Series 66 Correct

Which of the following investment strategies is likely to have the lowest tax impact for the client? A) Buy and hold B) Indexing C) Passive D) Contrarian

A) Buy and hold If one buys and holds without selling, there are never any capital gains on which to pay tax. And when there is a sale, the gain is invariably long term. Indexing (a very popular form of passive strategy) is a very tax-efficient strategy; however, because there are periodic changes to the portfolio to match the changes in the index, there are tax consequences, some of which could be short-term capital gain.

Which of the following indices or averages is based on the prices of only 65 stocks (30 industrial, 20 transportation, and 15 utility)? A) Dow Jones Composite Average B) S&P Composite C) Wilshire 5,000 D) Value Line

A) Dow Jones Composite Average The most widely quoted and oldest measures of changes in stock prices are the Dow Jones averages. They are also the smallest in terms of the number of stocks included in the averages with only 65 stocks.

Distributions from which of the following can be rolled over into an IRA? - Another IRA - Corporate pension plan - Corporate profit-sharing plan - Keogh plan A) I, II, III, and IV B) II and III C) I and IV D) III and IV

A) I, II, III, and IV Assets from any qualified corporate plan or from another IRA may be rolled over into an IRA.

Which of the following is(are) considered an associated person(s) of a broker-dealer under the Securities Exchange Act of 1934? - Any employee of a broker-dealer, except for clerical or ministerial employees - Any officer, partner, or manager associated with the broker-dealer - Any employee, other than a clerical or ministerial employee, who is supervised by, supervises, or is under common supervision of the broker-dealer A) I, II, and III B) I and II C) I and III D) II and III

A) I, II, and III An associated person is any officer or person in a control position to the broker-dealer or any employee of the broker-dealer, except for clerical or ministerial employees.

A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock would benefit by converting if the price of the common stock was A) above $22 per share B) above $20 per share C) below $22 per share D) above $18.20 per share

A) above $22 per share With a conversion price of $20 and a par value of $60, this preferred stock is convertible into 3 shares of the company's common stock. We divide the current price of the preferred ($66) by the 3 shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace

When referring to a federal covered investment adviser, all of the following are supervised persons EXCEPT A) an individual contracted to solicit for new advisory clients B) an investment adviser representative C) the chief securities analyst D) the receptionist who works for the investment adviser and analyzes client financial profiles

A) an individual contracted to solicit for new advisory clients All individuals working for an investment adviser who provide investment advice or management are considered supervised persons. Whether analyzing securities or customer profiles, one would be a supervised employee. Contracted solicitors are not employees of the adviser and, therefore, under the Investment Advisers Act of 1940, the adviser is only required to make a bona fide effort to determine that the solicitor complies with the solicitor agreement. Please be careful because this is not so under the USA. That act considers solicitors to be supervised persons, whether employed by the adviser or not, and requires IAR registration.

In general, a broker-dealer will disclose its fee schedule A) at the time of the account opening B) when requested by the client C) to its agents who are then responsible for sharing with client D) within 30 days following any changes in fees or charges

A) at the time of the account opening Although there are no specific industry requirements, a broker-dealer's fee schedule typically is disclosed at the time an account is opened. Changes are disclosed by giving notification before the change is made.

In search of higher returns, many investors have turned to alternative investments, such as structured products. Non-exchange-traded structured securities products (SSPs) typically have A) some form of embedded derivatives B) moderate liquidity C) a place in the portfolio of conservative investors D) FDIC insurance coverage

A) some form of embedded derivatives It is commonplace for SSPs to use derivatives, such as options. There is no insurance coverage and, unless listed for trading such as an ETN, low or no liquidity. These are highly complex products and would not be suitable for the average conservative investor.

An individual has been employed by a broker-dealer to make cold calls to solicit prospects for the firm's new wrap fee program. Under the USA, it is true to state that this individual A) would be defined as an investment adviser representative B) does not need supervision because he is only making cold calls C) would be permitted to use the term investment counsel D) is not defined as an investment adviser representative because he is only making cold calls

A) would be defined as an investment adviser representative As we know, when a broker-dealer offers wrap fee programs, the exclusion from the definition of investment adviser is lost. Any individual soliciting for that program would be considered an investment adviser representative and would need adequate supervision. Cold calling is about as far as you can get from the role of an investment counsel.

Which of the following terms best describes ETNs and leveraged ETFs? A) Registered investment companies B) Alternative investments C) Speculative investments D) Forms of hedge funds

B) Alternative investments These are two popular alternative investments. Are they speculative? Yes, but there are many other speculative investments that are not considered alternative investments. The question asks for the best description and, although it might seem like a "close call", these are "alts". The leveraged ETF is a registered investment company, but the ETN is not.

The Seeking Alpha Growth Fund directs a sizable portion of its portfolio executions to your broker-dealer. If the firm has this fund on its highly recommended list, this would be A) allowed without restriction B) a conflict of interest that would have to be disclosed C) prohibited only if selling shares and executions for the portfolio by the member takes place on the same business day D) allowed only when the investment company uses more than 1 broker-dealer to sell its shares

B) a conflict of interest that would have to be disclosed Recommending shares of a fund when the broker-dealer is aware that a policy exists to direct brokerage to them is an obvious conflict of interest and would have to be disclosed.

An owner of an equity index annuity would be wise to use the high-water crediting method if the underlying index was expected to A) decline. B) be volatile. C) remain steady. D) change its objective.

B) be volatile. An advantage of the high-water crediting method is that the interest is calculated using the highest value of the index during the term. Therefore, in a volatile market, where prices are going up and down, it picks up the highest price. DUPLICATE

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers would consider the adviser to be engaging in an unethical business practice if he loaned money to a client other than one A) who was in the money-lending business B) who was an affiliate of the adviser C) borrowing under the same terms and conditions as the client could find at a commercial bank D) who was an immediate family member of the adviser

B) who was an affiliate of the adviser Loaning money to a client is prohibited unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the IA. Please note that because this question deals with an IA lending money, the fact that the IA's client is in the money-lending business is of no consequence. That would only be an issue if the question dealt with the IA borrowing money.

Tamika is an investment adviser representative with Financial Engineers, LLC, a covered investment adviser. The firm uses an investment policy statement to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat 7 months from now. When using the IPS, this would be considered A) an investment goal B) a financial objective C) an investment constraint D) a capital need

C) an investment constraint Investment constraints are obstacles or restrictions that must be met in order to meet objectives. In this case, we are dealing with a liquidity constraint—in 7 months, cash will be necessary to make the purchase.

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment advisory contract must describe all of the following EXCEPT A) the amount of prepaid fee to be returned if the contract is terminated B) whether or not the contract grants discretionary authority C) any record of securities industry violations by the investment adviser D) that assignment of the contract cannot occur without client consent

C) any record of securities industry violations by the investment adviser An investment advisory contract is not required to disclose securities industry violations by the investment adviser. These must be disclosed, however, in Form ADV. The investment advisory contract must include the amount of prepaid fee to be returned if the contract is terminated, the fact that assignment of the contract cannot occur without client consent, and the fact that the agreement does or does not contain discretionary authority.

You have a client who wishes to manage his own portfolio of individual stocks. The simplest style for him to follow would be A) indexing B) core C) buy and hold D) tactical

C) buy and hold When it comes to individual stocks, nothing is simpler than buy and hold. If the client wished to have the simplest overall portfolio and didn't want to manage things, then indexing would be the answer.

The general rules dealing with a broker-dealer extending credit for a customer to purchase securities are found in Regulation T of the Federal Reserve Board. However, Regulation T does NOT address A) initial margin requirements B) loan value of securities C) maintenance margin D) mixed margin accounts

C) maintenance margin Maintenance margin levels are set by the SROs, such as FINRA. They are currently 25% for long accounts and 30% for short accounts (you will not have to calculate these).

If a stock has a beta of less than 1.0, the stock's price will A) decrease more than the market when the market is down B) decrease regardless of whether the market is up or down C) not increase as much as the market when the market is up D) increase more than the market when the market is up

C) not increase as much as the market when the market is up Beta compares a stock's price history to the movement of a total market index for the same period. A beta of less than 1 means that the stock's price does not swing as widely, up or down, as the average for the entire market.

Plenitude Premier Solutions (PPS) is registered in State C. If PPS wished to maintain custody of client funds or securities, A) notice is given to the State C Administrator as part of the annual updating amendment. B) prompt notice would have to be given to the State C Administrator in a private letter. C) prompt notice would have to be given to the State C Administrator on Form ADV. D) permission would have to be obtained from the State C Administrator .

C) prompt notice would have to be given to the State C Administrator on Form ADV. It is unlawful for an investment adviser, registered or required to be registered in a state, to have custody of client funds or securities unless the investment adviser notifies the Administrator promptly in writing on Form ADV that the investment adviser has or may have custody.

The Investment Advisers Act of 1940 requires advisers to prepare and adhere to a code of ethics. Which of the following is charged with the responsibility of enforcing that code? A) Administrator of the state in which the IA has its principal office B) The SEC C) Each individual IAR D) Chief compliance officer of the IA

D) Chief compliance officer of the IA Each federal covered investment adviser must have an individual designated as the chief compliance officer (CCO). It is that person's responsibility to make sure that the code of ethics is being followed. Although each individual IAR must follow that code, it is the CCO with the supervisory responsibility.

Which of the following are fiduciaries? - Executor of an estate - Administrator of a trust - Custodian of an UGMA account - Investment adviser representative granted with discretionary authority over the account A) I, II and III B) I and II C) II, III and IV D) I, II, III and IV

D) I, II, III and IV Each of these persons is in a relationship of trust to the customer and is therefore a fiduciary.

Under federal law, an application for becoming an associated person of a broker-dealer would be denied for an individual A) who is not a citizen of the United States B) convicted of a felony 122 months ago C) accused of a securities-related felony 110 months ago D) pleading no contest to a misdemeanor involving a financial matter 65 months ago

D) pleading no contest to a misdemeanor involving a financial matter 65 months ago An individual who is convicted of, or has pleaded guilty or no contest to, any felony or certain misdemeanors in the previous 10 years (120 months) is subject to statutory disqualification. Therefore, the misdemeanor involving a financial matter within the past 10 years is a cause for disqualification. A conviction made more than 10 years ago is part of the record but not cause for disqualification. One is presumed innocent until proven guilty so merely being accused is not the same as being convicted. There is no requirement that a registrant be a U.S. citizen.

A major stockholder of XYZ Corporation makes frequent purchases and sales of this stock on the open market to give the impression that it is actively traded. This unethical practice is best described as A) front running B) positioning C) pegging D) wash trades

D) wash trades A wash trade occurs when there is no real change in beneficial ownership. Purchases and sales are offset, but the volume of trading creates the illusion of substantial interest in the stock.

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) immediately B) when informed by the Administrator that the representative's registration is effective C) within 48 hours D) when informed by the investment adviser that the representative's registration is effective

D) when informed by the investment adviser that the representative's registration is effective Passing the exams does not automatically give one an effective investment adviser representative's license. Notice is received by the investment adviser from the appropriate state and/or federal authorities and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual.

Which of the following is not included in fundamental analysis of a company? A) The study of a company's historical stock prices and trading volume. B) The study of the direction of the economy. C) The study of a firm's financial statements. D) The study of a firm's position within its industry.

A) The study of a company's historical stock prices and trading volume. Studying historical stock prices and volume is related to technical analysis. Fundamental analysis is concerned with the earnings potential and risk associated with a particular firm. Doing so requires viewing the entire economy, that company's industry, and its financial statements.

The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if - results do not reflect the deduction of fees - actual market conditions during the referenced period are not disclosed - the advertisement did not reflect performance for a minimum period of 3 years - the advertisement did not disclose that it applied to only a specific group of clients A) I and II B) I, II, and IV C) II and IV D) I, II, III, and IV

B) I, II, and IV Advertising that reflects past performance must show a minimum period of 1 year, not 3. All investment advisers' advertising must reflect deduction of fees; disclose the specific group of clients to which it applies, if applicable; and state actual market conditions during the referenced period.

Thomas Smith, a registered agent of XYZ Broker-Dealer, believed that his client's security was overvalued. If Smith exaggerated the amount by which the security was overpriced to protect the client from a downturn in the price of the security, each of the following statements is true EXCEPT A) Smith made an untrue statement in connection with the sale of a security B) Smith acted in a dishonest and unethical manner C) Smith provided investment advice while acting in a sales capacity, which is a prohibited practice D) Smith engaged in fraud in connection with the sale of a security

C) Smith provided investment advice while acting in a sales capacity, which is a prohibited practice Smith acted in a dishonest and unethical manner, made an untrue statement in connection with the sale of a security, and engaged in fraud in connection with the sale of a security. The advice to sell the securities was good investment advice, but the sales method was fraudulent.

A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust? A) $10,000 B) $1,500 C) $4,500 D) $6,500

D) $6,500 All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust's DNI. The computation is: $1,500 in taxable interest + $2,000 in dividends (reinvestment means nothing here) + $3,000 in tax-exempt interest. This is a total of $6,500 of DNI. When distributed, only $3,500 will be taxable.

What is the total return on a bond that cost an investor $950, was sold for $1,000, and paid $50 in interest payments? A) 5% B) 10% C) The return cannot be determined from the information supplied D) 10.50%

D) 10.50% Total return is the sum of all payments ($50) plus the capital gains ($50) divided by the cost ($950). In this case, $50 + $50 ÷ $950 = 0.10526 or 10.5%.

A corporation calls in a portion of its long-term debt at 101. This will have the effect of - decreasing working capital - increasing working capital - decreasing net worth - increasing net worth A) II and IV B) II and III C) I and IV D) I and III

D) I and III Working capital is computed by subtracting current liabilities from current assets. Using a current asset, like cash, to call in the bonds, reduces those assets with no corresponding reduction to current liabilities. Whenever a bond is called at a premium, net worth is reduced by that premium.

The document that gives the Administrator the right to process complaints against a registrant is known as A) a writ of habeas corpus B) a durable power of attorney C) an injunction D) a consent to service of process

D) a consent to service of process The consent to service of process gives the Administrator the right to process legal complaints against the applicant.

Assume Frank has a portfolio with an actual return of 10.50% for the past year. The portfolio beta equals 1.25, the return on the market equals 9.75%, and the risk-free rate of return equals 3%. Based on this information, what is the alpha for Frank's portfolio and did it out outperform or underperform the market? A) −1.6875%, underperform B) +3.3750%, outperform C) +9.1875%, outperform D) −0.9375%, underperform

D) −0.9375%, underperform The formula for alpha: alpha = (actual return − risk-free rate) - (beta × [market return − RF])]. If we plug in the numbers, we get (10.5% - 3%) - (1.25 × [9.75% − 3%]) = 7.5% - (1.25 x 6.75) = 7.5% - 8.4375 = -.9375 The alpha for Frank's portfolio equals −0.9375%, indicating that his portfolio underperformed the market based on the level of assumed investment risk.

Under the USA, when one is referring to a security that is guaranteed, the guarantee applies to - capital gains to be expected by holding the specified security - dividends to be paid on the specified stock - interest and principal payment on the specified bond - reimbursement by the firm for any losses suffered while holding that security A) II and III B) II and IV C) I and III D) I and IV

A) II and III The USA defines the term guaranteed as meaning guaranteed as to payment of principal, interest, or dividends.

You have a client whose income from a real estate limited partnership is $11,000. During the same year, your client had net capital losses of $2,000 and losses from an oil and gas drilling program of $6,000. The effect of this investment activity would be to increase the client's taxable income by A) $11,000 B) $3,000 C) $9,000 D) $5,000

B) $3,000 The $11,000 passive income is offset by the $6,000 of passive loss giving the client $5,000 of passive income. Because capital losses up to $3,000 are deductible from taxable income, we can deduct the $2,000 in net losses giving a net increase to taxable income of $3,000.

An investor purchased 100 shares of GRA stock at $100 per share in a margin account. Two years later, the GRA was sold for $120 per share. If the investor's account was charged $700 in margin interest, it would be proper to state that this is an example of A) negative margin. B) positive margin. C) a long-term capital gain of $1,300. D) a speculative investment.

B) positive margin. Positive margin means that, after taking into consideration the interest paid on the borrowed money in a margin account, a specific transaction was profitable (negative margin is the reverse). In this case, the sale resulted in a gain of $2,000 which is $1,300 more than the interest cost.

A market maker is quoting ABC common stock at $76.10 - $76.31. That means A) the market maker is willing to pay $76.31 for the stock. B) the market maker is willing to pay $76.10 for the stock. C) the market maker's commission is $.21 per share. D) the spread is probably excessive.

B) the market maker is willing to pay $76.10 for the stock. Marker makers provide a two-sided quote. Because market makers stand ready to buy and sell the specific security, they provide a bid price, the price the firm is willing to pay for the stock, and the offer price, the price they are asking to receive when selling the stock. Market makers do not earn a commission; they charge a markup or markdown. A $.21 spread on a stock at this price is certainly not excessive.

Western Securities, Inc. (WSI) is a broker-dealer that also offers portfolio management. One of WSI's portfolio managers notices an article on asset allocation that harmonizes with WSI's investment philosophy. If WSI should post a link to this article on its website, it would probably be considered A) fulfillment B) estrangement C) adoption D) entanglement

C) adoption A firm will be responsible for the content of a linked third-party site if the firm "adopts" its content on any of the firm's sites. Adoption is defined as a firm's endorsement of the content of a third-party site. This is not illegal, but the firm is responsible for the content of the linked information and must be sure that it complies with the firm's policies. Entanglement is adoption taken one step further. This is when the firm (or one of its representatives) contributes to the third-party information and then posts it.

A client is risk averse and is planning on retiring in 16 years. As the client's investment adviser, which of the following would you recommend? A) A government bond fund B) A high-yield bond fund C) A diversified open-end investment company concentrating in small-cap stocks D) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds

D) 50% in an S&P 500 index fund; 50% in a portfolio of high-quality bonds Even though the government bond fund carries less market risk, with a 16-year retirement goal, some inflation protection is necessary. The index fund carries some market risk, but does offer purchasing power protection. The 50/50 mix would seem to be most appropriate.

Which of the following statements is (are) TRUE regarding the registration of investment advisers? - If they are required to be registered with the state, they must also be registered with the SEC. - If they are registered with the SEC, state registration is not required. - Whether a person is registered with the state or with the SEC depends on the type and scope of the person's advisory business. A) I and II B) I only C) II only D) II and III

D) II and III Registration with the state only or with the SEC only depends on the type and scope of the person's advisory business.

The alternative asset investments class is least associated with which of the following characteristics? A) Efficient pricing B) Diversification C) Illiquidity D) Non-normal returns

A) Efficient pricing Alternative assets are most often characterized by inefficient pricing, providing potential abnormal returns or alpha returns.

USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of A) FINRA B) the SEC C) the state with the most stringent financial requirements D) the state in which the principal office of the member is located

B) the SEC It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.

Under the USA, which of the following fits the definition of a sale? A) Attempt to dispose of a security for value B) Issuing a prospectus C) Contract to dispose of a security D) Solicitation of an offer to buy a security for value

C) Contract to dispose of a security Sales involve any contract or disposition for value; solicitations and attempts to dispose are offers.

Dan is the owner of a mutual fund that returned him a before-tax return of 15% last year. Inflation is running at an annual rate of 3%, and Dan is in a 27% marginal income tax bracket. What has been Dan's approximate inflation-adjusted after-tax return on the fund over the course of the last year (rounded to the nearest 2 decimal points)? A) 10.95% B) 8.76% C) 12.00% D) 7.95%

D) 7.95% First, compute Dan's after-tax rate of return of 10.95% as follows: .15 × (1 − .27), or .73 = .1095. Then, compute Dan's inflation-adjusted, or real, rate of return by subtracting the 3% inflation rate from his 10.95% after-tax return.

Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: - 16 clients in State A - 12 clients in State B - 6 clients in State C - 4 clients in State D Fred would have to register as an IAR in A) States A, B, and C B) States B and C C) States A and C D) States A and D

D) States A and D In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there).

Pemberton bought a stock share at $50 and wants to earn a profit, so he decided he will never sell it below $52. The company has now underperformed for multiple quarters as per street analysts, and the stock is down to $48. Pemberton continues to hold the stock in line with his original plan. In this case, Pemberton may be exhibiting A) herding bias. B) overconfidence bias. C) regret aversion bias. D) anchoring bias.

D) anchoring bias. In behavioral finance, an anchoring bias is when people tend to base their decisions on reference points that are often arbitrarily chosen. In this case, Pemberton "anchored" his selling price to the $50 he paid for it and will not recognize changes in the market.

The price-to-earnings ratio A) is higher for value stocks than for growth stocks B) indicates current cash flows C) reflects how liberal the company's dividend policies are D) shows how much investors value the stock as a function of earnings to the company's market price

D) shows how much investors value the stock as a function of earnings to the company's market price The 2 components of the price-to-earnings ratio are the current market price and the earnings per common share. When a company has a high P/E ratio, it means that investors are placing greater value on expected growth in earnings. That is one of the reasons why growth stocks carry higher P/E ratios than do value stocks.

The institutional trading desk of a major broker-dealer receives a substantial purchase order for XYZ common stock from one of its clients. While completing the paperwork to begin the order sequence, the firm decides to purchase shares of XYZ for its proprietary account. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, A) this would be considered market manipulation B) this would be the prohibited practice of front running C) the purchase could only be made with prior disclosure to the client D) the broker-dealer has the right to purchase shares of XYZ whenever it wishes.

B) this would be the prohibited practice of front running The practice of entering an order for the firm in front of a previously received customer order, known as front running, is prohibited. Customer orders always take priority over firm orders, assuming they were not received after the firm entered its orders.

A client owns 300 shares of BACH common stock in a margin account. The stock was originally purchased at a price of $40 per share and the Reg. T call was met. If the BACH is now selling for $50 per share, disregarding interest charges, the client's equity is now A) $1,000 B) $3,000 C) $9,000 D) $6,000

C) $9,000 Purchasing 300 shares at $40 per share is a total of $12,000. The Reg. T call of 50% requires a deposit of $6,000 with the remaining $6,000 the loan from the broker-dealer. If the market price of the shares increases to $50, the current market value of the account is $15,000. With a debit balance (the amount borrowed from the BD) of $6,000, the equity is $9,000. If you answered $3,000, you probably forgot the investor owned 300 shares, not 100.

Which of the following insurance company products is likely to have the longest time for which a surrender charge will be levied? A) Variable annuity B) Class B shares C) Bonus annuity D) Whole life insurance

C) Bonus annuity One of the characteristics of bonus annuities is that their surrender charges tend to be higher for a longer time than other insurance company products. When you see Class B shares on the exam, it will be referring to mutual funds, not insurance company products.

Among the provisions of the Investment Company Act of 1940 designed to protect the interests of investors is the provision that A) selection of company investments must be approved by SEC B) for diversification purposes, an investment company may own up to 10% of the shares of another investment company C) any change in fundamental investment policy must be approved by stockholders D) communications with the public must be approved by FINRA before its use

C) any change in fundamental investment policy must be approved by stockholders One of the requirements of the Investment Company Act of 1940 is that an investment company cannot change its investment policy without approval of a majority vote of the shareholders. For example, the board of directors of a growth fund could not change the fund's investment objective to income without that approval. This has the effect of offering protection to the investors that they won't be "blindsided" by the board or the portfolio manager. On this exam, you shouldn't expect to see anything "approved" by the SEC as a correct answer. An investment company may own up to 3% of another investment company, not 10%. Even though FINRA rules do require approval of investment company communications with the public, such approval is not part of the Investment Company Act of 1940.

One of the reasons why the discounted cash flow method of valuation is useful in assessing the value of fixed income instruments is A) the availability of ratings B) the priority of claim on earnings C) the predictability of income D) the known maturity date

C) the predictability of income Discounted cash flow evaluates the expected cash flow from an investment and then factors in the time value of money. Obviously, if there is no predictable cash flow (as there is with the interest payments on a bond), there are no reliable numbers to plug into the formula.

Assume Frank has a portfolio with an actual return of 10.50% for the past year. The portfolio beta equals 1.25, the return on the market equals 9.75%, and the risk-free rate of return equals 3%. Based on this information, what is the alpha for Frank's portfolio and did it outperform or underperform the market? A) +3.3750%, outperform B) +9.1875%, outperform C) −1.6875%, underperform D) -.9375%, underperform

D) -.9375%, underperform The alpha for Frank's portfolio equals −.9375% indicating that his portfolio underperformed the market based on the level of assumed investment risk. Let's do the computation. As with most math, there are two ways to arrive at the correct answer. The method shown in the LEM follows the formula: (Actual return - RF rate) - (beta x [market return - RF rate]). Plugging in the numbers we get, (10.5% minus 3%) - (1.25 x [9.75% - 3%]). That breaks down to 7.5% - (1.25 x 6.75%) or 7.5% - 8.4375% = negative .9375% Alternatively some might prefer this formula for alpha: alpha = actual return - [risk-free rate + beta x(market return - RF)]. If we plug in the numbers, we get .105 - [.03 +1.25 x(.0975 - .03)] = −.009375, or−.9375%.

The statistical measurement that indicates how much an investment's returns have fluctuated, compared to its average return, over a given period of time is known as A) R-squared B) beta C) convexity D) standard deviation

D) standard deviation Standard deviation measures how much an investment's returns have fluctuated over a given period of time. The higher the investment's standard deviation, the higher the risk.

A federal covered investment adviser employs the services of a third-party solicitor. The Investment Advisers Act of 1940 would require the solicitor to deliver - a copy of the IA's brochure - a copy of the solicitor's brochure - a copy of the solicitor's script - a copy of the IA's Form ADV Part 1 A) I and III B) I and II C) I, II, and IV D) II and IV

B) I and II Third-party solicitors must provide a copy of the investment adviser's brochure (Form ADV Part 2A), as well as a copy of the solicitor's brochure. The solicitor's script must be approved by the IA, and only the SEC receives a copy of the Form ADV Part 1.

The Investment Company Act of 1940 requires that a mutual fund do which of the following? - Provide a monthly balance sheet to investors - Have $100,000 minimum capitalization prior to making a public offering - Provide semiannual reports to shareholders - Not acquire more than 5% of the outstanding shares of another registered investment company A) I and III B) II and III C) II and IV D) I and IV

B) II and III The Investment Company Act of 1940 requires that an open-end investment company have a minimum of $100,000 in net assets prior to commencing a public offering. Reports must be sent to shareholders on a semiannual basis. No fund is permitted to own more than 3% of the outstanding shares of another registered investment company.

Consent of the client before completion of a trade made between the firm and a client must be made when A) a broker-dealer will be acting as a contra party to the trade B) an investment adviser will be acting in the capacity of a principal C) a broker-dealer will be acting in the capacity of an agent D) a broker-dealer will be acting in the capacity of a principal

B) an investment adviser will be acting in the capacity of a principal In those uncommon cases where an investment adviser acts in the capacity of a principal (or agent) with an advisory client, consent of the client before completion of the transaction is required. In the case of broker-dealers, disclosure of capacity on the trade confirmation, but not consent, is needed.

Under the Uniform Securities Act, which of the following is a broker-dealer? A) A corporation that sells interests in an oil and gas limited partnership to investors with the proceeds going to the issuer B) A credit union that sells its own stock C) An issuer D) An agent

A) A corporation that sells interests in an oil and gas limited partnership to investors with the proceeds going to the issuer A broker-dealer is any person that buys or sells for the accounts of others or for his own account. In this case, an entity structured as a corporation is selling , on behalf of the issuer, a security in the form of limited partnership units and is therefore a broker-dealer. A broker-dealer is not an issuer or an agent.

Which of the following methods of compensation to an investment adviser may be in violation of the USA? - An adviser charges a standard, or flat, fee for all accounts of $100,000 or less. - An adviser charges all accounts a percentage of assets under management. - A client agrees to compensate an adviser on a percentage of capital gains in excess of the S&P 500 in return for guaranteeing the S&P return. A) III only B) I, II, and III C) I only D) I and II

A) III only Guaranteeing a level of performance is a prohibited business practice whether the client agrees or not. An adviser may charge clients a flat fee, provided it is fair and reasonable for the services offered. Charging accounts a percentage of assets under management is also an acceptable business practice under the Uniform Securities Act.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, when is it unethical for an investment adviser to borrow money from a client? A) When the client is an immediate family member B) When the client is a bank or financial institution in the business of loaning money C) When the client is an affiliate of the investment adviser D) When the client is a broker-dealer

A) When the client is an immediate family member It is unethical to borrow money or securities from a client, unless the client is a broker-dealer, a bank or other financial institution in the business of loaning money, or an affiliated person of the adviser. Owing money or securities to a client is not only unethical, it could also influence advice rendered to a client, creating a potential conflict of interest. Even when the client is an immediate family member, borrowing must not take place unless it meets one of the conditions state above. How do we know the family member does not meet one of those conditions? We know because nothing in the question indicates such and, on the exam, if such is the case, it will be clearly spelled out.

An investor following the buy and hold model of investing would most likely be A) buying a stock as a long-term investment to reach a specific goal. B) buying a stock during the recovery cycle and selling at the peak. C) looking to shelter income from taxation. D) holding a stock until its ex-dividend date and then selling it to capture the dividend.

A) buying a stock as a long-term investment to reach a specific goal. Buy and hold is a perfect description of this strategy. Securities are purchased for the long run, generally with a specific objective in mind. Those would include things such as education, retirement, or future health needs. As a passive strategy, the investor would not be trying to time the business cycle. Although one who owns a stock and then sells it on the ex-dividend date receives the dividend when it is paid (the ex-date is the first day on and after which, the buyer does not get the dividend; the seller does), that is a short-term strategy. Buy and hold does offer the benefit of long-term capital gains rather than short-term ones, but that does not shelter or reduce an investor's income.

XYZ is an investment adviser registered in States B, C, and D. Part of its service is offering a comprehensive financial plan, for which there is an initial fee of $2,500. During a discussion with a prospect, one of its investment adviser representatives seeks to allay the individual's concerns by informing her that once the firm delivers its brochure and receives the client's payment, there is a 3-day period during which the client may cancel the contact and receive a refund of that fee. In this case, A) the investment adviser representative is in violation because the time period is 5 days B) the investment adviser representative is in violation because the brochure must be delivered at least 48 hours before signing the contract C) there is no violation because the 5-day penalty-free withdrawal feature is only found in state law and does not apply to SEC-registered advisers D) there is no violation because firms and their representatives can always make their rules more stringent than the regulators' rules

A) the investment adviser representative is in violation because the time period is 5 days The agent has committed an unethical business practice because the NASAA Model Rule dealing with advisers' brochures requires a 5-day penalty-free period when the brochure is not delivered at least 48 hours prior to entering into the contract. The firm and its agents cannot impose house rules that take away the client's rights.

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that it would be considered an unethical business practice for an investment adviser to charge an unreasonable advisory fee. In which of the following cases would it be likely that the Administrator would find the adviser's compensation to be unreasonable? - An adviser's fee schedule is not competitive with other advisers in the same general area offering essentially the same services. - In addition to charging a fee based on assets under management, the adviser also charges commissions on any securities transactions he effects. - The adviser charges the same hourly fee, regardless of the amount of the specific client's assets under management. - The fee is projected to consistently be more than the expected return in the portfolio. A) II and III B) I and IV C) I and II D) III and IV

B) I and IV The Model Rule specifically refers to the authority of the Administrator to determine whether an adviser's fee schedule is competitive. Logic would dictate that fees that consistently exceed the return earned on the portfolio should not be acceptable. Investment advisers, upon making proper disclosure, are permitted to charge both fees and commissions, and there is no requirement to discount one's hourly fee, regardless of the size of the client's portfolio.

What new benefit did the TCJA of 2017 bring to 529 plans effective 2018? A) Tax-deductible contributions of up to $10,000 per year to pay for K-12 tuition B) Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition C) Qualified withdrawals of up to $10,000 per year to pay for K-12 expenses D) Withdrawals may be made for qualified expenses at certain foreign educational institutions.

B) Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition The big change was the ability to use a 529 plan for K-12 expenses. However, the only expense that qualifies is tuition and there is a maximum limit of $10,000 per year. No contribution to any 529 is tax deductible. The use of the 529 for foreign educational institutions pre-dates the TCJA of 2017.

As an incentive to encourage clients to invest in a particular stock recommended by the broker-dealer, clients are told that anytime within 6 months after the purchase date, they may sell the stock back to the firm at original cost plus interest at the state's legal rate. This would be A) a right of rescission B) a prohibited guarantee against loss C) an offer that could only be made to accredited investors D) a violation of the antifraud provisions of the Uniform Securities Act

B) a prohibited guarantee against loss Offering to buy back a stock at its original cost, even without paying interest, is a prohibited guarantee against loss. Rescission is only when there was something improper about the sale. Technically, this offer is not a case of fraud and, in any event, we must always select the answer that best addresses the question—in this case, a guaranteed price.

ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $0.25 per share and capital gains of $0.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund is $28.50, and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be A) 83% B) 3.85% C) 3.33% D) 27.20%

C) 3.33% The current yield on mutual funds is calculated by dividing the annualized yield ($0.25 × 4 = $1) by the POP. In this case, $1 ÷ $30 = 0.0333 × 100 = 3.33%. In calculating the current yield, the law prohibits the inclusion of capital gains and growth.

Which efficient market hypothesis suggests that an investor can achieve above-market returns by only utilizing insider information? A) Weak B) Super-strong C) Semi-strong D) Strong

C) Semi-strong The semi-strong form suggests that fundamental analysis is of no value and only through the use of insider information can an investor achieve above-market returns. The weak form suggests that technical analysis is of no value and the strong form suggests that nothing has any value - efficient markets are totally random.

Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be A) a 50% municipal bond fund, 40% government bond fund, 10% money market fund B) a 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund C) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund D) a 50% municipal bond fund, 50% large-cap common stock fund

C) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund The allocation of 50% municipal bond fund, 40% government bond fund, and 10% large-cap common stock is appropriate for a high-income person of age 75 who is not concerned with liquidity. The 10% large-cap fund provides some inflation protection with very moderate downside risk.

Which of the following transactions are exempt from registration under the Uniform Securities Act? - A trustee of a corporation in bankruptcy liquidates securities to satisfy debt holders. - An offer of a securities investment is directed to 10 individuals in the state during a 12month consecutive period. - A sale of securities by the trustee of the Lorgan Family Children's Trust. - Agents for an entrepreneur offer pre-organization certificates to fewer than 10 investors in the state for a modest commission. A) II and IV B) I, III, and IV C) I and IV D) I and II

D) I and II Transactions by fiduciaries, such as a trustee in a bankruptcy reorganization, are exempt from registration. But only a trustee in bankruptcy is afforded this exemption, not for a family trust. An offer of a securities investment to 10 or fewer individuals (called a private placement) is also exempt from registration. Offers of pre-organization certificates are not exempt when compensation is paid.

In cases of fraudulent sales practices or advice with respect to securities, state securities Administrators may - not take enforcement action against federal covered investment advisers - take enforcement action against federal covered investment advisers - not take enforcement action against state-registered investment advisers - take enforcement action against state-registered investment advisers A) I and III B) I and IV C) II and III D) II and IV

D) II and IV State securities Administrators have jurisdiction over any securities transaction or investment advice that involves fraud, whether or not the person involved is a federal covered investment adviser. If it involves a security, there are no exemptions from the Uniform Securities Act for fraud.

The shares of the LMN closed-end management investment company are selling at $45, while LMN's net asset value is $40. It would be most accurate to say that LMN's shares are trading at A) a 12.5% discount to NAV. B) a 12.5% premium to NAV. C) an 11.1% discount to NAV. D) an 11.1% premium to NAV.

B) a 12.5% premium to NAV. The shares are selling at a $5 premium to the NAV. Mathematically, this is $5 divided by the $40 NAV, or a 12.5% premium.

Angelo lives and votes in State W. He winters in State C, splitting his time 60/40 between the 2 states. Angelo has a brokerage account with Sunset Investment Securities (SIS) and trades with an agent housed in SIS's State W office. SIS is also registered in States M and I but, having no place of business there, is not registered in State C. In order for Angelo's agent to handle the account, registration as an agent is required A) in State W. B) in State C. C) solely with FINRA. D) in State W and State C.

A) in State W. By not having a place of business in State C and only having a client who is temporarily in the state, SIS (and those functioning as its agents) qualify for the "snowbird" exemption.

A customer has just died. If his wife asks you what amount of federal estate tax will be imposed on the transfer of their personal property to her name, which of the following responses would be best? A) The amount of tax will depend on your late husband's tax bracket. B) Consult a qualified tax specialist. C) The amount of tax will depend on the size of the estate to be transferred. D) The amount may be prorated over the next 4 years.

B) Consult a qualified tax specialist. Specific tax advice should be referred to a qualified tax adviser such as an accountant or tax attorney. No federal estate tax is imposed as a result of the marital exclusion as long as the spouse is a U.S. citizen.

Which of the following most accurately identifies a private equity investment in income-producing real estate? A) Investment in a real estate mutual fund B) Direct ownership of real estate properties C) Private market mortgage lending by an insurance company D) Investment in a real estate investment trust (REIT)

B) Direct ownership of real estate properties Real estate investments take four major forms: private equity, publicly-traded equity, private debt, and publicly-traded debt. Private equity investment in real estate refers to direct ownership of real estate properties. Mortgage lending by banks or insurance companies is best described as private debt. Indirect ownership of real estate through equity securities such as REITs is an example of publicly-traded equity.

It would not be a violation of the Uniform Securities Act for an applicant for registration as an agent to do which of the following while the application is pending? A) Conduct seminars on asset allocation B) Sell fixed annuities C) Use a preliminary prospectus to obtain indications of interest for a new issue but wait until he is registered before accepting any orders D) Limit his sales activity to immediate family members only

B) Sell fixed annuities While registration as an agent is pending, the applicant can take no active role in the sale or offering of securities. However, because fixed annuities are not securities, registration as an agent is not required. Yes, I know that an insurance license would be required, but apparently NASAA doesn't care about that.

If a customer purchases shares in a municipal bond fund, which of the following statements are TRUE? - Dividends are taxable. - Dividends are not taxable. - Capital gains distributions are taxable. - Capital gains distributions are not taxable. A) I and IV B) II and IV C) II and III D) I and III

C) II and III Dividends distributed by municipal bond funds are federal tax free (and in some cases, state tax free as well) in alignment with the tax rules of how the fund's investment income was earned. However, any capital gains distribution resulting from the sale of bonds held long term by the fund is subject to taxation to the shareholder.

A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer makes a gift of the securities to his son. Which of the following statements are TRUE? - For gift-tax purposes, the value of the gift is $3,000. - For gift-tax purposes, the value of the gift is $7,000. - The son's cost basis on the stock is $3,000. - The son's cost basis on the stock is $7,000. A) I and IV B) II and IV C) II and III D) I and III

C) II and III When making a gift of securities, the market value at date of gift is used to determine if any gift taxes are due. However, when making a noncharitable gift of securities, the donor's cost basis is passed to the recipient.

What is the purpose of the Securities Exchange Act of 1934? A) It provides requirements relating to new issues. B) It provides standards among the states. C) It regulates the persons involved in the secondary market. D) It provides policies relating to unethical business practices.

C) It regulates the persons involved in the secondary market. The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and securities firms that trade in the secondary market. The Securities Act of 1933 was designed to provide regulation in the new issue market. Unethical business practices are covered in NASAA's Statements of Policy on Unethical Business Practices. The Uniform Securities Act provides a model for the states.

An agent working for a brokerage firm and his client both live in Illinois, and the agent makes an offer to the client by phone while the client is vacationing in California, which he accepts. The client travels to Texas before returning home and sends payment for the security from there. He makes his payment by sending a check from a money market fund based in Ohio. The Administrators of which of the following states have authority over the sale? - Illinois - California - Texas - Ohio A) II and III B) II, III, and IV C) I, II, III, and IV D) I and II

D) I and II Because the offer was made from Illinois to a person in California, the state Administrators of both states have jurisdiction. The state from which payment was mailed and the state in which the checking account or money market fund is based are irrelevant for the purpose of determining an Administrator's jurisdiction.

Becky Biggins has an executive position with a large corporation that covers her under its defined benefit pension plan. This year, Becky's salary will top $235,000. Becky has no dependents and wishes to maximize funds that she can accumulate for her retirement. Becky could - not open a traditional IRA - open a traditional IRA but would not be able to deduct her contributions - open a Roth IRA - not open a Roth IRA A) I and III B) II and III C) I and IV D) II and IV

D) II and IV Anyone with earned income can open a traditional IRA. Deductibility of contributions may be disallowed if the individual is covered under a corporate plan and has earnings in excess of a certain level. Becky's salary exceeds the maximum permitted for a single person so her contributions would be made with after-tax dollars. In the case of a Roth, nothing is deductible, so it doesn't matter if you are covered at work. However, Becky's salary is far in excess of the maximum permitted for a single person to contribute to a Roth IRA.

A broker-dealer publishes a list of securities it approves for inclusion in IRAs. This means A) an agent for the broker-dealer can place these in clients' IRAs knowing that the suitability requirements have been met B) the broker-dealer has committed an unethical business practice because use of the word approved is prohibited C) the broker-dealer has consulted with the regulatory bodies and has received approval from them to recommend these securities for IRAs D) the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning

D) the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning Approved is an odd word in this industry. It can never be used with reference to any regulator commenting on the status of a security or an individual. However, a broker-dealer creating an approved list of securities is not unethical or prohibited as long as it is clear that it is the BD and not any regulator granting the approval. Even though the firm has listed these securities as suitable for IRAs, that does not relieve the individual agent of verifying the suitability for each client for whom they are recommended.

Bail Bonds, Inc., might issue warrants in connection with a bond issue for which of the following reasons? - As an inducement to make the bonds more marketable - To lower their interest cost on the issue - To increase the marketability of their common stock - To increase the number of common shares outstanding A) I and IV B) I and II C) I only D) I, II, III, and IV

B) I and II Warrants permit the purchase of common stock of the issuer at a fixed price. A bond with warrants attached has more value than a straight bond and is more attractive (marketable) to investors. Attaching warrants to a bond issue usually permits the bonds to be issued with a lower interest rate.

If an unaffiliated person acts on behalf of an investment adviser in an attempt to solicit or refer new investment advisory clients, which of the following conditions is NOT required by the Investment Advisers Act of 1940 for the adviser to pay the solicitor a fee for this service? A) The adviser must be registered as an investment adviser. B) The solicitor must be registered as an investment adviser. C) There can be no outstanding SEC order barring the solicitor's activities. D) There must be a written agreement between the solicitor and the investment adviser.

B) The solicitor must be registered as an investment adviser. An unaffiliated (nonemployee, or third party) solicitor is usually not required to register as an investment adviser or investment adviser representative under the Investment Advisers Act of 1940 as long as certain stipulations are met. The solicitor is not under the control of the SEC. There must be a written agreement between the solicitor and the investment adviser for whom he solicits clients. The solicitor cannot have a disciplinary item in his background that would prohibit that solicitor from registering as an adviser or adviser representative.

Which of the following statements are generally TRUE of the buy-and-hold strategy? - Equities would grow relative to fixed income - Lower taxes and transactional costs - Easy to manage - The portfolio would more accurately demonstrate the client's investment objectives and risk tolerance A) II, III, and IV B) III and IV C) I, II, and III D) I and II

C) I, II, and III Over the long run, using the buy-and-hold strategy with equity securities has outperformed the rate of return on fixed income investments. With few transactions, there are almost no commissions and capital gains taxes. Of all strategies, this is the easiest to follow. There is no way to determine the client's objectives or risk tolerance based on the decision to buy and hold. The portfolio might contain small-cap stocks or large-cap stocks. It might contain 90% equities or 75% debt securities. Investors with differing goals and risk tolerance can use this strategy.

A registered investment company whose portfolio consists of equity securities and the portfolio does not change in response to market conditions is probably A) an ETN. B) a passively-managed mutual fund. C) a unit investment trust. D) a closed-end investment company.

C) a unit investment trust. Unit investment trusts are registered investment companies with a fixed portfolio. That is, at the time of organization, the portfolio is purchased and, because there is no ongoing management company, there are basically no changes made.

Under the Uniform Securities Act, requirements for registration as an investment adviser in a state include which of the following? - The Administrator may require an announcement of the application for registration in one or more newspapers in the state. - Minimum financial requirements for federal covered advisers with a place of business in the state who have custody of customer funds and/or securities, or have discretionary authority over customer accounts. - For those needing a surety bond, it must provide that any customer who can prove a violation is entitled to collect against the bond. A) I and II B) II and III C) I, II, and III D) I and III

D) I and III A published announcement may be required by the Administrator. The Administrator may not impose any financial requirements upon federal covered advisers (other than to pay a fee when notice filing). The USA has specific wording requiring that customers who can prove they were the subject of a violation by the IA are entitled to collect against the bond.

Which of the following are required in order to be in compliance with the recordkeeping requirements of the Uniform Securities Act? - Broker-dealers must maintain customer ledgers for 3 years. - Investment advisers must keep partnership records for 3 years after the partnership is terminated. - Agents must keep customer records for 3 years. - Investment adviser representatives must maintain records for 5 years. A) I and II B) I, II, III, and IV C) II and IV D) III and IV

A) I and II Recordkeeping requirements for broker-dealers are 3 years, and partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of an investment adviser and of any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise. There are no recordkeeping requirements for agents or IARs.

Your 30-year-old client has $100,000 to invest and willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in 6 months. Which of the following asset allocation strategies would best suit her situation? A) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund B) 70% large-cap stock fund, 20% balanced fund, 10% money market fund C) 50% government bond fund, 50% large-cap fund D) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund

B) 70% large-cap stock fund, 20% balanced fund, 10% money market fund This question is dealing with 2 different time horizons. First we have the short-term of 6 months for the home down payment, so she'll need capital preservation and liquidity. That is accomplished with the money market fund. Then, being 30 years old, she has a long-term time horizon that necessitates investing for growth and inflation protection. That is where the 70% in large-cap securities is the most appropriate asset allocation for her. The 20% in the balanced fund helps keep the overall risk level on the moderate side. One point to remember is that municipal bonds (or municipal bond funds) will never be the correct investment choice unless the question states that the client is in a high tax bracket or is looking for tax-free income.

Beth Jamison is an agent and an IAR for Consolidated Wealth Planning, a FINRA member broker-dealer and SEC-registered investment adviser. An advisory client purchases 300 shares of RMBN and the sale is made from Consolidated's inventory. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) the amount of commission charged for this transaction must be clearly disclosed. B) Beth would be required to obtain consent for this principal transaction if it was the subject of a recommendation. C) selling out of inventory to advisory clients would be considered an unethical business practice. D) Beth must obtain written consent of any advisory client whenever a sale is made as principal.

B) Beth would be required to obtain consent for this principal transaction if it was the subject of a recommendation. When acting in the capacity of IA (or IAR), that is, when making recommendations or advising a client to purchase (or sell) a security, any transaction in which the firm is a principal requires disclosure in writing to and consent (can be oral) from the client prior to the completion of the trade. However, if merely accepting a client order (no advice rendered), consent is not required.

Beth Jamison is an agent and an IAR for Consolidated Wealth Planning, a FINRA member broker-dealer and SEC-registered investment adviser. An advisory client purchases 300 shares of RMBN and the sale is made from Consolidated's inventory. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, A) selling out of inventory to advisory clients would be considered an unethical business practice B) Beth would not be required to obtain consent for this principal transaction if it was not the subject of a recommendation C) Beth must obtain consent of any advisory client whenever a sale is made as principal D) the amount of commission charged for this transaction must be clearly disclosed

B) Beth would not be required to obtain consent for this principal transaction if it was not the subject of a recommendation When acting in the capacity of IA (or IAR), that is, when making recommendations or advising a client to purchase (or sell) a security, any transaction in which the firm is a principal requires disclosure in writing to and consent from the client prior to the completion of the trade. However, if merely accepting a client order (no advice rendered), consent is not required.

Which of the following is an unethical practice for agents of broker-dealers? A) Effecting securities transactions not recorded on the books of the employing broker-dealer with the employing broker-dealers' approval in writing B) Effecting securities transactions not recorded on the books of the employing broker-dealer without prior written authorization C) Borrowing money from a commercial bank that has investment accounts at the broker-dealer D) Failure to make a bona fide public offering of all securities acquired as an underwriter

B) Effecting securities transactions not recorded on the books of the employing broker-dealer without prior written authorization It is an unethical practice for an agent of a broker-dealer to effect securities transactions not recorded on the books of the employing broker-dealer, unless prior written authorization is secured. Broker-dealers, acting in the capacity of underwriters, not their agents, must make a bona fide public offering in underwritings.

Under the Investment Advisers Act of 1940, which of the following are exempt from the requirements for registration? - Foreign investment advisers with fewer than 15 clients per year who do not hold themselves out as investment advisers to the public and have less than $25 million in AUM in the United States - Investment advisers who conduct all of their business in 1 state and who do not provide advice on securities listed on an exchange and have no private funds as clients - Investment advisers whose only clients are banks A) I only B) I and II C) I, II, and III D) II only

B) I and II Usually, anyone who meets the federal definition of investment adviser must be registered with the SEC. Some investment advisers are not excluded from the definition but are exempt from the registration requirements of the SEC. One example is an adviser whose clients are all residents of the state in which the adviser maintains its principal office who renders no advice on any exchange-listed security and does not give advice to any private funds. Advisers whose clients are limited to insurance companies are exempt from registration, as are foreign advisers who limit themselves to fewer than 15 clients a year (none of whom can be investment companies), do not advertise or hold themselves out to be investment advisers and have less than $25 million in AUM in the United States. There is no exclusion for advisers whose only clients are banks.

An analyst is reviewing a report on Company X. The report shows a P/E ratio of 10, compared with an industry average of 27. Based on the most current quarterly payment, X has a dividend yield of 3.65%. The analyst notices there is a footnote indicating the company has put $1.2 billion away for what it refers to as a rainy day fund. most likely, Company X would be considered A) a utility stock B) a value stock C) a growth stock D) a small-cap stock

B) a value stock Although there are no hard and fast rules, when a company's P/E ratio is substantially lower than its industry average and the dividend yield is fairly high, it will be considered to have great value. Solidifying this decision is the notation that there is the rather large rainy day fund. Yes, utility stocks do pay liberal dividends but what must be noticed here is the low P/E ratio compared with its peers.

In order to qualify as a REIT, A) a mortgage REIT must have at least 75% of the assets in government-insured mortgages. B) at least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities. C) at least 90% of the assets must be invested in real-estate related assets. D) at least 75% of the income must be paid out as dividends to investors.

B) at least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities. A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its income to investors, not 75%.

Charlie Mindel is the portfolio manager for the Steady Yield Bond Fund. If Charlie was of the opinion that interest rates were going to fall, he would A) keep the average duration the same. B) increase the average duration of the portfolio C) decrease the average duration of the portfolio. D) move more of the portfolio into cash.

B) increase the average duration of the portfolio As interest rates go down, prices of bonds rise. Those with the longest duration will have the greatest price increase. To benefit from this move, managers of bond portfolios will lengthen the average duration of the portfolio. The reverse action would be taken if Charlie thought that interest rates were going to rise. Of course, if interest rates move in the opposite direction of that the manager expects, the fund might start looking for a new manager.

A client of Wall Street Wealth Management (WSWM), a federal covered investment adviser, calls the IAR handling the account and gives instructions to use some of the surplus cash in the account to purchase 500 shares of RMBM, a small-cap stock traded on the Nasdaq Stock Market. Prior to submitting the order, the IAR checks with a supervisor and learns that WSWM has 1,000 shares of RMBM in its proprietary account and is looking to halve the position. If, instead of forwarding the order to the broker-dealer who normally handles trade executions for this client, WSWM filled the order out of its own account, A) WSWM would be engaging in a prohibited practice B) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction C) it would be permissible only if consent was obtained, and written disclosure of the firm's capacity was disclosed prior to execution D) because it was an unsolicited transaction, the only required disclosure would be the firm's capacity on the trade confirmation

B) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction In almost every case, an IA acting as a principal (out of inventory) or agent in a trade with an advisory client must obtain client consent and provide written disclosure of the IA's capacity in the trade no later the completion of the trade. If the IA is also a broker-dealer and the transaction with the advisory client was not generated through a recommendation (generally an unsolicited order), the only disclosure necessary is the firm's capacity on the confirmation. In this question, we can't assume that WSWM is also a broker-dealer.

An investment adviser is approached by an investment company that has 25 investors. The company would like to employ the adviser to manage its account. The IA is willing to do so, but proposes a compensation agreement that provides for a 20% share of the profits if performance exceeds a certain benchmark. In order for this to be acceptable, A) the individual in charge of the investment company must be a qualified investor B) the investment company must have net worth in excess of $2.1 million or at least $1 million in assets under management with the IA C) a majority of the shareholders in the investment company must be qualified investors D) all the shareholders in the investment company must be qualified investors

B) the investment company must have net worth in excess of $2.1 million or at least $1 million in assets under management with the IA In 1987, NASAA followed the lead of the SEC and permitted performance-based compensation when the investor (or company) had at least $500,000 in AUM with the IA, or had a net worth in excess of $1 million. In 1998, the SEC raised the threshold to $750,000 and $1.5 million, respectively. Then, in July, 2011, the bar was raised again by the SEC to $1 million and $2 million. On April 15, 2013, NASAA caught up and the numbers were unified. Most recently, on August 16, 2016, the net worth requirement was raised to in excess of $2.1 million (the $1 million in AUM remained the same). By the way, this is not a registered investment company under the Investment Company Act of 1940—those need at least 100 investors.

Which of the following statements is (are) TRUE regarding investment advisory contracts under the Uniform Securities Act? - The adviser cannot be compensated on the basis of a share of the capital gains or capital appreciation in a client's account. - The advisory contract may not be assigned without the consent of the client. - If the adviser is a partnership, the adviser must notify clients with whom the adviser has contracts of any changes in the partnership within a reasonable time. - An adviser may be compensated based on the total value of a client's account averaged over a specific period. A) I only B) II, III, and IV C) I, II, III, and IV D) II only

C) I, II, III, and IV Under the Uniform Securities Act, the basic rule is that an adviser cannot be compensated on the basis of a share of the capital gains or capital appreciation in a client's account. Although there are exceptions to the basic rule, the question does not address the exceptions. An adviser may be compensated based on the total value of a client's account averaged over a specific period. An adviser that is a partnership must notify its clients of changes in a minority of the partners within a reasonable period of time. If it is a majority or material change in partners, it is treated as an assignment and would require consent of the clients.

Under securities industry regulations, all of the following are prohibited when attempting to make a sale EXCEPT A) telling a client that he is trading commission free when, in actuality, your firm is acting as a principal and placing a markup on his trades B) telling a client that her stock is a sure candidate for a takeover bid C) a statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so D) an agreement by the agent to repurchase the security from the customer for the same price at a future date

C) a statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so An agent cannot guarantee to buy back the securities at the same price, cannot claim there are no transaction costs when the firm charges a markup, and cannot make exaggerated statements relating to future activity in a security. However, the agent may state that the company intends to list its shares on an exchange if this is a fact.

Which of the following transactions would NOT be exempt under the Uniform Securities Act? A) A customer calls his broker-dealer and submits an order to purchase a specific security. B) Securities are sold that were collateral for a defaulted loan. C) The executor of an estate sells securities to liquidate the property. D) A registered dealer sells Canadian government securities to a retail client.

D) A registered dealer sells Canadian government securities to a retail client. Unsolicited, nonissuer transactions (customer calls the broker-dealer to order or sell a security) are exempt transactions, as are fiduciary transactions to liquidate estates or receiverships by guardians, executors, administrators, trustees in bankruptcy, or conservators. Sales of securities that had been pledged as collateral for a defaulted loan are also exempt transactions. The sale of Canadian government securities by a registered dealer represents a security that is exempt under the Uniform Securities Act, but the transaction itself is not.