final exam

An investor has purchased a five-year TIPS U.S. note with a $1,000 par value and a 3.5% coupon. If inflation is 4% annually, what amount of principal will the investor receive in year five? A. $1,000 B. $1,040 C. $1,178 D. $1,217

$1,217. TIPS are Treasury Inflation-Protected Securities. To answer this question, you must first know that the protection is provided by adjusting the principal annually for inflation as measured by the CPI. Next, you need to realize that this question is also a compounded interest calculation question; however, it uses the inflation rate instead of an interest rate. Inflation is going up 4% each year for five years, so you must calculate 1.04 × 1.04 × 1.04 × 1.04 × 1.04 = 1.2166. Then multiply the original principal by the compounded rate: $1,000 × 1.2166 = $1,217. [Module 8, Risk & Evaluation, Sections 3.10 & 4.5]

A risk adverse client purchases an annual reset, equity-indexed annuity to participate in the market returns. The annuity has an 18% cap and a participation rate of 70%. She deposits $100,000 and the S&P returns 3%, -9% and 28% in the first three years. What is the annuity now worth? A. $109,635 B. $114,965 C. $120,478 D. $122,112

$120,478. Indexed annuities are fixed annuities. They can never lose money. If the S&P is down, they either earn the minimum guaranteed rate or 0% (if there is no minimum). The interest is credited either annually or at the end of the term, and interest is based on the performance of the associated index. If there is a participation rate, the interest credited is the participation rate × the S&P return (not to exceed any cap). In this example: Year 1: S&P returns 3%. 70% participation rate = 2.1%. Balance is $102,100. Year 2: S&P loses 9%. Annuity has no minimum return. 0% credited. Annuity still at $102,100. Year 3: S&P returns 28%. 70% participation rate = 19.6%. However, annuity is capped at 18%. Annuity earns 18% on $102,100 and ends with $120,478. [Module 7, Annuities & Retirement Plans, Section 6.7]

mother and father are planning for their eldest son, Tommy, to go to college. One of the investment vehicles for college savings they are looking at is the Coverdell ESA. Tommy is currently 14 years old. Tommy's parents file their taxes jointly and have a modified adjusted gross income of $200,000 per year. How much money will Tommy's parents be able to contribute annually to a Coverdell ESA for Tommy's benefit? A. $2,000 B. $4,000 C. $2,500 D. $0

$2,000. The total contribution cannot exceed $2,000 per year, per child under 18 years old. No contributions can be made if the modified adjusted gross income of Tommy's parents is more than $220,000, jointly. [Module 7, Annuities & Retirement Plans, Section 4.0]

Frank is an adviser at ABC Advisers, Inc. One of his biggest clients, a widowed grandmother, has requested that Frank set up an account on behalf of her grandchildren. She wants to generate $1,000 of income each month for her grandchildren into perpetuity. If she gives Frank one lump sum and receives a 3% rate of return, how much does she need to place in the account? A. $33,333 B. $44,444 C. $333,333 D. $400,000

$400,000. This is a perpetuity calculation question. The formula for calculating perpetuity is: The annual payment to be received divided by the compounded interest rate. In this question, the client would like to leave behind $1,000 a month. So $1,000 × 12 (months) = $12,000. $12,000 ÷ 0.03 = $400,000. [Module 8, Risk & Evaluation, Section 2.3]

A client would like to make a withdrawal of $5,000 from his qualified retirement plan. His contributions to the plan total $10,000 and his current account balance is $16,000. The client is 52 years old. On what amount, if any, will the client be taxed, and if there is a penalty, how much will that be? A. $5,000 taxable, no penalty B. $5,000 taxable, $500 penalty C. $0 taxable, no penalty D. $0 taxable, $500 penalty

$5,000 taxable, $500 penalty. Distributions from retirement plans are taxed on a last in, first out (LIFO) basis. Contributions (pretax or not) are considered the first money in, while earnings are considered the last money in and are distributed first. As the earnings grow tax-deferred, they will be taxed upon withdrawal. Additionally, as this is a premature distribution (prior to the age of 59 1/2), a 10% early withdrawal penalty will be assessed on anything that will be taxed as ordinary income. Since the plan is qualified and none of the contributions nor the earnings have been taxed, the whole $5,000 will be taxed and penalized. [Module 7, Annuities & Retirement Plans, Section 1.7]

One of your clients has put $2,000 into an investment that you have recommended. During the year, the client has received four payments of $50 each. At the end of the year, the value of the investment has declined to $1,700. Your client has a total rate of return of which of the following amounts? A. +5% B. +10% C. -5% D. -15%

-5%. The question asks for the total return. In this case, the account lost money, but it did have quarterly income of $50 for a total of $200. This nets out to only a loss of $100. Therefore, the total return is 100 $2,000 = .05 or 5%. It is a loss, so the answer is -5%. [Module 8, Risk & Evaluation, Section 3.2]

Which of the following could cause an agent's registration to be cancelled by a state administrator under the Uniform Securities Act? I. After reasonable search, the agent can't be located. II. The administrator discovers that the agent is deceased. III. The agent has been found mentally incompetent by a court. IV. The agent has been convicted of a securities-related felony. A. I only B. I and II only C. I, II, and III only D. I, II, III, and IV

. After reasonable search, the agent can't be located. II. The administrator discovers that the agent is deceased. III. The agent has been found mentally incompetent by a court. These three scenarios could cause the cancellation of an agent's registration -- if the agent is missing, deceased, or declared incompetent. However, if an agent is convicted of a securities-related felony, the administrator can revoke the registration, but not cancel it. Cancellation means there has been no wrongdoing; the individual is just no longer able to function as an agent. Revocation ordinarily indicates there has been some wrongdoing. [Module 2, Registration of Persons, Section 2.3]

Which of the following are considered income? I. Dividends II. Interest III. Capital gains distributions IV. Annuity payments A. I and II only B. I, II, and III only C. I, II, and IV only D. I, II, III, and IV

. Dividends III. Capital gains distributions IV. Annuity payments Dividends, interest, and annuity payments are all considered income. Capital gains distributions are not considered income and are treated differently. [Module 8, Risk & Evaluation, Section 3.0]

A client of an investment adviser works for the state of Louisiana. After completing the client's profile, the adviser notices that the investor is an active participant in a retirement plan. Which of the following plans would this investor most likely have? A. IRA B. 529 C. 403(b) D. 457

1.State employees participate in 457 plans — the retirement vehicles offered by federal, state, and municipal governments to their employees. The investor could have an IRA, but the reference to being employed by the state and the reference to a "retirement plan" rather than a "retirement account" makes the 457 plan the better option. 529 plans are for parents who are investing for their children's future college education, while 403(b) plans are for nonprofit organizations, like hospitals and schools. [Module 7, Annuities & Retirements, Section 1.2]

When do reports regarding the private securities transactions of an investment adviser have to be made to the administrator of the state where they are registered? A. 10 business days from the end of the month in which the transactions occur B. 30 calendar days from the end of the month in which the transactions occur C. 10 business days from the end of the quarter in which the transactions occur D. 30 calendar days from the end of the quarter in which the transactions occur

10 business days from the end of the quarter in which the transactions occur. The report must be sent by the 10th business day from the end of the quarter in which the transactions take place. [Module 2, Registration of Persons, Section 3.2]

An investment adviser has his own trading account that he buys and sells stocks for his own investment purposes. When must the IA report transactions that are done for the account? A. 10 days after the end of the month for completed transactions B. 10 days after the end of the quarter for completed transactions C. 10 days after the end of the month for completed transactions, except for trades that were in government securities D. 10 days after the end of the quarter for completed transactions, except for trades that were in government securities

10 days after the end of the quarter for completed transactions, except for trades that were in government securities. Trades of U.S. government securities do not have to be reported, but all other principal transactions by the IA must be reported every quarter. [Module 2, Registration of Persons, Section 3.2]

A block trade consists of how many shares? A. 10,000 B. 25,000 C. 100,000 D. 200,000

10,000. A block trade consists of a minimum of 10,000 shares of stock or $200,000 of bonds. Block trades are noncompetitive, privately negotiated trades that take place away from the exchange typically with institutional investors. [Module 10, Portfolio Management, Section 5.2]

An investor purchases 1,000 shares of XYZ stock at $22 per share and later receives a $1 dividend. One year after purchase, she sells the 1,000 shares at $24 per share. The inflation rate during this period is 1.4% and the risk-free return is 2%. Which of the following is the real rate of return? A. 6.8% B. 8.8% C. 11.7% D. 12.2%

12.2%. The "real rate of return" is the exact same thing as the "inflation-adjusted return." To answer this question, first determine the total return, and then subtract the inflation rate from it. Since the investor purchased the stock at $22, realized a $2 appreciation and income of $1 (the dividend), the total return on the investment is 12% (appreciation + income ÷ cost of original investment = 3 ÷ 22 = 13.6%). Since the inflation rate is 1.4% for that period, the inflation-adjusted return is 12.2% (13.6 - 1.4 = 12.2). [Module 8, Risk & Evaluation, Section 3.8]

A client of a broker/dealer firm purchases stock in the amount of $10,000. In year two, the value of the initial stock purchase has risen to $20,000. By year three, the client's stock position is valued at $30,000 when the client decides to sell the position. If the client is in the 28% tax bracket, what is the after-tax return? A. 72% B. 85% C. 144% D. 170%

170%. To calculate the after-tax return, you first must calculate the total return. The investment had appreciated by $20,000, which divided by the original cost of $10,000 gives a total return of 200%. To find out the after-tax return, multiply the total return of 200% by .85 (100% - 15% for long-term capital gains) to get the answer of 170%. Keep in mind, this is a long term gain, which is taxed at 15%, not the client's income tax bracket. [Module 8, Risk & Evaluation, Section 3.7]

Russell Ralston has been a small-scale investment adviser for 15 years. Interested in a career change, he files the paperwork to withdraw his registration with the state as an investment adviser. Under the NASAA Model Rules, how long will it take the withdrawal to be effective after it has been received by the state? A. 15 days B. 30 days C. 60 days D. 90 days

30 days. Unless the investment adviser requesting a withdrawal is under investigation in connection with a pending disciplinary action, the withdrawal is effective in 30 days, which is also how long it takes for a withdrawal to be effective for an IAR, a broker/dealer, and an agent. [Module 2, Registration of Persons, Section 2.4]

Which of the following ERISA plans provides participants with the benefit of a tax-deductible contribution? A. 403(b) plan B. IRA C. 457 plan D. 401(k) plan

401(k) plan. 401(k)s are ERISA-qualified plans that allow both the participant and the employer to make pretax, or deductible, contributions. The other plans also offer tax-deductible contributions, but they are not covered by ERISA. ERISA covers employer-sponsored, private sector retirement plans. 403(b) plans are for nonprofit organizations such as schools and hospitals and are generally considered to be non-ERISA plans. 457 plans are for employees of municipalities. While participants may or may not be able to benefit from a tax deduction following an IRA contribution, IRAs are individual plans and not employer-sponsored. [Module 7, Annuities & Retirement, Sections 1.6 & 5.0]

Which of the following would be most beneficial to firefighter who may consider early retirement? A. 457 plan B. 403(b) C. 401(k) D. Keogh

457 plan. 457 plans are retirement plans for municipal employees, such as firefighters. Additionally, 457 plans allow for penalty-free distributions prior to the age of 59 1/2. Distributions are still taxed, however, they are not assessed the typical 10% premature distribution penalty. The other choices all assess a 10% penalty on distributions taken prior to 59 1/2 (with certain exceptions). 403(b)s are for school boards and other nonprofit organizations. 401(k)s are typically for for-profit corporations and Keoghs are for self-employed individuals and their employees. [Module 7, Annuities & Retirement Plans, Section 5.0]

According to the different returns from last year's portfolios, which allocation mix provided the smallest variability of returns? Stock 100% 70% 50% 30% Bonds 0% 30% 50% 70% Returns 46.40% 11.52% 44.50% 23.12% 27.80% -9.32% 11.25% 45.02% -11.14% 45.80% -6.54% 12.21% 13.00% 24.50% 24.50% -9.12% A. 70% stocks, 30% bonds B. 100% stocks, 0% bonds C. 50% stocks, 50% bonds D. 30% stocks, 70% bonds

50% stocks, 50% bonds. The 50/50 portfolio presents the smallest amount of variability, or the difference between the lowest return (-6.54%) and the highest return (44.50%). The range of variability is often indicative of the standard deviation, which measures how spread out a portfolio's returns are from its average return and is a key measure of risk. [Module 8, Risk & Evaluation, Section 5.5]

An investor has recently purchased an eight-year 7% corporate bond for $950. The discount rate is currently 3%. The investor projects the compounded inflation rate over the eight-year period to be 6.5%. What is the investor's expected return on this investment? A. 4.52% B. 6.42% C. 57.71% D. 64.21%

64.21%. This question is just asking you to calculate the expected return of the investment, meaning the discount rate and the inflation rate are irrelevant. The investor pays $950 for a bond that will mature at $1,000. That gives the investor $50 in appreciation on the investment. The bond pays out 7% per year, or $70 each year, for eight years for a total of $560 in interest income. To calculate the expected return, add the appreciation ($50) to the income received over the life of the investment ($560) and divide it by the cost of the original investment ($950): $610 ÷ $950 = 64.21%. [Module 8, Risk & Evaluation, Section 3.1]

Which of the following has the most volatility? A. A-rated corporate bond paying 7% with a current yield of 8% B. A municipal bond paying 6% with a current yield of 5.5% C. A Treasury bond paying 4% with a yield of 4% D. A T-bill

A Treasury bond paying 4% with a yield of 4%. Of the choices provided, the Treasury bond is the most volatile. Duration measures a bond's price sensitivity to interest-rate changes. Bonds with longer durations experience greater volatility. When bonds have similar durations, the bond with the lower coupon or yield will be more volatile. In this question, eliminate the T-bill as it has the shortest maturity. Then, when unable to determine which of the remaining bonds has the longest maturity, choose the one with the lowest coupon — in this case, the Treasury bond. [Module 8, Risk & Evaluation, Section 4.6]

A company trades for its own account and does investment banking as well. What kind of firm is this? A. A broker/dealer B. An investment company C. A trust company D. A company composed of investment advisers

A broker/dealer. This is the description of a broker/dealer. Companies engaging in investment banking (the underwriting of new issues) must be registered as broker/dealers. An investment company does not do investment banking, and a trust company may buy and sell for the best interests of its company, but it does not participate in investment banking activities. Investment advisers give advice, but do not participate in investment banking activities. [Module 1, Uniform Securities Act, Section 3.3]

Which of the following best describes standard deviation? A. The comparison of the relative performance of an actual portfolio against a "benchmark" portfolio B. A measurement used to compare the fluctuation of an investment's return with its average return over a specific period C. A calculation used to determine the present value of an investment D. A statistical measurement used to determine an investment's return

A measurement used to compare the fluctuation of an investment's return with its average return over a specific period. This best describes the statistical measurement called standard deviation. It is a range of volatility around the expected return and is an indicator of risk. [Module 8, Risk & Evaluation, Section 5.5]

An issuer, as defined by the Uniform Securities Act, is: A. A mutual fund that sells its shares through a broker/dealer B. A broker/dealer that sells shares of ABC stock on Nasdaq out of inventory and keeps the proceeds C. A specialist on the floor of an exchange who executes a trade of PQR stock from his specialist's book D. An underwriter who sells shares of stock for a company that is going public for the first time

A mutual fund that sells its shares through a broker/dealer is considered an issuer. The mutual fund receives the proceeds and sends a concession to the broker/dealer. An underwriter represents an issuer. The transaction would be an issuer transaction, but the underwriter is not the issuer. The broker/dealer and the specialist are acting for their own accounts and are not issuers. An issuer is any person who issues or proposes to issue a security. The issuer receives the proceeds from the issuance and original sale (primary distribution) of a security. [Module 1, Uniform Securities Act, Section 3.2]

Under the Uniform Securities Act, all of the following are not included in the definition of a broker/dealer, except: A. An agent who effects transactions for a client's account B. A bank that has a trust department C. A trust company that executes transactions for clients' trust accounts D. A person engaged in the business of effecting transactions in securities for his own account

A person engaged in the business of effecting transactions in securities for his own account. This is nearly the exact definition of a broker/dealer used by the USA. A broker/dealer is any person (always a firm, however) that is in the business of effecting securities transactions for its own account and for the accounts of others. By definition, an agent is not a broker/dealer. Banks and trust companies are also excluded from the definition of broker/dealer. Watch out for double negative questions like this that state "not included, except." [Module 1, Uniform Securities Act, Section 3.3]

Under the Uniform Securities Act, all of the following are not included in the definition of a broker/dealer, except: A. An agent who effects transactions for a client's account B. A bank that has a trust department C. A trust company that executes transactions for client's trust accounts D. A person engaged in the business of effecting transactions in securities for his own account

A person engaged in the business of effecting transactions in securities for his own account. By definition, an agent is not a broker/dealer; however, a person who executes trades for their own account is defined as a broker/dealer. The difference is that the agent represents the broker/dealer, while the broker/dealer is the entity that is trading. [Module 1, Uniform Securities Act, Section 3.3]

Under the Uniform Securities Act, all of the following are not included in the definition of a broker/dealer, except: A. An agent who effects transactions for a client's account B. A bank that has a trust department C. A trust company that executes transactions for clients' trust accounts D. A person engaged in the business of effecting transactions in securities for its own account

A person engaged in the business of effecting transactions in securities for its own account. This is included in the definition of a broker/dealer -- be careful with this type of double negative question! By definition, an agent is not a broker/dealer; the definition of a broker/dealer is a person who executes trades for its own account. The difference is that the agent represents the broker/dealer, while the broker/dealer is the entity that is doing the trading. [Module 1, Uniform Securities Act, Sections 3.3 & 3.4]

Which of the following persons without an office in the state is required to be registered as an agent in the state if executing one of the following transactions? A. A person representing a broker/dealer effects an isolated, unsolicited transaction in foreign government securities with an individual in the state and is paid for the transaction. B. A person representing a broker/dealer effects transactions between issuers and underwriters and is not paid for the transactions. C. A person representing an issuer sells the issuer's securities to the issuer's employees without being paid for the transactions. D. A person representing a broker/dealer effects transactions with a mutual fund in commercial paper and is paid for the transaction.

A person representing a broker/dealer effects an isolated, unsolicited transaction in foreign government securities with an individual in the state and is paid for the transaction. This person must be registered as an agent in the state — a person who represents a B/D in transactions with non-institutional clients must be registered in the state whether they have an office in the state or not. A person representing a B/D who effects transactions between issuers and underwriters is working with institutional accounts and does not need to be registered in the state, unless they have an office in the state. An agent selling commercial paper to a mutual fund for compensation does not have to be registered since a mutual fund is an institutional account. A person representing an issuer who sells the issuer's securities to the issuer's employees without compensation does not need to be registered in the state as they are not defined as an agent. [Module 2, Registration of Persons, Section 1.2]

Under the USA, an agent is not allowed to do which of the following actions without having to be registered in that state? A. A person representing an issuer in one state sells municipal bonds from the state in which he is registered to clients in a state in which he is not registered, and is compensated B. A person representing the issuer in one state sells preferred stock issued by the corporation to a person who works for the company in another state, and is compensated C. A person representing a B/D is registered in one state, sells investment contracts for employee benefit plans in another state, and is compensated D. A person representing a B/D registered in one state sells exchange-traded stock to a mutual fund in another state and is compensated

A person representing an issuer in one state sells preferred stock issued by the corporation to a person who works for the company in another state, and is compensated. If representing the issuer, the person does not need to be registered if selling to someone who is employed by the company, as long as no compensation is involved. Whether the issue is exempt or not has no bearing on the individuals being registered in cases where they are selling to their co-workers so long as there is no transaction-based compensation. Individuals representing issuers of exempt securities such as municipal bonds (municipalities) do not need to register. Individuals representing broker/dealers do not need to register when working with institutional clients such as employee benefit plans or mutual funds provided they have no office in the state. [Module 1, Uniform Securities Act, Section 3.4]

Under the USA, an agent can perform which of the following actions and not be registered in that state? A. A person representing a B/D is registered in one state sells government securities to 10 clients in another state and is paid a commission B. A person representing a B/D is registered in one state, but makes an offer to sell shares of an unlisted stock to two clients in another state for which he will be compensated C. A person representing a B/D is registered in one state and offers to sell shares of an unlisted stock to four clients in another state, but will not be directly compensated D. A person representing an issuer is registered in one state, but makes an offer to sell shares of an unlisted stock to ten clients who are employees of the issuer in another state for which he will not be compensated

A person representing an issuer is registered in one state but makes an offer to sell shares of an unlisted stock to ten employees of the issuer in another state for which he will not be compensated. This person is not defined as an agent and need not register. Only investment advisers and investment adviser representatives have the luxury of a de minimis amount of clients. There is no de minimis amount of clients for an agent or a broker/dealer. Any person representing a broker dealer effecting securities transactions is defined as an agent and must register regardless of whether compensated or not for those transactions. Effecting both listed and unlisted stock makes the person subject to registration within the state where the securities are being sold, regardless of the number of people to whom the securities are being offered unless they are employees of the issuer. [Module 1, Uniform Securities Act, Section 3.4]

Which of the following individuals is exempt from registering with the state administrator as an investment adviser in a state? A. A person who gives advice to clients in a state on when to buy and sell specific securities as part of his business B. A person who does not have an office in a state, but talks to fee-based investment advisory clients on a regular basis in the state C. A person who sends out a monthly letter to each client in a state detailing his recommendations for that client and charges each a separate fee D. A person who has an office in a state and gives advice to clients in the state for a fee

A person who gives advice to clients in a state on when to buy and sell specific securities as part of his business. This person is exempt from registering with the state administrator as an IA in the state as there is no indication that the person is being compensated for the advice. All the others have to register since they talk to clients in a state and receive a fee for the advice. [Module 2, Registration of Persons, Section 1.4; Module 6, Investment Advisers & the Federal Acts, Sections 6.4 - 6.6]

Under the Uniform Securities Act, which of the following is defined as an exempt transaction? A. A public offering of a listed stock B. A public offering of a corporate bond C. A private placement offer to eight persons in a 12-month period D. An intrastate public offering

A private placement offer to eight persons in a 12-month period. This is defined as an exempt transaction. Private placement offers to not more than 10 persons in 12 months for investment purposes (not for immediate resale), with no commissions paid directly or indirectly, are exempt transactions. Public offerings are not exempt transactions. Some securities, such as listed stock, are exempt because of who the issuer is. "Corporate bond" is too vague to determine any exemption. Under the USA, intrastate offerings must register via qualification. [Module 3, Registration of Securities, Section 5.0]

Every year, an investment adviser must send or offer to send which of the following? A. A summary of fees B. A revised brochure C. Written disclosures D. Soft dollar arrangements

A revised brochure. Every year investment advisers must send or offer to send a revised brochure to their clientele. The brochure will contain all material from Form ADV Part 2A, such as a summary of fees to be charged, any written disclosures, and any soft dollar arrangements that may be in place. [Module 2, Registration of Persons, Section 5.2]

Which of the following securities must be registered in a state prior to being offered in that state? A. A general obligation bond issued in a state different than the issuer B. A U.S. Treasury note C. Put and call options on equity securities offered in a state D. A variable annuity

A variable annuity. A variable annuity must always be registered in the state where it will be sold. Government and municipal bonds are exempt from registration under the USA. Put and call options, regardless of the underlying security, are considered securities in a state but are exempt from registration. [Module 3, Registration of Securities, Section 4.0]

A broker/dealer has a number of agents working for the firm. One of the agents has many wealthy clients, one of whom contacts this agent regarding a new company that is being formed. The agent sells shares of this new company to some of his wealthier clients who are looking to find a new, growing company. The state administrator has heard about the sales and notifies the broker/dealer of the agent selling unregistered securities to clients of the broker/dealer. What can the broker/dealer do? A. Argue that the transaction was an unsolicited trade B. Argue that the transaction was an exempt security C. Accept the administrator's ruling and fire the agent D. Argue that the agent was not employed by the broker/dealer at the time of the transaction

Accept the administrator's ruling and fire the agent. The agent has engaged in several prohibited activities. Offering or selling securities that are nonexempt and not registered is prohibited. Selling securities off the books of the broker/dealer without the broker/dealer's consent is "selling away" and is not allowed. In addition to being fired, the agent can face other criminal and civil penalties. The firm may also face regulatory action for failure to supervise if appropriate procedures to prevent these types of violations were not in place. [Module 5, State Administrator & Regulatory Oversight, Section 1.0]

While soliciting a client, an agent unknowingly provides a verbal stock quote to a client that is incorrect. Who has the burden of proving that the agent was unaware of the incorrect quote when defending the agent? A. Agent B. Broker/dealer C. State administrator D. Supervisor

Agent. While some firms may assist in the defense of their agents, it is ultimately up to the actual individual to provide their own defense. In this case, the agent is responsible to prove that he had mistakenly given an incorrect quote for a stock to a client. [Module 5, State Administrator & Regulatory Oversight, Section 2.1]

Which of the following is true regarding the registration of a broker/dealer? A. All broker/dealers must register with both the SEC and the state administrator in the state where they have an office. B. Broker/dealers may register with the SEC only if their sole clients are composed of institutional clients and they have an office in the state. C. Broker/dealers may register with the SEC if they had been convicted of a felony to defraud clients more than five years prior. D. The SEC must be in agreement with the state administrator in regards to the disqualification of a broker/dealer before that broker/dealer's registration can be revoked.

All broker/dealers must register with both the SEC and the state administrator in the state where they have an office. Broker/dealers do not have to register with the state administrator if they only have institutional accounts and the B/D does not have an office in the state. Under the Act, no one that has been convicted of a felony for fraud in the last 10 years, not five years, can be registered. [Module 2, Registration of Persons, Section 1.1]

Under the Securities Exchange Act of 1934, all of the following are true, except: A. All people who execute trades for clients are governed by FINRA under the Securities Exchange Act of 1934. B. All corporations must make quarterly and annual reports to the SEC. C. Any stock purchased on margin is subject to the margin requirement of the Securities Exchange Act of 1934. D. All secondary trading of stock is governed by the rules of the Securities Exchange Act of 1934.

All corporations must make quarterly and annual reports to the SEC. This is not true — all public corporations must report quarterly and annually to the SEC. The Exchange Act created FINRA, allowing for industry self regulation under the Act. The Act mandates the margin rules and grants authority to the Federal Reserve Board to set the margin requirements. All secondary trading is subject to the 1934 Act. [Module 6, Investment Advisers & the Federal Acts, Section 3.0]

An agent solicits an order from a client who is new to investing to buy 3,000 shares of a $66 stock. The client is unable to pay for the purchase by the time the transaction settles and the position is liquidated. The agent: A. Did not make a reasonable inquiry into the customer's financial condition and ability to pay by the settlement date B. Failed to make a reasonable inquiry as to the customer's financial needs and investment objectives C. Induced an excessive transaction in view of the customer's resources D. All of the above

All of the above. The agent must always make sure a customer is financially able to make a trade and has the ability to pay by the settlement date. The agent should also always inquire into a new customer's financial needs, investment objectives, and resources, and record this information on the customer's new account form for future reference. Having to liquidate a customer's securities because he or she is unable to pay for the purchase by the time the transaction settles is considered evidence of an excessive transaction. [Module 4, Prohibited Practices, Section 1.0]

With whom can a broker/dealer trade that would cause a transaction to be an exempt transaction not requiring the issuer to register the security being traded with the administrator? I. A bank II. Another broker/dealer III. A trust company IV. An institutional investment adviser A. I and II only B. I, II, and III only C. I, II, and IV only D. I, II, III, and IV

All these are exempt transactions. All these are institutional buyers, and therefore, the transactions with them are exempt. [Module 3, Registration of Securities, Section 5.0]

Of the following, who must register as an investment adviser under the Uniform Securities Act? A. An investment adviser who has no place of business in the state and whose clients are institutions B. An accountant who charges fees for investment advice in addition to his or her accounting service fees C. A person who works for a broker/dealer and who advises clients to buy and sell on a regular basis while soliciting trades from clients D. The trust department of a bank that charges a set fee for managing a trust

An accountant who charges fees for investment advice in addition to his or her accounting service fees. This person must register as an investment adviser under the USA. An investment adviser to an institution who does not have an office in the state is defined as an investment adviser, but does not need to register as an investment adviser. A person who works for a broker/dealer and gives advice that is incidental in nature and for which he or she is not specifically compensated is not defined as an investment adviser. Financial institutions such as banks, savings and loans associations, or trust companies are also excluded from the definition of an investment adviser, even while giving advice and charging fees. [Module 1, Uniform Securities Act, Section 3.5]

An investment adviser is using a "benchmark portfolio" for measuring portfolio performance. If the IA uses one of the market indexes (such as the Russell Index) against which the performance should be compared, which of the following types of management styles is the IA considered to be using? A. A technical form of management B. A passive form of management C. A strategic form of management D. An active form of management

An active form of management. This is considered a form of active management. Active managers use market timing in making their investment decisions. They do not follow the "buy and hold" form of passive investing, but rather are looking to "buy and sell" as the market dictates. To determine their performance, active managers compare their returns against a "benchmark" index that matches their portfolio. [Module 10, Portfolio Management, Section 2.2]

Which of the following is acceptable under the Uniform Securities Act? A. An agent makes an untrue statement of material fact. B. An agent omits a material fact because his time for the presentation was too short. C. An agent fails to follow a client's instructions. D. An agent actively solicits orders to buy unregistered exempt securities.

An agent actively solicits orders to buy unregistered exempt securities. Agents may solicit orders for unregistered exempt securities or registered securities. An exempt security is one that is not required to be registered. Agents may not omit material facts or make untrue statements. An agent must follow a customer's instructions, although an agent may refuse to accept an order. An agent may not solicit orders for unregistered nonexempt securities unless the transaction is exempt. [Module 4, Prohibited Practices, Section 1.0; Module 3, Registration of Securities, Section 4.0]

All of the following are exempt transactions, except: A. An agent for a broker/dealer selling securities that have already been registered in the state to an investor B. An isolated non-issuer transaction effected through a broker/dealer C. An isolated non-issuer transaction not effected through a broker/dealer D. An agent selling Pink Sheet stock to an institutional client

An agent for a broker/dealer selling securities that have already been registered in the state to an investor. This is not exempt. As the securities have already been registered in the state and there is no mention of the type of client, one must assume the transaction is not exempt. An exempt transaction is a transaction in which the security involved is exempt from registering in the state. Isolated non-issuer transactions are exempt, regardless of whether or not they are effected through a broker/dealer. An agent selling Pink Sheet stock to an institutional client is an exempt transaction. Although Pink Sheet stock is not an exempt security, it does not need to be registered since it is being sold to an institutional client. [Module 3, Registration of Securities, Section 5.0]

Which of the following is false? A. If an agent discovers that he has sold a customer non-exempt, unregistered securities, he can offer to buy them back from the customer at cost plus interest, and avoid a civil lawsuit. B. When evaluating a customer's portfolio, an agent tells the client that one of his stocks is worth $5 per share more than its actual quote. Regarding this situation, the agent's actions are fraudulent. C. An agent has learned of a major negative development regarding Aluminum Tub and Tool, Inc. (AT&T) from his mother-in-law, the President of AT&T. On the following morning, the agent should call all of his clients who own AT&T and tell them to sell, but he should not short the stock in his own account. D. An agent may share in the profits of a client's account only when he has first obtained the permission of both the customer and his employer in writing, and his participation in the account is proportional to his investment in the account.

An agent has learned of a major negative development regarding Aluminum Tub and Tool, Inc. (AT&T) from his mother-in-law, the President of AT&T. On the following morning, the agent should call all of his clients who own AT&T and tell them to sell, but he should not short the stock in his own account. This is the false statement. It is unethical and prohibited to make recommendations based on nonpublic information or "rumors." All the other statements are true. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 1.0]

Which of the following individuals is defined as an agent under the Uniform Securities Act? A. A bank employee who represents the bank in the issue of its securities B. An individual who represents a broker/dealer in the issue of securities C. An individual who represents the issuer in a transaction with an institutional investor D. An individual who represents the government in the issuance of Treasury bonds

An individual who represents a broker/dealer in the issue of securities. This individual is defined as an agent under the USA. There are few exclusions to the definition of a broker/dealer agent under the Uniform Securities Act (nonresident and new resident); however, there are more exclusions from the definition of issuer agent. An individual representing an issuer selling the issuer's securities is not defined as an agent when selling certain exempt securities (Treasury notes or shares of a financial institution), when effecting exempt transactions (with an institutional investor), or when selling to employees of the issuer as long as there is no transaction-based compensation. [Module 1, Uniform Securities Act, Section 3.4]

Which of the following is required to register in a state as an investment adviser? A. An investment adviser representative who is a solicitor and does not maintain an office in the state, but who contacts 30 prospects in the state during the year B. A local branch of a major bank that provides investment advice to its customers in its branch C. An investment adviser that has no office in the state and whose clients are insurance companies, investment companies, and banks D. An investment adviser in the state whose clients are insurance companies, investment companies, and banks, whom he contacts from his office in the state

An investment adviser in the state whose clients are insurance companies, investment companies, and banks, whom he contacts from his office in the state. The IA must register with the state. If the firm had no office in the state, it would not have to register in the state based on the type of clients mentioned. Banks and investment adviser representatives are excluded from the definition of investment adviser and would not have to register as such. [Module 1, Uniform Securities Act, Section 3.5]

Which of the following must register with the state administrator? A. A person who is an officer of a federal covered investment adviser with no place of business in the state with institutional clients only B. An investment adviser who has no place of business in the state, but has four advisory clients in that state C. An investment adviser representative of a federal covered adviser with no office in the state who has 12 individual clients with whom she regularly meets or consults D. An adviser who provides investment advice only through newspaper columns, magazine articles, or financial publications of general and regular circulation

An investment adviser representative of a federal covered adviser with no office in the state who has 12 individual clients with whom she regularly meets or consults must register with that state administrator. An IAR who meets regularly with clients at the same location is considered to have a place of business in the state and must be registered in that state. Federal covered investment advisers register with the SEC and never register at the state level. If an adviser/IAR has no place of business in the state and the number of clients is five or fewer (de minimis), the adviser/IAR is exempt from registration. Publishers of newspapers, magazines, and financial publications that do not provide advice specific to one client also do not have to register as investment advisers. [Module 1, Uniform Securities Act, Section 3.6; Module 2, Registration of Persons, Section 4.2]

Regarding the registration of investment advisers and their representatives, which of the following is true? A. If an investment advisory firm is federally registered with the SEC, its representatives need not be registered with the administrator of any state. B. An investment adviser representative who transfers from one state-registered advisory firm to another need not notify the administrator of both events. C. If an investment advisory firm is registered with the administrator of a state, its representatives doing business in the state need not be registered with the administrator of the state. D. An investment advisory firm that hires an investment adviser representative who was employed at another investment advisory firm eight months previously does not have to register the person until the annual registration is renewed.

An investment adviser representative who transfers from one state-registered advisory firm to another need not inform the administrator of both events. Investment advisory firms or the investment adviser representative must notify the administrator when an IAR joins or leaves a firm. In the case of a state-registered adviser, this is handled by the IA firm; the IAR need not inform the administrator. IARs of federal registered investment advisers must register in any state in which they have a place of business; IARs of state-registered advisers must register in states in which the representatives maintain a place of business or are conducting advisory business, unless all clients are institutional clients or the de minimis standard is met. [Module 2, Registration of Persons, Sections 1.4 & 4.2]

Which of the following investment advisers would not be federal covered? A. An investment adviser who offers wrap programs B. An investment adviser who manages $130 million in client funds C. An investment adviser for a nationally recognized statistical ratings organization D. An investment adviser for a registered investment company

An investment adviser who offers wrap programs. This alone would not cause an investment adviser to have to register with the SEC. If an investment adviser manages over $30 million in client assets ($100 million per Dodd-Frank updates), advises for a nationally recognized statistical ratings organization, advises for a registered investment company, or advises a pension fund of over $50 million ($200 million per Dodd-Frank), they must be registered with the SEC and are considered to be federal covered. Lastly, if an investment adviser provides services in 30 (15 per Dodd-Frank) or more states, that adviser is also considered a federal covered adviser and must register with the SEC. [Module 2, Registration of Persons, Section 4.1]

A broker/dealer is not registered in a state. The firm may be required to register in that state if they solicit a trade from which of the following? A. A trust company B. A broker/dealer C. An investment adviser D. A savings and loan association

An investment adviser. Broker/dealers, trust companies, and savings and loan associations are all examples of institutional investors. In many cases, investment advisers are considered institutional investors as well, and therefore would not require the B/D to register either. However, there are instances where investment advisers are trading for their non-institutional client's accounts, not their own. In these cases, the IA is not the client, but rather a third party trading on behalf of its client. Since the trade is for the individual client, not the IA, the BD would have to register in the state of the client. [Module 1, Uniform Securities Act, Section 3.3]

Which of the following is true about a holding period return in relation to an annualized return? A. An investment held for nine months with a 5% return will have a higher annualized return. B. An investment held for nine months with a 5% return will have a lower annualized return. C. An investment held for nine months with a 5% return will have an equal annualized return. D. You cannot compare a holding period return with an annualized return.

An investment held for nine months with a 5% return will have a higher annualized return. An investment's annualized return uses compounding to determine what the annual return will be. The annualized return for an investment with a 5% return will have a slightly higher annualized return rate. [Module 8, Risk & Evaluation, Section 3.3]

Which of the following is not an exempt transaction as defined in the Uniform Securities Act? A. An offer of a private placement to four persons in which the solicitor will be compensated for the presentation and no one purchases the issue B. An offer and sale of an exchange-traded stock to an investment company or other financial institution and compensation is paid for the sale C. An offer of a private placement to eight persons in which the solicitor will not be compensated for the presentation and all of the persons purchase the issue D. An offer and sale of government securities to a bank

An offer of a private placement to four persons in which the solicitor will be compensated for the presentation and no one purchases the issue. Since the solicitor will be compensated, the offer is not an exempt transaction and the security must be registered. Private placement offers to less than 10 persons in a 12-month period with no compensation paid for the presentation are exempt transactions. Government securities are exempt securities; however, the transaction of a government security (or an exchange-traded stock) is not exempt if it is sold to an individual, but it is exempt if sold to an institutional investor. [Module 3, Registration of Securities, Section 5.1]

An agent is effecting transactions for a broker/dealer. When effecting the following transactions, which transaction is not defined as an exempt transaction under the Uniform Securities Act? A. An offer of a private placement to four persons where the solicitor will be compensated for the presentation and no one purchases the issue B. An offer and sale of an exchange-traded stock to an investment company or other financial institution C. An offer of a private placement to eight persons where the solicitor will not be compensated for the presentation and all of the persons purchase the issue D. An offer and sale of government securities to a bank

An offer of a private placement to four persons where the solicitor will be compensated for the presentation and no one purchases the issue . Since the agent is compensated, the offer is not an exempt transaction, and the person must be registered. When no compensation is paid for the presentation, the transaction is exempt. The offer and sale of an exchange-traded stock is not exempt if it is sold to an individual, but it is exempt if sold to an institutional investor. [Module 3, Registration of Securities, Section 5.1]

The Uniform Securities Act defines which of the following as an exempt transaction? A. A solicited offer and sale of a Pink Sheet stock to an individual who regularly purchases Pink Sheet stocks B. An unsolicited transaction where the customer has called a broker/dealer to purchase a security C. An offer of a private placement to three persons where the solicitor will be compensated for the presentation if any of the three persons purchases the issue D. An offer and sale of securities through a tombstone advertisement

An unsolicited transaction where the customer has called the broker/dealer to purchase a security. If the transaction is unsolicited, it is an exempt transaction, though the administrator may require a signed customer acknowledgement. Pink Sheet stocks and sales of Pink Sheet stocks to noninstitutional clients are nonexempt and must be registered. Private placements are exempt transactions only if sold to 10 or fewer clients and the agent is not compensated for the transactions. Offers through a tombstone publication during the cooling-off period are exempt; however, the resulting sales are not exempt. [Module 3, Registration of Securities, Section 5.1]

Which of the following measurements is the most commonly used method to determine the performance of the underlying index in an equity-indexed annuity? A. High-water mark B. Annual reset C. Point-to-point D. Comparing it to multiple indexes

Annual reset. The annual reset measurement is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to the annuity each year during the term. The high-water mark and point-to-point methods are measurements that are used in calculating the performance of the underlying index for an EIA, but they are not used as often as the annual reset method. The performance of the underlying index in an EIA is never determined by measuring it against the performance of other indexes. [Module 7, Annuities & Retirement Plans, Section 6.7]

A husband and wife have been married for 20 years and have two children. The husband is self-employed while the wife works for a large company where she participates in a 401(k), in which the husband is the primary beneficiary and her children as secondary beneficiaries. The wife dies in an accident, and before the husband can take money from the plan, he dies suddenly. The assets are now left to the children. When can the children withdraw the assets without penalty? A. When they turn 59 1/2 B. Anytime, as long as it is for higher education C. Anytime, in any manner, as long as the full amount is withdrawn within five years of the mother's death D. Anytime, in any manner, as long as the full amount is withdrawn within five years of the father's death

Anytime, in any manner, as long as the full amount is withdrawn within five years of the father's death. When the wife passed away, her retirement assets were considered to be her husband's, as her primary beneficiary, even though he was never able to take physical receipt of the assets. Upon the husband's death, the children, now the primary beneficiaries, are given a five-year period from their father's death to liquidate the account. [Module 7, Annuities & Retirement Plans, Section 2.0]

Investment advisers must act in the best interest of their clients. When making recommendations for clients, an investment adviser must act in which of the following roles? A. As a broker B. As a trustee C. As a fiduciary D. As a prudent man

As a fiduciary. The investment adviser must act as a fiduciary for its clients, meaning that it must act in the best interest of the client, putting the client's needs ahead of the firm's. The prudent-man rule, which has now been largely replaced by the Uniform Prudent Investor Act (UPIA), determines the investments a person can recommend to meet these fiduciary responsibility requirements. [Module 4, Prohibited Practices & Business Practices of IAs, Section 3.0]

You have just finished presenting an ARMI, Inc. variable life policy to Mrs. Starr. She seems to understand certain aspects of the variable life policy, yet she remains unclear about who is responsible in the event that any investments in the account underperform. You should reiterate to Mrs. Starr that: A. ARMI, Inc. assumes the market risk associated with the policy. B. As the policyholder, she assumes none of the market risk associated with the policy. C. As the policyholder, she assumes some of the market risk associated with the policy. D. As the policyholder, she assumes all of the market risk associated with the policy.

As the policyholder, she assumes all of the market risk associated with the policy. In variable policies, any and all market risk is borne by the insured, not by the insurance company. In traditional insurance policies, such as whole life policies, the insurance company does bear the market risk. [Module 7, Annuities & Retirement Plans, Section 7.4]

Marcel Hernandez is a director for ABC Securities, a broker/dealer firm based out of State X. The firm is now opening a new office in State Y. According to the NASAA Statements of Policy, Marcel will: A. Not have to register as an agent in State Y B. Have to register as an agent in State Y C. Automatically be registered as an agent in State Y D. Automatically be registered as a broker/dealer in State Y

Automatically be registered as an agent in State Y. Whenever broker/dealers open an office in a new state, they have to register in that state. They do so by filing Form BD, which discloses the officers and directors of the firm. When the state makes a broker/dealer's registration effective, those listed on Form BD are automatically registered as agents in that state. [Module 2, Registration of Persons, Section 1.2]

Bill Thompson is an agent for a broker/dealer firm. Bill has a friend who is a research analyst for a top Wall Street firm. Over lunch, the research analyst discusses the current merits of a particular company and later issues a report discussing the positive outlook of the company. Before the report is released, Bill purchases shares of stock in the company. Which of the following could be said of Bill's trade? A. Bill will receive a fine in the amount of any profit from the trade. B. Bill's purchase of the stock is a violation, because you can't trade ahead of a research report. C. Bill's purchase of the stock is allowed, because he had discussed it with the analyst. D. Bill's purchase of the stock is allowed as long as he did not share the analyst's positive outlook about the stock to his clients.

Bill's purchase of the stock is a violation, because you can't trade ahead of a research report. The agent has traded in advance of the public, who will be buying the security based on the analyst's report. This is a form of market manipulation and is a fraudulent act. [Module 6, Investment Advisers & the Federal Acts, Section 3.1]

A broker/dealer is registered in the state of California and Nevada. An agent for the broker/dealer is only registered in the state of California. The agent effects a transaction for one of the firm's clients in Nevada. Who will be held liable for this? A. Agent only B. Broker/dealer only C. Both the agent and the broker/dealer D. There is no liability as the agent had a de minimis number of clients in Nevada

Both the agent and the broker/dealer. Agents of broker/dealers are required to be registered in any state in which they transact business. There is no "de minimis" exclusion for agents or broker/dealers. Effecting a transaction for a single client defines one as an agent and requires that agent to be registered. Broker/dealer firms must sign off on every transaction and are responsible for ensuring that all persons are appropriately registered. Allowing an unregistered person to transact business would be construed as a failure to supervise and the broker/dealer would also be liable. [Module 2, Registration of Persons, Section 1.2]

A research analyst released a report stating that the performance of a particular pharmaceutical company was quite stellar, even though the pharmaceutical industry was struggling in general. As a result, an investor has decided to invest in the pharmaceutical company. This type of investing is known as: A. Top-down investing B. Bottom-up investing C. Rotating investing D. Contrarian investing

Bottom-up investing. Bottom-up investing means the investor is focusing on the performance of an individual company, rather than looking at other indicators, such as how the market is doing or how that particular company's industry is performing. A top-down approach means the investor is first looking at the market and then particular sectors or industries before making an investment decision. A contrarian approach means the investor is doing the opposite of what the general public is doing (if they are buying, you are selling, and vice-versa). [Module 8, Risk & Evaluation, Section 1.5]

An investment adviser is analyzing one security to forecast the performance of an entire sector of an industry. What type of analysis is this? A. Top-down B. Down-top C. Point-figure D. Bottom-up

Bottom-up. A bottom-up approach first looks at the individual elements of an industry before speculating on the industry as a whole. Top-down is the opposite — the industry is considered before picking individual securities within the sector. [Module 8, Risk & Evaluation, Section 1.5]

All of the following entities are considered to be a federal covered investment adviser in a state, except: A. Investment advisers who manage services portfolios in excess of $110 million B. Advisers for nationally recognized statistical rating organizations C. Pension consultants with $200 million or more in assets D. Broker/dealers who offer wrap programs

Broker/dealers who offer wrap programs. These are not considered federal covered investment advisers in a state. Broker/dealers who offer wrap programs are the B/D firms that charge commissions for trades and are charging for the investment advice as well. This alone does not define the firm as a federal covered adviser. All of the others are required to register with the SEC and are considered to be federal covered investment advisers that are exempt from registration at the state level. A federal covered investment adviser is any person that has at least $110 million in assets under management, advisers for pensions with $200 million or more in assets, and those advisers for nationally recognized rating organizations. If an investment adviser has between $100 and $110 million under management, they have the option of either registering with the state or with the SEC. [Module 2, Registration of Persons, Sections 4.1 & 6.0]

Which of the following business entities does not allow capital losses to be passed through? A. Sub S-corporation B. C-corporation C. LLC D. General partnership

C-corporation. Losses are not passed through to the shareholders of a C-corporation. The shareholders realize a loss only if they sell their shares for less than they pay for them. Losses are passed through to the owners, members, or partners of sub S-corporations, LLCs, and general partnerships, respectively. [Module 9, Customer Profiles, Section 1.1]

Regarding the charges by a fee-based adviser, which of the following goes against the compensation rules for investment adviser representatives? A. Yearly charges on the ending balance B. Performance-based fees C. A percent of the assets at the beginning of the year D. Charges of 12b-1 fees in the investment

Charges of 12b-1 fees in the investment. This is another question that contains two possible correct answers. If both 12b-1 fees and performance-based fees are in the answer choices, always pick the 12b-1fees. Investment companies charge shareholders 12b-1 fees under Section 12b-1 of the Investment Company Act of 1940. The portion of a 12b-1 that is paid to an investment professional is considered a commission and investment adviser representatives cannot receive commissions. Investment advisers are generally prohibited from being paid on performance of the assets. However, federal covered investment advisers can charge performance fees to certain clients. Asset-based fees can be charged on the beginning or the ending balance, but it must be consistent. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 5.1]

Regarding the charges by a fee-based adviser, which of the following is a violation of the rules under the advisory laws? A. Yearly charges on the ending balance B. Performance-based fees C. A percent of the assets at the beginning of the year D. Charging 12b-1 fees

Charging 12b-1 fees. 12b-1 fees are fees that investment companies charge shareholders under Section 12b-1 of the Investment Company Act of 1940. 12b-1 fees are sales, marketing, and distribution expenses that are considered to be commissions. Advisers may not charge 12b-1 fees. The Uniform Securities Act prohibits performance-based fees. However, the Investment Advisers Act of 1940 allows federal covered advisers to charge performance fees to certain clients. Advisory fees may be based on the beginning or the ending balance, but they must be consistent and stated in the advisory contract and brochure. [Module 4, Prohibited Practices and Business Practices of Investment Advisers, Section 5.0]

Which of the following actions by a firm is not considered unethical conduct according to the Uniform Securities Act? A. Commingling all customer securities that are held in street name for ease in counting the stock B. Commingling all customer cash in one account C. Recommending speculative securities to older clients because the firm is the underwriter and believes the company is going to be a ripe candidate for a takeover D. Purchasing shares of a stock for which the firm is an underwriter in a discretionary account without first having customer approval

Commingling all customer cash in one account. All customer cash may be maintained in one account as long as no firm cash is commingled. The firm, however, cannot commingle securities; securities must be separated by customer. Purchasing shares for a discretionary account without written approval when the firm is an underwriter is unethical. If the firm were not an underwriter, the purchase would be allowed assuming it was suitable given the client's investment objectives. Also, if a firm is an underwriter, it cannot make recommendations unless it discloses that it is part of the syndicate. [Module 4, Prohibited Practices & Business Practices of IAs, Section 3.4]

Tim Shaw is a married, 53-year-old economics professor. He has been a client of Maryland Securities, a broker/dealer firm, for the last 20 years. One day, Tim calls an agent at the firm and asks for the price of ABC common stock. The agent erroneously gives a quote that is not relevant to the value of the stock. The agent has: A. Committed a criminal act B. Committed an unethical act C. Committed a fraudulent and misleading act D. Not committed any violation since it is meant to encourage the client to purchase the stock

Committed an unethical act. Since the agent obviously made a mistake, this is an unethical act that may result in a civil suit if the client purchases the stock based on this information. Had the agent given the erroneous quote intentionally, it would constitute a fraudulent act. While there are exceptions, fraud typically involves knowingly providing wrong information or otherwise deceiving the investor. [Module 4, Prohibited Practices & Business Practices of IAs, Section 1.0]

An investment adviser representative has clients for which he effects trades through a B/D. The B/D charges commissions for the trades and attributes part of the commission as soft dollars. The soft dollars can be used for all of the following, except: A. Paying the salary of an analyst B. Buying subscriptions of an analyst's report C. Software that will enable the firm to analyze investment reports D. Purchasing computers that will be used for executing trades for the investment adviser

Computers that will be used for executing trades for the investment adviser. Soft dollars are money collected for trades, but are used to pay for other services, such as analyst reports, etc. The soft dollars must be allocated for research related items and cannot be used to purchase equipment, paying commissions for trades, or other non-related items. While, in practice, it is often interpreted a research analyst's salary would not be an acceptable use of soft dollars, you may encounter a question on the exam such as this that forces you to answer differently. Computer hardware for trade execution is never an acceptable use of soft dollars. [Prohibited Practices Module, Section 3.13 ]

An agent, while discussing mutual funds with a prospect, states that since all dividends and capital gains are to be reinvested, the prospect will always be able to redeem the mutual fund shares for more than the purchase price. This statement would be: A. Always correct due to dollar cost averaging B. Considered misleading and dishonest because the agent is guaranteeing a profit C. Acceptable if approved by the administrator D. Considered misleading and dishonest because this will not always be the scenario

Considered misleading and dishonest because the agent is guaranteeing a profit. Profit and performance guarantees are considered misleading and dishonest. To tell the client he or she will always be able to redeem the shares for more than the purchase price is providing a guarantee, which is not permitted. It is true that this will not always be the scenario, but that is not why the statement is dishonest. It is dishonest because the agent is providing a guarantee. [Module 4, Prohibited Practices, Section 1.0]

Which of the following is a drawback to an employer offering a money purchase plan? A. Contributions are mandatory. B. Contributions are made solely by the participant. C. Contributions are made with after-tax money. D. Earnings accrue on a tax-deferred basis.

Contributions are mandatory. There are two correct statements here — contributions are mandatory and earnings accrue on a tax-deferred basis. However, tax-deferred earnings are considered a benefit rather than a drawback, while mandatory contributions are a definite drawback to the employer offering the plan. [Module 7, Annuities & Retirement Plans, Section 1.4]

All of the following that do not have an office in the state are excluded from the definition of a broker/dealer under the Uniform Securities Act, except: A. A principal of a broker/dealer who supervises agents in purchasing shares of Nasdaq stock for clients in the state B. A broker/dealer that sells stock to institutional investors in the state C. A broker/dealer that sells stock to other broker/dealers in the state D. A broker/dealer that sells stock to four clients in the state

Correct answer (false statement): A broker/dealer that sells stock to four clients in the state is not excluded from the definition of broker/dealer. There is no de minimis standard for broker/dealers or agents. A broker/dealer firm that sells to even one non-institutional client is defined as a broker/dealer in that state. A principal acts on behalf of the broker/dealer but is never considered a broker/dealer under the Act. Only firms are defined as broker/dealers, and therefore they must register. Be careful when reading questions phrased "except" — make sure you understand what the question is asking. Out-of-state broker/dealers performing trades with institutions, other broker/dealers, or other institutional investors are not defined as broker/dealers in a state in which they hold no office. Bank trust departments may act as a broker/dealer, but they are excluded from the definition of broker/dealer. [Module 1, Uniform Securities Act, Section 3.3]

Which of the following may not contribute to a 403(b) retirement plan? A. A nurse at a city hospital B. Secretary at a nonprofit organization C. A university professor D. A U.S. government employee

Correct answer (false statement): A government employee may not contribute to a 403(b) retirement plan. The 403(b) was created for nonprofit organizations such as schools, universities, and hospitals as well as other 501(c)3 nonprofit organizations. People employed with the U.S. government are part of the government retirement plan, and therefore, are ineligible for a 403(b). [Module 7, Annuities and Retirement Plans, Section 1.5]

All of the following are investment companies as stipulated by the Investment Company Act of 1940, except: A. A unit investment trust B. A management company C. A mutual fund D. A face-amount certificate company

Correct answer (false statement): A mutual fund. The Investment Company Act of 1940 broadly classifies investment companies into three classifications: Face-amount certificate companies, unit investment trusts, and management companies. Management companies are divided into open-end and closed-end management companies. Although open-end management companies are referred to as mutual funds and are a type of investment company, they are a subclass of one of the three types of investment companies, as stipulated by the Investment Company Act of 1940. [Module 6, Investment Advisers & the Federal Acts, Section 4.0]

All of the following are exempt from registration in a state as a broker/dealer, except: A. A person who has an office in the state and buys and sells securities for the accounts of others B. A person who has no office in the state and buys and sells securities for investment companies, banks, and other financial institutions C. An agent who works in an office in the state, and buys and sells securities for the accounts of others D. A person who has no office in the state but gives advice for a fee to 15 residents of the state

Correct answer (false statement): A person who has an office in the state and buys and sells securities for the accounts of others is not exempt from registration in a state. The person who has no office in the state and gives advice to 15 clients in the state is an investment adviser, not a broker/dealer. Agents are not broker/dealers and are not registered as such -- they work for a broker/dealer. Therefore, always exclude the agent because all agents are excluded from the definition and from registering as a broker/dealer. However, agents do have to be registered as an agent. Anyone who does trades solely for financial institutions and has no office in the state is excluded from the definition of broker/dealer and from registration with the state. If a firm has an office in the state, then it must register in that state, even if its only clients are institutional. [Module 1, Uniform Securities Act, Section 3.4]

Which of the following does an administrator not have to provide in a disciplinary proceeding under the Uniform Securities Act? A. An opportunity for a hearing B. A notice of the proceeding to the respondent C. Advice to the respondent of his or her right to legal counsel D. Written findings of fact and conclusions of law

Correct answer (false statement): Advice to the respondent of his or her right to legal counsel. An administrator does not have to advise the respondent of his or her right to legal counsel in a legal disciplinary proceeding under the Uniform Securities Act. Such advice is not a requirement of the Act. In a criminal arrest, federal law requires such information to be provided, but that is not a requirement in this type of disciplinary proceeding. This is an administrative procedure and the administrator is not required to advise the respondent of the right to counsel. The respondent can, however, be represented by counsel, if desired. The other answers are items that an administrator must provide in a disciplinary procedure. [Module 2, Registration of Persons, Section 2.2]

Under the Uniform Securities Act, all of the following are true concerning the withdrawal of an agent's registration, except: A. Prior to revoking an agent's registration, the administrator must give notice to the agent's employer and the agent, and provide the opportunity for a hearing. B. An application for withdrawal is effective 30 days after the application is received by the administrator, assuming no disciplinary proceedings are pending. C. At the administrator's discretion, disciplinary proceedings may delay the effective date of a withdrawal application indefinitely. D. After an agent's withdrawal, disciplinary proceedings cannot be taken against the agent by an administrator.

Correct answer (false statement): After an agent's withdrawal, disciplinary proceedings cannot be taken against the agent by an administrator. Even after an agent's withdrawal, disciplinary proceedings can still be taken against him or her by an administrator. The administrator retains jurisdiction for one year after an agent's registration is terminated or withdrawn. All the other statements are true. [Module 2, Registration of Persons, Sections 2.2 & 2.4]

A broker/dealer is not registered with a state to do business in the state. All of the following advertisements by the broker/dealer would require the firm to be registered with the administrator in that state, except: A. An advertisement in a newspaper that does not originate in the state B. An advertisement in a newspaper that originates in the state C. An advertisement in a newsletter sent to prospective clients in the state D. A list of recommendations sent by the broker/dealer to the residents of the state

Correct answer (false statement): An advertisement in a newspaper that does not originate in the state. Since the newspaper does not originate in the state, the person or firm making the advertisement does not have to be registered in that state. Published offers are only considered to be offers in the state in which they are published, and only if at least 1/3 of the publication's circulation is in that state. All the other advertisements may have been published in the state, and thus the firm might have to register in that state. [Module 5, State Administrator & Regulatory Oversight, Section 3.4]

Which of the following is false? A. An agent has his office in Florida, a client of his lives in New York, and a transaction between the two takes place in Texas. The administrators of all three states would have jurisdiction with regard to this transaction. B. When an agent who works in one state wants to do business in another state, both the agent and the broker/dealer he represents must be registered in the new state. C. An agent who lives in one state would like to do business in another state. He may do so automatically if his firm is registered in the other state. D. When an agent leaves one broker/dealer to join another, both the previous firm and the new firm must notify the administrator in the state or states involved.

Correct answer (false statement): An agent who lives in one state would like to do business in another state. He may do so automatically if his firm is registered in the other state. The agent must register in any state where he/she will do business. The fact that the firm is registered in the state does not exempt the agent from registration. They are different states and each state administrator has jurisdiction in his own state. If transactions occur in a state, the state of the transaction, the state of the agent, and the state of the client all have jurisdiction. Any time an agent leaves a firm, joins a firm, or switches firms, the agent and the firm or firms are required to notify the administrator. [Module 2, Registration of Persons, Section 1.2]

All of the following are true about having a Roth IRA, except: A. Earnings grow tax-free. B. Investors under 50 years old may contribute $2,500 to a Roth IRA and $2,500 to a traditional IRA. C. Annual distributions are required to be taken by April 1 of the year after the investor turns 70 1/2, at the very latest. D. There are income cap limits that determine whether or not investors can contribute to a Roth IRA.

Correct answer (false statement): Annual distributions are required to be taken by April 1 of the year after the investor turns 70 1/2, at the very latest. This is a false statement — annual distributions are required for traditional IRAs, but not for Roth IRAs. Earnings grow tax-deferred in a Roth IRA and qualified distributions are tax-free. IRA contributions may be split between a Roth IRA and a traditional IRA (provided the investor is allowed to contribute to both). Roth IRAs do have income limits and it is possible to earn too much to be able to contribute to a Roth IRA. [Module 7, Retirement Plans & Annuities, Section 3.0]

Which of the following is not included as a cash flow entry in a business's financial statement? A. Income B. Assets C. Dividends D. Taxes

Correct answer (false statement): Assets. Assets are not included in the cash flow. Cash flow is considered to be "money in/money out." An asset has already been attained and therefore is not included in the cash flow. Income and dividends are considered "money in" while taxes paid are considered "money out." [Module 8, Risk and Evaluation, Section 6.3]

Bob Hurwitz has been an investment adviser in the state of California for the past 10 years. He has a small client base, catering mainly to investors who are closing in on retirement. One of his clients will be moving to Arizona upon retirement within the year. Bob has suggested that the client manage his portfolio with a "passive management approach." An investor with a "passive management approach" would be doing all of the following, except: A. Assuming the "efficient market theory" B. Assuming a form of "index investing" strategy theory C. Assuming the "random walk" theory D. Assuming the "undervalued securities" theory

Correct answer (false statement): Assuming the "undervalued securities" theory. The efficient market theory, which is consistent with the random walk theory, is a basis for passive management. Index investing, meaning investing in index funds, is a method of passive management. Searching out and investing in undervalued securities is an example of active portfolio management. [Module 10, Portfolio Management, Sections 2.1, 2.2 & 2.4]

"Market manipulation" includes all of the following actions, except: A. Buying a security on one exchange and simultaneously selling it at a better price on another exchange B. Giving a client a fictitious quote C. Providing misleading information about a security D. Creating an impression of greater than actual activity in a security

Correct answer (false statement): Buying a security on one exchange and simultaneously selling it at a better price on another exchange is not a form of market manipulation -- it is called an arbitrage, which is a legitimate trading strategy. Giving a client a fictitious quote, providing misleading information about a security, and creating an impression of greater than actual activity in a security are forms of market manipulation. [Module 4, Prohibited Practices, Section 1.0]

All of the following are measures of inflation, except: A. GDP B. CPI C. PPI D. CCI

Correct answer (false statement): CCI. The Consumer Confidence Index is an index calculated each month on the basis of a household survey of consumer opinions on current conditions and future expectations of the economy; it does not measure inflation. The gross domestic product (GDP), Producer Price Index (PPI), and the Consumer Price Index (CPI) all reflect or are measurements of the inflation rate. [Module 8, Risk & Evaluation, Section 3.8]

Under the Uniform Securities Act, which of the following does not describe an issuer? A. The president and manager of an organization that offers collateral trust certificates to the public B. AOP Investments offering $1,000 minimum trust participation units in a unit investment trust that owns a $40 million municipal bond C. GPB Corporation offering preferred shares to its own shareholders D. Dig Deep Corporation offering certificates of 1/10,000 mineral interest in a lease of 200,000 acres of a proven gas development area

Correct answer (false statement): Dig Deep Corporation offering certificates of 1/10,000 mineral interest in a lease of 200,000 acres of a proven gas development area. This does not describe an issuer. Under the Uniform Securities Act, there is no issuer of certificates of interest or participation in oil, gas, or mining titles or leases. Under state law, for certificates of deposit, voting trust certificates, collateral trust certificates, and shares of an unincorporated investment trust that doesn't have a board of directors or trustees, the depositor or the manager is considered to be the issuer. The entity that receives the benefit for offering shares of a registered investment company (UIT) or preferred equity shares is the issuer. [Module 1, Uniform Securities Act, Section 3.2]

Which of the following is not a true statement? A. IBM has declared a stock dividend of three shares for every five shares held by the present stockholders, which is treated as a sale of the stock under the Uniform Securities Act. B. Bullish Securities, a broker/dealer with no place of business in California, is excluded from the definition of broker/dealer in the state of California if financial institutions are the firm's only clients in the state. C. The local EGG store is giving away five shares of ABC stock with each purchase of an EGG computer. This is treated as a sale of the stock under the Uniform Securities Act. D. A person who represents an issuer that is a bank would not be defined as an agent under the Uniform Securities Act.

Correct answer (false statement): IBM has declared a stock dividend of three shares for every five shares held by the present stockholders, which is treated as a sale of the stock under the Uniform Securities Act. If IBM has declared a stock dividend of three shares for every five shares held by the present stockholders, it is not treated as a sale of the stock under the Uniform Securities Act. Stock dividends are not included in the definition of a sale. However, when securities are given as bonuses or with the purchase of anything, including other securities, it is considered a sale. An out-of-state broker/dealer whose only clients are financial institutions or other broker/dealers is excluded from the definition of a broker/dealer. If the issuer is a bank, the person representing the issuer is not defined as an agent, and is exempt from registration. [Module 1, Uniform Securities Act, Section 3.11]

Options trading is useful for all of the following, except: A. Hedging B. Speculation C. Indexing D. Income generation

Correct answer (false statement): Indexing. Options strategies include buying options to hedge a position, writing options contracts to generate income, or trading options for pure speculation. Indexing is a passive investment approach that allocates an investment portfolio to match the performance of a particular index. [Module 10, Portfolio Management, Sections 7.0 & 8.0]

Which of the following is not used in creating a client profile? A. Investment goals B. Investment knowledge C. Investment timing D. Investment experience

Correct answer (false statement): Investment timing. Investment timing is not part of a client's profile. Investment horizon (tenure of ownership) is used in determining objectives, but that is different than investment timing, which is a portfolio management technique. All the other answers are used in creating a client profile. [Module 9, Customer Profiles, Section 3.2]

Under the Securities Act of 1933, federal covered securities are not required to be registered with a state in order to be sold in the state. Of the following, which is not exempt as a federal covered security? A. Southern Pacific Railroad bonds B. Los Angeles, California, municipal bonds sold in California C. Securities sold in a private placement to qualified purchasers without a public offering D. San Francisco, California, municipal bonds sold in Oregon

Correct answer (false statement): Los Angeles, California, municipal bonds sold in California. This is the only choice that is not exempt as a federal covered security. "Federal covered" means the securities do not have to be registered in the state because of federal laws. Railroad issuers, classified as common carriers and regulated by the Interstate Commerce Commission, are exempt from registration under the Securities Act of 1933 and thus are federal covered. Securities that are listed on national exchanges or on Nasdaq and securities that are sold to qualified purchasers (having $5 million or more of invested net worth or persons who manage at least $25 million in investment assets), among others, are also considered federal covered securities. Municipal bonds, except those sold in the state of issue, are federal covered. Therefore, San Francisco, California municipal bonds sold in Oregon are federal covered securities, but Los Angeles, California municipal bonds sold in California are not. Recall, however, that municipal securities, as a whole, are exempt securities under the Uniform Securities Act and are exempt from state registration. [Module 3, Registration of Securities, Section 4.2]

All of the following are federal covered securities, except:************ A. U.S. government bond B. Unit investment trust C. Municipal bond sold in the state of issue D. A NYSE listed stock

Correct answer (false statement): Municipal bond sold in the state of issue. Municipal bonds are exempt from registering with the SEC under the Securities Act of 1933 and exempt from registering with the states under the Uniform Securities Act. However, municipal bonds sold in the state in which the issuer is located are NOT federal covered securities. It may seem like we are parsing words, but such is the nature of the exam. Remember, municipal bonds are not federal covered securities in the state in which they are issued, but municipal securities, on the whole, are exempt from registration under the USA. [Module 3, Registration of Securities, Section 4.2]

The administrator may do all of these. Once a broker/dealer is registered, the administrator may require filing of advertising, conduct examinations in and out of the state, and require the filing of amended documents and financial reports. [Module 2, Registration of Persons, Sections 1.5, 3.1, 3.6, & 3.7]

Correct answer (false statement): Omitting information about an issuer that would not have an effect on an investment decision is not a prohibited practice. Prohibited business practices include giving incorrect statements about items that are "material" to making an investment decision, such as actual or projected earnings or the amount of commission or markup that will be charged on a trade. Stating that a registered security is "approved" in any way by the SEC or the administrator is misleading and prohibited. [Module 4, Prohibited Practices, Section 1.0]

An investment adviser representative has clients for which he effects trades through a B/D. The B/D charges commissions for the trades and attributes part of the commission as soft dollars. The soft dollars can be used for all of the following, except: A. Paying an analyst's research conference registrations B. Buying subscriptions of an analyst's report C. Purchasing software that enables the firm to analyze investment reports D. Purchasing computers that will be used to execute trades for the investment adviser

Correct answer (false statement): Purchasing computers that will be used to execute trades for the investment adviser. Soft dollars are monies collected for trades but are used to pay for research services, such as buying subscriptions of an analyst's report. The soft dollars cannot be used to purchase equipment that will be used for nonresearch activities, paying commissions for trades, or other nonrelated items. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 3.13]

All of the following are common ways to measure the performance of the underlying index of an equity-indexed annuity, except: A. Point-to-point B. High-water mark C. Annual reset D. Term

Correct answer (false statement): Term. Term is the length of the annuity, not a performance measurement of the index. Point-to-point, high-water mark, and annual reset are all common ways to measure the performance of an underlying index. [Module 7, Annuities & Retirement Plans, Section 6.7]

All of the following are characteristics of a 404(c) compliant plan, except: A. Contributions are made by the employee. B. Contributions are made by the employer. C. The employer has to offer company stock in the plan. D. The participant must be offered at least three different investment alternatives.

Correct answer (false statement): The employer has to offer company stock in the plan. Compliance with ERISA Section 404(c) reduces liability exposure for plan sponsors and fiduciaries of participant-directed retirement plans, such as 401(k)s. In a 404(c) plan, both the employer and employee can make contributions, and plan participants (the employees) must be offered at least three different types of investments. Company stock may be offered, but it is not a requirement to be 404(c) compliant. [Module 7, Retirement Plans, Section 5.0]

An out-of-state securities firm and its agents are exempt from the definition of a broker/dealer within a state if all of the following requirements are met, except: A. The customer who is contacted is on vacation in the state for less than 30 days. B. The firm and agent who contact the customer are not registered in the client's state of residency. C. The customer who is contacted must have lived in his or her state of residency for at least 30 days in the past year. D. The customer who is contacted must have had the account with the agent for at least 14 days prior to the out-of-state transaction.

Correct answer (false statement): The firm and agent who contact the client are not registered in the client's state of residency. This requires the firm to be registered as a B/D in that state. All the other choices meet the requirements to remain exempt from registration in the state. If a client is on vacation in another state for less than 30 days, the firm and agent are not required to register in the state in which the client is vacationing; this is true as long as the firm and agent are registered with a state in which the customer was a resident or was present for at least 30 consecutive days during the one-year period prior to the day of the transaction and the client has been assigned to the agent for longer than 14 days. [Module 1, Uniform Securities Act, Sections 3.3 & 3.4]

All of the following are defined as an "offer" or a "sale," except: A. The gift of a non-assessable oil partnership interest B. The gift of an assessable stock C. Issuance of warrants to buy stock to existing shareholders D. Issuance of 90-day options to buy stock

Correct answer (false statement): The gift of a non-assessable oil partnership interest is not defined as a sale. A gift of a security is not considered a sale, unless the security given is an assessable security. An assessable security may require the security holder to pay additional money (an assessment) to the issuer to continue ownership. This answer choice states that the oil partnership interest is "non-assessable," which means it would not constitute a sale. Since warrants and options provide an opportunity to buy the underlying stock, they are treated as an offer of the underlying security because the payment of money is required to exercise the warrant or option. [Module 1, Uniform Securities Act, Section 3.11]

You are an agent for a broker/dealer who executes trades in stocks and bonds. You have heard some news about BFD Corporation and you start calling many of your clients who like this particular type of investment. Some of your clients decide to purchase the stock that you are suggesting to them. The information that you have heard would not be considered inside information in all of the following situations, except: A. The information has been released by a major news service. B. The information has been released to the SEC. C. The information has been released to the stockholders of the corporation. D. The information has been released to a financial news network.

Correct answer (false statement): The information has been released to the stockholders of the corporation. Information that is only given to stockholders is NOT considered to be released; thus, stockholder information is considered inside information. Information that has been released to a major news service, such as a newspaper, the AP/UPI, or a financial news network is considered released. Information that has been released to the SEC is considered released and no longer inside information. [Module 4, Prohibited Practices & Business Practices of IAs, Section 1.0]

All of the following are true of variable universal life insurance, except: A. The insurance company assumes the investment risk of the policy. B. A plan holder can make payments to the insurance or let the premiums be paid by the earnings from the investments. C. The variable universal life policy is a security. D. The variable universal life policy allows the holder to select what type of investments can made in the account.

Correct answer (false statement): The insurance company assumes the investment risk of the policy. This is not correct, since variable universal life insurance is a variable product. Variable products give the holder of the policy or contract the ability to select separate accounts, and therefore, the opportunity for market returns which involves investment risk. This is why variable products are considered securities. The insurance company assumes the risk in traditional, term, whole life, and universal life insurance. Payments of the premiums can come from the insured or from the investments. [Module 7, Retirement Plans and Annuities, Section 7.0]

All of the following are true regarding the guarantees of a variable annuity, except: A. The insurance company guarantees the investment risk. B. The insurance company guarantees the expense risk. C. The insurance company guarantees the mortality risk. D. The annuitant has the investment risk.

Correct answer (false statement): The insurance company guarantees the investment risk. In a variable annuity, the annuitant, or investor, carries the investment risk, while in a fixed annuity, the insurance company carries the investment risk. The expense and mortality risk are contractually borne by the insurance company in both fixed and variable annuities. [Module 7, Retirement Plans & Annuities, Sections 6.1 & 6.2]

An issuer registering with the state administrator must provide all the following information, except: A. The amount of securities to be offered B. A list of other states where the securities will be offered C. Any orders, judgments, or decrees entered against the issuer by any state D. The names of underwriters bringing the issue to market

Correct answer (false statement): The names of underwriters bringing the issue to market. The names of the underwriters are disclosed in the preliminary prospectus, not the registration application. The amount of securities to be offered, other states where the securities will be offered, and any orders, judgments, or decrees against the issuer must be disclosed on the issuer's registration application to the state. [Module 3, Registration of Securities, Section 1.1]

According to the North American Securities Administrators Association Model Rules regarding the record keeping requirements of an investment advisory firm, all of the following are required to be maintained by the firm, except: A. The original receipt for customer funds received B. A journal of cash receipts and disbursements C. Financial statements relating to the investment adviser's business D. Internal audit working papers related to the investment adviser's business

Correct answer (false statement): The original receipt for customer funds received. This does not need to be maintained by the firm. Investment advisers are only required to maintain copies of receipts given to customers who have made a deposit, not the originals. Journals of cash receipts and disbursements (daily blotter), and financial statements and internal audit working papers that relate to the IA's business must be maintained per the NASAA. [Module 2, Registration of Persons, Section 3.0]

The investment policies that are to be developed for all retirement plans subject to the 1974 ERISA Act must include all of the following, except:************* A. The appointment or designation of a person who will be responsible for the plan's administrative affairs B. Appointment of the person(s) who will be responsible for the decisions and advice regarding the investments C. The diversification of the investments D. The periodic analysis and review of the investments and their suitability for the plan

Correct answer (false statement): The periodic analysis and review of the investments and their suitability for the plan. There is no requirement under ERISA to perform reviews of the investments other than the "fiduciary responsibility" of the diversification of the investments. Under ERISA, the fiduciary responsibility includes the diversification of the investments. The appointment of the people who are responsible for the administrative affairs and those who will make the investment decisions are absolute. Although periodic analysis and review is important, it is not an ERISA requirement. [Module 7, Annuities & Retirement Plans, Section 5.0]

All of the following are considered a sale under the Uniform Securities Act, except: A. The purchase of government securities by an agent for a client B. The sale of exchange-traded stock by an agent for a client C. The recommendation to sell shares of exchange-traded stock by an agent for a client D. The sale of municipal securities to an institutional investor

Correct answer (false statement): The recommendation to sell shares of exchange-traded stock by an agent for a client is not considered a sale under the Uniform Securities Act. Such a recommendation would be considered an offer to sell, but not a sale because a transaction does not actually take place. An offer to sell includes any attempt to dispose of a security for value. A sale includes every contract of sale, contract to sell, or disposition of a security or interest in a security for value. [Module 1, Uniform Securities Act, Section 3.11]

You are considered a broker/dealer and must be registered with the administrator of a state in all of the following instances, except: A. You have an office in the state where you regularly meet with clients. B. You have no office in the state, but you rent a room in a hotel where you meet with five clients who are on vacation in the state. C. You have an office in the state in which you advertise in the newspaper. D. You have no office in the state, but you do business with more than six clients over the phone.

Correct answer (false statement): You have no office in the state, but you rent a room in a hotel where you meet with five clients who are on vacation in the state. There is no regular office and the person only rents rooms in a hotel to meet the five clients on vacation. As long as the hotel room is not advertised, it is not considered a place of business. The two with offices are automatically required to register, and a firm that transacts business with any amount of clients (remember there is no de minimis for broker/dealers) is required to register with the administrator of the state. [Module 1, Uniform Securities Act, Section 3.3; Module 2, Registration of Persons, Section 1.2]

Which of the following describes the formula for the quick ratio? A. Inventories - Current Liabilities ÷ Current Assets B. Current Assets - Current Liabilities ÷ Inventories C. Current Assets - Inventories ÷ Current Liabilities D. Current Assets ÷ Net Worth

Current Assets - Inventories ÷ Current Liabilities. The quick ratio, also known as the "acid-test ratio," provides an indication of a company's liquidity for the short-term — or the company's ability to meet short-term obligations with its most liquid assets. The higher the quick ratio, the better position the company is in to meet its short-term debt obligations. [Module 8, Risk & Evaluation, Section 6.1]

When making a portfolio recommendation to investors, an agent must disclose which of the following? A. Current yield B. Total return C. Internal rate of return D. After-tax return

Current yield. Agents must disclose the investment's current yield and explain why the investment is worth the risk vs. a risk-free investment. Disclosure of the internal rate of return is not a requirement. The total return and after-tax return are after-the-fact determinations, and therefore, they cannot be disclosed at the time the recommendation is made. [Module 10, Portfolio Management, Section 6

Under the Uniform Securities Act, which of the following is specifically exempt from registration? A. Certificates of interest in an oil and gas program B. Real estate investment trust certificates C. Debt-related securities issued by a credit union D. Preorganization subscription agreements

Debt-related securities issued by a credit union. The Uniform Securities Act specifically exempts from registration any securities issued or guaranteed by credit unions, banks, savings and loan associations, and insurance companies. All the other answer choices list securities that must be registered, unless sold in an exempt transaction. Certificates of interests in oil and gas programs or other similar programs are securities and must be registered. Preorganization certificates sold to not more than 10 clients are exempt transactions, but if sold to more than 10 they must be registered. The number of clients is not mentioned, so do not assume they are being sold to 10 or less people. [Module 3, Registration of Securities, Section 4.1]

Which of the following describes financial leverage? A. Current assets ÷ current liabilities B. Debt-to-equity ratio C. Assets - liabilities D. Current assets - inventory ÷ current liabilities

Debt-to-equity ratio. The financial leverage ratio used most often is the debt-to-equity ratio, which is calculated by dividing the amount of a company's debt by the company's equity. For example, a company with $20 million in debt and $40 million in equity has a debt-to-equity ratio of 0.5. Current assets ÷ current liabilities is the current ratio. Assets - liabilities is a company's equity. Current assets - inventories ÷ the current liabilities is the quick ratio (also known as the acid test ratio), which determines a company's liquidity. [Module 8, Risk & Evaluation, Section 6.1]

A new agent with a broker/dealer passes the required tests. The broker/dealer pays all of the fees required with the state administrator and the agent is registered as of October 15, 2015. When will the broker/dealer be required to renew the registration for the agent? A. December 31, 2015 B. October 1, 2016 C. October 15, 2016 D. December 31, 2016

December 31, 2015. All registrations expire on the last day of the year. Normally, new registrations are prorated each month. Therefore, this person would have paid 25% of the fee — only three months — and then would renew on December 31. If individuals do not renew by December 31 each year, their registration expires and they are prohibited from doing any business on January 1. [Module 2, Registration of Persons, Section 1.7]

Insured asset allocation involves which of the following? A. Adjusting the percentages of the portfolio when the market is changing B. Determining a minimum value for the portfolio and then adjusting as the value exceeds this minimum C. Buying stock in bear markets and selling stock in bull markets in timing the market D. Maintaining a constant mix of the asset allocations in the portfolio

Determining a minimum value for the portfolio and then adjusting as the value exceeds this minimum. The higher the value goes, the more that is invested into equities. As the market starts to drop, the portfolio shifts into more "risk-free" investments such as T-bills and other money market instruments. This preserves the original minimum target value of the portfolio. [Module 10, Portfolio Management, Section 1.4]

The allocation of funds in a portfolio into asset classes according to a set percentage, and then change the percentage as market conditions change -- this is tactical allocation. Strategic allocation is periodically rebalancing the assets to maintain the percentage. Insured allocation is having a minimum in safe funds and investing in more aggressive investments only when the portfolio is above this minimum amount. Asset allocation refers to dividing a portfolio among multiple asset classes that are not perfectly correlated to increase diversification and reduce the variability of returns. [Module 10, Portfolio Management, Section 1.3]

Do not comply with his wishes, since you have a fiduciary responsibility toward the pension plan. As an agent for the trustee, you must make sure the money is used for its intended purpose. Whether he is the CEO and the trustee really makes no difference as to what you can or cannot do. [Module 7, Annuities & Retirement Plans, Section 5.0]

Thompson Securities, a broker/dealer firm located in the state of Idaho, is registered in Idaho and Washington. Slalom, INC. is a privately owned skiing equipment manufacturer based in Colorado. The corporation has decided the time is right to take the company public and it would like Thompson Securities to be the lead underwriter for its initial public offering. Representatives of Thompson Securities travel to Colorado to sign an underwriting agreement to market common stock for Slalom, INC. Thompson Securities: A. Must notify the administrator of Colorado within 10 days B. Must wait 10 business days prior to signing the agreement C. May be subject to oral and/or written examinations D. Does not have to notify anyone

Does not have to notify anyone. Thompson Securities would not need to notify or register in the state of Colorado when signing of an underwriting agreement. Additional registrations may be required, depending on where and to whom the offering will be made. [Module 2, Registration of Persons, Section 1.2; Module 3, Registration of Securities, Sections 4.0 & 5.0]

An investment adviser representative is analyzing three different securities for her client. In particular, the IAR is comparing the cash inflows and outflows for the next five years. Which quantitative method of evaluating the securities is the IAR using? A. Total return B. Real return C. Expected return D. Net present value

Expected return. Expected return uses all the dividends or interest plus/minus the discount/premium of the security. The total return and real return are after the fact -- after the time period has ended -- not for the upcoming five years. Net present value is used to find a target amount in the future, not to calculate the inflows and outflows. It starts with what is needed, not a calculation of what it will be. [Module 8, Risk and Evaluation, Section 3.1]

Broker/dealer firms are subject to net capital requirements by which of the following? A. The Federal Reserve Board B. The state administrator C. FINRA D. North American Securities Administrators Association, Inc.

FINRA. Broker/dealer firms are subject to net capital requirements set by FINRA under SEC rules. Investment advisers are subject to net capital requirements by the state administrator. [Module 2, Registration of Persons, Section 1.9]

Which of the following best describes the state registration requirements of an issue registered under the 1933 Securities Act and the 1940 Investment Company Act? A. Filing B. Coordination C. Qualification D. Federal covered

Federal covered. Registered investment companies, those registered under the Investment Company Act of 1940, are federal covered securities and are exempt from registering at the state level. State administrators may require issuers of federal covered securities to notify the state, sign a consent to service of process, and pay a fee, but they are not permitted to require registration of federal covered securities. [Module 3, Registration of Securities, Section 4.2]

Which of the following is true regarding an investment adviser keeping readily accessible copies of the literature it sends out to a client? A. Five years from the end of the fiscal year in which the last entry was made B. Five years from the date it was sent to the client C. Two years from the end of the fiscal year in which the last entry was made D. Two years from the date sent to the client

Five years from the end of the fiscal year in which the last entry was made . Investment advisers are required to maintain records in a readily accessible location for five years from the end of the fiscal year in which the last entry was made. During the first two years, the records must be maintained in the principal (or appropriate) office of the adviser. Additionally, records may be maintained in a format determined by the IA as long as it is unalterable. [Module 2, Registration of Persons, Section 3.3]

Under the Uniform Securities Act, most investment adviser books and records must be kept for a minimum period of: A. One year B. Two years C. Three years D. Five years

Five years. An investment adviser must maintain and preserve all books and records in an easily accessible location for five years from the end of the fiscal year of the last entry. During the first two years, the adviser must maintain the required books and records at the adviser's principal office. However, the test may present this in several ways. If an answer says, "Five years, the first two in a readily accessible place," it is safe to choose that. If you see simply "five years" that is OK, too. The records can be kept electronically, as long they cannot be altered. [Module 2, Registration of Persons, Section 3.3]

According to the Uniform Securities Act, action must be brought against a violator for any criminal violation within __ year(s) of the violation. A. One B. Two C. Five D. No time limit

Five. According to the Uniform Securities Act, action must be brought against a violator for any criminal violation within five years of the violation. [Module 5, State Administrator, Section 2.1]

Which of the following best describes the filing of Form 10-Q by an issuer with the SEC? A. Form 10-Q is an unaudited report that must be filed quarterly. B. Form 10-Q is an audited report that must be filed quarterly. C. Form 10-Q is an unaudited report that must be filed annually. D. Form 10-Q is an audited report that must be filed annually.

Form 10-Q is an unaudited report that must be filed quarterly. This form is filed with the SEC and discloses the business and financial conditions of the company. Form 10-K is the form that must be filed with the SEC annually and is required to be audited before being submitted. [Module 6, Investment Advisers & the Federal Acts, Section 2.4]

Which of the following best describes SEC Form 8-K? A. Form 8-K is an annual, unaudited report reflecting an issuer's financial standing. B. Form 8-K is an annual, audited report reflecting an issuer's financial standing. C. Form 8-K is an annual report announcing material, major events to its shareholders. D. Form 8-K announces material, major events to shareholders and is filed within four business days of the disclosed events occurring.

Form 8-K announces material, major events to its shareholders and is filed within four business days of the disclosed events occurring. Don't confuse Form 8-K with Form 10-K, which is a form disclosing the issuer's business and financial conditions to the SEC on an annual basis. Think of Form 8-K as being the "current report." [Module 6, Investment Advisers & the Federal Acts, Section 2.4]

Which of the following forms is required to be submitted if an investment adviser is requesting a withdrawal of its registration? A. Form U-4 B. Form U-5 C. Form ADV-W D. Form ADV-II Schedule H

Form ADV-W. If an investment adviser is requesting to withdraw its registration with the state, it must submit Form ADV-W. If this were an IAR, Form U-5 would need to be submitted to the state. [Module 2, Registration of Persons, Section 2.4]

Which of the following best characterizes the difference between futures and forward contracts? A. Futures trade in the U.S. and forwards trade in Europe. B. Futures are personalized contracts. C. Forwards require an initial margin deposit. D. Futures are standardized contracts.

Futures are standardized contracts. Futures and forward contracts are both used to hedge against falling commodity prices. Both parties to both futures and forward contracts are obligated to fulfill the terms of the contract. A primary difference between futures and forwards is that futures contracts are standardized and trade on a futures exchange. Forward contracts are negotiated directly between the two parties and are paid upon settlement. [Module 1, Uniform Securities Act, Section 3.11]

All of the following offer investor's limited liability, except: A. LLC B. C-corporation C. S-corporation D. General partnership

General partnership . A limited liability company, a C-corporation, and an S-corporation all offer limited liability to shareholders. General partnerships carry unlimited liability. [Module 9, Customer Profiles, Section 1.1]

If an investor purchases a security in a foreign country just prior to upcoming elections in that country, what type of risk is assumed? A. Systematic risk B. Geopolitical risk C. Regulatory risk D. Inflation risk

Geopolitical risk. When a new government is established in a country or elections are being held, any investments made in that country assume political/geopolitical risk. All equity investments carry systematic risk, but it is not as prevalent as geopolitical risk. Regulatory risk is assumed when a law changes or a vote is pending that could affect the price of a company's stock. Inflation risk may actually be lessened if the investor is diversifying by purchasing securities in different countries. [Module 8, Risk & Evaluation, Section 4.10]

Ron and Martha O'Brien are a middle-aged couple who have inherited $25,000 from a recently deceased family member. They are most concerned about the preservation of their capital in their investment. As their investment adviser, what would you suggest to them for a mid- to long-term investment? A. Money market fund B. Option contracts on their stock C. Government bond fund D. Stock index fund

Government bond fund. Options and equity index funds are too volatile for anyone with preservation of capital as an objective. Money market funds provide preservation of capital, but usually for shorter periods of time. Since the couple has a mid- to long-term investment horizon, inflation or purchasing power risk is a concern. Therefore, the government bond fund, offering higher rates of return than the money market fund, is the better recommendation. Though government bond funds are subject to fluctuations in its NAV, they largely hold their value over the long run and offer returns that are more likely to keep pace with inflation. [Module 10, Portfolio Management, Section 1.0]

A middle-aged couple inherits $25,000 from a recently deceased parent. They want to earmark this money for retirement, but are concerned about preserving their capital. As their investment adviser, what would you suggest to these clients? A. Option contracts on their stock B. Government bond fund C. Stock index fund D. Money market fund

Government bond fund. Options and stock index funds are too risky, and have a good chance of losing their capital. Money market funds provide preservation of capital but have a very low yield, which brings up concerns of inflation risk since the clients have earmarked this money for retirement. The government bond fund does have interest-rate risk; if interest rates go up, it will lose principal and the couple could lose money if they had to sell their shares. However, over time it will likely provide a better return than the money market. Of the four choices, the government bond fund is the best answer given this couple's intended holding period. [Module 9, Portfolio Management, Section 2.0]

You have a client who is retired and is looking for investments that provide liquidity and income. Which of the following investments would be the best choice for this client? A. Short-term T-bill B. Bank CD C. Government bond with a 10-year maturity D. Growth equity

Government bond with a 10-year maturity. This is the best choice for a retired client looking for liquidity and income. Growth equities do not meet the income objective. CDs can pay monthly interest but charge penalties for early withdrawal and are not considered as liquid as U.S. government securities. The 10-year government bond is the better choice as it will pay interest semiannually and have a higher interest rate than the short-term T-bill. [Module 8, Risk & Evaluation, Section 6.0]

Which of the following roles can a grantor to a trust account take on? A. Grantor only B. Grantor and trustee only C. Grantor and beneficiary only D. Grantor, trustee, and beneficiary

Grantor, trustee, and beneficiary. If the trust is a living trust, it can be established so that the grantor is also the trustee and the beneficiary. However, in a nonliving trust, the grantor cannot take on any other roles. [Module 9, Customer Profiles, Section 1.1]

Mark Johnson is a CPA working out of State A who is an old college roommate of David Swanson, an investment adviser representative for a firm that is registered and has a place of business in State B. They reach an agreement in which David will compensate Mark for any referrals who become David's client. Mark, in turn, provides his clients with David's business card and the appropriate brochure and disclosure. Mark will: A. Not have to register with either state B. Have to register with State A only C. Have to register with State B only D. Have to register with States A and B

Have to register with State A only. Even though Mark is only referring his clients to an IAR rather than passing along client information to the IAR, he is considered a solicitor under the Uniform Securities Act and will have to register in the state where he has an office. [Module 1, Uniform Securities Act, Section 3.8]

A new associate to an investment adviser has passed all of his registration exams. He waits the required 30 days, and then starts advising. Which of the following is true of the statement on his business card? A. He may put investment adviser because he has passed his investment advisory exam and he works for an investment adviser B. He may put general securities representative and registered investment adviser representative because his firm also executes transactions and he has passed his investment advisers exam C. He must put investment adviser representative because he has passed his investment advisory exam and he works for an investment adviser D. He may not make any mention of investment advisory services, but he can state that he is an associate of an investment advisory firm

He must put investment adviser representative because he has passed his investment advisory exam and he works for an investment adviser. He cannot state that he is an investment adviser because he works for an investment advisory firm, and as such is an IA representative. There is no mention of the firm being a broker/dealer, so do not assume that all investment advisers work for broker/dealers, and therefore, do not choose the general securities representative as well. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 3.10]

Henry Ross is a registered agent working for Jefferson Securities, a broker/dealer firm in the state of Hawaii. He has a 24-year-old son, Wyatt, whom he is encouraging to invest in the stock market. Since Wyatt is new to investing, Henry suggests they open an account together, in which they will share in the profits and losses of the account. All of the following would be unethical conduct by Henry while sharing in the profits and losses in a customer's account, except: A. Henry shares in the profits and losses if Wyatt has given written consent and Henry's profits are in proportion to the profits and losses made. B. Henry shares in the profits and losses if the consent of Jefferson Securities has been given and Henry's profits are in proportion to the profits, but not the losses. C. Henry shares in the profits and losses if they are in proportion to the percentage of his contributed capital in the account, Wyatt has agreed in writing, and the firm has given consent. D. Henry shares in the profits and losses if FINRA and the state administrator have signed an agreement to the effect of his proportion of profit.

Henry shares in the profits and losses if they are in proportion to the percentage of his contributed capital in the account, Wyatt has agreed in writing, and the firm has given consent. Sharing profits is allowed, but only under these guidelines. In the first answer, only the client has given permission. In the second, only the firm has given permission. It takes permission of both the client and the firm for an agent to share in profits/losses in a customer's account. FINRA and the state administrator have nothing to do with it. Please note that an investment adviser representative may never share in a customer's profits, while agents may do so. [Module 4, Prohibited Practices and Business Practices of Investment Advisers, Section 1.0]

An investment adviser is showing a client how he would have done in a particular investment over a period of 10 years by adding all of the cash flow from the investment plus the capital gain, and subtracting any expenses involved. The investment adviser then divides that figure by the total amount invested. The adviser is showing the client which of the following? A. Total return B. Holding period return C. Real return D. Expected return

Holding period return. Holding period return is the total return for a particular time period. It shows the totals of the cash flows for the entire time and adds the capital gain. Expected return is similar, but doesn't divide by the investment and it is projected rather than using the actual realized amounts. Real return nets out inflation. [Module 8, Risk & Evaluation, Section 3.3]

A person who invests in which of the following types of business entities will have a full flow through of gains and losses? I. A Limited Liability Company II. A C-corporation III. A Sub-S Corporation IV. A General Partnership A. II and III only B. I and IV only C. I, III, and IV only D. I, II, III, and IV

I. A Limited Liability Company III. A Sub-S Corporation IV. A General Partnership A C-corporation is a taxable entity and pays corporate taxes on earnings. Shareholders receive profits through dividends, if paid. They also realize gains/losses based on the company share price. But all the others do pass through gains, losses, and income. [Client Profiles, Module, Section 1.1]

An investment adviser representative is currently registered and working in State X. The representative is now required to register in State Y based on the business she is doing. Which of the following would the representative have to disclose to State Y upon applying for registration? I. A disciplinary fine imposed by the state administrator of State X eight years ago II. A felony conviction in State Y five years ago III. A misdemeanor conviction in State X three years ago IV. A felony conviction in State X 15 years ago A. I only B. I and II only C. I, II, and IV only D. I, II, III, and IV

I. A disciplinary fine imposed by the state administrator of State X eight years ago II. A felony conviction in State Y five years ago IV. A felony conviction in State X 15 years ago When applying for registration in a new state, the IAR files an amended Form U-4. This requires the IAR to disclose any injunction or administrative order, any conviction of a misdemeanor involving a security or any aspect of the securities business, and any felony conviction. Note that while a conviction of a securities-related misdemeanor or of any felony within the last 10 years is grounds for denial, all such convictions must be disclosed. The misdemeanor conviction does not need to be disclosed as there is no mention of it being securities-related. [Module 2, Registration of Persons, Section 1.5]

Which of the following persons must be registered in a state as an agent? I. A person who effects U.S. government transactions in a state for a client's account while representing a broker/dealer II. A person who effects four transactions for a client's account in securities listed on a national exchange while representing a broker/dealer III. A person who effects 10 transactions for clients' accounts who are on vacation in a state while representing a broker/dealer IV. A person who effects transactions for clients' accounts while representing a broker/dealer who has an office in the state A. I and II only B. III and IV only C. I, II, and IV only D. I, II, III, and IV

I. A person who effects U.S. government transactions in a state for a client's account while representing a broker/dealer II. A person who effects four transactions for a client's account in securities listed on a national exchange while representing a broker/dealer IV. A person who effects transactions for clients' accounts while representing a broker/dealer who has an office in the state When a person represents a broker/dealer in effecting transactions, they must be registered in the state. This is true whether they are transactions in exempt securities, such as government securities or securities listed on an exchange, or nonexempt securities. As long as the person is effecting transactions for individual clients in a state and is representing a B/D, he or she must be registered in the state. However, effecting transactions for clients who are on vacation in a state does not define a person as an agent in that state; therefore, persons do not need to register as an agent in the state where the client is on vacation. [Module 1, Uniform Securities Act, Section 3.2]

Of the following, who is defined as an agent in a state under the Uniform Securities Act? I. A person who represents a broker/dealer in soliciting the sale of securities II. A person who represents the issuer, effects transactions in municipal bonds for the state, and is not compensated III. A person who represents the issuer, effects transactions in municipal bonds for the state, and is compensated IV. A person who represents the issuer and helps investors buy and sell commercial paper for no commission A. I only B. I and IV only C. II, III, and IV only D. I, II, III, and IV

I. A person who represents a broker/dealer in soliciting the sale of securities Anyone who represents a broker/dealer in soliciting securities or helps customers transact securities is an agent regardless of whether that individual is compensated. A person who represents the issuer and effects transactions in state-exempt securities, such as municipal bonds and commercial paper, whether compensated or not, is not defined as an agent under the Uniform Securities Act. [Module 1, Uniform Securities Act, Section 3.4]

Under the Uniform Securities Act, which of the following persons representing an issuer is excluded from being called an agent? I. A person who sells U.S. government securities II. A person who sells commercial paper with seven months to maturity III. A person who sells stock listed on a national exchange to employees of the issuer A. I and II only B. II and III only C. I and III only D. I, II, and III

I. A person who sells U.S. government securities II. A person who sells commercial paper with seven months to maturity III. A person who sells stock listed on a national exchange to employees of the issuer Individuals who sell U.S. government securities, Canadian and other specified government securities, commercial paper, and certain other exempt securities are excluded from the definition of agent if they are representing the issuer of those securities. Individuals representing an issuer and selling its stock to its employees are excluded from the definition of an agent, unless they get paid for the sale. Whether the stock is listed on an exchange or not has no bearing. [Module 1, Uniform Securities Act, Section 3.4]

Under the Uniform Securities Act, which of the following persons representing an issuer is exempt from being registered as an agent in a state? I. A person who sells U.S. government securities II. A person who sells commercial paper with seven months to maturity III. A person who sells new shares of a mutual fund to existing shareholders of the fund A. I and II only B. II and III only C. I and III only D. I, II, and III

I. A person who sells U.S. government securities II. A person who sells commercial paper with seven months to maturity III. A person who sells new shares of a mutual fund to existing shareholders of the fund Any person who sells certain exempt securities, including U.S. government securities and commercial paper, is excluded from the definition of agent if they are representing the issuer of those securities. To be representing the issuer, the trades must be new issues, the person selling government securities must work for the government, and the person selling commercial paper must work for the issuer of the commercial paper. Any person who represents an issuer in effecting transactions of a registered investment company, such as a mutual fund, is also excluded from the definition of agent and would not need to register with the state. [Module 1, Uniform Securities Act,

Which of the following is considered a nonissuer transaction under the Uniform Securities Act? I. A shareholder selling his stock in the open market II. Sale of an issuer's preferred stock to the issuer's qualified pension or profit-sharing plan III. Sale to a broker/dealer under a "best efforts" underwriting agreement IV. Placement of treasury stock in an employee pension plan A. I only B. II and IV only C. II, III, and IV only D. I, II, and IV only

I. A shareholder selling his stock in the open market A nonissuer is any person, other than the issuer of the security being traded, who is engaged in a securities transaction. A shareholder selling his stock is a nonissuer transaction. Selling an issuer's preferred stock to its own profit-sharing plan is an issuer transaction. The sale of securities to a broker/dealer in an underwriting agreement can only be an issuer transaction, and the issuer's placement of treasury stock in an employee pension plan is also an issuer transaction. [Module 1, Uniform Securities Act, Section 3.2]

For which of the following applicants is it always mandatory to provide fingerprints on their registration application, if the fingerprints are not already on file? I. Agent II. Investment adviser representative III. Broker/dealer IV. Investment adviser A. I only B. I and II only C. I, II, and IV only D. I, II, III, and IV

I. Agent Agents are always required to submit their fingerprints on their Form U-4, if they do not already have their fingerprints on file. Broker/dealer and investment firms do not have to submit fingerprints with their registration applications since they are firms, not individuals. Individual investment advisers and investment adviser representatives must file their fingerprints on a state-by-state basis — some states require fingerprints and some do not. Therefore, they are not "always required" as the question asks. [Module 2, Registration of Persons, Section 1.5]

Filing which of the following would also require filing the consent to service of process? I. An agent's initial application II. An agent's renewal application III. An investment adviser's initial application IV. A customer's complaint against a broker/dealer A. I and III only B. II and IV only C. I, II, and III only D. I, II, III, and IV

I. An agent's initial application III. An investment adviser's initial application The consent to service of process is the appointment of an individual or entity that is a resident of the state to accept subpoenas on behalf of the applicant. In most states, the administrator must be appointed. This means that the person instituting a legal action does not have to "track down" a registered individual or firm. A subpoena served on the administrator is as binding as if it were served on the individual or firm. A person can be jailed for contempt of court for not responding to a legally served subpoena. The consent need only be filed with an original application, not with renewals. The first consent to service of process filed remains binding as long as the administrator has jurisdiction over the registered person. A customer is not required to appoint someone else to accept subpoenas. [Module 2, Registration of Persons, Section 1.5]

According to the Uniform Securities Act, which of the following are exempt transactions? I. An investor sells 500 shares of ABC Inc., an unregistered security, to his next-door neighbor for $5,000. II. A customer calls a registered representative and asks her to purchase 2,000 shares of MDI Inc., a company with which the representative is not familiar, and the representative fills the order. III. A mutual fund manager sells one of the fund's holdings to a state-run pension plan. IV. XYZ Corporation signs an agreement to sell 2 million shares of its stock to RPM Securities, the broker/dealer that will act as underwriter in marketing the shares to the public. A. II only B. I and II only C. II, III, and IV only D. I, II, III, and IV

I. An investor sells 500 shares of ABC Inc., an unregistered security, to his next-door neighbor for $5,000. II. A customer calls a registered representative and asks her to purchase 2,000 shares of MDI Inc., a company with which the representative is not familiar, and the representative fills the order. III. A mutual fund manager sells one of the fund's holdings to a state-run pension plan. IV. XYZ Corporation signs an agreement to sell 2 million shares of its stock to RPM Securities, the broker/dealer that will act as underwriter in marketing the shares to the public. Isolated non-issuer transactions (the transaction between neighbors), unsolicited non-issuer transactions (MDI Inc.), transactions between financial institutions, and transactions between an issuer and its underwriter are all exempt transactions under the Uniform Securities Act. [Module 3, Registration of Securities, Section 5.1]

Which of the following is excluded from the definition of a broker/dealer in a state? I. An out-of-state institutional salesperson who effects transactions only with state-chartered banks II. A state-chartered bank III. An agent representing a broker/dealer in effecting transactions with retail clients IV. An out-of-state broker/dealer who effects transactions only with other broker/dealers A. I and III only B. II and IV only C. II, III, and IV only D. I, II, III, and IV

I. An out-of-state institutional salesperson who effects transactions only with state-chartered banks II. A state-chartered bank III. An agent representing a broker/dealer in effecting transactions with retail clients IV. An out-of-state broker/dealer who effects transactions only with other broker/dealers The Uniform Securities Act excludes, from the definition of broker/dealer, out-of-state firms that transact business within the state with banks, broker/dealers, and other institutional investors. One of the more difficult concepts to understand concerning the Act is that if an individual is acting as an agent, he is not defined as a broker/dealer and if a firm is acting as a broker/dealer, it is not defined as an agent. Because of these definitional differences, an agent representing a broker/dealer in transactions with retail clients is not defined as a broker/dealer. He would be defined as an agent and would have to register as such. This would also hold true for the out-of-state institutional salesperson who effects transactions only with state-chartered banks. The person would not be defined as a broker/dealer in the state. A bank is also not considered a broker/dealer under the Act. [Module 1, Uniform Securities Act, Section 3.3]

An agent for a broker/dealer has executed transactions for a client and would like to split the commissions he receives. With whom is the agent entitled to split the commissions? I. Another agent at the same firm who is registered in the state II. A person in the firm's office registered in another state III. An insurance company IV. Another broker/dealer firm A. I only B. I and II only C. I, II, and IV only D. I, II, III, and IV

I. Another agent at the same firm who is registered in the state An agent can only share commissions with another agent within the same broker/dealer who is registered in the state where the transaction occurred. The agent can only share commissions with other registered agents, not insurance companies or broker/dealer firms. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 1.2]

An investment adviser representative working for a federal covered investment adviser has an office in the state of Arizona and three clients in each of California, New Mexico, and Utah. The IAR will hold one meeting per year in a hotel room in Utah. The IAR will advertise this event in the local newspaper, but does not allow the attendance to exceed 20 persons. In which states must the IAR be registered? I. Arizona II. California III. New Mexico IV. Utah A. I only B. IV only C. I and IV only D. I, II, III, and IV

I. Arizona IV. Utah The investment adviser representative must be registered in Arizona and Utah. A federal covered investment adviser representative must always register in a state where it has a place of business; thus, Arizona is one of the answers. Utah is considered to be a place of business as well, as the representative has advertised the meeting she will be holding. The client does not have more than five clients (the de minimis) in California and New Mexico, so the IAR is exempt from registration in those states. [Module 2, Registration of Persons, Section 4.2]

Which of the following are exempt securities under the Uniform Securities Act? I. Bonds issued by a credit union II. A limited partnership interest in an oil-drilling venture III. A public utility common stock IV. A common stock listed on the New York Stock Exchange (NYSE) A. I and II only B. II and III only C. I, II, and III only D. I, III, and IV only

I. Bonds issued by a credit union III. A public utility common stock IV. A common stock listed on the New York Stock Exchange (NYSE)

Which of the following are considered unethical activities for an investment adviser? I. Borrowing money from a private client II. Borrowing securities from a private client III. Commingling client securities with the firm's own securities IV. Commingling client securities with those of other clients A. I and III only B. II and IV only C. I, II, and III only D. I, II, III, and IV

I. Borrowing money from a private client II. Borrowing securities from a private client III. Commingling client securities with the firm's own securities IV. Commingling client securities with those of other clients All the listed activities are considered unethical for an investment adviser. Borrowing money or securities from a client is considered unethical unless the client is a financial institution in the business of lending or is an affiliate of the IA. Commingling client securities with those of the advisory firm is always unethical. Client funds can be kept in a single account, but client securities must be separated by client. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 1.1.]

An agent transfers from Broker/Dealer A to Broker/Dealer B. Who must notify the administrator(s) in states where the agent was registered? I. Broker/Dealer A II. Broker/Dealer B III. The agent A. I only B. III only C. I and II only D. I, II, and III

I. Broker/Dealer A II. Broker/Dealer B III. The agent Each of these parties must notify the state administrator when an agent transfers from one broker/dealer to another. The agent and Broker/Dealer A must notify the administrator of the termination on Form U-5. The agent and Broker/Dealer B must notify the administrator of the new registration on an amended Form U-4. If this question were for an investment adviser representative, only the firms must notify the administrator. [Module 2, Registration of Persons, Section 1.3]

The term "agent" as defined by the Uniform Securities Act would not include an individual representing an issuer in which of the following transactions? I. Commercial paper with a six-month maturity II. Issuer/underwriter transactions III. Issuer/employee transactions, without compensation

I. Commercial paper with a six-month maturity II. Issuer/underwriter transactions III. Issuer/employee transactions, without compensation Correct answers (false statements): I, II, and III. A person who represents an issuer in any of these transactions would not be defined as an agent under the Uniform Securities Act. Commercial paper with nine months or less to maturity is an exempt security. Issuer/underwriter transactions and issuer/employee transactions without compensation are exempt transactions. Therefore, persons involved in these transactions are not considered agents under the Uniform Securities Act. [Module 1, Uniform Securities Act, Section 3.4]

Zachary Shore is an investment adviser representative in the state of Ohio. He is about to enter into contract with a new client to whom he will be giving advice and making recommendations. Zachary will also be executing trades for the client as well. Which of the following items must Zachary give to the client? I. Contract for advisory services II. Written discretionary authority to do trades III. The brochure or ADV Part 2A IV. Written agreement for the investment adviser to keep the securities A. I and II only B. I and III only C. I, II, and III only D. I, II, III, and IV

I. Contract for advisory services III. The brochure or ADV Part 2A Under the USA, when entering into a new advisory relationship, the IAR must provide to the new client a written contract as well as the IA's disclosure document, Form ADV Part 2A (or a brochure with the equivalent information). There are no required documents or disclosures that Zach must provide to the client as a broker/dealer agent. If either of Zach's firms, the IA or the B/D, intend to trade the account on a discretionary basis, then the written discretionary authority would also be required. If the either the IA or the B/D is going to keep custody of the client's funds or securities, that would have to be in writing as well. [Module 2, Registration of Persons, Section 5.2; Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 5.0]

An investment adviser has a new client to whom she will be giving advice and executing trades as well, all for a single fee. Which of the following items must be given to the client? I. Contract for advisory services II. Wrap fee brochure III. Written discretionary authority to do trades IV. Written agreement for the investment adviser to keep the securities A. I and II only B. III and IV only C. I, II, and IV only D. I, II, III, and IV

I. Contract for advisory services II. Wrap fee brochure All advisory clients must receive the appropriate disclosure document (the brochure) and a copy of the executed contract. If the account is a discretionary account, then written discretionary authority would be needed. The question does not state that it is a discretionary account. If the investment adviser is going to keep the securities, that would have to be in writing as well. The question does not state the investment adviser will be keeping the securities. Do not assume anything unless the question states it. [Module 2, Registration of Persons, Sections 5.0 & 6.0; Module 4, Prohibited Practices & Business Practices of Investment Advisers, Sections 3.3 & 3.4]

Which of the following are true regarding money purchase plans? I. Contributions are mandatory. II. Contributions are determined by the profitability of the employer. III. Earnings accrue on a tax-deferred basis. IV. Contributions are taxable to the participant once withdrawn. A. II only B. III and IV only C. I, III, and IV only D. II, III, and IV only

I. Contributions are mandatory. III. Earnings accrue on a tax-deferred basis. IV. Contributions are taxable to the participant once withdrawn. Contributions are mandatory in a money purchase pension plan. These plans are defined contribution plans and the employer is obligated to contribute annually to funding employee accounts, regardless of the company's profits. Earnings in a money purchase plan accrue tax deferred. Both contributions and earnings are taxed to the participant upon withdrawal. [Module 7, Annuities & Retirement Plans, Section 1.4]

When calculating the internal rate of return, which of the following are used? I. Dividends II. Interest III. Capital gains/loss assumption IV. Tax rates A. I and II B. III and IV C. I, II, and III D. I, II, III, and IV

I. Dividends II. Interest III. Capital gains/loss assumption To calculate the internal rate of return, you must factor in all of an investment's cash flows -- dividends and interest received as well as any capital gains or losses. You have to assume what gains/losses could occur, but the interest and dividends are more readily determined. Tax rates have nothing to do with the calculation of internal rate of return, but they are used for the tax-adjusted rate of return. [Module 8, Risk & Evaluation, Section 3.9]

An investment adviser has a complaint filed against him. The complaint goes to a hearing panel, and the investment adviser is found to have violated the rules and has been suspended for six months. When does the suspension from the administrator become effective, and how many days does he have to appeal the decision? I. Effective immediately II. Effective in 30 days III. Appeal within 45 days IV. Appeal within 60 days A. I and III B. I and IV C. II and III D. II and IV

I. Effective immediately IV. Appeal within 60 days The suspension is effective immediately after the order has been handed down, and appeals must be made within 60 days. [Module 5, State Administrator & Regulatory Oversight, Section 1.4]

Which of the following might an administrator require of a broker/dealer? I. Filing and/or examination fees II. Written and/or oral examinations III. Minimum net capital IV. Surety bond A. I and IV only B. I and III only C. II and III only D. I, II, III, and IV

I. Filing and/or examination fees II. Written and/or oral examinations III. Minimum net capital IV. Surety bond The USA allows the administrator to impose all of these requirements. The state administrator may require a broker/dealer to pay filing and/or examination fees and take written and/or oral exams. The administrator may also require B/Ds to maintain minimum net capital or be bonded. Federal law, however, restricts the administrator from imposing net capital or bonding requirements that are more restrictive than those of the SEC. [Module 2, Registration of Persons, Sections 1.5 & 1.9]

A broker/dealer, agent, investment adviser, or investment adviser representative found in violation of the Uniform Securities Act may be subject to: I. Fines II. Suspension III. Imprisonment IV. Civil liabilities A. I and II only B. II and IV only C. I, II, and IV only D. I, II, III, and IV

I. Fines II. Suspension III. Imprisonment IV. Civil liabilities Any violation of the Uniform Securities Act may subject an agent, broker/dealer, investment adviser, or investment adviser representative to any or all of these penalties. Violations could be considered criminal, civil, or both. [Module 5, State Administrator, Section 2.0]

An investment adviser representative is leaving Firm A, a state-registered investment advisory firm, for a new job with Firm B, another state-registered advisory firm. Under the Uniform Securities Act, which of the following will need to notify the state of the transfer of registration? I. Firm A II. Firm B III. The investment adviser representative A. I only B. I and II only C. I and III only D. I, II, and III

I. Firm A II. Firm B When an IAR is transferring from one firm to another, both firms must notify the state about the transfer. IARs themselves do not need to notify the state of the transfer, unlike an agent working for a broker/dealer who would have to notify the state along with the firms. [Module 2, Registration of Persons, Sections 1.3 & 1.4]

Which of the following are needed to calculate the discounted cash flow of a bond? I. Future value II. Inflation rate III. Interest rate IV. Discount rate A. I and II B. III and IV C. I, III, and IV D. I, II, III, and IV

I. Future value III. Interest rate IV. Discount rate Future value, interest rate, and the discount rate are all necessary components when calculating the discounted cash flow of a bond. Taking into account the time value of money, the calculation discounts future cash flows down to a present value. If that present value is greater than the market price of the bond, it is considered a good investment. The inflation rate is not taken into consideration. [Module 8, Risk & Evaluation, Section 2.1]

Which of the following are derivative investments? I. Futures II. Forward contracts III. CMOs IV. REITs A. I and II only B. III and IV only C. I, II, and III only D. I, II, III, and IV

I. Futures II. Forward contracts III. CMOs Derivatives are any instruments that derive their value from another instrument. They include options, futures, forward contracts, and CMOs. REITs are not considered derivatives. [Module 1, Uniform Securities Act, Section 3.11]

Chad Bradley is a newly hired associate of a broker/dealer in the state of Utah. He has passed his test for trading securities for the broker/dealer firm and has also passed the exam for investment advisers. He is now registered in Utah, where he will be doing business and soliciting clients, and would like to have a set of business cards to hand out to both potential and current clients. What can he put on his business card? I. His name and the firm's name II. The office address and telephone number III. The title "Registered Investment Adviser" IV. The title "General Securities Representative" A. I and II only B. I, II, and III only C. I, II, and IV only D. I, II, III, and IV

I. His name and the firm's name II. The office address and telephone number IV. The title "General Securities Representative" Of the choices given, Chad can only put the following on his business card: His name, the firm's name, address, and phone, and that he is a "General Securities Representative." He cannot, however, put "Registered Investment Adviser." Chad is not a registered investment adviser — he works as an investment adviser representative for the investment adviser. [Module 4, Prohibited Business Practices & Business Practices of Investment Advisers, Section 3.10]

Which of the following are securities as defined by the Uniform Securities Act? I. Interests in a real estate condominium II. Preorganization subscription agreements III. Real estate investment trust certificates IV. Credit union share certificates

I. Interests in a real estate condominium II. Preorganization subscription agreements III. Real estate investment trust certificates IV. Credit union share certificates Interests in a real estate condominium, preorganization subscription agreements, real estate investment trust certificates, and credit union share certificates are all defined as securities. Some of these investments, such as credit union shares, are exempt from registration, but are still considered securities under the Uniform Securities Act. [Module 1, Uniform Securities Act, Section 3.1]

Which of the following actions may the state administrator perform at his discretion while conducting an investigation? I. Issue subpoenas II. Administer oaths III. Gather evidence and require the production of books and records IV. Arrest those found to have performed fraud, thus violating the Uniform Securities Act A. I and II only B. II and III only C. I, II, and III only D. I, II, III, and IV

I. Issue subpoenas II. Administer oaths III. Gather evidence and require the production of books and records The administrator can issue subpoenas, administer oaths, gather evidence, and require the production of books and records while conducting an investigation in a state where the state administrator has jurisdiction in the investigation. If the administrator finds that fraud has or may have been committed, he/she will need to refer the matter to the state attorney general in order to initiate criminal proceedings under the Uniform Securities Act. [Module 5, State Administrator, Section 1.0]

Which of the following are defined contribution plans? I. Keogh plan II. 401(k) plan III. 403(b) plan IV. 457 plan

I. Keogh plan II. 401(k) plan III. 403(b) plan IV. 457 plan Keogh, 401(k), 403(b), and 457 plans are all considered defined contribution plans. Defined contribution plans are funded by the employer and/or the employee. The employee directs how the funds are invested and assumes the investment risk. The amount participants receive upon retirement is based on the amount invested and how their investments performed. [Module 7, Retirement Plans, Sections 1.2 & 1.7]

Which of the following are true regarding the taxation of a limited partnership? I. Limited partners are taxed individually. II. Each limited partner pays the same share of tax based on how the limited partnership is taxed. III. General partners must pay self-employment taxes. IV. Limited partners and general partners are both liable regarding the taxation of the limited partnership. A. I and III B. II and IV C. I, II, and IV D. I, III, and IV

I. Limited partners are taxed individually. III. General partners must pay self-employment taxes. IV. Limited partners and general partners are both liable regarding the taxation of the limited partnership. In a limited partnership, limited partners are taxed individually and are responsible for reporting and paying taxes on their share of the profits each year, but they are just paying ordinary income taxes. General partners, on the other hand, must pay self-employment taxes. If the limited partnership as a whole is in tax debt, the general partner is fully exposed to liability and the limited partner will also be liable for the tax debt the business has incurred up to the amount in which he or she has invested or borrowed from the LP. Limited partners do not all pay the same tax — it is based on their share in the partnership. [Module 9, Client Profiles, Section 1.1]

A customer purchases DMF as a result of an agent's recommendation. Later, when the stock is down four points, the customer calls the agent for a quote, and the agent quotes the stock at the purchase price instead of telling the customer the stock has declined in value. The customer then enters a sell order. When the customer receives the confirmation, he sees that the stock was sold four points lower than the quote he was given. The agent's actions would be considered: I. Misleading II. Fraud III. Unethical IV. Discretionary A. I and III only B. II and IV only C. I, II, and III only D. I, II, III, and IV

I. Misleading II. Fraud III. Unethical This agent's actions are misleading, unethical, and fraudulent. They are not discretionary because the agent did not exercise any authority to buy or sell without consulting the customer. [Module 4, Prohibited Practices, Section 1.0]

ABC Advisers is a federal covered investment advisory firm which also acts as a broker/dealer. As a part of its business, ABC makes recommendations to clients and then effects the ensuing transaction. Which of the following would apply to an agency cross transaction executed for Mr. Jones, an advisory client of ABC Advisers? I. Mr. Jones must provide prior written consent for the agency cross transaction. II. ABC Advisers can recommend the transaction to both parties of the transaction. III. An agency cross is a transaction in which a representative acts as an investment adviser representative and as a broker/dealer agent for both the advisory client and the party on the other side of the transaction. IV. ABC Advisers must make a written disclosure to the advisory client that it will act as a broker/dealer for both, which may create a conflict of interest, and that the firm may collect commissions from both parties. A. III only B. I and III only C. I, III, and IV only D. I, II, III, and IV

I. Mr. Jones must provide prior written consent for the agency cross transaction. III. An agency cross is a transaction in which a representative acts as an investment adviser representative and as a broker/dealer agent for both the advisory client and the party on the other side of the transaction. IV. ABC Advisers must make a written disclosure to the advisory client that it will act as a broker/dealer for both, which may create a conflict of interest, and that the firm may collect commissions from both parties. An agency cross transaction is a transaction in which a representative acts as an investment adviser representative and as a broker/dealer agent for both the advisory client and the person on the other side of the transaction. An advisory client must provide prior written consent for an agency cross transaction. An adviser must make written disclosure to the advisory client that it will act as a broker/dealer for both, which could create a conflict of interest, and may collect commissions from both parties. [Module 4, Prohibited Practices, Section 3.6]

Butler Financial is a registered investment advisory firm in the state of Nebraska. As business has grown, it has attracted clients outside of the state and intends to register in the state of Colorado. Which of the following persons with the firm will be automatically registered in Colorado as investment adviser representatives when the firm becomes registered in Colorado? I. Partners, officers, and directors of the IA II. Managers of those in charge of sales accounts III. Investment adviser representatives employed by the firm IV. Administrative and office support personnel of the firm A. I only B. I and II only C. I, II, and III only D. I, II, III, and IV

I. Partners, officers, and directors of the IA Only partners, officers, directors, and persons occupying similar positions who are listed on the firm's registration statement are automatically registered when the firm is registered. Representatives, plus all those in charge of representatives, are required to register, but note that not all managers are required to be listed on the firm's registration statement. Administrative and office support personnel are not required to register. [Module 2, Registration of Persons, Section 1.4]

An issuer uses a newspaper advertisement to solicit pre-organization subscriptions for a new company to be formed. Eight people subscribe for $25,000 each, but payments will not be made until the securities are issued. No commissions will be paid for the solicitation of the subscribers. Which of the following statements is/are true? I. Pre-organization subscriptions to 10 or fewer investors for which no commissions are paid, directly or indirectly, are exempt transactions. II. Subscription agreements are exempt securities. III. Unless an exemption is available, securities' underlying subscription agreements must be registered prior to sale. IV. The sale of subscription agreements is an exempt transaction. A. II only B. I and IV only C. I, III, and IV only D. I, II, III, and IV

I. Pre-organization subscriptions to 10 or fewer investors for which no commissions are paid, directly or indirectly, are exempt transactions. III. Unless an exemption is available, securities' underlying subscription agreements must be registered prior to sale. IV. The sale of subscription agreements is an exempt transaction. The sale of pre-organization subscriptions to 10 or fewer investors for which no commissions are paid -- directly or indirectly -- is an exempt transaction. Subscription agreements are not exempt securities. Offers and sales of subscription agreements are exempt transactions provided they are offered or sold to 10 or fewer investors with no commissions paid for the sales. The securities' underlying subscription agreements must be registered prior to sale unless an exemption is available. [Module 3, Registration of Securities, Section 5.1]

Which of the following transactions are exempt from registration under the Uniform Securities Act? I. Private placements II. Unsolicited transactions III. Fiduciary transactions IV. Transactions between financial institutions

I. Private placements II. Unsolicited transactions III. Fiduciary transactions IV. Transactions between financial institutions All of these are exempt transactions under the Uniform Securities Act. Private placements are offers to a limited number of persons, not more than 10 in a 12-month period, and are exempt provided they are sold for investment purposes with no commissions paid. A fiduciary transaction is a transaction by a person acting in an official capacity, such as a bankruptcy trustee. An unsolicited transaction is one in which the customer calls the broker/dealer to buy or sell a specific security. Transactions between financial institutions are always exempt transactions. [Module 3, Registration of Securities, Section 5.1]

Which of the following retirement plans are tax-qualified plans? I. Profit-sharing plan II. 457 plan III. 403(b) plan IV. 401(k) plan A. I and II only B. I and IV only C. II, III, and IV only D. I, II, III, and IV

I. Profit-sharing plan IV. 401(k) plan Qualified retirement plans are those covered by ERISA. ERISA guidelines apply to most private sector retirement plans. 401(k)s and profit-sharing plans are both corporate plans covered by ERISA and are deemed to be qualified. A 403(b) plan is for nonprofits and teachers, and though 403(b)s have similar characteristics such as pretax contributions, they are not considered qualified ERISA plans. A 457 plan is for employees of a municipal entity that does not have any other kind of retirement plan and is not considered a tax-qualified plan. [Module 7, Annuities & Retirement Plans, Section 5.0]

Ames Advisers is an investment advisory firm with an office in Grand Forks, North Dakota. The firm specializes in giving investment advice to wealthy investors, and has accumulated over $140 million in assets under management. Ames Advisers has 17 individual clients who live in Montana, 13 individual clients in Minnesota, and three institutional clients in North Dakota. Which of the following are required to be submitted to the state administrator of North Dakota? I. Registration fees II. Form ADV Parts 1 and 2 III. Surety bond A. I and II only B. II and III only C. I and III only D. I, II, and III

I. Registration fees II. Form ADV Parts 1 and 2 Since the firm has over $110 million in assets under management, it is required to register with the SEC; therefore, it is a federal covered investment advisory firm. A state administrator can require federal covered investment advisers who have an office in that state to make a notice filing. This involves paying a filing fee and submitting copies of Form ADV Parts 1 and 2. Surety bonds are only required if the adviser does not meet the minimum net capital requirement. [Module 2, Registration of Persons, Sections 1.11 & 4.1]

A variable annuity is: I. Regulated under the Investment Company Act of 1940 II. An investment with accounts like a mutual fund III. An insurance policy IV. Regulated by the department of insurance of the state in which the investment is sold A. I, II, and III only B. I, III, and IV only C. II, III, and IV only D. I, II, and IV only

I. Regulated under the Investment Company Act of 1940 II. An investment with accounts like a mutual fund IV. Regulated by the department of insurance of the state in which the investment is sold A variable annuity is an insurance product; however, it is not insurance. The investment portion of the variable annuity resembles a mutual fund, because the money is invested in a managed portfolio of securities. Variable annuities are regulated under the Investment Company Act of 1940, the Securities Act of 1933, and the department of insurance of the state in which they are sold (since an insurance company issues the annuity). [Module 7, Annuities & Retirement Plans, Section 6.2]

An administrator may perform which of the following after the registration of a broker/dealer is effective? I. Require filing of advertising and sales literature regarding nonexempt securities II. Conduct examinations of out-of-state broker/dealers that transact securities business within the state III. Require the filing of amended documents if there is any material change in information IV. Require regular filing of financial reports A. I and IV only B. II and III only C. III and IV only D. I, II, III, and IV

I. Require filing of advertising and sales literature regarding nonexempt securities II. Conduct examinations of out-of-state broker/dealers that transact securities business within the state III. Require the filing of amended documents if there is any material change in information IV. Require regular filing of financial reports After the registration of a broker/dealer is effective, an administrator may require filing of advertising and sales literature regarding nonexempt securities, conduct examinations of out-of-state broker/dealers that transact securities business within the state, require the filing of financial reports and amended documents if there is any material change in information filed, and require the regular filing of financial reports. [Module 2, Registration of Persons, Sections 1.5, 3.1, 3.6, & 3.7]

The administrator may do which of the following after the registration of an agent or broker/dealer? I. Require filing of advertising and sales literature regarding nonexempt securities II. Conduct examinations of out-of-state broker/dealers who transact securities business within the state III. Require the filing of amended documents, if there is any material change in the information filed IV. Require regular filing of financial reports A. I and IV only B. II and III only C. III and IV only D. I, II, III, and IV

I. Require filing of advertising and sales literature regarding nonexempt securities II. Conduct examinations of out-of-state broker/dealers who transact securities business within the state III. Require the filing of amended documents, if there is any material change in the information filed IV. Require regular filing of financial reports The administrator may do all of these. Once a broker/dealer is registered, the administrator may require filing of advertising, conduct examinations in and out of the state, and require the filing of amended documents and financial reports. [Module 2, Registration of Persons, Sections 1.5, 3.1, 3.6, & 3.7]

Neil Jones, an employee of a broker/dealer, has just sent off his application for registration as an agent to the state administrator. Which of the following duties can Neil perform for the broker/dealer? I. Sell fixed annuities II. Sell treasury notes III. Sell preorganization certificates IV. None of the above A. I only B. I and III only C. I, II, and III only D. IV only

I. Sell fixed annuities Neil can only sell fixed annuities. Neil has just sent off his application for registering as an agent; therefore, he has at least a 30-day waiting period before he can perform any securities related transactions. Since fixed annuities are not defined as a security under the Uniform Securities Act, selling them would be allowed. Both Treasury notes and preorganization certificates are defined as securities and would be off limits. [Module 1, Uniform Securities Act, Sections 3.1 & 3.4]

As an agent for a broker/dealer firm, Tom Smith interacts with clients on a daily basis. Under the Uniform Securities Act, which of the following actions by Tom is considered unethical conduct? I. Selling a client a new issue that has been registered with the SEC and implying that the SEC has approved the new offering II. Selling shares of a growth mutual fund to a client who has stated that her main objective is monthly income III. Using the past year's dividends from a stock fund to show the yield of the mutual fund IV. Encouraging a client to purchase shares of a mutual fund just prior to the ex-dividend date to enable the client to get the dividend A. I and II only B. I and III only C. I, II, and IV only D. I, II, III, and IV

I. Selling a client a new issue that has been registered with the SEC and implying that the SEC has approved the new offering II. Selling shares of a growth mutual fund to a client who has stated that her main objective is monthly income IV. Encouraging a client to purchase shares of a mutual fund just prior to the ex-dividend date to enable the client to get the dividend The SEC does not approve anything and to state differently is a criminal offense, and certainly unethical. The SEC only registers the issue and makes sure that all information is fully disclosed. Selling securities that are contrary to a client's objectives and encouraging the purchase of mutual fund shares just prior to the ex-dividend date are both unethical. However, using the last year's dividends is the only way to determine current yield since there is no way of telling what the dividends for the coming year will be. [Module 4, Prohibited Practices and Business Practices of Investment Advisers, Section 1.1]

Which of the following are exempt securities under the Uniform Securities Act? I. Shares in a credit union II. A partnership interest in an oil-drilling venture III. A public utility common stock IV. A common stock listed on the NYSE A. I and II only B. II and III only C. I, III, and IV only D. I, II, III, and IV

I. Shares in a credit union III. A public utility common stock IV. A common stock listed on the NYSE All the answer selections are securities, but only I, III, and IV are exempt. Exempt securities include shares in banks, credit unions, public utilities, and securities listed on a national exchange or Nasdaq. A limited partnership interest in an oil drilling venture is a security for which there is little or no secondary market, and therefore, would not be listed on an exchange or in the Nasdaq Stock Market, and would not be exempt from state registration. [Module 3, Registration of Securities, 0Section 4.0]

Which of the following securities are exempt due to NSMIA? I. Stocks listed on Nasdaq II. Church bonds III. Exchange-traded funds IV. Municipal bonds A. II and III B. I, III, and IV C. I, II, and IV D. I, II, III, and IV

I. Stocks listed on Nasdaq III. Exchange-traded funds IV. Municipal bonds Stocks listed on Nasdaq, exchange-traded funds, and municipal bonds are all exempt from registration at the state level due to NSMIA. All three are considered to be federal covered securities. All stocks listed on an exchange or on Nasdaq are exempt due to NSMIA. Securities issued by registered investment companies (such as exchange-traded funds) are also exempt due to NSMIA. Municipal bonds are federal covered securities, except in the state where they are issued. Church bonds are exempt from registration under the USA, not due to NSMIA. [Module 3, Registration of Securities, Section 4.2]

Which two of the following are requirements to be met for an administrator to take disciplinary action against an agent? I. The agent has or is about to violate the Uniform Securities Act. II. The agent has acted with malice. III. The agent has caused public harm. IV. The order is in the public interest. A. I and II B. III and IV C. II and III D. I and IV

I. The agent has or is about to violate the Uniform Securities Act. IV. The order is in the public interest. The agent has or is about to violate the USA and the order must be in the public interest. In order to take disciplinary action against a registrant, the administrator must always determine that the action is in the public interest and must state a cause for the action. [Module 2, Registration of Persons, Section 2.1]

Which of the following are defined as fraudulent conduct when an agent executes a transaction with a client? I. The agent knowingly makes a recommendation to a client that is not suitable for the client II. A husband calls the agent and tells the agent to buy XYA stock for his wife's account, mistakenly thinking it was a joint account, the agent effects the transaction III. An agent is having financial difficulty at home and borrows $10,000 from a client he has had for over 5 years IV. A municipal bond is trading flat when an agent sells the bond to a client and fails to mention that the issue is in default on the interest payment A. I and II only B. I and IV only C. I, II, and III only D. I, II, III, and IV

I. The agent knowingly makes a recommendation to a client that is not suitable for the client IV. A municipal bond is trading flat when an agent sells the bond to a client and fails to mention that the issue is in default on the interest payment Knowingly making recommendations that are unsuitable for the client is fraud. If there is no authorization by the wife, the husband cannot do the trade. If the agent mistakenly does the trade, it is unethical conduct. It is also unethical for an agent to borrow money from a client. Selling a bond that is trading flat means that the bond has defaulted and when the agent fails to mention this fact the agent has committed an unethical act that is considered fraudulent. Omitting or failing to state a material fact about a recommendation is defined as fraudulent, whether intended or not. The question here states the bond is trading flat, therefore, the agent should be aware of this fact and the trade is unethical and fraudulent. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 1.0]

An agent in Florida has a client who has just moved to New York. For the agent to continue to handle the account: I. The agent must become registered in New York. II. The agent's broker/dealer must register in New York. III. The agent may continue to handle the account without a New York registration, as the account was opened in Florida.

I. The agent must become registered in New York. II. The agent's broker/dealer must register in New York. An agent can service an account in any state, but both the B/D and the agent must be registered in that state unless an exemption applies. [Module 2, Registration of Persons, Section 1.2]

An investment adviser is using a solicitor to generate a new client base. Which of the following must be disclosed to the clients? I. The amount of compensation that will paid to the solicitor for his efforts in soliciting clients II. Whether or not the solicitor is registered in the state of the client III. The contents of the written agreement between the solicitor and the investment adviser IV. The contents of the written agreement between the client and the investment adviser A. I and III B. I and IV C. II and III D. II and IV

I. The amount of compensation that will paid to the solicitor for his efforts in soliciting clients IV. The contents of the written agreement between the client and the investment adviser The client must be given a signed copy of the advisory agreement between the client and the adviser. The fact that compensation will be paid must be disclosed, as well as a description of the fee including the amount of any cash fee. The client does not have to be given a copy of the agreement between the adviser and the solicitor. Whether a solicitor is registered in a state or not is a matter of regulatory concern and need not be disclosed to the client. [Module 1, Uniform Securities Act, Section 3.8]

A widowed father with a large sum of money has two children two years apart in high school. One will graduate this year and anticipates going to college. An investment adviser should take into consideration which of the following regarding the amount of money required to meet his college funding objective? I. The client's present income II. The cost of tuition to a college the children would like to go to III. The food and housing costs in the area of the college IV. The inflation rate for the next six years A. II and III only B. II, III, and IV only C. I, II, and III only D. I, II, III, and IV

I. The client's present income II. The cost of tuition to a college the children would like to go to III. The food and housing costs in the area of the college IV. The inflation rate for the next six years The investment adviser should consider all but the client's income when determining the amount of funding needed to achieve the goal. The client's income is important when it comes to how he will accumulate the funds. [Module 9, Customer Profiles, Section 3.0]

An investment adviser is structured as a general partnership and has three general partners. Partner B is in charge of handling customer assets. A client sues the advisory firm for mismanagement. Who is liable in the lawsuit? I. The firm II. Partner A III. Partner B IV. Partner C A. I only B. I and III only C. II, III, and IV only D. I, II, III, and IV

I. The firm II. Partner A III. Partner B IV. Partner C In general partnerships, ALL partners may be held liable. The investment advisory firm — the partnership — can be named in the suit as well. [Module 9, Customer Profiles, Section 1.1]

Which of the following are unethical conduct by an investment adviser who shares in the profits and losses in a customer's account? I. The investment adviser representative may share in the profits and losses if the customer has given written consent and the IAR's profits are in proportion to the profits and losses made. II. The investment adviser representative may share in the profits and losses if the consent of the IAR's firm has been given and the IAR's profits are in proportion to the profits but not the losses. III. The investment adviser representative may share in the profits and losses if FINRA and the state administrator have signed an agreement to the proportion of profit for the IAR. IV. The investment adviser representative may share in the profits and losses if the IAR's profits and losses are in proportion to the percentage of the IAR's contributed capital in the account, the customer has agreed, and the firm has given consent. A. I and IV only B. II and III only C. I, II, and III only D. I, II, III, and IV

I. The investment adviser representative may share in the profits and losses if the customer has given written consent and the IAR's profits are in proportion to the profits and losses made. II. The investment adviser representative may share in the profits and losses if the consent of the IAR's firm has been given and the IAR's profits are in proportion to the profits but not the losses. III. The investment adviser representative may share in the profits and losses if FINRA and the state administrator have signed an agreement to the proportion of profit for the IAR. IV. The investment adviser representative may share in the profits and losses if the IAR's profits and losses are in proportion to the percentage of the IAR's contributed capital in the account, the customer has agreed, and the firm has given consent. Even if the investment adviser shares in the profits and losses in proportion to the percentage of the investment adviser's contributed capital in the account, the customer has agreed, and the firm has given consent, sharing is still unethical. If this had been an agent sharing under these guidelines, it would be allowed. However, investment advisers and investment adviser representatives may not share in a customer's account. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 1.2]

According to the Uniform Securities Act, which of the following are true? I. The registrant must pay a fee. II. The registrant is not required to pay a fee. III. The administrator can allow a registrant to omit information from an application. IV. The administrator cannot allow a registrant to omit information from an application. A. I and III B. I and IV C. II and III D. II and IV

I. The registrant must pay a fee. III. The administrator can allow a registrant to omit information from an application. According to the Uniform Securities Act, registrants MUST pay a fee. The state administrator, however, has leeway in terms of the required information on an application and can allow a registrant to omit information. [Module 2, Registration of Persons, Section 1.1]

When a client enters into a contract with an investment adviser, which of the following information is required to be disclosed in the contract? I. The term of the contract II. The amount of the advisory fee or the formula used to compute it III. The services to be provided IV. The adviser's discretionary authority, if any A. II and III only B. I, II, and III only C. II, III, and IV only D. I, II, III, and IV

I. The term of the contract II. The amount of the advisory fee or the formula used to compute it III. The services to be provided IV. The adviser's discretionary authority, if any The term of the contract, the amount of the advisory fee or the formula used to compute it, the services to be provided, and the advisor's discretionary authority, if any, must all be disclosed in the investment adviser/client contract. In addition, both the investment adviser and the client must sign the contract. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 5.0]

Which two of the following are prohibited actions by an investment adviser under the Uniform Securities Act? I. To enter into a client contract that does not state the compensation arrangement II. To enter into a client contract in which the compensation is based on the total assets under management III. To hold the client's funds and securities IV. To fail to notify the administrator that a client's funds and securities are being held A. I and III B. I and IV C. II and III D. II and IV

I. To enter into a client contract that does not state the compensation arrangement IV. To fail to notify the administrator that a client's funds and securities are being held An investment adviser must notify the state administrator when the adviser is holding funds and/or securities for clients. The advisory agreement must also state the method of determining compensation in any arrangement with a client. The services provided (including whether the adviser will exercise discretion and/or maintain custody) and fees must be disclosed to the client on Form ADV, which is filed with the administrator as part of the registration statement. The compensation must be based on a fixed fee or a percentage of the assets, not based on the performance of the account, unless the question refers to a federal covered IA where performance fees are allowed. [Module 4, Prohibited Practices, Sections 3.4 & 5.0]

Which of the following is a "security" under the Uniform Securities Act? I. Treasury stock II. A listed option III. A debenture IV. An investment contract A. II only B. II and III only C. I, II, and III only D. I, II, III, and IV

I. Treasury stock II. A listed option III. A debenture IV. An investment contract Treasury stock, listed options, debentures, and investment contracts are all securities under the Uniform Securities Act. Although treasury stock is stock that has been repurchased by a company, it is still considered a security. An investment contract, which is an agreement or transaction where a person(s) invests money in a common enterprise that is managed by another party, is also considered a security under the Act. [Module 1, Uniform Securities Act, Section 3.1]

Under the Uniform Securities Act, which of the following are true in the filing of an issuer's registration statement with the state administrator? I. Only an issuer or a broker/dealer may file a registration statement. II. A broker/dealer who wishes to publicly offer shares of an unregistered, nonexempt security that is not federal covered must file a registration statement. III. An individual who wishes to offer more than 500,000 shares of a registered security in a non-issuer public offering or sale must file a registration statement. IV. An individual who wishes to publicly offer less than 1,000 shares of an unregistered, nonexempt security in a non-issuer offering or sale must file a registration statement. A. I and II only B. I and IV only C. II and III only D. II and IV only

II. A broker/dealer who wishes to publicly offer shares of an unregistered, nonexempt security that is not federal covered must file a registration statement. IV. An individual who wishes to publicly offer less than 1,000 shares of an unregistered, nonexempt security in a non-issuer offering or sale must file a registration statement. A registration statement can be filed by the issuer, a broker/dealer, or any other person making a public offering. If a security is not registered with the state and is not exempted from registration in the state by either state or federal law, a registration statement must be filed with the state for the security to be publicly offered in the state. An individual making a non-issuer offering of shares would not need to file a registration statement if the shares were already registered. There is no exemption based on a minimum number of shares offered. This might qualify as an exempt transaction if it were an isolated, non-issuer transaction, but the words "publicly offer" indicate that it is not isolated. [Module0 3, Registration of Securities, Sections 1.1 & 1.2]

Adam Richards, a recently hired associate of XYZ Securities, a broker/dealer firm in Delaware, has passed his licensing exams to become an agent. Regarding the registration of Adam as an agent for XYZ Securities, which of the following is true? I. Adam's registration is effective immediately after passing the appropriate exam. II. Adam's registration expires on December 31 each year, unless his registration is renewed. III. Adam's registration will remain effective should he resign from the employment of XYZ Securities. A. I only B. II only C. I and II only D. I and III only

II. Adam's registration expires on December 31 each year, unless his registration is renewed. Adam's registration expires on December 31 each year, unless his registration is renewed. An agent's initial registration is not effective until 30 days after an application is filed, even if the agent has already passed the appropriate exam. An agent's registration does not remain effective after he resigns from his employment with the broker/dealer. When he is terminated (voluntarily or not), the registration with the state and FINRA are no longer active. Any subsequent employment with another B/D would require re-registration, although a new test may or may not be needed. Qualifications remain inactive but are good for two years before they expire. After two years, an agent must requalify by exam. [Module 2, Registration of Persons, Sections 1.3, 1.5, & 1.7]

Which two of the following best describes the taxation of alimony? I. Alimony is not taxable to the recipient. II. Alimony is taxable to the recipient. III. Alimony is not deductable to the payer. IV. Alimony is deductable to the payer. A. I and III B. I and IV C. II and III D. II and IV

II. Alimony is taxable to the recipient. IV. Alimony is deductable to the payer. Alimony is both taxable to the recipient and deductable to the person paying it. [Module 9, Customer Profiles, Section 1.1]

In compliance with the NASAA Model Rules, investment advisers are required to maintain records of all of the following, except: I. Copies of customer checks II. All email correspondence III. Trade confirmations of all accounts IV. Customer statements A. I only B. III only C. I and IV only D. II and III only

II. All email correspondence III. Trade confirmations of all accounts Investment advisers are not required to keep copies of ALL email correspondence — only email communication with clients and other business-related email. Personal email is not required to be maintained. Investment advisers must only keep the trade confirmations of their discretionary clients. IAs must always maintain client statements and keep all copies of their clients' checks. [Module 2, Registration of Persons, Section 3.2]

All of the following have an office in the state and are effecting transactions in the state. Which of these persons is exempt as an agent under the Uniform Securities Act? I. An individual who is representing a broker/dealer in effecting transactions in U.S. government securities II. An individual who is representing an issuer in effecting transactions for employees in the state but will receive no remuneration III. An individual who is representing a broker/dealer in effecting transactions in bank and savings and loan securities IV. An individual who is representing a broker/dealer in effecting transactions in securities traded on a national exchange A. II only B. I and III only C. I, II, and IV only D. I, II, III, and IV

II. An individual who is representing an issuer in effecting transactions for employees in the state but will receive no remuneration An individual who is representing an issuer in effecting transactions for employees in the state but will receive no remuneration. An individual representing an issuer effecting transactions of certain exempt securities, exempt transactions, or transactions of the issuer's securities with other employees of the issuer, so long as the individual is not compensated for the trades, excludes that individual from the definition of an agent. An individual who is representing a broker/dealer in effecting transactions in securities, whether the securities are exempt or not, must be registered as an agent. A person effecting trades in government securities is not required to be registered as an agent if representing the issuer, but must be if representing a B/D. The securities may be exempt from registration, but the person who is selling them must be registered. [Module 1, Uniform Securities Act, Section 3.4]

Which of the following statements are not true? I. An agent may share in the profits or losses in a customer's account. II. An investment adviser representative may share in the profits or losses in a customer's account. III. An investment adviser may share in the profits or losses in a customer's account. IV. A broker/dealer may share in the profits and losses of a customer's account. A. I and II only B. II and III only C. I and III only D. I, II, III, and IV

II. An investment adviser representative may share in the profits or losses in a customer's account. III. An investment adviser may share in the profits or losses in a customer's account. Correct answers (false statements): Neither an investment adviser nor an investment adviser representative may share in the profits or losses in a customer's account. A broker/dealer or an agent may share in the losses or profits in a customer's account provided they are proportional to the capital invested in the account by the broker/dealer or agent, there is a written agreement with the customer permitting the sharing, and the broker/dealer consents to the arrangement between the agent and the customer. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 1.2]

Under the Uniform Securities Act, which of the following are exempt securities? I. Variable annuities issued by an insurance company licensed to do business in the state of purchase II. Bonds issued by an insurance company licensed to do business in the state of purchase III. Bonds issued and guaranteed by the California Teachers Credit Union IV. Bonds issued by the Bank of Mexico A. I and II only B. II and III only C. III and IV only D. I, II, and III only

II. Bonds issued by an insurance company licensed to do business in the state of purchase III. Bonds issued and guaranteed by the California Teachers Credit Union Debt-related securities issued by an insurance company organized under the laws of any state and licensed to do business in the state are exempt from registration. Debt-related securities issued by credit unions are also exempt. Variable annuities are not exempt securities under the Uniform Securities Act. Securities issued by recognized foreign government are exempt, but issues of banks of foreign countries are not. [Module 3, Registration of Securities Module, Section 4.1]

Brut Boomberg works for BFD Securities and Advisory Services, Inc. Brut trades for many clients as well as advises many clients for a fee. One of his clients, Madeline, is an advisory client and also executes her portfolio through Brut. One day she calls and asks him for advice on some stocks she has been watching. Brut does not think the investments are suitable for her needs. He suggests some other securities and cites his reasons for recommending those particular stocks. She agrees with Brut and instructs him to "put it into" her portfolio. Which of the following statements is/are true regarding the actions by Brut? I. Brut has acted as an investment adviser. II. Brut has acted as an agent. III. Brut has acted as a broker/dealer. IV. Brut has acted as an investment adviser representative.

II. Brut has acted as an agent. IV. Brut has acted as an investment adviser representative. Although this was an unsolicited sale, Madeline is an advisory client and he charges her fees for his advice; in this capacity, he is acting as an investment adviser representative. When he "puts the securities" into her account, he is acting as an agent. Therefore, on part of the transaction, Brut is an IAR when giving advice, and on entering the order, he is an agent. A person cannot be both an IA and an IAR, nor can they be both an agent and a B/D. [Module 1, Uniform Securities Act, Sections 3.3 - 3.7]

A client of an investment adviser has lost money due to an error on the part of the investment adviser. The error is an action that is contrary to the Uniform Securities Act and as such has caused the client to suffer a loss of money. The client sues the investment adviser in court. What can the client sue for in a civil lawsuit against the IA? I. The wrap fee paid for the advice of the investment adviser II. Court costs for suing the investment adviser III. Losses incurred by the decisions that were not suitable for the client IV. Interest on the money lost V. Attorney fees

II. Court costs for suing the investment adviser III. Losses incurred by the decisions that were not suitable for the client IV. Interest on the money lost V. Attorney fees Wrap fees cannot be recovered. Trade commissions, losses on the investment, interest on the money lost, attorney fees paid to recover the losses, and court costs can be recovered. There may be a fine by the state administrator, but that is not offered as a choice. [Module 5, State Administrator & Regulatory Oversight, Section 2.2]

Value investors look at which two of the following when determining which stock to purchase? I. Monte Carlo simulation II. Dividend payout ratio III. Risk arbitrage IV. Price/earnings ratio A. I and II only B. III and IV only C. I and III only D. II and IV only

II. Dividend payout ratio IV. Price/earnings ratio A value investor looks over the dividend payout ratio, price/earnings ratio, and price/book ratio when determining which stocks can be purchased at value. Both the Monte Carlo simulation and risk arbitrage are examples of special situation investing. [Module 10, Portfolio Management, Section 2.4]

Tom and Mary Pessimist meet with Michael Wright of Michael Wright Investment Advisory Services, and sign a contract at the meeting to have the firm manage their portfolio of $250,000. Michael also provides Tom and Mary with a copy of Form ADV Part 2A when they meet. Which of the following is true? I. The contract is void because Michael was to deliver Form ADV Part 2A at least 48 hours prior to entering into the contract with Tom and Mary. II. Form ADV Part 2A must be offered or delivered to Tom and Mary annually. III. Tom and Mary have five business days to cancel the contract. IV. Michael did not have to deliver Form ADV Part 2A, because the firm will be managing less than $500,000 for Tom and Mary. A. I only B. I and II only C. II and III only D. IV only

II. Form ADV Part 2A must be offered or delivered to Tom and Mary annually. III. Tom and Mary have five business days to cancel the contract. Form ADV Part 2A must be offered or delivered to Tom and Mary annually, and Tom and Mary have five business days to cancel the contract. Form ADV Part 2A, also called the brochure, must be delivered to clients at least 48 prior to their entering into a contract with an investment adviser. If it is not delivered at least 48 hours prior to entering into a contract, it must be delivered no later than at the time the client enters into the contract, and the client then has five business days in which to cancel the contract. [Module 2, Registration of Persons, Section 5.0]

Which of the following are true regarding the consent to service of process? I. It is revocable. II. It is irrevocable. III. It must be renewed annually. IV. Renewal is not required. A. I and III B. I and IV C. II and III D. II and IV

II. It is irrevocable. IV. Renewal is not required. The consent to service of process is irrevocable and need not be renewed as it remains in effect as long as the administrator has jurisdiction over the person. Each individual or firm that registers with a state must file a consent to service of process form with the state. This appoints the administrator to receive any legal documents on behalf of the registrant and ensures that legal process will be served. [Module 2, Registration of Persons, Section 1.5]

Which of the following with an office in the state would have to register as an investment adviser(s)? I. The trust department of Westamerica Bank provides investment advice to its clients for a fee. II. Jason Trembley gives his clients investment advice and executes transactions for an annual fee. III. Sarah Edwards advises customers regarding the value of commodities futures contracts on silver coins for a fee. IV. Neil Jackson writes a newspaper column that analyzes and recommends securities. A. II only B. III and IV only C. I, II, III, and IV D. None of the above

II. Jason Trembley gives his clients investment advice and executes transactions for an annual fee. Jason gets a yearly fee for both the advice and the transactions. If Jason worked for a firm, he would be an IAR. However, the question just states he gives advice and then executes the transactions, all for a fee, which makes him an investment adviser. Banks and trust departments are exempt from the definition of an investment adviser. Sarah is giving advice on commodities futures contracts, which are not defined as securities under the Uniform Securities Act. Neil's advice is not specific to a particular client; it is nonpersonal advice, so he is not classified as an investment adviser either. [Module 1, Uniform Securities Act, Sections 3.1 & 3.5]

Edith Curtis, a 46-year-old, married mother of three, has a brokerage account with her broker/dealer firm. She also has a low-risk tolerance when it comes to investing. Edith has now decided to invest for her retirement, and has chosen a traditional IRA to be the most prudent retirement vehicle. Which two of the following investments would Edith be allowed to hold in her traditional IRA? I. Term life insurance II. Newly minted gold coins from the U.S. Treasury III. Works of art IV. Mutual funds

II. Newly minted gold coins from the U.S. Treasury IV. Mutual funds Newly minted gold coins from the U.S. Treasury and mutual funds. Mutual funds are obvious, but know that coins generated either by the U.S. or from one of the states are allowable and do not fall in to the "collectibles" category. Neither life insurance nor works of art can be held in an IRA. Also, note that the question asks what could be held in a traditional IRA, not what would be the best investments regarding Edith's profile. [Module 7, Annuities & Retirement Plans, Section 2.0]

An offer is made to the general public through mass media advertising. Which of the following offers through mass media advertising is exempt as an offer in a state if the advertising is received in that state? I. National television shows originating in the state II. Newspaper advertisements received in the state, but published in another state III. Local radio show received in the state IV. Publications originating in the state that are sold nationally A. I and III only B. I and II only C. II and IV only D. I, II, III, and IV

II. Newspaper advertisements received in the state, but published in another state IV. Publications originating in the state that are sold nationally Television and radio shows originating in a state are subject to the rules of the state. Therefore, the offers on the television and radio shows are not exempt as an offer. If publications such as magazines, newspapers, and investment newsletters are published outside the state, or they are published in the state but at least 2/3 of the circulation is outside the state, the offer is not considered to have been made in the state and is not subject to that state's jurisdiction. [Module 5, State Administrator & Regulatory Oversight, Section 3.4]

Which of the following are true regarding a SIMPLE 401(k) plan? I. Any number of employees may take part in the plan. II. The maximum number of employees the company can have is 100. III. The employer must make contributions that are immediately vested to the employees. IV. The maximum contribution that can be made by the employer is $17,000. A. I and III only B. II and IV only C. II and III only D. I and IV only

II. The maximum number of employees the company can have is 100. III. The employer must make contributions that are immediately vested to the employees. SIMPLE 401(k)s are for companies of up to 100 employees. The number of participants is what makes it a "SIMPLE 401(k) plan." Employers must contribute either matching contributions up to 3%, or 2% of all employees' compensation. [Module 7, Annuities & Retirement Plans, Section 1.6]

An investor holds a mutual fund. She receives dividends from the investment and elects to reinvest them back into the fund. How will the dividends be treated for tax purposes? I. The new shares purchased with the dividends will be taxed using the cost basis from when the fund was initially purchased. II. The new shares purchased with the dividends will be taxed using the average cost basis of the shares. III. All the dividends will be taxed together at the average price per dividend once the investor sells her shares of the fund. IV. The dividends will be taxed in the year they are paid out. A. I and III only B. I and IV only C. II and III only D. II and IV only

II. The new shares purchased with the dividends will be taxed using the average cost basis of the shares. IV. The dividends will be taxed in the year they are paid out. The investor has elected to automatically reinvest dividends to purchase additional shares of the fund. Mutual fund dividends, however, are always taxed in the year in which they are paid. She will be taxed the year the dividend is paid out. Additionally, the new fund shares that are purchased as a result of the reinvestment will impact the average cost basis of all the shares in the account. When shares are sold, any tax consequence is calculated off the average cost basis unless the shareholder has elected to specify which shares are being sold. If the investor does specify shares, the investor (or her accountant or IA/IAR) must keep track of these different prices. [Module 9, Customer Profiles, Section 1.1]

Under the Uniform Securities Act rules regarding the registration of a new issue, which of the following is true of the withdrawal of a registration statement after the effective date? I. The registration statement may be withdrawn by the issuer after five months in a best efforts underwriting if only 40% of the securities have been sold and are outstanding. II. The registration statement may be withdrawn by the issuer at the end of seven months in an all-or-none underwriting if the escrow requirements have not been met and all sales are rescinded. III. The registration statement may be withdrawn by the administrator at the administrator's discretion. A. I only B. II only C. II and III only D. I, II, and III

II. The registration statement may be withdrawn by the issuer at the end of seven months in an all-or-none underwriting if the escrow requirements have not been met and all sales are rescinded. III. The registration statement may be withdrawn by the administrator at the administrator's discretion. The administrator may, at his or her discretion, withdraw the registration statement at any time, but it can only be withdrawn by the issuer if no securities are outstanding. The registration statement is effective for one year, and the registration statement cannot be withdrawn if any of the securities registered by the statement are outstanding. In an all-or-none offering, all investor monies are refunded, and no sales are considered to have been made if the escrow requirements are not met; therefore, the registration could be withdrawn, as none of the securities offered for sale would be outstanding. [Module 3, Registration of Securities, Sections 1.7 & 3.0]

Investment advisers that meets the following criteria would be required to register with the SEC under the Investment Advisers Act of 1940, if? I. They provide continuous and regular supervisory or management services to securities portfolios that total $100 million or more. II. They act as advisers to registered investment companies. III. They are advisers for nationally recognized statistical rating organizations. IV. They are pension consultants for pension plans with $200 million or more in assets. A. I only B. II only C. II, III, and IV only D. I, II, III, and IV

II. They act as advisers to registered investment companies. III. They are advisers for nationally recognized statistical rating organizations. IV. They are pension consultants for pension plans with $200 million or more in assets. Investment advisers that must register with the SEC under the Investment Advisers Act of 1940 are considered federal covered investment advisers. An investment adviser meeting these criteria is exempt from registration with state administrators; however, they may be required to file a notice of their federal registration and pay fees to a state administrator. The assets under management requirement for an investment adviser to register with the SEC is $110 million. IAs that have between $100 to $110 million under management have the choice to either register with the SEC or with the state; therefore, an IA with "$100 million or more" in assets under management is not necessarily "required" to register with the SEC. Investment advisers to registered investment companies and national statistical rating organizations must register with the SEC. Pension consultants to pension plans with assets in excess of $200 million must also register with the SEC. [Module 2, Registration of Persons, Section 4.1]

Which of the following is unethical to say to a client when speaking about an exempt security? I. This is an exempt security. II. This security can only be sold to sophisticated clients. III. The federal government does not exempt securities. A. II only B. I and III only C. II and III only D. I, II, and III

II. This security can only be sold to sophisticated clients. III. The federal government does not exempt securities. Remember that this is asking for what is unethical, not what is allowed. You are allowed to say the security is exempt, because it is. To state that an exempt security can only be sold to "sophisticated clients" is not completely accurate. Some transactions are exempt because they are offered to qualified investors only, but many exempt securities can be offered and sold to investors that are not qualified, accredited, or "sophisticated." The federal government does exempt securities from registration at both the federal and state levels. Some examples include U.S. government securities, municipal bonds, short-term corporate debt (commercial paper), and others. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 1.0]

Registration as an investment adviser is required under which of the following situations? I. An agent of a broker/dealer recommends the purchase of XYZ stock to a customer, who purchases 300 shares, and the agent earns a commission on the transaction. II. A broker/dealer charges its customers a fee for collecting dividends and interest and for maintaining their accounts in addition to the commission charges for any transactions executed. III. A broker/dealer provides investment research service to customers and charges fees for the service in addition to commission charges on transactions. IV. An agent of a broker/dealer prepares a financial plan for a customer without charging a fee. The plan includes recommendations for specific security transactions to achieve the plan's objectives. The customer places the recommended orders. The agent earns commissions on the transactions. A. III only B. III and IV only C. I, III, and IV only D. I, II, III, and IV

III. A broker/dealer provides investment research service to customers and charges fees for the service in addition to commission charges on transactions. A broker/dealer charging for research advice is charging for advisory services, which requires registration as an investment adviser. Broker/dealers and/or their agents are not defined as investment advisers if their advisory performance is incidental to the conduct of business and no special compensation is received for the research adviser services. Because preparing a plan is commonplace and also incidental to conducting business as a brokerage firm, it does not require registration as an adviser so long as there is no charge for the plan. Recommendations of securities purchases are incidental to the conduct of business and do not require registration. Collection of dividends and interest is clerical; these and other such services are not advisory services. [Module 1, Uniform Securities Act, Section 3.5]

Under the Uniform Securities Act, which of the following would have to register as a broker/dealer in a state? I. A bank and trust company doing business with clients in the state II. An agent for a broker/dealer with an office in the state III. A broker/dealer that does business only with insurance companies in the state from an office located in the state IV. A broker/dealer that does business only with other broker/dealers in the state and has no office in the state A. II only B. III only C. II, III, and IV only D. I, II, III, and IV

III. A broker/dealer that does business only with insurance companies in the state from an office located in the state A broker/dealer who does business only with insurance companies in the state from an office located in the state. This is the only choice that would have to register as a broker/dealer in the state. Since the broker/dealer has a place of business in the state, the firm is considered a broker/dealer in the state, even if it is only working with institutional investors or other broker/dealers. An out-of-state broker/dealer with no place of business in the state and dealing only with other broker/dealers would not be defined as a broker/dealer in that state. An agent of a broker/dealer is defined as an agent, not a broker/dealer. Banks, trust companies, and savings and loan associations are excluded from the definition of a broker/dealer. [Module 1, Uniform Securities Act, Section 3.3]

Which of the following are considered unethical activities for a broker/dealer? I. Lending money to a client II. Borrowing securities from a client III. Commingling client cash with the firm's cash IV. Commingling client securities with the securities owned by the firm A. I and III only B. III and IV only C. II, III, and IV only D. I, II, III, and IV

III. Commingling client cash with the firm's cash IV. Commingling client securities with the securities owned by the firm Commingling client cash and/or securities with those of the firm is unethical. Borrowing and lending money or securities from/to a client is permitted if the firm is a broker/dealer, but unethical if the firm is an investment adviser. A broker/dealer often lends money to clients. The broker/dealer also borrows client securities when the client purchases securities on margin and the B/D needs to lend them out for another client who is shorting shares of the security; this is allowed. [Module 4, Prohibited Practices & Business Practices of IAs, Section 1.1]

An SEC registered investment advisory firm has recently hired four interns. Intern A makes cold calls from the office to potential advisory clients. Intern B takes unsolicited calls for orders from existing clients. Intern C works from home calling out-of-state potential clients, gathering information, and passing it along to the firm. Intern D answers the phones, redirecting the calls to representatives of the firm. Which of the following interns must register as an investment adviser representative? I. Intern A II. Intern B III. Intern C IV. Intern D A. I only B. III only C. I and III only D. I, II, III, and IV

III. Intern C This question is dealing with interns who are acting as solicitors for the IA firm. Intern C has to register as an IAR because she is unsupervised. While Intern B would have to register as an agent if he were placing the trade orders, he would not have to register as an IAR — nor would interns A and D, since they are not working from home and therefore are directly supervised. Furthermore, Intern D's activities are purely administrative. [Module 1, Uniform Securities Act, Section 3.8]

Under the Uniform Securities Act, who must be registered as an investment adviser representative in the referenced state? I. Tom Knox who manages the trust department of WestAmerica Bank that provides investment advice to its clients in Montana II. Jason Tromberry, who works for Top Notch Advisory Firm in California and advises four clients in the state of Nevada III. Sarah Brendon, who works for Top Notch Advisory Firm in California and advises eight clients regarding the value of their investments in Oregon IV. Neil Jackson, who writes a newspaper column that analyzes and recommends securities in Hawaii A. III only B. II and III only C. II, III, and IV only D. I, II, III, and IV

III. Sarah Brendon, who works for Top Notch Advisory Firm in California and advises eight clients regarding the value of their investments in Oregon Since Sarah is giving advice to more than five clients, she must be registered. Since banks are exempt from the definition of an investment adviser a bank manager is not considered an IAR. A person without an office in a state who advises five or less clients in the state is exempt from registration as an investment adviser representative. Since Neil's advice is not client-specific, he needn't be registered. [Module 1, Uniform Securities Act, Section 3.5]

Which of the following is/are true? I. When an agent is suspended, his broker/dealer is also suspended. II. When a broker/dealer is suspended, the agent's registration remains effective. III. The administrator may suspend or revoke registrations whenever the "public good" is in jeopardy. A. III only B. I and III only C. II and III only D. I, II, and III

III. The administrator may suspend or revoke registrations whenever the "public good" is in jeopardy. An agent's suspension will not cause a broker/dealer to be suspended, but a B/D suspension does cause an agent's registration to be rendered inactive. The agent must wait until the B/D's suspension is over, or must transfer to another firm to render the registration active again. "Public good" is a primary reason for suspension of a license. [Module 2, Registration of Persons, Section 2.0]

Which of the following insurance products allow borrowing against the cash values without a tax consequence? I. Variable annuity II. Fixed annuity III. Whole life insurance IV. Universal life A. III only B. III and IV only C. II and III only D. II, III, and IV only

III. Whole life insurance IV. Universal life Only life insurance can be borrowed against without an eventual tax consequence. Annuities, whether variable or fixed, typically cannot be borrowed against, and cash must be withdrawn creating a tax consequence -- just income tax or income tax plus a penalty. Both whole life and universal life allow borrowing against the cash values, and if the policy is maintained until the death of the insured, the loans are forgiven and any remaining death benefit passes income-tax free to the beneficiary. [Module 7, Retirement Plans and Annuities, Sections 7.2 & 7.3]

Under the Uniform Securities Act, an investment adviser's compensation may be based on: I. Capital gains over the past 12 months II. Capital gains over the past three months III. Dividend and interest income over the past 12 months IV. Total invested capital A. IV only B. I and III only C. I and IV only D. II and IV only

IV. Total invested capital Of the choices provided, compensation can only be based on the total invested capital. Typically, adviser compensation is based on the total amount of assets under management (AUM). It can also be a flat fee, which was not an option here. Compensation based on capital gains or investment income would be considered performance-based compensation. Remember to ignore the performance fee exceptions unless the question states that it is a federally covered investment adviser. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 5.0]

An agent is informed by a client that his brother's dot-com company, Wine On Line Inc., which trades publicly, was in negotiations with another dot-com and was about to be bought out for two times its book value. All of the following would be unethical practices by the agent, except: A. If the agent calls all of his major clients and has them buy Wine On Line, Inc. since it will be making a major move soon, but does not disclose why or where he heard the news B. If the agent tells all of the other brokers in his office and most of them have a number of their clients purchase shares of Wine On Line, Inc. C. If the agent tells the principal of his office of the takeover who then postures the firm in anticipation of the public announcement that will be made D. If the agent has his uncle call his other broker to purchase at least 1,000 shares of Wine On Line, Inc. through the other broker, but does not tell him why to do so

If the agent tells the principal of his office of the takeover who then postures the firm in anticipation of the public announcement that will be made. As long as the firm makes no trades based on the inside information, but does stand ready for the public announcement, there is no violation. Passing along the nonpublic information in any other way is unethical, and also fraudulent if a trade results. [Module 4, Prohibited Practices and Business Practices of Investment Advisers, Section 1.0]

According to the Uniform Securities Act, an individual would be considered an agent under which of the following circumstances? A. If the individual represents an issuer and sells exclusively to the issuer's employees without receiving compensation B. If the individual represents an issuer and sells securities not listed on an exchange exclusively to wealthy investors C. If the individual represents an issuer in a transaction involving employee benefit plan investment contracts D. If the individual represents an issuer in a transaction with underwriters

If the individual represents an issuer and sells securities not listed on an exchange exclusively to wealthy investors. This individual would be considered an agent under the Uniform Securities Act. Individuals who represent an issuer and sell exclusively to an issuer's employees without receiving compensation, who enter into transactions only with employee benefit plan investment contracts, and who represent an issuer in transactions with underwriters are not considered agents under the Uniform Securities Act. [Module 1, Uniform Securities Act, Section 3.4]

new company has registered its shares for an initial public offering (IPO) under the Securities Act of 1933. Which of the following is true regarding the offering of the securities in the state of California? A. If the issuer waits too long after the federal registration, registration by coordination with the state may no longer be available. B. If the issue is registered by coordination in California, the state registration will become effective 30 days after the federal registration becomes effective. C. If registration is by coordination, the state registration may become effective before the federal registration. D. The federal registration makes state registration unnecessary.

If the issuer waits too long after the federal registration, registration by coordination with the state may no longer be available. If the issuer waits too long, the administrator may decide that it is not the same offering; in this case, the issuer would need to register the offering by means other than coordination. The registration by coordination becomes effective at the same time that the registration is made effective by the SEC — provided it has met the requirements of the state administrator and the registration statement has been on file with the administrator for at least 10 days. [Module 3, Registration of Securities, Section 2.2]

When is a broker/dealer firm allowed to effect a transaction of a non-exempt security? A. If the security is registered B. If the firm is federally covered C. If the security is exempt D. If the security is federally covered

If the security is registered . If the security is non-exempt, it must be registered in the client's state prior to being traded. [Module 4, Prohibited Practices, Section 1.0]

When would excessive trading in a client's account not be unethical or fraudulent? A. If the client is paying a flat fee for the trading in the account B. If the trading creates a lesser fee in commissions C. If the trading creates a higher fee in commissions D. If the trades are unsolicited orders

If the trades are unsolicited orders. Excessive trading that is requested by the client is not considered unethical or fraudulent. Transactions that are excessive in size or frequency (known as "churning" or "overtrading") in a client's account is, in general, a prohibited activity. Such trading is permissible only if it is done specifically through unsolicited orders directed by the client. [Module 4, Prohibited Practices, Section 3.1]

Which of the following best describes the concept behind the modern portfolio theory? A. Selecting assets in a portfolio individually, each on their own merits B. In creating a portfolio, considering how each asset changes in price relative to the other assets in the portfolio changing in price C. Spreading the risks of investing by purchasing different asset classes or investing in different securities within one asset class D. Having a minimum value in the portfolio set aside for fixed income securities

In creating a portfolio, considering how each asset changes in price relative to the other assets in the portfolio changing in price. The modern portfolio theory states that since investors have different levels of risk tolerance, portfolios should be constructed by looking at the investments as a whole and how they perform in accordance with one another, rather than on their own merits (Choice A). It suggests using diversification to create a portfolio in line with one's risk tolerance while obtaining an optimal expected return. Choice (C) is the definition of "diversification" and Choice (D) describes "insured asset allocation." [Module 10, Portfolio Management, Section 2.8]

Which of the following does not appear on a balance sheet? A. Assets B. Liabilities C. Income D. Net worth

Income. Income appears on the income statement, not the balance sheet. For balance sheets, think "Assets - Liabilities = Net Worth." As shareholders' equity is the net worth of the company, the equation could also be stated as "Assets = Liabilities + Shareholders' Equity." [Module 9, Customer Profiles, Section 3.0]

A trustee has been appointed as the fiduciary for a trust that has five beneficiaries. Two of the beneficiaries have opposing views on how the trust should be invested. The trustee, in determining the investments for the trust, must abide by which of the following? A. The beneficiary who is more aggressive since all the beneficiaries are young and can stand to invest aggressively B. The beneficiary who is more conservative since the object of the trustee is to keep the trust intact C. Investments that combine the views of both beneficiaries, and assign the securities to each as per their instructions D. Investments that are governed by the Uniform Prudent Investors Act and in line with the directives of the trust

Investments that are governed by the Uniform Prudent Investors Act and in line with the directives of the trust. The Uniform Prudent Investors Act regulates how fiduciaries are required to manage the assets for the beneficiaries of a trust. When beneficiaries disagree on investment decisions, the fiduciary should manage the trust according to the trust document for the beneficiaries as a whole, and consult the Prudent Investors Act. [Module 9, Customer Profiles, Section 1.1]

If an agent sells an unregistered nonexempt security, and the client agrees in writing, prior to the sale not to hold the agent or the broker/dealer liable in any way, the agreement: A. Is valid in most states B. Is null and void C. Exempts the broker/dealer from any civil liability D. Exempts the broker/dealer from only criminal liability

Is null and void. The Uniform Securities Act requires every security to be registered or exempt from registration to be sold in the state. The Act does not permit a client to waive any rights that are granted under its authority. Any such agreement would be considered null and void. [Module 4, Prohibited Practices, Section 1.0]

ABC Securities Inc. maintains their records on CD ROMs. Which of the following best describes the use of this practice?************ A. It is not allowed. The records have to be kept on paper for convenience. B. It is not allowed. The records have to be kept either on paper, microfiche, or microfilm. C. It is allowed as long as they let the SEC know that they are using this format. D. It is allowed as long as the CD ROM cannot be altered.

It is allowed as long as the CD ROM cannot be altered. Books and records can be kept and maintained electronically, as long as the information within is unalterable. Prior notification to the SEC that they are keeping records in this format is not a requirement. [Module 2, Registration of Persons, Section 3.1]

Jacob Schmalz is a registered agent who is working as an independent contractor for Reilly Securities, a broker/dealer firm. Jacob was hired by the firm to place trades for its clients who call in. He is strictly limited to placing trades of unsolicited orders. An issuer of a private placement contacts Jacob and asks him for assistance in selling the new issue to the public. Which of the following is a true statement? A. Jacob can sell the new issue unrestricted. B. Jacob can sell the new issue as long as he notifies the broker/dealer. C. Jacob can sell the new issue as long as he receives permission from the broker/dealer. D. Jacob cannot sell the new issue.

Jacob can sell the new issue as long as he receives permission from the broker/dealer. Agents may engage in private securities transactions (those not offered through their own B/D) only if they notify their firm and obtain written permission to do so. To engage in any such transaction without the knowledge and permission of the firm is a violation referred to as "selling away." [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 1.0]

Jon Boyle is a contract employee working for a specific term. Under the USA (Uniform Securities Act), Jon can perform which of the following actions and not have to be registered in that state as an agent? A. Jon is representing a broker/dealer and sells government securities to 10 clients in the state of Florida and is paid a commission. B. Jon is representing a broker/dealer and makes an offer to sell shares of an unlisted stock to two clients in the state of South Carolina for which he will be compensated. C. Jon is representing a broker/dealer and offers to sell shares of an unlisted stock to four clients in the state of Alabama, but will not be directly compensated. D. Jon is representing an issuer and makes an offer to sell shares of its unlisted stock to 10 clients who are employees of the issuer in the state of Mississippi for which he will not be compensated.

Jon is representing an issuer and makes an offer to sell shares of its unlisted stock to 10 clients who are employees of the issuer in the state of Mississippi for which he will not be compensated. In this case, Jon does not have to be registered in that state as an agent. When selling securities to employees of the issuer, the person must be registered unless they represent the issuer of the securities they are selling AND they are not compensated. When a person represents a broker/dealer in effecting securities transactions, whether the securities are exempt or nonexempt, listed or unlisted, and regardless of whether or not the individual is compensated for the transactions, that person is an agent and must register unless another exclusion applies. [Module 1, Uniform Securities Act, Section 3.4]

A variable annuity with life payments can be described as a: A. Lifetime payment of fixed payouts B. Lifetime payment of fluctuating portfolio values C. Lifetime payment of fixed portfolio values D. Lifetime payment of fluctuating payouts

Lifetime payment of fluctuating payouts . A variable annuity is just what the name implies: A changing (variable) amount of payments (annuity). Variable annuity subaccounts vary, so investors can select a particular investment that matches their needs. Variable annuity contracts can pay out the investment for a specific period of time or over the life of the annuitant. In this case, it is cash flow for life, with fluctuating payments. [Module 7, Annuities & Retirement Plans, Section 6.3]

In which of the following would a passive investor most likely invest? A. Sole proprietorship B. General partnership C. Growth stock D. Limited partnership

Limited partnership. This is a case of choosing the best option presented to you. A sole proprietorship and a general partnership both are investment vehicles that an investor creates and acts as an active participant, rather than simply invests in. Since passive investors follow a buy and hold strategy, a growth stock is an unlikely investment as its price tends to fluctuate — creating a better opportunity for an active investor to buy and sell. This leaves the limited partnership as the best remaining option. The investor can invest as a limited partner and let the money sit in the partnership over time while receiving income that is passed-through to the investor. [Module 9, Customer Profiles, Section 1.1]

All of the following activities are considered unethical conduct by an agent, except: A. Telling a client that a particular security has been approved by the state administrator B. Telling a client the price of stock and stating "plus commission," when in fact the stock has already been marked up C. Making a recommendation to a client based on the personal and financial information the client has provided D. Selling a mutual fund to a customer and telling the customer, "I guarantee that this mutual fund's value will rise, just as it has for the last three years!"

Making a recommendation to a client based on the personal and financial information the client has provided. Of the choices provided, this is the only ethical activity. An agent is allowed to make a recommendation to a client based on the personal and financial information the client has provided. Such recommendations should be standard practice for investment professionals. The other three choices are unethical activities and may also be fraudulent. Adding a commission to a marked-up stock is an unethical practice known as double dipping. Guaranteeing an outcome is unethical as is telling a client that a particular security has been approved by the state administrator. [Module 4, Prohibited Practices and Business Practices of Investment Advisers, Section 1.0]

An investment adviser is the trustee for the two beneficiaries of a trust account. Both of the beneficiaries are minors. One of them needs money right away, and the other does not need money until she is 21 years old. What kind of consideration should the trustee give to this situation? A. Manage the trust according to the beneficiary who doesn't need the money right away B. Manage the trust according to the beneficiary who needs the money right away C. Manage the trust according to the trust objectives, not to specific beneficiary needs D. Manage the trust according to the trust's rules and the needs of each beneficiary

Manage the trust according to the trust's rules and the needs of each beneficiary. Trustees and investment advisers acting as trustees are required to manage the assets in trust accounts based on the investment objectives and rules stated in the trust document. When managing the trust's investments, the trustee should follow the trust's objectives for the needs of the beneficiaries as a whole. However, when managing distributions, the trustee would follow the trust's rules for the needs of each beneficiary. [Module 9, Customer Profiles, Section 1.1]

What is the tax rate applied to the last dollar made? A. Ultimate tax rate B. Marginal tax rate C. Income tax rate D. Consumer tax rate

Marginal tax rate. The marginal rate is the tax rate paid on the last dollar of one's income. The marginal rate is equal to or higher than the tax rate paid on the person's entire income (effective rate), since income tax is a progressive tax and the tax rate is lower for the first dollars earned than the last. [Module 9, Customer Profiles, Section 1.1]

Mike Aldridge, a client of yours, lost his wife to cancer in March of this year. Two of Mike's three children have moved out of the house, but he is still supporting them. When it comes time for him to file his tax return, which of the following methods of filing would be most advantageous for him? A. Single B. Single with dependents C. Head of household D. Married

Married. Even though his wife has passed away, they were married until her death; therefore, he can file as either married or head of household. The most advantageous status for him is married since it gives him an extra person, his wife, as part of the deductions. The year after she dies, he must file as either single or head of household. [Module 9, Customer Profiles, Section 1.1]

BL Investment Advisory is a federal covered IA firm in the state of California and has hired Mary Jones, a resident of Colorado. She will be calling individuals in the state of Colorado and other states near Colorado. Mary would be defined as an investment adviser representative in all of the following situations, except: A. Mary will become an investment adviser representative in each state where the people she calls will become her clients. B. Mary will solicit individuals in the neighboring states and then give the client's names to one of the investment adviser representatives at BL Investment Advisory Firm. C. Mary will work and be supervised in an office of the investment adviser, soliciting individuals in the neighboring states and then giving the client's names to the investment adviser representatives. D. Mary will be supervising investment adviser representatives who will be giving advice to the clients she calls.

Mary will work and be supervised in an office of the investment adviser, soliciting individuals in the neighboring states and then giving the client's names to the investment adviser representatives. Since Mary is supervised, she does not need to register as an IAR, even though she is soliciting. When she is not supervised, she must be registered. If Mary becomes an IAR or supervises other IARs, then she is defined as an IAR and must be registered. [Module 1, Uniform Securities Act, Sections 3.5 - 3.8]

An agent of STS Securities, a broker/dealer, offers by telephone on May 14 a new issue whose registration by qualification is effective. Sam, a client of the agent, purchases 500 shares of the new issue on May 15. Sam pays for the shares on May 20 and receives delivery of the certificates on June 16. If the administrator requires a prospectus to be sent, when must it be sent to Sam?

May 14. The answer for the test is May 14 because for registration by qualification, administrators require the prospectus to be delivered either before or at the same time as the offer. This is different from the usual requirement to deliver a prospectus no later than the completion of the purchase, which applies to all other offerings. [Module 3, Registration of Securities, Section 2.3]

Which of the following records must be retained by an investment adviser for three years following the firm's closing? A. Balance sheet B. Meeting minutes C. Personal financial statements D. Advertisements

Meeting minutes. Investment advisers must maintain any organizational records for three years following the termination of their business. Organizational records include articles of incorporation, corporate by-laws, meeting minutes, and partnership agreements. The IA must also inform the state administrator where these records are being held. Balance sheets and advertisements are not considered organizational records and are subject to separate record retention requirements. Personal financial statements need not be maintained. [Module 2, Registration of Persons, Section 3.3]

A 78-year-old client is concerned about maintaining his principal and about the tax consequences of his investments. Which of the following would you recommend for this client to purchase? A. Corporate bonds B. Money market instruments C. Common stock D. Municipal bonds

Municipal bonds. This client is looking to invest using a defensive strategy. Since the client is looking to minimize the risk of losing principal, you should advise the client to invest in fixed income products. The secondary objective is minimizing tax consequences and cannot be ignored. Municipal bonds are the only choice that meet both objectives. [Module 10, Portfolio Management, Section 1.0]

Which of the following determines which investment advisers must register with the SEC? A. Securities Act of 1933 B. Investment Company Act of 1940 C. Investment Advisers Act of 1940 D. National Securities Market Improvement Act of 1996

National Securities Market Improvement Act of 1996 (NSMIA). This is the act that determines which investment advisers must register with the SEC. NSMIA aims to reduce the overlapping of federal and state regulations and, in fact, has amended several federal acts including the Investment Advisers Act of 1940. Had NSMIA not been a choice, the Investment Advisers Act of 1940 would have been the best answer. The Securities Act of 1933 determines which securities must be registered with the SEC and describes the registration process. The Investment Company Act of 1940 defines what an investment company is and the requirements to register with the SEC. [Module 6, Investment Advisers & the Federal Acts, Section 5.0]

When must an investment policy statement be notarized? A. Always B. Never C. Only when dealing with a high net-worth client D. Only when dealing with a pension plan

Never. Investment policy statements (IPS) are merely directions provided to a fiduciary to use as a guideline to manage a client's or plan's assets and are not required to be approved by a notary. Wills and beneficiary designations are two examples of when notarization is required. [Module 7, Retirement Plans & Annuities, Section 5.0]

Big Returns Securities, Inc. is a broker/dealer firm with offices in 40 states but registered in all 50 states. The firm does not have an office in the state of Washington, nor does it have any clients or transact business of any kind within the state. The state administrator of Washington intends to inspect the firm's office in Kentucky regarding a possible violation of the Uniform Securities Act. Notice of intent to examine the firm's records at the Kentucky office must be sent by the administrator of Washington at least how far in advance? A. No advance notice is required. B. 24 hours C. 30 days D. The administrator of Washington does not have jurisdiction and cannot examine the office in Kentucky.

No advance notice is required. The administrator can make any public or private investigation within or outside the state as is necessary to determine whether the firm or a person has violated or is about to violate the Act. The state administrator does not need to give prior notification to the investment adviser or broker/dealer before coming to inspect the books and records. Even though the firm does not have an office in the state of Washington, it is registered there. This gives the administrator the proper jurisdiction to conduct an inspection, as long as it is in the public interest. [Module 2, Registration of Persons, Section 3.7; Module 5, State Administrator and Regulatory Oversight, Section 1.3]

A broker/dealer, with its place of business in New York, places an ad in The Wall Street Journal, which is freely circulated in all 50 states. Which of the following is true? A. An offer is being made in New York. B. An offer is being made in every state except New York. C. An offer is being made in all 50 states. D. No offer is being made.

No offer is being made. Published advertisements are not considered offers in a state in which they have not been published or in the state in which they have been published if more than two-thirds of the circulation is outside the state. Since The Wall Street Journal is considered a "national publication," any securities advertisement published in The Journal is not considered an offer in any state. Instead, the offer is subject to federal jurisdiction, though state jurisdiction would come into play if/when a sale resulted from the offer. [Module 5, State Administrator & Regulatory Oversight, Section 3.4]

How is a corporation's deferred compensation plan treated on a balance sheet? A. Noncurrent liability B. Current asset C. Noncurrent asset D. Accounts receivable

Noncurrent liability. Deferred compensation plans are valued as noncurrent liabilities under the "liabilities" header on a balance sheet, since it is debt that the corporation owes to the employees participating in the plan. It is not valued as an asset or as "accounts receivable," which is a current asset. [Module 8, Risk & Evaluation, Section 6.1]

Under NASAA Model Rules, a state administrator may revoke the registration exemption for which of the following issues? A. Insurance company offering B. Nonprofit offering C. Municipal offering D. U.S. government offering

Nonprofit offering. The administrator may deny or revoke the exemption for a specific nonprofit offering, exchange-listed security, or employee benefit plan security. The administrator may also revoke the exemption for a specific transaction. [Module 3, Registration of Securities, Section 5.2]

John Stone is an agent for XYZ Securities, a broker/dealer firm. One of John's fellow agents at XYZ, Mitch Stevens, informs John that the CEO of Bethlehem Steel, Inc. is about to unload a good portion of his Bethlehem stockholdings. John has recently recommended to several of his clients that they should purchase shares of Bethlehem Steel. Which of the following actions should John take? A. First confirm the information with the issuer B. Call all of his clients who hold the security, and pass on the information as a rumor C. Notify his supervisor immediately D. Do nothing until the information is made public

Notify his supervisor immediately. If agents learn of inside information concerning a company, they cannot relay the information to customers and should immediately inform their supervisor of the information. Passing the information along to anyone other than a supervisor is prohibited and becomes fraudulent if a trade results. [Module 4, Prohibited Practices, Section 1.0]

A customer's spouse has recently opened an account with the same broker/dealer. The customer asks an agent to buy 200 shares of DMF at the market in the spouse's account. The order can be accepted: A. As this is generally accepted business practice B. Only if the agent accepts the liability if the stock declines in value C. Only if the spouse signs a trading authorization granting the customer third-party trading authority D. Under no circumstances

Only if the spouse signs a trading authorization granting the customer third-party trading authority. The customer is assuming discretionary power over the spouse's account, to which the spouse must agree in writing prior to the discretionary action. [Module 4, Prohibited Practices, Section 1.1]

An out-of-state agent has taken and passed the appropriate exam, but has not submitted an application or fee required for registration with a state. With regard to that state, the agent may: A. Accept only unsolicited orders B. Only prospect for clients, not accept orders C. Solicit indications of interest only D. Execute transactions as a broker/dealer with banks in the state

Only prospect for clients, not accept orders. Even though the agent has passed the appropriate exam, without submitting a fee or a registration form, the agent cannot solicit or transact business within the state. However, the agent can prospect for clients -- as long as no business is transacted -- in anticipation of registering in a state. The agent can never act as a broker/dealer, under any circumstances. [Module 2, Registration of Persons, Section 1.2]

Allen Hopkins is an investment adviser in the state of Alaska. Many of his clients are residents of the state of Washington, where Allen is registered. Much of the correspondence Allen has with his clients is through email. Which of the following is true regarding correspondence by email for investment advisers? A. All emails, including those which are strictly personal, must be retained for a minimum of two years. B. All emails, including those which are strictly personal, must be retained for a minimum of five years. C. Only work-related emails, such as client correspondence, must be retained for a minimum of five years. D. There is no record retention requirement for email.

Only work-related emails, such as client correspondence, must be retained for a minimum of five years. Business-related emails such as client correspondence, must be retained by investment advisory firms for five years and be readily accessible for at least two years. It is not necessary to retain strictly personal emails. [Module 2, Registration of Persons, Sections 3.2 & 3.3]

Over the past four quarters, which of the following portfolios has the largest amount of variability? Portfolio A Portfolio B Portfolio C Portfolio D -10.70% 17.45% 22.22% -18.11% 25.87% 32.66% 7.18% -24.90% 13.54% 6.12% -12.44% 0.25% 2.19% -5.29% -19.81% 19.99 A. Portfolio A B. Portfolio B C. Portfolio C D. Portfolio D

Portfolio D. To determine this, you need to take the worst performance of the portfolios and calculate the difference between the best quarterly performances for each portfolio. In Portfolio A, the lowest performing quarter is the first quarter (-10.70) with the second quarter having the best performance (25.87%). The range, or the difference, between the performance of the lowest quarter and highest quarter for Portfolio A is 36.57%. Using the same calculation methods, you will see that the range for Portfolio B is 37.95% (low of -5.29%, high of 32.66%) and Portfolio C is 42.03% (low of -19.81%, high of 22.22%). The portfolio with the largest amount of variability is Portfolio D, which has a range of 44.89% (low of -24.90%, high of 19.99%). Since it is the largest range of the four portfolios, it is the correct answer. [Module 8, Risk & Evaluation, Section 5.5]

A private corporation with 50 total employees is looking to offer its employees a retirement plan for which they will contribute. The corporation wishes to receive a tax benefit for their contributions, but they do not want to be locked into making an annual contribution in case the company performs poorly. Which type of retirement plan should the corporation offer its employees that will meet their goals? A. Profit-sharing plan B. Money purchase plan C. Keogh plan D. 401(k) plan

Profit-sharing plan. Since the corporation does not want to be locked into making an annual contribution but would rather make contributions based on the annual performance of the company, a profit-sharing plan would be the appropriate vehicle to recommend. Money purchase plans require annual employer contributions regardless of how the company performs. Though a Keogh or a 401(k) can be established with a profit-sharing component, when given a choice you should choose the plan designed to meet the parameters of the question. [Module 7, Annuities & Retirement Plans, Section 1.3]

An investment policy statement is strongly recommended for which of the following vehicles? A. Roth IRA B. Traditional IRA C. LLC D. Profit-sharing plan

Profit-sharing plan. While ERISA does not require employer plans to have investment policy statements in place, they are strongly suggested. If the policy is in place, and the fiduciary who is administrating the plan follows the IPS, it can greatly reduce any exposure to liability on the part of the fiduciary and the employer. While an IPS could be helpful for any account, including IRAs and business entities, it is strongly suggested to be used for employer-sponsored retirement plans. [Module 7, Annuities & Retirement Plans, Section 5.0]

An investment adviser has moved offices. How must it file this information with the state administrator? A. Promptly file an amendment to Form ADV Part 1 B. File an amendment to Form ADV Part 1 within 90 days C. File Form ADV Part 1 within 90 days D. Promptly file Form ADV Part 1

Promptly file an amendment to Form ADV Part 1. Any time that information on any part of Form ADV Part 1 or 2 changes or becomes inaccurate, the adviser must amend it "promptly." A form is considered to be filed promptly if it is filed within 30 days. [Module 2, Registration of Persons, Section 5.2]

If a publicly traded investment adviser replaces its independent auditing firm with another, it must file which of the following? A. 8-K B. 10-K C. 10-Q D. K-1

Publicly traded companies are subject to the filing requirements of the Securities Exchange Act of 1934. Any material change in the company that might impact the trading of the company's securities is required to be reported on Form 8-K within four business days of the event. Changing the independent auditor is a material event that must be reported on Form 8-K. Annual financial reports are filed on Form 10-K and quarterly financials are filed on Form 10-Q. Form K-1 is a tax form used to report an individual's tax liability from a pass-through entity such as an S-corporation, a partnership, or a trust. [Module 6, Investment Advisers & the Federal Acts, Section 2.4]

A company is required to register its security in a state, but does not have to register it with the SEC. Which form of registration would the issuer use? A. Notification B. Coordination C. Filing D. Qualification

Qualification. Qualification is the form of registration that is always used when the issuer will not be registering with the SEC. Intrastate securities (such as the security in this question) are exempt from registering with the SEC and must register in the state of issue via qualification. [Module 3, Registration of Securities, Section 2.3]

A new company that is not registering with the SEC is required to register its securities under the Uniform Securities Act by: A. Announcement B. Notification C. Qualification D. Coordination

Qualification. Registration by qualification is typically used by issuers that are not going to be registered with the SEC under the Securities Act of 1933. In registration by qualification, the company must qualify by filing all pertinent information, and the administrator determines whether the company qualifies to issue its securities in the state. Established companies, not new companies, use notification. Companies that are also registering with the SEC use coordination. Announcement is not a method for registering an issue. [Module 3, Registration of Securities, Section 2.3]

A new company is making an initial public offering in several states, and the issuer has registered the shares federally. The federal registration statement is effective, but the underwriter did not make application for the securities to be registered in the state of California prior to the effective date. A broker/dealer in California wishes to publicly offer the securities in California. The state administrator has ruled that an offering of the securities in California would not be considered part of the same initial offering. In order for the broker/dealer to offer the securities in California, they must be registered with the administrator of California in which of the following ways? A. Filing B. Qualification C. Coordination D. Need not be registered

Qualification. If the administrator decides the securities are not part of the same initial public offering, the securities cannot be registered by coordination. The usual reason for an administrator to make this type of ruling is because of a delay between the effective date under federal registration and the filing with the state. The question states that the issuer is a new company, so registration by filing would not be available. Therefore, registration by qualification is the only method of state registration left to the issuer. [Module 3, Registration of Securities, Section 2.0]

A new company is making an initial public offering in several states, and the issuer has federally registered the shares. The federal registration statement is effective but the underwriter did not make application for the securities to be registered in the state of California prior to the effective date. A B/D in California wishes to publicly offer the securities in California. The state administrator has ruled that an offering of the securities in California could not be considered connected to the same offering. In order for the B/D to offer the securities in California, these securities must be registered with the administrator of California in which of the following ways? A. Filing B. Qualification C. Coordination D. Need not be registered

Qualification. If the administrator decides the securities are not part of the same offering, then the securities cannot be registered by coordination. The usual reason for an administrator to make this type of ruling is because of a delay between the effective date under federal registration and the filing with the state. The question states that it is a new company, so registration by filing would not be available, and thus registration by qualification is the only method of registration left remaining to the issuer. [Module 3, Registration of Securities, Section 2.3]

A broker/dealer is helping an issuer bring a new issue of stock to market. The offering is only going to be held in one state. How is the offering registered in that state? A. Notification B. Qualification C. Coordination D. Indemnification

Qualification. Qualification is the actual qualifying of an issue since the administrator is not relying in any way on the SEC; it is the only way to register a security with the state if the issue is not registered or being registered with the SEC. Notification is used when an issue has been previously registered with the SEC and meets very stringent financial requirements. Coordination is when the issue is being registered with the SEC — the issue is registered with the administrator through coordination at the same time as with the SEC. Indemnification is insuring securities, not registering securities. [Module 3, Registration of Securities, Section 2.0]

Which of the following is a security? A. Fixed annuity B. IRA C. REIT D. Commodity

REIT. Real estate investment trusts (REITs) are defined as securities under the Uniform Securities Act. Fixed annuities, individual retirement accounts (IRAs), and commodities are not considered securities under the Act. [Module 1, Uniform Securities Act, Section 3.1]

A client of an SEC-registered investment advisory firm is interested in investing in a pharmaceutical company that is bringing a new drug to the market. It is possible that the Food and Drug Administration will rule unfavorably against the drug. What is the most prominent type of risk the client would be assuming if she invests in the company? A. Business risk B. Market risk C. Liquidity risk D. Regulatory risk

Regulatory risk. Regulatory risk is the most inherent risk when there is an upcoming ruling that involves an investment. Regulatory risk also includes the possibility that a change in the law could affect the investment. [Module 8, Risk & Evaluation, Section 4.7]

Breakpoint Advisers is an investment adviser firm headquartered in Sarasota, Florida, with branch offices in 10 states. The state administrator in Oklahoma, one of the states with a Breakpoint Advisers branch office, may not require which of the following from the registered firm? A. Keeping records for five years B. Periodic filing of financial information C. Renewal of registration semiannually D. Filing of advertisements and sales literature

Renewal of registration semiannually. An administrator may not require registrations to be renewed semiannually. Per the Uniform Securities Act, registrations are renewed annually, not semiannually. The USA does permit the administrator to require records to be kept any length of time, although five years is the usual amount. The administrator may also require the periodic filing of financial information and the filing of advertisements and sales literature. [Module 2, Registration of Persons, Sections 1.7, 3.2, & 3.3]

Which of the following best describes the Sharpe ratio? A. Risk-adjusted rate of return/standard deviation B. Risk-adjusted rate of return/inflation C. Risk-free rate of return/standard deviation D. Risk-free rate of return/inflation

Risk-adjusted rate of return/standard deviation. The Sharpe ratio is an investment's risk premium (portfolio return - risk-free return), a measure of risk-adjusted return divided by the portfolio's volatility determined by standard deviation. [Module 8, Risk & Evaluation, Section 5.6]

Which of the following indexes is composed of small cap stocks? A. FTSE 100 B. S&P 500 C. Russell 2000 D. Wilshire 5000

Russell 2000. The Russell 2000 is made up of small cap stocks. Both the S&P 500 (U.S.) and the FTSE 100 (UK) are made up of large cap stocks that are actively traded in the United States and England. The Wilshire 5000 is made up of stocks of all cap sizes. [Module 10, Portfolio Management, Section 3.0]

Which of the following entities restricts the number of shareholders it can have? A. S-corporation B. C-corporation C. LLC D. Partnership

S-corporation. S-corporations differ from the other entities in that they are limited to 100 shareholders. [Module 9, Client Profiles, Section 1.1]

Scott Riggins is an investment adviser who is registered with the SEC. A prospective client wishes to hire Scott, but only for a minimum of three hours, at a rate of $100 per hour. Which of the following is true? A. Federal-covered IAs may not charge by the hour. B. Investment advisers may only charge by the quarter, at a minimum. C. Scott may not charge the fees because they are excessive. D. Scott may accept the client's offer and charge the hourly rate.

Scott may accept the client's offer and charge the hourly rate. This is perfectly fine. There is no rule that investment advisers may not charge an hourly rate, whether they are registered with the SEC or just the state. The only rule is that the fees must be reasonable, and this question gives no indication that these fees are excessive. [Module 4, Prohibited Practices & Business Practices of IAs, Section 5.0]

An agent unknowingly sells an unregistered, nonexempt security to a client. How can the broker/dealer firm ensure that the client won't pursue civil action? A. Demand that the client return the security in return for the cost of the security and commissions B. Send a written offer to reimburse the client and provide 6% interest for the time the client owned the security C. Notify the state administrator of the infraction and request an arbitration hearing D. Request the issuing company to register the stock in the state

Send a written offer to reimburse the client and provide 6% interest for the time the client owned the security. By sending a letter of rescission to the client, the firm will be protected against a civil suit. The firm is required to offer to buy back the security at the original cost, provide legal interest (6%, per the USA) on the money invested for the period in which the money was tied up in the security, and to pay back any costs incurred by the client. If the offer is not accepted within 30 days, the client loses his right to a civil claim. If the offer is accepted within 30 days, the matter will be settled and a civil suit will be avoided. [Module 5, State Administrator & Regulatory Oversight, Section 2.2]

In which order are the proceeds distributed during the liquidation of a limited partnership? A. General partner, senior creditor, limited partner, unsecured creditor B. Senior creditor, limited partner, unsecured creditor, general partner C. Limited partner, senior creditor, general partner, unsecured creditor D. Senior creditor, unsecured creditor, limited partner, general partner

Senior creditor, unsecured creditor, limited partner, general partner. Upon liquidation, the general partners are the last to receive the proceeds, with the limited partners being paid before the general partners. Before the partners receive the proceeds, they must pay off the senior creditors first, followed by the unsecured creditors. [Module 9, Customer Profiles, Section 1.1]

How many days does an investment adviser have to deliver a brochure to a client, should the client request one? A. Seven days, if the client includes the brochure cost with the request B. Seven days, free of charge to the client C. 10 days, if the client includes the brochure cost with the request D. 10 days, free of charge to the client

Seven days, free of charge to the client. Anytime a client requests a brochure from an investment adviser, the adviser must send the brochure to the client within seven business days at no cost to the client. [Module 2, Registration of Persons, Section 5.4]

Charlotte Murray is a new associate to a federal covered investment advisory firm who has passed all of her exams for being an investment adviser representative. She waits the required 30 days, and then starts advising. Which of the following is true of the statement on Charlotte's business card? A. She may not mention investment advisory services, but she can state that she is an associate of an investment advisory firm. B. She may put "Investment Adviser Representative" because she has passed the investment advisory exam and she works for an investment adviser. C. She may put "Investment Adviser" because she has passed the investment advisory exam and she works for a federal covered investment adviser. D. She may put "General Securities Representative" and Registered Investment Adviser Representative" in case her firm executes transactions and she has passed her investment advisers exam.

She may put "Investment Adviser Representative" because she has passed her investment advisory exam and she works for an investment adviser. She cannot state that she is an investment adviser because she works for an investment advisory firm, and as such is an IAR. There is no mention of the firm being a broker/dealer, so do not assume that all investment advisers work for broker/dealers. In order to use "General Securities Representative," the firm would need to be a registered broker/dealer and Charlotte would need to have passed the Series 7 exam as well. [Module 4, Prohibited Practice & Business Practice of Investment Advisers, Section 3.10]

Alice Rhodes has clients for whom she gives advice on variable annuities. She charges a fee for the advice, which the clients use in determining their purchases. Which of the following is true about Alice? A. She does not have to be registered at all. B. She only needs to be registered as an agent. C. She only needs to be registered as an investment adviser. D. She needs to be registered as both an agent and an investment adviser.

She only needs to be registered as an investment adviser. Alice has engaged in the business of advising others regarding variable annuities, which are securities. She does not need to be registered as an agent as she is not in the business of performing those transactions. [Module 1, Uniform Securities Act, Section 3.5]

Mary Jones is a new small business owner. She is looking for the simplest type of business entity to establish and expects very little liability or regulatory oversight. Which of the following entities is the best recommendation for Mary to establish? A. Sole proprietorship B. Limited partnership C. S-corporation D. Limited liability company

Sole proprietorship . Since she is looking for the simplest type of business to start, does not have any partners in the business, and expects little liability or regulatory oversight, a sole proprietorship is the best investment vehicle to meet her needs. [Module 9, Customer Profiles, Section 1.1]

A new client of Hoosier Advisory Services is looking to start a company in the simplest manner possible. The client has money to fund the business, does not have government licensing requirements, and offers business services for which the client assumes liability. As an investment adviser representative of the firm, which of the following entities would you recommend the client start? A. Sole proprietorship B. General partnership C. S-corporation D. C-corporation

Sole proprietorship. The client is looking for simplification in starting a company. Since the client has the money to start the business, does not need other investors (partners), and will be assuming the liability of the business, a sole proprietorship would be the best recommendation for the client. [Module 9, Customer Profiles, Section 1.1]

Which of the following statements is true? A. A private placement is an example of a non-issuer transaction. B. Stock that is issued by insurance companies and sold by a broker/dealer does not have to be registered in a state. C. Keogh plans and IRAs are considered securities. D. Transactions in exempt securities are not subject to the antifraud provisions of state security laws.

Stock that is issued by insurance companies and sold by a broker/dealer does not have to be registered in a state. Stocks and bonds that are issued by insurance companies to raise operating capital are exempt from state registration. Keep in mind, however, that variable separate accounts must be registered. Keogh and IRAs are not securities, they are retirement accounts that can be used to purchase securities. Private placements are exempt, but they are not a non-issuer transaction — they are exempt for the limited offering exemption. [Module 3, Registration of Securities, Section 4.1]

Which of the following best describes the strategy of periodically moving funds from an over performing asset class into an underperforming asset class? A. Sector investing B. Dollar cost averaging C. Tactical asset allocation D. Strategic allocation

Strategic allocation. An investor who periodically sells from an asset class and invests the funds into another asset class that is not performing as well is rebalancing the portfolio by using the strategic asset allocation method. Tactical asset allocation does not take place "periodically" or on a set schedule. Instead, funds would be reallocated based on the market outlook, or bias, of the investment adviser. Dollar cost averaging involves investing a set amount of new money on a regular basis regardless of market movement in an effort to lower the average cost and avoid timing risk. Sector investing involves investing in equities of one particular sector of business — not investing in different asset classes like the scenario in the question. [Module 10, Portfolio Management, Section 1.2]

An agent goes to lunch with his grandfather, who is the CEO of a major corporation. The grandfather tells the agent of a new product the company will be bringing to market in the next two months. What can the agent do? A. Call all of his clients and tell them to purchase as many shares as they can, as long as he does not tell them of the new product B. Have all of his clients purchase shares of the company as long as the clients fully pay for the shares C. Tell the state administrator before he makes the recommendations to clients D. Tell only his principal of the information; he may not tell any clients until the information has been made public

Tell only his principal of the information; he may not tell any clients until the information has been made public. If an agent learns of inside information, the agent cannot relay the information to customers and should immediately inform his or her supervisor of the information. [Module 4, Prohibited Practices, Section 1.0]

A client of yours is only interested in paying off a mortgage in the event of death. Which of the following types of insurance policies should you recommend? A. Term life insurance with diminishing payments B. Whole life insurance C. Universal life insurance D. Variable life insurance

Term life insurance with diminishing payments. These policies are also known as "diminishing return term life insurance" and are used for mortgages — they offer lower and lower payouts each year as the total amount owed on the mortgage decreases. As such, they are not ideal life insurance policies for anything other than mortgages and other major purchases. Whole, universal, and variable life insurance policies are better for those seeking permanent insurance coverage. [Module 7, Annuities & Retirement Plans, Section 7.0]

Investment advisers use different returns to compare their investments. One of them is the Internal Rate of Return. What is the definition of Internal Rate of Return, or 'IRR'? A. The IRR is the discount rate that will produce a net present value of zero when applied to all of an investment's cash flows. B. The IRR is the total of all the cash flows and the capital growth during the specified period C. The IRR is the investment rate of return for a specified period of time D. The IRR is total of all the cash flows and the capital growth during the specified period and assuming compounding at various rates of return

The IRR is the discount rate that will produce a net present value of zero when applied to all of an investment's cash flows. Discounting all of an investments cash flows including interest or dividends and final payment to a dollar amount that fully offsets the current value of the investment provides the IRR. This is an investment's return independent of external factors such as inflation and taxes. [Module 8, Risk and Evaluation, Section 3.9]

An investment adviser must register with which of the following? A. MSRB B. NASAA C. SEC D. FINRA

The SEC. The SEC is the best answer of those available. Since it does not mention if the firm has $30 million or more in assets under management, you cannot tell if the IA would be registering with the SEC or with the state in question. Since it does not give the state as an answer option, you have to choose the SEC. A trap answer to this question is NASAA. NASAA is the North American Securities Administrators Association that wrote the Uniform Securities Act and is in charge of writing the state licensing exams (Series 63, 65, 66), but they are not in charge of state registrations — those are handled on a state-by-state basis. [Module 1, Uniform Securities Act, Section 3.6]

Which of the answers below best describes the Sharpe ratio? A. Comparison of a stock's real rate of return to its volatility, as measured by standard deviation B. Comparison of a stock's risk-free return to its volatility, as measured by standard deviation C. Comparison of a stock's expected return to its volatility, as measured by standard deviation D. Comparison of a stock's risk-adjusted rate of return, as measured by standard deviation

The Sharpe ratio is the comparison of a stock's risk-adjusted rate of return, as measured by standard deviation. It is calculated by dividing the portfolio's total return minus the risk-free return (this is a risk-adjusted return) by the standard deviation of the portfolio. The Sharpe ratio is the return per unit of risk and it is used to measure the incremental reward of assuming risk. [Module 8, Risk & Evaluation, Section 5.6]

A well-known trader of a major broker/dealer is going on a TV show with a business analyst to discuss certain investments. He is talking to an investment adviser that he knows and happens to tell the investment adviser that he is going to be making a buy recommendation on a particular security while on the show. Before the show, the investment adviser calls a number of his clients and tells them to buy the security since it is a good buy. Which of the following is true regarding the actions by the investment adviser? A. The actions by the investment adviser are allowed B. The actions by the investment adviser are not allowed C. The actions by the investment adviser are not allowed prior to the TV show D. The actions by the trader should never have taken place

The actions by the investment adviser are not allowed prior to the TV show. The trader's TV recommendation will likely impact the trading of the stock. Therefore, any recommendation made to the advisers' clients before the TV show airs could be considered market manipulation. The violation is similar to front running and insider trading, and is prohibited. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 1.1; Module 6, Investment Advisers & the Federal Acts, Section 3.1]

A state administrator has received a person's registration for an investment adviser. After the person is registered, the administrator finds that some of the information in the registration statement is misleading. What must the administrator do? A. The administrator has to reject the person's registration. B. The administrator may reject the person's registration. C. The administrator must investigate the situation before withdrawing the person's registration. D. There is nothing the administrator can do.

The administrator must investigate the situation before withdrawing the person's registration. The administrator must learn more about the misleading information — was it intentionally omitted or is it no longer valid? The administrator must also determine if the incorrect information will affect the interests of the people who encounter this investment adviser. If this were discovered during the registration period, the administrator could have rejected the person's registration as an IA. [Module 2, Registration of Persons, Section 2.1]

broker/dealer firm is registered in all 50 states. It has an office in the state of Washington, but doesn't have an office or clients in the state of Oregon. The administrator from Oregon comes to the office in Washington one day to perform an investigation of the firm's books and records. Which of the following is true? A. The administrator of Oregon does not have jurisdiction to investigate the office in Washington. B. The administrator of Oregon can investigate the office in Washington without notice. C. The administrator of Oregon must have permission from the administrator in Washington to inspect the office of the broker/dealer in Washington. D. The administrator of Oregon can investigate the office in Washington, but the administrator must give the firm at least 24 hours prior notice before the inspection.

The administrator of Oregon can investigate the office in Washington without notice. A securities administrator has the jurisdiction to inspect the books and records of any registrant without notice. Having an office in the state, or not, does not affect this and the administrator is not required to notify or gain permission of the administrator of the state in which the inspection is being made. [Module 5, State Administrator & Regulatory Oversight, Section 1.3]

A wealthy couple approaches an investment adviser who specializes in small cap and high-risk investments. The couple agrees with the adviser that these types of investments meet their suitability and risk tolerance level and decide to enter into a contract with the adviser. They establish the account with $200,000. After two years, the couple has lost $20,000 due to an adverse market movement. Which of the following is true? A. The couple can recoup the advisory fees they have been charged. B. The couple can recoup any paid advisory fees and part of the money that was lost. C. The couple can recoup any paid advisory fee and all of the money that was lost. D. The adviser acted in good faith.

The adviser acted in good faith. The adviser cannot guarantee the couple will make money. As long as the investments meet the suitability requirements and risk tolerance of the couple, there is nothing the adviser can do about the movement of the market. There cannot be any recouping of fees or loss, unless the adviser has violated the Uniform Security Act, or in some way acted in an unethical or fraudulent manner. [Module 5, State Administrator & Regulatory Oversight, Section 2.2]

An investment advisory firm is organized as a partnership. A senior partner wishes to retire and sell her majority interest. Under the Uniform Securities Act. which of the following would be required? A. The adviser must notify clients immediately upon the partner's decision to retire. B. The adviser must notify clients promptly upon the sale of the partnership interest. C. The adviser must notify and gain consent from clients prior to the sale of the partnership interest. D. Neither notification nor consent is required if the advisory firm does not anticipate a material change in the services it provides to clients.

The adviser must notify and gain consent from clients prior to the sale of the partnership interest. The Uniform Securities Act required all contracts to specify that clients will be notified of any change in the partnership of the firm within a reasonable time after the change. A majority change in the partnership, however, is construed as a contract assignment. The USA requires written client consent prior to any contract assignment. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 2.0]

When a broker/dealer enters into an underwriting contract with an issuer and has its agents sell the security for a commission paid by the broker/dealer: A. The agent is working for the broker/dealer. B. The agent is working for the issuer. C. The agent is working for both the broker/dealer and the issuer. D. The individual does not need to register as an agent.

The agent is working for the broker/dealer . When a broker/dealer is hired to perform underwriting services for an issuer, its agents are employed by and represent the broker/dealer firm only, not the issuer. There is nothing to indicate that the agent is exempt from registration, since that depends on to whom the agents are selling. [Module 1, Uniform Securities Act, Section 3.4]

To avoid an unpleasant situation, an agent tells a customer that a security in the customer's portfolio is quoted higher than the actual market for the security. The customer then sells the security for less than expected. Which of the following is true? A. The agent may tell the customer he'll make it up to the customer on the next trade. B. The agent's broker/dealer will have to make it up to the customer. C. The agent may be subject to civil and criminal action. D. The agent's errors and omissions insurance will cover the situation.

The agent may be subject to civil and criminal action. This is a fraudulent act because the customer was told false and misleading information. The agent cannot make it up to the customer in any subsequent trades, nor can the B/D make it up for the agent. Errors and omissions insurance will not cover fraudulent acts. [Module 4, Prohibited Practices & Business Practices of IAs, Section 1.0]

An agent receives a written complaint from a client regarding certain recommendations he previously made to the client. The client believes that the recommendations were unsuitable and is threatening to take legal action. Which of the following is true? A. The agent must forward the complaint to his supervisor immediately. B. The agent may decide what to do with the letter. C. The administrator can, by rule, dictate how this situation should be handled. D. The Uniform Securities Act requires that all material complaints be filed with the administrator.

The agent must forward the complaint to his supervisor immediately. Agents must alert their employing firm of any customer complaint received. The employer must then accept the complaint and record what action is taken. The agent cannot make the decision as to what action should be taken nor can the administrator determine by rule how this situation should be handled. FINRA has established rules for how complaints must be handled. [Module 4, Prohibited Practices and Business Practices of Investment Advisers, Section 1.1]

A prospective client is planning to retire in three years. The client tells an agent that he would like to take the equity in his home and invest it in the stock market to obtain enough money to retire. Which of the following actions should the agent take? A. The agent should make up a portfolio of high-yielding, income securities. B. The agent should construct a high-quality, growth portfolio. C. The agent should recommend that the prospect reconsider, as the investment objective is not reasonable in light of the time constraint. D. The agent should build a portfolio of very conservative equity securities.

The agent should recommend that the prospect reconsider, as the investment objective is not reasonable in light of the time constraint. Furthermore, it is never considered prudent for a customer to use the equity in his or her home to invest in the stock market. [Module 4, Prohibited Practices, Section 1.0]

A broker/dealer firm has recently been found to have violated the Uniform Securities Act multiple times and has had its registration with the state revoked as a result. In accordance with NASAA Model Rules, what will happen to the registration status of the agents who work for the B/D firm? A. The agents' registration status will not be affected. B. The agents' registrations will be made inactive. C. The agents' registrations will be suspended. D. The agents' registrations will be revoked.

The agents' registrations will be made inactive. This is most correct answer option of those provided. The best way to think of this situation is that agents who work for the firm will have their registrations placed "on hold." Once they become employed by other B/D firms that have effective registrations, the "on hold" status of their registrations will be lifted and their registrations will again be active. There is no need to requalify if this is done within two years. [Module 2, Registration of Persons, Section 2.0]

$120,478. Indexed annuities are fixed annuities. They can never lose money. If the S&P is down, they either earn the minimum guaranteed rate or 0% (if there is no minimum). The interest is credited either annually or at the end of the term, and interest is based on the performance of the associated index. If there is a participation rate, the interest credited is the participation rate × the S&P return (not to exceed any cap). In this example: Year 1: S&P returns 3%. 70% participation rate = 2.1%. Balance is $102,100. Year 2: S&P loses 9%. Annuity has no minimum return. 0% credited. Annuity still at $102,100. Year 3: S&P returns 28%. 70% participation rate = 19.6%. However, annuity is capped at 18%. Annuity earns 18% on $102,100 and ends with $120,478. [Module 7, Annuities & Retirement Plans, Section 6.7]

The allocation of funds in a portfolio into asset classes according to a set percentage and then change the percentage as market conditions change. Tactical asset allocation is a "hands-on" approach in which the allocation percentage of each asset class is adjusted based on the manager's market bias, or outlook. When a portfolio is rebalanced to maintain the percentages based on set triggers (time or percentage drift), this is referred to as strategic allocation. When a minimum dollar value is invested in safer funds and only a portion of the portfolio value in excess of that minimum is invested more aggressively, this is known as the insured allocation. [Module 10, Portfolio Management, Sections 1.2 - 1.4]

Which of the following best describes tactical allocation? A. The allocation of funds in a portfolio into asset classes according to a fixed percentage, and rebalance the portfolio as one or another of the asset classes exceeds or is less than the set percentage B. The allocation of funds in a portfolio into asset classes according to a set percentage, and then change the percentage as market conditions change C. The allocation of funds in a portfolio into one asset class according to the market, and then changing the asset class as the market changes D. The allocation of a minimum amount of funds in a portfolio into safe investments, and then adding more risk as the value of the portfolio increases above the minimum value

The allocation of funds in a portfolio into asset classes according to a set percentage, and then change the percentage as market conditions change -- this is tactical allocation. Strategic allocation is periodically rebalancing the assets to maintain the percentage. Insured allocation is having a minimum in safe funds and investing in more aggressive investments only when the portfolio is above this minimum amount. Asset allocation refers to dividing a portfolio among multiple asset classes that are not perfectly correlated to increase diversification and reduce the variability of returns. [Module 10, Portfolio Management, Section 1.3]

An investor is receiving a quarterly interest rate of 3%. What is the annualized compound rate? A. 6% B. 12% C. 12.3% D. 12.6%

The annualized compound rate is 12.6%. The formula for compounding is FV = PV(1+R)N. "FV" = future value, "PV" = present value, "R" = rate of return, and "N" = number of compounding periods. To calculate the annualized compound interest rate, you assume the PV is $1 and simply add a "1" before the quarterly interest rate and multiply it by itself four times. 1.03 × 1.03 × 1.03 × 1.03 = 1.1255. Drop the 1 and you get 12.55%, or 12.6%. [Module 8, Risk & Evaluation, Section 3.10]

A broker/dealer incurs an unexpected liability shortly after filing its registration statement with the administrator. The liability materially affects its net worth. Under the Uniform Securities Act, which of the following statements is true? A. The broker/dealer must reflect the change in the next scheduled filing with the administrator. B. The broker/dealer is not required to file an amendment to the registration or notify the administrator. C. The broker/dealer must promptly file an amendment to its registration with the administrator. D. The broker/dealer need not file an amendment to its registration if it is due for an examination by the administrator.

The broker/dealer must promptly file an amendment to its registration with the administrator. This is because the information in the registration statement has become materially inaccurate and must be amended promptly. Any information in a registration found to be inaccurate or incomplete in any respect requires the prompt filing of a correcting amendment to the registration. [Module 2, Registration of Persons, Section 1.5]

A client of yours has an emergency and needs to take out some money from one of his accounts. From which of the following can he not make a withdrawal? A. Savings account B. Securities account that has stocks that are purchased on margin C. The equity portion of a stock account D. The cash value of a term life insurance

The cash value of a term life insurance. Term life insurance is pure insurance and does not have a cash value. The only payout a term life policy makes is the death benefit upon the death of the policyholder. The client would be able to make withdrawals from any of the other three options. [Module 7, Annuities & Retirement Plans, Section 7.1]

A client buys a stock valued at $1,000. When the stock value drops to $950, the client decides to sell. The stock also pays out a $100 dividend. Which of the following is true? A. The client has a realized capital loss. B. The client has a realized capital gain. C. The client has a recognized capital loss. D. The client has a recognized capital gain.

The client has a realized capital loss. This client has taken a loss on the stock investment. The dividend will be taxed separately as income. The reason it is a "realized loss" rather than a "recognized loss" is because there is nothing in the question stating that the loss has already been taxed ("recognized" by the IRS). [Module 8, Risk & Evaluation, Section 3.7]

An investment adviser gives an investor the brochure right before entering into contract with him. The IA forgets to get a confirmation from the client that he has received and understands the brochure. The contract also states that the client has two business days to cancel the contract. In which way has the IA broken the brochure rule? A. The adviser needs to give the client the brochure after entering into contract, not before. B. The client did not receive the brochure 48 hours prior to entering into contract. C. The client has five days to cancel the contract, not two. D. The adviser did not get the confirmation from the client.

The client has five days to cancel the contract, not two. Clients who do not receive the IA's brochure 48 hours prior to entering into contract with the IA must at least receive the brochure prior to entering into contract with the IA. If clients do not receive the brochure 48 hours prior to contract, they can cancel the contract within five days at no cost. Signing the contract is acknowledgement that the brochure has been received and is understood. [Module 2, Registration of Persons, Section 5.3]

A client of an investment adviser has not signed a discretionary authorization form with the adviser. He calls and informs the adviser that he is leaving the country for two months and would like the adviser to "take care of his account" while he is gone. Under which of the following conditions could the investment adviser trade in the client's account? A. Never B. Only if the client calls with specific trading instructions C. The client must send in a signed discretionary authorization form before the first trade. D. The client must send in a signed discretionary authorization form within 10 business days of the first trade.

The client must send in a signed discretionary authorization form within 10 business days of the first trade. IAs and IARs may begin to exercise discretionary authority that has been granted verbally as long as written authorization is received within 10 business days after the first discretionary trade is placed. If this were an agent for a broker/dealer, written discretionary authorization from the client would be required before placing a discretionary order. [Module 4, Prohibited Practices & Business Practices of Investment Advisers, Section 3.3]

What information can be found in Schedule H of Form ADV Part 2A? A. Detailed information about the partnership if the investment adviser is a partnership B. Detailed information about the corporation if the investment adviser is a corporation C. The balance sheet that is required in Form ADV Part 2A D. The description of the wrap programs if the investment adviser is offering wrap programs

The description of the wrap programs if the investment adviser is offering wrap programs. If an investment adviser is going to be offering a wrap program to its clients, it must file the wrap program disclosure statement on Schedule H of Form ADV Part 2. Note that updated naming conventions have changed the name of this form to Form ADV Part 2A, Appendix 1, though you may still see reference to "Schedule H" or "ADV-H" on your exam. [Module 2, Registration of Persons, Section 6.1]

Which of the following is an example of "purchasing power risk"? A. The economy experiences moderate inflation, but stock and bond prices fall more than expected and the real return is less than expected. B. The indexes of stocks on the exchanges and Nasdaq drop, indicating that stock prices have fallen and the value of an investor's portfolio has declined, allowing less to be purchased. C. The trade deficit widens causing the value of the dollar to decrease. D. Bonds increase in value causing yields to decline for the purchase of bonds in the secondary market.

The economy experiences moderate inflation, but stock and bond prices fall more than expected and the real return is less than expected. Purchasing power risk is related directly to inflation, and is sometimes even referred to as inflation risk. If the rate of inflation exceeds the investment's/portfolio's return, the real rate of return is negative and the investor loses purchasing power. Some of the other answers may seem correct, but purchasing power risk is directly related to inflation. [Module 8, Risk and Evaluation, Section 4.5]

How do fees for variable annuities compare to the fees associated with mutual funds? A. The fees for variable annuities are generally lower than fees for mutual funds. B. The fees for variable annuities are always lower than fees for mutual funds. C. The fees for variable annuities are usually the same as fees for mutual funds. D. The fees for variable annuities are generally higher than fees for mutual funds.

The fees for variable annuities are generally higher than fees for mutual funds. Variable annuities may also tack on surrender charges for withdrawals within a specified time range (usually six to eight years). [Module 7, Annuities & Retirement Plans, Section 6.2]

Under which of the following circumstances would a firm be "in the business of providing investment advice" under interpretations in SEC Release IA-1092? A. The firm advises its clients on which issues to buy and which issues to hold. B. The firm advertises itself as an investment adviser. C. The firm sends customers quarterly economic reports and provides an analysis of the economy. D. The firm provides investment advice on government securities.

The firm advertises itself as an investment adviser. Advertising as an investment adviser meets the "in the business" component of the three-prong test interpreted in the release. The other choices satisfy the "advice" component of the test; however, this question is testing on the specifics of SEC Release 1092 as it relates to the "in the business" component. Test 1 (advice): Whether or not the IA is giving advice about a security (insurance, commodities, and fixed annuities are not securities) Test 2 (business): Whether or not the "person" is "in the business" (advertising or providing investment advice on a regular basis meets this test) Test 3 (compensation): Whether or not the "person" is compensated (directly or indirectly) for the advice Under the release, a person who meets all three tests is defined as an investment adviser. [Module 6, Investment Advisers and Federal Acts, Sections 6.3 - 6.6]

A broker/dealer firm is headquartered in California. Under which of the following circumstances would the firm have to register in a state other than California? A. When the firm has a client in another state that is an investment adviser B. When the firm has a client in another state who purchases mutual funds C. When the firm has a client in another state that is a broker/dealer D. When the firm has a client in another state that is an institutional investor

The firm has a client in another state who purchases mutual funds. If the firm's only client were an investment adviser, a broker/dealer, or an institutional investor, it would not meet the definition of a broker/dealer under the Uniform Securities Act (assuming it has no place of business in the state) and, therefore, it would not have to register in the other state. When a client is purchasing mutual funds, it depends on who the client is to determine if the firm must register. If the client is an individual, the firm has to register. [Module 1, Uniform Securities Act, Section 3.3]

An investment adviser pays $100 for referrals to a friend who is an accountant. Which of the following is true? A. The friend must register as an IAR. B. The friend is exempt from registering as an IAR. C. The friend must register as an agent. D. The friend must register as an IAR and an agent.

The friend must register as an IAR. Both state and federal laws define "solicitor" as anyone who solicits the services of, or receives a fee for referring business to, an investment adviser. While federal law doesn't always require solicitors to register, under the USA a solicitor is always defined as an IAR and must register as such. If a question doesn't specifically reference the federal law (the Investment Advisers Act of 1940), assume that solicitors, and anyone else receiving a referral fee, must register. [Module 1, Uniform Securities Act, Section 3.8]

Jim Jones is a registered investment adviser with the SEC. He has just been hired to be the investment manager for Rippem Investment Company's high yield bond fund. According to the Investment Company Act of 1940, which of the following is true of Jim's initial contract with the investment company? A. The initial contract is valid for one year and must be approved by a majority vote of the board of directors of the investment company. B. The initial contract is valid for one year and must be approved by a majority vote of the board of directors and the shareholders of the investment company. C. The initial contract is valid for two years and must be approved by the voting shares of the investment company. D. The initial contract is valid for two years and must be approved by the board of directors and the voting shares of the investment company.

The initial contract is valid for two years and must be approved by the voting shares of the investment company. The initial contract is good for two years, and then is renewable or cancelable on a yearly basis after that. Only the shareholders voting their shares must approve the contract. Either the board or the shares as voted by the shareholders can renew or cancel subsequent contracts. [Module 6, Investment Adviser & the Federal Acts, Section 4.0]

One method that calculates the discounted rate of return to produce a net present value of zero over a predetermined period is: A. Expected return B. Internal rate of return C. Real return D. Holding period return

The internal rate of return is calculated to have a net present value of zero (0) . The expected return is projected returns and the real return deducts inflation. Holding period return is the total return for a specific period. [Module 8, Risk & Evaluation, Sections 3.1, 3.3, 3.8, & 3.9]

A Canadian investor has a summer home in the United States where she will be living over the summer months. An investment adviser representative works for a firm that is based in the United States, but the representative is not currently registered in the state where the Canadian's summer home is located. Which of the following best describes how an investment adviser representative will have to register if she wishes to take on this individual as a client? A. The investment adviser representative will only have to register in Canada. B. The investment adviser representative will not have to register in Canada or the state in which the summer home is located. C. The investment adviser representative will have to register in Canada and the state in which the summer home is located. D. The investment adviser representative will not have to register in Canada, but will have to register in the state where the summer home is located.

The investment adviser representative will not have to register in Canada or the state in which the summer home is located. Investment advisory firms and their representatives who are headquartered in the United States are exempt from registering in Canada if they are representing a Canadian client. The IAR would not have to register in the state where the summer home is located due to the de minimis exemption — unless the addition of this client would give her six (or more) clients residing in that state. [Module 2, Registration of Persons, Section 1.4]

Sales or offers to sell would not be subject to the Uniform Securities Act in which of the following circumstances? A. A sale is made in the state. B. Neither buyer nor seller is located in the state, but the broker (agent) is located in the state. C. The offer is made by a commercial radio or TV broadcast originating outside the state, but it is being received in the state. D. The agent is not located in the state, but the customer is one of 22 people for whom the agent makes transactions in the state.

The offer is made by a commercial radio or TV broadcast originating outside the state, but it is being received in the state. All the rest are offers or sales under the Uniform Securities Act. An offer or sale is not considered to be made in a state if the offer is made by a radio or TV station outside the state. According to the USA, an administrator has jurisdiction over any offer or sale that occurs with their state. If the agent is located in the state, then the offer comes from the state, and if the agent is not located in the state and one or more clients make trades in the state, the offer and sale are considered to be made in the state. [Module 5, State Administrator & Regulatory Oversight, Section 3.0]

Under the Uniform Securities Act, which of the following is not true? A. The manager of a unit investment trust is the issuer of the trust units. B. The owner of the mineral estate is the issuer of the fractional units in an oil and gas program. C. The depositor under a trust agreement is the issuer of the trust agreements. D. A corporation is the issuer of an equipment trust certificate.

The owner of the mineral estate is the issuer of the fractional units in an oil and gas program. This is not true. Under the Uniform Securities Act, there is no issuer of the interests in oil and gas programs. Under state law, for certificates of deposit, voting trust certificates, collateral trust certificates, and shares of an unincorporated investment trust that doesn't have a board of directors or trustees, the depositor or the manager is considered to be the issuer. Equipment trust certificates are one type of debt issued by corporations. [Module 1, Uniform Securities Act, Section 3.2]

A 60-year-old investor is about to withdraw earnings from a variable annuity to fund retirement. Which of the following will occur? A. The distribution will be taxed as ordinary income, with an early withdrawal penalty. B. The distribution will be taxed as ordinary income, without an early withdrawal penalty. C. The distribution will be tax-free if the annuity is over five years old. D. The distribution must be rolled into an IRA to avoid taxation.

The payout will be taxed as ordinary income, without an early withdrawal penalty. The investor is over 59 1/2 years old and is not subject to the 10% premature distribution penalty. Earnings, however, have grown tax-deferred and will be subject to ordinary income taxes upon withdrawal. If the annuity contains qualified money, it could be rolled into a traditional IRA avoiding taxation. But again, the earning will be taxed when distributed to fund retirement. [Module 7, Annuities & Retirement Plans, Section 6.2]

Voltaire Imaging Consultants Inc. is a start-up company specializing in graphic arts. After exploring different options, the company has settled on a 401(k) as its retirement plan. Under the 1974 Employee Retirement Income Security Act, certain investment policies must be implemented into the 401(k) plan. These policies include all of the following, except: A. The periodic analysis and review of the investments and their suitability for the plan B. The diversification of the investments C. The appointing or designating of a person who is responsible for the administrative affairs of the plan D. The appointing of the person or people who will be responsible for the decisions and advice regarding the investments

The periodic analysis and review of the investments and their suitability for the plan. There is no requirement under ERISA to review the investments, other than the "fiduciary responsibility" of the investment's diversification. ERISA requires plans to establish a fiduciary who will be responsible for the operation of the plan. This includes the responsibility to provide benefits to plan participants, defray costs, and provide diversified investment options. Although important, periodic analysis of the investments and checking to see if they are suitable are not specifically required by ERISA. [Module 7, Annuity & Retirement Plans, Section 5.0]

A person is going to be a solicitor for an IA in the state of Texas. The solicitor has an office in New Mexico, but calls on people in Texas. Which of the following is true regarding the registration of this person? A. The person must be registered in the state in which she has an office. B. The person does not have to be registered at all since she is not giving advice. C. The person must be registered in the state in which she will be calling. D. The person must be registered with the SEC as an investment adviser solicitor.

The person must be registered in the state in which she has an office. According to the Investment Advisers Act of 1940, if solicitors are not directly supervised, they must be registered in the state where their office is located, not where the firm is located (unless it is in the same state). Solicitors are not required to register out of state since the people they are calling will never be their clients, as they are not an IA or IAR. Solicitors are not required to register at all if they are directly supervised. [Module 1, Uniform Securities Act, Section 3.8]

Alicia Hoffner is the investment adviser for the growth and income fund of the Ringem and Switchim Family of Funds. She has been the investment adviser for the last six years. Her contract is coming up in November of this year. Which of the following statements is true about her contract? A. The renewed contract is valid for one year and must be approved by a majority vote of the board of directors of the investment company. B. The renewed contract is valid for one year and must be approved by a majority vote of the board of directors or the voting shares of the investment company. C. The renewed contract is valid for two years and must be approved by the voting shares of the investment company. D. The renewed contract is valid for two years and must be approved by the board of directors and the voting shares of the investment company.

The renewed contract is valid for one year and must be approved by a majority vote of the board of directors or the voting shares of the investment company. The initial contract of two years is voted on only by the voting shares since the board is responsible for finding the investment adviser, and then the voting shares must approve that decision. However, either the board or the voting shares can renew the contract. [Module 6, Investment Adviser & the Federal Acts, Section 4.0]

According to the Prudent Investor's Act, which of the following actions may a trustee never delegate? A. The reinvestment of dividends B. The mailing of the quarterly statements C. The buying and selling of investments D. The running of the trust

The running of the trust. As a trustee, the fiduciary is in charge of managing the trust on behalf of the trust's beneficiaries. A trustee can delegate the actual act of placing a trade (buying, selling, and reinvesting dividends) and it is perfectly normal for the statements to be mailed out by a firm's operation or mailing department. [Module 9, Customer Profiles, Section 1.1]

The Uniform Securities Act addresses the methods of limiting unethical and fraudulent practices. Which of the following do the antifraud provisions not apply? A. Institutional trading accounts B. Trading government agency issues C. Transactions with advisory clients D. The sale of life insurance policies

The sale of life insurance policies. Fraud, as defined under the Uniform Securities Act, can only occur in the sale or transactions of securities with investors. Insurance policies are not considered securities, and therefore, are not covered under the Uniform Securities Act. Since government agency issues are considered securities, trading them comes under the antifraud provisions. Since the antifraud provisions apply to transactions with customers, and a customer can be an institutional buyer as well as an individual, the same provisions apply. [Module 1, Uniform Securities Act, Section 3.1; Module 4, Prohibited Practices & Business Practices of IAs, Section 1.0]

Which of the following is used to determine the Sharpe ratio? A. The standard deviation B. The average return C. The Treasury bill rate D. The after-tax return

The standard deviation is used to determine the Sharpe ratio. The Sharpe ratio is a risk-adjusted return calculated using volatility, as measured by the standard deviation. Since the average return is based over a period of time, it is not part of the Sharpe ratio. The after-tax return is after taxes have been deducted from the total return, not adjusting the return as in the Sharpe ratio. While the Sharpe ratio may use the Treasury bill rate as a proxy for the risk-free return, standard deviation is a better answer -- this is good practice for test questions that will appear to have multiple correct responses. [Module 8, Risk & Evaluation, Sections 5.5 & 5.6]

Which of the following is true regarding the net capital requirement of a broker/dealer? A. Broker/dealers have a higher requirement than investment advisers. B. Broker/dealers and investment advisers have the same requirements. C. The state can impose stricter requirements than the SEC. D. The state cannot impose stricter requirements than the SEC.

The state cannot impose stricter requirements than the SEC. Net capital rules for broker/dealers in each state generally follow the net capital requirement under federal rules -- $25,000 -- but cannot be stricter than the SEC requirement. [Module 2, Registration of Persons, Section 1.9]

Which of the following best describes the calculation for determining the "holding period return"? A. The total of all of the cash flows from the investment and capital growth during the period, divided by the initial investment B. The amount that is returned in the form of income plus capital gains, divided by the amount of the investment C. Investment income plus all capital gains minus the inflation rate D. Investment rate of return minus the discounted rate of return over the holding period

The total of all of the cash flows from the investment and capital growth during the period, divided by the initial investment. Since this is the holding period, it must be over a certain period. In addition, since we are finding return, you must divide by the initial investment. [Module 8, Risk and Evaluation, Section 3.3]

An investment adviser looks to the duration of an investment for the client. What is the duration? A. The probabilities that the investor will be forced to liquidate caused by emergencies or other business opportunities B. The weighted average of a bond's cash flows to maturity including the final maturity payment C. The length of time that an investor has the willingness to hold the investments D. The time before the investor will be looking to liquidate the investments

The weighted average of a bond's cash flows to maturity including the final maturity payment. Duration is a measurement of the chance of how much movement a bond will have based on the change in interest rates. It is a weighted average of all the payments that will be received through the maturity date of the bond, including both interest and the principal. [Module 8, Risk & Evaluation, Section 4.6]

A client of an investment adviser is 52 years old and has contributed $48,000 to her traditional IRA. The account is now worth $106,000. Her daughter is about to start college. She intends to take $10,000 out for her daughter's college education. How is the withdrawal treated for tax purposes? A. The whole $10,000 is taxed as ordinary income. B. The whole $10,000 is taxed as ordinary income plus a 10% penalty. C. The whole $10,000 is taxed the 10% penalty. D. The whole $10,000 is a tax-free withdrawal.

The whole $10,000 is taxed as ordinary income. Premature withdrawals (made when the accountholder is under 59 1/2) are assessed an additional 10% tax penalty, however, a penalty will not be incurred if the distribution is due to death, disability, college education, or for purchasing first-time homes. The ordinary income tax on any distribution of earnings still has to be paid. [Module 7, Annuities & Retirement Plans, Section 2.0]

A mutual fund investor elects to have all dividends automatically reinvested. For tax purposes, how are the dividends treated? A. They are taxed only when withdrawn B. They are taxed as capital gains C. They increase the investor's cost basis in the fund D. If the fund distributes 90% or more of its net investment income, the dividends are tax-free to the investor

They increase the investor's cost basis in the fund. Mutual fund dividends are always taxable in the year received, whether the investor receives the dividends or elects to have them reinvested. As the investor must pay the taxes from another source, the dividends are considered after-tax investments into the fund and increase the investor's cost basis. [Module 9, Customer Profiles, Section 1.1]

Trustee. The trustee's responsibility is to assure that the terms of the trust are carried out (administer the trust). [Module 9, Customer Profiles, Section 1.1]

They increase the investor's cost basis in the fund. Mutual fund dividends are always taxable in the year received, whether the investor receives the dividends or elects to have them reinvested. As the investor must pay the taxes from another source, the dividends are considered after-tax investments into the fund and increase the investor's cost basis. [Module 9, Customer Profiles, Section 1.1]

An investment adviser has a client who has been with the firm for the last 25 years. The client has preferred to keep all his securities in his safety deposit box and his cash in his own bank. Because he is now older, it is difficult for him to get to the bank for securities or to deposit money. The investment adviser is also concerned for the client's health and suggests that the client send the firm his securities and his trading money. The client agrees and proceeds to send in all of his securities as well as a check for $300,000 for trading. Which of the following is true regarding the actions by the investment adviser? A. This is a prohibited action as the investment adviser is suggesting actions that are contrary to the wishes of the client. B. This is allowed provided all the securities and all of the money are segregated from the firm's account and other customer accounts. C. This is allowed provided all the securities are segregated from the firm's and other customer accounts, but the money can be commingled with other customers' money. D. This is allowed provided all the securities are commingled with the firm's and other customer accounts, but the money is segregated from the firm's and other customers' money.

This is allowed provided all the securities are segregated from the firm's and other customer accounts, but the money can be commingled with other customers' money. There is nothing wrong with making the suggestion to keep the client's securities and cash in one place. However, the securities must be segregated from both the firm's and other customers' securities. The cash can be commingled with other customers' cash so long as it is segregated from the firm's cash. [Module 4, Prohibited Practices & Business Practices of IAs, Section 1.1]

An agent for a broker/dealer who executes many trades for his clients suggests that his clients leave their stock certificates and sales proceeds on deposit with the broker/dealer. The firm has a bank account in which it keeps all cash from clients as well as its own cash. When purchases are made, the money is taken out of the account, and when sales occur, the proceeds are deposited into the account. Which of the following statement(s) is true regarding this practice? A. This is never allowed. B. This is always allowed. C. This is only allowed if the firm keeps all customer cash separate from the firm's cash. D. Firms are not allowed to hold customer's cash.

This is only allowed if the firm keeps all customer cash separate from the firm's cash. This is true for both a broker/dealer and an investment adviser. Investment advisers and broker/dealers may commingle customer funds, but the funds must be fully segregated from the firm's funds. Typically, the new account agreement, which is signed by the client, allows this to occur. By signing, the client agrees to all terms and conditions when the account is first opened. Securities, on the other hand, cannot be commingled at any time. [Module 4, Prohibited Practices, Section 3.4]

The maximum number of years for which an individual may be held civilly liable for unlawful securities transactions under the Uniform Securities Act is: A. Three years B. Seven years C. 10 years D. Varies from state to state

Three years. According to the Uniform Securities Act, the statute of limitations is three years from the event, or two years from the discovery of wrongdoing, whichever occurs first. Remember that while actual securities laws can vary from state to state, this question and the questions on your exam will ask or refer to what is stated in the Act itself. [Module 5, State Administrator, Section 2.2]

A small company located in Eugene, Oregon has issued stock that trades on the Pink Sheets. When issued, the stocks were registered with the SEC and in the states of Oregon, California, and Washington. Now the company would like to register the issue in Nevada. In order to qualify for registration by notification, the company must have been in business for at least: A. One year B. Two years C. Three years D. Four years

Three years. In order to qualify for registration by notification, also called registration by filing, an issuer must be in business for at least 36 consecutive months, or three years. The issuer must also have at least $4 million in net worth or $2 million in net worth and a profit for two of the previous three years. [Module 3, Registration of Securities, Section 2.1]

When purchasing foreign investments, why is it advantageous to purchase foreign mutual funds? A. To offset currency exchange rate losses B. To avoid choosing individual stocks C. To eliminate the risk of owning foreign stocks D. To avoid paying foreign taxes

To avoid choosing individual stocks. The exchange rate losses/gains will not come into play as the prices are set. Investing in foreign mutual funds and foreign stocks both carry the risk of owning foreign stocks. Taxes to the investment company can be passed on to the investor, so the investor would still be taxed with the mutual fund. The advantage of any mutual fund is having a professional management team that chooses the stocks for you. [Module 8, Risk and Evaluation, Section 4.2 ]

Why would an investor write covered calls? A. To have the opportunity for a larger gain B. To generate income C. To have the opportunity to sell their stock at a fixed price D. To protect their stock position

To generate income. The biggest reason an investor would write a covered call would be to generate income. Writing a covered call would actually limit the investor's ability to realize a larger gain, because if the stock's price were to increase, the call could be exercised -- forcing the investor to sell his stock at the strike price rather than the higher market price. If the customer were looking to sell his stock at a fixed price, he should buy a put. [Module 10, Portfolio Management, Section 8.2]

How is alpha used by an investment adviser? A. To measure the volatility of the market price of a stock or portfolio compared to the market B. To measure the movement of a stock compared to the money supply C. To measure the return of a company compared to other companies in its industry D. To measure the return of a company based on factors within the company

To measure the return of a company based on factors within the company. Alpha is the return in excess of the expected return. This excess return is attributed to factors within the company such as the strength of the management team. [Module 8, Risk & Evaluation, Section 5.1]

If an investment adviser has discretionary authority over an investor's account, what is the adviser's duty to the client? A. To preserve capital B. To receive the most possible growth C. To tailor a plan for the client D. To receive the most possible income

To tailor a plan for the client. When an IA or IAR is given discretionary authorization over a person's investments, they have a fiduciary responsibility to obtain the investment suitability for that client. Clients have different investment objectives — some may be looking for growth stocks, some may be looking for income, and others may be looking to preserve capital. The IA/IAR needs to determine specific strategies for each individual client. [Module 10, Portfolio Management, Section 6.2]

Optimal Advisers is an investment advisory firm located in Arizona that has $175 million in assets under management. It is time for the firm to renew its registration. Where must the firm send its registration paperwork? A. To FINRA B. To the IARD C. To the SEC D. To the state of Arizona

To the IARD. All registration applications and renewals of registrations for IAs and IARs are sent to the IARD, and this includes federal covered investment advisers who are registered with the SEC. The information submitted to the IARD is then forwarded to the appropriate regulator — either the SEC or the state(s). [Module 2, Registration of Persons, Section 4.1]

Tom Tomlinson is an investment adviser in the state of New York. Tom started his business with a mutual fund being his only client. He is now offering his services to the general public as well and is looking to add individual clients. Which of the following is true regarding this situation? A. Tom must end his relationship with the mutual fund if he wishes to give advice to individual clients. B. Tom can add the individual clients and does not need to inform them of his relationship with the mutual fund. C. Tom can add the individual clients and maintain his relationship with the mutual fund, but he can no longer receive advisory fees from the mutual fund. D. Tom can add the individual clients, maintain his relationship with the mutual fund, and continue to receive advisory fees from the mutual fund, as long as he discloses this relationship to all of his clients.

Tom can add the individual clients, maintain his relationship with the mutual fund, and continue to receive advisory fees from the mutual fund, as long as he discloses this relationship to all of his clients. Investment advisers in this situation would need to disclose the relationship and the fact that they are compensated in Form ADV Part II. This alerts the client of the relationship should the IA ever recommend the mutual fund as an investment to a client. [Module 4, Prohibited Practices, Section 3.8]

Rick Cole, an investment adviser representative of a federal covered investment adviser, has over 30 clients in the state of Texas. He instructs his clients to reinvest dividends and capital gains on investments that they already own. Which of the following is the best measure of this type of investing as a long-term investment? A. Total return B. Average return C. Internal rate of return D. Nonlinear reinvestment analysis

Total return is the best method of determining the return of an investment or portfolio. Internal rate of return is similar in that it takes into account all cash flows, dividends, and capital gains; however, IRR is usually an interpolation of assumed cash flows of an investment, while total return is the calculation of the actual return on an investment/portfolio. Average annual return is simply the total return averaged out over the holding period in years. Nonlinear reinvestment analysis may sound cool, but is a made-up term. [Module 8, Risk & Evaluation, Section 3.2]

An investment adviser representative has a client who has been retired for 10 years. The client is looking primarily for preservation of capital, but is also seeking maximum liquidity and marketability with a little income. Which of the following investments should the representative recommend to the client? A. Bank CD B. A variable annuity C. Growth fund D. Treasury note

Treasury note. The Treasury note offers the investor preservation of capital, maximum liquidity, and marketability, as well as a limited amount of income. The variable annuity is more appropriate for a person who is looking for lifetime income, which does not require maximum liquidity. CDs are not liquid enough, and a growth fund does not offer the client the required preservation of capital. [Module 9, Customer Profiles, Section 2.0]

Which of the following persons is exempt from registering as an investment adviser? A. An attorney who gives investment advice for a fee B. Trust executives who effect trades for a fee C. An insurance company that gives investment advice for a fee D. An accountant who gives investment advice for a fee

Trust executives who effect trades for a fee

The person or entity that is responsible for seeing that the terms of the trust are carried out and who often manages the investments is the: A. Beneficiary B. Administrator C. Trust operations manager D. Trustee

Trustee. The trustee's responsibility is to assure that the terms of the trust are carried out (administer the trust). [Module 9, Customer Profiles, Section 1.1]

What is the minimum number of clients to which any notice, circular, letter, or other written communication needs to be addressed to be considered and saved as advertising by an investment adviser? A. Two B. Five C. 10 D. 20

Two The Investment Advisers Act of 1940 and NASAA model rules state that the term "advertisement" includes any notice, circular, letter, or other written communication addressed to more than one person. This includes notices or announcements delivered by electronic or printed publication, radio, and television. [Module 4, Prohibited Practices, Section 3.10]

In the future, an investor will have additional funds to contribute beyond the current premiums. What type of life insurance product should you recommend to her? A. Term life insurance with diminishing payments B. Whole life C. Universal life D. Variable life

Universal life. A universal life insurance policy would be the best product for this client. The universal policy allows investors to make varying premium payments — bigger payments when possible and smaller payments in leaner times. Whole life and variable life policies require fixed payments. Term life insurance with diminishing payments is generally used for mortgages where the policyholder receives a larger death benefit at the beginning of the policy. The death benefit then decrease over time as the mortgage is paid off. [Module 7, Annuities & Retirement Plans, Section 7.0]

As a retirement vehicle, which of the following would most likely provide the greatest protection of purchasing power? A. Fixed annuities B. Corporate bonds C. Variable annuities D. Series HH bonds

Variable annuities. Variable annuities offer a variable rate of return, whereas all of the other investments listed only offer fixed rates of return. If the rate of return from a fixed rate investment consistently performs better than the stock market, these investments would be a better overall investment. However, the potential return from investing in the stock market using a variable annuity has the best chance of beating inflation and offering protection against purchasing power risk. [Module 7, Annuities & Retirement Plans, Section 6.2]

Regarding variable annuities, which of the following statements is true? A. Variable annuities give investors an option to earn tax-deferred income. B. Variable annuity fees are generally higher than mutual fund fees. C. Variable annuities offer investors guaranteed income for retirement. D. Death benefits for the beneficiary of a variable annuity must first go through probate court.

Variable annuity fees are generally higher than mutual fund fees. This is the best answer as variable annuities have both investment and insurance expenses. Variable annuities offer tax-deferred growth (it is not an option). Variable annuities may also offer a guaranteed income for life, but that would depend on the settlement option if the annuity is annuitized. Death benefits for variable annuities go directly to the beneficiary and probate court is avoided. [Module 7, Annuities & Retirement Plans, Section 6.2]

All of the following are not considered a "security" under the Uniform Securities Act, except: A. Keogh or IRA plans B. Fixed annuities C. Warehouse receipts D. Endowment policies

Warehouse receipts. A warehouse receipt is considered a security under the Uniform Securities Act. Again, be careful of the wording of the question. A warehouse receipt (also called a whiskey warehouse receipt) is a security. Both a fixed annuity and an endowment policy are traditional insurance contracts issued and guaranteed by insurance companies, and thus are not securities. Keogh and IRA plans are retirement plans, not securities, although the funds in these plans may be used to purchase securities. [Module 1, Uniform Securities Act, Section 3.1]

On Monday, Burke Advisers, an investment advisory firm, is notified by its accountants that it is below the minimum net capital amount. In accordance with NASAA Statements of Policy, when must the firm file a report disclosing its financial condition with the state administrator? A. Monday B. Tuesday C. Wednesday D. Thursday

Wednesday. As a condition of the right to transact business in the state, an investment adviser must notify the administrator by close of business on the next business day if its net worth is below the minimum. The adviser must then file a report of its financial condition with the administrator by the close of business the following business day, or two business days after initially discovering it is below the minimum. [Module 2, Registration of Persons, Section 1.10]

You are the investment adviser who is acting as the fiduciary for an estate that is going through liquidation. As the fiduciary for the estate, what is the most important question you need to ask the attorney handling the estate? A. What are the risk profiles of the beneficiaries? B. What are the tax implications of the estate? C. What are the tax brackets of the beneficiaries? D. What are the investment objectives of the beneficiaries?

What are the tax implications of the estate? Since the estate is currently going through liquidation, the first thing you would need to find out as the fiduciary would be the tax implications of the estate. After the estate has been liquidated, you can turn your focus to the beneficiaries to learn their risk profiles, investment objectives, and tax situations. [Module 9, Client Profiles, Section 1.1]

Under the Uniform Securities Act, certain investment advisers must file audited balance sheets, while other investment advisers are allowed to file unaudited balance sheets. In addition, there are some investment advisers who are exempt from filing balance sheets altogether. Under which of the following conditions may an investment adviser file an unaudited balance sheet? A. When the investment adviser has custody of client funds B. When the investment adviser has discretionary authority over client accounts C. When the investment adviser has custody of client funds and discretionary authority over client accounts D. When the investment adviser has neither custody of client funds nor discretionary authority over client accounts

When the investment adviser has discretionary authority over client accounts, an investment adviser may file an unaudited balance sheet. Investment advisers that exercise limited discretion, but do not maintain custody of customer funds or securities, must file a balance sheet. However, it is not required to be audited. If the investment adviser has custody of client funds or securities, or requires a prepayment of advisory fees of $500 or more, six or more months in advance, it would have to file an annual audited balance sheet. If the adviser does not have custody of funds, discretionary authority over client accounts, or the above mentioned prepayment of advisory fees, it would not be required to file a balance sheet at all. [Module 2, Registration of Persons, Section 1.10]

According to the Uniform Securities Act, within which of the following times must an investment adviser file any general changes? A. Within 30 days of the fiscal year-end B. Within 90 days of the fiscal year-end C. Within 30 days of the change D. Within 90 days of the change

Within 90 days of fiscal year-end. Any general, nonmaterial changes to the investment adviser's business practices are required to be filed with the state administrator within 90 days of the adviser's fiscal year-end. [Module 2, Registration of Persons, Section 6.1]

Which of the following is not a method of valuing the performance of the common stock of a particular company? A. Total return B. Yield to maturity C. Expected return D. Dividend discount

Yield to maturity. This is a means of measuring the value of bonds, not stock. A basic method of valuing the performance of stock is the dividend discount model that discounts the sum of all expected dividends to their present value. Expected return and total return are also methods of evaluating the performance of a stock. [Module 8, Risk & Evaluation, Sections 3.1, 3.2, & 3.13]

All of the following have an office in the state and are effecting transactions in the state. Which of these persons is exempt as an agent under the Uniform Securities Act? A. A person who is representing a broker/dealer in effecting transactions in U.S. government securities B. A person who is representing a broker/dealer in effecting transactions with banks and savings and loans C. A person who is representing an issuer in effecting transactions for employees in the state, but will receive no remuneration D. A person who is representing a broker/dealer in effecting transactions in securities traded on a national exchange

person who is representing an issuer in effecting transactions for employees in the state, but will receive no remuneration. This person is exempt from registering as an agent. A person who is representing a broker/dealer in effecting transactions in securities traded on a national exchange must be registered as an agent. The effecting of government securities does not require a person to be registered as an agent if representing the issuer, but if representing a B/D they must be registered as an agent. Representing an issuer and not being paid exempts the person from being registered as an agent as that person would not be defined as an agent. Effecting transactions in exchange securities does require a person to be registered. The securities may be exempt from registration, but the person selling them is not. [Module 1, Uniform Securities Act, Section 3.4]

Of the following, which is an exempt transaction as defined in the Uniform Securities Act? A. A solicited offer and sale of nonlisted, non-Nasdaq traded stock to an individual who regularly purchases exchange-traded stock B. An unsolicited transaction where the customer has called a broker/dealer to purchase a security C. An offer of a private placement to three persons where the solicitor will be compensated for the presentation, and all of the persons purchase the issue D. An offer and sale of securities through a tombstone advertisement

unsolicited transaction where the customer has called the broker/dealer to purchase a security. Unsolicited transactions are exempt transactions, though the administrator may require the client to sign an acknowledgement stating that the transaction was, in fact, unsolicited. The remaining choices do not qualify as exempt transactions. [Module 3, Registration of Securities, Section 5.1]