s65 improved areas

A state-registered investment advisory firm that plans to take custody of clients' securities must do which of the following? Receive permission from the state Administrator. Give notice to the state Administrator. Provide a copy of its balance sheet to clients. Provide a custody brochure to clients.

2,3 For a state-registered investment adviser to take custody of customer funds and securities, it must give notice to the state Administrator and provide those customers with a copy of its balance sheet. Permission from the state Administrator is not required and there is no such thing as a custody brochure.

If an investor received a lump-sum distribution from a 401(k) plan when he left his job, he may roll over his account into an IRA within 60 days transfer his account without taking possession of the money keep the funds and pay ordinary income tax invest in a tax-exempt municipal bond fund to avoid paying tax

1 and 3 Because the client has already received the lump sum, he may either roll the money into an IRA account within 60 days, or retain the money and pay income tax (and possibly a penalty) on it. Any amount the client does not roll over will be taxed as income, even if invested in tax-exempt bonds. A direct custodian-to-custodian transfer is not permitted because the client has already received the distribution.

SYZ Corporation is having a rights offering that will enable existing shareholders to acquire 1 share of SYZ common stock for each 10 shares they currently own. Under the Uniform Securities Act, what would this be considered? An offer of SYZ rights A sale of SYZ rights An offer of SYZ common stock A sale of SYZ common stock

1 and 3 This is obviously an offer of the rights (that's what the question says). In addition, the USA states that any offer of a right or warrant that gives the holder the ability to subscribe to another security is also an offer of that security.

When an investment adviser prepares a BCP, what should it be based on? The size of the firm The firm's annual net income The number of locations of the firm The types of services provided

1,3,4 amount of an investment advisers net income is not relvant to a BCP

Under the National Securities Markets Improvement Act of 1996, which of the following describe federal covered securities? A security registered under the Uniform Securities Act A security registered under the Investment Company Act of 1940 A security of a company traded on the Nasdaq Stock Market A security issued by the U.S. government

2,3,4 A federal covered security has a federally imposed exemption from state registration, so selecting a choice that includes registering under the USA cannot be correct. The list includes most securities exempt from registration under the federal Securities Act of 1933 (those issued by the U.S. government and state and local governments). In addition, it includes a number of securities registered with the SEC, primarily those traded on the exchanges and Nasdaq, as well as investment companies registered under the Investment Company Act of 1940.

One of your clients has called you to discuss an interesting investment opportunity discovered on one of the LinkedIn groups she participates in. Which of the following factors might increase the likelihood that this is a scam? A registration statement with the SEC is available on the website of the proposed investment The purchase money must be wired to an offshore account One of the members of the group is a principal in the company being offered Bonus shares are offered for recruiting friends into the deal

2,3,4 Although not foolproof, the existence of an available SEC registration statement greatly reduces the likelihood that a deal like this is a scam. The other choices are certain red flags.

When opening an account at a broker-dealer, if the most recent copy of the firm's fee schedule is not available, NASAA recommends that the client A) not place any assets in the account until it is provided. B) promptly notify the Administrator of the firm's failure to comply. C) select another broker-dealer and open the account there. D) go ahead with the account opening but refrain from trading until its receipt.

A It is proper for fees to be disclosed at the time a customer account is opened. If not presented, clients should ask for the fee schedule and make sure it's up to date. If it is not readily available, clients should not place any assets into the account until it is provided. NASAA believes that clients have the right to know the fees in advance.

The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is not true? A) This may be done, but only if the entire account is rolled over. B) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. C) If there is a distribution of the assets, the rollover must be completed within 60 days. D) Even though these plans are generally under state control, the rollover rules are federal law.

A Partial rollovers are permitted.

Which of the following statements are true? A federal covered adviser sells federal covered securities only. Federal covered advisers are advisers with federally imposed exemptions from state registration as investment advisers. A federal covered security is exempt from registration with the SEC. Federal covered securities include those issued by investment companies registered under the Investment Company Act of 1940.

A federal covered adviser is an adviser with a federally imposed exemption from state registration. Securities issued by investment companies registered under the Investment Company Act of 1940 are included in the definition of a federal covered security.

Under which of the following circumstances will a private placement fail to qualify for exemption from registration under the Uniform Securities Act? A) The offer is directed to only five individuals during any 12-month period. B) A modest commission is paid to the agents who sell the offering to noninstitutional clients. C) The seller reasonably believes that individual purchasers are buying for investment purposes rather than immediate resale. D) A bank holding company purchases the offering for trading purposes rather than investment purposes.

A private placement will lose its exemption if those who sell the offering are paid commissions on sales to noninstitutional clients. For a private placement to be exempt, the offer cannot be directed to more than 10 persons during a 12-month period. In the case of noninstitutional buyers, the seller must reasonably believe (nice to have it in writing, but not required) they are purchasing the offering for investment purposes only. Institutional purchasers do not have to purchase the offering for investment purposes.

Which of the following types of life insurance has premiums that increase each time the policy is renewed, and no cash value buildup? A) Ordinary whole life B) Variable life C) Universal life D) Term

A term policy provides life insurance only with no savings element. Upon renewal, the rates are higher as you age

In a trust account, the person who makes the account management decisions is A) the beneficiary. B) the trustee. C) the investment adviser representative. D) the nontrustee custodian.

A trust is a legal entity that designates a person (the trustee) to manage the trust's assets for the benefit of another person (the beneficiary or beneficial owner).

A client profile is not complete without a family income statement. A typical one would include dividends credit card debt autos mortgage interest A) I and IV B) III and IV C) II and III D) I and II

A) I and IV Income statements reflect the family's income and expenses, not assets and liabilities. Dividends represent money received, and mortgage interest is money paid out. Credit card debt is a liability and autos are assets.

Angelo lives and votes in State W. He winters in State C, splitting his time 60/40 between the two states. Angelo has a brokerage account with Sunset Investment Securities (SIS) and trades with an agent housed in SIS's State W office. SIS is also registered in States M and I but, having no place of business there, is not registered in State C. In order for Angelo's agent to handle the account, registration as an agent is required A) in State W. B) in State W and State C. C) solely with FINRA. D) in State C.

A) in State W. By not having a place of business in State C and only having a client who is temporarily in the state, SIS (and those functioning as its agents) qualifies for the snowbird exemption.

All of the following are exempt from state registration except A) variable annuities issued by a major insurance company. B) common stock in Mutual Savings Bank. C) fixed annuities issued by a small insurance company. D) fixed-income securities issued by a bank.

A) variable annuities issued by a major insurance company. Fixed annuities are not securities, so there is no registration required. Of the other choices listed, only variable annuities are required to be registered.

Under the USA, if an agent in New York calls a prospective client in Ohio recommending the purchase of a listed security, the Administrators of which state(s) has (have) jurisdiction? A) New York B) Neither state until a transaction takes place C) Both New York and Ohio D) Ohio

Administrators have jurisdiction over offers made in the originating state (New York), the state to which the offer is directed (Ohio), and the state in which the offer is accepted.

Searching Out New Growth (SONG) is a venture capital fund. As such, all of the following statements are true except A) SONG only issues securities that are, except in extraordinary circumstances, nonredeemable. B) SONG must have less than $150 million in assets in the fund. C) SONG is not registered under the Investment Company Act of 1940. D) SONG's investment adviser is exempt from registration.

Although venture capital (VC) funds are included in the general definition of private funds, unlike the private equity fund, there is no ceiling on the size of the fund before the adviser loses the exemption. Advisers to VC funds are exempt from registration. The funds themselves do not register with the SEC under the Investment Company Act of 1940 (and don't register with the states either). These investments do not offer ready liquidity.

All of the following are exempt transactions under the Uniform Securities Act except A) initial sale of shares to in-state residents of a local manufacturing company. B) a securities transaction by an executor. C) a sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator. D) a rescission offer, sale, or purchase.

An initial sale of shares to in-state residents is an intrastate initial public offering and must be registered with the state securities Administrator. A securities transaction by an executor; a sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator; or a rescission offer, sale, or purchase are exempt transactions.

Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144? A) Stock acquired by a corporate affiliate in a private placement B) Stock acquired on the NYSE by a corporate affiliate C) Unregistered stock acquired by a nonaffiliate under an investment letter D) Unregistered stock acquired by a corporate affiliate in a stock option program

B) Stock acquired on the NYSE by a corporate affiliate The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.

If an investment adviser representative of a federal covered adviser that transacts business in a state terminates employment with that investment adviser, which of the following statements is true? A) Both the representative and the investment adviser must notify the Administrator. B) The representative must notify the Administrator. C) No notice to the Administrator is required. D) The investment adviser must notify the Administrator.

B) The representative must notify the Administrator. It is the investment adviser representative's responsibility to notify the Administrator. The advisory firm is not registered with the state; only the representative is registered.

The shares of the LMN closed-end management investment company are selling at $45, while LMN's net asset value (NAV) is $40. It would be most accurate to say that LMN's shares are trading at A) a 12.5% discount to NAV. B) a 12.5% premium to NAV. C) an 11.1% premium to NAV. D) an 11.1% discount to NAV.

B) a 12.5% premium to NAV. The shares are selling at a $5 premium to the NAV. Mathematically, this is $5 divided by the $40 NAV, or a 12.5% premium.

Creative Wealth Management (CWM), an investment adviser (IA) registered in five states, has a preferred brokerage arrangement with Bullish Bobbie Brown Securities (BBBS), a FINRA member broker-dealer. If one of CWM's clients chooses to use a broker-dealer other than BBBS, CWM must disclose which of these? In a client-directed brokerage account, the client may pay higher brokerage commissions because the IA may not be able to aggregate orders to reduce transaction costs. The advisory contract is in danger of not being renewed if the client insists on using anyone other than BBBS for trade execution. The client may receive less favorable prices because the IA has arranged a preferred commission rate with a preferred broker-dealer. Using BBBS assures the client of receiving research ahead of those clients who trade elsewhere. A) I and III B) II and IV C) III and IV D) I and II

Because of preferred arrangements between the IA and the broker-dealer, it is likely that larger orders will be combined (with a concurrent cost savings) and there may be a better commission schedule available for the adviser's clients. This would not be a cause for the adviser to refuse to renew the contract, and it would be an unfair business practice to make research available to certain clients ahead of others.

All of the following statements regarding scheduled premium variable life insurance are correct except A) premiums are determined based on age and sex of the insured B) once selected, the policyowner may change payment modes C) better than anticipated results in the separate account could lead to a reduction in annual premium D) the policyowner has the right to change the selection of subaccounts

C) better than anticipated results in the separate account could lead to a reduction in annual premium Scheduled (fixed) premium variable life premiums are fixed. It is universal life that has flexible premiums.

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

C) I, II, and III If an investor holds stock for more than 12 months and sells it for a gain, the gain will be treated as a long-term capital gain. The advantage of long-term capital gains is that the maximum tax rate on long-term capital gains is lower than the maximum rate on ordinary income. If an investor holds stock for 12 months or less, though, any gain will be considered a short-term capital gain and will be taxed at the same rate as ordinary income. LO 15.c

Under the Uniform Securities Act, the Administrator has the power to deny, suspend, or revoke the registration of an issue if it is in the public interest and which of these are true? The issuer discloses in the prospectus that there is virtually no chance that the company's business model will be successful and investors should anticipate losing their entire investment. The Administrator of another state has revoked the issue's registration. An officer of the registrant has been convicted of a securities-related crime. The prospectus contains misstatements of nonmaterial information. The issuer discloses in the prospectus that there is virtually no chance that the company's business model will be successful and investors should anticipate losing their entire investment. The Administrator of another state has revoked the issue's registration. An officer of the registrant has been convicted of a securities-related crime. The prospectus contains misstatements of nonmaterial information.

C) II and III If the Administrator of another state has revoked an issue's registration, the USA considers that just cause for denial in this state. Conviction of an officer of the issuer for a crime related to the securities industry will invariably lead to denial or revocation. Disclosure that the company is not expected to be successful is not a cause for denial; all that is required is full disclosure. Misstatements of material information would be cause for action by the Administrator, but nonmaterial, by definition, does not impact an investor's decision-making process.

An applicant for registration as an investment adviser discloses on Form ADV that it plans to use palm readers to help determine investments most suitable for their clients. Under the Uniform Securities Act, the Administrator A) will request that the applicant furnish past performance records to determine whether this method of investment analysis has merit. B) is empowered to deny this application. C) may deny applications only on the basis of the limitations of the law. D)

C) may deny applications only on the basis of the limitations of the law. A denial of registration must be based on the concept of law. There are stated reasons, such as felony convictions, outstanding injunctions, and insolvency. Although it is required to disclose methods of analysis used, the Administrator is not empowered to pass judgment on them.

When can an investment adviser registered with the SEC use the term investment counsel? Its principal business consists of rendering investment advice. A substantial portion of its business involves investment supervisory services. It maintains full investment discretion. A) II and III B) I, II, and III C) I and III D) I and II

D) I and II These are the two requirements for use of the term investment counsel. Although it can be a factor, exercising discretion is not a requirement of the definition. Many investment advisers exercise discretionary power over client accounts but do not meet the two principal requirements for use of the term investment counsel.

Under the Uniform Securities Act, all of the following are exempt from state registration as investment advisers except A) investment adviser representatives. B) investment advisers with no office in the state who only advise employee benefit plans with assets of more than $1 million. C) publishers of financial publications that are not addressed to clients' specific individual investment situations. D) financial planners who provide fee-based investment advisory services to clients.

D) financial planners who provide fee-based investment advisory services to clients. Financial planners who provide fee-based investment advisory services to the public generally must register with their state securities Administrator, as long as their total assets under management are less than $100 million. Investment advisers with no office in the state who only advise employee benefit plans with assets of more than $1 million need not register with state securities Administrators. Investment adviser representatives do not register as investment advisers but as investment adviser representatives. Financial publishers who do not publish specific investment advice are exempt from state registration.

Among the reasons why a corporation might choose to utilize a deferred compensation plan for retirement planning would be A) compliance with ERISA B) current tax savings on money contributed to fund the plan C) employees who leave the company prior to retirement would not receive benefits D) the plans are nondiscriminatory

Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited. These plans are discriminatory and there is no current tax saving, hence the term "deferred." As nonqualified plans, they do not have to comply with ERISA.

An agent lives in Montana and is registered in Montana and Idaho. His broker-dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may A) not deal with the client until the broker-dealer registers in Pennsylvania. B) only accept unsolicited orders. C) conduct business with the client as usual. D) not conduct any business with the client.

Even though the college program is called a resident program, that does not mean that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence.

An applicant for registration as an IAR in this state was convicted four years ago of a non-financially related crime in another state. Under that state's laws, the crime was a misdemeanor, but under this state's laws, it is a felony. When viewing this IAR's application, the Administrator will A) censure the investment adviser for even thinking of employing this individual. B) treat the crime as any felony. C) treat the crime as a nonfinancial misdemeanor. D) treat the crime as a nonfinancial felony.

Even though the crime is a felony in the state where registration is being sought, the applicant's record shows a misdemeanor; therefore, this individual will not be subject to statutory disqualification.

A client of an investment adviser (IA) needs a bridge loan and approaches the IA to see if the firm is interested. Because the IA is not in the business of lending money, a special agreement is drawn up specifying the terms of the loan. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the loan A) would not be permitted under any circumstances. B) could be made if the IA was affiliated with a bank. C) could only be made after the advisory contract was terminated. D) could be made if the client was an institutional investor.

First of all, a bridge loan has nothing to do with a bridge. The client is not trying to cross over anything. The term is used to refer to a short-term loan to provide funds until permanent financing may be arranged. Now that we've gotten that out of the way, we can answer the question. Loans may never be made to clients unless the firm is in the business of lending money. Because this IA states that it is not their business model, the only way this loan could be made is if there was no adviser/client relationship.

Strategic Capital Asset Managers (SCAM) is an investment adviser that is registered in five states. In lieu of preparing a fancy brochure, SCAM is permitted to provide its clients with a copy of its A) annual renewal form provided to the SEC. B) Form ADV, Part 2A and Part 2B. C) Form ADV, Part 1 and Part 1B. D) Form ADV, Part 2, Appendix 1.

Form ADV, Part 2 (both parts) is acceptable for use as the firm's brochure. Part 1 is for registration purposes, and Part 1B is only used by state-registered advisers (as this firm is). Part 2, Appendix 1 is used for investment advisers who offer wrap fee programs. As a state-registered investment adviser, SCAM does not file any forms with the SEC.

At his death, on January 1, 2017, Morris owned shares of ABC Corporation common stock, with a fair market value of $50 per share, which he had purchased in 2107 for $25 per share. If Morris's executor elected to value the estate by using the alternate valuation date, but then sold the shares through a broker-dealer on May 15, 2017, at $40 per share, what is the estate's basis per share for estate tax purposes? A) $50 B) $125 C) $40 D) $15

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.

NASAA has a Model Rule dealing with sales of securities at financial institutions. The rule applies exclusively to broker-dealer services conducted by broker-dealers on the premises of a financial institution where retail deposits are taken. Under the rule, financial institution means federal and state-chartered banks, savings and loan associations, savings banks, and credit unions. No broker-dealer shall conduct broker-dealer services on the premises of a financial institution where retail deposits are taken unless the broker-dealer complies initially and continuously with all of the following requirements except A) attempting to obtain written acknowledgement from customers that they have received and read the disclaimers. B) making a reasonable attempt to be in a location physically distinct from that where retail deposits are taken. C) being under common control with the financial institution. D) disclosing both in writing and orally to customers that the investments being sold are not FDIC insured, may lose value, and are not obligations of the financial institution.

It is a NASAA Model Rule that broker-dealers operating on the premises of a financial institution make certain disclosures. Every attempt should be made to locate separately from the banking operation and to obtain something in writing from the clients indicating that they have received the disclosures. It is not necessary that there be any relationship between the BD and the institution other than a business one.

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

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.

Bulaan Advisory Services, Inc. (BAS), an investment adviser registered in five states, was found to have been untruthful in its performance reporting. Once this news was released, most of its clients terminated their advisory contracts. As a result, BAS shuttered its doors on July 18, 2018. Minutes of shareholder meetings must be preserved until at least A) July 18, 2021. B) December 31, 2018. C) December 31, 2023. D) July 18, 2023.

NASAA's Model Rule on recordkeeping by investment advisers requires that partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise.

To assist broker-dealers with compliance, NASAA prepared a fee disclosure template. Based on the template, all of the following broker-dealer charges would be disclosed except A) brokerage commissions. B) fees for issuance of stock certificates. C) account transfer fees. D) account maintenance fees.

Not included in the fee disclosure documents are commissions, markups and markdowns, and advisory fees.

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

Offering to buy back a stock at its original cost, even without paying interest, is a prohibited guarantee against loss. Rescission is only when there was something improper about the sale. Technically, this offer is not a case of fraud, and in any event, we must always select the answer that best addresses the question—in this case, a guaranteed price.

It would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified? A) Equity mutual funds B) Bond mutual funds C) Common stock D) Preferred stock

Qualified dividends are those eligible for reduced income tax rates. Those rates can be as low as 0% and as high as 23.8%, with most falling within the 15% to 20% bracket. We don't expect the exam to test on the requirements for a dividend to be considered qualified or how you reach that 23.8% rate. Dividends on bond funds and money market funds are not qualified because the majority of those dividends represent interest earned by the fund and the tax break does not apply to earnings from interest.

An issuer properly files Form D in accordance with Rule 503 of Regulation D of the Securities Act of 1933. As such, the securities that are the subject of any transaction are A) federal covered securities. B) required to register with the state(s) in which they are sold. C) available only to institutional purchasers. D) required to register with the SEC.

Securities sold under Regulation D of the Securities Act of 1933 are private placements and, under the NSMIA, are considered federal covered securities.

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be correct to state that A) premiums will vary based upon performance of the separate account B) by surrendering the policy, its cash value may be obtained C) if a policy loan exceeds the policy cash value, the deficiency must be remedied within 10 business days to keep the policy from lapsing D) you will receive a statement of your death benefit no less frequently than semiannually

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.

A person who has no place of business in this state would not be considered a broker-dealer if he effects transactions in this state exclusively with all of the following except A) investment advisers. B) insurance companies. C) other broker-dealers. D) the issuers of the securities involved in the transaction.

The Uniform Securities Act excludes from the definition of broker-dealer, a person who has no place of business in this state if he effects transactions in this state exclusively with or through the issuers of the securities involved in the transactions, other broker-dealers, or banks, savings institutions, trust companies, insurance companies, investment companies as defined in the Investment Company Act of 1940, pension or profit-sharing trusts, or other financial institutions or institutional buyers. Please note that investment advisers are not included in this list. What is confusing is that the USA offers almost the exact same exclusion for investment advisers and that list includes other investment advisers as well as broker-dealers.

An agent is analyzing the financial statements of a corporation. The company has cash on hand of $2 million, accounts receivable of $500,000, accounts payable of $700,000, land valued at $3 million, wages payable of $300,000, goodwill of $100,000, inventory of $1.5 million, and retained earnings of $5 million. From this information, the agent would determine that the acid-test ratio for this company is A) 1:1 B) 3.375:1 C) 2.5:1 D) 4:1

The acid-test, or quick, ratio is all of the current assets, except for inventory, divided by the current liabilities. The non-inventory current assets are the cash on hand and the accounts receivable. The current liabilities are the accounts payable and wages payable. This results in a calculation of $2.5 million divided by $1 million, or

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 three 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

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 one 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 three years of his investment.

Serenity Strategic Investments (SSI) is an investment adviser registered in four states. SSI's most previous annual updating amendment showed AUM of $108 million. Six months later, a favorable market resulted in SSI's AUM growing to $120 million. Unfortunately, several large clients left, so at the end of SSI's year, its AUM was down to $94 million. Which of the following statements is correct? A) SSI must become registered with SEC within 90 days of exceeding $110 million. B) SSI has the choice of remaining state-registered or registering with the SEC. C) SSI may remain SEC registered as long as AUM is at $90 million or more. D) SSI remains state registered because its AUM is less than $100 million.

The key to answering this question is remembering that, for purposes of SEC registration, it is the AUM (technically known as the RAUM—regulatory AUM) shown on the annual updating amendment to Form ADV that is the determining factor. We are told that SSI is state registered, something permitted when reported AUM is $108 million, although it was eligible to register with the SEC. The midyear increase has no effect on registration, only that at the end of the year. Because SSI will report $94 million on the next annual update, it will remain state registered and does not have the option to register with the SEC because its AUM is below $100 million. The only time the $20 million buffer down to $90 million enables an investment adviser to remain registered with the SEC is just that—the IA is already registered with the SEC and can stay there.

In the field of securities analysis, there are many tools available. Which of the following would most likely be used by an analyst to approximate a reasonable price for a common stock? A) Par value B) The dividend discount model C) Book value per share D) Yield to maturity

The simplest model for valuing equity is the dividend discount model—the value of a stock is the present value of expected dividends on it. Yield to maturity only applies to debt securities with a fixed maturity date. The par value of a common stock has nothing to do with its market price. Although fundamental analysts will examine a company's book value per share, it generally has little or no bearing on the current market price of the stock.

In the field of securities analysis, there are many tools available. Which of the following would most likely be used by an analyst to approximate a reasonable price for a common stock? A) Yield to maturity B) The dividend discount model C) Par value D) Book value per share

The simplest model for valuing equity is the dividend discount model—the value of a stock is the present value of expected dividends on it. Yield to maturity only applies to debt securities with a fixed maturity date. The par value of a common stock has nothing to do with its market price. Although fundamental analysts will examine a company's book value per share, it generally has little or no bearing on the current market price of the stock.

An investment constraint that is unique to private foundations is the requirement to A) distribute 5% of its assets each year as qualifying distributions. B) have an investment policy statement. C) invest 5% of its assets each year in qualifying investments. D) have a board of directors.

Under Section 4942 of the Internal Revenue Code, a private foundation must pay out each year an amount equal to 5% of its net investment assets in "qualifying distributions". There is no legal requirement on how much must be invested each year, and having an investment policy statement is not unique to foundations. Likewise, there is nothing unique about the requirement to have a board of directors and that isn't an investment constraint.

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

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

An investor inherits 1,000 shares of the ABC Global Growth Fund when the NAV is $9.50, the bid price is $9.00, and the ask price is $9.15. Two years later, the investor sells all shares when the NAV is $14.25, the bid is $14.50, and the ask is $14.60. What are the tax consequences of this sale? A) Long-term capital gain of $5,350 B) Long-term capital gain of $4,750 C) Long-term capital gain of $5,450 D) Long-term capital gain of $5,500

Upon death, the beneficiary inherits closed-end funds at their bid price (what the estate could have sold them for), or $9.00 per share. The sale two years later takes place at the bid ($14.50) for a profit of $5.50 per share (times 1,000 shares). Remember, in the case of a closed-end fund, the NAV does not figure into any computations; prices are based on supply and demand and have a bid and ask price, the same as any stock. How did you know this was a closed-end company? Only in the case of a closed-end company can the ask price be lower than the NAV (ask = $9.15, NAV = $9.50).

Delta Advisers is registered in Alabama, Mississippi, and Louisiana. Billy Joe works for Delta Advisers rendering investment advice to individual clients. He works out of Delta's Jackson, MS office and has 3 clients in Mississippi, 6 clients in Alabama and 4 in Louisiana. Billy's friend, Bobby Ray, works for Biloxi Investments, a federal covered adviser with offices in several cities in Mississippi. Bobby Ray works out of the Tupelo, MS office and has 45 retail clients in Tennessee, 4 in Georgia, and 6 in Alabama. With regards to registration as an IAR, which of the following statements is TRUE? A) Billy Joe must register in AL and Bobby Ray must register in MS, TN, and AL. B) Billy Joe must register in MS and AL and Bobby Ray must register in MS, TN, and AL. C) Billy Joe and Bobby Ray must register in MS only. D) Billy Joe must register in MS and AL and Bobby Ray must register in MS.

Working for a state registered investment adviser, Billy Joe must register in the state in which he maintains a place of business (MS) and any other state in which his clients exceed the de minimis limit of 5 (AL in this case). Working for a federal covered investment adviser, Bobby Ray needs to only register in those states in which he maintains a place of business, regardless of the number of clients. That means he is only required to register in MS.

Which of the following would be deemed to be an assignment of an investment adviser's contracts? All of the stock in NLT Advisers, a corporation, is acquired by MMS Advisers, Inc. The Lucky Seven Partnership is an investment adviser with seven partners. Four of the partners make a fortune and decide to retire. They are replaced by new partners. Albert is an investment adviser. His clients' accounts are automatically debited monthly for his fee. Because of this steady cash flow, his banker readily accepts a pledge of these accounts as collateral for a loan.

all of above It is deemed to be an assignment whenever a majority interest in an adviser changes hands. Pledging a client's contract is considered to be an assignment.

Why may the Administrator deny an application for registration as an agent? The applicant has been convicted of a misdemeanor involving securities fraud within the past 120 months. The applicant is insolvent. The applicant has been convicted of a felony within 10 years of the date of application. The applicant has filed an incomplete application. A) I, III, and IV B) I and III C) I, II, III, and IV D) I and IV

all of the above A record of any felony conviction or misdemeanors involving securities fraud during the last 10 years is sufficient grounds for the Administrator to deny an application for registration in the securities industry. Insolvency and failure to file a complete application are also grounds for denial.

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? Policy 1; his wife is the insured. Policy 2; his business partner is the insured. Policy 3; his daughter is the insured. Policy 4; he is the insured.

all of the above 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.

Which of the following statements are true? An agent must register in the state in which he advertises and solicits a security. To make sales, an agent need not register in a state in which the broker-dealer is already registered. Under no circumstances may an agent register with two unrelated broker-dealers. A secretary for a broker-dealer who, as a courtesy, takes orders for the broker-dealer's clients must be registered. A) II and III B) I and IV C) I and II D) III and IV

1 and 4 An agent must be registered in the state in which a security is advertised and solicited. A secretary who takes orders for the broker-dealer's clients must be registered. If the state Administrator specifically grants an exception, an agent may be registered with two unrelated broker-dealers. The fact that a broker-dealer is registered in a state does not qualify the agent for sales unless he is also properly licensed in that state.

Securities of which of the following issuers are exempt under the Uniform Securities Act? National banks State banks Bank holding companies Federal savings and loan associations

1,2,4 Under the USA, the registration exemption for bank-issued securities is justified by strict financial requirements imposed on banks by banking industry regulators such as the FDIC, the Comptroller of the Currency, and the Federal Reserve. Both federal and state banks and federal savings and loan associations are subject to such regulation. However, bank holding companies (as separate legal or corporate entities) are subject to state registration if not otherwise exempt. Thus, securities issued by bank holding companies are not exempt securities under the act.

Under the Investment Advisers Act of 1940, in which of the following cases has an investment adviser acted improperly by not making appropriate disclosures to clients? An adviser that requires prepayment of $1,000 in fees, nine months in advance, has liabilities that exceed its assets and does not disclose this fact to clients. An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients. An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients.

2,3 An adviser's financial impairment must be disclosed to clients if the adviser has discretion, has custody, or requires prepayment of more than $1,200 in fees, six or more months in advance. Legal or disciplinary action taken against an adviser by a court or a regulatory authority within the past 10 years must be disclosed to clients in any case. Note also that by requiring prepayment of over $1,200 in fees, six or more months in advance, an adviser is required to include an audited balance sheet with Part 2 of Form ADV, which must be filed with the SEC and made part of the adviser's disclosure brochure.

Before taking any disciplinary action with respect to a registration under the Uniform Securities Act, the Administrator must always do which of the following? Obtain the approval of the appropriate state court. Find that the action is in the public interest. Cite a cause listed in the act.

2,3 Disciplinary actions with respect to registration may be taken by the Administrator after a finding of public interest and cause. Court orders are required only for legal action, such as seeking an injunction or appointment of a receiver over an adviser's assets.

Under the Investment Company Act of 1940, which of the following statements about advisory contracts between an investment company and an outside adviser is true? A) The contract may not be unilaterally assigned to another adviser. B) The initial contract is effective once approved by the board of directors. C) The contract may be in writing, or it may be oral if there are at least two witnesses to the agreement. D) The contract must be established for a one-year period and renewed annually thereafter.

All contracts between an investment company and an outside adviser must be in writing and must contain certain provisions; these include that the contract may not be unilaterally assigned to another adviser. The initial contract may be for two years, but it is subject to annual renewal by a majority vote of the outstanding shares or the board of directors, as well as a majority of the directors who are considered to be noninterested parties.

In 1933, Congress passed the Securities Act, which required the registration of new issues before their offering to the public. However, the law contained a number of exemptions, including that for A) obligations of the Canadian government. B) equipment trust certificates issued by a regulated common carrier. C) corporate common stock listed on the NYSE. D) stock issued by a regulated insurance company.

Although each of these is considered an exempt security under the Uniform Securities Act (state laws), only the securities of a regulated common carrier carry an exemption from federal registration.

In general, a broker-dealer will disclose its fee schedule A) at the time of the account opening. B) within 30 days following any changes in fees or charges. C) when requested by the client. D) to its agents, who are then responsible for sharing it with the client.

Although there are no specific industry requirements, a broker-dealer's fee schedule typically is disclosed at the time an account is opened. Changes are disclosed by giving notification before the change is made.

While the Administrator has great power, the USA does place some limitations on the office. Which of the following statements regarding those powers are true? In conducting an investigation, an Administrator can compel the testimony of witnesses. Investigations of serious violations must be open to the public. An Administrator in Illinois may only enforce subpoenas from South Carolina if the violation originally occurred in Illinois. An Administrator may deny the registration of a securities professional who has been convicted of any felony within the past 10 years.

An Administrator can compel the testimony of witnesses when conducting an investigation. Investigation of serious violations need not be held in public. An Administrator in Illinois may enforce subpoenas from South Carolina, whether the violation occurred in Illinois or not. An example is when an agent based in Illinois makes an improper sale to a customer who is a resident of South Carolina. Conviction for any felony within the past 10 years is one of a number of reasons that the Administrator may have for denying a license.

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

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

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements about an investment adviser's fees is true? Fees that are excessive compared to fees charged by other advisers for comparable services are unethical. The Administrator may investigate excessive fees by a comparison of services offered and fees charged. If a client agrees to a certain fee, the adviser may not be held for unethical conduct. A) III only B) II only C) I and II D) I only

An adviser is entitled to charge reasonable fees for services provided, but unreasonable fees are unethical. The Administrator may survey the market to establish fees charged against services provided in determining whether an adviser's fees are excessive. Fees that are determined to be excessive are unethical, even if the client agrees to them in the contract.

An agent registered in one state may solicit business in another state, provided A) the agent was previously registered with a different firm in the other state. B) the agent applies for registration in the other state. C) the agent's firm is properly registered in the other state. D) both the agent and the employing broker-dealer are properly registered in the other state.

An agent holding registration in one state may solicit and/or transact business in another state only if registered in that state and the employing broker-dealer is also registered in that state, unless an exemption is available.

If the owner of a $1 million IRA leaves it to his daughter, which of the following best describes the income tax treatment to the daughter? A) She will pay income taxes on the full amount she withdraws each year. B) She will pay income taxes only on a portion of the withdrawals which exceed $1 million. C) She will pay income taxes on the full $1 million immediately. D) She will pay no income taxes because the estate taxes have already been paid.

An inherited IRA will be subject to income taxes to the beneficiary at time of withdrawal, on the same terms as if it had been distributed to the original owner.

Tim, Jim, and Kim are equal partners in TJK Investment Advisers, a general partnership. Tim decides to sever his relationship with the other partners and work for a different firm. When, if at all, must the clients of TJK be notified of Tim's departure? A) TJK must notify its clients of Tim's departure within 30 days of Tim's severance from the firm. B) TJK must notify its clients of Tim's departure within a reasonable period after his severance from the firm. C) TJK must notify its clients of Tim's departure within 15 days of Tim's severance from the firm. D) It is not necessary to notify TJK's clients of Tim's departure, because the advisory will continue to serve its clients as before.

An investment adviser firm organized as a general partnership must notify its clients of the departure of a general partner within a reasonable time.

A portfolio that maximizes an investor's preferences with respect to return and risk is called A) a diversified portfolio B) the efficient frontier C) an uncorrelated portfolio D) an optimal portfolio

An optimal portfolio will generally lie on the efficient frontier (which is a graph, not a portfolio). The special nature of an optimal portfolio is that it may not always be the most efficient portfolio (offering the greatest return for the least risk) because it takes into consideration the specific preferences of the individual investor, which might create a bias.

Two years after their wedding, Pam and Jim became the proud parents of child. Both grandparents want to help ensure educational funds for their new grandchild by using the Coverdell ESA. Assuming they are within the earnings limitations, which of the following would be permitted? A) $2,000 from Pam's parents and $2,000 from Jim's parents into a single ESA B) $1,000 from Pam's parents and $1,000 from Jim's parents into separate ESAs C) $2,000 from Pam's parents and $2,000 from Jim's parents into separate ESAs D) $2,000 from Pam's mother, $2,000 from Pam's father, $2,000 from Jim's mother, and $2,000 from Jim's father

Any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions. There's no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can't exceed $2,000.

Commercial paper with a maturity of nine months or less, with a minimum denomination of $50,000, possessing a rating in the top three grades of a recognized rating agency A) must be sold on the New York Stock Exchange. B) must be registered as a security. C) can only be issued by underwriters. D) need not be registered as a security.

Any short-term debt instrument in the top three grades of a recognized rating service (such as Moody's or Standard & Poor's) with 270 days or less to maturity issued in face amounts of $50,000 or more as commercial paper, a promissory note, a bill of exchange, a draft, or a banker's acceptance is exempt from registration.

Some registered investment advisers (IAs) are federal covered, while others register on a state-by-state basis. In the case of a state-registered investment adviser having its only office in Oregon with no offices in any other state, the authority of the office of the Administrator would include A) requiring each IAR to provide a statement of financial condition. B) requiring the IA to renew its consent to service of process when paying the annual fee. C) requiring IARs to pass a qualification exam. D) the Idaho Administrator requiring registration of IARs who make telephone calls to residents of Idaho.

As you know from being here right now, this test is required by the Administrator. What about the Idaho Administrator? Well, maybe the IARs are making five or fewer calls in any 12-month period. Maybe they are calling institutional clients domiciled in Idaho. In any event, if you have to choose between an answer that is 100% right all of the time (qualification exams) and one that is right only some of the time, go for the 100%.

A new client is looking for a recommendation. The client is 72 years old, has sufficient income from Social Security, and has a pension plan to cover all of her living expenses. She has just inherited $100,000. She wants to invest this money to have a bit more income so she can spoil her grandchildren. Which of the following would be antipodal to her wishes? A) Public utility stock B) Treasury STRIPS C) Treasury bonds D) Jumbo CDs

B) Treasury STRIPS zeros don't pay income

Which items change when a company pays a cash dividend? Working capital Total assets Total liabilities Shareholders' equity A) I and IV B) II, III, and IV C) II and III D) I, II, and III

From an accounting standpoint, once a corporation declares a cash dividend, it becomes a current liability on the company's balance sheet. When that dividend is paid, cash—a current asset—is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth).

An investment adviser runs an advertisement in the business section of the local newspaper. The ad describes the nature of the firm's model portfolio and indicates that it has outperformed the overall market by 800% over the past 10 years, and the firm therefore guarantees that clients will more than keep pace with inflation. At the bottom of the ad, in smaller print, is the following statement: "Results are not guaranteed. Past performance is not indicative of future results. These results are not normal and cannot be expected to be repeated." This is an example of A) an improper hedge clause. B) a wrap fee account. C) a properly worded disclaimer. D) a violation of an investment adviser's fiduciary responsibility.

Hedge clauses may not be used to disclaim statements that are inherently misleading.

Which of the following are exempt securities under the Uniform Securities Act? A security issued by a bank A Canadian government bond A security listed on the NYSE A security issued by a charitable or other nonprofit organization A) II and IV B) I only C) I, II, III, and IV D) I and III

I, II, III, and IV The securities exempt from the registration requirements of the Uniform Securities Act include securities issued by the U.S. or Canadian government or any state, province, or political subdivision; securities issued or guaranteed by any foreign government with which the United States has diplomatic relations; securities issued by banks, savings and loans, insurance companies, and credit unions; securities issued or guaranteed by common carriers and public utilities (e.g., railroads); securities listed on national exchanges (e.g., NYSE, Nasdaq); securities issued by nonprofit, religious, or charitable organizations; commercial paper; investment contracts issued in connection with employee benefit plans; and any securities issued by cooperatives or associations.

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

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

In which of the following situations has the investment adviser not violated the antifraud provisions of the Investment Advisers Act of 1940? A) George intends to implement a financial plan using only products available through a broker-dealer with whom he is associated but does not make this intention known to the client. B) Ray's financial plan uses products available through a number of different broker-dealers. Ray intends to act as an agent of a broker-dealer with whom he is associated in implementing only a portion of the plan. He does not make this intention known. C) Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account. D) Jane is affiliated with a broker-dealer but doesn't tell clients that the investment advice she renders is outside the scope of her employment with that broker-dealer.

If advisers intend to implement a plan using only products available from a broker-dealer with which they are affiliated, this fact must be disclosed to clients. If advisers will act as agents of a broker-dealer with which they are affiliated in implementing any part of a plan, this fact must be disclosed. If the investment advice provided is outside the scope of their employment with the broker-dealer with which they are affiliated, this fact must be disclosed. However, advisers are required to disclose trades made for their own accounts only if those trades are designed to profit from the market impact of recommendations or are inconsistent with their advice. In this case, the transaction made for the adviser's own account is consistent with her advice.

An investment adviser has legal access to a broker-dealer's confidential research document and uses the information to support a recommendation to a client. The investment is successful. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the adviser A) need not disclose the source of the information. B) must provide the client with a copy of the research document. C) must notify the client that the recommendation was based on the broker-dealer's research document. D) must share the commission with the broker-dealer that prepared the research document.

If an adviser provides its clients with reports or recommendations prepared by a third party without disclosure of the source, the adviser has acted unethically. There is, however, an exception to this rule, which happens to apply here. If the adviser uses third-party reports as a basis for its own recommendation or as support for its own recommendation to its client, it does not have to disclose this information.

Ebony sets up a revocable trust, naming her daughter, Sylvia, as the sole beneficiary. Ebony has appointed the Pacific Atlantic Trust Institution (PATI) as the trustee. Any income to the trust will be taxable to A) the grantor. B) the trust. C) the beneficiary. D) the trustee.

In almost all cases, income received into a revocable (grantor) trust, whether distributed or not, is taxable to the grantor. Things are different when the trust is irrevocable, but much more complicated and not likely to be tested.

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

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

A client with a sizable estate would probably find it most efficient to pay estate taxes with A) proceeds from the liquidation of a tax-deferred retirement plan. B) proceeds from the liquidation of a diversified portfolio. C) cash. D) proceeds from a life insurance policy.

In general, people with estates where there is a potentially large estate tax liability find that the most efficient way to pay those taxes is through a life insurance policy.

Under the Uniform Securities Act, which of the following statements is true about the authority of an Administrator? A cease and desist order may be issued prior to a hearing. A cease and desist order may be issued after a hearing. A cease and desist order is valid for a maximum of 30 days.

In issuing a cease and desist order, the Administrator may provide prior notice and hearing or may issue the order without prior notice or hearing (summarily). There is no time period associated with the order. (1,2)

Under the Uniform Securities Act, which of the following is not an offer or a sale? A) 100 shares of ABC stock received in exchange for 200 shares of XYZ stock as a result of a corporate merger B) The sale of a warrant C) A gift of assessable stock D) A broker-dealer offering 10 shares of XYZ common stock as a free gift to any client who invests at least $10,000 in mutual funds

In order for a sale to occur, there must be some financial consideration. In the case of the merger, shares are exchanged without any payment of funds. Any bonus offered in connection with a sale of another security is a sale. A gift of assessable stock is always considered a sale; gifts of nonassessable stock are not sales.

The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers generally prohibits an IA from disclosing any confidential account information without specific consent of the client. However, disclosure would be permitted to A) the client's accountant who is representing him before the IRS B) the client's spouse when this is a joint account C) the client's friends on his Facebook account D) the client's attorney representing him in a lawsuit

In the case of a joint account, all owners are entitled to any information relating to the account. The trick here is that the IRS can compel disclosure in a tax case, but the client's CPA can't.

A) Signing an investment advisory contract that did not outline the compensation arrangements B) An owner of a majority of the stock in the investment adviser pledging that stock as collateral to a bank for a personal loan C) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees D) Failing to notify the Administrator that the adviser has custody of a client's securities or funds, even though the Administrator has no rule that prohibits such custody

Investment advisory contracts must outline compensation provisions and indicate the amount to be refunded, if any, if the contract is terminated. Nothing in the USA requires that there be a refund, only that the terms must be disclosed. The USA also requires investment advisers (IAs) to notify the Administrator if they have or will have custody of customers' funds. The USA considers that a pledge of a majority interest in an IA is an assignment of the IA's contracts.

In which of the following cases is the exemption from registration with the SEC not based on the value of assets under management? A) An investment adviser that acts as an adviser solely to one or more national banks B) An investment adviser that acts as an adviser solely to private funds and has assets under management in the United States of less than $150 million C) An investment adviser that acts as an adviser solely to one or more venture capital funds D) An investment adviser with assets under management of less than $25 million

It is only in the case of the adviser to venture capital funds where there is no dollar limitation on AUM. Private fund advisers with AUM of $150 million or more must register, and "small" investment advisers—those with less than $25 million in AUM—are generally prohibited from SEC registration. If the investment adviser's only clients are insurance companies, the adviser is exempt from SEC registration even if the firm has billions in AUM, but that exemption does not apply when the only clients are banks.

Which of the following is specifically excluded from the definition of an investment adviser, provided the investment advice is solely incidental to the business in which the person is engaged? A) Industrial engineer B) Pension manager C) Movie star's business manager who handles the star's investment portfolio D) Sports representative who advises on securities for a fee

Lawyers, accountants, engineers, teachers, and broker-dealers whose advice is incidental to their profession and who do not charge a separate fee for investment-related advice are excluded from the definition under the Investment Advisers Act of 1940.

A life insurance policy where the premium increases each time the policy is renewed while the face amount remains level is A) increasing term B) variable universal C) renewable level term D) decreasing term

Level term insurance offers a fixed face amount over the life of the policy. If the policy is renewable, the owner has the ability to renew it for that same face amount and the new term, but at new, higher premiums as the insured's age increases.

When a participant in a 401(k) plan dies before retirement, the proceeds are distributed A) according to the terms of the will after going through probate. B) according to the terms of the will without going through probate. C) to the designated beneficiary after going through probate. D) to the designated beneficiary without going through probate.

Most qualified retirement plans require naming a designated beneficiary (or beneficiaries). Upon the death of the participant, the account proceeds are distributed without going through the probate process. This is done without regards to the terms of the will, similar to the beneficiary of a life insurance policy.

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

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).

Fundamental analysts give significant credence to financial ratios. Which of the following tends to give an indication of the profitability of the enterprise? A) Sales-to-earnings ratio B) Debt-to-equity ratio C) Price-to-earnings ratio D) Current ratio

Of the four choices given, the sales-to-earnings ratio is the only one not discussed in the License Exam Manual. Why not? Because we know there will always be a question or two on the real exam that was not covered in our material. It is important that students use good test-taking skills to correctly answer those questions. It would seem logical that a question about profitability would relate to earnings. That would reduce the choices to two from four. The price-to-earnings (P/E) ratio reveals the relationship between the market price of the company's stock and its earnings, but it doesn't tell us anything about the degree of profitability of the enterprise. If we know that the P/E ratio compares the price to the earnings, then it makes sense that the sales-to-earnings ratio compares the net sales of the business with its earnings. Companies with a higher percentage of earnings from each dollar of sales are more profitable. For example, Company A and Company B both reported $100 million in net sales for the year. The net income (earnings) of Company A was $20 million and Company B was $8 million. We can see that each dollar of sales generated $0.20 of profit for Company A and only $0.08 of profit for Company B. Or, we could say that it takes $5 of Company A sales to generate $1 of profit ($100 ÷ 20) while it takes $12.50 of Company B sales ($100 ÷ 8) to earn that same $1 of profit.

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

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 Alexander, 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.

Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan; after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral, A) it would be permitted if Susan made the proper disclosures. B) both Susan and Mary would have to disclose the cash payment to Amanda. C) Susan would have to obtain Mary's permission first. D) only Mary would have to make disclosure to Amanda.

Referrals from unaffiliated third parties are considered endorsements under the SEC's investment adviser marketing rule. Disclosures of any potential conflicts of interest must be made, and if there is any compensation paid for the endorsement, it must be noted as well. If the amount of the compensation, cash or non-cash, exceeds $1,000 over the preceding 12 months, a written agreement between the investment adviser and the endorser must be in effect.

Registration by qualification is effective A) no earlier than 10 days after the filing date. B) when determined by the Administrator. C) 20 days after the filing date. D) when the federal registration becomes effective.

Registration by qualification is effective when determined by the Administrator. Qualification is the only form of registration where the timing of the effective date is determined by the Administrator.

Each of the following are advantages offered by a nonqualified deferred compensation plan that are not found in a qualified plan except A) they are an attractive benefit to the employer because participation requirements and nondiscrimination restrictions do not apply. B) employer contributions to the plan are not subject to current taxation to the employee. C) deferred compensation plans are not subject to most of the requirements of the Employee Retirement Income and Security Act of 1974 (ERISA). D) they are an attractive benefit for highly compensated employees because they're free from the contribution limits.

Tax deferral is found in both NQDC plans and qualified plans, so there is no advantage that one has over the other. However, NQDC plans have much more flexibility without the burdensome compliance issues with ERISA.

An investment adviser to a private fund wishes to qualify for the exemption offered under the Uniform Securities Act when the fund has no more than 100 investors. In order to qualify, A) neither the private fund adviser nor any of its advisory affiliates have been convicted of a felony within the past 12 years. B) every investor must have either at least $1.1 million in assets managed by the investment adviser or a net worth, excluding the value of the primary residence, in excess of $2.2 million. C) the private fund adviser must have less than $110 million in private fund assets under management. D) the fund's outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are individuals with at least $5 million in investments.

The 100 or less investors is technically known as advising a 3(c)(1) issuer. In that case, all the investors must be qualified by meeting the net worth or assets managed by the adviser as stated. The $5 million is the requirement under federal law for an adviser seeking the federal exemption for a 3(c)(7) fund, which is not limited to 100 investors. Conviction of a felony within the past 10 years, not 12, will generally make one a "bad actor" and cause the exemption to be forfeited. Private fund advisers must keep the AUM under $150 million, not $110 million.

An issuer is planning to offer securities for sale in State A and several other states. Which of the following statements regarding registration in State A under the Uniform Securities Act is not true? A) The Administrator may, by order, permit omission of items of information or documents from a registration statement. B) The Administrator may, as a condition of registration by qualification or coordination, rule that the securities can only be sold on a specified form of subscription and that a signed copy must be filed with the Administrator. C) The Administrator may not, as a condition of registration by qualification or coordination, require the security to be deposited in escrow and the proceeds to be impounded until the issuer receives a specified amount. D) Every registration must specify the total amount of securities to be offered in State A, the states in which the offering is to be made, and any adverse order or judgment by a regulatory authority.

The Administrator may, as a condition of registration by qualification or coordination, require the security to be deposited in escrow and the proceeds to be impounded until the issuer receives a specified amount. It is true that every registration must specify the amount of securities to be sold in the state, the states in which the offering is to be made, and any adverse order or judgment of a regulatory authority. The Administrator may, by order, permit omission of any item of information or document from a registration statement. The Administrator may, as a condition of registration by qualification or coordination, rule that the securities can only be sold on a specified form of subscription and that a signed copy must be filed with the Administrator.

Cecil has a discretionarily-managed account with Pelf Reliable Advisors (PRA), an investment adviser registered in States C, D, and G. Over the past year, the portfolio produced a 12% return with a beta of 1.05. The risk-free rate is 3.5%, and the overall market returned 10.85%. Based on this information, calculate alpha and determine if PRA added any value to the portfolio. A) Alpha = 1.15%; the adviser outperformed the market by 1.15% B) Alpha = -1.21%; the adviser underperformed the market by 1.21% C) Alpha = 0.78%; the adviser underperformed the market by 2.72% D) Alpha = 0.78%; the adviser outperformed the market by 0.78%

The alpha for this portfolio is +0.78% (rounded). A positive alpha indicates that Pelf outperformed the market on a risk-adjusted basis. As with most calculations, there are two ways to solve for the answer. Let's use the LEM's formula first. When the riskfree (RF) rate is given, the formula is (actual return - RF rate) - (beta x [market return - RF rate]). Plussing in the numbers, we have (12% minus 3.5%) minus (1.05 times [10.85% minus 3.5%]). That breaks down to 8.5% minus (1.05 times 7.35%) or 8.5% minus 7.72% = +0.78%. An alternative method is as follows: 12% - [3.5% + 1.05 (10.85% - 3.5%)] = 12% - [3.5% + 7.7175] = 12% - 11.2175 = +0.7825.

With regard to the state registration requirements of agents of registered broker-dealers, all of the following statements are correct except A) registration is not required in a state where the agent has no place of business and only deals with existing clients who are vacationing in that state. B) registration is required in each state in which the employing broker-dealer has a place of business. C) registration is required if they solicit the sale of securities by telephone to fewer than six individuals residing in that state. D) registration is required when they limit their activity to the sale of exempt securities.

The fact that the broker-dealer does business in a state has nothing to do with a specific agent. Many broker-dealers are registered in all states; very few agents are. Agents must register in each state where they are selling or offering securities, even if the security or the transaction is exempt. That exemption only applies to the need for the security to be registered, not the agent. Soliciting the sale of securities by telephone is considered making an offer, and there is no de minimis exemption available. Finally, registration is not required when making use of the snowbird exemption.

An application has been filed with the Administrator of State A for registration as a broker-dealer by Assured Success Investments (ASI), a broker-dealer registered in States B, C, and D. While the application is pending, a lawsuit against ASI is filed in civil court in State B. The effect of this will be A) ASI's application in State A will be put on hold. B) ASI's application in State A will be denied. C) ASI's application in State A will proceed as normal. D) ASI's registration in State B will be suspended.

The filing of a lawsuit has no immediate effect on a broker-dealer's application for registration. After all, one is innocent until proven guilty. Even a guilty verdict might not lead to any action, because we don't know whether the lawsuit is connected to the brokerage activities.

The issuance of a stop order by a state securities Administrator requires A) that the subject of the stop order be given an opportunity for a hearing. B) an issuance of criminal charges. C) the subject to stop the activity without the opportunity for hearing. D) an issuance of an injunction by a court with jurisdiction over such issues.

The subject of a stop order must be given the opportunity for a hearing. As long as the stop order is in effect, the security subject to the order may not be sold to the public. Stop orders do not require an injunction by a court, and the Administrator does not have the authority to issue criminal charges.

As a fiduciary, the investment adviser representative (IAR) owes his clients an affirmative duty of utmost good faith, as well as full and fair disclosure of all material facts. This affirmative duty of disclosure is required by the IAR in all of the following situations except A) his family has a beneficial interest in a private medical equipment firm that he recommends to the client. B) the advice he is providing is outside the scope of his brokerage employment and is not under the control or supervision of his employer. C) he has donated funds to a nonprofit medical research institute that owns securities that he has recommended. D) he receives compensation from his employing broker for transactions that are executed through the brokerage house.

The investment adviser representative (IAR) need not disclose that he donated funds to a nonprofit research institute. No conflict of interest is present that requires an affirmative duty to disclose. The fact that the institute owns securities consistent with the IAR's recommendations is not relevant to the IAR's relationship with the client. The IAR has an affirmative duty to disclose all material facts in all the other choices.

In general, a broker-dealer is required to register with the SEC. An exception to that requirement would apply to a broker-dealer who A) is registered with the Administrator of the states in which it does business and only deals with issuers of the securities it trades. B) is currently registered with the SEC as an investment adviser. C) maintains a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange. D) does not have a place of business in the state and limits its clientele to institutional clients.

The only exemption from SEC registration applies to broker-dealers functioning strictly on an intrastate basis. Many broker-dealers are registered with the SEC as both broker-dealers and IAs—one does not suffice for the other. The exemptions from state registration as a broker-dealer are much broader and would include the cases where the broker-dealer does not have a place of business in the state and its only clients are institutions or it effects transactions in this state exclusively with or through the issuers of the securities involved in the transactions.

When would an individual employed by an issuer to sell its stock to the public have to register as an agent? A) When the transaction is exempt B) When the employer is the U.S. Treasury C) When the employer is a savings institution D) When the employer is an insurance company

The question is not looking for the exemption—it wants to know when the individual must register. There are two instances where an individual employed by the issuer to sell its securities is not considered an agent. The first is when the issuer is one of five specific named cases. That list includes savings institutions (banks) and the federal governments of the United States and Canada, as well as any of their political subdivisions. The list does not include insurance companies. The second case is when the securities are being sold in an exempt transaction. From a practical standpoint, the most common case where this occurs is when the issuer makes a private placement of its shares.

A transactional exemption would be available under the Uniform Securities Act when an agent for a broker-dealer A) receives an unsolicited order from a client to purchase heating oil contracts. B) sells a large block of an unregistered nonexempt security to an insurance company that is not authorized to do business in this state. C) sells a retail client $10,000 of U.S. Treasury bonds. D) sells a large block of an unregistered nonexempt security to an individual who meets the definition of an accredited investor.

The sale of a security to an institution, such as an insurance company, is considered an exempt transaction. The fact that the company is not authorized to do business in the state only means that its securities would not be exempt, but that does not change the fact that this is a sale to an institution and is, therefore, exempt. The term accredited investor is meaningless here; only institutions qualify for exempt treatment, not rich people. The T-bonds are an exempt security, but the sale to a retail client is not an exempt transaction. Heating oil contracts are a commodity, not a security.

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

There are three requirements for a preorganization subscription to qualify as an exempt transaction, and those three are the incorrect choices to this question. A preorganization subscription may be advertised.

Functioning responsibly as an agent requires disclosure of any potential conflicts of interest that could arise from a securities recommendation. Examples of potential conflicts of interest that must be disclosed to clients would include all of the following except A) recommending a variable annuity where the insurance company is offering a trip to Australia for any agent meeting a specified sales volume. B) recommending shares of a pharmaceutical company that manufactures a drug that the agent takes for chronic indigestion. C) recommending a purchase of a mutual fund whose underwriter is affiliated with the agent's broker-dealer. D) recommending shares of a corporation where an immediate family member of the agent is a control person.

There is no conflict in recommending a stock where the agent uses a product sold by the company unless we can see some direct or indirect benefit to the agent if the client purchases the stock.

An agent has a new client who is prone to tergiversation. As such, it would probably make sense to A) obtain permission from both the client and the broker-dealer before sharing in the profits and losses in the account. B) make recommendations on a frequent basis. C) accept unsolicited orders only. D) open a discretionary account.

Those who tergiversate repeatedly change their attitude or opinions. As a consequence, the client who likes an agent's recommendation one day may quickly change his mind the next. Therefore, the agent could be placed in an untenable position, being unable to satisfy the client. To avoid this possibility, it would be most sensible to leave all the decisions to the client and only accept unsolicited orders.

Under which of the following circumstances can an agent conduct customer transactions without the activity being recorded on the books and records of the broker-dealer employer? A) The customer is a member of the agent's immediate family. B) The agent will receive no compensation. C) The transactions are authorized in writing by the broker-dealer before execution of the transactions. D) The securities are exempt under the Uniform Securities Act.

Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be considered contrary to the standards imposed for an agent to effect securities transactions not recorded on the regular books or records of the broker-dealer that the agent represents, unless the transactions are authorized in writing by the broker-dealer before execution of the transaction.

A securities trade is made. Under normal circumstances, all of the following would be noted on the order ticket except A) the registered agent who accepted the order B) the account number C) the time stamp of the time of order submission D) the name of the individual who transmitted the order

Transmitting an order is a clerical function, and we don't put that on the order ticket. A typical ticket will include the account for which the trade is being made, the registered individual placing the order for the client, time stamps for entering and execution (or cancellation), execution price, and terms and conditions of the order (market, limit, etc.).

Which of the following persons are included in the definition of an agent under the Uniform Securities Act? An individual who represents First Securities Brokers, Inc., in selling shares of XYZ Corporation, a New York Stock Exchange-listed company An individual who, as part of the job description, represents the City of Chicago in selling its bonds to the public An individual who represents a corporation traded on the New York Stock Exchange in selling securities to the public An individual who is employed by the Federal Reserve Board to sell Treasury bills to retail investors A) III and IV B) II and IV C) I and II

Under the USA, an agent is defined as an individual who represents a broker-dealer selling any type of security, whether that security is exempt or nonexempt. Individuals who represent issuers in trading exempt securities or exempt transactions are not defined as agents. An individual who represents an issuer selling nonexempt securities is an agent and must be registered.

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

Universal life (not universal variable life) does not invest in the market through a separate account. That is only true of life insurance policies using the word "variable." These policies are frequently overfunded (premium over the required amount is paid-in by the policyowner). Term life cannot be overfunded and annuities of any type are not life insurance policies.

Mary, who is licensed as an agent in State A, got a promotion and will turn her clients over to Julie, who is licensed only in State B. Under the registration requirements of the Uniform Securities Act, before Julie can take over the accounts, she must A) receive permission from each of those clients. B) register with FINRA. C) register with the NYSE. D) register with State A.

Unless an exemption applies (and there is nothing in the question that would indicate such), for an individual to sell securities in a particular state, she must be licensed in that state. This question is specifically about registration requirements, not whether client permission is needed. There is nothing in the USA that requires client consent when the agent of record on the account changes. Do not confuse this with the contract assignment rules applying to investment advisers.

Which of the following is the primary advantage to the employer who offers a nonqualified plan when compared to one that offers a qualified plan? A) The qualified plan costs less to administer than the nonqualified plan. B) The nonqualified plan allows for an immediate employer deduction for contributions. C) The qualified plan is permitted to discriminate in favor of key employees. D) The nonqualified plan is permitted to discriminate in favor of highly compensated employees.

Unlike a qualified plan, a nonqualified plan is permitted to discriminate in favor of highly compensated employees. Because there are so few regulations involved, the administrative costs of a nonqualified plan are much lower than those for a qualified plan. The nonqualified plan, typically deferred compensation, allows for a tax deduction when the money is ultimately paid out to the employee or beneficiary.

Under the Investment Advisers Act of 1940, which of the following are exempt from the requirements for registration? Foreign investment advisers with fewer than 15 clients per year, who do not hold themselves out as investment advisers to the public and who have less than $25 million in AUM in the United States Investment advisers who conduct all of their business in one state, do not provide advice on securities listed on an exchange, and have no private funds as clients Investment advisers whose only clients are banks

Usually, anyone who meets the federal definition of investment adviser must be registered with the SEC. Some investment advisers are not excluded from the definition but are exempt from the registration requirements of the SEC. One example is an adviser whose clients are all residents of the state in which the adviser maintains its principal office who renders no advice on any exchange-listed security and does not give advice to any private funds. Advisers whose clients are limited to insurance companies are exempt from registration, as are foreign advisers who limit themselves to fewer than 15 clients a year (none of whom can be investment companies), do not advertise or hold themselves out to be investment advisers, and have less than $25 million in AUM in the United States. There is no exclusion for advisers whose only clients are banks.

Willful violations under the Investment Advisers Act of 1940 may result in which of the following punishments? $10,000 fine A prison term of up to 10 years Being barred from association with any investment adviser

Violations of the Investment Advisers Act or SEC rules carry penalties of up to $10,000 in fines and prison terms of up to five years. The SEC also has the power to suspend the violator for up to 12 months or bar individuals from the industry. This is in addition to any disciplinary actions that may be imposed by SROs or state Administrators or civil actions brought by clients or regulatory authorities.

After receiving some money from an inheritance, an individual purchases a rare gold coin for $10,000. Five years later, he gives the coin to his daughter-in-law after receiving an appraisal showing the coin is worth $15,000. The daughter-in-law's cost basis of the coin is A) $0.00. B) $15,000. C) $10,000. D) $5,000.

When a gift is made of an asset, whether it be a security or a collectible, the donor's cost basis passes to the donee. In this case, the original cost is $10,000 and that becomes the cost basis for the daughter-in-law and is used to determine a gain or loss when that coin is sold. Do not confuse this with the annual gift tax exclusion. Because the value of the gift did not exceed $16,000, the donor has no gift tax obligation, but that is completely different from the daughter's cost basis.

If the Administrator has summarily suspended an investment adviser representative's registration, the registrant may request a hearing by written request and the hearing will be granted within

When an Administrator summarily suspends a registration, the registrant has a right to a hearing if the request is made in writing. The hearing must be granted within 15 days of receipt of the request. Registration of professionals takes place at noon of the 30th day, and an appeal for review of an Administrator's order must be filed within 60 days.