STC Series 66 Final #1 and 2

A client and his wife purchased their home for $300,000. They have occupied their home for the last 26 years and have made $80,000 of improvements over the years. The home was recently put on the market for $800,000, but eventually sold for $770,000. Upon sale, the taxable capital gains would be how much?

$0 Upon the sale of a primary residence, a portion of any capital gains are excluded from taxation. If filing a single tax return, the first $250,000 of gains from the sale are excluded. If filing a joint tax return, the first $500,000 in gains are excluded. In general, to qualify for the exclusion, both the ownership test and the use test must be met. For example, five years prior to the sale of the home you must have occupied the home as your primary residence for a minimum period of two years.

A bond is convertible at $20 and is purchased for $1,100. If the common stock of the issuer appreciates and is currently selling for $25 per share, what is the conversion value of the common stock?

$1,250 The bond is able to be converted into 50 shares of the issuer's stock ($1,000 ÷ $20 = 50 shares). If the underlying stock is currently trading at $25, an investor who converts the bond will receive 50 shares that are valued at $25 per share, or $1,250.

An investor writes an uncovered RST May 25 put for a premium of 4. What is the maximum profit that the investor could realize

$400 The writer received the $400 premium. If the option expired, he would have no obligation, recognizing the entire premium as a profit. The premium represents the most that the writer could profit

An investment adviser must record the personal securities transactions that are effected by its officers, directors, partners, and employees by no later than:

10 days after the end of the calendar quarter According to NASAA's Model Rule for Recordkeeping Requirements for Investment Advisers, an adviser must maintain a record of each personal securities transaction in which the adviser, an IAR, an officer, director, partner, or employee acquires either direct or indirect ownership. These transactions must be recorded by no later than 10 days after the end of the calendar quarter in which the transaction occurred.

As an investment adviser, you are required to record and keep a record of every transaction in a security for a client's account within:

10 days of the end of each quarter, excluding direct obligations of the U.S. government Under both the Investment Advisers Act and the Uniform Securities Act, investment advisers are required to keep a record of every securities transaction within 10 days of the end of the quarter in which the transaction took place. Transactions in direct obligations of the U.S. government are excluded from this requirement.

Under the Uniform Securities Act, an Administrator may deny registration to an agent because of findings that indicate the agent had been convicted of a felony within the past:

10 years The Administrator may deny an agent's registration if she finds the individual has been convicted of a felony within the past 10 years. (62109)

A client purchases an equity-indexed annuity contract that guarantees a 4% return or 80% of the performance of the S&P 500, whichever is greater. The index declines over the course of the next year. What return will your client receive?

4% An equity-indexed annuity guarantees the contract owner a minimum interest rate or the performance of a stock index such as the S&P 500 Index. If the return on this index is less than the guaranteed rate, the owner receives the guaranteed rate. If the index return is greater than the guarantee, the owner receives the greater return. (62437)

Based on the past performance of XYZ stock, an investment adviser has determined that there is a 25% chance that in a bull market, XYZ stock will return 20%. In a flat market (50% probability), the return should be 5%. The likelihood of a bear market is 25%, and expected returns would be a loss of 10%. What is the expected return for XYZ stock?

5% According to modern portfolio theory, the expected return is the sum of the weighted average of an investment's return. To find each weighted return, multiply the return by the likelihood of that return. For XYZ stock, the expected return is as follows. Return Likelihood Weighted Return20%x25%=5%5%x50%=2.5%(10%)x25%=(2.5%) Expected return = 5% (5% + 2.5% - 2.5%)

When trading on margin, clients are required to deposit:

50% of the market value of the security The 1934 Securities Exchange Act, Regulation T, provided the Federal Reserve with the power to establish equity requirements when trading on margin. The current initial requirement when purchasing common stock is 50% of the market value of the security at the time of the transaction.

Geraldo and Gwen are married and in their late 30s. They want to plan for their retirement. Which of the following asset allocations is most appropriate?

70% equities and 30% fixed-income instruments To plan for their retirement, the couple should be focused on growth at this point. Equities have a greater historic growth potential than fixed-income instruments; therefore, a greater percentage of the assets should be invested in equities. However, diversification is also important. If the portfolio of investments is too heavily weighted in equities (e.g., 90% equities and 10% fixed-income instruments), market risk (systematic risk) is high. The best choice is to allocate investments more heavily in equities, but to have a reasonable percentage also invested in fixed-income instruments.

Under NASAA's Statement of Policy on Unethical Business Practices, which of the following statements is TRUE regarding investment advisory fees charged to customers?

Advisers may not charge fees that are unreasonably high in relation to fees charged by other advisers for similar services Although it is difficult to compare the advisory services provided to clients of different advisers, a general standard of reasonable fees is used to compare fees charged by various advisers. Fees that are obviously out of line with those charged for similar services are considered unethical.

A company issued $50 million of common stock in a private placement under Regulation D. In order to sell the stock initially in any state, the Administrator requires the filing of:

A Notice Filing Since stock that's issued under Regulation D is federal covered, the shares do not need to be registered at the state level. However, state Administrators can require the issuer to complete a Notice Filing. Form 10-K is a financial report that corporations file with the SEC. Form ADV-NR is filed by investment advisers that have principal officers who are not residents of the United States.

Under the Uniform Securities Act, which of the following transactions is NOT exempt from state registration?

A Rule 147 offering The Rule 147 (intrastate) exemption is a federal or SEC exemption and does not apply to the Uniform Securities Act. For that reason, an issuer conducting an offering of securities in one state is required to register the offering in that state. On the other hand, a transaction by a fiduciary, such as an executor, sheriff, marshal, guardian, trustee in bankruptcy, is exempt from state registration. Additionally, isolated, non-issuer transactions and transactions executed on the New York Stock Exchange, Nasdaq, or any other recognized national or regional exchanges are exempt from state registration.

Which of the following yields results in the highest real inflation-adjusted rate of return?

A bond yields 8% when inflation is at 3% The inflation-adjusted rate of return, also referred to as the real interest rate, is calculated as follows: yield minus inflation rate. The highest inflation-adjusted return is available on the bond that yields 8% when inflation is at 3%, since it's adjusted return is 5% (8% bond yield - 3% inflation rate). (32410)

A variable life insurance contract is appropriate for all of the following clients, EXCEPT:

A client who needs to meet her short-term savings goals Variable life insurance is unsuitable for a client who needs to meet a short-term savings goal. Instead, variable life insurance is suitable for clients who have a long-term investment need, are willing to assume risk, and want market-based returns. Keep in mind, traditional life insurance policies provide a fixed or guaranteed return.

Under the USA, which of the following choices has/have status as a legal person?

A corporation The USA has a broad definition of the term person. Natural persons (individuals) and legal persons (partnerships and corporations) are included in this definition. Minor children, incompetent adults, and deceased persons are not considered persons under the USA.

Who would NOT be exempt from the definition of agent under the Uniform Securities Act?

A finance V.P. of a major appliance manufacturer who sells AAA bonds to the public Sometimes employees of an issuer selling securities may be considered agents. Generally, an employee of an issuer selling stock to the public would be considered an agent under the USA. Exemptions occur when the employee sells exempt securities, such as municipal debt, or is involved in an exempt transaction, such as a sale of securities to an investment banker during an underwriting. Employees who simply process financial transactions for coworkers are exempt unless they receive additional compensation for these activities.

What information may NOT be part of an investment adviser's contract with its clients?

A hedge clause limiting adviser liability except in cases of gross negligence The SEC believes that hedge clauses that limit the adviser's liability or the investor's potential right of actions against the adviser may violate the antifraud provisions of the Investment Advisers Act.

A hedge fund is being sold to accredited investors as a private placement under Regulation D. An agent believes that this fund would be an excellent investment for several of his clients. The agent may recommend the fund to which of the following investors?

A middle-aged couple who are both physicians with a joint annual income of $400,000 Many hedge funds are issued as private placements under Regulation D. In order to qualify for the exemption, they must be offered only to accredited investors and/or no more than 35 non-accredited investors. Accredited investors include: Individuals with an annual income of at least $200,000 during the last two years who reasonably expect to continue to earn that much in the future A married couple with a joint income of at least $300,000 who reasonably expect their income to continue at the same level in the future An individual or a couple with a net worth of at least $1 million The newly-retired investor meets the income requirement, but his income will likely drop now that he's retired. The young, aggressive investor fails to meet either the income or the net worth requirements. The couple that just won the lottery have income for the year that is likely much higher than normal and it's unlikely to remain at the same level in the future. Only the couple who are both physicians and in their prime earning years can reasonably expect to continue making the same income. (32479)

Which of the following events would NOT require a public company to file a Form 8-K report?

A minority owned subsidiary changes locations Form 8-K is the report that companies must file with the SEC to announce material corporate events that shareholders should know about. A change in the location of a minority owned subsidiary is not a material event which may affect the company or its shareholders. All of the other answer choices represent events which require the filing of a Form 8-K.

Which of the following persons would be subject to statutory disqualification under the Securities Exchange Act of 1934?

A person who pleaded guilty to stock manipulation five years ago A statutory disqualification is the denial of an applicant for registration based on the past transgressions of the applicant, including violations of any securities or commodities law. Being the chief executive of a failed broker-dealer does not itself lead to statutory disqualification, but this information must be disclosed on any subsequent application in the securities industry. A person accused of insider trading has not been convicted

The following persons would be allowed to trade the account of an incapacitated individual, EXCEPT:

A relative named in a living will A living will is related to medical decisions that may need to be made in the event of an individual's incapacity. All the other choices would allow the individual to trade in the account of an incapacitated person, providing proper documentation is provided. A durable power of attorney gives someone the authority to make financial and healthcare decisions on another's behalf should that person become incapacitated. (62971)

Which of the following employees of an investment adviser are not considered a registered investment adviser representative?

A senior partner An investment adviser representative (IAR) is considered any person who is associated with an investment adviser and manages client accounts or portfolios, makes investment recommendations, or gives advice about securities. The IAR definition also includes any person who determines the type of investment advice to give to clients, any person who solicits or negotiates the sale of these services, as well as any person who supervises the personnel performing these job functions. The reason that the senior partner is not considered a registered investment adviser representative is that there's no indication that this person has any of the responsibilities of an IAR.

Action Advisers creates financial plans for clients. It generally implements these plans through Packaged Products Producers (PPP), a limited broker-dealer owned by Action. PPP offers a mix of mutual funds and variable annuities, but does not engage in transactions involving individual stocks or bonds. What information must be disclosed to Action's advisory clients?

A statement that the implementation of client financial plans may be limited because of the incomplete product selection available through PPP According to SEC Release IA-1092, an IAR/RR who intends to implement a plan using only products offered by a given broker-dealer must inform the client that the plan's implementation may be limited as a result. The IAR/RR should also disclose that PPP is a subsidiary of Action, since this is a conflict of interest. Mutual funds may provide sufficient diversification for many clients.

If a portfolio manager is rebalancing a client's assets on a quarterly basis, this would be considered:

A strategic asset allocation strategy A strategic asset allocation strategy may include the periodic rebalancing of the portfolio on a monthly, quarterly or annual basis in order to keep the original asset allocation intact. A tactical asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions. (62385)

With a $1,000 investment, a brokerage client purchases a security that consists of a zero-coupon bond for $750 and an equity call option for $250. At maturity the investor receives the bond's principal plus any appreciation in the option. What is this investment?

A structured product This is an example of a structured product. Although there is no single comprehensive definition, a structured product typically consists of a debt instrument (note or bond) and a derivative product (e.g., an option). The debt instrument provides a guaranteed principal payment, while the derivative provides a variable payment at maturity.

A limited partnership would be the least suitable for which of the following investors?

A widower investing the proceeds of his deceased spouse's life insurance policy, whose main objectives are current income and capital preservation A limited partnership may not be a suitable investment for any of these individuals. The use of insurance proceeds are definitely the least suitable based on his circumstances and investment objectives. (32451)

A small, single-office investment advisory firm has $4 million in assets under management. The firm is located in Texas. According to the Uniform Securities Act, which of the following persons associated with the firm will NOT fall under the definition of an investment adviser representative?

An in-house accountant who tabulates investment results for client accounts IA representatives are persons who are associated with an IA and make recommendations, manage accounts, solicit or negotiate the sale of IA services, or supervise any persons who engage in these activities. Persons who perform clerical functions (e.g., accountants) are not considered IA representatives. There is no requirement for a person to be an employee or to be solely dedicated to sales to meet the definition of IA representative.

Terri, an IAR, has decided that with her overhead expenses increasing each year, she will increase the advisory fees she charges new clients, but not for existing ones. In order to do so, she must offer which of the following forms to her clients?

ADV Part 2 A change in advisory fees is a material change, and her ADV Part 2 must be amended within 30 days and a copy, or a separate brochure containing the same information, must be given to new clients and offered to her existing clients. (62808)

Henry is a trustee for an account that has beneficiaries ranging in age from 2 through 17. Under the Uniform Prudent Investor Act (UPIA), how should the assets of the trust be managed?

All beneficiaries' interests should be weighed prior to making any investments Under the Uniform Prudent Investor Act (UPIA), a trustee managing an account that has multiple beneficiaries must act impartially when investing and managing the trust's assets. When making investments, a trustee must take into account the different interests of all beneficiaries. (79491)

During the day, Big Block Traders has taken down 100,000 shares of Vantage Holdings at $6.33, another 200,000 shares at $6.17, and then 327,000 shares at $6.54. When distributing these shares to its discretionary clients, which of the following allocation methods is acceptable?

All clients should be given shares at a price that is near the firm's average daily cost When examining a firm's method of allocating trades among its clients, the regulators main focus is on fairness. Of the given choices, the best approach is to give stock to all clients at a price that is near the firm's average daily cost (plus commissions/markups, etc.). The average market price for the security during the day is irrelevant since the firm's average daily cost may differ significantly from this price.

Which of the following statements best describes why an individual may choose to create a general partnership rather than a limited partnership?

All of the investors want to manage or operate the business A business owner may create a general partnership because it allows all of the investors to manage or work in the business. The other items listed are not valid reasons to create a general partnership since both limited and general partnerships are taxed in the same manner, and general partners have more liability than limited partners.

Which of the following statements describes a strong form efficient market?

All public and private information is reflected in securities prices. The Efficient Market Hypothesis (EMH) explains three different forms -- strong, semi-strong, and weak form efficiency. In a weak form efficient market, all past prices and data are fully reflected in current prices. In a semi-strong form efficient market, all public data, including historical pricing, is reflected in current prices. In a strong form efficient market, both public and non-public (i.e., inside) information is reflected in current prices. The assumption that investors want to minimize risk and maximize returns is made in the Modern Portfolio Theory, not the Efficient Market Hypothesis.

A client is interested in trading actively, purchasing on margin, and having broad exposure to the U.S. equity market. Which of the following investments is the LEAST suitable?

An S&P 500 Index mutual fund Open-end investment company (mutual fund) shares are not appropriate for short-term trading, do not trade on an exchange, and cannot be purchased on margin. On the other hand, most ETFs and closed-end fund shares trade on an exchange and allow the use of margin and short selling.

Which of the following types of internet-based advertisements are permitted for an investment adviser?

An advertisement that lists an adviser's credentials. Investment advisers are permitted to list their credentials as long as the list is not untrue or misleading. IA's are not allowed to use testimonials in any form of advertisement. Advisers can refer to past recommendations, but they need to at least offer to provide clients with access to all of their recommendations, regardless of whether they were profitable.

Who is permitted to participate in a tax-sheltered annuity established under Internal Revenue Code Section 403(b)?

An employee of a school district Tax-sheltered annuities are funded with pretax dollars and represent an immediate deduction to the investor. They are made available to employees of public school systems under IRS Code 403(b) and to employees of certain nonprofit organizations under IRS Code 501(c)(3).

Which of the following would NOT be considered an investment adviser representative under the Uniform Securities Act?

An individual who works for an investment adviser as a clerk or receptionist The Uniform Securities Act specifically exempts clerical employees of an investment adviser from the definition of an investment adviser. Advisory fees may consist of both commissions and management fees. When clients begin the advisory relationship, they must receive written disclosure of any fees or commissions.

Registration by coordination would most likely be used to register what type of offering?

An initial public offering Under normal circumstances, the method of registration most often used by the new issuers of securities is registration by coordination. Mutual funds are federal covered securities. All listed securities, such as Nasdaq securities, are also federal covered and, therefore, exempt from registration with the states. Intrastate offerings are commonly registered by qualification.

Under the USA, which of the following choices is considered an offer of securities?

An investor purchased bonds and received a warrant as a bonus According to the Uniform Securities Act, any security that an investor receives as a bonus for purchasing another security is considered an offer of that security. The USA specifically states that receiving shares due to a stock dividend or other corporate action (e.g., stock split) is never considered an offer or offer to sell that security. A tender offer is an offer to buy a security from existing shareholders.

When dealing with a customer, a broker-dealer is quoting an offering price of $10.00 per share on a stock that is currently trading in the market at $6.00 per share. If the broker-dealer does not disclose the difference in prices to the customer, this would be considered:

An unethical business practice since the quoted price is not related to the current market price This question contains an example of providing a quote that is not based on the contemporaneous market price. Even with proper disclosure, this is considered an unethical business practice. A market maker is prohibited from adding a large markup to a stock price in order to ensure a profit. The contemporaneous market price is the current price at which a firm is willing to effect a trade.

Under the USA, which of the following transactions is NOT considered exempt?

An unsolicited issuer transaction that is executed through a registered broker-dealer The USA provides a specific exemption to unsolicited, non-issuer transactions. However, unsolicited issuer transactions that are executed through registered broker-dealers are not given an exemption. Under the Uniform Securities Act, exempt transactions also include any offer to an investment company or other institutional investor as well as a transaction by an executor of an estate or a trustee involved in a bankruptcy.

An adviser is constructing a bond portfolio for a client whose goals are stable income and return of principal. The adviser determines that the appropriate benchmark to compare this portfolio's performance is the Wheyman Intermediate-term Government Bond Index. Which of the following statements is NOT TRUE regarding this decision?

Any returns of this portfolio that exceed the performance of the benchmark are measured by the beta of the portfolio. When constructing a portfolio, an adviser typically starts by considering the securities in the benchmark and will then determine what additional securities may add value to the portfolio. The benchmark indicates not only the types of securities that should be included in the portfolio, but also the types that should be ignored. In this example, the choice of a government bond index as the benchmark for the client's portfolio is indicative of the fact that the portfolio should not include a large percentage of securities that have a high degree of risk. Since the benchmark is an intermediate-term government bond index, it is expected that it will offer a low return that is in line with the low level of risk that is typically associated with government bonds. Since a benchmark is simply a measuring stick for comparison purposes, choosing this benchmark does not guarantee that the goals will be met and it does not protect against bad investment decisions or market fluctuation. The beta of a portfolio is actually used to compare its volatility to the volatility of the market; it does not measure excess returns above a benchmark (which is measured by alpha). Another important point is that beta is not a measure to be used for fixed-income portfolios. (32491)

If a client executes a secondary market trade through a broker-dealer, what information must be disclosed to the client?

Any unusually excessive fees Broker-dealers and/or their agents are always required to notify their clients if the fees that they are going to be charged are excessive or out of the ordinary. Form ADV Part 2 or the brochure is actually a disclosure document that investment advisers provide to their clients; this is not used by broker-dealers. A prospectus is required only for new issues in the primary market, not when secondary market trades are executed through a broker-dealer. Although all securities recommendations should be suitable, there is no requirement to provide an explanation in advance as to why each trade is suitable.

A client who purchased a security from a broker-dealer has filed a lawsuit arguing that he is entitled to damages after discovering a material error on the firm's part. Which of the following is a reasonable defense to the suit?

As the seller, the broker-dealer may attempt to prove that the firm did not know about the error and that reasonable care was taken to discover any errors As the seller, if the broker-dealer took reasonable care in checking the facts and made an unintentional, material error, it could make a reasonable defense against the lawsuit. The buyer is not required to prove what the broker-dealer knew. Instead, the buyer is only required to prove that the broker-dealer should have known about the error and that it was negligent.

The manager of the XYZ Fund is permitted to move assets between the stock and bond markets, depending on economic conditions. Last year the manager had 70% of the fund's assets invested in stocks while only 30% in bonds. This year she has reversed the ratio. XYZ fund is most likely a(n):

Asset allocation fund An asset allocation fund permits the manager to change investment strategies and vehicles, based on changing market/economic conditions.

Required minimum distributions (RMDs) from a traditional IRA account must:

Begin by April 1 of the year following the one in which the individual turns 72 Required minimum distributions (RMDs) from a traditional IRA must begin by the year following the calendar year in which the individual turns 72.

Your client, Robert Bonderman, would like to invest in a fixed-income security for his portfolio. He needs to balance risk and return. Which of the following investments will provide Robert with the highest overall return, while avoiding speculative-grade investments?

BBB collateral trust certificate, present value = $1,261, market price = $1,158 In order to answer this question, each bond's current market value must be compared to its present value. The present value of each bond has been calculated by discounting the cash flows from each coupon payment and determining the present value of the principal repayment, using the investor's desired rate of return. When comparing the present value of a bond to its current market value, an investor can determine if the bond is fairly valued, undervalued, or overvalued. The AAA and Baa bonds have a current market value greater than the present value (i.e., the bonds cost more than they're worth). Since the bonds are trading at a premium to their present value, the investor would receive a lower return than desired. The BBB and BB bonds have a current market value less than their present value (i.e., they cost less than what they're worth). Since these bonds are trading at a discount to their current market value, they would provide a return that's higher than what the investor desires. However, since the investor also wants to avoid speculative-grade investments, (BB and below) the BB bond choice should be eliminated.

Jim is an agent of a broker-dealer who has received an employment offer from another broker-dealer. If Jim resigns from his present firm, his registration will:

Be terminated through the filing of Form U5 The registration of an agent is only effective for the period during which he is associated with a broker-dealer. If an agent resigns from employment with a broker-dealer, the agent's registration will be terminated. However, the agent's registration will be reinstated if he registers with a new firm within two years. An agent's active registration will expire if it is not renewed each year by December 31.

Your client John has a portfolio of large-cap stocks representing companies in many different industries. You want to help him reduce his exposure to market risk by recommending investments that are negatively correlated with his current holdings. Of the following investments, you would most likely recommend a(n):

Bond index fund When two groups of securities are negatively correlated, it means that their prices tend to move in the opposite direction. When the first group goes up, the second goes down and vice versa. Of all the choices, fixed-income securities are most likely to be negatively correlated with the client's current holdings. An S&P 500 index fund would largely overlap his current holdings. Exchange-traded funds invest in a variety of securities, and with no further information, this is probably not a good choice. Hedge funds are largely illiquid investments that are unsuitable for most retail investors.

Kevin is an agent of CMP Broker-Dealers which is registered in 10 states. Kevin is currently registered in five states, but only transacts business with institutional clients. Due to recent mergers, some of Kevin's clients will be relocating to North Carolina and CMP now wants to open a new office there. Kevin will not be moving from his current office in Missouri, a state in which both Kevin and CMP are registered. Under the USA:

Both Kevin and CMP are required to be registered in North Carolina This is a tricky question, but the main concept is that a broker-dealer is not required to register in a state if it has "no place of business in the state." However, since CMP is opening an office in North Carolina, the firm is required to be registered in the state regardless of the type of securities being sold or the types of clients with which it conducts business. Since the broker-dealer will be registered in North Carolina, any agents of that broker-dealer who execute client transactions in that state are also required to be registered, regardless of the types of clients being represented. Although Kevin may not visit or work out of the North Carolina office, since his firm has a place of business there and Kevin will be effecting transactions in the state, he must register

Kevin is an agent of CMP Broker-Dealers which is registered in 10 states. Kevin is currently registered in five states, but only transacts business with institutional clients. Due to recent mergers, some of Kevin's clients will be relocating to North Carolina and CMP now wants to open a new office there. Kevin will not be moving from his current office in Missouri, a state in which both Kevin and CMP are registered. Under the USA:

Both Kevin and CMP are required to be registered in North Carolina This is a tricky question, but the main concept is that a broker-dealer is not required to register in a state if it has "no place of business in the state." However, since CMP is opening an office in North Carolina, the firm is required to be registered in the state regardless of the type of securities being sold or the types of clients with which it conducts business. Since the broker-dealer will be registered in North Carolina, any agents of that broker-dealer who execute client transactions in that state are also required to be registered, regardless of the types of clients being represented. Although Kevin may not visit or work out of the North Carolina office, since his firm has a place of business there and Kevin will be effecting transactions in the state, he must register.

Which of the following statements BEST describes the similarities between an S Corporation and a general partnership?

Both provide flow-through of losses An S Corporation provides limited liability to its shareholders, but a general partnership involves full liability of all the partners. (A limited partnership would provide limited liability to the limited partners.) However, both an S Corporation and a general partnership offer the tax advantage of flow-through treatment of profits and losses, where a share of both is passed through to each owner every year.

During the course of an investigation under the Uniform Securities Act, the Administrator finds that an investment adviser representative has engaged in fraudulent activities. The representative says that he is unaware of any fraud and was only following the directions of his firm. He produces a written recommendation list issued by his firm upon which he based his recommendations. What action would the Administrator most likely take in this situation?

Bring an action in court to impose a fine but not a prison sentence Any person who willfully violates the Uniform Securities Act may be fined up to $5,000 and imprisoned for up to three years. However, if the person proves that he had no knowledge of the fraudulent activities or that he was not aware or could not have been reasonably aware of what was going on, then a prison sentence may not be imposed.

The possibility that a company may perform poorly, causing its stock to decline in value is called:

Business risk Business risk is the possibility that a corporation's business will not do well, causing its stock to drop in value, or even become worthless, if the company declares bankruptcy.

If a client is long a large number of stocks in different industries, he may reduce the risk of a market decline by doing which of the following?

Buy S&P 500 Index puts By buying puts on the S&P 500 Index, the client has the right to receive cash, the in-the-money amount, should the market decline. Selling calls on the Index will provide the investor with income, but little protection. Buying calls gives the investor the right to receive cash, the in- the-money amount, should it increase. Selling puts obligates the investor to pay the in-the-money amount should it decline

Jerry is a partner of an investment advisory firm and also an agent of an affiliated broker-dealer. When a recommendation is made for an advisory client to trade a security, Jerry earns a commission and the IA collects an advisory fee. The firm's fiduciary duty is satisfied if:

Clients are provided with a disclosure of Jerry's total compensation A person who is employed by an investment adviser may also act as an agent if he is employed by an affiliated broker-dealer. If an investment adviser earns a advisory fee and the agent receives compensation for executing securities transactions that result from the recommendations of his affiliated adviser the IA will satisfy its fiduciary duty by disclosing the agent's total compensation to its clients

Which of the following features is a characteristic of a Roth IRA?

Contributions are made with after-tax dollars A Roth IRA is funded with after-tax dollars; therefore, there is no immediate tax benefit. Withdrawals from a Roth IRA are classified as qualified distributions only if it has been at least five years since the investor first opened and contributed to her Roth IRA. Qualified distributions may be withdrawn tax-free when the investor reaches age 59 1/2. Any person who has earned income is NOT eligible to fund a Roth IRA since income limitations apply to investors who establish Roth IRAs.

If an adviser wanted to determine a company's ability to pay debts that would be maturing in one year, the adviser would be most interested in the:

Current ratio The current ratio is a comparison of current assets to current liabilities for a one-year period. The acid-test ratio excludes inventories and usually is for a one- to three-month period. (62003)

Advisory affiliates include all of the following, EXCEPT:

Customers of the adviser All are considered affiliates of the adviser, with the exception of the adviser's customers.

The economic cycle consists of four stages--full recession, early recovery, late recovery, and early recession. Since the market tends to move ahead of the economic cycle, an adviser who believes the economy is in a full recession may advise clients to rotate into what sector?

Cyclicals, such as transports and technology n anticipation of changes in the economic cycle, an adviser may advocate sector rotation, in which a client's portfolio holdings are rotated from one or more business sectors into others. If the economy is in full recession, one strategy is to rotate into cyclical stocks that would benefit from a recovering economy, such as industrials, e.g., manufacturers of autos, appliances, or houses, which would experience increased sales in a recovery. (66213) 18 of 110

Which of the following actions by an agent of a broker-dealer is prohibited?

Determining the type of joint account that a client should open An agent is in the business of representing a broker-dealer in effecting securities transactions for her firm's account and the accounts of others. Providing a general description of the details and characteristics of brokerage products and accounts is acceptable. On the other hand, determining or suggesting the best type of account for a customer to open has legal ramifications and should be provided by an attorney.

Under the Capital Asset Pricing Model, risk is defined as:

Deviation in returns The Capital Asset Pricing Model (CAPM) measures risk using beta to measure systematic risk and alpha to measure nonsystematic risk. Risk is the variance in expected return, not the loss of client funds or failure to meet an objective.

Buy and hold and systematic rebalancing are examples of passive approaches to asset allocation, and based on the theory known as:

Efficient Market Hypothesis Efficient Market Hypothesis (Theory) states that financial markets are efficient and that the prices of securities reflect all known information; therefore, it is impossible to outperform or time the market. Sector rotation is the moving of investments from one industry sector into another in anticipation of a change in the economy. CAPM, Capital Asset Pricing Model, describes the relationship between risk and expected return. Modern Portfolio Theory focuses on diversifying across various asset classes to enhance returns without significantly increasing risk.

All of the following choices are typical characteristics of a 401(k) plan, EXCEPT:

Employers must match employee contributions In a 401(k) plan, an employee can usually make a pretax contribution to the plan and reduce taxable income. Employee contributions and growth in the account are tax-deferred. Employers are not required to match contributions, but may do so.

According to the Uniform Securities Act, the Administrator may require federal covered advisers to:

Give notice or notice file in any state where they transact business with six or more individual retail clients The Administrator may require federal covered investment advisers to notice file if they transact business with more than five noninstitutional clients over a 12-month period. Notice filing is not a form of registration. Instead, it is the process of a federal covered adviser sharing information with the Administrator that it has filed with the SEC. (67640)

A technology company's stock is listed on an exchange and is also traded over-the-counter by a small number of market makers. The stock is considered by the Administrator to be a:

Federal covered security and not subject to registration with the Administrator Securities that are listed on the NYSE, Nasdaq, or other national exchanges are considered federal covered securities and exempt from registration with the Administrator. This federal covered status applies regardless of where other trades may take place. Although notice filing does apply to certain federal covered securities, it does not apply to listed securities. Investment company securities and securities that are issued under Regulation D Rule 506 are considered federal covered securities (exempt from state registration), but subject to notice filing.

A client of an IA owns his own home and the title is in his name. If he wants to avoid probate when the property is transferred upon his death, the adviser may recommend which of the following?

File a transfer on death (TOD) deed which identifies a specific beneficiary In order to avoid probate upon the clients death, the IA may recommend filing a transfer-on-death (TOD) deed which names one or more specific beneficiaries.

If an investment adviser uses a social media site as a form of advertising, all records of its use must be maintained for at least:

Five years According to NASAA's recordkeeping requirements, any notice, circular, or advertisement, including any communications through social media, must be maintained for five years

Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is:

Five years The statute of limitations for criminal violations under the Act is five years. (62943)

An agent is bullish on XYZ stock and intends to recommend the stock to three of her clients. Before the recommendations are made, the agent buys a large block of XYZ stock for her own account. Then, once the clients' orders are completed, the RR sells her shares for a large profit. The agent s action is referred to as:

Front-running When a broker-dealer or agent buys or sells stock or options before the public release of proprietary information concerning a large block order, it is considered a prohibited practice that is referred to as front-running. As shown in this question, the agent buys the stock and then recommends that her clients buy the same stock. After the clients buy the stock, the RR would likely benefit from the potential increase in the stock's price. Even if the client recommendations are suitable, it is unethical for the RR to put her own interests before her clients' interests.

Which of the following statements is TRUE regarding futures and forward contracts?

Futures contracts are standardized, and forward contracts are not standardized The terms of a futures contract are standardized and typically trade on an exchange. Forward contracts are privately negotiated between two counter parties and the terms are customized

Which of the following statements about barbell strategies is NOT TRUE?

Gains from the short-term maturities will offset losses in the long-term maturities A barbell strategy consists of buying short-term and long-term bonds, but not intermediate-term bonds. The purchase of long-term bonds allows an investor to capture higher long-term interest rates. The short-term bond provides the opportunity to invest elsewhere if the bond market takes a downturn. There is no guarantee that any money made on the short end of the strategy will offset losses that could occur on the long end of the barbell.

Which of the following is TRUE concerning the private placement of securities being distributed under Rule 506(c) of Regulation D?

General advertising is permitted, but all investors must be accredited. Under Rule 506(c) of Regulation D, issuers may raise an unlimited amount of capital and they may solicit all types of investors; however, the issuer can only accept accredited investors. In other words, general advertising/solicitation is allowed, but only accredited investors may purchase the securities. Under Regulation D, issuers may also sell securities privately through a 506(b) offering. Two key differences between 506(c) and 506(b) are that 506(b) offerings do not allow for general advertising/solicitation and the issuer may sell to an unlimited number of accredited investors, but no more than 35 non-accredited (yet still sophisticated) investors. (89022

One of your clients would like to buy 100,000 shares of Smallco Industries, a thinly traded OTC security. You would like to purchase a nominal amount of shares ahead of the client for your own account, since his prior picks have proven to be profitable. Under which of the following conditions is this action acceptable?

Generally, you should never take this action Taking this action would constitute an ethical violation. The practice is often referred to as trading ahead of a client. Some practices, even when disclosed, are still considered unethical and should be avoided.

An 81-year-old father is establishing a bypass trust for his two adult children who are both in their 40s. His investment adviser is evaluating the risks and benefits of numerous investment vehicles. Which of the following choices is MOST appropriate investment in a bypass trust?

Growth stocks, since the beneficiaries will not need the funds for several years A Bypass Trust (or Credit Shelter Trust) is a type of irrevocable trust and is most commonly used to pass assets from parents to children at the time of the second parent's death. The key to this specific question is to identify the ages of the beneficiaries. Since both children are in their 40s, a growth investment is the most appropriate. The focus must be on the beneficiaries, not the grantor.

A client contacts a firm and indicates his desire to buy a call option on a stock that he already owns. Why would the investor buy a call option on the stock?

He wants the ability to buy more shares at a guaranteed price in case the stock goes up When buying a call option on a stock, the client is able to buy the underlying security at a specific price. He would buy a call option if he believes the price of the security is going to increase. In this situation, buying a call does not generate income, hedge risk, or increase the rate of return.

An investment adviser is registered in State X. A new employee is recently hired as an investment adviser representative (IAR), but had previously worked for an adviser in State Y. The IAR still directs client communications with 22 of her clients from State Y, but no longer has a place of business there. Under the Uniform Securities Act, the IAR would be required to register in State Y if six or more of the clients are:

Highly qualified wealthy investors with a net worth of more than $1 million Under the Uniform Securities Act, investment advisers and investment adviser representatives are exempt from registration in a state if they have no place of business in the state and all of their clients are institutional investors. Examples of institutional investors include broker-dealers, banks, insurance companies, qualified employee trusts, and other investment advisers. Remember, there is no registration exemption for advisers simply based on the fact that their clients are wealthy or have a high net worth.

If an agent of a broker-dealer is advertising on the Internet, which TWO of the following statements are TRUE? The agent must disclose the name of her affiliated broker-dealer. The broker-dealer that creates the advertisement is responsible for review and approval of the content. The agent is working outside of the scope granted by the broker-dealer. A legend must be included which states that the agent is exempt from the anti-fraud provisions of applicable state laws

I and II According to NASAA's interpretive order concerning broker-dealers, investment advisers, broker-dealer agents, and investment adviser representatives regarding general dissemination of information, the name of the broker-dealer or investment adviser that approved the content as well as the one with whom the agent is affiliated must be on all Internet-based advertising. In addition, only individuals who are either properly registered within the potential customer's state or exempt may follow up and respond to potential leads.

Which TWO of the following are considered exempt reporting advisers (ERAs)? Venture capital advisers Private fund advisers with assets under management of less than $150 million Family office advisers Private fund advisers with assets under management exceeding $150 million

I and II Venture capital advisers and private fund advisers with assets under management of less than $150 million are exempt from registration as an adviser with the SEC and/or state Administrator; however, they must still pay fees and report public information via the IARD/FINRA system.

An agent of a broker-dealer publishes a Web page that discusses the benefits of dollar cost averaging and why investors should invest with long-term goals in mind. If a customer in a state where the agent is not registered reads the Web site, which of the following legends must be on the Web site in order to take advantage of the safe harbor rule and not register in the state? The agent will only conduct business in the state if registered or exempted. Follow-ups will be handled only by agents who are registered or exempt. Internet advertising is exempt from state regulation and subject to SEC review. The rule number of the safe harbor being used is disclosed.

I and II only According to NASAA's interpretive order concerning broker-dealers, investment advisers, broker-dealer agents, and investment adviser representatives, for the general dissemination of information on products and services, when advertising on the Internet an agent must include a legend in which it is clearly stated that (1) A broker-dealer agent or investment adviser representative in question may transact business in the state only if first registered, excluded, or exempted from state registration requirements. (2) Follow-up, or individualized responses to persons in this state by a broker-dealer agent or investment adviser representative that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with state registration requirements, or an applicable exemption or exclusion. The SEC is not the only entity that regulates Internet advertising, and there is no requirement to disclose rule numbers.

Which of the following statements are TRUE of both variable life insurance and variable annuities? The investment risk is borne by the contract owner. The product must be sold with a prospectus. Partial surrenders are first treated as a tax-free return of principal. If the contract owner dies, the beneficiary receives any proceeds tax-free

I and II only Although partial surrenders of variable life insurance policies are first treated as a return of principal up to the amount of basis, variable annuities are subject to interest-first taxation. Only life insurance proceeds pass to beneficiaries tax-free. Beneficiaries of variable annuity contracts are taxed on the proceeds in the same manner as the annuitant

Colleen is an agent for a broker-dealer. She is buying a condominium but needs additional cash for the down payment. Her father, who is also one of her clients, has offered to help. Which of the following is TRUE? Colleen's father may give her a gift without limitation Colleen's father may give her a loan Loans from clients are strictly prohibited Any loans from clients are limited as to the amount

I and II only Colleen may accept a gift from her father. Also, she may borrow money from certain clients such as immediate family members, or clients who are in the business of loaning or borrowing money, or if there is a personal or business relationship that exists outside the brokerage relationship.

Which of the following is/are regulated under the Investment Company Act of 1940? Investment companies investing money into other investment companies The firm that serves as a mutual fund's custodian and holds its assets The minimum rate of return required to remain registered as a fund The performance of the investment company

I and II only The Investment Company Act of 1940 regulates investment companies, their investment advisers, custodian banks, and distributors. The Investment Company Act of 1940 does not regulate performance and it does not require minimum rates of return in order to maintain registration. (32401)

Under the Uniform Securities Act, an individual applying for an investment adviser representative registration may be required by the Administrator to: Pass an examination Pay a filing fee Maintain a minimum net capital

I and II only When an individual applies for an investment adviser representative registration, the Administrator may require the individual to pass an examination (which may be oral, written, or both) and pay a filing fee. Investment advisers and broker-dealers may be required to maintain a minimum net capital in addition to meeting the two previously mentioned requirements.

Which TWO of the following statements are TRUE regarding the contributions that are made to public charities and private foundations? Contributions that are made to public charities are tax-deductible Contributions that are made to public charities are non-deductible Contributions that are made to private foundations are tax-deductible Contributions that are made to private foundations are non-deductible

I and III According to IRS rules, contributions that are made to either public charities or private foundations are tax-deductible (pre-tax).

An adviser is comparing two bonds of similar credit quality and duration for a client. The client is seeking a yield of 6.5%. After performing discounted cash flow analysis on each bond, the adviser has determined that Bond A is trading at a discount to its present value, while Bond B is trading at a premium to its present value. Which TWO of the following statements are TRUE? Bond A is priced attractively and should be purchased. Bond B is priced attractively and should be purchased. The investor will earn an annual interest rate greater than 6.5% with Bond A. The investor will earn an annual interest rate greater than 6.5% with Bond B.

I and III Discounted cash flow (DCF) analysis evaluates the present value of all coupon payments and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for a client. If a bond is trading at a discount to its present value, the investor will earn more than the interest rate that has been used to calculate the present value. Conversely, a bond that is trading at a premium to its total present value will be worth less than the price of the bond. (The investor would be overpaying for the bond.)

In which TWO of the following ways do exchange-traded funds (ETFs) differ from mutual funds? ETF share prices may change throughout the trading day ETF share prices are determined at the close of the market each day ETF shares may be sold short When ETF shares are purchased, buyers pay a sales charge

I and III ETFs differ from mutual funds in the following ways: the shares trade on an exchange, the share prices change throughout the day based on supply and demand, and the shares may be sold short and purchased on margin. Also, rather than paying a sales charge, an investor will pay a commission on her ETF trades.

The Administrator of the state of Wisconsin has designated the Investment Adviser Registration Depository (IARD) as the approved method for filing registration applications in that state. All filings must be done electronically through the IARD. Under which TWO conditions would an investment adviser requesting an application in Wisconsin NOT need to file electronically with the IARD? The IARD is not able to recognize the form that is filed. The application is not filed during normal business hours. The investment adviser claims a hardship exemption from filing. The firm has not previously filed a Form ADV.

I and III In states where the Administrator has designated the IARD as the method for filing registration applications electronically, two exemptions are available. The exemptions are given in cases where the form that is filed cannot be accepted by the IARD and for hardships incurred through unexpected technical difficulties in filing. In such cases the investment adviser may file a manual application.

Which TWO of the following statements are TRUE regarding the buyers of options? Buyers of calls have the right to buy stock. Buyers of calls have the right to sell stock. Buyers of puts have the right to buy stock. Buyers of puts have the right to sell stock.

I and IV Once an investor pays the option's premium, the investor receives the right or the ability to control the option. Buyers of calls have the right to buy stock at the strike price, while buyers of puts have the right to sell stock at the strike price. Sellers of options assume obligations. (62005)

Under the Uniform Securities Act, which of the following statements is/are TRUE regarding the registration of securities? A security is considered registered for one year from the effective date of its registration statement Once the registration statement is declared effective by the Administrator, the security is considered to be registered as long as the issuer files quarterly and annual financial statements If the registration statement for a security is declared effective by the Administrator of one state, it is also immediately effective in any state in which an identical registration statement has been filed The filing of a registration statement may be done by a person other than the issuer

I and IV only Under the USA, a registration statement is effective for one year from its effective date and may be filed by the issuer, a registered broker-dealer, or any other person on whose behalf the offering is being made. The filing of quarterly and annual financial statements is not a requirement for registration. Also, if an Administrator of one state declares an offering effective, it does not automatically mean that the registration is effective in any other state

Rancho Rio Investments is a single-office investment advisory firm that is based in New Mexico and plans to expand its business to New Jersey. Under the Uniform Securities Act, in which TWO of the following situations is Rancho Rio NOT considered to be an IA in New Jersey? The firm transacts business only with New Jersey broker-dealers The firm transacts business in New Jersey, but only with a few employee benefit plans that contain assets under $500,000 The firm's only business in New Jersey is with 10 or fewer non-institutional customers within a 12-month period The firm's only business in New Jersey is with a limited number of federal covered advisers

I and IV only Under the Uniform Securities Act, any investment adviser that has no place of business in a given state and whose clients are banks, broker-dealers, investment advisers, and other institutions is exempt from registration in that state. Also, any IA that has no place of business in the state and deals with five or fewer retail customers who are residents of the state within a 12-month period is also exempt. Since this question makes no reference to Rancho Rio having an office in New Jersey, it may transact business with New Jersey institutional investors, such as broker-dealers (choice I) and investment advisers (choice IV), without being registered in New Jersey. To do business with an employee benefit plan in a state without being registered, the plan must have assets of $1 million or more.

When selecting a value stock, an agent would look for which of the following characteristics? High earnings per share Low price/earnings ratio Low price to book value High dividend yield

I, II, III, and IV A value stock is one that tends to trade at a lower price relative to its fundamentals (i.e., dividend yield, earnings per share, sales, price/earnings ratio, market price to book value) and is, therefore, considered undervalued by a value investor. These companies tend to have the following characteristics: high earnings per share, high dividend yield, low price-to-book ratio, and/or low price-to-earnings ratio.

Which of the following choices is NOT a broker-dealer in State B? An agent in State A who contacts a client in State B A corporation that sells commercial paper every other week in State B A broker-dealer registered in State A, where its only office is located, which has only insurance companies as clients in State B A bank trust department that buys and sells securities for its customers

I, II, III, and IV Agents, issuers, and banks are not broker-dealers. Also, a person with no place of business in a state, who deals only with institutional investors, is not a broker-dealer.

Based on the suitability standards of the Uniform Securities Act, which of the following should be considered by an investment adviser when making recommendations to clients? Information obtained through a personal meeting with the client The client's current economic condition The clients stated investment objective The client's investment experience

I, II, III, and IV Investment advisers should consider all relevant information about a customer when determining specific investment recommendations. IAs may not consider information that was not provided to them directly by the client.

Which of the following elements are required for an investment contract to be considered a security? An investment of money An expectation of profits A common enterprise Efforts made by a third party

I, II, III, and IV The test of whether an investment meets the definition of a security was established by a Supreme Court case (referred to as the Howey Test). All of the four choices listed are required parts of the test.

Under IRS rules, which of the following items are exempt from the definition of earned income? Unemployment benefits Alimony Child support Income received from investments in property Net earnings from self-employment

I, II, III, and IV only The IRS defines earned income as compensation received for personal services that have been rendered. According to the IRS, all of the following items are considered earned income: Wages, salaries, commissions, and tips Union strike benefits Long-term disability benefits received prior to minimum retirement age Net earnings from self-employment However, unemployment benefits, alimony, and child support are not considered earned income. Income that's received from investments in property is defined as passive income, which is different from earned income and treated separately by the IRS. (17395)

What information is important when determining whether a limited partnership is appropriate for a particular client? The client's ability to assume risk The client's investment objectives Whether the client's other investments are liquid The client's educational background

I, II, and III only A client's educational background is not an important factor when determining whether a limited partnership is appropriate for the client.

Related to a transaction, which of the following actions would cause it to be subject to the laws of State Z? The offer and acceptance occur in State Z. The offer originates over the phone from State Z and is directed to State A. The offer is mailed from State A, directed to State Y, and accepted in State Z. The offer originates over the phone from State Y and the sale occurs in State A.

I, II, and III only A securities transaction is subject to a state's securities laws if the offer originates in, is directed to, or is accepted in the state. Of the choices listed, only choice (IV) has all of the action occurring outside of State Z. (67572)

A broker-dealer is required to have in place a business continuity plan that addresses all the following issues, EXCEPT: How the firm will communicate with regulators Mission-critical systems That the firm may not deviate from the plan That the plan must be reviewed by the firm annually

III only All of these issues are addressed in the firm's business continuity plan, except choice (III). The firm may deviate from the plan as events dictate

Under ERISA, the Investment Policy Statement of a qualified plan: Defines the roles of the parties involved in the management of the plan Identifies specific asset classes to be offered in the plan Lists the criteria for the selection and performance requirements for each investment option Requires the fiduciary of the plan to be registered as an IA with the state Administrator

I, II, and III only The Investment Policy Statement of a qualified plan does not address the registration requirements or status of the fiduciary. However, under the Uniform Securities Act, an IA has fiduciary responsibility and is exempt from state registration if the plan's assets are at least $1 million and the IA has no place of business in the state.

Under the Uniform Securities Act, an Administrator who requires the posting of a surety bond MAY: Accept cash Accept securities Use discretion as to whether the type of securities and the amount of the deposit are appropriate Disallow the deposit of cash or securities instead of a bond

I, II, and III only The state Administrator may accept a deposit of cash or securities in lieu of a surety bond. The Administrator may determine the type of securities acceptable for deposit but may not altogether disallow deposits of securities in lieu of a bond.

XYZ broker-dealer is located in State A, where it maintains its corporate headquarters. Under the Uniform Securities Act, XYZ would meet the definition of a broker-dealer in State B if it: Has an office in State B and only sells securities to investment companies located in State B Has an office is State B and conducts business only with other broker-dealers that do not have an office in State B Has no office in State B and only sells securities to high net worth clients that are residents of State B Has no office in State B and only conducts business with other broker-dealers that have an office in State B

I, II, and III only Under the USA, the term broker-dealer does NOT include a person that has no place of business in the state AND only transacts business with issuers, other broker-dealers, financial institutions, or institutional buyers. If a firm has an office in State B, it would meet the definition of a broker-dealer in State B regardless of the clients it sells securities to or conducts business with. Whether the other broker-dealers or institutional clients have an office in State B is irrelevant, since XYZ has an office in State B. There is no exemption from the definition of broker-dealer in a state if you sell securities to high net worth individual investors since they are not considered institutional buyers.

In order to determine the lump-sum amount that a person will need at retirement, what elements are required for an investment adviser to make the projection? Life expectancy Inflation rate Current cash flow Investment return

I, II, and IV only The three elements that are required to project the lump sum amount that a person will need at retirement are life expectancy, inflation rate, and investment return. However, the person's current cash flow is relevant, but only after the lump-sum estimation has been completed. For example, the current income of a 30-year-old will not have an effect on the amount that she will need in order to retire at age 60. (89026)

A whole life insurance policy may be referred to as: Permanent life Term life Ordinary life Straight life

I, III, and IV only Whole life insurance may be called permanent, ordinary, or straight life insurance. Term insurance is a completely different type of policy that only provides coverage for a specific period.

Which TWO of the following statements are TRUE concerning Section 457 plans? They are state-sponsored and used to fund higher education expenses. They are used to fund retirement. They grow tax-deferred. They grow tax-free.

II and III A Section 457 plan is a type of retirement plan used by many public sector workers. These 457 plans grow on a tax-deferred basis and are generally subject to the same contribution limits as 401(k) and 403(b) plans. All have similar tax features and contribution allowances. The difference between the plans is the type of employee who may use them. A 401(k) plan is used by for-profit employees, a 403(b) plan by nonprofit employees, and a 457 by some local government workers. State-sponsored, higher education savings vehicles are referred to as Section 529 plans, not 457 plans.

Which TWO of the following statements are TRUE regarding the cash value in a variable universal life policy? It is fixed during the life of the contract. It can fluctuate with the performance of the separate account. Any loans taken will reduce the cash value. Loans have no effect on the cash value.

II and III In a variable universal life policy, the performance of the separate account could increase or decrease the cash value. Loans against the policy would reduce the cash value available.

Which TWO of the following investments are NOT considered money-market instruments? A U.S. Treasury bill A money-market mutual fund A convertible debenture A tax anticipation note

II and III Money-market securities are defined as debt instruments that have less than one year until maturity. U.S. Treasury bills and tax anticipation notes (TANs) are both short-term debt instruments and are considered money-market instruments. A money-market mutual fund is an instrument that issues common shares which represent an investor's ownership interest in a portfolio of money-market securities. Convertible debentures are debt instruments; however, since the maturity of the debentures is not provided in the answer, it should not be assumed to be one year or less.

Which TWO of the following statements are TRUE regarding investment advisers with $135 million of assets under management? They must register in any states in which they will conduct business. They are exempt from state registration. They must register with the SEC. They must register with the SEC only if their clients are all retail investors.

II and III NSMIA, the National Securities Markets Improvement Act, was created to eliminate some of the dual requirements of federal and state securities law. The federal government and the states have a division of responsibility when regulating investment advisers. Unless exempt from registration, advisers are required to register with either the state Administrator or the SEC, but not both. According to Dodd-Frank, an adviser has a choice and may register with the state Administrator or the SEC once it has assets under management (AUM) of $100 million. Once the adviser's AUM reaches $110 million, it is categorized as a federal covered adviser and is required to register with the SEC. In addition, firms that provide advice to an investment company, or firms that provide advisory service in 15 or more states, are also categorized as federal covered. Once registered with the SEC, a mid-sized adviser may remain registered with the SEC provided it has AUM of at least $90 million. If an adviser's AUM falls below $90 million, it must instead register at the state level. (62646)

According to AML procedures, which TWO of the following details is a broker-dealer required to obtain when opening an account for a non-U.S. person? Current employer Passport number and issuing country Current address Telephone number

II and III To satisfy the requirements of the Customer Identification Program (CIP) when opening an account for a non-U.S. person, a firm must obtain the person's name, address, date of birth, and either passport number along with country of issuance or taxpayer identification number. The person's employment information and telephone number are not required in order to confirm the person's identification.

Jack has a substantial amount of cash value built up in his variable life insurance policy. He would like to use some of it for a home renovation project. Which TWO of the following choices would be used to explain to Jack his options for accessing his cash value? If he withdraws some of his cash value, it will be treated as taxable earnings first, then a tax-free return of premiums (LIFO). If he withdraws some of his cash value, it will be treated as a tax-free return of premiums first, then taxable earnings (FIFO). If he takes a loan against the cash value, it will be taxed as earnings first, then treated as a tax-free return of premiums (LIFO). If he takes a loan against the cash value, it will be tax-free.

II and IV Any withdrawal of cash value from a life insurance policy is considered a return of premiums first, which would be tax-free. Withdrawals above the amount of premiums paid will be considered interest and, therefore, taxable as income. Policyholders usually prefer to borrow against their cash value, since this would be tax-free. The loan does not need to be repaid, but any amount still outstanding upon the death of the insured will be subtracted from the death benefit.

Which of the following statements are TRUE regarding a dollar-weighted rate of return? It may be used to compare the performance of two money managers. It is a way of calculating an investor's internal rate of return. It takes into consideration the inflows and outflows of cash. It measures the average return that the client's investment earned.

II, III, and IV only Dollar-weighted rates of return are used to calculate a client's internal rate of return and take into account how much the client earned based on the amount of money invested. This method is not considered a fair way to measure the performance of money managers since they have no control over when their clients invest. Time-weighted averages are used to compare the performance of two money managers.

All the following descriptions are TRUE of a closed-end management company, EXCEPT: Shares are purchased at the current offering price Shares are redeemable Investors can purchase full and fractional shares The company may issue only common stock When making a purchase, a customer will pay a markup or a commission

II, III, and IV only Shares of a closed-end fund are not redeemable instruments. The shares are usually traded in the open market on an exchange. The purchaser pays either a commission or a markup on both a purchase and a sale. A closed-end fund may issue common stock, preferred stock, or bonds. The fund may issue only full shares. Unlike a mutual fund, the closed-end management company may not issue fractional shares.

Pick TWO statements that are TRUE regarding time-weighted and dollar-weighted rates of return. Time-weighted returns allow investors to measure how much money they have earned on their investments. Dollar-weighted returns allow investors to compare the performance of two investment advisers. Time-weighted returns allow investors to compare the performance of two investment advisers. Dollar-weighted returns allow investors to measure how much money they have earned on their investments.

III and IV Dollar-weighted returns measure the performance of an investor's actual investment over a defined period. Time-weighted returns assume that a fixed-dollar amount was invested and then measure how that amount would have performed over a defined period. Time-weighted averages are often used to compare the performance of mutual fund managers.

What is the biggest advantage of investing in a general partnership?

Income is only taxed once Partnerships are tax-advantaged investments since the income they generate is taxed only once. A partnership's income passes through to its partners and is, therefore, taxed at each partner's level. In general partnerships, since there are no limited partners, limited liability is not an available feature. Also, profits are not automatically split equally among the partners.

Which of the following would NOT be considered an active portfolio management strategy?

Indexing An indexed portfolio attempts to mirror the composition of a benchmark index, such as the S&P 500 or the Russell 2000. Since buying or selling occurs only when funds are added to or withdrawn from the portfolio, transaction costs are minimized. Sector rotation refers to a strategy that attempts to time the movement of funds into different market sectors based on differences in performance in those segments. For example, an investor who anticipates that technology stocks have reached a peak, and that utility stocks will begin to advance, might move funds (rotate) from one sector to the other.

While acting in a fiduciary capacity, what must an investment adviser provide to a customer who's intends to make an investment?

Information this particular investor needs in order to make an investment decision As fiduciaries, investment advisers have a duty of loyalty to their clients. In addition to providing suitable advice, fiduciaries must provide their clients enough information for them to make informed investment decisions. Fiduciaries are required to make recommendations based on what a "prudent investor" would do. However, if a particular client needs additional disclosures, a fiduciary must provide them. A fiduciary that advises a more experienced client is able to tailor the information to that client's specific needs. In many cases, an adviser is not required to provide all of the information that a beginning or average investor would need.

If an agent participates in a joint account with a client, the agent may:

Initiate transactions in the account If an agent has a joint account with a client, she may share in the gains and losses proportionately, and initiate transactions. However, any distribution will be made payable to all parties in a joint account unless the joint owners consent.

A married couple is about to retire and would like to roll over their employer-sponsored 401(k) plans into an IRA and invest all of their assets in U.S. Treasury bonds. Based on this strategy, which risks are the most significant?

Interest-rate risk and inflation risk Treasury bonds are long-term debt instruments that are guaranteed by the U.S. government. Because they are backed by the U.S. government, regulatory risk and business risk do not really apply to these investments. However, investing in bonds will expose investors to interest-rate risk and inflation. Interest-rate risk is based on the concept that if interest rates rise, bond prices will decline. Inflation risk is the chance that the cash flows from an investment will not be worth as much in the future because of changes in purchasing power due to inflation.

An investment adviser's client is considering acquiring a company for $10 million. The company's expected future cash flows are $2 million in the first year, $4 million in the second year, and $8 million in the third year. Which of the following measures would be most helpful when evaluating the this investment?

Internal rate of return (IRR) This is really a question about the present and future values of the company. The present value of the company is simply the purchase price of $10 million, while the future values are the cash flows of $2 million, $4 million, and $8 million. The internal rate of return is therate of return that makes the present value of all cash flows[i.e. $2/(1 + r)1, $4/(1 + r)2, and $8/(1+ r)3] equal to the market value (i.e. $10 million). In the formula, the "r" is the missing IRR. Once the IRR is calculated, the client can use that rate to compare this investment to other investments (e.g., competing companies, bonds, or money market securities).

An Administrator in State Y who receives a complaint regarding an advertisement that originated in State X will take which of the following actions?

Investigate the complaint The Administrator would first investigate the complaint before taking any action. (62845)

Which of the following is NOT a leveraged investment strategy?

Investing in a company with a large amount of debt outstanding When a person leverages a portfolio, he acquires a loan in order to buy more securities. This activity is done in a margin account, which allows him to magnify his investment results by increasing the number of shares or bonds that he is able to purchase. Investing in a company that has issued a great deal of debt, such as a utility company, is not a leveraged portfolio strategy.

When investing in a variable annuity, investors would be MOST concerned with which of the following risks?

Investment risk In a variable annuity contract, an investor's principal is invested in a separate account. The separate account contains a pool of securities that will fluctuate over time. A variable annuity client would be most concerned with the fact that the value of his investment will fluctuate due to changes in the overall market.

What is the benefit of discounting the cash flows of a fixed-income security?

It compares the price of a bond against the sum of the present values of the bond's future payouts A discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determines the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for a client.

Which of the following statements is accurate regarding dollar cost averaging?

It is a systematic, fixed-dollar method of investing Dollar cost averaging is a systematic approach in which an investor periodically contributes a constant dollar amount over a fixed period. Buying more shares when prices are low and fewer when prices are high results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits, lower cost than the average price, are only obtained when the value of the asset fluctuates and the investor buys more shares

Kyle and Christina have been friends since high school. Christina is an agent of a broker-dealer, while Kyle is a wealthy musician. Together they open a joint brokerage account. They each deposit $30,000 and agree to split any profits equally. What are the regulations for this arrangement?

It is acceptable if Kyle, Christina, and Christina's broker-dealer agree to it in writing In order to share in a customer's account, an agent must obtain permission from her employer and the customer. Since the agent will be investing, she is also considered a customer and will also be required to give permission. Additionally, profits and losses must be shared proportionately, based on the amounts both parties contribute to the account. (67656)

All of the following statements regarding discounted cash flow are NOT TRUE, EXCEPT:

It is used to determine the attractiveness of an investment Discounted cash flow (DCF) analysis is a method of estimating the fair market price of an investment. If the investment is trading at a value lower than its discounted cash flow value, this would suggest it is attractive or undervalued. Research analysts use discounted cash flow analysis to determine the value of many different investment opportunities in the marketplace.

Which of the following statements is TRUE about indexing?

It may result in a portfolio that does not accurately track the index. Indexing is a passive, not an active, management strategy. When using this passive strategy, an IA attempts to build a portfolio that will mirror or match the performance of a specific index. However, it is quite possible that the portfolio's actual return may not match the performance of the index. If this is the case, it is referred to as a tracking error.

An investment adviser may store its books and records on electronic media if:

It provides immediate access to the books and records Using a form of electronic media storage is acceptable provided the records are readily accessible and copies may be created. Electronic records must also be nonerasable, nonrewritable, and tamper-evident.

The major disadvantage to a limited partner in a DPP is:

Lack of liquidity An investor has limited control (management) in equity investments and no control (management) in bond or DPP investments. The major disadvantage of a DPP is the lack of liquidity, meaning that the investor cannot easily sell his portion of ownership.

The expenditures section of a personal income statement should include all of the following information, EXCEPT:

Life insurance policy dividends Dividends from all sources, including life insurance policies, would be included in the income section of a personal income statement, not in the expenditures section. (62015)

Ed and Stephan want to start a Web site design business. They are trying to decide what the best way is to organize the business. They want to protect their personal assets from any debts that the business incurs, but they also want to avoid being double-taxed on their profits. Based on these objectives, the BEST organizational structure for them to adopt would be a:

Limited liability company The two main advantages of a limited liability company are that the owners cannot be held personally liable for the company's debts, and the IRS treats limited liability companies the same way as partnerships for tax purposes. Ed and Stephan can limit their liability but they can also avoid paying both corporate and personal income taxes on their profits, as they would otherwise need to do if they formed a C Corporation. A general partnership would not protect them from liability since all general partners are responsible for the partnership's debts. A limited partnership must have both a general partner and a limited partner, so only the limited partner would be protected from liability.

Which types of investments have historically shown a great deal of exposure to regulatory risk?

Limited partnerships Regulatory risk is the possibility that changes in the law or regulations can have an adverse impact on the value of investments. Although all kinds of investments can be subject to regulatory risk, limited partnerships have historically been particularly vulnerable. For example, adverse changes in the tax laws in 1986 caused the value of many limited partnerships to drop. (62016)

A hedge fund investment would be least suitable for a client who is seeking:

Liquidity Hedge funds typically invest in a variety of securities, using a number of strategies, as deemed appropriate by the investment manager. When a hedge fund is set up as a limited partnership, investors receive the flow-through of passive gains and losses. Most funds will allow investors only to withdraw their funds after a certain period, or only during certain periods--thus, the lack of liquidity.

A client of a registered representative owns a small business. The business produces strong cash flow during the holiday season, but negative cash flow for the rest of the year. This may indicate a need for which of the following choices?

Liquidity Since the client may need to have access to capital when the cash flow from his business is negative, the portfolio should contain some investments that are liquid. Given the liquid nature of money-market instruments, they may be suitable investments for a portion of the portfolio.

Value investors would be interested in companies that have

Low price earnings ratios Value investing is a method of identifying securities that are undervalued based on company fundamentals. Value stocks tend to have low stock prices in relationship to their earnings, a higher dividend yield than their industry peers, and, typically, trade at a price closer to or at a discount to the book value than their competitors. Value investors believe that the most undervalued companies should rebound and outperform the market. This, of course, assumes that the company is financially sound. (63012)

Value stocks are characterized by a:

Low price/earnings ratio Value stocks typically have low price-to-earnings (P/E) ratios and are companies that are trading in the market at a low stock price in relationship to their book value. These companies are perceived as being undervalued based on their sales. Value stocks tend to have positive earnings and high dividend yields. Value stocks are often compared to growth stocks, which typically have high P/E ratios. They tend to retain their earnings and have low dividend payout ratios.

Arnold is the sole shareholder of Luro Trading Corporation, a small investment advisory firm registered with the states of New York, New Jersey, and Connecticut. Arnold decides to sell 60% of his shares to another investment adviser and retire to Hawaii. This transaction would require the approval of:

Luro's clients An investment adviser may not assign a client's contract to another investment adviser without the client's consent. An assignment includes the acquisition of the majority of the adviser's stock by another entity.

The following two funds are listed in a mutual fund's prospectus: —Short-term Global A —Short-term Global B The difference between these two funds is likely the:

Manner in which the sales charges are collected though they are shares of the same fund, Class A shares have a front-end load, while Class B shares have a contingent deferred sales charge as well as a small 12b-1 fee.

Under the USA, which of the following characteristics is required for a banker's acceptance to be exempt from registration?

Maturities of no more than nine months Short-term, corporate, fixed-income securities such as commercial paper and a banker's acceptance may qualify as an exempt security. The maximum maturity is nine months. The minimum denomination is $50,000 and it must be rated in one of the three highest rating categories by a nationally recognized statistical rating organization.

An elderly widow opens an account with an advisory firm. She tells her IAR that she has income of $20,000 a year and a total net worth (including her house) of $300,000. She has little previous investment experience. Her main objectives are income and preservation of capital. She also tells her IAR that she may need to access her funds on short notice for emergency medical expenses. Based on these circumstances, which of the following choices would be the MOST suitable investment for her account?

Money-market instruments and high-quality bonds Given this client's investment objectives--low risk tolerance and need for liquidity--high-quality bonds and money-market instruments would be the most suitable of the choices given.

An advantage of a Coverdell ESA over a 529 plan is:

More investment options The maximum annual contribution to a Coverdell ESA is $2,000; however, contributions to a 529 plan are substantially higher. Although there's no annual limit on a 529 plan, contributions that exceed the annual gift limits may be subject to gift taxes. There are income limitations that apply to Coverdell ESA contributors, but not to 529 plan contributors. Qualified distributions from both Coverdell and 529 plan accounts are tax-free. In a 529 plan, investments are not self-directed; instead, investors must choose from a list of investments that are approved by the state in which the plan is created. On the other hand, Coverdell accounts are self-directed (like IRAs) and are not limited to investments which have been approved by the state.

Megamerger is a federal registered investment adviser with offices in all fifty states. John is an investment adviser representative with Megamerger. He is registered in New York where his primary office is located but often travels to New Jersey and uses one of Megamerger's offices there to conduct business. John:

Must register as an IAR in New Jersey Investment adviser representatives who work for federal covered investment advisers must register in every state in which they maintain a place of business

Under what circumstances may a variable annuity be recommended as a short-term investment?

Never, since this practice is prohibited under industry rules Under industry rules, mutual funds or annuities may not be recommended as short-term investments or trading vehicles. The fact that a product is no-load does not change this SRO prohibition. There is no such thing as a CDSC reduction agreement. (62118)

According to the Investment Advisers Act of 1940, when must an access person submit a transaction report?

No later than 30 days after the end of each calendar quarter The Investment Advisers Act of 1940 requires an access person of an adviser to report his personal securities transactions by no later than 30 days after the end of each calendar quarter. On the other hand, the Uniform Securities Act requires an adviser to maintain a record of all personal securities transactions by no later than 10 days after the end of the calendar quarter.

Susan is a high-ranking official in the Comptroller's Office of Zanzibar Securities. Her title is Executive Vice President. Under the Uniform Securities Act, Susan is:

Not considered an agent since she is not involved in sales or trading Only personnel engaged in securities transactions are agents. Officers can be considered agents, but it depends on their particular job function. (79474)

Under Section 404(c) of ERISA, fiduciaries are:

Not liable for investment losses provided that certain requirements are met Section 404(c) provides a limited exception to the normal rules governing fiduciary responsibility under ERISA for plans that provide for individual, self-directed accounts, such as 401(k) plans. Fiduciaries are not held responsible for investment losses if certain conditions are met.

One of your clients has heard that the use of leverage can increase his portfolio's return. This client normally buys securities that have high dividend payout ratios and uses the dividends to supplement his income. He wants to open a margin account and asks you to use his existing securities as collateral to purchase additional shares of the same stocks that you have in your portfolio. You should:

Not recommend this strategy since buying on margin may not increase the return received by this client A margin account will allow a client to buy more securities by leveraging or borrowing additional funds. A client is only required to deposit half of the funds required to execute a transaction and profits if the stock rises. By purchasing more shares, a client can increase her profit, but will also be exposed to a larger loss if the stock purchased declines in value. This client purchased securities primarily for the dividend income, not for speculation or trading purposes. Therefore, buying stock on margin would not be suitable in this situation. A brokerage firm will charge a client interest on the funds the client borrows when trading on margin. The increased dividend income from the additional shares in a margin account would not be sufficient to pay for the interest expense on the borrowed funds.

You are the chief financial officer of Colfax Advisers, a registered investment adviser located in Dallas, Texas. Your firm manages portfolios and has safekeeping services for its clients. The state of Texas requires that all registered advisers who have custody of client assets maintain a minimum net worth of $35,000. In reviewing the month-end financials for the firm, you calculate the current net worth at $32,875. What would your best course of action be considering these circumstances?

Notify the Administrator within one business day and file a statement of financial condition by the next business day If an investment adviser's net worth drops below the required minimum (as set by the Administrator), the adviser must file a deficiency notice with the Administrator within one business day and also file a report on its financial condition by the next business day

Barry McKenna's equity portfolio was strongly correlated to the performance of the S&P 500 Index. Barry was concerned that the S&P was overdue for a correction, so he liquidated the portfolio and moved to short-term Treasury securities that were yielding 2%. After one year, the S&P 500 returned 8%. What is the BEST term to describe the difference in the Treasuries and the S&P 500 as it relates specifically to Barry's situation?

Opportunity cost The best choice here is opportunity cost. Opportunity cost is a term used in a variety of ways in economics. For purposes of the question, the focus here is on investment choices. Opportunity cost is the difference in return between an investment made and one that is not made. In this case, Barry invested in a Treasury and it returned 2% over the year. Barry gave up the opportunity of his old portfolio which returned 8%. In this situation, his opportunity costs are 6% (8% - 2%).

When considering the tax consequences of trading securities within a trust, the trustee should examine:

Other taxable income that is generated by the trust A trust is managed for the benefit of the beneficiary; however, any income that is generated by the trust is taxable to the trust. For that reason, an examination of the tax consequences of a trust must focus on the income derived by the trust, not the income derived by the trustee or beneficiary. Although the income that beneficiaries receive from the trust and/or from other assets may be taxable, it is irrelevant for purposes of determining the tax consequence of the trust itself.

Mrs. Smith sets up a grantor trust where the income is used to pay the premiums on her husband's life insurance policy. Mr. and Mrs. Smith file their taxes as married but filing separately. The tax on the income generated by the trust is:

Paid by the wife A grantor trust is one in which the grantor retains a right to any income generated by the trust, as well as the power to revoke the trust. The income generated by the trust must be included in the grantor's taxable income. The grantor is responsible for paying all taxes on any funds the trust distributes or retains for future distribution. For tax purposes, it is irrelevant that the income is used to pay the premiums on insurance policies owned by the grantor or the spouse

If Jane Brown annuitizes her nonqualified variable annuity, how will the series of payments be taxed?

Part of each payment is taxable earnings and part is a tax-free cost basis A nonqualified annuity has a cost basis consisting of the after-tax dollars invested, as well as earnings that are tax-deferred. If it is annuitized, the cost basis is returned in equal amounts in each payment. The rest of each payment is tax-deferred earnings that become taxable (as income) upon receipt.

An investment advisory firm has completed extensive research into the pharmaceutical industry and is in the process of establishing long positions in several companies. Although many of the stocks are speculative issues, several of the firm's client accounts are conservative. According to the Uniform Securities Act, the placement of such speculative shares in any of the clients' accounts is:

Permitted if it is consistent with the clients' objectives The adviser may only purchase securities that are consistent with client objectives. The fact that the firm has completed extensive research does not alter this requirement.

What method of crediting an equity indexed annuity's returns is based on the index value over a specified period?

Point-to-point Equity index annuities (EIAs) provide returns that are based on the return of an equity index; however, if the market falls, they also provide a minimum rate of return. Insurance companies will credit the annuitants' accounts periodically. Some insurance companies credit their policyholders monthly, annually, or bi-annually, while others do it on a specific date (e.g., the starting point may be the value of the index on the date of issuance and the ending point is the value of the index on a particular date), which is referred to as "point-to-point." The amount of credited interest will then be based on the increase or decreased in the indexed value since the last time it was credited.

All of the following statements regarding the Capital Asset Pricing Model (CAPM) are TRUE, EXCEPT it:

Predicts future values for the stock CAPM does not establish a price objective for the stock. All of the other statements regarding this theory are true.

The biggest disadvantage of investing in a growth mutual fund is the potential loss of:

Principal When an individual invests in a mutual fund that consists primarily of common stocks, his principal is at risk. As the market value of the mutual fund fluctuates over the life of the investment, the result may be a loss of the customer's principal or investment.

When must the Administrator be notified if an agent's employment is terminated by his broker-dealer?

Promptly Upon termination, both the agent and the broker-dealer must promptly notify the Administrator. If the agent is subsequently employed by another broker-dealer, both the new employer and the agent must also promptly notify the Administrator. All registered persons are considered in violation if they fail to report employment termination to the Administrator within 30 days (which is what the Uniform Securities Act considers prompt notification).

Which of the following securities or transactions are subject to the registration provisions of the Uniform Securities Act (USA)?

Public offerings of securities Public sales (offerings) are typically subject to registration requirements. Private placements, unsolicited non-issuer transactions, and transactions with financial institutions are exempt from the registration provisions of the Uniform Securities Act. However, no transaction is ever exempt from the antifraud provisions of the Act.

XYZ Financial, Inc. is a registered investment adviser that is affiliated with ABC Company, a broker-dealer. The investment adviser representatives who manage client portfolios for XYZ Financial prefer to use ABC Company to execute securities transactions. Which of the following statements is TRUE?

RIAs may execute transactions through affiliated broker-dealers provided they disclose the practice to clients and ensure that the clients receive the best execution possible Although an investment adviser is permitted to execute securities transactions through an affiliated broker-dealer, this practice represents a conflict of interest which must be clearly disclosed to clients. Written disclosure of the conflict is typically made on Form ADV Part 2.

Which of the following choices is an asset class?

Real estate An S&P Index Fund, diamonds, baseball cards, and real estate are all assets; however, real estate is the only one that represents an asset class. For example, a baseball card is an asset but the asset class to which it belongs is collectibles.

According to the Investment Advisers Act of 1940, which of the following statements is NOT TRUE regarding the storage of records?

Records must be destroyed after five years All choices are true, except the statement that records must be destroyed after five years. In fact, some records must be maintained for up to three years after termination of the firm (e.g., partnership agreements, articles of incorporation, minutes from board meetings, etc.).

Pat, an advisory client of Terri, is in his late 20s. He has a higher-than-average income, his own home, and several other valuable assets, with little debt other than a mortgage. He has indicated that his main goal is retiring at age 55. He also tells Terri that the stock market makes him very nervous, and that he has never been comfortable putting his money in anything but CDs and money-market funds. Which of the following statements is TRUE regarding this situation?

Regardless of whether Pat can financially bear some risk, Terri must take his low-risk tolerance into account when making recommendations An investment adviser must take into account a client's psychological ability to tolerate risk, regardless of the level of the client's financial resources. However, this does not prevent the adviser from trying to convince the client that a higher level of risk might be appropriate.

According to NASAA's Statement of Policy on Unethical Business Practices, which of the following statements is TRUE regarding the use of reports or recommendations prepared by someone other than the investment adviser using such information?

Reports or recommendations prepared by another party may be provided to clients if the adviser discloses their source It is unethical for an investment adviser to provide a report or a recommendation to a client that has been prepared by someone other than the adviser without disclosing that fact to the client. This prohibition does not apply to the use of outside source materials to formulate a recommendation provided by the adviser. (

Under the Uniform Securities Act, all of the following meet the definition of an agent, EXCEPT an individual who:

Represents an issuer in effecting exempt transactions Without exception, an individual who represents a broker-dealer in effecting securities transactions is considered an agent. Also, if an individual represents an issuer and receives compensation for selling securities that have been subject to registration, she is an agent. However, if an individual represents an issuer in an exempt transaction, she is not considered an agent. Remember, if an individual represents a broker-dealer in effecting securities transactions, she must always register as an agent, even if she is involved in executing exempt transactions. To determine if an individual qualifies for an exception as an agent, determine who the individual represents— a broker-dealer or issuer. Exceptions are available for individuals who represent an issuer, but not for individuals representing a broker-dealer.

Under what form of ownership may a husband and wife ensure that their property is not able to be attached by the creditors of either spouse?

Tenancy by the entirety Tenancy by the entirety, which is only available to married couples, allows spouses to own property as a single legal entity. With this form of ownership, a creditor of one spouse is unable to make a claim to the account's assets. However, if the creditor has a claim against both spouses, it may make a claim to the assets.

Which of the following is not a sector rotation strategy?

Rotating between long-term and short-term bonds Sector rotation refers to a strategy that attempts to time the movement of assets into different market sectors based upon the superior performance in those segments. For example, an investor who anticipates that one emerging economy will outperform another, or one industry group that is correlated with the market (cyclical) will outperform the market as the economy recovers. Rotating between long-term and short-term bonds will help an investor reduce the volatility of the portfolio but is not a sector rotation strategy.

A married couple, who are both 60-years-old, earned $150,000 jointly last year. They each make 401(k) contributions, but want to save more for their retirement. The most suitable type of plan for an IAR to recommend is a:

Roth IRA, into which each may contribute $7,000 per year The maximum annual contribution to either a traditional or Roth IRA is $6,000 per individual. However, if a person is age 50 or older, the IRA catch-up provision allows for an additional $1,000 to be contributed ($7,000 total). The couple's level of gross income doesn't exceed Roth income eligibility requirements, therefore, the Roth is typically a better choice compared to a traditional IRA. The significant benefit of a Roth IRA is that future withdrawals are tax-free. On the other hand, with a traditional IRA, any earnings are taxed as ordinary income at the time of distribution, plus the contributions may be taxed if they were made on a pre-tax basis. Given the clients' ages, income, and the tax-free withdrawals, the Roth is the better investment choice. (16155)

An advisory client is concerned that the economy is close to reaching its peak. He instructs his adviser to sell his holdings in automobile stocks, and invest the proceeds in consumer staples. This strategy is known as:

Sector rotation Sector rotation is a strategy often used in anticipation of changes in the business cycle. If it is believed the economy is about to slow, profitable sectors to invest in would be consumer staples, or defensive stocks

Which of the following securities is NOT considered exempt under the Uniform Securities Act?

Securities issued by an automobile company Under the Uniform Securities Act, any security issued by Canada or a Canadian Province, or savings and loan association, or any railroad company is considered an exempt security. There is an exemption under the Act for common carriers but an automobile company does not qualify for this exemption. (

As a group, limited partners may NOT:

Sell assets to pay creditors Limited partners are not permitted to be involved in management and could not sell assets to pay a creditor (a management decision). They do have the right to inspect the books, as well as sue and/or remove the general partner.

The Investment Advisers Act of 1940 would consider an individual to be in the business of providing investment advice if:

She provides mutual fund timing and sector rotation advice to her clients Investment advisers provide advice that is timed and tailored to each client. An investment adviser's advice is not general, isolated, or occasionally offered. An adviser is considered in the business of providing advice when it holds itself out as an adviser or makes recommendations that are client-specific.

Dan is the CEO of MKM Advisers and also a member of the local golf club. Dan has found that his club membership has provided MKM Advisers with a number of new clients and referrals. In an effort to continue building relationships, Dan decides to charge lower fees to members of the golf club than what nonmembers are charged. The services MKM provides are the same for all of its customers. MKM Advisers provides full disclosure of the special fee arrangement for golf club members in its advisory contracts and in Form ADV Part 2. Based on Uniform Securities Act regulations, which statement BEST describes MKM Advisers' fee arrangement?

Since it is properly disclosed in all contracts and in Form ADV Part 2, the arrangement does not violate the USA Provided proper disclosure is made, charging clients different fees is not prohibited. The fee arrangement must be disclosed to the Administrator or the SEC in Form ADV Part 2 and also specifically disclosed to clients in their advisory contracts.

If an agent unknowingly misrepresents the risk associated with a security, which of the following statements is correct according to the Uniform Securities Act?

Since the agent unknowingly made misrepresentations regarding a security, the agent is not subject to disciplinary action. In this question, since the agent did not willfully intend to mislead an investor, unknowingly making misrepresentations regarding a security is not considered fraudulent. For this reason, the agent is not subject to disciplinary action by the Administrator. However, if the misrepresentations were intentional, the Administrator may deny, suspend, or revoke the agent's registration. If action is ever taken against an agent, it will not have an effect on the registration of the security.

An agent recommends that her client exchange her shares in XYZ's Income Fund for shares in XYZ's Growth Fund. Which of the following is TRUE of this recommendation?

Since the exchange is done within the same fund family, there are no additional sales charges; however, it may be a taxable event Many fund families allow shareholders to exchange shares in one fund for shares of a different fund without incurring additional sales charges. However, if an exchange results in a capital gain, the gain is taxable.

An investment adviser representative is supervising a large, diverse portfolio for an elderly client. Although the account is nondiscretionary, the client almost always accepts the recommendations of the IAR. The portfolio contains a significant position in bonds that are denominated in foreign currency, and the IAR has become concerned that the increased volatility in the currency market could damage the value of the client's investments. The IAR is thinking about recommending the use of foreign currency futures to hedge the foreign currency risk of the portfolio. Considering prudent investor standards, which of the following statements is TRUE?

Since there are no categorical prohibitions on types of investments under prudent investor standards, the use of futures could be appropriate for a portfolio under certain conditions The standard of prudence under the Uniform Prudent Investor Act is applied to the client's total portfolio, rather than on an investment-by-investment basis. Since there are no categorical restrictions on types of investments under the Act, anything might be appropriate as part of a portfolio designed to achieve specific aims. In this case, the use of futures to hedge currency risk could be appropriate as part of an overall strategy for this elderly investor. (62147)

The disadvantages of hedge funds for investors include all of the following choices, EXCEPT:

Sophisticated investment strategies Some of the disadvantages of hedge funds are illiquidity, less transparency than other investments, and more complicated tax structures. An advantage of hedge funds for most investors is that they engage in sophisticated investment strategies.

An investment adviser has computed investment returns from clients over the past three years. Which of the following methods would be most useful for calculating the variance of returns that the clients have attained?

Standard Deviation Standard deviation is a statistical term used to characterize the dispersion of numerical measures in a given population. The standard deviation tells how tightly a set of values is clustered around the average. It is a measure of dispersal, or variation, in a group of numbers. Standard deviation provides a good indication of volatility.

Warren is a growth-oriented investor who is bullish on the long-term prospects of the U.S. stock market. He has diversified his portfolio in the following ways: individual stocks from various sectors, an S&P 500 Index fund, an aggressive growth fund, a fund of funds, and a variable annuity where he has invested in mid- and large-cap stock portfolios. What type of risk is his portfolio MOST subject to?

Systematic risk Systematic risk is market risk. This is the risk that a decline in the overall market will cause a similar decline in an individual's portfolio. Systematic risk cannot be diversified away. Warren owns many kinds of stocks, in many different market segments and sectors. However, if the overall market declines, Warren's portfolio will be affected. Many of the stocks he owns may also subject Warren to business risk and capital risk. But the overriding concern in this portfolio is a general market decline taking Warren's portfolio with it. As an adviser, you might suggest that Warren consider investing some of his portfolio in bonds and other investments outside of the stock market. (62738)

Which of the following securities is most susceptible to interest-rate risk?

T-bonds Long-term bond prices are more sensitive to interest-rate risk than short-term bonds. For example, if an investor owns a bond with a 5% coupon and interest rates rise to 7%, he would be earning less than new investors. If the investor only needs to wait two months for his bond to mature, he will be able to invest at the higher interest rate relatively quickly. If the investor's bond has a long maturity and he must wait 20 years for his bond to mature, his disadvantage will last longer. Conversely, if interest rates fall, the long-term bond will earn more than the market interest rate for a longer period. The short-term bond will not be as valuable since the maturity comes sooner and its advantage over the market rate will not last as long.

Those investors, who believe markets are not perfectly efficient, may use an active strategy in which the asset mix of a portfolio is altered in anticipation of economic events. This market timing approach is known as:

Tactical Asset Allocation Tactical Asset Allocation is used to identify and buy into sectors that are anticipated to outperform the market. Strategic asset allocation is used to assemble an investment portfolio based on the client's risk tolerance and objectives. As the assets change in value, the portfolio may then be rebalanced frequently. Indexing is a passive investment approach.

What's required to be obtained by an investment adviser when it engages with a new client?

Tax ID Financial institutions must collect certain information when they open accounts for clients. Typically, a client's name, address, date of birth, and tax identification number (i.e., Social Security number) must be obtained. A driver's license can be used to verify the information, but it's not specifically required since financial institutions are permitted to use other forms of identification. The employer's address and the date on which the account is opened are not required to be documented.

In completing Form BD, all the following information is required, EXCEPT:

The Social Security number if the applicant is a corporation All are required to be disclosed except Social Security numbers, unless the applicant is an individual. (75938)

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that any fee arrangement based on capital gains or portfolio appreciation may only be used if which of the following disclosures is made in writing?

That the arrangement may cause the adviser to recommend strategies that encourage a client to take greater-than-normal risks As opposed to other fee arrangements, performance-based fees are more likely to encourage an adviser to take greater risks with a client's money in order to generate more fees. While performance-based fees are generally prohibited under the Uniform Securities Act, some state Administrators make exceptions. (67684)

Which of the following statements is TRUE regarding the state securities Administrator?

The Administrator may issue a cease-and-desist order to an agent of a broker-dealer without a hearing Under the Uniform Securities Act, the state Administrator does not have the authority to issue an injunction or an enjoining order, nor may the Administrator arrest anyone or send him to jail. These orders must come strictly from a judge or court of law. The Administrator may, however, issue a cease-and-desist order to an entity under its jurisdiction.

An investment adviser representative was the subject of a customer complaint two years ago in the state of Idaho and resigned his position as a result. The Administrator conducted an investigation, the results of which were not made public. He is currently applying for a mortgage for a new home in Boise. The bank where he is applying requests his employment history and contacts the investment adviser for verification. The personnel manager at the firm is reluctant to give the bank any information about its former employee and directs the bank to contact the state Administrator. When the bank calls the Administrator, what information can it expect to receive?

The Administrator will not release any details of the complaint According to the Uniform Securities Act, no provision of the Act authorizes the Administrator or any of his officers or employees to disclose information except among themselves or, when necessary, in a proceeding or investigation under the Act that was not made public.

Sid is an investment adviser. A number of his clients are willing to accept a relatively high level of risk to achieve potentially high returns. At various times in his career, Sid has attempted to anticipate market events to generate higher returns for his clients. He has found that over time, the results were disappointing. Sid is now a firm believer in indexing. Sid's view of a portfolio's performance over an extended time horizon is an example of:

The Efficient Market Hypothesis The Efficient Market Hypothesis states that financial markets are efficient and that the prices of securities reflect all known information; therefore, prices adjust instantly to reflect new information. It would, therefore, be unlikely to consistently outperform the market over an extended period.

If an investment adviser sells a security that it owns to an advisory client, which of the following scenarios would violate the Uniform Securities Act?

The IA acts as a broker-dealer to the buyer of the securities without written consent and disclosure When an investment adviser sells securities directly to a client (i.e., principal trade), the firm must provide disclosure and obtain the client's consent before completing the transaction.

Under the Uniform Securities Act, in order for an issuer to be eligible to use registration by coordination, the issuer must also register with the SEC under:

The Securities Act of 1933 The Securities Act of 1933 regulates the federal registration of newly issued securities. Under the Uniform Securities Act, in order to register a security using registration by coordination, the security must also be registered with the SEC under the Securities Act of 1933. (67470)

The advantages of investing in a limited partnership include:

The ability to limit risk A limited partner is risking only the amount she invests in the partnership. The potential for assessments (demands for more money from investors) and the lack of control over the management of the venture are considered disadvantages of limited partnerships. Tax losses generated by the partnership are passed on to investors, but they may only be used to reduce income generated by other passive activities. They may not be used to reduce earned income (wages and salaries) or income from most other types of investments. (63049)

An agent opens a new account for a client and enters a market order to buy 200 shares of XYZ. At the end of the day, the agent turns in a new account form and a copy of the order ticket for approval by the supervisor. Under the Uniform Securities Act, which of the following statements is TRUE?

The agent needed approval for the new account prior to executing the first order Although prior approval from a supervisor is not required for every order, every new account must be approved by a supervisor prior to executing the first order.

An agent of a broker-dealer intends to sell shares of a security, but the transaction does not involve his firm. If he proceeds with the transactions, in which of the following situations will he NOT be accused of selling away?

The agent notifies his firm and awaits approval (if required) The rule regarding private securities transactions requires an agent to provide written notice to his firm if he intends to engage in securities transactions that are not within the scope of his firm's business. If he executes the transaction and does not notify his firm, the action is considered selling away. In addition, if the agent will be compensated for the transactions, he must also receive written approval from his firm to participate. On the other hand, if he will not be compensated, the firm is required to provide a written acknowledgement to him and has the right to impose conditions on his participation

KiddieLand is a company that operates several theme parks across the United States. Pilar would like to purchase 18 shares of KiddieLand stock for her newborn niece. Her broker-dealer charges a specified minimum ticket amount for small orders. Which of the following statements is TRUE?

The agent should disclose that the commissions charged for this transaction could be unusually large as a percentage of the market price It is considered fraudulent for a broker-dealer to fail to notify a client of larger-than-ordinary commissions or costs. Purchases or sales of a small amount of securities can often lead to larger-than-ordinary costs because of minimum charges assessed for transactions. This can lead to commissions that are large as a percentage of the purchase price. It is not illegal to assess such charges, but it is illegal not to inform the client about them. Charging a client an unreasonable commission is prohibited.

All of the following choices are required to be included in a trade blotter, EXCEPT:

The amount of interest or dividends the investor will receive Broker-dealers and investment advisers are required to keep certain books and records. One of them is a blotter, which is a daily record of all purchases and sales of securities. The trade blotters contain information concerning the transaction such as the account in which the trade was executed, the trade date, the unit value and total value of the transaction, the name and amount of securities, and whom the securities were bought from or sold to. Blotters are also required when a firm receives or delivers securities as well as receives or disburses cash.

A broker-dealer located in State A, in business for three years, goes out of business in July. Some of the principals at the firm start a new broker-dealer in August of that year. Which of the following statements is TRUE concerning the broker-dealer's registration fee?

The appropriate registration fee must be paid Every applicant whether an agent, broker-dealer, investment adviser, or investment adviser representative must pay a registration fee. This fee is paid when an applicant files the initial application as well as when the registration expires each year on December 31. If a registration fee is paid in the middle of the year, the fee is usually not prorated.

When sharing in the profits of a customer's account, whose approval is required?

The client's The client and the broker-dealer carrying the account are required to approve any account in which both the agent and the customer share in the profits and losses. The sharing must be proportionate to the capital at risk. Of the choices given, the client is the only correct answer.

An agent of a broker-dealer has written an electronic marketing piece that recommends the purchase of a new investment company which is being offered by his firm. He wants to send it by e-mail to 40 non-institutional clients. If the product is suitable for each client who's on the agent's distribution list, which of the following statements is TRUE?

The content of the e-mail is not required to be filed with the Administrator because the securities are federal covered. Advertisements, including standardized emails, are generally required to be filed with the state Administrator before they're used. However, advertisements for exempt securities and securities that are sold in exempt transactions are not required to be filed. Since registered investment companies are federal covered and exempt from registration with the state Administrator, the agent's email is not required to be filed.

A corporation has current assets of $150,000 and current liabilities of $75,000. The corporation uses cash to pay $35,000 in current liabilities. Which of the following statements is TRUE?

The current ratio increases When the $35,000 in current liabilities is paid in cash, current assets fall to $115,000 and liabilities fall to $40,000. The result is an increased current ratio of 2.875, compared to 2 before the payment. Working capital and stockholders' equity would stay the same. Bond interest coverage compares earnings before interest and taxes to the bond interest expense, and would not be affected in this case.

A firm that is expecting to take its shares public has recently hired a new employee to assist in selling shares to investors. According to the Uniform Securities Act, which of the following statements is TRUE?

The employee would be required to register in any state in which he solicits investors In this question, the employee is considered an agent of the issuer. Since the stock is going to be sold publicly, the shares are required to be registered along with the employees of the issuer selling them. There are situations in which employees may be exempt from registration (e.g., engaged in exempt transactions) however, registration is generally required if shares are being sold to the public.

An investment adviser will NOT violate NASAA's model rules by charging a different fee to different clients for the same advisory service if:

The fees are reasonable based on industry standards and are disclosed NASAA's model rules require that advisory fees be reasonable based on industry standards. Disclosing a fee and receiving written acceptance from a client does not assure that an adviser has met its fiduciary requirement. Even if a client agrees to an excessive fee, it is still excessive and may be a violation.

The Administrator may require an investment adviser to file which of the following documents along with its initial ADV application?

The firm's current financial condition Of the items listed, a new adviser would only be required to file a statement regarding its financial condition.

Which of the following should NOT be considered by an investment adviser that is managing the assets of a trust?

The grantor's tax situation The trustee has a fiduciary duty to manage the assets in a reasonable manner and to act in the best interest of the beneficiaries. The grantor endows the trust and, unless he is a beneficiary, is not considered a client. Therefore, the trustee would not consider the grantor's tax needs. (67500)

What is the liability for loss for an investor in a limited partnership?

The investor's basis A limited partner's liability when investing in a partnership is referred to as the investor's basis. An investor's basis consists of her initial investment plus any recourse loans (cosigned loans) or profits retained by the partnership that are not distributed. If a partner receives a cash distribution or loss, this would reduce her basis or capital at risk. The general partner may not arbitrarily assign liabilities to investors in a partnership.

Under the Uniform Prudent Investor Act, which choice BEST explains the level of care a trustee must exercise when managing a trust?

The objectives of the trust as a whole should be taken into consideration when making investment decisions Since they are considered a fiduciary, trustees must adhere to the provisions stated in the Uniform Prudent Investor Act. The trustee must not only consider the investment objectives of the entire trust, he must also pay attention to the beneficiaries' total assets. (67714)

Which of the following statements is TRUE concerning family limited partnerships?

They must have a legitimate business purpose in order to receive the full potential tax benefits Practically any type of property may be placed in a family limited partnership (FLP). However, the FLP must have a legitimate business purpose (other than avoiding taxes) in order to receive the full potential tax benefits. (62259)

When using a solicitor, investment advisers must provide their clients with a separate written solicitor disclosure document. According to the Investment Advisers Act of 1940, all of the following are required to be included in the disclosure, EXCEPT:

The performance history of the investment adviser Investment advisers are not required to disclose their performance history in the solicitor disclosure document. Instead, they are required to disclose the name of their firm, a description of the solicitor relationship, and the compensation arrangement. (67587)

A small business owner enters your office with multiple insurance policies issued by many different companies. She has over $600,000 of coverage that expires in five years. Which of the following statements BEST describes the policies?

The policies are term life A term life policy expires at the end of a period. The other choices are forms of insurance that are permanent and do not have a specific term.

Charlie Johnson owns a variable life insurance policy. Which of the following statements is TRUE concerning Mr. Johnson's policy?

The policy may establish a minimum death benefit With a variable life insurance policy, the company usually establishes a minimum death benefit, which protects the investor in the event of poor performance in the separate account. The allocation of investments can be changed, although the contract may place limits on the number of changes per year. If Mr. Johnson died, his estate would pay the taxes. If the company guaranteed payments, it would be considered a fixed annuity.

The securities holdings report that an access person of an adviser is required to file with her firm's chief compliance officer does NOT include:

The prices paid to acquire the securities The securities holdings report that an access person files with her firm's CCO include the types of securities held in her personal account, the date that the report is submitted, and the name of the broker-dealer that maintains her personal account. However, the price that is paid to acquire securities is actually included in a different report (the transaction report).

Under the Uniform Securities Act, which of the following sales is considered a non-issuer transaction?

The sale of an outstanding security on the New York Stock Exchange A non-issuer transaction (secondary market trade) involves any purchase or sale of a security whereby the issuer does not directly or indirectly derive a benefit. A stock trade that occurs on the New York Stock Exchange is an example of a non-issuer transaction. All of the other answer choices represent issuer transactions (i.e., the proceeds of the offering are for the issuer's benefit). (32515) 21 of 110

If an investment adviser has an arrangement with a third-party solicitor, what must the adviser maintain?

The solicitor's disclosure document Solicitors are often third parties (e.g., accountants or attorneys) that refer customers to investment advisers (IAs). In order to solicit for an IA, a solicitor must provide a solicitor disclosure document that was written in coordination with the IA. Although the solicitor's disclosure document must disclose any compensation, there's no separate solicitor fee disclosure document. Since solicitors don't always need to be registered, there's no requirement to provide Forms ADV or U4.

Under the Securities Exchange Act, a customer confirmation is NOT required to disclose:

The time of the trade execution The Securities Exchange Act requires broker-dealers to make specific disclosures on customer confirmations. Some of the required information includes the capacity in which the broker-dealer is acting (i.e., agency or principal), the amount of commission received by the broker-dealer for executing an agency trade, and the settlement date of the trade. The time of the trade execution is not required to be disclosed on a customer confirmation; however, it may be provided if the customer makes a specific request.

Your client is considering purchasing a fund of hedge funds. Which of the following statements concerning this investment is TRUE?

These securities are not liquid investments A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds. Although hedge funds are not required to register with the SEC, funds of hedge funds typically do not have this exemption available to them. Since funds of funds are invested in illiquid securities, hedge funds, they do not typically offer investors the opportunity to sell on a daily basis. (Traditional mutual funds offer this feature.) Liquidity means an investor can efficiently sell or convert her investment into cash.

A CPA who specializes in tax and estate planning is serving as a trustee. Since the CPA will be charging a minimal fee for his services, he chooses not to perform a complete tax analysis for the trust. Under the Uniform Prudent Investor Act, the CPA's actions are considered:

Unacceptable because the trustee is not acting in the best interest of the trust Ignoring a client's tax situation would be a violation of a trustee's fiduciary duty. Charging a minimal fee for service does not give the CPA permission to ignore the client's best interests. In many cases, a trustee may seek outside tax advice; but, if the trustee is also a CPA, it is reasonable to assume that she would perform the tax analysis.

Modern Portfolio Theory (MPT) defines risk as the:

Variability of expected returns about the mean In MPT, risk is defined as the degree to which investment returns deviate from what was expected or predicted. It is usually measured by the standard deviation of expected returns about the mean (δ), although its square, variance (δ2), is sometimes used.

Rather than utilizing a custodian, an investment adviser chooses to maintain custody of customer assets. According to the Investment Advisers Act of 1940, the adviser is required to:

Verify client funds and submit to an unannounced annual audit by a CPA If an IA acts as a qualified custodian and holds customer cash and securities, the assets must be subject to an unannounced annual audit by a CPA (not by the SEC). At the completion of the audit, the CPA (not the IA) must file Form ADV-E.

According to the efficient market hypothesis, which form of efficiency asserts that using technical analysis in identifying securities which may be undervalued is of no benefit?

Weak-form efficiency Weak-form efficiency asserts that all past market prices are fully reflected in security prices. In that technical analysis attempts to identify patterns in stock price movements in order to predict future price trends, weak-form efficiency believes fundamental analysis should be used in determining if a stock is over or under valued. Semistrong-form efficiency asserts that security prices reflect all publically available information. Thus, analysis of any type does not necessarily result in superior returns as the information is available to investors. Strong-form efficiency asserts that the price of a stock reflects all public and private information, thus no one can consistently outperform the market. Passive-form efficiency is not a form of efficiency.

According to NASAA's Statement of Policy on Unethical Business Practices, all of the following information must be disclosed in an investment advisory contract, EXCEPT:

Whether the contract may be assigned to another registered investment adviser without the client's consent NASAA's Statement of Policy on Unethical Business Practices provides that when an investment advisory contract is entering into or renewed, the following disclosures must be made: All fees and services provided The term of the contract A formula for computing the advisory fee The amount of prepaid fees to be returned in the event of an early termination of the contract The fact that no assignment of the contract will be made without the consent of the client Whether the contract grants discretionary power to the adviser The fact that the fee for managing equity securities may be higher than for fixed-income securities Since contracts may not be assigned without the consent of the client, there can be no stipulation in the contract which permits this activity.

Under the Uniform Securities Act, in the absence of fraud, when must action be taken for recovery on a transaction made in violation of a state registration provision?

Within three years of occurrence and two years of discovery, whichever comes first If an agent unknowingly (without fraud) sells a security in violation of a state registration provision, her customer must take action for recovery within three years of the occurrence of the violation, or within two years of discovery of the violation, whichever comes first.

Bob is a business manager for professional athletes. As manager, he negotiates their contracts, pays their bills, and provides them with tax advice. When trying to minimize their tax liabilities, Bob will periodically provide advice relating to securities. He considers this advice to be incidental to the business management service he provides. According to the Investment Advisers Act, would Bob be considered an investment adviser?

Yes, SEC Release 1092 states that the Advisers Act applies to people who provide investment advice to athletes and entertainers SEC Release 1092 states that sports and entertainment representatives who provide investment advice to their clients are investment advisers and subject to the Investment Advisers Act. The fact that the question refers to Bob as a business manager rather than a sports representative is not relevant. Advice that is incidental to a professional's services is limited to lawyers, accountants, teachers, and engineers. Entertainment and sports representatives who provide securities-related advice for compensation may not claim an exclusion from the definition of investment adviser. (79471)

The investment policy statement of a qualified retirement plan states that no more than 50% of the plan's assets may be invested in stocks. The investment manager places 65% of the plan's assets in stocks in order to take advantage of a bull market and increase the value of the plan's assets. Has the investment manager violated the fiduciary responsibility provisions of ERISA?

Yes, since the investment manager did not follow the stipulations of the investment policy statement This is an actual court case. The plan's trustees sued the investment manager who was held liable even though the plan's assets increased. (62146)

You have been approached by Steven to provide investment advice. Steven was recently named as executor of his uncle's estate and wants your assistance managing the investment portfolio pending disposition. Which of the following statements is TRUE?

You may accept the assignment You may accept the assignment. The executor is free to obtain any necessary outside advice in the exercise of his fiduciary duty. Permission of the court or heirs is not required. Regarding your advice, remember that the estate will be short-lived and, therefore, your focus should be mainly on safeguarding the assets for the benefit of the heirs. Long-term investments or speculative investments would generally not be suitable.