Simulated exam (wrong answers)

If an investment adviser purchases a research report from the advisory arm of a nonaffiliated broker-dealer, the adviser may distribute this report to clients A) if the clients are told that the report was prepared by a third party. B) without restriction. C) provided a fee is paid to the broker-dealer for each copy distributed. D) under no circumstances.

A An adviser may use research prepared by others, provided disclosure is made that the report was prepared by a third party, not the adviser. There is an exception for certain statistical information but not research reports. LO 14.g

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

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

Given the following information: Stock Beta A2.16 B1.54 C.96 D1.28 Assume the risk-free rate of return is 2.75% and the market rate of return is 6.75%. An investor has a required rate of return of 9.5%. Which of these stocks would offer the best investment opportunity? A) Stock B B) Stock C C) Stock D D) Stock A

A Calculate the expected rate of return of each stock using CAPM and compare the result to the investor's required rate of return. Stock A: E(r) = 2.75 + (6.75 - 2.75)2.16 = 11.39%. Stock B: E(r) = 2.75 + (6.75 - 2.75)1.54 = 8.91%. Stock C: E(r) = 2.75 + (6.75 - 2.75).96 = 6.59%. Stock D: E(r) = 2.75 + (6.75 - 2.75)1.28 = 7.87%. Based on a required rate of return of 9.5%, Stock A with an expected return of 11.39% is the best available investment opportunity. LO 21.h

In which one of these business entities does the term member refer to the owners? A) Limited liability company. B) S corporation. C) Limited partnership. D) Sole proprietorship.

A Owners of LLCs are called members.

Under the Uniform Securities Act, which of the following statements regarding the employment of investment adviser representatives by a state-registered investment adviser is true? I. The investment adviser must notify the Administrator whenever an investment adviser representative is terminated. II. An investment adviser is not required to notify the Administrator when an investment adviser representative begins employment. III. The registration of an investment adviser representative is effective only as long as the individual is employed by a registered investment adviser. A) I and III B) I only C) I, II, and III D) III only

A Whenever an individual begins or ends association as an IAR with a state-registered IA, the IA must notify the Administrator. An IAR's registration is only valid while employed by a registered IA. LO 10.c

Which of the following employer-sponsored plans would never be covered by ERISA? A) 403(b) B) Deferred compensation C) Defined benefit pension D) 401(k)

B

Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment? A) Unit investment trust B) Closed-end investment company C) Hedge fund D) Open-end investment company

B A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market. LO 3.b

A client bought 100 shares of a mutual fund on December 28, 2016, for $4,000 and received a capital gains distribution of $2.40 per share on March 6, 2017, which was taken in cash. He sold his 100 shares for $4,300 on June 19, 2017. For tax purposes, this transaction resulted in A) a $240 long-term capital gain. B) a $300 short-term capital gain. C) a $240 long-term capital gain and a $60 short-term capital gain. D) a $60 short-term capital gain.

B The June sale of the shares purchased in December resulted in a short-term capital gain of $300. The distribution represents a long-term gain of $240, but this question only deals with the client's transaction. LO 15.c

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

D A market maker is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price. The term is most often used in the context of the over-the-counter (OTC) markets. Market makers trade for their own inventory (position trade). The term specialist historically referred to the person on the floor of a stock exchange who performed a similar function; the current term is designated market maker (DMM). LO 23.d

An investor would have to pay the alternative minimum tax when A) there are tax-preference items reported on the tax return. B) the investor has received income from a limited partnership. C) the investor's capital gains exceed 10% of total income. D) it exceeds the investor's regular income tax.

D A taxpayer must pay the alternative minimum tax (AMT) in any year that it exceeds regular tax liability. Tax-preference items are re-input in figuring the AMT, but the AMT is paid only if that amount is higher than the regular income tax. LO 15.d

ABC Corporation's 5% mortgage bond is currently trading at a premium. The bond is callable at par in 10 years and matures in 15 years. When comparing the returns available to an investor, it would be accurate to state A) the current yield is higher than the nominal yield. B) the yield to maturity is higher than the current yield. C) the yield to call is higher than the current yield. D) the yield to maturity is higher than the yield to call.

D Whenever a bond is selling at a premium, the return—in descending order—is nominal yield, current yield, YTM, and YTC. It is the reverse order when the bond is selling at a discount. When the bond is at par, all are the same (if the call is at par). LO 2.e

An agent has a client who is relatively new to investing in securities, having been a bank CD purchaser most of her life. One of the client's holdings is a stock that the agent recommended, and its market price has recently fallen by over 10%. Knowing her fear of loss, the agent comforts her by continuing to report that the stock is moving upwards with the market. This action is A) fraudulent because it is equivalent to giving fictitious quotations B) fraudulent unless the agent receives permission from a designated supervisor C) fraudulent because the agent has a fiduciary responsibility to the client to manage the account in her best interests D) permitted because the client is not selling anytime soon and why cause her to be upset

A

Under the Investment Company Act of 1940, which of the following would be considered affiliated persons? I. Persons who control, are controlled by, or share common control with the company II. Any officer, director, or employee of the company III. Persons who own or control 5% or more of the voting shares of the company A) I, II, and III B) II and III C) I and III D) III only

A

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

A A gift of assessable stock is always considered a sale. Exercise of warrants is a sale of the underlying stock. Pledging stock as collateral is never a sale. LO 12.a

The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if which of these are true? I. Results do not reflect the deduction of fees. II. Actual market conditions during the referenced period are not disclosed. III. The advertisement does not reflect performance for a minimum period of three years. IV. The advertisement does not disclose that it applies to only a specific group of clients. A) I, II, and IV B) II and IV C) I, II, III, and IV D) I and II

A Advertising that reflects past performance must show a minimum period of one year, not three. All investment advisers' advertising must reflect deduction of fees; disclose the specific group of clients to which it applies, if applicable; and state actual market conditions during the referenced period. LO 13.i

Which of the following is NOT registered with the SEC under the Investment Company Act of 1940? A) Exchange-traded notes B) Unit investment trusts C) Open-end investment companies D) Exchange-traded funds

A Exchange-traded notes (ETNs) register as debt securities under the Securities Act of 1933. LO 5.

An investor purchased a bond with a 6% coupon rate exactly three months after its most recent interest payment. As a result, I. the buyer will pay $15 accrued interest. II. the buyer will receive $15 accrued interest. III. the seller will pay $15 accrued interest. IV. the seller will receive $15 accrued interest. A) I and IV B) I and III C) II and IV D) II and III

A First of all, a 6% bond pays $30 semiannually (half of $60 per year). Therefore, the accrued interest on this bond purchased halfway between interest payments is half of $30 or $15. That $15 dollars is added to the purchaser's cost and will be paid to the seller as it represents the interest the seller earned for holding the bond for three months. At the next interest payment date, the purchaser will receive the full $30 payment representing the accrued interest paid to the seller plus the interest earned for the three months the purchaser held the bond. LO 2.a

Which of the following actions should be taken by an agent when a client decides to open an options account? A) Review with the client the risks involved when trading options before the first options trade B) Provide an options disclosure document (ODD) no later than 15 days after the first trade C) Assure that an options agreement has been signed prior to the first trade taking place D) Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade

A It is imperative that suitability and risk be addressed with the client before allowing option trading to take place. The ODD must be delivered no later than with account opening, and the options agreement must be returned no later than 15 days after the account approval. An options account must be approved by a designated supervisor prior to any trading taking place in the account. LO 16.a

Regardless of the nature of the issuer, one thing an investor in debt securities can expect is A) a stated maturity date. B) physical coupons that are clipped every six months for interest payments. C) an interest rate that varies with changes to market interest rates. D) priority in payout second only to stock with a prior lien.

A It would be very rare to find a debt security without a stated date indicating when the debt will be paid off (the maturity date). In the majority of cases, debt securities have a fixed interest rate (which is why they are called fixed-income securities). There are some with variable rates, but the question would have to indicate that exception. No stock of any kind has priority over a debt security. Prior to 1986, you would have physical coupons on the bond, but none of them have been issued since then. LO 2.a

urturing growth of the enterprise would be the objective of which of the following types of investments? A) Private fund B) Investment adviser C) 529 plan D) Growth fund

A Private funds invest in companies where the objective is to use their money and business acumen to grow the company to the point where the fund's holding can be sold at a large profit. Growth funds are looking for growth but take no role in the operations of the companies in which they invest. An investment adviser would like to see portfolio values grow, but you don't invest in an investment adviser. A 529 plan, just like a growth fund, does not take an active role in management. LO 3.d

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents contains an extensive list of prohibited practices. However, it would not be considered a violation A) for two individuals employed by the same broker-dealer and with the same category of license to share in commissions without telling the client. B) if a properly registered agent were to share in the profits and losses in a customer's account proportionate to the amount of time the agent devoted to handling the account. C) when a broker-dealer sells a security out of inventory to a retail customer and indicates on the confirmation that the firm acted in an agency capacity. D) to borrow money from a client who is not in the lending business.

A Properly registered individuals employed by the same or an affiliated broker-dealer are permitted to split their commissions. Because there is no additional cost to the client, this action does not have to be reported. Sharing with clients may only be done with the written consent of the client and the agent's broker-dealer. It has nothing to do with the time spent on the account. A broker-dealer selling out of inventory must disclose that the firm acted in a principal capacity. No broker-dealer or agent may ever borrow money from a client who is not in the money-lending business unless that client is an affiliated person. LO 14.i

A customer's limit order to buy 500 shares of QRS at 60 is executed and the agent reports the trade execution to the customer. One hour later, the customer notices that QRS is down 2 points and informs the agent that he no longer wants the stock and is not planning to pay for it. The agent should tell the customer that A) he owns the stock and must submit payment B) he personally will repurchase the securities from the customer for the price paid C) he may sell the stock at the purchase price in the open market D) the firm will repurchase the securities from the customer for the price paid

A The customer has entered into a contract to purchase a security as soon as the order is executed. The customer owns the stock and must submit payment. LO 23.f

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

A This practice is ethical, providing it is accurate and not employed in a coercive manner. It would be expected that when Bryan decides to sell his position, he would not do so prior to notifying his clients with a position in that stock. Otherwise, this would be an ethical problem. LO 14.i

In general, one would prefer to purchase a bond when its current market price is A) less than its present value B) more than its present value C) less than its future value D) the same as its present value

A When a bond can be purchased for less than its present value, it has a positive net present value (NPV). For example, if the present value of a bond is $600 and it can be purchased for $565, it has an NPV of $35 and should be an attractive investment. Every bond selling at a discount has a market price that is less than its future value (par), so that doesn't tell us anything about its NPV. LO 20.a

When does the Investment Advisers Act of 1940 not require delivery of a brochure containing information about the adviser's background and business practices? I. When the service provided is an individual supervisory service II. When the client is an investment company III. When the contract is for an impersonal advisory service requiring payment of less than $500 IV. When the client is an individual with a net worth of more than $1 million A) II, III, and IV B) II and III C) I, III, and IV D) I and II

B A disclosure brochure is not required to be delivered if the client is a registered investment company or if the advisory service is of an impersonal nature and costs less than $500. A brochure is required when the service provided is an individual supervisory service, and the client's net worth has no bearing on brochure delivery requirements. LO 13.g

It is generally accepted that agents and IARs will give greater consideration to which of the following when making recommendations to their senior clients? I. Age II. Life stage III. Retirement savings IV. Tax status A) I and IV B) II and III C) I and II D) III and IV

B All of these are important suitability considerations for all customers. But when it comes to seniors, it is felt that life stage (including whether the customer is employed, retired, or nearing retirement) and current retirement savings relate particularly to seniors. LO 17.c

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

B Alpha is obtained by comparing how a security actually performed to the performance one would have expected based on its beta. A beta of 1.0 is used to indicate the expected volatility of the overall market. Because Security C has a beta of 1.0, its 13% return matches that of the market. Furthermore, Security C has an alpha of zero because its actual return was the same as the expected return. With a beta of 0.8, one would expect Security L to produce a lower return, but how much lower? Its return should be 80% of the market or, in this case, 80% of 13%, which computes to 10.4%. However, its actual return fell short of that by 0.3%, giving it a negative alpha of 0.3. Had its actual return been 10.7%, it would have had a 0.3 positive alpha. Although this question doesn't ask it, based on the criteria given, the IAR would have selected Security C. LO 20.e

When a corporation files for bankruptcy, heading the priority for payment would be holders of A) commercial paper B) senior debt C) senior prior lien preferred stock D) common stockholders

B In the case of a corporation's liquidation, here is the order that is followed for paying off creditors and stockholders: 1) secured (senior) claims like mortgage bonds, equipment trust certificates, and collateral trust bonds; 2) unsecured liabilities (debentures) and general creditors; 3) subordinated debt; 4) preferred stockholders (regardless of how many adjectives are used to describe the stock); and 5) common stockholders. The term senior debt (or senior notes) always refers to secured debt because the term senior means it comes first. LO 19.d

Which of these is among the advantages of including preferred stock in an investor's portfolio? A) The maturity date is likely shorter than that of debt securities offered by the same issuer. B) Dividends must be paid before any distribution to common stockholders. C) The rate of return is likely to keep pace with inflation. D) There is an opportunity for increased income if the issuer's profits increase.

B Preferred stock carries a fixed dividend that must be paid before any distribution to common stockholders—hence the name preferred. Disadvantages of owning preferred stock are that the fixed return may not keep up with inflation and, regardless of corporate earnings, the dividend will not change, so there is no hope for increased income. Finally, unlike debt securities, preferred stock is not issued with a maturity date. Nothing has been borrowed so there is no future repayment date. LO 1.c

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

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

Under the Uniform Securities Act, when may an investment adviser legally have custody of money or securities belonging to a client? I. The investment adviser has insufficient net worth or is not appropriately bonded. II. The Administrator has not issued a rule prohibiting custody. III. The investment adviser does not also have discretionary authority over the account. IV. The investment adviser has notified the Administrator that custody is maintained. A) II only B) II and IV C) I and III D) II, III, and IV

B The Administrator may, by rule, prohibit advisers from having custody of client funds or securities. If no such prohibition applies, the Administrator must be notified in writing if an adviser has custody. In almost all jurisdictions, a bond or sufficient net worth is required to maintain custody. Discretionary authority does not affect an adviser's ability to have custody. LO 14.e

The first of the federal securities acts was the Securities Act of 1933. This act requires persons selling a new offering to their clients to A) be properly registered prior to making the offer. B) deliver an effective (final) prospectus no later than with confirmation of the sale. C) deliver a copy of the registration statement no later than with confirmation of the sale. D) deliver a preliminary (red herring) prospectus prior to the sale.

B The Securities Act of 1933, sometimes referred to as the paper act, requires that an effective, or final, prospectus be delivered to all purchasers of a new offering no later than with confirmation of the sale. It is not required that purchasers receive a red herring prospectus, and only the SEC gets copies of the registration statement. Yes, they must be properly registered to make the offer (and sale), but that comes under the people act, (the Securities Exchange Act of 1934). LO 8.c

The future value of an invested dollar is dependent on I. the exchange rate of the dollar at the beginning and end of the period II. the interest rate at maturity III. the rate of return it earns IV. the time period over which it is invested A) I only B) III and IV C) II and III D) II only

B The future value of a dollar reflects the interest rate it earns over time. The rate of foreign exchange is not related to or used in the calculation of the future value of a dollar. The foreign exchange rate is not relevant. LO 20.

An investor purchases $10,000 of A-rated debentures in early January. At the end of the year, $500 in interest has been received and the value of the investment is $9,500. If the investor is in the 25% tax bracket, the after-tax yield is A) 5.0%. B) 3.75%. C) 0.0%. D) -1.25%.

B The only return (as far as yield is concerned) is the $500 of interest. Subtracting 25% for taxes leaves $375 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.75%. If the question had asked about total return, then the $500 unrealized loss would have been included, although there would have been no tax benefit to it because it is only a "paper" loss. LO 22.a

DEF Investment Advisers, organized as a partnership, is currently registered with State Y. Marjorie is one of the partners and is registered as an IAR. If DEF were to register with State Z, A) Marjorie's registration as an IAR in State Z would become effective after passing the Series 65 or Series 66 exam. B) Marjorie would automatically be registered as an IAR in State Z. C) because DEF is a state-registered investment adviser, Marjorie could only register in State Z if she is a resident of the state. D) Marjorie would be required to complete an application for IAR registration with State Z.

B When DEF's registration becomes effective in State Z, those individuals included in the filing are granted automatic registration—they don't have to file an individual Form U4. That filing includes the names and other pertinent information about all of the partners, officers, or directors who are already acting as IARs. Please note, it is not any IAR, it is only those listed or, as the rule states, those occupying a similar status, et cetera, who receive this treatment. LO 10.c

All of the following statements regarding registration of broker-dealers under the Uniform Securities Act are true except A) no broker-dealer can be required to meet financial requirements in excess of those of the SEC. B) a successor firm is exempt from filing a consent to service of process until the renewal date. C) a successor firm is exempt from paying registration fees until the renewal date. D) broker-dealers with discretion over client accounts may be required to post a surety bond.

B When one firm succeeds another, no fees are due until the renewal date. However, the successor firm must file a consent to service of process at the time it registers. Broker-dealers with discretionary authority may be required to post a surety bond or maintain minimum net capital. However, no state can impose financial or recordkeeping requirements that exceed those of the SEC. LO 11.e

Western Securities, Inc., (WSI) is a broker-dealer that also offers portfolio management. One of WSI's portfolio managers notices an article on asset allocation that harmonizes with WSI's investment philosophy. If WSI should post a link to this article on its website, it would probably be considered A) estrangement. B) fulfillment. C) adoption. D) entanglement.

C A firm will be responsible for the content of a linked third-party site if the firm adopts its content on any of the firm's sites. Adoption is defined as a firm's endorsement of the content of a third-party site. This is not illegal, but the firm is responsible for the content of the linked information and must be sure that it complies with the firm's policies. Entanglement is adoption taken one step further. This is when the firm (or one of its representatives) contributes to the third-party information and then posts it. LO 13.h

Which of the following would be a difference between a universal life insurance policy and a scheduled premium variable life insurance policy? A) There is a greater choice of separate account subaccounts in the universal life policy. B) The universal life policy will generally outperform the variable life policy during a period of falling interest rates and rising stock prices. C) Premiums on a scheduled premium variable life policy are fixed, while those on a universal life policy are flexible. D) There is a minimum guaranteed return on the variable life, while there is no guaranteed return on the universal.

C A major difference between these two insurance programs is the payment of premiums. Scheduled premium is just another way of saying fixed premium. In a universal life policy, including universal variable life, the premiums are flexible. There is no choice of separate account subaccounts for universal life. Universal life is designed to benefit from periods of high interest rates, not falling ones. Finally, universal life policies have a minimum guaranteed interest rate; no such guarantee applies to variable life. LO 24.f

Due to an escalating trade war, the portfolio manager of an equity mutual fund anticipates a negative impact on his fund's assets. To protect his investment portfolio, the fund manager would A) sell S&P 500 index calls B) sell S&P 500 index puts C) buy S&P 500 index puts D) buy S&P 500 index calls

C A portfolio manager who expects a decline in the market as a result of a trade war (or any factor that might hurt stock prices) would buy puts on a broad market index such as the S&P 500 to protect his position. Selling calls limits upside potential and only protects the portfolio to the extent of the income received from the sale of the calls. LO 21.k

Market interest rates rise by 50 basis points. If each of these bonds has about the same maturity date, which of the following would decline the least? A) Treasury bond issued at par carrying a 6% coupon B) AAA corporate bond carrying a 6% coupon C) Treasury bond issued at par carrying a 7% coupon D) AA corporate bond carrying a 7% coupon

C All other factors being equal, bonds of higher quality experience less price volatility than do bonds of lower quality. Treasury securities have higher quality than other debt securities due to the elimination of default risk. When market interest rates rise, bonds having higher coupons will decline less than bonds having lower coupons. LO 20.

Your customer opens a Coverdell ESA for his niece. In order to meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be A) nontaxable to either party B) taxable to the uncle, the donor to the plan C) taxable to the niece, the beneficiary of the plan D) automatically reinvested back into the plan

C Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution.

An investor purchasing gold bullion is most likely looking for an investment that is A) income producing. B) cyclical. C) countercyclical. D) exchange traded.

C Countercyclical assets are those whose prices tend to move in the opposite direction of the overall economy. Historically, the price of precious metals, especially gold (and stock in gold-mining companies), moves up when the economy enters the contraction phase and moves in the reverse direction during expansion. Cyclical stocks follow the cycle. There is no "gold bullion exchange." It is a dealer market with bullion dealers all over the world setting their own spreads. A bar of gold does not provide income. LO 6.a

An investment adviser is eligible to register with the SEC if it A) would be required to register in at least 10 different states. B) has rendered advice to more than 5 retail clients during the most recent 12-month period. C) anticipates acquiring at least $100 million in assets under management within the next 120 days. D) has more than 100 investment adviser representatives.

C IAs must have at least $100 million in AUM in order to register with the SEC. If it is reasonable to expect reaching that level within the next 120 days, SEC registration is allowable now. One of the exceptions that would permit small and mid-size advisers to register with the SEC is if they would have to register in at least 15 states, not 10. LO 9.d

A customer wishes to open a new account but refuses to provide suitability information. Under NASAA rules, the agent A) may open the account but must limit recommendations to U.S. government securities. B) may open the account but must limit recommendations to investment-grade securities. C) may open the account but may not make any recommendations. D) must not open the account.

C If a customer fails to provide suitability information, the account may be opened, but the member may not make any recommendations; the only trades permitted are those that are unsolicited. LO 14.i

An employer whose 401(k) plan complies with ERISA Section 404(c) is placing investment risk with A) the Securities and Exchange Commission. B) the Internal Revenue Service C) the plan participant D) the plan fiduciary

C In a 401(k) plan, a plan sponsor can shift investment risk to the employee by complying with ERISA Section 404(c) rules. LO 18.g

All of the following are exempt from registration requirements with the SEC under the Investment Advisers Act of 1940 as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 except A) investment advisers whose only clients are insurance companies. B) someone who gave investment advice to 11 private funds throughout the Midwest last year and has total assets under management of $120 million. C) investment advisers with $110 million or more in assets under management. D) an adviser with 50 clients, none of whom is a private fund, all within one state, that furnishes no advice on exchange-listed securities

C Investment advisers with $110 million or more of assets under management are subject to registration with the SEC under the Investment Advisers Act of 1940 and the Dodd-Frank Act. Federal exemptions apply to advisers whose clients are all in one state, whose principal office is in that state, and whose clients (none of whom are private funds) are not furnished advice on exchange-traded securities. Private fund managers are exempt from SEC registration until their AUM in the United States reaches $150 million. LO 9.d

As an incentive to encourage clients to invest in a particular stock recommended by the broker-dealer, clients are told that anytime within six months after the purchase date, they may sell the stock back to the firm at original cost plus interest at the state's legal rate. This would be A) a right of rescission. B) a violation of the antifraud provisions of the Uniform Securities Act. C) a prohibited guarantee against loss. D) an offer that could only be made to accredited investors.

C Offering to buy back a stock at its original cost, even without paying interest, is a prohibited guarantee against loss. Rescission is only when there was something improper about the sale. Technically, this offer is not a case of fraud, and in any event, we must always select the answer that best addresses the question—in this case, a guaranteed price. LO 13.d

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) within 48 hours. B) immediately. C) when informed by the investment adviser that the representative's registration is effective. D) when informed by the Administrator that the representative's registration is effective.

C Passing the exams does not automatically give one an effective investment adviser representative's license. Notice is received by the investment adviser from the appropriate state and/or federal authorities, and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual. LO 10.c

Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan; after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral, A) Susan would have to obtain Mary's permission first. B) both Susan and Mary would have to disclose the cash payment to Amanda. C) it would be permitted if Susan made the proper disclosures. D) only Mary would have to make disclosure to Amanda.

C Referrals from unaffiliated third parties are considered endorsements under the SEC's investment adviser marketing rule. Disclosures of any potential conflicts of interest must be made, and if there is any compensation paid for the endorsement, it must be noted as well. If the amount of the compensation, cash or non-cash, exceeds $1,000 over the preceding 12 months, a written agreement between the investment adviser and the endorser must be in effect. LO 13.i

All of the following statements regarding investment advisory contracts under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers are true except A) the contract must not permit assignment without the client's consent. B) the contract must be renewed in writing. C) the contract's term may not exceed one year. D) the contract must detail any prepaid fees to be refunded to the client upon termination.

C The contract must set forth the term of the contract, which need not be for only one year. Any renewals or extensions of the contract at the end of the term must be in writing. The contract must describe any refunds upon termination and may not permit assignment without the client's consent. LO 13.e

The semi-strong form of the efficient market hypothesis (EMH) is most accurately described as asserting that security prices fully reflect all A) historical price and volume information. B) market prices for the foreseeable future C) publicly available information. D) relevant information, including information not publicly available.

C The semi-strong form of the EMH asserts that security prices fully reflect all publicly available information. In addition to financial statement information, this includes all historical price and volume information, which the weak form of the EMH asserts is fully reflected in security prices. The strong form of the EMH asserts that security prices fully reflect all public and private information. No form of EMH can reflect the future market prices. LO 21.i

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

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

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

C When an investment adviser's business structure is a general partnership (as is the case with PAP), the brochure must be signed by a general partner; an officer's signature is not sufficient. If the firm is a corporation, then an officer's signature is acceptable. The investment adviser's disclosure brochure must contain the relevant information from Form ADV, Part 2A and, for those where it applies, Part 2B. For a state-registered IA, the brochure rule does permit advisers to deliver the brochure when the client enters the contract, provided the client is allowed to cancel the contract without penalty within five business days; otherwise, the brochure must be delivered no later than 48 hours before entering into an advisory contract. LO 13.f

One of your clients is considering allocating about 10% of her portfolio to commodities. Her current portfolio is a mix of stocks, bonds, and broad market index ETFs. Relative to her existing portfolio, you would explain to her that the primary benefit of the commodity investment is most likely A) increased short-term performance. B) lower trading costs. C) commodity returns have a low or negative correlation to the other assets in her portfolio. D) an increase in the reliability of income generated in the portfolio.

C he returns on commodities exhibit low or even negative correlation with stock and bond returns. This is generally cited as a major advantage to investing in commodities. Commodities do not generate income; there are no dividends or interest paid on them—the investor recognizes a gain or a loss, but no income. In general, allocating a small percentage of the portfolio to commodities should be viewed as a long-term, not short-term, strategy. There is no evidence that trading costs on commodities are lower than on traditional investments. In fact, it seems likely the opposite is true.

Your advisory customer calls to check on her account value at 9:00 am, but you were unavailable at the time. It is now 2:00 pm and you are able to call her back. If between 9:00 am and 2:00 pm her account value dropped from $711,500 to $710,000, what should you tell her? A) Your account has a value of $711,500. B) Your account was down to $699,700 earlier today but is up to $711,500. C) Your account value cannot be determined until the market closes. D) Your account is valued at $710,000 at this time.

D All other choices are clearly a misrepresentation of account status. LO 14.k

Platinum Investment in Growth Group, Inc., (PIGGI) is registered in and has its principal office in State W. PIGGI has near-term plans to open offices in States A and B. In an effort to test the waters, PIGGI mails several hundred flyers to prospects in those two states. Under the Uniform Securities Act, A) as a federal covered investment adviser, the flyers would need filing with the SEC. B) as long as PIGGI did not maintain an office in either of these states, the flyers could be mailed. C) these flyers can be mailed, but no accounts can be opened until PIGGI is registered in States A and B. D) these flyers cannot be mailed until PIGGI is registered in States A and B.

D Any attempt to hold oneself out as offering investment advice as part of a business would require the person to be registered in the state, unless that person qualifies for an exclusion or exemption. Nothing in this question implies that an exclusion or an exemption applies. We know that PIGGI is not a federal covered investment adviser (and therefore does not need to file its flyers with the SEC) because we are told it is registered in State W—federal covered advisers don't register in any state. LO 9.d

Which of the following would be causes for concern about cybersecurity? I. A broker-dealer keeps all the firm's financial records in a ledger book. II. A broker-dealer stores some of the firm's financial records electronically. III. A broker-dealer's agents operate as independent contractors and maintain devices that access personally identifiable information about clients. IV. A broker-dealer's bookkeeper prefers to do the books from home on a personal computer. A) II, III, and IV B) I and III C) II and IV D) I, II, III, and IVV

D Anytime a broker-dealer's financial records are being handled electronically, there is the possibility of cyber fraud. By definition, cyber fraud could not occur with something that exists on paper only. There are also concerns when there is possible access to personally identifiable information about clients (Social Security number, date of birth, etc.). LO 14.l

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

D One of the characteristics of an open-end investment company (mutual fund) is the ease of redeeming holdings. When the dollar amount of shares being redeemed exceeds that of those being purchased, the result is net redemptions. Although poor performance could lead to net redemptions, that is not always the case, so it is not always a true statement. LO 3.i

The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is not true? A) Even though these plans are generally under state control, the rollover rules are federal law. B) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. C) If there is a distribution of the assets, the rollover must be completed within 60 days. D) This may be done, but only if the entire account is rolled over.

D Partial rollovers are permitted. LO 18.h

All of the following statements regarding scheduled premium variable life insurance are correct except A) premiums are determined based on age and sex of the insured B) the policyowner has the right to change the selection of subaccounts C) once selected, the policyowner may change payment modes D) better than anticipated results in the separate account could lead to a reduction in annual premium

D Scheduled (fixed) premium variable life premiums are fixed. It is universal life that has flexible premiums. LO 24.f

The Administrator may deny a person's registration as an investment adviser representative if the person meets which of the following criteria? I. Has a recent securities-related criminal record II. Has recently been convicted of a felony not related to the securities industry III. Has lost a civil lawsuit within the last year IV.Was convicted of any misdemeanor within the last year that did not involve securities or money A) III and IV B) II and III C) I and IV D) I and II

D The Administrator may deny a license to individuals who have been convicted of any felony or a securities- or money-related misdemeanor within the last 10 years. Civil lawsuits will rarely have an effect upon securities registration. LO 12.c

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

D The CAPM does not consider taxes or transaction costs; they are irrelevant. The main assumptions of the capital market theory are as follows: All investors can borrow or lend money at the risk-free rate of return. All investors are rational and evaluate investments in terms of expected return and variability (standard deviation). Therefore, given a set of security prices and a risk-free rate, all investors use the same information to generate an efficient frontier. The time horizon is equal for all investors: when choosing investments, investors have equal time horizons for the chosen investments. There are no transaction costs or personal income taxes; investors are indifferent between capital gains and dividends. There is no inflation. All assets are infinitely divisible: this means that fractional shares can be purchased. There is no mispricing within the capital markets: it is assumed that the markets are efficient and that no mispricings within the markets exist. Another way to state this is that capital markets are in equilibrium. LO 21.g

A company has paid a dividend every quarter for the past 20 years. If the stock's price has fallen dramatically over the past quarter but the dividend has remained the same, it may be concluded that A) the dividend yield to maturity has decreased. B) the current dividend yield has remained the same. C) the current dividend yield has decreased. D) the current dividend yield has increased.

D The current dividend yield is income dividend divided by price. If the price of a stock decreases and the dividend remains the same, the dividend yield will increase. LO 2.e

With regard to the state registration requirements of agents of registered broker-dealers, all of the following statements are correct except A) registration is not required in a state where the agent has no place of business and only deals with existing clients who are vacationing in that state. B) registration is required if they solicit the sale of securities by telephone to fewer than six individuals residing in that state. C) registration is required when they limit their activity to the sale of exempt securities. D) registration is required in each state in which the employing broker-dealer has a place of business.

D The fact that the broker-dealer does business in a state has nothing to do with a specific agent. Many broker-dealers are registered in all states; very few agents are. Agents must register in each state where they are selling or offering securities, even if the security or the transaction is exempt. That exemption only applies to the need for the security to be registered, not the agent. Soliciting the sale of securities by telephone is considered making an offer, and there is no de minimis exemption available. Finally, registration is not required when making use of the snowbird exemption. LO 11.d

Which items would change if a company declared a cash dividend? I. Working capital II. Total assets III. Total liabilities IV. Shareholders' equity A) I and IV B) I, II, III, and IV C) I only D) I, III, and IV

D The key word is declared. Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid. LO 7.a

Which of the following accounts could be opened with a TOD designation? I. Individual II. Joint tenants in common III. Joint tenants with rights of survivorship IV. UTMA A) I and II B) I, III, and IV C) II and IV D) I and III

D The only types of accounts that may have the Transfer on Death (TOD) designation are individual, JTWROS, and TBE accounts. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased's estate. LO 16.f

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

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

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, a person who buys securities with material, privileged, nonpublic information may be subject to a civil penalty of A) the amount paid or saved on the securities trade B) $20,000.00 C) an amount equal to the amount of violation D) up to 3 times the amount of gain or prevention of loss

D Trading on inside information is prohibited under the Securities Exchange Act of 1934, and under the Insider Trading and Securities Fraud Enforcement Act of 1988, the SEC is empowered to seek the greater of $1,978,690 (not tested) or treble damages through the courts for violations of the inside trading rules. The damages can amount to up to 3 times the profit gained or 3 times the loss avoided on the transaction. All persons who controlled the insider are also subject to these damages if improper supervision is proven. LO 14.k

Although there may be some slight differences in methodology, when S&P or Moody's evaluate a security in order to assign a rating, they would be least likely to consider the issuer's A) profitability ratio B) liquidity ratio C) cash flow to debt ratio D) asset turnover ratio

D What is the purpose of a security's rating? To inform investors of the financial risk of the investment. The higher the rating, the lower the risk. This is one of those questions that students answer correctly because all of the other choices are incorrect (they are important factors). Remember, this is a negative question: "least likely." Certainly profitability of the issuer is a key factor in assessing the safety of the issue. Liquidity and cash flow are important factors as well. The rate at which assets are turned over is not nearly as important to determining a rating as the other three. LO 20.h

Which of the following persons are included in the definition of an agent under the Uniform Securities Act? I An individual who represents First Securities Brokers, Inc., in selling shares of XYZ Corporation, a New York Stock Exchange-listed company II. An individual who, as part of the job description, represents the City of Chicago in selling its bonds to the public III. An individual who represents a corporation traded on the New York Stock Exchange in selling securities to the public IV. An individual who is employed by the Federal Reserve Board to sell Treasury bills to retail investors A) II and IV B) I and II C) III and IV D) I and III

Under the USA, an agent is defined as an individual who represents a broker-dealer selling any type of security, whether that security is exempt or nonexempt. Individuals who represent issuers in trading exempt securities or exempt transactions are not defined as agents. An individual who represents an issuer selling nonexempt securities is an agent and must be registered. LO 11.d