STC Series 66 Greenlight exams

A married couple wants to fund IRAs to save for their retirement. The husband is 60 years old and is a retired CFO, while the wife is 55 years old and works for the federal government. What is the maximum amount that the couple may contribute?

$14,000 For a married couple, as long as one person has earned income, contributions may be made in two separate IRAs. Since both the husband and wife are age 50 or older, the total amount that may be contributed annually to each IRA is $7,000 ($6,000 plus the additional catch-up contribution of $1,000). Therefore, the total combined contribution is $14,000.

An investor pays $100 per share for 1,000 shares of a 6% cumulative preferred stock which has one year of dividends in arrears. One year after making the purchase, the issuer has paid its normal preferred dividend, plus the dividends in arrears. At that point, if the investor then sells the preferred stock at $104 per share, what is the total return on the preferred stock for the period?

16% A security's total return takes into account the cash flow from dividends or interest, plus appreciation or minus depreciation, and divides by the security's original value. In this question, at the end of the year, the stock paid the $6 of dividends in arrears, plus the $6 stated dividend, plus the stock appreciated by $4. Therefore, the total return is 16%($6 + $6 + $4 ÷ $100).

Eight years ago, a person invested $4,000. During the eighth year, the investment had increased to $8,800, but finished the year at $8,000. What is the compounded return on investment achieved for the eight-year period?

9% The Rule of 72 can be used to find the annual return on the investment over the eight-year period. To approximate the compounded growth rate, 72 is divided by the number of years it takes for the funds to double. In this example, it took eight years for the money to double (from $4,000 to $8,000); therefore, 72 divided by 8 years equals a growth rate of 9%. (67356)

Two clients of an IAR are forming their own business entity and plan to incorporate. Which of the following entities has the MOST tax disadvantages?

A C corporation Please note that the question is asking not asking about tax advantages; it is asking about tax disadvantages. From a tax perspective, a C Corporation is the least advantageous. The corporation is first required to pay corporate taxes on any profits it generates; thereafter, its shareholders (owners) are required to pay personal income taxes on anything that is distributed to them in the form of dividends. All of the other choices are flow-through entities for tax purposes, which makes them more tax efficient.

Which of the following fee structures is NOT permitted for broker-dealers that offer investment advisory services to retail customers?

A fee based on a percentage of the profits of the account Fees that are based on the percentage of profits in the customer's account are generally not permitted.

An investor is long 1,000 bushels of wheat that she purchased for 50 cents per bushel. What's the investor's gain or loss if the price of wheat has dropped to 45 cents per bushel?

A loss of $50 Since the investor went long and the price went down, she will be losing money. She bought the wheat for $0.50 per bushel (50 cents = $0.50) and the price is now $0.45; therefore, she has lost $0.05 per bushel. Since the position is 1,000 bushels, the total loss is $50 (1,000 bu. x $0.05 loss) which will be realized if the position is sold.

Which of the following statements is TRUE regarding a sports and entertainment representative?

A sports and entertainment representative who provides advice about asset allocation, but does not recommend individual investments, meets the definition of investment adviser. Under SEC Release IA-1092, sports and entertainment representatives have been included as investment advisers. These representatives offer a number of services, such as negotiating employment contracts, developing promotional opportunities, as well as providing advice that is related to investments, tax planning, budgeting, and money management. Some of the investment-related services these representatives provide include asset allocation recommendations as well as advice about individual investments. There is no specific client number that determines whether a sports and entertainment representative is considered an IA.

Of the following choices, which one is a derivative?

A swap Of the given choices, only a swap is considered a derivative. A derivative is a security whose price is dependent on or derived from one or more underlying assets. There are many different types of swaps, including interest-rate swaps, currency swaps, and credit default swaps.

If a client is interested in purchasing a stock that has a low P/E ratio, a high dividend payout ratio, and wants the issuer to have a large amount of cash reserves, what type of stock should an IAR recommend?

A value stock Two of the characteristics of value stocks are low P/E (price/earnings) ratios and high dividend payout out ratios (or high dividend yields). A company's dividend payout ratio is the percentage of its earnings that are paid to investors as earnings. Value stocks are also characterized by low price-to-book ratios, which is consistent with a company that has a significant amount of cash on hand. In contrast, growth stocks (choice a) generally have high P/E ratios and low dividend payout ratios. These companies tend to keep most of their earnings in order fund their continued expansion. Large-cap stocks (choice c) are issued by companies that have market capitalizations of greater than $10 billion. Many value stocks may also be large-cap stocks since they tend to be mature companies with a history of regular dividend payments; however, they are NOT necessarily characterized by low P/E ratios.

An investment adviser hires a new employee and her registration became effective July 14. When is the IA required to renew the IAR's registration?

At the calendar year end Most state registrations, including those for IARs, are required to be renewed on December 31 (i.e., at the end of the calendar year). Federal covered advisers are required to renew their registration at the end of their fiscal year. Remember, IARs (even those who are employed by federal covered advisers) are required to register at the state level; therefore, their registrations are always renewed on December 31. For securities (e.g., stocks and bonds) to remain registered with an Administrator, the issuer is required to renew their registrations one year after their effective date.

A semi-retired IAR works for an investment adviser that is located in State A, but she intends to spend the winter months in her second home in State B. The IAR put the addresses of both her office in State A and her home address in State B on her business cards since she intends to continue servicing her clients that reside in State A over the winter months. If the investment adviser does not have an office in State B, which of the following statements is TRUE?

Both the IAR and the investment adviser need to be registered in State B since the IAR's residence in State B is considered an office and it is listed on her business card. Because the IAR has put both her home address in State B and phone number on her business cards, her residence qualifies as an office in State B. Both the investment adviser and the IAR are required to register in State B, despite the fact that they are only doing business with clients who are not residents of State B.

Which of the following is a type of unsystematic risk?

Business risk Unsystematic or diversifiable risks are those that are unique to a certain investment or security. On the other hand, systematic or diversifiable risks are not unique to one investment and will affect all investments, although not always to the same level. Business risk is the risk that one particular company will do better or worse than expected, which will provide an investor with a higher or lower return. Business risk can be minimized by owning a diversified portfolio of stocks in many different companies. With diversification, one company's performance can be mitigated by the performance of the other stocks in a portfolio. All of the other choices will have an impact on all investments.

An investor has heard conflicting reports about the success of a company's latest products. Since the investor is unsure of the direction in which the stock's price will move, which option strategy should be recommended?

Buy a call and buy a put on the stock The simultaneously purchase of both a call and put on the same stock (with the same expiration months and same strike price) creates a long straddle. Long straddles are used if an investor anticipates volatility in the price of a stock. If the stock rises, the call becomes profitable; however, if the stock declines, the put becomes profitable. Choices (a) and (b) are incorrect since each choice by itself only takes advantage of one side of volatility. Choice (d) is a call spread, which limits both gain and loss, but does not provide the ability to take advantage of volatility.

An industry average debt-to-equity ratio is 2.0. Stocks in the industry have following ratios: Company W: 3.5Company X: 1.7Company Y: 1.3Company Z: 0.7 Which of the following statements is TRUE?

Company W is the most leveraged firm The debt-to-equity ratio measures the leverage of a company. A higher ratio implies that a firm has borrowed a large amount of money and may have trouble repaying its creditors. Since Company W has the highest ratio, it is the firm that is the most leveraged. In this question, there is no way to identify the amount of overall debt a firm has by simply examining the debt-to-equity ratio. To find the overall debt, a person should examine the firm's balance sheet.

Which of the following metrics is the MOST important when attempting to diversify a stock portfolio?

Correlation Correlation measure the degree to which two securities move in relation to each other. The greatest diversification benefit is found when a security is negatively correlated. Choice (b) — asset allocation — is incorrect since the question relates to diversifying a stock portfolio. Asset allocation involves the process of building a portfolio that consists of multiple asset classes (e.g., stocks, bonds, cash equivalents, real estate).

Which of the following business types is the LEAST likely to be affected by an increase in interest rates?

Cosmetics When interest rates are rising, industrial corporations that sell expensive items (e.g., manufacturing and automotive) and banks are heavy borrowers and will be adversely affected. However, cosmetic companies—due to the relative inexpensive nature of their business and the low cost of their products—are not as affected by rising interest rates.

A state Administrator is permitted to apply all of the following administrative actions, EXCEPT:

Require a higher minimum financial requirement than the state in which a broker-dealer maintains its principal office. No other state Administrator may impose financial requirements on a broker-dealer that are more restrictive than those that are established by the state in which the broker-dealer maintains its principal (main) office

If a client has no life insurance and low income, what life insurance policy should be recommended?

Term life If a client currently has no insurance and low income, a term life policy is likely the best choice. A term policy is the cheapest alternative since the insured is simply paying for pure insurance. Unlike the permanent insurance policies (e.g., whole, universal, or variable), a term policy does not build cash value.

In a JTWROS account, if one person dies, which of the following statements is TRUE?

With proper documentation, the assets in the account become the property of the other person. In a Joint Tenants with Right of Survivorship (JTWROS) account, after the presentation of a death certificate, the ownership is transferred to the other person who is named on the account title. Depending on the state, additional documentation may be required. If the account was established by two persons as Joint Tenants in Common (JTIC), a portion of the account's assets are transferred to the survivor and the remainder is distributed to the estate of the deceased person.

When should a federal covered adviser (FCA) file an amendment to its registration?

Within 90 days of the end of its fiscal year Within 90 days after an adviser's fiscal year end, it must file an "Annual Updating Amendment." This amendment to the adviser's Form ADV reaffirms the eligibility information contained in the form and updates the responses to any other item for which the information is no longer accurate.

According to the Uniform Securities Act, which of the following statements is NOT misleading if it is made by an agent?

"A gift of assessable stock is technically treated as both an offer and a sale." Assessable stock is a class of stock on which the issuing company is allowed to demand additional funds from existing stockholders. A gift of assessable stock involves both an offer and a sale and is subject to the USA's requirement to disclose all material facts. Prior to the USA, individuals could give gifts of assessable stock without disclosing that additional capital (an assessment) was required in order to maintain ownership. The Uniform Securities Act made this practice illegal. The other three choices are considered misleading statements and/or the use of inflated language. The problem with choice (a) is that all equities (even a portfolio consisting of multiple common stock issues) is fully subject to market risk.

An investment adviser representative who recommends a hedge fund to an accredited investor must confirm that the investor meets the financial test. The minimum net worth requirement is:

$1 million It is important to remember that when hedge funds are recommended, solicitations must be limited to accredited investors. An accredited investor is a person who meet the following financial test—net worth of $1 million OR annual income of $200,000 in each of the last two years ($300,000 with a spouse). If the question was asking about the necessary investor standards for entering into a performance-based fee arrangement, the investor must be a qualified client. The financial test for a qualified client is having assets under management of at least $1 million or a net worth of $2.1 million.

One month ago, a client purchased a convertible debenture, which is convertible at $20. If the underlying common stock is currently trading at $22 per share, what is the parity price of the bond?

$1,100 For questions that involve convertible securities, the first step is to find the conversion ratio (number of shares received upon conversion). For formula for finding conversion ratio is Par ÷ Conversion Price; therefore, the ratio is 50 to 1 ($1,000 ÷ $20). The second step is to determine the aggregate value of the shares. Since the investor is entitled to 50 shares and the shares are trading at $22 per share, the parity price of the bond is $1,100 (50 shares x $22). Parity represents the price at which both the bond and the aggregate value of the stock are equal.

An agent is implementing a $500-per-month dollar cost averaging strategy for his client who is purchasing stock. The price of the stock decreases from $10 per share to $5 per share. How much will the client invest next month if he wishes to continue with this strategy?

$500 When implementing a dollar cost averaging strategy, the same dollar amount is contributed over a fixed period. In this example, the client implemented the strategy by investing $500 per month. Regardless of whether the price rises or falls, the client will continue to contribute the same dollar amount

An investor has purchased a corn futures contract at $1.20 per bushel and the contract delivery size is 5,000 bushels. If the price of corn has fallen to $1.10 per bushel, what's the client's profit or loss?

$500 unrealized loss Since the investor bought (i.e., went long) a futures contract, he wants the price to rise. There's no exercise of a futures contract; instead, at expiration, there's physical delivery of the commodity. At the expiration of the contract, if the price of corn has fallen by $0.10, the client will have an unrealized loss of $0.10 per bushel. For that reason, the customer's total unrealized loss is $500 ($0.10 per bushel x 5,000 bushels).

Which of the following investments provides the highest real rate of return?

An investment earning 10% when inflation is 2% The real rate of return, also referred to as the inflation adjusted return, is an investment's rate of return (e.g., a bond's interest rate) minus the rate of inflation. Choice (c) provides the highest result of 8% (10% - 2%) and therefore gives an investor the best real rate of return

A bond is convertible at $50 and is selling in the market for $1,080. At what price per share must the common stock be trading to be at parity with the bond?

$54 For questions that involve convertible securities, the first step is to find the conversion ratio (number of shares received upon conversion). The formula for finding conversion ratio is Par ÷ Conversion Price; therefore, the ratio is 20 to 1 ($1,000 ÷ $50). The second step is to determine the value at which the stock must be trading to be equal to the current market value of the bond. Since the bond's value is $1,080 and the investor is entitled to 20 shares, the parity price of the stock is $54 ($1,080 ÷ 20). Parity represents the price at which both the bond and the aggregate value of the stock are equal.

Based on the past performance of XYZ Company, an investment adviser has determined that in a bull market there is 25% probability that XYZ stock will return 15%. In a flat market, there is 50% probability that the stock will return 4%. In a bear market, there is 25% probability that the stock will lose 20%. What is the expected return for XYZ stock?

+0.75% Return X Likelihood = Weighted Return According to Modern Portfolio Theory, the expected return is the sum of the weighted average of an investment's return. To find each weighted return, multiply the return by the likelihood (probability) of that return. For XYZ stock, each weighted return is calculated as follows: Return Likelihood Weighted Return 15% x 25% =3.75% 4% x 50% =2.0% (-20%) x 25% =-5.0% XYZ"s expected return is +0.75%, which is determined by adding each weighted return (3.75% + 2.0% - 5.0%). (-) = loss

During the first quarter of the year, XYZ common stock paid a $1 dividend, but the stock's price fell from $50 per share at the beginning of the quarter to $48 per share at the end of the period. Based on the quarterly results, what is the stock's annualized total return?

-8% A security's total return takes into account the cash flow from dividends or interest, plus appreciation or minus depreciation, and divides by the original value. In this case, during the first quarter, the stock paid a $1 dividend, but its price fell by $2. To determine the quarterly return,$1 + (-$2) ÷ $50 = -2%. To annualize the return, the -2% quarterly return is multiplied by four, which equals a -8%.

A portfolio contains fixed-income instruments and common stock. The portfolio's beginning value was $240,000; however, the portfolio was valued at $280,000 at the end of the second year. If interest and dividends totaled $20,000, what's the annualized yield on the portfolio?

12.5% Total Return = (Ending value - Beginning Value) + Income -------------------------------------------------- Beginning Value In this question, the gain is $40,000 ($280,000 - $240,000) and the income is $20,000, for a total of $60,000. The $60,000 is then divided by the starting value of $240,000, which equals a total return of 25%. However, the 25% return was based on performance over two years. Since the question is asking for the annualized return, the 25% return must be divided by the two years, which equals an annualized return of 12.5%. ***60 / 24 = /25 but biannual payment = 12/5**

According to the Uniform Securities Act, which of the following persons is an agent?

A CEO who sells shares of his company's IPO to family, friends, and other retail investors This question is about identifying when a person who represents the issuer of securities is considered an agent. Since the CEO is representing his company by selling its stock to the public, he is considered an agent of the issuer. One exclusion from the definition of an issuer agent exists when the individual effects transactions in securities that are exempt, such as U.S. government of municipal securities. Another exclusion from the definition is when the person is involved in exempt transactions, including private placements, sales to qualified purchasers, and transactions between the issuer and its underwriter. If an individual represents a broker-dealer in effecting securities transactions, he is always considered an agent and required to be registered.

A young, married couple are ready to start investing and their main objective is long-term growth. Of the following choices, the most appropriate mutual fund for the couple is one with a portfolio that contains:

40% large-cap stocks, 20% mid-cap stocks, 20% small-cap stocks, and 20% bonds The best choice for the young couple is a diversified portfolio that primarily consists of stocks along with a smaller percentage of bonds. When determining an appropriate asset allocation, a generally guideline is to start with the number 100 and subtract the investor's age to determine the percentage that may be devoted to equities. Although the question does not specify the ages of the couple, since they are young and want long-term growth, it should be assumed that a large percentage of equities is appropriate. Although Choice (b) is 100% equities, half of the portfolio is devoted to foreign stocks and is probably too risky.

A resident of State A buys a 4% general obligation bond offered by State B. The investor is in the 30% federal tax bracket and State A imposes a 5% tax. What is the bond's taxable equivalent yield?

5.71% The interest derived from a municipal bond is exempt from federal taxes, but is typically subject to state income tax. Since the State B bond is being purchased by a resident of State A, the interest must be declared as income and is subject to state income taxes. On the other hand, if the issuing municipality is located within the state in which the investor files her return, interest on the bond is exempt from state taxes as well. The formula for calculating the taxable equivalent yield for a tax-free bond is: Tax-free yield ÷ (100% - Tax rate %). For this question, the taxable equivalent yield is 5.71% (4% ÷ [100% - 30%]).

An investor who is in a high federal tax bracket and also subject to state and local taxes will benefit the MOST by purchasing:

A Commonwealth of Puerto Rico Water and Sewer bond The interest on bonds that are issued by territories and possessions of the United States is triple-tax-exempt (i.e., it is not subject to federal, state, and local income taxes). For that reason, these bonds are attractive investments for investors in high tax brackets. General obligation bonds and revenue bonds are the two types of municipal bonds and their interest is exempt from federal tax, but may still be subject to state and local tax. Interest on Treasury STRIPS is exempt from state and local tax, but still subject to federal income tax.

When a limited partnership is formed, which of the following documents is filed with the state in which the partnership operates?

A certificate of limited partnership To establish a limited partnership, most states require the filing of the certificate of limited partnership. The certificate of limited partnership discloses the existence of the partnership, the nature of the business, and the names of all partners. The articles of incorporation is filed to establish a corporation, not a partnership. The subscription agreement is used to establish the investor's suitability for investing in a limited partnerships, such as the income and net worth standards; it ultimately serves as a confirmation of their investment. A private placement memorandum is the disclosure document for partners that invest in a private placement.

Which of the following statements is NOT TRUE concerning agency cross trades executed by investment advisers?

A client may provide verbal authorization for up to 10 days. An agency cross trade occurs when an investment adviser acts as a broker for its client and for another person on the other side of the transaction. Agency cross trades are not permitted if the investment adviser recommends the trade to both the buyer and the seller—one side must be unsolicited. For cross trades to be executed, the adviser must: Provide a prospective client with a written disclosure regarding any potential conflicts that may arise Obtain written, revocable client consent Send the client a written confirmation which provides the date and details of the trade At least annually, send each client a summary of the adviser's agency cross activity

A 30-year-old single mother has income of $25,000 and has put money into an equity fund for her 12-year-old son's college education. She wants to balance out the risk with a small bond investment and is hoping to avoid accessing any of this money until her son turns 18. Which of the following securities is the MOST appropriate for the mother?

A government bond fund The most appropriate choice for the mother is to invest in a government bond fund. Since U.S. government securities have no credit risk, this choice will balance out the risk of the equity fund. Additionally, the fund will offer the benefit of a diversified portfolio of government securities. Choices (b) and (c) are NOT appropriate since they are direct bond investments. To explain the problem, let's assume that the mother needs the funds early due to an emergency and it is at a time that interest rates have increased. In this situation, since the bonds have a 15-year maturity, their values will have declined. Choice (d) is too risky for a person who only makes $25,000 per year. Remember, high-yield bonds are high-risk investments.

If a client is interested in purchasing a stock that has a high P/E ratio and a low dividend payout ratio, what type of stock should an IAR recommend?

A growth stock Growth stocks generally have high price/earnings (P/E) ratios and low dividend payout ratios. These companies tend to retain most of their earnings in order fund their continued expansion. A company's dividend payout ratio is the percentage of its earnings that are paid to investors. On the other hand, two characteristics of value stocks are low P/E ratios and high dividend payout out ratios (or high dividend yields). Cyclical stocks are simply stocks of companies whose values follow the business cycle (e.g., automotive, manufacturing). Defensive stocks are stocks of companies that are resistant to recession (e.g., utilities, cosmetics, pharmaceuticals)

What can investment advisers include in their contracts with clients?

A guarantee of performance against a benchmark; however, if it is not met, they will surrender their fee for the year Utilizing a fulcrum fee, investment advisers may guarantee performance against a benchmark. However, if the required performance is not achieved, the fee must be reduced or eliminated. This fee arrangement may only be offered to investment companies and clients with significant wealth. Exculpatory (hedge) clauses, failing to disclose conflicts of interest, and assigning contracts without client consent are all prohibited

A person is interested in investing in the oil and gas sector because she anticipates an increase in demand as the economy moves out of a recession. The person's IAR advises her on various vehicles to gain exposure to this sector, such as oil and gas mutual funds, oil and gas futures, options on the Oil and Gas Index, and oil and gas limited partnerships. When comparing these choices, what is one disadvantage of a limited partnership investment?

A limited partnership's interest is less liquid. Since limited partnership interests generally do not trade in the secondary market, investors may find it difficult to sell their interests if the need arises. On the other hand, mutual funds shares are redeemable, and options and futures can be closed out (traded) in the secondary market. Partnership interests can be used as collateral and can be offered to any type of investor. Only if partnership interests are offered through a private placement conducted under Reg. D is there is a limit on the number and types of investors that may participate.

According to SEC Release 1092, which of the following persons is considered an investment adviser?

A pension consultant who advises several large publicly traded companies Under the Investment Advisers Act of 1940, an entity must meet a three-part test to be considered an investment adviser. The three parts of the test are Advice, Business, and Compensation. SEC Release IA-1092 expanded the definition to specifically include financial planners, pension consultants, and sports and entertainment representatives as investment advisers.

According to the Uniform Securities Act, which of the following entities or persons must register as a broker-dealer in State A?

A person that is located in State A and executes securities transactions for its own account or the account of others. A person that executes securities transactions for its own account or the account of others is defined as a broker-dealer. Although choice (b) indicates that the entity is a broker-dealer, an exclusion from registration in a state is provided if the existing customers of the broker-dealer are temporarily in the state. Choice (c) describes an investment adviser.

Which of the following persons is required to register as an agent in State A?

A person who represents a broker-dealer that is located in State A and solicits securities transactions on an intrastate basis for clients' accounts. A person who represents a broker-dealer in securities transactions is defined as an agent. An agent who is located in State A is required to be registered in that state. Note the use of the term intrastate which in this case does not involve an issue of securities, but rather, securities solicitations that occur only within one state. As an exclusion from registration, agents who are not registered in a state may execute transactions for existing customers who are temporarily in that state. A person who represents an issuer in a securities transaction is not defined as an agent provided she is only dealing with exempt securities or involved in exempt transactions (e.g., a transaction between the issuer and its underwriter). The same is true for an employee of the government who effects securities transactions on behalf of the government

Which of the following persons must be registered as a broker-dealer in State B?

A person with a place of business in State B, but effects securities transactions with institutional clients in State B. Regardless of the types of clients it has, a person that has a place of business in State B and executes securities transactions in State B must be registered as a broker-dealer in the State B. In Choice (d), the person is not required to register in State B since it has NO place of business in State B and is only dealing with its existing clients who are not residents of State B. Exclusions from the broker-dealer definition are given to agents of broker-dealers (Choice a), issuers (Choice b), as well as banks, savings and loan companies, and trust companies.

According to the Uniform Securities Act, which of the following is an exempt security?

A public offering of U.S. government securities Choice (c) involves an exempt security. However, choices (a), (b), and (d) are examples of exempt transactions.

Which of the following choices is a characteristic of equity-indexed annuities?

A rate of return that varies with the value of the underlying index In an equity-indexed annuity, the insurance company guarantees the contract owner a minimum rate of return. However, the guaranteed return is never as high as the return of the actual index. The insurance company usually guarantees that the investor will receive most of her premium payments back plus a fixed return based on current interest rates. The investor's ultimate return may be higher than the minimum guaranteed rate depending on the performance of the index to which the contract is linked (choice [b])

A broker-dealer is registered and intends to sell stock from its own account to a client. Which of the following statements is TRUE?

After the completion of this transaction, the firm must disclose that it acted in a principal capacity. After a broker-dealer executes a transaction in a principal capacity, the firm is required to disclose its capacity on a confirmation statement. Firms that act in a principal capacity are able to charge a markup. (67296)

Under the Uniform Securities Act, which of the following firms is excluded/exempt from the definition of investment adviser?

All of the above According to the Uniform Securities Act, the following persons are excluded/exempt from the investment adviser definition—investment adviser representatives (IARs), banks, savings institutions, and trust companies, professionals whose investment advice is incidental to the practice of their professions (specifically, lawyers, accountants, teachers, and engineers), broker-dealers and their agents, and federal covered advisers. Choices (a) and (b) are examples of federal covered advisers since Choice (a) has assets under management of $115 million ($110 million or more determines FCA status) and Choice (b) is an adviser to a registered investment company (mutual fund). Choice (c) references a bank, and banks are not IAs

Which of the following is a risk-adjusted rate of return?

Alpha Alpha is risk-adjusted rate of return that measures the amount that a stock, bond, or portfolio returned above the expected rate of return, which is predicted by the CAPM formula. Duration and convexity are measures of interest-rate risk and do not specifically measure the performance of investments (i.e., they are not rates of return). Beta is also a measure of risk, specifically the degree to which an investment or portfolio moves in relation to the market as a whole. Beta is used to find the expected rate of return in the CAPM formula, but alone is not a measure of return.

Which of the following is a risk-adjusted return?

Alpha The difference between an investment's expected return (as indicated by its hypothetical position on the Security Market Line) and its actual return is considered its alpha. An investment's alpha is also referred to as its risk-adjusted return. Some analysts believe that stocks with positive alphas represent buying opportunities, while negative alphas are signals to sell. Alpha is also used to evaluate the performance of portfolio managers. Managers whose portfolios show positive alphas are considered to be adding value with their management skills.

All the following are characteristics of passive asset allocation strategies, EXCEPT:

Altering a portfolio in anticipation of an economic event A passive asset allocation strategy (e.g., buy and hold) is characterized by low transaction costs and minimal tax consequences. Systematic rebalancing, another passive strategy, alters the portfolio on a monthly, quarterly, or annual basis to restore an original strategic asset allocation if market movements have changed it. On the other hand, active (tactical) asset allocation strategies effect changes to a portfolio's allocation in anticipation of economic events.

Which of the following provides an option customer with the most flexibility if she wants to exercise her option?

An American style option American style is a method of option exercise which allows the option owner to exercise at any time during the option's life. All listed equity options use this flexible American style. On the other hand, European style is a method of option exercise which allows the option owner to exercise only on the day of expiration. Non-equity options (e.g., index and currency options) use European style

An IAR is comparing an S Corporation and a limited partnership for a client. What is an advantage of investing in an S Corporation that is not available with a limited partnership?

An S Corporation provides investors with more control over management decisions. In an S Corporation, its shareholders have voting rights, which provides some control over management decisions. However, in a limited partnership, taking part in management decisions jeopardizes an investor's status as a limited partner and may result in creditors of the partnership considering the investor to be a general partner with unlimited personal liability for debts of the partnership. Both of these business entities provide investors with limited liability. As with a limited partnership, an S Corporation's gains and losses flow through to its investors, but there is no way to determine which will pay more since the flow-through is based on the performance of the specific vehicle's management. An S Corporation is limited to 100 shareholders.

An investment adviser's contract with its clients may contain all of the following provisions, EXCEPT:

An exculpatory provision Advisers may not include provisions in contracts that claim to waive compliance with the Advisers Act or any of its rules. Therefore, contract language may not lead clients to believe they have waived any available right to take legal action against the adviser (i.e., through exculpatory clauses). Additionally, advisory contracts may not contain hedge clauses that absolve the adviser from liability or mandatory arbitration provisions. Contracts must provide provisions regarding the potential assignment of client contracts, provisions regarding the termination of contracts, and provisions regarding performance-based fees for certain types of clients.

According to the Uniform Securities Act, all of the following are excluded from the investment adviser definition, EXCEPT:

An insurance company Under the Uniform Securities Act, an exclusion from the investment adviser definition is given to investment adviser representatives (IARs), broker-dealers and their agents, publishers, professionals who provide incidental advice (i.e., lawyers, accountants, teachers, engineers), and federal covered advisers. There is no specific exclusion provided to insurance companies.

Under the Uniform Securities Act, which of the following persons is considered an investment adviser representative?

An office manager of an advisory firm who supervises salespersons, but does not have her own clients The Uniform Securities Act defines an investment adviser representative (IAR) as any partner, officer, director, or other individual who is associated with an investment adviser and, 1) makes recommendations or gives advice regarding securities, 2) manages accounts or portfolios of clients, 3) determines which recommendations or what advice should be given, 4) solicits, offers, or negotiates the sale of investment advisory services, or 5) supervises employees who perform any of these functions. In choice (c), although the office manager has no clients of her own, she is considered an IAR since she is responsible for supervising employees who manage accounts and offer investment advice.

An equity-indexed annuity is suitable for which of the following clients?

An person who needs a minimum guaranteed return with the potential for a greater return than CDs offer Equity-indexed annuities are NOT considered securities. Instead, they are hybrid products that combine elements of both fixed and variable annuities. The return of an EIA is linked to the performance of an underlying stock index. The insurance company that issues an equity-indexed annuity guarantees a minimum rate of return (as in a fixed annuity), but the annuity's ultimate return (which is capped) will vary depending on the performance of the index to which it is linked. To receive the EIA's guarantees, an investor must be willing to accept the limited potential gain.

A client sells an XYZ November 40 call and receives a premium of $300. What is the client's maximum loss?

An unlimited amount When and investor sells call options and does not own the underlying stock, the call writer has an unlimited potential maximum loss. If the underlying stock's price increases, the call seller/writer may be exercised against and forced to buy the stock in the market at its current higher price and subsequently sell at the lower strike price. Theoretically, the stock's potential upside is unlimited.

An investor maintains a portfolio of debt securities. She is concerned that the FRB may tighten the money supply, leading to an increase in interest rates. To measure the effect that this change will have on the value of her portfolio, which of the following choices will be the BEST in providing her with this information?

Analyzing the duration in her portfolio Duration is a measurement of how sensitive a bond's price is to small changes in interest rates. Bonds with longer maturities tend to be more sensitive to interest-rate swings—in other words, the bonds have longer durations. Conversely, bonds with shorter maturities are less sensitive to interest-rate swings—they have shorter durations.

When comparing variable annuities to fixed annuities, which TWO statements are TRUE regarding the assumption of investment risk? It is assumed by the investor in a variable annuity. It is assumed by the insurance company in a variable annuity. It is assumed by the investor in a fixed annuity. It is assumed by the insurance company in a fixed annuity.

Analyzing the duration in her portfolio Duration is a measurement of how sensitive a bond's price is to small changes in interest rates. Bonds with longer maturities tend to be more sensitive to interest-rate swings—in other words, the bonds have longer durations. Conversely, bonds with shorter maturities are less sensitive to interest-rate swings—they have shorter durations.

According to Uniform Securities Act, which of the following is NOT considered a state?

Any Canadian province When defining the term state, the Uniform Securities Act includes any state, commonwealth, territory or possession of the United States, including the District of Columbia and the Commonwealth of Puerto Rico. However, Canadian provinces are NOT considered to be states

All the following activities by an investment adviser representative are considered unethical, EXCEPT:

Arranging a loan for a client conducted through a broker-dealer that is affiliated to the investment adviser for the purpose of paying for stock which is recommended by the investment adviser representative. Choice (d) utilizes a margin account and is a situation in which a broker-dealer is permitted to lend money to a client. For choice (a), it is prohibited for an investment adviser representative to lend money to a client who sustained investment losses. Choice (b) is prohibited since a firm cannot make a promissory statement by telling a client that a stock's price will increase. The problem with choice (c) is that trades of excessive size or frequency which disregard a client's objectives or risk tolerance are prohibited regardless of the returns.

Under the Uniform Securities Act, an investment adviser must deliver a disclosure document (brochure) to a client:

At least 48 hours prior to signing the contract or, if given at the time that the contract is signed, the client must be given five days to rescind the contract A disclosure document (ADV Part 2 or a document containing the same information) must be provided to new clients at least 48 hours prior to the signing of the contract, or at the time of the contract signing with the customer. If provided at the time of the signing of the contract, the client must be given five days to rescind the contract. The disclosure document must be sent to existing clients at least annually. If an existing client requests a current copy of the disclosure document, it must be sent to the client within seven days of the request.

An investor is analyzing two bonds. Bond A has a 5% coupon and matures in three years; Bond B also has a 5% coupon, but matures in 10 years. If interest rates decline by 1%, what is to be expected?

Bond B's price will increase more than Bond A's price As interest rates change, prices of bonds with longer maturities will fluctuate more than prices of bonds with shorter maturities. When interest rates decline, all bond prices will rise; however, prices of bonds with longer maturities will increase more than prices of bonds with shorter maturities. For that reason, the price of Bond B (the 10-year bond) will increase more than the price of Bond A (the three-year bond). ***DURATION***

An investor has owned stock for several years and has an unrealized capital gain. If he is willing to sacrifice some yield in order to protect the unrealized gain, which option strategy is the BEST?

Buying puts on the stock Using options, the best way to hedge or protect an unrealized gain is to buy puts. The downside to buying puts for protection is the fact that the premium must be paid. If the stock's price stays flat or rises, the option will expire worthless. This will ultimately result in a loss of the premium, which will negatively affect the performance of the portfolio.

According to NASAA's Model Rule on Unethical Business Practices of IAs and IARs, all of the following are prohibited, EXCEPT

Charging the customer a reasonable advisory fee. Charging customers a reasonable fee is not prohibited. However, all of the other choices are considered unethical according to NASAA's model rule.

An investment adviser is registered with the state Administrator in State A. The fee structure, which is disclosed on the registration form, indicates a flat fee which will be assessed annually. What is an investment adviser representative's responsibility as it relates to disclosing the fee structure?

Clients must be provided with the IA's brochure at the time of, or before, the commencement of advisory services. The investment adviser's disclosure document, also referred to as its Brochure, must be a copy of Form ADV Part 2 or a document created by the investment adviser that contains specific information found in Form ADV Part 2. This document must be provided to the client at, or before, the time the advisory contract becomes effective. Advisers are not required to send their clients the entire Form ADV as indicated in choice (b).

If the average current ratio for a sector is 2.0, which of the following companies has the best short-term outlook?

Company A with a current ratio of 3.5 The current ratio measures the liquidity or short-term financial health of a company. The formula for calculating the current ratio is Current Assets ÷ Current Liabilities. Typically, a higher current ratio is a signal of a stronger business, especially in the short-term. Since company A has the highest current ratio and is higher than the sector average, it has the best short-term outlook.(

Which of the following measures the leverage of a company?

Debt-to-equity ratio The debt-to-equity ratio measures the leverage of a company (i.e., the amount that it has borrowed). Working capital and the quick asset ratio measure the short-term financial health (i.e., the liquidity) of a firm. The price-to-earnings (P/E) ratio measures the degree to which a company's share price has become over- or under-valued.

An agent is registered in State A and provides financial services to an older client who lives in State A. The client's son, who lives in State B, calls the agent and indicates his intention to open an account, but wants to immediately place an order to buy 1,000 shares of XYZ stock. If the agent is not currently registered in State B, what course of action should he take?

Decline the order Since the broker-dealer is not registered in State B, the order from the son must be declined. A broker-dealer is only permitted to effect transactions in a state(s) in which it is registered.

An investment adviser representative is preparing a financial plan for a client. As part of this process, he's helping her create a personal balance sheet and income statement. The income statement should include all of the following items, EXCEPT:

Depreciation on the primary residence Any appreciation or depreciation in real estate that the client owns is included on the client's balance sheet, not her personal income statement. Commissions, bonuses, interest, and dividends are all sources of income that should be included on the client's income statement.

An investment adviser representative has discretionary authority over a client's portfolio. The client's objective is conservative growth. According to the UPIA, which of the following statements is TRUE regarding the use of equity derivatives in his portfolio?

Derivative strategies may be appropriate as part of a conservative portfolio. The Uniform Prudent Investor Act (UPIA) guides a fiduciary (e.g., an IA, trustee, or custodian) when managing the assets on behalf of another person. Under the UPIA, categorical restrictions on specific types of investments have been removed; therefore, any investment may be appropriate as part of a well-balanced portfolio. For that reason, equity derivatives (options) and even futures may be used in the account/portfolio of a conservative client.

An investment adviser uses an unaffiliated broker-dealer to execute transactions for its clients, despite the fact that the broker-dealer charges higher commissions. Which of the following statements is TRUE?

Directing customer transactions to a broker-dealer that charges higher commissions is acceptable if the firm provides best execution An adviser directing customer trades to a broker-dealer that charges higher commissions is not necessarily unethical or prohibited, especially if the broker-dealer provides the best execution of trades. The fact that trades are directed to a specific broker-dealer must be disclosed to customers; however, approval of the state Administrator is not required

What is the name of the process by which an investor calculates the sum of the present values of projected cash flows to determine the fair market value of an investment?

Discounted cash flows When an investor takes an investment's future cash flows (e.g., dividends or interest payments) and calculates their present value, she is using discounted cash flow analysis. The process is referred to as discounting since the present value formula takes the future value and divides by the time value of money term, i.e., (1+r)t. Net present value takes the process a step further by subtracting the actual market price of an investment by the fair market value that is found in the discounted cash flow analysis

A client contacts an investment adviser representative to discuss the possibility of incorporating. Which of the following is a disadvantage of forming a C Corporation?

Double taxation The major disadvantage of a C Corporation is that its shareholders (owners) are taxed twice. The corporation must first pay taxes on its earnings at the corporate level, then its shareholders must pay personal income taxes on any income they receive from the corporation in the form of dividends

Which of the following factors is the BEST measure of a bond's volatility?

Duration Duration measures the price sensitivity of a particular bond based on changes in interest rates.

All of the following methods of ownership will avoid probate, EXCEPT:

Estate Probate involves the administering of a deceased person's will or the estate of a deceased person without a will. Due to court costs and the involvement of lawyers who collect fees from the estate, many people try to minimize the costs associated with the probate process. Holding assets as community property, joint tenants with right of survivorship, and pay on death will avoid probate since a beneficiary has been named in the event of death.

Which of the following statements is TRUE regarding American style versus European style exercise for option contracts?

European style options may only be exercised by the buyer on the business day of expiration. European style options may only be exercised by the buyer on the business day of expiration. However, American style options may be exercised by the buyer on any day up to, and including, the day of expiration. Only the buyer of the contract has the ability to exercise the option. In contrast, sellers are exercised against.

A client of an agent has instructed her to buy 1,000 shares of a Nasdaq stock as close to the opening price as possible. However, at 9:00 a.m., negative news about the company is released. If the agent placed a call to inform the client of the news, but has not yet reached him, what should she do?

Execute the trade Despite the news release, the agent is obligated to execute the trade based on the client's directions. Agents of broker-dealers are required to follow all lawful client requests when servicing their accounts. If a client indicates a desire to purchase, sell, transfer, or close an account, the agent has an obligation to properly execute the client's instructions in a timely manner. This rule applies even if the broker-dealer or agent has discretion over the account

According to the Uniform Securities Act, which of the following activities by an agent of a broker-dealer is unethical?

Executing orders to sell securities in a client's individual and joint account based on instructions from the client's spouse. Unless the client's spouse has been given specific authorization, executing these orders is unethical. An agent may exercise discretion over the price and/or time of execution, based on verbal authorization from the client. Agents are allowed to accept unsolicited orders to buy and sell securities. Agents are not required to send all clients a preliminary prospectus, but they are required to send a final prospectus to clients who purchase non-exempt securities.

According to the Uniform Securities Act, the application process for an investment adviser includes:

Filing a completed Form ADV and a Form U4 for each IAR who will be providing advisory services For an investment adviser, the application process includes the filing of a completed Form ADV and a Form U4 for each investment adviser representative who will be providing advisory services on behalf of the firm.

Under the Uniform Securities Act, amendments to an investment adviser's Form ADV must be filed promptly. On August 31, an investment adviser closes one of its branch offices and must therefore file an amendment. What constitutes a prompt filing with the IARD?

Filing the notice by September 30 of the current year Amendments to Form ADV are required to be filed promptly with the Investment Adviser Registration Depository. Under the Uniform Securities Act, a filing is done promptly if it is done within 30 days of the event that caused the filing requirement, which in this question is September 30.

An individual is licensed as an agent of a broker-dealer, an insurance agent, and an investment adviser representative. One of her clients is nearing retirement and explains that he intends to live off his investments and pension once he retires. He believes that his pension will provide the monthly income he needs to cover his basic expenses. His main investment objectives are to leave a substantial amount of assets to his grandchildren upon his death and to prevent a loss of purchasing power in the event that he lives another 20 to 30 years. The agent should NOT consider recommending a:

Fixed immediate annuity Based on the objectives of the client, the fixed immediate annuity is unsuitable. Since the insurance company assumes the investment risk of a fixed annuity, it will not be invested in such a way to provide protection of purchasing power. Additionally, since it is an immediate annuity, the funds are already being distributed to the annuitant and will not be available to his grandchildren upon his death. However, each of the other choices will satisfy the client's needs.

Assuming an expected rate of return, a specific holding period, and a sum to be invested, an IAR is able to determine an investment's:

Future value The future value of an investment is based on the present value of the amount invested, using a discount rate each year, and doing so over a given period of time. The assumption is that the annual return is reinvested at the same rate, or is compounded over the given time period, thereby resulting in a future value that exceeds the present value.

Under the Uniform Securities Act, an investment adviser is exempt from registration if it:

Has no place of business in the state, its only clients are institutional investors, and /or the adviser does not direct communications to more than five non-institutional clients within 12 consecutive months Under the Uniform Securities Act, the de minimis exemption for advisers is available if the adviser (1) has no place of business in the state and only advises institutional clients, or (2) has no place of business in the state and directs communications to no more than five non-institutional clients within 12 consecutive months.

An individual earns $35,000 per year and has contributed to his Individual Retirement Account (IRA) for each of the past two years. The company for which he works has recently instituted a pension plan. Since he's now covered by a corporate pension plan, which of the following statements is TRUE regarding his IRA?

He may keep the IRA and make a contribution of up to $6,000 each year. An individual who is covered by a corporate pension plan may continue to make contributions of up to $6,000 to an IRA. However, the contribution may or may not be tax-deductible. Any individuals who are age 50 or older may contribute an additional $1,000.

After conducting extensive research on XYZ Company, an agent believes that the company's prospects are very positive. The agent thinks the stock could easily double in the short-term and plans on sending out an e-mail to all of his customers recommending purchase of XYZ stock. How should the agent proceed?

He should reconsider his plan, since XYZ stock may not be appropriate for all of his clients. Agents should always have reasonable grounds for recommending a particular security and must ensure that the recommendation is suitable for each client to whom the recommendation is made. When determining suitability, agents depend on the information obtained from clients, such as financial status, needs, objectives, and willingness to assume risk. The same recommendation being made to all of the agent's clients is likely an unsuitable practice.

Which TWO of the following factors are used in a discounted cash flow (DCF) analysis? Present value of future cash flows Expected rate of return earned on reinvested cash flows Future value of current cash flows Expected risk-free rate of return over the life of the investment

I and II Discounted cash flow analysis uses the present value formula and applies it to an investment with multiple future cash flows (e.g., the interest and principal payments of a bond). In order to find the present value of a single cash flow, an investor needs the future cash flows, an expected rate of return (i.e., discount rate), and the number of years until the future cash flow will be received. The risk free-rate of return is used in the Capital Asset Pricing Model (CAPM) formula and is generally not required when performing a discounted cash flow analysis.

According to the National Securities Markets Improvement Act (NSMIA), which TWO of the following federal covered securities are subject to notice filing? Investment company securities Securities sold under Rule 506 of Regulation D Exchange listed securities Securities sold to qualified purchasers

I and II Notice filing is required of issuers of investment company securities as well as issuers that distribute their securities pursuant to a Rule 506 private placement. Notice filing refers to a state's demand that certain issuers of federal covered securities satisfy state requirements such as signing a consent to service of process, paying a filing fee, and possibly filing with an Administrator any copies of material that has been filed with the SEC as a part of the issuer's federal registration.

According to the Uniform Securities Act, in which TWO of the following cases is an investment adviser exempt from sending clients a written disclosure document under the Brochure Rule? The adviser's clients are only investment companies. An adviser provides impersonal advisory services to online subscribers that cost $250 per year. An investment adviser has no office in the state. The adviser's clients are select institutional investors.

I and II According to the Uniform Securities Act, an investment adviser must satisfy the Brochure Rule and provide its clients or prospective clients with a disclosure document (usually Form ADV Part 2). Exceptions to this rule are made available if the adviser's only clients are investment companies or for contracts which involve impersonal advisory services that cost less than $500.

In a soft-dollar arrangement, which TWO of the following choices are benefits that would justify a broker-dealer charging a higher commission to an investment adviser? Software to conduct research Payments for advertising and marketing Seminar attendance fees Computer terminals

I and III Soft-dollars are broadly defined as commission rebates that money managers (IAs) receive for channeling some or all of their trades through certain brokerage firms. The key is that the service(s) the adviser receives as part of a soft-dollar arrangement must benefit its clients and be reasonable in relation to commissions paid. Soft-dollars may be used to acquire traditional research reports, software for analyzing portfolios, certain types of trading software, and the coverage of attendance fees to securities seminars. Soft-dollars may not be used to acquire payments for advertising and marketing, travel expense reimbursement, or computer terminals

Which TWO of the following statements are TRUE regarding a time-weighted rate of return? It may be used to compare the performance of two money managers. It is a way of calculating an investor's internal rate of return. It does not consider the inflows and outflows of cash. It measures the average return that a client's investment earned.

I and III Time-weighted return is used to compare the performance of two money managers. Since managers cannot control when investors either deposit or withdraw their funds, the time-weighted return does not consider inflows and outflows. Dollar-weighted return is used to calculate a client's internal rate of return and takes into account how much the client earned based on the amount of money invested.

Which TWO of the following statements are TRUE regarding an investment adviser that maintains custody of its clients' assets? The securities must be deposited with a qualified custodian. The securities must be held in a vault that is maintained by the firm. A notice must be sent to the clients to indicate the secure location or custodian of the securities. Annual statements must be sent to each client of the investment adviser.

I and III According to Rule 206(4)-2 of the Investment Advisers Act of 1940, it is a deceptive trade practice to maintain custody (safekeeping) of client funds and securities unless they are held by a qualified custodian. When the IA opens an account with a qualified custodian, the client must be informed of the name and address of the custodian. Clients must be provided with account statements at least quarterly (NOT annually).

A Canadian broker-dealer may continue to effect transactions for its Canadian clients who are in the U.S. temporarily, provided it satisfies which TWO of the following? It is a member of a self-regulatory organization or stock exchange in Canada It establishes an office in the appropriate state It effects transactions only with Canadian residents who are in the U.S. temporarily It only allows investors to trade exempt securities

I and III According to the Uniform Securities Act, a Canadian broker-dealer may continue to transact business with its existing Canadian clients who are in the U.S. state temporarily. Additionally, the broker-dealer must have a place of business in Canada, be a member of an SRO or stock exchange in Canada, and file an application and consent to service of process with the state Administrator.

Which TWO of the following statements are most likely considered violations of the USA's antifraud rules? "Our representative's investment acumen has been verified by the state Administrator." "To stay current, each of our representatives attends at least five tax planning or investment seminars per year." "Each of our investment experts is Series 66-certified." "Our representatives are CFP accredited."

I and III As it relates to communication with clients, the USA's antifraud rules prohibit the use of inflated language or excessive claims. The issue with Choice (I) is that the Administrator does not verify the abilities of representatives. The issue with Choice (III) is the use of the term "experts" as it relates to IARs. Statements of fact are permitted, which is what Choices (II) and (IV) provide.

Which TWO of the following choices are considered derivatives? Interest-rate swaps Unit investment trusts (UITs) Credit default swaps (CDS) Mutual funds

I and III Derivatives are securities whose value is determined by an underlying asset on which it is based. If the price of the underlying asset changes, the value of the derivative will change with it. Some examples of derivatives include options, swaps, futures, and forwards. Both unit investment trusts (UITs) and mutual funds are considered forms of investment companies

According to the Uniform Gifts to Minors Act, a person may do which TWO of the following? Give an unlimited amount of cash Give only up to $15,000 in cash Give securities Revoke any gifts that are given

I and III Gifts that are given to an UGMA account may be in the form of cash and/or securities. There is no limitation on the amount of a gift that may be given to a minor. However, if a gift of greater than $15,000 is given, the amount exceeding $15,000 is subject to the gift tax. Any gifts that are made to UGMA accounts are irrevocable.

Two friends are forming a business. They want the benefits of incorporation, but want to protect their personal assets and also avoid being taxed twice on any profits that the business generates. Which TWO structures will meet their needs? An S Corporation A C Corporation A limited partnership A limited liability company

I and IV To meet their needs, the friends should consider forming the business as either an S Corporation or a limited liability company (LLC). Both S Corporations and LLCs avoid corporate taxation by electing to pass their corporate income, losses, deductions, and credits through to their owners. Therefore, shareholders of S Corporations and LLCs report the flow-through of income and losses on their own personal tax returns and are assessed tax at their individual income tax rates (thereby avoiding double taxation)

The accountant for a registered investment adviser representative has expressed an interest in directing accounting clients to the IAR's firm for investment advisory services. If the accountant wants a referral fee for his efforts, which TWO of the following statements are TRUE regarding this arrangement? There must be a written agreement between the investment adviser and the accountant. The investment adviser may not pay more than $250 for each client referral. The accountant must not have been convicted of any felonies or securities-related misdemeanors. The accountant must be fingerprinted and file a copy with the state securities Administrator.

I and III In order for a person to act as a solicitor for an investment adviser, three conditions must be met: (1) the adviser must be licensed, (2) the agreement between the solicitor and the adviser must be in writing, and (3) the solicitor must not have been statutorily disqualified from association with an investment adviser either because he was convicted of a felony or securities-related misdemeanor during the last 10 years or by order of the SEC. The solicitor must also disclose to clients the nature of his relationship with the adviser. The exact form that this disclosure must take depends on the nature of the arrangement between the solicitor and the adviser. Additionally, the adviser must retain a copy of its agreement with the solicitor for its records.

The investment adviser of the ABC Fund typically invests a high percentage of the fund's assets in growth stocks, but has recently turned bearish on the market. Which TWO of the following strategies should be utilized based on the IA's bias? Buy puts on the growth stocks Buy calls on the growth stocks Increase cash levels in the portfolio Decrease cash levels in the portfolio

I and III The best choice for the adviser is to hedge (protect) the stocks in the portfolio by purchasing puts on those stocks. This gives the adviser the ability to sell the stocks at a predetermined price if they were to decline in value. Depending on the adviser's long-term view of the market versus those stocks, it could also choose to maintain possession of the stocks, but later sell (close-out) the puts for a much higher premium than what it originally paid for them. This assumes that the market decline occurs. Either way, the adviser should raise cash in the portfolio so that it is able to purchase the securities that it believes are undervalued when (and if) the decline occurs.

An investment adviser has no place of business in State A. According to the Uniform Securities Act, in which TWO of the following situations is the firm required to register as an investment adviser in State A?The firm only provides advice to accredited investors in State A.The only client the firm has in State A is a pension fund.Over the last 12 months, the firm has provided advice to 10 retail customers who are residents of State A.The firm is registered under the Investment Company Act of 1940.

I and III Under the USA, there are two situations in which a person that meets the definition of an investment adviser is considered exempt from registration. The first exemption is when the adviser has no place of business in the state and the adviser's only clients are institutional investors. The second exemption is when the adviser has no place of business in the state and the adviser does not direct communications to more than five non-institutional clients in the state within 12 consecutive months. In this question, although the firm has no place of business in State A, choice (I) indicates that the adviser's clients are accredited investors (as defined under Regulation D). To be exempt, the firm's clients must be institutional investors; however, the reference to accredited investors does not specifically mean that all of the investors are institutional (individual investors who meet a financial test are included as accredited). Choice (III) indicates that the adviser has 10 retail (non-institutional) clients, but to be exempt, it may have no more than five retail (non-institutional) clients.

As fiduciaries, investment adviser representatives must do which TWO of the following? Engage in actions that are exclusively in their clients' best interest If any conflict of interest exists, abstain from any action If any conflict of interest exists, a public record must be published Disclose any potential conflict of interest to their clients

I and IV IAs and IARs are prohibited from engaging in fraudulent, deceptive, or manipulative conduct in their activity as fiduciaries. Rather than solely pursuing their own personal gain, fiduciaries have an affirmative duty to act in good faith and in the best interest of their clients. Any conflicts of interest that arise for IAs or IARs must be fully and fairly disclosed to clients at or prior to the time that the conflicts occur.

Which TWO of the following statements regarding investment advisory contracts are TRUE? Under the Uniform Securities Act, IA contract must be written Under the Uniform Securities Act, IA contracts are not required to be written Under the Investment Advisers Act of 1940, IA contracts must be written Under the Investment Advisers Act of 1940, IA contracts are not required to be written

I and IV State law (the USA) requires that contracts between clients and state-registered advisers be in written form. However, federal law (the IA Act of 1940) does not require investment advisory contracts to be in written form. Despite this, as a matter of good business, most advisers formalize client contracts with a written agreement.

Which TWO of the following retirement plans typically have a zero cost basis? A 401(k) A Roth IRA A Coverdell IRA A traditional IRA

I and IV The phrase "zero cost basis" refers to a retirement plan that has been funded on a pre-tax basis, with tax-deferred earnings growth. Of the choices given, a zero cost basis typically exists for 401(k) plans and traditional IRAs (assuming the IRA is funded by a person whose employer does not sponsor a retirement plan). Both Roth IRAs and Coverdell Education Savings Accounts are funded after-tax; therefore, the investor immediately establishes a cost basis.

A Nasdaq listed company is offering 1,000,000 shares of common stock in State A. The Administrator in State A may: Not require registration of the stock in State A. Require the issuer to perform notice filing. Require the issuer to pay a fee. Investigate the underwriter for possible fraud in connection with the offering.

I and IV only Securities that are listed on a national exchange (e.g., Nasdaq, NYSE, or AMEX) are referred to as federal covered securities and, therefore, are not required to be registered at the state level. Additionally, if the federal covered security is listed on an exchange, the state may not require the issuer to pay a fee, submit a notice filing, or provide a consent to service of process. However, the state Administrator may investigate any broker-dealer (including the underwriter) that participates in the offering for fraud or deceit and file an enforcement action if it is warranted.

The factors that assist in determining a client's risk tolerance include: Income Age Personality Net worth

I, II, III, IV A person's risk tolerance is based on income, age, personality type, net worth, as well as any other relevant details. For instance, family considerations may also influence a person's risk tolerance.

Disadvantages of investing in a C Corporation include which of the following choices? Shareholders are taxed on dividends that they receive. The corporation is taxed on its income. Shareholders may not deduct their share of the corporation's losses on their personal tax returns. Shareholders are paid last if the corporation liquidates.

I, II, III, and IV All of the choices are disadvantages of investing in a C Corporation

Which TWO of the following are TRUE of most 457 plans? Contributions are non-deductible (after-tax) Contributions are deductible (pre-tax) Eligible participants are certain employees of state and local government entities Eligible participants are employees of public school systems

II and III A 457 plan is a form of non-qualified deferred compensation plan which offers features that are similar to a qualified plan. These plans allow participants to contribute on a deductible (pre-tax) basis and the earnings grow tax-deferred. The eligible participants include employees of certain state and local governments.

Under NASAA's Statement of Policy on Unethical Business Practices and regarding a customer order, an agent is considered to be exercising discretionary authority if the client DOES NOT specify which TWO of the following? The price of execution The specific security and number of shares to be bought or sold Whether to buy or sell The time of execution

II and III If a client's order does not specify the action (whether to buy or sell), the amount (e.g., the number of shares), and the asset (e.g., the specific stock), the order is considered discretionary and power of attorney is required. However, if an agent receives a client's order which specifies the action, amount, and asset, but the agent is able to determine the time and/or price of execution, the order is not considered discretionary

An investor has set aside a large sum of money to purchase a corporation. The legal details of the acquisition should be completed within the next six months, but he is unsure of the exact date on which this will happen. If the investor decides to temporarily invest his money in Treasury bonds until he needs the funds to complete the purchase, which TWO of the following risks are the most serious for him? Currency risk Interest-rate risk Timing risk Credit risk

II and III In a variable annuity, the investment risk is assumed by the investor. In fact, for variable contracts, the insurance company directs the assets to a separate account. In a fixed annuity, the investment risk is assumed by the insurance company. For fixed contracts, the insurance company directs the assets to its general account.

Which TWO of the following statements are TRUE regarding TIPS? During a period of inflation, the interest rate is adjusted upward. During a period of deflation, the principal is adjusted downward. During a period of inflation, the principal is adjusted upward. During a period of deflation, the interest rate is adjusted downward.

II and III Treasury Inflation Protected Securities (TIPS) have a fixed coupon rate, but have a principal amount that is periodically increased or decreased based on changes in the Consumer Price Index (CPI). The semiannual interest payments for TIPS are calculated based on the adjusted principal. The CPI is a key measure of inflation. If the CPI rises (inflation), the principal of TIPS will rise; however, if the CPI falls (deflation), the principal of TIPS will fall.

Under NASAA's Statement of Policy on Unethical Business Practices, unethical activities of an investment adviser include: Exercising discretion for a limited period based on oral instructions Charging a client an excessively high advisory fee, as long as the client agrees to the terms Failing to disclose compensation arrangements that are connected with advisory services

II and III only NASAA's Statement of Policy on Unethical Business Practices prohibits unreasonable fees. To make this determination, Administrators will research the competitiveness of fees and the advisory services provided to clients. Even if the client does not object to the fee amount, excessive fees are not permitted. Advisers are required to provide written disclosure of any material conflict of interest that could impair the rendering of unbiased and objective advice. Investment advisers are permitted to exercise discretion based on oral instructions for up to 10 business days.

Which TWO of the following are TRUE regarding an agent selling away? The agent must provide verbal or written notification to her supervisor. The agent must provide written notification to her firm. The agent must notify the state securities Administrator or the SEC. The agent must receive her firm's written permission before executing a transaction.

II and IV An agent who wants to sell securities outside of her normal course of employment must first provide written notification to her firm regarding the proposed transactions and must receive her firm's written permission. The notice must provide details of the proposed private securities transactions. If the firm approves of the agent's activities, then it is responsible for supervising the transactions and recording them in its books and records

Which TWO of the following persons are required to register as agents according to the Uniform Securities Act? The CEO of a company who sells his company's new issue of stock to its underwriter A life insurance salesperson who solicits sales in separate account products An outside consultant who has entered into a contract with a municipality to assist in the marketing of its debt obligations A branch manager of a brokerage firm who supervises several salespersons who are engaged in the sale of securities

II and IV The two persons who are required to register as agents are the insurance salesperson who is selling separate account products and the branch manager who supervises salespersons who engage in securities sales. Remember, separate account products are associated with variable contracts and variable contracts are considered securities. At the state level, to offer securities products, a person must be registered as an agent. Although the branch manager does not have her own customers, to be responsible for supervising agents, she too must be registered as an agent. Choices (I) and (III) both relate to persons representing the issuer who are not required to register as agents, either because they are involved in an exempt transaction (between issuer and underwriter) or because they are involved in the sale of an exempt security (municipal debt obligations)

XYZ broker-dealer is located in State A and maintains its only office there. Under the Uniform Securities Act, XYZ will NOT be considered a broker-dealer in State B in which TWO of the following situations?It sells securities to an investment club that is located in State BIt engages in securities sales with no more than five retail investors who are residents of State BIt conducts business only with financial institutions in State BIt enters into a transaction with a resident of State A, who is temporarily visiting State B

III and IV According to the USA, there are two exclusions from the broker-dealer definition that are necessary to answer this question. The first is that a person is NOT considered a broker-dealer in a state if it has no place of business in the state AND only transacts business with issuers, other broker-dealers, financial institutions, or institutional buyers (Choice II). The second is that a person is NOT considered a broker-dealer in a state if it has no place of business in the state AND is registered where the person maintains its place of business AND only conducts business with existing retail clients who are not residents of the state (e.g., clients on vacation, attending school, or working in another state), which is the case in Choice IV. The investment club referenced in Choice I is not considered an institutional investor since it could simply be a group of retail investors. As for Choice II, broker-dealers are not offered a de minimis exemption for the number of retail clients it can have in a state in which it has no office. At the state level, the exemption that allows a person to have no more than five clients in a state without being registered there is only available to investment advisers.

When comparing asset allocation strategies, passive and active strategies can be characterized in which TWO ways? I. Some active strategies seek to restore the volatility of the portfolio to its original level if it deviates due to securities' price movements. Passive strategies are based on the premise that markets are inefficient. Some passive strategies seek to restore the volatility of the portfolio to its original level if it deviates due to securities' price movements. Active strategies are based on the premise that markets are inefficient.

III and IV Active (tactical) asset allocation involves the belief that securities markets are not perfectly efficient may try to use an active strategy (i.e., market timing) to alter the portfolio's asset mix in an effort to take advantage of anticipated economic events. Conversely, passive (strategic) asset allocation involves buying and selling assets on a periodic basis. Through rebalancing, the intent is to restore or retain the original asset allocation—and its risk/reward characteristics.

Which TWO of following situations are disadvantages of portfolio rebalancing? Appreciating assets are retained while depreciating assets are sold. The risk-reward characterizations of the portfolio are retained. There are increased tax liabilities due to the sale of appreciated assets. There are increased transaction costs.

III and IV The important thing to recognize in this question is that it is inquiring about the disadvantages of portfolio rebalancing. Portfolio rebalancing involves buying and selling assets on a periodic basis. Through rebalancing, the intent is to restore or retain the original asset allocation—and its risk/reward characteristics. More frequent rebalancing will keep the portfolio closer to its strategic allocation; however, the rebalancing may result in higher transaction costs and increased tax liabilities as some assets are sold and others are purchased.

The retention requirements for the books and records of investment advisers and broker-dealers are: Five years for a broker-dealer with two years easy accessibility Three years for investment advisers with two years easy accessibility Three years for a broker-dealer with two years easy accessibility Five years for an investment adviser with two years easy accessibility

III and IV only The requirements for maintaining books and records specify three years for a broker-dealer and five years for an investment adviser. In each case, broker-dealers and investment advisers must maintain the most recent two years of records in an easily accessible location and in their original condition.

Which of the following statements about discounted cash flow (DCF) analysis is TRUE?

If the net present value of an investment is greater than zero, it represents a good investment opportunity. Discounted cash flow analysis uses an estimate of future cash flows (e.g., dividends and interest payments) to estimate the current value of an investment (i.e., the present value of the investment). If the present value of an investment is calculated and it is compared it to the investment's current market price, the net present value (NPV) is determined. A positive NPV means that the investment can be purchased for less than its present value. In other words, the DCF analysis indicates that with positive NPV the investment will pay out more in the future than what it costs to purchase. For that reason, positive NPV represents a good investment opportunity.

Which of the following is NOT considered an active portfolio management strategy?

Indexing Investors who subscribe to the Efficient Market Hypothesis believe that market timing is ineffective. These investors usually favor passive asset allocation strategies, including buy-and-hold and market indexing strategies. Indexing involves maintaining investments in companies that are part of major stock (or bond) indexes, such as the DJIA and the S&P 500. Each of the other choices are references to active (tactical) asset allocation.

Which of the following types of risk is MOST associated with the purchase of a five-year T-bond?

Interest-rate Interest-rate risk, which is also referred to as money-rate risk, is essentially the risk that if interest rates rise, the prices of the debt securities will fall. If an investor needs to liquidate her debt investment prior to maturity, rising interest rates reduce the value she would receive if she sold the security in the secondary market. Market risk is primarily associated with common stock. Since the secondary market for Treasuries is very active, liquidity risk is not a factor. Although legislative risk (changes in the law) could create diminished value for the instruments, it is not likely to occur.

When calculating the current ratio of a corporation, all of the following are included, EXCEPT:

Net income The formula for calculating the current ratio is current assets of a firm divided by its current liabilities. Both accounts receivable and inventory are current assets and are therefore included. Accounts payable is a current liability on a company's balance sheet and is also included. However, net income is not actually included on a firm's balance sheet; instead, it appears on the income statement. As a result, net income is not needed when calculating the current ratio.

A married couple wants to pay off their mortgage when they retire in 15 years, which will require $60,000. After receiving an inheritance of $30,000, they meet with their investment adviser representative for help in determining the lowest annual rate of return that they need to earn on the inheritance in order to use it to pay off the mortgage in 15 years. The IAR tells them the rate is 4.75%, which is referred to as the:

Internal rate of return This question relates to the formula for present value. In this question, the couple knows the present value of their investment (the $30,000 inheritance) and also knows the future value that they need ($60,000 to pay off their mortgage). The part that is missing is the rate of return that is required to make the $30,000 grow to $60,000 in 15 years. This return is referred to as the internal rate of return.

Regarding inverse ETFs, which of the following statements is TRUE?

Inverse ETFs use derivatives in order to move in opposition to the underlying index. Inverse ETFs are designed to give investors a return that's roughly equivalent to shorting a stock index. When the underlying index is falling, inverse ETFs should be increasing in value. The inverse ETF does this by actually selling stock short and using derivatives, such as options and futures. These products will actually reset their portfolios on a daily basis and are typically suitable for short-term investors.

From a compliance standpoint, which of the following activities causes the greatest concern when determining if there are conflicts of interest between an advisory firm and its clients?

Investment adviser representatives are allowed to own the same securities that the firm recommends to its clients. Of the choices listed, the greatest concern is when IARs are permitted to own the same securities as those being recommended to clients. One potential concern that could arise from this includes trading ahead (IARs placing their own personal trades before client trades

Which of the following is an advantage of investing in a hedge fund?

Investment strategies which could potentially outperform the market as a whole For most investors, an advantage of investing in hedge funds is that they engage in sophisticated investment strategies, which could potentially outperform the market. Some of the disadvantages of hedge funds include the lack of liquidity, less transparency than other investments, and higher fees.

Which of the following statements is TRUE regarding a client's occupation as it relates to her financial status and the suitability of recommendations?

It can influence the liquidity needs of the client's portfolio. Some clients have stable jobs that provide a steady, reliable income, while others may have jobs that provide volatile and unpredictable income. Obviously, a person's occupation represents how she makes money, but it is also an important factor in determining her liquidity needs. If a client's income is somewhat unstable, an adviser should be mindful of this when making investment recommendations since she has greater liquidity needs.

Which of the following statements best describes an equity-indexed annuity?

It is a fixed annuity that offers the potential for greater returns. An equity-indexed annuity (EIA) is a type of fixed annuity and is not a security. Since an EIA is not a security, these contracts are not required to be registered with the SEC. The owner receives a guaranteed minimum interest rate; however, there is potential upside since the rate of return is based on the performance of an index (e.g., the S&P 500 Index). If the index underperforms, the investor receives the guaranteed minimum rate, but if the index performs well, the investor receives the indexed return up to a maximum capped rate.

Which of the following is TRUE of the investment policy statement of a qualified retirement plan?

It is a written document that describes the plan's investment objectives and guidelines The investment policy statement of a qualified retirement plan describes the plan's investment objectives and strategies. It may describe the types of assets to be purchased, the plan's risk tolerance, time horizons, and long-term goals. As for choice (d), a legal list is a type of state statute that limits fiduciaries to certain types of investments. In contrast, qualified retirement plans are subject to the prudent investor standard, which is outlined in ERISA

An investor may purchase interests in a limited partnership for all of the following reasons, EXCEPT:

It is an illiquid investment Limited partnerships offer investors many potential advantages, including the ability to deduct non-cash expenses (e.g., depreciation and depletion) against any passive income that is generated by the partnership. Unlike corporations, partnerships are not subject to income taxes; therefore, any tax consequences flow through to the investors.

Two lifelong friends intend to open a joint trading account, with each contributing $30,000 to the account. Upon the death of either owner, each wants her share of the account to revert to her individual estate. The type of account the friends should open is:

Joint tenants-in-common The friends should open a joint tenants-in-common (JTIC) account. In a JTIC account, each owner's interest in the account will pass to her estate upon death.

Which of the following types of stocks is the MOST suitable for a conservative investor who has a low-risk tolerance, but wants to invest in equity securities?

Large-caps Large-cap stocks are those that are generally issued by well-established companies that have a long history of profits and dividend payments. Of the choices given, the large-cap category is the most suitable for the investor with a low-risk tolerance and an interest in equities.

Two friends are starting their own business and are trying to decide whether to organize this new business as an S Corporation or a general partnership. What is a significant advantage of an S Corporation compared to a general partnership?

Limited liability (original and wrong answer was favorable tax treatment, which is an advantage of a partnership, S corp has limited liability due to more shareholders, general partners have unlimited liability) If they form a general partnership, both partners are fully liable for the partnership's debts. (Limited partners are not fully liable; however, the question gives no indication that one of the partners will be a limited partner.) In an S Corporation, the owners are not fully liable for the company's debts—they have only limited liability. As for choice (a), both entities receive favorable federal tax treatment. Since both business entities are pass-through vehicles for tax purposes, all losses and profits are passed through to the owners.

According to NASAA's Statement of Policy Regarding Dishonest and Unethical Business Practices, which of the following statements regarding customer accounts is TRUE?

Margin agreements must be signed promptly following the first transaction. Margin agreements must be signed by a client, but the signature may be received after the first transaction. Customers are able to place orders with their broker-dealers over the phone, they are not required to be written. Conversion, which is defined as the unauthorized use of client assets for personal use (e.g., theft), is always prohibited. An agent is allowed to borrow from or lend money to immediate family members.

The beta of a stock would be useful when measuring:

Market risk Market risk (also referred to as systematic risk) refers to the risk that is inherent in all securities due to general market volatility and it cannot be eliminated by diversifying a portfolio. A stock's beta is a measure of its market risk (its volatility when compared to the volatility of the whole market). The market (the S&P 500 Index) has a beta of 1; therefore, stocks with a beta of more than one are more volatile than the market. Conversely, stock with a beta of less than one are less volatile than the market.

An issuer is seeking to raise capital through a private placement offering. The company is located in State A and does not want to incur registration expenses for the offering at either a state or federal level. To satisfy the issuer's goal, the offering:

May be offered to institutional investors in State A without any registration By selling the securities to only institutional investors in State A, the issuer will be able to avoid registration at either the state or federal level. Remember, if an offering is conducted within only one state, federal regulations will not apply. For that reason, initially choices (b), (c), and (d) seem to work, but both (c) and (d) have problems. Choice (c) indicates that the securities may be offered to a maximum of 35 non-accredited investors; however, a private placement at the state level allows for no more than 10 non-accredited investors. Choice (d) references accredited investors which are defined under Regulation D as officer/directors of the issuer, institutions, and individuals who meet a financial test. Since choice (d) does not indicate a limited number of investors, Choice (b) is a better answer

A company whose stock is listed on the NYSE intends to issue additional shares in State X. The Administrator of State X:

May not require the registration of the offering in State X. Securities that are listed on a national exchange (e.g., NYSE, Nasdaq, or AMEX) are referred to as federal covered securities and, therefore, are not required to be registered at the state level. Additionally, if the federal covered security is listed on an exchange, the state may not require the issuer to pay a fee, submit a notice filing, or provide a consent to service of process. However, the state Administrator may investigate any broker-dealer (including the underwriter) that participates in the offering for fraud or deceit and file an enforcement action if it is warranted.

An entertainment representative for a number of famous actors is approached by a journalist who is doing research for a favorable article about one of his clients. The client has been very outspoken about the environment and limits his investments to socially responsible companies. The representative handles his client's investments and has discretion over the account. If the journalist wants the representative to provide her with a listing of some of the client's investments, the representative:

May only release the information if he receives his client's written permission Investment advisers may not release financial information regarding their clients without the written permission of the clients. In this question, although the representative has discretion over his client's investment activities, he may not release private financial information without his client's permission or unless he is compelled by law to do so.

Regarding the influence of market risk on personal investments, an investor can:

Minimize market risk by investing in low-risk, low-return investments Market risk, also referred to as systematic risk, refers to the risk that is inherent in all securities due to market volatility. An investor can minimize market risk by investing in low-risk, low-return instruments (e.g., cash equivalents).

An investor has a portfolio comprised of large-cap, mid-cap, and international equities. To which of the following risk is the investor LEAST exposed?

Money-rate In this question, the equity portfolio may be subject to business risk, regulatory risk, and currency risk. Business risk is simply the risk that a business may not be profitable or may be unable to meet its goals. Regulatory risk is based on the fact that changing laws could have a negative impact on the business. In this question, currency risk is being assumed since the portfolio consists of international equities, which may involve the need to exchange foreign currencies into U.S. dollars. However, since the portfolio consists of equities, money-rate (interest-rate) risk less likely to be a concern. Money-rate risk is more likely to be associated with bond portfolios.

Asset A has a correlation of +0.95 with Asset B. The assets:

Move in the same direction Correlation is the degree to which two assets or investments move in the same direction. The highest possible correlation is +1.00. Therefore, if two assets have a correlation of +0.95, they will move in the same direction most of the time. Assets with correlation approaching -1.0 will move in the opposite direction. A correlation of 0 means that the two assets are uncorrelated and don't move in predictable patterns with one another.

If an investment adviser receives an advisory fee of $5,000, six months in advance, the adviser:

Must provide the client an audited balance sheet An investment adviser is required to provide its clients with an audited balance sheet (financial information) if it 1) has custody of client funds or securities, 2) has full discretionary authority over a client's account, or 3) solicits prepayment of advisory fees. For federal-covered advisers, the prepayment amount is more than $1,200, six months or more in advance. However, for state-registered advisers, the prepayment amount is more than $500, six months or more in advance.

A company's price-to-earnings (PE) ratio measures:

The value of $1.00 EPS The price-to-earnings (PE) ratio measures the amount that investors will pay for $1.00 in earnings from a company. The PE ratio is an easy way to measure how over or undervalued a stock is relative to its EPS. A company with a low PE ratio is a bargain, since the share price (i.e., the "P") is lower and earnings (i.e., the "E") are higher. On the other hand, a company with a high PE is overvalued, since the stock price is higher and earnings are lower.

An investment adviser maintains its home office in State A and is also registered there. State A has a minimum financial (net worth) requirement of $70,000. The firm intends to open an office and provide advisory services in State B, which has a minimum financial requirement of $80,000. Is any action required for the adviser to open the office in State B?

No, it is only required to satisfy the requirement of its home state. According to the Uniform Securities Act, an investment adviser's minimum financial requirement is set by the state in which the adviser maintains its principal place of business. No other state may impose higher requirements than the adviser's home state. For that reason, this adviser is only required to satisfy the $70,000 requirement of its home state (State A).

A client will be traveling and wants her IAR to have check-writing privileges so that he is able to pay her utility bill while she is away. Her IAR should

Obtain full power of attorney from the client For the IAR to be given check-writing privileges, the client must provide full power of attorney. If the IAR was only being asked to buy or sell securities in the client's account, limited power of attorney would be sufficient. Durable power of attorney is only necessary if the client wants the IAR to have the ability to make decisions in the event that the client becomes incapacitated.

Securities that are registered through qualification may only be sold:

Once the registration is declared effective by the Administrator Securities that are registered through qualification may be sold once the registration is declared effective by the Administrator. Note that in choice (c), the use of the term approved is inappropriate. Securities that are deemed effective for sale by an Administrator may not be described as having been approved by the Administrator.

According to the Investment Advisers Act of 1940, a notice that offers advisory services and appears in a publication, on radio, or on TV is considered an advertisement if it is offered to more than:

One person This question is simply asking about the definition of advertising. Communications that are made through the public media which offer investment advisory services, including analyses or reports, are considered advertising if they are addressed to more than one person. A different issue that relates to advertising is the retention requirement. According to the Investment Advisers Act of 1940, an adviser must maintain a copy of any advertisement that is distributed to 10 or more persons.

Portfolio A has a standard deviation of 3.50%, while Portfolio B has a standard deviation of 2.75%. How are these portfolios related to one another?

Portfolio A has more risk than Portfolio B. Standard deviation is the amount that a portfolio's (or asset's) returns will deviate from its historical average. In the Modern Portfolio Theory (MPT), standard deviation is used as a measure of a portfolio's risk. If a portfolio has a higher standard deviation, its indicative of a portfolio with greater risk. Although riskier portfolios and stocks will outperform safer ones over the long-term, safer portfolios will often perform better than riskier ones (e.g., during a recession).

According to modern portfolio theory (MPT), the expected return of an investment is the:

Possible returns on the investment weighted by the likelihood of that return occurring MPT defines the expected return of an investment as the possible returns on the investment weighted by the likelihood of that return occurring.

If material information that a state Administrator has on file is no longer accurate, when is an amendment required to be filed?

Promptly A change of material information requires prompt notification to the Administrator. Some examples of material information include the address of the firm, the fee structure of the firm, and whether the firm maintains custody of customer cash and securities.

An investment adviser intends to purchase 100,000 shares that it will place into various clients' accounts. Which of the following is an acceptable method of allocating the bunched order?

Provide clients with the average price at which the investment adviser purchased the shares Bunched orders allow investment advisers to buy shares for several clients at the same time. However, since the purchased shares are a part of a large order and may not be executed at the same price, investment advisers must allocate these shares to their clients in a manner that is fair and non-preferential. Most investment advisers use the average price of the shares that they have purchased. Note, the average price of the shares over the entire trading day is not an acceptable practice.

An S Corporation is similar to a partnership in that both:

Provide flow-through of losses Both S Corporations and partnerships are considered pass-through investments. In other words, any profits and losses that are generated by these entities are distributed (passed through) to the owners/partners and reported on their personal tax returns (i.e., profits are only taxed once). Since the question did not specify whether the partnership was a limited partnership, choice (a) is incorrect. In some partnerships (e.g., general partnerships), the partners assume unlimited personal liability.

An IAR is meeting with a prospective client. The client is in his late 20s, has a higher-than-average income, has several valuable assets, and little debt other than his home mortgage. The client indicates that his main goal is to retire at age 55, but that the stock market makes him very nervous, and that he has never been comfortable investing in any assets other than CDs and money-market funds. Which of the following statements is TRUE regarding this situation?

Regardless of whether the client is capable of financially bearing some risk, the IAR must take his low-risk tolerance into account when making recommendations. An investment adviser must take into account a client's willingness to tolerate risk, regardless of the level of the client's financial resources. However, this does not prevent the adviser from attempting to convince the client that a higher level of risk might be appropriate.

The liabilities section of a personal balance sheet could include which of the following?

Remaining mortgage balance The liabilities section of a personal balance sheet represents money that is owed. Credit card balances, student loans, and mortgage obligations are all included as a person's liabilities. Choices (a), (c), and (d) are all items that a person owns or possesses. The difference between a person's assets and her liabilities is her net worth.

Which of the following statements is TRUE regarding research reports that are prepared by others?

Research that is obtained from an external source and distributed to clients must disclose the name of the source. An adviser that provides its clients with research reports or recommendations that are produced by third parties must disclose that the adviser is not the author of these materials. Instead, the adviser must disclose the name of the provider. However, this disclosure requirement does not apply when an adviser uses various outside sources to formulate its own independent conclusions.

A nonissuer transaction is also referred to as a(n):

Secondary market transaction If all or part of a transaction is for the benefit of a person other than the issuer, it is considered a non-issuer transaction. Non-issuer transactions are also simply referred to as secondary market trades. For example, when ABC stock is traded between two investors, it is considered a non-issuer transaction.

When analyzing strategic and tactical asset allocation, all of the following statements are TRUE, EXCEPT:

Sector rotation is a form of strategic asset allocation, while buy-and-hold is a form of tactical asset allocation. All of the statements are true, with the exception of choice (d). Sector rotation is a form of tactical asset allocation in which investors shift assets from one sector to another based on economic changes. Buy-and-hold is actually a form of strategic asset allocation. Strategic asset allocation is based on a client's risk tolerance and investment objectives. Strategic asset allocators tend to view the market as efficient and market-timing as expensive and ineffective. By contrast, tactical asset allocators believe that securities markets are not perfectly efficient and may try to use an active strategy to alter the portfolio's asset mix and take advantage of anticipated economic events. Tactical asset allocation uses this market timing approach in an attempt to beat the market

An investor owns a large portfolio of stock and wants to hedge against a market downturn. Which of the following orders are the most appropriate?

Sell stop orders Stop orders are often entered to protect existing positons. Sell stop orders allow an investor to sell their existing stock position if the stock's price falls to a certain price. Although sell limit orders also allow an investor to sell, these orders are only executed if the market rises. For that reason, an investor will be realizing a gain, rather than protecting against a loss.

According to the Uniform Securities Act, if a person has no place of business in State A and is not registered in State A, which of the following actions is permitted?

Selling unlisted securities to institutions that are located in State A. In choice (c), the person is not required to register as a broker-dealer in State A as long as it has no place of business in the state and effects securities transactions only with institutional investors that are located in State A.

A person who invests in a variable annuity is most concerned with the performance of the insurance company's:

Separate account The performance of a variable annuity is related to the performance of the insurance company's separate account. On the other hand, an insurance company's general account backs the company's fixed annuities and other traditional (guaranteed) insurance products. Although an investor may be concerned with the overall profitability of the insurance company, it has no bearing on the performance of the variable annuity's separate account.

The primary advantage of establishing a trust is:

Separate tax status of the trust, which is distinct from the party that establishes the trust A trust is created when one person (a trustee) is put in charge of managing property for the benefit of another person (a beneficiary). The trustee has legal control of the trust property (corpus), but must manage it in the interests of the beneficiary. For tax purposes, the trust is a separate taxable entity; therefore, taxes are the responsibility of the trust (or potentially the beneficiary), not the trustee or the person who created the trust.

Which of the following choices is a disadvantage of investing in a C Corporation?

Shareholders pay tax on income that was already taxed to the company. As taxable entities, C Corporations are required to pay corporate taxes on their income. Additionally, C Corporation shareholders (owners) are required to pay personal income taxes on any profits they receive in the form of cash dividends. In other words, a major disadvantage for C Corporation shareholders is that they are subject to double taxation. C Corporation shareholders have limited liability and do not share in any losses that are realized by the corporation.

The Modern Portfolio Theory uses which of the following to measure volatility?

Standard deviation The primary measure of volatility used in the Modern Portfolio Theory is standard deviation. Standard deviation is a statistical measures of the amount of variability or dispersion around an average. In simple terms, volatility is a reflection of the degree to which a security's price moves. A stock with a price that has wide fluctuations or moves erratically is volatile. On the other hand, a stock that maintains a relatively stable price has low volatility. Beta shows the sensitivity of a fund's, security's, or portfolio's performance in relation to the market as a whole. Alpha is considered a risk-adjusted return and represents the difference between an asset's expected return and its actual return. The Sharpe Ratio is a risk-adjusted return measurement that indicates the amount of return earned per unit of risk. The basic idea is to determine how much additional return is being received for the willingness to hold a risky asset

In which of the following practices is an agent permitted to engage?

Stating facts to a client which relate to a market letter that is published by her firm. An agent is permitted to communicate with clients about published market letters. However, agents are prohibited from disclosing material, non-public information to clients. Providing communication about an unannounced underwriting is prohibited until it has been made public. An agent is generally prohibited from disclosing the investments that are held by another client of the firm, unless the client has provided his written consent.

According to the Uniform Securities Act, which of the following activities is considered a prohibited business practice by a broker-dealer?

Stating to a client that the offering price of a security is the current market price, when the broker-dealer is the only firm making a market in that security. If a broker-dealer states to a client that a security is being offered at a price that represents the current market price, the broker-dealer must have reasonable grounds for making this statement. If the broker-dealer is the only firm that is making a market in the security, the price that it is quoting may NOT be considered the current market price. Therefore, if a broker-dealer is the only market maker and made this statement to a client without proper disclosure of this fact, it is considered an unethical business practice. In choice (b), the broker-dealer is not the only firm making a market and is therefore not setting the price. In choice (c), providing material, public information is permitted. The concern is when material, non-public information is being distributed. In choice (d), a broker-dealer may extend credit (a loan) to a customer who is purchasing securities in a margin account

An adviser is managing the portfolios of several clients who are invested in bonds. He anticipates that the economy is beginning to expand too rapidly and advises his clients to reallocate some of their holdings into money market instruments. What strategy is the adviser utilizing?

Tactical asset allocation Tactical (active) asset allocation may be utilized by investors who believe that securities markets are not perfectly efficient. These investors may try to use an active strategy (i.e., market timing) to alter the portfolio's asset mix in an effort to take advantage of anticipated economic events. This market timing approach is primarily based on short-term decisions. On the other hand, periodically rebalancing a client's portfolio in an effort to maintain an optimal portfolio based on his risk tolerance and investment objectives is referred to as strategic (passive) asset allocation. Strategic asset allocators tend to view the market as efficient and market timing as ineffective, thereby taking a more long-term outlook. Sector rotation is an investment strategy that involves the movement of money from one industry or sector to another in an attempt to beat the market

An investor has a total of $350,000 to invest, but he wants to invest $150,000 in a manner that will follow the business cycle. This type of investing is referred to as:

Tactical asset allocation Tactical asset allocation shifts assets based on market timing, trends, and the business cycle. Technical analysis utilizes theories and pattern analysis, but it is a form of analysis, not a form of asset allocation. Strategic asset allocation uses a blend of particular securities that are rebalanced over time as the performance within the portfolio causes the weighting of the assets to shift outside the optimal percentages. (79687)

According to NASAA's Statement of Policy on Unethical Business Practices, all of the following disclosures are required when a client enters into an investment advisory contract, EXCEPT:

That performance-based fees are allowed for every client NASAA's Statement of Policy on Unethical Business Practices requires the following disclosures when an investment advisory contract is renewed: All fees and services provided A formula for computing the advisory fee The amount of prepaid fees to be returned in the event of an early termination of the contract The fact that no assignment of the contract will be made without the consent of the client. Under the Uniform Securities Act, with the exception for certain types of clients, performance-based fees are generally prohibited

A person has established an IA as a sole proprietorship and works as an IAR out of his home office. To help promote and manage the IA, he has set up a website which contains personal information about his clients. A few weeks after setting up the website, the IAR discovers that the website has been hacked and his customers' account information has been stolen. What is the primary regulatory concern?

The IA did not prepare proper cybersecurity policies, procedures, and measures before launching the website. Both the SEC and state Administrators require IAs to establish cybersecurity policies in order to protect their clients. Since the website was hacked, the regulator's primary concern is the extent of the IA's cybersecurity measures. The regulations don't require websites to be password protected, despite the fact that many IAs may find them necessary to protect client information. Also, there's no requirement for an IA to be federally covered before creating a website. Although websites are considered advertisements and regulators must be notified, it's unlikely that this is the primary regulatory concern.

An IAR intends to recommend speculative debt offerings to some of her more aggressive accounts. Since the IAR specializes in equity investments, she plans to use an outside fixed-income expert to help in the selection process. In this situation, which of the following statements is TRUE under the UPIA?

The IAR may delegate her investment decision-making authority. In the past, any person acting in a fiduciary capacity was solely responsible for making decisions on behalf of another person. However, the Uniform Prudent Investor Act (UPIA) now permits fiduciaries to delegate investment responsibilities to competent third parties (e.g., accountants, attorneys, or securities professionals with different expertise).

An IAR has been discussing the advantages of purchasing a financial plan with a potential client. During a party that they are both attending, the client mentions that she has looked over the contract and is ready to move forward with the financial plan. The client hands her signed contract and a check to the IAR. Although the IAR has not provided the client with his firm's brochure, the client states that she has reviewed it online. Regarding the disclosure document, which of the following statements is TRUE?

The IAR may not accept the contract until he has provided the client with a copy of his firm's brochure. In this question, since the IAR did not give the client his firm's brochure earlier, he must provide it at the time of entering into the contract. When clients are given the brochure at the time of signing a contract, they must be provided with five business days to cancel the contract without a penalty. However, if a client is given a brochure 48 hours in advance of signing a contract, she cannot cancel the contract without a penalty.

An investment adviser representative and a client have similar financial resources, investment goals, and risk tolerance. However, despite the fact that the IAR recommends penny stocks as a small part of her client's portfolio, she does not personally invest in penny stocks. Which of the following statements is TRUE?

The IAR should disclose to her client that the recommendation is inconsistent with her own investment policy. If an investment adviser's personal investing is inconsistent with the recommendations that she makes to her clients, she is generally obligated to provide them with disclosure of this fact.

An investor has an account with an investment adviser and has provided discretionary authority to his IAR. The client's objectives are income and preservation of capital. Although his account has shown a positive return, he is concerned about numerous in-and-out trades that occurred on the same day. Which of the following statements best describes this situation?

The IAR's actions are unethical. Illegal activities are specifically prohibited by a regulations, laws, or statutes. Since the IAR has written power of attorney, he is allowed to place trades in the customer's account and is not violating any securities laws. However, since the high frequency trading is clearly unsuitable, the IAR's actions are unethical.

While advising a client who is in a low income tax bracket, an investment adviser representative recommends that he purchase municipal securities. Which of the following statements best describes this action?

The advice given by the representative is unethical. The action of the representative is unethical, rather than fraudulent. Municipal securities provide federally tax exempt interest income, which is advantageous to individuals who are in higher tax brackets. Recommending municipal securities to an individual in a low tax bracket is unsuitable

A federal covered adviser is considering the possibility of establishing an in-house custodial program to eliminate the payment it currently makes to its custodian. Which of the following statements concerning the custodian activity is TRUE?

The adviser is permitted to establish its own program to maintain custody of client assets. An investment adviser is permitted to maintain custody of customer funds and securities; however, it must abide by the following guidelines. The Advisers Act requires investment advisers with custody to 1) deposit the funds of each client in a separate account, 2) provide each client with written notification of the place and manner in which the funds and securities are being maintained, 3) send to each client, at least quarterly, an itemized statement of all the funds, securities, and transactions effected in the account, and 4) arrange an unannounced annual examination by an independent public accountant to verify the amount of funds and securities. In this question, since the adviser is federally covered, it is not required to involve the state Administrator.

An investment advisory firm and an accounting firm have offices in the same building, but are otherwise unaffiliated. One of the investment adviser representatives pays a cash referral fee to a CPA in the other office for any clients she sends over to the adviser. All the following statements are TRUE, EXCEPT:

The adviser must give each client that is acquired through the CPA another copy of the separate solicitor disclosure document at the time the client agrees to enter into an advisory relationship. The adviser is not required to give clients another copy of the separate solicitor disclosure document. However, the adviser is required to obtain written acknowledgment from any clients that the CPA refers that they received the adviser's brochure and the separate solicitor disclosure statement either before or at the time the client enters into a contract for the adviser's services.

If a state registered investment adviser intends to enter into a contract with a registered investment company to manage its portfolio valued at $75 million, what is required of the adviser?

The adviser must withdraw its state registration and register at the federal level with the SEC. In this question, the state registered adviser will become a federal covered adviser because it will be begin managing the portfolio of a registered investment company. Regardless of the amount of assets under management, an adviser to a registered investment company is considered a federal covered adviser. For that reason, the adviser must make a partial withdrawal by fling ADV-W. The partial withdrawal notifies the state in which the adviser is registered that it will be withdrawing its state registration and become registered with the SEC at the federal level

An investment advisory firm has created a new contract for its advisory clients. Which of the following clauses should NOT appear in the contract?

The adviser will not be held liable for civil damages unless criminal liability is established. Advisers are not permitted to include provisions in contracts that claim to waive compliance with the any applicable rules or regulations. Therefore, contract language may not include exculpatory clauses which lead clients to believe that they have waived any available right to take legal action against the adviser. Additionally, advisory contracts may not contain hedge clauses that absolve the adviser from liability or mandatory arbitration provisions.

An agent has opened a new account for a client and entered a market order to buy 200 shares of stock. Prior to the end of the day, the agent turned in the new account form and a copy of the order ticket for approval by his supervisor. According to the Uniform Securities Act, which of the following statements is TRUE?

The agent needed approval for the new account before executing the first trade. Agents are required to obtain supervisor approval for a new account before trading can commence in the account. Once the account has been opened, agents are not required to receive approval before each order is executed. However, a supervisor must typically review transactions daily (i.e., after the trades are executed).

When analyzing a client's personal balance sheet, which of the following items is classified as an asset?

The amount of cash the client has in a checking account. On a personal balance sheet, the amount of cash that a client has in a checking or savings account is included with his assets. The remaining balance on a mortgage is included on the balance sheet, but as a liability, not an asset. The client's income, including his weekly paycheck, is included on his income statement. The client's monthly mortgage payment is also included on the income statement, but as an expense.

The former CEO of a public company whose stock trades on the NYSE has recently retired. He liquidates his holdings in the company by selling his shares privately and intentionally withholds material information about the company. Shortly after the sale, the company files for bankruptcy. The state Administrator wants the former CEO prosecuted for fraud in court. Which of the following statements is TRUE?

The antifraud provisions of the Uniform Securities Act apply to any person conducting a sale of securities, regardless of the registration status. The antifraud provisions of the Uniform Securities Act apply to any fraudulent activity relating to the sale of securities within the state, regardless of the registration status of the securities or persons involved.

If a client buys a futures contract and holds it to expiration, what is his obligation?

The buyer is obligated to take delivery of the underlying commodity Futures contracts obligate an investor to either buy or sell a fixed amount of a commodity (e.g., wheat) at some point in the future. Although some investors choose to offset their obligation prior to the contract's expiration, an investor who does not offset his contract must either take or make delivery of the physical commodity. Buyers are obligated to take or accept delivery of the commodity, while sellers are obligated to make delivery.

Which of the following statements BEST describes a discounted cash flow (DCF) analysis that could lead to a recommendation to a client?

The calculation results in the present value of the future cash flows exceeding the current market value Discounted cash flow (DCF) analysis is a method of estimating an appropriate price for an income-producing investment (e.g., a bond). The calculation begins by taking a bond's future cash flows (e.g., interest payments and principal) and discounts them back to the present value, using the present value formula. Once the calculation is done, a person can then compare his estimated value from the DCF analysis to the current market value. If the bond is currently trading for more than the DCF value, the investor is effectively required to pay more than what he thinks the bond is worth (i.e., it is overvalued). If the bond is trading for less than the DCF value, then it a good investment (i.e., it is undervalued). Undervalued bonds (those that can be purchased for less than their estimated value) represent the best investments. The reason for this is that an investor will actually be earning more than the discount rate that was used in the initial analysis. Remember, bonds do not pay more or less income based on DCF analysis. Discounted cash flow analysis is used to determine what the fixed interest payments are worth right now (i.e., in the present). DCF analysis also does not measure whether a bond is worth more or less than its par value, instead it compares an estimated value to the current market prices, which may be at a discount or premium.

If an agent of a broker-dealer is granted a durable power of attorney over a client's account, all of the following statements are TRUE, EXCEPT

The client must be an institution A durable power of attorney provides the agent with the power to manage the grantor's financial affairs even if the grantor becomes incapacitated. With this authority (which must be in written form), the agent of the broker-dealer may make financial decisions on behalf of the grantor (discretion). A standard power of attorney is terminated if the grantor becomes incapacitated. (17178)

A client purchases a TIPS with a 2% coupon and, over the course of the year, the CPI increases by 1%. Which of the following statements is TRUE?

The client will earn 2% on an adjusted principal amount Treasury Inflation-Protected Securities (TIPS) are U.S. government securities whose principal is inflation-adjusted based on the Consumer Price Index (CPI). With TIPS, the rate of interest is fixed, but the principal amount on which the interest is paid will be inflation adjusted. Since it is the principal that is adjusted for inflation, the return (in this example) is consistently 2% of the principal amount; however, the principal may be higher or lower than par due to the adjustments for inflation. At maturity, investors receive either the par value or the adjusted principal value, whichever is greater. TIPS are typically purchased as protection against inflation or purchasing-power risk. (67287)

An investor placed money in his Roth IRA and invested in mutual fund shares. He has consistently reinvested any distributions and purchased extra shares. Since the fund charges an 8.5% sales charge, the fund allowed for reinvestment at the NAV. When the investor withdraws money at retirement, how will the distributions be taxed?

The distributions are considered tax-free Since Roth IRAs are always funded with after-tax dollars, investors may withdraw their contributions at any time without paying taxes. However, any accumulated earnings in the account may only be withdrawn tax-free if the distribution is made five years after the first taxable year in which a contribution was made and the investor is age 59 1/2 or older. In this question, it is assumed that the client meets both of these requirements; therefore, the distributions are tax-free.

All of the following fall under the jurisdiction of a state securities Administrator, EXCEPT:

Transactions that were forwarded into the Administrator's state State securities Administrators have jurisdiction over securities transactions that are directed into their state, originate within their state, or are accepted in their state

An investor intends to purchase mutual fund shares, but needs to determine whether she should buy Class A, B, or C shares. Which of the following considerations is NOT important when making this decision?

The experience of her agent The experience of the investor's agent is not a concern when choosing the appropriate share class in which to invest. The dollar amount being invested is significant since breakpoints and rights of accumulation are only offered for Class A shares. The anticipated holding period is equally important since Class B shares have a declining sales charge that is based on the length of time the investor owns the shares prior to redemption. When compared to Class A shares, both Class B and Class C shares often have higher annual operating expenses. Therefore, Class A shares may be the cheapest to own over a long period.

An investor has granted power of attorney over his account to his daughter. Whose objectives and related investment experience should be considered when making a determination of suitability?

The father's If a person grants power of attorney of his account to another person, it does not change the ownership status of the account. In this question, the investor (father) remains the owner of the account. Since all investments and strategies must be suitable for the account owner, it is the father's investment experience that is relevant.

An investment adviser that is registered in State A has recently fired several of its portfolio managers. As a result, the firm is required to amend the registration application that was filed with the Administrator. What action must the firm take to remain in compliance with the USA?

The firm must file the amendments promptly. According to the Uniform Securities Act, if material information that was provided to the Administrator becomes inaccurate or outdated, an amendment must be filed promptly (generally within 30 days).

An investment adviser has $57.5 million under management. Among the firm's clients is a small, in-house family of funds whose shares are currently offered exclusively to the adviser's clients. What is the firm's status for registration requirements?

The firm must register as an investment adviser with the SEC. Although the investment adviser only has assets under management (AUM) of $57.5 million, it is deemed to be a federal covered adviser because one of its clients is a registered investment company (mutual fund). If an IA advises an investment company, the adviser's amount of assets under management may be disregarded and it is automatically a federal covered adviser. Another qualification for federal covered status is if an IA has assets under management of $110 million or more.

A mother has invested money into a 529 plan to save for her son's college expenses. If her son is awarded a full scholarship to a university, what is the mother permitted to do with the funds in the 529 plan without paying taxes or a penalty?

The funds may be given to another relative to be used for education expenses. In a 529 plan, if the original beneficiary does not need or use the funds for qualified education expenses, the assets may be transferred to another family member (i.e., a change in beneficiary). If the funds are simply withdrawn and not transferred to another beneficiary for qualified education purposes, the earnings portion may be subject to tax and an additional 10% penalty.

Under the Uniform Securities Act, an investment adviser is required to provide a balance sheet when it files Form ADV Part 2 in all of the following situations, EXCEPT when:

The investment adviser inadvertently received client securities, but returned them after two business days. In choice (c), the investment adviser has three business days to return the securities before custody is established. Since the adviser returned the securities in two business days, custody was not established and no balance sheet is required. Under the USA, investment advisers that require the prepayment of fees of more than $500, six months or more in advance, are required to include a balance sheet when they file Form ADV Part 2 (choice [a]). In choice (b), the investment adviser has custody, which also requires the inclusion of a balance sheet when it files Form ADV Part 2. In choice (d), the investment adviser has authority to execute transactions in an account that belongs to a client; therefore, the adviser has discretion over the account and is required to provide a balance sheet when it files Form ADV Part 2.

Which of the following situations does not constitute the assignment of an investment advisory contract requiring client approval?

The investment adviser is a partnership with three partners, one of whom dies An investment adviser must obtain its clients' consent in order to have their contracts assigned to another adviser. If an adviser is a corporation, the acquisition of a controlling block of the adviser's shares by another entity is considered a change of control which requires client consent. Also, if an adviser is organized as a partnership, the death or resignation of a majority of the partners is considered a change of control which requires client consent. For choice (c), the death of one of the three partners (not a majority) does not constitute assignment. 1/3 is not a majority

An investment adviser's sole office is located in State A and its only client is the State A Triple Tax-Free Municipal Bond Fund. The adviser exercises discretion over the fund's investments and also performs safekeeping services for the fund. Which of the following statements is TRUE?

The investment adviser is not required to meet the net worth requirements or post a bond since it is regulated at the federal level. Since the investment adviser's only client is an investment company (a mutual fund), it is considered a federal covered adviser. A federal covered adviser is not required to register at the state level and is not subject to state requirements (e.g., maintaining a minimum net worth requirement). Additionally, the Investment Advisers Act of 1940 (which is the appropriate regulation for federal covered advisers) does not impose minimum net worth requirements.

An issuer has filed a registration statement in a state to offer securities. Which of the following choices is NOT a valid reason for the Administrator to deny its registration?

The issuer has not filed a registration statement with the SEC. There are a number of justifiable reasons for an Administrator to deny an issuer's registration statement, including 1) filing a registration statement that is incomplete, false, or misleading in any material respect, 2) the issuer, any partner, officer, director, control person, or underwriter has willfully violated a provision of the Uniform Securities Act or any rule or order imposed by an Administrator, 3) any officer of the issuer or underwriter has been convicted of a crime involving securities, 4) the issuer's enterprise or method of business includes activities that are illegal, 5) if it believes that the denial is in the public's best interest, and 6) if the issuer has failed to pay the proper registration filing fee. There is no provision for registration denial due to the issuer not filing a registration statement with the SEC.

In an effort to generate new business, an investment adviser wants to publish a list of its past recommendations. According to the USA, which of the following best describes the adviser's obligations?

The list must include all recommendations that it made over a minimum one-year time frame An investment adviser may include a list of its previous investment recommendations in advertising and sales materials as long as the list includes all of the adviser's recommendations during the relevant period (which must be at least one year).

What's the name of the agreement in which an adviser discloses it's obligation to keep customer information confidential?

The non-disclosure agreement (NDA) An investment adviser will disclose its legal obligations regarding a client's information on a non-disclosure (i.e., confidentiality) agreement. If signed, an arbitration agreement forces a client to use arbitration to settle civil lawsuits against the investment adviser. Conflicts of interest are typically disclosed on the adviser's brochure, rather than on a separate agreement.

All of the following statements are TRUE regarding term life insurance, EXCEPT:

The policy matures and its cash value is paid out at the end of the term period. Term life insurance policies remain in force for a specified period (e.g., 10 or 20 years) and are the simplest type of life insurance that may be purchased. The policyholder pays the premiums with the agreement that the company will pay the death benefit to the beneficiary if the insured dies while the policy is in force. Term life insurance is best suited for a person who only wants life insurance protection and is not interested in using his life insurance policy for investment purposes, since term policies do not build cash value. Term insurance policies do not have a maturity; instead, they simply provide coverage if the insured dies within the policy's term period.

A registered investment adviser is located in State X and is going out of business. Which of the follow is TRUE regarding the registration of the adviser and its IARs?

The registrations of both the IA and its IARs will become ineffective 30 days after the IA files withdrawal forms with the Administrator. When an IA files forms to withdraw its registration, it must also file to withdraw the registrations of all of its IARs. According to the Uniform Securities Act, the withdrawal is effective 30 days after the filing.

What is likely to happen if an investment adviser representative fails to appear at a hearing as directed by a subpoena?

The representative will be found in contempt of court If a court order to appear and testify at a hearing is ignored, the person will be found in contempt of court.

Under the Uniform Securities Act, all of the following transactions are exempt, EXCEPT:

The sale of corporate bonds to a customer in a solicited trade Under the Uniform Securities Act, certain transactions are exempt and not subject to the Uniform Securities Act either because the purchasers are limited in number or they are sophisticated. Securities being sold to institutions (e.g., investment companies, banks, and savings and loan associations) are exempt under the USA. Another type of exempt transaction is an unsolicited sale, in which an agent of a broker-dealer does not recommend (i.e., solicit) the customer to buy or sell. However, solicited transactions are non-exempt.

An investment adviser representative recommends to a client the wrap fee program of a third-party adviser. The IAR will be entitled to compensation based on the client's participation. Which of the following disclosures is NOT required to be made in the wrap fee brochure?

The specific dollar amount of compensation that the person making the recommendation will receive If an adviser receives compensation based on a client's participation in a recommended wrap fee program, SEC rules require the adviser to disclose that the person recommending the program will be compensated, that the amount of compensation may be more than the adviser would receive if the client participated in other programs, and that the adviser then has a financial incentive to recommend the program over other programs and services. However, the specific dollar amount of compensation paid to the person making the recommendation is not required to be disclosed.

A client has recently won the lottery. She has the option of receiving $100,000 immediately or $150,000 spread over 15 years with monthly installment payments. Which of the following concepts would help her make the best decision?

The time value of money For investors who are choosing between a $100,000 immediate payout and monthly payments over a fixed period, the most useful concept is the time value of money. The $100,000 is her present value and the monthly payments represent future values. If the client chooses a rate of return that she can earn on her investments, she can then discount the future payments back to the present value and compare them to the $100,000 lump-sum payment

Which of the following statements is NOT TRUE of hedge funds?

They are typically registered with the SEC under the Securities Act of 1933. Hedge funds are private investment pools that are typically sold under an exemption (Regulation D Rule 506) and are therefore not required to register with the SEC under either the Securities Act of 1933 or the Investment Company Act of 1940. Since hedge funds are not subject to the Act of 1933 or Act of 1940, they are not required to sell with a prospectus. The first hedge funds used leverage and short selling strategies in an attempt to outperform the market. Modern hedge funds invest in a wide variety of financial instruments and employ a number of different aggressive investment strategies. Hedge funds are typically available to a limited range of professional or wealthy investors and these investors are often charged performance fees by the fund managers.

A 19-year-old high school graduate who lives in State A has decided to attend college in State B. Her parents have been funding her college education through a Section 529 savings plan. Which of the following statements is TRUE concerning the tax considerations on her withdrawals for her education expenses?

They may be withdrawn without federal tax liabilities Under federal law, 529 plan contributions are made with after-tax dollars and any earnings grow tax-deferred. However, any withdrawals that are used for educational purposes (e.g., room, board, books) are considered qualified and tax-free at the federal level. These provisions are available regardless of whether the beneficiary attends an in-state or out-of-state school.

When executing a trade for a client, an agent inadvertently misrepresents the risks associated with U.S. Treasury bonds. Under the Uniform Securities Act, which of the following statements is TRUE?

This activity is unethical. Since the action was inadvertent, it does not constitute fraud. However, the action certainly represents unethical activity which could lead to civil liabilities, due to the fact that the client has the right to sue to recover his losses. For choice (d), suggesting that U.S. Treasury bills, bonds, and notes are free of risk is inaccurate. Although government securities have no credit (default) risk, they remain subject to interest-rate risk.

An agent represents a broker-dealer that is headquartered in State A, but has offices in numerous states. The Administrator of State B has revoked the broker-dealer's registration, causing the firm to close that office. One of the agent's clients has moved to State B and the agent wants to continue to do business with her. According to the Uniform Securities Act, which of the following statements is TRUE?

This is not acceptable and neither the broker-dealer nor any of its agents may conduct business in State B. An agent's registration is only in effect while he is employed by a broker-dealer that has an effective registration in the state. When the Administrator of State B revoked the broker-dealer's registration, the agent's registration was effectively revoked as well. Since the broker-dealer is no longer registered in the state, its agents are prohibited from engaging in business with residents of the state.

Two agents (Agent X and Agent Y) work for the same brokerage firm that is located in State A. Agent X recently contacted a referral who currently works in State A, but maintains a primary residence in State B for tax purposes. Agent X is not registered in State B, but Agent Y is registered there. Since the account may be a multimillion dollar, actively traded account, Agent X wants to have the account serviced by Agent Y, with whom she will split the commissions. How should this be handled?

This is not permissible since Agent X is not registered in State B. For an agent to be permitted to split or divide commissions with another person, the other person must be a registered agent in the same state and be employed by the same broker-dealer or one that is under common control. A firm under common control includes an affiliate, subsidiary, or parent company. In this question, since both of the agents are not registered in State B, splitting commissions on transactions involving this client is not permitted.

If an adviser inadvertently receives client funds and/or securities, it can avoid the implication that it is maintaining custody of the assets by returning them to the sender within:

Three business days of receiving them An investment adviser that holds clients' cash and/or securities, even temporarily, puts those assets at risk of misuse or loss. For an investment adviser to avoid the implication of having custody after inadvertently receiving client funds or securities, it must return them to the sender within three business days of receiving them

The owner of a small investment advisory practice has decided to close her firm. The adviser currently has a sizable surety bond posted with the state Administrator and the owner wants to use these funds for personal reasons. The adviser is required to maintain the bond with the Administrator for:

Three years following the firm's withdrawal date A surety bond must be maintained for as long as the registrant is in business and for three years thereafter. The requirement to post a bond may apply to registered broker-dealers, agents, and investment advisers if any of these securities professionals maintain custody of, or discretionary authority over, their clients' funds or securities.

An investor opens an account with a local advisory firm and deposits $100,000. Some of the employees in the office recognize the investor from her early work as a child actor and begin discussing the rumors of her substantial wealth and real estate holdings. The investor indicates that she wants to trade aggressively, but refuses to give additional information about her income or net worth. Under these circumstances, what is the MOST appropriate action for the investment adviser to take?

To presume that the client has no other assets except the $100,000 in her account The investment adviser cannot presume that the client has any assets or sources of income other than the $100,000 in her account. Rumors are not sufficient grounds on which to base suitability judgments. Until the client is willing to be more forthcoming with her financial background, there is little that the investment adviser is able to do for her.

Which of the following insurance policies allows the owner to skip her premium payments?

Universal life insurance Universal life policies, including universal variable life policies, offer flexible premiums. Provided there is sufficient cash value, the owner can stop making premium payments. However, if cash value is insufficient, the policy will lapse. All of the other choices require the owner to pay premiums over a predetermined time period.

An investor is seeking an investment that will pay her family after she dies. The investor's income is sufficient to satisfy her living expenses and she is willing to accept a moderate degree of risk. Which of the following is the MOST suitable?

Variable life insurance Since the investor can tolerate some risk, a variable life insurance policy is likely the most suitable recommendation. Annuities are typically a retirement savings vehicle and not the best way to pass money on to family members after death

An individual wants an insurance contract that will accumulate a market-competitive return on the cash value in her contract, but she also wants the ability to pay fixed premiums. She should buy a

Variable life policy A variable life insurance policy charges level premiums, but allows for the possibility of achieving higher returns than offered by a whole life policy.

When is a mutual fund's prospectus required to be delivered?

When a client is solicited to buy mutual fund shares Agents selling mutual fund shares are required to deliver a prospectus when they attempt to sell to prospective investors (i.e., at or before solicitation). In some instances, agents of broker-dealers can use a summary prospectus when selling, but only if the full prospectus is delivered at the confirmation of the sale. (62597)

The difference between a corporation's current assets and its current liabilities is the:

Working capital The amount by which a corporation's current assets exceed its current liabilities is referred to as working capital.

Which of the following options positions has the MOST risk?

Writing an uncovered call If an investor writes an uncovered (naked) call, she has sold call against stock that she does not own. If the underlying stock rises and the call writer is exercised against, she will be obligated to deliver the stock at the strike price. Since the call is uncovered, she must first purchase the stock in the open market. Theoretically, there is no limit as to how high the stock's price could rise; therefore, the investor is exposed to unlimited risk.

An investor has owned stock for several years and has an unrealized capital gain. If she believes that the stock's price will remain stable and wants to increase her portfolio's yield, which option strategy is the BEST?

Writing calls against the stock Since the investor wants to generate additional income (i.e., increase her yield), she should write calls against her stock position (i.e., write covered calls). Although buying puts will allow her to protect her gains, she is required to pay for the options, which will decrease her potential yield. Spread positions are a way to speculate while limiting both gains and losses; however, they are not typically paired with existing stock positions.

An investment adviser representative indicates to his compliance officer that he believes a new stock offering shows great promise and has a significant upside. The IAR plans to purchase significant amounts for his clients as well as his personal account. The research department of the IAR's firm does not currently follow the issuing company. Does this proposed course of action violate the IAR's fiduciary responsibilities to his clients?

Yes, since he does not have a reasonable basis for his recommendation and the purchase may not be suitable for each of his clients. Based on the information provided in the question, the IAR does not seem to have a reasonable basis for his recommendation. It is unlikely that a new stock offering would be suitable for all of his clients.