Series 65 Exam

As defined in the Uniform Securities Act, an investment adviser is all of the following EXCEPT I) a broker-dealer who charges for investment advice II) a publisher of a financial newspaper III) a person who sells security analysis IV) a CPA who, as an incidental part of his practice, suggests certain tax-sheltered investments to his affluent clients A) II and IV B) III and IV C) II and III D) I and II

A. A publisher of a financial newspaper and a CPA who, as an incidental part of his practice, suggests tax-sheltered investments are not investment advisers. Once a broker-dealer is compensated for investment advice, usually referred to as special compensation in the rules, the exclusion from the definition is lost. This answer would be the same under either the USA or federal law.

ABCO Materials, Inc., is in the process of raising money from the public for the first time. Which of the following must be disclosed in ABCO's registration statement filed with the Administrator? I) Biographical sketches of each of the members of the board of directors, as well as ABCO's principal officers II) Expected use of the proceeds of the offering III) Performance of the company's stock over the last five years or since the founding of the company, whichever is the shorter period IV) Expected range of the public offering price A) I, II, and IV B) III and IV C) II and III D) I and IV

A. A registration statement will always include the expected use of the proceeds of the offering, as well as short biographies of the members of the board of directors (and key officers as well). This question stated that it was the company's IPO, so there could not be any previous stock performance, although the public offering price is not determined until the effective date, the expected range is indicated to the state(s).

A state-registered investment adviser maintains custody of client funds and securities. On Thursday, the chief financial officer of the firm informs the chief compliance officer that their net worth is $31,578. Under the provisions of the Uniform Securities Act, the firm would A) send a detailed financial report to the Administrator by the close of business Monday B) need to increase the amount of their surety bond C) send a detailed financial report to the Administrator by the close of business Friday D) do nothing, as their net worth is far in excess of the minimum requirement of $10,000

A. A state-registered investment adviser who maintains custody of client assets must maintain net worth of at least $35,000 or a bond of the same amount (not both). If the net worth should fall below the minimum, by the close of the next business day after discovery (Friday in our example), notice of the deficiency must be sent to the Administrator of the state in which the principal office of the adviser is located. Then, by the close of business the day after that (Monday in our example), a detailed financial report, including the number of clients served by the adviser, must be sent to the Administrator. The firm would need to increase their net worth, not the bond.

Under the Uniform Securities Act, the term broker-dealer would include A) a person with no office in the state who directs offers to no more than 5 individual residents of the state in any 12-month period B) an agent registered under the act who from time to time sells stock from personal inventory C) an issuer distributing its own common stock offering D) a trust company

A. Although a person has no office in the state, offers are directed to residents of the state. Under the USA, this person is defined as a broker-dealer. There is no de minimis exemption for broker-dealers. A person is exempt from the definition of broker-dealer if there is no office in the state and offers are directed to institutional clients or existing individual clients who are not residents of that state. The agent is merely selling his own stock as would any other individual; that does not make one a broker-dealer.

Which of the following would NOT be an issuer? A) A corporation selling certificates of interest in a mining lease B) A partnership selling partnership interests C) An investment company D) A governmental agency borrowing money for short-term needs

A. Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer. Even though the choice does not indicate how the governmental agency is borrowing, we can assume they are issuing a short-term note.

Under Section 401 of the Uniform Securities act, the term agent does not include an individual who represents an issuer in effecting transactions in a security A) issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state B) issued by and representing an interest in or a debt of, or guaranteed by, any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in this state C) issued or guaranteed by any federal credit union or any credit union, industrial loan association, or similar association organized and supervised under the laws of this state D) issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association

A. An individual representing an issuer in the sale of that issuer's security is not defined as an agent if the security is: issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state; issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency of the foregoing; any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor; a promissory note, draft, bill of exchange or bankers' acceptance that evidences an obligation to pay cash within 9 months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization; or any investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan. It is not just any exempt security that qualifies the individual for the exemption—only the five listed above. A confusing point is that the individual is not an agent when the sales are made in any exemption transaction with no exceptions.

Under federal law, an application for becoming an associated person of a broker-dealer would be denied for an individual A) pleading no contest to a misdemeanor involving a financial matter 65 months ago B) accused of a securities-related felony 110 months ago C) who is not a citizen of the United States D) convicted of a felony 122 months ago

A. An individual who is convicted of, or has pleaded guilty or no contest to, any felony or certain misdemeanors in the previous 10 years (120 months) is subject to statutory disqualification. Therefore, the misdemeanor involving a financial matter within the past 10 years is a cause for disqualification. A conviction made more than 10 years ago is part of the record but not cause for disqualification. One is presumed innocent until proven guilty so merely being accused is not the same as being convicted. There is no requirement that a registrant be a U.S. citizen.

James Stillman is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. Stillman works out of an office in State P and has 4 retail clients there. In addition, Stillman has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Stillman would be required to register as an investment adviser representative in A) State P. B) States P, D, and M. C) States P and O. D) States D and M.

A. As an IAR for a federal covered investment adviser, Stillman is required to register only in those states in which he (Stillman) has a place of business. Although Stillman has clients in several states, the question tells us that his place of business is the office in State P. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state.

In order for a security to lawfully be sold or offered under the USA, it must meet at least one of the following requirements EXCEPT A) that it is registered with the SEC B) that it is an exempt or federal covered security C) that it is sold in an exempt transaction D) that it is properly registered with the Administrator

A. It is unlawful to sell a security in a state unless the security is a federal covered security, exempt from registration under the USA, sold in an exempt transaction, or registered under the act. There is no requirement that a security be registered with the SEC; that is the primary purpose of registration by qualification—registering a security on the state level that is not SEC-registered.

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

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

An agent and a broker-dealer maintain wrap fee accounts for several of their customers. Which of the following registrations is required? A) The firm must register as an investment adviser. B) Only the registered principal would need to be registered in the state(s) in which they do business. C) The agent must be registered as an investment adviser. D) Neither the broker-dealer nor the agent is required to have any license other than their regular securities license.

A. Once a broker-dealer handles wrap fee accounts, it loses the exclusion from the definition of investment adviser. Therefore, the firm must be registered with either the state or the SEC. Any agents handling these accounts would be registered as investment adviser representatives.

The term "federal covered investment adviser" would apply to a person who A) is registered as such under the Investment Advisers Act of 1940 B) limits the advice offered strictly to securities issued or guaranteed by the U.S. government or 1 of its political subdivisions C) is registered as such under the Investment Company Act of 1940 D) limits the advice offered strictly to securities listed on the New York Stock Exchange (NYSE)

A. Only federal covered investment advisers register under the Investment Advisers Act of 1940. Even if the person only gives advice on exchange-listed securities (which are federal covered securities), that does not make the person federal covered. After all, if the AUM is under $100 million, registration is only possible with the state(s), unless meeting an exception. Although the term "federal covered adviser" does apply to those who limit their advice to securities issued or guaranteed by the U.S. government, it would not apply if advice is given on political subdivisions (states, cities, etc.).

Joan owns and operates a jewelry store, and she has contracted to purchase 5,000 Swiss watches, paying the watch manufacturer in Swiss francs 3 months from the date of contract. To protect (hedge) her currency risk, she purchases call options on Swiss francs. Which of the following statements best describes her transaction in the Swiss franc calls in light of the USA? A) She has engaged in a securities transaction because options on foreign currencies are considered to be securities under the USA. B) She has engaged in a prohibited transaction because American investors are generally prohibited from trading in foreign currencies under the USA. C) She has not engaged in a securities transaction because she purchased the options to hedge a business risk. D) She has not engaged in a securities transaction because options on foreign currencies are not considered to be securities under the USA.

A. Options, regardless of the underlying asset, are considered securities under the USA. Therefore, Joan engaged in a securities transaction by purchasing call options on the Swiss franc. While there is no prohibition against American investors trading in foreign currency options or futures under the USA, acquiring the currency itself, rather than the option, would not have involved a securities transaction; currency is not a security.

Foster Advisers, based in New Jersey, manages $135 million in funds for New Jersey-based clients. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following statements best describes the registration requirement for Foster Advisers? A) Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation. B) Foster Advisers is required to register with both the SEC and the Administrator of the New Jersey Department of Securities. C) Foster Advisers is required to register as an adviser with the SEC and has no requirement to notify the Administrator of the New Jersey Department of Securities. D) Foster Advisers is required to register with the Administrator of the New Jersey Department of Securities.

A. Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment advisers with $110 million or more in assets under management must register with the SEC. These advisers are called federal covered advisers. Investment managers who manage less than $100 million must register with the state Administrator. Advisers with at least $100 million but less than $110 million of assets under management have the option to register with either their state Administrator or with the SEC. Once the $110 million level is reached, registration with the SEC is mandatory. With $135 million under management, Foster Advisers must register with the SEC. Foster Advisers is subject to the additional requirement of notifying the administrators of the securities departments of states in which it maintains offices or clients of its operations. At the state level, a notification fee (but not registration) is generally required. One aim of the NSMIA was to eliminate dual registration of investment advisers with the states and the SEC. Investment advisers are not required to register at both state and federal levels.

Which of the following statements regarding registration of investment advisers is (are) TRUE under the Investment Advisers Act of 1940? I) If any material information filed in the registration II) becomes inaccurate, an amendment must be filed promptly. III) If any nonmaterial information filed on Form ADV changes, an amendment must be filed within 90 days of the end of the fiscal year. IV) Material information requires a prompt amendment, but nonmaterial changes do not require amendment. A) I and II B) I only C) III only D) II only

A. The SEC requires prompt amendment of any material information changes on Form ADV (e.g., names, location, control, custody, organization) and also requires nonmaterial amendments within 90 days of the end of the adviser's fiscal year.

State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the Uniform Securities Act? A) Investment adviser representatives B) Economists whose advice is strictly incidental to their professional activity C) Bank subsidiary offering investment advice D) Broker-dealers receiving special compensation

A. The USA specifically excludes IARs from its definition of investment adviser. Excluded are banks but not subsidiaries offering investment advice. Once broker-dealers receive special compensation, such as in a wrap fee program, they lose their exclusion. Economists are not included in the list of exclusions.

Under the Investment Advisers Act of 1940, which of the following are excluded from the definition of an investment adviser? A) Banks and trust companies B) Accountants who advise on securities (only) for a fee C) Insurance companies D) Attorneys who advise on securities (only) for a fee

A. The act excludes the following from the definition: banks or trust companies; publishers of bona fide publications of general circulation (newspapers and magazines); persons advising about certain securities (U.S. government or agency issues); broker-dealers not receiving special compensation for giving advice; and persons whose advice is incidental to their profession, such as lawyers, accountants, engineers, and teachers

Which of the following statements concerning transactions exempt from registration under the Uniform Securities Act is TRUE? A) The antifraud provisions of the Uniform Securities Act apply to exempt transactions. B) An unregistered, nonexempt security may be lawfully sold in a nonexempt transaction. C) The Administrator may require that a security be registered and a prospectus delivered in an exempt transaction. D) A security sold under an exempt transaction must be registered.

A. The antifraud provisions of the act are always applicable, even if the securities or the transaction are exempt from the registration provisions of the act. Fraud is a crime, and no criminal acts are exempt from the law. If a security is nonexempt, it is required to be registered before sale. The term "exempt transaction" means that a determination of whether the security is registered or is exempt from registration is not necessary to do the transaction. Exempt transactions avoid the necessity of registration and prospectus delivery.

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

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

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

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

The Affray Compassionate Finance Company (ACFC) is offering $100 million of 150-day commercial paper for sale in State L. The paper is available in minimum denominations of $100,000 and has been rated AA by a leading rating organization. Who of the following would be required to register as an agent in State L in order to legally sell this security in the state? A) An agent of a broker-dealer registered in the state. B) An employee of the Affray Compassionate Finance Company who receives a 1% commission on sales. C) An investment adviser who recommends this security to clients. D) Because this security is exempt from registration, offers and sales can be made without registration as an agent.

A. Those individuals who represent broker-dealers registered in the state must register as agents in that state if they wish to sell securities to that state's residents. It makes no difference what kind of security it is or to whom the security is being sold. Yes, this is an exempt security (less than 270 days' maturity; minimum $50,000 denomination; rating in the top 3 grades), but that only means that the security does not have to register. An exclusion from the definition of agent is given to those who represent issuers of certain exempt securities. Commercial paper is one of the 5 cases where this exclusion applies so ACFC's employee would not be defined as an agent. This is true even though compensation is being received. Investment advisers don't register as agents if all they do is give investment advice.

When comparing the limited offering exemption under federal law with that of the exemption in the Uniform Securities Act, which of the following statements is TRUE? A) The Uniform Securities Act's exemption for such transactions is narrower than the comparable federal exemption because offers are limited to a smaller number of nonqualified offerees. B) The statutory resale restriction is the same under both state and federal law. C) The federal law permits purchases by both accredited and nonaccredited investors, while state law limits offers solely to those who are accredited investors. D) The federal law does not permit compensation on investments made by retail investors while the state law does.

A. Under both laws, there are numerical limits placed on the number of investors who are not "qualified." Under federal law, that would generally be a maximum of 35 nonaccredited persons. Under the Uniform Securities Act, that number would generally be an offer to no more than 10 noninstitutional persons in a particular state during any 12-month period. Please note the difference in terminology. Under federal law, those who are "qualified" (don't count toward the numerical limit) are referred to as accredited investors, while under state law, those who are "qualified" are called institutional investors. Under the USA, commissions are limited to sales made to institutional, not retail clients. Under Regulation D, there is a requirement that noninstitutional investors sign an investment letter stating that the purchase was made for investment purposes only and not made with the intention of immediate resale. Under state law, all that is required is a reasonable belief that the purchase is being made for investment only. In both cases, purchases may be made by institutional and retail investors (and those retail investors do not have to be accredited).

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following is (are) required to register as investment adviser in a particular state? I) An adviser who manages client accounts in excess of $100 million in value II) An adviser who manages client accounts with less than $100 million in value III) An adviser to investment companies registered under the Investment Company Act of 1940 IV) An adviser who acts as pension consultant to employee benefit plans with assets of $200 million or more A) II only B) I, II, III, and IV C) I only D) II and IV

A. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, only advisers who manage client assets that total less than $100 million are required to register with the state Administrators. Those who manage client assets of at least $110 million or advise registered investment companies are required to register with the SEC and are exempted from state registration. The pension consultant in this question would not be required to register with the state because those who act as pension consultants and have at least $200 million in assets under management have the option to register with the SEC. There is a corridor between $100 and $110 million in which the adviser also has a choice of state or federal registration.

As defined in the NSMIA, federal covered securities would include I) open-end investment companies registered under the Investment Company Act of 1940 II) closed-end investment companies registered under the Investment Company Act of 1940 that trade on the OTC Bulletin Board III) bonds listed on the OTC Link where the company's common stock trades on Nasdaq IV) bonds issued by the Province of Ontario A) I, II, and III B) I and II C) I, II, III, and IV D) III and IV

A. Under the NSMIA, federal covered securities include all investment companies registered under the Investment Company Act of 1940, regardless of where they trade. Any stock listed on Nasdaq is federal covered, and that makes any security equal to or senior (like their bonds) also federal covered, regardless of where they trade. Canadian government and municipal securities are not federal covered (although under the Uniform Securities Act, they are exempt securities).

Which of the following would be an agent under the terms of the Uniform Securities Act? I) A sales representative of a licensed broker-dealer who sells secondary securities to the general public II) An assistant to the president of a broker-dealer who, for administrative purposes, accepts orders on behalf of senior partners III) A subsidiary of a major commercial bank registered as a broker-dealer that sells securities to the public IV) An issuer of nonexempt securities that are registered in the state and sold to the general public A) I and II B) II and III C) II and IV D) I and IV

A. Under the USA, only an individual can be an agent (a person who sells securities for a broker-dealer). An administrative person, such as the assistant to the president of a broker-dealer, is considered an agent if that individual takes securities orders from the public. Corporate entities, broker-dealers, and issuers are all excluded from the definition of an agent.

Under the Investment Advisers Act of 1940, which of the following are exempt from the requirements for registration? I) Foreign investment advisers with fewer than 15 clients per year who do not hold themselves out as investment advisers to the public and have less than II) $25 million in AUM in the United States III) Investment advisers who conduct all of their business in 1 state and who do not provide advice on securities listed on an exchange and have no private funds as clients IV) Investment advisers whose only clients are banks A) I and II B) II only C) I, II, and III D) I only

A. Usually, anyone who meets the federal definition of investment adviser must be registered with the SEC. Some investment advisers are not excluded from the definition but are exempt from the registration requirements of the SEC. One example is an adviser whose clients are all residents of the state in which the adviser maintains its principal office who renders no advice on any exchange-listed security and does not give advice to any private funds. Advisers whose clients are limited to insurance companies are exempt from registration, as are foreign advisers who limit themselves to fewer than 15 clients a year (none of whom can be investment companies), do not advertise or hold themselves out to be investment advisers and have less than $25 million in AUM in the United States. There is no exclusion for advisers whose only clients are banks.

Anyone who represents an issuer in effecting transactions between the underwriter and the issuer: A) is excluded from the definition of agent under the Uniform Securities Act. B) must be registered as an agent. C) must be registered as an investment adviser. D) must be registered as an administrator.

A. When an individual represents an issuer (not a broker-dealer), the Uniform Securities Act provides several exclusions from the definition of an agent. One of those is representing the issuer in an exempt transaction. A transaction between the issuer and the underwriter of its securities is an example of the exempt transactions we'll cover again in U4LO3.

Included in the Uniform Securities Act's definition of broker-dealer would be A) a broker-dealer with a place of business in the state whose only clients are insurance companies. B) individuals who are registered as agents. C) issuers of securities. D) savings institutions.

A. When the firm has a place of business in the state, regardless of its clientele, it is a broker-dealer. Exclusions from the definition include agents, issuers, and most financial institutions, such as banks and savings institutions. Also excluded are broker-dealers with no place of business in the state who only deal with institutional clients, such as banks and insurance companies.

Under the USA, which of the following are securities? I) Stock option contract II) Treasury stock III) Keogh plan A) I, II, and III B) I and II C) II and III D) I and III

B. A stock option contract and treasury stock are securities under the USA. A Keogh plan is a vehicle for an investment, but it is not a security in and of itself.

In 1933, Congress passed the Securities Act which required the registration of new issues before their offering to the public. However, the law contained a number of exemptions, including that for A) corporate common stock listed on the NYSE B) equipment trust certificates issued by a regulated common carrier C) obligations of the Canadian government D) stock issued by regulated insurance company

B. Although each of these is considered an exempt security under the Uniform Securities Act (state laws), only the securities of a regulated common carrier carry an exemption from federal registration.

A state-registered investment adviser suddenly incurs a liability that materially affects its net worth, causing it to drop below the required minimum. Which of the following statements is TRUE? A) The ​investment adviser is not required to file​ ​an amendment to its registration with the Administrator. B) The​ ​investment adviser must notify the Administrator​ by the close of business on the following business day​. C) The investment adviser must notify the Administrator promptly. D) The ​investment adviser ​must increase its surety bond to make up the deficiency.

B. Although most notifications involving emergency type situations require prompt notification, when an investment adviser's net worth is below the requirement, the NASAA Model Rule is a bit different. Unless otherwise exempted, as a condition of the right to transact business in the state, every investment adviser registered with the state shall, by the close of business on the next business day, notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day after that, a report with the Administrator of its financial condition.

Searching Out New Growth (SONG) is a venture capital fund. As such, all of the following statements are true EXCEPT A) SONG only issues securities which are, except in extraordinary circumstances, non-redeemable B) SONG must have less than $150 million in assets in the fund C) SONG's investment adviser is exempt from registration D) SONG is not registered under the Investment Company Act of 1940

B. Although venture capital funds are included in the general definition of private funds, unlike the private equity fund, there is no ceiling on the size of the fund before the adviser loses the exemption. Advisers to VC funds are exempt from registration. The funds themselves do not register with the SEC under the Investment Company Act of 1940 (and don't register with the states as well). These investments do not offer ready liquidity.

An investment adviser with no place of business in the state is exempt from registration with the state when making recommendations to all of the following EXCEPT A) AAA Manufacturing Co., with respect to the quality of investment bankers available for an underwriting of AAA securities B) when the recommendations are made exclusively to individual residents of the state who are accredited investors regarding new issues of exempt securities not registered in that state C) Amalgamated Bank D) St. Amelia's college endowment fund

B. An investment adviser with no place of business in the state is not exempt from registration with the state when making recommendations to individual accredited investors who are residents of that state, even when the securities being recommended are exempt from registration. The Uniform Securities Act exempts investment advisers with no place of business in the state who deal with certain institutional customers such as banks, insurance companies, investment management companies, and employee benefit plans with assets in excess of $1 million. College endowments and other nonprofit organizations also carry exempt status, but not wealthy individuals. An adviser advising an issuer on the quality of potential underwriters does not fall within the definition of investment adviser under the Uniform Securities Act and is therefore exempt from registration.

Which of the following financial instruments are considered securities under the USA? I) Collateral trust certificates II) Investment contracts, including interests in oil and gas drilling partnerships III) Options listed on the Chicago Board Options Exchange IV) Foreign currency options contracts traded on the Philadelphia Stock Exchange A) II, III, and IV B) I, II, III, and IV C) I and II D) II and III

B. Collateral trust certificates, investment contracts, options, and option contracts, regardless of the underlying asset, are identified as securities in the Uniform Securities Act and are subject to its provisions. Currencies are not securities, but options on currencies are. The key to questions like this is to remember those things that are not securities.

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

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

The Investment Advisers Act of 1940 contains the basic definition of persons who are investment advisers. Which of the following persons would be included in the listing of those who must register? I) A person who gives advice to investors on collectibles that are most likely to appreciate in value in the next 10 years II) A chemical engineer who gave advice on new product ideas that was solely incidental to the practice of the profession and for which no compensation was received III) A person, while receiving compensation, described the advantages of certain types of managed investments, such as mutual funds and REITs, but did not recommend a specific investment IV) A fee-based financial planner who, on the basis of current economic forecasts, had many of his clients liquidate their investment-grade bonds and purchase gold coins with the proceeds A) III only B) III and IV C) I and II D) I, II, and IV

B. It is not necessary to recommend specific stocks, bonds, or other investment products by name to be included in the definition of investment adviser. Although a person receiving a fee to suggest gold coins to clients would not be an IA, in this case the financial planner is giving securities advice (liquidate the bonds) to invest in a nonsecurities asset.

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

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

Which of the following are not investment advisers under the Uniform Securities Act? I) Joe advises customers regarding the value of gold and silver coins. II) The trust department of ABC Bank provides investment advice to its clients. III) Tammy writes a newspaper column in which she analyzes and recommends securities. IV) Jack is an investment adviser representative. A) I and IV B) I, II, III, and IV C) I and II D) II, III, and IV

B. Joe's advice does not concern securities. Banks are excluded from the definition of investment adviser. Tammy's advice is neither specific nor based on the situation of each client (impersonal advice). An investment adviser representative (IAR) is specifically excluded from the definition of an investment adviser.

Which of the following is NOT considered to be in the business of investment advising? A) An insurance agent who provides investment advice regularly, but such advice represents a small portion of her business B) Insurance agents who discuss the merits of whole life insurance verses nonsecurities financial instruments and who receive commissions on the sale of life insurance only C) A person who prepares reports about securities in general D) A financial planner who provides advice on many types of financial instruments, including securities, and receives commissions on the sale of life insurance

B. Please note that this question is not asking "who is an investment adviser?" It is asking about one of the 3 prongs - being in the "business". The insurance agent who discusses the merits of whole life insurance does not sell investment advice or securities, only insurance policies. The insurance agent does not hold herself out as an adviser nor does she provide advice on securities. If a person advertises as one who provides investment advice or engages in providing investment advice or analyses on a regular basis (even if not the person's principal business activity), the person is considered in the business of giving investment advice. If the person receives any compensation that represents a clearly definable charge, commission, or fee for such advice (whether paid separately or not), she is considered in the business. If the person engages in other financial activities in connection with the advice, it cannot be used to avoid the business standard.

Section 402(a) of the Uniform Securities Act contains a lengthy list of securities that are exempt from the registration and advertising filing requirements of the Act. Included in that list would be all of the following EXCEPT A) church bonds B) bonds issued by the city of Berlin, Germany C) municipal bonds D) common stock listed on the NYSE

B. Securities exempt from state registration include those issued by a U.S. or Canadian governmental unit, such as municipal bonds, and securities issued by nonprofit and charitable organizations, such as church bonds. However, bonds issued by a non-sovereign foreign government (cities, etc.) are not considered exempt securities unless guaranteed by the sovereign (German, in this case) government. Even before the NSMIA created the exemption for federal covered securities, those listed on the NYSE received what was called the "blue-chip" exemption.

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

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

Which of the following persons must register as an investment adviser under the Uniform Securities Act? A) An investment adviser whose advice is limited to securities issued or guaranteed by the U.S. government and who has 3 places of business in the state B) An investment adviser who only serves institutional clients and whose only office is in this state C) An accountant who makes no pretense of providing investment advisory services but gives incidental advice to clients as a small part of accounting services provided D) An investment adviser representative with no place of business in the state who has dealt with 7 retail clients during the most recent 12 month period

B. The Uniform Securities Act requires those defined as investment advisers to register with the state. Accountants are excluded when their advice is incidental to their profession and no additional compensation is charged. Advisers whose only advice is on securities issued or guaranteed by the government are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. This means they are federal covered investment advisers, not required to register with the Administrator even with offices in the state. As long as there is an office in the state, unless the adviser is federal covered (as described in the previous sentence), there is no exemption from registration in that state. The IAR has exceeded the de minimis limits and would have to register in the state, but as an IAR, not as an IA.

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

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

In general, one of the first steps in becoming an agent for a broker-dealer is the completion of the Form U4. One piece of information that is not disclosed on the Form U4 is A) disciplinary actions. B) education background and degrees earned. C) employment for the previous 10 years. D) any other names used.

B. There is no place on the Form U4 to indicate the applicant's education background. This can be confusing because if, during the previous 10 years, some of that time was spent in an educational institution, that is shown as part of the previous 10-year's employment history. However, that disclosure only indicates the name of the institution and dates attended; no mention is made of the course of study.

Ways in which offerings under Rule 506(c) of Regulation D of the Securities Act of 1933 differ from those under Rule 506(b) include each of these except A) the issuer must take "reasonable steps" to verify that all purchasers are accredited investors in a 506(c) offering, while no such obligation falls upon issuers in a 506(b) offering B) securities issued under Rule 506(c) are federal covered, while those under Rule 506(b) are not C) general solicitation is permitted under Rule 506(c) offerings; no advertising is permitted under Rule 506(b) D) all purchasers of the Rule 506(c) securities must be accredited investors as defined in Rule 501, whereas Rule 506(b) permits a limited number of sophisticated but not accredited investors

B. Under the NSMIA, any security issued under the federal transaction exemption offered under Rule 506, either (b) or (c), is considered a federal covered security. Rule 506(c) permits advertising (general solicitation) but requires that the issuer take reasonable steps to assure all purchasers meet the accredited investor standard. In a Rule 506(b) offering, up to 35 non-accredited investors are permitted with no limit placed on the number of accredited investors.

A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee A) need not register as an agent of the issuer under any circumstances B) must register as an agent only if he will receive commissions or remuneration, either directly or indirectly related to the volume of sales C) may receive commissions without registration D) must register as an agent of the issuer

B. Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if commissions or other remuneration related to the sale are paid. Therefore, there are cases where the employee would have to register as an agent. When the individual is paid a straight salary for this work, no registration is required.

Which of the following situations would require registration as an investment adviser? I) A broker-dealer provided investment research services to a customer and charged a fee for the service. II) An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. III) A broker-dealer has its agents prepare complete financial plans for customers for a nominal fee. The plans recommend specific securities transactions, and when the customers place orders, the agents earn commissions on those securities transactions. IV) A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed. A) I, II, III, and IV B) I and III C) I, III, and IV D) I only

B. Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. Preparing a complete financial plan for a customer goes beyond being solely incidental to conducting a brokerage business and would require registration as an investment adviser because a fee was charged, even if only a nominal one. Although not asked in this question, those agents would also have to register as IARs. Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.

A state-registered investment adviser with discretionary authority over client accounts discovered on Monday, that the firm's net worth is below the required amount. He must notify the administrator and then file a report no later than the A) close of business Tuesday, close of business Friday B) close of business Tuesday, close of business Wednesday C) close of business Monday, close of business Friday D) close of business Monday, close of business Wednesday

B. Unless otherwise exempted, every investment adviser registered or required to be registered under the Act shall by the close of business on the next business day notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day a report with the Administrator of its financial condition.

GEMCO Securities, a registered broker-dealer, has a policy of hiring unpaid interns from top business schools. GEMCO is currently the lead underwriter on a new issue and has assigned three of its interns to specific tasks. One is doing entering the data as indications of interest are received, the second is calling clients to offer to deliver their prospectus via email instead of mail, and the third is calling clients to describe the new issue and accept indications of interest. Which of the interns would need to register as agents? A) Because they are not being compensated, none of the interns need to register. B) Only the third intern would have to register. C) The second and third interns would be required to register. D) All of the interns would need to register.

B. When an individual representing a broker-dealer contacts clients to obtain indications of interest for a new securities offering, that person is performing a function requiring registration as an agent. Employees of a broker-dealer, permanent or temporary, compensated or not, do not have to register if their only function is clerical or administrative. Compiling data is clerical and following up with clients to determine how they wish to receive documents for a purchase they've already made is simply an administrative task.

Under both state and federal law, there are a number of exclusions from the definition of investment adviser. Which of the following would not qualify for an exclusion? A) An economist who teaches a course in fundamental analysis at a local community college B) A CPA who gives high tax bracket clients a chart showing the tax-equivalent yield of municipal bonds C) A publisher of a newsletter that is paid to make reports to be used in the sale of specific securities D) A personal injury attorney who recommends that clients consult with a CFP® for advice on how to deal with the large settlements they receive

C. Although there is an exclusion for publishers, it must be of general and regular circulation and not be the recipient of compensation from the issuers of any securities covered.

Which of the following are required for an initial application for registration as an investment adviser? I) A consent to service of process II) A fee III) Disclosure as to whether the applicant will have discretionary powers over client funds and/or securities IV) Disclosure as to whether the applicant will have custody of client funds or securities A) II only B) I, II, and IV C) I, II, III, and IV D) I and II

C. An initial application must contain a consent to service of process and a fee, and it must disclose whether the applicant will have discretionary powers over, or custody of, client funds and/or securities.

Which of the following are included in the definition of federal covered security? I) ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Delaware II) ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Maryland III) City of Portland, Maine, GO bond sold to a resident of Augusta, Maine IV) City of Portland, Maine, GO bond sold to a resident of Augusta, Georgia A) I, II, III, and IV B) II, III, and IV C) I, II, and IV D) I and II

C. Any security listed on the NYSE, regardless of the corporation's or the customer's state of domicile, is a federal covered security. Municipal bonds, exempt securities under the Securities Act of 1933, are also federal covered securities with one significant exception: if the issuer is a political entity in this state and it is sold to a resident of this state, it is not considered a federal covered security in this state.

Which of the following persons is defined as an agent by the Uniform Securities Act? A) Secretary of a branch office sales manager B) Silent partner of a broker-dealer C) Clerk at a broker-dealer who is authorized to take orders D) Broker-dealer executive who does not solicit or transact business

C. Anyone who solicits or receives an order while representing a broker-dealer is an agent. Silent partners, administrative personnel, and executives of broker-dealers with no sales responsibilities are not agents under the terms of the USA because they do not solicit or receive orders.

Under the Investment Advisers Act of 1940, which of the following is excluded from the definition of a person associated with an investment adviser? A) An employee who manages client accounts for an investment advisory firm B) A minority partner of an investment advisory firm C) A clerk in an investment advisory firm D) A majority stockholder of an investment advisory firm

C. Employees with no investment advisory functions, such as clerks and administrative personnel, are excluded from the definition of associated person.

A firm is registered as an investment adviser under the Investment Advisers Act of 1940. It has decided to raise its annual management fee from $1,500 to $1,800 and require that it be paid 1 year in advance instead of quarterly. The firm would A) be in violation of the law that prohibits pre-payments more than 6 months in advance B) continue doing business as before because the firm was already charging more than $1,200 per year C) now come under the requirement to include a balance sheet as part of its brochure D) need SEC permission to make this change

C. For federal covered investment advisers, a prepayment in excess of $1,200 and for periods of 6 months or more in advance (substantial prepayment) requires the adviser to submit an annual audited balance sheet as part of its ADV Part 2 (and brochure). Previously, even though the firm's fee was in excess of $1,200, because it was collected on a quarterly basis, the firm did not fall under the balance sheet rule. Had this been a state-registered IA, the answer would have been the same, even though the dollar limit is $500 rather than $1,200. That is for the reason given above—the former fee was charged quarterly and the substantial prepayment definition requires both exceeding a stated dollar amount ($500 or $1,200) and it being for 6 months or more in advance.

As the use of social media has mushroomed, most firms in the securities business have created and maintain websites. In addition to password-protected areas for existing clients, these websites generally have pages accessible to anyone. Which of the following statements could be on an investment adviser's website that would not be on that of a broker-dealer? A) A statement that the firm is registered with the SEC under the Securities Exchange Act of 1934 B) The content found on this website has been approved by the SEC C) A statement that the firm is registered with the SEC under the Investment Advisers Act of 1940 D) The firm is a member of FINRA

C. Investment advisers register with either the SEC or the state(s). Those who are registered with the SEC do so in compliance with the Investment Advisers Act of 1940. Broker-dealers cannot make that statement because they are registered with the SEC as required by the Securities Exchange Act of 1934. Neither can state that the website has been approved and FINRA membership is for broker-dealers only. Here is where a problem arises. Many of our students will be representing firms that are registered as broker-dealers and investment advisers. That is why it is so important to read the question carefully. It specifically refers to an investment adviser and makes no implication that the firm is also a broker-dealer.

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

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

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

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

What is the purpose of the Securities Exchange Act of 1934? A) It provides standards among the states. B) It provides policies relating to unethical business practices. C) It regulates the persons involved in the secondary market. D) It provides requirements relating to new issues.

C. The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and securities firms that trade in the secondary market. The Securities Act of 1933 was designed to provide regulation in the new issue market. Unethical business practices are covered in NASAA's Statements of Policy on Unethical Business Practices. The Uniform Securities Act provides a model for the states.

Under the Uniform Securities Act, which of the following is an agent? A) A clerical person who files trade confirmations for the firm B) An individual who is in the business of providing investment advice on behalf of his employer C) An individual who effects securities transactions for commissions D) A broker-dealer that charges a commission as a regular part of its business

C. The Uniform Securities Act defines an agent as any individual (other than a broker-dealer) who represents a broker-dealer in effecting securities transactions.

Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Sharon's client is a bank, she does not have to register as an IAR in State X. B) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X. C) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. D) because Sharon has a client in State X, registration as an IAR would be required in State X.

C. The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there. The fact that the client is a bank is of no relevance nor is the location of her employer's principal office.

Serenity Strategic Investments (SSI) is an investment adviser registered in four states. SSI's most previous annual updating amendment showed AUM of $108 million. Six months later, a favorable market resulted in SSI's AUM growing to $120 million. Unfortunately, several large clients left, so at the end of SSI's year, its AUM was down to $94 million. Which of the following statements is CORRECT? A) SSI may remain SEC registered as long as AUM is at $90 million or more. B) SSI has the choice of remaining state-registered or registering with the SEC. C) SSI remains state-registered because its AUM is less than $100 million. D) SSI must become registered with SEC within 90 days of exceeding $110 million.

C. The key to answering this question is remembering that, for purposes of SEC registration, it is the AUM (technically known as the RAUM - Regulatory AUM) shown on the annual updating amendment to the Form ADV that is the determining factor. We are told that SSI is state registered, something permitted when reported AUM is $108 million, although it was eligible to register with the SEC. The mid-year increase has no effect on registration, only that at the end of the year. Because SSI will report $94 million on the next annual update, it will remain state registered and does not have the option to register with the SEC because its AUM is below $100 million. The only time the $20 million buffer down to $90 million enables an investment adviser to remain registered with the SEC is just that—the IA is already registered with the SEC and can stay there.

The sole proprietor of an insurance business that exclusively provides advice on fixed-income annuity contracts A) must register as a broker-dealer with the SEC B) must register as an investment adviser under the Investment Advisers Act of 1940 C) need not register under any securities laws D) must register as an investment adviser representative under the USA

C. The sole proprietor of an insurance business need not register under the Uniform Securities Act or Investment Advisers Act. He provides advice on fixed-income annuities only, which are insurance products, not securities. Regulations under the USA, as well as federal securities laws, only apply to securities.

An exemption from registration under the Securities Act of 1933 is available to securities that are A) offered to the public only when the total amount is more than $4 million B) listed on national exchanges C) sold only to persons resident in one state when the issuer is a resident doing business within that state D) sold in more than one state by persons resident in those states

C. These securities are eligible for the intrastate exemption afforded under Rule 147. They might have to register in that particular state, depending on whether they met the exemption requirements in that state for that type of issue. Only under the NSMIA and the Uniform Securities Act do securities listed on a national stock exchange receive a registration exemption.

Under the Investment Advisers Act of 1940, which of the following criteria are considered in determining whether a person is in the business of rendering investment advice? I) The person regularly gives advice on securities. II) The person derives his earnings from executing transactions on recommended securities. III) The person receives compensation from rendering advice on securities. A) I and II B) I, II, and III C) I and III D) II and III

C. To be in the business of rendering investment advice, a person must regularly provide advice about securities and must be compensated for giving such advice. Those whose earnings are based on securities transactions are broker-dealers and/or agents.

Which of the following is (are) not exempt from registration as an investment adviser representative in the state in which they conduct business? I) A Certified Financial Planner who, while affiliated with a broker-dealer and an investment adviser, prepares comprehensive financial plans and whose only compensation is commissions generated from the purchase of recommended securities. II) An insurance agent affiliated with the company's advisory division, who prepares comprehensive financial plans and receives compensation only on insurance products purchased by his clients III) A broker-dealer with extensive business in the state IV) A mutual fund company with offices and clients in the state A) III and IV B) I only C) I, II, III, and IV D) I and II

D. A CERTIFIED FINANCIAL PLANNER™ (CFP®) who prepares comprehensive (the exam could say detailed) financial plans and is compensated by the commissions earned when the customer purchases the recommended securities must register in the state as an investment adviser representative of the advisory firm. This is considered indirect compensation because the regulators take the stance that the CFP® would not go through the effort to prepare the plan (which contains securities advice) without receiving the compensation from the trades. Note that the CFP® is affiliated with both a broker-dealer and an investment adviser. That's how the CFP® can earn commissions on the securities sales. An insurance agent affiliated with an investment adviser, who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the USA.

Which of the following statements is NOT true? I) A broker-dealer must be a firm or corporation (legal person) as opposed to a natural person (human being). II) An investment adviser must be a firm or a corporation as opposed to a natural person. III) An investment adviser representative (IAR) cannot, under any circumstances, be employed by a registered broker-dealer. A) I and III B) I and II C) II and III D) I, II, and III

D. A broker-dealer or investment adviser can be either a natural person (i.e., organized as a sole proprietorship) or a legal person (i.e., a corporation or partnership). There is no prohibition against an investment adviser representative also being licensed as an agent with a broker-dealer.

When the USA refers to unsolicited orders, which of the following is TRUE? A) Under certain conditions, an Administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders. B) If the order ticket is appropriately marked, the Administrator may not challenge a broker-dealer's assertion that the order was unsolicited. C) A client may not purchase, at his own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order. D) Unsolicited orders are defined as exempt transactions under the USA.

D. A client has the right to buy or sell whatever she may desire. The issue becomes who initiates the trade. An unsolicited transaction may be executed by an agent if it is the client who asks for the trade. The trade ticket should be marked as unsolicited. The state securities Administrator has the right to seek verification from the client that the trade was, in fact, unsolicited. The security involved in the trade can be one that is nonexempt and unregistered in the state.

A federal covered investment adviser is a person A) registered with North American Securities Administrators Association (NASAA) B) registered under the Uniform Securities Act C) exempt from regulation under the Securities Exchange Act of 1934 D) registered, or excluded from the definition, under the Investment Advisers Act of 1940

D. A federal covered investment adviser refers to a natural person or firm registered under the Investment Advisers Act of 1940 or excluded from the definition of investment adviser under that act. A person registered under the Investment Advisers Act of 1940 is exempt from state registration or licensing requirements of state securities Administrators under the Uniform Securities Act. Federal covered investment advisers are not exempt from the antifraud provisions of the USA. Investment advisers, whether state or federal registered, do not register with NASAA.

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

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

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

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

Which of the following is NOT included in Form ADV Part 2A? A) Investment policy of the adviser B) Types of investments made by the adviser C) A description of how the adviser is compensated D) States in which the investment adviser is registered or intends to register

D. ADV Part 2A is the brochure that investment advisers must deliver to clients; it describes the investment adviser's fees, investment policies, and types of investments made. The states in which the adviser is registered or intends to be registered are not contained in ADV Part 2A. If the IA is registering with the SEC, on Part 1A, it lists only the largest 5 offices (in terms of numbers of employees). If state-registered, it lists each state it will be registering in or is already registered in.

Which of the following statements best describes an investment supervisory service as described by the Investment Advisers Act of 1940? A) An investment advisory firm offers nondiscretionary services on a non-client-specific basis. B) An investment adviser sends monthly newsletters to 200 clients offering nonspecific advice. C) No actions are taken in client accounts without first being approved by a senior supervisory person. D) An investment adviser provides continuous advice based on the client's individual needs.

D. An investment supervisory service is an individualized service delivered to a specific client on a continual basis. General nonspecific advice given across the board is deemed impersonal advisory services. Only when an investment adviser provides investment supervisory service, and the adviser's principal business activity is the giving of advice, may the term "investment counsel" be used.

ABC Advisers, a federal covered investment adviser, is moving the firm's headquarters to a new office park in the suburbs. ABC is required to file this change with the SEC A) within 60 days B) promptly C) within 30 days D) within 90 days

D. Any material change that affects an investment adviser's ADV must be filed promptly with the SEC (or Administrator if state-registered) and a change of address would certainly be material.

Under SEC Release 1A-1092, which of the following has (have) met the test of providing advice or analysis concerning securities? I) A stockbroker calls a client and recommends the purchase of a certain stock. II) A lawyer recommends against purchasing shares of a mutual fund in favor of another investment. III) A publisher of an investment newsletter provides general information and recommendations concerning specific securities. A) I only B) I and II C) I and III D) I, II, and III

D. Any person who gives advice (positive or negative, specific or general) or issues reports or analyses concerning specific securities meets the criterion of providing advice. This does not mean that these examples qualify for the definition of investment adviser. They only qualify for the first criterion. For example, a lawyer may be exempt from the definition if she provides advice incidental to the profession and does not receive compensation, but may still meet the first criterion. Likewise, if the stockbroker's only compensation is commissions from securities transactions, the exclusion is in effect.

Information required on an application for registration as an agent would include I) the form of business (corporation, partnership, LLC, etc.). II) felony convictions, whether securities related or not. III) a statement of financial condition. IV) citizenship information. A) III and IV B) I and II C) I and III D) II and IV

D. Applicants for registration as agents must include any felony conviction (misdemeanors are limited to those that are securities related) and a statement of citizenship. Agents can only be individuals, not business entities, and it is only broker-dealers and investment advisers that must submit financial information.

Alpha-Beta Advisers (ABA) has its principal office in State X. ABA limits its clientele to insurance companies that are authorized to do business in State X. Which of the following best describes the registration requirements for ABA? A) Neither the SEC nor State X B) SEC only C) Both the SEC and State X D) State X only

D. Dealing exclusively with insurance companies makes this advisory firm exempt from registering with the SEC. However, unlike those who are excluded from the definition of investment adviser, being exempt does not make ABA a federal covered adviser. Although advisers dealing solely with institutions, such as insurance companies, are not deemed to be investment advisers in the state, that only applies when there is no place of business in the state. Obviously, with its home office in State X, that does not apply to ABA, so it would have to register in that state.

An agent lives in Montana and is registered in Montana and Idaho. His broker-dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may A) not conduct any business with the client B) not deal with the client until the broker-dealer registers in Pennsylvania C) only accept unsolicited orders D) conduct business with the client as usual

D. Even though the college program is called a resident program, that does not mean that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence.

While several methods of registration are described under the Uniform Securities Act, which of the following would be most appropriate for an investment company registered with the SEC under the Investment Company Act of 1940? A) Coordination B) Registration C) Qualification D) Notice filing

D. Federal covered securities (those listed on the NYSE, the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]), and the Nasdaq Stock Market) are exempt from registration under the USA. However, the states are permitted to assess fees and some require filing of certain information. This is notice filing and most commonly occurs with investment companies registered under the Investment Company Act of 1940.

Which of the following statements describes a person who provides investment advice on a regular basis but does not charge fees, yet would be considered an adviser under Release IA-1092? A) A retired chief investment officer of a well-known investment management company, without compensation, writes a column in a general circulation newspaper commenting on the value of investing in equity securities; many readers find his advice useful and become clients of his former investment management company. B) A wealthy college professor gives free lectures on sound investment practices and makes specific securities recommendations based on a quantitative model he has developed. C) The secretary of the U.S. Treasury, as part of his official duties, comments on conditions in the financial markets and their future investment implications. D) A financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space.

D. If an individual is in the business of providing advice and receives any economic benefit, such benefit is considered compensation under Release IA-1092. Because the financial planner is in the business of giving advice to pension plans, actually provides that advice, and is compensated for it, he meets all 3 elements in the definition of an adviser. The noncash benefit, as in this case, need not come directly from the beneficiary of the services to be considered compensation. The college professor, the chief investment officer, and the secretary of the Treasury do not receive separate compensation, nor are they in the business of providing investment advice.

A notice filing would be most appropriate for which of the following new issues? A) Railroad equipment trust certificate B) Federal credit union shares C) Intrastate offering D) Open-end investment company shares

D. Investment companies registered under the Investment Company Act of 1940 are exempt from registration with the states under the NSMIA. However, most states require notice filing and the payment of fees. Federal credit union shares and railroad equipment trust certificates are exempt securities and intrastate issues would have to register using qualification.

Bulaan Advisory Services, Inc. (BAS), an investment adviser registered in 5 states, was found to have been untruthful in its performance reporting. Once this news was released, most of its clients terminated their advisory contracts. As a result, BAS shuttered its doors on July 18, 2018. Minutes of shareholder meetings must be preserved until at least A) July 18, 2023. B) December 31, 2023. C) December 31, 2018. D) July 18, 2021.

D. NASAA's Model Rule on record keeping by investment advisers requires that partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, shall be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.

According to the Uniform Securities Act, which of the following would be defined as an investment adviser representative? I) John, who opens an investment advisory firm where he devotes his time exclusively to management responsibilities as the sole proprietor of the firm II) Paul, who works for a firm soliciting investment management accounts on behalf of several different investment managers III) Margaret, who works as a commission sales agent for a broker-dealer IV) Mark, an employee of AAA Broker-Dealers, who solicits brokerage clients for commissions on the basis of research conducted by his firm's securities analyst A) II and IV B) I and IV C) II and III D) I and II

D. Paul, who works for a firm soliciting investment management accounts for several investment managers, would be defined as an investment adviser representative because he is acting in the capacity of a sales agent for investment advisers. John, as the owner of a sole proprietorship, is both an investment adviser and the firm's only investment adviser representative. Margaret would not be defined as an investment adviser representative because she functions as a registered agent for a broker-dealer. If she sold investment advice for the broker-dealer's investment management subsidiary, she then would be defined as an investment adviser representative. An agent of a broker-dealer, earning commissions on security sales, is not an IAR even if his primary selling tool for the brokerage business is the firm's outstanding research department.

An investment adviser with $20 million under management exercises investment discretion over client portfolios. If the firm's accounting manager were to discover that the firm's net worth was only $8,500, the USA would require the firm to I)cancel all discretionary powers II) immediately raise an additional $1,500 III) send notice to the Administrator before the close of business on the day following discovery IV) send a financial report to the Administrator before the close of business on the day following the sending of notice A) I and II B) II and III C) I and IV D) III and IV

D. State-registered investment advisers maintaining discretion over client accounts must maintain a minimum net worth of $10,000. Any advisory firm whose net worth falls below required minimums is required to send notice to the Administrator no later than the close of business on the day following discovery. This notice must be followed up no later than the next business day with a complete financial report to the Administrator.

An investment adviser (IA) has its primary office in State A. They have branches in states B and C, and they advertise in states D, E, and F. What net capital requirements must they meet? A) The state where the largest number of its clients reside B) All the states combined C) Whichever state is the highest D) Where its principal office is located

D. The Administrator of every state, other than State A, follows the rule that every investment adviser that has its principal place of business in a state other than his state need maintain only the minimum capital as required by the state in which the investment adviser maintains its principal place of business, provided the investment adviser is licensed in that state (State A) and is in compliance with that state's minimum capital requirement.

If a federal covered adviser's fiscal year ends on November 30, 2017, it must file its annual updating amendment to its Form ADV no later than A) January 18, 2018 B) March 30, 2018 C) December 31, 2017 D) February 28, 2018

D. The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end.

The purpose of the Investment Advisers Act of 1940 is to provide A) regulation for investment companies and their operations B) standards among the various states for the regulation of investment advisers C) minimum standards of performance for those registered as investment advisers D) standards at the federal level for the regulation of investment advisers

D. The purpose of the Investment Advisers Act of 1940 is to provide federal standards for the regulation of investment advisers. Providing standards among the various states for the regulation of investment advisers is the purpose of the Uniform Securities Act. Providing regulation for investment companies and their operations is the purpose of the Investment Company Act of 1940.

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

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

Under the Uniform Securities Act, which of the following must register with the state securities Administrator? A) Investment advisers without an office in the state whose clients are exclusively insurance companies B) Investment advisers to an investment company registered under the Investment Company Act of 1940 C) Investment advisers who have $100 million or more under management D) Investment advisers with a place of business in the state and less than $100 million in assets under management

D. Under the USA, an investment adviser with a place of business in the state must register with the state securities Administrator, regardless of who the clients are, unless they are federal covered advisers. Advisers without an office in the state, or whose clients are exclusively insurance companies, are not defined as investment advisers in that state under the USA. An adviser who manages an investment company that is registered under the Investment Company Act of 1940 or who has $100 million or more under management, are federal covered investment advisers that do not register with the states. Once the $100 million level is reached, the adviser has the choice of state or SEC registration until hitting $110 million.

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

D. Unregistered personnel may be paid a bonus as long as it is not directly related to any specific sales activity.

Under the Uniform Securities Act, an offer to sell would NOT include I) stock acquired through a merger II) the issuance of warrants or convertible securities III) the issuance of stock rights to existing shareholders A) I only B) I and III C) I, II, and III D) II and III

A An offer to sell is any activity in an effort to dispose of a security for value. The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an offer to sell the underlying security because, unlike stock dividends, mergers, and bona fide loans, they involve the payment of money to acquire the stock, thereby making them an offer to sell

Kapco Advisers, a federal covered investment adviser operating on a calendar-year basis, published a list of recommended securities in January 2015. A copy of this must be maintained until at least A) January 31, 2020 B) January 31, 2017 C) December 31, 2020 D) December 31, 2017

A. Investment adviser records, including copies of advertisements, must be kept for at least 5 years from the end of the fiscal year in which the record originated—in this case, 5 years from the end of 2015.

Which of the following accurately describes a cease and desist order as authorized by the Uniform Securities Act? A) An Administrator's order to refrain from a practice of business believed by that Administrator to be unethical B) An Administrator's order to an issuer to suspend sale of its security as a result of improper disclosures in the registration statement C) An order from one brokerage firm to another to refrain from unfair business practices D) A court-issued order requiring a business to stop an unfair practice

A. A cease and desist order is a directive from an administrative agency to immediately stop a particular action. The order can come from a federal, state, or judicial body; it is not exclusive to anyone. Administrators may issue cease and desist orders with or without a prior hearing. Brokerage houses cannot issue cease and desist orders to each other. An order issued by the Administrator to halt the sale of a security is known as a stop order, not a cease and desist order.

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

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

A securities analyst's stock selection method is to begin by looking for superior companies, regardless of their industry sector or the condition of the overall economy. In so doing, this analyst is using A) the bottom-up approach. B) the optimal portfolio approach. C) the top-down approach. D) the business cycle approach.

A. This is the basic approach of bottom-up analysis. Rather than focusing the attention on the overall market (the "macro" view of the economy) or the sectors that are likely to outperform, this approach seeks to identify, usually based on the company's fundamentals, the most attractive individual stocks.

An investment constraint that is unique to private foundations is the requirement to A) distribute 5% of its assets each year as qualifying distributions. B) have a board of directors. C) have an investment policy statement. D) invest 5% of its assets each year in qualifying investments.

A. Under Section 4942 of the Internal Revenue Code, a private foundation must pay out each year an amount equal to 5% of its net investment assets in "qualifying distributions". There is no legal requirement on how much must be invested each year, and having an investment policy statement is not unique to foundations. Likewise, there is nothing unique about the requirement to have a board of directors and that isn't an investment constraint.

One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken? A) Trustee and beneficiary B) Beneficiary C) As the grantor, no other roles may be taken D) Trustee

A. Under trust law, the grantor of a trust, sometimes referred to as the settlor, may also be the beneficiary and the trustee.

Your client in the 25% federal income tax bracket lives in a state where his earnings place him in the 6% bracket for state income tax purposes. If he were to purchase a 4% bond issued by a political subdivision of another state, his total tax-equivalent yield would be A) slightly less than 5.33% B) 4% C) approximately 12.90% D) slightly more than 5.33%

A. When an individual owns a municipal bond issued in a state other than his state of residence, although the interest is tax free on a federal basis, it is taxable (at least in all cases on the exam) in that state. Therefore, the tax-equivalent yield here is slightly lower than it would be if we only computed using the federal tax rate. Because that would be 4.0% divided by 0.75 (100% minus the 25% tax bracket) or 5.33%, paying the state income taxes would decrease the yield slightly.

Under all of the following circumstances, the USA requires investment advisers with no place of business in the state to register EXCEPT A) when an adviser with numerous clients in the state has not been subject to disciplinary action within any state within the last 10 years B) when an adviser only provides investment advice to 401(k) plans with assets of $250,000 or more C) when an adviser only provides advice to registered investment companies D) when an adviser has maintained assets of $100 million or more for 7 out of the last 10 years

An adviser that only provides investment advice to investment companies registered under the Investment Company Act of 1940 is federal covered and does not have to register in a state, regardless of whether or not it has a place of business there. An adviser that provides advice only to 401(k) plans or other tax qualified employee benefit plans with $1 million in assets (not $250,000) is not required to register in a state in which it does not have a place of business. The assets of the adviser is not what determines becoming a federal covered adviser; it is assets under management and the determining factor is the AUM now, not the range over the previous 10 years.

When an individual registered with a broker-dealer has a change of residence, an amended Form U4 must be filed A) within 90 days of the end of the fiscal year B) within 30 days C) within 2 business days D) within 60 days

B. Virtually any change to the information on the Form U4 (an action resulting in statutory disqualification is the notable exception) requires filing an amended Form U4 promptly. In this case, "promptly" is defined as within 30 days. Terminations are reported on Form U5 within 30 days.

Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is true? A) The bond's current yield is lower than its yield to maturity. B) The bond's current yield is calculated by dividing its annual interest by its current market price. C) To determine the bond's current yield, its stated rate must be compared against other fixed-rate investments in the client's portfolio. D) The bond is a discount bond.

B. A bond's current yield is calculated by dividing its annual interest by its current (market) price. In this case, it would be $85 ÷ $1,100. The current yield will be higher than its yield to maturity, which takes into consideration the $100 difference between the purchase price and the par value (a loss of $100). The determination of a bond's yield is unrelated to other bonds. In addition, this bond is selling at a premium (more than $1,000), not at a discount (less than $1,000).

If the risk-free rate of return is 3.5%, the expected market return is 9.5%, and the beta of a stock is 1.3, what is the required return on the stock according to the capital asset pricing model? A) 7.80% B) 11.30% C) 8.85% D) 12.35%

B. The formula for the required return is: E(R) = Rf + (E (RM) - Rf) × Beta or 0.035 + (1.3 × [0.095 - 0.035]) = 0.035 + 0.078 = 0.113, or 11.3%.

A corporation offering securities registered under the Act of 1933 may make which of the following statements? I) "The SEC has passed on the merits of these securities as an investment." II) "The SEC has released our securities for sale to the public." III) "The SEC has passed on the accuracy of the information in our prospectus." IV) "The SEC has declared this prospectus effective." A) II and III B) II and IV C) I and IV D) I and III

B. When a security registers with the SEC, the date that sales are allowed is known as the effective date. The SEC neither approves nor disapproves an issue, nor does it pass on the accuracy or adequacy (completeness) of the information presented in a prospectus.

If information filed with the Administrator by a broker-dealer as part of its registration changes in a material way, the registrant must A) amend the registration statement within 60 days of the material change B) amend or update the information promptly regardless of the renewal date C) update the information on the registration on the next annual renewal date D) submit an entirely new registration form within 30 days of the material change in information

B. When material information changes, the registrant must promptly amend or update the information regardless of the renewal date. The requirement to amend a registration applies to investment advisers, broker-dealers, and securities. However, the Uniform Securities Act does not define the term "promptly."

If a person offers to buy a security after reading a tombstone ad, the offer to buy would be considered A) solicited B) illegal C) unsolicited D) null and void

C. A client calling to buy based on reading a tombstone ad is considered an unsolicited order because, under the law, the tombstone ad is neither a solicitation to buy nor an offer to sell. If the question had stated that the agent had sent a prospectus out and the client was responding to that, it would have been a solicited order.

A grantor retained annuity trust (GRAT)would not be used to reduce I) estate taxes. II) gift taxes. III) income taxes. A) I only B) I and II only C) III only D) II and III only

C. A GRAT is an estate planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor.

A registered broker-dealer would not be able to open an account for A) the estate of a deceased individual. B) the CEO of a company whose stock is NYSE-traded. C) a person deemed mentally incompetent. D) two unrelated individuals.

C. A broker-dealer can only open an account with a legal person. Those deemed mentally incompetent are not persons under the law. Deceased individuals are not persons either, but their estate is so an account may be opened in the name of the estate. Although the CEO's account would have to be monitored for any hint of insider trading, one's position in a listed company is not an impediment to opening a brokerage account. There is no legal requirement that the owners of a joint account be related; friends are fine as are business partners.

Under the Securities Act of 1933, a registration statement for a security generally becomes effective how many days after it is filed? A) 31 B) 10 C) 20 D) 30

C. A registration statement for a security becomes effective 20 days after it is filed, unless the SEC orders a delay.

An investment in which of the following would expose the investor to the greatest capital risk? A) Mortgage bonds B) Debentures C) Common stock D) Preferred stock

C. Capital risk is the risk of losing capital. Of the choices given, the greatest risk of losing capital is the common stock, as common shareholders come last in liquidation under bankruptcy proceedings.

What is the risk measure associated with the capital market line (CML)? A) Systematic risk B) Beta C) Standard deviation D) Alpha

C. In the context of the CML, the measure of risk is total risk, or standard deviation. Beta (systematic risk) is used to measure risk for the security market line (SML).

Which of the following items is NOT required under the customer identification program (CIP)? A) Physical address B) Date of birth C) Sex D) Visa details for non-citizens

C. The CIP does not ask if the account holder is male or female.

Among the effects of a country devaluating its currency is that there will probably be I) a credit to that nation's trade account balance II) a debit to that nation's trade account balance III) an increase in that nation's exports IV) an increase in that nation's imports A) II and III B) II and IV C) I and III D) I and IV

C. When a currency is devalued by a country, it means that foreigners will find their money has more buying power in that country. Therefore, it would be expected that foreigners would buy more goods produced in that country causing an increase in exports. Those exports result in a credit to the country's trade account balance.

All of the following are potential benefits of high frequency trading (HFT) except A) lower costs for institutional purchasers. B) increased liquidity, especially in very active stocks. C) greater trading opportunities for the small investor. D) arbitrage opportunities increase market efficiency.

C. With HFT, it is the smaller investors who lose out because they don't get access to the information as quickly.

A risk faced by many seniors is longevity risk. What security would be most appropriate to protect against that risk? A) Fixed annuity B) Common stock C) REIT D) Variable annuity

D. Longevity risk is the uncertainty that one will outlive his money. The only instrument that guarantees a payout for as long as one lives is an annuity. Because the question asks for a security, only the variable annuity is correct, otherwise the fixed annuity would also offer protection.

Stock market indices have a variety of uses. Which of the following is least accurate regarding the use of stock market indices? A) They help in portfolio performance measurement. B) They act as a market barometer. C) They act as the basis of ETFs. D) They are a lagging indicator of an economy's corporate performance.

D. The stock market and market indices are leading indicators of the economy's corporate and financial performance.

Many fixed-income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk? A) Ba-rated corporate mortgage bond B) Baa-rated municipal revenue bond C) A-rated general obligation municipal bond D) Aa-rated corporate debenture

D. A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk.

A business organized as a sole proprietorship wishes to open an advisory account. When preparing an investment policy statement, the IA would have to consider the objectives of A) the members B) the partners C) the stockholders D) the sole proprietor

D. A sole proprietorship only has one owner. Therefore, the account would focus on the needs of that individual.

Your client maintains a small cash account at the firm. One typical broker-dealer fee that would not be charged to this client is A) the fee for transferring certificates B) an account maintenance charge C) a charge if the client asks to have funds wired D) margin interest on the debit balance

D. In a cash account, you can't have margin activity, so there can't be a margin interest charge.

D. Which of the following statements regarding preemptive rights is TRUE? A) Neither common nor preferred stockholders have the right to subscribe to a rights offering. B) Common stockholders do not have the right to subscribe to a rights offering. C) Both common and preferred stockholders have the right to subscribe to a rights offering. D) Preferred stockholders do not have the right to subscribe to a rights offering.

Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.

Which of the following would be most suitable for a young couple investing the assets of their IRAs? A) Oil and gas exploration programs B) Call options on large-cap stocks C) Growth mutual funds D) Penny stocks

C. IRA accounts are designed to provide for future retirement needs. An IRA is a personal pension plan for anyone who receives earned income. While the rules are fairly liberal regarding suitable investments for IRAs, penny stocks, options, or oil and gas programs would not likely be suitable because of the high risks inherent in these securities. However, growth mutual funds are suitable.

One of the more popular money market instruments is the negotiable CD. These normally are found in minimum denominations of A) $100,000 B) $500,000 C) $1,000,000 D) $25,000

A. Negotiable CDs, sometimes referred to as jumbo CDs, have a minimum denomination of $100,000. They are unsecured, interest-bearing obligations of banks.

An investor wishing to buy US Treasury bonds receives a quote from the dealer of 98.16. This represents A) the offer price B) a discount C) an indication of falling interest rates D) the bid price

A. A dealer's quotes consist of the bid and the offer (ask). The bid price is what the dealer will pay a customer to purchase a security, and the offer is the dealer's selling price. In this case, the client wishes to purchase bonds, so the 98.16 represents the price the dealer is asking for them. Yes, the quote is a discount, but the better answer for this question is offer.

An individual purchasing a flexible premium variable life contract should know which of the following? I) Timing and amount of premiums generally are discretionary. II) The death benefit will generally be higher than that of a comparable whole life policy. III) The face amount is fixed at the beginning of the contract. IV) The performance of the separate account directly affects the policy's cash value. A) I and IV B) II and IV C) II and III D) I and III

A. A flexible premium policy allows the insured to determine the amount and timing of premium payments, provided minimums are met. Depending on the policy, the face amount (death benefit) is recalculated each year. It is intended that the death benefit receive some inflation protection, but this cannot be guaranteed. If separate account performance causes the cash value to drop below an amount necessary to maintain the policy in force, the policy lapses unless the requisite amount is received within 31 days.

An investor goes short 5 soybean futures contracts on the Chicago Mercantile Exchange (CME). When the contract expires, A) both the buyer and the seller are obligated to perform B) only the buyer is obligated to perform C) only the seller is obligated to perform D) only the exchange is obligated to perform

A. Among the ways in which futures differ from options is that both parties, long and short, are obligated to execute the contract. At expiration date, if not exercised before, the buyer must purchase at the contract price and the seller must deliver at the contract price. In the case of options, the buyer (long position) is the one who chooses to exercise or not, and it is the seller (short position) who becomes obligated to perform.

A man is planning to start his own glass-sculpturing business. He wants to be able to deduct his anticipated losses for the first 2 years. He anticipates that the enterprise will borrow money from lenders and is willing to personally guarantee the debt. He also wants to attract other investors but does not want to give up control of the day-to-day business decisions. What business form do you recommend? A) Limited partnership B) General partnership C) S corporation D) C corporation

A. A limited partnership with him as general partner would allow for additional investment capital without giving up management control. C corporations do not allow deductibility of losses; S corporations do not allow guaranteed debt to be included in the taxpayer's basis. General partnerships could allow the other partners to more easily control the day-to-day operations than a limited partnership, in which the other investors (presumably limited partners) would not be permitted to take a role in the running of the business.

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

A. 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.

A mutual fund's expense ratio is found by dividing its expenses by its A) average annual net assets B) dividends C) public offering price D) income

A. A mutual fund's expense ratio is calculated by dividing its expenses by its average annual net assets. For example, if the fund had net assets of $100 million and its annual expenses are $1 million, the expense ratio is $1 million divided by $100 million = 1%.

Which of the following statements are TRUE of a discretionary account at a broker-dealer? I) It must be approved by a designated supervisory individual of the firm. II) It must be reviewed frequently to minimize the chances that the account has been churned. III) A discretionary order may be placed once the customer has placed a power of attorney in the mail. IV) It must be approved by the Administrator of the state of residence of the client. A) I and II B) III and IV C) II and IV D) I and III

A. A new discretionary account must first be approved by a designated supervisory person, and the account must be reviewed frequently for suitability and avoidance of churning. The written discretionary power must be "in hand," not in the mail, before discretion may commence.

A client with a net worth of $5 million is compensating an investment adviser with a performance-based fee. According to the Investment Advisers Act of 1940, this arrangement must be based on A) capital gains minus capital losses, including both realized and unrealized gains and losses B) the S&P 500 index performance C) This arrangement is not permitted because the client has not met the minimum invested assets requirements D) a period of no less than 6 months

A. A performance-based fee must be based on capital gains minus capital losses, include both realized and unrealized gains and losses and must reflect a time period of no less than 12 months. This client is well above the minimum net worth requirements of more than $2.1 million. The rule requires that the performance be measured against a recognized benchmark but does not specify one.

Due to an escalating trade war, the portfolio manager of an equity mutual fund anticipates a negative impact on his fund's assets. To protect his investment portfolio, the fund manager would A) buy S&P 500 index puts B) sell S&P 500 index puts C) sell S&P 500 index calls D) buy S&P 500 index calls

A. A portfolio manager who expects a decline in the market as a result of a trade war (or any factor that might hurt stock prices) would buy puts on a broad market index such as the S&P 500 to protect his position. Selling calls limits upside potential and only protects the portfolio to the extent of the income received from the sale of the calls.

A bond purchased at $900 with a 5% coupon and a 5-year maturity has a current yield of A) 5.56% B) 5.00% C) 7.80% D) 7.40%

A. Current yield is determined by dividing the annual interest payment by the current market price of the bond ($50 ÷ $900 = 5.56%). Years to maturity is not a factor in calculating current yield.

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

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

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) universal life B) term life. C) whole life. D) variable life.

A. 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.

A 35-year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is A) 9% B) 8.5% per premium payment C) 8.5% of total premiums over the life of the plan D) 9% per premium payment

A. A variable life insurance plan may charge a maximum sales charge of 9% over a period not to exceed 20 years.

Hugh Clark, a partner with a minority interest in ABC Investment Partners, a registered investment adviser, withdraws from the partnership to form his own separate partnership, Clark Advisers. ABC Investment Partners A) must notify its clients of Clark's departure within a reasonable period B) must notify Clark Advisers of Clark's withdrawal from ABC Investment Partners within a reasonable period C) need not notify its clients of Clark's departure because Clark was only a minority partner D) must change its name because the partnership has a new mix of partners as a result of Clark's departure

A. ABC Investment Partners must promptly notify its clients of Clark's departure. Under the Uniform Securities Act, a change to a minority interest in the membership of a partnership requires the partnership to notify all investors of the change within a reasonable period. ABC has no obligation to notify Clark Advisers of Clark's new employment.

According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following business practices are dishonest or unethical and may constitute grounds for denial, suspension, or revocation of an agent's registration? I) Executing a transaction on behalf of a customer without authorization to do so II) Sharing in profits or losses in the account of any customer without the written authorization of the customer and the broker-dealer that the agent represents III) Splitting commissions from a securities purchase or sale with an agent of a different broker-dealer, or a broker-dealer not under direct or indirect common control IV) Recommending securities that possess a high probability of loss and a low probability of gain A) I, II, III, and IV B) I, II and III C) II and III D) I and II

A. According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is a dishonest or unethical business practice to execute a transaction on behalf of a customer without authorization to do so; share in profits or losses in the account of any customer without the written authorization of the customer and the broker-dealer that the agent represents; and split commissions or profits from the purchase or sale of securities with any person not also registered as an agent for the same broker-dealer, or a broker-dealer under direct or indirect common control. It would likely be considered dishonest or unethical for an agent to sell securities that possess high probabilities of loss and low probabilities of gain.

Which of these features are common to both variable annuities and scheduled premium variable life insurance? I) Income earned in the separate account is tax deferred. II) Separate account performance below the AIR causes a reduction in cash value. III) Fixed contributions are required. IV) Contract owners have voting rights. A) I and IV B) II and III C) I and II D) III and IV

A. All variable products offer tax deferral of earnings in the separate account. Unit holders of a variable annuity vote on the basis of the number of units they own; holders of variable life insurance receive 1 vote for each $100 of cash value. With variable life insurance, AIR applies only to the death benefit, not to cash value.

As referred to in the NSMIA, the term "covered security" would apply to I) preferred stock in the XYZ Corporation whose common stock is listed on the NYSE II) common stock in ABCD, Inc., a stock traded on the OTC Link III) Springfield, Illinois, municipal bonds sold to a resident of Springfield, Illinois IV) Springfield, Illinois, municipal bonds sold to a resident of Springfield, Missouri A) I and IV B) I and II C) II and III D) III and IV

A. Any security equal or senior to one listed on the NYSE is a covered security. The hierarchy goes from common stock, (the most junior) to preferred stock and then to any debt security. Equal to the common stock would be rights and warrants. Municipal bonds are a covered security except in their state of issuance. OTC Link and OTC Bulletin Board securities are not considered federal covered securities.

Your client calls you after reading a story in the business section of his local newspaper. It seems that the article focused on changes to the core CPI and the client wants to know how that is different from the normal CPI. You should explain that it is A) the Consumer Price Index excluding energy and food prices B) the Consumer Price Index excluding housing and automobiles C) the total of the leading indicators, excluding stock prices D) the figure used to determine annual increases, if any, to Social Security benefits

A. Because of their high volatility, economists exclude energy and food prices from core inflation figures. Social Security adjustments (and many others as well) are based upon the CPI itself, not the core.

Wrap fee accounts would tend to be most suitable for investors who follow A) a tactical approach to investing B) a passive approach to investing C) a buy-and-hold philosophy D) a strategic approach to the market

A. Because one of the key benefits to the wrap fee program is the elimination of transaction fees (commissions), it is most suitable for those who are active traders, such as those who take a tactical approach to investing. The other 3 choices engage in far less trading activity, potentially not being able to take full advantage of all of the benefits of the wrap program.

Calvin has the following securities in his portfolio: ABC common stock, XYZ common stock, PQR mutual fund (domestic small cap), DEZ mutual fund (foreign small cap), 30-year Treasury bond, and 5-year Treasury note. Which of the following risks should not concern Calvin? A) Default risk B) Reinvestment rate risk C) Business risk D) Systematic risk

A. Default risk applies only to debt securities. That is, one can default only on a debt (failure to pay the interest when due and/or the principal). For exam purposes, there is one category of debt securities that has no default risk: securities issued by the U.S. Treasury. Therefore, with a portfolio consisting of nothing but equity securities and Treasuries, default risk would not be a concern to Calvin. Business risk is the uncertainty that a corporation will underperform, either due to management failures or some other event unique to that company or industry. That is certainly a concern with the investments in ABC and XYZ common stock. To a lesser degree (because of the diversification), business risk also applies to ownership of mutual funds. Reinvestment rate risk is the risk that as cash flows are received they will be reinvested at lower rates of return than the investment that generated the cash flows and applies largely to any debt security. Systematic risk is the risk that all securities are subject to and typically cannot be eliminated through diversification.

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

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

When does a customer have to receive the OCC Options Disclosure Document? A) At or prior to the time the account is approved for options trading B) With the confirmation of his first options transaction C) Within 5 business days of the first options trade D) Within 15 days of account approval

A. Before opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options at or prior to the time of account approval, the broker-dealer satisfies the risk disclosure requirements.

All of the following statements concerning capital market theory are correct EXCEPT A) beta is a measure of volatility, or relative unsystematic risk, for stock or portfolio returns. B) the market risk premium is the difference between the expected return for the equities market and the risk-free rate of return. C) the security market line (SML) depicts the tradeoff between risk and expected return for all assets, whether individual securities, inefficient portfolios, or efficient portfolios. D) the security market line (SML) is the graphical depiction of the capital asset pricing model (CAPM).

A. Beta is a measure of relative systematic risk for stock or portfolio returns. A stock or portfolio with a beta of 1.0 would have the same systematic risk as the overall market.

A sudden decrease in market interest rates will have the effect of increasing the trading price of an existing bond because A) the present value of the bond's future cash flows increases B) a reduction in market interest rates generally signifies a stronger economy C) lower interest rates will result in a higher rating for the bond D) the future value of the bond's present cash flows increases

A. Bond valuations using discounted cash flow take into consideration the present value of the bond's future cash flows. That is, the greater the value of the interest payments to be received in the future, the higher the price of the bond. When market interest rates decline, because the coupon rate of the existing bond is fixed, the present value of those interest payments increases, creating a higher value for the bond.

Olga holds XYZ stock. The stock recently increased in value by 50%. She would like to preserve as much of this gain as possible and retain the potential for additional price increases. Which strategy best meets Olga's goal? A) Buy a put option B) Short the stock C) Buy a call option D) Write a call option

A. Buying a put option would allow Olga to hold the stock for additional gain but reserve the right to sell at or near the current value if the stock price plummets. Shorting the stock would lock in Olga's gain but not allow her to take advantage of additional price increases; additional price increases would be offset by the cost of replacing the shorted stock. Writing a call option would provide some offset to a drop in price but would not allow for potential gain in value. Buying a call option would not provide any downside protection.

A registrant's registration may be canceled by the Administrator A) if the Administrator is unable to locate the registrant B) as long as there is opportunity for a hearing C) when the registrant has been found in violation of the Uniform Securities Act D) upon the order of a court of competent jurisdiction

A. Cancellation is nonpunitive—nothing wrong was done. But when the Administrator is unable to locate the registrant, or the registrant is declared mentally incompetent or is deceased, registration is canceled.

Asset-based sales charges will generally be lowest when holding which of the following mutual fund share classes? A) Class A shares B) Class T shares C) Class C shares D) Class B shares

A. Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load, but do have a higher asset-based sales charge. Class T shares always have a 12b-1 charge.

Under NASAA Model Rule on Custody Requirements for Investment Advisers, which of the following are violations of the requirements for advisers who have custody of client securities or funds? I) An adviser deposits client funds into its own bank account, making a careful record of the amount of funds belonging to each client. II) An adviser allows a CPA to make an unscheduled audit of all client securities and funds in the adviser's custody. III) Once a year, an adviser sends each client a report on the securities and funds in the adviser's custody. A) I and III B) I and II C) I, II, and III D) II and III

A. Client funds must be deposited in separate bank accounts. Each year, accounts must be audited by an independent public accountant in an unannounced examination. Clients must receive statements quarterly (not yearly). Clients must also be notified in writing of the location of their property and any change in that location. Client securities must be properly segregated and identified.

FinCEN Form 112, the Currency Transaction Report, is filed with A) the Department of the Treasury B) the Federal Bureau of Investigation (FBI) C) the National Security Agency D) the SEC

A. Currency transactions in excess of $10,000 are reported electronically on FinCEN Form 112 to the Department of the Treasury.

Which items change when a company pays a cash dividend? I) Working capital II) Total assets III) Total liabilities IV) Shareholders' equity A) II and III B) I, II, and III C) I and IV D) II, III, and IV

A. From an accounting standpoint, once a corporation declares a cash dividend, it becomes a current liability on the company's balance sheet. When that dividend is paid, cash, a current asset, is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth).

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

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

An investor who is long XYZ stock would consider going long an XYZ call to A) protect against an increase in the market price of XYZ stock B) obtain income from the premium C) protect against a decrease in the market price of XYZ stock D) hedge the long position

A. Going long a call means that you have bought it. Only sellers of options generate income. If you wish to hedge your long stock position, you buy a put, not a call. That leaves us with two choices that are polar opposites. Good test-taking skills teach us that, in almost all cases, when we see that, one of those must be the right answer. Buying a call is bullish. Forget the first part (you are long the stock). You would buy a call so that, if the price of the stock went up, you could exercise at the lower strike price of your call option.

Under the Uniform Securities Act, all of the following statements regarding an investment adviser withdrawing its registration are true EXCEPT A) it prevents the investment adviser from reregistration in the future B) it is generally effective 30 days after written notification C) it must be in writing D) it cannot take effect if the Administrator is instituting a revocation proceeding

A. If an investment adviser withdraws its registration, it retains the right to reregister at some future date. The USA provides for a 30-day withdrawal period.

The Uniform Securities Act grants the Administrator the power to deny or revoke a registration of a securities professional. However, the Administrator generally would not deny or revoke a registration A) if a person associated with a registered investment adviser has been convicted of any non-securities-related misdemeanor within the last 10 years B) if a registrant is temporarily enjoined by any court of competent jurisdiction from engaging in the securities business C) of a securities professional in the case of insolvency D) if a registrant has engaged in dishonest or unethical (but not illegal) practices in the securities business

A. In most cases, conviction for a non-securities-related misdemeanor is not sufficient cause for revocation. An Administrator may revoke a registration if a person associated with an investment adviser has been convicted of any felony or any securities-related misdemeanor within the last 10 years. Insolvency of a securities professional is cause for termination of the registration.

A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true except A) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment B) the adviser may collect fees for investment advice and commissions for executing trades C) the adviser must state that the client may be subject to certain limitations because of this arrangement D) this practice is ethical if full disclosure is made to all clients

A. In order for the investment adviser to sell securities products through any broker-dealer, affiliated or not, registration as an agent is required. Whenever an IA acts in an agency capacity with an advisory client, disclosure of the capacity and consent of the client must be received not later than completion of the trade. Please note that the consent does not have to be in writing. There are cases, such as agency cross transactions, where prior written consent of the client is needed. One of the limitations that must be disclosed is that dealing solely with proprietary products limits the universe of available recommendations.

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

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

Under the USA, every investment adviser organized as a partnership, must include in its contracts an agreement to notify clients within a reasonable period of time of A) the addition or removal of any of the partners B) the decision to charge fees in advance rather than arrears C) a change in the location of securities held in custody D) a change in the method of computing fees

A. Investment advisers organized as partnerships must include in their advisory contracts a statement that they will notify all clients of a change to the composition of the partnership within a reasonable period of time. All of the other choices mentioned here would require prompt notification, which although not quantified in the USA, is much sooner than a reasonable period of time.

Which of the following activities would violate the Uniform Securities Act? I) An investment advisory partnership admits a renowned securities analyst to the partnership without informing its clients of this highly desirable addition. II) An investment adviser incorporated in California fails to inform its clients of the departure of the chief financial officer, who did not have an equity position in the firm. III) An investment advisory firm incorporated in Illinois charges clients a share of the capital gains on the basis of a guaranteed performance level above a designated benchmark. IV) An investment advisory firm assigns those accounts that fall to a low level to other firms willing to accept them with the consent of the account holder. A) I and III B) I, III, and IV C) II and III D) I and II

A. Investment advisers who are partnerships must inform their clients of any change in the membership of the partnership within a reasonable period. Unless the question refers to a specific exemption, it is a violation of the USA for an advisory firm to charge on the basis of performance. An investment advisory firm may assign accounts to another firm with the consent of the client.

Interest rates are rising. An analyst would be most likely to state that the business cycle is in which stage? A) Expansion B) Trough C) Contraction D) Peak

A. It is during periods of economic expansion that interest rates tend to increase. They tend to fall during contractions.

Jake Aaron is registered as an agent with ABC Securities, a broker-dealer registered with the SEC doing business in 34 states. In addition, Aaron has his own investment advisory business, Jake's Money Advisers, and is registered with the SEC. To comply with all appropriate regulations, which of the following would have to be stated on the business card for Jake's Money Advisers? I) Jake Aaron, RIA II) Jake's Money Advisers, RIA III) Jake's Money Advisers, registered investment adviser IV) Securities offered through ABC Securities A) III and IV B) I, III, and IV C) I and III D) II and IV

A. It is not permissible to use the initials RIA, but one would properly describe the fact that the firm is a registered investment adviser. If one is registered as an agent with a broker-dealer, that fact always must be stated on that person's business card.

All the pundits are predicting bad times ahead—not only a recession but a period where prices actually fall (deflation). If they are right, the best place for your client would probably be A) U.S. Treasury securities B) real estate C) gold D) common stock

A. It is times like this that the flight to safety has investors commit their funds to U.S. government securities. Gold (and other commodities) tends to increase in price during inflationary, not deflationary, periods. Both real estate and equities tend to rise when things are good, not during recessions.

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

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

Limited liability is a characteristic of being an owner of I) a general partnership II) an interest in a limited partnership III) shares of an S corporation IV) a sole proprietorship A) II and III B) I, II, and III C) I and IV D) III only

A. Limited partnerships and any corporate form of ownership offer limited liability. Such is not the case with a general partnership and certainly not the case with a sole proprietorship.

Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her? A) General Partnership B) C Corporation C) S Corporation D) Limited Partnership

A. Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. While an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.

A market maker is quoting ABC common stock at $76.10 - $76.31. That means A) the market maker is willing to pay $76.10 for the stock. B) the market maker's commission is $.21 per share. C) the market maker is willing to pay $76.31 for the stock. D) the spread is probably excessive.

A. Marker makers provide a two-sided quote. Because market makers stand ready to buy and sell the specific security, they provide a bid price, the price the firm is willing to pay for the stock, and the offer price, the price they are asking to receive when selling the stock. Market makers do not earn a commission; they charge a markup or markdown. A $.21 spread on a stock at this price is certainly not excessive.

Which of the following is federally tax exempt for a corporation? A) Municipal bond interest B) Foreign corporate stock dividends C) Capital gains D) Preferred stock dividends

A. Municipal bonds are tax exempt for corporations, as well as for individuals. Preferred stock dividends are taxable but at a reduced rate for corporations due to the 50% dividend exclusion. That break does not apply to the dividends on foreign securities. Regardless of the security, capital gains are taxable.

The minimum face amount of a negotiable CD is: A) $100,000.00 B) $10,000.00 C) $50,000.00 D) $25,000.00

A. Negotiable CDs are issued in the minimum face amount of $100,000. These are called jumbo CDs and are traded in blocks of $1 million.

Under the USA, it is unlawful to sell A) a nonexempt, nonregistered security issued by a foreign corporation from a country with which the U.S. government maintains diplomatic relations B) a security registered in the state under the USA but not registered in any other state C) a security of a commercial bank not registered in the state D) a federal covered security not registered in the state

A. Nonexempt, nonregistered securities cannot be lawfully sold in a state unless in an exempt transaction (and nothing in the question indicates that is the case). The fact that they are issued by a foreign corporation is irrelevant; nonexempt securities must be registered. A federal covered security need not be registered in a state. Securities issued by banks, not bank holding companies, are always exempt securities.

A wealthy individual has set up a GRAT. Should she die during the time the trust is active, how are the remaining assets in the trust taxed? A) The original value plus any appreciation is taxed as part of the grantor's estate. B) The original value plus any appreciation passes to the beneficiaries but is subject to gift tax. C) The original value plus any appreciation passes to the beneficiaries and is taxed as ordinary income. D) No tax is due if the grantor should die during the term of the trust.

A. One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3-10 years), the assets put in the GRAT, plus any appreciation, are included in her estate.

Flexible premium payments are a feature of A) universal variable life B) whole life C) term life D) variable life

A. Only universal and universal variable life policies have flexible premium payments.

One way in which open-end investment companies differ from closed-end investment companies is that an open-end investment company's shares A) outstanding will vary in number at any point in time. B) are traded in the secondary markets rather than on an exchange. C) may be priced at a premium or discount relative to its net asset value. D) are purchased and redeemed based on supply and demand.

A. Open-end investment companies are capitalized with a continuous offering of new shares. As a result, the number of shares outstanding is constantly changing. It is the closed-end company, traded in the secondary markets, whose share prices are based on supply and demand which causes them to be bought or sold at a premium or discount to the NAV.

A securities analyst's approach is to look at the overall economy and try to forecast which industry will outperform. Then, the analyst searches for those individual companies within that industry that appear to have the best expected return and add those to their recommended list. In so doing, this analyst is using the A) top-down approach. B) business cycle approach. C) bottom-up approach. D) optimal portfolio approach.

A. This is the basic approach of top-down analysis - start with the "big picture" and narrow it down to the most attractive individual stocks.

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

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

An investor holding which of the following equity securities would NOT expect to have preemptive rights? A) Preferred stock B) Common stock acquired in a private placement C) Common stock D) Control stock

A. Preferred stockholders do not have preemptive rights. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership.

Which of the following would appear as assets on a corporation's balance sheet? I) Prepaid expenses II) Deferred tax credits III) Notes payable IV) Notes receivable A) I and IV B) II and III C) I and III D) I, II, and IV

A. Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability.

All of the following would flow through as a loss to limited partners except A) principal repayment on partnership debt. B) depletion. C) interest payments on partnership debt. D) accelerated depreciation.

A. Principal repayments are not an expense for tax purposes. The interest on the debt is an expense and, along with depletion and depreciation expense, does flow through to the limited partners as passive loss.

Under the Investment Advisers Act of 1940, if an investment adviser's sales literature describes an investment system, the description must include I) the length of time the system has been used II) the difficulties and limitations of using the system III) the performance history of the system A) II only B) I, II, and III C) I and III D) II and III

A. References to charts, tables, formulas, or other devices used to forecast securities prices without setting forth difficulties or limitations in their use is prohibited. It is not necessary to indicate how long the system has been used or its performance history. However, nothing prevents this information from being included. The question asks only what must be included.

Under the Uniform Securities Act, which of the following is TRUE regarding the registration of securities? A) State registration by coordination is available only if a federal registration statement has been filed under the Securities Act of 1933 in connection with the same offering. B) The Administrator may require that a prospectus be delivered to every purchaser of a registered security no sooner than the time at which the security is delivered. C) The effectiveness of a registration statement assures the accuracy of the information contained in the statement. D) Registration by coordination becomes effective on a date ordered by the Administrator.

A. Registration by coordination becomes effective simultaneously with the federal registration. A prospectus may be delivered at or prior to the time actual delivery of the security is made. The act prohibits any statement or implication that registration involves approval of accuracy of facts by the Administrator. The federal registration statement is what the state registration is being coordinated with.

Which of the following is the form of portfolio management that rotates between sectors based on changes to the business cycle? A) Segment rotation B) Cyclical rotation C) Strategic portfolio management D) Tactical portfolio management

A. Segment rotation, more commonly known as sector rotation, involves altering portfolio composition based on which sectors are poised to outperform as the business cycle is changing phases.

KapCo Balance Fund has a NAV of $9.50 and POP of $10. Over the past 12 months, it distributed dividends totaling $.75 and capital gains totaling $1.00. What is KapCo's current yield? A) 7.5% B) 17.5% C) 10% D) 7.9%

A. This question gives you excess information. The first point is that capital gains are not included in calculation of a mutual fund's current yield. You must also remember that the NAV is not involved. The calculation is: [ $0.75 (annual dividend) = 7.5% ] / $10.00 (POP)

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, advertisements must comply with rules set out under the Investment Advisers Act of 1940. Those rules include A) requiring a written agreement between an investment adviser and a promoter who receives more than $1,000 over a 12-month period for endorsing the services of the adviser. B) a prohibition against showing the adviser's past performance. C) a requirement that a copy of all advertisements be sent to the SEC at the time they are disseminated to the public. D) a prohibition against reduced-fee introductory offers.

A. State-registered investment advisers must comply with the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. That model rule states that, when it comes to advertising, IAs and their IARs must comply with the rules of the Investment Advisers Act of 1940. The SEC Model Marketing Rule for Investment Advisers incorporated significant amendments to the Advisers Act. Among the requirements of the rule is that an adviser who compensates a non-affiliated third party promoter for endorsing the services of the IA must have a written agreement with that promoter if the compensation will exceed $1,000 over a 12-month period. Advertisements may not contain false statements, refer selectively to past recommendations, refer to a chart or device for evaluating securities without explaining its limitations and difficulties, or offer anything free of charge if in fact there will be some requirement, however minor, for obtaining the free item. There is no federal filing requirement for advertisements of investment advisers (although filing may be required by the state Administrator). As long as the past performance is displayed in a manner consistent with the rules, there is no problem.

A portfolio manager using index options is trying to hedge which of the following types of risks? A) Systematic B) Financial C) Selection D) Purchasing power

A. Systematic risk (sometimes called market risk) refers to the impact the overall market has on an equity portfolio's value. Index options help insure portfolios against systematic risk. The purchase of index puts to protect a portfolio by hedging is termed portfolio insurance.

When comparing mutual funds, one of the factors to consider is A) the length of time the fund manager has been managing the fund B) the length of time it takes for the fund to redeem shares C) the amount of sales charge levied on reinvested capital gain distributions D) the fund's net asset value per share

A. Tenure in the job can be an important consideration when evaluating and comparing mutual funds. All funds must redeem in 7 days, and no fund can levy a sale charge on reinvested capital gains.

With regard to the powers of the Administrator, which of the following statements are NOT correct? I) The Administrator must seek an injunction to issue a cease and desist order. II) The USA requires an Administrator conduct a full hearing, public or private, prior to issuing a cease and desist order. III) The USA grants the Administrator the power to issue injunctions to force compliance with the provisions of the act. A) I, II, and III B) I and II C) I and III D) II and III

A. The Administrator need not seek an injunction to issue a cease and desist order. The Administrator can seek an injunction from a court. The USA does not require that an Administrator conduct a public or private hearing prior to issuing a cease and desist order. When time does not permit, the Administrator may issue a cease and desist prior to a hearing to prevent a pending violation. The USA does not grant the Administrator the power to issue injunctions to force compliance with the act. The act permits the Administrator to issue cease and desist orders and, if they do not work, to seek an injunction from a court of competent jurisdiction. A cease and desist order is an administrative order, whereas an injunction is a judicial order.

The capital asset pricing model (CAPM) is most commonly used to determine an investor's A) expected return B) risk-adjusted return C) time-weighted return D) holding period return

A. The CAPM suggests that we can determine the expected return of any security (or portfolio) by using the following mathematical formula: Er = Rf + Beta(expected return on the market − Rf). Er stands for expected return, Rf is the risk-free return. Remember, expected return is a form of risk-adjusted return and is the more specific answer to this question.

The Securities Exchange Act of 1934 gives the SEC the power to do all of the following EXCEPT A) set margin requirements B) refer evidence for prosecution C) subpoena witnesses D) administer oaths

A. The Securities Exchange Act of 1934 specifies that the Federal Reserve Board will have control over the issuance of credit when trading securities. The Securities Exchange Act of 1934 gives the SEC the power to make, amend, and rescind rules; issue cease and desist orders; administer oaths; conduct investigations; take evidence; and subpoena witnesses, books, and records. The Commission may seek temporary or permanent restraining orders (injunctions) from the courts, file civil suits, or refer evidence to the attorney general for criminal prosecution.

Which of the following are regulated under the Securities Exchange Act of 1934? I) New issues II) Broker-dealers III) Transfer agents A) II and III B) I, II, and III C) II only D) I and III

A. The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and the securities firms who do the trading. While the Securities Act of 1933 covers requirements relating to new issues, the Securities Exchange Act of 1934 covers almost everything else in the securities industry. Included are the registration requirements for broker-dealers and their agents as well as transfer agents, the organizations responsible for recording changes in ownership to a security. If it is the primary market (new issues), it is the Securities Act of 1933. If it is the secondary market, it is the Securities Exchange Act of 1934.

Which of the following statements about bid and asked prices are TRUE? I) The bid price is the price a dealer is willing to pay to buy a security. II) The asked price is the price a dealer is willing to accept to sell a security. III) The bid price for a security is higher than the asked price for the security. A) I and II B) II and III C) I and III D) I, II, and III

A. The bid price is the price at which a dealer will buy a security, and the asked price is the price at which a dealer will sell. A dealer will always bid a lower price to buy a stock than to sell it.

All the following factors support fundamental analysis while assessing a wide range of qualitative factors except A) the company's stock price trend. B) the company's business model. C) the company's management team's quality and experience. D) the company's competitive position.

A. The company's stock price trend is important to technical analysis. Remember that a technician "charts prices and volume over time". The others are factors to consider in fundamental analysis.

An individual purchased a variable life insurance policy 10 years ago. The policy has a $500,000 face amount which has grown to $525,000 due to the performance of the selected separate account subaccounts. Three years ago, the insured borrowed $50,000 against the policy which has never been repaid. The effect of this is that the total death benefit today is A) $475,000. B) $525,000. C) $450,000. D) $500,000.

A. The death benefit of a variable life insurance policy is the current face amount ($525,000) or the guaranteed minimum, whichever is greater, less any outstanding loans ($50,000).

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt-to-equity ratio is A) 28.6% B) 40% C) 64.3% D) 22.2%

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

Expected return is A) an estimate of probable returns an investment may yield B) the difference between an investment's present value and its cost C) the one discount rate that equates the future value of an investment with its net present value D) the worth of future income discounted to reflect what that income is worth today

A. The expected return is the estimate of probable returns that an investment may yield when taking the sum of all probabilities.

An investment advisory firm requires all new clients to complete a 4-page questionnaire before conducting the first meeting. This would be known as A) the information-gathering stage. B) fulfilling the requirements of the CIP. C) the client disclosure document. D) the investment adviser's brochure.

A. The first step in any adviser's relationship with a client is information gathering. A popular way of doing this is by using a questionnaire.

Margin is borrowing money from a broker-dealer to buy a stock using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer's stock? A) The hypothecation agreement B) The loan consent agreement C) The securities pledge agreement D) The credit agreement

A. The hypothecation agreement gives permission to the broker-dealer to pledge a customer's margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the broker-dealer on the basis of the loan value of these securities. The credit agreement contains the terms of the loan, including the method of computing interest on the borrowed money. The loan consent agreement, granting permission to the broker-dealer to lend out the customer's securities, is optional.

As a fiduciary, the investment adviser representative owes his clients an affirmative duty of utmost good faith, and full and fair disclosure of all material facts. This affirmative duty of disclosure is required by the IAR in all of the following situations EXCEPT A) he has donated funds to a nonprofit medical research institute that owns securities that the investment adviser representative has recommended B) the advice he is providing is outside the scope of his brokerage employment and is not under the control or supervision of his employer C) his family has a beneficial interest in a private medical equipment firm that he recommends to the client D) he receives compensation from his employing broker for transactions that are executed through the brokerage house

A. The investment adviser representative need not disclose that he donated funds to a nonprofit research institute. No conflict of interest is present that requires an affirmative duty to disclose. The fact that the institute owns securities consistent with the IAR's recommendations is not relevant to his relationship with his client. The IAR has an affirmative duty to disclose all material facts in all the other choices.

All of the following practices violate NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT A) hypothecating customer securities held in margin accounts B) conducting securities transactions, with clients, that are not reflected on the books of the broker-dealer and without the knowledge and supervision of the employing broker-dealer C) recommending the purchase of a security to a majority of the clients solely on the basis of the issuer's properly published press release regarding a likely increase in earnings per a new product branding strategy D) effecting a transaction with no change in beneficial ownership

A. The normal method of financing customer margin accounts is by hypothecating their securities so there is nothing dishonest or unethical happening. According to the North American Securities Administrators Association's (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, agents may not recommend securities without reasonable basis. Even then, when the same security is recommended to a majority of the firm or agent's clients, it is likely going to be the prohibited practice of blanket recommendations. Effecting transactions with no change in beneficial ownership is a form of market manipulation in conflict with NASAA's Statement of Policy. Conducting securities transactions not reflected on the books of the employing broker-dealer and without the employing broker-dealer's prior written authorization is known as selling away, considered by NASAA to be an unethical practice.

Which of the following statements are TRUE of a variable annuity? I) The number of annuity units is fixed when payout begins. II) The value of accumulation units is fixed at purchase. III) The monthly annuity payment is a variable amount. IV) The annuity payments are not subject to income taxes. A) I and III B) II and III C) III and IV D) I and II

A. The number of annuity units is fixed when an annuitant starts the payout process, and the monthly payment will vary with the market value of the securities in the separate account portfolio. The value of accumulation units varies with the value of the portfolio, and the growth portion of the monthly payments is subject to income tax.

Investment advisers who preach the benefits of strategic asset allocation do so because they believe A) the market is perfectly efficient because stock prices reflect all available information B) over the long run, strategic management will eventually outperform the market C) active management of a portfolio offers tactical benefits D) the market is basically inefficient and there is a strategy that can beat it

A. The primary difference between strategic and tactical asset allocation comes down to the belief by those following the strategic style that it is not possible, over a long period of time, to beat the market.

A popular tool used by analysts is discounted cash flow (DCF). Most use this tool to evaluate A) the present value of future cash flows to determine an appropriate current value. B) the present value of future cash flows to determine the value at a specified date in the future. C) the future value of present cash flows to determine an appropriate current value. D) the future value of future cash flows to determine the value at a specified date in the future.

A. The principle behind a DCF computation is that an investment made currently is worth an amount equal to the sum of all the future cash flows expected to be received. These future cash flows are discounted to arrive at a fair value.

Howard is the owner of 4 different insurance policies. Which of the following policies have death benefits proceeds that are NOT subject to income tax upon death of the insured? I) Policy 1; his wife is the insured. II) Policy 2; his business partner is the insured. III) Policy 3; his daughter is the insured. IV) Policy 4; he is the insured. A) I, II, III, and IV B) II and IV C) II and III D) I, II, and III

A. The question is asking for income tax treatment of insurance proceeds, not estate tax treatment. Life insurance proceeds are not income taxable to an original human owner of the policy.

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 record date. B) the last day of the company's fiscal year. C) the election date. D) the ex-dividend date.

A. 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.

Risk-adjusted return is calculated by A) dividing the security's return in excess of the risk-free rate by its standard deviation B) dividing the price of the stock by the standard deviation C) dividing the security's price by its beta D) multiplying the return of an investment by its standard deviation

A. The return from a security can be adjusted for the risk by dividing the security's return in excess of the risk-free rate by its standard deviation. This is the Sharpe ratio.

One of your clients currently holds a long position in DEF common stock. Which of the following types of orders is designed to offer the client protection against loss? A) Sell stop B) Buy stop C) Buy limit D) Sell limit

A. The risk to a long stock position is to the downside. The stock can, at least theoretically, fall to zero. To protect against a decline in the stock's price beyond the point the investor is willing to lose, it is wise to enter a sell stop order at that price. If the stock should fall to that price, the order is triggered, a market order is entered, and the stock is sold. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money.

It would be correct to state that I) the specialist stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market II) the specialist stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market III) the market maker stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market IV) the market maker stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market A) I and IV B) II and III C) II and IV D) I and III

A. The specialist performs his activities on the floor of an exchange, while the market maker performs a similar function in the OTC market. Note: The term specialist has been replaced by designated market maker (DMM), but specialist might still appear on the exam.

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

A. The weak form of the EMH states that all market information has already been incorporated into the current stock price. Therefore, having that information is of no help in predicting movements in the market.

In order to be in compliance with the rules, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) purchasing shares directly from advisory clients B) the trade is being executed by an officer or partner of the firm C) directing securities transactions to an affiliated broker-dealer D) engaging in an agency cross transaction

A. There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent—that's the reason for the term.

Which of the following statements regarding the economics of fixed-income securities are TRUE? I) Short-term interest rates are more volatile than long-term rates. II) Long-term interest rates are more volatile than short-term rates. III) Short-term bond prices react more than long-term bond prices given a change in interest rates. IV) Long-term bond prices react more than short-term bond prices given a change in interest rates. A) I and IV B) I and III C) II and III D) II and IV

A. There are two separate issues in this question: the volatility of rates and the volatility of bond prices. Short-term rates are more volatile than long-term rates and move more quickly than long-term rates. Often the most volatile interest rate is the federal funds rate, which is an overnight rate of interest. Given a change in rates, long-term bond prices move more than short-term bond prices because of the compounding effect over a much longer period.

An investment adviser registered in 4 states would be permitted to enter into an advisory contract with all of the following prospective clients except A) a registered investment company. B) a charitable foundation. C) a university endowment fund. D) a single parent.

A. This is a bit sneaky. In order for an investment adviser to enter into an advisory contract with an investment company, the adviser must be SEC registered (federal covered). Federal covered investment advisers are never registered in any states.

To a technical analyst, the resistance level signifies the price at which a stock's supply would be expected to A) increase substantially. B) decrease substantially. C) remain constant. D) cause the stock price to "break out".

A. This is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down. The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price range where a stock appears expensive and initiates increased selling. This selling represents an oversupply of the stock which results in downward pressure on the stock.

An investor is analyzing the impact of the specific type of risk affecting bonds because the fixed cash payments that they deliver may become less valuable. What risk is this? A) Inflation risk B) Systematic risk C) Credit risk D) Interest rate risk

A. This is an example of a question where careful reading is necessary. Indeed, every one of the choices is a risk faced by bond investors, but only one specifically answers the question. When the semiannual interest payments 10 or 20 years from now don't buy as much as they would today, that is inflation or purchasing power risk. That falls into the category of systematic risk. On the exam, when one choice is specific and the other is broad, go with the specific one. Interest rate risk is another systematic risk, but it indirectly relates to the question. Credit risk is an unsystematic risk and has nothing to do with the issue raised here.

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

A. This is not considered discrimination, because the discount applies equally to all (if they are among the first 50). Fee reimbursement or waivers are not permitted. The 5-day withdrawal provision applies to state-registered investment advisers when the brochure is not delivered at least 48 hours prior to (not after) the signing of the contract.

Your 30-year-old client has $100,000 to invest and willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in 6 months. Which of the following asset allocation strategies would best suit her situation? A) 70% large-cap stock fund, 20% balanced fund, 10% money market fund B) 50% government bond fund, 50% large-cap fund C) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund D) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund

A. This question is dealing with 2 different time horizons. First we have the short-term of 6 months for the home down payment, so she'll need capital preservation and liquidity. That is accomplished with the money market fund. Then, being 30 years old, she has a long-term time horizon that necessitates investing for growth and inflation protection. That is where the 70% in large-cap securities is the most appropriate asset allocation for her. The 20% in the balanced fund helps keep the overall risk level on the moderate side. One point to remember is that municipal bonds (or municipal bond funds) will never be the correct investment choice unless the question states that the client is in a high tax bracket or is looking for tax-free income.

Purchasers of options can have a number of different objectives. One of your clients who is a soft drink fan already has a long position in KO. What would be a possible reason for this client to go long a KO call option? A) To fix the cost of acquiring additional stock to the portfolio B) This would generate additional income C) To complete the other side of a spread D) Owning a long call on stock you already own offers a hedge against a market decline

A. Those who are bullish on a stock, but don't have sufficient funds at this time to purchase the stock, can "lock-in" their future cost by going long a call. Income is generated only through selling options. Because a long call is on the same side of the market as long stock, there is no hedge. A spread involves a long and short option.

The holding period return (HPR) on a share of stock is equal to A) the capital appreciation plus the dividend income received over the period B) the capital appreciation minus the inflation rate over the period C) the current yield plus the dividend yield D) the dividend yield plus the risk premium

A. To compute holding period return, you calculate the total return for that holding period. Total return combines any dividend income plus appreciation (or minus depreciation).

Damon Raymond is an agent with ABC Investment Planning, a registered broker-dealer and investment adviser. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity? A) When the trade that is made is unrelated to the advisory relationship B) Never C) Only if the client terminates the advisory relationship D) When the client has given ABC blanket permission to engage in this type of transaction

A. Under normal circumstances, when acting in an advisory capacity, client consent must be obtained no later than completion of the trade. However, in a case like this where the transaction is strictly based on the broker-dealer relationship rather than on the advisory one, no consent is necessary.

In which of the following circumstances has John, employed at AAA Securities Corporation, made an offer as defined in the USA? I) John calls a long-standing client, Brenda, to indicate that a security on his firm's restricted list is suitable for her portfolio. John indicates that he cannot sell the securities unless Brenda requests them on an unsolicited basis. Brenda considers making the purchase but ultimately declines. II) John discovers that Brenda has inherited shares in a manufacturing firm trading on the New York Stock Exchange and suggests that she sell them to him in a private transaction in which no commission would be charged. III) John owned XYZ securities for several years and decided to transfer them to his college's endowment fund in lieu of giving a cash gift. He then took a tax deduction for the value of the securities transferred. IV) Mr. Baxter, as a reward for the years of John's service as his agent, transferred $5,000 worth of XYZ Corporation securities to John, claiming the transfer as a business expense on his tax form. A) I and II B) I only C) I, II, III, and IV D) I, II, and III

A. Under the USA, the term "offer" includes an attempt to dispose of securities for value, or a solicitation of an offer to buy a security. Gifts, whether legal or not, are not considered an offer except when dealing with gifts of assessable stock.

Which of the following statements is TRUE concerning variable life separate account valuation? A) Unit values are computed daily and cash values are computed monthly. B) Unit values are computed monthly and cash values are computed daily. C) Unit values are computed weekly and cash values are computed monthly. D) Unit values are computed monthly and cash values are computed weekly.

A. Unit values are computed each day. Policy cash values are a monthly computation.

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

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

In May, an investor purchased a futures contract to purchase 5,000 bushels of wheat at $4.30 per bushel for December delivery. On settlement date, the spot price of wheat is $4.20 per bushel. For the investor, this A) represents a loss of $500 B) represents a loss of $50 C) contract should be left to expire D) represents a successful hedge

A. Unlike options, both parties to a futures contract are obligated to perform. That is, the buyer must accept delivery of the contract (in this case, 5,000 bushels of wheat). In practical matters, instead of having a truck show up at the door, the wheat would be sold at its spot price to a user. Therefore, the investor would lose 10 cents per bushel which, on 5,000 bushels, is $500. It was the seller of the contract who had a successful hedge because, instead of having to sell at the $4.20 spot price, the wheat is sold at the strike price of $4.30.

Which of the following statements regarding unsystematic risk are TRUE? I) It is the risk that an individual stock will not perform well. II) It is the same as market risk. III) Diversification reduces it. IV) Diversification does not reduce it. A) I and III B) II and IV C) II and III D) I and IV

A. Unsystematic risk is company risk, the risk that an individual investment will perform poorly. Diversification can reduce most unsystematic risks.

The common stock of companies within which industry sector would be most adversely affected by an increase in the general level of interest rates? A) The utilities industry B) The food industry C) The electronics industry D) The clothing industry

A. Utilities are generally very heavily funded with debt. If interest rates go up, their new debt will be at higher interest rates, causing lower earnings available for common stocks.

One of your clients has a margin account. There is a drop in the value of the stock owned in the account, and additional funds are required based on the terms of the firm's margin agreement. This would be known as A) a house call B) a sellout C) a margin call D) a Regulation T call

A. When additional funds are required, it is known as a house or maintenance call. If based on the firm's stricter requirement, it is a house call; if based on the requirement of the SRO, it is a maintenance call. The initial or Regulation T call (the margin call) occurs at the time of the purchase. If any call for funds is not met, then there will be a sellout. Remember the three important margin terms: Margin call: Set by the Federal Reserve Board under Regulation T. This is the initial 50% deposit required when purchasing securities on margin. Minimum maintenance: Set by the SROs. This is the minimum equity that must be maintained in a margin account. Should the equity fall below the minimum required, a maintenance call (sometimes called maintenance margin) will go out demanding an immediate deposit of enough equity to bring the account above the required level. House maintenance: Set by the individual broker-dealer firm. As a cushion, and to reduce the possible sellout caused by failure to meet a maintenance call, most firms set a minimum equity level above the SRO minimum. Falling below this amount triggers a house call.

An investor has $50,000 to invest in bonds. Currently, 10-year bonds are offering very attractive yields, but the client is concerned that in a few years, rates will be even higher. What would you suggest? A) Barbell bonds B) Bullet bonds C) Laddering D) Diversifying

A. With the barbell strategy, the investor would place $25,000 into bonds maturing in 10 years and the other half into bonds maturing in two years. This makes $25,000 available for reinvestment in two years enabling the investor to take advantage of the higher rates (if they materialize).

Which of the following is CORRECT regarding zero-coupon bonds? A) They eliminate reinvestment rate risk. B) They sell at a premium. C) They offer minimum price volatility. D) They have low interest rate risk.

A. Zero-coupon bonds are sold at a deep discount from par value and have no coupon payments. Because there is nothing to reinvest, there is no reinvestment risk. That is why many investors prefer zero-coupon for specific goals, such as college education for children. The tradeoff is that no coupon also means higher interest rate risk. These bonds have maximum price volatility and respond sharply to interest rate changes.

Of the following securities, which is most commonly recommended to fund a child's college education? A) Zero-coupon Treasury bonds B) Investment-grade corporate bonds C) Municipal bonds D) Treasury bills

A. Zero-coupon bonds, particularly those carrying the guarantee of the U.S. Treasury, are a favored investment vehicle for saving for a child's higher education. They have the advantage of providing a certain, quantifiable sum at a certain date in the future.

Mr. Berg has been charting DMF stock prices. The stock usually fluctuates between 71 and 86. The stock is currently at 84, and the increasing upside volume makes him believe that a breakout is possible. Which of the following would he most likely enter? A) A buy limit at 85 B) A buy stop at 88 C) A sell limit at 88 D) A sell stop at 70

B. A breakout occurs when a security trades outside an established range. In this case, because Mr. Berg has no position, he would want to purchase only if the stock breaks through the resistance level already established.

Under the Uniform Securities Act, which of the following would be considered an exempt transaction? I) An existing client calls his agent with an order to purchase 1,000 shares of a common stock that is not registered in this state II) At the suggestion of the agent handling her account, a client purchases some U.S. Treasury bonds for inclusion in her IRA III) Shares of a technology company's IPO are sold to an institutional client IV) Shares of an insurance company's IPO are sold to an individual client A) I, III, and IV B) I and III C) II and IV D) I, II, III, and IV

B. A client calling to purchase stock is an unsolicited transaction, probably the most common of the exempt transactions. Any sale to an institutional client is an exempt transaction, whereas those to individuals, unless unsolicited, generally are not. Please note, even though the Treasury bonds are an exempt security, because the transaction was solicited by an agent to an individual client, it is not an exempt transaction.

The Investment Advisers Act of 1940 requires delivery of a brochure containing information about the adviser's background and business practices in all of the following situations EXCEPT I) when the service provided is an individual supervisory service II) when the client is an investment company III) when the contract is for an impersonal advisory service requiring payment of less than $500 IV) when the client is an individual with a net worth of more than $1 million A) I and II B) II and III C) II, III, and IV D) I, III, and IV

B. A disclosure brochure is not required to be delivered if the client is a registered investment company, or if the advisory service is of an impersonal nature and costs less than $500. A brochure is required when the service provided is an individual supervisory service and the client's net worth has no bearing on brochure delivery requirements.

Among the differences between C corporations and S corporations is I) the liability assumed by the shareholders II) the number of allowable shareholders III) the tax treatment of the corporation's earnings IV) residency requirements of shareholders A) II and III B) II, III, and IV C) I, II, III, and IV D) I and IV

B. A feature common to both C and S corporations is the limited liablity of the investor. That is, the investor is not liable for the debts of the business and cannot lose more than the original investment. Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.

You have a 70-year-old client with a $500,000 whole life insurance policy purchased 25 years ago. The policy currently has a cash value of approximately $150,000. With all of the children on their own and successful, the client no longer feels the need for the insurance, and asks you if there is any option that might result in netting more than surrendering the policy for its cash value. You might recommend A) canceling the policy, but leaving the cash value with the insurance company with interest B) engaging in a life settlement C) using IRS Section 1035 to transfer the cash value into a deferred annuity D) keeping the policy because the cash value will continue to grow

B. A life settlement, involves selling an existing life insurance policy for an amount in excess of the cash value, but less than the death benefit. Exact numbers are hard to compute without knowing all the details of the type of policy and health of the insured, but it would certainly be well above the $150,000 cash value. If the question indicates a terminally ill individual, the answer would be a viatical. An IRS Section 1035 transfer to an annuity will not put any additional cash in the client's hands.

To fill a customer buy order for 800 WXYZ shares, your firm requests a quote from a market maker. The response is "bid 15, ask 15.25." If the order is placed, the market maker must sell A) 800 shares at no more than $15 per share B) 800 shares at $15.25 per share C) 100 shares at $15.25 per share D) 800 shares at $15 per share

B. A market maker is responsible for honoring a firm quote. If no size is requested by the inquiring trader, a quote is firm for 100 shares. In this example, the trader requested an 800-share quote, so the market maker is responsible for selling 8 round lots of 100 shares at the ask price of $15.25 per share.

In discussing a direct participation program with your customer, rank the following items in order of importance from most to least. I) Tax write-offs II) Liquidity and marketability III) Potential for economic gain A) I, II, III B) III, I, II C) II, III, I D) III, II, I

B. A program's economic viability is the first priority in the assessment of DPPs. The IRS considers programs designed solely to generate tax benefits abusive. Because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority.

Under the Uniform Securities Act, which of the following constitutes an offer of a security? A) Agreement between an issuer and an underwriter B) The delivery of a prospectus to a prospective purchaser C) Stock dividend distributed to current shareholders D) Tombstone advertisement

B. A prospectus is the document that offers a security for sale. A tombstone advertisement always states that in and of itself, it is not an offer to sell, that such an offer may only be made by prospectus, and where a prospectus may be obtained. The key to this question is that the delivery is being made to a prospective purchaser; that is what makes it an offer.

If an investor wants to invest in the electronics industry but does not want to limit his investments to only one or two companies, which type of fund would be most suitable? A) Bond B) Specialized C) Money market D) Hedge

B. A specialized or sector fund invests 25% or more of its assets in a particular region or industry.

Which of the following would NOT be defined as a sale or an offer to sell under the Uniform Securities Act? A) ABC issues a rights offering. B) ABC issues a $1.50 quarterly dividend to existing stockholders of record. C) ABC attaches warrants to buy common stock of XYZ Corporation to a bond issue. D) A bonus given as a direct result of the purchase of another security.

B. ABC's issue of a $1.50 quarterly dividend to existing stockholders is not a sale as defined in the Uniform Securities Act. Bonuses are considered sales, and rights and warrants are considered offers of the underlying stock.

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) 2% C) 18.8% D) 6.8%

B. 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%.

One of the differences between call options, rights, and warrants is that A) rights generally have the longest "life" of these 3. B) a corporation can't issue call options on its own stock. C) warrants generally have a strike price below the current market value of the underlying stock. D) holders of call options stand to profit if the market price of the underlying stock increases.

B. Although a corporation can issue stock rights and warrants, they cannot issue call options. Listed call options (the only type that will be on the exam), are issued by the Options Clearing Corporation (OCC). Although there are call options with weekly expiration, most expire in 9 months and rights rarely have a life longer than 45 days. Warrants, which generally have the longest time until expiration, are always issued with a strike price above the current market value of the underlying stock. At issuance, they only have time value. It is true that holders of call options stand to profit if the market price of the underlying stock increases, but so do the other 2 - they do not differ in that respect.

A risk-averse client, living in the United States and holding a high proportion of his assets in cash and cash equivalents in U.S. dollars, is exposed to which of the following risks? A) Market risk B) Purchasing power risk C) Reinvestment rate risk D) Exchange rate risk

B. Although cash and cash equivalents (money market instruments) may assist in managing liquidity risk, they do have purchasing power, or inflation risk, because they have limited opportunity for capital appreciation. Exchange rate, (currency risk) risk does not apply because this is a U.S. client with investments denominated in dollars. There is no market risk to cash and virtually none to cash equivalents. There is nothing to reinvest with cash, and the returns and maturities on cash equivalents are such that reinvestment risk is not a concern.

Municipal bonds are often called tax-exempts. This refers to the exemption of their income from A) state, federal, and inheritance taxes B) federal income taxes C) state income taxes D) federal estate taxes

B. Although municipal bonds are sometimes exempt from state income tax (if issued in the state of residence of the taxpayer), all references to tax exemption refer to their exemption from federal income taxes.

One of your clients has called you to discuss an interesting investment opportunity discovered on one of the LinkedIn groups she participates in. Which of the following factors might increase the likelihood that this is a scam? I) A registration statement with the SEC is available on the website of the proposed investment II) The purchase money must be wired to an offshore account III) One of the members of the group is a principal in the company being offered IV) Bonus shares are offered for recruiting friends into the deal A) I, II, III, and IV B) II, III, and IV C) II and IV D) I and III

B. Although not foolproof, the existence of an available SEC registration statement greatly reduces the likelihood that a deal like this is a scam. The other choices are certain red flags.

Due to health reasons, Danny has decided to withdraw his registration as an agent. The withdrawal will take effect A) on the 30th day after filing of the Form U5 B) on the 30th day after filing of the Form U5 unless the Administrator determines an earlier date C) immediately D) when authorized by his employing broker-dealer

B. Although the normal time for withdrawal of a registration is the 30th day after filing the Form U5, the Administrator has the jurisdiction to shorten that period if circumstances warrant it.

A portfolio manager who is engaging in rebalancing on a semiannual basis is most likely using which portfolio management style? A) Tactical asset allocation B) Strategic asset allocation C) Active asset allocation D) Buy and hold

B. At least annually, and sometimes more frequently, a portfolio manager who follows strategic asset allocation will examine the relative proportion of the selected asset classes and, based on market performance, rebalance the portfolio to bring it back to its ideal. Active (also called tactical) asset allocation attempts to time the market and doesn't pay the same amount of attention to proportionate holdings as does strategic asset allocation. By its very nature, buy and hold can go years without a portfolio change.

Under the Investment Advisers Act of 1940, in which of the following cases has an investment adviser acted improperly by not making appropriate disclosures to clients? I) An adviser that requires prepayment of $1,000 in fees, 9 months in advance, has liabilities that exceed its assets and does not disclose this fact to clients. II) An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients. III) An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients. A) I, II, and III B) II and III C) I and II D) I and III

B. An adviser's financial impairment must be disclosed to clients if the adviser has discretion or has custody or requires prepayment of more than $1,200 in fees, 6 or more months in advance. Legal or disciplinary action taken against an adviser by a court or a regulatory authority within the past 10 years must be disclosed to clients in any case. Note also that by requiring prepayment of over $1,200 in fees, 6 or more months in advance, an adviser is required to include an audited balance sheet with Part 2 of Form ADV, which must be filed with the SEC and made part of the adviser's disclosure brochure.

The tax consequence of transferring proceeds from one fund to another within the same family of funds is: A) no gain or loss is recognized until redemption B) on the date of the transaction, any gain or loss is recognized for tax purposes C) losses are deducted and gains are deferred D) gains are taxed and losses are deferred

B. An exchange is the sale and then a purchase of a new security and is therefore a taxable event.

In order to achieve its goals, an inverse ETF uses A) preemptive rights. B) derivatives and debt. C) short selling. D) arbitrage.

B. An inverse ETF will almost always use derivatives, such as options and, in the case of a leveraged ETF, will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to take advantage of temporary imbalances between the ETF's net asset value and market price.

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

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

An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. Which of the following is TRUE? A) He must sign a new letter for the $2,000 to receive the breakpoint. B) The fund will liquidate shares to meet the additional sales charge. C) He has 90 days to invest the additional $2,000 for the breakpoint. D) There are no additional requirements; he will receive the breakpoint.

B. An investor has only 13 months to meet a letter of intent commitment. Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had originally given the investor. This is accomplished by liquidating a sufficient number of shares to cover the additional sales charge to be imposed.

A client has invested $25,000 into a variable annuity which has grown to $150,000 over the accumulation period. At age 60, the account is liquidated. The tax treatment of the withdrawal would be A) capital gains tax on $125,000. B) ordinary income tax on $125,000. C) ordinary income tax on $125,000 with a 10% tax penalty. D) partly ordinary income and partly capital gains depending on the length of time the variable annuity was in force.

B. Any increase in the value of a variable annuity is taxed as ordinary income, never capital gain. In this case, there is no 10% penalty tax because the client is over 59½ years old. On the exam, all annuities are non-qualified unless the question states differently or there is a clue, such as being part of a 403(b) plan.

The distributable net income (DNI) of a simple trust would not include A) interest received on municipal bonds. B) reinvested capital gains. C) interest received on corporate bonds. D) dividends received.

B. It is capital gains that are reinvested in the corpus (body) of a simple trust which are not part of DNI. Although the interest on municipal bonds in not taxable, it is still included as part of the DNI.

When contrasting preemptive rights and warrants, it would be correct to state that, at issuance, A) rights have time value while warrants have intrinsic and time value. B) rights have intrinsic and time value while warrants only have time value. C) rights have intrinsic value while warrants have intrinsic and time value. D) rights have intrinsic and time value while warrants only have intrinsic value.

B. At the time of issuance, preemptive rights always offer the stock at a price below the current market thus creating intrinsic value. Although rights rarely are effective for longer than 45-60 days, that does represent time value. On the other hand, warrants are always issued with an exercise price above the current market (no intrinsic value) but do have time value.

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

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

A REIT and a direct participation program are similar because they both A) can be described as a limited partnership B) are operated by a centralized management C) are traded actively in the secondary market D) pass through losses to investors

B. Both a REIT and a DPP are run by centralized management. A REIT may not pass through losses to its investors, and it is not a limited partnership. A DPP cannot be easily traded in the secondary market.

A research analyst studying the performance of ABC Industries compares that with reports from other analysts reviewing other companies in other industries. This is known as A) sector analysis B) bottom-up analysis C) fundamental analysis D) top-down analysis

B. Bottom-up analysis starts by attempting to find superior performing companies, regardless of the industry. Those analysts believe that these companies will provide attractive returns even if they are in an industry sector that is in a negative position in the economic cycle.

A client wants to purchase commercial paper. The licensed agent may indicate to the client that the security need not be registered if I) the minimum denomination is $50,000 II) the maximum maturity is 270 days III) it is rated in 1 of the 3 highest rating categories by a recognized rating agency IV) it is in book entry form A) I and III B) I, II, and III C) I and II D) II, III, and IV

B. Commercial paper may qualify as an exempt security if the minimum denomination is $50,000, has a maturity of not more than 270 days, and is rated in one of the three highest rating categories by a nationally recognized rating agency. It may or may not be in book entry form (electronic records with no paper certificate); that has nothing to do with an exemption from registration. How do we know this is referring to the exemption under the Uniform Securities Act instead of the Securities Act of 1933 which has no rating requirement? The first reason, and most important, is that this is the NASAA exam and, by default, unless stated otherwise, all questions refer to the USA and NASAA model rules. The second is the use of the term "agent." That is a registration designation found only in state law.

One reason for including commodities in an investment portfolio is because they have a high correlation to A) the bond market. B) the inflation rate. C) the stock market. D) the U.S. dollar.

B. Commodity prices tend to have a high correlation with the inflation rate. As inflation goes up, the value of the dollar generally falls. The relationship is inverse, a characteristic of negative correlation. As inflation increases, interest rates invariably do the same leading to a decrease in bond prices. Stock prices have a random correlation to commodities, generally negative.

Which of the following are exempt securities under the Uniform Securities Act? I) Common stock, not listed on any regulated exchange, purchased by an open-end investment company registered under the Investment Company Act of 1940 II) Preferred stock issued by an insurance company authorized to do business in this state III) Municipal bonds issued by Toronto, Ontario IV) Private placements A) I and III B) II and III C) II, III, and IV D) I and II

B. Common stock not listed on any regulated exchange and purchased by an open-end investment company is an exempt transaction, but that common stock is not an exempt security. Securities issued by insurance companies, and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to business in this state is exempt. Qualifying private placements are exempt transactions, not exempt securities.

A new convertible bond has a provision that it cannot be called for 5 years after the issue date. This call protection is most valuable to a recent purchaser of the bond if A) interest rates are falling B) the market price of the underlying common stock is increasing C) interest rates are stable D) interest rates are rising

B. Convertible bonds are more sensitive to the price of the underlying common stock than they are to interest rates. Call protection would enable this investor to hold on to the bond while the stock rises in value rather than having the bond called away.

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

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

A couple, ages 63 and 66, are long-time clients of your firm and are in good health. They plan to retire from gainful employment in 4 years and wish to discuss decumulation strategies. One of the important factors to consider is the time horizon for this couple. Which of the following would be the best estimate to use? A) 8 years B) 25 years C) 10 years D) 4 years

B. Decumulation is the opposite of accumulation. Instead of focusing on how to increase the assets, the focus is on how to make sure they last as long as required. Just how long is that time horizon? Until the death of the second party. Today's statistics would indicate that a couple of these ages would likely have at least one of the two live another 25 years.

When constructing a portfolio, one of the goals is to increase diversification. Which of the following pairs offers the most diversification? A) Municipal GO bonds and long-term U.S. Treasury bonds B) U.S. equity securities and foreign equity securities C) Corporate debentures/convertible bonds D) Large-cap stock/blue-chip stock

B. Diversification is generally accomplished by adding securities that don't have a high degree of correlation. Large-cap and blue-chip are essentially the same thing. Most convertible bonds are debentures. Only in the case of domestic and international stocks will we find a low correlation.

Under the Uniform Securities Act, which of the following statements is (are) TRUE regarding civil liability of advisers and broker-dealers? I) The statute of limitations for civil liability is five years. II) A lawsuit against a broker-dealer or adviser can be avoided if restitution, costs, and interest are paid to a client. III) If restitution is made to a client by a broker-dealer, the Administrator may not prosecute the securities violation. A) II and III B) II only C) I only D) I and II

B. Do not confuse the statute of limitations for criminal prosecution (5 years) with the statute of limitations for civil liability (3 years from the date of the event or 2 years from discovery, whichever occurs first). Because civil liability under the act is limited to restitution, costs, and reasonable interest, a lawsuit could be avoided by a return of the investor's funds plus interest. Payment of restitution to a client does not prevent the Administrator from prosecution for violating the provisions of the act.

In general, when describing the characteristics of equity index annuities and variable annuities, each of the following would be a true statement EXCEPT A) only the variable annuity is considered a security B) both offer an opportunity for unlimited gain C) only the EIA has a minimum guaranteed return D) both are issued by life insurance companies

B. EIAs almost always come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor's account. There is, theoretically, no limit as to how much one could earn with a variable annuity. Both are issued by life insurance companies, and only the EIA offers a guaranteed floor (minimum return). Based on court rulings in effect at this time, the equity index annuity is not considered a security.

Under the Uniform Securities Act, which of the following would constitute a fraudulent practice in connection with a sale or offer of securities? I) Susan tells a client that she is good friends with the CFO of a listed company and has the "inside track" on what is going on. Susan has never met the CFO. II) John makes a material misstatement during a sale, but the sale is not made. III) Joe omits material facts while making an offer, but the client makes money on the securities. IV) Harold, who is excluded from the definition of investment adviser, omits material facts during an offer. A) III and IV B) I, II, III, and IV C) II and IV D) I and III

B. Failure to state material facts that are known to the agent or adviser and that would make other statements not misleading is fraudulent. Securities professionals may not be deliberately selective of which material facts to present to clients or prospective clients. In recommending the purchase or sale of a security, misleading or untrue statements of material facts include inaccurate market quotations; incorrect statements of earnings or projected earnings; inaccurate statements of commissions, markup, markdown, or other charges; implying approval by the SEC or state Administrator; using rumors or inside information to induce transactions; indicating approval of a security by any regulatory body; or failure to describe important facts or risks.

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

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

GNMA mortgage-backed securities are A) available to investors through a minimum purchase of $5,000 B) a direct obligation of the U.S. government C) exempt from federal income tax for the interest payments received by the bondholders D) backed exclusively by a pool of mortgages

B. GNMA securities are a direct obligation of the U.S. government and are backed by a pool of mortgages (which is why the choice, backed exclusively by a pool of mortgages is not the best choice). The monthly payments are partially a return of principal and partially taxable interest, which is subject to state and federal income tax. GNMA pass-through securities are available to investors with a minimum issue price of $25,000.

If the value of the U.S. dollar increases against other currencies, which of the following are TRUE? I) U.S. exports are more competitive in foreign countries. II) U.S. exports are less competitive in foreign countries. III) Foreign imports into the United States are more competitive in U.S. markets. IV) Foreign imports into the United States are less competitive in U.S. markets. A) II and IV B) II and III C) I and IV D) I and III

B. If the value of the U.S. dollar increases against other currencies, then U.S. exports cost more for foreign markets to purchase. This also makes foreign imports less expensive for U.S. consumers.

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

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

All of the following statements regarding futures contracts are correct EXCEPT A) purchasing a contract for future delivery is considered taking a long position. B) completing a futures contract requires the delivery of the commodity. C) a short position will increase in value if the underlying commodity or asset declines in value. D) futures contracts can be written on financial assets or commodities.

B. In almost all cases, the holder of the futures contract will purchase an offsetting contract canceling the original position or sell the contract prior to expiration. In isolated cases, delivery of the commodity may be made but is not required. Futures contracts can be written on financial assets such as currencies and stock indexes, as well as on commodities such as agricultural products or precious metals. As with anyone taking a short position, the value goes up when the price of the underlying asset declines. And, just as purchasing a stock or bond, a long position represents one of ownership.

A client of Wall Street Wealth Management (WSWM), a federal covered investment adviser, calls the IAR handling the account and gives instructions to use some of the surplus cash in the account to purchase 500 shares of RMBM, a small-cap stock traded on the Nasdaq Stock Market. Prior to submitting the order, the IAR checks with a supervisor and learns that WSWM has 1,000 shares of RMBM in its proprietary account and is looking to halve the position. If, instead of forwarding the order to the broker-dealer who normally handles trade executions for this client, WSWM filled the order out of its own account, A) because it was an unsolicited transaction, the only required disclosure would be the firm's capacity on the trade confirmation B) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction C) it would be permissible only if consent was obtained, and written disclosure of the firm's capacity was disclosed prior to execution D) WSWM would be engaging in a prohibited practice

B. In almost every case, an IA acting as a principal (out of inventory) or agent in a trade with an advisory client must obtain client consent and provide written disclosure of the IA's capacity in the trade no later the completion of the trade. If the IA is also a broker-dealer and the transaction with the advisory client was not generated through a recommendation (generally an unsolicited order), the only disclosure necessary is the firm's capacity on the confirmation. In this question, we can't assume that WSWM is also a broker-dealer.

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) Tactical asset allocation B) Strategic asset allocation C) Efficient market allocation D) Top-down fundamental analysis

B. 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.

An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee A) has a capital gain of $10 per share B) is taxed on $10 per share as if it were salary C) is taxed on $20 per share as if it were salary D) is taxed on $30 per share as if it were salary

B. In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee.

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

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

Consent of the client before completion of a trade made between the firm and a client must be made when A) a broker-dealer will be acting in the capacity of a principal B) an investment adviser will be acting in the capacity of a principal C) a broker-dealer will be acting as a contra party to the trade D) a broker-dealer will be acting in the capacity of an agent

B. In those uncommon cases where an investment adviser acts in the capacity of a principal (or agent) with an advisory client, consent of the client before completion of the transaction is required. In the case of broker-dealers, disclosure of capacity on the trade confirmation, but not consent, is needed.

Which of the following is a coincident economic indicator? A) Machine tool orders B) Industrial production C) Stock market prices as measured by the S&P 500 D) Agricultural employment

B. Industrial production is a coincident indicator. The stock indexes and manufacturing orders are leading indicators. Economists do not use agricultural employment as an indicator.

One of the components of a cash flow statement is cash flow from investing activities. Included would be A) cash proceeds from issuing stocks or bonds. B) transactions and events involving the purchase and sale of land, buildings, and equipment. C) cash receipts (money coming in) from items such as interest and dividends. D) payments to retire bonds and the payment of dividends.

B. Investing activities include transactions and events involving the purchase and sale of securities, land, buildings, equipment, and other assets not generally held for resale as a product of the business. The proceeds from issuing securities (stocks or bonds) is a financing activity as is using funds to retire bonds and/or pay dividends. Cash receipts are included in cash flow from operating activities, even when generated through investments such as interest or dividends.

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

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

The general rules dealing with a broker-dealer extending credit for a customer to purchase securities are found in Regulation T of the Federal Reserve Board. However, Regulation T does NOT address A) initial margin requirements B) maintenance margin C) mixed margin accounts D) loan value of securities

B. Maintenance margin levels are set by the SROs, such as FINRA. They are currently 25% for long accounts and 30% for short accounts (you will not have to calculate these).

A client of yours owns some convertible preferred stock. She notices an article in the business section of her local newspaper that reports the company is going to pay a 20% stock dividend on their common stock. She wants to know how this will affect her? A) More than likely, the price of the preferred stock will rise. B) If there is an antidilution clause, her conversion privilege will permit her to acquire 20% more shares than before the stock dividend. C) She will also receive 20% more shares because preferred stock has a priority claim ahead of common. D) There will be no effect.

B. Most convertible securities are sold with antidilutive clauses that provide for an adjustment in the number of shares based on stock splits or stock dividends.

A 50-year-old client with modest means wants to construct an investment program. He has no investment experience, his major consideration is saving for retirement, and he has limited risk tolerance. Which of the following would you recommend? A) High-grade bond fund B) Growth and income mutual funds C) Aggressive growth mutual funds D) Call options on the S&P 500 Index

B. Mutual funds that offer growth and income best meet the client's needs, offering growth for retirement and current income. A high-grade bond fund would not offer the growth that the client needs for retirement, although the fund would supplement the modest income of the client. A client of modest means may not be able to sustain the risk of principal that accompanies an aggressive growth fund; in addition, this alternative is unsuitable because the client has limited risk tolerance. Index options are a speculative investment.

The owners' equity portion of a corporation's balance sheet would contain all of the following except A) preferred stock. B) net income. C) Treasury stock. D) paid-in capital.

B. Net income is only found on the income statement. The other three are part of stockholders' equity (net worth). Treasury stock is company stock that has been issued to the public and then re-acquired by the issuer (the company). It appears as a negative number so it reduces the net worth (owners' equity). Note, even though the Treasury stock reduces the owner's equity, the question is asking for the items you would see in the owners' equity section on the balance sheet and, if it exists, it would appear there as a deduction.

Components of a company's net worth would include all of these EXCEPT A) inventory B) operating income C) goodwill D) fixed assets

B. Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.

A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences EXCEPT A) suitability requirements B) fees and expenses C) liquidity D) regulatory oversight

B. The internal operating costs of a REIT, such as management fees and administrative expenses, have nothing to do with where units of the REIT are traded. One of the major risks inherent in an unlisted REIT is lack of liquidity. As a result, there is a greater stringency when it comes to suitability, and this leads to stronger oversight by the regulators.

A new client is opening a margin account and notices the following wording in the documentation: "You are authorized to lend to yourself or others any securities held by you in my margin account and to carry all securities lent as general loans, and you shall have no obligation to retain under your possession and control a like amount of such securities." When the client asks you what this is about, you would respond that A) this is the credit agreement B) this is the loan consent agreement C) this is the hypothecation agreement D) if the client does not sign the document, the account cannot be opened

B. No broker-dealer shall lend securities that are held on margin for a customer and that are eligible to be pledged or loaned, unless the broker-dealer shall first have obtained a written authorization from such customer permitting the lending of such securities. That written authorization is known as the loan consent agreement and is the only one of the margin documents that is optional.

What is the procedure by which federal covered securities, registered under the Investment Company Act of 1940, file their offerings with state securities Administrators? A) Coordination B) Notice filing C) Federal covered securities need not file with state securities Administrators D) Qualification

B. Notice filing primarily applies to securities issued by investment companies, such as mutual funds, registered under the Investment Company Act of 1940. Offerings of securities that are not federal covered securities must be registered with the states by either coordination or qualification, unless exempt.

A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? I) The entire amount is taxed as ordinary income. II) The growth portion is taxed as ordinary income. III) The growth portion is taxed as a capital gain. IV) The growth portion is subject to a 10% penalty. A) II and III B) II and IV C) I and IV D) III and IV

B. On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). In this case, the investor is taking a lump-sum distribution before reaching age 59½ and must pay an additional 10% penalty on the taxable amount.

Among the differences between an investment in a limited partnership offering and in a corporation is that A) limited partners take a more active role in the management of the enterprise than do stockholders of a corporation. B) limited partnership offerings do not pay dividends; corporations do. C) only corporations are organized to run a business. D) only corporations issue securities.

B. One of the key features of a limited partnership investment is the concept of flow-through of operating results. If the business operates at a loss, the limited partner's share of that loss is treated as a passive loss on the investor's tax return. If the business is profitable, the limited partner's share of the profit is treated as passive income. Corporations issue securities, primarily stocks and bonds, while limited partnerships issue units representing the limited partner's interest in the venture. Those units are investment contracts and, as taught in Unit 4, LO4, securities. Limited partners who take an active role in the partnership lose their limited status.

When viewing a corporation's balance sheet, you would expect to see all of the following included in owner's equity except A) retained earnings. B) cash. C) paid-in capital. D) preferred stock.

B. Owners' equity, sometimes referred to as stockholders' equity, is simply the net worth of a corporation. Net worth is the total assets minus the total liabilities. The primary components listed on a balance sheet under owner's equity are the: 1. par value of the outstanding preferred stock; 2. par value of the outstanding common stock; 3. any excess paid in over the par value of the common stock at issuance, known as paid-in capital or paid-in surplus; 4. retained earnings (years ago referred to as earned surplus); and 5. if the company has re-acquired any of its common stock (Treasury stock), the cost of that purchase is subtracted from retained earnings.

A 75 year-old client's $500,000 portfolio is 40/60 equity/debt. Six months later, the portfolio balance is $480,000 of which $180,000 is equity. If the investment adviser recommends semiannual rebalancing, the client will A) stay put because selling now would realize a loss. B) sell $12,000 of the debt and use the proceeds to purchase $12,000 of equity. C) purchase $12,000 of debt and $8,000 of equity to return to the original $500,000. D) sell $12,000 of the equity and use the proceeds to purchase $12,000 of debt.

B. Rebalancing involves getting the account back to its original percentage mix (not original market value). With a current value of $480,000, of which $180,000 is equity, the debt is $300,000, an amount greater than the 60% allocation. A 40/60 mix requires $192,000 in equity and $288,000 in debt.

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) Future value B) Internal rate of return C) Net present value D) Duration

B. 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.

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

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

The economic theory that says economic growth results from lower tax rates and lower government spending is A) monetary theory B) supply-side theory C) demand-side theory D) Keynesian theory

B. Supply-side economics is the theory of Arthur Laffer, who believed that heavy taxing and government intervention have a negative effect on the economy.

If a technician believed in the importance of volume, which of the following would indicate bullish sentiment? A) Prices decrease on light volume. B) Prices increase on heavy volume. C) Prices increase on light volume. D) Prices decrease on heavy volume.

B. Technicians watch volume changes along with price movements as an indicator of changes in supply and demand. A price increase on heavy volume relative to the stock's normal trading volume is interpreted as an indication of bullish activity.

Which of the following statements regarding a state-registered investment adviser's registration is true? A) Withdrawal from registration is done on Form ADV-W and takes effect 45 days after filing. B) If the investment adviser ceases to act as an adviser or goes out of business, the Administrator will cancel the registration. C) Registrations expire each year coinciding with the adviser's fiscal year. D) Registrations become effective in 45 days unless delayed by the Administrator.

B. Termination of an investment adviser's registration by cancellation will generally occur when the adviser goes out of business (mail is returned with no forwarding address) or ceases performing the functions of an investment adviser. It is registration on a federal level where the 45 days applies for initial registration and 60 days for withdrawal. On the state level, annual renewal is December 31, regardless of when the IA's fiscal year ends.

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

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

Under the USA, when one is referring to a security that is guaranteed, the guarantee applies to I) capital gains to be expected by holding the specified security II) dividends to be paid on the specified stock III) interest and principal payment on the specified bond IV) reimbursement by the firm for any losses suffered while holding that security A) II and IV B) II and III C) I and III D) I and IV

B. The USA defines the term guaranteed as meaning guaranteed as to payment of principal, interest, or dividends.

If 150 investors want to form a corporation to limit their financial liability to the amount of money they invest and do not want to be responsible for any debt that the corporation incurs, they would most likely form A) a proprietorship B) a C corporation C) a general partnership D) an S corporation

B. The investors would form a C corporation. The advantages of the C corporation are that stockholders are not liable for corporate debt; that it is easier to raise money by issuing stock; that it is easier to transfer ownership; and that unlike a partnership or a proprietorship, a C corporation has a continuous life because it does not terminate on the death of shareholders, officers, or directors. An S corporation is limited to 100 investors.

An analyst comparing revenues with expenses is most likely analyzing A) liquidity B) cash flow C) working capital D) capitalization

B. The analyst is most likely measuring the income statement for cash flow (money coming in against money going out). Working capital analysis would involve examining the balance sheet's current assets and current liability entries, not the income statement. Capitalization analysis involves examination of long-term debt and stock issues. Liquidity analysis involves examining current assets and liabilities from the balance sheet.

If GHI currently has earnings of $3 and pays an annual dividend of $1.75 and GHI's market price is $35, the current yield is A) 3% B) 5% C) 8.6% D) 1.75%

B. The current yield is calculated by dividing the annual dividend by the current market value ($1.75 ÷ $35 = 5%).

An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for 3 years from now. Meanwhile, he would like to generate some income on the money with as little risk and expense as possible. Which of the following recommendations is likely to be the most suitable for this customer? A) Class B shares of the XYZ Growth Fund B) Class C shares of the ABC Investment-Grade Bond Fund C) Class A shares of the MNO High-Yield Bond Fund D) Class B shares of the ABC Investment-Grade Bond Fund

B. The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best because the customer would pay no front-end sales charge and no CDSC after a short time, probably 1 year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the 3 years of his investment.

A customer purchases stock for $40 per share and holds it for 1 year, selling it for $50 per share exactly 12 months after the date of purchase. Four quarterly qualifying dividends of $.50 were paid during the year. If the customer's tax bracket is 30%, what is the after-tax rate of return? A) 21% B) 21.75% C) 18.40% D) 17.5%

B. The customer's return on the stock includes the $10 per share short-term capital gain ($50 − $40) plus the $2 qualifying dividend (quarterly dividend of $0.50 × 4). Remember, an asset must be held for more than 12 months for the gain to be long-term. After-tax rate of return is found by computing the total after-tax earnings. Short-term gains are taxed at the same rate as ordinary income, and qualifying dividends are taxed at a maximum rate of 15% (except for very high income earners—not tested). The tax on the $10 gain is $3 ($10 × 30%), and the tax on the $2 qualifying dividend is $0.30 ($2 × 15%). The investor's total return is the $12 total minus the $3.30 in taxes, or $8.70; $8.70 divided by the original investment of $40 results in an after-tax return of 21.75%.

Which of the following best describes the death benefit provision of a variable annuity? A) Upon death, the proceeds pass to the beneficiary free of federal income tax. B) The principal amount at death is the greater of the total of premium payments or the current market value. C) If death should occur before age 59½, the 10% early withdrawal penalty does not apply. D) Upon death, the beneficiary will receive the benefit as a lump sum.

B. The death benefit insures that the investor will never receive back less than the original amount contributed to the account. Unlike life insurance proceeds, with annuities, anything above the cost basis is taxed as ordinary income. Receiving the benefit as a lump sum is only one of the options available to a beneficiary of a variable annuity death benefit. There are others, such as annuitizing the benefit.

Which of the following forms of the efficient market hypothesis claims that technical analysis works? A) Semi-strong B) None of these C) Weak D) Strong

B. The efficient market hypothesis is in direct contradiction to technical analysis because the efficient market hypothesis is founded on the notion that all historical price and volume data, which is used by technical analysts, is already accounted for in the current stock price. The weak form claims that fundamental analysis works and the semi-strong form claims that inside information works. True believers in EMH claim that none of these can outperform random selection.

Which of the following investments is the most liquid? A) Common stock in a small oil drilling corporation that is quoted on the OTC Link B) Long-term municipal bond fund C) Municipal revenue bond issued by a township D) Oil drilling limited partnership interest

B. The long-term municipal bond fund is the most liquid because it is a mutual fund (a redeemable security), and the investor is assured of a buyer that will exchange money for the redeemed fund shares within 7 days of the redemption request. Municipal bonds of a township, especially those that are from extremely small issuers, may have thin trading markets where sellers have difficulty finding willing buyers. There is not an active secondary market for reselling interests in limited partnerships. Stock of a small corporation that trades on the OTC Link (formerly known as the "Pink Sheets") may also have a thin trading market.

If an investor buys a utility stock with a stable 5% dividend, and after a year the investor's total return in the stock is 10%, the most likely reason for this is A) the investor reinvested the quarterly dividends B) the stock appreciated by 5% C) the company doubled its dividend payment D) the stock price declined

B. The most likely cause for the total return was an increase in the stock price.

An individual has just received a bonus of $12,473 and wishes to generate some income without risking loss of capital. Assuming the client is in a low tax bracket, which of the following would be the most suitable choice? A) Public utility stocks B) Bank-insured CDs C) Growth stocks D) Insured municipal bonds

B. The only choice here with no risk to capital is the bank-insured CD. Although the insured municipal bond is guaranteed to repay principal at maturity, the bond will still be subject to interest rate risk and, with the client in a low tax bracket, municipal bonds are generally unsuitable investments.

A similarity between the capitalization of closed-end and open-end management investment companies is that both A) raise capital through a continuous public offering of shares. B) compute net asset value per share. C) can issue common and preferred stock. D) are traded on listed exchanges or in the over-the-counter market.

B. The only similarity here is that both kinds of management investment companies compute NAV. Open-ends must do it daily and closed-ends can compute daily or even weekly. It is only the open-end company where the capital is raised through a continuous offering of new shares. Closed-end funds generally have a single IPO of common stock and may, if they wish, also have a preferred stock issue. Open-end funds are limited to one class of equity security (not to be confused with different classes for sales charge purposes). There is no secondary market trading in open-end funds, only closed-ends.

An investor purchased a Mosaks, Inc. put option with a strike price of $105. If Mosaks' stock price is $115 at expiration, the value of the put option is A) -$10. B) $0. C) $10. D) $105.

B. The put has a value of $0 because it will not be exercised. Why would you want to exercise (sell the stock) at $105 per share when the current market value is $115?

While listening to a commentator on cable TV, you hear the statement "the flight to quality has ended." What would you expect the effect of this to be? A) Airline stocks are in for a beating. B) Yield spreads are narrowing. C) Yield spreads are widening. D) Pessimism is spreading.

B. The term yield spread refers to the difference in yield between very-high-quality debt instruments, such as U.S. government bonds, and those with lower ratings. The spread compensates for the additional risk. When investors perceive that the risk has lessened, they won't demand as much in return from the lower-rated instruments.

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is A) reported as cash income on the income statement B) the net change in the cash position of the firm for the reporting period C) reported as a separate line item on the balance sheet D) an integral part of the footnotes to the balance sheet required by generally accepted accounting principles

B. The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows which is a separate financial statement.

Which form of the efficient market hypothesis (EMH) suggests that fundamental analysis and insider information may produce above-market returns? A) Semi-strong B) Weak C) Strong D) Semi-weak

B. The weak form holds that current stock prices reflect all historical market data and that historical price trends are therefore of no value in predicting future prices. However, this form holds that credible fundamental analysis and insider information may produce above-market returns. Those who truly believe in the EMH are of the opinion that none of these will do any better than the market; random selection is as good as anything else.

Which of the following are considered unsystematic risks? I) Business II) Liquidity III) Market IV) Purchasing power A) III and IV B) I and II C) II and IV D) I and III

B. There are 4 general unsystematic risks: business, liquidity, political, and regulatory. Market and purchasing power risk are systematic.

Your client turns in a buy limit order for 100 shares of ABC at $58. Following the entry of the order, trades occur at 59, 59, 58.80, 58.20, 58.40, 57.95, 57.85. At what price was this limit order triggered? A) $57.85. B) The order was not triggered. C) $57.95. D) $58.20.

B. This is a perfect example of how important it is to read the question. The subject of the question is a limit order and then it asks for the trigger price. Stop orders are the only orders that have triggers so there is no trigger for this limit order. If the question had asked about the execution price, a buy limit order will be executed at the limit price or better (lower). In this case, the first trade at $58 or lower is $57.95. When you have a question like this on your exam, don't say to yourself, "But what if there is stock ahead?" We never want to overcomplicate a question by looking for something that isn't mentioned.

Among the special characteristics of a universal life insurance policy is A) early termination could lead to surrender charges B) the policy may be overfunded C) death benefits may increase above the initial face amount D) that policyowners may borrow against the cash value

B. This question is looking for a feature found in universal life that is not generally found in other forms of life insurance, i.e, something special. In the case of universal life, the policyowner is permitted to pay in an amount in excess of the stated premiums (one of the reasons universal life is known as flexible premium life). The IRS puts limits on the amount of the overfunding before certain tax advantages are lost, but that is beyond the scope of the exam. Not only universal life, but variable life as well, has the possibility of increased death benefits. In fact, some whole life policies allow policy dividends to be used to increase the death benefit. Permanent forms of insurance policies, including whole life, universal life, and variable life, permit loans against the cash value. Therefore, being able to borrow against the cash value is nothing special. Many forms of life insurance have surrender charges for early termination.

An investor purchases a 5% callable convertible subordinated debenture at par. Exactly one year later, the bond is called at $104. The investor's total return is: A) 4%. B) 9%. C) 7.5%. D) 5%.

B. Total return consists of income plus gain. Buying a bond at par and having it called at $104 results in a $40 gain. With a 5% coupon, there will be two semiannual interest payments of $25 in a one-year holding period. Adding the $40 + $50 = $90 total return on an investment of $1,000 which = 9%.

According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts, A) the schedule should be made available on the broker-dealer's public website and should be password protected B) the schedule should be made available on the broker-dealer's public website without requiring any login or password C) fee schedules should only be delivered by hand or postal mail to reduce cyber security threats D) as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers

B. Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included.

As defined in the Securities Exchange Act of 1934, the term municipal security would include A) 50-year bonds issued by the Tennessee Valley Authority B) a City of Chicago school district bond C) a Province of Ontario library construction bond D) a U.S. Treasury bill

B. Under federal law, municipal bonds are those issued by any domestic political body or subdivision from the state level on down. Treasury bills and TVA issues are defined as government securities, not municipal securities. Under federal law, Canadian cities (or provinces) are not municipal securities.

Which of the following statements concerning universal life insurance are CORRECT? I) Universal life has flexible premiums. II) Universal life is based on the assumption that level annual premiums are to be paid throughout the insured's life. III) The death benefit can fluctuate, but never below the guaranteed minimum face amount. IV) Cash values can fluctuate and may even fall to zero. A) II and III B) I and IV C) I and II D) III and IV

B. Universal life features flexible premiums that add to the cash value account, although there are no guarantees and the cash value can disappear if insufficient premiums are paid. There is no guaranteed minimum death benefit as there is with fixed (scheduled) premium variable life. The assumption that level annual premiums are to be paid throughout the insured's life is associated only with ordinary whole life and scheduled premium variable life policies.

All of the following statements relating to an account registered as tenants in common are true EXCEPT A) this form of registration is less common for married couples than JTWROS B) upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s) C) cotenants can own unequal percentages of the assets in the account D) each cotenant has an undivided interest in the entire account

B. Unlike an account registered JTWROS, when a cotenant in a TIC account dies, that individual's share of the account passes to the individual's estate, not the other cotenant(s). That would be the case with JTWROS (which is why that form is far more popular with married couples instead of TIC). In a TIC account, each cotenant has an undivided interest (specific securities in the portfolio are not designated to each cotenant—they share ownership in the entire portfolio). This is not to be confused with the fact that the ownership interests can be unequal. For example, one investor can own 40% of the account and the other 60%.

One way in which closed-end management investment companies differ from open-end investment management companies is that A) they were in existence prior to 1940 B) they trade at a price independent of their net asset value C) they are federal covered securities D) their portfolio may contain common stock, preferred stock and debt securities

B. Unlike open-end companies (mutual funds) where the price is based on the net asset value (NAV), closed-end companies trade at a market price based on supply and demand which could be above, below or the same as the NAV. Both are federal covered, both can have equity and debt in their portfolios (although only closed-end companies can issue senior securities) and both were in existence prior to passage of the Investment Company Act of 1940.

Which of the following transactions would NOT be exempt under the Uniform Securities Act? A) A customer calls his broker-dealer and submits an order to purchase a specific security. B) A registered dealer sells Canadian government securities to a retail client. C) The executor of an estate sells securities to liquidate the property. D) Securities are sold that were collateral for a defaulted loan.

B. Unsolicited, nonissuer transactions (customer calls the broker-dealer to order or sell a security) are exempt transactions, as are fiduciary transactions to liquidate estates or receiverships by guardians, executors, administrators, trustees in bankruptcy, or conservators. Sales of securities that had been pledged as collateral for a defaulted loan are also exempt transactions. The sale of Canadian government securities by a registered dealer represents a security that is exempt under the Uniform Securities Act, but the transaction itself is not.

If a business fails because a new technology makes its products obsolete, this is an example of A) systematic risk B) unsystematic risk C) inflation risk D) interest rate risk

B. Unsystematic (business) risk is the danger inherent in conducting the operations of the business itself. Technology companies are especially sensitive to business risk as a result of competing technologies. Systematic (market risk) refers to risk of the overall market. Inflation risk refers to the loss of buying power as the result of the increase in prices. Interest rate risk is the danger that interest rates will increase, causing a fixed-income security to decline in price.

All of the following are examples of unsystematic risk EXCEPT A) financial risk B) purchasing power risk C) political risk D) tenure risk

B. Unsystematic risk, also known as diversifiable risk, affects only a particular company, country, or sector and its securities. Purchasing power risk is an example of systematic risk that affects the certainty of returns associated with any investment—most particularly, fixed income. Political and financial risk would be considered unsystematic and there is no formal classification known as tenure risk, although some mutual funds whose advisers have a short tenure, might be considered to have that kind of risk. If that were to be considered, it would still be an unsystematic risk.

Under the Uniform Securities Act, which of the following statements regarding the employment of investment adviser representatives by a state-registered investment adviser is (are) true? I) The investment adviser must notify the Administrator whenever an investment adviser representative is terminated. II) An investment adviser is not required to notify the Administrator when an investment adviser representative begins employment. III) The registration of an investment adviser representative is effective only as long as the individual is employed by a registered investment adviser. A) I, II, and III B) I and III C) I only D) III only

B. Whenever an individual begins or ends association as an IAR with a state-registered investment adviser, the IA must notify the Administrator. An IAR's registration is only valid while employed by a registered investment adviser.

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

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

Which of the following would best describes a Yankee bond? A) U.S. dollar-denominated bond issued by a non-U.S. entity outside the United States B) U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States C) U.S. dollar-denominated bond issued by a U.S. entity inside the United States D) U.S. dollar-denominated bond issued by a U.S. entity outside the United States

B. Yankee bonds are issued by non-U.S. entities in marketplaces inside the United States. The bonds are issued in U.S. dollars meaning these foreign issuers will have currency risk if the dollar drops in value against their local currency.

A bond's yield to maturity reflects its A) return based on annual interest as a percentage of current price B) internal rate of return C) nominal return D) taxable equivalent return

B. Yield to maturity reflects the internal rate of return on a bond. Internal rate of return (IRR) equates the cost of an investment to the cash flows produced by that investment.

A broker-dealer with an office in this state would be defined as an investment adviser if it charges: I) commissions for selling securities II) commissions for selling securities while offering investment advice incidental to the sale of the securities III) a fee for selling investment research and additional fees in the form of commissions for the sale of securities IV) fees for investment research sold exclusively to institutions located in this state A) I and II B) II and III C) III and IV D) I and IV

C. A broker-dealer would be considered an investment adviser if it has a place of business in this state and if it charges a fee for selling investment research or any other form of investment advice, even to institutions. If a person is in the business of selling research for a fee, that person or firm meets the definition of an investment adviser. If a broker-dealer charges commissions for selling securities and offers investment advice incidental to the sale of the securities, the broker-dealer is not an investment adviser because it is not compensated for the research.

Which of the following investment styles would be most suitable for a long-term investor who seeks capital growth but is concerned about execution costs? A) Market timing B) International C) Buy/hold D) Growth style

C. A buy-and-hold style would be appropriate for the long-term investor because long-term gains are taxed at a lower rate, and execution costs are reduced by not buying and selling frequently.

All of the following statements regarding a closed-end investment company whose shares are listed on the NYSE are true except A) it differs from a mutual fund B) it is a type of management company C) it may redeem its own shares D) it sells at the market price based on supply and demand

C. A closed-end investment company does not redeem its own shares. The term "mutual fund" refers to an open-end management investment company that issues redeemable shares. Although there is a category of closed-end funds that do redeem their shares, (interval funds), those do not trade in the secondary markets like the NYSE.

You have a client who sold her $5 million whole life insurance policy through a life settlement broker. If she dies 2 years later, A) her estate can invoke the right of rescission and receive the policy proceeds minus the sale proceeds. B) the insurance broker must return all commissions to the insurance company. C) the new owner receives the $5 million death benefit. D) the insurance company is not obligated to pay the death benefit because she no longer owns the policy.

C. A life settlement contract involves the sale of a life insurance policy to a party other than the insured. In exchange for the payment, the new owner is entitled to the death benefit when the seller passes away. The right of rescission applies to illegal securities sales and this is not a security nor has any illegal activity been described.

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

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

A 54-year-old individual invests $25,000 into a nonqualified single premium deferred variable annuity. Five years later, with an account value of $35,000, the investor engages in a Section 1035 exchange into a variable annuity issued by a different insurance company. Four years later, with an account value of $50,000, the investor withdraws $20,000. The tax consequence of the withdrawal is A) $15,000 of ordinary income, $5,000 of long-term capital gain. B) $20,000 of ordinary income plus a 10% penalty tax. C) $20,000 of ordinary income. D) $15,000 of ordinary income, $5,000 nontaxable return of principal.

C. A partial withdrawal from a nonqualified annuity is taxed on a LIFO basis. That is, the last money in (assumed to be earnings), is the first money out. The cost basis is the original $25,000. The 1035 exchange merely carried that cost basis over and resulted in no current tax on the $10,000 of earnings. When $20,000 is withdrawn, all of it represents the earnings and that is taxed as ordinary income. There is never capital gains taxation on an annuity and there is no 10% penalty tax because this investor is older than 59½ at the time of the withdrawal.

A state securities Administrator may do all of the following except A) issue a subpoena to registrants who are out of state B) require the use of specific forms C) issue an injunction after a hearing D) issue interpretive opinions

C. A state securities Administrator may not issue injunctions, which are issued by courts, not administrative agencies. Administrators may require specific forms to be used, issue subpoenas to registrants who are out of state, and issue interpretive opinions.

Which of the following statements is most accurate when describing equity straddle options? I) The option buyer is looking for market volatility. II) The option buyer is looking for market stability. III) The option seller is looking for market volatility. IV) The option seller is looking for market stability. A) II and IV B) I and III C) I and IV D) II and III

C. A straddle is the combination of a put and a call on the same stock with the same strike prices and expiration dates. The solution to the question is the same for any option position in that option buyers need price movement and option sellers make money from stability. In the case of a straddle, a buyer is expecting sharp movement but does not know the direction of the move. The seller of the straddle will benefit if there is no significant price movement.

Under the Investment Advisers Act of 1940, an IA that uses a website would be required to I) maintain a copy of the screens used on its site in the firm's advertising file II) place copies of new screens into the firm's advertising file each time a change is made III) file copies of the web design with the SEC IV) password protect the site to limit access to existing clients only A) I and III B) III and IV C) I and II D) II and IV

C. A website is considered advertising, and the Investment Advisers Act of 1940 requires that a file copy be maintained of all advertisements that will be seen by 10 or more persons. Whenever the site is changed, it is considered new advertisement copy and must be placed into the firm's advertising file. Advertisements are never filed with the SEC.

An investment adviser representative (IAR) prepares a comprehensive financial plan for a new client. Part of the plan includes detailed portfolio recommendations. Seeing a negative reaction from the client, it becomes obvious to the IAR that he is dealing with an ignorant person who is filled with many market misconceptions. It would be reasonable for the IAR to A) prepare a new portfolio that is more in line with what the customer has indicated he is comfortable with B) drop the client C) attempt to educate the client to correct those misconceptions, but leave the final decision up to the client D) tell the client he will make some changes, but keep the original portfolio because that really is in the client's best interest

C. All decisions are ultimately up to the client, but there is nothing wrong with the IAR attempting to educate the client, especially when it could lead to greater investment success.

Under the Investment Advisers Act of 1940, as amended by the Marketing Rule for Investment Advisers, advertising done by investment advisers prohibits I) the use of testimonials II) reference only to specific past recommendations III) untrue statements A) III only B) I and III C) II and III D) I only

C. Amendments effective in 2021 to SEC Rule 206(4), issued under the Investment Advisers Act, permit the use of testimonials under certain conditions. The rule still prohibits untrue statements of material fact and reference only to specific past recommendations.

SEC Release IA-1092 requires an investment adviser to make each of the following disclosures except A) if his personal securities transactions are inconsistent with the advice given to clients. B) that the investment adviser may structure his personal securities transactions to trade on the market impact caused by his recommendations to clients. C) annual compensation for the past five years or initial registration if that is shorter. D) any compensation received from an issuer of a security being recommended to clients.

C. An investment adviser must disclose his methods of compensation and must disclose compensation received from the issuer of any recommend security. However, investment advisers are under no obligation to disclose their annual income. An investment adviser who structures his personal securities transactions to trade on the market impact caused by his recommendations to clients must disclose this practice to clients. An IA generally also must disclose if his personal securities transactions are inconsistent with the advice given to clients.

Publicly-traded corporations are generally required to have an annual independent audit of their financial records. What is the highest opinion offered under GAAP? A) Qualified opinion B) Disclaimer of opinion C) Unqualified opinion D) Adverse opinion

C. An unqualified or "clean" opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements. An adverse opinion means the auditor is not willing to vouch for the accuracy of the information. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

An investor owns a common stock that has been paying a dividend at an annual rate of $2.00. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is A) 4% B) 12% C) 20% D) 5%

C. Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $0.50 (1 quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for 3 months − 1 quarter. Multiply that by 4 to get the annual rate.

Which of the following activities of an investment advisory firm would NOT require notification to and consent of the clients of the advisory firm? A) The retirement of a sole proprietor investment adviser who wishes to sell the practice to another investment adviser B) An investment adviser wishing to merge with a larger national advisory firm C) A minority partner resigning from the firm to start his own advisory firm D) The chief operating officer of an investment advisory firm wishing to pledge her majority interest in the firm to a local bank for a loan to purchase an office building that will be leased to the advisory firm

C. Any change in the controlling interest in an advisory firm, including pledging the controlling interest, is treated as an assignment of the contract and requires notification to and consent of the clients of the investment adviser. The change in a minority interest is not considered an assignment, so only notification, but not consent, is required.

One of the features of convertible preferred stock is that A) the owner has the opportunity to convert the stock into the issuer's bonds B) the dividend is paid ahead of all other securities C) the owner has the opportunity to participate in the growth of the company D) the holder is able to select the conversion price

C. Any convertible security, preferred stock or debenture, is convertible into the issuer's common stock. As a result, if the business is successful, the common stock's price will rise to the point where conversion is a wise idea. Although the investor can generally select when to convert, the conversion price or ratio is set at the time of issuance. Interest on debt securities is paid before the dividends on any stock. When it comes to preferred stock, there is frequently a "pecking order", such as a prior lien preferred or first preference preferred that would come ahead of the other preferred shares.

Charlie Mindel is the portfolio manager for the Steady Yield Bond Fund. If Charlie was of the opinion that interest rates were going to fall, he would A) keep the average duration the same. B) move more of the portfolio into cash. C) increase the average duration of the portfolio D) decrease the average duration of the portfolio.

C. As interest rates go down, prices of bonds rise. Those with the longest duration will have the greatest price increase. To benefit from this move, managers of bond portfolios will lengthen the average duration of the portfolio. The reverse action would be taken if Charlie thought that interest rates were going to rise. Of course, if interest rates move in the opposite direction of that the manager expects, the fund might start looking for a new manager.

One way in which universal life and variable life are similar is that both A) are considered securities B) have flexible premiums C) permit loans against the cash value D) have a fixed minimum cash value

C. As long as the policy has cash value, loans are permitted. Neither of these has a fixed minimum cash value, and only universal life has flexible premiums. Only variable life is considered a security.

A client of a broker-dealer calls his agent and submits an order to purchase 1,000 shares of a Chilean silver mining company. As the order ticket is being prepared, the agent notices that this is a nonexempt unregistered stock. The agent should A) continue to process the order because this is an exempt security B) inform the client that no orders for this stock may be accepted until it is properly registered in the state C) continue to process the order because this is an exempt transaction D) wait for firm approval before processing the order

C. Because the client initiated the process, this is an unsolicited order. As such, it is included in the USA's definition of exempt transaction. Even when the security is nonexempt, registration is not required when the transaction is exempt. Therefore, this order may be taken as placed.

If general interest rates increase, the interest income of a bond unit investment trust will probably: A) increase B) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace C) remain the same D) decrease

C. Because the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.

A client of yours comes to the office and shows you some sales literature from a mutual fund that has him very excited. According to the material, the fund's average annual return over the past 10 years has been in excess of 15% and it has achieved the highest rating from the major fund rating services. Before recommending this fund to your clients, the first thing you would probably check for in the fund's prospectus is A) the fund's sales charge. B) the fund's objectives. C) the portfolio manager's tenure. D) the fund's expense ratio.

C. Because this client has been "sold" on past performance, you need to verify if the manager achieving those results is still on the job. That is the prime reason why the regulations require disclosure of the fund manager's tenure; it is important for investors to know if the current manager was the one who had the winning streak or if that manager just came on board. The other choices are something to look at, but in this instance, they take a back seat to checking on the manager's tenure. Sure, the expense ratio is important, but the past performance is after expenses so that has already been taken into consideration.

A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be A) disclosed promptly to all customers by amending the brochure B) disclosed in the summary of material changes in the annual updating amendment to the SEC C) disclosed promptly only to those customers who will be affected by the change through an amended brochure D) disclosed promptly to the Administrator of the state where the IA maintains its principal office

C. Because this will only affect new clients, the brochure (or Part 2A of the ADV) must be amended to reflect this new method of operation and made available promptly to these clients and to the SEC; it cannot be part of the end-of-year amendments. The state has no cause to receive a copy of a federal covered adviser's brochure.

The long party to a put option contract has A) the obligation to sell the underlying asset. B) the right to buy the underlying asset. C) the right to sell the underlying asset. D) the obligation to buy the underlying asset.

C. Being long a put option means owning the option. Owners have rights while sellers have obligations. A put option gives the owner the right to sell the underlying asset at the exercise price. The seller of the put option is obliged to take delivery and pay the exercise price if the buyer exercises the option.

When a stock has a beta of less than 1, this indicates that A) it will have a high level of unsystematic risk B) it will, on average, give a return in excess of that of a stock with a beta of greater than 1 C) it will, on average, give a return below that of the market D) it will have a high level of systematic risk

C. Beta tracks a stocks co-movement with the overall market. Because the "market" has a beta of 1.0, any stock with a lower beta will generally not have price movement equal to the market. Beta is a measurement of systematic risk, and low-beta stocks have less than high beta ones. Beta has no relationship to unsystematic risk.

Which of the following statements correctly describe similarities between exchange-traded funds and closed-end investment companies? I) There are a limited number of outstanding shares. II) They are traded on registered stock exchanges. III) They trade at prices that are not dependent upon but close to their net asset value. IV) Investors pay commissions to purchase and liquidate their positions. A) II and III B) I and IV C) II and IV D) I and III

C. Both exchange-traded funds and closed-end investment companies are traded on exchanges; therefore, investors pay a commission when purchasing and liquidating shares. Only closed-end investment companies have a limited number of shares. Closed-end funds may trade at significant premiums or discounts from their NAV, while ETFs rarely stray far from NAV.

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

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

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of A) a majority of the board of directors B) no one because they do not need approval C) a majority of the outstanding shares D) the fund's investment adviser

C. Changes in investment policy require a vote of the majority of outstanding shares for approval.

Which of the following are characteristics of commercial paper? I) Backed by money market deposits II) Negotiated maturities and yields III) Issued by insurance companies IV) Not registered with the SEC A) I and III B) III and IV C) II and IV D) I and II

C. Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Both yield and maturity are open to negotiation. Because commercial paper is issued with maturities of no more than 270 days, it is exempt from registration under the Securities Act of 1933.

Core inflation is best described as an inflation rate A) for producers' raw materials. B) that includes food and energy prices. C) that excludes certain volatile goods prices. D) the central bank views as acceptable.

C. Core inflation is measured using a price index that excludes food and energy prices. The primary reason for that is the volatility of those two.

Which of the following choices offers the highest tax-equivalent yield? A) 5.5% municipal bond to an individual in the 28% tax bracket B) 5.8% municipal bond to an individual in the 25% tax bracket C) 6.2% municipal bond to a corporation in the 21% tax bracket D) 5% municipal bond to an individual in the 35% tax bracket

C. Corporations receive the same tax break on municipal bonds as do individuals. Therefore, receiving a 6.2% return in the 21% tax bracket is equivalent to 7.85% before tax. A 5% bond to someone in the 35% bracket is equivalent to 7.69%; a 5.5% coupon to someone in the 28% bracket is equivalent to 7.64%; and a 5.8% coupon to someone in the 25% bracket is equivalent to 7.73%.

All of the following actions must be completed prior to customers entering their first option trade EXCEPT A) delivery of the options disclosure document (ODD) B) approval by a designated options supervisor C) receipt of a completed options agreement D) completion of the new account form

C. Customers do not have to complete (sign) the options agreement prior to entering an order; under current rules, the agreement must be signed and returned by the customer within 15 days of account approval.

In general, from the choices given, the type of security offering the greatest degree of safety to an investor is A) preferred stock B) a debenture C) a mortgage bond D) common stock

C. Debt securities, because they are an obligation of the issuer, are generally considered safer than equity securities. Secured debt is safer than unsecured debt. The only one of these debt obligations with pledged assets as security for the loan is the mortgage bond. Debentures are unsecured corporate debt obligations.

When discussing employment and production, which of the following industries are typically more affected by a recession? I) Capital goods II) Consumer durable goods III) Consumer nondurable goods IV) Services A) I and III B) II and IV C) I and II D) III and IV

C. Durable goods and capital goods are more affected by a recession than are nondurable goods and services. This is primarily because they are larger items, last for a longer period, and are somewhat discretionary.

Duration is A) the deviation of a bond's returns from its average returns B) identical to a bond's maturity C) a measure of a bond's volatility with respect to a change in interest rates D) equivalent to the yield to maturity

C. Duration measures a bond's volatility with respect to a change in interest rates. The higher the duration, the greater the change in a bond's price with respect to interest rate changes.

During an economic recession, which of the following items will most likely increase? A) Consumer confidence and profits B) Inflation C) Bond prices D) Interest rates

C. During a recessionary period, inflation and interest rates generally decline. This causes bond prices to increase because they are inversely related to the change in interest rates. Consumer confidence and profits are declining at this point in the economic cycle.

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

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

An inverted yield curve results in part by A) investors buying short-term bonds and selling long-term bonds B) rising interest rates C) investors buying long-term bonds and selling short-term bonds D) declining interest rates

C. First of all, what is an inverted yield curve? That is what we get when the yields on short-term debt are higher than the yields on long-term debt. Next, what happens to make the yield of a bond go up? When the price of the bond falls, the yield rises. Conversely, when the price of a bond rises, the yield falls. Finally, what causes the price of a security, any security, to go up or go down? Supply and demand in the marketplace. That is, when there are more buyers than sellers, that demand pushes the price up. Likewise, if there are more sellers than buyers, the price will go down. That's the basic economics of supply and demand. When investor demand is for long-term bonds, the price of those bonds will rise, causing the yields to fall. And, when investors are selling short-term bonds, that selling pressure causes the price to drop and the yields to increase. That is what has happened in this question: more demand for the long-term, resulting in higher prices and lower yields, and more supply for the short-term, resulting in lower prices and higher yields.

A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where he works. The annuity contract is currently valued at $16,000, and he plans to retire. On what amount will the customer be taxed if he chooses a lump-sum withdrawal? A) $10,000.00 B) He will not owe taxes because the annuity was nonqualified. C) $6,000.00 D) $16,000.00

C. Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings of $6,000.

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the 2 previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders? A) $0.00 B) $8.00 C) $24.00 D) $16.00

C. If the company is going to pay a common stock dividend, it must pay the preferred dividends first. A cumulative preferred stockholder must also receive all dividends in arrears. There are $16 due in back dividends, in addition to $8 this year, for a total of $24.

Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? I) Receiving cash distributions may reduce Customer A's proportional interest in the fund. II) Customer A may use the cash distributions to purchase shares later at NAV. III) Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. IV) Due to compounding, Customer B's principal will be at greater risk. A) II and III B) I and IV C) I and III D) II and IV

C. If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, his proportional interest in the fund will decline. Automatic reinvestment is always at NAV.

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

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

An investor owns a long-term U.S. Treasury bond with a 6% coupon and 21 years to maturity. The client wishes to sell and receives a quote from a dealer of 96.13. This number represents A) the markdown B) the discount C) the bid price D) the offer price

C. If you want to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, the quote would have been the offer (ask) price. What does the 6% coupon and the 21 years to maturity have to do with the question? Nothing. Knowing that treasuries are quoted in 32nds has nothing to do with it either. Also, the price quote is below 100 so it is at a discount, but the better answer is bid price because the question is referring to the quote.

A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the principal value of the bond at the end of 5 years? A) $1,000 B) $1,200 C) $1,219 D) $1,440

C. In addition to paying interest, a TIPS bond increases its principal value semiannually by the amount of inflation. If the inflation rate is 4% for 5 years, the principal value of the bond increases semiannually by that inflation rate. Allowing for compounding, the best choice would be the $1,219. This is computed by multiplying $1,000 by 102% 10 times. The License Exam Manual (LEM) contains a step by step example of how this computation works.

A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) a large-cap growth fund B) a long-term government bond fund C) an intermediate-term, high-grade corporate bond fund D) an intermediate-term government bond fund

C. In all of these cases, liquidity should not be a problem because mutual funds have a 7 day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolio offers that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection.

All of the following statements regarding futures contracts are correct except A) a short position will increase in value if the underlying commodity or asset declines in value. B) futures contracts can be written on financial assets or commodities. C) completing a futures contract requires the delivery of the commodity. D) purchasing a contract for future delivery is considered taking a long position.

C. In almost all cases, the holder of the futures contract will purchase an offsetting contract canceling the original position or sell the contract prior to expiration. In isolated cases, delivery of the commodity may be made, but is not required. Futures contracts can be written on financial assets such as currencies and stock indexes as well as on commodities such as agricultural products or precious metals. As with anyone taking a short position, the value goes up when the price of the underlying asset declines. And, just as purchasing a stock or bond, a long position represents one of ownership.

If an investment adviser wishes to engage in an agency cross transaction involving advisory clients, it would be prohibited from A) earning a commission on both the purchase and the sale B) obtaining written consent from the parties prior to engaging in agency cross transactions C) recommending the trade to both sides D) representing both the buyer and the seller

C. In an agency cross transaction, the IA represents advisory clients on both sides of the trade and may earn a buying and selling commission. To engage in these types of transactions, written notice must be furnished to advisory clients before the trade. These transactions can never be recommended to both sides of the trade.

The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, the maximum that a purchaser would be entitled to claim would be I) attorney's fees II) court costs III) interest at the state's legal rate IV) the greater of the original consideration paid for the security or the current market value A) III and IV B) I and II C) I, II, and III D) I, II, III, and IV

C. In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees.

An individual purchases a $10,000 CD with a 5-year maturity from her local bank branch. In doing so, she is eliminating A) inflation risk. B) opportunity cost. C) interest rate risk. D) purchasing power risk.

C. Interest rate risk is the uncertainty that changes to market interest rates will cause the price of an investment to fluctuate in value. Because this type of bank CD is nonnegotiable (it doesn't trade), changes to interest rates do not impact the principal value of the investment - she can always redeem the CD for $10,000 (although there could be a penalty for early withdrawal). As a fixed-income investment, though, it does suffer from purchasing power risk, also known as inflation risk, and the investor has the opportunity cost of settling for a lower rate of return than could potentially be obtained with equities.

Which of the following would be deemed to be an assignment of an investment adviser's contracts? I) All of the stock in NLT Advisers, a corporation, is acquired by MMS Advisers, Inc. II) The Lucky Seven Partnership is an investment adviser with 7 partners. Four of the partners make a fortune and decide to retire. They are replaced by new partners. III) Albert is an investment adviser. His clients' accounts are automatically debited monthly for his fee. Because of this steady cash flow, his banker readily accepts a pledge of these accounts as collateral for a loan. A) I and II B) I and III C) I, II and III D) II and III

C. It is deemed to be an assignment whenever a majority interest in an adviser changes hands. Pledging a client's contract is considered to be an assignment.

Interest rates are rising. An analyst would be most likely to state that the business cycle is in which stage? A) Peak B) Contraction C) Expansion D) Trough

C. It is during periods of economic expansion that interest rates tend to increase. They tend to fall during contractions.

An investment adviser representative who makes extensive use of third-party research to formulate portfolio recommendations to clients A) must disclose that fact to the clients B) must obtain consent of the clients to use third-party research C) need not disclose that fact to the clients D) is in violation of his fiduciary responsibility as IARs may only use research provided by the firm

C. It is not necessary to disclose what sources an IAR uses as the basis for recommendations. If the third-party research is distributed to clients, proper attribution is required.

Which of the following statements regarding REITs are NOT true? I) Investors receive flow-through benefits of income as well as loss. II) Hybrid REITs own properties, as well as make loans on others. III) Equity REITs are prohibited from using leverage to acquire properties. IV) REITs are easily traded in the secondary market. A) II and IV B) I and IV C) I and III D) II and III

C. It is not true that REITs offer flow-through of losses; they are not DPPs. As with most real estate purchasers, leverage, usually in the form of a mortgage, is used to acquire property. A hybrid REIT contains the features of both an equity REIT and a mortgage (debt) REIT, and most REITs trade on the exchanges or Nasdaq. Note: Even though there has been an increase in the number of non-traded REITS, unless something in the question indicates that, the question will be dealing with publicly traded REITS.

If John Good, a properly registered investment adviser, opens his own office and hires several representatives to work for him, his business card may NOT read A) John Good Investment Advisers, Inc. B) Good and Associates Investment Advisers, Inc. C) Good Performance Advisers, Inc. D) Good's Investment Advisers, Inc.

C. John Good, a registered investment adviser, cannot put on his business card "Good Performance Advisers." In this instance, the word Good can be interpreted as an adjective modifying the word performance, as opposed to John's given name, Good. An adviser cannot present himself to the public in terms that can be misleading or interpreted as exaggerating performance. The other three choices are appropriate because they do not use the term Good as an adjective touting the results of the adviser, but as the name of the adviser.

The Investment Company Act of 1940 states that: A) no more than 50% of the board of directors of an investment company may be officers or employees of the company or investment advisers to the company B) it is unnecessary for the prospectus to disclose the management fee C) open-end companies may issue common stock only D) an investment company must have $5 million capital before its securities can be offered to the public

C. Open-end companies may issue only common stock. The prospectus must state the management fee, and an investment company needs only $100,000 to offer itself to the public. In addition, no more than 60% of the board of directors can be made up of officers or employees of the company.

A registration of an IAR can be denied or revoked if it is in the public interest and I) the registrant fails to include the fact that he had been convicted of a non-securities-related misdemeanor within the last 2 years II) the registrant has willfully violated the securities laws of a foreign jurisdiction III) the registrant is qualified on the basis of knowledge and training but lacks requisite experience IV) the registrant has engaged in dishonest or unethical practices in the securities business A) II and III B) III and IV C) II and IV D) I and II

C. Just cause for denial, suspension, or revocation of an IAR's license would include engaging in dishonest or unethical practices in the securities business and willfully violating the securities laws of a foreign jurisdiction. Failure to include convictions for a securities-related misdemeanor (or any felony) constitutes filing an incomplete or misleading application and that too would be just cause for taking action. Don't confuse this with the 10-year rule. These convictions must always be disclosed; 10 years is the time period during which it is almost a sure thing that the application will be denied. An Administrator may not deny a registration solely on the basis of lack of experience.

A support level is the price range at which a technical analyst would expect A) the supply of a stock to increase substantially. B) the demand for a stock to decrease substantially. C) the demand for a stock to increase substantially. D) the supply of a stock to decrease substantially.

C. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level, the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level. Generally, a support level will develop after a stock has experienced a steady decline from a higher price level. Technicians believe that at some price during the decline, those investors who have been waiting for a reversal to get into the stock will now buy. When the price reaches this support price, demand surges, and price and volume begin to increase again. Other terms that may be used in this context are overbought and oversold. Overbought generally refers to the resistance level. Interest in buying the stock has begun to dry up and the price of the stock plateaus. Oversold is when the opposite occurs: there are few sellers to be found and the price of the stock bottoms. In either case, the next move is a reversal: down when the stock is overbought and up when oversold.

Jon, an agent with Johnson-Bayer Securities, was reacting to peer pressure to use email as a prospecting tool. He decided to highlight the exciting new process for drug delivery that was covered in the new offering prospectus when explaining why he felt the issuer found the next "aspirin." He summed up the email by stating potential investors needed to act quickly to get in on the ground floor. His decision to do so fell into the category of which of the following? A) Fraud B) Phishing C) Unethical business practice D) Advertising

C. NASAA considers it to be an unethical business practice to use any advertising or sales presentation in such a fashion as to be deceptive or misleading. Examples of such practices would be a distribution of any nonfactual data; any material or presentation based on conjecture; unfounded or unrealistic claims in any brochure, flyer, or display by words, pictures, or graphs; or anything otherwise designed to supplement, detract from, supersede, or defeat the purpose or effect of any prospectus or disclosure.

To assist broker-dealers with compliance, NASAA prepared a fee disclosure template. Based on the template, all of the following broker-dealer charges would be disclosed except A) account transfer fees. B) fees for issuance of stock certificates. C) brokerage commissions. D) account maintenance fees.

C. Not included in the fee disclosure documents are commissions, markups and markdowns, and advisory fees.

A client of yours recommends your services to his mother, who is 80 years old. She lives on Social Security ($2,215 per month) and has a home with a net value of $186,000. She has lost a large amount of money that she had placed into a high-risk technology fund about 10 years ago. The fund is part of a family that has a wide range of funds with varying objectives. With only $27,000 left in that account, what would you suggest as the best option for her? A) Ask her attorney what the best choice would be B) Leave the funds where they are and hope for a recovery C) Move her to a lower-risk fund that is in the fund family D) Sell all of the account and select a more appropriate fund in a different family

C. Obviously, this client invested in a fund that is not suitable for someone in her situation. Because families of funds offer the exchange privilege (exchanging shares from one fund to another at NAV), it is generally considered an unfair business practice to move to another fund and potentially incur a new sales charge.

Which of the following statements regarding a zero-coupon corporate bond is TRUE? A) The investor reports the difference between the purchase price and maturity value as ordinary income at maturity. B) Bonds selling at a premium have a yield lower than the coupon rate. C) The investor has phantom income, which must be reported on an annual basis. D) These bonds have higher reinvestment risk as to interest than bonds paying semiannual interest.

C. On a taxable zero-coupon bond, the annual imputed interest is reported for tax purposes. Because this income is not actually received annually, it is referred to as phantom income. Zero coupon bonds always sell at a discount from their maturity value - never at a premium and one risk that zero coupon bonds avoid is reinvestment risk because there are no interest payments to reinvest.

Your retired 72-year-old client still lives in the home he purchased 35 years ago for $40,000. It is currently valued at $700,000 and there is no mortgage. The client has almost $500,000 in his self-directed IRA rollover account. When determining suitable investments for this client, you would base your recommendations on the fact that I) the client is an accredited investor having a net worth in excess of $1 million II) a home equity loan could more than double the amount of funds available to invest III) as a retiree, any losses suffered cannot be made up from current income IV) the client's time horizon could be as long as 20 years A) I and IV B) I and II C) III and IV D) II and III

C. One of the risks facing senior investors who are retired is that, unlike those still employed, loss of principal can be devastating. With today's medical advances, a 72-year-old can be looking at 15 to 20 additional years of life. Therefore, recommendations must be made to maximize the probability of the client's assets lasting that long. Effective with the Dodd-Frank Act of 2010, this investor is no longer accredited because the value of the primary residence must be excluded from the net worth computation. And, even if he were, eligibility does not equal suitability.

Your client purchased an index annuity from you last year with an investment of $100,000. The particular index tied to this product had an annual return of -4%. If the participation rate is 90% with a cap of 5% and no annual minimum guarantee, the value of the account would be A) $103,600. B) $96,400. C) $100,000. D) $96,000.

C. Please note that the return is negative (-4%). An index annuity does not participate in losses of the index, only gains. With no gain, and no guaranteed annual minimum, the account value remains at $100,000.

Which of the following would NOT be considered an unethical practice for a registered investment adviser? A) Unfairly criticizing an estate plan prepared by the client's attorney B) Acting as a principal in a recommended transaction without consent of the client prior to completion of the trade C) Acting as a trustee for a client's trust D) Failing to notify the Administrator that the adviser is maintaining custody of client funds and securities

C. Please notice the word not in the question. Although acting as a trustee for the client's trust is probably not a good business practice, it is not included in the list of unethical activities for an adviser.

Programs allowing for the direct pass-through of losses and income to investors include all of the following EXCEPT A) oil and gas drilling direct participation programs B) S corporations C) REITs D) new construction real estate direct participation programs

C. REITs allow for the direct pass-through of income but not losses. The other choices are forms of business which allow for pass-through of income and losses.

A highly compensated customer owns 200 shares of Datawaq. He bought it 20 years ago, and it is now trading at 90. If he donates the stock to a 501(c)(3) charity, how much can he claim as a tax deduction for this donation? A) $12,000 B) $0 C) $18,000 D) $6,000

C. Securities can be gifted to charity and deducted at their fair market value, as long as they have been held more than one year. The fair market value of the deduction allowed for 200 shares is 200 multiplied by the current market price of the stock, or $18,000.

An investor interested in investing in sovereign debt would most likely purchase A) bonds backed by gold sovereigns. B) bonds issued by the Bank of the United States. C) Sweden 2.5s of 2032. D) European Central Bank debt issues.

C. Sovereign debt refers to bonds and other debt instruments issued by a specific country. The European Central Bank manages the currency of the 19 countries who have adopted the Euro. There is no such thing as the Bank of the United States and gold sovereigns are coins - they are not used to back debt.

Differences between static and interactive content on social media include I) only static content can be reused by others II) only static content needs preapproval III) only static content can be changed by the person who originated it IV) only interactive content can be commented on by others A) I and III B) I and IV C) II and IV D) II and III

C. Static content requires preapproval. Interactive content can be reused by others and can be commented on by others. Both static and interactive content can be changed by its originator, but static canbe changed only by its originator and interactive by the originator or others.

MaryBeth Williamson is the CEO of MBW Software Associates. MBW is having an offering of common stock to investors on an intrastate basis. Williamson has been telling potential investors that the registration of the stock indicates approval by the state. Under the Uniform Securities Act, she is committing misrepresentation of A) material information. B) qualification. C) registration. D) authorization.

C. Stating that a securities offering has been approved by a regulatory body is misrepresentation of the registration of the security. As an intrastate offering, the registration format would be qualification, but that is not the misrepresentation here.

Which of the following is not included in fundamental analysis of a company? A) The study of a firm's financial statements. B) The study of a firm's position within its industry. C) The study of a company's historical stock prices and trading volume. D) The study of the direction of the economy.

C. Studying historical stock prices and volume is related to technical analysis. Fundamental analysis is concerned with the earnings potential and risk associated with a particular firm. Doing so requires viewing the entire economy, that company's industry, and its financial statements.

Which of the following securities of Synergy, Inc., (an issuer whose stock trades on the Nasdaq Stock Market), does NOT have an exemption from registration with the state? A) Synergy, Inc., senior bonds B) Synergy, Inc., debentures C) Synergy's oil and gas limited partnership units (Synergy, Inc., is the general partner) D) Synergy, Inc., preferred stock

C. Synergy's oil and gas limited partnerships are not issued by Synergy, Inc.; Synergy is only the general partner. The oil and gas partnerships are issued by separate legal entities; they do not have the blue-sky exemptions. They must be registered in the states in which they are sold, unless they have some other exemption. Any security equal or senior in claim to an exempted common stock is exempted as well. The company's preferred stock, senior bonds, and debentures all have blue-sky exemptions from state registration because the company's common stock is traded on the Nasdaq Stock Market.

When building an investment portfolio, it is generally recommended that an asset allocation process be used to increase the portfolio diversification and reduce risk. Which of the following is least likely to be considered an asset class? A) Cash and cash equivalents B) Stock C) Mutual funds D) Bonds

C. The 3 basic asset classes are equity (stock), debt (bonds), and cash/cash equivalents. Mutual funds are viewed as a tool for allocating to one or more specific asset classes; they, in themselves, are not an asset class. For example, a mutual fund investing in investment-grade bonds would be part of the portfolio's debt security allocation while a money market mutual fund would be part of the cash equivalents allocation. Many asset allocation models add tangibles, such as real estate or certain commodities. Unlike mutual funds, REITs are often used as a proxy for real estate so they might be considered an asset class on the exam.

An investor is looking to add some bonds to her portfolio. One of the bonds she is analyzing has a 3% coupon and the other a 6% coupon. Assuming both bonds have the same maturity date, a change in interest rates will have a more profound effect upon the market price of which bond? A) The 6% coupon B) Changes in interest rates affect both bonds equally C) The 3% coupon D) The bond with the lower rating

C. The longer a bond's duration, the more its price is affected by changes to interest rate. When bonds have the same maturity, the one with the lowest coupon has the longest duration. Ratings have little or nothing to do with price changes caused by interest rate changes.

Which of the following statements under the Investment Company Act of 1940 is TRUE? A) Mutual funds must file semiannual reports with the SEC. B) Investment companies are prohibited from owning more than 5% of another investment company's shares. C) Holding companies are not included in the definition of an investment company. D) Mutual funds furnish financial reports to shareholders at least annually.

C. The Act lists three different types of investment companies: face amount certificate companies, unit investment trusts and management companies. Holding companies, business entities which invest in other companies for the purpose of management control, are not included in the definition. The limit on investment in another investment company's shares is 3%, not 5%. Section 30(d) of the act requires semiannual reports from the fund to its shareholders and an annual filing with the SEC.

XYZ Securities, Inc., is a broker-dealer registered in states A, B, C, and D. The home office is in the largest city in State A, with branches in States B and C. One of their clients living in State D feels that his State B-based agent has been churning the account. If a complaint is filed, Administrators from which states would have jurisdiction? I) State A II) State D III) State C IV) State B A) I and IV B) I and II C) II and IV D) II and III

C. The Administrator in the state of residence of the client (State D) would certainly have jurisdiction. It is also likely that the Administrator in the state where the agent is located would have jurisdiction because all offers were being made from State B. The fact that the home office is in State A does not enter into the discussion.

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that A) the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box B) the CIP requires a statement of the customer's goals while the regulators only require current financial information C) the CIP requires date of birth while the regulators only require proof of legal age D) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts

C. The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts.

A client has been contributing to a periodic payment annuity for 20 years. The M&E charge is 1.25% per year. What happens to that charge when the client annuitizes at attained age 68? A) It continues B) It continues but at a reduced rate C) It ceases D) It increases because the client's mortality risk is higher at the older age

C. The M&E charge is for mortality and expenses. Once an annuity contract, fixed or variable, is annuitized, that charge no longer applies to the account. There may be an internally computed charge, but unlike the accumulation period, the charge is not broken out separately.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, which of the following are insiders for purposes of insider trading? I) Attorney who writes an offering circular for a company II) An investor holding 4% of the company's stock III) The next-door neighbor of a board member of a company IV) Brother of a company's president A) I and III B) II and III C) I and IV D) II and IV

C. The Securities Exchange Act of 1934 defines an insider as an officer, director, or stockholder owning more than 10% of a company's outstanding voting equity. The definition also includes anyone else who has or could have access to insider information, such as immediate family members. Merely being someone's neighbor does not automatically classify someone as an insider. Any professional who takes part in preparing the registration statement is automatically considered to have insider information.

Under the Securities Exchange Act of 1934, which body regulates the extension of credit for nonexempt securities? A) The New York Stock Exchange B) The SEC C) The Federal Reserve Board D) The Comptroller of Currency

C. The Securities Exchange Act of 1934 empowered the Federal Reserve Board (FRB) to set margin requirements and regulate the use of credit to purchase securities. The FRB determines what issues may be purchased on margin and what percentage of the purchase price must be deposited by the purchaser.

As defined in the Uniform Securities Act, an issuer is any person who issues, or proposes to issue, a security for sale to the public. Based on that definition, which of the following is not an issuer? A) The AAA Manufacturing Company, which proposes to offer shares to the public but has not completed the offering B) The City of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds C) A partner in the AAA Oil and Gas Partnership selling his interest in the investment D) The U.S. government announcing an offering of 20 year Treasury bonds

C. The Uniform Securities Act defines an issuer as any person who issues, or proposes to issue, a security. The resale of a partnership interest by an investor is a nonissuer sale because the investor is not the issuer. Examples of issuers are a municipality such as the city of Chicago, which issues tax-exempt highway improvement bonds; the AAA Manufacturing Company, which proposes to offer shares to the public even though it has not completed the offering; and the United States government, when it offers Treasury bonds.

The Uniform Securities Act provides for all of the following EXCEPT A) exemption from registration for federal covered securities B) criminal penalties for violations of the act C) specific civil penalties for up to 3 times the amount of money invested for willful violation of the act D) subpoena power for the state Administrator

C. The Uniform Securities Act provides for criminal penalties of up to 3 years in prison and/or $5,000 in fines. The act describes civil liability, not specific civil penalties. Civil liability includes interest costs, rescission of trade, payment of attorney's fees, and return of principal invested. The act makes no reference to penalties of 3 times the amount of money invested. The Uniform Securities Act does provide the state Administrator with the power to issue subpoenas.

A bond with a par value of $1,000 and a nominal yield of 6% paid semiannually is currently selling for $1,300. The bond matures in 25 years and is callable in 15 years at $1,080. In the computation of the bond's yield to call, which of these would be a factor? A) Present value of $1,080 B) 50 payment periods C) Interest payments of $30 D) Future value of $1,300

C. The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. With a 15-year call, there are only 30 semiannual interest payment periods, not 50. The present value is $1,300 and the future value is $1,080; the reverse of the numbers indicated in the answer choices.

If an agent recommends the purchase of a technology company with an impressive growth record, but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has A) committed a prohibited business practice by selling an unsuitable investment B) not committed a prohibited business practice C) violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents D) not violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents because no untrue statements were made

C. The agent has violated the NASAA Statement of Policy of Dishonest or Unethical Business Practices of Broker-Dealers and Agents by failing to inform the client of the potential downside in the sale of a security.

Which of the following is a NOT a leading economic indicator? A) Orders for durable goods B) Money supply C) Duration of unemployment D) New housing permits

C. The average amount of time it takes for an unemployed person to find a new job is a lagging indicator, not a leading one. Employment is usually one of the last things to pick up as the economy enters a period of expansion. Layoffs are one of the last resorts for companies when the economy turns down.

Which of the following statements describes the federal funds rate? A) Charge on loans to brokers on stock exchange collateral B) Base rate on corporate loans at large U.S. money center commercial banks C) Rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more D) Charge on loans to depositary institutions by the New York FRB

C. The federal funds rate represents the interest charge on reserves, traded among commercial banks for overnight use, in amounts of $1 million or more.

Yield curve analysis plays an important role as a benchmarking and forecasting tool for the future direction of interest rates. In most cases, this analysis involves examining A) bonds of varying quality of similar maturities. B) bonds of similar quality over varying maturities. C) bonds of a single issuer over varying maturities. D) bonds of varying quality over a number of maturities.

C. The most common yield curves are drawn using U.S. Treasury securities. The curve is plotted using maturities ranging from the short-term T-bills to the long bonds. There are other curves drawn with bonds from other sectors, such as corporate bonds, to show the "yield spread", but that is going beyond the scope of this question.

Disclosure to customers of an investment adviser's control relationships is required in I) agency transactions II) principal transactions III) exempt transactions A) II only B) I and III C) I, II, and III D) I and II

C. The nature of any control relationship or conflict of interest must be disclosed to customers, regardless of the capacity in which the firm acted or the type of transaction made.

Probable return is A) the current worth of future income discounted to reflect what that income is worth today B) the one discount rate that equates the future value of an investment with its net present value C) an estimate of all of the possible returns an investment is expected to yield D) the difference between an investment's present value and its cost

C. The probable return is computed by taking the various likely returns for an investment and adding them together. The difference between an investment's present value and its cost is the NPV. The current worth of future income discounted to today is used to determine present value. The one discount rate that equates the future value of an investment with its NPV is the internal rate of return (IRR).

The Uniform Securities Act specifically exempts certain issues from the registration and advertising filing requirements of the act. Which of the following securities does NOT carry that exemption? A) Canadian government bond B) Tax-free municipal bond C) Bank holding company stock D) 6-month commercial paper

C. The securities of banks, trust companies, and savings institutions are exempt; the securities of bank holding companies are not. Commercial paper with a maturity of 270 days or less is also included in the list of exempted securities.

A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the amount of the final semiannual interest check? A) $17.50 B) $35.00 C) $21.33 D) $42.66

C. The semiannual interest of a TIPS bond is computed on the basis of the inflation-adjusted principal. Because the principal increases with the inflation rate, at the end of the 5-year term, it has grown to $1,219 ($1,000 × 102% ten times). Therefore, the final interest check is for $1,219 × 1.75% (remember that it is a semiannual check). The License Exam Manual (LEM) contains a step by step example of how this computation works.

Under the Uniform Securities Act, a civil suit to recover damages may not be brought by an advisory client if I) more than 2 years ago, the client realized the advice rendered was improper II) the adviser has died III) the client willingly signed a statement waiving the adviser's compliance with the provision of the act on which the suit is based A) I, II, and III B) II and III C) I only D) I and II

C. The statute of limitations for civil cases is 2 years after discovery or 3 years after the event, whichever is sooner. The death of neither the adviser nor the client removes a cause of action for civil liability, and clients may not waive an adviser's compliance with the rules.

The Conference Board releases information about the economy on a periodic basis. Included are a number of different indicators. These indicators can be used to predict how the economy as a whole might change. Which of the following would be considered a leading indicator? A) Industrial production B) Gross domestic product C) Stock prices as measured by a broad index such as the S&P 500 D) CPI for services

C. The stock market, which anticipates economy activity, is a leading economic indicator. Industrial production is a coincident, or current, economic indicator. CPI for services is a lagging indicator. GDP is not included in the Conference Board's list of economic indicators.

Which of the following equations correctly shows the relationship between the items on a company's balance sheet? A) Assets = liabilities − net worth. B) Assets = stockholders' equity − liabilities. C) Assets = liabilities + stockholders' equity. D) Assets + liabilities = net worth.

C. The stockholders' equity, sometimes referred to as net worth, equals the difference between the company's assets and its liabilities (assets − liabilities = stockholders' equity). This formula is often restated as assets = liabilities + stockholders' equity.

An investor is considering a 10-year stripped U.S. Treasury and a 10-year U.S. Treasury note, both with a yield to maturity of 4.8%. Compared to the note, the strip has A) more reinvestment risk and less interest rate risk. B) more liquidity risk and less interest rate risk. C) less reinvestment risk and more interest rate risk. D) more interest rate risk and less liquidity risk.

C. The strip is a zero-coupon security so it has no cash flows to reinvest and therefore no reinvestment risk. However, it has more interest rate risk (longer duration) than the Treasury note. Remember, the duration of a zero-coupon bond is its maturity date while any debt security paying periodic interest (Treasury notes pay semiannually) will always have a duration shorter than its length to maturity.

The bulk of "dark liquidity" represents trades A) engaged in by institutional traders and trading desks on the exchange markets. B) where the identity of the participants is disclosed. C) engaged in by institutional traders and trading desks away from the exchange markets. D) involving noninstitutional investors.

C. The trades are "dark" because they are not made on the exchange markets. The identity of the participants is usually unknown and the participants are almost exclusively institutional.

Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) engaging in an agency cross transaction B) directing securities transactions to an affiliated broker-dealer C) purchasing shares from advisory clients that were originally acquired as a result of the adviser's previous buy recommendation D) the trade is being executed by an officer or partner of the firm

C. There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In agency cross transaction, the firm is acting as an agent—that's the reason for the term.

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT A) charges for late payments B) issuance of a stock certificate C) advisory fees D) account inactivity fee

C. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1. commissions; 2. markups and markdowns; and 3. advisory fees for those firms that are also registered as investment advisers.

Why are "country" funds organized as closed-end funds? A) So that additional capital may easily be raised B) Because the United Nations Investment Act of 1952 requires that they all be closed-end C) Because it is often difficult to liquidate the foreign securities to get their value into the U.S. D) Because redemption at net asset value within 7 days is assured

C. There are a number of funds that invest exclusively (or predominately) in the shares of companies domiciled (and traded) in a single country. Not all securities markets are as liquid as those in the United States, and many countries have currency restrictions limiting the amount of money that may be taken out of the country at any one time. Therefore, organizing as a mutual fund is not very practical. With no need to redeem shares, closed-end companies are the obvious solution. Please Note. In recent years, things have changed, and a majority of country funds today are now open-end companies (mutual funds). We are urging NASAA to remove or revise any questions that deal with "old" information and will update our questions (and LEM) when they do.

An analytical tool used to project the current value of a common stock using projected future dividends is A) the price-to-earnings ratio B) the future value computation C) the dividend discount model D) the dividend payout ratio

C. There are two widely accepted forms of common stock price projection using dividends—the dividend discount model and the dividend growth model.

If an agent solicits a client to purchase nonexempt, unregistered securities, and the solicitation results in a sale, which of the following statements is NOT true? A) The agent may be subject to civil penalties. B) The broker-dealer may be sued if the client loses money, but if money is made the client may keep it. C) The employing broker-dealer must offer the right of rescission within 30 days of discovery. D) The broker-dealer who employs the agent may be sued.

C. There is no specified time limit on when the right of rescission must be offered. The 30-day period is the length of time the client has, after receiving the notice, to accept or reject the offer. Agents are prohibited from soliciting sales for unregistered, nonexempt securities and any broker-dealer who employs an agent who does so may be sued. The agent may also be subject to civil penalties. Both agents and their broker-dealers may be sued when a sale results from an improper solicitation. If money is made, the client may keep it.

Which of the following categories of assets is most likely classified as an alternative asset? A) Preferred stocks B) Convertible bonds C) Real assets D) Cash

C. Traditional investments include cash, bonds, and stocks, regardless of the adjective used. Alternative investments include four major categories: real assets, hedge funds, private equity, and structured products.

Securities of which of the following issuers are exempt under the USA? I) National banks II) State banks III) Bank holding companies IV) Federal savings and loan associations A) I only B) I, II, III, and IV C) I, II, and IV D) I and II

C. Under the USA, the registration exemption for bank-issued securities is justified by strict financial requirements imposed on banks by banking industry regulators such as the FDIC, the Comptroller of the Currency, and the Federal Reserve. Both federal and state banks and federal savings and loan associations are subject to such regulation. However, bank holding companies (as separate legal or corporate entities) are subject to state registration if not otherwise exempt. Thus, securities issued by bank holding companies are not exempt securities under the act.

The USA would permit an agent to use the term "guaranteed" to refer to I) a security that is backed by the U.S. government II) a bond that is backed by the taxing power of a governmental body III) a bond whose interest and principal payments are guaranteed by someone other than the issuer IV) a stock whose dividend payments are guaranteed by someone other than the issuer A) I and III B) I and II C) III and IV D) II and IV

C. Under the USA, the term "guaranteed" refers to a guarantee of interest, principal, or dividends by a party other than the issuer.

Active Technicians (AT) is a state-registered investment adviser. In its brochure supplement, it would include information relating to each of the following individuals EXCEPT A) those providing investment advice and having direct contact with retail clients in the state B) those providing investment advice and having direct contact with institutional clients in the state C) members of AT's board of directors who are active in the firm's business D) those exercising discretion over assets of clients in this state, even if no direct contact is involved

C. Unless the individual has direct contact with clients (retail or institutional) or exercises discretion, a copy of the Part 2B brochure supplement for each individual is not required. This would include officers and members of the board of directors. Of course, if any of these individuals had direct client contact or exercised discretion, a supplement for them would need to be prepared.

Under the USA, an investment adviser's current clients must be delivered a brochure A) quarterly if the adviser has both discretion and custody B) annually​, but only​ if the adviser has neither custody nor discretion C) annually whether or not the adviser has custody or discretion D) within 48 hours of renewal

C. Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients [except those who are exempt from the brochure delivery requirements (impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940)] within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing.

Which of the following stocks would probably be most appealing to a value investor? A) A stock that has relatively high volatility B) A stock with a relatively low dividend yield C) A stock with a relatively low P/E ratio D) A stock with a relatively high price-to-book-value ratio

C. Value investors look for stocks in companies that have been overlooked or undervalued by other investors. They often focus on stocks with relatively low P/E ratios or price-to-book-value ratios or stocks with relatively high dividend yields compared with other stocks in the same industry.

Bail Bonds, Inc., might issue warrants in connection with a bond issue for which of the following reasons? I) As an inducement to make the bonds more marketable II) To lower their interest cost on the issue III) To increase the marketability of their common stock IV) To increase the number of common shares outstanding A) I, II, III, and IV B) I and IV C) I and II D) I only

C. Warrants permit the purchase of common stock of the issuer at a fixed price. A bond with warrants attached has more value than a straight bond and is more attractive (marketable) to investors. Attaching warrants to a bond issue usually permits the bonds to be issued with a lower interest rate.

Which 2 are most associated with a U. S. Treasury bond? I) Credit risk II) Liquidity risk III) Reinvestment risk IV) Interest rate risk A) II and III B) I and II C) III and IV D) I and IV

C. We negate credit risk when it comes to U.S. Treasury securities. Liquidity is also not an issue. However, any interest-bearing bond carries interest rate risk, as well as reinvestment risk.

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is A) selling at NAV. B) selling at a discount. C) selling at a premium. D) an open-end investment company.

C. When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the assets are the $100 million portfolio value and the liabilities are $10 million for the unpaid securities plus the $5 million in accrued management fees. Subtracting the $15 million in liabilities from the $100 million in assets leaves $85 million. Divide that by the 2,611,437 shares outstanding, and the quotient is approximately $32.55. Once we know the NAV, it is clear that the price of $36.38 is a premium over the NAV. And, we know that this can't be an open-end investment company because if it was, the $3.83 sales charge represents 10.5% of the asking price ($3.83 ÷ $36.38), which is well in excess of the maximum 8.5% permitted.

Under the USA, the term guaranteed refers to all of these EXCEPT A) dividends B) interest C) capital gains D) principal

C. When a security is guaranteed, that means that someone other than the issuer has guaranteed timely payment of interest and principal on a debt security, or the payment of dividends on an equity security. No one ever guarantees that the investor will have a capital gain.

An IA hires a third-party promoter to solicit for new clients. Which of the following records is the IA required to keep? A) A copy of the written agreement between the IA and the solicitor, signed by the client B) Copies of all investment recommendations made by the solicitor C) A copy of the written agreement between the parties if the compensation exceeded $1,000 over a 12-month period D) A receipt for any fee charged by the solicitor, signed by the client

C. When a third-party promoter engaged by an investment adviser to solicit for new business is going to be compensated above the de minimis limit, there must be a written agreement between the parties. As with most agreements, a copy must be kept in the IA's files. That written agreement between the adviser and the solicitor does not require a signature from any client or prospect. Solicitors don't recommend investments.

An investor purchases 100 shares of RIF common stock. In the year following the purchase, the RIF shares appreciated by 12% and paid a 2% dividend. If inflation, as measured by the CPI, was at a 4% rate, the investor's total return on the RIF shares is closest to A) 8% B) 10% C) 12% D) 14%

D. This question is asking for the total return, which is 14% (12% appreciation + 2% dividend). Had the question asked for the inflation-adjusted return, (which it doesn't), that is 14% minus the 4% CPI.

According to the Uniform Securities Act, which of the following would not be an unlawful activity for an investment adviser? A) Entering into an investment advisory contract that does not mention the compensation arrangements B) Taking custody of a customer's securities or funds without notifying the Administrator, even though the Administrator has no rule that prohibits such custody C) Notifying clients within a reasonable amount of time of the departure of a minority partner of the firm D) Entering into an investment advisory contract that provides specifically for compensation based on a share of capital appreciation of the customer's funds

C. When an IA organized as a partnership has a change involving a minority of the partners, notification to all clients must be sent within a reasonable amount of time. NASAA does not define reasonable, but that is the correct term to use. Although there are cases where performance-based compensation is permitted, unless the question specifically refers to that exception, the action is prohibited.

When does a customer have to receive the OCC Options Disclosure Document? A) Within 15 days of account approval by the firm's designated options supervisor B) Within 5 business days of the first options trade C) Before accepting the customer's first order to trade options covered by the ODD D) With the confirmation of the first options transaction

C. When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account or accepts the customer's first order to trade the listed options covered by the ODD.

What generally happens to outstanding fixed-income securities when the rate of inflation slows? A) Short-term securities are affected the most. B) Coupon rates go up. C) Prices go up. D) Yields go up.

C. When the rate of inflation slows and is expected to remain stable, coupons on new issue bonds will often decline to offer lower yields. The prices of outstanding bonds will go up to adjust to the lower yields on bonds of similar quality.

Your client with $100,000 to invest is looking for maximum current income. Which of the following would offer the highest current return? A) $200,000 of utility common stock paying a current dividend of 3.5% B) $100,000 of zero-coupon bonds with a yield to maturity of 6% C) $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity D) $100,000 AA-rated corporate bonds trading at par with a 6% coupon rate

C. When you read the full question, including the answer choices, you can immediately disregard two of the four options. With $100,000 to invest, the answer cannot be to purchase $200,000 of anything. Maximizing current income excludes zero-coupon bonds because there is no current income. Now, to the correct choice. Why does a bond sell at a premium over par? Although there are exceptions, primarily it is because the coupon rate on that bond is higher than the current market interest rate. Therefore, with a higher coupon rate, the current income on the same amount of principal invested ($100,000 in our question) will always be higher for a bond selling at a premium. That is the K.I.S.S (Keep It Simple Student) answer. For those who want to delve further, here we go. For example, if current market interest rates are 6% (likely the case here because the AA-rated bonds with a 6% coupon are trading at par), then a bond with a 7% coupon will be selling at a premium. The current yield on $100,000 of the 6% bonds would be $6,000 per year. If a bond's yield to maturity is 6% and it is selling at a premium, it must be that the coupon is higher than 6%. For example (and we're doing the math that you won't have to do), $93,000 par (93 times $1,000) value of bonds with a 7% coupon, selling at $100,000 (a premium over the $93,000), maturing in 10 years has a YTM of 6.0%. Investing $100,000 into these bonds will result in current income of $6,510 per year ($93,000 par times the 7% coupon).

Which of the following powers are under the jurisdiction of the Administrator? A) Issuing a final order suspending the registration of a person as long as, upon written request, a hearing will be granted in no more than 15 days B) Performing an annual audit of investment advisers registered in the state C) Issuing a cease and desist order to an agent without any prior notice D) Performing an annual audit of broker-dealers registered in the state

C. Whenever it appears to the Administrator that any person has engaged, or is about to engage, in any act or practice constituting a violation of any provision of the USA or any rule or order hereunder, he may in his discretion issue a cease and desist order, with or without a prior hearing against the person or persons engaged in the prohibited activities, directing them to cease and desist from further illegal activity. Any person aggrieved by a final order of the Administrator (that means after the hearing has taken place) may obtain a review of the order in the appropriate court by filing a written petition in court, within 60 days, not 15, after the entry of the order. Broker-dealers and some IAs have to file annual audited financials with the Administrator, but the audit is conducted by an independent accountant, not the Administrator.

Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except A) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO. B) ISOs may only be granted to employees while NSOs may be given to virtually anyone. C) the recipient of the grant of the ISO has no income tax consequences at the time of the grant. D) the holder of an ISO can recognize capital gain (loss) as a result of exercise, whereas ordinary income (loss) is the result with an NSO.

C. Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. ISOs can only be granted to employees while the NSO can also be granted to members of the board of directors and even to vendors. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least 1 year from the date of exercise and at least 2 years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the option within 10 years of the grant, it is treated as an NSO for tax purposes.

If a client owns 1,000 shares in a growth company and receives a 25% stock dividend, according to the Uniform Securities Act, this would be considered A) a sale B) an offer C) neither a sale nor an offer D) a secondary transaction

C. With the typical stock dividend, the stockholder receives additional shares of stock without furnishing money or other valuable consideration in exchange for the stock. A sale must entail exchange of consideration. A stock dividend is not an offer; the stockholder did not choose whether to acquire the additional shares acquired through the stock dividend.

Expressed as a percentage, what is the total return on a 1-year, newly issued (365 days to maturity) zero coupon debt obligation priced at 95? A) 5.26% plus the implied coupon rate B) 5% C) 5.26% D) The return cannot be determined without knowing current interest rates.

C. Zero coupon bonds get their name from the fact that there is no coupon interest paid. The investor's return is the difference between the discounted price paid and the $1,000 maturity value. In this question, the price paid was 95 ($950) and the maturity value is $1,000. That $50 difference is the investor's return. To determine the total return percentage on this zero coupon debt obligation, the $50 capital appreciation is divided by the cost of the bond, in this case $950, for a total return of 5.26%. Total return of a zero coupon security is made up entirely of the difference between the cost of the security and its sale or maturity price. The market price of the security, not current interest rates, is used in the calculation of total return.

According to the Investment Advisers Act of 1940, for how many years must books and records be maintained for an account after the end of the year in which the last transaction occurred? A) 2 years B) 5 years C) 1 year D) 10 years

C. Those investment advisers registered with and regulated by the Securities and Exchange Commission (SEC) must adhere to SEC Rule 204-2 regarding the maintenance of records. The rule states the required records must be kept for 5 full years from the end of the fiscal year during which the last entry was made on the record. The first 2 years, records must be kept in the principal office of the adviser and the balance of the time, easily accessible. They are subject to SEC examination at any time.

Which of the following securities are the most interest rate sensitive? I) Utility stocks II) Growth stocks III) Preferred stocks IV) Common stocks A) III and IV B) I and II C) II and IV D) I and III

D. Utility and preferred stocks are the most interest rate sensitive. Utility stocks are interest rate sensitive because they are highly leveraged. Preferred stocks are interest rate sensitive because they have a set dividend and fluctuate in price like bonds when interest rates change.

Kapco Advisers registers with the Administrator on April 1. Pete Patel, an IAR with Kapco, registers on the same day. Both of them file renewal papers, accompanied by the appropriate fees, on March 31 of the following year. Which of the following statements are TRUE? I) Kapco's renewal was timely. II) Kapco's renewal was late. III) Patel's renewal was timely. IV) Patel's renewal was late. A) I and IV B) II and III C) I and III D) II and IV

D. Regardless of when initial registration occurs, the renewal date for all professionals is December 31.

A mutual fund's computed NAV on April 24 is $100 per share. On April 25, the portfolio realized gains of $2 per share, and enjoyed $1 per share in unrealized appreciation. What would the NAV be on April 26 assuming an unchanged market? A) $103 per share B) $100 per share C) $102 per share D) $101 per share

D. A mutual fund's net asset value per share (NAV) is the fund's total assets minus total liabilities (net asset) divided by the number of shares outstanding. The major asset is the fund's portfolio. Portfolio securities are carried at their value as of the close of the markets (4PM ET). As a result, unrealized appreciation (and depreciation) are part of the NAV. Therefore, when that gain (or loss) is realized, paper profit (or loss) is now real and there is no change to total assets. In the subject question, the realization of the $2 per share gain has no effect, but, the new $1 in unrealized appreciation increases the NAV by that amount.

Which ratio would be looked at to determine the liquidity of a corporation? A) Debt/equity B) Price/earnings C) Dividend payout D) Current

D. A company's current ratio is their current assets divided by their current liabilities. If their current ratio is strong, they have a highly liquid position.

Looking at the balance sheet, a corporation builds its capital structure with all of the following except A) retained earnings. B) long-term debt. C) capital stock. D) cash.

D. A corporation's capital structure consists of its long-term debt plus shareholders' equity. Included in shareholders' equity are the equity capital (stock) and the retained earnings.

Under modern portfolio theory (MPT), all portfolios that can be constructed from a given set of stocks is referred to as A) the correlation coefficient B) the efficient set C) the capital market line D) the feasible set

D. A feasible portfolio is defined as a portfolio that an investor can construct given the assets available. The feasible set is the collection of all feasible portfolios. Once we have the feasible set, we can select the efficient set (the most return for a given amount of risk, or the least risk for a given amount of return).

In order to comply with the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following is NOT required to open a margin account for a trust? A) Approval of the account by the designated supervisory person B) A margin agreement C) Specific text in the trust agreement authorizing a margin account D) A completed margin suitability form

D. A margin account allows the customer to borrow money from the broker-dealer in order to buy securities. Although that does entail assuming greater risk on the part of the trust, there is no such thing in the Statement of Policy as a margin suitability form. However, under the Statement of Policy, the margin forms and agreements must be completed promptly after the initial margin trade. All accounts, not just margin, or trust accounts, require the approval of an appropriate supervisory person.

A money market mutual fund would be least likely to invest in which of the following assets? A) Newly issued ​U.S. Treasury bills B) Jumbo CDs C) Repurchase agreements D) Newly issued ​U.S. Treasury notes

D. A money market mutual fund typically invests in money market instruments, those with a maturity date not exceeding 397 days. Treasury notes are issued with maturity dates of 2-10 years.

Which of the following statements regarding ADRs are TRUE? I) The securities are vehicles used to facilitate U.S. trading of foreign securities. II) Dividends are received in the foreign currency. III) Holders have foreign currency risk. IV) The receipts are issued by a foreign branch of a domestic bank. A) II and IV B) I, III and IV C) I, II and III D) I and III

D. ADRs are vehicles that facilitate U.S. trading of foreign securities. They are issued in English in the United States by domestic banks. Dividends are declared in the foreign currency but are payable to holders in U.S. dollars, which means that ADR holders are subject to foreign currency risk.

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

D. Advertising that reflects past performance must show a minimum period of 1 year, not 3. All investment advisers' advertising must reflect deduction of fees; disclose the specific group of clients to which it applies, if applicable; and state actual market conditions during the referenced period.

If you are registered as an agent for a broker-dealer in State Y and you conduct business as an agent of theirs in State Z, a state in which you are not registered as their agent, you I) expose yourself and your employer to disciplinary action by State Z II) expose yourself to a possible fine III) may obligate your broker-dealer to offer your client the right to rescind the sale IV) may have your registration in State Y revoked A) II, III, and IV B) I, II, and III C) II and III D) I, II, III, and IV

D. Agents must be registered in each state where selling or offering to sell securities unless an exemption is available. Failure to do so exposes the agent and the broker-dealer to fines and possible disciplinary action. In addition, the individual could have his registration revoked where he is registered, and the broker-dealer could be required to offer customers the right to rescind any securities transactions.

ABC Manufacturing Company is in the business of making high quality machine tools. Which of the following would be included in ABC's cash flow from financing activities? A) The purchase of a new computer-driven lathe B) The sale of XYZ Lathe Manufacturing bonds C) The purchase of a new building to store inventory D) Payment of cash dividends

D. All financing activities deal with the flow of cash to or from the business owners. Who do dividends go to? The company's shareholders and that is why they are included in financing activities. The other choices are part of cash flow from investing activities.

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

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

When a bank's reserve account is running low, it might choose to borrow from the Fed. When doing so, the bank will be charged A) the prime rate B) the call loan rate C) the federal funds rate D) the discount rate

D. When a bank borrows from the Federal Reserve, it does so at the discount rate. When borrowing from another bank, it is at the federal funds rate. The prime rate is charged by the banks to their stronger borrowers, and the call loan rate is what broker-dealers pay on stock market collateral pledged for margin accounts.

According to both the Investment Advisers Act of 1940 and the Uniform Securities Act, under which of the following circumstances is an investment adviser required to make disclosure to the client? I) The adviser intends to recommend the use of the broker-dealer with whom he is affiliated. II) The transactions recommended to the client are inconsistent with those for the adviser's own account. III) The investment adviser intends to sell the client the insurance policy recommended for his financial plan. IV) The adviser is employed by a broker-dealer but provides investment advisory services outside the scope of his employment with the broker-dealer. A) II and IV B) I and III C) III and IV D) I, II, III, and IV

D. All of the situations listed involve some potential conflict of interest. Although such transactions are not prohibited, proper disclosure is required.

A customer needs $10,000 to pay for a new house within the next year. His agent suggests that he invest in a stock that has been performing extremely well the past year and assures the customer that he cannot go wrong. According to the Uniform Securities Act, this is I) an unethical business practice II) an example of guaranteeing a profit III) an example of flamboyant language IV) an unsuitable investment A) II and IV B) I and III C) I, II and IV D) I, II, III, and IV

D. All the choices listed are true. There is nothing in the LEM about flamboyant language, but there should be enough examples of what is fair and ethical for you to realize that flamboyant or exaggerated statements would be against the spirit of the law if not actually a violation. Use that kind of common sense on the real exam.

A risk-averse investor wants to invest in Treasury securities. The investor's agent recommends Treasury notes, pointing out that federal government-backed securities are default-free securities not subject to interest rate risk. In the above situation, the agent has acted A) properly because Treasury notes are suitable for a risk-averse customer and are free of all investment risk B) properly because Treasury notes carry no risk of principal default C) fraudulently because Treasury notes are unsuitable for a risk-averse customer D) fraudulently because the agent failed to disclose that the investment carries interest rate risk

D. Although Treasury securities (such as T-notes issued by the federal government) do not carry default risk, the customer who buys them bears interest rate risk because the value of the notes will fall if interest rates rise. The agent has acted fraudulently in not disclosing this risk to the customer.

Which of the following is not a type of life insurance policy? A) Universal life policy B) Endowment policy C) Term to 65 policy D) Variable annuity policy

D. Although a variable annuity may have a death benefit provision, it is not considered a life insurance policy. One key to that is, among other things, there is no health questionnaire when purchasing an annuity. Perhaps you have never heard of an endowment policy (it is not mentioned in the LEM). This type of situation may come up on the actual exam where one of the choices is something unfamiliar to you. Don't let that cause you to lose your focus. Annuities are issued by life insurance companies, but they are not life insurance policies, so select the correct answer and move on.

One of the features of an index annuity is the ability for the principal value to increase based on the performance of the specified index. Which of the following is NOT used as a method to compute the amount of interest to be credited to the account? A) Annual reset B) Point to point C) High-water mark D) Participation rate

D. Although the participation rate is a component of the computation, it is not a method of computing the interest credit. In the annual reset index method, interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to the annuity each year during the term. Using the high-water mark, the index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date the annuity was purchased. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to the annuity at the end of the term. And finally, with the point-to-point method, the index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to the annuity at the end of the term. In each of these, the insurance company will specify the participation rate (what percentage of the increase will be credited) and a cap rate (the maximum amount to be credited).

For larger accounts, a broker-dealer is least likely to waive its normal fee for A) wiring funds to the client's bank B) the annual account maintenance charge C) safekeeping of funds or securities in the account D) transferring the account to another broker-dealer

D. Although there is no official standard, larger accounts tend to have many of the smaller fees waived. However, if the client is moving the account to another firm, it is likely that the transfer fee will be charged.

Under the Uniform Securities Act, which of the following disciplinary actions is(are) authorized as part of the Administrator's authority? I) The Administrator may suspend or revoke a current registration. II) The Administrator may censure or bar an applicant from future registration. III) The Administrator may restrict the securities-related business of a broker-dealer, adviser, or registered agent. A) I and III B) I only C) II and III D) I, II, and III

D. An Administrator may deny an application for registration, suspend or revoke a current registration, or censure or bar from future registration. The Administrator may also restrict or limit the securities-related business activity of a broker-dealer, adviser, or their registered agents or representatives.

An Administrator may restrict the activities of a registered agent who is A) found to have inadequate experience B) found to be a citizen of a country other than the United States C) found to have split commissions with another agent in his office D) determined to have become insolvent

D. An Administrator may, by order, restrict the activities or revoke the registration of a registered agent who is determined to have become insolvent. Lack of experience by itself is not a sufficient reason to restrict an agent's activities. U.S. citizenship is not a requirement for registration under the Uniform Securities Act.

Among the advantages of forming an S corporation rather than a C corporation for a new business enterprise is A) shareholders' losses are limited to the amount of their investment B) the ease in raising substantial amounts of capital. C) unlike the C corporation, which is limited to 100 investors, there is no such limit for an S corporation D) any losses flow through to the investors

D. An S corporation offers the benefit of flow-through of both income and losses (losses being a particular benefit for a start-up because they usually take some time to become profitable). It is the S corporation rather than the C corporation that is limited to 100 investors. Both offer the benefit of limited liability. The C corporation is superior for raising large amounts of capital.

Under the USA, a sales agent's registration may be suspended by the Administrator for all of the following reasons EXCEPT A) it has been discovered that the agent is not properly supervised B) the agent is convicted of willful violations of the USA C) the agent is enjoined by a court of law from engaging in the securities business D) the agent is accused of violations of the antifraud provisions of the USA

D. An accusation is not grounds for suspension, unlike convictions, court injunctions, and lack of supervision.

If the risk and return profiles of all the possible risky portfolios were plotted on a graph, those portfolios that would be the most attractive to investors would lie on A) the y-axis B) the capital market line C) the security market line D) the efficient frontier

D. An efficient portfolio is one that offers the most return for a given amount of risk, or the least risk for a given amount of return. The collection of efficient portfolios is called the efficient set or efficient frontier. This efficient frontier is plotted as a curve.

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

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

Under the Uniform Securities Act, securities issued by which of the following entities are included in the definition of exempt security? I) State of Michigan II) City of Calgary, Alberta III) City of Birmingham, UK IV) Kapco Leveraged Partners, an unregistered hedge fund whose adviser is registered with the SEC A) I, II, and IV B) I, II, and III C) I, II, III, and IV D) I and II

D. Any state or Canadian province, or political subdivision thereof, is considered an exempt issuer. Foreign national governments with which the United States has diplomatic relations, but not their political subdivisions, are considered exempt issuers. SEC-registered investment companies are exempt issuers, but unregistered hedge funds are not, regardless of with whom their advisers are registered.

Due to changes in market rates, a corporation is able to purchase some of its outstanding 20-year bonds at a discount. Which of the following is CORRECT? I) Working capital is increased. II) Working capital is reduced. III) Net worth is increased. IV) Net worth is reduced. A) II and IV B) I and III C) I and IV D) II and III

D. Even though the bonds are purchased for less than par value, working capital is reduced because the company is using a current asset—cash—to pay off a long-term liability. However, the fact that it is reducing its debt for less than the amount shown on the books will result in an increase to net worth.

Which of the following is NOT true regarding the Securities Exchange Act of 1934? A) The act proscribes the use of wash trades. B) The act prohibits the simultaneous purchase and sale of a security to create the appearance of trading. C) The act prohibits the spread of false rumors to induce others to trade. D) The act bars the use of arbitrage by broker-dealers.

D. Arbitrage is a legal activity, usually performed by traders at broker-dealers, which takes advantage of momentary discrepancies in the price of a security in different markets. The act prohibits any form of manipulation of securities prices or any practices that would influence the market price of a security. This includes wash trades, which are simultaneous purchases and sales that create the appearance of trading activity, and the use of rumors to induce others to trade.

A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is NOT true? A) Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year end. B) Material changes to wrap fee programs must be filed promptly with the Administrator. C) Information on Appendix 1 of Form ADV Part 2A must also be contained in client disclosure documents. D) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC.

D. As a state-registered investment adviser, all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of ADV Part 2A. Every investment adviser, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even non-material information is included. However, the customer brochure, or a summary, needs to be delivered only if there are material changes.

All of the following would qualify as management companies EXCEPT I) face-amount certificate companies II) unit investment trusts III) closed-end investment companies IV) open-end investment companies A) I and III B) III and IV C) II and IV D) I and II

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

Current assets on a corporate balance sheet would include I) accounts payable II) accrued wages III) cash IV) inventory A) II and IV B) I and III C) I and II D) III and IV

D. Cash is the most obvious current asset. The general definition of a current asset is one that is expected to be turned into cash within the year. One would certainly hope that to be true of inventory. Accounts payable and accrued wages are liabilities, obligations that must be paid on a current basis.

Under the NASAA Model Custody Rule, an investment adviser would be considered to have custody of client assets if that adviser inadvertently receives I) a check from a client for a purchase that is made payable to the investment adviser and does not return the check within 24 hours II) a check from a client for a purchase that is made payable to a third party and does not forward the check within 3 business days III) stock certificates from a client and does not forward them within 3 business days IV) stock certificates from a client and does not return them within 3 business days A) I, II and IV B) II and III C) I and IV D) II and IV

D. Checks made payable to a third party must be forwarded to that party within 3 business days of receipt or the IA will be considered to be maintaining custody. In the case of certificates or checks made out to the IA for a securities purchase, return must be made within 3 business days of receipt in order to avoid custody issues; they are never forwarded.

A client owning shares of a closed-end investment company entering an order to liquidate the position would receive a price based on A) the previous net asset value per share. B) the offering price computed after the order is received. C) the next computed net asset value per share. D) supply and demand for the shares.

D. Closed-end investment company shares are traded in the same manner as any other corporate stock. That is, the price received when selling or the price paid when buying, is determined by supply and demand and has no direct relation to the net asset value. If this question was asking about an open-end investment company, the choice would be the next computed NAV, not offering price (that is the price when the investor is buying, not selling).

Which of the following statements about diversification through asset class allocation are true? I) Diversification involves investing a portfolio in at least 20 different securities of the same asset class II) Diversification is a way to reduce unsystematic risk in a portfolio. III) Diversification is a defensive investment strategy. A) I and III B) I, II, and III C) I and II D) II and III

D. Diversification through asset class allocation is the popular investment strategy of investing in several different classes of investments. It is designed to lower the unsystematic risk in a portfolio. The opposite of diversification, through asset allocation is the aggressive strategy of concentrating the portfolio in a single asset class, even when spread out over a large number of issues.

During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from A) the person named as executor of the estate B) the spouse C) the person with a durable power of attorney D) the person appointed as administrator of the estate

D. Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.

KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? I) Tax rate II) Cash dividend III) Interest charged on bank loans A) I only B) I and II C) II only D) I and III

D. Higher taxes mean less net income. Interest charged on loans is an expense item; increasing it lowers operating income. Dividends are paid out of retained earnings and have no effect on the net income the company reports.

Your customer owns $100 par 5½% callable convertible preferred stock convertible into 4 shares of common stock at $25. What should she be advised to do if the board of directors were to call all the preferred at 106 when the common stock is trading at $25.50? A) Place irrevocable instructions to convert the preferred stock into common stock and sell short the common stock immediately. B) Convert her preferred stock into common stock because it is selling above parity. C) Hold the preferred stock to continue the 5½% yield. D) Present the preferred stock for the call because the call price is $4 above the parity price.

D. If the preferred stock is called, the client will receive $106. Tendering the preferred stock will provide the highest value. The value of converting the preferred stock into 4 shares of common is worth $102 (4 × $25.50 = $102), which is less than the call value of $106. The dividends will cease on the call date if the preferred stock is held beyond the call date.

Suzie McQueen has a very successful interior design shop she has run as a sole proprietorship. She has just celebrated her 60th birthday and has been giving thought to an eventual sale of the business. She wants your opinion on whether she should incorporate or change to a partnership. You might respond that A) the partnership form of business structure would enable Suzie to maximize her sale price B) the corporate form of business structure would be the least expensive to form C) the partnership form of business structure would be the easiest for ultimate transfer of ownership D) the corporate form of business structure would be the easiest for ultimate transfer of ownership

D. In general, the corporate form of business leads to the easiest transfer of ownership. Because Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. If Suzie wanted to reorganize as a partnership, she would have to bring in at least one additional individual, ending her total ownership of the business. Even then, a partnership interest is not as easy to sell as stock.

If the current risk-free rate is 3% and the expected market risk premium is 6%, what return should we expect from a security that has a beta of 2? A) 9% B) 12% C) 18% D) 15%

D. In most questions of this type, we are given the market return. Here, there is a trick. We are told there is a market risk premium of 6%. That means that the market return must be 6% above the risk-free rate, or 9%. Now, we can plug in the formula. Expected return = 3% + ([9% -3%] × 2) = 3% + (6% x 2) = 3% + 12% = 15%. In this question, because we're already given the risk premium, we can avoid the first step. That would be 3% + (6% x 2) = 3% + 12% = 15%.

Under the current gift tax marital deduction, how much can an individual give a spouse who is a U.S. citizen without incurring a gift tax? A) No more than $15,000 per year B) No more than $152,000 per year C) No more than $30,000 per year D) An unlimited amount

D. The gift tax marital deduction permits an individual to give a spouse an unlimited amount of property without incurring a gift tax. However, if the spouse is not a U.S. citizen, the maximum marital gift is $155,000 (2019).

Jack, a registered investment adviser, will take the Certified Financial Planner examination when it is offered in 2 months. He is currently enrolled in an educational program to prepare for the exam. He has just run out of business cards. Because he is confident that he will pass the exam through diligent study, Jack begins to use new business cards with the letters CFP® following his name. This would be A) permissible because designations are not licenses B) permissible because Jack is enrolled in an appropriate education program C) prohibited as a conflict of fundamentals D) prohibited as an exaggerated claim

D. Indicating that an adviser holds a recognized financial services credential, when that is not so, is an example of an exaggerated claim and prohibited.

Which of the following is a coincident economic indicator? A) Agricultural employment B) Stock market prices as measured by the S&P 500 C) Machine tool orders D) Industrial production

D. Industrial production is a coincident indicator. The stock indexes and manufacturing orders are leading indicators. Economists do not use agricultural employment as an indicator.

Under the concept of inertial inflation, A) prices tend to remain the same until the system receives an economic shock. B) inflation and deflation alternate at regular intervals. C) core inflation is a better measure of the actual inflation rate than the CPI. D) prices tend to increase at a steady rate until the system receives an economic shock.

D. Inertial inflation is an economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs, at which time, the rate of inflation changes. It is true that most economists view the core inflation rate as a more accurate measure of true inflation than the CPI, but that has nothing to do with inertial inflation.

Tamika is an investment adviser representative with Financial Engineers, LLC, a covered investment adviser. The firm uses an investment policy statement to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat 7 months from now. When using the IPS, this would be considered A) an investment goal B) a capital need C) a financial objective D) an investment constraint

D. Investment constraints are obstacles or restrictions that must be met in order to meet objectives. In this case, we are dealing with a liquidity constraint—in 7 months, cash will be necessary to make the purchase.

Which of the following actions should be taken by an agent when a client decides to open an options account? A) Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade B) Provide an options disclosure document no later than 15 days after the first trade C) Assure that an options agreement has been signed prior to the first trade taking place D) Review with the client the risks involved when trading options before the first options trade

D. It is imperative that suitability and risk be addressed with the client before allowing option trading to take place. The ODD must be delivered no later than with account opening, and the options agreement must be returned no later than 15 days after the account opening. An options account must be approved by a designated supervisor prior to any trading takes place in the account.

In their advertising campaigns, state-registered investment advisers are prohibited from doing all of the following except A) showing past performance of the best performing recommendations B) exaggerating the capabilities of the firm and its personnel C) guaranteeing future performance D) offering free services

D. It is not unethical to advertise free services as a benefit of using a firm, but failing to supply services offered as free is unethical. Guaranteeing future performance, and exaggerating the capabilities of the firm and its personnel are unethical. When showing past performance of recommendations, investment advisers are not permitted to "cherry-pick" the best perrformers; all recommendations must be shown.

If an investment adviser places an advertisement in a newspaper offering a free brochure to those who call, under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, what may the adviser require from callers as a condition of receiving the brochure? A) A purchase B) A financial profile C) The names of three friends who might be interested D) None, because no obligation may be placed on the callers

D. It is unethical to offer free services unless the offer is free of any obligation, monetary or otherwise.

Which of the following practices is considered unlawful under the Uniform Securities Act? A) Not disclosing to a client within 48 hours of entering into an advisory contract that the adviser's brother was recently convicted of a securities-related felony B) Claiming an agent is registered and authorized to conduct business in the state in which he practices C) Accepting indications of interest in securities that are in the process of registering with the SEC D) Soliciting orders for unregistered, nonexempt securities

D. It is unlawful under the USA for an agent to solicit orders for securities that must be registered (nonexempt). An agent may indicate that he is registered to conduct business in a state, if that is true. The agent may not state that the Administrator has approved or endorsed a registration. An adviser is not under any legal obligation to disclose that his brother was convicted of a securities-related felony. The adviser, however, must disclose within 48 hours of entering into the contract if he has been convicted of a securities-related felony within the last 10 years. An agent may accept indications of interest for securities during the registration process. The red herring prospectus is used during this period, and neither offers to sell nor orders to buy may be accepted prior to the effective date.

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

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

If an agent feels that his secretary is underpaid and decides to split his commissions on an 80%/20% basis, this practice is A) permitted if the secretary is also registered as an agent B) a violation under all circumstances C) a violation in certain states D) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement

D. Just as with any other individual, splitting commissions can only be done with those having the proper registration, in this case, that of an agent. Because compensation is determined and processed by the employing broker-dealer, any splitting would need the approval of the appropriate supervisor.

John, a newly registered agent with a broker-dealer in Illinois, violated the Uniform Securities Act if he A) mistakenly told a client that the dividend yield on a common stock selling at $75 per share was 5%, though he accurately indicated that the dividend payment was $.75 per quarter B) deliberately omitted the number of employees at a corporation making its first issue of securities to the public because he did not consider that fact relevant to the investor's decision making process C) told his clients, against his better judgment, that past performance is no guarantee of future performance D) knowingly sold revenue bonds as general obligation bonds because he wanted his best client to earn additional interest without taking on significantly higher risk

D. Knowingly selling revenue bonds as general obligation bonds is a misstatement of material fact and therefore fraudulent. An agent, when making a sale to a client, need not include all facts, such as the number of employees. The agent must not deliberately fail to mention the material facts regarding the nature of the investment. For example, it is not fraud to make a mathematical mistake, such as inadvertently misquoting the dividend yield on a common stock as 5% when in fact it is 4%, while accurately indicating that the actual dividend payment is $.75 per quarter. An agent may never state that past performance is expected to be replicated.

A life insurance policy where the premium increases each time the policy is renewed while the face amount remains level is A) variable universal B) decreasing term C) increasing term D) renewable level term

D. Level term insurance offers a fixed face amount over the life of the policy. If the policy is renewable, the owner has the ability to renew it for that same face amount and the new term, but at new, higher premiums as the insured's age increases.

According to NASAA's Statement of Policies Regarding Dishonest or Unethical Business Practices of Broker-Dealers and Agents, an agent may A) not exercise discretionary authority until 30 days after receipt of a written power of attorney from the client B) borrow funds from a client only if the debt is formally documented and possesses a fixed maturity date, a stated rate of interest, and a schedule of repayment C) not recommend a specific professional money manager to those clients who want professional investment management services D) exercise discretionary investment authority over an account providing the client provides written discretionary authority

D. NASAA's Statement of Policy Regarding Dishonest or Unethical Business Practices of Broker-Dealers and Agents allows agents to exercise discretionary investment authority over an account, providing the client grants written discretionary authority. An agent may not borrow money from a client unless the client is a financial institution in the business of lending money. There is nothing in NASAA's policy that prohibits an agent from recommending money managers to clients who want their funds professionally managed. There is no requirement that discretionary authority cannot be exercised until a 30-day waiting period has transpired.

Under the brochure rule of the Investment Advisers Act of 1940 A) each client must be delivered a written disclosure statement no later than 48 hours after signing the contract B) each client must be offered a written disclosure statement at least 48 hours before signing a contract C) each client must be offered a written disclosure statement at the time of signing the contract D) each client must be delivered a written disclosure statement no later than at the time of agreement to contract for the adviser's services

D. No agreement between an investment adviser and a client may commence without delivery of the adviser's brochure. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent.

Alexander Wimpton is registered as an agent with WorthMore Securities, a broker-dealer registered with the SEC and 10 states. Wimpton is also an investment adviser representative (IAR) with their wholly owned subsidiary, WorthMore Investments, a federal covered investment adviser. Many of Wimpton's advisory clients also maintain brokerage accounts at WorthMore Securities. If one of those clients were to call Wimpton and enter an order to purchase shares of a stock the broker-dealer is selling out of inventory, A) the commission charged on the trade would have to be fair and reasonable B) the order would have to be refused because of the potential conflict of interest C) consent of the client would be necessary anytime an advisory client is sold securities out of the broker-dealer's inventory D) consent of the client would not be necessary as long as the only capacity in which Wimpton was acting was that of an agent

D. Only when acting in an advisory capacity is there a requirement to obtain client consent when selling out of inventory. In this case, unless there was a statement to the effect that the security had been recommended by Wimpton, this is just a brokerage transaction and consent is not necessary (although the principal capacity would have to be stated on the trade confirmation). Because this is a principal transaction, there is no commission, only a markup.

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

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

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

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

Which of the following has the greatest liquidity risk? A) Real estate investment trust (REIT) B) Municipal bond unit investment trust (UIT) C) Long-term bond mutual fund D) Rental apartment building

D. Real estate (such as an apartment building) is among the most difficult investments to convert into cash and the most illiquid of the choices given. REITs provide investors with liquidity through trading in the secondary markets. A bond mutual fund is a redeemable security; the issuer provides liquidity. Unit investment trusts are more liquid than real estate because they are redeemable securities.

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

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

If securities of an issuer registered with the state are outstanding, how long after the effective date of registration must an issuer wait before the registration may be withdrawn? A) 6 months B) Only at the Administrator's discretion C) 18 months D) 12 months

D. Registration statements are usually effective for a period of 1 year from the effective date and may not be withdrawn during this period if any of the securities of the issuer of the same class are still outstanding.

All of the following statements concerning the types of risk are correct except A) default risk is the potential inability of a debt issuer to make timely interest and principal repayments. B) business risk is the uncertainty regarding operating income. C) financial risk is the risk that a firm's financial structure will negatively affect the value of an equity investment. D) reinvestment rate risk is the risk that proceeds available for reinvestment must be reinvested at a higher rate than that of the investment vehicle that generated the proceeds.

D. Reinvestment rate risk is the risk that proceeds available for reinvestment might be reinvested at a lower rate than that of the investment vehicle that generated the proceeds. The computation of a bond's yield to maturity assumes that the coupon interest will be reinvested at the coupon rate. Reinvestment risk is the uncertainty of that happening.

When a sale violates provisions of the Uniform Securities Act, which of the following statements regarding civil liabilities is (are) TRUE? I) A buyer may not sue for compensation later than 3 years after the sale. II) A rescission offer must include interest. III) A rescission offer must be at the current market price. A) II only B) I only C) I, II, and III D) I and II

D. Rescission must occur by the earlier of 2 years after the discovery of the facts or 3 years after the occurrence. The offer of rescission is based on the price originally paid for the security plus interest at a rate determined by the Administrator (less any income received from that security).

All of the following are characteristics of a rights offering EXCEPT A) it is issued to current stockholders B) the subscription price is below the current market value C) the rights are marketable D) the subscription period is up to 2 years

D. Rights offerings are usually very short-lived (30 to 45 days).

Which of the following entities would issue a Schedule K-1? A) Sole proprietorship B) C corporation C) REIT D) Limited partnership

D. Schedule K-1s are issued to owners of partnerships (limited or general), LLCs with more than one member, and S corporations. Sole proprietors use a Schedule C, C corporations report dividends and/or interest paid on a Form 1099, and the same is true for distributions from a REIT.

The statistical measurement that indicates how much an investment's returns have fluctuated compared with its average return over a period of time is known as A) Sharpe ratio B) beta C) duration D) standard deviation

D. Standard deviation is the statistic that indicates how much an investment's returns have fluctuated compared with its average returns over a given period of time. An investment with a high standard deviation tends to have a higher level of risk than an investment with a low standard deviation.

When it comes to social media, agents need to understand the difference between interactive and static content. Which of the following would be considered static content? A) Tweets B) Emails sent to clients C) Comments on a Facebook posting D) A broker-dealer's profile posted on Facebook

D. Static content is content that remains posted until it is changed by the firm or an individual who established the account. Interactive content is generally real-time communications, such as the other three choices shown here.

The economic theory that says economic growth results from lower tax rates and lower government spending is A) demand-side theory B) monetary theory C) Keynesian theory D) supply-side theory

D. Supply-side economics is the theory of Arthur Laffer, who believed that heavy taxing and government intervention have a negative effect on the economy.

An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6%, and during the first year, the inflation rate is 9%. How much interest would be paid for the year? A) $65.40 B) $90.00 C) $60.00 D) $64.11

D. TIPS bonds have a fixed coupon rate with a principal that varies each 6 months based on the inflation rate. With an annual inflation rate of 9%, each 6 months, the principal increases by 4.5% (half of the annual rate). Each semiannual coupon is half of the 6% rate times the new principal. The arithmetic is: $1,000 × 104.5% = $1,045 × 3% = $31.35 plus, $1,045 × 104.5% = $1,092 × 3% = $32.76. Adding the 2 interest payments together results in a total of $64.11 for the year.

An agent is registered in New York and Vermont. While working in his New York office, he places a call to the cell phone of one of his New York clients and learns that the client happens to be on vacation in Ohio. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Indiana. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, which choice consists solely of Administrators who do not have jurisdiction? A) Ohio and Indiana B) Indiana and Illinois C) New York and Indiana D) Illinois and Ohio

D. The Administrator has jurisdiction from the state in which the offer originated (NY) and was accepted (IN). Mailing of the certificate is of no consequence. Ohio does not have jurisdiction because the client was merely traveling and the call was directed to the New York number. When the Uniform Securities Act was written in 1956, obviously, there were no cell phones, but there was a situation similar to this. The USA addresses the issue of forwarded mail and rules that the original address is what counts, not the state to which the mail is forwarded. NASAA applies that logic when an agent contacts a client on a cell phone. It is the home location of the owner of the phone that counts, not where the call is received. That changes when the client actively participates in the transaction from another state, in this case Indiana.

If a publicly traded corporation was going to sell a wholly-owned subsidiary, the information would be made available through the filing of a Form A) 10-K B) 10-Q C) 13-F D) 8-K

D. The Form 8-K is filed with the SEC within 4 business days of any one of a number of significant actions, including the sale of a significant asset such as a wholly-owned subsidiary.

LMN Manufacturing Company, listed on the NYSE, is an SEC reporting company. Each of the following would require the filing of a Form 8-K EXCEPT A) a change in top management B) a change in external CPA firm engaged to perform the annual audit C) acquisition of a major asset D) relocation of wholly owned subsidiary

D. The Form 8-K is used to report significant events that could affect the price of the company's stock. The SEC does not consider a relocation of a subsidiary to be of significant magnitude.

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

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

U.S. Treasury bonds are generally subject to all of the following risks except A) purchasing power risk. B) reinvestment risk. C) inflation risk. D) liquidity risk.

D. The market for U.S. Treasury bonds is highly liquid. As safe and as liquid as they are, they, like all fixed-income investments, are subject to purchasing power (also known as inflation) risk and reinvestment risk.

Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it A) sent a brochure within 150 days of the end of AT's fiscal year B) sent a copy of Form ADV Part 1A and Part 1B within 120 days of the end of AT's fiscal year C) filed a brochure with the Administrator, noting that it was available to clients upon request D) did not send an annual brochure to its clients if there was no material change from the previous year

D. The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If a brochure or summary of material changes is required, the delivery date is 120 days after the end of the adviser's fiscal year, not 150 days. If the adviser wishes to use Form ADV, it should use Part 2A and 2B.

Under which of the following circumstances does NASAA allow an investment adviser to charge performance-based fees? I) The client must initially have $1.1 million under management or a net worth in excess of $2.2 million. II) Compensation paid in this way must be for gains reduced by losses. III) Disclosure must be made that the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee. A) I only B) II and III C) I and II D) I, II, and III

D. The NASAA Model Rule permits performance-based fees if the client has at least $1.1 million in assets under management or a net worth in excess of $2.2 million, provided the compensation is based on gains and losses. Unlike the Investment Advisers Act of 1940, under the NASAA Model Rule, state-registered advisers must make additional disclosures, including the incentive to take additional risk.

Which of the following statements regarding advisers who maintain custody over client accounts is NOT true? A) If customer funds and securities are deposited in a bank, the bank account must only contain customer funds and identify the adviser who is acting as an agent for the customers. B) Advisers must send clients quarterly statements that itemize the funds and securities in the adviser's possession. C) The adviser must maintain complete and accurate records of all accounts and ensure that the funds and securities are segregated by client. D) The adviser must arrange for the audit of client accounts by an independent public accountant on a systematic basis at least once a year.

D. The adviser must arrange for the audit of client accounts by an independent public accountant without prior notice to the adviser, and not on a systematic basis (hence the surprise audit). The adviser must send quarterly statements to clients itemizing the funds, securities, and transactions that have occurred. The adviser must maintain accurate records of all accounts and ensure that the funds and securities are segregated by client.

Those investors wishing to examine a document that would probably give them the most information about a corporation's current and planned operations would seek out A) the balance sheet B) the Form 10-K C) the investor's brochure D) the annual report

D. The annual report to shareholders is going to contain not only a complete financial report of the prior year's operations but will also include statement from key personnel dealing with the company's future plans. The Form 10-K does not include discussion of future business plans - it is a report of "what has happened over the previous fiscal year."

BFJ Corp's 5% convertible bond is trading at 120. The bond is convertible at $50. An investor buying the bond now and immediately converting into common stock, would receive A) 2.4 shares B) 24 shares C) 20 shares plus cash for fractional shares D) 20 shares

D. The conversion ratio always uses the par value ($1,000), never the current market price. With a par value of $1,000 and a conversion price of $50 per share, this bond is convertible into 20 shares ($1,000 / $50). Remember, the number of shares in a conversion never changes. When the market price changes, the parity price changes, but that isn't relevant to this question.

If a company's dividend increases by 5% but its market price remains the same, the current yield of the stock will A) remain at 5% B) decrease C) remain at 7% D) increase

D. The current yield of a stock is the annual dividend divided by the market price. If a company's dividend increases and its market price remains the same, its current yield will increase.

Which of the following statements about the federal government's fiscal policy is TRUE? I) The federal government's fiscal policy is its policy for managing taxation, spending, and debts. II) The federal government's fiscal policy can have a great impact on the III) The federal government finances its deficit spending by selling bonds. A) I and II B) II and III C) I and III D) I, II, and III

D. The federal government's fiscal policy establishes the government's taxation, spending, and debt practices. Fiscal policy can affect the securities markets because it can be used to regulate prices, employment, and economic growth. If fiscal policy includes deficit spending, the government sells bonds to make up the deficit.

The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 12%, and a particular stock's beta is 0.8 with a correlation coefficient of 0.60, the expected return would be A) 9.6% B) 11.6% C) 7.2% D) 10.0%

D. The formula for this computation is as follows: 12% (the return on the market is a beta of 1.0) minus the risk-free rate of 2%, or 10%. Then, multiply that by the beta of this stock (0.8) to arrive at 8%. That is, the stock should return 8% above the risk-free rate of 2%, or 10%. The correlation coefficient is not relevant to this computation.

Which of the following activities would have an effect on the NAV of a mutual fund? I) The sale of securities from the portfolio II) Automatic reinvestment of dividends by the shareholders III) Market appreciation of portfolio securities IV) Market decline in the value of portfolio securities A) I, II, III, and IV B) I and II C) I, III, and IV D) III and IV

D. The formula to determine NAV is: assets minus liabilities divided by shares outstanding. The sale of securities from the portfolio will replace the asset (securities) with an equal value of the asset (cash) and will have no effect on the NAV. The reinvestment of dividends will also not affect the NAV, because the shares going out are offset equally by the cash coming in. Market appreciation or decline will, however, affect the NAV because asset value will either increase or decrease, but liabilities and shares outstanding will remain unchanged.

One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that A) there is a maximum 5-year limit for exercise on the ISO while the time limit on the NQSO is 10 years. B) the bargain element of the ISO is reported as wages on the tax returns of the employer and the employee. C) gains on an ISO are always short-term while those on an NQSO are long-term. D) the bargain element of the ISO is an AMT preference item.

D. The only true statement here is that the bargain element (the difference between the current market price at the time of exercise and the strike price) of the ISO (but not the NQSO) is one of the preference items for the alternative minimum tax. It is the bargain element of the NQSO which is reported as wages and it is possible, although difficult, to have long-term capital gains on both. Only the ISO has a maximum time limit and it is 10 years, not 5.

If an index annuity has a participation rate of 80%, it means A) the investor's account will be charged with 80% of the amount lost by the index. B) the investor's account will never be less than 80% of the initial investment. C) the investor's account will participate in 80% of the gains and losses of the index. D) the investor's account will be credited with 80% of the growth of the index.

D. The participation rate of an index annuity is the percentage of the growth of the index credited to the investor's account. For example, if the index had a return of 10% and the participation rate is 80%, the investor's account is credited with 8% growth. This may be limited by a cap (a maximum), but unless a cap rate is stated in the question, there isn't one. One of the benefits of an index annuity is that it only shares in the growth, never any losses.

When comparing the pricing of open-end investment companies with that of closed-end investment companies, it is correct to state that A) both must compute their NAV at least once every day as of the close of trading. B) shares of closed-end funds are generally priced higher than open-end shares. C) the closed-end can issue common and preferred shares; the open-end can only issue one class of stock. D) only the open-end bases its price on the next computed net asset value per share.

D. The pricing of open-end shares (mutual funds) is based on the next computed NAV per share (forwards pricing), while closed-end shares (CESs) trade based on supply and demand. There is no correlation between share prices and fund structure. Only the open-end must perform a daily NAV computation; closed-end funds may compute daily, but many do it only weekly. It is correct to state that closed-end funds can issue preferred stock in addition to common stock and open-end funds can only issue one class of stock, but that has nothing to do with comparing the pricing of the two.

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a lagging economic indicator? A) Manufacturers' new orders for consumer goods B) Building permits (housing starts) C) Nonagricultural employment D) Prime interest rate

D. The prime interest rate is a lagging indicator. Nonagricultural employment is a coincident indicator. The other two choices are leading indicators.

All of the following describe exempt transactions EXCEPT A) First National Bank sells its entire publicly traded bond portfolio to Amalgamated National Bank B) Amalgamated National Bank sells its publicly traded bond portfolio to ABC Insurance Company C) ABC Securities, a registered broker-dealer functioning as an underwriter, purchases securities from XYZ Corporation D) Joe Smith, an employee in the consumer lending department of Amalgamated National Bank, buys securities from ABC Securities, a broker-dealer registered in the state

D. The purchase of securities from a broker-dealer by an employee of a bank is a nonexempt transaction because it is a sale of a security by a broker-dealer to a member of the public. Transactions between broker-dealers and issuers, transactions between banks, and between banks and insurance companies are exempt because they occur between financial institutions. Exempt transactions are most often identified by the transaction's parties, rather than the type of security involved.

The Securities Act of 1933 covers all of the following except A) liabilities for misleading filings B) prospectus requirements C) full and fair disclosure D) blue-sky laws

D. The purpose of the Securities Act of 1933 is to provide investors with full disclosure about a new securities issue. Misleading information can lead to civil and perhaps even criminal liability. The act is federal in scope, whereas blue-sky laws refer to state securities regulations.

With the current rate of the 91-day Treasury bill at 2%, a stock paying dividends at a rate of 4% and having a total return over the measured period of 7% would have a risk premium of A) 4% B) 9% C) 2% D) 5%

D. The risk premium is a premium demanded for internal and external risk factors. It is the amount of total return in excess of the risk-free rate. In this case, the total return is 7% (the dividend return is included in the total) minus the 2% T-bill rate.

Under the Uniform Securities Act, the Administrator may require the filing of advertising and sales literature in which of the following offerings? A) Sale of preferred stock of a long-established company registered with the SEC whose common shares trade on the New York Stock Exchange B) Sale of a U.S. Treasury bond maturing in more than 10 years C) Sale of the bonds of AAA insurance company organized under the laws of the state D) Sale of an IPO limited to residents of the state

D. The state securities Administrator may require the filing of advertising and sales literature of an IPO limited to residents of the state. The other choices are securities of exempt issuers or, in the case of the NYSE-listed issuer, federal covered securities. The Administrator may not require exempt and federal covered securities to file advertising and sales literature.

The definition of "offer" (offer to sell) includes which of the following? I) An attempt to dispose of a security for value II) A solicitation of an offer to buy an interest in a security for value III) The actual sale of a security for value IV) An offer to dispose of a security for value A) I only B) I, II, III, and IV C) I and IV D) I, II, and IV

D. The term "offer" (or offer to sell) is any activity in an effort to dispose of a security for value, such as the offer to sell or the solicitation of an offer to buy a security. The term "sale" or "sell" includes every contract of sale, contract to sell, or any disposition of a security for value.

A viatical sale would generally involve A) a leveraged ETF. B) the sale of a term life insurance policy. C) a security with a large increase in value. D) an individual with a terminal illness.

D. The term "viatical" comes from a Latin word with a religious connotation involving prayers for those near death. Viatical settlements stem from that definition and are generally used by those with a terminal illness and a life expectancy of 2 years or less. It is the sale of a life insurance policy, almost always whole life or another form of permanent insurance - rarely a term insurance policy.

Which of the following is designed primarily as a retirement vehicle to help protect contract owners from a decline in purchasing power? A) Life-paid-up-at-age-65 life insurance B) Retirement income life insurance C) Flexible premium fixed annuity D) Variable annuities

D. The tradeoff with lack of guarantees is the potential to keep pace with inflation.

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

D. The trustee can be reimbursed for expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can withdraw funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial or trust accounts, not in noncustodial accounts.

A new client indicates a desire to avoid investing in mid-cap stocks because of large losses suffered several years ago. What type of consideration would this be? A) Systematic B) Financial C) Unsystematic D) Nonfinancial

D. There are 2 basic investment considerations, financial and nonfinancial. The former deals largely with quantifiable items and the latter with attic attitudinal ones. Wanting to avoid a certain type of asset is generally considered to be attitudinal. The fact that the mid-cap stocks lost money is probably a systematic risk, but that isn't what the question is asking.

A term used to describe the results of subtracting a corporation's liabilities from its assets is A) net income. B) retained earnings. C) operating income. D) owners' equity.

D. There are several terms used on the exam to express the results of the balance sheet formula. In most cases, it will be shown as: assets minus liabilities equals net worth. Net worth can also be expressed as owners' equity or shareholders' equity. Income has nothing to do with assets and liabilities, and retained earnings is a component of owners' equity.

Broker-dealers are required to furnish clients with a fee disclosure document. All of the following are true statements about that document except A) it must be up-to-date. B) changes to the fee schedule must be announced in advance. C) it must be filed with the Administrator of the state in which the broker-dealer's principal office is located. D) changes to the fee schedule may be shown on the firm's website.

D. There is no requirement that the fee schedule be filed with the Administrator. It must be up-to-date and any changes must be announced in advance (usually a minimum of 30 days). There are a number of ways to disclose the fees, the firm's website is one of them.

An investor originally purchased a debt security at par value. Unfortunately, the value has fallen to $920, even though the company has reported record earnings. This decline in value would be representative of what type of risk? A) Credit risk B) Timing risk C) Purchasing power risk D) Interest rate risk

D. This decline in value is most likely due to interest rate risk, which indicates that as prevailing interest rates rise, the price of existing debt instruments declines. Purchasing power risk is essentially synonymous with inflation risk, and credit risk is the danger that the issuer may default on its debt service, something that seems unlikely considering the recent earnings reports.

Adell, a retiring social worker, has some money to invest. An agent suggests she look into investing in a private placement security that is raising money to build apartment buildings in Puerto Rico. According to the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents I) building projects are not appropriate for retirees who typically need immediate income II) private placements are not usually appropriate for retiring individuals because they are not liquid III) no rule has been violated because the customer has only been offered the product IV) if the customer lives in Puerto Rico, the proposed investment may be suitable because there may be a ready market A) II and IV B) I and III C) II and III D) I and II

D. This is not a suitable recommendation for a social worker about to retire. Based on the information given, one would expect that her objectives would be income with a high degree of safety, yet this building project will give her neither. Additionally, the private placement suffers from a lack of liquidity, something that could be an important factor in Adell's future.

A securities analyst's approach is to look at the overall economy and try to forecast which industry will outperform. Then, the analyst searches for those individual companies within that industry that appear to have the best expected return and add those to their recommended list. In so doing, this analyst is using the A) business cycle approach. B) bottom-up approach. C) optimal portfolio approach. D) top-down approach.

D. This is the basic approach of top-down analysis - start with the "big picture" and narrow it down to the most attractive individual stocks.

A securities analyst's approach is to look at the overall economy and try to forecast which industry will outperform. Then, the analyst searches for those individual companies within that industry that appear to have the best expected return and add those to the recommended list. In so doing, this analyst is using A) the bottom-up approach. B) the optimal portfolio approach C) the business cycle approach. D) the top-down approach.

D. This is the basic approach of top-down analysis—start with the "big picture" and narrow it down to the most attractive individual stocks.

A hedge fund with a 2-plus-20% fee structure has equal probabilities of a 10% loss or a 30% gain in its first year. The probable return to an investor in the fund for the first year is closest to A) 17.6%. B) 8.8%. C) -2.0%. D) 5.2%.

D. To our knowledge, the exam has never asked a question this complicated. But, things can always change so we wanted you to get the "flavor" of combining probable return (which is tested) with hedge fund performance fees. With a 30% gain, the fund would earn fees of 2% + 0.20(30% - 2%) = 2% + 0.20 (28%) = 2% + 5.6% = 7.6%. With a 10% loss, the fund would only earn its management fee of 2%. To the investor, the expected return is 0.5(-10% - 2%) = 0.5 (-12%) = -6% + 0.5(30% - 7.6%) = -6% + 0.5 (22.4%) = -6% + 11.2% = 5.2%.

An investor purchases a Treasury note and the confirmation shows a price of $102.21. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $1,022.10. B) $1,022.21. C) $102.21. D) $1,026.56.

D. Treasury notes are quoted in 32nds where each 32nd equals $.3125. The 102 in the quote equals $1,020 and the 21/32 is an additional $6.56 bringing the total to $1,026.56.

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

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

Under the Uniform Securities Act, which of the following concerning the withdrawal of an agent's registration is NOT true? A) Absent any disciplinary proceedings, withdrawal is effective 30 days after application. B) Disciplinary proceedings may be taken against an agent after the agent's withdrawal is effective. C) At the Administrator's discretion, disciplinary proceedings may delay effectiveness of a withdrawal application indefinitely. D) Absent any disciplinary proceedings, withdrawal is effective 60 days after application.

D. Under the USA, withdrawals of registration are generally effective on the 30th day after filing, unless a disciplinary action is instituted. The Administrator may institute a revocation or suspension proceeding within 1 year after an agent's withdrawal has become effective.

A client needs funds for an unexpected medical emergency. If the client takes out a loan against the cash value of his life insurance policy and does not pay it back, the insurance company can do which of the following? A) Reduce the cash value at the next anniversary B) Cancel the policy C) Increase the premium amortized over the life of the policy D) Reduce the death benefit when the client dies

D. Unpaid cash value loans reduce the death benefit.

An investor inherits 1,000 shares of the ABC Global Growth Fund when the NAV is $9.50, the bid price is $9.00, and the ask price is $9.15. Two years later, the investor sells all shares when the NAV is $14.25, the bid is $14.50, and the ask is $14.60. What are the tax consequences of this sale? A) Long-term capital gain of $5,450 B) Long-term capital gain of $5,350 C) Long-term capital gain of $4,750 D) Long-term capital gain of $5,500

D. Upon death, the beneficiary inherits closed-end funds at their bid price (what the estate could have sold them for), or $9.00 per share. The sale two years later takes place at the bid ($14.50) for a profit of $5.50 per share (times 1,000 shares). Remember, in the case of a closed-end fund, the NAV does not figure into any computations; prices are based on supply and demand and have a bid and ask price, the same as any stock. How did you know this was a closed-end company? Only in the case of a closed-end company can the ask price be lower than the NAV (ask = $9.15, NAV = $9.50).

XYZ stock has a beta of 0.92. The risk-free rate of return is 3% and the market's rate of return is 8%. Using the capital asset pricing model (CAPM), what is the expected rate of return of this stock? A) 10.12% B) 6.85% C) 5.06% D) 7.60%

D. Use the CAPM to calculate the expected rate of return. Expected (required) return = 0.03 + [0.92 (0.08 − 0.03)] = 0.0760, or 7.60%.

Among the effects of a country devaluating its currency is that there will probably be I) a credit to that nation's trade account balance II) a debit to that nation's trade account balance III) an increase in that nation's exports IV) an increase in that nation's imports A) II and IV B) II and III C) I and IV D) I and III

D. When a currency is devalued by a country, it means that foreigners will find their money has more buying power in that country. Therefore, it would be expected that foreigners would buy more goods produced in that country causing an increase in exports. Those exports result in a credit to the country's trade account balance.

Beth Jamison is an agent and an IAR for Consolidated Wealth Planning, a FINRA member broker-dealer and SEC-registered investment adviser. An advisory client purchases 300 shares of RMBN and the sale is made from Consolidated's inventory. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, A) the amount of commission charged for this transaction must be clearly disclosed B) Beth must obtain consent of any advisory client whenever a sale is made as principal C) selling out of inventory to advisory clients would be considered an unethical business practice D) Beth would not be required to obtain consent for this principal transaction if it was not the subject of a recommendation

D. When acting in the capacity of IA (or IAR), that is, when making recommendations or advising a client to purchase (or sell) a security, any transaction in which the firm is a principal requires disclosure in writing to and consent from the client prior to the completion of the trade. However, if merely accepting a client order (no advice rendered), consent is not required.

Prosperity Asset Partners (PAP) is organized as a general partnership. PAP is registered in four states. All of the following statements regarding the investment adviser brochure rule of the Uniform Securities Act are true except A) the disclosure brochure must be delivered no later than 48 hours before entering into an advisory contract for there to be no requirement to offer a 5-day refund right B) the brochure rule permits advisers to deliver the disclosure brochure when the client enters the contract providing the client is allowed to cancel the contract without penalty within 5 business days C) the disclosure brochure must contain essentially the same information as is contained in Form ADV, Part 2A and, if applicable Part 2B. D) the disclosure brochure must be signed by an officer or a general partner of the firm

D. When an investment adviser's business structure is a general partner (as is the case with PAP), the brochure must be signed by a general partner. If the firm is a corporation, then an officer's signature is acceptable. The investment adviser's disclosure brochure must contain the relevant information from Form ADV Part 2A and, for those where it applies, Part 2B. The rule does permit advisers to deliver the brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within 5 business days; otherwise, the brochure must be delivered no later than 48 hours before entering into an advisory contract.

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

D. When it comes to retaining the services (hiring) of a person (or persons) to manage the portfolio of a mutual fund, there are three parties involved in the approval process. Those three parties are: the shareholders; the fund's board of directors'; and that portion of the fund's board consisting of noninterested members. (Remember, the board must be at least 40% noninterested, which is sometimes stated as a maximum of 60% interested.) This question asks about the initial contract. That contract is always for two years and requires the approval of a majority vote of the outstanding shares (the shareholders) and a majority vote of that group of board members who are noninterested. You should also know that, when it comes to renewal (done annually after the initial two-year contract, once again, a majority vote of that group of board members who are noninterested is required, along with either a majority of the total board or a majority of the outstanding shares. The one constant is the approval of the noninterested board members.

XYZ Aircraft Manufacturing Corporation, based in the United States, announces a multibillion dollar order for its new jumbo jet from Fly Airlines, a Japanese-based carrier. When the sale is completed, there will be A) no effect on the balance of trade B) a credit to the current account of Japan C) a credit to the current account of the United States D) a debit to the current account of the United States

D. Whenever money from a foreign source enters the United States, it becomes a credit item in the U.S. balance of payments.

An investor purchases a 30-year zero-coupon corporate bond. The bond was issued by a Fortune 500 company. Her investment is subject to all of the following risks except A) interest rate risk. B) purchasing power risk. C) default risk. D) reinvestment risk.

D. Zero-coupon bonds are not subject to reinvestment risk because there is nothing to reinvest. However, they are subject to purchasing power, interest rate, and default risk.

Regarding performance-based fees charged by ​covered ​investment advisers, all of the following statements are correct EXCEPT A) to determine performance, the results of the client's investment portfolio must be compared against an appropriate index or benchmark B) performance-based fees may be charged against the assets of a closed-end investment company listed on the NYSE C) performance-based fees are generally prohibited D) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods

D. ​Covered advisers are those under federal jurisdiction rather than state. ​ The SEC assumes that any investor meeting the qualifications is aware of the greater risk entailed, so no disclosure is necessary. Although performance-based investment adviser compensation is generally prohibited, it is permitted under certain circumstances on the basis of the nature of the client. Charges of this type may be made to clients who are registered investment companies. When charging performance-based compensation, the results of the client's portfolio must be compared against an appropriate index or benchmark. ​ Please note that the NASAA Model Rule on Performance-based Compensation would require the risk disclosure.​