Series 66 Wrong Qs

A client owns an equity index annuity with the following characteristics: • 10% cap rate • 85% participation rate • 2% minimum annual guarantee The client purchased the annuity with an initial investment of $100,000. In the first year the underlying index returned +18%. In the second year, the market return was negative 4%, and in year three it returned +6%. What is the value of the annuity at the end of year three?

$117,922 It is important to be able to compute the ending value of an equity index annuity. Here, the annual returns must account for the annuities features of the 10% cap, 85% participation, and 2% annual guarantee given market returns of +18%, ?4%, and +6%. To solve this type of question one must determine what amount will be credited to the account at the end of each year. In year one, the 18% market return is limited to a 10% return ($10,000) due to the cap rate. Year two then begins with $110,000 in the account and the market returns ?4%, resulting in the application of the 2% minimum annual guarantee, for a credit of $2,200. The end of year two and beginning of year three value is therefore $112,200. In year three the market returned 6%, but the annuity will only be credited 85% of that, namely, $112,200 × 0.06 × 0.85 = $5,722. The balance in the account at the end of the three years is therefore, $117,922.

If the Administrator has summarily suspended an investment adviser representative's registration, the registrant may request a hearing by written request and the hearing will be granted within

15 days When an Administrator summarily suspends a registration, the registrant has a right to a hearing if the request is made in writing. The hearing must be granted within 15 days of receipt of the request. Registration of professionals takes place at noon of the 30th day and an appeal for review of an Administrator's order must be filed within 60 days.

An interest in which of the following is a security under the Uniform Securities Act? I. Preorganization certificate II. Certificate of deposit for a security III. Oil and gas drilling program IV. Cattle feeding program

A) I, II, III, and IV The best strategy is to memorize the short list of things that are not securities rather than try to remember all of the things that are.

A client asks his adviser to calculate a variety of returns on his portfolio. The portfolio posted returns of 10%, with the CPI at 4%, and the investor is in a 22% tax bracket. What is the investor's real rate of return?

6.0% The real rate of return subtracts the rate of inflation, as measured by the consumer price index (CPI), from the portfolio's return. Here, the portfolio returned 10% less the 4% CPI rate which equals a 6% real rate of return. Another potential return one could calculate here is the after-tax rate of return which is the portfolio's return of 10% less the 22% taxes owed = 10% × (1 - 22%) = 7.8%

Which of the following persons, natural or corporate, fall under the definition of a broker/dealer under the Uniform Securities Act?

A corporation that sells interests in an oil and gas limited partnership to qualified investors A broker-dealer is a person that buys and sells securities for its own account and for the accounts of others. Agents, issuers, and commercial banks (which include credit unions, savings and loans, and thrifts), are specifically excluded from the definition of a broker-dealer.

Under the Investment Advisers Act of 1940, what is the maximum fine that may be imposed for violating the act? A) $10,000 B) $1,000 C) $5,000 D) $20,000

A) $10,000 Any person who violates the act or SEC rules is subject to a fine of up to $10,000 and/or a prison term of up to 5 years. Note that this is different than the Uniform Securities Act, which provides for penalties of 3 years and $5,000.

Under the NASAA Model Rule on financial requirements for investment advisers, investment advisers who have custody of customer funds are usually required to have a net worth in the amount of A) $35,000 B) $5,000 C) $10,000 D) $50,000

A) $35,000 The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an investment adviser with custody of customer funds or securities to have a minimum net worth in the amount of $35,000. If the adviser does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000. In the event the adviser wishes to post a bond​ because it doesn't meet the net worth requirement​, ​it must be an amount determined by the Administrator based upon the number of clients and the total assets under management of the investment adviser.

When investing in mutual funds, each of the following is a sales charge EXCEPT A) 12b-1 fees B) a front-end load C) a back-end load D) a CDSC

A) 12b-1 fees 12b-1 fees are not defined as sales charges because they are not a function of buying or selling your shares. These fees are asset-based, generally charged quarterly, and come out of the NAV. Front-end loads and back-end loads (CDSCs) are charged either when you buy the fund (front end) or sell your shares (back-end).

An agent is analyzing the financial statements of a corporation. The company has cash on hand of $2 million, accounts receivable of $500,000, accounts payable of $700,000, land valued at $3 million, wages payable of $300,000, goodwill of $100,000, inventory of $1.5 million, and retained earnings of $5 million. From this information, the agent would determine that the acid-test ratio for this company is A) 2.5:1 B) 4:1 C) 3.375:1 D) 1:1

A) 2.5:1 The acid-test, or quick, ratio is all of the current assets, except for inventory, divided by the current liabilities. The non-inventory current assets are the cash on hand and the accounts receivable. The current liabilities are the accounts payable and wages payable. This results in a calculation of $2.5 million divided by $1 million, or 2.5:1.

According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of

A) 24 months Although state law may allow for periods longer than 24 months, federal law requires a 2-year conversion privilege.

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt-to-equity ratio is

A) 28.6% The debt-to-equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%. As we point out in the LEM, this is really a misnomer—it should be called the debt-to-total-capital ratio, but probably will not be shown that way on the exam.

A bond investor's portfolio consists of the following 3 bonds: - ABC First Mortgage bond, current market value of $4 million with a duration of 5 years. - DEF Debenture, current market value of $5 million with a duration of 8 years. - U.S. Treasury bond, current market value of $1 million with a duration of 10 years. What is the average duration of the portfolio?

A) 7 years It is unlikely that you will have a question this complicated on the exam, but, just in case, we wanted to show you the way to do it. Computing average duration of a bond portfolio involves taking each bond and figuring the proportion of the portfolio its duration represents. In this question, ABC is 40% of the portfolio so we take 40% of its 5-year duration (2). Then, we do the same with the other two bonds. DEF is 50% of 8 (4) and the Treasury bond is 10% of 10 (1). When we add the 3 numbers together, it results in an average duration of 7 years.

Which of the following statements regarding the powers of the Administrator under the USA would NOT be true? A) A final order of the Administrator may not be appealed. B) The administrator may issue cease and desist orders. C) Denial of registration may take place in the event of the filing of an incomplete application. D) In the case of noncompliance, the Administrator may apply to a court of competent jurisdiction for the issuance of an injunction.

A) A final order of the Administrator may not be appealed. Final orders of the Administrator may be appealed to the appropriate court within 60 days of the issuance of the order.

Which of the following individuals would be considered a noninterested person in a mutual fund? A) A member of the board of directors who does not hold another position within the investment company B) A member of the board of directors who is also employed as the investment adviser C) A person who holds a position with the fund's underwriter D) A shareholder who owns 10% of the fund's shares

A) A member of the board of directors who does not hold another position within the investment company The Investment Company Act of 1940 defines an interested person as someone employed by or who has a material business relationship with the fund, its adviser, or underwriter. Someone who owns 5% or more of the outstanding shares (an affiliated person) is also considered "interested." Merely sitting on the board does not make someone an interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person.

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclosing which of the following fees? A) Account closing fees B) Advisory fees C) Commissions D) Markups and markdowns

A) Account closing fees It is very common for a broker-dealer to charge a fee for processing the closing of an account. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1. commissions; 2. markups and markdowns; and 3. advisory fees for those firms that are also registered as investment advisers.

Which of the following statements is TRUE? A) An agent's registration may never be revoked without the opportunity for a hearing. B) An individual may not buy or sell securities unless the transaction is made by a licensed broker-dealer or agents. C) In the sale of U.S. government securities, a misrepresentation or other fraudulent practice by an agent would not fall under the jurisdiction of the state security Administrator because these securities are exempt. D) All securities must be registered with the appropriate state Administrator.

A) An agent's registration may never be revoked without the opportunity for a hearing. The agent always has an opportunity for a hearing even though the Administrator has broad powers to revoke and/or suspend an agent's registration. While individuals who transact in U.S. government securities are not required to register, they are subject to the antifraud provisions of the Uniform Securities Act. U.S. government and municipal securities need not be registered.

Which of the following statements are NOT true? I. The kiddie tax applies to any income received by a child under the age of 19. II. IRAs have advantages over other estate assets when left to charity. III. Simple trusts have to distribute income annually. IV. For U.S. citizens, there is an unlimited marital estate tax deduction.

A) I and II The kiddie tax applies to unearned income only such as that received in an UTMA account. Leaving IRA assets to a charity offers the same estate tax benefits as any other asset. Simple trusts must distribute income annually, and there is an unlimited marital estate tax deduction between spouses who are U.S. citizens.

Which of the following actions by an investment adviser registered in 3 states is permitted? A) Announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year B) Guaranteeing a rate of return equivalent to a 5-year insured bank CD or waiving their yearly fees C) Delivering the brochure within 48 hours after signing of the contract, as long as there is a 5-day, penalty-free withdrawal provision D) Stating in the advisory contract that fees will be reimbursed if account performance is less than agreed upon

A) Announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year This is not considered discrimination, because the discount applies equally to all (if they are among the first 50). Fee reimbursement or waivers are not permitted. The 5-day withdrawal provision applies to state-registered investment advisers when the brochure is not delivered at least 48 hours prior to (not after) the signing of the contract.

Minnie's Uncle Bob would like to contribute to his one-year-old niece's education expenses. He is able to contribute a maximum of $1,200 per year. There is no other family member in a position to make a contribution. If minimizing the taxes at withdrawal and low cost investing, such as index mutual funds, is the objective, which of the following would you recommend? A) Coverdell ESA B) UTMA C) Dollar cost averaging D) Section 529 plan

A) Coverdell ESA When you see contribution levels at $2,000 per year or less, that is a signal that Coverdell is the proper recommendation. Higher levels would be the 529 plan. There are no specific tax benefits to the UTMA. In fact, tax rates on unearned income can be rather high. Although Uncle Bob might dollar cost average by investing $100 per month, that does not specifically answer the question.

Under Section 28(e) of the Securities Exchange Act of 1934, which of the following is allowable soft-dollar compensation from a broker-dealer to an investment adviser under the safe harbor provisions? A) Custodial services provided by the broker-dealer B) Vacations C) Cell phones to rapidly communicate with clients D) Office rental payments

A) Custodial services provided by the broker-dealer The use of a client's commission dollars to purchase a broker-dealer's custodial services is an allowable soft-dollar compensation. It is an investment benefit that accrues directly to the client and not to the adviser. Office rental payments, cell phones, and vacations are not allowable because their benefits do not accrue directly to the client. Other examples of permitted soft-dollar items are research and analytical software because they benefit the client whose commission dollars are, in effect, paying for them.

Which of the following would generally NOT result in any income tax liability? A) Death benefit proceeds from a life insurance policy B) Profits generated by an S corporation C) Qualified dividends from common stock D) Profits generated by a sole proprietorship

A) Death benefit proceeds from a life insurance policy As a rule, profits from flow-through businesses like S corporations and earnings from a sole proprietorship are subject to income tax. Qualified dividends are taxed at a lower rate than nonqualified ones; in fact, for taxpayers in the 10% or 15% tax bracket, the rate on these dividends is 0%. But don't choose that answer in a question like this (unless the question specifies the lowest tax bracket investors), because that is an exceptional case (there are not many people buying securities in those low tax brackets). Death benefits from life insurance policies are invariably tax free.

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

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

As defined in the Uniform Securities Act, the term person would include I. a limited partnership II. a political subdivision III. an unincorporated association IV. the executor of an estate for a deceased individual

A) I, II, III, and IV All of these would be included in the USA's definition of person. Not included are a minor, a deceased person, or someone judged mentally incompetent.

An investment adviser registered with the SEC could use the term investment counsel if I. its principal business consists of rendering investment advice II. a substantial portion of its business involves investment supervisory services III. it maintains full investment discretion

A) I and II These are the 2 requirements for use of the term investment counsel. Although it can be a factor, exercising discretion is not a requirement of the definition. Many investment advisers exercise discretionary power over client accounts, but do not meet the two principal requirements for use of the term, investment counsel.

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

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

ERISA regulation does not apply to I. public school district retirement plans II. publicly traded utility company retirement plans III. federal government employee retirement plans

A) I and III only ERISA rules only apply to private sector plans. Government or public sector plans are not subject to the Employees Retirement Income Security Act of 1974.

Among the advantages of including preferred stock in an investor's portfolio are I. dividends must be paid before any distribution to common stockholders II. a rate of return that is likely to keep pace with inflation III. the opportunity for increased income if the issuer's profits increase IV. a fixed rate of return that is likely higher than that for a debt security offered by the same issuer

A) I and IV Preferred stock carries a fixed dividend that must be paid before any distribution to common stockholders—hence the name preferred. However, unlike the interest on a debt security, there is no obligation to pay the dividend. Therefore, the yield on a company's preferred stock is invariably higher than that on its debt issues. Disadvantages of owning preferred stock are that the fixed return may not keep up with inflation and, regardless of corporate earnings, the dividend will not change, so there is no hope for increased income.

Securities issued by which of the following would be exempt from the registration requirements of the Uniform Securities Act? I. Nonprofit organization II. Exchange-listed security III. Federal savings and loan association IV. Federal credit union

A) I, II, III, and IV All of the issuers listed are exempt from the registration provisions of the Uniform Securities Act.

Which of the following statements about capital gains are TRUE? The minimum holding period required to qualify for long-term capital gains treatment is 1 day longer than 12 months. The highest federal income tax rate on long-term capital gains is less than the highest federal income tax rate on ordinary income. If an investor holds stock for 12 months or less and has no other transactions, any gain on the sale of the stock is taxed at the same rate as ordinary income. A) I, II, and III B) I and III C) I and II D) II and III

A) I, II, and III If an investor holds stock for more than 12 months and sells it for a gain, the gain will be treated as a long-term capital gain. The advantage of long-term capital gains is that the maximum tax rate on long-term capital gains is lower than the maximum rate on ordinary income. If an investor holds stock for 12 months or less, though, any gain will be considered a short-term capital gain and will be taxed at the same rate as ordinary income.

An agent is registered in Montana and North Dakota. While working in his North Dakota office, he places a call to the cell phone of one of his clients, who happens to be on vacation in Wyoming. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Idaho. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, jurisdiction resides with the Administrator of I. North Dakota II. Idaho III. Wyoming IV. Illinois

A) I, II, and III The Administrator has jurisdiction from the state in which the offer was made (ND), received (WY), and accepted (ID). Mailing of the certificate is of no consequence.

The James Henry Company (JHC), an SEC-registered securities broker-dealer with offices in Chicago and Los Angeles, limits its clientele to banks and trust companies. JHC makes a sale of U.S. government securities to the Wall Street Bank located in New York City. Which of the following statements is (are) TRUE under the Uniform Securities Act? I. The security itself is exempt from registration. II. The transaction is exempt. III. The broker-dealer is not required to be registered in the state of New York.

A) I, II, and III The sale involves a U.S. government security, which is exempt from the registration requirements under the act. The transaction itself is also exempt because it involves a sale to a financial institution. Remember, in an exempt transaction, the security subject of the transaction need not be registered with the state in which the transaction takes place. In this example, the security was already exempt, but that does not diminish the fact that the transaction is exempt. The fact that the firm limits its clientele to financial institutions, such as banks, and that the broker-dealer has no office in New York means that, under the Uniform Securities Act, the firm is not considered a broker-dealer in that state. Therefore, the broker-dealer is not required to be registered in the state of New York.

Which of the following statements about the redemption of mutual fund shares are TRUE? I. A mutual fund may, but is not required to, redeem its shares if requested by a shareholder. II. A mutual fund will redeem fractional shares as well as full shares. III. Redemptions of mutual fund shares are handled under forward pricing.

A) II and III A mutual fund is required by law to redeem (buy back) its shares on the request of a shareholder, and a mutual fund will redeem fractional shares, as well as full shares. Redemptions are handled under what is known as forward pricing, which means that the redemption price will be the next net asset value per share calculated after the mutual fund receives the request for redemption.

Which of the following statements regarding the brochure delivery requirements of the Investment Advisers Act of 1940 are TRUE? I. The brochure must be updated each time Part 1A of Form ADV is updated. II. The brochure delivery requirement does not apply to investment companies or clients who are serviced on an impersonal basis, such as with a newsletter, with an annual cost of less than $500. III. A brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year.

A) II and III Because the information in the brochure is derived from Part 2A of the Form ADV, changes to Part 1A will not necessarily apply to items that are important to the client. Therefore, stating that the brochure must be updated whenever there is a change to Part 1A would not be correct. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The brochure delivery requirements do not apply to customers that are investment companies or for clients of impersonal services (those that do not purport to meet the investment objectives or needs of specific clients), as long as the cost of the service is less than $500 per year.

William and Kat, a married couple, are advisory clients of yours. Each is employed and covered by a qualified plan. Which of the following statements are correct? I. Employees covered by a qualified plan are not eligible to open Roth IRAs. II. Employees covered by a qualified plan are eligible to open Roth IRAs. III. Distributions from a qualified plan may be rolled over into a Roth IRA. IV. Distributions from a qualified plan may not be rolled over into a Roth IRA.

A) II and III Eligibility for opening a Roth IRA is not affected by participation in a qualified plan. Unlike a traditional IRA, where participation in a plan by the taxpayer or spouse may limit the deductibility of the contributions, the limit on eligibility for opening a Roth IRA is based on exceeding a specified adjusted gross income (AGI). Regardless of the AGI, distributions from a qualified plan, such as a 401(k), may be rolled over into a Roth IRA. With regards to the Roth IRA, although not part of this question, it is important to note that the portion of the distribution from the qualified plan representing pre-tax contributions will be subject ordinary income tax. Then, assuming the qualifications are met, distributions from the Roth IRA will be tax-free.

Under the Uniform Securities Act, the Administrator has the power to deny or revoke exemptions for which of the following types of securities? I. Stock issued by a bank organized under the laws of another state. II. Securities of nonprofit organizations. III. Investment contracts issued by employee benefit plans.

A) II and III The Administrator may deny or revoke the exemption granted to a nonprofit organization or investment contracts issued by employee benefit plans. Any transaction exemption, except one relating to a federal covered security, may be revoked as well. However, there are certain security exemptions that the USA does not grant the Administrator the power to deny. Included in that list is any security issued or guaranteed by any bank organized under the laws of any state.

Which of the following are exempt transactions as defined in the Uniform Securities Act? I. An agent sells a security issued by a foreign government with which the United States has diplomatic relations to an individual client II. An agent fills a buy order based upon an unsolicited request from an existing client to purchase a nonexempt security III. The sale of an unregistered nonexempt security in a private, nonpublicly advertised transaction to 14 noninstitutional investors over a period not exceeding 12 months IV. The sale of unlisted securities by a trustee in bankruptcy

A) II and IV Unsolicited customer orders, regardless of the type of security involved, are always exempt transactions as are sales by fiduciaries. The private placement exemption is limited to 10 noninstitutional offerees, so 14 purchasers would certainly be over the limit. While a security issued by a foreign government with which we have diplomatic relations is an exempt security, a solicited sale by an agent to an individual client is not an exempt transaction.

Which of the following would be permitted to contribute to an IRA? I. An individual whose sole income consists of dividends and capital gains II. A divorced mother whose sole income is alimony and child support under the terms of a divorce agreement signed on October 31, 2018 III. A self-employed attorney who has a Keogh plan IV. A corporate officer covered by 401(k)

A) II, III, and IV An IRA contribution can only be made by someone who has earned or otherwise eligible income. Earned income is defined as salary, wages, commissions, and tips. Alimony, (but not child support) is considered eligible income for an IRA as long as the divorce decree was signed prior to January 1, 2019. Individuals can contribute to an IRA even if they are covered by a corporate pension plan or Keogh plan. Although a contribution can be made, it may or may not be deductible depending on the individual's income. Dividends and capital gains are not considered earned income. Please note: Effective January 1, 2019, the tax treatment of alimony for all divorce agreements entered on and after that date (no changes to those already in existence) changed. Questions on the exam (and our q-bank) reflect those changes.

A QDRO is a judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant. The QDRO must contain certain specific information as stated in whose regulations? A) IRS B) NASAA C) DOL D) ERISA

A) IRS It is the IRS who states the QDRO must contain certain specific information, such as: the participant and each alternate payee's name and last known mailing address, and the amount or percentage of the participant's benefits to be paid to each alternate payee. This is not part of ERISA or the Department of Labor and, least of all, NASAA.

Which of the following is an issuer transaction? A) John's father, a founder of XYZ corporation, purchased shares of XYZ directly from the corporation subsequent to its founding without paying a commission. B) John purchased shares in XYZ Corporation in a transaction made in the over-the-counter market. C) John sold the securities he had inherited from his father to his neighbor, Peter, at the market price without charging a commission. D) John inherited securities of the XYZ Corporation from his father who, as a founder to the company, received the shares directly from the company as a result of stock options.

A) John's father, a founder of XYZ corporation, purchased shares of XYZ directly from the corporation subsequent to its founding without paying a commission. An issuer transaction is one where the issuer of the securities receives the proceeds of the sale. John's father, although a founder of the company, purchased shares directly from the company. This transaction is an issuer transaction because the firm received the funds from the sale of the shares. In all the other instances, the firm, the original issuer of the securities, did not receive the proceeds of the transaction. These transactions are called nonissuer transactions.

An investor inherits 1,000 shares of the ABC Global Growth Fund when NAV is $9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? A) Long-term capital gain of $4,750 B) Long-term capital gain of $4,250 C) Long-term capital gain of $5,000 D) Long-term capital gain of $5,500

A) Long-term capital gain of $4,750 Upon death, the beneficiary inherits mutual funds at their NAV ($9.50). The IRS uses that number because it represents the price at which those shares could have been redeemed. The final sale (redemption) takes place at the NAV ($14.25) for a profit of $4.75 per share (times 1,000 shares). Had this question said the investor bought the shares, then the cost basis would have been the price paid for the shares, the POP. That would have made the answer $4,250 ($14.25 - $10 times 1,000 shares).

Which of the following is NOT a security? A) Participating whole life insurance that pays annual dividends B) Corporate equity C) Variable annuity D) Corporate debt

A) Participating whole life insurance that pays annual dividends Whole life insurance policies, even those that pay dividends, are not securities; variable life and variable annuities are. Corporate equity is stock, and corporate debt is bonds and debentures.

Which of the following items are NOT included in the gross estate of a decedent? A) Proceeds from a life insurance policy owned by the deceased's spouse B) Property held in an account registered tenants in common C) Proceeds from a life insurance policy held in a revocable trust D) The first $250,000 of a primary residence if owned singly, $500,000 if owned jointly with spouse

A) Proceeds from a life insurance policy owned by the deceased's spouse One popular estate-planning technique is to have life insurance owned by (and premiums paid by) someone other than the insured. In that case, proceeds are generally excluded from the gross estate of the deceased. If the trust was irrevocable, that same benefit might be achieved, but not with one that is revocable. There is an exclusion for income tax purposes on the sale of a primary residence, but that has nothing to do with the estate. Finally, when property is owned tenants in common, the percentage belonging to the deceased is part of the gross estate.

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

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

As a general matter, the regulators do not treat posts by customers or other third parties as the firm's communication with the public. Under certain circumstances, however, third-party posts may become attributable to the firm. Whether third-party content is attributable to a firm depends on whether the firm has (1) involved itself in the preparation of the content or (2) explicitly or implicitly endorsed or approved the content. Where the firm endorses or approves of the material, but has no part in its creation, it is known as A) adoption. B) entanglement. C) retail communication. D) usage.

A) adoption. Adoption is the term used to describe material posted to a securities professional's social media site by a third party where the securities professional explicitly or implicitly endorses or approves of the content, but plays no role in its development. Where the firm is involved in the preparation of the content, it is known as entanglement.

Which of the following statements is CORRECT? A) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. B) A state-registered investment adviser collecting fees of $500 for 6 months or more in advance, is considered to be receiving a substantial prepayment. C) Both state-registered and federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. D) Federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients.

A) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. It is only state-registered investment advisers who must provide audited balance sheets to clients for whom they maintain custody. In order to be considered a substantial prepayment of fees, state laws require that they be more than $500 for 6 or more months in advance.

Under the SEC's Marketing Rule for Investment Advisers, which of the following is true with regard to advertising? A) The advertisement may use testimonials from clients with proper disclosures. B) The advertisement may refer to specific past recommendations if they reflect the actual performance of a client's portfolio. C) The advertisement may refer to any formula, charting device, or graphing method provided a disclaimer is included stating there is no assurance that the same results will be obtained in the future. D) The advertisement may offer free services for a nominal charge.

A) The advertisement may use testimonials from clients with proper disclosures. One of the key changes brought about by the Marketing Rule was the removal of prohibitions against testimonials. As long as it is from a client and discloses whether or not compensation was involved, the testimonial is generally permitted. Offers of free services are permitted but must be totally free with no strings attached. If past performance is included in the ad, it cannot cherry pick and use only selected recommendations; everything must be shown. Charts, formulas, or other devices may be referred to in an ad, but the ad must disclose the difficulties or limitations in their use.

Which of the following would be included in the Uniform Securities Act's definition of a "sale"? A) Transfers, for value, of unit trusts to a nontaxable organization B) Conveying, for value, precious metals to a jewelry distributor C) Sale of a large fixed annuity contract to a taxable institution D) Donation of interests in rights, warrants, or options on a nonexempt security

A) Transfers, for value, of unit trusts to a nontaxable organization For a security to be sold, it must be exchanged for value. Fixed annuities and precious metals are not securities, so no security sale took place. Donating a security does not qualify as a sale.

Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment? A) Unit investment trust B) Hedge fund C) Open-end investment company D) Closed-end investment company

A) Unit investment trust A unit investment trust (UIT) is a type of investment company whose units are sold in the secondary market and is generally unmanaged, or passively managed. The trust manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the UIT terminates.

Which of the following securities is NOT exempt from the registration procedures of the Uniform Securities Act? A) Variable annuities issued by an insurance company authorized to do business in this state B) Bonds issued by a church operating as a nonprofit organization under IRS Code Section 501(c)(3) C) General obligation bonds issued by a city located in this state D) Common stock issued by a public utility company whose rates are subject to state regulation

A) Variable annuities issued by an insurance company authorized to do business in this state Variable annuities are not exempt from state registration because the payments from the annuity are dependent on the performance of a segregated fund invested in securities. Municipal securities and regulated public utilities are exempt from registration. Securities issued by religious and charitable organizations are exempt from registration under the USA.

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

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

If an agent chooses to appeal an Administrator's order, when must the agent file for review of the order with the appropriate court? A) Within 60 days after the entry of the order B) Within 30 days after the entry of the order C) Within 180 days after the entry of the order D) Immediately

A) Within 60 days after the entry of the order Under the USA, a registered person has up to 60 days to appeal any disciplinary finding by the state Administrator.

All of the following are exempt transactions EXCEPT A) a Certified Financial Planner selling NYSE-listed securities to numerous high-net-worth individual clients B) a client, on his own initiative, requesting a transaction in a security that is not registered in the state C) an administrator of an estate selling securities to liquidate the estate's assets D) a pledgee liquidating securities that were put up as collateral for a loan that has now gone into default

A) a Certified Financial Planner selling NYSE-listed securities to numerous high-net-worth individual clients A Certified Financial Planner selling NYSE-listed securities to numerous individual clients, regardless of their net worth, might be engaged in a nonexempt transaction, not an exempt transaction. This would not be true if the financial planner's clients were all financial institutions rather than individuals. Transactions by an administrator and an executor are exempt transactions, as are unsolicited nonissuer transactions. When securities that have been pledged as collateral for a loan, if that loan goes into default, the liquidation of that collateral is an exempt transaction.

As defined in the Uniform Securities Act, the term "offer" or "offer to sell" includes all of the following EXCEPT A) a loan with a stated interest rate payable upon demand B) an offer of a special stock dividend in return for additional payments C) a purported gift of assessable stock D) an offer of convertible securities and warrants

A) a loan with a stated interest rate payable upon demand A loan is not a sale of a security for value and is explicitly excluded from the definition of "offer" or "offer to sell." Although a stock dividend is normally excluded from the terms "offer" and "sale," when additional payment is required, we now have an offer that must be accepted before there is a sale. An offer of a convertible bond or warrant is an offer of both the bond or warrant, as well as the underlying stock. It is only a sale when the offer is accepted. The USA defines a purported gift of assessable stock as both an offer and a sale.

An investment adviser sends a notice offering a research report she has recently prepared to a group of 25 new members of the local Lions Club. Under the NASAA Model Rule on recordkeeping for investment advisers, the firm must keep a copy of the notice along with A) a memorandum describing the list and its source B) a copy of the full roster of the local chapter C) the names of those members to whom the report was sent D) the date the Administrator approved the research report

A) a memorandum describing the list and its source If an investment adviser sends any notice, circular, or other advertisement offering any report, analysis, publication, or other investment advisory service to more than 10 persons, the investment adviser shall not be required to keep a record of the names and addresses of the persons to whom it was sent, except if the notice, circular, or advertisement is distributed to persons named on any list, then the investment adviser shall retain with the copy of the notice, circular, or advertisement a memorandum describing the list and its source.

Your elderly client has $10,000 to invest and seeks preservation of capital and a moderate income stream. If she has never invested in mutual funds before and all of her savings are in bank CDs and saving accounts, you should recommend A) a money market fund B) a tax-exempt bond fund C) a T-bill D) a government bond fund

A) a money market fund A money market fund is the most appropriate for an elderly person seeking preservation of capital and some income on a regular basis. A T-bill, although safe, provides interest income only at maturity. Because the client has never invested in mutual funds before, she may be uncomfortable with the potential fluctuations in principal of the bond funds. This exam will not want you to go so far as to claim, "but if the client purchased 4-week T-bills, there would be the ultimate safety and income every 28 days." No client with this background is going to be trading every month—don't go there.

The USA places a number of recordkeeping requirements on investment advisers. Records required to be kept by all state-registered investment advisers include all of the following EXCEPT A) a record by security showing each client's interest and location thereof B) a list of discretionary accounts C) bank records D) emails

A) a record by security showing each client's interest and location thereof The key to this question is the requirement for all advisers. A security record is only required for those advisers who have custody of client assets.

A federal covered registered investment adviser who receives compensation for advice and whose business is primarily as an investment adviser may describe its business as investment counsel if A) a substantial part of his business is providing investment supervisory services B) it maintains its registration by filing an updating amendment to its Form ADV annually C) it maintains custody of customer funds and/or securities D) it receives SEC approval to use the definition

A) a substantial part of his business is providing investment supervisory services The Investment Advisers Act of 1940 prohibits the use of the term "investment counsel," unless the principal business of the person is as an investment adviser and a substantial part of the business is providing investment supervisory services (i.e., continuous advice for individual client portfolios).

Registration with the SEC as an investment adviser would be required for a person who A) acts as the investment adviser to an investment company registered under the Investment Company Act of 1940 B) limits the advice offered strictly to securities issued or guaranteed by the U.S. government C) limits the advice offered strictly to securities listed on the New York Stock Exchange (NYSE) D) acts as the investment adviser to an investment company registered under the Investment Advisers Act of 1940

A) acts as the investment adviser to an investment company registered under the Investment Company Act of 1940 If a person acts under contract to an investment company registered under the Investment Company Act of 1940 (investment companies do not register under the Advisers Act; only advisers do) is required to register with the SEC. Excluded from the definition of investment adviser are those whose only advice deals with securities issued or guaranteed by the U.S. government. With the exception of managing a registered investment company, registration with the SEC is based on assets under management (AUM), not the type of security advised on. A person whose advice relates solely to securities on the NYSE is required to register with the SEC only if AUM reaches $110 million.

Nonsecurities derivatives include futures and forwards. Among the differences between futures and forwards is that futures contracts A) are rarely exercised while forwards generally are. B) are nonstandardized while forwards are. C) are preferred to forwards by producers. D) are not regulated by the CFTC while forwards are.

A) are rarely exercised while forwards generally are. In the vast majority of the cases, futures contracts are closed out prior to expiration. That is one reason they are more popular with speculators than forwards. Because forwards are generally delivered, they are the preferred tool by producers and it is futures which are standardized and CFTC regulates, not forwards.

Under the Uniform Securities Act, the Administrator may require that a prospectus for a security registered under qualification be sent or given to each person to whom an offer is made A) before the sale of the security. B) within 72 hours of the effective date. C) before or concurrent with the filing of the registration statement. D) only upon request of the offeree.

A) before the sale of the security. Under registration by qualification, the USA specifies that the Administrator has the power to require prospectus delivery before the sale of the security. That means the offeree (the investor), receives the prospectus prior to making a purchase. There is no prospectus prior to or concurrent with the filing. Because the prospectus is not available until the effective date, one can't be distributed prior to the effective date.

If an investor wished to compute the mean return of her portfolio, she is going to A) find the arithmetic mean B) compute the standard deviation C) compute using straight-line averaging D) find the median

A) find the arithmetic mean Unless something else is specified, whenever the mean return is referenced, it is always the arithmetic mean (the simple average).

IRAs and Keogh plans are similar in the following ways except A) identical amounts of contributions are allowed B) deferral of taxes C) there is a 50% tax penalty for insufficient distributions D) distributions without penalty can begin as early as age 59½

A) identical amounts of contributions are allowed IRAs and Keogh plans do not have identical contribution amounts; IRAs allow a maximum of $6,000 per individual or $12,000 per couple per year (with a catch-up of $1,000 for each individual aged 50 or older), whereas Keogh plans allow substantially more. Both IRAs and Keoghs allow tax-deferred growth until the individual withdraws the funds. IRAs and Keoghs have premature distribution penalties before age 59½. Once the participant reaches 72, required minimum distributions must be made or a 50% tax penalty will be assessed.

An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of Kapco common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the Kapco stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case, the agent acted A) improperly; the order should have been placed on Thursday B) improperly; the order should have been placed on Monday C) properly because the agent saved the client money D) properly because the agent used discretion as to price and time

A) improperly; the order should have been placed on Thursday In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time or price. However, time or price discretion are only good for that day—those are considered "day" orders, so the agent is able to use judgment, but the order must be placed during the day it was received.

If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely A) increase B) decrease C) remain unchanged D) It cannot be determined from the information given

A) increase Most mutual funds do not have 100% of their assets in securities, and they continually receive new money from investors. Any increase in the general interest rate would allow the fund to purchase new, higher-yielding instruments, which would increase the fund's income.

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) loan out the customer's margin securities B) lend the customer money C) commingle the customer's securities with securities owned by the firm D) hypothecate securities in the account

A) loan out the customer's margin securities A signed loan consent agreement permits a firm to loan out a customer's margin securities. This is the only part of the margin documentation that is optional.

You have a 70-year-old client who owns a whole life insurance policy. The face amount of the policy is $1 million and it currently has a cash value of $400,000. The client is interested in a life settlement. If the policy is accepted, the client would expect to receive A) more than $400,000, but less than $1 million. B) less than $400,000. C) the face amount plus the cash value. D) the $1 million face amount.

A) more than $400,000, but less than $1 million. When a policy is sold through the life settlement process, the insured receives more than the cash value, but less than the face amount of the policy.

An individual has been registered in State C and State D as an agent of a broker-dealer for the past three years. Due to a number of this agent's clients moving to State F, the agent registers there in early November. The individual's new registration in State F will expire A) on December 31 of the same year. B) automatically within 30 days after the withdrawal of registration if the state securities Administrator has initiated proceedings against the registrant. C) on December 31 of the following year. D) on every anniversary date of the initial registration.

A) on December 31 of the same year. State registration for all securities professionals expires on December 31 next following the date of registration. The next December 31 after a November registration is December 31 of that same year. If the state Administrator initiates a proceeding, the withdrawal is put on hold until the results of the hearing are final.

Greater Wealth Managers, (GWM) is an investment adviser registered in States A, B, C, and D. They have recently hired an individual to solicit new advisory accounts for the firm. This person will not be engaged in giving advice of any kind, and all activities will be closely supervised by senior personnel of the firm. Under Section 201 of the Uniform Securities Act, A) registration as an investment adviser representative is required for this individual B) registration as an investment adviser representative and as an agent is required for this individual C) no registration is required, because this individual is not rendering investment advice and is being closely supervised D) no registration is required, because this individual is not rendering investment advice

A) registration as an investment adviser representative is required for this individual Because GWM is registered on the state level, it comes under the provisions of the Uniform Securities Act. Under the USA, the definition of investment adviser representative includes, among others, those who solicit for the services of the investment adviser. Therefore, these individuals must register as IARs.

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an investment adviser who has custody of client securities or funds must do all of the following EXCEPT A) send clients semiannual, itemized statements detailing the funds and securities in the adviser's custody at the end of the period and all transactions during the period B) if not held by a qualified custodian, deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held C) have client funds and securities examined at least once a year by an independent public accountant on a surprise basis D) notify the Administrator in writing

A) send clients semiannual, itemized statements detailing the funds and securities in the adviser's custody at the end of the period and all transactions during the period The adviser must send clients quarterly, itemized statements listing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. Unless using a qualified custodian, the adviser must deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held. The adviser must also arrange for an annual, surprise audit by an independent public accountant of client funds and securities. The adviser must notify the Administrator that the adviser has or may have custody of client securities or funds.

All of the following statements regarding the registration of an investment adviser in a state are true EXCEPT A) the annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process B) if the investment adviser is not an individual, any officer or partner active in the advisory business is automatically registered as an investment adviser representative C) the initial application must include a consent to service of process along with Form ADV and the appropriate fees D) the adviser's registration expires on December 31 each year

A) the annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process The consent to service is a permanent document that remains on file with the Administrator; it need not be resubmitted for yearly renewal. The initial application for registration must include a consent to service of process along with Form ADV and the appropriate fees. If the investment adviser is not an individual, all officers or partners of the business entity that play an active role in the giving or supervision of giving advice are automatically registered as IARs.

An investor owns a long-term U.S. Treasury bond with a 5% coupon and 15 years to maturity. The client wishes to sell and receives a quote from a dealer of 104.22. This number represents A) the bid price B) the yield to maturity C) the premium D) the offer price

A) the bid price If you are looking to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, then the quote would have been the offer (ask) price. What does the 5% coupon and the 15 years to maturity have to do with the question? NOTHING. And, knowing that treasuries are quoted in 32nds has nothing to do with it either. And, one more thing. The price quote is above 100, so it is at a premium, BUT the better answer is bid price because the question is referring to the quote.

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of A) the majority vote of the outstanding shares and a majority of that portion of the board of directors that is considered noninterested members B) the majority vote of the outstanding shares C) the majority vote of the noninterested directors D) the majority vote of the board of directors

A) the majority vote of the outstanding shares and a majority of that portion of the board of directors that is considered noninterested members The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the noninterested members of the board of directors. It is renewed annually by either a majority of the board or a majority of the outstanding shares. In addition, as with all contracts, initial and renewal, it requires a majority of the noninterested board members.

When an investment adviser chooses to use a promoter to solicit new business, the Investment Advisers Act of 1940 requires all of the following conditions except A) the solicitor must register with the SEC as an investment adviser B) either the solicitor or the adviser must disclose to the customer any additional costs of providing advisory services due to solicitor involvement C) the promoter and investment adviser must enter into a written agreement if the compensation exceeds $1,000 over a 12-month period. D) the solicitor must not be subject to disciplinary actions involving finance or dishonesty

A) the solicitor must register with the SEC as an investment adviser There must be a written agreement between a solicitor and an adviser if the compensation exceeds the de minimis amount. The solicitor is required to provide the customer with a copy of the adviser's brochure. The adviser or the solicitor must disclose any additional costs that the customer will pay due to the use of the solicitor. The solicitor cannot be subject to disciplinary actions involving finance or dishonesty. Although the investment adviser must be registered, there is no requirement for a solicitor to register with the SEC.

One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that A)they are not registered as investment companies B) they have no more than 100 investors C) they have assets of less than $150 million D) their advisers are exempt from filing reports on Form ADV

A) they are not registered as investment companies Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file a Form ADV Part 1 answering most of the questions on the Form.

The Uniform Securities Act lists a number of securities that are exempt from both the registration and the advertising filing requirement of the Act. Included in that list would be all of the following except A) universal life insurance policies issued by insurance companies authorized to do business in the state. B) securities issued by the Podunk and Western Railroad, a regulated common carrier. C) securities issued by the XYZ Industrial Loan Association organized and supervised under the laws of this state. D) common stock issued by the Bailey Brothers Building and Loan, organized under the laws of New York State and authorized to do business in this state.

A) universal life insurance policies issued by insurance companies authorized to do business in the state. Universal life insurance policies are not exempt securities for one simple reason—they are not securities. Each of the other choices is included in the USA's listing of exempt securities.

NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. As far as the topic of compensation is concerned, which of the following must be disclosed? I. Transaction-based compensation, such as commissions on recommended securities II. 12b-1 trails on no-load mutual funds in the client's portfolio III. Expenses reimbursed by third-party sources IV. Compensation-sharing arrangements between the investment adviser and its representatives

A)I ,II, and III All forms of compensation, whether direct or indirect, must be disclosed. However, the method by which an adviser pays its representatives is an internal matter and not for public disclosure.

Which of the following statements regarding exemptions is TRUE?

An exemption for a transaction must be established on an individual basis before each transaction. Exempt securities must establish their exemption at the time the securities are issued. An exempt transaction is done on a transaction-by-transaction basis.

Which of the following has the power to close a stock exchange for up to 90 days? A) The president of that stock exchange B) The Administrator in the state where that stock exchange is located C) The SEC D) The president of the United States

C) The SEC The Securities Exchange Act of 1934 granted the SEC the power to close any registered stock exchange for up to 90 days. All that is required is notice to the president of the United States.

Under the NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, investment advisers who have discretionary powers but NOT custody of customer funds are usually required to have a net worth in the amount of A) $50,000.00 B) $10,000.00 C) $35,000.00 D) $5,000.00

B) $10,000.00 The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an adviser who does not have custody of customer funds or securities but has discretionary power over customer accounts to have a minimum net worth of $10,000.

Under the Uniform Securities Act, investment advisers are exempt from registration in a state where they have no office if they direct business communications with no more than 5 retail clients within A) 2 years B) 12 months C) 30 days D) 6 months

B) 12 months If investment advisers have no office in a state, they are not defined as investment advisers and are exempt from registration if either of the following conditions applies: their only clients within the state are other investment advisers or broker-dealers, financial institutions (banks, savings and loans, trusts), institutional investors (certain pension funds, insurance companies, investment companies), or government agencies or other political entities; and they have no more than 5 clients within the state in a 12-month period (de minimis exemption).

This is the performance of your portfolio over the previous 4 years: Year 1 - 10% Year 2 - 45% Year 3 + 20% Year 4 + 35% In order for the portfolio to be equal to the starting investment, the return in Year 5 must be nearest to A) 0%. B) 25%. C) 20%. D) 33%.

B) 25%. Suppose the initial value of your portfolio is $1,000. In Year 1, you lose 10%. Your portfolio is now worth $1,000 x (1 - 0.1) = $1,000 x 0.9 = $900. In Year 2, you lose 45%. Your portfolio is now worth $900 x (1 - 0.45) = $900 x 0.55 = $495. In Year 3, you gain 20%. Your portfolio is now worth $495 x (1 + 0.2) = $495 x 1.2 = $594. In Year 4, you gain 35%. Your portfolio is now worth $594 x (1 + 0.35) = $594 x 1.35 = $801.9. You would like to know by how much your portfolio needs to appreciate in Year 5 to be worth its original value of $1,000. Let's set "y" to be this number. Then we have: $801.9 x (1 + y) = $1,000. Solving this equation for "y" gives: y = ($1,000 ÷ $801.9) - 1 = 0.247 = 24.7%. Rounding this answer in percentage terms (24.7%) to the nearest integer yields the desired answer of 25%. Your portfolio thus needs to increase by nearly 25% in Year 5 for it to be worth its original value of $1,000. Some might find it easier to look at the shortfall ($1,000 - $801.90) = $198.10. Divide that by the current value and you have 198.10 ÷ 801.90 = 24.7%. Some might just look at the number and recognize that you are about $200 short on a value of $800 and that is 25%.

A client enters an order as follows: Sell stop 100 shares of LTC at 45 limit 45.50. Following the entry of that order, trades occur in the following sequence: 47; 46; 45.12; 44.97; 45.28; 45.97; 46.05. More than likely, the client received

B) 45.97 This is really two orders. The first is to stop at 45. That is, once the stock trades at 45 or lower, enter the order. The second order is a sell, but with a limit of 45.50. So the first time the stock hits 45 (or less) is the trade at 44.97. That triggers the sell limit. The next trade is at 45.28 and that is not acceptable to the limit order at 45.50. Because the limit order is saying, "get me 45.50 or higher," the 45.97 is an acceptable price.

The USA provides either an exclusion from the definition or an exemption from registration as an investment adviser for certain persons. Which of the following would be required to register? A) A teacher who teaches a course in the local high school on consumer economics B) A CFP® who provides a full range of financial planning to clients on a fee-only basis C) An engineer employed by an oil company selling limited partnership interests to public investors who provides estimates of recoverable reserves D) A bank trust officer with less than $250 million in assets under management

B) A CFP® who provides a full range of financial planning to clients on a fee-only basis Unless excluded or exempted, anyone charging a fee for investment advice must register. Banks and their employees are excluded. Engineers and teachers fall under the late exclusion as long as the advice is incidental to their profession and no special compensation is received.

Which of the following would NOT constitute custody of a client's account under the Investment Advisers Act of 1940? I. Client prepayment of $1,000 of advisory fees, 6 months in advance II. Having temporary custody of a client's securities III. Depositing client funds in bank accounts accessible by the investment adviser

C) I only "Custody" means possession (even temporarily) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but it does not include the acceptance by the adviser of prepaid advisory fees.

What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer? A) Instruct the client to send the certificate to the transfer agent because you cannot accept it. B) Accept the certificate and give the customer a receipt. C) File a currency transaction report if the current market value of the stock represented by the certificate exceeds $10,000. D) Accept the certificate and send the customer a receipt within 24 hours of the delivery.

B) Accept the certificate and give the customer a receipt. When a client delivers a stock certificate to the broker-dealer's office, the appropriate procedure is to furnish the customer with a receipt on the spot. Broker-dealers are far more likely to have custody arrangements than are investment advisers.

Under the terms of the Uniform Securities Act, which of the following is an investment adviser for purposes of state regulatory jurisdiction? A) A federal covered adviser with clients in the state B) An investment advisory subsidiary of a bank holding company located in the state that manages $20 million in assets C) An accountant located in the state who offers general securities advice as an incidental part of his business D) A commercial bank with a place of business in the state that advises clients on banking matters

B) An investment advisory subsidiary of a bank holding company located in the state that manages $20 million in assets A bank holding company's investment advisory subsidiary that manages $20 million in assets is an investment adviser subject to the Uniform Securities Act (USA). Under the language of the USA, a commercial bank is excluded from the definition of investment adviser whereas a bank holding company subsidiary is not. While a federal covered adviser is an investment adviser in practice (that is, it performs the functions of an adviser), it is excluded from the definition of an investment adviser under the USA to avoid duplicate regulation. An accountant located in the state that offers general securities advice as an incidental part of his business is not an investment adviser.

Section 28(e) of the Securities Exchange Act provides a safe harbor for certain soft dollar compensation extended from broker-dealers to investment advisers. Which of the following is most likely to be included in that safe harbor? A) Meal expenses to attend an investment seminar sponsored by the broker-dealer B) Bespoke software designed to give clients access to asset allocation programs C) Desks remaining after the broker-dealer re-designed its office D) Use of vacant office space in the broker-dealer's facilities

B) Bespoke software designed to give clients access to asset allocation programs Among the items generally in the safe harbor are those items designed to assist the firm's customers. Customized software that helps clients would be acceptable. Although seminar registration expenses are in the safe harbor, travel and transportation expenses, such as meals and lodging, are not. Rent and office furniture are specifically listed as out of the safe harbor.

An investment adviser is analyzing 4 bonds of similar quality for a client. Bond A has a coupon of 6%, matures in 12 years, and is currently priced at 50. Bond B has a coupon of 8%, matures in 9 years, and is currently priced at 50. Bond C has a coupon of 4%, matures in 18 years, and is priced at 45. Bond D has a coupon of 12%, matures in 6 years, and is priced at 50. Based on NPV, which of these bonds represents the better value? A) Bond B B) Bond C C) Bond A D) Bond D

B) Bond C Because you don't have the proper calculator to do a real PV calculation, NASAA expects you to use the rule of 72. Remember, under that rule, dividing 72 by the interest rate tells you the number of years it will take for a deposit to double. Or, if you divide 72 by the number of years, it will tell you the interest rate required for a present deposit to double. Finally, a positive NPV is when you can buy the bond for less than its present value. So, let's look at all 4 choices. Bond A, at 6%, takes 12 years to double. That's exactly the time to maturity, so the PV of this bond should be approximately $500 (a quote of 50). The same is true of bonds B and D—their PV should be approximately $500 (72 ÷ 8% = 9 years; 72 ÷ 12% = 6). Because their price is the same as the PV, the NPV is zero. However, with bond C, 72 divided by 4% equals 18 years, so this bond also has a PV of approximately $500 (50), but it can be purchased for less than that: 45 ($450). Therefore, with an NPV of $50, bond C is the best value. One final point: If you are stuck and have to guess, note that 3 of the 4 bonds are selling for $500 with the other priced at $450. If they are all going to mature at $1,000, a good guess would be that the cheapest one is the best deal.

Strategic Capital Asset Managers (SCAM) is an investment adviser that is registered in 5 states. In lieu of preparing a fancy brochure, SCAM is permitted to provide its clients with a copy of its A) Form ADV Part 2, Appendix 1 B) Form ADV Part 2A and Part 2B C) Annual renewal form provided to the SEC D) Form ADV Part 1 and Part 1B

B) Form ADV Part 2A and Part 2B The Form ADV Part 2 (both parts) is acceptable for use as the firm's brochure. Part 1 is for registration purposes, and Part 1B is only used by state-registered advisers (as this firm is). Part 2, Appendix 1 is used for investment advisers who offer wrap fee programs. As a state-registered investment adviser, SCAM does not file any forms with the SEC.

Many investment advisers prepare an investment policy statement (IPS) when counseling their clients. Which of the following should least likely be included as a constraint in an investment policy statement? A) Asset classes the client specifically forbids or limits based on past experience B) How the funds are spent after being withdrawn from the portfolio C) Constraints put on investment activities by regulatory agencies D) Any unique needs or preferences an investor may have

B) How the funds are spent after being withdrawn from the portfolio How funds are spent after withdrawal would not be a constraint of an IPS. Anything that might be an obstacle to reaching the goals, such as regulatory restrictions and specific investor preferences, are considered constraints.

When an Administrator issues a final order, an agent subject to the order may I. obtain a review of the order in an appropriate court of law II. request that additional evidence be presented to the court III. request a hearing 90 days after the final order IV. not appeal a court's decision

B) I and II An agent subject to a final order of an Administrator has the right to have the order reviewed by an appropriate court in the state. If the court finds that the circumstances warrant such action, additional evidence may be submitted by any party to the case. An agent subject to an order must file for a judicial review of the Administrator's final order within 60 days.

All of the following would qualify as management companies EXCEPT I. face-amount certificate companies II. unit investment trusts III. closed-end investment companies IV. open-end investment companies

B) I and II As defined in the Investment Company Act of 1940, closed- and open-end funds are subclassifications of management companies (actively managed portfolios). Face-amount certificate companies and unit trusts are separate investment company classifications and do not have managed portfolios.

The Uniform Securities Act contains a number of exemptions from registration of securities. Which of the following do not qualify for any of those exemptions? I. A bond issued by a corporation II. A bond issued by the city of Athens, Greece III. A bond issued by the province of Manitoba IV. A security issued by a credit union authorized to do business in the state

B) I and II Securities issued by political subdivisions of countries other than the U.S. and Canada are not exempt unless guaranteed by their federal government (and that government has diplomatic relations with the U.S.). The only way the corporate bond would be exempt is if it was issued by a company whose common stock was federal covered. Because the question does not tell us that, we must assume it is not.

Under the Uniform Securities Act, broker-dealers are required to prepare and maintain certain records. Which of the following statements reflects the position of the act? I. A firm registered in more than one state must meet the recordkeeping requirements of the state where its principal office is located, even if those are less comprehensive than those of some of the other states where it is registered. II. A firm must maintain records of every email sent from the office by agents. III. A broker-dealer's website is considered advertising. IV. Once a broker-dealer's trade blotter has been posted, it may be discarded.

B) I and III Regardless of the recordkeeping requirements of other states, the only requirements that must be met are those of the state where the principal office is located. Among the items of advertising requiring maintenance of records is a firm's website. Personal email sent by agents that is not business related does not have to be retained. Trade blotters have a 3-year retention requirement. Please note that in most cases, broker-dealers are registered with the SEC in addition to the states in which they do business. In that case, the recordkeeping requirements of the SEC trump those of any state.

Which of the following accounts could be opened with a TOD designation? I. Individual II. Joint tenants in common III. Joint tenants with rights of survivorship IV. UTMA

B) I and III The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased's estate.

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. allow plan participants to purchase U.S. Treasury securities

B) I and III The safe harbor requirements relieve the trustee of a 401(k) plan of liability if the plan participants have the ability to select from at least 3 different investments and are allowed to make selection changes no less frequently than quarterly.

Which of the following statements regarding the USA are TRUE? I. State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA, if the security involved is not covered by federal exemption. II. State securities Administrators may not deny, by rule or order, an exemption to an exempt transaction under the USA, if the security involved is not covered by federal exemption. III. State securities Administrators may deny, by rule or order, an exemption to a federal covered security. IV. State securities Administrators may not deny, by rule or order, an exemption to a federal covered security.

B) I and IV State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA unless the security involved is covered by a federal exemption. State securities Administrators may not, however, deny an exemption provided to a federal covered security. Federal covered securities are granted exemption from state registration by federal law, so the state Administrator has no authority to deny the exemption granted by the federal government.

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

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

Which of the following statements concerning the books and records of a state-registered investment adviser under the Uniform Securities Act is (are) true? I. Books and records must be maintained in the principal office of the adviser for the first two years. II. Books and records must be maintained in an easily accessible place for no less than five years from the end of the last fiscal year in which an entry was made. III. Copies of all investment letters, advertisements, or communications to two or more persons must be preserved for five years from the end of the fiscal year of the publication date. IV. An adviser who ceases business continues to be responsible for the maintenance and preservation of certain records, such as corporate charters and minute books, for three years after termination of the enterprise.

B) I, II, III, and IV All books and records required to be maintained by actively registered investment advisers—including investment letters, advertisements, or other communications to two or more persons (10 if the question dealt with federal law)—must be preserved in a readily accessible place for five years from the end of the fiscal year in which they were created or communicated. For the first two years, they must be maintained in the appropriate office of the adviser. The adviser remains responsible for the preservation of certain records, such as corporate charters and minute books or partnership agreements if operated in that business form, for three years after ceasing business.

One measure of a corporation's liquidation value is its book value per share. When performing this computation, which of the following must be taken into consideration? I. Goodwill II. Long-term debt III. Retained earnings IV. Par value of the preferred stock

B) I, II, III, and IV The computation of book value per share is basically net tangible worth per share of common stock. Included in the net worth are all assets and liabilities (such as long-term debt), as well as the stockholders equity (par value of the preferred stock and par + paid in surplus of the common stock and retained earnings). Subtracted from this to get tangible book value would be the par value of the preferred stock and the value of intangible assets such as goodwill.

Which of the following investment activities are acceptable for a fiduciary acting under the prudent expert rule? I. Purchasing AAA-rated debentures II. Purchasing a growth mutual fund III. Purchasing new issues of a AAA-rated issuer IV. Writing covered calls on dividend-paying stocks

B) I, II, III, and IV The prudent expert rule permits a fiduciary to invest in securities that a prudent expert might buy. These investments are nonspeculative, low to moderate risk, and likely to be considered prudent if they are used in a way consistent with modern portfolio theory (MPT).

The Uniform Securities Act provides for both civil and criminal prosecution. In which of these cases might an agent face civil liability? I. A sale was made of an unregistered nonexempt security. II. During a sales presentation, the agent misstated a material fact that resulted in the prospect deciding to make the purchase. III. The agent was included in the judgment along with the broker-dealer for a civil infraction.

B) I, II, and III These are all cases for civil, not criminal liability. Unless it can be proven that the agent acted willfully and with knowledge, it is hard to have a criminal case.

Under the Uniform Securities Act, the Administrator has the power to deny, suspend, or revoke the registration of an issue if it is in the public interest and I. the issuer discloses in the prospectus that there is virtually no chance that the company's business model will be successful and investors should anticipate losing their entire investment II. the Administrator of another state has revoked the issue's registration III. an officer of the registrant has been convicted of a securities-related crime IV. the prospectus contains misstatements of nonmaterial information

B) II and III If the Administrator of another state has revoked an issue's registration, the USA considers that just cause for denial in this state. Conviction of an officer of the issuer for a crime related to the securities industry will invariably lead to denial or revocation. Disclosure that the company is not expected to be successful is not a cause for denial; all that is required is full disclosure. Misstatements of material information would be cause for action by the Administrator, but nonmaterial, by definition, does not impact an investor's decision-making process.

Which of the following qualified retirement plans offer tax advantages to both the employer and the employee? I. Individual retirement arrangements (IRAs) II. 401(k) plans III. Deferred compensation plans IV. Defined benefit plans

B) II and IV In both 401(k) plans and defined benefit plans, tax advantages accrue to both the employer and the employees. Employer contributions are deductible, and earnings growth is tax deferred to the employee. IRAs offer no benefit to the employer (note that the answer choice did not say "SEP IRA"), and deferred compensation plans are nonqualified.

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

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

All of the following statements regarding an investment's internal rate of return (IRR) are true EXCEPT A) investments are acceptable when their internal rates of return exceed the investor's required rate of return B) IRR is most often used with growth stocks C) IRR expresses the rate of interest that matches the initial investment with the present value of future cash flows D) IRR is the one rate of return that results in an investment having a net present value (NPV) of 0

B) IRR is most often used with growth stocks It is possible, although very difficult, to calculate IRR for investments with uneven cash flows such as growth stocks where dividends are generally not reliable. IRR is the rate of interest that equates the initial investment with the present value of future cash flows; it is the rate of return that results in an investment having a net present value of 0.

Which of the following statements regarding nonqualified annuities is CORRECT? A) Because taxes on earnings are deferred, all money withdrawn will be subject to income tax when received. B) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. C) Because only insurance companies issue variable annuities, they are not considered securities. D) The exclusion ratio applies to accumulation units only.

B) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. Nonqualified annuities, fixed or variable, are those where contributions are made with after-tax dollars. Withdrawals due to death or disability or taking substantially equal annuity distributions over the life of the insured can begin before age 59½ without being subject to a tax penalty. The exclusion ratio only applies during the payout period. Even though taxes on earnings are deferred, that portion of the withdrawal that represents a return of principal on a nonqualified annuity, is not subject to tax or penalty.

Long-Term Financial Solutions, Inc. (LTFSI), an investment adviser registered in five states, files a Form ADV-W indicating the business is closing. It is being acquired by another federal covered adviser, Gold and Sylver Advisers, LLC. Which of the following statements is correct? A) As the successor firm, Gold and Sylver Advisers must keep copies of the LTFSI corporate charter for at least three years after LTFSI's acquisition. B) LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least three years after the acquisition. C) Gold and Sylver will not have to amend their Form ADV Part 1 until the filing of their annual updating amendment. D) Gold and Sylver must notify all clients of LTFSI that their advisory contracts have been assigned.

B) LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least three years after the acquisition. When an investment adviser ceases to exist, either through going out of business or being succeeded by another firm (as is the case here), it is their responsibility to ensure that articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor be preserved until at least three years after termination of the enterprise. Although it is true the contracts have been assigned to the successor firm (Gold and Sylver), the consent for that had to be obtained by LTFSI. A change of this nature requires prompt amendment to the Form ADV Part 1.

Which of the following statements is NOT correct? A) Time-weighted returns show performance without the influences of additional investor deposits or withdrawals from the account. B) Net present value (NPV) is the difference between the initial cash outflow (investment) and the future value of discounted cash flows. C) Net present value analysis (NPV) is a commonly used time value of money technique employed by businesses and investors to evaluate the cash flows associated with capital projects and capital expenditures. D) Internal rate of return (IRR) is a method of determining the exact discount rate to equalize cash inflows and outflows, thus allowing comparison of rates of return on alternative investments of unequal size and investment amounts.

B) Net present value (NPV) is the difference between the initial cash outflow (investment) and the future value of discounted cash flows. Net present value (NPV) is the difference between the initial cash outflow (investment) and the present value of discounted cash flows (NPV = PV of CF − cost of investment). That is why it is called net present value instead of net future value.

Which of the following is an example of a nonissuer transaction? A) Primary issue of corporate stock B) Secondary offering by an institutional seller C) Private placement by an issuer D) Preemptive rights offering

B) Secondary offering by an institutional seller Investors or shareholders routinely receive the proceeds from a secondary transaction. About the only time a secondary offering is an issuer transaction is if the issuer were reselling treasury stock because the proceeds go to the issuer.

Sharon Smith is an agent for Highwater Securities, a broker-dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act, A) because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X B) Sharon must be registered in State X in order to accept the order C) because Sharon has no place of business in State X and the order is unsolicited, Sharon may accept the order without registering in State X D) because Highwater Securities is registered in all 50 states, Sharon must also be registered in all of them

B) Sharon must be registered in State X in order to accept the order Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state that is the domicile of a client placing an order. One does not have to be registered as an agent in every state the BD is, only in those where she expects clients to reside.

Pontourny Advisory and Investment Services (PAIS) is a federal covered investment adviser. Its principal office is in State X. PAIS also maintains branch offices in States Y and Z. Brenda is the manager of the branch office in State Y. Some of the individuals being supervised by Brenda have clients in States X and Y, and others have clients in States Y and Z. Brenda must register as an IAR in

B) State Y Those who supervise the activities of investment adviser representatives are themselves defined as IARs. An IAR representing a federal covered investment adviser need only register in the state or states in which she (the IAR) has a place of business. There is nothing in this question to suggest that Brenda has a place of business anywhere other than in State Y, where her branch office is located. Remember, when it comes to federal covered advisers, registration of their IARs is dependent on the IAR's place of business, not the location of their clients.

Which of the following would not be justification for the Administrator to cancel the registration of an agent? A) The Administrator's repeated attempts to contact the agent were futile B) The agent violated several provisions of the Uniform Securities Act C) A court has declared the agent mentally incompetent D) The agent has been reported as deceased

B) The agent violated several provisions of the Uniform Securities Act Cancellation is a form of nonpunitive termination. If an agent dies, is declared mentally incompetent, or mail is returned with no forwarding address, registration will be canceled. Violation of the Act is cause for disciplinary action, not cancellation.

Which of the following statements regarding investment theory is not correct? A) In a well-diversified portfolio, diversifiable risk is zero. B) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. C) A correlation coefficient of 0.14 between the returns of Stock C and Stock L indicates that very little of Stock C's returns can be attributed to the returns of Stock L. D) Combining two stocks with a negative correlation coefficient can significantly reduce the portfolio's standard deviation.

B) The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. Beta is a measure of systematic risk, not unsystematic risk. The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume systematic risk. Diversifiable risk (unsystematic risk) can be brought down to zero with proper diversification. Including securities with negative correlation is a prime method of reducing overall risk (expressed by the portfolio's standard deviation) and the closer the correlation coefficient gets to zero (and 0.14 is close), the more random the relationship between the returns earned by two securities.

If an investment adviser files an initial registration with a state on June 30, which of the following statements regarding the filing fee to be paid is TRUE? A) The fee will be prorated from the filing date. B) The full year's fee must be paid. C) The fee will be prorated from the effective date. D) No filing fee is required until December 31.

B) The full year's fee must be paid. While some states make exceptions for filings late in the year, under the USA there is no pro rating of filing fees. The full year's fee must be paid with the initial registration request.

Which of the following statements regarding the Administrator's authority to examine the books and records of registrants is TRUE? A) If a broker-dealer's or investment adviser's records are located outside the Administrator's state, they only may be examined to collect evidence for a hearing. B) The records may be examined at any time during normal business hours for any reason within or outside the state if it is in the public interest to do so. C) Broker-dealer records may be examined at any time during normal business hours, but the same is not so in the case of investment advisers. D) Such examinations are not necessary or appropriate for the protection of investors or in the public interest.

B) The records may be examined at any time during normal business hours for any reason within or outside the state if it is in the public interest to do so. All required records must be made available for examination by a state Administrator during normal business hours, within or outside the state, as is appropriate or necessary in the public interest.

Under which of the following circumstances can an agent conduct customer transactions without the activity being recorded on the books and records of his broker-dealer employer? A) The customer is a member of the agent's immediate family. B) The transactions are authorized in writing by the broker-dealer before execution of the transactions. C) The securities are exempt under the Uniform Securities Act. D) The agent will receive no compensation.

B) The transactions are authorized in writing by the broker-dealer before execution of the transactions. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be considered contrary to the standards imposed for an agent to effect securities transactions not recorded on the regular books or records of the broker-dealer that the agent represents, unless the transactions are authorized in writing by the broker-dealer before execution of the transaction.

In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account, is A) passbook savings account B) Totten trust C) demand deposit account (DDA) D) revocable trust

B) Totten trust The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same.

The Federal Reserve Board has just taken action leading to an increase in interest rates. Which of the following industries is most likely to be affected adversely by this action? A) Heavy industries such as steel B) Utilities C) Defensive industries D) Cyclical industries

B) Utilities Utility stocks tend to be interest rate sensitive for two reasons. First, they are typically bought for income portfolios, and, as such, changes to interest rates impact their price. Second, because utilities are typically the most highly leveraged of all industries, an increase in interest rates could substantially increase their debt service costs and thus reduce earnings.

All of the following are true about education funding plans except A) Section 529 plans allow a gift tax exclusion equal to five times the annual limit that may be repeated every 5 years B) a beneficiary of an ESA who withdraws the funds for nonqualified expenses will be taxed on the entire amount of the withdrawal plus a 10% penalty C) proceeds in 529s may be withdrawn income-tax free only if used for qualified educational expenses. D) proceeds in ESAs may be withdrawn income tax free for qualified education expenses even if the child is under age 18

B) a beneficiary of an ESA who withdraws the funds for nonqualified expenses will be taxed on the entire amount of the withdrawal plus a 10% penalty The tax and 10% penalty is only levied against earnings since the contributions were made with after-tax dollars. ESAs may be used for any level of education, including elementary school where it is hoped that the student would be under age 18. In order to receive the favored tax treatment, the proceeds must be used to pay for qualified educational expenses. Section 529 plans have the unique 5-year front-loading feature.

When an open-end management investment company computes its net asset value per share, each of the following occurrences would have an impact EXCEPT A) interest payments made on debt securities held in the fund's portfolio B) a greater value of shares being redeemed than purchased C) a drop in the value of equity securities held in the fund's portfolio D) a capital gains distribution

B) a greater value of shares being redeemed than purchased Because shares are purchased and redeemed at NAV, net redemptions (this case) or net purchases have no effect on the net asset value of the fund's shares. However, receipt of cash in the form of interest payments causes assets to increase, while falling equity prices leads to a decrease. Distributions of capital gains (or dividends) represents a payment of cash, thus decreasing the amount of assets on hand.

An individual investor specifies to her investment adviser representative that her portfolio must produce a minimum amount of cash each year. This would be considered A) a legal and regulatory constraint. B) a liquidity constraint. C) a unique circumstance. D) a tax constraint.

B) a liquidity constraint. Liquidity constraints arise from an investor's need for spendable cash.

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

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

An agent making a sales presentation to a client about a mutual fund's historical returns is required to explain to the client the difference between the fund's A) current yield and holding period return. B) current yield and total return. C) total return and risk-adjusted return. D) current yield and real return.

B) current yield and total return. When comparing to a benchmark, it is common to show various return computations. In connection with the solicitation of investment company shares, it is considered an unfair business practice to discuss returns without fully explaining the difference between current yield and total return.

Registration as an investment adviser or investment adviser representative under the Uniform Securities Act is required of A) a tax attorney who, as an incidental part of his tax practice, recommends that his high-tax-bracket clients investigate the use of municipal bonds in their portfolios B) an economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee C) an officer of a trust company handling investments for trust accounts D) an agent of a broker-dealer who recommends model portfolios to clients in exchange for them executing their trades through him

B) an economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee If you are putting yourself out to the public as providing investment advice and charging a fee for doing so, you must register. The exceptions to this are if your giving of investment advice is incidental to your primary reason of doing business and if you are not charging specifically for the giving of that advice. Trust companies and their employees are specifically excluded from the definition of "investment adviser." A tax attorney making recommendations incidental to his legal practice and not charging specifically for the making of those recommendations is also not an investment adviser. The professor would have also been exempt from registration except for the fact that compensation was received for securities-related advice. Agents who are compensated only on the basis of recommended trades are not receiving special compensation and are, therefore, not considered to be in the business of giving advice.

Under the National Securities Markets Improvement Act of 1996 (NSMIA), investment companies registered under the Investment Company Act of 1940 are required to register A) as exempt securities, at neither state nor federal levels B) as securities at the federal level only C) as securities at the state level only D) as securities at both state and federal levels

B) as securities at the federal level only The NSMIA requires that the SEC, rather than individual states, assume responsibility for the registration and regulation of federal registered mutual funds and other investment companies. Thus, these federal registered investment companies are no longer required to register at the state level; however, they will likely have to pay state filing fees by going through the notice filing procedure.

While an application for registration as an agent of a broker-dealer is still pending, that person would be permitted to A) engage in no activity at the office other than studying for the exam B) assist registered employees of the firm by doing research on securities they are following C) limit her acceptance of orders to those from the broker-dealer's existing clients D) accept unsolicited orders only

B) assist registered employees of the firm by doing research on securities they are following While registration as an agent is pending, the applicant can take no active role in the sale or offering of securities. However, performing research on an internal basis does not involve contact with the public in a sales effort and would be permitted.

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

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

The Uniform Securities Act is designed to protect the general public and not restrict investment activities of institutional or professional investors. Any offer or sale to any of the following would be considered exempt from the registration and advertising filing requirements of the USA EXCEPT A) banks B) chief executive officers of companies listed on the NYSE C) savings institutions D) broker-dealers

B) chief executive officers of companies listed on the NYSE Any offer or sale to a bank, savings institution, trust company, insurance company, investment company as defined in the Investment Company Act of 1940, pension or profit-sharing trust, or other financial institution or institutional buyer, or to a broker-dealer, whether the purchaser is acting for itself or in some fiduciary capacity is considered an exempt transaction. Corporate chief executive officers are individual investors under the USA. Transactions in their personal investment accounts are therefore not exempt from the provisions of the act.

Each of the following are advantages offered by a nonqualified deferred compensation plan that are not found in a qualified plan EXCEPT A) they are an attractive benefit to the employer because participation requirements and nondiscrimination restrictions do not apply. B) employer contributions to the plan are not subject to current taxation to the employee. C) they are an attractive benefit for highly compensated employees because they're free from the contribution limits. D) deferred compensation plans are not subject to most of the requirements of the Employee Retirement Income and Security Act of 1974 (ERISA).

B) employer contributions to the plan are not subject to current taxation to the employee. Tax deferral is found in both NQDC plans and qualified plans, so there is no advantage that one has over the other. However, NQDC plans have much more flexibility without the burdensome compliance issues with ERISA.

Section 404(c) of ERISA deals with A) distribution options B) fiduciary responsibilities C) tax qualification of the plan D) eligibility requirements

B) fiduciary responsibilities The requirement for a retirement plan trustee to follow fiduciary standards is found in Section 404 (c) of ERISA.

A person who has no place of business in this state would not be considered a broker-dealer if he effects transactions in this state exclusively with all of the following except A) insurance companies. B) investment advisers. C) the issuers of the securities involved in the transaction. D) other broker-dealers.

B) investment advisers. The Uniform Securities Act excludes from the definition of broker-dealer, a person who has no place of business in this state if he effects transactions in this state exclusively with or through i. the issuers of the securities involved in the transactions, ii. other broker-dealers, or iii. banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, pension or profit-sharing trusts, or other financial institutions or institutional buyers. Please note that investment advisers are not included in this list. What is confusing is that the USA offers almost the exact same exclusion for investment advisers and that list includes other investment advisers as well as broker-dealers.

In general, one would prefer to purchase a bond when its current market price is A) less than its future value B) less than its present value C) more than its present value D) the same as its present value

B) less than its present value When a bond can be purchased for less than its present value, it has a positive net present value (NPV). For example, if the present value of a bond is $600 and it can be purchased for $565, it has an NPV of $35 and should be an attractive investment. Every bond selling at a discount has a market price that is less than its future value (par), so that doesn't tell us anything about its NPV.

The state securities Administrator has the authority to A) issue a ruling under its authority with no requirement to publish that ruling B) make, amend, or rescind rules, forms, and orders necessary to administer the USA C) amend or alter the Uniform Securities Act D) issue and enforce an injunction against a registered party

B) make, amend, or rescind rules, forms, and orders necessary to administer the USA A state securities Administrator may issue a ruling or order to comply with the blue-sky laws of the state and designate the use of certain forms, but he does not have authority to amend or alter the Uniform Securities Act itself. All rules and forms of the Administrator must be published. Only the courts can issue injunctions.

An issuer wishing to comply with Regulation D of the Securities Act of 1933 must file a Form D with the SEC A) no fewer than 20 days prior to the first expected date of sale B) no later than 15 days after the first sale C) no later than the time of the first sale D) no later than 30 days after the first sale

B) no later than 15 days after the first sale Issuers wishing to avail themselves of the private placement exemption offered under Regulation D of the Securities Act of 1933 must file a Form D with the SEC no later than 15 days after the first sale.

All of the following statements regarding universal life insurance are correct EXCEPT A) may include a minimum guaranteed interest rate B) premiums are fixed for the life of the policy C) there are two death benefit options D) offers the policyowner exceptional flexibility in adjusting the premiums, cash value, and death benefit

B) premiums are fixed for the life of the policy The single most distinguishing characteristic of universal life is the fact that premiums are flexible and not fixed.

With regard to the state registration requirements of agents of registered broker-dealers, all of the following statements are correct except A) registration is not required in a state where the agent has no place of business and only deals with existing clients who are vacationing in that state B) registration is required in each state in which the employing broker-dealer has a place of business C) registration is required if they solicit the sale of securities by telephone to fewer than 6 individuals residing in that state D) registration is required when they limit their activity to the sale of exempt securities

B) registration is required in each state in which the employing broker-dealer has a place of business The fact that the broker-dealer does business in a state has nothing to do with a specific agent. Many broker-dealers are registered in all states; very few agents are. Agents must register in each state where they are selling or offering securities, even if the security or the transaction is exempt. That exemption only applies to the need for the security to be registered, not the agent. Soliciting the sale of securities by telephone is considered making an offer, and there is no de minimis exemption available. Finally, registration is not required when making use of the "snowbird" exemption.

After receiving complaint letters from an irate customer, the agent decides against a reply and discards the letters. Under the Uniform Securities Act, A) the agent is entitled to decide how to handle such situations B) the agent must forward all written complaints to a supervisory person C) the agent must forward material complaints to the Administrator D) the Administrator may, by rule, dictate how this should be handled

B) the agent must forward all written complaints to a supervisory person The Uniform Securities Act requires an agent to forward written complaints to a person who supervises that agent. Complaints need not be forwarded to the state securities Administrator.

Surrender charges may cause a reduction to all of the following EXCEPT A) the redemption value of Class B mutual fund shares B) the death benefit of a variable life insurance policy C) the cash value of a variable life insurance policy D) the liquidation value of a variable annuity

B) the death benefit of a variable life insurance policy Surrender charges never apply in the case of a death benefit. There may be a surrender charge in the case of early surrender of a variable annuity, taking out the cash value of a variable life policy, or redemption of Class B (back-end load) mutual fund shares.

With regard to an SEC-registered investment adviser employing the services of a promoter to solicit business, it would be correct to state that A) referral fees may be paid only if the solicitor is also registered with the SEC. B) the investment adviser may not compensate a solicitor who is subject to a statutory disqualification. C) cash referral fees may be paid pursuant to a written or oral agreement to which the investment adviser is a party. D) delivery of the solicitor's brochure must take place within five days after the entry into the advisory contract.

B) the investment adviser may not compensate a solicitor who is subject to a statutory disqualification. One of the important requirements when hiring a solicitor is making sure that the person is not statutorily disqualified from registration. That is, any person who would be unable to register as a securities professional because of prior conduct cannot act as a solicitor for a registered investment adviser. Promoters do not have to prepare (much less deliver) a brochure. If the promoter is to be compensated more than the de minimis amount, there must be a written, not oral, agreement.

Under the Uniform Securities Act, a registration statement for a security must be signed by A) the issuer's chief executive officer and the underwriter B) the issuer's chief executive officer, chief financial officer, and a majority of the issuer's board of directors C) a majority of the issuer's board of directors only D) a majority of the issuer's board of directors and the underwriter

B) the issuer's chief executive officer, chief financial officer, and a majority of the issuer's board of directors The underwriter's signature is not required on a registration statement, but the chief executive officer, the chief financial officer, and a majority of the board of directors must all sign.

A registered investment adviser hires his friend to act as an adviser solicitor on his behalf. The friend asks if he is required to identify his affiliation with the adviser when contact is made to potential customers. If the adviser says that such disclosure is not required, he is not in violation of provisions of the Investment Advisers Act of 1940, which require disclosure of a relationship between an investment adviser and an investment adviser solicitor, if A) the friend is an employee of the advisory firm B) the solicitations are for impersonal advisory services C) There are no exceptions D) the friend is a client of the adviser's firm

B) the solicitations are for impersonal advisory services Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves impersonal advisory services only. An example of an impersonal advisory service is a newsletter that makes the same general recommendations to all readers.

It has been a great year at Capital Funding, Inc., an SEC-registered broker-dealer that is also registered in 22 states. The company decides to share its good fortune with employees by paying a year-end bonus equal to 31% of annual salary. In order for clerical personnel to receive this bonus, A) the bonus must be sales related B) they must be employees of the broker-dealer C) they must be licensed as investment adviser representatives D) they must be licensed as agents

B) they must be employees of the broker-dealer Unregistered personnel may be paid a bonus as long as it is not directly related to any specific sales activity.

An investment adviser (IA) has a number of clients who need high-quality estate planning. These clients are referred to the Rox Law Firm, and in exchange, Mr. Rox sends those of his clients needing investment advice to the IA. The IA pays a referral fee to Mr. Rox of $300 for each referral who becomes a client. Under the NASAA Model Rule on Unethical Business Practices Of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) this is permissible, but does not need to be disclosed to clients because Mr. Rox is an attorney and this would be a violation of attorney/client privilege B) this is permissible, but only if disclosed to clients C) this type of arrangement is never permitted D) this is permissible, but only if disclosed to the Administrator

B) this is permissible, but only if disclosed to clients Actually, NASAA doesn't say anything at all about referral fees, but you have to pick an answer. It is the Investment Advisers Act of 1940 that deals with the topic and permits them as long as proper disclosures are made and the fee is not related to the size of the account. Because it is a flat $300, it would be the same for a $100,000 account as a $10 million account.

An individual may NOT act as an agent for more than one broker-dealer A) under any circumstances B) unless the Administrator, by rule or order, authorizes such employment C) unless the broker-dealers are exchange members D) unless the broker-dealers are unrelated

B) unless the Administrator, by rule or order, authorizes such employment An individual may only act as an agent for multiple broker-dealers that are affiliated with each other. If the broker-dealers are unrelated, an agent may not work for them unless the state securities Administrator, by rule or order, authorizes such employment.

At his death, on January 1, 2017, Morris owned shares of ABC Corporation common stock, with a fair market value of $50 per share, which he had purchased in 2001 for $25 per share. If Morris's executor elected to value the estate by using the alternate valuation date, but then sold the shares through a broker-dealer on May 15, 2017, at $40 per share, what is the estate's basis per share for estate tax purposes?

B)$40 If the executor elects to value the decedent's estate by using the alternate valuation date, the value per share is the value at the date 6 months after death, unless the property is sold prior. In this case, the value per share is the FMV on the date of sale, $40 in this example.

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

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

An agent unintentionally sells nonexempt securities that have not been registered. Under the Uniform Securities Act, the broker-dealer may write a letter and offer to buy back the security plus interest, minus any income received. The client gives up the right against the firm to bring action in court if he does not respond within how many days of receipt of the letter? A) 60 B) 20 C) 30 D) 15

C) 30 The right of rescission under the Uniform Securities Act allows the customer 30 days to respond to a rescission letter from a broker-dealer offering to buy back securities sold illegally. If the customer does not accept or reject the offer, the customer waives his right to bring court action against the adviser for the improper sale.

A fundamental analyst reviewing the current ratios of four different companies would consider which of the following to be in the most liquid position? A) 2.7:1 B) 0.5:1 C) 4.2:1 D) 1.5:1

C) 4.2:1 The current ratio is the current assets divided by the current liabilities. The higher the ratio, the more liquid the company. Therefore, a 4.2 to 1 ratio is the strongest and a 0.5 to 1 ratio is the weakest.

A company currently has earnings of $4 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield? A) 10% B) 15% C) 5% D) 1.25%

C) 5% The quarterly dividend is $0.50, so the annual dividend is $2.00; $2 ÷ $40 (market price) = 5% annual yield (current yield).

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

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

An investor purchases 100 shares of Kapco stock at $50 per share. At the time of the purchase, the stock is paying a quarterly dividend of $0.25. The dividend increases 5% each year over the next 5 years. The purchaser sells the 100 shares 5 years after purchase for $82 per share. What is the total return for the investor over the 5 years holding period? A) 74% B) 10% C) 75% D) 11%

C) 75% Total return includes capital appreciation plus income. The capital gain realized was $32 per share. The income was $1.00 per share (four quarterly dividends of $0.25) the 1st year, 5% higher the 2nd year ($1.05) and 5% higher each successive year. The total of the dividends received is $5.53. Adding that to the $32, we compute by dividing $37.53 by $50 resulting in a 75% total return.

Which of the following involves an offer or sale? A) A pledge of stock B) A stock dividend C) A gift of an assessable security D) An exchange of securities due to a reorganization

C) A gift of an assessable security The gift of an assessable security, where the recipient may be required (assessed) to put up money, involves both an offer and a sale.

Which of the following must register as an agent under the Uniform Securities Act? A) A broker-dealer with offices in the state B) An individual who sells securities of an issuer to the issuer's employees without earning a commission C) A sales assistant who takes orders on behalf of agents in a branch office D) An administrative assistant who provides securities quotes to clients

C) A sales assistant who takes orders on behalf of agents in a branch office A sales assistant who takes orders on behalf of agents in a branch office is required to register under the Uniform Securities Act. An administrative assistant who provides securities quotes to clients is not functioning as an agent and need not register. An individual who sells securities of an issuer to the issuer's employees without earning a commission need not register under the terms of the USA. Remember, a broker-dealer is excluded from the definition of an agent under the USA.

An application has been filed with the Administrator of State A for registration as a broker-dealer by Assured Success Investments (ASI), a broker-dealer registered in States B, C, and D. While the application is pending, a lawsuit against ASI is filed in civil court in State B. The effect of this would be A) ASI's application in State A would be denied B) ASI's application in State A would be put on hold C) ASI's application in State A would proceed as normal D) ASI's registration in State B would be suspended

C) ASI's application in State A would proceed as normal The filing of a lawsuit would have no immediate effect on a broker-dealer's application for registration. After all, one is innocent until proven guilty. Even a guilty verdict might not lead to any action, because we don't know whether the lawsuit is connected to the brokerage activities.

Which of the following would be considered a prohibited practice if performed by an investment adviser representative without appropriate disclosure? A) Inheriting 200 shares of a New York Stock Exchange-listed company he recommends B) Owning shares of a mutual fund that is not on his firm's recommended list C) Acting as an agent of the brokerage firm that executes the trades he recommends and receiving commissions on them as a result D) Offering his client tickets to a game of a professional football team in which his son is the star quarterback and a principal stockholder

C) Acting as an agent of the brokerage firm that executes the trades he recommends and receiving commissions on them as a result An investment adviser representative must disclose to the client the capacity in which he is acting so the client can make an informed decision as to the objectivity of the advice and whether to sustain the relationship. The fact that an IAR inherited a small amount of stock in a publicly traded company does not, of itself, present a conflict of interest that must be disclosed. No conflict of interest exists unless the IAR recommended companies in which he also has a significant beneficial ownership. It would not be required to disclose personal ownership of a mutual fund not on the firm's recommended list. Unless there is some kind of conflict of interest, an IAR's personal holdings do not have to be disclosed to clients.

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, under which of the following circumstances has the investment adviser acted properly? A) An adviser tells a client that, by keeping his entire portfolio invested in government securities, he will not experience a great deal of appreciation but is guaranteed not to lose money. B) An adviser promises a client that by following the firm's trademark investment program, the returns will exceed those of the previous 12 months or all fees paid will be returned. C) An adviser discloses confidential information about an advisory account to the spouse, who is a joint owner of the account. D) An advisory firm states in the advisory contract that if the investor does not experience a minimum return of 6%, the firm will pay the client out of its own funds to make up any difference.

C) An adviser discloses confidential information about an advisory account to the spouse, who is a joint owner of the account. According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, it is unethical for an adviser to guarantee performance or rebate fees if performance is below a minimum standard. With respect to government securities, there is no, at least for exam purposes, default risk, but there is interest rate risk; all of the choices are improper. Disclosure of confidential account information may be made under a court or IRS order or when requested by a joint owner of the account.

Which of the following is not included in the definition of broker-dealer as found in the Uniform Securities Act? A) Credit unions B) Attorneys C) Banks D) Investment advisers

C) Banks In the Uniform Securities Act, it specifically states: "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. "Broker-dealer" does not include (1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company. Attorneys are excluded from the definition of investment adviser, as long as their advice is incidental to their legal practice, but that exclusion does not apply to the term "broker-dealer". Even though credit unions engage in banking activity, they are not included in the exclusion. Being an investment adviser does not exclude a person from the need to register as a broker-dealer if that person is performing the functions of a BD.

There are waivers from the Series 65 exam requirement for certain professional designations. Among those qualifying for the waiver are individuals who are A) CPAs. B) CLUs. C) CFP®s. D) MBAs.

C) CFP®s. This is tricky. CFPs do qualify for the waiver. ChFCs (not CLUs) also qualify and those with the PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants), but not solely a CPA, qualify. MBA is not a professional designation. In general, the following designations allow for a waiver of the exam requirement: CFP®—CERTIFIED FINANCIAL PLANNER™ (granted by the CFP Board of Standards); CIC—Chartered Investment Counselor (granted by the Investment Adviser Association); ChFC®—Chartered Financial Consultant® (granted by the American College of Financial Services); PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants); and CFA®—Chartered Financial Analyst® (granted by the Chartered Financial Analyst Institute).

In addition to the normal required filings, an investment adviser who maintains custody of client funds and/or securities will be required to complete A) Form ADV Appendix 1 B) Form ADV-W C) Form ADV-E D) Form ADV Part 1

C) Form ADV-E The Form ADV-E (E for Examination) is completed by every investment adviser who maintains custody of client assets. Then, the form is used by the independent accountant who performs the surprise annual examination of the adviser's records. The accountant is the one who submits the ADV-E to the SEC (or the state, if appropriate).

If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability? A) He pays federal estate taxes on $12.5 million. B) He pays federal estate taxes only on the amount that exceeds the estate tax credit. C) He pays no estate tax. D) He pays federal estate taxes on the entire balance.

C) He pays no estate tax. Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.

To be in compliance with the Securities Act of 1933, the sale of which of the following securities would require delivery of a prospectus? I. Primary offering of a closed-end investment company registered under the Investment Company Act of 1940 II. Primary offering of 5-year U.S. Treasury notes sold to an individual investor III. Private placement sold under the provisions of Regulation D IV. Sale of shares of an open-end investment company whose first public offering was 23 years ago

C) I and IV Any primary offering, unless the security is exempt, requires timely delivery of a prospectus. Treasury notes and private placements are exempt.

Which of the following are nonissuer transactions? I. An investment manager purchases 100,000 shares of XYZ on the NYSE. II. An investment adviser sells a block of YYY Corp. shares to an overseas investor in a private transaction. III. The president of Dot.com, Inc., sells his personal shares of Dot.com on the NYSE. IV. Dot.com purchases its own shares on the open market in order to place them in treasury.

C) I, II, III, and IV A nonissuer transaction is a transaction in which the proceeds do not directly or indirectly go to the issuer, as in a secondary transaction. When the investment manager purchases XYZ shares on the NYSE, the proceeds of the sale do not go to XYZ Corp. but to the investors who sold the stock. When an investment adviser sells YYY Corp. shares to an overseas private investment group, YYY Corp. does not benefit directly or indirectly because the proceeds go to the investment adviser, not to YYY Corp. When Dot.com purchases its own shares on the open market, the proceeds go to outside investors, not to Dot.com as the purchaser. However, if Dot.com resold its shares, the transaction would be an issuer transaction.

Under the Uniform Securities Act, if sent to 2 or more persons, a file must be maintained containing a copy of which of the following? I. Bulletins II. Newspaper articles III. Notices IV. Websites

C) I, II, III, and IV All of these types of communications, unless sent to persons connected with the investment adviser, require maintenance of a file containing a sample copy.

Under the Securities Act of 1933, which of the following are exempt securities? I. Securities issued by the U.S. government, government agencies, and any state or municipality II. Any security issued by a religious, educational, charitable, or not-for-profit institution III. Any security issued by a federal or state bank, savings and loan association, building and loan association, or similar institution IV. Any interest in a railroad equipment trust

C) I, II, III, and IV Most of the securities exempt from registration and prospectus delivery requirements in the Securities Act of 1933 are also exempt under the Uniform Securities Act. Securities exempt under the Securities Act of 1933 include government issues, commercial paper, securities issued or guaranteed by financial institutions, regulated common carrier issues, and nonprofit charitable or religious institutions. Three securities are exempt under the Uniform Securities Act and not exempt under the Securities Act of 1933: Stocks and bonds issued by insurance companies Securities issued by foreign governments Securities listed on certain exchanges are not exempt under the Securities Act of 1933

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following must be included in an advisory contract? I. Whether the contract grants discretionary power to the adviser II. The term of the contract III. A clause preventing assignment without consent IV. The formula used for computing the fee

C) I, II, III, and IV Written advisory contracts must disclose services provided; the term of the contract; the amount of the fee or the formula used to compute it; the amount of fee to be refunded, if any, if the advisory fee is prepaid and the contract is terminated; provisions as to whether the adviser has discretionary authority and to what extent; and provisions requiring consent of the client to assign the contract.

An Administrator has specific authority under the USA to I. suspend the registration of a security if the suspension is in the public interest and the offering has excessive underwriting fees II. issue emergency injunctions to prevent a violation of the act III. enforce subpoenas in the state at request of an Administrator of another state for alleged violations that occurred in another state IV. require that the proceeds from an offering be held in escrow until the issuer receives a certain percentage of the sale of the securities offered

C) I, III, and IV The Administrator may impound the proceeds of an offering in an escrow account until the issuer receives a specified amount. The Administrator may also suspend a security's registration if excessive fees or commissions are charged as part of the offering. State Administrators have the authority to cooperate with each other in enforcing the provisions of USA by ensuring that the subpoenas from other states are enforced. Injunctions are judicial orders that can only be issued by a court of law, not by an administrative agency such as a state securities Administrator.

Under the Investment Advisers Act of 1940, it is legal for an investment adviser to I. rebate the commission on a mutual fund sale to a client who has already paid a fee for investment advice II. keep the commission on a mutual fund sale when the client who purchased the shares has already paid for investment advice III. reduce a client's advisory fee by any commissions earned on mutual fund sales to that client

C) II and III Rebating commissions on mutual fund sales is prohibited. However, because mutual fund commissions are not negotiable (as are secondary market transactions), the adviser may reduce the client's advisory fee by the commission or, with appropriate disclosure, keep the commission.

Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15? I. Sole proprietorship II. Single-member LLC III. Multiple-member LLC electing to be treated as a corporation​ IV. S corporation

C) III and IV For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline. For C corporations, the due date is the 15th day of the 4th month following the close of the corporation's year; this date is April 15 for a calendar-year filer.

Which of the following is TRUE of the weak form of the efficient market hypothesis? A) It implies that stock prices react to information when it becomes publicly available. B) It implies that throwing darts is just as efficient as analyzing the market. C) It implies that market information cannot be used to identify future price movements. D) It implies that insiders cannot make a profit from their trading.

C) It implies that market information cannot be used to identify future price movements. The weak form of the EMH states that all market information has already been incorporated into the current stock price. Therefore, having that information is of no help in predicting movements in the market.

Common stock of KAPCO, Inc., trades on the NYSE. Which of the following securities would not be exempt from registration under the USA? A) KAPCO, Inc. subordinated debentures, traded on the "Pink Sheets" B) KAPCO noncumulative preferred stock C) Limited partnership interests in a shopping center with KAPCO, Inc., as the general partner D) Stock rights to acquire KAPCO common stock

C) Limited partnership interests in a shopping center with KAPCO, Inc., as the general partner When an issuer's stock is listed on the NYSE, any security it issues that is equal to or senior to that stock is a federal covered security and exempt from registration with any state. When that issuer acts as a general partner in a real estate offering, it is not its security that is being sold, so the exemption does not apply.

Which of the following statements regarding Section 529 plans is CORRECT? A) Qualified expenses would include all residence costs incurred by a full-time student. B) Funds not used for qualified expenses by age 30 must be distributed or rolled over. C) Qualified expenses could include tuition for attendance at a foreign university. D) Residents of some states receive a deduction on their federal income tax returns.

C) Qualified expenses could include tuition for attendance at a foreign university. As of the date of this question, there are approximately 330 institutions of higher learning located outside of the United States where Section 529 plans may be used to pay qualified expenses. The expense for room and board (residence cost) qualifies only to the extent that it isn't more than the greater of the following 2 amounts: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution It is the Coverdell ESA that has the age 30 requirement and some states offer deduction on the state income tax return, not the federal one.

Regarding open-end investment companies, which of the following sales charges is based on the NAV per share? A) Commission B) 12b-1 fee C) Redemption fee D) Sales load

C) Redemption fee If the fund has a redemption charge (CDSC), it is based on the NAV per share, not the public offering price (POP). That is, if the client liquidated shares when the NAV was $10 per share and the POP was $10.50, the CDSC would be charged based on the $10 rather than the $10.50. Commission is not a term used with mutual funds. The 12b-1 fee is a charge against overall assets of the fund; it is not considered to be a charge related to the buying or selling of fund shares.

Which of the following is considered to be a security? A) Section 403(b) plan B) Coverdell ESA C) Section 529 plan D) Section 457 plan

C) Section 529 plan The definition of security specifically excludes retirement plans (the Coverdell was originally known as the Education IRA). Section 529 plans are technically considered municipal fund securities.

A business organized as which of the following pays federal income tax on its income? A) LLC B) Partnership C) Sole proprietorship D) S corporation

C) Sole proprietorship The income generated by a sole proprietorship is reported on Schedule C of the Form 1040 of the individual owner. The IRS considers that business as a taxable entity. In the case of the other three choices, their income flows through to the owners (members, shareholders, or partners, respectively), for the business itself pays no tax.

Which one of the following is NOT among the powers granted to the Administrator under the Uniform Securities Act (USA)? A) The power to permit an investment adviser to charge performance-based fees on an account of a client with net worth of $750,000 and an account balance of $200,000. B) The power to require a federal covered adviser who has individual clients in his state, to file with the Administrator, prior to acting as a federal covered adviser in his state, any documents that have been filed with the Securities and Exchange Commission that the Administrator wishes. C) The power to require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the investment adviser has a place of business in the state. D) The power to audit the books of a federal covered adviser with clients in his state if he suspects fraudulent business behavior.

C) The power to require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the investment adviser has a place of business in the state. IARs associated with federal covered advisers are only required to register in a state in which they (the IAR) have a place of business. Although federal covered advisers are generally exempt from state regulation, the USA does give the Administrator the power to investigate when there is a suspicion of fraud. Even though the USA sets certain standards for performance-based fees, there is a provision that grants the Administrator the authority to waive those limits when deemed appropriate. Unless the federal covered adviser has no office in the state and only deals with institutional clients or other federal covered advisers, the Administrator has the power to demand to see relevant information that has been filed with the SEC.

When saving money for a child's college education, one consideration is the impact that those savings will have on the child's eligibility for financial aid. Funds saved in which of the following vehicles has the most detrimental effect on financial aid? A) Section 529 B) Prepaid tuition plan C) UTMA D) Coverdell ESA

C) UTMA Assets held in custodial accounts (UTMA or UGMA) are counted at 20% of their value, which compares unfavorably with the 5.64% valuation of Section 529 or Coverdell ESA assets. Please note: It is highly unlikely that you will need to know the percentages - but you will need to know that custodial accounts do not receive as beneficial treatment when applying for financial aid.

In which of the following situations is an agent committing a prohibited practice? A) Buying a security on one exchange and simultaneously selling it on another to take advantage of a price disparity B) Allowing the customer to place an order to sell 100 shares of ABC in the client's discretionary account C) Using discretion to purchase a security in a discretionary account while awaiting written receipt of trading authority D) Buying a security on behalf of a customer and then reselling it before the customer has paid for it

C) Using discretion to purchase a security in a discretionary account while awaiting written receipt of trading authority Written receipt of trading authority is required before conducting any trade on a discretionary basis. Oral authorization is not sufficient; it must be in writing. It is not a prohibited practice to sell a security before the customer has paid for it (day trading), and arbitrage (buying securities on one exchange and selling them on another to take advantage of temporary price differences) is also an acceptable practice. Although the agent may have trading authority in a discretionary account, nothing prohibits the client from making his own trades.

The contribution limit has to be aggregated when participating in both A) a 457 and a Roth IRA B) a 403(b) and a 457 C) a 401(k) and a 403(b) D) a 401(k) and a 457

C) a 401(k) and a 403(b) Contributions to a 457 plan do not have to be aggregated with other retirement plans. That is, if eligible, one could contribute the maximum to a 401(k), a 403(b), or an IRA (traditional or Roth) and could also contribute the maximum to a 457 plan.

An individual has been hired by a person to assist in the selling of securities it is issuing to residents of State A. The individual would be defined as an agent under the Uniform Securities Act if the issuer is A) issuing commercial paper in minimum denominations of $100,000 with an AA rating and a 6month maturity. B) the city of Saskatoon, Saskatchewan (Canada). C) a credit union organized and supervised under the laws of State A. D) a trust company organized and supervised under the laws of State B.

C) a credit union organized and supervised under the laws of State A. Credit unions are not in that list so those individuals are agents and must be registered as such. Individuals representing banks, including savings institutions and trust companies when organized and supervised under the laws of any state (not necessarily the state in which the securities will be sold), are not agents. If the agent represents the issuer of commercial paper meeting the exemption requirements of the USA ($50,000 minimum denomination, top 3 grades, and maximum 9-month maturity), that individual is not an agent. Finally, representing the United States or Canadian federal government, or any of their political subdivisions, excludes one from the definition of agent.

As defined in the Uniform Securities Act, the term "offer to sell" would include A) the attempt to sell gold coins. B) a gift of nonassessable stock. C) a gift of warrants. D) the sale of U.S. Treasury bills.

C) a gift of warrants. Even though a gift is not normally a sale or an offer to sell, when it is of a warrant, a right, or any convertible security, it is considered to be an offer to sell the underlying security. Although a gift of assessable stock is considered both a sale and an offer to sell, a gift of nonassessable stock is simply a gift. A sale of Treasury bonds is a sale, not an offer, and the attempt to sell gold coins is an offer to sell, but not of a security, and the USA is only concerned with an offer to sell a security.

Margin regulations are determined by the Board of Governors of the Federal Reserve System. The authority for them to do so is found in A) the Federal Reserve Act of 1913 B) the Maloney Act of 1938 C) the Securities Exchange Act of 1934 D) the Securities Act of 1933

C) the Securities Exchange Act of 1934 The Securities Exchange Act of 1934 contains the authorization for the Fed to regulate the use of credit in the securities business.

A type of fraud using social media where the fraudsters pretend to be member of a group, sometimes using respected leaders of the group to spread the word about the scheme is known as A) relationship fraud B) ethnic fraud C) affinity fraud D) group fraud

C) affinity fraud This is a classic definition of how affinity fraud operates. Although it is frequently aimed at ethnic groups, there is no such term as ethnic fraud.

Reticent Asset Management (RAM) is claiming an exemption from registration with the state because it is an adviser to private funds. One of the requirements to qualify for this exemption is A) private fund assets under management cannot exceed $110 million. B) there can be no more than 10 investors during any 12-month period. C) all investors must be qualified clients. D) all investors must be accredited.

C) all investors must be qualified clients. On the state level, the exemption requires that all investors meet the USA's definition of qualified client. That means the investor must have a net worth of at least $2.1 million dollars or at least $1 million in assets under management with the adviser. This is a more stringent test than that for accredited investors. In addition, accredited investor is a federal term, and this question is about state law. There is no limit placed on the number of investors (don't confuse this with the private placement exemption for registration of the security). The limit on AUM is $150 million (this is not to be confused with the AUM limits on becoming registered with the SEC).

In the Howey decision, the U.S. Supreme Court held that an investment contract is a security if it represents A) an interest in a publicly traded corporation whose managers are engaged in a regulated business enterprise B) an investment of money in a common enterprise with the expectation of profit from the efforts of the investor C) an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others D) an investment of money in a common enterprise with the expectation of profit or tax-deductible losses from the managerial efforts of others

C) an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others The Howey decision defined an investment contract as a security when there is (1) an investment of money (2) in a common enterprise (3) where there is an expectation of a profit (4) through the efforts of a third party and not the investor.

In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under the Investment Advisers Act of 1940, this activity requires written A) disclosure to the client B) consent of and the disclosure to the client prior to execution of the transaction C) disclosure to the client and consent prior to completion of the transaction D) consent of the client

C) disclosure to the client and consent prior to completion of the transaction Unlike broker-dealers, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client. SEC Release IA- 1732 requires that this be accomplished before the completion of the transaction, where completion is defined as settlement date.

A living will is used to A) eliminate, or at least reduce, estate taxes. B) ensure that the author's assets are properly distributed after death. C) express the author's end-of-life wishes. D) avoid the cost and time of probate.

C) express the author's end-of-life wishes. Sometimes referred to as a medical directive or advanced care directive, a living will is used to express the author's end-of-life wishes, such as organ donation, "pulling the plug," and so forth. It has nothing to do with a last will and testament describing the distribution of assets after death.

Under the Uniform Securities Act, an investment adviser would be exempt from registration in a state in which he has no place of business if he A) had no more than 10 clients in that state within the past 12 months B) is registered as a broker-dealer C) had no more than 5 clients in that state within the past 12 months D) had no more than 15 clients in that state within the past 12 months

C) had no more than 5 clients in that state within the past 12 months An adviser who had no more than 5 clients in a state within the prior 12-month period or deals exclusively with institutions is not required to register in a state in which he has no place of business.

One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to rollover the entire account into an IRA, the tax treatment would be A) current tax at ordinary income rates on the unrealized appreciation of the company stock, ordinary income rates on the balance when withdrawals are taken B) no current tax on the portion applicable to the mutual funds; ordinary income on the cost basis of the company stock; and long-term capital gains on the unrealized appreciation of the company stock when it is sold C) no current tax, but any withdrawals would be taxed as ordinary income D) no current tax, but any withdrawals representing the gain on the company stock would be taxed as long-term capital gains

C) no current tax, but any withdrawals would be taxed as ordinary income As with any rollover from a qualified plan to an IRA, there is no current tax, but withdrawals are taxed at ordinary income tax rates. This client would have saved had he taken advantage of the NUA (net unrealized appreciation) approach. In that case, taking the company stock and putting it into a taxable account would have resulted in ordinary income tax on the $25,000 cost basis, and long-term capital gain rates on the appreciation whenever the stock was sold.

Dr. David Livingstone is registered as an agent in States H and M with Stanley Securities, a broker-dealer registered in every state. Livingstone would now like to register in State W. In order to do so, all of the following would be required except A) filing a consent to service of process with State W. B) filing an application for registration with State W. C) passing State W's qualification exam. D) paying the appropriate fee to State W.

C) passing State W's qualification exam. Many years ago, applicants for registration as an agent in a state had to pass that state's exam. Now, because the NASAA exams are uniform exams, they are accepted in every state that requires passage of an exam. A consent to service must be filed with every state in which the person intends to register and, of course, the application must be accompanied by the proper fee.

Under the USA, a guaranteed security is protected by someone other than the issuer against loss of all of these EXCEPT A) interest on debt securities B) principal repayment at maturity on debt securities C) principal on equity issues D) dividends on equity securities

C) principal on equity issues Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not provide against market loss. Please note that capital gains are never included in this type of guarantee.

Investment companies must send financial reports to shareholders A) monthly B) annually C) semiannually D) quarterly

C) semiannually Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report.

Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must A) send a copy of its brochure, or a summary of the changes, to all clients within 60 days of the end of its fiscal year B) send a copy of its brochure, or a summary of the changes, within 7 days of receiving a request from a client C) send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year D) send a copy of its brochure, or a summary of the changes, to all clients within 90 days of the end of its fiscal year

C) send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year Whether the firm is a state or federal covered investment adviser, if there have been material changes, a copy of the IA's brochure, or a summary of the changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year.

One way in which an investment adviser acting in the capacity of an agent in a transaction with a client differs from a broker-dealer performing the same task is that the investment adviser A) shall disclose the agency capacity before the transaction B) may not charge a commission on the transaction C) shall obtain client consent before completion of the transaction D) shall notify the Administrator of its capacity in the proposed transaction

C) shall obtain client consent before completion of the transaction In order to act as an agent (or principal) in a trade with an advisory client, there are 2 requirements: The client receives full written disclosure as to the capacity in which the adviser proposes to act Consent of the client Both of these are required before the completion of the transaction.

Under the Investment Advisers Act of 1940, an adviser is required to be registered with the SEC if A) the adviser's advice relates solely to securities issued or guaranteed by the U.S. government. B) the adviser is the publisher of a news magazine of general and regular circulation C) the adviser's clients are investment companies registered under the Investment Company Act of 1940 D) the adviser's clientele is exclusively federal credit unions and the adviser has less than $100 million in assets under management

C) the adviser's clients are investment companies registered under the Investment Company Act of 1940 Advisers to registered investment companies are required to be SEC-registered. Under the Advisers Act, as modified by the Dodd-Frank Act, advisers are exempt from SEC registration if they manage less than $100 million in assets and have no investment company clients. Persons are excluded from the Advisers Act definition of investment adviser if they are publishers of news or business/financial publications of general and regular circulation or if their advice relates solely to U.S. government securities.

An investor plans to fund the college education for her newborn child by purchasing $5,000 of investment-grade bonds on an annual basis. She is most likely using A) the 529 plan strategy. B) the laddering strategy. C) the bullet strategy. D) the barbell strategy.

C) the bullet strategy. The bullet strategy is used when aiming at a target. In this case, the target is having sufficient funds about 18 years from now. This strategy involves buying bonds at different intervals, but all with approximately the same maturity date. The barbell strategy has all bonds purchased at the same time with two different sets of maturities - half of the bonds mature near term and half mature intermediate term. Laddering requires purchasing bonds on a regular basis, but not with new funds as this investor is doing. As bonds mature, the proceeds are rolled-over into new bonds. She may be doing this in a 529 plan, but the plan is not a strategy, it is a type of account.

All of the following statements regarding investment advisory contracts under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers are true EXCEPT A) the contract must detail any prepaid fees to be refunded to the client upon termination B) the contract must not permit assignment without the client's consent C) the contract's term may not exceed 1 year D) the contract must be renewed in writing

C) the contract's term may not exceed 1 year The contract must set forth the term of the contract, which need not be for only 1 year. Any renewals or extensions of the contract at the end of the term must be in writing. The contract must describe any refunds upon termination and may not permit assignment without the client's consent.

The most common form of investment vehicle for venture capital is A) the corporate venture capital funds. B) the venture capital fund of funds. C) the limited partnership. D) the limited liability company.

C) the limited partnership. The limited partnership structure is by far the most common for venture capital.

Platinum Investment in Growth Group, Inc. (PIGGI) is registered in and has its principal office in State W. PIGGI has near-term plans to open offices in State A and B. In an effort to test the waters, PIGGI mails several hundred flyers to prospects in those 2 states. Under the Uniform Securities Act, A) these flyers could be mailed, but no accounts can be opened until PIGGI is registered in States A and B B) as a federal covered investment adviser, the flyers would need filing with the SEC C) these flyers could not be mailed until PIGGI was registered in States A and B D) as long as PIGGI did not maintain an office in either of these states, the flyers could be mailed

C) these flyers could not be mailed until PIGGI was registered in States A and B Any attempt to hold oneself out as offering investment advice as part of a business would require the person to be registered in the state, unless that person qualifies for an exclusion or exemption. Nothing in this question implies that an exclusion or an exemption applies. We know that PIGGI is not a federal covered investment adviser (and therefore does not need to file its flyers with the SEC) because we are told it is registered in State W—federal covered advisers don't register in any state.

A client has just finalized her divorce and intends to sell her gold wedding band. Because the price of gold has risen significantly since she married 20 years ago, she will be able to realize a profit on the sale, but she does not know what to use as the cost basis. You suggest she speak to a tax specialist who will tell her to A) obtain an appraisal from a qualified jeweler and use that as the cost basis B) use a cost basis of zero because it was a gift C) use the original cost of the ring D) ignore the profit for tax purposes because precious metals are not subject to capital gains taxation

C) use the original cost of the ring Regardless of the nature of the asset, the cost basis of any asset acquired as a gift is that of the donor. Although not tested, the maximum rate on capital gains from collectibles, such as a gold ring, is 28% (higher than the rate for securities).

Which of the following securities is NOT exempt from state registration and advertising filing requirements?

Common stock of a foreign corporation domiciled in a country that maintains diplomatic relations with the United States While debt issued by a foreign government that maintains diplomatic relations with the United States is exempt from registration, securities issued by foreign corporations are not. If an issuer is exempt from registration, its securities are also exempt from registration. Any securities that are traded on the New York Stock Exchange or Nasdaq Market are federal covered securities and are therefore exempt from registration

There are several financial models that refer to the "risk-free" rate of return. Which of the following instruments is used to measure that rate? A) Federal funds B) 30-year Treasury bond C) 1-year CD D) 91-day Treasury bill

D) 91-day Treasury bill The standard benchmark used to measure the "risk-free" rate of return is the 91-day Treasury bill.

If an agent has been given limited power of attorney to exercise discretion in an account by the account holder, which of the following statements is TRUE? A) The account holder is not permitted to enter new orders independently. B) The power of attorney must be renewed annually by the account holder. C) Each order must receive the prior approval of the agent's manager before it is entered. D) A designated supervisory individual must frequently review the account.

D) A designated supervisory individual must frequently review the account. All discretionary accounts are subject to frequent review by a designated supervisory individual with the firm. Each order need not receive the prior approval of the agent's manager before it is entered; orders are reviewed after execution. There is no requirement that the power of attorney be renewed annually by the account holder, although some firms make it their policy. The account holder is permitted to enter new orders independently.

Which of the following meets the USA's definition of a broker-dealer? A) A bank B) A trust company C) A savings and loan association D) A person who effects transactions for the accounts of others

D) A person who effects transactions for the accounts of others A person buying and selling securities for customers' accounts is deemed a broker-dealer under the Uniform Securities Act. Specifically excluded from the definition of a broker-dealer are banks, trust companies, and savings and loan associations.

Cecil has a discretionarily-managed account with Pelf Reliable Advisors (PRA), an investment adviser registered in States C, D, and G. Over the past year, the portfolio produced a 12% return with a beta of 1.05. The risk-free rate is 3.5%, and the overall market returned 10.85%. Based on this information, calculate alpha and determine if PRA added any value to the portfolio. A) Alpha = 0.78%; the adviser underperformed the market by 2.72% B) Alpha = 1.15%; the adviser outperformed the market by 1.15% C) Alpha = -1.21%; the adviser underperformed the market by 1.21% D) Alpha = 0.78%; the adviser outperformed the market by 0.78%

D) Alpha = 0.78%; the adviser outperformed the market by 0.78% The alpha for this portfolio is +0.78% (rounded). A positive alpha indicates that Pelf outperformed the market on a risk-adjusted basis. As with most calculations, there are two ways to solve for the answer. Let's use the LEM's formula first. When the riskfree (RF) rate is given, the formula is (actual return - RF rate) - (beta x [market return - RF rate]). Plussing in the numbers, we have (12% minus 3.5%) minus (1.05 times [10.85% minus 3.5%]). That breaks down to 8.5% minus (1.05 times 7.35%) or 8.5% minus 7.72% = +0.78%. An alternative method is as follows: 12% - [3.5% + 1.05 (10.85% - 3.5%)] = 12% - [3.5% + 7.7175] = 12% - 11.2175 = +0.7825.

Which of the following activities would NOT be considered a prohibited practice under the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents? A) An agent purchases a suitable stock for a client's account prior to receiving written discretionary authorization B) An agent opens a brokerage account at his employing broker-dealer in his wife's maiden name in order to purchase an IPO being underwritten by the firm C) In order to meet production quotas, an agent opens several accounts under fictitious names D) An agent shares in the profits and losses in a customer's account without making a financial contribution to the account

D) An agent shares in the profits and losses in a customer's account without making a financial contribution to the account As long as the agent has the consent of the customer and the employing broker-dealer, profits and losses may be shared and no financial contribution is required of the agent. No purchases can be made by an agent in a discretionary account prior to receipt of the written trading authorization. Opening accounts in fictitious names or a spouses name in order to hide improper purchases are prohibited practices. Please note: The correct choice does not include the consent requirements so the statement is only partially correct. But, the other answers are definitely prohibited actions so you pick the best answer when you get something like this on the exam.

Which of the following would fall under the USA's definition of exempt transaction? A) An investment adviser purchases securities from the issuer B) An agent accepts an order from a client after having sent a research report dealing with that security C) A real estate partnership sells interests to the public with no commission charge D) An issuer sells a new issue to a broker-dealer

D) An issuer sells a new issue to a broker-dealer Transactions between issuers and broker-dealers (but not investment advisers) are exempt transactions. As long as the sale is to the public, regardless of commissions charged (or not charged), the transaction is nonexempt. Don't be lured into thinking that accepting an order from a client is unsolicited. That's not true in this case because it is as the result of the research report.

If a nonexempt issuer wants to register simultaneously with the state and the SEC, which method would be used? A) Registration by qualification B) Notice filing for certain federal covered securities C) Registration by notification D) Registration by coordination

D) Registration by coordination Registration by coordination is done concurrently with registration at the federal level. Registration by qualification is the method for local companies sold only within the state.

You have a 37-year-old client whose wife has just given birth to triplets. Because of the added responsibilities, he wants to maximize the amount of life insurance he can acquire. Which of the following types of insurance will give him the greatest amount of coverage for the lowest initial premium? A) Whole life B) Variable life C) Universal life D) Annual renewable term

D) Annual renewable term At any given age, term insurance always carries the lowest premium and, of the term policies available, annual renewable term always has the lowest initial premium. Of course, because the premium tends to increase each year the policy is renewed, at older ages it can become unaffordable. But, remember, this question is only asking about initial cost.

Which of the following is not correct regarding the capital asset pricing model (CAPM)? A) The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock. B) The market risk premium is the incentive required for the individual to invest in the securities market. C) CAPM only considers the systematic risk. D) CAPM uses standard deviation as a measure of market risk.

D) CAPM uses standard deviation as a measure of market risk. CAPM accounts for the impact of systematic risk (as measured by beta) only and does not take into consideration unsystematic risk, which is assumed to have been diversified away.

A feature of which of the following business entities is limited liability but no flow-through of earnings or losses? A) LLC B) Limited partnership C) Sole proprietorship D) Corporation

D) Corporation The corporation (always assume C corporation unless it says different on the test) offers limited liability to its shareholders, but there is no flow-through of income or loss. LLCs and limited partnerships offer both and the sole proprietorship has unlimited liability.

The Uniform Securities Act empowers the Administrator to begin proceedings to revoke the registration of an investment adviser when certain violations are suspected. Which of the following are considered serious enough to warrant a revocation? A) Being charged with commission of a felony involving a nonfinancial matter B) Failure to obtain approval to maintain custody of client funds or securities C) Being charged with commission of a securities-related misdemeanor D) Failure to supervise the activities of investment adviser representatives

D) Failure to supervise the activities of investment adviser representatives Among the many violations justifying a revocation is failure to supervise. Maintaining custody of customer funds or securities requires notification to the Administrator, not approval. It is only a conviction, not being charged of a crime, which would be cause for revocation.

For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis? A) Pension plan B) Sole proprietorship C) C corporation D) General partnership

D) General partnership Because all the partners in a general partnership share collective liability, the investment policy to be followed in the business's account is based on the collective suitability of all partners. Although the suitability is based on the owner of a sole proprietorship, there is only one owner, so a question asking about collective suitability doesn't ring true for that.

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? A) He will have a $1,000 loss to carry over to the next year. B) He will have a $1,000 gain. C) There will be no tax consequences. D) He will offset $1,000 ordinary income this year.

D) He will offset $1,000 ordinary income this year. Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward.

Which of the following statements is (are) TRUE regarding the jurisdiction of the SEC under the Securities Exchange Act of 1934? I. The SEC has jurisdiction over exchanges and SROs. II. The SEC has jurisdiction over broker-dealers, investment advisers, and associated persons that are required to be registered under federal law. III. The SEC has jurisdiction over banks and savings and loans regarding their securities activities.

D) I and II The SEC was created by the Securities Exchange Act of 1934 and has the responsibility of administering all federal securities laws. The SEC has jurisdiction over exchanges, SROs, and all persons required to be registered under federal law. The SEC does not enforce state securities statutes, nor does it have jurisdiction over banks or savings and loans regarding their securities activities. Banking authorities, such as the Federal Reserve Board, the Federal Deposit Insurance Corporation, and others, regulate banks and savings and loans.

All of the following statements concerning IRA contributions are true EXCEPT A) contributions can be paid into this year's IRA from January 1 of this year until April 15 of next year B) between January 1 and April 15, contributions may be made for the current year, the past year, or both C) if you pay your tax on January 15, you can still deduct your IRA contribution, even if not made until April 15 D) contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis

D) contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis Contributions can be made to an IRA only until the first tax filing deadline (April 15), regardless of having filed an extension.

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

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

SYZ Corporation is having a rights offering that will enable existing shareholders to acquire 1 share of SYZ common stock for each 10 shares they currently own. Under the Uniform Securities Act, this would be considered I. an offer of SYZ rights II. a sale of SYZ rights III. an offer of SYZ common stock IV. a sale of SYZ common stock

D) I and III This is obviously an "offer" of the rights (that's what the question says). In addition, the USA states that any offer of a right or warrant that gives the holder the ability to subscribe to another security is also an offer of that security.

There are several ways that a securities professional's registration can be terminated. Nonpunitive termination of a securities professional's registration could be done through I. cancellation II. suspension III. revocation IV. withdrawal

D) I and IV Cancellation and withdrawal are nonpunitive methods of termination of a person's registration. Suspension, revocation, and denial are considered forms of punishment.

Which of the following statements regarding agent registration under the Uniform Securities Act are TRUE? I. In the absence of any action by the Administrator, the effective date of a registration is noon of the 30th day. II. The Administrator may initiate a disciplinary action within 2 years of an agent's withdrawal of registration. III. The administrator may request the agent furnish a statement of assets and liabilities. IV. If, before the effective date of the registration, the Administrator requires amendments to the application, the registration will be considered to have first been filed upon filing of those amendments.

D) I and IV Normally, registration of persons becomes effective at noon of the 30th day following filing. If the Administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Agents do not have financial requirements, and the Administrator has a maximum of 1 year after termination to initiate any actions.

Under the Securities Act of 1933, which of the following transactions is(are) exempt? I. Private transactions not involving the issuer or a broker-dealer II. Issuer transactions that do not involve a public offering III. Sales or offers limited to accredited investors

D) I, II, and III If offerings are not made to the public, registration can generally be avoided. The purpose of the Securities Act of 1933 was to protect the public in a new issue. The private offering exemption is used when the offering is made to 35 or fewer nonaccredited purchasers within a 12-month period and no general solicitation (advertising) is used [506(b)]​. In addition to private offerings, offers and sales limited to accredited investors are also exempt​, but they may have​ public solicitation​, [506(c)]​.

An investment adviser is preparing an advertisement. Which of the following would be acceptable? I. A testimonial on radio or TV from a celebrity who is a client of the firm II. Identifying his best investment recommendations for the past 6 months III. Offering to provide the firm's investment recommendations for the past 12 months IV. Promoting his system of charts and formulas while mentioning their limitations and difficulties

D) I, III, and IV Any mention of investment recommendations in any adviser advertisement must always include all recommendations (not just good ones) made over the course of the last 12 months. If the adviser uses charts or formulas, any mention of them must always include a statement to the effect that they have limitations and may be difficult to use. Testimonials are permitted from clients as long as disclosure is made of the compensation arrangements (if any). As is the case with any advertisement, the content must be fair and balanced.

Under the Uniform Securities Act, which of the following statements are TRUE? I. It is unlawful for anyone to conduct business as a broker-dealer in a state unless also registered as an agent. II. A registration statement may be filed by an issuer itself, a broker-dealer, or any other person on whose behalf the offering is to be made. III. Registration of an agent is not effective when the agent is not associated with a broker-dealer registered under the act. IV. Registrations are automatically renewed one year after approval, provided no violations occurred during the year.

D) II and III It is unlawful for anyone to conduct business as a broker-dealer in a state unless properly registered as such; an agent is not a broker-dealer. A registration statement can be filed by an issuer itself or any other person on whose behalf the offering is to be made, or by a broker-dealer. Registration of an agent is not effective when the agent is not associated with a broker-dealer registered under the act. Registrations expire on December 31 unless renewed, regardless of violations.

A client who purchased a variable life insurance policy 15 months ago has suffered a stroke. In addition, he has developed adult onset diabetes. When receiving treatment for the stroke, he was diagnosed with lung cancer. He has decided to convert his variable policy to a whole life policy. Which of the following statements is CORRECT? I. He will not be able to convert to a whole life insurance policy because his health has deteriorated to such a severe level. II. The new policy will bear the same issue date and age as the original policy. III. The face amount must remain the same. IV. The premium will be rated because his health has taken a marked turn for the worse.

D) II and III Variable life insurance offers a unique conversion policy. Anytime during the first 24 months after policy issue, the policy may be exchanged for a whole life policy (or some similar form of permanent insurance if the company doesn't offer whole life) using the age and medical condition at issue, regardless of the insured's current health. However, the face amount cannot be changed from its original amount.

Which of the following statements are TRUE? I. A federal covered adviser sells federal covered securities only. II. Federal covered advisers are advisers with federally imposed exemptions from state registration as investment advisers. III. A federal covered security is exempt from registration with the SEC. IV. Federal covered securities include those issued by investment companies registered under the Investment Company Act of 1940.

D) II and IV A federal covered adviser is an adviser with a federally imposed exemption from state registration. Securities issued by investment companies registered under the Investment Company Act of 1940 are included in the definition of a federal covered security.

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 identical to that particular client IV. transactions recommended to the client are inconsistent with those for the IAR's own account

D) 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 will include 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, 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 objectives would purchase or have recommended for purchase the same securities.

Which of the following statements regarding a qualified profit-sharing plan is TRUE? A) Contributions are required annually. B) It can permit regular direct cash payouts to participants before retirement. C) It must define a specific contribution amount. D) It must be established under a trust agreement.

D) It must be established under a trust agreement. All qualified retirement plans must be established under a trust agreement. Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement.

Under the Uniform Securities Act, which of the following is an investment adviser? A) Jane advises customers regarding the value of gold and silver coins. B) Tom writes a newspaper column that analyzes and recommends securities. C) The Trust Department of ABC Bank provides investment advice to its clients. D) Jill is an attorney specializing in estate planning who, as a side job, structures portfolios for the beneficiaries of her deceased clients at a reduced fee.

D) Jill is an attorney specializing in estate planning who, as a side job, structures portfolios for the beneficiaries of her deceased clients at a reduced fee. Although an attorney is generally excluded, Jill is giving investment advice for a fee in a manner that is not incidental to her legal practice. Jane's advice does not concern securities; banks are excluded from the definition; Tom's advice is not specific on the basis of the situation of each client (impersonal advice).

Which of the following is not an annuity purchase option? A) Single premium deferred annuity B) Single premium immediate annuity C) Periodic payment deferred annuity D) Periodic payment immediate annuity

D) Periodic payment immediate annuity With an immediate annuity, payout begins immediately (generally within 30-60 days). As such, the concept of making purchases while receiving payout is illogical and is, therefore, not permitted as an option.

One of the most important definitions found in the Investment Company Act of 1940 is that of "investment company." Included in that definition are all of the following EXCEPT A) management investment companies B) face-amount certificate companies C) unit investment trusts D) REITs

D) REITs Even though REITs (real estate investment trusts) share many of the same characteristics of investment companies, they are not included in the definition as found in the Investment Company Act of 1940.

Which of these is an advantage of using a Coverdell ESA rather than a 529 plan to fund a child's future education? A) The Coverdell allows for transfer of beneficiary. B) Contributions to the Coverdell are eligible for the annual gift tax exclusion. C) The Coverdell has greater tax advantages. D) The Coverdell offers greater investment flexibility.

D) The Coverdell offers greater investment flexibility. A Coverdell ESA works similar to a self-directed IRA where stocks, bond, mutual funds, ETFs, and other investment vehicles are options. With a 529 plan, the donor is limited to whatever is available in the state plan chosen. Tax advantages might be better for the 529 plan because many states allow a portion of the contribution to be taken as a deduction or credit against state income taxes. Both allow for transfer to a new beneficiary as long as that individual is a member of the original beneficiary's family. In both cases, whatever is contributed to the program is treated as a completed gift and is eligible for the annual gift tax exclusion.

A self-employed attorney has income of $110,000 per year. If he contributes $4,000 to his traditional IRA and has no other retirement plans, which of the following statements is true? A) The contribution is partially tax deductible. B) The contribution is not permitted. C) The contribution is not tax deductible. D) The contribution is fully tax deductible.

D) The contribution is fully tax deductible. Traditional IRA contributions are fully deductible no matter how much income is earned if the taxpayer is not covered by any other qualified plan. Anyone with earned income can contribute to a traditional IRA.

Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio? A) Discounted cash flow B) Dollar-weighted return C) Dollar cost averaging D) Time-weighted return

D) Time-weighted return Time-weighted returns are used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals. Dollar-weighted return is more commonly used for evaluating investor performance.

Which of the following is TRUE regarding a state Administrator's authority? A) The Administrator's subpoena power covers that state only where officiating. B) If a specific securities transaction meets the USA's definition of "exempt transaction," the Administrator does not have the power to void that exemption. C) The Administrator may suspend an agent's license based solely on the public good doctrine. D) With certain limited exceptions, the Administrator has authority over any transaction made in the state where officiating.

D) With certain limited exceptions, the Administrator has authority over any transaction made in the state where officiating. With certain limited exceptions, a state Administrator has jurisdiction over securities transactions conducted in the officiating state. The Administrator may issue subpoenas or otherwise conduct inspections of records in states other than where officiating if circumstances warrant. Such inspections may be made if the Administrator deems doing so to be in the public's interest. A person's license can only be suspended when it is in the public interest AND a specific provision of the act or rules has been violated. Only in the case of a transaction involving a federal covered security does the Administrator not have the power to void the exemption.

You have a client with a margin account at your broker-dealer. If the market price of the securities in the client's account should fall to a point where your firm has to ask the client for additional funds, it is A) a market call B) a margin call C) a Regulation T call D) a maintenance margin call

D) a maintenance margin call The original call for funds is the Regulation T or margin call. When the call is for additional money, it is known as maintenance margin.

If a broker-dealer offers or recommends products for which the firm receives greater fees or compensation than other products, it would be considered A) churning B) misrepresenting the registration status of a security C) arbitrage D) a potential conflict of interest

D) a potential conflict of interest There are certain products that carry higher compensation rewards to the broker-dealer than do others of a similar nature. This presents a potential conflict of interest, should the firm recommend these over others. There is nothing illegal about doing so, as long as disclosure of the conflict is made to the client.

Under the Uniform Securities Act, it is NOT considered fraudulent if an agent A) omitted a material fact because she knew she did not have time to cover everything in a short presentation B) made an untrue statement of a material fact C) deliberately failed to follow a customer's instructions D) actively solicited orders in unregistered exempt securities

D) actively solicited orders in unregistered exempt securities Securities that do not require registration under the USA are exempt securities. Although the securities are exempt from registration, thereby making the solicitation permitted, the agent who makes the solicitation and the broker-dealer must be registered. An agent may not make an untrue statement of a material fact, omit a material fact, or deliberately fail to follow a customer's instructions.

A nonqualified, single premium variable annuity differs from a Keogh plan in that A) both are subject to early withdrawal penalties B) it is open to self-employed persons C) earnings are tax deferred D) all payouts are fully taxable in a Keogh plan

D) all payouts are fully taxable in a Keogh plan Earnings on investments made in both a Keogh plan and nonqualified annuity grow on a tax-deferred basis; they are not taxed until withdrawn. The cost basis in a Keogh plan is zero because contributions are tax deductible, but distributions are fully taxable upon receipt. However, in a nonqualified annuity, the cost basis is equal to the amount invested because the contributions are nondeductible; only the earnings portion of the distributions is taxable.

An application to register securities may be filed under the USA by any of these EXCEPT A) issuer B) person on whose behalf the offering is made C) broker-dealer acting on behalf of the issuer D) an agent of a broker-dealer

D) an agent of a broker-dealer Agents of broker-dealers are not eligible to file a registration statement for a securities offering. Registration statements may be filed by a broker-dealer, a person on whose behalf the offering is made (e.g., an offering made by a large shareholder), or more commonly, the issuer.

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

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

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

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

The risk/return pyramid where the bottom is lowest risk and the "point" is the highest, generally places commodities A) at the bottom. B) halfway between the middle and the top. C) in the middle. D) at the top.

D) at the top.

A federally chartered credit union is domiciled in Texas. The credit union is making an offering of securities in Nebraska. To comply with the Uniform Securities Act's exclusion from the definition of agent, any individual offering the security in Nebraska A) would have to receive only nominal commissions B) would have to be an employee of a broker-dealer registered in Nebraska C) would have to be an employee of a broker-dealer registered in Texas D) could not sell without being an agent

D) could not sell without being an agent It is unusual to have an answer set up this way, but it does happen sometimes on the exam—"to comply with"—and then there is no way to comply. First of all, the USA's exclusions from the definition of agent only apply to individuals working for the issuer, never broker-dealers. Then, the exclusion only applies when selling the following exempt securities in nonexempt transactions: U.S. government and municipal securities; Securities of governments with which the United States has diplomatic relationships; Securities of U.S. commercial banks and savings institutions or trust companies (when not engaged in securities-related broker-dealer activities); Commercial paper rated in the top three categories by the major rating agencies with denominations of $50,000 or more with maturities of nine months or less; and Investment contracts issued in connection with employee's stock purchase, savings, pensions, or profit-sharing plans. Selling other exempt securities, such as those issued by a federally chartered credit union, on behalf of the issuer, requires one to become registered as an agent of the issuer. Don't confuse this with the exemption offered in the case of exempt transactions. In that case, regardless of whether the security is exempt or not, if an individual's only sales activity while representing an issuer is in exempt transactions, then the exclusion from the definition of an agent applies. It is obviously a much broader exemption than when selling exempt securities.

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions EXCEPT A) compensation is based on gains, less losses, for a period of no less than 1 year B) the formula used to calculate compensation includes realized capital losses and unrealized depreciation C) the client must meet certain minimum financial standards D) disclosure that the performance compensation may create an incentive for the adviser to take greater risks

D) disclosure that the performance compensation may create an incentive for the adviser to take greater risks Because these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to. The minimum net worth requirement is over $2.1 million, or a client is qualified if he has at least $1 million under management with the adviser. Any performance fee must take into consideration gains and losses, both realized and unrealized, and the performance period must be no less than 1 year. Please note: State-registered investment advisers must make this "incentive" disclosure so if the question asked about them, there would be no exception.

A broker-dealer having no place of business in a state is not required to be registered in that state if the broker-dealer A) is a member of the New York Stock Exchange B) is licensed/registered in its state of residence C) is a member of FINRA D) does no business in that state other than with institutional clients

D) does no business in that state other than with institutional clients A broker-dealer must be registered in every state where it sells or offers to sell securities, unless an exemption is available. If a broker-dealer has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required.

With respect to taxation, an investment adviser representative should NOT A) consider tax implications as a way of improving a client's after-tax returns B) explain the taxable status of particular investments C) discuss the tax implications of investments D) draft tax and estate documents to ensure compliance with current law to provide substantial after-tax returns

D) draft tax and estate documents to ensure compliance with current law to provide substantial after-tax returns An investment adviser representative must not draft legal documents; they should only be drafted by an attorney because doing so constitutes practicing law. An investment adviser representative should, however, discuss all relevant tax implications of recommended investments, including how the recommended investments might improve a client's after-tax returns.

Since its inception in 1986, virtually all the states have replaced the Uniform Gifts to Minors Act with the Uniform Transfers to Minors Act. It is generally agreed that one of the primary benefits offered by UTMA over UGMA is A) greater flexibility in naming custodians B) mandatory surrender of control at majority C) greater flexibility in naming beneficiaries D) greater flexibility in the type of property that may be transferred

D) greater flexibility in the type of property that may be transferred The property that may be transferred into an UGMA account is generally limited to cash and securities, while in an UTMA account, almost any kind of property—real or personal, tangible or intangible—can be transferred to the custodian.

If a nonexempt company has authorized a stock split that will give each shareholder 2 shares for every 1 share owned without charge, this action A) need not be registered because the shares of the corporation have already been registered B) must be registered because it is the issuance of new nonexempt securities C) must have the prior written approval of each state Administrator in which the shares trade D) need not be registered because it is neither an offer to sell or a sale

D) need not be registered because it is neither an offer to sell or a sale Shares issued as a result of a stock split need not be registered because the distribution of additional shares through a stock split or stock dividend is not within the definition of an offer to sell or a sale as long as no consideration (payment) is involved.

Under adverse market conditions, it is not unusual for mutual fund investors who had been investing on a regular basis to cease or reduce their level of financial commitment. This can have the effect of A) a reduction in the fund's net operating income due to a reduction in sales charges received B) reducing the operating expense ratio of the fund C) reducing the NAV of the fund as the demand for new shares wanes D) net redemptions

D) net redemptions In adverse market conditions, not only do some investors stop putting money in, they liquidate their holdings. If new sales fall while liquidations rise, the effect could be net redemptions. The NAV is not affected by supply and demand, and if anything, the expense ratio would rise because some of the expenses would remain the same but would be shared by fewer assets. Mutual funds do not receive the sales charges—they go to the underwriter.

An individual has been employed by a broker-dealer to solicit new subscriptions for the firm's free monthly stock market report. The individual is paid a salary plus bonus based on his success rate with signing up subscribers. Under the USA, this person would A) have to be registered as an investment adviser representative B) have to be registered as an agent of the broker-dealer C) only be allowed to contact existing clients of the broker-dealer D) not have to be registered as an agent of the broker-dealer

D) not have to be registered as an agent of the broker-dealer Agents of broker-dealers are in the business of securities-related transactions on behalf of clients of the firm. A free-market report is not a security, so this individual is not soliciting securities business.

Some registered investment advisers are federal covered, while others register on a state by state basis. In the case of a state-registered investment adviser having its only office in Oregon with no offices in any other state, the authority of the office of the Administrator would include A) the Idaho Administrator requiring registration of IARs who make telephone calls to residents of Idaho B) requiring each IAR to provide a statement of financial condition C) requiring the IA to renew its consent to service of process when paying the annual fee D) requiring IARs to pass a qualification exam

D) requiring IARs to pass a qualification exam As you know from being here right now, this test is required by the Administrator. What about the Idaho Administrator? Well, maybe the IARs are making 5 or fewer calls in any 12-month period. Maybe they are calling institutional clients domiciled in Idaho. In any event, if you have to choose between an answer that is 100% right all of the time (qualification exams) and one that is right only some of the time. Go for the 100%.

A high net worth individual wishes to know when a gift can be made this year without being obligated to pay gift tax. You would respond that there is no gift tax when the gift is made to A) a grandchild of the donor. B) a non-citizen spouse. C) a sibling of the donor. D) the American Red Cross.

D) the American Red Cross. Gifts to recognized 501(c)(3) charities, such as the American Red Cross, are never subject to the gift tax. If the spouse is a non-citizen, there is a limit ($152,000 in 2018) and anything in excess of $15,000 to a grandchild or sibling is taxable unless the donor elects to use the excess against the lifetime exclusion ($11.2 million in 2018).

The responsibility for administering the Investment Advisers Act of 1940 lies with A) the Investment Advisers Association (IAA). B) FINRA. C) the Administrator. D) the SEC.

D) the SEC. The Investment Advisers Act of 1940 is federal law and that comes under the jurisdiction of the SEC.

The Uniform Securities Act requires client consent for assignment of the investment advisory contract. It would be considered that contracts were assigned in all of the following situations except A) the sole stockholder of the investment advisory firm pledges all of the stock in the firm as collateral for a bank loan B) the sole proprietor of an investment advisory firm sells the firm to another adviser C) 2 investment advisory firms intend to merge, causing a change in the majority interest of the partners D) the death of a partner holding a minority interest with the remaining partners acquiring that share equally

D) the death of a partner holding a minority interest with the remaining partners acquiring that share equally Whenever there is a change in a majority interest in an investment adviser structured as a partnership, it is considered an assignment of the advisory contracts. The assignment requires client consent. The death of a partner with a minority interest does not require consent because it is not considered an assignment. All that is necessary is notification of the change in the partnership within a reasonable period. The sole stockholder of the advisory firm can pledge the firm's stock as collateral but requires client consent to maintain the advisory contracts. The merger of partnerships or sale of a sole proprietorship involves a change in majority interest, which requires consent to maintain the advisory contracts.

All of the following statements are features of a straight life, fixed, single-premium immediate annuity except A) payments do not increase with inflation. B) the annuitant may die before a return of the principal is realized. C) payments stop when the annuitant dies. D) the income level may drop if the underlying investments go down in value.

D) the income level may drop if the underlying investments go down in value. Payments from a straight life, fixed, single-premium immediate annuity are fixed and are not dependent on underlying investments. However, as fixed payments, they do not offer inflation protection. As a straight life annuity, payments cease at the death of the annuitant. Because there is no minimum payout period, early death could result in total payments being less than the amount of the invested principal.

Twenty-five individuals have formed an investment company. They have heard wonderful things about you as an investment adviser and ask if you would be interested in managing their portfolio. You reply that you would be interested but will only take the account if you can structure a compensation arrangement that calls for you to receive a base fee plus 18% of the profits to the extent that the account's performance exceeds a standard benchmark. Under the Uniform Securities Act, this type of agreement is allowable if A) the contract is signed by one of the investors who is an accredited investor B) a majority of the shareholders in the investment company are qualified investors C) the individual in charge of the investment company is a qualified investor D) the investment company has net worth of at least in excess of $2.1 million or will place at least $1 million in assets under management with the IA

D) the investment company has net worth of at least in excess of $2.1 million or will place at least $1 million in assets under management with the IA An investment adviser may enter into, extend, or renew an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds, or any portion of the funds, of the client if the client entering into the contract is: a natural person or a company who, immediately after entering into the contract, has at least $1 million under the management of the investment adviser; or a person who the investment adviser and its investment adviser representatives reasonably believe, immediately before entering into the contract, is a natural person or a company whose net worth, at the time the contract is entered into, exceeds $2,100,000. Do not be confused by thinking this is an institutional client (a registered investment company)—they need at least 100 investors and registration with the SEC.

IRAs and Keogh plans are similar in each of the following ways EXCEPT A) taxes on earnings are deferred B) rollovers are allowed once every 12 months and must be completed within 60 days C) distributions without penalty may begin as early as age 59½ D) the maximum allowable cash contribution is the same

D) the maximum allowable cash contribution is the same Both IRAs and Keogh plans have maximum annual allowable contribution limits but they are significantly higher in a Keogh Plan.

Which of the following is (are) NOT exempt from registration as an investment adviser representative in the state in which they conduct business? I. A Certified Financial Planner who prepares financial plans and whose only compensation is commissions II. An insurance agent who prepares comprehensive financial plans and receives commissions on any insurance products purchased by his clients III. A broker-dealer with extensive business in the state IV. A mutual fund company with offices and clients in the state

I and II A Certified Financial Planner who prepares financial plans for commissions must register in the state as an investment adviser representative. An insurance agent who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the Uniform Securities Act.

Which of the following are prohibited practices? I. An investment adviser transferred a client's account to a brokerage house because the account went below the firm's minimum size and then informed the client. II. An investment adviser organized as a partnership did not inform its clients of the departure of a partner who had only a very small interest in the firm. III. An investment adviser subsidiary of a publicly traded bank holding company failed to inform its clients of the departure of the firm's chairman and major stockholder. IV. An investment adviser firm organized as a general partnership sends prompt notification to all clients after the addition of a new partner.

I and II Transfer or assignment of an advisory account without prior client consent is always prohibited. An investment adviser need not inform clients of departures of employees, senior or otherwise, from investment advisory firms that are incorporated. Clients must, however, be informed of the departure or addition of any partner if the firm is organized as a partnership. The legal requirement for this notification is "within a reasonable period of time," but there is nothing prohibited about doing it promptly.

During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, I. Kapco's P/E ratio has decreased II. Kapco's P/E ratio has increased III. an investor holding Kapco over this period would have noticed a decrease in income received IV. an investor holding Kapco over this period would have noticed no change in income received

I and IV At the beginning of the period, the P/E ratio was 23.5 to 1 ($47 divided by $2.). At the end of the period, the P/E ratio was 20 to 1 ($50 divided by $2.50). Initially, Kapco was paying out 50% of its $2.00 per share earnings, or $1.00 in dividends. At the end, Kapco was paying out 40% of its $2.50 per share earnings, also $1.00 in dividends.

According to the Uniform Securities Act, which of the following would be considered exempt transactions? I. The sale of a unlisted corporate bond by an executor of an estate II. The gift of 100 shares of a NYSE-listed stock from a father to his minor child III. Preorganization certificates subscribed to by 14 institutional investors during a 12-month period for which no payment has been made IV. An unsolicited order from an individual client to purchase a nonexempt, unregistered security

I and IV Fiduciary transactions and unsolicited orders, regardless of the security being purchased or sold, are always exempt transactions under the USA. Preorganization certificates are limited to a maximum of 10 subscribers, whether individuals or institutions. A gift of securities is not a sale, so no transaction has taken place.

Which of the following is considered a sale of securities under the Uniform Securities Act? I. Redemption of mutual funds shares worth $10,000 II. Dividends of common stock for which no consideration was given for the dividends III. With the approval of the board of directors, an exchange of common stock for the stock in another company under a merger IV. Disposition of stock for which cash consideration is received

I and IV Redemption of mutual fund shares is always treated as a sale by the redeeming shareholder. The exchange of securities in a merger is not considered a sale under the act. Any disposition (liquidation) of securities that involves cash consideration, or in which the shareholder has a choice of cash or securities, is a sale.

Broker-dealers and their agents can have their licenses suspended or revoked for engaging in business practices in violation of NASAA's policy statements on unethical and prohibited practices. Which of the following activities would NASAA consider an unethical or prohibited practice? I. Hypothecating a customer's securities in a margin account without written consent from the customer II. Exercising discretionary power and effecting securities transactions within the first 10 business days of a customer's account with verbal authority from the customer III. Charging unreasonable fees or commissions for brokerage execution services IV. Retaining an insufficient number of clerical personnel to handle current customer transactional activities

I, II, and III Hypothecation is the process by which customers pledge their securities as collateral for a loan. Hypothecation can only be done with the customer's consent. Broker-dealers and agents are always required to have written authority to exercise discretion. IA and IARs have 10 business days upon account opening to exercise discretionary power obtained verbally from the customer. After 10 business days a IA or IAR must obtain written discretionary authority from the customer. Firms must always charge reasonable fees and expenses. Retaining an insufficient number of clerical personnel is not a violation according to NASAA policy.

In defining an investment adviser under SEC Release 1A-1092, which of the following would meet the business standard? I. A person who advertises himself as an investment adviser II. A person who provides securities-related advice on a frequent or regular basis III. A person who receives separate or additional compensation for securities-related advice

I, II, and III To meet the business standard, persons must meet 3 criteria. First, they must hold themselves out (advertise) as persons who provide investment advice. Second, they must provide such advice on a frequent or regular basis, but it need not be their principal business activity. Third, they must receive separate or additional compensation for doing so.

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

I, II, and IV All investment adviser advertising must reflect fees, state actual market conditions during the referenced period, and disclose the specific group of clients to which it applies. However, advertising that reflects past performance must show a minimum period of 1 year, not 3 years.

An Administrator may deny or revoke a registration if he finds a broker/dealer I. is insolvent II. has no agents in its employ III. was convicted of a felony 9 years ago IV. is under an injunction from another state

I, III, and IV For an Administrator to deny or revoke a registration it must have 2 reasons to do so, with one of the reasons being that it is in the public's best interests. Reasons include insolvency (meaning the firm cannot meet its financial obligations), conviction of a securities or money related crime within the last 10 years, or if another state prohibits the firm from participating in the securities industry. There is no specific rule that authorizes the Administrator to deny or revoke a registration if it does not employ any agents.

Registered agents employed with a broker/dealer registered in California regularly mail sales material to 4 clients in Oregon. The California broker/dealer I. need not register in Oregon until it has 5 or more clients in Oregon II. must register in California III. must register in Oregon IV. must register in all states from which it receives any mail from clients

II and III Broker-dealers are required to register in the state if they have an office in the state or if they have a single resident client in the state, without exception. Note that Investment Advisers can avoid registration in a state if they do not have an office in the state and have fewer than 6 retail clients in a given year.

Under the Uniform Securities Act, which of the following statements are TRUE regarding private placements? I. They are offered to no more than 10 persons in a state in a 12-month period. II. They may be offered to an unlimited number of institutional investors. III. Institutional buyers need not be purchasing for investment.

II and III Private placements are transactions resulting from offers to no more than 10 noninstitutional persons (retail clients) in 12 months for investment purposes only. The offeror must be convinced that buyers are purchasing for investment. This means no immediate resale intentions are allowed on the buyer's part. No commissions may be paid, directly or indirectly, for these transactions. However, sales to institutional purchasers are exempt from the limitations regarding number of sales, resale restrictions, and commissions. They may, therefore, be offered to more than 10 persons. (Remember that the term person is defined very broadly in the act.)

Tax considerations are frequently an important factor when determining appropriate recommendations for advisory clients. In which of the following accounts is the tax status of the individual a critical factor? I. An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer II. An account opened by a sole proprietor in the name of the company III. An account opened in the name of ABC Corporation, an S corporation by one of its shareholders IV. An account opened in the name of the GHI Fund, a regulated investment company, by the fund's portfolio manager

II and III Sole proprietorships and S corporations have their income and losses pass through to the owners. Therefore, an account opened in the name of the business will create tax consequences for the owners. Regular, or C corporations, pay taxes on their earnings and, even though a regulated investment company passes through at least 90% of its earnings to shareholders, the tax situation of each individual shareholder of the fund is of no consideration when making recommendations to the fund's portfolio manager.

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 10 different investment alternatives II. allow plan participants to exercise control over their investments III. allow plan participants to change their investment options no less frequently than monthly IV. provide plan participants with information relating to the risks and performance of each investment alternative offered

II and IV To comply with the safe harbor provisions of ERISA's Section 404(c), the plan trustee must allow each participant control over her investments and furnish her with full performance and risk information. The rule only mandates a minimum of 3 alternatives and quarterly changes.

Under the Uniform Securities Act, an issuer is any person who issues or proposes to issue a security for sale to the public. According to the USA, which of the following is NOT an issuer? I. The city of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds II. AAA Partnership, which issues certificates of interest or participation in its oil, gas, and mining titles III. The AAA Manufacturing Company, which proposes to offer shares to the public but has not completed the offering IV. The United States government, which proposes to offer Treasury bonds

II. AAA Partnership, which issues certificates of interest or participation in its oil, gas, and mining titles Under the Uniform Securities Act, an issuer is any person who issues or proposes to issue a security. However, with respect to certificates of interest or participation in oil, gas, or mining titles or leases, there is not considered to be any issuer, even though those certificates are included in the definition of "security." Examples of issuers are a municipality such as the city of Chicago, which issues tax-exempt highway improvement bonds; the AAA Manufacturing Company, which proposes to offer shares to the public, even though it has not completed the offering; and the United States government, when it proposes to offer Treasury bonds.

Terry Bolton opens a UTMA for each of his sons, Josh, age 12, and Drake, age 14. Under current tax regulations (2020 and beyond), after deductions and exemptions, how will the income in the UTMAs be taxed? I. Josh's income is taxed at his tax rate. II. Drake's income is taxed at his tax rate. III. Josh's income in excess of $2,200 is taxed at Terry's marginal tax rate. IV. Drake's income in excess of $2,200 is taxed at Terry's marginal tax rate.

III and IV Because the income on the UTMAs is not considered to be earned income, the kiddie tax rules apply. Currently (2020 and beyond, but indexed), children younger than 19 having such income in excess of $2,200 are subject to tax at the parent's marginal tax rate. That means if the parent is in the 32% income tax bracket, the children's excess income will be taxed at 32%.

An Administrator may initiate a suspension or revocation proceeding against a broker-dealer registered in his state I. up to 2 years after a broker-dealer voluntarily withdraws its registration II. when an agent of the broker-dealer is convicted of a felony violation of the Securities Exchange Act of 1934 III. upon discovery that the broker-dealer's license had been suspended in another state IV. upon discovery of new facts unknown to the Administrator at the time of the broker-dealer's initial registration

III and IV The Administrator maintains jurisdiction over a license that has been withdrawn for a period of 1 year after the effective date of the withdrawal. An action against an agent of the broker-dealer does not allow the regulatory authority to also go after the broker-dealer. It is only when the question states that the individual is an executive or other supervisory person of the firm that action against the firm may commence unless that agent is a supervisor of the broker-dealer or part of the ruling indicated that there was a failure to supervise. The broker-dealer must disclose all suspensions by other regulatory agencies, including other states, to the state Administrator of its own state. A broker-dealer must also provide full disclosure of all relevant facts to the state Administrator concerning its registration.

Which of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held more than 1 year? A) Class B B) Class 1% C) Class A D) Class C

It is the Class C shares that have no front-end load, but they do have a 1% CDSC for a period of 1 year.

A client inquires about the liquidity risk associated with pooled-investment vehicles. An adviser could accurately state each of the following except

Mutual funds have liquidity risk because they cannot be sold between willing buyers and sellers or on exchanges. While it is true that mutual funds cannot trade directly between investors or on exchanges, they are required by law to be redeemable by the mutual fund company at the NAV. Because the fund is required to redeem its shares, investors in mutual funds do not have liquidity risk. Each of the other statements is true.

A client would like assistance evaluating a hedge fund's performance results. The fund returned 8% which doubled its benchmark index's 4% annual return. Targeting aggressive investors, the fund highlighted its beta of 2.5. Which of the following statements best describes the fund's performance?

Negative alpha of -2.0 and underperformed given the risk taken. This fund manager generated negative alpha of 2.0. Based on the fund's beta of 2.5 the risk-adjusted return should have more than doubled the market. alpha = (portfolio return) (beta x market return) = (8%) - (2.5 x 4%) = (8%) - (10%) = -2.0 *Note that the risk-free rate was not given and can therefore be excluded from the analysis.

An elderly investor covers living expenses with the income produced from her diversified long-term bond portfolio. Most of the bonds were purchased 3-5 years ago, when interest rates were higher than they are today. The investor is concerned that the prevailing market rates may impact her investments and ability to maintain her standard of living. All of the following are true statements except

Quotes for her bonds would show a yield to maturity that is above their nominal yield. A portfolio of bonds purchased when interest rates were higher than they are now will be premium bonds (e.g. the purchased bonds pay 6% and similar bonds are now being issued at 4%). The portfolio's bonds, however, will continue to pay the same fixed coupons until they mature, regardless of prevailing interest rates. The risk that will be faced is reinvestment rate risk as the coupons will need to be redeployed into a market that is offering lower returns. Answer choice(D) is incorrect in that the premium bonds will show yield to maturity quotes that are lower than their nominal yield because the bonds will be priced above par.

An agent sells his client 10 U.S. government bonds due to mature in 30 years. According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, which of the following statements may the agent legally make? A) The U.S. government guarantees that principal and interest payments will keep pace with inflation. B) The bonds are guaranteed as to principal and interest payments by the U.S. government. C) There is no way to lose money on the safest security on earth. D) The full faith and credit backing of the U.S. government means virtually no chance of loss.

Stating that the bonds are guaranteed as to principal and interest payments by the U.S. government is an accurate statement of fact. A client can lose money on government bonds should interest rates rise after he purchases the bonds. The government does not guarantee that the principal and interest will keep up with inflation.

An investment adviser has built a robust and seasoned team of experienced investment professionals. Each member of the team brings unique analysis and insight to the overall group who collectively weigh the evidence and then make recommendations to their clients to invest in or divest from specific securities, asset classes, or structure of their overall portfolio allocation. What term best describes this type of advice?

Tactical asset allocation Tactical asset allocation describes investment advice and portfolio allocation based on current market conditions and an adviser's specific view of which investments will perform best. Here, the advice is based on the specific views of the assembled advisory team. Strategic allocation describes how to allocate across asset classes at large and does not depend on the specific short-term view of how that asset class will perform. Special situation investing looks to more unusual investment opportunities, such as in distressed instruments, M&A, or other "special" circumstances.

A mutual fund must redeem its tendered shares within how many days after receiving a request for their redemption? A) 5 B) 3 C) 10 D) 7

The 7-day redemption rule is required by the Investment Company Act of 1940.

Impressed by a televised interview with a fund manager, a client calls an adviser at 10 AM to purchase shares. The fund's NAV per share is $30.00 and there is a 5.00% sales charge. Which of the following statements is true?

The adviser can accept the order and fill it at the end of the day at $31.58, if the NAV remains at $30.00 Shares of mutual funds are purchased at the forward price, which is determined by the next Net Asset Value (NAV) calculation performed after an order is entered. Most funds calculate their NAV at the end of each market day. Here, the order placed at 10:00 am would be priced after the 4:00 PM close and then adjusted from the NAV to the public offer price (POP). The POP is the NAV / (1 sales charge). If the NAV remained at $30.00 the price per share would be: $30.00 / (1 0.05) = $30.00 / 0.95 = $31.58. Remember that the sales charge cannot be multiplied by the NAV ($30 x 1.05), this will produce the wrong price. Finally, orders for mutual fuds can be placed and accepted at any time, but they will not be executed until the next NAV calculation.

An agent representing a broker/dealer in Illinois has a customer who moves to New Jersey from Illinois. The agent and the broker/dealer now have one customer in New Jersey. Which of the following is TRUE?

The agent and broker/dealer must register in New Jersey. If a broker-dealer or agent has a single resident client in a given state both entities must be registered in the state. Both the broker-dealer and the agent would be permitted (in most states) to continue to work with the client for 30 days from the change of residence while they apply for registration in the new state.

An executor is distributing assets of an estate which includes pieces of fine art and real estate. As directed by the will, a particular piece of art is to be sold significantly below fair market value to a family member of the artist. For purposes of estate valuation and taxation which of the following statements is most accurate?

The art will be valued at an appraised fair market value, regardless of the transaction price. When an asset is sold for a price significantly less than its fair market value the IRS requires that the estate include the asset at its fair market value for purposes of estate valuation and taxation.

Under the Uniform Securities Act, which of the following is NOT an exempt transaction? A) A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid B) A sale of securities by the executor of an estate C) The sale of a non-Nasdaq over-the-counter stock to a closed-end investment company D) The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer

The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer In the case of a U.S. government security, the security is exempt, but the transaction is not. All the other choices are exempt transactions because they are either to an institutional investor, existing owners for no consideration, or by certain fiduciaries, such as an executor.

A young, recently married couple is seeking investment advice to help them prepare to purchase their first home. They plan to use all of their savings and investments for a down payment in the next few years. Their adviser ascertains that they both have stable jobs, can meet all their current obligations, and can fully contribute to their retirement plans. In terms of their risk tolerance, they indicate they are aggressive. Given these characteristics which of the following statements is most accurate?

The short-term need for capital must take precedence over their aggressive risk tolerance resulting in a conservative portfolio. Clients who wish to deploy their capital in the short-term, often considered anything under 5 years, should transition those assets into conservative investments to ensure there are sufficient assets to achieve their desired goal. For example, it is unsuitable to take significant market risk and timing risk with funds earmarked for a home purchase.

As year-end approaches a trustee is reviewing a trust's principal and the net investment income it produced during the year. The trustee is considering how to best distribute those assets in accordance with the trust documents. Which of the following statements regarding the trust are true?

The trustee must distribute all trust net income, if it is a simple trust The main difference between a simple and complex trust is whether all net income must be distributed on an annual basis. A simple trust requires all net income be distributed annually, whereas a complex trust permits the retention of net investment income year over year. With respect to the distribution of trust principal, the trustee of a simple trust is not authorized to distribute trust principal, whereas the trustee of a complex trust is authorized, but not required, to do so. The answer choice that indicates the trustee of a complex trust "must" distribute trust principal it is false, as this is permissible, but not required.

A client is interested in viatical investments and life settlements. In describing these to the client, an adviser might make each of the following statements except

The viatical market has an active secondary market that helps ensure fair pricing of policies. Viatical investments or life settlements describe the sale of a life insurance policy (or the sale of the right to receive a death benefit) to a party other than the issuing insurance company (selling the policy back to the life insurance company is called surrendering the policy). In doing so the insured can access the value of the death benefit while still alive. For example, the owner of a million-dollar policy may sell the right to that one-million-dollar death benefit for $600,000 today. NASAA considers all viatical investments to be securities that require proper registration. Because there is no or a very limited secondary market for these instruments it can be difficult to determine their fair value. Best practices suggest advisers obtain multiple quotes when assisting clients who buy or sell viaticals.

A retired couple indicates that capital preservation and principal protection are very important to them. Which of the following best describes why structured notes may be an appropriate investment for the couple?

They can expect to receive a return of at least the note's par value at maturity. Structured notes are customized products that allow investors to achieve a specific investment objective. Many structured notes offer principal protection, which promise the return of the principal plus a return based on an underlying asset or index (e.g. the S&P 500). In exchange for limiting the downside risk and offering principal protection, many notes also cap or limit the potential return at maturity. The structured note product typically does not hold the actual underlying assets that will determine the note's return, instead derivatives are used to produce the capital to payout the investors. In addition, these instruments have significant liquidity risk (there is often a penalty or surrender fee to exit prior to maturity) and credit risk (if the issued broker-dealer fails the investor because an unsecured creditor of the firm). As an unsecured creditor, the investor would not be assured to obtain the return of the principal. The fact that they are SEC registered securities with SIPC coverage does not address why these securities would be appropriate for these clients.

In a rising interest rate environment, a fund manager is pursuing an investment strategy of identifying and purchasing discount bonds with call provisions. If the purchased bonds are called the fund will generate

a higher rate of return than if the bonds are not called. When discount bonds are called they produce a higher yield than if they are not, as the owner earns the difference between the price paid (less than par) and par value more quickly. By accelerating this gain over a shorter number of years, and being able to redeploy the capital at the higher interest rates (it is given that interest rates are rising), the fund will see higher returns than if the bonds were not called.

State securities Administrators can require

agents to post a surety bond if they have discretion over client funds and securities Agents are required to post a bond if they maintain discretionary accounts. Agents are not subject to net worth or minimum net capital requirements. Investment Advisers are subject to net worth requirements while B/Ds are subject to net capital requirements. The Administrator cannot require firms to post a bond exceeding that required by the SEC.

An adviser pursuing a strategic asset allocation on behalf of client could do each of the following except

allocate and adjust the portfolio based on current market conditions. A strategic asset allocation constructs a portfolio based on risk tolerance, time horizon, or other criteria without relying on any specific market view. Thus, the strategic allocation could use a percentage to allocate between asset classes and rebalance to maintain that allocation over time. It remains a "strategic allocation" to rebalance to maintain the desired percentages (constant ratio plan) or to rebalance to maintain a constant dollar amount invested in each asset class (constant dollar plan). If an adviser is attempting to time the market or pick specific asset classes that is best described as tactical asset allocation.

An analyst is comparing the yield between 10-year corporate bonds and 10-year treasury bonds. The analyst observes that the credit spread between these instruments has been narrowing and might therefore conclude

economic conditions are improving. When credit spreads (also called yield spreads) narrow between corporate bonds and treasury bonds it is positive signal for the economy. It indicates that investors are willing to lend money to corporate borrowers at an interest rate that is more similar to the risk-free rate available to the federal government. If credit spreads are widening it is a negative sign for the economy as the market is indicating a preference for less risky (or risk-free) assets and expressing less trust and confidence in corporate entities.

In pursuing dollar-cost averaging a client seeks to

reduce the average cost per share as compared to the average price per share. Dollar cost averaging is a strategy that invests the same dollar amount in each investment period. In doing so, more shares will be purchased when the price is low and fewer shares are purchased when the price is high. Over time, the investor will purchase more shares at lower prices resulting in a lower average cost per share (what the investor paid on average for all the shares) as compared to the average price per share (the average price of each acquisition). This strategy helps reduce, but does not eliminate, timing risk (the risk that an investor makes a large transaction at the top or bottom of the market).

An individual is registered as an agent with a broker/dealer that has recently begun offering wrap fee programs to its clients. To offer such wrap accounts to the public, the agent must

register with the state as an investment adviser representative Under a wrap fee program, a firm charges a customer one fee for the cost of trading (brokerage services) and the cost of advice. By selling both brokerage and advice the firm is required to register as both a broker-dealer and an investment adviser. The firm's employees, who are offering the programs, are required to register as investment adviser representatives. Registration as an investment adviser representative is always at the state level. Knopman Note: A fee-based account is not the same as a wrap account and would not require registration as an IA or IAR.

Under the USA, an individual is NOT an agent if he is employed by a broker/dealer and only

serves as a partner, officer, or director of the firm with exclusive responsibility for information technology Partners, officers, and directors of a broker-dealer are considered agents if they are involved in the purchase or sale of securities. They are also required to register if they supervise agents. All individuals who are employed by the broker-dealer and are involved in securities transactions are required to register as agents of the broker-dealer.

An adviser explaining equity-indexed annuities to a potential client would state that most of these products carry each of the following attributes except

tax deductibility of contributions, tax deferral of earnings and growth. An equity-indexed annuity is a complex product offering a variety of features. These include a minimum guarantee that is credited to the account each year (e.g. 1-3% of the premiums paid), a participation rate that determines how much of the index's return is credited to the account (e.g. 80%), and interest rate caps that limit the account's total return per year (e.g. 8% per year). The equity-indexed annuity does not offer tax deductible contributions as a 403(b) or 401(k) contribution might.

Company XYZ is a mature company in an established industry. The company has experienced increased demand for its products, and the CEO and Chairman of the Board will jointly announce an increase in its long-standing dividend of 2.5% per year on a going forward basis. An analyst valuing Company XYZ's stock should

use the dividend growth model as it will produce the best valuation To value a company's stock price when it pays a growing dividend, the dividend growth model is most appropriate. It is more important to know when to deploy this formula as opposed to the formula itself. The dividend discount model is most appropriate shares that are paying a stable (non-growing) dividend. All things being equal, the dividend growth model will produce a higher valuation than the dividend discount model. Both of these valuations are fundamental in nature. Two technical analyses are the advance/decline line and moving averages. The advance/decline line indicates overall market movements by plotting the number of stocks that have gained value versus lost value on a daily basis. A moving average plots the average price of a stock over a historical period, e.g. the average price of a stock during the past 50, 100, or 200 days.