Series 66 study

Different types of management styles?

-Strategic -Rebalancing -Tactical -Buy and hold

Transfer on Death (TOD)

- Allows different percentages - Avoids probate

USA IA taking custody of client securities and funds should do what:

- Notify the Administrator - Segregate and put funds in safekeeping - Notify client where funds are located - Send a client statement every Quarter

Definition of Sharpe Ratio:

Sharpe ratios measure the return per unit of risk taken. Risk-free return - actual return / Standard Deviation

If a person leaves, there current company and takes a new job what can they do with a 401k plan?

Stay in the plan Roll over into new employers 401(k) plan Roll it over to a traditional IRA

If an agent is placing a trade for his own account and gets a call from a client to sell the same trade who must be traded first?

The Clients- Agents always place clients' interests ahead of their own

Form 13F

$100 million or more of 13 (f) securities file form 13f - 45 days end of each quarter Filed for Investment companies - Open end, Closed end, ETF's etc...

Who are the only legal individuals who can share in the profits and losses in the accounts shared with clients under the USA?

Agents

What would cause a mutual fund's portfolio manager to have poor investment results?

Net Redemptions Poor results will frequently lead to investors liquidating their holdings in a greater amount than new investors coming in. This leads to net redemptions; more money going out than coming in. -No mutual fund can ever sell below NAV -The management contract is renewed Annually.

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) removes the requirement for the plan to provide employees with quarterly reports. B) removes the requirement for "top-heavy" testing. C) shifts the responsibility for account performance to the employee. D) might find the administrator to be shirking his fiduciary responsibility.

C) Shifts the responsibility for account performance to the employee Under Section 404(c) of ERISA, when the employees have adequate control of their own investments and sufficient alternatives, the responsibility for account performance is shifted from the administrator to the employee.

All of these are reasoning a corporation might choose to establish a nonqualified plan rather than a qualified plan except A) the corporation can exclude rank-and-file employees from a nonqualified plan. B) a nonqualified plan has more design flexibility than a qualified plan. C)the employer can take a tax deduction at the time the contribution is made to the plan. D)a nonqualified plan typically has lower administrative costs.

C)the employer can take a tax deduction at the time the contribution is made to the plan. Employers cannot take a tax deduction until the assets are received by the executive as income after the deferral period.

When must the margin agreement be signed?

Can be obtained after first trade in the account, not prior.

How do you determine the appropriate life insurance coverage to meet a client's goals and objectives?

Capital Needs Analysis - Meet life insurance needs to meet clients' goals and objectives

What does the debt to equity ratio measure?

Capitalization..........................................

Difference in customer vs consumer:

Customer: ongoing relationship Consumer: A one Shot deal

Objective vs. Constraints:

Objectives: route you wish to take (Obstacles) Constraints: might keep you from getting there

Who is automatically registered as an IAR When an IA registers in a new state?

Officers, Partners, and Directors of the firm who are functioning as IARS These members are already IARs in at least one state

State investment advisers must register when?

De minimis - more than 5 clients in state Snowbird - Outside state for longer than 30 days

UPIA: Uniform Prudent Investor Act

Exercise reasonable care, skill, and caution

Limits for donating to campaigns?

Max of $150 no vote Max of $350 can vote

ESG (Environmental, Social, and Governance)

Represents attitudes toward a specific industry etc...

What appears on a cash flow statement?

Salary taxes interest on savings account -Assets do not "Flow" salary and interest flow in and taxes flow out.

How does a portfolio manager reduce inflation risk?

Tangible assets: -Real Estate -Precious Metals - Other commodities

Venture Capital Investment

-Immature/new firm -Investor risk all capital and could lose it all -"Negative cash flow firm" -Risky

Private Placement exemptions under the USA?

-Limited to 10 offers for 12 months non institutional purchasers -Purchasing for investment only

Exempt securities under USA

-Negotiable CD with $100,000 denomination -Insurance companies authorized to sell policies in particular state - Debt Securities issued by UK - Commercial paper with less than 270 days

Modern Portfolio Theory (MPT)

-Risk aversion... Equal risk: Go with highest expected return "Risk to Reward"

Index annuities have what terms in contract?

-Settlement options -Participation rate -Cap Rate

An analyst wishing to measure the sensitivity of a debt security when faced with changes in interest rates will compute the security's A) duration B) yield to maturity C)nominal yield D)sensitivity ratio

A) Duration Duration is the term used to measure the sensitivity of a debt security to changes in interest rates. The longer the duration, the greater the sensitivity and vice versa.

One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) verify that the investment adviser still qualifies for SEC registration B) ensure that full disclosure has been made in the adviser's brochure C) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian D) provide updated information on those associated persons who are in charge of giving investment advice

A) Verify that the investment adviser still qualifies for SEC registration In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information.

Safe Harbor Section 28(e) rule:

Must benefit the Client, not the adviser.

All of the following are considered to be equity securities EXCEPT A) equity-linked notes B) unit investment trusts C) exchange-traded funds D) warrants

A) Equity Linked Notes ELNS, AND ETNS

Which of the following items does NOT fall within the Section 28(e) safe harbor? A) Software used to simplify the investment adviser's preparation of its tax returns B) Software used to analyze client's portfolios C) Research reports prepared by a third party other than the broker-dealer D) Proprietary research reports analyzing the performance of a specific industry

A) Software used to simplify the Investment Adviser's preparation of its tax returns Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyze securities is also permissible since that benefits the client. Tax preparation software benefits the adviser, but not the client.

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 trendlines C) the support and resistance levels D) the short interest

A) The 100-day moving average A major benefit of charting moving averages is that it takes short-term market fluctuations and smooths them out.

Averaging techniques would include all of the following EXCEPT A) dollar cost averaging B) maintaining a constant ratio plan C)maintaining a DRIP with a stock listed on the NYSE D)reinvesting all distributions from an open-end investment management company

B) Maintaining a constant ratio plan Averaging techniques involve some form of regular investing. a constant ratio plan involves buying and selling different asset classes to keep the ratio between them at a static percentage.

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)3.33% B)5% C)2% D).33%

a) 3.33% An investor's total return percentage is calculated by adding together income plus capital gain (or loss) and dividing that total by the initial cost. The math looks like this: three quarterly dividends of $1 each is $300. Selling the stock at $59 per share represents a loss of $1 per share or $100. The net positive return is $200 which, when divided by the original cost of $60 per share, results in a total return of 3.33% Even though the CPI is given, the question is not asking for inflation adjusted or real rate of return; it is just another example of a question containing unnecessary information.

How often do Investment advisors have to provide a statement or summary of the account identifying the total number of transactions and remuneration from these transactions?

- Annually

The (3) biggest asset classes used in construction of a portfolio?

-Bonds -Cash -Stock

The GHIJ Corporation has a 3% convertible debenture outstanding with a conversion price of $40. The bond's current market price is 126. The most probable reason for this is A) the current market price of the GHIJ common stock is approximately $50 per share B) interest rates have risen since the debenture was issued C)the current market price of the GHIJ common stock is approximately $35 per share D)GHIJ's earnings have risen since the debenture was issued

$1000 / $40 = 25 $1,260 / 25 = $50.4 per share A) the current market price of the GHIJ common stock is approximately $50 per share

Non Financial Considerations

- Age - Attitudes - values - experience with investments

When a variable annuity is annuitized A) the number of annuity units redeemed each payment period remains constant B) the number of accumulation units redeemed each payment period varies based upon the performance of the separate account C)the number of annuity units redeemed each payment period varies based upon the performance of the separate account D)the number of accumulation units redeemed each payment period remains constant

A) The number of annuity units redeemed each payment period remains constant Upon annuitization, the accumulation units are exchanged for annuity units. Based upon actuarial computations, the same number of annuity units is redeemed each payment period (usually monthly). The value of each unit is what varies.

Among the major stock averages and indexes, only one is price weighted. That would be A) the Dow Jones Industrial Average. B) the Wilshire 5000 Total Market Index. C) the Russell 2000 Index. D) the Standard and Poor's 500 Composite Index.

A) The Dow Jones Industrial Average

A state-registered investment adviser organized as a corporation is required to preserve a copy of its articles of incorporation A) easily accessible for 2 years in the firm's principal office. B) for 3 years after the termination of the enterprise. 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 end of the fiscal year in which the most recent entry was made.

B) For 3 years after the termination of the enterprise 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.

Ways in which a Section 529 plan differs from a Coverdell ESA include I. tax-free distributions when the funds are used for qualifying educational expenses. II. higher contribution limits III. no earnings limitations IV. contributions that may be made by someone other than a parent or legal guardian A) II and IV B) I and II C) I and IV D) II and III

D) II AND III -Higher contribution Limits -No Earning Limitations Contributions to an ESA are limited to $2,000 per beneficiary per year, while the 529 limit is set by the plan sponsor, sometimes as high as $300,000. Unlike the ESA where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 plans and Coverdell ESAs enjoy tax-free distributions, and plans may be established by almost anyone.

What is the only thing that IA's can do in client account as far as fees and sharing for profit?

*IA's can charge performance-based fees to accredited investors only*

In preparing a research report, an investment adviser reviewing the returns on a specific stock over the past 10 years, notices that the median is lower than the mean. The most probable cause for this is A)the distribution of the returns is skewed to the left B)a majority of the returns are less than the mean C)a majority of the returns are greater than the mean D)the returns are symmetrical

B) A majority of the returns are less than the mean A few high returns, some might refer to them as outliers, will skew the distribution to the right giving us a higher mean than median. When the returns are symmetrical, the mean and median are the same (or very, very close).

An investment adviser with custody of customer funds and securities discovers that its net worth has dropped below the required minimum under the rules of the State Administrator. Under NASAA rules, the adviser must I. notify the administrator by the close of business the day after discovery II. file a report of its financial condition with the Administrator no later than the close of business 1 day after notification including a statement as to the number of client accounts III. cease doing business IV. notify all clients and make plans for the return of the funds and securities A) I, II, III, and IV B) I, II, and IV C)I and II D)I, II, and III

C) I AND II This rule requires notification to the Administrator no later than the first business day after discovery. This notice is followed up with a complete report of the adviser's financial condition within 1 additional day. There is no requirement to discontinue business unless the state regulator orders a closure. It is required that the regulator be kept up to date on what is done to correct the problem. If the resolution is not acceptable, this may lead to closure of the business and notification to the existing clients.

Which of the following measures the risk-reward trade-off? A) Correlation. B) Standard deviation. C)Sharpe ratio. D)Alpha.

C) Sharpe Ratio The Sharpe ratio measures the return per unit of risk taken. It is computed by subtracting the risk-free return from the investment's actual return and dividing that figure by the security's standard deviation. The higher the Sharpe ratio is, the better the returns are per unit of risk taken.

An investor who resides in New York reads a newspaper ad for advisory services in a newspaper published in New Jersey. More than 80% of the newspaper's circulation is in the state of New York. According to the Uniform Securities Act, an offer has been made in A) New Jersey and New York B) New Jersey C) New York D) neither New Jersey nor New York

D) Neither New jersey nor New York Offer is not made when newspaper is circulated but not published in the state or inside the state with more than 2/3 of its circulation outside.

Which of the following could NOT be an open-end fund? A) PQR Fund ask price 17-NAV 17 B) RST Fund ask price 45.25-NAV 44.80 C)LMN Fund ask price 7.75-NAV 7.50 D)WXY Fund ask price 10.50-NAV 11.25

D) WXY Fund ask price 10.50 - NAV 11.25 Although closed-end fund shares may have an ask price below NAV, this is not true of an open-end fund. The ask price (POP) of an open-end fund is either the NAV (a no-load fund) or the NAV plus a sales charge.

What must be disclosed in an exchange for a VLI Variable life insurance policy ?

Exchange for a form of permanent life insurance (whole life) etc... for a period of 2 years same company. With no additional evidence of insurability.

The term that best describes a person entrusted with the duty of acting for the benefit of another party is:

Fiduciary A person entrusted with the duty of acting for the benefit of another party is a fiduciary and must follow the standards of fiduciary duty appropriate to the nature of the relationship. Investment advisers are generally held to a fiduciary standard, but there are many fiduciaries who are not IAs. The best example is a trustee (not a trustor—that is the person who establishes the trust and appoints the trustee to handle the assets).

Dividend Discount Model

Find theoretical price of a common stock Take anticipated future dividends to be paid by the company and discounts them to Present Value. Expected dividend rate / Required rate of return for equity investors - dividend growth rate For example, assume a company is expected to pay a $1 dividend next year. if the required rate of return is 8% and expected dividend growth rate is 3%, then the projected price of the common stock is $1 dividend / 8% - 3% = $1 / .05 = $20

Soft Dollar provisions - Directed Transactions

Must benefit the Client and not the IA.

L.A.T.E. exemptions of Investment Adviser

lawyers, accountants, teachers, and engineers.

Form 13D

10 days 5% of voting

Many corporations make available dividend reinvestment plans for their shareholders. Among the benefits of using these plans are all of these EXCEPT: A) discounts from the current market price. B) the ability to add additional funds to the dividend. C)avoiding taxation until the shares are sold. D)reduced or eliminated commissions.

C) Avoiding taxation until the shares are sold. DRIPs, like any other plan involving dividend reinvestment, do not avoid current taxation. In most cases, shares are available at a slight discount from the current market and/or reduced or eliminated commissions. Many plans allow investors to add thousands of dollars to the reinvested dividend, taking advantage of the previous two benefits.

Retirement planning: most important

- *How much money is needed at end* - Investment Objectives - Current savings and investments -Anticipated years until retirement

The Uniform Securities Act prohibits an investment: A) adviser from disclosing the identity and investments of clients when required by law without the client's written consent. B) advisory subsidiary of a broker-dealer from charging performance-based fees to all retail clients without reference to the assets placed with the broker-dealer or the client's net worth. C)adviser from providing, with appropriate disclosure of the source, a securities recommendation prepared by someone other than the adviser. D)adviser from loaning money to an affiliate of the adviser.

B) advisory subsidiary of a broker-dealer from charging performance-based fees to all retail clients without reference to the assets placed with the broker-dealer or the client's net worth. The USA prohibits an investment advisor from charging performance-based fees unless the client qualifies for an exception based on either the amount of AUM with the adviser or the client's net worth. It would be a violation of the act to charge performance-based fees to all retail clients unless they met those qualifications.

Delta Advisers is registered in Alabama, Mississippi, and Louisiana. Billy Joe works for Delta Advisers rendering investment advice to individual clients. He works out of Delta's Jackson, MS office and has 3 clients in Mississippi, 6 clients in Alabama and 4 in Louisiana. Billy's friend, Bobby Ray, works for Biloxi Investments, a federal covered adviser with offices in several cities in Mississippi. Bobby Ray works out of the Tupelo, MS office and has 45 retail clients in Tennessee, 4 in Georgia, and 6 in Alabama. With regards to registration as an IAR, which of the following statements is TRUE? A)Billy Joe must register in AL and Bobby Ray must register in MS, TN, and AL. B)Billy Joe must register in MS and AL and Bobby Ray must register in MS, TN, and AL. C)Billy Joe must register in MS and AL and Bobby Ray must register in MS. D)Billy Joe and Bobby Ray must register in MS only.

C) Billy joe must register in MS and AL and Bobby Ray must register in MS. Working for a state registered investment adviser, Billy Joe must register in the state in which he maintains a place of business (MS) and any other state in which his clients exceed the de minimis limit of 5 (AL in this case). Working for a federal covered investment adviser, Bobby Ray needs to only register in those states in which he maintains a place of business, regardless of the number of clients. That means he is only required to register in MS.

An investment adviser executes a transaction for a client who has a contract for advisory services. The adviser also represents the person who is the contra party in the sale and is paid a commission. Which of the following best describes this transaction? A riskless and simultaneous transaction. An agency cross transaction. Not permitted under any circumstances. Permitted with prior written disclosure and consent. A)I and III. B)II and III. C)II and IV. D)I and IV.

C) II AND IV This is an example of an agency cross transaction in which the investment adviser represents both parties in a trade. This transaction is permissible if the adviser did not recommend the trade to both parties and the client received written disclosure prior to the first cross and gave consent. An IA can only recommend to one party at a time Agent or Principal Transactions. Never both

Parker Abernathy is a partner at Abernathy and Wilkins Advisers (AWA), an investment advisory firm registered in three states. Parker's primary responsibility is supervising the firm's investment adviser representatives. On a personal level, Parker has no advisory clients and never has dealings with the public. Under the Uniform Securities Act, Parker A) must register as an investment adviser principal due to having supervisory responsibilities. B) must register as an investment adviser. C) must register as an investment adviser representative. D) is exempt from registration because there are no dealings with the public.

C) Must register as an investment Adviser Representative On the list of those who meet the definition of investment adviser representative are those individuals who supervise IARs. Unlike FINRA, there is no principal designation and AWA is the investment adviser, not Parker.

How do you determine a company's liquidity?

-Acid-test -current ratio -Quick Asset ratio The quick asset ratio, also known as the acid-test ratio, is the most stringent test of a company's liquidity. Current ratio is probably the most commonly used, but the debt-to-equity ratio deals with capitalization and is not a liquidity test.

While enjoying some après-ski after a long day vacationing out of state on the slopes, Gervaise, an investment adviser representative with a federal covered investment adviser, spots several existing advisory customers. They invite Gervaise to join them for some spirits, and the invitation is warmly accepted. After about an hour, some of these customers and their friends ask Gervaise if it would be possible to have a lesson on what specific stocks should be considered under current market conditions. To make this presentation, Gervaise A) does not have to be registered in the state as long as the only participants are these existing customers. B) must be registered in this state because the advice being given is specific rather than general. C)must not receive any compensation, direct or indirect. D)does not have to be registered in the state because, as a representative of a covered adviser, registration is required only in those states where a place of business is maintained.

A) Does not have to register as long as the only participants are the existing clients IARs representing federal covered investment advisers register only in those states where they, the IARs, have a place of business. Being on vacation out of state indicates that Gervaise does not maintain a place of business there. When that is the case, an IAR can do business (and giving this lesson is doing business) with existing customers without the need to register there. As their IAR, Gervaise can certainly receive compensation whether direct or in the form of the beverage of choice. When dealing with existing customers, it is expected that an IAR will give advice about specific securities. Things change dramatically if someone other than an existing customer attends.

To protect the benefits of plan participants and beneficiaries, ERISA prescribes standards for the execution of the plan fiduciary's duties and responsibilities. Which of the following CORRECTLY describes those standards? I. The standard of prudence applies to responsibilities relating to the investment of the plan assets but not to the responsibilities relating to the administration and management of the plan. II. Participants must be offered a broad range of investment options. III. The rules prohibit transactions between the plan and persons who have conflicts of interest with the plan even though a particular transaction may benefit the plan participants. IV. ERISA requires the plan fiduciaries to adopt and adhere to an investment policy that must be communicated in writing to all participants. A) II and III. B) III and IV. C)I and IV. D)I and II.

A) II AND III The fiduciary standards of ERISA require that plan participants be offered a broad range of investment options in order to obtain the benefit of broad diversification. Under no circumstance, even when benefiting plan participants, are fiduciaries permitted to engage in prohibited transactions such as lending money to the plan. The standards of prudence apply to the administration of the plan, as well as to the investment decisions, and the investment policy, although a good thing to have, is not required under ERISA.

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 receiving instructions from the executor of Mr. Fawcett's account 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) Mr. Fawcett's share will be transferred to his sister and an individual account will be opened in her name D) 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. With an account opened as tenancy in common (TIC), in the event that one party dies, their portion of the assets will be transferred to an estate account and distributed according to will; the surviving party's assets remain undistributed and will be transferred into an individual account.

Value investing is one of the popular portfolio management styles. Those who adhere to the value style to select stocks would be most likely to spend most of their effort A)seeking companies that are in the forefront of new technology B) analyzing the issuer's financial statements C)analyzing both micro and macroeconomic trends. D)charting the stock's market price using moving averages

B) Analyzing the Issuers financial statements Looking for "value- undervalued" Bottom of their 52-week For example, the current market price is near or less than book value per share. The only way to find that out is by looking at the company's balance sheet. Higher Dividends- that is why the balance sheet may be short on earnings

An investment adviser is required to disclose any financial condition that is reasonably likely to impair its ability to meet contractual commitments to their clients in any of the following cases EXCEPT when the adviser A) requires substantial prepayment of fees B) charges performance-based fees to qualified clients C)has discretionary authority D)maintains custody

B) Charges performance-based fees to qualified clients In an effort to protect customers, investment advisers must give prompt notice to their regulator in the event of a financial impairment that could cause the adviser to be unable to meet contractual obligations to clients when the adviser has discretion, maintains custody, or receives substantial prepayments of fees ($500, 6 or months in advance for state; $1,200, 6 or more months in advance for federal). This rule does not apply if the only condition existing is performance-based compensation.

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) disclosure to the client and consent prior to completion of the transaction. C)consent of and the disclosure to the client prior to execution of the transaction. D)consent of the client.

B) Disclosure to the client and consent prior to completion of the transaction 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.

Which of the following does NOT constitute market manipulation under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) Deliberately responding to a request for a quote with inaccurate information. B) Excessive trading in a client's account for the sole benefit of increasing commission income. C) Engaging in transactions that would cause an appearance of increased market activity when no beneficial change of ownership actually occurs. D) Entering numerous buy orders at the close of the trading day to prevent a stock from closing lower.

B) Excessive trading in a client's account for the sole benefit of increasing commission income. Excessive trading for the purpose of increasing commissions is the prohibited practice known as churning, but it is not a form of market manipulation. Intentionally providing inaccurate quotes, creating fictitious volume, and entering orders to prevent a stock from moving up or down are forms of market manipulation.

Broker-dealers and their agents can have their licenses suspended or revoked for engaging in business practices in violation of NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. Which of the following activities would NASAA consider an unethical or prohibited practice? I. Hypothecating a customer's securities in a margin account without written consent from the customer II. Executing a margin transaction in new customer accounts before receiving written margin agreements from the customers III. Charging unreasonable fees for custody and securities transfer services A)I and II B)I and III C)I, II, and III D)II and III

B) I AND III I. Hypothecating a customer's securities in a margin account without written consent from the customer III. Charging unreasonable fees for custody and securities transfer services A firm would be in violation of NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents and its registration would be subject to suspension or revocation if it engaged in misuse of customer funds, such as hypothecating securities without consent. Charging unreasonable fees for services is also a prohibited practice, but the signed margin agreements only need be obtained promptly after the first trade in the account, not prior.

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

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

KAPCO has an outstanding 6% $100 par preferred stock issue as well as a $1 par common stock. If KAPCO's last reported earnings per share for the year were $3 and the market price of the preferred stock is $120 and the common is $45, it would be correct to state that A) the price-to-earnings ratio is 40:1 B) the preferred stock is selling at a price above its book value C)the price-to-earnings ratio is 15:1 D)the current yield on the common stock is greater than that of the preferred

C) The price - to - earnings ratio is 15:1 The price-to-earnings ratio (PE) is only computed on the common stock, never the preferred. Although we do know the current yield on the preferred stock (we assume they are paying the dividend) is 5%, we have no idea what the yield is on the common stock because no indication is given for the dividend, if any. The preferred stock is selling above par value, not book value (and book value is only computed for common stock). How did we know the current yield on the 6% $100 par preferred stock is 5%? The 6% and $100 par tells us the annual dividend is $6. With a current market price of $120, the current yield is $6 divided by $120 or 5%.

An individual has just received an inheritance of $15,000 and has the goals of preservation of capital and income. The client is in a low tax bracket. Which of the following would be the most suitable choice? A) Insured municipal bonds B) Public utility stocks C)Newly issued U.S. Treasury bonds D)Bank-insured CDs

D) Bank-insured CDs When preservation of capital is a goal and one of the choices is an insured bank CD, pick it. When the question refers to a low tax bracket, municipal bonds will never be the correct choice. Newly issued Treasury bonds have maturities of at least 10 years. During that time, changes to interest rates in the market place would cause the market price of those bonds to fluctuate. Although the public utilities will offer income frequently higher than the CD, there are no guarantees the principal will remain intact. (Some public utilities have gone bankrupt.)

As the number of stocks in a portfolio increases, the portfolio's systematic risk A) increases at a decreasing rate B) decreases at a decreasing rate C)decreases at an increasing rate D)can increase or decrease depending on the beta of the added stocks

D) Can increase or decrease depending on the beta of the added stocks When you increase the number of stocks in a portfolio, unsystematic risk will decrease at a decreasing rate. However, the portfolios systematic risk can be increased by adding higher-beta stocks or decreased by adding lower-beta stocks.

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 with the most stringent requirements. B) must meet the financial requirements of the state in which the investment adviser's principal office is located. C) must meet the financial requirements of all of the states in which he does business. D) has no financial requirements with regard to a minimum net worth.

D) Has no financial requirements with regard to a minimum net worth. There are no financial requirements placed on IARs, only the IA. Investment advisers must meet the financial requirements of the state where the firm's principal office is located.

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

D) I AND III I. Offer plan participants at least three different investment alternatives III. Allow plan participants to change their investment options no less frequently than quarterly The safe harbor requirements of ERISA Section 404(c) relieve the trustee of a 401(k) plan of liability if the plan participants have the ability to select from at least three different investments and are allowed to make selection changes no less frequently than quarterly. Immediate vesting is required in a safe harbor 401(k), which is one that is safe from top-heavy testing.

An investment adviser representative's business card containing which of the following designations would be in violation of the NASAA policy on advertising? A) CFP® B) MBA C)CLU® D)IAR

D) IAR The term investment adviser representative may appear, but not the abbreviation IAR. As long as certain academic designations have been earned, such as MBA or JD, they may be used. Certain professional designations (if earned) may also be used. The LEM has a list of the most common ones.

A broker-dealer registered in all 50 states, using both radio and television advertisements to promote its services, directs prospects to a toll-free number that will connect them with a registered agent. An existing customer living in New York calls and is connected to an agent in Cleveland who is registered in Ohio, Michigan, and Pennsylvania. The client asks the agent to recommend something that would fit the existing account's stated investment objectives. Under the Uniform Securities Act, the agent: A) can make a recommendation because the call was received in Ohio, a state in which the agent is registered. B) can only recommend securities that are exempt from registration. C)can make a recommendation because the call was made on an unsolicited basis from an existing client. D)should transfer the call to an agent who is registered in New York.

D) Should transfer the call to an agent who is registered in New York Agents must be registered in the state of residence of the client.

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 IRA, with the son getting the brokerage account. B) the daughter getting the home and furnishings and the brokerage account, with the sister getting the IRA. C)the daughter receiving everything as stated in the will. D)the daughter getting the home and furnishings, the son the brokerage account, and the sister the IRA.

D) The daughter getting the home and furnishings, the son the brokerage account, and the sister the IRA. 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.

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) whichever person has been designated by the group as its spokesman C) each of the four individuals D) each of the individuals, and if married, their spouses

c) Each of the four individuals On any joint account, it is required to obtain suitability information on all of the account owners.

Walter and Wanda Willingham are new client's. While reviewing their holdings, you notice an account at a local bank titled, "Walter Willingham, in Trust for Walter Willingham, Jr." The account provides that, upon Walter's death, the assets in the account will pass to his son. This is an example of A) a testamentary trust B) an account opened JTWROS C)a Totten trust D)an UTMA account

c) a TOTTEN Trust A Totten trust is an informal trust that is set up as a bank account. The person who sets up the Totten account is the trustee of the account and can name any person as the beneficiary of the account. Upon the death of the trustee, the money will immediately be made available to the named beneficiary.

Benefits of opening a (TOD) designation "Transfer on Death"

Probate is avoided...percentages of beneficiaries can be changed. You can have 40% go to one child and 50% to another 10% to the third child.

What type of retirement plan does not have RMD (Required minimum distributions) at the age of 72?

Roth IRA

Exempt transactions under USA

sales to institutions, fiduciaries, or unsolicited transactions

What is a 1035 exchange considered to be?

A 1035 exchange is available for insurance contracts, if an insured takes cash surrender of their life insurance policy or annuity, they must pay ordinary income tax on any interest they received.

An investment adviser representative with a registered investment adviser would like to structure an arrangement for a new advisory account in which profits and losses in the account will be shared with the client. Under the USA, which of the following statements is TRUE? A) An investment adviser representative may not share in the profits and losses in an advisory client's account. B) This arrangement must be agreed upon before the opening of the account. C)In order for an investment adviser representative to share in the profits and losses in an advisory account, written authorization must be given by both the client and the employing investment adviser. D)Sharing may only occur if the client has a net worth of at least $2 million or at least $1 million in assets under management with the firm.

A) An investment adviser representative may not share in the profits and losses in an advisory client's account. Sharing in accounts is permissible under certain conditions for agents of broker-dealers, but the USA specifically prohibits investment advisers and their representatives from sharing in an account with any advisory clients under any circumstances. Performance-based compensation is not considered "sharing".

Under the Uniform Securities Act, a private placement is considered an exempt transaction if: A) the number of noninstitutional offers is limited to a maximum of 10 in any 12-month period. B) the sale is unsolicited. C)the security is rated in the top three grades by a recognized rating agency. D)no payment is made with any purchase.

A) The number of noninstitutional offers is limited to a maximum of 10 in any 12-month period The transaction exemption available to private placements requires that no more than 10 offers be made in any 12-month period to noninstitutional (retail) purchasers. Whether individual or institutional, payment is made, but commissions may be paid only on institutional sales.

Which of the following would be most useful information for an IAR attempting to determine the ability of a client to have the necessary funding to purchase an investment with a $25,000 minimum entry level? A) Income tax return. B) Family balance sheet. C)Marginal tax bracket. D)Cash flow statement.

B) Family Balance Sheet Some clients invest in a lump sum, others with periodic payments and others do both. Since this is lump sum question, the balance sheet indicates the ability to commit funds at one time.

A state-registered investment advisory firm that plans to take custody of clients' securities must do which of the following? I. Receive permission from the state Administrator. II. Give notice to the state Administrator. III. Provide a copy of its balance sheet to clients. IV. Provide a custody brochure to clients. A) I and IV. B) II and III. C)I and III. D)II and IV.

B) II AND III II Give notice to the state Administrator III Provide a copy of its balance sheet to clients For a state-registered investment adviser to take custody of customer funds and securities, it must give notice to the state Administrator and provide those customers with a copy of its balance sheet. Permission from the state Administrator is not required and there is no such thing as a custody brochure.

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of I. the Securities Exchange Act of 1934 II. the Investment Company Act of 1940 the Investment Advisers Act of 1940 the Uniform Securities Act A) I, II, and III B) II and IV C) I and III D) II, III, and IV

B) II AND IV The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940. Sure, it makes good sense, but it is not required. There is nothing in the Securities Exchange Act of 1934 that relates to investment advisers, much less their contracts with clients.

If a natural person files his first application for registration as an agent in the state in late October, the agent's license will expire: A) automatically within 30 days after the withdrawal of registration if the state securities Administrator has initiated proceedings against the registrant. B) on December 31 of the same year. C)on every anniversary date of the initial registration. D)on December 31 of the following year.

B) On December 31 of the same year Regardless of the registration's effective date, an agent must renew his registration every December 31.

In most cases, the front cover of a prospectus for a registered stock offering must contain a statement to the effect that the SEC, or state if an intrastate offering, had not approved or disapproved of the security. This statement is known as A) the warning. B) the disclaimer. C) the caveat. D)the tombstone.

B) The Disclaimer

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A)DEF 6s of 2051 B)GHI 7s of 2052 C)ABC 5s of 2050 D)JKL 4s of 2022

C) ABC 5s of 2050 The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2050 through 2052, the bond with the lowest coupon will have the longest duration. The 4s of 2022 have a relatively short duration, even though their coupon is low. If there was a zero-coupon bond it would have the longest duration.

Which of the following would be included in the USA's definition of an agent? A) An individual employed by an issuer. B) A broker-dealer selling nonexempt securities to its customers. C)A research analyst for a broker-dealer who maintains a limited retail customer base. D)A sales assistant of an agent who is responsible for mailing trade confirmations to the agent's clients.

C) A research analyst for a BD who maintains a limited retail customer base Broker-dealers and sales assistants whose duties are clerical in nature are not included in the definition of an agent. An employee of an issuer would only be defined as an agent if the job function was selling the issuer's securities and neither they nor the transaction were exempt. A research analyst who maintains even a small clientele is an agent, as defined by the USA, and must register as such.

On a scheduled premium variable life insurance policy, the insured is guaranteed: A) at least 100% of the stated cash value. B) nothing. C)at least 100% of the stated death benefit. D)that premiums may be reduced due to better than projected performance in the separate account.

C) At least 100% of the stated death benefit Scheduled, or fixed, premium variable life insurance has a minimum guaranteed death benefit equal to 100% of the original face amount. There are no guarantees to the cash value and, as a fixed premium policy, no changes are made as a result of performance of the separate account.

Which of the following statements regarding estates are CORRECT? Estate taxes are due on April 15 of the first year following the death of the deceased Estate taxes are due 9 months after the date of death of the deceased Assets are valued based on their market value as of the date of death, or, alternatively, 6 months later Assets are valued based on their cost, or, alternatively, 6 months after the date of death A) I and IV B) I and III C)II and III D) II and IV

C) II AND III II Estate taxes are due 9 months after the date of death of the deceased III Assets are valued based on their market value as of the date of death, or, alternatively, 6 months later Estate taxes are due, unless an extension has been obtained, no later than 9 months after the date of death. For estate tax purposes, the executor (or administrator) may elect to use the values as of the date of death or those 6 months later (the alternative valuation date).

Different forms:

Form ADV-E is used for the independent examination of an IA who maintains custody. Form 112 is the FinCEN form for reporting large cash transactions. Form 13F exercise investment discretion over equity portfolio with a market value of $100 million or more

Earnings momentum would be important to an analyst using which of the following portfolio management styles? A) Growth B) Tactical C)Value D)Buy and hold

Growth managers - Earnings Momentum Growth managers are looking for companies whose earnings are growing at an increasing rate. That is the basic definition of earnings momentum.

An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated the position for $55 per share while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, the investor's real rate of return is closest to: A)14%. B)1%. C)4%. D)11%.

D) 11% The investor receives a total of $7 in return on this investment: $5 in capital gains and $2 in dividend income. The return on this $50 investment is 14%, and when adjusted for 3% inflation, the investment's real rate of return is 11%.

An investment adviser would be most likely to be the contra-party to a trade when acting as A) a broker. B) an agent. C)an investment counsel. D)a principal.

D) A principal The term contra-party means the other side of the trade. There are always two parties (the principals) to any transaction: the buyer and the seller. When an investment adviser is selling a security out of, or purchasing a security for its proprietary account, it is one of the principals.

A long term client contacts you to inform you that his lawyer has drafted a trust agreement and wants to name you trustee. You accept, and several months later, the beneficiary of the trust approaches you with a request for a disbursement that is contrary to the provisions of the trust document. In accordance with the provisions of the Uniform Prudent Investor Act, you should A) contact the client B) have a court of competent jurisdiction amend the trust C)follow the wishes of the beneficiary D)follow the terms of the trust

D) Follow the terms of the trust Under trust law, although there are many obligations placed on trustees, the first one is that trustees must always follow the provisions of the trust.

Compliance with delivery requirements pertaining to an adviser's brochure under the Uniform Securities Act would require an adviser to: A) furnish clients with a copy of the brochure on an annual basis even if there have been no material changes. B) furnish clients with a copy of the brochure at least 48 hours before entering into the agreement. C)file a copy of the brochure with SEC on an annual basis. D)furnish clients with a copy of the brochure within 120 days of the end of the adviser's fiscal year unless there have been no material changes.

D)furnish clients with a copy of the brochure within 120 days of the end of the adviser's fiscal year unless there have been no material changes. Whether state or federal covered, unless there have been no material changes, investment advisers must send a brochure to eligible clients within 120 days of the end of the adviser's fiscal year. Under the NASAA brochure rule, there is a requirement not found in the federal law. State-registered investment advisers are required to deliver the brochure to the client at least 48 hours before entering into an advisory contract or at the time of entering into an advisory contract if the advisory client has the right to terminate the contract without penalty within five business days after entering into the contract. Please note, the 48-hour requirement is not mandatory; it can be avoided by agreeing to offer the client the five-day termination option (5-day penalty free withdraw)

DRIPs (Dividend Reinvestment Plans)

DRIPs, like any other plan involving dividend reinvestment, offer the opportunity to have the investment compound. In most cases, shares are available at a slight discount from the current market and/or reduced or eliminated commissions. Many plans allow investors to add thousands of dollars to the reinvested dividend, taking advantage of the previous two benefits. However, there is no tax advantage, and this is merely reinvesting a cash dividend, not receiving a stock dividend.

Ownership limits with company structure types: S Corp, LLC, JTWROS, Sole Proprietorship

LLC (Limited Liability Company) - UNLIMITED MEMBERS C- Corp - Unlimited Members JTWROS - Unlimited, but rare. S CORP - 100 SHAREHOLDERS - Must be U.S. citizen SOLE PROPRIETORSHIP - 1 member

What are growth Investing portfolio management styles looking for?

Looking for earnings momentum, Most of these companies will reinvest everything back into the company looking to buy stocks at the high-end of their 52-week price range. Litte or no dividend

Open-end investment companies by Investment company act of 1940 are:

Minimum of $100,000 in assets Maximum Limited 3% voting shares of another fund No Margin

Investment companies restricted from:

More than 3% of voting stock No Margin Must have Minimum of $100,000

When are performance-based fees acceptable for Investment advisors?

Never unless - Qualified individual investors

When must you begin taking distributions of a traditional IRA and 401 (k) by?

No later than April 1 of the year following the year you turn 72.

Section 529 plans are considered municipal fund securities. They must therefore be sold by?

Official statement or offering circular, not a prospectus. Because Section 529 Plans are technically municipal fund securities, an official statement or offering circular is the document delivered, not a prospectus

When must a Federal Covered adviser register with a state?

Only in state in which he maintains a place of business regardless of number of clients.

3-day business rule

There are 3 cases that would not be custody revolving around the 3-business-day rule. They are as follows: 1. Receiving a check made payable to a 3rd party and forwarding that to the 3rd party within 3 business days 2. Receiving a check made payable to the IA and returning it within 3 business days 3. Receiving securities from a client and returning them within 3 business days If the IA has direct or indirect control over any client assets, that would be custody. Holding securities in street name is direct control. Discretion is not custody because the IA doesn't have any physical control, only the ability to make buy-and-sell decisions in the account.