Series 65 Questions 6

Which of the following bonds is most likely to exhibit the greatest volatility due to interest rate changes? A bond with A) a low coupon and a long maturity. B) a high coupon and a long maturity. C) a low coupon and a short maturity. D) a high coupon and a short maturity.

A Other things equal, a bond with a low coupon and long maturity will have the longest duration and therefore greatest price volatility. LO 20.b

Kapco Advisers registers with the Administrator on April 1. Pete Patel, an IAR with Kapco, registers on the same day. Both of them file renewal papers, accompanied by the appropriate fees, on March 31 of the following year. Which of the following statements are true? I) Kapco's renewal was timely. II) Kapco's renewal was late. III) Patel's renewal was timely. IV) Patel's renewal was late. A) II and IV B) I and IV C) I and III D) II and III

A Regardless of when initial registration occurs, the renewal date for all professionals is December 31. LO 10.c

An investor is long stock in a cash account and does not expect the price to change in the immediate future. His best strategy to generate income may be to A) sell a call. B) buy a put. C) buy a call. D) sell a put.

A Selling a call against a security will generate additional income (the premium). An investor who writes a put receives additional income from the position but must also be willing to increase his position should the put be exercised. An investor who buys a call is speculating that the stock will soon rise dramatically. An investor who buys a put is speculating the stock will soon fall, not staying steady in price. LO 4.b

An investor interested in investing in sovereign debt would most likely purchase A) Sweden 2.5s of 2032. B) bonds backed by gold sovereigns. C) European Central Bank debt issues. D) bonds issued by the Bank of the United States.

A Sovereign debt refers to bonds and other debt instruments issued by a specific country. The European Central Bank manages the currency of the 19 countries that have adopted the euro. There is no such thing as the Bank of the United States, and gold sovereigns are coins—they are not used to back debt. LO 2.i

Which of the following is correct regarding zero-coupon bonds? A) They eliminate reinvestment rate risk. B) They sell at a premium. C) They offer minimum price volatility. D) They have low interest rate risk.

A Zero-coupon bonds are sold at a deep discount from par value and have no coupon payments. Because there is nothing to reinvest, there is no reinvestment risk. That is why many investors prefer zero-coupon bonds for specific goals, such as college education for children. The tradeoff is that no coupon also means higher interest rate risk. These bonds have maximum price volatility and respond sharply to interest rate changes. LO 2.j

Under the concept of inertial inflation, A) prices tend to remain the same until the system receives an economic shock. B) prices tend to increase at a steady rate until the system receives an economic shock. C) core inflation is a better measure of the actual inflation rate than the CPI. D) inflation and deflation alternate at regular intervals.

B Inertial inflation is an economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs, at which time, the rate of inflation changes. It is true that most economists view the core inflation rate as a more accurate measure of true inflation than the CPI, but that has nothing to do with inertial inflation. LO 6.d

All of the following are characteristics of a rights offering except A) the rights are marketable. B) the subscription price is below the current market value. C) it is issued to current stockholders. D) the subscription period is up to two years.

D Rights offerings are usually very short-lived (30 to 45 days). LO 4.c

If a corporation issues mortgage bonds, all of the following would be affected except A) working capital. B) total assets. C) total liabilities. D) shareholders' equity.

D This is it affects total assets and total liabilities and those cancel out. It affects current assets which will have an effect on working capital When issued, the corporation receives the net proceeds in cash, increasing current assets (and thus total assets). Simultaneously, the corporation's long-term liabilities increase, reflecting the debt (and thus total liabilities). Working capital increases because of the increase in current assets. Shareholders' equity, or net worth, is only affected by the sale of new equity securities or by any profit or loss generated by the corporation. LO 7.b

A securities trade is made. Under normal circumstances, all of the following would be noted on the order ticket except A) the name of the individual who transmitted the order B) the account number C) the registered agent who accepted the order D) the time stamp of the time of order submission

A Transmitting an order is a clerical function, and we don't put that on the order ticket. A typical ticket will include the account for which the trade is being made, the registered individual placing the order for the client, time stamps for entering and execution (or cancellation), execution price, and terms and conditions of the order (market, limit, etc.). LO 23.f

What happens to bond durations when coupon rates increase and maturities increase? As coupon rate increase, duration? As maturities increase, duration? A) increases. increases. B) decreases. increases. C) decreases. decreases. D) increases. decreases.

B As coupon rates increase, the duration on the bond will decrease because investors are receiving more cash flow sooner. As maturity increases, duration will increase because the payments are spread out over a longer time. LO 20.b

All of the following would flow through as a loss to limited partners except A) accelerated depreciation. B) principal repayment on partnership debt. C) depletion. D) interest payments on partnership debt.

B Principal repayments are not an expense for tax purposes. The interest on the debt is an expense and, along with depletion and depreciation expenses, does flow through to the limited partners as passive loss. LO 5.a

Which of the following is not included in the calculation of a mutual fund's NAV per share? A) Closing values of portfolio assets B) Accrued sales charges C) Accrued management fees D) Accrued custodian bank fees

B Sales charges have nothing to do with a mutual fund's net asset value (NAV). The NAV is computed by subtracting all liabilities (it is the investor who pays the sales charge, not the fund) from the fund's assets. The principal asset is the portfolio, and that is valued as of the close of the markets, generally 4:00 pm ET. LO 3.b

Which of the following statements is most accurate when describing equity straddle options? I) The option buyer is looking for market volatility. II) The option buyer is looking for market stability. III) The option seller is looking for market volatility. IV) The option seller is looking for market stability. A) II and IV B) II and III C) I and IV D) I and III

C A straddle is the combination of a put and a call on the same stock with the same strike prices and expiration dates. The solution to the question is the same for any option position in that option buyers need price movement and option sellers make money from stability. In the case of a straddle, a buyer is expecting sharp movement but does not know the direction of the move. The seller of the straddle will benefit if there is no significant price movement. LO 4.b

Which of the following indexes represents the largest portion of the domestic stock markets? A) Russell 2000 B) MSCI EAFE C) Standard & Poor's 500 D) Wilshire 5000

D Although there are no longer 5000 stocks in the Wilshire 5000, it is still the broadest index representing the domestic stock markets. The MSCI EAFE is an index of foreign securities. LO 22.b

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's A) previous high B) 200-day moving average C) resistance level D) support level

D Sell stops are entered below the market. They are used to turn an order into a market order if the current market value falls below the stop level. In technical analysis, support levels are theoretical levels where the market supports the stock price (keeps it from falling below the stated level). A technical analyst who makes investment decisions by watching the technical graphs and numbers would enter a sell stop below a support level in order to sell out if the support level is breached. A breakthrough of a support level is believed to forecast a major market price decline. LO 21.d

Moonglow Specialties, Inc., is paying a quarterly dividend per share of $0.05. Based on a current share price of $10, the dividend yield is closest to A) 2.00%. B) 0.50%. C) 20.00%. D) 1.25%.

A Dividend yield = annual dividend per share ÷ share price. If the annual dividend per share is $0.20 and the share price is $10.00, then the yield is $0.20 ÷ $10.00, which is 2%. This may also be referred to as the current yield. LO 20.h

If applicable, disclosure of payment for order flow is required A) on the customer trade confirmation. B) on the customer order ticket. C) if requested by the customer. D) when the trade is in an exempt security.

A If the broker-dealer executing the customer's trade received payment for order flow, it must be disclosed on the customer trade confirmation. This is not an optional disclosure. LO 23.e

An investor buys five put contracts with a strike price of $55 per share. The current price of the underlying stock is $60 and the option premium is $7. The commission schedule is as follows: Trade Amount / Commission Rate ≤ $2,500 / $35 + 0.9% of trade amount $2,501-$11,999 / $35 + 0.7% of trade amount ≥ $12,000 / $35 + 0.5% of trade amount Using the information provided, what is the total commission cost for this trade? A) $59.50 B) $199.50 C) $297.50 D) $39.90

A The cost per contract is $7 × 100 shares, or $700. That makes the total trade amount $700 × 5 contracts, or $3,500, which qualifies for the commission rate of $35 + 0.7% of the trade amount. The math is $35 + (0.7% of $3,500) = $35 + (0.7% × $3,500) = $35 + $24.50 = $59.50 total charge. LO 4.e

An analyst has prepared a lengthy research report on KLUM Corporation and concluded that the stock has a 50% chance of returning 4%, a 20% chance of returning 2%, and a 30% chance of returning -10%. Based on this information, you could calculate the probable return of this stock as A) +0.6% B) -0.6% C) +3.0% D) +5.4%

B We simply multiply the individual returns by the likely percentage and then add them together. 50% of 4% equals +2%. 20% of 2% equals +0.4%. 30% of minus 10% equals -3%. The sum is 2% + 0.4% = 2.4%, minus 3% equals an expected return of -0.6%. Yes, it is possible that you will have a question with a probable return that is negative. LO 22.a

Sales made under the provisions of Rule 506(b) of Regulation D must be reported on A) Form 13F. B) Form U4. C) Form D. D) Form 506.

C Form D is the form that must be filed electronically with the SEC no later than 15 days after the first sale of securities in the offering. LO 8.d

Which of the following bonds has the shortest duration? A bond with A) a 20-year maturity, 6% coupon rate. B) a 20-year maturity, 10% coupon rate. C) a 10-year maturity, 10% coupon rate. D) a 10-year maturity, 6% coupon rate.

C Two factors go into the computation of a bond's duration - the length to maturity and the coupon rate. When the maturities are the same, the bond with the highest coupon has the shortest duration. When the coupons are the same, the bond with the nearest maturity has the shortest duration. The 10% bond maturing in 10 years "wins" on both counts. It has the nearest maturity with the highest coupon. All else being equal, a bond with a longer duration will be more sensitive to changes in interest rates. LO 20

Which of the following investments is not registered under the Investment Company Act of 1940? A) FACCs B) ETFs C) UITs D) ETNs

D Exchange-traded notes, sometimes called equity-linked notes, are registered under the Securities Act of 1933 as debt instruments. All of the other choices are registered as investment companies under the Investment Company Act of 1940. LO 5.c

All the pundits are predicting bad times ahead—not only a recession but a period where prices actually fall (deflation). If they are right, the best place for your client would probably be A) real estate. B) gold. C) common stock. D) U.S. Treasury securities.

D It is times like this that the flight to safety has investors commit their funds to U.S. government securities. Gold (and other commodities) tends to increase in price during inflationary, not deflationary, periods. Both real estate and equities tend to rise when things are good, not during recessions. LO 6.d

What new benefit did the TCJA of 2017 bring to 529 plans effective 2018? A) Qualified withdrawals of up to $10,000 per year to pay for K-12 expenses B) Withdrawals may be made for qualified expenses at certain foreign educational institutions. C) Tax-deductible contributions of up to $10,000 per year to pay for K-12 tuition D) Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition

D The big change was the ability to use a 529 plan for K-12 expenses. However, the only expense that qualifies is tuition and there is a maximum limit of $10,000 per year. No contribution to any 529 is tax deductible. The use of the 529 for foreign educational institutions pre-dates the TCJA of 2017. LO 18.h

Fusion Financial is a broker-dealer registered in States A, B, and C, with its home office in State B. A complaint is filed against the firm by a client who resides in State A. Under the powers granted under the Uniform Securities Act, the Administrator of State B could do all of the following except A) gather evidence from State A. B) gather evidence from State B. C) subpoena witnesses from State C. D) issue an injunction against Fusion Financial.

D ​​An Administrator has the power to gather evidence both within and outside of the home state, as well as subpoena evidence and witnesses in any state.​ Only the courts can issue an injunction.​ LO 12.b

A customer who sold a bond at a loss must wait how long before he can buy back a substantially identical bond and not have the sale classified as a wash sale? A) 31 days B) 5 days C) 0 days D) 20 days

A When a customer sells a security at a loss, he may not buy back the same (or a substantially identical) security from 30 days before to 30 days after the sale that established the loss, without having the loss disallowed. LO 15.c

An agent making a sales presentation to a client about a mutual fund's historical returns is required to explain to the client the difference between the fund's A) current yield and total return. B) current yield and holding period return. C) total return and risk-adjusted return. D) current yield and real return.

A When comparing to a benchmark, it is common to show various return computations. In connection with the solicitation of investment company shares, it is considered an unfair business practice to discuss returns without fully explaining the difference between current yield and total return. LO 22.a

Which of the following would not be justification for the Administrator to cancel the registration of an agent? A) A court has declared the agent mentally incompetent. B) The agent violated several provisions of the Uniform Securities Act . C) The Administrator's repeated attempts to contact the agent were futile. D) The agent has been reported as deceased.

B Cancellation is a form of nonpunitive termination. If an agent dies or is declared mentally incompetent, or if mail is returned with no forwarding address, registration will be canceled. Violation of the act is cause for disciplinary action, not cancellation. LO 12.c

Which of the following statements regarding preemptive rights is true? A) Neither common nor preferred stockholders have the right to subscribe to a rights offering. B) Preferred stockholders do not have the right to subscribe to a rights offering. C) Both common and preferred stockholders have the right to subscribe to a rights offering. D) Common stockholders do not have the right to subscribe to a rights offering.

B Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock. LO 1.c

Which of the following has the power to close a stock exchange for up to 90 days? A) The president of the United States B) The SEC C) The Administrator in the state where that stock exchange is located D) The president of that stock exchange

B The Securities Exchange Act of 1934 granted the SEC the power to close any registered stock exchange for up to 90 days. All that is required is notice to the president of the United States. LO 23.c

An investor plans to fund the college education for her newborn child by purchasing $5,000 of investment-grade bonds on an annual basis. She is most likely using A) the 529 plan strategy. B) the bullet strategy. C) the barbell strategy. D) the laddering strategy.

B The bullet strategy is used when aiming at a target. In this case, the target is having sufficient funds about 18 years from now. This strategy involves buying bonds at different intervals, but all with approximately the same maturity date. The barbell strategy has all bonds purchased at the same time with two different sets of maturities - half of the bonds mature near term and half mature intermediate term. Laddering requires purchasing bonds on a regular basis, but not with new funds as this investor is doing. As bonds mature, the proceeds are rolled-over into new bonds. She may be doing this in a 529 plan, but the plan is not a strategy, it is a type of account. LO 21.f

One of your clients buys 300 shares of RIF common stock in March at $25 per share. Three months later, the client purchases 200 shares of RIF at $30 per share. One month later, RIF pays a dividend of $1 per share. Then, five months later, another purchase of RIF is made—this time 400 shares at $35 per share. If the client were to sell all RIF at $30 per share, what is the client's capital gain or loss? A) No gain or loss B) $500 loss C) $400 gain D) $500 gain

B The investor's total cost is $27,500 for the 900 shares purchased. The proceeds of the sale are $27,000 (900 × $30). That results in a capital loss of $500. The cash dividend has nothing to do with capital gain or loss. LO 15.c

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investments and must distribute at least what percentage of its taxable income to shareholders annually in the form of dividends? A) 75% B) 90% C) 50% D) 70%

B Under SEC rules, to qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investments and must distribute at least 90% of its taxable income to shareholders annually in the form of dividends. Don't confuse this with the requirement to have at least 75% of its income from real estate or 75% of its assets invested in real estate-related assets. LO 3.h

When does a customer have to receive the OCC Options Disclosure Document? A) Within 5 business days of the first options trade B) At or prior to accepting the customer's first order to trade options covered by the ODD C) Within 15 days of account approval by the firm's designated options supervisor D) With the confirmation of the first options transaction

B When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account or accepts the customer's first order to trade the listed options covered by the ODD. LO 16.a

What information is required on an application for registration as an agent? I) The form of business (corporation, partnership, LLC, etc.) II) Felony convictions, whether securities related or not III) A statement of financial condition IV) Citizenship information A) I and II B) I and III C) II and IV D) III and IV

C Applicants for registration as agents must include any felony conviction (misdemeanors are limited to those that are securities related) and a statement of citizenship. Agents can only be individuals, not business entities, and it is only broker-dealers and investment advisers that must submit financial information. LO 11.f

What is the total return on a 1-year, newly issued (365 days to maturity) zero-coupon bond priced at 950? A) The return cannot be determined without knowing current interest rates B) 5.00% C) 5.26% D) 5.26% plus the implied coupon rate

C To determine the total return on this zero-coupon bond, the $50 capital appreciation is divided by the cost of the bond (in this case, $50 divided by $950 equals a total return of 5.26%). Total return of a zero-coupon bond is made up entirely of the difference between the cost of the bond and the sale or maturity price of the bond. LO 22.a

Under federal law, an application for becoming an associated person of a broker-dealer would be denied for an individual A) convicted of a felony 122 months ago. B) accused of a securities-related felony 110 months ago. C) who is not a citizen of the United States. D) pleading no contest to a misdemeanor involving a financial matter 65 months ago.

D An individual who is convicted of, or has pleaded guilty or no contest to, any felony or certain misdemeanors in the previous 10 years (120 months) is subject to statutory disqualification. Therefore, the misdemeanor involving a financial matter within the past 10 years is a cause for disqualification. A conviction made more than 10 years ago is part of the record but not cause for disqualification. One is presumed innocent until proven guilty, so merely being accused is not the same as being convicted. There is no requirement that a registrant be a U.S. citizen. LO 11.f

If the current risk-free rate is 3% and the expected market risk premium is 6%, what return should we expect from a security that has a beta of 2? A) 12% B) 9% C) 18% D) 15%

D In most questions of this type, we are given the market return. Here, there is a trick. We are told there is a market risk premium of 6%. That means that the market return must be 6% above the risk-free rate, or 9%. Now, we can plug in the formula. Expected return = 3% + ([9% -3%] × 2) = 3% + (6% x 2) = 3% + 12% = 15%. In this question, because we're already given the risk premium, we can avoid the first step. That would be 3% + (6% x 2) = 3% + 12% = 15%. LO 21.h

An investor owns a long-term U.S. Treasury bond with a 5% coupon and 15 years to maturity. The client wishes to sell and receives a quote from a dealer of 104.22. This number represents A) the bid price B) the premium C) the yield to maturity D) the offer price

A If you are looking to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, then the quote would have been the offer (ask) price. What does the 5% coupon and the 15 years to maturity have to do with the question? notHING. And, knowing that treasuries are quoted in 32nds has nothing to do with it either. And, one more thing. The price quote is above 100, so it is at a premium, BUT the better answer is bid price because the question is referring to the quote. LO 23.e

In order for a security to lawfully be sold or offered under the Uniform Securities Act, it must meet at least one of the following requirements except A) that it is registered with the SEC. B) that it is sold in an exempt transaction. C) that it is an exempt or federal covered security. D) that it is properly registered with the Administrator.

A It is unlawful to sell a security in a state unless the security is a federal covered security, exempt from registration under the USA, sold in an exempt transaction, or registered under the act. There is no requirement that a security be registered with the SEC; that is the primary purpose of registration by qualification—registering a security on the state level that is not SEC-registered. LO 8.c

Which of the following would not be cause for automatic rejection of an investment adviser representative's application? A) Lack of experience B) Current insolvency C) Lack of evidence of skills or training D) Evidence of fraud in the application

A Lack of experience on its own is not sufficient cause for an application for registration as an investment adviser representative to be rejected. It is expected that the individual will receive adequate training. Fraudulent information in an application and financial problems are obvious causes for rejection. LO 12.c

Which of the following statements is true about sales of new issues under the Securities Exchange Act of 1934? A) The use of credit to purchase new issues is prohibited for the first 30 days. B) Installment payments are allowed on purchases. C) The SEC determines what issues may be purchased on margin. D) Credit may be used in purchasing new issues.

A The Securities Exchange Act of 1934 specifically bars the use of credit in purchasing new issues for the first 30 days from the date of issue. In addition, it prohibits installment payments on issues that can be bought on margin. The Securities Exchange Act of 1934 also empowered the Board of Governors of the Federal Reserve Board (FRB) to set margin requirements, and the FRB determines which issues may be purchased on margin. LO 23.a

An investor purchased 100 shares of a stock at $100 per share on January 1. On the following July 1, the shares were sold for $120 per share. The tax consequences are A) a $2,000 short-term loss. B) a $2,000 short-term gain. C) a $2,000 long-term gain. D) a $2,000 long-term loss.

B One hundred shares sold for $120 per share that were purchased for $100 per share results in a capital gain of $2,000. Because the holding period did not exceed one year, the gain is considered short term for tax purposes. LO 15.c

A client is long 400 shares of ABC common stock. The current market price of ABC is $150 per share. The client is of the opinion that the market is going to be moving sideways for a while and would like to generate additional income from the ABC stock. What strategy might you recommend? A) Buy two ABC 150 put options and write two ABC 150 call options B) Write four ABC 150 put options C) Write an ABC 150 call option D) Write four ABC 150 call options

D Writing call options on a long stock position (a covered call) is a common strategy for generating additional income from a stock holding. If the market moves sideways (neither up nor down), the option will likely expire unexercised and the client will earn the premium and still have the stock. Being long 400 shares would mean writing four contracts. Writing put options would generate premium income, but if the stock price falls, the writer could be exercised requiring the purchase of an additional 400 shares at $150 per share (the client really doesn't want to own 800 shares). If the client buys two options and sells two options, the premiums will likely offset each other and not help the client reach the objective of generating additional income. LO 4.b

As a general matter, the regulators do not treat posts by customers or other third parties as the firm's communication with the public. Under certain circumstances, however, third-party posts may become attributable to the firm. Whether third-party content is attributable to a firm depends on whether the firm has (1) involved itself in the preparation of the content or (2) explicitly or implicitly endorsed or approved the content. Where the firm has involved itself in the preparation of the content, it is known as A) adoption. B) fraud. C) entanglement. D) preparation.

C Entanglement is the term used to describe material posted to a securities professional's social media site by a third party, where the securities professional has taken part in the preparation of the material. This differs from adoption, where the firm has endorsed or approved of the post but played no part in its preparation. LO 13.h

Which of the following would be deemed to be an assignment of an investment adviser's contracts? I) All of the stock in NLT Advisers, a corporation, is acquired by MMS Advisers, Inc. II) The Lucky Seven Partnership is an investment adviser with seven partners. Four of the partners make a fortune and decide to retire. They are replaced by new partners. III) Albert is an investment adviser. His clients' accounts are automatically debited monthly for his fee. Because of this steady cash flow, his banker readily accepts a pledge of these accounts as collateral for a loan. A) I and III B) II and III C) I and II D) I, II, and III

D It is deemed to be an assignment whenever a majority interest in an adviser changes hands. Pledging a client's contract is considered to be an assignment. LO 13.e

Which of the following sources of income is eligible for funding an IRA? A) Income received as a shareholder of an S corporation B) Child support C) Income received as a limited partner D) Income received as a sole proprietor

D Only earned income can be used to fund an IRA. When a business is run as a sole proprietorship, the income reported on the taxpayer's Schedule C is considered earned. As a shareholder of an S corporation or a limited partner in a partnership, the income received is considered passive rather than earned and may not be used to fund an IRA. Child support is not earned income and alimony received from a divorce settlement dated January 1, 2019 or later is also not considered earned. LO 18.a

Which of the following offers the opportunity to realize a capital gain rather than ordinary income? A) Section 529 plans B) Cash dividends C) Deferred annuities D) Stock dividends

D Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead, they reduce the owner's cost basis and, when sold at a price above that cost basis, are treated as a capital gain rather than ordinary income. Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty. LO 15.c

Which of the following statements concerning international direct investing is correct? A) Information is not as readily available on foreign investments as on domestic ones. B) Foreign markets are usually mature and offer no growth advantages. C) The addition of foreign securities to a portfolio may result in increased portfolio risk due to the different movements of foreign markets and U.S. markets. D) The rates of return on foreign securities are generally less than those available from U.S. markets.

A diversification decreases risk In general, foreign investments don't have the transparency of domestic ones. Rather than directly investing in the foreign security, trading the ADR has the advantage of the full disclosure requirements of the SEC. Investors may earn higher returns in foreign markets, and including foreign securities in an investment portfolio may lower risk through greater diversification. This is because there may be a low correlation with U.S. markets. Although securities markets in most developed economies are mature, that doesn't mean they can't grow, and the markets in emerging economies offer great potential growth commensurate with their greater risk. LO 1.f

An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. Which of the following is true? A) There are no additional requirements; he will receive the breakpoint. B) The fund will liquidate shares to meet the additional sales charge. C) He must sign a new letter for the $2,000 to receive the breakpoint. D) He has 90 days to invest the additional $2,000 for the breakpoint.

B An investor has only 13 months to meet a letter of intent commitment. Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had originally given the investor. This is accomplished by liquidating a sufficient number of shares to cover the additional sales charge to be imposed. LO 3.c

Which of the following investment advisers would be permitted to use the term investment counsel? A) An investment adviser who has been admitted to the bar in the state in which the firm's principal office is located B) A financial planner offering a wide range of services to his clients, including tax planning, estate planning, insurance planning, and investment advice C) A firm whose exclusive business is placing clients' assets into model portfolios D) A professional providing a market timing service with an annual subscription fee of $995, with this service attempting to maximize profits by suggesting entry and exit points for over 100 listed stocks

C In order for the term investment counsel to be used, two criteria must be met. First, the principal business of the adviser must be the rendering of investment advice. Second, the nature of the advice must meet the definition of investment supervisory service. That means giving continuous investment advice to clients based on their individual needs. That is frequently accomplished by selecting model portfolios most appropriate to the client's needs. The financial planner clearly is not principally in the business of offering investment advice because he describes his service as offering a wide range of services, of which advice is only a part. The exam frequently uses that wording to indicate that advice is not the principal activity. While the publisher's principal business activity may be offering advice, nothing about the description indicates that individual client accounts are being monitored. LO 9.a

One of your customers called you on Wednesday at 8:00 am ET and asked you to buy $10,000 of the Liberty Balanced Fund Class A shares. If the Wednesday morning financial pages show the fund's NAV to be $45.83 and the POP to be $48.24 and the Thursday morning quote shows the NAV as $46.22 and the POP as 48.65, what is the price per share for this purchase? A) $45.83 B) $48.24 C) $48.65 D) $46.22

C One of your customers called you on Wednesday at 8:00 am ET and asked you to buy $10,000 of the Liberty Balanced Fund Class A shares. If the Wednesday morning financial pages show the fund's NAV to be $45.83 and the POP to be $48.24 and the Thursday morning quote shows the NAV as $46.22 and the POP as 48.65, what is the price per share for this purchase? A) $45.83 B) $48.24 C) $48.65 D) $46.22 Explanation

Which of the following investments would provide the highest after-tax income to your client in the 35% federal income tax bracket? A) 5% general obligation municipal bond issued by State H B) 6% U.S. Treasury bond C) 8% debenture issued by the LMN Corporation D) 7% bond issued by Canadian Province M

C Only the State H bond is exempt from federal income tax. Using the tax-equivalent yield formula of the muni coupon divided by (100% minus the investor's tax bracket %), we get 5% divided by 65%, or 7.7%. That's a better deal than receiving 6% on the Treasury and paying taxes as well as 7% on the Canadian bond (although you learned that securities issued by Canadian provinces were exempt from registration under the Uniform Securities Act, that has nothing to do with U.S. income taxes). However, with a TEY of 7.7%, your client would take home more with the 8% taxable corporate security. You can also work backward to get the correct answer. Simply subtract 35% tax from each of the choices (other than the muni) and see which is the highest. In this case, 8% minus a 35% tax equals 5.2%—just a bit higher than the 5% coupon on the municipal bond. LO 2.h

Under the USA, the Administrator may do all of the following except A) prescribe form and content of financial statements required under the act. B) conduct hearings in public, unless—at the Administrator's discretion and with agreement of all parties—the Administrator decides otherwise. C) mandate the method used to maintain and file records. D) take jurisdiction over any person who sells or offers to sell either when the offer is made in the state or when an offer to buy is made and accepted in the state.

C The Uniform Securities Act does not grant the Administrator the power to make any specific bookkeeping method mandatory. The only requirement is that the books and records must accurately reflect the nature of the firm's business. LO 11.e

Under the Uniform Securities Act, the Administrator may require that a prospectus for a security registered under qualification be sent or given to each person to whom an offer is made A) before or concurrent with the filing of the registration statement. B) only upon request of the offeree. C) within 72 hours of the effective date. D) before the sale of the security.

D Under registration by qualification, the USA specifies that the Administrator has the power to require prospectus delivery before the sale of the security. That means the offeree (the investor), receives the prospectus prior to making a purchase. There is no prospectus prior to or concurrent with the filing. Because the prospectus is not available until the effective date, one can't be distributed prior to the effective date. LO 8.g

One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that A) the bargain element of the ISO is reported as wages on the tax returns of the employer and the employee. B) gains on an ISO are always short term, while those on an NQSO are long term. C) there is a maximum five-year limit for exercise on the ISO, while the time limit on the NQSO is 10 years. D) the bargain element of the ISO is an AMT preference item.

The only true statement here is that the bargain element (the difference between the current market price at the time of exercise and the strike price) of the ISO (but not the NQSO) is one of the preference items for the alternative minimum tax. It is the bargain element of the NQSO that is reported as wages and it is possible, although difficult, to have long-term capital gains on both. Only the ISO has a maximum time limit and it is 10 years, not five. LO 1.d

Partners with the United States in the creation of Brady bonds were which of these? I) International Monetary Fund (IMF) II) Import/Export Bank III) United Nations IV) World Bank A) I and IV B) II and III C) I and II D) III and IV

A Joining the United States in creating Brady bonds were the IMF and the World Bank. LO 2.i

An investor is trying to decide whether to purchase $10,000 face amount of a U.S. Treasury bond or a highly rated corporate bond. The price of the Treasury bond is 102.20 while the price of the corporate bond is 99 3/8. If the investor decides to purchase the Treasuries, disregarding commissions, the price difference is A) $325.00. B)\ $282.50. C) $28.25. D) $32.50.

A The first step is remembering that Treasuries are quoted in 32nds. That means that 102.20 is 102 and 20/32 which is 102 5/8. Subtract 99 3/8 from 102 5/8 to get 3 2/8 or 3 1/4. On a $1,000 bond, that is $32.50. Then, note that this investor is purchasing 10 bonds, so the difference in price is $32.50 times 10 or $325. LO 2.c

Consent of the client before completion of a trade made between the firm and a client must be made when A) a broker-dealer will be acting as a contra party to the trade. B) an investment adviser will be acting in the capacity of a principal. C) a broker-dealer will be acting in the capacity of a principal. D) a broker-dealer will be acting in the capacity of an agent.

B In those uncommon cases where an investment adviser acts in the capacity of a principal (or agent) with an advisory client, consent of the client before completion of the transaction is required. In the case of broker-dealers, disclosure of capacity on the trade confirmation, but not consent, is needed. LO 13.a

An investment adviser representative has constructed a portfolio for a client that is 20% U.S. government bonds, 20% corporate bonds, 20% preferred stock, 15% common stock in public utilities, 10% in cash and 15% in small cap stocks. From this, you could safely assume that the client's investment objective is: A) income. B) preservation of principal. C) capital appreciation. D) growth with income.

A 85% of this portfolio is generating income. The only appreciation or growth is coming from the small cap stocks, but they are too small a percentage to be significant. However, with 50% of the portfolio in equities (20% preferred, 15% utilities and 15% small caps) one could not expect preservation of capital to be primary. LO 17.d

When performing a capital needs analysis for a client, factors to be considered would include I) the client's projected earnings II) the projected inflation rate III) projected market volatility IV) the client's age A) III and IV B) I, II, and IV C) I and II D) I, II, III, and IV

B A capital needs analysis is used to help determine the proper amount of life insurance that will provide for the family's needs in the event of premature death of the primary breadwinner. The agent would factor in the client's projected earnings until retirement and, in order to do that, would need to know the current age. In addition, to be sure to allow for enough to keep up with the rising cost of living, the projected inflation rate is needed. However, market volatility does not impact the analysis because the amount of the selected death benefit will remain constant, regardless of changes to the market. LO 17.c

A frequent concern of parents initiating a savings plan for the college education of their child is the lack of control over the assets, particularly if the child decides to forego higher education. When you have a client who shares this concern with you, it would be most appropriate to suggest A) U.S. Treasury zero-coupon bonds. B) a Section 529 plan. C) opening a new account in the client's name for this purpose. D) an UTMA account.

B One of the features of the Section 529 plan is that the donor maintains control over the funds in the account. Therefore, should the child not go to college, the money can either be transferred to another family member or withdrawn by the donor (although that will incur taxation issues). With an UTMA account, once the child reaches the termination age set by the state, the money is now hers. The zero-coupon bonds would have to be purchased in a custodial account so the issue is the same. Yes, the client could open a separate account and consider its usefulness for the child's education, but there are no tax benefits, unlike with a 529 plan. Furthermore, there might be complications, such as those assets not being protected from creditors. LO 18.i

Which of the following would not be considered a nonissuer transaction as defined in the Uniform Securities Act? A) Buffy Warren, the largest shareholder in Barkshire Mathaway, purchases an additional 50,000 shares on the NYSE. B) Gates Williams, the largest shareholder in Maxihard Corporation, sells 100,000 shares in a registered secondary transaction. C) Gemco, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in Gemco stock. The stock was donated to Gemco by a former officer of the firm. D) In its capacity as a market maker, XYZ Securities sells 200 shares of Gemco common stock to the corporate treasurer of Gemco, buying for the company's investment account.

C A nonissuer transaction is one in which the issuer does not receive the proceeds of the sale. When a stockholder sells his shares, he is the one who receives the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in. When an issuer sells shares, whether in a primary or secondary transaction (as is the case with the donated shares), if it receives the proceeds, it is an issuer transaction. LO 8.b

Which of the following is the most appropriate action for an agent to take after receiving a written complaint letter from a client? A) Forward the complaint to the Administrator and maintain a copy in the agent's records. B) Place a telephone call to the client to resolve the issue. C) Commence a thorough investigation and provide a report of the results to the agent's employer. D) Turn the letter over to the agent's supervisor.

D Any agent or investment adviser representative receiving a written customer complaint is required to turn the complaint over to their supervisor without delay. LO 14.i

If the Consumer Price Index (CPI) is down but consumer demand is up, the economy is likely in which stage of the business cycle? A) Recovery to expansion B) Peak to contraction C) Contraction to trough D) Recovery to trough

A As prices trend downward and consumer demand increases, the economy is moving from recovery to expansion. As demand continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak. LO 6.a

An agent with a broker-dealer is suddenly called out of town on a personal family matter. While away, the agent's unregistered sales assistant receives a phone call from an existing client wishing to purchase 200 shares of a listed stock. What would be the most appropriate action for the sales assistant to take? A) Explain that the agent is out of town and request the client to call back with the order next week. B) Route the call to a licensed agent in the office. C) Accept the order because it is from an existing customer. D) Accept and place the order because it is unsolicited.

B The fact that the order is unsolicited does not preclude the rule that under no circumstances may an unregistered individual accept and place orders. LO 11.d

ABC Manufacturing Company is in the business of making high-quality machine tools. Which of the following would be included in ABC's cash flow from financing activities? A) Payment of cash dividends B) The purchase of a new computer-driven lathe C) The sale of XYZ Lathe Manufacturing bonds D) The purchase of a new building to store inventory

A All financing activities deal with the flow of cash to or from the business owners. Who do dividends go to? The company's shareholders, and that is why they are included in financing activities. The other choices are part of cash flow from investing activities. LO 7.d

In the securities industry, when a person is acting in an agency capacity, the form of compensation received is A) commission B) fees C) account maintenance charges D) markup or markdown

A Broker-dealers act in the capacity of brokers (agency); they earn commissions. When acting in the capacity of a dealer (principal), the compensation comes from markup or markdown. Compensation in the form of fees is most common for investment advisers. LO 23.d

All of the following actions must be completed prior to customers entering their first option trade except A) receipt of a completed options agreement B) completion of the new account form C) approval by a designated options supervisor D) delivery of the options disclosure document (ODD)

A Customers do not have to complete (sign) the options agreement prior to entering an order; under current rules, the agreement must be signed and returned by the customer within 15 days of account approval. LO 16.a

Before taking any disciplinary action with respect to a registration under the Uniform Securities Act, the Administrator must always do which of the following? I) Obtain the approval of the appropriate state court. II) Find that the action is in the public interest. III) Cite a cause listed in the act. A) II and III B) I, II, and III C) I and II D) I and III

A Disciplinary actions with respect to registration may be taken by the Administrator after a finding of public interest and cause. Court orders are required only for legal action, such as seeking an injunction or appointment of a receiver over an adviser's assets. LO 12.c

Which of the following would fall under the USA's definition of exempt transaction? A) An agent accepts an order from a client after having sent a research report dealing with that security. B) An issuer sells a new issue to a broker-dealer. C) An investment adviser purchases securities from the issuer. D) A real estate partnership sells interests to the public with no commission charge.

B Transactions between issuers and broker-dealers (but not investment advisers) are exempt transactions. As long as the sale is to the public, regardless of commissions charged (or not charged), the transaction is nonexempt. Don't be lured into thinking that accepting an order from a client is unsolicited. That's not true in this case because it is the result of the research report. LO 8.d

If an agent recommends the purchase of a technology company with an impressive growth record but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has A) not violated the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents because no untrue statements were made. B) not committed a prohibited business practice. C) committed a prohibited business practice by selling an unsuitable investment. D) violated the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.

D The agent has violated the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents by failing to inform the client of the potential downside in the sale of a security. LO 14.i

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) $36.38. B) $34.46. C) $26.11. D) $32.55.

D 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

Keogh Plans are qualified plans intended for those with self-employment income and owner-employees of unincorporated businesses or professional practices filing a Form 1040 Schedule C with the IRS. Which of the following statements relating to Keogh Plans is not true? A) The maximum allowable contribution to a Keogh Plan is substantially higher than that for an IRA. B) A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan. C) A participant in a Keogh Plan may also maintain an IRA. D) Owner-employee businesses and professional practices must show a gross profit in order to qualify for a tax-deductible contribution.

B Rollovers are permitted into an IRA regardless of any plans maintained. Tax-deductible contributions are not allowed unless there is potentially taxable income against which to deduct. Anyone with earned income may have an IRA, regardless of participation in another qualified plan, and the Keogh Plan contribution limits are much higher than those for an IRA. LO 18.c

A transactional exemption would be available under the Uniform Securities Act when an agent for a broker-dealer A) Sells a retail client $10,000 of U.S. Treasury bonds. B) sells a large block of an unregistered nonexempt security to an insurance company that is not authorized to do business in this state. C) receives an unsolicited order from a client to purchase heating oil contracts. D) sells a large block of an unregistered nonexempt security to an individual who meets the definition of an accredited investor.

B The sale of a security to an institution, such as an insurance company, is considered an exempt transaction. The fact that the company is not authorized to do business in the state only means that its securities would not be exempt, but that does not change the fact that this is a sale to an institution and is, therefore, exempt. The term accredited investor is meaningless here; only institutions qualify for exempt treatment, not rich people. The T-bonds are an exempt security, but the sale to a retail client is not an exempt transaction. Heating oil contracts are a commodity, not a security. LO 8.d

Affray Compassionate Finance Company (ACFC) is offering $100 million of 150-day commercial paper for sale in State L. The paper is available in minimum denominations of $100,000 and has been rated AA by a leading rating organization. Whom of the following would be required to register as an agent in State L in order to legally sell this security in the state? A) An employee of ACFC who receives a 1% commission on sales B) An agent of a broker-dealer registered in the state C) None of these (Because this security is exempt from registration, offers and sales can be made without registration as an agent.) D) An investment adviser who recommends this security to clients

B Those individuals who represent broker-dealers registered in the state must register as agents in that state if they wish to sell securities to that state's residents. It makes no difference what kind of security it is or to whom the security is being sold. Yes, this is an exempt security (less than 270 days' maturity; minimum $50,000 denomination; rating in the top three grades), but that only means that the security does not have to register. An exclusion from the definition of agent is given to those who represent issuers of certain exempt securities. Commercial paper is one of the five cases where this exclusion applies, so ACFC's employee would not be defined as an agent. This is true even though compensation is being received. Investment advisers don't register as agents if all they do is give investment advice. LO 11.d

A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) a large-cap growth fund B) an intermediate-term government bond fund C) a long-term government bond fund D) an intermediate-term, high-grade corporate bond fund

D In all of these cases, liquidity should not be a problem because mutual funds have a 7 day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolio offers that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection. LO 17.d

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) Unregistered stock acquired by a nonaffiliate under an investment letter C) Stock acquired by a corporate affiliate in a private placement D) Stock acquired on the NYSE by a corporate affiliate

D 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

The Uniform Securities Act provides for both civil and criminal prosecution. In which of these cases might an agent face civil liability? A sale was made of an unregistered, nonexempt security. During a sales presentation, the agent misstated a material fact that resulted in the prospect deciding to make the purchase. The agent was included in the judgment, along with the broker-dealer, for a civil infraction. A) I, II, and III B) I and II C) II and III D) I and III

A These are all cases for civil, not criminal, liability. Unless it can be proven that the agent acted willfully and with knowledge, it is hard to have a criminal case. LO 12.e

Which items change when a company pays a cash dividend? I) Working capital II) Total assets II) Total liabilities III) Shareholders' equity A) II and III B) I and IV C) I, II, and III D) II, III, and IV

A Explanation From an accounting standpoint, once a corporation declares a cash dividend, it becomes a current liability on the company's balance sheet. When that dividend is paid, cash—a current asset—is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth). LO 7.b

The illegal business practice of purchasing and selling a security for the purpose of creating an appearance of market activity is known as A) arbitrage B) matched orders C) front running D) spinning

B A matched order, sometimes known as "painting the tape," is defined as when trades are coordinated for the purchase or sale of a security. Essentially an order is placed with the knowledge that another order (or orders) of substantially the same size, at substantially the same time, and at substantially the same price, has been or will be entered. The effect is to cause an appearance of market activity and price movement that is not market driven. LO 14.k

Thomas, age 49, owns his own business and pays himself a salary of $80,000 per year. He employs his wife, Grace, age 51 as receptionist and pays her $45,000 per year. What is the maximum deductible contribution that they could have made to their traditional IRAs? A) They can contribute a total of $6,500 only because they both work at the same business. B) They can contribute $6,500 to his IRA and $7,500 to hers. C) They cannot make deductible contributions because their joint incomes are too high. D) They can contribute $6,500 to each of their individual IRAs.

B They both could have made deductible contributions to their own respective IRAs for that year. Because Grace is 51, she can take advantage of the $1,000 catch-up provision and, therefore, contribute $7,500 rather than Thomas's $6,500 limit. A taxpayer's income does not restrict the deductibility of the contributions unless one or both of the spouses are also covered under some other qualified plan. Even though Thomas could establish a Keogh or a SEP, the question did not state that he had. Do not read more into the question than is there. LO 18.a

Active Technicians (AT), a state-registered investment adviser serving primarily retail accounts, would be in compliance if it A) sent a brochure within 150 days of the end of AT's fiscal year. B) filed a brochure with the Administrator, noting that it was available to clients upon request. C) did not send an annual brochure to its clients if there was no material change from the previous year. D) sent a copy of Form ADV, Part 1A and Part 1B within 120 days of the end of AT's fiscal year.

C The NASAA Model Rule dealing with brochures states that investment advisers do not have to deliver a summary of material changes or a brochure to clients if no material changes have taken place since the last summary and brochure delivery. If a brochure or summary of material changes is required, the delivery date is 120 days after the end of the adviser's fiscal year, not 150 days. If the adviser wishes to use Form ADV, it should use Parts 2A and 2B. LO 13.g

Under the Uniform Securities Act, which of the following constitutes an offer of a security? A) Agreement between an issuer and an underwriter B) The delivery of a prospectus to a prospective purchaser C) Stock dividend distributed to current shareholders D) Tombstone advertisement

B A prospectus is the document that offers a security for sale. A tombstone advertisement always states that, in and of itself, it is not an offer to sell, that such an offer may only be made by prospectus, and where a prospectus may be obtained. The key to this question is that the delivery is being made to a prospective purchaser; that is what makes it an offer. LO 12.a

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers would consider the adviser to be engaging in an unethical business practice if he loaned money to a client other than one A) who was in the money-lending business. B) borrowing under the same terms and conditions as the client could find at a commercial bank. C) who was an immediate family member of the adviser D) who was an affiliate of the adviser.

D Loaning money to a client is prohibited unless the investment adviser (IA) is a financial institution engaged in the business of loaning funds or the client is an affiliate of the IA. Please note that because this question deals with an IA lending money, the fact that the IA's client is in the money-lending business is of no consequence. That would only be an issue if the question dealt with the IA borrowing money. LO 14.g

If the owner of a $1 million IRA leaves it to his daughter, which of the following best describes the income tax treatment to the daughter? A) She will pay income taxes only on a portion of the withdrawals which exceed $1 million. B) She will pay income taxes on the full amount she withdraws each year. C) She will pay no income taxes because the estate taxes have already been paid. D) She will pay income taxes on the full $1 million immediately.

B An inherited IRA will be subject to income taxes to the beneficiary at time of withdrawal, on the same terms as if it had been distributed to the original owner. How do we know that all of the contributions were made with pre-tax funds? We don't. What we do know is that we never read into a question to make it more complicated. If a portion of the IRA represented contributions that were not tax-deductible, the question would tell us that fact. LO 18.b

If an investment adviser wishes to engage in an agency cross transaction involving advisory clients, it would be prohibited from A) earning a commission on both the purchase and the sale. B) recommending the trade to both sides. C) obtaining written consent from the parties prior to engaging in agency cross transactions. D) representing both the buyer and the seller.

B In an agency cross transaction, the IA represents advisory clients on both sides of the trade and may earn a buying and selling commission. To engage in these types of transactions, written notice must be furnished to advisory clients before the trade. These transactions can never be recommended to both sides of the trade. LO 13.a

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

C 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

Tax considerations are frequently an important factor when determining appropriate recommendations for advisory clients. In which of the following accounts is the tax status of the individual a critical factor? I) An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer II) An account opened by a sole proprietor in the name of the company III) An account opened in the name of ABC Corporation, an S corporation by one of its shareholders IV) An account opened in the name of the GHI Fund, a regulated investment company, by the fund's portfolio manager A) I and II B) I and IV C) III and IV D) II and III

D Sole proprietorships and S corporations have their income and losses pass through to the owners. Therefore, an account opened in the name of the business will create tax consequences for the owners. Regular, or C corporations, pay taxes on their earnings and, even though a regulated investment company passes through at least 90% of its earnings to shareholders, the tax situation of each individual shareholder of the fund is of no consideration when making recommendations to the fund's portfolio manager. LO 16.c

The Uniform Securities Act authorizes the Administrator to make certain demands of broker-dealers. In general, the Administrator would not require a broker-dealer to A) publish an announcement of the application for registration in a newspaper published in the state. B) file various financial reports. C) promptly file a correcting amendment to any document on file with the Administrator that becomes inaccurate or incomplete in any material respect. D) post a surety bond if the broker-dealer does not have investment discretion over client accounts or does not maintain custody of customer funds and/or securities.

D The question asks for something that cannot be required by the Administrator. It is important to catch that negative. It is only when a broker-dealer exercises discretion over customer accounts or maintains custody of customer funds and securities that the Administrator has the authority to require a surety bond. The correct answer refers to a broker-dealer who does neither. Many states require that broker-dealers applying for registration publish an announcement in one or more newspapers published in the state. These are found in the legal notices section of the newspaper where you find applications for liquor licenses and the formation of new corporations. All states require correcting amendments to be filed, and the same is true for most states needing financial information from broker-dealers registered in the state. LO 11.e

Concerning index annuities and their method of crediting interest, which of the following is true? A) Annual reset offers the best return regardless of market fluctuations. B) On average, annual reset has a higher participation rate than point to point. C) Point to point offers the best return when the market has had a single drastic decline during the period. D) High-water mark with look back offers the best return during periods of high volatility.

D Using the annual high-water mark with look back will generally result in the highest return during periods of high volatility. The reason is because under this method, the highest anniversary value is used to determine the gain. In a volatile market, there is likely to be a high spike sometime during the period and that is the value used. The problem with point to point when there is a single drastic decline during the period is that the decline might occur at or just prior to the annual crediting computation. Annual reset does ignore the daily market fluctuations, but if the index is lower at the end of the year, there is nothing credited. In reality, annual reset has a lower participation rate than point to point. LO 24.c

One of the major financial decisions to be made by a family is the amount and type of life insurance to purchase. The form of insurance that offers flexible premiums without a fixed cash value is A) universal life B) whole life. C) term life. D) variable life.

A A unique feature of universal life is that the premiums are flexible. That is, if the client wishes to pay more or less than the target premium, that may be done. However, the nature of the universal life product is such that cash values can fluctuate. Cash values can fluctuate in variable life, but unless the policy is UVL (universal variable life), premiums are scheduled (fixed). Typically there are no cash values with term insurance and the premiums are fixed and whole life has both fixed premiums and guaranteed cash values. LO 24.f

Jimmy Merchant is an agent with FLATT securities, a registered broker-dealer. When Jimmy submits an order ticket to purchase securities for a client, all of the following would appear except A) the current market price of the security B) the broker-dealer's name C) the account number D) Jimmy's name

A Any order ticket submitted by an agent for execution at a broker-dealer will always include the account number, the agent's name, and that of the BD. All order details must be listed (e.g., the number of shares, limit or market, etc.), but the current market price is never included. Once the order is executed, the execution price is entered. LO 23.f

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 only B) II and III C) I and II D) I only

A 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 portfolio of a client of an investment adviser began the year with a market value of $1.2 million. Sixty percent of the portfolio was in equities, thirty percent in bonds, and the remainder in cash. It was a good year for equities and, at the end of the year, the total value of the account was $1.5 million. This resulted in the portfolio manager liquidating approximately $100,000 of stock and placing the money into bonds. Given this information, it is most likely that this manager's investment style is A) contrarian. B) strategic asset management. C) tactical asset management. D) rebalancing.

B Strategic asset management, which is basically a passive strategy, views the market on a long-term basis. The manager does recognize that, over the period of one year, market and economic changes can result in managed portfolios becoming out of balance. Although we do not know the actual numbers, the fact that the manager is selling stock and buying bonds indicates that the portfolio mix no longer matches what was originally designed. Bringing the portfolio back into balance is the process of rebalancing. So, why isn't rebalancing a correct choice? It is not correct because rebalancing is not a management style; it is a feature of the strategic or passive style of portfolio management. Tactical asset management, a good example of which is market timing, looks at the short run changes and moves in and out of positions as necessary. That results in buying and selling far more frequently than once per year. The contrarian style is doing the opposite of what the majority does. That is, contrarians are selling when others are buying and vice versa. LO 21.c

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

C Persons convicted of willful violations are subject to the criminal penalties specified in the act (three years and/or $5,000 fine). Thus, the representative is subject to criminal penalties and civil liabilities resulting from clients who sue him for loss of money. The act subjects to civil liabilities any person supervising those who violate the law. However, a supervisor may not be held liable for the actions of those whom he supervises if it can be proved that the supervisor used reasonable care to discover and prevent the violations and has no knowledge of the violations. LO 12.e

Bachelier and Louis Associates, BALA, is an investment adviser registered in States W, X, and Y. BALA is completing the Form ADV to register in State Z. Which of these would be automatically registered as an agent in State Z simultaneously with BALA's effective registration? A) Janice, the director of the company's information technology (IT) department B) Thomas, an IAR currently registered in States W, X, and Y C) Wilson, the company's legal counsel D) Louise, vice president of the company's sales department

D The Uniform Securities Act provides that registration of an investment adviser automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions. Supervising the sales department requires the individual to be an IAR. As an officer, Louise is listed on Form ADV and receives the automatic registration in the new state. This is limited to IARs who are in these specific positions or who are performing these functions. There is no reason for the head of an investment adviser's IT department to be an IAR. LO 10.c

Your client has turned bearish on the market, but does not have a margin account. Which of the following securities would probably best meet your client's needs? A) A long call option B) An interest rate swap C) An inverse fund D) A balanced mutual fund

C Those who are bearish wish to profit in a market downturn. Inverse funds are sometimes called short funds because they deliver positive returns when the underlying benchmark declines in value. This client can't sell short because you need a margin account for that. LO 5.c

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 maintenance fees. B) account transfer fees. C) fees for issuance of stock certificates. D) brokerage commissions.

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

Under the USA, a person who has passed the appropriate NASAA examination but whose license has not yet been issued can participate in A) prospecting for new clients in person. B) prospecting for new clients by mail. C) accepting unsolicited orders. D) filing payroll reports.

D A person who has passed the NASAA exam cannot transact securities business until the Administrator notifies the employer that the registration is effective. Filing payroll reports is a clerical activity, and registration would not be required to perform that function. LO 11.d