LAST STUDY SET

One of your clients asks about a Coverdell Education Savings Account for college savings. To avoid income taxation and penalties, your advice is that these funds must be used before the student reaches age A) 30. B) 32. C) 24. D) 25.

A (All funds within a CESA must be used before the student reaches 30 years of age. Any funds remaining must be distributed within 30 days of the birthday and earnings in the account are subject to ordinary income tax plus a 10% penalty. There is an exception for a special needs beneficiary and that would have to be mentioned in the question to apply.)

Components of a company's net worth would include all of these EXCEPT A) goodwill B) operating income C) fixed assets D) inventory

B (Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.)

Among the benefits of an HSA is A) funds may be used for various medical expenses once the low deductible has been met. B) funds not used for health expenses may be invested in mutual funds and other securities. C) up to $10,000 per year may be accumulated. D) the amount that may be contributed is based on the number of dependents.

B (Unlike an FSA (flexible spending account), employee contributions to a health savings account (HSA) not used for medical expenses may be invested in a wide variety of securities. Although mutual funds are the most common, many providers offer the opportunity to invest in stocks and bonds. Remember, one of the eligibility requirements for an HSA is a high, not low, deductible. Currently, the maximum contribution is $3,450 for an individual or $6,850 if family coverage, regardless of the number of dependents covered.)

All of the following actions will increase the deficit in the U.S. balance of payments EXCEPT A) investments by U.S. firms abroad B) Americans buying Japanese cars C) purchase by foreigners of U.S. securities D) U.S. foreign aid

C (A debit in the U.S. balance of payments occurs when the country pays out more abroad than it takes in. This occurs when the U.S. imports more than it exports, invests money abroad, or sends money to foreign countries in the form of foreign aid.)

One way in which universal life and variable life are similar is that both A) have a fixed minimum cash value B) have flexible premiums C) permit loans against the cash value D) are considered securities

C (As long as the policy has cash value, loans are permitted. Neither of these has a fixed minimum cash value, and only universal life has flexible premiums. Only variable life is considered a security.)

Which of the following statements about capital gains are TRUE? I. The minimum holding period required to qualify for long-term capital gains treatment is 1 day longer than 12 months. II. The highest federal income tax rate on long-term capital gains is less than the highest federal income tax rate on ordinary income. III. If an investor holds stock for 12 months or less and has no other transactions, any gain on the sale of the stock is taxed at the same rate as ordinary income. A) I and II B) I and III C) II and III D) I, II, and III

D (If an investor holds stock for more than 12 months and sells it for a gain, the gain will be treated as a long-term capital gain. The advantage of long-term capital gains is that the maximum tax rate on long-term capital gains is lower than the maximum rate on ordinary income. If an investor holds stock for 12 months or less, though, any gain will be considered a short-term capital gain and will be taxed at the same rate as ordinary income.)

The capital asset pricing model (CAPM) is an investment theory that serves as a model for A) pricing securities based on their systematic risk B) pricing securities based on their total risk C) pricing securities based on their unsystematic risk D) measuring the correlation between a security and the overall market

a (Under the CAPM, securities are priced based on their systematic risk only, because this risk cannot be eliminated through diversification. The expected return of a security or portfolio is calculated by adding the rate on a risk-free security to a risk premium multiplied by the asset's systematic risk.)

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) decline. B) be volatile. C) remain steady. D) change its objective.

B (An advantage of the high-water crediting method is that the interest is calculated using the highest value of the index during the term. Therefore, in a volatile market, where prices are going up and down, it picks up the highest price.)

The RIF Corporation would not be able to issue A) RIF rights. B) RIF call options. C) RIF warrants. D) RIF common stock.

B (Options contracts are not issued by the underlying asset. Technically, listed options (the only type that will be on the exam), are issued by the Options Clearing Corporation (OCC). A corporation issues common stock and can issue rights (preemptive rights) and/or warrants.)

Sales made under the provisions of Rule 506(b) of Regulation D must be reported on A) Form U4. B) Form 506. C) Form D. D) Form 13F.

C (Form D is the form that must be filed electronically with the SEC no later than 15 days after the first sale of securities in the offering.)

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) correlation coefficient. C) standard deviation D) opportunity cost.

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

Which of the following statements regarding Roth IRAs is TRUE? A) Like traditional IRAs, Roth IRA contributions may not be made after the participant reaches age 72. B) Like traditional IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan. C) Roth IRAs are not subject to the minimum distribution rules until the death of the owner/participant of the plan. D) Roth IRA withdrawals are tax free in their entirety regardless of the participant's age at withdrawal.

C (Unlike traditional IRAs, Roth IRAs are not subject to the minimum distribution rules regarding a participant's age (72). Rather, distributions need not be made until the death of the owner/participant. For a Roth IRA withdrawal to be entirely tax free, it must be made following a 5-year holding period after the first contribution and after the participant reaches age 59½. Effective with the SECURE Act, there are no age limitations for contributions for any retirement plan.)

An Administrator does not have jurisdiction over an offer to sell that is made in I. a TV broadcast originating outside the state II. a newspaper published outside the state III. a newspaper published inside the state where more than 2/3 of its circulation is outside the state A) I only B) II and III C) I, II, and III D) II only

C Under the broadcast and publishing exceptions, the Administrator does not have jurisdiction if the offer is made in a TV or radio broadcast originating outside the state or in a newspaper published outside the state. Furthermore, if a newspaper is published inside a state but more than 2/3 of its circulation is outside the state, the Administrator does not have jurisdiction.

If a company's dividend increases by 5% but its market price remains the same, the current yield of the stock will A) decrease B) remain at 7% C) remain at 5% D) increase

D (The current yield of a stock is the annual dividend divided by the market price. If a company's dividend increases and its market price remains the same, its current yield will increase.)

A customer who sold a bond at a loss must wait how long before he can buy back a substantially identical bond and not have the sale classified as a wash sale? A) 20 days B) 5 days C) There is no waiting period D) 31 days

D (When a customer sells a security at a loss, he may not buy back the same (or substantially identical) security from 30 days before to 30 days after the sale that established the loss, without having the loss disallowed.)

Which of the following is TRUE regarding a state Administrator's authority? A) The Administrator may suspend an agent's license based solely on the public good doctrine. B) The Administrator's subpoena power covers that state only where officiating. C) If a specific securities transaction meets the USA's definition of "exempt transaction," the Administrator does not have the power to void that exemption. D) With certain limited exceptions, the Administrator has authority over any transaction made in the state where officiating.

D (With certain limited exceptions, a state Administrator has jurisdiction over securities transactions conducted in the officiating state. The Administrator may issue subpoenas or otherwise conduct inspections of records in states other than where officiating if circumstances warrant. Such inspections may be made if the Administrator deems doing so to be in the public's interest. A person's license can only be suspended when it is in the public interest AND a specific provision of the act or rules has been violated. Only in the case of a transaction involving a federal covered security does the Administrator not have the power to void the exemption.)

One of the reasons why the discounted cash flow method of valuation is useful in assessing the value of fixed income instruments is A) the predictability of income B) the priority of claim on earnings C) the known maturity date D) the availability of ratings

A (Discounted cash flow evaluates the expected cash flow from an investment and then factors in the time value of money. Obviously, if there is no predictable cash flow (as there is with the interest payments on a bond), there are no reliable numbers to plug into the formula.)

Which one of the following would NOT be considered a fraudulent or prohibited business practice? A) Attempting to solicit a trade in unregistered exempt securities with an individual client B) Larger than ordinary commissions without prior disclosure to the client C) Submitting a trade order for a potential client who has promised that the new account would be opened tomorrow D) Omitting a material fact because the agent felt the client would not understand the information involved

A (Even though the security is unregistered, because it is exempt, no registration is required. Material information must be disclosed, even if the client doesn't understand its meaning. No trades can take place until an account is opened, and although there are circumstances that permit larger than ordinary commissions, that fact must be disclosed to the client.)

Under the Uniform Securities Act, the Administrator has the power to deny or revoke exemptions for which of the following types of securities? I. Stock issued by a bank organized under the laws of another state. II. Securities of nonprofit organizations. III. Investment contracts issued by employee benefit plans. A) II and III B) I and II C) I, II, and III D) II only

A (The Administrator may deny or revoke the exemption granted to a nonprofit organization or investment contracts issued by employee benefit plans. Any transaction exemption, except one relating to a federal covered security, may be revoked as well. However, there are certain security exemptions that the USA does not grant the Administrator the power to deny. Included in that list is any security issued or guaranteed by any bank organized under the laws of any state.)

Under the Uniform Securities Act, an Administrator who believes a violation has occurred or is about to occur may I. Issue a cease and desist order without a prior hearing II. bring action to obtain an injunction and have a receiver appointed over the alleged violator's accounts III. seek a court order requiring the alleged violator to make restitution to others A) I and II B) I, II, and III C) I and III D) II and III

B (Administrators have the power to issue cease and desist orders, apply to a court for a temporary or permanent injunction, or apply to a court for restitution to investors or to have the court appoint a receiver for a violator's assets. In issuing the cease and desist order, the Administrator may do so with prior notice and hearing or may issue the order summarily (without such notice and hearing).)

Mitch purchased a 30-year bond for 97¾ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Mitch receives semiannual coupon payments and expects to hold the bond to maturity? A) 4.36% B) 5.68% C) 8.67% D) 8.50%

C (No calculation is necessary here. Why not? Because anytime a bond is purchased at a discount from par (97¾% is a discount), the YTM must be greater than the nominal (coupon) rate. There is only one choice greater than 8.5%. It isn't about your computational skills; it is about your understanding the relationship between prices and yields.)

The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax. This is done by adding back to the taxpayer's ordinary income, items such as accelerated depreciation and excess intangible drilling costs. The term used to describe these items used to arrive at the taxpayer's alternative minimum taxable income (AMTI) is A) Form 6251 items. B) AMT taxable items. C) tax preference items. D) tax preferred items.

C (The proper term is "tax preference items." Those would include the following: Deductions taken for accelerated (but not straight-line) depreciation; Excess intangible drilling costs; Capital gains on incentive stock options; and Otherwise tax-exempt interest from specified private activity bonds.)

An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6% and, during the first year, the inflation rate is 9%. How much interest would be paid for the year? A) $90.00 B) $64.11 C) $65.40 D) $60.00

B (TIPS bonds have a fixed coupon rate with a principal that varies each 6 months based on the inflation rate. With an annual inflation rate of 9%, each 6 months, the principal increases by 4.5% (half of the annual rate). Each semiannual coupon is half of the 6% rate times the new principal. The arithmetic is: $1,000 x 104.5% = $1,045 x 3% = $31.35 plus, $1,045 x 104.5% = $1,092 x 3% = $32.76. Adding the 2 interest payments together results in a total of $64.11 for the year. You should be able to "eyeball" this. Any bond with a 6% coupon will pay $60 in one year ($30 x 2). Because the TIPS bond increases the principal after the first 6 months, the second interest payment will be slightly higher than $30. There is only one choice slightly higher than $60.00 and it would be that way on the real exam.)

It would not be considered an unethical business practice under NASAA's policies for an investment adviser to charge fees I. as well as commissions II. based on an hourly rate III. based on a percentage of the change in value of funds from quarter to quarter IV. based on a percentage of the aggregate value of funds under management A) III and IV B) II and III C) I and IV D) I, II, and IV

D

Under the Uniform Securities Act, which of the following is NOT a requirement for a preorganization subscription to be an exempt transaction? A) No payment may be made by any subscriber. B) No commission may be paid to anyone for soliciting potential subscribers. C) There may be no more than 10 subscribers. D) The offer of the security may not be advertised.

D (There are three requirements for a preorganization subscription to qualify as an exempt transaction. A preorganization subscription may be advertised.)

To comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must I. offer plan participants at least 10 different investment alternatives II. allow plan participants to exercise control over their investments III. allow plan participants to change their investment options no less frequently than monthly IV. provide plan participants with information relating to the risks and performance of each investment alternative offered A) I and IV B) II and III C) I and III D) II and IV

D (To comply with the safe harbor provisions of ERISA's Section 404(c), the plan trustee must allow each participant control over her investments and furnish her with full performance and risk information. The rule only mandates a minimum of 3 alternatives and quarterly changes.)

All of the following situations are exempt transactions complying with the requirements of the USA EXCEPT A) broker-dealer B offers a private placement to 15 regular public customers and closes the offering at the end of 30 days B) Mammoth Mutual Fund purchased 250,000 shares of common stock in a nonissuer transaction C) the executor of an estate liquidates 1,000 shares of IBM held by the estate D) broker-dealer A has put together a syndicate of 15 insurance companies and pension funds to purchase the entire issue of XYZ Corporation's preferred stock

A (Under the Uniform Securities Act, an unregistered private placement may be offered to no more than 10 prospective purchasers, with the exception of financial institutions and other broker-dealers. Transactions by executors, the sheriff, marshals, receivers, trustees in bankruptcy, guardians, or conservators are exempt. Sales to financial institutions, such as mutual funds and insurance companies, are also exempt.)

The portfolio manager of a bond fund believes that interest rates are going to increase in the near future. As such, it would be wise for that manager to A) lengthen the average duration of the portfolio. B) shorten the average duration of the portfolio. C) shift into higher-rated bonds. D) increase the equity portion of the portfolio.

B (Increasing interest rates lead to declining bond prices, regardless of the ratings. This is interest rate risk. Those bonds with the longest duration have the most sensitivity to that risk, while short-term maturities are only slightly affected. Reducing the average duration of the portfolio means that the average maturities will be shortened, thus reducing the effects of an increase to interest rates.)

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

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

An advantage of structuring a business operation as an S corporation rather than a C corporation would be A) the C corporation is limited to a maximum of 100 shareholders while no such limit exists for the S corporation B) limited liability C) avoiding double taxation D) simplicity when raising capital through a public offering

C (Because an S corporation is taxed like a partnership, all earnings (or losses) flow directly through to the shareholders. This avoids the double taxation inherent in receiving a share of the profits (through dividends) from a C corporation. It is the S corporation that is limited to 100 shareholders. That is why it is not suitable for raising capital through a public offering. The shareholders of both S and C corporations enjoy the benefit of limited liability.)

Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? I. Receiving cash distributions may reduce Customer A's proportional interest in the fund. II. Customer A may use the cash distributions to purchase shares later at NAV. III. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. IV. Due to compounding, Customer B's principal will be at greater risk. A) II and IV B) II and III C) I and III D) I and IV

C (If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, his proportional interest in the fund will decline. Automatic reinvestment is always at NAV.)

If the current risk-free rate is 5%, and the expected return from the market is 10%, what return should we expect from a security that has a beta of 1.5? A) 15% B) 11.5% C) 12.5% D) 10%

C (The expected return = 5% + (10% - 5%) × 1.5 = 5% + (5% x 1.5) = 5% + 7.5% = 12.5%.)

An Administrator may deny or revoke a security's exemption A) if the Administrator, in a court of competent jurisdiction, proves that a security does not qualify for an exemption B) for a federal covered security if its issuer is in violation of state law C) if the Administrator determines that an exemption applicable to federal covered securities is inconsistent with state securities law D) without a hearing if the issuer is given an opportunity for a hearing after the revocation

D (An Administrator may deny or revoke a security's exemption without a hearing if the issuer is given an opportunity for a hearing after the revocation. The issuer requesting an exemption must prove the exemption; this is not the responsibility of the Administrator. The Administrator may not revoke exemptions of federal covered securities.)

Which of the following methods of compensation to an investment adviser may be in violation of the USA? I. An adviser charges a standard, or flat, fee for all accounts of $100,000 or less. II. An adviser charges all accounts a percentage of assets under management. III. A client agrees to compensate an adviser on a percentage of capital gains in excess of the S&P 500 in return for guaranteeing the S&P return. A) I, II, and III B) I only C) I and II D) III only

D (Guaranteeing a level of performance is a prohibited business practice whether the client agrees or not. An adviser may charge clients a flat fee, provided it is fair and reasonable for the services offered. Charging accounts a percentage of assets under management is also an acceptable business practice under the Uniform Securities Act.)

One of the primary differences between trading on listed exchanges and trading in the over-the-counter market is that only on the exchanges are prices determined A) by an auction process. B) by the FINRA 5% markup policy. C) through a negotiation process. D) by the exchange itself.

A (One of the chief characteristics of exchange markets is the auction process for determining the price of a security. In the OTC markets, prices are determined by negotiation. The stock exchanges do not set the price, and although FINRA's markup policy is used to determine the charges to customers, that is separate from determining the security's price.)

Current assets on a corporate balance sheet would include I. accounts payable II. accrued wages III. cash IV. inventory A) II and IV B) III and IV C) I and III D) I and II

B (Cash is the most obvious current asset. The general definition of a current asset is one that is expected to be turned into cash within the year. One would certainly hope that to be true of inventory. Accounts payable and accrued wages are liabilities, obligations that must be paid on a current basis.)

A 401(k) offering which of the following choices would be most likely to be in compliance with Section 404(c) of ERISA? A) Money market fund, intermediate-term municipal bond fund, large-cap stock index fund B) Money market fund, intermediate-term government bond fund, large-cap stock index fund C) Small-cap fund, large-cap stock ETF, money market fund D) Long-term bond fund, large-cap stock index fund, foreign equity fund

B (The trustee of a 401(k) would be able to reduce her ERISA fiduciary exposure and meet the safe harbor provisions of 404(c) if the plan offered a broad index fund, a medium term government bond fund, and a cash equivalent fund. It isn't the number of funds that counts; it is the different asset classes available. In general, a municipal bond fund (or municipal bonds themselves) would be an inappropriate investment for a tax-qualified plan.)

An investment adviser is a member of a country club and provides substantial fee reductions to those members who become clients. The adviser justifies this because these club members are known for great referrals. The IA charges regular clients a fee that was larger for the same services because they were not members of the country club. Is this permissible? A) It is not permissible because all clients must be charged at the same rate. B) It is not permissible because the firm is charging other clients fees that are excessive in nature compared with the fees charged to country club members. C) This is permissible as long as proper disclosure is made in the adviser's brochure. D) It is permissible as long as the offer is not published as an inducement to join the country club.

C (Item #5 on the Form ADV Part 2A asks about the adviser's fee schedule. The adviser is asked if fees are negotiable. If so, the adviser must describe the nature of the fee structure and what type of variations there might be. As long as the adviser discloses that there are some affinity groups that will qualify for a lower fee, there should be no problem. This is not considered to be a referral fee.)

A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable? A) Treasury bonds B) Insured bank CDs C) ETNs D) ETFs

C (The question describes an individual with a low risk tolerance, so the Treasury bonds and CDs would certainly be considered appropriate. Because ETNs are a debt security backed solely by a single issuer while an ETF based on a specific index of debt securities represents a large group of issuers, they are only suitable for those who can understand and take the risks involved.)

Under which of the following circumstances can an Administrator initiate a suspension or revocation proceeding against a broker-dealer registered in the state? I. On discovery that the broker-dealer's license had been suspended in another state II. On the conviction of a violation of the Securities Exchange Act of 1934 III. Two years after the withdrawal of registration by the broker-dealer IV. On the basis of facts known by the Administrator at the time of the broker-dealer's initial registration A) II and III B) I and II C) I and III D) II and IV

B (An Administrator may initiate suspension proceedings against a broker-dealer on discovering that its registration has been suspended in another state and on conviction of a violation of the Securities Exchange Act of 1934. The Administrator may not initiate revocation proceedings against a broker-dealer later than 1 year after the broker-dealer has withdrawn its registration. The Administrator may not suspend or revoke a broker-dealer's registration at a subsequent time on the basis of facts known by the Administrator at the time of the initial application.)

Included among the powers of the Administrator is the ability to A) deny the registration of a securities professional, if doing so is in the public interest B) sentence an investment adviser representative who has been convicted of fraud to a prison sentence, not to exceed 3 years C) arrest an agent who violates the USA D) request the court to appoint a receiver to freeze the bank accounts of a broker-dealer who is the subject of an injunction

D (If a temporary or permanent injunction is issued against any securities professional, upon request of the Administrator, a receiver or conservator may be appointed over the defendant's assets. The Administrator cannot arrest but can seek a warrant. In order to deny a registration, not only must it be in the public interest, but there must be some other issue, such as insolvency, incomplete application, et cetera. Although the maximum prison sentence under the USA is 3 years, it is the courts that do the sentencing, not the Administrator.)

Under the Uniform Securities Act, all of the following are included in the definition of the term exempt transaction except A) a sale of unregistered nonexempt securities in an unsolicited transaction B) a sale of securities to a bank C) a sale of securities to an individual investor with a net worth of more than $5 million D) a sale of nonexempt securities to a broker-dealer

c (Unless there was something specified in the question or the answer choice to indicate that the transaction met one of several specific conditions, (isolated nonissuer, fiduciary, unsolicited, and so forth), sales to individuals, regardless of their wealth, are not exempt transactions. If the transaction is truly unsolicited (and the Administrator has the power to verify that), it is an exempt transaction. Transactions with financial institutions such as banks, savings and loans, and insurance companies are exempt. Although not specifically a financial institution, the USA also considers sales to broker-dealers to be exempt transactions.)

Which of the following statements regarding modern portfolio theory is not correct? A) The optimal portfolio will always lie above the efficient frontier. B) The optimal portfolio offers the highest return for a given level of risk. C) The optimal portfolio has the lowest risk for a given level of return. D) The optimal portfolio for an investor depends upon the investor's ability to assume risk.

A (The optimal portfolio for an investor will always lie on the efficient frontier. That is where, for any given level of risk, the return is the highest. Stated another way, for a given level of return, the risk is the lowest.)

When a new issue of common stock is registered under qualification, the Uniform Securities Act states that the Administrator may require an agent to present the prospectus for the issue to the offeree A) prior to making the sale B) prior to making the offer C) after the settlement date D) no later than the mailing of the certificates

A (Under Section 305(l) of the Uniform Securities Act, the Administrator may require that a prospectus be sent or given to each person to whom an offer is made before the sale of the security, but not prior to the offer. Remember, the offer is the attempt to sell and that always precedes the sale itself.)

Thirty years ago, an investor deposited $100,000 into a single premium deferred variable annuity. Today, the value of the accumulation units is $1.5 million. The investor is ready to annuitize and wishes to maximize monthly payments to be received. You would suggest which of the following settlement options? A) Life with 10 years certain B) Joint and survivor C) Straight life D) Life with 20 years certain

C (When one annuitizes, the amount of the annuity payment is highest when the annuitant takes the most risk (and the insurance company the least). Straight life payments end upon the death of the individual, and if that should be the following month, the insurance company keeps the rest of the money. In the period certain choices, the insurance company is "on the hook" for that number of years, even if the annuitant does not live that long.)

An adviser buys a substantial block of stock for its clients. The order was filled at several prices. Which of the following would dictate how stock is to be allocated among the clients? A) The allocation among clients would be made according to a fair method disclosed in the advisory firm's written policies and procedures manual. B) The clients holding the largest accounts would be entitled to the lowest executions. C) The clients holding the largest accounts would be entitled to the highest-priced executions. D) The firm may allocate best executions in any manner it chooses, as long as best executions are not routinely allocated to proprietary (house) accounts.

A (The allocation of order executions among clients should be made according to a fair method disclosed in the advisory firm's written policies and procedures manual. The most common method is the average cost basis.)

An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several that she feels are equally suitable for the client, but one of the companies is offering a trip for 2 to Las Vegas for reaching certain sales goals. She continues by stating that this sale will put her over the goal and win her the trip. If the client purchases that annuity, the agent A) should pack her bags for the trip; she earned it B) will probably be disciplined for failure to disclose the potential conflict of interest C) should only sell what is suitable for the client based on all available information D) should pack her bags and leave the firm before the compliance department learns of her actions

A (The annuity recommended by the agent is offering an incentive. The agent is clearly disclosing that fact to the client and, if the client goes ahead and makes the purchase, it is with full knowledge of the potential conflict of interest. The question states that the agent considers this annuity, along with others, to be suitable.)

Watson, a customer of Gibraltar Securities, wishes to place an order to buy 50 shares of a thinly traded stock priced at $8 per share. Because the stock is so thinly traded, Gibraltar Securities feels it needs to charge Watson a commission of $100 to justify the time it must spend locating a seller of the stock. Which of the following statements best describes this action? A) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction. B) A commission of $100 on a transaction involving $400 worth of stock would generally not be deemed excessive. C) Gibraltar Securities is not required to disclose the amount of commission in advance to Watson. However, it must receive clearance from the Administrator before charging commission in amounts exceeding 10% of the value of the securities traded under the transaction. D) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson chose to proceed with the trade.

D (It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson proceeded with the trade. However, charging larger than normal commissions without informing the customer of such intent in advance is a prohibited practice under the Uniform Securities Act. There is no requirement for administrative clearance prior to charging larger than normal commissions.)

Jack, who is proficient in both fundamental and technical analysis, would like to become an investment adviser. Although Jack is fairly new to the securities business, he worked in the commodities business for many years. Five years ago, Jack's Commodity Pool Operator's license was suspended by the Commodity Futures Trading Commission for having willfully violated or willfully failing to comply with any provision of the Commodity Exchange Act. Which of the following best describes how Jack's application to open an investment advisory business will be handled under the Investment Advisers Act of 1940? A) Jack's application will likely be denied because he violated the Commodity Exchange Act within the 10-year period prior to his application. B) Jack's application will likely be accepted because his violation of investment-oriented regulations occurred 5 years prior to his application. C) Jack's application will likely be denied because he has little experience in the securities industry. D) Jack's application will likely be accepted because he has not violated any securities law.

A (Jack's application will probably be denied because he was found guilty of violating the Commodity Exchange Act within the 10-year period prior to his application. Registration as an investment adviser will be denied to any party that has been convicted, within the 10-year period prior to application, of a violation of federal securities acts or the Commodity Exchange Act. Such statutory denial will also impact those enjoined under domestic or foreign court orders from engaging in the business of investing, presuming such orders were made in the 10-year period prior to the application date.)

All of the following must be specified in a security's state registration statement EXCEPT A) the total amount of the security that will be offered in other states B) the amount of securities to be offered in the state C) the expected use of the projected proceeds of the offering D) a stop order from another state that affects the offering of the security within that state

A (The total amount of the security to be offered in other states need not be specified although identifying those states is required. The amount of the security to be offered in the state of registration is required, as it generally provides the basis on which the registration fee is calculated. A stop order from another state that affects the offering of the security within the state must be included. The registration statement will always describe the intended use of the proceeds.)

Which of the following is not a type of life insurance policy? A) Term to 65 policy B) Variable annuity policy C) Universal life policy D) Endowment policy

B (Although a variable annuity may have a death benefit provision, it is not considered a life insurance policy. One key to that is, among other things, there is no health questionnaire when purchasing an annuity. Perhaps you have never heard of an endowment policy (it is not mentioned in the LEM). This type of situation may come up on the actual exam where one of the choices is something unfamiliar to you. Don't let that cause you to lose your focus. Annuities are issued by life insurance companies, but they are not life insurance policies, so select the correct answer and move on.)

John, an investment adviser, employs an investment adviser representative who is found guilty of defrauding many of the firm's clients over a long period of time. Which of the following is (are) TRUE under the Uniform Securities Act? I. The investment adviser representative is subject to criminal penalties specified in the act and to civil liabilities resulting from clients who sue as a result. II. John may be subject to civil liabilities resulting from actions taken by the investment adviser representative. III. John is not subject to civil liabilities as a supervisor if he can prove that he had no knowledge of the actions of the representative and, while exercising reasonable care, he could not have had knowledge of the violations. A) I and II B) I, II, and III C) II and III D) I and III

B (Persons convicted of willful violations are subject to the criminal penalties specified in the act (3 years and/or $5,000 fine). Thus, the representative is subject to criminal penalties and civil liabilities resulting from clients who sue him for loss of money. The act subjects to civil liabilities any person supervising those who violate the law. However, a supervisor may not be held liable for the actions of those whom he supervises if it can be proved that the supervisor used reasonable care to discover and prevent the violations and has no knowledge of the violations.)

Which of the following statements is CORRECT? A) Both state-registered and federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. B) Federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. C) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. D) A state-registered investment adviser collecting fees of $500 for 6 months or more in advance, is considered to be receiving a substantial prepayment.

C (It is only state-registered investment advisers who must provide audited balance sheets to clients for whom they maintain custody. In order to be considered a substantial prepayment of fees, state laws require that they be more than $500 for 6 or more months in advance.)

Which of the following could reduce the amount that an individual may contribute to a Traditional IRA? I. Roth IRA contributions made for the year II. High income level III. Participation in an employer-sponsored plan IV. Marital status A) I only B) I, II and III C) I and II D) I, II, III and IV

A (The maximum annual contribution applies as a total among your Roth and your traditional IRA. So, if the maximum is $6,000 and you put $3,000 into your Roth, you could only put $3,000 into your traditional IRA. You could do a total of $7,000 if you were 50 or older. High income level and participation in an employer-sponsored plan will affect the amount you may deduct but not the amount you may contribute. Even though a married couple can have their own IRAs or set up a spousal IRA if one is nonworking, that doesn't reduce the amount that either spouse can contribute.)

Parsimonious Planning Associates (PPA), an investment adviser with over $250 million in assets under management, is accused of violating the antifraud provisions of the Uniform Securities Act. Which of the following statements is true? A) No investigation may take place until the charges are proven true. B) The Administrator of the state where PPA's principal office is located is the only person authorized to investigate the charge. C) Because PPA is a federal covered adviser, only the SEC has the jurisdiction to investigate the charge. D) The Administrator of the state where the alleged fraud occurred may investigate the charge.

D (Once an investment adviser's AUM reaches $110 million, registration with the SEC is required. That makes PPA a federal covered adviser. Although covered advisers are exempt from the jurisdiction of the state for most things, one area in which they are not is when the antifraud provisions of the USA are breached. In that case, jurisdiction will usually rest with the Administrator of the state where the alleged fraudulent activity took place. In some states, the Administrator will refer the charges to the Administrator of the state where the IA's principal office is located, but that is not mandatory. Because the violation is of the USA, the SEC has no jurisdiction. Without an investigation, how can the charges be proven true (or false)?)