firm that executes trades for its own account or the account of others is deemed a broker/dealer (B/D). |
| Who manages accounts, solicits services, or makes recommendations on behalf of a registered investment adviser? | An investment adviser representative (IAR) |
| What are the 3 components that must be met for a firm to be defined as an IA? | 1) Provides advice regarding securities, 2) Do so as a business 3) Receive specific compensation (the ABC test) |
| An _________________________________ is to an investment adviser what an ________ is to a B/D. | An investment adviser representative (IAR) is to an investment adviser what an agent is to a B/D. |
| Identify who is NOT considered a person under the USA. | Minors, incompetents, securities, and the deceased |
| What requirements may states impose on IAs that are registered with the SEC? | 1. File with the state any documents that were filed with SEC, 2. File Ccnsent to Service of Process, 3 Pay state fees |
| The USA refers to an individual who represents a B/D in the sale of securities as an ______________. | The USA refers to an individual that represents a B/D in the sale of securities as an agent. |
| Identify who is considered a person under the USA. | Business entities, issuers, estates, governments, individuals, (e.g., clients, IARs and agents) |
| What is the 3 pronged test for determining whether a firm meets the IA definition? | A-B-C A=advice,analysis, B=business, C=compensation |
| What is the general definition of an investment adviser? | A firm that provides advice;analyses regarding securities, as part of a business, and for compensation |
| According to the USA, who is included under the term person? | Any legal entity, including individuals (clients/agents/IARs), B/Ds,IAs,issuers, corporations, and partnerships. |
| Identify the acronym: USA | Uniform Securities Act |
| Identify the acronym: IA | Investment Adviser |
| Identify the acronym: IAR | Investment Adviser Representative |
| Identify the acronym:NSMIA | National Securities Markets Improvement ACT |
| Identify the acronym:NASAA | North American Securities Administrators Association |
| What is the ABC Test for investment advisers? | The test that defines an IA as a firm that provides Advice as part of a Business for Compensation |
| Identify the acronym: RIA | Registered Investment Adviser |
| Who enforces the Uniform Securities Act? | The Administrator |
| Name some of the federal covered securities | Listed on exchange, issued by an investment company, sold as a private placement (Reg. D), and municipal bonds |
| What's notice filing? | The process in which information that is filed with the SEC is also filed or shared with the Administrator |
| True or False: The states may make rules that are more restrictive than SEC (federal) rules. | False. NSMIA prohibits states from making requirements that are more restrictive than existing federal requirements |
| What is the federal law that governs investment advisers? | The Investment Advisers Act of 1940 |
| What is the federal law that governs investment advisers? | The Investment Advisers Act of 1940 |
| True or False: The Administrator may bring a case in a civil court. | True. Both the Administrator and a private citizen may bring a case in civil court. |
| What is the general definition of an issuer? | Any person who issues or purposes to issue a security, such as government entities and corporations. |
| True or False: The USA requires all employees of a B/D to register. | False. Only those representing a B/D in effecting transactions (as an agent) must register. |
| An ________ of an _________ is an individual who represents an issuer in effecting transactions with the general public. | An agent of an issuer is an individual who represents an issuer in effecting transactions with the general public. |
| What's an issuer transaction? | A transaction in which the issuer receives the proceeds. |
| What are the justifiable reasons for denying an individual's registration? | Conviction for any felony or securities-related misdemeanor within the last 10 years |
| An agent whose registration has been revoked must be granted a hearing, if requested, within _____ days of the request. | An agent whose registration has been revoked must be granted a hearing, if requested, within 15 days of the request. |
| If an agent has withdrawn registration, the Administrator may still take action for ___ year(s) after the withdrawal. | If an agent has withdrawn registration, the Administrator may still take action for 1 year after the withdrawal. |
| A prospectus mailed by an agent in one state to a client in another state is considered an offer in which state(s)? | Both states |
| True of False: A gift of assessable stock is considered both an offer and sale. | True |
| Is the payment of a stock dividend considered an offer or sale? | No |
| Is the conversion of a bond into a stock considered an offer or sale? | No |
| If shares of stock are freely given with the purchase of a bond, is this considered an offer and sale? | Yes |
| True or False: An Administrator may issue a cease-and-desist order before a violation has occurred. | True |
| True or False: An Administrator may issue an injunction | False. An injunction may only be issued by a court. |
| Under the Uniform Securities Act, the statute of limitations for fraud is _______ years. | Under the Uniform Securities Act, the statute of limitations for fraud is 5 years. |
| The statute of limitations for criminal violations of the Uniform Securities Act is _____ years. | The statute of limitations for criminal violations of the Uniformed Securities Act is 5 years. |
| Statue of limitations for USA civil violations is ____ yrs. of occurrence or ___ yrs. of discovery, whichever is first. | Statue of limitations for the USA civil violations is 3 yrs. of occurrence or 2 yrs. of discovery, whichever is first. |
| Maximum criminal penalties under the USA are $ ______ fine and/or ______ years in prison. | Maximum criminal penalties under the USA are a $5,000 fine and/or 3 years in prison. |
| May an Administrator enter other states to investigate potential violations that occurred in his own state? | Yes, the Administrator has broad inspectorial power, which stretches beyond his own state. |
| Administrative cease-and-desist orders may be appealed in a state court if application is made within _____ days. | Administrative cease-and-desist orders may be appealed in a state court if application is made within 60 days. |
| An _______ is any attempt or solicitation to acquire or dispose of a security for value. | An offer is any attempt or solicitation to acquire or dispose of a security for value. |
| A _______ is any agreement or contract to dispose of a security for value. | A sale is any agreement or contract to dispose of a security for value. |
| True or False: Registration may be denied due to any misdemeanor convictions. | False. Registration may be denied for any felony conviction or securities-related misdemeanor conviction. |
| How may the failure to pay the proper filing fee be corrected? | By paying the appropriate amount |
| True or False: An administrator may cancel a registration without the opportunity for a hearing. | True. Cancellation may be due to the death of an agent, or a firm no longer being in business. |
| If a cease-and-desist order is issued against an agent, the agent must file an appeal within ____ days. | If a cease-and-desist order is issued against an agent, the agent must file an appeal within 60 days. |
| If an appeal has been filed by an agent, does the appeal lift (suspend) the order? | No |
| True or False: A client who receives a letter of rescission after selling the security may still initiate civil action. | True |
| If an offer is made using television or radio, where is the offer considered to have been made? | In the state in which the broadcast or telecast originated. |
| If an offer is made using the mail, where is the offer considered to have been made? | In the state from which it originated and the state to which it is directed. |
| True or False: Offers made in a newspaper are deemed to have been made in any state in which the paper is circulated. | False. With newspapers, the offer is only considered to be made in the state in which it is published. |
| With newspaper offers, no offer is made if more than _________ of the circulation is outside of the publishing state. | With newspaper offers, no offer is made if more than two-thirds of the circulation is outside of the publishing state. |
| True or False: A gift of assessable stock would not be considered a sale. | False. A gift of assessable stock is considered both an offer and a sale and is regulated by the USA. |
| True or False: The tendering of a convertible bond is considered a sale according to the USA. | False |
| Is being charge with a felony or securities-related misdemeanor grounds for statutory disqualification? | No. Statutory disqualification includes conviction for any felony or securities-related misdemeanor in the past 10 yrs. |
| When may the Administrator cancel a registrant's registration? | If the registrant has died, ceased doing business, been declared mentally incompetent or cannot be located |
| True or False: A stock dividend is considered a sale. | False |
| True or False: The exercise of convertible securities would constitute a sale under the USA. | False |
| True or False: A warrant attached to the sale of a bond would constitute a sale of the warrant. | True |
| May the Administrator levy fines on a registrant? | No |
| May the Administrator initiate criminal or civil liability action against a registrant? | Yes |
| When will an offer fall under an Administrator's jurisdiction? | If the offer originated in, was directed in, or was accepted in the Administrator's state |
| If the Administrator believes a person has violated or is about to violate the USA, may a stop order be issued? | Yes |
| Does the Administrator require proof of wrongdoing to initiate an investigation? | No, but she does need to be able to refer to a rule or order when starting the investigation. |
| When conducting an investigation of wrongdoing, is the Administrator limited to state boundaries? | No, the Administrator may subpoena books, records, and witnesses from outside the state. |
| If found civilly liable for violating the USA, what is the penalty? | The original amount paid, plus the legal rate of interest, attorney fees, and court costs, minus any cash received. |
| Who is the official that monitors and administers a state's securities laws? | The Administrator or Commissioner |
| IF the Administrator enjoins an agent's registration and a hearing is requested, when must the hearing be held? | Within 15 days of the Administrator receiving a written request from the registrant |
| True or False: A gift of non-assessable stock would constitute a sale. | False. However, the gift of assessable stock is considered both an offer and a sale. |
| If a registrant wishes to withdraw her registration, when does the withdrawal become effective? | 30 days after filing the withdrawal request with the Administrator, provided there is no action pending |
| For how long does a Administrator maintain jurisdiction over a registrant after a withdrawal of registration? | 1 year |
| IF the Administrator believes a person has violated or is about to violate the USA, may an injunction be issued? | No. The administrator may not issue an injunction. Injunctions may only be issued by a court of competent jurisdiction. |
| A person may appeal a stop order issued by the Administrator within ______ days. | A person may appeal a stop order issued by the Administrator within 60 days. |
| The appeal of an administrative order is made before a court of ________________________. | The appeal of an administrative order is made before a court of competent jurisdiction (state court) |
| Does the appeal of an administrative order act as a stay of the order? | No. The order remains in effect until the outcome of the hearing. |
| The maximum criminal penalty for violations of the USA is ______ years in prison and/or up to a $ _________ fine. | The maximum criminal penalty for violations of the USA is 3 years in prison and/or up to $5,000 fine. |
| The statute of limitations for criminal violations of the USA is _______ years. | The statute of limitations for criminal violations of the USA is 5 years. |
| Statute of limitations for USA civil violations is _____ yrs. of occurrence or ____ yrs. of discovery, whichever is first. | Statue of limitations for USA civil violations is 3 yrs. of occurrence or 2 yrs. of discovery, whichever is first. |
| What is a letter of rescission? | An offer to buy back a security from a client when that security was sold in violation of the USA |
| A customer must respond to a letter of rescission within ___ days or lose the right to sue. | A customer must respond to a letter of rescission within 30 days or lose the right to sue. |
| Define jurisdiction | The poser to interpret and apply the law or the territorial range of authority of control. |
| An _____ is any attempt or solicitation to dispose of a security for value. | An offer (offer to sell) is any attempt or solicitation to dispose of a security for value. |
| Define assessable stock | Stock in which the issuer is allowed to demand additional funds from existing stockholders. |
| Can a B/D punish one of its agents for responding to a subpoena? | No. This is a prohibited action. |
| A hearing will be held _____ days after a written request. | A hearing will be held 15 days after a written request. |
| True or False: An individual may be denied registration due to lack of experience. | False. However, a lack of training, knowledge, and experience may be grounds for denial. |
| A registration withdrawal is effective _____ days after filing. | A registration withdrawal is effective 30 days after the filing. |
| What action may an Administrator take on receipt of a complaint regarding an ad that originated from another state? | Investigate the complaint |
| Is a firm that has an office in a state, but only deals with institutional clients in the state, considered a B/D? | Yes, because the firm established an office in the state. |
| Is a bank whose trust department occasionally executes securities transactions considered a B/D? | No. Banks are excluded from the B/D definition. |
| If a corporation raises capital bye selling new shares of its stock to the public, is it considered a B/D? | No. The corporation is an issuer and issuers are excluded from the B/D definition. |
| Is a bank holding company that occasionally executes securities transactions considered a B/D? | Yes. Bank holding companies are not excluded for the B/D definition. |
| Is a firm with no office in a state that only deals with institutional clients in the state considered a B/D? | No. The firm is excluded from the B/D definition. |
| Is a firm with no office in Ohio that effects trades in Ohio with 6 clients residing in Iowa considered a B/D? | No. The firm is excluded from the B/D definition in OH (no office in OH and only deals with existing Iowa clients). |
| Is an individual who represents a B/D in the sale of Treasury bonds considered an agent? | Yes, since anyone representing a B/D in the sale of securities is an agent. |
| Is a sales assistant for a B/D who accepts unsolicited orders from clients considered an agent? | Yes, since anyone representing a B/D in the sale of securities is and agent. |
| Is an individual who represents an issuer in the sale of municipal bonds considered an agent? | No, since the individual is involved in the sale of exempt securities. |
| Is an individual who represents the issuer of a private placement considered an agent? | No, since the individual is involved in an exempt transaction. |
| Is an individual who represents a B/D in the sale of municipal bond considered an agent? | Yes, since anyone representing a B/D in the sale of securities is an agent. |
| Is an individual who represents the issuer in the sale of Treasury bonds considered an agent? | No, since the individual is involved in the sale of exempt securities. |
| If a corporation raises capital by selling new shares of its stock to the public, is it considered a B/D? | No, the corporation is an issuer and issuers are excluded from the B/D definition. |
| Is a bank holding company that occasionally executes securities transactions considered a B/D? | Yes. bank holding companies are not excluded from the B/D definition. |
| Is a firm with no office in a state that only deals with institutional clients in the state considered a B/D? | No. The firm is excluded from the B/D definition. |
| Is a firm with no office in Ohio that effects trades in Ohio with 6 clients residing in Iowa considered a B/D? | No. The firm is excluded from the B/D definition in OH (no office in OH and only deals with existing Iowa clients). |
| Is an individual who represents a B/D in the sale of Treasury bonds considered an agent? | Yes, since anyone representing a B/D in the sale of securities is an agent. |
| Is a sales assistant for a B/D who accepts unsolicited orders from clients considered an agent? | Yes, since anyone representing a B/D in the sale of securities is an agent. |
| Is an individual who represents an issuer in the sale of municipal bonds considered an agent? | No, since the individual is involved in the sale of exempt securities. |
| Is an individual who represents the issuer of a private placement considered an agent? | No, since the individual is involved in an exempt transaction. |
| Is an individual who represents the issuer in the sale of Treasury bonds considered an agent? | No, since the individual is involved in the sale of exempt securities. |
| Is an individual who represents a B/D in the sale of a private placement considered an agent? | Yes, since anyone representing a B/D in the sale of securities is an agent. |
| Is an individual who represents a bank in the sale of the bank's stock considered an agent? | No, since the individual is representing the issuer in the sale of exempt securities. |
| Is an individual who represents a B/D in the sale of a bank's stock considered an agent? | Yes, since anyone representing a B/D in the sale of securities is an agent. |
| Is an individual who represents a B/D in the sale of stock to a bank considered an agent? | Yes, since anyone representing a B/D in the sale of securities is an agent. |
| Is an individual who represents an issuer in the sale of stock to a bank considered an agent? | No, since the individual is involved in an exempt transaction. |
| Is an individual who represents an issuer in the sale of the issuer's stock to its underwriter considered an agent? | No, since the individual is involved in an exempt transaction. |
| Is Jim an agent if he works in ABC's retirement dept. and, once a year, places ABC stock in employees' accounts? | No, Jim is representing the issuer in an exempt transaction. |
| True or False: A Consent to Service of Process is an example of an exculpatory clause. | False. Exculpatory clauses are waivers absolving agents from wrongdoing. The waivers are null and void under the USA. |
| True or False: A Consent to Service of Process must be filed by B/Ds, but not their agents. | False. A Consent to Service of Process is required of all registrants. |
| True or False: A successor advisory firm must pay a new filing fee, but need not file a new application. | False. The successor firm must update its application, but not pay a new filing fee. |
| B/D records must be kept for at least ____ years. | B/D records must be kept for at least 3 years. |
| If a B/D's net capital falls below the required minimum, it must notify the Administrator within ___ business day(s). | If a B/D's net capital falls below the required minimum, it must notify the Administrator within 1 business day. |
| True or False: An agent whose client moves to a new state may not contact the client until registered in the new state. | False. The agent may engage in transactions with the client for 60 days if registration is pending in the new state. |
| May an agent whose client is visiting another state sell securities to the client without being registered in the state? | Yes, provided the client is in the state temporarily. |
| True or False: Canadian agents are not permitted to effect trades with existing Canadian clients temporarily in the U.S. | False. Provided the relationship with the client existed prior to entering the U.S., trades may be effected. |
| With whom may an agent split commissions? | Another agent registered with the same B/D, or another B/D under common control |
| A B/D located and licensed in Canada may contact what types of individuals in the U.S.? | Existing clients who are temporarily in the U.S. |
| True or False: In state law, individuals representing issuers in effecting securities trades are ALWAYS deemed agents. | False. Individuals are not deemed agents if representing issuers of exempt securities or effecting exempt transactions. |
| List some of the exclusions from the definition of a B/D. | Agent, issuer, bank, or a B/D with no office in the state that only deals with institutions or its existing clients |
| May the Administrator set minimum net capital requirements for B/Ds? | Yes, but the requirement on B/Ds may not exceed the federal (SEC) requirement. |
| As it applies to a B/D or IA, what does the term "exclusion" mean in the USA? | Exclusion signifies that a person does not meet the definition of a B/D or IA in the state. |
| A _________ bond is posted to cover the potential costs of legal action taken against certain persons. | A surety bond is posted to cover the potential costs of legal action taken against certain persons. |
| An individual who represents an issuer in selling registered, non-exempt securities for compensation is an ________. | An individual who represents an issuer in selling registered, non-exempt securities for compensation is an agent. |
| May an agent continue to do business in a state if his B/D has gone out of business? | No. An agent's registration is only in effect while associated with a B/D or issuer. |
| When an agent ends her association with a B/D, who must notify the Administrator? | Both the agent and the B/D |
| True or False: A partner, officer, or director of a B/D is always considered an agent of the B/D. | False. A partner, officer, or director is an agent of the B/D if she is involved in the purchase/sale of securities. |
| If a B/D is not registered in a state, may an agent of the B/D do business in the state without being registered there? | Yes, if the agent is dealing with an existing client that is temporarily in the state. |
| If a client moves to a new state, may the agent continue to do business while applying for registration in the state? | Yes, as long as the agent is registered in at least one other state and is not subject to disqualification. |
| A client of a Canadian B/D is visiting the U.S. May the agent do business with her without registering in the state? | Yes. Since she is an existing client of the Canadian B/D, business may continue in the state. |
| May an agent of a B/D located in Mexico do business with a client in the U.S. without registering in the state? | No. B/Ds of Mexico are required to register in the U.S. to effect securities transactions in a state. |
| Does the de minimis exemption apply to B/Ds that have no place of business in a state? | No. The de minimis exemption only applies to IAs and IARs |
| What is the purpose of a Consent to Service of Process? | To appoint the Administrator as the applicant's attorney to receive and process any non-criminal legal complaints |
| Who must sign a Consent to Service of Process? | Any issuer, B/D, IA, IAR, or agent initially registering to engage in business within a state |
| Must the Consent to Service of Process be renewed each year? | No. It is only required at initial registration. |
| State registration expires annually on ______________. | State registration expires annually on December 31. |
| When does state registration become effective? | At noon on the 30th day after filing an application, provided there are no proceedings pending |
| If a B/D is registered with the SEC, is registration required in any state in which it intends to do business? | Yes. There are no exemptions from registration in the state as a B/D. |
| True or False: If a B/D registers in a state on March 3, it must pay a registration fee for the full year. | True |
| If a firm meets the B/D definition in the state, are there any exemptions from registration under the USA? | No. Firms that meet the B/D definition are required to register in the state. |
| Is there an exemption for agents conducting business in a state? If so, what are the guidelines? | Yes, no place of business in state and a client visits the state or existing client moves to the state (regist. pending) |
| May the Administrator set net capital requirements for B/Ds? | Yes |
| Is there a limit to the amount of net capital the Administrator may require of a B/D? | Yes. The Administrator may not set a requirement that exceeds the SEC requirement. |
| If the Administrator requires an IA, B/D, or agent to post a bond, is a deposit of cash or securities acceptable? | Yes. However, the Administrator determines the amount and types of securities that are appropriate |
| A B/D must maintain its books and records for a minimum of ____ years. | A B/D must maintain its books and records for a minimum of 3 years. |
| Identify the acronym: CRD | Central Registration Depository |
| True or False: An IA firm acquired by a competitor must pay a new filing fee. | False. The purchasing firm must update its application, but a new filing fee is not required. |
| A B/D in New York gets an order from a client who is on vacation in Florida. Does the firm need to register in Florida? | No. Registration is not required since the client is an existing client who is temporarily in Florida. |
| True or False: B/Ds must file advertising and sales literature with the Administrator. | True |
| Is an individual who represents an issuer in the sale of stock to the public considered an agent? | Yes. An individual representing an issuer of securities being offered publicly must register as an agent. |
| Is a certified public accountant who provides tax advice considered an IA under the USA? | No, CPAs are excluded from the IA definition. |
| True or False: A publisher of a financial magazine is considered an IA under the USA. | False. Publishers of newspapers/magazines are excluded from the IA definition. |
| Is an organization that provides ratings of securities and is nationally known considered an IA under the USA? | No |
| Is an attorney who exclusively provides estate planning services considered an IA under the USA? | No. Provided the attorney's advice is incidental to his profession, he is excluded from the IA definition. |
| True or False: A B/D who promotes wrap accounts to its clients would have to register as an IA under the USA. | True. Since the wrap account involves management, the B/D must register as an IA. |
| True or False: A B/D making recommendations about investing in various securities is an IA under the USA. | False. Since the B/D is not charging a fee for the advice, it is excluded from the IA definition. |
| True or False: According to the USA, a B/D providing asset allocation plans to its clients for a fee is an IA. | True. Since the B/D is receiving specific compensation for its advice, it is considered an IA |
| True or False: The USA defines a bank providing investment recommendations to its clients as an IA. | False. Banks are excluded from the IA definition. |
| True or False: A firm producing investment research for B/Ds to deliver to clients is considered an IA under the USA. | True. Since advice is being provided, as a business, and compensation is received, the ABC test is met. |
| True or False: The USA classifies an agent of a B/D who also manages wrap accounts as an IA. | No. IAs are firms, not individuals. |
| True or False: The CEO of an advisory firm who establishes investment policy for the firm must register as an IA. | False. The CEO would be considered an IAR, not an IA. |
| Is an employee of a securities firm who manages accounts for a fee considered an IAR? | Yes |
| Is an employee of a B/D who solicits new customers for an IA considered an IAR? | Yes. Anyone who solicits investment advisory service is considered an IAR. |
| True or False: An agent for a B/D who solicits client trades would not be considered an IAR under the USA. | True. There is no indication that the agent is managing accounts and charging a fee. |
| Individuals employed by an IA who only perform ____________________ duties are excluded from registration under the USA. | Individuals employed by an IA who only perform clerical/ministerial duties are excluded from registration under the USA. |
| True or False: The manager of an IA's human resources department is considered an IAR. | No. The manager's responsibilities do not include providing advice about securities or managing accounts. |
| An individual employed by an IA to manage the research dept. would be required to register as an ______ under the USA. | An individual employed by an IA to manage the research dept. would be required to register as an IAR under the USA. |
| Is an employee of an IA who answers the telephone and does clerical work considered an IAR? | No |
| An electronic system used to register investment advisers is called ___________________________________________. | An electronic system used to register investment advisers is called Investment Adviser Registration Depository (IARD). |
| A surety bond may be required if an investment adviser has _____________ or __________ of client assets. | A surety bond may be required if an investment adviser has discretion or custody of client assets. |
| In place of a surety bond, the Administrator will accept a deposit of _______ or _____________. | In place of a surety bond, the Administrator will accept a deposit of cash or securities. |
| The application for registration of an agent or IAR becomes effective in _____ days. | The application for registration of an agent or IAR becomes effective in 30 days. |
| The application for withdrawal of registration of an agent or IAR becomes effective in _____ days. | The application for withdrawal of registration of an agent or IAR becomes effective in 30 days. |
| IA records must be kept for at least ____ years. | IA records must be kept for at least 5 years. |
| What form is used to notify Administrators that an IA is maintaining custody of client assets? | Form ADV |
| Investment advisers with custody must have an annual audit done by a(n) ____________________. | Investment advisers with custody must have an annual audit done by a(n) independent CPA. |
| An IAR has an office in State A and has 4 clients who reside in the state. Is the IAR required to register in State A? | Yes, since the IAR has an office in State A. The client number is not relevant because of the office location. |
| An IAR of a federal covered adviser has an office in State B with 4 clients who live in State B. Where must he register? | He must register in State B since he has an office in the state. The number of clients is not relevant. |
| An IAR has no place of business in State A, but has 6 or more individual clients in State A. Where must she register? | She must register in any state where she has 6 or more individual clients (even if she has no office in the state). |
| An IAR of a federal covered adviser has no office in NY, but has 6 or more clients living in NY. Must he register in NY? | No. IARs of federal covered advisers are only required to register in states in which they have an office. |
| An IAR of a state-registered IA has no office in NJ, but has 6 or more clients living in NJ. Must she register in NJ? | Yes. IARs of state-regulated IAs register where they have an office and where they have 6 or more individual clients. |
| What type of advice may lawyers, accountants, teachers and engineers provide and not be considered an IA? | Advice that is incidental to their profession. If a separate fee is charged for the advice, the exclusion is lost. |
| List the 4 categories of professionals who are excluded from the IA definition. | Lawyers, accountants, teachers, and engineers (remember L A T E) |
| Is there a limit to the amount of net capital the Administrator may require of a B/D? | Yes. The Administrator may not set a requirement that exceeds the federal (SEC) requirement. |
| May the Administrator set minimum net worth requirements for IAs? | Yes, but no state may impose a requirement that exceeds the requirement of the IA's home state. |
| May federal covered adviser's books and records be subject to inspection by an Administrator? | Yes |
| If an IA maintains custody of a client's funds or securities, how often must account statements be provided to clients? | Statements must be sent quarterly. |
| If an IA maintains custody of client funds, are unannounced audits required? | Yes. IAs must arrange for unannounced audits on an annual basis. |
| True or False: An IA maintaining custody of client assets need not notify the Administrator. | False. The Administrator must be notified in writing using Form ADV. |
| When does the de minimis exemption from registration apply for an IA that has no place of business in a state? | When an IA has no more than 5 non-institututional clients in the state in the previous 12 months |
| Does the de minimis exemption apply to investment adviser representatives? | Yes |
| IAs with no place of business in a state, and whose clients are ____________ are not required to register in that state. | IAs with no place of business in a state, and whose clients are institutions are not required to register in that state. |
| List some of the different types of institutional clients. | IAs, B/Ds, investment, insurance, or trust companies, banks, savings and loan associations, and pension plans |
| If an IA is registered with the SEC, is registration required in any state in which it intends to do business? | No. The National Securities Markets Improvement Act (NSMIA) exempts federal covered advisers from state registration. |
| Under the USA, the de minimis exemption limits an IA to no more than ____ clients within the previous _____ months. | Under the USA, the de minimis exemption limits an IA to no more than 5 clients within the previous 12 months. |
| If an IA meets the IA definition in a state, are there any exemptions from registration under the USA? | Yes, no office in the state and a) its clients are institutions or b) 5 or fewer retail clients in the last 12 months |
| Is there a registration exemption for IARs doing business in a state if employed by an IA registered in another state? | Yes, if the IAR has no office in the state and has 5 or fewer retail clients in the state in the past 12 months. |
| True or False: An IA with 5 or fewer retail clients in the state in the past 12 months need not register under the USA. | True |
| True or False: If an IA's clients are institutions (e.g., banks, B/Ds), it is exempt from registration under the USA. | True |
| Under the USA, are banks and bank holding companies excluded from the IA definition? | No. Banks, savings institutions and trust companies are excluded, but bank holding companies are not. |
| For how long does the registration of a state-registered adviser remain in effect? | Until December 31, unless renewed by the adviser |
| IAs file their applications electronically through the ___________________________________. | IAs file their applications electronically through the Investment Adviser Registration Depository (IARD). |
| Is there a limit to the amount of net worth the Administrator may require of an IA? | Yes. The Administrator may not set a requirement that exceeds the IA's home state. |
| Is an IAR who is employed by a federal covered adviser required to register in the state? | Yes. IARs of federal covered advisers must register in any state in which they have a place of business. |
| What type of advice may lawyers, accountants, teachers, and engineers provide and not be considered an IA? | Advice that is incidental to their profession. If a separate fee is charged for the advice, the exclusion is lost. |
| An IA must maintain its books and records for a minimum of ____ years. | An IA must maintain its books and records for a minimum of 5 years. |
| If employed by a federal covered IA, is an IAR required to register in all states in which she is conducting business? | No. If the IAR has no place of business in the state, no state registration is required. |
| With what system do IAs file their registration applications? | The Investment Adviser Registration Depository (IARD) |
| True or False: Bank holding companies are not considered IAs under the USA. | False. They are excluded from the definition under the IA Act of 1940, not under the USA. |
| Identify the acronym: IARD | Investment Adviser Registration Depository |
| What form do IAs file to register? | Form ADV |
| Define the term custody. | The legal responsibility for, or control over, someone’s assets |
| True or False: An American Depositary Receipt (ADR) is a security. | True |
| Is an option on a commodity futures contract a security? | Yes. The futures contract is not, but the option is a security. Options could be based on an equity, index, or currency. |
| Would an interest in a real estate condominium development be considered a security? | Yes |
| True or False: Precious metals are not considered securities. | True |
| Is a voting trust certificate a security? | Yes |
| Is a Keogh plan considered a security? | No, but Keogh plan participation is considered a security. |
| Is an investment interest in livestock considered a security? | Yes |
| Is a certificate of interest in a mining lease a security? | Yes |
| Is a fixed annuity a security? | No, but variable contracts (e.g., variable annuities or variable life insurance) are considered securities. |
| Is an endowment life insurance policy a security? | No |
| Is a variable life insurance policy a security? | Yes, but a term or universal life insurance policy is not considered a security. |
| Is a universal life insurance policy considered a security? | No |
| Is Keogh plan participation considered a security? | Yes, but the Keogh plan itself is not a security. |
| Is a 401(k) plan considered a security? | No |
| Is treasury stock considered a security? | Yes. Treasury stock is stock that was issued and subsequently repurchased by the company. |
| Is a debenture considered a security? | Yes. A debenture is an unsecured corporate bond. |
| Is a preemptive right considered a security? | Yes |
| Is a warrant a security? | Yes. Warrants are financial instruments that allow investors to acquire stock at a preset price. |
| Is a preorganization certificate considered a security? | Yes |
| Is an IRA account considered a security? | No |
| Is a futures contract considered a security? | No, but an option on a futures contract is a security. |
| Is a multi-level distributorship considered a security? | Yes |
| Is a limited partnership a security? | Yes |
| Is an interest in oil and gas drilling program considered a security? | Yes |
| Is a whiskey warehouse receipt considered a security? | Yes |
| True or False: Securities issued by provinces and municipalities of Canada are subject to state registration. | False. Securities issued by Canadian provinces or municipalities are exempt from registration. |
| Are bonds issued by the City of New York exempt from state registration? | Yes |
| True or False: Securities issued by the states and municipalities of Mexico are exempt from registration under the USA. | True. An exemption is provided to securities issued by foreign governments with whom the U.S. has diplomatic relations. |
| Securities issued by any government with whom the U.S. has _____________ relations are exempt from state registration. | Securities issued by any government with whom the U.S. has diplomatic relations are exempt from state registration. |
| True or False: Securities issued by the U.S. Treasury and U.S. agencies are deemed exempt securities under the USA. | True |
| ________ issued by insurance companies are exempt from state registration. | Bonds issued by insurance companies are exempt from state registration. |
| List some securities that are considered federal covered and exempt from registration. | Those listed on national exchanges (NYSE, AMEX, NASDAQ) and investment company securities (e.g., mutual fund shares) |
| True or False: Securities listed on the AMEX are exempt from state registration. | True |
| True or False: Securities of a Canadian company, but listed on the NYSE, are exempt from state registration. | True |
| Are bonds issued by a charitable organization subject to state registration? | No. Securities issued by non-profit organizations are exempt from registration. |
| What criteria must be met for commercial paper to be exempt from registration? | A 270-day maximum life, minimum denomination of $50,000, rated in one of the top-three categories according to an NRSRO |
| An executor of an estate sells a block of securities that are not registered. Is this a violation? | No. This is an example of an exempt transaction. |
| Would securities that are traded on the Toronto Stock Exchange be subject to state registration requirements? | No. These secondary market transactions are considered exempt from registration according to the USA. |
| True or False: Bankers' Acceptances rated AAA, maturing in 6-months, and issued in $25,000 denominations are exempt. | False. Because the BAs were not issued in at least $50,000 denominations, registration is required. |
| Is a private placement defined as an exempt transaction or as an exempt security under the USA? | Exempt transaction |
| Under the USA, private placements are exempt if securities are offered to ____ or fewer retail clients over ____ months. | Under the USA, private placements are exempt if securities are offered to 10 or fewer retail clients over 12 months. |
| What does the USA consider a security issued by an investment company that is registered under the Inv. Co. Act of 1940? | The securities are considered federal covered. |
| True or False: Agents selling unregistered, non-exempt securities to banks and trust companies are violating the USA. | False. Transactions with banks and trust companies are considered exempt transactions. |
| If an NYSE stock trades in the secondary market, does the USA consider it an exempt security or exempt transaction? | Exempt security |
| If a Nasdaq stock trades in the secondary market, does the USA consider it an exempt security or exempt transaction? | Exempt security |
| Are securities traded on the OTCBB or the Pink Sheets exempt? | No |
| True or False: Bonds issued by a railroad are exempt from state registration. | True. Securities issued by a railroad, common carrier, or public utility are exempt at the state level. |
| Under the USA, is stock issued by a telephone company an exempt security or an exempt transaction? | Securities issued by public utilities are considered exempt securities. |
| Are securities issued by a software company exempt from state registration? | No |
| True or False: According to the USA, debt issued by a fraternal organization would NOT be considered exempt. | False. Securities issued by non-profit organizations are exempt from state registration. |
| Non-issuer trading of securities subject to reporting requirements of the Act of 1934 are _________ transactions. | Non-issuer trading of securities subject to reporting requirements of the Act of 1934 are exempt transactions. |
| True or False: Occasional, secondary market transactions in an OTCBB stock are considered exempt transactions. | False. Only non-recurring secondary market transactions are considered exempt transactions. |
| Is an isolated, non-recurring, non-issuer transaction in OTCBB or Pink Sheets stock subject to registration? | No. It is considered an exempt transaction. |
| Is an unsolicited, non-issuer transaction in an OTC stock exempt from state registration? | Yes, because it is unsolicited. |
| True or False: The sale of securities to a pension plan is considered an exempt transaction under the USA. | True |
| Registration by Filing (Notification) requires issuers to be in business at least _____ months preceding registration. | Registration by Filing (Notification) requires issuers to be in business at least 36 months preceding registration. |
| An intra-state offering would use which method of state securities registration? | Qualification |
| What method of state securities registration requires issuers to wait to hear from the Administrator before selling? | Qualification |
| To use Filing (Notification) to register stock, the offering price must be at least $______ per share. | To use Filing (Notification) to register stock, the offering price must be at least $5.00 per share. |
| Registration by Filing (Notification) requires that the underwriting commission be no more than _____%. | Registration by Filing (Notification) requires that the underwriting commission be no more than 10%. |
| Registration by Coordination has a minimum cooling-off period of _____ days. | Registration by Coordination has a minimum cooling-off period of 10 days. |
| Which method of state securities registration would likely be used for an IPO being offered in several states? | Coordination |
| Registration by Coordination requires issuers to meet requirements of the USA as well as what other Act? | The Securities Act of 1933 |
| True or False: A state may require a registration fee from the issuer of a Nasdaq security. | False. Nasdaq securities are federal covered securities. |
| True or False: A state may require notice filing by an issuer of an NYSE security. | True. Notice filing is the requirement to provide the state with the same information that was filed with the SEC. |
| True or False: An Administrator may not require a sales report from the issuer of an OTC security. | False |
| Define an investment contract (according to the Howey Test). | An investment of money, in a common enterprise, with expectation of a profit due to efforts of third-party management. |
| True or False: Securities issued by registered investment companies are considered federal covered securities. | True |
| True or False: Issuers of federal covered securities may be required to pay a registration fee to a state Administrator. | True |
| True or False: Securities traded on the NYSE may be required to pay a registration fee to a state Administrator. | False |
| After receiving an effective date, what information may an issuer change by amending its registration statement? | The number of shares being offered. A new registration is required to change offering price or underwriter compensation. |
| Regarding federal covered securities, may an Administrator cancel a registration? | No |
| Regarding federal covered securities, may an Administrator prohibit the sale of the security in his state? | No |
| Regarding federal covered securities, may an Administrator require the issuer to complete the notice filing? | Yes. Notice filing is the process by which information filed with the SEC is also filed/shared with the Administrator. |
| As it applies to persons and securities, what does the term "exemption" mean in the USA? | Exemption signifies that a person or security is not subject to registration under the USA. |
| True or False: Variable annuities are not securities and are, therefore, not subject to registration. | False. Any variable products are considered securities. However, fixed insurance products are not securities. |
| True or False: IRAs and Keogh plans are considered securities. | False. The participation in these plans (what goes in the plan) is considered a security, but the plan itself is NOT. |
| True or False: Options on commodities are securities. | True. Options are always considered securities (e.g., options on futures, a currency, an index, or equities). |
| State registration remains in effect for ___ year(s). | State registration remains in effect for 1 year. |
| True or False: Two friends, anticipating a rise in value, purchase property. The property is considered a security. | False |
| Identify the three forms of state securities registration. | Notification (filing), coordination, qualification |
| How would a well-established corporation register a subsequent offering to be sold in multiple states? | Notification (filing) |
| True or False: Paperwork related to coordination is filed with the Administrator at the same time as the SEC filing. | False. Registration will become effective simultaneously with SEC registration, but need not be filed at the same time. |
| What is the minimum cooling-off period for registration by notification? | 5 days |
| Do the anti-fraud provisions of the USA apply to exempt securities? | Yes. Nothing is exempt from fraud. |
| True or False: A trade of unregistered, non-exempt securities between two B/Ds would be a violation of the USA. | False. This is an exempt transaction. |
| NSMIA indicates that securities listed on the NYSE, AMEX, NASDAQ and Toronto Exchange are _________________ securities. | NSMIA indicates that securities listed on the NYSE, AMEX, NASDAQ and Toronto Exchange are federal covered securities. |
| If registering an IPO, an issuer would most likely use what form of state registration? | Coordination |
| What form of state registration is not available in all states? | Notification (filing) |
| The only form of state registration that has its effective date set by the Administrator is _______________. | The only form of state registration that has its effective date set by the Administrator is qualification. |
| True or False: Securities issued by municipalities of Mexico are exempt under the USA. | True. An exemption applies to securities issued by foreign governments with whom the U.S. has diplomatic relations. |
| True or False: Securities issued by municipalities of Canada are exempt under the USA. | True |
| Transactions between the issuer and its underwriter are considered ________ transactions. | Transactions between the issuer and its underwriter are considered exempt transactions. |
| May a state prevent the sale of a federal covered security in its state? | No. Federal covered securities are not regulated by the state. |
| True or False: Bank holding companies are excluded from the IA definition under the USA. | False |
| True or False: An IA with fewer than 15 retail clients in the past 12 months is exempt from registering under the USA. | False. The USA de minimis exemption for advisers is 5 or fewer individual clients. |
| True or False: Notification to existing clients is required for a minority change in ownership of an IA. | True. However, if a majority change occurs, client consent is required since this would be considered an assignment. |
| What are some reasons for the Administrator denying a securities' registration statement? | Filing false registration documents, issuer's business is illegal, spread is unfair, or failing to pay the filing fee. |
| True or False: A transaction by an executor is exempt. | True. Any transaction by an executor, administrator, trustee in bankruptcy, or conservator is considered exempt. |
| Who must prove that an exemption exists? | The party claiming the exemption |
| True or False: Principals must approve discretionary orders prior to entry. | False. The orders must be approved promptly afterward. |
| May a wife enter trades in a husband’s account? | Yes, with written third-party authorization. |
| Churning is described as _____________________ designed to _____________________. | Churning is described as excessive trading designed to generate commissions. |
| Define painting the tape. | Traders effecting transactions back and forth to create a misleading appearance of activity |
| The _____________________ has the authority to regulate margin requirements. | The Federal Reserve Board (FRB) has the authority to regulate margin requirements. |
| ____________ governs the extension of credit by B/Ds. | Regulation T governs the extension of credit by B/Ds. |
| Does the payment date requirement of Regulation T apply to cash or margin accounts? | Payment is required within 5 business days for both (100% in a cash account, 50% in a margin account). |
| True or False: Fraud may sometimes be unintentional. | False |
| For an agent to exercise discretion over a client's account, the client must have signed a ________________________. | For an agent to exercise discretion over a client's account, the client must have signed a power of attorney. |
| True or False: If churning in a client's account generates large profits, it is not considered a violation. | False |
| B/D securities and client securities must be segregated; in other words, they may not be ______________. | B/D securities and client securities must be segregated; in other words, they may not be commingled. |
| John and Sam are continually trading QRS stock between their accounts to cause the price to rise. Is this permitted? | No, this prohibited practice is referred to as "painting the tape." |
| Sam buys stock on one exchange and shorts it on another at a slightly higher price. Is this permitted? | Yes. Sam is engaging in arbitrage. |
| True or False: Soliciting orders for unregistered, non-exempt securities is prohibited. | True |
| Accepting orders for unregistered, non-exempt securities is allowed if clients attest that the trade was _____________. | Accepting orders for unregistered, non-exempt securities is allowed if clients attest that the trade was unsolicited. |
| True or False: According to the USA, investment advisers may generally charge performance-based fees. | False. Unless the Administrator deems the client qualified, performance-based fees are prohibited. |
| True or False: An IA that has full discretion over a client's account at a separate B/D is considered to have custody. | True |
| An IAR may exercise discretion over a client's account based on oral authorization from the client for up to _____ days. | An IAR may exercise discretion over a client's account based on oral authorization from the client for up to 10 days. |
| May a cash account be opened without the customer's signature? | Yes |
| May a margin account be opened without the customer's signature? | No |
| May an agent execute securities trades for compensation and not record the trades on the B/D's books and records? | No. This is referred to as "selling away." |
| Before an IA may assign a client's contract to another advisory firm, it must obtain _________________________. | Before an IA may assign a client's contract to another advisory firm, it must obtain the client's consent. |
| Before an IA may assign a client's contract to another advisory firm, it must obtain _________________________. | Before an IA may assign a client's contract to another advisory firm, it must obtain the client's consent. |
| An IA that is also a B/D may execute agency cross trades, earning commission on both sides, if one side is ____________. | An IA that is also a B/D may execute agency cross trades, earning commission on both sides, if one side is unsolicited. |
| __________________ is the prohibited act of a B/D trading for its own account ahead of a customer's block order. | Front-running is the prohibited act of a B/D trading for its own account ahead of a customer's block order. |
| True or False: It is an unethical practice for a B/D to delay the delivery of securities purchased by a customer. | True |
| Joe places an order to sell 10,000 shares of ABC whenever it's best. Is written discretionary authority required? | No. Since discretion is limited to time and/or price, written authority is not required. |
| What 3 details must be provided by a client so a B/D may accept a discretionary order without written authorization? | Action (buy/sell), asset, and amount. Time and/or price may remain the B/D's discretion without written authorization. |
| True or False: The initial transaction in a margin account requires a written margin agreement promptly after the trade. | True |
| True or False: Charging an unreasonably high commission is acceptable provided disclosure is made to client | False |
| Transactions should be executed at a price that is reasonably related to the _________________ price. | Transactions should be executed at a price that is reasonably related to the current market price. |
| What is required of a B/D controlled by/affiliated with an issuer of a security being sold to/purchased by a customer? | Both oral and written disclosure of the relationship |
| True or False: If a B/D receives a formal complaint from a client, it may be ignored if the complaint seems baseless. | False. Failing to respond to any complaint is prohibited. |
| A firm promises a refund to all clients who invest in an IPO if shares fail to rise 20%. Is this permitted? | No. This is unethical since it is considered a guarantee against loss. |
| May an agent use a new issue prospectus to create a marketing piece and only include positive details about the issue? | No. Material provided to clients must include all facts about the issue, not just the positive ones. |
| When selling mutual funds, an agent must adequately disclose the _____________. | When selling mutual funds, an agent must adequately disclose the sales charge. |
| True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable. | False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit. |
| Is it acceptable to recommend that a client sell a mutual fund in order to buy another fund with the same objective? | No. This is a prohibited practice and would be considered an unsuitable recommendation. |
| True or False: If a customer receives a prospectus during a solicitation, an agent has provided full and fair disclosure. | False. The agent may still have omitted material facts. |
| True or False: Forward-looking statements regarding mutual fund performance may be used when soliciting clients. | False. Past performance is not indicative of future results. |
| To whom are written or electronically-sent grievances (complaints) forwarded? | An immediate supervisor |
| An agent makes this statement to a client: "Go with us; we're approved by the Administrator and SEC." Is it acceptable? | No. Neither the SEC nor the Administrator provide approval for securities or securities professionals. |
| According to the USA, all investment advisory contracts must be in __________ form. | According to the USA, all investment advisory contracts must be in written form. |
| Firms must keep client information confidential unless disclosure is authorized by the _______ or a ___________________. | Firms must keep client information confidential unless disclosure is authorized by the client or a regulatory authority. |
| If an adviser has check-writing privileges in a client's account, does this constitute custody? | Yes. Full discretionary control (having the ability to remove funds from the client's account) is considered custody. |
| An IA inadvertently receives client funds/securities and doesn't return them within 3 business days. Is this custody? | Yes |
| Define "assignment" as it relates to IA contracts. | The transfer of ownership of a client's account from one advisory firm to another. Client consent is required. |
| What may an investment adviser do with full discretion, but not with limited discretion? | Withdraw money from the account |
| Define churning. | Excessive trading in a customer's account for the primary purpose of generating commissions and other fees |
| May an adviser borrow money from a client? | Yes, if the client is in the business of lending money, or if the client is an affiliate of the adviser, or is a B/D. |
| May an adviser or B/D lend money to a client? | Yes, if the adviser or B/D is in the business of lending money. |
| What is required of an IA that uses third-party research? | The IA must disclose the source of the research to its client. |
| Is an adviser required to disclose the source of raw data used to determine the recommendations to its customers? | No. Disclosure is not required if the IA's recommendations are based on its own independent conclusions. |
| May an adviser release account information to the spouse of a client? | No, not without the client's written authorization. |
| Are advisory fees fixed and are they subject to administrative review? | Fees are not fixed, but must be in line with other advisers. Fees are subject to administrative review. |
| Under the USA, all IA contracts must be __________ and must disclose __________ provided and related ______. | Under the USA, all IA contracts must be in writing and must disclose services provided and related fees. |
| What is required of an IA if the firm goes through a majority change in ownership? | The firm must obtain written permission of its clients to assign the contracts. If not, the contracts will be voided. |
| What is required of an IA if there has been a minority change in firm ownership? | Provide written notification to clients |
| An IAR leaves his firm and his clients are distributed to other IARs. Is this an assignment of the contracts? | No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment. |
| How are advisory fees most commonly charged? | As a percentage of assets under management over a specific period of time |
| Does an IA have custody when it is in possession of checks drawn by its client and made out to third parties? | No |
| May an agent and a client share in an account? | Yes, with firm approval and provided the sharing in gains and losses is proportionate to the investment of each party. |
| What is needed for an investment adviser to exercise discretion over a client's funds? | An adviser may exercise discretion for 10 days with oral authorization as long as it is followed up in writing. |
| What is needed for a B/D to exercise discretion over a client’s account? | B/Ds need prior written authorization. |
| The solicitation of buyers for unregistered, non-exempt securities is _____________. | The solicitation of buyers for unregistered, non-exempt securities is prohibited. |
| ________ is the willful or intentional act of deceiving another person for gain or profit. | What is selling away? |
| Define commingling. | The prohibited act of mixing client funds with those of the B/D |
| May an agent share in the profits of a client's account? | Yes, in a joint account with proportionate sharing. Permission is required from both the client and the firm. |
| If an agent has been given time and price discretion on a client order, is written power of attorney required? | No. Provided the client determines the action (buy/sell), amount, and asset, power of attorney is not required. |
| If an adviser exercises full discretionary control over a client's account, does this constitute custody? | Yes. Full discretionary control (having the ability to remove funds from the client's account) is considered custody. |
| When does a durable power of attorney become automatically canceled? | Upon the death of the grantor of the POA |
| When does a standard power of attorney become automatically canceled? | Upon either the death of the grantor or declaration of incompetence of the grantor |
| __________ stock is the repeated practice of placing stock in the account of someone who is not the rightful owner. | Parking stock is the repeated practice of placing stock in the account of someone who is not the rightful owner. |
| What is a consent to service of process? | A document appointing the Administrator as attorney for any non-criminal legal complaints issued against a registrant |
| Identify the acronym: NAFTA | North American Free Trade Agreement |
| Identify the acronym: POA | Power of Attorney |
| Define the prohibited practice of shadowing. | After executing a large block order, but before the trade is reported, a B/D trades for its own account. |
| Define front running. | A firm/individual executing trades for its own account with knowledge of an impending large block customer order. |
| True or False: All illegal activities are intentional. | False. Some accidental or unintentional actions are considered unethical and, therefore, illegal. |
| An agent encourages a customer to buy a stock due to an upcoming dividend. Is this a legal practice? | No, this is a prohibited action known as selling dividends. |
| You advise a client to buy stock of a company that just fired its CEO. Is disclosure to the client required? | Yes, since this is a material fact, it must be disclosed before the customer buys the stock. |
| True or False: An agent must always have reasonable grounds for recommending a particular security. | True |
| An agent of a B/D lends $5,000 to his brother, is this acceptable? | Yes, lending to immediate family members is permissible. |
| Define conversion. | The prohibited act of an agent using client funds for personal use. |
| Define selling away. | An agent executing trades that have not been recorded on the books and records of a B/D. |
| True or False: If an agent disagrees with a customer's order, he may disregard the order. | False. Agents and IARs must follow all customer requests, even those with which they disagree. |
| True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client. | False. An IA must always disclose a conflict, but they don't necessarily need to end the relationship. |
| Define an agency cross transaction. | A trade executed by a financial firm that is acting as a broker for both the buyer and seller. |
| True or False: The Administrator may issue an injunction. | False. Only a court may issue an injunction, however, the Administrator may issue a cease and desist order. |
| What may a purchaser recover from civil damages? | Full purchase price, plus interest, court costs, and attorney fees, minus any income received from the security |
| Statute of limitations on a civil suit is ___ years from occurrence or ___ years from discovery, whichever comes first. | Statute of limitations on a civil suit is 3 years from occurrence or 2 years from discovery, whichever comes first. |
| The maximum criminal penalties under the USA are a fine of $_______ and ____ years in prison. | The maximum criminal penalties under the USA are a fine of $5,000 and 3 years in prison. |
| May investment adviser advertising refer to testimonials? | No. Testimonials may not be circulated to clients. |
| The Securities Act of 1933 regulates _____________. | The Securities Act of 1933 regulates new issues. |
| What is the primary purpose of the Securities Act of 1933? | Provide investors with full and fair disclosure regarding new issues (prospectus) |
| True or False: The SEC judges an offering’s investment merit and provides approval. | False |
| List the securities that are exempt from registration. | Government/municipal bonds, commercial paper, bankers' acceptances, bank issues, non-profit and small business issues |
| Though some securities are exempt from registration, nothing is exempt from the ____________ provisions of the Act. | Though some securities are exempt from registration, nothing is exempt from the anti-fraud provisions of the Act. |
| Regulation A exemption is allowed if issuers raise no more than $____________ over 12 months. | Regulation A exemption is allowed if issuers raise no more than $5 million over 12 months (a capital, not share, limit). |
| The ____________________ is the disclosure document concerning a Regulation A issue. | The Offering Circular is the disclosure document concerning a Regulation A issue. |
| True or False: 100% of investors must be state residents to qualify for an intrastate exemption. | True |
| What is the rule that issuers must follow to qualify for an intrastate exemption? | 80% of assets located in-state, 80% of revenue produced in-state, and 80% of proceeds raised are used in-state. |
| ____ is the maximum number of non-accredited investors allowed in a Private Placement. | 35 is the maximum number of non-accredited investors allowed in a Private Placement. |
| The private placement disclosure document is the _____________________. | The private placement disclosure document is the Offering Memorandum. |
| May a preliminary prospectus (red herring) be sent during the cooling-off period? | Yes, so potential purchasers can provide indications of interest. |
| Indications of interest are _______________ on both the customer and B/D. | Indications of interest are non-binding on both the customer and B/D. |
| What should an RR do if a client sends a check to purchase securities going through the cooling-off period? | Return the check to the customer |
| The ____________________ will not appear in a red herring. | The final offering price will not appear in a red herring. |
| What rules govern the registration of an issue in any state in which it will be offered? | Blue-Sky Laws |
| True or False: Blue-Sky Laws apply to broker-dealers and agents operating within a state. | True |
| True or False: MSRB rules regulate the municipal activities of B/Ds, banks, and the employees of these institutions. | True. The MSRB also regulates municipal advertising |
| What is the purpose of a Tombstone Ad? | It calls attention to the new issuance of securities |
| Who is responsible for the formulation and interpretation of rules for the municipal industry? | The MSRB |
| The Securities Exchange Act of 1934 regulates the ____________________. | The Securities Exchange Act of 1934 regulates the Secondary Market |
| What U.S. Government agency, created by the '34 Act, enforces securities laws? | The Securities and Exchange Commission (SEC) |
| Define an insider. | Officers, directors, partners, greater than 10% owners, and immediate family members of all listed |
| Name two prohibitions related to being an insider. | 1. No shorting of the stock and 2. No keeping of short-swing profits |
| Insiders must return short-swing profits, which are those earned on stock held less than ____ months. | Insiders must return short-swing profits, which are those earned on stock held less than 6 months. |
| Trading on material, non-public information is considered __________________. | Trading on material, non-public information is considered insider trading. |
| __________ is a manipulative activity designed to keep the price of a stock from rising (and is prohibited). | Capping is a manipulative activity designed to keep the price of a stock from rising (and is prohibited). |
| __________ is a manipulative activity designed to keep the price of a stock from falling (and is prohibited). | Pegging is a manipulative activity designed to keep the price of a stock from falling (and is prohibited). |
| A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation? | Yes, both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act. |
| The criminal penalties for insider trading by individuals is a maximum of $____________ and/or ____ years in prison. | The criminal penalties for insider trading by individuals is a maximum of $5 million and/or 20 years in prison. |
| What are treble damages? | The civil penalty for insider trading, which is three times the profit made or loss avoided |
| What is the criminal penalty for insider trading by corporations? | $25 million per violation |
| After the initial offering, where are shares of a closed-end management company purchased? | In the secondary market (like shares of stock) |
| What price is paid for closed-end management company shares? | Market price plus a commission |
| True or False: The market price of closed-end shares could be higher, lower, or equal to the NAV. | True. Shares can trade at a premium or discount to NAV based on supply and demand forces. |
| What is the annual fee levied against a fund's assets to pay expenses of commissions, advertising, and sales literature? | 12b-1 fee |
| "For insider trading violations, the SEC can sue for treble damages." What does that statement mean? | The SEC can sue for three times the damage (profit made or loss avoided). |
| Next week ABC plans to announce its earnings. If ABC's CEO wants to sell some of her shares now, is the sale restricted? | Yes. Insiders are required to wait until an earnings report is released publicly before selling shares. |
| What restrictions exist in describing a fund as no-load? | It may have no front-end or deferred sales charge, and a 12b-1 fee may not exceed .25%. |
| According to the Investment Company Act of 1940, who are considered affiliated persons of an investment company? | Officers/directors, members of the advisory board, employees, or owners of 5% or more of the voting stock |
| What is the maximum penalty for criminal violations of the Investment Company Act of 1940? | 5 years in prison and/or a $10,000 fine |
| The cooling-off period for a federal securities registration is a minimum of _____ days. | The cooling-off period for a federal securities registration is a minimum of 20 days. |
| What is the purpose of providing investors with a preliminary prospectus (red herring)? | To obtain indications of interest |
| Regarding the underwriting of an issue, what is the purpose of holding a due diligence meeting? | To ensure the accuracy and completeness of all information being distributed to the public |
| What information will not be found in a preliminary prospectus? | The final public offering price and the effective date |
| Under Reg D, a private placement may be sold to how many non accredited investors? | No more than 35 |
| Accredited investors have net worth of at least $_________ or pre-tax income in each of the last two years of $________. | Accredited investors have net worth of at least $1,000,000 or pre-tax income in each of the last two years of $200,000. |
| A new issue being offered in one state only is _________ from federal registration under SEC Rule ______. | A new issue being offered in one state only is exempt from federal registration under SEC Rule 147 |
| What percentage of investors must be residents of the state for a security to be eligible for a 147 exemption? | 100% |
| The SEC may suspend trading in a security for up to _____ days. | The SEC may suspend trading in a security for up to 10 days |
| The SEC may suspend trading on an exchange for up to _____ days with notification to the ____________. | The SEC may suspend trading on an exchange for up to 90 days with notification to the President. |
| Schedule _____ must be filed within _____ days if an investor acquires more than 5% of a publicly traded company. | Schedule 13D must be filed within 10 days if an investor acquires more than 5% of a publicly traded company. |
| A person subject to an SEC order may appeal the order to the U.S. Court of Appeals within _____ days. | A person subject an SEC order may appeal the order to the U.S. Court of Appeals within 60 days. |
| Identify the acronym: SRO | Self-Regulatory Organization (such as FINRA) |
| Identify the acronym: MSRB | Municipal Securities Rulemaking Board |
| Identify the acronym: FINRA | Financial Industry Regulatory Authority |
| What is Form 13F? | A report filed by investment managers with discretion over securities that exceed $100 million |
| Define securities information processor. | Any entity that collects and disseminates information regarding securities quotes and trades |
| Define omitting prospectus | A written communication for mutual fund shares that contains limited information (less than a regular prospectus). |
| May an agent sell mutual fund shares to a client after giving them an omitting prospectus? | Yes, as long as she offers to give the customer the standard prospectus. |
| What's a no load fund? | A mutual fund with no front-end sales charge, no deferred sales charge, and no 12b-1 fee exceeding .25% per year. |
| What is not pertinent when opening an account, a client’s educational or financial background? | Educational background |
| Describe a wrap account. | An account that charges the client a single fee that covers transactions and management |
| How do nonmanaged, fee-based accounts differ from wrap accounts? | A fee is charged to cover transaction costs (often a percentage of assets), but no management is performed. |
| If a client gives little information when opening an account, what securities may an agent recommend to the client? | Only securities that are suitable based on the information the client did provide |
| An IA directs transactions to a B/D who rebates 15% of the commissions to the IA for the business. Is this acceptable? | Yes, provided the IA provides written disclosure (often in Form ADV) to clients. |
| If a client wins $1 million, what should an agent or an IAR do? | Update the client's information that is on file |
| What is soft-dollar compensation? | Non cash compensation paid by a B/D to an IA for directing securities transactions. |
| What forms of soft-dollar compensation are acceptable? | Research reports, seminars, software used to provide analysis |
| What forms of soft-dollar compensation are NOT acceptable? | Rent, travel expense reimbursement, hardware, furniture, entertainment, meals |
| True or False: IAs have a fiduciary responsibility to clients and must obtain best execution on directed transactions. | True |
| True or False: Under the Uniform Prudent Investor Act (UPIA), an IA's main objective should be risk avoidance. | False. The UPIA indicates that advisers are responsible for managing risk, not avoiding risk. |
| True or False: Under the UPIA, an adviser should never recommend speculative investments to conservative investors. | False. The management of risk is what is important. Investments such as options or commodities may reduce overall risk. |
| In what type of account would you most likely expect reverse churning? | A fee-based (wrap) account |
| True or False: When conducting a client's financial analysis, liquid investments would be considered long-term assets. | False. Liquid investments would be considered current assets. |
| True or False: When formulating a financial plan, it is always important to consider the client's liquidity needs. | True |
| What step must an IA complete when faced with a conflict of interest? | The conflict must be disclosed to the client. If disclosure is insufficient, the IA must abstain from the action. |
| The program where a single fee is charged in lieu of commissions and advisory fees is generally called a ______ program. | The program where a single fee is charged in lieu of commissions and advisory fees is generally called a wrap program. |
| True or False: A mutual fund asset allocation program requires a special wrap program disclosure document. | False. These programs charge a percentage of assets to manage a portfolio of no-load mutual funds. |
| True or False: The wrap fee brochure must disclose that it may cost less to purchase the IA's services separately. | True |
| Identify the acronym: UPIA | Uniform Prudent Investor Act |
| Describe a soft-dollar arrangement between an IA and a B/D. | An IA directs client transactions to a specific B/D in return for research and brokerage services. |
| To be allowed, a soft-dollar arrangement must benefit ____________. | To be allowed, a soft-dollar arrangement must benefit the client. |
| Identify some permissible uses of soft-dollar arrangements. | Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars. |
| What are some of the examples of items that cannot be covered by a soft-dollar arrrangement? | Advertising, travel expense reimbursement, meals and entertainment, and computers |
| Define fiduciary. | Someone who acts on behalf of another, which gives rise to a relationship of trust and confidence. |
| List some examples of fiduciaries. | IARs, executors of an estate, custodians in a UTMA/UGMA account, trustees, and pension plan administrators |
| What duties does an IAR have according to the "know your customer" rules? | Make a reasonable inquiry into a customer's background and provide suitable advice based on known information. |
| May an IAR recommend that a client meet/speak with another financial professional? | Yes. If an IAR lacks expertise in a certain area (e.g., insurance), it's acceptable to recommend outside assistance. |
| Both advertising and sales literature require ____________________. | Both advertising and sales literature require principal approval. |
| Is an adviser to a mutual fund considered an IA under the USA? | No, mutual funds advisers are federally covered and are excluded from the IA definition at the state level. |
| Since ABC Advisers has $32 million under management, it must register with the ______. | Since ABC Advisers has $32 million under management, it must register with the SEC. |
| An IA with more than $____ million under management must register with the SEC. | An IA with more than $30 million under management must register with the SEC. |
| An adviser with offices in _____ or more states will register with the SEC. | An adviser with offices in 30 or more states must register with the SEC. |
| True or False: An adviser to a mutual fund would register in the state where the fund is domiciled. | False. The IA must be registered with the SEC, not a state. |
| What document, regularly provided to clients, will IAs use to notify clients of the location of their securities? | The client's account statement |
| A balance sheet is provided with Form ADV if IAs require pre-paid fees of $_____ or more, ___ months or more in advance. | A balance sheet is provided with Form ADV if IAs require pre-paid fees of $500 or more, 6 months or more in advance. |
| If an IA has custody or discretion, it must include a _________________ with their Form ADV and brochure. | If an IA has custody or discretion, it must include a balance sheet with their Form ADV and brochure. |
| An IA's Brochure must have the same information that appears in what part of Form ADV? | Part II of Form ADV |
| When an IA has custody, with whom are the assets held? | Assets are held by a qualified custodian. Clients must be notified of custodian's name, address, and manner of holding. |
| If an IA has $_____ million or more under management, it must register with the SEC. | If an IA has $30 million or more under management, it must register with the SEC. |
| An IA with between $____ and $____ million under management may register with either the state or the SEC. | An IA with between $25 and $30 million under management may register with either the state or the SEC. |
| Regardless of assets under management, IAs must register with the SEC if any client is a ______________________________. | Regardless of assets under management, IAs must register with the SEC if any client is a registered investment company. |
| The rule governing the disclosure requirement of an IA to its clients is called the __________ Rule. | The rule governing the disclosure requirement of an IA to its clients is called the Brochure Rule. |
| Is registration with the SEC required of an adviser that manages $27 million in assets? | No. If the IA manages between $25-$30 million in assets, it is the choice of the IA to register with the SEC or state. |
| An adviser with more than $_____ million of assets under management must register with the SEC. | An adviser with more than $30 million of assets under management must register with the SEC. |
| An IA is required to deliver the brochure to its clients no later than the __________ of the contract. | An IA is required to deliver the brochure to its clients no later than the signing of the contract. |
| If an IA delivers a brochure at the time of contract signing, clients must be given ____ days to cancel without penalty. | If an IA delivers a brochure at the time of contract signing, clients must be given 5 days to cancel without penalty. |
| If an IA contract stipulates cancellation penalties, a brochure must be provided ____ hours before the contract signing. | If an IA contract stipulates cancellation penalties, a brochure must be provided 48 hours before the contract signing. |
| In general, does the USA allow an adviser to charge performance-based fees? | No. However, such fee arrangements may be permitted by rule or order of the Administrator |
| What is required of an IA to assign an advisory contract to another adviser? | Written permission of the client |
| An IA has custody if it inadvertently receives client securities and hasn't returned them within ____ business days. | An IA has custody if it inadvertently receives client securities and hasn't returned them within 3 business days. |
| Give examples of candidates included in the expanded IA definition due to SEC Release IA-1092. | Sports and entertainment reps, pension consultants, financial planners, and nationally known rating organizations |
| True or False: Bank holding companies are not considered IAs under the Investment Advisers Act of 1940. | True |
| True or False: If an adviser's only clients are insurance companies, it is exempt from SEC registration. | True |
| What type of information will be found in an investment adviser's ADV Part I? | Firm name, # of employees, nature of business, history of officers/directors, legal/disciplinary action in past 10 years |
| Is an IA always required to include a balance sheet in its ADV Part II? | No. A balance sheet is required if the IA has custody of the client's funds or if the IA requires prepayment of fees. |
| Any material changes to Form ADV must be filed ___________. | Any material changes to Form ADV must be filed promptly (within 30 days). |
| What types of changes would be considered material changes that require prompt amendment of an adviser's ADV? | Significant items, such as a name or location change |
| When are non-material (routine) changes to Form ADV required to be filed? | Routine items require an amendment within 90 days after the end of the IA's fiscal year. |
| Identify some non-material (routine) changes to Form ADV. | A change in the number of discretionary accounts or a change in the dollar amount under management by the adviser |
| What is the purpose of Schedule I of Form ADV and when is it filed? | Used to determine if IA is eligible for continued SEC registration; filed 90 days from the end of the IA's fiscal year. |
| When and by whom is Form ADV-E filed? | Filed within 30 days from completion of an audit of the IA's books; filed by the auditor conducting the audit |
| When is Form ADV-W filed? | When an adviser withdraws its registration |
| Under the IA Act of 1940, are banks and bank holding companies excluded from the IA definition? | Yes |
| ADV Part I is a disclosure document for use by the _____ and the ________________. | ADV Part I is a disclosure document for use by the SEC and the Administrator. |
| ADV Part II may be used as a disclosure document for __________ of the IA. | ADV Part II may be used as a disclosure document for clients of the IA. |
| When must the adviser's balance sheet be included in the ADV Part II? | When the firm has custody of a client's funds or requires prepayment of fees $500 or more, six months or more in advance |
| Who operates the IARD? | FINRA |
| When an adviser files Form ADV with the SEC, when does registration become effective? | Within 45 days of filing, the SEC will either grant the registration or institute denial proceedings. |
| When should routine changes to an adviser's ADV be filed? | Within 90 days of the end of the adviser's fiscal year |
| When should significant changes to an adviser's ADV be filed? | Promptly (within 30 days) |
| What types of changes would be considered significant changes to the adviser's ADV? | Change in fees, custody, and the name or location of adviser |
| When must a federal adviser file an updating amendment to determine continued eligibility for SEC registration? | Within 90 days of the end of the adviser's fiscal year. |
| If an IA is no longer eligible for SEC registration, they have _____ days to file ADV-W and register at the state level. | If an IA is no longer eligible for SEC registration, they have 90 days to file ADV-W and register at the state level. |
| Define the local exemption from SEC registration for an IA. | All clients reside in the state where the IA's office is located, and no advice is given for exchange-listed securities. |
| Is an IA managing more than $30 million in assets with only insurance companies as clients subject to SEC registration? | No. An SEC exemption is provided to IAs whose only clients are insurance companies. |
| The private adviser exemption (de minimis) limits a federal adviser to how many clients? | Fewer than 15 (none of whom may be investment companies) |
| For how long does the registration of an adviser registered with the SEC remain in effect? | Until it has been withdrawn, cancelled, or revoked by the SEC. |
| What is Part II of Form ADV? | The portion of an IA's application that may be used to satisfy the Brochure Rule |
| If an adviser has $_____ million in assets under management, it must register with the SEC. | If an adviser has $30 million in assets under management, it must register with the SEC. |
| In lieu of an IA-prepared brochure, what document may be delivered to IA clients? | The adviser's ADV Part II |
| True or False: Delivery of a disclosure document is required for all IA contracts. | False. A brochure is not required for investment company contracts or impersonal advisory services priced below $200. |
| What is a client's right if an IA does not deliver the required brochure 48 hours prior to the signing of the contract? | The client may terminate the contract without penalty within 5 business days from the signing of the contract. |
| True or False: An adviser is only required to deliver ADV Part II when entering into a wrap fee program with a client. | False. The SEC requires the delivery of a special disclosure document when opening a wrap account for a client. |
| True or False: An IA must physically deliver its brochure to clients at least annually. | False. At a minimum, the IA must (in writing) offer to deliver its brochure annually. |
| When assigning an IA contract to another IA, __________ must be obtained from the client prior to assignment | When assigning an IA contract to another IA, consent must be obtained from the client prior to assignment. |
| Is an exculpatory provision in an advisory contract permitted? | No. An exculpatory provision would serve to absolve an adviser from blame or liability and is prohibited. |
| Under the IA Act of 1940, an IA may charge performance fees for clients with at least $_________ under management. | Under the IA Act of 1940, an IA may charge performance fees for clients with at least $750,000 under management. |
| Under the IA Act of 1940, an IA may charge performance fees for clients with a net worth of at least $____________. | Under the IA Act of 1940, an IA may charge performance fees for clients with a net worth of at least $1,500,000. |
| True or False: Under the IA Act of 1940, performance fees are allowed for persons who are not residents of the U.S. | True |
| The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to more than _____ clients. | The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to more than 10 clients. |
| The IA Act of 1940 stipulates that any communication directed to more than ____ person(s) is considered advertising. | The IA Act of 1940 stipulates that any communication directed to more than 1 person is considered advertising. |
| Criminal penalties for violating the IA Act of 1940 may not exceed $_______ and/or imprisonment not exceeding ___ years. | Criminal penalties for violating the IA Act of 1940 may not exceed $10,000 and/or imprisonment not exceeding 5 years. |
| Identify the acronym: NRSRO | Nationally Recognized Statistical Ratings Organization |
| What is Form ADV? | The form filed by investment advisers for registration |
| What is Form ADV-W? | The form filed by investment advisers to withdraw registration |
| What is Form ADV-E? | Form filed by an independent public accountant after auditing the records of an IA maintaining custody of client assets |
| With whom would an IA register if it has $20 million under management and advises an investment company? | Any IA who advises an investment company must register with the SEC. |
| Where do IAs send their registration forms? | The Investment Adviser Registration Depository (IARD) |
| Define investment supervisory services. | The giving of continuous advice as to the investment of funds on the basis of the individual needs of each client. |
| What are the minimum educational requirements for those rendering investment advice? | There are no minimums; however, the SEC and Administrator may require disclosure of educational backgrounds. |
| What is updated at the annual renewal of an IA's registration? | Assets under management, the number of accounts, clients, employees, and IA representatives |
| What is Form ADV-NR? | Form required for IAs with general partners who are nonresidents of the U.S.; gives the SEC the right to receive legal papers. |
| May the Administrator revoke the registration of a federally covered adviser? | No. However, she may require the IA to notice file. |
| Is an accountant defined as an IA? | No. Accountants are excluded from the IA definition if their advice is incidental to their business. |
| Identify the acronym: LATE | Lawyers, Accountants, Teachers and Engineers—these are the professionals excluded from the IA definition. |
| If a B/D is promoting wrap accounts, does it need to register as an IA? | Yes. Selling wrap accounts is considered advisory service which requires registration. |
| Is the publisher of a newspaper required to register as an investment adviser? | No. Publishers are excluded if the newspaper has general circulation and any advice is impersonal and untailored. |
| If a firm provides advice solely based on U.S. government securities, does it need to register as an IA? | No, government securities advisers are excluded from the definition. |
| If an IA has $50 million under management and 10 individual clients in FL, is it required to register with the SEC? | No, the IA meets the de minimis exemption under SEC rules (i.e., fewer than 15 clients). |
| Define impersonal advisory services. | Services costing less than $200 per year that are not tailored to meet the investment objectives of specific clients |
| Define wrap account. | An account where a client is charged one specified fee for investment advisory services and trade execution |
| Will a client always pay lower fees in a wrap account? | No. Depending on how much the client trades, it's possible he will pay more than if the fees were paid separately. |
| Define assignment. | A client has just learned that his account will now be handled by another IAR. Is this considered an assignment? |
| An IA established as a partnership has 2 out of its 5 partners retire. Is this considered an assignment? | No, since only a minority of the partners have changed. A majority would have to retire to be considered an assignment. |
| For how long must an IA maintain records? | 5 years |
| List some of the records that must be retained by an IA. | Journals, blotters, ledgers, position records, and trade confirmations. |
| Does an IA need written consent before executing each agency cross trade with an advisory client? | No, the client must provide written consent initially, but not for every trade. |
| What is a principal trade? | A trade involving a firm (B/D or IA) buying or selling securities for its own account at its own risk. |
| May an IAR solicit both sides of an agency cross transaction? | No, one side must be unsolicited. |
| Define solicitor. | Any person who, directly or indirectly, solicits any client for, or refers any client to, an IA. |
| May a solicitor receive compensation from an IA? | Yes, if the IA is registered, a written agreement exists, and a court has not limited the solicitor’s activities. |
| May an IA use testimonials in its promotional material? | No |
| Define testimonial. | An advertisement in which an individual recommends the IA’s services based on personal experiences with the firm. |
| An newly hired investment adviser representative wants to put the initials "IAR" on her business card. Is this allowed? | No. However, she may spell out "Investment Adviser Representative." |
| An appeal of an SEC order must be filed within _____ days. | An appeal of an SEC order must be filed within 60 days. |
| True or False: Only one person must provide information to open a joint account. | False. Each owner must provide information to open a joint account. |
| True or False: All corporate officers may effect transactions for the corporation. | False, only those named in the Corporate Resolution |
| A ___________________ is required to open an account for a partnership. | A Partnership Agreement is required to open an account for a partnership. |
| Money-market securities have a maturity of __________________. | Money-market securities have a maturity of one year or less. |
| Name some of the different types of money- market instruments. | T-Bills, Bankers' Acceptances (BAs), Commercial Paper, Negotiable CDs. |
| In a qualified annuity, how is the payout taxed? | The entire payout is taxed as ordinary income. |
| Who is eligible to contribute to a qualified annuity? | Public school employees [403(b)] and certain non-profit organization employees [501(c)3] |
| $_______ or ____% of earned income is the maximum contribution to an IRA. | $5,000 or 100% of earned income is the maximum contribution to an IRA. |
| If Joe is 55 years old, how much could he contribute to his IRA? | For anyone 50 or older, an additional $1,000 is allowed, making the maximum contribution $6,000 |
| A contribution of $_______ can be made to a Spousal IRA for a non-working spouse. | A contribution of $5,000 can be made to a Spousal IRA for a non-working spouse. |
| What is the penalty for making excess contributions to an IRA? | 6% of the excess |
| True or False: Excess contributions made to an IRA will still be deductible and will grow tax-deferred. | False. Excess contributions are non-deductible and will not grow on a tax-deferred basis. |
| IRA contributions must be made in what form? | Cash |
| What are some of the acceptable investments for IRA contributions? | Stocks, bonds, mutual funds, and CDs |
| What are some of the investments that are not suitable for IRA contributions? | Collectibles, insurance, and metals (except U.S. gold and silver coins) |
| Anyone with __________ income may contribute to an IRA. | Anyone with earned income may contribute to an IRA. |
| When is an individual (single filer) eligible to make tax-deductible contributions to a Traditional IRA? | Those not covered by an employer-sponsored plan |
| Rollovers must be completed within ____ days. | Rollovers must be completed within 60 days. |
| Only one rollover is allowed per rolling ____ months. | Only one rollover is allowed per rolling 12 months. |
| There is a ____% penalty for early withdrawals from an IRA. | There is a 10% penalty for early withdrawals from an IRA. |
| True or False: To avoid a late withdrawal penalty, IRAs have a required minimum distribution (RMD) provision. | True |
| When must IRA withdrawals begin in order to avoid the late withdrawal penalty? | By April 1st of the year after an individual turns age 70 1/2 |
| How is a Roth IRA contribution different from a Traditional IRA contribution? | The Roth IRA contribution is always made on an after-tax basis. |
| How are withdrawals from a Traditional IRA treated for tax purposes? | If all contributions were deductible, then the entire withdrawal is taxed as ordinary income. |
| How are withdrawals from a Roth IRA treated for tax purposes? | Withdrawals will be tax-free if the account is open for at least 5 years and is not considered an early withdrawal. |
| Early withdrawal without penalty is allowed for what reasons? | Death, disability, qualified higher education expenses, or first-time home buyer ($10,000 limit) |
| ERISA gave the U.S. Government jurisdiction over ___________________ plans. | ERISA gave the U.S. Government jurisdiction over private pension plans. |
| According to ERISA, are there any standards that must be followed regarding how money is invested? | Yes, the plan's trustee must abide by the Uniform Prudent Investor Act. |
| Describe the employees who must be eligible to contribute to an ERISA qualified plan. | Employees who are 21 years or older with one year of full-time service |
| What is the maximum annual contribution to a 401(k)? | $16,500 for 2009 |
| What retirement plan is available to the self-employed? | Keogh Plan |
| What is the maximum annual contribution for a Keogh Plan? | 100% of pre-tax income up to $49,000 each year |
| Contributions to a Keogh plan are solely based on _________________ income. | Contributions to a Keogh plan are solely based on self-employment income. |
| May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan? | Yes, provided the Keogh contribution is solely based upon the employee's self-employment income. |
| May an individual with a Keogh Plan also fund an IRA? | Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax-deductible. |
| _____ Plans are college savings plans with high contribution limits set by the state sponsor. | 529 Plans are college savings plans with high contribution limits set by the state sponsor. |
| Describe the tax treatment of contributions made to a 529 Plan. | They are after-tax contributions that may possibly grow tax-free. |
| How much may be contributed to a 529 Plan and avoid gift tax? | $13,000 per year |
| True or False: 529 Plans allow for a 5-year front-end contribution of $65,000, which avoids gift tax. | True ($13,000 x 5 years) |
| Grandparents contributing to a grandchild's 529 Plan may give how much money and still avoid gift tax consequences? | Front-loading 5 years of contributions is allowed; therefore, each could contribute $65,000 for a total of $130,000. |
| A savings plan which funds both elementary and higher education is referred to as the ____________________________. | A savings plan which funds both elementary and higher education is referred to as the Coverdell Education Savings Plan. |
| How much may be contributed to a Coverdell each year? | An after-tax contribution of $2,000 is allowed per year. |
| Is it a 529 Plan or Education IRA that imposes income limitation on the contributors? | The Education IRA (Coverdell) |
| In a 529 Plan, what happens if the funds are withdrawn, but not used for qualified education expenses? | The earnings would be subject to ordinary income tax plus a 10% penalty. |
| If not needed for a child's education, may the funds be transferred to a relative's 529 Plan? | Yes |
| What is a Simplified Employee Pension (SEP) Plan? | A plan that allows employers to contribute 25% of employee income up to $49,000 per year |
| Define vesting. | The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits |
| True or False: SEPs require employees to become immediately vested in the full amount contributed. | True |
| If an employer makes a Keogh contribution on its own behalf, what must be done for its employees? | A contribution at the same percentage must be made for the employee. |
| If a client's goal is preservation of principal, what fund would be most appropriate? | Money-market fund |
| A limited partnership could be formed by a minimum of how many individuals? | Two (one general partner and one limited partner) |
| What are the two types of partners in a limited partnership? | General partner and limited partner |
| Describe the liability of the two partners in a limited partnership. | General partners have unlimited liability, while limited partners have limited liability. |
| The _________ partner is in charge of management and decision-making for the partnership. | The general partner is in charge of management and decision-making for the partnership. |
| What actions are considered a violation for the general partner of a limited partnership? | Admit another general partner, change the partnership, compete with the program, personally use partnership assets |
| What are some of the acceptable actions for the limited partner? | Inspecting partnership books, suing the general partner, voting on major issues affecting the partnership, competing |
| What document is filed with the state of legal domicile to create a partnership? | Certificate of Limited Partnership |
| What does the Partnership Agreement define? | The rights, liabilities, and obligations of each partner |
| To invest in a limited partnership, an investor must complete the _________________________. | To invest in a limited partnership, an investor must complete the Subscription Agreement. |
| ____________ Partners are the primary contributors of capital. | Limited Partners are the primary contributors of capital. |
| What does it mean to say "a limited partnership is a pass-through investment?" | The results of the business venture (profits and losses) flow through directly to the investor. |
| Is income generated by a limited partnership taxed once or twice? | Only once, and it is at the partner's level. The program itself is not a taxable entity. |
| List some important considerations when determining the suitability of recommendations made to customers. | Investment objectives, financial situation, risk tolerance, tax status |
| To open any account on behalf of a corporation, what document must agents and IARs examine? | Corporate Resolution |
| True or False: C Corporations are subject to double taxation. | True. The corporation pays tax on its earning and any distributions are taxed to the owners (shareholders). |
| The maximum number of shareholders in an S Corporation is _____. | The maximum number of shareholders in an S Corporation is 100. |
| How are S Corporations treated for tax purposes? | S Corporations have the same flow-through treatment of a partnership. (S corporations are not a taxable entities.) |
| What is the primary purpose of forming a family limited partnership (FLP)? | To minimize estate tax and gift tax liabilities |
| What is required to receive the tax benefits of a family limited partnership? | A legitimate business purpose is required. (If created solely for tax benefits, the IRS may disallow the benefits.) |
| In a limited partnership, which partner has unlimited personal liability and which has limited liability? | General partners (GPs) have unlimited liability, while the limited partners (LPs) have limited liability. |
| The tax treatment of a limited liability company (LLC) is similar to the treatment of what other entity? | A Subchapter S Corporation |
| What are the contents of an estate? | The total assets and liabilities of a decedent |
| What are the different terms used to identify the individual who sets up a trust? | Creator, maker, grantor, donor, trustor, settlor |
| The __________ is the person who has fiduciary control over a trust. | The trustee is the person who has fiduciary control over a trust. |
| What are the differences between a simple and a complex trust? | A simple trust must distribute earnings, but not principal. Complex trusts may retain earnings or distribute principal. |
| What are the benefits of setting up an irrevocable trust? | It will reduce estate taxes and also avoid probate. |
| What is the benefit of establishing a revocable trust? | It avoids probate |
| When investing for an estate, the most suitable investments are normally _______-term. | When investing for an estate, the most suitable investments are normally short-term. |
| Who establishes a testamentary trust? | The estate of the deceased |
| When is an inter vivos trust established? | During the donor's lifetime |
| In a trust, all actions of the trustee must be for the benefit of the ______________. | In a trust, all actions of the trustee must be for the benefit of the beneficiary. |
| To whom will the earnings produced in an irrevocable trust normally be taxed? | The trust |
| The earnings generated in a revocable trust will be taxed to the __________. | The earnings generated in a revocable trust will be taxed to the grantor. |
| In which type of trust could the grantor not also be the trustee? | A testamentary trust, since it is established by the estate of the grantor |
| IAs have greater responsibility to their clients than B/Ds. This is referred to as the IA's ___________ responsibility. | IAs have greater responsibility to their clients than B/Ds. This is referred to as the IA's fiduciary responsibility. |
| A revocable trust will eliminate __________, but will not reduce _________ tax. | A revocable trust will eliminate probate, but will not reduce estate tax. |
| An irrevocable trust will eliminate __________ and will reduce _________ tax liability. | An irrevocable trust will eliminate probate and will reduce estate tax liability. |
| A trust is required to be managed for the benefit of the _____________. | A trust is required to be managed for the benefit of the beneficiary. |
| Name the person who establishes a trust. | The grantor, settlor, or donor |
| Define an estate. | The total of all assets and liabilities of a decedent |
| Identify the acronym: AMT | Alternative Minimum Tax |
| Identify the acronym: TSA | Tax-Sheltered Annuity (a qualified contract) |
| Identify the acronym: RMD | Required Minimum Distribution (only required of Traditional IRAs) |
| Identify the acronym: IRA | Individual Retirement Account |
| What is ERISA? | Employment Retirement Income Security Act |
| Identify the acronym: ESA | Education Savings Account (Coverdell) |
| Identify the acronym: SEP | Simplified Employee Pension Plan |
| Identify the acronym: UGMA/UTMA | Uniform Gifts to Minors Act / Uniform Transfers to Minors Act (governs custodial / minor's accounts) |
| Define a sole proprietorship. | A business that is owned by one person who is responsible for all management decisions and entitled to all profits |
| For a qualified retirement plan, what document details the plan’s needs, goals, time horizon, and investment philosophy? | The investment policy statement |
| ______________ retirement plans need not meet IRS requirements for employee coverage, contribution limits, and vesting. | Nonqualified retirement plans need not meet IRS requirements for employee coverage, contribution limits, and vesting. |
| Name two examples of nonqualified retirement plans | Payroll deduction plans and deferred compensation plans |
| True or False: A beneficiary of a trust account must pay the associated taxes. | False. Taxes are paid by the trust, not by the beneficiary. |
| List some of the common financial goals. | Income, growth, preservation of capital, liquidity, tax relief, and speculation |
| If a client is reluctant to disclose information, what must an IAR do? | Take the information given and create a plan based on that information. An IAR may not make assumptions. |
| Without incurring gift taxes, individuals may give gifts of up to $________ per year to any number of persons. | Without incurring gift taxes, individuals may give gifts of up to $13,000 per year to any number of persons. |
| True or False: Spouses may give an unlimited amount to one another and not be subject to the gift tax. | True |
| Regarding clients, list some of the non-financial considerations an IAR must consider? | Age, occupation, time horizon, investment experience, and social values |
| Define the investment policy statement. | A document that describes a retirement plan’s investment strategy, as well as the specific needs of the plan |
| True or False: Employees are fully vested in their own contributions. | True |
| True or False: A defined contribution plan provides employees with a fixed monthly payment at retirement. | False. This statement describes a defined benefit plan. |
| Who is eligible for a 457 plan? | Employees of state and local governments |
| How often may an individual roll over an IRA? | Once per rolling 12 months |
| When may an individual withdraw from an IRA without penalty? | After he turns 59 1/2 |
| S-Corporations are not subject to ________________. | S-Corporations are not subject to double taxation. |
| What business structure does not provides flow-through tax treatment? | A C-Corporation |
| What is the proper order of liquidation for a corporation at bankruptcy? | Unpaid workers, IRS, secured creditors, unsecured creditors, preferred, and then common. |
| With options, what terms are synonymous with buyer? | Owner, holder, long |
| A call option gives the owner the right to _____. | A call option gives the owner the right to buy. |
| With options, what terms are synonymous with seller? | Writer, short |
| If exercised against, the writer of a call is obligated to _______________________. | If exercised against, the writer of a call is obligated to sell the stock that is called away from them. |
| A put option gives the owner the right to ______. | A put option gives the owner the right to sell. |
| If exercised against, the writer of a put is obligated to _______________________. | If exercised against, the writer of a put is obligated to buy the stock that is put to them. |
| True or False: Options are derivatives since the contract value is based on the changing value of the underlying stock. | True |
| Name three important factors for determining the premium of an equity option. | The stock's market price versus the strike price, time left until expiration, and volatility of the underlying security |
| Calls and puts are the two ________ of options. | Calls and puts are the two types of options. |
| Sandra buys 1 ABC Dec 70 Call at 4. What is Sandra's strategy? | Bullish (to find the strategy for call buyers, CALL UP) |
| An investor writes 1 DEF May 55 Call at 6. What is the investor's strategy? | Bearish |
| An investor holds 1 XYZ Jan 80 Put at 5. What is her strategy? | Bearish (to find strategy for put buyers, PUT DOWN) |
| The annuity with growth dependent on the performance of securities in a separate account is called a __________ annuity. | The annuity with growth dependent on the performance of securities in a separate account is called a variable annuity. |
| True or False: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus. | True |
| Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified? | Qualified |
| Which annuity is funded with after-tax dollars - Qualified or Non-Qualified? | Non-Qualified |
| In a Non-Qualified Annuity, how is the payout taxed? | Only the earnings portion is subject to tax as ordinary income |
| The money invested in an annuity is used to buy ________________________. | The money invested in an annuity is used to buy accumulation units (similar to mutual fund shares). |
| At annuitization (payout), accumulation units are exchanged for __________ units. | At annuitization (payout), accumulation units are exchanged for annuity units. |
| At annuitization (payout), what will determine the annuitant's payment? | A fixed number of annuity units with a fluctuating value per unit |
| _________________ is the payout option that provides payments for the annuitant's whole life and will cease at death. | Straight-Life is the payout option that provides payments for the annuitant's whole life and will cease at death. |
| What is the benefit of the Straight-Life payout option to the annuitant? | This option provides the highest monthly income. |
| What modification is made to the Straight-Life payout option to guarantee payments for a minimum number of years? | Straight-Life with Period Certain |
| What payout option requires the insurance company to provide payments for as long as one of two people remain alive? | Joint and Last Survivor |
| What does a Limited Partnership's Subscription Agreement state in regard to the purchaser? | They understand risks, meet suitability standards, have read disclosure information, and know the required investment. |
| To become a limited partner, the __________________'s signature is required on the Subscription Agreement. | To become a limited partner, the general partner's signature is required on the Subscription Agreement. |
| Over-development and high leverage are the risks associated with a __________________ Program. | Exploratory Drilling Programs are also referred to as Wildcatting. |
| What type of oil and gas program drills for new oil reserves in unproven areas? | Exploratory (wildcatting) |
| ________________ Drilling Programs drill in proven areas. | Developmental Drilling Programs drill in proven areas. |
| True or False: Income Programs purchase already producing wells, but offer few intangible drilling costs. | True |
| Passive losses can only be used as deductions against ____________________. | Passive losses can only be used as deductions against passive income. |
| True or False: Passive income is income derived from dividends and interest generated by securities in a portfolio. | False, passive income is derived from an investment in a limited partnership. |
| What happens when an investor's passive losses exceed her passive income? | She is able to carry forward the passive losses. |
| True or False: Limited partnership units are illiquid and require permission of the general partner to sell. | True |
| Identify the position: An investor buys 1 GDG Mar 50 call at 4 and buys 1 GDG Mar 50 put at 4. | A straddle, which is the purchase or sale of both a call and a put with the same stock, expiration and strike price. |
| An investor buys 1 XYZ Dec 70 call at 4 and buys 1 XYZ Dec 70 put at 4. What is the investor's strategy? | Volatility |
| An investor sells 1 ABC Jan 50 call at 2 and sells 1 ABC Jan 50 put at 3. What is the investor's strategy? | Stability |
| Investors wishing to generate income on a stock position should ______ an option. | Investors wishing to generate income on a stock position should sell an option. |
| True or False: Covered call writing is a conservative option strategy designed to generate income. | True |
| What is a covered call position? | The sale of a call (obligation to sell) against stock that is owned |
| An investor buys 100 shares of IBM at 91 and also 1 IBM Nov 90 put at 2. Is the investor bullish or bearish on IBM? | Bullish since they are long the stock. The put is purchased to protect downside risk. |
| An investor buys 100 shares of RST at 30 and sells 1 RST Oct 35 call at 2. What's the reason for selling the call? | To provide premium income on stable stock. Also note the premium provides a partial hedge against downside risk. |
| What is the breakeven point? Buy 1 XYZ Jan 120 Call at 4.20 | The breakeven point is strike price + premium = 124.20 |
| What is the breakeven point? Sell 1 RFQ Feb 85 Call at 4.50 | The breakeven point is strike price + premium = 89.50 |
| What is the breakeven point? Long 1 MNO March 55 Put at 6.20 | The breakeven point is strike price - premium = 48.80 |
| What is the breakeven point? Short 1 XYZ Apr 35 Put at 1.80 | The breakeven point is strike price - premium = 33.20 |
| What is the breakeven point? Buy 100 shares of XYZ at 64 and Write 1 XYZ July 60 Call at 8.00 | The breakeven point is cost of the stock - premium = 56.00 |
| Is a hedge fund investment considered liquid? | No |
| Who typically buys hedge funds? | Qualified (sophisticated) investors through Reg. D offerings |
| May hedge funds sell stocks short and use margin? | Yes |
| What is a fund of funds? | A mutual fund that invests in other mutual funds |
| What is the dollar limit that may be contributed annually to a non-qualified annuity? | There is no contribution limit. |
| True or False: The AIR is a guaranteed minimum rate of return. | False. The AIR is a benchmark rate that is not guaranteed. |
| If performance in a given period is greater than the AIR, the next payment will ___________. | If performance in a given period is greater than the AIR, the next payment will increase. |
| If performance in a given period is below the AIR, the next payment will ___________. | If performance in a given period is below the AIR, the next payment will decrease. |
| If performance in a given period equals the AIR, the next payment will __________________. | If performance in a given period equals the AIR, the next payment will remain constant. |
| True or False: Performance must be negative for a variable annuity's payment to fall. | False. Performance below the AIR will cause the payment to fall, even if the investment result was positive. |
| Does an equity-indexed annuity transaction require the delivery of a prospectus? | No, these contracts are not yet considered securities by the SEC |
| What technique can be used to roll assets from one annuity into another without taxation? | A 1035 Exchange |
| Variable contract assets are placed in the insurance company's ___________ account. | Variable contract assets are placed in the insurance company's separate account. |
| Prospectus delivery is required for all ___________ insurance contracts. | Prospectus delivery is required for all variable insurance contracts. |
| Who assumes the investment risk in a variable insurance contract? | The client |
| Who assumes the investment risk in a traditional insurance contract? | The insurance company |
| May loans be taken against variable life policies? | Yes, for a portion of the contract's cash value (often 85%) |
| Does a term life policy have cash value? | No. It is pure insurance. |
| Traditional contract assets are placed in the insurance company's __________ account. | Traditional contract assets are placed in the insurance company's general account. |
| Does a variable life policy have a guaranteed minimum death benefit? | Yes. The minimum will be paid regardless of account performance. |
| Can a variable life policy's death benefit grow over time? | Yes. If the account performance is positive, the benefit will increase. |
| May a firm advertise a hedge fund being offered through a Reg. D private placement to the general public? | No. This is prohibited. |
| True or False: In a straight-life annuity payout option, no beneficiary will receive payments at the annuitant's death. | True. All payments cease upon the annuitant's death. |
| Which annuity payout option provides for the greatest monthly payment? | Straight-life |
| A client has annuitized her contract under the straight-life option and soon dies. What is her death benefit? | $0. There is no death benefit post-annuitization, since the contract is based on her life only. |
| Identify the acronym: AIR | Assumed Interest Rate |
| Identify the acronym: VLI | Variable Life Insurance |
| Identify the acronym: EIA | Equity-Indexed Annuity (also known as an Equity-Indexed Contract or EIC) |
| All variable contract premiums are placed in the insurance company's ________account. | All variable contract premiums are placed in the insurance company's separate account. |
| Are life insurance death benefits taxable? | No. These benefits are federally tax-free. |
| What is a 1035 Exchange? | A tax-free exchange of one annuity for another, allowed under Section 1035 of the Tax Code |
| Define insured. | The person whose life is covered by an insurance contract |
| Describe term life insurance. | A life insurance policy that pays a death benefit to a beneficiary if the insured dies within the term specified |
| Describe whole life insurance. | A life insurance policy that has a fixed death benefit, fixed premium payments, and builds cash value over time |
| Describe universal life insurance. | A permanent life insurance policy designed so the policy owner may adjust the death benefit and premium payments |
| Describe variable life insurance. | A life policy where the death benefit varies depending upon the performance of the investment options |
| Define futures contract. | An agreement to buy or sell a specific amount of a commodity on a stipulated date in the future |
| True or False: Forward contracts are exchange traded. | False. Futures, not forwards, trade on the exchanges. |
| What are the two main uses for futures? | The two main uses are hedging and speculation |
| True or False: LEAPS and interest Rate Swaps are derivatives. | True. Both swaps and LEAPS are derivatives. |
| Reinvesting dividends in a mutual fund creates a ________ event. | Reinvesting dividends in a mutual fund creates a taxable event. |
| A Section 3(c)(1) hedge fund is exempt from _____________. | A Section 3(c)1 hedge fund is exempt from registration. |
| True or False: A Section 3(c)(1) hedge fund may contain performance based fees. | True. However, investors should understand the fee structure of a hedge fund. |
| List some of the characteristics of hedge funds. | Hedge funds are often leveraged, unregistered, and illiquid. |
| Name four asset classes. | Stocks, Bonds, Real Estate, Cash |
| Equities (stocks), fixed income (bonds), real estate, money markets (cash) are examples of _____________. | Equities (stocks), fixed income (bonds), real estate, money markets (cash) are examples of asset classes. |
| True or False: The S&P 500 is an asset class. | False. Stocks, bonds, real estate, and cash are asset classes. |
| ___________ stock fluctuates with the business cycle. | Cyclical stock fluctuates with the business cycle (auto companies). |
| _________ stock pays higher than average dividends. | Income stock pays higher than average dividends (utility companies). |
| ____________ stock is resistant to recession. | Defensive stock is resistant to recession (utility companies). |
| What instruments are used to facilitate trading of foreign securities in the U.S.? | American Depositary Receipts (ADRs) |
| What is the formula for calculating current yield? | Annual Interest ÷ Current Market Price |
| True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down. | False. There is an inverse relationship between interest rates and prices. |
| Given a yield change, ____________ bonds move more in price. | Given a yield change, long-term bonds move more in price (lower coupon or longer duration are also correct.) |
| Define real interest rate (real rate of return). | Interest rate minus the inflation rate (e.g., Bond yielding 8% when inflation is 3% has a real interest rate of 5%). |
| Which interest rates are generally more volatile? | Short-term rates |
| Describe inflation or purchasing power risk. | The risk that today’s investment will not be worth as much when the money is received in the future. |
| What are TIPS? | Treasury Inflation-Protected Securities |
| The principal value of TIPS may be adjusted based on changes to the __________________________. | The principal value of TIPS may be adjusted based on changes to the Consumer Price Index (CPI). |
| True or False: The interest rate on TIPS is fixed, but the principal may be adjusted. | True |
| Municipal bond interest is exempt from __________ tax. | Municipal bond interest is exempt from federal tax. |
| Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____________. | Stop and stop-limit orders are triggered when a round lot trades at, or through, the stop price. |
| If long stock, a sell stop order can be used to limit ___________ risk. | If long stock, a sell stop order can be used to limit downside risk. |
| If short stock, a buy stop order can be used to limit _________ risk. | If short stock, a buy stop order can be used to limit upside risk. |
| Stop orders become _________ orders once triggered/activated. | Stop orders become market orders once triggered/activated. |
| Stop-limit orders become ________ orders once triggered/activated. | Stop-limit orders become limit orders once triggered/activated. |
| If a stop order is activated, at what price will the trade be executed? | The next trade after activation. |
| Do stop orders guarantee a specific price when buying or selling? | No, stop orders execute at the market price (which is uncertain) once they are activated. |
| True or False: Stop-limit orders are guaranteed execution if the trigger is touched. | False. Stop-limit orders may not be executed if the limit price cannot be met. |
| A _______-based index measures the market as a whole. | A broad-based index measures the market as a whole. |
| A _______-based index measures the movement of a particular sector or industry. | A narrow-based index measures the movement of a particular sector or industry. |
| ___________________ is the balancing of investment classes according to an investor's investment objectives. | Asset allocation is the balancing of investment classes according to an investor's investment objectives. |
| How is interest on municipal bonds treated for tax purposes? | Federally tax-exempt, but may be subject to state and local tax |
| ______ is the measure of an asset's volatility compared to the market as a whole. | Beta is the measure of an asset's volatility compared to the market as a whole. |
| What is the beta of the market (S&P 500)? | 1 |
| If an asset outperforms the market when prices are up/underperforms when prices are down, its beta is _____ than 1.00. | If an asset outperforms the market when prices are up/underperforms when prices are down, its beta is greater than 1.00. |
| To find a stock's current yield, the formula is: ____________ ÷ ____________ | To find a stock's current yield, the formula is: Annual Dividend ÷ Current Market Price |
| What is the Capital Asset Pricing Model (CAPM)? | A model of the relationship between expected risk and expected return |
| True or False: According to CAPM, a security's return equals a risk-free return (T-Bill return) plus a risk premium. | True |
| True or False: Inflation is a persistent rise in the general level of prices. | True |
| Would inflationary periods be characterized by rising or falling interest rates? | Rising |
| The _______________________ is often considered the most important measure of inflation. | The Consumer Price Index (CPI) is often considered the most important measure of inflation. |
| The ________________ the duration, the greater the bond's price sensitivity. | The longer/greater the duration, the greater the bond's price sensitivity. |
| Define duration. | The measure, expressed in years, of a bond's price sensitivity to interest rate changes |
| What business structure provides flow-through tax treatment and has a P & L reported on the owner's personal tax return? | An S Corporation |
| __________ value is the dollar amount to be invested today to meet a specific dollar objective at a set future point. | Present value is the dollar amount to be invested today to meet a specific dollar objective at a set future point. |
| __________ value determines how much a dollar amount invested today will be worth at a set point in the future. | Future value determines how much a dollar amount invested today will be worth at a set point in the future. |
| What is used to determine how a given present value will become a needed future value. | The internal rate of return (IRR) |
| $10,000 has become $80,000 in 36 years. What is the internal rate of return? | The money doubled every 12 years. The 10 grew to 20, the 20 to 40, and the 40 to 80. Using the Rule of 72, 72 ÷ 12 = 6%. |
| Assuming a 12% rate of return, how long will it take $50,000 to double? | 6 years. Using the Rule of 72, 72 is divided by the rate of return to determine the number of years (72 ÷ 12 = 6 years). |
| Modern Portfolio Theory (MPT) focuses on differing __________ of assets rather than on _____________ securities. | Modern Portfolio Theory (MPT) focuses on differing classes of assets rather than on individual securities. |
| What are the three main concepts underlying the Modern Portfolio Theory? | Expected return, standard deviation, and correlation |
| Define expected return | The possible return of an asset multiplied by the likelihood of occurrence |
| Standard deviation is a measure of the dispersion of ____________ returns. | Standard deviation is a measure of the dispersion of expected returns. |
| What is the likelihood of an investment's return falling within 1, 2, and 3 standard deviation units? | 67% within 1 standard deviation, 95% within 2 standard deviations, and 99% within 3 standard deviations |
| What is used as the basic measure of risk for an investment? | Standard deviation |
| The greater the dispersion of historical returns of a security, the _________ its standard deviation. | The greater the dispersion of historical returns of a security, the higher its standard deviation. |
| ______________ measures the degree to which the movements of two variables are related. | Correlation measures the degree to which the movements of two variables are related |
| If two investments closely track one another, this is referred to as ___________ correlation. | If two investments closely track one another, this is referred to as positive correlation. |
| If two investments go in opposite directions from one another, this is referred to as ___________ correlation. | If two investments go in opposite directions from one another, this is referred to as negative correlation. |
| If there is no relationship between the movement of two investments, they are considered to be _______________. | If there is no relationship between the movement of two investments, they are considered to be uncorrelated. |
| True or False: Perfect negative correlation is -1.00, while a perfect positive correlation is 1.00. | True |
| True or False: Securities with a correlation coefficient of zero would be considered uncorrelated. | True |
| MPT has found that having asset classes with a slight ___________ correlation provides the best long-term performance. | MPT has found that having asset classes with a slight negative correlation provides the best long-term performance. |
| What is the efficient frontier? | The line representing portfolios (excluding risk-free alternatives) showing the lowest risk for a given level of return |
| Strategic asset allocation assumes that the markets are ____________. | Strategic asset allocation assumes that the markets are efficient. |
| True or False: Tactical asset allocation is changing a portfolio's asset mix because of market and economic factors. | True |
| True or False: With a buy and hold strategy, investors are consistently rebalancing their portfolios. | False. Buy and hold involves no rebalancing. |
| Tactical asset allocation assumes that markets are ______________. | Tactical asset allocation assumes that markets are inefficient. |
| What is another name for diversifiable risk? | Non systematic risk |
| What is another name for non diversifiable risk? | Systematic risk |
| True or False: Diversification is one method by which an investor may avoid non-systematic risk. | True |
| What type of risk does beta measure? | Non diversifiable |
| If a security's beta is more than 1, is it considered more or less volatile than the market as a whole? | The higher the beta, the greater the volatility. |
| What types of securities would generally have a high beta? | Growth stocks |
| What types of securities would generally have a low beta? | Defensive stocks |
| During a declining market, would you expect a high beta security to out perform or under perform the market as a whole? | Under perform |
| During a rising market, would you expect a low beta security to out perform or under perform the market as a whole? | Under perform |
| True or False: Alpha represents an investment's actual return in excess of its expected return. | True |
| A stock with a positive alpha would generally be considered a _________ opportunity by an analyst. | A stock with a positive alpha would generally be considered a buying opportunity by an analyst. |
| Another name for a security's risk-adjusted return is its ________. | Another name for a security's risk-adjusted return is its alpha. |
| List some forms of business risk when investing in individual equity securities. | Poor management, obsolete products, changing market conditions |
| True or False: The longer an investor's time horizon, the more concerned he is with market fluctuations. | False. The longer the time horizon, the less concerned he would be with market fluctuations. |
| Do long-term bonds have higher or lower interest-rate risk? | Higher |
| What is the risk that Congress may enact tax law changes that negatively impact the value of an investment? | Regulatory or legislative risk |
| What is the risk of having an excessive portion of a portfolio invested in one particular security or asset class? | Concentration risk |
| ____________ risk is the inability to sell an investment easily. | Liquidity risk is the inability to sell an investment easily. |
| What uses computer simulations to present random outcomes of an investment strategy? | Monte Carlo Simulation |
| What is considered an optimal portfolio? | One that has the highest expected return given the client's tolerance for risk |
| What measures risk-adjusted return? | Alpha and the Sharpe Ratio |
| Which type of risk is non diversifiable? | Market risk |
| What is the formula for determining an asset's total return? | (Total cash flow + appreciation or - depreciation) ÷ original cost |
| Is market risk considered a form of diversifiable or non-diversifiable risk? | Non-diversifiable risk |
| Is business risk considered a form of diversifiable or non-diversifiable risk? | Diversifiable risk |
| What is the risk that changes in tax law or environmental regulations could impact securities prices? | Legislative or regulatory risk |
| Identify the risk of existing bond prices declining while interest rates are rising. | Interest rate risk |
| To determine a bond's real interest rate, the bond's yield is subtracted by the rate of ___________. | To determine a bond's real interest rate, the bond's yield is subtracted by the rate of inflation. |
| True or False: A low beta security would be expected to rise more than a high beta security in a bull market. | False. An asset with a low beta would be less volatile and would, therefore, be expected rise less in a rising market. |
| An investor's net return is the gross return minus ________ paid. | An investor's net return is the gross return minus taxes paid. |
| Define holding period return. | The total return received from holding an asset or portfolio of assets |
| What is the formula for determining holding period return? | [Income + (ending value - beginning value)] ÷ beginning value |
| A security has appreciated from $10 to $15 over 3 months and has paid no dividend. What is the annualized return? | 200%, which is calculated by multiplying the holding period return (50%) times 4 quarters |
| What is the formula for determining a bond's current yield? | Annual interest ÷ current market value of the bond |
| What is the formula for determining a stock's current yield? | Annual dividend ÷ current market value of the stock |
| True or False: The longer a bond's duration, the less sensitive the bond's price will be to changes in interest rates. | False. The longer the duration, the greater a bond's price sensitivity to changes in interest rates. |
| Would investing in stocks or bonds be a better hedge against inflation? | Historically, stocks have outperformed inflation. Since bonds are fixed income instruments, they are hurt by inflation. |
| An investor buys stock that returns 2% for the year instead of a T-Bond yielding 6%. The ______________ cost is 4%. | An investor buys stock which returns 2% for the year instead of a T-Bond yielding 6%. The opportunity cost is 4%. |
| Identify the acronym: CPI | Consumer Price Index |
| What type of mean is used to calculate the expected return? | The weighted arithmetic mean |
| An investment earns 10%, 50%, and 30% in three years. How would the annualized average rate of return be calculated? | When calculating an annualized rate of return over time, the geometric mean is used. |
| Identify the acronym: CAPM | Capital Asset Pricing Model |
| Identify the acronym: MPT | Modern Portfolio Theory |
| What rule can be used to determine how long it takes for an amount of money to double at a given rate of return? | The Rule of 72 |
| Jim invested $25,000 in an annuity with a 6% return. How long will it take for the money to double? | Using the Rule of 72, divide 72 by the rate of return (72 ÷ 6 = 12 years). |
| 12 years ago, Tina invested $25,000 which has now grown to $100,000. What is the annual growth rate of her investment? | Rule of 72 says divide 72 by the years needed for money to double. In 12 years, money has doubled twice (72 ÷ 6 = 12%). |
| _________ value projects what an investment will be worth at some point in the future. | Future value projects what an investment will be worth at some point in the future. |
| __________ value is the amount of money that must be invested today to result in a certain sum at a future time. | Present value is the amount of money that must be invested today to result in a certain sum at a future time. |
| A bond's inflation-adjusted rate of return may also be referred to as the _______ interest rate. | A bond's inflation-adjusted rate of return may also be referred to as the real interest rate. |
| True or False: Tactical asset allocation is considered a passive asset allocation approach. | False. Tactical asset allocation is considered an active approach. |
| True or False: Strategic asset allocation is considered an active asset allocation approach. | False. Strategic asset allocation is considered a passive approach. |
| Do those who favor passive strategies believe markets are efficient or inefficient? | Efficient. Rather than trying to time the market, they may rebalance their portfolio periodically (e.g., quarterly). |
| Do those who favor market timing (active strategies) believe markets are efficient or inefficient? | Inefficient. They may alter their portfolio to take advantage of anticipated economic events. |
| What is an advantage to buy and hold portfolio management? | Transaction costs and tax consequences are minimized. |
| Identify the risk: Investors miss out on receiving a better return by placing their funds elsewhere. | Opportunity risk |
| True or False: When the market suffers a large, general decline, all stocks are affected. | True. Stock is subject to the risks of the stock market as a whole. |
| Identify the risk: A particular enterprise may not perform well due to poor management or increased competition. | Business risk |
| Is indexing considered an active or passive portfolio management strategy? | Passive, since the portfolio of an index fund stays the same as the composition of the benchmark index. |
| What method of investing is characterized by regularly investing a set amount of money, regardless of share prices? | Dollar Cost Averaging |
| Describe a growth investor. | One seeking stocks of companies with an above-average growth rate, high P/E ratios, and low dividend payout ratios |
| Describe a value investor. | One seeking stocks that are undervalued in relation to their earnings and have low P/E ratios |
| How is market capitalization (cap) determined? | A company's current share price multiplied by the number of shares outstanding |
| What are Large-Cap stocks? | Stocks of mature companies with a long history of dividend payments |
| What are Mid-Cap stocks? | Stocks of companies that are more volatile and growth-oriented than the Large-Cap stocks |
| What are Small-Cap stocks? | Typically stocks of new companies with more volatility, but more growth potential as well |
| What are Micro-Cap stocks? | Stocks of emerging companies that would generally be suitable only for speculative investors |
| Over the last 3 months, Jim's stock rose from $50 to $51 and he received a $.25 dividend. What is the annualized return? | The 3-month return is 2.5% ($1.25 ÷ $50). A quarterly return may be annualized by multiplying by 4 (2.5% x 4 = 10%). |
| Sue bought a 6% bond at par. One year later, her bond's value has fallen to $970. What is her annual return? | Sue received the 6% rate of interest, but her bond lost 3% of its value. (-$30 + 60) ÷ $1,000 = 3%. |
| A bond is yielding 8%, when the rate of inflation is 3%. What is the real interest rate? | 8% - 3% = 5%. Real interest rate measures the true yield once inflation is factored out. |
| Bond A yields 7.5% when inflation is 3%. Bond B yields 8% when inflation is 4%. Which has a higher real interest rate? | Bond A. Bond A's real interest rate is 4.5% (7.5% - 3%) and Bond B's real interest rate is 4% (8% - 4%). |
| Identify the formula? Po =_PN___ (1+r)n | Present value |
| Identify the formula? Pn - Po(1+r)n | Future value of money |
| "A dollar received today is worth more than a dollar received tomorrow" describes what concept? | The time value of money |
| If a bond is trading at a discount to its value based on DCF, will an investor earn more or less than a comparable bond? | A bond trading at a discount to its DCF value will earn more than comparably priced bonds. |
| If a bond is trading at a premium to its value based on DCF, will an investor earn more or less than a comparable bond? | A bond trading at a premium to its DCF value will earn less than comparably priced bonds. |
| What are two assumptions of MPT? | nvestors want to minimize risk and maximize returns |
| What is the name for the graph of optimal portfolios? | The efficient frontier |
| Which would have the least risk—large-, mid-, or small-cap companies? | Large cap stocks have the least risk. |
| Which would have the most risk—large-, mid-, or small-cap companies? | Small cap stocks would have the most risk. |
| True or False: Systematic rebalancing involves buying and selling on a periodic basis. | True |
| True or False: Systematic rebalancing assumes markets are inefficient. | False |
| What is an efficient market? | A market in which prices reflect all known information; therefore, nothing will be overvalued or undervalued. |
| Name the three forms of market efficiency. | Strong-, Semi-Strong and Weak-Form |
| True or False: In a weak-form efficient market, technical analysis will be useful. | False, in a weak-form efficient market only fundamental analysis will be useful. |
| True or False: Strong-form market efficiency advocates believe they can beat the market. | False, strong-form market efficiency states that no one can beat the market. |
| Which form of market efficiency declares only insiders can regularly beat the market? | Semi-strong |
| What type of trading strategy would be used if you believe markets are efficient? | Passive strategies, such as indexing or systematic rebalancing |
| True or False: The S&P 500 is a large-cap index. | True |
| True or False: The S&P 400 is a large-cap index. | False, the S&P 400 is a mid-cap index. |
| What type of trading strategy would be used if you believe markets are inefficient? | Active strategies, such as tactical asset allocation or sector rotation |
| Define sector rotation. | A strategy that anticipates the next turn in the business cycle and shifts assets into the sectors that will benefit. |
| What are some of the forms that publicly traded companies must file with the SEC? | Registration statements, 10-K, 10-Q, 8-K, proxy statements, and possibly Schedule 13D |
| What is the balance sheet equation? | Assets = Liabilities + Stockholder Equity |
| Define capital structure. | A company’s issuance of debt and equity securities (both common and preferred stocks) to finance operations |
| What are two measures of liquidity? | Current ratio and the quick asset ratio (acid test) both measure a company's liquidity. |
| What is the difference between the current ratio and the quick asset ratio? | The quick asset ratio is more stringent since it excludes inventory from the current assets. |
| A company with more debt than equity outstanding is considered ____________. | A company with more debt than equity outstanding is considered leveraged. |
| True or False: A bottom up approach to investing uses the economy as a main factor in determining which stocks to buy. | False, bottom up investing uses company specific items, such as earnings and dividend payments to pick stocks. |
| _______ investors look for stocks of companies that are intrinsically undervalued. | Value investors look for stocks of companies that are intrinsically undervalued. |
| What are some of the characteristics of a value stock? | Low P/E ratios, history of profitability, high dividend payout, and low market-to-book ratio |
| What is the formula for the P/E ratio? | Price ÷ EPS (Earnings Per Share) |
| _______ investors are concerned with a company's future earnings potential. | Growth investors are concerned with a company's future earnings potential. |
| The __________ style of investing is one that bets against market trends. | The contrarian style of investing is one that bets against market trends. |
| What is a dollar-weighted return? | A dollar-weighted return is a geometric mean (average) used to measure how a portfolio performed over time. |
| What is a time-weighted return? | A time-weighted return is a geometric mean (average) that eliminates the effect of varying cash inflows (dividends). |
| What is a major disadvantage when using an arithmetic mean to measure investment performance? | Arithmetic means (averages) can misrepresent compounding effects on an investment's return. |
| True or False: Systematic risk may be avoided through diversification. | False. Systematic (non-diversifiable) risk may not be avoided through diversification. |
| Market, interest rate, and inflation risk are all types of ___________ risk. | Market, interest rate, and inflation risk are all types of systematic risk. |
| Business, regulatory, political, and liquidity risk are all types of ____________ risk. | Business, regulatory, political, and liquidity risk are all types of unsystematic risk. |
| What is the risk that certain circumstances or factors may have a negative impact on the profitability of a company? | Business risk |
| What risk is based on the possibility that new laws or regulations may have a negative impact on an investment’s value? | Regulatory risk |
| What is the risk of foreign investors losing money due to changes with a country’s government or regulatory environment? | Political risk |
| What is the risk that investors may be unable to dispose of a securities position quickly and at a fair price? | Liquidity risk |
| True or False: Investors who are planning to hold bonds until maturity have no risk. | False. Opportunity risk (the risk of missing out on a superior investment) would be a risk this type of investor faces. |
| Define reinvestment risk. | The risk that an investor will not be able to reinvest their principal at the same interest rate. |
| True or False: A country with high interest rates will generally have a stronger currency. | True |
| Define currency risk. | The risk that foreign investments will be worth less in the future due to changes in exchange rates. |
| What would happen to the U.S. trade deficit if the dollar is weakening? | A trade deficit would be shrinking as U.S. goods would be cheaper for foreign consumers. |
| To what risk would structured debt products (e.g., CMOs) be subject? | Complexity risk is high in structured debt investments, such as CMOs. |
| What is the formula for the Sharpe Ratio? | (Return on Investment - Risk-Free Return) ÷ Standard Deviation |
| What is the Sharpe Ratio used to determine? | The Sharpe Ratio is used to determine if returns are from wise investments or the result of excess risk. |
| Buy limit orders are placed ________ the market. | Buy limit orders are placed below the market. |
| Sell limit orders are placed ________ the market. | Sell limit orders are placed above the market. |
| List some items that may be found on an income statement? | Revenues, expenses, net income, or net loss |
| How is a company’s market capitalization calculated? | (Number of common shares outstanding) x (Market price of shares) |
| What return will an investment have if its net present value is greater than zero? | The investment will generate a positive return. |
| What return will an investment have if its net present value is less than zero? | The investment will generate a negative return. |
| What return will an investment have if its net present value is equal to zero? | The investment will not generate a return. |
| What is required to make the dollar weighted return and the time weighted return equal? | Remove or subtract deposits into and withdrawals out of the portfolio |
| True or False: Dollar weighted return (DWR) takes into account the deposits into or withdrawals out of the portfolio. | True. DWR includes the weighted value of cash flows into and out of the portfolio when calculating return. |
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chad1475