Mock Tests

The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if I results do not reflect the deduction of fees II actual market conditions during the referenced period are not disclosed III the advertisement did not reflect performance for a minimum period of 3 years IV the advertisement did not disclose that it applied to only a specific group of clients A) I, II, III, and IV B) I, II, and IV C) I and II D) II and IV

B Advertising that reflects past performance must show a minimum period of 1 year, not 3.

An investment adviser representative who makes extensive use of third-party research to formulate portfolio recommendations to clients A) is in violation of his fiduciary responsibility as IARs may only use research provided by the firm B) need not disclose that fact to the clients C) must disclose that fact to the clients D) must obtain consent of the clients to use third-party research

B It is not necessary to disclose what sources an IAR uses as the basis for recommendations. If the third-party research is distributed to clients, proper attribution is required.

An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for 3 years from now. Meanwhile, he would like to generate some income on the money with as little risk and expense as possible. Which of the following recommendations is likely to be the most suitable for this customer? A) Class A shares of the MNO High-Yield Bond Fund B) Class C shares of the ABC Investment-Grade Bond Fund C) Class B shares of the XYZ Growth Fund D) Class B shares of the ABC Investment-Grade Bond Fund

B The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best because the customer would pay no front-end sales charge and no CDSC after a short time, probably 1 year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the 3 years of his investment.

Five years ago, an investor purchased an ABC Corporation BBB-rated debenture with a coupon of 6% maturing in 2037. Currently, new BBB-rated debentures maturing in 2037 are being issued with coupons of 5%. Based on the discounted cash flow method, one could say that the present value of the investor's security is A) less than the par value B) more than the par value C) equal to the par value D) positive

B The discounted cash flow method is just a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices. The discount rate here is the current market rate of 5%. Because this investor's debenture is paying at a rate of 6%, its cash flow is more valuable than a 5% bond; therefore, it will sell at a premium (above par). Inverse relationship - interest rates went down, prices went up...More than par value

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

B 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. (Risk free rate+risk premium)xsystematic risk

GEMCO Securities, Inc., a broker-dealer registered in the state, has over 10,000 clients ranging from small individual accounts to substantial institutions. GEMCO has determined that the most efficient way to maintain contact with its clients is through electronic communications. Under the USA, these emails must be retained by the broker-dealer for a minimum of A) 8 years B) 2 years C) 3 years D) 5 years

C The USA specifies that for BDs all records, including electronic communications (emails), must be maintained for a minimum of 3 years. For investment advisers, the requirement is 5 years. --------------------------- For both BDs and Investment advisers after the enterprise closes it is the responsibility of the firm to keep certain records for a period of 3 years after the termination of the business

Your client often makes irrational financial decisions because she bases her decisions on information that should have no influence on the decision at hand. The client's behavior is known as A) overconfidence. B) confirmation bias. C) anchoring. D) herd mentality.

C Making irrational decisions based on information that should have no influence on the decision at hand is known as anchoring

John is a client of Greater Growth Opportunities, Inc. (GGOI), a state-registered investment adviser. Which of the following constitute(s) John giving the GGOI authority to trade his account? I John tells his adviser representative over the telephone to buy 200 shares of a certain security and when to make the purchase. II John tells his adviser representative to be on the lookout for securities that seem likely to fit his investment objectives. III John gives his adviser representative a written discretionary authorization form to buy or sell securities for his account as she sees fit. A) I, II, and III B) III only C) I and III D) II only

C When the client specifies all three "A's" - the asset, the action, and amount as is done in choice I, that gives the authority to the securities professional to act on the client's behalf and place the trade. - also written discretionary authorization gives authority

****** ****A customer buys a 10-year 6% AAA bond at par when it was issued. Two years later, if the CPI has increased from 2% to 4%, the price of the bond most likely A) has declined B) has stayed at par C) has increased D) cannot be determined

**** ****A When inflation is on the rise, interest rates often rise. When interest rates increase, bond prices may be expected to decline.

****When determining whether to make an investment in a real estate limited partnership, Bill is concerned with the discount rate that equates the net investment cash inflows to the net investment cash outflows. Which calculation is Bill using to make this prudent investment decision? A) Future value B) Duration C) Net present value D) Internal rate of return

****D The internal rate of return (IRR) is the discount rate that, when applied to the cash flows of an investment, equates the net cash inflows to the net cash outflows. If the IRR calculated is greater than or equal to the investor's required rate of return, then the investor should consider making the investment, all other factors being equal. If the IRR is less than the investor's required rate of return, the investment should not be made. Inflows, Outflows, IRR

***When an individual registered with a broker-dealer has a change of residence, an amended Form U4 must be filed A) within 2 business days B) within 90 days of the end of the fiscal year C) within 30 days D) within 60 days

***C Virtually any change to the information on the Form U4 (an action resulting in statutory disqualification is the notable exception) requires filing an amended Form U4 promptly. In this case, "promptly" is defined as within 30 days. Terminations are reported on Form U5 within 30 days.

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include I a charge when a client requests that a stock certificate be issued in his name II a commission charge when a client buys a security on a listed exchange III the interest charged by the firm on money owed by customers in their margin accounts IV fees for providing advisory services to high-net-worth individuals A) I and III B) II and III C) III and IV D) I and IV

A 3 primary expenses involved with brokerage accounts that are NOT included in the fee disclosure template. Those are: - commissions; - markups and markdowns; and - advisory fees

The most common way in which to distinguish whether social media content is static or interactive is A) the ability for others to change it B) the ability for others to link to it C) the ability for others to comment on it D) the ability for others to like it

A Static content can only be changed by the originator (or someone under that person's control).

The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket? A) Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order B) Customer name, customer address, execution price, and time of execution or cancellation C) Customer name, execution price, time of order entry, and time of execution or cancellation D) Account number, customer address, time of order entry, and terms and conditions of the order

A This is one of those questions where the best way to find the answer is by determining what is NOT correct. Customer name and/or address would never be on an order ticket and that knocks out three of the choices.

Terminated his employment

Agents A...All parties notify Investment Adviser Representatives: - if federally covered: the representative notifies - if registered with state: the IA company notifies

Given the following information, calculate the risk-adjusted return. I 91-day T-bill rate: 4% II Actual return: 14% III Beta = 1.4 IV CPI: 3% V Standard deviation: 5.0 A) 5% B) 2% C) 11% D) 10%

B

In addition to transaction costs (e.g., commissions or markups), most broker-dealers have a schedule of miscellaneous fees. The purpose of these fees is to A) help to reimburse the broker-dealer for expenses incurred in performing the transaction or a service for the client B) build in a hidden markup C) keep commissions low while making up the difference with fees D) increase the broker-dealer's net income

A Although charging these fees does have a positive effect on the firm's bottom line, they are designed for reimbursement purposes, not as an additional source of income.

An investment advisory contract is considered assigned if an adviser formed as A) a partnership with 2 partners and adds five partners B) a partnership with 5 partners and adds 2 partners C) a corporation with 5 officers and adds 2 officers D) a corporation with 2 officers and adds 5 officers

A If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary *assignment* to the new partnership. In this case, client approval is required.

A pooled investment fund buys all the shares of a publicly-traded company. The fund takes the company private, reorganizes the company, and replaces its management team. Three years later, the fund exits the investment through an initial public offering of the company's shares. This pooled investment fund is best described as A) a hedge fund. B) a venture capital fund. C) a private equity fund. D) a leveraged ETF.

C A private equity fund or buyout fund is one that acquires entire public companies, takes them private, and reorganizes the companies to increase their value. A hedge fund will rarely get involved with reorganizing an existing company. Venture capital funds invest in start-up companies. Leveraged ETFs do not take part in the management of their investments.

Which of the following items is NOT required under the customer identification program (CIP)? A) Date of birth B) Physical address C) Visa details for non-citizens D) Sex

D The CIP does not ask if the account holder is male or female.

Janice is investing in stocks that are temporarily neglected by the market and often have high-dividend yields. Which of the following investment styles might she be following? A) Contrarian B) Momentum C) Growth D) Value

D There is VALUE in high dividend yields. value stocks have low P/E ratios I know low P/E ratios are good. The value style of portfolio management looks for stocks that are undervalued. For example, the current market price is near or less than book value per share. The only way to find that out is by looking at the company's *balance sheet.*

******Sharon Smith is an agent for Highwater Securities, a broker-dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act, A) because Sharon has no place of business in State X and the order is unsolicited, Sharon may accept the order without registering in State X B) because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X C) because Highwater Securities is registered in all 50 states, Sharon must also be registered in all of them D) Sharon must be registered in State X in order to accept the order

***************D Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state that is the domicile of a client placing an order. One does not have to be registered as an agent in every state the BD is, only in those where she expects clients to reside. BD agents need to be registered in the state the client lives. *one must be licensed in any state that is the domicile of a client placing an order.*

*********Under the Investment Advisers Act of 1940, which of the following is considered an investment adviser? A) A person who publishes a regular newsletter of advice on U.S. Treasury bonds and other U.S. government securities B) A syndicated columnist who gives weekly reports and recommendations on investments C) A lawyer who specializes in consulting on investing in securities D) The trust officer of a commercial bank who manages investment accounts for clients

**********C Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment adviser. Under the federal law, anyone giving advice dealing only with U.S. government securities is excluded from the definition, as are those who work for banks and trust companies. The lawyer is not excluded because the advice provided is not incidental to the profession; it is the lawyer's specialty.

*********The Investment Company Act of 1940 requires that a mutual fund do which of the following? I Provide a monthly balance sheet to investors II Have $100,000 minimum capitalization prior to making a public offering III Provide semiannual reports to shareholders IV Not acquire more than 5% of the outstanding shares of another registered investment company A) I and IV B) I and III C) II and IV D) II and III

**********D The Investment Company Act of 1940 requires that an open-end investment company have a minimum of $100,000 in net assets prior to commencing a public offering. Reports must be sent to shareholders on a semiannual basis. NO fund is permitted to own more than 3% of the outstanding shares of another registered investment company not just mutual funds

********Which of the following is NOT an exempt transaction as defined in Section 402 of the USA? A) Sale of XYZ common stock, traded on the OTC Bulletin Board, to an individual investor by the executor of an estate B) Isolated sale of a corporate bond on behalf of the bond's issuer C) Corporate bond sale to an insurance company D) Sale of common stock by the county sheriff at the request of the state securities Administrator

*********B Isolated sale of a corporate bond on behalf of the bond's issuer NOT exempt First of all, don't panic when you see a Section number—just answer the question based on the specific topic; in this case, the definition of an exempt transaction. An isolated sale of a corporate bond on behalf of the bond's issuer is not exempt. *Under the USA, only isolated nonissuer transactions are exempt.* In this question, the transaction is on behalf of the issuer, so this transaction is not exempt. The sale of a corporate bond to an insurance company is the sale of a security to a financial institution; this is an exempt transaction. A sale of common stock by the executor of an estate, or by the county sheriff is considered a fiduciary transaction and is exempt regardless of the client or the type of security.

*******In which of the following cases is a 3rd-party trading authorization acceptable? A) The spouse of a client sends an email to the investment adviser saying that the client has given authorization to the spouse to trade in the account. B) A client's secretary presents a card signed by the client stating that the secretary can trade in the account while the client is on a business trip. C) An investment adviser makes a hospital visit to a client who was critically injured. While there, the client gives oral instructions to permit her daughter to trade in the account. D) The trades will be made through a broker-dealer under common control with the investment adviser.

*********B Third-party trading authorization must be in writing; oral authority is never acceptable. If the email came from the client directly instead of the spouse, it would be acceptable.

*********Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: I 16 clients in State A II 12 clients in State B III 6 clients in State C IV 4 clients in State D Fred would have to register as an IAR in A) States A and C B) States A, B, and C C) States A and D D) States B and C

*********C when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there). I knew that the IAR had to register in state D b/c has a place of business there.

********If a broker-dealer provides investment advice or discretionary portfolio management services to its clients and the firm also recommends or sells products that it or affiliated companies issue, A) the firm would be straddling a commingled arbitrage B) disclosure of the potential conflict of interest must be made C) disclosure of the capacity in which the firms acts in the transaction must be made on the trade confirmation D) the firm would be engaged in a dishonest or unethical business practice

********B A classic example of a potential conflict of interest is when a broker-dealer has discretion over a client's account and purchases securities for that account that are issued by the firm or an affiliated company. There is nothing wrong with this, as long as disclosure is made, and in some cases (not tested), the client must give consent. What about disclosing capacity in the trade? Isn't that always required? Yes, it is, but this is an example of a question where there could be 2 correct answers, and you must choose the one that is closest to dealing with the point being made in the question.

********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) II and III B) I and III C) I and IV 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.

*******What is the proper course of action for the fiduciary of a trust that has a portfolio made up of 10% cash and 90% stock of one company that has recently experienced a 40% market gain? A) Increase the cash position to 25% by taking some of the profits off the table B) Maintain the current allocation if, while acting in the capacity of trustee, he believes it aligns with the goal of the trust C) Use the cash to acquire more shares of the stock D)Begin diversifying the equity portfolio

*******B In almost every trust question, the correct answer will be that the trustee (fiduciary) has to follow the terms of the trust and meet the trust's goals and objectives.

**********The USA provides either an exclusion from the definition or an exemption from registration as an investment adviser for certain persons. Which of the following would be required to register? A) An engineer employed by an oil company selling limited partnership interests to public investors who provides estimates of recoverable reserves B) A CFP® who provides a full range of financial planning to clients on a fee-only basis C) A teacher who teaches a course in the local high school on consumer economics D) A bank trust officer with less than $250 million in assets under management

*******B Unless excluded or exempted, anyone charging a fee for investment advice must register. Banks and their employees are excluded. Engineers and teachers fall under the late exclusion as long as the advice is incidental to their profession and no special compensation is received.

*******During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, I Kapco's P/E ratio has decreased II Kapco's P/E ratio has increased III an investor holding Kapco over this period would have noticed a decrease in income received IV an investor holding Kapco over this period would have noticed no change in income received A) I and IV B) I and III C) II and III D) II and IV

******A At the beginning of the period, the P/E ratio was 23.5 to 1 ($47 divided by $2.). At the end of the period, the P/E ratio was 20 to 1 ($50 divided by $2.50). Initially, Kapco was paying out 50% of its $2.00 per share earnings, or $1.00 in dividends. At the end, Kapco was paying out 40% of its $2.50 per share earnings, also $1.00 in dividends.

****Who of the following is not exempt from registration as an investment adviser under the Investment Advisers Act of 1940? A) An adviser to seven private funds with total assets under management in the U.S. of $125 million B) An adviser whose clientele consists solely of insurance companies C) An adviser whose only office is in State G who deals only with State G residents, none of whom is a private fund, and does not deal in securities listed on any national securities exchange D) An adviser, with total AUM of $125 million, specializing in stocks listed on the New York Stock Exchange, whose only place of business is in State F and whose only clients are 110 State F resident individuals

******D The intrastate exemption has no numerical limitation, only that all of the clients be residents of the state and none of the clients can be private funds. - However, no advice may be given on securities traded on a national stock exchange which causes this State F adviser to lose the exemption. Furthermore, with $125 million in AUM, this IA would need to register with the SEC as a federal covered investment adviser. Under the federal law, an exemption from registration applies if the adviser's only clients are insurance companies. And, if an adviser's only clients are private funds (regardless of how many) and AUM in the United States is less than $150 million, that adviser is exempt as well. Please note that the adviser in State G would likely have to register in that state, but this question deals with the requirements of the federal law. ------------------ note: Advice to fewer than 15 clients qualifies one for an exemption (not an exclusion from the definition) from registration, but only in the case of a foreign adviser with less than $25 million in AUM in the United States.

*****You have a client who is not covered under an employer-sponsored retirement plan and has been contributing the maximum to her traditional IRA. She has just informed you that she won $1 million in the lottery, plans to continue working, and would like to continue to contribute to her IRA. Which of the following statements is correct? A) She may continue to contribute and her contribution will be tax deductible. B) Her income for the year exceeds the allowable limit for making a contribution. C) She may continue to contribute, but her contribution will not be tax deductible. D) She may continue to contribute, but only a portion of her contribution will be tax deductible.

*****A The only time that there is an earnings limit is when the individual (or spouse) is covered under an employer-sponsored retirement plan. That is not the case here. It is important to note that the client intends to continue in her job because lottery winnings are not considered earned income for an IRA contribution.

*****An investor inherits 1,000 shares of the ABC Global Growth Fund when NAV is $9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? A) Long-term capital gain of $4,250 B) Long-term capital gain of $5,500 C) Long-term capital gain of $4,750 D) Long-term capital gain of $5,000

*****C Upon death, the beneficiary inherits mutual funds at their NAV ($9.50). The IRS uses that number because it represents the price at which those shares could have been redeemed. The final sale (redemption) takes place at the NAV ($14.25) for a profit of $4.75 per share (times 1,000 shares). *Had this question said the investor bought the shares, then the cost basis would have been the price paid for the shares, the POP* That would have made the answer $4,250 ($14.25 - $10 times 1,000 shares).

*****All of the following activities comply with the requirements for agency cross transactions EXCEPT A) before obtaining a client's written consent in an agency cross transaction, the adviser must disclose that it will receive commissions from both parties and that the transactions involve a conflict of interest B) an adviser sends an annual statement to clients that reveals the total number of agency cross transactions for the client and the total amount of commissions the adviser received from those transactions C) a client consents (in writing) to the adviser's dual role in the transaction as both adviser to the client and broker to the other party D) after proper written disclosure, an adviser recommends the transaction to both the seller and the buyer

*****D An adviser CANNOT recommend a trade to both buyer and seller in an agency cross transaction, a transaction in which the adviser acts on behalf of both buyer and seller. The adviser can act as broker to both parties upon proper written disclosure and consent, *provided the adviser did NOT recommend the transaction to both sides.*. Statements must be sent annually

******Damon Raymond is an agent with ABC Investment Planning, a registered broker-dealer and investment adviser. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity? A) Never B) Only if the client terminates the advisory relationship C) When the client has given ABC blanket permission to engage in this type of transaction D) When the trade that is made is unrelated to the advisory relationship

*****D Under normal circumstances, when acting in an advisory capacity, client consent must be obtained no later than completion of the trade. However, in a case like this where the transaction is strictly based on the broker-dealer relationship rather than on the advisory one, no consent is necessary. *********************************** Whenever an IA acts in an agency capacity with an advisory client, disclosure of the capacity and consent of the client must be received not later than completion of the trade. Please note that the consent does not have to be in writing. Note: IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction.

***The Federal Reserve Board has just taken action leading to an increase in interest rates. Which of the following industries is most likely to be affected adversely by this action? A) Cyclical industries B) Utilities C) Heavy industries such as steel D) Defensive industries

****B Utility stocks tend to be interest rate sensitive for two reasons. First, they are typically bought for income portfolios, and, as such, changes to interest rates impact their price. Second, because utilities are typically the most highly leveraged of all industries, an increase in interest rates could substantially increase their debt service costs and thus reduce earnings.

****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) It is permissible as long as the offer is not published as an inducement to join the country club. D) This is permissible as long as proper disclosure is made in the adviser's brochure.

****D 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. -------------------------------- Part 2 of ADV satisfies brochure requirement Brochure must be delivered annually

***Which of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held more than 1 year? A) Class C B) Class A C) Class B D) Class 1%

***A It is the Class C shares that have no front-end load, but they do have a 1% CDSC for a period of 1 year. Class C shares CDSC that goes away

***Under the Investment Advisers Act of 1940, cash referral fees may be paid by an investment adviser to a promoter for soliciting for new accounts A) when a written agreement providing certain disclosures has been entered into between the investment adviser and the third party if the compensation exceeds $1,000 over a 12-month period. B) under no circumstances. C) only if the referring party is registered as an investment adviser representative. D) with no restrictions.

***A The promoter soliciting business does not need to be a registered rep?

***Which of the following statements is (are) TRUE regarding investment advisory contracts under the Uniform Securities Act? I The adviser cannot be compensated on the basis of a share of the capital gains or capital appreciation in a client's account. II The advisory contract may not be assigned without the consent of the client. III If the adviser is a partnership, the adviser must notify clients with whom the adviser has contracts of any changes in the partnership within a reasonable time. IV An adviser may be compensated based on the total value of a client's account averaged over a specific period. A) I, II, III, and IV B) II, III, and IV C) II only D) I only

***A Under the Uniform Securities Act, the basic rule is that an adviser cannot be compensated on the basis of a share of the capital gains or capital appreciation in a client's account. Although there are exceptions to the basic rule, the question does not address the exceptions.

**In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the Release, which of the following would be included in the definition? I Commercial banks offering comprehensive financial planning for their high-net-worth clients II Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate III Persons who receive a nominal fee for assisting employee benefit plan administrators select investment managers for the plan's assets IV Lawyers who prepare trust agreements for clients with large securities holding with a goal of minimizing estate taxes A) I and II B) II and III C) I and IV D) II and IV

***B Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent now comes under the IA-1092 definition of investment adviser. Similarly, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant and is required to register under IA-1092. Banks are never IAs, and the lawyer is merely doing legal and tax work.

**Alexander Wimpton is registered as an agent with WorthMore Securities, a broker-dealer registered with the SEC and 10 states. Wimpton is also an investment adviser representative (IAR) with their wholly owned subsidiary, WorthMore Investments, a federal covered investment adviser. Many of Wimpton's advisory clients also maintain brokerage accounts at WorthMore Securities. If one of those clients were to call Wimpton and enter an order to purchase shares of a stock the broker-dealer is selling out of inventory, A) the commission charged on the trade would have to be fair and reasonable B) consent of the client would not be necessary as long as the only capacity in which Wimpton was acting was that of an agent C) consent of the client would be necessary anytime an advisory client is sold securities out of the broker-dealer's inventory D) the order would have to be refused because of the potential conflict of interest

***B Only when acting in an advisory capacity is there a requirement to obtain client consent when selling out of inventory. In this case, unless there was a statement to the effect that the security had been recommended by Wimpton, this is just a brokerage transaction and consent is not necessary (although the principal capacity would have to be stated on the trade confirmation). Because this is a principal transaction, there is no commission, only a markup.

***A review of an agent's client's account indicates daily trading with rapid portfolio turnover. Under NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this would NOT be considered excessive trading activity (churning) if A) each security purchased is suitable for the client B) the client's investment objective is quick return, the client has the financial resources necessary for such activity, and the agent uses a sophisticated technical program designed to cut losses and take profits quickly C) the client's account shows a profit D) the client has approved each trade

***B The Statement of Policy determines whether the trading is excessive by evaluating the client's investment objectives, financial resources, and the character of the client's account. While such trading activity is not suitable for everyone, there are some clients for whom such activity would be suitable. Having client approval for each trade does not necessarily eliminate the requirement to only make suitable recommendations, nor does it excuse excessive trading.

***Which of the following activities are prohibited under the Uniform Securities Act? I Engaging in a practice not expressly forbidden by the act but defined as unethical by the Administrator in a rule II Deliberately omitting a material fact when soliciting a client III Selling recommended securities to a client from the investment adviser's own account without disclosing this and receiving consent of the client prior to completion of the transaction A) II and III B) I and III C) I and II D) I, II, and III

***D ALL

**A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true except A) the adviser must state that the client may be subject to certain limitations because of this arrangement B) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment C) this practice is ethical if full disclosure is made to all clients D) the adviser may collect fees for investment advice and commissions for executing trades ------------------------------------------------- Questions 2: A registered investment adviser recommends a stock that will be sold to his client in a principal transaction. The broker-dealer that will sell the stock is also registered as an investment adviser and employs the investment adviser as an agent. This transaction A) requires the consent of the client B) is prohibited C) requires written disclosure to the client D) requires both written disclosure to and the consent of the client prior to the completion of the transaction --------------------------------------------- One of the differences between broker-dealers and investment advisers is the disclosures that must be made when the IA is acting as a principal or agent in a transaction with an advisory client. In the case of a firm registered in both capacities, those disclosures would not be required when A) there was a transaction with a client of both entities, but the trade was not based upon advisory services rendered B) approval was granted by an officer of the firm C) cleared with the Administrator D) the transaction was in an exempt security

**B Whenever an IA acts in an agency capacity with an advisory client, disclosure of the capacity and consent of the client must be received not later than completion of the trade. - *disclosure is in writing* - *consent does NOT have to be in writing.* Note: IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than *completion of the transaction.* ------------------------------------- Question 2: Answer D SAME SITUATION AS THE FIRST QUESTION: investment adviser is recommending the transaction so both *written disclosure by the adviser and consent by the client are required prior to completion of the transaction.* (even when an adviser sells securities through an affiliated firm in a principal transaction.) NOTE: when a broker-dealer acts as a principal in a trade and has discretion, that fact is noted on the confirmation always AND disclosure must be made ------------------------------ A Under those conditions—where a firm is registered as both a BD and an IA—the disclosure requirements incumbent upon IAs do not apply when the transaction is solely related to the firm's capacity as a BD. (trade was not based upon advisory services rendered)

ANNUITY QUESTION A 54-year-old individual invests $25,000 into a nonqualified single premium deferred variable annuity. Five years later, with an account value of $35,000, the investor engages in a Section 1035 exchange into a variable annuity issued by a different insurance company. Four years later, with an account value of $50,000, the investor withdraws $20,000. The tax consequence of the withdrawal is A) $20,000 of ordinary income. B) $15,000 of ordinary income, $5,000 nontaxable return of principal. C) $20,000 of ordinary income plus a 10% penalty tax. D) $15,000 of ordinary income, $5,000 of long-term capital gain.

A A partial withdrawal from a nonqualified annuity is taxed on a LIFO basis. That is, the last money in (assumed to be earnings), is the first money out. When $20,000 is withdrawn, all of it represents the earnings and that is taxed as ordinary income. There is never capital gains taxation on an annuity and there is no 10% penalty tax because this investor is older than 59½ at the time of the withdrawal. ----------------------------- NOTE: With an annuity, - random withdrawals are taxed on a LIFO basis. - money invested in a nonqualified annuity represents the investor's cost basis. - upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income.

Which of the following statements regarding an S corporation owner and an owner of an LLC are TRUE? I Creditors have very limited recourse rights to the owners. II They may not be nonresident aliens. III They both are considered stockholders. IV Both receive the tax benefit of owning flow-through entities. A) I and IV B) II and IV C) II and III D) I and III

A Creditors don't have recourse to the owners of either entity unless the owners have specifically allowed it. Both are flow-through or conduit entities. Owners of S corporations are stockholders, whereas those in an LLC are members. Nonresident aliens may not own an S corporation.

Which of the following is an allowable early withdrawal from a traditional IRA without penalty? A) A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence. B) A single parent supplements a home equity loan with $5,000 from her IRA to pay for an additional home (a vacation home). C) A person withdraws funds from his IRA to buy a principal residence after he sold his first home as a result of medical expenses. D) A single parent withdraws funds from her IRA to pay for the education of a nephew.

A Educational withdrawals are limited to the taxpayer or a spouse, child, or grandchild.

All of the following permit investments into various securities, such as stocks, bonds, and mutual funds EXCEPT A) an FSA. B) a Roth IRA. C) an HSA. D) a traditional IRA. ------------------------------------------------ A tax-advantaged medical savings account available to employees enrolled in a high-deductible health plan is A) an HSA. B) a Section 162 plan. C) an FSA. D) Medicare, Part C.

A Flexible spending accounts (FSAs) allow deductions from an employee's paycheck. A health savings account (HSA) permits the employee to invest in a wide variety of securities. IRAs, traditional and Roth, have always permitted investment flexibility. --------------------------------- A One of the requirements for enrolling in an HSA is that the individual be covered under a health plan with a high deductible. No such requirement applies to a flexible spending account (FSA). Medicare Part C, sometimes known as Medicare Advantage, is government health coverage and does not generally apply to those who are covered by health insurance at a place of employment (and Medicare is not tested on the exam). A Section 162 plan is an executive bonus plan, generally involving life insurance and has never been covered on the exam.

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an investment adviser who has custody of client securities or funds must do all of the following EXCEPT A) send clients semiannual, itemized statements detailing the funds and securities in the adviser's custody at the end of the period and all transactions during the period B) notify the Administrator in writing C) if not held by a qualified custodian, deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held D) have client funds and securities examined at least once a year by an independent public accountant on a surprise basis

A Must send itemized list *quarterly* NOT monthly or semiannual The adviser must send clients quarterly, itemized statements listing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. Unless using a qualified custodian, the adviser must deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held. The adviser must also arrange for an annual, surprise audit by an independent public accountant of client funds and securities. The adviser must notify the Administrator that the adviser has or may have custody of client securities or funds.

****A state-registered investment adviser would be permitted to A) use Part 2 of the Form ADV to satisfy the brochure requirement B) use Part 1 of the Form ADV to satisfy the brochure requirement C) make annual delivery of the brochure within 150 days of the end of the fiscal year D) deliver the brochure to a new client no later than 48 hours after entering into the contract -------------------------------------------- Which of the following statements regarding the brochure delivery requirements of the Investment Advisers Act of 1940 are TRUE? I The brochure must be updated each time Part 1A of Form ADV is updated. II The brochure delivery requirement does not apply to investment companies or clients who are serviced on an impersonal basis, such as with a newsletter, with an annual cost of less than $500. III A brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. A) II and III B) I, II, and III C) I and III D) I and II

A Part 2 of ADV satisfies brochure requirement Brochure must be delivered annually ------------------------------- A Because the information in the brochure is derived from Part 2A of the Form ADV, changes to Part 1A will not necessarily apply to items that are important to the client. Therefore, stating that the brochure must be updated whenever there is a change to Part 1A would not be correct. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The brochure delivery requirements do not apply to customers that are investment companies or for clients of impersonal services (those that do not purport to meet the investment objectives or needs of specific clients), as long as the cost of the service is less than $500 per year.

All of the following would flow through as a loss to limited partners except A) principal repayment on partnership debt. B) interest payments on partnership debt. C) depletion. D) accelerated depreciation.

A Principal repayments are NOT an expense for tax purposes. The interest on the debt is an expense and, along with depletion and depreciation expense, does flow through to the limited partners as passive loss.

Under the Uniform Securities Act, broker-dealers are required to prepare and maintain certain records. Which of the following statements reflects the position of the act? I A firm registered in more than one state must meet the recordkeeping requirements of the state where its principal office is located, even if those are less comprehensive than those of some of the other states where it is registered. II >A firm must maintain records of every email sent from the office by agents. III A broker-dealer's website is considered advertising. IV Once a broker-dealer's trade blotter has been posted, it may be discarded. A) I and III B) I and II C) II and IV D) III and IV

A Regardless of the recordkeeping requirements of other states, the only requirements that must be met are those of the state where the principal office is located. Among the items of advertising requiring maintenance of records is a firm's website. Personal email sent by agents that is not business related does not have to be retained. Trade blotters have a 3-year retention requirement. Please note that in most cases, broker-dealers are registered with the SEC in addition to the states in which they do business. In that case, the recordkeeping requirements of the SEC trump those of any state.

Which of the following are regulated under the Securities Exchange Act of 1934? I Broker-dealers II Investment advisers III Pension plans IV Transfer agents A) I and IV B) II and III C) I and II D) III and IV ------------------------------------------ Under federal law, which act regulates the activities of broker-dealers and associated persons? A) Investment Company Act of 1940 B) Trust Indenture Act of 1939 C) Securities Exchange Act of 1934 D) Uniform Securities Act

A 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. ----------------------------------- C The Securities Exchange Act of 1934 regulates the secondary market and its employees and firms.

MATH ***If the current risk-free rate is 5%, and the expected return on the market is 10%, what return can be expected from a security that has a beta of 1.5? A) 12.5% B) 15% C) 20% D) 15.5% ------------------------------------------- Given the following information, calculate the risk-adjusted return. I 91-day T-bill rate: 4% II Actual return: 14% III Beta = 1.4 IV CPI: 3% V Standard deviation: 5.0 A) 5% B) 2% C) 11% D) 10%

A The formula for this is: risk-free rate plus the (difference between the market return and the RF) times the beta. RiskFree+[(MarketReturn-RiskFree)xBeta] In this question, those numbers are: 5% + [(10% - 5%) × 1.5] = 5% + (5% x 1.5) = 5% + 7.5% = 12.5%. --------------------------------------- B *********************Any question asking about the *risk-adjusted return* is going to be referring to the *Sharpe ratio*. Remember Sharpe things have nothing to do with Betas Sharpe ratio formula= (Return-RiskFree)/Stdv.= (14-4)/5=2

​​​As defined in the Investment Advisers Act of 1940, all of the following would be considered investment advisers EXCEPT A) a professional plumber with excellent stock market skills who as a hobby and without pay, manages portfolios for 8 of his neighbors B) a tax attorney who manages investment portfolios for 50 clients C) a portfolio manager who limits advice to municipal securities exclusively D) a civil engineer making investment decisions for $5 million held in escrow while a bridge for which she is the project manager is being constructed

A The plumber would not be considered an investment adviser because two of the three "prongs" are missing—advice is not being given as part of a regular business and there is no compensation. While an exclusion from the definition applies to advisers limiting advice to U.S. government securities, no such exclusion operates for advisers limiting advice to municipal securities. Similarly, there is an exclusion for attorneys providing investment advice on an incidental basis, but 50 clients is not incidental. Engineers are excluded from the definition, provided their advice is incidental to their profession, but making investment decisions on the money in escrow is clearly not incidental.​

A viatical sale would generally involve A) an individual with a terminal illness. B) a leveraged ETF. C) the sale of a term life insurance policy. D) a security with a large increase in value.

A Viatical settlements stem from that definition and are generally used by those with a terminal illness and a life expectancy of 2 years or less. It is the sale of a life insurance policy, almost always whole life or another form of permanent insurance - rarely a term insurance policy.

Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must A) send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year B) send a copy of its brochure, or a summary of the changes, within 7 days of receiving a request from a client C) send a copy of its brochure, or a summary of the changes, to all clients within 60 days of the end of its fiscal year D) send a copy of its brochure, or a summary of the changes, to all clients within 90 days of the end of its fiscal year

A Whether the firm is a state or federal covered investment adviser, if there have been material changes, a copy of the IA's brochure, or a summary of the changes, must be sent to all clients *no later than 120 days after the close of the IA's fiscal year.* ------------------------------- When filing -if administrator finds material misstatements or omissions, a correcting amendment must be filed "Promptly" a federal covered investment adviser, is moving the firm's headquarters to a new office park in the suburbs. - this change must be filed with the SEC "Promptly"

Under the USA, an investment adviser's current clients must be delivered a brochure A) annually whether or not the adviser has custody or discretion B) quarterly if the adviser has both discretion and custody C) annually​, but only​ if the adviser has neither custody nor discretion D) within 48 hours of renewal

A annually whether or not the adviser has custody or discretion Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients [except those who are exempt from the brochure delivery requirements (impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940)] within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing.

Under the NASAA Model Rule on financial requirements for investment advisers, investment advisers who have custody of customer funds are usually required to have a net worth in the amount of A) $35,000 B) $5,000 C) $10,000 D) $50,000

A unless an exception exists, requires an investment adviser with custody of customer funds or securities to have a minimum net worth in the amount of $35,000. If the adviser does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000.

If a customer purchases shares in a municipal bond fund, which of the following statements are true? I Dividends are subject to federal income tax II Dividends are not subject to federal income tax III Capital gains distributions are subject to federal capital gains tax. IV Capital gains distributions are not subject to federal capital gains tax. A) II and IV B) II and III C) I and III D) I and IV

B Dividends distributed by municipal bond funds are federal tax free (and in some cases, state tax free as well) in alignment with the tax rules of how the fund's investment income was earned. However, any capital gains distribution resulting from the sale of bonds held long term by the fund is subject to capital gains taxation to the shareholder. Just like if you hold a normal municipal bond: *While the interest income is tax-exempt, any capital gains distributed are taxable to the investor.*

A feature of which of the following business entities is limited liability for owners, as well as flow-through of income? A) C corporation B) Limited partnership C) General partnership D) Sole proprietorship

B Limited partnership interests offer both flow-through of income (or loss) along with limited liability. the general partnership has full liability, as does the sole proprietorship. *C corporations have limited liability, but no flow-through.*

The general rules dealing with a broker-dealer extending credit for a customer to purchase securities are found in Regulation T of the Federal Reserve Board. However, Regulation T does NOT address A) loan value of securities B) maintenance margin C) mixed margin accounts D) initial margin requirements

B Maintenance margin levels are set by the SROs, such as FINRA. They are currently 25% for long accounts and 30% for short accounts (you will not have to calculate these).

An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend? A) Money market mutual fund B) Mid-cap common stock mutual fund C) Municipal unit investment trust D) Ginnie Mae fund

B Mid-cap stocks (see Glossary of Terms) have historically provided good hedges against inflation making them appropriate for an investor seeking long-term growth and inflation protection. There are several key words here to remember for the exam. Whenever you see "low tax bracket," the answer cannot be a municipal bond. Likewise, **whenever you see "inflation protection," the answer will be common stock** (unless a TIPS is given as a choice).

Which of the following individuals would be considered a noninterested person in a mutual fund? A) A member of the board of directors who is also employed as the investment adviser B) A member of the board of directors who does not hold another position within the investment company C) A person who holds a position with the fund's underwriter D) A shareholder who owns 10% of the fund's shares

B Noninterested party includes A member of the board of directors who does not hold another position within the investment company The Investment Company Act of 1940 defines an interested person as someone employed by or who has a material business relationship with the fund, its adviser, or underwriter. Someone who owns 5% or more of the outstanding shares (an affiliated person) is also considered "interested." *Merely sitting on the board does not make someone an interested person.* Thus, a director with no other relationship with the fund qualifies as a noninterested person.

A business organized as which of the following pays federal income tax on its income? A) S corporation B) Sole proprietorship C) Partnership D) LLC

B The income generated by a sole proprietorship is reported on Schedule C of the Form 1040 of the individual owner. The IRS considers that business as a taxable entity. The other choices their income flows through to the owners (members, shareholders, or partners, respectively), for the business itself pays no tax.

Which of the following is TRUE of the weak form of the efficient market hypothesis? A) It implies that insiders cannot make a profit from their trading. B) It implies that market information cannot be used to identify future price movements. C) It implies that stock prices react to information when it becomes publicly available. D) It implies that throwing darts is just as efficient as analyzing the market. --------------------------------- The semi-strong form of the efficient market hypothesis (EMH) asserts that stock prices A) don't reflect any information. B) fully reflect all relevant information, including insider information. C) fully reflect all historical price information. D) fully reflect all publicly-available information.

B The weak form of the EMH states that all market information has already been incorporated into the current stock price. Therefore, having that information is of no help in predicting movements in the market. -------------------------------- D The semi-strong form of the EMH states that security prices fully reflect all publicly-available information. This would include all historical information. *The weak form relates to historical information only.* The strong form relates to public and private (inside) information. One could conclude from this that both fundamental and technical analysis don't "work" in an efficient market

Minnie's Uncle Bob would like to contribute to his one-year-old niece's education expenses. He is able to contribute a maximum of $1,200 per year. There is no other family member in a position to make a contribution. If minimizing the taxes at withdrawal and low cost investing, such as index mutual funds, is the objective, which of the following would you recommend? A) Dollar cost averaging B) Coverdell ESA C) Section 529 plan D) UTMA

B When you see contribution levels at $2,000 per year or less, that is a signal that Coverdell is the proper recommendation. **The Coverdell offers greater investment flexibility.** - A Coverdell ESA works similar to a self-directed IRA where stocks, bond, mutual funds, ETFs, and other investment vehicles are options. With a 529 plan, the donor is limited to whatever is available in the state plan chosen.

******Howard is the owner of 4 different insurance policies. Which of the following policies have death benefits proceeds that are NOT subject to income tax upon death of the insured? I Policy 1; his wife is the insured. II Policy 2; his business partner is the insured. III Policy 3; his daughter is the insured. IV Policy 4; he is the insured. A) II and IV B) I, II, III, and IV C) II and III D) I, II, and III ------------------------------------------ All of the following statements regarding scheduled premium variable life insurance are correct EXCEPT A) the policyowner has the right to change the selection of subaccounts B) premiums are determined based on age and sex of the insured C) once selected, the policyowner may change payment modes D) better than anticipated results in the separate account could lead to a reduction in annual premium ---------------------------------------- Which of the following is indicative of the primary difference between variable life insurance and straight whole life insurance? A) Tax treatment of the death proceeds B) Amount of insurance that can be issued C) Cost of the insurance D) Way in which the cash values are invested ----------------------------------------------- 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) Straight life B) Life with 20 years certain C) Joint and survivor D) Life with 10 years certain ----------------------------------------------- Which of the following is guaranteed by a variable life policy? A) Policy loans after the policy has been in effect for at least 24 months B) Minimum death benefit C) Minimum separate account performance D) Cash value ------------------------------------------- When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be CORRECT to state that A) by surrendering the policy, its cash value may be obtained B) if a policy loan exceeds the policy cash value, the deficiency must be remedied within 10 business days to keep the policy from lapsing C) you will receive a statement of your death benefit no less frequently than semiannually D) premiums will vary based upon performance of the separate account ------------------------------------------- Which of the following insurance company products is likely to have the longest time for which a surrender charge will be levied? A) Whole life insurance B) Bonus annuity C) Class B shares D) Variable annuity ------------------------------------- All of the following statements regarding universal life insurance are correct EXCEPT A) may include a minimum guaranteed interest rate B) premiums are fixed for the life of the policy C) offers the policyowner exceptional flexibility in adjusting the premiums, cash value, and death benefit D) there are two death benefit options

B***** The question is asking for income tax treatment of insurance proceeds, not estate tax treatment. *Life insurance proceeds are not income taxable to an original human owner of the policy.* NOTE: a scheduled premium variable life insurance policy, the insured is guaranteed a minimum gaurantee death benefit NOTE: Life insurance policies are nontransferrable.... Upon surrender, the cash value may be taken or used to purchase extended term insurance or a reduced value, paid-up, whole life policy. --------------------------------- D Scheduled premium variable annuities have fixed premiums no matter what. Scheduled (fixed) premium variable life premiums are fixed. It is universal life that has flexible premiums. ----------------------------------- D Variable life insurance allows the policyowner to decide how the cash value is invested through a number of subaccounts. --------------------------------- A 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. --------------------------------- B A variable life policy has a minimum guaranteed death benefit, but there is no minimum guaranteed cash value. There is no performance guarantee on separate accounts, and policy loans are required after the policy has been in effect for at least 3 years (36 months). ------------------------------- B Surrender of the contract requires the insurance company to pay out its cash value. The death benefit is calculated annually (not semiannually) with the cash value being figured monthly. There is no time requirement to remedy a cash value deficiency. Scheduled premium means fixed premium, one that does not change. It is the cash value and the death benefit that will be affected by the performance of the separate account. --------------------------------- B One of the characteristics of bonus annuities is that their surrender charges tend to be higher for a longer time than other insurance company products. When you see Class B shares on the exam, it will be referring to mutual funds, not insurance company products. -------------------------------- B The single most distinguishing characteristic of universal life is the fact that premiums are flexible and not fixed.

**Which of the following statements regarding civil liabilities under the Uniform Securities Act are TRUE? I In a fraudulent securities transaction, the customer is entitled to recover the amount of the transaction with interest at a rate set by the Administrator, less any income earned on the security plus attorney's fees. II Causes of action under the USA survive the death of either plaintiff or defendant. III No suit may be initiated more than 3 years after the transaction or 2 years after the discovery of the violation, whichever occurs first. IV Rights and remedies in this act are in lieu of any others that exist under other laws. A) III and IV B) II, III, and IV C) I, II, and III D) I and II

C - In a fraudulent securities transaction, the customer is entitled to recover the amount of the transaction with interest at a rate set by the Administrator, less any income earned on the security plus attorney's fees. - Causes of action under the USA survive the death of either plaintiff or defendant. - No suit may be initiated more than 3 years after the transaction or 2 years after the discovery of the violation, whichever occurs first.

In contrast with a typical forwards contract, futures contracts have: A) greater counterparty risk. B) less liquidity. C) standardized terms. D) nonstandard terms.

C A forward contract is a private and customizable agreement that settles at the end of the agreement and is traded over the counter. Being very FORWARD should only be done in PRIVATE ------------------------------------ A futures contract has standardized terms and is traded on an exchange including -Quantity -Quality - The time for delivery - The delivery price NOTE: The Market price is NOT standardized (it fluctuates continuously) NOTE: The Uniform Securities Act excludes futures contracts from the definition of security - so you do NOT need to be registered to sell them most peoples FUTURE is STANDARD

Your client owns a 91-day T-bill, a 2-year T-note, a 20-year T-bond, and a 20-year STRIP. The market price of which of these is likely to have the smallest movement when there are changes to the discount rate? A) T-note B) STRIP C) T-bill D) T-bond

C As a short-term instrument (short duration), the price fluctuations of a T-bill are very small when there is a change to interest rates. Longer term instruments have much larger price movements. Long-term zeros can be particularly sensitive to changes in interest rates, exposing them to what is known as duration risk.

During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from A) the person named as executor of the estate B) the spouse C) the person appointed as administrator of the estate D) the person with a durable power of attorney

C Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.

In general, a broker-dealer will disclose any changes to its fee schedule A) when requested by the client B) within 30 days following the change C) by notifying clients of the change in advance D) to the Administrator and then to the clients

C Most broker-dealers disclose fee changes at least 30 days in advance, and there is no requirement whatsoever to notify the Administrator.

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? A) There will be no tax consequences. B) He will have a $1,000 loss to carry over to the next year. C) He will offset $1,000 ordinary income this year. D) He will have a $1,000 gain.

C Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward.

Although generally prohibited, there are conditions under which a state-registered investment adviser is permitted to charge performance-based fees. Which of the following meets the necessary criteria? A) Charging a performance-based fee to an individual with a net worth in excess of $10 million without describing that there is an incentive for the adviser to take greater risks B) Charging a performance-based fee to an individual who meets the definition of an accredited investor C) Charging a performance-based fee to an elderly client whose net worth is $2.3 million, with only $150,000 under the adviser's management D) Charging a performance-based fee to an aggressive entrepreneur whose net worth is $1.8 million who has $500,000 under the adviser's management

C Performance fees may be charged, regardless of the client's age, to anyone with a net worth in excess of $2.2 million or with at least $1.1 million under management with the firm. 2.2 1.1

***Compared to a publicly-traded fund, a private equity fund is most likely to A) provide more details regarding its financial performance. B) exhibit stronger corporate governance. C) disclose less information about its financial performance. D) be more concerned with short-term results.

C Private equity funds are not held to the same financial reporting requirements as publicly-traded funds. Less public scrutiny and limited financial disclosure may lead to weaker corporate governance. Private equity funds generally need several years before the fruits of their labor are ready to be harvested.

Which of the following statements are TRUE of a variable annuity? I The number of annuity units is fixed when payout begins. II The value of accumulation units is fixed at purchase. III The monthly annuity payment is a variable amount. IV The annuity payments are not subject to income taxes. A) III and IV B) II and III C) I and III D) I and II

C The number of annuity units is fixed when an annuitant starts the payout process (when annuitized), and the monthly payment will vary with the market value of the securities in the separate account portfolio. You accumulate BEFORE annuitization Then you get annuity units

A resident of Albany, NY, is visiting relatives in Albany, GA. While there, she receives a phone call from her agent in the Troy, NY, office of Capital City Investments who offers a security that the client immediately agrees to purchase. The next day, she sends her payment from Georgia. The agent sends the trade confirmation to the purchaser's residence address in New York. This agent is registered in 12 states, including New York and Georgia. The security is not exempt and was not registered. Which Administrator has the authority to pursue action against the agent? A) Georgia B) New York C) Both Georgia and New York D) The Administrator of any of the 12 states in which the agent is registered

C The offer originated in New York and was directed to Georgia where it was accepted. The mailing of the confirmation is of no consequence. Therefore, the Administrators of both New York and Georgia would have jurisdiction over this activity.

When does a customer have to receive the OCC Options Disclosure Document? A) Within 15 days of account approval by the firm's designated options supervisor B) With the confirmation of the first options transaction C) Before accepting the customer's first order to trade options covered by the ODD D) Within 5 business days of the first options trade

C The options agreement has to be signed and retuned by client within 15 days of the initial order The options disclosure document must be received before accepting the first order

One measure of a corporation's liquidation value is its book value per share. When performing this computation, the value of which of the following would normally be subtracted from the corporation's net worth? I Cash II Wages payable III Patents IV Preferred stock A) I and II B) II and III C) III and IV D) I and IV

C To find book value per share subtract - preferred stock and - Patents (intangible assets) The computation of book value per share is basically net tangible worth per share of common stock.

***************excluded exemption exception *******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) States P, D, and M. C) State P. D) States D and M. ------------------------------------- Creative Financial Solutions (CFS) is a broker-dealer registered with the SEC. CFS has its principal and only office in State A. CFS also does business with clients in State B. Which of these clients would cause CFS to have to register in State B? A) 15 other broker-dealers B) 6 banks doing business in State B C) 4 retail clients residing in State B D) 1 mutual fund registered with the SEC -------------------------------------- Included in the Uniform Securities Act's definition of broker-dealer would be A) issuers of securities. B) a broker-dealer with a place of business in the state whose only clients are insurance companies. C) individuals who are registered as agents. D) savings institutions. --------------------------------------------- An investment adviser has its home office in Wisconsin. Its only business is with trust companies, large employee benefit plans, and insurance companies. It has no place of business in Colorado but provides investment advice to two Denver banks, both chartered under Colorado banking laws. There is a new Administrator in Colorado, and it is his opinion that this IA should be required to register in his state. A careful reading of Section 201 of the Uniform Securities Act would indicate that A) the Administrator is correct and the firm must register B) this firm would be exempt from registration with the Colorado Administrator because it is doing business in more than one state C) as long as the IA does not have an office in Colorado, there are no conditions that would mandate registration there D) the firm does not have to register because it has no place of business in the state and its only clients are registered financial institutions ------------------------------------------- Which of the following must register as a broker-dealer under the USA? A) A broker-dealer with no place of business in the state that deals exclusively with broker-dealers with offices in that state B) A broker-dealer with a place of business in the state that effects transactions exclusively with broker-dealers registered in other states C) A broker-dealer with no place of business in the state that effects transactions exclusively with issuers of securities in that state D) A broker-dealer with no place of business in the state that has directed offers to clients who have more than 30 days' temporary residency in the state

C********************** 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. Although Stillman has clients in several states, the question tells us that his place of business is the office in State P. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state. ----------------------------- C Excluded from the definition of broker-dealer under the Uniform Securities Act is a broker-dealer with *no place of business* in a given state whose clientele consists exclusively of other broker-dealers, financial institutions (banks, investment companies), or existing customers who are temporarily in the state. ***However, once the BD has even 1 retail (noninstitutional) client who resides in the state, registration is required. There is no de minimis exemption for broker-dealers (unlike investment advisers).**** -------------------------------- B **When the firm has a place of business in the state, regardless of its clientele, it is a broker-dealer. ** Exclusions from the definition include agents, issuers, and most financial institutions, such as banks and savings institutions. Also excluded are broker-dealers with no place of business in the state who only deal with institutional clients, such as banks and insurance companies. -------------------------------- D specifically excluded are those IAs with no place of business in the state who confine their advisory activities in the state to other investment advisers, federal covered advisers, broker-dealers, banks, trust companies, savings and loan associations, insurance companies, employee benefit plans with assets of not less than one million dollars ($1,000,000), and governmental agencies or instrumentalities ------------------------- B If a broker-dealer has an office in the state, it must register with the state, regardless of what types of clientele it serves. The term "broker-dealer" excludes anyone without a place of business in the state who effects transactions exclusively with issuers, other broker-dealers, or institutions, or who directs an offer in the state to an existing customer who temporarily resides in the state where the offer is received, regardless of the length of time. As long as the broker-dealer is properly registered in the vacationer's state of permanent residence and does not maintain an office in the state being visited, it is not defined as a broker-dealer.

In order to compute an investor's real rate of return on a common stock holding, all of the following are necessary EXCEPT A) dividends B) appreciation C) inflation rate D) marginal tax bracket

D *The real rate of return is another term for inflation-adjusted return.* It is the total return, which is appreciation plus income (dividends), which is then adjusted for the inflation rate as expressed by the CPI. Tax bracket is necessary to compute after-tax return.

**Due to health reasons, Danny has decided to withdraw his registration as an agent. The withdrawal will take effect A) on the 30th day after filing of the Form U5 B) immediately C) when authorized by his employing broker-dealer D) on the 30th day after filing of the Form U5 unless the Administrator determines an earlier date --------------------------------- Broker-dealers, investment advisers, and agents must renew their licenses with the state Administrator: A) semiannually B) licenses are permanent unless revoked, suspended, or canceled C) annually upon the date of original registration D) every December 31, unless otherwise specified by state law

D Although the normal time for withdrawal of a registration is the 30th day after filing the Form U5, the Administrator has the jurisdiction to shorten that period if circumstances warrant it. ---------------------- D Under the Uniform Securities Act, registrations must be renewed every December 31. Registrations are not permanent and can be denied, revoked, or canceled according to the terms of the act.

Blue-sky laws pertain to all of the following EXCEPT A) the registration of securities within a state B) the regulation of securities transactions in a state C) the registration of securities salespeople in a state D) the regulation of securities trading in other countries

D Blue-sky (Uniform Securities Act) laws refer to state securities regulation in the state. Blue-sky laws require new securities to be registered with the state and regulate trading of securities in a state.

The chief financial officer (CFO) of a company approaches an investment adviser representative who happens to be the trustee of the corporation's qualified plan requesting a loan from the plan to help the company meet some short-term obligations. Which of the following would be the appropriate action to be taken by the IAR? A) The IAR is prohibited from making this loan if it is not a part of the asset allocation model used in the plan's investment policy statement. B) The IAR is permitted to meet any reasonable request from the CFO of the employing company. C) With sufficient collateral, the loan may be made. D) The IAR is prohibited from making this loan because of his fiduciary responsibility to the plan.

D Companies cannot use their qualified plan assets to finance their business operations.

A wealthy individual has set up a GRAT. Should she die during the time the trust is active, how are the remaining assets in the trust taxed? A) No tax is due if the grantor should die during the term of the trust. B) The original value plus any appreciation passes to the beneficiaries and is taxed as ordinary income. C) The original value plus any appreciation passes to the beneficiaries but is subject to gift tax. D) The original value plus any appreciation is taxed as part of the grantor's estate.

D One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3-10 years), the assets put in the GRAT, plus any appreciation, are included in her estate. Grantor retained annuity trust

Which of the following most accurately identifies a private equity investment in income-producing real estate? A) Investment in a real estate mutual fund B) Investment in a real estate investment trust (REIT) C) Private market mortgage lending by an insurance company D) Direct ownership of real estate properties

D Real estate investments take four major forms: private equity, publicly-traded equity, private debt, and publicly-traded debt. Private equity investment in real estate refers to direct ownership of real estate properties. Mortgage lending by banks or insurance companies is best described as private debt. Indirect ownership of real estate through equity securities such as REITs is an example of publicly-traded equity.

According to the USA, under which of the following circumstances may an Administrator cancel an investment adviser representative's registration? A) The Administrator determines it would be in the public interest. B) The investment adviser representative is the subject of an insider trading lawsuit. C) The investment adviser representative has admitted to selling unregistered exempt securities to individual clients. D) The investment adviser representative is judged to be mentally incompetent.

D Registration may be canceled by the Administrator if the registered individual has been judged mentally incompetent. Cancellation is a nonpunitive action of the Administrator.

***Under the USA, which of the following fits the definition of a sale? A) Solicitation of an offer to buy a security for value B) Issuing a prospectus C) Attempt to dispose of a security for value D) Contract to dispose of a security

D Sales involve any contract or disposition for value; solicitations and attempts to dispose are offers.

Computing the Sharpe ratio for a specific stock requires using all of the following EXCEPT: A) the standard deviation of the subject security. B) the actual rate of return for the subject security. C) the risk-free return available in the market. D) the beta for the subject security.

D Sharpe ratio measures the performance of an investment such as a security or portfolio compared to a risk-free asset, after adjusting for its risk using standard deviation (actual rate of return minus the risk-free rate of return) divided by the standard deviation of the security. Beta is not a component. ****Sharpe things have nothing to do with Betas***

A popular tool used by analysts is discounted cash flow (DCF). Most use this tool to evaluate A) the future value of future cash flows to determine the value at a specified date in the future. B) the present value of future cash flows to determine the value at a specified date in the future. C) the future value of present cash flows to determine an appropriate current value. D) the present value of future cash flows to determine an appropriate current value. --------------------------------------- Which of the following statements best represents a bond's present value? A) Present value is the discounted future repayment of principal. B) Present value is the sum of all the discounted future interest payments. C) Present value is the sum of all the discounted future payments. D) Present value represents the internal rate of return (IRR) of the bond.

D The principle behind a DCF computation is that an investment made currently is worth an amount equal to the sum of all the future cash flows expected to be received. These future cash flows are discounted to arrive at a fair value. The discounted cash flow, DCF, is used to assess the value of a fixed-income security by looking at the future expected free cash flow and discounting it to arrive at a present value. This is basically nothing more than taking the income payments you are scheduled to receive over a given future period and adjusting that for the time value of money. --------------------------------------- C Present value is the sum of all the discounted future payments. NOTE: The present value of a dollar: indicates how much needs to be invested today at a given interest rate to equal a specific cash value in the future

Selmer Jones has just inherited some money and wants to set some of it aside for a vacation in Hawaii one year from today. His bank will pay him 5% interest on any funds he deposits. In order to determine how much of the money must be set aside now and held for the trip, he should use the 5% as a A) required rate of return. B) opportunity cost. C) nominal rate of return. D) discount rate.

D This is a present value question. Selmer needs to figure out how much the trip will cost in one year, and use the 5% as a discount rate to convert the future cost to a present value.

A popular funding technique that involves investing the same amount at regular intervals is known as dollar cost averaging. Participating in this funding approach tends to lessen which risk? A) Market B) Inflation C) Credit D) Timing

D Timing sometimes called market timing risk

Your client has $10,000 to invest today and expects to earn an after-tax return of 8% to send his daughter to college in 12 years. Which of the following is needed to determine whether the investment is likely to satisfy the client's goal? A) Consumer Price Index B) Present value C) Client's marginal federal income tax bracket D) Expected cost of college

D To determine whether the investment will satisfy the goal, the investment adviser representative needs to know the amount needed to pay for college. The information we have here will allow us to compute the future value: $25,181.70. This may not be enough to pay for even 1 year of college 12 years from now.

There are various ways in which an investment adviser may be compensated for services rendered. All of the following would be permitted under the Uniform Securities Act EXCEPT A) 1% of the average annual assets B) hourly fees C) 0.25% of the asset per quarter D) 1% of the increase in account value over the next quarter

D Unless the question specifically references the allowable exception, investment advisers are not permitted to receive performance-based compensation. Exceptions: - has at least $1 million under the management of the investment adviser; or - IA has reason to believe that immediately prior to entering into the contract has a net worth exclusive of the primary residence in excess of $2.1 million; or - officer or director of the investment adviser or one of their IARs who has been employed in the industry at least 12 months.

Keogh Plans are qualified plans intended for those with self-employment income and owner-employees of unincorporated businesses or professional practices filing a Form 1040 Schedule C with the IRS. Which of the following statements relating to Keogh Plans is NOT true? A) The maximum allowable contribution to a Keogh Plan is substantially higher than that for an IRA. B) A participant in a Keogh Plan may also maintain an IRA. C) Owner-employee businesses and professional practices must show a gross profit in order to qualify for a tax-deductible contribution. D) A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan.

D You can rollover any distribution from a qualified corporate plan into a rollover IRA even if you have a Keogh plan This is true : Tax-deductible contributions are not allowed unless there is potentially taxable income against which to deduct.

*********Which of the following statements is (are) true? I A person with a place of business in the state who transacts business exclusively with banks and savings institutions is not an investment adviser under the Uniform Securities Act. II A person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 who offers investment advice to individual investors residing in this state, and has less than $25 million in assets under management, is subject to the jurisdiction of the state Administrator. III A person included in the definition of an investment adviser under the Investment Advisers Act of 1940, who manages funds on a regular basis as a business headquartered in a state, is subject to payment of filing fees required by the state Administrator. IV Broker-dealers who supply incidental investment advice and make securities recommendations to customers who pay commissions for the execution of their trades are not investment advisers subject to state or federal registration. A) II and III B) I and II C) I and IV D) III and IV

D****** A person who conducts business exclusively with banks and savings institutions is an investment adviser under the USA if he has a place of business in the state. Had the person no place of business in the state and conducted business exclusively with banks and savings institutions, he would not be considered a broker-dealer subject to the regulatory control of the state Administrator. Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of state filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not investment advisers.