S66 Progress Exam

Which of the following statements are TRUE concerning certain federal covered security? I. The Administrator may require the issuer to pay a filing fee. II. The Administrator may bring enforcement action if fraud is involved. III. The Administrator may require the issuer to file a consent to service of process. IV. The Administrator will grant the registration after a final review of the filing. a. I and II only b. I and III only c. I, II, and III only d. I, II, III, and IV

C. I, II, and III only The Uniform Securities Act sets limits on the powers of the Administrator concerning federal covered securities. The Administrator may require the filing of a registration fee, the filing of a consent to service of process, and the filing of certain documentation with the SEC. The Administrator may bring enforcement action if fraud or deceit is used in the sale of a security. The Administrator may not subject the issuer to a state review. This occurs when a state has the authority to allow or disallow a security to be offered in a state and is sometimes referred to as a merit review.

A broker-dealer has offices in States X and Y. One of its agents is registered in State X where the agent's primary office is located. The agent often travels to State Y and uses the broker-dealer's office there to meet with clients. The agent: a. Is exempt from registration in State Y as long as the agent does not have more than five clients who are residents of State Y b. Is exempt from registration in State Y, since the agent is only using the office temporarily c. Must register in State Y, since the agent uses an office there d. Must register in every state in which the broker maintains an office

C. Must register in State Y, since the agent uses an office there. The agent must register in State Y since the agent has a place of business (office) in State Y.

A registered representative has written an electronic marketing piece that recommends the purchase of a new variable annuity being offered by his firm. He wants to send it by e-mail to 40 retail clients. If the product is suitable for each of the clients on the RR's distribution list, which of the following statements is TRUE? a. The content of the e-mail must be reviewed by a principal within 10 business days b. The initial communication must be approved, while the second communication must be reviewed c. The e-mail must be approved by a principal d. The RR may not send the e-mail since it is a bulk recommendation

C. The e-mail must be approved by a principal. Since the communication is being sent to more than 25 retail investors, it is considered a retail communication. A retail communication containing an investment or financial recommendation, or promoting a product or service of the member firm, must be preapproved by a principal. Correspondence is defined as any written or electronic message that is sent by a member firm to 25 or fewer retail investors within any 30-calendar-day period. Correspondence does not require principal preapproval.

Under the Investment Advisers Act of 1940, which of the following is required to register with the SEC? a. An investment adviser with clients in 13 states b. An investment adviser that recommends exchange-traded securities c. An investment adviser that manages more than $110 million ($110 MM) in assets d. An investment adviser that only manages the money of a few wealthy clients

C. an investment adviser that manages more than $110 million ($110 MM) in assets Unless exempt from registration, advisers are required to register with either the state Administrator or the SEC, but not both. An adviser has a choice and may register with the state Administrator or the SEC once it has assets under management (AUM) of $100 million. Once the adviser s AUM reaches $110 million, it is categorized as a federal covered adviser and is required to register with the SEC. In addition, firms that provide advice to an investment company, or firms that provide advisory service in 15 or more states, are also categorized as federal covered. Once registered with the SEC, a mid-sized adviser may remain registered with the SEC provided it has AUM of at least $90 million. If an adviser's AUM falls below $90 million, it must instead register at the state level.

According to the Uniform Securities Act, which of the following statements is NOT TRUE concerning a private placement offering? a. The offer may not be made to more than 10 retail investors in the state during any 12-month period. b. The offer may not be made to more than 35 retail investors in the state during any 12-month period. c. The offer may be made to an unlimited number of institutional investors during any 12-month period. d. Commissions may not be paid if the buyers are non-institutional investors.

Under the Uniform Securities Act, a private placement offering is one that involves no more than 10 retail investors; however, there may be an unlimited number of institutional investors. The offering is considered an exempt transaction if the following conditions are met: - The seller believes that all of the retail (non-institutional) buyers are purchasing for investment purposes only and, - No commission or other remuneration is being paid for soliciting retail (non-institutional) buyers Choice (b) refers to a condition for private placements under Regulation D of the Securities Act of 1933, which is a federal regulation.

A corporation has the following financial information. $1 million in cash $2 million in accounts receivable $5 million of inventory $10 million of equipment $3 million in short-term debt $50 million in long-term debt $2 million accounts payable What is the corporation's current ratio? a. 1.6 b. 2.0 c. 2.6 d. 3.6

a. 1.6 The current ratio is found by dividing the current assets by the current liabilities. In this question, current assets include cash, accounts receivables, and inventory, totaling $8 million. Current liabilities include short-term debt and accounts payable, totaling $5 million. The current ratio is $8 million / $5 million, or 1.6.

Two of your clients, Bruce and Gary, are forming their own company. They are planning to incorporate and want to know which corporate entity would be best from a tax perspective. Which of the following entities would have the MOST tax disadvantages? a. A C Corporation b. An S Corporation c. A limited liability company (LLC) d. A limited liability partnership (LLP)

a. A C Corporation A C Corporation would be the worst option from a tax perspective. The corporation would first need to pay corporate taxes on any profits it generated. Its shareholders (owners) would then be required to pay personal income taxes on anything that is distributed to them in the form of dividends. All the other choices are flow-through entities for tax purposes.

A father makes a gift of XYZ stock to his daughter. Two years ago, the father purchased the stock for $5,000 and, at the time of the gift, the stock was worth $10,000. If the daughter sells the stock 10 months later for $12,000, what is the tax implication? a. A long-term capital gain of $7,000 b. A long-term capital gain of $2,000 c. A short-term capital gain of $2,000 d. Since the gifted amount is under the gift tax limit, it is a tax-free event.

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

All of the following are characteristics of forward contracts, EXCEPT: a. Delivery and settlement of the contracts occurs immediately b. The contracts are negotiated off of an exchange c. The contracts cannot be offset d. The amount and type of the delivered commodity are negotiable

a. Delivery and settlement of the contracts occurs immediately. A forward contract is an agreement to buy and sell commodities at a future time and place. Forwards are over-the-counter contracts that will be negotiated off of a futures exchange. All aspects of the contract are negotiated between the buyer and seller, including the price, type of commodity, and amount, as well as the time and place of delivery.

Under SEC Release 1092, who would NOT be exempt from the definition of investment adviser? a. A marketing firm whose investment advice is solely incidental to its profession b. An accounting firm whose investment advice is solely incidental to its profession c. A law firm whose investment advice is solely incidental to its profession d. A professor whose investment advice is solely incidental to his profession

a. A marketing firm whose investment advice is solely incidental to its profession According to SEC Release 1092, the professional exclusion provided by the Advisers Act is only available to lawyers, accountants, engineers, and teachers. A person engaged in any other profession who performs investment advisory services would be considered an investment adviser, whether or not the performance of investment services is incidental to the practice of her profession. However, other exemptions under the Act may be available to professionals, e.g., accountants and lawyers. The Act does not provide a specific exemption to a marketing firm. For example, a firm that markets financial planning services does not have an exemption from the definition of investment adviser and may be required to register.

Which of the following events would NOT require a public company to file a Form 8-K report? a. A minority owned subsidiary changes locations b. The auditors of the company resign c. The company acquires a controlling interest in another company d. The company merges with another company

a. A minority owned subsidiary changes locations Form 8-K is the report that companies must file with the SEC to announce material corporate events that shareholders should know about. A change in the location of a minority owned subsidiary, choice (a) is not a material event which may affect the company or its shareholders. Choices (b), (c), and (d), all require the filing of a Form 8-K.

Under the Uniform Securities Act, what information would NOT need to be disclosed when filing a registration by qualification? a. A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors b. The capitalization and long-term debt of the issuer and any significant subsidiary c. The general character and location of the issuer's business and a statement of the general competitive conditions within the industry or business in which it operates d. The estimated cash proceeds to be received by the issuer from the offering

a. A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors An analysis of the issuer's profit margin as compared to its competitors would not be required. All other items listed would be required when filing a registration by qualification.

Action Advisers creates financial plans for clients. It generally implements these plans through Packaged Products Producers (PPP), a limited broker-dealer owned by Action. PPP offers a mix of mutual funds and variable annuities, but does not engage in transactions involving individual stocks or bonds. What information must be disclosed to Action's advisory clients? a. A statement that the implementation of client financial plans may be limited because of the incomplete product selection available through PPP b. PPP's monthly net capital position c. A statement that the plans implemented using only mutual funds and annuities will not be able to sufficiently offer diversification for most clients d. A statement that the plan will probably have subpar performance due to the limited investment choices offered by PPP

a. A statement that the implementation of client financial plans may be limited because of the incomplete product selection available through PPP According to SEC Release IA-1092, an IAR/RR who intends to implement a plan using only products offered by a given broker-dealer must inform the client that the plan's implementation may be limited as a result. The IAR/RR should also disclose that PPP is a subsidiary of Action, since this is a conflict of interest. Mutual funds may provide sufficient diversification for many clients.

Under the USA, which of the following choices is considered an offer of securities? a. An investor purchased bonds and received a warrant as a bonus b. An investor receives additional shares due to a stock split c. An investor receives a stock dividend d. An investor receives a tender offer

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

Kevin is an agent of CMP Broker-Dealers which is registered in 10 states. Kevin is currently registered in five states, but only transacts business with institutional clients. Due to recent mergers, some of Kevin's clients will be relocating to North Carolina and CMP now wants to open a new office there. Kevin will not be moving from his current office in Missouri, a state in which both Kevin and CMP are registered. Under the USA: a. Both Kevin and CMP are required to be registered in North Carolina b. CMP is required to be registered in North Carolina, but Kevin is not c. Neither Kevin nor CMP is required to be registered in North Carolina d. Only Kevin is required to be registered in North Carolina

a. Both Kevin and CMP are required to be registered in North Carolina This is a tricky question, but the main concept is that a broker-dealer is not required to register in a state if it has "no place of business in the state." However, since CMP is opening an office in North Carolina, the firm is required to be registered in the state regardless of the type of securities being sold or the types of clients with which it conducts business. Since the broker-dealer will be registered in North Carolina, any agents of that broker-dealer who execute client transactions in that state are also required to be registered, regardless of the types of clients being represented. Although Kevin may not visit or work out of the North Carolina office, since his firm has a place of business there and Kevin will be effecting transactions in the state, he must register.

A client sells shares of an S&P 500 company's common stock. The proceeds are reinvested in an S&P 500 Index fund. The client has reduced which of the following risks? a. Business b. Market c. Economic d. Political

a. Business By selling the shares, the client is no longer subject to the risks that may affect a single company. By investing in the S&P 500 Index, the client has greater diversification.

If an adviser wanted to determine a company's ability to pay debts that would be maturing in one year, the adviser would be most interested in the: a. Current ratio b. Acid-test ratio c. Inventory turnover d. Debt-to-equity ratio

a. Current ratio The current ratio is a comparison of current assets to current liabilities for a one-year period. The acid-test ratio excludes inventories and usually is for a one- to three-month period.

XYZ broker-dealer is located in State A, where it maintains its corporate headquarters. Under the Uniform Securities Act, XYZ would not meet the definition of a broker-dealer in State B if it: a. Has no office in State B and only sells securities to an investment company located in State B b. Has an office in State B and conducts business only with other broker-dealers c. Has an office in State B and conducts business with insurance companies d. Has no office in State B and conducts business with high net worth clients that are residents of State B

a. Has no office in State B and only sells securities to an investment company located in State B Under the USA, the term broker-dealer does NOT include a person that has no place of business in the state AND only transacts business with issuers, other broker-dealers, financial institutions, or institutional buyers. If a firm has an office in State B, it would meet the definition of a broker-dealer in State B regardless of the clients it sells securities to or conducts business with. There is no exclusion from the definition of broker-dealer in a state if you sell securities to high net worth individual investors since they are not considered institutional buyers.

The rate of return that a mortgage company may earn over the life of a loan to a customer is the: a. Holding period rate of return b. Real rate of return c. Risk-free rate of return d. Expected rate of return

a. Holding period rate of return The return that is earned over the life of an investment and/or a loan is referred to as the holding period rate of return. Since the question asks for the return over the life of the investment (i.e., the loan), the holding period rate of return is the best answer.

Ben is an agent for a broker-dealer. One of Ben's clients is going on a business trip and is interested in adding a pharmaceutical stock to her portfolio, but is unsure of which one of three stocks to choose. The client fears that the most appropriate time to buy might be during her trip. Which of the following orders may Ben accept without written discretionary authority? I. "Buy 500 shares of SureCure whenever you think the price is right." II. "Enter a market order for 500 shares of SureCure whenever you think it is appropriate." III. "Buy 500 shares of whichever pharmaceutical stock seems to be the best value when the market opens on Monday." a. I and II only b. I, II, and III c. III only d. None of the above

a. I and II only Broker-dealers and their agents are prohibited from exercising discretionary authority in a customer's account without first obtaining written authority from the customer, except when the customer provides verbal discretion to select the price and/or time of the transaction. For the exception to apply, the customer would need to specify all other details of the trade, including whether to buy or sell, the specific security, and the amount. In choices (I) and (II), the agent is free to choose the price or time, so written discretionary authority is not necessary. In choice (III), the agent would also need to select the specific security to be purchased, which would require written discretionary authority.

According to the Investment Advisers Act of 1940, the definition of an investment adviser includes which of the following choices? I. Pension consultants II. Broker-dealers III. Bank holding companies IV. U.S. government securities advisers a. I only b. I and II only c. I, II, and III only d. I, II, and IV only

a. I only Pension consultants may provide securities-related advice as an integral part of other financial services and may be considered investment advisers under SEC Release 1092. The other choices are all specifically excluded from the definition of an investment adviser under the 1940 Act.

Jim and Tammy decide to start a new broker-dealer and establish themselves as the sole shareholders. What facts may be used by the Administrator as grounds for denying their application? I. Six years ago, Jim pled guilty to one felony count of criminal trespassing. II. Eight years ago, Tammy's agent license was suspended for one month. III. Jim's liabilities currently exceed his assets and he is having trouble paying his bills. IV. Jim and Tammy both lack extensive experience in operating a brokerage firm. a. I only b. I and III only c. I, II, and III only d. I, II, and IV only

a. I only When an application is made for a broker-dealer license, the application may be denied based on the history and condition of the applicant (the broker-dealer) or its controlling persons (Jim and Tammy), officers, or directors. The fact that Jim was convicted of a felony within the last ten years could result in denial of their application. If the applicant is currently subject to a suspension, the application could be denied. However, Tammy's suspension has ended. Insolvency could also be used as grounds for denial, but the Administrator must find that the broker-dealer is insolvent, not an individual controlling person. Lack of experience alone may not be used as grounds for denial.

Which of the following statements is accurate regarding dollar cost averaging? a. It is a systematic, fixed-dollar method of investing b. If employed, the average price will be less than the average cost c. It can only be set up through a payroll deduction plan d. The benefits can be obtained if one invests in a money-market fund

a. It is a systematic, fixed-dollar method of investing Dollar cost averaging is a systematic approach in which an investor periodically contributes a constant dollar amount over a fixed period. Buying more shares when prices are low and fewer when prices are high results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits, lower cost than the average price, are only obtained when the value of the asset fluctuates and the investor buys more shares.

An individual represents an issuer in the sale of the issuer's securities to its employees, but does not earn commissions on the transactions. The individual is: a. Not considered to be an agent of the issuer b. Considered to be an agent of the issuer c. Considered to be a broker-dealer d. Considered to be the issuer

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

Under the Uniform Securities Act, for an investment adviser to be able to maintain custody of client assets, it must meet all of the following conditions, EXCEPT: a. Obtaining written discretionary authority from each client for whom it is holding funds and/or securities b. Sending each client an itemized statement of his account at least quarterly c. Verifying client funds and securities at least once every calendar year through an unannounced audit conducted by an independent accountant d. Ensuring that all client cash and securities are segregated from the adviser's cash and securities

a. Obtaining written discretionary authority from each client for whom it is holding funds and/or securities It is important to recognize that this is an EXCEPT question. Essentially, an adviser may maintain custody of a client' regardless of whether discretionary authority has been provided. In fact, obtaining discretionary authority does not automatically constitute custody unless the adviser has been given full discretion.. If an IA is considered to be maintaining custody of a client's assets, it must comply with the requirements stipulated in choices (b), (c), and (d).

When considering the tax consequences of trading securities within a trust, the trustee should examine: a. Other taxable income that is generated by the trust b. The taxable assets of the trustee c. The taxable assets of the grantor d. The taxable income of the beneficiary of the trust

a. Other taxable income that is generated by the trust A trust is managed for the benefit of the beneficiary; however, any income that is generated by the trust is taxable to the trust. For that reason, an examination of the tax consequences of a trust must focus on the income derived by the trust, not the income derived by the trustee or beneficiary. Although the income that beneficiaries receive from the trust and/or from other assets may be taxable, it is irrelevant for purposes of determining the tax consequence of the trust itself.

What type of risk does NOT apply to the holder of a zero-coupon bond? a. Reinvestment risk b. Credit risk c. Purchasing-power risk d. Market risk

a. Reinvestment Risk Zero-coupon bonds are issued at a discounted price and do not pay semiannual interest. Since there are no interest payments to reinvest, the bond has no reinvestment risk. When investing in fixed-income securities, one of the uncertainties is whether interest rates will allow the investor to realize the total return that was calculated at the time of the investment (i.e., the yield-to-maturity). Although zero-coupon bonds do not have reinvestment risk, but they do have credit risk, market risk, and extreme interest-rate risk since the bond's duration will equal its years to maturity.

Those investors, who believe markets are not perfectly efficient, may use an active strategy in which the asset mix of a portfolio is altered in anticipation of economic events. This market timing approach is known as: a. Tactical Asset Allocation b. Strategic Asset Allocation c. Rebalancing d. Indexing

a. Tactical Asset Allocation Tactical Asset Allocation is used to identify and buy into sectors that are anticipated to outperform the market. Strategic asset allocation is used to assemble an investment portfolio based on the client's risk tolerance and objectives. As the assets change in value, the portfolio may then be re-balanced frequently. Indexing is a passive investment approach.

If a company registers its offering with a state Administrator using coordination, it would also file a registration statement under which federal act? a. The Securities Act of 1933 b. The Securities Exchange Act of 1934 c. The Investment Company Act of 1940 d. None of the above, since it would be an exempt transaction

a. The Securities Act of 1933 Under the Uniform Securities Act, registration by coordination is generally used for initial public offerings (IPOs). New issues, including IPOs, are required to register with the SEC under the Securities Act of 1933.

When determining the risk premium on an investment, an investor would analyze the difference between: a. The total return and the risk-free rate of return b. The mean return and dollar-weighted return c. The total return and annualized rate of return d. The coupon rate of a bond and current interest rates

a. The Total return and the risk-free rate of return Total return - risk-free rate of return = risk premium. The risk premium is the amount of return earned in excess of the risk-free rate of return (i.e., the return on a T-bill).

A corporation has current assets of $150,000 and current liabilities of $75,000. The corporation uses cash to pay $35,000 in current liabilities. Which of the following statements is TRUE? a. The current ratio increases b. Working capital increases c. Bond interest coverage probably increases d. Stockholders' equity increases

a. The current ratio increases When the $35,000 in current liabilities is paid in cash, current assets fall to $115,000 and liabilities fall to $40,000. The result is an increased current ratio of 2.875, compared to 2 before the payment. Working capital and stockholders' equity would stay the same. Bond interest coverage compares earnings before interest and taxes to the bond interest expense, and would not be affected in this case.

Which of the following statements is TRUE in relation to the buyer of a call option? a. The investor has limited risk. b. The investor has a limited potential profit. c. The investor is entitled to all dividends paid on the underlying stock. d. The investor must exercise the option if the underlying stock goes up.

a. The investor has limited risk. A purchaser of a call option would have limited risk with the potential for unlimited profit. The risk is the possibility of losing the entire premium (cost of the option). The owner of the call option is not an equity owner of the stock unless and until the option is exercised.

Which of the following is the LEAST important factor when planning for college? a. The parents' net worth b. The current cost of tuition c. A historical growth rate d. When the money will be needed

a. The parents' net worth This question assumes that the formula for determining future value will be used, as shown below: FV = PV (1 + r) t For purposes of this question: FV is the future value, which is what a person will need in order to pay for college in the future. PV is the present value, which represents the current cost of tuition (choice b). r is the rate of return, which is based on a historical growth rate (choice c). t is the time until the funds are needed (choice d) The parents' net worth is not required to calculate the future value of money

The top-down approach to investing generally includes the idea that: a. The price of a stock is based on external factors, such as the economy, not just facts about the company itself b. The management team of a company is usually a reliable gauge as to how the company will perform c. A company's position in its industry is an important predictor of future performance d. Investors should find companies with a history of profits and compare it to competitors

a. The price of a stock is based on external factors, such as the economy, not just facts about the company itself One of the factors involved in the evaluation of stocks in the top-down approach is the economic climate. All of the other choices are characteristics of a bottom-up approach.

Under the Uniform Securities Act, which of the following sales is considered a non-issuer transaction? a. The sale of an outstanding security on the New York Stock Exchange b. A primary offering being sold by a broker-dealer c. The sale of a security being executed by an agent of the issuer d. The sale of a new issue through a private placement

a. The sale of an outstanding security on the NY-Stock Exchange Choices (d), (b), and (c) are examples of issuer transactions (i.e., the proceeds of the offering are for the issuer's benefit). On the other hand, a non-issuer transaction (secondary market trade) involves any purchase or sale of a security whereby the issuer does not directly or indirectly derive a benefit. A trade between two investors for stock on the New York Stock Exchange is an example of a non-issuer transaction.

Which of the following individuals has/have limited liability? a. The shareholders of an S Corporation b. The shareholders of a C Corporation c. A general partner d. The owners of an LLC e. A sole proprietor f. A limited partner

a. The shareholders of an S Corporation b. The shareholders of a C Corporation d. The owners of an LLC f. A limited partner

Which of the following statements is TRUE regarding funds of hedge funds? a. They are generally illiquid investments. b. The parent company invests in a number of mutual funds representing different asset classes. c. They have lower expenses than most mutual funds. d. They are a good choice for investors who wish to use dollar cost averaging.

a. They are generally illiquid investments. A fund of hedge funds is a type of registered investment product in which the parent fund invests in a number of hedge funds. They are usually illiquid investments. Funds of funds tend to have higher expenses than mutual funds.

According to the Disclose or Abstain Principle, an IA must disclose all of the following actions, EXCEPT: a. Using contracts that include hedge clauses. b. Providing clients with research prepared by a third-party. c. Acting as a broker-dealer and/or securities agent. d. Effecting agency cross transactions for two clients when only one side is unsolicited.

a. Using contracts that include hedge clauses If disclosed, an investment adviser may provide clients with third-party research as a resource, act as a broker-dealer or securities agent, or effect agency cross transactions provided one side of the trade is solicited. However, investment advisers must abstain from using contracts that include exculpatory provisions, and hedge and mandatory arbitration clauses.

William is an IA Rep. His firm has created a brochure that contains the same information as his firm's Form ADV Part 2. William gives this brochure to one of his new clients, who has verbally agreed to the contract. He has not previously provided her with any other documents. Which of the following statements is TRUE regarding William's actions? a. William's firm is in compliance with the Brochure Rule of the Investment Advisers Act. b. William's firm has not fully complied with the disclosure requirements of the Investment Advisers Act. c. William must send his client a copy of the firm's Form ADV Part 2 within 48 hours of her signing the contract. d. If William's client is a registered investment company, he will be required to provide a brochure after the contract was signed.

a. William's firm is in compliance with the Brochure Rule of the Investment Advisers Act. The Brochure Rule permits advisers to give a disclosure brochure to clients at the time they enter into contracts. For federal covered advisers, the brochure must be given to clients even if the advisory contract with the client is oral. IAs or IARs are not required to provide a brochure to registered investment companies or clients whose contracts are for limited impersonal advisory services for which the client pays less than $500 per year. Under the USA, clients may be given the brochure at the time the contract is signed, as long as they have five business days to cancel the contract without penalty. Otherwise, the brochure must be given to a client 48 hours prior to the signing of the contract.

XYZ Corporation's common stock has the same beta as ABC Company's common stock. However, XYZ stock, on the average, produces better returns than ABC. Which of the following would explain this difference? a. XYZ stock has a higher alpha than ABC stock. b. ABC stock is more liquid than XYZ stock. c. XYZ Corporation is more highly leveraged than ABC Company. d. ABC Company has a smaller market capitalization than XYZ Corporation.

a. XYZ stock has a bigger alpha than ABC stock While a stock's beta measures its performance as it relates to the overall market, alpha measures that part of a stock's return that is independent of the market. It is influenced by factors that are unique to that company and its industry group.

Randy inherited his father's IRA. If his father died at the age of 69 and Randy did not choose to take a lump-sum distribution, he must withdraw the entire account: a. By no later than the fifth year following the owner's death b. And rollover the funds into this own IRA c. By no later than the 10th year following the owner's death d. By the time Randy reaches the age of 70 1/2

a. by no later than the fifth year following the owner's death According to IRS rules regarding inherited IRAs, a non-spouse who inherits an IRA and the decedent had not yet reached the age of 70 1/2, may take a lump-sum distribution, have the funds distributed over his expected lifetime, or have the funds distributed by the end of the fifth year following the IRA owner's death.

Buy and hold and systematic rebalancing are examples of passive approaches to asset allocation, and based on the theory known as: a. Efficient Market Hypothesis b. Sector Rotation c. CAPM d. Modern Portfolio Theory

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

According to ERISA 404(c) guidelines, which of the following actions is considered a prohibited practice? a. Failing to properly diversify the plan b. Managing plan assets c. Exercising discretion over plan assets d. Disposing of or liquidating plan assets

a. failing to properly diversify the plan Plan fiduciaries provide services to the plan. They might manage plan assets or provide safekeeping services. Buying and selling plan assets is a normal business practice. Plan administrators are prohibited from engaging in a transaction in which they have an interest and must make sure that they diversify plan assets in a manner that protects against large losses.

What is the biggest advantage of investing in a general partnership? a. Income is only taxed once b. Each partner has limited liability c. Each partner shares equally in the partnership's profits d. It is easy to dissolve or liquidate the partnership

a. income is only taxed once Partnerships are tax-advantaged investments since the income they generate is taxed only once. A partnership's income passes through to its partners and is, therefore, taxed at each partner's level. In general partnerships, since there are no limited partners, limited liability is not an available feature. Also, profits are not automatically split equally among the partners.

A client and his wife purchased their home for $300,000. They have occupied their home for the last 26 years and have made $80,000 of improvements over the years. The home was recently put on the market for $800,000, but eventually sold for $770,000. Upon sale, the taxable capital gains would be how much? a. $470,000 b. $0 c. $390,000 d. $500,000

b. $0 Upon the sale of a primary residence, a portion of any capital gains are excluded from taxation. If filing a single tax return, the first $250,000 of gains from the sale are excluded. If filing a joint tax return, the first $500,000 in gains are excluded. In general, to qualify for the exclusion, both the ownership test and the use test must be met. For example, five years prior to the sale of the home you must have occupied the home as your primary residence for a minimum period of two years.

An equity-indexed annuity is linked to the S&P 500 Index and has a spread of 2.5%. If the S&P returns 7.5% in one year, the annuity's rate of return will be: a. 2.5% b. 5.0% c. 7.5% d. 10%

b. 5.0% Some equity-indexed annuities have a spread, margin, or asset fee. These represent the amount that will be deducted from the returns generated by the underlying index to determine the contract's returns. If the annuity had a spread of 2.5% and its underlying index returned 7.5%, then the annuity would be credited with 5% that year (7.5% - 2.5% = 5%).

Who would NOT be exempt from the definition of agent under the Uniform Securities Act? A NYC official who sells investment-grade GO bonds to the public A finance V.P. of a major appliance manufacturer who sells AAA bonds to the public A finance officer of a biotech company who sells IPO stock to his company's investment banker A clerk processing 401(k) distributions for former coworkers

b. A finance VP of a major appliance manufacturer who sells AAA bonds to the public Sometimes employees of an issuer selling securities may be considered agents. Generally, an employee of an issuer selling stock to the public would be considered an agent under the USA. Exemptions occur when the employee sells exempt securities, such as municipal debt, or is involved in an exempt transaction, such as a sale of securities to an investment banker during an underwriting. Employees who simply process financial transactions for coworkers are exempt unless they receive additional compensation for these activities.

The last dollar that a client earns would be taxed at their: a. Capital gains rate b. Marginal tax rate c. Internal tax rate d. Base rate

b. Marginal tax rate Earned income is taxed at an individual's personal income tax rate or marginal rate. The last dollar that you earn each year is taxed at your marginal rate.

Under the Uniform Securities Act, all of the following individuals meet the definition of an agent, EXCEPT: a. A person selling stocks that are listed on the NYSE b. A person advising clients about securities for compensation c. A person effecting securities transactions and not receiving commissions d. A person representing an insurance company in the sale of variable annuities

b. A person advising clients about securities for compensation An agent is an individual who represents a broker-dealer or an issuer in effecting securities transactions. The person in choice (b) is not an agent since she is providing advice and not effecting securities transactions. It is important to note that the type or amount of compensation received is not a factor in determining whether a person is an agent.

Under the Uniform Securities Act, which of the following statements is TRUE concerning the state registration of an agent? a. An agent may only sell securities that have been properly registered. b. An agent's registration to sell securities in a given state expires at the end of the calendar year. c. An agent may solicit business in a state if the agent, but not the broker-dealer, is registered in that state. d. If an agent leaves a broker-dealer to go to another broker-dealer, the Administrator does not need to be notified.

b. An agent's registration to sell securities in a given state expires at the end of the calendar year. The licenses of all agents, broker-dealers, investment advisers, and investment adviser representatives expire on December 31 each year and must be renewed in order to be effective. Renewal is accomplished by the payment of a filing fee. An agent may sell unregistered securities, as long as they qualify for an exemption.

Registration by coordination would most likely be used to register what type of offering? a. A new issue of mutual fund shares b. An initial public offering c. A new issue of shares listed on Nasdaq d. An intrastate offering

b. An initial public offering Under normal circumstances, the method of registration most often used by the new issuers of securities is registration by coordination. Mutual funds are federal covered securities. All listed securities, such as Nasdaq securities, are also federal covered and, therefore, exempt from registration with the states. Intrastate offerings are commonly registered by qualification.

When dealing with a customer, a broker-dealer is quoting an offering price of $10.00 per share on a stock that is currently trading in the market at $6.00 per share. If the broker-dealer does not disclose the difference in prices to the customer, this would be considered: a. A typical example of a market maker adding a markup b. An unethical business practice since the quoted price is not related to the current market price c. An unethical business practice since the spread was not disclosed to the customer d. An ethical practice provided the customer is willing to pay the offering price

b. An unethical business practice since the quoted price is not related to the current market price This question contains an example of providing a quote that is not based on the contemporaneous market price. Even with proper disclosure, this is considered an unethical business practice. A market maker is prohibited from adding a large markup to a stock price in order to ensure a profit. The contemporaneous market price is the current price at which a firm is willing to effect a trade.

All of the following transactions are considered exempt under the Uniform Securities Act, EXCEPT: a. A nonissuer transaction effected through a broker-dealer on an unsolicited basis b. Any transaction directed to a maximum of 15 retail (noninstitutional) investors c. A nonissuer transaction of a security filed under the Investment Company d. Any transaction between an issuer and an underwriter

b. Any transaction directed to a maximum of 15 retail investors Choice (b) may appear to be a private placement however, the maximum number of retail (noninstitutional) investors is 10, not 15. Any nonissuer transaction of a security registered under the Investment Company Act, or any transaction between an issuer and an underwriter would be considered exempt transactions. Additionally, unsolicited transactions effected through a broker-dealer are exempt

All of the following would be considered an investment adviser representative under the Uniform Securities Act, EXCEPT a(n): a. Portfolio manager for Winners Asset Management Co b. Broker-dealer offering wrap accounts to its clients c. A partner of Winners Asset Management Co. who supervises investment adviser reps d. An accountant who works for Winners Asset Management Co., who provides financial plans for clients

b. Broker-dealer offering wrap accounts to its clients An investment adviser representative is any person who is associated with an investment adviser and makes recommendations, manages accounts, provides advice, solicits advisory services, negotiates the sale of advisory services, or supervises persons engaged in these activities. A broker-dealer offering wrap accounts would be considered an investment adviser, not an investment adviser representative.

Section 15 of the Securities Exchange Act of 1934 regulates: a. Exchange-listed securities transactions b. Broker-dealer registration c. The sale of equity securities by insiders d. The delivery of prospectuses for nonexempt securities

b. Broker-dealer registration Section 15 of the Securities Exchange Act of 1934 requires broker-dealers to register with the SEC.

A technology company's stock is listed on an exchange and is also traded over-the-counter by a small number of market makers. The stock is considered by the Administrator to be a: a. Non-exempt security and subject to registration by coordination b. Federal covered security and not subject to registration with the Administrator c. Federal covered security and subject to registration by qualification d. Federal covered security and subject to notice filing with the Administrator

b. Federal covered security and not subject to registration wit h the Administration. Securities that are listed on the NYSE, Nasdaq, or other national exchanges are considered federal covered securities and exempt from registration with the Administrator. This federal covered status applies regardless of where other trades may take place. Although notice filing does apply to certain federal covered securities, it does not apply to listed securities. Investment company securities and securities that are issued under Regulation D Rule 506 are considered federal covered securities (exempt from state registration), but subject to notice filing.

Susan is a high-ranking official in the Comptroller's Office of Zanzibar Securities. Her title is Executive Vice President. Under the Uniform Securities Act, Susan is: a. An agent since all officers of a securities firm are considered agents b. Not considered an agent since she is not involved in sales or trading c. Considered an agent but would not need to pass a qualifying exam d. Not an agent but could accept unsolicited orders

b. Not considered an agent since she is not involved in sales or trading Only personnel engaged in securities transactions are agents. Officers can be considered agents, but it depends on their particular job function.

One of the main differences between futures contracts and forward contracts is that: a. Forward contracts do not involve commodities b. Forward contracts may not be offset without permission c. Futures contracts are always used to speculate d. An investor may not be short a futures contract

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

An investor is negotiating a contract with an investment adviser. The adviser wants to charge the investor a 2% management fee plus 20% of any appreciation that is realized in any given quarter. Although the investor is not opposed to the idea, in order to comply with the law, the investor must: a. Be an accredited investor b. Have assets under management of at least $1 million or a net worth of more than $2.1 million c. Have an existing brokerage account with an affiliated firm d. Be identified as an institutional investor

b. Have assets under management of at least $1 million or a net worth of more than $2.1 million Investment advisers may only charge performance-based fees to persons who are categorized as qualified clients. A qualified client is defined as a person that has $1 million of assets under management with the adviser or a net worth of more than $2.1 million. It is important to recognize that being considered an accredited investor does not satisfy the levels necessary to be considered a qualified client. Under Regulation D of the Securities Act of 1933, an accredited investor is a person with annual income of at least $200,000 or a net worth of at least $1 million. For qualified clients, the $1 million is the assets under management requirement; however, for accredited investors, the $1 million is the net worth requirement. Also note, the net worth does not include the person's primary residence or any associated mortgage.

The Administrator of the state of Wisconsin has designated the Investment Adviser Registration Depository (IARD) as the approved method for filing registration applications in that state. All filings must be done electronically through the IARD. Under which TWO conditions would an investment adviser requesting an application in Wisconsin NOT need to file electronically with the IARD? I. The IARD is not able to recognize the form that is filed. II. The application is not filed during normal business hours. III. The investment adviser claims a hardship exemption from filing. IV. The firm has not previously filed a Form ADV. a. I and II b. I and III c. II and IV d. III and IV

b. I and III In states where the Administrator has designated the IARD as the method for filing registration applications electronically, two exemptions are available. The exemptions are given in cases where the form that is filed cannot be accepted by the IARD and for hardships incurred through unexpected technical difficulties in filing. In such cases the investment adviser may file a manual application.

Which TWO of the following types of insurance have fixed premiums? I. Whole life insurance II. Universal life insurance III. Variable life insurance IV. Variable universal life insurance a. I and II b. I and III c. II and IV d. III and IV

b. I and III Universal life policies, including variable universal life, have flexible premiums. Variable universal life is sometimes called flexible-premium variable life insurance. Whole life and variable life insurance policies have fixed premiums.

Foresight Advisers does not have an office in New Mexico. Under the Uniform Securities Act, in which of the following situations would the firm be required to register as an investment adviser in that state? I. Foresight limits its practice to wealthy individual investors with $1 million or more in net assets who are domiciled in New Mexico. II. Foresight only advises government entities. III. Foresight solicits its services to eight retail customers in New Mexico. IV. Foresight has assets of $103.4 million under management. a. I and II only b. I and III only c. III and IV only d. I, III, and IV only

b. I and III only Firms with no office in a state would not be required to register as an investment adviser in the state provided the firm deals exclusively with institutions such as broker-dealers or government entities, but not individual investors. Another exemption exists for firms that send communications to a maximum of five noninstitutional customers in a 12-month period and have no office in the state. Any firm with assets under management (AUM) of $100 million up to $110 million is given the choice to register with the state or the SEC. Firms with AUM of $110 million or more are categorized as federal covered advisers and are, therefore, exempt from state level registration.

Under the Investment Company Act, which TWO of the following statements are NOT TRUE regarding the redemption of mutual fund shares? I. The investor will receive the net asset value as previous day's close. II. The investor will receive the next computed net asset value after the order is entered. III. The fund must pay the investor within seven days of receipt of the redemption. IV. The fund must pay the investor within three days of redemption. a. I and III b. I and IV c. II and III d. II and IV

b. I and IV Share redemption of mutual funds is based on forward pricing, which means that the investor will receive the next computed net asset value. This value is normally computed at the end of the business day. The client must be paid within seven calendar days of redemption.

Which TWO of the following statements are TRUE regarding non-qualified annuities? a. There is a 10% penalty on any taxable withdrawals that are taken before age 59 1/2 b. There is no 10% penalty on any taxable withdrawals that are taken before age 59 1/2 c. Distributions must begin by age 70 1/2 d. There is no required minimum distribution at age 70 1/2 a. I and III b. I and IV c. II and III d. II and IV

b. I and IV Non-qualified annuities are funded with after-tax (non-deductible) contributions. If funds are withdrawn before age 59 1/2, the earnings portion will be subject to taxation and a 10% penalty. However, since non-qualified annuities are funded after-tax, the IRS does not require distributions to begin at age 70 1/2.

One of the most common uses for a bypass trust is to: a. Provide capital to pay estate taxes b. Bypass capital gains taxes but pay ordinary income taxes on the assets c. Bypass all tax obligations on income paid to the beneficiaries d. Pass assets from the second deceased parent to his children

b. Pass assets from the second deceased parent to his children One of the most common uses for a bypass trust is to pass assets from parents to their children upon the death of the second parent.

Under the Uniform Securities Act, which of the following statements is/are TRUE regarding the registration of securities? I. A security is considered registered for one year from the effective date of its registration statement II. Once the registration statement is declared effective by the Administrator, the security is considered to be registered as long as the issuer files quarterly and annual financial statements III. If the registration statement for a security is declared effective by the Administrator of one state, it is also immediately effective in any state in which an identical registration statement has been filed IV. The filing of a registration statement may be done by a person other than the issuer a. II only b. I and IV only c. I, III, and IV only d. II, III, and IV only

b. I and IV only Under the USA, a registration statement is effective for one year from its effective date and may be filed by the issuer, a registered broker-dealer, or any other person on whose behalf the offering is being made. The filing of quarterly and annual financial statements is not a requirement for registration. Also, if an Administrator of one state declares an offering effective, it does not automatically mean that the registration is effective in any other state.

Under IRS rules, which of the following items are exempt from the definition of earned income? I. Unemployment benefits II. Alimony III. Child support IV. Income received from investments in property V. Net earnings from self-employment a. I, II, and III only b. I, II, III, and IV only c. II, III, IV, and V only d. I, II, IV, and V only

b. I, II, III, and IV The IRS defines earned income as compensation received for personal services actually rendered. According to the IRS, all of these items are considered earned income. - Wages, salaries, and tips - Union strike benefits - Long-term disability benefits received prior to minimum retirement age - Net earnings from self-employment - Unemployment, alimony, and child support are not considered earned income. Income received from investments in property are defined as passive income, which is different from earned income, and treated separately by the IRS.

Jack has a substantial amount of cash value built up in his variable life insurance policy. He would like to use some of it for a home renovation project. Which TWO of the following choices would be used to explain to Jack his options for accessing his cash value? I. If he withdraws some of his cash value, it will be treated as taxable earnings first, then a tax-free return of premiums (LIFO). II. If he withdraws some of his cash value, it will be treated as a tax-free return of premiums first, then taxable earnings (FIFO). III. If he takes a loan against the cash value, it will be taxed as earnings first, then treated as a tax-free return of premiums (LIFO). IV. If he takes a loan against the cash value, it will be tax-free. a. I and III b. II and IV c. II and III d. I and IV

b. II and IV Any withdrawal of cash value from a life insurance policy is considered a return of premiums first, which would be tax-free. Withdrawals above the amount of premiums paid will be considered interest and, therefore, taxable as income. Policyholders usually prefer to borrow against their cash value, since this would be tax-free. The loan does not need to be repaid, but any amount still outstanding upon the death of the insured will be subtracted from the death benefit.

When reviewing a corporation's financials, an agent would find which of the following items on the balance sheet? I. Cost of goods sold II. EBIT (earnings before interest and taxes) III. Taxes paid IV. Accounts payable a. II only b. IV only c. II and III only d. I, II, III, and IV

b. IV only The only item listed that is included on the balance sheet is choice (IV). All the other choices are found on the income statement. On your exam, you would need to be able to contrast items that are found on a balance sheet, such as accounts payable, accounts receivable, shareholders' equity, and good will, with items found on an income statement.

A client has $20,000 to invest, a 10-year time horizon, and a desire to have $50,000 at the end of the investment period. The rate of return that must be earned to arrive at $50,000 is called the: a. Expected return b. Internal rate of return c. Current yield d. Future return

b. Internal rate of return The rate of return that a sum P0 (present value) must earn over n periods to produce a final (future) value of Pn is the internal rate of return. It is represented by the quantity r in the basic time value of money equation: Pn = P0(1 + r)n A calculator is normally used to calculate the internal rate of return, since it is difficult to compute manually.

An investment adviser's client is considering acquiring a company for $10 million. The company's expected future cash flows are $2 million in the first year, $4 million in the second year, and $8 million in the third year. Which of the following measures would be most helpful when evaluating the this investment? a. Estimated payback period b. Internal rate of return (IRR) c. Future value of current cash flows d. Average rate of return

b. Internal rate of return (IRR) This is really a question about the present and future values of the company. The present value of the company is simply the purchase price of $10 million, while the future values are the cash flows of $2 million, $4 million, and $8 million. The internal rate of return is the rate of return that makes the present value of all cash flows [i.e. $2/(1 + r)1, $4/(1 + r)2, and $8/(1+ r)3] equal to the market value (i.e. $10 million). In the formula, the "r" is the missing IRR. Once the IRR is calculated, the client can use that rate to compare this investment to other investments (e.g., competing companies, bonds, or money market securities).

Which of the following statements is TRUE regarding discounted cash flow? a. It is used to calculate the volatility of the market b. It is used to determine the attractiveness of an investment c. It can only be used to determine the value of a bond d. It can only be used to determine the value of common stock

b. It is used to determine the attractiveness of an investment Discounted cash flow (DCF) analysis is a method of estimating the fair market price of an investment. If the investment is trading at a value lower than its discounted cash flow value, this would suggest it is attractive or undervalued. Research analysts use discounted cash flow analysis to determine the value of many different investment opportunities in the marketplace.

All of the following statements regarding discounted cash flow are NOT TRUE, EXCEPT: a. It is used to calculate the volatility of the market b. It is used to determine the attractiveness of an investment c. It can only be used to determine the value of a bond d. It can only be used to determine the value of common stock

b. It is used to determine the attractiveness of an investment Discounted cash flow (DCF) analysis is a method of estimating the fair market price of an investment. If the investment is trading at a value lower than its discounted cash flow value, this would suggest it is attractive or undervalued. Research analysts use discounted cash flow analysis to determine the value of many different investment opportunities in the marketplace.

The disadvantages of limited partnerships include: a. Inflation risk b. Potential assessments c. Double taxation of distributions d. Limited liability

b. Potential assessments An investor in a limited partnership may receive an assessment--a demand that he contribute additional capital to the partnership. Many partnerships invest in assets such as real estate that may actually be a hedge against inflation, choice (a). One of the advantages of limited partnerships compared to C Corporations is that they are not subject to double taxation, choice (c). Limited partnerships are pass-through entities for tax purposes--all income, losses, and gains are passed through to the partners, who must declare the income on their own tax returns. Limited liability is considered an advantage, not a disadvantage, when investing in LPs, choice (d).

An adviser could recommend the purchase of a bond to a client, if its: a. Present value is less than its current market value b. Present value is more than its current market value c. Net present value is less than zero d. Future value is less than its current market value

b. Present value is less than its current market value In evaluating the value of fixed-income securities, one method is discounted cash flow (DCF). Each future cash flow (interest payments and principal) is discounted to its present value and the present value of each cash flow is combined to determine the bond's present value. If the present value of future cash flows is less than the current market value of the bond, the investor would be paying a premium to acquire the bond and the net present value would be less than zero. If the current market value of the bond is less than the bond's present value, the bond can be purchased at a discount to its present value resulting in a net present value greater than zero. The future value of an investment is not considered in the DCF calculation.

An advisory client is pessimistic and believes that the economy is about to go into a recession. He instructs his adviser to sell his holdings in housing and technology stocks and purchase utilities and consumer staples. This strategy is known as: a. Diversification b. Sector rotation c. Tax selling d. Leveraging

b. Sector rotation Sector rotation is a strategy often used in anticipation of changes in the business cycle. If it is believed the economy is about to slow, profitable sectors to invest in would be consumer staples, or defensive stocks.

In which of the following situations does the registration of a broker-dealer result in an Administrator automatically registering an individual of the firm as an agent? a. The individual is an attorney who represents the firm b. The individual is a director of the broker-dealer and is actively engaged in the business of the firm c. The individual is an agent of the broker-dealer and is registered in another state d. The individual had been previously employed by the broker-dealer

b. The individual is a director of the broker-dealer and is actively engaged in the business of the firm The registration of a broker-dealer in a state will automatically constitute the registration of an individual as an agent if this person is actively engaged in the business of the firm and is a partner, director, officer, or occupies a similar status.

A broker-dealer is a syndicate member involved in a firm-commitment underwriting of a highly anticipated upcoming initial public offering (IPO). During the underwriting, the broker-dealer holds onto some of the shares in order to sell them at a later date since the shares are expected to rise in value. The broker-dealer's conduct is: a. Acceptable if the issuer approves of the trade b. Unethical and prohibited under the Uniform Securities Act c. Allowable only if the shares will be listed on a national exchange d. Acceptable since the broker-dealer is accepting risk that the shares may fall in value

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

Under the Investment Advisers Act of 1940, when is a firm's registration required to be renewed? a. Within 30 days of the calendar year-end b. Within 90 days of the adviser's fiscal year-end c. Within 30 days of the adviser's fiscal year-end d. Within 90 days of the calendar year-end

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

A client of an IAR is 35 years old and single with three children, ages 7, 9, and 12. She has 15 years remaining on her home mortgage. She would like to ensure her children will be able to attend college and that the mortgage will be paid off in the event of her death. She does not currently have a great deal of discretionary income. Which of the following would be most suitable for the IAR to recommend? a. A whole life policy, cancelable after 15 years b. A 15-year term life insurance policy c. A whole life policy with a 15-year term rider d. A universal life policy with increased premiums after 15 years

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

Who would NOT be exempt from the definition of agent under the Uniform Securities Act? a. A NYC official who sells investment-grade GO bonds to the public b. A finance V.P. of a major appliance manufacturer who sells AAA bonds to the public c. A finance officer of a biotech company who sells IPO stock to his company's investment banker d. A clerk processing 401(k) distributions for former coworkers

b. a finance VP of a major appliance manufacturer who sells AAA bonds to the public Sometimes employees of an issuer selling securities may be considered agents. Generally, an employee of an issuer selling stock to the public would be considered an agent under the USA. Exemptions occur when the employee sells exempt securities, such as municipal debt, or is involved in an exempt transaction, such as a sale of securities to an investment banker during an underwriting. Employees who simply process financial transactions for coworkers are exempt unless they receive additional compensation for these activities.

Under the Uniform Securities Act, which of the following transactions would be considered a sale? a. The exercise of a call option b. A gift of assessable stock c. A stock dividend d. Lending stock to short-sellers

b. a gift of assessable stock Gifts are generally not considered sales. However, since assessable stock may require the person who receives the gift to provide additional money or capital, it is considered a sale. Loans and pledges of securities as well as stock dividends do not constitute a sale if nothing of value is given by the shareholder for the dividend.

Which of the following persons would be subject to statutory disqualification under the Securities Exchange Act of 1934? a. A person accused of insider trading b. A person who pleaded guilty to stock manipulation five years ago c. A person who was the defendant in a civil lawsuit d. A person who was the chief executive officer of a failed broker-dealer

b. a person who pleaded guilty to stock manipulation five years ago A statutory disqualification is the denial of an applicant for registration based on the past transgressions of the applicant, including violations of any securities or commodities law. Being the chief executive of a failed broker-dealer does not itself lead to statutory disqualification, but this information must be disclosed on any subsequent application in the securities industry. A person accused of insider trading has not been convicted.

An 81-year-old father is establishing a bypass trust for his two adult children who are both in their 40s. His investment adviser is evaluating the risks and benefits of numerous investment vehicles. Which of the following choices is MOST appropriate investment in a bypass trust? a. Government securities, since they preserve the value of the assets that will be passed to the beneficiaries b. Growth stocks, since the beneficiaries will not need the funds for several years c. Municipal securities, since the income that will be provided to the beneficiaries is tax-free d. Bonds with short-term maturities due to the grantor's age

b. growth stocks, since the beneficiaries will not need the funds for several years A Bypass Trust (or Credit Shelter Trust) is a type of irrevocable trust and is most commonly used to pass assets from parents to children at the time of the second parent's death. These trusts are structured in such a way that the children will be required to pay estate taxes on any assets that exceed the current estate tax exemption. The key to this specific question is to identify the ages of the beneficiaries. Since both children are in their 40s, a growth investment is the most appropriate. The focus must be on the beneficiaries, not the grantor.

Which of the following statements is TRUE regarding the Consent to Service of Process? a. It must be renewed every year. b. It is used for receiving and processing noncriminal complaints. c. Filing is optional. d. None of the above

b. it is used for receiving and processing noncriminal complaints. The Consent to Service of Process appoints the state Administrator to serve as the applicant's attorney for the purpose of receiving and processing noncriminal complaints. It is required of all registrants when they file for registration in a state.

An agent recommends that a client purchase a particular security. The agent believes the client has the resources to pay for the transaction. Three days after the trade is executed, the client indicates that he cannot meet his financial obligation to the brokerage firm. According to the Uniform Securities Act, if the agent lends personal funds to the client: a. The agent has committed fraud b. The agent has acted in an unethical manner c. The client forgoes the right to be offered a letter of rescission d. All of the above

b. the agent has acted in an unethical manner This is unethical behavior, not fraud. An agent may not borrow funds from, or lend funds to, a client.

Ten years ago a client transferred her 401(k), worth $80,000, into an IRA. Her account has grown to $120,000 and she takes a distribution of $10,000 at age 52. The tax consequences of her actions would be: a. $10,000 long-term capital gain plus a 10% penalty b. $40,000 of taxable ordinary income c. $10,000 of taxable ordinary income plus a $1,000 penalty d. $10,000 long-term capital gain plus a 15% penalty

c. $10,000 long=term capital gain plus a 15% penalty. Withdrawals from an IRA prior to age 59 1/2 will result in a 10% penalty and be added to income for tax purposes. The penalty will not be incurred if the withdrawal is made due to physical disability or death. Additionally, under specific circumstances, withdrawals used to pay medical expenses and qualified educational expenses, may be made penalty-free prior to the attainment of age 59 1/2.

Biff and Muffy want to contribute the maximum amount to each of their grandchildren's 529 college savings plans. What is the most that they can give each grandchild without incurring federal gift tax liability? a. $2,000 annually or $10,000 every 5 years b. $2,000 annually or $20,000 every 5 years c. $28,000 annually or $140,000 every 5 years d. As much as they want each year up to $300,000

c. $28,000 annually or $140,000 every 5 years As a married couple, Biff and Muffy may contribute $28,000 annually to each of their grandchildren's 529 savings plans without incurring gift taxes. They may also compact five years of contributions into one and contribute $140,000 to each grandchild's 529 plan without incurring gift taxes. If they choose to aggregate their contributions into one large lump sum, they may not contribute more for the following five years without incurring gift taxes.

A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63. The trade was executed at: a. 18.25 b. 18.38 c. 18.50 d. 18.63

c. 18.50 After the order was activated by the round-lot sale of 18.25, the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and would be the execution price.

With reference to the Uniform Securities Act, when does an agent's registration become effective? a. December 31 b. 60 days after filing the application c. 30 days after filing the application d. As soon as the agent passes the exam

c. 30 days after filing the application Under the Uniform Securities Act, registrations become effective at noon on the 30th day after filing the application.

Which of the following choices is a broker-dealer in State B? a. An agent in State A who contacts a client in State B b. A corporation that sells commercial paper every other week in State B c. A broker-dealer registered in State A, where its only office is located, which has three individual clients in State B d. A bank trust department that buys and sells securities for its customer

c. A broker-dealer registered in State A, where its only office is located, which has three individual clients in State B. Agents, issuers, and banks are not broker-dealers. Also, a person with no place of business in a state, who deals only with institutional investors, is not a broker-dealer. If a firm deals with individuals, it would be considered a broker-dealer, even if it did not have an office in the state.

Which of the following choices is NOT a characteristic of equity-indexed annuities? a. A guaranteed minimum rate of return b. A rate of return that varies along with the underlying index c. A rate of return that is determined by the subaccounts that the contract owner selects d. A return that is less than that of the underlying index

c. A rate of return that is determined by the subaccounts that the contract owner selects In an equity-indexed annuity, the insurance company guarantees the contract owner a minimum rate of return. The insurance company usually guarantees that the investor will receive most of her premium payments back plus a fixed return based on current interest rates. The investor's ultimate returns may be higher than the minimum guaranteed rate depending on the performance of the index to which the contract is linked; however, it will always be lower than the return on the index.

Mary Smith is setting up an investment advisory business in the town in which she grew up. She has known the mayor of the community since childhood. She places an advertisement in the local newspaper that quotes the mayor saying, "I have known Mary Smith since childhood and we are fortunate to have someone with her expertise and integrity locating her investment advisory business in our community." This advertisement would be: a. Acceptable as long as it stated whether the mayor was receiving more than a nominal fee for his statement b. Acceptable as long as the advertisement contained a footnote describing the mayor's qualifications c. A violation of the IA Act of 1940 and, therefore, prohibited d. Prohibited because a mayor is not qualified to comment on the competence of an investment adviser

c. A violation of the IA Act of 1940 and, therefore, prohibited. A broker-dealer may use testimonials as long as they disclose whether more than a nominal fee was paid for them. An investment adviser may not use testimonials in its advertising.

Which of the following items are listed on a balance sheet? I. Assets II. Liabilities III. Retained earnings IV. Operating expenses a. I only b. I and III only c. I, II, and III only d. I, II, III, and IV

c. I, II, and III only Assets, liabilities, and retained earnings are balance sheet items and are not represented on the income statement. Retained earnings are the funds that a company earned that it did not pay out in the form of cash dividends.

Under NASAA's Statement of Policy on Unethical Business Practices, which of the following statements is TRUE regarding investment advisory fees charged to customers? a. There is no limit on the fee charged, provided the customer agrees to the method of computation and the method is disclosed in writing to the client b. Investment advisory fees may not exceed an annual rate of 5% of the total assets under management, with assets valued at the end of the computation period c. Advisers may not charge fees that are unreasonably high in relation to fees charged by other advisers for similar services d. As long as the fees charged by an investment adviser (IA) are based on a percentage of the assets under management, and not on a percentage of profits, and are agreed to by the client, there is no limitation on the size of fees charged

c. Advisers may not charge fees that are unreasonably high in relation to fees charged by other advisers for similar services. Although it is difficult to compare the advisory services provided to clients of different advisers, a general standard of reasonable fees is used to compare fees charged by various advisers. Fees that are obviously out of line with those charged for similar services are considered unethical.

During the day, Big Block Traders has taken down 100,000 shares of Vantage Holdings at $6.33, another 200,000 shares at $6.17, and then 327,000 shares at $6.54. When distributing these shares to its discretionary clients, which of the following allocation methods is acceptable? a. Allocating low cost shares to the largest clients b. Allocating high cost shares to non-wrap accounts c. All clients should be given shares at a price that is near the firm's average daily cost d. All clients should be charged the average market price of the security for that date

c. All clients should be given shares at a price that is near the firm's average daily cost When examining a firm's method of allocating trades among its clients, the regulators main focus is on fairness. Of the given choices, the best approach is to give stock to all clients at a price that is near the firm's average daily cost (plus commissions/markups, etc.). The average market price for the security during the day is irrelevant since the firm's average daily cost may differ significantly from this price.

Diminutive Advisers is a small, single-office investment advisory firm with $4 million in assets under management. The firm is located in Texas. According to the Uniform Securities Act, which of the following persons associated with the firm would NOT fall under the definition of an investment adviser representative? a. Sally Fin, a school teacher employed full-time by the San Antonio school district, who also does some part-time investment counseling and to whom Diminutive pays a nominal commission on assets directed its way b. Ben Braynee, the firm's supervisory analyst, who does not have client contact c. An in-house accountant who tabulates investment results for client accounts d. All of the above, since none of the aforementioned individuals has full-time sales responsibility

c. An in-house accountant who tabulates investment results for client accounts IA representatives are persons who are associated with an IA and make recommendations, manage accounts, solicit, or negotiate the sale of IA services, or supervise any persons who engage in these activities. Strictly clerical persons, such as the accountant, are not considered IA representatives. There is no requirement for a person to be an employee or to be solely dedicated to sales to meet the definition of IA representative.

According to the Form ADV, a felony, as compared to a misdemeanor, is defined by all the following choices, EXCEPT: a. An offense punishable by a sentence of at least one-year imprisonment b. An offense punishable by a fine of at least $1,000 c. An offense punishable by a fine of at least $500 d. A general court martial

c. An offense punishable by a fine of at least $500 All the choices are applicable except choice (c). A felony is an offense punishable by a sentence of at least one year imprisonment and/or a fine of at least $1,000. The term also includes a general court martial. A misdemeanor includes a special court martial, or an offense punishable by a sentence of less than one year imprisonment and/or a fine of less than $1,000.

An agent in Maine calls a prospective client in New Hampshire and recommends the purchase of a security. Under the Uniform Securities Act, the offer is made in: a. Maine only b. New Hampshire only c. Both Maine and New Hampshire d. No offer is made unless the client agrees to buy the security

c. Both Maine and New Hampshire Under the USA, an offer is made in a particular state when the offer either: (1) originates from the state, or (2) is directed by the person making the offer (the agent) to the state, and is received in the place to which it is directed.

Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is: a. One year b. Three years c. Five years d. There is no time limit for criminal violations

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

Under the Uniform Securities Act, which of the following activities of an investment adviser would constitute impersonal advisory services? a. Telling a client to buy municipal bonds in order to reduce her tax liability b. Providing clients with a recommended list of mutual funds for their retirement accounts c. Giving a client a list of mutual funds with the lowest expense ratios for the past five years d. Telling a client that investment XYZ will meet her investment objectives

c. Giving a client a list of mutual funds with the lowest expense ratios for the past five years Impersonal advisory services are those activities of an investment adviser that do not meet the specific needs or objectives of a client, or which do not render an opinion of the investment merits of a particular security.

An investment adviser is registered in State X. A new employee is recently hired as an investment adviser representative (IAR), but had previously worked for an adviser in State Y. The IAR still directs client communications with 22 of her clients from State Y, but no longer has a place of business there. Under the Uniform Securities Act, the IAR would be required to register in State Y if six or more of the clients are: a. Insurance companies b. Broker-dealers c. Highly qualified wealthy investors with a net worth of more than $1 million d. Qualified institutional investors

c. Highly qualified wealthy investors with a net worth of more than $1 million Under the Uniform Securities Act, investment advisers and investment adviser representatives are exempt from registration in a state if they have no place of business in the state and all of their clients are institutional investors. Examples of institutional investors include broker-dealers, banks, insurance companies, qualified employee trusts, and other investment advisers. Remember, there is no registration exemption for advisers simply based on the fact that their clients are wealthy or have a high net worth.

Under the Investment Advisers Act of 1940, which of the following statements is/are TRUE concerning an investment adviser's use of a solicitor? I. The cash fee paid to a solicitor must be disclosed. II. A partner, officer, director, or employee cannot perform solicitation activities. III. The solicitor must provide the client with a separate written disclosure that sets forth the solicitor's relationship with the adviser and any differential in advisory fees charged over the adviser's usual fees. IV. The adviser must receive from the client a signed acknowledgment of receipt of the solicitor's written disclosure brochure. a. I only b. I and II only c. I, III, and IV only d. I, II, III, and IV

c. I, III, and IV only Some advisers pay solicitors to obtain clients. If the services of a solicitor are used, various disclosures must be made to the client. In addition to ADV Part 2, there must be a separate solicitor disclosure document that describes the solicitor's relationship to the adviser and the terms of solicitor compensation. Partners, officers, directors, and employees may perform solicitation activities as long as this fact is disclosed.

Which TWO of the following statements are NOT TRUE regarding the investment risk of a life insurance policy? I. Whole life policy writers bear the risk that the general account return will not meet the guaranteed rate. II. Whole life policy owners bear the risk that the general account return will not meet the guaranteed rate. III. Variable life policy writers bear the risk of poor separate account returns. IV. Variable life policy owners bear the risk of poor separate account returns. a. I and III b. I and IV c. II and III d. II and IV

c. II and III Since the writer of a whole life policy guarantees the return, the insurer bears the risk that general account returns will not meet the guaranteed rate. In a variable account, the writer does not guarantee increases in death benefits and cash value. They are dependent on the returns in the separate account.

According to the Uniform Securities Act, if the Administrator wishes to revoke a firm's registration, which of the following statements is/are TRUE? a. Revocation may not be started until the firm has had a hearing with the Administrator and the State's Ethics and Procedures Panel (SEPP). b. The firm may request a hearing with the Administrator within 15 days of the revocation. c. The firm may apply for judicial review of the Administrator's actions within 60 days. d. All employees of the firm must requalify by examination. a. I only b. I and IV only c. II and III only d. I, III, and IV only

c. II and III only The Administrator may revoke a registration without providing the opportunity for a prior hearing but, if requested, the Administrator will grant a hearing within 15 days. The firm has 60 days to apply for legal (judicial) review of the Administrator's action. Registrations of all persons associated with the firm will become inactive during this period, but they will not need to requalify solely because their employer's registration has been revoked.

According to Sarbanes-Oxley, a public corporation's financial statements must be certified by the corporation's: I. Chief auditor II. Chief executive officer III. Legal counsel IV. Chief financial officer V. Compliance officer a. I only b. I and II only c. II and IV only d. II, III, and V only

c. II and IV only Sarbanes-Oxley is a federal law that, among other things, requires a corporation's annual and quarterly financial reports to be certified by the CEO and CFO of the corporation.

Which of the following bonds have the MOST credit risk? a. Equipment trust certificates b. Mortgage bonds c. Industrial development bonds d. General obligation bonds

c. Industrial development bonds Although they are issued by municipalities, industrial development bonds (IDBs) are unsecured and often issued to finance the creation of certain types of industrial facilities. IDBs are more subject to credit risk than the other choices since they are backed by the creditworthiness of the corporation that leases the facility that has been created. On the other hand, equipment trust certificates and mortgage bonds are types of secured corporate bonds. Since these bonds are backed by physical assets owned by a corporation, they have less credit risk. A general obligation bond is backed by the taxing authority and full faith and credit of a municipality and, on average, is considered to have less credit risk than an unsecured corporate bond.

Which of the following statements is TRUE about indexing? a. It measures the performance of an IA versus an index. b. It is an active management strategy. c. It may result in a portfolio that does not accurately track the index. d. It is a strategy in which an IA attempts to outperform a specific index.

c. It may result in a portfolio that does not accurately track the index. Indexing is a passive, not an active, management strategy. When using this passive strategy, an IA attempts to build a portfolio that will mirror or match the performance of a specific index. However, it is quite possible that the portfolio's actual return may not match the performance of the index. If this is the case, it is referred to as a tracking error.

According to modern portfolio theory, a diversified portfolio should be comprised of assets that are: a. Highly liquid b. Optimally efficient c. Largely uncorrelated d. Alternative investments

c. Largely uncorrelated Ideally, a diversified portfolio should be composed of assets that are largely uncorrelated--i.e., do not move in the same direction.

An agent solicits the purchase of MPH, Inc, a nonexempt, unregistered security. The agent requests the client sign a document, acknowledging the security's status. The document also includes an exculpatory provision absolving the agent and the broker-dealer from any liability or wrongdoing. The waiver the client signed is: a. Acceptable b. Acceptable with the Administrator's approval c. Null and void d. Subject to civil liability and criminal penalty

c. Null and void Agents must not solicit nonexempt, unregistered securities nor should they request a client sign documents absolving the agent or broker-dealer from wrongdoing. Such statements are sometimes called exculpatory clauses and are prohibited. These documents would be null and void under the Uniform Securities Act.

On Tuesday, June 3, an IA discovers its net worth has fallen below the minimum requirement. When must the IA file a report of its financial condition with the Administrator? a. On Tuesday, June 3 b. On Wednesday, June 4 c. On Thursday, June 5 d. On Friday, June 6

c. On Thursday, June 5 If an IA's net worth is less than the required minimum, it must notify the Administrator by the close of the next business day (in this question, Wednesday, June 4). After notification is made, the IA must file a report of its financial condition by the next business (in this question, Thursday, June 5). Thereafter, the Administrator may require the IA to post a bond for the deficiency.

An investment adviser representative manages a portfolio for a client on a discretionary basis. The client's objective is conservative growth. According to prudent investor standards, which of the following statements is TRUE regarding the inclusion of options in his portfolio? a. Options, although generally not appropriate in a conservative portfolio, would be permitted with the prior written consent of the client. b. Options would be appropriate only if the investor has had previous experience investing in options. c. Options strategies may be appropriate as part of a conservative portfolio. d. Options strategies may be appropriate for conservative portfolios, provided the strategy does not include the purchase of uncovered options.

c. Options strategies may be appropriate as part of a conservative portfolio Prudent investor standards are applied to the client's total portfolio, not on an investment-by-investment basis. Rather than restricting individual investments, anything might be appropriate as part of a portfolio if the investment helps the portfolio achieve specific objectives. For example, writing covered calls or buying protective puts could be part of a conservative growth portfolio. There are no purchases of uncovered options. An uncovered position is the sale of an option without an underlying position in a stock.

Mrs. Smith sets up a grantor trust where the income is used to pay the premiums on her husband's life insurance policy. Mr. and Mrs. Smith file their taxes as married but filing separately. The tax on the income generated by the trust is: a. Paid by the trust b. Paid by the husband c. Paid by the wife d. Not taxable, since the proceeds of life insurance are not taxable

c. Paid by the wife A grantor trust is one in which the grantor retains a right to any income generated by the trust, as well as the power to revoke the trust. The income generated by the trust must be included in the grantor's taxable income. The grantor is responsible for paying all taxes on any funds the trust distributes or retains for future distribution. For tax purposes, it is irrelevant that the income is used to pay the premiums on insurance policies owned by the grantor or the spouse.

If Jane Brown annuitizes her nonqualified variable annuity, how will the series of payments be taxed? a. LIFO b. FIFO c. Part of each payment is taxable earnings and part is a tax-free cost basis d. All taxable earnings first, then all cost basis

c. Part of each payment is taxable earnings and part is a tax-free cost basis A nonqualified annuity has a cost basis consisting of the after-tax dollars invested, as well as earnings that are tax-deferred. If it is annuitized, the cost basis is returned in equal amounts in each payment. The rest of each payment is tax-deferred earnings that become taxable (as income) upon receipt.

According to modern portfolio theory (MPT), the expected return of an investment is the: a. Average return including realized and unrealized gains and losses, plus income over a measured time period b. Market return on the investment adjusted by the beta of the stock or the portfolio c. Possible returns on the investment weighted by the likelihood that return will occur d. Standard deviation of gains and losses over the life of the investment

c. Possible returns on the investment weighted by the likelihood that return will occur. MPT defines the expected return of an investment as the possible returns on the investment weighted by the likelihood that return will occur.

According to the USA, if the ownership of a registrant changes, it must do which of the following? a. Notify the Administrator at the time of renewal b. Promptly file a new application with the Administrator c. Promptly file a correcting amendment with the Administrator d. Provide notification of the change to the Administrator by altering its books and records

c. Promptly file a correcting amendment with the administrator Whenever there is a material change of ownership for a registrant, a correcting amendment to its registration must be filed with the Administrator promptly. While registrants are not required to file a new application, they may not wait until the time of their annual renewal to notify the Administrator of the change.

According to the Uniform Securities Act, which of the following securities are exempt from registration? Stock issued by a FINRA member firm Debentures issued by a Canadian bank Stock issued by a state-regulated railroad company Preferred stock sold to investors in the same state in which the firm is incorporated

c. Stock issued by a state-regulated railroad company Common carriers, such as railroads and shipping companies, are exempt from registration under the Uniform Securities Act. While securities issued in the same state in which the firm is incorporated may be exempt from the Securities Act of 1933, they are usually required to register with the state. Agencies of the Canadian government and domestic U.S. banks are also exempt from registration, but securities issued by Canadian banks receive no such exemption.

Warren is a growth-oriented investor who is bullish on the long-term prospects of the U.S. stock market. He has diversified his portfolio in the following ways: individual stocks from various sectors, an S&P 500 Index fund, an aggressive growth fund, a fund of funds, and a variable annuity where he has invested in mid- and large-cap stock portfolios. What type of risk is his portfolio MOST subject to? a. Capital risk b. Business risk c. Systematic risk d. Inflation risk

c. Systematic Risk Systematic risk is market risk. This is the risk that a decline in the overall market will cause a similar decline in an individual's portfolio. Systematic risk cannot be diversified away. Warren owns many kinds of stocks, in many different market segments and sectors. However, if the overall market declines, Warren's portfolio will be affected. Many of the stocks he owns may also subject Warren to business risk and capital risk. But the overriding concern in this portfolio is a general market decline taking Warren's portfolio with it. As an adviser, you might suggest that Warren consider investing some of his portfolio in bonds and other investments outside of the stock market.

Under which of the following circumstances will the payout from a variable annuity increase? a. The rate of inflation exceeds the AIR. b. The performance of the separate account exceeds the rate of inflation. c. The performance of the separate account exceeds the AIR. d. The performance of the separate account for the current period exceeds the performance of the separate account for the previous period.

c. The performance of the separate account exceeds the AIR. Whether the payment from a variable annuity changes depends on the relationship between the performance of the separate account and the assumed interest rate (AIR) in the contract. If the account performance exceeds the AIR, the payment will be greater than the last payment. If the account performance equals the AIR, the payment will be unchanged from the last payment. If the account performance is less than the AIR, the payment will decline from the last payment.

An investment advisory firm has three partners and ten associates. While all of the partners have earned a CFP (Certified Financial Planner) designation, the associates are attending CFP classes, but have not yet earned the designation. The advisory firm has published an advertisement that states, "All of our partners have completed the CFP certification program." Which of the following statements is TRUE? a. This is unethical since investment advisers may not advertise their qualifications. b. This is unethical since it implies that all of the firm's employees are CFPs, which is misleading. c. This is acceptable since the statement is literally true. d. This is acceptable since the content of adviser advertisements is not regulated.

c. This is acceptable since the statement is literally true. Under NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers, it is unethical to misrepresent the qualifications of the adviser or any employee. Advisers must consider how the wording of their ads will be interpreted by the public and how it could be misleading. Since the advertisement states that the partners, not all employees, have earned their CFP certification, this is acceptable since the statement is true.

ABC Investment Advisers purchases quarterly research reports from XYZ Brokerage and sends the report to clients. Which of the following statements, if printed on the research reports, would violate NASAA guidelines on Unethical Business Practices of Investment Advisers? a. This report is provided to you courtesy of ABC Investment Advisers. b. ABC Investment Advisers uses this and other information from XYZ Brokerage in determining its investment recommendations. c. This research report was created for your benefit by ABC Investment Advisers. d. ABC Investment Advisers does not necessarily endorse the recommendations of XYZ Brokerage contained in this report.

c. This research report was created for your benefit by ABC Investment Advisers Choice (c) gives the impression that the third-party research report was actually created by ABC. This would be a misleading statement.

According to the Uniform Securities Act, which of the following statements is TRUE? a. When an agent's registration is suspended in a state, the broker-dealer would no longer be able to conduct business in that state. b. When an investment adviser representative's registration is suspended, the investment adviser's registration is no longer in effect. c. When a broker-dealer is suspended, the agent's registration is no longer in effect. d. None of the above

c. When a broker-dealer is suspended, the agent's registration is no longer in effect. If an agent's registration is suspended, the broker-dealer's registration remains intact. However, an agent's registration is only effective when the broker-dealer's registration remains in effect. If an investment adviser representative's registration is suspended, the investment adviser's registration is not affected.

Carrie has been a client of an investment adviser that is established as a partnership for four years and is happy with the performance of her account. If she wants to renew her contract with the firm, which of the following provisions is NOT required in the contract? a. Notification if a managing partner, who does not manage any of Carrie's assets, retires from the firm b. Notification if a managing partner, who does not manage any of Carrie's assets, leaves to start a new advisory firm c. Notification if the investment adviser representative, who manages Carrie's assets, leaves to start a new advisory firm d. Notification if a minority partner leaves the firm

c. notification if the investment adviser representative, who manages Carrie's assets, leaves to start a new advisory firm. One of the provisions that is required in investment advisory contracts is that the adviser will notify its clients of any change in the partnership (ownership) within a reasonable period. Whether a partner who leaves or dies is responsible for managing a client's assets is irrelevant to the notification provision. The reason that choice (c) is the answer is because the IAR that manages Carrie's assets is not a partner of the advisory firm. Although it is a good business practice for the advisory firm to notify Carrie that her IAR has left the firm, it is not a requirement.

A client invested $100,000 in an Equity Indexed Annuity. The participation rate is 90% with a cap rate of 15%. In year one, the index increased by 20%. In year two, the index lost 5%. In year three, the index gained 10%. What is the value of the annuity after year three? a. $118,000 b. $115,000 c. $135,700 d. $125,350

d. $125,350 - An Equity Indexed Annuity is credited with the lesser of the participation rate or the cap rate, based on the performance of an index such as the S&P 500. In year one, the index increased by 20%. 90% of the gain is equal to 18%, but since the annuity can't be credited with more than the cap of 15%, the value of the annuity would be $115,000 (1.15 X $100,000). - Many Equity Indexed Annuities have a floor of zero, thus a negative return in the index will not cause the value of the annuity to decline. Therefore, in year two, the value of the annuity would remain the same. - In year three, the index increased by 10%. 90% of the gain is 9%, which is less than the cap rate, so the annuity would be credited with 9%, or $125,350 (1.09 X $115,000).

During the first quarter, TJG common stock paid a $.75 dividend. The stock's price fell from $75 per share at the beginning of the quarter to $67.50 per share at the end of the period. Based on these results, what is the stock's annualized total return? a. 2% b. -9% c. -10% d. -36%

d. -36% The total return for a security is found by taking the ending value minus the beginning value plus any income. In this example, the ending value of the stock was $67.50 minus the beginning value of $75.00 plus $0.75 in dividends. Dividing this sum by the beginning value of $75.00 will equal a 9% loss for the quarter. Multiplying this by four quarters will equal an annualized loss of 36%.

Under the Uniform Securities Act, which of the following transactions is NOT exempt from state registration? a. The sale of securities by a sheriff b. An isolated, non-issuer transaction c. A transaction executed on a national securities exchange d. A Rule 147 offering

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

Which of the following elements are required for an investment contract to be considered a security? I. An investment of money II. An expectation of profits III. A common enterprise IV. Efforts made by a third party a. I and II only b. I, II, and III only c. I, II, and IV only d. I, II, III, and IV

d. I, II, III, and IV The test of whether an investment meets the definition of a security was established by a Supreme Court case (referred to as the Howey Test). All of the four choices listed are required parts of the test.

Which of the following persons would meet the definition of an investment adviser according to SEC Release 1092? a. A broker-dealer that provides the public with asset allocation tools b. An accountant who holds herself out to the public as a provider of tax planning advisory services c. A bank that holds itself out to the public as a provider of trust services d. A lawyer who holds himself out to the public as a provider of financial planning advisory services

d. A lawyer who holds himself out to the public as a provider of financial planning advisory services. According to SEC Release 1092, lawyers who hold themselves out to the public as providers of financial planning services would meet the definition of an investment adviser. In these circumstances, the advice provided by the lawyers would no longer be incidental to their law practice.

According to the Uniform Securities Act, which of the following investment adviser representatives (IARs) is considered to have custody of customer funds? a. An IAR who receives a customer check in the mail that is made payable to a broker-dealer b. An IAR who receives a customer's permission to place trades in her account c. An IAR who also acts as an agent for a broker-dealer and earns commissions d. An IAR who has been hired by a customer to act as the trustee for the customer's account

d. An IAR who has been hired by a customer to act as the trustee Trustees are responsible for the care, custody, and control of the assets of someone else. An IAR acting as a trustee has check-writing privileges in his customer's account and is considered to have custody of the customer's assets. As in choice (a), if an IAR receives a customer check made payable to a third party, he avoids any custody issues by returning it to the customer within three business days. Simply having discretionary authority to make investment decisions (limited discretion) does not meet the threshold for custody.

According to the Investment Advisers Act of 1940, which of the following individuals would need to register as an investment adviser? a. An attorney who determines the fair market value of the assets inside of an estate b.An accountant who recommends a tax-advantaged strategy when reviewing a client's tax return c. A broker-dealer d. An individual who sells a market timing newsletter that advises clients when to buy and sell exchange-traded options

d. An individual who sells a market timing newsletter that advises clients when to buy and sell exchange-traded potions Broker-dealers are excluded from the definition of an investment adviser, as are certain professionals, such as attorneys, and engineers, whose advice is incidental to their profession. An individual who sells a market timing newsletter is selling securities-related advice that is not incidental.

Under the Uniform Securities Act, which of the following statements is TRUE concerning the registration of an investment adviser? a. An investment adviser who maintains an office in a state and whose clients are all savings and loan associations is exempt from registration. b. An investment adviser who does not maintain an office in a state and whose clients are all savings and loan associations is not exempt from registration. c. An investment adviser who does not maintain an office in a state and whose clients are all accredited investors is exempt from registration. d. An investment adviser who does not maintain an office in a state who has seven clients who are residents of that state is not exempt from registration.

d. An investment adviser who does not maintain an office in a state who has seven clients who are residents of that state is exempt from registration. An investment adviser is exempt from registration if the adviser has no office in a state and has clients who are all institutional investors (savings and loan associations), or does not have more than five retail clients who are residents of that state. Not all accredited investors are institutional investors.

An adviser is constructing a bond portfolio for a client whose goals are stable income and return of principal. The adviser determines that the appropriate benchmark to compare this portfolio's performance is the Wheyman Intermediate-term Government Bond Index. Which of the following statements is NOT TRUE regarding this decision? a. Choosing this index implies that mortgage-backed securities are not a large part of the portfolio. b. This portfolio should have low levels of risk to match the benchmark. c. The client's goals of stable income and return of principal are not guaranteed by the choice of this benchmark. d. Any returns of this portfolio that exceed the performance of the benchmark are measured by the beta of the portfolio.

d. Any returns of this portfolio that exceed the performance of the benchmark are measured by the beta of the portfolio When constructing a portfolio, an adviser typically starts by considering the securities in the benchmark and will then determine what additional securities may add value to the portfolio. The benchmark indicates not only the types of securities that should be included in the portfolio, but also the types that should not be. In this example, the choice of a government bond index as the benchmark for the client's portfolio is indicative of the fact that the portfolio should not include a large percentage of securities that have a high degree of risk. Since the benchmark is an intermediate-term government bond index, it is expected that it will offer a low return that is in line with the low level of risk that is typically associated with government bonds. Since a benchmark is simply a measuring stick for comparison purposes, choosing this benchmark does not guarantee that the goals will be met and it does not protect against bad investment decisions or market fluctuation. As referenced in choice (d), beta is actually used to compare the volatility of a portfolio to the volatility of the market; it does not measure excess returns above a benchmark (which is measured by alpha). Another important point is that beta is not a measure to be used for fixed-income portfolios.

Your client, Ms. Fabozzi, would like to invest in a fixed-income security for her portfolio. She understands there is a tradeoff between risk and return; however, she prefers to avoid speculative-grade investments. Which of the following bonds is MOST suitable for her portfolio? a. AAA-rated corporate bond, present value = $1,265, market price = $1,334 b. Baa debenture, present value = $1,128, market price = $1,250 c. BB mortgage bond, present value = $1,355, market price = $1,111 d. BBB collateral trust certificate, present value = $1,251, market price = $1,148

d. BBB collateral trust certificate, present value = $1,251, market price = $1,148 In order to answer this question you must compare each bond's current market value to its present value. The present value of each bond has been calculated by discounting the cash flows from each coupon payment and determining the present value of the principal repayment, using the investor's desired rate of return. When comparing the present value of a bond to its current market value, an investor can determine if the bond is fairly valued, undervalued, or overvalued. The bonds in choices (a) and (b) have a current market value greater than the present value. Since the bonds are trading at a premium to their present value, the investor would receive a lower return than desired. The bonds in choices (c) and (d) have a current market value less than their present value. These bonds are trading at a discount to their present value and therefore would result in a return higher than what the investor desired. Since the investor also wants to avoid speculative-grade investments, (BB and below) choice (c) would be eliminated.

Which of the following statements BEST describes the similarities between an S Corporation and a general partnership? a. Both provide limited personal liability b. Both require full personal liability c. Both do not provide flow-through of losses d. Both provide flow-through of losses

d. Both provided flow-through of losses An S Corporation provides limited liability to its shareholders, but a general partnership involves full liability of all the partners. (A limited partnership would provide limited liability to the limited partners.) However, both an S Corporation and a general partnership offer the tax advantage of flow-through treatment of profits and losses, where a share of both is passed through to each owner every year.

An agent is terminated by his broker-dealer. Who must notify the Administrator and when? a. The agent, promptly b. The broker-dealer within 30 days c. The agent, within 30 days d. Both the agent and broker-dealer, promptly

d. Both the agent and broker-dealer, promptly. Upon termination, both the agent and the broker-dealer must notify the Administrator, promptly. If the agent is subsequently employed by another broker-dealer, both the employer and the agent must also notify the Administrator promptly. All registered persons are considered in violation if they do not report a termination to the Administrator within 30 days.

The possibility that a company may perform poorly, causing its stock to decline in value is called: a. Selection risk b. Market risk c. Opportunity risk d. Business risk

d. Business risk Business risk is the possibility that a corporation's business will not do well, causing its stock to drop in value, or even become worthless, if the company declares bankruptcy.

Chris is a customer who has very little understanding of financial markets. Chris has custodial power over his children's accounts and is concerned that his lack of investment experience could hurt his children's investment returns. He is considering allowing a third party to assume control of the accounts through a limited power of attorney. Under the UPIA, which of the following statements is TRUE? a. This practice is prohibited in all cases b. This practice is prohibited unless the custodian obtains the written consent of each child c. Custodians may delegate discretion only to licensed advisers and/or attorneys d. Custodians may delegate discretion to any competent person

d. Custodians may delegate discretion to any competent person Under the UPIA, a custodian is permitted to delegate investment functions to any competent third party. Minors have no say in this decision. Note: In the past, the UPIA specifically prohibited a custodian from delegating discretion to a third party. This is no longer the case.

A 6% coupon bond is selling at a basis of 6.20. If interest rates in the market decline below 6%, the bond's basis will: a. Increase b. Remain the same c. Increase or decrease, depending on its maturity d. Decline

d. Decline A bond's basis is synonymous with its yield-to-maturity. Interest rates and yield-to-maturity on a bond will move in the same direction. If market interest rates decline, it means that yields (including the yield-to-maturity) will also decline.

An equity-indexed annuity is a type of: a. Variable annuity that tracks the S&P 500 Index b. Variable annuity that tracks the DJIA c. Fixed annuity that tracks the performance of a designated mutual fund d. Fixed annuity that offers the potential for greater returns

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

Which of the following statements about barbell strategies is NOT TRUE? a. The strategy consists of purchasing bonds with both short and long maturities, but no intermediate-term securities are included b. The short-term bonds will provide for quick cash to purchase new bonds upon maturity c. A barbell strategy is used to take advantage of potential interest-rate changes d. Gains from the short-term maturities will offset losses in the long-term maturities

d. Gains from the short-term maturities will offset losses in the long-term maturities A barbell strategy consists of buying short-term and long-term bonds, but not intermediate-term bonds. The purchase of long-term bonds allows an investor to capture higher long-term interest rates. The short-term bond provides the opportunity to invest elsewhere if the bond market takes a downturn. There is no guarantee that any money made on the short end of the strategy will offset losses that could occur on the long end of the barbell.

Which of the following is TRUE concerning the private placement of securities being distributed under Rule 506(c) of Regulation D? a. The securities may only be offered to accredited investors. b. The securities may only be sold to no more than 35 non-accredited investors. c. General advertising is prohibited. d. General advertising is permitted, but all investors must be accredited.

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

When selecting a value stock, an agent would look for which of the following characteristics? I. High earnings per share II. Low price/earnings ratio III. Low price to book value IV. High dividend yield a. I and II only b. I and III only c. I, II, and III only d. I, II, III, and IV

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

If a federal covered adviser changes its fee: I. The investment adviser must file an amended ADV Part 2 with the state Administrator II. The investment adviser must file an amended ADV Part 2 with the SEC III. The new fee must be reflected in the Brochure IV. All existing clients must be advised a. I, II, and III only b. I, II, and IV only c. II, III, and IV only d. I, II, III, and IV

d. I, II, III, and IV. All of the statements listed are correct concerning the actions a federal covered adviser is required to take if the fees charged to clients are changed.

When calculating a fixed-income security's discounted cash flow, which of the following statements is/are TRUE? I. A bond trading at a discount to its discounted cash flow value is undervalued. II. A bond trading at a premium to its discounted cash flow value is overvalued. III. Discounted cash flow calculations can determine fair market values for a fixed-income security. IV. Discounted cash flow takes into account current interest rates of comparably priced bonds. a. I only b. I and III only c. I, II, and III only d. I, II, III, and IV

d. I, II, III, and IV. Discounted cash flow analysis is a way of estimating the fair market value of an investment based upon its projected cash flows. If the market price of a bond is trading at a price greater than the value predicted based on the discounted cash flow calculation, it is overvalued. If the market price of a bond is trading at a price less than predicted by DCF, then it is undervalued. The DCF calculation takes into consideration the current interest rates found in the market for bonds of similar maturities and risk.

Which of the following actions may be taken by the Administrator? I Limit or restrict the functions or activities of the registrant Administer an oath II Cancel registration if the registrant cannot be located III after a reasonable search a. I and II only b. I and III only c. II and III only d. I, II, and III

d. I, II, and III The Administrator is given the authority to take all these actions.

Which of the following are characteristics of zero-coupon bonds? I. They can be purchased at a deep discount II. There is no reinvestment risk III. Tax consequences occur only at maturity IV. The investor is taxed annually a. I and III only b. I and II only c. I, II, and III only d. I, II, and IV only

d. I, II, and IV only Zero-coupon bonds are issued at a deep discount and mature at par value; therefore, they require a minimal capital outlay. Also, due to the fact that zeros do not pay interest on a semiannual basis, they have no reinvestment risk (there is nothing to reinvest). For tax purposes, the IRS requires zero coupon investors to accrete (upwardly adjust) their basis. The result of accretion is that each year a portion of the discount is reported as taxable interest income.

Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend? I. A GTC order to sell 100 XYZ at $50 II. A GTC to buy 100 XYZ at $50 stop III. A GTC to buy 100 XYZ at $50 IV. A GTC to sell 100 XYZ at $50 stop a. I and II b. II and III c. II and IV d. III and IV

d. II and IV Open or good-until-cancelled (GTC) orders that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked Do Not Reduce (DNR). Orders that are placed below the current market at the time of entry are buy limit orders, sell stop orders, and sell stop-limit orders. Open orders that are entered above the market are sell limit orders, buy stop, and buy stop-limit orders. The GTC buy limit and sell stop orders are entered below the market, and are reduced on the ex-dividend date.

A futures contract is different than a cash forward contract because the futures contract is: I. A personal transaction between the buyer and the seller II. For a standard amount of the commodity rather than for a specific amount and quality of the cash commodity III. Not negotiated by open outcry in the trading pits and not subject to the rules of a futures exchange IV. Or may be offset on the exchange where the contract was established a. I and III only b. I and IV only c. II and III only d. II and IV only

d. II and IV only A futures contract is a standardized contract whose terms are set by the exchange it trades on. Buyers and sellers of futures contracts are not required to take delivery of the underlying commodity. Instead, futures positions can be offset on the exchange where the contract is established.

What is the benefit of discounting the cash flows of a fixed-income security? a. It will measure the degree of price volatility that a bond will exhibit if interest rates increase b. An adviser can focus on a company's long-term growth potential and its ability to repay the bond's principal at maturity c. It provides the most accurate measurement of interest-rate fluctuations and volatility for bonds having maturities of 10 years or more d. It compares the price of a bond against the sum of the present values of the bond's future payouts

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

An investment adviser would like to send an e-mail to potential clients and include a report which contains a listing of all of its recommendations. Is this an unethical business practice? a. It is, since an adviser is not permitted to use electronic communication to list past recommendations b. It is, since an adviser is only permitted to send this type of communication to existing clients c. It is not, provided the report has been filed with either the SEC or the appropriate state prior to the adviser sending the e-mail d. It is not, provided the first page of the report bears a legend stating that future recommendations will not always be as profitable as those that were made in the past

d. It is not, provided the first page of the report bears a legend stating that future recommendations will not always be as profitable as those that were made in the past NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers states that any notice, circular, or report is considered advertising whether or not it is delivered by written or electronic means. An adviser is permitted to include a listing of all recommendations, provided the following conditions are met. The adviser furnishes a list of all recommendations it has made within the immediately preceding period of not less than one year and (i) states the name of each such security recommended, the date and nature of each such recommendation (e.g., whether to buy, sell, or hold), the market price at that time, the price at which the recommendation was to be acted upon, and the market price of each such security as of the most recent practicable date, and (ii) contains the following cautionary legend on the first page: "It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list." Advertising does not need to be filed with the SEC or the state prior to being disseminated and may be sent to both existing and potential clients.

All of the following risks are considered types of unsystematic risk, EXCEPT: a. Political risk b. Business risk c. Credit risk d. Market risk

d. Market risk Remember, market risk is a form of systematic risk and cannot be avoided by securities investors. For example, if the overall stock market is declining, this will negatively affect all of the stocks in the market. Conversely, unsystematic risk is able to be reduced through appropriate diversification.

The major advantage of an S Corporation versus a C Corporation is that an S Corporation: a. Provides its owners with limited liability b. Has greater access to the capital markets c. Is exempt from state corporate income taxes d. May elect to be treated like partnerships for federal tax purposes

d. May elect to be treated like partnerships for federal tax purposes. For most businesses, the major advantage of forming an S Corporation (or a limited liability company), rather than a regular C Corporation, is that S Corporations may elect to be taxed like partnerships under Subchapter S of the Internal Revenue Code. S Corporations must meet certain restrictions in order to qualify for this special treatment. The owners of both types of corporations have the protection of limited liability.

H M Advisers (HMA) is a small investment adviser with $19 million under management. The firm is the adviser for a start-up, Micro Cap Mutual Fund. HMA: a. Is considered an exempt adviser and is not required to register until its assets exceed $10 million b. Must register with both the SEC and each state in which it does business until its assets under management exceed $130 million c. May register as either a state or federal adviser d. Must register as a federal adviser

d. Must register as a federal adviser The federal government and the states have a division of responsibility when regulating investment advisers. In general, an adviser must be registered with either the SEC or with one or more states. There is no requirement to register at both the federal and state levels. The basis for the federal/state division is usually the amount of assets under management (AUM). Advisers with assets of $110 million or more must register with the federal government, while those with fewer assets fall under state jurisdiction. (Note: An IA may also choose to register with the SEC if it has AUM of $100 million up to $110 million.) One important exception to remember applies to advisers to registered investment companies. These firms must be registered as IAs with the SEC (federal covered advisers) regardless of the amount of assets they have under management.

According to the Securities Exchange Act of 1934, which of the following organizations is NOT accountable to the SEC? a. National exchanges b. The MSRB c. FINRA d. National banks

d. National banks The SEC does not regulate national banks, but it does have oversight over the MSRB, FINRA, and exchanges.

A firm, located in State Y, has been hired to evaluate the investment manager of a pension plan whose office is in State Z. The firm must advise the pension plan whether to retain the investment manager or hire a new one. Under the Uniform Securities Act, does the firm meet the definition of an investment adviser? a. Yes, because a fee is being charged for the firm's services as a consultant b. No, because the firm is not making investment recommendations regarding a portfolios c. Yes, because the firm advising the pension plan owner and not the participants d. No, because the firm is servicing an institutional investor

d. No, because the firm is servicing an institutional investor Under the Uniform Securities Act, an adviser that has no place of business in a state and whose clients are only institutional investors (e.g., pension plans), are exempt from the registration requirements.

Which of the following transactions are exempt from the antifraud provisions of the Uniform Securities Act (USA)? a. Unsolicted transactions involving a private placement b. Unsolicited nonissuer transactions c. Transactions with financial institutions d. None of the above

d. None of the above Certain transactions may be exempt from the registration requirements of the USA; however, no transaction is ever exempt from the antifraud provisions of the Act.

Which of the following investments are prohibited under the UPIA? a. Speculative option positions b. Penny stock investments c. Junk bonds d. None of the above

d. None of the above No type or class of investment is specifically banned under the Uniform Prudent Investor Act (UPIA). The Act looks at the portfolio as a whole and makes an assessment as to the risk/reward trade-off of the investments selected when determining if an asset mix is acceptable for a given account. The standard of prudence is applied to the whole portfolio as opposed to individual investments.

Betty owns and operates Right Choice Advisers, a small investment advisory firm registered with the states of Oregon, Washington, and California. Betty decides to sell 60% of her shares to another investment adviser and retire. This transaction would require the approval of: a. The SEC b. FINRA c. The state securities Administrator d. Right Choice's clients

d. Right Choice's clients An investment adviser may not assign a client's contract to another investment adviser without the client's consent. An assignment includes the acquisition of the majority of the adviser's stock by another entity.

Six months ago, an investor purchased shares of a mutual fund and he recently received a long-term capital gain distribution from the fund. What is the tax implication of the distribution? a. The distribution is taxed as a short-term capital gain since he has owned the shares for less than one year b. The distribution is not taxed since it represents a return of the investor's capital c. The capital gain distribution is taxed in the same manner as dividend distributions d. The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year

d. The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year. When a mutual fund distributes a capital gain, the tax implication is based on the fund's holding period, NOT the shareholder's holding period. The question indicates that the distribution was a long-term capital gain; therefore, it is both reported and taxed as a long-term capital gain.

A firm that is expecting to take its shares public has recently hired a new employee to assist in selling shares to investors. According to the Uniform Securities Act, which of the following statements is TRUE? a. The employee does not have to be registered since the shares are being registered b. The employee is automatically considered to be registered since he was hired before the firm registered c. If the issuer is going to sell stock, it must first register as a broker-dealer d. The employee would be required to register in any state in which he solicits investors

d. The employee would be required to register in any state

A state Administrator has suspended a broker-dealer. Which of the following statements concerning the broker-dealer is TRUE? a. The firm is allowed to accept unsolicited orders. b. The only activity the firm may not participate in is new issue distributions. c. The firm may continue business as usual during the appeal process. d. The firm may apply to the state court for a review of the order.

d. The firm may apply to the state court for a review of the order. Although the firm may apply to the state court to review the Administrator's order, there is no stay of the order. The firm is still suspended during the appeal process and may not participate in any securities-related activities in that state.

The Administrator may require an investment adviser to file which of the following documents along with its initial ADV application? a. A list of all customer securities and the location where they are held b. A list of all of its recommendations for the past five years c. A list of all customers and their addresses d. The firm's current financial condition

d. The firm's current financial condition Of the items listed, a new adviser would only be required to file a statement regarding its financial condition.

Under the Securities Exchange Act, a customer confirmation is NOT required to disclose: a. The amount of commission to be received by the broker-dealer for executing an agency transaction b. The settlement date of the trade c. The capacity in which the broker-dealer is acting d. The time of the trade execution

d. The time of the trade execution The Securities Exchange Act requires broker-dealers to make specific disclosures on customer confirmations. Some of the required information includes the capacity in which the broker-dealer is acting (i.e., agency or principal), the amount of commission received by the broker-dealer for executing an agency trade, and the settlement date of the trade. The time of the trade execution is not required to be disclosed on a customer confirmation; however, it may be provided if the customer makes a specific request.

You are interviewing prospective clients, Jack and Jill. They tell you they have approximately $10,000 to invest and would like to earn the type of returns that equity investments exhibit over the long term. However, they do not want their portfolio to be as volatile as the stock market. What would you tell them? a. They should purchase a long-term U.S. Treasury mutual fund instead of a stock fund b. Your firm is a member of SIPC, which will insure their account c. They should invest in a variable annuity, since it is issued by an insurance company d. They cannot expect to earn the type of returns that equities produce over the long term without assuming a corresponding amount of risk

d. They cannot expect to earn the type of returns that equities produce over the long term without assuming a corresponding amount of risk. One of the basic principles of investing is that risk and return are closely related. Historically, equities such as common stock have shown long-term returns of approximately 10% per year. However, the year-to-year variation in stock performance can be significant. Investments that are less volatile than stocks cannot be expected to produce the same returns over the long haul.

Why would an investment adviser perform a capital needs analysis for a client? a. To determine how much income the client will need at retirement b. To determine how to best reduce the client's tax liability c. To determine how much disposable income the client has available to purchase insurance d. To determine how much insurance the client needs in order to fund future financial goals

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

All of the following statements are NOT TRUE, EXCEPT: a. Variable life, as with universal life, gives the policyholder the flexibility to change the death benefit and the premium payments b. Universal life, as with variable life, gives the policyholder flexibility in changing how the cash value is invested c. Variable life, as with whole life, has fixed premiums and a fixed death benefit d. Variable life, as with whole life, has fixed premiums paid at fixed intervals

d. Variable life, as with whole life, has fixed premiums paid at fixed intervals While universal life allows the policy owner to change the premiums and/or the death benefit, variable life has fixed premiums and a fixed minimum death benefit. The actual death benefit on a variable life policy is not changed by a decision of the policyholder but, instead, as a result of growth in the subaccounts. Universal life has a minimum interest rate and an actual rate that could be higher, but it is determined by the insurance company, not the policyholder. Variable life and whole life are the same in having fixed premiums paid at fixed intervals.

William is an agent with a broker-dealer and is registered presently in three states. One of William's clients informs him that he is moving to a state where neither William nor his firm is registered. Which of the following statements is TRUE regarding William's registration in the new state? a. William would be permitted to transact business in the new state immediately. b. William must register in the new state and receive verification from the state Administrator that the registration is effective before conducting any new business with the client. c. William must file a Consent to Service of Process with the state. d. William is not eligible to register in the new state until his broker-dealer is registered in that state .

d. William is not eligible to register in the new state until his broker-dealer is registered in that state. An agent may transact business in a state in which he is not currently registered under certain circumstances. The employing broker-dealer must be registered in the state, and the individual must be registered in at least one other state. Since his broker-dealer is not registered, William is not eligible for registration.

Bob is a business manager for professional athletes. As manager, he negotiates their contracts, pays their bills, and provides them with tax advice. When trying to minimize their tax liabilities, Bob will periodically provide advice relating to securities. He considers this advice to be incidental to the business management service he provides. According to the Investment Advisers Act, would Bob be considered an investment adviser? a. No, the Act specifically excludes persons who provide financial services to athletes and entertainers b. No, since the investment advice is incidental to the business management service provided c. Yes, if Bob receives special compensation for the investment advice that he gives his clients d. Yes, SEC Release 1092 states that the Advisers Act applies to people who provide investment advice to athletes and entertainers

d. Yes, SEC Release 1092 states that the Advisers Act applies to people who provide investment advise to athletes and entertainers SEC Release 1092 states that sports and entertainment representatives who provide investment advice to their clients are investment advisers and subject to the Investment Advisers Act. The fact that the question refers to Bob as a business manager rather than a sports representative is not relevant. Advice that is incidental to a professional's services is limited to lawyers, accountants, teachers, and engineers. Entertainment and sports representatives who provide securities-related advice for compensation may not claim an exclusion from the definition of investment adviser.

Under the Uniform Securities Act, an employee of a municipal issuer selling securities to the public is considered: a. An agent of the issuer and is subject to registration b. An agent of the issuer and is not subject to registration c. An agent of a broker-dealer d. Not an agent

d. not an agent A person representing a municipal issuer is not considered an agent and would not be subject to registration. If the securities were not exempt, the employee would be subject to registration.

Which of the following securities is most susceptible to interest-rate risk? a. Common stock b. Commercial paper c. T-bills d. T-bonds

d. t-bonds Long-term bond prices are more sensitive to interest-rate risk than short-term bonds. For example, if an investor owns a bond with a 5% coupon and interest rates rise to 7%, he would be earning less than new investors. If the investor only needs to wait two months for his bond to mature, he will be able to invest at the higher interest rate relatively quickly. If the investor's bond has a long maturity and he must wait 20 years for his bond to mature, his disadvantage will last longer. Conversely, if interest rates fall, the long-term bond will earn more than the market interest rate for a longer period. The short-term bond will not be as valuable since the maturity comes sooner and its advantage over the market rate will not last as long.