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Financial Regulations and Securities Quiz
57 Questions
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Financial Regulations and Securities Quiz

Created by
@DetachableHydra

Questions and Answers

If you change your fees as an IA, you have to give your updated brochure to current clients.

False

Industrial stocks are:

  • Non-cyclical
  • Volatile
  • Stable
  • Cyclical (correct)

    • A registered representative who wants to sell securities outside of her normal course of employment must first notify her firm:

  • Either orally or in writing
  • Orally
  • In writing (correct)
  • Not necessary

    • _ and _ are valued each day, at the close of market, based on their net asset value.

    <p>Open-end management companies (mutual funds), unit investment trusts (UITs)</p> Signup and view all the answers

    Dividends are taxed as _ at the investor's tax rate.

    <p>ordinary income</p> Signup and view all the answers

    What is the difference between fraud and unethical practices?

    <p>Fraud always includes some sort of false statement, misrepresentation, or deceitful conduct, while unethical behavior is not necessarily illegal.</p> Signup and view all the answers

    Form _ is required for any investor that acquires more than _% of the common stock of a reporting company.

    <p>13D, 5%</p> Signup and view all the answers

    Schedule 13D must be filed within _ days of acquiring the stock.

    <p>10</p> Signup and view all the answers

    With whom must Schedule 13D be filed?

    <p>SEC, issuer, appropriate exchange</p> Signup and view all the answers

    What is the next step if a state regulated IA falls below the minimum financial requirements?

    <p>Provide a notice to the state administrator the next day and file a statement of financial condition on the day after providing the notice.</p> Signup and view all the answers

    What are the three options for a spouse inheriting her deceased husband's IRA?

    <p>Transfer the IRA to her own name, treat it as an inherited IRA, or use the 5 year rule for distributions if the husband was under 70.5 years old.</p> Signup and view all the answers

    Shares of an REIT are allowed in an IRA.

    <p>True</p> Signup and view all the answers

    Value stocks tend to have high ______ and low ______, ______, and ______.

    <p>EPS, P/E ratios, price to book value, dividend yield</p> Signup and view all the answers

    A person employed by an issuer is required to register under the USA when making a sale of a _ security to a _ investor.

    <p>non exempt, retail</p> Signup and view all the answers

    What is alpha in investment terminology?

    <p>Actual return - expected return.</p> Signup and view all the answers

    What is the rule of 72 used for?

    <p>To estimate the time it takes for an investment to double.</p> Signup and view all the answers

    Future value of mo______ey formula is: P______ = P0(1+r)^_

    <p>n</p> Signup and view all the answers

    Funds of hedge funds are liquid and can be redeemed at the end of the trading day.

    <p>False</p> Signup and view all the answers

    Employees of issuers are considered agents.

    <p>False</p> Signup and view all the answers

    Who are the affiliates of an IA?

    <p>Officers, partners, directors; nonclerical employees; any person owning 5% or more of the outstanding securities.</p> Signup and view all the answers

    What does modern portfolio theory focus on?

    <p>Diversifying across various asset classes without significantly increasing risk.</p> Signup and view all the answers

    A cash withdrawal from a life insurance policy is done via _

    <p>FIFO</p> Signup and view all the answers

    According to IA act of '40, when must an access person submit their personal security holdings?

    <p>10 days after becoming an access person and then at least every 12 months after.</p> Signup and view all the answers

    The IA act of '40 requires an access person to submit a transaction report no later than _ days after the end of each _.

    <p>30, calendar quarter</p> Signup and view all the answers

    What must be included in the access person's report regarding his security holdings?

    <p>The type of securities, the date the report is submitted, the name of BD that maintains the account.</p> Signup and view all the answers

    What does the administrator require an IA to file with its initial ADV?

    <p>Firm's current financial condition.</p> Signup and view all the answers

    What action must a FCA take if they transact business with six or more retail clients in any state?

    <p>Give notice or notice file.</p> Signup and view all the answers

    Investing in different countries is considered sector rotation.

    <p>True</p> Signup and view all the answers

    The Investment Company Act of '40 regulates minimum rates of return.

    <p>False</p> Signup and view all the answers

    Under the USA, _ is not required to be on a customer confirmation, but _ is.

    <p>the time is not, the date is.</p> Signup and view all the answers

    What statements must a website advertisement include according to NASAA?

    <p>Agent will only conduct business in the state if registered or exempt; follow-ups will be handled only by agents who are registered or exempt.</p> Signup and view all the answers

    What must be disclosed if performance-based fees are allowed?

    <p>This arrangement may cause the advisor to recommend strategies that encourage a client to take greater than normal risk.</p> Signup and view all the answers

    Registration of an agent is only valid as long as they are associated with the BD.

    <p>True</p> Signup and view all the answers

    A third-party solicitor must register as an IAR under the act of '40.

    <p>False</p> Signup and view all the answers

    What must an investment adviser do to act as a broker for both parties to a transaction?

    <p>Disclose the capacity in which it is acting prior to the completion of the transaction and obtain the client's written consent.</p> Signup and view all the answers

    What does market risk refer to?

    <p>The degree to which investment returns deviate from what was expected.</p> Signup and view all the answers

    Who is considered an accredited investor?

    <p>Someone with an annual income of 200k or a net worth of 1mm; a senior officer of the issuer.</p> Signup and view all the answers

    Under the USA, who is an institutional investor?

    <p>Whoever the administrator deems.</p> Signup and view all the answers

    A BD can use testimonials as long as they disclose if a fee was paid for them.

    <p>True</p> Signup and view all the answers

    What is capital needs analysis used for?

    <p>Determining the amount of insurance a client needs to purchase today to fund future financial goals.</p> Signup and view all the answers

    A structured product usually consists of a debt instrument and a derivative.

    <p>True</p> Signup and view all the answers

    What is required for a BD to post a surety bond?

    <p>If the BD has custody or discretionary authority.</p> Signup and view all the answers

    What must an adviser include regarding investment tools developed?

    <p>Adequate disclosure regarding the tool's limitations and its applicability for all clients.</p> Signup and view all the answers

    What is systematic rebalancing?

    <p>The process of buying and selling securities within a portfolio to restore its original asset allocation.</p> Signup and view all the answers

    When developing a plan for a client, what is more important - current interest rates or approximate inflation rate?

    <p>Approximate inflation rate.</p> Signup and view all the answers

    Sales literature for exempt securities is subject to filing requirements of the USA.

    <p>False</p> Signup and view all the answers

    What is a liquidity ratio that measures both short term and long term debt?

    <p>Debt coverage ratio.</p> Signup and view all the answers

    What is disclosed on a bond confirmation?

    <p>Coupon rate, YTM.</p> Signup and view all the answers

    Under the Investment Company Act of 1940, shareholders are entitled to current information about the composition of the fund's portfolio.

    <p>False</p> Signup and view all the answers

    REITs must generate at least _% of their income from investing in real property and distribute at least _% of their income to shareholders.

    <p>75%, 90%</p> Signup and view all the answers

    What is the only part of a futures contract that is not standardized?

    <p>The price, which is negotiated between buyer and seller.</p> Signup and view all the answers

    Forward contracts can be offset.

    <p>False</p> Signup and view all the answers

    What is a good way to hedge against systematic risks?

    <p>Options.</p> Signup and view all the answers

    What is a 'certificate of interest' considered?

    <p>A security regulated by the administrator.</p> Signup and view all the answers

    What is one important thing that must be included on an order ticket for an IA?

    <p>The IA who recommended the transaction.</p> Signup and view all the answers

    The administrator may only cite reasons in state law to disqualify a person from registration.

    <p>True</p> Signup and view all the answers

    What happens if the administrator revokes a firm's registration?

    <p>The firm may request a hearing within 15 days and apply for judicial review within 60 days.</p> Signup and view all the answers

    Study Notes

    Regulatory Compliance and Actions

    • A state-regulated Investment Adviser (IA) must notify the state administrator the day after falling below minimum financial requirements, followed by a financial condition statement submission the next day.
    • Employees of an issuer must register under the Uniform Securities Act (USA) when selling a non-exempt security to a retail investor.

    Inheritance Options for IRAs

    • A spouse can transfer her deceased husband's IRA to her own, treat it as an inherited IRA, or utilize the 5-year rule for distributions if the husband was under 70.5 years of age.

    Securities and Investments

    • Shares of Real Estate Investment Trusts (REITs) are permitted in Individual Retirement Accounts (IRAs), but oil futures are not allowed.
    • Value stocks typically exhibit high earnings per share (EPS), low price-to-earnings (P/E) ratios, low price-to-book values, and high dividend yields.

    Financial Concepts

    • Alpha represents the difference between actual return and expected return.
    • The Rule of 72 assists in estimating the time required for an investment to double, while the future value of money is calculated using the formula ( P_n = P_0(1+r)^n ).

    Fund Liquidity and Fees

    • Funds of hedge funds are illiquid and cannot be redeemed at day's end. Closed-end funds do not offer redeemable shares, while open-ended funds allow fractional share purchases.
    • Performance-based fees for advisers must disclose potential risks, emphasizing that they might induce clients into taking excessive risks.

    Reporting and Record Keeping

    • An Adviser must file a personal securities holdings report within ten days of becoming an access person and update it at least every 12 months. Transaction reports need to be filed within 30 days after each calendar quarter.
    • The IA Act of 1940 mandates that investment advisers maintain records of clients sent advertisements if the number is ten or fewer.

    Investment Advisers and Clients

    • Investment advisers must disclose their relationship if executing transactions through an affiliated broker-dealer using Form ADV II.
    • If an investment adviser changes their fees, an updated brochure is not required for current clients, but new clients must receive it.

    Risk and Performance Measurement

    • Market risk denotes daily fluctuations in security prices, while a systematic rebalancing strategy restores original asset allocation over time.
    • The Capital Asset Pricing Model (CAPM) defines risk through return deviation, utilizing beta and alpha in its calculations.

    Client and Investor Status

    • Accredited investors are defined as individuals with an annual income exceeding $200,000 or a net worth of at least $1 million, including senior officers of the issuer.
    • Institutional investor classification is at the discretion of state administrators.

    Investment Derivatives

    • Structured products consist of a debt instrument paired with a derivative, while options can hedge against systematic risks.
    • Non-qualified annuity payments adhere to a mixed taxation pattern when disbursed.

    Federal Regulations and Compliance

    • Not all federally exempt securities are exempt under USA regulations.
    • Disclosures during sales involving a broker-dealer's stock must include the nature of the relationship prior to transactions.

    Investment Company Act

    • Under the Investment Company Act of 1940, shareholders do not have rights to current portfolio information.

    Tender Offers and Securities

    • A tender offer is considered a proposal to buy, not an offer of securities, and does not require the same regulatory scrutiny.

    Other Key Facts

    • REITs are mandated to generate at least 75% of income from real property investments and must distribute 90% of income to shareholders annually.
    • A credit spread indicates the yield difference between various bonds compared to Treasury securities of similar maturity.

    Miscellaneous

    • The statute of limitations for criminal acts under the USA is five years.
    • The process of buying and selling securities to maintain original asset allocation is known as systematic rebalancing, which can significantly affect investment performance.

    Changes to Regulations

    • Following a change in employment, registration validity is only maintained while associated with a broker-dealer. If moving to another firm, the original employer must file Form U5.
    • An investment adviser wishing to broker transactions for both parties must disclose their capacity and obtain written consent from clients involved.

    General Investment Strategies

    • Dollar-cost averaging results in average costs per share being lower than the average price when stock prices fluctuate, enhancing investment returns.
    • Dividends are taxed as ordinary income at the investor's tax rate, typically not exceeding 20%.

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    Description

    Test your knowledge on regulatory compliance regarding investment advisers, inheritance options for IRAs, and key concepts in securities and investments. This quiz covers essential financial principles that every investor should understand.

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