Series 66 Vol. 8
A value investor seeks stocks that have: A. low P/E ratios B. high market capitalizations C. low dividend D. high price to book value per share ratios
The best answer is A. A value investor is looking for "out-of-favor" stocks that typically have low Price/Earnings ratios; high dividend yields; low price to book value per share ratios; and low market capitalization because the share price is depressed. The theory is the market will recognize that this really is a good company, and the share price will rise -so at the current price, the stock is a "value."
Under ERISA provisions, a pension fund manager that wishes to write naked call options: A. can only do so if explicitly allowed in the plan document B. can do so if the plan document allows for options transactions C. can do so without restriction D. is prohibited under ERISA requirements
The best answer is A. ERISA does not specify securities strategies that are prohibited. It does state that all investments must meet both "fiduciary responsibility" tests and "prudent man" rule tests. Selling naked call options exposes the writer to unlimited risk, but is not explicitly prohibited. If the plan document specifically authorizes such a strategy, it would be permitted. However, the plan trustee bears unlimited liability, if this action is deemed to be imprudent.
An investor believes that interest rates will be flat or falling into the future; and that prices may deflate. The MOST appropriate investment is: A. Long term U.S. Government bonds B. Real estate C. Gold D. Large Capitalization stocks
The best answer is A. In periods of deflation, interest rates fall. A fixed income security's price will go up as interest rates fall. Furthermore, since prices are deflating, the fixed interest payments received are able to buy more and more over time. This is the best investment choice. In times of deflation, real estate prices fall; as do gold prices. Stock prices tend to fall as well, since companies are forced to cut their prices to maintain sales volume.
Which of the following are defined as passive income? I Distributive share of income from a real estate limited partnership investment II Dividends received from a real estate investment trust investment III Interest received from a corporate debenture investment IV Proceeds from the sale of a partnership unit in excess of the tax basis of that unit A. I only B. I and II C. III and IV D. I, III and IV
The best answer is A. Passive income and loss is defined as that derived from real estate investments and limited partnership investments. Income from a real estate investment trust is "portfolio income." Income from corporate bonds is "portfolio income." Finally, a gain on the sale of any security (including partnership units) is a capital gain; and all capital gains are "portfolio income."
Section 529 plans are established by the: A. state B. donor C. recipient D. custodian
The best answer is A. State sponsored education savings programs are "Section 529" plans.
An investment adviser representative obtains a list of all 263 members of the local Kiwanis Club and sends a coupon to 52 leads on the list, along with a letter, offering a 20% discount on services to new clients that are club members. Aside from retaining a copy of the letter, under the provisions of the Investment Advisers Act of 1940, the investment adviser MUST keep: A. a memorandum describing the list and the source of the list B. a record of the names and addresses of the persons to whom the offer was made C. the worksheets that estimate the net worth of leads and the standards used to determine which leads were to receive the offer D. a record of the names and addresses of all of the Kiwanis Club members on the list
The best answer is A. The Investment Advisers Act of 1940, under Rule 204-2 on Recordkeeping, requires that if an investment adviser sends any notice, circular or other advertisement to more than 10 persons, the adviser is not required to keep a record of the names and addresses of the persons to whom it was sent. But if the notice is distributed to persons named on any list, the adviser must "retain, along with a copy of such notice, a memorandum describing the list and the source thereof."
An investment adviser has its principal office in State A. It also has offices in States B, C, and D. The net worth requirements of States C and D are more stringent than that required by State A and the net worth rules of State B are the most stringent of all. The investment adviser is required to maintain minimum net worth in accordance with the rules of: A. State A B. State B C. State C D. State D
The best answer is A. The Uniform Securities Act states that if an adviser complies with the provisions of the Act as adopted in the State where the adviser has its principal office, then other States cannot impose more stringent recordkeeping requirements or minimum net worth requirements on that investment adviser, even if the adviser has offices in those States.
An agent of a broker-dealer is told by a wealthy, well-connected client that "I just talked to the president of ABCD Corp. (an NYSE listed company) and was told that this quarter's results are going to be lousy." Which statement is TRUE? A. The agent can discuss this phone conversation with his branch manager B. The agent can discuss the phone conversation with his spouse C. The agent can discuss the phone conversation with anyone who is registered as an agent in that State D. The agent cannot discuss this phone conversation with anyone
The best answer is A. The agent has just received "inside information". The problem is that if the agent tells others about the information, and those people trade on it, then not only are those who traded deemed to be "insiders," but the agent can be deemed to be an insider as well (under the "tipper-tippee" doctrine, that holds the tipper that gave the information that resulted in the trade as liable). While Choice D is a plausible answer, Choice A is better. The agent should discuss the conversation with his or her branch manager - since the regulators have rules requiring inside information to be reported to the exchange where that security trades. The branch manager would discuss the situation with the firm's compliance department; which in turn would notify the regulator.
A married couple purchased their residence 5 years ago for $500,000. For 3 of the last 5 years, they rented out the property for income, and lived in the house of 2 of those years. The clients sell the house for $800,000. How much of the gain is taxable? A. 0 B. $50,000 C. $250,000 D. $300,000
The best answer is A. The tax code permits the first $250,000 of capital gain from the sale of a personal residence to be excluded from tax for an individual ($500,000 for a married couple). To qualify, the residence cannot have been rented out for more than 3 of the preceding 5 years (so it must be lived-in for personal use by the owner for 2 of the past 5 years). This property was sold for a $300,000 gain by the married couple, all of which is excluded from capital gains tax, since it meets the personal use test.
The manager of a broker-dealer is discussing investment strategies with her in-house research assistant. The conversation leads to a discussion about a client for whom the broker-dealer is negotiating to underwrite a common stock offering. The research assistant tells the manager that she is preparing a report indicating that the company is having sales difficulties and is going to downgrade the stock from "Accumulate" to "Hold." What should the research analyst do? A. Wait until the status of the underwriting contract is resolved before taking any further action B. Issue the report as scheduled after changing the recommendation back to "Accumulate" C. Issue the report immediately D. Sell short the stock and then issue the report
The best answer is A. This one is a bit sticky. During the period when an underwriter is negotiating with an issuer to do an underwriting, the firm cannot issue research reports on that stock (except under very specific rules where the issuer has always previously been publishing reports about that company; and the new report is no more favorable than the old reports). The issue here is that a favorable report would tend to influence that issuer's price upward; and then if the underwriter gets the deal, the underwriter could then sell the issuer's shares at a higher price and earn a larger underwriting spread. This is a conflict of interest. In this case the research analyst is going to issue a report that would influence the price of the stock downward - and the underwriting firm probably would not go through with the underwriting deal if the downgrade made the public too negative on the stock. The best course of action is to wait until the status of the underwriting contract is resolved before issuing the report.
An individual who is a registered representative with a broker-dealer prepares financial plans for customers under the supervision of the broker-dealer and does not charge for the plans. The individual takes commissions on transactions that result from the implementation of the recommendations included in the plans. Under SEC Release IA-1092: A. both the individual and the broker-dealer must register with the SEC as an investment adviser representative and an investment adviser, respectively B. neither the individual nor the broker-dealer need register with the SEC as an investment adviser representative and an investment adviser, respectively C. the individual must register with the SEC as an investment adviser representative; the broker-dealer is not required to register with the SEC as an investment adviser D. the individual need not register with the SEC as an investment adviser representative; the broker-dealer is required to register with the SEC as an investment adviser
The best answer is B. If a broker-dealer is registered with the SEC, and its representatives are registered with the SEC, and if the broker-dealer does not charge separately for advice, then it is excluded from the definition of an "investment adviser" and need not register as such with the SEC. However, if the broker-dealer were to charge separately for a financial plan, then it would have to register with the SEC as an investment adviser; and its sales persons would have to register as "investment adviser representatives".
Passive income includes income received from: I Real estate investments II Real estate limited partnership investments III Real estate investment trust investments IV Collateralized mortgage obligation investments A. II only B. I and II only C. I, II, III D. I, II, III, IV
The best answer is B. Passive income is defined as income from direct investments in real estate and limited partnerships. Income from real estate investment trusts (REITs) is defined as portfolio income, as is income from collateralized mortgage obligations.
Which security is MOST affected by interest rate risk? A. Common stock B. Preferred stock C. Treasury bill D. Commercial paper
The best answer is B. Preferred stock is a fixed income security, with a perpetual life - there is no stated maturity. Thus, this is the longest term fixed income security available, and its price is greatly affected by interest rate risk (remember, longer maturities and lower coupon rate issues are most susceptible to interest rate risk). Common stock prices are not directly influenced by interest rate movements - the connection is indirect at best. Common stock prices are directly influenced by expectations regarding future earnings, sales, dividends, etc. Treasury bills and commercial paper are money market instruments with very short maturities - interest rate risk has little impact on these issues.
An individual client purchased his residence 5 years ago for $200,000. For 3 of the last 5 years, the client rented out the property for income, and lived in the house of 2 of those years. The client sells the house for $500,000. How much of the gain is taxable? A. 0 B. $50,000 C. $250,000 D. $300,000
The best answer is B. The tax code permits the first $250,000 of capital gain from the sale of a personal residence to be excluded from tax for an individual ($500,000 for a married couple). To qualify, the residence cannot have been rented out for more than 3 of the preceding 5 years (so it must be lived-in for personal use by the owner for 2 of the past 5 years). This property was sold for a $300,000 gain, of which $250,000 is excluded from tax and $50,000 is taxable.
All of the following are included in the Form ADV filed with the SEC under the Investment Advisers Act of 1940 EXCEPT a list of the: A. officers of the advisory firm B. shareholders of the advisory firm C. customers of the advisory firm D. States in which the advisory firm is registered
The best answer is C. The Form ADV Part 1 filed with the SEC includes the officers of the firm, the States in which the firm is registered, and if the firm is a partnership, a schedule of the partners' names is included; while if the firm is a stock company (privately held) a schedule of the shareholders in included. There is no listing of the customers of the adviser in the Form ADV. Note, however, the Part 2A, which constitutes the "Brochure" does include the type and approximate number of customers and the approximate value of assets under management.
Mutual fund performance charts show: I Time Weighted Average Return II Dollar Weighted Average Return III a return that is affected by investor cash inflows and outflows IV a return that is not affected by investor cash inflows and outflows A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Time Weighted Average Return is used by mutual funds on their performance charts to show average annual investment returns. It measures how well the fund manager performed in increasing the dollars that have been invested. Additional cash moving into the fund or out of the fund does not affect the computation. This is the average annual return that would be provided from a "buy and hold" strategy. Dollar Weighted Average Return is the same as the Internal Rate of Return. It is the discount rate that takes all of the cash flows from the investment. Dollar Weighted Return takes into account the impact of cash inflows and outflows from purchases and sales as well as growth in assets. The classic comparison of these 2 returns is where a fund receives a large cash inflow after a period of superior performance (which attracted the new investors to the fund) and then suffers a period of poor performance. Time Weighted Average Return shown over the following periods will be much higher than the Dollar Weighted Average Return experienced by the new investors. For example, $100 is invested in a fund at the beginning of the year with a $10 per share NAV = 10 shares purchased. After 6 months, the NAV per share increases to $20 per share and the happy customer invests another $100 (5 more shares). At the end of the year, the NAV falls back to $10 and the investor sells all 15 shares. In this example, the Time Weighted Average Return will be 0% (because the NAV per share was the same at year beginning and year end). However, this customer invested a total of $200 and sold the shares for $150 at year end, experiencing a $50 loss. This equals an annualized dollar weighted average return (IRR) of -32%. If the investor did not make the additional cash deposit at mid year and did not sell the shares at year end, then the 2 measures would have been the same.
Which of the following statements are TRUE regarding payouts from variable annuity contracts? I The payout is determined by the number of annuity units II The payout is determined by the number of accumulation units III When payout commences, unit value is fixed while the number of units varies IV When payout commences, unit value varies while the number of units is fixed A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. When payout is to commence from a variable annuity, the holder's accumulation units are converted into a fixed number of annuity units (based on mortality tables and payout option selected). The monthly payout is determined by taking that fixed number of annuity units times the unit value (which fluctuates as the value of the securities in the underlying separate account fluctuates).
The term "Investment Adviser" includes: A. lawyers who give advice about investments as part of an estate tax plan B. depository institutions that recommend bank products as investments C. publishers of reports on securities tailored to client situations D. broker-dealers who make recommendations to clients and charge commissions on the resulting trades
The best answer is C. An investment adviser is defined as a person who, for compensation, engages in the business of advising others, directly or indirectly, as to the value of securities or the advisability of investing in, buying, or selling, securities. Under this definition, persons who take fees for advising clients about investments; and newsletters that give advice based upon the specific investment situation of clients, are defined as "investment advisers." Excluded from the State definition are: •investment adviser representatives; •professionals such as lawyers and accountants who give incidental advice without taking a fee; •broker-dealers since they also give incidental advice without taking a fee for the advice (instead they earn a commission on the trade); •financial publications that are not tailored to specific client situations; and •depository institutions such as banks, and savings and loans (they are already highly regulated under other laws).
Which of the following individuals is defined as an Investment Adviser under the provisions of the Uniform Securities Act? A. The publisher of a financial newsletter that covers the relative merits of different insurance policies B. An accountant that offers advice on investing in fixed annuity contracts for an additional charge C. A lawyer that offers advice about investments in corporate stocks and bonds for an additional charge D. The publisher of research reports about corporate stocks that are distributed only to institutional investors
The best answer is C. For a lawyer or accountant to be excluded from the definition of an investment adviser, he or she must only give incidental advice about investing in securities and cannot charge separately for the advice. Choices A and B are not required to register as investment advisers in the State because they are giving advice about insurance products, not about securities. Choice D does not have to register because only financial publications that tailor their recommendations to specific client situations fall under the definition.
A Certified Public Accountant offers clients financial planning services, for which a separate fee is charged. Which statement is TRUE? A. The accountant is not required to register as an investment adviser in the State because he has an independently conferred professional accreditation B. The accountant is not required to register as an investment adviser because he is already registered with the State as a CPA C. The accountant must register in the State as an Investment Adviser D. The accountant must register in the State as an Investment Adviser Representative
The best answer is C. If this accountant did not separately charge for financial planning, then he (or she) would not be defined as an investment adviser. Because a separate fee is being charged, the CPA is defined as an Investment Adviser who must register in the State. If the CPA has any employees that sell financial plans, they would have to register as Investment Adviser Representatives (IARs).
If an investor believes that inflation rates will be rising in the foreseeable future, he might rebalance his portfolio to include: A. Fixed annuities B. 5 year certificates of deposit C. Tangible assets D. U.S. Government bonds
The best answer is C. In times of inflation, interest rate levels rise, so bond prices fall; and stock prices fall as well, since companies typically cannot raise prices to consumers fast enough to cover their increasing costs, causing profits to suffer. In times of inflation, any security that gives a fixed return, such as fixed annuities and certificates of deposit, are a bad bet. The payout on these instruments remains fixed over time, yet costs are rising. Tangible assets, such as real estate, collectibles, etc. tend to keep pace with inflation; as overall prices inflate, their prices inflate as well. These are the best choice of the ones offered.
Which statements are TRUE about the applicability of NASAA recordkeeping rules to investment advisers? I NASAA recordkeeping rules apply to Federal Covered advisers II NASAA recordkeeping rules do not apply to Federal Covered advisers III NASAA recordkeeping rules apply to State-registered advisers IV NASAA recordkeeping rules do not apply to State-registered advisers A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. NASAA does not set rules for federal covered advisers - only the Investment Advisers Act of 1940 applies! Federal covered advisers are those with $100 million or more of assets under management and advisers to investment companies. NASAA rules for IAs only apply to State-registered advisers (those advisers with less than $100 million of assets under management).
Under the Investment Company Act of 1940, the investment adviser's contract must be renewed by a majority vote of the fund's: A. Board of Directors B. outstanding shares C. Board of Directors or the outstanding shares D. unaffiliated Directors
The best answer is C. The investment adviser contract, under the Investment Company Act of 1940, must be renewed annually by either a majority vote of the management company's Board of Directors; or a majority vote of the outstanding shares.
Which of the following is the MOST appropriate investment for an estate account? A. Investment grade long term bonds B. Long Treasury Bonds C. Treasury Bills D. Insured Municipal Bonds
The best answer is C. The objective of an estate account is to preserve principal and to effect a timely distribution of estate assets. The best investment of the choices offered is Treasury Bills - they are liquid and have little market risk. Long term bonds (the 3 other choices), even if they are liquid and safe, are subject to substantial market risk.
A customer that is willing to assume market risk should: A. only invest in stocks that have a beta of at least 1.00 B. invest a portion of his funding in Treasury Bonds to diversify the portfolio C. allocate a portion of his portfolio to negative beta stocks D. diversify the portfolio sufficiently to eliminate non-systematic risk
The best answer is D. Another name for market risk is systematic risk. A fully diversified portfolio only has market risk. A portfolio that is not fully diversified is said to have both systematic and non-systematic risk. Once enough stocks are added to the portfolio, non-systematic risk is diversified away, leaving the portfolio with only market (aka systematic) risk.
For any one year, what is the maximum amount that parents can contribute to a 529 plan for a child without incurring gift tax liability in 2015? A. $10,000 B. $14,000 C. $52,000 D. $140,000
The best answer is D. Donors contributing to a 529 plan can make a 1-time lump sum contribution to a 529 plan equal to 5 years of contributions based on the annual gift tax exclusion of $14,000 (in 2015). Using the 5 year rule, each parent may contribute 5 times the annual maximum ($14,000 x 5) or $70,000. A couple could double that amount to $140,000 without gift tax consequences.
A variable annuity contract shows an AIR in its prospectus of 5%. The performance of the separate account during the first month is actually 8% on an annualized basis; in the second period, the account performance is 6% on an annualized basis. The separate account's performance in the third month is 6% as well. A person who has annuitized his or her contract can expect that the: A. first, second, and third payments will be the same B. first payment will be the largest; the second payment will be lower; and the third payment will be the lowest C. second payment will be larger than the first or third payments D. third payment will be the largest; the second payment will be lower; and the first payment will be the lowest
The best answer is D. Here is an example of how the assumed interest rate works relative to the actual performance of the separate account in determining the monthly annuity payment. (This example shows the annual return applied to the monthly payment for simplicity. In actuality, the return would be 1/12th of the amount shown.) Month 1: Assumed monthly payment $100. (based on account earning 5% AIR) Assumed interest rate 5%; Actual interest rate 8% Since the actual performance was 8%, the excess is 3% over the 5% AIR. The first month's payment is increased by this excess and is now $100 + $3 = $103. This becomes the base for the next month's computation. Month 2: Assumed monthly payment $103. (based on account earning 5% AIR) Assumed interest rate 5%; Actual interest rate 6% Since the actual performance was 6%, the excess is 1% over the 5% AIR. The second month's payment is now $103 + $1 = $104. This becomes the base for the next month's computation. Month 3 Assumed monthly payment $104. (based on account earning 5% AIR) Assumed interest rate 5%; Actual interest rate 6% Since the actual performance was 6%, the excess is 1% over the 5% AIR The third month's payment is now $104 + $1 = $105. This becomes the base for the next month's computation. To summarize, as long as the actual return exceeds the AIR, the payment amount will increase. If the actual return equals the AIR, the payment amount stays the same. If the actual return is less than the AIR, the payment amount will decrease.
The vice president of a publicly traded company casually tells a close friend over dinner that the company's results are looking very weak this quarter. The friend offers some comforting words to the vice president and does not tell anyone else about the news. Which statement is TRUE? A. The vice president has violated the insider trading laws B. The friend has violated the insider trading laws C. Both the vice president and the friend have violated the insider trading laws D. Neither the vice president nor the friend have violated the insider trading laws
The best answer is D. The "tipper-tippee" doctrine applies only to cases where the tipper "intentionally" gives the information to the "tippee," who then trades on it. In this case, the "tippee" never traded, so there is no violation.
Which statements are TRUE regarding advisory contracts under the Investment Company Act of 1940? I Advisory contracts must be in writing II Advisory contracts must be approved by a majority vote of the outstanding shares III Advisory contracts can be terminated by a majority vote of the Board of Directors IV Advisory contracts can be terminated by a majority vote of the outstanding shares A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is D. Under the Investment Company Act of 1940, investment advisory contracts between the fund and the adviser must be in writing and must be approved by a majority vote of the outstanding shares. Termination of the contract is permitted with either a majority vote of the Board of Directors; or a majority vote of the outstanding shares.
