Series 66 #4

If a broker-dealer is publishing both bid and ask prices for securities in the secondary market, it is acting as a: a. Broker-dealer b. Market maker c. Designated specialist d. Board broker

b. Market maker Market makers are firms that act as dealers in offering to buy and sell securities in the secondary market at their own risk.

Which of the following would NOT be included in the adjusted gross income (AGI) of a customer? a. Salary b. Alimony payments received from an ex-spouse c. Income received from investments d. Interest received from a municipal bond investment

d. Interest received from a municipal bond investment A client's federal adjusted gross income (AGI) consists of her taxable income. If taxable, a client's salary, alimony received, and income derived from her investments would be included in AGI. Since interest from a municipal bond is tax-free, it would not be part of the AGI.

Which of the following investments would be MOST suitable for an estate account? a. Commercial paper b. Treasury bonds c. Preferred stock d. Nonnegotiable CDs

a. Commercial paper Estates are intended to last only for a short time (a year or two). The executor or administrator of the estate has a fiduciary responsibility to safeguard the estate's assets until they can be distributed to the heirs. Estates should generally invest only in short-term, safe, liquid assets such as money-market instruments. Money-market instruments include T-bills (not Treasury notes or bonds), commercial paper, choice (a), and negotiable CDs.

When considering investments in various mutual funds, an IA may recommend an emerging markets fund as a means of: a. Diversifying investments in various funds b. Reducing the risk of various fund holdings c. Achieving a higher return than with other funds d. Reducing taxes, since earnings are not subject to U.S. taxes

a. Diversifying investments in various funds An emerging markets fund invests in companies of countries that are moving out of their economic development phase and into a more growth-oriented stage in their development. Such funds do have risk and, typically, a high degree of volatility. Investing in such a fund together with other funds may provide greater diversification and the opportunity for a greater return.

Which of the following is *NOT* a type of systematic risk? a. Liquidity risk b. Market risk c. Interest-rate risk d. Inflation risk

a. Liquidity risk Liquidity risk is an example of unsystematic or diversifiable risk. Systematic risk is one that affects all asset classes in the same manner. Examples of systematic risk include market risk, interest-rate risk, and inflation risk. If there is an overall decline in the stock market, it will cause stock prices to go down (market risk). If market interest rates rise, it will cause bond prices to decline (interest-rate risk). And finally, an increase in the rate of inflation will generally cause the overall bond market to decline. The decline in the bond market is essentially tied to the market's anticipation of Federal Reserve Board action (i.e., raising interest rates).

According to federal law, which of the following would best describe what happens when a security is federal covered? a. The issuer must register the security with the SEC only b. The Administrator has a diminished authority to review the security during an offering in the state c. The security is considered AAA-rated d. The security becomes a suitable pension plan investment

a. The issuer must register the security with the SEC only Federal covered securities are registered with, and regulated by, the SEC. A state Administrator does not have authority over any offering documents related to federal covered securities. Remember, federal covered securities are subject to business risk and are not automatically considered safe or investment-grade.

Dividends are: a. Taxed as short-term gains b. Taxed as long-term gains c. Taxed as ordinary income d. Tax-free if reinvested

c. Taxed as ordinary income Dividends are taxed as ordinary income at the investor's tax rate (even if reinvested to acquire more shares), usually at no more than a tax rate of 20%.

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

d. Fixed annuity that offers the potential for greater returns An equity-indexed annuity is a type of fixed (nonvariable) annuity. There is no SEC registration requirement for these contracts. The owner receives a guaranteed minimum interest rate. The upside potential exists since the rate of return is tied to an index such as the Standard & Poor's (S&P) Index. If the index underperforms, the client receives the minimum rate. If the index performs well, investors will receive the indexed return up to a maximum capped rate.

A broker-dealer acting as a market maker will: a. Add a commission to the asked price when selling b. Mark down the stock from the offer when selling c. Mark up the stock from the offer when buying d. Mark down the stock from the bid when buying

d. Mark down the stock from the bid when buying When acting as a market maker, a broker-dealer does not charge a commission. A market maker either buys into inventory or sells out of inventory and charges a markup or a markdown. The broker-dealer will mark up from the offer price (asked) when selling and will mark down from the bid when buying.

Brian lives in New Jersey. He is opening a 529 college savings plan sponsored by the state of Montana for his daughter Julie. His initial contribution is $70,000. Which of the following statements is TRUE? a. Brian will be able to deduct the $70,000 from his state income taxes b. Brian will be required to pay federal gift taxes on the $70,000, since the amount exceeds the annual gift exclusion c. Anything that the account earns will be taxed at Julie's tax rate d. Neither Brian nor Julie will be liable for gift taxes on the $70,000 contribution

d. Neither Brian nor Julie will be liable for gift taxes on the $70,000 contribution Brian may contribute up to $70,000 at one time to Julia's 529 plan without worrying about federal gift taxes. The tax code allows donors to aggregate five years' worth of gifts under the annual gift exclusion ($14,000) into one lump sum (5 x $14,000). Some states do allow donors to deduct a portion of contributions to 529 plans from their state income taxes, but only if the donor contributes to a plan sponsored by his home state.

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. With State A under the Uniform Securities Act, but not with the SEC under the Investment Advisers Act of 1940 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

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

a. 10 or fewer If sent to more than 10 persons, the IA does not need to maintain a record of names and addresses. Note: Any communications sent to two or more persons must be kept on file with the IA for five years. If sent to more than one person, it is considered advertising.

TopJob Advisers has discretionary authority over client funds. The firm does not take custody of client securities or cash assets. TopJob: a. Must prepare a balance sheet that must be filed with the Administrator b. Must prepare an audited balance sheet that must be filed with the Administrator c. Is not required to prepare a balance sheet unless the majority of the firm's clients are qualified pension plans d. Is not required to prepare a balance sheet, but its books are subject to spot checks by the Administrator, provided 72 hours' notice is given

a. Must prepare a balance sheet that must be filed with the Administrator A registered investment adviser that has discretionary authority over client funds or securities, but does not take custody, is required to file a balance sheet with the Administrator. There is no requirement for the balance sheet to be audited.

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. Five years if sent to two or more persons 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.

According to the Uniform Securities Act, which of the following choices would meet the definition of a broker-dealer in State A? a. The trust department of the Merchants Bank located in State A b. Woodwyle Incorporated, a broker-dealer located in State B that conducts transactions for a customer who has moved to State A c. A person located in State A, who is in the business of providing advice relating to securities d. An agent located in State A, who effects securities transactions for his own account or the account of others

b. Woodwyle Incorporated, a broker-dealer located in State B that conducts transactions for a customer who has moved to State A Woodwyle is defined as a broker-dealer and must be registered in the state to conduct business with existing customers who have moved to the state. An agent not registered in the state has 60 days to obtain registration in the state, provided the broker-dealer is registered in the state, the agent is registered in at least one state, and is not disqualified from registration in the state.

Under the USA, financial planners: a. Would be considered de facto investment advisers regardless of their stated or actual activities b. Would not include persons who provide advice on fixed annuities only c. Would include persons who recommend investment strategies using life insurance only d. May only use the designation financial planner on business cards if it is followed by RIA

b. Would not include persons who provide advice on fixed annuities only An investment adviser is defined as any person who, for compensation, as a regular part of a business engages in advising others, as to investing in, the value of, purchasing and/or selling securities. Choice (a) is incorrect because the designation of financial planner does not automatically define the person as an investment adviser if the person does not engage in the activities previously described. Choice (d) is incorrect because the abbreviation RIA is not allowed on business cards. Since life insurance and fixed annuities are not securities, a person giving advice on those insurance products would not be considered a financial planner under the USA, making choice (b) the correct answer.

Marcia owns a $1,000 TIPS with a coupon of 3%. Assuming the CPI increases by 1% every 6 months over the next 3 years (36 months), what would her current yield be after 3 years? a. 1% b. 1.5% c. 3% d. 9%

c. 3% The principal of a TIPS is adjusted upward or downward ,semi-annually, based on an inflation index. One half of the annual coupon (1.5%) is then multiplied by the adjusted principal to determine the semi-annual interest payment. To find the current yield for the TIPS, determine the annual interest payments of the final year and divide by the ending adjusted principal. After Month Principal Coupon Interest 6 $1,010.00 1.5% $15.15 12 $1,020.10 1.5% $15.30 18 $1,030.30 1.5% $15.45 24 $1,040.60 1.5% $15.61 30 $1,051.00 1.5% $15.76 36 $1,061.51 1.5% $15.92 Total interest for the last year ($31.68) divided by the ending principal ($1,061.51) equals 3% current yield. ($31.68 ÷ $1,061.51 = 3%) You can also observe from the above calculation, that the investor's real (inflation adjusted) return is the TIPS coupon rate.

A married couple received a $50,000 cash wedding gift and would like to use the money as a down payment on a new home. They anticipate closing on the new home within six months. Which of the following investments would be suitable? I. A money-market mutual fund II. A bank-insured CD III. A diversified portfolio of blue chip stocks a. I only b. II only c. I and II only d. I, II, and III

c. I and II only Since both money-market mutual funds and bank-insured certificates of deposit are very conservative and liquid investments, they would be the best choices for this couple. A stock portfolio would expose the couple to market risk and would therefore be unsuitable based on their short time horizon and capital preservation need.

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. a. I and IV only b. II and III only c. II, III, and IV only d. I, II, III, and IV

c. II, III, and IV only 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.

A broker-dealer that is structured as a partnership is being acquired by a publicly traded corporation. The directors of the corporation acquiring the partnership would: a. Automatically be registered as agents b. Automatically be registered as a principal c. Need the broker-dealer to register them as agents d. Be exempt since they are executives of the company and not selling securities

c. Need the broker-dealer to register them as agents Persons such as sole proprietors, officers, partners, and directors of a broker-dealer are typically registered as agents when the broker-dealer initially files Form BD. Once the broker-dealer is established, the broker-dealer must initiate the registration process and register the appropriate individuals as agents

If a portfolio manager has a diversified portfolio of large-cap stocks, it would use index options to reduce which of the following risks? a. Timing risk b. Interest-rate risk c. Systematic risk d. Nonsystematic risk

c. Systematic risk If a portfolio manager wants to hedge a diversified stock portfolio from systematic (market) risk, it could buy puts or sell call options on the index. If the market declines as a whole, the puts would provide the best hedge by becoming more valuable and would offset the risk. In the event the overall market declines, the call options would provide only limited protection through the collection of the premium on the expiring call options.

A client with a net worth of $2,500,000 has $300,000 in funds managed by an investment adviser. The investment adviser normally charges 1% of the assets under management but will waive the fee if the performance of a client's account does not attain a certain level of capital appreciation. According to the Investment Advisers Act, which of the following statements is TRUE? a. Only a control person of the investment adviser may approve the arrangement b. Only the SEC may approve the arrangement c. This provision is allowed if the client signs the contract d. This practice is prohibited

c. This provision is allowed if the client signs the contract This case is an example of a contingent fee, which generally includes any arrangement in which the adviser's fee depends on attaining a specific level of capital gains or appreciation (or avoiding capital losses or depreciation). The SEC considers contingent fees a type of performance fee, which are generally prohibited in advisory contracts. Exceptions include contracts for clients who have at least $1,000,000 under management with the adviser, or clients who have a net worth in excess of $2,000,000. Since the client has a net worth of $2,500,000, she would qualify for this exception.

As part of the record-keeping requirements for IAs, an order memorandum must include all the following information, EXCEPT: a. The person who recommended the transaction b. The person who placed the order c. When the order was executed d. The date the order was entered

c. When the order was executed According to the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, the order memoranda should show the terms and conditions of the order, instructions, modification, or cancellation, the person connected with the IA who recommended the transaction and the person who placed the order, the date of entry, the bank or broker-dealer through which the transaction was executed and, if discretionary, that a power of attorney was designated

After a hearing, Bill, an agent, has been found guilty of selling securities that were not properly registered. As a consequence, the Administrator may take all of the following actions, EXCEPT: I. Seize the personal property of Bill II. Revoke his registration III. Suspend his registration IV. Levy a fine to cover any legal claims a. I only b. I and II only c. II and III only d. I and IV only

d. I and IV only The Administrator may not seize the personal property of a registrant, nor levy fines. Fines may be levied only by the courts.

A customer's investment policy statement may contain which of the following? I. Expectations related to the markets II. Analysis of risks and rewards III. Asset allocation models a. I only b. I and II only c. II and III only d. I, II, and III

d. I, II, and III A customer's investment policy, which details how the customer's money is to be managed, may include all of these items.

All the following descriptions would meet the definition of agent under the Uniform Securities Act, *EXCEPT*: I. A sales representative of a broker-dealer who sells only securities covered under a federal exemption II. An assistant to a sales agent who takes orders when the agent is not available III. A subsidiary of a bank, registered as a broker-dealer that sells nonexempt securities to the public IV. A broker-dealer that sells only exempt securities within the state a. I and II only b. I and IV only c. II and IV only d. III and IV only

d. III and IV only A sales agent of a broker-dealer is by definition an agent. It does not matter whether the securities are covered under a federal exemption or not. If administrative personnel are authorized to take orders, they are agents. By definition, an agent is an individual and not a firm. Choices (III) and (IV) are both firms and not individuals.

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

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