Series 66 Flashcards 2

Unlike forward contracts, futures contracts are standardized agreements that are traded on exchanges and readily transferred. Forward contracts are not readily transferable since both parties to the original contract must agree before one of them may sell the contract to a third party. (62918)

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

A The investment advisory contract must disclose the manner in which the adviser will be compensated. The contract must also include a statement that the adviser may not assign the contract to another party unless the client consents and may not be compensated based on a share of capital gains. (62944)

Broker-dealers are required to keep a copy of all orders, EXCEPT: Not-held orders Cancelled orders Orders to subscribe to a rights offering Market orders

A broker-dealer is required to maintain a copy of all orders, except those that subscribe to a rights offering, as they are sent directly to the issuer by the shareholder. (62816)

According to the Form ADV, a felony, as compared to a misdemeanor, is defined by all the following choices, EXCEPT: An offense punishable by a sentence of at least one-year imprisonment An offense punishable by a fine of at least $1,000 An offense punishable by a fine of at least $500 A general court martial

All the choices are applicable except choice (c). A felony is an offense punishable by a sentence of at least one year imprisonment and/or a fine of at least $1,000. The term also includes a general court martial. A misdemeanor includes a special court martial, or an offense punishable by a sentence of less than one year imprisonment and/or a fine of less than $1,000. (75899)

What information is important for determining whether a limited partnership is appropriate for a particular client? The client's financial status and ability to assume risk The client's investment objectives The client's occupation The client's educational background I only I and II only I, II, and III only I, II, III, and IV

C A client's educational background is not an important factor for determining whether a limited partnership is appropriate for the individual. (75096)

Which of the following actions by an agent of a broker-dealer is NOT permitted? Providing securities-related advice to a customer and receiving a commission based on the purchase of the security by the customer Describing the features of a trust to a customer Providing advice to a customer regarding the type of joint account to be opened Providing advice to a customer regarding the investments within a custodial account

C Giving advice to customers regarding the type of joint account to be opened is legal advice and, therefore, may only be provided by attorneys. (62014)

Under the USA, which of the following transactions would NOT be considered exempt? An offer to an investment company A transaction by an executor of an estate An unsolicited issuer transaction effected through a registered broker-dealer A transaction by a trustee that is involved in a bankruptcy proceeding

C Under the Uniform Securities Act, any offer to an investment company or other institutional investor, a transaction by an executor of an estate, or a trustee involved in a bankruptcy, would be defined as an exempt transaction. An unsolicited nonissuer transaction may qualify as an exempted transaction. (62648)

A Section 457 plan is a type of retirement plan used by many public sector workers. These 457 plans grow on a tax-deferred basis and are generally subject to the same contribution limits as 401(k) and 403(b) plans. All have similar tax features and contribution allowances. The difference between the plans is the type of employee who may use them. A 401(k) plan is used by for-profit employees, a 403(b) plan by nonprofit employees, and a 457 by some local government workers. State-sponsored, higher education savings vehicles are referred to as Section 529 plans, not 457 plans. (62284)

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A limited partner is risking only the amount she invests in the partnership. The potential for assessments (demands for more money from investors) and the lack of control over the management of the venture are considered disadvantages of limited partnerships. Tax losses generated by the partnership are passed on to investors, but they may only be used to reduce income generated by other passive activities. They may not be used to reduce earned income (wages and salaries) or income from most other types of investments. (63049)

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If an agent unknowingly (without fraud) sells a security in violation of a state registration provision, her customer must take action for recovery within three years of the occurrence of the violation, or within two years of discovery of the violation, whichever comes first. (62057)

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In states where the Administrator has designated the IARD as the method for filing registration applications electronically, two exemptions are available. The exemptions are given in cases where the form that is filed cannot be accepted by the IARD and for hardships incurred through unexpected technical difficulties in filing. In such cases the investment adviser may file a manual application. (62008)

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It is considered fraudulent for a broker-dealer to fail to notify a client of larger-than-ordinary commissions or costs. Purchases or sales of a small amount of securities can often lead to larger-than-ordinary costs because of minimum charges assessed for transactions. This can lead to commissions that are large as a percentage of the purchase price. It is not illegal to assess such charges, but it is illegal not to inform the client about them. Charging a client an unreasonable commission is prohibited. (62939)

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Many hedge funds are issued as private placements under Regulation D. In order to qualify for the exemption, they must be offered only to accredited investors, or no more than 35 nonaccredited investors. Accredited investors include: Individuals with an annual income of at least $200,000 during the last two years who reasonably expect to continue to earn that much in the future A married couple with a joint income of at least $300,000 who reasonably expect their income to continue at the same level in the future An individual or a couple with a net worth of at least $1 million The investor in choice (a) meets the income requirement but his income will probably drop now that he is retired. The investor described in choice (c) does not meet either the income or the net worth requirements. The couple described in choice (d) just won the lottery. Thus, their income was probably much higher this year than normal and it is unlikely to remain at the same level. Only the couple described in choice (b), two doctors in their prime earning years, can reasonably expect to continue making the same income. (79694)

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One of the major differences between futures contracts and forward contracts is the ability to offset each position. In a futures contract, the investor may offset the position at any time before the contract is assigned. However, in a forward contract, the agreement between the two parties may not be assigned without permission of the other party. (62128)

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Tactical Asset Allocation is used to identify and buy into sectors that are anticipated to outperform the market. Strategic asset allocation is used to assemble an investment portfolio based on the client's risk tolerance and objectives. As the assets change in value, the portfolio may then be rebalanced frequently. Indexing is a passive investment approach. (62036)

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Under the Uniform Securities Act, banks, trust companies, and saving institutions are excluded from the definition of IA. An odd aspect of the Act is that federal covered advisers (generally advisers with assets of $110 million or more) are not considered advisers under the Uniform Securities Act, since they are subject to SEC regulation. Publishers who give general advice to their readers without rendering individual advice are typically exempt, but those who give advice based on the client's specific situation are considered advisers. (62891)

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Which of the following statements best describes why an individual may choose to create a general partnership rather than a limited partnership? All of the investors want to manage or operate the business The owners of the business want to make sure it dissolves after a certain date In a general partnership, income is only taxed once The owners want to protect themselves from liability

A A business owner may create a general partnership because it allows all of the investors to manage or work in the business. The other items listed are not valid reasons to create a general partnership since both limited and general partnerships are taxed in the same manner, and general partners have more liability than limited partners. (67520)

An adviser is comparing two bonds of similar credit quality and duration for a client. The client is seeking a yield of 6.5%. After performing discounted cash flow analysis on each bond, the adviser has determined that Bond A is trading at a discount to its present value, while Bond B is trading at a premium to its present value. Which TWO of the following statements are TRUE? Bond A is priced attractively and should be purchased. Bond B is priced attractively and should be purchased. The investor will earn an annual interest rate greater than 6.5% with Bond A. The investor will earn an annual interest rate greater than 6.5% with Bond B. I and III I and IV II and III II and IV

A Discounted cash flow (DCF) analysis evaluates the present value of all coupon payments and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for a client. If a bond is trading at a discount to its present value, the investor will earn more than the interest rate that has been used to calculate the present value. Conversely, a bond that is trading at a premium to its total present value will be worth less than the price of the bond. (The investor would be overpaying for the bond.) (62013)

An advisory client is discussing the purchase of AA-rated, 15-year municipal bonds with his adviser. The bonds offer a coupon rate of 3.2% and can be purchased at a small premium to par. The adviser is not certain if the bonds are trading at an advantageous price. Which calculation would provide the BEST method of determining whether the bonds should be purchased? Discounted cash flow Yield to maturity Duration Current yield

A Discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for her client. (62315)

A CPA who specializes in tax and estate planning is serving as a trustee. Since the CPA will be charging a minimal fee for his services, he chooses not to perform a complete tax analysis for the trust. Under the Uniform Prudent Investor Act, the CPA's actions are considered: Unacceptable because the trustee is not acting in the best interest of the trust Unacceptable because fee reduction is only permitted for immediate family members Acceptable because no conflict of interest exists Acceptable since the trustee is charging a minimal fee and providing minimal service

A Ignoring a client's tax situation would be a violation of a trustee's fiduciary duty. Charging a minimal fee for service does not give the CPA permission to ignore the client's best interests. In many cases, a trustee may seek outside tax advice; but, if the trustee is also a CPA, it is reasonable to assume that she would perform the tax analysis. (67716)

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

A Short-term, corporate, fixed-income securities such as commercial paper and a banker's acceptance may qualify as an exempt security. The maximum maturity is nine months. The minimum denomination is $50,000 and it must be rated in one of the three highest rating categories by a nationally recognized statistical rating organization. (62446)

When sharing in the profits of a customer's account, whose approval is required? The client's The SEC's The Administrator's This practice is prohibited and unethical

A The client and the broker-dealer carrying the account are required to approve any account in which both the agent and the customer share in the profits and losses. The sharing must be proportionate to the capital at risk. Of the choices given, the client is the only correct answer. (62709)

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

A The holding period rate of return states how much an investor earns over the period an investment is held. The annualized rate of return states how much an investor makes over a one-year period. If an investor had a 5% rate of return over six months, her holding period rate of return would be 5%; however, her annualized rate of return would be 10% (the 5% return earned over the six-month period multiplied by two). If the holding period had been more than one year, the opposite would be true--the holding period return would be larger than the annualized rate of return. (67481)

Bert and Berti are both 60 years old and earned $150,000 jointly last year. They contribute to their 401(k) plans but would like to save more for their retirement. The most suitable type of plan for an IAR to recommend is a: Roth IRA, in which each may contribute $6,500 per year Traditional IRA, in which each may contribute $5,500 per year Roth IRA, in which both may contribute $5,500 per year Traditional IRA, in which both may contribute $6,500 per year

A The maximum annual contribution to either a traditional or Roth IRA is $5,500, per individual. However, for people age 50 or older, the maximum annual contribution is $6,500. Bert and Berti's gross income does not exceed Roth income eligibility requirements, so the Roth is typically a better choice compared to a traditional IRA, since withdrawals from a Roth are tax-free. With the traditional IRA, any earnings are taxed as ordinary income upon distribution, plus the contributions may be taxed if contributions were made on a pretax basis. Given the clients' ages, income, and the tax-free withdrawals, the Roth is the better investment choice. (63083)

In order for a $25,000 investment to increase in value to $100,000 in 20 years, it would have to earn an annual return of: 7.2% 14.4% 25% 50%

A To determine the rate of return at which an investment would double in value, use the rule of 72. Since the investment doubled every 10 years, 72 / 10 years = 7.2%, which is the annual rate of return for the investment to increase to $100,000 after 20 years. (62860)

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

A Under the USA, the term broker-dealer does NOT include any person that does not have a place of business in the state AND only transacts business with issuers, other broker-dealers, financial institutions, or institutional buyers. Since CMP is opening an office in North Carolina, the firm would need to be registered in that state regardless of the clients it sells securities to or conducts business with. Since the broker-dealer will be registered in North Carolina, any agent of that broker-dealer effecting transactions in that state would also need to be registered. (62583)

Under the Uniform Securities Act, an individual applying for an investment adviser representative registration may be required by the Administrator to: Pass an examination Pay a filing fee Maintain a minimum net capital I and II only I and III only II and III only I, II, and III

A When an individual applies for an investment adviser representative registration, the Administrator may require the individual to pass an examination (which may be oral, written, or both) and pay a filing fee. Investment advisers and broker-dealers may be required to maintain a minimum net capital in addition to meeting the two previously mentioned requirements. (62988)

An IAR, who is new to the industry, has a client enter his office with an interest in investing $45 million. After completing a client profile, the IAR determines that the client has a high risk tolerance and the objective of capital appreciation. What should the IAR do in this situation? Consult with other experts since he alone is not qualified to manage such a large sum Build a portfolio consisting of stocks that meet the client's needs Research stocks and then put together the portfolio Consult his firm's list of approved securities and build a portfolio

A When an investment adviser representative opens an account with a very significant amount of money, he should know his firm's policies and procedures. In a situation like this, he may not be qualified to personally invest and manage such a large amount of assets. (67547)

One of your clients anticipates a significant decline in XYZ stock. The client would like to establish a position to take advantage of this, but not expose himself to significant risk. Which of the following actions would best satisfy your client's needs? Short XYZ stock Purchase an XYZ put Purchase an XYZ straddle Establish an XYZ debit put spread

B A long put would allow your client to realize a gain determined by the amount the stock falls below the option's strike price, less the premium. The investor is only at risk for the amount paid for the put, i.e., the premium. In selling XYZ short, an investor exposes himself to unlimited risk. When purchasing a straddle, the investor pays a premium greater than when purchasing only one put on the stock. While the debit put spread is bearish, the gain is limited to the difference between the strike price on the long put and the strike price on the short put, less the net premium. (62693)

According to SEC Release 1092, an attorney is excluded from the definition of an investment adviser in all the following circumstances, EXCEPT: An attorney charges a separate fee for investment advice and offers these services only to existing legal clients The attorney's Web site states that he is available to give investment advice on any judgments won by his clients Investment advice offered by the attorney is incidental to the practice of law The income derived from rendering investment advice is less than 1% of the attorney's gross income and is, therefore, incidental to his law practice I and II only I, II, and IV only III only III and IV only

B According to SEC Release 1092, lawyers, accountants, teachers, and engineers are excluded from the definition of investment advisers, provided the advice is incidental to their professional activities. There may be no separate charge for the investment advice, nor may these professionals hold themselves as investment advisers. If these conditions are not met, the professional exclusion will not apply. This would require the professional to register as an investment adviser. No dollar amount or percentage of income is applied to define incidental services. (62388)

A client who wants to use dollar cost averaging would be MOST likely to invest in which of the following funds? Hedge funds Mutual funds Exchange-traded funds Venture capital funds

B An investor using dollar cost averaging will invest a fixed-dollar amount at regular intervals. One of the advantages of mutual funds is that you can invest a fixed-dollar amount at regular intervals and purchase full and fractional shares in the fund. (62925)

According to the USA, if an investment adviser wants to charge a fee based on the average value of a client's portfolio, the fee: Is prohibited unless permitted by the Administrator Is permitted unless prohibited by the Administrator Is always permitted Is always prohibited

B Asset-based fees are one of the most common methods that investment advisers use to charge their clients. Under the Uniform Securities Act, these types of fees are allowed provided they have stated time periods. Since Administrators may create rules prohibiting any type of fee, it would be incorrect to state that they are always permitted. (67658)

A client of an IAR is 35 years old and single with three children, ages 7, 9, and 12. She has 15 years remaining on her home mortgage. She would like to ensure her children will be able to attend college and that the mortgage will be paid off in the event of her death. She does not currently have a great deal of discretionary income. Which of the following would be most suitable for the IAR to recommend? A whole life policy, cancelable after 15 years A 15-year term life insurance policy A whole life policy with a 15-year term rider A universal life policy with increased premiums after 15 years

B Based on the client's future obligations and lack of discretionary income, term life offers the least expensive policy for the period she needs it for. A whole life policy charges higher premiums. A whole life policy with a term rider would be even more expensive, and the same is true of universal life. (62660)

All of the following statements regarding discounted cash flow are NOT TRUE, EXCEPT: It is used to calculate the volatility of the market It is used to determine the attractiveness of an investment It can only be used to determine the value of a bond It can only be used to determine the value of common stock

B Discounted cash flow (DCF) analysis is a method of estimating the fair market price of an investment. If the investment is trading at a value lower than its discounted cash flow value, this would suggest it is attractive or undervalued. Research analysts use discounted cash flow analysis to determine the value of many different investment opportunities in the marketplace. (63031)

A broker-dealer located in State A, in business for three years, goes out of business in July. Some of the principals at the firm start a new broker-dealer in August of that year. Which of the following statements is TRUE concerning the broker-dealer's registration fee? A fee is not required until the next year The appropriate registration fee must be paid A prorated fee must be paid A fee is not required since the broker-dealer and not the agent is seeking registration

B Every applicant whether an agent, broker-dealer, investment adviser, or investment adviser representative must pay a registration fee. This fee is paid when an applicant files the initial application as well as when the registration expires each year on December 31. If a registration fee is paid in the middle of the year, the fee is usually not prorated. (62511)

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

B Firms with no office in a state would not be required to register as an investment adviser in the state provided the firm deals exclusively with institutions such as broker-dealers or government entities, but not individual investors. Another exemption exists for firms that send communications to a maximum of five noninstitutional customers in a 12-month period and have no office in the state. Any firm with assets under management (AUM) of $100 million up to $110 million is given the choice to register with the state or the SEC. Firms with AUM of $110 million or more are categorized as federal covered advisers and are, therefore, exempt from state level registration. (62652)

In order to clarify items in the balance sheet or income statement, a corporation may include them as: An addendum Footnotes A supplement A correcting amendment

B Footnotes on a financial statement are used to provide additional information or to clarify information, i.e., methods of depreciation used, inventory valuation methods, reserves for future events, etc. (62801)

Under the Uniform Securities Act, which TWO of the following transactions would be considered a sale? The exercise of an option A gift of assessable stock A stock dividend Lending stock to short sellers I only I and II only I and III only II and IV only

B Gifts are generally not considered sales. However, since assessable stock may require the person who receives the gift to provide additional money or capital, it is considered a sale. Loans and pledges of securities as well as stock dividends do not constitute a sale if nothing of value is given by the shareholder for the dividend. If an option is exercised, one party to the contract is selling the underlying securities. (62892)

The last dollar of income earned each year is taxed at the: Effective tax rate Marginal tax rate Average tax rate Highest tax rate

B Income is taxed at progressively higher rates. The first dollar earned is taxed at the lowest bracket, or rate, while the last dollar earned is taxed at the appropriate rate, or marginal tax rate. The effective tax rate is the average of the taxes paid at different rates. (62858)

Under Section 404(c) of ERISA, fiduciaries are: Relieved of all responsibility for monitoring the plan and its investment options Not liable for investment losses provided that certain requirements are met Able to engage in prohibited transactions Considered the same as the plan participants

B Section 404(c) provides a limited exception to the normal rules governing fiduciary responsibility under ERISA for plans that provide for individual, self-directed accounts, such as 401(k) plans. Fiduciaries are not held responsible for investment losses if certain conditions are met. (62377)

Under the Uniform Securities Act, the Administrator is NOT authorized to: Issue subpoenas on behalf of other Administrators Issue injunctions Issue orders to deny, suspend, or revoke a registration without prior notice, opportunity for hearing, and written findings of fact or law Compel the presentation of books and records

B The Administrator is not able to issue injunctions. Only a court of competent jurisdiction may issue an injunction. The Administrator may subpoena books, records, testimony, and work in conjunction with other regulators to help them enforce the laws within their states. (63139)

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

B The IRS defines earned income as compensation received for personal services actually rendered. According to the IRS, all of these items are considered earned income. Wages, salaries, and tips Union strike benefits Long-term disability benefits received prior to minimum retirement age Net earnings from self-employment Unemployment, alimony, and child support are not considered earned income. Income received from investments in property are defined as passive income, which is different from earned income, and treated separately by the IRS. (62748)

The stock market recently experienced a severe correction. An IA rep receives a letter from a client complaining about the losses that he has suffered as a result of the adviser's investment decisions. The client later calls the adviser and apologizes for the letter and tells the IA rep to return it. He wants to withdraw the complaint. What should the agent do? Return a copy of the complaint to the client and keep the original along with a copy Return the original letter to the client and keep a copy Return the original complaint along with any copies Shred the original letter and any copies

B The NASAA Model rule regarding record-keeping requirements for investment advisers states that advisers must keep a file containing copies of all written client complaints. Thus, if a client requests that the original complaint be returned, the firm and the IA rep should follow the client's instructions, document that the original was sent at the client's request, and retain a copy for their records. (62744)

Under the Uniform Securities Act, in order for an issuer to be eligible to use registration by coordination, the issuer must also register with the SEC under: The Investment Company Act of 1940 The Securities Act of 1933 The Securities Exchange Act of 1934 The Investment Advisers Act of 1940

B The Securities Act of 1933 regulates the federal registration of newly issued securities. Under the Uniform Securities Act, in order to register a security using registration by coordination, the security must also be registered with the SEC under the Securities Act of 1933. (67470)

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

B The best choice here is opportunity cost. Opportunity cost is a term used in a variety of ways in economics. For purposes of the question, the focus here is on investment choices. Opportunity cost is the difference in return between an investment made and one that is not made. In this case, Barry invested in a Treasury and it returned 2% over the year. Barry gave up the opportunity of his old portfolio which returned 8%. In this situation, his opportunity costs are 6% (8% - 2%). (62772)

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

B The rate of return for a fixed annuity is specified in the contract. The insurance company is obligated to pay this amount regardless of the performance of its investments. (62445)

Ward Cleaver, age 81, is establishing a bypass trust for his adult children, Wallace and Theodore. His investment adviser, Edward Haskell, is evaluating the risks and benefits of numerous investment vehicles. Which of the following choices is most applicable for investments in a bypass trust? Government securities are advisable to preserve the value of assets passing to the beneficiaries Growth stocks are advisable, since long-term capital gains tax rates will apply to the beneficiaries, but would not apply to the estate Municipal securities would provide tax-free income to the beneficiaries Short-term maturities are most suitable, given the grantor's age

B The tax rates for estates can be significantly higher than the maximum long-term capital gains tax rate of 20%. In a Credit Shelter Trust (also known as a bypass trust, family trust, or B trust), when an individual dies, his assets flow into the trust in the amount of the estate-tax exemption. Although this amount is subject to tax, an individual can apply his unified credit to the amount and the trust is free from estate taxes in the future. The growth of the trust is not part of the estate. The beneficiaries pay taxes as capital gains, but this is often a far lower rate than estate tax rates. Growth stocks are often appropriate because of the significant difference between the two tax rates. (62027)

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

B Under the Uniform Securities Act, any firm without an office in a given state that deals only with banks, broker-dealers, and advisers, would be exempt from registration. The Act also exempts firms dealing with five or fewer retail customers. (Honcho Rio is dealing with too many individuals to take advantage of this exemption.) Under the USA, the exemption for employee benefit plans applies only to plans with assets of $1 million or more; therefore, Honcho Rio is not entitled to this exemption either. (62423)

A company enters into bankruptcy and is being liquidated by the trustee. When a building is sold, its value is greater than the value of the mortgage that collateralizes the building. What will the trustee do with the excess funds? The trustee will distribute the proceeds of the sale to the secured creditors The trustee will use the proceeds that exceed the mortgage to pay the company's general creditors The proceeds must be distributed to the stockholders as a capital gain The proceeds in excess of the mortgage balance will be paid to the stockholders as income

B When a company liquidates under Chapter 7, the secured lenders are entitled to the payment of principal and interest. The remaining assets would be distributed to general creditors since the bondholders are not entitled to excess returns. The common stockholders would not be entitled to any return of capital until the general creditors are paid. When filing for Chapter 7 bankruptcy, a company stops all operations and goes completely out of business. A trustee is appointed to liquidate the company's assets and the money is used to pay off its debts, which may include debts to creditors and investors. (67539)

Which TWO of the following statements are TRUE regarding nonqualified annuities? There is a 10% penalty on any taxable withdrawals before age 59 1/2. There is no 10% penalty on any taxable withdrawals before age 59 1/2. Distributions must begin by age 70 1/2. There is no requirement for distributions to begin by age 70 1/2. I and III I and IV II and III II and IV

B Whether an annuity is qualified or nonqualified, the 10% penalty for withdrawals before 59 1/2 would apply to any taxable amount withdrawn. If it is qualified, all of the money received will be taxable as income and subject to the 10% penalty. If it is nonqualified, only the tax-deferred earnings, which come out first, are taxable and subject to the 10% penalty. Withdrawal of the cost basis (after-tax contributions) is tax-free and penalty-free. On the other hand, the IRS does not require that distributions from a nonqualified annuity be started by age 70 1/2, as it typically does with qualified annuities. (63061)

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

C A nonqualified annuity has a cost basis consisting of the after-tax dollars invested, as well as earnings that are tax-deferred. If it is annuitized, the cost basis is returned in equal amounts in each payment. The rest of each payment is tax-deferred earnings that become taxable (as income) upon receipt. (63060)

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

C All choices are true, except the statement that records must be destroyed after five years. In fact, some records must be maintained for up to three years after termination of the firm (e.g., partnership agreements, articles of incorporation, minutes from board meetings, etc.). (63101)

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

C Although it is difficult to compare the advisory services provided to clients of different advisers, a general standard of reasonable fees is used to compare fees charged by various advisers. Fees that are obviously out of line with those charged for similar services are considered unethical. (62043)

Under the Uniform Securities Act, which of the following choices would fall under the definition of an agent? A trust company, bank, or savings institution A sales assistant authorized to accept client orders Any person other than a broker-dealer who acts on behalf of a broker-dealer or issuer in effecting sales or purchases of securities II only III only II and III only I, II, and III

C Anyone transacting securities business (i.e., accepting orders) on behalf of a broker-dealer or issuer is generally considered an agent. This would include sales assistants who take client orders, as well as registered representatives. A trust company, bank, or savings institution would not be included. (62009)

Carrie David has been a client of Closter Investment Advisers for four years. She is happy with the performance of her account and wants to renew her contract with the firm. Which of the following provisions is NOT required in the contract? Notification if a managing partner, who does not manage any of Carrie's assets, retires from the firm Notification if a managing partner, who does not manage any of Carrie's assets, leaves to start a new advisory firm Notification if the investment adviser representative, who manages Carrie's assets, leaves to start a new advisory firm Notification if the investment adviser representative, who manages Carrie's assets, does not leave the firm, but her supervisor, who is a partner, leaves the firm

C Certain provisions are required in investment advisory contracts. One provision requires the adviser to notify clients of any change in the membership of the partnership within a reasonable period. Whether the partners manage Carrie's assets is not relevant to the notification provision. It would be a good business practice for Closter to notify Carrie if the person that manages her assets leaves the firm, but it is not required since that person is not a partner. (62480)

According to the Uniform Securities Act, which of the following securities are exempt from registration? Stock issued by a FINRA member firm Debentures issued by a Canadian bank Stock issued by a state-regulated railroad company Preferred stock sold to investors in the same state in which the firm is incorporated

C Common carriers, such as railroads and shipping companies, are exempt from registration under the Uniform Securities Act. While securities issued in the same state in which the firm is incorporated may be exempt from the Securities Act of 1933, they are usually required to register with the state. Agencies of the Canadian government and domestic U.S. banks are also exempt from registration, but securities issued by Canadian banks receive no such exemption. (67607)

If the NPV (net present value) of an investment is greater than zero, the investment will provide a return: Of less than the discount rate used Equal to the discount rate used Greater than the discount rate used That is unknown

C If the net present value of an investment is greater than zero, the investment will generate a positive return. Net present value is used in discounted cash flow (DCF) analysis. It is a standard method for using the time value of money to evaluate investments. For example, if an adviser wants to purchase a portfolio of bonds, she would discount the cash flows of those bonds into one present value amount, for example, $1,300,000. If the adviser can purchase the bonds for less than that amount, then the investment has a positive net present value. This would mean that the return on the portfolio would be greater than the discount rate used to arrive at the net present value. If the adviser could not locate the bonds for a total price of less than $1,300,000, then the purchase would not be completed. (63078)

An institutional client is seeking an investment that is not correlated to the stock or bond markets. Which of the following investments should you recommend? An index fund A balanced fund A hedge fund A variable annuity

C Many institutions and other sophisticated investors place a portion of their portfolios in hedge funds or other alternative investments for the reason stated in the question--their returns are not supposed to be highly correlated with more traditional investments. By investing in commodities and real estate, for example, hedge funds may avoid the risk associated with a downturn in the stock market. (63039)

Which of the following documents must be retained by an investment adviser regarding its IARs? Fingerprint cards Background checks Registration applications Employment applications I only II only I and III only III and IV only

C NASAA Recordkeeping Requirements for IAs include the retention of all documents that the IA files with either the state or federal regulators regarding itself and its representatives, such as applications for registration, amendments, renewal filings, and correspondence. (62848)

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

C Shares of a closed-end fund are not redeemable instruments. The shares are usually traded in the open market on an exchange. The purchaser pays either a commission or a markup on both a purchase and a sale. A closed-end fund may issue common stock, preferred stock, or bonds. The fund may issue only full shares. Unlike a mutual fund, the closed-end management company may not issue fractional shares. (62606)

A registered representative has written an electronic marketing piece that recommends the purchase of a new variable annuity being offered by his firm. He wants to send it by e-mail to 40 retail clients. If the product is suitable for each of the clients on the RR's distribution list, which of the following statements is TRUE? The content of the e-mail must be reviewed by a principal within 10 business days The initial communication must be approved, while the second communication must be reviewed The e-mail must be approved by a principal The RR may not send the e-mail since it is a bulk recommendation

C Since the communication is being sent to more than 25 retail investors, it is considered a retail communication. A retail communication containing an investment or financial recommendation, or promoting a product or service of the member firm, must be preapproved by a principal. Correspondence is defined as any written or electronic message that is sent by a member firm to 25 or fewer retail investors within any 30-calendar-day period. Correspondence does not require principal preapproval. (75800)

Under the Capital Asset Pricing Model, risk is defined as: Loss of principal Loss of interest Deviation in returns Failure to accomplish the client's objective

C The Capital Asset Pricing Model (CAPM) measures risk using beta to measure systematic risk and alpha to measure nonsystematic risk. Risk is the variance in expected return, not the loss of client funds or failure to meet an objective. (62674)

Which of the following statements regarding the differences between an annual rebalancing strategy and a buy-and-hold strategy over a 30-year period is FALSE? The tax and transactions costs will be lower with a buy and hold strategy The buy and hold strategy is easier to manage than a rebalancing strategy The risk in a buy and hold strategy portfolio will match the investor's risk tolerance The equity portion in a buy and hold portfolio could grow in relation to the fixed-income portion, whereas a rebalanced portfolio will remain balanced every year

C The risk levels in a buy and hold portfolio will rise and fall, while a rebalanced portfolio will be adjusted periodically to meet the investor's risk tolerance. Rebalanced portfolios will also attempt to maintain the percentage of equity and debt in the portfolio, while buy and hold portfolios will allow the percentages to drift. One of the advantages of a buy and hold strategy is that transaction and tax expenses are minimized since there is generally no continuous buying and selling. (67576)

An investment adviser is registered in State X. A new employee is recently hired as an investment adviser representative (IAR), but had previously worked for an adviser in State Y. The IAR still directs client communications with 22 of her clients from State Y, but no longer has a place of business there. Under the Uniform Securities Act, the IAR would be required to register in State Y if six or more of the clients are: Insurance companies Broker-dealers Highly qualified wealthy investors with a net worth of more than $1 million Qualified institutional investors

C Under the Uniform Securities Act, investment advisers and investment adviser representatives are exempt from registration in a state if they have no place of business in the state and all of their clients are institutional investors. Examples of institutional investors include broker-dealers, banks, insurance companies, qualified employee trusts, and other investment advisers. Remember, there is no registration exemption for advisers simply based on the fact that their clients are wealthy or have a high net worth. (67645)

Jim, an agent, has received an employment offer from another broker-dealer. If Jim resigns from his present firm, his registration will: Automatically be transferred to the new firm Automatically expire Be terminated Not be affected

C Upon resignation from a broker-dealer, the agent's registration will be terminated. It will be reinstated upon joining the new firm. An agent's registration will expire if not renewed by December 31, each year. The registration of an agent is not effective during any period he is not associated with a broker-dealer. When an agent begins or terminates employment, the agent and the broker-dealer must promptly notify the Administrator. (62815)

An investment adviser may store its books and records on electronic media if: It discloses the format type to the regulators It also makes separate paper copies and stores them separately It provides immediate access to the books and records It discloses to all clients that electronic media storage is used

C Using a form of electronic media storage is acceptable provided the records are readily accessible and copies may be created. Electronic records must also be nonerasable, nonrewritable, and tamper-evident. (67727)

Value stocks are characterized by a: Large number of shares outstanding High price/earnings ratio Low price/earnings ratio Prices less than $20.00 per share

C Value stocks typically have low price-to-earnings (P/E) ratios and are companies that are trading in the market at a low stock price in relationship to their book value. These companies are perceived as being undervalued based on their sales. Value stocks tend to have positive earnings and high dividend yields. Value stocks are often compared to growth stocks, which typically have high P/E ratios. They tend to retain their earnings and have low dividend payout ratios. (62386)

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

C When an investment adviser sells securities directly to a client (i.e., principal trade), the firm must provide disclosure and obtain the client's consent before completing the transaction. (67589)

The difference between a corporation's current assets and its current liabilities is called: Cash flow Current ratio Working capital Liquid assets

C Working capital is defined as current assets minus current liabilities. The current ratio, choice (b), is current assets divided by current liabilities. Current assets and current liabilities are found on the balance sheet. (62734)

Which of the following statements is TRUE regarding the grantor of a trust? The grantor may not be the trustee of a trust The grantor may not be the beneficiary of a trust The grantor may not be both the trustee and the beneficiary of a trust The grantor may be the trustee and/or the beneficiary of a trust if desired

D

The owner of a sole proprietorship is responsible for which of the following activities? Filing K-1 Forms with the SEC Reporting quarterly performance to stockholders The hiring of a chief financial officer Accurately maintaining all of the necessary business records

D A sole proprietorship does not have stockholders, federal reporting requirements, or a chief financial officer. Partnerships and S Corporations file Form K-1, not sole proprietorships. The owner is required to maintain all necessary books and records in the event of an audit by the IRS or State Department of Revenue. (67545)

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

D According to NASAA's interpretive order concerning broker-dealers, investment advisers, broker-dealer agents, and investment adviser representatives, for general dissemination of information, the name of the broker-dealer or investment adviser who approved the content as well as the one with whom the agent is affiliated must be on all Internet-based advertising. In addition, only individuals who are properly registered within the potential customer's state or exempt may follow up and respond to potential leads. (63015)

William Kirk purchased $10,000 worth of VULC when he was 60 years old. At the age of 98, William dies and leaves the shares of VULC to his grandson James. James learns that the shares are now worth $300,000. According to the IRS, which TWO of the following statements are TRUE regarding the shares of VULC? The cost basis of the shares is $10,000. The cost basis of the shares is $300,000. The holding period of the shares for James is short-term. The holding period of the shares for James is long-term. I and III I and IV II and III II and IV

D According to the IRS, when securities are inherited, the recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period. (62780)

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

D According to the Uniform Securities Act, no provision of the Act authorizes the Administrator or any of his officers or employees to disclose information except among themselves or, when necessary, in a proceeding or investigation under the Act that was not made public. (62536)

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

D All choices are required to be filed with the Administrator, since the securities are federal covered and subject to notice filing, and Form D for private placements registered under Regulation D. (75918)

Which of the following persons are fiduciaries? An executor charged with administering an estate A custodian for an account opened under the Uniform Gifts to Minors Act A trustee for a charitable remainder trust A sports representative who provides financial planning services to clients I and II only I and III only I, II, and III only I, II, III, and IV

D All of these people are fiduciaries. A sports or entertainment representative who gives investment advice to clients is considered an investment adviser and, consequently, a fiduciary. (62270)

Which of the following statements BEST describes the similarities between an S Corporation and a general partnership? Both provide limited personal liability Both require full personal liability Both do not provide flow-through of losses Both provide flow-through of losses

D An S Corporation provides limited liability to its shareholders, but a general partnership involves full liability of all the partners. (A limited partnership would provide limited liability to the limited partners.) However, both an S Corporation and a general partnership offer the tax advantage of flow-through treatment of profits and losses, where a share of both is passed through to each owner every year. (62735)

Which of the following choices is an asset class? An S&P Index Fund Diamonds Baseball cards Real estate

D An S&P Index Fund, diamonds, baseball cards, and real estate are all assets; however, real estate is the only one that represents an asset class. For example, a baseball card is an asset but the asset class to which it belongs is collectibles. (63021)

According to the Uniform Securities Act, which of the following conditions constitutes completion of the registration application process? The application has been sent to the Administrator All required documents are received by the Administrator The adviser is approved by the Administrator All required fees and documents are received by the Administrator

D An application for initial or renewal registration is not considered filed until the Administrator has received all required fees and documents. (62950)

An IA has power of attorney for all his retired clients. Rather than setting up a separate account for each client at a broker-dealer to execute his client's trades, he may use a(n): General discretionary account Prime account Special adviser account Omnibus account

D An investment adviser allocates investments from an omnibus account to each of its clients. If an IA has one account for all of its clients at a broker-dealer then the IA is responsible for sending an account statement to each customer. (62818)

Arnold is the sole shareholder of Luro Trading Corporation, a small investment advisory firm registered with the states of New York, New Jersey, and Connecticut. Arnold decides to sell 60% of his shares to another investment adviser and retire to Hawaii. This transaction would require the approval of: The SEC FINRA The state securities Administrator Luro's clients

D An investment adviser may not assign a client's contract to another investment adviser without the client's consent. An assignment includes the acquisition of the majority of the adviser's stock by another entity. (62088)

During the course of an investigation under the Uniform Securities Act, the Administrator finds that an investment adviser representative has engaged in fraudulent activities. The representative says that he is unaware of any fraud and was only following the directions of his firm. He produces a written recommendation list issued by his firm upon which he based his recommendations. What action would the Administrator most likely take in this situation? Impose a fine and prison sentence Impose a fine but not a prison sentence Bring an action in court to impose a fine and prison sentence Bring an action in court to impose a fine but not a prison sentence

D Any person who willfully violates the Uniform Securities Act may be fined up to $5,000 and imprisoned for up to three years. However, if the person proves that he had no knowledge of the fraudulent activities or that he was not aware or could not have been reasonably aware of what was going on, then a prison sentence may not be imposed. (62614)

Which of the following statements is TRUE regarding an omitting prospectus for an investment company? Investment advisers may not omit a prospectus under any circumstances Performance data may not be included An application to invest may be included An investor must be informed that she should read the full prospectus

D Certain investment company advertising may be published even if it meets the definition of a prospectus. An omitting prospectus is an exempt investment company advertisement that only includes information available in the full prospectus (such as performance). An application to invest may not be included. The customer must be informed as to how she may obtain the actual prospectus, and that the prospectus should be read prior to investing any money. An application to receive a prospectus may be included. (62186)

Which of the following statements are TRUE regarding a dollar-weighted rate of return? It may be used to compare the performance of two money managers. It is a way of calculating an investor's internal rate of return. It takes into consideration the inflows and outflows of cash. It measures the average return that the client's investment earned. I and II only I, II, and III only II and III only II, III, and IV only

D Dollar-weighted rates of return are used to calculate a client's internal rate of return and take into account how much the client earned based on the amount of money invested. This method is not considered a fair way to measure the performance of money managers since they have no control over when their clients invest. Time-weighted averages are used to compare the performance of two money managers. (67488)

The Big Brain Inc. Defined Benefit Retirement Plan maintains a written statement for the plan's fiduciaries that provides them with information concerning various categories of investments and guidance concerning investment decisions. The common name for this document is the: Plan administration protocol Fiduciary guidelines statement Statement of investment guidelines Investment policy statement

D Every retirement plan must maintain a written statement of investment policy. This document provides the fiduciaries with guidelines concerning various categories of investment management decisions. Two of the main issues addressed in the statement are proxies and the activities of the investment manager. (62505)

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

D If issuers do not qualify for an exemption from the Securities Act of 1933, they are required to register with the SEC. Broker-dealers and their registered representatives file their registration statements with FINRA, while the Administrator handles all filings required under the Uniform Securities Act. (67678)

Modern Portfolio Theory (MPT) defines risk as the: Possibility of loss of principal Possibility that returns will be less than the rate of inflation Slope of the regression line of portfolio returns versus the market Variability of expected returns about the mean

D In MPT, risk is defined as the degree to which investment returns deviate from what was expected or predicted. It is usually measured by the standard deviation of expected returns about the mean (δ), although its square, variance (δ2), is sometimes used. (62034)

Your client, Ms. Fabozzi, would like to invest in a fixed-income security for her portfolio. She understands there is a tradeoff between risk and return; however, she prefers to avoid speculative-grade investments. Which of the following bonds is MOST suitable for her portfolio? AAA-rated corporate bond, present value = $1,265, market price = $1,334 Baa debenture, present value = $1,128, market price = $1,250 BB mortgage bond, present value = $1,355, market price = $1,111 BBB collateral trust certificate, present value = $1,251, market price = $1,148

D In order to answer this question you must compare each bond's current market value to its present value. The present value of each bond has been calculated by discounting the cash flows from each coupon payment and determining the present value of the principal repayment, using the investor's desired rate of return. When comparing the present value of a bond to its current market value, an investor can determine if the bond is fairly valued, undervalued, or overvalued. The bonds in choices (a) and (b) have a current market value greater than the present value. Since the bonds are trading at a premium to their present value, the investor would receive a lower return than desired. The bonds in choices (c) and (d) have a current market value less than their present value. These bonds are trading at a discount to their present value and therefore would result in a return higher than what the investor desired. Since the investor also wants to avoid speculative-grade investments, (BB and below) choice (c) would be eliminated. (62077)

Which of the following securities is most susceptible to interest-rate risk? Common stock Commercial paper T-bills T-bonds

D Long-term bond prices are more sensitive to interest-rate risk than short-term bonds. For example, if an investor owns a bond with a 5% coupon and interest rates rise to 7%, he would be earning less than new investors. If the investor only needs to wait two months for his bond to mature, he will be able to invest at the higher interest rate relatively quickly. If the investor's bond has a long maturity and he must wait 20 years for his bond to mature, his disadvantage will last longer. Conversely, if interest rates fall, the long-term bond will earn more than the market interest rate for a longer period. The short-term bond will not be as valuable since the maturity comes sooner and its advantage over the market rate will not last as long. (67522)

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

D Provided proper disclosure is made, charging clients different fees is not prohibited. The fee arrangement must be disclosed to the Administrator or the SEC in Form ADV Part 2 and also specifically disclosed to clients in their advisory contracts. (67657)

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

D Since the client in choice (d) has not used the services of the investment adviser, the disclosure rules for investment advisers do not apply. However, broker-dealers are required to disclose on trade confirmations when they act in a principal or agency capacity. (67451)

An investor wants to know how much money he will have in 10 years if he invests $100,000 in a variable annuity today, assuming an annual average return of 6%. This investor needs to calculate the: Dollar-weighted return Time-weighted return Present value of money Future value of money

D The investor is trying to determine the future value of money. He wants to know how much he will have in 10 years if he invests $100,000 today with an annual return of 6%. (63004)

A 6% coupon bond is selling at a basis of 6.20. If interest rates in the market decline below 6%, the bond's basis would: Increase Remain the same Increase or decrease, depending on its maturity Decline

D The term selling at a basis is synonymous with yield to maturity. As interest rates decline, the price of existing bonds increases, so their yields decline. (62933)

Jerry is the president of an investment adviser and also an agent of an affiliated broker-dealer. When a recommendation is made for an advisory client to trade a security, Jerry earns a commission while the IA collects an advisory fee. In a situation like this, the IA has: Satisfied its fiduciary duty as long as the recommendations are suitable Satisfied its fiduciary duty as long as it discloses that the broker-dealer is affiliated Failed to satisfy its fiduciary duty by allowing Jerry to earn a commission Failed to satisfy its fiduciary duty by not disclosing that Jerry earns compensation in the form of a commission

D When acting as an agent or an investment adviser representative, it is not a violation to earn a commission. In this situation, the problem is that the investment adviser did not disclose to the customer the total amount of compensation (which may include commissions) earned by the firm and its employees. (67533)

Your client John has a portfolio of large-cap stocks representing companies in many different industries. You want to help him reduce his exposure to market risk by recommending investments that are negatively correlated with his current holdings. Of the following investments, you would most likely recommend a(n): Exchange-traded fund Contrarian hedge fund S&P 500 index fund Bond index fund

D When two groups of securities are negatively correlated, it means that their prices tend to move in the opposite direction. When the first group goes up, the second goes down and vice versa. Of all the choices, fixed-income securities are most likely to be negatively correlated with the client's current holdings. An S&P 500 index fund, choice (c), would largely overlap his current holdings. Exchange-traded funds, choice (a), invest in a variety of securities. There is no way to know what exchange-traded funds will invest in, which is the reason choice (a) is not the best answer. Hedge funds, choice (b), are largely illiquid investments that are not suitable for most investors. (62681)

An agent of a broker-dealer executes a securities transaction that is not recorded on the broker-dealer's books and records. This would not be an unethical business practice if the agent had done which of the following? The agent received the broker-dealer's oral authorization to execute the transaction The agent received the broker-dealer's written authorization prior to the execution of the transaction The agent received the broker-dealer's written authorization after the execution of the transaction This type of transaction is considered an unethical business practice regardless of receiving the broker-dealer's authorization

It is generally considered an unethical business practice for an agent to effect securities transactions and not record them on the broker-dealer books and records. An exception occurs when the agent receives written authorization from the broker-dealer prior to the transaction. This may happen if two broker-dealers employ the agent and both firms are aware of and give written consent to the agent. (62422)

Under the Investment Company Act, which TWO of the following statements are TRUE regarding the redemption of mutual fund shares? The investor will receive the net asset value as computed on the previous day's close. The investor will receive the net asset value computed on the day the order is entered. The fund must pay the investor within seven days of receipt of the redemption. The fund must pay the investor within three days of redemption. I and III I and IV II and III II and IV

Share redemption of mutual funds is based on forward pricing, which means that the investor will receive the next computed net asset value. This value is normally computed at the end of the business day. The client must be paid within seven calendar days of redemption. (62424)

Investors who subscribe to the Efficient Market theory, may invest in various indices. Which of the following indices is a small-cap benchmark? Nifty 50 NASDAQ 1000 DJIA Russell 2000

The Russell 2000 Index is comprised of 2,000 small- to mid-cap companies. The Nifty 50 and NASDAQ 1000 are not indices. The DJIA (Dow Jones Industrial Average) is a large-cap index that includes 30 of the largest publicly traded companies. (62045)

Which of the following elements are required for an investment contract to be considered a security? An investment of money An expectation of profits A common enterprise Efforts made by a third party I and II only I, II, and III only I, II, and IV only I, II, III, and IV

The test of whether an investment meets the definition of a security was established by a Supreme Court case (referred to as the Howey Test). All of the four choices listed are required parts of the test. (67601)