Series 66 Missed Questions
Which of the following items does not fall within the Section 28(e) safe harbor? A) Software used to simplify the investment adviser's preparation of its tax returns B) Research reports prepared by a third party other than the broker-dealer C) Software used to analyze client's portfolios D) Proprietary research reports analyzing the performance of a specific industry
A) Software used to simplify the investment adviser's preparation of its tax returns Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyze securities is also permissible since that benefits the client. Tax preparation software benefits the adviser but not the client. LO 14.d
Jonah purchased 100 shares of DEF common stock at a price of $25 per share on August 4, 2020. On December 1, 2021, with the stock selling for $29 per share, he gifted the stock to his daughter. She subsequently sold the stock nine months later for $32 per share. Her tax consequence is A) $300 short-term capital gain. B) $700 long-term capital gain. C) $700 short-term capital gain. D) $300 long-term capital gain.
B) $700 long-term capital gain. Securities acquired as a gift carry the donor's cost basis and date of purchase. In this case, the cost is $25 and the holding period began in 2020. So, the sale is long-term, and the profit is $7 per share. LO 16.g
One of your customers purchased a TIPS bond three years ago. The bond's nominal yield is 4%, and inflation has averaged 6% over the holding period. The interest payment at the end of the three years would be closest to A) $21.60. B) $33.78. C) $23.88. D) $47.76.
C) $23.88. With a TIPS bond, the principal is adjusted every six months by the inflation rate. When that rate is 6%, there is a 3% semiannual adjustment. Multiplying the $1,000 par value times 103% six times (there are six semiannual adjustments in three years) results in a principal value just over $1,194. Because the 4% coupon rate is paid semiannually, the payment at the end of three years will be the adjusted principal of $1,194 times 2%, and that equals $23.88. For testing purposes, you can always arrive at the correct answer by using simple instead of compounded interest. That is, with a 6% annual inflation rate, the bond's principal will increase by $60 per year for three years. That would make the adjusted principal $1,180. Take 2% of that and the result is $23.60. The correct answer will always be the next greater number. LO 22.a
An IAR is attempting to develop an investment plan for a client. The IAR decides to use two different mutual funds in an effort to provide appropriate diversification. Of the four pairs given below, which one would offer the most diversification? A) Portfolio 1 and 2, with a correlation coefficient of +0.90 B) Portfolio 5 and 6, with a correlation coefficient of -0.05 C) Portfolio 7 and 8, with a correlation coefficient of -0.20 D) Portfolio 3 and 4, with a correlation coefficient of +0.20
C) Portfolio 7 and 8, with a correlation coefficient of -0.20 If two portfolios have a high correlation coefficient, it means that their performance will be very similar. The purpose of diversification is to have some negative correlation so that losses in one portfolio are offset by gains in the other. LO 20.g
One of your clients has a marginal tax rate of 32%. The 35% tax bracket begins in another $30,000 of income. Should the client receive a bonus of $50,000, the federal income tax due on that would be A) $17,500. B) $16,900. C) $15,600. D) $16,600.
D) $16,600. A taxpayer's marginal tax rate is the rate at which an additional dollar of income is taxed. If enough additional money is earned, it moves the taxpayer into the next bracket. In our question, the first $30,000 of the bonus is taxed at 32%, and the next $20,000 is taxed at the next bracket of 35%. The math is $30,000 times 32% = $9,600. To that we add $20,000 times 35% = $7,000. That gives us a total of $16,600 in tax. LO 15.a
The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would not be entitled to claim A) attorney's fees. B) interest at the state's legal rate less any income received on the security. C) court costs. D) the original consideration paid for the security or the current market value, whichever is greater.
D) the original consideration paid for the security or the current market value, whichever is greater. In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees. LO 12.d
An investor would be entitled to a breakpoint on quantity purchases made together with all of the following accounts except A) his brother with whom he regularly shares investment ideas. B) his wife's personal account. C) shares of that fund held in his 401(k) that were purchased with employer-matching funds. D) a custodian account under UTMA for his child.
A) his brother with whom he regularly shares investment ideas. The breakpoints allow for combinations from a number of family accounts, but they have to be spouse or dependent children, not brothers. LO 3.c
Which of the following activities might result in a positive yield curve in the bond market? A) Investors buying long-term bonds and selling short-term bonds B) Investors buying short-term bonds and selling long-term bonds C) A parallel downward shift in interest rates D) A parallel upward shift in interest rates
B) Investors buying short-term bonds and selling long-term bonds A positive yield curve is the normal condition and occurs when long-term rates are higher than short-term rates. Buying short-term bonds tends to drive their prices up and their yields down, while selling long-term bonds has the opposite effect. LO 6.b
A significant difference between opening an account for a trust and an account for an estate is A) the standard of prudent investing applies to trusts but not to executors. B) the trust account will generally be active for a much longer period of time. C) banks can be named as trustees for a trust but not as an executor. D) only the estate has beneficiaries.
B) the trust account will generally be active for a much longer period of time. Trusts can be set up to run for many years; the executor's job is over once the estate has been settled. LO 16.d
An investor indicates that her objective is long-term growth. Income is of secondary importance. While she is basically quite conservative, she feels her time horizon is long enough to give her a bit more risk tolerance. Which of the following common stock mutual fund selections would probably be most suitable? A) 100% large-cap B) 100% small-cap C) 75% large-cap, 25% small-cap D) 50% large-cap, 25% small-cap, 25% investment-grade bonds
C) 75% large-cap, 25% small-cap The large-cap stocks are generally the most conservative when looking for growth. Adding 25% small-cap stocks to the mix adds the small extra risk the investor indicated she was willing to assume. Although the mix with the investment grade bonds might be a good one, please note that the question specifically asks about common stock funds. LO 17.d
Form ADV-E A) must be completed by investment advisers that have custody of client funds or securities B) may be used to amend any information included in an investment adviser's registration statement (e.g., business address) C) is only used by those advisers not subject to an annual surprise examination D) is used to claim an exemption from registration
A) must be completed by investment advisers that have custody of client funds or securities Form ADV-E is the form used by advisers for advisers that have custody of client funds or securities in order to be in compliance with SEC rule 206(4)-2 or similar state rules. LO 14.e
One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) verify that the investment adviser still qualifies for SEC registration. B) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian. C) ensure that full disclosure has been made in the adviser's brochure. D) provide updated information on those associated persons who are in charge of giving investment advice.
A) verify that the investment adviser still qualifies for SEC registration. In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information. LO 9.e
As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A purchase of stock by an accredited investor under Rule 506(b) B) A purchase of bonds by a trustee of an irrevocable trust C) A sale of stock by an administrator of an estate D) A sale of U.S. Treasury bonds to a retail investor
C) A sale of stock by an administrator of an estate A sale by certain fiduciaries, such as an executor or administrator of an estate, is an exempt transaction under the USA. Even though the Treasury bonds are an exempt security, the sale to an individual is not an exempt transaction. Rule 506(b) is the federal transaction exemption not found in the USA, and only a trustee in bankruptcy is considered for the exemption. LO 8.d
Which of the following are not exempt from the delivery requirements of the NASAA Model Brochure Rule Requirements for Investment Advisers? A) An adviser whose only clients are exchange-traded funds B) An adviser whose only clients are closed-end investment companies C) An adviser who deals with qualified clients only D) An adviser who only provides impersonal advisory services at an annual charge of less than $500
C) An adviser who deals with qualified clients only There are only two exemptions from NASAA's (and the SEC's) brochure delivery rule. They are when the client is a registered investment company and when the adviser's clients receive only impersonal advice and pay less than $500 in fees per year. Qualified clients, those with at least $1.1 million in assets with the investment adviser or net worth of at least $2.2 million, may be charged performance fees, but that has nothing to do with brochure delivery. LO 13.g
Daphna works for Automated Asset Allocators (AAA), an investment adviser that has offices in States D, E, and F and is registered with the SEC. Daphna spends most of her time in an office in State D, but, once every other week, she goes to the branch in State E. Daphna would be exempt from registration as an IAR in which of the following states? A) State E, where she has no retail clients B) States E and F C) State F, where she has 227 retail clients D) Daphna would have to register in all three states
C) State F, where she has 227 retail clients As an IAR with a federal covered investment adviser, Daphna only has to register in those states in which she maintains a place of business. That means registering in States D and E. The number of clients is irrelevant. LO 10.b
Under the Uniform Securities Act, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) directing a securities transaction to an affiliated broker-dealer. B) the trade was being executed by an officer or partner of the firm. C) selling shares from its proprietary account to an advisory client. D) engaging in an agency cross transaction.
C) selling shares from its proprietary account to an advisory client. There are two principals in every securities trade: the buyer and the seller. In this case, selling shares directly to the client from its own account places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In agency cross transaction, the firm is acting as an agent rather than a principal; that's the reason for the term. LO 13.a
A balance sheet shows that a corporation builds its capital structure with all of the following except A) capital stock. B) long-term debt. C) retained earnings. D) cash.
D) cash. A corporation's capital structure consists of the capital raised through the issuance of long-term debt securities (bonds), equity securities (stock), and money reinvested in the business (retained earnings). LO 7.a
In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the release, which of the following is included in the definition? I.) Commercial banks offering comprehensive financial planning for their high-net-worth clients II.) Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate III.) Persons being compensated for assisting employee benefit plan administrators in selecting investment managers for the plan's assets IV.) Lawyers who prepare trust agreements for clients with large securities holdings, with a goal of minimizing estate taxes A) II and III B) I and II C) II and IV D) I and IV
A) II and III Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent comes under the IA-1092 definition of investment adviser. In a like manner, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant, requiring registration under IA-1092. Banks are never IAs, and the lawyer is merely doing legal and tax work. LO 9.a
An investment adviser representative is required to make disclosure to the client when I.) the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated. II.) the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale. III.) transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that particular client. IV.) transactions recommended to the client are inconsistent with those for the IAR's own account. A) II and IV B) II, III, and IV C) I and III D) I, II, and III
A) II and IV An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This includes the case where a recommended product will generate a commission or other source of income to the adviser, as well as full disclosure if a recommendation is not consistent with the adviser's own activity in his own account. The adviser can use any source of information to create his own analysis, with disclosure of source only being required if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same or similar objectives would purchase or have recommended for purchase the same securities. LO 14.g
Which of the following statements regarding an agent's registration is correct? A) Revocation of the registration of an agent's broker-dealer will result in placing that agent's effective registration in suspense. B) Agents may be licensed in a state even if their broker-dealer is not. C) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator, and the agent will be required to register with an active broker-dealer no later than 30 days following the revocation. D) Individuals whose only securities activity with a broker-dealer is trading for the firm's proprietary account are not required to register as agents.
A) Revocation of the registration of an agent's broker-dealer will result in placing that agent's effective registration in suspense. The registration of an agent is not effective during any period when he is not associated with a particular broker-dealer registered under the Uniform Securities Act or a particular issuer. LO 11.f
Each of the following would be exempt from the definition of an agent under the Uniform Securities Act except A) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees. B) Florence, an employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients. C) Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio. D) Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the next quarter.
A) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees. When an individual receives compensation for selling employer stock to employees, that person is defined as an agent and must register as such. Managing a pension plan (and getting paid for it, naturally) does not make one an agent; she is not being compensated for the trades. Because banks and trust companies are excluded from the definition of a broker-dealer, their employees cannot be considered agents. LO 11.d
As specified in the Dodd-Frank Act of 2010, which of the following would not qualify for the private fund exemption? A) An investment adviser who limits its advisory services to private funds with less than $150 million in assets under management in the United States B) An investment adviser who limits its advisory services to insurance companies C) An investment adviser who limits its advisory services to venture capital funds D) A non-U.S.-based investment adviser with no place of business in the United States and less than $25 million in assets under management belonging to U.S. clients
B) An investment adviser who limits its advisory services to insurance companies The Dodd-Frank Act tells us that we're referring to federal law. Although investment advisers dealing solely with insurance companies are exempt from registration under the Investment Advisers Act of 1940, that is not the private fund exemption found in the Dodd-Frank Act of 2010 the question is asking about. LO 9.c
Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of I.) the Securities Exchange Act of 1934. II.) the Investment Company Act of 1940. III.) the Investment Advisers Act of 1940. IV.) the Uniform Securities Act. A) I and III B) II and IV C) I, II, and III D) II, III, and IV
B) II and IV The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940. Sure, it makes good sense, but it is not required. There is nothing in the Securities Exchange Act of 1934 that relates to investment advisers, much less their contracts with clients. LO 13.e
A 46-year-old investor wants to have retirement savings worth $1 million at age 70. If the investor can earn 9%, using the rule of 72, the present value needed today is closest to A) $250,000. B) $90,000. C) $500,000. D) $125,000.
D) $125,000. The rule of 72 can be used to determine how long it takes for a specific sum to double in value. If you know the rate of return (9% in this question), you divide 72 by that rate (72 divided by 9) to learn that money will double every eight years. A 46-year-old looking ahead to age 70 has 24 years (70 - 46) for the money to grow. If the IRA earning 9% will double in value every eight years, in 24 years, it will double three times. If a number doubles three times, its value is eight times the original amount (1 doubled is 2; doubled is 4; doubled is 8). $1 million / 8 = $125,000. Another way to get the answer on the exam is to start with the answer choices and see which one when doubled three times reaches $1 million. If you have $125,000 presently, the first doubling takes it to $250,000, the second to $500,000, and the third to $1 million. LO 20.a
The day after reaching age 50, an investor purchased a single-premium deferred nonqualified variable annuity with a face amount of $100,000. Nine years later, with the value of the accumulation units at $220,000, the investor withdraws $150,000 for the first-time purchase of a home. If the investor is in the 37% federal income-tax bracket, the tax liability is A) $44,400. B) $55,400. C) $70,500. D) $56,400.
D) $56,400. Withdrawals from nonqualified annuities are taxed on a LIFO basis. That is, the last money in (in the case of a single-premium annuity, it could only be the earnings) is the first money taken out. In our question, that is the $120,000 representing the growth in the annuity's value. That money is taxed at the individual's marginable tax rate: 37% in this question. Secondly, because the investor is only 59 (purchased at age 50, withdraws nine years later), there is a tax penalty of 10%. That makes the effective tax rate 47%, and 47% of $120,000 is $56,400. By the way, the avoidance of the 10% penalty for up to $10,000 used for the first-time purchase of a primary residence applies to IRAs and is not relevant to this question. LO 24.e
Early in the year, an investor purchased 100 shares of KAP common stock for $60 per share. Just prior to the end of the year, after receiving three quarterly dividends of $1, the investor liquidated all of the KAP at a price of $59 per share. If the Consumer Price Index (CPI) increased by 3%, the investor's total return over the holding period was A) 2.00%. B) 0.33%. C) 5.00%. D) 3.33%.
D) 3.33%. An investor's total return percentage is calculated by adding together income plus capital gain (or loss) and dividing that total by the initial cost. The math looks like this: three quarterly dividends of $1 each is $300. Selling the stock at $59 per share represents a loss of $1 per share or $100. The net positive return is $200 which, when divided by the original cost of $60 per share, results in a total return of 3.33% Even though the CPI is given, the question is not asking for inflation adjusted or real rate of return; it is just another example of a question containing unnecessary information. LO 22.a
Which of the following clients of a federal covered investment adviser are not exempt from the delivery requirements of the brochure rule? A) A closed-end investment company traded on the New York Stock Exchange B) An individual investor purchasing the IA's newsletter with an annual subscription price of $410 C) An open-end investment company with less than $25 million in assets D) An employee benefit plan with assets of at least $5 million
D) An employee benefit plan with assets of at least $5 million The only exemptions from the IA brochure rule are registered investment companies (both open- and closed-end) and impersonal advice costing less than $500 per year. LO 13.g
In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must I.) offer plan participants at least three different investment alternatives. II.) ensure that plan participants are insulated from control over their portfolios. III.) allow plan participants to change their investment options no less frequently than quarterly. IV.) permit immediate vesting of employer contributions. A) II and III B) I and IV C) II and IV D) I and III
D) I and III The safe harbor requirements of ERISA Section 404(c) relieve the trustee of a 401(k) plan of liability if the plan participants have the ability to select from at least three different investments and are allowed to make selection changes no less frequently than quarterly. Immediate vesting is required in a safe harbor 401(k), which is one that is safe from top-heavy testing. LO 18.g
Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. B) federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. C) state-registered advisers who do not deliver the brochure at least five days prior to contract signing must offer a 48-hour penalty-free withdrawal. D) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a five-day penalty free withdrawal.
D) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a five-day penalty free withdrawal. State-registered investment advisers who do not deliver the brochure at least 48 hours prior to entering the contract must offer a penalty-free withdrawal of five days. There is nothing comparable to that in the federal law. Both have the 120-day delivery requirement, and state-registered investment advisers cannot have investment companies as clients. LO 13.g
John was convicted five years ago of failure to pay child support—a misdemeanor in his home state. John would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state A) will determine John's status based upon the extent to which his child support payments are being paid. B) will consider John to be statutorily disqualified since in this state, his crime is a felony. C) will consider granting registration to John, but only if he receives heightened supervision. D) will disregard that conviction when determining John's qualifications for registration.
D) will disregard that conviction when determining John's qualifications for registration. The conviction on John's record is for a misdemeanor. The fact that the same crime is a felony in another state is not relevant to his application for registration in that state. LO 12.c
