Practice Exam

In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must do which of the following? Offer plan participants at least three different investment alternatives Ensure that plan participants are insulated from control over their portfolios Allow plan participants to change their investment options no less frequently than quarterly Permit immediate vesting of employer contributions

1 and 3

To assist broker-dealers with compliance, NASAA prepared a fee disclosure template. Based on the template, all of the following broker-dealer charges would be disclosed except (3)

1. commissions 2. markups and markdowns 3. advisory fees

only exemptions from brochure rule

1. investment companies 2. impersonal advice of less than 500

An index annuity has no cap on gains but guarantees a minimum return of 3.35% with an 80% participation rate. If the index increases by 15%, what is the rate of return to the investor?

12%

A 46-year-old investor wants to have retirement savings worth $1 million at age 70. If the investor can earn 9%, using the rule of 72, the present value needed today is closest to

125k

One of your clients has a marginal tax rate of 32%. The 35% tax bracket begins in another $30,000 of income. Should the client receive a bonus of $50,000, the federal income tax due on that would be

16,600

In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the release, which of the following is included in the definition? Commercial banks offering comprehensive financial planning for their high net worth clients Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate Persons being compensated for assisting employee benefit plan administrators in selecting investment managers for the plan's assets Lawyers who prepare trust agreements for clients with large securities holdings, with a goal of minimizing estate taxes

2 and 3 banks are never IAs

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of which of the following? The Securities Exchange Act of 1934 The Investment Company Act of 1940 The Investment Advisers Act of 1940 The Uniform Securities Act

2 and 4

When is an investment adviser representative (IAR) required to make disclosure to the client? When the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated When the IAR recommends a specific insurance policy for the client's overall financial plan where a commission will be received on that sale When transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that particular client When transactions recommended to the client are inconsistent with those for the IAR's own account

2 and 4

One of your customers purchased a TIPS bond three years ago. The bond's nominal yield is 4%, and inflation has averaged 6% over the holding period. The interest payment at the end of the three years would be closest to

23.88 1000 * 103%^6 * 2%

An investor has many tax preference items. Computing the investor's income tax using the regular method results in a tax burden of $29,200 while computing the alternative minimum tax (AMT) results in a tax liability of $27,500. Based on this information, the investor's income tax liability for the year is

29,200

The day after reaching age 50, an investor purchased a single-premium deferred nonqualified variable annuity with a face amount of $100,000. Nine years later, with the value of the accumulation units at $220,000, the investor withdraws $150,000 for the first-time purchase of a home. If the investor is in the 37% federal income-tax bracket, the tax liability is

56,400 first home purchase is an IRA exemption

A significant difference between an account for a trust and an account for an estate is A) the trust account will generally be active for a much longer period of time. B) only the estate has beneficiaries. C) banks can be named as trustees for a trust but not as an executor. D) the standard of prudent investing applies to trusts but not to executors.

A

A state-registered investment adviser maintaining custody of customer funds and securities discovers that the firm's net worth is $32,000. Which of the following steps would not be required? A) Returning the customer funds and securities within three business days of the discovery B) Filing a financial report with the administrator by the close of business on the next business day following notice C) Notifying the administrator of the deficiency by the close of business on the next business day D) Reporting to the administrator the number of client accounts being served by the investment adviser

A

An investment adviser's model portfolio consists of stocks with a market cap ranging from $500 million to $1.3 billion. If a potential client wanted to see if the adviser was generating positive alpha, the most likely benchmark for comparison would be A) the Russell 2000. B) the Nasdaq 100. C) the Dow Jones 30 Industrials. D) the Wilshire 5000.

A

As specified in the Dodd-Frank Act of 2010, which of the following would not qualify for the private fund exemption? A) An investment adviser who limits her advisory services to insurance companies B) An investment adviser who limits her advisory services to private funds with less than $150 million in assets under management in the United States C) An investment adviser who limits her advisory services to venture capital funds D) A non-U.S.-based investment adviser with no place of business in the United States and less than $25 million in assets under management belonging to U.S. clients

A

One respect in which advertising by investment advisers differs from that of broker-dealers is that A) investment adviser advertising is regulated by federal law while advertising by broker-dealers is regulated by FINRA. B) investment advisers are permitted to conduct seminars while broker-dealers cannot. C) investment advisers are permitted to refer to charting systems in their advertisements while broker-dealers cannot. D) investment advisers are not permitted to use the internet while broker-dealers can.

A

When an investment adviser representative (IAR) terminates employment with a federal covered investment adviser and immediately accepts employment performing the same functions with a different federal covered investment adviser in the state where the individual resides, A) only the investment adviser representative must notify the Administrator promptly. B) the investment adviser representative and each of the federal covered advisers must notify the Administrator promptly. C) only the terminating investment adviser must notify the Administrator. D) the investment adviser representative and the employing adviser must notify the Administrator promptly.

A

Which of the following forms of joint ownership is most associated with ownership of real estate? A) Tenancy by the entirety B) Totten trust C) Joint tenants with right of survivorship D) Tenants in common

A

Which of the following is required for annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Paying the state licensing fee B) Filling out the consent to service of process C) Filling out Form U4 D) Sending a renewal notice to the SEC

A

Which of the following statements regarding agent registration under the Uniform Securities Act is true? A) In the absence of any action by the administrator, the effective date of a registration is noon on the 30th day after the filing of a complete application. B) If, before the effective date of the registration, the administrator requires amendments to the application, the registration will be considered to have first been filed as of the original filing date. C) The administrator may initiate a disciplinary action within two years of an agent's withdrawal of registration. D) The administrator may request that the agent furnish a statement of assets and liabilities.

A

Under the Uniform Securities Act, all of the following persons with no place of business in the state are exempt from registration as an investment adviser except A) advisers who have conducted business with no more than six clients, other than institutions, in the state within the past 12 months. B) advisers who deal exclusively with federal covered investment advisers located in the state. C) advisers who deal exclusively with savings banks located in the state. D) advisers who deal exclusively with investment companies registered under the Investment Company Act of 1940.

A -- must be less than 6

A balance sheet shows that a corporation builds its capital structure with all of the following except A) retained earnings. B) cash. C) long-term debt. D) capital stock.

B

An investment adviser representative (IAR) is attempting to develop an investment plan for a client. The IAR decides to use two different mutual funds in an effort to provide appropriate diversification. Of the four pairs given below, which one would offer the most diversification? A) Portfolio 1 and 2, with a correlation coefficient of +0.90 B) Portfolio 7 and 8, with a correlation coefficient of -0.20 C) Portfolio 3 and 4, with a correlation coefficient of +0.20 D) Portfolio 5 and 6, with a correlation coefficient of -0.05

B

Each of the following would be excluded from the definition of an agent under the Uniform Securities Act except A) Florence, an employee of the First Fidelity Trust Company, who sells shares of FFTC stock to meet the needs of her trust clients. B) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees. C) Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the next quarter. D) Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio.

B

One of the differences between state and federal laws involving an investment adviser maintaining custody of customer funds and/or securities relates to the handling of client checks made payable to third parties such as broker-dealers. Which of the following properly expresses that difference? A) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. B) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. C) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt.

B

Which of the following activities might result in a positive yield curve in the bond market? A) A parallel downward shift in interest rates B) Investors buying short-term bonds and selling long-term bonds C) A parallel upward shift in interest rates D) Investors buying long-term bonds and selling short-term bonds

B

Daphna works for Automated Asset Allocators (AAA), an investment adviser that has offices in States D, E, and F and is registered with the SEC. Daphna spends most of her time in an office in State D, but once every other week, she goes to the branch in State E. Daphna would be exempt from registration as an investment adviser representative (IAR) in which of the following states? A) Daphna would have to register in all three states. B) Daphna would be exempt in State F, where she has 227 retail clients. C) Daphna would be exempt in States E and F. D) Daphna would be exempt in State E, where she has no retail clients.

B federally covered -- register only in states where maintain a place of business

A broker-dealer with no place of business in a state is not required to be registered in that state if the broker-dealer A) is a federal covered broker-dealer. B) limits its clientele to employee benefit plans with assets of at least $1 million. C) is registered in the state where its principal office is located. D) is a member of the New York Stock Exchange.

B -- only institutional

An individual has just received an inheritance of $15,000 and has the goal of preservation of capital and income. The client is in a low tax bracket. Which of the following would be the most suitable choice? A) Newly issued U.S. Treasury bonds B) Bank-insured CDs C) Insured municipal bonds D) Public utility stocks

B -- pres of cap -> bank-insured CDs

An investment adviser wishes to advertise a proprietary charting system used to time the market. In order to be in compliance with the Investment Advisers Act of 1940, A) results obtained by using the system must be shown using a time period of no less than 12 months. B) the advertisement must be filed with the appropriate SRO within 10 business days of first use. C) a statement reflecting the limitations and difficulties of using the system must be included in the ad. D) authorship of the system must be prominently disclosed.

C

An investor contacts you to say he is somewhat puzzled over the fact that he saw a newspaper listing for the KAPLOW Fund where the net asset value per share was $10.27 and the asking price was $14.14 per share. He wants to know why the difference between the two is so great. You would respond, saying A) the KAPLOW Fund is being investigated by the SEC for being sold with a sales charge in excess of the 8.5% maximum limit. B) that this is probably an unregistered hedge fund not subject to SEC rules. C) the KAPLOW Fund is a closed-end company with a selling price based not on NAV, as is the case with an open-end fund. D) there is probably a misprint in the paper, and more than likely, the asking price is $11.22, making the sales charge 8.5%.

C

One of the major goals of most hedge funds is to A) generate higher fees for their advisers. B) appeal to the sophisticated investor. C) use long and short strategies to provide a stable return in both up and down markets. D) generate liberal tax write-offs for their investors.

C

One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) ensure that full disclosure has been made in the adviser's brochure. B) provide updated information on those associated persons who are in charge of giving investment advice. C) verify that the investment adviser still qualifies for SEC registration. D) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian.

C

Under the provisions of the Uniform Securities Act, which of the following statements about unsolicited orders is true? A) A client may not purchase, at his own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order. B) Under certain conditions, an administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders. C) An unsolicited order from a noninstitutional client for an unregistered, nonexempt security is considered a transaction exempt from the registration and advertising filing requirements of the act. D) If the order ticket is appropriately marked, the administrator may not challenge a broker-dealer's assertion that the order was unsolicited.

C

Under federal law, the brochure rule requires: A) concurrent delivery of the Form ADV Part 1A. B) delivery no later than 5 business days after the formalizing of the advisory. C) delivery of a brochure, or summary of material changes, to all clients within 120 days of the end of the adviser's fiscal year. D) delivery no later than 48 hours before entering into an investment advisory contract.

C 48 hour rule -- state reg

An investment adviser representative overhears a discussion about an information barrier. More than likely, the topic being discussed was A) the difficulties encountered when trying to get personal information about a client's financial position. B) safeguarding the details of executive compensation. C) an upcoming site examination by the firm's regulator and the need to protect sensitive information. D) safeguarding of material nonpublic information (MNPI) and the prevention of insider trading.

D

An investor indicates that her objective is long-term growth. Income is of secondary importance. While she is basically quite conservative, she feels her time horizon is long enough to give her a bit more risk tolerance. Which of the following common stock mutual fund selections would probably be most suitable? A) 50% large cap, 25% small cap, 25% investment-grade bonds B) 100% large cap C) 100% small cap D) 75% large cap, 25% small cap

D

As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A sale of U.S. Treasury bonds to a retail investor B) A purchase of bonds by a trustee of an irrevocable trust C) A purchase of stock by an accredited investor under Rule 506(b) D) A sale of stock by an administrator of an estate

D

Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A) state-registered advisers who do not deliver the brochure at least five days prior to contract signing must offer a 48-hour, penalty-free withdrawal. B) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. C) federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. D) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a five-day, penalty-free withdrawal.

D

Individuals who pass the Series 65 exam will be able to tell prospects that A) by passing the exam, they are now registered as investment adviser representatives with the SEC. B) their investments will be offered protection by the antifraud statutes of the Uniform Securities Act. C) this indicates the regulatory bodies consider them qualified to manage money. D) they passed a 130-question examination in order to qualify as investment adviser representatives.

D

The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would not be entitled to claim A) court costs. B) attorney's fees. C) interest at the state's legal rate less any income received on the security. D) the original consideration paid for the security or the current market value, whichever is greater.

D

Which of the following are not exempt from the delivery requirements of the NASAA Model Brochure Rule Requirements for Investment Advisers? A) An adviser who provides only impersonal advisory services at an annual charge of less than $500 B) An adviser whose only clients are closed-end investment companies C) An adviser whose only clients are exchange-traded funds D) An adviser who deals with qualified clients only

D

Under the provisions of Regulation SP, a person who has an investment advisory contract with a registered investment adviser is known as

a customer

Which of the following is most commonly used when the author wants to express end-of-life wishes?

a living will

As defined in the Uniform Securities Act (USA), the term person would include which of the following? A limited partnership A political subdivision An unincorporated association The executor of an estate for a deceased individual

all 4 not included: minor, deceased person, mentally incomp

In order to come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over

an equity port of over 100M in 13f secs

Low risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor?

banks

One of the important definitions in the Uniform Securities Act is that of investment adviser representative. Not included in the definition would be a person who A) is a graduate student at a local college who works three evenings per week cold-calling potential clients. B) is limited to supervising investment adviser representatives but has no advisory clients. C) provides only impersonal investment advice. D) manages accounts or portfolios of clients.

c

Dodd-Frank

federal law

A portfolio manager who follows the value style of investing would most likely focus her attention on

financial statements

A life insurance policy with benefits tied to the performance of a separate account that allows the policyholder to skip premium payments is called

flex premium variable life insurance

The weak form of the efficient market hypothesis

implies that tech analysis is not worthwhile -- states that historical prices are already included

In the over-the-counter market, the person who performs the dealer function that a DMM is responsible for on an exchange is

market maker

KAPCO, Inc., has 100 million shares of $1 par common stock outstanding. If the current market price of the KAPCO common stock is $33 per share, KAPCO would be considered a

midcap stock

Form ADV-E

must be completed by invest advisors that have custody of clients funds or secs

Irving Wilson works for Wall Street Limited (WSL), a registered investment adviser. He limits his advice exclusively to equity securities listed on the NYSE. Under the Uniform Securities Act, Irving

must register as an IAR

A financial ratio used by some analysts to help determine if a company's stock is over or undervalued is

price to book value ratio

small cap, mid cap, large cap

small: 250 mill to 2 bill mid: 2 bill to 10 bill large: 10 bill to 200 bill

The fiduciary handling a qualified retirement plan usually provides a written document that sets forth the objectives and constraints on a managed portfolio. This document is called

the investment policy statement

One of your clients is a widow with three grown children. She wants the assets in her account to go to her children upon her death—50% to her daughter and 25% to each of her sons. She does not want the estate to have to deal with probate on these assets. How should her account be set up?

transfer on death