66-Final 6

To deny or revoke a securities registration, the Administrator may issue a: A. stop orderB. cease and desist order C. court order D. subpoena

The best answer is A.Administrators are permitted to enter "stop" orders denying or revoking registration.

A customer who is retired wants to select an investment that is liquid, marketable, and that provides regular income. The BEST choice would be to recommend: A. Treasury BillsB. Treasury Notes C. Preferred Stock D. Certificates of Deposit

The best answer is B. Certificates of Deposit are non-negotiable - they are non-marketable, so this does not meet the client's needs. Preferred stock is marketable, but not as marketable as Treasury securities, making Treasury securities the better choice. So we are left with either a T-Bill or a T-Note. Treasury notes pay interest semi-annually; while Treasury Bills do not provide a regular income stream, so a T-Note is the better choice. (One could argue that buying T-Bills at a discount and letting them mature at par and then rolling over the original investment amount into a new T-Bill purchase will also provide an income stream, but this requires continuous reinvestment on the part of the customer. Buying a T-Note is a completely passive investment in terms of the customer's needs.)

In order to recommend a security to a customer, the MOST important consideration is: A. investment experienceB. investment objective and risk tolerance C. investment time horizon D. investment tax benefit

The best answer is B.The most important consideration when recommending a security to a customer is that customer's investment objective and risk tolerance.

The "hurdle rate" is the same thing as the: A. expected rate of returnB. required rate of return C. risk free rate of return D. real rate of return

The best answer is B.When making an investment decision, the "hurdle rate" is the minimum rate for that investment to "clear the hurdle" - meaning that it is a "go." It is the same thing as the required rate of return - the return required by an investor in order to commit funds to that investment.

A Federal covered investment adviser registered under the Investment Advisers Act of 1940 wants to include an exculpatory clause in the advisory contract. Which statement is TRUE about this? A. The clause is permitted because this is a Federal covered adviser B. The clause is permitted because it is beneficial to the clientC. The clause is prohibited and unenforceable under Federal and State law D. The clause is prohibited because it denies the adviser the right to pursue claims against the client

The best answer is C.An "exculpatory" clause seeks to limit the adviser's liability for gross negligence or for acting in bad faith, and is not enforceable in a court of law. The adviser will always be liable for gross negligence, acting in bad faith or for violating any State or Federal law. Writing in a contract that the adviser is not liable for these is meaningless.

Which of the following is (are) included in the computation of stockholders' equity? I CashII Treasury StockIII Retained EarningsIV Additional Paid-In Capital A. I only B. II and IIIC. II, III, IV D. I, II, III, IV

The best answer is C.Common stockholders' equity consists of: Common at par + Capital in Excess of Par + Retained Earnings, reduced by any buy backs of that company's stock for its Treasury. Cash is not part of the computation.

The person who sets up a trust as a legal business entity is the: A. Trustee B. Grantor C. BeneficiaryD. Trust Attorney

The best answer is D.To open a Trust Account, there must be a trust agreement prepared by a trust attorney. The trust attorney will also apply for a tax identification number for the trust, since these are legally taxable entities. The trust agreement will name the grantor (the person donating the assets into the trust); the beneficiary (the person who get the income from the trust's assets); and the trustee (the fiduciary who must oversee the operations of the trust). Often, the trust attorney acts as the trustee, but this is not a requirement.

An investment adviser representative has been reviewing the likelihood that an equity investment will produce the desired return. He has determined that the mean return on the investment is 20%, with a 15% standard deviation, and a 95% probability of occurrence. This means that he would expect the range of returns to be approximately: A. 5.00% - 35.00% B. 17.00% - 21.10% C. 4.75% - 33.25% D. 16.15% - 20.05%

The best answer is A. A 15% standard deviation means that the investment return can vary plus or minus 15% from the mean (average) return over the course of a year. With a 20% average (mean) return, it might fall as low as 5% (20% - 15% deviation); or it might rise as high as 35% (20% + 15% deviation). The probability of the return falling in this range is 95%. This has nothing to do with the actual calculation of the range of returns. The "probability" of investment returns looks at historical investment return data to see how much investment returns have varied over the years. Historical investment returns follow a "normal distribution," which when plotted on a graph looks like a bell shaped curve. The mean return is the center of the "bell." Returns over time tend to center around the "mean" - the farther away one gets from the mean (either up or down), the less the likelihood of that return occurring. A 1 Standard Deviation move ( + or - ) encompasses 68% of the data history (the bulk of the bell curve); A move of 2 Standard Deviations ( + or - ) encompasses 95% of the data history; Historically, investment returns have not varied by more than 2 standard deviation moves in a given year. For equities as measured by the Standard and Poor's 500 Index, this has been a maximum variance of: +/-15% that is equal to a 1 standard deviation move with a probability of occurrence of 68%. +/-30% that is equal to a 2 standard deviation move with a probability of occurrence of 95%. Based on this historical pattern, when stock prices dropped by 45% in 2008, the probability of this occurring was only 5%. Just because something has a very low probability does not mean that it cannot occur. By the way, the previous drop of a similar percentage occurred in 1973 to 1974 - so this is actually a pretty rare event!

Contingent bond portfolio immunization: A. is an investment approach where an active fund manager will switch to a defensive strategy if the portfolio falls below a predetermined pointB. matches the maturity of each expected liability to an investment that will provide cash flows to match C. uses put options to hedge against potential market interest rate increases that will devalue the value of positions held in the portfolio D. periodically liquidates positions that have increased in value and uses to proceeds to invest in positions that have decreased in value

The best answer is A. Do not confuse bond portfolio immunization with "contingent" bond portfolio immunization. Portfolio immunization protects a bond portfolio against interest rate risk. It is the strategy of managing a portfolio to make it worth a specific amount at a stated date in the future. This strategy is typically used to fund a known future liability, and often uses a top-credit rated zero coupon bond that matures at the obligation due date as the funding vehicle. Contingent bond portfolio immunization is an "active management" strategy where the manager attempts to select bonds that will outperform a benchmark index; but if the portfolio drops below a predetermined value, the manager shifts to a defensive strategy, buying top-credit rated bonds with a lower rate of return, but this assures, at least, a minimum return rate.

Time Weighted Return will be the same as Dollar Weighted Return for an individual customer that has a mutual fund holding if: A. actual cash deposits into the mutual fund and actual withdrawals out of the mutual fund are ignored B. cash deposits into the mutual fund are ignored C. cash withdrawals out of the mutual fund are ignored D. the customer takes all distributions from the fund as a checks and does not reinvest them

The best answer is A. Dollar weighted average return is most often used when evaluating a specific investor's mutual fund return. It is the return achieved, accounting for the timing of all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor's deposits and withdrawals. Because investors often "chase" past performance, they will buy a fund "too late" (after the fund has posted its best performance and now enters a period of lesser performance) and will sell "too soon." Thus, for the individual investor, dollar weighted average return is often lower than time weighted average return. In contrast, time weighted average return is the measure used for mutual fund performance charts (Total Return, which shows dividends and capital gains as continually reinvested). It reflects the growth that would be achieved from a 1-time investment into the fund and then holding that investment over time - this is a buy and hold strategy. This method is consistent when comparing one fund's performance to another fund's performance. Time Weighted Average Return and Dollar Weighted Average Return are the same as long as the customer makes a 1-time investment and then automatically reinvests fund distributions, removing the effect on return of additional cash payments into the fund; or cash redemptions out of the fund.

A security that is priced at equilibrium would tend to: I be stable in priceII be volatile in priceIII have lower transaction costsIV have higher transaction costs A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. When a stock has found its equilibrium price in the market, this means that there is active trading occurring and that the number of buyers and sellers is balanced. In such a market, the spread is minimized, and this is a cost of trading (aside from commission costs). Note that when markets are rapidly rising, which happens when buyers outnumber sellers, market makers are continually revising their quotes, and their spreads tend to be wider as they are doing this. The same is true when markets are rapidly falling. So transaction costs in "fast moving" markets tend to be higher (because spreads are wider); while transaction costs in stable markets tend to be lower.

An investment adviser representative who is both located and registered in New York State has clients in Florida. The State Administrator of Florida, located in Tallahassee, has subpoenaed the representative to testify in Tallahassee. The representative tells her manager about this and the manager tells her to ignore it, because she is located in New York and only New York can issue a subpoena. Which statement is TRUE? A. The agent must comply with the subpoena and show up in Tallahassee on the date so ordered B. The manager is correct and the agent may disregard the subpoena C. The agent can petition the Administrator of the State of New York to void the subpoena D. The agent must resign her registration with the State of Florida in order to disregard the subpoena

The best answer is A.A State Administrator has jurisdiction over transactions that occur in his State. Even though this representative is located in New York, because the firm has clients in Florida, the Florida State Administrator has jurisdiction over transactions that take place in Florida. The representative must comply with the subpoena to testify, otherwise he or she will be found in contempt of court.

Index ETFs are: I passively managedII actively managedIII negotiableIV redeemable A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.Almost all ETFs are based on a benchmark index. They mirror the composition of the index, so they are "passively" managed and have low management fees. An actively managed fund is one where the investment adviser chooses which securities to buy and sell. Active management comes with higher management fees. There are only a very few actively managed ETFs - almost all are passively managed. They trade like any other stock and are not redeemable.

Under the Uniform Securities Act, if an offer of not-for-profit "church" bonds is to be made in a State: I the Administrator can require that a Notice Filing be made in the StateII the Administrator can require that the issue be Registered by Coordination in the StateIII the Administrator can require the filing of any promotional materials used in connection with the offer and sale of the issueIV the Administrator can disallow the exemption without providing any reason for such a denial A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.Bonds issued by not for profit organizations are an exempt security under Uniform State Law. For example, so-called "church" bonds, used to pay for the construction of new churches or church additions, are an exempt security. Please note, however, that there have been many frauds associated with these offerings, where "good people of faith" have been fleeced. Because of this, the Uniform Securities Act provides that, in order to offer a note, bond or debt of a religious, benevolent, fraternal or social organization, the Administrator:can require the issuer to file a Notice specifying the material terms of the offer in the State and file copies of proposed advertising and sales literature used in connection with the offeringcan provide that the exemption becomes effective only if the Administrator does not disallow it within a stated time period (typically 10 business days)can disallow the exemption, providing the grounds for denial or suspensioncan require the issuer to register in the State (used if the Administrator believes that the bond issue is really a "commercial offering" and not a true "charitable" offering) Note that because not for profit issues are exempt securities under Federal law, there would be no Federal registration filing that could be "coordinated" with a State registration. question # 1-2-35-2Uniform Securities Act: Securities Registration: Exempt Securities: Not For Profit Issue ExemptionCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

Which of the following statements concerning taxation of 401(k) plans are TRUE? I Distributions are fully taxable in the year they are receivedII Investment earnings are taxable to employees annuallyIII Employee salary deferrals avoid income tax in the year contributedIV Employer contributions are taxable to employees in the year contributed A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.Employee contributions to a 401(k) reduce taxable income, so these are made with pre-tax dollars. Thus, they avoid taxation in the year contributed. Earnings in the account build tax-deferred, so these dollars have not been taxed. Any matching employer contributions are not taxable to the employee when contributed; they are tax deductible to the employer, so these are also pre-tax dollars. When distributions commence, none of the money has ever been taxed, so now each payment received is 100% taxable at ordinary income tax rates. question # 5-2-22-3Financial Profile / Ret. and Educ. Savings Plans: Retirement Plans: 401(k) Plans: Contribution TaxationCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

Which of the following guarantees do insurance companies typically give with BOTH fixed and variable annuities? I Mortality guaranteeII Expense guaranteeIII Investment return guaranteeIV Benefit amount guarantee A. I & II only B. I & IV only C. II & III onlyD. III & IV only

The best answer is A.Insurers give mortality and expense guarantees for both fixed and variable annuities. Only issuers of a fixed annuity guarantee the investment return and the benefit payment amounts. The investment return and benefit payment amounts from a variable annuity contract are not guaranteed by the issuer - the actual amount to be paid depends on the performance of the underlying securities held in the separate account. Thus, the purchaser of a variable annuity contract assumes the investment risk.

Which of the following are prohibited practices under NASAA guidelines? I An investment adviser lending money to a customerII An investment adviser lending money to a customer that is a relativeIII An investment adviser lending money to a customer through a bank affiliateIV A broker-dealer lending money to a customer where securities are collateral under Regulation T A. I and II B. III and IV C. II, III, IV D. I, II, III, IV

The best answer is A.Loans to a customer by an investment adviser or broker-dealer is a prohibited practice, unless the provisions of Regulation T are met. Since nothing is said about Regulation T, it must be assumed that Choice I is prohibited. In addition, NASAA takes the stance that lending to customers that are relatives is also prohibited. Loans made by an affiliate that is a bank are OK, since the affiliate must comply with the banking laws. Similarly, lending a customer money where securities are collateral in compliance with Regulation T is fine as well.

A NASDAQ stock is quoted at $34 Bid / $35 Ask. A trader that places a buy order will most likely be filled at: A. $35 B. $34 1/2 C. $34 D. $33 1/2

The best answer is A.Market makers maintain a bid / ask quote in a security. Bid / Ask quotes are always from the standpoint of the dealer. The dealer is willing to sell at his "asking" price; and is willing to buy at his "bidding" price. The difference between the bid and ask is the spread - that is the market makers gross compensation for making a market in the security.Customers who wish to buy do so at the dealer's ask; customers who wish to sell do so at the dealer's bid. This customer who wishes to buy will do so at the dealer's ask price of $35- the price at which the dealer will sell the stock to the customer.

Money purchase retirement plans have: A. mandatory employer contributions B. optional employer contributions C. mandatory employee contributions D. optional employee contributions

The best answer is A.Money purchase retirement plans are a type of defined contribution plan that require the employer to contribute a fixed percentage of each employee's salary to the plan each year - regardless of whether the employer is profitable or not. For example, the plan can require that 3% of each employee's salary be contributed by the employer to the plan. This mandatory contribution is tax deductible to the employer.

An investment adviser charges a fee equal to the greater of 1% of assets annually or $1,000. When examining the investment adviser, the Administrator would review this policy in relation to: A. accounts with balances under $20,000 B. accounts with balances over $20,000,000 C. accounts that give the adviser discretion D. new accounts as compared to existing accounts

The best answer is A.NASAA rules prohibit investment advisers from charging "unreasonable fees," without actually stating what those are. A 1% fee is pretty reasonable - there are advisers that charge 2% or even 3% annual fees. The flat $1,000 fee also seems pretty reasonable, however a $1,000 annual fee charged on an account with $20,000 of assets amounts to a 5% annual fee - which is high. The question ignores the fact that most advisers with such a fee structure will not accept an account unless it has a minimum asset size - typically $50,000 or so of assets.

Which of the following is NOT an accredited investor under Regulation D of the Securities Act of 1933? A. Registered Investment AdviserB. Registered Investment Company C. State Regulated Insurance Company D. State Regulated Banking Institution

The best answer is A.Regulation D of the Securities Act of 1933 covers private placements, which may be sold to an unlimited number of accredited (that is, wealthy) investors and to only 35 non-accredited investors. Institutional investors are accredited as long as they have $5,000,000 of assets to invest. Included under this definition would be banks, insurance companies and investment companies. Investment advisers, many of whom are very small firms, do not fit this definition.

An investment adviser directs its trades to a broker-dealer paying non-discounted rates. In return, the broker-dealer provides the adviser with proprietary investment analysis software that it has developed. This is a(n): A. soft dollar arrangement B. give-up clearing arrangement C. unethical practice D. silent interest

The best answer is A.The SEC and State Administrators permit so called "soft dollar" arrangements. An adviser may direct its portfolio trades to a brokerage firm that charges a higher commission (as opposed to the lowest-cost broker) in return for the adviser getting something of value from the broker-dealer, such as research reports, asset allocation software, stock screening software, etc. The "idea" is that the value of the broker-dealer "give-back" is much higher than the "extra commission" amount paid to the broker-dealer by the adviser and will enhance the adviser's investment returns, which will benefit the adviser's clients.

A young housewife is the beneficiary of a trust, as are her 2 children, who have also been appointed as trustees. What MUST the investment adviser do when managing the assets of the trust? I The investment adviser should review the trust document thoroughlyII The investment adviser should select the portfolio investments balancing the objectives and needs of the wife and the 2 childrenIII The investment adviser is limited to selecting portfolio investments that are on the State's legal listIV The investment adviser is allowed to split the advisory fees with the plan trustees A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is A.The trustee must act in the best interests of the trust's beneficiaries. What is "unusual" about this question is that the children are the trustees, and the implication is that they are minors, since their mother is a "young housewife." A strange but true fact - a minor can be a trustee, but a court must appoint an interim trustee until the minor reaches adult age. Also note that this fact has no bearing on the answer to the question! The investment adviser managing the trust assets should review the trust document thoroughly, specifically looking at the trust's investment objectives, permitted investments and any investment prohibitions. The assets should be managed to meet the needs of all of the beneficiaries. The assets selected are not limited to the State's legal list (typically investment grade bonds) - this is an obsolete concept. The Uniform Prudent Investor Act allows the plan trustee to consider overall portfolio composition when determining whether an investment is prudent, with the goal of diversification. Finally, the plan trustee is a fiduciary and cannot accept "kickbacks" from the investment adviser in the form of part of the advisory fees paid.

An investment adviser can call itself an "investment counsel" if the: A. adviser's principal business is rendering investment supervisory services B. adviser is a broker-dealer registered in the state C. adviser's principal business is the custody of customer's monies only D. adviser's principal business is the custody of customer's monies and securities

The best answer is A.Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the giving of advice is the primary business of the firm. Having custody of the customer's monies or securities does not mean the firm is also advising about securities.

A speculator that initiates a short futures position in Swiss Francs: I believes that the Swiss Franc will declineII believes that the Swiss Franc will increaseIII will need to buy Swiss Franc futures to close his position if he wants to avoid making delivery in the futureIV can only satisfy the terms of the contract by making delivery of Swiss Francs on the delivery date A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.When one goes short a futures contact, this is a "bet" that the price of the reference asset will decline. Futures contracts can be offset at anytime by trading, so the contract can be closed with an offsetting purchase. If the contract is not closed with an offsetting purchase, then the seller is required to deliver Swiss Francs on the delivery date.

Which of the following individuals is EXCLUDED from the definition of an "agent" under the Uniform Securities Act? I An individual who represents an issuer in the sale of 1 year commercial paperII An individual who represents an issuer in the sale of Canadian Government DebtIII An individual who represents an issuer in a transaction with an underwriterIV An individual who represents a "secondary" government broker-dealer in the sale of U.S. Government bonds A. I and II onlyB. II and III only C. III and IV only D. I, II, III, IV

The best answer is B. An individual who represents an issuer in the sale of an exempt security is excluded from the definition of an agent under the Act. Any government security, whether U.S. or foreign, is exempt. For example, an employee of GNMA who markets GNMA securities to investors, is excluded from the definition of an agent, because these are very safe securities and State Administrators are not worried about these being sold to State residents. If an individual represents a broker-dealer in selling exempt securities to the public, that individual is NOT excluded from registration. Thus, Choice IV is not excluded from registration. Commercial paper is an exempt security only if its maturity does not exceed 270 days. Thus, Choice I is not excluded, because the agent of the issuer is offering commercial paper with a 1 year maturity. Because of this, in the real world, commercial paper sold by corporations always has a maximum maturity of 9 months - then the company never has to worry about registering its employees that sell the commercial paper in each State. The Act excludes from licensing as an "agent," those individuals representing issuers who do not deal with the public - these are exempt transactions. Thus, individuals representing issuers who deal solely with underwriters or financial institutions are not defined as "agents" who must be registered. The idea here is that the purchaser is sophisticated and the State protection of agent registration is not required. question # 1-1-12-2Uniform Securities Act: Registration / Licensing: Definition of Terms: Agent: ExclusionsCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

Which of the following comparisons between 529 plans and Coverdell ESAs is TRUE? A. Section 529 plan distributions can be used to pay for qualified educational expenses, but Coverdell ESA distributions can only be used to pay for higher education expensesB. Section 529 plan contributions can be made by high-income taxpayers, but Coverdell ESA contributions phase-out for higher income taxpayers C. Section 529 plans allow rollovers of unused account balances to other family members, but Coverdell ESAs do not permit rollovers D. Section 529 plans allow deductions for contributions made, but Coverdell ESAs do not

The best answer is B. Funds that are in a 529 plan can be used without limit to pay for higher education expenses. Additionally, starting in 2018, up to $10,000 per year can be used to pay for lower levels of education. Funds in a Coverdell ESA can be used without limit to pay for any "qualifying" educational expense, and these include elementary school, middle school, and high school related expenses, in addition to higher education (college) expenses. There are no income phase-out rules for 529 plans, while high-earning individuals are prohibited from contributing to a Coverdell ESA. Both 529 plans and Coverdell ESAs allow for rollovers of unused balances to other family members to pay for education expenses. Contributions to both 529 plans and Coverdell ESAs are not deductible. question # 5-3-16-4Financial Profile / Ret. and Educ. Savings Plans: Education Savings Plans: Section 529 Plans: Comparison to Coverdell ESAsCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

Which of the following MUST act in a fiduciary capacity? I CEO of a company who decides company's matching contribution level in its 401(k) planII A securities agent who recommends an investment to a clientIII An investment adviser who prepares financial plans on a "fee only" basisIV A lawyer who is appointed as executor over the estate of a person that is deceased A. I and II onlyB. III and IV onlyC. II and III only D. I, II, III, IV

The best answer is B. Investment advisers have a fiduciary obligation to their customers. They must always act in the customer's best interests and must always take the same side of a trade as the customer. It is for this reason that if an investment adviser recommends a security to a customer, it cannot be the seller of the security to the customer. In contrast, an agent of a broker-dealer is only obligated to recommend a security that is "suitable" and can take the other side of the trade. Executors of estates and trustees are, by definition, fiduciaries. The CEO deciding the matching contribution level for the company's 401(k) plan is making a business decision and is a plan settlor. He or she is not acting as a fiduciary to the plan. Plan fiduciaries are persons who control, or have discretionary authority, over plan assets.

When offering a new issue to an elderly customer, the agent prepares a large-type summary to make it easier for the customer to understand the details of the offering. Which statement is TRUE? A. This action is appropriate because it is in the best interests of the customerB. This action is a violation of the Uniform Securities Act C. This action is only permitted if the changes to the prospectus are approved by the SEC D. This action is only permitted if the prospectus is filed with the Administrator

The best answer is B.A prospectus cannot be altered, highlighted, or summarized. It is a legally prepared document that cannot be changed before it is delivered to the purchaser of a new issue security. Note that the SEC does not approve new issue offerings, nor does it approve the documents filed in connection with the sale of those offerings, making Choice C incorrect.

Which statements are TRUE about an investment adviser with an office in State A? I If the investment adviser's only clients are investment companies, the investment adviser must register with the SECII If the investment adviser's only clients are investment companies, the investment adviser must register in the StateIII If the investment adviser's only clients are insurance companies, the investment adviser must register with the SECIV If the investment adviser's only clients are insurance companies, the investment adviser must register in the State A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.Advisers to investment companies are "federal covered" - they must register with the SEC and cannot be required to register in the State (but the State can require a notice filing). The main intent of the Investment Advisers Act of 1940 was to register advisers to investment companies and limit their compensation. Thus, they fall under federal regulation and cannot be regulated by the States. Advisers to insurance companies are not "federal covered" advisers - the Investment Advisers Act of 1940 was not worried about insurance companies being overcharged for investment advice, since they are normally "frugal" and are unlikely to overpay. So, advisers to insurance companies are only required to register at the State level. question # 1-1-42-9

The advantage of buying a foreign index fund as compared to direct investing in foreign stocks is that it: A. minimizes the risk of changing currency valuesB. is easier than individually investing in foreign stocks C. reduces tax liability when dividends are distributedD. minimizes the business risk of the investments

The best answer is B.Buying a foreign stock index fund is much simpler than trying to buy foreign stocks directly. The holder is still subject to the risk that the companies invested in do poorly - this is business risk. The holder of a foreign stock index fund is still subject to exchange rate risk (the risk that the value of the foreign currency in which the stocks are denominated falls versus the U.S. dollar, so that when the currency value is converted into U.S. dollars, it buys fewer U.S. dollars). Finally, all dividend distributions from mutual funds are taxable (with the exception of distributions from municipal bond funds).

In the same year, a customer has $14,000 of long-term capital losses on stock positions and $4,000 of short-term capital gains on options positions. Which statement is TRUE? A. The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, all of which is deductibleB. The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, $3,000 of which is deductible C. The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with all $14,000 of capital losses being deductible and all $4,000 of capital gains being taxableD. The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with only $3,000 of capital losses being deductible and all $4,000 of capital gains being taxable

The best answer is B.Capital gains and capital losses on all assets are "netted" against each other. There is no segregation by type of asset. This customer had $14,000 of long term capital losses on stocks and $4,000 of short term capital gains on options. The customer has a net $10,000 long-term capital loss, of which only $3,000 is deductible in 1 year. The remaining $7,000 of unused net capital losses is carried forward to the next year.

Under the Investment Advisers Act of 1940, if an investment adviser has an impaired financial condition, this must be disclosed to customers: A. by all investment advisersB. only by investment advisers that take custody of customer funds; or those that accept prepaid advisory fees of $1,200 or more C. only if the investment adviser files for bankruptcy D. only if the investment adviser is also a broker-dealer

The best answer is B.Disclosure of an impaired financial condition to customers by an investment adviser is only required where the investment adviser already has his "hands in the customer's pocket," and thus, could use the customer's monies to help the firm through its financial difficulties! Thus, this disclosure is required only if the adviser takes custody of client funds or securities; or if the adviser accepts prepaid advisory fees of $1,200 or more, 6 or more months in advance of rendering services.

To exercise discretion in a customer account, the agent must first obtain: A. a verbal power of attorney from the customerB. a written power of attorney from the customer C. either a verbal or written power of attorney from the customer D. permission of the employing broker-dealer

The best answer is B.If an agent chooses more than price and time of execution for a customer, the trade is considered to be "discretionary." Prior to opening a discretionary account, a written power of attorney must be obtained from the customer.

Which of the following is prohibited in a margin account? A. Buying stocks without making full paymentB. Selling short securities that cannot be borrowed by settlement C. Buying and selling the same security on the same day D. Depositing fully paid securities as collateral to buy other marginable securities

The best answer is B.In a margin account, one does not pay in full; rather a percentage of the purchase price is deposited (the margin requirement); with the balance of the purchase amount lent to the customer by the broker-dealer. One can sell short securities in a margin account (that is the sale of borrowed shares). However, in order to do so, it must be determined that the securities to be sold short can be borrowed and delivered by settlement. If the securities cannot be borrowed and delivered by settlement, then a short sale would not be permitted. One can buy and then sell the same security on the same day in a margin account - this is called "day trading" and is permitted. Finally, one can deposit fully paid securities to a margin account, pledging them to the broker-dealer as collateral for a loan used to buy other securities.

In an over-the-counter agency trade, the member firm executing the order: I is a brokerII is a dealerIII charges a mark-upIV charges a commission A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.In an over-the-counter agency transaction, the firm acts as a broker, matching a customer who wishes to buy with a seller (and vice-versa). For this service, the member firm earns a commission. In contrast, in an over-the-counter principal transaction, the member firm sells a security out of its inventory to a customer who wishes to buy; or buys a security into its inventory from a customer who wishes to sell. In this transaction, the firm acts as a dealer, and marks-up the stock to the customer who wishes to buy; or marks-down the stock from the customer that wishes to sell.

An investment adviser representative has a customer that has been telling all of his friends that "My adviser has been great - for each of the last 3 years, my portfolio grew by 20%." Which statement is TRUE? A. The customer has committed an unethical practice under NASAA rules because giving testimonials is prohibitedB. The investment adviser representative can ask the customer for the names of those friends and solicit their business C. The investment adviser representative can use the customer statement in an advertisement to solicit new business D. The investment adviser representative cannot make use of this statement because of the restrictions imposed by the "tipper-tippee" doctrine

The best answer is B.NASAA rules apply to broker-dealers, investment advisers and their agents. They do not apply to customers, making Choice A incorrect. The agent can ask the customer for the names of his or her friends and can solicit them - there is no prohibition on this. Testimonials are prohibited in investment adviser advertising, making Choice C incorrect. Choice D only applies to "inside" information - not to testimonials. question # 1-3-131-7Uniform Securities Act: Business Practices: Other Rules: Unethical Practices - IAsCo

Passive income includes income received from: I Real estate investmentsII Real estate limited partnership investmentsIII Real estate investment trust investmentsIV Collateralized mortgage obligation investments A. II onlyB. I and II only C. I, II, III D. I, II, III, IV

The best answer is B.Passive income is defined as income from direct investments in real estate and limited partnerships. Income from real estate investment trusts (REITs) is defined as portfolio income, as is income from collateralized mortgage obligations.

Regulatory risk for a municipal bond would be characterized by: A. the Federal Reserve pursuing an "easy money" policy of lowering interest ratesB. Congress pursuing an economic stimulus policy of lowering tax rates C. export quotas being placed on U.S. goods by foreign countries that are trading partners with the United States D. the European Economic Union pursuing a policy of increasing the value of the Euro versus the value of the U.S. Dollar

The best answer is B.Regulatory risk (also called legislative risk) is usually the risk of a tax law change. For municipals, if tax rates are lowered, the relative attractiveness of buying a "tax-free" municipal bond is diminished, reducing the market value of outstanding municipal bonds compared to the value of taxable bonds.

A married man opens an individual account at a brokerage firm. The customer places his first trade. The confirmation is received by the customer's wife, who calls the broker and informs him that her husband doesn't have the money to pay for the transaction by settlement date and that the stock should be sold immediately. The agent should: A. liquidate the account immediatelyB. attempt to contact the customer but otherwise do nothing C. accept the order from the wifeD. refer the customer account to the firm's collection department

The best answer is B.Since the customer opened an individual account, and there is no mention of the husband giving the wife trading authorization, the wife has no say in what happens in the account. The representative should contact the customer to find out what is going on!

All of the following statements are true about the Securities Act of 1933 EXCEPT that it requires: A. the registration of non-exempt new issue offerings with the SECB. the registration of non-exempt new issue offerings in each State where the security will be sold C. that investors receive full and fair disclosure when purchasing a new issue of securities D. that new issues cannot be sold to customers in any manner that is fraudulent

The best answer is B.The Securities Act of 1933 prevents fraud in the sale of new issue securities to the public. It requires that any non-exempt new issue security must be registered with the SEC and sold to investors who are given full and fair disclosure through a prospectus. The Securities Act of 1933 is Federal law and does not cover State securities registration requirements. Those are covered by the Uniform Securities Act as adopted in each State.

All of the following real estate investments would be defined as a "security" under the Uniform Securities Act EXCEPT: A. a condominium time share unit that will be rented for 50 weeks per year by an outside manager and will be used personally for 2 weeks per yearB. a condominium apartment that will be used as a vacation home by the purchaser for 2 weeks per year and will be held open for rental by the purchaser for the remaining 50 weeks per year C. shares of a real estate investment trust that buys rental apartment complexes to generate income using third party management D. promissory notes issued by a borrower secured by real estate investments

The best answer is B.The most basic definition of a security is "an enterprise entered into for profit managed by a third party." Under this definition, condominium time shares that are being managed by a third party are defined as a security in many States. On the other hand, the purchase of a condominium that will be held out for rent (a business purpose), but that will be managed by the purchaser (not by a third party), is simply a real estate investment - it is not a "security." Shares of stock (in this case, in an REIT) are a security; as are bonds and notes.

A solicitor for a Registered Investment Adviser is compensated by earning a percentage of the advisory fee. Which statement is TRUE? A. The solicitor is required to be registered with the SEC as either an investment adviser or an investment adviser representative to receive such a paymentB. The solicitor is required to be registered in the State as either an investment adviser or an investment adviser representative to receive such a payment C. The solicitor must be registered with both the SEC and the State as either an investment adviser or an investment adviser representative to receive such a payment D. The solicitor is neither required to be registered with the SEC nor the State as an investment adviser or investment adviser representative to receive such a payment

The best answer is B.There is no SEC registration requirement for adviser representatives; only for "Federal Covered" advisers. At the State level, the State requires registration of advisers that are not "Federal Covered" and also requires registration of investment adviser representatives - whether they are associated with either Federal Covered advisers or State-registered advisers.

A 7% coupon bond is being offered on an 8% basis. If interest rates for similar bonds fall below 8%, the basis for this bond will: A. increaseB. decrease C. be unaffected D. be volatile

The best answer is B.This is pretty simple. A basis quote is a yield to maturity quote. If market yields are rising, the basis quote will rise, forcing the bond's price down. If market yields are falling, the basis quote will fall, forcing the bond's price up.

stomer bought 100 shares of DEF stock at $23 per share. The stock has appreciated to $41 per share, and the customer would like to protect the gain at minimal cost. Which of the following options positions would "collar" the position at the lowest cost? A. Buy 1 DEF Jan 40 Call and Sell 1 DEF Jan 45 PutB. Buy 1 DEF Jan 40 Put and Sell 1 DEF Jan 45 Call C. Sell 1 DEF Jan 40 Call and Buy 1 DEF Jan 45 Put D. Sell 1 DEF Jan 40 Put and Buy 1 DEF Jan 45 Call

The best answer is B.To protect the stock position from a downside move, a put must be purchased. To keep the cost of the put low, the put should be "out of the money." Since the stock is currently worth $41, the purchase of a 40 put, which is 1 point "out of the money," would be the cheapest. To further reduce the cost of protection, the customer would sell an "out of the money" call to collect a premium that could be used to offset the cost of the put premium. Since the stock is at $41, the sale of a 45 call would give the customer 4 points of additional upside gain if the market should rise. If the market rises above this, the call will be exercised, and the customer would deliver the stock at $45 per share. In exchange for giving up any further upside gain above $45 per share, the customer collects the premium income from the sale of the call (and this offsets the cost of buying the put). Thus, the customer has "collared" the stock position, either selling the stock at $40 by exercising the long put if the stock price should fall below $40; or by selling the stock at $45 if the market should rise above this, since the short call will be exercised.

Under the Uniform Securities Act of 1956, as amended, an issuer is defined as any person: A. engaged in the sale of new issue offerings to the publicB. who issues or proposes to issue a security. C. engaged in the sale of non-exempt securities offerings to the public D. engaged in the sale of secondary offerings to the public

The best answer is B.Under the Uniform Securities Act of 1956, as amended, an issuer is defined as any person who issues or proposes to issue a security. This is just a pure regurgitation of the definition.

A father is writing his will (the testator) and is naming as beneficiaries his 2 adult sons - Son A and Son B. Each one will get an equal share "per stirpes" of the father's estate upon the father's death. Each of the sons has children (the grandchildren of the testator) who are not yet adults. Son A has 2 children - A1 and A2. Son B has 1 child - B1. Son B predeceases the testator. This means that: A. Son A gets 100% of the assets of the estate upon the death of the testatorB. the grandchild B1 gets 50% of the assets of the estate upon the death of the testatorC. the grandchildren A1, A2, and B1, each get 33% of the assets of the estate upon the grandfather's death D. no assets will be distributed upon the death of the testator until the grandchildren become adults

The best answer is B.When a will is created, the estate can be distributed either "per capita" or "per stirpes." These 2 ways deal with the issue of a named beneficiary dying before the testator."Per stirpes" is Latin for "by the branch." What this means is that each family branch gets an equal share of the estate. So if the father has 2 sons, Son A and Son B, each gets 1/2 of the father's estate upon the father's death. If Son B dies before the father, the 1/2 share now goes to the children of Son B- since there is only 1 child - B1 - he or she gets the 50% share.

Investor likes and dislikes that must be taken into account when making a recommendation to a customer is an example of: A. financial considerationsB. non-financial considerations C. investment horizon D. investment style

The best answer is B.When making a recommendation, taking into account investor likes and dislikes is an example of "non-financial" considerations. For example, a customer may refuse to invest in a gambling stock or a tobacco stock due to ethical concerns.

Which investment offers the BEST protection against inflation risk? A. Common stocksB. Tangible assets C. Long-Term Corporate Bonds D. Treasury Bonds

The best answer is B.When there is a lot of inflation, market interest rates rise, causing long-term bond prices to drop steeply. This is purchasing power risk and high credit quality (e.g., Treasury bonds) does not protect a bond issue from this. When inflation rates and interest rates rise, corporate earnings suffer greatly, causing common stock prices to fall. When there is steep inflation, the best investments are money market instruments and tangible assets (e.g., precious metals, real estate). Money market instruments do not suffer inflation risk and because interest rates are high when there is inflation, they give a nice rate of return. However, this is not offered as a choice! Tangible assets tend to hold their value (or increase in value) when there is inflation, usually because investors are afraid to put their money into stocks or bonds!!!

A broker-dealer is offering an IPO to the public that is "hot." The broker-dealer withholds 15% of the shares to set aside for its future use. This action is: A. permitted because broker-dealers have discretion over IPO allocationsB. prohibited because the broker-dealer is "free riding and withholding" C. permitted because the broker-dealer takes financial liability when performing an underwriting D. prohibited because the broker-dealer is not allowed to own stock in companies that go public

The best answer is B.Whether a new stock issue is "hot" is actually irrelevant to the question. Broker-dealers and their employees are prohibited from buying IPO shares at the offering price in the underwriting. They can, however, purchase the shares in the secondary market. A broker-dealer buying IPO shares for its own or for employee accounts is "withholding the issue from sale to the public" with the intention of taking a "free ride" on the likely upward price movement once the issue opens for trading in the market. This is a violation called "free riding and withholding."

Which of the following persons would be defined as an "agent" under the Uniform Securities Act? A. April Showers, an administrative assistant in the Treasurer's Department at Rainwear Industries, who sells Rainwear common stock to Rainwear employees under Rainwear's ESOP B. John Q. Public, a municipal employee that accepts tender offers from the public for new issues of general obligation bonds being sold by New York CityC. Marvin Mercenary, the President of Capital Industries, who sells Capital Industries common stock to the public D. Ima Pigg, the Controller of PorkPie Products, who negotiates and sells a private placement of PorkPie stock to institutional investors

The best answer is C. An "agent" is an individual who represents a broker-dealer or issuer in effecting securities transactions. Under this definition, the President of Capital Industries offering common stock to the public is defined as an agent. The Act specifically EXCLUDES from the definition of an agent, any individual who represents issuers in trading specified exempt securities. Thus, the employee of New York City offering its bonds is excluded from the definition. Also, the Act excludes from the definition of an "agent," any individual who represents an issuer offering securities issued in connection with Savings, Pension, Profit Sharing Plans, and Employee Stock Option Plans (ESOPs). The Act also EXCLUDES from the definition of an "agent," those individuals who represent issuers in "exempt transactions." These individuals do not have to be registered in the State. Generally, exempt transactions are trades that do not involve the public. Transactions with financial or institutional investors, as defined under the Act (including banks, financial institutions, trusts, insurance companies, investment companies, underwriters, and pension plans) are exempt because the investors are sophisticated, and are not deemed to require legislative protection.

The anti-fraud provisions of the Uniform Securities Act would apply to the sale in the State of: I fixed annuitiesII variable annuitiesIII whole life insuranceIV variable life insurance A. I and II only B. III and IV onlyC. II and IV onlyD. I, II, III, IV

The best answer is C. Anti-fraud questions are simple - the anti-fraud rules apply to everyone and everything! However, the Uniform Securities Act only applies to fraud involved in the sale of securities. It does not apply to fraud involved in the sale of a pure insurance product - then that State's insurance laws apply. Both a fixed annuity and a whole life insurance policy are insurance products and are not securities. In contrast, any variable product, either a variable annuity or variable life insurance, is defined as a security, since the underlying separate account funding the contract is invested in mutual funds. question # 1-4-48-2Uniform Securities Act: Administrative Procedures: Overview of the Act's Liability and Penalty Provisions: Anti-Fraud Rule - AdvancedCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

A company that has a market capitalization of between $6 billion and $7 billion is considered to be: A. Small Cap B. Mid CapC. Large Cap D. Nano Cap

The best answer is C. Regarding market capitalization of stocks, the definitions used by Standard and Poor's are: Micro-Cap: Any company whose outstanding market capitalization is less than $300,000,000Small-Cap: Any company whose outstanding market capitalization is between $300,000,000 and $1,000,000,000Mid-Cap: Any company whose outstanding market capitalization is between $1,000,000,000 and $5,000,000,000Large-Cap: Any company whose outstanding market capitalization is over $5,000,000,000

Under the Investment Advisers Act of 1940, which of the following are defined as "investment advisers"? I A firm that prepares research reports about the NYSE marketII A firm that solely prepares research reports about the municipal securities marketIII A firm that prepares asset allocation reports covering securities, real estate, commodity and insurance investmentsIV A firm that prepares reports on the outlook for the U.S. economy A. I and IV only B. II and III onlyC. I, II, III D. I, II, III, IV

The best answer is C.A firm that prepares research reports about the NYSE market or municipal securities is included within the definition of an investment adviser; as is a firm that prepares asset allocation models for investors. A firm that prepares reports about the outlook for the U.S. economy is not giving advice about securities, and thus is not an investment adviser.

Under the Investment Company Act of 1940, violations are punishable for up to how many years in jail? A. 1 year B. 3 yearsC. 5 years D. 10 years

The best answer is C.All of the Federal securities laws stipulate that violations are punishable by up to 5 years in jail and a $10,000 fine. This differs from Uniform State law, which imposes a maximum $5,000 fine and 3 years in jail for violations.

Which statement is TRUE regarding mutual funds? A. That day's opening price is the basis for fund purchase price and redemption computations B. The next day's opening price is the basis for fund purchase price and redemption computationsC. That day's closing price is the basis for fund purchase price and redemption computations D. The next day's closing price is the basis for fund purchase price and redemption computations

The best answer is C.An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value adjusted by any sales charges or redemption fees. If the fund is no load, there's no sales charge.

A customer, age 60, has a fixed annuity contract with a value of $16,000. The cost basis in the contract is $10,000. If the customer withdraws $5,000 and the IRS taxes distributions on a LIFO basis, the tax consequence of a withdrawal will be: A. $0 taxable/$0 penalty B. $0 taxable/$500 penaltyC. $5,000 taxable/$0 penalty D. $5,000 taxable/$500 penalty

The best answer is C.Annuity contract contributions are not tax deductible, so the original contribution of $10,000 represents dollars that were already taxed. Any earnings in the account build tax-deferred. So the $6,000 excess value above the cost basis of $10,000 represents the untaxed build-up. IRS rules require that annuity distributions be taxed on a LIFO (Last In First Out) basis - with the build-up portion being the "Last In;" therefore these are the first dollars to be distributed. Thus, all $5,000 will be taxable. In addition, since this individual is over age 59½, there is no penalty tax on the distribution.

Brothers Joe and John have a joint account with tenants in common. Which of the following statements are TRUE regarding the activities in the account? I Checks drawn on the account may be made out to Joe only or John onlyII Checks drawn on the account must be made out to both Joe and John jointlyIII Orders may be entered into the account by Joe only or John onlyIV Orders must be entered into the account by Joe and John jointly A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.Any checks that are drawn on a joint account must be made out to the full name of the account - in this case checks are made out to both Joe and John. Orders in joint accounts can be entered by any single party - so Joe can enter an order or John can enter the order - they don't have to do this together.

Under NASAA's rules on Unethical Business Practices for Registered Investment Advisers and Investment Adviser Representatives, which of the following client information is permitted to be disclosed to a third party without first obtaining client consent? I Account information directed to be disclosed by the client's CPA in a written letter signed by the CPAII Aggregated and averaged account information that the adviser wants to use in an advertisementIII Account information directed to be disclosed by the investment adviser by the State AdministratorIV Account information directed to be disclosed by the investment adviser by the client's spouse A. I and III only B. II and IV onlyC. II and III only D. I, II, III, IV

The best answer is C.Customer privacy rules only cover information that can be linked to a specific client. Aggregated or averaged information is not private and can be disclosed at anytime, to anyone. Otherwise, customer account information can only be disclosed if the customer permits (not if the customer's spouse says so!); or if the request is made by a regulator (such as the State Administrator) or a court of law.

Any final order of an Administrator may be appealed to the: A. Securities and Exchange Commission B. State Securities CommissionC. State Superior Court D. Federal District Court

The best answer is C.Final orders of the State Administrator can be appealed to that State's court system.

An elderly client is visiting an Investment Adviser Representative (IAR) in the IA's office. He tells the IAR that he is going to have major surgery and is concerned about the safety of his stock certificates that he keeps at home in a small fireproof box. The Investment Adviser Representative wishes to help the client out. Which of the following should the IAR NOT do? A. Drive the client to his house to retrieve the stock certificates and then take him to the bank used by the Investment Adviser where the client rents a safe deposit box in the client's name and deposits the securities B. Ask the client for the name of his attorney and then call him to ask for his opinion of what should be done in this situationC. Drive the client to his house to retrieve the stock certificates and then take him to the Investment Adviser's bank and place the certificates in the Investment Adviser's safety deposit box, making sure to write down all of the certificate numbers and other pertinent information D. Drive the client to his house to retrieve the stock certificates and then take him to his bank where the client rents an existing safe deposit box and deposit the securities

The best answer is C.If the investment adviser were to put the certificates in its own safe deposit box, it would be taking custody, and all securities kept in custody must be kept by a qualified custodian - not by the IA. Taking the client to his bank, where he deposits the securities to his existing safe deposit box is OK. (Choice D). The client can rent his own safe deposit box at any bank - even the one used by the IA - so Choice A is OK. Calling the client's attorney for advice (Choice B) is fine as well.

The risk of tax law changes that may negatively affect securities held in a portfolio is called: A. business risk B. credit riskC. legislative risk D. market risk

The best answer is C.Legislative (regulatory) risk is the risk of law changes; primarily the risk of tax law changes. Since the interest income from municipal bonds is exempt from Federal income tax, the main risk associated with these securities is that the Federal government may attempt to tax their interest income (this has already happened with certain types of municipal bonds). Also note that these securities are subject to market risk and credit risk; but this is not the "primary" concern with these investments.

Which of the following statements are TRUE? I Password-protected websites are defined as AdvertisingII Password-protected websites are defined as Sales LiteratureIII Password protected websites can be required to be filed with the AdministratorIV Password protected websites cannot be required to be filed with the Administrator A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.Password protected websites are seen by a specific audience, so they are defined as sales literature. In contrast, a non-password-protected website is defined as advertising, because it is seen by the general public. The Administrator has the power to require filing of advertising and sales literature.

A new customer wants to open a discretionary account by initially depositing $20,000 in cash. He signs the authorization form and indicates to an agent that his investment objective is long-term growth. He wishes that the agent immediately invest his money to take advantage of market timing. Which statement is TRUE? A. As long as the customer is an American Citizen born in the United States and this is verified, the agent may invest the money in a manner consistent with the customer's objective B. Once the new account form is approved by the State Administrator, the agent can start investing as long as the investment is consistent with the customer's objectiveC. The agent should contact her branch manager as cash deposits or withdrawals exceeding $10,000 must be reported to the Department of Treasury D. The agent should contact her State Administrator as amounts exceeding $10,000 must be reported to the Secretary of the State

The best answer is C.The Department of Treasury requires that any deposits of cash made by a customer; or withdrawals of cash made by a customer; in the amount of more than $10,000, must be reported to FinCEN (Financial Crimes Enforcement Network).

The "Brochure Rule" applies to: A. oral advisory contracts only B. written advisory contracts onlyC. both of the above D. none of the above

The best answer is C.The SEC states that the "Brochure Rule" it applies to both oral and written advisory contracts. Note that this does conflict with the Investment Adviser Act of 1940's requirement that advisory contracts be in writing; but this is a later rule, written by someone who wanted the broadest interpretation possible.

The SEC would revoke the registration of a federal covered adviser for all of the following reasons EXCEPT the adviser: A. has been convicted of violating the Securities Exchange Act of 1934 five years ago B. has been convicted of a misdemeanor involving securities nine years agoC. is the subject of an adverse ruling in State Supreme Court in a civil lawsuit with a client D. has been enjoined in a court of law of another state from being in the commodities business

The best answer is C.The SEC will deny or revoke the registration of an investment adviser if the adviser has been convicted in a court of law of violating Federal securities law. If the adviser is convicted of a misdemeanor or felony involving money or securities (e.g., theft, misappropriation of funds, etc.) in the last 10 years, then the SEC will deny or revoke registration. If the adviser has been suspended or expelled by any self-regulatory body over the securities or commodities markets (e.g., FINRA, the CBOT, etc.), then registration will be revoked. If the adviser loses a lawsuit with a customer, this is not a reason for revocation of the adviser's SEC registration.

Under the Investment Advisers Act of 1940, which statement is TRUE regarding an investment adviser's registration renewal? A. The investment adviser's registration is renewed quarterly by filing an electronic amendment to Form ADV Part 1 B. The investment adviser's registration is renewed annually by filing an electronic amendment to Form ADV Part 1C. The investment adviser's registration is renewed annually by filing an electronic amendment to Form ADV Part 1 and Part 2, if there are any changes to the Brochure D. There is no need to renew an investment adviser's registration, as long as there are no formal (written) customer complaints against the adviser

The best answer is C.The investment adviser's registration is renewed annually; and is accomplished by filing an electronic amendment to Form ADV Part 1 and also Part 2 (the Brochure) if there are any changes, within 90 days of the adviser's fiscal year end. To withdraw from registration, Form ADV-W is filed.

Arrange the following in proper sequence when opening a new account for a customer: I Completing the new account formII Executing the first transactionIII The manager signing the new account formIV Completing the order ticket for first order A. I, II, III, IV B. IV, I, II, IIIC. I, IV, III, II D. I, IV, II, III

The best answer is C.The procedure to open a new account is to complete the new account form, qualifying the customer and then completing the first order ticket. The manager receives both of these and must approve the opening of the account prior to the first trade. It is prohibited for the agent to execute the trade before the manager approves the account's opening.

Which annuity payout option usually results in the largest periodic payment? A. Unit Refund Annuity B. Joint and Last Survivor AnnuityC. Life AnnuityD. Life Annuity-Period Certain

The best answer is C.The shorter the expected annuity period, the larger the payment. A life annuity lasts only for that person's life - this is the shortest expected period of those given. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.

At which Standard and Poor's rating is a bond first considered to be speculative ("junk bond")? A. AA B. BBBC. BB D. C

The best answer is C.The top 4 ratings are "investment grade" - AAA, AA, A, and BBB. Bonds below these ratings are speculative. The best (i.e. first) speculative rating is, therefore, BB.

When making a sales presentation to a new client, an IAR makes a sale of advisory services to the customer, having the customer sign a sales contract. The IAR gives the customer a glossy brochure, but does not have the customer sign it. The brochure states that the client has 2 business days to back out of the contract. Under NASAA rules, why is this considered to be unethical? A. Because the customer did not sign the brochure B. Because the customer should have been given the brochure 48 hours prior to having the customer sign the sales contractC. Because the customer must be given 5 business days to back out of the contract D. Because the customer has a 30 day right of rescission under the Uniform Securities Act

The best answer is C.Under NASAA rules, when advisory services are sold to a new client, the client must be delivered Form ADV Parts 2A and 2B - the "Brochure" and "Brochure Supplement." The rule states that the customer must get these either 48 hours prior to entering into the advisory contract; or alternatively, the customer can sign the contract and be given the Brochure and Supplement, but then has 5 business days to terminate without penalty.

"Intrastate offerings" are exempt transactions under the Securities Act of 1933 under the provisions of: A. Regulation A B. Rule 144C. Rule 147 D. Regulation D

The best answer is C.Under Rule 147 - Intrastate Offerings - if all of the activity takes place within 1 state (intrastate), only State law applies. To be exempt from Federal registration: 100% of the issue must be offered and sold to residents of that state; the issuer must have its principal place of business in that state; and for a 6-month period after purchasing the issue, resale is only permitted to residents of that state.

Violations of the Investment Advisers Act of 1940 are punishable by which of the following? A. Fines of up to $10,000 only B. Fines of up to $15,000 onlyC. Fines of up to $10,000; and up to 5 years in jail D. Fines of up to $15,000; and up to 5 years in jail

The best answer is C.Violations of the Investment Advisers Act of 1940 are punishable by fines of up to $10,000; and up to 5 years in jail. (Note that this differs from Uniform State Law, which imposes fines of $5,000 and jail for up to 3 years for violations.)

A new customer calls a representative and says the following: "I own 1,000 shares of DEF stock, which is currently held at another broker-dealer. I want to sell the shares at the market." The representative accepts the order from the customer. The order ticket should be marked: A. long sale B. long sale - exemptC. short sale D. short sale - exempt

The best answer is C.When a customer sells, the order ticket must be marked either "long" or "short." A sale is marked long if it is reasonably expected that the customer will deliver the shares on settlement. A sale is marked "short" if the shares must be borrowed to settle the sale. Because the shares are sitting at another broker-dealer, they cannot be delivered to this firm by settlement (the account transfer process takes at least 4 business days and typically takes longer). Thus, the order ticket must be marked "short." Also note that there is no such thing as "long-exempt" and the "short-exempt" order ticket marking is only used for short sales of stocks that have dropped by 10% or more in value, where the sale must be done on an up-bid under Regulation SHO.

All of the following would be included in the evaluation of the amount an investor would pay for a viatical or life settlement EXCEPT: A. Life expectancy of the viator B. Amount of discount from policy face amountC. Availability of investorsD. Tax consequence to the viator of selling the policy

The best answer is D. A "viatical settlement" is a contract between a life insurance policyholder (the "viator") and a viatical settlement provider, where, the policyholder gets an immediate cash payment in exchange for transferring ownership of the policy to the viatical settlement provider - the purchaser of the policy. These typically appeal to insured individuals who are terminally ill, who can get immediate cash to pay for medical and support needs by selling the policy. The policy is sold at a discount to face value, and the purchaser assumes the responsibility for making the premium payments until the insured individual/viator dies. When the insured person dies, the purchaser of the policy (the viatical settlement provider) who now owns the policy gets the policy face amount. The discount to policy face value is based on the estimate of the remaining life of the insured/viator. The shorter the expected life of the insured, the less the discount to face that will be paid for the policy. The viatical settlement provider can then sell interests in the policy to investors - and a readily available pool of investors will increase the amount that would be paid for the policy. The fact that the sale of the policy might result in taxable income to the viator/policyholder is a consideration for the insured person; not for the investor who is paying for the policy.

The tax basis for an investor in a limited partnership that establishes the maximum loss deduction includes: I original investmentII partnership debt assumedIII distributive share of partnership gainsIV distributive share of partnership losses A. I only B. I and II only C. III and IV onlyD. I, II, III, IV

The best answer is D. An investor in a limited partnership establishes a "tax basis" that sets the limit for permitted tax deductions. The beginning basis is the amount invested, plus that partner's share of any debt assumed by the partnership. For example, if an investor puts down $10,000 and signs a recourse note for $40,000, the investor's beginning tax basis is $50,000. Each year, the basis is adjusted upwards for that partner's share of income earned; and adjusted downwards for that partner's share of losses. Thus, the basis keeps changing from year to year.

All of the following State-registered advisers must file an annual audited financial statement with the Administrator within 120 days of completion of a surprise audit EXCEPT an adviser that: A. accepts $500 or more of prepaid advisory fees, 6 months or more in advance of rendering servicesB. uses a qualified custodian to hold customer assets C. maintains custody of customer assetsD. exercises discretion in customer accounts under a limited power of attorney

The best answer is D. Taking custody means that the adviser is holding customer funds or securities. For purposes of this rule, accepting prepaid advisory fees of $500 or more, 6 months or more in advance of rendering services, is taking custody of customer funds for State-registered advisers under NASAA rules (note, in contrast, that the SEC rule for Federal-covered advisers is $1,200). Any adviser that takes custody must keep customer assets with a qualified custodian, and a CPA must conduct a surprise audit verifying the assets annually. The auditor's report must be filed by the investment adviser with the State Administrator within 120 days of completion. Being given investment discretion is only "custody" if the adviser has a full power of attorney over the account, which gives the adviser the ability to withdraw customer funds or securities. If the adviser is given a limited power of attorney, the adviser can trade, but cannot withdraw funds or securities, so the adviser does not take custody. question # 1-3-255-2Uniform Securities Act: Business Practices: Advisory Contract and Anti-Fraud Rules: Custody of Client Funds: Annual Surprise Audit Results Filing with AdministratorCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

All of the following are disclosed in Form ADV Part 2A EXCEPT: A. investment policies of the adviser B. type of investments made by the adviser C. investment practices of the adviserD. states in which the adviser is registered

The best answer is D. The Form ADV Part 2 is broken down into Part 2A, which details the adviser's business, analytic methods, types of clients, assets under management, fees, conflicts of interest, etc. Part 2A must include a balance sheet of the firm if it will take custody of customer funds or securities; or will accept $1,200 or more of prepaid fees, 6 months or more in advance of services rendered. This is the "Brochure" that must be given to customers at, or prior to, entering into an advisory contract. Part 2B is the "Brochure Supplement" that must be delivered to new customers at the same time as Part 2A. Part 2B details the educational and work background of the key personnel who set investment strategy or manage accounts. The ADV Part 1 is the basic registration information filed with the SEC - such as name of firm, address, phone number, officers, shareholders, States where the adviser is registered, etc.

Which of the following is the SIMPLEST business type to form? A. C Corporation B. S Corporation C. LLCD. Sole Proprietorship

The best answer is D.A sole proprietorship is the simplest business to form. One just goes into business and that's it! The other business forms require that the business legally be formed in the State with either a corporate charter in the State or a certificate of partnership in the State. This entails filings, fees and lawyers!

Which of the following is the easiest business to form? A. C Corporation B. S Corporation C. Limited PartnershipD. General Partnership

The best answer is D.C Corporations, S Corporations and Limited Partnerships all must be formed by chartering the business in a State. There are required "formation documents" that must be filed and fees paid to establish these businesses. General partnerships and sole proprietorships usually do not require State formation filings.

Which statements are TRUE about Coverdell Education Savings Accounts? I Contributions are tax deductibleII Contributions are not tax deductibleIII Distributions are taxableIV Distributions are not taxable A. I and III B. I and IV C. II and IIID. II and IV

The best answer is D.Contributions to a Coverdell Education Savings Account are limited to $2,000 per year per recipient of the contribution. Contributions are not tax deductible. Earnings in the account build tax deferred and the funds can be withdrawn with no tax due to pay qualified education expenses.

Which of the following statements are TRUE regarding the distributions from an Individual Retirement Plan? Distributions: I must start at age 59 1/2II must start at age 70 1/2III are 100% taxable at ordinary income tax rates only if the original contribution was non-deductibleIV are 100% taxable at ordinary income tax rates only if the original contribution was deductible A. I and III B. I and IV C. II and IIID. II and IV

The best answer is D.Distributions from regular Individual Retirement Accounts can start at age 59 1/2; and must start by April 1st of the year after reaching age 70 1/2. Distributions from regular IRAs are taxable at ordinary income tax rates if the contributions in the account were deducted from income when they were made (this is the case with most IRA contributions). Note that if an individual is covered by another qualified retirement plan and if that individual earns too much, the contribution will not be tax deductible; and any distributions are taxed only on the amount received above the original contribution into the plan (which was made with already-taxed dollars, so taxing it again would be a "double tax").

Which security would be expected to have the greatest duration? A. 5 year; 5% coupon bond B. 5 year; zero-coupon bondC. 20 year; 6% coupon bondD. 20 year; zero-coupon bond

The best answer is D.Duration is a measure of price volatility of a fixed income security. As maturity lengthens or the coupon rate drops, duration increases. These are the securities which are most greatly affected by interest rate risk. Of the choices given, the security that would have the greatest duration is the 20 year, zero-coupon bond - it has the longest maturity and lowest coupon rate.

Which State-registered adviser is considered to have taken custody of client funds? An adviser: I that accepts $300 of advisory feesII that accepts $600 of advisory feesIII as a prepayment covering the upcoming 3 monthsIV as a prepayment covering the upcoming 6 months A. I and III B. I and IV C. II and IIID. II and IV

The best answer is D.If a State-registered investment adviser accepts $500 of prepaid advisory fees (or more), 6 months or more in advance of rendering services, then the adviser is considered to have taken custody of client funds under NASAA's interpretation. (Also note, in contrast, that the Investment Advisers Act of 1940 sets this limit at $1,200 for Federal Covered Advisers, but this is not the rule for State-registered advisers).

A federal covered investment adviser makes a loan to one of her clients for the purpose of buying a residence for personal use. The loan is secured by a lien on the house. Which statement is TRUE? A. This is not permitted because an adviser cannot place a lien on assets B. This is not permitted because the value of the security for the loan may change in relation to the principal amount of the loan C. This is permitted because the adviser can make a loan secured by real estateD. This is not permitted because an adviser cannot make a loan to a client

The best answer is D.Investment advisers are prohibited from lending money to clients - no ifs, ands, or buts. On the other hand, broker-dealers are permitted to lend money to customers where securities are collateral, in compliance with Regulation T of the Federal Reserve Board.

A person who renders advice on fixed annuities for a fee; and who then sells the annuities, charging a commission, must register as a(n): I investment adviser in that StateII broker-dealer in that StateIII agent in that State A. I only B. I and II C. I and IIID. None of the above

The best answer is D.Since a fixed annuity is not defined as a security (instead it is defined as an insurance product), State securities law does not apply! (However, State insurance laws do apply, but they are outside of the scope of this examination.) There is no requirement for this person to be registered as an investment adviser since no advice is being rendered on securities. There is no requirement for this person to register as a broker-dealer or agent, since no securities transactions are occurring. Please note that if this were a variable annuity, then it is defined as a security. To take a fee for recommending a variable annuity product, registration as an investment adviser would be required. To charge a commission when selling this product, registration as a broker-dealer would be required as well.

A stock in a customer account has been dropping rapidly in value. The investment adviser has attempted to contact the customer to advise her to sell the security, but the adviser is unable to reach that customer. The investment adviser is prohibited from placing the sell order unless the: A. adviser contacts the customer's spouse and gets permission to sell the stock B. adviser believes that selling the stock is in the customer's best interests C. customer approves the executed sell order 24 hours laterD. customer had placed an existing sell order 1 year ago

The best answer is D.There is no mention of the customer having given the adviser discretion to trade the account, so Choices B and C are incorrect. There is no mention of the customer giving the spouse a trading authorization over the account, so Choice A is incorrect. However, if the customer had previously placed a sell order (this would be a stop loss order) in the account, then the sell order would be filled once the stock falls to the stop price. Note that this would be a "GTC" - "Good-Til-Canceled" order. The order sits waiting to be executed. Note that the length of time is open-ended and that the order might have been placed 1 month ago, 6 months ago, 1 year ago, etc.

Which option position is used to generate additional income against a short stock position? A. long callB. short call C. long putD. short put

The best answer is D.When one has a short stock position, borrowed shares have been sold with the agreement that the customer will buy back the position at a later date. If the customer thinks that the market will remain flat, he can sell a covered put against his stock position to earn extra income during that time period. If the stock is sold short and a put is sold with the same strike price, then if the market stays the same, the put expires "at the money" and the premium collected is retained. If the stock falls, the short put is exercised, obligating the customer to buy the stock at the same price at which it was sold. In this case, only the premium is earned. If the put had not been sold, then the customer would have had an increasing gain on the short stock position as the market fell - so he does not make as much in a falling market. On the other hand, if the market rises, the short put expires "out the money" and the customer is exposed to unlimited upside risk on the short stock position that remains.