Series 66; FULL exams

All of the following securities transactions are exempt under the USA EXCEPT A) a sale of private placement securities to 25 noninstitutional investors in a state B) a sale of stock to a pension trust C) a purchase of stock by an underwriter from the issuer in a firm commitment underwriting D) an offer of preorganization certificates made to 25 persons that involves no commission or payment

A Private placements are exempt under the USA if they are offered to no more than 10 general public (retail) investors in a 12-month period. Institutional investors are not included in the numerical limitations. Transactions involving issuers and underwriters, pension trusts, and other financial institutions are also exempt. The sale of preorganization certificates is exempt if there is no commission for solicitation or payment by subscribers and no more than 10 subscribers; there is no limit to the number of offers that may be made.

Which of the following is most commonly used to evaluate the marketplace's perceived value of a particular stock? A) Price-to-earnings ratio B) Margin of profit C) Earnings per share D) Dividend payout ratio

A The price-to-earnings ratio compares the market price of a stock to the company's earnings per share. When investors are very positive regarding a stock's future, the P/E ratio will generally be higher than those of other companies in the same industry.

Computing the Sharpe ratio for a specific stock requires using all of the following EXCEPT: A) the actual rate of return for the subject security. B) the beta for the subject security. C) the standard deviation of the subject security. D) the risk-free return available in the market.

B Sharpe ratio is as follows: (actual rate of return minus the risk-free rate of return) divided by the standard deviation

When an agent is discussing possible discounts related to the purchase of mutual funds shares, she would be referring to A) 12b-1 fees B) reinvesting distributions C) the CDSC D) breakpoints

D Explanation Mutual funds that carry a load will have a schedule of reduced sales charges when reaching specified quantity levels known as breakpoints.

A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee A) may receive commissions without registration B) need not register as an agent of the issuer under any circumstances C) must register as an agent of the issuer D) must register as an agent only if he will receive commissions or remuneration, either directly or indirectly related to the volume of sales

D Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if commissions or other remuneration related to the sale are paid. Therefore, there are cases where the employee would have to register as an agent. When the individual is paid a straight salary for this work, no registration is required.

Oral discretion is only permitted for investment advisers and their representatives (never broker-dealers or agents) during the first 10 business days after the initial discretionary transaction in the account.

Oral discretion is only permitted for investment advisers and their representatives (never broker-dealers or agents) during the first 10 business days after the initial discretionary transaction in the account.

Which of the following statements about closed-end investment companies are TRUE? Investors in closed-end investment companies may trade only in full shares. Shares in closed-end investment companies may trade at more or less than the net asset value of the shares. A closed-end investment company offers a fixed number of shares and does not continually offer new shares in response to investor demand. A) I, II, and III B) II and III C) I and III D) I and II

A A closed-end investment company makes an initial public offering of stock, and once those shares have been purchased, no more shares are available from the company until it offers a new issue. Investors may purchase shares of a closed-end investment company on an exchange or over the counter at whatever price the market demands. This price may be more or less than net asset value. Investors may not buy or sell fractional shares but may trade only in full shares.

An investment adviser registered with the state is organized as a partnership. The IA may A) not change its ownership structure without formally notifying its clients B) not change its ownership structure under any circumstances C) assign their contracts without client notification D) change its ownership structure without formally notifying its clients

A An investment adviser that is organized as a partnership, as opposed to a corporation, must notify its clients of changes in its ownership structure. An investment adviser organized as a corporation need not notify its clients of an organizational change. Investment advisers, whether partnerships or corporations, may not assign their advisory contracts to other advisers without the express written consent of the client.

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

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

A sudden decrease in market interest rates will have the effect of increasing the trading price of an existing bond because A) the present value of the bond's future cash flows increases B) the future value of the bond's present cash flows increases C) lower interest rates will result in a higher rating for the bond D) a reduction in market interest rates generally signifies a stronger economy

A Bond valuations using discounted cash flow take into consideration the present value of the bond's future cash flows. That is, the greater the value of the interest payments to be received in the future, the higher the price of the bond. When market interest rates decline, because the coupon rate of the existing bond is fixed, the present value of those interest payments increases, creating a higher value for the bond.

Broker-dealer A wants to promote and reward teamwork. The firm plans to pay out a small percentage of the firm's profits to the clerical staff as a bonus for their hard work. Under NASAA rules, is this permitted? A) Yes, no registration is necessary. B) No, this cannot be done. C) Yes, if all of the agents agree to it. D) Yes, if the entire clerical staff is registered as agents for the firm.

A Bonuses based on a broker-dealer's profits may be payable to nonregistered clerical help as long as there is no direct relationship to any specific sales.

If a person offers to buy a security after reading a tombstone ad, the offer to buy would be considered A) unsolicited B) null and void C) solicited D) illegal

A Explanation A client calling to buy based on reading a tombstone ad is considered an unsolicited order because, under the law, the tombstone ad is neither a solicitation to buy nor an offer to sell. If the question had stated that the agent had sent a prospectus out and the client was responding to that, it would have been a solicited order.

Under the Securities Act of 1933, the definition of prospectus includes an offer of a security made orally a tombstone advertisement for a security an offer of a security made in a personal letter A) III only B) I, II, and III C) II and III D) I and III

A Explanation A prospectus is a communication made in writing or by radio or TV that offers a security for sale. An oral offer would therefore not be a prospectus. Tombstone advertisements are specifically excluded from the definition of prospectus. If such a letter were not preceded or accompanied by an official prospectus that contained all the required information, the sender of the letter would have violated the Securities Act of 1933.

Which of the following are issuers of securities? ABC Manufacturing Corporation borrows in the capital markets by selling bonds every few months. Dot.Com, Inc., in an initial public offering, sells all its securities to the public within a few minutes after the shares go public. XYZ Corp., in an initial public offering, fails to sell any shares to the public because it is not an attractive investment. YYY Corp., with 1 million shares outstanding, sells additional shares to the public in a primary offering. A) I, II, III, and IV B) I only C) I, II, and IV D) III and IV

A Explanation ABC Manufacturing Corp. is an issuer raising debt capital, whereas Dot.Com, Inc., is an issuer raising equity capital. YYY Corp. is an issuer raising equity capital by selling additional new shares in a public primary offering. XYZ Corp. is an issuer despite its failure to sell any shares. The USA defines an issuer as a person that issues or proposes to issue a security. It is not necessary that an issuer actually issue the shares it proposes to issue.

When saving money for a child's college education, one consideration is the impact that those savings will have on the child's eligibility for financial aid. Funds saved in which of the following vehicles has the most detrimental effect on financial aid? A) UTMA B) Prepaid tuition plan C) Coverdell ESA D) Section 529

A Explanation Assets held in custodial accounts (UTMA or UGMA) are counted at 20% of their value, which compares unfavorably with the 5.64% valuation of Section 529 or Coverdell ESA assets. Please note: It is highly unlikely that you will need to know the percentages - but you will need to know that custodial accounts do not receive as beneficial treatment when applying for financial aid.

Terry Bolton opens a UTMA for each of his sons, Josh, age 12, and Drake, age 14. Under current tax regulations (2020 and beyond), after deductions and exemptions, how will the income in the UTMAs be taxed? Josh's income is taxed at his tax rate. Drake's income is taxed at his tax rate. Josh's income in excess of $2,200 is taxed at Terry's marginal tax rate. Drake's income in excess of $2,200 is taxed at Terry's marginal tax rate. A) III and IV B) I and IV C) II and III D) I and II

A Explanation Because the income on the UTMAs is not considered to be earned income, the kiddie tax rules apply. Currently (2020 and beyond, but indexed), children younger than 19 having such income in excess of $2,200 are subject to tax at the parent's marginal tax rate. That means if the parent is in the 32% income tax bracket, the children's excess income will be taxed at 32%.

Securities traded in which of the following marketplaces would be excluded from the definition of federal covered securities? A) Toronto Stock Exchange B) NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) C) Nasdaq Stock Market D) New York Stock Exchange

A Explanation Federal covered securities include those on exchanges registered with the SEC, such as the NYSE, the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]), and the Nasdaq Stock Market, as well as investment companies registered under the Investment Company Act of 1940.

The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers generally prohibits an IA from disclosing any confidential account information without specific consent of the client. However, disclosure would be permitted to A) the client's spouse when this is a joint account B) the client's friends on his Facebook account C) the client's attorney representing him in a lawsuit D) the client's accountant who is representing him before the IRS

A Explanation In the case of a joint account, all owners are entitled to any information relating to the account. The trick here is that the IRS can compel disclosure in a tax case, but the client's CPA can't.

Which of the following bonds is most affected by interest rate risk? A) 7.6s of '41 yielding 7.2% B) 7.8s of '37 yielding 7.3% C) 7s of '32 yielding 7% D) 7.5s of '34 yielding 7.2%.

A Explanation Interest rate risk is the decline in market price due to rising interest rates. Because there is little difference in coupon rates, the bond with the greatest time to maturity (longest duration) will experience the greatest fall in a rising interest rate market.

The distributable net income (DNI) of a simple trust would not include A) realized capital gains. B) interest received on municipal bonds. C) interest received on corporate bonds. D) dividends received.

A Explanation It is capital gains that are reinvested in the corpus (body) of a simple trust which are not part of DNI. Although the interest on municipal bonds in not taxable, it is still included as part of the DNI.

It would be considered a prohibited activity for an agent to engage in any of the following activities EXCEPT A) executing a transaction in a nonexempt security in a discretionary account B) failing to record exempt transactions on the broker-dealer's books and records C) trading in the account of a conservative client exclusively in initial public offerings with proper trading authorization from the client D) sharing in profits of an account as a reward for the agent's recommendations exceeding the S&P 500

A Explanation Once a discretionary account has been properly documented, the agent handling the account can trade exempt and nonexempt securities. Nothing in this answer choice implies that the nonexempt security is unregistered. All transactions, no matter in exempt or nonexempt securities, must be recorded on the books of the broker-dealer.

The Uniform Prudent Investor Act identified a number of fundamental changes in the former criteria for prudent investing. Which of the following incorrectly states one of these changes? A) The standard of prudence is applied to each investment individually. B) Delegation of trust investment and management functions is permitted, subject to safeguards. C) Prudent investing requires that fiduciaries diversify their investments. D) The trade-off between risk and return in all investing is the fiduciary's central consideration.

A Explanation Prior to the Uniform Prudent Investor Act, the focus was on individual investment choices, which made it very difficult to focus on the risk and return of the entire portfolio. The benefits of diversification have now been firmly established, and the standard of prudence is now applied to any investment as part of the total portfolio rather than to that investment individually. Another key change was the ability to delegate the portfolio management decisions to others (who must be qualified).

The statistical method used to determine the return profile of a security or portfolio that recreates potential outcomes by generating random values based on the risk and return characteristics of the securities themselves is known as A) the Monte Carlo simulation B) the optimal portfolio C) the capital asset pricing model (CAPM) D) the efficient market hypothesis

A Explanation This is the basic definition of the Monte Carlo simulation.

Which of the following is not included in fundamental analysis of a company? A) The study of a company's historical stock prices and trading volume. B) The study of the direction of the economy. C) The study of a firm's position within its industry. D) The study of a firm's financial statements.

A Explanation Studying historical stock prices and volume is related to technical analysis. Fundamental analysis is concerned with the earnings potential and risk associated with a particular firm. Doing so requires viewing the entire economy, that company's industry, and its financial statements.

Which of the following statements under the Investment Company Act of 1940 is TRUE? A) Holding companies are not included in the definition of an investment company. B) Mutual funds furnish financial reports to shareholders at least annually. C) Mutual funds must file semiannual reports with the SEC. D) Investment companies are prohibited from owning more than 5% of another investment company's shares.

A Explanation The Act lists three different types of investment companies: face amount certificate companies, unit investment trusts and management companies. Holding companies, business entities which invest in other companies for the purpose of management control, are not included in the definition. The limit on investment in another investment company's shares is 3%. Mutual Funds requires semiannual reports from the fund to its shareholders and an annual filing with the SEC.

Among the differences between a Coverdell Education Savings Account and Section 529 plans are one has adjusted gross income limits, the other does not one has contribution limits set by federal law, the other by the individual state if the money is not used, money reverts back to the donor in one and to the beneficiary in the other A) I, II, and III B) II and III C) I and III D) I and II

A Explanation The Coverdell may only be used by persons who fall within certain income limits—no such limits apply to the 529 plan. The Coverdell has contribution limits set by federal law; each state sets its own 529 limit. If the money is not used for education, it reverts back to the donor in a 529 plan but to the beneficiary in a Coverdell.

If Maria turned 72 on August 16, 2020, when must the first required minimum distribution (RMD) be made from her IRA? A) April 1, 2021 B) December 31, 2020 C) December 31, 2021 D) April 1, 2022

A Explanation The IRS requires that RMDs commence no later than April 1 of the year following the year that the owner turned 72 years old. Maria turned 72 on August 16, 2020. Therefore, distributions must commence by April 1, 2021.

An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several that she feels are equally suitable for the client, but one of the companies is offering a trip for 2 to Las Vegas for reaching certain sales goals. She continues by stating that this sale will put her over the goal and win her the trip. If the client purchases that annuity, the agent A) should pack her bags for the trip; she earned it B) will probably be disciplined for failure to disclose the potential conflict of interest C) should pack her bags and leave the firm before the compliance department learns of her actions D) should only sell what is suitable for the client based on all available information

A Explanation The annuity recommended by the agent is offering an incentive. The agent is clearly disclosing that fact to the client and, if the client goes ahead and makes the purchase, it is with full knowledge of the potential conflict of interest. The question states that the agent considers this annuity, along with others, to be suitable.

Marianne has a fixed-premium variable life policy in which the separate account has been performing extremely well, and the face value has been increasing as a result of the investment performance. However, recently the separate account performance has been negative. If this continues, the face value could decrease A) to the original face value B) to the original face value minus any future negative performance C) to 50% of the original face value D) to 0

A Explanation The face value in an insurance policy is the death benefit. In a variable life policy, the face value will fluctuate with the separate account's performance, but it will never decrease below the original minimum face value.

A client approaches the IAR handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The IAR suggests a stock paying a $.28 quarterly dividend. That stock will meet the income objective if it has a current market price of A) $18.67 B) $6.72 C) $11.91 D) $4.67

A Explanation The first thing to do is annualize the dividend by multiplying the $0.28 by 4. Once we have the annual dividend of $1.12, divide by 6% and the result is $18.6666 or $18.67 properly rounded. If you left your math skills at home, all you have to do is multiply each of the 4 choices by 6% to see which one is closest to $1.12.

Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated? A) A living will B) A durable power of attorney C) A living trust D) An incapacitated will

A Explanation The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to "pull the plug." A living trust deals with how assets are distributed, durable power of attorney grants authorization to a person to legally act on behalf of someone who cannot do so.

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed? A) FIFO B) Identified shares C) LIFO D) Wash sale rules

A Explanation When a customer does not choose a method, the IRS uses FIFO (first-in, first-out). This will likely result in shares with the lowest cost basis being redeemed first, which creates a greater taxable gain.

Opening a margin account involves significant documentation. Which of those documents discloses the interest rate charged by the broker-dealer, including the method of interest computation and situations under which interest rates may change? A) The credit agreement B) The hypothecation agreement C) The interest computation agreement D) The loan consent agreement

A It is the credit agreement that discloses the terms of the credit extended by the broker-dealer, including the method of interest computation and situations under which interest rates may change.

When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed? A) As ordinary income based on an exclusion ratio B) As capital gains based on LIFO accounting C) As capital gains based on an exclusion ratio D) As ordinary income based on LIFO accounting

A Life with 20-year period certain is an annuitization option. When an annuity is annuitized, ordinary income taxes are paid based on an exclusion ratio (cost basis divided by expected return =the original principal invested), and not subject to income taxes). Testing note: Unless the question specifically mentions that the annuity is qualified, or gives you a clue, such as it is in a 403(b) plan, the annuity is always nonqualified.

Professor William Sharpe stipulated that certain assumptions must be present for the capital asset pricing model (CAPM) to be useful. Which of the following is not one of these assumptions? A) Investment expenses, such as taxes and transaction costs, are relevant in investment decision making. B) At all times, capital markets are in equilibrium. C) All investors have the same expectations for a given investment. D) Investors can always borrow and lend money at the risk-free rate of return.

A The CAPM does not consider taxes or transaction costs; they are irrelevant. The main assumptions of the capital market theory are as follows: -All investors can borrow or lend money at the risk-free rate of return. -All investors are rational and evaluate investments in terms of expected return and variability (standard deviation). -all investors use the same information to generate an efficient frontier. The time horizon is equal for all investors: when choosing investments, investors have equal time horizons for the chosen investments. There are no transaction costs or personal income taxes; investors are indifferent between capital gains and dividends. There is no inflation. All assets are infinitely divisible: this means that fractional shares can be purchased. There is no mispricing within the capital markets: it is assumed that the markets are efficient and that no mispricings within the markets exist. Another way to state this is that capital markets are in equilibrium.

According to the NASAA investor advisory regarding fees charged by broker-dealer firms for services and maintenance of investment accounts, A) the schedule should be made available on the broker-dealer's public website without requiring any login or password B) as long as the schedule is available in electronic form, it is not necessary to provide a paper version to retail customers C) the schedule should be made available on the broker-dealer's public website and should be password protected D) fee schedules should only be delivered by hand or postal mail to reduce cyber security threats

A Transparency requires that obtaining the fee schedule should be a simple process for retail customers and prospects. That means access without logging in to the broker-dealer's website or needing a password. Paper copies should always be available and cyber security is not a threat because there is no confidential information included.

Under which of the following circumstances will a private placement fail to qualify for exemption from registration under the USA? A) A bank holding company purchases the offering for trading purposes rather than investment purposes. B) A modest commission is paid to the agents who sell the offering to noninstitutional clients. C) The offer is directed to only 5 individuals during any 12-month period. D) The seller reasonably believes that individual purchasers are buying for investment purposes rather than immediate resale.

B A private placement will lose its exemption if those who sell the offering are paid commissions on sales to noninstitutional clients. private placement to be exempt, the offer cannot be directed to more than 10 persons during a 12-month period. In the case of noninstitutional buyers, the seller must reasonably believe, they are purchasing the offering for investment purposes only. Institutional purchasers do not have to purchase the offering for investment purposes.

An investment adviser (IA) has a number of clients who need high-quality estate planning. These clients are referred to the Rox Law Firm, and in exchange, Mr. Rox sends those of his clients needing investment advice to the IA. The IA pays a referral fee to Mr. Rox of $300 for each referral who becomes a client. Under the NASAA Model Rule on Unethical Business Practices Of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) this is permissible, but does not need to be disclosed to clients because Mr. Rox is an attorney and this would be a violation of attorney/client privilege B) this is permissible, but only if disclosed to clients C) this is permissible, but only if disclosed to the Administrator D) this type of arrangement is never permitted

B Actually, NASAA doesn't say anything at all about referral fees, but you have to pick an answer. It is the Investment Advisers Act of 1940 that deals with the topic and permits referral fees, proper disclosures are made and the fee is not related to the size of the account. Because it is a flat $300, it would be the same for a $100,000 account as a $10 million account.

An investment adviser representative is looking for a suitable investment for a client. The IAR wishes to find something that will offer an attractive return commensurate with its systematic risk. The choices have been narrowed to Security C and Security L, and the selection will be based on alpha. C has a beta of 1.0 and earned 13%, while L has a beta of 0.8 and earned 10.1%. The alpha of Security L is A) −2.9 B) −0.3 C) +2.9 D) +0.3

B Alpha is obtained by comparing how a security actually performed to the performance one would have expected based on its beta. A beta of 1.0 is used to indicate the expected volatility of the overall market. Because Security C has a beta of 1.0, its 13% return matches that of the "market." With a beta of 0.8, one would expect Security L to produce a lower return, but how much lower? Its return should be 80% of the "market" or, in this case, 80% of 13%, which computes to 10.4%. However, its actual return fell short of that by 0.3%, giving it a negative alpha of 0.3. Had its actual return been 10.7%, it would have had a 0.3 positive alpha. Although this question doesn't ask it, based on the criteria given, the IAR would have selected Security C.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may NOT borrow money from which of the following clients? A) A broker-dealer not affiliated with the adviser B) A federal covered investment adviser not affiliated with this adviser C) A finance company not affiliated with the adviser D) A bank not affiliated with the adviser

B An investment adviser may only borrow from a client that is in the business of loaning money, such as a bank or a broker-dealer, or a client that is affiliated with the investment adviser. Investment advisers are not in the business of loaning money and the only way this could be done is if the 2 firms were affiliated.

Information required on an application for registration as an agent would include the form of business (corporation, partnership, LLC, etc.). felony convictions, whether securities related or not. a statement of financial condition. citizenship information. A) I and II B) II and IV C) I and III D) III and IV

B 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 only broker-dealers and investment advisers that must submit financial information.

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

B Do not confuse the statute of limitations for criminal prosecution (5 years) with the statute of limitations for civil liability (3 years from the date of the event or 2 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 prosecution for violating the provisions of the act.

Which of the following is (are) NOT exempt from registration as an investment adviser representative in the state in which they conduct business? A Certified Financial Planner who prepares financial plans and whose only compensation is commissions An insurance agent who prepares comprehensive financial plans and receives commissions on any insurance products purchased by his clients A broker-dealer with extensive business in the state A mutual fund company with offices and clients in the state A) III and IV B) I and II C) I, II, III, and IV D) I only

B Explanation A Certified Financial Planner who prepares financial plans for commissions must register in the state as an investment adviser representative. An insurance agent who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the Uniform Securities Act.

Which of the following would be included in the Uniform Securities Act definition of "sale"? An offer of common stock in a new issue properly registered or exempt from registration in the state A gift of assessable stock An investor exercising warrants attached to a convertible bond purchased 5 years ago An investor pledging stock she owns to a bank as collateral for a loan A) III and IV B) II and III C) I and II D) I and IV

B Explanation A gift of assessable stock is always considered a sale. Exercise of warrants is a sale of the underlying stock. Pledging stock as collateral is never a sale.

A wealthy client wishes to endow her favorite charity with a lump-sum gift that, with an assumed rate of return of 4% per annum, will provide $2,500 per month in perpetuity. What amount does the client need to deposit? A) $1,000,000 B) $750,000 C) $100,000 D) $75,000

B Explanation A monthly income of $2,500 is equal to $30,000 per year. At a 4% earning rate, $750,000 must be deposited to generate that amount (30,000 ÷ 4%). 12 X 2,500 = 30,000 30,000 divided by 4% = 750,000

Which of the following would NOT be defined as a sale or an offer to sell under the Uniform Securities Act? A) ABC attaches warrants to buy common stock of XYZ Corporation to a bond issue. B) ABC issues a $1.50 quarterly dividend to existing stockholders of record. C) ABC issues a rights offering. D) A bonus given as a direct result of the purchase of another security.

B Explanation ABC's issue of a $1.50 quarterly dividend to existing stockholders is not a sale as defined in the Uniform Securities Act. Bonuses are considered sales, and rights and warrants are considered offers of the underlying stock.

Which of the following statements regarding a qualified profit-sharing plan is TRUE? A) Contributions are required annually. B) It must be established under a trust agreement. C) It can permit regular direct cash payouts to participants before retirement. D) It must define a specific contribution amount.

B Explanation All qualified retirement plans must be established under a trust agreement. Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement.

Which of the following statements (is)are TRUE? An Administrator can suspend a pending registration on a summary basis. An Administrator may not issue a stop order without prior notice and opportunity for a hearing. An Administrator may cancel a registration for the same reasons he revoked or suspended a registration. A) II and III B) I and II C) III only D) I only

B Explanation An Administrator can, on a summary basis, suspend a pending registration but may not issue a stop order without a prior notice and an opportunity for a hearing. Cancellation is different from revocation and is not a result of disciplinary action; it occurs when a registrant no longer exists, ceases to do business, is declared mentally incompetent, or cannot be located.

There are number of potential sources of income to a client that would have to be reported on their Form 1040 tax return. Among them could be all of these EXCEPT A) operation of a sole proprietorship B) death benefit received from a life insurance policy C) ownership of stock in an S corporation D) interests in a DPP

B Explanation An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will possibly use the obsolete term, Subchapter S). And, if units of a DPP throw off income, that would be reported as well. Of course, taxable income can be generated by investments in the form of dividends, interest, and capital gains from any source. The death benefit is from a life insurance policy are not subject to income tax. Depending on how the ownership is structured, the death benefit could be subject to estate tax, but that would be reported on the Form 706 and is generally not considered income. unlike the death benefit from an annuity WHICH IS SUBJECT TO INCOME TAX

Which of the following is an allowable early withdrawal from a traditional IRA without penalty? A) A single parent withdraws funds from her IRA to pay for the education of a nephew. B) A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence. C) A person withdraws funds from his IRA to buy a principal residence after he sold his first home as a result of medical expenses. D) A single parent supplements a home equity loan with $5,000 from her IRA to pay for an additional home (a vacation home).

B Explanation Any individual withdrawing $10,000 from his IRA to purchase his first principal residence would have the penalty waived. The wealth of the individual is not relevant. The purchase must be a first-time purchase as well as the primary residence. A single parent who withdraws funds from her IRA to pay for the education of a nephew will pay a 10% tax penalty. Educational withdrawals are limited to the taxpayer or a spouse, child, or grandchild.

XYZ Corporation common stock has a market price of $45 per share and earnings per share of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings ratio of XYZ stock will be A) 5 B) 15 C) 3 D) 45

B Explanation Before the split, the stock had a P/E ratio of 15 ($45 per share ÷ $3). After the split, the price per share and the EPS drop in the same proportion, leaving the P/E ratio unchanged (new price = $15, new EPS = $1).

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

B Explanation 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.

Under the Investment Advisers Act of 1940, an adviser's registration usually becomes effective how many days after it is filed? A) 10 B) 45 C) 20 D) 30

B Explanation In the absence of any denial order or pending proceedings, registrations of federal covered investment advisers (and broker-dealers) will become effective on the 45th calendar day after the date of filing (the date received in the SEC's office). The SEC may specify an earlier date.

Which of the following would not be unlawful for an investment adviser under the Uniform Securities Act? A) An owner of a majority of the stock in the IA pledging that stock as collateral to a bank for a personal loan B) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees C) Failing to notify the Administrator that the adviser has custody of a client's securities or funds, even though the Administrator has no rule that prohibits such custody D) Signing an investment advisory contract that did not outline the compensation arrangements

B Explanation Investment advisory contracts must outline compensation provisions and indicate the amount to be refunded, if any, if the contract is terminated. Nothing in the USA requires that there be a refund, only that the terms must be disclosed. The Uniform Securities Act also requires investment advisers to notify the Administrator if they have or will have custody of customers' funds. The USA considers that a pledge of a majority interest in an IA is considered an assignment of the IA's contracts.

When reading the prospectus for a fund, you notice that it states that the fund may make portfolio purchases on margin, take short positions, and use arbitrage techniques. This is most likely what type of fund? A) Exchange traded B) Hedge C) Closed end D) Index

B Explanation Margin trading and selling short are techniques commonly found in hedge funds, rather than in open-end or closed-end management funds or ETFs. Because hedge funds are considered private funds, exempt from registration, the offering document is called the private placement memorandum.

A mutual fund would have net redemptions when A) the fund manager is selling more securities in the portfolio than are being purchased B) the number of shares being liquidated by investors exceeds those being purchased C) the fund is performing below the average of other funds with the same objectives D) the fund increases its sales charge

B Explanation One of the characteristics of an open-end investment company (mutual fund) is the ease of redeeming holdings. When the dollar amount of shares being redeemed exceeds that of those being purchased, the result is net redemptions. Although poor performance could lead to net redemptions, that is not always the case, so it is not always a true statement.

Which of the following has the highest real return? A) A bond that yields 10% when inflation is 7% B) A bond that yields 5% when inflation is 1% C) A bond that yields 8% when inflation is 5% D) A bond that yields 6% when inflation is 4%

B Explanation Subtracting the inflation rate from the bond yield will result in a real return of 4% on the 5% bond, the highest of the choices offered. CY: Cannot use capital gains/growth it's only dividend divided by current price real rate of return is the actual return less the inflation rate as measured by the CPI.

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be CORRECT to state that A) you will receive a statement of your death benefit no less frequently than semiannually B) by surrendering the policy, its cash value may be obtained C) if a policy loan exceeds the policy cash value, the deficiency must be remedied within 10 business days to keep the policy from lapsing D) premiums will vary based upon performance of the separate account

B Explanation Surrender of the contract requires the insurance company to pay out its cash value. Death benefit is adjusted annually.

Which of the following persons must register as an investment adviser under the Uniform Securities Act? A) An investment adviser whose advice is limited to securities issued or guaranteed by the U.S. government and who has 3 places of business in the state B) An investment adviser who only serves institutional clients and whose only office is in this state C) An accountant who makes no pretense of providing investment advisory services but gives incidental advice to clients as a small part of accounting services provided D) An investment adviser representative with no place of business in the state who has dealt with 7 retail clients during the most recent 12 month period

B Explanation The Uniform Securities Act requires those defined as investment advisers to register with the state. Accountants are excluded when their advice is incidental to their profession and no additional compensation is charged. Advisers whose only advice is on securities issued or guaranteed by the government are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. This means they are federal covered investment advisers, not required to register with the Administrator even with offices in the state. As long as there is an office in the state, unless the adviser is federal covered (as described in the previous sentence), there is no exemption from registration in that state. The IAR has exceeded the de minimis limits and would have to register in the state, but as an IAR, not as an IA.

A securities market investment theory that attempts to derive the expected return on an assetbased upon the asset's systematic risk is A) the Monte Carlo simulation. B) the capital asset pricing model (CAPM). C) the efficient market hypothesis (EMH). D) the random walk theory.

B Explanation The capital asset pricing model (CAPM) attempts to describe the relationship between the systematic risk and the expected return of the asset in an effort to determine the asset's appropriate price.

Which of the following is TRUE of the tax consequences when a participant in a noncontributory pension plan withdraws a monthly income at retirement? A) The income is partly taxed as ordinary income and partly taxed as capital gains. B) The income is taxable as ordinary income. C) The income is taxable as capital gains. D) The income is nontaxable.

B Explanation The employer has been making all the contributions to the pension plan. Noncontributory means that the employee has made no contributions. Under the Internal Revenue Code, the income to the retiree from the plan is ordinary income.

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

B Explanation We can show our appreciation for the referrals by referring our clients to qualified professionals. A flat fee may be paid to other professionals for their referrals, but it must be disclosed to the client.

Nonqualified corporate retirement plans differ from qualified retirement plans because nonqualified plan contributions are not exempt from current income tax nonqualified plan earnings accumulate on a tax-deferred basis the corporation need not comply with nondiscrimination rules that apply to qualified plans the corporation must comply with ERISA requirements dealing with communications to plan participants A) I and II B) I and III C) II and IV D) II and III

B Explanation Two of the primary ways in which nonqualified corporate retirement plans differ from qualified retirement plans is that contributions are not exempt from current income tax and they need not comply with nondiscrimination rules that apply to qualified plans. Under most circumstances, the accounts do not provide for tax deferral on earnings because these plans are rarely funded. The ERISA communication requirements apply to qualified plans only.

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) only upon request of the offeree. B) before the sale of the security. C) within 72 hours of the effective date. D) before or concurrent with the filing of the registration statement.

B Explanation 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.

Under the Uniform Securities Act, an issuer is any person who issues or proposes to issue a security for sale to the public. According to the USA, which of the following is NOT an issuer? The city of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds AAA Partnership, which issues certificates of interest or participation in its oil, gas, and mining titles The AAA Manufacturing Company, which proposes to offer shares to the public but has not completed the offering The United States government, which proposes to offer Treasury bonds A) I only B) II only C) I, II, and IV D) I, II, and III

B Explanation Under the Uniform Securities Act, an issuer is any person who issues or proposes to issue a security. However, with respect to certificates of interest or participation in oil, gas, or mining titles or leases, there is not considered to be any issuer, even though those certificates are included in the definition of "security." Examples of issuers are a municipality such as the city of Chicago, which issues tax-exempt highway improvement bonds; the AAA Manufacturing Company, which proposes to offer shares to the public, even though it has not completed the offering; and the United States government, when it proposes to offer Treasury bonds.

The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only An adviser with a place of business in the state whose total fee income in the state amounts to $150 An adviser with no place of business in a state who only provides advice on fixed annuities An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of 1940 A) I, II, and IV B) I and II C) I only D) I, II, and III

B Explanation Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable.

Under the Uniform Securities Act, the Administrator may require a broker-dealer to post a surety bond of A) $35,000 B) an amount not in excess of that set by the SEC C) $10,000.00 D) $25,000.00

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

An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be A) credit risk B) interest rate risk C) purchasing power risk D) reinvestment risk

B Treasury STRIPS are zero-coupon bonds and, as such, have a longer duration than those paying semiannual interest. The longer the duration, the greater the interest rate risk. Because both are guaranteed by the U.S. government, there is no credit risk. Both have the same purchasing power risk, and there is no reinvestment risk with a zero-coupon bond.

Which of the following activities would violate the Uniform Securities Act? An investment advisory partnership admits a renowned securities analyst to the partnership without informing its clients of this highly desirable addition. An investment adviser incorporated in California fails to inform its clients of the departure of the chief financial officer, who did not have an equity position in the firm. An investment advisory firm incorporated in Illinois charges clients a share of the capital gains on the basis of a guaranteed performance level above a designated benchmark. An investment advisory firm assigns those accounts that fall to a low level to other firms willing to accept them with the consent of the account holder. A) I, III, and IV B) I and III C) II and III D) I and II

B Investment advisers who are partnerships must inform their clients of any change in the membership of the partnership within a reasonable period. Unless the question refers to a specific exemption, it is a violation of the USA for an advisory firm to charge on the basis of performance. An investment advisory firm may assign accounts to another firm with the consent of the client.

An individual is employed by a federal covered investment adviser for the sole purpose of giving advice related to monitoring investment portfolios, but only to qualified employee benefit plans. Under the Uniform Securities Act, this individual is A) defined as an IAR because the plan is qualified B) defined as an IAR because the individual is rendering investment advice C) not defined as an IAR because the individual works for a federal covered investment adviser D) not defined as an IAR because the plan is considered an institutional client

B Regardless of whom the advice is given to, unless there is some kind of exemption involved, individuals working for IAs (state or federal) must register as IARs in at least one state. It makes no difference if the plan is qualified or not.

Under the USA, each of the following is specifically excluded from the definition of a broker-dealer EXCEPT an A) agent B) investment adviser C) international bank D) issuer

B The USA specifically excludes agent/issuers and banks, international or domestic, from the definition of a broker-dealer. Investment advisers also may have to register as broker-dealers if their method of operation requires it.

A securities market investment theory that attempts to derive the expected return on an assetbased upon the asset's systematic risk is A) the random walk theory. B) the capital asset pricing model (CAPM). C) the Monte Carlo simulation. D) the efficient market hypothesis (EMH).

B The capital asset pricing model (CAPM) attempts to describe the relationship between the systematic risk and the expected return of the asset in an effort to determine the asset's appropriate price.

One measure of a corporation's liquidation value is its book value per share. When performing this computation, the value of which of the following would normally be subtracted from the corporation's net worth? Cash Wages payable Patents Preferred stock A) II and III B) III and IV C) I and II D) I and IV

B The computation of book value per share is basically net tangible worth per share of common stock. Therefore, we subtract both the par value of the preferred stock and the value listed on the balance sheet for the intangible assets, such as patents.

Which of the following is a method for determining the internal rate of return to an investor based on cash flow in and out of the portfolio? A) Time-weighted return B) Dollar-weighted return C) Dollar cost averaging D) Discounted cash flow

B The dollar-weighted return measures the internal rate of return (IRR) of a portfolio's actual performance between 2 dates, including all cash inflow and outflows. Because of this, the IRR of a portfolio can be significantly affected by both the timing and the size of any contribution or distribution. Luck in the timing of the investor's inflows or outflows can drastically swing numbers one way or the other.

Bryan, an agent registered with a broker-dealer, buys 1,000 shares of XYZ Corp. in his own account. In recommending XYZ Corp. to his customers, Bryan informs them that he believes in the company so much that he put his own money in the stock. This practice is A) only unethical if investors lose money in the investment B) not an unethical sales practice C) an illegitimate sales tactic D) only unethical if Bryan sells his shares after informing his clients of his intention to do so

B This practice is ethical, providing it is accurate and not employed in a coercive manner. It would be expected that when Bryan decides to sell his position, he would not do so prior to notifying his clients with a position in that stock. Otherwise, this would be an ethical problem.

Which of the following are characteristics of newly issued warrants? A) Intrinsic value, but no time value B) Time value, but no intrinsic value C) No intrinsic value and no time value D) Time value and intrinsic value

B Warrants could be thought of as call options with a long expiration period. They are always issued with a strike price in excess of the current market value, so there is no intrinsic value. One could say that on issuance, they are always out-of-the-money. The only value is in the time to expiration, usually several years or longer.

An investment adviser plans to sell securities out of its own investment account to an advisory client. In order to do so, which of the following is required? A reduction in the fee equivalent to the profit made on the trade Consent of the client before completion of the trade Written disclosure of the adviser's capacity before completion of the trade Notification to the Administrator of the adviser's plan to act as a principal A) II and IV B) I and IV C) II and III D) I and III

C (FOR IA and IAR) In order to act as a principal (or agent) in a trade with an advisory client, there are 2 requirements: The client receives full written disclosure as to the capacity in which the adviser proposes to act Consent of the client Both of these are required prior to the completion of the transaction.

An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose A) the scheduled premium policy because earnings do not affect the contract's face amount B) the flexible premium policy because the contract's face amount cannot be less than a predetermined percentage of cash value C) the scheduled premium policy because the contract is issued with a minimum guaranteed face amount D) the flexible premium policy because earnings of the contract directly affect the face value of the policy and earnings can never be negative

C A scheduled premium variable life contract is issued with a guaranteed minimum death benefit. If the individual is concerned about having the minimum guarantee, you should recommend the scheduled contract.

All of the following are exempt from state registration under the Uniform Securities Act EXCEPT A) debt securities issued by or guaranteed by an insurance company licensed to do business in this state B) bonds issued by a bank that is a member of the Federal Reserve System C) variable annuities or other variable insurance products offered by an insurance company authorized to do business in the state D) securities issued by a nonprofit organization

C A variable annuity (or other variable insurance product) offered by an insurance company is a nonexempt security under the Uniform Securities Act. Securities issued by or guaranteed by an insurance company are covered by extensive state insurance regulations and are exempt from state securities registration. Securities issued by banks are exempt because banks are covered by extensive state and federal banking regulations.

Under the Uniform Securities Act, which of the following are elements in the definition of an investment adviser? Advice as to investments must be in writing, not given orally. Advice must relate to the value of securities or recommendations to purchase or sell securities. There must be compensation for services rendered. A) I and II B) I, II, and III C) II and III D) I and III

C An investment adviser provides advice related to securities for compensation. The advice may be given orally or in writing.

Your client with $100,000 to invest is looking for maximum current income. Which of the following would offer the highest current return? A) $100,000 of zero-coupon bonds with a yield to maturity of 6% B) $200,000 of utility common stock paying a current dividend of 3.5% C) $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity D) $100,000 AA-rated corporate bonds trading at par with a 6% coupon rate

C Bonds selling at a premium have higher coupons than those selling at par. Therefore, the current yield on those bonds is higher than the ones at par, even though they would have the same yield to maturity. The zero-coupon bonds offer no current income and the investor only has $100,000 to invest, so the utility stock is not a viable option.

All of the following statements regarding exchange-traded funds (ETFs) are correct except A) ETFs can be bought on margin. B) ETFs may be passively managed. C) ETFs may not be sold short. D) ETFs trade based on supply and demand for the shares rather than their NAV.

C Exchange-traded funds can be sold short and can be bought on margin just like other listed securities. Because most ETFs are based on an underlying index, they are passively managed and like other listed securities, their price is based on supply and demand rather than the NAV (although the price will generally be close).

According to the Investment Advisers Act of 1940, which of the following statements regarding registration of investment advisers is TRUE? State registration is a requirement for federal registration. An investment adviser must be registered with the SEC to be registered at the state level. A) II only B) Both I and II C) Neither I nor II D) I only

C Explanation A critical point to remember about investment advisers is that, if required to register, they register with either the state or the SEC, never with both. broker-dealers register with both the SEC and the state(s) in which they do business.

Which of the following is required for a preorganization subscription to be an exempt transaction? A) Full payment has been made. B) There may be no more than 15 subscribers. C) No commission has been paid. D) Prior notification of intent to incorporate must be given to the Administrator.

C Explanation A preorganizational subscription is an exempt transaction if there are no more than 10 subscribers and no commissions are paid, either directly or indirectly. The subscribers make no payments until they purchase the underlying security.

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) lend the customer money B) hypothecate securities in the account C) loan out the customer's margin securities D) commingle the customer's securities with securities owned by the firm

C Explanation A signed loan consent agreement permits a firm to loan out a customer's margin securities. This is the only part of the margin documentation that is optional.

Which of the following securities are exempt from the registration requirements of the Uniform Securities Act? An investment contract issued in connection with an employee pension plan Securities issued by St. Paul's Catholic Church in Tempe, Arizona Securities issued by a public utility Securities issued by the Canadian government A) II and IV B) II and III C) I, II, III, and IV D) I and III

C Explanation All of the securities listed are exempt from registration under the USA.

To comply with Section 404(c) of ERISA, A) the plan fiduciary must act in accordance with the provisions of the retirement plan's objectives and goals B) the plan must cover all full-time employees with at least 1 year of service who are 21 or older C) the plan must offer at least 3 different investment choices, including a stable value option, an income option, and a conservative growth option D) plan participant loans must be limited to 50% of vested assets or $50,000, whichever is less

C Explanation Although each of these statements is true, the only one that applies to Section 404(c) is the fact that there must be at least 3 different investment alternatives offered.

On June 20, 2016, an investor in the 30% marginal federal tax bracket acquired a growth stock paying no dividend for $10 per share. On June 22, 2017, the investor sold the stock for $20 per share. Presuming capital gains rates are 15%, the investor's after-tax rate of return is closest to A) 100% B) 70% C) 85% D) 200%

C Explanation Although the stock grew at a 100% rate of return (by doubling), the investor must pay capital gains tax on the investment at 15%, and the investor realizes an after-tax rate of return of approximately 85%. Because the investor held the stock for more than 1 year, the sale is taxed at a favorable capital gains rate rather than at the investor's ordinary income tax rate.

During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, Kapco's P/E ratio has decreased Kapco's P/E ratio has increased an investor holding Kapco over this period would have noticed a decrease in income received an investor holding Kapco over this period would have noticed no change in income received A) II and III B) II and IV C) I and IV D) I and III

C Explanation At the beginning of the period, the P/E ratio was 23.5 to 1 ($47 divided by $2.). At the end of the period, the P/E ratio was 20 to 1 ($50 divided by $2.50). Initially, Kapco was paying out 50% of its $2.00 per share earnings, or $1.00 in dividends. At the end, Kapco was paying out 40% of its $2.50 per share earnings, also $1.00 in dividends. It is the same dividend amount

An agent working for a brokerage firm and his client both live in Illinois, and the agent makes an offer to the client by phone while the client is vacationing in California, which he accepts. The client travels to Texas before returning home and sends payment for the security from there. He makes his payment by sending a check from a money market fund based in Ohio. The Administrators of which of the following states have authority over the sale? Illinois California Texas Ohio A) II, III, and IV B) II and III C) I and II D) I, II, III, and IV

C Explanation Because the offer was made from Illinois to a person in California, the state Administrators of both states have jurisdiction. The state from which payment was mailed and the state in which the checking account or money market fund is based are irrelevant for the purpose of determining an Administrator's jurisdiction.

An individual works for an accounting firm that does not have a retirement fund. She is paid $18,000 per year. During her spare time, she is a commercial artist and earned $16,000 doing this work last year. What is the basis for her contribution under a Keogh plan (HR-10)? A) $34,000.00 B) $18,000.00 C) $16,000.00 D) $0.00

C Explanation Contributions to a Keogh must be based on self-employment income.

Which of the following would be least likely to be organized as a limited partnership? A) Hedge fund B) Private equity fund C) Index ETF D) Venture capital fund

C Explanation ETFs are rarely organized as a limited partnership while the other choices almost always are.

Under the Uniform Securities Act, which of the following statements are TRUE regarding private placements? They are offered to no more than 10 persons in a state in a 12-month period. They may be offered to an unlimited number of institutional investors. Institutional buyers need not be purchasing for investment. A) I and II B) I, II, and III C) II and III D) I and III

C Explanation Private placements are transactions resulting from offers to no more than 10 noninstitutional persons (retail clients) in 12 months for investment purposes only. The offeror must be convinced that buyers are purchasing for investment. This means no immediate resale intentions are allowed on the buyer's part. No commissions may be paid, directly or indirectly, for these transactions. However, sales to institutional purchasers are exempt from the limitations regarding number of sales, resale restrictions, and commissions. They may, therefore, be offered to more than 10 persons. (Remember that the term person is defined very broadly in the act.)

If securities of an issuer registered with the state are outstanding, how long after the effective date of registration must an issuer wait before the registration may be withdrawn? A) 6 months B) Only at the Administrator's discretion C) 12 months D) 18 months

C Explanation Registration statements are usually effective for a period of 1 year from the effective date and may not be withdrawn during this period if any of the securities of the issuer of the same class are still outstanding.

Capital Asset Planning & Management (CAPM), a registered investment adviser, has decided to employ the services of Optimized Lead Generators (OLG), a third-party solicitor. In order to be in compliance, OLG's disclosure document must include the name of the solicitor (OLG) the name of the investment adviser (CAPM) the nature of the relationship between OLG and CAPM the fact that OLG will receive compensation, the terms of the compensation arrangement, and indicate whether the client will pay a specific charge or a higher advisory fee because OLG recommended CAPM to the client. A) I and II only B) I, III, and IV only C) I, II, III, and IV D) II, III, and IV only

C Explanation SEC Release IA-688 contains the specifications for required inclusions in a third-party solicitor's disclosure document (brochures). This document, which includes all the information in these choices, must be delivered along with the IA's brochure. Although not in this question, you should know that the investment adviser must receive from the client, prior to or at the time of entering into any written or oral investment advisory contract with such client, a signed and dated acknowledgment of receipt of the investment adviser's brochure and the solicitor's written disclosure document.

ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $0.25 per share and capital gains of $0.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund is $28.50, and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be A) 3.85% B) 83% C) 3.33% D) 27.20%

C Explanation The current yield on mutual funds is calculated by dividing the annualized yield ($0.25 × 4 = $1) by the POP. In this case, $1 ÷ $30 = 0.0333 × 100 = 3.33%. In calculating the current yield, the law prohibits the inclusion of capital gains and growth.

The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 10%, and a particular stock's beta is 1.5 with a standard deviation of 3.2, the expected return would be A) 18.2% B) 12% C) 14% D) 15%

C Explanation The formula for this computation is as follows: 10% (the return on the market is a beta of 1.0) minus the risk-free rate of 2% or 8%. Then, multiply that by the beta of this stock (1.5) to arrive at 12%. That is, the stock should return 12% above the risk-free rate of 2%, or 14%. The standard deviation is not relevant to this computation.

If an agent chooses to appeal an Administrator's order, the agent must file for review of the order with the appropriate court A) immediately B) within 30 days of order entry C) within 60 days of order entry D) within 180 days of order entry

C Explanation Under the USA, a registered person has up to 60 days to appeal any disciplinary finding by the state Administrator.

Among the benefits of an HSA is A) up to $10,000 per year may be accumulated. B) funds may be used for various medical expenses once the low deductible has been met. C) funds not used for health expenses may be invested in mutual funds and other securities. D) the amount that may be contributed is based on the number of dependents.

C Explanation Unlike an FSA (flexible spending account), employee contributions to a health savings account (HSA) not used for medical expenses may be invested in a wide variety of securities. Although mutual funds are the most common, many providers offer the opportunity to invest in stocks and bonds. Remember, one of the eligibility requirements for an HSA is a high deductible. Currently, the maximum contribution is $3,450 for an individual or $6,850 if family coverage, regardless of the number of dependents covered.

A broker-dealer registered with State A created a website 2 years ago to promote its services. Recently, they hired a new media person who totally redesigned the site. Under the recordkeeping requirements of the Uniform Securities Act, A) a copy of the new website page must be maintained for a period of 3 years from the first use of the original site B) copies of both the original and the new website page must be maintained for 5 years after original use C) a copy of the original website page must be maintained for 3 years from original use D) there are no requirements for storage of electronic data

C Explanation Websites are treated as would be any other advertisement. So, the original site design is kept for 3 years and, whenever revised, the new copy is maintained and starts a new retention requirement for that copy. Therefore, you will likely have several different versions in your advertising file at the same time.

Liquidity risk is the risk that when an investor wishes to dispose of an investment, no one will be willing to buy it, or that a very large purchase or sale would not be possible at the current price. With that in mind, which of the following would likely have the lowest degree of exposure to liquidity risk? A) Investment-grade municipal bonds​ B) RELPs C) Money market mutual funds D) REITs

C RELPs (real estate limited partnerships) would have high liquidity risk because there is generally no secondary market for them. Municipal bonds, even highly rated ones, can have liquidity issues. Even though many REITs are listed on exchanges, there are a growing number of non-traded ones where liquidity can be an issue. However, money market funds with their check-writing privilege, are about as liquid as you can get.

When describing the differences between an investment adviser and an investment adviser representative, it would be correct to state that the investment adviser may exercise discretion in an account, whereas an IAR may not maintain custody of client funds and securities, whereas an IAR may not be required to be bonded, whereas an IAR may not be required to maintain a minimum net worth, whereas an IAR may not A) II and III B) I and IV C) II, III, and IV D) I and II

C Registered investment advisers, but not their representatives, are permitted to maintain custody of client assets (if not prohibited by the Administrator). There is no minimum net worth standard for IARs, as there is for IAs. Both may be granted written discretionary powers, and if so, only the IA may be required to be bonded (adequate net worth will suffice).

A 457 plan could cover which of the following? Employees of a corporation Independent contractors providing services to the county Employees of a nonincorporated business City employees A) I and IV B) II and III C) II and IV D) I and III

C The 457 plan is a nonqualified deferred compensation plan for municipal employees, as well as for independent contractors performing services for those entities.

An application has been filed with the Administrator of State A for registration as a broker-dealer by Assured Success Investments (ASI), a broker-dealer registered in States B, C, and D. While the application is pending, a lawsuit against ASI is filed in civil court in State B. The effect of this would be A) ASI's registration in State B would be suspended B) ASI's application in State A would be denied C) ASI's application in State A would proceed as normal D) ASI's application in State A would be put on hold

C The filing of a lawsuit would have no immediate effect on a broker-dealer's application for registration. After all, one is innocent until proven guilty. Even a guilty verdict might not lead to any action, because we don't know whether the lawsuit is connected to the brokerage activities.

The statute of limitations for criminal offenses under the USA is A) 3 years B) 10 years C) 5 years D) 2 years

C USA Remember the sequence 5-5-3: 5-year statute of limitations, $5,000 maximum fine, and imprisonment for up to 3 years.

A basic difference between a Section 457 plan established on behalf of a governmental entity and one established by a private tax-exempt organization is that A) a tax exempt plan's distributions are not eligible for a favorable lump sum 10-year averaging treatment. B) a tax-exempt plan participant does not have to include plan distributions in taxable income C) a governmental plan cannot make a distribution before the participant attains age 70½ D) a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants

D A governmental Section 457 plan must be funded—that is, it must hold plan assets in trusts or custodial accounts for the benefit of individual participants. Conversely, a tax-exempt (nongovernmental) Section 457 plan may not be funded

An investment strategy where a higher price is paid for a stock based on expected returns is A) dollar cost averaging B) futures investing C) return on investment. D) growth investing

D A growth investor purchases shares that have exhibited faster-than-average gains in earnings over the past few years that is likely to continue to show high levels of margin. Over the long run, growth stocks tend to outperform the market but are riskier than most other stocks and generally pay little or no dividend.

An investment adviser may state which of the following in the advisory contract? A) The advisory contract may only be assigned to another party after adequate compensation. B) The adviser may be compensated on the basis of a reasonable share of the capital gains. C) The investment adviser may be compensated on the basis of capital gains, providing assets in the account are below $250,000. D) The advisory contract may only be assigned to another party with the consent of the client.

D An investment advisory contract may only be assigned to another adviser with the client's consent. Advisers are not allowed to be compensated solely on the basis of capital gains, regardless of how reasonable the share appears to be. Performance-based compensation is not generally allowed unless the client has a minimum under management (currently $1 million) or a substantial net worth (currently in excess of $2.1 million).

A Schedule K-1 would be received by an individual with an ownership interest in all of the following except A) an S corporation. B) a partnership. C) an LLC. D) a C corporation.

D C corporations pay tax on their earnings; the other business types listed here flow through the income to their owners. The owner's share of income (or loss) is reported to them on the Schedule K-1. A shareholder in a C corporation who receives dividends will have that reported on a Form 1099.

Which of the following are features of Class C mutual fund shares? Typically charge no front-end load Typically charge a front-end load Typically impose lower CDSCs than Class B shares for a shorter period Typically convert to Class A shares after they are held for a defined period A) II and IV B) II and III C) I and IV D) I and III

D Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, because the level load never discontinues.

The term "sale" includes which of the following? A contract of sale A contract to sell The disposition for value of an interest in a security A warrant (for common stock of the issuer) given with the purchase of a bond A) I, III, and IV B) I and III C) II and III D) I, II, III, and IV

D Explanation "Sale," used interchangeably with" sell," is defined in the Uniform Securities Act as any contract of sale, any contract to sell, and any disposition of a security or interest in a security. The sale of a corporate bond is a sale with or without a warrant attached and involves the disposition of an interest in a security of the issuer. Because the distribution of the warrant is conditional upon the purchase of the bond, the acquisition of the warrant is considered to be a sale.

When investing in mutual funds, each of the following is a sales charge EXCEPT A) a back-end load B) a CDSC C) a front-end load D) 12b-1 fees

D Explanation 12b-1 fees are not defined as sales charges because they are not a function of buying or selling your shares. These fees are asset-based, generally charged quarterly, and come out of the NAV. Front-end loads and back-end loads (CDSCs) are charged either when you buy the fund (front end) or sell your shares (back-end).

One of your advisory clients indicates that he would like to sell forward contracts in soybeans. It would be wise to warn the client that he will be facing the following risks: Liquidity Creditworthiness of the buyer Lack of assurance that the delivery price will remain stable The location for the delivery may change A) I and IV B) II and III C) III and IV D) I and II

D Explanation Because there is no standardization for forward contracts, they are considered to be illiquid. Because there is no entity backing up the contract (as the OCC does with listed options), a seller must always be concerned about the ability of the buyer to pay. Although the market price probably will change, the delivery price is always agreed upon at the time of the contract, as is the method, location, and time of delivery.

A client of Wall Street Wealth Management (WSWM), a federal covered investment adviser, calls the IAR handling the account and gives instructions to use some of the surplus cash in the account to purchase 500 shares of RMBM, a small-cap stock traded on the Nasdaq Stock Market. Prior to submitting the order, the IAR checks with a supervisor and learns that WSWM has 1,000 shares of RMBM in its proprietary account and is looking to halve the position. If, instead of forwarding the order to the broker-dealer who normally handles trade executions for this client, WSWM filled the order out of its own account, A) it would be permissible only if consent was obtained, and written disclosure of the firm's capacity was disclosed prior to execution B) because it was an unsolicited transaction, the only required disclosure would be the firm's capacity on the trade confirmation C) WSWM would be engaging in a prohibited practice D) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the completion of the transaction

D Explanation In almost every case, an IA acting as a principal (out of inventory) or agent in a trade with an advisory client must obtain client consent and provide written disclosure of the IA's capacity in the trade no later the completion of the trade. If the IA is also a broker-dealer and the transaction with the advisory client was not generated through a recommendation (generally an unsolicited order), the only disclosure necessary is the firm's capacity on the confirmation. In this question, we can't assume that WSWM is also a broker-dealer.

Under which of the following conditions does NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers permit an IA to divulge personal information about a specific client? When it will be used in a testimonial regarding the advisory services offered When the IA has received a subpoena from a court of competent jurisdiction When the client has given the IA specific permission to do so With the approval of the Administrator A) II and IV B) I and III C) I and IV D) II and III

D Explanation Investment advisers are generally prohibited from divulging any information about their clients unless required by law or the courts. However, if the client specifically approves, the IA may act within the limits stated by the client. Testimonials are never permitted for investment advisers.

An issuer wishing to comply with Regulation D of the Securities Act of 1933 must file a Form D with the SEC A) no later than 30 days after the first sale B) no later than the time of the first sale C) no fewer than 20 days prior to the first expected date of sale D) no later than 15 days after the first sale

D Explanation Issuers wishing to avail themselves of the private placement exemption offered under Regulation D of the Securities Act of 1933 must file a Form D with the SEC no later than 15 days after the first sale.

Which of the following firms in the business of rendering investment advice for compensation would be considered a federal covered adviser? A) GHI Consultants, a sole proprietorship, managing $82 million belonging to high-net-worth individuals B) DEF Fund managers, a corporation managing an unregistered hedge fund with $10 million in assets C) ABC Money Managers, a partnership with $115 million under management D) JKL Pension Consultants, a management firm providing services to employee benefit plans, and currently has $179 million under management

D Explanation It makes no difference what the structure of the adviser is. As long as the assets under management are $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply to it. Pension consultants are not eligible for SEC registration until their AUM reaches $200 million.

Your client purchased an index annuity from you last year with an investment of $100,000. The particular index tied to this product had an annual return of -4%. If the participation rate is 90% with a cap of 5% and no annual minimum guarantee, the value of the account would be A) $103,600. B) $96,000. C) $96,400. D) $100,000.

D Explanation Please note that the return is negative (-4%). An index annuity does not participate in losses of the index, only gains. With no gain, and no guaranteed annual minimum, the account value remains at $100,000.

An S corporation is characterized by A) limited lifetime B) unlimited personal liability C) more than 100 shareholders D) flow-through tax treatment

D Explanation Shareholders of an S corporation have limited liability, are limited to no more than 100 shareholders, and receive flow-through tax treatment.

An analyst computing a stock's Sharpe ratio would need to know the stock's A) correlation coefficient. B) beta coefficient. C) alpha. D) standard deviation.

D Explanation The formula for the Sharpe ratio is: actual return minus the risk-free rate which is then divided by the standard deviation.

Under the Uniform Securities Act, the Administrator may require the filing of advertising and sales literature in which of the following offerings? A) Sale of a U.S. Treasury bond maturing in more than 10 years B) Sale of an IPO limited to residents of the state C) Sale of the bonds of AAA insurance company organized under the laws of the state D) Sale of preferred stock of a long-established company registered with the SEC whose common shares trade on the New York Stock Exchange

D Explanation The state securities Administrator may require the filing of advertising and sales literature of an IPO limited to residents of the state. The other choices are securities of exempt issuers or, in the case of the NYSE-listed issuer, federal covered securities. The Administrator may not require exempt and federal covered securities to file advertising and sales literature.

When a security is being registered under coordination, all of the following are required EXCEPT A) payment of the appropriate fee B) a description of the proposed use of the proceeds of the underwriting C) prompt filing with the Administrator of any amendments filed with the SEC D) filing with the Administrator of a statement of the maximum and minimum proposed offering price and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC

D Explanation The statement of the maximum and minimum proposed offering prices and the maximum underwriting compensation must be filed at least 2 full business days before the effective date, not with the initial filing.

Under the Uniform Securities Act, the definition of security includes a wide range of items. One of these is a two-party agreement representing a promise to repay a specific sum on a specified date that, if it meets certain requirements, is exempt from registration. This agreement is commonly called A) a loan contract B) a debenture C) a futures contract D) a promissory note

D Explanation This is the basic definition of a promissory note, and it is one of the many items fitting the definition of a security under the USA.

Damon Raymond is an agent with ABC Investment Planning, a registered broker-dealer and investment adviser. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity? A) Only if the client terminates the advisory relationship B) Never C) When the client has given ABC blanket permission to engage in this type of transaction D) When the trade that is made is unrelated to the advisory relationship

D Explanation Under normal circumstances, when acting in an advisory capacity, client consent must be obtained no later than completion of the trade. However, in a case like this where the transaction is strictly based on the broker-dealer relationship rather than on the advisory one, no consent is necessary.

Under the USA, a state securities Administrator can start an investigation against a registrant even if a violation has not yet occurred subpoena witnesses living in the Administrator's state only subpoena witnesses living outside the state begin an investigation only after a violation of the act has occurred A) I and II B) II and III C) II and IV D) I and III

D Explanation Under the USA, the Administrator has a broad investigative authority and may begin an investigation against a registrant before a violation has occurred and may subpoena witnesses in any state.

Section 402 of the Uniform Securities Act contains a listing of those securities that are granted an exemption from the registration and advertising filing requirements of the Act. Excluded from that listing would be A) bonds issued by a Canadian province B) securities issued by a credit union authorized to do business in the state C) bonds issued by the District of Columbia D) corporate debentures

D Explanation Unless some other condition is given, such as the issuer's common stock is listed on an exchange or Nasdaq (making it federal covered), a corporate debenture is not an exempt security. State and local issues (the USA includes the District of Columbia in its definition of, state) and Canadian provinces are exempt. Any security issued by a federally chartered credit union or one that is authorized to do business in the state is exempt.

Which of the following would be included in the Uniform Securities Act's definition of a "sale"? A) Conveying, for value, precious metals to a jewelry distributor B) Sale of a large fixed annuity contract to a taxable institution C) Donation of interests in rights, warrants, or options on a nonexempt security D) Transfers, for value, of unit trusts to a nontaxable organization

D For a security to be sold, it must be exchanged for value. Fixed annuities and precious metals are not securities, so no security sale took place. Donating a security does not qualify as a sale.

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

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

Investment companies must send financial reports to shareholders A) annually B) monthly C) quarterly D) semiannually

D Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report.

In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the Release, which of the following would be included in the definition? Commercial banks offering comprehensive financial planning for their high-net-worth clients Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate Persons who receive a nominal fee for assisting employee benefit plan administrators select investment managers for the plan's assets Lawyers who prepare trust agreements for clients with large securities holding with a goal of minimizing estate taxes A) II and IV B) I and II C) I and IV D) II and III

D Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent now comes under the IA-1092 definition of investment adviser. Similarly, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant and is required to register under IA-1092. Banks are never IAs

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

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

Registration statements for securities A) are effective for at least 2 years from their effective dates, or longer if the securities are still under distribution by the underwriters B) need not be filed with the Administrator if the securities are only sold in one state. C) expire on December 31 of each year and must be renewed if further sales are to be continued D) may be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and the initial offering price have not changed

D Registration of securities under the USA may be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and initial offering prices have not changed. Securities registration statements remain effective for 1 year from their effective date, and do not expire on December 31 of each year. Registrations of agents, investment advisers, and broker-dealers expire on December 31 and need to be renewed. Registration statements are effective for 1 year from their effective dates (or longer if the securities are still under distribution by the underwriters).

Which of the following statements regarding the Investment Advisers Act of 1940 and the adviser's brochure is CORRECT? A) Each client must receive the brochure no later than 48 hours after entering into the advisory contract. B) Annual delivery of a summary of material changes relieves the adviser of the obligation to deliver a brochure. C) Advisers must deliver the brochure to clients for whom they offer impersonal advisory service only when the annual charge does not reach $500. D) Each client must receive the brochure no later than the entry into the advisory contract.

D SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The summary includes an offer to provide a copy of the updated brochure and information on how the client may obtain it. There is no 48-hour rule under federal law, as there is for state law, and in any event, that law has a 48-hour in advance requirement. Only when the charge for the impersonal advice is $500 per annum or more is there a requirement to deliver the brochure.

Which of the following statements regarding the USA are TRUE? State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA, if the security involved is not covered by federal exemption. State securities Administrators may not deny, by rule or order, an exemption to an exempt transaction under the USA, if the security involved is not covered by federal exemption. State securities Administrators may deny, by rule or order, an exemption to a federal covered security. State securities Administrators may not deny, by rule or order, an exemption to a federal covered security. A) II and III B) II and IV C) III and IV D) I and IV

D State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA unless the security involved is covered by a federal exemption. State securities Administrators may not, however, deny an exemption provided to a federal covered security. Federal covered securities are granted exemption from state registration by federal law, so the state Administrator has no authority to deny the exemption granted by the federal government.

With the current rate of the 91-day Treasury bill at 2%, a stock paying dividends at a rate of 4% and having a total return over the measured period of 7% would have a risk premium of A) 2% B) 4% C) 9% D) 5%

D The risk premium is a premium demanded for internal and external risk factors. It is the amount of total return in excess of the risk-free rate. In this case, the total return is 7% (the dividend return is included in the total) minus the 2% T-bill rate.

An investor invests $1,000 into the shares of the Stratford Growth and Income Fund, an open-end investment company registered under the Investment Company Act of 1940. On the purchase application, the investor checked the boxes signifying that dividends were to be paid out in cash and capital gains were to be reinvested. During year, the fund pays dividends of $20 and distributes a $250 capital gain. At the end of the year, the fund's value is $1,300. The total return to this investor was A) 30% B) 27% C) 25% D) 32%

D Total return is all distributions plus/minus appreciation/depreciation. In this question, the $1,300 includes the $250 capital gain so all we add is the $20 dividend. $320 divided by $1,000 equals 32% total return.

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

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

Which of the following activities are prohibited practices under the principles of the Uniform Securities Act? Buying and selling the same stock on the same day on different exchanges Offering shares of an unregistered, nonexempt security to retail customers Offering a Canadian government bond to a resident of a state in which the agent of a broker-dealer is not registered A) I only B) I, II, and III C) II only D) II and III

D Unless qualifying for an exemption, broker-dealers and agents must be registered in each state where offers or sales occur. Also, every security must be registered unless it is an exempt security. Buying a security on one exchange and selling it on another is an arbitrage activity and not a violation of the USA. Although the Canadian government bond is an exempt security, the agent must be properly licensed in each state in which an offer to sell is being made.

In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under the Investment Advisers Act of 1940, this activity requires written A) consent of the client B) disclosure to the client C) consent of and the disclosure to the client prior to execution of the transaction D) disclosure to the client and consent prior to completion of the transaction

D Unlike broker-dealers, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client. SEC Release IA- 1732 requires that this be accomplished before the completion of the transaction, where completion is defined as settlement date.

If Wallace resigned his position as an agent with Rockland Securities to work for Gibraltar securities, which of the following parties must notify the Administrator of Wallace's move? A) Rockland and Gibraltar B) Wallace and Rockland C) Gibraltar and Wallace D) Rockland, Gibraltar, and Wallace

D When an agent with one broker-dealer resigns and affiliates with another, both broker-dealers and the agent must notify the Administrator of the change in registration. Notification is accomplished by filing Forms U5 and U4 with FINRA's CRD.

Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: 16 clients in State A 12 clients in State B 6 clients in State C 4 clients in State D Fred would have to register as an IAR in A) States A, B, and C B) States B and C C) States A and C D) States A and D

D when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there).

In an effort to benefit from the economies of scale, Liquid Assets Management, Inc. (LAMI) and Strategic Assets Management Company (SAMCO), both registered with the Administrator as investment advisers, have merged into a new firm with the name of Strategic and Liquid Assets Management Company (SLAMCO). This would A) be considered an assignment of the advisory contracts and would require consent of the clients. B) be an unethical business practice. C) require the filing of a new Form ADV along with the proper registration fee. D) require notification to the clients within a reasonable period of time.

A Explanation A change of management control is deemed to be considered an assignment of the advisory contracts held by LAMI and SAMCO. In order for those contracts to be continued by SLAMCO, consent of the clients is required. It is only when a change to a minority interest in an advisory firm organized as a partnership that notification within a reasonable period of time is required. Although SLAMCO would have to register with a new FORM ADV, as a successor company, no registration fees would be due until renewal on December 31.

Nite Capital Group is a registered broker-dealer whose primary business model is providing quotations for OTC stocks in which they position trade. Nite would be known as A) a market maker B) a secondary market C) an investment company D) a specialist

A Explanation A market maker is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price. The term is most often used in the context of the over-the-counter (OTC) markets. Market makers trade for their own inventory (position trade). The term specialist historically referred to the person on the floor of a stock exchange who performed a similar function; the current term is designated market maker (DMM).

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) loan out the customer's margin securities B) commingle the customer's securities with securities owned by the firm C) lend the customer money D) hypothecate securities in the account

A Explanation A signed loan consent agreement permits a firm to loan out a customer's margin securities. This is the only part of the margin documentation that is optional.

A widower wants to fund a Section 529 plan for his daughter. What is the maximum amount he may initially contribute in 2019 without having to pay gift taxes? A) $75,000 B) $15,000 C) An unlimited amount because a gift occurs only when he irrevocably changes the beneficiary D) $150,000

A Explanation A special rule under Section 529 allows the donor to load front-end load contributions and avoid paying gift taxes. Five years' worth may be used under this method (5 × $15,000 = $75,000). If he remarries, his wife may also consent to gift split, thereby doubling this amount to $150,000. Please note: The annual exclusion was increased to $15,000 effective January 1, 2018.

When referring to a federal covered investment adviser, all of the following are supervised persons EXCEPT A) an individual contracted to solicit for new advisory clients B) the chief securities analyst C) the receptionist who works for the investment adviser and analyzes client financial profiles D) an investment adviser representative Explanation All individuals working for an investment adviser who provide investment advice or management are considered supervised persons. Whether analyzing securities or customer profiles, one would be a supervised employee. Contracted solicitors are not employees of the adviser and, therefore, under the Investment Advisers Act of 1940, the adviser is only required to make a bona fide effort to determine that the solicitor complies with the solicitor agreement. Please be careful because this is not so under the USA. That act considers solicitors to be supervised persons, whether employed by the adviser or not, and requires IAR registration.

A Explanation All individuals working for an investment adviser who provide investment advice or management are considered supervised persons. Whether analyzing securities or customer profiles, one would be a supervised employee. Contracted solicitors are not employees of the adviser and, therefore, under the Investment Advisers Act of 1940, the adviser is only required to make a bona fide effort to determine that the solicitor complies with the solicitor agreement. Please be careful because this is not so under the USA!!!!!!! That act considers solicitors to be supervised persons, whether employed by the adviser or not, and requires IAR registration. Fed: Only supervise employees USA: Solicitors include (supervised and IAR registration required)

In a life settlement, the seller receives more than the premiums paid into the policy but less than A) the face amount. B) the cash value. C) the future premiums payable. D) the accumulated dividends.

A Explanation The sale price of a life settlement is always more than the cash value less than the face value.

According to the Uniform Securities Act, which of the following is an investment adviser representative? A clerical employee of the AAA Investment Management Company, an investment advisory firm registered in the state that offers investment portfolio services to the public An employee of AAA Investment Management Company who is properly registered under the USA and supervises analysts who provide research to clients An employee of a federal covered adviser with an office in the state who offers investment advice to the public An agent of a broker-dealer with strong investment opinions who sells securities only on a commission basis A) II and III B) III and IV C) I and IV D) I and II

A Explanation An investment adviser representative means any partner, officer, director, or other individual, except clerical or administrative personnel, who is employed by an investment adviser that is registered or required to be registered. Therefore, unregistered personnel are not investment adviser representatives. An employee who supervises analysts who deal with the public must be an investment adviser representative. The employee of the federal covered adviser with an office in the state is also an investment adviser representative. The agent is an agent of a broker-dealer, not an investment adviser representative.

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

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

The current yield of a callable bond selling at a premium is calculated A) as a percentage of its market value B) to its maturity date C) as a percentage of its call price D) as a percentage of its par value

A Explanation Current yield for any security is always computed on the basis of the current market value.

Which of the following must register as a broker-dealer under the USA? A) A broker-dealer with a place of business in the state that effects transactions exclusively with broker-dealers registered in other states B) A broker-dealer with no place of business in the state that has directed offers to clients who have more than 30 days' temporary residency in the state C) A broker-dealer with no place of business in the state that deals exclusively with broker-dealers with offices in that state D) A broker-dealer with no place of business in the state that effects transactions exclusively with issuers of securities in that state

A Explanation If a broker-dealer has an office in the state, it must register with the state, regardless of what types of clientele it serves. The term "broker-dealer" excludes anyone without a place of business in the state who effects transactions exclusively with issuers, other broker-dealers, or institutions, or who directs an offer in the state to an existing customer who temporarily resides in the state where the offer is received, regardless of the length of time. As long as the broker-dealer is properly registered in the vacationer's state of permanent residence and does not maintain an office in the state being visited, it is not defined as a broker-dealer.

Jean owns a $1 million life insurance policy on her mother, Clara. Jean is named as sole beneficiary, and so far she has paid $150,000 in premiums. If Clara dies, which of the following will occur? The proceeds will be exempt from income tax. $850,000 of the proceeds will be subject to income tax. The proceeds will be included in Clara's estate for estate tax purposes. The proceeds will not be included in Clara's estate. A) I and IV B) II and IV C) I and III D) II and III

A Explanation Life insurance proceeds are generally free from income taxes and will be free from estate taxes, if the insured possesses no incidence of ownership.

You have a 70-year-old client who is in excellent health. Both parents lived into their late 90s and the client is concerned about outliving her money. One product that should be considered to alleviate this concern is A) an annuity. B) whole life insurance. C) an index fund. D) a 30-year term policy.

A Explanation One of the unique characteristics of an annuity (variable or fixed) is that it guarantees monthly payments for the life of the annuitant. Life insurance provides a death benefit, but not income. An index fund carries no guarantees.

Sharon Smith is an agent for Highwater Securities, a broker-dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act, A) Sharon must be registered in State X in order to accept the order B) because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X C) because Sharon has no place of business in State X and the order is unsolicited, Sharon may accept the order without registering in State X D) because Highwater Securities is registered in all 50 states, Sharon must also be registered in all of them

A Explanation Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state that is the domicile of a client placing an order. One does not have to be registered as an agent in every state the BD is, only in those where she expects clients to reside.

Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $60,000 B) $30,000 C) $15,000 D) Unlimited

A Explanation The current gift tax exclusion (2019) is $15,000 per donor to each recipient. A married couple can give $30,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $30,000 to their son and $30,000 to their daughter-in-law without paying any gift tax.

If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable? A) Municipal GOs B) Treasury receipts C) Money market instruments D) High-yield bonds

A Explanation The interest on municipal GOs is exempt from federal income tax and perhaps state income tax, depending on the investor's residency.

If investors hold bonds until maturity, their realized rate of return, assuming all interim cash flows are reinvested at that same rate, would be equal to A) the yield to maturity. B) the coupon return. C) the income return. D) the price return.

A Explanation The yield to maturity is an investor's total return if they purchase the bond at any point and then hold it until maturity, assuming all interim cash flows are reinvested at that same YTM

In order to be in compliance with the rules, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) purchasing shares directly from advisory clients B) directing securities transactions to an affiliated broker-dealer C) the trade is being executed by an officer or partner of the firm D) engaging in an agency cross transaction

A Explanation There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent—that's the reason for the term.

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include a charge when a client requests that a stock certificate be issued in his name a commission charge when a client buys a security on a listed exchange the interest charged by the firm on money owed by customers in their margin accounts fees for providing advisory services to high net worth individuals A) I and III B) II and III C) I and IV D) III and IV

A Explanation There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers. AMC disclosure! Advisory fee for IA Markups and markdowns Commissions

ABC Investment Company shares are trading at $13.80 on a per-share basis. The net asset value per share is $12.00. Which of the following conclusions correctly defines the relationship between trading price and NAV? A) The fund's shares are trading at a premium of 15% to the NAV. B) NAV per share is calculated as per-market demand and supply for the fund's shares. C) The value of $13.80 is calculated as total assets minus total liabilities divided by total outstanding shares. D) The fund's shares are trading at a discount of 15% to underlying NAV.

A Explanation This is a closed-end investment company whose shares are trading at a premium. The premium is 15% relative to the underlying NAV ($1.80 ÷ $12.00). The market price, not the NAV of the fund's shares, is determined by supply and demand in the market. How do we know this is not a mutual fund? There are two ways. Mutual funds do not trade; there is no secondary market for them. Secondly, the sales charge is 13.8% ($1.80 ÷ $13.80) which is far above the maximum 8.5% allowed.

A bond analyst who determines the value of a debt security by adding the present value of the future coupons to the present value of the maturity value is using which of the following valuation methods? A) Discounted cash flow B) Dividend discount C) Future value D) Present value

A Explanation This type of question sometimes appears on the exam. There is a second answer that could be correct, but is not scored as such. In this example, a case could be made for present value, but the better choice is discounted cash flow; it is more correct.

Regional Financial Services, LLC, is registered as an investment adviser in States A, B, C, and D. They have just filed an application for registration in State E. Registration of this investment adviser in State E automatically confers registration as an IAR in State E on A) officers, partners, and directors of the firm who will be functioning in State E as IARs B) clerical employees handling back-office operations C) any employee who is functioning as an IAR in State A, B, C, or D D) an employee who will be soliciting clients for the adviser in State E

A Explanation Under the Uniform Securities Act, registration of an investment adviser in a state 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.

John is a client of Greater Growth Opportunities, Inc. (GGOI), a state-registered investment adviser. Which of the following constitute(s) John giving the GGOI authority (allows him) to trade his account? John tells his adviser representative over the telephone to buy 200 shares of a certain security and when to make the purchase. John tells his adviser representative to be on the lookout for securities that seem likely to fit his investment objectives. John gives his adviser representative a written discretionary authorization form to buy or sell securities for his account as she sees fit. A) I and III B) III only C) I, II, and III D) II only

A Explanation When the client specifies all three "A's" (the asset, the action, and the amount) as is done in choice I, that gives the authority to the securities professional to act on the client's behalf and place the trade. Nothing is required in writing because no discretion has been used. The universal industry standard is that a securities professional can exercise discretion once a written authorization form has been received by the firm. A unique condition exists in the case of investment advisers and their representatives in that oral discretion may be used for a period of 10 business days following the initial discretionary trade in the account. After then, without the proper written authorization, further discretion may not be employed.

A client of your broker-dealer, currently long 1,000 shares of DEF Corporation common stock, wishes to liquidate the position. Based on the following market maker quotes, it would be expected that the firm's trader would direct a market order to A) MMC: 9.75 - 9.85, 20 x 20. B) MMB: 9.65 - 9.75, 10 x 10. C) MMD: 9.75 - 9.90, 5 x 10. D) MMA: 9.65 - 9.85, 5 x 5.

A (Bid-Ask) Explanation A market order to sell 1,000 shares should be directed to the market maker with the highest bid price that is firm for at least 1,000 shares. The highest bid price is $9.75 by both MMC and MMD, but MMD's quote is only firm for 500 shares.

A grantor retained annuity trust is a planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize A) income taxes. B) estate taxes. C) excise taxes. D) property taxes.

B Explanation A GRAT is an estate planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor.

If a retiree is paid an annual amount equal to 30% of the average of his last 3 years' salary, which of the following retirement plans offers this type of payment? A) Profit-sharing B) Defined benefit ​pension C) Deferred compensation D) Money purchase pension

B Explanation A retirement plan that establishes the retiree's payout in advance is a defined benefit plan. ​Profit sharing and money purchase pension plans are defined contribution plans.

Being concerned about price volatility, a bond investor wishes to compute the duration of a bond being considered for her portfolio. Which of the following is NOT a necessary component of that calculation? A) Time until maturity B) Rating of the bond C) Coupon rate D) Current market price

B Explanation Although it is true that lower-rated bonds tend to have greater price volatility than high-rated ones, the rating has nothing to do with the calculation of the bond's duration. Duration is simply the weighted average of the cash flows an investor will receive over time, discounted to the bond's present value. Those cash flows come from the coupon and the return of the par value at maturity. The market price represents the present value of those future cash flows.

Among the advantages of forming an S corporation rather than a C corporation for a new business enterprise is A) shareholders' losses are limited to the amount of their investment B) any losses flow through to the investors C) the ease in raising substantial amounts of capital. D) unlike the C corporation, which is limited to 100 investors, there is no such limit for an S corporation

B Explanation An S corporation offers the benefit of flow-through of both income and losses (losses being a particular benefit for a start-up because they usually take some time to become profitable). It is the S corporation rather than the C corporation that is limited to 100 investors. Both offer the benefit of limited liability. The C corporation is superior for raising large amounts of capital. S Corp = Startup!!!

In order to compute a client's realized holding period return, it is NOT necessary to know A) the original investment B) the paper profits and losses C) the income received D) the ending value

B Explanation An investor's realized holding period return is the total return received over the specified holding period. That return includes any income plus or minus any realized gain or loss. That is why paper gains or losses, which are not realized, are not part of the computation.

ERISA regulation does not apply to public school district retirement plans publicly traded utility company retirement plans federal government employee retirement plans A) I only B) I and III only C) I and II only D) I, II, and III

B Explanation ERISA rules only apply to private sector plans. Government or public sector plans are not subject to the Employees Retirement Income Security Act of 1974.

IRAs and Keogh plans are similar in the following ways EXCEPT A) distributions without penalty can begin as early as age 59½ B) identical amounts of contributions are allowed C) deferral of taxes D) there is a 50% tax penalty for insufficient distributions

B Explanation IRAs and Keogh plans do not have identical contribution amounts; IRAs allow a maximum of $6,000 per individual or $12,000 per couple per year (with a catch-up of $1,000 for each individual aged 50 or older), whereas Keogh plans allow substantially more. Both IRAs and Keoghs allow tax-deferred growth until the individual withdraws the funds. IRAs and Keoghs have premature distribution penalties before age 59½.

All of the following practices are unethical under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT A) backdating a customer's records to save the client a substantial amount of income tax B) charging higher commissions than normal for executing thinly traded foreign securities C) using deceptive or misleading advertising or sales presentations D) effecting any transaction in a security that involves no change in beneficial ownership

B Explanation It is not an unethical practice to charge higher commissions for trades that are difficult to execute, such as trading a thinly traded foreign security. The other activities are unethical business practices prohibited by the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? A) He will have a $1,000 gain. B) He will offset $1,000 ordinary income this year. C) He will have a $1,000 loss to carry over to the next year. D) There will be no tax consequences.

B Explanation Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward.

Fairweather Securities Corp. (FSC), a registered broker-dealer, has invited several IARs from Econometric Advisory Services (ESA), a registered invested adviser that directs transactional business to FSC, to a seminar featuring a disquisition on current economic trends being presented by a leading economist. It would be permitted for FSC to cover which of the following expenses? A) Travel and transportation fees, but not the seminar fee B) Registration fees for the seminar C) None; because ESA directs commission business to FSC, it would be an unethical business practice for FSC to pay any portion of the expenses D) Registration fees for the seminar plus travel expenses

B Explanation Payment for seminar fees is permitted under the safe harbor provisions in Section 28(e) of the Securities Exchange Act of 1934.

A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be specific security selection methods of performance measurement determination for meeting future cash flow needs the Summary Plan Description A) I, II, and III B) II and III C) II and IV D) III and IV

B Explanation The IPS will include methods of performance measurement (if it is meeting objectives) and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities to be purchased, but will include the types that may be placed in the portfolio. The Summary Plan Description (SPD) is a Department of Labor (DOL)-required document that gives employees a summary of the plan and its features. It has nothing to do with determining how the money is invested.

Which of the following is (are) required to register with a state Administrator? Investment adviser representatives of federal covered advisers who have natural person clients and have a place of business in the state A person who only provides impersonal investment advice through newspaper columns, magazine articles, or financial publication of general and regular circulation An investment adviser registered in a different state and who has no place of business in the state, but has had fewer than 6 individual advisory clients in this state during the previous 12 months A person who is an officer of a federal covered investment adviser and does not function as an investment adviser representative A) II only B) I only C) II and III D) I, II, III, and IV

B Explanation The investment adviser representatives of a federal registered adviser are required to register in each state in which they have a place of business. Under state law, the publication of investment advice that is not based on the specific investment situation of each client excludes the publisher from the definition of an investment adviser. Based on this definition, the publisher of an investment advisory newsletter providing only impersonal investment advice available only on a subscription basis is not required to register with the Administrator. The Uniform Securities Act provides a de minimis standard exemption from state registration for advisers who have no place of business in a state and have fewer than six clients resident in the state over a 12 month period. A person employed as an officer of a federal covered investment adviser who does not function as an investment adviser representative is not required to register with state Administrators. Note: The automatic registration of officers, partners, and directors only applies to those individuals performing the functions of an investment adviser representative.

U.S. Treasury bonds are generally subject to all of the following risks except A) purchasing power risk. B) liquidity risk. C) inflation risk. D) reinvestment risk.

B Explanation The market for U.S. Treasury bonds is highly liquid. As safe and as liquid as they are, they, like all fixed-income investments, are subject to purchasing power (also known as inflation) risk and reinvestment risk.

Regarding the treatment of estates by the IRS, it would not be correct to state any of the following EXCEPT A) a deceased person may reduce the value of the estate by taking advantage of the annual gift tax exclusion B) the maximum tax rate on estates is the same as that on gifts C) income received by the estate is reported on Form 1040 D) estates may be valued either at date of death or 9 months later using the alternative valuation option

B Explanation The maximum tax rate on estates and gifts is 40% (the number is not tested; only that the rates are the same). The alternative valuation date is 6 months after death; 9 months after death is when the tax is due. Dead people can't make gifts and any income received by the estate before it is liquidated is reported on Form 1041.

The financial ratio that shows the relationship between the price of a company's stock and the company's net worth (stockholders' equity) is A) the price-earnings (P/E) ratio B) the price-to-book-value ratio C) the dividend discount ratio D) the price-sales ratio

B Explanation The price-to-book-value ratio is calculated by dividing the price per share by the stockholders' equity per share. This ratio shows the relationship between a company's stock price and the company's book value.

The Uniform Securities Act requires that a consent to service of process be filed by each of the following EXCEPT A) an issuer that proposes to offer a security in the state B) a trustee operating in a fiduciary capacity in the state C) an applicant for registration as an investment adviser in the state D) an applicant for registration as a broker-dealer in the state

B Explanation The state securities Administrator has jurisdiction over investment advisers, broker-dealers, and anyone who is associated with those entities. The Administrator also has jurisdiction over securities offered for sale by a company in the Administrator's state and requires a consent to service of process be filed by the issuer. Trustees do not register with the Administrator; there is no jurisdiction.

An investor purchases a Treasury note and the confirmation shows a price of $102.21. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $1,022.21. B) $1,026.56. C) $102.21. D) $1,022.10.

B Explanation Treasury notes are quoted in 32nds where each 32nd equals $.3125. The 102 in the quote equals $1,020 and the 21/32 is an additional $6.56 bringing the total to $1,026.56.

One popular method used to predict the expected return of a stock is the capital asset pricing model. Analysts using CAPM rely on all of these EXCEPT A) the beta coefficient of the stock B) the standard deviation of the stock C) the expected return on the market D) the risk-free rate available in the market

B Explanation Under the CAPM, using the SML, we can determine the expected return of any given stock by taking the risk-free rate and adding to that the product of that stock's beta coefficient and the difference between the expected return on the market and the risk-free rate. Standard deviation is not a factor in this computation.

One of your clients is in the process of forming a new business venture with a friend and is considering whether to operate as a general partnership or a C corporation. Among the advantages of operating as a general partnership are ease of dissolution ease of raising additional capital flow-through of income or loss limited liability A) III and IV B) I and III C) II and IV D) I and II

B Explanation Unlike a C corporation, operating income or losses of a general partnership flow through directly to the partners. There are several easy ways to dissolve a partnership. However, they do not offer the limited liability protection of a corporation. The corporate form of business is generally the most suitable for raising additional capital.

XYZ stock has a beta of 0.92. The risk-free rate of return is 3% and the market's rate of return is 8%. Using the capital asset pricing model (CAPM), what is the expected rate of return of this stock? A) 6.85% B) 7.60% C) 10.12% D) 5.06%

B Explanation Use the CAPM to calculate the expected rate of return. Expected (required) return = 0.03 + [0.92 (0.08 − 0.03)] = 0.0760, or 7.60%.

Beth Jamison is an agent and an IAR for Consolidated Wealth Planning, a FINRA member broker-dealer and SEC-registered investment adviser. An advisory client purchases 300 shares of RMBN and the sale is made from Consolidated's inventory. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, A) selling out of inventory to advisory clients would be considered an unethical business practice B) Beth would not be required to obtain consent for this principal transaction if it was not the subject of a recommendation C) Beth must obtain consent of any advisory client whenever a sale is made as principal D) the amount of commission charged for this transaction must be clearly disclosed

B Explanation When acting in the capacity of IA (or IAR), that is, when making recommendations or advising a client to purchase (or sell) a security, any transaction in which the firm is a principal requires disclosure in writing to and consent from the client prior to the completion of the trade. However, if merely accepting a client order (no advice rendered), consent is not required.

A nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees is called A) a defined benefit plan. B) a payroll deduction plan. C) a SERP. D) a defined contribution plan.

C Explanation A supplemental executive retirement plan (SERP) is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees. It is probably not a testable point, but these are frequently funded with cash value life insurance policies. Defined benefit and defined contribution plans are qualified - the question states, nonqualified. A payroll deduction plan is usually nonqualified, but that is most often used by lower income employees; it is definitely not an executive's plan.

If interest rates were to decline sharply, which of the following securities is likely to appreciate the most? A) 20-year municipal bond currently trading at par B) 20-year mortgage-backed security currently trading at a small discount C) 20-year zero-coupon Treasury bond currently trading at a deep discount D) 20-year corporate bond currently trading at a small premium

C Explanation As a rule, the longer the duration, the greater the price appreciation. In this case, all the fixed-income securities have 20-year maturities. Another general rule is that the lower the coupon on the bond, the longer the duration. The zero-coupon bond has the lowest coupon and would likely appreciate the most.

Patrice has an investment portfolio with the following characteristics: Portfolio actual return: 9% Market actual return: 12% Portfolio standard deviation: 4% Market standard deviation: 7% Portfolio beta: 0.65 Risk-free rate of return: 3% What is her portfolio's alpha? Did her portfolio outperform the market on a risk-adjusted basis? A) With an alpha of -0.15%, her portfolio underperformed the market. B) With an alpha of -5.10%, her portfolio underperformed the market. C) With an alpha of 0.15%, her portfolio outperformed the market. D) With an alpha of 5.10%, her portfolio outperformed the market.

C Explanation As with most computation questions, there is more than one way to arrive at the answer. Using the steps in the LEM (U10LO4), Alpha - (total portfolio return minus risk-free rate) minus (portfolio beta times [market return minus risk-free rate]). (9% - 3%) - (.65 times [12% minus 3%]) = 6% - (.65 x 9%) = (6% - 5.85% = 0.15% An alternative method simply moves the parentheses a bit. If this is easier for you, use it. Alpha = 9% − [3% + 0.65 (12% − 3%)] = 9% - [3% + .65 (9)] = 9% - (3% + 5.85) = 9% - 8.85 = 0.15%. A positive alpha indicates that the portfolio outperformed the market on a risk-adjusted basis. Did you notice that the standard deviation was irrelevant to our computation? It is not unusual for the exam to include information that is extraneous to the question just to confuse you.

The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations? A) There is a cash withdrawal in excess of the cost basis B) The death benefit is paid C) A loan is taken equal to 95% of the policy's cash value D) The policy is surrendered

C Explanation Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the withdrawal. Although the death benefit will always be free of income tax, it could be subject to estate tax.

In the construction of a qualified retirement plan portfolio, which of the following investment vehicles would be considered generally inappropriate? A guaranteed investment contract (GIC) A municipal bond fund A leveraged real estate limited partnership A corporate bond rated A or higher A) I and IV B) III and IV C) II and III D) I and II

C Explanation GIC's and investment-grade corporate bonds (A- or higher-rated bonds) are considered appropriate investments for a qualified plan. A municipal bond fund will potentially convert tax-free income into ordinary income and using leveraged investments in retirement plans is generally prohibited.

Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A) $4,000 long-term capital gain. B) $6,000 long-term capital gain plus $500 short-term capital gain. C) $6,500 long-term capital gain. D) $2,500 long-term capital gain plus $1,000 short-term capital gain.

C Explanation Gifted stock carries the donor's cost basis. In this case, 100 shares at $10 per share is $1,000. The stock split means there are now 200 shares, but that doesn't change the total cost basis. When that stock is sold at $35 per shares, the proceeds of $7,000 exceed the cost basis by $6,000, all of which is long-term capital gain. Inherited stock receives a stepped-up basis. That is, the cost basis is at date of death. In this case, the cost per share is $30. When that 100 shares is sold at $35 per share, a $500 profit is realized. In one of the quirks in the Internal Revenue Code, stock received as an inheritance always has a long-term holding period, even when, as in this question, the actual holding period was short-term. Adding the $6,000 of gain from the gift and the $500 of gain from the inheritance gives a total of $6,500 long-term capital gain.

Included among the powers of the Administrator is the ability to A) arrest an agent who violates the USA B) sentence an investment adviser representative who has been convicted of fraud to a prison sentence, not to exceed 3 years C) request the court to appoint a receiver to freeze the bank accounts of a broker-dealer who is the subject of an injunction D) deny the registration of a securities professional, if doing so is in the public interest

C Explanation If a temporary or permanent injunction is issued against any securities professional, upon request of the Administrator, a receiver or conservator may be appointed over the defendant's assets. The Administrator cannot arrest but can seek a warrant. In order to deny a registration, not only must it be in the public interest, but there must be some other issue, such as insolvency, incomplete application, et cetera. Although the maximum prison sentence under the USA is 3 years, it is the courts that do the sentencing, not the Administrator.

A 55-year-old investor makes a withdrawal from his qualified pension plan. Which of the following can he do to avoid tax liability? A) Roll it over into a nonqualified annuity B) Use the withdrawal to pay his current year's taxes C) Roll over the funds into an IRA within 60 days D) Transfer it as a gift to an UGMA account for his son

C Explanation If withdrawals are made from qualified retirement programs with no extenuating circumstances, the participant can roll over the proceeds into an IRA within 60 days and have no tax liability.

Which of the following illustrates an example of positive margin? A) The interest rate being charged on borrowings is less than the rate of inflation. B) The investment purchased on margin is sold for a price above its original purchase price. C) The rate of return on the investment exceeds the interest cost on the borrowed money. D) The stock purchase is being paid for in full rather than by using borrowed funds.

C Explanation Positive margin means that you were successful in your use of the leverage afforded by using margin (borrowed money). That means that the investor's total return exceeds the cost of the borrowed money. It is possible to actually sell the security for a price above its original purchase price, but not more than the total of the cost plus the interest. That would result in negative margin.

An investor purchased 100 shares of GRA stock at $100 per share in a margin account. Two years later, the GRA was sold for $120 per share. If the investor's account was charged $700 in margin interest, it would be proper to state that this is an example of A) a long-term capital gain of $1,300. B) a speculative investment. C) positive margin. D) negative margin.

C Explanation Positive margin means that, after taking into consideration the interest paid on the borrowed money in a margin account, a specific transaction was profitable (negative margin is the reverse). In this case, the sale resulted in a gain of $2,000 which is $1,300 more than the interest cost.

The Administrator may, by rule, A) suspend federal law if the Administrator believes it to be in the public interest B) allow an agent to waive provisions of the USA C) forbid investment advisers registered in that state from taking custody of client funds D) suspend the registration of a federal covered adviser because the contract did not meet the requirements for a state-sanctioned investment advisory contract

C Explanation The Administrator has considerable discretion to make rules or issue orders. Specifically, the USA allows the Administrator to prohibit custody by rule. However, the USA does not allow the Administrator to waive provisions of the USA, nor can the Administrator suspend federal law. The NSMIA took away the power of the states to regulate federal covered advisers except in the case of a violation of the antifraud statutes.

An analyst uses the dividend growth model to assist in determining appropriate stocks to recommend. This analyst would consider all of the following factors EXCEPT A) required rate of return B) current dividend C) market capitalization D) growth of the dividend

C Explanation The classic definition of the dividend growth model is "a stock valuation model that deals with dividends and their growth, discounted to today." The market capitalization is the number of outstanding shares multiplied by the current market price per share and has nothing to do with the company's dividend policies.

An investment adviser representative is preparing a financial plan for a new client. As part of the data collection process, the IAR needs to collect the relevant information to analyze the client's cash flow. Included in the cash flow statement would be all of the following EXCEPT A) interest on savings B) salary C) assets D) income taxes

C Explanation The income statement is the basis for an individual's cash flow statement. Rather than assets and liabilities, as would be found on a balance sheet, the concern is measuring income and expenses.

A broker-dealer receives a request from a client to purchase an OTC stock. When the broker-dealer's trading department contacts the market maker in the stock, she receives a quote of 35 − 35.25, 7 by 9. Based on this information, the spread is A) $0.63 B) $2 C) $0.25 D) within the allowable range of NASAA's 5% markup policy.

C Explanation The spread is the difference between the bid (35) and the ask (35.25) prices.

Abel Kane is an agent for Garden City Securities, a broker-dealer registered with the SEC and all 50 states. It would be considered an unethical or dishonest business practice for Kane to fail to make prompt delivery of certificates when requested by the customer fail to obtain written authorization for a discretionary account prior to the first trade in that account accept an order from a client's spouse without written trading authorization prior to receiving the order share commissions with another agent registered with Garden City Securities A) I, II, and III B) III and IV C) II and III D) I and IV

C Explanation This question is tricky. The key here is that agents have no responsibility for delivering customer securities. That is an obligation of the broker-dealer.

The statement, "Stock prices fully reflect all information from public and private sources," can be attributed to which form of the efficient market hypothesis (EMH)? A) Semi-weak form B) Weak form C) Strong form D) Semi-strong form

C Explanation This statement is the definition of the strong form EMH. Private sources include insider information, such as persons holding non-public access to information relevant to the company. Weak includes historical pricing and volume information. Semi-strong includes all publicly-available information, such as earnings reports.

Under the Uniform Securities Act, investment advisory contracts A) must list each state in which the adviser is registered B) are cancelable without penalty for 48 hours after the customer signs C) must contain a description of fees D) cannot be assigned without the Administrator's approval

C Explanation Under the USA, all advisory contracts must be in writing and contain descriptions of how fees are determined. Contracts are valid upon signing, need not list all states in which an adviser is registered, and cannot be assigned without the client's approval. However, if the brochure is not delivered at least 48 hours before the signing of the contract, the client has the right to withdraw without penalty for 5 business days. Administrator approval is not required.

When a will calls for property to be distributed per stirpes, it means that A) the property is divided into as many equal shares as there are surviving children and grandchildren of the designated ancestor B) all living descendants of the ancestor receive equal shares in the property remaining after all estate expenses are paid C) the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants D) the property is divided into as many equal shares as there are surviving children of the designated ancestor, with nothing going to surviving descendants of deceased children

C Explanation When a will calls for a per stirpes distribution of assets, it provides that if any named beneficiary predeceases the testator (the maker of the will), surviving children of that individual share in the share that the individual would have received. For example, if the testator had 3 children and 1 of them died first, any children of the deceased would share in their parent's portion (they would split one-third of the estate between them).

Prosperity Asset Partners (PAP) is organized as a general partnership. PAP is registered in four states. All of the following statements regarding the investment adviser brochure rule of the Uniform Securities Act are true except A) the disclosure brochure must contain essentially the same information as is contained in Form ADV, Part 2A and, if applicable Part 2B. B) the brochure rule permits advisers to deliver the disclosure brochure when the client enters the contract providing the client is allowed to cancel the contract without penalty within 5 business days C) the disclosure brochure must be signed by an officer or a general partner of the firm D) the disclosure brochure must be delivered no later than 48 hours before entering into an advisory contract for there to be no requirement to offer a 5-day refund right

C Explanation When an investment adviser's business structure is a general partner (as is the case with PAP), the brochure must be signed by a general partner. If the firm is a corporation, then an officer's signature is acceptable. The investment adviser's disclosure brochure must contain the relevant information from Form ADV Part 2A and, for those where it applies, Part 2B. The rule does permit advisers to deliver the brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within 5 business days; otherwise, the brochure must be delivered no later than 48 hours before entering into an advisory contract.

An investment adviser making investment decisions within parameters agreed upon with the client is managing the portfolio on A) an advisory basis. B) a best-efforts basis. C) a discretionary basis. D) a nondiscretionary basis.

C Explanation When the investment adviser makes investment decisions with parameters agreed upon with the client, the arrangement is best described as being on a discretionary basis.

A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock would benefit by converting if the price of the common stock was A) above $20 per share B) below $22 per share C) above $22 per share D) above $18.20 per share

C Explanation With a conversion price of $20 and a par value of $60, this preferred stock is convertible into 3 shares of the company's common stock. We divide the current price of the preferred ($66) by the 3 shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace. 60par/20conversion = 3shares 66price/3shares= 22parity

Arthur M. Munger recently joined Piedmont Partners LLP as an analyst and is curious about modern portfolio theory (MPT). He approaches his senior, Sarah, to describe MPT. Sarah tells Arthur that MPT suggests that A) by combining securities into a diversified portfolio, the overall portfolio risk will be more than the weighted average risk of the individual stocks. B) we cannot outperform the overall market. C) the total risk of a portfolio cannot be reduced at all. D) by combining securities into a diversified portfolio, the overall portfolio risk will be less than the weighted average risk of the individual stocks.

D Explanation A diversified portfolio of stocks that are not perfectly positively correlated with each other will have portfolio risk (as measured by standard deviation of returns) less than the weighted average risk of the individual stocks.

Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection? A) A small-cap growth fund B) An international index fund C) S&P 500 Index fund D) A large-cap growth fund

D Explanation A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index.

Investment company portfolio managers are apt to classify common stocks into groups. One measurement is the product of multiplying the market price per share times the number of shares outstanding. The result is known as A) debt-to-equity ratio B) total value C) market value D) market capitalization

D Explanation A stock's market capitalization is determined by multiplying the price per share times the number of outstanding common shares. For example, if a company had 1 billion shares outstanding and the market price was $20 per share, the company would be said to have a market cap of $20 billion. This would put it into the category of "large-cap" stocks.

When a client is interested in investing in commodities, you would expect to discuss A) oil drilling programs B) museum-quality art C) investment-grade coins D) soybeans, wheat, and corn

D Explanation Agricultural products, including soybeans and other grains, are popular commodities.

An Administrator may deny or revoke a security's exemption A) for a federal covered security if its issuer is in violation of state law B) if the Administrator, in a court of competent jurisdiction, proves that a security does not qualify for an exemption C) if the Administrator determines that an exemption applicable to federal covered securities is inconsistent with state securities law D) without a hearing if the issuer is given an opportunity for a hearing after the revocation

D Explanation An Administrator may deny or revoke a security's exemption without a hearing if the issuer is given an opportunity for a hearing after the revocation. The issuer requesting an exemption must prove the exemption; this is not the responsibility of the Administrator. The Administrator may not revoke exemptions of federal covered securities.

Given the following information, calculate the risk-adjusted return. 91-day T-bill rate: 4% Actual return: 14% Beta = 1.4 CPI: 3% Standard deviation: 5.0 A) 10 B) 5 C) 11 D) 2

D Explanation Any question asking about the risk-adjusted return is going to be referring to the Sharpe ratio. This is shown as a simple number and is calculated by subtracting the risk-free rate (91-day T-bill) from the actual return and dividing that remainder by the standard deviation. In this example, 14% − 4% = 10% divided by 5 = 2.

Your married client has an AGI of $105,000 per year and is covered by his employer's defined benefit pension plan. When inquiring about opening a Roth IRA, you would respond that A) the client could open a Roth but, depending on future earnings, might not be able to deduct all of the annual contribution B) the client's earnings exceed the Roth limits so the plan could not be opened C) one cannot be a participant in a qualified plan and a Roth IRA at the same time D) the client could open the Roth IRA without any restriction

D Explanation As long as a married couple's AGI does not exceed 208,000 (for 2021), a Roth IRA can be opened without any restrictions. Contributions are never deductible.

Which of the following is generally believed to present a more accurate picture of a portfolio manager's performance? A) Dollar-weighted return B) Net present value C) Real rate of return D) Time-weighted return

D Explanation Because contributions and withdrawals by the investor are not under the control of the fund manager, time-weighted return is a more reliable measure of a portfolio manager's performance. Dollar-weighted is a more reliable measure of how the investor fared. Real rate of return and net present value are not relevant to this question.

A manufacturing company is in the process of registering a securities issue with the SEC. In order to make the shares available for sale in this state, the method of registration that would most likely be used is A) notification B) qualification C) notice filing D) coordination

D Explanation Coordination is the method used for nonexempt companies that are registering with the SEC. Qualification is for intrastate registration of those companies not registered with the SEC. Notice filing is the procedure whereby federal covered investment companies notify the states in which they want to issue shares and to whom they must pay a fee.

The agreement that the Administrator can receive subpoenas on behalf of a registered agent, broker-dealer, or investment adviser involved in any securities sale that violates the Uniform Securities Act is A) the right of retribution B) the right of rescission C) the agreement to actionable offenses D) the consent to service of process

D Explanation Every applicant for registration and every issuer must file an irrevocable consent to service of process appointing the Administrator as attorney to receive service of any lawful process in any civil suit, action, or proceeding. It has the same legal effect as if the person had been served personally.

An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm, all of the following statements are correct EXCEPT A) the agent would now come under a greater fiduciary responsibility B) the broker-dealer would have to be registered as an investment adviser C) the agent would be defined as an investment adviser representative D) the agent would be defined as an investment adviser

D Explanation Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level. The agent would now become an IAR of the firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business. wrap = Broker to IA, Agent to IAR

Flexible premium payments are a feature of A) whole life B) variable life C) term life D) universal variable life

D Explanation Only universal and universal variable life policies have flexible premium payments.

According to the Uniform Securities Act, which of the following would be defined as an investment adviser representative? John, who opens an investment advisory firm where he devotes his time exclusively to management responsibilities as the sole proprietor of the firm Paul, who works for a firm soliciting investment management accounts on behalf of several different investment managers Margaret, who works as a commission sales agent for a broker-dealer Mark, an employee of AAA Broker-Dealers, who solicits brokerage clients for commissions on the basis of research conducted by his firm's securities analyst A) I and IV B) II and III C) II and IV D) I and II

D Explanation Paul, who works for a firm soliciting investment management accounts for several investment managers, would be defined as an investment adviser representative because he is acting in the capacity of a sales agent for investment advisers. John, as the owner of a sole proprietorship, is both an investment adviser and the firm's only investment adviser representative. Margaret would not be defined as an investment adviser representative because she functions as a registered agent for a broker-dealer. If she sold investment advice for the broker-dealer's investment management subsidiary, she then would be defined as an investment adviser representative. An agent of a broker-dealer, earning commissions on security sales, is not an IAR even if his primary selling tool for the brokerage business is the firm's outstanding research department.

Foster Advisers, based in New Jersey, manages $135 million in funds for New Jersey-based clients. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following statements best describes the registration requirement for Foster Advisers? A) Foster Advisers is required to register with the Administrator of the New Jersey Department of Securities. B) Foster Advisers is required to register with both the SEC and the Administrator of the New Jersey Department of Securities. C) Foster Advisers is required to register as an adviser with the SEC and has no requirement to notify the Administrator of the New Jersey Department of Securities. D) Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.

D Explanation Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment advisers with $110 million or more in assets under management must register with the SEC. These advisers are called federal covered advisers. Investment managers who manage less than $100 million must register with the state Administrator. Advisers with at least $100 million but less than $110 million of assets under management have the option to register with either their state Administrator or with the SEC. Once the $110 million level is reached, registration with the SEC is mandatory. With $135 million under management, Foster Advisers must register with the SEC. Foster Advisers is subject to the additional requirement of notifying the administrators of the securities departments of states in which it maintains offices or clients of its operations. At the state level, a notification fee (but not registration) is generally required. One aim of the NSMIA was to eliminate dual registration of investment advisers with the states and the SEC. Investment advisers are not required to register at both state and federal levels.

Which of the following is NOT a characteristic of a Monte Carlo simulation? A) The user gets a best-case scenario and a worst-case scenario. B) It provides insight into the range of outcomes. C) It is a technique used to model uncertainty in retirement planning. D) Large changes in the projected rate of return will make small differences in the outcome.

D Explanation Small changes in the projected rate of return will make large differences in the outcome.

An investor has purchase a single payment, deferred non-qualified variable annuity. Each of the following statements is true EXCEPT A) random withdrawals are handled under LIFO tax rules B) upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income C) money invested in this annuity represents the investor's cost basis D) taxes on earned dividends, interest, and capital gains are paid annually, until the owner withdraws money from the contract

D Explanation Taxes on earned dividends, interest, and capital gains are not paid annually. They are deferred and paid later, when the owner withdraws money from the contract. Money randomly withdrawn (not annuitized) is handled under LIFO tax rules; money invested in a non-qualified annuity represents the investor's cost basis; and on withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income.

The term security would include which of the following? A) Indentures B) Coverdell ERAs C) 403(b) plans D) Section 529 plans

D Explanation Technically, Section 529 plans are known as municipal fund securities. As such, the rules of the MSRB require delivery of an official statement, sometimes called an offering circular but never referred to as a prospectus. Retirement plans are not included in the definition and an indenture is a document specifying the legal obligations of the bond issuer and rights of the bondholders. It is some¬times called the deed of trust, and although it details information about a security, it is not, in itself, a security.

Which of the following would be a violation of the NASAA Contents of Investment Advisory Contract Model Rule? A) An investment adviser permits clients to renew their investment advisory contracts by email. B) An investment adviser organized as a partnership has the practice of notifying clients of any change in the membership of the partnership within a reasonable time after the change. C) Indicating a performance-based contract that the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee D) Without the consent of advisory contract holders, the owner of a majority of the stock of the advisory firm pledges that stock to a bank as collateral for a loan enabling the firm to acquire better cybersecurity technology.

D Explanation The NASAA Contents of Investment Advisory Contract Model Rule states that no direct or indirect assignment or transfer of the contract may be made by the investment adviser without the consent of the client or other party to the contract. Pledging a majority interest in the company as collateral for a loan to the business is considered an indirect assignment; the reason for the loan is of no significance. All contract renewals for state-registered advisers must be in writing and email is considered written communication. Notification of changes to members of the partnership and warning of the incentive in a performance-based contract are requirements of the Model Rule.

You have a client who originally invested $25,000 into the ABC Growth Fund. Over the past 5 years, there have been no distributions and the value of the shares is now $35,000. If the client should ask about exchanging the entire holding for shares of the ABC Income Fund, you would explain A) the new shares would be acquired at the public offering price B) that taking advantage of the exchange privilege results in taxes being deferred until the liquidation of the account C) the new shares will have the same cost basis as the old ones D) there is a long-term capital gain of $10,000

D Explanation The exchange privilege permits shares of one fund in the family (The ABC Fund Group) to be exchanged for shares of another at net asset value, not public offering price. However, for tax purposes, it is considered a sale and a purchase so there would be a capital gain realized on any difference between the cost basis and the proceeds. In this case, the new shares would have a new cost basis of $35,000.

If you knew a given stock had a 40% chance of earning a 10% return, a 40% chance of earning 20%, and a 20% chance of earning −10%, the stock would have A) an annualized return of 10% B) a real rate of return of 10% C) a total return of 10% D) an expected rate of return of 10%

D Explanation The expected return is computed by taking the probability of each possible return outcome and multiplying it by the return outcome itself.

If Brokers, Inc., a broker-dealer registered in this state, refuses to comply with the Administrator's order to retain records for 2 years longer than required by the Securities Exchange Act of 1934, which of the following statements are TRUE? The securities Administrator cannot require registrants to retain books and records longer than required by the SEC. Brokers, Inc., is not in violation of the Securities Exchange Act of 1934. Both the securities Administrator and Brokers, Inc., are in violation of both the Securities Exchange Act of 1934 and the Uniform Securities Act. Brokers, Inc., must comply with orders issued by state securities regulators whether or not the orders are in compliance with the NSMIA. A) I and III B) II and IV C) II and III D) I and II

D Explanation The securities Administrator is in violation of the National Securities Markets Improvement Act of 1996 (NSMIA), which prohibits state securities regulators from establishing requirements in addition to those required by the Securities Exchange Act of 1934.

Your married customers are both 42 years old, have 2 children ages 14 and 12, and have spent the past 10 years accumulating money to provide for their children's education. Their oldest child will enter college in 4 years, and the customers are very cautious investors. If they need a safe investment that provides regular income to help them meet tuition payments, which of the following mutual funds is the most suitable for these customers? A) ABC Stock Index Fund B) RST Balanced Fund C) ATF Overseas Opportunities Fund D) LMN Investment-Grade Bond Fund

D Explanation These clients cannot afford a downturn in the stock market between now and the time they want to send their children to college. An investment-grade bond fund will provide the income and safety required for accumulating additional funds for college expenses.

The holding period return (HPR) on a share of stock is equal to A) the dividend yield plus the risk premium B) the capital appreciation minus the inflation rate over the period C) the current yield plus the dividend yield D) the capital appreciation plus the dividend income received over the perio

D Explanation To compute holding period return, you calculate the total return for that holding period. Total return combines any dividend income plus appreciation (or minus depreciation).

An investor purchases a Treasury note and the confirmation shows a price of $102.25. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $1,022.50. B) $102.25. C) $1,020.25. D) $1,027.81.

D Explanation Treasury notes are quoted in 32nds where each 32nd equals $.3125. The 102 in the quote equals $1,020 and the 25/32 is an additional $7.81 bringing the total to $1,027.81.

Judy is in the business of giving general investment advice, suggesting appropriate asset allocation percentages, but not recommending specific securities. George's business model is giving investment advice and recommending specific securities. Assuming that both receive compensation, who must register as an investment adviser under the Uniform Securities Act? A) Only Judy B) Only George C) Neither D) Both

D Explanation Two of the 3 critical elements in the definition of investment adviser are whether the person provides advice regarding securities and receives compensation for doing so. (The third element is "being in the business" and the question states that both are). Even without recommending specific securities, the fact that Judy suggests asset allocation percentages constitutes investment advice. Both Judy and George provide advice regarding securities for compensation and must register, unless specific exemptions apply.

An investment adviser affiliated with a broker-dealer would be considered to be maintaining custody when A) charging fees on an hourly basis B) receiving performance-based compensation C) having the power to make buy-and-sell decisions in an account D) receiving a check made payable to that broker-dealer

D Explanation Under the NASAA Model Rule on Custody Requirements for Investment Advisers, when an investment adviser uses an affiliated broker-dealer as its qualified custodian, the adviser is considered to be maintaining custody. Therefore, receipt of a check made payable to the BD is acceptable (it does not have to be forwarded).​ Discretion is not custody and the method of compensation has nothing to do with custody. Don't confuse that with the case where the IA can debit the client's account for fees—that would be custody—but whether the fees are hourly, performance-based, or any other method is not related to custody.

Leslie is an IAR with Financial Visions (FV), a federal covered investment adviser. Leslie operates Innovative Financial Solutions (IFS), a separate financial planning company with its own office in State W. Should Leslie be found guilty of fraudulent business activities, FV would A) be immune from State W's Administrator's jurisdiction because it is a federal covered adviser. B) claim that IFS is a separate entity over which FV has no responsibility. C) possibly have its State W registration suspended. D) be subject to possible disciplinary action brought by the State W Administrator if it could be shown that FV failed to supervise Leslie's activities.

D Explanation Under the doctrine of respondent superior, an investment adviser is responsible for the actions of any of its registered IARs, even those who operate an independent financial planning firm (independent contractors). Although, as a federal covered adviser, FV doesn't have a registration that can be suspended, state administrators do have jurisdiction over covered advisers when fraud is involved.

Mrs. Beech, age 52, as the sole survivor of her mother, recently inherited, among other assets, an IRA. After receiving a distribution of the account's assets, she dutifully rolled over 100% of the account value into a new rollover IRA. As a result, Mrs. Beech A) should have left the funds in her mother's IRA, because she is not yet 59½ B) will only be liable for the 10% premature distribution penalty tax C) will be able to avoid taxation on the distribution until she begins to take distributions from the rollover IRA D) will have to declare the entire IRA value as ordinary income

D Explanation When an IRA is inherited, other than from a spouse, the only way to avoid a reportable distribution is to do a trustee-to-trustee transfer. Because Mrs. Beech received the distribution, the normal rollover rules do not apply. However, Mrs. Beech will not have to pay the 10% penalty tax.

Prosperity Asset Partners (PAP) is organized as a general partnership. PAP is registered in four states. All of the following statements regarding the investment adviser brochure rule of the Uniform Securities Act are true except A) the disclosure brochure must contain essentially the same information as is contained in Form ADV, Part 2A and, if applicable Part 2B. B) the disclosure brochure must be delivered no later than 48 hours before entering into an advisory contract for there to be no requirement to offer a 5-day refund right C) the brochure rule permits advisers to deliver the disclosure brochure when the client enters the contract providing the client is allowed to cancel the contract without penalty within 5 business days D) the disclosure brochure must be signed by an officer or a general partner of the firm

D Explanation When an investment adviser's business structure is a general partner (as is the case with PAP), the brochure must be signed by a general partner. If the firm is a corporation, then an officer's signature is acceptable. The investment adviser's disclosure brochure must contain the relevant information from Form ADV Part 2A and, for those where it applies, Part 2B. The rule does permit advisers to deliver the brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within 5 business days; otherwise, the brochure must be delivered no later than 48 hours before entering into an advisory contract.

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

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

While an application for registration as an agent of a broker-dealer is still pending, that person would be permitted to A) engage in no activity at the office other than studying for the exam B) accept unsolicited orders only C) limit her acceptance of orders to those from the broker-dealer's existing clients D) assist registered employees of the firm by doing research on securities they are following

D Explanation While registration as an agent is pending, the applicant can take no active role in the sale or offering of securities. However, performing research on an internal basis does not involve contact with the public in a sales effort and would be permitted.

Under the USA, which of the following statements regarding the posting of surety bonds is NOT true? A) The Administrator requires the posting of bonds primarily to cover the cost of civil liabilities associated with violations of the Uniform Securities Act. B) Bonds may be required for agents of broker-dealers. C) The Administrator can accept securities instead of cash if the posting of a bond is required. D) The Administrator requires all broker-dealers to post bonds even if they maintain net capital in excess of minimum amounts.

D Firms that maintain net capital in excess of minimum requirements may be exempted from the requirement of posting surety bonds. Agents exercising discretion over client accounts MAY be required to post a surety bond.

An investor is of the opinion that the recent bull market has run its course, and she wants to protect her portfolio consisting largely of equities with a market cap of less than $1 billion. Her best choice would be to A) sell futures on the Russell 2000. B) buy puts on the S&P 500. C) sell puts on the S&P 500. D) buy puts on the Russell 2000.

D small-cap stocks, the appropriate benchmark for hedging would be the Russell 2000.

For purposes of safeguarding customer information, which of the following would be considered a covered account? A) A margin account in the name of the Interglobal Hedge Fund B) An account in the name of the State of X employee pension fund C) A margin account in the name of Mary Beth Simmons D) An account in the name of the Wells Morgan Bank

X Explanation The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies.