Exam Questions

Which gift is exempt from the annual exclusion for the gift tax?

$25,000 payment for college tuition The annual gift tax exclusion is $18,000 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 $36,000 per year (i.e., 2 x $18,000) or front-load a plan with $180,000 provided they don't make another gift to the plan for the next five years (i.e., $36,000 annually x 5 years). Since the gift of $200,000 into a 529 is over the exclusion, it would be subject to the gift tax.

An IAR who holds full discretionary authority over a customer's account may:

1. Buy and sell 2. withdraw money

Under the Investment Advisers Act, which of the following forms must be filed if an investment adviser has custody of customer funds and securities?

ADV-E CUSTODEE

Which bonds would have the greatest sensitivity to interest rate changes?

Bonds with high duration and bonds with low coupons

What happens to power of attorney when a client dies?

POA is void after clients death

A portfolio has an alpha of 0%, a beta of 1.0, and an actual return of 12%. What would the alpha of the portfolio be if the beta was 0.9 and the actual return was 10.6%?

-0.20% Alpha is the difference between the portfolio's actual return (which is given) and expected return. The expected return can be determined by using the Capital Asset Pricing Model (CAPM). Since this question doesn't provide a risk-free rate, the calculation of expected return is simply beta multiplied by the market return (Expected Return = Beta x Market Return). The first step is to find the return on the market. Since the portfolio has an alpha of 0%, the actual rate of return on the portfolio is equal to the expected rate of return (i.e., 0% Alpha = Actual Return of 12% - Expected Return). If a portfolio has a beta of 1.0, its expected return will be the same as the market return (i.e., Expected Return of 12% = Beta of 1.0 x Market Return). In summary, if alpha is 0% and beta is 1.0, the portfolio's actual rate of return is the same as the market return, which is 12%. Using the market return of 12%, the expected return can be determined if the beta changes to 0.9. The expected return is 10.8% (Beta of 0.9 x Market Return of 12%. Therefore, the alpha can then be calculated by taking the actual return on the portfolio minus the expected return (actual return of 10.6% - expected return of 10.8% = -0.2% alpha).

According to the Uniform Securities Act, if the Administrator revokes, denies, or suspends a registration, it would be required to provide which of the following?

1. an opportunity for a hearing 2. written findings of facts or conclusions 3. written prior notice

Which of the following are considered exempt reporting advisors?

1. venture capital advisors 2. Private Fund Advisors with AUM of less than $150m

According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is:

10 or fewer An investment adviser is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is 10 or fewer. Therefore, if an IA distributes communication to more than 10 persons, it is not required to maintain a record of names and addresses of the persons to whom it was sent. The belief is that it may be too burdensome for an IA to maintain an extensive list of the names and addresses if the communication is sent to more than 10 persons. As a reminder, any communication that is sent to two or more persons is considered advertising.

The trustee is responsible for reporting all income, gains, and losses of a trust to the IRS on Form:

1041 On an annual basis, a trustee must report the trust's income, gains, and losses to the IRS on Form 1041. Regarding the other forms, Form 1040 is used for personal tax returns, Form 1065 is an informational return that is filed by partnerships, and Form 1040EZ is used by single person or those who are married, filing jointly with less than $100,000 of taxable income.

A firefighter is planning to retire before he turns 59 1/2. He's currently contributing the maximum annual amount into an individual retirement account (IRA). If he wants to save even more, which of the following accounts should his agent recommend?

457 plan Firefighters are typically employed by local governments or their agencies. Government employees may be offered 457 plans to help them save for retirement and is the best option for this investor. In addition, 457 plans do not assess a penalty on withdrawals before the accountholder turns 59 1/2. Conversely, 401(k) plans and SIMPLE IRAs are established by for-profit businesses, not local governments. Also, 403(b) plans can only be established by non-profit organizations and public school districts.

An advisory firm is evaluating an investment opportunity for a client. Current projections show that the net present value (NPV) is equal to zero and the client requires an internal rate of return of 6%. Based on this given information, what is the investment's internal rate of return (IRR)?

6% When using net present value (NPV) to evaluate a project, the value of the cash inflow is compared to the cash outflows returned by the project. If the NPV is zero, then the project is assumed to return all of the cash inflow plus the required rate of return.

Financial statements must be filed when an investment adviser's (IA's) renews its registration. How long after the IA's fiscal year-end must financial statements be filed with the SEC?

90 days

A client of an IAR is 35 years old and single with three children, ages 7, 9, and 12. She has 15 years remaining on her home mortgage. She would like to ensure her children will be able to attend college and that the mortgage will be paid off in the event of her death. She does not currently have a great deal of discretionary income. Which of the following would be most suitable for the IAR to recommend?

A 15-year term life insurance policy Based on the client's future obligations and lack of discretionary income, term life offers the least expensive policy for the period she needs it for. A whole life policy charges higher premiums. A whole life policy with a term rider would be even more expensive, and the same is true of universal life.

If the owner of a non-profit organization wants to start a defined contribution plan for her employees, what retirement plan should she choose?

A 403(b) plan Section 403(b) plans can be established by tax-exempt (i.e., non-profit) organizations and public schools. These plans are a type of defined contribution plan, which permits both employees and the employer to make contributions. Section 403(b) plans also give a tax-deduction on the contributions made and any gains or investment income are tax-deferred until the funds are withdrawn. The other choices are retirement plans that can be established by for profit organizations.

Under the Uniform Securities Act, which of the following transactions is NOT exempt from state registration?

A Rule 147 offering The Rule 147 (intrastate) exemption is a federal or SEC exemption and does not apply to the Uniform Securities Act. For that reason, an issuer conducting an offering of securities in one state is required to register the offering in that state. On the other hand, a transaction by a fiduciary, such as an executor, sheriff, marshal, guardian, trustee in bankruptcy, is exempt from state registration. Additionally, isolated, non-issuer transactions and transactions executed on the New York Stock Exchange, Nasdaq, or any other recognized national or regional exchanges are exempt from state registration.

Why would an investment adviser perform a capital needs analysis for a client?

A capital needs analysis is used to determine the amount of insurance a client needs to purchase today in order to fund her future financial goals. For example, if the client dies prematurely and the value of her investments are not sufficient to pay for her child's college education, life insurance is needed to fund the difference.

A court has appointed a person to be the guardian for an incompetent individual. To open a guardianship account with a broker-dealer, which of the following court-issued documents is required?

A certificate of incumbency A certificate of incumbency is a court-issued document that provides the legal authority of a court-appointed guardian to act on behalf of another person. The certificate serves as evidence that the listed person is authorized to act as a fiduciary for another person (the account holder) or any unincorporated entity (i.e., business, club, association, or organization). On the other hand, a durable power of attorney authorizes a person to manage the affairs of an individual who is in good health and remains in force if the individual is declared incompetent or becomes incapacitated. It is important to note that a power attorney is not issued by a court; instead, it is issued by one person to another person.

Terri, an IAR, has decided that with her overhead expenses increasing each year, she will increase the advisory fees she charges new clients, but not for existing ones. In order to do so, she must offer which of the following forms to her clients?

A change in advisory fees is a material change, and her ADV Part 2 must be amended within 30 days and a copy, or a separate brochure containing the same information, must be given to new clients and offered to her existing clients.

Credit Spread

A credit spread represents the difference in the yields of various bonds as compared to Treasury securities of similar maturities. If a corporate bond yields 6% and a Treasury bond with a similar maturity yields 4.5%, then the credit spread is 1.5%. Choice (III) is incorrect since the credit spread is 1% (the difference between 5.5% and 4.5%).

Ten years ago, Tom bought 100 shares of ABC stock at $150 ($15,000 basis). Eight years later, ABC stock was trading at $250 and he gave his brother Vince 40 of his shares. Two years later, Tom passed away and Vince inherited Tom's remaining 60 shares when ABC stock was trading at $350. If Vince immediately disposes of all 100 shares at $400, the tax consequences are:

A long-term capital gain of $13,000 Vince's cost basis for the 40 shares that are gifted to him is $150 (Tom's original cost). Therefore, when these 40 shares are ultimately sold at $400 (two years after receipt), the $250 gain per share x 40 shares equals a $10,000 long-term gain. Vince's cost basis for the remaining 60 shares is based on the market value at the time of death, which in this case is $350 per share. Since the remaining 60 shares are also being sold at $400, the gain is $3,000 (60 shares x $50 per share). Any securities that are received through inheritance are assigned a long-term holding period. Therefore, the $10,000 gain plus the $3,000 gain are combined to represent a $13,000 long-term capital gain.

A father makes a gift of XYZ stock to his daughter. Two years ago, the father purchased the stock for $5,000 and, at the time of the gift, the stock was worth $10,000. If the daughter sells the stock 10 months later for $12,000, what is the tax implication?

A long-term capital gain of $7,000 When a person receives a gift of stock, the recipient's cost basis is the donor's cost basis or the stock's current market value, whichever is less. The stock was originally purchased by the father for $5,000, but was then given as a gift to the daughter when its current market value was $10,000. Since the original cost basis ($5,000) was less than the current market value ($10,000), the original cost basis is used to determine the gain or loss when the stock is sold. In this question, the daughter subsequently sells the stock for $12,000; therefore, she has a resulting capital gain. To determine the ultimate tax implication, the daughter's holding period is based on the donor's holding period. Since the donor had held the stock for two years prior to the gift, the daughter's holding period is considered long-term. By using the original cost basis of $5,000 and comparing it to the proceeds of $12,000, the result is a long-term capital gain of $7,000 ($12,000 - $5,000).

Which of the following securities would NOT be considered federal covered, but would still be considered exempt under the Securities Act of 1933?

A municipal bond issued by a state and sold only in that state While a municipal bond is considered an exempt security under the Securities Act of 1933, it is NOT a federal covered security. Federal covered securities include those listed on a national exchange (NYSE, AMEX, or Nasdaq) and those issued by a registered investment company. There is no federal exemption for either variable annuities or trust certificates.

Which of the following documents may be sent to a client without the client's consent?

A mutual fund prospectus provided by e-mail Prospectuses for new issues (e.g., mutual funds) must be sent to a client who buys a new issue even if the customer doesn't specifically request it. Electronic delivery (e.g., e-mail) of a prospectus is acceptable without a client's consent. However, electronic delivery of account statements from a broker-dealer and material updates to an investment adviser's brochure require written consent. Offering memorandums are used in private placements and will only be sent to accredited investors. In addition, most investors who receive an offering memorandum must consent to a non-disclosure agreement (NDA).

What is a notice filing?

A notice filing is a document that SEC-registered advisors must file with state securities authorities12. It is a way of informing the state that the advisor will be doing business in its jurisdiction2. A notice filing usually includes an ADV form, which outlines an advisory firm's investment style, key personnel, and assets under management1. A notice filing may also require additional paperwork and fees depending on the state2.

Which of the following investments pass through both income and losses to investors?

A real estate limited partnership A limited partnership is permitted to pass through both income and losses to its investors (partners). An SEC reporting company, a real estate investment trust, and a regulated investment company (e.g., a mutual fund) are able to pass through income, but are not able to pass through losses to its investors.

Which of the following statements is TRUE regarding an offering of common shares?

A secondary offering of common stock that's listed on a registered securities market is exempt from registration. 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.

Paul wants to set up a pension plan for his small business but does not want to obligate the company to making set annual contributions, nor does he want a plan that will be complex or expensive to administer. Which plan would be the best choice for Paul's company?

A simplified employee pension (SEP) plan is the best choice given this criteria. As the name implies, a SEP plan is simpler to administer and set up than some other types of pension plans. The employer is not required to make fixed annual contributions to the employee's account. A Money Purchase plan requires an employer to make fixed annual contributions regardless of its cash flow. A 403(b) plan may be established only by certain tax-exempt organizations and public school systems. A Coverdell is an education savings plan, not a pension plan.

Special purpose acquisition company (SPAC) shares are originally issued:

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 offer 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.

Which trust is the most expensive for a trustee to manage?

A trust that has several young children as beneficiaries. As it relates to trusts, when children are the beneficiaries, it can be assumed that the trust will need to be managed for a longer period and will incur more costs. The other choices will most likely be closed in a shorter period and be less expensive for the trustee to manage.

When selecting a value stock, an agent would look for which of the following characteristics?

A value stock is one that tends to trade at a lower price relative to its fundamentals (i.e., dividend yield, earnings per share, sales, price/earnings ratio, market price to book value) and is, therefore, considered undervalued by a value investor. These companies tend to have the following characteristics: high earnings per share, high dividend yield, low price-to-book ratio, and/or low price-to-earnings ratio.

A married couple in their thirties, with two small children, owns a small business. They have already funded their retirement plans at work. They consult an investment adviser about the best way to save more money for their retirement. Based on this information, which of the following choices would be the most suitable recommendation?

A variable annuity This couple's stated investment goal is to save more money for retirement. Annuities provide this feature. Although the couple's circumstances may indicate a need for life insurance coverage, this is not their focus at the moment. A 529 savings plan is used to save money for higher education expenses, not for retirement.

According to the Investment Advisers Act of 1940, access persons must submit their personal security holdings reports by:

According to the Investment Advisers Act of 1940, access persons include officers, directors, partners and other supervised persons who have access to non-public information. They are required to submit their personal securities holdings reports no later than 10 days after becoming an access person; then at least once every 12 months thereafter. Personal security transactions by an access person must be reported no later than 30 days after the end of each calendar quarter.

Under the USA, which of the following choices is considered an offer of securities?

According to the Uniform Securities Act, any security that an investor receives as a bonus for purchasing another security is considered an offer of that security. The USA specifically states that receiving shares due to a stock dividend or other corporate action (e.g., stock split) is never considered an offer or offer to sell that security. A tender offer is an offer to buy a security from existing shareholders.

A broker-dealer is registered in every state, but its only office is located in State X. The Administrator in State X sends a notice to the broker-dealer's compliance department indicating that it is going to audit the books and records of the firm. Does the Administrator in State X have the authority to audit the firm?

Administrators have jurisdiction or authority over all securities professionals who are registered in their state or who offer, sell, or hold themselves out to potential clients in their state. Since the broker dealer is registered in State X, the Administrator in State X has the ability to audit and subpoena its books and records and to compel testimony.

An agent of a broker-dealer has written an electronic marketing piece that recommends the purchase of a new investment company which is being offered by his firm. He wants to send it by e-mail to 40 non-institutional clients. If the product is suitable for each client who's on the agent's distribution list, which of the following statements is TRUE?

Advertisements, including standardized emails, are generally required to be filed with the state Administrator before they're used. However, advertisements for exempt securities and securities that are sold in exempt transactions are not required to be filed. Since registered investment companies are federal covered and exempt from registration with the state Administrator, the agent's email is not required to be filed.

When does a person become eligible for Social Security benefits?

After she's worked 40 quarters Social Security eligibility is based on credits that taxpayers earn by working. Individuals become eligible for Social Security benefits if they have earned 40 credits. Taxpayers can earn up to four credits for every year they work (i.e., one per quarter) and taxpayers become eligible by earning 40 credits. If an individual is earning the maximum credits per year, she can become eligible after 10 years (4 credits per year x 10 years = 40 credits). Be careful, even if a person has earned enough credits, she cannot take benefits until she turns age 62.

Which of the following is a measure of non-systematic risk?

Alpha is a way to measure risk that's association with a single investment, which is better known as non-systematic risk. On the other hand, systematic risk is associated with all investments and is measured by beta. Gamma and theta are both risk measurements, but they're specific to option contracts.

According to the Uniform Securities Act, which of the following investment adviser representatives (IARs) is considered to have custody of customer funds?

An IAR who has been hired by a customer to act as the trustee for the customer's account

An individual represents an issuer in the sale of the issuer's securities to its employees, but does not earn commissions on the transactions. The individual is:

An agent is an individual who represents a broker-dealer or an issuer in effecting securities transactions. However, an individual who represents an issuer in a transaction with existing employees and does not receive commissions is NOT considered to be an agent. In this question, the individual does not fall under the definition of either a broker-dealer or an issuer.

Which of the following transactions would NOT be considered exempt under the Securities Act of 1933?

An initial public offering of an investment company's common stock With the exception of the public offering of investment company shares, all of the transactions listed are exempt from the Securities Act of 1933. Generally, when investment company shares are offered to the public, they must be registered and sold with a prospectus.

Which of the following choices is considered an offer or an offer to sell securities under the Uniform Securities Act?

An issuer that offers additional shares of common stock at a preset price is conducting an offering of stock rights and this is considered an "offer or offer to sell securities" under the USA. The USA doesn't include the receipt of a stock dividend or securities received as a result of a reorganization plan that's been approved by a bankruptcy court as offers or offers to sell. If a car dealer gives a bank-issued certificate of deposit (CD) to every person who purchases a car, the provisions of the USA don't apply since the CD is non-negotiable and not considered a security (it's a banking product). Given the extensive protections that the federal bank regulatory scheme affords depositors, non-negotiable CDs are not regulated by the USA. However, if a car dealer offers securities to every person who purchases a car, the provisions of the USA will apply.

Under the Uniform Securities Act of 1956, certain transactions may be completed without the filing of a registration statements with the Administrator. Which of the following transactions DOES NOT require a registration statement?

An offering of non-convertible debt being made to three different individual investors every six months. Under the Uniform Securities Act, private placements are exempt from registration if the securities are offered to no more than 10 non-institutional investors in a 12 month period. Non-convertible bonds being offered to three investors every six months ultimately adds up to six investors over a 12-month period and is an exempt offering. Under the private placement provision of the Uniform Securities Act, the term "offered" (not "sold") is used. An offering to investors in a local business association (e.g., a Rotary club) would not be exempt because it's likely that the offering was made to more than 10 investors (i.e., the entire club), even if only eight investors purchased the securities. Using a classified ad would be a public, rather than a private, offering of securities. A corporation offering bonds through an intermediary (e.g., a broker-dealer) for a fee is non-exempt, since renumeration (e.g., commissions or referral fees) is not permitted for the private placement exemption.

A publicly traded corporation has 20,000,000 shares of common stock outstanding and an investor buys 1,400,000 of the shares in the open market. Which of the following forms is the investor required to file with the SEC?

Any investor that acquires more than 5% of the common stock of a reporting company is required to file Form 13D with the SEC. Since the client has acquired 7% of the 20,000,000 outstanding common shares ($1.4 million ÷ $20 million), he is subject to the filing requirement. Form 13F is filed by institutional investment managers that exercise investment discretion over $100 million or more in equity securities. Form 144 is filed when an investor intends to sell restricted (private placement) stock or when an insider intends to sell control stock.

Which term is most closely aligned with an ETN?

Bond Exchange-traded notes (ETNs) are unsecured bonds that are issued by broker-dealers and listed on stock exchanges. Unlike most bonds, ETNs don't pay semiannual interest. Instead, at their maturity, ETNs will pay investors the value of a stock index or basket of securities. While ETNs technically have long-term maturities, most investors will buy ETNs and then sell them before they mature (i.e., short-term holding periods).

Which of the following securities would likely have the highest beta coefficient?

Beta is a measurement of a security's volatility as compared to an index such as the S&P 500 Stock Index. A high beta (greater than one) indicates that a company is more volatile than the benchmark index. Utilities and other defensive industry stocks tend to have low betas.

What does a stock's beta measure?

Beta is the measure of a stock's systematic risk compared to the overall stock market (e.g., the S&P 500 Index), not the overall economy. Beta is actually calculated using a statistical measure - referred to as "covariance" - which is similar to correlation. Risk-free rates are estimated using U.S. government securities.

Which of the following statements is TRUE regarding Roth IRAs and Coverdell Education Savings Accounts?

Both are only permitted for individuals whose income is below a certain amount. Contributions that are made to either a Roth IRA or Coverdell Education Savings Account (ESA) are only permitted for persons whose income is below a certain level. Both allow for tax-free growth if certain conditions are met; however, the contributions are made in after-tax dollars (i.e., they're non-deductible). A Roth IRA allows a catch-up contribution of $1,000 by any person who is age 50 or older. A Roth IRA allows for a maximum annual contribution of $7,000 ($6,500 in 2023), while the maximum annual contribution to a Coverdell ESA is $2,000.

When is a broker-dealer required to deliver a prospectus?

Broker-dealers are required to deliver prospectuses to purchasers of a new issue along with the confirmation, which is due by the settlement date.

A sole proprietor desires to set up their business as a separate entity, but retain the same flow-through tax treatment with full ownership. Which of the following business entities would be BEST?

By establishing a Subchapter S Corporation, the business is not taxed. Instead, income and losses flow through to the shareholders, which in this case is one person. While partnerships also provide flow-through of tax treatment, they require more than one owner or investor. A C Corporation is a taxable entity that lacks flow-through tax treatment.

A client inherited his father's IRA. If his father died at the age of 69 and the client did not choose to take a lump-sum distribution, he must withdraw the entire account:

By no later than the 10th year following the owner's death According to IRS rules regarding inherited IRAs, a non-spouse who inherits an IRA may take a lump-sum distribution or have the funds distributed by the end of the 10th year following the IRA owner's death.

Which of the following entities pays federal income taxes?

C Corporation In the U.S., a C Corporation is taxed separately from the owners of the business. After the C Corporation has paid income taxes, it can pay their shareholders a dividend; however, this payment is then taxable to the shareholder (i.e., double taxation). Both S Corporations and sole proprietorships are not taxable entities. In other words, all of their income passes through and is taxed to the owners (i.e., single taxation). Taxation of trusts is more complicated, but in some instances, income from a trust is only taxable to the beneficiary. Since C Corporations are always taxed, it's the best answer to this question.

Which of the following statements is TRUE regarding payment for order flow (PFOF)?

Clearing brokers will pay introducing firms for their retail customers' orders. 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.

An investment adviser is registered in State A and transacts business through a broker-dealer that is registered in State A and with the SEC. What may the Administrator in State A require the broker- dealer to file with its office?

Copies of all financial statements that are required by the SEC State Administrators may not require broker-dealers to provide more documentation than what is required under federal (SEC) guidelines.

An investor purchases a bond that was quoted in terms of its yield-to-call. The best outcome for the investor is:

Holding the bond until it matures Bond yields are quoted on the basis of yield-to-call or yield-to-maturity, whichever is lower (i.e., yield-to-worst). Since the yield-to-call is quoted, the yield-to-maturity must be higher and will represent a greater rate of return than if the bond is called.

An advisory client is discussing the purchase of AA-rated, 15-year municipal bonds with his adviser. The bonds offer a coupon rate of 3.2% and can be purchased at a small premium to par. The adviser is not certain if the bonds are trading at an advantageous price. Which calculation would provide the BEST method of determining whether the bonds should be purchased?

Discounted Cash Flow Discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for her client.

Which of the following statements BEST describes discounted cash flow?

Discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for her client.

Which of the following statements are TRUE regarding a dollar-weighted rate of return?

Dollar-weighted rates of return are used to calculate a client's internal rate of return and take into account how much the client earned based on the amount of money invested. This method is not considered a fair way to measure the performance of money managers since they have no control over when their clients invest. Time-weighted averages are used to compare the performance of two money managers

Buy and hold and systematic rebalancing are examples of passive approaches to asset allocation, and based on the theory known as:

Efficient Market Hypothesis (Theory) states that financial markets are efficient and that the prices of securities reflect all known information; therefore, it is impossible to outperform or time the market. Sector rotation is the moving of investments from one industry sector into another in anticipation of a change in the economy. CAPM, Capital Asset Pricing Model, describes the relationship between risk and expected return. Modern Portfolio Theory focuses on diversifying across various asset classes to enhance returns without significantly increasing risk.

How are shares of ETFs priced?

Exchange-traded funds (ETFs) are exchange-traded portfolios that are typically designed to track an index. Like closed-end funds, ETFs are valued based on the bids and offers of investors and traders on stock exchanges.

According to the USA, which of the following securities are exempt from registration?

Exempt securities include those that are issued by a U.S. federal, state, or local government, a railroad, a common carrier, a public utility, or a holding company that is subject to specified regulations. Debt securities issued by insurance companies are exempt but not the stock of their subsidiaries. However, variable annuities issued by insurance companies are subject to registration.

Broker-Dealer A is a publicly traded company listed on the New York Stock Exchange. Which of the following statements is TRUE regarding an agent of Broker-Dealer A who wants to sell securities of his company to a client?

Failing to disclose that a broker-dealer is affiliated with or controlled by an issuer of securities is considered a dishonest and/or unethical business practice. The agent would need to disclose the affiliation before entering into any contract with a customer to buy or sell securities. The disclosure may be made verbally prior to the trade if written disclosure is made at or before the completion of the transaction (usually the settlement date). The disclosure would need to be made to any account of a broker-dealer.

According to the Investment Advisers Act, in order to register as an investment adviser with the SEC, which of the following choices is required?

File Part 1 and Part 2 of Form ADV In order to register as an investment adviser with the SEC, the applicant must file Part 1 and Part 2 of Form ADV with the SEC. Individual registration of employees with the SEC is not required.

What's required to be obtained by an investment adviser when it engages with a new client?

Financial institutions must collect certain information when they open accounts for clients. Typically, a client's name, address, date of birth, and tax identification number (i.e., Social Security number) must be obtained. A driver's license can be used to verify the information, but it's not specifically required since financial institutions are permitted to use other forms of identification. The employer's address and the date on which the account is opened are not required to be documented.

Under the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all electronic communications and their amendments must be maintained by the adviser for how long if distributed directly or indirectly and to how many persons?

Five years if sent to two or more persons

An equity-indexed annuity is a type of:

Fixed annuity that offers the potential for greater returns An equity-indexed annuity is a type of fixed (non-variable) annuity; therefore, SEC registration is not required for these contracts. The owner receives a guaranteed minimum rate of return, but has significant upside potential since the annuity's return is tied to a benchmark index (e.g., the S&P 500 Index. If the index underperforms, the investor will simply receive the minimum rate. On the other hand, if the index performs well, the investor will receive the indexed return based on contractual provisions.

When is a statutory (final) prospectus used?

For all new issues Statutory (final) prospectuses are required for the sale of any new issue in the primary market, including, stocks, bonds, investment company securities, and variable products.

As an investment adviser representative, when does the use of donor advised funds (DAF) make the most sense?

For estate planning 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.

A client of an IA owns his own home and the title is in his name. If he wants to avoid probate when the property is transferred upon his death, the adviser may recommend which of the following?

In order to avoid probate upon the clients death, the IA may recommend filing a transfer-on-death (TOD) deed which names one or more specific beneficiaries.

Which statement about an investment adviser's annual renewal is TRUE?

Form ADV is filed with the SEC within 90 days of a federal covered adviser's fiscal year end, or with the state Administrator(s) within 90 days of the calendar year end.

One of the main differences between futures contracts and forward contracts is that:

Forward contracts may not be offset without permission One of the main differences between futures contracts and forward contracts is that future contracts may be offset (bought or sold). Indeed, most buyers and sellers of future contracts never actually take delivery of the underlying commodity or financial instrument. In a forward contract, however, both parties involved in the contract must agree before the contract may be bought or sold.

Fundamental analysis involves evaluating:

Fundamental analysts use an issuer's financial statements (e.g., income statement, balance sheet) to value stocks. Technical analysts use historical prices, price charts, and support and resistance levels to make trading decisions.

Which of the following is TRUE concerning the private placement of securities being distributed under Rule 506(c) of Regulation D?

General advertising is permitted, but all investors must be accredited. Under Rule 506(c) of Regulation D, issuers may raise an unlimited amount of capital and they may solicit all types of investors; however, the issuer can only accept accredited investors. In other words, general advertising/solicitation is allowed, but only accredited investors may purchase the securities. Under Regulation D, issuers may also sell securities privately through a 506(b) offering. Two key differences between 506(c) and 506(b) are that 506(b) offerings do not allow for general advertising/solicitation and the issuer may sell to an unlimited number of accredited investors, but no more than 35 non-accredited (yet still sophisticated) investors.

An Administrator from State A has jurisdiction over an offer made:

Generally, an Administrator will have jurisdiction over any offer if it originated in that state, was directed in that state, or was accepted in the Administrator's state. However, if the communication originated outside the state and was in the form of a radio or television broadcast, the Administrator would not have jurisdiction. The Administrator has jurisdiction if the newspaper is published in that state and more than one-third of the circulation is inside that state.

A durable power of attorney:

Gives a person the authority to manage the grantor's finances even if the grantor becomes incapacitated A durable power of attorney gives a person the power to manage the grantor's financial affairs even if the grantor becomes incapacitated. Conversely, a regular (standard) power of attorney terminates if the grantor becomes incapacitated. A registered representative (RR) must have durable power of attorney in order to exercise discretion in the event his client becomes incapacitated.

Both variable life insurance and variable annuities have all of the following features, EXCEPT:

Guaranteed cash values Variable life insurance and variable annuity products do not provide guaranteed cash values. When investors buy variable products, they invest in a separate account and assume market risk.

A CPA who specializes in tax and estate planning is serving as a trustee. Since the CPA will be charging a minimal fee for his services, he chooses not to perform a complete tax analysis for the trust. Under the Uniform Prudent Investor Act, the CPA's actions are considered:

Ignoring a client's tax situation would be a violation of a trustee's fiduciary duty. Charging a minimal fee for service does not give the CPA permission to ignore the client's best interests. In many cases, a trustee may seek outside tax advice; but, if the trustee is also a CPA, it is reasonable to assume that she would perform the tax analysis.

If an investment increases in value, which of the following statements would be TRUE?

If it was held for less than one year, the annualized rate of return would be greater than the holding period return The holding period rate of return states how much an investor earns over the period an investment is held. The annualized rate of return states how much an investor makes over a one-year period. If an investor had a 5% rate of return over six months, her holding period rate of return would be 5%; however, her annualized rate of return would be 10% (the 5% return earned over the six-month period multiplied by two). If the holding period had been more than one year, the opposite would be true--the holding period return would be larger than the annualized rate of return.

An investment advisory contract may not be assigned without a client's consent. Any event that causes a change in the adviser's management or control is considered an assignment.

If the adviser is organized as a partnership, the death or resignation of a minority of the partners does not constitute a change of control or management. A sole proprietorship hiring 40% more advisers doesn't signify a majority change; therefore, no assignment has occurred. However, a corporation acquiring 60% of the assets of an IA that's organized as a partnership's constitutes a change of control. Note, an investment adviser that's organized as a partnership MUST notify its clients if the composition of the partnership changes, but is NOT required to obtain client approval. (32475)

A client of a broker-dealer has requested for his agent to buy shares of a technology company for his account. The customer also told the agent that, "I trust your judgement and trust your price." When is the execution of this order in violation of the Uniform Securities Act?

If the customer failed to specify which technology stock to purchase. If a customer provides the action (i.e., buy or sell), the amount (i.e., number of shares), and the assets (i.e., specific stock); then an agent of a broker-dealer may determine the time and/or price of execution without obtaining written power of attorney from the customer. In this question, if the customer failed to specify which technology stock he wants to purchase, the execution would be a violation of the USA.

Which of the following choices is guaranteed in an equity-indexed annuity?

In an equity-indexed annuity, the insurance company guarantees a minimum rate of return (typically 87.5% of the premium payments plus 3%).

An agent who is registered in State A contacts an individual investor in State B. The investor agrees to open an account and buy a security through the agent. If the broker-dealer is registered in State B, but the agent is not, the agent MAY:

In order to sell a security in a state, the broker-dealer and the agent must be registered in that state. Since the agent is not registered in State B, he may not sell the security to the investor. It is important to note that individual investor is a new client. If the investor was an established client who previously lived in State A, but had moved to State B, the agent could continue to service the client's account for 60 days after the client moved. However, this provision is only available if the agent's registration was pending in State B.

An investment adviser's client base is limited to insurance companies. If the adviser has its only office in State A, with whom must it register?

In this example, since the investment adviser is dealing exclusively with insurance companies, it is exempt from registration under the Investment Advisers Act of 1940. However, the IA would likely be required to register in State A because it has an office there.

A grandfather has set up a revocable living trust and named his grandchildren as the beneficiaries. What's the tax implication for any income produced by the trust?

Income is taxable at the grantor's tax rate Income that's generated in a revocable trust is taxed at the grantor's (i.e., creator's) tax rate. On the other hand, irrevocable trusts are taxed at the trust's tax rate.

A wealthy, married couple, who are both in their 40s, have money that they would like to invest. If their objective is long-term growth with minimum tax liability upon liquidation in 25 years, which of the following investments is the most appropriate?

Individual equity securities Of the given choices, investing in individual equities is likely the most appropriate. If the equities rise in value and are then, years later, liquidated, the gains will be taxed at the long-term capital gains rate. Historically, the long-term capital gains tax rate is lower than the highest rate at which ordinary income is taxed. Municipal bonds provide tax-free income, but they offer limited growth potential. A variable annuity and an equity-indexed annuity may provide growth potential, but that growth is taxed as ordinary income when it is withdrawn from the annuity.

In order to comply with the safe harbor provision provided under ERISA Section 404(c) involving the removal of liability for investment losses, what must be provided by a fiduciary?

Information to participants about investment options which are adequate enough to make an informed investment decision

Which type of offering will likely be more volatile in the aftermarket?

Initial public offerings (IPOs) 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.

Which of the following would most likely be registered with the state Administrator?

Interests in mining or real estate ventures are examples of partnership offerings. General and limited partnerships are often registered with the Administrator in the state in which they are offered. Municipal bonds are not subject to registration requirements since they are categorized as exempt securities under the Uniform Securities Act. Also, mutual fund shares and securities listed on the NYSE are federal covered securities, since these issues are only required to be registered with the SEC.

What type of broker-dealer sends orders to a market maker in order to execute orders for retail customers?

Introducing broker 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.

An investor is negotiating a contract with an investment adviser. The adviser wants to charge the investor a 2% management fee plus 20% of any appreciation that is realized in any given quarter. Although the investor is not opposed to the idea, in order to comply with the law, the investor must:

Investment advisers may only charge performance-based fees to persons who are categorized as qualified clients. A qualified client is defined as a person that has $1.1 million of assets under management with the adviser or a net worth of more than $2.2 million. It's important to recognize that being considered an accredited investor does NOT satisfy the levels necessary to be considered a qualified client. Under Regulation D of the Securities Act of 1933, an accredited investor is a person with annual income of at least $200,000 or a net worth of at least $1 million. For qualified clients, the $1.1 million is the assets under management requirement; however, for accredited investors, the $1 million is the net worth requirement. Also note, the net worth does NOT include the person's primary residence or any associated mortgage.

What kind of federally covered securities are subject to notice filling by a state administrator?

Investment company securities and securities that are issued under Regulation D Rule 506 are considered federal covered securities (exempt from state registration), but subject to notice filing. (89021)

Which of the following business structures allows the pass-through of income and loss to its members on a Form K-1?

Limited liability company (LLC) Each of the answer choices provide for the pass-through of income for tax purposes to investors. However, only limited partnerships, LLCs, and S-corporations will report their income on a Form K-1. The reason that LLCs is the answer is because they refer to their owners as members. Owners of an S-corporation are referred to as shareholders, while owners of a limited partnership are referred to as partners.

Are Section 457 plans required to follow ERISA guidelines?

No, because they're non-qualified plans. Section 457 plans are retirement accounts for municipal government workers and certain non-profits. Unlike 401(k) plans, 457 plans are non-qualified and are not required to meet guidelines that were established by the Employee Retirement Income Security Act of 1974

All of the following are benefits of a swap contract, EXCEPT:

Lower cost Swap contracts are derivative contracts in which two parties exchange future cash flows (e.g., a fixed interest rate for a floating rate). Swaps are customized to fit the needs of the buyer and seller. As a result, they can have short or long expiration dates and can be used to hedge or speculate on a variety of financial assets (e.g., stocks, bonds, or currencies). As with futures and options, swaps will have premiums and typically increase the total investment of the parties involved.

A client is an executive of a company that provides a 401(k) plan. He's maximizing his 401(k) plan contributions, but wants to add a real estate investment to his portfolio. He calls his attorney about purchasing a second home that can be used for personal vacation and as a rental. He wants to use proceeds from his 401(k) plan to make the purchase. The client:

May set up an LLC to buy the real estate Although the client will be required to pay taxes and potentially a penalty, he can withdraw money from a 401(k) plan and use the proceeds to buy real estate. Since he's using the home as a rental, establishing a limited liability company (LLC) is advisable. The LLC business structure provides pass through of income and he may be the only owner (i.e., member). Partnerships and REITs must be established by two or more people and are not a good fit for the single client.

An investor lives in New Jersey and is opening a 529 college savings plan that's sponsored by the state of Montana for his daughter's benefit. His initial contribution is $90,000. Which of the following statements is TRUE?

Neither the investor nor his daughter will be liable for gift taxes on the $90,000 contribution. The investor may contribute up to $90,000 at one time to his daughter's 529 plan without incurring federal gift taxes. The IRS allows donors to aggregate five years' worth of gifts under the annual gift exclusion into one lump-sum contribution (5 x $18,000). (Note, in 2023, the gift tax exclusion amount was $17,000.) Some states do allow donors to deduct a portion of contributions made to 529 plans from their state income taxes, but only if the donor contributes to a plan that's sponsored by his home state.

When an investment adviser representative is recommending that a client invest in various mutual funds, she may recommend an emerging markets fund as a means of:

Obtaining diversification through investments in a single country or a group of developing countries An emerging markets fund invests in companies which are located in countries that are moving out of their economic development phase and into a more growth-oriented stage. Although investing in an emerging markets fund provides for diversification, it does not guarantee higher returns as compared to other mutual funds. These funds present both a high degree of risk and volatility.

If an offer is broadcast over television or radio, which state Administrator has jurisdiction?

Offers that are made using TV or radio are unique because the only Administrator that has jurisdiction is the Administrator of the state in which the camera or microphone is located. For offers that are mailed or received through a newspaper or magazine, there may be multiple state Administrators who have jurisdiction.

As of the close of business on Monday, a state-regulated IA has fallen below its minimum financial requirement. When must the IA file a statement of financial condition?

On the business day following the date that it reported the issue to the state Administrator.

Which of the following securities have no loan value?

Options that expire in nine months or less may not be bought on margin. These contracts have no loan value and, therefore, must be paid for in full. On the other hand, options that have maturities of greater than nine months have a margin requirement of 75% (i.e., customers must pay 75% of the cost and the firm may loan the remaining 25%).

If a 62-year-old married woman is about to start taking Social Security payments, which of the following is TRUE?

She locks in the payment she will receive. An individual may start taking Social Security benefits once she reaches age 62. However, if she waits, she will receive larger payments. Once an individual begins taking benefits, she locks in the base amount that she will receive. The age at which a person begins taking benefits doesn't prevent her from receiving cost of living adjustments.

Which of the following records must be kept for the lifetime of an investment adviser plus three years after the termination of the business?

Partnership agreements Although most books and records of an investment adviser are kept for five years, legal documents that establish the investment adviser's business must be kept for the lifetime of the IA. For an adviser that's established as a partnership, it must keep the partnership agreement for its lifetime. An adviser that's established as a corporation must keep a copy of its articles of incorporation. Business documents must also be kept for three years after the adviser closes. All of the other answer choices are records that must be kept for five years.

Which of the following distribution methods will ensure that each branch of family receives an equal share of an estate?

Per stirpes Per stirpes distributions are done per branch of a family and, in some instances, members of the same generation of a family will receive different amounts from an estate. A per capita distribution of an estate ensures that each member of a generation will receive the same amount as any other. Inter vivos and testamentary are terms that are associated with trust accounts, but not estates.

According to the Uniform Securities Act of 1956, under which of the following circumstances is a registration statement NOT required to be filed for a promissory note?

Promissory notes (e.g., commercial paper) are loans, just like bonds. These debt securities are exempt if they have nine months or less to maturity, they're issued in minimum denominations of $50,000, and they're rated in one of the three highest rating categories from a nationally recognized statistical rating organization (NRSRO). Notice that $50,000 is the minimum denomination, not the maximum denomination. Any of the three highest ratings is sufficient; it doesn't need to necessarily be the highest. To be exempt from registration, there's no requirement for promissory notes to be secured. In fact, most are unsecured.

Tenants in common:

Provide each owner with an undivided interest in the property The tenants in common designation provides multiple owners with an undivided interest in shared property and doesn't require the owners to be married. The undivided interest means that either owner is permitted to use or benefit from the property, even if their ownership interest is unequal. One owner of a tenants in common arrangement is permitted to sell jointly owned property without permission from the other owner(s). Unlike other forms of joint ownership, interest in property in a tenancy in common designation passes to the deceased's estate after the person dies. The other owners of the property will not automatically receive ownership after one owner dies.

Which of the following statements is TRUE regarding the taxation of qualified cash dividends?

Qualified cash dividends are taxed at a maximum rate of 20% in the year in which they're paid. Qualified cash dividends are typically taxed at a maximum rate of 20% in the year in which they're paid. Corporate bond interest is taxed at an investor's ordinary income rate, municipal bond interest is typically tax exempt. Stock dividends, not cash dividends, will adjust an investor's cost basis.

If an advisory client is most concerned with minimizing her tax liability, common stocks may provide a greater benefit than corporate bonds because:

Qualified cash dividends are taxed at a maximum rate that is less than the rate at which the interest on corporate bonds is taxed

According to the NASAA Model Rule on Registration Exemption for Investment Advisers to Private Funds, a private equity fund manager is NOT required to register as an investment adviser if the fund exclusively accepts investments from:

Qualified clients Private funds (e.g., hedge funds) are similar to investment companies (e.g., mutual fund), but they're not required to register with the SEC. Specifically, private funds that meet the requirements under Section 3(c)(1) of the Investment Company Act of 1940 are exempt from registration. As a result, private funds may be referred to as Section 3(c)(1) funds. Advisers that manage these funds are exempt under the Uniform Securities Act if the funds only accept investments from qualified clients. Qualified clients are individuals with either a net worth of $2.2 million or greater, or have assets under management of $1.1 million or greater. This is the same definition that's used in the rule for charging performance-based fees.

Which investment offers income tax relief?

Real estate investments offer tax breaks that mutual funds cannot offer. For real estate, one of the largest tax breaks is the interest deductions on loans. If a person purchases an apartment building with a mortgage, the interest paid on the loan can be deducted against the rent received from tenants. Similarly, owners of apartment buildings can also depreciate the cost of their buildings.

A 50-year-old client mentions that she wants a retirement plan outside of her 401(k) plan. Specifically, she's interested in a plan with more investment options. The BEST recommendation is a:

Roth IRA Individual retirement accounts (IRAs) are a way to save outside of an employer-sponsored retirement plan. In addition, IRAs often have more investment options than employer-sponsored plans. Section 412(i) plans are a type of defined benefit plan that's offered by smaller employers. Both defined benefit plans (e.g., pension plan) and 412(i) plans are only offered through an employer and investors cannot elect to open those accounts on their own. Growth funds are a type of mutual fund, but not a type of retirement account.

Schedule A of Form ADV is filed:

Schedule A of Form ADV is only filed during an adviser's initial registration. Schedule A lists the direct owners (e.g., those who have more than 5% ownership) and executives (e.g., CEO and CFO) of the investment adviser. After an investment adviser becomes registered, Schedule C is used to amend and update information about its owners and executives

What are section 457 Plans, and are they considered qualified? What does the answer mean?

Sections 457 Plans are retirement plans for municipal government workers and certain non-profits. They are not qualified plans Since they are not qualified plans, they are not required to follow ERISA guildlines

A client has his portfolio invested in a number of different equity securities in the energy, manufacturing, and technology sectors. His investment adviser representative wants to help him reduce his systematic risk. Which of the following types of securities would the IAR most likely discuss with the client?

Securities which have a negative correlation with the securities that are currently in his portfolio, such as debt instruments. In order to minimize systematic (market) risk, the Modern Portfolio Theory states that an investor should have different asset classes in his portfolio that have a negative correlation. When securities are negatively correlated, their prices have a tendency to move in opposite directions, such as the movement of common stocks relative to debt instruments.

The Investment Advisers Act of 1940 would consider an individual to be in the business of providing investment advice if:

She provides mutual fund timing and sector rotation advice to her clients Investment advisers provide advice that is timed and tailored to each client. An investment adviser's advice is not general, isolated, or occasionally offered. An adviser is considered in the business of providing advice when it holds itself out as an adviser or makes recommendations that are client-specific.

A client currently has $75,000 in cash he does not envision needing for the next 18 months. He is interested in seeing if he can receive a greater return on this cash than the savings account it is currently in. Which of the following choices would be MOST suitable?

Short-term debt instruments In this case, we can remove immediately the equity income fund as a choice. Stocks are never a good choice for someone with less than a 4- to 5-year time horizon. We can also remove the municipal bond. Why? Because there is no mention of a tax concern, or a job that implies a large income each year. Now we are left with the GNMA fund and short-term debt instruments. Both have principal risk. However, a GNMA fund is usually a better choice for someone with 2+ years' time horizon. This is mainly due to the interest-rate risk the fund is subject to. This person has 18 months as his time horizon, which is relatively short-term. The correct choice is short-term debt instruments because this client would be purchasing securities such as Treasury bills and similar items.

According to the Investment Advisers Act of 1940, when is an investment adviser required to provide an audited balance sheet to its clients?

Since state and federal laws overlap regarding the concept of providing an audited balance sheet, it is important to identify which regulator is asking the question. According to the Investment Advisers Act of 1940 (federal law) an adviser is required to provide clients with an audited balance sheet if it collects prepaid fees of more than $1,200, six months or more in advance of providing advisory services. However, according to the Uniform Securities Act (state law), an adviser is required to provide clients with an audited balance sheet if 1) the firm collects/solicits prepaid fees of more than $500, six months or more in advance of the service, or 2) the firm maintains custody or discretionary control of clients' assets.

A company issued $50 million of common stock in a private placement under Regulation D. In order to sell the stock initially in any state, the Administrator requires the filing of:

Since stock that's issued under Regulation D is federal covered, the shares do not need to be registered at the state level. However, state Administrators can require the issuer to complete a Notice Filing. Form 10-K is a financial report that corporations file with the SEC. Form ADV-NR is filed by investment advisers that have principal officers who are not residents of the United States.

If a portfolio manager has a diversified portfolio of large-cap stocks, it would use index options to reduce which of the following risks?

Systematic risk If a portfolio manager wants to hedge a diversified stock portfolio from systematic (market) risk, it could buy puts or sell call options on the index. If the market declines as a whole, the puts would provide the best hedge by becoming more valuable and would offset the risk. In the event the overall market declines, the call options would provide only limited protection through the collection of the premium on the expiring call options.

Under what form of ownership may a husband and wife ensure that their property is not able to be attached by the creditors of either spouse?

Tenancy by the entirety Tenancy by the entirety, which is only available to married couples, allows spouses to own property as a single legal entity. With this form of ownership, a creditor of one spouse is unable to make a claim to the account's assets. However, if the creditor has a claim against both spouses, it may make a claim to the assets.

If FINRA disqualifies a broker-dealer or agent, may the Administrator overrule FINRA?

The Administrator has no jurisdiction beyond enforcing state securities laws.

If FINRA issues an order against a broker-dealer, what actions may be taken by the Administrator according to the Uniform Securities Act?

The Administrator may suspend a registration if a broker-dealer is subject to a FINRA action The Administrator may suspend a broker-dealer's registration if it has violated a law, is about to violate a law, or if the firm is subject to a FINRA order. The Administrator is not required to take action, but will instead decide on the appropriate course on a case-by-case basis.

Which of the following would be grounds for the denial, revocation, or suspension of a registration by an Administrator?

The Administrator will generally not take action for minor rule violations. However, a broker-dealer's failure to supervise its agents is a not considered a minor violation. The failure to supervise has the potential to cause great harm to the capital markets as well as to the investing public.

An Administrator in State Y who receives a complaint regarding an advertisement that originated in State X will take which of the following actions?

The Administrator would first investigate the complaint before taking any action.

Under the Investment Advisers Act, the form that is filed annually with the SEC and determines an adviser's continued eligibility for federal registration is called:

The Annual Updating Amendment is submitted to confirm that an SEC registered investment adviser is still eligible for federal registration. The form must be filed within 90 days after the end of the adviser's fiscal year.

Which of the following issuers must register with the state?

The Canadian government and provinces are exempt under the Uniform Securities Act and are not required to register their securities. Municipal bonds that are issued by U.S. states and securities issued by exchange-listed corporations are also exempt. Unless an answer indicates that a Canadian company's stock is listed on the Toronto Stock Exchange, it should be assumed that the stock is not exempt under the Uniform Securities Act.

A company's PE ratio has historically been 30, but it has recently dropped to 15. In this case, what has most likely happened to the company?

The Price-to-Earnings (PE) ratio is the price of a company's stock divided by its Earnings Per Share (EPS) (i.e., PE Ratio = Stock Price ÷ EPS). If the company's PE ratio has fallen, this means that either the stock price has fallen or the EPS of the company has risen. Paying common shareholders a dividend doesn't impact EPS and will most likely cause the stock's price to rise.

An investment adviser has created promotional material that will be sent to five institutional clients. The material promotes a stock that's about to be listed on the Philadelphia Stock Exchange. Under the Uniform Securities Act, does the adviser's promotional material need to be filed with the state Administrator?

The Uniform Securities Act provides an exemption for filing advertisements related to securities that are either currently listed on an exchange or are approved to be listed on an exchange. Since the stock in this question is about to be listed on the Philadelphia Stock Exchange, the advertisement is not required to be filed with an Administrator.

Which of the following would NOT be an important consideration when conducting a capital needs assessment for a client?

The amount of anticipated volatility in the marketplace A capital needs assessment analyzes a client's future goals and needs. Retirement planning, college funding, and the risk of death before meeting a savings goal are all considered. A client's life expectancy, the rate of inflation, and her earnings will all affect the capital needs assessment. Market volatility may influence the securities on which recommendations are based, but not the capital needs assessment.

A married couple just received a small inheritance and want to use a portion of it to pay off their mortgage in the future. They ask their investment adviser representative how much of the inheritance they need to invest based on an estimated rate of return of 7% annually to be able to pay off their mortgage balance in 15 years. The adviser tells them $18,122. This amount is referred to as the payoff amount's:

The amount of money that must be invested at an expected rate over a specified number of periods to produce a sum of money is referred to as the present value.

Under the Investment Advisers Act of 1940, when is a firm's registration required to be renewed?

This is a tricky question because federal regulation of IAs is based on fiscal year, while state regulation is based on calendar year. According to the Investment Advisers Act of 1940, IAs are required to renew their registration within 90 days of their fiscal year-end. On the other hand, the Uniform Securities Act requires registration renewal to be completed at the end of the calendar year.

A client of an IA has over 20% of his assets invested in a coal mining company's stock. The IA recommends greater diversification and indicates that stocks in this sector have been continually declining in value over the last 10 years. The client believes that the stock will eventually recover and refuses to sell it. The client's behavior may be described as:

This is an example of anchoring. Anchoring involves a client being attached to the belief in an investment's potential upside despite indications to the contrary.

When trading in the secondary market, investors will sell at the (blank) price and buy at the (blank) price

investors will sell at the bid price and buy at the ask price

Under the Uniform Securities Act, an institutional investor:

The best answer to this question is that, by rule or order, the Administrator has the power to designate a person as an institutional investor. A client with net worth of more than $2.2 million or a client with a minimum of $1.1 million under management with an investment adviser is defined as a qualified client, not necessarily an institutional investor. Both financial institutions and trusts may be considered institutional investors, but there's a financial requirement that must be met.

If the net present value of an investment is less than 0:

The current market value is more than the discounted cash flows. Net present value is the difference between the present value of an investment's cash flows (e.g., interest payments), less the market value of the investment (i.e., NPV = PV Cash Flows - Market Price). If the net present value is less than 0, the present value of the cash flows is worth less than the purchase price and the investment is overvalued (i.e., NPV is less than 0 if PV of Cash Flows is less than the Market Price)

Which of the following is a valuation model used to calculate the anticipated return for a portfolio of securities?

The expected rate of return is used to estimate or anticipate the performance of a portfolio by averaging all of the possible returns and the probability that they will occur.

An investment adviser is registered in 10 states. The firm wants to transact business with three clients in a state in which it is not registered. According to the Uniform Securities Act, which of the following statements is TRUE?

The firm would not be required to register as an investment adviser if it did not lease an office in the state in which it is not registered According to the Uniform Securities Act, if a firm has five or fewer clients in a state (during a 12-month period) in which it has no office, it is exempt from registration in that state. Also, if all the clients, regardless of their number, are banks, trust companies, insurance companies, or employee benefit plans, the firm is exempt from state registration.

Which of the following statements is TRUE concerning taxation of capital gains distributions from a Subchapter S Corporation?

The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain A Subchapter S Corporation is treated as a partnership for tax purposes. It avoids corporate taxation and its shareholders are taxed based on the distributions from the corporation. The gain would be taxed only once, at the shareholder's tax rate. A Subchapter S Corporation would report a proportional amount of the shareholder's net capital gains on a K-1 tax form. The S Corporation would not pay corporate tax, while the shareholder would pay a capital gains tax based on her individual tax rate. The gain would not be taxable as ordinary income.

When is the internal rate of return (IRR) used?

The internal rate of return (IRR) is a rate that makes the present value of an investment equal to the market price of the investment. In other words, the IRR is the rate that makes the net present value (NPV) of an investment equal to zero.

A client of an investment adviser representative has just died. If the client did not have a will, from whom may the investment adviser representative accept instructions?

The intestate Administrator If an individual dies without a will and the assets of estate exceed the estate's liabilities, the estate is considered intestate. A probate court will appoint a person to act as the administrator of the estate and distribute the estate's assets to the beneficiaries. A power of attorney is void after a client dies.

According to federal law, which of the following would best describe what happens when a security is federal covered?

The issuer must register the security with the SEC only Federal covered securities are registered with, and regulated by, the SEC. A state Administrator does not have authority over any offering documents related to federal covered securities. Remember, federal covered securities are subject to business risk and are not automatically considered safe or investment-grade.

As it relates to gift and estate taxes, what's portability?

The lifetime gift tax exclusion is currently $13.61 million. Over the course of a person's life, he can give up to $13.61 million without being required to pay the gift tax. If a person dies without giving away $13.61 million, any unused portion can be used by his surviving spouse. For example, if an individual has given away $12.61 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 $14.61 million in her lifetime.

An agent of a broker-dealer is soliciting investors for a Regulation D offering. A non-accredited investor asks if he can invest less than the minimum required amount. Which of the following statements is TRUE?

The non-accredited investor must invest at least the minimum required amount. Securities that are sold under Regulation D are not required to be registered if they're sold to accredited investors and/or up to 35 non-accredited investors. If investors want to purchase securities being distributed through a Regulation D offering (regardless of whether the investors are accredited or non-accredited), they're required to invest the minimum required amount that's established by the broker-dealer selling the securities. Investors are not permitted to invest less than the minimum required amount.

When does the registration for an agent of a broker-dealer expire?

The registration of an agent of a broker-dealer expires at the end of each calendar year (December 31). On the other hand, the registration for securities will expire one year (i.e., 365 days) after their effective date.

Which of the following is TRUE if the price of a discount bond falls?

The spread between the yield-to-maturity and yield-to-call will increase and the yield-to-call will rise. When bond prices fall, both the yield-to-maturity and yield-to-call will rise. Short-term yields will always move more than long-term yields. Since the call date is always before maturity, the yield-to-call is a shorter-term than the yield-to-maturity on the same bond. To summarize, the yield-to-call will always move more than the yield-to-maturity. In this question, the yield-to-call is already higher than the yield-to-maturity since the bond is trading at a discount. When the price falls even further, the yield-to-call will increase more than the yield-to-maturity and therefore the spread between them will increase.

Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is:

The statute of limitations for criminal violations under the Act is five years.

All of the following are characteristics of a revocable trust, EXCEPT:

The trust does NOT avoid probate One of the primary reasons that revocable trusts are established is to avoid probate issues. Revocable trust income is taxable to the grantor during the grantor's lifetime and the assets are included in the grantor's estate when the grantor dies.

XYZ Inc. is an investment adviser. One of its institutional clients would like to sell 1,000 shares of ABC stock. XYZ believes that this would be a suitable investment for another institutional client. XYZ proposes to arrange a trade between the two clients and would charge each customer a small fee for its services. This would allow each client to receive a better price than either could obtain in the open market. Which of the following statements is TRUE in this situation?

This is permitted if XYZ discloses to each client that it is acting as a broker for both parties and receives each client's written consent

Which of the following is a precursor to inflation?

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.

Which of the following statements is NOT TRUE concerning the registration requirements of securities professionals?

There is no exemption from registration for broker-dealers that have no place of business in a state and who limit their agent's activities to selling exempt securities. It is the securities that are exempt, not the agents selling those securities. Investment advisers that have no place of business in a state may still do business in that state without registering provided they limit their advice to institutional clients or no more than five noninstitutional clients in that state. There is no de minimis exemption for broker-dealers that have no place of business in a state and a limited number of noninstitutional clients.

A client requests that her agent display a quote in a thinly traded security. The client is the majority shareholder in this security and the broker-dealer honors the request and displays the quote. Which of the following statements is TRUE?

This would be permissible if the broker-dealer believed the quote was bona fide A broker-dealer is permitted to publish quotes (bid and ask prices) on behalf of its clients or for its own account. The broker-dealer must believe the quotes are bona fide and not intended to manipulate the market price of a security. If the quotes are not bona fide and the broker-dealer publishes them, they would have engaged in an unethical business practice.

What is the motivation behind setting up an UTMA account?

To provide gifts to the child/owner Due to the popularity of 529 plans, the effectiveness of custodian accounts has diminished. Any of the earnings that are generated in an UTMA are subject to taxation. The primary purpose for establishing a UTMA is to provide gifts of cash and/or securities for a child's future benefit.

Which of the following accounts allow for deductible contributions?

Traditional IRAs Since traditional IRAs allow for deductible contributions, any subsequent 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. Section 529 plans are taxed in a similar way to Roth plans. In other words, their contributions are non-deductible and withdrawals that are used for qualified educational expenses are tax-free. Contributions to non-qualified annuities are non-deductible, but withdrawals are tax-deferred.

Which of the following advisers are exempt from registration under the Investment Advisers Act of 1940?

U.S. government securities advisers The IA Act of 1940 provides an exemption for advisers that limit their advice to U.S. government securities. Note, there is no de minimis exemption for domestic advisers. However, there is a de minimis exemption for foreign advisers that have fewer than 15 clients and (1) have no place of business in the state, and (2) have less the $25 million in aggregate assets under management that are attributable to U.S. investors.

An insurance company is considering raising capital by issuing bonds. Under the Securities Act of 1933, the bonds are considered:

Under the Securities Act of 1933, securities that are issued by insurance companies are subject to both the SEC's registration requirements and its prospectus delivery requirements. However, the bonds are exempt from registration with the state Administrator. Keep in mind, no securities are exempt from the antifraud provisions of the Securities Act of 1933.

According to the Uniform Securities Act, which of the following statements is NOT TRUE concerning private placements?

Under the Uniform Securities Act, a "private placement" is any transaction that involves an unlimited number of institutional investors and no more than 10 other persons (non-institutional investors) during any 12-month period. Along with limiting the number of non-institutional investors, a private placement must meet the following conditions: 1) the seller must believe that all of the non-institutional buyers are purchasing for investment purposes only, and 2) no commission or other remuneration can be paid for soliciting non-institutional buyers. Any reference to an offering of securities to 35 or fewer persons (non-accredited investors) is a private placement under Regulation D of the Securities Act of 1933 and NOT the Uniform Securities Act.

Under the Uniform Securities Act, what's included in the damages from a misstatement or omissions of a material fact?

Under the Uniform Securities Act, civil damages include. attorney's fees, court costs, and a reasonable rate of interest. Treble damages are not included

A broker-dealer is a syndicate member involved in a firm-commitment underwriting of a highly anticipated upcoming initial public offering (IPO). During the underwriting, the broker-dealer holds onto some of the shares in order to sell them at a later date since the shares are expected to rise in value. The broker-dealer's conduct is:

Unethical and prohibited under the Uniform Securities Act This situation is known as withholding and is prohibited by both the Uniform Securities Act and the Securities Act of 1933. When a broker-dealer participates in a firm-commitment underwriting, it must sell the shares at the public offering price (POP) as soon as possible.

Five years ago, a registered representative sold a variable annuity to a 65-year-old client. The annuity carries a seven-year surrender fee. The client made a lump-sum investment of $100,000 into a growth-oriented separate account which has grown to $150,000. The RR expects a major market correction in the near future and recommends that the client conduct a 1035 Exchange into a fixed annuity. The RR explains to the client that the surrender fee will be less than the anticipated decrease in account value. This recommendation is:

Unsuitable, since there is no benefit in surrendering the annuity due to the other investment options that are available in the separate account.

Which TWO of the following are considered exempt reporting advisers (ERAs)?

Venture capital advisers and private fund advisers with assets under management of less than $150 million are exempt from registration as an adviser with the SEC and/or state Administrator; however, they must still pay fees and report public information via the IARD/FINRA system.

A broker-dealer owns 100 shares of ABCO stock which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base the markup on:

When selling stock to a customer, a markup should be based on the lowest offer on the Nasdaq system, not the price the dealer paid to purchase the stock (dealer's inventory cost).

Which of the following is TRUE regarding the difference between owning property under community property compared to joint tenants with right of survivorship?

With a community property agreement, when one owner dies the cost basis of all of the assets steps-up to the market value, thereby reducing potential capital gains Community property is a type of joint ownership that's only available to married couples and only in select states. On the other hand, joint tenants with right of survivorship is available in all states and the joint owners don't need to be married. With both forms of ownership, assets will be transferred to the surviving owner(s) after the death of one owner. With community property, the cost basis of all of the assets is stepped-up after the death of one owner in a manner that's similar to inheriting securities. However, with joint tenants with right of survivorship, the decedent's portion of the assets are stepped-up, but the surviving owner's assets basis remains the same.

When can an issuer use an omitting or summary prospectus?

With sales of investment company securities and variable contracts In most securities offerings, the prospectus is the only disclosure document that's permitted. However, the SEC does permit the use of a summary or omitting prospectus when selling investment company securities and variable products. The summary prospectus is a shorter document, which summarizes the full prospectus. The disclosure document for a private placement is referred to as an offering memorandum or private placement memorandum.

Which of the following statements is TRUE regarding an individual who takes benefits from a retirement account that's been awarded under a QDRO?

Withdrawals can be made without penalty, even if the individual is under the age of 59 1/2. A qualified domestic relations order (QDRO) is created to divide a person's retirement account during a divorce. The spouse who receives benefits awarded under a QDRO is exempt from the early withdrawal penalties, but the withdrawals are taxable. The beneficiary can also roll her portion of the account into an IRA, thereby delaying withdrawals and taxes. QDROs are used for any ERISA qualified retirement account, including pensions, 403(b) plans, and 401(k) plans.

Bob is a business manager for professional athletes. As manager, he negotiates their contracts, pays their bills, and provides them with tax advice. When trying to minimize their tax liabilities, Bob will periodically provide advice relating to securities. He considers this advice to be incidental to the business management service he provides. According to the Investment Advisers Act, would Bob be considered an investment adviser?

Yes, SEC Release 1092 states that the Advisers Act applies to people who provide investment advice to athletes and entertainers

An investment adviser's application for registration indicates that it will base its investment decisions on non-financial criteria, including psychic readings. According to the Uniform Securities Act, which of the following statements BEST describes the Administrator's power?

an administrator may only deny or postpone registration for the reasons that are specified in the law (violations, convictions, etc)

A 70-year-old retiree is very risk-averse, but needs to generate investment income. She is not wealthy and is in a low tax bracket. Which of the following investments will BEST meet her needs?

certificate of deposit Since the client is risk-averse, needs income, and is concerned about her principal fluctuating, the best choice is a certificate of deposit. All of the other choices are unsuitable because they are either too speculative or they are tax-free, which provides her with little benefit since she is in a low tax bracket.

To determine the after-tax return on a bond,

multiply the the yield on the bond by (1 - the tax bracket)

The Administrator has authority over any offer to buy or sell that is

originated, accepted, or directed in the Administrator's state. A sale need not be made in order to meet the definition of an offer to sell.

A client's federal adjusted gross income (AGI) consists of her

taxable income. Examples of taxable income include a client's salary, tips, bonuses, dividends, and corporate bond interest. However, municipal bond interest is tax-free and not included in person's AGI.

Before soliciting on behalf of an investment adviser,

the Investment Advisers Act of 1940 requires solicitors and advisers to have a written agreement in place.

Beta is not a measure of the overall economy, it is used to measure and compare with

the US stock market