Mock Exam Questions - Series 66

D) SEC-registered advisers with at least $150 million in private fund assets under management Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC. U1LO4

Form PF must be filed by A) state-registered private fund managers, regardless of the amount of assets under management B) SEC-exempt reporting advisers C) SEC-registered advisers with no more than $150 million in private fund assets under management D) SEC-registered advisers with at least $150 million in private fund assets under management

D) Mr. Hawkins as the donor Because Mrs. Hawkins has an economic interest, this is a grantor trust. Thus, all income will be taxed to the donor, Mr. Hawkins. U18LO4

Mr. Hawkins sets up a revocable trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to A) Mrs. Hawkins as the contingent beneficiary B) the trust because it is a separate legal entity C) Madeleine as the primary beneficiary D) Mr. Hawkins as the donor

D) Discounted cash flow This type of question sometimes appears on the exam. There is a second answer that could be correct, but is not scored as such. In this example, a case could be made for present value, but the better choice is discounted cash flow; it is more correct. U13LO12

A bond analyst who determines the value of a debt security by adding the present value of the future coupons to the present value of the maturity value is using which of the following valuation methods? A) Future value B) Present value C) Dividend discount D) Discounted cash flow

D) ETNs The question describes an individual with a low risk tolerance, so the Treasury bonds and CDs would certainly be considered appropriate. Because ETNs are a debt security backed solely by a single issuer while an ETF based on a specific index of debt securities represents a large group of issuers, they are only suitable for those who can understand and take the risks involved. U17LO3

A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable? A) ETFs B) Insured bank CDs C) Treasury bonds D) ETNs

C) not have to be registered as an agent of the broker-dealer Agents of broker-dealers are in the business of securities-related transactions on behalf of clients of the firm. A free-market report is not a security, so this individual is not soliciting securities business. U3LO4

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

D) GEMCO Funds are suitable for the referred client. When determining what securities to recommend to any client, new or existing, the most important thing is suitability. U7LO4

An investment adviser has recommended funds sponsored by the GEMCO Fund group for many years. One of his clients who has been in several GEMCO Funds for over 10 years sends the IA a referral suggesting that the IA put his friend into the same GEMCO Funds as he owns. Under what circumstances would this be the appropriate action to take? A) The IA discloses that GEMCO Funds provides the firm with soft-dollar compensation. B) GEMCO Funds have had outstanding performance for the past 10 years. C) The referred client says that he wants just what your existing client owns. D) GEMCO Funds are suitable for the referred client.

A) maintenance margin The original call for funds is the Reg. T or margin call. But, when the call is for additional money, it is known as maintenance margin. This generally occurs when the value of the collateral in the account has fallen sharply. U22LO2

The term used to describe a broker-dealer contacting a margin account client with a demand for additional funds is A) maintenance margin B) margin call C) market call D) Reg. T call

D) only deduct the passive loss against passive income Passive losses, such as those generated by limited partnership investments (DPPs), are only deductible against passive income. U17LO1

Your client who owns a DPP that generated a $10,000 passive loss for the year could A) deduct $10,000 against capital gains B) deduct $3,000 against ordinary income and carry over the rest C) deduct $10,000 against ordinary income D) only deduct the passive loss against passive income

B) Moderate risk, moderate safety, low liquidity A middle-aged couple planning for their retirement is most likely interested in moderate risk, moderate safety, and low liquidity. A couple of their age should be planning for retirement and the demands for liquidity should be low; they need to take moderate risk to earn above-inflation returns. Moderate safety is appropriate for a middle-aged couple. Additionally, a middle-aged couple should not be invested in high-risk securities. U19LO5

A married couple in their early 50s saving for retirement would most likely have which of the following objectives? A) High risk, moderate safety, low liquidity B) Moderate risk, moderate safety, low liquidity C) Moderate risk, low safety, high liquidity D) Low risk, high safety, high liquidity

B) be volatile. An advantage of the high-water crediting method is that the interest is calculated using the highest value of the index during the term. Therefore, in a volatile market, where prices are going up and down, it picks up the highest price. DUPLICATE U15LO3

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

B) have a check drawn on the account payable to the trustee for trustee expenses The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts (not to be confused with custodian for minors), not in noncustodial accounts. U18LO4

Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can A) arrange to have the trust's funds pledged to support a loan for the trustee B) have a check drawn on the account payable to the trustee for trustee expenses C) place the securities in the trust fund in a noncustodial brokerage account D) have funds withdrawn from the account at the direction of the beneficiary

C) 3 years The USA specifies that all records, including electronic communications (emails), must be maintained for a minimum of 3 years. For investment advisers, the requirement is 5 years. U3LO5

GEMCO Securities, Inc., a broker-dealer registered in the state, has over 10,000 clients ranging from small individual accounts to substantial institutions. GEMCO has determined that the most efficient way to maintain contact with its clients is through electronic communications. Under the USA, these emails must be retained by the broker-dealer for a minimum of A) 5 years B) 8 years C) 3 years D) 2 years

D) REITs Even though REITs (real estate investment trusts) share many of the same characteristics of investment companies, they are not included in the definition as found in the Investment Company Act of 1940. U14LO9

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

A) Strategic asset allocation In strategic asset allocation, once the allocation is determined, it remains relatively constant until some change to the investor's objectives occurs. Periodically, the portfolio is re-balanced to reflect any changes in market conditions. U20LO3

Which of the following investment strategies is used to determine an appropriate allocation based on the long-term goals and risk tolerance of the client? A) Strategic asset allocation B) Efficient market allocation C) Tactical asset allocation D) Top-down fundamental analysis

C) excess return earned compared to its total risk. The Sharpe ratio is defined as a fund's excess return (fund's return exceeding the risk-free rate) divided by the total risk (standard deviation). U23LO2

The Sharpe ratio measures a stock's A) excess return earned compared to its unsystematic risk. B) return earned compared to its total risk. C) excess return earned compared to its total risk. D) excess return earned compared to its systematic risk.

B) Internal rate of return The internal rate of return (IRR) is the discount rate that, when applied to the cash flows of an investment, equates the net cash inflows to the net cash outflows. If the IRR calculated is greater than or equal to the investor's required rate of return, then the investor should consider making the investment, all other factors being equal. If the IRR is less than the investor's required rate of return, the investment should not be made. U10LO1

When determining whether to make an investment in a real estate limited partnership, Bill is concerned with the discount rate that equates the net investment cash inflows to the net investment cash outflows. Which calculation is Bill using to make this prudent investment decision? A) Duration B) Internal rate of return C) Net present value D) Future value

C) RMDs may be deferred only from the plan sponsored by the current employer. The rule is that you can only defer RMDs in the plan of the employer where you are currently employed. For example, assume you retire from Company A and get a job with Company B, and both companies have a 401(k) plan. You can only defer RMDs from the Company B plan, because that is your current employer; you will have to take RMDs from the Company A plan. The same would be true if it were 2 different school systems with 403(b) plans. U24LO4

Your client's wife retired as a 3rd grade teacher in 2009, where she was covered under the school system's 403(b) plan. If she resumes employment with a corporate employer, and that new employer has a 401(k) plan, is she entitled to defer RMDs from the 403(b) plan past the regular age 72 date? A) RMDs may be deferred only if the current employer offered a 403(b) plan. B) RMDs may never be deferred for those who were participants in a 403(b) plan. C) RMDs may be deferred only from the plan sponsored by the current employer. D) RMDs may be deferred as long as the individual is employed on a full-time basis.

A) the Administrator. Registration of IARs is done solely on the state level. IARs register with the Administrator of each state in which they are required to be registered. U2LO3

An investment adviser representative of a federal covered investment adviser registers with A) the Administrator. B) the FINRA. C) the NASAA. D) the SEC.

C) not increase as much as the market when the market is up Beta compares a stock's price history to the movement of a total market index for the same period. A beta of less than 1 means that the stock's price does not swing as widely, up or down, as the average for the entire market. U10LO4

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

A) I, II and/or III Those securities professionals found guilty of violating the USA could face various sanctions from the Administrator, including a fine and/or jail sentence if mandated by the courts. U5LO4

If an agent, broker-dealer, investment adviser or investment adviser representative is found to be in violation of the provisions of the Uniform Securities Act, penalties could include administrative action fines imprisonment A) I, II and/or III B) I and/or III C) II and/or III D) I and/or II

C) A unit investment trust whose portfolio consists of municipal bonds The key word here is "diversify." Muni bond UITs will own a number of different tax-exempt municipal issues. Short-term municipal notes, although paying tax-free interest, will not offer as high a return due to the short maturities and do not indicate that there is diversification as to issuers. U14LO7

Investing in which of the following would maximize after-tax income and diversify the portfolio for a high-tax-bracket investor? A) Short-term municipal notes B) Preferred stock mutual fund C) A unit investment trust whose portfolio consists of municipal bonds D) GNMAs

B) universal life A unique feature of universal life is that the premiums are flexible. That is, if the client wishes to pay more or less than the target premium, that may be done. However, the nature of the universal life product is such that cash values can fluctuate. Cash values can fluctuate in variable life, but unless the policy is UVL (universal variable life), premiums are scheduled (fixed). Typically there are no cash values with term insurance and the premiums are fixed and whole life has both fixed premiums and guaranteed cash values. U15LO6

One of the major financial decisions to be made by a family is the amount and type of life insurance to purchase. The form of insurance that offers flexible premiums without a fixed cash value is A) variable life. B) universal life C) whole life. D) term life.

B) the record date. The record date is a date announced by the company as the official date you must be an owner on the company's records in order to participate in the annual meeting and corporate election. A fact not tested is there is no standard regarding how far in advance of the voting date this should be other than it must be at least the normal settlement period, currently 2 business days. U12LO2

One of the rights of being a stockholder is the ability to vote on important corporate matters, such as the election of members to the board of directors. The date that determines which shareholders are eligible to votes is A) the election date. B) the record date. C) the last day of the company's fiscal year. D) the ex-dividend date.

B) compensation earned on dealings with clients It is compensation beyond that paid by the client (such as a sales award or other prize) that must be disclosed. U6LO4

Strategic Capital Asset Managers (SCAM) is preparing its Form ADV Part 2B relating to certain individuals. On this form, SCAM must disclose all of the following information EXCEPT A) the name, title, and telephone number of the individual supervising any listed person B) compensation earned on dealings with clients C) disciplinary information about material events within the past 10 years D) the fact that any listed person has no formal education after high school

D) straight-line depreciation. Straight-line depreciation is not a preference item. All of the other choices are included in the IRS listing of tax preference items. In the case of the ISO, it is a preference item to the extent that the fair market value of the employer's stock is in excess of the strike price of the option. As a test-taking tip, when you see two opposites as answer choices, it is likely that one of them is the correct answer. In this case, we have straight-line and accelerated depreciation, only one of which is a preference item. U21LO4

Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following except A) excess intangible drilling costs. B) accelerated depreciation. C) certain incentive stock options. D) straight-line depreciation.

B) for two individuals employed by the same broker-dealer and with the same category of license to share in commissions without telling the client Properly registered individuals employed by the same or affiliated broker-dealers are permitted to split their commissions. Because there is no additional cost to the client, this action does not have to be reported. Sharing with clients may only be done with the written consent of the client and the agent's broker-dealer. It has nothing to do with the time spent on the account. A broker-dealer selling out of inventory must disclose that the firm acted in a principal capacity. No BD or agent may ever borrow money from a client who is not in the money-lending business unless that client is an affiliated person. U7LO4

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents contains an extensive list of prohibited practices. However, it would NOT be considered a violation A) if a properly registered agent were to share in the profits and losses in a customer's account proportionate to the amount of time the agent devoted to handling the account B) for two individuals employed by the same broker-dealer and with the same category of license to share in commissions without telling the client C) to borrow money from a client who is not in the lending business D) when a broker-dealer sells a security out of inventory to a retail customer and indicates on the confirmation that the firm acted in an agency capacity

C) The renewal may be executed orally, provided it is done within 2 years of the initial contract. When an investment company employs an outside investment advisory firm to manage its portfolio, the act requires a written contract setting forth the adviser's compensation. The contract is for 2 years initially and must be renewed annually thereafter. The contract must be initially approved by a majority vote of the outstanding shares and the noninterested members of the board of directors and annually renewed by either a majority vote of the board of directors or of the outstanding shares, as well as a majority vote of the noninterested members of the board. The contract must be terminable at any time, with a maximum of 60 days' notice and with no penalty, upon a majority vote of the board of directors or of the outstanding shares, and it must terminate automatically if assigned. U14LO1

Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract is NOT true? A) The renewal must state the adviser's compensation. B) The renewal must be approved by either majority vote of the board or majority vote of the outstanding shares, as well as majority vote of the noninterested members of the board. C) The renewal may be executed orally, provided it is done within 2 years of the initial contract. D) The contract must be terminable upon no more than 60 days' notice.

B) Rutherford must register as an agent of WAJI with the State of Virginia. Rutherford represents a broker-dealer in dealing with clients and that requires registration as an agent in any state in which he maintains a place of business. The fact that WAJI only trades in U.S. Treasury securities is irrelevant. Perhaps you were thinking of an investment adviser who, under these circumstances, would be excluded from the definition of IA under the Investment Company Act of 1940. That has nothing to do with broker-dealers. Even if WAJI's only clients were banks and insurance companies, it would still have to register in the state where it is headquartered; the "institutions only" exemption applies when the broker-dealer does not have a place of business in the state. U3LO5

Washington, Adams, and Jefferson, Inc. (WAJI) is a broker-dealer whose principal and only office is in Alexandria, VA. WAJI's sole business is trading in securities issued by the U.S. Treasury. Rutherford Buchanan is employed by the firm in the main office and has the responsibility of servicing the firm's bank and insurance company clients. Which of the following statements is correct regarding Rutherford's licensing requirements? A) Rutherford is exempt from registration because his only clients are institutions. B) Rutherford must register as an agent of WAJI with the State of Virginia. C) Rutherford is exempt from registration because he only deals with securities issued by the U.S. Treasury. D) Rutherford cannot register as an agent of WAJI because dealing exclusively with U.S. Treasury securities removes the firm from the definition of a broker-dealer.

D) an individual contracted to solicit for new advisory clients All individuals working for an investment adviser who provide investment advice or management are considered supervised persons. Whether analyzing securities or customer profiles, one would be a supervised employee. Contracted solicitors are not employees of the adviser and, therefore, under the Investment Advisers Act of 1940, the adviser is only required to make a bona fide effort to determine that the solicitor complies with the solicitor agreement. Please be careful because this is not so under the USA. That act considers solicitors to be supervised persons, whether employed by the adviser or not, and requires IAR registration. U7LO1

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

D) III and IV A person who conducts business exclusively with banks and savings institutions is an investment adviser under the USA if he has a place of business in the state. Had the person no place of business in the state and conducted business exclusively with banks and savings institutions, he would not be considered a broker-dealer subject to the regulatory control of the state Administrator. Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of state filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not investment advisers. U1LO3

Which of the following statements is (are) true? A person with a place of business in the state who transacts business exclusively with banks and savings institutions is not an investment adviser under the Uniform Securities Act. A person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 who offers investment advice to individual investors residing in this state, and has less than $25 million in assets under management, is subject to the jurisdiction of the state Administrator. A person included in the definition of an investment adviser under the Investment Advisers Act of 1940, who manages funds on a regular basis as a business headquartered in a state, is subject to payment of filing fees required by the state Administrator. Broker-dealers who supply incidental investment advice and make securities recommendations to customers who pay commissions for the execution of their trades are not investment advisers subject to state or federal registration. A) I and II B) I and IV C) II and III D) III and IV

C) A loan is made to an investment adviser representative by one of her clients who happens to be the chief loan officer where she maintains her principal banking relationship. It is an unethical and prohibited business practice for investment advisers and their representatives to borrow money from clients who are not in the business of lending money. In this case, the loan officer is the one who is doing the lending, not the bank. IAs are permitted to base their fees on the amount of assets under management, generally charging a lower percentage to those with higher balances. IAs are permitted to act as principals in recommended trades, but appropriate disclosure must be made. In an agency cross transaction, a recommendation may be made to either, but not both, parties to the trade. U7LO4

Which of the following would be considered unethical under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) An investment adviser representative receives an order to buy XYZ stock from an advisory client and simultaneously recommends that another advisory client sell that stock in an agency cross transaction. B) An investment adviser discloses in its brochure that, from time to time, it may sell securities recommended to clients directly out of the firm's inventory. C) A loan is made to an investment adviser representative by one of her clients who happens to be the chief loan officer where she maintains her principal banking relationship. D) An investment adviser varies the annual fee based upon each client's assets under management, charging less for those with higher balances and more for those meeting the account minimum.

A) $175,000 The question is asking for the net estate, not the amount of estate tax due. The market value of all assets that William has an incident of ownership in will be included in the gross estate. All assets left to the spouse and the debts/expenses are allowable reductions to arrive at the net or taxable estate. The math goes like this. The $1.1 million gross estate (add together the assets ($200,000 + $650,000 + $250,000) is reduced by the $850,000 left to his wife. That brings the net estate down to $250,000 ($1,100,000 minus $850,000). The net estate is further reduced by the $75,000 in debt and expenses. Subtracting $75,000 from $250,000 leaves a net estate of $175,000. That is well below the estate tax exemption of $11.4 million in assets for 2019. U21LO5

William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate? A) $175,000 B) $750,000 C) $0; it is below the $11.4 million exemption equivalent D) $625,000

C) 2% Alpha is the extent to which a security's performance exceeds (or falls short of) what would be expected based on its beta. A stock with a beta of 1.4 would be expected to perform 40% better in an up market than one with a beta of 1.0. Because XYZ with a beta of 1.0 gained 12%, ABC should return 140% of that or 16.8% (12% × 1.4). With an actual return of 18.8%, ABC beat the expected by 2% and that is its alpha. More accurately, this question should also include the risk-free rate, but if, as in this case, it doesn't, the computation is easier. If the RF rate was shown, then that would have to be subtracted from "both sides." If the RF was 2%, then the computation would be (12% − 2%) × 1.4 = 14%. Then, we subtract the 2% RF rate from the 18.8 to get 16.8%. The difference between 16.8% and 14% would be alpha of 2.8%. U10LO4

XYZ Corporation has a beta of 1, and ABC has a beta of 1.4. XYZ has returned 12% and ABC 18.8%. Based on this information ABC had alpha of A) 4.8% B) 6.8% C) 2% D) 18.8%