Series 66

According to the Investment Advisers Act, a successor adviser may file an amendment instead of a new application under which of the following circumstances? I. A change in the state of incorporation II. A change in the partnership III. A change from a partnership to a corporation

All A successor adviser can file an amendment to an original investment adviser registration in lieu of filing a new application if the changes relate to a: • Form of organization • State of incorporation • Partnership

Value stock characteristics: EPS P/E Ratio Price to book value Dividend yield

High EPS Low P/E Low price to book High dividend yield

In order to determine the lump-sum amount that a person will need at retirement, what elements are required for an investment adviser to make the projection? I. Life expectancy II. Inflation rate III. Current cash flow IV. Investment return

I, II & IV The three elements that are required to project the lump sum amount that a person will need at retirement are life expectancy, inflation rate, and investment return. However, the person's current cash flow is relevant, but only after the lump-sum estimation has been completed. For example, the current income of a 30-year-old will not have an effect on the amount that she will need in order to retire at age 60.

Under NASAA's Statement of Policy on Unethical Business Practices, an adviser is considered to have exercised discretionary power with respect to a customer order if the client has NOT specified: I. The price of execution II. The specific security or number of shares to be bought or sold III. Whether to buy or sell

II & III The term discretionary power, as part of an amendment to the Securities Exchange Act of 1934, does not include discretion as to the price or time of the transaction if the client has directed or approved the purchase or sale of a definite amount of a specific security.

Which of the following choices are considered securities according to the USA? Commodity futures contracts Commodity options contracts Voting trust certificates ADRs Variable annuities Variable universal life insurance Fixed annuities An investment contract An IRA Universal life insurance Participation in a Keogh plan

Memorize what is not a security. -Fixed annuities -Life insurance (term, whole, or universal) or endowment policies -Commodity futures contracts -An IRA or Keogh plan

Registration by Coordination

Used if the same offering is being registered under the Securities Act of 1933. Registration statement must be filed with the Administrator along with 3 copies of the latest prospectuses that were filed with SEC.

Registration by Qualification

Used when either a security's federal registration has already become effective or when no federal registration will be filed - as would be the case for intrastate offerings. Registration becomes effective only when determined by the administrator.

If an investment adviser sells a security that it owns to an advisory client, which of the following scenarios would violate the Uniform Securities Act? a. The IA acts as a broker-dealer to the seller of the securities without written disclosure b. The IA acts as a principal in the transaction with written consent and disclosure c. The IA acts as a broker-dealer to the buyer of the securities without written consent and disclosure d. The IA recommends the purchase of a private placement to the customer

c. When an investment adviser sells securities directly to a client (i.e., principal trade), the firm must provide disclosure and obtain the client's consent before completing the transaction.

Advisers whose advice is limited to U.S. government securities are defined as investment advisers and required to register with: a. The SEC only b. The SEC and state Administrator c. The appropriate SRO d. The state Administrator only

d. According to the Investment Advisers Act of 1940, any adviser that limits its advice to U.S. government securities is excluded from the investment adviser definition. However, the Uniform Securities Act does not offer the same exclusion. For that reason, an adviser that provides advice only about U.S. government securities is defined as an investment adviser at the state level and is required to register with the appropriate state Administrator.

According to the Uniform Securities Act, investment advisers are required to maintain their books and records for: a. Three years with the most recent two years in an appropriate office b. Three years with the most recent two years easily accessible c. Five years with the most recent three years in an appropriate office d. Five years with the most recent two years in an appropriate office

d. According to the Uniform Securities Act, investment advisory firms are required to maintain their books and records for a minimum of five years with the most recent two years in an appropriate office of the investment adviser.

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

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

An individual may give a gift of cash and securities to another individual up to a maximum of: a. $5,500 b. $14,000 c. $28,000 d. There is no limit

d. There is no limit to how much an individual can give as a gift. Individuals may give gifts of up to $14,000 per year to any number of persons (related or unrelated) without incurring gift taxes. A married couple may combine their individual gifts for a total of $28,000 per recipient. In addition, the person receiving the gift will not need to pay income taxes on the gift. Be careful. The tax consequence of giving the gift is not mentioned in the question.

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

b. One of the main differences between futures contracts and forward contracts is that future contracts may be offset (bought or sold). Indeed, most buyers and sellers of future contracts never actually take delivery of the underlying commodity or financial instrument. In a forward contract, however, both parties involved in the contract must agree before the contract may be bought or sold.

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

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

Which of the following statements is TRUE according to the "Business Standard Test" referred to in SEC Release 1092? I. A person is in the business of providing advice if the person holds him- or herself out to be in the business of providing advice. II. A person is not in the business of providing advice if the advice given occurs rarely or in isolated nonperiodic instances. III. A person is in the business of providing advice if separate or additional compensation is received for providing investment advice.

All SEC Release 1092 refers to the three-pronged test that must be met if a person is going to fall under the definition of an investment adviser. The three prongs are advice, compensation, and the business standard. To meet the business standard, a person must provide advice about securities with some regularity, receive compensation for the advice or analysis provided, or hold oneself out to be in the business of providing advice.

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

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

Sales of viatical investments can only be made to suitable investors. Which TWO of the following are considered suitable? I. An accredited investor under regulation D II. Anyone who has been specifically approved by the state Administrator III. Anyone who is in the highest marginal tax bracket and is in need of liquidity IV. Anyone with a minimum net worth of $150,000 and gross income last year of at least $100,000, or a minimum net worth of $250,000

I & IV A viatical investment involves the purchase of an interest in an insurance policy covering the life of an individual. The purchase may be for a whole or fractional interest in the policy at a price above the cash value. The investors pay the premiums on the policy until the death of the insured at which time the death benefit is paid to the investors. Since it is unknown when the insured will die and the funds are not readily assessable on demand, NASAA has specific suitability requirements as found in choices (I) and (IV).

When advertising on the Internet, an agent of a broker-dealer must disclose which of the following items? I. The name of his affiliated broker-dealer II. The name of the broker-dealer that reviewed and approved the content III. The fact that the agent is working within the scope granted by the broker-dealer IV. A legend stating that he will not conduct business unless registered or exempt

All According to NASAA's interpretive order concerning broker-dealers, investment advisers, broker-dealer agents, and investment adviser representatives, for general dissemination of information, the name of the broker-dealer or investment adviser who approved the content as well as the one with whom the agent is affiliated must be on all Internet-based advertising. In addition, only individuals who are properly registered within the potential customer's state or exempt may follow up and respond to potential leads.

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

All of the statements listed are correct concerning the actions a federal covered adviser is required to take if the fees charged to clients are changed.

An investment adviser who provides personalized financial advice may pay a fee to a nonaffiliated person to solicit clients provided that: I. There is a written contract governing the relationship between the investment adviser and the solicitor II. The solicitor is not statutorily disqualified from association with an investment adviser III. The solicitor provides each client whom he refers to the adviser with the adviser's brochure, plus a separate solicitor's written disclosure document, at the time of the solicitation IV. The investment adviser is registered either with the SEC or the appropriate state(s)

All these things must be in place for an investment adviser to pay cash fees to a nonaffiliated person or entity to solicit clients.

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

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

An agent of a broker-dealer publishes a Web page that discusses the benefits of dollar cost averaging and why investors should invest with long-term goals in mind. If a customer in a state where the agent is not registered reads the Web site, which of the following legends must be on the Web site in order to take advantage of the safe harbor rule and not register in the state? I. The agent will only conduct business in the state if registered or exempted. II. Follow-ups will be handled only by agents who are registered or exempt. III. Internet advertising is exempt from state regulation and subject to SEC review. IV. The rule number of the safe harbor being used is disclosed.

I & II According to NASAA's interpretive order concerning broker-dealers, investment advisers, broker-dealer agents, and investment adviser representatives, for the general dissemination of information on products and services, when advertising on the Internet an agent must include a legend in which it is clearly stated that (1) A broker-dealer agent or investment adviser representative in question may transact business in the state only if first registered, excluded, or exempted from state registration requirements. (2) Follow-up, or individualized responses to persons in this state by a broker-dealer agent or investment adviser representative that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with state registration requirements, or an applicable exemption or exclusion. The SEC is not the only entity that regulates Internet advertising, and there is no requirement to disclose rule numbers.

In which TWO of the following cases will the Uniform Securities Act exempt an investment adviser from sending a written disclosure document to clients? I. The firm advises only investment companies. II. An investment adviser charges $250 per year for financial news articles that are available online to subscribers. III. An investment adviser has no office in that state. IV. The investment advisory component of a broker-dealer only advises institutional investors.

I & II According to the Uniform Securities Act, an investment adviser must give a client or prospective client a disclosure document (usually Form ADV Part 2) at least 48 hours before or at the time of opening an account. Exceptions to this rule include an adviser whose clients are only investment companies or where the contract is for impersonal services for which the client pays a fee of less than $500.

Two months ago, Jason, one of your agents, put five of his clients in an in-state-sponsored mutual fund under a Section 529 plan for their children's college education. They each have a $100-per-month payroll deduction set up at their place of employment. Last week, Jason called each of them and convinced them to roll over their holdings into a prepaid tuition plan while continuing their payroll deductions. Yesterday, he called them again to sell them on a rollover to a new Coverdell Education Savings Account that your firm is offering. What is wrong with this course of action on the part of the registered rep? I. It suggests excessive activity and may be considered churning the accounts II. A 529 plan cannot be rolled over into a Coverdell ESA III. There is no violation since all the plans are different IV. There is no problem since the investments are made through payroll deduction

I & II Since three different investments were suggested within a two-month period, this could be considered excessive activity (churning the accounts), especially if the investments were in mutual funds. Additionally, the provisions of Section 529 plans provide for a rollover without a change of beneficiary only once within a 12-month period, but not into a Coverdell ESA.

A company is issuing stock through an underwriting syndicate. As a part of the syndicate's compensation, it 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 & 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 being offered by the warrants constitutes an offer/offer to sell for the term of the warrant. In this example, since the warrants do not expire for two years the issuer is subject to state reporting requirements for that period.

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

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

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

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

Lindsay owns 4 Stooges Inc. 6% bonds that, when purchased, had a current yield of 7%. One year prior to maturity, Stooges issued a new bond with a coupon of 5%. Assuming no change in the credit standing of Stooges, if Lindsay sells her 6% bonds in the market and uses the proceeds to purchase the 5% bonds, Lindsay would have: I. Purchased the 6% bonds at a discount II. Purchased the 6% bonds at a premium III. Sold the 6% bonds at a premium IV. Sold the 6% bonds at a discount

I & III Since the bonds had a 6% coupon and, at the time of purchase, a current yield of 7%, Lindsay would have purchased the bonds at a discount, i.e., $60 / $857 = 7.0%. When she sold the 6% bonds, interest rates had dropped, as evidenced by the 5% coupon rate of the new offering. Since interest rates had declined, the price of Lindsay's 6% bonds would have increased, and would be priced higher than par value (a premium bond).

A client purchases a 2% TIPS and the CPI is 3%. Which TWO of the following statements are TRUE? I. The client will receive a 2% coupon rate. II. The client will receive a 5% coupon rate. III. The client will receive a 2% return on the principal. IV. The client will receive a 5% return on the principal.

I & III 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 2% 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.

All of the following are characteristics of futures contracts, EXCEPT: I. Most of the contract's terms are set by the buyer and the seller II. The amount of the commodity being traded is standardized III. Prices are negotiated between the buyer and the seller IV. The buyer of a futures contract cannot be forced to take delivery

I & IV A futures contract is an agreement to buy or sell a specific amount of a commodity or financial instrument. Most of the contract's terms, such as the size of the contract, the point of delivery, the delivery month, and the grade of the underlying security or commodity are set by the exchange on which it trades. Although futures contracts may be offset, they differ from options because the buyer of futures contract may be forced to take delivery.

Needy Capital Corporation is a Nasdaq issuer. If 1,000,000 shares of common stock are to be offered by the company in State A, the state Administrator may: I. Not require registration of the stock in State A II. Require notice filing by the issuer III. Require a payment of a fee by the issuer IV. Investigate the underwriter for possible fraud in connection with the offering

I & IV Securities listed on Nasdaq are federal covered securities and, therefore, a state may not require registration. Furthermore, If the federal covered security is listed on an exchange (such as Nasdaq, the NYSE, or AMEX), the state may not require the issuer to pay a fee, submit a notice filing, or consent to service of process. The states may, however, investigate any broker-dealer (including the underwriter) who participate in the offering for fraud or deceit and file an enforcement action if warranted.

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

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

Rancho Rio Investments is a single-office investment advisory firm that is based in New Mexico and plans to expand its business to New Jersey. Under the Uniform Securities Act, in which TWO of the following situations is Rancho Rio NOT considered to be an IA in New Jersey? I. The firm transacts business only with New Jersey broker-dealers II. The firm transacts business in New Jersey, but only with a few employee benefit plans that contain assets under $500,000 III. The firm's only business in New Jersey is with 10 or fewer non-institutional customers within a 12-month period IV. The firm's only business in New Jersey is with a limited number of federal covered advisers

I & IV Under the Uniform Securities Act, any investment adviser that has no place of business in a given state and whose clients are banks, broker-dealers, investment advisers, and other institutions is exempt from registration in that state. Also, any IA that has no place of business in the state and deals with five or fewer retail customers who are residents of the state within a 12-month period is also exempt. Since this question makes no reference to Rancho Rio having an office in New Jersey, it may transact business with New Jersey institutional investors, such as broker-dealers (choice I) and investment advisers (choice IV), without being registered in New Jersey. To do business with an employee benefit plan in a state without being registered, the plan must have assets of $1 million or more.

Related to a transaction, which of the following actions would cause it to be subject to the laws of State Z? I. The offer and acceptance occur in State Z. II. The offer originates over the phone from State Z and is directed to State A. III. The offer is mailed from State A, directed to State Y, and accepted in State Z. IV. The offer originates over the phone from State Y and the sale occurs in State A.

I, II & III A securities transaction is subject to a state's securities laws if the offer originates in, is directed to, or is accepted in the state. Of the choices listed, only choice (IV) has all of the action occurring outside of State Z.

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

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

In which of the following cases would an investment adviser provide a balance sheet when filing Form ADV Part 2? I. An investment adviser requires prepayment of advisory fees of $800 seven months in advance. II. An investment adviser has custody over clients funds and securities. III. An investment adviser inadvertently received client securities and returns them after two business days. IV. An investment adviser has authority to take action in an account where a client has beneficial interest.

I, II, & IV Investment advisers that require prepayment of fees of more than $500 six months or more in advance would need to include a balance sheet when filing Form ADV Part 2 (choice (I)). In choice (II), the investment adviser has custody, which also requires that a balance sheet be included when filing Form ADV Part 2. The investment adviser in choice (III) has three business days to return the securities before custody is established. Since the adviser returned the securities in two business days, custody was not established so no balance sheet is required. The investment adviser in choice (IV) has authority to take action in an account that belongs to a client. Therefore, the adviser has discretion over the account and would be required to provide a balance sheet when filing Form ADV Part 2.

According to the Uniform Securities Act, persons providing investment advice are NOT required to register as investment advisers if the adviser: I. Deals only with insurance or investment companies and has only one office in the state II. Is a savings institution, bank, or trust company III. Is in a profession such as accounting or law, where the performance of this service is incidental IV. Conducts business exclusively with broker-dealers and other investment advisers and maintains branch offices only in the state

II & III Choices (II) and (III) are specifically excluded from the definition of investment adviser under both the Uniform Securities Act and the Investment Advisers Act. The advisers in choices (I) and (IV) would not need to register as investment advisers if they did not have a place of business in the state.

According to the Uniform Securities Act, which of the following statements is/are TRUE concerning private placements? I. The offer may not be made to more than 10 persons in that state during any 12-month period. II. The offer may not be made to more than 35 persons in that state during any 12-month period. III. The offer may be made to any number of institutional investors during any 12-month period. IV. Commissions may not be paid if the buyers are noninstitutional customers.

I, III & IV Under the Uniform Securities Act, any transaction involving no more than 10 persons (there is no limit on institutional accounts) is considered an exempt transaction, known as a private placement, if the following conditions are met. •The seller believes that all the noninstitutional buyers are purchasing for investment purposes only. • No commission or other remuneration is paid for soliciting noninstitutional buyers. Choice (II) refers to a condition for private placements under Regulation D of the Securities Act of 1933, the federal act.

An Administrator receives a written notice indicating that an IA has just violated the net capital rule and is currently below the minimum requirement. Which of the following reports would the Administrator demand? I. A current balance sheet II. Contact information for the qualified custodian that handles the clients' funds III. A client ledger IV. A list of all client-owned securities and nonsegregated funds

I, III & IV According to NASAA rules, if an IA violates the net capital rule, the Administrator may require the adviser to provide its balance sheet, client ledger, and a list of all customer-owned securities and nonsegregated funds. However, the Administrator would not require the qualified custodian's name since that information is already disclosed in the investment adviser's Form ADV.

A whole life insurance policy may be referred to as: I. Permanent life II. Term life III. Ordinary life IV. Straight life

I, III & IV Whole life insurance may be called permanent, ordinary, or straight life insurance. Term insurance is a completely different type of policy that only provides coverage for a specific period.

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

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

Bill is an investment adviser representative for an advisory firm that has satellite offices in Florida and California, but its principal office is in New York City. The adviser has assets under management of $63,000,000 and its largest client is the Aquarius SmallCap Growth Mutual Fund. Bill works in the New Jersey office and has clients that reside in Florida, New York, and New Jersey. In which of the following states must Bill register as an investment adviser representative? I. California II. New Jersey III. New York IV. Florida

II Although Bill's advisory firm has less than $100 million under management, it is an adviser to a registered investment company. For that reason, the firm is considered a federal covered investment adviser and is only required to register with the SEC (i.e., it is exempt from registration at the state level). The IARs of federal covered advisers are required to register with the Administrator in any state in which they maintain an office. In this question, since Bill only maintains a place of business in New Jersey, he is required to register as an IAR in New Jersey.

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

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

ABC Investment Adviser is a federal covered adviser and requires its IARs to have an MBA degree before they are able to provide advice to its clients. For any of the firm's IARs who provides advice, in what document(s) must their education be disclosed? I. ADV Part 1 II. ADV Part 2 III. Schedule E IV. The adviser's brochure

II & IV If an investment adviser requires a specific level of education or business experience for its IARs to be able to provide advice, it must be disclosed in its ADV Part 2, which may also be used as the adviser's brochure.

All the following descriptions are TRUE of a closed-end management company, EXCEPT: I. Shares are purchased at the current offering price II. Shares are redeemable III. Investors can purchase full and fractional shares IV. The company may issue only common stock V. When making a purchase, a customer will pay a markup or a commission

II, III & IV Shares of a closed-end fund are not redeemable instruments. The shares are usually traded in the open market on an exchange. The purchaser pays either a commission or a markup on both a purchase and a sale. A closed-end fund may issue common stock, preferred stock, or bonds. The fund may issue only full shares. Unlike a mutual fund, the closed-end management company may not issue fractional shares.

Under the Uniform Securities Act, which of the following statements are NOT TRUE concerning an Administrator taking disciplinary action against a person? I. There must be written findings of fact and conclusions of law. II. The Administrator may take action against a person with or without the opportunity for a hearing. III. The Administrator does not need to provide the person with prior written notice. IV. The Administrator's order may be appealed if the person files a petition in court within 90 days.

II, III & IV The Administrator must provide a person with prior written notice, an opportunity for a hearing, and written findings of fact and conclusions of law when taking disciplinary action against a person. The Administrator's order may be appealed if the person files a petition in state court within 60 days.

Pick TWO statements that are TRUE regarding time-weighted and dollar-weighted rates of return. I. Time-weighted returns allow investors to measure how much money they have earned on their investments. II. Dollar-weighted returns allow investors to compare the performance of two investment advisers. III. Time-weighted returns allow investors to compare the performance of two investment advisers. IV. Dollar-weighted returns allow investors to measure how much money they have earned on their investments.

III & IV Dollar-weighted returns measure the performance of an investor's actual investment over a defined period. Time-weighted returns assume that a fixed-dollar amount was invested and then measure how that amount would have performed over a defined period. Time-weighted averages are often used to compare the performance of mutual fund managers.

A group of investors is starting a business to explore and drill for oil. All want to be actively involved in the business, but none wants to be personally liable for the venture's debts. Which of the following business structures would meet their objectives? I. A limited partnership II. A general partnership III. A limited liability company IV. An S Corporation

III & IV Since none of the group is willing to be liable personally for the business's obligations, they cannot form a general partnership or a limited partnership. All general partners have unlimited liability for any obligations that the business incurs. A limited partnership requires at least one general partner. Also, they all want to be involved in management and a limited partner who becomes actively involved in management loses the shield of limited liability. A partnership is not an option for them. Either a limited liability company (LLC) or an S Corporation would allow all of them to take an active role in running the venture without incurring personal liability.

Empire State Financial Advisers' sole office is located in New York City. Empire has only one client, the New York State Triple Tax Free Municipal Bond Fund. Empire exercises discretion over the investments of the fund, and also performs safekeeping services for the fund. Which of the following statements is/are TRUE? I. Empire must register with New York State as an investment adviser. II. Empire must meet the minimum net worth requirement of the Uniform Securities Act or New York State, whichever is higher, since it has discretion over a client's funds. III. Empire must meet the minimum net worth requirement set by the Uniform Securities Act or New York State, whichever is higher, since it maintains custody of a client's funds and securities. IV. Empire does not need to post a bond or meet net worth requirements because there are no such requirements under the Investment Advisers Act.

IV only Empire is acting as an investment adviser for the New York State Triple Tax Free Municipal Bond Fund, which is an investment company under the Investment Company Act of 1940. Empire, by definition, is a federal adviser subject to registration with the SEC (not New York State). There are no net worth requirements under the Investment Advisers Act.

Registration by Filing

Notification - Used by well-established corporations that meet stringent financial requirements.

SEC Release 1092

Sports and entertainment representatives who provide investment advice to their clients are investment advisers and subject to the Investment Adviser Act.

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

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

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

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

In completing Form BD, all the following information is required, EXCEPT: a. The Social Security number if the applicant is a corporation b. Whether the applicant has been charged with a crime c. Whether the applicant has been convicted of a crime d. Minor rule violation

a. All are required to be disclosed except Social Security numbers, unless the applicant is an individual.

Under the Uniform Securities Act, what information is NOT disclosed in an investment advisory contract? a. Any other states in which the investment adviser is registered b. The manner in which the advisory fee will be computed c. A provision disallowing the investment adviser to assign the contract to another party without client consent d. A provision prohibiting the investment adviser from being compensated based on a share of capital gains

a. The investment advisory contract must disclose the manner in which the adviser will be compensated. The contract must also include a statement that the adviser may not assign the contract to another party unless the client consents and may not be compensated based on a share of capital gains.

An investor who resides in State Y is visiting State X. Before returning to his home, he meets with a friend who is an agent and is registered in State X. While at a restaurant in State X, the agent convinces the client to immediately buy a specific security, rather than waiting until the client gets home. The client pays for the purchase and is told that the confirmation will be sent to his home in State Y. If the agent sold this client an unregistered, non-exempt security, which of the following statements is TRUE? a. The Administrators of State X and State Y may take action against the agent. b. The Administrator of every state in which the agent is registered may take action against the agent. c. Only the Administrator of State Y may take action against the agent. d. Only the Administrator of State X may take action against the agent.

a. An Administrator has jurisdiction over every offer or offer to sell that is made or accepted in a state. In this question, an offer was made and accepted in state X however, the client resides in state Y. Though the Administrator in state X has jurisdiction, action can be taken by the administrator of both states.

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

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

Notice Filing may be required by which of the following federal covered securities? a. Securities issued by an investment company b. Securities issued by a Nasdaq-listed company c. Securities issued by an NYSE-listen company d. Securities issued by the US government

a. Federal covered securities are required to register with the SEC; some may also be required to notice file. Notice filing refers to the state's requirement that issuers of such securities file the same information as provided to the SEC. Though investment companies are federal covered securities, they are also required to notice file.

Which of the following activities is considered a prohibited business practice by a broker-dealer? a. Stating to a client that the offering price of a security is the current market price, if the broker-dealer is the only market maker in that security b. Stating to a client that the offering price is the current market price, if the broker-dealer is part of an underwriting syndicate in that security c. Stating that the price at which it is offering to sell a security to a client is the current market price if the broker-dealer is one of five registered market makers in that security d. Stating that the price at which it is offering to sell a security to a client is the current market price if the security is listed on the New York Stock Exchange

a. If a broker-dealer represents that a security is being offered at a price that represents the current market price, the broker-dealer must have reasonable grounds for making this statement to a client. If the broker-dealer is the only person that is willing to buy or sell a security, the prices it is quoting may not be considered the current market price. If a broker-dealer made this statement to a client without proper disclosure of this fact, it would be considered an unethical business practice.

Which of the following investment advisers would most likely NOT be required to register with the Administrator? a. A firm that provides advice on fixed annuities b. A firm that provides advice on listed securities c. A firm that provides investment advice to a tollway authority d. A firm that provides investment advice to an employer's pension plan

a. Investment advisers provide securities-related investment advice. A fixed annuity is not considered a security by state Administrators. Since the firm is not considered to be providing securities-related advice, it would be exempt from the definition of an investment adviser.

For how long must broker-dealers and investment advisers maintain their books and records according to the Uniform Securities Act? a. Three years for broker-dealers and five for investment advisers b. Five years for broker-dealers and three for investment advisers c. Two years for broker-dealers and five for investment advisers d. Two years for each

a. Investment advisory firms are required to keep books and records for a minimum of five years and broker-dealers for three years, according to the Uniform Securities Act.

According to modern views about investing, fiduciaries should be most concerned about which of the following objectives when making investment decisions? a. Developing an investment policy that accords with the client's goals and risk tolerance b. Developing a properly diversified portfolio consisting of securities that will minimize the risk exposure to clients c. Ensuring that the client's capital is preserved for heirs d. Making certain that the client avoids the purchase of non-investment-grade debt instruments and equities that are nonlisted, non-Nasdaq issues

a. Modern views of fiduciary responsibility in investing place less emphasis on preservation of capital and more emphasis on risk management (not complete avoidance), appropriate diversification, and development of an investment policy that is consistent with client goals. Fiduciaries are no longer limited to investing in certain classes of assets as they were under the legal list approach.

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

a. One of the factors involved in the evaluation of stocks in the top-down approach is the economic climate. All of the other choices are characteristics of a bottom-up approach.

Under the USA, which of the following characteristics is required for a banker's acceptance to be exempt from registration? a. Maturities of no more than nine months b. Issued by a blue-chip company c. Rated in the highest category by at least three ratings companies d. Minimum denominations of $100,000 or more

a. Short-term, corporate, fixed-income securities such as commercial paper and a banker's acceptance may qualify as an exempt security. The maximum maturity is nine months. The minimum denomination is $50,000 and it must be rated in one of the three highest rating categories by a nationally recognized statistical rating organization.

A client who is willing to accept market risk should be advised to accept which of the following investment recommendations? a. Eliminating the unsystematic or diversifiable risk in his portfolio b. Creating a portfolio with a beta that is less than 1.0 c. Buying insurance contracts that would protect him against market losses d. Creating an emergency fund that is separate from his portfolio and consists of U.S. Treasury bonds

a. Since the customer is willing to assume market risk, the best course of action is to eliminate unsystematic risk. All of the other choices are inappropriate since they either avoid or eliminate the market risk that the customer is willing to accept. As referenced in choice (b), beta is the measure of the volatility of an asset/portfolio as compared to the volatility of the market. Generally, assets with a beta higher than 1 are more volatile than the market, while assets with a beta lower than 1 are less volatile than the market.

What type of order may a customer use to protect profits or limit losses in current positions? a. Price/time order b. Stop order c. Market order d. Limit order

a. Stop orders are entered to limit losses or to protect profits on current positions in an investor's account. If the market rises, buy stop orders may be used to protect short stock positions. If the market falls, sell stop orders may be used to protect long stock positions. Market and limit orders are typically used to enter the market, rather than to protect a current position.

When trading on margin, clients are required to deposit: a. 50% of the market value of the security b. 50% of the amount of money borrowed c. 25% of the market value of the security d. 25% of the amount of money borrowed

a. The 1934 Securities Exchange Act, Regulation T, provided the Federal Reserve with the power to establish equity requirements when trading on margin. The current initial requirement when purchasing common stock is 50% of the market value of the security at the time of the transaction.

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

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

Yesterday Cedric, an investment advisory client of Ralph, brought in a common stock certificate for 100 shares of Scottish Wool Company. Cedric inherited the shares from a relative and would like Ralph to have someone appraise the security. If Ralph still has the certificate in his possession today, which of the following statements is TRUE? a. The investment advisory firm is deemed to have custody b. Ralph must return the certificate to the customer by the end of the day c. If Ralph returns the certificate within three business days of receiving it, the firm is not considered to have custody d. If the value of the securities is less than $10,000, the firm is not considered to have custody

a. The custody rule (in the Investment Advisers Act) states that custody includes the possession of client funds or securities, unless the firm receives the securities inadvertently and the securities are returned to the sender promptly (within three business days of receiving them). In this case, Ralph's acceptance of the securities was not inadvertent. The firm has custody.

Mammoth Investments is a federal covered investment adviser with offices in 42 states. Which of the following statements concerning the firm's registration is TRUE? a. Mammoth's federal registration is sufficient to do business in all states and state registration of the firm is not required b. Mammoth must also register as an adviser in each state in which it has an office c. Mammoth must maintain dual federal and state registrations in all states in which it does business d. Mammoth must maintain both federal and state registrations in all states in which it does business with noninstitutional customers

a. The federal government and the states have divided the responsibility for regulating investment advisers. In general, an adviser must be registered with either the SEC or with one or more states. There is no requirement to register at both the federal and state levels. The basis for the federal/state division is usually the amount of assets under management. If an investment adviser has $110 million or more under management, registration with the SEC as a federal covered adviser is mandatory. Smaller advisers generally register with one or more states. (Note: An IA may also choose to register with the SEC if it has AUM of $100 million up to $110 million.)

If an investment increases in value, which of the following statements would be TRUE? a. If it was held for less than one year, the annualized rate of return would be greater than the holding period return b. If it was held for less than one year, the holding period rate of return would be greater than the annualized return c. Regardless of the actual holding period, the holding period and annualized return are always identical d. If held for more than one year, the holding period return would be less than the annualized return

a. The holding period rate of return states how much an investor earns over the period an investment is held. The annualized rate of return states how much an investor makes over a one-year period. If an investor had a 5% rate of return over six months, her holding period rate of return would be 5%; however, her annualized rate of return would be 10% (the 5% return earned over the six-month period multiplied by two). If the holding period had been more than one year, the opposite would be true--the holding period return would be larger than the annualized rate of return.

An investor pays $100 per share for 1,000 shares of a 6% cumulative preferred stock with one year's dividends in arrears. At the end of one year, the issuer has paid its normal preferred dividend, plus the dividends in arrears. The investor then sells the preferred stock when the market value is $104 per share. What is the investor's total return on the preferred stock for the period? a.16% b.12% c.10% d.6%

a. The total return of an investment takes into account the cash flow from dividends or interest, plus any appreciation or less depreciation in the value of the investment. In this example, the cash flow consists of the normal 6% dividend, plus the additional 6% dividend that was in arrears. The stock also increased in value by 4%, for a total return of 16% (6% + 6% + 4%).

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

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

Which of the following statements is TRUE regarding general partnerships? a. All the general partners have the authority to bind the partnership b. They may only be established by filing a written agreement with the appropriate state agency c. None of the partners is personally liable for the partnership's debts d. They are usually taxed like C Corporations

a. Unless the partnership agreement specifies otherwise, all the partners in a general partnership have the authority to transact business on the partnership's behalf. A general partnership is formed by an agreement among the partners. No specific filing with the state is necessary. All the partners are personally responsible for the partnership's debts. Most partnerships qualify for flow-through taxation, which means that they are not taxed as individual entities unlike C Corporations, which are taxed as separate entities.

According to the efficient market hypothesis, which form of efficiency asserts that using technical analysis in identifying securities which may be undervalued is of no benefit? a. Weak-form efficiency b. Semistrong-form efficiency c. Strong-form efficiency d. Passive-form efficiency

a. Weak-form efficiency asserts that all past market prices are fully reflected in security prices. In that technical analysis attempts to identify patterns in stock price movements in order to predict future price trends, weak-form efficiency believes fundamental analysis should be used in determining if a stock is over or under valued. Semistrong-form efficiency asserts that security prices reflect all publically available information. Thus, analysis of any type does not necessarily result in superior returns as the information is available to investors. Strong-form efficiency asserts that the price of a stock reflects all public and private information, thus no one can consistently outperform the market. Passive-form efficiency is not a form of efficiency.

When a person acquires ownership of more than 5% of a voting class of a company's equity securities registered under the Securities Exchange Act of 1934, he is required to file a: a. Schedule 13D b. Schedule 13F c. Form 8-K d. Schedule H

a. When a person acquires ownership of more than 5% of a voting class of a company's equity securities registered under the Securities Exchange Act of 1934, he is required to file a Schedule 13D with the SEC. Schedule 13D is commonly referred to as a beneficial ownership report.

Terri, an IAR, has decided that with her overhead expenses increasing each year, she will increase the advisory fees she charges new clients, but not for existing ones. In order to do so, she must offer which of the following forms to her clients? a. ADV Part 1 b. ADV Part 2 c. ADV-W d. ADV-NR

b. A change in advisory fees is a material change, and her ADV Part 2 must be amended within 30 days and a copy, or a separate brochure containing the same information, must be given to new clients and offered to her existing clients.

Under the Uniform Securities Act, all of the following persons are considered agents, EXCEPT: a. A person who represents a broker-dealer and offers unregistered, exempt securities to accredited investors b. A person who is hired to sell an issuer's securities to existing employees, but does not receive compensation that specifically relates to this activity c. A person who represents an issuer and receives no commissions, but does receive a quarterly bonus based on the amount of money raised d. A person who is employed by a broker-dealer in a ministerial function and receives no commissions, but is authorized to accept client orders

b. A person who represents a broker-dealer in effecting securities transactions is defined as an agent, even if the transactions involve exempt securities. On the other hand, if an employee of a broker-dealer performs only ministerial or clerical functions, she is not considered an agent and is not required to register. Notice that for choice (d), if an employee is authorized to accept client orders (even unsolicited), then he is considered as an agent and must be registered. According to the Uniform Securities Act, if a person represents an issuer and executes transactions with existing employees, partners, officers, or directors of an issuer and does not receive commissions or other payment that is directly or indirectly related to soliciting the order in that state, the person is not considered an agent and consequently is not required to register.

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? a. Three years if sent to two or more persons b. Five years if sent to two or more persons c. Three years if sent to ten or more persons d. The life of the firm if sent to thirty-five or more persons

b. According to NASAA Recordkeeping Requirements for Investment Advisers Model Rule, all investment adviser records must be maintained for not less than five years, the first two years in the principal office of the adviser, including those made by electronic media (Web sites, e-mail, etc.) if directly or indirectly sent to two or more persons.

An investment adviser representative tells his compliance officer that he believes Bionic Irrigation, a recent initial public offering, shows great promise for a price increase. The representative plans to purchase significant amounts for his clients. He also plans to buy it for his personal account. The research department of the investment advisory representative's firm does not follow Bionic Irrigation. Would this proposed course of action violate the investment advisory representative's fiduciary responsibilities to his clients? a. It would not, since he is not discriminating among his clients and he is also buying the stock for his personal account b. It would, since he does not have a reasonable basis for his recommendation, and this purchase may not be suitable for all his clients c. It would not, not if the stock is a suitable investment for all his clients d. It would, since the research department of his firm does not follow the stock

b. According to the fact pattern presented in the question, he does not have a reasonable basis for his recommendation. The investment also may not be suitable for all his clients.

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

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

An investment adviser representative is preparing a financial plan for a client. As part of this process, he is making a personal balance sheet and income statement. The income statement should include all of the following items, EXCEPT: a. Commissions and bonuses b. Depreciation on the primary residence c. Interest income d. Mutual fund dividends

b. Any appreciation or depreciation in real estate that the client owns would be included on the client's balance sheet, not his personal income statement. Choices (a), (c), and (d) are all sources of income that should be included on the client's income statement.

According to the Uniform Securities Act, the Administrator may require federal covered advisers to: a. Register in every state in which they have a branch office b. Give notice or notice file in any state where they transact business with six or more individual retail clients c. Register with the Administrator in any state where they transact business with six or more individual retail clients d. Do nothing because the Administrator has no jurisdiction

b. Give notice or notice file in any state where they transact business with six or more individual retail clients

Paul and Todd are starting their own business. They are trying to decide whether to organize this new business as a partnership or an S Corporation. What are some of the advantages of an S Corporation compared to a partnership? a. Favorable tax treatment b. Limited liability c. More transparency d. Fewer start-up costs

b. In a partnership, the general partners are liable for the partnership's debts. (Limited partners are not liable but there is no indication in the question stem that one of them is going to be a limited partner.) In an S Corporation, the owners are not liable for any of the company's debts. They have only limited liability. As for choice (a), both entities receive favorable federal tax treatment. Both are pass-through entities for tax purposes. All losses and profits are passed through to the owners.

Sherry is the portfolio manager of the ZZZ Fund. Believing that some of the fund's investments have appreciated to their full potential, Sherry has sold several long-term holdings. As a result, the fund now has very large, realized long-term capital gains. Sherry does not want to saddle fund shareholders with a large capital gains distribution at the end of the year. How could she avoid this? a. Reinvest the gains in the portfolio b. Sell some portfolio securities that have declined in value c. Transfer the gains to an insurance company separate account that she also manages d. She cannot avoid a large distribution, since at least 90% of the gain must be passed on to shareholders

b. Like any other type of investor, a mutual fund may offset capital gains with capital losses. Selling securities in the portfolio that have depreciated could result in a small or nonexistent net capital gain.

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

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

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

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

According to the Uniform Securities Act, the Administrator may require federal covered advisers to: a. Register in every state in which they have a branch office b. Give notice or notice file in any state where they transact business with six or more individual retail clients c. Register with the Administrator in any state where they transact business with six or more individual retail clients d. Do nothing because the Administrator has no jurisdiction

b. The Administrator may require federal covered investment advisers to notice file if they transact business with more than five noninstitutional clients over a 12-month period. Notice filing is not a form of registration. Instead, it is the process of a federal covered adviser sharing information with the Administrator that it has filed with the SEC.

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: a. The Investment Company Act of 1940 b. The Securities Act of 1933 c. The Securities Exchange Act of 1934 d. The Investment Advisers Act of 1940

b. 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.

Barry McKenna's equity portfolio was strongly correlated to the performance of the S&P 500 Index. Barry was concerned that the S&P was overdue for a correction, so he liquidated the portfolio and moved to short-term Treasury securities that were yielding 2%. After one year, the S&P 500 returned 8%. What is the BEST term to describe the difference in the Treasuries and the S&P 500 as it relates specifically to Barry's situation? a. Systematic risk b. Opportunity cost c. Interest-rate risk d. Reinvestment risk

b. The best choice here is opportunity cost. Opportunity cost is a term used in a variety of ways in economics. For purposes of the question, the focus here is on investment choices. Opportunity cost is the difference in return between an investment made and one that is not made. In this case, Barry invested in a Treasury and it returned 2% over the year. Barry gave up the opportunity of his old portfolio which returned 8%. In this situation, his opportunity costs are 6% (8% - 2%).

A limited partnership sells an asset for a capital gain in the current year; however, the gain is distributed to the partners in the following year. What is the tax consequence of the gain? a. As ordinary income in the year it is distributed to the partners b. As a capital gain in the year it is realized by the partnership c. As ordinary income in the year it is distributed to the partnership d. As passive income the year realized by the partnership

b. The key to this question is to recognize that choice (b) is the only answer that recognizes the result as a capital gain. Any capital gains that are realized by the partnership are taxed to the partners in the year that the gain is incurred, not when the distribution is made to the partners. When a partnership generates income, a tax liability is created for the partners in the year in which it is generated. All sources of partnership income are reported to the partners on Schedule K-1. Capital gains can be classified as either short-term or long-term.

A company has entered into bankruptcy and is in the process of being liquidated by the trustee. When one of the company's buildings is sold, its current value is greater than the outstanding loan that is collateralized by the building. What will the trustee do with the excess funds? a. Distribute the excess funds to the secured creditors b. Use the excess funds to pay the company's general creditors c. Distribute the proceeds to the stockholders as a capital gain d. Distribute the proceeds to the stockholders as income

b. The key to this question is to recognize that it is asking about the use of the excess funds. For example, if the corporation's building is being used to collateralize a $30 million loan, but it is sold at its current value of $37 million, there are excess funds of $7 million. After paying the secured creditors, the excess funds are paid out to the general creditors. Choice (a) is incorrect since the secured creditors only receive payments based on the level of the loan which is collateralized by the building.

Which of the following choices determines the rate of return of a fixed annuity? a. The investment performance of the issuer b. The amount specified by the contract c. The investment selections of the owner d. The S&P Bond Index

b. The rate of return for a fixed annuity is specified in the contract. The insurance company is obligated to pay this amount regardless of the performance of its investments.

An Administrator in State Y who receives a complaint regarding an advertisement that originated in State X will take which of the following actions? a. Request the Administrator of State X to issue a cease-and-desist order b. Enjoin the advertiser from further advertising c. Investigate the complaint d. Issue a subpoena for the advertiser to appear before the Administrator

c. The Administrator would first investigate the complaint before taking any action.

Which of the following statements is NOT TRUE concerning the registration requirements of securities professionals? a. Broker-dealers with no place of business in a state and a limited number of noninstitutional clients in a state must register b. Broker-dealers with no place of business in a state who limit their agents to selling exempt securities in a state need not register c. Investment advisers with no place of business in a state and whose only clients are institutional investors in a state need not register d. Investment advisers with no place of business in a state and a limited number of noninstitutional clients need not register

b. There is no exemption from registration for broker-dealers that have no place of business in a state and who limit their agent's activities to selling exempt securities. It is the securities that are exempt, not the agents selling those securities. Investment advisers that have no place of business in a state may still do business in that state without registering provided they limit their advice to institutional clients or no more than five noninstitutional clients in that state. There is no de minimis exemption for broker-dealers that have no place of business in a state and a limited number of noninstitutional clients.

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

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

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

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

As an investment adviser, you are required to record and keep a record of every transaction in a security for a client's account within: a. 10 days of the end of each quarter b. 10 days of the end of each quarter, excluding direct obligations of the U.S. government c. 20 days of the end of each quarter d. 20 days of the end of each quarter, excluding direct obligations of the U.S. government

b. Under both the Investment Advisers Act and the Uniform Securities Act, investment advisers are required to keep a record of every securities transaction within 10 days of the end of the quarter in which the transaction took place. Transactions in direct obligations of the U.S. government are excluded from this requirement.

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

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

Which of the following statements is TRUE regarding the state securities Administrator? a. The Administrator may issue an injunction against a registered agent of a broker-dealer b. The Administrator may issue a cease-and-desist order to an agent of a broker-dealer without a hearing c. For due cause, the Administrator, may enjoin, or legally block, an agent's ability to conduct business in a particular state d. The Administrator may arrest any registered employee of a broker-dealer

b. Under the Uniform Securities Act, the state Administrator does not have the authority to issue an injunction or an enjoining order, nor may the Administrator arrest anyone or send him to jail. These orders must come strictly from a judge or court of law. The Administrator may, however, issue a cease-and-desist order to an entity under its jurisdiction.

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

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

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

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

Under the Uniform Securities Act, all the following transactions are classified as exempt, EXCEPT: a. Transactions in equity securities between an issuer and an underwriter b. The pledge of securities to collateralize a loan c. The sale of U.S. government securities to a public customer d. Unsolicited transactions in nonexempt securities

c. (c) is an exempt security, but not an exempt transaction.

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

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

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

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

According to the Uniform Securities Act, which of the following actions are permitted by persons NOT located in a state, or registered in a state? a. A person who represents a broker-dealer receives commissions for the sale of exempt securities to customers who are residents of a state b. A person represents a broker-dealer and offers nonexempt securities to noncustomers located in a state in which the person is not registered c. A person sells unlisted securities to an institution that is located in a state in which that person is not registered d. A person who represents an issuer receives compensation for the sale of the issuer's securities to nonemployees of the issuer

c. A person who effects securities transactions for institutions and is not located in the state is not defined as a broker-dealer within the state. Registration is not required within the state under these conditions.

The Uniform Securities Act considers which of the following to be an investment adviser representative (IAR)? a. A CPA who gives occasional advice in connection with his tax service, but charges no additional fees b. A clerical employee of an advisory firm that has a place of business in the state c. A CPA with an office in a state who charges a fee for advice that is more than just incidental to his profession d. An officer or director of a federal covered adviser who has clients in a state, but has no office in that state

c. According to the Uniform Securities Act, an individual who solicits, sells, or negotiates investment advisory services is defined as an investment adviser representative (IAR). The rule excludes any person serving in a clerical or administrative position or any employee of a federal covered adviser who does not have an office in the state. Professionals (lawyers, accountants, teachers, and engineers) qualify for the exemption if their advice is incidental to their profession and no additional fee or charge is assessed for the advice.

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

c. Agents, issuers, and banks are not broker-dealers. Also, a person with no place of business in a state, who deals only with institutional investors, is not a broker-dealer. If a firm deals with individuals, it would be considered a broker-dealer, even if it did not have an office in the state.

According to the Investment Advisers Act of 1940, which of the following statements is NOT TRUE regarding the storage of records? a. Records may be stored on microfiche b. Records may be stored electronically, such as on a tamper-evident CD-ROM c. Records must be destroyed after five years d. Records must be indexed for easy retrieval

c. All choices are true, except the statement that records must be destroyed after five years. In fact, some records must be maintained for up to three years after termination of the firm (e.g., partnership agreements, articles of incorporation, minutes from board meetings, etc.).

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

c. Although it is difficult to compare the advisory services provided to clients of different advisers, a general standard of reasonable fees is used to compare fees charged by various advisers. Fees that are obviously out of line with those charged for similar services are considered unethical.

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

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

Which of the following actions by an agent of a broker-dealer is prohibited? a. Providing advice to a customer about a specific security and then receiving a commission for executing the purchase transaction for the customer b. Describing the features of a trust to a customer c. Determining the type of joint account that a client should open d. Providing advice to a customer regarding different potential investments to place in a custodial account

c. An agent is in the business of representing a broker-dealer in effecting securities transactions for her firm's account and the accounts of others. Providing a general description of the details and characteristics of brokerage products and accounts is acceptable. On the other hand, determining or suggesting the best type of account for a customer to open has legal ramifications and should be provided by an attorney.

All of the following choices are required to be included in a trade blotter, EXCEPT: a. The account in which the trade was executed b. The trade date c. The amount of interest or dividends the investor will receive d. The unit value and total value of the transaction

c. Broker-dealers and investment advisers are required to keep certain books and records. One of them is a blotter, which is a daily record of all purchases and sales of securities. The trade blotters contain information concerning the transaction such as the account in which the trade was executed, the trade date, the unit value and total value of the transaction, the name and amount of securities, and whom the securities were bought from or sold to. Blotters are also required when a firm receives or delivers securities as well as receives or disburses cash.

One of the advantages of investing in an oil limited partnership exploratory program is that the program: a. Provides immediate cash flow and minimal risk b. Offers investors a depreciation allowance to offset gains c. Allows investors to reduce their taxable income d. Will have a predictable income stream

c. Exploratory programs tend to provide significant tax advantages and are appropriate for investors seeking to reduce their taxable income. Since exploratory programs search for oil in unproven areas, investors will not receive immediate cash flow or a predictable income stream. The investor must be willing to accept a high degree of risk.

Under the Uniform Securities Act, which of the following BEST describes the term inspectorial power? a. The state Administrator's power to delegate responsibility to a self-regulatory organization b. The state Administrator's power to have special investigators review the records of registered investment advisers c. The state Administrator's power to subpoena records inside and outside of the state d. The state Administrator's power to apply the stop-order test

c. Inspectorial power refers to a state Administrator's ability to inspect or review any records that are located both inside and outside of the state in order to carry out the provisions of the Uniform Securities Act.

Megamerger is a federal registered investment adviser with offices in all fifty states. John is an investment adviser representative with Megamerger. He is registered in New York where his primary office is located but often travels to New Jersey and uses one of Megamerger's offices there to conduct business. John: a. Must register in New Jersey unless all of his clients there are institutions b. Is exempt from registration in New Jersey, since he is only using the office temporarily c. Must register as an IAR in New Jersey d. Is exempt from registration, since he is already registered in New York

c. Investment adviser representatives who work for federal covered investment advisers must register in every state in which they maintain a place of business.

The beta of a stock would be useful when measuring: a. Diversifiable risk b. Nonsystematic risk c. Market risk d. Risk-adjusted returns

c. Market risk (also known as systematic risk) refers to the risk that is inherent in all securities due to general market volatility. While market risk cannot be eliminated by diversifying a portfolio, it can be measured by a calculation known as beta (a stock's volatility when compared to the volatility of the whole market). Stocks with a beta of more than one are more volatile than the market. Those with a beta of less than one are less volatile than the market.

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

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

A 70-year-old retiree is very risk-averse, but needs to generate investment income. She is not wealthy and is in a low tax bracket. Which of the following investments will BEST meet her needs? a. A long-term municipal bond fund b. A growth mutual fund c. A certificate of deposit d. A diversified portfolio of stocks with covered calls written against them

c. Since the client is risk-averse, needs income, and is concerned about her principal fluctuating, the best choice is a certificate of deposit. All of the other choices are unsuitable because they are either too speculative or they are tax-free, which provides her with little benefit since she is in a low tax bracket.

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

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

A client is primarily concerned with having enough money to retire in 20 years. All of the following are considerations when making recommendations to the client, EXCEPT: The approximate inflation rate The current amount of available funds The expected return on the client's investments Current interest rates

d

Which of the following transactions would NOT be considered exempt under the Securities Act of 1933? a. private placement b. An intrastate offering c. An unsolicited brokerage transaction d. An initial public offering of an investment company's common stock

d

All the following activities by an investment adviser representative are considered unethical, EXCEPT: a. Lending money to a client who has sustained an investment loss b. Informing a client that the price of a stock will increase after the release of a positive research report on a company c. Executing trades of frequency and size that exceed a client's risk tolerance, but result in a higher return than the client expected d. Arranging a loan for a client conducted through an affiliated broker-dealer of the investment adviser for the purpose of paying for stock recommended by the investment adviser representative

d. A broker-dealer is permitted to lend money. The situation described in choice (d), is a margin account. It is prohibited for an investment adviser representative to loan money to a client who sustained investment losses—choice (a). Telling a client that the price of a stock will increase is a promissory statement and is prohibited—choice (b). Trades of excessive size or frequency that disregard a client's objectives or risk tolerance are not permitted regardless of the returns—choice (c).

Which of the following would NOT be an important consideration when conducting a capital needs assessment for a client? a. The rate of inflation b. The client's future anticipated earnings c. The client's life expectancy and retirement needs d. The amount of anticipated volatility in the marketplace

d. A capital needs assessment analyzes a client's future goals and needs. Retirement planning, college funding, and the risk of death before meeting a savings goal are all considered. A client's life expectancy, the rate of inflation, and her earnings will all affect the capital needs assessment. Market volatility may influence the securities on which recommendations are based, but not the capital needs assessment.

Which of the following is NOT included in the adjusted gross income (AGI) of a customer? a. Salary, tips, and bonus b. Alimony support payments that are received from an ex-spouse c. Dividends received from stock d. Interest received from a municipal bond investment

d. A client's federal adjusted gross income (AGI) consists of her taxable income. Examples of taxable income include a client's salary, tips, bonuses, alimony received, and dividends. Since municipal bond interest is tax-free, it is not a part of the AGI.

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

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

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

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

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

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

An investment adviser representative was the subject of a customer complaint two years ago in the state of Idaho and resigned his position as a result. The Administrator conducted an investigation, the results of which were not made public. He is currently applying for a mortgage for a new home in Boise. The bank where he is applying requests his employment history and contacts the investment adviser for verification. The personnel manager at the firm is reluctant to give the bank any information about its former employee and directs the bank to contact the state Administrator. When the bank calls the Administrator, what information can it expect to receive? a. The Administrator will provide the details of the complaint since it was securities-related b. The Administrator will contact the investment adviser for authorization to release the information c. The adviser must contact the Administrator for approval to release the information to the bank d. The Administrator will not release any details of the complaint

d. According to the Uniform Securities Act, no provision of the Act authorizes the Administrator or any of his officers or employees to disclose information except among themselves or, when necessary, in a proceeding or investigation under the Act that was not made public.

A company issued $50 million of common stock in a private placement under Regulation D. In order to sell the stock initially in any state, the Administrator requires the filing of: a. Form D b. A Consent to Service of Process c. A Notice Filing d. All of the above

d. All choices are required to be filed with the Administrator, since the securities are federal covered and subject to notice filing, and Form D for private placements registered under Regulation D.

An IAR is comparing the advantages and disadvantages of an S Corporation and a limited partnership for a client. What is one advantage of investing in an S Corporation that is not found in a limited partnership? a. There is unlimited personal liability b. An S Corporation pays higher dividends c. An S Corporation allows for an unlimited number of shareholders d. Investors have more control over management decisions

d. An S Corporation is limited to 100 shareholders. Like a limited partnership, its gains and losses "flow through" to its investors, there is no way to determine which will pay more since flow-through will be based on the performance of the specific vehicle's management. Both provide investors with limited liability. The shareholders of an S Corporation have voting rights, which provides some control over management decisions. In a limited partnership, taking part in management decisions jeopardizes an investor's status as a limited partner, and may result in being considered by creditors a general partner who has unlimited personal liability for debts of the partnership.

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

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

According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is: a. 10 or fewer b. 10 or more c. More than 10 d. Less than 10

d. An investment adviser is required to maintain a record of the names and addresses of any person to whom it has sent any notice, circular, advertisement, offering, report or publication if the number of persons is 10 or fewer. Therefore, if an IA distributes communication to more than 10 persons, it is not required to maintain a record of names and addresses of the persons to whom it was sent. The belief is that it may be too burdensome for an IA to maintain an extensive list of the names and addresses if the communication is sent to more than 10 persons. As a reminder, any communication that is sent to two or more persons is considered advertising.

A whole life insurance policy would be most appropriate for which of the following individuals? a. A 65-year-old man, whose objective is to accumulate enough money to pay for an elaborate funeral b. A 72-year-old grandmother who wants to insure that funds will be available for her grandchildren's education c. A 27-year-old single man who wants to pay the lowest premium for his life insurance d. A married 29-year-old woman with a successful career and two small children who is concerned about their future if she should die before they reach adulthood

d. Based on the individual's age, and objectives, a whole life insurance policy is most appropriate for the married 29-year-old woman.

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

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

Investors often use financial futures to hedge portfolios against which of the following types of risk? a. Business risk b. Political risk c. Event risk d. Market risk

d. Buyers and sellers of financial futures are often trying to hedge portfolios against interest-rate risk, exchange-rate risk (also called currency risk), and market risk. Business risk is the possibility that certain circumstances will affect the profitability of a company. Political risk is usually high in emerging markets and is the risk of losing money due to changes is a foreign country's government or regulatory environment. Financial futures cannot protect against these types of risks.

Broker-Dealer A is a publicly traded company listed on the New York Stock Exchange. Which of the following statements is TRUE regarding an agent of Broker-Dealer A who wants to sell securities of his company to a client? a. This would be considered an unethical business practice b. This is acceptable only if the agent discloses the relationship in writing prior to the transaction c. This is acceptable if the agent discloses the relationship verbally prior to the transaction since no written disclosure is necessary d. This is acceptable if the agent discloses the relationship verbally prior to the transaction and in writing before the settlement date

d. Failing to disclose that a broker-dealer is affiliated with or controlled by an issuer of securities is considered a dishonest and/or unethical business practice. The agent would need to disclose the affiliation before entering into any contract with a customer to buy or sell securities. The disclosure may be made verbally prior to the trade if written disclosure is made at or before the completion of the transaction (usually the settlement date). The disclosure would need to be made to any account of a broker-dealer.

Which of the following persons would be required to register as an investment adviser under the Uniform Securities Act? a. A federal covered adviser b. An accountant who provides investment advice that is incidental to her tax practice c. A bank's trust department that provides fee-based investment advice d. The publisher of a financial periodical that responds to each subscriber with personalized investment advice

d. Federal covered advisers and trust companies are not subject to registration under the Uniform Securities Act. Lawyers, accountants, teachers, engineers, and publishers are also exempt provided their securities advice is incidental and not timed and tailored to a specific client. In choice (d), the publisher has tailored its investment advice and would therefore be subject to registration.

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

d. 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.

If an agent participates in a joint account with a client, the agent may: a. Withdraw sale proceeds b. Follow the client's instructions only c. Share disproportionately in any gains or losses d. Initiate transactions in the account

d. If an agent has a joint account with a client, she may share in the gains and losses proportionately, and initiate transactions. However, any distribution will be made payable to all parties in a joint account unless the joint owners consent.

Under the Securities Act of 1933, with whom are nonexempt issuers required to file registration statements? a. FINRA b. Only the state in which the issuer is headquartered c. Only the state in which the securities will be sold d. SEC

d. 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 representatives file their registration statements with FINRA, while the Administrator handles all filings required under the Uniform Securities Act.

An investment adviser's client base is limited to insurance companies. If the adviser has its only office in State A, with whom must it register? a. With the SEC under the Investment Advisers Act of 1940 and with State A using the coordination method under the Uniform Securities Act b. With the SEC under the Investment Advisers Act of 1940 and notice file with State A c. With the SEC under the Investment Advisers Act of 1940 only d. With State A under the Uniform Securities Act, but not with the SEC under the Investment Advisers Act of 1940

d. In this example, since the investment adviser is dealing exclusively with insurance companies, it is exempt from registration under the Investment Advisers Act of 1940. However, the IA would likely be required to register in State A because it has an office there.

Broker-Dealer X is registered as an investment adviser in State A. Some of Broker-Dealer X's clients are not advisory clients. Broker-Dealer X would like to sell stock from its own account to a nonadvisory client. Which of the following statements is TRUE? a. Prior to the completion of this transaction, X must notify all its advisory clients that it is acting in a principal capacity b. Prior to the completion of this transaction, X must notify the client that it is acting in a principal capacity and then obtain the client's written consent c. A firm that is dually registered as a broker-dealer and investment adviser must operate under the same rules for all clients, whether advisory or not d. The rule regarding principal transactions by advisers does not apply in this case since X is acting solely as a broker-dealer and not as an investment adviser

d. Normally, an investment adviser that wishes to act as a principal for its own account must: 1. Disclose the capacity in which it is acting prior to the completion of the transaction, and 2. Obtain the client's written consent. However, this rule does not apply to broker-dealers when they are not acting as investment advisers, as is the case in this question.

Dan is the CEO of MKM Advisers and also a member of the local golf club. Dan has found that his club membership has provided MKM Advisers with a number of new clients and referrals. In an effort to continue building relationships, Dan decides to charge lower fees to members of the golf club than what nonmembers are charged. The services MKM provides are the same for all of its customers. MKM Advisers provides full disclosure of the special fee arrangement for golf club members in its advisory contracts and in Form ADV Part 2. Based on Uniform Securities Act regulations, which statement BEST describes MKM Advisers' fee arrangement? a. It is always acceptable and does not violate the USA b. For equal services, it discriminates against nonclub members in an unfair manner and is prohibited under the USA c. It causes nonmembers to be charged excessively and is prohibited under the USA d. Since it is properly disclosed in all contracts and in Form ADV Part 2, the arrangement does not violate the USA

d. Provided proper disclosure is made, charging clients different fees is not prohibited. The fee arrangement must be disclosed to the Administrator or the SEC in Form ADV Part 2 and also specifically disclosed to clients in their advisory contracts.

Howie is both a registered investment adviser and a licensed real estate agent. He recently prepared a financial plan for Bob. In this plan, Howie recommended that Bob increase his life insurance coverage and also consider putting a portion of his portfolio in hard assets, such as real estate. Howie knew of a property called Blackacre that was currently for sale and told Bob about it. Bob eventually purchased Blackacre using Howie as his real estate agent and Howie received a commission for the purchase. Would Howie's commission for selling Blackacre be considered compensation under the Investment Advisers Act? a. Yes, but only if Howie did not fully disclose that he was receiving a commission from the sale of Blackacre b. No, since the commission was not connected with the purchase or sale of a security c. No, real estate transactions are governed by state regulation d. Yes, Howie's commission for Blackacre would be considered part of his compensation as an investment adviser

d. SEC Release 1092 states that investment adviser compensation includes "any economic benefit." It can include commissions generated by the sale of nonsecurities products such as insurance or real estate. Thus, Howie's commission for Blackacre would be considered investment adviser compensation within the meaning of the Investment Advisers Act.

ABC Inc., a financial services company, is registered as both a broker-dealer and an investment adviser. On a regular basis, ABC is required to provide its clients with disclosures and obtain written agreements from them regarding acting in both a broker-dealer and investment adviser capacity. In which of the following situations is ABC not required to obtain a written agreement from the client prior to effecting the transaction? a. The client sells a security, and ABC, who is acting in a principal capacity for its own account, buys the security for its own account b. The client buys a security, and ABC, who is acting in a principal capacity for its own account, sells the security to the client c. At the time of initiating her contract, the client signed a document waiving her right to receive any and all disclosure documents d. The investment adviser side of ABC makes no recommendation to the client, but the client decides to effect a securities transaction through the broker-dealer

d. Since the client in choice (d) has not used the services of the investment adviser, the disclosure rules for investment advisers do not apply. However, broker-dealers are required to disclose on trade confirmations when they act in a principal or agency capacity.

Sovereign wealth funds are subject to: a. The Securities Act of 1933 b. The Securities Exchange Act of 1934 c. The Investment Company Act of 1940 d. None of the above

d. Sovereign wealth funds are investment pools created by government entities. Many countries have their own investment portfolios (e.g., Dubai World Holdings), and some state governments do as well (e.g., California's Public Employees -- CalPERS). These investment portfolios are typically exempt from the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940.

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

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

Under the Uniform Securities Act, which of the following would be considered an investment adviser? a. The publisher of a periodical that has general circulation b. An accountant who provides occasional advice as part of his practice c. A savings institution d. A person who receives compensation for providing investment advice related to bank stock prices

d. The Uniform Securities Act provides a list of exemptions from the investment adviser definition. Exemptions include a bank or savings institution, a professional (lawyer, engineer, accountant, or teacher) whose advice is incidental to his profession, a broker-dealer whose advice is incidental to its business as a broker or dealer, and a bona fide publisher. No specific exemption is available for an individual who provides advice regarding securities issued by banks, so he would most likely be considered an investment adviser.

According to NASAA Model Rules, an IA may be compensated on the basis of performance provided the adviser discloses all the following information in writing to the client, EXCEPT the: a. Fee arrangement may create an incentive for the adviser to make riskier or more speculative investments b. Adviser may receive a share of both realized and unrealized gains in the account c. Period used to measure performance d. Fact that the adviser has discretion as to any index to measure performance

d. The adviser may not use any index to measure performance, only one that is appropriate. The adviser must disclose the nature of any index and why the adviser believes it is appropriate.

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

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

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

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

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

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

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

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

An investment adviser representative acts as portfolio manager for her advisory firm's retirement fund. In addition, she acts as portfolio manager for two other pension funds that are clients of her firm. She has an opportunity to purchase a small amount of a new issue suitable for her firm's pension fund, as well as the clients' pension funds. Under what circumstances may she place the stock in her own firm's pension account rather than her clients' accounts? a. If she discloses this transaction to her clients b. If her advisory firm's ADV Part 2 states that this might happen c. If the number of shares involved is an insubstantial amount as defined under FINRA rules d. Under no circumstances

d. While there are many circumstances in which a conflict of interest can be handled by disclosing it to clients, some conflicts are so serious that disclosure does not cure them. This is an example of such a situation. The SEC has sanctioned investment advisers severely for these types of allocations.