review

At his death, on January 1, 2012, Morris owned shares of ABC Corporation common stock, with a fair market value of $50 per share, which he had purchased in 2001 for $25 per share. If Morris' executor elected to value the estate by using the alternate valuation date, but then sold the shares through a broker/dealer on May 15, 2012 at $40 per share, what is the estate's basis per share for estate tax purposes? A) $15. B) $125. C) $50. D)

$40. If the executor elects to value the decedent's estate by using the alternate valuation date, the value per share is the value at the date six months after death, unless the property is sold prior. In this case, the value per share is the FMV on the date of sale, $40 in this example.

What is the maximum sentence that can be administered by the state attorney general for actions by an agent of a B/D who has committed fraud in the selling of securities? A. Restitution of the amount invested, interest, and attorney costs B. $5,000 fine and 5 years in jail C. $5,000 fine and 3 years in jail D. Double charges in restitution costs, plus interest

$5,000 fine and 3 years in jail. Do not mix up the statute of limitation for the action with the amount of time in jail. There is a new amount of time and money, but the exam is still testing the old law until further notice. The new amount is 5 years in jail and $10,000 fine. If the 3 years is not there, then pick the 5 years. [State Administrator and Regulatory Oversight Module, Section 2.1]

A couple with moderate means wishes to start funding a college educational fund for their three children, ages 5, 6, and 8. The time horizon of this objective is ___ years. A. 5 B. 10 C. 18 D. 25

18 years. This is the best answer offered. The investor's time horizon will extend through the college education of the youngest child. 10 years is not long enough as the oldest child will only be 18 and just starting college. Presumably, funds will be needed until the youngest graduates in approximately 18 years. 25 years, would be too long a period. Even the youngest child will be 30 in 20 years and-- hopefully -- will have graduated by then. [Customer Profiles Module, Section 3.2]

A Unit Investment Trust would come under the regulatory authority of which of the following acts? A. 1939 Trust Indenture Act B. 1940 Investment Company Act C. 1934 Securities Exchange Act D. 1938 Maloney Act

1940 Investment Company Act. A Unit Investment Trust is an investment company, just like a mutual fund, except it is a non-managed company and generally its shares mature. Some are almost identical to mutual funds today, but are called Unit Investment Trusts because of the nature of the make-up of the company. In any event, they are regulated under the 1940 Investment Company Act, not the 1940 Investment Adviser's Act. [Investment Advisers and the Federal Acts Module, Section 4.0]

A couple in their early 40s would like to start planning for their retirement at age 65. What time horizon should they consider in their investment plan? A. 10 years B. 15 years C. 30 years D. 50 years

30 years. Life expectancy for persons who are currently in their early forties is over 80 years old, so this couple should plan for at least 30 years into the future. 50 years is a bit too long, and 30 years might end up being a bit short, but since life expectancy is 84 for men and 87 for women and most do not survive that long, the best answer is 30 years. [Customer Profiles Module, Section 3.2]

Ken Jones purchases 100 shares of ABC Company in June for $20 per share. He sells all his shares at the end of the year for $29 per share. During the year, he receives $1 in dividends. If Ken is in a 35% income tax bracket, what is his after-tax return? A. 5% B. 30% C. 33.5% D. 50%

33.5%. Find the after-tax real return as follows: His total return is $1,000 ($9 short-term gain + $1 dividend × 100 shares.) Of the $1,000, $900 will be taxed at his income tax rate (35%) and the dividend of $100 will be taxed at 15%. His after-tax income is $670 ($900 × 1 - 35% = $585. $100 × 1- 15% = $85. $585 + $85 = $670. His after-tax real return is 33.5% ($670 ÷ $2,000 = 33.5%). [Module 8, Risk & Evaluation, Section 3.7]

All of the following employee retirement plans are subject to the investment and fiduciary rules of ERISA, except: A. 401(k) plan B. Defined benefit plan C. 457 plan D. Profit sharing plan

457 plan. The 457 plan is for municipal employee retirement plans, and thus, is not subject to the ERISA rules. All of the others are corporate retirement plans and thus are subject to the laws and rules of ERISA. [Annuities and Retirement Plans Module, Section 5.0]

At a time Treasury Bills were yielding 5%, the total return on bio-med stocks was 30%. The risk-free rate of return is ____%. A. 5% B. 15% C. 25% D. 35%

5% The risk-free rate of return is equivalent to the return on Treasury Bills. In this case, 5%. Don't get fooled into thinking "risk-adjusted" return, which would have been 25%. [Risk and Evaluation Module, Section 3.4]

XYZ Corp. is a relatively new company. It has experienced exceptional growth over the last couple of years. Given the growth in the number of employees, XYZ's owner would like to establish a retirement plan for her employees. Most of her employees are recent college graduates. As the owner's investment adviser, you should recommend that she establish: A. A defined benefit plan because it would allow most employees to know how much they can expect to receive at retirement B. A defined contribution plan because it would allow most employees to know how much they can expect to receive at retirement C. A defined benefit plan because it would allow most employees to benefit from the longer period of time before they reach retirement D. A defined contribution plan because it would allow most employees to benefit from the longer period of time before they reach retirement

A defined contribution plan because it would allow most employees to benefit from the longer period of time before they reach retirement. You are told that the owner of the company would like to establish a retirement plan for the benefit of his employees, most of whom are recent college graduates. A defined contribution plan is preferable for younger employees because they have more time to contribute to the plan and to have their contributions grow. A defined benefit plan would be preferable if most of the employees were relatively close to retirement because it would allow them to take advantage of the plan sooner in addition to having a defined benefit amount from their retirement plan. [Annuities and Retirement Plans Module, Sections 1.1 & 1.2]

Generally, a trust is established to hold and manage assets for the benefit of which of the following? A. The trustee B. The grantor C. A third party D. An estate

A third party. This third party is called the beneficiary of the trust. The trustee will manage the assets of the trust for the beneficiary, either for a set length of time or until the occurrence of a particular event. The grantor is the individual who created the trust and is the person who named the trustee and the beneficiary or beneficiaries. If an estate is involved, the trust is called a testamentary trust, and comes into being at the death of the grantor, whose last will created the. Trusts can be very complicated, and legal and tax professionals should be consulted when drawing up a trust document. [Customer Profiles Module, Section 1.1]

Which of the following is true concerning trusts? A. A testamentary trust is created by a will B. A living trust is created during the grantor's lifetime C. A trust may be used to defer estate taxes D. All of the above are true

A will creates a testamentary trust, a living trust is created during the grantor's lifetime, and a trust may be used to defer estate taxes. [Customer Profiles Module, Section 1.1]

The goal of short-term asset allocation is usually? A. To achieve maximum return B. To achieve maximum growth C. To achieve maximum safety with income D. To achieve diversity

Achieve maximum safety with income. Short-term investments are associated with goals of maximum safety and generating income. [Portfolio Management Module, Section 1.0]

An agent's registration is in effect: A. For a period dependent on the renewal dates in the various states B. For a maximum period of one year C. Until canceled by the agent or administrator D. For the time the agent is employed by a broker/dealer

All agents' registrations are good for a maximum period of one year. Any termination by a broker/dealer obviously ends the agent's registration. Joining another firm allows the agent to re-register with the new employer. An agent's registration may not be in effect for a full year in the agent's first year of registration or if their employment with a B/D ends at some point in the year. [Registration of Persons Module, Section 1.7]

Which of the following best describes the method of calculating the total return? A. Amount of income divided by the amount invested B. Amount of capital gain divided by amount invested C. Amount of income plus capital gain divided by amount invested D. Amount of income plus capital gain divided by amount invested minus the inflation rate

Amount of income plus capital gain divided by amount invested. The total return is everything that has been made or lost from the investments / the amount invested. If you subtract the inflation rate, you are calculating the real return. [Risk and Evaluation Module, Section 3.2]

Which of the following would be considered an investment adviser and must be registered as such? A. A bank trust officer B. A manager of an investment trust C. An attorney who provides information regarding investments for a fee D. A registered representative of a broker/dealer who gives advice to her clients as part of her duties

An attorney who provides information regarding investments for a fee. This type of attorney is considered an investment adviser because they give information that is not merely incidental to their legal advice. Such attorneys provide financial advice for a fee regardless of whether or not the advice is actually followed by their clients. If the manager of the investment trust has an office in the state, the manager would have to be registered as an investment adviser, even if the adviser is a federal covered investment adviser. [Investment Advisers and the Federal Act Module, Section 6.5]

Under the Uniform Securities Act, which of the following is required to register in a state? A. A local branch of a major bank that provides investment advice to its customers in its branch B. An investment adviser that has no office in the state and whose clients are insurance companies, investment companies, and banks C. An investment adviser in the state whose clients are insurance companies, investment companies and banks, whom he contacts from his office in the state D. An investment adviser who does not maintain an office in the state and contacts five clients in the state during the year

An investment adviser in the state whose clients are insurance companies, investment companies and banks, which he contacts from his office in the state must register with the state. If the firm had no office in the state, it would not have to register in the state. Banks do not have to register since they are exempt, nor does an investment adviser who has no office in the state and only contacts 5 or fewer clients in a 12-month period. Remember that there is a difference in the de minimis rules for an investment adviser and a broker/dealer. [Uniform Securities Act Module, Section 3.5 & Registration of Persons Module, Section 1.4]

Regarding the registration of investment advisers and their representatives, which of the following is true? A. If an investment advisory firm is federal registered with the SEC, its representatives need not be registered with the administrator of any state B. An investment adviser representative who was previously employed at an investment advisory firm in April of this year and is hired by another investment advisory firm in May of this year does not need to notify the administrator of both events C. If an investment advisory firm is registered with the administrator of a state, its representatives doing business in the state need not be registered with the administrator of the state D. An investment advisory firm that hires an investment adviser representative who was employed at another investment advisory firm eight months previously does not have to register the person until the firm's annual registration is renewed

An investment adviser representative who was previously employed at another investment advisory firm in April of this year and is hired by another investment advisory firm in May of this year does not need to inform the administrator of both events. Investment advisory firms must tell the administrator when a representative leaves their firm, but the investment adviser representative is not obligated to inform the state administrator. However, agents of broker/dealers must tell the administrator. Please note the difference. Both federal registered investment advisers and state-registered investment advisers must register their representatives in states in which the representatives are conducting advisory business, unless an exemption applies. [Registration of Persons Module, Sections 1.4 & 4.1]

A "broker/dealer" is: A. Any person in the business of trading for his own account, or for the accounts of others B. Agents executing principal transactions C. Trust companies executing transactions in accounts in which they are not acting in a fiduciary capacity D. A person giving advice for a fee to clients on which securities are best for their portfolio

Any person in the business of trading for his own account or for the accounts of others must be registered as a broker/dealer. The Uniform Securities Act definition includes partner, officer/director, or securities firm that effects transactions for the accounts of other or for their own account. A principal, when acting as an agent, is not a B/D. The state laws differentiate between an acting as an agent and acting as a broker/dealer. An individual making sales is acting as an agent, while an individual performing management responsibilities is acting as a B/D. Trust companies are exempt from the definition of a B/D, as are banks and other financial institutions. A person giving advice for a fee is an investment adviser, not a B/D or an agent. [Uniform Securities Act Module, Section 3.3]

An individual has just received a bonus of $12,473 and wishes to generate some income without risking loss of capital. Assuming the client is in a low tax bracket, which of the following would be the most suitable choice? A) Growth stocks. B) Public utility stocks. C) Insured municipal bonds. D) Bank insured CDs.

Bank insured CDs. The only choice here with no risk to capital is the bank insured CD. Although the insured municipal bond is guaranteed to repay principal at maturity, the bond will still be subject to interest rate risk and, with the client in a low tax bracket, municipal bonds are generally unsuitable investments.

An investment adviser has an office in the state of Nevada. He has a client that is in the state of California. In working with the client, the investment adviser gives the client recommendations based on the suitability of the client, but fails to make known to the client some material facts that could influence the price of the investment. In failing to state the important facts, the investment adviser has violated the Uniform Securities Act. The administrator in which of the states would have jurisdiction regarding the investment adviser? A. The administrator in the state of Nevada B. The administrator in the state of California C. Both administrators in Nevada and in California D. This is not a violation, but is fraudulent and only the state attorney will have jurisdiction

Both administrators in Nevada and in California. The Nevada administrator has jurisdiction since the investment adviser has an office in that state. The California administrator has jurisdiction since that is where the client lives. [State Administrator and Regulatory Oversight Module, Section 3.0]

A new business, when just being organized, is expected to operate at a loss for the first few years. From a tax standpoint, which would have the LEAST advantages in this loss situation? A. S-corporation B. Limited partnership C. C-corporation D. Limited liability

C-corporation. C-corporations cannot flow-through operating losses to the owners. All of the others may flow-through operating losses to the owners who may be able to take deductions for them. [Customer Profiles Module, Section 1.1]

All of the following is true of C-corporations, except: A. The corporation pays taxes on its profits. B. Shareholders pay taxes on their dividends. C. There is no limit to the number of shareholders. D. All owners have unlimited tax liability.

Correct answer (false statement): All owners have unlimited tax liability. Owners of Subchapter C corporations have only limited liability. Their liability is limited to what they paid for their stock in the corporation. A C-corporation is double-taxed, however, because the company is taxed on its profits AND the shareholders pay taxes on the dividends they receive from the company. There is no limit to the number of shareholders. [Customer Profiles Module, Section 1.1]

Which of the following is not necessary to meet the compliance requirements of an advisory contract under the NASAA's Statement of Policy? A. The contract must be in writing. B. The contract must outline the services to be provided. C. The contract must state that the term of the contract is a minimum of three years. D. The contract must state the amount of the advisory fee, or the formula used to compute it.

Correct answer (false statement): The contract must state that the term of the contract is a minimum of three years. The contract must state the term of the contract, but there is no minimum or maximum required term. All of the other answers are items required in an advisory contract. The contract must be in writing, it must outline the services to be provided, and it must state the amount of the advisory fee or the formula used to compute it. [Investment Advisers and the Federal Acts Module, Section 5.1]

Which of the following is not true of limited liability companies? A. The number of owners is limited. B. Owners enjoy limited liability. C. Tax consequences may flow-through to owners. D. Dissolution is not required upon the death of an owner.

Correct answer (false statement): The number of owners is limited. LLCs can have unlimited owners (called members), unlike S-corporations that are limited to 100 shareholders. All the other statements are true. [Module 9, Customer Profiles, Section 1.1]

If a new client has $200,000 to invest and wants to retire in 15 years, which of the following client information is least necessary for an adviser to recommend a suitable investment program? A) Tolerance toward risk. B) Current income and cash flow requirements. C) The age of the client. D) The amount of income he requires for his retirement years.

Current income and cash flow requirements. While current income and cash flow requirements are ordinarily important considerations, in this question we are being asked about the investment of a lump sum, not periodic additional investments. The amount of income required will determine the types of investments and how they must be structured in order to achieve the retirement income desired. The client's age is necessary to determine the time horizon. That is, if the client is currently 35 and wishes to retire at age 50, the money will have to last a lot longer than if we are dealing with a 55-year-old who wishes to retire in 15 years at 70. A client's tolerance toward risk is among the most important non-financial considerations in determining investment suitability.

The sensitivity of a bond's market price to small changes in the general level of interest rates is referred to as __________. A. Alpha B. Beta C. Standard deviation D. Duration

Duration. Duration measures a bond's sensitivity to small changes in interest rates. [Risk and Evaluation Module, Section 4.6]

Investment analysts sometimes use the _______ to predict the investment performance of a model portfolio. A. Inflation adjusted return B. Total return C. Net present value D. Expected return

Expected return. The key word is predict; an expected return is a prediction. Total return is calculated after the securities have been sold. The inflation adjusted return is also an after the fact determination, but is adjusted by the inflation rate. The net present value is calculating the present value of the security based on a future value with a given rate of inflation. [Risk and Evaluation Module, Section 3.1]

According to the Uniform Securities Act, action must be brought against a person for any criminal violation within ____ year(s) of the violation. A. One B. Two C. Five D. No time limit

Five. According to the Uniform Securities Act, action must be brought against a person for any criminal violation within five years of a violation. For civil action, a proceeding must be brought to court within two years of discovery or within three years of the event that caused the suit, whichever occurs first. A good way to remember this is that the two civil terms, 2 and 3 years, add up to the one criminal term, 5 years. [State Administrators and Regulatory Oversight Module, Section 2.1]

An initial application to the administrator for registration as an investment adviser must include? I. A fee II. A consent to service of process III. Whether or not the applicant intends to have custody of client funds and securities IV. Whether the applicant intends to exercise discretionary powers over client accounts A. I only B. I and II only C. I, II, and III only D. I, II, III, and IV

I. A fee II. A consent to service of process III. Whether or not the applicant intends to have custody of client funds and securities IV. Whether the applicant intends to exercise discretionary powers over client accounts The initial application requires the following: •A fee •A consent to be served if sued or called to an arbitration hearing (consent to service of process) •Whether the applicant has custody of client funds and securities •A description of the services they offer, such as whether or not they are planning to have discretionary powers over client accounts. [Registration of Persons Module, Section 1.5]

An investment adviser representative unintentionally advised a client of some investments that did not fit the suitability of the customer. Two years after the investments were made, the client realizes that the investments have taken a bad turn due to the change in the economy. The client goes to civil court and sues the investment advisory firm and the rep. What is the maximum penalty the firm and investment adviser rep may face? I. Restitution of original costs II. Attorney costs and interest for the period of time the investments were in place III. Suspension of license and fines by the administrator of the state that has jurisdiction IV. Up to 3 years in jail A. I and III only B. III and IV only C. I and II only D. I, II, and III only

I. Restitution of original costs II. Attorney costs and interest for the period of time the investments were in place III. Suspension of license and fines by the administrator of the state that has jurisdiction The maximum amount the client can receive is restitution, interest on the money that it could have been earning, and costs that the customer has incurred. The Administrator can suspend both the rep and the firm, and the Administrator can fine the rep and or firm. Since the unsuitable recommendations were made without intent, this is not considered fraud and will be a civil matter rather than a criminal one. [State Administrator and Regulatory Oversight Module, Sections 2.1 & 2.2]

There are many sources of taxable income to an individual. Included might be money received from which of the following? I.Sole proprietorship. II.Subchapter S corporation. III.Investments. IV.Death benefits. A) I, II, III and IV. B) I, II and III. C) II and III. D) I and II.

I.Sole proprietorship. II.Subchapter S corporation. III.Investments. An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will probably use the obsolete term, Subchapter S). Of course, taxable income can be generated by investments in the form of dividends, interest and capital gains. The assumption here must be that the death benefits are from a life insurance policy because those, unlike the death benefit from an annuity, are not subject to income tax.

Under the Uniform Securities Act, which of the following is true regarding the filing of an issuer's registration statement with the state administrator? I. Only an issuer or a broker/dealer may file a registration statement II. A broker/dealer who wishes to publicly offer shares of an unregistered, non-exempt security, which is not a federal covered security, must file a registration statement III. An issuer who wishes to offer more than 500,000 shares in a public offering or sale may file a registration statement IV. An individual who wishes to sell less than 1,000 shares in a secondary market transaction must file a registration statement A. I and II B. I and IV C. II and III D. II and IV

II. A broker/dealer who wishes to publicly offer shares of an unregistered, non-exempt security, which is not a federal covered security, must file a registration statement III. An issuer who wishes to offer more than 500,000 shares in a public offering or sale may file a registration statement The issuer, the B/D, or any other person who is making a public offering may file a registration statement. If a security is not registered with the state and is not exempted from registration in the state by either state or federal law, then a registration statement must be filed with the state for the security to be publicly offered in the state. There is no exemption based on a minimum amount of shares offered. The individual selling shares in a secondary market transaction would not have to register the shares. That would be the issuer or broker/dealers responsibility when the shares were initially offered. [Registration of Securities Module, Section 1.2]

Which of the following are true of contributions to a Roth IRA? I. Contributions must stop by age 70 1/2. II. Contributions may continue until any age. III. Distributions must start by age 70 1/2. IV. Contributions are not tax-deductible. A. I and III only B. II and III only C. I and IV only D. II and IV only

II. Contributions may continue until any age. IV. Contributions are not tax-deductible. A Roth IRA does not have the age limitations that a regular IRA has, so contributions can be made up to any age and there is no age at which distributions must begin. The other aspect of Roth IRAs is that since the contributions are not tax-deductible, they are not taxed at withdrawal (provided the assets are left in the account for at least five years and the person is over 59 1/2 years old). [Annuities and Retirement Plans Module, Section 4.0]

Match the following asset classes with the appropriate tenure of ownership: I. Equity investments -- Short-term investment horizon II. Interest-bearing investments -- Short-term investment horizon III. Interest-bearing investments -- Long-term investment horizon IV. Equity investments -- Long-term investment horizon A. I and III B. I and IV C. II and III D. II and IV

II. Interest-bearing investments -- Short-term investment horizon IV. Equity investments -- Long-term investment horizon If one has only a short time horizon, then short-term, interest-bearing investments are ordinarily a more suitable investment. Equity securities should be associated with a growth objective. Growth requires time to occur, and the investor must avoid liquidating his holdings during periods of market decline. [Portfolio Management Module, Section 1.0]

Which of the following is/are true of an agent's registration? I. It is valid for a period of time that varies from state to state II. It is not effective immediately after passing the Series 63 exam III. It is not valid if the agent terminates employment with a broker/dealer A. I only B. I and II only C. II and III only D. I, II, and III

II. It is not effective immediately after passing the Series 63 exam III. It is not valid if the agent terminates employment with a broker/dealer The Uniform Securities Act states that all registrations expire on December 31st of each year, meaning the registration is valid for a maximum of one year in each state.. There is no waiting period after passing the Series 63, but there is a 30-day waiting period after the registration application has been filed until it is effective, even if the applicant has passed the required exam during the period. If the agent terminates employment with the broker/dealer, voluntarily or otherwise, the agent's registration is revoked. The agent and the employing firm must report the termination to the administrator. [Registration of Persons Module, Sections 1.5, 1.7, & 2.0]

Which two of the following are the major advantages of a passive management approach? I. Diversification II. Lower capital gains taxes III. Lower transaction costs IV. Dollar cost averaging A. I and IV B. I and II C. II and III D. III and IV

II. Lower capital gains taxes III. Lower transaction costs Lower capital gains taxes and transaction costs. While diversification and dollar cost averaging are possible with a passive management approach to investing, they are not specifically major advantages. Lower capital gains taxes and lower transaction/commission costs are. With the buy-and-hold strategy of the passive approach, an investor makes purchases and hopes that by holding the positions for a long period of time, the natural growth in the overall market will provide sufficient returns on his investment. [Module 10, Portfolio Management Module, Section 2.1]

Which of the following assets can be purchased for an IRA? I. Diamonds II. Options III. Real estate IV. Government bonds A. IV only B. II and IV only C. II, III, and IV only D. I, II, III, and IV

II. Options IV. Government bonds

Which of the following entities provide BOTH limited liability to owners and the flow-through of tax benefits? I. Sole proprietorship II. S-corporation III. C-corporation IV. Limited partnership V. Limited liability company A. I, II, and IV only B. II, IV, and V C. II and III only D. IV and V only

II. S-corporation IV. Limited partnership V. Limited liability company S-corporations, limited partnerships, and limited liability companies all have both limited liability for owners and the flow through of tax consequences. A sole proprietorship enjoys flow through, but incurs full personal liability. A C-corporation shareholder enjoys no personal liability, but has no flow through tax benefits. [Customer Profiles Module, Section 1.1]

Which of the following items must be disclosed to the administrator in an application for registration as a corporate investment adviser? I. Each director and officer's net worth II. The Corporation's net worth III. A previous conviction of an officer of the firm of a non-securities-related felony IV. A previous conviction of an officer of the firm of a non-securities-related misdemeanor A. I and III only B. II and III only C. I, III, and IV only D. II, III, and IV only

II. The Corporation's net worth III. A previous conviction of an officer of the firm of a non-securities-related felony The net worth of the firm must be reported, but not the net worth of each director or officer of the firm. The Uniform Securities Act does not differentiate between an individual and a corporate investment adviser. The requirements are the same for both. Conviction of felonies, whether related to securities industry or not, must be reported. Misdemeanors outside the securities industry do not have to be reported. (Traffic violations are non-securities-related misdemeanors.) Securities-related misdemeanors must be reported. [Registration of Persons Module, Section 1.5 & Prohibited Practices and Business Practices Module, Section 4.1]

Under the Uniform Securities Act rules regarding the registration of a new issue, which of the following is true of the withdrawal of an effective registration statement after the effective date? I. The registration statement may be withdrawn by the issuer after five months in a best efforts underwriting if only 40% of the securities have been sold and are outstanding II. The registration statement may be withdrawn by the issuer at the end of seven months in an all-or-none underwriting if the escrow requirements have not been met and all sales are rescinded III. The registration statement may be withdrawn by the administrator after 18 months of a minimum-maximum underwriting the administrator's discretion A. I only B. II only C. II and III only D. I, II, and III

II. The registration statement may be withdrawn by the issuer at the end of seven months in an all-or-none underwriting if the escrow requirements have not been met and all sales are rescinded III. The registration statement may be withdrawn by the administrator after 18 months of a minimum-maximum underwriting the administrator's discretion The administrator, at their discretion, may withdraw the registration statement at any time, but can only be withdrawn by the issuer if no securities are outstanding. The registration statement is effective, good for one year, and the registration statement cannot be withdrawn if any of the securities registered by the statement are outstanding. In an all-or-none offering, all investors' monies are refunded, and no sales were considered to have been made if the escrow requirements are not met. Therefore, the registration could be withdrawn, as none of the securities offered for sale would be outstanding. [Registration of Securities Module, Section 1.7]

An investment adviser representative has a client who needs a safe, secure investment that generates regular income. Which of the following choices would be appropriate? I. U.S. Treasury bill. II. U.S. Treasury bond. III. U.S. Treasury note. IV. U.S. Treasury STRIP. A) II and III. B) II and IV. C) I and II. D) I and IV.

II. U.S. Treasury bond. III. U.S. Treasury note. Treasury Bills and STRIPS are purchased at a discount and pay no interest so neither of them would be appropriate investments based upon the client's need for regular income.

Which of the following exemptions apply to the sale of securities to institutional investors? I. Blue-chip exemption II. Manual exemption III. Exempt transactions IV. Exempt securities A. III only B. II and IV only C. I and III only D. I, II, III, and IV

III. Exempt transactions Transactions that are sales to institutional investors are exempt transactions. These are insurance companies, banks, investment companies, broker/dealers, etc. Exempt securities are exempt from registration. The "blue-chip" exemptions are trades in securities that are listed on exchanges and on Nasdaq. A manual exemption refers to an obsolete exemption used by some states many years ago which exempted securities listed in a manual published by a state. [Registration of Securities Module, Section 5.1]

Your client recently sold his business for $5 million. He is 55 and feels that he is too young to retire. He plans to start a new business venture and will be funding the $250,000 start-up costs with his own funds. With substantial personal assets, he could limit his personal exposure by using which of the following business structures? I.Sole proprietorship II.General partnership III.Limited liability company IV.S corporation A) II, III, and IV B) I and II C) III and IV D) II and III

III.Limited liability company IV.S corporation Both the limited liability company (LLC) and the S corporation offer the benefit of limited liability to the owner(s). If the business is structured as a sole proprietorship or general partnership, personal assets are put at risk.

Violations of the Act include: I. Not charging a commission II. Failing to charge a markup III. Failing to state every fact IV. Use of insider information A. III only B. IV only C. I and II only D. III and IV only

IV. Use of insider information Using insider information is always a violation. Not charging mark-ups or commissions is not a violation of the Act. Failing to state "material" facts is a violation, but it is not a requirement to state every fact. [Prohibited Practices and Business Practices Module, Section 1.0]

You have a client that has an individual account plus accounts for the rest of the family. One of the accounts is an UGMA/UTMA account for the client's 14year old son. The minor has no will and no executor. The son is killed in an accident. What do you do regarding the account? A. Wait for orders from the executor of the son B. Continue to trade the account at the discretion of the custodian C. Accept a letter from the custodian of the account regarding what to do with the securities and funds in the account D. Inform the heirs/custodian that they will need to take their claim to probate court before the assets can be released

Inform the heirs/custodian that they will need to take their claim to probate court before the assets can be released. There is really nothing else that can be done. The court will decide if your client is the rightful heir. Just because this is a minor does not mean it is treated any differently than it would be for an adult. The only difference is that the minor cannot trade the account, but the minor is still the owner. If there were a will and executor, that will make the answer the same as if this were an adult, you would still need to wait for information from the executor. The account should be identified as deceased and all open orders should be closed. [Customer Profiles Module, Section 1.1]

Which of the following best describes a limited liability company (LLC)? A. It has the tax advantages of a corporation and the liability of a partnership. B. It has the tax advantages of a partnership and the liability of a corporation. C. It is treated as a non-profit for both taxes and liability. D. It is treated as a partnership, but cannot issue stock.

LLCs receive the tax advantages of a partnership and the liabilities of a corporation. LLCs can issue different classes of stock, (i.e., common and preferred) and are not limited to 75 shareholders. Owners of an LLC can participate in the management of the company, or they can elect a manager or a board of managers to run the company. Under no circumstances are LLCs treated like non-profit organizations. [Customer Profiles Module, Section 1.1]

Which of the following portfolio attributes would tend to indicate that a bond portfolio would have a fairly stable market value? A. Low purchasing power risk B. Low interest-rate risk C. High beta D. High R-squared

Low interest-rate risk. Interest-rate risk is the risk that a bond's value will decline when interest rates rise. Duration measures interest-rate risk (how much a bond's price will move given a particular move in rates). The greater the duration, or interest-rate risk, the greater the volatility of the bond or bond portfolio. The lower the duration, the more stable the value of the bond or bond portfolio. Purchasing power risk is another name for inflation risk and is not a direct measure of volatility. Beta is a measure of the volatility of equities as compared to the market. R-squared is an indication of how much the volatility of an equity can be explained/predicted by the market. [Module 8, Risk & Evaluation, Sections 4.3 & 4.6]

Strategic asset allocation involves which of the following? A. Adjustment of the percentages of the portfolio when the market is changing B. Determination of a minimum value for the portfolio and then adjustment as the value exceeds this minimum C. Purchase of stock in bear markets and sale of stock in bull markets in a timing of the market D. Maintenance of a constant mix of the asset allocations in the portfolio

Maintenance of a constant mix of the asset allocations in the portfolio. If one of the parts of the portfolio increases but others stay the same or go down, then the assets are rebalanced so that the constant percentage remains the same. [Portfolio Management Module, Section 1.2]

An agent of STS Securities, a broker/dealer, offers by telephone on May 14, a new issue whose registration by qualification is effective. Sam, a client of the agent, purchases 500 shares of the new issue on May 15. Sam pays for the shares on May 20 and receives delivery of the certificates on June 16. If the administrator requires a prospectus be sent, when must the prospectus be sent to Sam? A. May 13 B. May 14 C. May 18 D. May 20

May 14. The answer for the test is May 14 because the Administrator may require the prospectus to be delivered at or before the offer for registration by qualification. The federal act requires delivery of the prospectus by the settlement date, in this case May 20. Normally, the prospectus is due on or before completion of the transaction. [Registration of Securities Module, Section 2.3]

Which of the following businesses is technically dissolved upon the death of one of the owners? A. Partnerships B. S-corporations C. C-corporations D. Estates

Partnerships. Even limited partnerships must go through a "dissolution" upon the death or withdrawal of a general partner. The term dissolution is a technical term in this context. If the partnership agreement permits, the dissolution is purely a technical legal function and the business may continue with the remaining partners. Corporations are not dissolved upon the death of an owner. An estate is not a business, and is actually created when someone dies. [Module 9, Customer Profiles, Section 1.1]

Under which of the following methods must securities that are not federally registered and are issued by a non-exempt corporate issuer be registered with the state administrator? A. Filing B. Condemnation C. Qualification D. Coordination

Qualification. Registration by qualification is the means of registering a non-exempt issue with the state administrator if the issue is not registering with the SEC. If federally registered, the security would be registered with the state through coordination or filing. [Registration of Securities Module, Sections 2.2 & 2.3]

A new company, ABC, Inc., had its initial public offering (IPO) and sold 20 million shares at a price of $32.50 per share. As far as market capitalization is concerned, what size company is ABC, Inc.? A. Micro cap B. Small cap C. Mid cap D. Large cap

Small cap. The formula for market capitalization is the number of shares multiplied by the market price. So, 20,000,000 times $32.50 per share equals $650,000,000. According to the Standard & Poor's criteria for market capitalization, ABC, Inc., is a small cap company because its market capitalization of $650,000,000 places it in the $250,000,000 to $1 billion range. Micro cap would be up to a max of $250,000,000; mid cap is $1 billion to $5 billion, and large cap is over $5 billion. Market capitalization is often used as one of the criteria for index fund investing. [Module 10, Portfolio Management Module, Section 3.0]

An investment adviser suggests to a client that her funds be invested based on fixed percentages for each asset class. As an asset class increases or decreases in market value due to market movement, the adviser suggests that the assets be rebalanced to reflect the previously determined percentage. What is this portfolio management strategy called? A. Tactical asset allocation B. Insured asset allocation C. Strategic asset allocation D. Market timing asset allocation

Strategic asset allocation. In strategic asset allocation, funds are divided among a liquid class, (money market funds and/or T-bills), long-term growth class, (stocks), and long-term income class (bonds). As one class outperforms the others, more funds are placed in the other two classes, or positions are reduced in the over-performing class and placed in the under-performing classes to rebalance the portfolio back to its original allocation. Tactical asset allocation involves changing the proportions of allocations among the classes as market conditions change - a kind of market timing. Insured asset allocation involves determining a base value for the whole portfolio and shifting the assets between investment classes to maintain the base value. Market timing asset allocation is another term for tactical asset allocation. [Module 10, Portfolio Management Module, Section 1.2]

What kind of trust is created by the grantor's will at the time of the grantor's death? A. Fiduciary trust B. Revocable trust C. Testamentary trust D. Irrevocable trust

Testamentary trust. Fiduciary trusts are for living beneficiaries who may not be capable of handling their own financial affairs. Both revocable and irrevocable trusts are types of living trusts, created while the grantor is still alive. Testamentary trusts are managed by the trustee or executor of the estate for the benefit of the beneficiaries, which are usually friends and family members. [Customer Profiles Module, Section 1.1]

Interest rates have been increasing over the last eight months. In fact, they have increased by 40 basis points during this period. Which of the following bonds will decrease the most in price? Bond, Coupon, Maturity, Yield A. U.S. Treasury bond, 7%, 4/22, 6% B. AAA corporate bond, 9%, 5/22, 8% C. U.S. Treasury bond, 10%, 6/22, 7% D. BB corporate bond, 13%, 3/22, 9%

The 7% U.S. Treasury bond will decrease the most in price. Duration measures the volatility of bond prices due to changes in interest rates. Bonds with longer durations have greater price volatility. Duration is longer in bonds that have a longer time to maturity. However, since all of these bonds mature within a few months of each other far into the future, the maturities are considered statistically equivalent. When bonds have the same maturities, look next to the coupon. The lower the coupon the longer the duration. [Module 8, Risk & Evaluation, Section 4.6]

Which of the following best describes tactical allocation? A. The allocation of funds in a portfolio into asset classes according to a fixed percentage and rebalance the portfolio as one or another of the asset classes exceeds or is less than the set percentage B. The allocation of funds in a portfolio into asset classes according to a set percentage and then change the percentage as market conditions change C. The allocation of funds in a portfolio into one asset class according to the market and then changing the asset class as the market changes D. The allocation of a minimum amount of funds in a portfolio into safe investments and then adding more risk as the value of the portfolio increases above the minimum value

The allocation of funds in a portfolio into asset classes according to a set percentage and then change the percentage as market conditions change. If there were a rebalancing of the assets to maintain the percentage, then this would be strategic allocation. Having the minimum in safe funds and only investing when this minimum is above a certain amount is insured allocation. [Module 10, Portfolio Management Module, Sections 1.2, 1.3, & 1.4]

One quantitative method of investment valuation that discounts cash flows to determine a rate of return that will balance them to zero is called: A. Internal rate of return B. Net present value C. Risk-adjusted return D. R-Squared

The internal rate of return determines the rate, which would produce a zero net present value. The major difference between IRR and NPV (net present value) is that the IRR calculates the rate needed to achieve zero, NPV assumes a rate of return to see if the result will be greater than zero. [Risk and Evaluation Module, Sections 2.2 & 3.9]

The "random walk theory" is based on which of the following? A. Timing is of utmost importance in investing B. It is impossible to predict the market's future performance based on looking at past performance C. Due to the uncertainty of the market, market timing will never be as profitable as a buy-and-hold investment strategy D. Past performance is strategically important in investing

The random walk theory states that it is impossible to predict the market's future by looking at past performance. All the others are the opposite of this theory. [Portfolio Management Module, Section 2.1]

Which of the following theories is part of the passive management of a portfolio? A. The diversification theory B. The random walk theory C. The rebalance theory D. The market timing theory

The random walk theory. The random walk theory assumes that market prices follow a random path up and down, and that it is impossible to predict the market's future movements by looking at past performance. The diversification theory is a defensive strategy. The rebalance theory is a strategic asset form of asset allocation. The market timing theory is a tactical asset form of asset allocation investing. [Module 10, Portfolio Management Module, Section 2.1]

Which of the following best describes the Sharpe Ratio? A. The relationship of risk-adjusted return to portfolio volatility B. Risk-adjusted return compared to the risk-free rate of return C. The relationship of investment return to the total investment D. The relationship of a portfolio's volatility to a benchmark portfolio

The relationship of risk-adjusted return to portfolio volatility The Sharpe Ratio compares risk-adjusted return to portfolio volatility determined by standard deviation. [Risk and Evaluation Module, Section 4.6]

The Investment Advisers Act of 1940 was passed to do which of the following? A. To regulate the securities of issuers who want to sell securities to the public in interstate commerce and register the securities with the SEC B. To allow FINRA to supervise the over-the-counter market C. To define the meaning of "investment adviser" and set forth the rules governing investment advisers' operations, sales, and sales literature D. To sponsor the formation of SIPC to supervise the liquidation of a bankrupt broker/dealer

To define the meaning of "investment adviser" and set forth the rules governing investment advisers' operations, sales, and sales literature. The Investment Company Act of 1940 had already been passed, but Congress wanted to define and regulate investment advisers and their activities. Therefore, the Investment Advisers Act of 1940 was put together to set forth the rules and regulations governing investment advisers, what they can do, and what they can send out. [Investment Advisers and the Federal Acts Module, Section 5.0]

A portfolio manager may use beta for which of the following purposes? A. To measure the portfolio's investment return B. To time purchases and sales of portfolio securities C. To measure the volatility of different securities in the portfolio D. To determine which securities to buy or sell

To measure the volatility of different securities in the portfolio. Beta is a measurement of volatility. It measures the volatility of a stock against that of the market. [Risk and Evaluation Module, Section5.2]

A wealthy individual has set up a GRAT. During the term of the trust, how is the income taxed? A) Only to the extent that the actual earnings exceed the amount of the annuity payout. B) To the grantor. C) To the beneficiaries. D) Deferred until the termination of the trust.

To the grantor Even though the Grantor Retained Annuity Trust (GRAT) is technically an irrevocable trust, because of the retained interest by the grantor, tax liability on the trust's income remains with him. 6.1.3.4.3

One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken? A) Trustee and beneficiary. B) Beneficiary. C) Trustee. D) As the grantor, there are no other roles that may be taken.

Trustee and beneficiary. Under trust law, the grantor of a trust, sometimes referred to as the settlor, may also be the beneficiary and the trustee. 6.1.3.1

The needs analysis approach to life insurance planning: A) provides an accurate insurance recommendation that ensures that the survivors' needs will be met. B) involves calculating the present value of cash and future income needs of an individual's survivors. C) does not include other assets. D) is based on a series of generally accepted rules of practice.

involves calculating the present value of cash and future income needs of an individual's survivors. The needs analysis approach evaluates the income replacement needs of one's survivors in the event of untimely death.

A review of the prospectus of an open-end investment company reveals that its portfolio consists entirely of CDs, Treasury bills, and repurchase agreements. This is probably a(n): A) balance fund. B) exchange-traded fund (ETF). C) money market fund. D) index fund.

money market fund. Money market funds hold money market instruments like negotiable CDs, Treasury bills, banker's acceptances, commercial paper and repurchase agreements.

A business organized as a sole proprietorship wishes to open an advisory account. When preparing an investment policy statement, the IA would have to consider the objectives of A) the members B) the stockholders C) the partners D) the sole proprietor

the sole proprietor A sole proprietorship only has one owner. Therefore, the account would focus on the needs of that individual.