Series 65 Questions

An investor writes an uncovered RST May 25 put for a premium of 4. What is the maximum loss the investor could sustain?

$2,100

Must the Consent to Service of Process be renewed each year?

No. It is only required at initial registration.

An investment adviser must record the personal securities transactions that are effected by its officers, directors, partners, and employees by no later than:

10 days after the end of the calendar quarter

According to NASAA's Prohibited Conduct of IAs, IARs, and federal covered IAs, Model Rule, publicly distributed, written materials are defined as any written materials distributed to:

35 or more persons who pay for the materials According to NASAA Model Rule 502(b)(1)(4), any written materials distributed to 35 or more persons who pay for the material are defined as publicly distributed, written materials, such as research reports.

In what type of account is reverse churning most likely found?

A fee-based (wrap) account

According to the USA, who is included under the term person?

Any legal entity, including individuals (clients/agents/IARs), BDs, IAs, issuers, corporations, and partnerships.

How are dividends taxed?

As ordinary income.

_______ is the balancing of investment classes according to an investor's investment objectives.

Asset allocation is the balancing of investment classes according to an investor's investment objectives.

When an agent ends her association with a BD, who must notify the Administrator?

Both the agent and the BD

Churning is described as _____________________ designed to _____________________.

Churning is described as excessive trading designed to generate commissions.

Who operates the IARD?

FINRA

During a deflationary period, interest rates:

Decrease, causing bond prices to rise A deflationary period is characterized by a sluggish economy, where goods and services decline in value. Because the demand for money is low, interest rates tend to trend downward, causing bond prices to rise.

True or False: Bank holding companies are excluded from the IA definition under the USA.

False

A pension fund manager wants to protect the fund's diversified stock portfolio against a market downturn. To best meet this objective, she should purchase:

Index options would move in the same direction as the market as a whole and, therefore, provide a better hedge for a diversified portfolio than individual stock options.

When and by whom is Form ADV-E filed?

It is filed within 120 days from the completion of an audit of the IA's books; filed by the auditor.

An investment adviser may store its books and records on electronic media if:

It provides immediate access to the books and records

NSMIA indicates that securities listed on the NYSE, NASDAQ and Toronto Exchange are _______ _______ securities.

NSMIA indicates that securities listed on the NYSE, NASDAQ and Toronto Exchange are federal covered securities.

According to the Investment Advisers Act of 1940, when must an access person submit a transaction report?

No later than 30 days after the end of each calendar quarter

May an adviser release account information to the spouse of a client?

No, not without the client's written authorization.

When conducting an investigation of wrongdoing, is the Administrator limited to state boundaries?

No. The Administrator may subpoena books, records, and witnesses from inside and outside the state.

Does the appeal of an administrative order act as a stay of the order?

No. The order remains in effect until the outcome of the hearing.

When should significant changes to an adviser's ADV be filed?

Promptly (within 30 days)

What forms of soft-dollar compensation are acceptable?

Research reports, seminars, software used to provide analysis

Due to SEC Release 1092, what other candidates are included in the expanded IA definition?

Sports and entertainment reps, pension consultants and financial planners

For tax purposes, how is the commission that a customer pays to purchase a security usually treated?

The commission that a customer pays to purchase a security is usually added to the cost basis.

True or False: A warrant attached to the sale of a bond is considered a sale of the warrant.

True

True or False: Under the IA Act of 1940, performance fees are allowed for persons who are not residents of the U.S.

True

True or False: If an IA's clients are institutions (e.g., banks and BDs), it is exempt from registration under the USA.

True. However, this is provided that it has no place of business in the state.

What is required of an IA to assign an advisory contract to another adviser?

Written permission of the client

Retail communication generally requires ______________ __________

principal approval

The pricing of preferred stock will most closely follow the pricing of:

T-Bonds. A preferred stock pricing will follow the pricing of debt instruments and not common stock because preferred stock pays a fixed dividend and, therefore, is purchased by investors looking for income, not capital appreciation. Since there is no indication in the question that this particular stock is callable, you need to assume that it is not. Therefore, since there is no equivalent of a maturity date, it would most closely follow the pricing of long-term debt instruments.

What is the minimum cooling-off period for registration by notification?

Five days

If an investment adviser uses a social media site as a form of advertising, all records of its use must be maintained for at least:

Five years

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

Five years if sent to two or more persons

After occurrence of the event for which a filing is required, when must a Form 8-K be filed?

Four days Unless otherwise specified, Form 8-K must be filed or furnished within four business days after the occurrence of the event for which the filing is made. Form 8-K is required by the SEC to announce certain significant changes in a public company, such as a merger or acquisition, a name or address change, bankruptcy, change of auditor or accountant, or any other information that may be reasonable for a potential investor to know.

___________ is the willful or intentional act of deceiving another person for gain or profit.

Fraud

A company has a cumulative preferred stock outstanding that pays a $5 dividend per year. If dividends on the preferred stock were not paid last year but will be paid this year, how much should the preferred stockholder receive?

$10. The preferred stock is cumulative, which means if the dividend is not paid, it accumulate to the next year and must be paid in addition to any current dividends, before common stockholders may receive a dividend. Therefore, the preferred stockholder should receive $10 in the current year ($5 dividend in arrears + $5 current dividend).

A client wants to make a payment in perpetuity of $3,000 per year to a beneficiary. Assuming a 3% annual return, how much principal would your client need to deposit?

$100,000 The client would need to deposit $100,000. To calculate the required principal, take the annual payment in perpetuity of $3,000 and divide it by the annual rate of return of 3% ($3,000 / .03 = $100,000). The phrase in perpetuity may also be referred to as a perpetual payment, meaning that payments will continue to be made forever.

A corporation has a 9% cumulative preferred stock issue outstanding. The company paid a $7 dividend in 2014 and $8 in 2015. If the company wants to pay a common stock dividend in 2016, the cumulative preferred stockholders must first receive a dividend of:

$12. The cumulative preferred stockholder should receive a yearly dividend of $9. Since it is a cumulative issue, any dividend that is not paid (in arrears) must be made up prior to a common dividend being paid. If a common dividend is to be paid in the Year 2016, the cumulative preferred stockholders must first receive $12 ($2 for 2014 plus $1 for 2015 plus $9 for 2016).

The SEC may suspend trading in a security for up to _____ days.

10 days.

A market maker gives a firm quote of 15 - 15.50 for a stock. If the party on the other side decides to buy 800 shares, how many shares is the market maker obligated to sell at 15.50?

100 shares When a market maker gives a firm quote with no size indicated, the market maker is obligated to buy or sell at least 100 shares of the stock. The market maker has the option to sell more at that price if requested.

A multi-state adviser must file a Form ADV-W to withdraw from federal registration if the number of states in which it is required to register is less than:

15 A person, who is required to register as an investment adviser based on the laws of 15 or mores states, is considered a multi-state adviser and, therefore, must register with the SEC. If the number of states in which the adviser is required to register falls below 15, the adviser is required to file Form ADV-W indicating a partial withdrawal at the time of filing its annual updating amendments.

An investment advisory firm is analyzing the market and building a portfolio for a client. The firm starts by identifying companies with strong financial performance and then creates forecasts for the entire sector based on its analysis. This is an example of:

A bottom-up approach. When an investment adviser analyzes the market by first evaluating individual companies, it is considered a bottom-up approach. Conversely, when an adviser begins by analyzing the performance of a sector as a whole, it is considered a top-down approach.

Chuck, an IAR, is discussing an equity-indexed annuity with a client. In discussing the participation rates of the annuity, Chuck explains that if the S&P 500 Index gains more than 10%, the annuity will be credited with no more than 7%. Chuck is describing what type of annuity?

A capped equity-indexed annuity

What is the general definition of an investment adviser?

A firm that provides advice/analyses regarding securities, as part of a business, and for compensation

One of your clients anticipates a significant decline in XYZ stock. The client would like to establish a position to take advantage of this, but not expose himself to significant risk. Which of the following actions would best satisfy your client's needs?

A long put would allow your client to realize a gain determined by the amount the stock falls below the option's strike price, less the premium. The investor is only at risk for the amount paid for the put, i.e., the premium. In selling XYZ short, an investor exposes himself to unlimited risk. When purchasing a straddle, the investor pays a premium greater than when purchasing only one put on the stock. While the debit put spread is bearish, the gain is limited to the difference between the strike price on the long put and the strike price on the short put, less the net premium.

The expected impact that a small growth in the GDP would have on the CPI and the nation's rate of inflation would be:

A moderate increase in the CPI and A moderate rise in the rate of inflation. With a moderately growing economy you would expect the CPI to increase moderately. The Consumer Price Index (CPI) is the basic measure of inflation and, with a moderately growing economy, it would be expected to show a moderate increase in inflation.

When a broker-dealer is selling a private placement to a nonaccredited investor, the investor must be represented by:

A purchaser representative. A nonaccredited investor should be represented by a purchaser representative when purchasing a private placement under Regulation D. This person must be designated, in writing, for each offering. Although there are specific requirements for a purchaser representative, he should be someone such as an investment adviser, attorney, or accountant who should be able to read and understand the offering documents (offering memorandum) and be able to explain the potential risks to the investor.

A company issued $50 million of common stock in a private placement under Regulation D. The Administrator does not require the filing of:

A registration statement would not be required since the securities are federal covered and subject to notice filing. Form D for private placements registered under Regulation D would be required in addition to a Notice Filing and a Consent to Service of Process.

A company issued $50 million of common stock in a private placement under Regulation D. The Administrator requires not require the filing of:

A registration statement would not be required since the securities are federal covered and subject to notice filing. Form D for private placements registered under Regulation D would be required in addition to a Notice Filing and a Consent to Service of Process.

All of the following funds would be suitable recommendations for investors primarily seeking income, EXCEPT a: -Muni Bond Fund -Sector fund -Money-market fund -Balanced fund

A sector fund invests in securities of a specific industry or specific geographic location and typically does not have income as a primary objective.

If a portfolio manager is rebalancing a client's assets on a quarterly basis, this would be considered:

A strategic asset allocation strategy A strategic asset allocation strategy may include the periodic rebalancing of the portfolio on a monthly, quarterly or annual basis in order to keep the original asset allocation intact. A tactical asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions.

If a portfolio manager is rebalancing a client's assets on a quarterly basis, this would be considered:

A strategic asset allocation strategy may include the periodic rebalancing of the portfolio on a monthly, quarterly or annual basis in order to keep the original asset allocation intact. A tactical asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions.

A customer buys 100 shares of stock at $39 a share. She also sells a call option with a strike price of $40 and receives a premium of $2. What is the customer's breakeven point on this stock and why did she engage in this position?

A type of option position where an investor buys or holds stock and writes a call option is called a covered call. This strategy is typically used to generate income. The breakeven point is $37. It is determined by subtracting the premium from the cost basis of the stock ($39 - $2).

After buying a large block of stock for herself, an agent is overheard telling another employee that after her purchase she recommended the same stock to a number of her clients who also purchased it. After completing the clients' orders, the agent sold her stock for a large profit. The agent's prohibited action is best described as:

Front-running

_____________ is the prohibited practice of a BD trading for its own account ahead of a customer's block order.

Front-running is the prohibited practice of a BD trading for its own account ahead of a customer's block order.

An investor who believes in the Efficient Market Hypothesis most likely:

Believes that the markets were too efficient to actively trade with superior results. A follower of the Efficient Market Hypothesis believes that the market is too efficient to effectively trade with sustained returns exceeding the average return of the market. She would, therefore, most likely follow a buy and hold strategy, possibly in index funds. Market timing, even with index funds, is not a way to follow the Efficient Market Hypothesis.

In the OTC market, a market maker stands ready to purchase a security at its:

Bid

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

ADV-E

An IA has custody if it inadvertently receives client securities and hasn't returned them within ____ business days

An IA has custody if it inadvertently receives client securities and hasn't returned them within 3 business days.

Accredited investors have net worth of at least $_________ or pre-tax income in each of the last two years of $________.

Accredited investors have net worth of at least $1,000,000 or pre-tax income in each of the last two years of $200,000.

Tactical asset allocation is a type of:

Active asset allocation In tactical asset allocation, an investment adviser changes a portfolio's asset mix in an attempt to time the market. This is considered an active asset allocation strategy. Buy-and-hold and systematic rebalancing are passive asset allocation strategies.

What type of advice may lawyers, accountants, teachers, and engineers provide and not be considered an IA?

Advice that is incidental to their profession. If a separate fee is charged for the advice, the exclusion is lost.

Which of the following are TRUE regarding a comparison of strategic versus tactical asset allocation? -Strategic asset allocation focuses on the client's investment objectives and risk tolerance, while tactical asset allocation focuses on economic and market conditions. -Strategic asset allocation has a long-term outlook, while tactical asset allocation encompasses short-term decisions. -Unlike strategic asset allocators, tactical asset allocators believe that investors can time the market.

All. Asset allocation based on a client's risk tolerance and investment objectives is called strategic asset allocation. In theory, it is the best mix of assets given the client's goals and level of risk aversion, giving it a long-term outlook. Strategic asset allocators tend to view the market as efficient and market-timing as ineffective. By contrast, those who believe securities markets are not perfectly efficient may try to use an active strategy to alter the portfolio's asset mix, to take advantage of anticipated economic events. This market timing approach is sometimes called tactical asset allocation.

A Japanese company would like to have its stock traded in the U.S. securities markets. This would most likely be accomplished through the issuance of:

American Depositary Receipts (ADRs) facilitate U.S. investment in foreign securities. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.

If a U.S. client wishes to invest in a Chinese solar power company whose common stock is listed on the Hong Kong Exchange, this would most likely be accomplished by purchasing a(n):

An ADR is a receipt for shares of the stock of a foreign company that have been deposited in a U.S. bank. The purpose of ADRs is to facilitate trading in foreign securities in the United States. Investors can purchase and sell them on U.S. exchanges or in the over-the-counter markets in the same way that they can purchase other stocks. The investors purchase ADRs with U.S. dollars and also receive their dividends in U.S. dollars, eliminating the need to exchange currencies.

An IA with offices in _____ or more states must register with the SEC.

An IA with offices in 15 or more states must register with the SEC.

Which of the following terms is NOT specifically defined under the Uniform Securities Act? -Investment adviser -Broker-dealer -Investment adviser representative -Broker-dealer representative

An agent is defined as a person who is employed by a broker-dealer or issuer to sell securities. There is no mention of the term broker-dealer representative. An investment adviser representative is a person employed by an investment adviser who provides investment advice.

If an adviser has custody of customer funds and securities, the submission of Form ADV-E must be performed by:

An independent accountant within 120 days after the completion of an audit

According to the Securities Act of 1933, a pooled investment fund is considered a federal covered security when it:

An investment pool is considered a federal covered security when recognized as an investment company under the Investment Company Act of 1940 and when its offering is registered with the SEC. Requesting an exemption or employing a federal covered adviser does not make an investment pool an investment company.

Which of the following is NOT TRUE regarding exchange-traded notes (ETNs)? -ETNs are forms of secured debt instruments that have no credit risk -The return on ETNs is linked to the performance of an index, commodity, or currency -ETNs may be sold short -At maturity, ETN investors receive the value of the underlying asset

An investment in an ETN may be risky since it is an unsecured debt instrument. An ETN's performance is linked to an underlying index, commodity, or currency. Although ETNs do not pay interest, any gains on the underlying instruments are paid at maturity. ETNs can be purchased on margin and are able to be sold short.

An ________ is any attempt or solicitation to acquire or dispose of a security for value.

An offer is any attempt or solicitation to acquire or dispose of a security for value.

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

Annual Updating Amendment

What name is given to the type of units used during the payout phase of a variable annuity?

Annuity units

Who must sign a Consent to Service of Process?

Any issuer, BD, IA, IAR, or agent initially registering to engage in business within a state

When does state registration become effective?

At noon on the 30th day after filing an application, provided there are no proceedings pending

Are exchanges considered auction markets or negotiated markets?

Auction markets

Use the following calendar to answer this question. August S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 An exercise notice for an August European-style stock index option may be entered on:

August 21 European style options may be exercised only on the day the contract expires—the expiration date. As of February 15, 2015 the expiration date for standardized option contracts, including European-style options, is the third Friday of the expiration month. In this question, an exercise notice for the August option may be entered on Friday, August 21.

A common investment strategy is dollar cost averaging. The objective of using this method of investment is the: A common investment strategy is dollar cost averaging. The objective of using this method of investment is the:

Average price of the securities purchased will be more than the average cost of the securities over a long period. Dollar cost averaging involves investing the same amount of money, in the same securities, over a long period. The objective is that the average cost of the securities purchased should be less than the average price of the securities over that period, though a profit is not a guarantee.

An investment adviser wants to gain access to equity initial public offerings (IPOs). In order to have more IPO choices, the adviser contacts Jane who is not affiliated with the firm. Jane is not registered with any state Administrator or with the SEC. Jane will charge the firm a finder's fee for any investment secured through her service. Under the Investment Advisers Act of 1940, why is Jane prohibited from accepting payment?

Because Jane is acting as a solicitor for the adviser when she finds the IPOs

The original asset allocation of an investment portfolio was 10% cash, 40% bonds, and 50% stocks. A recent bear market, however, has altered this allocation to 10% cash, 50% bonds, and 40% stocks. The client's investment objectives and risk tolerance have not changed. The adviser recommends that the portfolio be systematically rebalanced by selling:

Bonds and buying stocks with the proceeds. Systematic rebalancing is the process of buying and selling securities within a portfolio to restore its original asset allocation. Systematic rebalancing may be done either periodically (annually, quarterly, or monthly) or whenever market forces or different rates of return cause a significant change in the original asset allocation.

A portfolio manager heavily invested in bonds is concerned about an increase in interest rates. In order to make his portfolio less price sensitive to yield changes, the manager should make which two changes in the portfolio?

Bonds with low durations and large coupons will be less price sensitive to changing interest rates. Bonds with high durations and small coupons will be more volatile in price as interest rates change.

During the course of an investigation under the Uniform Securities Act, the Administrator finds that an investment adviser representative has engaged in fraudulent activities. The representative says that he is unaware of any fraud and was only following the directions of his firm. He produces a written recommendation list issued by his firm upon which he based his recommendations. What action would the Administrator most likely take in this situation?

Bring an action in court to impose a fine but not a prison sentence Any person who willfully violates the Uniform Securities Act may be fined up to $5,000 and imprisoned for up to three years. However, if the person proves that he had no knowledge of the fraudulent activities or that he was not aware or could not have been reasonably aware of what was going on, then a prison sentence may not be imposed.

Identify who is considered a person under the USA.

Business entities, issuers, estates, governments, individuals (e.g., clients, IARs and agents)

A company's stock experiences wild fluctuations due to unsubstantiated rumors about its products. After further analysis, the company's earnings and sales are better than average. The wild price swings may be described as:

Business risk Since the rumors are limited to the products of one specific company, this is an example of business risk. If the rumors affected the market as a whole, it would be an example of market risk. Additionally, an investor has the ability to diversify away from the risk these rumors present by purchasing stocks of several companies. The ability to diversify is a key component in handling business or unsystematic risk.

A client is short 1,000 shares of XYZ. Which of the following actions may the adviser recommend to offset the risk of the short stock?

Buy 10 XYZ calls To reduce the risk of shorting the stock, the adviser may recommend buying calls on XYZ, as the investor has the right to buy the stock should its price rise, so as to be able to replace the shares that were borrowed.

Which of the following statements is/are TRUE of exempt securities under the Uniform Securities Act? -Any security exempt under the Uniform Securities Act is also exempt under federal regulations -Any security exempt under federal regulations is also exempt under the Uniform Securities Act -Certain federal covered securities are required to notice file with the state Administrator -Canadian securities are not required to register

Certain federal covered securities are required to notice file with the state Administrator. Certain federal covered securities are required to notice file with the State Administrator. An example of this would be an investment company security. A security can be exempt under federal law but not state law, and vice versa. Only Canadian government securities are exempt from registration, not all Canadian securities.

As an investment adviser, you would consider municipal bonds to be suitable investments for all of the following clients, EXCEPT a(n): -Corporate pension plan -Insurance company -Wealthy individual -Bank

Corporate pension plan. A corporate pension plan's investments grow on a tax-deferred basis but are taxed as ordinary income when the funds are distributed. Pension plans, therefore, do not require the tax advantages offered by municipal bonds.

What main characteristic qualifies an American-style equity option to be described as a derivative security?

Derivative contracts (e.g., options) obtain their value from the price/value of an underlying asset. Derivatives are often priced based on both intrinsic and time value. Futures and swaps are types of derivatives whose owners have no exercise rights. Simply being risky does not qualify a security as a derivative. American-style options are able to be exercised by the owner at any time prior to its expiration. However, European-style options may only be exercised by the owner on the last trading day prior to expiration.

Maintaining a fair and orderly market and acting as a broker for other brokers is the function of the:

Designated market maker

The amount of the bond that a broker-dealer is required to post is:

Determined by the Administrator

In reference to storing customer books and records, an adviser is permitted to store records on:

Disks, provided the information cannot be altered

Analysts who base stock price valuations on calculations of the present value of estimated future dividend payments are using which of the following models?

Dividend discount model The dividend discount model attempts to evaluate what the current market value of a stock should be based on a calculation of the present value of a stock's predicted future dividend cash flows. If the actual market price is less than the calculated present value, the stock is undervalued and should be purchased. If the current market price is more than the calculated present value, the stock is overvalued.

Common and preferred stock are similar in that:

Dividends for both common and preferred stock must be declared by the board of directors. While preferred stock normally has a fixed dividend, neither common nor preferred stock are guaranteed a dividend.

An investor has a long-term goal of saving for his daughter's college education in 15 years. He is planning on investing regularly over the next several years in the Pluto Growth Fund to attain that goal. The investor acknowledges that he has not had much success picking individual stocks or predicting the market. Which of the following investment strategies might be MOST appropriate under these circumstances?

Dollar Cost Averaging. This investor seems to believe a market timing approach will not work for him. Since he intends to invest regularly over several years, a dollar-cost-averaging approach would probably be most appropriate. A buy-and-hold approach assumes the investor has a lump sum to invest up front. Systematic rebalancing is, by definition, an asset allocation approach. It would involve spreading funds over several asset classes, whereas this investor has chosen only one class, equities, to fund his investment program.

Define breakpoint.

Dollar levels of investment purchases that qualify for a reduced sales charge

Define churning.

Excessive trading in a customer's account for the primary purpose of generating commissions and other fees

A mutual fund may only be described as a no-load fund if the fund has:

FINRA rules state that a no-load fund is not allowed to have 12b-1 fees in excess of twenty-five basis points (.25%) of the annual average net asset value of the fund, or a sales charge (load). The 12b-1 test is based on average net asset value and not assets under management.

True or False: The exercise of convertible securities is considered a sale under the USA

False

A stock that is traded on the NYSE has a high P/E ratio, a low dividend payout ratio, and a high level of retained earnings? What type of stock is it?

Growth stocks are characterized by high P/E ratios, low dividend payout ratios and high levels of retained earnings. Thus, the stock described in the question is most likely a growth stock. Value stocks are characterized by low P/E ratios, high dividend payout ratios, and low price-to-book ratios.

Harold has established a revocable trust. His son Stanley is the trustee and his daughter Dora and her children are the beneficiaries. The income is currently taxable to:

Harold

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

Have assets under management of at least $1 million or a net worth of more than $2.1 million The $1 million amount is a financial threshold in determining accredited investors and qualified clients, but there is a difference in where to apply this amount. $1 million is the net worth requirement to be considered an accredited investor, however when determining if an individual is a qualified client, the $1 million is the threshold for assets under management with the adviser. A qualified client must have a net worth of more than $2.1 million. Investment advisers may only charge performance-based fees to persons who are categorized as qualified clients. Note, the net worth does not include the person's primary residence or any associated mortgage.

A company is issuing stock through an underwriting syndicate. As a part of its compensation package, the syndicate will be given warrants which are able to be exercised at any time over the next two years. Under the Uniform Securities Act, which TWO of the following statements is TRUE regarding the issuer of the stock? I. The issuer must register the stock or distribute it under an exemption before the warrants can be issued II. The issuer may distribute the warrants when the registration statement for the stock is filed III. The issuer is subject to state reporting requirements until the warrants expire IV. The issuer is subject to state reporting requirements only until the stock distribution is completed

I and III. According to the Uniform Securities Act, in order for the warrants to be exercised/converted the underlying stock must be registered or sold under an exemption prior to the warrants being issued. Under the Uniform Securities Act, the conversion/exercise privilege offered by the warrants constitutes an offer/offer to sell, for the term of the warrant. In this example, the warrants do not expire for two years, therefore, the issuer is subject to state reporting requirements until the warrants expire.

Which of the following choices would NOT be dilutive to existing shareholders? I. Stock dividend II. Corporation issues new stock for an employee stock option program III. Corporation issues warrants IV. Corporation has a rights offering

I and IV. Stock dividends and stock splits are nondilutive because they are proportionate. They will not change existing investors' ownership levels. When a corporation has a rights offering, it is offering additional shares to existing stockholders so that their ownership level will not be diluted. When a corporation issues more stock for any purpose, it is dilutive. It is not relevant that those shares are going to existing employees.

An investor purchased a new issue municipal bond at 101. Which of the following statements would be TRUE if the investor held the bond to maturity? -The premium must be amortized over the life of the bond -The investor may not claim a capital loss at maturity -The cost basis of the bond will be adjusted annually to reflect the amortization -The annual amortization will be deducted from ordinary income for tax purposes

I, II, and III only All premium bonds must be amortized annually, that is, the cost basis is reduced each year until maturity. If held to maturity, the investor's basis will equal par value. There will be no capital loss. Although the amortization of the premium may be deducted against interest income in the cases of corporate and U.S. Treasury instruments, amortization is NOT deductible for municipal bonds.

IAs file their applications electronically through the ___________________________________.

IAs file their applications electronically through the Investment Adviser Registration Depository (IARD).

According to modern portfolio theory, a diversified portfolio should be comprised of assets that are:

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

If an Administrator was aware of facts before a registration became effective, a stop order may be issued if done within __ days.

If an Administrator was aware of facts before a registration became effective, a stop order may be issued if done within 30 days.

If a registrant wishes to withdraw her registration, when does the withdrawal become effective?

If no action is pending, it is effective 30 days after filing the withdrawal request with the Administrator.

When does an Administrator require an adviser to include its balance sheet in its ADV Part 2?

If the firm has custody of a client's funds or collects prepaid fees of $500 or more, six months or more in advance

Modern Portfolio Theory (MPT) defines risk as the:

In MPT, risk is defined as the degree to which investment returns deviate from what was expected or predicted. It is usually measured by the standard deviation of expected returns about the mean (δ), although its square, variance (δ2), is sometimes used.

When comparing variable annuities to fixed annuities, investment risk is assumed by investor and annuity company in which?

In a fixed annuity, the annuity company guarantees a fixed monthly payment. The company, therefore, must invest the monies and assume the investment risk. In a variable annuity, the annuity company makes no guarantee. The company will invest the investor's money and the investor's annuity benefits will depend on the value of the investments. The investor, therefore, assumes the investment risk.

Ellis purchases an equity-indexed annuity contract that guarantees a 5% return with a 10% interest-rate cap. The index to which the funds are tied falls in value by 2% this year. What return does Ellis receive?

In an equity-indexed annuity, the owner receives a guaranteed minimum interest rate with potential upside based on the performance of the designated index. If the return on this index is less than the guaranteed rate, the owner receives the minimum. If the index return is greater than the guarantee, the owner receives the greater return up to the capped maximum. In this case, the index earned -2%, so the client receives the guaranteed maximum 5% rate.

An investor purchased an A-rated corporate bond with a coupon of 5%. After one year, the total return is 3.50%. The most likely reason for this is:

Interest Rates rose

A customer in the 35% federal tax bracket and 4% state tax bracket is a resident of New Jersey. She can buy a 5.10% State of New Jersey municipal bond at par. What yield would the customer require from a taxable corporate bond in order to receive the same aftertax yield as the municipal bond?

Interest earned on municipal obligations (state or local) is typically exempt from federal tax. Municipal bond interest may be subject to state and local tax, depending on the laws of the individual state. In most states, taxpayers do not pay state and local tax on bonds issued by government entities in that state. If a customer in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a corporate bond, it is necessary to find the equivalent taxable yield. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is taxed at a combined rate of 39% (35% federal and 4% state). The municipal bond has a 5.10% coupon rate and, since it is purchased at par, the yield is also 5.10%. 5.10% (Municipal Bond Yield) / 61% (100% - 39%) = 8.36% Equivalent Taxable Yield

A 6% coupon bond is selling at a basis of 6.20. If interest rates in the market decline below 6%, the bond's basis would:

Interest rates and yields can be used interchangeably. In addition, the term basis is synonymous with yield-to-maturity. If interest rates in the market decline this would mean that yields, including the yield-to-maturity, would also decline.

An investment adviser's client owns a company and wants to add a new line of business with an initial cash outlay of $1,000. The expected cash flow is $200 the first year, $400 the second, and $800 the third. What would the best measure be to evaluate the client's entrance into the new business?

Internal Rate of Return (IRR) The internal rate of return is the most appropriate method to use to determine the profitability of a project. The IRR uses the present value of cash flows to determine whether the project provides a net present value equal to or greater than the initial cash outlay.

A, B, and C are the general partners of the ABC partnership, which they established to operate a commercial ostrich-raising farm. The farm will raise ostriches and sell their meat and eggs to stores and restaurants that specialize in exotic foodstuffs. Each partner contributed $50,000 in cash to the venture. Partner B also contributed a parcel of farmland, the fair market value of which is $100,000, and which has an outstanding mortgage of $50,000. What is the impact of B's contribution of the farmland on his cost basis in the partnership?

Investor B has increased his basis in the partnership by contributing property. Generally, an investor's basis in a partnership increases whenever he contributes additional cash or property (real or personal) to the partnership. Note, however, that his basis is increased $50,000, not $100,000. The partnership assumes responsibility for the property's mortgage. Investor B is relieved of that responsibility. Investor B's cost basis will be increased by the value of his equity in the property ($100,000 fair market value - $50,000 mortgage).

A major difference between futures contracts and forward contracts is:

Investors may not offset forward contracts without permission

Compared to Treasury securities, agency securities are:

Less liquid, higher yielding. In general, agency issues are not as liquid as Treasury securities, since the issues are usually smaller in size and are not traded as much. Lower liquidity and a slightly greater credit risk for those agencies not directly backed by the U.S. government means that agencies have slightly higher yields than Treasuries.

Arnold is the sole shareholder of Luro Trading Corporation, a small investment advisory firm registered with the states of New York, New Jersey, and Connecticut. Arnold decides to sell 60% of his shares to another investment adviser and retire to Hawaii. This transaction would require the approval of:

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

The percentage of tax that is applied to your income once another bracket is crossed is called the:

Marginal tax rate

The tax rate that applies to the last dollar that a person earns is called the:

Marginal tax rate

If a broker-dealer is publishing both bid and ask prices for securities in the secondary market, it is acting as a:

Market maker

Freedmont Airlines stock has a beta of 1.3. Over the past year, Freedmont has returned 12% while the market as a whole has risen only 10%. A technical analyst would say that Freedmont Airlines has an alpha that is:

Negative 1% Alpha is the amount either above or below the expected return as indicated by the beta. If a security outperforms the expected return, it is said to have a positive alpha. If it underperforms the expected return, it has a negative alpha. With the market advancing 10%, the expected return for a security with a beta of 1.3 would be 13%. Since Freedmont Airlines only went up 12%, its actual return is 1% below the expected return.

Is an exculpatory provision in an advisory contract permitted?

No. An exculpatory provision would serve to absolve an adviser from blame or liability and is prohibited.

Broker-dealers are required to keep a copy of all orders, EXCEPT:

Orders to subscribe to a rights offering

Mrs. Smith sets up a grantor trust where the income is used to pay the premiums on her husband's life insurance policy. Mr. and Mrs. Smith file their taxes as married but filing separately. The tax on the income generated by the trust is:

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

Part 2 of Form ADV may be used as the disclosure document that is provided to the IA's ________.

Part 2 of Form ADV may be used as the disclosure document that is provided to the IA's clients.

Under the Securities Act of 1933, with whom are nonexempt issuers required to file registration statements?

SEC. If issuers do not qualify for an exemption from the Securities Act of 1933, they are required to register with the SEC. Broker-dealers and their registered reps file their registration with FINRA, while the Administrator handles all filings required under the Uniform Securities Act.

Which TWO of the following statements are TRUE regarding portfolio management strategies? -Value managers invest in stocks with low P/E ratios for their sectors. -Value managers invest in stocks that will pay little or no dividends. -Growth managers invest in stocks with low P/E ratios for their sectors. -Growth managers invest in stocks that will pay little or no dividends.

Portfolio managers employing a value style are looking for companies carrying a market price that, when compared to its earnings, is inexpensive. In other words, stocks with low price/earnings ratios. Growth managers are looking for companies with extreme growth potential. These are companies that have not saturated the markets in which they reside and are planning to take earnings and pour them back into the organization to foster future growth. Companies like these usually pay little or no dividend.

What is the primary purpose of the Securities Act of 1933?

Provide investors with full and fair disclosure regarding new issues (prospectus)

An initial public offering (IPO) is being sold in one state only and is not being submitted for registration with the SEC under the Securities Act of 1933. According to the provisions of the Uniform Securities Act, what method of registration would be used for this offering?

Qualification

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

Qualified cash dividends are taxed at a maximum rate that is less than the tax rate on interest from corporate bonds If the client held the stock for a certain period of time, the dividend would be considered a qualified cash dividend and would be taxed at a maximum rate of 20%. The interest on corporate bonds is taxed as ordinary income. Capital gains are only taxable when realized—the client sold the asset at a price higher than he paid for it.

According to the Securities Act of 1933, a pooled investment fund is considered a federal covered security when it:

Registers with the SEC under the Investment Company Act of 1940. An investment pool is considered a federal covered security when recognized as an investment company under the Investment Company Act of 1940 and when its offering is registered with the SEC. Requesting an exemption or employing a federal covered adviser does not make an investment pool an investment company.

A portfolio manager has recently taken his client's equity holdings out of technology stocks and moved them into manufacturing stocks. The manager has historically moved client funds from one industry to another during defined periods. What is this type of strategy called?

Sector rotation is the switching from one industry (sector) into another as the economy changes. Dollar cost averaging is investing the same dollar amount over a fixed period, regardless of the price changes. Rebalancing strategies involve buying and selling to keep the portfolio's asset mix consistent over the long term.

In a declining market, the type of order that would potentially contribute to the decline is a:

Sell stop Orders to sell at the market have the potential of worsening a market decline. This eliminates a buy order. Sell limit orders are placed above the current market price and would be executed only in a rising market. The sell stop limit is placed below the market and is activated when there is a trade at or below the stop price. However, the order will be executed only if the market subsequently moves up. The sell stop order will be triggered when the security trades at or below (through) the stop price and then becomes a market order to sell, potentially pushing the market further down.

According to business decision exceptions to ERISA fiduciary rules, certain decisions affecting the plan would not be considered fiduciary decisions, such as the decision to create, amend, or terminate the plan. These types of decisions are known as:

Settlor functions

Your client is very concerned about the future of the economy. He is worried about the rise in corporate bankruptcies and believes that there will be a dramatic increase in both inflation and interest rates over the next several years. You would recommend:

TIPS Treasury Inflation-Protected Securities (TIPS) are direct obligations of the U.S. government and are considered free from credit risk. They will provide the client with safety of principal and protection from inflation and rising interest rates. The principal of the bond is adjusted semiannually based on the CPI. This will not only protect the principal from inflation, but since the coupon is paid on a greater face amount, cash flow will increase. T-bonds and STRIPs are not subject to credit risk, but do not provide a hedge against rising interest rates and a loss of purchasing power due to inflation. Historically, during periods of high inflation, common stock prices have not fared well.

True or False: The wrap fee brochure must disclose that it may cost less to purchase the IA's services separately.

TRUE

Elana Shapiro is a shareholder in a Subchapter S Corporation. The corporation opens a brokerage account and invests in a number of different growth stocks. If the company has a capital gain on the stocks purchased, the gain would be:

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

Who is the official that monitors and administers a state's securities laws?

The Administrator or Commissioner

The IA Act of 1940 considers any communication that is directed to more than ___ person(s) to be advertising.

The IA Act of 1940 considers any communication that is directed to more than one person to be advertising.

Who is responsible for the formulation and interpretation of rules for the municipal industry?

The MSRB

The ____________________ is the disclosure document concerning a Regulation A issue.

The Offering Circular is the disclosure document concerning a Regulation A issue.

Under the Uniform Securities Act, an investment adviser who has no place of business in a state is exempt from registration if:

The adviser has no more than five clients who are residents of the state Under the Uniform Securities Act, an adviser does not need to register in a state if it has no place of business in the state and does not have more than five clients who are residents of that state. This is referred to as the de minimis exemption.

An investment adviser is evaluating several bonds in a portfolio. If the adviser would like to determine which bond would have the greatest price sensitivity to interest rates, he would compare the bonds':

The best measure of a bond's price sensitivity to small changes in interest rates is its duration.

What is a client's right if an IA does not deliver the required brochure 48 hours prior to the signing of the contract?

The client may terminate the contract without penalty within five business days from the signing of the contract.

Of the four funds listed below, which is definitely a closed-end fund? .....................................NAV............Asked Price A Fund D...............$20.15...............$21.85 B Fund A...............$ 7.50................$ 8.10 C Fund C...............$28.14...............$27.75 D Fund B...............$10.10...............$10.95

The closed-end investment company is definitely Fund C (net asset value $28.14 - asked price $27.75) because the net asset value is higher than the asked price. This may only occur in a closed-end investment company. In all of the other choices, the net asset value is lower than the asked price. A no-load open-end investment company has the bid price or net asset value and the asked price equal.

The cooling-off period for a federal securities registration is a minimum of _____ days.

The cooling-off period for a federal securities registration is a minimum of 20 days.

According to the dividend discount model, when interest rates rise:

The discount rate used in the model would rise, causing stock prices estimated by the model to fall

Imports into the United States have been falling dramatically, while exports have been rising. A major cause of this would be:

The dollar declining relative to our trading partners' currencies Normally, if a country's currency is declining in value relative to the currencies of its trading partners, imports would fall and exports would rise. When a country's currency is in decline, its goods would fall in price relative to similar products imported from abroad. Falling interest rates in the U.S. may not always have an effect on lowering the value of the dollar.

What information will not be found in a preliminary prospectus?

The final public offering price and the effective date

A client wants to purchase shares of common stock in a company which he feels has high potential growth prospects over the next few months. In order not to tie up existing funds, the client opens a margin account in which he executes the transaction. The client would need to deposit:

The greater of $2,000 or 50% of the market value Regulation T of the FRB requires a client to deposit a minimum of 50% of the market value to purchase stock on margin. FINRA has an initial minimum equity requirement of $2,000 in order for a broker-dealer to lend funds to a client purchasing stock on margin. Since this is an initial transaction in a margin account the client would need to deposit the greater of $2,000 or 50% of the market value.

An investor deposits $20,000 with the expectation of its future value including cash inflows and outflows. What rate would the IAR use to calculate a net present value of zero?

The internal rate of return

Limited partners of a real estate limited partnership would be limited to a potential loss of:

The liability for limited partners may not exceed their initial investment amount plus any agreed-upon future contributions. Generally, limited partners are not liable for the debts of the partnership. However, there are rare cases in which a limited partner will cosign on a loan for the partnership. In such a case, the limited partner's liability is increased.

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

The lowest offer on the Nasdaq system

An OTC market maker would justify the amount of its markup based on all of the following, EXCEPT:

The market maker's cost

The maximum criminal penalty for violations of the USA is _____ years in prison and/or up to a $______ fine.

The maximum criminal penalty for violations of the USA is three years in prison and/or up to a $5,000 fine.

Which of the following features would NOT affect the annual return of an equity-indexed annuity contract? -The payout option -The cap rate -The margin fees -The participation rate

The performance of an equity-indexed annuity is based on the participation rate (the percentage of the index's performance credited to the account), the cap rate (the greatest rate of return that will be credited), and the margin fee (the spread or asset-based fee deducted from the performance of the index). The payout option will only affect the investor if she annuitizes.

A company has a cumulative preferred stock outstanding that pays a $5 dividend per year. If dividends on the preferred stock were not paid last year but will be paid this year, how much should the preferred stockholder receive?

The preferred stock is cumulative, which means that if the dividend is not paid, it accumulates to the next year and must be paid in addition to any current dividends, before common stockholders may receive a dividend. Therefore, the preferred stockholder should receive $10 in the current year ($5 dividend in arrears + $5 current dividend).

Though some securities are exempt from registration, nothing is exempt from the ____________ provisions of the Act.

Though some securities are exempt from registration, nothing is exempt from the anti-fraud provisions of the Act.

A state pension fund is evaluating three separate investment advisers to manage the equity portion of its portfolio. Two of the advisers have had significant client growth in the past three years. The pension fund is worried that the positive in-flows of cash may distort the returns of the advisers. Which of the following measures would give the fund the BEST comparison of the three advisers' returns over that three-year period?

Time-weighted return Time-weighted return (TWR) is a more accurate measure of a portfolio manager's performance since it eliminates the effects of cash flowing into the portfolio over a given period. It is assumed that all cash distributions are reinvested in the portfolio and the same periods are used for comparisons. The effect of varying cash inflows is eliminated by assuming a single investment at the beginning of a period and measuring the growth or loss of value to the end of that period.

What is the purpose of a Consent to Service of Process?

To appoint the Administrator as the applicant's attorney to receive and process any non-criminal legal complaints

What is the purpose of an annual updating amendment.

To determine if an IA is eligible for continued SEC registration; it is filed within 90 days of its fiscal year end

An investor in the 35% tax bracket is considering investing in a corporate bond, which has a 6% coupon. In order to earn an amount equal to her after-tax return from the corporate bond, she would need to invest in a tax-free bond that is yielding:

To determine the after-tax return, multiply the yield on the corporate bond by (1 - Tax Bracket). .06 x (1 - .35) = .039 3.9% is also known as the net yield, or the after-tax return. If the investor bought a tax-free bond (e.g., a municipal bond) yielding 3.9%, divide by (1 - .35) to obtain the taxable-equivalent yield, or 6% in this example.

A corporate bond has a 12% nominal yield. To be equivalent, an investor in the 28% tax bracket would need a municipal bond with a yield of:

To determine the net yield of a taxable bond, multiply the yield times the complement of the tax bracket. The net yield would be 8.6% (12% yield multiplied by 72%, which is the complement of the tax bracket).

Define painting the tape.

Traders effecting transactions back and forth to create a misleading appearance of activity

A client purchases 4% TIPS and the CPI is 5%. Which TWO of the following statements are TRUE? -The client will receive a 4% coupon rate. -The client will receive a 9% coupon rate. -The client will receive a 4% return on the principal. -The client will receive a 9% return on the principal.

Treasury Inflation-Protected Securities (TIPS) are U.S. government securities that are inflation-adjusted based on the Consumer Price Index (CPI). With TIPS, the rate of interest is fixed. This fact makes choice (I) correct. The principal amount upon which interest is paid will vary based on the CPI. Because the principal is adjusted for inflation, the return will still be 4% on the principal; however, that principal may be higher or lower than par because of the adjustments. This fact makes choice (III) correct. The Treasury does pay the greater of par or the adjusted principal value upon maturity of the TIPS. They are usually purchased as protection against inflationary or purchasing-power risk.

True or False: MSRB rules regulate the municipal activities of BDs, banks, and the employees of these institutions.

True. The MSRB also regulates municipal advertising.

Under the IA Act of 1940, an IA may charge performance fees to clients with at least $_________ under management.

Under the IA Act of 1940, an IA may charge performance fees to clients with at least $1,000,000 under management.

If a company registers its offering with a state Administrator using coordination, it would also file a registration statement under which federal act?

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

A firm will charge a commission for the service of:

When acting in an agent capacity, a firm will buy and sell on a client's behalf and charge a commission for this service.

When is Form ADV-W filed?

When an adviser withdraws its registration

Which of the following choices is not considered a security? - American Depositary Receipts - A Treasury bond futures contract - A variable annuity set up as a retirement plan - Call options on a gold futures contract

Under the Uniform Securitiess Act, futures contracts are not securities. However, options on commodity futures contracts are considered securities. Variable products (annuities and life insurance policies) and ADRs are also defined as securities.

The life insurance policy that allows for the greatest flexibility regarding the payment of premiums is:

Universal life allows the policyholder to vary the premium payments. The holder can elect to pay for the entire policy in one payment, allowing the insurance company to withdraw premium payments as required. Premium payments can also be made in specified intervals. However, payments that are too low may cause the policy to lapse if they do not cover the cost of insurance and other policy expenses.

A client calls an investment adviser representative to discuss a stock she is interested in purchasing. The stock has a low P/E ratio, a high dividend payout ratio and its issuer has a large amount of cash reserves. What type of stock is it

Value. Two of the characteristics of value stocks are a low P/E (price/earnings) ratio and a high dividend payout ratio (or high dividend yield). A company's dividend payout ratio is the percentage of its earnings that are paid to investors as a dividend. Value stocks are also characterized by low price-to-book ratios, which is consistent with a company that has a lot of cash on hand. In contrast, growth stocks generally have a high P/E ratio and a low dividend payout ratio. These companies tend to keep most of their earnings in order to fund their continued expansion. Large-cap stocks are issued by companies that have market capitalizations of more than $10 billion. Many value stocks may also be large-cap stocks, since they tend to be issued by mature companies with a history of regular dividend payments but they are NOT characterized by low P/E ratios.

A municipality is issuing 8 1/4% general obligation bonds at par value. The bonds will mature in 20 years. An investor purchasing a bond at its offering price and holding the bond for 20 years will receive a yield to maturity of:

When a bond is purchased at its par value, the yield to maturity will be the same as the nominal yield or coupon rate. In this example, the coupon rate is 8 1/4%. Therefore, the yield to maturity would also be 8 1/4%. When a bond is purchased at a discount (below par value), the yield to maturity will be greater than the coupon rate. When a bond is purchased at a premium (above par value), the yield to maturity will be lower than the coupon rate.

Does the de minimis exemption apply to investment adviser representatives?

Yes

When must insiders report their transactions?

Within 2 business days of the trade

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

Within 90 days of the adviser's fiscal year-end

When should routine changes to an adviser's ADV be filed?

Within 90 days of the end of the adviser's fiscal year

Is a gift of $30,000 per married couple, per year, exempt from gift tax?

YES

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

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

If a client moves to a new state, may the agent continue to do business while applying for registration in the state?

Yes, as long as the agent is registered in at least one other state and is not subject to disqualification.

An investor holds TIPS worth $1,000 that have a coupon of 3.5%. Over a three-year period, the annual inflation rate is 4%. What is the total return after three years?

23.85% The calculation for total return is, ending value minus beginning value plus income received (interest and/or dividends) divided by the beginning value. Since this question involves TIPS, part of the challenge is calculating the ending value. To do so you must adjust the principal upward each year by the rate of inflation and then multiply by the coupon rate to determine the annual interest.

ABC Corporation is paying a $5 annual dividend on its preferred stock. The market price of the preferred stock is $80. The current yield is

6.25% The current yield on common or preferred stock is found by dividing the annual dividend by the market price of the stock. In this example, the market price of the preferred stock is $80 and the annual dividend is $5. This equals a current yield of 6.25%. ($5 divided by $80 equals 6.25%.)

The annual percentage returns on ABC over the last 10 years have been: 7, 8, -9, 8, -4, 5, 6, 8, 10, and 12. Which of the following choices represents the mode?

8 The mode of a set of data (in this case, annual returns) is the value in the set that occurs most often. In this question, 8% occurs most often and therefore is the mode.

Identify some non-material (routine) changes to Form ADV.

A change in the number of discretionary accounts or a change in the dollar amount under management by the adviser

A _______ is any agreement or contract to dispose of a security for value.

A sale is any agreement or contract to dispose of a security for value.

If a BD is not registered in a state, may an agent of the BD do business in the state without being registered there?

Yes, if the agent is dealing with an existing client that is temporarily in the state.

Ms. Brown sells short 100 shares of ABC at 95. Two weeks later, the stock drops to a price of 89. In an attempt to protect her profit, Ms. Brown would enter a:

Buy stop order at 90

Mr. Smith holds a portfolio of blue-chip stocks that have appreciated in value. To generate additional current income from his holdings, Mr. Smith would:

By selling (writing) options, Mr. Smith would receive the option premiums, thus generating income. Since he currently owns a portfolio of stocks, he would write calls covered by the long stock in the portfolio.

A portfolio manager for the Metal Madness Mutual Fund has invested heavily in Golden Goose Minerals, a large Alberta mining concern, and Silverado Holdings, a leading manufacturer of fine tableware. Over time, the two stocks have shown a price correlation of .82. This statistic means that the:

Correlation is the measurement of the relationship between the price movements of two or more securities. If securities have a positive correlation, they tend to move in the same direction over time. Securities with a negative correlation tend to move in opposite directions over time. Mathematically, a correlation of +1.00 means the stocks move in perfect unison. Any positive number below 1.0 means the stocks move in the same direction, but the movement is less closely correlated. Stocks with negative correlation tend to move in opposite directions. In our example, a correlation of .82 means the two stock prices are highly (positively) correlated and tend to move in the same direction.

Which TWO of the following statements are TRUE regarding a bond's current yield? -Current yield measures the investor's total return -Current yield does not consider the price appreciation of a discount bond held to maturity or the price depreciation of a premium bond held to maturity -Current yield measures the interest the investor receives in relation to the current market price -Current yield is more important than the yield to maturity as investors always want to know how their investment is currently performing

Current yield measures the interest the investor receives from the bond compared to the price the investor paid for the bond and is calculated by dividing the annual interest payments by the purchase price. Current yield does not consider the price appreciation of a bond purchased at a discount or the price depreciation of a bond purchased at a premium. This gain or loss associated with bonds purchased at a premium or discount is considered when calculating the yield to maturity.

True or False: According to the IA Act of 1940, delivery of a disclosure document is required for all IA contracts.

False. A brochure is not required for investment company contracts or impersonal advisory services priced below $500.

True or False: A partner, officer, or director of a BD is always considered an agent of the BD.

False. A partner, officer, or director is deemed an agent of a BD if she is involved in the purchase/sale of securities.

True or False: A gift of non-assessable stock is considered a sale.

False. However, the gift of assessable stock IS considered both an offer and a sale.

True or false: An IA with five or fewer retail clients in the state in the past 12 months must register under the USA

False. No registration is required as long as the IA has no place of business in the state.

True or False: An IA with fewer than 15 retail clients in the past 12 months is exempt from registering under the USA.

False. The USA de minimis exemption for advisers is five or fewer individual clients.

True or False: An unsolicited transaction of an unregistered, non-exempt security to a client is a violation of the USA.

False. Unsolicited transactions are exempt transactions.

The portfolio manager of an open-end investment company has investment discretion for amounts of more than $100 million in equity securities. He is required to file what form with the SEC?

Form 13F

The portfolio manager of an open-end investment company has investment discretion for amounts of more than $100 million in equity securities. He is required to file what form with the SEC?

Form 13F If the portfolio manager has investment discretion for more than $100 million of equity securities, he must file Form 13F with the SEC within 45 days of the end of quarter, if that is the value of his holdings as of the end of any month.

The major advantage of an S Corporation versus a C Corporation is that an S Corporation:

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

May a state prevent the sale of a federal covered security in its state?

No. Federal covered securities are not regulated by the state.

If an agent has been given time and price discretion on a client order, is written power of attorney required?

No. If the client determines the action (buy/sell), amount and asset, power of attorney is not required.

If an IA is registered with the SEC, is registration required in any state in which it intends to do business?

No. The National Securities Markets Improvement Act (NSMIA) exempts federal covered advisers from state registration.

How would a well-established corporation register a subsequent offering to be sold in multiple states?

Notification (filing)

What form of state registration is not available in all states?

Notification (filing)

What forms of soft-dollar compensation are NOT acceptable?

Rent, travel expense reimbursement, hardware, furniture, entertainment, meals

Market TOPs, a broker-dealer, lost a great deal of its capital trading CMOs and is unable to pay its creditors. To protect its clients and creditors, the Administrator would:

Request a court hearing to obtain an order appointing the Administrator as the receiver

Market TOPs, a broker-dealer, lost a great deal of its capital trading CMOs and is unable to pay its creditors. To protect its clients and creditors, the Administrator would:

Request a court hearing to obtain an order appointing the Administrator as the receiver The Administrator must first request a court hearing in order to obtain an order appointing the Administrator to act as the receiver. The receiver will conduct an orderly liquidation of the firm's assets and attempt to satisfy creditor claims. Customer accounts are insured under SIPC.

What does the Wilshire Associates Equity index consist of?

Roughly 7,000 NYSE, AMEX, and NASDAQ stocks.

In order for a fund to assess a fee under a 12b-1 plan, the plan must be approved by:

Shareholders vote to accept or reject a 12b-1 plan. The regulatory authorities (FINRA, the SEC) have no input as to whether the plan is approved. The Investment Company Institute is a trade organization.

Your client, Fred Smith, has recently inherited a sizable sum of money and is asking your advice as to how to invest it. In your interview with him you determine that he is a conservative investor and would like to invest in either U.S. government securities or securities issued by Government-Sponsored Enterprises. He would like to generate current income but his major concern is the income generated will lose purchasing power because of expected inflation over the next several years. You would most likely recommend:

Since the client wants income, Treasury Receipts/STRIPS as non-interest bearing securities are not appropriate. Although T-notes/bonds and GNMAs will provide the income desired, they will be adversely affected by inflation. TIPS (Treasury Inflation-Protected Securities) are interest-bearing (fixed-coupon) but the principal is adjusted semiannually to reflect inflation. Therefore, in an inflationary environment, both his income and principal will rise.

What type of order may a customer use to protect profits or limit losses in current positions?

Stop order

If a portfolio manager is focused on keeping a client's assigned asset allocation properly balanced over the long term, she is using a:

Strategic asset allocation strategy

The NAV per share for both an open-end and closed-end investment company is determined by:

Total assets of the portfolio minus the liabilities of the portfolio, divided by the number of common shares outstanding. With both open-end (mutual funds) and closed-end funds the NAV is calculated by taking the total value of all assets in the portfolio and then subtracting the liabilities of the portfolio to arrive at the net assets of the portfolio and then dividing by the number of common shares outstanding.

"For insider trading violations, the SEC can sue for treble damages." What does that statement mean?

The SEC can sue for three times the damage (profit made or loss avoided

Under the Uniform Securities Act, in order for an issuer to be eligible to use registration by coordination, the issuer must also register with the SEC under:

The Securities Act of 1933 regulates the federal registration of newly issued securities. Under the Uniform Securities Act, in order to register a security using registration by coordination, the security must also be registered with the SEC under the Securities Act of 1933.

If a company registers its offering with a state Administrator using coordination, it would also file a registration statement under which federal act?

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

What U.S. Government agency, created by the '34 Act, enforces securities laws?

The Securities and Exchange Commission (SEC)

How are capital gains distributions taxed from a Subchapter S Corp?

The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain.

An initial public offering (IPO) is being sold in one state only and is not being submitted for registration with the SEC under the Securities Act of 1933. According to the provisions of the Uniform Securities Act, what method of registration would be used for this offering?

The notification and coordination methods of state registration may only be used when the issuer also files a federal registration statement under the Securities Act of 1933. The qualification method of registration may be used in any state for any issuer that is not seeking federal registration.

Which of the following features would NOT affect the annual return of an equity-indexed annuity contract? -The margin fees -The participation rate -The payout option -The cap rate

The performance of an equity-indexed annuity is based on the participation rate (the percentage of the index's performance credited to the account), the cap rate (the greatest rate of return that will be credited), and the margin fee (the spread or asset-based fee deducted from the performance of the index). The payout option will only affect the investor if she annuitizes.

A company has a noncumulative preferred stock outstanding that pays a $5 dividend per year. If dividends on the preferred stock were not paid last year but will be paid this year, how much should the preferred stockholder receive before common stockholders may receive dividends?

The preferred stock is noncumulative, which means that if the dividend is not paid, it does not accumulate to the next year. Therefore, the preferred stockholder will receive only $5 for this year.

Brady bonds are:

The principal of a Brady bond is backed by U.S. Treasury bonds that are deposited with the Federal Reserve. Brady bonds are not guaranteed in any way by the Treasury Department, the Federal Reserve, or any other agency of the United States government. Although there are a few exceptions, most Brady bonds are denominated in U.S. dollars.

Mike, an agent for Wall and Wall Brokerage, is recommending one of his clients purchase a $1,000 TIPS with a coupon of 4%. Assuming the CPI increases by 1% every 6 months, what would be the annual inflation adjusted return, after two years?

The principal of a Treasury Inflation Protected Security (TIPS) is adjusted upward or downward based on an inflation index. Since the coupon payment is also adjusted at the same rate as the principal, the inflation adjusted return will always be the same as the coupon rate.

Define commingling.

The prohibited act of mixing client funds with those of the BD

May an agent and a client share in an account?

Yes, if both the firm and customer provide approval and all sharing is proportionate to each party's investment.

The statute of limitations for criminal violations of the USA is ____ years.

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

An investor has purchased a U.S. government bond for $1,000. The bond is now worth $850. What risks are of most concern to the investor?

There are certain types of risk that are common to any investment. Market risk and opportunity risk would be among these generic risks. Market risk is the day-to-day price fluctuation of a security trading in the marketplace. Opportunity risk is the risk that a better investment decision could have been made after the completion of a purchase or sale. U.S. government bonds would not be subject to credit risk or currency risk, unless the investor had purchased them with foreign currency.

With a $1,000 investment, a brokerage client purchases a security that consists of a zero-coupon bond for $750 and an equity call option for $250. At maturity the investor receives the bond's principal plus any appreciation in the option. What is this investment?

This is an example of a structured product. Although there is no single comprehensive definition, a structured product typically consists of a debt instrument (note or bond) and a derivative product (e.g., an option). The debt instrument provides a guaranteed principal payment, while the derivative provides a variable payment at maturity.

A client, age 61, has invested $200,000 in after-tax dollars in a variable annuity. His annuity is currently worth $380,000. The client decides to draw down $50,000 from the contract. How will the distribution be taxed?

This question discusses a nonqualified annuity. In a nonqualified annuity, the investment is made with after-tax dollars. When a client makes a single (irregular) withdrawal from a contract, the IRS requires that a last in, first out (LIFO) method be used when calculating tax liability. This means earnings (the last in) come out first. In this case, the $50,000 is taken out of the $180,000 of earnings and would be fully taxable as ordinary income. Annuities never generate long-term capital gains.

According to the Uniform Securities Act, is an agent of a broker-dealer required to provide its clients with disclosure of a material public fact about an issuer?

Yes, if the agent's other comments to the customer could be considered misleading without the additional public information Material facts are the facts that investors need in order to make informed investment decisions. Agents should make a good faith effort to fully and fairly disclose all material facts during sales presentations. While it may not be possible to disclose every fact, omitting a material fact in order to make an investment appear more attractive is a violation.

Is there a registration exemption for agents who conduct business in a state? If so, what are the guidelines?

Yes, no place of business in state and a client visits the state or existing client moves to the state (regist. pending)

If an adviser has check-writing privileges in a client's account, does this constitute custody?

Yes. Full discretionary control (having the ability to remove funds from the client's account) is considered custody.

If the Administrator requires an IA, BD, or agent to post a bond, is a deposit of cash or securities acceptable?

Yes. However, the Administrator determines the amount and types of securities that are appropriate.

Do the anti-fraud provisions of the USA apply to exempt securities?

Yes. Nothing is exempt from fraud.

Is there a limit to the amount of net worth the Administrator may require of an IA?

Yes. The Administrator may not set a requirement that exceeds the IA's home state.