Series 66 SE - 1/10

A man divorces his spouse after 10 years of marriage and remarries. If the man is the sole provider, what part of the worker's Social Security benefits is the new spouse entitled to? A) She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage. B) The new spouse is entitled to splitting the benefits with the ex-spouse. C) The new spouse is entitled to more benefits than the ex-spouse. D) She is entitled to the same Social Security benefits as the ex-spouse.

D) She is entitled to the same Social Security benefits as the ex-spouse. When an individual remarries, the new spouse is entitled to full Social Security benefits. As long as the previous marriage lasted at least 10 years, that ex-spouse (if not remarried) is also entitled to full benefits. That means it is possible for 2 people to receive full benefits at the same time. U19LO5

Your client often makes irrational financial decisions because she bases her decisions on information that should have no influence on the decision at hand. The client's behavior is known as A) overconfidence. B) confirmation bias. C) herd mentality. D) anchoring.

D) anchoring. Making irrational decisions based on information that should have no influence on the decision at hand is known as anchoring. Herd mentality is the tendency to follow the actions of a larger group, whether rational or not. Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers her abilities to be much better than they actually are. U19LO3

An analyst would use the discounted cash flow method in an attempt to find A) the fair value of a security. B) the current rate of return of a security. C) the current market price of a security. D) the cash flow from operations.

A) the fair value of a security. DCF uses the present value of future cash flows, based on a specified discount (interest) rate, to evaluate the price that a security should be selling for in the market. If the current market price of the security is less than this value, it has a positive net present value (NPV) and should be a good investment. The opposite is true if there is a negative NPV (the market price is higher than that computed under the DCF method). U13LO12

Which of the following must register as an agent when representing a broker-dealer? A) The telephone switchboard operator who directs orders to the appropriate extension B) An employee who accepts unsolicited orders from institutional clients C) An individual who represents an underwriter only in transactions between an issuer and the underwriter D) A partner of a broker-dealer who has no securities sales functions

B) An employee who accepts unsolicited orders from institutional clients An employee of a broker-dealer who accepts orders must register as an agent. The fact that it is unsolicited and/or from an institution (making them exempt transactions) has no bearing on the requirement for the individual to register as an agent. A partner of a broker-dealer with no securities sales functions and an individual who represents an underwriter only in transactions between an issuer and the underwriter need not register. Individuals whose function is strictly clerical do not register as agents. U3LO4

In a scheduled premium variable life insurance policy, the insured is guaranteed A) nothing. B) minimum guarantee death benefit. C) cash value. D) positive return.

B) minimum guarantee death benefit. The only real guarantee in a variable life policy is that the minimum death benefit will be the face amount of a scheduled (fixed) premium policy. Of course, any loans must be taken out first, but they are taken from that guaranteed amount. Cash value and a positive return depends on the performance of the separate account. U15LO7

Under which of the following circumstances may an agent borrow money from a customer? A) With written permission from NASAA B) Upon notification to his firm C) If the customer is a bank D) Under no circumstances

C) If the customer is a bank An agent may borrow funds from a client who is in the business of lending money. U7LO4

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) A limited amount because her spouse is not a U.S. citizen B) $15,000 C) $100,000 D) Unlimited

A) A limited amount because her spouse is not a U.S. citizen 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). U21LO5

The alternative asset investments class is least associated with which of the following characteristics? A) Illiquidity B) Efficient pricing C) Non-normal returns D) Diversification

B) Efficient pricing Alternative assets are most often characterized by inefficient pricing, providing potential abnormal returns or alpha returns. U17LO3

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents contains an extensive list of prohibited practices. However, it would NOT be considered a violation A) to borrow money from a client who is not in the lending business B) for two individuals employed by the same broker-dealer and with the same category of license to share in commissions without telling the client C) when a broker-dealer sells a security out of inventory to a retail customer and indicates on the confirmation that the firm acted in an agency capacity D) if a properly registered agent were to share in the profits and losses in a customer's account proportionate to the amount of time the agent devoted to handling the account

B) for two individuals employed by the same broker-dealer and with the same category of license to share in commissions without telling the client Properly registered individuals employed by the same or affiliated broker-dealers are permitted to split their commissions. Because there is no additional cost to the client, this action does not have to be reported. Sharing with clients may only be done with the written consent of the client and the agent's broker-dealer. It has nothing to do with the time spent on the account. A broker-dealer selling out of inventory must disclose that the firm acted in a principal capacity. No BD or agent may ever borrow money from a client who is not in the money-lending business unless that client is an affiliated person. U7LO4

A customer buys a 5% bond at par. The bond is callable in 5 years at par and matures in 10 years. Which of the following statements is TRUE? A) YTC is higher than YTM. B) YTC is lower than YTM. C) YTC is the same as YTM. D) Nominal yield is higher than either YTM or YTC.

C) YTC is the same as YTM. If a bond is trading at par, the nominal yield (coupon rate) = current yield = yield to maturity = yield to call (unless the call price is at a premium in which case the YTC would be higher). YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par. U13LO10

Which of the following most accurately identifies a private equity investment in income-producing real estate? A) Investment in a real estate investment trust (REIT) B) Private market mortgage lending by an insurance company C) Investment in a real estate mutual fund D) Direct ownership of real estate properties

D) Direct ownership of real estate properties Real estate investments take four major forms: private equity, publicly-traded equity, private debt, and publicly-traded debt. Private equity investment in real estate refers to direct ownership of real estate properties. Mortgage lending by banks or insurance companies is best described as private debt. Indirect ownership of real estate through equity securities such as REITs is an example of publicly-traded equity. U17LO5

As enumerated in the USA, exempt securities would include those issued by all of these EXCEPT A) any credit union organized and supervised under the laws of this state B) a sovereign foreign government with which the United States maintains diplomatic relations C) a promissory note that evidences an obligation to pay cash within 9 months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization D) a corporation based in Toronto, Ontario, whose common stock trades on the Toronto Stock Exchange

D) a corporation based in Toronto, Ontario, whose common stock trades on the Toronto Stock Exchange Although securities issued by the Canadian government or any political subdivision are exempt, those issued by Canadian corporations would only be exempt if trading on U.S. exchanges as federal covered securities. U4LO3

It would not be considered an unethical business practice under NASAA's policies for an investment adviser to charge fees I. as well as commissions II. based on an hourly rate III. based on a percentage of the change in value of funds from quarter to quarter IV. based on a percentage of the aggregate value of funds under management

I, II, and IV Unless a specific exception is referred to in the question, fees based on a share of capital gains or appreciation in an account are prohibited. The other choices are acceptable fee structures. An adviser may charge commissions and fees as long as the fact is clearly disclosed. U6LO4

With regard to the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, proscribed actions would include I. accepting an order from a third party after written trading authorization has been received II. forwarding a written complaint from a customer to the appropriate supervisory person III> offering to repurchase a security at its original cost if it does not increase in value IV. borrowing money from a client who was the agent's college roommate

III and IV Prohibited actions under the policy would be guaranteeing a client against loss by agreeing to repurchase a security at its cost and borrowing money from a client who is not in the money-lending business. U7LO4

If a federal covered investment adviser wishes to sell his business to another advisory firm, which of the following statements is TRUE? A) No approvals are required. B) The sale must be approved by the SEC. C) The sale must be approved by the Administrator. D) The sale must be approved by each customer of the selling adviser.

A) No approvals are required. An investment adviser does not need the approval of clients to sell the business. However, technically, the sale means that the advisory contracts will be assigned and that cannot be done without client consent. In an event such as this, the clients would be given the choice of having the new firm manage their assets or taking their accounts elsewhere. U6LO4

Under the USA, an investment adviser's current clients must be delivered a brochure A) annually whether or not the adviser has custody or discretion B) within 48 hours of renewal C) annually​, but only​ if the adviser has neither custody nor discretion D) quarterly if the adviser has both discretion and custody

A) annually whether or not the adviser has custody or discretion Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients [except those who are exempt from the brochure delivery requirements (impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940)] within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing. U6LO4

Which of the following is a motivation for creating structured products? Structured products A) improve market completeness. B) improve profits for broker-dealers. C) reduce costs to issuers. D) are less expensive for investors to buy and trade.

A) improve market completeness. Primary motivation for financial structuring is to increase market completeness. What does that mean? As stated in the LEM, structured products are created to meet a specific need for which there is nothing available in the current market. Creating this structured product is said to be "completing the market." Creating structured products is a cost to issuers. Investors pay fees to access structured products in addition to transaction costs. They may, in fact, improve the structuring broker-dealer's profits, but that is not what NASAA will be looking for as an answer. U17LO3

When comparing a private equity fund to a public one, it would be incorrect to state that the private fund has A) higher risk. B) lower reporting costs. C) stronger governance. D) less liquidity.

C) stronger governance. The first step is to notice that the question is looking for the statement that is not correct. Corporate governance is an area where public shareholders look to ensure that the management is performing in ways that not only maximize operating results, but also represent high standards of business ethics. In the case of private funds, there are very few shareholders and they generally take less of an interest in ESG (environment, social, and corporate governance) matters. Private funds are not liquid and because they are private, they do not have the costs of regular reporting to the SEC. In general, private funds are considered a higher-than-average risk investment. U18LO4

Under the Investment Advisers Act of 1940, an adviser who has custody of a client's funds must I. notify a client when the client's funds are moved to another location II. segregate client's funds and keep them identified by client III. not move the client's funds without prior notification and specific written authority from the client

I and II Advisers who have custody must segregate a client's securities and keep them in a safe place, deposit client funds in bank accounts that contain only client funds (may be combined in one account, but complete records must be kept), report to clients at least every 3 months with a statement, and annually arrange for an unannounced audit by an independent accountant that will report the audit results to the SEC. All clients must be notified in writing of the location of their securities or funds and of any changes to the location. It is not necessary to notify the client before the move to obtain the client's specific written authority to move the fund. The original custodial agreement includes that authority at the discretion of the adviser. U7LO2

A registered investment adviser has a fiduciary duty to disclose all real and potential conflicts of interests to clients. Which of the following are examples of conflicts that would require disclosure? I. A registered investment adviser spends about 25% of its time on investment advisory activities and the balance on managing rental real estate projects II. A registered investment adviser spends about 25% of its time supervising the activities of its investment adviser representatives III. An investment adviser representative, who is also an insurance agent, may decide to recommend a particular insurance product based on an incentive to sell the product IV. An investment adviser representative, who is also an agent with an unaffiliated broker-dealer, directs transactions to that firm

I, III, and IV There is nothing wrong with an investment adviser devoting time, even a majority of the time, to nonadvisory pursuits, as long as it is disclosed. Recommending products based on an incentive is fine as well, as long as disclosure is made. Finally, IARs can be agents of affiliated or nonaffiliated broker-dealers, but the existence of that relationship must be disclosed. One would hope that the investment adviser devotes enough time to supervising its IARs, but that is not something that is disclosed to clients. U6LO1

Which of the following actions by an investment adviser representative would be an unethical practice under the Uniform Securities Act? A) Indicating, in an advisory contract that, in order to maximize account performance, it will sometimes be necessary to waive compliance with certain provisions of the Uniform Securities Act or of the Investment Advisers Act of 1940 B) Recommending securities that result in negative returns in the customer's account C) Splitting compensation with a sales assistant who is registered as an IAR with the same firm D) Failing to enter a sell order for a security when its price is falling, when the representative has discretionary authority

A) Indicating, in an advisory contract that, in order to maximize account performance, it will sometimes be necessary to waive compliance with certain provisions of the Uniform Securities Act or of the Investment Advisers Act of 1940 The Model Rule is very clear that waivers of this type are never permitted—you just can't waive compliance with the laws. Investment adviser representatives' securities recommendations that result in losses are not a violation of the Uniform Securities Act. Splitting compensation with a fellow licensed employee is not a violation of the Uniform Securities Act. An adviser representative with discretionary authority is not under an obligation to sell a security simply because it is declining in price. U6LO4

A securities analyst reviewing the financial statements of the XYZ Corporation observes that the company's total liabilities are in excess of its total assets. From this information, the analyst could conclude that XYZ has A) a negative book value per share. B) a highly leveraged capital structure. C) a high current ratio. D) a low price-to-earnings ratio.

A) a negative book value per share. When the liabilities exceed the assets, there is a negative net worth. By extension, that means a negative book value per share. We don't know anything about the current assets and current liabilities, so we can't measure the current ratio. We also don't know if the debt is from borrowing or just an excess of payables over receivables, so we don't know if financial leverage has been employed. Likewise, we have no information about the company's earnings, so we can't compute the PE ratio. It is likely that it is low, but if this is a start-up enterprise, it is possible that the PE could be rather high. In any event, when faced with two choices that could be correct, always go with the one that is correct without any exceptions. U10LO7

Platinum Investment in Growth Group, Inc. (PIGGI) is registered in and has its principal office in State W. PIGGI has near-term plans to open offices in State A and B. In an effort to test the waters, PIGGI mails several hundred flyers to prospects in those 2 states. Under the Uniform Securities Act, A) these flyers could not be mailed until PIGGI was registered in States A and B B) as long as PIGGI did not maintain an office in either of these states, the flyers could be mailed C) as a federal covered investment adviser, the flyers would need filing with the SEC D) these flyers could be mailed, but no accounts can be opened until PIGGI is registered in States A and B

A) these flyers could not be mailed until PIGGI was registered in States A and B Any attempt to hold oneself out as offering investment advice as part of a business would require the person to be registered in the state, unless that person qualifies for an exclusion or exemption. Nothing in this question implies that an exclusion or an exemption applies. We know that PIGGI is not a federal covered investment adviser (and therefore does not need to file its flyers with the SEC) because we are told it is registered in State W—federal covered advisers don't register in any state. U1LO5

All of the following statements concerning qualified tuition programs for educational funding are correct EXCEPT A) prepaid tuition plans are plans where prepayment of college tuition is allowed at current prices for enrollment in the future B) a college savings plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred C) control over the account passes to the student/beneficiary once withdrawals commence D) unless there is a change in beneficiary, assets in the QTP may be moved from the plan of one state to the plan of another as frequently as once per 12 months

C) control over the account passes to the student/beneficiary once withdrawals commence ne of the advantages of QTPs (qualified tuition ​programs, better known as Section 529 plans) is that the owner-contributor ​is always in control of the program. Without a change in beneficiary, plan "rollovers" are limited to once per 12-month period. U24LO6