Series 66: Comprehensive Question Review

Which of the following is NOT required to be contained in written disclosure documents provided to clients by solicitors under the 1940 Act? [A] The name of the broker/dealer firm that will be executing trades for the account [B] Details as to how the solicitor will be compensated [C] The name of the IA firm placed in charge of providing advisory services for the account [D] Details as to how the IA firm and the solicitor are affiliated

A Each of the items listed must be provided in the details of the written disclosure document provided by the solicitor to clients other than the name of the broker/dealer firm that will be executing trades for the account

Under the Investment Company Act of 1940, which of the following would the shareholders in a mutual fund not have a right to? [A] receive notice from the investment advisor of the changes in the fund's portfolio as they occur [B] elect the fund's Board of Directors [C] approve any major change in the fund's investment policy [D] approve the contract of the investment advisor with the fund

A Shareholders would NOT be advised of changes in the funds portfolio as they OCCUR. That would impossible for the fund to disseminate on an on-going basis

According to Federal Regulations, the SEC would have to issue an exemptive order before a mutual fund may [A] Adopt a 12b-1 plan. [B] Change its investment objectives [C] Employ as an investment adviser a person who has been convicted within the past 10 years of a crime involving the securities business. [D] Do any of the above

C The SEC would have to issue an exemptive order before a mutual fund may employ a person as an investment adviser who has been convicted within the past 10 years of a crime involving the securities business.

Investment Companies are regulated under the Investment Company Act of 1940. According to the 1940 Act which two of the following are true: I. Open-end investment companies are also called Mutual Funds. II. The 1940 Act regulates an investment company that decides to invest in another investment company. III. Investment companies are not allowed to have custodians carry the assets of the investment company. IV. The 1940 Act regulates the minimum return that must be provided to investors in an investment company investment. [A] I & II [B] II & IV [C] I & III [D] III & IV

A The Investment Company Act of 1940 regulates the investment of one investment company in another investment company, states that Open-end investment companies are Mutual Funds and that investment companies employ custodians to hold company assets. The 1940 does NOT regulate or have any minimum requirement for the return earned on an investment company investment.

Under the Uniform Securities Act when an Agent represents an issuer, the definition has exclusions for transactions in some exempt securities. These exemptions include all of the following except? [A] U. S. Government Securities transactions [B] Limited Partnership transactions [C] Municipal Bond transactions [D] Investment Contract transactions

B An individual that represents an issuer in the sale of a limited partnership is considered an agent. All other choices are excluded from the USA's definition of an agent.

Private Placements under the Uniform State Securities Act: [A] Are not governed but are covered under the 1933 Act. [B] Have an exemption that is narrower in scope than the Federal exemption. [C] State that if you qualify under the 1933 Act, the transaction is automatically qualified in every state. [D] Are not governed but are covered by the Securities and Exchange Act of 1934.

B The exemption under the Uniform Securities Act is limited to no more than 10 persons other than institutional investors. The exemptions under the Securities Act of 1933 and the SEC Regulation D permits an unlimited number of accredited investors.

You are computing the anticipated portfolio return on a client's portfolio. The formula that you are using incorporates the cash inflows and outflows in the portfolio. Which return calculation are you most likely using? [A] The expected return calculation [B] The risk-adjusted return calculation [C] The internal rate of return calculation [D] The holding period return calculation

C The Internal Rate of Return (IRR) is the interest rate that will discount future cash inflows and outflows of an investment to its present value (i.e. - the market price). For example, the yield-to-maturity (or basis) of bonds discounts all of the bond's cash flows to its present value (the current market price).

What are the two primary differences between an open-end investment company and a closed-end investment company? I. Open-end investment companies have a fixed capitalization, while the capitalization of a closed-end investment company is constantly changing. II. Open-end investment companies have a capitalization that is constantly changing, while the capitalization of a closed-end investment company is fixed. III. Open-end investment companies offer redeemable shares, while closed-end investment companies offer shares that sell in the primary market, but then trade in the listed or OTC markets. IV. Open-end investment companies offer shares that sell in the primary market, but then trade in the listed or OTC markets, while closed-end investment companies offer redeemable shares. [A] I and III [B] I and IV [C] II and III [D] II and IV

C The primary difference between open-end and closed-end investment companies is capitalization. Open-end investment companies are just that, open-ended. The capitalization is constantly changing as they sell and redeem shares. Open-end investment companies sell shares directly to the public, who must redeem with the issuer at a later date. Closed-end investment companies are just that, closed-ended. The capitalization is fixed. There is an initial public offering of shares, after which shares trade in the listed market or over-the-counter. When an investor is ready to sell, they simply do so in the secondary market. There is no redemption with closed-end shares.

Paula bought her home 30 years ago for $75,000 and decides to sell her home this year for $400,000. She will have a taxable gain of? [A] $0 [B] $325,000 [C] $250,000 [D] $75,000

D Paula qualifies for the $250,000 deduction from gains on the sale of her home. $400,000 Sale Price $-75,000 Original Cost $325,000 Adjusted Basis -$250,000 Deduction $ 75,000 Taxable Gain

A broker/dealer, with its place of business being in New York, places an ad in the Wall Street Journal. The Journal is freely circulated in all fifty states. Which of the following is true? [A] An offer is being made in New York. [B] An offer is being made in every state but New York. [C] An offer is being made in all fifty states. [D] No offer is being made.

D Since 2/3rds of the offering is outside of NY, it would not be an offer.

When an Investment Advisor is considering the purchase of debt securities, they must evaluate which of the following types of risks? I. Credit Risk II. Purchasing Power Risk III. Legislative Risk IV. Interest Rate Risk [A] I only [B] I and IV [C] II, III, IV [D] I, II, III, IV

D When considering the purchase of debt securities, all of the types of risks listed should be evaluated.

The Securities Exchange Act of 1934 regulates which of the following? I. securities offerings of companies II. periodic filings of reporting companies III. broker/dealers and their associated persons IV. transfer agents [A] I, II [B] I, IV [C] III, IV [D] II, III, IV

D In choice I 'securities offerings' are regulated under the Securities Act of 1933. Choice II, III and IV are regulated under the Securities Exchange Act of 1934, which regulates the secondary market.

According to the Uniform Securities Act, when can an agent offer to sell securities in a pending underwriting in a state? [A] never [B] only if the agent discloses that the securities have not yet been registered [C] only if the agent acquires a written statement from the customer acknowledging the unregistered status of the securities offered [D] only if a registration statement has been filed with the state and the SEC

A While underwritings are being put together (pending), those securities can never be sold until such time as registration becomes effective.

When calculating the yield to call, which of the following is typically used? [A] The bond's next available call date [B] A call date that is mid-way between the first call date and the maturity date on the bond [C] The bond's final maturity date [D] A call date specified in the bond's indenture

A Yield to call is typically calculated to the bond's next available call date

Under the Investment Advisors Act of 1940, which of the following persons would be considered to be in the business of providing "investment advice": [A] An individual is paid for giving advice about purchasing futures contracts. [B] A firm which is paid to render advice only to banks regarding stocks. [C] A firm which is paid to advise individuals about purchasing precious metals. [D] An individual who regularly gives advice about purchasing stocks but receives no compensation for it.

B According to SEC Release IA-1092, the definition of an Investment Advisor is a person who is "in the business" of giving advice about securities and is required to register. Specifically in this question the Bank is considered a client.

The Investment Company Act of 1940 regulates which of the following? I. investment trusts II. real estate investment trusts III. separate accounts established by insurance IV. companies to run securities based on variable annuities [A] I, II [B] I, III [C] II, III [D] I, II, III

B Real Estate Investment Trusts are simply a trust and are NOT considered to be an Investment Company, whereas Investment Trust and separate accounts of Variable Annuities are considered to be Investment Companies and would be regulated under the Investment Company Act of 1940.

Which of the following statements are true concerning the enforcement of the Investment Advisors Act of 1940: I. The state court in which the defendant lives or has a primary place of business has primary jurisdiction in both criminal and civil cases brought under the act. II. The SEC has the power to subpoena witnesses and records, collect evidence, and question witnesses under oath in connection with the conduct of its investigation under this act. III. Anyone wishing to appeal an order of the SEC under any act may do so by filing such appeal in the U.S. Court of Appeals. [A] I and II [B] I and III [C] II and III [D] All

C The SEC has equal jurisdiction over advisors and if the SEC issues an order against an advisor, and the advisor wants to appeal, an appeal may be filed with the U.S. Court of Appeals.

Which of the following statements are true? I. Strategic portfolio management is the determination of the asset allocation percentages among differing asset classes in the portfolio II. Strategic portfolio management is the determination of the permitted variance within each asset allocation percentage assigned to a specific asset class III. Tactical portfolio management is the determination of the asset allocation percentages among differing asset classes in the portfolio IV. Tactical portfolio management is the determination of the permitted variance within each asset allocation percentage assigned to a specific asset class [A] I and III [B] I and II [C] II and III [D] I and IV

D Strategic portfolio management generally occurs when assets are kept at assigned balances in differing asset classes. Tactical portfolio management is when a portfolio has targeted balances but those balances can vary based on market performance in different sectors of the portfolio.

Of the following types of risk, which most dramatically affects a zero-coupon US Treasury Bond with a 20-year maturity? [A] Market risk [B] Legislative risk [C] Liquidity risk [D] Inflationary risk

D The risk listed that will have the most dramatic affect on a zero coupon US Treasury Bond will be inflationary risk. This will have the biggest affect on the market price of such a bond. Typically US Treasury Securities will have little exposure to market risk, legislative risk, and liquidity risk.

According to the Investment Advisors Act of 1940, the factors that are used to determine if a person is engaged in the business of providing investment advice would include which of the following? I. how often the advice is provided II. whether compensation for providing investment advice represents a substantial part of the person's business income III. whether the person advertises the availability of investment advisory services [A] III only [B] I, II [C] I, III [D] I, II, III

D All of the statements would apply when determining if a person is engaged in the business of providing advice.

The bid price of a security is the price that a [A] customer will receive when selling a security to a market maker. [B] market maker will receive to sell a security to a customer. [C] customer will pay when buying a security from a market maker. [D] market maker will receive from another market maker in a "wholesale" trade.

A The bid price is the price a customer will receive when selling to a market maker or the price at which a market maker will buy from a customer.

Rudy Smith received 100 shares of ABC stock as a gift from his Grandma. Grandma originally paid $20 per share for the stock 5 years ago. On the day Rudy received the stock gift, the market value was $30 per share. Grandma passes away a few years later and gives Rudy an additional 200 shares in her will. The market price at the date of death was $50 per share. Six months later, the value of the stock doubled to $100 per share and Rudy sold all of the shares of stock. What is the tax consequence to Rudy? [A] $18,000 Long term Gain [B] $8,000 Long term Gain and $10,000 Short term Gain [C] $16,000 Long term gain [D] $7,000 Long term Gain and $10,000 Short term Gain

A The inheritance needs to be calculated separately from the gift. Gift: 100 shares of stock with an original cost basis of $20 per share and a sale price of $100 per share. 100 shares x 20 cost basis for grandma = $2,000 100 shares x 100 per share at time of sale = $10,000 $10,000 - 2,000 = $8,000 gain The gain is long-term because grandma held the shares for over 1 year (5 years ago). Inheritance: 200 shares of stock with a stepped-up cost basis of $50 per share at the time of death of Grandma that are sold for $100 per share. 200 shares x 50 per share price at time of grandma's death = $10,000 200 shares x 100 per share at the time of sale = $20,000 $20,000 sale - $10,000 cost basis = $10,000 gain The gain is also long-term because inherited stock always has a long-term holding period. Rudy has a long-term gain of $18,000 total.

According to the Uniform Securities Act, which of the following is a federal covered security? [A] Pennsylvania state bonds offered outside of Pennsylvania [B] A fixed annuity [C] A futures contract [D] Securities issued by a non-profit organization

A Under the definition of federal covered security municipal bonds (Pennsylvania) offered outside the state of issue are included whereas the other choices are NOT federal covered.

All of the following would be factors that would be used to determine if a common stock was classified as a Value Stock EXCEPT? [A] The current ratio of the common stock. [B] The stock's current P/E ratio. [C] The price of stock versus the sales of the company. [D] The stock's price to book value.

A Value investors focus on value stocks which are undervalued companies with low price/earning ratios, low price/book ratios and good price/sales reports. The Current ratio is generally not considered when looking at Value Stock indicators.

In which of the following scenarios would an access person, a director, officer, partner, or supervised person with access to non-public information, be exempt from reporting their personal securities holdings and transactions? [A] The access person is a limited partner in a hedge fund. [B] The access person has a self-directed Traditional IRA. [C] The access person is invested in the company's 401(k) plan. [D] The access person has a joint account with their spouse.

A An exception from reporting requirements exists when an access person's securities are held in an account over which the access person has "no direct or indirect influence or control". As a limited partner in a hedge fund, the access person would not have direct or indirect influence or control. In each of the other scenarios, the access person would have direct or indirect control over investments held within the portfolios or investment vehicles listed.

A federal covered advisor is properly registered under the Investment Advisors Act of 1940. The firm plans to advertise to the public in a certain state in order to attempt to get more business. Each of the following are requirements for advertisements under the Investment Advisor's Act of 1940 EXCEPT: [A] The federal covered advisor is prohibited from using advertising unless it has previously submitted the advertising to the SEC for approval. [B] The federal covered advisor is permitted to use graphs and formulas in their advertising, but must disclose that such graphs and formulas do not, by themselves, determine securities that should be purchased or sold. [C] The federal covered advisor is prohibited from using testimonials of celebrities in their advertising. [D] The federal covered advisor is permitted to offer "free" reports, but only is permitted to do so if the offer is actually free without condition.

A Each of the items listed is true except for the statement regarding submitting advertising to the SEC prior to use. This is a false statement. Federal covered advisors must abide by regulations created which cover advertising, but do not have to submit all advertising to the SEC prior to use.

A small investment company is owned by its own employees. The employees of the investment company have decided to focus on marketing and decide to hire an investment advisor with a good reputation to manage the investment company's portfolio. The investment manager charges a set percentage of the increased value in the portfolio on a semi-annual basis. The contract entered into between the IA and the investment company would be acceptable if: [A] The investment company has at least $1,000,000 under management or a net worth of $2,100,000. [B] The employees of the investment company are all qualified clients under the 1940 Act. [C] The investment advisor becomes an employee of the investment company and receives a salary that would be equal to the IA's required set percentage. [D] The investment company would not be allowed to employ any outside investment advisor.

A In order for an Investment Advisor to charge a performance based fee to a client, the client would have to be a Qualified Client. This would be a natural person or company that has at least $1,000,000 under management or has a net worth of more than $2,100,000 (previously $2,000,000).

Which of the following accurately describes an investment advisory firm registered under the Investment Advisors Act of 1940? [A] This would be any investment advisor that operates within the boundaries of the United States. [B] This would always describe a Federal Covered Advisor. [C] This would be any investment advisor that solely gives advice on U.S. Government Securities such as T-Bills. [D] This would always describe a Broker/Dealer.

B An investment advisory firm registered under the Investment Advisors Act of 1940 would meet the definition of a Federal Covered Advisor under the 1940 Act and the Uniform Securities Act. Just because an investment advisory firm operates within the US, it does not mean that the firm would have to register under the 1940 Act. Firms may only be required to register at the State level. A firm that solely gives advice on U.S. Government Securities would qualify for an exemption and would not have to register under the 1940 Act. Broker/dealer firms effect trades for clients and work on commissions. This differs from the function of an investment advisory firm. So though a firm can be both a broker/dealer and investment advisor, an investment advisory firm would not "always" be a broker/dealer firm.

If an investor primarily invests in FDIC Certificates of Deposit and Treasury Bills, which of the following are likely? I. The investor likely has certain income needs related to investment. II. The investor likely has no need for income related to investment. III. The investor likely is willing to accept a sizeable amount of risk in relation to investments. IV. The investor is likely unwilling to accept a sizeable amount of risk in relation to investments. [A] I and III only [B] I and IV only [C] II and III only [D] II and IV only

B Here, investments are being made in products which may provide a minimal amount of interest income which would be suitable for someone with modest income needs. If the investor had no need for income related to investment, there are other products which would be more suitable. Also, the investor is likely averse to risk, being that the investor primarily invests in very safe products which are either FDIC- insured or backed by the US Government.

Dylan has purchased an equity indexed annuity which has a participation rate of 75%. It is indexed to the S&P 500, which rose 5% this year, from 2,000 points up to 2,100 points. How will Dylan's equity indexed annuity be affected? [A] Dylan will see a 1.25% increase in the value of his equity indexed annuity. [B] Dylan will see a 3.75% increase in the value of his equity indexed annuity. [C] Dylan will see a 25% increase in the value of his equity indexed annuity. [D] Dylan will see a 75% increase in the value of his equity indexed annuity.

B If an investor has a participation rate of 75% of gains in an equity indexed annuity, the investor can expect to participate in 75% of the amount by which the index appreciated. Here, the S&P 500 rose by 5%, so Dylan should participate in 75% of that increase. This will end up being 3.75% (0.05 x .75 = 0.0375 or 3.75%).

Joe recently purchased a Put option on ABC common stock. If Joe decides to exercise the Put option he would: [A] Buy 100 shares of ABC common stock [B] Sell 100 shares of ABC common stock [C] Be closing out his position with an offsetting transaction [D] Become of owner of 100 shares of ABC common stock

B When an investor Buys a Put option they are in a position where they have the right to "Sell" 100 shares of the underlying stock if they decide to exercise the Put option.

While employed, Sally purchased shares of a mutual fund with a certain investment objective. Sally has decided to retire this year, and she wants to change the investment objective of her mutual fund investments. When Sally goes to the investment company to change investment objective, which of the following fees would Sally likely have to pay? [A] Purchase Fees [B] Exchange Fees [C] Redemption Fees [D] Sales Loads

B When an investor wishes to change investment objective and they hold mutual fund shares, they will most likely have to exchange those shares for shares with the desired investment objective. Most companies offering mutual funds will allow an investor to exchange their shares for shares of a different fund in the same family of funds. By doing this, investors would avoid purchase fees, redemption fees, and sales loads. However, there will likely be a fee associated with exchanging one type of fund for another, and these are called "Exchange Fees".

Under the Investment Advisors Act of 1940, investment advisors have a fiduciary duty to their clients. Such fiduciary duty would be considered to have been broken if the investment advisor did which of the following? [A] The IA has provided impersonal advice to each of his clients. [B] The IA included a Hedge Clause in the Investment Contract to lessen liability. [C] The IA took on the same positions as those recommend to his clients and made a disclosure as to that fact. [D] The IA recommended the firms' own products and made a disclosure as to that fact.

B An IA has a fiduciary duty to clients. That being said, the IA must act in the best interest of the client. A "hedge clause" is intended to limit the liability of the IA. Such a clause puts the best interests of the client behind the best interests of the IA, making it a breach in the IA's fiduciary duty to the client and thus not allowed.

Under the Securities Act of 1933 an "accredited" investor generally refers to wealthy investors who are eligible to invest in Reg D Private Placements and would include all of the following except: [A] Any Trust with total assets in excess of $5,000,000 [B] Registered Investment Advisors [C] Insurance Companies [D] Individuals with a $1,000,000 net worth

B Individuals with a $1,000,000 net worth would be included in the definition as well as Registered Investment Companies, any Trust with total assets of $5,000,000 and Insurance Companies. A Registered Investment Advisor, just by virtue of being an investment advisor would NOT automatically be considered "accredited".

Generally, the Investment Company Act of 1940 requires that: [A] not more than 40% of a mutual fund's Board of Directors be from inside the company. [B] not more than 60% of a mutual fund's Board of Directors be considered interested persons under the Act. [C] members of a mutual fund's Board of Directors must own shares of the fund. [D] an investment company may not invest in more than 100 different companies.

B The Investment Company Act of 1940 requires that at least 40% of the Board of Directors must be non-affiliated persons. That means that no more than 60% may be affiliates of the company.

According to the Investment Advisors Act of 1940, which of the following are excluded from the definition of "investment advisor"? I. an insurance company formed under the laws of the state II. a bank which is not an investment company a person whose investment advice relates solely to III. securities issued by the U.S. Government [A] I, II [B] I, III [C] II, III [D] I, II, III

C According to the Investment Advisors Act of 1940, an investment advisor is an individual who receives compensation for investment advice. The exclusions from this definition include any bank or bank holding company and any person whose advice or services is related only to U.S. Government securities. When looking at the exclusions from the definition of an Investment Advisor, according to the Investment Advisors Act of 1940, choices II and III are specifically listed. There is not an exclusion listed for an insurance company formed under the laws of a state.

Nick is a Federal Covered Investment Adviser and has decided to expand his business by bringing in new clients. Since he will have to hire more assistants and move to a larger office to attain his goal, he has decided that he will charge new clients a higher advisory fee and also require prepayment of fees. According to the Investment Advisers Act of 1940,Nick would be required to do all of the following except? [A] Provide the SEC with an amended Form ADV. [B] Update Part II of Form ADV. [C] Notify and obtain consensus approval from Nick's current clients before taking on new clients. [D] Notify the SEC and the State Administrator of the location of the new office.

C As a Federal Covered Adviser, Nick would be required to file an amended Form ADV with the SEC, update part II of Form ADV which is the Brochure Rule, and notify both the SEC and the State Administrator of the location of the new office. Nick would NOT be required to either notify or get approval from his current clients in order to take on new clients.

Any person whose principal business is providing financial services other than investment advice, would not be regarded as "being in business" of giving investment advice if, as part of the services, the person does which of the following: I. discusses in general terms the advisability of investing in securities pertaining to a discussion of economics of the role of investments in securities in a client's overall financial plan II. on rare and isolated instances, discusses the advisability of investing or analyses concerning specific Blue Chip securities III. on rare and isolated instances discusses the advisability of investing in or issues reports or analyses concerning categories of securities, for example: bonds, mutual funds, common stocks IV. provides market timing services [A] I, II [B] III, IV [C] I, II, III [D] I, II, III, IV

C Choices I, II and III would NOT be considered "in the business" since the information provided was either "general" or given on "rare and isolated instances." On the other hand, choice IV would give specific advice on market timing.

According to the Investment Advisors Act of 1940, a person who provides investment advice may be considered to be compensated for that advice if the person receives: I. a commission on securities transactions II. a commission on the sale of a life insurance policy III. a referral fee from a broker when the client of the person placed an order to purchase securities [A] III [B] I, II [C] II, III [D] I, II, III

C Commission on "securities transactions" (plural) would be considered acting as aa B/D or Agent, not an IA. If choice I had said "a commission for providing advice on a securities transaction" then we would include it the answer. If an individual provides investment advice and that investment advice includes a life insurance policy off of which the person receives compensation (commission, fee, etc), then that would fall under the compensation aspect of the investment adviser definition. As well, remember that there are many forms of life insurance that include a variable aspect, which would be a security for exam purposes.

According to the Uniform Securities Act, for an offering of a pre-organization certificates to be exempt which of the following conditions must be met? I. Commissions or other compensation may be received in connection with the offering. II. Advertisements are permitted. III. The offering cannot be made to more than 10 investors. [A] I only [B] II only [C] II and III [D] I, II, III

C Conditions which should be met to make a preorganization subscription exempt are as follows: subscribers cannot exceed 10, no commissions may be paid, and payments may only be made after the security is registered. Additionally, advertising is acceptable.

According to SEC Release IA-1092, what information must IAs disclose to clients? I. IAs must disclose that they take positions consistent with those recommended to clients II. IAs must disclose that they take positions inconsistent with those recommended to clients III. IAs must disclose any potential conflicts of interest IV. IAs must inform clients that by making full disclosure, it absolves them from adhering to certain provisions of the Investment Advisor's Act of 1940 [A] I and II only [B] I and III only [C] I, II, and III only [D] I, II, III and IV

C The Investment Advisors Act, including SEC Release IA-1092, specifies that IAs must make full disclosure including potential conflicts of interest as well as how they personally invest, whether it is consistent or inconsistent with the positions that are recommended to clients. SEC Release IA-1092 also states that disclosure does not relieve an Investment Adviser from abiding by all other provisions of the 1940 Act.According to the Investment Advisors Act of 1940, a person who provides investment advice may be considered to be compensated for that advice if the person receives:

According to the Securities Exchange Act of 1934, a person who becomes the beneficial owner of more than 5% of a security registered under the act must file a report [A] Promptly [B] Within 2 days [C] Within 10 days [D] Within 20 days

C The Securities Exchange Act of 1934 states that any person who becomes the owner of 5% or more of a security registered on a National Securities Exchange must file a report with the SEC within 10 days.

In working as an investment adviser (IA), you see opportunity to benefit your clients holding nondiscretionary accounts by gaining access to initial public offerings. In order to have more choices as to the initial public offerings, you decide to hire a person, who is unaffiliated with your firm and not registered with the SEC or in any state. This person charges a finder's fee of a quarter of the value of any investment secured through the use of the service. According to the Investment Advisor's Act of 1940, the person charging the finder's fee cannot accept such payments because [A] There has been no interest expressed in the investments by the nondiscretionary account holders. [B] The IA has gone outside of their normal broker-dealer research groups who could have performed the same services for less cost. [C] In soliciting information from the offering companies, the unaffiliated person would be then acting on behalf of the IA as a solicitor. [D] The unaffiliated person would be acting as a broker-dealer because they would be receiving commissions based on their finding the securities.

C The activities of non-registered persons working together with registered investment advisers are very limited. They are basically limited to clerical work which must be closely supervised by the IA. They are usually paid either hourly or a salary, but never on commission.

In which of the following scenarios is an investment advisory firm REQUIRED to register with the SEC as a Federal Covered Adviser? [A] The firm has clients in 13 states. [B] The firm only provides advice related to federal covered securities. [C] The firm manages over $150 million in assets within one state only. [D] In order to open an account at the firm, new clients must be accredited investors.

C The only item listed that would require the firm to register at the federal level would be managing $150 million in assets. An investment manager with over $100 million in assets under management has the option of registering with the states or with the SEC at the federal level. An investment manager with over $110 million in assets under management is required to register with the SEC at the federal level. The previous thresholds for these numbers were $25 million and $30 million. We recommend being familiar with all to ensure the capability of answering old questions in the real exam database. Having clients in multiple states, recommendations related to federal covered securities, and requiring new clients to be accredited are not, by themselves, grounds for the requirement of registration at the federal level.

Under SEC Release IA-1092, which of the following are included in the definition of an "investment advisor"? I. Pension consultants II. Advisors to entertainers III. Advisors to athletes IV. Advisors to issuers [A] I only [B] II and III only [C] I, II, III [D] I, II, III, IV

C Under SEC release IA-1092 all of the following are included in the definition: Financial Planners, Pension Consultants, Advisors to Athletes and\or Entertainers, Advisors to Employee Benefit Plans, and Advisors to Clients regarding the selection or retention of an Investment Manager; NOT Advisors to issuers (underwriters).

Harry wants to buy a stock. He calls his agent, Penelope, and asks that she enter the order at the market. Assuming that Harry gets an execution on his order, what price will Harry receive? [A] Harry's order will be executed at the quoted "last sale" price. [B] Harry's order will be executed at the opening price the following day. [C] Harry's order will be executed at the applicable "bid" price. [D] Harry's order will be executed at the applicable "ask" price.

D When customers enter market orders to buy, they can expect an execution at the applicable "ask" price. When customers enter market orders to sell, they can expect an execution at the applicable "bid" price. Last sale information and the following day's opening price would not be relevant to Harry's trade, since the market can move up or down from the time the order is entered and can move significantly from the time of entry until the following day's opening price.

A customer purchases 1 XYZ July 50 Call @5. The customer will breakeven at which of the following market prices for the underlying stock? [A] 5 [B] 45 [C] 50 [D] 55

D When doing breakeven questions, we have to follow one of two rules: 1. If you have a Call contract, we "Call Up", which means we ADD the premium to the strike price 2. If you have a Put contract, we "Put Down", which means we SUBTRACT the premium from the strike In this question, we had a Call option contract. Therefore, we take the strike price of 50 + the premium of 5 and that gives us the breakeven of 55.

When an investment advisor receives compensation in the form of a wrap fee, all of the following statements are correct EXCEPT: [A] The investment advisor must provide a written copy Schedule H of Form ADV to the client. [B] Wrap fees are allowed when the IA provides portfolio management services only. [C] Wrap fees are allowed when the IA provides advice with regard to the selection of other Investment advisors on behalf of the client. [D] Wrap fees always exist when the client is charged commissions per transaction executed.

D All choices except "D" represent circumstances where the client would receive a written disclosure statement based on Form ADV when compensation (wrap fee or management fee) is to be paid. When a client is simply charged commissions per transaction, executed that does not fall under a wrap fee program.

Investment advisors may be formed as: I. Partnerships II. Corporations III. Associations [A] I only [B] II only [C] III only [D] I, II, III

D Investment advisors may be formed as Partnerships, Corporations, and Associations. Therefore, the correct answer is "D".

If an investment adviser representative (IAR) is also a licensed insurance agent and recommends that a client sells his/her mutual fund shares to buy life insurance, all of the following disclosures should be made EXCEPT: [A] That the sale of mutual funds will be a taxable event [B] That the IAR will receive a commission on the insurance sale [C] That the investment advice will not be any less objective [D] That the recommendation to buy life insurance is not connected to the services of the advisory firm

D Remember that when an IAR sells both securities and non-securities related products, they continue to be regulated by the IA rules even when selling the non-securities products therefore the best answer is "D" since that advice would be connected to the advisory services.

The Securities Act of 1933: [A] established the Securities and Exchange Commission to regulate the securities business and to administer the Federal Securities Laws. [B] provided for the creation of FINRA to regulate the OTC securities market. [C] was passed primarily to provide a fair secondary market for securities. [D] was passed primarily to provide a full and fair disclosure regarding securities sold to the public in interstate commerce and through the mail.

D The primary purpose of the Securities Act of 1933 is to attempt to be sure that full and fair disclosure regarding securities being offered to public is made. The Securities Exchange Act of 1934 established the SEC and the Maloney Act Amendment established FINRA.

Under the Investment Advisors Act of 1940, which of the following statements is true regarding a firm's use of the term "investment counselor"? [A] A firm may use the term synonymously with investment advisor. [B] A firm may use the term if it also publishes lists of securities along with buy and sell recommendations. [C] The use of the term investment counsel is prohibited under the Act. [D] A firm may use the term only it if derives a substantial part of its business from providing continuous investment advice according to clients' individual needs.

D The term "Investment Counsel" may be used if a substantial part of the investment advisor's business consists of providing investment supervisory services, i.e. providing continuous advice according to clients' individual needs.

An investment advisory firm is set up to provide advice on Treasury Bills, Treasury Notes, and Treasury Bonds. This firm will not provide advice on any other securities. According to the regulations of the Uniform Securities Act, which of the following are true regarding this firm's registration requirements? [A] Because of the limited scope of the recommendations, the firm is not required to register as an investment advisor in the state. [B] Because of the fact that the firm will only give recommendations on US Government Securities, the firm is not required to register as an investment advisor in the state. [C] The firm would be required to register as an investment advisor, because there are never exemptions from the definition of an investment advisor under the Uniform Securities Act. [D] The firm would be required to register as an investment advisor, because under the Uniform Securities Act, advice related to any security would require registration.

D This firm would be required to register under the Uniform Securities Act. This is a key differentiation between the Investment Advisors Act of 1940, which provides an exemption for US Government Securities, and the Uniform Securities Act, which does NOT. Advice related to any security would require registration under the Uniform Securities Act. Exemptions do exist from the definition of an investment advisor under the Uniform Securities Act, but none of these exemptions apply in this case. Be mindful of absolute statements that include "never, always, etc".

Under the SEC Release IA-1092, which of the following would be required to register as an investment advisor? I. A certified Financial Planner who provides general financial planning for a fee. II.An attorney who manages the financial affairs of athletes for a fee. III. An accountant who manages the financial affairs of entertainers for a fee. IV. An economist who gives advice to pension plans for a fee on the outlook for the securities markets. [A] II and III only [B] I and IV only [C] II, III, IV [D] I, II, III, IV

D Under the SEC Release IA-1092, any persons that give advice with regard to securities and/or hold themselves out as offering such services would be deemed an investment advisor and would be required to register. Therefore, all of the listed options would be required to register

During the "pay-out" period of a variable annuity the units are referred to as [A] annuity units. [B] pay-in units. [C] accumulation units. [D] pay-out units.

A During the pay-out period of a variable annuity the units received by the investor are referred to as annuity units.

Which of the following investments is considered a derivative? I. Equity Options II. Real Estate Investment Trusts III. Commodity Futures IV. Mutual Funds [A] I and III [B] I and IV [C] II and III [D] II and IV

A Futures contracts and option contracts are both considered derivatives. They can be used to arbitrage but are not "only used" in arbitrage situations. Options are used for swaps and futures contracts would not be involved. An equity index consists of equity securities. Options on equities may be related to an equity index, but futures contracts would not be found on an equity index

Of the securities listed below, which would be considered the most vulnerable to interest rate risk? [A] Treasury bonds [B] T-Bills [C] Exchange listed common stocks [D] CD's

A Long term bonds are the most sensitive to changes in interest rates.

An investor has a broadly diversified portfolio of blue chip stocks. The use of index options to hedge the portfolio would reduce: [A] systematic risk [B] non-systematic risk [C] interest rate risk [D] timing risk

A Systematic Risk is also known as Market Risk and the use of index Put options on a portfolio of securities would reduce the systematic or market risk of a portfolio. Remember the best downside protection on stock or on a portfolio of stocks would be through the use of Buying Put options on the stock or indexes that closely mirrors the portfolio of stocks.

Suzie is very excited because she will be retiring in the next few months. Upon her retirement she plans to spend at least a year traveling and has saved the money she will need for her travel. She also has a retirement portfolio of conservative securities but has decided that she is going to move 50% of her portfolio into speculative growth stocks and try to make that amount grow quickly so that she will be able to fully pay off her home mortgage when she retires. She calls her advisor to tell him her decision. Based on this information, which of the following would be best for this situation? [A] Her advisor should advise her to put the percentage of her portfolio that she will need to pay off her mortgage into a Money Market fund until she retires to provide for safety of principal and some income. [B] Her advisor should tell her to put all of her portfolio into speculative growth stocks until she retires, liquidate what she will need for her mortgage, and then move the balance back to conservative investments once retired. [C] Her advisor should tell her to put 50% of her portfolio into bonds and the other 50% into blue chip common stocks. [D] Her advisor should execute the transactions as requested by Suzie since she is the customer and has made that investment choice.

A The advisor should tell Suzie to put the percentage of her portfolio needed to pay off her mortgage into a Money Market Fund so that she can easily liquidate when she retires and the investment will provide safety of principal and some income. The advisor should not advise her to put all or even half of her portfolio into stocks, since she could lose all of her principal and not be able to meet her goal of paying off the mortgage. The advisor may even end up doing what Suzie is asking but should not just go along with it initially since it is not in Suzie's best interest.

The seller of a call option is obligated to [A] sell the underlying security. [B] buy the underlying security. [C] short the underlying security. [D] defer a taxable gain

A The seller of a call option (short the option) is obligated to sell the underlying security if the option is exercised.

Under the Investment Advisors Act of 1940, if a registered investment advisor requires prepayment of $1200 or more of advisory fees, 6 months or more in advance of rendering services, the advisor must: [A] File an audited balance sheet promptly with the SEC and clients. [B] File a new brochure with the Securities and Exchange Commission promptly. [C] File a new initial ADV application with the Securities and Exchange Commission. [D] Notify the State no later than 30 business days.

A When an Investment Advisor requires prepayment of fees of $1200 (formerly $500) or more, 6 months or more in advance of rendering services the advisor is required to promptly file an audited balance sheet with the SEC and with clients.

All of the following are characteristics of term life insurance, except: [A] It provides death benefits only with no cash values. [B] It is normally renewed for an additional term at the same premium level. [C] It provides the most death benefits for the premium amount paid. [D] It is frequently part of a "buy term and invest the difference" strategy.

B Although term insurance is frequently renewable, the premium will increase on renewal because the policyholder will be older. The other choices are all correct.

An investment advisor is assisting a client in preparing a personal income statement. Which of these items would the adviser need to complete the income statement? I. Dividends received from common stock holdings II. Real property III. Automotive expenses IV. Personal liabilities [A] I, II, and III [B] I and III [C] II and IV [D] I, II, III, and IV

B An income statement would include moneys coming in and expenses paid out by the individual or entity. Dividends would be included in this, but assets (such as real property) and liabilities would not be included on an Income Statement.

Each of the following would be potential ways to distinguish between different classes of mutual fund shares, EXCEPT: [A] Sales load percentages [B] Investment objectives [C] Fund fees and expenses [D] Timing of the assessment of sales loads

B Different classes of mutual fund shares can be determined by the sales loads charged by the fund, expenses and fees charged to the fund, and the timing of when fund sales loads are charged (front-end versus back-end). The investment objective of a fund would not be helpful in determining the class of fund shares, as all fund shares can have the same or differing investment objectives.

The distribution to an annuitant during the payout period of a non-qualified variable annuity contract would be taxed as: [A] Capital gain only [B] Ordinary income on the amount of excess over the original cost basis. [C] Ordinary income only [D] Capital gain on the amount of excess over the original cost basis.

B In a non-qualified annuity, the principal invested has already been taxed, so it would not be taxed again when withdrawn from the annuity. Any increase in monies over the original amount invested is considered ordinary income.

A conservative investor has a portfolio that consists of diversified investments in equity securities, debt securities, and money market instruments. The investor is mildly concerned about a downturn in the stock market. If this investor were seeking to further diversify, which of the following would be the BEST recommendation? [A] A Balanced Fund [B] Real Estate-Related Investments [C] A Hedge Fund [D] Speculation in Equity Options

B Of the choices listed, the best option is the Real Estate-Related Investments. The real estate market often moves in the opposite direction from or is unaffected by the equities markets. A balanced fund would be redundant with the investor's current holdings. A hedge fund and speculation in options would likely carry too much risk for a conservative investor, and would still be exposing the investor to risks in the equities markets.

Which of the following securities would be most affected by interest rates? [A] Common stock [B] Preferred stock [C] Treasury bill [D] Commercial paper

B Preferred stock is a fixed income security and is sensitive to interest rates. Preferred stock will usually move inversely to interest rate moves.

Each of the following would be risks associated with investment in precious metals, EXCEPT: [A] Price volatility and the influence of speculation in the market [B] Significant domestic currency de-valuation [C] Increased supply of the precious metal [D] Safekeeping of bullion in the form of bars and coins

B Significant domestic currency de-valuation would typically cause an increase in the demand and value of precious metals. Each of the other items are risks associated with investment in precious metals.

The seller of a put option is obligated [A] sell the underlying security . [B] buy the underlying security. [C] short the underlying security. [D] defer a taxable gain.

B The seller of a put option (short the option) is obligated to buy the underlying security if the option is exercised.

All of the following are characteristics of a call option EXCEPT: [A] It gives the buyer or holder the right, but not the obligation, to buy an underlying asset at a fixed price for a limited period of time. [B] The underlying asset may only be a security. [C] It may be traded on an options exchange. [D] It obligates the seller or writer to sell the underlying asset if the holder exercises his option.

B The underlying asset does not have to be a security as in equity options ((e.g. stock). The underlying assets for options on futures contracts are often commodities such as wheat or pork bellies.

Jerry has purchased an equity indexed annuity. His participation in increases in the index is capped at 4% . If the index goes up by 25%, how much will Jerry get? [A] Jerry will see 4% of 25%, or an increase of 1%. [B] Jerry will see a total of 4% of increase. [C] Jerry will see an increase of 21% in the value of the equity indexed annuity. [D] Jerry will see an increase of 25%, since this exceeds 4%.

B When the structure of an equity indexed annuity involves a cap, that is the most that the investor will receive in appreciation in that year, despite the fact that the index could have gone up significantly more. Even though the index went up 25%, Jerry will be limited to 4% increases in the value of his equity indexed annuity because of the cap that is discussed.

A pension consultant receives compensation for advising an employee pension fund. Under the Investment Advisers Act of 1940, which of the following advice on securities would require the pension consultant to register as an investment adviser (IA)? [A] Investing the assets of the plan in real property [B] The allocation of the assets of the plan between securities and other securities-related investments [C] Hiring a labor law firm to advise the plan [D] Hiring an outside accountancy firm for auditing and consulting services regarding the plan

B Under the Investment Advisers Act of 1940, a person is an "investment adviser" if the person advises about securities for compensation.

In order to bring in new business, an investment adviser decides to run an advertisement directed solely to accredited investors. The IA includes the following phrase in the advertisement: "We are a fee-only adviser, so come in and we'll see what we can do for you." Which of the charges listed below would conflict with the IA's advertisement? [A] The IA charges clients fees based only on assets under management. [B] The IA charges clients a fee based on performance. [C] The IA charges clients a 12b-1 fee on a mutual fund. [D] The IA charges clients on a per hour basis when developing their financial plan.

C A 12b-1 fee is an extra fee that is charged by some mutual funds. A 12b-1 fee would not be charged by an IA, it would be charged by a mutual fund, therefore it would "conflict" with other types of charges generally made by IAs.

A municipal bond has declined in value due to a regulatory change. Of the following, which is most likely to cause such a situation? [A] Significant increases in IPOs [B] The municipality's credit rating is downgraded [C] Income tax rates are reduced [D] Interest rates in general are increased

C A regulatory risk is the chance of a change in the laws, rules, or tax rates that would adversely affect a security's price or return. Even though choice "D" seems like it might be a better answer because it is talking about interest rates in "general" that would not be considered to be "regulatory".

An investor plans on retiring in six months. She wants to use her portfolio in its entirety to pay off a mortgage at the time of retirement. The best asset allocation for her portfolio is currently [A] 20% REITS, 30% equities, 20% money market, 30% bonds [B] 60% bonds, 40% equities [C] 100% money market [D] 60% bonds, 40% money market

C At this point the investment objective of the client is to maintain the amount of capital in the account. The investor also needs the money to be available in 6 months. Both the investment objective and the short term needs of the client signal that the client should not be investing in equities (most volatile), REITS (usually long term investment), or bonds (longer maturity). Investing solely in money market accounts allows liquidity and maintenance of capital.

Which of the following are features of a call or put option contract which has a "European-Style" exercise? I. This type of option can be exercised at any time up to and including at expiration. II. This type of option can only be exercised at expiration. III. This type of option is most commonly used for hedging purposes. IV. This type of option is most commonly used for speculative purposes. [A] I and III [B] I and IV [C] II and III [D] II and IV

C European-style options, calls and puts, can only be exercised at expiration. Because they cannot be exercised at other times prior to expiration, the primary use of European-style options is hedging. American-style options, calls and puts, can be exercised at any time up to expiration. Because these options can be exercised at any time, they are much more favorable for investors who are considering speculating, because exercise can occur at will.

All of the following are TRUE about using futures contracts for hedging purposes EXCEPT: [A] A long hedge would be used to protect against rising prices. [B] A short hedge would be used to protect against falling prices. [C] Hedging is typically used by speculators. [D] Hedging is typically used by the producers or consumers of the underlying commodity.

C Hedging is typically used by the producers or consumers of the underlying commodities to protect against the risk of future adverse price movements. Speculators are the counterparties who are willing to assume the risk to make a profit if they bet right as to the direction of prices.

Which of the following statements regarding the handling of business income is correct? [A] Owners of Limited Liability Companies (LLCs) do not receive flow-through of income. [B] Owners of general partnerships do not receive flow-through of income. [C] Owners of C Corporations do not receive flow-through of income. [D] Owners of S Corporations do not receive flow-through of income.

C Of the options listed, a C-Corporation is the only business entity where owners do not receive flow-through of income. A C-Corporation is taxed as an entity, and then shareholders are taxed on dividends.

Which of the following is MOST accurate when discussing risk tolerance? [A] A client's risk tolerance is determined using a specific formula to generate a dependable assessment. [B] A client's risk tolerance has more to do with the client's financial condition and investment objectives than the client. [C] A client's risk tolerance will vary depending on the client and their attitude toward investing in general as well as investing in specific products or companies. [D] A client's risk tolerance should always be a secondary consideration with the primary consideration being the IAR's ideal portfolio structure and products that might be favored by the IA firm.

C Risk tolerance is a variable that changes by customer. Each customer will have differing risk tolerances when it comes to investing in general as well as when it comes to investing in specific products or companies. Risk tolerance is largely subjective in comparison to other more objective client information such as name, age, income, insurance needs, etc. There is no set formula to determine risk tolerance, but risk tolerance should never be a "secondary consideration", being that IARs must be concerned with suitability and risk tolerance plays a key role in determining suitability of products.

Which of the following are benefits of a Health Savings Account (HSA)? I. Tax-free withdrawals are permitted for any medically-related expense. II. Earnings within the account are tax-deferred. III. Contributions to the HSA are tax-deductible up to limitations. IV. HSAs can be established as investment accounts. [A] I and III only [B] I, II, and III only [C] II, III, and IV only [D] I, II, III, and IV

C Tax-free withdrawals are permitted in HSAs for "Qualified Medical Expenses", so it would be incorrect to say that tax-free withdrawals are permitted for "any" medically-related expense, because that could include elective plastic surgeries, etc. All of the other answers are true of HSAs.

The person that administers a trust is the: [A] guarantor [B] beneficiary [C] trustee [D] executor

C The person that is empowered to administer a Trust would only be the designated trustee named in the trust.

All of the following are characteristics of a traditional equity indexed annuities EXCEPT: [A] Annuity payments are linked to the performance of a specific stock index. [B] If the index rises, there may be a "cap" on how much of the gain is credited to the contract. [C] Supervision of sales of this product is not required since it is not treated like a security. [D] If the index declines, there may be a "floor" on how much of the loss is charged against the contract.

C Traditional EIA's were considered to be securities. Modern EIAs are not considered to be a security and have a "no loss" protection of capital and credit interest.

A stop limit order to buy may result in a trade when the market price reaches the [A] limit price. [B] limit price then reaches the stop price. [C] stop price then reaches the limit price or better. [D] stop price

C When the market price reaches the stop price, the order is activated. When a stop limit order to buy is in place, the limit order is activated once the market price reaches the stop price. Once the stop is triggered, the order may result in an execution at the limit price or better (e.g., stop at 40 and limit at 50, market goes to 41 and activates limit and execution takes place at 42, below limit of 50). Remember that execution of a trade is never guaranteed.

CMOs may be collateralized by which of the following? I. Ginnie Mae II. Fannie Mae III. FHA mortgage loans IV. Conventional mortgages [A] I and II only [B] III and IV only [C] I, II, and III only [D] I, II, III and IV

D All items listed may be used to collateralize CMO's.

One of your clients owns a large block of XYZ Corporation common stock. The investor calls and wants to buy a call option for XYZ Corporation common stock. Why would this investor choose to buy a call on XYZ common stock? [A] The investor wants to generate income from the premiums on the options. [B] The investor believes that XYZ Corporation common stock is going to lose value. [C] The investor wants to ensure that any losses on the XYZ Corporation common stock are limited. [D] The investor wants to ensure a set price on XYZ Corporation common stock in the event that they want to buy more shares.

D Buying a call option on stock allows the investor to buy at the strike price of the option contract for a specified period of time. This would be the reason for buying the call. The investor is buying the call and paying premiums. If buying a call, the investor is on the upside of the market, which does not protect against losses and is not an action performed in anticipation of losses.

A large Wall Street investment bank owns and operates a "dark pool". In explaining its popularity to potential institutional customers, it rightly claims as advantages over stock exchanges all of the following EXCEPT: [A] Large blocks of stock can be traded without moving the price of the stock [B] Neither executed orders, nor bid and ask quotes, are reported [C] Large trading volume provides large liquidity [D] Trading large blocks of stock away from the floors of stock exchanges is a new and innovative strategy

D Institutions have always crossed large blocks of stock off the exchange floors. The other claimed advantages are legitimate.

All of the following are characteristics of Universal Life insurance EXCEPT: [A] The cash values are interest sensitive (sometimes with a guaranteed minimum). [B] Policyholders do not choose the underlying investments. [C] Flexible premium payments are available. [D] Premium payments are deposited into the Separate Account of the life insurance company.

D Premium payments are deposited into the General Account of the life insurance company. Policyholders do not have control over the investments.