series 66 Final exam incorrect answers
hich of the following would be the most common issuer of Agencies CMOs? [A]Government Agencies which would include; Fannie Mae, Freddie Mac, Ginnie Mae[B]Private institutions such as banks, investment banks, and home builders[C]Real Estate Investment Trusts[D]Direct Participation Programs
A (Agency CMO's are securities issued and/or guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.)
An investment adviser (IA) and an investment adviser representative (IAR) must use the utmost good faith in conducting business with clients and must fully disclose all material facts. Which of the following best defines this statement? [A]This defines an IAs fiduciary duties to a client[B]This is the prudent investor rule[C]This is the suitability rule[D]This is the preferred practice rule
A (IAs and IARs act in a fiduciary capacity in their dealings with clients pursuant to the Investment Advisers Act of 1940. This means that they must act solely in the best interests of the client and must make full disclosure of all material facts.)
All of the following business entities have a limited life except? [A]S corporation[B]General partnership[C]LLC[D]Sole proprietorship
A (General partnerships and sole proprietorships are generally dissolved upon the death of one of the owners (partner) or the owner (sole proprietor). In order to escape the tax consequences of a corporation, LLCs do not have a perpetual life and have a date of termination. Therefore, the only answer that does not have a limited lifetime would be the S Corporation.)
An IA is registered in several states, including the state in which it has its principal place of business. Which of the following statements is true concerning the IAs obligation to maintain a minimum set capital? [A]the IA must satisfy the requirements of the SEC.[B]The IA must satisfy the requirements of the state.[C]The IA must satisfy the requirements of the state where it has its principal place of business only.[D]The IA must satisfy the requirements of the state in which it has the highest number of clients.
C (An Investment Adviser is only required to maintain the minimum capital requirements required in the state where they maintain their principal place of business)
Which of the following types of life insurance offers an adjustable death benefit and flexible premium payments? [A]Term life insurance[B]Whole life insurance[C]Universal life insurance[D]Variable life insurance
C (Universal life insurance offers and adjustable death benefit and flexible premium payments .)
The difference between the yield on a Corporate Bond and the yield on a Treasury Bond, each with the same maturity date is referred to as: [A]Debit Spread[B]Yield to Maturity[C]Risk Yield[D]Credit Spread
D (A Credit Spread on Bonds is the difference between two bonds of similar maturity, generally a Corporate Bond as compared to a Treasury Bond with the same or similar maturity)
An investment strategy which purchases appropriate high quality investments to fit a portfolio and maintains the portfolio with the anticipation of appreciation and income is known as which of the following strategies? [A]Passive Asset Allocation[B]Strategic Asset Allocation[C]Dollar Cost Averaging[D]Buy and Hold
D (An investment strategy where the investment manager designs a portfolio with the purchase of high quality securities to fit that portfolio, then holds the investments with the anticipation of appreciation and income is known as the Buy and Hold Strategy.)
A large Wall Street investment bank owns and operates a "dark pool". In explaining its popularity to potential institutional customers, it rightly claims as advantages over stock exchanges all of the following EXCEPT: [A]Large blocks of stock can be traded without moving the price of the stock[B]Neither executed orders, nor bid and ask quotes, are reported[C]Large trading volume provides large liquidity[D]Trading large blocks of stock away from the floors of stock exchanges is a new and innovative strategy
D (Institutions have always crossed large blocks of stock off the exchange floors. The other claimed advantages are legitimate.)
A variable annuity contract is similar to a life insurance policy because it may contain all of the following EXCEPT [A]death benefits.[B]beneficiary designation.[C]loan provisions.[D]guaranteed cash values
D (Variable annuities do not have guaranteed cash values.)
When a portfolio is spread among U. S. Equity securities which two of the following types of risk are reduced? I. System Risk II. Financial Risk III. Market Risk IV. Business Risk [A]I & III only[B]II & IV only[C]I & IV only[D]II & III only
B (Both Business and Financial risk would be reduced with diversification in domestic equity securities. System risk and Market risk are the same thing and would not be reduced with diversification within the SAME asset class (U.S. Equity stocks).)
What is a characteristic of an ETN? [A]It is a secured security[B]It is an unsecured security[C]It is a guaranteed security[D]It is a mutual fund security
B (ETNs are unsecured debt securities that are not principal protected but do participate in the performance of a specific index or investment strategy.)
Bob Smith wants to become an Investment Adviser and set up and Advisory Firm. According to the Investment Advisers Act of 1940, Bob would have to file his application for registration with [A]The North American Securities Administrators Association (NASAA)[B]The U.S. Securities and Exchange Commission (SEC)[C]The National Association of Securities Dealers (NASD)[D]The National Futures Association (NFA)
B (From the 1940 Act: An investment adviser, or any person who presently contemplates becoming an IA, may be registered by filing with the SEC an application for registration. Since this question specifically mentions the 1940 Act, the SEC would be the appropriate entity to receive the registration application.)
When working with a new client to provide advice on planning for her financial future, you have the client create a list of financial goals. While creating this list, you should advise the client to: [A]choose a specific investment to achieve that goal[B]set a beginning and end date for each goal[C]evaluate the risk of each goal[D]decide if the goal is possible to achieve
B (Of the choices offered the BEST choice would be to determine the beginning and end target date of each goal. She cannot really do any of the others without some time frames built into her plan.)
Which of the following types of life insurance offers a fixed death benefit, fixed cash value and fixed premium payment? [A]Term life insurance[B]Whole life insurance[C]Universal life insurance[D]Variable life insurance
B (Whole life insurance offers fixed death benefits, fixed cash values, and fixed premium payments.)
Which of the following statements about rebalancing strategies for portfolios are true? I. A rebalancing strategy maintains defined levels of assets within a portfolio as a means of ensuring the desired level of exposure to risk in each of those assets. II. At predetermined time intervals (e.g., annually) a rebalancing strategy allows an investor to make adjustments to their portfolio related to investment objectives and risk tolerance. III. When using a rebalancing strategy, investors are not permitted to make adjustments to the weighting of the portfolio that is established when opening the portfolio. IV. Transaction and management costs associated with a rebalancing strategy are tied to the frequency of rebalancing but are typically lower than accounts that are actively traded on a daily basis. [A]I and III only[B]II and IV only[C]I, II, and IV only[D]I, II, III, and IV
C (When using portfolio rebalancing, an investor will attempt to keep a certain percentage of the portfolio in one type of asset and a certain percentage in another type of asset. For example, an investor may desire to keep 50% of their portfolio in bonds and 50% of their portfolio in equities. If the portfolio is rebalanced annually, it is expected that fluctuations may cause that 50/50 balance to shift. The investor balances the portfolio by buying/selling investments in order to get back to 50/50.The reason for rebalancing is primarily tied to limiting exposure to risk and keeping a balance of one's assets. These accounts can be adjusted by the investor. In our example, it would be fine if the investor decided to change their bond/equity balance to 40/60 if they wished to put more money in equities.Transaction costs and taxation for these types of accounts will often be lower than accounts that are actively managed on a daily basis. However, a rebalanced account will have higher transaction costs and costs associated with taxation than passive investment strategies such as a buy and hold strategy.)
You are an investment adviser representative (IAR) at a state-registered investment adviser. Under the Uniform Securities Act, you must be registered if you do NOT currently have a place of business in the state, and if your clientele includes which of the following? [A]The business of another investment adviser (IA)[B]The business of a mutual fund[C]The business of an employee benefit plan[D]The business of an accredited investor.
D (Investment companies, employee benefit plans, and other investment advisers are included in the exemptions from the definition of an Investment Adviser and therefore would not be required to register.)
The yield that a saver earns on a bank certificate of deposit and the annualized percentage rate that an auto dealer earns on a car loan are both examples of which types of rate of return? [A]Risk-free Return[B]Expected Return[C]Internal Rate of Return[D]Holding Period Return
D (The Holding Period return measures the total return on the investment received from holding an asset for an unspecified period of time.)
Which of the following would be the best description of a Unit Investment Trust? [A]A trust which issues redeemable units, has a fixed portfolio, generally of bonds, and is terminated once all of the bonds have reached maturity.[B]A trust which issues publically traded common shares, has a changing portfolio, and is ongoing.[C]A trust which issues and redeems its own shares, which are perpetually traded.[D]A trust which issues certificates at a discount and redeems them at full value at maturity.
A (A Unit Investment Trust is a trust which issues redeemable units, has a fixed portfolio, generally of bonds, and is terminated once all of the bonds have reached maturity.)
All of the following are cause for the revocation of an IA's registration under the USA except: [A]The IA loses a civil lawsuit filed by a client[B]The IA is found to be acting in violation of the 1940 Act[C]The IA is found to be violating the commodities laws of another state[D]The IA was convicted of a misdemeanor involving securities 4 years ago
A (A finding of a violation of any federal or state securities law is cause for revocation under the USA. So too is a conviction of any felony or securities misdemeanor in the last 10 years.)
Which of the following statements describes one of the primary reasons to establish a general partnership? [A]A general partnership would be established so that more than one individual could operate a business as co-owners.[B]A general partnership would be formed in order to ensure a set date of dissolution for the company.[C]A general partnership would be formed to reduce or eliminate tax liabilities.[D]A general partnership would be established to protect the general partners from liability.
A (A general partnership would be formed so that multiple owners (more than one owner) could operate a business as co-owners. This is the primary reason for a general partnership. General partnerships would have reduced tax consequences, but only in comparison to a company formed as a C-corporation. There are many other types of business entities where there would be no reduction or elimination of taxes, comparatively-speaking, when forming a general partnership.)
Mary is a registered agent with XYZ Brokerage Services. Sue is a licensed insurance agent with ABC Life Insurance Company but is not registered to sell securities. Sue solicits the sale of mutual fund shares with her clients and processes the transaction through Mary. Mary splits her commissions with Sue. How has Mary violated the NASAA Statement of Policy on Dishonest & Unethical Behavior? [A]She split her commissions[B]She sold away from her broker-dealer[C]The activity that she engaged in was unregistered[D]She sold unsuitable securities
A (An agent shall not share commissions with any person not also registered as an agent with the same broker-dealer.)
vIn which of the following scenarios would an access person, a director, officer, partner, or supervised person with access to non-public information, be exempt from reporting their personal securities holdings and transactions? [A]The access person is a limited partner in a hedge fund.[B]The access person has a self-directed Traditional IRA.[C]The access person is invested in the company's 401(k) plan.[D]The access person has a joint account with their spouse.
A (An exception from reporting requirements exists when an access person's securities are held in an account over which the access person has "no direct or indirect influence or control". As a limited partner in a hedge fund, the access person would not have direct or indirect influence or control. In each of the other scenarios, the access person would have direct or indirect control over investments held within the portfolios or investment vehicles listed.)
What is Annual Reset? [A]It is a valuation method used for Equity Index Annuities, in which the annuitant locks in gains from the beginning of the year to the end of the year[B]It measures the movements from a high point of an index and compares it to the index value at the beginning of the period[C]It is a valuation method used for managers, to determine if they are managers which produce profits for a Hedge Fund[D]It is when securities in an account are rebalanced to keep the original asset allocation
A (Choice A is the definition on Annual Reset. The annuitant locks in gains every year the index is positive.)
Exchange Traded Notes (ETNs) allow investors to [A]participate in sectors that are considered speculative, risky, and often unsuitable for the average investor.[B]eliminate fees while allowing performance similar to that of an Exchange Traded Fund (ETF).[C]gain access to securities markets without opening a securities account through a broker-dealer.[D]profit from increases in an underlying asset class on a tax-free basis.
A (Exchange Traded Notes (ETNs) allow investors to participate in sectors such as commodities, foreign currency, and emerging markets. These sectors can be considered speculative, risky, and often unsuitable for the average investor. The ETN allows a standardized securities product that provides the ability to participate in those markets without having to open specialized accounts or accounts in foreign markets.ETNs do have investor fees. These products must be purchased in an appropriate securities account which would be available via a broker-dealer firm. When profits are realized, they are taxable to the investor as capital gains.)
If an analyst is performing a bottom-up analysis of a particular industry, which of the following can be expected? I. The analyst will be looking at individual firms, then building information in an attempt to analyze the industry as a whole. II. The analyst will be looking at the industry as a whole, then deducing information down to the firm level. III. The goal of the analyst is to get a picture of how an industry is going to perform. IV. The goal of the analyst is to get a picture of how an individual stock is going to perform. [A]I and III[B]I and IV[C]II and III[D]II and IV
A (In a bottom-up approach to analysis, an analyst will look at the performance of firms within a particular industry in order to formulate a picture of how that particular industry will perform. The goal is not necessarily to pick individual stocks, but more to get a picture of how a particular industry will perform based on the projections of firms within that industry.)
George has been looking into buying a bond for his portfolio. His greatest investment objective is total return. Which of the following bonds would be the BEST choice for George with this objective in mind? [A]A bond which has a price of $850, a Yield to Maturity of 4%, and a Current Yield of 3.75%[B]A bond which has a price of $875, a Yield to Maturity of 3.95%, and a Current Yield of 3.80%[C]A bond which has a price of $825, a Yield to Maturity of 3.5%, and a Current Yield of 3.45%[D]A bond which has a price of $925, a Yield to Maturity of 3.75%, and a Current Yield of 3.65%
A (In this scenario, George would be looking for the bond which has the highest Yield to Maturity. This is because Yield to Maturity will take the most factors into account, including purchase price, principal returned at maturity, coupon rate, etc. Even though other bonds may have lower prices or higher current yields, the bond with the highest Yield to Maturity will be the best for George's investment objective of Total Return.)
According to the Investment Advisers Act of 1940, which of the following statements is true regarding the information that an SEC-registered adviser is required to deliver or offer to deliver to their advisory clients? [A]Written disclosure documents must be delivered or offered to clients annually.[B]The advisers must prepare and send each client a statement showing the commissions that have been paid by the client over the last year.[C]The adviser must revise the advisory contract annually and provide or offer to provide it to the client.[D]The adviser must send a copy of all records of account activity over the course of the previous year to each client.
A (The Brochure Rule of the Investment Advisers Act of 1940 requires investment advisers to deliver or offer to deliver the written disclosure document (brochure) at least annually.)
Is a U.S. Treasury Security included in the Uniform Securities Act definition of "security"? [A]Yes, U.S. Treasury Securities are included in the definition of a security.[B]No, U.S. Treasury Securities are exempt from the definition of a security.[C]Yes, U.S. Treasury Securities are included in the definition of a security, but only when being sold in the secondary market.[D]No, U.S. Treasury Securities are considered Federal Covered Securities and are therefore exempt from the definition of a security.
A (The definition of a "security" does include U.S. Treasury Securities. U.S. Treasury Securities would also be considered "exempt" and "federally covered", but this does not exempt them from the definition of a "security" under the Uniform Securities Act. They are merely exempt or federally covered "securities", which applies to the registration and advertising rules.)
A current and updated amendment to an Investment Adviser's registration must be electronically filed with the SEC according to the Investment Advisers Act of 1940 how often? [A]within 90 days from the close of the Investment Adviser's fiscal year[B]within 30 days from the beginning of the Investment Adviser's fiscal year[C]within 90 days from the close of the Investment Adviser's calendar year[D]within 30 days from the beginning of the Investment Adviser's calendar year
A (Under the Investment Advisers Act of 1940 investment advisers are required to send an electronic filing of an annual updated registration amendment within 90 days after the close of its fiscal year.)
Under the Uniform Prudent Investor Act, a trustee has been entrusted to oversee the real estate, securities investments, and tax situation of a sizeable Trust. The trustee is experienced in real estate and securities investments but did not analyze the tax situation of the trust since the trustee thinks that owner of the trust has a tax attorney. This trustee has [A]Acted prudently by only handling the parts of the trust that he has experience in.[B]Acted imprudently because the job of a trustee is to manage the trust from an overall strategy.[C]Acted prudently since the owner of the trust bears some responsibility for oversight of the trust.[D]Acted prudently as long as the owner of the trust is consulted with regard to the tax attorney.
B (A trustee's investment and management decisions respecting individual assets must be evaluated not in isolation to any one or two particular parts of the trust but to the trust as a whole and as part of an overall investment strategy. Also, if a trustee has expertise, the trustee would be expected to use those skills when fulfilling the duties of being a trustee.)
Which TWO of the following best describe the use and characteristics of discounted cash flow methodology? I. DCF methodology evaluates the profitability of an investment by assigning a present value to future cash flows. II. DCF methodology is a means of receiving a discount so that outgoing cash flows are reduced. III. DCF methodology can only be used on equity securities like common stock. IV. DCF methodology can be used to evaluate and compare fixed-income securities. [A]I and III[B]I and IV[C]II and III[D]II and IV
B (Discounted Cash Flow Methodology attempts to assign present values to an investment's anticipated future cash flows. It is an effective way to evaluate and compare various investment options to one another. Because fixed-income securities have fixed interest payments, DCF is an effective way to compare fixed-income securities.)
When analyzing an investment that has continuously increased in value using annualized return, [A]the holding period return will be greater than the annualized return if the investment is held for less than one year.[B]the holding period return will equal the annualized return if the investment is held for one year.[C]the holding period return will be less than the annualized return if the investment is held for more than one year.[D]the holding period return and annualized return will always be identical.
B (Holding period return is simply the level of return achieved while the security is held. If the security is held for one year, then the holding period return will be equal to the annualized return, because annualized return is calculated based on returns over one year. If the value of the security is constantly growing, then the holding period return for less than one year would be less than the annualized return for that same year. If the holding period is greater than one year, then the holding period return will be greater than the annual return.)
According to the Investment Adviser's Act of 1940, the "Brochure Rule" states: [A]that it is required that Part I of Form ADV must be given to all clients and potential clients of a registered IA[B]that it is required that a registered IA provide written disclosure statements to both prospective and current clients[C]that all advertising brochures of a registered IA must be filed with the SEC[D]that brochures must be delivered to prospective clients only
B (Part II of Form ADV may be provided to satisfy the "brochure rule" requirement.)
A sole proprietorship is in the process of becoming a corporation. This will be a smaller corporation with an offering of shares intrastate to add capital so that the company can keep up with growing demand for a product. When it comes to this scenario, which of the following is an accurate statement according to the rules of the Uniform Securities Act? [A]The stock of the corporation would have to be registered by qualification, but only if the Administrator feels it necessary.[B]The stock of the corporation would have to be registered by qualification, because as described, the stock would not qualify for any exemptions.[C]The stock of the corporation would be exempt, because it is only being sold intrastate.[D]The stock of the corporation would be exempt, because the size of the corporation is still small.
B (The Administrator of a State can prescribe exemptions by rule or order, but is not permitted to arbitrarily enforce rules on registration. In this case, the corporation would be selling securities within the State that would have to be registered by qualification. As with all registered securities, the company would then have to file and abide by sales literature requirements.)
John is a friend of yours who also happens to be an IAR. The two of you go to a bar for a beer and run into a mutual friend who is there with several people. The mutual friend begins to talk of how John knows his sister-in-law and has produced great returns for her since she became John's client. What may John do in this situation? [A]John can state that the sister-in-law is a client and that she has received large increases in investment results since he has been her IAR.[B]John can state that he knows the sister-in-law.[C]John can state that he has produced average returns on the portfolio in excess of 20%.[D]John can state that the sister-in-law is a client, but he cannot talk about any of her investments in her portfolio.
B (The Model Rules forbid the IA or IAR from disclosing the identity, affairs, or investments of any client unless required to do so by law or with the client's consent. In this situation, John can only state that he knows the sister-in-law.)
Excluded from the definition of an investment adviser under the Uniform Securities Act is: [A]An insurance company that, for a fee, provides investment advice to clients[B]A trust company that, for a fee, provides investment advice to clients[C]A firm that, for a fee, provides investment advice about public institutions only[D]A firm that, for a fee, provides investment advice about municipal bonds only
B (The Uniform Securities Act defines an investment adviser as anyone who provides advice related to any security for compensation. Excluded from the definition are banks, savings institutions, and trust companies (but not insurance companies))
According to NASAA regulations, which of the following would be required in order to establish a margin account for a client? [A]Require the client to sign a Margin Agreement prior to executing any transactions in the account.[B]Require the client to sign a Margin Agreement promptly after the initial transaction in the account.[C]Require the client to file financial statements to determine the suitability of a margin account for the client.[D]Require the client to first establish a cash account with the firm for a period of time to establish the client's credibility.
B (Under NASAA Statements of Policy, Broker-dealers shall not execute any transaction in a margin account without securing from the customer a properly executed written margin agreement promptly AFTER the initial transaction in the margin account. Verbal authorization cannot replace the written agreement.)
Under the Investment Advisers Act of 1940, when a contract has provisions which state that services may be provided by means of written material, oral statements, statistical information which expresses no opinion, and that such statements do not purport to meet the needs of any specific individuals and accounts of the firm, this would be defined as: [A]Trustee relationship[B]Impersonal advisory service[C]Custodian relationship[D]Management relationship
B (Under the Investment Advisers Act of 1940, when a contract has provisions which state that services may be provided by means of written material, oral statements, statistical information which expresses no opinion, and that such statements do not purport to meet the needs of any specific individuals and accounts of the firm, this would be defined as "Impersonal Advisory Services" or general information and therefore delivery of a Brochure would not be required.)
When calculating net present value, which of the following components are discounted back to a present value to determine the net present value? I.Year-to-year inflows throughout the project II. Annual computations of the holding period return III. Anticipated opportunities in other investments IV. Anticipated return of capital upon project completion [A]I and II[B]I and IV[C]II and III[D]II and IV
B (When calculating Net Present Value, all future inflows are discounted back to a present value in order to find the total net present value. So if a project or investment has different annual cash flows, a present value is determined for each year, then the total of all present values throughout the project or investment will be the net present value. This number, if positive, will help to give an investor an idea about how much a project will make or lose in relation to money and rates of return in the future.)
In order to bring in new business, an investment adviser decides to run an advertisement directed solely to accredited investors. The IA includes the following phrase in the advertisement: "We are a fee-only adviser, so come in and we'll see what we can do for you." Which of the charges listed below would conflict with the IA's advertisement? [A]The IA charges clients fees based only on assets under management.[B]The IA charges clients a fee based on performance.[C]The IA charges clients a 12b-1 fee on a mutual fund.[D]The IA charges clients on a per hour basis when developing their financial plan.
C (A 12b-1 fee is an extra fee that is charged by some mutual funds. A 12b-1 fee would not be charged by an IA, it would be charged by a mutual fund, therefore it would "conflict" with other types of charges generally made by IAs.)
A federal covered adviser hires a solicitor to bring in new clients. The solicitor and adviser come to agreements on affiliation as well as compensation arrangements. Individuals who become customers of the federal covered adviser as a result of the solicitor's work will pay a slightly higher start-up fee than those who enroll directly with the federal covered adviser. Which of the following is true in this case? [A]The practice of charging customers who come through the solicitor more is unethical and could result in investigations directed at the solicitor.[B]The practice of charging customers who come through the solicitor more is unethical and could result in investigations directed at the federal covered adviser.[C]The practice of charging customers who come through the solicitor more is ethical, assuming that proper disclosures are made by both the solicitor and the federal covered adviser.[D]The practice of charging customers who come through the solicitor more is ethical and the only entity required to give disclosures to the customer would be the federal covered adviser.
C (A higher fee for customers coming to the adviser through the solicitor would not, in and of itself, constitute unethical behavior. If unethical behavior takes place, both solicitor and adviser can be investigated. Whenever a solicitor is used, the Investment Advisers Act of 1940 requires disclosures by both solicitors and advisers. The solicitor must disclose to potential advisory service customers the name of the advisory firm for whom they solicit, the business arrangement/affiliation between the solicitor and adviser, the compensation arrangement between the solicitor and adviser, and a disclosure as to any additional charges to the customer because of the use of a solicitor.)
According to the Securities Act of 1933, a pooled investment fund will be classified as a federal covered security if it is [A]offered in all states in the United States.[B]managed by a federally registered investment adviser.[C]registered under the Investment Company Act of 1940 as an investment company.[D]a fund with a fixed portfolio of bonds.
C (A mutual fund or "pooled investment fund" would be considered to be federally covered if it is registered as an investment company under the Investment Company Act of 1940. The Investment Company Act of 1940 is a Federal regulation recognized by the Securities Act of 1933.)
Qualified plan fiduciaries, responsible for the investment choices of a qualified plan, would find which of the following in the Investment Policy Statement of the plan? [A]The investment manager's compensation arrangement[B]The tax treatment of the plan[C]Participant goals, objectives, and a statement of the purpose and responsibilities of the plan[D]Details of the contract in place with an investment advisory firm
C (An Investment Policy Statement for a plan fiduciary would contain the client's investment goals and objectives, the purpose and responsibilities of the plan, and guidelines for review. The Statement would NOT contain the investment manager's compensation arrangements, tax treatment, or the Investment Advisory Contract.)
When utilizing Net Present Value and/or Internal Rate of Return to evaluate a project or investment, which of the following is primarily used? [A]Amortization[B]Compounding[C]Discounting[D]Accretion
C (Discounting and compounding are very similar in nature, but discounting is the primary means of evaluation that is used when discussing Net Present Value (NPV) and Internal Rate of Return (IRR), both forms of Discounted Cash Flow Methodology (DCF).)
An investment adviser's compensation may be based on: [A]A percentage of capital gains and losses in the account.[B]Any terms as long as they are in writing and mutually agreed to.[C]The average value of funds managed over a period of time.[D]Any of the above
C (Generally, an Investment Adviser's Compensation cannot be based on capital gains or losses but basing compensation on the overall value of the account would be acceptable.)
Of the securities listed below, which would be exempt from the registration requirements of the Uniform Securities Act? I. Securities issued by a railroad common carrier company. II. Securities issued by a federal credit union established for teachers. III. Securities issued by a trust company. IV. Securities issued by a corporation. [A]I only[B]I and III only[C]I, II, and III only[D]I, II, III, and IV
C (Of the choices listed, the only option which would not be exempt under the Uniform Securities Act would be securities issued by a corporation. All other items fall under an exemption of the Uniform Securities Act.)
An investor interested in obtaining an Official Statement for a particular state's 529 Plan would contact which of the following? [A]SEC - Securities Exchange Commission[B]FINRA - Financial Industry Regulatory Authority[C]MSIL - Municipal Securities Information Library[D]Governor of the State
C (Official Statements for a state's 529 Plan must be filed with the Municipal Securities Information Library (MSIL) and are available to the public.)
An Investment Adviser employs several IAR's. The IA is required to maintain a copy of which of the following with regard to its IAR's? [A]Securities screening and background checks that were performed on each IAR[B]A copy of their driver's license[C]The initial application completed by each IAR[D]A copy of each IAR's fingerprints obtained from a police department
C (Recordkeeping regulations require the IA to retain a copy of each IAR's initial application for registration)
Which of the following statements regarding the sales loads charged on mutual funds is FALSE? [A]Front-end sales loads are sales loads charged when an investor buys mutual fund shares.[B]Back-end sales loads are sales loads charged when an investor redeems mutual fund shares.[C]Redemption fees are a form of back-end sales load.[D]Sales loads are limited to 8.5% under FINRA rules.
C (Redemption fees are not classified as a form of sales load. All of the other items are true.)
According to SEC Release IA-1092, what information must IAs disclose to clients? I. IAs must disclose that they take positions consistent with those recommended to clients II. IAs must disclose that they take positions inconsistent with those recommended to clients III. IAs must disclose any potential conflicts of interest IV. IAs must inform clients that by making full disclosure, it absolves them from adhering to certain provisions of the Investment Advisers Act of 1940 [A]I and II only[B]I and III only[C]I, II, and III only[D]I, II, III and IV
C (The Investment Advisers Act, including SEC Release IA-1092, specifies that IAs must make full disclosure including potential conflicts of interest as well as how they personally invest, whether it is consistent or inconsistent with the positions that are recommended to clients. SEC Release IA-1092 also states that disclosure does not relieve an Investment Adviser from abiding by all other provisions of the 1940 Act.)
The maximum amount of investors allowed in "private funds" of all types is limited to which of the following numbers by the SEC? [A]Up to 99[B]No more than 100[C]Up to 499[D]No more than 500
C (The SEC sets the limits at no more than 100 investors for one category of private fund and no more than 499 for another, making the maximum number of investors regardless of type of private fund 499.)
All of the following are included in the definition of an "agent" under the Uniform Securities Act, EXCEPT: [A]An individual representing an issuer in effecting transactions in equity securities[B]An individual who represents a broker-dealer as the broker-dealer effects sales of the broker-dealer's securities where commissions are paid[C]An individual who is a partner of a broker-dealer who effects purchases and sales of the broker-dealer's securities to existing employees where no commission is paid[D]An individual representing an issuer who effects sales of limited partnership interests
C (There are specific exclusions which permit commission-free transactions to employees of a firm without registration of the individual who distributes the securities. These are put into place for situations such as employee stock option plans, where no commissions are paid and the person likely is part of the HR department.)
An article is released detailing how Tech Company A has created software that is currently the best on the market. Tech Company A is expected to gain a major portion of market share for this type of software. One of your clients reads the article and buys a sizeable amount of the stock of Tech Company A. Six months later, an article is released which details a new form of software released by Tech Company Z. The new software may revolutionize the industry currently dominated by Tech Company A. As a result, Tech Company A's stock drops significantly. Which best describes this scenario? [A]This is an example of event risk.[B]This is an example of market risk.[C]This is an example of competitive risk.[D]This is an example of business risk.
C (This is an example of competitive risk. Competitive risk is the risk that a firm will not remain competitive with other firms in terms of technology, products, or general competition. Here, the tech firm expects a majority of market share and falls victim to a new technology.)
Which of the following is NOT a shared characteristic between common stock and preferred stock? [A]The Board of Directors must declare dividends, which are always voluntary.[B]A reduced tax rate can be achieved on capital gains by holding for one year and one day or longer.[C]Changes in market value of shares is primarily driven by company performance.[D]Dividends are taxed as ordinary income and can be qualified when certain criteria are met.
C (Though the market price of both types of stock can be affected by company performance, the performance of common stock is more heavily driven by company performance, while the market price of preferred stock is more commonly driven by changes to interest rates and dividend rates on similar preferred stocks.Each of the other items listed is a similar characteristic.)
Which of the following are NOT exempt from the sections of the Uniform Securities Act which require registration and filing of advertising materials? I. Secured bonds issued by a common carrier such as a railroad company. II. Equity options related to a stock that trades over-the-counter. III. Bonds issued by the country of Cuba. IV. Debentures issued by a bank or federal credit union. [A]I and III only[B]I and IV only[C]II and III only[D]II and IV only
C (Under the Uniform Securities Act, equity options that are not listed or tied to a listed security would not be exempt from registration and filing of advertising materials. As well, bonds issued by the country of Cuba would not qualify for any exemptions. Securities issued by common carriers, banks, and federal credit unions do qualify for exemptions under the Uniform Securities Act.)
Steve owns a Sub-Chapter S Corporation and is one of the major shareholders in the corporation. The company has had a good year and has realized capital gains which will be distributed to all shareholders. How will these distributions be reported by the shareholders when they file their tax returns? [A]Ordinary income[B]Earned income[C]Shareholder Capital Gains[D]Dividend income
C (When a Sub-Chapter S Corporation has realized capital gains, those gains are distributed to the shareholder as Shareholder Capital Gains. The S-Corporation does not pay taxes, and gains are "passed through" to shareholders.)
Under the Investment Advisers Act of 1940, which of the following statements are true pertaining to Investment Advisers who have taken custody of the funds of clients? I. The adviser's clients must receive notification of the manner in which their funds are being kept as well as the place in which their funds are being kept. II. The adviser must have received approval of registration and currently be registered as a broker-dealer. III. The funds of the clients must be deposited and spread among one or more separate accounts which only contain client funds. [A]I only[B]II and III only[C]I and III only[D]I, II, and III
C (When an IA has custody of the funds and securities of a client, they are NOT required to be registered as a broker-dealer. They are required to keep the funds and securities of each client in a separate account. However, the funds and securities of an IA's clients must be kept separate from all other funds and securities, including those of the IA to prevent comingling. They are also required to inform the clients in writing of the whereabouts and manner in which the funds are being kept.)
An investor purchases shares of a mutual fund that have a Contingent Deferred Sales Load. It is TRUE to state that these shares [A]are eligible for sales charge breakpoints on large-volume purchases.[B]will have a sales load that will remain constant over time and be paid upon redemption.[C]will have the lowest annual expense charges of all classes of mutual fund shares that are available.[D]are typically labelled as Class B Shares and that if held for an extended number of years, the sales load can be reduced.
D (EXPLANATION Mutual fund shares that have a Contingent Deferred Sales Load are typically referred to as "Class B Shares". The "contingent deferred" piece of the sales load means that the sales load is paid on the back-end (upon redemption) and if shares are held for a longer period of time, the sales load on these shares can be reduced. Generally, Class A mutual fund shares will have the lowest annual expense charges of all classes of mutual fund shares available (not Class B or C shares).)
Rudy Smith Sold Short 100 shares of ABC stock for $50. ABC stock has been depreciating in value in the market, currently ABC stock has decreased to $20 per share. However, today the market took a bad turn and the stock price goes up to $30 per share. Rudy wants to protect his profit, what order would he place? [A]Sell Limit[B]Buy Limit[C]Sell Stop Loss[D]Buy Stop Loss
D (A Buy Stop Loss is used to protect an investor with a short stock position, when the market is going up.)
A parent corporation has securities that are listed on a national stock exchange. The parent corporation wishes to issue other securities, but does not want to have to register the securities being issued. Which of the following qualify for exemption from registration under the Uniform Securities Act? I. Secured Equipment Bonds II. Subscription Rights and Warrants for Additional Shares of Common III. Preferred Stock IV. Subordinated Debentures [A]I and III only[B]II and III only[C]I, II, and III only[D]I, II, III, and IV
D (All of the choices listed fall within the exemption under the Uniform Securities Act. Exemption is provided for "any other security of the same issuer which is of senior or substantially equal rank, any security called for by subscription rights or warrants so listed or approved, or any warrant or right to purchase or subscribe to any of the foregoing.)
A new hire at a broker-dealer firm is not yet registered. Which of the following activities by the unregistered employee would be prohibited under the regulations of the Uniform Securities Act? I. The new hire talks to clients on the phone and accepts unsolicited orders. II. The new hire sets up meetings with clients where investment objectives and risk tolerance are established. III. The new hire accepts orders, but only from friends and family who know the new hire personally. IV. The new hire works as an assistant for a registered agent and takes clients to lunch or golfing, where investments are occasionally discussed. [A]I and II only[B]I and III only[C]I, II, and IV only[D]I, II, III, and IV
D (An unregistered person is prohibited from discussing investments, investment objectives, and risk tolerance. Unregistered persons also may not accept orders from clients, regardless of the clients relation to the unregistered person.Unregistered persons can perform clerical tasks at the firm. Examples would be directing phone traffic, directing walk-ins to registered agents, mailroom functions, secretarial functions if investments are not discussed in any way, performing generic research which is to be used by a registered person in discussions with a client, and other non-investment related tasks that may need to be performed at a broker-dealer firm.)
Which one of the following must be registered as an investment adviser under the Uniform Securities Act? [A]Accountants who provide incidental investment advice to clients without compensation.[B]The trust department of a bank which receives compensation for investment advice.[C]Any given federal covered adviser[D]A financial journal's publisher who responds to reader's mail with financial planning advice
D (Because the publisher responds to reader's mail and gives advice, they would have to register as an Investment Adviser.)
Which of the following is included in the definition of underwriter, according to the Securities Act of 1933? [A]Agents[B]Investment Advisers (IA s)[C]Issuers[D]Broker-Dealers
D (By basic definition, broker-dealers are included in the definition of underwriter because they underwrite new issues. Issuers are issuers, and do not underwrite their own issues. Investment advisers are registered to give investment advice. Agents work for broker-dealers, but are not included in the definition of underwriter.)
Under the Uniform Securities Act, an agent must disclose personal knowledge concerning a material public fact about an issuer to a customer in connection with the sale of an issue: [A]If the investor is not employed by the issuer in such a position as to have knowledge of material public facts.[B]Whether or not the broker-dealer with whom the agent is registered permits the agent to discuss the material fact.[C]If the fact that such disclosure would make other statements made by the agent misleading under the circumstances.[D]All of the above.
D (Disclosure to clients with regard to a material public fact about an issuer in connection with a sale of securities is always required.)
An IA may be liable for civil damages to a client if: I. The IA fails to disclose a material fact in soliciting the clients II. The IA fails to disclose that the IA will sell a recommended security from its own account. III. The IA fails to reasonably supervise an employee who becomes civilly liable to clients for negligent investment advice. [A]I and II only[B]I and III only[C]II and III only[D]I, II, and III
D (Failure to disclose a material fact is fraud. An IA is liable for the negligence of its employees.)
The process of assigning present values to future inflows and outflows of cash which is dependent on such cash flows is known as which of the following? [A]Constant Dollar Investing[B]Annualizing Rates of Return[C]Future Value[D]Internal Rate of Return
D (IRR assigns present values to future inflows and outflows of cash. It is therefore dependent or determined using those cash flows. The cash flows are then set equal to zero to find the IRR figure.)
According to the Uniform Securities Act, it is illegal for an investment adviser (IA) to sell a security that it owns to an advisory client if: [A]The IA recommended the purchase of a private placement offering.[B]Without written disclosure to the client, the IA acts as broker for the seller.[C]With both written consent and disclosure, the IA acts as principal to the transaction.[D]Without written disclosure to the client, and consent from the client to the transaction
D (It is unlawful for any adviser to act as principal for their own account (to knowingly sell to or purchase any security from a client) without proper disclosure to the client. Proper disclosure is constituted by delivery of written disclosure to the client prior to the completion of the transactions and consent from the client, but this consent need not be in writing.)
Under the Uniform Securities Act, in order for a person to sell a security that person must be registered. Which of the following securities would be included in the USA's definition of a Security? I. Futures contracts on soybeans II. Common stock issued by a publically traded company III. Variable Annuity Contract IV. Interest in oil, gas, or mining titles [A]I only[B]II & III only[C]III & IV only[D]II, III, IV only
D (Of the items listed, Futures contracts on soybeans would be the only item that is not included in the definition of a security.)
One of your clients is an elderly gentleman whose wife has recently passed away. A $25,000 life insurance policy has paid out to the client and the client wishes to invest the proceeds. The client is a conservative investor, does not have a need for income at this time, and his biggest concern and objective is maintaining and preserving capital. Which of the following types of investments best suits this investor's needs? [A]The IA should recommend a fund comprised of government bonds.[B]The IA should recommend a mutual fund comprised of growth and income equities.[C]The IA should recommend investments in REITs.[D]The IA should recommend CDs issued by a commercial bank.
D (Taking all of the facts into consideration, the best investment would be the bank-issued certificates of deposit. The client is elderly, conservative, and does not need income. Government bond funds are not insured and are normally suitable for investors looking for income. A growth and income mutual fund would not suit a conservative investor with no need for income. REITs can carry risks which are unacceptable to investors and REITs will also pass through profits to investors providing income. The best investment for this client would be the bank-issued CDs which are FDIC insured, normally provide a stable interest rate, and are safe investments.)
Which of the following acts deals most closely with the regulation of mutual funds? [A]The Securities Act of 1933[B]The Securities Exchange Act of 1934[C]The Investment Advisers Act of 1940[D]The Investment Company Act of 1940
D (The Investment Company Act of 1940 deals mostly with the regulation of mutual funds (a form of investment company).)
When is the borrowing of money from a client allowed under the NASAA Model Rule on Unethical Business Practices of Investment Advisers and Federal Covered Advisers? [A]It is only allowed if the client is a close relative of the adviser.[B]It is only allowed if the client has been a client for over 10 years.[C]It is allowed given that the adviser pays an appropriate percentage of interest to the client.[D]When the client is an affiliate of the IA, such action is allowed.
D (The NASAA Statement of Policy on Investment Advisers (IAs) says that IAs and IARs shall not borrow money or securities from a client unless the client is a broker-dealer, an affiliate of an investment adviser, or a financial institution engaged in the business of loaning funds.)
All of the following are benefits of complying with the ERISA Sec,404(c) requirements for qualified plans EXCEPT: [A]Plan participants are not held to the diversification and prudence standards that a plan fiduciary must meet[B]Plan fiduciaries are not liable for losses resulting from plan participant's exercise of control[C]Plan fiduciaries are responsible for choosing and monitoring the investment options available to plan participants[D]Plan fiduciaries may deal with the assets of the plan for its own account.
D (The two main benefits of complying with ERISA Sec.404(c) safe harbors are that it does not relieve plan fiduciaries of all responsibility for plan investments. They must choose and monitor the investment options available to the plan participants and the investment managers selected to manage the accounts. The plan fiduciary is also responsible for any decisions made which are not as a result of participant instructions. Plan fiduciaries may NOT deal with the assets of the plan for its own interest or for its own account.)
A CPA refers a client to an investment adviser for a referral fee. The investment adviser must: I. Have a written agreement with the CPA II. Disclose the referral in the Form ADV III. Disclose the referral to the client in writing IV. Get a signed receipt of the disclosure from the client [A]I only[B]I and II only[C]II, III, and IV only[D]I, II, III, and IV
D (Under the Investment Advisers Act of 1940, someone who refers clients to an IA for a fee is called a solicitor. Solicitors may be affiliated with the IA (e.g., an employee) or unaffiliated (e.g., a CPA). In either event, everything has to be in writing and fully disclosed to the client with an acknowledgement back from the client.)
An individual is attempting to determine if it is necessary to register as an investment adviser due to the nature of some of their activities. The individual only works with accredited or qualified clients. How does this affect registration requirements? The clients of the adviser are all either Qualified or Accredited Investors. [A]Because clients are accredited or qualified, the individual need not register.[B]Because clients are accredited or qualified, the individual may qualify for an exemption.[C]Because clients are accredited or qualified, the individual automatically must always become federally registered.[D]Clients being accredited or qualified would not affect registration requirements or exemptions.
D (Under the Investment Advisers Act of 1940, specific requirements are given to determine whether registration is necessary. These include specific advice about securities, being compensation, and being the business of giving advice. An IA would have to register if they are participating in those activities regardless of whether or not the clients are accredited or qualified.)
An Administrator has the ability to require the filing of advertising and sales literature, per state requirements, for all of the following except? [A]The stock of a small intra-state corporation[B]A non-profit organization for which the Administrator has, by order, denied the exemption[C]The bonds of a corporation that are being sold in multiple states through qualification[D]The common stock of a federally-covered security
D (When a security is federally covered, the jurisdiction is federal. The Administrator is not permitted to create their own advertising and sales literature requirements. This security may be required to file in the Administrator's state, and the Administrator may ask for duplicate copies of information submitted to the Feds, but the Administrator does not have authority to create and require filing of the advertising and sales literature.)
An investment advisory firm's offices are located in State X. The IA exclusively services financial institutions such as insurance companies. This IA firm must [A]be fully registered with the SEC under the Investment Advisers Act of 1940 and coordinate registration with State X.[B]be fully registered with the SEC under the Investment Advisers Act of 1940 and perform a notice filing registration with State X.[C]be fully registered with the SEC under the Investment Advisers Act of 1940 only.[D]be fully registered with State X but need not register with the SEC under the Investment Advisers Act of 1940.
D (With the information provided, the investment advisory firm must register with the state where it has its principal place of business, State X, and does not need to register at the federal level with the SEC.)
In terms of the market for Collateralized Mortgage Obligations (CMOs), CMOs usually trade in the [A]listed market with commissions.[B]listed market with mark-ups and mark-downs.[C]over-the-counter market with commissions.[D]over-the-counter market with mark-ups and mark-downs.
D (Collateralized Mortgage Obligations (CMOs) normally trade on the OTC market with mark-ups and mark-downs.)
A broker-dealer is looking to expand its business. In an attempt to lure the business of a prominent local investment adviser representative (IAR), it offers the IAR several of its services allowing them to be paid for by soft dollars. Which of the following would be an inappropriate soft dollar arrangement? [A]The offer of market quotes performed in real time[B]The offer of the use of asset allocation software that has been customized for the application[C]The offer of subscriptions to the broker-dealer's research reports[D]The offer of paying the salary for the services of an analyst from the research department.
D (Soft dollars are a means for Investment Advisers to pay brokerage firms for their products or services rather than through direct payment of actual dollars. Soft dollar arrangements could include research reports, software applications, and real time quotes, but not a person's salary.)
