Test Questions #3

Form PF must be filed by A) SEC-registered advisers with no more than $150 million in private fund assets under management B) SEC-registered advisers with at least $150 million in private fund assets under management C) SEC-exempt reporting advisers D) state-registered private fund managers, regardless of the amount of assets under management

B

One of the important roles of an investment adviser representative is assisting clients in analyzing the performance of securities held in their portfolios. Which of the following is the best measurement of a security's performance? A) Beta B) Total return C) Yield D) Standard deviation

B

To a technical analyst, the resistance level signifies the price at which a stock's supply would be expected to A) decrease substantially. B) increase substantially. C) cause the stock price to "break out". D) remain constant.

B

Who is obligated for the payment of taxes in an UTMA account? A) Custodian B) Child C) Donor D) Parent

B

Which of the following would not constitute a conflict of interest between the plan and a fiduciary? A) A fiduciary participates in a transaction on the plan's behalf that involves a party with interests adverse to those of the plan in order to ensure favorable terms for the plan. B) The fiduciary receives fees for acting as a trustee to the plan. C) A fiduciary offers reduced commissions to the plan for transactions that are executed through his employing financial institution. D) A fiduciary sells a real estate investment to the plan at the current market rate.

B - A fiduciary can receive compensation from the sponsor of the plan for acting as a trustee, if fees are reasonable and consistent with duties performed

Which of the following statements would NOT be allowable under the rules regarding an investment adviser's contract? A) I charge a flat fee of $1,500 per year. B) If you make money, I make money because my compensation is based on how well your account performs. C) I charge 1% per year on the value of your assets, plus any commissions I earn on sales done through me. D) My hourly charge is $300.

B - Unless an exception is stated in the question, performance-based fees are never permitted. As long as disclosed, fees plus commissions on transactions is an allowable form of compensation

An owner of an equity index annuity would be wise to use the high-water crediting method if the underlying index was expected to A) remain steady. B) change its objective. C) decline. D) be volatile.

D

Holly Cavendish is an IAR with Remington, Fairchild, and Hume, a federal covered investment adviser. Holly's manager tells her that he will be busy for a couple of hours working on completing the Form ADV-E. This tells Holly that her firm A) will be changing to state registration. B) is reporting certain errors discovered by management. C) is undergoing a special evaluation by its clients. D) maintains custody of customer funds and or securities.

D

The statistical measurement that indicates how much an investment's returns have fluctuated, compared to its average return, over a given period of time is known as A) R-squared B) convexity C) beta D) standard deviation

D

Under the provisions of the Uniform Securities Act, it is NOT necessary for an investment adviser to register when it A) has a place of business in the state but deals exclusively with federal covered advisers B) has a place of business in the state but has conducted business with 3 individual investors during the preceding 12 consecutive months C) is headquartered in a state where it conducts most of its business with broker-dealers only D) has no place of business in the state and deals with savings and loan associations only

D

When doing cash flow analysis on a mortgage-backed pass-through security, you would want to know A) size of the tranche being analyzed B) whether there is a real estate "bubble" C) the quality of the mortgages D) the average maturities

D - The rate at which the cash flows are generated depends, among other things, on the rate at which the mortgages mature.

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

A

Howard Robard is an investment adviser representative with Hughes & Company, a state-registered investment adviser having its principal office in State O and offices in States P and D. Howard works out of an office in State P and has 4 retail clients there. In addition, Howard has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Howard would be required to register as an investment adviser representative in A) States P, D, and M. B) States D and M. C) State P. D) States P, D, M, and O.

A - With an office in State P, registration is required there, regardless of the number of clients. In both States D and M, the de minimis has been exceeded so registration is required there. The fact that the IA's principal office is in state O has no bearing on Howard and, with only 1 retail client there, he qualifies for the de minimis exemption.

Under the Uniform Securities Act, which of the following is responsible for notifying the Administrator when an agent changes his place of employment from one broker-dealer to another? A) New broker-dealer B) The agent, the former employer, and the new employer C) Former broker-dealer D) Agent

B

Which of the following is not an annuity purchase option? A) Single premium deferred annuity B) Periodic payment immediate annuity C) Periodic payment deferred annuity D) Single premium immediate annuity

B

James Stillman is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. Stillman works out of an office in State P and has 4 retail clients there. In addition, Stillman has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Stillman would be required to register as an investment adviser representative in A) States P and O. B) State P. C) States P, D, and M. D) States D and M.

B - As an IAR for a federal covered investment adviser, Stillman is required to register only in those states in which he (Stillman) has a place of business.

Investment advisers who preach the benefits of strategic asset allocation do so because they believe A) the market is basically inefficient and there is a strategy that can beat it B) over the long run, strategic management will eventually outperform the market C) the market is perfectly efficient because stock prices reflect all available information D) active management of a portfolio offers tactical benefits

C

The bond strategy used most often by those with a target goal is A) the duration strategy. B) the laddering strategy. C) the bullet strategy. D) the barbell strategy.

C

This is the performance of your portfolio over the previous 4 years: Year 1 - 10% Year 2 - 45% Year 3 + 20% Year 4 + 35% In order for the portfolio to be equal to the starting investment, the return in Year 5 must be nearest to A) 33%. B) 0%. C) 25%. D) 20%.

C

Under the rules of the Securities Exchange Act of 1934, trading in a client's account would be considered excessive if the agent receives a commission from trading trading is conducted without considering the client's investment objectives trading is inappropriate in view of a client's resources A) II only B) I, II, and III C) II and III D) I only

C

According to both the Investment Advisers Act of 1940 and the Uniform Securities Act, under which of the following circumstances is an investment adviser required to make disclosure to the client? The adviser intends to recommend the use of the broker-dealer with whom he is affiliated. The transactions recommended to the client are inconsistent with those for the adviser's own account. The investment adviser intends to sell the client the insurance policy recommended for his financial plan. The adviser is employed by a broker-dealer but provides investment advisory services outside the scope of his employment with the broker-dealer. A) II and IV B) I and III C) I, II, III, and IV D) III and IV

C - All of the situations listed involve some potential conflict of interest. Although such transactions are not prohibited, proper disclosure is required.

The current market interest rate for a bond rated AA with 20 years to maturity is 5%. In an efficient market, a similar bond with a coupon of 4% could be expected to have an internal rate of return of A) 4%. B) 6%. C) 5%. D) 8%.

C - In an efficient market, bonds are priced so that their NPV is zero. That means the bond's yield to maturity is equal to the current market interest rates for similar bonds. When that rate is 5%, as is given in this question, all AA bonds with 20 years remaining to maturity should have a YTM of 5%.

Centripetal Investment Advisers (CIA) has its principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases except A) CIA's advisory contract calls for the automatic deduction of advisory fees B) checks made out to CIA are deposited into the client's account within 3 business days C) checks made out to 3rd parties are forwarded within 3 business days D) CIA has a power of attorney granting authority to withdraw funds from the custodian

C - When a check made payable to a third party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days.

Which of the following statements regarding discretionary accounts is TRUE? A) The rules regarding churning of accounts do not apply to discretionary accounts. B) A branch manager must approve discretionary orders before entry. C) A principal must approve discretionary orders before entry. D) An order in which an investor designates the security's name, the number of shares, and whether to buy or sell and gives the agent discretion as to time and price only is not considered discretionary.

D

An investor sells ten 5% bonds at a profit and buys another 10 bonds with a 5¼% coupon rate. The investor's yearly return will increase by A) $1.00 per bond B) $2.00 per bond C) $1.50 per bond D) $2.50 per bond

D - 5% coupon rate × $1,000 face value = $50 per year per bond; 5¼% coupon rate × $1,000 face value = $52.50 per year per bond.

Which of the following items would be found on a family balance sheet? A) Annual salary B) Income taxes paid C) Dividends and interest received D) Spouse's engagement ring

D - A balance sheet, whether for a family or a business, shows assets and liabilities, not income and expenses. The ring is certainly an asset; the others are income or expenses.

A 35-year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is A) 8.5% per premium payment B) 8.5% of total premiums over the life of the plan C) 9% per premium payment D) 9%

D - A variable life insurance plan may charge a maximum sales charge of 9% over a period not to exceed 20 years.

A major stockholder of XYZ Corporation makes frequent purchases and sales of this stock on the open market to give the impression that it is actively traded. This unethical practice is best described as A) front running B) pegging C) positioning D) wash trades

D - A wash trade occurs when there is no real change in beneficial ownership. Purchases and sales are offset, but the volume of trading creates the illusion of substantial interest in the stock.

The Investment Company Act of 1940 requires certain types of investment companies to compute their net asset value on a regular basis. Excluded from that requirement are A) closed-end management investment companies. B) open-end management investment companies. C) unit investment trusts. D) face-amount certificate companies.

D - The two investment companies offering redeemable securities, open-end funds, and UITs, must compute their NAV on a daily basis. Closed-end funds can do it daily; many compute every Friday. The concept of NAV makes no sense with a FACC.

Which of the following are regulated under the Securities Exchange Act of 1934? Broker-dealers Investment advisers Pension plans Transfer agents A) III and IV B) I and IV C) II and III D) I and II

B - The Securities Exchange Act of 1934 regulates broker-dealers and transfer agents. Investment advisers are regulated under the Investment Advisers Act of 1940 (and, to a certain extent, the Investment Company Act of 1940), whereas pension plans in the private sector are regulated under ERISA.

Investment risk may broadly be categorized as either unsystematic or systematic risk; both types of risk together constitute total, or absolute, risk. Total risk is measured by A) beta coefficient. B) standard deviation C) correlation coefficient. D) opportunity cost.

B - Unlike beta, which only measures systematic risk, standard deviation reflects both systematic and unsystematic risk, revealing the total risk of the investment.

An investment adviser who has custody of customer funds and securities discovers that her net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must notify the Administrator by close of business after the day of discovery file a report of its financial condition no later than close of business the day after notification include in the report of financial condition a statement as to the number of client accounts cease doing business A) I, II, III, and IV B) I and IV C) I, II, and III D) I only

C - As a condition of the right to continue business, the adviser must notify the Administrator by close of business after the day of discovery. No later than close of business the day after notification, the adviser must file a report of its financial condition, which must include statements regarding the number of client accounts.

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

C - Assets held in custodial accounts (UTMA or UGMA) are counted at 20% of their value, which compares unfavorably with the 5.64% valuation of Section 529 or Coverdell ESA assets

When comparing a private equity fund to a public one, it would be incorrect to state that the private fund has A) lower reporting costs. B) less liquidity. C) higher risk. D) stronger governance.

D - Corporate governance is an area where public shareholders look to ensure that the management is performing in ways that not only maximize operating results, but also represent high standards of business ethics.

A federal covered investment adviser would like to charge a client a performance fee based on a selected benchmark. The client has $400,000 invested with the adviser but has a net worth of $2,150,000, of which $350,000 represents an investment account, 50% of which is shared with his cousin. A) Because we can allow none of the jointly held property, this client does not have the necessary net worth to qualify for a performance-based compensation program. B) Because the total of the amount invested with the adviser ($400,000) plus the individual's personal net worth ($1,800,000 without counting the joint property) exceeds $2 million, this client has the necessary net worth to qualify for a performance-based compensation program. C) Because we can allow all of the jointly held property, this client has the necessary net worth to qualify for a performance-based compensation program. D) Because the client's 50% share of the investment account is only $175,000, this client does not qualify for a performance-based compensation program

A

A benefit of waiting until the age of 70 to claim Social Security benefits is that A) benefits are increased by 8% for each year from the full retirement age. B) Medicare benefits are increased. C) a higher percentage of the monthly benefit is exempt from income taxes. D) the income tax rate is reduced once the claimant reaches 70.

A - If an individual delays taking Social Security until age 70, the benefit is increased by 8% for each year from the full retirement age.

Which of the following statements are TRUE? An agent may never be simultaneously employed by more than one broker-dealer. An agent must submit separate registrations for each broker-dealer with which he is registered. Certain states prohibit agents from dual or multiple registration. An agent who sells securities in several states must be registered with different broker-dealers in each state. A) II, III, and IV B) I only C) II and III D) IV only

C - If the agent is permitted by the admin to operate with more than 1 BD, he must file separate registrations with each BD and certain states can prohibit that.

Your client maintains a small cash account at the firm. One typical broker-dealer fee that would not be charged to this client is A) a charge if the client asks to have funds wired B) an account maintenance charge C) margin interest on the debit balance D) the fee for transferring certificates

C - In a cash account, you can't have margin activity, so there can't be a margin interest charge.

An investor owns a common stock that has been paying a dividend at an annual rate of $2.00. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is A) 12% B) 5% C) 4% D) 20%

D - Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $0.50 (1 quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for 3 months − 1 quarter. Multiply that by 4 to get the annual rate.

USAAdvisers is registered in 10 Midwest states. Regarding financial requirements, USAAdvisers must meet those of A) each state in which it has a place of business B) the state with the most stringent financial requirements C) the SEC D) the state in which its principal office is located

D - Under the Uniform Securities Act, when it comes to financial requirements, bonding, recordkeeping, and so forth, as long as the adviser meets the requirements of the state in which the principal office is located, the other states have no further claim.

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

A - Bond valuations using discounted cash flow take into consideration the present value of the bond's future cash flows. That is, the greater the value of the interest payments to be received in the future, the higher the price of the bond

All of the following practices violate NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT A) recommending the purchase of a security to a majority of the clients solely on the basis of the issuer's properly published press release regarding a likely increase in earnings per a new product branding strategy B) hypothecating customer securities held in margin accounts C) effecting a transaction with no change in beneficial ownership D) conducting securities transactions, with clients, that are not reflected on the books of the broker-dealer and without the knowledge and supervision of the employing broker-dealer

B - The normal method of financing customer margin accounts is by hypothecating their securities so there is nothing dishonest or unethical happening.

Which of the following is (are) required to register with a state Administrator? An adviser who only provides impersonal investment advice through newspaper columns, magazine articles, or financial publication of general and regular circulation Investment adviser representatives of federal registered advisers who have natural person clients and have a place of business in the state An investment adviser who has no place of business in the state and has 5 advisory clients in the state A person who is an officer of a federal registered investment adviser who has no natural person clients A) I, II, III, and IV B) I only C) II only D) II and III

C

Which of the following is NOT included in Form ADV Part 2A? A) Types of investments made by the adviser B) A description of how the adviser is compensated C) Investment policy of the adviser D) States in which the investment adviser is registered or intends to register

D - ADV Part 2A is the brochure that investment advisers must deliver to clients; it describes the investment adviser's fees, investment policies, and types of investments made.

As an incentive to encourage clients to invest in a particular stock recommended by the broker-dealer, clients are told that anytime within 6 months after the purchase date, they may sell the stock back to the firm at original cost plus interest at the state's legal rate. This would be A) a violation of the antifraud provisions of the Uniform Securities Act B) a right of rescission C) an offer that could only be made to accredited investors D) a prohibited guarantee against loss

D - Offering to buy back a stock at its original cost, even without paying interest, is a prohibited guarantee against loss.

Under the Securities Act of 1933, all of the following must sign a registration statement for a new issue of nonexempt securities EXCEPT A) a majority of the members of the board of directors B) the chief executive officer of the issuer C) the chief financial officer of the issuer D) the managing underwriter of the issuer

D - The registration statement, which is an issuer document, must be signed by members of the board, as well as by the CEO and the CFO. It is also signed by the lawyers and accountants representing the issuer who express their opinions on the legal and accounting aspects of the proposed new issue.

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

D - Unlike a C corporation, operating income or losses of a general partnership flow through directly to the partners. There are several easy ways to dissolve a partnership. However, they do not offer the limited liability protection of a corporation.

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

A

Which of the following bonds is most likely to exhibit the greatest volatility due to interest rate changes? A bond with A) a high coupon and a long maturity. B) a low coupon and a long maturity. C) a high coupon and a short maturity. D) a low coupon and a short maturity. Explanation

B - LONG AND LOW BABY

A state-registered investment adviser maintains custody of client funds and securities. On Thursday, the chief financial officer of the firm informs the chief compliance officer that their net worth is $31,578. Under the provisions of the Uniform Securities Act, the firm would A) send a detailed financial report to the Administrator by the close of business Monday B) need to increase the amount of their surety bond C) do nothing, as their net worth is far in excess of the minimum requirement of $10,000 D) send a detailed financial report to the Administrator by the close of business Friday

A - . If the net worth should fall below the minimum, by the close of the next business day after discovery (Friday in our example), notice of the deficiency must be sent to the Administrator of the state in which the principal office of the adviser is located. Then, by the close of business the day after that (Monday in our example), a detailed financial report, including the number of clients served by the adviser, must be sent to the Administrator.

When must an investment adviser disclose personal securities transactions to a client? If the adviser makes trades in his own account that are inconsistent with advice given to a client If the adviser makes trades that are designed to take advantage of the impact caused by recommendations to clients Investment advisers must disclose all personal transactions to clients A) I and II B) III only C) I only D) II only

A - They must disclose an affiliation with a securities broker-dealer if the advisory service is independent of the broker-dealer, if the adviser only recommends products offered by the broker-dealer, if the adviser will be compensated by the broker-dealer for the transaction, or if the products recommended by the adviser are available from other broker-dealers.

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

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

Which of the following are characteristics of a money market mutual fund? Shares are offered without a sales charge. There is a redemption fee. All purchasers must receive a copy of the prospectus. The letter of intent must be signed within 16 months. A) II and III B) I and III C) II and IV D) I and IV

B - Money market funds are offered without sales loads or redemption fees. As with all mutual funds, a prospectus is required.

A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use? A) Charitable remainder trust B) Complex trust C) Simple trust D) Charitable lead trust

B - Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.

A client wants to purchase commercial paper. The licensed agent may indicate to the client that the security need not be registered if the minimum denomination is $50,000 the maximum maturity is 270 days it is rated in 1 of the 3 highest rating categories by a recognized rating agency it is in book entry form A) I and III B) I and II C) I, II, and III D) II, III, and IV

C - Commercial paper may qualify as an exempt security if the minimum denomination is $50,000, has a maturity of not more than 270 days, and is rated in one of the three highest rating categories by a nationally recognized rating agency.

Which of the following activities of an investment advisory firm would NOT require notification to and consent of the clients of the advisory firm? A) The retirement of a sole proprietor investment adviser who wishes to sell the practice to another investment adviser B) An investment adviser wishing to merge with a larger national advisory firm C) The chief operating officer of an investment advisory firm wishing to pledge her majority interest in the firm to a local bank for a loan to purchase an office building that will be leased to the advisory firm D) A minority partner resigning from the firm to start his own advisory firm

D - Any change in the controlling interest in an advisory firm, including pledging the controlling interest, is treated as an assignment of the contract and requires notification to and consent of the clients of the investment adviser. The change in a minority interest is not considered an assignment, so only notification, but not consent, is required.

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

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

A state-registered investment adviser with discretionary authority over client accounts discovered on Monday, that the firm's net worth is below the required amount. He must notify the administrator and then file a report no later than the A) close of business Tuesday, close of business Friday B) close of business Tuesday, close of business Wednesday C) close of business Monday, close of business Wednesday D) close of business Monday, close of business Friday

B - Unless otherwise exempted, every investment adviser registered or required to be registered under the Act shall by the close of business on the next business day notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day a report with the Administrator of its financial condition

In conducting investigations, the Administrator may require a person to file a statement in writing and under oath publish information of any violation over the vigorous objections of a violator make investigations both inside the state and in other states to determine whether violations of the USA have occurred in his state make investigations outside the state to determine whether violations of the USA have occurred in that other state A) II and III B) I and II C) I, II, and III D) I, II, III, and IV

C - The admin is not authorized to conduct investigations in other states to determine whether a violation of the USA has occurred in those states.

On the initial public offering, an investor buys a $10,000 Aa-rated, 20-year corporate bond with a 4% coupon rate. One year later, the prevailing market rate is 5% and the bond has had its rating increased to Aa1. Which of the following is most likely TRUE with reference to the current market price of this bond? A) Par value B) Premium C) Discount D) Cannot be determined from the information given

C - When interest rates go up, bond prices go down. Had interest rates remained the same, the slight improvement in rating would have probably caused the bond to sell at a very slight premium, but that rating increase is not nearly strong enough to offset a 25% increase in market interest rates.

The Investment Advisers Act of 1940 requires advisers to prepare and adhere to a code of ethics. Which of the following is charged with the responsibility of enforcing that code? A) Chief compliance officer of the IA B) Each individual IAR C) Administrator of the state in which the IA has its principal office D) The SEC

A - Each federal covered investment adviser must have an individual designated as the chief compliance officer (CCO). It is that person's responsibility to make sure that the code of ethics is being followed. Although each individual IAR must follow that code, it is the CCO with the supervisory responsibility.

You have a 70-year-old client with a $500,000 whole life insurance policy purchased 25 years ago. The policy currently has a cash value of approximately $150,000. With all of the children on their own and successful, the client no longer feels the need for the insurance, and asks you if there is any option that might result in netting more than surrendering the policy for its cash value. You might recommend A) engaging in a life settlement B) canceling the policy, but leaving the cash value with the insurance company with interest C) keeping the policy because the cash value will continue to grow D) using IRS Section 1035 to transfer the cash value into a deferred annuity

A - A life settlement, involves selling an existing life insurance policy for an amount in excess of the cash value, but less than the death benefit. Exact numbers are hard to compute without knowing all the details of the type of policy and health of the insured, but it would certainly be well above the $150,000 cash value.

You have a client whose income from a real estate limited partnership is $11,000. During the same year, your client had net capital losses of $2,000 and losses from an oil and gas drilling program of $6,000. The effect of this investment activity would be to increase the client's taxable income by A) $11,000 B) $9,000 C) $3,000 D) $5,000

C - The $11,000 passive income is offset by the $6,000 of passive loss giving the client $5,000 of passive income. Because capital losses up to $3,000 are deductible from taxable income, we can deduct the $2,000 in net losses giving a net increase to taxable income of $3,000.

Under current regulations, registration with the SEC is optional for all of the following investment advisers EXCEPT A) Employee Benefit Specialists, Inc., a pension consultant with $225 million in AUM B) Midwestern Asset Managers, LLC, with $53 million in AUM, required to register in 17 states C) CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board D) Grand Visions Advisers, a sole proprietorship with $104 million in AUM

C - registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end)

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the contract between an investment adviser and its clients shall include all of the following EXCEPT A) the formula for computing the fee B) whether the contract grants discretionary power to the adviser C) the services to be provided D) a provision to reduce or waive fees in the case of underperformance

D - There is never any case where waivers of this nature would ever be permitted.

Under the USA, all the following statements regarding the registration of agents are true EXCEPT A) if a broker-dealer's registration is revoked by a state, it has no effect on the agent's registration B) a nonresident agent can solicit business in another state only if the agent and the broker-dealer are registered in that state C) if an agent resigns and affiliates with another broker-dealer, both firms and the agent must notify the Administrator D) an agent can only sell securities that have been registered in a state or that are exempt from registration

A - If a broker-dealer's (or investment adviser's) registration is revoked by a state, the registrations of all its agents (or IARs) are suspended. That is, those individuals can no longer function in a registered capacity until they register with another active firm.

It would not be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to divide or otherwise split the agent's commissions, profits, or other compensation from the purchase or sale of securities with any person also registered as an agent for the same broker-dealer with any person also registered as an agent for a broker-dealer under direct or indirect common control as long as the arrangement is in writing as long as the client has approved of the sharing arrangement A) I and II B) III and IV C) I, II, III, and IV D) I, II, and III

A - NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents permits commission sharing as long as the agents are properly registered with the same broker-dealer or one under common control. There is no requirement for the arrangement to be in writing, and the customer has no say so in this matter.

An Administrator may initiate a suspension or revocation proceeding against a broker-dealer registered in his state up to 2 years after a broker-dealer voluntarily withdraws its registration when an agent of the broker-dealer is convicted of a felony violation of the Securities Exchange Act of 1934 upon discovery that the broker-dealer's license had been suspended in another state upon discovery of new facts unknown to the Administrator at the time of the broker-dealer's initial registration A) III and IV B) I and II C) II, III, and IV D) I, II, III, and IV

A - The Administrator maintains jurisdiction over a license that has been withdrawn for a period of 1 year after the effective date of the withdrawal. An action against an agent of the broker-dealer does not allow the regulatory authority to also go after the broker-dealer. It is only when the question states that the individual is an executive or other supervisory person of the firm that action against the firm may commence unless that agent is a supervisor of the broker-dealer or part of the ruling indicated that there was a failure to supervise.

The Investment Company Act of 1940 does which of the following? A) Prescribes procedures for the establishment of investment companies B) Sets rules for the registration of investment advisers C) Regulates the secondary market D) Governs the issuance of new issues

A - The Investment Company Act of 1940 requires all investment companies to register with the SEC as such and be regulated under the act. The companies are still subject to all the other applicable securities acts. However, the Investment Company Act of 1940 provides additional regulation to ensure that investors are fully informed and fairly treated by the management of investment companies.

XYZ is an investment adviser registered in States B, C, and D. Part of its service is offering a comprehensive financial plan, for which there is an initial fee of $2,500. During a discussion with a prospect, one of its investment adviser representatives seeks to allay the individual's concerns by informing her that once the firm delivers its brochure and receives the client's payment, there is a 3-day period during which the client may cancel the contract and receive a refund of that fee. In this case, A) the investment adviser representative is in violation because the time period is 5 days B) there is no violation because the 5-day penalty-free withdrawal feature is only found in state law and does not apply to SEC-registered advisers C) the investment adviser representative is in violation because the brochure must be delivered at least 48 hours before signing the contract D) there is no violation because firms and their representatives can always make their rules more stringent than the regulators' rules

A - The agent has committed an unethical business practice because the NASAA Model Rule dealing with advisers' brochures requires a 5-day penalty-free period when the brochure is not delivered at least 48 hours prior to entering into the contract

The investment adviser under contract to a regulated, diversified, open-end investment company does NOT A) change investment objectives that he believes are in the best interest of the investors B) attempt to fulfill the fund's investment objective by means of careful investing C) investigate the tax status of potential investments D) make sure the fund invests in such a manner as to retain its diversified status

A - The fund's objective may be changed only by majority vote of the outstanding shares (i.e., by the owners of the company, not the portfolio manager).

If a client wishes to purchase a life insurance policy that doesn't invest in the market, but allows the holder to pay additional premium if desired, the recommendation is A) universal life. B) index annuity. C) variable life. D) term life.

A - These policies are frequently overfunded (premium over the required amount is paid-in by the policyowner).