Series 66 Mastery / Practice Exam
Social media can be static or interactive. Examples of static content typically available through social networking sites include all of the following except A) video recordings of public appearances. B) an online seminar. C) banner ads. D) biographical information.
B- online seminar is an example of interactive because the presenter and viewers can talk or "interact" with one another" -STATIC: remains posted until changed by the person who established the account on the site. Generally accessible to all visitors to the site. -INTERACTIVE: inputer from both the creator and the viewer. Example: Facebook, Twitter, Instagram, or Linkedin.
A company has two outstanding bond issues, both with a coupon rate of 10%. Bond A will mature in 3 years while Bond B will mature in 20 years. If interest rates were to decrease to 8%, which of the following statements is correct? A) Both bonds will be selling at a discount. B) The issuer will attempt to call in Bond A. C) Bond B will be selling at a greater premium than Bond A. D) Bond B will be selling at a greater discount than Bond A.
C
The management style that is most similar to buy and hold is: A) contrarian. B) tactical management. C) strategic management. D) active management.
C
Under which of the following asset allocation programs is it most likely that commission expense will have a significant impact on portfolio performance? A) Strategic B) Rebalancing C) Tactical D) Buy and hold
C *The tactical style is an active one; the other choices are all passive. Obviously, the more active the management, the more trading in the account. That means that commissions are going to be higher.
Which of the following actions is a form of market manipulation? A) Front running B) Arbitrage C) Wash sales D) Matched orders
D
When a market maker publishes a quote, what prices will be shown? Bid Market Offer Spread A) I and III B) II and IV C) III and IV D) I and II
A
The Uniform Securities Act prohibits broker-dealers from engaging in activity that has the effect of manipulating stock market prices. These would include: A) matched orders. B) higher than reasonable commissions or markups. C) selling unregistered nonexempt securities. D) churning.
A *Page 173 LEM.
Adnan is an investment adviser representative associated with a state-registered investment adviser. He is registered in several states. To be in compliance with the Uniform Securities Act, Adnan A) must meet the financial requirements of the state in which the investment adviser's principal office is located. B) has no financial requirements with regard to a minimum net worth. C) must meet the financial requirements of all of the states in which he does business. D) must meet the financial requirements of the state with the most stringent requirements.
B
An investment adviser representative has constructed a portfolio for a client that is 20% U.S. government bonds, 20% corporate bonds, 20% preferred stock, 15% common stock in public utilities, 10% in cash and 15% in small cap stocks. From this, you could safely assume that the client's investment objective is: A) capital appreciation. B) income. C) growth with income. D) preservation of principal.
B
Ways in which a Section 529 plan differs from a Coverdell ESA include 1. tax-free distributions when the funds are used for qualifying educational expenses. 2. higher contribution limits 3. no earnings limitations 4. contributions that may be made by someone other than a parent or legal guardian A) II and IV B) II and III C) I and II D) I and IV
B
Which of the following items does NOT fall within the Section 28(e) safe harbor? A) Software used to analyze client's portfolios B) Software used to simplify the investment adviser's preparation of its tax returns C) Proprietary research reports analyzing the performance of a specific industry D) Research reports prepared by a third party other than the broker-dealer
B
A client approaches the investment adviser representative handling the advisory account with a request to find a preferred stock that will offer a 5.4% income return. The IAR suggests a stock paying a $1.73 quarterly dividend. That stock will meet the income objective if it has a current market price of A) $128.15. B) $32.04. C) $37.37. D) $78.03.
A
All of the following are requirements to be a salesman of variable products EXCEPT A) affiliation with a registered investment adviser B) possession of a valid FINRA registration C) possession of a valid life insurance license D) affiliation with a registered broker-dealer
A
The following set of data represents a sample from a normally distributed population of prices of a stock traded on the Nasdaq Stock Market over a one-month period: $28, $36, $32, $30, $34, $32. Which of the following statements about this sample is least accurate? A) The median equals $31. B) The mean equals $32. C) The mode equals $32. D) The range equals $8.
A
An investor contacts you somewhat puzzled over the fact that she saw a newspaper listing for the KAPLOW Fund where the net asset value per share was $10.27 and the asking price was $14.14 per share. She wants to know why the difference between the two is so great. You would respond, saying A) the KAPLOW Fund is being investigated by the SEC for being sold with a sales charge in excess of the 8.5% maximum limit B) the KAPLOW Fund is a closed-end company whose selling price is not based upon NAV, as is the case with an open-end fund C) that this is probably an unregistered hedge fund not subject to SEC rules D) there is probably a misprint in the paper and, more than likely, the asking price is $11.22, making the sales charge 8.5%
B
On a scheduled premium variable life insurance policy, the insured is guaranteed: A) nothing. B) at least 100% of the stated death benefit. C) that premiums may be reduced due to better than projected performance in the separate account. D) at least 100% of the stated cash value.
B *ExplanationA 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.U15LO7
A corporate bond with a BB rating is currently selling for 95. If the bond has a coupon of 6% and matures in 10 years, its yield to maturity is closest to A) 5.71% B) 6.67% C) 6.32% D) 5.37%
B *CY: $60 / $950 = 6.32 %. *Discount bonds, YTM > CY. Therefore, must be B, 6.67%.
Mr. Peabody Fawcett and his sister, Ms. Gwenyth Paige-Newberry open a brokerage account at your firm with an initial deposit of $11 million. The account is opened as tenancy in common (TIC) with Peabody owning 40% and Gwenyth the balance. Several years later, Peabody is fatally injured while playing polo. As a result A) the account will be frozen until the results of the probate court are released B) 40% of the value of the account will be transferred to an estate account in his name and 60% will be transferred into an individual account in her name C) the account will be frozen until receiving instructions from the executor of Mr. Fawcett's account D) Mr. Fawcett's share will be transferred to his sister and an individual account will be opened in her name
B *Page 337 LEM *Assets pass to tenants estate upon death.
The antifraud provisions of the Uniform Securities Act would apply to all of the following except A) persons availing themselves of the de minimis exemption. B) an individual employed by a registered broker-dealer whose sole function is selling commodity futures contracts. C) newsletter publishers who do not give advice to subscribers on the subscriber's specific investment situation. D) a broker-dealer registered pursuant to the limited registration option available to Canadian broker-dealers and their agents.
B *Uniform Securities Act's antifraud provisions deal with securities; commodities are not a security.
Mr. J.B. Rich founded Rich, Inc. and owns a substantial block of stock with a very low cost basis. Which of the following statements are true regarding the disposition of Mr. Rich's stock? 1. If it is given away, the recipient of the gift assumes Mr. Rich's cost basis. 2. If it is given away, the recipient of the gift receives a stepped-up basis to the market value as of the date of the gift. 3. If it is inherited, the beneficiary will assume Mr. Rich's cost basis. 4. If it is inherited, the beneficiary receives a stepped-up basis to the market value as of the date of Mr. Rich's death. A) II and III. B) I and IV. C) I and III. D) II and IV.
B 1. Given securites results in the CB passing to the recipient. 4. Inharited securites receive step-up basis to the MV as of the date of death of the donor.
Under federal law, all of the following investment advisers are exempt from registration EXCEPT A) advisers solely to venture capital funds B) advisers solely to private funds with less than $150 million in assets under management in the United States C) advisers whose only clients are banks whose deposits are insured by the FDIC D) foreign private advisers with no place of business in the United States and less than $25 million in assets under management
C
The following numbers (in %) represent the returns from an investment fund over the past seven years: 2014: 13%, 2015: 11%, 2016: 2%, 2017: 6%, 2018: 5%, 2019: 8%, 2020: 6%. Using the range measure would indicate that the seven-year returns from the fund had a mid-range of A) 2%. B) 4%. C) 7.5%. D) 11%.
C *(The midrange of any group of numbers occurs between the highest and lowest in the group. In this example, the highest number is 13% and the lowest is 2%. The number in the middle of those two is 7.5%)
The term that best describes a person entrusted with the duty of acting for the benefit of another party is A) a principal. B) a trustor. C) a fiduciary. D) an investment adviser.
C *A fiduciary duty is the obligation a party has to act in another party's best interest *GOOGLE SEARCH: Fiduciary: A person who undertakes to act on behalf of and primarily for the benefit of another. For example, a trustee for a trust.
If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A) Preferred stock B) Annuities C) Tangible assets D) AAA bonds
C *Tangible assets, such as real estate, precious metals, and other commodities, tend to keep pace with inflation. Fixed dollar investments do not.
Which of the following municipal bonds would be most subject to interest rate risk? A) 7s '28 on a 7½% basis B) 7.8s '35 on a 7.4% basis C) 8s '40 on a 7.8% basis D) 7.5s '29 on a 7.2% basis
C *The longer the duration of a bond, the greater the interest rate risk. The 8s '40 on a 7.8% basis, (YTM), is a bond with a 2040 maturity, which is the longest maturity (without a substantially higher coupon) of the choices available. Remember, duration is a function of coupon and length to maturity. If the coupons are relatively close, the longest maturity is the one with the longest duration (and greatest sensitivity to changes in interest rates). There is a giveaway to this answer if you look carefully. The greater the risk, the greater the reward and the 8s '40 have the highest yield, indicating that investors are demanding a higher return for the greater risk.
An investment of $5,000 made 16 years ago is now worth $20,000. Using the Rule of 72, the approximate compounded annual rate of return is A) 25%. B) 4.5%. C) 9.0%. D) 18%.
C *shortcut method to determine the # of years it takes for an investment to double. *Page 190 LEM
Early in the year, an investor purchased 100 shares of KAP common stock at a price of $60 per share. Just prior to the end of the year, after receiving three quarterly dividends of $1, the investor liquidated all of the KAP at a price of $59 per share. If the Consumer Price Index (CPI) increased by 3%, the investor's total return over the holding period was A) 2% B) .33% C) 5% D) 3.33%
D
It has been a great year at Capital Funding, Inc., an SEC-registered broker-dealer that is also registered in 22 states. The company decides to share its good fortune with employees by paying a year-end bonus equal to 31% of annual salary. In order for clerical personnel to receive this bonus: A) they must be licensed as investment adviser representatives. B) the bonus must be sales related. C) they must be licensed as agents. D) they must be employees of the broker-dealer.
D
One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of A) a small-cap stock B) a AAA corporate bond C) a preferred stock D) a large-cap stock
D
Richard, Tim, Sam, and Fred have a regular golf foursome every weekend. During one of their outings, they decide it is time they did something constructive with their money by opening an account with a brokerage firm. If the account is opened tenants in common, suitability information would be required on A) only that individual with the authorization to trade the account B) each of the individuals, and if married, their spouses C) whichever person has been designated by the group as its spokesman D) each of the four individuals
D
The assumptions underlying the efficient market hypothesis (EMH) lead its proponents to believe that stock market prices react rapidly to newly released information and, therefore, limit the ability of the investor to achieve abnormal gains. Which of the forms of EMH concludes that an investor cannot achieve abnormal gains using fundamental analysis? A) Weak form B) Spring form C) Strong form D) Semi-strong form
D
Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction? A) An executor liquidates the estate's portfolio. B) The sale of ABCD common stock, listed on the OTC Bulletin Board, to an insurance company. C) The sale of an unregistered nonexempt security to an individual client at that client's request. D) An agent sells U.S. treasury bonds to an individual client.
D
The regulators require securities professionals to make disclosure of any potential conflict of interest. Which of the following cases would be least likely to present a conflict of interest? A) Recommending a specific stock to a customer that has been the subject of a recent underwriting managed by the broker-dealer B) Offering a limited partnership in an oil and gas drilling program where the general partner is the brother of the manager of the branch office handling that customer's account C) Encouraging customers of the broker-dealer to purchase shares of a specific stock after the agent has taken a long position in call options on that stock D) Recommending a specific mutual fund to a customer because of the fund's outstanding past performance
D -A: recommending a stock to a customer that was recently underwritten by your BD. -B: offering a security where there is a relationship with a control or affiliated person. -C: Front Running -D: recommending this is permitted IF the IAR gives a following disclosure. "past performance is not a guarantee of future results. Page 136 LEM.
Because investment advisers generally act in a fiduciary capacity, they need to follow the provisions of the Uniform Prudent Investors Act (UPIA). When handling client's assets, the investment adviser must consider the objectives and goals as well as the risks. The adviser can satisfy the standard of prudent management by A) limiting the choice of investments to those appearing on the state's legal list. B) ensuring that no single security carries a risk greater than that of the overall portfolio. C) delegating the investment decisions to a trustee. D) exercising reasonable care, skill, and caution.
D -UPIA: The Prudent Investor Ruel. Fiduciary act with reasonable care, skill and caution. Page 162 and 484 LEM.
Under the provisions of Regulation S-P, a person who has an investment advisory contract with a registered investment adviser is known as A) a customer B) a cohort C) a consumer D) a client
A *Regulation S-P defines a customer relationship as a continuing relationship between a consumer and a financial institution. Examples of a customer relationship include an individual who has an advisory contract with an investment adviser.
Wynifred is an investment adviser representative for an SEC-registered investment adviser. She lives in State X and receives a letter from a former boyfriend requesting a contribution to the friend's political campaign for governor of State X. As it happens, Wynifred's firm provides advisory services to State X's employee retirement fund and Wynifred actively solicits business from other state agencies. Which of the following actions would be permitted to Wynifred under the SEC's pay-to-play rule without causing any concerns to her firm? A) Donating a maximum of $350 to the campaign B) Sending a letter to the friend indicating that the rules would not permit her to contribute to the campaign C) Donating a maximum of $150 to the campaign D) Donating a maximum of $250 to the campaign
A *The rule allows covered employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections. 3.21.1.1 in the License Exam Manual
Financial planners frequently assist their clients with budgeting. One can't really prepare a budget without knowing the family's cash flow. In preparing a family cash flow statement, all of the following items would appear except A) salary B) assets C) interest on saving accounts D) taxes
B *Page 356 LEM: Balance sheet only includes assets and liabilites, not income, such as salary, dividends, or interest, or amounts paid for expenses.
When discussing direct ownership of investment real estate with a client, an agent should point out that A) the use of leverage usually has the effect of reducing potential returns B) real estate tends to be a hedge against deflation C) investment real estate is generally illiquid when compared to listed stocks D) real estate prices tend to mirror those of the overall stock market
C
You are viewing three securities to place in a client's portfolio. Security X has an expected return of 15%, security Y has an expected return of 20%, and security Z has an expected return of 10%. If you were to place 40% of the portfolio into security X, 40% into security Y, with the balance going into security Z, the probable return of the portfolio is A) 17%. B) 15%. C) 16%. D) 14%.
C
Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of 1. the Securities Exchange Act of 1934 2. the Investment Company Act of 1940 3. the Investment Advisers Act of 1940 4. the Uniform Securities Act A) II, III, and IV B) I and III C) II and IV D) I, II, and III
C -Investment Company act of 1940 -U.S.A. Act.
Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Renewal notice to the SEC B) Form U-4 C) Consent to service of process D) State licensing fee
D *. State Licensing Fee. All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.
Under rules of the SEC, any institutional investment manager that exercises investment discretion over an equity portfolio with a market value of $100 million or more in certain securities on the last trading day in any of the preceding 12 months must file A) a Form 112. B) a Form 13D. C) a Form ADV-E. D) a Form 13F.
D *Section 139f) filings. Any institutional investment manager that exercises investment discretion over an equity portfolio with a market value on the last trading dat in any of the preceding 12 months of $100million or more in 13(f) securites MUST file FORM 13(f) with the SEC quarerly, within 45 days of the end of each quarter.
A bullish client invests into a 3x leveraged fund based on the S&P 500 Index. If the index should rise by 10%, your client's investment would be expected to A) increase by 20% B) increase by 50% C) decrease by 30% D) increase by 30%
D -10%--> 20% is 2x. 20% --> 30% is 3x.
One of your clients is a widow with three grown children. She wants the assets in her account to go to her children upon her death—50% to her daughter and 25% to each of her sons. She does not want the estate to have to deal with probate on these assets. How should her account be set up? A) Transfer on death B) Tenants in the entirety C) Tenants in common D) Joint tenants with right of survivorship
A
A technical analyst who wishes to smooth out the fluctuations of stock market prices would probably chart A) the 100-day moving average B) the support and resistance levels C) the trendlines D) the short interest
A *Page 230 LEM: To avoid volatility frequently present in stock price trends, analysts will use the moving average. A moving average attempts to modify the fluctuations of a stock prices into a "SMOOTHED" trend.
Carmen Lobianco, who has been highly successful in business, has a thirty-year-old son. The son has been a quite a spendthrift. Lobianco is afraid the son will not be able to live within his means. To protect this from happening, Lobianco places $2,500,000 into a trust for the benefit of the son. To provide added safety, Lobianco arranges for the Amalgamated Bank and Trust Company to have total control over the assets. In this case, which of the following is not correct? A) Carmen's son is the beneficiary. B) Carmen is the trustee. C) Amalgamated Bank and Trust Company is the trustee. D) Carmen is the grantor.
B
Most states have replaced the Uniform Gifts to Minors Act (UGMA) with the Uniform Transfers to Minors Act (UTMA). One of the major advantages of UTMA is A) the beneficiary has access to the account at an earlier age B) greater flexibility in the choice of investments C) reduced fiduciary exposure to the custodian D) better tax benefits
B
Special tax treatment is afforded to REITs if they A) distribute at least 75% of their taxable income to their investors B) agree to flow-through losses to their investors C) distribute at least 90% of their taxable income to their investors D) receive at least 90% of their income from real estate
C
An investment adviser whose primary business is the rendering of investment advice providing investment supervisory services is entitled to use the term: A) investment counsel. B) senior adviser. C) pension consultant. D) financial planner.
A *Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the giving of advice is the primary business of the firm.
According to standard terminology used in the securities industry, when a person sells securities out of inventory, that person is acting in the capacity of a (an): A) agent. B) investor. C) principal. D) broker.
C
Under the Uniform Security Act, all of the following persons with no place of business in the state are exempt from registration as an investment advisers EXCEPT: A) advisers who deal exclusively with savings banks located in the state. B) advisers who deal exclusively with investment companies registered under the Investment Company Act of 1940. C) advisers who have conducted business with no more than 6 individual clients in the state within the last 12 months. D) advisers who deal exclusively with federal covered investment advisers located in the state.
C
In which one of these business entities does the term "member" refer to the owners? A) S corporation. B) Sole proprietorship. C) Limited liability company. D) Limited partnership.
C *LLC owners are referred to as members and there can be an unlimited number of them in this business entity. The primary benefit of an LLC business formation is this liability protection. If a business is sued, the plaintiff can only go after the LLC's business assets and not the owner's personal assets.
One of the terms found in the Securities Exchange Act of 1934 is that of a "person associated with a broker-dealer." Included in that definition would be all of the following EXCEPT A) an individual registered with the broker-dealer as an agent who does not maintain a place of business in the state B) an individual whose sole duties are ministerial in nature C) the individual managing the firm's smallest branch office D) any person directly or indirectly controlling, controlled by, or under common control with the broker-dealer
B
You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is A) inflation risk B) liquidity risk C) business risk D) systematic risk
B *A portfolio of listed common stocks will have little to no liquidity risk as listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living.
All of the following are characteristics of exchange-traded funds except A) they usually trade at or near their net asset value. B) large investors known as authorized participants buy or sell shares on an in-kind basis. C) they may not be sold short. D) they are generally tax efficient.
C
An investment adviser representative is meeting with a potential advisory client. Among the items of information the IAR needs to obtain in order to develop the proper plan are the prospect's anticipated number of years until retirement location of current bank and brokerage accounts current savings and investments college alma mater A) III and IV B) I and II C) I and III D) II and IV
C
Given below are the EPS for the previous four quarters for four different companies being analyzed by your research department. Which of these companies is exhibiting earnings momentum? A) DEF - Q1: $0.58; Q2: $0.52; Q3: $0.50; Q4: $0.49 B) JKL - Q1: $0.82; Q2: $0.90; Q3: $0.83; Q4: $0.92 C) GHI - Q1: $0.25; Q2: $0.27; Q3: $0.30; Q4: $0.36 D) ABC - Q1: $0.58; Q2: $0.61; Q3: $0.64; Q4: $0.67
C
An individual is currently registered as an agent with a broker-dealer. The firm recently began offering wrap fee programs to select clients. If the agent would like to offer these 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 agent would have to become registered as an investment adviser representative C) the agent would have to become registered as an investment adviser D) the broker-dealer would have to be registered as an investment adviser
C *An agent of a broker-dealer must register with the state as an investment adviser representative to offer a wrap fee program to clients.
If the Administrator were examining the actions of a particular agent to determine whether the agent engaged in churning a client's account, focus would be placed upon the: A) length of time the account had been opened. B) number of complaints received relating to that agent. C) client's objectives, financial resources, and the character of the account. D) amount of profits generated in the client's account.
C *Churning is the practice of generating commissions through excessive trading in a client's account. To determine what is excessive, the regulators will look at the client's investment objectives, financial resources, and the character of the account.
The term used to describe investment vehicles whose value is based on an underlying asset is: A) funded debt. B) parity. C) separate account. D) derivative.
D *Page 305 LEM: Derivative securities derive their value from an underlying instrument, such as a stock, stock index, interest rate or foreign currency.
When preparing a client profile, it is prudent to investigate the prospect's non-financial considerations. Included would be that client's: 1. age. 2. attitudes. 3. experience with investments. 4. values. A) I, II, III, and IV. B) II and IV. C) I, II, and IV. D) I and III.
A -Page 357 LEM: All four of these are included in nonfinancial considerations. -Example of Finanical Considerations: current expenditures, debt obligations, tax status, income sources and balance sheets items.
Assume you own KAPCO Stock Fund that returned 14% over the past five years, during which the stock market returned 12%. This fund has a beta of 1.1 and the risk-free rate of return is 4%. What is the fund's alpha? A) +9.1 B) +6.0 C) +1.2 D) +2.0
C
If a client prefers owning an investment company whose portfolio consists primarily of companies that have a history of paying regular dividends, rather than companies reinvesting their earnings for the purpose of generating capital appreciation, what type of mutual fund would you recommend? A) A government bond fund B) A growth fund C) An income fund D) An index fund
C
When an investment adviser representative terminates employment with a federal covered investment adviser and immediately accepts employment performing the same functions with a different federal covered investment adviser in the state where the individual resides A) the investment adviser representative and each of the federal covered advisers must notify the Administrator promptly B) the investment adviser representative and the employing adviser must notify the Administrator promptly C) only the investment adviser representative must notify the Administrator promptly D) only the terminating investment adviser must notify the Administrator.
C
Which of the following statements are accurate when describing preferred stock? 1. Owners of convertible preferred stock have an opportunity to participate in the growth of the company. 2. Unlike any other securities the company may issue, the return on preferred stock is fixed. 3. Issuing preferred stock confers certain tax benefits to the company. 4. In general, preferred stock does not have a maturity date. A) I and IV B) II and III C) I and II D) III and IV
A *Page 226: Convertible preferred issued w/ lower yield vs. nonconvertible because the investor may have the OPPORTUNITY to convert to common shares and enjoy greater capital gain potential. *Page 220 LEM: Preferred stock rate of return is FIXED rather than subject to variation as with common stock. *Preferred's technically have an unlimited life because they have no fixed maturity date, but they may be called by the issuer after a certain date
Performance guarantees are prohibited under state and federal regulations. Which of the following is an example of a performance guarantee offered by a broker-dealer? A) Our firm's research department has set a 12-month price target on this recommendation of $50 per share. B) Our firm is so confident that this recommendation will perform as predicted that it will buy this security back from any customer at the prevailing market price. C) Our firm is so confident that this recommendation will perform as predicted that it has established an escrow account with the Administrator to protect investors against loss. D) Our firm is so confident that this recommendation will perform as predicted that it has purchased 1,000 shares for the firm's investment account.
B
When dealing with suitable recommendations to clients, it is important to distinguish between investment objectives and investment constraints. Which of the following would be an investment objective rather than a constraint? A) Need for liquidity B) Current income C) Tax considerations D) ESG investing
B -Pg. 360 LEM. Investment Objective (goals) Examples: Current Income, capital preservation, capital growth, speculation, . -Investment Constraints (obstacles) Examples: liquidity, tax considerations, ESG investing or values, time horizon, laws and regulations.
Section 401(b) of the Uniform Securities Act defines an agent as an individual who represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. However, the term agent would not include an individual: A) employed by a broker-dealer selling securities on behalf of an issuer. B) employed by an issuer to research industry trends. C) representing a non-exempt issuer in the sale of the issuer's securities in a non-exempt transaction. D) employed by the investment banking firm engaged to underwrite a new issue of nonexempt securities.
B The text in Section 401(b) of the Uniform Securities Act reads, "Agent means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. There are cases where an individual representing an issuer would not be considered an agent, such as if the transaction is exempt, but that doesn't change the definition.
The Investment Advisers Act of 1940 excludes from the definition of "investment adviser" persons whose advice: relates solely to municipal issues. relates solely to issues issued by or guaranteed by the U.S. Treasury. is solely incidental to their professional practice as an aeronautical engineer. is limited to insurance companies only. A) III and IV. B) I, II, and IV. C) I, II, III, and IV. D) II and III.
C
Which of the following are restrictions on the operations of registered open-end investment companies under the Investment Company Act of 1940? 1. No registered investment company may commence a public offering with less than $1 million of capital. 2. No investment company may own more than 3% of the voting stock of another registered investment company. 3. No investment company may purchase portfolio securities on margin. A) I and III B) I and II C) II and III D) I, II, and III
C
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) disclosure to the client. B) consent of the client. C) disclosure to the client and consent prior to completion of the transaction. D) consent of and the disclosure to the client prior to execution of the transaction.
C -The client receives full written disclosure as to the capacity in which the adviser proposes the act. -Client CONSENT is obtained.
One of your customers has inherited $100,000 of Kemach Farm Products, Inc. (KFPI), guaranteed bonds. Being wary of the term guaranteed, you are asked for its meaning in this context. You would explain A) the interest and final principal payment on this bond are guaranteed by KFPI. B) the interest payments on this bond are guaranteed to increase to keep pace with inflation. C) bondholders may redeem their bonds at the face value at any time prior to maturity. D) the interest and final principal payment on this bond are guaranteed by someone other than the issuer.
D *A guaranteed bond is a debt security that offers a secondary guarantee that interest and principal payments will be made by a third party, should the issuer default due to reasons such as insolvency or bankruptcy. A guaranteed bond can be of either the municipal or corporate variety.
Three sisters are interested in forming a business together. They have three initial concerns: How to maximize their benefits from the fact that the business is not expected to earn money for at least the first 2 years Making sure that the business will be able to continue in the event one or two of the sisters dies Minimizing their personal liability for the obligations of the business On the basis of the sister's concerns, which form of business is appropriate for the situation? A) LLC. B) General partnership. C) C corporation. D) Limited partnership.
A
Among the major stock averages and indexes, only one is price-weighted. That would be A) the Dow Jones Industrial Average. B) the Standard and Poor's 500 Composite Index. C) the Russell 2000 Index. D) the Wilshire 5000 Total Market Index.
A *The Dow Jones Industrial Average is an index of 30 "blue chip" stocks of U.S. industrial companies. The Index includes a wide range of companies—from financial services companies, to computer companies, to retail companies—but excludes transportation and utility companies, which are included in separate indices. Unlike many other indices, the DJIA is not a "weighted" index, meaning it does not take market capitalization into account.
To be in compliance with the rules under the Investment Advisers Act of 1940, which two of the following statements are correct regarding a registered investment adviser's relationship with solicitors? 1.An individual who is subject to statutory disqualification from registration as an investment adviser representative may solicit clients for the adviser as an employee of a third-party solicitor. 2.There must be a written agreement between the investment adviser and the solicitor. 3.While the sales script used may be written by the solicitor, its content is the responsibility of the adviser. 4.Cash referral fees to solicitors may only be paid in the case of impersonal advisory services. A) III and IV B) II and III C) I and IV D) I and II
B
Which of the following are methods of portfolio rebalancing? You can sell off investments from over-weighted asset categories 1.and use the proceeds to purchase investments for under-weighted asset categories. 2.You can purchase new investments for under-weighted asset categories. 3.If you are making continuous contributions to the portfolio, you can alter your contributions so that more investments go to under-weighted asset categories until your portfolio is back into balance. 4.You can purchase new investments for better performing asset categories. A) I and III. B) I, II, and III. C) III and IV. D) I, III, and IV.
B
A 45-year-old client has just received an inheritance and would like to invest $100,000 into a growth mutual fund offered by your firm. The client intends to use the money to supplement retirement. You should probably recommend the purchase of A) a fixed annuity B) Class A shares C) Class B shares D) Class C shares
B **Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load, but do have a higher asset-based sales charge. Class C shares always have a 12b-1 charge. -Class A: Better for wealthy investors, long time horizon. -Class B: Better for investors with little cash investments and long time horizon. (At least 5-8 years.) -Class C: Better for retail investors with a short time horizon. (Usually 1-3 years).
An investment adviser representative with a state-registered investment adviser reads an article in the newspaper about a local company that has had a surge in demand for its product line. If the representative's supervisor gives approval, posting the article on her social media accounts would constitute A) entanglement. B) acceptance. C) adoption. D) fraud.
C
If the Administrator believes that a violation of the act has occurred or is about to occur, the Uniform Securities Act grants the office the power to issue a cease and desist order seek an injunction against the alleged violation seek to have a receiver appointed over the violator's assets seek to have the violator make restitution to investors A) I, II, and III B) III and IV C) I and II D) I, II, III, and IV
D *The Administrator has the power to issue cease and desist orders, apply to courts for temporary or permanent injunctions or restitution to investors, or have the court appoint receivers over a violator's assets.
Under federal law, the brochure rule requires: A) delivery of a brochure, or summary of material changes, to all clients within 120 days of the end of the adviser's fiscal year. B) concurrent delivery of the Form ADV Part 1A. C) delivery no later than 48 hours before entering into an investment advisory contract. D) delivery no later than 5 business days after the formalizing of the advisory.
A *Each year you must (i) deliver, within 120 days of the end of your fiscal year, to each client a free updated brochure that either includes a summary of material changes or is accompanied by a summary of material changes, or (ii) deliver to each client a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure. See SEC rule 204-3(b) and similar state rules.
If the administrator of a corporate 401(k) plan ensures that a wide variety of investment alternatives are available to employees along with the ability for the employees to monitor their accounts and make frequent changes as needed, ERISA: A) shifts the responsibility for account performance to the employee. B) might find the administrator to be shirking his fiduciary responsibility. C) removes the requirement for "top-heavy" testing. D) removes the requirement for the plan to provide employees with quarterly reports.
A or C? *Pg. 487 of LEM. Safe Harbor Provisions. *ERISA: 401(k) plans. Safe Harbor from liability for the trustee if certain conditions are met. Fiduciary is NOT LIABLE for losses to the plan resulting from the participant's selection of investment in his own account. *TOP-HEAVY TESTING: Term used to describe a 401(k) plan that offers a disproportionate benefit to KEY employees. Testing must be done on an annual basis unless the plan qualifies as a safe harbor 401(k).
Rank the following bonds in order of shortest to longest duration. ABC 8s of 2035. DEF 9s of 2034. GHI 5s of 2036. JKL zeros of 2033. A) III, I, II, IV. B) IV, II, I, III. C) II, I, III, IV. D) IV, III, I, II.
C
Form ADV-E A) may be used to amend any information included in an investment adviser's registration statement (e.g., business address) B) is only used by those advisers not subject to an annual surprise examination C) must be completed by investment advisers that have custody of client funds or securities D) is used to claim an exemption from registration
C
Without prior authorization from the client, an investment adviser could release information relating to the client's account: in order to comply with the brochure delivery requirements of the USA. 1. when requested by the IRS. 2. for the purpose of furnishing information for a statistical survey 3.being compiled by the Administrator. 4.upon the receipt of a subpoena from a court of competent jurisdiction. A) II and III. B) I, II, III, and IV. C) I, III, and IV. D) II and IV.
C
Many corporations make available dividend reinvestment plans for their shareholders. Among the benefits of using these plans are all of these EXCEPT: A) the ability to add additional funds to the dividend. B) reduced or eliminated commissions. C) avoiding taxation until the shares are sold. D) discounts from the current market price.
C *Page 400 LEM: Shareholders automatically purchase additional shares DIRECTLY from the issuer. -Paying LITTLE OR NO commission and -often a discount from market price. -Most companies permit investors in these plans to add money along with reinvested dividends. -They are TAXED in the year of receipt as with any cash dividend.
Under the Uniform Securities Act, a private placement is considered an exempt transaction if: A) no payment is made with any purchase. B) the sale is unsolicited. C) the number of noninstitutional offers is limited to a maximum of 10 in any 12-month period. D) the security is rated in the top three grades by a recognized rating agency.
C *Private placements involve the sale of nonexempt securities to investors without the need for registration. There is no numerical limit to the number of offers that may be made to institutional buyers. However, offers to noninstitutional buyers are limited to a maximum of 10 in any 12-month period. Rights offerings are only exempt if there is no compensation, and only unsolicited orders are exempt transactions. *Page 70 LEM: EXEMPT Transactions called a PRIVATE PLACEMENT directed or OFFERED at no more than 10 persons during the previous 12 consecutive months. (FEDERAL law restricts # of purchasers, U.S.A. restricts # on OFFERS).
Popular strategies used by bond investors to mitigate the effects of changes in interest rates would include any of the following EXCEPT A) the barbell strategy B) the laddering strategy C) the strategy of lengthening the maturities of their holdings D) the bullet strategy
C
Although there are others that may be used in construction of a portfolio, the primary asset classes used in asset class allocation include: bonds. cash. commodities. stock. A) I, II, and IV. B) II and III. C) I and IV. D) I, II, III, and IV.
A
An investment adviser representative's business card containing which of the following designations would be in violation of the NASAA policy on advertising? A) IAR B) CLU® C) MBA D) CFP®
A
In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must offer plan participants at least three different investment alternatives ensure that plan participants are insulated from control over their portfolios allow plan participants to change their investment options no less frequently than quarterly permit immediate vesting of employer contributions. A) I and III B) I and IV C) II and III D) II and IV
A
As defined in the Uniform Securities Act, in which of the following cases would an investment adviser NOT be considered to be maintaining custody? A) The investment adviser keeps client securities in street name B) The investment adviser has direct control over the client's securities C) The investment adviser receives a check made payable to the IA and returns it within 3 business days D) The investment adviser has indirect control over the client's securities
C
Both the Investment Advisers Act of 1940 and SEC Release IA-1092 specifically exclude from the definition of "investment adviser" certain persons who provide investment advice solely incidental to the practice of their profession. Which of the following would NOT by definition qualify for this exclusion? 1. An accountant who provides high tax bracket clients with a useful chart showing them how to compute the tax equivalent yield for municipal bonds 2. A divorce attorney who, after obtaining settlements for clients, provides them with a list of suggested investment alternatives encouraging them to be prudent with their newfound wealth 3. A university professor who provides investment advice for a substantial fee to fewer than 15 clients during any consecutive 12-month period, none of whom is an investment company 4. An economist who consults with very large corporate employee benefit plans on how to best invest their funds A) I and II B) I and IV C) II and III D) III and IV
D *L.A.T.E. *Lawyers, accountants, engineers, teachers, and broker-dealers whose advice is incidental to their profession and who do not charge a separate fee for investment-related advice are excluded from the definition under the Investment Advisers Act of 1940.
One of your customers passed away recently. The customer had an IRA with you and had his sister listed as the beneficiary. Other assets included the home and furnishings and a brokerage account at another firm. The titling on that brokerage account was the customer and his son, JTWROS. The customer's will specified that 100% of his assets should pass to his daughter. Based on this information, the estate settlement will have A) the daughter getting the home and furnishings and the brokerage account, with the sister getting the IRA. B) the daughter getting the home and furnishings, the son the brokerage account, and the sister the IRA. C) the daughter receiving everything as stated in the will. D) the daughter getting the home and furnishings and the IRA, with the son getting the brokerage account.
B *A will can designate the disposition of an estate's assets only to the extent that they are not previously assigned. A JTWROS account specifies that the assets go to the survivor and that overrules any will. An IRA (or any qualified retirement plan) always has a designated beneficiary and that supersedes any will. Anything other than the assets in the JTWROS account or the IRA will go to the daughter.
Serendipity Asset Planning (SAP) is a covered investment adviser doing business in 48 states. Alicia Adams is an IAR with SAP and splits her time between an office in state X and state Z. Adams has retail clients as follows: 10 clients in state W 30 clients in state X 65 clients in state Y 4 clients in state Z Adams would have to register as an IAR in A) states X and Y. B) states W, X, and Y. C) states X and Z. D) states W and Z.
C *If the individual represents a covered investment adviser, there is a special exemption under section 203A of the 1940 act. Those performing as IARs for federal covered advisers, IAR registration is ONLY required in those states where that individual has a place of business. *If the individual represents a STATE-IA, there is a DE MINIMIS exemption. Same as IA, the IAR must NOT maintain a place of business in that state AND during the preceding 12-month period has NO MORE than five retail clients. -Pg: 39 LEM
Registration with the state as an investment adviser would be required for a person with an office in this state who: A) manages the portfolio of the KPF Balanced Fund, a registered open-end investment company with $22 million in net assets. B) only gives advice on securities issued by or guaranteed by the government of the United States. C) manages $13 million in assets for 4 clients. D) serves as a pension consultant to the XYZ Employees Retirement Plan, covering 1,200 employees with total assets of $278 million.
C *Under the Dodd-Frank Bill, investment advisers with less than $100 million in assets under management must register with the states. If the adviser manages a registered investment company, the adviser must be federal covered. If the person serves as a pension consultant with $200 million or more in AUM, the person has the option of registering with the SEC. A person whose sole advice deals with U.S. government securities is excluded from the federal definition of investment adviser and, therefore, under the NSMIA, is considered a federal covered adviser.
A state-registered investment adviser organized as a corporation is required to preserve a copy of its articles of incorporation A) for 3 years after the end of the fiscal year in which the most recent entry was made. B) easily accessible for 2 years in the firm's principal office. C) for 5 years after the end of the fiscal year in which the most recent entry was made. D) for 3 years after the termination of the enterprise.
D *NASAA's Model Rule on record keeping requires partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, to be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.
A client of yours purchased a periodic payment variable annuity 10 years ago. Each month, the client invested $200 and then died suddenly when the account contained 1,355 accumulation units with a value of $16.23 each. Which of the following statements is CORRECT? 1. The beneficiary will receive 21,991.65. 2. The beneficiary will receive $24,000. 3. There is no income tax liability on the part of the beneficiary. 4. If the beneficiary is younger than 59½, there is a 10% tax penalty on any distribution. A) I and III. B) II and IV. C) I and IV. D) II and III
C *1,355 x $16.23 = $21,991.65 *Pg 282 LEM: Money deposited into a VARIABLE ANNUITY is deposited into one or more subaccounts of the company's separate account. *Payouts may vary considerably because an annuity's net worth fluctuates with the value of the subaccoutns. *If an annuity contract has a death-benefit provision, the owner can designate a beneficiary to inherit the remaining annuity payments after death. The earnings on an inherited annuity are taxable.
Which of the following actions are prohibited under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) Determining the price and time of execution of customer orders without written discretionary authority. B) Notifying the Administrator that the adviser intends to maintain custody of customer securities. C) Depositing securities in lieu of a required surety bond. D) Claiming that advisory fees are negotiable, but maintaining a fixed fee schedule.
D A- Time and price discretion can be oral. (Day only) B- IA's must notify the ADMIN if they intend to maintain custody of securities. C- Page 57 LEM: In lieu of a surety bond, the ADMIN will accept deposits of cash or securities.
Both state and federal law will permit an investment adviser to engage in agency cross transactions provided the advisory client executes a written consent prospectively authorizing the investment adviser to effect agency cross transactions for such clients and the adviser discloses all of the following except A) on at least a biennial basis, the adviser will furnish a statement or summary of the account identifying the total number of such transactions and the total amount of all remuneration from these transactions. B) the adviser will be receiving commissions from both sides of the trade. C) no transaction is effected in which the same investment adviser or an investment adviser and any person controlling, controlled by, or under common control with that investment adviser recommended the transaction to both any seller and any purchaser. D) there is a potential conflict of interest because of the division of loyalties to both sides.
A- ANNUAL basis the IS will furnish a statement of summary, not "beinnial". *B -the adviser will be receiving commissions from both sides of the trade D-there is a potential conflict of interest b/c of the division of loyalties to both sides -Aon at least an annual basis, the adviser will furnish a statement or summary of the account identifying the total number of such transactions and the total amount of all remuneration from these transactions -in a conspicuous manner, indicates that this arrangement may be terminated at any time -Cno transaction is effect in which the same investment adviser or an investment adviser and any person controlling, controlled by, or under common control with that investment adviser recommended the transaction to both any seller and any purchaser
NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents states that it is unethical for an agent registered with a broker-dealer to 1.personally lend money to the broker-dealer firm with which the agent is registered. 2.personally lend money to a bank that is a client of the broker-dealer firm with which the agent is registered. 3.split commissions with an agent registered with a broker-dealer that is under common control. 4.borrow money from a mortgage broker who is a client of the agent. A) I and IV. B) II and III. C) II and IV. D) I and III.
C *Borrowing and lending is generally permitted when the lender is in the business of lending money and when the borrower borrows from someone in the business of lending money. Banks are the most common lenders, but broker-dealers are also in that business. When a client has a margin account, the broker-dealer is lending money to that customer to purchase additional securities. The fact that the bank branch manager is a client of the agent who is borrowing money does not change this situation as the loan is from the bank, not the manager. Loans are also permitted between affiliates. *Page 166 LEM: When it comes to borrowing or lending money, you cannot borrow from any client (including your mother), unless that client is a lending institution such as a bank or credit union. BE CAREFUL, mortgage brokers are NOT in the business of lending money. *IAR: you can NEVER lend money to any client unless the client has come kind of affiliation with your firm.
