Series 65 Practice Exam Review
A letter to an individual client discussing her portfolio is not an advertisement. What is it?
Correspondence
What is Reg D
D -- private part, private placement In a major effort aimed at facilitating the capital formation needs of small businesses, the SEC adopted Regulation D, the private placement exempt transaction. Often restricted for resale for a certain time period. Rule 506(b) says that in a Reg D offering, there can only be 35 non-accredited investors, no advertising, and investors must sign a letter showing they understand the risks they are taking.
What are the distribution rules for a roth IRA?
Distributions are not required to begin at age 70 1⁄2. But if the account holder dies, the beneficiary must begin making withdrawals
What are the 3 types of investment companies under the investment company act of 1940
Face amount certificate Unit investment trust Management companies: open and closed
Per Stirpes
If a mom dies and she has 3 kids, only 2 of them living. The stuff would be divided by 3. The 2 living kids would get 1/3 each and the children of the deceased child would split the other 1/3.
What are LEAPS?
Long-term Equity Anticipation Securities, LEAPS, options have the same characteristics as standard options, but with expiration dates up to three years in the future.
Ways to reach breakpoint
Lump sum (can be combined with spouses and dependent children, but not other family members) LOI (13 months) Rights of accumulation (count the amount already held in that fund)
What are the record keeping requirements for IA's?
Maintain in a readily accessible place for 5 years Last 2 years must be at the principal office 3 years after termination of the enterprise
The name of the person who stands ready to buy and sell at least the minimum trading unit, usually 100 shares (or any larger amount they have indicated), in each stock in which they have published bid and ask quotes. (OTC market)
Market Maker
Are commodity futures and actual commodities securities?
No
Are money market FUNDS insured by the FDIC?
No
Can you rebate commissions on mutual funds?
No
Does Universal Life insurance invest in the market?
No
Can an IA provide the customer with 3rd party research without disclosing that fact?
No. A prohibited practice is Providing a report or recommendation to any advisory client prepared by someone other than the adviser without disclosing the fact. (This prohibition does not apply to a situation where the adviser uses published research reports or statistical analyses to render advice or where an adviser orders such a report in the normal course of providing service.)
Name all of the current (coincident) indicators
Nonagricultural employment Personal income, minus Social Security, veteran benefits, and welfare payments (happens now) Industrial production (happens right now) Manufacturing and trade sales in constant dollars (happens right now)
The Administrator has power over any offer to buy or sell that...
ODA Originated Directed Accepted In their state
2 exemptions from brochure rule
Open-end investment companies Impersonal advisory services (market letters) under $500/year
What are the penalties associated with traditional IRAs?
Overcontribute: 6% Early withdrawal: 10% Insufficient RMD: 50%
Name the main leading indicators
new housing permits (this indicates there will be many new purchases like wood, shingles, windows, etc) manufacturer's new orders (if they bought an airplane mold, it means they will make more airplanes) SP500 index (shows investor sentiment) Money Supply
What is the formula for quick ratio, quick asset ratio, and acid test ratio
these are all synonyms. (CA - Inventory)/CL
Regarding investment advisers, how many people does an ad have to be sent to before it is necessary to retain a copy?
10
Testamentary Trust
A trust that is created by a will and therefore does not take effect until the death of the grantor. The assets DO pass through probate.
Irrevocable Trust
A trust that, once set up, the grantor may not revoke. Not counted as part of the decedents estate for estate tax purposes
Difference between federal and state law for IA's having custody
Under state law, the receipt of checks drawn by clients and made payable to unrelated third parties is considered custody unless forwarded to the third party within three business days of receipt the SEC never considers the receipt of a third-party check to constitute custody,
Rules on oral authorization for discretionary trades
Unlike BDs, IAs can use oral authorization for discretion for 10 business days after initial discretionary trade. After that, written only.
What is the highest opinion offered under GAAP?
Unqualified Opinion
What new benefit did the TCJA of 2017 bring to 529 plans effective 2018?
Use for tuition expenses for K-12 education
In a joint account, what does Undivided Interest mean?
What does that mean, especially when we see that TIC can have unequal shares? Simply stated, an undivided interest means that the no tenant has a designated interest in any specific asset in the account. Even when the shares are unequal, one tenant doesn't get stock A and the other stock B. Using our 60/40 example with the TIC account, one owner would have 60% of each of the holdings and the other 40% of each—the assets themselves are not divided between the owners.
Explain the different classes of mutual fund shares
Class A shares (front-end load): investors pay the charge at the time of purchase. Class B shares (back-end load): declines over time so investors pay the charge at redemption. Class C shares (level load): no sales charge to purchase, generally a 1% CDSC for one year, with a continuous 12b-1 charge. Class I shares, which would be sold only to institutional investors (hence the letter, I), and usually have lower fees and expenses. Class R shares, which would be sold only to participants in retirement plans, such as a 401(k), and have no front-end or back-end load, but may have a 12b-1 fee. The class of shares determines the type of sales charge as well as operating expenses with Class A having lower costs (usually a low or no 12b-1 fee) than Class B and Class C shares. All other rights associated with mutual fund ownership remain the same across each class.
What are the key points on Social Security?
To qualify for full benefits, an individual must have at least 40 quarters of employment. Waiting until age 70 (from 62) to claim benefits gives the individual an 8% compound return from full retirement age. If you don't need the funds and are in good health, it is generally worth the wait. Benefits for an ex-spouse. - If you're divorced and were married to the man for at least 10 years, you're eligible for some of your ex's Social Security. - In addition to the 10-year requirement, you must be unmarried at the time you become eligible to claim on your ex's Social Security.
Registration with the SEC as an investment adviser would be required for a person who
acts as the investment adviser to an investment company registered under the Investment Company Act of 1940 not someone who limits the advice offered strictly to securities listed on the New York Stock Exchange (NYSE) (unless their AUM is over $110m)
Spousal IRA
allows a spouse who is not in the paid labor force, or a low-earning spouse to make a fully deductible contribution to a traditional IRA. This is NOT a joint-account. It is 2 separate IRA accounts where the working spouse can contribute for himself and his spouse up to the maximum. In order to qualify, they must file joint tax returns.
Intestate
dying without a will. The state decides where your stuff goes.
dark pools
electronic trading networks where participants can anonymously buy or sell large blocks of securities
Payout options for annuities
straight life (life only) Life with period certain Joint with last survivor Unit (cash refund) (at least get you principal back)
What are the net worth/bonding requirements of state-registered IA's who maintain custody and what are the exceptions?
$35k Exceptions: Solely for deduction of fees Solely for pooled investment vehicles **If custody is maintained, State IA must include audited balance sheet with ADV 2A. SEC IA's don't need to do this.
What are the exceptions to the early withdrawal penalty for a Roth IRA? (where you don't have to pay income tax either)
- Regular contributions may always be withdrawn tax free because they are made with nondeductible contributions. Earnings accumulated may be withdrawn tax free, five years following the initial deposit, provided the: account holder is 59 1⁄2 or older; money withdrawn is used for the first-time purchase of a principal residence (up to $10,000); or account holder has died or become disabled. (you can also take out your cost basis at any time without penalty because you already paid tax on that, plus you can take out money for school without penalty but you have to pay tax)
Describe the 4 parts of form ADV
1A: questions about the investment adviser, its business practices, the persons who own and control the firm, and the persons who provide investment advice on behalf of the firm. All advisers registering with the SEC or any of the state securities authorities must complete Part 1A. Also contains Schedule A and DRPs (Discipline) 1B: asks additional questions required by state securities authorities. Investment advisers applying for registration or who are registered only with the SEC do not have to complete Part 1B. 2A: requires advisers to create narrative brochures containing information about the advisory firm. The requirements in Part 2A apply to all investment advisers registered with or applying for registration with the SEC or the states. 2B: Part 2B requires advisers to create brochure supplements containing information about certain supervised persons. The requirements in Part 2B apply to all investment advisers registered with or applying for registration with the SEC or the states. It may help you remember that the A in Part 2A tells us that that part is for the Adviser and the B in Part 2 is about the Bodies (the people) who work there.
A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the amount of the final semiannual interest check?
21.33 (remember, they are paid on a semi-annual basis!!!)
Requirements for commercial paper to be exempt from registration
270 days or less to maturity at least $50k denomination AAA, AA, or A
Under federal law what is the statute of limitations for civil liabilities?
3 years from the date of the sale or 1 year after discovery, whichever comes first
Under the USA what is the statute of limitations for civil liabilities?
3 years from the date of the sale or 2 years after discovery, whichever comes first
What are the record keeping requirements of BDs?
3 years, 2 years in main office
What are the time limits on rights of recission?
30 days If the buyer receives a rescission offer and fails to accept or reject within 30 days, they may not sue
What is the statute of limitations for criminal activity?
5 years
How long after death can an alternative valuation be determined?
6 months
How quickly do federal and state covered advisors need to file the updating amendment to form ADV? How quickly do they need to send it to clients?
90 days, 120 days
What are the perks of a 457 plan?
A 457 Plan is non-qualified (although there are tax benefits). As a non-qualified plan, it is exempt from ERISA requirements. That means key employees may be covered - the plan can discriminate.
What does Rule 144 deal with?
A control person selling stock In almost all cases, those who wish to sell control stock or restricted stock must do so by filing a Form 144. control person: person who owns 10% in a company. Answer: A. His 15% ownership is control. Her 5% is not, but the fact that she is the spouse of an insider makes her one, causing this to be a sale of control stock.
What is a swap?
A derivative representing an exchange of cash flows
living will
A document that indicates what medical intervention an individual wants if he or she becomes incapable of expressing those wishes.
red herring prospectus
A preliminary prospectus that can be distributed to potential investors after the registration statement (for a securities offering) has been filed with the Securities and Exchange Commission. The name derives from the red legend printed across the prospectus stating that the registration has been filed but has not become effective.
What are the IA advertising rules?
All investment adviser advertising must not use testimonials, must reflect fees, state actual market conditions during the referenced period, and disclose the specific group of clients to which it applies, and advertising that reflects past performance must show a minimum period of 1 year.
loan consent agreement
An agreement signed by a margin client that allows the broker-dealer to lend securities to a third party. A loan consent is not required to be part of an overall margin agreement
Viatical Settlement
An arrangement that allows someone living with a life threatening condition to sell their existing life insurance policy and use the proceeds when and where they are most needed, before death. (expected to die within 24 months)
Name all of the lagging indicators
Average duration of unemployment (people dont get re-hired right away. it takes a little bit) Ratio of consumer installment credit to personal income Ratio of manufacturing and trade inventories to sales Average prime rate Change in the CPI for services Total amount of commercial and industrial loans outstanding Change in the index of labor cost per unit of output (manufacturing)
Mr. Beale buys 10M 6.6s of 10 at 67. What will his annual interest be?
Buys 10 bonds (M is roman numeral for 1K so 10K worth of bonds) coupon is 6.6% maturing in 2010 bought at $670 each
What are the early withdrawal penalties for non-qualified variable annuities?
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.
Who fills out and submits the ADV-E
Fills out: IA Submits: Independent CPA The Form ADV-E (E for surprise Examination) must be completed by investment advisers that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this form to the independent public accountant that, in compliance with the Investment Advisers Act of 1940 or applicable state law, examines client funds and securities in the custody of the investment adviser. The independent public accountant performing the surprise examination must submit this form within 120 days of the time chosen by the accountant for the surprise examination.
What is form ADV-W?
Form ADV-W must be filed to withdraw the registration voluntarily.
What did the Dodd-Frank Act of 2010 do?
Frank, French, Foreign advisors are private funds Think PRIVATE FUNDS. Provided 3 new exemptions from registration for certain private funds. Private Funds with less than $150m AUM Non-U.S. advisers with no place of business in the United States and minimal AUM (less than $25 million) attributable to U.S. clients and investors (the foreign private adviser exemption) An exemption for advisers solely to venture capital funds (the venture capital fund exemption)
What are the 2 types of municipal bonds? Which is safer and which offers a higher yield?
General Obligation (GO) and Revenue Bonds. GO Bonds are safer because they are backed by taxes while Revenue Bonds are backed by revenues from state-owned companies like water, sewer, electric, toll-bridge, airports, etc. Taxes are a safer bet and, therefore, offer a lower yield. Since Revenue Bonds are riskier (but still quite safe) they often have a higher yield.
How do the state and federal brochure rules differ for giving the brochure and the content int he brochure?
Giving brochure Federal: At or before contract State: No later than at the signing of contract, but if not delivered 48 hrs before signing, customer has 5 days to back out. Content of brochure: Include balance sheet if there is a substantial pre-payment of fees. State: more than $500 6 or more months. Also include balance sheet if IA maintains custody. Fed: more than $1200 6 or more months Both: Material legal disciplinary action for past 10 years and fines greater than $2,500
In a revocable trust, who is responsible for the income tax on the distributed income?
Grantor -- even if he is not the beneficiary
Penalties for insider trading
Greater of $2 mil or 300% profit (treble damages) and up to 20 year jail term
Which is the employer-sponsored retirement plan that allows withdrawals before reaching age 59 1/2 without the 10% penalty?
IRC 457(b) Plans
An individual wishing to register as an agent with a broker-dealer may have to
In almost all cases, an individual wishing to register as an agent must pass an examination. Many Administrators require that all agents post a bond, whereas others only require bonding for those with investment discretion in customer accounts. Minimum net capital requirements apply to broker-dealers, not agents.
Explain indexed annuities
Indexed annuities (IAs) are currently popular among investors seeking market participation but with a guarantee against loss. If the index does well, the annuitant is credited with a specified percentage of the growth of the index—typically 80% or 90% of the growth. This is known as the participation rate. If, over the life of the annuity, the index does poorly, the annuitant may receive the IA's minimum guaranteed return—typically 1 to 3%. . In any year where the index declines, the annuitant's account is not credited with earnings, but would not lose value either. The 2% guaranteed rate would apply if, over the term of the annuity, performance was less than 2%.
Who are accredited investors for purpose of a Reg D?
Institutional Investors Individuals with net worth of $1m outside of primary residence, or annual income of $200k for last 2 years ($300k with spouse) Officers or directors of the issuer
What are the loan rules for IA's?
Investment advisers may lend money only to persons affiliated with the firm (as the IAR is) or if the adviser is in the money-lending business. We borrow money from banks because they are in the business of lending money, but we don't lend money to the money lenders. An IA may only borrow from lending entities, and a mortgage broker does not lend money; the broker arranges the loan but does not act as a principal.
What is a common method of avoiding estate tax?
Irrevocable life insurance trust (ILIT)
List exempt transactions
Isolated non-issuer transactions (for sale by owner to another person, not often) Unsolicited brokerage transactions Underwriter Transactions Bankruptcy: Executor, administrator, sheriff in bankruptcy transactions Institutional investor transactions (no minimum size) Limited offering (no more than 10 people other than institutional investors in last year) Pre-organization certificates (only 10 and no payment yet, no commission) Transactions with existing shareholders (as long as no commissions) Nonissuer transactions by pledgees (For example, you pledged stock as collateral for a loan and defaulted on your obligation. The lender will sell your stock to try to recoup his loss and, under the USA, this is considered an exempt transaction.)
Characteristics of annuities
Issued by insurance companies that guarantees income for life Can be qualified (pay income tax @ withdrawal) or non-qualified (pay tax when you earn it and its tax free @ withdrawal) Single payment premium (can be immediate or deferred) Periodic payment (deferred only)
What can the company change in their issue after effective date of registration?
It can change the number of shares being offered Cannot change the price or commissions
What did SEC Release IA-1092 do? Who did it apply to?
It expanded the definition of Investment Advisor. Financial Planners (comprehensive) Pension Consultants (choosing how to fund the plans or choosing investment managers) Sports and entertainment reps (if they advise them on investments)
Who may participate in Keogh Plans?
Keogh plans are Employee Retirement Income Security Act (ERISA)-qualified plans intended for self-employed individuals and owner-employees of unincorporated business concerns or professional practices. Included in the self-employed category are independent contractors, consultants, freelancers, and anyone else who files and pays self-employment Social Security taxes. The term owner-employee refers to sole proprietors. A corporation cannot use a Keogh plan. For those filing tax returns in 2019, as much as $56,000 may be contributed on behalf of a plan participant.
When may performance based fees be used in an IA contract?
Performance fees may be charged, regardless of the client's age, to anyone with a net worth in excess of $2.1 million or with at least $1 million under management with the firm. An individual reaches accredited investor status with a net worth of $1 million - not enough to qualify and one way in which the states differ from federal law is the requirement to disclose the incentive to take greater risks. or officer, director, or IAR who is employed by the IA and has been in the industry for at least 12 months.
Longevity Risk
Possibility of outliving one's financial resources
What are the rules on substantial prepayment of fees for SEC and State IA's?
SEC: More than $1200 6 months or more in advance State: More than $500 6 months or more in advance
What is 13F filing and who has to do it?
Section 13(f ) of the Securities Exchange Act of 1934 requires that any institutional investment manager that exercises investment discretion over an equity portfolio with a market value on the last trading day in any of the preceding 12 months of $100 million or more in 13(f ) securities, must file a Form 13F with the SEC quarterly, within 45 days of the end of each quarter. The purpose of this rule is to require institutional investment managers who exercise investment discretion over accounts holding certain levels of securities to make periodic public disclosures of significant portfolio holdings.
SEP IRA
Simplified employee pension plans (SEPs) offer self-employed persons and small businesses easy-to-administer pension plans. A SEP is a qualified plan that allows an employer to contribute money directly to an individual retirement account (IRA) set up for each employee, hence the name SEP IRA. Max cont: $56k
The name of the person who maintains orderly market in exchange market for listed securities
Specialist (DMM)
IAR Registration Exemptions
State IA: de minimus (5 or less) Snowbird SEC IA: only in states where they have a place of business
Blue Sky Laws
State securities laws
Explain the rules of solicitors for SEC IA's and State IA's
State: anyone who solicits on behalf of an investment adviser must be registered as an IAR. SEC: IA must be registered, the solicitor cannot have a statutory disqualification, the agreement must be in writing and if a 3rd party solicitor is used a bunch of disclosures must be made and brochures delivered.
SERP
Supplemental Executive Retirement Plan. A nonqualified deferred compensation plan that allows employers to provide additional retirement income to key, highly compensated employees. It allows employers to provide benefits beyond those of traditional qualified plans, such as 401(k) plans.
What are the exceptions to the early withdrawal penalty for a traditional IRA?
Taxable withdrawals before age 59 1⁄2 are also subject to a 10% early withdrawal penalty unless they are due to: death; disability; first-time purchase of a primary residence ($10,000 lifetime maximum); qualified higher education expenses for immediate family members (including grandchildren, but not nieces or nephews); or certain medical expenses.
Hypothecation Agreement (part of margin agreement)
The "hypothecation agreement" gives permission to the broker/dealer to pledge customer margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the broker/dealer on the basis of the loan value of these securities. All customer securities must be held in "street name" (registered in the name of the firm) to facilitate this process. When customer securities are held in street name, the broker/dealer is known as the "nominal" or "named", owner. The customer is the "beneficial owner", because he retains all rights of ownership.
What is the SEC's role in reviewing prospectuses?
The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue.
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
The bid price (dealers bid to buy and offer or ask to sell) 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.
What is the recipient's cost basis and date of acquisition for a security he was gifted?
The client is considered to have acquired the security on the donor's purchase date and at the donor's purchase price.
What is the recipient's cost basis and date of acquisition for a security he inherited?
The client's cost basis for determining if there is a taxable capital gain is the fair market value (FMV) as of the date of death. The holding period is not a consideration because any gains are considered long-term.
What are the main investment constraints?
The commonly tested investment constraints are: liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences. Risk tolerance is included in the investment objectives of the policy statement, not in the constraints.
Define alpha
The extent to which a portfolios return exceeds (or is below) its expected return based on its beta. An alpha of 2% means you beat expectations by 2%
At what rate are qualified dividends taxed?
The long term capital gains rate
What is the sale price of a life settlement?
The sale price of a life settlement is always more than the cash value and less than the face value
What are the 2 important numbers associated with REITS?
They pay out 90% of their taxable income must be distributed to investors as dividends. At least 75% of the value of a REIT's total assets must consist of real estate assets, cash, cash items and government securities
Explain TIPS
Treasury inflation protected securities. These notes are issued with a fixed interest rate, but the principal amount is adjusted semiannually by an amount equal to the change in the Consumer Price Index, the standard measurement of inflation. The interest payment the investor receives every six months is equal to the fixed interest rate times the newly adjusted principal. If you have a TIPS bond with 3% coupon and inflation is 4% that year, the first payment will be 1.5%(1000*1.02) or 15.30. The last payment of the year will be 1.5%(1020*1.02) or 15.61.
BDs and IAs can be either natural persons or legal persons
True If they are organized as a sole proprietorship, they will be a natural person
What are the 3 types of joint accounts? What is unique about them?
With all 3, each cotenant has an undivided interest in the account. Tenants in Common - deceased tenant's fractional interest in the account is retained by that tenant's estate and is not passed to the surviving tenant(s). Ownership of a TIC account may be divided unequally. Joint tenants with rights of survivorship - stipulates that a deceased tenant's interest in the account passes to the surviving tenant(s). Regardless of contributions, each JTWROS account owner has an equal and undivided interest in the cash and securities in the account. Tenancy by Entirety - can be created only by married persons. The most important difference is that in this form of ownership, the consent of the other tenant is required before the other tenant can sell or give away his interest in the property. Tenancy by the entirety is most commonly used for ownership of real property (real estate).
What are US Treasury STRIPS?
Zero coupon bonds from US Treasury. Coupon payments have been "stripped away". They are always sold at a discount. No reinvestment risk, but interest rate risk is high.
Security Market Line (SML)
a positively sloped straight line displaying the relationship between expected return and beta
living trust
a trust that takes effect while the grantor is still alive
In what circumstances would the Administrator cancel a registration?
ceased to do business (or cant locate) Deceased Declared mentally incompetent
How do open-end investment companies differ from closed-end investment companies?
continuous primary offering, prospectus always required since always an IPO, can only issue common shares, company redeems shares when sold, no secondary trading, price is determined by formula (never below NAV), 8.5% max sales charge (class A), ex-date set by BOD)
Characteristics of life insurance
death benefits are income tax free, but may be subject to estate taxes Universal life insurance: has no guaranteed minimum death benefit since the payments are flexible Variable life insurance: Guaranteed minimum death benefit. When you pay the premium, part of it goes toward the death benefit (insurance company invests this in conservative markets) and part goes into separate accounts to increase cash value (you can choose how risky). Can exchange for Whole Life insurance within 2 years of purchasing VLI without exam
What is Regulation S-P
requires that firms take identity theft seriously and have adequate safeguards in the form of privacy policies to protect nonpublic personal information from unauthorized access or use. A consumer obtains a product from a firm and has no more contact. A customer has a continued relationship.
Non-contributory plan
retirement plan funded entirely by employer contributions
What are the ranges of micro, small, mid, and large cap companies?
under 300m, 300m - 2b , 2b - 10b , over 10b
