Series 65 Prep

What are the 4 Investment company prohibited activities?

1. purchase securities on margin 2. participate on a joint basis in a trading account 3. short sell securities 4. acquire more than 3% of voting shares of another investment co

Two primary differences between open-end and closed-end management companies?

1. The way they are initially capitalized 2. The way they trade Closed-end inv companies initially offer a fixed number of common shares registered with the SEC similar to corporations. The capitalization is fixed unless/until a subsequent offering is made to the pubic. They can also issue bonds and preferred stock (just like corporations). Open-end inv companies register for a non-specified number of shares and can raise an unlimited amt of capital by continuously offering new shares of common stock only (no debt, no preferred).

What are the 3 types of Investment Companies under the Investment Companies Act of 1940?

1. face-amount certificate company (FACC) 2. management company (open and closed end mutual funds) 3. unit investment trust (UIT) NOT holding companies

Five important points about REITs

1. owner of REIT holds an undivided interest in a pool of real estate investments (property and/or mortgages) 2. they're liquid because they trade on exchanges and OTC 3. they are not investment companies (mutual funds) 4. they offer dividends and gains to investors but don't flow through losses like LPs and are therefore not considered DPPs (direct participation programs) 5. (i) at least 75% of assets must be real estate, (ii) at least 75% of gross income must be from real estate-related income, (iii) must distribute at least 90% of its taxable income.

Define Yield to Maturity

(annual interest + (+discount-premium / years to maturity)) / avg price of bond

Describe how the statue of limitations for violations differs for criminal vs civil violations for both USA/State and Federal law...

1. Criminal violation 1A State/USA: 5 years after alleged violation 1B Federal ? 2. Civil infraction 2A State/USA: sooner of 2 years after discovery or 3 years after the infraction 2B Federal: the sooner of 1 year after discovery or 3 years after the infraction U5LO3

Investment company reporting requirements.

1. File annual report with SEC 2. Reports must contain audited income statement and balance sheet 3. Send financial info semi-annually to shareholders

Who was added to the definition of IA per SEC Release IA-1092 in the 1980s?

1. Financial planners 2. Pension advisors 3. Entertainer and athlete advisers

What are the 3 main methods of charging fees on sale of open-end mutual fund shares?

1. Front-end load (diff between POP and net NAV, typically lower expense Class A shares) 2. Back-end load (contingent deferred sales load/charge CDSC, aka Class B shares, usually fees drop annually to zero after 6-8 years and then converted to Class A shares) 3. 12b-1 fees (asset-based fees, technically not a sales charge)

What is the three-prong test a firm must meet in order to be regulated as an investment adviser?

1. Provides advice or analysis on securities 2. As a regular part of business 3. For compensation

What are the private equity fund limitations of 3(c)(1) and 3(c)(7)funds?

3(c)(1) 1. no more than 100 investors 2. Under state law, all of them must be qualified clients. 3(c)(7) 1. all of them must be qualified purchasers 2.the fund is limited to 1,999 investors Most private funds are organized as partnerships

Eurodollar bond vs a Yankee bond?

A eurodollar bond is a US dollar-denominated bond issued by a non-US entity outside the US market vs. A Yankee bond is also US dollar-denominated bond issued by a non-US entity in the US market

What is a hedge fund?

A type of private equity fund that (1) is usually organized as a limited partnership with no more than 100 investors, (2) doesn't have to register with SEC so there's less transparency than with mutual funds which file a prospectus with the SEC, (3) generally invests in riskier investments such as arbitrage and shorts, (4) may use derivatives and leverage, (5) tends to have very high fees, and (6) has less liquidity for investors. Partnership is the issuer of ownership units. Portfolio mgrs often invest with investors.

What is a venture capital fund?

A type of private equity fund that focuses specifically on early-stage companies that are usually not operational yet.

Who is exempt from registration under Investment Advisors Act of 1940?

Advisers who only service insurance companies or venture capital funds are exempt, as are advisers performing intrastate who do not give advice to private funds or on listed securities.

What is carried interest in private equity and venture capital funds?

An annual management fee (typically 2% of committed capital) plus 20% of the profits when the business is sold. Also known as "2 and 20"

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) would be required to register in 15 or more states D) 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

Answer D. 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.

An investor in a high tax bracket who invested in a DPP should have which of the following characteristics? I. Need for tax benefits II. Substantial liquid assets III. Ability to identify both risks and merits of the program IV. Ability to commit money for a long time A) I and II B) I, II, III, and IV C) II and III D) II, III, and IV

Answer is B -- All. DPPs are appropriate for investors who can benefit from substantial tax deductions or credits, are not bothered by illiquidity, understand the business risks and benefits involved, and can stay in the program until completion.

If a publicly traded corporation was going to sell a wholly-owned subsidiary, the information would be made available through the filing of a Form A) 10-K B) 8-K C) 10-Q D) 13-F

Answer: 8-K. The Form 8-K is filed with the SEC within 4 business days of any one of a number of significant actions, including the sale of a significant asset such as a wholly-owned subsidiary. U9LO3

All of the following statements regarding scheduled premium variable life insurance are correct EXCEPT A) better than anticipated results in the separate account could lead to a reduction in annual premium B) premiums are determined based on age and sex of the insured C) once selected, the policyowner may change payment modes D) the policyowner has the right to change the selection of subaccounts

Answer: A -- Scheduled (fixed) premium variable life premiums are fixed. It is universal life that has flexible premiums.

Which of the following statements relating to penalties under the USA is CORRECT? A) 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. B) 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. C) 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. D) Unknowing violation of the USA by an agent is cause for imprisonment under the criminal liability provisions of the act.

Answer: A. 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

As defined in the Uniform Securities Act, the term "offer" or "offer to sell" includes all of the following EXCEPT A) a loan with a stated interest rate payable upon demand B) a purported gift of assessable stock C) an offer of convertible securities and warrants D) an offer of a special stock dividend in return for additional payments

Answer: A. A loan is not a sale of a security for value and is explicitly excluded from the definition of "offer" or "offer to sell." Although a stock dividend is normally excluded from the terms "offer" and "sale," when additional payment is required, we now have an offer that must be accepted before there is a sale. An offer of a convertible bond or warrant is an offer of both the bond or warrant, as well as the underlying stock. It is only a sale when the offer is accepted. The USA defines a purported gift of assessable stock as both an offer and a sale. U5LO1

The agreement between an investment adviser and client is the advisory contract. To be in compliance with the law, contracts under the USA differ from those under the Investment Advisers Act of 1940 in that they A) must be in writing B) generally do not provide for discretion C) must disclose the amount or method of calculation of the adviser's fee D) typically are renewed on an annual basis

Answer: A. Although it is not the general practice, the federal law does permit oral contracts, whereas the USA requires that all initial and renewal contracts be in writing. U6LO4

Under the USA, an agent may file for a review of an Administrator's revocation order within how many days of revocation? A) 60 days B) 270 days C) 30 days D) 90 days

Answer: A. An agent may appeal a final order of the state Administrator but a written petition must be filed with the appropriate court within 60 days of the entry of the Administrator's order.

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

Answer: A. 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

All of the following are unethical business practices for an agent of a broker-dealer EXCEPT A) borrowing money or securities from a client who is a broker-dealer, an affiliate of the broker-dealer, or a financial institution engaged in the business of loaning funds B) placing an order to purchase or sell a security for a client's account per the instruction of a third party, without having first obtained a written third-party trading authorization from the client C) placing an order to purchase or sell a security for a client's account without specific authority to do so D) deliberately misinforming a client regarding the agent's age

Answer: A. Borrowing money or securities from a client is unethical UNLESS the client is a broker-dealer, an affiliate of the firm, or a financial institution engaged in the business of loaning funds. Placing an order to purchase or sell a security for a client's account without authority to do so, and placing an order to purchase or sell a security for the account of a client upon instruction of a third party, without first having obtained a written third-party trading authorization from the client, are both unethical business practices. Deliberately misinforming a client regarding the agent's age is also an unethical business practice. U7LO4

An agent of a broker-dealer is currently doing business in one state and would like to conduct business in another state. When checking with the firm's compliance department, the agent would be told which of the following? A) If the agent is a partner, officer, or director and held that position at the time the broker-dealer was registered in that state, the individual need not register separately. B) Registration is required only if an offer is directed, accepted, and paid for in that state. C) No registration is necessary in the other state provided the agent's activities are limited exclusively to effecting transactions in certain exempted securities. D) No registration is necessary if no commission or other remuneration is paid or given directly or indirectly.

Answer: A. Both the broker-dealer and the agent must be registered in the state where business is to be transacted, unless they both qualify for an exemption from registration in that state (e.g., they have no place of business in the state and their only clients are institutions). At the time the broker-dealer is registered, officers, directors, or partners of the firm who act as agents will be automatically registered as agents. U3LO5

Which of the following vehicles make use of the unified estate tax credit? I. Bypass trust II. Generation-skipping trust III. Living trust IV. Simple trust A) I and II B) II and III C) I and IV D) III and IV

Answer: A. Both the bypass trust and the generation-skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.34 million for 2014) to heirs other than the spouse, usually grandchildren in the case of the GST.

As long as properly disclosed, a broker-dealer would be permitted to charge a fee for all of these EXCEPT A) solicitation of proxies B) issuing a stock certificate C) wiring funds to the client's bank D) annual maintenance fees

Answer: A. Broker-dealers are not permitted to charge for soliciting proxies—the issuer is responsible for reimbursing the broker-dealer for any of its expenses. All of the other charges are permitted if fully disclosed to clients. This is a case where you answer the question correctly because you know the other choices are permitted charges. U7LO1 Note: I guessed that the out-wiring bank couldn't charge a fee but the incoming wire bank could. Wrong.

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) Midwestern Asset Managers, LLC, with $53 million in AUM, required to register in 17 states C) Employee Benefit Specialists, Inc., a pension consultant with $225 million in AUM D) Grand Visions Advisers, a sole proprietorship with $104 million in AUM

Answer: 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

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) advisers who are registered on the state level, but who file their Form ADVs through the IARD D) broker-dealers who are considered investment advisers solely because they offer wrap fee accounts

Answer: 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.

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

Answer: A. For federal covered investment advisers, a prepayment in excess of $1,200 and for periods of 6 months or more in advance (substantial prepayment) requires the adviser to submit an annual audited balance sheet as part of its ADV Part 2 (and brochure). Previously, even though the firm's fee was in excess of $1,200, because it was collected on a quarterly basis, the firm did not fall under the balance sheet rule. Had this been a state-registered IA, the answer would have been the same, even though the dollar limit is $500 rather than $1,200. That is for the reason given above—the former fee was charged quarterly and the substantial prepayment definition requires both exceeding a stated dollar amount ($500 or $1,200) and it being for 6 months or more in advance. U1LO5

Ginnie Mae pass-throughs will pay back both principal and interest A) monthly B) quarterly C) annually D) semiannually

Answer: A. Ginnie Mae (GNMA) securities are called pass-through certificates because the monthly home mortgage payments, which consist of both principal and interest, pass through to the GNMA investor monthly. U13LO1

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 180 days of the adviser's fiscal year-end B) Do nothing and continue as a federal covered adviser C) Withdraw from SEC registration immediately D) Withdraw from SEC registration within 90 days of the adviser's fiscal year-end

Answer: A. 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

Which of the following persons is required to register with the SEC as a federal covered adviser? A) An adviser that gives advice to registered investment companies only B) An adviser who gives advice only related to U.S. government securities C) An adviser that manages assets of $90 million or more D) A publisher that gives incidental investment advice only

Answer: A. Investment advisers that act as advisers to investment companies registered under the Investment Company Act of 1940, regardless of their size, are required to register with the SEC. Don't be tricked by the $90 million. Only those with at least $110 million under management (using AUM as the deciding factor) are required to register with the SEC. Once that level has been reached, the IA may remain SEC registered as long as its AUM does not drop below $90 million. U1LO5

Investment companies must send financial reports to shareholders A) semiannually B) quarterly C) annually D) monthly

Answer: A. Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report. U14LO1 Note: I never should have gotten this wrong!

Under the NASAA Model Custody Rule, an investment adviser would be permitted to take or have custody of any securities or funds of any client if A) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules B) customer permission was obtained prior to entering into the contract C) the IA maintained adequate net worth or a surety bond D) permission was obtained from the Administrator and custody was not prohibited by that state's rules

Answer: A. It is unlawful for any investment adviser to take or have custody of any securities or funds of any client if 1. the Administrator, by rule, prohibits custody; or 2. in the absence of rule, the investment adviser fails to notify the Administrator that he has or may have custody. It is true that there is a minimum net worth or bond required, but that is not part of NASAA's Custody Rule—those requirements are found in Model Rule 202(d)-1, NASAA's Minimum Financial Requirements for Investment Advisers. U7LO2

According to the ethical guidelines set forth in the NASAA Statements of Policy and Model Rules, which of the following statements regarding discretion is CORRECT? I. An agent of a broker-dealer must have written prior discretionary authorization prior to effecting discretion in a client's account. II. An agent of a broker-dealer must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. III. An investment adviser representative must have written prior discretionary authorization before effecting discretion in a client's account. IV. An investment adviser representative must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. A) I and IV B) I and III C) II and IV D) II and III

Answer: A. One way in which the use of discretionary authority differs between agents and IARs is that agents may never exercise discretion without prior written authority. IARs must receive the written consent no later than 10 business days after the first discretionary transaction in the account. U7LO2 Note: I had this exactly backwards... in this case the restriction on BDs is stricter than IAs.

The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is NOT true? A) This may be done, but only if the entire account is rolled over. B) Even though these plans are generally under state control, the rollover rules are federal law. C) If there is a distribution of the assets, the rollover must be completed within 60 days. D) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period.

Answer: A. Partial rollovers are permitted. U24LO7

Under the Uniform Securities Act, violations of the act may result in criminal penalties of up to A) $5,000 B) $10,000 C) $50,000 D) $1,000

Answer: A. Persons convicted of willful violations of the act or knowingly filing a fraudulent document under the USA may be subject to imprisonment and/or fines for each violation. The maximum penalties are 3 years in jail and/or $5,000 in fines. The statute of limitations for criminal violations under the Uniform Securities Act is 5 years. U5LO4

Under the USA, an individual would not be considered an agent while representing the issuer in any of the following transactions EXCEPT A) nonexempt, initial public offerings B) investment contracts issued in connection with an employee's stock purchases, savings, pension, profit-sharing, or similar employee benefit plan C) promissory notes, such as commercial paper, with a maturity of nine months or less D) issuers in exempt transactions

Answer: A. Persons who represent nonexempt issuers of new securities, are agents under the USA unless it is stated that the transaction is exempt. Representing issuers in exempt transactions excludes the person from the definition of agent. U3LO4

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

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

Holly Cavendish is an IAR with Remington, Fairchild, and Hume, a federal covered investment adviser. Holly's manager tells her that he will be busy for a couple of hours working on completing the Form ADV-E. This tells Holly that her firm A) maintains custody of customer funds and or securities. B) is reporting certain errors discovered by management. C) will be changing to state registration. D) is undergoing a special evaluation by its clients.

Answer: A. 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. U7LO2

An agent tells his customer that a corporation has graduated to the level of quality acceptable for trading on the New York Stock Exchange and, therefore, has less market risk. If he recommends the stock to the customer based on the exchange's listing requirements, the agent has acted A) fraudulently, because listing on the New York Stock Exchange does not reduce the client's loss exposure and, therefore, the agent misled his client B) fraudulently because the NYSE listing requirements are not a matter of public knowledge C) properly, because returns were not guaranteed D) properly, because the New York Stock Exchange requires that the companies it lists are substantially capitalized

Answer: A. The New York Stock Exchange listing requirements are quantitative rather than qualitative. Exchange listing does not indicate the level of risk associated with owning a stock. The agent is acting fraudulently if he indicates that NYSE listing is indicative of a security's quality. An agent may not indicate that a security graduated to the level of quality acceptable for trading on the New York Stock Exchange, even if the agent indicates that returns are not guaranteed. Information regarding listing requirements is widely disseminated. U7LO5

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 sale B) a gift C) a prohibited transaction D) an offer

Answer: A. 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

Proponents of the concept of inflation inertia believe that A) prices will rise slowly and then begin to increase at a faster rate B) prices will rise rapidly and then begin to contract C) the rate of inflation will parallel the CPI D) prices will remain the same for a protracted period of time

Answer: A. The concept of inflation inertia is that prices will rise slowly during an initial period of inflation and then begin to "pick up steam" as a result of some economic shock. U8LO3 Note: I guessed D but also considered A

Broker-dealers who use the internet to distribute information on available products and services are not deemed to be transacting business in this state for purposes of the Uniform Securities Act and are, therefore, exempt from registration, if A) the internet communication does not involve either effecting or attempting to effect transactions in securities in this state over the internet, but is limited to the dissemination of general information on products and services being offered B) the broker-dealer does not maintain a place of business in the state and uses encrypted passwords for access C) the internet communication contains a legend in which it is clearly stated that the broker-dealer in question is exempt from state broker-dealer registration requirements D) the internet communication contains a mechanism, including and without limitation, technical firewalls or other implemented policies and procedures, designed reasonably to ensure that before any subsequent, direct communication with prospective customers or clients in this state, the client is first registered in this state or qualifies for an exemption or exclusion from such requirement

Answer: A. The internet exemption applies to broker-dealers when the firm limits its communications to the dissemination of general information.

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) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege B) there is a violation because the brochure must be delivered at least 48 hours prior to entering into the contract. C) there is no violation as long as the customer signs a waiver agreeing to these terms. D) there is a violation because the IAR failed to obtain the signed receipt.

Answer: A. 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

The Conference Board releases information about the economy on a periodic basis. Included are a number of different indicators. These indicators can be used to predict how the economy as a whole might change. Which of the following would be considered a leading indicator? A) Stock prices as measured by a broad index such as the S&P 500 B) Gross domestic product C) Industrial production D) CPI for services

Answer: A. The stock market, which anticipates economy activity, is a leading economic indicator. Industrial production is a coincident, or current, economic indicator. CPI for services is a lagging indicator. GDP is not included in the Conference Board's list of economic indicators. U8LO3 Note: I wrong chose C thinking it was leading

XYZ Securities, Inc., a FINRA member broker-dealer, is registered in all 50 states. XYZ has its principal office in State C and a branch office in State A. If the State U Administrator wished to examine certain financial records of XYZ's, the Administrator would be able to do all of the following EXCEPT A) examine those records located in State U B) ask FINRA to perform the examination C) ask the State C Administrator to perform the examination D) do so during normal business hours without prior notice

Answer: A. This broker-dealer does not have a place of business in State U so there are no records located there. How can an Administrator examine records that don't exist. All records are kept in the principal office and those pertaining to branch operations are kept in the branch office. If a broker-dealer is registered in her state, the Administrator can examine that firm's books and records during normal business hours without prior notice. To minimize expenses, Administrators usually ask the Administrator of the state in which the broker-dealer has its principal office to ask on their behalf. Alternatively, the Administrator may call on a self-regulatory organization (SRO) like FINRA to examine one of its member firms on behalf of the Administrator. U5LO2

If an investment adviser representative commits a criminal violation of the Uniform Securities Act, she is subject to legal action for A) 5 years after the alleged violation B) 3 years after the alleged violation C) 10 years after the alleged violation D) the sooner of two years after discovery or three years after the violation

Answer: A. This is a perfect example of how important it is to read the question very carefully. Notice that this is a criminal violation, not a civil one. Under the criminal provisions of the Uniform Securities Act, the statute of limitations is five years after the alleged violation. Do not confuse this five years with the maximum prison sentence of three years. Further, this is different from the statute of limitations for a civil case. That is the sooner of two years after discovery or three years after the infraction. Under federal law, the civil statute of limitations is slightly different. For federal civil cases, it is the sooner of one year after discovery or three years after the infraction. U5LO4

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

Answer: 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

What type of securities orders have triggers?

Stop orders are the only orders that have triggers so there is no trigger for a limit order. If the question had asked about the execution price, a buy limit order will be executed at the limit price or better (lower). Be careful and note whether the question is asking for a "trigger" price or execution price.

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) Felicia must register in Georgia. B) Because all 3 are registered in the state where KAPCO maintains its principal office, no further registrations are necessary for these IARs. C) Sean must register in Kentucky. D) Claire must register in Ohio.

Answer: A. 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).

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

Answer: A. Under the Uniform Securities Act, a person representing an issuer in securities transactions between an underwriter and an issuer is not deemed an agent and is exempt from the agent registration requirements of the act. U3LO4

Centripetal Investment Advisers (CIA) has its principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases EXCEPT A) checks made out to 3rd parties are forwarded within 3 business days B) checks made out to CIA are deposited within 3 business days C) CIA's advisory contract calls for the automatic deduction of advisory fees D) CIA has a power of attorney granting authority to withdraw funds from the custodian

Answer: A. When a check made payable to a 3rd party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser, it must be returned to the sender within 3 business days or else it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody. U7LO2 Note. I did get this right.

The prohibited practice of an investment adviser placing the same security in the accounts of all of the firm's clients is known as A) blanket recommendations B) discretionary misrepresentation C) matched orders D) churning

Answer: A. When the same security is recommended to all or most of an IA's clients, the regulators considered this to be an unethical practice known as "blanket recommendations" because the same security will almost never be suitable for everyone. U7LO4 Note: A was my initial guess, but then I changed it because it asks about placing not recommending.

A 78-year-old retiree has a $100,000 CD maturing and is dissatisfied with current yields on CDs. Aside from Social Security and a monthly pension, the $100,000 is his total liquid net worth. The agent recommends investing the funds in a single premium immediate variable annuity and allocating funds to the separate account as follows: Medical Technology − $10,000 High Yield Corporate − $40,000 Growth & Income − $50,000 The agent's recommendation is A) unsuitable primarily because of the customer's age, objectives, and risk tolerance B) suitable, provided the customer agrees with the recommendation C) unsuitable primarily because of the customer's probable liquidity needs D) suitable because it appears probable to increase the value of his holdings, as well as to generate increased income

Answer: A. With half of the investment allocated to medical technology and high-yield separate accounts, which carry a higher risk, the allocation seems unsuitable for a 78-year-old needing this monthly income. U19LO6

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) a guaranteed security only guarantees payment of interest or dividends B) the agent is describing a guaranteed security C) the agent is possibly committing fraud D) agents should always recommend securities that are familiar to the investor

Answer: B. 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

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) hypothecate securities in the account B) loan out the customer's margin securities C) lend the customer money D) commingle the customer's securities with securities owned by the firm

Answer: B. A signed loan consent agreement permits a firm to loan out a customer's margin securities. This is the only part of the margin documentation that is optional. U22LO1

When advising an investor on the purchase of mutual funds, the agent should instruct the client to compare open-end mutual funds with the same objective for all of the following EXCEPT A) portfolio turnover B) liquidity C) services offered D) costs

Answer: B. All open-end mutual funds are liquid since inv companies are required by law to redeem shares within 7 days at their NAV, therefore liquidity is not a point of comparison.

Under the USA, which of the following is considered a broker-dealer in a state? A) An agent effecting transactions for a broker-dealer B) XYZ broker-dealer with an office in the state whose only clients are insurance companies C) ABC broker-dealer with no place of business in the state who only does business with other broker-dealers in the state D) First Federal Trust Company, specializing in underwriting new municipal issues

Answer: B. Any broker-dealer with an office in the state, regardless of the nature of its clients, is defined as a broker-dealer under the USA. If the firm did not have an office in the state and its only clients were institutions such as insurance companies, or other broker-dealers, it would be excluded from the definition. Banks or trust companies and agents are never broker-dealers.

A broker-dealer is registered in State W, but its principal, and only place of business, is in State L. Which of the following statements regarding the ability of the Administrator to perform an onsite examination is CORRECT? A) Because the broker-dealer does not have a place of business in State W, it is impossible for the Administrator of that state to perform an onsite examination. B) The Administrators of both State L and State W may perform unannounced onsite examinations during normal business hours. C) Neither Administrator would be able to perform an onsite examination without giving 15 days written notice to the broker-dealer. D) Because the broker-dealer's principal office is located in State L, only that state's Administrator has the jurisdiction to perform an onsite examination.

Answer: B. As long as a broker-dealer is registered in a state, the Administrator of that state has the jurisdiction to perform an onsite, unannounced (surprise) examination (audit). In those cases where there is no place of business in the state, as in this question, the examination takes place at the principal office where the Administrator will view records pertaining to clients residing in State W.

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) Uneven cash flows B) Uneven cash flows, no maturity date and price C) No net present value D) Uneven cash flows and no maturity

Answer: B. 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 Note: I chose D because I thought "price" referred to current price, which is known.

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 ADV Part 1A B) Form PF C) Form D D) Form 13F

Answer: B. 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.

All of the following are true of negotiable, jumbo certificates of deposit EXCEPT A) they are readily marketable B) they are secured obligations of the issuing bank C) they usually have maturities of 1 year or less D) they are usually issued in denominations of $100,000 to $1 million

Answer: B. Negotiable CDs are general obligations of the issuing bank; they are not secured by any specific asset. They do qualify for FDIC insurance (up to $250,000), but that is not the same as stating that the bank has pledged specific assets as collateral for the loan. U13LO13

A broker-dealer (BD) registered in multiple states must meet the record retention requirements of A) the state with the most stringent requirement B) the SEC C) the state where the principal office of the BD is located D) the state where the BD is incorporated

Answer: B. One of the effects of the NSMIA was to establish the preemption of federal law over state law. A broker-dealer registered in multiple states is going to be registered with the SEC as well. NSMIA amended the Securities Exchange Act of 1934 (the 34 Act) to add section 15(h)(1), which reads as follows: No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title. However, had this question been dealing with an investment adviser registered on the state level, then it would have been the requirements of the state where the principal office of the adviser is located. U3LO5 Note: I chose C thinking about IAs.

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

Answer: B. 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.

John, an investment adviser, employs an investment adviser representative who is found guilty of defrauding many of the firm's clients over a long period of time. Which of the following is (are) TRUE under the Uniform Securities Act? I. The investment adviser representative is subject to criminal penalties specified in the act and to civil liabilities resulting from clients who sue as a result. II. John may be subject to civil liabilities resulting from actions taken by the investment adviser representative. III. John is not subject to civil liabilities as a supervisor if he can prove that he had no knowledge of the actions of the representative and, while exercising reasonable care, he could not have had knowledge of the violations. A) I and III B) I, II, and III C) II and III D) I and II

Answer: B. Persons convicted of willful violations are subject to the criminal penalties specified in the act (3 years and/or $5,000 fine). Thus, the representative is subject to criminal penalties and civil liabilities resulting from clients who sue him for loss of money. The act subjects to civil liabilities any person supervising those who violate the law. However, a supervisor may not be held liable for the actions of those whom he supervises if it can be proved that the supervisor used reasonable care to discover and prevent the violations and has no knowledge of the violations. U5LO4

Under the USA, which of the following fits the definition of a sale? A) Attempt to dispose of a security for value B) Contract to dispose of a security C) Solicitation of an offer to buy a security for value D) Issuing a prospectus

Answer: B. Sales involve any contract or disposition for value; solicitations and attempts to dispose are offers. U5LO1 Note: I got this wrong because I misread it and chose the one that was obviously NOT a sale -- issuing a prospectus.

A number of different pooled investment vehicles are included in the term "alternative investment." One of them, a synthetic investment instrument that has been created to meet a specific need that cannot be met by a standardized financial instrument, is known as A) an arbitrage B) an inverse fund C) a structured product D) a z-tranche CMO

Answer: B. Structured products are created as a tool to meet the issuer's debt financing needs when they will result in a lower cost than a standardized financial instrument available in the market place. U17LO3

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) the presence of a single client in State Y requires GRAB to register in that state B) GRAB is not defined as a broker-dealer in State Y if it does not have a place of business in the state C) GRAB is not defined as a broker-dealer in State Y due to the de minimis exemption D) GRAB is permitted to accept only unsolicited orders from the client in order to be exempt

Answer: B. 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.

The first of the federal securities acts was the Securities Act of 1933. This act requires persons selling a new offering to their clients to A) deliver a copy of the registration statement no later than with confirmation of the sale B) deliver an effective (final) prospectus no later than with confirmation of the sale C) deliver a preliminary (red herring) prospectus prior to the sale D) be properly registered prior to making the offer

Answer: B. The Securities Act of 1933, sometimes referred to as the "paper act," requires that an effective, or final, prospectus be delivered to all purchasers of a new offering no later than with confirmation of the sale. It is not required that purchasers receive a red herring prospectus, and only the SEC gets copies of the registration statement. Yes, they must be properly registered to make the offer (and sale), but that comes under the "people act," the Securities Exchange Act of 1934. U4LO3

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

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

A securities analyst reviewing a corporation's financial statements notes that the enterprise has total current assets of $10 million, inventory of $4 million, cash on hand of $2 million, total current liabilities of $8 million, and net income of $15 million. The company's acid-test ratio is closest to A) 1.00 to 1 B) 0.75 to 1 C) 1.25 to 1 D) 1.50 to 1

Answer: B. The acid-test ratio, also known as the quick asset ratio, is computed by subtracting the inventory from the total current assets and then dividing that remainder by the total current liabilities. In this case, that would be $10 million minus $4 million ($6 million) divided by $8 million, or .75%. U10LO7

The Investment Advisers Act of 1940 provides for an exemption from registration to investment advisers whose clients are residents of the state in which the adviser has its principal office and only place of business and who do not give advice dealing with securities listed on any national exchange (e.g., New York Stock Exchange). This exemption is denied to any investment adviser meeting all of the requirements, but having as a client A) a bank. B) a private fund. C) an accredited investor. D) an insurance company.

Answer: B. The intrastate exemption offered under the Investment Advisers Act of 1940 does not apply to an investment adviser with even a single private fund as a client. What about the insurance company exemption? First of all, that only applies when all of the IA's clients are insurance companies. Secondly, the question is asking about the intrastate exemption not exemptions in general. Another point is that, although there are cases where an investment adviser without a place of business in a state whose only clients are institutions like banks and insurance companies qualifies for an exemption under state law, this question deals with federal law. In addition, the question points out that this particular exemption (intrastate) applies only when the client resides in the same state as the IA's principal office. U1LO3

Which items would change if a company declared a cash dividend? I. Working capital II. Total assets III. Total liabilities IV. Shareholders' equity A) I only B) I, III, and IV C) I, II, III, and IV D) I and IV

Answer: B. The key word is "declared." Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid. U9LO1 Note: I misread the questions! I missed that it was declared but not yet paid.

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions EXCEPT A) compensation is based on gains, less losses, for a period of no less than 1 year B) the client must meet certain minimum financial standards C) disclosure that the performance compensation may create an incentive for the adviser to take greater risks D) the formula used to calculate compensation includes realized capital losses and unrealized depreciation

Answer: C. Because these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to. The minimum net worth requirement is over $2.2 million, or a client is qualified if he has at least $1.1 million under management with the adviser. Any performance fee must take into consideration gains and losses, both realized and unrealized, and the performance period must be no less than 1 year. Please note: State-registered investment advisers must make this "incentive" disclosure so if the question asked about them, there would be no exception. U7LO1 Note: I incorrectly assumed that the IA would need to disclose C.

A registered broker-dealer is under common control with a registered investment adviser. An individual who is an agent of the broker-dealer and an investment adviser representative of the adviser has a client with $250,000 under an asset management program. The terms of the account call for discretionary power to be given for the account and all required forms have been received. In the opinion of the IAR, the purchase of 500 shares of RMBM common stock is an appropriate addition to the portfolio. The broker-dealer is a market maker in RMBM, and the sale will be made as a principal, a fact that is disclosed to the client on the trade confirmation. In this situation, the registered person has acted A) lawfully in that the disclosure of capacity was made on the confirmation B) unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity C) unlawfully in that any stock the broker-dealer is a market maker in is probably not suitable for a managed money client D) lawfully in that disclosure of capacity is not necessary when executing trades in managed accounts

Answer: B. The rules regarding investment advisers and account trading are much stricter than those for broker-dealers because of the fiduciary responsibility of the adviser. Even though the firm has discretionary power, any action that results in a transaction in which the firm or an affiliate acts in either a principal or agent capacity requires the adviser to provide written disclosure of that fact to the client and obtain approval from the client prior to completion of the transaction. U6LO1

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 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) 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 maintains an office in State B, but his only clients in that state are institutions.

Answer: 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.

Which of the following securities is NOT exempt from the registration procedures of the Uniform Securities Act? A) Common stock issued by a public utility company whose rates are subject to state regulation B) Variable annuities issued by an insurance company authorized to do business in this state C) General obligation bonds issued by a city located in this state D) Bonds issued by a church operating as a nonprofit organization under IRS Code Section 501(c)(3)

Answer: B. Variable annuities are not exempt from state registration because the payments from the annuity are dependent on the performance of a segregated fund invested in securities. Municipal securities and regulated public utilities are exempt from registration. Securities issued by religious and charitable organizations are exempt from registration under the USA. U4LO3

When the 91-day Treasury bill rate is 3%, an investor decides to purchase a 20-year corporate bond at par with a coupon of 8%. If the corporate bond does not pay as expected, the investor's potential loss is considered A) market cost B) opportunity cost C) duration risk D) purchasing power risk

Answer: B. When an investor forgoes the risk-free returns of the 91-day Treasury bill in favor of another investment, anything lost is considered the opportunity cost of passing up the sure thing. U11LO3

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following must be included in an advisory contract? I. Whether the contract grants discretionary power to the adviser II. The term of the contract III. A clause preventing assignment without consent IV. The formula used for computing the fee A) II only B) I, II, III, and IV C) I, II, and IV D) I and II

Answer: B. Written advisory contracts must disclose services provided; the term of the contract; the amount of the fee or the formula used to compute it; the amount of fee to be refunded, if any, if the advisory fee is prepaid and the contract is terminated; provisions as to whether the adviser has discretionary authority and to what extent; and provisions requiring consent of the client to assign the contract. U6LO4 Note: I got this one wrong because I wasn't sure about the clause preventing assignment without consent.

An investment adviser is preparing an advertisement. Which of the following would be acceptable? I. A testimonial on radio or TV from a celebrity who is a client of the firm II. Identifying his best investment recommendations for the past 6 months III. Offering to provide the firm's investment recommendations for the past 12 months IV. Promoting his system of charts and formulas while mentioning their limitations and difficulties A) I and II B) III and IV C) I, III, and IV D) II and III

Answer: C. Any mention of investment recommendations in any adviser advertisement must always include all recommendations (not just good ones) made over the course of the last 12 months. If the adviser uses charts or formulas, any mention of them must always include a statement to the effect that they have limitations and may be difficult to use. Testimonials are permitted from clients as long as disclosure is made of the compensation arrangements (if any). As is the case with any advertisement, the content must be fair and balanced. U6LO5 Note: I got this wrong because I assumed that a testimonial was prohibited so didn't pick I.

A sales agent who is only registered in State A works for a broker-dealer that is registered in all 50 states. A customer who is a resident of State B calls the agent in State A and offers to purchase securities. Under the Uniform Securities Act, the agent should A) accept the order because her broker-dealer is registered in all 50 states B) accept the order because it is unsolicited C) reject the order because she is not registered in State B D) accept the order because she received it in State A

Answer: C. Both the broker-dealer and the agent must be registered in each state where they plan to do business. Although the broker-dealer is properly registered, in order for the agent to accept the order, she must be registered in State B. Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident. U3LO5

Under which of the following circumstances may an Administrator revoke a state registered investment adviser's registration? A) The adviser has been declared mentally incompetent by a court of jurisdiction. B) The adviser is no longer in business. C) The adviser has been convicted of a nonsecurities-related felony. D) The adviser cannot be located after a reasonable search by the Administrator.

Answer: C. If an adviser committed a felony or participated in unethical business practices, its registration will be revoked, not canceled. An adviser's registration may be canceled if the adviser is found to be mentally incompetent, cannot be located, or is no longer in business. The difference between canceling and revoking a registration is subtle; cancellation is not punitive while revocation involves some sort of wrongdoing.

Ditherton, Wiggleman, and Jones, LLC, is an investment adviser with $2 billion in AUM. In appreciation for the large volume of brokerage transactions directed their way, Alexander Wimpton and Sons, Members of the NYSE, offer to send Mr. Ditherton on an all expense trip to Zurich to attend a seminar covering the latest developments in global investing. Under Section 28(e) of the Securities Exchange Act of 1934, A) Mr. Ditherton could not attend because the safe harbor under Section 28(e) only applies to domestic events B) Mr. Ditherton could attend because attendance at a business-related seminar such as this falls under the safe harbor provisions of Section 28(e) C) Mr. Ditherton could attend, but only if he paid all of the expenses except for those direct costs of the seminar D) Mr. Ditherton could attend, but only if he paid the direct costs of the seminar and let Wimpton and Sons take care of the transportation costs

Answer: C. Section 28(e) provides a safe harbor for soft dollar compensation from broker-dealers to investment advisers. Included is covering the registration fees of seminars related to the adviser's business. However, all transportation and personal expenses must be paid by the investment adviser. U7LO1

Which of the following securities are exempt from the registration provisions of the USA? I. Issue of a savings and loan association authorized to do business in this state II. General obligation municipal bond III. Bond issued by a company that has common stock listed on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) A) II only B) I only C) I, II, and III D) II and III

Answer: C. The USA exempts a number of different issues from registration, including securities issued by a bank, or anything that functions like a bank (e.g., a savings and loan or credit union). Securities issued by a governmental unit are always exempt. Securities listed on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) are part of a group known as federal covered securities that also includes those listed on the New York Stock Exchange and Nasdaq Stock Market issues. If the common stock is listed, then any security of that issuer that is equal or senior in claim to the common is also considered exempt. U4LO3

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

Answer: C. The most common yield curves are drawn using U.S. Treasury securities. The curve is plotted using maturities ranging from the short-term T-bills to the long bonds. There are other curves drawn with bonds from other sectors, such as corporate bonds, to show the yield spread, but that is going beyond the scope of this question. U8LO4 Note: I guessed B

Following the advice of its portfolio managers, the Rising Tide hedge fund executes most of its securities transactions through Momentum Securities, a registered full-service broker-dealer. In order to compensate for the commissions charged, Momentum Securities allows employees of Rising Tide to use its furniture and facility at a discounted rate. Under the soft-dollar provisions of Section 28(e), A) as long as the discounted rate reflected the volume of business done by Rising Tide, this would be permitted B) this would fall under the safe harbor C) this would not fall under the safe harbor D) this would not fall under the safe harbor provisions unless the employees were those who directed the transactions to Momentum Securities

Answer: C. The use of furniture or office facilities is not included in the list of safe harbor items, regardless of the roles employees of the fund play. U7LO1

The Investment Advisers Act of 1940 requires that investment advisers make certain disclosures to their customers through the delivery of the adviser's brochure. However, there are instances where the act grants an exemption if the client is I. a broker-dealer II. an insurance company III. an investment company IV. a person receiving impersonal advice for which the annual fee is less than $500 A) I, II, and III B) I, II, III and, IV C) III and IV D) I and II

Answer: C. There are two exemptions from the brochure rule. The first is if the client is an investment company. The other is if the advice being rendered is impersonal and the charge is less than $500 ($500 as well under the USA) per year. U6LO4

An investment adviser representative of a federal covered investment adviser that provides advisory services to State A would not trigger the "pay-to-play" prohibition against the firm receiving compensation from that state for advice as long as the IAR contributed no more than A) $500 per election cycle for a candidate that IAR was eligible to vote for B) $350 per election cycle for a candidate that IAR was ineligible to vote for C) $350 per election cycle for a candidate that IAR was eligible to vote for D) $250 per election cycle for a candidate that IAR was ineligible to vote for

Answer: C. There is a de minimis level that is considered an exception from the pay-to-play restriction on investment advisers for political contributions. If the covered employee can vote for the person, the maximum contribution is $350 per election cycle. If the covered employee cannot vote for the person, the maximum contribution is $150 per election cycle. U7LO6

The consumer price index is best described as A) a measure of transactions between a country and the rest of the world over a period of time, usually a year B) the inflation rate for a given period of time C) an unbiased estimate of changes in the cost of living D) a weighted average cost for a basket of goods and services

Answer: D. The consumer price index (CPI) is the average cost of a basket of goods and services, weighted to represent the purchases of a typical household and indexed to a reference base period. The inflation rate is a percentage change in a price index such as the CPI. The balance of payments tracks transactions between a country and the rest of the world over a period of time, usually a year. U8LO3

Which of the following statements regarding the Investment Advisers Act of 1940 and the adviser's brochure is CORRECT? A) Each client must receive the brochure no later than 48 hours after entering into the advisory contract. B) Advisers must deliver the brochure to clients for whom they offer impersonal advisory service only when the annual charge does not reach $500. C) Each client must receive the brochure no later than the entry into the advisory contract. D) Annual delivery of a summary of material changes relieves the adviser of the obligation to deliver a brochure.

Answer: C. There is no 48-hour rule under federal law, as there is for state law, and in any event, that law has a 48-hour in advance requirement. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The summary includes an offer to provide a copy of the updated brochure and information on how the client may obtain it. Only when the charge for the impersonal advice is $500 per annum or more is there a requirement to deliver the brochure. U6LO4

Under state law, the registration of an agent of a broker-dealer is in effect until A) the last day of his employer's fiscal year B) withdrawn by the agent or revoked by the Administrator C) December 31, unless renewed D) the anniversary of initial registration

Answer: C. Under state law, registrations for broker-dealers, agents, investment advisers, and investment adviser representatives expire on December 31 of each year, unless renewed, withdrawn or canceled. U3LO5

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

Answer: C. 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.

The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? I. An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only II. An adviser with a place of business in the state whose total fee income in the state amounts to $150 III. An adviser with no place of business in a state who only provides advice on fixed annuities IV. An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of 1940 A) I, II, and III B) I only C) I and II D) I, II, and IV

Answer: C. Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable. U1LO5

Which of the following statements are TRUE? I. When an investment adviser representative begins or terminates employment with an adviser registered under the USA, only the investment adviser must notify the Administrator. II. When an investment adviser representative begins or terminates employment with a federal covered adviser, only the investment adviser representative must notify the Administrator. III. When an agent of a broker-dealer leaves the firm, only the broker-dealer must notify the Administrator. IV. When an investment adviser representative or a registered agent of a broker-dealer terminates employment, notice must be given to the Securities and Exchange Commission. A) I and III B) II and IV C) I and II D) III and IV

Answer: C. When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. However, when an agent of a broker-dealer begins or terminates employment, both the agent and the broker-dealer must promptly notify the Administrator. Notice to the SEC is not required. U3LO5 When an IAR leaves a... State reg IA: IA gives notice to Administrator Fed cov IA: IAR gives notice to Administrator When an agent leaves a... BD: both IA and IAR give notice to Administrator SEC is never notified

Construction of an investment policy statement (IPS) requires identifying the client's objectives and constraints. Which of the following would not be in the list of constraints? A) Liquidity B) Taxes C) Risk tolerance D) Time horizon

Answer: C. When constructing an investment policy statement (IPS) risk tolerance is an objective, not a constraint. Time horizon, taxes, and liquidity are all constraints. An easy way to remember the five constraints is TTLLU (time horizon, taxes, liquidity, laws, unique).

On the initial public offering, an investor buys a $10,000 Aa-rated, 20-year corporate bond with a 4% coupon rate. One year later, the prevailing market rate is 5% and the bond has had its rating increased to Aa1. Which of the following is most likely TRUE with reference to the current market price of this bond? A) Par value B) Premium C) Discount D) Cannot be determined from the information given

Answer: C. When interest rates go up, bond prices go down. Had interest rates remained the same, the slight improvement in rating would have probably caused the bond to sell at a very slight premium, but that rating increase is not nearly strong enough to offset a 25% increase in market interest rates. U13LO10 Note: Badly structured question IMO. How are we supposed to know the magnitude of price benefit to a rating increase? It's not covered in the material.

The compliance rules of the Investment Advisers Act of 1940 require all of the following EXCEPT A) appointment of a chief compliance officer (CCO) B) written compliance policies and procedures C) independent review of an advisory firm's compliance procedures D) annual compliance review

Answer: C. While the rules require annual compliance reviews, such reviews may be conducted internally by the firm's appointed chief compliance officer rather than an independent party. The rules require written policies and procedures, an annual compliance review, and the appointment of a chief compliance officer (CCO). U7LO6 Note: I incorrectly assumed the annual review had to be independent.

Which of the following is TRUE regarding a state Administrator's authority? A) The Administrator's subpoena power covers that state only where officiating. B) If a specific securities transaction meets the USA's definition of "exempt transaction," the Administrator does not have the power to void that exemption. C) With certain limited exceptions, the Administrator has authority over any transaction made in the state where officiating. D) The Administrator may suspend an agent's license based solely on the public good doctrine.

Answer: C. With certain limited exceptions, a state Administrator has jurisdiction over securities transactions conducted in the officiating state. The Administrator may issue subpoenas or otherwise conduct inspections of records in states other than where officiating if circumstances warrant. Such inspections may be made if the Administrator deems doing so to be in the public's interest. A person's license can only be suspended when it is in the public interest AND a specific provision of the act or rules has been violated. Only in the case of a transaction involving a federal covered security does the Administrator not have the power to void the exemption. U5LO1

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

Answer: D. 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.

ABC Securities is a broker-dealer registered with the SEC and domiciled in State M. ABC Securities would not be defined as a broker-dealer in State N under the Uniform Securities Act if it had no offices in State N and I. its only clients were insurance companies II. it had contact with fewer than 6 State N residents in any 12-month period III. its only solicitation of State N residents was through radio advertisements originating in State M but received in State N IV. it occasionally engaged in firm commitment underwriting with issuers based in State N A) I and II B) III and IV C) II and III D) I and IV

Answer: D. A broker-dealer with no office in the state is not defined as a broker-dealer in that state if its only business is with institutions, other broker-dealers, and issuers when engaged in underwriting their securities. There is no de minimis exemption, and any solicitation of individuals into the state, whether in person or by radio, television, or any publication, requires registration in the state. U3LO5 Note: I initially chose A.

Western Securities, Inc. (WSI) is a broker-dealer that also offers portfolio management. One of WSI's portfolio managers notices an article on asset allocation that harmonizes with WSI's investment philosophy. If WSI should post a link to this article on its website, it would probably be considered A) estrangement B) entanglement C) fulfillment D) adoption

Answer: D. A firm will be responsible for the content of a linked third-party site if the firm "adopts" its content on any of the firm's sites. Adoption is defined as a firm's endorsement of the content of a third-party site. This is not illegal, but the firm is responsible for the content of the linked information and must be sure that it complies with the firm's policies. Entanglement is adoption taken one step further. This is when the firm (or one of its representatives) contributes to the third-party information and then posts it. U6LO5 Note: I got this one correct, but putting it here for review.

The primary purpose of the securities registration requirements of the Uniform Securities Act is to ensure that proper disclosure is made available to potential investors. However, not all securities are required to register. Which of the following qualify for an exemption from registration under the act? A) Commercial paper with no more than 9 months to maturity that is in 1 of the 3 highest ratings by a nationally recognized rating agency and in a minimum denomination of $10,000 B) Equipment trust certificates issued by railroads whose rates are not subject to regulation by a state or federal agency C) Bonds that are obligations of the People's Republic of North Korea D) Common stock issued by life insurance companies authorized to conduct insurance sales in that state

Answer: D. A security issued by a life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads under the jurisdiction of other state or federal regulators carry an exemption from state securities registration for their equipment trust certificates, but if the railroad is not regulated (the case here), the exemption does not apply. The commercial paper would qualify if the denomination was $50,000 instead of $10,000. The exemption for foreign government securities only applies to those countries with which the United States maintains diplomatic relations. At the time of this writing, North Korea is on a very short list of countries who do not qualify.

There are a number of different ways in which a business may be structured. For tax purposes, which form is taxed on its income? A) S corporation B) LLC C) General partnership D) Sole proprietorship

Answer: D. A sole proprietorship's income is taxed on the owner's Form 1040. Specifically, Schedule C of the Form 1040 is used to report income (or loss) from a sole proprietorship. Partnerships, LLCs, and S corporations are flow-through entities. They file information returns and send a Schedule K-1 to each owner indicating the amount of taxable income (or loss) to be reported by that owner who then is responsible for any tax consequences. U21LO6

NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. As far as the topic of compensation is concerned, which of the following must be disclosed? I. Transaction-based compensation, such as commissions on recommended securities II. 12b-1 trails on no-load mutual funds in the client's portfolio III. Expenses reimbursed by third-party sources IV. Compensation-sharing arrangements between the investment adviser and its representatives A) I and III B) I, II, III, and IV C) III and IV D) I ,II, and III

Answer: D. ALL forms of compensation, whether direct or indirect, must be disclosed. However, the method by which an adviser pays its representatives is an internal matter and not for public disclosure. U7LO1 Note: I didn't think 12b-1 trails would be included, but I was wrong.

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

Answer: D. According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it is a dishonest or unethical business practice to execute a transaction on behalf of a customer without authorization to do so; share in profits or losses in the account of any customer without the written authorization of the customer and the broker-dealer that the agent represents; and split commissions or profits from the purchase or sale of securities with any person not also registered as an agent for the same broker-dealer, or a broker-dealer under direct or indirect common control. It would likely be considered dishonest or unethical for an agent to sell securities that possess high probabilities of loss and low probabilities of gain. U7LO4 Note: I got this wrong because I guessed that IV could in some circumstances be OK depending on the $ magnitude of gains and losses.

A fundamental analyst is reviewing a company's financial statements. When attempting to determine their debt exposure, all of the following would be included EXCEPT A) taxes payable B) accounts payable C) outstanding principal balance on long-term debt D) accounts receivable

Answer: D. Accounts receivable are assets; all the other listings represent liabilities of the company. U9LO1 Note: I assumed A/R would be considered an asset used to cover debt. Wrong.

A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust? A) $1,500 B) $10,000 C) $4,500 D) $6,500

Answer: D. All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust's DNI. The computation is: $1,500 in taxable interest + $2,000 in dividends (reinvestment means nothing here) + $3,000 in tax-exempt interest. This is a total of $6,500 of DNI. When distributed, only $3,500 will be taxable. U21LO5

Which of the following is NOT an accredited investor? A) An individual whose income was greater than $200,000 in each of the 2 most recent years with a reasonable expectation of reaching that level again this year. B) A registered open-end investment company with net assets of $600,000. C) Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million. D) An individual with a net worth, including the value of her primary residence, that is greater than $1 million.

Answer: D. An accredited investor can take different forms: an individual with a net worth, excluding the value of the principal residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past 2 years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501.

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

Answer: D. Any material change that affects an investment adviser's ADV must be filed promptly with the SEC (or Administrator if state-registered) and a change of address would certainly be material. U1LO5

Under the Uniform Securities Act, which of the following would be least likely to be civilly liable for making false registration statements, using a prospectus that is untrue, or failing to meet the prospectus delivery requirements of the act? A) Every underwriter of the security B) Any and every person who has signed the registration statement C) Every expert who is named in the registration statement D) Every stockholder named in the registration statement

Answer: D. Anyone who has signed the registration statement, anyone who is named in the statement as an expert, and every underwriter may be liable to the purchasers of the securities if the statement contains false information. Although a registration statement contains the names of stockholders who own 10% or more of the issue, they are not liable unless they fall into one of the other categories (officer, director, or expert). Anyone who sells the underlying security without providing a valid prospectus, uses a prospectus that is false, or omits material information is also civilly liable to the purchaser. U4LO3

A broker-dealer publishes a list of securities it approves for inclusion in IRAs. This means A) an agent for the broker-dealer can place these in clients' IRAs knowing that the suitability requirements have been met B) the broker-dealer has consulted with the regulatory bodies and has received approval from them to recommend these securities for IRAs C) the broker-dealer has committed an unethical business practice because use of the word approved is prohibited D) the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning

Answer: D. Approved is an odd word in this industry. It can never be used with reference to any regulator commenting on the status of a security or an individual. However, a broker-dealer creating an approved list of securities is not unethical or prohibited as long as it is clear that it is the BD and not any regulator granting the approval. Even though the firm has listed these securities as suitable for IRAs, that does not relieve the individual agent of verifying the suitability for each client for whom they are recommended. U6LO2

Which of the following conditions would most likely meet compliance standards of state regulators? A) Only those in a supervisory role need to recognize the difference between business and nonbusiness communications. B) At a minimum, a firm that permits use of social media sites must hold biannual training as part of its continuing education obligations. C) Maintaining an under-the-radar system of monitoring social media use by its agents is permissible when determining compliance with NASAA's rules. D) Both supervisory personnel and agents need to understand the difference between interactive and static content.

Answer: D. Before allowing associated persons to use social media for business purposes, a firm's policies and procedures must provide for personnel training and education relating to the parameters of permitted use. Both supervisory personnel and agents need to understand the difference between interactive and static content, between business and nonbusiness communications. A firm should consider requiring training in the use of social media prior to permitting use. At a minimum, a firm that permits use of social media sites must hold annual training as part of its continuing education obligations. U6LO5

Which of the following statements regarding Coverdell ESAs and QTPs is NOT correct? A) Coverdell ESAs are designed to offer tax benefits to those individuals who wish to save money for a child/grandchild's higher-education expenses. B) If a portion or all of the withdrawal from a QTP is spent on anything other than qualified higher-education expenses, the the recipient of the money (the owner or the beneficiary) will be taxed at their own tax rate plus a 10% penalty on the earnings portion of the withdrawal. C) QTPs are extremely useful tools that provide significant tax savings, allow for substantial investments for a child's education and provide a tool for avoidance of gift and estate taxes, if used correctly. D) Coverdell ESAs currently permit up to $5,000 in annual contributions, whereas QTPs allow large contributions reaching as high as $250,000 and above.

Answer: D. Coverdell ESAs currently permit up to $2,000 in annual contributions, whereas QTPs (Section 529 plans) allow large contributions reaching as high as $250,000 and above. U24LO6

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) Become licensed as a broker-dealer B) Pass an oral or written examination C) Comply with the notice filing requirements of the state D) Register as an investment adviser representative in State B

Answer: 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.

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

Answer: D. Investing activities include transactions and events involving the purchase and sale of securities, land, buildings, equipment, and other assets not generally held for resale as a product of the business. The proceeds from issuing securities (stocks or bonds) is a financing activity as is using funds to retire bonds and/or pay dividends. Cash receipts are included in cash flow from operating activities, even when it is generated through investments such as interest or dividends. U9LO2

Federal covered securities, as defined under the Uniform Securities Act, A) must be registered with the SEC before they can be offered in the state B) would not include securities senior to a common stock listed on the NYSE C) must be registered in the state before they can be offered within the state D) include shares of an investment company registered with the SEC under the Investment Company Act of 1940

Answer: D. It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are exempt from registration in any state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings to be sold in the state. If the common stock is a covered security, as one listed on the NYSE would be, then any security with a senior claim, such as preferred stock or bonds, would also be considered federal covered. U4LO3

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

Answer: 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.

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

Answer: 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

When registering a security under the Uniform Securities Act, the registrant must indicate all of the following EXCEPT A) the amount of securities to be offered in the state B) all other states in which the security is to be registered C) adverse rulings by a court, regulatory authority, or the SEC with respect to the offering D) the effective date of the offering

Answer: D. The effective date is determined by the state Administrator or the SEC, not the person registering the security. Registrants must indicate all other states in which the security is to be registered. The amount of securities to be offered in the state, for which a specific registration is sought, must be disclosed in addition to any adverse rulings related to the offering. U4LO3

With respect to the recordkeeping rules under the USA, which of the following statements is NOT correct? A) 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. B) 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. C) Investment adviser representatives have no recordkeeping responibiilties. 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.

Answer: 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.

Under the Investment Advisers Act of 1940, which of the following is considered an investment adviser? A) A person who publishes a regular newsletter of advice on U.S. Treasury bonds and other U.S. government securities B) A syndicated columnist who gives weekly reports and recommendations on investments C) The trust officer of a commercial bank who manages investment accounts for clients D) A lawyer who specializes in consulting on investing in securities

Answer: D. Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment adviser. Under the federal law, anyone giving advice dealing only with U.S. government securities is excluded from the definition, as are those who work for banks and trust companies. The lawyer is not excluded because the advice provided is not incidental to the profession; it is the lawyer's specialty. U1LO3

Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) Income from a sole proprietorship B) Wages and tips C) State income tax refunds D) Stock dividends

Answer: D. Stock dividends (dividends paid as additional shares of stock rather than in cash) adjust the investor's cost basis and don't come into play until the stock is sold.

Maria, age 49, was discussing with some coworkers the recent family vacation she took. She commented that she was able to afford it by taking a penalty-free withdrawal from her retirement plan. Based on that statement, Maria must be covered under A) a 403(b) plan. B) a defined benefit plan. C) a 401(k) plan. D) a 457 plan.

Answer: D. The 457 plan is unique in that it is the only tax-qualified retirement plan permitting withdrawals, for any reason, before reaching 59½ without penalty. All qualified plans have exceptions to the 10% penalty tax, but only the 457 allows the withdrawals for any reason. Even though there is no early distribution tax, Maria will still owe ordinary income tax on the amount withdrawn - the 457 benefit is only that there is no additional 10% tax. U24LO2

The Administrator in Texas has jurisdiction over an offer of securities made I. on a radio program originating in Texas II. on a radio program originating in Oklahoma III. in a newspaper circulated in Texas but published in Oklahoma A) I, II, and III B) III only C) I and II D) I only

Answer: D. The Administrator does not have jurisdiction over an offer made in a TV or radio broadcast that originated outside of the state. The same is true for a newspaper published outside the state. U5LO1

An agent is registered in New York and Vermont. While working in his New York office, he places a call to the cell phone of one of his New York clients and learns that the client happens to be on vacation in Ohio. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Indiana. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, which choice consists solely of Administrators who do not have jurisdiction? A) Indiana and Illinois B) New York and Indiana C) Ohio and Indiana D) Illinois and Ohio

Answer: D. The Administrator has jurisdiction from the state in which the offer originated (NY) and was accepted (IN). Mailing of the certificate is of no consequence. Ohio does not have jurisdiction because the client was merely traveling and the call was directed to the New York number. When the Uniform Securities Act was written in 1956, obviously, there were no cell phones, but there was a situation similar to this. The USA addresses the issue of forwarded mail and rules that the original address is what counts, not the state to which the mail is forwarded. NASAA applies that logic when an agent contacts a client on a cell phone. It is the home location of the owner of the phone that counts, not where the call is received. That changes when the client actively participates in the transaction from another state, in this case Indiana. U5LO1 Note: I got this wrong because I thought Indiana wouldn't have jurisdiction since the client was traveling/on vacation when the order was approved...wrong.

XYZ Securities, Inc., is a broker-dealer registered in the states of Alabama, Tennessee, Georgia, and Florida. The home office is in Birmingham, with branches in Nashville and Atlanta. One of their clients living in Miami feels that his Nashville-based agent has been churning the account. If a complaint is filed, which Administrator would have jurisdiction? I. Alabama II. Florida III. Georgia IV. Tennessee A) I and II B) II and III C) I and IV D) II and IV

Answer: D. The Administrator in the state of residence of the client would certainly have jurisdiction. It is also likely that the Administrator in the state where the agent is located would also have jurisdiction because all offers were being made from Nashville. The fact that the home office is in Alabama does not enter into the discussion. U5LO1 Note: I got this wrong because I focused on the home office location - AL - and not the state where the agent was churning.

The Investment Company Act of 1940 requires that a mutual fund do which of the following? I. Provide a monthly balance sheet to investors II. Have $100,000 minimum capitalization prior to making a public offering III. Provide semiannual reports to shareholders IV. Not acquire more than 5% of the outstanding shares of another registered investment company A) I and IV B) II and IV C) I and III D) II and III

Answer: D. The Investment Company Act of 1940 requires that an open-end investment company have a minimum of $100,000 in net assets prior to commencing a public offering. Reports must be sent to shareholders on a semiannual basis. No fund is permitted to own more than 3% of the outstanding shares of another registered investment company. U14LO1 Note: I couldn't remember whether it was 5% or 3% - guessed wrong

All of the following statements concerning an agency cross transaction for an advisory client are true EXCEPT A) an advisory client must provide prior written consent for the adviser to be able to engage in agency cross transactions B) an investment adviser must make prior written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties C) it is a transaction in which a person acts as an investment adviser in relation to a transaction in which the adviser or related person acts as a broker-dealer for both the advisory client and another person on the other side of the transaction D) an investment adviser may recommend the transaction to both parties to the transaction

Answer: D. The investment adviser handling an agency cross transaction may NOT recommend the transaction to both parties. An agency cross transaction is a transaction in which a person acts as an investment adviser in relation to a transaction in which the adviser or related person acts as a broker-dealer for both the advisory client and another person on the other side of the transaction. An advisory client must provide prior written consent for an adviser to be able to do agency cross transactions as part of his operating plan. An investment adviser must make written disclosure to the advisory client that it will act as broker-dealer for, have a potential conflict of interest with, and may collect commissions from both parties. U7LO6

Under the Uniform Securities Act, which of the following is NOT a requirement for a preorganization subscription to be an exempt transaction? A) No commission may be paid to anyone for soliciting potential subscribers. B) No payment may be made by any subscriber. C) There may be no more than 10 subscribers. D) The offer of the security may not be advertised.

Answer: D. There are three requirements for a preorganization subscription to qualify as an exempt transaction. A preorganization subscription may be advertised. U4LO3 Note: The 3 requirements are the other 3 choices: 1. no commission for soliciting subscribers 2. no payment made 3. no more than 10 subscribers

The Wrights live in Texas, where Maria Wright has had an extremely successful cattle business for a number of years. As a very generous person, how much money can Maria give to her spouse, a Canadian citizen, in 2019 without incurring gift tax consequences? A) $100,000 B) Unlimited C) $15,000 D) A limited amount because her spouse is not a U.S. citizen

Answer: D. Under current tax regulations, there is a limit to the amount of a gift that may be made to a noncitizen spouse. For 2019, that limit is $155,000, (the amount is never tested).

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) may receive commissions without registration B) need not register as an agent of the issuer under any circumstances C) must register as an agent of the issuer D) must register as an agent only if he will receive commissions or remuneration, either directly or indirectly related to the volume of sales

Answer: D. Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if commissions or other remuneration related to the sale are paid. Therefore, there are cases where the employee would have to register as an agent. When the individual is paid a straight salary for this work, no registration is required. U3LO4

Agent A with Firm Y and Agent B with Firm Z conduct a joint seminar. They agree to share the commissions on any resulting business. Under the Uniform Securities Act, which of the following statements regarding sharing commissions is CORRECT? A) Only an agent who makes a sale is eligible to earn a commission. B) Sharing commissions that are a result of a joint seminar is never permitted. C) In this instance, sharing of commissions could only be done with the approval of both firms. D) Sharing of commissions by agents of two unrelated firms is prohibited.

Answer: D. Unless an exception is granted by the Administrator, it is prohibited for an agent to share commissions with any person not also registered as an agent for the same or affiliated broker-dealer. U7LO4 Note: I got this wrong assuming this would be possible with consent of the 2 firms.

Unless an exemption applies, under the Investment Advisers Act of 1940, an investment adviser is required to A) furnish a statement of the total dollar amounts of securities bought and sold each year to customers B) furnish an audited balance sheet each year to customers for whom the advisor maintains custody C) maintain a bond for an amount based on the assets under management D) provide each advisory client with a brochure or a summary of material changes within 120 days of the end of its fiscal year

Answer: D. Unless an exemption applies (the client is an investment company or the adviser is providing impersonal advisory services costing less than $500 per year), SEC rules require that a brochure containing summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. The summary itself may be sent with instructions as to how to receive the entire brochure if the client desires. If there are no material changes, a brochure does not have to be sent. Under federal law, the balance sheet is only required when the IA requires or charges a substantial prepayment of fees (it is only state registered advisers who must supply balances sheets when maintaining custody). Bonding requirements apply only to state registered investment advisers. U6LO4

After an investigation, the Administrator wishes to have the registration of an investment adviser revoked. In order to do so, all of the following are true EXCEPT A) the investment adviser has a right to a hearing B) an appeal may be filed within 60 days of the final order C) the Administrator must be able to point to specific facts of law violated by the investment adviser D) the investment adviser may elect to withdraw its registration

Answer: D. Withdrawal is a form of non-punitive termination and cannot be employed once an investigation has begun. U5LO2

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

Any increase in the value of a variable annuity is taxed as ordinary income, never capital gain. In this case, there is no 10% penalty tax because the client is over 59½ years old. On the exam, all annuities are non-qualified unless the question states differently or there is a clue, such as being part of a 403(b) plan. U15LO5

What is an Affiliated Person w/r/t investment companies?

Any person directly or indirectly owning, controlling or holding with power to vote, 5% or more of the outstanding shares of the investment company.

L.A.T.E. exclusions. under the USA... would not be considered Investment Advisors...

L - lawyers A - accountants T - teachers E - engineers Are excluded from the definition of IA both for Federal and State purposes.

Describe the classes of mutual fund shares...

Classes distinguish how investors pay the sales charge (all other rights are the same across all classes). Class A: front-end load; usually lower operating expenses than Class B and C shares Class B: back-end load (CDSC) load paid at redemption Class C: level load; no load at purchase, usually 1% CDSC for one year then annual 12b-1 fees. Other possible classes on the test: Class I: for institutional investors only; usually lower fees and expenses Class R: sold only to participants in retirement plans, such as 401k, have no front or back-end load and usually 12b-1 fee.

What is CDSC?

Contingent deferred sales charge (or load). This is a back-end sales load charged to the investor when he redeems mutual fund shares. Usually this sales load declines over time and is down to zero after 6-8 years at which point they are converted to Class A shares. Commonly referred to as Class B shares.

Per the SEC, how does a mutual fund's Current Return differ from Total Return?

Current Return, as required by the SEC, is based only on income distributions over the past 12 months divided by the current share price. Any realized or unrealized capital appreciation/depreciations is excluded from current return calculation. CR = annual income / current offered price.

What is a DPP?

Direct Participation Program is a class of alternative investment, usually set up as a LP, allow the economic consequences of a business to flow through to investors. Any income or loss is considered passive to the investor. LPs pay no dividends, but instead pass income, gains, losses, deductions, and credits directly to investors (limited partners).

What is meant by "Substantial Prepayment of Fees" for Federal covered vs. State IAs?

Federal covered IA (IAA '40): MORE THAN $1,200 for 6 OR MORE months in advance State IA (NASAA model rule): MORE THAN $500 for 6 OR MORE months in advance Then IA must include audited balance sheet in latest Form ADV Part 2A

A client of an investment adviser needs a bridge loan and approaches the IA to see if the firm is interested. Because the IA is not in the business of lending money, a special agreement is drawn up specifying the terms of the loan. Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers A) the loan could be made if the IA was affiliated with a bank B) the loan could be made if the client was an institutional investor C) the loan could only be made after the advisory contract was terminated D) the loan would not be permitted under any circumstances

First of all, a "bridge" loan has nothing to do with a bridge. The client is not trying to cross over anything. The term is used to refer to a short-term loan to provide funds until permanent financing may be arranged. Now that we've got that out of the way, we can answer the question. Loans may never be made to clients unless the firm is in the business of lending money. Because this IA states that it is not their business model, the only way this loan could be made is if there was no adviser/client relationship. U7LO4 Note: IMO a really badly structured question. Why would an IA terminate an advisory contract in order to do a one-off bridge loan? Makes no sense. Why not just refer them to a lender??

What are the requirements under Uniform Securities Act states IAs for keeping records?

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.

What is a GRAT?

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

What is bond duration?

Measures the sensitivity of the price of a debt security to changes in interest rates. The greater the maturity, the greater the duration. It is basically a computation of the measurement of the time it takes for the cashflow to repay the invested principal (so, the lower the coupon, the longer the duration). For zero-coupon, the duration = time to maturity.

Can an IA be compensated based on capital gains?

No. Advisers are not allowed to be compensated solely on the basis of capital gains, regardless of how reasonable the share appears to be. Performance-based compensation is not generally allowed unless the client has a minimum under management (currently $1.1 million) or a substantial net worth (currently in excess of $2.2 million).

What is the relationship between a current Bond price and nominal yield? current yield? yield to maturity? yield to call?

Nominal yield is the coupon and is constant. Current yield is higher when bond is at a discount, CY is lower than NY when bond is at a premium. YTM is higher than CY when bond is at a discount because it includes the annualized portion of the discount. YTM is lower than CY when bond is at premium because the annualized premium reduces the yield. YTC is the highest when bond at a discount since it has the shortest term and vice-versa for premium price.

Define Current Yield...

Of a bond = annual coupon $ / current price $ Of a stock = annual dividend $ / current price $

What does Section 12b-1 of the Investment Companies Act of 1940 do?

Permits a mutual fund to collect a fee for promotion or sales-related activities in connection with the distribution of its shares. Usually a % of the fund's avg total NAV during the year. Cannot exceed 0.75% of net assets. If the fee is above 0.25%, the fund can not use the term "no-load." Disclosed in the fund's prospectus.

What is the de minimis exemption for IA registration?

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 as an IA in that state.

Understanding bond yield rankings

Ranking Yields from Lowest to Highest ----------------------------------------- Discounts Premiums ----------------------------------------- Nominal YTC CY YTM YTM CY YTC Nominal

What is hedge fund "2 & 20" mean?

Refers to typical hedge fund fee structure - 2% annual Mgmt fee and 20% when sold.

What qualifies under the Section 28(e) safe harbor provisions for soft-dollar compensation?

Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service.

What is the Ex-Date?

The ex-date is the first day on and after which, a purchaser of a stock is not entitled to a previously declared dividend (cash or stock).

Duration and bond price sensitivity

The general rule of thumb is that bonds with long-term maturities will have greater fluctuations in price than will short-term maturities, given the same move in interest rates. Furthermore, discounted bonds, with their lower coupon rates, have a longer duration than a bond selling at a premium and will respond more favorably to falling rates than will those premium bonds.

What is bond convexity?

The measurement of the curve that results when plotting a bond's price movements in response to changes in interest rates. (more accurate than duration, which is linear). If 2 bonds have the same duration, the one with the higher convexity offers greater interest rate risk protection.

What are Preemptive Rights?

The right of a COMMON shareholder in a corporation to have the first opportunity to purchase a new issue of that corporation's stock in proportion to the amount of stock already owned by the shareholder - so that their proportional ownership is not diluted. Preferred shares don't have preemptive rights.

What are the Investment Advisers Act of 1940 maintenance of books and records requirements?

The rule states the required records must be kept for 5 full years from the end of the fiscal year during which the last entry was made on the record. The first 2 years, records must be kept in the principal office of the adviser and the balance of the time, easily accessible. They are subject to SEC examination at any time.

Tax-Eqivalent Yield (for municipal bonds)

The tax-equivalent yield of a municipal bond is what a taxable bond yield would need to be to be equivalent return. It is calculated by dividing the bond's coupon rate by the complement of the investor's tax rate (1 - the investor's tax bracket). If the bond has a coupon of 4% and the investor is in the 20% bracket, the tax-equivalent yield is 4% divided by (1 - .20) or 4% divided by .80 = 5%.

The term Investment Counsel...

The term investment counsel may only be used by those IAs whose primary function is the rendering of investment advice with individual continuous monitoring of the accounts.

What is an unit investment trust (UIT)?

Type of pooled investment company. Unmanaged investment company organized under a trust indenture. Do not have a board of directors, do not employ an investment advisor, do not manage their portfolios (once compiled, the portfolio remains fixed), issues only redeemable securities called units or share of beneficial interest.

What are the dollar of AUM thresholds for state vs Federal IA registration?

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.

What is the minimum net worth of IA with Custody or Discretionary Power per NASAA Model Rule?

Unless an exception exists, requires an IA with custody of customer funds or securities to have a minimum net worth in the amount of $35,000. If the IA does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000. In the event the IA wishes to post a bond​ because it doesn't meet the net worth requirement​, ​it must be an amount determined by the Administrator based upon the number of clients and the total assets under management of the IA.

What are the rules around notifying the Administrator when an IAR begins or terminates employment? (state registered vs federal covered)

When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. Because IARs are never registered with the SEC, notice to the SEC is not required.

What is a Control Person w/r/t investment companies?

When owning or controlling more than 25% of outstanding shares of investment company.