Series 66
Time Weighted Return will be the same as Dollar Weighted Return for an individual customer that has a mutual fund holding if: A. actual cash deposits into the mutual fund and actual withdrawals out of the mutual fund are ignored B. cash deposits into the mutual fund are ignored C. cash withdrawals out of the mutual fund are ignored D. the customer takes all distributions from the fund as a checks and does not reinvest them
The best answer is A. Dollar weighted average return is most often used when evaluating a specific investor's mutual fund return. It is the return achieved, accounting for the timing of all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor's deposits and withdrawals. Because investors often "chase" past performance, they will buy a fund "too late" (after the fund has posted its best performance and now enters a period of lesser performance) and will sell "too soon." Thus, for the individual investor, dollar weighted average return is often lower than time weighted average return.
"Painting the tape" is the: A. illegal practice of effecting wash trades in thinly traded issues in a common trading pool B. illegal practice of matching buyers and sellers who want immediate trade executions C. legal practice of effecting both long sales and short sales subject to the "uptick" rule D. legal practice of taking both a stock and option position on the same "side of the market"
The best answer is A. In the "old" days, stock trade reporting was done mechanically through the "ticker tape." The "ticker" was a machine similar to a telegraph that received reported trades and printed them on a paper tape. A manipulative practice was "painting the tape" - that is, effecting a series of buy and sell trades in a stock at successively higher prices, but where there is no change of ownership (so-called "wash" trades) just to show trading activity coming across the tape. This was done by a group of individuals who owned the stock and who would trade with each other at successively higher prices, to create the appearance of activity and upward price movement in the stock. The individuals in the trading pool would rebate the gain or loss among themselves during the time period that they were doing the wash trades. The increased trading activity would attract other traders to buy the stock (since they would think that "something was going on with the stock"), and the price would rise - at which point, the manipulators would unload their stock position.
An investor employing sector rotation is using a: A. timing strategy B. momentum strategy C. contrarian strategy D. value strategy
The best answer is A. Sector rotation is a strategy that "rotates" investment based on the economic cycle. For example, when the economy is in a period of recession, an investor may have shifted investment assets to cash. Once the economy enters a period of recovery, industrial stocks outperform and the investor could rotate out of cash and into industrial stocks. This is a "tactical" or timing strategy, that times the investment to the changes in the economic cycle. Momentum investing assumes that stocks that have been moving up will continue to do so (they have momentum), so these are the investments to make. Contrarian investors believe that crowd behavior of investors is wrong, so if they are selling, it is the time to buy; and vice-versa. Value investors seek to invest in undervalued stocks, in the belief that the market will bring these stocks up to their full value
An example of a passive long term bond investment strategy is: A. buy and hold B. a barbell C. a ladder D. interest rate anticipation
The best answer is A. Since long term bonds are more volatile than short term bonds as market interest rates move, a long term bond investor should be a "buy and hold" investor. As long as the bond is held to maturity, the bondholder will not experience a market value loss due to an interest rate rise. This is a "passive" strategy because it does not require a manager to decide when to change the portfolio composition. When constructing a bond portfolio, "laddering" the portfolio means that the portfolio is structured with short-term; intermediate term; and long-term investments. As the short-term bonds mature, the proceeds are reinvested either in new short-term, intermediate-term or long-term bonds, depending on anticipated movements in interest rates (if rates are expected to rise, then the proceeds are invested in short-term bonds, which will fall the least from a market interest rate rise; if rates are expected to fall, then the proceeds are invested in long term bonds, which will rise the most from a market interest rate fall; if rates are expected to be stable, then the proceeds are invested in intermediate term bonds). Thus, there is active portfolio rebalancing going on as interest rates move - so this is an example of an interest rate anticipation strategy. A barbell strategy is a similar strategy, using only short term and long term bonds (the 2 ends of the barbell). Thus, a barbell, a ladder, and interest rate anticipation, are all "active" strategies.
All of the following individuals would be allowed to effect transactions in the account of a customer who is mentally incapacitated EXCEPT a(n): A. individual named in the customer's living will B. individual given a durable power of attorney C. conservator appointed by a court of law D. joint tenant that owns the account with the customer
The best answer is A. A "living" will appoints an individual to make only "end of life" medical decisions, not financial decisions. A durable power of attorney granted by the customer prior to his or her mental incapacitation appoints an individual to make decisions for the incapacitated customer, so this works. A court appointed conservator over the account is authorized to trade. If the account was held as joint tenants, the other party in the account is still authorized to trade.
Which of the following securities is NOT exempt from the registration requirements of the Uniform Securities Act? A. U.S. Government Bonds B. Debentures of a New York Stock Exchange listed company C. Stock issued by a charitable corporation D. Limited Partnership Interests
The best answer is D. Under the Uniform Securities Act, U.S. Government bonds; securities issued by Exchange listed companies ("blue-chips"); and securities issued by charitable organizations are exempt. Limited partnership interests are defined as a security under the Act and are non-exempt.
A customer has a free credit balance at a broker-dealer. The customer makes a verbal request over the phone that the broker-dealer pay the amount of the balance immediately, in check form. Which statement is TRUE? A. The request should be honored as given B. The broker-dealer cannot honor the request unless it is in writing C. The broker-dealer cannot honor the request unless the customer makes it in person D. The request cannot be honored since free credit balances are not payable to the customer
The best answer is A. A free credit balance is an uninvested cash balance. The customer can request that the firm pay this amount at any time - there is no need for a written request. The firm must make the payment promptly to the customer, if a request is made.
The State Administrator has the power to do which of the following to a federal covered adviser? A. Increase the number of audits that the Administrator makes of the adviser B. Establish minimum financial requirements that are more stringent than the requirements of the Investment Advisers Act of 1940 C. Require the adviser to file financial reports other than those filed under the Investment Advisers Act of 1940 D. Require the adviser to keep records other than those required under the Investment Advisers Act of 1940
The best answer is A. Because of federal supremacy, the State Administrator cannot require anything of a federal covered adviser that is already covered under the Investment Advisers Act of 1940. The State Administrator can, however, audit any adviser, federal covered or not, who does business in the State.
Which of the following would be an unethical practice under the Uniform Securities Act? A. Telling a customer that the price of a security is $25 per share if the broker-dealer is the sole market maker in the stock B. Telling a customer that the price of a security is $25 per share if the source of the quote is the NASDAQ system C. Telling a customer that the price of a security is $25 per share if this is the P.O.P. of the issue in a syndicate distribution D. Telling a customer that the price of a security is $25 per share if the source of the quote is the NYSE
The best answer is A. If a broker-dealer is the sole market maker in a stock, then there is no true independent market - the price is whatever the broker-dealer says it is! In such a case, the rule is that the price is "contemporaneous cost" - meaning the last price at which the broker actually bought the stock! On the other hand, the last price reported from the NYSE or NASDAQ is a true market price and can be quoted. Finally, all prospectus offerings are fixed price sales made at the P.O.P. - Public Offering Price, with the price stated in the prospectus. Quoting this price is just fine!
A retiree who annuitizes a variable annuity contract subjects him or herself to: A. market risk B. purchasing power risk C. regulatory risk D. opportunity cost risk
The best answer is A. In a variable annuity, the annuity payment varies with the performance of the underlying mutual fund that is the source of the funding of the annuity payments. If the mutual fund does well, the payment amount goes up; if the fund does poorly, the payment amount goes down. Thus, the annuitant is exposed to market risk. Typically, the mutual fund backing the annuity is an equity fund, so there is little purchasing power risk. If the mutual fund backing the annuity were a fixed income fund, then there would be purchasing power risk as well. However, market risk is the best of the choices offered.
The primary reason for a customer to make a tax shelter investment is the: A. economic viability of the project B. immediate deductions generated by the project C. immediate tax credits generated by the project D. future capital gains generated by the project
The best answer is A. In considering a tax sheltered investment, economic viability comes first; tax benefits come second.
Investment companies that are required to be registered with the SEC under the Investment Company Act of 1940 have at least: I 100 shareholders II 1,000 shareholders III $100,000 of net assets IV $1,000,000 of net assets A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Investment companies that must register with the SEC are those with at least 100 shareholders and at least $100,000 of net assets.
Under NASAA rules, each Registered Investment Adviser must establish, implement and maintain a Business Continuity and Succession Plan that: A. is based on the investment adviser's business model including the size of the firm, types of services provided, and number of business locations B. ensures that key management personnel have been familiarized with the policies and procedures to be followed in the event of a significant business interruption C. designates the investment adviser's independent outside accountant as the person to take responsibility in the event of a significant business interruption D. announces to the public in local newspapers and on the internet the fact that a significant business interruption has occurred
The best answer is A. NASAA has a Model Rule covering "Business Continuity and Succession Planning for Investment Advisers" (Broker-Dealers are already covered under a similar FINRA rule). It states that every investment adviser must establish, implement and maintain a Business Continuity Plan based on the facts and circumstances of the RIA's business model including the size of the firm, types of services provided, and number of locations of the investment adviser. The plan must provide, at a minimum, for:•The protection, backup, and recovery of books and records; •Alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators, including providing notice to these persons of significant business interruption, cessation of business activities or death or unavailability of key personnel; •Office relocation in the event of temporary or permanent loss of a principal place of business; •Assignment of duties to qualified persons in the event of death or unavailability of key personnel; and •Minimizing service disruptions and client harm that could result from a significant business disruption.
Which statement is TRUE regarding the State Administrator's authority to establish recordkeeping rules for broker-dealers? A. The Administrator can only establish recordkeeping rules that are the same as those set by the SEC B. The Administrator cannot establish recordkeeping rules for broker-dealers C. The Administrator has the power to set recordkeeping rules if it is in the public interest D. The Administrator can neither establish nor enforce recordkeeping requirements for broker-dealers
The best answer is A. NSMIA made clear that Federal law has supremacy over State law regarding net capital rules, custody rules, margin rules, financial responsibility rules and recordkeeping rules. Since the SEC sets recordkeeping rules for broker-dealers, the State Administrator can only create rules that agree with those created by the SEC.
Which statement concerning distributions from a Coverdell Education Savings Account is TRUE? A. Distributions to pay for qualified education expenses are income tax free B. Distributions to pay for qualified education expenses are subject to income tax at the student's lower income tax rate C. Distributions to pay for qualified education expenses are subject to tax at capital gains rates D. Distributions to pay for qualified education expenses are subject to income tax at the parent's tax bracket
The best answer is A. Qualified distributions from educational savings accounts are tax-free. "Qualified" means distributions used to pay for qualified education expenses.
A registered representative would ask a potential client which of the following when doing a suitability determination? A. "With the funds that you have available, is it better for you to buy a new car or put the funds into an IRA?" B. "Do you need to set aside funds to take a vacation this year? If this is the case, you will have less to invest." C. "Do you want me to select the investments in the account? If so, you must sign a power of attorney giving me discretion." D. "Do you own your own home and if so, do you have adequate homeowner's insurance?"
The best answer is A. Suitability means that the recommended security meets the customer's investment objective, risk tolerance level, and investment time horizon. It also means that it makes sense within the customer's existing portfolio of investments. Only Choice A makes a recommendation of a security - the IRA investment. Choice B impacts the amount available for investment - but it does not recommend one. Choice C asks whether the customer wants the agent to exercise discretion when selecting investments - again, it is not recommending a security. Finally, Choice D has nothing to do with recommending a security.
The advantage of a limited partnership business structure as opposed to a corporate business structure is: A. flow-through of gain and loss B. centralized management C. lower risk of audit D. limited liability
The best answer is A. The advantage of the partnership form of business is that the partnership itself is not a taxable entity; income and loss from the partnership "flows-through" onto the individual partners' tax returns. Thus, any net income is taxed once; and any net loss is included on the partner's tax return. In contrast, a corporation must compute net income or loss at the corporate level; and must pay tax on any income. The only way for the shareholder to receive a portion of the net income is for the corporation to pay a dividend, which must be included on the shareholder's tax return; and which is taxed again! Any net losses remain at the corporate level - they cannot be distributed to shareholders. Both corporations and limited partnerships have centralized management; and both shareholders and limited partners have limited liability. Partnerships have a higher risk of audit than corporations, making this a real disadvantage to the partnership form of business.
To be defined as a diversified management company, the maximum percentage of the portfolio's assets that can be invested in a single issuer is: A. 5% B. 10% C. 25% D. 75%
The best answer is A. To be defined as a "diversified" management company, the fund must have at least 75% of its assets invested in securities; with no more than 5% of assets invested in a single issuer; with no holding representing more than 10% of the voting stock of that issuer.
If total liabilities of a company are subtracted from total assets of a company, the result is the company's: A. market value B. net worth C. capitalization D. net working capital
The best answer is B. (Current Assets - Current Liabilities equals Net Working Capital.)
When computing standard deviation of returns against the mean, the measure used for the mean is: A. geometric mean B. arithmetic mean C. weighted average mean D. moving average mean
The best answer is B. Standard deviation of investment returns is computed by comparing all of the investment returns against the "average" investment return. The more broadly dispersed the investment returns are as compared to the arithmetic mean (which is simply the average of all investment returns), then the greater the standard deviation. Standard deviation is a "risk" measure. Geometric mean considers compounding of annual returns, as compared to arithmetic mean, which is a simple average. The other 2 choices are not tested.
Which statement is TRUE regarding mutual fund distributions? A. All dividends distributed by the fund are taxable to the recipient at the same tax rate as for ordinary income B. All capital gains distributed by the fund are taxable to the recipient based on the fund's holding period, even if the recipient has held the shares for less than 1 year C. All distributions reported on Form 1099-DIV are excluded from tax if they are automatically reinvested D. All distributions from municipal bond funds are excluded from taxation because of the federal tax exemption applied to the underlying securities
The best answer is B. Taxation of mutual fund distributions is based on the length of time that the fund held the underlying securities. It makes no difference that the distributions are automatically reinvested in additional share purchases. All fund distributions, whether they are dividends, short term capital gains or long term capital gains, are reported to shareholders and to the IRS on Form 1099-DIV. Also note that regarding municipal bonds and municipal bond funds, the interest income is exempt from federal tax, but any capital gains from selling the bonds at a profit are taxable.
Limited partnership shares are sold to a bank. Under the provisions of the Uniform Securities Act of 1956, as amended, this transaction is subject to: I advertising filing requirements with the Administrator II anti-fraud provisions as promulgated in the Act III payment of filing fees with the State A. I and III only B. II only C. II and III only D. I, II, III
The best answer is B. The sale of securities to a financial institution is an "exempt transaction" under the Uniform Securities Act - because the general public is not involved. As an exempt transaction, the securities involved are not required to be registered in the State (however the person selling them must still be registered in the State). Both exempt securities and exempt transactions are specifically excluded from the Act's advertising filing requirements. Finally, filing fees are only required for securities registrations in the State (primary market); not for secondary market transactions that occur in the State.
Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the: A. adviser is also a bank located in that State B. adviser is also a broker-dealer registered in that State C. primary business of the adviser is recommending the brokerage services of another firm D. primary business of the adviser is the rendering of investment advice
The best answer is D. Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the giving of advice is the primary business of the firm.
The yield to maturity on a bond is less than the yield to call. This bond is trading: A. at par B. at a discount C. at a premium D. in the money
The best answer is B. Aside from the coupon rate earned on a bond, yield to maturity and yield to call computations take into account whether the bond is purchased at a discount or at a premium. If a bond is purchased at a discount, the pro-rata annual earning of the discount as the bond approaches par value at maturity is added to the coupon rate, increasing the yield. If such a bond is called prior to maturity (an unlikely event), then the discount is earned faster and the yield to the "call date" increases above the yield to maturity. Thus, for a discount bond, the yield to maturity is lower than the yield to call.
The measure of stock price volatility relative to the market is: A. alpha B. beta C. delta D. sigma
The best answer is B. Beta measures a security's volatility relative to the market.
Under the Uniform Securities Act, if the Administrator prohibits an investment adviser from taking custody of customer funds or securities, the investment adviser would be permitted to: A. buy securities for a customer using the investment adviser's monies, and then delay delivery of those securities to the customer B. buy securities for a customer who has given a limited power of attorney to the adviser using monies deposited by that customer to an account established by the adviser specifically for that purpose C. hold customer funds in accounts established and maintained by the adviser that have been segregated and properly identified D. accept a prepaid advisory fee of $500 from the client covering a period of up to 1 year
The best answer is B. If the adviser is prohibited from taking custody of client funds or securities by the State Administrator, the adviser can trade the customer account under a limited power of attorney - this is normal practice. So Choice B is the correct answer. The adviser cannot buy securities for a customer and then delay delivery of the securities to the client - this is an unethical practice. If an adviser is prohibited from taking custody, it cannot hold customer funds and securities, making Choice C incorrect. There is nothing precluding an adviser from taking a prepaid advisory fee, but if the adviser accepts $500 or more of prepaid fees, 6 months or more in advance of rendering services, this is defined as "taking custody" under NASAA rules.
An account is opened for three individuals as "Tenants in Common". If one of the individuals dies, the: A. account must be liquidated to facilitate the division of assets among the surviving tenants and the deceased's estate B. estate assumes the tenancy of the deceased individual in the account C. account becomes the property of the two remaining survivors as Tenants in Common D. account becomes the property of the two remaining survivors as Joint Tenants with Rights of Survivorship
The best answer is B. In an account opened "Tenants in Common," if one participant dies, that person's share in the account goes to the estate. The disposition of the deceased person's interest is handled by the estate. There is no requirement to liquidate the account, nor does the account become the sole property of the remaining tenants. (This would be the case if the account were owned as "Joint Tenants with Rights of Survivorship.")
The primary risk associated with investing in an index fund is: A. liquidity risk B. market risk C. business risk D. regulatory risk
The best answer is B. Index funds are fully diversified - so business risk is minimized. There is little liquidity risk because index fund shares can be redeemed at Net Asset Value daily. Diversification does not protect against market risk. If the market falls in general, so will the value of the securities in the index fund. Market risk is the risk that cannot be diversified away (but one can hedge against it by using the appropriate option contract).
Monte Carlo simulation: A. is used to determine the expected value of an investment's return based on the probability of a specific result occurring B. establishes a frequency distribution of investment returns over a range of different conditions C. predicts the variability of return that can occur relative to the mean or median return D. establishes the asset allocation percentages applied to each asset class based upon an investor's objectives, risk tolerance, and time horizon
The best answer is B. Monte Carlo simulation is a computer simulation methodology that is used to determine the most probable outcome of an investment decision. Instead of using a formula, this method assesses the outcome of the investment's return under an extremely broad range of varying conditions, creating thousands of computer calculated scenarios to converge on the most probable outcome. Thus, it creates a frequency distribution of investment returns, with the most likely result being the investment returns that are generated with the greatest frequency.
Monte Carlo simulation is used to assess a portfolio's: A. expected rate of return on investment B. probability of achieving investment returns under varying conditions C. standard deviation of returns under varying conditions D. minimum and maximum rate of return
The best answer is B. Monte Carlo simulation is a computer-driven "decision-tree" analysis of possible portfolio returns that can be achieved based on varying factors, such as differing future interest rate levels; equity return levels; inflation rate levels, etc. It assesses the probability of getting the desired portfolio return over a long time horizon, during which these variables can change thousands of times.
The principal difference between a structured product and an ETN is: A. investment time horizon B. liquidity risk C. credit risk D. reference index
The best answer is B. Regarding structured products, each bank's version has different features. They are "buy and hold" securities - there is almost no trading market. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated.
An individual buys 100 shares of ABC stock at $40. This person dies when the stock is trading at $52, and leaves the shares to his son. The son sells the stock when it is trading at $55. The son's cost basis in the stock is: A. $0 B. $40 C. $52 D. $55
The best answer is C. For estate tax purposes, securities are valued at the current market value at the date of death. Estate tax is due based upon the market value of all assets held at this date - with the tax paid by the estate. The beneficiary of the estate receives the asset at this market value - $52 per share in this case. Any future capital gain or loss to the recipient is determined from this cost basis when the asset is sold.
Appeals of decisions made by the State Administrator must be filed: A. promptly B. within 30 days C. within 60 days D. within 90 days
The best answer is C. If a person disagrees with a final order of the Administrator, he or she must petition the appropriate court within 60 days of the order.
An Investment Adviser obtains a list of the 30 members of the local rotary club and sends each a letter that includes a coupon that gives a 20% discount to club members if they purchase the adviser's services. Which statement is TRUE under the provisions of the Investment Advisers Act of 1940? A. This is a fraudulent and prohibited practice B. A adviser must keep a record of the letter and a memorandum describing the mailing list C. The adviser is only required to keep a record of any rotary club members that use the coupon D. The adviser is not required to keep copies of prospecting letters
The best answer is B. The Investment Advisers Act of 1940 covers this situation under Rule 204-2. It requires that if an adviser sends any notice, circular or advertisement, it must keep a record of the names and addresses of the persons to whom the communication was sent. If the communication is sent to more than 10 persons, this detailed record is not required to be kept, however if the communication is sent to a list of individuals (as in this case), a copy of the letter, along with a memorandum describing the list and its source, must be retained.
Under the provisions of the Uniform Securities Act, which statements are TRUE regarding surety bond coverage as a requirement for registration as an Investment Adviser? I Investment advisers that take custody are required to maintain surety bond coverage II Investment advisers that take custody are not required to maintain surety bond coverage III Investment advisers that do not take custody are required to maintain surety bond coverage IV Investment advisers that do not take custody are not required to maintain surety bond coverage A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Under State law, if an investment adviser will not take custody of a client's funds, there is no surety bond requirement. However, if the adviser will take custody, it must have a minimum net worth or minimum surety bond coverage of $35,000.
Administrators can require minimum Net Capital and Net Worth for registration of: I Agents II Broker-Dealers III Investment Advisers IV Issuers A. I only B. II and III C. III and IV D. I, II, III, IV
The best answer is B. Under the Act, minimum Net Capital and Net Worth requirements can be set by the Administrator to register broker-dealers and investment advisers. There is no such requirement for agents or investment adviser representatives. Issuers do not register under the Act; only the non-exempt securities that they issue must be registered. Registration of non-exempt securities is covered in the following section.
Who can make a tax-deductible contribution to a Traditional IRA? A. 75-year old man who earned $14,000 working as a greeter in a department store B. 33-year old woman who earns $200,000 as a department manager who is eligible to contribute to her company's 401(k) plan C. 14-year old boy who earned $2,000 working on a newspaper route after school D. 41-year old socialite who receives payments of $100,000 per year from her trust fund
The best answer is C. A true, but not widely known, fact about Traditional IRAs is that contributions can be made by anyone who has "earned income" regardless of his or her age. Thus, a child can make IRA contributions based on income earned (Choice C). Contributions to Traditional IRAs are not permitted after age 70 ½, making Choice A false. Higher earners who are covered by other qualified plans can make contributions, but they are not tax deductible, making Choice B false. Contributions can only be made based on "earned income," not on portfolio income, making Choice D false.
A new client wishes to open an account with an agent of a broker-dealer, but refuses to divulge any information regarding investment objectives, income, net worth or other investment holdings. Under the provisions of the Uniform Securities Act, the agent should: A. refuse to open the account B. only recommend securities on the Legal List C. only accept unsolicited orders from the customer D. make recommendations to the customer that are in compliance with the Prudent Man Rule
The best answer is C. An account can be opened for a customer that does not wish to give suitability information, but only unsolicited trades can be accepted from that customer. No recommendations can be made to the customer, because the agent has no basis for making a recommendation.
An investment adviser providing advice solely about municipal securities is subject to: I state registration II federal registration III state advertising filing requirements A. I only B. II only C. I or II D. I, II, III
The best answer is C. An investment adviser who provides advice solely about municipal securities is subject to either Federal or State registration, depending on the amount of assets the adviser has under management (note that this is not the case for an adviser that gives advice only about U.S. Government securities, where there is an exemption from Federal registration but not from State registration). There are no advertising filing requirements in a State for securities or transactions that are exempt; or for federal covered securities. Since municipals are exempt securities, the Administrator cannot impose an advertising filing requirement on offerings of these securities.
Which statement is TRUE about re-registration of broker-dealers in the State? A. Broker-dealers are not required to re-register in the State B. Broker-dealers must re-register in the State annually, based upon their fiscal year end C. Broker-dealers must re-register in the State annually at calendar year end D. Broker-dealers must re-register in the State bi-annually at calendar year end
The best answer is C. Annual registration renewal in each State is required for broker-dealers, investment advisers, and their agents. This occurs at December 31st of each year, so it is based on calendar year end - not a registrant's fiscal year end.
Which statement is TRUE regarding delivery of the "Brochure" to existing customers, under the Investment Advisers Act of 1940? A. The brochure, if revised, must be sent to customers quarterly B. The brochure, if revised, must be sent to customers semi-annually C. The brochure, if revised, must be sent to customers annually D. The brochure, if revised, must be sent to customers bi-annually
The best answer is C. Existing customers must be sent an updated "Brochure" at least annually if there are material changes. As an alternative, the customer can be sent the "Summary of Material Changes" section of the current brochure along with the offer of the revised Brochure.
Which statement is TRUE? A. The Administrator can require the filing of Internet Communications in electronic form only B. The Administrator can require the filing of Internet Communications in printed form only C. The Administrator can require the filing of Internet Communications in either electronic or printed form D. The Administrator does not have the power to require the filing of Internet Communications
The best answer is C. The Administrator can require the filing of advertising in any format - printed or electronic. Which method is used depends on the level of computerization of that State.
Under the Investment Advisers Act of 1940, if an investment adviser wishes to renew an advisory contract which will allow it to start taking prepaid advisory fees of $1,200 or more, 6 months in advance of rendering services, which of the following statements is TRUE? A. A revised "Brochure" must be sent to each of the adviser's customers B. The adviser's customers must be given a "Brochure" at least 48 hours prior to contract renewal; and then decide during that time frame whether or not they wish to accept the terms of the new contract. C. The investment adviser must file a Form ADV 2A and balance sheet with the SEC promptly, and must make the revised "Brochure" available to its customers D. The investment adviser is prohibited from changing the terms of the advisory contract.
The best answer is C. If the adviser wishes to renew an advisory contract with a customer where the terms of the contract are changed, this requires that a revised "Brochure" be given to that customer. However, if, for the first time, the adviser will accept $1,200 or more of prepaid fees 6 months or more in advance of services rendered, then the adviser must file an ADV Part 2A with an audited balance sheet promptly.
Which statement is TRUE about a leveraged ETF? A. Leveraged ETFs are a suitable investment for a client with a low risk tolerance level because they are index funds B. Leveraged ETFs could put the customer in the position of losing more than the amount invested C. Leveraged ETFs are highly liquid and can be readily traded in the market D. Leveraged ETFs are assessable securities where the holder can receive a capital call from the sponsor to put up additional funds
The best answer is C. Leveraged ETFs are exchange-traded index funds that use leverage (borrowing) to magnify the velocity of price movements. For example, a 3X leveraged ETF would move 3 times as fast as the reference index. Therefore, the client must have a high risk tolerance, making Choice A incorrect. While leveraged ETFs are designed to move faster than the market, the maximum loss is the amount invested, making Choice B incorrect. ETFs are highly liquid and are actively traded, making Choice C correct. Finally, the sponsor of the ETF has no right to demand additional capital from the ETF holder. The right of assessability only exists in partnership units, where the partners can be assessed to put up more capital.
Which statement is TRUE regarding registration requirements under the Uniform Securities Act? A. Minimum net capital can be required for agents, broker-dealers and investment advisers B. Minimum net capital and a surety bond can be required for agents, broker-dealers and investment advisers C. Minimum net capital can be required for broker-dealers and investment advisers D. Minimum net capital and an examination can be required for agents, broker-dealers and investment advisers
The best answer is C. Minimum net capital can be required for registration as a broker-dealer or investment adviser; it is not required for registration as an agent of a broker-dealer or investment adviser. Surety bond coverage can be required for registration of broker-dealers, their agents, and investment advisers. Note that there is no surety bond requirement for investment adviser representative registration.
For a sale of securities to be exempt under Regulation D under the Securities Act of 1933, there must be a limit on the: A. dollar amount of the offering B. number of States where the security is offered C. number of non-accredited investors to whom the security is offered D. number of accredited investors to whom the security is offered
The best answer is C. Regulation D under the Securities Act of 1933 gives a "private placement" exemption for securities that are sold to no more than 35 "non-accredited" investors. There is no limit on the dollar amount sold; on the number of States in which the issue is sold; or on the number of accredited investors (wealthy investors) to whom the issue is sold.
Under ERISA Rule 404(c), a 401(k) plan fiduciary would be relieved from liability resulting from the plan participant's investment directions: A. under no circumstances B. if the investment choices offered are imprudently selected C. if the plan offers investment options consisting of a Fixed Income Fund, Growth Fund and a Capital Preservation Fund D. if the plan offers investment options consisting of a Government Bond Fund, Fixed Income Fund, Money Market Fund and a Capital Preservation Fund
The best answer is C. Rule 404(c) permits a 401(k) plan to offer investment options to its participants. It requires that the plan sponsor offer at least 3 investment alternatives that are diversified; that have materially different risk and return characteristics; and that when combined with each other, tend to minimize risk through diversification (e.g., an equity fund, a fixed income fund, and a capital preservation fund). This is the case with Choice C. Choice D does not offer an equity fund.
Under the Uniform Securities Act, for an agent to share in the gains and losses of a customer account, which statements are TRUE? I The customer must agree to the arrangement in writing II The broker-dealer must agree to the arrangement in writing III The Administrator must agree to the arrangement in writing IV Sharing is permitted only in direct proportion to capital contributed to the account A. I and IV only B. II and III only C. I, II, and IV D. I, II, III, IV
The best answer is C. Sharing in the gain or loss in a customer account by an agent is prohibited unless: •the customer agrees in writing (this is evidenced by the customer signing a joint account agreement with the agent); •the broker-dealer approves of the account in advance; and •any sharing is in direct proportion to capital contributed. There is no requirement for the Administrator's approval of the account.
Under SEC Release IA-1092, which of the following are specifically included under the definition of an "investment adviser"? I Pension consultants II Advisers to entertainers III Advisers to athletes IV Advisers to issuers A. I only B. II and III only C. I, II, III D. I, II, III, IV
The best answer is C. Specifically included in the definition of an investment adviser that must register with the SEC under IA-1092 are pension consultants and advisers to entertainers and athletes. Advisers to issuers are not specifically included - but they would be required to register with the SEC if they met the 3-prong test.
Which portfolio allocation is most likely to have the highest "beta?" A. 10% stocks / 10% bonds / 80% money market instruments B. 10% stocks / 90% bonds C. 90% stocks / 10% bonds D. 10% stocks / 50% bonds / 40% money market instruments
The best answer is C. Stocks exhibit greater price volatility than either bonds or money market instruments, so the portfolio most heavily weighted in stocks would have the highest "beta" (price volatility measured against the market as a whole).
The Administrator can, by order, deny an exemption from registration, to which of the following? I General Obligation bonds of another State that are being offered only in that State II An executor selling stock held by an estate III Corporate bonds being sold to a bank trust department A. I only B. II only C. II and III D. I, II, III
The best answer is C. The Administrator cannot deny the registration in a State of an exempt security, such as a U.S. Government bond or a municipal bond. Note that the Uniform Securities Act requires the persons selling these securities in the State to be registered. On the other hand, the Administrator can modify the definition of an exempt transaction; or can deny an exempt transaction. For example, an "isolated non-issuer transaction" is exempt under State law, but each Administrator actually defines what this is (for example, maybe it is only 1 permitted transaction in a year; or maybe it is fewer than 5 permitted transactions in a year - the Administrator sets the requirements for the exemption).
A customer invests $100,000 in an Equity Indexed Annuity contract tied to the Standard and Poor's 500 Index. The contract has a 90% participation rate and a 15% cap. Interest is credited to the contract under the annual reset method and is compounded annually. The performance of the Standard and Poor's Index over the next 3 years is: Year 1: + 20% Year 2: - 4.5% Year 3: + 10% At the end of year 3, the customer will have a principal balance of: A. $120,807 B. $123,959 C. $125,350 D. $132,000
The best answer is C. The first year increase in the index of 20% with a 90% participation means that 18% would be credited to the account - however, because of the 15% cap, this is the first year credit, so the $100,000 balance is worth $115,000 after the first year. Because this is an insurance product, the customer does not bear investment risk, and the "floor" rate is 0% (unless the product offers a higher floor rate). Because of the 0% floor, the balance stays at $115,000 as of the end of year 2. In the 3rd year, the 90% participation in the 10% increase means that the account will be credited with a 9% increase against the $115,000 value = $115,000 x 1.09 = $125,350.
Which of the following investments has a known long-term internal rate of return? A. Low grade 7% corporate bond B. Investment grade 5% municipal bond C. Treasury STRIP D. GNMA Pass-Through Certificate
The best answer is C. The internal rate of return is the implicit yield to maturity that an investment returns. Securities that have a fixed coupon rate make periodic payments to the holder. These must be reinvested at the same yield as the investment is returning over its life, in order for the yield not to be affected by "reinvestment risk." For example, if a person buys a 10% 20-year bond at par, and over the life of the investment, interest rates are declining, then the rate of return earned on the reinvested interest payments will decline below the 10% that the security is yielding. The compounded rate of return on the investment will fall below 10% in such a case. If one buys a 20-year zero-coupon bond (a Treasury STRIP is "stripped" of coupons and is a zero-coupon obligation), the implicit yield of the investment is "locked in" at purchase and is not affected by reinvestment risk since periodic interest payments are not being made. The interest rate that discounts the redemption price (Par) to the discounted purchase price is the implicit yield of the investment; and is the same as the internal rate of return of the investment.
To compute the interest rate that will discount the present value of cash flows to be received in upcoming years to "0," the method to be used is called: A. Black-Scholes B. Monte Carlo Simulation C. Internal Rate of Return D. Macaulay Duration
The best answer is C. The present value method that finds the interest rate that discounts the value of cash flows to be received in the future to "0" is the Internal Rate of Return. This is the true yield to maturity of an investment. Black-Scholes is a sophisticated options pricing model. Monte Carlo simulation tests expected outcomes by varying the assumptions used to find best/worst case scenarios for likely investment outcomes; and Macaulay duration measures bond price volatility as market interest rates move.
The "Present Value" of a fixed income security is based on the: A. original price paid by the investor B. sum of all expected future payments to be made by the issuer of the security C. discounting of all expected future payments to be made by the issuer of the security D. current price of the security in the market
The best answer is C. The present value of a fixed income security takes all of the future payments to be made by that security and discounts them at the current market rate of interest (compounded yearly) to arrive at the security's "present value." This is the actual market price of the security at that moment.
Under SEC Release IA-1092, which of the following are considered to be compensation to an investment adviser? I Prepaid advisory fees that will be refunded in part if the contract is canceled II Hourly advisory fees III Fixed advisory fees IV Commissions received on transactions that result from the implementation of a financial plan created for "free" by the adviser A. II and III only B. I and III only C. II and IV only D. I, II, III, IV
The best answer is D. "Compensation" to an investment adviser can basically be received in any form - it includes fixed fees, hourly fees, fees based upon assets under management, prepaid fees; and any compensation received from anyone else in connection with that investment advice.
Which of the following would be defined as an investment adviser under the Uniform Securities Act? A. U.S. Trust Corp. B. Washington Savings and Loan Corp. C. AIM Investment Advisers, a firm with $400,000,000,000 of assets under management D. Greenwich Investment Counsel, a firm that offers research and asset allocation services to accredited investors
The best answer is D. Any deposit-taking institution is excluded from the definition of an investment adviser under the Uniform Securities Act (USA), making Choice A and Choice B incorrect. Federal covered advisers are also excluded from the definition of an investment adviser under USA. Since any adviser with $100,000,000 of assets or more under management is a Federal covered adviser, Choice C is incorrect as well. There is no exclusion from the definition of an investment adviser for advisers that only deal with accredited (wealthy) investors. Note, however, that there is an exemption available for investment advisers that have no business location in the State and that only deal with other advisers or with institutions. This exemption is not available to advisers that deal with wealthy individuals, however.
Which of the following statements are TRUE when comparing a C corporation to an S corporation? I C corporations give the shareholders unlimited liability II S corporations give the shareholders limited liability III Income in a C corporation is taxable at the shareholder level only IV Income in an S corporation is taxable at the shareholder level only A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. Both C and S corporations give limited liability. C corporations are taxable entities - net income is computed at the corporate level and taxes are paid on this income. S corporations are "flow through" vehicles, similar to partnerships. Any net income or loss "flows through" directly onto the shareholders' tax returns and is not taxed at the corporate level. Taxation only occurs at the investor level.
An Investment Adviser (IA) hires a 3rd party to solicit new investors for the IA. The 3rd party is an independent contractor who will be paid a referral fee for each new client. Under NASAA and SEC rules, which statement is TRUE? A. The solicitor is not required to be registered as an Investment Adviser Representative because he or she is not an employee of the Investment Adviser B. The solicitor is not required to be registered as an Investment Adviser Representative because he or she is receiving referral fees only C. The solicitor must be registered as an Investment Adviser Representative but is under no obligation to disclose the nature of the relationship between the solicitor and the Investment Adviser D. The solicitor must be registered as an Investment Adviser Representative and is obligated to disclose the nature of the relationship between the solicitor and the Investment Adviser
The best answer is D. Both NASAA and the SEC require that solicitors for Investment Advisers be registered as Investment Adviser Representatives. The registration of IARs occurs in the State for both IARs of State-registered and Federal covered advisers. It makes no difference if the solicitor is an employee or independent contractor - he or she must be registered. Furthermore, the solicitor must give any potential client a copy of the IA Brochure and a copy of the "Solicitor's Brochure" which details the nature of the relationship between the IA and the solicitor and the additional fees that will be paid to the solicitor. The client must sign an acknowledgement of receipt of both the IA Brochure and the Solicitor's Brochure.
Fixed income portfolios are subject to which of the following risks? I Credit risk II Purchasing power risk III Opportunity cost IV Interest rate risk A. I and IV B. II and III C. I, II, IV D. I, II, III, IV
The best answer is D. Fixed income portfolios are subject to all of the risks listed. Credit risk is the risk that the issuer will default. Purchasing power risk is the risk of inflation, which will erode the value of the fixed income security. Opportunity cost is the risk that rates rise, and the existing investment yields less than current market rates. Interest rate risk is the risk that if interest rates rise, the price of the fixed income security will fall.
Which records MUST be retained in a state-registered investment adviser's principal office? I Financial reports II Customer securities positions III Investment adviser's bank statements IV Records of customer purchases and sales orders A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. NASAA rules require that State-registered advisers keep, in their principal office, records of: •customer purchases and sales; and •customer securities positions (account statements). The rule requires that the records be kept for 5 years, with the prior 2 years immediately accessible. (Also note that the SEC rule for these records, which applies to broker-dealers and Federal covered advisers, is that these records be kept for 6 years. This rule would not apply to State-registered advisers.) NASAA has an extensive list of other records that advisers must keep, but does not specify the location where they should be kept or the time period they should be kept - so this is left to each State Administrator.
A father gives a $22,000 gift of securities to his son; and a $22,000 gift of securities to his daughter. Which statement is TRUE? A. The father has no gift tax liability B. The father has gift tax liability on the gift to the son C. The father has gift tax liability on the gift to the daughter D. The father has gift tax liability on both gifts
The best answer is D. The first $15,000 of a gift (other than to a spouse) is excluded from tax in 2018. Any amount above this is subject to gift tax, to be paid by the donor. Since the gift to both the son and the daughter was valued at $22,000 each, the amount above the gift limit exclusion is subject to gift tax, paid by the donor (the father).
An investment adviser has managed a portfolio that has averaged an annual total 12% rate of return. Of the 12% total return, 3% was from dividends and interest earned and 9% was from capital gains on appreciated securities positions sold. During the investment time horizon, inflation averaged 3% per year. The investment adviser's real "total" return is: A. 0% B. 3% C. 6% D. 9%
The best answer is D. The investment adviser produced an annualized total return of 12%, but because the inflation rate over that time period was 3%, the real rate of return was 12% - 3% = 9%.
Under the Investment Advisers Act of 1940, to determine if a person is "in the business" of giving investment advice, which of the following statements are TRUE? I The individual regularly gives advice on securities II The advice is rendered about securities III The individual receives compensation for giving advice on securities A. I only B. I and III only C. II and III only D. I, II, III
The best answer is D. To be "in the business" of giving investment advice, this must be a regular activity of the firm or person; and the advice must be rendered about securities; and that person must be compensated for giving such advice.
An investment adviser is selling a Wrap Account where the assets are held in custody of the advisory firm. The Wrap Fee Brochure must include: I information on investment advisory fees II information on participation or interest in client transactions III the balance sheet of the investment adviser A. I only B. III only C. I and III D. I, II, III
The best answer is D. Under the Investment Advisers Act of 1940, the investment adviser brochure must be delivered to clients, at or prior to, entering into a contract to provide advisory services. It details, among other things, the fees charged and conflicts of interest (Choices I and II). A copy of the investment adviser's balance sheet is included in the brochure if the adviser will take prepaid advisory fees of $1,200 or more, 6 months or more in advance of rendering services.
When comparing the Alternative Minimum Tax calculation to the Regular income tax calculation, which deductions are NOT permitted in the AMT calculation but are permitted in the Regular income tax calculation? A. Personal exemption B. State and local tax deduction C. Miscellaneous itemized deductions D. All of the above
The best answer is D. When calculating the Alternative Minimum Tax, aside from adding back "tax preferences," many of the basic deductions permitted when calculating Regular income tax are not allowed, increasing the amount of AMT income that is subject to tax. When calculating AMT, there is no deduction for the personal exemption; no deduction for state and local taxes paid (including property taxes paid); no deduction for miscellaneous items such as tax preparation fees; and no standard deduction; among other items.
