Series 65

A speculator, believing that a drought in the Midwest will lead to a weak corn crop, would probably A) take a long position in corn futures B) take a short position in corn futures C) take a long position in orange juice futures D) take a long position in corn forwards

A) A weak corn crop means a shortage in the supply. That will lead to an increase in prices. When one is speculating that prices will go up, the best position is a long one. So, why not the long forwards? Those who purchase forwards contracts anticipate accepting delivery of the asset. This individual is merely speculating and has no interest in taking physical possession of the commodity and paying for transportation, silage, and insurance until the commodity is sold. If the person in the question had been a user of corn (a cereal maker, for example), then the forward contract would have been a better choice. U16LO4

Under current regulations, registration with the SEC is optional for all of the following investment advisers EXCEPT A) CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board B) Grand Visions Advisers, a sole proprietorship with $104 million in AUM C) Midwestern Asset Managers, LLC, with $53 million in AUM, required to register in 17 states D) Employee Benefit Specialists, Inc., a pension consultant with $225 million in AUM

A) Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end). It is optional for: 1. pension consultants once their AUM reach $200 million; 2. small and mid-size advisers who would be required to register in 15 or more states; and 3. those advisers with at least $100 million in AUM, but not $110 million in AUM. Any of these choosing to register with the SEC are federal covered advisers and do not register with any state, although a notice filing may be required. U1LO5

Kate, age 59, has an investment portfolio exceeding $250,000. She considers herself a moderate to conservative investor. To generate additional income, she is anticipating adding bonds to her portfolio. She lives in a state that does not have an income tax and she is in the 28% federal income tax bracket. Which of the following bonds would be the best recommendation for her portfolio? A) Bond A, A-rated corporate debenture with a 6.5% coupon rate B) Bond D, AAA-rated Treasury note with a 2.55% coupon rate C) Bond C, CCC-rated corporate debenture with an 8% coupon rate D) Bond B, BBB-rated municipal bond with a 3.75% coupon rate

A) Even though Bond C has the highest after-tax rate of return, this bond would not be appropriate for Kate based on her risk tolerance. Therefore, Bond A would be the best choice. Calculations: Bond A: 6.5 × (1 - 0.28) = 4.68% Bond B: 3.75% Bond C: 8% × (1 - 0.28) = 5.76% Bond D: 2.55% × (1 - 0.28) = 1.84% U13LO6

The term exempt reporting adviser refers to A) advisers that rely on either the venture capital fund adviser exemption or the private fund adviser exemption B) advisers whose only clients are insurance companies C) broker-dealers who are considered investment advisers solely because they offer wrap fee accounts D) advisers who are registered on the state level, but who file their Form ADVs through the IARD

A) Exempt reporting advisers (ERAs) are defined as investment advisers, but, because they either are private fund advisers or advise venture capital funds, they are exempt from registration on either the state or federal level. However, even though they are exempt from registration, they must file certain portions of Form ADV—hence the name exempt reporting advisers. U1LO4

With regard to the keeping of records, the Uniform Securities Act states that investment advisers must keep records for A) 5 years, the first 2 in the principal office of the adviser B) 5 years C) 3 years D) 3 years, the first 2 in the principal office of the adviser

A) For state-registered investment advisers, records must be kept for a total of 5 years. For the first 2 of those years, they must be located in the principal office of the adviser. U1LO5

Which of the following practices is fraudulent? A) Marking up a security by 5%, but indicating to the client that the markup is only 2% B) Selling a security to a customer with a commission that exceeds industry standards C) Failing to state all the facts related to a security D) Marking up a security by 10% more than industry standards with the customer's knowledge and consent

A) Fraud is the willful deception of a client. Stating that the markup will be 2% and then effecting a 5% markup is a fraudulent act. Marking up a security by more than industry practices is a prohibited practice but is not necessarily fraudulent. It is not necessary to state all the facts; only those that are material are required. U7LO5

Under the Investment Advisers Act of 1940, which of the following would be excluded from the definition of an investment adviser? A) An individual who made recommendations regarding which types of securities would meet a client's investment objectives but who did not recommend specific securities B) A bank that charged a fee for providing investment advice C) A broker-dealer that managed clients' portfolios for a fee D) The publisher of an investment advisory newsletter that plans issues based on market events

B) A blanket exclusion from the definition of investment adviser applies to most banks. Broker-dealers are excluded only if the advice is within the scope of their brokerage business and they receive no special compensation, such as an additional fee, for that advice. Publishers must have general, regular circulation to be excluded under the Advisers Act. Publishing based on market events would not qualify. Advice relating to types of securities is specific enough to qualify as investment advice, even if mention of particular securities is avoided. U1LO3

Under the USA, all of the following are exempt transactions EXCEPT A) unsolicited customer orders B) a sale of a primary offering registered with the SEC C) isolated nonissuer transaction D) transaction executed by a trustee in bankruptcy

B) In almost every instance, an issuer transaction—that is, one for the benefit of the issuer—will not be considered an exempt transaction. Exempt transactions include isolated nonissuer transactions; transactions between an issuer and an underwriter; transactions by an executor, Administrator, sheriff, marshal, trustee in bankruptcy, guardian, or conservator; any sale or offer to a bank, savings institution, investment company, or other financial institution; and private placements. U4LO3

Early in the year, an investor purchased shares of the GEMCO Fund at $10.40 per share when the net asset value per share was $9.53. Just before the last trading day of the year, this investor liquidated the position at $10.60 per share when the net asset value per share was $10.77. From this, you can discern that GEMCO Fund is A) an open-end investment company B) a closed-end investment company C) a unit investment trust D) a face-amount certificate company

B) It is only the closed-end investment company where shares trade at a premium or discount to the NAV per share. U14LO3

Which of the following is NOT an exempt transaction as defined in Section 402 of the USA? A) Isolated sale of a corporate bond on behalf of the bond's issuer B) Sale of XYZ common stock, traded on the OTC Bulletin Board, to an individual investor by the executor of an estate C) Corporate bond sale to an insurance company D) Sale of common stock by the county sheriff at the request of the state securities Administrator

A) First of all, don't panic when you see a Section number—just answer the question based on the specific topic; in this case, the definition of an exempt transaction. An isolated sale of a corporate bond on behalf of the bond's issuer is not exempt. Under the USA, only isolated nonissuer transactions are exempt. In this question, the transaction is on behalf of the issuer, so this transaction is not exempt. The sale of a corporate bond to an insurance company is the sale of a security to a financial institution; this is an exempt transaction. A sale of common stock by the executor of an estate, or by the county sheriff is considered a fiduciary transaction and is exempt regardless of the client or the type of security. U4LO3

How quickly must a broker-dealer notify the Administrator if material information relating to that broker-dealer's registration should change? A) Promptly B) Within 24 hours C) Within days D) No later than the time of license renewal

A) If the information contained in any document filed with the Administrator is or becomes inaccurate or incomplete in any material respect, the registrant must file a correcting amendment promptly. U3LO5

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an investment adviser must register with the SEC if it A) limited its clients to insurance companies only B) its only place of business is outside of the United States, deals with fewer than 15 U.S.-based clients, and has less than $25 million in AUM in the United States C) has $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management D) would be required to register in 15 or more states

C) An adviser with $110 million or more in assets under management, regardless of the asset class, must register with the SEC. Advisers whose only clients are insurance companies are exempt from registration with the SEC. There is an exemption for foreign advisers who have fewer than 15 clients in the United States, and their AUM in the United States is less than $25 million. When an investment adviser is required to register in 15 or more states, it is eligible, but not required to register with the SEC. U1LO5

Jimmy Merchant is an agent with FLATT securities, a registered broker-dealer. When Jimmy submits an order ticket to purchase securities for a client, all of the following would appear EXCEPT A) the account number B) Jimmy's name C) the current market price of the security D) the broker-dealer's name

C) Any order ticket submitted by an agent for execution at a broker-dealer will always include the account number, the agent's name, and that of the BD. All order details must be listed (e.g., the number of shares, limit or market, etc.), but the current market price is never included. Once the order is executed, the execution price is entered. U22LO6

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) States P, D, and M. B) States P and O. C) State P. D) States D and M.

C) 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. U2LO2

A corporation organized as a C corporation I. is taxed on the corporate level and then again to its shareholders when dividends are paid II. is limited to a maximum of 100 shareholders III. provides limited liability to its owners IV. may not have any trusts as shareholders A) III and IV B) II and IV C) I and III D) I and II

C) C corporations are taxable on the corporate level and then again to the shareholder when income is distributed in the form of dividends. Shareholders' liability is limited to the amount of their investment. The S corporation is limited to 100 shareholders. Trusts may own shares of both C and S corporations. U18LO3

Which of the following is not a characteristic of hedge funds? Hedge funds A) use leverage, short positions, and concentrated positions. B) are privately organized and generally unregistered. C) offer managers high fixed fees. D) invest in private securities, real assets, derivatives, and structured products.

C) Hedge funds attempt to attract the top managers because they offer performance-based fees, which vary based on fund performance. The typical fee structure is 2% + 20% where 2% is the fixed fee and 20% of the profits is the performance portion. U14LO6

On last year's annual updating amendment filed with the SEC, Alpha Investment Advisers indicated that it had more than $140 million in assets under management. Due to a reduction in the size of the firm, this year's annual updating amendment shows that assets under management have fallen to the $75 million level and are expected to remain there. Which of the following actions are required for Alpha? A) Withdraw from SEC registration within 90 days of the adviser's fiscal year-end B) Do nothing and continue as a federal covered adviser C) Withdraw from SEC registration within 180 days of the adviser's fiscal year-end D) Withdraw from SEC registration immediately

C) If an adviser reports on its annual updating amendment that it has less than $90 million under management and it is not otherwise eligible to register with the SEC, it must withdraw from SEC registration within 180 days of the adviser's fiscal year-end by filing Form ADV-W. The adviser could consult the securities departments of states in which it maintains offices or conducts business to determine the appropriate state registration requirements. U1LO5

With respect to the recordkeeping rules under the USA, which of the following statements is NOT correct? A) Investment adviser representatives have no recordkeeping responibiilties. B) Investment advisers must maintain records of electronic communications for a minimum of 5 years. from the end of the year in which the communication was made. C) Investment advisers must maintain copies of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the adviser for a minimum of 5 years. D) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of 5 years.

D) Partnership articles and any amendments thereto, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor must be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise. Emails are treated as any other communication: 5 years from the end of the year in which the record originated for investment advisers. U1LO5

Under the Uniform Securities Act, all of the following are excluded from the definition of an investment adviser EXCEPT A) broker-dealers and their agents B) a federal covered adviser C) banks D) an individual providing advice on municipal bonds

D) Providing advice on municipal bonds (even though they are exempt securities) does not entitle one to an investment adviser exclusion. U1LO3

When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a different federal covered investment adviser in the state where the individual has an office, A) only the terminating investment adviser must notify the Administrator B) the investment adviser representative and the federal covered advisers must notify the Administrator promptly C) only the investment adviser representative must notify the Administrator promptly D) the investment adviser representative and the employing adviser must notify the Administrator promptly

C) If you are working for a registered investment adviser within a specific state, that state securities Administrator wants to know who you are. The problem becomes a question of who is responsible for notifying the state securities Administrator of your employment. A federal registered investment adviser is exempt from registration at the state level and therefore has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the state securities Administrator that you are working there, as well as when you terminate. U2LO3

During the application process for registration as an agent, the Administrator may request information about the applicant's A) marital status B) financial condition as disclosed on the agent's most recent balance sheet C) citizenship D) record involving a non-securities misdemeanor conviction 5 years ago

C) Individual registrants may be asked about their citizenship, but not their marital status. Non-securities misdemeanors are not relevant and financial condition is only a requirement for broker-dealers and investment advisers. U3LO5

Andrew voluntarily leaves his position as an agent with Gibraltar Securities. Which of the following best describes the reporting requirements relative to this termination? A) Only Andrew must notify the Administrator, and must do so within 30 days of his resignation. B) Notification to the Administrator is not required, presuming that Andrew was not terminated for cause. C) Both Andrew and the firm must notify the Administrator of Andrew's resignation promptly. D) Only the firm must notify the Administrator, and must do so within 30 days of Andrew's resignation.

C) On termination of an agent from a firm with which he is registered, both the agent and the firm must notify the Administrator of such termination promptly. U3LO5

A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client? A) A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis B) Capital gains taxation on the earnings withdrawn in excess of the owner's basis C) A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn D) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis

D) Contributions to a nonqualified annuity are made with the owner's after-tax dollars. Distributions from such an annuity are computed on a LIFO basis with the income taxed first. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Because the client is older than 59½ at the time of distribution, the additional 10% penalty tax is not incurred. U15LO5

A client is considering the purchase of American depositary receipts (ADRs). The client is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A) ADRs are denominated and pay dividends in U.S. dollars. B) ADRs are both liquid and marketable. C) Information regarding the foreign company is more easily attainable than if directly purchased. D) They are not subject to exchange rate, or currency, risk.

D) Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. The bank furnishes information about the underlying security in English rather than the foreign language and ADRs are traded like any domestic stock. U12LO5

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

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

Each of the following persons is able to issue securities EXCEPT A) a partnership B) a credit union C) a corporation D) an individual

D) Individuals (natural persons) cannot issue securities. You can't sell stock in yourself. U4LO2

An individual with a place of business in State A manages client assets on behalf of a covered investment adviser. This individual wishes to expand his client base by working 1 day per week out of the firm's office in State B. Which of the following actions must this individual take to practice within that particular state? A) Pass an oral or written examination B) Become licensed as a broker-dealer C) Comply with the notice filing requirements of the state D) Register as an investment adviser representative in State B

D) Individuals managing client assets while employed by federal covered investment advisers must register as investment adviser representatives if they maintain a place of business in the state. Working on a regular schedule in the firm's office in State B, even if only once per week, constitutes maintaining a place of business in the state. Because this individual is already registered in State A, it is not necessary to pass another exam to become registered in another state. It is the investment adviser who may be required to notice file with the Administrator. U2LO3

The U.S. Supreme Court case resulting in the decision that an investment contract is a security is the A) Muller case B) Steiner case C) Golub case D) Howey case

D) It was the Howey case in 1946 where the decision ruled that an investment contract meeting the 4 prongs: (1) an investment of money, (2) into a common enterprise, (3) with the expectation of profit, and (4) due to the managerial efforts of others, is a security. U4LO1

Although many advisers to private funds are exempt from registration, larger ones generally register with the SEC. SEC-registered investment advisers with at least $150 million in private fund assets under management use which form to report information about the private funds that they manage? A) Form 13F B) Form ADV Part 1A C) Form D D) Form PF

D) Logically enough, the letters, PF stand for private fund and that is the form used. The ADV Part 1A is used by any investment adviser registering with the SEC (or the states); it is not unique to private funds. Form 13F applies to any institutional investor with discretion over $100 million or more in certain equity securities. Those are on a list published by the SEC and are called, "13F securities". Form D is used under Rule 506 for private placements and has nothing to do with investment advisers. U1LO4

Under the Uniform Securities Act, which of the following would be included in the definition of an investment adviser representative? A) An employee, highly skilled in evaluating securities, who performs administrative or clerical functions for an investment adviser B) An agent who offers incidental advice on securities and whose sole compensation is from commissions on transactions C) An individual who renders fee-based advice on precious metals D) An employee whose only role is soliciting new investment advisory clients for the firm

D) Soliciting for advisory clients on behalf of an investment adviser is considered 1 of the functions describing an investment adviser representative under the Uniform Securities Act. An employee who performs only clerical or administrative functions is not an investment adviser representative. Precious metals are not securities and, therefore, a person advising on them is not considered an investment adviser representative. An agent is a representative of a broker-dealer, and as long as the only form of compensation is sales commissions based upon transactions, registration as an investment adviser representative is not required. U2LO1

Great Research & Analysis Brokers (GRAB) is an SEC registered broker-dealer with its principal office in State X. One of GRAB's clients vacations for 3 months during the winter in State Y. Under the registration requirements of the Uniform Securities Act, A) GRAB is not defined as a broker-dealer in State Y due to the de minimis exemption B) the presence of a single client in State Y requires GRAB to register in that state C) GRAB is permitted to accept only unsolicited orders from the client in order to be exempt D) GRAB is not defined as a broker-dealer in State Y if it does not have a place of business in the state

D) The "snowbird" exemption provides that if a broker-dealer does not have a place of business in a state and only deals with existing clients who are temporarily in a state, the firm is exempt from registration. That means the BD can engage in any business with the existing customer; it is not limited to exempt transactions such as unsolicited orders. There is no de minimis exemption for broker-dealers and agents. U3LO2

KAPCO Advisers is registered as an IA with the SEC. Their only office is in New Jersey and all IARs are registered there. IAR Claire has 10 clients who reside in Ohio; IAR Sean has 6 clients who live in Kentucky; and IAR Felicia has 3 clients who are Georgia residents. In addition, Felicia conducts a quarterly presentation at the Augusta, Georgia National Golf Club where she discusses current market developments. The seminar is restricted to club members only. Which of the following is CORRECT? A) Because all 3 are registered in the state where KAPCO maintains its principal office, no further registrations are necessary for these IARs. B) Sean must register in Kentucky. C) Claire must register in Ohio. D) Felicia must register in Georgia.

D) Under Section 203A of the Investment Advisers Act of 1940, any IAR with a federal covered adviser who has no place of business in a state is not required to register in that state even when the number of clients they have in a state exceeds the de minimis level. Holding a public seminar on a quarterly basis in the same location would be considered having a place of business in Georgia (even though attendance is limited to club members only—they are still members of the general public). U2LO2

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) must register as an agent of the issuer B) need not register as an agent of the issuer because the offering is limited to current employees of the issuer C) may receive commissions, but not a salary, without registration D) must register as an agent if sales-related compensation will be received by the employee, either directly or indirectly

D) Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if sales-related compensation is paid. As a practical matter, the employee would be on straight salary. U3LO4

An investor using yield curve analysis would expect to view bonds of A) a single issuer over varying maturities B) varying quality over a number of maturities C) similar quality over varying maturities D) varying quality of similar maturities

A) 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. U8LO4

Which of the following is NOT an example of a non-qualified retirement plan? A) A SIMPLE plan B) A SERP C) A deferred compensation plan D) A payroll deduction plan

A) A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plan is a qualified retirement plan designed for small businesses (100 or fewer employees). The others are all non-qualified plans. U24LO3

Which of the following is NOT considered to be an annuity purchase option? A) Periodic payment immediate annuity B) Periodic payment deferred annuity C) Single-premium deferred annuity D) Single-premium immediate annuity

A) An immediate annuity is one in which the payout begins immediately (generally within 30-60 days). As such, the concept of making purchases while receiving payout is illogical and is, therefore, not offered as an option. U15LO4

Which of the following statements regarding convertible bonds is NOT true? A) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. B) The conversion rate is set at issuance and does not change. C) Convertible bondholders are creditors of the corporation. D) If there is no advantage to converting the bonds into common stock, they would sell at a price based on their market value without the convertible feature.

A) Because convertible debentures offer investors the opportunity to gain from increases in the issuer's common stock, those investors are willing to accept a lower coupon (interest) rate than debt securities without the convertible feature. Debentures are debt securities making their holders creditors of the issuer. At the time the debenture is issued, the bond indenture indicates the conversion rate. That rate is fixed and does not change over the life of the security. In general, the conversion feature will be exercised only if the market price of the underlying stock has risen to the point where the investor is better off owning the stock than the debenture. One of the benefits of owning this security is that, as a debt instrument, if the stock price falls below the conversion price, the debenture will trade in the market like a comparable non-convertible issue. That is, it will trade at a market price offering a yield similar to non-convertible debt securities of the same quality and maturity. U13LO8

Flow-through is one of the features of A) direct participation plans B) open-end investment companies C) variable annuities D) REITs

A) Flow-through is the term commonly used to describe that any income or loss generated by a direct participation program flows through to the owner(s). In the case of a REIT, the only thing that passes through is income or gains, never losses. U17LO1

As part of your annual review for clients, you perform a net worth computation. You have computed a specific client's net worth at $500,000. This client calls you and asks what his net worth will be after withdrawing $4,000 from his savings account to pay off credit cards, taking another $6,000 to deposit to his IRA and buying a $25,000 home theater system using store credit. You would respond that the client's net worth is now A) $500,000 B) $475,000 C) $491,000 D) $466,000

A) In each case, we have an asset offsetting a liability so there is no change to the net worth. U19LO2

Which of the following would be considered an investment constraint rather than an investment goal? A) Liquidity B) Growth of capital C) Capital preservation D) Current income

A) Investment constraints are those things that limit our ability to reach our goals. If the investor needs high liquidity, that factor will affect the investment selection process and place a limit on the available investment options. U19LO5

The use of futures to hedge against a price increase is best referred to as A) a long hedge B) a neutral hedge C) a short hedge D) a trimmed hedge

A) Just as with stock options, the strongest hedge is always accomplished by buying (going long) on the opposite side. U20LO12

Which of the following is a possible advantage of scheduled premium variable life insurance over whole life insurance? A) Possible inflation protection for the death benefit B) Greater guaranteed cash value C) Flexibility of premium payments D) Less risk in the underlying investment instruments

A) Scheduled (fixed) premium variable life has fixed, not flexible, premium payments. The distinguishing factor is the variable death benefit. The insured assumes more risk, not less, in exchange for the possibility that the death benefit will provide protection from inflation. U15LO6

One of the offshoots of the capital asset pricing model (CAPM) is the Capital Market Line (CML). The equation for the CML uses which of the following? A) Standard deviation B) Alpha C) Beta D) Correlation coefficient

A) The CML provides an expected return for a portfolio based on the expected return of the market, the risk-free rate of return, and the standard deviation of the portfolio in relation to the standard deviation of the market. The equation for the CML uses the: expected return of the portfolio; risk-free rate; return on the market; standard deviation of the market; and standard deviation of the portfolio. U20LO8

The duties and responsibilities of a fiduciary are spelled out in A) the Uniform Prudent Investors Act of 1994 B) the Summary Plan Document of the DOL C) the Uniform Gift to Minors Act D) the Investment Advisers Act of 1940

A) The UPIA is the legal guide for fiduciaries, who must act with skill and caution in the best interest of their clients. U7LO3

In a margin account, broker-dealers lend money to clients to enable them to leverage their investments. The account document that is evidence of the debtor-creditor relationship is A) the credit agreement B) the hypothecation agreement C) the loan consent agreement D) the IOU agreement

A) The credit agreement, sometimes simply referred to as the margin agreement, is the written agreement between the client and the broker-dealer evidencing the loan. The loan consent agreement is the optional portion of the account documentation which allows the broker-dealer to lend out the client's margin securities. The hypothecation agreement allows the broker-dealer to re-pledge, (rehypothecate), the client's securities as collateral for the money it borrows at the broker call loan rate. U22LO1

Withdrawals during retirement from which of the following accounts would most likely be subject to the greatest amount of taxation? A) Qualified variable annuity B) Nonqualified variable annuity C) Nondeductible traditional IRA D) Roth IRA

A) The entire amount of the distribution from a qualified annuity will be subject to taxation at ordinary income rates. No tax is due on the Roth, and only the earnings on the nonqualified annuity or nondeductible IRA will be subject to tax. U24LO3

Buying a put option on a security he holds allows an investor to A) participate in additional gains if the security continues to increase in price B) receive the premium for the purchase of the put C) increase his profit if the security declines in price D) buy more stock if he exercises the put

A) This is an example of a protective put; that is, purchasing a put option on a stock the investor already owns. This allows the stockholder to lock in a sale price (the strike price of the put). If the market price of the stock continues to rise, the investor would not exercise the put. The put would expire, and the long stock remains in the account at the higher market price. The investor could hold the stock or sell it at the higher market price and in either case, the investor continues to participate in the additional gains. The protection (the hedge) occurs if the price of the stock falls. Then, the investor would be able to exercise the right to sell the stock at the strike price. That would offset the loss on the long position, not generate additional profit. Remember that options buyers pay the premium; they do not receive it. And exercising a put gives the holder the right to sell the stock, not buy it. Perhaps viewing an example will help. The investor owns 100 shares of ABC stock currently trading at $50 per share. Wanting to protect against a drop in price, the investor purchases an ABC put option with a strike price of 50 and pays a premium of 3. If the stock's price rises to $60 per share by the expiration date, the put option will expire worthless (who wants to put [sell] stock at $50 when it is selling for $60?). In this case, the investor has paid a premium of 3 points to insure that the stock can always be sold (during the life of the option) for a price of $50 while still having the opportunity to participate in future price increases of the stock. In our example, the investor has gained $7 per share (the difference between the increase from $50 to $60 less the premium paid for the option). U16LO2

A fiduciary, acting in accordance with the UPIA, would choose investments on the basis of all of the following EXCEPT A) transaction costs B) needs for liquidity, regularity of income, and preservation or appreciation of capital C) other resources of the beneficiaries D) general economic conditions

A) Under the Uniform Prudent Investor Act, transaction costs are not a primary factor in a trustee's determination of which investments to choose for the trust. They may be a factor in determining where to execute the transactions. The key for the prudent investor is to use skill and caution examining all of the factors involved to meet the stated objectives. U7LO3

When a securities firm is position trading, it is acting A) as a dealer B) as a broker C) unethically D) on principle

A) When a broker-dealer has a position in a security, it means the firm owns it or has sold it short (long or short position). In either case, the firm is acting for its own account and that means it is acting as a dealer or principal. There is nothing unethical about this—it is exactly what market makers do all day long. U22LO4

If a new client has $200,000 to invest and wants to retire in 15 years, which of the following client information is least necessary for an adviser to recommend a suitable investment program? A) Current income and cash flow requirements B) The age of the client C) Tolerance toward risk D) The amount of income he requires for his retirement years

A) While current income and cash flow requirements are ordinarily important considerations, in this question we are being asked about the investment of a lump sum, not periodic additional investments. The amount of income required will determine the types of investments and how they must be structured in order to achieve the retirement income desired. The client's age is necessary to determine the time horizon. That is, if the client is currently 35 and wishes to retire at age 50, the money will have to last a lot longer than if we are dealing with a 55-year-old who wishes to retire in 15 years at 70. A client's tolerance toward risk is among the most important non-financial considerations in determining investment suitability. U19LO6

An analyst wishing to view a good consolidated indicator of a business's cash inflow and outflow would most likely ask look at A) the working capital B) the statement of cash flows C) the consolidated income statement D) the current ratio

B) Cash flow is the money (cash) that flows into and out of a business. It consolidates the flow of money from operating activities, investing activities, and financing activities. Working capital and current ratio are indicators of current liquidity and in the income statement only reflect income and expenses. Items such as the cash received from the issuance of securities (stocks or bonds) or a loan from a bank do not appear. U9LO2

Which of the following statements regarding investment companies is not true? A) When an open-end investment company, or mutual fund, registers its offering with the SEC, it does not specify the exact number of shares it intends to issue. B) A management investment company can offer investors two ways of participating in the fund under management through the purchase of closed-end shares or, if the investor prefers, open-end redeemable shares. C) When investors redeem their open-end fund shares, they receive the net asset value (NAV) per share next computed after the redemption order was received. D) The Investment Company Act of 1940 classifies investment companies into 3 types: face-amount certificate companies, unit investment trusts, and management investment companies.

B) A management investment company cannot offer investors two ways of participating in the fund under management. The fund must either be a closed-end fund with shares traded in the marketplace or an open-end fund with redeemable shares. The Investment Company Act of 1940 classifies investment companies into 3 types: FACs, UITs, and management investment companies. Redemption (or purchase) of open-end investment company shares is based on the forward pricing rule. Because the offering of open-end investment shares is continuous, it is impractical to specify the exact number that will be issued. U14LO2

Which of the following is NOT true concerning a Coverdell Education Savings Account (ESA)? A) The beneficiary may be the contributor's child or grandchild or child of a friend of the contributor. B) In order for the withdrawal to be considered qualified, it may only be used for post-secondary education expenses. C) The maximum contribution is $2,000 per beneficiary. D) A beneficiary's unused balance may be rolled over to an ESA account for another child.

B) An ESA may be used to fund education at any level. The maximum contribution permitted for any beneficiary is $2,000 per year. The beneficiary need not be related to the contributor(s). ESAs may be rolled over to change investment vehicles or to change beneficiaries. Unlike the Section 529 plan, the contribution limits for an ESA are set by the federal government and are considerably less than those for 529 plans. U24LO6

Liquidity risk would be greatest for an investor whose portfolio was primarily composed of A) municipal bond UITs B) municipal bonds C) ADRs listed on the NYSE D) Nasdaq stocks

B) Any stock listed on the NYSE or traded on Nasdaq has high liquidity. Municipal bonds tend to be thinly traded, thereby exposing their holders to a higher degree of liquidity risk. UITs, regardless of their portfolio, stand ready to redeem their units so liquidity is not a problem for the investor. U11LO2

One characteristic found in equity securities issued by a corporation is A) preemptive rights B) limited liability C) a history of keeping pace with inflation D) cumulative dividends

B) Equity securities include common and preferred stock. Both have the benefit of limited liability; the investor can never be held liable for debts of the corporation. Only common stock has preemptive rights and the potential for growth to keep pace with inflation. It is preferred stock that can have the cumulative feature regarding its dividends. U12LO1

One of your customers notices that the short interest on KAPCO common stock is high. When she asks you for an interpretation, you should tell her that this signals A) a bearish outlook B) a bullish outlook C) that a change in interest rates is coming D) a shortage of enough stock to go around

B) Even though short interest represents the number of share sold short (typically by bearish investors), technical analysts believe that when it gets high, it is a bullish indicator. Each share that has been sold short must be replaced (covered) at some point. To replace the stock, an investor must go into the market to buy that stock. When all of those short sellers have to buy back the stock they shorted, it puts upward pressure on the price of that stock. U12LO6

ABC Advisers, Inc., a federal covered investment adviser is a wholly owned subsidiary of ABC Corporation, a holding company that also owns ABC Securities, a full-service broker-dealer that is a member of the New York Stock Exchange and FINRA. One of the clients of ABC Advisers calls his IAR to explain that he has just received a margin call in his ABC Securities account. Under these circumstances, it would NOT be prohibited for the IAR to use securities owned in the advisory account to obtain a loan for this client A) because ABC Advisers, Inc. is in the money lending business B) because the 2 firms are affiliated C) if the client agreed to repay the loan within 30 days D) when the client has furnished ABC Advisers, Inc., with a proper discretionary trading authorization

B) In most cases, the only money lenders on the exam will be banks and broker-dealers. If an advisory client receives a margin call from activity in his brokerage account, securities owned in the advisory account may be used by the affiliated broker-dealer to meet the margin deficiency. U7LO4

All of the following are examples of non-diversifiable risks EXCEPT A) interest rate risk B) liquidity risk C) purchasing power risk D) market risk

B) Liquidity risk is a type of unsystematic, or diversifiable, risk. All of the other choices are systematic risk, which is considered to be non-diversifiable. U20LO2

Nifty Advisers Group made an announcement on its website that the firm was going to create a Facebook account to keep all its clients and prospective clients updated on the market. To get the word out, Nifty sent an email notice to its current clients and asked them to please refrain from airing complaints through that account; any negative comments would be addressed through the normal channels. Also, contained in the email was an announcement that anyone simply clicking like on the company Facebook page would receive a one-time 5% decrease in the client's quarterly fees. For this campaign, which of the following are not true? A) The SEC Investment Adviser Marketing Rule permits testimonials, such as a like on the firm's Facebook page as long as certain disclosures are made B) This would not be considered a testimonial and therefore permitted under the regulations. C) Third-party use of the "like" feature on an investment adviser's social media site could be deemed a testimonial. D) "Likes" posted to the personal accounts of IARs are treated the same as those posted to the firm's account.

B) Please note that this question is looking for the statement that is not true—in other words, find the false statement. In 2021, the Investment Advisers Act of 1940 was amended by the SEC's new marketing rule. That rule permits testimonials (a like on a Facebook page is considered a testimonial) as long as certain disclosures are made. One of those disclosures is the receipt of any direct or indirect compensation. The 5% decrease in fees is considered a form of compensation and simply clicking "like" does not give any indication that compensation for the testimonial is being given to the client. A client could give a testimonial on the firm's website or Facebook page, but the full range of disclosures, including compensation, the fact that the person is a client, and any potential conflicts of interest, such as a family relationship with a principal of the firm, must be made. U6LO5

Which of the following statements about stop orders is not true? A) A sell stop order is always placed at a price that is below the current market price. B) A sell stop order is used to protect a short sale. C) A stop order will become a market order once a security trades at or through a specified price. D) A stop order to buy is always set at a price that is higher than the current market price.

B) Short sellers use a buy stop order for protection, not a sell stop. After all, their obligation is to buy the stock to replace the stock borrowed when the short position was established. If the stock begins to rise, they'll want to buy it back before it "reaches the sky." Stop orders become market orders once the security trades at or through the stated stop price. A sell stop order is typically used to protect a profit or limit a loss on a security the investor owns. Should the stock's price decline to the level of the stop, a market order is triggered and the security is sold before any further decline occurs. Therefore, sell stop orders are always entered at a price that is below the current market price ("Don't sell my stock until it falls to this price"). Conversely, a stop order to buy is always placed at a price that is higher than the current price and is used to protect a short sale. Buy and sell stop orders are also used by those who follow technical analysis. A buy stop is used when a stock is approaching a resistance level. Placing a stop at a price somewhat above the resistance price means that if there should be a breakout, the order will be triggered, and the investor will purchase the stock before it runs any higher. Conversely, a sell stop would be used when a stock is approaching the support level. If the investor believes the stock may break through the support, a sell stop order placed somewhat below the support price means the sell stop order will be triggered as the price is plunging, and the investor will get out before any further loss. U22LO6

As defined in the Investment Company Act, investment companies include A) diversified companies, nondiversified companies, and face-amount certificate companies B) face-amount certificate companies, management companies, and unit investment trusts C) open-end companies, closed-end companies, and unit investment trusts D) mutual funds, closed-end companies, and unit investment trusts

B) The act defines investment companies as being management companies, face-amount certificate companies, or unit investment trusts. Management companies are further categorized as being open-end or closed-end, diversified or nondiversified. U14LO1

When reading a research report about an investment company, you read that, in addition to common stock, the company also has a preferred stock issue outstanding. From this, you could conclude that this is A) a blended investment company B) a closed-end investment company C) a unit investment trust D) an open-end investment company

B) The only investment company that can legally issue preferred stock is a closed-end investment company. Open-end companies can only issue 1 class of stock (common stock or its equivalent). UITs issue units and term blended investment company makes no sense here. U14LO2

A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has an net asset value (NAV) of $12 and an ask price of $12.50, and that the ABC Fund has an NAV of $11.50 and an ask price of $10.98. The customer should conclude that A) both are open-end funds B) GEM may be an open- or closed-end fund and ABC is a closed-end fund C) ABC is an open-end fund and GEM is a closed-end fund D) ABC and GEM are both unit investment trusts

B) The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have an ask (or offering) price less than its NAV, therefore ABC cannot be an open-end fund. U14LO3

A deceased individual with 2 surviving children and a spouse, had established a trust for his family. The trust document appointed both children as co-trustees. The surviving spouse is to receive current income, and his 2 children will receive equal shares of the remaining principal upon the spouse's death. As the adviser to the account, you A) focus on generating income for the spouse B) follow the instructions of the trustees C) attempt to generate reasonable income while keeping the principal intact for the children D) focus on increasing principal for the children

B) The responsibility of following the trust's instructions is that of the trustee(s). Should they attempt to deviate from that, the adviser should inform them that they face potential liability under trust law. However, in all cases, the adviser must follow the direction of the trustees. As a practical matter (not tested), if the trustees appear to violate the trust's instructions, many advisers would terminate their relationship to avoid any potential liability. U18LO5

You are an IAR. One of your clients is a C level officer with a publicly traded corporation. When needing to relieve yourself, you are shown to the executive washroom. While cleaning up, you notice a report, stamped "Confidential" and a quick peek reveals that it is highly favorable to the company. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, you A) can accept unsolicited orders from clients and buy for your personal account only B) cannot buy any of the stock for personal or client accounts C) should tell your client what you saw and ask permission to act on this information D) contact the Administrator immediately

B) This is a case of "accidentally" acquiring material, inside, nonpublic information. Under no circumstance are you permitted to make any use of this until the report is made public. However, you may accept unsolicited customer orders (unless they were in the washroom with you), but you can't do anything for yourself. U7LO5

Exercise of which of the following would NOT result in the money going to the issuer? A) Rights B) A call option C) Convertible preferred stock D) Warrants

B) When a call option is exercised, the strike price is paid to the seller of the option, not the issuer. U16LO3

Agatha has an account with her aunt, Sally, which is registered as TIC. If Sally predeceases Agatha, the assets in the account go to A) Sally's spouse B) Sally's estate C) the person designated under the laws of escheat in her state D) Agatha

B) When an account is opened as tenants in common (TIC), upon the death of one of the cotenants, that individual's share now becomes part of the deceased's estate. It might be that Agatha or Sally's spouse are beneficiaries named in Sally's will, but we don't know that. U18LO2

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 offer price B) the discount C) the bid price D) the markdown

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. U22LO5

Under the Uniform Securities Act, the definition of a broker-dealer includes A) a trust company when executing transactions in accounts in which it does not act in a fiduciary capacity B) an agent handling principal transactions with major institutional clients C) a person in the business of making trades in his own account or for the accounts of others D) an authorized representative of the issuer who receives a commission

C) A broker-dealer is defined as any person in the business of making trades in its own account or for the accounts of others. Agents and banks, including trust companies, are specifically excluded from the definition of broker-dealer. U3LO1

A bond issued by the GEMCO Corporation has been rated BBB by a major bond rating organization. This bond would be considered A) secured B) a high-yield corporate bond C) an investment-grade corporate bond D) callable

C) An investment-grade bond has a bond rating between AAA and BBB. Lower-rated bonds are considered high-yield bonds and are often referred to as junk bonds. The bond may or may not be secured—the rating does not indicate that fact. U13LO4

An investment adviser registered with the SEC could have all of the following as advisory clients EXCEPT A) the XYZ Growth Fund B) the DEF Life Insurance Company C) the ABC Unit Investment Trust D) Mildred, an accredited investor

C) Be careful—UITs do not have investment advisers. Any of the others could have advisory accounts. U18LO1

Securities issued by which of the following issuers have the direct backing of the U.S Treasury? A) Federal Agricultural Mortgage Corporation (Farmer Mac) B) Federal National Mortgage Association (Fannie Mae) C) Government National Mortgage Association (Ginnie Mae) D) Federal Home Loan Mortgage (Freddie Mac)

C) Bonds issued or guaranteed by the Government National Mortgage Association (Ginnie Mae) are backed by the "full faith and credit of the U.S. government," just like Treasuries. Bonds issued by government-sponsored enterprises (GSE) such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage (Freddie Mac), and The Federal Agricultural Mortgage Corporation (Farmer Mac) are not backed by the same guarantee as federal government agencies. Bonds issued by GSEs carry credit risk. The GSEs are publicly traded companies whose shares are registered with the SEC. U13LO1

A new customer of your broker-dealer calls after her first stock purchase and comments she did not see a commission charged on the trade confirmation and wants to thank you for the good deal. It would be incumbent on you to A) reply with a thank you and tell her you're looking forward to more trades B) explain that your firm does that on the first trade to help build the relationship C) explain that the firm acted as a principal and included a markup in the price D) report this to your supervisor promptly

C) Commissions are always disclosed on the trade confirmation when the firm has acted in an agency capacity (broker). When there is no commission displayed, it is because the firm is acting as a dealer (principal) and is charging a markup (on a purchase) or a markdown (on a sale). In some cases, but not all, the markup or markdown must be displayed. But, in all cases, the confirmation must disclose the capacity in which the broker-dealer functioned. U22LO4

In a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable rate preferred stock, changes in interest rates would be most likely to affect the market price of the A) convertible preferred stock B) common stock C) straight preferred stock D) adjustable rate preferred stock

C) Fixed income securities, such as straight preferred stock, are the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable rate preferred stock is usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates. U12LO2

Which of the following statements is TRUE? A) A futures contract always requires delivery of an asset. B) A futures contract does not involve obligations to buy or sell an asset. C) A futures contract has standardized terms. D) Unlike forwards, futures are not traded on an exchange.

C) Futures contracts are traded on exchanges and, therefore, have standardized terms. In forwards, the terms of each contract are separately negotiated. U16LO4

KAPCO common stock is listed on the New York Stock Exchange. If an executive vice president of the company buys 400 shares of the company's stock on the NYSE, she A) may sell immediately without restriction B) may sell under Rule 144 only after a 6-month holding period C) may sell immediately subject to Rule 144 volume limitations D) may not sell until she leaves the company

C) If purchased in the open market, such as on the NYSE, the transaction is not a private placement and the stock does not have a holding period restriction. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations under Rule 144. U12LO4

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) properly because the agent saved the client money B) properly because the agent used discretion as to price and time C) improperly; the order should have been placed on Thursday D) improperly; the order cannot be placed without prior written authorization allowing discretion

C) 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 and or price. However, time and/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. U7LO2

Which of the following attributes of common stock best describes why internal rate of return (IRR) is not generally used to determine the return on common stock? A) No net present value B) Uneven cash flows and no maturity C) Uneven cash flows, no maturity date and price D) Uneven cash flows

C) Internal rate of return (IRR) best measures investments with a known price and maturity. The internal rate of return is the discount rate that makes the future value of an investment equal to its present value. The yield to maturity on a bond is actually its internal rate of return. U10LO1

In general, an investor wishing to gain economic exposure to commodities would find it easiest to do so by A) investing in forwards contracts B) growing the commodity C) investing in futures contracts D) buying the commodity directly

C) It is generally agreed that using commodity futures is the easiest and most common way to gain economic exposure to commodities. Forwards are more commonly used by producers or users because, unlike futures, most forward contracts result in the delivery of the actual commodity. Only about 1% of all futures contract positions involve the delivery of the underlying commodity. U17LO7

Open- and closed-end investment companies have all of the following in common EXCEPT A) they actively manage their portfolios B) they have stated investment objectives C) they trade their shares in the secondary market D) they compute their net asset values

C) Open-end companies do not trade shares in the secondary market. However, both open-end and closed-end companies compute their net asset values, actively manage their portfolios, and have stated investment objectives. U14LO3

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be CORRECT to state that A) if a policy loan exceeds the policy cash value, the deficiency must be remedied within 10 business days to keep the policy from lapsing B) premiums will vary based upon performance of the separate account C) by surrendering the policy, its cash value may be obtained D) you will receive a statement of your death benefit no less frequently than semiannually

C) Surrender of the contract requires the insurance company to pay out its cash value. Death benefit is adjusted annually. U15LO7

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

C) The 7-day redemption rule is required by the Investment Company Act of 1940. U14LO1

The term sweetener would most often apply to A) convertibles B) rights C) derivatives D) warrants

D) A warrant is a derivative which gives the holder the ability to acquire shares of common stock at a fixed price. At issuance, that price is always higher than the current market value of the stock, but warrants generally have a long expiry date which gives them great time value. When an issuer attaches warrants to a bond or preferred stock issue, they serve to sweeten the offering resulting in lower interest rates or dividends. U16LO3

An investor has made the following purchases, all in the same calendar year: 100 ABC at $20 on January 15; 200 ABC at $25 on April 4; and 100 ABC at $30 on July 23. With ABC currently selling at $22, if this investor needed to sell 200 ABC, the best decision from a tax standpoint would probably be to A) use FIFO B) hold the stock until the price reaches $25 C) use LIFO D) use average cost

C) The best decision from a tax standpoint is to arrange things to show the largest loss. Remember, losses can be used against gains and, if there are more losses than gains, up to $3,000 of that loss can reduce taxable income. Using a form of share identification known as LIFO (last in first out), enables the investor to designate the 100 shares purchased at $30 in July and 100 of the shares purchased at $25 in April. That will result in a short-term capital loss of $1,100 ($800 on the July shares purchased at $30 plus $300 on the April shares purchased at $25.) That loss may be used either against realized gains or, if this is the investor's only transactions, deducted in full against ordinary income. The average cost method is only available for mutual funds. If this investor used FIFO, the sale would be of the 100 shares bought in January at $20 per share and 100 of the shares bought in April at $25 per share. The sale of the January purchase results in a $200 gain ($22 - $20 × 100 shares). The sale of the April purchase results in a $300 loss ($22 - $25) = -$3 times 100 shares. Combining them generates a net loss of $100. From a tax standpoint, declaring a loss of $1,100 is preferable to a loss of $100. U21LO3

All of the following statements regarding incentive stock options (ISOs) are correct EXCEPT A) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain B) the exercise of ISOs does not create taxable income C) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise D) upon the exercise of an ISO, income for AMT purposes is created

C) The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of exercise or 2 years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT. U12LO3

An investor is long 100 shares of XUZ common stock. If the investor wishes to generate some additional income while also creating a partial hedge, the recommended strategy would be to A) go short an XUZ put B) buy additional XUZ stock C) go short an XUZ call D) go long an XUZ call

C) The only way to generate income with options is to sell them (take a short position). Selling the call brings in a premium which creates a partial hedge. U20LO12

A client was reading an offering document for an oil and gas drilling limited partnership program and noticed that one of the features was flow-through benefits. How would you explain this? A) Once the program has paid taxes on its income, the entire remaining balance passes through to the investors. B) Losses generated by the program pass through to the investor and may be deducted in full against ordinary income. C) Rather than being a separate taxable entity, the program's income or losses pass through directly to the investors. D) Investors in the program are assured of a steady flow of income if the drilling is successful.

C) The philosophy behind flow-through is that any income or losses generated by a program of this type (DPP) flow directly to the investors—there is no tax at the entity level. If there are losses, they may only be deducted against passive income (e.g., income from other partnerships). No assurances can ever be given. U17LO1

The issuer of an ADR is A) the exchange on which the ADR is traded B) a foreign branch of a foreign bank C) a U.S. depositary bank D) a domestic branch of a foreign bank

C) The stocks of most foreign companies that trade in the U.S. markets are traded as American Depositary Receipts (ADRs). U.S. depositary banks, (domestic branches of U.S. banks), issue these stocks. Each ADR represents 1 or more shares of foreign stock or a fraction of a share. If you own an ADR, you have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR. U12LO5

One way in which active and passive real estate investing differ is that A) there are circumstances under which losses from passive real estate investing can be deducted against ordinary income B) losses from active real estate investing can only be deducted against income from other active investing projects C) there are circumstances under which losses from active real estate investing can be deducted against ordinary income D) only real estate professionals can deduct losses from active real estate investing.

C) There are certain conditions under which active real estate investors can deduct as much as $25,000 in losses from ordinary income. Those conditions are likely to be far more complex than the exam will delve, but it can be important to know that this is possible. Passive real estate losses can only be deducted against passive income. U17LO5

The measurement of a portfolio's actual or realized return in excess of (or deficient to) the expected return calculated by the capital asset pricing model (CAPM) is known as A) beta B) IRR C) alpha D) NPV

C) This is the textbook definition of alpha. Portfolio managers strive for a positive alpha (returns in excess of the expected return). U10LO4

The term private fund would apply to all of the following EXCEPT A) a hedge fund B) a venture capital fund C) a unit investment trust D) a liquidity fund

C) Unit investment trusts are one of the types of investment companies defined in the Investment Company Act of 1940. They register with the SEC prior to offering their units to the public. The other choices are all types of private funds. U14LO5

Your 47-year-old client plans to retire at age 65. When constructing a recommendation for the client's $850,000 IRA rollover account, your first consideration should be the client's A) tax status B) planned retirement age C) risk tolerance D) liquidity needs

C) While tax status, planned retirement age, and liquidity needs are important considerations in determining a client's investment profile, the first concern that should be addressed in this case is the client's risk tolerance. U19LO4

An agent has a conservative investor looking for income. The agent recommends a bond of a company the investor has never heard of. To allay the client's fear of loss, the agent states that the payment of interest and principal is guaranteed by a well-known blue chip company. Under the Uniform Securities Act, A) agents should always recommend securities that are familiar to the investor B) a guaranteed security only guarantees payment of interest or dividends C) the agent is possibly committing fraud D) the agent is describing a guaranteed security

D) A guaranteed security is one where the interest and principal (in the case of a bond) are guaranteed by a third party. If a guaranteed stock, it is the dividends that are the subject of the third-party guarantee. With tens of thousands of publicly traded securities, it is unlikely that your client will be familiar with most of them, but that doesn't prohibit the agent from making the recommendation if suitable. U6LO3

An unintentional omission of material facts when offering or selling a security may result in I. civil liabilities II. criminal liabilities III. criminal penalties A) II only B) II and III C) I, II, and III D) I only

D) An unintentional omission of material facts when offering or selling a security would result in civil, but not criminal, liabilities under the USA. If the omission of material facts is willful, it can result in criminal liabilities and penalties. U5LO4

When are estate taxes due? A) 6 months after death B) 9 months after valuation C) 6 months after valuation D) 9 months after death

D) Estate taxes are due 9 months after death. The taxes are based on either the value at death or the alternative valuation 6 months after death. U21LO5

A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to A) decline the transaction because short-term trading of funds is not allowed B) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee C) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee D) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee

D) If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares. But, you ask, we don't know what the CDSC is for the Class B shares - it isn't given. It doesn't have to be because the CDSC for redemptions in the first year would never be lower than the Class A front-end load (4% in this question and certainly higher than the 1% on the Class C shares). U14LO4

Investing in emerging market stocks is least likely to expose your client to which of the following risks? A) Political B) Liquidity C) Currency D) Interest rate

D) Interest rate risk applies primarily to fixed income securities. Stock, unless it specifies preferred stock, are not normally considered to have interest rate risk. However, any foreign investment incurs currency risk and, when dealing with emerging markets, there is a higher degree of liquidity and political risk than with developed economies. U12LO5

Which of the following would NASAA consider to be a substantial prepayment of fees? A) $600 covering the next calendar quarter B) $500 covering the next six months C) $1,000 covering the next month D) $600 covering the entire contract year

D) NASAA defines a substantial prepayment of fees to be more than $500 six or more months in advance. A payment of $600 covering a full year qualifies on both points; it is more than $500 and for more than six months. A payment of $500 covering the next six months meets the time requirement, but it is not more than $500. Payments of $600 for the next quarter or $1,000 for the next month meet the dollar amount but not the time requirement. U6LO4

One popular method of determining the value of certain securities is discounted cash flow. Using the DCF with the current discount rate at 3%, which of the following would be expected to have the highest market value? A) U.S. Treasury bond maturing in 20 years with a 4% coupon B) XYZ Corporation mortgage bond maturing in 10 years with a coupon of 4.5% C) Bay Area Rapid Transit Authority 4% revenue bond maturing in 15 years D) ABC Corporation debenture maturing in 25 years with a 5% coupon

D) The current discount rate represents market interest rates. At 3%, each of these bonds should sell at a premium (their coupon rates are higher than 3%). When a bond is paying interest at a rate higher than the current market rate, the longer the investor will be receiving that higher rate, the higher the premium. Therefore, the 5% bond with 25 years to maturity will have the highest present value using the DCF. U13LO12

In order to be in compliance with SEC reporting rules, a company will typically file a Form 10-Q how many times during its fiscal year? A) 2 times B) 4 times C) 1 time D) 3 times

D) The Form 10-Q is used for quarterly financial reporting. However, even though there are 4 quarters in an accounting year, only 3 forms are filed. This is because the Form 10-K, the annual report, takes the place of the 4th quarterly report. U9LO3

A bond with a par value of $1,000 and a coupon rate of 6% paid semi-annually, is currently selling for $1,200. The bond is callable in 15 years at 105. In the computation of the bond's yield to call, which of these would be a factor? A) Present value of $1,050 B) Future value of $1,200 C) 15 payment periods D) Interest payments of $30

D) 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. A bond with a 6% coupon will make $30 semi-annual interest payments. With a 15-year call, there are 30 semi-annual payment periods, not 15. The present value is $1,200 and the future value is $1,050, the reverse of the numbers indicated in the answer choices. U13LO10

"An investment company with a low expense ratio and a portfolio that doesn't change," is a description of A) a no-load fund B) an ETF C) an index fund D) a UIT

D) The key to this is that the portfolio does not change. Unit investment trusts (UITs) are characterized by a fixed portfolio; once put together, it remains until maturity of the bonds or liquidation of the equities. Index funds and ETFs do change their portfolios from time to time as the composition of the underlying index changes. U14LO7

A Nasdaq market maker buys 1,000 shares of stock from a customer at its bid to satisfy a customer order. This is an example of A) an agency trade B) a market order C) a block trade D) a principal trade

D) The market maker is acting in a principal (dealer) capacity. U22LO4

The owner of a convertible debt issue A) has the choice of receiving the bond's interest or dividends on the underlying stock, whichever is higher B) generally expects a higher current return than with a nonconvertible bond of the same quality and maturity C) is generally in a senior position to other bondholders D) is a creditor of the issuer

D) The owner of any bond is a creditor of the issuer. Dividends are only paid on stock and the investor will have to convert in order to be a stockholder. Because of the growth potential of the common stock, holders of convertible securities invariably accept a lower coupon rate. In almost all cases, convertible debt securities are debentures and, therefore, junior to secured bonds. U13LO3

When opening an account for a trust, which of the following sets of terms are synonymous? A) Grantor—trustee B) Beneficiary—trustee C) Trustee—settlor D) Settlor—grantor

D) The settlor, sometimes referred to as the grantor, is the person who establishes the trust. The trustee administers the trust and could be the grantor but does not have to be. U18LO4

Which of the following statements is NOT true concerning the wrap fee programs brochure under the Uniform Securities Act? A) Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. B) It lists the services provided under the program, including the types of portfolio management services. C) The disclosure document must contain the information required by Appendix 1 of Form ADV Part 2A. D) It contains a statement that the program will generally cost the client less than purchasing these services separately.

D) The wrap fee brochure must contain a statement that the program may cost the client more or less than purchasing these services separately. The brochure must be filed with the Administrator and must contain the information required by Appendix 1 of Form ADV Part 2A. Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. U6LO4

A client's mixed margin account has the following positions: Long, 100 XYZ with a current market value of $5,000 Long, 300 ABC with a current market value of $16,000 Short, 200 DEF with a current market value of $10,000 Short, 100 GHI with a current market value of $8,000 The account has a debit balance of $8,000 and a credit balance of $22,000. What is the combined equity in the account? A) $9,000 B) $31,000 C) $11,000 D) $17,000

D) There are two ways to compute the combined equity in a mixed (long and short) margin account. One is to add the "positives" and subtract the "negatives". In this case, we are long (that is a "plus" for us) $21,000, and we have a credit balance (also a "plus" for us) of $22,000. That is a total of $43,000. Then, we owe (the debit balance) $8,000 against the long stock, and it will cost us $18,000 to buy back the short stock. That is a total of $26,000. Subtracting that from the $43,000 gives us a +$17,000. The other way is to take each account separately. In the long account, what we own ($21,000), minus what we owe ($8,000), equals $13,000 of long equity. In the short account, what we "own" is the $22,000 credit balance, and what we owe is the $18,000 market value of the short. That comes out to $4,000. Now, add those 2 together, and you get the same $17,000. U22LO2

In a scheduled premium variable life contract, which of the following has a guaranteed minimum? A) The cash value B) The maturity value C) The expense ratio D) The death benefit

D) There is a guaranteed minimum death benefit. The cash value will vary according to the performance of the investments in the separate account. These policies to not have a maturity value and may have a guaranteed maximum expense, ratio, not a guaranteed minimum. U15LO6

Otto and Lucy set up a 529 plan to save funds for the college education of their daughter, Marangue, who is 14. What is the most suitable investment for the largest portion of their contribution? A) A large-cap stock fund B) A growth stock fund C) A long-term bond fund D) An intermediate term bond fund

D) This is a straight suitability question. Match the time horizon to the investment offered, and an intermediate term bond fund is the only logical answer. U19LO6

Last year, the bond market was profitable and ABC fund had 70% of its assets in bonds. Next year, the fund's managers expect the equity market to outperform and will adjust the fund's portfolio so that 60% of its assets will be invested in stock. ABC is most likely A) an asset allocation fund B) an income fund C) a specialized fund D) a growth fund

A) A mutual fund whose portfolio managers have the flexibility to allocate between different investment classes is known as an asset allocation fund. U14LO10

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) this practice is ethical if full disclosure is made to all clients C) the adviser must state that the client may be subject to certain limitations because of this arrangement D) the adviser may collect fees for investment advice and commissions for executing trades

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. U6LO1

A client who has a margin account is out of town for a week. The securities in the client's account fall dramatically, which requires the client to make immediate deposits into the account. Which of the following can the agent do to assist the client? A) Make every reasonable attempt to contact the client B) Arrange for the firm to give the client another loan C) Deposit funds into the client's account on behalf of the client D) Arrange for a different client to give his client a loan

A) In this instance, all that the agent can do is to try to contact the client. The agent cannot arrange for a loan or deposit her own funds into the client's account. U7LO4

High-yield bonds are frequently called junk bonds. Which of the following expresses the highest rating that would apply to a junk bond? A) BB B) CC C) CCC D) BBB

A) Investment-grade bonds run from a highest Standard and Poor's rating of AAA (Aaa − Moody's) down to BBB (Baa − Moody's). When the rating gets to BB (or Ba) the bond is considered high yield, or a junk bond. U13LO4

Watson, a customer of Gibraltar Securities, wishes to place an order to buy 50 shares of a thinly traded stock priced at $8 per share. Because the stock is so thinly traded, Gibraltar Securities feels it needs to charge Watson a commission of $100 to justify the time it must spend locating a seller of the stock. Which of the following statements best describes this action? A) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson chose to proceed with the trade. B) A commission of $100 on a transaction involving $400 worth of stock would generally not be deemed excessive. C) Gibraltar Securities is not required to disclose the amount of commission in advance to Watson. However, it must receive clearance from the Administrator before charging commission in amounts exceeding 10% of the value of the securities traded under the transaction. D) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction.

A) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson proceeded with the trade. However, charging larger than normal commissions without informing the customer of such intent in advance is a prohibited practice under the Uniform Securities Act. There is no requirement for administrative clearance prior to charging larger than normal commissions. U22LO5

A client is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened? A) Options B) Margin C) Discretionary D) Retirement

A) One question asked on a new options account form that is not required on a normal brokerage account opening is investment experience and knowledge (e.g., number of years, size, frequency, and type of transactions) for options, stocks and bonds, commodities, and other financial instruments. U18LO2

The Administrator, with proper notice, may examine the financial records of which of the following persons registered in his state? A) Broker-dealers and investment advisers B) Only broker-dealers C) Only investment advisers D) Broker-dealers, agents, and investment advisers

A) Only broker-dealers and investment advisers are required to maintain financial records. There are no financial inspections of agents or investment adviser representatives as there are with broker-dealers and advisers. U3LO5

Registration by qualification is effective A) when determined by the Administrator B) when the federal registration becomes effective C) no earlier than 10 days after the filing date D) 20 days after the filing date

A) Registration by qualification is effective when determined by the Administrator. Qualification is the only form of registration where the timing of the effective date is determined by the Administrator. U4LO3

If the current risk-free rate is 5%, and the expected return on the market is 10%, what return can be expected from a security that has a beta of 1.5? A) 12.5% B) 20% C) 15% D) 15.5%

A) The formula for this is: risk-free rate plus the (difference between the market return and the RF) times the beta. In this question, those numbers are: 5% + [(10% - 5%) × 1.5] = 5% + (5% x 1.5) = 5% + 7.5% = 12.5%. U20LO9 CAPM formula

Fusion Financial is a broker-dealer registered in States A, B and C, with its home office in State B. A complaint is filed against the firm by a client who resides in State A. Under the powers granted under the Uniform Securities Act, the Administrator of State B could do all of the following EXCEPT A) issue an injunction against Fusion Financial B) gather evidence from State B C) subpoena witnesses from State C D) gather evidence from State A

A) ​​An Administrator has the power to gather evidence both within and outside of the home state, as well as subpoena evidence and witnesses in any state.​ Only the courts can issue an injunction.​ U5LO2

In general, the Administrator would require that a broker-dealer's social media policies A) be committed to writing and communicated firmwide B) be limited to defining the responsibilities of supervisory personnel C) be left up to the manager of each branch office D) be updated at least once every 3 years

A) Although NASAA does not yet have a Model Rule dealing with social media, individual states have developed policies, and most of them mirror FINRA's, which requires that a firm's social media policies be in writing and made known to all in the company. It is not just supervisory personnel who must know the policy; any employee is subject to it. Updating every 3 years is not nearly frequent enough in this dynamically changing industry. U6LO5

Sales made under the provisions of Rule 506(b) of Regulation D must be reported on A) Form 13F. B) Form D. C) Form 506. D) Form U4.

B) Form D is the form that must be filed electronically with the SEC no later than 15 days after the first sale of securities in the offering. U4LO3

One of your clients dies. You could legally take instructions regarding the individual's estate from A) a CPA who prepared the deceased's tax return B) the administrator in intestacy C) a person with durable power of attorney D) the spouse of the deceased

B) If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power. U18LO4

Which of the following statements relating to penalties under the USA is CORRECT? A) A seller who notices that a sale was made in violation of the act may offer a right of rescission to the purchaser that must be accepted either 2 years after notice of the violation or 3 years after the sale, whichever comes sooner. B) A purchaser of a security where a violation of the USA occurred may recover the original purchase price plus legal costs and interest, less any earnings already received. C) Unknowing violation of the USA by an agent is cause for imprisonment under the criminal liability provisions of the act. D) Any person aggrieved by an order of the Administrator may request an appeal of the order within 15 days which, in effect, functions as a stay of the order during the appeal period.

B) A client who purchased a security in violation of the USA may recover the original purchase price plus costs involved in filing a lawsuit. In addition, the purchaser is entitled to interest at a rate stated by the Administrator, less any earnings already received on the investment. To be subject to time in prison, a sales agent must knowingly have violated the USA. The right of rescission must be accepted or rejected within 30 days of receipt of the letter of rescission; it is the statute of limitations for claims that runs the 2- or 3-year period. An appeal will only stay an order when so directed by a court of competent jurisdiction. U5LO3

Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment? A) Open-end investment company B) Closed-end investment company C) Unit investment trust D) Hedge fund

B) A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market. U14LO3

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements about material conflicts of interest is (are) TRUE? Any conflicts of interest must be disclosed either orally or in writing before rendering advice. Material conflicts of interest must be disclosed in writing before rendering advice. Material conflicts relating to the adviser, adviser representative, or adviser employees must be disclosed. A) I and III B) II and III C) I only D) II only

B) Advisers must disclose any material conflicts of interest in writing before rendering advice. Material conflicts of interest include any compensation to be received regarding recommendations to the client from other sources in addition to the advisory fee charged and affiliations between the adviser and suppliers of related services or other investment products. U6LO1

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

B) An individual may only act as an agent for multiple broker-dealers that are affiliated with each other. If the broker-dealers are unrelated, an agent may not work for them unless the state securities Administrator, by rule or order, authorizes such employment. U3LO5

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 portfolio manager's tenure. C) the fund's expense ratio. D) the fund's objectives.

B) 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. U14LO10

When contrasting call options, preemptive rights, and warrants, it would be correct to state A) only call options and warrants have time value. B) only preemptive rights and warrants are issued by the underlying corporation. C) only call options are traded on listed exchanges. D) all of these are issued by the underlying corporation.

B) Corporations issue preemptive rights (if called for in the corporate charter) when issuing additional shares. Warrants are issued by corporations usually as a sweetener to make a bond issue more attractive. Call options are issued by the options exchanges, not the underlying corporation. All three of these products trade on listed exchanges and all of them have time value with warrants generally having the longest expiration date. U16LO3

The Administrator may require which of the following from a federal covered adviser? I. copy of the IA's Form ADV II. filing of the IA's advertising in the state III. a listing of the IA's fee schedule IV. a filing fee A) I, II, III, and IV B) I and IV C) II and III D) I and II

B) Even though Administrators have limited jurisdiction over federal covered advisers, they can require filing of a copy of the information filed by that IA with the SEC (the Form ADV), as well as a filing fee. U1LO5

In this industry, many words have similar meaning. Which of the following choices consists of a pair which are NOT properly considered synonyms? A) Interest rate risk—money rate risk B) Financial risk—market risk C) Liquidity risk—marketability risk D) Inflation risk—purchasing power risk

B) Financial risk is an unsystematic risk; generally, the concern that an issuer will be unable to meet its debt obligations as they come due. It could be paired with either credit risk or default risk. Market risk is a systematic risk. U11LO2

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

B) 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. U5LO1

A resident of Albany, NY, is visiting relatives in Albany, GA. While there, she receives a phone call from her agent in the Troy, NY, office of Capital City Investments who offers a security that the client immediately agrees to purchase. The next day, she sends her payment from Georgia. The agent sends the trade confirmation to the purchaser's residence address in New York. This agent is registered in 12 states, including New York and Georgia. The security is not exempt and was not registered. Which Administrator has the authority to pursue action against the agent? A) Both Georgia and New York B) New York C) The Administrator of any of the 12 states in which the agent is registered D) Georgia

B) Let's start with the legal stuff first. Under the Uniform Securities Act, an offer to sell or to buy is made in a state when the offer (1) originates from the state or (2) is directed by the offeror (the agent) to the state and received at the place to which it is directed (or at any post office in the state in the case of a mailed offer). Furthermore, an offer to buy or to sell is accepted in a state when acceptance is communicated to the offeror orally or in writing, inside, or outside the state. The offer originated in New York and was directed to Georgia where it was accepted. The mailing of the confirmation is of no consequence. Therefore, the Administrators of both New York and Georgia would have jurisdiction over this activity. If the check had been mailed from another state while the client was on her way home, it would have no impact on this question. U5LO1

The DERP Corporation has an outstanding convertible bond issue that is convertible into 8 shares of stock. If the current market price of the bond is 80, the parity price of the stock is A) $64 per share B) $100 per share C) $125 per share D) $80 per share

B) Parity means equal. With a conversion ratio of 8 shares per bond, the investor can convert the bond into 8 shares. If the bond is currently selling for $800, then, to be of equal value (parity), the 8 shares must be selling at $100 each. U13LO9

It would not be considered a prohibited or unethical business practice for an investment adviser to A) charge a performance-based fee to an individual who meets the SEC's accredited investor standard detailed in Rule 501 of Regulation D B) pay a nominal fixed fee to certain professionals as a form of thanking them for client referrals C) borrow money from clients who are seeking a higher rate of return on their fixed income investments D) pay a nominal fee, based on account size, to certain professionals as a form of thanking them for client referrals

B) Referral fees (not cash fees for full-time soliciting) may be paid to certain professionals (lawyers, accountants, insurance agents, etc.) as long as the fee is both a nominal amount (up to several hundred dollars) and is the same amount for any referral. That is, it is not based on the size of the account. In order to charge a performance-based fee, investors must have a net worth in excess of $2.2 million while they can meet the accredited investor standard when their net worth exceeds a much lower amount: $1 million. Finally, under both state and federal law, investment advisers may never borrow money from clients unless the client is in the money-lending business or is affiliated with the firm. U7LO1

Securities issued by which of the following are exempt from the registration and disclosure requirements of the Uniform Securities Act (USA)? I. The United States or any territory II. A state or political subdivision of a state III. A common carrier (e.g., a railroad) regulated in respect to its rates and charges by the United States or a state IV. Banks and savings institutions A) II and IV B) I, II, III, and IV C) I and II D) II and III

B) The Uniform Securities Act exempts all of the securities listed from registration and disclosure requirements. Banks and common carriers are under the regulatory supervision of other government agencies. U4LO3

An individual registered as an agent with ABC broker-dealer has an independent financial planning practice. Hourly fees are charged for developing financial plans, and if the client wishes, he refers transactions to ABC broker-dealer and is paid commissions for products sold. The Investment Advisers Act of 1940 requires A) that ABC register as an investment adviser but not the financial planner B) that the financial planner register as an adviser but not the broker-dealer C) neither the financial planner nor ABC is required to register as an investment adviser. D) that ABC register as an investment adviser because it sells securities

B) The agent is receiving compensation for rendering advice. A broker-dealer is exempt from registering as an investment adviser unless it receives special compensation (typically a fee) for the advice. U1LO2

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) regulatory oversight B) fees and expenses C) liquidity D) suitability requirements

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. U14LO10

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

B) The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same. U18LO5

Which of the following would NOT be considered an investment adviser under Release IA-1092? A) A retired banker who solicits business and advises former clients on a monthly basis as to the specific investment merits of banking securities and receives compensation for his services B) The president of an investment club who provides research and advice to the members of his club on a regular basis as an integral part of his duties C) A pension consultant who advises a defined contribution plan on alternative methods of funding the plan and the relative merits of a selected list of investment managers D) An agent for an athlete who negotiates contracts for a baseball player, as well as advises the client on securities, but does not have discretionary authority over the athlete's securities account

B) The president of the investment club does not meet all 3 of the required elements in the definition of an investment adviser as outlined in Release IA-1092. The investment club president is neither in the business of providing advice nor does he receive compensation for his services. Agents for athletes are considered investment advisers if they include investment recommendations as part of their services, whether or not they have discretion over the funds. U1LO2

In a life settlement, the seller receives more than the premiums paid into the policy but less than A) the future premiums payable. B) the face amount. C) the cash value. D) the accumulated dividends.

B) The sale price of a life settlement is always more than the cash value and less than the face value. U17LO4

An agent in Illinois, Missouri, and Iowa has a client move from Chicago to Detroit on July 1, 2016. On September 1 of that year, he buys 100 shares of a nonexempt security in a nonexempt transaction. On August 1, 2017, the client discovered that the agent's firm never licensed him in Michigan and, therefore, he is subject to civil liability to the purchaser. The statute of limitations for this sale runs out A) September 1, 2018 B) August 1, 2019 C) August 1, 2020 D) September 1, 2019

B) The statute of limitations for civil liability is the earlier of 3 years after the date of the sale or 2 years after discovery of the violation. In this case, the earliest date is 2 years after the discovery date of August 1, 2017. U5LO3

An option that may be exercised before its expiration date is said to be A) Premature style B) American style C) European style D) Flexible style

B) There are two forms of option exercise—American and European. American style can be operationally exercised any day that the market is open before the expiration date. With European style, the only time you can operationally exercise your contract is the last trading day before expiration. Remember, even though there is only one day in which you can exercise your contract, you can always close out your option position in the secondary market any day prior to expiration. U16LO2

The Uniform Securities Act provides for a number of cases where an investment adviser representative is not defined as such in a specific state. One of those cases is when A) the individual maintains an office in State B, but his only clients in that state are institutions. B) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has fewer than six retail clients in State B. C) the individual represents a federal covered investment adviser and has two retail clients in a state in which she has no place of business. D) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has six or fewer retail clients in State B.

B) Those individuals representing a state-registered investment adviser (IA) can take advantage of the de minimis exemption. That is, if the individual has no place of business in a state and conducts business with no more than five retail clients in the state, registration is not required. Be sure you understand that "no more than five," "fewer than six," and "five or fewer" mean the same thing. Six or fewer is too many. The representative of the covered IA would not have to register; but that is not part of the USA, it is part of the federal law. There are never any exceptions for those with a place of business in the state. U2LO2

All of the following situations are exempt transactions complying with the requirements of the USA EXCEPT A) the executor of an estate liquidates 1,000 shares of IBM held by the estate B) broker-dealer B offers a private placement to 15 regular public customers and closes the offering at the end of 30 days C) Mammoth Mutual Fund purchased 250,000 shares of common stock in a nonissuer transaction D) broker-dealer A has put together a syndicate of 15 insurance companies and pension funds to purchase the entire issue of XYZ Corporation's preferred stock

B) Under the Uniform Securities Act, an unregistered private placement may be offered to no more than 10 prospective purchasers, with the exception of financial institutions and other broker-dealers. Transactions by executors, the sheriff, marshals, receivers, trustees in bankruptcy, guardians, or conservators are exempt. Sales to financial institutions, such as mutual funds and insurance companies, are also exempt. U4LO3

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 receipt for any fee charged by the solicitor, signed by the client B) A copy of the written agreement between the parties if the compensation exceeded $1,000 over a 12-month period C) Copies of all investment recommendations made by the solicitor D) A copy of the written agreement between the IA and the solicitor, signed by the client

B) 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. U7LO1

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) I, II, III, and IV B) I and IV C) II, III, and IV D) II and III

C) 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. U18LO3

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements about material conflicts of interest is (are) TRUE? I. Any conflicts of interest must be disclosed either orally or in writing before rendering advice. II. Material conflicts of interest must be disclosed in writing before rendering advice. III. Material conflicts relating to the adviser, adviser representative, or adviser employees must be disclosed. A) I only B) I and III C) II and III D) II only

C) Advisers must disclose any material conflicts of interest in writing before rendering advice. Material conflicts of interest include any compensation to be received regarding recommendations to the client from other sources in addition to the advisory fee charged and affiliations between the adviser and suppliers of related services or other investment products. U6LO1

In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the Release, which of the following would be included in the definition? I. Commercial banks offering comprehensive financial planning for their high-net-worth clients II. Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate III. Persons who receive a nominal fee for assisting employee benefit plan administrators select investment managers for the plan's assets IV. Lawyers who prepare trust agreements for clients with large securities holding with a goal of minimizing estate taxes A) I and II B) I and IV C) II and III D) II and IV

C) Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent now comes under the IA-1092 definition of investment adviser. Similarly, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant and is required to register under IA-1092. Banks are never IAs, and the lawyer is merely doing legal and tax work. U1LO2

One way in which the penalty for a civil infraction differs from that for a criminal one is that in the civil case, the guilty party cannot A) appeal the verdict B) be fined C) receive a jail sentence D) receive a suspension

C) Only in criminal cases is prison time an option. U5LO4

The National Securities Markets Improvement Act of 1996 (NSMIA) A) created a national market system B) overcame the restrictions of selling securities in interstate commerce C) defined the term "federal covered adviser" D) created the concept of fraud, as used in the Uniform Securities Act

C) The NSMIA defined the term "federal covered adviser," referring to advisers who must register with the SEC or who are excluded from the definition of "investment adviser" under the Investment Advisers Act of 1940. Fraud is a legal concept and is prohibited by the Uniform Securities Act. Selling securities in interstate commerce is not fraudulent, provided the antifraud provisions securities laws are observed. The roots of a national market system began with the Securities Amendments Act of 1975. U1LO5

John was convicted 5 years ago of failure to pay child support, a misdemeanor in his home state. John would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state will A) determine John's status on the basis of the extent to which his child support payments are being paid B) consider granting registration to John, but only if he receives heightened supervision C) disregard that conviction when determining John's qualifications for registration D) consider John to be statutorily disqualified because in this state his crime is a felony

C) The conviction on John's record is for a non-securities-related misdemeanor. The fact that the same crime is a felony in another state is not relevant to John's application for registration in that state. U5LO2

Under current law, which of the following would NOT be required to register as an investment adviser in a state? A) A person whose home office is in the state and who manages less than $90 million in assets B) A person who limits advisory services exclusively to issuers of securities in that state while maintaining no office therein C) A person who deals exclusively with broker-dealers in that state, but maintains no place of business within the boundaries of the state D) A person who has directed advice relating to securities to 6 individuals in that state within the past 12 months, even though he has no place of business within the state

C) The exemption from registration for those who have no office in the state and only deal with issuers applies to broker-dealers, not to investment advisers.Persons having no place of business in a state are generally limited to having fewer than 6 retail (individual) residents of that state as clients within any 12 month period before being required to register, (the de minimis exemption). Unless an exception applies, investment advisers who have less than $100 million in AUM must register on the state level. Once they reach $100 million of assets under management, they have the choice of state or SEC registration. Once $110 million is reached, the only choice is registration with the SEC. Once registered with the SEC, if the AUM falls below $90 million, the adviser can no longer remain SEC registered and must register on the state level. U1LO3

Which of the following circumstances would require an investment adviser to notify all clients of the firm? A) The investment adviser opens a branch office in another state. B) The investment adviser acquires the accounts of another firm. C) A partner of the firm was disciplined by the firm. D) The investment adviser hires another partner for the firm.

C) The investment adviser must disclose to the client any change in the members of a partnership. The adviser must notify only those clients whose accounts were obtained. The adviser does not need to notify existing clients of the new accounts. Internal disciplinary actions generally do not have to be reported to clients. U6LO4

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. U1LO5

An investment adviser prepares a slick advertising piece containing the relevant information from the firm's Form ADV - Part 2. One of the firm's IARs secures a contract with a new client and presents the brochure at that time. While explaining the terms of their agreement, the IAR mentions that the client may withdraw within the first 48 hours without any penalty. Upon returning to the office, the IAR realizes that he forgot to have the client sign a receipt for the disclosure document. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) there is a violation because the brochure must be delivered at least 48 hours prior to entering into the contract. B) there is no violation as long as the customer signs a waiver agreeing to these terms. C) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege D) there is a violation because the IAR failed to obtain the signed receipt.

C) The problem here is that the client has 5 days to withdraw, not 48 hours. Under Rule 203(b)-1 of the Uniform Securities Act, an investment adviser, or investment adviser representative must deliver the brochure to an advisory client or prospective advisory client not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client; or at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within 5 business days after entering into the contract. A signed receipt is not necessary and waivers are never allowed. U6LO4

States may require investment advisers who are registered with the SEC to do each of the following EXCEPT A) pay state notice filing fees B) file any documents with the state that are filed with the SEC C) maintain net capital requirements D) file a consent to service of process

C) The state may require federal covered advisers to pay notice filing fees, provide a consent to service of process, and submit copies of documents filed with the SEC, but cannot determine net worth or net capital requirements for federal covered IAs. The Administrator can require minimum net worth for state registered advisers, but under the NSMIA, cannot do so for federal covered ones. U1LO5

The USA defines all of the following as securities EXCEPT A) unlisted stock B) U.S. Treasury bills C) commodity futures D) debentures

C) The term security encompasses a wide range of investments. The best thing is to remember the 6 items that are not securities. Included in that list are commodity futures. U4LO1

If two agents of a broker-dealer agree to work together as a partnership in soliciting business and they agree to split commissions, this practice is A) permitted, but only with the prior written consent of the affected clients B) permitted only if the broker-dealer's compliance department audits the partnership's financial performance C) permitted D) in violation of the Uniform Securities Act's prohibition against sharing in the profits of an account

C) There is nothing in the USA that prohibits agents registered with the same broker-dealer from forming a partnership to conduct business or solicit clients. Under the USA, the compliance department need not audit the financial performance of such an arrangement. It is considered an unethical business practice for agents who are not licensed with the same or affiliated broker-dealers to share commissions. U7LO4

An investment adviser wishes to engage the services of a third party to solicit new clients for the firm. To be in compliance with the Investment Advisers Act of 1940, I. the solicitor must be registered as an IAR II. compensation may not be sales related III. the solicitor must not be subject to statutory disqualification IV. disclosure of the solicitation arrangement must be made to clients upon request A) I and IV B) II and IV C) II and III D) I and III

C) Third-party solicitors are not required to be registered as IARs and therefore may not receive sales-related compensation. However, they must not be subject to statutory disqualification that would prevent them from becoming registered. Disclosure is necessary, whether or not it is requested. U7LO1

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 transactions are authorized in writing by the broker-dealer before execution of the transactions. D) The agent will receive no compensation.

C) 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. U7LO4

If interest rates were to decline sharply, which of the following securities is likely to appreciate the most? A) 20-year municipal bond currently trading at par B) 20-year corporate bond currently trading at a small premium C) 20-year zero-coupon Treasury bond currently trading at a deep discount D) 20-year mortgage-backed security currently trading at a small discount

C) As a rule, the longer the duration, the greater the price appreciation. In this case, all the fixed-income securities have 20-year maturities. Another general rule is that the lower the coupon on the bond, the longer the duration. The zero-coupon bond has the lowest coupon and would likely appreciate the most. U13LO11

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

C) When an investment adviser ceases to exist, either through going out of business or being succeeded by another firm (as is the case here), it is their responsibility to ensure that articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor be preserved until at least three years after termination of the enterprise. Although it is true the contracts have been assigned to the successor firm (Gold and Sylver), the consent for that had to be obtained by LTFSI. A change of this nature requires prompt amendment to the Form ADV Part 1. U1LO5

An Administrator has jurisdiction over an offer to sell securities if it is made in a newspaper published out of state A) with at least ⅓ of its circulation in the state B) with at least ⅔ of its circulation in the state C) with at least ½ of its circulation in the state D) under no circumstances

D) An offer to sell or to buy is not made in the state when the publisher circulates or there is circulated on their behalf in the state any bona fide newspaper or other publication of general, regular, and paid circulation which is not published in the state, or which is published in the state but has had more than ⅔ of its circulation outside the state during the past 12 months. U5LO1

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

D) Beta is a measure of systematic risk, not unsystematic risk. The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume systematic risk. Diversifiable risk (unsystematic risk) can be brought down to zero with proper diversification. Including securities with negative correlation is a prime method of reducing overall risk (expressed by the portfolio's standard deviation) and the closer the correlation coefficient gets to zero (and 0.14 is close), the more random the relationship between the returns earned by two securities. U10LO6

With regard to a state-registered investment adviser using Form ADV Part 2 as its brochure, it would be correct to state that A) it must be delivered to all new clients B) it must be delivered not later than 48 hours after entering into an advisory agreement with a new client C) if requested by a client, it must be sent within 5 days of the request D) it is filed through the IARD system

D) The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a 5-day penalty-free withdrawal right. Annually, the Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempted. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state-registered. U6LO4

Under the Securities Exchange Act of 1934, which body regulates the extension of credit for nonexempt securities? A) The Comptroller of Currency B) The New York Stock Exchange C) The SEC D) The Federal Reserve Board

D) 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. U22LO1

A broker-dealer sends an email to all of its clients stating that anyone purchasing at least 100 shares of an IPO that has just become effective will receive, at no additional cost, a bonus of 10 shares of a Nasdaq traded stock. Under the Uniform Securities Act, delivery of this stock to a qualifying client would represent A) a gift B) an offer C) a prohibited transaction D) a sale

D) The USA states that, "any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered part of the subject of the purchase and to have been offered and sold for value." U5LO1

The Uniform Securities Act provides for all of the following EXCEPT A) exemption from registration for federal covered securities B) subpoena power for the state Administrator C) criminal penalties for violations of the act D) specific civil penalties for up to 3 times the amount of money invested for willful violation of the act

D) 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. U5LO3

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

D) 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. U1LO5

A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100, even though the customer has made no new investments. Which of the following statements is TRUE? A) The letter of intent is considered fulfilled. B) Shares held in escrow will be liquidated at the appreciated value. C) The investment no longer qualifies for a breakpoint. D) The agent should remind the customer of the letter of intent that was signed 12 months ago.

D) The letter of intent is not satisfied by the price appreciation of the shares. A letter of intent must be met with dollars invested within 13 months, so the customer needs to invest an additional $7,000 to fulfill the letter of intent. The agent should remind the customer of the intention to qualify for the reduced sales charge. The provisions of the LOI hold regardless of the price appreciation. Shares will not be liquidated until 13 months have lapsed. U14LO4

A customer requests information on a new mutual fund and asks her agent to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted A) without restriction B) if accompanied by an unmarked prospectus C) if approved by a principal D) under no circumstances

D) The prospectus is a legal document and may not be altered. U4LO3

In order to compute an investor's real rate of return on a common stock holding, all of the following are necessary EXCEPT A) dividends B) appreciation C) inflation rate D) marginal tax bracket

D) The real rate of return is another term for inflation-adjusted return. It is the total return, which is appreciation plus income (dividends), which is then adjusted for the inflation rate as expressed by the CPI. Tax bracket is necessary to compute after-tax return. U23LO2