Addendum Question Bank

What's the difference between qualitative and quantitative analysis? a. Qualitative analysis relies on metrics that are able to be counted or measured. b. Qualitative analysis relies on descriptive judgements rather than objective measurements. c. Quantitative analysis is the only method that's approved by the Prudent Investor Standard. d. Quantitative analysis often uses narratives, while qualitative analysis does not.

(B) Quantitative analysis uses quantities, including numbers, statistics, and other objective measurements to draw conclusions. Qualitative analysis relies on descriptive judgements and narratives rather than objective measurements. However, both are needed in order to make the best investment decisions.

What type of broker-dealer executes orders for retail customers on a registered securities exchange? a. Introducing broker b. Exchanging dealer c. Clearing broker d. Custodian

(C) Clearing brokers are broker-dealers that execute trades on an exchange for their own account as well as accounts of investors. After a trade is executed, the clearing broker will communicate (i.e., clear) with the counter-party and then deliver securities or cash (i.e., settle the trade).

Special purpose acquisition company (SPAC) shares are originally issued: a. In an SEC-registered initial public offering (IPO) b. In a Regulation D private placement c. Using the Regulation A safe harbor d. In a sale that's conducted under Rule 147 and registered with the state Administrator(s)

(A) A special purpose acquisition company (SPAC) is initially set up as a blank check company with shares that are sold to investors in an initial public offering (IPO) and subsequently listed on an exchange. Like any IPO, the sale of SPAC shares to public investors must be registered with the SEC. In addition, the SPAC's IPO must also be registered in any state in which the offered is made, typically using registration by coordination. After the SPAC's shares are sold to investors, the manager will then find another privately held company in which to invest.

All of the following are methods of comparing actively managed pooled investment returns, EXECPT: a. Sales charges b. Manager tenure c. Independent ratings d. Benchmark returns

(A) By themselves, sales charges don't measure performance. However, comparing fund returns to a benchmark (e.g., S&P 500 Index), comparing manager tenure, and independent ratings (e.g., Morningstar) are methods for comparing fund performance.

Which right is associated with common stock ownership and prevents the proportionate loss of an individual's ownership in a corporation? a. Anti-dilution b. Inspection c. Voting authority d. Section 10b-5 plans

(A) Companies can write anti-dilution clauses into their corporate charters. These clauses ensure that common shareholders will be protected against dilution if the corporation issues additional shares of common stock. One outcome of anti-dilution rights is the issuance of preemptive rights to existing shareholders before offering new common stock to the public.

How is a corporation permitted to borrow from a bank? a. Through a revolving credit facility b. By issuing preferred stock c. By issuing bonds d. Through credit cards

(A) Corporations and other businesses can take loans from banks. One of the more popular corporate loans is referred to as a revolving credit facility, which is also considered an operating line, bank line, or just a revolver. These loans are similar to credit cards that are issued to individual consumers. Revolvers have a maximum loan amount and the business will only be charged interest on what it borrows. Bonds are a type of loan, but corporations are borrowing money from the bondholders (i.e., investors), rather than banks.

What type of broker-dealer segregates and holds customer assets for safekeeping? a. Custodian b. Introducing broker c. Clearing broker d. Market maker

(A) Custodians are broker-dealers that hold customer assets for safekeeping. The assets must segregate (i.e., not commingle) customer assets from the assets that are owned by the broker-dealer.

All of the following are non-financial investment considerations, EXECPT: a. A corporation's dividend policy b. A corporation's net carbon emissions c. A corporation's diversity, equity, and inclusion (DEI) policies d. The makeup of a corporation's board of directors

(A) Dividends are factored into a security's return and are a financial consideration. Carbon emissions, DEI policies, and corporate governance are all non-financial investment considerations. Today, investors are commonly using non-financial considerations when making investment decisions. These non-financial concerns are often dividend into environmental, social, and governance (i.e., ESG).

Which of the following assets being placed in a donor advised fund (DAF) will provided the greatest estate planning benefit? a. Securities with a large capital gain b. U.S. Treasury bonds c. Farm equipment d. Cash

(A) Donor advised funds (DAFs) can receive charitable gifts of cash, securities, or other property. Assets that are placed into a DAF are deductible, thereby reducing income taxes in the year of the contribution. In addition, assets with a large gain are not subject to capital gains taxes if they're donated to a DAF. For estate planning purposes, donating securities with large capital gains is often the most efficient way to minimize the donor's tax liability.

Which of the following BEST defines the term "finder" in securities markets? a. Individuals who attempt to find potential investors for private companies. b. Unregistered individuals who solicit investment advisory services. c. A broker-dealer that clears and settles stock market transactions. d. An attorney who refers illegal activity to the state Administrator(s).

(A) Finders are individuals who attempt to find buyers for privately held firms that are selling securities in a private placement. Finders often work with larger investment banks to sell private placements.

Which of the following statements is TRUE regarding digital assets? a. Some digital assets are securities. b. All digital assets are securities. c. Digital assets are exempt from the anti-fraud provisions of the USA. d. Digital assets are exempt from registration with state Administrator(s).

(A) In some cases, digital assets (e.g., cryptocurrencies) are defined as securities. Like any investment, digital assets must meet the four part Howey Test in order to meet the definition of a security. To determine whether an instrument is a security under the Howey Test, there must be an investment of money, in a common enterprises, with the expectation of profits, which are derived from the efforts of others. Since many digital assets are not investments in a business or enterprise that's managed by others, they don't meet the standards of the Howey Test. All instruments that are considered securities are subject to the anti-fraud provisions of the USA. Although digital assets could be sold in an exempt transaction, if they're sold publicly and are defined as securities, they're required to be registered.

What's the purpose of IRMAA? a. To increase Medicare premiums for high income individuals b. To decrease Medicare premiums for low income individuals c. To increase Social Security benefits for the elderly d. To regulate who's eligible to receive Social Security benefits

(A) Income-related monthly adjustment amounts (IRMAA) are an increase in Medicare premiums for individuals who earn over a specified amount. This results in an increase in the total Medicare expense to any person who's subject to IRMAA and doesn't impact individuals who are below the income threshold.

What's an IPO? a. The sale of stock of a company that's not currently filing reports with the SEC. b. An offering of stock of a company that's current in its Form 10-K filings. c. A type of exempt transaction. d. An issuance of stock for a company that's currently listed on a registered securities market.

(A) Initial public offerings (IPOs) represent the issuance of new shares of a company that is not yet a reporting issuer or whose stock is not yet listed on an exchange. When a company that's currently filing Forms 10-K and 10-Q issues stock (i.e., a public company), it's considered a secondary or follow-on offering. Both IPOs and secondary offerings are subject to registration with the SEC under the Securities Act of 1933 and, in some cases, with the state Administrators under the USA.

Which of the following is the BEST explanation of the difference between progressive and regressive taxes? a. Regressive taxes will result in lower income individuals paying proportionately more in taxes than higher income individuals. b. Regressive taxes assess higher marginal rates on lower income individuals. c. Progressive taxes assess the same tax rate for all taxpayers. d. Progressive taxes assess higher rates on lower income individuals.

(A) Progressive taxes are designed to ensure that higher income individuals will pay more taxes in proportion to their income. On the other hand, regressive taxes (e.g., sales taxes) often charge the same rate to all taxpayers, which results in lower income individuals paying more taxes in proportion to their income. For example, if a billionaire and a middle class individual each buy the same item in a grocery store, they will both pay the same sales taxes rate on the purchase. However, since the billionaire's income is much higher, the sales tax (as a percent of her overall income) will be much lower than it is for a middle class taxpayer. Progressive taxes will charge higher rates to individuals with higher income (e.g., income taxes), thereby making the tax burden more equitable.

A customer recently purchased shares of an SEC-reporting issuer through a Regulation D private placement. From the date of purchase, how long must the customer wait before being permitted to re-sell the shares? a. Six months b. 90 days c. One year d. 18 months

(A) Restricted shares of an SEC-reporting issuer have not been registered with the SEC and must be held for six months before the purchaser can resell them. However, if the issuer is a non-reporting issuer, the shares must be held for one year before the purchaser is permitted to resell them. If restricted stock is being sold on an exchange, the selling shareholder must also comply with Rule 144, which limits the number of shares that can be sold in a 90-day period.

What type of employer may establish a solo 401(k) plan? a. A business with no employees b. A general partnership c. A corporation with fewer than 10 employees d. A business with no subsidiaries

(A) Solo or individual 401(k)s plans are retirement plans that can be opened by businesses with no common law employees. Under IRS rules, since spouses don't count as employees, business owners may include their spouses in solo 401(k) plans. As with traditional 401(k) plans, solo 401(k) plans are taxdeductible, but have higher annual contribution limits that traditional 401(k) plans. Also, similar to Roth IRAs and Roth 401(k) plans, Roth solo 401(k) plans allows for non-deductible contributions, but qualified withdrawals are tax-free.

All of the following are exempt from the gift tax, EXECPT: a. Securities b. Medical expenses c. Tuition d. Gifts to a spouse

(A) The annual gift tax exclusion is $17,000 per person, per year. Gifts of cash or securities that exceed $17,000 per year could be subject to the gift tax. However, medical expenses, tuition payments, and gifts to spouses are exempt from gift tax. This means the gift tax doesn't apply to gifts to a spouse, the payment of tuition, or payment of medical expenses.

When is an agent's uniform registration form (Form U4) required to be updated? a. Whenever there's a material change b. Only if a complaint is filed against the registrant c. Never d. Whenever there's a change

(A) The uniform registration form (i.e., Form U4) for agents and IARs must be updated promptly after any material change (e.g., change in residential or business address). According to regulations, the term "promptly" typically means within 30 days of the change.

In a qualified retirement account, which of the following is NOT an acceptable qualified default investment alternative (QDIA)? a. Securities of the employer b. A target date mutual fund c. A balanced mutual fund d. A product that's managed by an investment adviser

(A) When investors fail to select an investment in a qualified retirement account, the plan's sponsor must invest in a qualified default investment alternative (QDIA). The Department of Labor (DOL) specifically prohibits the QDIA from being invested directly into an employer's securities. Instead, many qualified plans use target date mutual funds and balanced funds as their QDIAs. Under the DOL's rules, a diversified portfolio that's managed by an investment adviser or investment company is also eligible as a QDIA.

What's a SPAC? a. A trust that buys a basket of stocks and holds them for a predetermined period. b. A blank check company that's formed with the intention of buying shares in another company. c. An investment fund that invests in a pool of securities which is actively managed by an investment adviser. d. A security that gives the owner the right to purchase a predetermined number of shares at a fixed price.

(B) A special purpose acquisition company (SPAC) is initially set up as a blank check company with shares that are sold to investors in an initial public offering (IPO) and subsequently listed on an exchange. After the IPO, the manager of the SPAC will have two years to find another company to purchase in a reverse merger, which is referred to as a de-SPAC transaction. After the de-SPAC transaction, the purchased company will be folded into the SPAC and the surviving corporate entity will continue to be exchange-traded. Unlike investment companies, SPACs only invest in one other corporation, rather than a diversified portfolio of securities.

Which of the following is a characteristic of designating an asset as community property with rights of survivorship? a. The primary beneficiary is not required to be a spouse b. The owners must be married c. Assets will be owned separately until the death of the primary owner d. Ownership is equitable, but not necessarily equal

(B) Community property is a way to own assets, but it's only available to married couples or domestic partners. In addition, community property is only available in some states. One drawback of community property is that assets are owned equally (i.e., 50/50) by each party. If community property has rights of survivorship added, then the surviving spouse will inherit assets from the decedent. Another beneficiary cannot be designated.

Which of the following is an advantage of investing in real estate? a. Large capital expenditures b. Tax deductions c. Lower volatility d. Loss of liquidity

(B) Depending on how real estate is purchased and the specific property, real estate can provide tax benefits. For example, interest on a mortgage and repairs to a building are tax deductible. However, real estate investments typically take large up-front capital investments, lack liquidity, and have higher (not lower) price volatility.

All of the following are examples of digital assets, EXCEPT: a. Cryptocurrency b. Blockchains c. Non-fungible tokens (NFTs) d. Stablecoins

(B) Digital assts include cryptocurrencies, non-fungible tokens (NFTs), and stablecoins. A blockchain is a method of recording ownership of digital assets, (e.g., a ledger). Blockchains are used to keep track of purchases and sales of digital assets; however, in and of themselves, they're not an investment. Unlike traditional securities markets which typically use one central clearinghouse to record transactions, blockchains are decentralized. In other words, blockchain records are updated communally and verified through an algorithm.

Which of the following statements is TRUE regarding the characteristics of ESG investing? a. Fiduciaries should prioritize investment returns over all other considerations. b. Fiduciaries must utilize both financial and non-financial factors before investing. c. Fiduciaries should prioritize economics, Sharpe ratios, and good returns before non-financial considerations. d. Fiduciaries must always minimize risk, even if it means sacrificing returns.

(B) Environmental, social, and governance (ESG) investing is also referred to as sustainable investing. ESG investors argue that a company must consider its overall impact to society, in addition to generating profits for investors. ESG investors attempt to balance both financial and non-financial considerations when making investments. For example, ESG investors may avoid a company or industry that harms the environment, even if investors would earn above average returns.

ETF shares are bought and sold at: a. The next calculated net asset value plus a sales charge b. The best available price on the exchange on which the ETF's shares are listed c. The resulting value of the net assets of the fund divided by the number of outstanding shares of the ETF d. The strike price of the ETF minus the market price of the underlying shares

(B) Exchange-traded fund (ETF) shares are listed on exchanges and are bought and sold at the best price on the exchange. Mutual fund shares are bought and sold at the next calculated net asset value (NAV). When mutual fund shares are purchased, investors must pay the NAV plus a sales charge. A formula for calculating a fund's NAV is the net assets divided by the number of outstanding shares of the mutual fund.

If taken by an individual, which action would require her to be registered as an investment adviser representative? a. Providing advice regarding real estate transactions for a fee of 1% of the transaction b. Charging a fee for advice on the most appropriate variable annuity c. Soliciting the sale of mutual funds which include a front-end load d. Creating a free website and providing general commentary on the municipal bond market

(B) Investment adviser representatives (IARs) provide advice or solicit advisory services for a fee. Since variable annuities are securities, a person charging customers for advice related to variable annuities would make her an IAR. Since real estate is not a security, providing advice related to real estate doesn't qualify a person as an IAR, even if she's receiving a fee. Soliciting the sale of mutual funds which include a sales charge makes an individual an agent of a broker-dealer since the sales charge is assessed for the purchase, not the advice.

Which of the following is a benefit of owning a master limited partnership (MLP)? a. Double taxation b. Exchange-listing c. Exempt from registration under the Securities Act of 1933 d. Availability for all industries

(B) Master limited partnerships (MLPs) are limited partnerships, but they're interests are traded on an exchange (like a corporation's stock). As with any partnership, MLPs receive flow through of income, rather than the double taxation of a C-corporation. Because MLPs are exchange-traded, they must be registered with the SEC. MLPs can only be formed by companies in real estate or natural resources. In fact, most MLPs are in the oil and natural gas industries.

Which of the following are considered material changes that require updating an individual's uniform registration form (Form U4)? I. Change in residence II. Receipt of a bonus for the previous quarter's sales III. Becoming registered in a new jurisdiction IV. New outside business activity a. I and II only b. I, III, and IV only c. III and IV only d. I, II, III, and IV

(B) Material changes that require an update to Form U4 include a change in legal name, a new business or residential address, becoming registered in a new state (i.e., adding a jurisdiction), and additional outside business activities. The receipt of a bonus doesn't require the updating of Form U4.

What financial arrangement exists when a market maker or exchange pays a broker-dealer for the routing of the broker-dealer's customer orders? a. Soft dollar arrangement b. Payment for order flow c. Layering d. Spoofing

(B) Payment for order flow (PFOF) is a practice in which a market maker or exchange pays a retail broker-dealer for sending (i.e., routing) its customer orders. Payment for order flow is a legal business practice, but the broker-dealer that holds the customer accounts must disclose its PFOF practice when customer accounts are opened and periodically thereafter.

Which of the following statements is TRUE regarding payment for order flow (PFOF)? a. Custodians will pay introducing firms for their retail customers' orders. b. Clearing brokers will pay introducing firms for their retail customers' orders. c. Clearing brokers will send their retail customer orders to a custodian for safekeeping. d. Payment for order flow is prohibited; however, payment for custodial services is permitted.

(B) Payment for order flow (PFOF) is the payment made by a clearing broker to an introducing broker in exchange for the introducing broker's retail orders. PFOF is permitted as long as the introducing broker discloses its order routing practices to its customers.

Which of the following statements is TRUE regarding an offering of common shares? a. An initial public offering of common stock is exempt from both state and federal registration requirements. b. A secondary offering of common stock that's listed on a registered securities market is exempt from registration. c. An initial public offering is exempt from state registration requirements, but must register under federal law. d. A secondary offering of common stock is exempt from both state and federal registration requirements.

(B) Secondary offerings of exchange-listed stocks are considered federal covered securities and are therefore exempt under the Uniform Securities Act. Initial public offerings (IPOs) are subject to both state and federal registration requirements. When registering with the state Administrators, issues of IPOs typically use registration by coordination.

An individual recently signed an advisory contract with an investment adviser. The individual runs a consulting business by herself and wants advice on the best retirement account to set up. Her business earns $300,000 per year and she wants to maximize t a. Roth IRA b. Individual 401(k) plan c. 529 plan d. SIMPLE 401(k)

(B) Since the client is self-employed and has no employees, a solo (i.e., individual) 401(k) plan is the best choice. A SIMPLE 401(k) plan can be set up by businesses that have fewer than 100 employees, but they have lower contribution limits than solo 401(k) plans. IRAs have the lowest contribution limits of any retirement account and 529 plans are used to save for educational expenses, not retirement.

Why is manager tenure important when comparing two different pooled investments? a. Because it's easier to predict future performance with funds that frequently change managers. b. Because some investors believe that manager tenure can be used to estimate a manager's ability and predict positive returns in the future. c. Because funds that have long tenured managers will have lower investment advisory fees. d. Because manager tenure is a good way to estimate the risk-adjusted returns for retail and institutional shareholders.

(B) Some investors believe that a fund manager who has been managing the same fund for 10 years or longer is more talented than its peers. These investor also believe long-tenured investment managers will be more successful in the future. Notice that investor who believes in efficient markets and passive management don't believe that an investment managers' performance can be reliably predicted.

What's the unified tax credit for estate and gift taxes? a. $17,000 b. $12.92 million c. $34,000 d. $170,000

(B) The annual exclusion to the gift tax is $17,000 per year, per person (or $34,000 for married couples). A gift that exceeds the annual exclusion could be taxable, but only if it takes the cumulative lifetime gifts over the unified tax credit for gift and estate taxes, which is currently $12.92 million. For example, a gift of $18,000 is over the annual exclusion, but it's only taxable if the excess amount takes the lifetime gifts from the donor over $12.92 million. It's important to note that if the donor has only gone over the annual limit (i.e., $17,000), the gift is reported, but the excess amount will not be taxable as long as the donor has not exceeded $12.92 million. Ultimately, if a person has given away $12.92 million during her lifetime, then the amount remaining in her estate is subject to the estate tax.

What's the maximum number of shares of control or restricted stock that an investor is permitted to sell in a 90-day period? a. The greater of 4% of the outstanding shares or the average weekly trading volume over the last week b. The greater of 1% of the outstanding shares or the average weekly trading volume over the last four weeks c. The lesser of 10% of the outstanding shares or the average weekly trading volume over the last 12 weeks d. The lesser of 5% of the outstanding shares or 10% of the publicly traded shares

(B) Under Rule 144, control or restricted shareholders are permitted to sell the greater of 1% of the outstanding shares or the average weekly trading volume over the previous four weeks.

Which of the following is a right that's given to common shareholders of an issuer? a. Guaranteed profits b. Seniority to creditors in liquidation c. Voting in corporate elections d. Tax-deductible dividends

(C) A company's common shareholders have the right to vote in corporate elections (e.g., election of board members). Although shareholders can receive profits in the form of dividends, they're neither guaranteed nor tax-deductible. Common shareholders have a junior (i.e., lower) claim to creditors when a company declares bankruptcy and is being liquidated.

SPACs are typically: a. Unit investment trusts b. Open-end management companies c. Blank check companies d. A pool of U.S. government agency securities

(C) A special purpose acquisition company (SPAC) is initially set up as a blank check company with shares that are sold to investors in an initial public offering (IPO) and subsequently listed on an exchange. After being listed, the manager of the blank check company will have two years to try to find another company to purchase using their investor's cash. If the SPAC's manager cannot find a suitable target to purchase within two years, the investors will receive their initial investment back with interest and the blank check company will be dissolved.

If taken by an individual, which action would require him to be registered as an agent? a. Supervising a group of employees who solicit investment advisory services b. Executing real estate transactions for a commission c. Soliciting the purchase and sales of U.S. government securities d. Finding and matching buyers and sellers for commodity forward contracts

(C) Agents are individuals who solicit or effect securities transactions for commissions. Soliciting transactions in U.S. government securities is an activity that would require registration as an agent of a broker-dealer. Real estate and commodity forward contracts are not securities; therefore, these activities don't require registration as an agent. Supervising employees who solicit investment advisory services would require registration an investment adviser representative (IAR), not as an agent of a broker-dealer.

Which of the following is an advantage of community property with rights of survivorship? a. Additional owners may be added after property has been acquired b. It's available in every state c. Property is passed to the surviving owner without passing through probate d. Ownership is not required to be equal

(C) Community property is a way to own assets, but it's only available to married couples or domestic partner. In addition, community property is only available in some states. If community property has rights of survivorship then, upon the death of one owner, the surviving owner will inherit the property without being required to go through probate. Since community property is only available to married couples, an additional owner cannot be added. Assets that are held as community property must be owned equally (i.e., 50/50).

What's an environmental concern for ESG investors? a. The diversity, equity, and inclusion (DEI) policies for employees b. The diversity of a company's board of directors c. Net carbon emissions d. Executive pay

(C) ESG investors are concerned with a company's environmental, social, and governance policies. The environmental component of ESG typically focuses on pollution, including carbon emissions. Corporate social policies include diversity, equity, and inclusion (DEI), in addition to human rights concerns. Governance factors include the makeup of the board of directors and executives' compensation.

Which of the following is the LEAST relevant risk of owning digital assets? a. Liquidity b. Regulatory c. Inflation d. Market

(C) Inflation typically impacts fixed-income investments the most. Since many digital assets, especially cryptocurrencies and non-fungible tokens (NFTs), don't pay any income, inflation risk is not a significant concern. Digital assets are often illiquid and their prices can be quite volatile. In addition, the regulations for issuing and trading digital assets are still being established, thereby giving digital assets a large amount of regulatory risk as well.

Which type of offering will likely be more volatile in the aftermarket? a. Follow-on offerings b. Secondary offerings c. Initial public offerings (IPOs) d. Closed-end offerings

(C) Initial public offerings (IPOs) represent the issuance of new shares of a company that is not yet a reporting issuer or whose stock is not yet listed on an exchange. Since these shares are being publicly traded for the first time, they're often more volatile in the aftermarket (secondary market) than stocks that have been listed for many years. Secondary offerings (which are also referred to as follow-on offerings) tend to be less volatile because the issuer's stock is already publicly traded.

When reviewing soft dollar arrangements, what's a fund manager required to do? a. Disclose the conflict of interest with the SEC or state Administrator b. Confirm that the term of the contract with the broker-dealer doesn't exceed 36 months c. Ensure that the added benefits justify the larger commissions and fees paid by the adviser's clients d. Waive its fiduciary responsibility before entering the contract

(C) Investment advisers, including mutual fund managers, must ensure that the benefit of a soft dollar arrangement is worth the added costs to their clients. Advisers must disclose the conflict of interest that's posed by soft dollar arrangements with their customers, but are not specifically required to file the conflict with a regulator. There's no maximum length of time for a soft dollar contract in state or federal law. Advisers are not permitted to waive their fiduciary responsibility as it relates to a soft dollar arrangement.

What's a domestic settlement agreement? a. A power of attorney that gives an investment adviser discretionary authority over a client's account. b. A legal arrangement which authorizes the state Administrator to receive non-criminal legal complaints on a registrant's behalf. c. A legal contract between two parties which outlines the obligations to one another after the dissolution of a legal arrangement. d. A legal contract that permits several individuals to act as one entity to achieve a desired business objective.

(C) Legal settlements are contracts that are established to outline what one party owes another and are often used when prior legal arrangements are broken (e.g., bankruptcy). Domestic settlements are established between family members and are often used when two people are getting divorced.

Which of the following statements is TRUE regarding the pricing of ETF shares? a. ETFs must be purchased at the next calculated net asst value plus a sales charge b. ETFs do not have a net asset value c. ETFs can be bought at a premium or discount to their net asset value d. ETFs can only be sold at a discount to their net asset value

(C) Like closed-end investment companies, exchange-traded funds (ETFs) are bought an sold on stock exchanges. While they will have a net asset value (NAV), ETF shares will be bought and sold for their market price (i.e., a discount or premium to the NAV).

All of the following are pass-through entities, EXCEPT: a. LLCs b. MLPs c. C-Corp d. REITs

(C) Partnerships, master limited partnerships (MLPs), limited liability companies (LLCs), and real estate investment trusts (REITs) are all pass-through entities. These businesses are not required to pay taxes; instead, their profits flow through to their investors and these investors ultimately pay taxes. Ccorporations are double taxed because the corporation itself owes income taxes and then is permitted to pay a dividend to its shareholders. Once the dividends are received by the company's shareholders, they too are taxed on the dividends.

Gifts that exceed the annual gift tax exclusion are: a. Always taxable b. Never taxable c. Taxable if the excess gift takes the donor over the lifetime gift tax exclusion d. Only taxable if the gift is made to a 529 college savings plan

(C) The annual exclusion to the gift tax is $17,000 per year, per person (or $34,000 for married couples). A gift that exceeds the annual exclusion could be taxable, but only if takes the cumulative lifetime gifts to the recipient over the lifetime exclusion, which is currently $12.92 million. For example, a gift of $18,000 is over the annual exclusion, but it's only taxable if the excess amount take the donor's lifetime gifts over $12.92 million. It's important to note that if the donor has only gone over the annual limit (i.e., $17,000), the gift is reported, but the excess amount will not be taxable as long as the donor has not exceeded $12.92 million.

Which of the following is a precursor to inflation? a. Decreasing supply costs b. High unemployment c. Low unemployment d. Tight monetary policies

(C) There are many causes of inflation. One way is through increasing demand, which is referred to as demand pull inflation. Demand pull inflation can be caused by high employment and low unemployment. If there's high employment (many people working), they will be more likely to spend their money on goods and services which will thereby drive prices higher. Maintaining a loose monetary policy, leading to an increase in the money supply and lower interest rates, can also cause inflation to increase.

All of the following accounts allow for non-deductible contributions, EXCEPT: a. Solo Roth 401(k) plans b. 529 plans c. Traditional IRAs d. Non-qualified annuities

(C) Traditional IRAs allow for deductible contributions and withdrawals are taxed at the owner's ordinary income rate. Contributions to Roth 401(k)plans and solo Roth 401(k) plans are non-deductible and qualified withdrawals are tax-free. 529 plans are taxed in a similar way to Roth plans, their contributions are non-deductible and withdrawals for qualified educational expenses are tax-free. Contributions to non-qualified annuities are non-deductible, but withdrawals are tax-deferred.

According to NASAA's Model Rule on IAR continuing education (CE), how many credit hours of continuing education must an IAR complete each year? a. Zero, if the IAR is also registered with FINRA as an associate member. b. 10 credit hours of training on regulatory changes. c. Six credit hours related to products and practices and six credit hours related to regulatory and ethics (three of which must specifically cover ethics). d. Six credit hours related to products and practices and zero credit hours related to ethics if the IAR is registered with FINRA.

(C) Under NASAA's Model Rule for IAR CE, individuals must annually complete six credit hours related to regulatory and ethics and six credit hours related to products and practices. If an IAR is also registered with FINRA, then he's only required to complete six credit hours related to reglatory and ethics (i.e., the products and practices requirement is waived).

When evaluating the performance of different mutual funds, which benchmark should be used? a. S&P 500 Index b. Dow Jones Industrial Average c. A benchmark that most closely matches the investment objectives of the mutual funds d. The real return on a risk-free asset

(C) Using benchmarks to evaluate the performance of pooled investments (e.g., mutual funds and hedge funds) is a common practice. Investors should use a benchmark that closely resembles the both the consistency of the portfolio and the objectives of the fund being evaluated. For example, a diversified stock portfolio should be compared with a broad stock index (e.g., the S&P 500 Index). Bonds funds should be compared with an index of similar bonds (e.g., municipal bonds with municipal bonds). Comparing fund returns with a risk-free asset can be done when attempting to find the excess market return and other risk-adjusted returns, rather than comparing different funds.

The sale of additional shares of an SEC-reporting issuer is referred to as: a. An initial public offering b. A reverse merger c. A going private transaction d. A secondary offering

(D) A secondary offering or follow-on offering is when an SEC-reporting company (i.e., a public company) sells additional shares of stock. For example, if a company that has been listed on Nasdaq for the last 10 years and sells new shares of common stock this year, it's engaging in a secondary offering. Initial public offerings (IPOs) are the issuance of new shares of a company that is not yet a reporting issuer or listed on an exchange.

Which of the following is the BEST definition of a will? a. A power of attorney that permits an executor to immediately dispose of assets. b. A power of attorney that empowers a U.S. attorney to dispose of corporate assets during liquidation. c. A legal contract between two parties which outlines the obligations to one another after the dissolution of a legal arrangement. d. A legal contract which coordinates the distribution of assets and other legal matters after an individual dies.

(D) A will is a legal contract that outlines how assets will be distributed after an individual dies. Wills can also appoint guardians for children. A will is not enforceable until after a person dies and it doesn't give immediate authority to the executor.

As an investment adviser representative, when does the use of donor advised funds (DAF) make the most sense? a. For retirement planning b. For educational savings c. For generating investment income d. For estate planning

(D) Donor advised funds (DAFs) are a way to give to charities. Money that's invested into DAFs is tax deductible and reduces a donor's taxable income. In addition, the money that's invested in a DAF is excluded from the donor's estate, thereby creating a viable way to minimize estate taxes.

Through which process can an ETF shares be arbitraged to minimize the difference in the ETF's NAV and the market price? a. By purchasing and selling shares of the underlying portfolio at the ETF's net asset value b. Since ETFs are exchange-traded, the difference between the market price and NAV cannot be arbitraged c. By issuing puts on shares of the ETF d. By allowing authorized participants to use creation and redemption units of the ETF

(D) ETF shares can be created or redeemed in a process that's similar to shares of a mutual fund. However, unlike mutual funds, ETF creation and redemption units can only be bought and sold by certain financial institutions, which are referred to as authorized participants (APs). APs cannot directly buy new ETF shares for cash; instead, they're able to create new shares of the ETF by buying the same stocks that the ETF owns. Once the AP delivers shares included in the ETF's portfolio, the ETF will issue a new share of the ETF. Redemption works in a similar way, but the AP will trade in shares of the ETF and receive the individual stocks in the ETF's portfolio. As the net asset value of the ETF drifts from the ETF's market price, APs can buy or sell the underlying stock and take advantage of the difference using the ETF's creation and redemption process (i.e., arbitrage price difference).

Which non-qualified deferred compensation plan can be offered to managers of a government agency? a. 401(a) b. 401(k) c. 403(b) d. 457

(D) Generally, 457 plans are available to local government employees and employees of non-profits. Note, 457(b) plans are a type of non-qualified retirement account which allow employees to defer some of their compensation. Unlike qualified plans, such as 401(k) and 403(b) plans, some types of 457 plans can be offered only to a select group of higher-earning employees (e.g., managers). Section 401(a) plans are a type of savings account, not a deferred compensation plan, that's available to government employees.

Which of the following BEST defines the income-related monthly adjustment amount (IRMAA)? a. It's the increase in Social Security benefits due to rising living costs b. It's an adjustment in monthly income received from a variable annuity c. It's the methodology that's used to calculate the payout from a trust account d. It's an increase in Medicare premiums for individuals with income over a certain limit

(D) Income-related monthly adjustment amounts (IRMAA) represent an increase in Medicare premiums for individuals who earn over a specified amount. This results in an increase in the total Medicare expense for any person who's subject to IRMAA.

What type of broker-dealer sends orders to a market maker in order to execute orders for retail customers? a. FINRA member firm b. Custodian c. Clearing broker d. Introducing broker

(D) Introducing brokers (IBs) don't have the ability to execute, clear, or settle trades for customers. Instead, IBs will send their customers' orders to a clearing broker (e.g., market maker) that will then execute customer trades on an exchange.

All of the following investments are permitted in a 401(k) plan, EXCEPT: a. Shares of exchange-traded funds (EFTs) b. Mutual fund shares c. Employer's stock d. Real estate

(D) Investors cannot directly purchase real estate in a 401(k) plan. However, shares of ETFs, mutual fund shares, individual stocks, and bonds are all acceptable investments in a 401(k) plan. If the stock of a person's employer is publicly traded, the employee can purchase the shares in a 401(k) plan.

An individual is dually registered with her broker-dealer as both an agent and IAR. Recently, she moved and updated her legal name. Regarding the updating of the individual's uniform forms, which of the following statements is TRUE? a. Form U4 and Form ADV must be re-filed with the CRD and IARD within 30 days. b. Form U5 must be updated in the CRD within 60 days. c. Form ADV Part II must be updated in the IARD at the fiscal year-end of the individual's employer. d. Form U4 must be updated in the CRD and IARD within 30 days.

(D) Material changes to a registration (e.g., name change) must be updated promptly (i.e., within 30 days). Both agents and IARs register using Form U4; however, agents file with the Central Registration Depository (CRD) and IARs file with the Investment Adviser Registration Depository (IARD). Form ADV is used for the registration of an advisory firm, not its employees. Form U5 is filed when a person leaves the industry and is no longer registered.

What's restricted stock? a. Stock that's been registered with the SEC b. Stock that can never be resold c. Stock that was purchased in an initial public offering d. Stock that's not been registered with the SEC

(D) Restricted stock is stock that's not been registered with the SEC and is typically sold under Regulation D (i.e., a private placement). Restricted stock cannot be sold unless the shares have been held for at least six months (if the issuer is an SEC-reporting company) or one year (if the issuer is a nonreporting company). In order to resell restricted stock on a stock exchange, investors must sell the shares in accordance with Rule 144, which limits the number of restricted shares that can be sold in a 90-day period.

Special purpose acquisition companies (SPACs) are suitable for which type of investor? a. A long-term investor who is seeking a growth investment b. A short-term investor who is seeking tax-free income c. A risk averse investor who desires safety of principal and is willing to sacrifice returns d. A risk tolerant investor who is searching for large gains

(D) SPACs are publicly traded, blank check companies that search for a privately held company to acquire. After a SPAC acquires another company, the surviving corporate entity will be publicly traded. Ultimately, this is a complicated process that involves taking a privately held company public. As a result, SPACs are suitable for more risk tolerant investors who are willing to accept higher price volatility.

An individual currently has $100 to invest. She has calculated that the future value of her investment will be either $130 under favorable market conditions or $80 under unfavorable market conditions. Which of the following statements about the investor's a. If market conditions are favorable, the investor will have a $20 gain. b. The discount rate must be the same for both the favorable and unfavorable market conditions. c. The present value of the investment is $105. d. If market conditions are unfavorable, the investor will have a $20 loss.

(D) Since the present value is $100, if market conditions are unfavorable and the price is $80, the investor will lose $20 ($80 FV - $100 PV). If conditions are favorable, the investor will gain $30 ($130 FV - $100 PV). Since the future value is different under favorable and unfavorable conditions, the investor is using different discount rates under the two conditions.

Which gift is exempt from the annual exclusion for the gift tax? a. Stock given to a child that has a fair market value of $20,000 b. $40,000 of cash that's given to a friend c. $180,000 of cash that a married couple gives to their relative's 529 plan d. $25,000 payment for college tuition

(D) The annual gift tax exclusion is $17,000 per person, per year, and applies to gifts of cash and securities. However, paying a person's tuition is exempt from the gift tax as long as the tuition is paid directly to the educational institution. There are special rules for 529 plan contributions. Married couples are able to contribute $34,000 per year (i.e., 2 x $17,000) or front-load a plan with $170,000 provided they don't make another gift to the plan for the next five years (i.e., $34,000 annually x 5 years). Since the gift of $180,000 into a 529 is over the exclusion, it would be subject to the gift tax.

As it relates to gift and estate taxes, what's portability? a. The ability to double the annual gift tax exclusion for married couples b. The ability to use the gift tax exclusion on state income taxes c. The ability to exclude charitable donations from the gift tax d. The ability for a surviving spouse to use the deceased spouse's unused lifetime gift tax exclusion

(D) The lifetime gift tax exclusion is currently $12.92 million. Over the course of a person's life, he can give up to $12.92 million without being required to pay the gift tax. If a person dies without giving away $12.92 million, any unused portion can be used by his surviving spouse. For example, if an individual has given away $11.92 million in his lifetime, the remaining $1 million he did not use can be "ported" or used by his surviving spouse. As a result, the surviving spouse could give away a total of $13.92 million in her lifetime.

According to NASAA's Model Rule on IAR CE, when must an IAR complete her continuing education credits? a. Once every five years b. Twice per year c. Only if a regulatory action has been taken against the IAR d. Annually

(D) Under NASAA's Model Rule for IAR CE, individuals must annually complete six credit hours related to ethics and six credit hours related to products and practices. If an IAR is also registered with FINRA, she's only required to complete six credit hours related to ethics (i.e., the products and practices requirement is waived).

Which security is given to shareholders as a part of an issuer's anti-dilution policy when it intends to raise additional capital? a. An employee stock ownership plan (ESOP) b. Convertible bonds c. Warrants d. Preemptive rights

(D) When a corporation intends to issue additional shares of stock, a preemptive rights offering can be made to its current shareholders. The rights provide the shareholders with the opportunity to buy shares at a discounted price before they're offered to the public. They also give existing shareholders the ability to maintain their proportionate ownership (i.e., avoid being diluted). Warrants are typically attached to the sale of an issuer's bonds or preferred stock when it's seeking to raising capital. However, warrants are dilutive to the existing shareholders. Similarly, employee stock options and convertible securities also dilute existing shareholders since they could result in the issuance of more shares of common stock.

Which funds are the most easily comparable? a. Funds that are issued by the same fund family b. Funds with similar sales charges c. Funds with the similar manager tenure d. Funds with similar investment styles

(D) When evaluating pooled investments (e.g., mutual funds), comparisons should only be made between funds with similar objectives and portfolios. Even if two fund are issued by the same family, have similar sales charges, and the same manager tenure, it's not fair to compare them if they have different investment styles. For example, since a stock mutual fund that has a growth objective will typically have larger returns and risk than an income fund that holds mostly bonds, making direct comparisons is quite difficult.

If an ERISA plan participant fails to specify how her savings are invested, the plan sponsor must: a. Choose a suitable investment for the participant b. Purchase the highest yielding instruments that are backed by the full faith and credit of the U.S. Treasury c. Invest in an FDIC insured certificate of deposit d. Place the funds in a qualified default investment alternative

(D) When investors fail to select an investment in a qualified retirement account, the plan's sponsor must invest in a qualified default investment alternative (QDIA). The QDIA cannot assess any penalties for selecting another investment option later. In addition, the QDIA must be diversified and managed by an investment adviser or registered investment company.