Series 65 Missed Questions

C) at a discount The YTM is greater than the nominal yield, or coupon yield. Therefore, the bond is trading at a discount.

A municipal bond has a coupon of 6.25%, and at the present time, its yield to maturity is 6.75%. From this information, it can be determined that the municipal bond is trading: A) flat B) at par C) at a discount D) at a premium

D) monthly payments will continue until death. When choosing the settlement option, life with 10 years certain, the annuitant will receive payments until the later of death or 10 years.

A 68-year-old individual, who purchased a single premium immediate fixed annuity, elected monthly payments for life with a 10-year certain settlement option. If the individual lives to the age of 80, A) monthly payments will cease at age 78. B) monthly payments will remain fixed until age 78 and then reduce until death. C) monthly payments will continue to the beneficiary(s) for 10 years after the annuitant's death. D) monthly payments will continue until death.

D) 5 Most loans from a 401(k) plan are required to be repaid within 5 years. This rule does not apply to loans taken for a home purchase.

As a rule, loans from a 401(k) plan must be repaid within how many years? A) 10 B) 20 C) 15 D) 5

A) I and II Any insurance product that includes the word variable is a security. Otherwise, it is not.

Life insurance companies offer many different products. Which of the following would NOT be considered a security? I. Index annuity II. Modified endowment III. Variable annuity IV. Variable life A) I and II B) III and IV C) II and IV D) I and III

C) the internal rate of return Internal rate of return (IRR) is not a component of modern portfolio theory as are the other 3 terms.

Each of the following terms is commonly found in modern portfolio theory EXCEPT A) the capital asset pricing model B) the efficient set C) the internal rate of return D) the feasible set

A) I and II Employee contributions are excluded from taxable income at the time of contributions, which exempts them from income tax, but not from payroll taxes.

Employee contributions to a 401(k) plan are subject to I. Social Security taxes II. federal unemployment taxes III. federal income tax withholding IV. state income tax withholding A) I and II B) III and IV C) I and III D) II and IV

A) legal and regulatory. Legal and regulatory constraints are those that apply to an investor by law. We haven't heard of it being tested, but IRS requirements are that a foundation must generally payout 5% of its assets each year as qualifying distributions. This legal requirement to make distributions places constraints on how the foundation's money is to be invested.

A private foundation is required by statute to pay out a minimum percentage of its asset value each year as qualifying distributions. This investment constraint is best classified as A) legal and regulatory. B) liquidity. C) unique circumstances. D) time horizon.

D) sector rotating Sector rotation is the practice of changing investment emphasis based on patterns to the business cycle. Yes, this could be a form of tactical management, and if the analyst is investing opposite the cycle, the analyst could be contrarian. However, on the exam, you will sometimes have to choose from several answers that could be correct by selecting the one that is most likely to be correct.

A securities analyst who recommends allocating to industries based on changes to the business cycle would most likely be said to be A) laddering B) a tactician C) a contrarian D) sector rotating

A) a discretionary basis. When the investment adviser makes investment decisions with parameters agreed upon with the client, the arrangement is best described as being on a discretionary basis.

An investment adviser making investment decisions within parameters agreed upon with the client is managing the portfolio on A) a discretionary basis. B) a best-efforts basis. C) an advisory basis. D) a nondiscretionary basis.

D) assets The income statement is the basis for an individual's cash flow statement. Rather than assets and liabilities, as would be found on a balance sheet, the concern is measuring income and expenses.

An investment adviser representative is preparing a financial plan for a new client. As part of the data collection process, the IAR needs to collect the relevant information to analyze the client's cash flow. Included in the cash flow statement would be all of the following EXCEPT A) interest on savings B) salary C) income taxes D) assets

A) Commodities Commodities are among the most speculative investments and not generally an element in retirement planning.

Which of the following is generally NOT an appropriate product for retirement planning? A) Commodities B) Life insurance C) Mutual funds D) Bonds

C) with a very short time horizon. Inverse and leveraged ETFs are structured in such a manner that makes holding them for more than a few days or a week becomes unattractive. They are for bearish investors, which is why they are often referred to as short funds. They are purchased for short-term capital gains; there is no income. The passive strategy is for the long-term, not the short-term.

Inverse ETFs are suitable primarily for investors A) wishing to leverage their income. B) who follow a passive investment strategy. C) with a very short time horizon. D) who are bullish on the market's future.

A) I and II NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents permits commission sharing as long as the agents are properly registered with the same broker-dealer or one under common control. There is no requirement for the arrangement to be in writing, and the customer has no say so in this matter.

It would not be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to divide or otherwise split the agent's commissions, profits, or other compensation from the purchase or sale of securities I. with any person also registered as an agent for the same broker-dealer II. with any person also registered as an agent for a broker-dealer under direct or indirect common control III. as long as the arrangement is in writing IV. as long as the client has approved of the sharing arrangement A) I and II B) I, II, and III C) I, II, III, and IV D) III and IV

A) To fix the cost of acquiring additional stock to the portfolio Those who are bullish on a stock, but don't have sufficient funds at this time to purchase the stock, can "lock-in" their future cost by going long a call. Income is generated only through selling options. Because a long call is on the same side of the market as long stock, there is no hedge. A spread involves a long and short option.

Purchasers of options can have a number of different objectives. One of your clients who is a soft drink fan already has a long position in KO. What would be a possible reason for this client to go long a KO call option? A) To fix the cost of acquiring additional stock to the portfolio B) This would generate additional income C) To complete the other side of a spread D) Owning a long call on stock you already own offers a hedge against a market decline

C) Utilities Utility stocks tend to be interest rate sensitive for two reasons. First, they are typically bought for income portfolios, and, as such, changes to interest rates impact their price. Second, because utilities are typically the most highly leveraged of all industries, an increase in interest rates could substantially increase their debt service costs and thus reduce earnings.

The Federal Reserve Board has just taken action leading to an increase in interest rates. Which of the following industries is most likely to be affected adversely by this action? A) Defensive industries B) Cyclical industries C) Utilities D) Heavy industries such as steel

D) only deduct the passive loss against passive income Passive losses, such as those generated by limited partnership investments (DPPs), are only deductible against passive income.

Your client who owns a DPP that generated a $10,000 passive loss for the year could A) deduct $10,000 against ordinary income B) deduct $3,000 against ordinary income and carry over the rest C) deduct $10,000 against capital gains D) only deduct the passive loss against passive income

A) A margin account in the name of Mary Beth Simmons The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies.

For purposes of safeguarding customer information, which of the following would be considered a covered account? A) A margin account in the name of Mary Beth Simmons B) An account in the name of the Wells Morgan Bank C) A margin account in the name of the Interglobal Hedge Fund D) An account in the name of the State of X employee pension fund

A) $20,000 of ordinary income. A partial withdrawal from a nonqualified annuity is taxed on a LIFO basis. That is, the last money in (assumed to be earnings), is the first money out. The cost basis is the original $25,000. The 1035 exchange merely carried that cost basis over and resulted in no current tax on the $10,000 of earnings. When $20,000 is withdrawn, all of it represents the earnings and that is taxed as ordinary income. There is never capital gains taxation on an annuity and there is no 10% penalty tax because this investor is older than 59½ at the time of the withdrawal.

A 54-year-old individual invests $25,000 into a nonqualified single premium deferred variable annuity. Five years later, with an account value of $35,000, the investor engages in a Section 1035 exchange into a variable annuity issued by a different insurance company. Four years later, with an account value of $50,000, the investor withdraws $20,000. The tax consequence of the withdrawal is A) $20,000 of ordinary income. B) $15,000 of ordinary income, $5,000 nontaxable return of principal. C) $15,000 of ordinary income, $5,000 of long-term capital gain. D) $20,000 of ordinary income plus a 10% penalty tax.

B) an inverted yield curve An inverted, or negative, yield curve is one that results when debt with short-term maturities has higher yields than those with maturities that are longer. A positive, or normal, yield curve results when the yields increase as maturities do.

A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This is an example of A) an algorithmic yield curve B) an inverted yield curve C) a positive yield curve D) a normal yield curve

D) the yield to maturity is higher than the yield to call. Whenever a bond is selling at a premium, the return, in descending order is: nominal yield, current yield, YTM, and YTC. It is the reverse order when the bond is selling at a discount. When the bond is at par, all are the same (if the call is at par).

ABC Corporation's 5% mortgage bond is currently trading at a premium. The bond is callable at par in 10 years and matures in 15 years. When comparing the returns available to an investor, it would be accurate to state A) the current yield is higher than the nominal yield. B) the yield to call is higher than the current yield. C) the yield to maturity is higher than the current yield. D) the yield to maturity is higher than the yield to call.

B) both the buyer and the seller are obligated to perform Among the ways in which futures differ from options is that both parties, long and short, are obligated to execute the contract. At expiration date, if not exercised before, the buyer must purchase at the contract price and the seller must deliver at the contract price. In the case of options, the buyer (long position) is the one who chooses to exercise or not, and it is the seller (short position) who becomes obligated to perform.

An investor goes short 5 soybean futures contracts on the Chicago Mercantile Exchange (CME). When the contract expires, A) only the seller is obligated to perform B) both the buyer and the seller are obligated to perform C) only the exchange is obligated to perform D) only the buyer is obligated to perform

D) Default risk Default risk applies only to debt securities. That is, one can default only on a debt (failure to pay the interest when due and/or the principal). For exam purposes, there is one category of debt securities that has no default risk: securities issued by the U.S. Treasury. Therefore, with a portfolio consisting of nothing but equity securities and Treasuries, default risk would not be a concern to Calvin. Business risk is the uncertainty that a corporation will underperform, either due to management failures or some other event unique to that company or industry. That is certainly a concern with the investments in ABC and XYZ common stock. To a lesser degree (because of the diversification), business risk also applies to ownership of mutual funds. Reinvestment rate risk is the risk that as cash flows are received they will be reinvested at lower rates of return than the investment that generated the cash flows and applies largely to any debt security. Systematic risk is the risk that all securities are subject to and typically cannot be eliminated through diversification.

Calvin has the following securities in his portfolio: ABC common stock, XYZ common stock, PQR mutual fund (domestic small cap), DEZ mutual fund (foreign small cap), 30-year Treasury bond, and 5-year Treasury note. Which of the following risks should not concern Calvin? A) Business risk B) Systematic risk C) Reinvestment rate risk D) Default risk

B) 7.95% First, compute Dan's after-tax rate of return of 10.95% as follows: .15 × (1 − .27), or .73 = .1095. Then, compute Dan's inflation-adjusted, or real, rate of return by subtracting the 3% inflation rate from his 10.95% after-tax return.

Dan is the owner of a mutual fund that returned him a before-tax return of 15% last year. Inflation is running at an annual rate of 3%, and Dan is in a 27% marginal income tax bracket. What has been Dan's approximate inflation-adjusted after-tax return on the fund over the course of the last year (rounded to the nearest 2 decimal points)? A) 10.95% B) 7.95% C) 8.76% D) 12.00%

C) the Department of the Treasury Currency transactions in excess of $10,000 are reported electronically on FinCEN Form 112 to the Department of the Treasury.

FinCEN Form 112, the Currency Transaction Report, is filed with A) the Federal Bureau of Investigation (FBI) B) the SEC C) the Department of the Treasury D) the National Security Agency

A) the Congress The United States Congress is responsible for voting approval of the budget submitted by the president.

Final approval of the annual operating budget for the United States is given by A) the Congress B) the Cabinet C) the president D) the Conference of Governors

C) refuse to allow this to happen because it would be a violation of your fiduciary responsibility ERISA never permits transactions of this type for a plan trustee. As an IAR handling some of the plan's investments, you would be placed in a fiduciary position and could not violate that trust.

GEMCO Manufacturing Co. has appointed the company's CFO as the trustee for their employee retirement plan. You are an IAR and you advise a substantial portion of the plan's assets. You are contacted by the CFO requesting a short-term loan from the plan assets for which he will pay the plan prime + 2%. Your best course of action would be to A) refuse to allow this to happen because the plan assets will suffer B) permit the loan once you have been satisfied that there is adequate collateralization in place C) refuse to allow this to happen because it would be a violation of your fiduciary responsibility D) permit the loan because the CFO is the plan trustee

D) $9.60. The P/E ratio is the relationship between the market price and the annual earnings per share. Because this question stated the quarterly earnings, they must be multiplied by 4 to get to the $1.20 annual rate. Therefore, the shares should be selling at 8 × expected EPS = 8 × $1.20 = $9.60.

Hermon Industries is operating in a sector where the average prospective price-to-earnings ratio is currently eight times. If Hermon's earnings per share (EPS) are expected to be $0.30 per quarter, the implied value of a Hermon share is closest to A) $8.00. B) $7.70. C) $2.40. D) $9.60.

B) a buy stop limit order The customer has placed a buy stop limit order. If the stock rises to the stop price of $140, the order will be triggered and becomes a buy limit order at $144, meaning an order to buy at $144 or better (lower).

If a client places an order to buy 300 DWQ at 140 stop, but not over 144, and the order is left with a specialist, this is A) a buy stop order B) a buy stop limit order C) a buy limit order D) a market order

D) Municipal GOs The interest on municipal GOs is exempt from federal income tax and perhaps state income tax, depending on the investor's residency.

If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable? A) Treasury receipts B) High-yield bonds C) Money market instruments D) Municipal GOs

C) December 31, 2020 Investment adviser records, including copies of advertisements, must be kept for at least 5 years from the end of the fiscal year in which the record originated—in this case, 5 years from the end of 2015.

Kapco Advisers, a federal covered investment adviser operating on a calendar-year basis, published a list of recommended securities in January 2015. A copy of this must be maintained until at least A) January 31, 2020 B) January 31, 2017 C) December 31, 2020 D) December 31, 2017

C) corporate debentures Unless some other condition is given, such as the issuer's common stock is listed on an exchange or Nasdaq (making it federal covered), a corporate debenture is not an exempt security. State and local issues (the USA includes the District of Columbia in its definition of, state) and Canadian provinces are exempt. Any security issued by a federally chartered credit union or one that is authorized to do business in the state is exempt.

Section 402 of the Uniform Securities Act contains a listing of those securities that are granted an exemption from the registration and advertising filing requirements of the Act. Excluded from that listing would be A) securities issued by a credit union authorized to do business in the state B) bonds issued by the District of Columbia C) corporate debentures D) bonds issued by a Canadian province

A) III and IV Under the USA, the term "guaranteed" refers to a guarantee of interest, principal, or dividends by a party other than the issuer.

The USA would permit an agent to use the term "guaranteed" to refer to I. a security that is backed by the U.S. government II. a bond that is backed by the taxing power of a governmental body III. a bond whose interest and principal payments are guaranteed by someone other than the issuer IV. a stock whose dividend payments are guaranteed by someone other than the issuer A) III and IV B) I and II C) II and IV D) I and III

D) the ability for others to change it Static content can only be changed by the originator (or someone under that person's control).

The most common way in which to distinguish whether social media content is static or interactive is A) the ability for others to comment on it B) the ability for others to link to it C) the ability for others to like it D) the ability for others to change it

A) the net change in the cash position of the firm for the reporting period The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows which is a separate financial statement.

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is A) the net change in the cash position of the firm for the reporting period B) an integral part of the footnotes to the balance sheet required by generally accepted accounting principles C) reported as a separate line item on the balance sheet D) reported as cash income on the income statement

D) as a contra party to the trade In every trade, there are 2 principals—the buyer and the seller. If the broker-dealer is one of the principals (either buyer or seller), the firm is the contra party to the other side of the trade.

When a broker-dealer acts in the capacity of a principal in a trade, the firm has acted A) as an agent B) in an unethical manner C) for the benefit of the client D) as a contra party to the trade

B) Form 13F. Form 13F is used by money managers who manage equity portfolios with at least $100 million in equity securities. The other choices are forms that are filed as appropriate with the SEC by companies whose securities are registered with the SEC.

Under SEC regulations, publicly-traded (reporting) companies are required to file all of the following except A) Form 10-K. B) Form 13F. C) Form 8-K. D) Form 10-Q.

D) XYZ 3s of 44 The technical method for answering this question is to compare the duration of each of the bonds. The one with the longest duration will be impacted the most by a change in interest rates. Invariably, when the length of time to maturity is relatively close (as is the case here), the bond with the lowest coupon rate will have the longest duration. It should be easy to spot that the bond with the shortest duration is the NOP 12s of 42 - they have both the highest coupon and the nearest maturity and would be the correct answer if the question had asked for the bond suffering the smallest decline in market price.

Your client has the following bonds in her portfolio: XYZ 3s of 44. TUV 6s of 45. QRS 9s of 43. NOP 12s of 42. If interest rates were to suddenly rise, which of her bonds would suffer the greatest decline in market price? A) NOP 12s of 42 B) TUV 6s of 45 C) QRS 9s of 43 D) XYZ 3s of 44

A) 5% The quarterly dividend is $0.50, so the annual dividend is $2.00; $2 ÷ $40 (market price) = 5% annual yield (current yield).

A company currently has earnings of $4 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield? A) 5% B) 1.25% C) 10% D) 15%

D) Interest payments of $30 The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. With a 15-year call, there are only 30 semiannual interest payment periods, not 50. The present value is $1,300 and the future value is $1,080; the reverse of the numbers indicated in the answer choices.

A bond with a par value of $1,000 and a nominal yield of 6% paid semiannually is currently selling for $1,300. The bond matures in 25 years and is callable in 15 years at $1,080. In the computation of the bond's yield to call, which of these would be a factor? A) Future value of $1,300 B) Present value of $1,080 C) 50 payment periods D) Interest payments of $30

B) must segregate them Any securities held in custody by a broker-dealer (or, for that matter, an investment adviser) must be segregated from those belonging to the broker-dealer (or investment adviser). To do otherwise would be to commit the prohibited practice of commingling. Fully paid securities may not be loaned out, only those collateralizing a debit balance may be and, then, only with customer permission.

A broker-dealer holds fully paid-for customer securities for safekeeping. Under the NASAA Statement of Policy on Unethical and Dishonest Business Practices of Broker-Dealers and Agents, the broker-dealer A) must pay interest to the clients B) must segregate them C) may lend them to make delivery on short sales D) would be in violation unless a properly executed margin agreement was in effect

B) contain information that doesn't have a place in the main body of the financial statements. There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are: method of accounting used, collateral securing debt, pension liabilities, and many others. Footnotes are an integral part of the financial statements and are usually found with this notation: "The accompanying footnotes to the financial statements are an integral part of these statements."

A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes A) serve as a bibliography indicating where additional information may be obtained. B) contain information that doesn't have a place in the main body of the financial statements. C) contain a detailed history of the enterprise and its products or services. D) are used to explain how the various ratios are computed because companies recognize that many shareholders do not have a financial background.

C) its value is based on some underlying asset Although the unique characteristic of a European option is that it can only be exercised on its expiration date, that doesn't answer this question. It is a derivative like any other option because its value is based on the underlying asset.

A client calls to say he has just read about a European option and doesn't know what it is. You would explain that it is a derivative because A) the currency used is generally something other than the U.S. dollar B) it can only be exercised on the expiration date C) its value is based on some underlying asset D) intrinsic value does not affect the premium

B) Intermediate-term municipal bond fund When the question states a high-income tax bracket, the answer will almost always be municipal bonds. An intermediate-term municipal bond fund will experience less price fluctuations when interest rates change than would a long-term municipal bond fund due to its shorter duration. Even if the high-yield bond fund might produce a greater yield after taxes, it would not be suitable for an investor with a moderate risk tolerance. Money market funds will provide safety from large swings, but even if it is a municipal money market fund where the income would be tax-exempt, the current income would be too low to be attractive to this investor.

A client is interested in investing in a mutual fund that will provide current income without the risk of large swings in the portfolio's value. The client is in a high-income tax bracket and has a moderate risk tolerance. Which of the following funds is most appropriate for this client? A) Money market fund B) Intermediate-term municipal bond fund C) Long-term municipal bond fund D) High-yield bond fund

A) the portfolio manager's tenure. Because this client has been "sold" on past performance, you need to verify if the manager achieving those results is still on the job. That is the prime reason why the regulations require disclosure of the fund manager's tenure; it is important for investors to know if the current manager was the one who had the winning streak or if that manager just came on board. The other choices are something to look at, but in this instance, they take a back seat to checking on the manager's tenure. Sure, the expense ratio is important, but the past performance is after expenses so that has already been taken into consideration.

A client of yours comes to the office and shows you some sales literature from a mutual fund that has him very excited. According to the material, the fund's average annual return over the past 10 years has been in excess of 15% and it has achieved the highest rating from the major fund rating services. Before recommending this fund to your clients, the first thing you would probably check for in the fund's prospectus is A) the portfolio manager's tenure. B) the fund's expense ratio. C) the fund's sales charge. D) the fund's objectives.

A) use the testimonial provided disclosure is made that the athlete is a client and the extent of any compensation paid. Testimonials promoting investment advisers' services are permitted under the SEC rule. The rule distinguishes between a testimonial and an endorsement. The former is from a client and the later from someone who is not a client.When accepting a testimonial, the fact that the person is a client must be disclosed. Disclosure is also required if any compensation is being paid. Advertisements are not filed with the SEC.

A client, who is a famous tennis player, offers to record a testimonial for a covered investment adviser. The recording will be used in a television commercial. Under the SEC's Marketing Rule for Investment Advisers, the firm may A) use the testimonial provided disclosure is made that the athlete is a client and the extent of any compensation paid. B) have to file the testimonial with the SEC. C) go ahead with the recording but only if it is an endorsement rather than a testimonial. D) use the testimonial, provided the athlete receives no compensation.

A) ahead of the common stock and the preferred stock, but after the bonds Any debt security, even a subordinated debenture, has a claim ahead of all equity. However, it is subordinated to all other debt.

A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim A) ahead of the common stock and the preferred stock, but after the bonds B) ahead of the common stock, but after the preferred stock and the bonds C) behind the bonds, the preferred stock, and the common stock D) ahead of the common stock, the preferred stock, and the bonds

A) The customer must accept the execution for 300 shares, and the remainder of the order is canceled after the close. The customer must accept the order for 300 shares. The representative cannot guarantee that the order will be filled by the end of day.

A day order is entered to buy 500 LMN at 24.35. By the close, the firm has 100 shares at 24.25 and 200 at 24.35. If the remainder is unfilled, what is the outcome? A) The customer must accept the execution for 300 shares, and the remainder of the order is canceled after the close. B) The customer may reject the incomplete order unless the broker-dealer can guarantee filling the remainder by the end of the day. C) The customer may reject the incomplete order unless the remainder can be filled within 3 business days. D) The customer may demand that the firm deliver the remaining shares at 24.35.

D) the price-to-book-value ratio The price-to-book-value ratio compares the company's market price with its book value per share. The higher the ratio, the greater premium the public is willing to pay over the intrinsic value of the enterprise. Usually, a ratio of less than 1 indicates an undervalued company.

A financial ratio used by some analysts to help determine if a company's stock is over or undervalued is A) the quick asset ratio B) the current ratio C) the dividend payout ratio D) the price-to-book-value ratio

A) insured bank certificates of deposit Whenever you see "low tax bracket," the answer cannot be municipal bonds. With a low risk tolerance, the only suitable choice for "safe" income would be insured bank CDs.

A new client wants your recommendation on available investment options. You prepare a client profile, which reveals that the investor is 66 years of age, has a low risk tolerance, and is in a low tax bracket. The investor's primary objectives are safety and income. Of the following, the most suitable choice would be A) insured bank certificates of deposit B) large-cap common stock C) a municipal bond mutual fund investing solely in AAA- and AA-rated bonds D) a growth and income mutual fund

A) all payouts are fully taxable in a Keogh plan Earnings on investments made in both a Keogh plan and nonqualified annuity grow on a tax-deferred basis; they are not taxed until withdrawn. The cost basis in a Keogh plan is zero because contributions are tax deductible, but distributions are fully taxable upon receipt. However, in a nonqualified annuity, the cost basis is equal to the amount invested because the contributions are nondeductible; only the earnings portion of the distributions is taxable.

A nonqualified, single premium variable annuity differs from a Keogh plan in that A) all payouts are fully taxable in a Keogh plan B) both are subject to early withdrawal penalties C) earnings are tax deferred D) it is open to self-employed persons

D) I, II, III, and IV Unless the security is a U.S. government bond, all bonds have credit risk. Including government bonds, they all fluctuate with changes in the interest rates and lose value due to inflation. Opportunity cost is the risk taken by choosing to invest in a lower-risk investment rather than attempt the higher returns that historically have been earned though investment in equities.

A portfolio that is primarily invested in corporate bonds would be subject to I. credit risk II. interest rate risk III. opportunity cost IV. purchasing power risk A) II and IV B) I and II C) I, II, and IV D) I, II, III, and IV

B) direct participation programs. An individual employed by a broker-dealer who is involved in the sale of securities must register as an agent. The security here is the DPP.

A sales assistant employed by a full service broker-dealer would be required to register as an agent when accepting orders for A) fixed annuities. B) direct participation programs. C) commodity futures contracts. D) gold coins.

D) II and III Dollar cost averaging requires a fixed dollar investment on a periodic or monthly basis. This strategy is most effective when prices in the market are volatile.

A successful dollar cost averaging strategy requires I. stable market conditions II. volatile market conditions III. a fixed dollar amount invested monthly IV. a fixed number of shares purchased monthly A) II and IV B) I and IV C) I and III D) II and III

A) 12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors

According to the Investment Company Act of 1940, all of the following statements are true EXCEPT A) 12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors B) persons convicted within the past 10 years of a securities industry crime are not allowed to serve as directors without SEC permission C) mutual fund shareholders must be sent semiannual statements that identify compensation paid to directors, officers, and other affiliated persons D) investment companies can own no more than 3% of the shares of another investment company

B) an agent soliciting a customer to buy a new issue of corporate bonds Solicited trades are generally not exempt transactions unless with institutional buyers. Sales by a fiduciary (such as an executor of an estate) are exempt from the registration provisions. Sales to financial institutions (such as a bank) are also exempt under the act. Unsolicited trades in securities traded in the secondary markets are exempt from state registration and advertising filing requirements.

All of the following are exempt transactions under the USA EXCEPT A) a bank buying common shares in a publicly traded railroad B) an agent soliciting a customer to buy a new issue of corporate bonds C) an agent buying a listed stock at the client's request D) an executor selling shares of common stock for an estate

A) contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis Contributions can be made to an IRA only until the first tax filing deadline (April 15), regardless of having filed an extension.

All of the following statements concerning IRA contributions are true EXCEPT A) contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis B) between January 1 and April 15, contributions may be made for the current year, the past year, or both C) contributions can be paid into this year's IRA from January 1 of this year until April 15 of next year D) if you pay your tax on January 15, you can still deduct your IRA contribution, even if not made until April 15

A) the annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process The consent to service is a permanent document that remains on file with the Administrator; it need not be resubmitted for yearly renewal. The initial application for registration must include a consent to service of process along with Form ADV and the appropriate fees. If the investment adviser is not an individual, all officers or partners of the business entity that play an active role in the giving or supervision of giving advice are automatically registered as IARs.

All of the following statements regarding the registration of an investment adviser in a state are true EXCEPT A) the annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process B) the adviser's registration expires on December 31 each year C) the initial application must include a consent to service of process along with Form ADV and the appropriate fees D) if the investment adviser is not an individual, any officer or partner active in the advisory business is automatically registered as an investment adviser representative

B) the company's stock price trend. The company's stock price trend is important to technical analysis. Remember that a technician "charts prices and volume over time". The others are factors to consider in fundamental analysis.

All the following factors support fundamental analysis while assessing a wide range of qualitative factors except A) the company's management team's quality and experience. B) the company's stock price trend. C) the company's business model. D) the company's competitive position.

C) $2,000 short-term gain One hundred shares sold for $120 per share that were purchased for $100 per share results in a capital gain of $2,000. Because the holding period did not exceed one year, the gain is considered short term for tax purposes.

An investor purchases 100 shares of a stock at $100 per share on January 1. On the following July 1, the shares are sold for $120 per share. The tax consequences are A) $2,000 long-term gain B) $2,000 long-term loss C) $2,000 short-term gain D) $2,000 short-term loss

C) market risk Market risk is the uncertainty that the market price of a stock will drop even when earnings are strong. Most stocks follow the "market" and this would appear to be no exception. Financial risk concerns itself with financing, particularly debt, so it is related to credit risk. Nothing in this question infers anything about financing difficulties.

An agent for a well-known broker-dealer has taken it upon herself to look for investment opportunities for her clients. Her research indicates that, in spite of record earnings, the stock of GEMCO, Inc., is poised for a price reversal. Should this analysis prove correct, this would be an example of A) financial risk B) regulatory risk C) market risk D) reinvestment risk

C) accept unsolicited orders only Those who tergiversate repeatedly change their attitude or opinions. As a consequence, the client who likes an agent's recommendation one day may quickly change his mind the next. Therefore, the agent could be placed in an untenable position, being unable to satisfy the client. To avoid this possibility, it would be most sensible to leave all the decisions to the client and only accept unsolicited orders.

An agent has a new client who is prone to tergiversation. As such, it would probably make sense to: A) open a discretionary account B) make recommendations on a frequent basis C) accept unsolicited orders only D) obtain permission from both the client and the broker-dealer before sharing in the profits and losses in the account

D) 28.6% The debt-to-equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%. As we point out in the LEM, this is really a misnomer—it should be called the debt-to-total-capital ratio, but probably will not be shown that way on the exam.

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt-to-equity ratio is A) 40% B) 22.2% C) 64.3% D) 28.6%

A) inertial inflation. This is a definition of inertial inflation. Just like it sometimes takes a "shock" to get people moving (lack of inertia), it can require a shock to move the economy. It is unlikely that any of the other terms shown here will appear as a correct answer on your exam.

An economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs, at which time, the rate of inflation changes is known as A) inertial inflation. B) stagflation. C) price controls. D) stagnation.

A) is taxed on $10 per share as if it were salary In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee.

An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee A) is taxed on $10 per share as if it were salary B) has a capital gain of $10 per share C) is taxed on $30 per share as if it were salary D) is taxed on $20 per share as if it were salary

D) sold only to persons resident in one state when the issuer is a resident doing business within that state These securities are eligible for the intrastate exemption afforded under Rule 147. They might have to register in that particular state, depending on whether they met the exemption requirements in that state for that type of issue. Only under the NSMIA and the Uniform Securities Act do securities listed on a national stock exchange receive a registration exemption.

An exemption from registration under the Securities Act of 1933 is available to securities that are A) sold in more than one state by persons resident in those states B) listed on national exchanges C) offered to the public only when the total amount is more than $4 million D) sold only to persons resident in one state when the issuer is a resident doing business within that state

D) I and II Any state or Canadian province, or political subdivision thereof, is considered an issuer of exempt securities. The exemption also applies to securities issued by foreign governments with whom the United States has diplomatic relations, but not their political subdivisions such as the City of London, England. Although securities issued by investment companies registered with the SEC are exempt from state registration, the authority for that exemption is found in the NSMIA of 1996 (federal covered securities) rather than the Uniform Securities Act.

An exemption from state registration is granted under the specific authority of the Uniform Securities Act to securities issued by which of the following entities? I. State of Georgia II. City of London, Ontario III. City of London, England IV. Kapco Income Fund, an open-end investment company registered with the SEC A) I, II, and IV B) I, II, III, and IV C) I, II, and III D) I and II

A) unless the Administrator, by rule or order, authorizes such employment An individual may only act as an agent for multiple broker-dealers that are affiliated with each other. If the broker-dealers are unrelated, an agent may not work for them unless the state securities Administrator, by rule or order, authorizes such employment.

An individual may NOT act as an agent for more than one broker-dealer A) unless the Administrator, by rule or order, authorizes such employment B) unless the broker-dealers are exchange members C) unless the broker-dealers are unrelated D) under any circumstances

B) when informed by the investment adviser that the representative's registration is effective Passing the exams does not automatically give one an effective investment adviser representative's license. Notice is received by the investment adviser from the appropriate state and/or federal authorities and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual.

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) immediately B) when informed by the investment adviser that the representative's registration is effective C) when informed by the Administrator that the representative's registration is effective D) within 48 hours

D) 20% Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $0.50 (1 quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for 3 months − 1 quarter. Multiply that by 4 to get the annual rate.

An investor owns a common stock that has been paying a dividend at an annual rate of $2.00. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is A) 5% B) 12% C) 4% D) 20%

B) The advisory contract may only be assigned to another party with the consent of the client. An investment advisory contract may only be assigned to another adviser with the client's consent. Advisers are not allowed to be compensated solely on the basis of capital gains, regardless of how reasonable the share appears to be. Performance-based compensation is not generally allowed unless the client has a minimum under management (currently $1.1 million) or a substantial net worth (currently in excess of $2.2 million).

An investment adviser may state which of the following in the advisory contract? A) The advisory contract may only be assigned to another party after adequate compensation. B) The advisory contract may only be assigned to another party with the consent of the client. C) The adviser may be compensated on the basis of a reasonable share of the capital gains. D) The investment adviser may be compensated on the basis of capital gains, providing assets in the account are below $250,000.

D) I only For purposes of this Rule, the term "net worth" means an excess of assets over liabilities. But net worth does not include the following as assets: goodwill, franchise rights, patents, copyrights, marketing rights, and all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what's the deal with the sofa? Because the choice specifically says that it is in the reception area, we must assume that it is not a "home" furnishing, rather one in the office and those are not excluded assets.

An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, which of the following assets would be included? I. A sofa in the reception area II. The value of the copyright on an investment manual authored by the investment adviser III. The reputation of the investment adviser IV. Patents held by the investment adviser on a stock tracking software program A) II, III, and IV B) IV only C) I, II, and III D) I only

A) a registered investment company. This is a bit sneaky. In order for an investment adviser to enter into an advisory contract with an investment company, the adviser must be SEC registered (federal covered). Federal covered investment advisers are never registered in any states.

An investment adviser registered in 4 states would be permitted to enter into an advisory contract with all of the following prospective clients except A) a registered investment company. B) a university endowment fund. C) a single parent. D) a charitable foundation.

D) when the recommendations are made exclusively to individual residents of the state who are accredited investors regarding new issues of exempt securities not registered in that state An investment adviser with no place of business in the state is not exempt from registration with the state when making recommendations to individual accredited investors who are residents of that state, even when the securities being recommended are exempt from registration. The Uniform Securities Act exempts investment advisers with no place of business in the state who deal with certain institutional customers such as banks, insurance companies, investment management companies, and employee benefit plans with assets in excess of $1 million. College endowments and other nonprofit organizations also carry exempt status, but not wealthy individuals. An adviser advising an issuer on the quality of potential underwriters does not fall within the definition of investment adviser under the Uniform Securities Act and is therefore exempt from registration.

An investment adviser with no place of business in the state is exempt from registration with the state when making recommendations to all of the following EXCEPT A) AAA Manufacturing Co., with respect to the quality of investment bankers available for an underwriting of AAA securities B) Amalgamated Bank C) St. Amelia's college endowment fund D) when the recommendations are made exclusively to individual residents of the state who are accredited investors regarding new issues of exempt securities not registered in that state

C) is an improper waiver and makes the contract null and void The regulators tend to be quite strict on the use of hedge clauses waiving certain rights of clients or obligations of IAs. More than likely, the Administrator would view this language as potentially misleading to clients, given the adviser's duties as a fiduciary. Moreover, the adviser's statement that it assumes liability for "violation of applicable law" only compounds the problem because it was unlikely that the client would realize that "applicable law" does, under several circumstances, provide a right of action for even good faith "errors in judgment."

An investment adviser's contract contains the following statement: "While GEMCO Advisers agrees to use its best efforts in the management of the portfolio, GEMCO shall not be responsible for errors in judgment or losses incurred on investments made in good faith, and its liability shall be limited expressly to losses resulting from fraud or malfeasance, or from violation of applicable law." Under the USA, this statement A) clearly defines the parameters of the adviser's responsibilities B) offers protection to the client by limiting those acts for which the adviser can be sued C) is an improper waiver and makes the contract null and void D) complies with the investment adviser's fiduciary liability

C) I, II, III, and IV DPPs are appropriate for investors who can benefit from substantial tax deductions or credits, are not bothered by illiquidity, understand the business risks and benefits involved, and can stay in the program until completion.

An investor in a high tax bracket who invested in a DPP should have which of the following characteristics? I. Need for tax benefits II. Substantial liquid assets III. Ability to identify both risks and merits of the program IV. Ability to commit money for a long time A) II and III B) I and II C) I, II, III, and IV D) II, III, and IV

B) $6 per share The investor paid $50 and sold it for $52 for a $2 per share gain. During the 2-year holding period, $4 in dividends were paid. That is a total return of $6 per share.

An investor purchases shares of ABC stock at $50 per share. One year later, ABC is selling for $54 per share and, at the end of the 2nd year, the price is $52 per share. ABC has paid dividends of $2 per year. Upon liquidation, the investor would have earned a return of A) $8 per share B) $6 per share C) $4 per share D) $2 per share

A) employer contributions to the plan are not subject to current taxation to the employee. Tax deferral is found in both NQDC plans and qualified plans, so there is no advantage that one has over the other. However, NQDC plans have much more flexibility without the burdensome compliance issues with ERISA.

Each of the following are advantages offered by a nonqualified deferred compensation plan that are not found in a qualified plan EXCEPT A) employer contributions to the plan are not subject to current taxation to the employee. B) they are an attractive benefit for highly compensated employees because they're free from the contribution limits. C) they are an attractive benefit to the employer because participation requirements and nondiscrimination restrictions do not apply. D) deferred compensation plans are not subject to most of the requirements of the Employee Retirement Income and Security Act of 1974 (ERISA).

A) the securities Administrator does not have the authority to conduct an onsite examination of an investment adviser registered in his state if the adviser does not have an office in that state Administrators have the authority to conduct an onsite examination of a registered investment adviser, even if there is no place of business maintained in the Administrator's state. Under the Act, Administrators may require the filing of advertising used by broker-dealers and investment advisers, who must also comply with certain recordkeeping requirements and file correcting amendments.

Each of the following statements about postregistration provisions is true EXCEPT A) the securities Administrator does not have the authority to conduct an onsite examination of an investment adviser registered in his state if the adviser does not have an office in that state B) investment advisers must comply with recordkeeping rules C) a registered investment adviser may be required to file advertisements D) a correcting amendment to the Form ADV must be filed with the Administrator if any information filed becomes inaccurate or incomplete

D) Spouse's engagement ring A balance sheet, whether for a family or a business, shows assets and liabilities, not income and expenses. The ring is certainly an asset; the others are income or expenses.

Which of the following items would be found on a family balance sheet? A) Dividends and interest received B) Income taxes paid C) Annual salary D) Spouse's engagement ring

B) less than the par value The discounted cash flow method is just a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices. The discount rate here is the current market rate of 7%. Because this investor's debenture is paying at a rate of 6%, its cash flow is less valuable than a 7% bond; therefore, it will sell at a discount (below par).

Five years ago, an investor purchased an ABC Corporation BBB-rated debenture with a coupon of 6% maturing in 2037. Currently, new BBB-rated debentures maturing in 2037 are being issued with coupons of 7%. Based on the discounted cash flow method, one could say that the present value of the investor's security is A) more than the par value B) less than the par value C) negative D) equal to the par value Explanation

A) the market value of the securities on the date of gift If a gift tax is due, it is paid by the donor and based on the gift's value on the date it is given.

If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on A) the market value of the securities on the date of gift B) the cost of the securities C) the market value of the securities as of April 15 of the year in which the gift is made D) the market value of the securities as of December 31 of the year in which the gift is made

D) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement Just as with any other individual, splitting commissions can only be done with those having the proper registration, in this case, that of an agent. Because compensation is determined and processed by the employing broker-dealer, any splitting would need the approval of the appropriate supervisor.

If an agent feels that his secretary is underpaid and decides to split his commissions on an 80%/20% basis, this practice is A) a violation in certain states B) a violation under all circumstances C) permitted if the secretary is also registered as an agent D) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement

D) have to register in California Typically, an agent, when representing the broker-dealer to solicit securities transactions, must register in every state where business is conducted even if the securities or the transactions are exempt. Of course, in order for the agent to do so, the broker-dealer must also be registered in that state.

If an agent located in the Ogden, Utah, office of a broker-dealer wishes to solicit prospects residing in California, under the Uniform Securities Act, the agent would A) not have to register if the broker-dealer is registered in California B) not have to register in California C) be allowed to solicit if the securities are exempt D) have to register in California

B) violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents The agent has violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents by failing to inform the client of the potential downside in the sale of a security.

If an agent recommends the purchase of a technology company with an impressive growth record, but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has A) committed a prohibited business practice by selling an unsuitable investment B) violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents C) not violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents because no untrue statements were made D) not committed a prohibited business practice

A) The full year's fee must be paid. While some states make exceptions for filings late in the year, under the USA there is no pro rating of filing fees. The full year's fee must be paid with the initial registration request.

If an investment adviser files an initial registration with a state on June 30, which of the following statements regarding the filing fee to be paid is TRUE? A) The full year's fee must be paid. B) No filing fee is required until December 31. C) The fee will be prorated from the effective date. D) The fee will be prorated from the filing date.

C) recommending the trade to both sides In an agency cross transaction, the IA represents advisory clients on both sides of the trade and may earn a buying and selling commission. To engage in these types of transactions, written notice must be furnished to advisory clients before the trade. These transactions can never be recommended to both sides of the trade.

If an investment adviser wishes to engage in an agency cross transaction involving advisory clients, it would be prohibited from A) earning a commission on both the purchase and the sale B) representing both the buyer and the seller C) recommending the trade to both sides D) obtaining written consent from the parties prior to engaging in agency cross transactions

A) find the arithmetic mean Unless something else is specified, whenever the mean return is referenced, it is always the arithmetic mean (the simple average).

If an investor wished to compute the mean return of her portfolio, she is going to A) find the arithmetic mean B) find the median C) compute using straight-line averaging D) compute the standard deviation

D) I and IV If the dollar goes down in relation to foreign currencies, then foreigners can buy more U.S. goods with the same amount of their currency, making U.S. goods more competitive in foreign markets. This same movement in the dollar means it takes more dollars to buy the same amount of foreign goods in domestic markets, making foreign goods less competitive with U.S. goods.

If the U.S. dollar is devalued relative to other world currencies, which of the following will occur with respect to the prices of goods? I. U.S. exports will be more price-competitive overseas. II. U.S. exports will be less price-competitive overseas. III. Foreign imported goods will be more price-competitive with ours. IV. Foreign imported goods will be less price-competitive with ours. A) I and III B) II and III C) II and IV D) I and IV

C) She will pay income taxes on the full amount she withdraws each year. An inherited IRA will be subject to income taxes to the beneficiary at time of withdrawal, on the same terms as if it had been distributed to the original owner.

If the owner of a $1 million IRA leaves it to his daughter, which of the following best describes the income tax treatment to the daughter? A) She will pay no income taxes because the estate taxes have already been paid. B) She will pay income taxes on the full $1 million immediately. C) She will pay income taxes on the full amount she withdraws each year. D) She will pay income taxes only on a portion of the withdrawals which exceed $1 million.

C) increase equity exposure and reduce fixed income exposure Rising inflation will reduce real returns on fixed-income investments, so you would want to reduce that exposure. Equities, tangible assets, and commodities tend to increase along with the inflation rate.

If you had expectations of high inflation, you would A) increase fixed-income exposure and reduce equity exposure B) increase fixed-income exposure and reduce tangible asset exposure C) increase equity exposure and reduce fixed income exposure D) increase fixed-income exposure and reduce commodity exposure

A) majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board When it comes to management investment companies (open-end or closed-end), renewal of the investment adviser's contract is approved annually by the fund's board of directors or a majority vote of the outstanding voting shares. The initial contract must be approved by both the board of directors and a majority vote of the outstanding shares. In both of these cases, initial and renewal, a majority vote of the noninterested (outside) members of the fund's board of directors is also required.

In accordance with the stated provisions of the Investment Company Act of 1940, renewal of an open-end management investment company's investment adviser's contract must be approved by A) majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board B) the SEC C) the principal underwriter of the fund D) FINRA

B) Constant dollars The GDP must be adjusted for inflation to get an accurate comparison from 1 year to the next.

In comparing the change in the GDP from 1 year to another, to arrive at an accurate figure, each year's GDP should be converted to which of the following? A) Dollars valued by exchange with foreign currencies B) Constant dollars C) Dollars in terms of gold bullion D) International dollars

B) the stock's beta. The real rate of return on a stock is another way of asking for the inflation-adjusted return. That means the total return, which includes dividends plus any capital gain (or less any capital loss) minus the inflation rate as determined by the CPI. Beta has nothing to do with computing rate of return.

In order to compute the real rate of return on a specific stock, all of the following information is required EXCEPT A) capital gain or loss. B) the stock's beta. C) any dividends paid. D) the change to the CPI.

A) does not approve or disapprove of the issue The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue.

In reviewing prospectuses and registration statements, the SEC A) does not approve or disapprove of the issue B) passes on the merits of a particular security covered by a registration statement C) guarantees the adequacy of the disclosures made in a prospectus D) certifies the accuracy of the disclosures made in a prospectus

A) Qualification The effective date of registration by qualification is set by the Administrator. The effective date under registration by coordination is set by the SEC, and notice filing is merely the filing of certain documents in order for the registrant to be able to offer securities in that state.

In which of the following does registration of an issue become effective when ordered by the Administrator? A) Qualification B) Coordination C) Notice filing D) Integration

A) I, II, and IV Unless a specific exception is referred to in the question, fees based on a share of capital gains or appreciation in an account are prohibited. The other choices are acceptable fee structures. An adviser may charge commissions and fees as long as the fact is clearly disclosed.

It would not be considered an unethical business practice under NASAA's policies for an investment adviser to charge fees I. as well as commissions II. based on an hourly rate III. based on a percentage of the change in value of funds from quarter to quarter IV. based on a percentage of the aggregate value of funds under management A) I, II, and IV B) II and III C) I and IV D) III and IV

C) State P. As an IAR for a federal covered investment adviser, Stillman is required to register only in those states in which he (Stillman) has a place of business. Although Stillman has clients in several states, the question tells us that his place of business is the office in State P. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state.

James Stillman is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. Stillman works out of an office in State P and has 4 retail clients there. In addition, Stillman has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Stillman would be required to register as an investment adviser representative in A) States D and M. B) States P and O. C) State P. D) States P, D, and M.

B) Money market mutual funds RELPs (real estate limited partnerships) would have high liquidity risk because there is generally no secondary market for them. Municipal bonds, even highly rated ones, can have liquidity issues. Even though many REITs are listed on exchanges, there are a growing number of non-traded ones where liquidity can be an issue. However, money market funds with their check-writing privilege, are about as liquid as you can get.

Liquidity risk is the risk that when an investor wishes to dispose of an investment, no one will be willing to buy it, or that a very large purchase or sale would not be possible at the current price. With that in mind, which of the following would likely have the lowest degree of exposure to liquidity risk? A) Investment-grade municipal bonds​ B) Money market mutual funds C) RELPs D) REITs

A) Private fund Private funds invest into companies where the objective is to use their money and business acumen to grow the company to the point where the fund's holding can be sold at a large profit. Growth funds are looking for growth, but take no role in the operations of the companies in which they invest. An investment adviser would like to see portfolio values grow, but you don't invest in an investment adviser. A 529 plan, just like a growth fund, does not take an active role in management.

Nurturing growth of the enterprise would be the objective of which of the following types of investments? A) Private fund B) Investment adviser C) Growth fund D) 529 plan

A) Defined benefit In a defined benefit plan, the retiree receives a specified amount, with the sponsor bearing the investment risk. Keogh plans are not corporate plans. In a defined contribution plan, the employee contributes a defined amount each period, bears the investment risk, and does not receive a defined amount upon retirement. TSAs (tax-sheltered annuity plans, a common name for 403(b) plans) are defined contribution plans, not defined benefit plans.

On retirement, if your customer who is a corporate executive will receive retirement income equaling a percentage of the average of his last 5 years of compensation, this is which type of plan? A) Defined benefit B) TSA C) Defined contribution D) Keogh

C) the CIP requires date of birth while the regulators only require proof of legal age The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts.

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that A) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts B) the CIP requires a statement of the customer's goals while the regulators only require current financial information C) the CIP requires date of birth while the regulators only require proof of legal age D) the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box

C) there is no age limit by which time the funds must be used. Unless the child is a special needs case, funds in a Coverdell ESA must be used by age 30. Contributions to neither program are tax deductible and both plans allow changing the beneficiary to another member of the beneficiary's family. Although the 529 plan is technically a municipal fund security, that is neither an advantage nor disadvantage to the investor.

One of the advantages of using a 529 plan rather than a Coverdell ESA to fund higher education is A) the 529 allows you to change the beneficiary to another member of the beneficiary's family. B) contributions to a 529 plan are tax deductible. C) there is no age limit by which time the funds must be used. D) the 529 plan is a security while the ESA is not.

D) the amount and timing of distributions The UPIA allows a fiduciary to delegate the investment decisions to a qualified third party. Determining distribution amounts and timing is not part of portfolio management and can only be done by the fiduciary (trustee).

One of the major changes incorporated into the Uniform Prudent Investors Act of 1994 was the ability of a trustee to delegate certain responsibilities to qualified third parties. However, a fiduciary would not be able to delegate A) which investment style to be used for managing the portfolio B) the selection of different managers for different asset classes C) the ability to decide on the specific securities to be acquired D) the amount and timing of distributions

A) ownership must be established by the record date Only stockholders who are on the company's books by the record date are eligible to vote.

One of the rights of those owning common stock is the opportunity to vote on issues brought up at the corporation's annual meeting. To be eligible to cast a vote, A) ownership must be established by the record date B) the company must be current on its dividends to preferred stockholders C) the stockholder must be a natural person D) the stock must be paid for in full before the annual meeting

C) the standard deviation of the stock Under the CAPM, using the SML, we can determine the expected return of any given stock by taking the risk-free rate and adding to that the product of that stock's beta coefficient and the difference between the expected return on the market and the risk-free rate. Standard deviation is not a factor in this computation.

One popular method used to predict the expected return of a stock is the capital asset pricing model. Analysts using CAPM rely on all of these EXCEPT A) the expected return on the market B) the risk-free rate available in the market C) the standard deviation of the stock D) the beta coefficient of the stock

A) indicate that there are limitations and difficulties to using the system Anytime you see a question dealing with advertising a charting system (or investment formula, etc.), always look for limitations and difficulties in the answer.

One way to make money is to buy low and sell high. If an investment adviser has developed a proprietary charting system that has had a very high degree of success in picking stocks near their market bottoms, any advertisement about the system must A) indicate that there are limitations and difficulties to using the system B) indicate the length of time the system has been in play C) provide customer testimonials evidencing their satisfaction with the system D) show performance for at least the past 12 months, including both winners and losers

A) I and IV Investment policy, track record, portfolio, and sales load should all be researched when assessing a fund. The identity of the custodian bank for the fund, or number of shares outstanding, does not bear on its performance or suitability.

Potential investment company clients should be advised to investigate a fund by looking at which of the following? I. Investment policy II. Number of shares outstanding III. Custodian bank IV. Portfolio A) I and IV B) II and III C) I and III D) II and IV

D) giving those shareholders an opportunity to participate in the future success of the company The benefit of any convertible security, bond or preferred stock, is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond, and because preferred dividends are an after-tax outlay, there are no tax savings, as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.

Reasons why a corporation might issue a convertible preferred stock would include A) tax savings to the issuer B) a lower cost to the issuer than would be incurred by the issuance of convertible bonds C) giving those shareholders the ability to convert into the issuer's bonds D) giving those shareholders an opportunity to participate in the future success of the company

A) an investment adviser may use a testimonial, but only if it comes from someone who is not an existing client Testimonials from exisiting clients are permitted for use by investment advisers. Certain disclosures are needed, such as the fact that the person giving the testimonial is a client and the extent of any compensation paid for the testimonial. Those who are not clients of the advisory firm give endorsements. Agents and broker-dealers are permitted to use testimonials if they meet FINRA standards. One of the most common forms of testimonial is the public comment by a celebrity about an existing relationship with a financial firm, IA, or BD.

Regarding the use of testimonials in advertising, all of the following are true except A) an investment adviser may use a testimonial, but only if it comes from someone who is not an existing client B) divulging a list of the investment adviser's clients in response to a court order is not considered a testimonial C) an agent of a broker-dealer may use a testimonial from an existing client with the approval of a designated officer of the firm D) a prominent celebrity speaking publicly about his relationship with the investment adviser is considered to be giving a testimonial

D) Average weekly initial claims for unemployment insurance Of these, the only one that is included in the list of leading indicators is the average weekly initial claims for unemployment insurance. Manufacturing and trade sales is a coincident indicator, and average duration of unemployment and average prime rate are lagging indicators.

The Conference Board, a nongovernmental nonprofit organization, regularly publishes a list of economic indicators. Which of the following would be included in their list of leading indicators? A) Average duration of unemployment B) Average prime rate C) Manufacturing and trade sales (in constant dollars) D) Average weekly initial claims for unemployment insurance

B) I, II, III, and IV The FRB attempts to slow the economy and decrease the money supply with a corresponding increase in interest rates. When interest rates rise, the prime rate increases, bond yields rise, and bond prices drop. Higher interest rates have a tendency to slow corporate growth, with a resulting slowdown in earnings; these events occur in this approximate sequence.

The Federal Reserve Board foresees the probability of an overheated economy and the resumption of double-digit inflation. Therefore, the FRB takes actions to slow down the economy, including increasing the discount rate. Which of the following are likely effects of these moves? I. An increase in the prime rate II. An increase in bond yields and an accompanying decrease in bond prices III. A slowdown in corporate growth IV. A decrease in corporate earnings A) I and II B) I, II, III, and IV C) III and IV D) I, III, and IV

A) Form 8-K The Form 8-K is used to report newsworthy events to the SEC, thereby making them available to the public. These reports must be filed within four business days of the event. The Form 10-Q is a quarterly report and, depending on the size of the company, is filed within 40 or 45 days of the end of the quarter. The Form 10-K is the annual report and, once again, the filing time depends on the size of the company and ranges from 60 to 90 days after the end of the fiscal year. The annual report is technically the Form 10-K, although most major corporations publish an additional expanded document with pretty pictures and other information about the company.

The SEC requires that reporting companies (those registered with the SEC) file certain information within specified time limits. Which of the following reports carries the shortest time limit? A) Form 8-K B) Annual report C) Form 10-K D) Form 10-Q

C) I, II, III, and IV The state Administrator may require qualification examinations for officers of investment advisers, as well as its representatives, and may require them to publish an announcement in one or more newspapers published in the state. The Administrator may also require either an oral or written examination.

The Uniform Securities Act authorizes the state Administrator to require I. either oral or written qualification examinations of investment adviser representatives and officers of investment adviser partnerships or corporations II. officers of investment advisers to pass a qualification examination III. an applicant for initial registration to publish an announcement of the application in one or more specified newspapers published in the state IV. investment adviser representatives to pass a qualification examination

C) issue injunctions Only a court of competent jurisdiction has the power to issue an injunction. The Administrator may go to the court to request the injunction but cannot issue it himself. The Administrator may issue a cease and desist order with or without a prior hearing. Records, no matter where they are located, may be subpoenaed by the Administrator.

The Uniform Securities Act gives the Administrator the authority to do all of the following EXCEPT A) issue cease and desist orders B) examine the records of a broker-dealer, regardless of the state where those records are located C) issue injunctions D) conduct hearings

D) Bank holding company stock The securities of banks, trust companies, and savings institutions are exempt; the securities of bank holding companies are not. Commercial paper with a maturity of 270 days or less is also included in the list of exempted securities.

The Uniform Securities Act specifically exempts certain issues from the registration and advertising filing requirements of the act. Which of the following securities does NOT carry that exemption? A) Canadian government bond B) Tax-free municipal bond C) 6-month commercial paper D) Bank holding company stock

D) this would be the prohibited practice of front running The practice of entering an order for the firm in front of a previously received customer order, known as front running, is prohibited. Customer orders always take priority over firm orders, assuming they were not received after the firm entered its orders.

The institutional trading desk of a major broker-dealer receives a substantial purchase order for XYZ common stock from one of its clients. While completing the paperwork to begin the order sequence, the firm decides to purchase shares of XYZ for its proprietary account. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, A) this would be considered market manipulation B) the purchase could only be made with prior disclosure to the client C) the broker-dealer has the right to purchase shares of XYZ whenever it wishes. D) this would be the prohibited practice of front running

B) I, II, and III The cash received from the sale of the bonds is a current asset of the company, and as such would increase assets and working capital on the balance sheet. The bonds are debt of the company and would increase the liabilities of the company. Shareholders' equity is only affected by gains, losses, new invested capital, and the declaration of cash distributions (dividends) to shareholders.

The issuance of a long-term debt instrument, such as a bond, by a company would have an immediate effect on which of the following balance sheet items? I. Total assets II. Total liabilities III. Working capital IV. Shareholders' equity A) II, III, and IV B) I, II, and III C) I, II, and IV D) I, III, and IV

D) net income. Net income is only found on the income statement. The other three are part of stockholders' equity (net worth). Treasury stock is company stock that has been issued to the public and then re-acquired by the issuer (the company). It appears as a negative number so it reduces the net worth (owners' equity). Note, even though the Treasury stock reduces the owner's equity, the question is asking for the items you would see in the owners' equity section on the balance sheet and, if it exists, it would appear there as a deduction.

The owners' equity portion of a corporation's balance sheet would contain all of the following except A) paid-in capital. B) Treasury stock. C) preferred stock. D) net income.

C) It must be established under a trust agreement. All qualified retirement plans must be established under a trust agreement. Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement.

Which of the following statements regarding a qualified profit-sharing plan is TRUE? A) It must define a specific contribution amount. B) It can permit regular direct cash payouts to participants before retirement. C) It must be established under a trust agreement. D) Contributions are required annually.

B) They can contribute $6,000 to his IRA and $7,000 to hers. They both could have made deductible contributions to their own respective IRAs for that year. Because Grace is 51, she can take advantage of the $1,000 catch-up provision and, therefore, contribute $7,000 rather than Thomas's $6,000 limit. A taxpayer's income does not restrict the deductibility of the contributions unless one or both of the spouses are also covered under some other qualified plan. Even though Thomas could establish a Keogh or a SEP, the question did not state that he had. Do not read more into the question than is there.

Thomas, age 49, owns his own business and pays himself a salary of $80,000 per year. He employs his wife, Grace, age 51 as receptionist and pays her $45,000 per year. What is the maximum deductible contribution that they could have made to their traditional IRAs? A) They cannot make deductible contributions because their joint incomes are too high. B) They can contribute $6,000 to his IRA and $7,000 to hers. C) They can contribute $6,000 to each of their individual IRAs. D) They can contribute a total of $6,000 only because they both work at the same business.

B) TJK must notify its clients of Tim's departure within a reasonable period after his severance from the firm. An investment adviser firm organized as a general partnership must notify its clients of the departure of a general partner within a reasonable time.

Tim, Jim, and Kim are equal partners in TJK Investment Advisers, a general partnership. Tim decides to sever his relationship with the other partners and work for a different firm. When, if at all, must the clients of TJK be notified of Tim's departure? A) TJK must notify its clients of Tim's departure within 30 days of Tim's severance from the firm. B) TJK must notify its clients of Tim's departure within a reasonable period after his severance from the firm. C) It is not necessary to notify TJK's clients of Tim's departure, because the advisory will continue to serve its clients as before. D) TJK must notify its clients of Tim's departure within 15 days of Tim's severance from the firm.

A) increase substantially. This is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down. The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price range where a stock appears expensive and initiates increased selling. This selling represents an oversupply of the stock which results in downward pressure on the stock.

To a technical analyst, the resistance level signifies the price at which a stock's supply would be expected to A) increase substantially. B) decrease substantially. C) cause the stock price to "break out". D) remain constant.

C) I and III There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1. commissions; 2. markups and markdowns; and 3. advisory fees for those firms that are also registered as investment advisers

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include I. a charge when a client requests that a stock certificate be issued in his name II. a commission charge when a client buys a security on a listed exchange III. the interest charged by the firm on money owed by customers in their margin accounts IV. fees for providing advisory services to high net worth individuals A) III and IV B) I and IV C) I and III D) II and III

A) annually. The rule requires that a review be performed no less frequently than annually.

Under Rule 206(4)-7, it is unlawful for an investment adviser registered with the Commission to provide investment advice unless the adviser has adopted and implemented written policies and procedures reasonably designed to prevent violation of the Advisers Act by the adviser or any of its supervised persons. Under this rule, investment advisers are required to perform a review of the adequacy of the policies and procedures established pursuant to this section and the effectiveness of their implementation no less frequently than A) annually. B) semiannually. C) quarterly. D) biannually.

D) 1 year after discovery or 3 years after the action, whichever is sooner In the federal regulations, the statute of limitations for a civil action is the sooner of 1 year after discovery or 3 years after the action. Under the USA, it is the sooner of 2 years after discovery or 3 years after the action.

Under federal law, the statute of limitations for civil liability is A) 2 years after the action B) 2 years after discovery or 3 years after the action, whichever is sooner C) 1 year after discovery of the action D) 1 year after discovery or 3 years after the action, whichever is sooner

C) Securities Exchange Act of 1934 The Securities Exchange Act of 1934 regulates the secondary market and its employees and firms.

Under federal law, which act regulates the activities of broker-dealers and associated persons? A) Investment Company Act of 1940 B) Trust Indenture Act of 1939 C) Securities Exchange Act of 1934 D) Uniform Securities Act

C) II and III Amendments effective in 2021 to SEC Rule 206(4), issued under the Investment Advisers Act, permit the use of testimonials under certain conditions. The rule still prohibits untrue statements of material fact and reference only to specific past recommendations.

Under the Investment Advisers Act of 1940, as amended by the Market Rule for Investment Advisers, advertising done by investment advisers prohibits I. the use of testimonials II. reference only to specific past recommendations III. untrue statements A) I only B) III only C) II and III D) I and III

B) real estate agents In the Investment Advisers Act of 1940 and the subsequent releases explaining the act, there is no specific exemption for real estate agents who give investment advice that is incidental to their practice. Engineers, teachers, accountants, and lawyers are specifically excluded if their advice is incidental to their practice.

Under the Investment Advisers Act of 1940, the exclusion for providing investment advice that is solely incidental to the practice of a profession is NOT available to A) attorneys B) real estate agents C) teachers D) engineers

C) The adviser must report the location of funds or securities at 6-month intervals. Advisers who have custody must segregate client securities and funds and keep them in a safe place. Client funds must be deposited in bank accounts containing only the client's funds, and unless using a qualified custodian, the adviser must be named as agent or trustee. The adviser is required to report quarterly with a written, itemized statement indicating the funds and/or securities in the adviser's possession and all transactions in the account. Annually, the adviser must arrange (hire the accounting firm) for an independent surprise audit of all custodied client accounts and the results must be forwarded to the SEC. Thus, the adviser reports to clients every 3 months, not every 6 months.

Under the Investment Advisers Act of 1940, which of the following statements is not true regarding custody of a client's funds or securities? A) The adviser must arrange for an audit of the client's accounts at least once annually and arrange for the results to be forwarded to the SEC. B) The adviser must be named as agent or trustee for a client's account or else use a qualified custodian. C) The adviser must report the location of funds or securities at 6-month intervals. D) Client securities must be segregated and kept safe.

D) I only The statute of limitations for civil cases is 2 years after discovery or 3 years after the event, whichever is sooner. The death of neither the adviser nor the client removes a cause of action for civil liability, and clients may not waive an adviser's compliance with the rules.

Under the Uniform Securities Act, a civil suit to recover damages may not be brought by an advisory client if I. more than 2 years ago, the client realized the advice rendered was improper II. the adviser has died III. the client willingly signed a statement waiving the adviser's compliance with the provision of the act on which the suit is based A) I and II B) II and III C) I, II, and III D) I only

B) I and III An agent may conduct business in a state in which he is not registered if an existing client is visiting in that state or if the client has moved to the state within the past 30 days.

Under the Uniform Securities Act, an agent registered in one state may transact business in another state in which he is not registered with which of the following? I. An existing client visiting the state for a 2-week period II. An existing client who moved to the state 6 months ago III. An existing client who moved to the state less than 30 days prior IV. An acquaintance from another state who requests that the agent execute transactions on his behalf A) II and IV B) I and III C) I and IV D) II and III

A) has committed a fraudulent and unlawful business practice Disseminating false or misleading quotes is a fraudulent practice under the USA but is not necessarily a felony. Trades must be executed at market prices, not fictitious or fabricated prices.

Under the Uniform Securities Act, an agent who deliberately gives a fictitious quote to a customer A) has committed a fraudulent and unlawful business practice B) is guilty of a felony and subject to criminal penalties C) must execute at the price quoted, regardless of the market D) is committed to selling or buying only 100 shares at that price

A) I and IV As long as communications are directed to no more than 5 noninstitutional clients in a 12-consecutive-month period and the adviser does not have a place of business in the state, an exemption from registration is provided.

Under the Uniform Securities Act, an investment adviser is exempt from registration if the person has no place of business in a state and does not direct communication I. to more than 5 noninstitutional clients II. to more than 15 noninstitutional clients III. within 9 consecutive months IV. within 12 consecutive months A) I and IV B) I and III C) II and III D) II and IV

B) II and IV The Administrator may, by rule, prohibit advisers from having custody of client funds or securities. If no such prohibition applies, the Administrator must be notified in writing if an adviser has custody. In almost all jurisdictions, a bond or sufficient net worth is required to maintain custody. Discretionary authority does not affect an adviser's ability to have custody.

Under the Uniform Securities Act, an investment adviser may legally have custody of money or securities belonging to a client if the I. investment adviser has insufficient net worth or is not appropriately bonded II. Administrator has not issued a rule prohibiting custody III. investment adviser does not also have discretionary authority over the account IV. investment adviser has notified the Administrator that custody is maintained A) II, III and IV only B) II and IV C) II only D) I and III

D) 30 Registration becomes effective 30 days after the application is filed unless the Administrator begins a proceeding or issues a stop order before that time. The Administrator may specify an earlier date, or if an application must be amended, the Administrator may extend the date to 30 days after the amendment was filed.

Under the Uniform Securities Act, if the Administrator does not deny an application for registration and no disciplinary proceeding is underway in regard to it, how many days after filing the application as an investment adviser representative does registration generally become effective? A) 10 B) 7 C) 5 D) 30

D) I, II, and III The Administrator may deny or revoke any transaction exemption except those involving a federal covered security. The only security exemptions where the Administrator has this power is in the case of securities issued by nonprofit organizations and investment contracts of employee benefit plans. The order must pertain to a specific transaction or security.

Under the Uniform Securities Act, the Administrator may deny or revoke the exemption from registration for which of the following? I. A security issued by a nonprofit organization II. Investment contracts of employee benefit plans III. An exempt transaction not involving a federal covered security A) I and III B) II and III C) I only D) I, II, and III

A) before the sale of the security. Under registration by qualification, the USA specifies that the Administrator has the power to require prospectus delivery before the sale of the security. That means the offeree (the investor), receives the prospectus prior to making a purchase. There is no prospectus prior to or concurrent with the filing. Because the prospectus is not available until the effective date, one can't be distributed prior to the effective date.

Under the Uniform Securities Act, the Administrator may require that a prospectus for a security registered under qualification be sent or given to each person to whom an offer is made A) before the sale of the security. B) only upon request of the offeree. C) before or concurrent with the filing of the registration statement. D) within 72 hours of the effective date.

C) With the original application only Initial applications for registration must be accompanied by a consent to service of process. This document becomes a permanent part of the application and appoints the Administrator to accept subpoenas on behalf of the applicant.

Under the Uniform Securities Act, when must a consent to service of process be filed with the Administrator? A) It need not be filed, unless requested by the Administrator B) With the original application and renewal C) With the original application only D) When a case is pending

A) Investment advisers with a place of business in the state and less than $100 million in assets under management Under the USA, an investment adviser with a place of business in the state must register with the state securities Administrator, regardless of who the clients are, unless they are federal covered advisers. Advisers without an office in the state, or whose clients are exclusively insurance companies, are not defined as investment advisers in that state under the USA. An adviser who manages an investment company that is registered under the Investment Company Act of 1940 or who has $100 million or more under management, are federal covered investment advisers that do not register with the states. Once the $100 million level is reached, the adviser has the choice of state or SEC registration until hitting $110 million.

Under the Uniform Securities Act, which of the following must register with the state securities Administrator? A) Investment advisers with a place of business in the state and less than $100 million in assets under management B) Investment advisers who have $100 million or more under management C) Investment advisers without an office in the state whose clients are exclusively insurance companies D) Investment advisers to an investment company registered under the Investment Company Act of 1940

C) Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application. While the Administrator may specify an earlier date, absent any denial orders or pending proceedings, registrations become effective at noon on the 30th calendar day after the date of filing. The application is considered to be filed on the date received in the offices of the Administrator, not the date of mailing by the applicant.

Under the Uniform Securities Act, which of the following statements is TRUE regarding registration of an investment adviser if the application has not been amended? A) Unless specified earlier by the Administrator, the registration becomes effective at noon on the 60th day after application. B) Unless specified earlier, registration becomes effective no sooner than 15 days after the application is filed. C) Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application. D) Unless specified earlier, registration becomes effective no later than 90 days after the application is filed.

B) I and III Whenever an individual begins or ends association as an IAR with a state-registered investment adviser, the IA must notify the Administrator. An IAR's registration is only valid while employed by a registered investment adviser.

Under the Uniform Securities Act, which of the following statements regarding the employment of investment adviser representatives by a state-registered investment adviser is (are) true? I. The investment adviser must notify the Administrator whenever an investment adviser representative is terminated. II. An investment adviser is not required to notify the Administrator when an investment adviser III. representative begins employment. III. The registration of an investment adviser representative is effective only as long as the individual is employed by a registered investment adviser. A) I only B) I and III C) III only D) I, II, and III

D) the president of the United States. The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification to the president of the United States and may summarily suspend securities trading in a registered security that is listed on a stock exchange for up to 10 days if it believes such action to be in the public interest.

Under the provisions of the Securities Exchange Act of 1934, the SEC may suspend trading on a national exchange by notifying A) the Board of Governors of the Federal Reserve Bank. B) the chairperson of a joint House/Senate committee on banking. C) the president of that exchange. D) the president of the United States.

C) The price of the bonds would decrease. Bond prices fall when interest rates rise because bond prices have an inverse relationship with interest rates.

What would likely happen to the market value of existing bonds during an inflationary period coupled with rising interest rates? A) The nominal yield of the bonds would increase. B) The price of the bonds would increase. C) The price of the bonds would decrease. D) The price of the bonds would stay the same.

B) the agent, the former broker-dealer, and the current broker-dealer must all notify the Administrator When an agent transfers employment from any broker-dealer to any other broker-dealer, both the agent and the broker-dealers must notify the state securities Administrator.

When an agent transfers employment from a broker-dealer registered with the SEC to a broker-dealer registered solely in this state A) only the agent and the state-registered broker-dealer must notify the Administrator B) the agent, the former broker-dealer, and the current broker-dealer must all notify the Administrator C) only the agent must notify the Administrator promptly D) only the agent and the SEC-registered broker-dealer must notify the Administrator promptly

B) 7.60% Use the CAPM to calculate the expected rate of return. Expected (required) return = 0.03 + [0.92 (0.08 − 0.03)] = 0.0760, or 7.60%.

XYZ stock has a beta of 0.92. The risk-free rate of return is 3% and the market's rate of return is 8%. Using the capital asset pricing model (CAPM), what is the expected rate of return of this stock? A) 10.12% B) 7.60% C) 6.85% D) 5.06%

C) only preemptive rights and warrants are issued by the underlying corporation. Corporations issue preemptive rights (if called for in the corporate charter) when issuing additional shares. Warrants are issued by corporations usually as a sweetener to make a bond issue more attractive. Call options are issued by the options exchanges, not the underlying corporation. All three of these products trade on listed exchanges and all of them have time value with warrants generally having the longest expiration date.

When contrasting call options, preemptive rights, and warrants, it would be correct to state A) all of these are issued by the underlying corporation. B) only call options are traded on listed exchanges. C) only preemptive rights and warrants are issued by the underlying corporation. D) only call options and warrants have time value.

A) hedge funds do not offer the transparency of mutual funds. Because hedge funds are not registered with the SEC (or the states), there are limited disclosures—the transparency is not nearly what investors have with mutual funds. Mutual fund investment managers always register with the SEC, and the same is true of must hedge fund managers, typically those with AUM of at least $150 million. Neither hedge funds nor mutual funds trade on listed exchanges and hedge funds do not have traditional share classes; they may offer a choice of different currencies, but that is totally different from the share classes of mutual funds.

When discussing the differences between purchasing a mutual fund and a hedge fund, the investor should be aware that A) hedge funds do not offer the transparency of mutual funds. B) hedge fund shares are generally listed on an exchange while mutual fund shares are not. C) hedge funds only offer Class A shares, while mutual funds offer many different classes. D) managers of hedge funds are generally registered with the SEC while mutual fund managers are registered with the state(s).

B) I, II, and IV A capital needs analysis is used to help determine the proper amount of life insurance that will provide for the family's needs in the event of premature death of the primary breadwinner. The agent would factor in the client's projected earnings until retirement and, in order to do that, would need to know the current age. In addition, to be sure to allow for enough to keep up with the rising cost of living, the projected inflation rate is needed. However, market volatility does not impact the analysis because the amount of the selected death benefit will remain constant, regardless of changes to the market.

When performing a capital needs analysis for a client, factors to be considered would include I. the client's projected earnings II. the projected inflation rate III. projected market volatility IV. the client's age A) I and II B) I, II, and IV C) I, II, III, and IV D) III and IV

D) Brady bonds When describing an asset class, we are not looking at a specific security. IBM common stock is considered as an equity security—it is not an asset class by itself. Brady bonds are considered a debt security, but not an asset class. Brady bonds are issued by a developing country as a result of a restructuring of its defaulted bank debt. They are government obligations issued after the debtor nation negotiates with the creditor banks' advisory committee to restructure loans that are no longer performing. The creditor banks exchange the nonperforming loans for various Brady bonds offered by the debtor government.

When preparing an asset allocation program, all of these would be considered asset classes EXCEPT A) debt securities B) cash or cash equivalents C) equity securities D) Brady bonds

B) CAPM uses standard deviation as a measure of market risk. CAPM accounts for the impact of systematic risk (as measured by beta) only and does not take into consideration unsystematic risk, which is assumed to have been diversified away.

Which of the following is not correct regarding the capital asset pricing model (CAPM)? A) CAPM only considers the systematic risk. B) CAPM uses standard deviation as a measure of market risk. C) The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock. D) The market risk premium is the incentive required for the individual to invest in the securities market.

B) II and III From an accounting standpoint, once a corporation declares a cash dividend, it becomes a current liability on the company's balance sheet. When that dividend is paid, cash, a current asset, is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth).

Which items change when a company pays a cash dividend? I. Working capital II. Total assets III. Total liabilities IV. Shareholders' equity A) I and IV B) II and III C) II, III, and IV D) I, II, and III

C) II and IV Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Both yield and maturity are open to negotiation. Because commercial paper is issued with maturities of no more than 270 days, it is exempt from registration under the Securities Act of 1933.

Which of the following are characteristics of commercial paper? I. Backed by money market deposits II. Negotiated maturities and yields III. Issued by insurance companies IV. Not registered with the SEC A) I and II B) I and III C) II and IV D) III and IV

A) II and III Front running is the prohibited practice of placing an order to benefit from news not yet released or orders that will impact the market. An adviser acquiring stock and then publishing a buy recommendation or an IAR benefiting from an analyst's news before public release are examples of this type of wrongdoing. Although allocation based on client positions is a prohibited practice, it is not front running.

Which of the following are examples of the prohibited business practice known as front running? I. An investment adviser publishes a strong buy recommendation for XYZ common stock and then purchases a large block for the firm's own account several days later. II. An investment adviser publishes a strong buy recommendation for ABC common stock several days after purchasing a large block for the firm's own account. III. An analyst informs an IAR that he is going to discuss the fact that he has changed a recent buy recommendation to a sell when he appears on cable TV later that afternoon. The IAR immediately establishes a large short position in that stock. IV. An IAR purchases 10,000 shares of DEF 6% preferred stock for 4 of her income-oriented clients. It takes several separate trades to fill the entire order, and the prices range from $24.25 to $24.33. The IAR allocates the shares, giving price preference to clients taking the largest positions. A) II and III B) II and IV C) I and III D) I and IV

D) II and III Common stock not listed on any regulated exchange and purchased by an open-end investment company is an exempt transaction, but that common stock is not an exempt security. Securities issued by insurance companies, and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to business in this state is exempt. Qualifying private placements are exempt transactions, not exempt securities.

Which of the following are exempt securities under the Uniform Securities Act? I. Common stock, not listed on any regulated exchange, purchased by an open-end investment company registered under the Investment Company Act of 1940 II. Preferred stock issued by an insurance company authorized to do business in this state III. Municipal bonds issued by Toronto, Ontario IV. Private placements A) I and II B) I and III C) II, III, and IV D) II and III

A) The difference between the sum of the discounted cash flows that are expected from an investment and its initial cost Net present value is a computation taking into consideration future cash flows, discounted to the present, and comparing that to the capital investment necessary to obtain those flows. It is always expressed in monetary units and, if positive, indicates a potentially worthwhile investment.

Which of the following best describes net present value? A) The difference between the sum of the discounted cash flows that are expected from an investment and its initial cost B) It is the true interest yield expected from an investment expressed as a percentage C) The discount rate that results in a return of zero for a series of future cash flows D) The amount of money that must be invested today at some specified rate of return to equal a targeted value in a specified number of years

B) I and III Unsystematic risk is company risk, the risk that an individual investment will perform poorly. Systematic risk is market risk, the risk that the market will perform poorly, dragging one's portfolio along with it. Diversification will remove most unsystematic risk. The more stocks owned, the lower the risk that a poor performer will jeopardize the overall value of the portfolio.

Which of the following describe unsystematic risk? I. The risk that an individual stock will not perform well II. The same as market risk III. Can be diversified to lower risk IV. Cannot be diversified to lower risk A) II and III B) I and III C) II and IV D) I and IV

C) Deferred compensation Deferred compensation plans are not ERISA-covered plans; that is what gives them greater flexibility than a covered plan.

Which of the following employer-sponsored plans is NOT covered by ERISA? A) Defined benefit pension B) 401(k) C) Deferred compensation D) 403(b)

B) I and IV Income received by investors in Government National Mortgage Association (GNMA) securities is subject to both state and federal income tax, and the asset backing them is residential mortgages.

Which of the following is TRUE of GNMA securities? I. Interest is subject to federal income tax. II. Interest is exempt from federal income tax. III. They are backed by farm mortgages. IV. They are backed by residential mortgages. A) II and IV B) I and IV C) II and III D) I and III

B) Industrial production Industrial production is a coincident indicator. The stock indexes and manufacturing orders are leading indicators. Economists do not use agricultural employment as an indicator.

Which of the following is a coincident economic indicator? A) Stock market prices as measured by the S&P 500 B) Industrial production C) Agricultural employment D) Machine tool orders

D) Variable annuities The tradeoff with lack of guarantees is the potential to keep pace with inflation.

Which of the following is designed primarily as a retirement vehicle to help protect contract owners from a decline in purchasing power? A) Life-paid-up-at-age-65 life insurance B) Retirement income life insurance C) Flexible premium fixed annuity D) Variable annuities

B) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm 6 months ago. ABC must notify the Administrator of this association promptly. Only state-registered investment advisory firms are required to notify the appropriate state Administrator when employment is terminated or begun. In the case of investment adviser representatives of federal covered advisers, notification is the responsibility of the adviser representative. Investment adviser representatives of both state and federal registered investment advisers must be registered with the appropriate state Administrator(s), unless otherwise exempted. In the case of agents, not only the broker-dealers but also the agents must notify the Administrator.

Which of the following regarding the registration of investment advisers and their representatives is TRUE? A) XYZ Advisers, Inc., is a federal covered investment advisory firm registered with the SEC; therefore, its representatives need not be registered with the Administrator. B) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm 6 months ago. ABC must notify the Administrator of this association promptly. C) ABC Advisers, Inc., is an investment advisory firm registered with the Administrator; therefore, its representatives need not be registered with the Administrator. D) An investment adviser representative, terminated his employment with ABC Advisers and, 6 months later, was employed as an advisory representative by KLM, a federal covered adviser. Each firm is required to notify the Administrator of each event.

A) Synergy's oil and gas limited partnership units (Synergy, Inc., is the general partner) Synergy's oil and gas limited partnerships are not issued by Synergy, Inc.; Synergy is only the general partner. The oil and gas partnerships are issued by separate legal entities; they do not have the blue-sky exemptions. They must be registered in the states in which they are sold, unless they have some other exemption. Any security equal or senior in claim to an exempted common stock is exempted as well. The company's preferred stock, senior bonds, and debentures all have blue-sky exemptions from state registration because the company's common stock is traded on the Nasdaq Stock Market.

Which of the following securities of Synergy, Inc., (an issuer whose stock trades on the Nasdaq Stock Market), does NOT have an exemption from registration with the state? A) Synergy's oil and gas limited partnership units (Synergy, Inc., is the general partner) B) Synergy, Inc., senior bonds C) Synergy, Inc., debentures D) Synergy, Inc., preferred stock

D) The CPI measures the increase or decrease in the level of consumer prices with respect to the level of wholesale prices on which consumer prices depend. The CPI does not measure the increase or decrease in the level of consumer prices with respect to the level of wholesale prices. The CPI only measures retail prices, not whether wholesale prices are passed through to the consumer. It is the most common reference when discussing the inflation or deflation rate.

Which of the following statements about the Consumer Price Index (CPI) is NOT true? A) The CPI is computed monthly. B) The CPI is the most commonly used indicator of the inflation (or deflation) rate in the United States. C) The CPI measures the rate of increase or decrease in a broad range of prices, such as food, housing, medical care, and clothing. D) The CPI measures the increase or decrease in the level of consumer prices with respect to the level of wholesale prices on which consumer prices depend.

C) Net present value (NPV) is the difference between the initial cash outflow (investment) and the future value of discounted cash flows. Net present value (NPV) is the difference between the initial cash outflow (investment) and the present value of discounted cash flows (NPV = PV of CF − cost of investment). That is why it is called net present value instead of net future value.

Which of the following statements is NOT correct? A) Time-weighted returns show performance without the influences of additional investor deposits or withdrawals from the account. B) Internal rate of return (IRR) is a method of determining the exact discount rate to equalize cash inflows and outflows, thus allowing comparison of rates of return on alternative investments of unequal size and investment amounts. C) Net present value (NPV) is the difference between the initial cash outflow (investment) and the future value of discounted cash flows. D) Net present value analysis (NPV) is a commonly used time value of money technique employed by businesses and investors to evaluate the cash flows associated with capital projects and capital expenditures.

D) The amount of money in the economy determines the overall price level over time, therefore the Federal Reserve should control the growth in the amount of money in the economy in a gradual and predictable way. Monetarists believe that the economy and inflation are best controlled through the management of the money supply rather than through fiscal policy stimulation.

Which of the following statements reflects the monetarist economic position? A) The amount of money in the economy is not significant because economic activity reflects the value of real goods and services, therefore the Federal Reserve should not attempt to manage the money supply. B) The best way to control the money supply is to raise taxes which will reduce the amount of money in the economy and lower prices. C) The total amount of money in the economy is the result of the level of interest rates. D) The amount of money in the economy determines the overall price level over time, therefore the Federal Reserve should control the growth in the amount of money in the economy in a gradual and predictable way.

B) The bond's current yield is calculated by dividing its annual interest by its current market price. A bond's current yield is calculated by dividing its annual interest by its current (market) price. In this case, it would be $85 ÷ $1,100. The current yield will be higher than its yield to maturity, which takes into consideration the $100 difference between the purchase price and the par value (a loss of $100). The determination of a bond's yield is unrelated to other bonds. In addition, this bond is selling at a premium (more than $1,000), not at a discount (less than $1,000).

Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is true? A) The bond is a discount bond. B) The bond's current yield is calculated by dividing its annual interest by its current market price. C) To determine the bond's current yield, its stated rate must be compared against other fixed-rate investments in the client's portfolio. D) The bond's current yield is lower than its yield to maturity.

D) Each client must receive the brochure no later than the entering into the advisory contract. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The summary includes an offer to provide a copy of the updated brochure and information on how the client may obtain it. There is no 48-hour rule under federal law as there is for state law, and in any event, that law has a 48-hour in advance requirement. Only when the charge for the impersonal advice is $500 per annum or more is there a requirement to deliver the brochure.

Which of the following statements regarding the Investment Adviser Act of 1940 and the adviser's brochure are CORRECT? A) Annual delivery of a summary of material changes relieves the adviser of the obligation to deliver a brochure. B) Advisers must deliver the brochure to clients for whom they offer impersonal advisory service only when the annual charge does not reach $500. C) Each client must receive the brochure no later than 48 hours after entering into the advisory contract. D) Each client must receive the brochure no later than the entering into the advisory contract.

B) I and IV Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability.

Which of the following would appear as assets on a corporation's balance sheet? I. Prepaid expenses II. Deferred tax credits III. Notes payable IV. Notes receivable A) II and III B) I and IV C) I, II, and IV D) I and III

B) I and II Under the USA, only individuals can be agents. A person who sells securities for a broker-dealer is an agent. An administrative person, such as the assistant to the president of a broker-dealer, is considered an agent if he takes securities orders from clients. Corporate entities are excluded from the definition of an agent. Broker-dealers and issuers are not agents.

Which of the following would be an agent as the term is defined in the Uniform Securities Act? I. An individual representing a registered broker-dealer in the sale of securities to the general public II. An assistant to the president of a broker-dealer who accepts orders from clients on behalf of the senior partners III. A subsidiary of a major commercial bank registered as a broker-dealer that sells securities to the public IV. An issuer of nonexempt securities registered in the state and sold to the general public A) I, II, III and IV B) I and II C) I, II and III D) III and IV

A) Agents correcting execution orders in their customer's accounts When a good-faith error is made, only the firm can make the correction; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm's website).

Which of the following would be considered an unethical business practice? A) Agents correcting execution orders in their customer's accounts B) Broker-dealers sending retail clients an email 30 days in advance of a change to fees C) Broker-dealers charging larger than ordinary commissions on certain transactions D) Agents exercising discretion in discretionary accounts

C) Ethical and moral investing Socially responsible investing (SRI) is an impact investment strategy which seeks to consider both financial return and social good. In general, socially responsible investors encourage highly ethical corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity.

Which of the following would likely be stressed in a socially responsible fund? A) Avoidance of foreign securities B) Higher-than-average returns C) Ethical and moral investing D) Lower than average expenses

D) Yield spreads are narrowing. The term yield spread refers to the difference in yield between very-high-quality debt instruments, such as U.S. government bonds, and those with lower ratings. The spread compensates for the additional risk. When investors perceive that the risk has lessened, they won't demand as much in return from the lower-rated instruments.

While listening to a commentator on cable TV, you hear the statement "the flight to quality has ended." What would you expect the effect of this to be? A) Airline stocks are in for a beating. B) Yield spreads are widening. C) Pessimism is spreading. D) Yield spreads are narrowing.

B) generally buy when the majority of other investors are selling and sell when the majority of other investors are buying. As the term implies, a contrarian takes positions that are opposite to the prevailing opinions.

While reading the prospectus of a mutual fund, you notice that the management describes their style as contrarian. They further explain that they A) have higher-than-average income as their goal. B) generally buy when the majority of other investors are selling and sell when the majority of other investors are buying. C) tend to invest in stocks with a high correlation coefficient. D) believe that indexing provides the most attractive returns.

B) 70% large-cap stock fund, 20% balanced fund, 10% money market fund This question is dealing with 2 different time horizons. First we have the short-term of 6 months for the home down payment, so she'll need capital preservation and liquidity. That is accomplished with the money market fund. Then, being 30 years old, she has a long-term time horizon that necessitates investing for growth and inflation protection. That is where the 70% in large-cap securities is the most appropriate asset allocation for her. The 20% in the balanced fund helps keep the overall risk level on the moderate side. One point to remember is that municipal bonds (or municipal bond funds) will never be the correct investment choice unless the question states that the client is in a high tax bracket or is looking for tax-free income.

Your 30-year-old client has $100,000 to invest and willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in 6 months. Which of the following asset allocation strategies would best suit her situation? A) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund B) 70% large-cap stock fund, 20% balanced fund, 10% money market fund C) 50% government bond fund, 50% large-cap fund D) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund