Series 66 Practice Exam Review - for exams 2, 3, & 4

Which of the following have equity positions in a corporation? I. Common stockholders II. Preferred stockholders III. Convertible bondholders IV. Mortgage bondholders A) II and IV B) I and III C) I and II D) III and IV

C) I and II Common and preferred stockholders have equity or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners. LO 1.a

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

D) brokerage commissions. Not included in the fee disclosure documents are commissions, markups and markdowns, and advisory fees. LO 13.b

A prospect has primary investment objectives of current income and safety of principal. During the initial public offering of a closed-end government bond fund, an agent explains to the prospect that the fund invests in U.S. government-backed bonds, which are very safe as to principal, and plans to make monthly distributions. Little could therefore go wrong. Taken as a whole, this representation is .... A) misleading because government bonds experience considerable credit risk. B) accurate because the fund offers current income. C) accurate because the fund invests in government bonds. D) misleading because closed-end fund shares are subject to market pricing.

D) misleading because closed-end fund shares are subject to market pricing. Though parts of the agent's presentation are factually accurate, overall, the statements are misleading because the value of the fund is subject to unpredictable change. Closed-end funds can, and often do, trade below their net asset value, thus subjecting the customer's principal to risk. LO 3.b

One of the most important benefits of investing in index mutual funds is .... A) the ability to buy them on margin B) greater liquidity than other mutual funds C) generally lower minimum initial investment requirements than common stock funds D) their very low expense ratio

D) their very low expense ratio Because the function of the management of an index mutual fund is merely to mirror the designated index, the management charge is quite low. In addition, there is much less frequent trading in the portfolio which means lower commission expense. LO 17.d

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

A) excess return earned compared to its total risk. The Sharpe ratio is defined as a fund's excess return (fund's return exceeding the risk-free rate) divided by the total risk (standard deviation). LO 22.a

Under which of the following circumstances does NASAA allow an investment adviser to charge performance-based fees? I. The client must initially have $1.1 million under management or a net worth in excess of $2.2 million. II. Compensation paid in this way must be for gains reduced by losses. III. Disclosure must be made that the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee. A) II and III B) I, II, and III C) I and II D) I only

B) I, II, and III The NASAA Model Rule permits performance-based fees if the client has at least $1.1 million in assets under management or a net worth in excess of $2.2 million, provided the compensation is based on gains and losses. Unlike the Investment Advisers Act of 1940, under the NASAA Model Rule, state-registered advisers must make additional disclosures, including the incentive to take additional risk. LO 14.c

The powers of the Administrator include the ability to determine .... A) minimum net worth requirements for agents who exercise discretion. B) minimum net worth requirements for investment advisers. C) surety bond requirements for investment advisers who do not exercise discretion or maintain custody. D) maximum net capital requirements for broker-dealers.

B) minimum net worth requirements for investment advisers. The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. If the investment adviser does not exercise discretion (or maintain custody), no surety bond is required. Agents who exercise discretion may need a surety bond, but not a minimum net worth. LO 9.f

A portfolio that has a negative correlation coefficient relative to the market will .... I. decrease in value as the market declines II. increase in value as the market declines III. decrease in value as the market goes up IV. increase in value as the market goes up A) I and III B) I and IV C) II and III D) II and IV

C) II and III A negative correlation coefficient indicates that the portfolio's value will move in the opposite direction of the market. A positive correlation indicates the portfolio's value will change with the market. LO 20.g

If a security has an anticipated return of 8.7% and a standard deviation of 14.6%, you would expect the returns to have a 95% probability (assuming a normal distribution) of falling between .... A) −5.9 and +23.3% B) 0 and 37.9% C) 8.7 and 23.3% D) −20.5 and +37.9%

D) −20.5 and +37.9% A security with a normal distribution has a 95% probability of falling within 2 standard deviations of its anticipated return. In this case, that would be −20.5% and +37.9%, which is computed by calculating return movements of 29.2% (14.6 × 2) in either direction. LO 20.f

An investor looking for liquidity would be least likely to consider ... A) REITs. B) NFTs. C) ETFs. D) CEFs.

B) NFTs. NFTs are nonfungible tokens and, because they are nonfungible, their liquidity is limited. CEFs (closed-end funds) and ETFs (exchange-traded funds) are highly liquid. Although there are nontraded REITS, for exam purposes, all REITs are considered to be publicly traded unless something in the question indicates otherwise. LO 5.h

Under the Uniform Securities Act, the Administrator may require a broker-dealer to post a surety bond of .... A) $10,000. B) an amount not in excess of that set by the SEC. C) $25,000. D) $50,000.

B) an amount not in excess of that set by the SEC. Unlike investment advisers where the USA specifies posting a surety bond in the amount of $35,000, the Uniform Securities Act does not specify an amount for broker-dealers. However, the NSMIA states that the Administrator may not require a broker-dealer to be bonded in an amount above that set by the SEC. Furthermore, bonds will not be required of broker-dealers that maintain a specified net capital. LO 11.e

Riley, as an investor, prefers to be on the lower end of the efficient frontier. We would expect to see which of the following risk and return combinations? A) High risk and low return B) Low risk and medium return C) Low risk and low return D) Low risk and high return

C) Low risk and low return The lower end of the efficient frontier includes low-risk and low-return portfolios. The higher end includes high-risk and high-return portfolios. It is all about the risk-reward ratio - the more risk the investor is willing to assume, the higher the potential rewards. LO 21.g

Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144? A) Unregistered stock acquired by a corporate affiliate in a stock option program B) Stock acquired by a corporate affiliate in a private placement C) Unregistered stock acquired by a nonaffiliate under an investment letter D) Stock acquired on the NYSE by a corporate affiliate

D) Stock acquired on the NYSE by a corporate affiliate The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions. LO 1.e

Selmer Jones has just inherited some money and wants to set some of it aside for a vacation in Hawaii one year from today. His bank will pay him 5% interest on any funds he deposits. In order to determine how much of the money must be set aside now and held for the trip, he should use the 5% as a .... A) opportunity cost. B) required rate of return. C) nominal rate of return. D) discount rate.

D) discount rate. This is a present value question. Selmer needs to figure out how much the trip will cost in one year, and use the 5% as a discount rate to convert the future cost to a present value. Thus, in this context the rate is best viewed as a discount rate. Although you would never have to compute it, for each $1,000 Selmer needs, he would have to put away $952.38 (the present value of $1,000 at 5% in 1 year). LO 20.a

Under the USA, all of the following statements are true regarding investment advisory contracts except .... A) they must be in writing. B) they cannot be assigned without customer approval. C) they can allow fees to be performance related only under certain limited circumstances. D) they cannot allow for prepaid advisory fees.

D) they cannot allow for prepaid advisory fees. Nothing in the USA prohibits prepaid advisory fees. The contract must describe the nature of these fees and the circumstances, if any, under which any or all of the prepaid fee may be returned in the event of early cancellation of the contract. The USA requires initial and renewal contracts to be in writing and to state that assignment may take place only with the client's consent. There are certain circumstances, such as an investor with a net worth of at least $2.2 million, where performance-based fees are permitted. LO 13.e

The minimum face amount of a negotiable CD is .... A) $50,000. B) $100,000. C) $10,000. D) $25,000.

B) $100,000. Negotiable CDs are issued in the minimum face amount of $100,000. These are called jumbo CDs and are usually traded in blocks of $1 million or more. LO 2.f

An investor purchases two PMJ Dec 16 calls at $0.85. If the commission charge is $8, the total cost is .... A) $328. B) $178. C) $188. D) $93.

B) $178. A premium of 85 cents per share means each contract has a cost of $85. There are two of them, making that $170. Adding the $8 commission brings the total to $178. LO 4.e

Mary Huggins is the ex-wife of Charlie Huggins. They were married for 12 years and then finalized a divorce. Charlie is now 70 and has begun taking his Social Security benefits. Mary remarried last year. It would be correct to state that .... A) Mary is entitled to Charlie's Social Security benefits only when she reaches full retirement age. B) Mary is entitled to Charlie's Social Security benefits or those of her new husband, whichever is the greater. C) Mary is entitled to full spousal benefits because they were married for at least 10 years. D) Mary is not entitled to any of Charlie's Social Security benefit.

D) Mary is not entitled to any of Charlie's Social Security benefit. When a couple has been married for at least 10 years, the ex-spouse is entitled to full spousal Social Security benefits unless remarried. By remarrying, Mary no longer has any claim on Charlie's Social Security benefits. LO 17.c

NASAA has a Model Rule dealing with sales of securities at financial institutions. The rule applies exclusively to broker-dealer services conducted by broker-dealers on the premises of a financial institution where retail deposits are taken. Under the rule, financial institution means federal and state-chartered banks, savings and loan associations, savings banks, and credit unions. No broker-dealer shall conduct broker-dealer services on the premises of a financial institution where retail deposits are taken unless the broker-dealer complies initially and continuously with all of the following requirements except .... A) being under common control with the financial institution. B) attempting to obtain written acknowledgement from customers that they have received and read the disclaimers. C) disclosing both in writing and orally to customers that the investments being sold are not FDIC insured, may lose value, and are not obligations of the financial institution. D) making a reasonable attempt to be in a location physically distinct from that where retail deposits are taken.

A) being under common control with the financial institution. It is a NASAA Model Rule that broker-dealers operating on the premises of a financial institution make certain disclosures. Every attempt should be made to locate separately from the banking operation and to obtain something in writing from the clients indicating that they have received the disclosures. It is not necessary that there be any relationship between the BD and the institution other than a business one. LO 14.j

One method of securities registration under the Uniform Securities Act is qualification. The effective date of a security registered using this method is .... A) when so ordered by the Administrator. B) within 2 business days of the filing of maximum and minimum proposed offering prices. C) by noon of the 30th day following the filing of the application. D) when the offering is made effective by the SEC.

A) when so ordered by the Administrator. Registration by qualification becomes effective on the date set by the Administrator. It is the registration of a security by coordination, where the effective date is contingent upon SEC effectiveness. Coordination also has the requirement of submitting the maximum and minimum offering prices at least two business days before the effective date. It is the registration of securities professionals that is effective at noon of the 30th day after the filing of a complete application. LO 8.g

Which of the following is (are) advantages of irrevocable insurance trusts? I. Provide estate liquidity. II. Insurance proceeds are removed from the estate of the insured for tax purposes. III. The insured has the flexibility to alter the trust arrangements. IV. Once set up, no changes may be made. A) II and IV B) I and II C) I and III D) III and IV

B) I and II As with all life insurance, the proceeds are available almost immediately upon death providing estate liquidity. When done properly, the proceeds of the policy are not included in the deceased's estate, thereby saving estate taxes. The trust is irrevocable—no changes can be made, and this is one of the few disadvantages. LO 16.e

The regulators are concerned when a broker-dealer operates on the premises of a financial institution. However, the rules only apply when which of the following activities takes place on those premises? A) Personal loans are made B) Retail deposits are taken C) Safe deposit boxes are available D) Mortgage loan applications are accepted

B) Retail deposits are taken Because of the potential for misunderstanding the difference between bank retail products (savings accounts, CDs, money market checking accounts) and brokerage accounts, the rules on BDs operating on the premises of a financial institution apply only when that location accepts retail deposits. In most cases, these other activities will take place, but it is the accepting of retail deposits that triggers the "on the premises" rule. LO 14.j

Which of the following statements about balance sheets are true? I. Balance sheets provide a snapshot of a company's financial position on a given date. II. Balance sheets represent the relationship between a company's assets, liabilities, and stockholders' equity. III. Balance sheets provide a record of a company's earnings over a given period. A) II and III B) I and II C) I, II, and III D) I and III

B) I and II A balance sheet shows a company's assets, liabilities, and stockholders' equity on a specific date. The financial statement that reflects a company's operating activities and earnings over a period of time is the income statement. LO 7.a

An agent receives a check in the mail from a client. The check was made out to the agent in error and the client who has left the country cannot be reached for several weeks. To prevent a margin call, the agent deposits the check in his personal account and simultaneously deposits a check for the same amount into the client's account. The state Administrator would consider this action to be which of the following? I. Prohibited. II. Permissible. III. Commingling. IV. Borrowing. A) I and IV. B) I and III. C) II and IV. D) II and III.

B) I and III. The agent has violated the Policy by commingling client funds with his personal funds. This practice is prohibited regardless of the situation. LO 14.e

Which of the following accounts can only be opened by spouses? A) Tenants in common B) TOD accounts C) Tenants in the entirety D) Tenants with right of survivorship

C) Tenants in the entirety The unique characteristic of a tenants in entirety account is that it can only be opened by spouses. Each of the others can be opened jointly by any legal persons. LO 16.a

Over the past 5 years, an investor's portfolio has shown returns of 6%, 4%, 11%, 10%, and 4%. Which of the following statements is correct? I. The mean return is 7%. II. The median return is 6%. III. The mode is 4%. IV. The range is 7%. A) I and II B) III and IV C) I, II, III, and IV D) I, II, and III

C) I, II, III, and IV The mean is the average return. Add these 5 numbers together, and the total is 35% over a 5-year period. That is an average (or mean) return of 7% (35 divided by 5). The median is the return that has as many above as below and, in this case, would be 6% (4, 4 below and 10, 11 above). The mode is the return that appears the most often and, with 2 of the 5 at 4%, that is the mode. The range is the difference between the highest and lowest returns. In this case, from the high of 11% to the low of 4% is a range of 7%. LO 20.d

A 3x leveraged fund priced at $42 tracks an index that is up 2% one day and then down 3% on the next day. What should this fund be approximately priced at following these two volatile days? A) $40.50 B) $43.18 C) $45.86 D) $41.55

A) $40.50 Starting with the $42 purchase price, a 2% increase to the index on Day 1 equals $0.84 up (0.02 × $42 = $0.84). Given the 3x leverage, this would equate to a $2.52 increase on Day 1 (3 × $0.84 = $2.52). At the start of Day 2, the fund would be priced at $44.52 ($42 + $2.52 = $44.52). On Day 2, the index falls by 3%. A 3% decrease in the fund equals $1.34 [0.03 × $44.52 ($1.3356 rounds up to 1.34)]. Again due to the 3x leverage structure of the fund, the $1.34 decrease equates to a $4.02 drop in the fund price (3 × $1.34 = $4.02). Therefore, after the two volatile days, the fund should be priced at approximately $40.50. LO 5.c

Although bonds are issued by many different entities, most of their features are the same. With few exceptions, included in that list of similarities would be all of these except .... A) a stated maturity date. B) a stated interest date. C) safety of principal. D) price movement that is inverse to interest rates.

C) safety of principal. The safety of principal largely depends on the issuer. For example, there are no bonds as safe as U.S. Treasury bonds. On the other hand, there are some corporate bonds that are quite speculative. In general, all bonds have a stated maturity date , interest rate, and interest payment date, and they are exposed to interest rate risk. That is the risk that as interest rates rise, the price of the bonds will decline. LO 2.a

All of the following would be prohibited practices under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers except .... A) maintaining custody of a customer's funds and securities without notification to the Administrator. B) charging fees that are higher than customary but offering a performance guarantee to compensate for the higher fees. C) borrowing money from an existing client who is an accredited investor. D) accepting an order from a client's spouse shortly after receiving a written trading authorization.

D) accepting an order from a client's spouse shortly after receiving a written trading authorization. With written trading authorization, orders may be accepted from the designated person. The NASAA Model Rule requires that investment adviser advertisements comply with the Investment Advisers Act of 1940. Borrowing money from clients is permitted only when the client is in the lending business. Being an accredited investor does not indicate that the person is a money-lender. Performance guarantees are never permitted, and custody always requires notification to the Administrator. LO 14.g

The NASAA Model Rule on Business Continuity and Succession Planning requires that every investment adviser (IA) establish, implement, and maintain written procedures relating to a business continuity and succession plan. The rule requires that .... A) double authentication methods be used to protect data. B) the adviser use offsite servers. C) all data be properly encrypted. D) the plan be reasonable in relation to the IA's business model and size.

D) the plan be reasonable in relation to the IA's business model and size. The Model Rule specifically requires that the plan be based upon the facts and circumstances of the investment adviser's business model, including the size of the firm, type(s) of services provided, and the number of locations of the investment adviser. All the other choices refer to cybersecurity requirements. LO 14.m

Which of the following are required in order to be in compliance with the recordkeeping requirements of the Uniform Securities Act? I. Broker-dealers must maintain customer ledgers for three years. II. Investment advisers must keep partnership records for three years after the partnership is terminated. III. Agents must keep customer records for three years. IV. Investment adviser representatives must maintain records for five years. A) I and II B) III and IV C) I, II, III, and IV D) II and IV

A) I and II Recordkeeping requirements for broker-dealers are three years, and partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of an investment adviser and of any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. There are no recordkeeping requirements for agents or IARs. LO 11.f

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 90 days. B) promptly. C) within 60 days. D) within 30 days.

B) promptly. 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. LO 9.e

Which of the following assets will have the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application? A) A prepaid tuition plan B) A Coverdell ESA C) An UTMA account D) A Roth IRA

C) An UTMA account Although the exact percentages will likely not be tested, 20% of the money in an UTMA (or UGMA) account is counted, while only 5.64% of a Section 529 plan (either option) is counted. Retirement accounts are not considered assets on the application for student aid, which means the value of a Roth IRA won't hurt the individual's chances for financial aid eligibility. LO 18.h

An IAR has received several referrals from a prominent estate-planning attorney. Under the USA, the IAR would be permitted to .... A) open a managed account for the attorney and offer a discounted fee structure based on the frequency of referrals. B) send a thank you note and nothing else. C) refer advisory clients who need estate planning to this attorney. D) compensate the attorney with a fee based on the assets placed under management as a result of these referrals.

C) refer advisory clients who need estate planning to this attorney. Referrals from unaffiliated third parties are considered endorsements under the investment adviser marketing rule. Disclosures of any potential conflicts of interest must be made, and if there is any compensation paid for the endorsement, it must be noted as well. If the amount of the compensation, cash or non-cash, exceeds $1,000 over the preceding 12 months, a written agreement between the investment adviser and the endorser must be in effect. LO 13.i

According to the Investment Advisers Act of 1940, how can records of the investment adviser's business be stored during the first two years? I. In written form on site II. On microfilm on site III. On magnetic tape or a computer on site IV. On computer disks at an offsite storage facility that requires 30 days' notice to retrieve A) I only B) I, II, and III C) II and III D) I, II, III, and IV

B) I, II, and III The act requires certain records of business activities to be kept for five years (the first two in a readily accessible place subject to SEC examination at any time). Records originated on paper may be microfilmed or microfiched, and records originated on computer may be stored electronically. The USA has the same rule, and in both cases, the key point is that any storage vehicle used must be able to generate a hard copy while the examiner is present. One other requirement applies to computer disks, and that is that they cannot be rewritten. LO 9.g

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

B) States in which the investment adviser is registered or intends to register Form ADV Part 2A is the brochure that investment advisers must deliver to clients; it describes the investment adviser's fees, investment policies, and types of investments made. The states in which the adviser is registered or intends to be registered are not contained in Form ADV Part 2A. If the investment adviser is registering with the SEC, on Part 1A, it lists only the largest five offices (in terms of numbers of employees). If state-registered, it lists each state it will be registering in or is already registered in. LO 9.e

Although there may be some slight differences in methodology, when S&P or Moody's evaluate a security in order to assign a rating, they would be least likely to consider the issuer's .... A) liquidity ratio B) asset turnover ratio C) profitability ratio D) cash flow to debt ratio

B) asset turnover ratio What is the purpose of a security's rating? To inform investors of the financial risk of the investment. The higher the rating, the lower the risk. This is one of those questions that students answer correctly because all of the other choices are incorrect (they are important factors). Remember, this is a negative question: "least likely." Certainly profitability of the issuer is a key factor in assessing the safety of the issue. Liquidity and cash flow are important factors as well. The rate at which assets are turned over is not nearly as important to determining a rating as the other three. LO 20.h

A new client wants your recommendation on available investment options. You prepare a client profile, which reveals that the investor is 66 years of age, has a low risk tolerance, and is in a low tax bracket. The investor's primary objectives are safety and income. Of the following, the most suitable choice would be .... A) a growth and income mutual fund B) insured bank certificates of deposit C) large-cap common stock D) a municipal bond mutual fund investing solely in AAA- and AA-rated bonds

B) insured bank certificates of deposit Whenever you see "low tax bracket," the answer cannot be municipal bonds. With a low risk tolerance, the only suitable choice for "safe" income would be insured bank CDs. LO 17.d

An individual established an irrevocable trust. The individual's two adult children were named equal beneficiaries of the trust. Several years after the death of the grantor, one of the children fell upon hard times and asked the trustee for a greater share of the trust's income. Under trust law, the trustee .... A) must provide this beneficiary with the additional income requested. B) must be impartial when following the terms of the trust. C) should ask the cotrustee for advice. D) may rewrite the terms of the trust to accommodate the request of this beneficiary.

B) must be impartial when following the terms of the trust. In general, the primary obligation of a trustee is to follow the terms of the trust agreement. LO 16.d

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) partly ordinary income and partly capital gains depending on the length of time the variable annuity was in force. B) ordinary income tax on $125,000. C) ordinary income tax on $125,000 with a 10% tax penalty. D) capital gains tax on $125,000.

B) ordinary income tax on $125,000. 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 says it is qualified or there is a clue, such as being part of a 403(b) plan. LO 24.e

If an investment adviser's client wishes to save current income taxes by placing certain investments in a charitable trust, ethically, the investment adviser should .... A) refuse to discuss the trust with the client because the adviser is not an attorney. B) recommend the client consult with a qualified attorney. C) help the client draft the appropriate documents following a discussion of the advantages of the arrangement. D) urge the client to consult with an attorney who pays a referral fee to the investment adviser.

B) recommend the client consult with a qualified attorney. Presuming the adviser is not a licensed attorney, he should recommend the client see a qualified attorney. However, it is ethical to discuss the nature of a charitable trust with the client. LO 16.d

A broker-dealer informs a client that it does not intend to abide by all the provisions of the Uniform Securities Act. It has the client sign a waiver that specifically prohibits the client from entering a suit against the firm. The client's signature is properly witnessed and notarized. Which of these is true? A) Because the client signed the agreement, a suit against the firm will have no legal standing. B) This waiver is only effective if a copy is filed and registered with the Administrator. C) Clients cannot waive their legal rights. D) The client will only be able to sue in the case of fraud.

C) Clients cannot waive their legal rights. Never is a waiver acceptable. LO 13.e

Under the Uniform Securities Act, in order for the Administrator to summarily suspend an agent's registration, which of the following statements is not correct? A) The agent must be presented with an opportunity for a hearing. B) Notification must be given to the employing broker-dealer of the final order. C) No notice or hearing is required to issue a suspension. D) Notice must be given of the proposed action and hearing.

C) No notice or hearing is required to issue a suspension. The Administrator may, by order, summarily postpone or suspend registration pending final determination of any proceeding under the USA. Upon the entry of the order, the Administrator shall promptly notify the applicant or registrant, as well as the employer or prospective employer if the applicant or registrant is an agent or investment adviser representative, that it has been entered and of the reasons therefore and that within 15 days after the receipt of a written request, the matter will be set down for hearing. Because the law states that the employer will be notified once the action commences, it should be obvious that once the suspension order becomes final, the employer will be notified. LO 12.b

A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A) ADRs are denominated and pay dividends in U.S. dollars. B) Information regarding the foreign company is easily attainable. C) They are not subject to exchange rate, or currency, risk. D) ADRs are traded on exchanges and the OTC markets.

C) They are not subject to exchange rate, or currency, risk. Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. In order to trade in the U.S. markets, information about the foreign company must be available to investors. ADRs representing the best-known companies typically trade on the NYSE or the Nasdaq stock market while lesser companies trade OTC. LO 1.f

Which of the following involves an offer or sale? A) An exchange of securities due to a reorganization B) A pledge of stock C) A stock dividend D) A gift of an assessable security

D) A gift of an assessable security The gift of an assessable security, where the recipient may be required (assessed) to put up money, involves both an offer and a sale. LO 12.a

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

D) II only Do not confuse the statute of limitations for criminal prosecution (five years) with the statute of limitations for civil liability (three years from the date of the event or two years from discovery, whichever occurs first). Because civil liability under the act is limited to restitution, costs, and reasonable interest, a lawsuit could be avoided by a return of the investor's funds plus interest. Payment of restitution to a client does not prevent the Administrator from prosecuting a violation of the provisions of the act. LO 12.e

The antifraud provisions of the Uniform Securities Act apply to all of the following except .... A) a broker-dealer registered pursuant to the limited registration option available to Canadian broker-dealers and their agents. B) newsletter publishers who do not give advice to subscribers on the subscribers' specific investment situations. C) persons availing themselves of the de minimis exemption. D) an individual employed by a registered broker-dealer whose sole function is selling commodity futures contracts.

D) an individual employed by a registered broker-dealer whose sole function is selling commodity futures contracts. The Uniform Securities Act's antifraud provisions deal with securities; commodities are not a security. Even if one is exempt from registration due to meeting the de minimis exemption or is excluded from the definition of investment adviser under the publisher's exclusion, the antifraud provisions still apply. The same is true for those Canadian securities professionals who do business in the United States by using the limited registration option available to them. LO 11.f

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

D) straight-line depreciation. Straight-line depreciation is not a preference item. All of the other choices are included in the IRS listing of tax preference items. In the case of the ISO, it is a preference item to the extent that the fair market value of the employer's stock is in excess of the strike price of the option. As a test-taking tip, when you see two opposites as answer choices, it is likely that one of them is the correct answer. In this case, we have straight-line and accelerated depreciation, only one of which is a preference item. LO 15.d

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding, the net asset value per share is closest to .... A) $32.55. B) $34.46. C) $26.11. D) $36.38.

A) $32.55. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the net assets are the $100 million portfolio value minus the liabilities of $10 million for the unpaid securities plus the $5 million in accrued management fees. That leaves $85 million divided by the 2,611,437 shares outstanding, which is approximately $32.55. LO 3.b

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

A) I and III It is not true that REITs offer flow-through of losses; they are not DPPs. As with most real estate purchasers, leverage, usually in the form of a mortgage, is used to acquire property. A hybrid REIT contains the features of both an equity REIT and a mortgage (debt) REIT, and most REITs trade on the exchanges or Nasdaq. Note: Even though there has been an increase in the number of non-traded REITS, unless something in the question indicates that, the question will be dealing with publicly traded REITS. LO 3.i

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

D) attempt to educate the client to correct those misconceptions, but leave the final decision up to the client All decisions are ultimately up to the client, but there is nothing wrong with the IAR attempting to educate the client, especially when it could lead to greater investment success. LO 17.d

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

A) II and IV On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). In this case, the investor is taking a lump-sum distribution before reaching age 59½ and must pay an additional 10% penalty on the taxable amount. LO 24.e

Prohibited business practices under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents would not include .... A) sharing commissions with an agent of a nonaffiliated broker-dealer. B) sharing in the profits and losses in a client's account without making a financial contribution to the account. C) borrowing money for graduate school tuition from a client who happens to be the agent's father. D) making specific investment recommendations to the group attending a free lunch seminar.

B) sharing in the profits and losses in a client's account without making a financial contribution to the account. Unlike the FINRA rule, agents may share in the profits and losses in a client's account without making a financial contribution; all that is required is consent of the client and the employing broker-dealer. The so-called free lunch seminars are typically promoted as educational, and in any case, how can the agent make specific recommendations to a group without having suitable information on each attendee? Borrowing money from a client, regardless of the purpose, is not permitted unless the lender is in the business of lending money. Sharing commissions with an agent licensed with the same or affiliated broker-dealer, but not one with which there is no affiliation, is permitted. LO 14.i

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an adviser who has custody of client securities or funds must do which of these? I. Submit to a surprise audit of client accounts by an independent accountant each year. II. Provide an audited balance sheet to the Administrator each year and include a balance sheet with his disclosure statement (brochure) to all prospective clients. III. Send monthly statements to clients on the status of their accounts. A) I and III B) I, II, and III C) I and II D) II and III

C) I and II An adviser who has custody must submit to an annual surprise audit by an independent accountant and include an audited balance sheet with Part 2A of Form ADV, which must be filed with the Administrator and also forms the basis of the information that must be contained in the disclosure brochure. Other requirements include segregation of client securities, deposit of client funds into separate bank accounts, written notification to clients of the location of their property, and quarterly (not monthly) reports to clients on their accounts. LO 14.e

Which of the following are prohibited practices? I. An investment adviser transferred a client's account to a brokerage house because the account went below the firm's minimum size and then informed the client. II. An investment adviser organized as a partnership did not notify its clients of the departure of a partner who had only a very small interest in the firm. III. An investment adviser subsidiary of a publicly traded bank holding company failed to inform its clients of the departure of the firm's chairman and major stockholder. IV. An investment adviser firm organized as a general partnership sends prompt notification to all clients after the addition of a new partner. A) III and IV B) I and IV C) II and III D) I and II

D) I and II Transfer or assignment of an advisory account without prior client consent is always prohibited. An investment adviser need not inform clients of departures of employees, senior or otherwise, from investment advisory firms that are incorporated. Clients must, however, be informed of the departure or addition of any minority partner if the firm is organized as a partnership. The legal requirement for this notification is "within a reasonable period of time," but there is nothing prohibited about doing it promptly. LO 13.e

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

D) I and II A CERTIFIED FINANCIAL PLANNER™ (CFP®) who prepares comprehensive (the exam could say detailed) financial plans and is compensated by the commissions earned when the customer purchases the recommended securities must register in the state as an investment adviser representative of the advisory firm. This is considered indirect compensation because the regulators take the stance that the CFP® would not go through the effort to prepare the plan (which contains securities advice) without receiving the compensation from the trades. Note that the CFP® is affiliated with both a broker-dealer and an investment adviser. That's how the CFP® can earn commissions on the securities sales. An insurance agent affiliated with an investment adviser, who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the USA. LO 10.b

Which of the following situations would present a conflict of interest that an adviser must disclose to clients to avoid unlawful and deceitful behavior under the Investment Advisers Act of 1940? A) The adviser has a non-securities-related loan from a large commercial bank where one of his clients is a vice president. B) A family member of the adviser has been indicted for securities fraud unrelated to the adviser or the clients' securities. C) The adviser receives compensation from the issuer of securities that he recommends to his clients. D) The adviser owns real estate that is unrelated to his investment advisory business, but it requires considerable time and attention.

C) The adviser receives compensation from the issuer of securities that he recommends to his clients. An adviser has an affirmative duty to provide full and fair disclosure in those transactions where his interests may conflict with the best interests of the client. If an adviser receives payment from an issuer of securities sold to his clients, the adviser's judgment on the investment merits of the security could be influenced. The client must be informed of and consent to this arrangement to prevent fraud. Advisers are allowed to have separate businesses that do not, by their nature, present a conflict of interest. LO 13.b

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

B) A registered dealer sells Canadian government securities to a retail client. Unsolicited, nonissuer transactions (customer calls the broker-dealer to order or sell a security) are exempt transactions, as are fiduciary transactions to liquidate estates or receiverships by guardians, executors, administrators, trustees in bankruptcy, or conservators. Sales of securities that had been pledged as collateral for a defaulted loan are also exempt transactions. The sale of Canadian government securities by a registered dealer represents a security that is exempt under the Uniform Securities Act, but the transaction itself is not. LO 8.d

Peterson Financial Planning is a small personal financial planning partnership in Missouri that has $10 million in assets under management. As a result of the Dodd-Frank Act, which of the following statements best describes the registration requirement for Peterson Financial Planning? A) Peterson Financial Planning is required to register as an investment adviser with the SEC but has no requirement to register with the Administrator of the Missouri Department of Securities. B) Peterson Financial Planning is required to register as an adviser with the Administrator of the Missouri Department of Securities. C) Peterson is required to register as an adviser with both the SEC and the Administrator of the Missouri Department of Securities. D) Peterson Financial Planning is required to register as an investment adviser with the SEC and to notify the Administrator of the Missouri Department of Securities of its operation.

B) Peterson Financial Planning is required to register as an adviser with the Administrator of the Missouri Department of Securities. With less than $25 million under management, Peterson Financial Planning is considered a "small" investment adviser and must register with the state. Advisers managing at least $25 million but less than $100 million are considered "mid-size" investment advisers and, unless qualifying for an exception, must also register with the state. Investment advisers with at least $100 million in AUM, but not $110 million, register with the SEC or the state. Once the $110 million level is reached, SEC registration is mandatory. LO 9.d

If an investment adviser representative of a federal covered adviser that transacts business in a state terminates employment with that investment adviser, which of the following statements is true? A) No notice to the Administrator is required. B) The representative must notify the Administrator. C) The investment adviser must notify the Administrator. D) Both the representative and the investment adviser must notify the Administrator.

B) The representative must notify the Administrator. It is the investment adviser representative's responsibility to notify the Administrator. The advisory firm is not registered with the state; only the representative is registered. LO 10.c

What is the proper course of action for the fiduciary of a trust that has a portfolio made up of 10% cash and 90% stock of one company that has recently experienced a 40% market gain? A) Maintain the current allocation if, while acting in the capacity of trustee, he believes it aligns with the goal of the trust B) Increase the cash position to 25% by taking some of the profits off the table C) Begin diversifying the equity portfolio D) Use the cash to acquire more shares of the stock

A) Maintain the current allocation if, while acting in the capacity of trustee, he believes it aligns with the goal of the trust In almost every trust question, the correct answer will be that the trustee (fiduciary) has to follow the terms of the trust and meet the trust's goals and objectives. LO 18.g

​Oscar and Hilda, a married couple, are collecting Social Security. They speak to their financial planner for advice on taxation of those benefits. At what level do their benefits become subject to income tax?​ A) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000 B) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $25,000 C) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $32,000 D) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $25,000

A) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000 These are the current numbers used by the IRS to determine if Social Security benefits are taxable. It is interesting that the computation of provisional or combined income indirectly can cause tax-exempt interest to become taxable. Once the couple's income under this computation exceeds $44,000, 85% of it is taxable. If the question dealt with a single person, the limit would be $25,000 rather than $32,000. LO 16.e

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

A) he has donated funds to a nonprofit medical research institute that owns securities that he has recommended. The investment adviser representative (IAR) need not disclose that he donated funds to a nonprofit research institute. No conflict of interest is present that requires an affirmative duty to disclose. The fact that the institute owns securities consistent with the IAR's recommendations is not relevant to the IAR's relationship with the client. The IAR has an affirmative duty to disclose all material facts in all the other choices. LO 13.b

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

A) must notify its clients of Clark's departure within a reasonable period. ABC Investment Partners must promptly notify its clients of Clark's departure. Under the Uniform Securities Act, a change to a minority interest in the membership of a partnership requires the partnership to notify all investors of the change within a reasonable period. ABC has no obligation to notify Clark Advisers of Clark's new employment. LO 13.e

Under SEC Release IA-1092, a financial planner would not be considered an investment adviser when .... A) the extent of her planning is limited to wills, estates, and trust creation. B) she does financial planning as part of offering a wrap fee program as a licensed agent of a broker-dealer. C) she is a licensed insurance agent and credits the commission earned on the sale of insurance policies included in a comprehensive financial plan against the fee charged for the plan. D) there is an up-front fee charged for creating a comprehensive financial plan, even when the plan is not put into place

A) the extent of her planning is limited to wills, estates, and trust creation. Wills, estates, and trusts are not securities, so any advice given on them does not make one an investment adviser (IA). Look for the term comprehensive financial plan because that always includes securities advice, and as long as a fee is charged, even when the advice is not followed, registration as an IA (or perhaps IAR) is required. Wrap fee programs may only be offered by IAs or IARs. LO 9.a

Under the Investment Advisers Act of 1940, a third party receiving compensation from an investment adviser in return for providing an endorsement of the advisers' service is permitted .... A) when a written agreement providing certain disclosures has been entered into between the investment adviser and the third party if the compensation exceeds $1,000 over a 12-month period. B) with no restrictions. C) under no circumstances. D) only if the referring party is registered as an investment adviser representative.

A) when a written agreement providing certain disclosures has been entered into between the investment adviser and the third party if the compensation exceeds $1,000 over a 12-month period. The marketing rule for investment advisers permits investment advisers to pay third parties for their endorsement as long as the required disclosures are made. A written agreement between the parties is required when the compensation, cash or non-cash, exceeds the de minimis amount (more than $1,000 during the preceding 12 months). LO 13.i

Which of the following regarding the registration of investment advisers and their representatives is true? A) XYZ Advisers, Inc., is a federal covered investment advisory firm registered with the SEC; therefore, its representatives need not be registered with the Administrator. B) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly. C) ABC Advisers, Inc., is an investment advisory firm registered with the Administrator; therefore, its representatives need not be registered with the Administrator. D) An investment adviser representative terminated his employment with ABC Advisers, Inc., a state-registered investment adviser and, six months later, was employed as an advisory representative by KLM, a federal covered adviser. Each firm is required to notify the Administrator of each event.

B) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly. Only state-registered investment advisory firms are required to notify the appropriate state Administrator when employment is terminated or begun. In the case of investment adviser representatives of federal covered advisers, notification is the responsibility of the adviser representative. Investment adviser representatives of both state and federal registered investment advisers must be registered with the appropriate state Administrator(s), unless otherwise exempted. In the case of agents, not only the broker-dealers but also the agents must notify the Administrator. LO 10.c

Which of the following regarding the registration of investment advisers and their representatives is true? A) XYZ Advisers, Inc., is a federal covered investment advisory firm registered with the SEC; therefore, its representatives need not be registered with the Administrator. B) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly. C) An investment adviser representative terminated his employment with ABC Advisers, Inc., a state-registered investment adviser and, six months later, was employed as an advisory representative by KLM, a federal covered adviser. Each firm is required to notify the Administrator of each event. D) ABC Advisers, Inc., is an investment advisory firm registered with the Administrator; therefore, its representatives need not be registered with the Administrator.

B) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly. Only state-registered investment advisory firms are required to notify the appropriate state Administrator when employment is terminated or begun. In the case of investment adviser representatives of federal covered advisers, notification is the responsibility of the adviser representative. Investment adviser representatives of both state and federal registered investment advisers must be registered with the appropriate state Administrator(s), unless otherwise exempted. In the case of agents, not only the broker-dealers but also the agents must notify the Administrator. LO 10.c

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

B) An insurance agent who discusses the merits of whole life insurance verses nonsecurities financial instruments and who receives commissions on the sale of life insurance only Please note that this question is not asking, "Who is an investment adviser?" It is asking about one of the three prongs—being in the "business." The insurance agent who discusses the merits of whole life insurance does not sell investment advice or securities, only insurance policies. The insurance agent does not hold herself out as an adviser, nor does she provide advice on securities. If a person advertises as one who provides investment advice or engages in providing investment advice or analyses on a regular basis (even if not the person's principal business activity), the person is considered in the business of giving investment advice. If the person receives any compensation that represents a clearly definable charge, commission, or fee for such advice (whether paid separately or not), she is considered in the business. If the person engages in other financial activities in connection with the advice, it cannot be used to avoid the business standard. LO 9.b

Which of the following statements relating to Form ADV-E are correct? I. The form is completed by an investment adviser who maintains custody of customer funds and/or securities. II. The form is completed by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. III. The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. IV. The form may be used to amend the investment adviser's registration. A) I, III, and IV B) I and III C) I, II, and IV D) I and II

B) I and III Form ADV-E (E for Examination) must be completed by investment advisers (IAs) 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, who examines client funds and securities in the custody of the IA, in compliance with the Investment Advisers Act of 1940 or applicable state law. The independent public accountant performing the surprise examination must submit this form within 120 days of the time chosen by the accountant for the surprise examination. LO 14.e

An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks? I. Loss of principal can occur. II. Price volatility of preferred stock is closely related to interest rates. III. Preferred stock cannot be traded as readily as bonds. IV. If the stock is callable, the client's income can be suddenly lowered. A) I, II, III, and IV B) I, II, and IV C) III and IV D) I and II

B) I, II, and IV Because bonds have seniority over any equity security, there is a greater risk of loss of principal with preferred stock than with bonds. The price volatility of preferred stocks, like bonds, is impacted by interest rate changes. Unlike bonds, however, preferred stock does not have a maturity date. This means that preferred shares may never return to their par value, as bonds do at maturity date. Because the preferred stock may have a callable feature, the company can redeem its shares anytime after the call protection period (if any) is over. This usually happens when interest rates have declined, so the client whose stock was called will not be able to reinvest the proceeds at the same rate and could, therefore, suffer an unexpected drop in income. Preferred shares, particularly those listed on the exchanges, are generally easier to trade than corporate bonds (and certainly no worse). LO 1.c

NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents would likely consider which of the following to be prohibited activities? I. A client is rather insistent on purchasing a security deemed unsuitable by the agent. In an effort to dissuade the client, the agent furnishes several websites of analysts who have issued negative reports on that security. ​ ​II. An agent takes an order from the client's attorney without written trading authorization. ​III. An agent takes an order from the secretary of a nondiscretionary client who is too busy to give the order h​ersel​f. ​IV. An agent encourages a client to acquire a security on the basis of research recently published by the broker-dealer for its institutional clients. A) I and III B) II and III C) II, III, and IV D) I and II

B) II and III An agent cannot take trading orders from anyone but the client unless he has written authorization on file. Using publicly available information to encourage clients to change their opinion about an unsuitable investment is acting in the clients' best interest, and there is nothing wrong with using "house" research reports to develop client recommendations, as long as they are suitable. LO 14.i

The Wall Street pundits are predicting a substantial increase in interest rates. If they are correct, which of the following bonds would be most sensitive to that increase? A) 5s of 2035 B) 4s of 2025 C) 5s of 2045 D) 5s of 2040

C) 5s of 2045 The bond with the longest duration will have the greatest sensitivity to change in interest rates. We examine two factors: the coupon rate and the length to maturity. When the coupon rates are the same, as they are for three of these bonds, the one with the maturity date farthest into the future will have the longest duration. Even though the 4% coupon is lower than the others, the maturity date is so much closer making it have the shortest duration (least sensitivity to change) of this group LO 20.b

Witherspoon, Eustis, and Brahmin (WEB), an investment banking firm and SEC-registered investment adviser, is the principal underwriter for MTEX's upcoming stock issue. Lynn is an analyst and IAR with WEB, and she learned from an employee in MTEX's programming department that a serious problem was recently discovered in the software program of its major new product line. In fact, the problem is so bad that many customers have canceled their orders with MTEX. Lynn checked the stock's prospectus and found no mention of this development. The red herring prospectus has already been distributed. According to WEB's required code of ethics, Lynn's best course of action is to .... A) notify potential investors of the omission on a fair and equitable basis. B) keep quiet because this is material nonpublic inside information. C) inform her immediate supervisor at WEB of her discovery. D) report her discovery to the Administrator of the state where MTEX's principal office is located.

C) inform her immediate supervisor at WEB of her discovery. Whether it's the adviser's code of ethics or rules of FINRA and NASAA, whether acting as an investment adviser or broker-dealer, the answer to a question like this is always to notify your immediate supervisor. From there, it will probably be taken to the chief compliance officer (CCO). Depending on the nature of the problem and the firm's policies, it might be necessary for this to be escalated to the proper regulatory authorities, but we can't tell that from the information given. You can never go wrong with going to your supervisor. LO 14.k

Harry Thomas has turned 19 and decided that he is going to join the Marines and postpone going to college. If Harry decides to stay in the military, the unused funds contributed to his Coverdell ESA .... A) must be distributed to Harry no later than 30 days after his 21st birthday B) must remain in the plan until Harry's 30th birthday C) may be transferred into another Coverdell ESA for Harry's 25 year-old cousin, Julia D) must be returned to the donor with tax plus a 10% penalty on the earnings

C) may be transferred into another Coverdell ESA for Harry's 25 year-old cousin, Julia Funds that are not used for qualified education expenses may be withdrawn, but the earnings are subject to income tax plus a 10% tax penalty. To avoid this, the IRS permits the funds to be transferred into another Coverdell ESA for someone related to the first beneficiary (Harry), who is under 30 years of age. In the case of the Section 529 plan, the transferee has no age limitations. Related parties include immediate family members of the original beneficiary, parents, cousins, aunts and uncles, and even in-laws. If funds remain unused in the Coverdell ESA, they must be distributed to the named beneficiary on the account by 30 days after the child's 30th birthday, not the 21st. By statute, there is no age limit for the Section 529 plan, but some states set a time limit for distribution of unused funds. In either case, there would be the tax and penalty. LO 18.h

Under the Uniform Securities Act, an investment advisory contract must contain (in writing) all of the following provisions except .... A) the investment adviser's compensation shall not be based on capital gains in client accounts. B) no assignment of the investment advisory contract may be made without the client's consent. C) on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account. D) the adviser, if a partnership, must notify the client of any change in the partnership's membership.

C) on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account. Investment advisers organized as corporations are under no obligation to inform their clients of changes to shareholders. However, if an investment adviser is a partnership, clients must be notified of any change in the membership of the partnership. Keep in mind the distinction between notification and assignment. Investment partnerships must notify clients of any change in the partnership's membership, no matter how insignificant the partner's position in the firm. However, the death of a minority partner does not constitute an assignment (transfer) of the account, although the information must be communicated to clients. A change in a majority interest in the partnership would be an assignment of the account that requires client consent. LO 13.e

The main disadvantage of a contributory defined contribution pension plan is that .... A) the employees can choose the amount they wish to invest. B) at retirement, the client might want to use the retirement fund to generate income in retirement, possibly by purchasing an annuity. C) the actual sum an employee will receive at retirement is unknown. D) the employer contributed toward the retirement planning of the employee.

C) the actual sum an employee will receive at retirement is unknown. The liability of the employer in the defined contribution pension plan is an agreed contribution to the plan. The actual performance of the plan's investments will determine the final amount to be paid to the individual at retirement. In a contributory plan, the employee is also eligible to make contributions. LO 18.c

Functioning responsibly as an agent requires disclosure of any potential conflicts of interest that could arise from a securities recommendation. Examples of potential conflicts of interest that must be disclosed to clients would include all of the following except .... A) recommending a purchase of a mutual fund whose underwriter is affiliated with the agent's broker-dealer. B) recommending shares of a corporation where an immediate family member of the agent is a control person. C) recommending a variable annuity where the insurance company is offering a trip to Australia for any agent meeting a specified sales volume. D) recommending shares of a pharmaceutical company that manufactures a drug that the agent takes for chronic indigestion.

D) recommending shares of a pharmaceutical company that manufactures a drug that the agent takes for chronic indigestion. There is no conflict in recommending a stock where the agent uses a product sold by the company unless we can see some direct or indirect benefit to the agent if the client purchases the stock. LO 13.b

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

D) the portfolio manager's tenure. Because this client has been "sold" on past performance, you need to verify if the manager achieving those results is still on the job. That is the prime reason why the regulations require disclosure of the fund manager's tenure; it is important for investors to know if the current manager was the one who had the winning streak or if that manager just came on board. The other choices are something to look at, but in this instance, they take a back seat to checking on the manager's tenure. Sure, the expense ratio is important, but the past performance is after expenses, so that has already been taken into consideration. LO 3.i

Which of the following investment advisers, with no place of business in the state, does not qualify for the de minimis exemption? A) An investment adviser who, during the preceding 12-month period, has had no more than six retail clients B) An investment adviser who, during the preceding 12-month period, has had fewer than six retail clients C) An investment adviser who, during the preceding 12-month period, has had five or fewer retail clients D) An investment adviser who, during the preceding 12-month period, has had no more than five retail clients

A) An investment adviser who, during the preceding 12-month period, has had no more than six retail clients The de minimis exemption limits the number of retail clients to a maximum of five during the preceding 12 months. There are three ways to say that: Fewer than six Five or fewer No more than five LO 9.b

The SROs have instituted maintenance margin levels for those situations where the equity in a client's margin accounts is reduced to a dangerous level. Currently, those levels are .... A) 25% for a long account. B) 25% for a short account. C) 50% for a long account. D) 30% for a long account.

A) 25% for a long account. The current minimum maintenance levels set by the SROs is 25% equity in a long margin account and 30% equity in a short margin account. The initial margin requirement under Reg. T is 50% for both long and short accounts. LO 23.b

Which of the following statements regarding an agent's authority to place orders for a client's account under NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents is true? A) The client's oral approval is sufficient for a specific order. B) The agent is not required to obtain authorization to place orders for a client's account unless a conflict of interest is involved. C) Written approval from the client authorizing a stated amount of a specified security is required before placing an order. D) The agent may, without the client's approval, place a sell order for the purpose of avoiding losses but may not place a buy order without the client's authorization.

A) The client's oral approval is sufficient for a specific order. Oral approval from the client authorizing a stated amount of a specified security is sufficient to place an order. An agent must receive authority to place orders for a client, whether or not there is a conflict of interest. Written approval from the client authorizing a stated amount of a specified security is not required before placing the order. However, written authority is necessary for the agent to exercise discretion in the account. LO 14.f

One of the distinguishing characteristics of an investment adviser (IA) is that of fiduciary responsibility to clients. That responsibility specifically requires the IA to .... A) always place the client's interest ahead of its own. B) be sure that all recommendations to clients are suitable. C) disclose all potential conflicts of interest. D) charge fees that are reasonable under the circumstances of the account.

A) always place the client's interest ahead of its own. Although each of these is a requirement for acting ethically as an investment adviser, the only choice that specifically reflects the obligation as a fiduciary is to place the interest of the clients first. LO 14.a

If an investor wanted to verify a company's working capital, she would do so by reviewing their .... A) balance sheet B) cash flow statement C) footnotes D) income statement

A) balance sheet Working capital, current assets minus current liabilities, is determined from numbers found on the balance sheet. LO 20.h

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

A) compensation earned on dealings with clients. It is compensation beyond that paid by the client (such as a sales award or other prize) that must be disclosed. LO 13.f

Under the Uniform Securities Act, which of the following may have to qualify as an investment adviser representative? A) An employee who, although highly skilled in evaluating securities, solely performs administrative or clerical functions for an investment adviser B) An employee of a state-registered investor advisor whose job function is to solicit for new advisory clients C) An agent who offers incidental advice on securities as part of her sales commissions D) An individual who renders fee-based advice on precious metals

B) An employee of a state-registered investor advisor whose job function is to solicit for new advisory clients If the goal is obtaining clients for the investment adviser, an employee of the investment adviser is generally considered an investment adviser representative (IAR) under the Uniform Securities Act. Although the term solicitor has been largely replaced in the federal law with the term promoter, we expect you'll still see frequent usage of solicitor on the state (NASAA) exams. An employee who performs clerical or administrative functions only is not an IAR. Precious metals are not securities, and a person advising on them is not considered an IAR. An agent is a representative of a broker-dealer. LO 10.a

If XYZ is a registered broker-dealer with its lone office located in State T, under which of the following circumstances must it also register in State L? I. XYZ's only dealings in State L are directly with issuers of securities in State L. II. XYZ engages in extensive transactions with the largest insurance company in State L. III. XYZ routinely sells nonexempt securities to extremely high net-worth residents of State L. IV. XYZ purchases exempt securities from extremely high net-worth residents of State L for resale to residents of State T. A) I and II B) III and IV C) II, III, and IV D) I only

B) III and IV Under the Uniform Securities Act, broker-dealers must register in any state where they engage in securities transactions with individual investors. The net worth of the individual is irrelevant. Broker-dealers with no offices in the state who engage in transactions in the state with certain institutional investors, such as insurance companies or investment companies, need not register in that state. Transactions between the issuer and a broker-dealer are exempt transactions. LO 11.b

A deceased client's trust account has over 90% of its value invested in a single common stock whose recent performance has been outstanding, resulting in a very large unrealized capital gain at the time of death. What action would most likely be taken by the investment adviser handling this account? A) Selling all of that stock in order to rebalance the trust's assets B) Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death C) Exchanging a portion of that stock for a suitable security held in the adviser's trading account D) Continuing to hold that stock position if it is felt that it meets the objectives of the trust

B) Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death Under current tax law, a beneficiary inherits assets at their fair market value as of the time of death. This is known as a stepped-up basis (probably because these assets are generally at a higher price than when originally purchased). In this question, we are told that there is a large unrealized gain. Therefore, with a portfolio that is overconcentrated in one security, it would make sense to diversify while, at the same time, avoiding or minimizing capital gains taxes. It would be against the provisions of the UPIA for a fiduciary to ever engage in trading from his own account. LO 16.g

A bank is advertising a no-cost DDA. Your client asks you to describe what that is. You would respond that DDA stands for .... A) direct deposit account. B) demand deposit account. C) deferred deposit account. D) digital deposit account.

B) demand deposit account. In the banking industry, the most common definition of a DDA is demand deposit account, better known as a checking account. LO 2.f

One of your longtime advisory clients has been critically injured in an automobile accident. The client is in the ICU at the local hospital, unable to communicate. You would be able to accept orders for the account .... A) from the client's spouse. B) from a person who has a written durable power of attorney over the account. C) from the client by getting a squeeze of the hand for a "yes." D) from the client's lawyer.

B) from a person who has a written durable power of attorney over the account. When a client is incapacitated, agents may transact business in the account only when they receive instructions from someone with proper authorization, in this case, a durable power of attorney. LO 16.d

Someone who wishes to invest in precious metals would consider any of the following except .... A) platinum. B) lead. C) gold. D) silver.

B) lead. Lead is not considered a precious metal. LO 5.f

According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, all of the following practices are considered unethical for an agent except .... A) determining the quantity of a specific security to purchase once the client has designated that security and the action to be taken. B) selling 3,000 shares of ABC as directed by a client at a price that the agent determines, without oral or written discretionary authority. C) receiving written discretionary authority from a client within 10 business days of first executing a discretionary trade with oral authority from the client. D) selling 3,000 shares of ABC at a price the agent determines is the best the client can get, without oral or written discretionary authority.

B) selling 3,000 shares of ABC as directed by a client at a price that the agent determines, without oral or written discretionary authority. It is not unethical for an agent to choose time and price of a trade as long as the client has determined the asset, the action, and the amount. Discretionary authority must be received by agents in writing prior to any discretionary trading taking place in the account. Please note that it is investment advisers and their IARs, not broker-dealers and their agents, who are allowed to use oral discretion for the first 10 business days after the initial discretionary trade. LO 14.f

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

C) 11.30% The formula for the required return is: E(R) = Rf + (E (RM) - Rf) × Beta or 0.035 + (1.3 × [0.095 - 0.035]) = 0.035 + 0.078 = 0.113, or 11.3%. LO 21.h

One of the potential effects of a mutual fund's portfolio manager having poor investment results might be .... A) failure to renew the bi-annual management contract. B) the redemption price of the fund shares dropping below their net asset value per share. C) net redemptions. D) a restriction on the sale of new shares.

C) net redemptions. Poor results will frequently lead to investors liquidating their holdings in a greater amount than new investors coming in. This leads to net redemptions; more money going out than coming in. No mutual fund can ever sell below NAV and the management contract is renewed on an annual, not bi-annual basis. LO 3.i

Securities industry rules require that securities professionals disclose all potential conflicts of interest to their clients. Examples of potential conflicts of interest include which of these? I. Offering a proprietary product II. An agent having a financial interest in a recommended security III. A broker-dealer publishing a favorable research report after underwriting the issuer's stock offering IV. The sponsor of a mutual fund offering a trip to Key West for all agents reaching a minimum sales level of any of the sponsor's funds A) I, III, and IV B) II and IV C) I and III D) I, II, III, and IV

D) I, II, III, and IV All of these represent the potential for a conflict of interest that must be disclosed to clients. LO 13.b

Under the Uniform Securities Act, if the Administrator does not deny an application for registration and no disciplinary proceeding is underway in regard to it, how many days after filing the application as an investment adviser representative does registration generally become effective? A) 7 B) 5 C) 10 D) 30

D) 30 Registration becomes effective 30 days after the application is filed unless the Administrator begins a proceeding or issues a stop order before that time. The Administrator may specify an earlier date, or if an application must be amended, the Administrator may extend the date to 30 days after the amendment was filed. LO 10.c

The current yield on a bond with a coupon rate of 5.5% selling at 110 is .... A) 5.5%. B) 6.0%. C) 2.0%. D) 5.0%.

D) 5.0%. The current yield of any security, equity, or debt is always the income return (dividend or interest) divided by the current market price. In this case, it is the annual interest of $55 ($1,000 × 5.5%) divided by $1,100, and that equals 5%. LO 2.e

Which of the following statements are generally true of the buy-and-hold strategy? I. Equities would grow relative to fixed income II. Lower taxes and transactional costs III. Easy to manage IV. The portfolio would more accurately demonstrate the client's investment objectives and risk tolerance A) III and IV B) II, III, and IV C) I and II D) I, II, and III

D) I, II, and III Over the long run, using the buy-and-hold strategy with equity securities has outperformed the rate of return on fixed income investments. With few transactions, there are almost no commissions and capital gains taxes. Of all strategies, this is the easiest to follow. There is no way to determine the client's objectives or risk tolerance based on the decision to buy and hold. The portfolio might contain small-cap stocks or large-cap stocks. It might contain 90% equities or 75% debt securities. Investors with differing goals and risk tolerance can use this strategy. LO 21.e

For which of the following employer-sponsored qualified plans is it mandatory that annual contributions be made? A) Profit-sharing plan B) Deferred compensation plan C) Defined benefit plan D) Money purchase pension plan

D) Money purchase pension plan When an employer sets up a type of defined contribution plan known as a money purchase pension plan, annual contributions are mandatory. Profit-sharing plan contributions are optional and largely depend on the company's profits. Deferred compensation plans carry no obligations. What about defined benefit plans? Because those are based on an actuarial computation, if the account over-performs expectations, it could result in a year when no contribution is necessary. LO 18.a

Mr. and Mrs. Rose, advisory clients of yours, request a meeting with you to discuss the options available if they wish to deposit a lump sum to save for college tuition for their child. All of these would be factors to consider except .... A) the expected inflation rate B) current college costs C) the age of the child D) the Roses' salaries

D) the Roses' salaries When making a lump sum investment, salary is not a factor. The funds will have to come out of savings or investments. This is basically a present value computation. In order to project how much will be needed, we need to know what the current tuition is, the rate at which it is expected to inflate, and the number of years we have until the child starts college. That will give us the three components of present value: total amount needed, earnings rate, and length of investment. LO 20.a