S66 Questions

Unit 10. RAP mutual fund had the following returns over the past 3 years: Year 1: 15%. Year 2: -5%. Year 3: 7%. What is the arithmetic mean of the returns for the RAP fund? A) 5.67% B) 9.00% C) 20.00% D) 7.00%

A) 5.67% The arithmetic mean (the average) is 5.67%, calculated as follows: (15% - 5% + 7%) ÷ 3 = 17 ÷ 3 = 5.67%. The median is 7% and the range is 20% (the difference between -5 and +15). If you didn't notice the year 2 return was negative, then your computation would be 9%.

Unit 3. An individual wishing to register as an agent with a broker-dealer may have to I. pass an examination II. post a bond III. maintain minimum net capital IV. meet minimum state educational requirements A) I and II B) II and III C) III and IV D) I and III

A) I and II In almost all cases, an individual wishing to register as an agent must pass an examination. Many Administrators require that all agents post a bond, whereas others only require bonding for those with investment discretion in customer accounts. Minimum net capital requirements apply to broker-dealers, not agents.

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

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

15. A client needs funds for an unexpected medical emergency. If the client takes out a loan against the cash value of his life insurance policy and does not pay it back, the insurance company can do which of the following? A) Reduce the death benefit when the client dies B) Increase the premium amortized over the life of the policy C) Cancel the policy D) Reduce the cash value at the next anniversary

A) Reduce the death benefit when the client dies Unpaid cash value loans reduce the death benefit.

An elderly widower explains to his investment adviser representative that he requires his investments to provide the maximum current income. The IAR should recommend A) a mutual fund that matches the investor's stated objective B) a growth fund C) a zero-coupon bond D) a widow fund, structured specifically for this type of investor

A) a mutual fund that matches the investor's stated Recommendations should always be investments that match the investor's stated objective. Growth funds are not designed to meet the requirement of providing maximum current income. Zero-coupon bonds do not pay out any interest until maturity and, therefore, are unsuitable for an investor looking for current income. Although the name of a fund should bear a resemblance to its objective, the investor and the IAR should read the fund's prospectus carefully to ensure that the fund's objective matches the investor's.

Unit 3. The First Fidelity Building and Loan association, organized in State A and authorized to do business in State B, has an offering of common stock being made in State B. In order for an individual selling the offering to be excluded from the definition of agent in State B, the individual A) could not sell without being an agent B) would have to be employed by a broker-dealer registered in this state C) would have to be employed by a broker-dealer registered in the other state D) would have to be employed by First Fidelity

A) could not sell without being an agent Included in the USA's list of exempt securities are those issued by any building and loan or similar association organized under the laws of any state and authorized to do business in this state. However, they are not included in the short list of exempt securities under which individuals selling on behalf of the issuer are excluded from the definition of an agent. Had this been a bank, savings institution, or trust company, then, as long as the individual was an employee of the institution, no registration would be necessary.

Unit 5. 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) may deny applications only on the basis of the limitations of the law B) is empowered to deny this application C) will request that the applicant furnish past performance records to determine whether this method of investment analysis has merit D) will probably turn to the SEC for guidance

A) 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.

15. Your client purchased an index annuity from you last year with an investment of $100,000. The particular index tied to this product had an annual return of -4%. If the participation rate is 90% with a cap of 5% and no annual minimum guarantee, the value of the account would be A) $96,400. B) $100,000. C) $103,600. D) $96,000.

B) $100,000. Please note that the return is negative (-4%). An index annuity does not participate in losses of the index, only gains. With no gain, and no guaranteed annual minimum, the account value remains at $100,000.

1. In which of the following cases would the Uniform Securities Act require registration of an investment adviser who had no place of business in the state? A) His website was seen by residents of the state. B) He had more than 5 noninstitutional clients who were residents of the state. C) Under no circumstances is registered required if there is no place of business in the state. D) He had more than 5 institutional clients domiciled in the state.

B) He had more than 5 noninstitutional clients who were residents of the state. The de minimis exemption applies when there is no place of business in the state and the adviser has no more than 5 noninstitutional (retail) clients in the state during any 12-month period.

15. Which of the following statements is TRUE concerning variable life separate account valuation? A) Unit values are computed weekly and cash values are computed monthly. B) Unit values are computed monthly and cash values are computed daily. C) Unit values are computed daily and cash values are computed monthly. D) Unit values are computed monthly and cash values are computed weekly.

C) Unit values are computed daily and cash values are computed monthly. Unit values are computed each day. Policy cash values are a monthly computation.

1. The USA places a number of recordkeeping requirements on investment advisers. Records required to be kept by all state-registered investment advisers include all of the following EXCEPT A) a list of discretionary accounts B) bank records C) a record by security showing each client's interest and location thereof D) emails

C) a record by security showing each client's interest and location thereof The key to this question is the requirement for all advisers. A security record is only required for those advisers who have custody of client assets.

15. All of the following statements regarding scheduled premium variable life insurance are correct EXCEPT A) once selected, the policyowner may change payment modes B) premiums are determined based on age and sex of the insured 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.

15. In general, when describing the characteristics of equity index annuities and variable annuities, each of the following would be a true statement EXCEPT A) only the variable annuity is considered a security B) only the EIA has a minimum guaranteed return C) both offer an opportunity for unlimited gain D) both are issued by life insurance companies

C) both offer an opportunity for unlimited gain EIAs almost always come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor's account. There is, theoretically, no limit as to how much one could earn with a variable annuity. Both are issued by life insurance companies, and only the EIA offers a guaranteed floor (minimum return). Based on court rulings in effect at this time, the equity index annuity is not considered a security.

15. Which of the following insurance company products is likely to have the longest time for which a surrender charge will be levied? A) Variable annuity B) Class B shares C) Whole life insurance D) Bonus annuity

D) Bonus annuity One of the characteristics of bonus annuities is that their surrender charges tend to be higher for a longer time than other insurance company products. When you see Class B shares on the exam, it will be referring to mutual funds, not insurance company products.

21. Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A) $6,500 long-term capital gain. B) $6,000 long-term capital gain plus $500 short-term capital gain. C) $2,500 long-term capital gain plus $1,000 short-term capital gain. D) $4,000 long-term capital gain.

A) $6,500 long-term capital gain. Gifted stock carries the donor's cost basis. In this case, 100 shares at $10 per share is $1,000. The stock split means there are now 200 shares, but that doesn't change the total cost basis. When that stock is sold at $35 per shares, the proceeds of $7,000 exceed the cost basis by $6,000, all of which is long-term capital gain. Inherited stock receives a stepped-up basis. That is, the cost basis is at date of death. In this case, the cost per share is $30. When that 100 shares is sold at $35 per share, a $500 profit is realized. In one of the quirks in the Internal Revenue Code, stock received as an inheritance always has a long-term holding period, even when, as in this question, the actual holding period was short-term. Adding the $6,000 of gain from the gift and the $500 of gain from the inheritance gives a total of $6,500 long-term capital gain.

21. Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $60,000 B) Unlimited C) $30,000 D) $15,000

A) $60,000 The current gift tax exclusion (2019) is $15,000 per donor to each recipient. A married couple can give $30,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $30,000 to their son and $30,000 to their daughter-in-law without paying any gift tax.

23. Expressed as a percentage, what is the total return on a 1-year, newly issued (365 days to maturity) zero coupon debt obligation priced at 95? A) 5.26% B) 5.26% plus the implied coupon rate C) The return cannot be determined without knowing current interest rates. D) 5%

A) 5.26% Zero coupon bonds get their name from the fact that there is no coupon interest paid. The investor's return is the difference between the discounted price paid and the $1,000 maturity value. In this question, the price paid was 95 ($950) and the maturity value is $1,000. That $50 difference is the investor's return. To determine the total return percentage on this zero coupon debt obligation, the $50 capital appreciation is divided by the cost of the bond, in this case $950, for a total return of 5.26%. Total return of a zero coupon security is made up entirely of the difference between the cost of the security and its sale or maturity price. The market price of the security, not current interest rates, is used in the calculation of total return.

22. An investor has her agent enter a sell stop order at 60, limit 60. Following the order entry, trades occur at 62.12, 60, 59.95, 60.06, 61. More than likely, the investor received A) 60.06 B) 60 C) 61 D) 59.95

A) 60.06 This is really two orders. The first is to "stop" at 60. That is, once the stock trades at 60 or lower, enter my order. That second order is a sell, but with a limit of 60. So the first time the stock hits 60 (or less) is the trade at 60. That triggers the sell limit. The next trade is a 59.95. Because the limit order is saying, "Get me 60 or higher, the 59.95 is not an acceptable price." But, the next trade, 60.06 will meet the client's goal of receiving no less than 60.

24. If Maria turned 70 on July 16, 2016, when must the first required minimum distribution (RMD) be made from her IRA? A) April 1, 2018 B) December 31, 2017 C) December 31, 2016 D) April 1, 2017

A) April 1, 2018 The IRS requires that RMDs commence no later than April 1 of the year following the year that the owner turned 70½ years old. Maria turned 70½ on January 16, 2017. Therefore, distributions must commence by April 1, 2018.

21. Which of the following business entities files a tax return on the 15th day of the 4th month after the end of the calendar (or fiscal) year? A) C corporations on Form 1120 B) S corporations on Form 1120s C) Partnership returns on Form 1065 D) Multiple member LLCs on Form 1065

A) C corporations on Form 1120 Of this group, the C corporation is the only one filing on the 15th day of the 4th month (April 15 for a calendar-year filer). The other three all file their returns along with a Schedule K-1 for each partner, member, or shareholder on the 15th day of the 3rd month, typically, March 15.

18. A customer has just died. If his wife asks you what amount of federal estate tax will be imposed on the transfer of their personal property to her name, which of the following responses would be best? A) Consult a qualified tax specialist. B) The amount of tax will depend on the size of the estate to be transferred. C) The amount may be prorated over the next 4 years. D) The amount of tax will depend on your late husband's tax bracket.

A) Consult a qualified tax specialist. Specific tax advice should be referred to a qualified tax adviser such as an accountant or tax attorney. No federal estate tax is imposed as a result of the marital exclusion as long as the spouse is a U.S. citizen.

24. The employer does not get a current tax deduction when offering which of the following retirement plans? A) Deferred compensation plan B) SIMPLE plan C) Defined benefit plan D) Money purchase plan

A) Deferred compensation plan Because there is no constructive receipt of income until the deferral period is over, the employing company does not get a current tax deduction. Of course, the employee doesn't report taxable income until then. In the other plans, all qualified, any contributions made by the employer represent a current business expense and are deductible from the company's income.

16. Which of the following investments would NOT be considered an exchange-traded derivative? A) Forwards B) Options C) Warrants D) Futures

A) Forwards Forwards are never traded on an exchange; the other 3 choices can be traded OTC or on an exchange.

20. Which of the following statements are generally TRUE of the buy-and-hold strategy? I. Equities would grow relative to fixed income II. Lower taxes and transactional costs III. Easy to manage IV. The portfolio would more accurately demonstrate the client's investment objectives and risk tolerance A) I, II, and III B) III and IV C) I and II D) II, III, and IV

A) I, II, and III Over the long run, using the buy-and-hold strategy with equity securities has outperformed the rate of return on fixed income investments. With few transactions, there are almost no commissions and capital gains taxes. Of all strategies, this is the easiest to follow. There is no way to determine the client's objectives or risk tolerance based on the decision to buy and hold. The portfolio might contain small-cap stocks or large-cap stocks. It might contain 90% equities or 75% debt securities. Investors with differing goals and risk tolerance can use this strategy.

18. Tax considerations are frequently an important factor when determining appropriate recommendations for advisory clients. In which of the following accounts is the tax status of the individual a critical factor? I. An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer II. An account opened by a sole proprietor in the name of the company III. An account opened in the name of ABC Corporation, an S corporation by one of its shareholders IV. An account opened in the name of the GHI Fund, a regulated investment company, by the fund's portfolio manager A) II and III B) I and II C) III and IV D) I and IV

A) II and III Sole proprietorships and S corporations have their income and losses pass through to the owners. Therefore, an account opened in the name of the business will create tax consequences for the owners. Regular, or C corporations, pay taxes on their earnings and, even though a regulated investment company passes through at least 90% of its earnings to shareholders, the tax situation of each individual shareholder of the fund is of no consideration when making recommendations to the fund's portfolio manager. In summary, Shareholders of an S corporation have limited liability, are limited to no more than 100 shareholders, and receive flow-through tax treatment.

24. Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) Municipal bond interest B) Salary and commissions C) Dividends paid on preferred stock D) Unemployment compensation

A) Municipal bond interest Although tax-exempt interest is reported on the Form 1040 (line 8b), it is not included in adjusted gross income.

21. A man divorces his spouse after 10 years of marriage and remarries. If the man is the sole provider, what part of the worker's Social Security benefits is the new spouse entitled to? A) She is entitled to the same Social Security benefits as the ex-spouse. B) The new spouse is entitled to splitting the benefits with the ex-spouse. C) She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage. D) The new spouse is entitled to more benefits than the ex-spouse.

A) She is entitled to the same Social Security benefits as the ex-spouse. When an individual remarries, the new spouse is entitled to full Social Security benefits. As long as the previous marriage lasted at least 10 years, that ex-spouse (if not remarried) is also entitled to full benefits. That means it is possible for 2 people to receive full benefits at the same time.

22. What is the term used to describe a person on the floor of a stock exchange who stands ready to buy or sell shares of specified stocks? A) Specialist B) Arbitrageur C) Floor broker D) Member

A) Specialist This is the basic definition of the specialist. If the question had said the over-the-counter market, it would have been a market maker. A more correct answer would be the DMM (designated market maker), but sometimes NASAA is slow to make changes. Although the specialist is a member of the Exchange, only a small number of members act as DMMs (specialists)

20. Which of the following is NOT a type of diversification that is achieved by investing in international equities? A) Style B) Asset class C) Geographic D) Currency

A) Style Following a value or a growth style, or using a buy-and-hold strategy, is independent of the continent of domicile of the issuer. Investing in different countries diversifies investments among various currencies, other than the client's domestic currency. Different geographic areas have different types of industries whose performance may vary on the basis of regional resources. International equities are considered another asset class for purposes of asset allocation in one's portfolio

20. Which of the following portfolio management styles would most likely incur the highest transaction costs? A) Tactical asset allocation B) Indexing C) Buy and hold D) Strategic asset allocation

A) Tactical asset allocation A tactical allocation strategy calls for active trading of a portfolio and will likely incur the highest transaction costs. Passive styles, such as buy and hold and index, have relatively low transaction costs.

22. Which of the following has the power to close a stock exchange for up to 90 days? A) The SEC B) The Administrator in the state where that stock exchange is located C) The president of that stock exchange D) The president of the United States

A) The SEC The Securities Exchange Act of 1934 granted the SEC the power to close any registered stock exchange for up to 90 days. All that is required is notice to the president of the United States.

24. Under UTMA, which of the following are allowable distributions for the benefit of the minor? A) The cost to attend a summer camp B) A percentage of food expense C) Clothing expense for a child who has gone through a growth spurt D) A percentage of housing expenses, such as the utilities for his bedroom

A) The cost to attend a summer camp You cannot use UTMA (or UGMA) money for the basics: food, clothing, and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, and sports league registration, would be permitted.

17. Your client who owns a DPP that generated a $10,000 passive loss for the year could A) deduct $10,000 against capital gains B) deduct $10,000 against ordinary income C) deduct $3,000 against ordinary income and carry over the rest D) only deduct the passive loss against passive income

D) only deduct the passive loss against passive income Passive losses, such as those generated by limited partnership investments (DPPs), are only deductible against passive income.

24. Which of the following does not benefit both the employee and the employer? A) Traditional IRA B) SERP C) SEP-IRA D) Defined benefit plan

A) Traditional IRA There is no employee/employer relationship in a traditional (or Roth) IRA. A SEP-IRA is different in that the employer makes the contribution, gets the tax deduction, and the employee's account is enriched by that contribution. The same is true for the defined benefit plan and the SERP. A supplemental executive retirement plan is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees.

16. All of the following statements regarding futures contracts are correct EXCEPT A) completing a futures contract requires the delivery of the commodity. B) a short position will increase in value if the underlying commodity or asset declines in value. C) purchasing a contract for future delivery is considered taking a long position. D) futures contracts can be written on financial assets or commodities.

A) completing a futures contract requires the delivery of the commodity. In almost all cases, the holder of the futures contract will purchase an offsetting contract canceling the original position or sell the contract prior to expiration. In isolated cases, delivery of the commodity may be made but is not required. Futures contracts can be written on financial assets such as currencies and stock indexes, as well as on commodities such as agricultural products or precious metals. As with anyone taking a short position, the value goes up when the price of the underlying asset declines. And, just as purchasing a stock or bond, a long position represents one of ownership.

22. A customer's limit order to buy 500 shares of QRS at 60 is executed and the agent reports the trade execution to the customer. One hour later, the customer notices that QRS is down 2 points and informs the agent that he no longer wants the stock and is not planning to pay for it. The agent should tell the customer that A) he owns the stock and must submit payment B) he may sell the stock at the purchase price in the open market C) he personally will repurchase the securities from the customer for the price paid D) the firm will repurchase the securities from the customer for the price paid

A) he owns the stock and must submit payment The customer has entered into a contract to purchase a security as soon as the order is executed. The customer owns the stock and must submit payment.

21. Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following except A) straight-line depreciation. B) certain incentive stock options. C) accelerated depreciation. D) excess intangible drilling costs.

A) straight-line depreciation. Straight-line depreciation is not a preference item. All of the other choices are included in the IRS listing of tax preference items. In the case of the ISO, it is a preference item to the extent that the fair market value of the employer's stock is in excess of the strike price of the option. As a test-taking tip, when you see two opposites as answer choices, it is likely that one of them is the correct answer. In this case, we have straight-line and accelerated depreciation, only one of which is a preference item.

All of the following factors have an inverse relationship to a bond's duration except A) time to maturity. B) coupon rate. C) yield to maturity. D) current yield.

All of the following factors have an inverse relationship to a bond's duration except A) time to maturity. B) coupon rate. C) yield to maturity. D) current yield.

24. Which factor is least important when assessing a defined benefit pension? A) Expected amount payable B) Investment performance of the fund C) Age at which benefits can be taken D) Lump sum available at retirement

B) Investment performance of the fund Under a defined benefit plan, the pension payable is related to the length of service and usually expressed as a proportion of final earnings. The investment performance of the fund is therefore the least important factor to consider.

Unit 1. The term "private fund", as defined under federal and state law, would not apply to A) an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that act. B) a leveraged ETF. C) a venture capital fund. D) a hedge fund.

B ETFs are publicly traded. Hedge funds and venture capital funds meet the definition of a private fund which is, "an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that act."

21. XYZ, Inc. is a C corporation in the 21% federal income tax bracket. Which of the following investments offers the company the highest after-tax return? A) REIT paying a 6.5% dividend B) ABCD, Inc. preferred stock paying a 6% dividend C) Municipal bond with a 5% coupon rate D) Corporate bond with a 6.75% coupon

B) ABCD, Inc. preferred stock paying a 6% dividend The key to this answer is that corporations have a 50% dividend exclusion on dividends received from other companies. The math looks like this: Only half of the 6% dividend is taxable. That means 3% per year is tax free and the other 3% is subject to tax at the 21% rate. So, we have 3% + 79% of the taxable 3% = 3% + 2.37% = 5.37% after-tax return. The municipal bond is not taxed, but that only produces 5% after tax. The corporate bond is subject to 21% tax so the corporation gets to retain the other 79%. That computes to 6.75 x 79% = 5.33%, just a bit less than the preferred stock. In most cases, dividends paid to corporations by REITs are fully taxable. That makes the after-tax return on the 6.5% dividend only 5.14%.

20. Which of the following statements concerning market efficiency is least accurate? A) If weak form market efficiency holds, technical analysis cannot be used to earn abnormal returns over the long run. B) An efficient market assumes one can generate abnormal returns with active portfolio management. C) If semi-strong form market efficiency holds, technical and fundamental analysis cannot be used to earn abnormal returns over the long run. D) If strong form of market efficiency holds, even insider information cannot be used to earn abnormal returns.

B) An efficient market assumes one can generate abnormal returns with active portfolio management. Market efficiency assumes active portfolio management cannot help earn abnormal (excess) risk-adjusted returns. The weak form indicates that technical analysis doesn't work. The same is true for the use of inside information under the strong form. Semi-strong says that neither technical nor fundamental analysis will work.

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

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

23. Which of the following is not a market cap-weighted index? A) FTSE 100 and FTSE All-Share B) Dow Jones Industrial Average C) Morgan Stanley Capital International D) S&P 500

B) Dow Jones Industrial Average The Dow Jones Industrial Average is a price-weighted index. All other options are market cap-weighted indexes.

16. Which of the following would NOT be considered a derivative? A) Forwards B) ETFs C) Warrants D) Options

B) ETFs ETFs, whether leveraged or not, are investment companies and are not included in the definition of derivative.

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

B) 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.

24. Which of the following statements regarding a qualified profit-sharing plan is TRUE? A) It must define a specific contribution amount. B) It must be established under a trust agreement. C) Contributions are required annually. D) It can permit regular direct cash payouts to participants before retirement.

B) It must be established under a trust agreement. All qualified retirement plans must be established under a trust agreement. Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement.

24. The term security would include which of the following? A) Indentures B) Section 529 plans C) 403(b) plans D) Coverdell ERAs

B) Section 529 plans Technically, Section 529 plans are known as municipal fund securities. As such, the rules of the MSRB require delivery of an official statement, sometimes called an offering circular but never referred to as a prospectus. Retirement plans are not included in the definition and an indenture is a document specifying the legal obligations of the bond issuer and rights of the bondholders. It is some¬times called the deed of trust, and although it details information about a security, it is not, in itself, a security.

24. Maria, age 49, was discussing with some coworkers the recent family vacation she took. She commented that she was able to afford it by taking a penalty-free withdrawal from her retirement plan. Based on that statement, Maria must be covered under A) a 401(k) plan. B) a 457 plan. C) a defined benefit plan. D) a 403(b) plan.

B) a 457 plan. The 457 plan is unique in that it is the only tax-qualified retirement plan permitting withdrawals, for any reason, before reaching 59½ without penalty. All qualified plans have exceptions to the 10% penalty tax, but only the 457 allows the withdrawals for any reason. Even though there is no early distribution tax, Maria will still owe ordinary income tax on the amount withdrawn - the 457 benefit is only that there is no additional 10% tax.

20. An investor is short stock at 60. The current market price of the stock is 35, and he anticipates it will continue to decline. If he thinks the price will rise temporarily and if he does not wish to close out his short position, his best strategy to prevent a loss would be to A) sell an XYZ 35 call B) buy an XYZ 35 call C) buy an XYZ 35 put D) sell an XYZ 35 put

B) buy an XYZ 35 call This client is temporarily bullish on the stock but, in the long term, feels that it will continue to decline so the short stock position is to be maintained. If the client is correct, a near-term rise in the price of XYZ will cause the long 35 call to be in the money and the investor can sell the call at a profit. When it comes to hedging a short stock position, buying a call is always the best strategy.

20. An investment manager is looking at 10 possible stocks to include in a client's portfolio. In order to create the most efficient portfolio, the manager must A) include all 10 stocks in the portfolio in equal amounts. B) find the combination of stocks that produces a portfolio with the maximum expected rate of return at a given level of risk. C) include only the stocks that have the lowest volatility at a given expected rate of return. D) include only the stocks that have the highest volatility at a given expected rate of return.

B) find the combination of stocks that produces a portfolio with the maximum expected rate of return at a given level of risk. The most efficient portfolio will be the one that lies on the efficient frontier. It will offer the highest expected return at a given level of risk compared to all other possible portfolios.

17. Which of the following is a motivation for creating structured products? Structured products A) reduce costs to issuers. B) improve market completeness. C) improve profits for broker-dealers. D) are less expensive for investors to buy and trade.

B) improve market completeness. Primary motivation for financial structuring is to increase market completeness. What does that mean? As stated in the LEM, structured products are created to meet a specific need for which there is nothing available in the current market. Creating this structured product is said to be "completing the market." Creating structured products is a cost to issuers. Investors pay fees to access structured products in addition to transaction costs. They may, in fact, improve the structuring broker-dealer's profits, but that is not what NASAA will be looking for as an answer.

21. An investor would have to pay the alternative minimum tax when A) the investor has received income from a limited partnership B) it exceeds the investor's regular income tax C) the investor's capital gains exceed 10% of total income D) there are tax-preference items reported on the tax return

B) it exceeds the investor's regular income tax A taxpayer must pay the alternative minimum tax in any year that it exceeds regular tax liability. Tax-preference items are re-input in figuring AMT, but the AMT is paid only if that amount is higher than the regular income tax.

22. The term used to describe a broker-dealer contacting a margin account client with a demand for additional funds is A) market call B) maintenance margin C) margin call D) Reg. T call

B) maintenance margin The original call for funds is the Reg. T or margin call. But, when the call is for additional money, it is known as maintenance margin. This generally occurs when the value of the collateral in the account has fallen sharply.

17. Many sophisticated investors have added alternative investments to their portfolios. Benefits in doing so would include A) returns that generally exceed those of traditional stock and bond investments B) portfolio diversification C) greater regulation than traditional investments such as stocks and bonds D) lower expenses than traditional stock and bond investments

B) portfolio diversification Alternative investments, such as limited partnership vehicles and hedge funds, have a tendency to add diversification to a traditional stock and bond portfolio. Many alternative investments have little or no regulation and their expenses are typically high.

22. 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 name of the individual who transmitted the order C) the time stamp of the time of order submission D) the account number

B) 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.).

17. You have a client who sold her $5 million whole life insurance policy through a life settlement broker. If she dies 2 years later, A) the insurance company is not obligated to pay the death benefit because she no longer owns the policy. B) the new owner receives the $5 million death benefit. C) her estate can invoke the right of rescission and receive the policy proceeds minus the sale proceeds. D) the insurance broker must return all commissions to the insurance company.

B) the new owner receives the $5 million death benefit. A life settlement contract involves the sale of a life insurance policy to a party other than the insured. In exchange for the payment, the new owner is entitled to the death benefit when the seller passes away. The right of rescission applies to illegal securities sales and this is not a security nor has any illegal activity been described.

Unit 10. The financial ratio that shows the relationship between the price of a company's stock and the company's net worth (stockholders' equity) is A) the price-sales ratio B) the price-to-book-value ratio C) the dividend discount ratio D) the price-earnings (PE) ratio.

B) the price-to-book-value ratio The price-to-book-value ratio is calculated by dividing the price per share by the stockholders' equity per share. This ratio shows the relationship between a company's stock price and the company's book value.

An interest in which of the following is a security under the Uniform Securities Act? I. Preorganization certificate II. Certificate of deposit for a security III. Oil and gas drilling program IV. Cattle feeding program A) I only B) III only C) I, II, III, and IV D) II and III

C) I, II, III, and IV

One of your prospective clients is considered a key employee at his place of business. This individual has a net worth of almost $6 million, currently earns in excess of $500,000 per year, and is married with 2 teenage children. He currently has a little over $1 million in his 401(k), more than half of which is invested in his employer's common stock. The company is the beneficiary of a $1.5 million key person life insurance policy on his life. Given these facts, what is your greatest concern as his adviser? A) Alternative minimum tax B) Too high a percentage of the retirement plan invested in the company's stock C) Inadequate life insurance coverage D) Inadequate funding for college savings

C) Inadequate life insurance coverage Because the client's only life insurance seems to be that with the company as beneficiary, it does not appear that he has adequately planned for his premature death and the potential estate taxes.

21. Which of the following statements regarding grantor trusts is NOT correct? A) If the grantor can receive income from the trust, he is treated as the owner of the trust. B) If the grantor can control the beneficial enjoyment of the trust, he is treated as the owner of the trust. C) The grantor may be taxed on trust income only if the grantor actually received the income. D) If the grantor has the power to revoke the trust, he is treated as the owner of the trust.

C) The grantor may be taxed on trust income only if the grantor actually received the income. As long as the grantor has the power directly or indirectly to control the trust, he is treated as the owner. The grantor may be taxed on trust income if the grantor either actually or constructively receives the income.

21. An investor purchases 1,000 shares of ABC at $42 per share. One year later, the stock is trading at $50 per share and the investor receives 50 shares of ABC as a stock dividend. How will this dividend be currently taxed? A) As a $2,100 capital gain B) As a $2,500 capital gain C) The shares are not subject to taxation D) As $2,500 ordinary income

C) The shares are not subject to taxation Shares received per a stock dividend are not currently taxable. Instead, shareholders who receive stock dividends must adjust their cost basis in the shares downward. The total number of new shares, multiplied by their new adjusted basis, must equal the shareholder's total interest before the stock dividend was received.

24. 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) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. B) If there is a distribution of the assets, the rollover must be completed within 60 days. C) This may be done, but only if the entire account is rolled over. D) Even though these plans are generally under state control, the rollover rules are federal law.

C) This may be done, but only if the entire account is rolled over. Partial rollovers are permitted.

Pemberton bought a stock share at $50 and wants to earn a profit, so he decided he will never sell it below $52. The company has now underperformed for multiple quarters as per street analysts, and the stock is down to $48. Pemberton continues to hold the stock in line with his original plan. In this case, Pemberton may be exhibiting A) regret aversion bias. B) overconfidence bias. C) anchoring bias. D) herding bias.

C) anchoring bias. In behavioral finance, an anchoring bias is when people tend to base their decisions on reference points that are often arbitrarily chosen. In this case, Pemberton "anchored" his selling price to the $50 he paid for it and will not recognize changes in the market.

20. An investor who buys a stock and wishes to limit the potential downside risk should A) buy a call B) enter a sell limit order C) buy a put D) enter a buy stop order

C) buy a put The purchase of a put limits the downside risk to the difference between the stock price and the put's strike price. This is the most common way to hedge a long stock position.

20. An investment manager is looking at 10 possible stocks to include in a client's portfolio. In order to create the most efficient portfolio, the manager must A) include only the stocks that have the lowest volatility at a given expected rate of return. B) include all 10 stocks in the portfolio in equal amounts. C) find the combination of stocks that produces a portfolio with the maximum expected rate of return at a given level of risk. D) include only the stocks that have the highest volatility at a given expected rate of return.

C) find the combination of stocks that produces a portfolio with the maximum expected rate of return at a given level of risk. The most efficient portfolio will be the one that lies on the efficient frontier. It will offer the highest expected return at a given level of risk compared to all other possible portfolios.

24. One of your clients has told you that his employer has just instituted a Roth 401(k) plan. If the employer wishes to make matching contributions, A) the employee may choose whether he wants the matching contribution to be made to the Roth 401(k) or a regular 401(k) B) it may contribute a specified percentage of the employee's pay to the Roth 401(k) C) it may contribute a specified percentage of the employee's pay to a regular 401(k) D) current tax law does not permit matching contributions to be made on behalf of any employee participating in a Roth 401(k) plan

C) it may contribute a specified percentage of the employee's pay to a regular 401(k) In order to have matching contributions, participants in a Roth 401(k) plan must actually have 2 accounts—the Roth and a regular 401(k). The employer contributions are made on a tax-deductible basis to the regular 401(k) and are fully taxable upon withdrawal.

18. One of the ways in which a simple trust differs from a complex trust is that simple trusts A) may make distributions from the corpus of the trust. B) may retain income. C) must distribute their distributable net income each year. D) are easier to prepare.

C) must distribute their distributable net income each year. Unlike complex trusts, simple trusts must distribute their DNI on an annual basis. Unlike complex trusts, simple trusts may not make distributions from the corpus (body) of the trust nor may they retain income. The terms "simple" and "complex" do not refer to the simplicity of the trust preparation.

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

C) principal repayment on partnership debt. Principal repayments are not an expense for tax purposes. The interest on the debt is an expense and, along with depletion and depreciation expense, does flow through to the limited partners as passive loss.

17. In a life settlement, the seller receives more than the premiums paid into the policy but less than A) the accumulated dividends. B) the cash value. C) the face amount. D) the future premiums payable.

C) the face amount. The sale price of a life settlement is always more than the cash value and less than the face value.

16. With respect to the specific commodity that is the subject of the contract, all of the following are standardized parts to an exchange-traded futures contract except A) the quality. B) the time for delivery. C) the market price. D) the quantity.

C) the market price. It is the delivery price which is standardized, not the market price (that is continuously fluctuating). Exchange-traded futures contracts offer standardized quantities and qualities (grade of the commodity) as well as a standardized time for delivery.

21. If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on A) the market value of the securities as of April 15 of the year in which the gift is made B) the market value of the securities as of December 31 of the year in which the gift is made C) the market value of the securities on the date of gift D) the cost of the securities

C) the market value of the securities on the date of gift If a gift tax is due, it is paid by the donor and based on the gift's value on the date it is given.

18. When a will calls for property to be distributed per stirpes, it means that A) the property is divided into as many equal shares as there are surviving children and grandchildren of the designated ancestor B) all living descendants of the ancestor receive equal shares in the property remaining after all estate expenses are paid C) the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants D) the property is divided into as many equal shares as there are surviving children of the designated ancestor, with nothing going to surviving descendants of deceased children

C) the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants When a will calls for a per stirpes distribution of assets, it provides that if any named beneficiary predeceases the testator (the maker of the will), surviving children of that individual share in the share that the individual would have received. For example, if the testator had 3 children and 1 of them died first, any children of the deceased would share in their parent's portion (they would split one-third of the estate between them).

21. One of your ultra-high net worth clients would like to give some low cost basis stock as gifts to her adult grandchildren. It would be prudent for you to tell her that A) making the gift under the Uniform Transfer to Minors Act is generally the most advantageous for the child. B) for purposes of the gift tax, her cost basis will be used. C) unlike an inheritance, there is no stepped-up cost basis. D) it would be wise for her to use a TOD account to avoid probate.

C) unlike an inheritance, there is no stepped-up cost basis. One of the benefits of inheriting low cost basis securities is the stepped-up basis and that does not apply to gifts. Although the donor will not be the one subject to capital gains tax, it would be the right thing to do to let her know that the donees (her grandchildren) will be receiving the stock at her cost basis. TOD would not apply to stock that is the subject of a gift; it is only when the stock remains in the grandmother's name and has been designated for the grandchildren after her death. When computing the value of a gift to determine if there is a gift tax obligation, it is the fair market value of the gift that is used. Finally, the question states these are adult grandchildren - UTMA would not apply to them.

23. A client purchased a security for $60 and sold it 1 year later for $59. If he received 4 quarterly dividends of $0.50 each during the period, his total percentage return would be A) 3.30% B) 2% C) 0% D) 1.67%

D) 1.67% The total return on an investment is the sum of the capital gains/losses plus any income distribution such as dividends or interest. In this case, the client had a capital loss of $1 ($60 − $59 = $1), which was offset by $2 (4 × $0.50 = $2) in dividend distributions for a total dollar return of $1. In percentage terms, the return is calculated by dividing the dollar return amount by the total invested or $1 divided by $60 = 1.67%.

22. In order to be considered a block trade, an order for common stock must be for at least A) 100 shares B) 100,000 shares C) 1,000 shares D) 10,000 shares

D) 10,000 shares In the industry, the term block trade refers to a common stock transaction involving at least 10,000 shares.

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

D) 25%. Suppose the initial value of your portfolio is $1,000. In Year 1, you lose 10%. Your portfolio is now worth $1,000 x (1 - 0.1) = $1,000 x 0.9 = $900. In Year 2, you lose 45%. Your portfolio is now worth $900 x (1 - 0.45) = $900 x 0.55 = $495. In Year 3, you gain 20%. Your portfolio is now worth $495 x (1 + 0.2) = $495 x 1.2 = $594. In Year 4, you gain 35%. Your portfolio is now worth $594 x (1 + 0.35) = $594 x 1.35 = $801.9. You would like to know by how much your portfolio needs to appreciate in Year 5 to be worth its original value of $1,000. Let's set "y" to be this number. Then we have: $801.9 x (1 + y) = $1,000. Solving this equation for "y" gives: y = ($1,000 ÷ $801.9) - 1 = 0.247 = 24.7%. Rounding this answer in percentage terms (24.7%) to the nearest integer yields the desired answer of 25%. Your portfolio thus needs to increase by nearly 25% in Year 5 for it to be worth its original value of $1,000.

24. An individual covered under a traditional IRA would NOT be able to also maintain which of the following? A) A 401(k) and a 457 B) A Roth IRA C) A 403(b) and a 457 D) A 401(k) and a 403(b)

D) A 401(k) and a 403(b) It is not permitted to have a 401(k) and a 403(b) at the same time. One of the features of a 457 plan is that the participant can also have other retirement plans, such as a 401(k) or a 403(b). Remember, anyone with earned income can have an IRA, traditional, Roth, or both.

15. A variable annuity annuitant bears all of the following risks EXCEPT A) market risk B) interest rate risk C) inflationary risk D) mortality risk

D) mortality risk The insurance company issuing the variable annuity bears mortality risk, or the danger that some annuitants will live to surpass their average life expectancy. The investor in a variable annuity bears inflationary risk, market risk, and interest rate risk.

24. A grandparent wishes to contribute funds to an account for the benefit of the college education of a grandchild. In which of the following does the donor have the greatest amount of control over the assets in the account? A) An UTMA account B) An UGMA account C) A Coverdell ESA D) A Section 529 plan

D) A Section 529 plan It is the Section 529 plan that offers the greatest amount of control to the donor. In the case of the ESA, on the IRS form used to open the account, it states: "The 'responsible individual"' named by the depositor shall be a parent or guardian of the designated beneficiary." Unless we are told that the grandparent has been appointed as legal guardian, there is a lack of control. And, even then, one thing the "responsible individual" cannot do that the donor to a 529 plan can is take the money back. Although the grandparent could be named the custodian of the UGMA or UTMA account, the only authority there is to make the investment decisions and disbursements until the termination age of the account.

21. The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations? A) There is a cash withdrawal in excess of the cost basis B) The policy is surrendered C) The death benefit is paid D) A loan is taken equal to 95% of the policy's cash value

D) A loan is taken equal to 95% of the policy's cash value Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the withdrawal. Although the death benefit will always be free of income tax, it could be subject to estate tax.

20. Which of the following stocks would probably be most appealing to a value investor? A) A stock with a relatively low dividend yield B) A stock with a relatively high price-to-book-value ratio C) A stock that has relatively high volatility D) A stock with a relatively low P/E ratio

D) A stock with a relatively low P/E ratio Value investors look for stocks in companies that have been overlooked or undervalued by other investors. They often focus on stocks with relatively low P/E ratios or price-to-book-value ratios or stocks with relatively high dividend yields compared with other stocks in the same industry.

17. Which of the following terms best describes ETNs and leveraged ETFs? A) Registered investment companies B) Forms of hedge funds C) Speculative investments D) Alternative investments

D) Alternative investments These are two popular alternative investments. Are they speculative? Yes, but there are many other speculative investments that are not considered alternative investments. The question asks for the best description and, although it might seem like a "close call", these are "alts". The leveraged ETF is a registered investment company, but the ETN is not.

22. One of your clients currently holds a short position in DEF common stock. Which of the following types of orders is designed to offer the client protection against loss? A) Sell stop B) Sell limit C) Buy limit D) Buy stop

D) Buy stop The risk to a short seller is to the upside (there is, at least theoretically, no limit as to how high the stock's price can go). To protect against an increase to the stock's price beyond the point the investor is willing to lose, it is wise to enter a buy stop order at that price. If the stock should reach that price, the order is triggered, a market order is entered, and the short position is closed out. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money.

24. One of your clients, a couple in their early 30s, asks you to recommend a plan to save for their newborn child's education. They are only able to contribute $1,800 per year. Which of the following would most likely be the best fit for their situation? A) UTMA B) Equity index annuity C) Section 529 plan D) Coverdell ESA

D) Coverdell ESA The key to this choice is the contribution level. The Coverdell ESA has a maximum annual limit of $2,000 and offers tax-free growth. Why not the Section 529 plan? Invariably, that will be the correct choice when the question involves higher contribution amounts or tax benefits on a state level. When the couple can only contribute $1,800 per year, it seems logical to assume that they are in a low tax bracket where those benefits would be of minimal value. UTMA offers less flexibility and the annuity would not be suitable for anyone wishing to use the funds prior to age 59½.

21. Dr. Howard dies. Which of the following life insurance policies will be included in his gross estate? Policy I—owned by Dr. Howard; he is the insured and his wife is the beneficiary. Policy II—owned by Mrs. Howard; she is the beneficiary. Policy III—originally owned by Dr. Howard; Mrs. Howard is the insured and he gave the policy to his daughter 5 years ago. Policy IV—owned by Dr. Howard; Mrs. Howard is the insured and he is the beneficiary. A) I and II B) I, II, III, and IV C) II and III D) I and IV

D) I and IV The question asks which will be included in the gross estate, not which policies will be part of the taxable estate. Any policies that are owned by the decedent at the date of death will be included in the decedent's gross estate. Of course, there may be a deduction from the gross estate for anything left to a spouse. Policy II was never owned by the decedent, therefore it is not included. Policy III is not included because it was given away more than 3 years before Dr. Howard's death.

A new client indicates a desire to avoid investing in mid-cap stocks because of large losses suffered several years ago. What type of consideration would this be? A) Systematic B) Unsystematic C) Financial D) Nonfinancial

D) Nonfinancial There are 2 basic investment considerations, financial and nonfinancial. The former deals largely with quantifiable items and the latter with attic attitudinal ones. Wanting to avoid a certain type of asset is generally considered to be attitudinal. The fact that the mid-cap stocks lost money is probably a systematic risk, but that isn't what the question is asking.

21. Which of the following statements regarding the alternative minimum tax is TRUE? A) The tax bracket will determine whether the regular tax or the alternative tax is paid. B) The lesser of the regular tax or the alternative tax is paid. C) The alternative minimum tax is added to the regular tax. D) The excess of the alternative tax over the regular tax is added to the regular tax.

D) The excess of the alternative tax over the regular tax is added to the regular tax. The excess of the alternative tax over the regular tax is added to the regular tax amount. The taxpayer does not have the option of paying the alternative tax or the regular tax depending on his tax bracket. The purpose of the alternative minimum tax is to ensure that certain taxpayers pay a tax consistent with their wealth and income.

22. Which of the following illustrates an example of positive margin? A) The investment purchased on margin is sold for a price above its original purchase price. B) The interest rate being charged on borrowings is less than the rate of inflation. C) The stock purchase is being paid for in full rather than by using borrowed funds. D) The rate of return on the investment exceeds the interest cost on the borrowed money.

D) The rate of return on the investment exceeds the interest cost on the borrowed money. Positive margin means that you were successful in your use of the leverage afforded by using margin (borrowed money). That means that the investor's total return exceeds the cost of the borrowed money. It is possible to actually sell the security for a price above its original purchase price, but not more than the total of the cost plus the interest. That would result in negative margin.

24. A nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees is called A) a payroll deduction plan. B) a defined contribution plan. C) a defined benefit plan. D) a SERP.

D) a SERP. A supplemental executive retirement plan (SERP) is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees. It is probably not a testable point, but these are frequently funded with cash value life insurance policies. Defined benefit and defined contribution plans are qualified - the question states, nonqualified. A payroll deduction plan is usually nonqualified, but that is most often used by lower income employees; it is definitely not an executive's plan.

24. Each of the following individuals is eligible to participate in a Keogh plan EXCEPT A) an engineer employed by a corporation who earns $5,000 making public speeches in her spare time B) a securities analyst employed by a major research organization who makes $2,000 giving lectures in his spare time C) a self-employed doctor in private practice D) an executive of a corporation who receives $5,000 in stock options from his company

D) an executive of a corporation who receives $5,000 in stock options from his company Individuals with income from self-employment may participate in Keogh plans. Stock options, capital gains, dividends, and interest are not considered income earned from self-employment.

17. If an investor was of the opinion that the market was going to have a bad day, to maximize that investor's gains, you might recommend A) selling a call option on the S&P 500 Index B) an inverse ETF C) a leveraged ETF D) an inverse leveraged ETF

D) an inverse leveraged ETF An inverse ETF should go up if the market goes down. Adding leverage to it means moving by a factor of 2x or 3x, so to maximize the potential gain, we combine leverage to the inverse and suggest the inverse leveraged ETF.

16. A farmer who produces soybeans believes that this year's crop will be the biggest ever. The farmer would most likely hedge this risk by A) going short soybean futures B) going long soybean futures C) going long soybean forwards D) going short soybean forwards

D) going short soybean forwards A big crop means more supply and lower prices when the crop is harvested. Hedging involves taking an opposite position (benefiting if prices fall). If the farmer is correct, selling short at today's price will enable delivery in the future at that higher price. Because this is a producer who will have product to deliver, forwards are likely to be more appropriate than futures.

An investor is considering a 10-year stripped U.S. Treasury and a 10-year U.S. Treasury note, both with a yield to maturity of 4.8%. Compared to the note, the strip has A) more interest rate risk and less liquidity risk. B) more liquidity risk and less interest rate risk. C) more reinvestment risk and less interest rate risk. D) less reinvestment risk and more interest rate risk

D) less reinvestment risk and more interest rate risk. The strip is a zero-coupon security so it has no cash flows to reinvest and therefore no reinvestment risk. However, it has more interest rate risk (longer duration) than the Treasury note. Remember, the duration of a zero-coupon bond is its maturity date while any debt security paying periodic interest (Treasury notes pay semiannually) will always have a duration shorter than its length to maturity.

Unit 1. The powers of the Administrator include the ability to determine A) maximum net capital requirements for broker-dealers B) minimum net worth requirements for agents who exercise discretion C) surety bond requirements for investment advisers who do not exercise discretion or maintain custody D) minimum net worth requirements for investment advisers

D) minimum net worth requirements for investment advisers The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. If the investment adviser does not exercise discretion (or maintain custody), no surety bond is required. Agents who exercise discretion may need a surety bond, but not a minimum net worth.

23. Bill will put money into stocks only if he expects that stock returns, over time, will outpace bond returns by some amount that compensates him for the added volatility of owning stocks. This reflects A) premium priced bonds B) option premium C) time premium D) risk premium

D) risk premium Investors will put money into stocks only if they expect that stock returns, over time, will outpace bond returns by some amount that compensates them for the added risk of owning stocks. This extra return from stocks is known as risk premium-literally, the premium an investor receives in exchange for owning a riskier, more volatile instrument.

20. A securities analyst who recommends allocating to industries based on changes to the business cycle would most likely be said to be A) a contrarian B) a tactician C) laddering D) sector rotating

D) sector rotating Sector rotation is the practice of changing investment emphasis based on patterns to the business cycle. Yes, this could be a form of tactical management, and if the analyst is investing opposite the cycle, the analyst could be contrarian. However, on the exam, you will sometimes have to choose from several answers that could be correct by selecting the one that is most likely to be correct.

Unit 2. An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm, all of the following statements are correct EXCEPT A) the broker-dealer would have to be registered as an investment adviser B) the agent would now come under a greater fiduciary responsibility C) the agent would be defined as an investment adviser representative D) the agent would be defined as an investment adviser

D) the agent would be defined as an investment adviser Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level. The agent would now become an IAR of the firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business.

23. One measure of an investor's total return is called holding period return. The computation includes both income and appreciation and is used for both debt and equity securities. An investor's holding period return would be less than the bond's yield to maturity if A) the investor purchased a put option on the bond B) the bond was called at a discount C) the bond was redeemed at a premium D) the coupons were reinvested at a rate below the yield to maturity

D) the coupons were reinvested at a rate below the yield to maturity The calculation of yield to maturity assumes reinvestment of the bond's interest at the coupon rate. Therefore, if the investor was only able to do less than that, the holding period return would be decreased. This is part of the concept of internal rate of return (IRR), which takes into consideration the time value of money (compounding). It is tempting to choose the answer "a call at a discount," but bonds are never called at a price below par. Just keep it simple: If the question says you can earn less than the YTM, your return will be lower than the quoted YTM.

15. Surrender charges may cause a reduction to all of the following EXCEPT A) the redemption value of Class B mutual fund shares B) the cash value of a variable life insurance policy C) the liquidation value of a variable annuity D) the death benefit of a variable life insurance policy

D) the death benefit of a variable life insurance policy Surrender charges never apply in the case of a death benefit. There may be a surrender charge in the case of early surrender of a variable annuity, taking out the cash value of a variable life policy, or redemption of Class B (back-end load) mutual fund shares.

Unit 10. The _____ rate of return compounds returns and takes into consideration the time value of money. ____ rate of return considers the inflation rate and risk-adjusted return is another way of stating the Sharpe ratio.

internal, real

Unit 3. Which of the following statements is NOT true? I. A broker-dealer must be a firm or corporation (legal person) as opposed to a natural person (human being). II. An investment adviser must be a firm or a corporation as opposed to a natural person. III. An investment adviser representative (IAR) cannot, under any circumstances, be employed by a registered broker-dealer. A) I, II, and III B) II and III C) I and II D) I and III

A) I, II, and III A broker-dealer or investment adviser can be either a natural person (i.e., organized as a sole proprietorship) or a legal person (i.e., a corporation or partnership). There is no prohibition against an investment adviser representative also being licensed as an agent with a broker-dealer.

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

A) accept unsolicited orders only 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.

Which of the following is NOT a valuation method for a fixed-income security? A) Conversion parity B) Price-to-earnings ratio C) Discounted cash flow D) Dividend discount model

B) Price-to-earnings ratio The P/E ratio is only used with common stock. The parity price is a way to value a convertible bond or convertible preferred stock. DCF is one of the most popular ways to value bonds. The DDM can be used with preferred stock, which, because of its fixed dividend, is considered in the general category of fixed-income security.

An application to register securities may be filed under the USA by any of these EXCEPT A) broker-dealer acting on behalf of the issuer B) an agent of a broker-dealer C) issuer D) person on whose behalf the offering is made

B) an agent of a broker-dealer Agents of broker-dealers are not eligible to file a registration statement for a securities offering. Registration statements may be filed by a broker-dealer, a person on whose behalf the offering is made (e.g., an offering made by a large shareholder), or more commonly, the issuer.

Unit7. It is unlawful for a state-registered investment adviser to do any of the following EXCEPT A) fail to disclose the departure of a general partner of an investment advisory partnership who only had a minority interest in the firm B) take custody of a client's securities and funds, in the absence of a rule on custody by the state Administrator C) unilaterally transfer an account to another firm if the assets fall below a minimum level D) share in the profits of an account in relation to the amount of time devoted to the account

B) take custody of a client's securities and funds, in the absence of a rule on custody by the state Administrator The NASAA Model Rule on Custody provides that an investment adviser may maintain custody over an advisory client's assets unless the Administrator, by rule, prohibits all advisers in his state from taking custody. Under the brochure rule, an investment adviser cannot share in the profits of an account based on time devoted and may not assign an account without the written permission of the client. An investment adviser organized as a partnership must disclose to clients when any partner, minority interest or not, departs from the firm.

Unit 7. A client of an investment adviser 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 dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers A) the loan would not be permitted under any circumstances B) the loan could only be made after the advisory contract was terminated C) the loan could be made if the IA was affiliated with a bank D) the loan could be made if the client was an institutional investor

B) the loan could only be made after the advisory contract was terminated 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 got 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.

Unit 7. A major stockholder of XYZ Corporation makes frequent purchases and sales of this stock on the open market to give the impression that it is actively traded. This unethical practice is best described as A) positioning B) wash trades C) pegging D) front running

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

An investment adviser representative has a client who prefers the safety of securities guaranteed by the U.S. Government, yet is concerned about volatility due to uncertainties in the future direction of interest rates. Which of the following recommendations would best address these concerns? A) Treasury STRIPS, maturing in 2036 B) 6% Treasury bond maturing in 2035 C) 8% Treasury bond maturing in 2036 D) 5% Treasury bond, maturing in 2037

C) 8% Treasury bond maturing in 2036 Generally speaking, those bonds with the highest coupons have the shortest duration, therefore, are the least subject to interest rate risk. STRIPS, which are zero-coupon bonds, are the most volatile because they have the longest duration.

Unit 12. Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend? A) Support and resistance B) Trend lines C) Moving averages D) Consolidation

C) Moving averages To avoid the volatility frequently present in stock price trends, analysts will frequently use moving averages. These averages reduce short-term distortions to a minimum.

Unit 7. An agent who carefully evaluates a client's risk tolerance, financial situation, and investment objectives engages in an unethical practice when he: A) buys or sells securities with exceptionally high commissions or transaction costs B) underestimates a company's interest rate risk as a result of cautious accounting practices recently adopted by the company C) automatically recommends securities that are highly regarded by other agents in the office D) fails to discuss a company's working capital position (because the client does not want to be bothered by details) if the securities are fundamentally suitable for his portfolio

C) automatically recommends securities that are highly regarded by other agents in the office It is a prohibited practice to automatically recommend securities without having a reasonable basis for the recommendation; other agents recommending the security is not a reasonable basis for recommendation. Purchasing securities with high transaction costs is not prohibited, provided that disclosure is made to the client. An agent is not required to describe all facts surrounding an investment, but he must present all those that are material. Regarding estimates of a company's interest rate risks, the representative did not misrepresent a material fact that would have otherwise precluded the client from purchasing the security.

Unit 7. Twenty-five individuals have formed an investment company. They have heard wonderful things about you as an investment adviser and ask if you would be interested in managing their portfolio. You reply that you would be interested but will only take the account if you can structure a compensation arrangement that calls for you to receive a base fee plus 18% of the profits to the extent that the account's performance exceeds a standard benchmark. Under the Uniform Securities Act, this type of agreement is allowable if A) the individual in charge of the investment company is a qualified investor B) a majority of the shareholders in the investment company are qualified investors C) the investment company has net worth of at least in excess of $2.1 million or will place at least $1 million in assets under management with the IA D) the contract is signed by one of the investors who is an accredited investor

C) the investment company has net worth of at least in excess of $2.1 million or will place at least $1 million in assets under management with the IA An investment adviser may enter into, extend, or renew an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds, or any portion of the funds, of the client if the client entering into the contract is: a natural person or a company who, immediately after entering into the contract, has at least $1 million under the management of the investment adviser; or a person who the investment adviser and its investment adviser representatives reasonably believe, immediately before entering into the contract, is a natural person or a company whose net worth, at the time the contract is entered into, exceeds $2,100,000. Do not be confused by thinking this is an institutional client (a registered investment company)—they need at least 100 investors and registration with the SEC.

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) GHI 7s of 2042 B) DEF 6s of 2041 C) JKL 4s of 2020 D) ABC 5s of 2040

D) ABC 5s of 2040 The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2040 through 2042, the bond with the lowest coupon will have the longest duration. The 4s of 2020 have a relatively short duration, even though their coupon is low.

According to the Investment Advisers Act of 1940, how can records of the investment adviser's business be stored during the first 2 years? I. In written form on site II. On microfilm on site III. On magnetic tape or computer on site IV. On computer disks at an offsite storage facility that requires 30 days' notice to retrieve A) I, II, III, and IV B) II and III C) I only D) I, II, and III

D) I, II, and III The act requires certain records of business activities to be kept for 5 years (the first 2 in a readily accessible place subject to SEC examination at any time). Records originated on paper may be microfilmed or microfiched, and records originated on computer may be stored electronically. The USA has the same rule, and in both cases, the key point is that any storage vehicle used must be able to generate a "hard" copy while the examiner is present. One other requirement applies to computer disks and that is that they cannot be rewritten.

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

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

Unit 3. Which of the following is not included in the definition of broker-dealer as found in the Uniform Securities Act? A) Banks B) Credit unions C) Investment advisers D) Attorneys

A) Banks In the Uniform Securities Act, it specifically states: "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. "Broker-dealer" does not include (1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company. Attorneys are excluded from the definition of investment adviser, as long as their advice is incidental to their legal practice, but that exclusion does not apply to the term "broker-dealer". Even though credit unions engage in banking activity, they are not included in the exclusion. Being an investment adviser does not exclude a person from the need to register as a broker-dealer if that person is performing the functions of a BD.

Which of the following are nonissuer transactions? I. An investment manager purchases 100,000 shares of XYZ on the NYSE. II. An investment adviser sells a block of YYY Corp. shares to an overseas investor in a private transaction. III. The president of Dot.com, Inc., sells his personal shares of Dot.com on the NYSE. IV. Dot.com purchases its own shares on the open market in order to place them in treasury. A) I, II, III, and IV B) III and IV C) I and II D) I only

A) I, II, III, and IV A nonissuer transaction is a transaction in which the proceeds do not directly or indirectly go to the issuer, as in a secondary transaction. When the investment manager purchases XYZ shares on the NYSE, the proceeds of the sale do not go to XYZ Corp. but to the investors who sold the stock. When an investment adviser sells YYY Corp. shares to an overseas private investment group, YYY Corp. does not benefit directly or indirectly because the proceeds go to the investment adviser, not to YYY Corp. When Dot.com purchases its own shares on the open market, the proceeds go to outside investors, not to Dot.com as the purchaser. However, if Dot.com resold its shares, the transaction would be an issuer transaction.

Unit 5. Under the Uniform Securities Act, a state securities Administrator who believes that a registered investment adviser representative is about to violate a provision of the act would initially A) issue a cease and desist order B) withdraw the investment adviser representative's license C) seek a court injunction to prevent the pending violation D) issue an order that permanently bars the investment adviser representative from conducting business in the state

A) issue a cease and desist order The Administrator would initiate action by issuing a cease and desist order. If the registered investment adviser representative continues to pursue activities that result in a violation of the USA, the Administrator may seek a court injunction to prevent the abuse.

15. Among the special characteristics of a universal life insurance policy is A) the policy may be overfunded B) early termination could lead to surrender charges C) that policyowners may borrow against the cash value D) death benefits may increase above the initial face amount

A) the policy may be overfunded In the case of universal life, the policyowner is permitted to pay in an amount in excess of the stated premiums (one of the reasons universal life is known as flexible premium life). The IRS puts limits on the amount of the overfunding before certain tax advantages are lost, but that is beyond the scope of the exam. Not only universal life, but variable life as well, has the possibility of increased death benefits. In fact, some whole life policies allow policy dividends to be used to increase the death benefit. Permanent forms of insurance policies, including whole life, universal life, and variable life, permit loans against the cash value. Many forms of life insurance have surrender charges for early termination.

Unit 7. An investment adviser may not have custody of a customer's funds and securities under the Uniform Securities Act if A) there is a rule in the state barring such custody B) the adviser is not a registered broker-dealer C) the customer fails to tell the adviser that he has custody D) the customer has not received a wrap fee brochure

A) there is a rule in the state barring such custody If there is a rule barring custody, under no circumstances may the adviser have custody of customer funds or securities. It is the adviser who must notify the customer that custody is being maintained, not the reverse.

Which of the following securities is NOT exempt from the registration procedures of the Uniform Securities Act? A) General obligation bonds issued by a city located in this state B) Variable annuities issued by an insurance company authorized to do business in this state C) Common stock issued by a public utility company whose rates are subject to state regulation D) Bonds issued by a church operating as a nonprofit organization under IRS Code Section 501(c)(3)

B) Variable annuities issued by an insurance company authorized to do business in this state Variable annuities are not exempt from state registration because the payments from the annuity are dependent on the performance of a segregated fund invested in securities. Municipal securities and regulated public utilities are exempt from registration. Securities issued by religious and charitable organizations are exempt from registration under the USA.

15. 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

B) by surrendering the policy, its cash value may be obtained Surrender of the contract requires the insurance company to pay out its cash value. Death benefit is adjusted annually.

Which of the following are required for an initial application for registration as an investment adviser? I. A consent to service of process II. A fee III. Disclosure as to whether the applicant will have discretionary powers over client funds and/or securities IV. Disclosure as to whether the applicant will have custody of client funds or securities A) I, II, and IV B) II only C) I, II, III, and IV D) I and II

C) I, II, III, and IV An initial application must contain a consent to service of process and a fee, and it must disclose whether the applicant will have discretionary powers over, or custody of, client funds and/or securities.

Unit 6 What is the appropriate procedure to follow when a customer fails to sign the form provided by the investment adviser stating that he has received a copy of the investment adviser's brochure? A) Proceed with the account; the signature is not required. B) Don't do anything with the account until the customer's signature acknowledging receipt of the brochure is received. C) Proceed with the account, but make a supervisory person aware of this. D) Only unsolicited orders may be accepted until the signed receipt is received.

C) Proceed with the account, but make a supervisory person aware of this. Although it is true that there is no legal requirement for a client to sign acknowledging receipt of the brochure, if it is the adviser's practice, the account may proceed, but only with notice to the appropriate supervisory person.

Of the following bonds, which has the greatest price volatility? A) AA corporate bond with 7 years to maturity B) Zero-coupon bond with 5 years to maturity C) Zero-coupon bond with 15 years to maturity D) Corporate bond fund

C) Zero-coupon bond with 15 years to maturity The longer the duration of a bond, the greater the volatility will be of its market price when interest rates change. Because zero-coupon bonds do not make interest payments but are priced at a deep discount to par value, they are more volatile than coupon-bearing bonds.

Unit 3. With regard to the state registration requirements of agents of registered broker-dealers, all of the following statements are correct except A) registration is required if they solicit the sale of securities by telephone to fewer than 6 individuals residing in that state B) registration is required when they limit their activity to the sale of exempt securities C) registration is required in each state in which the employing broker-dealer has a place of business D) 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

C) registration is required in each state in which the employing broker-dealer has a place of business 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.

Unit 10. The difference between present value and net present value represents A) the discounted cash flow B) the credit risk premium C) the initial cash outlay D) the internal rate of return

C) the initial cash outlay When computing the net present value, we remember that the word net means that something must be subtracted. The number subtracted is the initial cost of the investment.

Unit 12. Which of the following factors would be considered by an investor who uses fundamental analysis to value a company's stock? I. The company's financial condition, as revealed by its income statement and balance sheet II. General economic conditions, such as employment levels and changes in interest rates III. Charts showing past movements in stock prices and trading volumes A) II and III B) I and III C) I, II, and III D) I and II

D) I and II Fundamental analysis attempts to value stock by examining general economic conditions and the company's financial condition and growth prospects. Technical analysis, on the other hand, tries to identify trends and predict changes in the market. Charts showing past price movements and trading volumes would be used in technical analysis but not in fundamental analysis. Note fundamental analysis also heavily use financial ratios

Unit 5. Under the Uniform Securities Act, which of the following statements are TRUE about the authority of an Administrator? I. A cease and desist order may be issued prior to a hearing. II. A cease and desist order may be issued after a hearing. II. A cease and desist order is valid for a maximum of 30 days. A) I only B) I, II, and III C) II and III D) I and II

D) I and II 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.

A registered investment adviser has been investigated by the Administrator for fraudulent misrepresentations purportedly made to several clients. If the IA is found to have been in violation of the Uniform Securities Act, this may result in I. a $10,000 fine per violation II. a receiver being appointed over the adviser's assets III. a prison term of 5 years per violation IV. the requirement that the investment adviser make restitution to the victims A) I and III B) I and II C) III and IV D) II and IV

D) II and IV The Administrator may appoint a receiver over the investment adviser's assets and require the IA to make restitution to the victim. The maximum fine for a violation of the USA is $5,000, and the maximum prison term is 3 years.

Unit 4. Under the Uniform Securities Act, which of the following is NOT an exempt transaction? A) The sale of a non-Nasdaq over-the-counter stock to a closed-end investment company B) A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid C) A sale of securities by the executor of an estate D) The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer

D) The sale of U.S. government securities to an individual with a net worth in excess of $2 million by a registered government securities dealer In the case of a U.S. government security, the security is exempt, but the transaction is not. All the other choices are exempt transactions because they are either to an institutional investor, existing owners for no consideration, or by certain fiduciaries, such as an executor.

Unit 12. An analyst uses the dividend growth model to assist in determining appropriate stocks to recommend. This analyst would consider all of the following factors EXCEPT A) growth of the dividend B) required rate of return C) current dividend D) market capitalization

D) market capitalization The classic definition of the dividend growth model is "a stock valuation model that deals with dividends and their growth, discounted to today." The market capitalization is the number of outstanding shares multiplied by the current market price per share and has nothing to do with the company's dividend policies.

Unit 7. An elderly man who verbally tells his adviser that his son can trade while he's in the hospital or a client who signs a card stating that her secretary can trade while she is on vacation. In which of the following cases is a third-party trading authorization acceptable? A) A client's secretary presents a card signed by the client stating that the secretary can trade in the account while the client is on a business trip. B) The trades will be made through a broker-dealer under common control with the investment adviser. C) An investment adviser makes a hospital visit to a client who was critically injured. While there, the client gives oral instructions to permit her daughter to trade in the account. D) The spouse of a client sends an email to the investment adviser saying that the client has given authorization to the spouse to trade in the account.

A) A client's secretary presents a card signed by the client stating that the secretary can trade in the account while the client is on a business trip. Third-party trading authorization must be in writing; oral authority is never acceptable. If the email came from the client directly instead of the spouse, it would be acceptable.

Unit 4. Which of the following statements regarding unsolicited, nonissuer transactions is TRUE? A) An Administrator may require representatives to obtain customer signatures acknowledging that orders were unsolicited. B) An agent may not accept unsolicited orders unless the transaction directly benefits the issuer. C) An agent may only accept unsolicited orders with prior approval of a principal. D) An agent can only accept unsolicited orders in exempt securities.

A) An Administrator may require representatives to obtain customer signatures acknowledging that orders were unsolicited. Administrators are authorized by the USA to require agents to obtain written client acknowledgment of unsolicited transactions. An agent may accept unsolicited orders in secondary transactions in either exempt or nonexempt securities. An agent may accept unsolicited orders without prior approval of a principal; approval is necessary after the trade.

Unit 6. Beth Jamison is an agent and an IAR for Consolidated Wealth Planning, a FINRA member broker-dealer and SEC-registered investment adviser. An advisory client purchases 300 shares of RMBN and the sale is made from Consolidated's inventory. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) Beth would be required to obtain consent for this principal transaction if it was the subject of a recommendation. B) selling out of inventory to advisory clients would be considered an unethical business practice. C) the amount of commission charged for this transaction must be clearly disclosed. D) Beth must obtain written consent of any advisory client whenever a sale is made as principal.

A) Beth would be required to obtain consent for this principal transaction if it was the subject of a recommendation. When acting in the capacity of IA (or IAR), that is, when making recommendations or advising a client to purchase (or sell) a security, any transaction in which the firm is a principal requires disclosure in writing to and consent (can be oral) from the client prior to the completion of the trade. However, if merely accepting a client order (no advice rendered), consent is not required.

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

A) CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end). It is optional for: 1. pension consultants once their AUM reach $200 million; 2.small and mid-size advisers who would be required to register in 15 or more states; and 3. those advisers with at least $100 million in AUM, but not $110 million in AUM. Any of these choosing to register with the SEC are federal covered advisers and do not register with any state, although a notice filing may be required.

Unit6. Which of the following are prohibited practices? I. An investment adviser transferred a client's account to a brokerage house because the account went below the firm's minimum size and then informed the client. II. An investment adviser organized as a partnership did not inform its clients of the departure of a partner who had only a very small interest in the firm. III. An investment adviser subsidiary of a publicly traded bank holding company failed to inform its clients of the departure of the firm's chairman and major stockholder. IV. An investment adviser firm organized as a general partnership sends prompt notification to all clients after the addition of a new partner. A) I and II B) II and III C) III and IV D) I and IV

A) I and II Transfer or assignment of an advisory account without prior client consent is always prohibited. An investment adviser need not inform clients of departures of employees, senior or otherwise, from investment advisory firms that are incorporated. Clients must, however, be informed of the departure or addition of any partner if the firm is organized as a partnership. The legal requirement for this notification is "within a reasonable period of time," but there is nothing prohibited about doing it promptly.

Under NASAA Model Rule on Custody Requirements for Investment Advisers, which of the following are violations of the requirements for advisers who have custody of client securities or funds? I. An adviser deposits client funds into its own bank account, making a careful record of the amount of funds belonging to each client. II. An adviser allows a CPA to make an unscheduled audit of all client securities and funds in the adviser's custody. III. Once a year, an adviser sends each client a report on the securities and funds in the adviser's custody. A) I and III B) II and III C) I and II D) I, II, and III

A) I and III Client funds must be deposited in separate bank accounts. Each year, accounts must be audited by an independent public accountant in an unannounced examination. Clients must receive statements quarterly (not yearly). Clients must also be notified in writing of the location of their property and any change in that location. Client securities must be properly segregated and identified.

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

A) I and III 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.

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

A) II and III In general, an agent will only be registered with a single broker-dealer. However, the USA does permit registration with more than one under certain conditions. An agent must submit separate registrations for each broker-dealer with which he is registered, and an agent may be prevented from multiple registration in those states that prohibit dual or multiple registrations.

Unit 5. An individual has filed an application for registration as an agent with a broker-dealer in this state. Which of the following would be ample cause for the Administrator to deny the registration? I. Bankruptcy filing by the individual 5 years and 4 months ago II. Conviction for a felony committed less than 10 years ago III. Conviction for a misdemeanor involving the securities industry less than 8 years ago IV. The applicant is not a legal resident of this state A) II and III B) II and IV C) I and II D) I and IV

A) II and III The Administrator will deny an application for registration if the applicant has been convicted of a securities-related misdemeanor or any felony within the past 10 years. Bankruptcy is not a cause for denial, and one does not have to be a resident of a state in order to become licensed in that state.

Unit 7. MaryBeth is an agent with QuickTrade Securities, a subsidiary of QuickLoan Bankcorp, a holding company that also owns QuickIssue Capital Markets, an underwriter specializing in bringing new issues to market. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, MaryBeth would be permitted to split commissions resulting from securities transactions with any of the following individuals EXCEPT A) an agent properly registered with USATrade Securities B) another agent registered with QuickTrade Securities C) an agent registered with QuickIssue Capital Markets D) the principal supervising her activities at QuickTrade Securities

A) an agent properly registered with USATrade Securities Under the NASAA Policy, in order to split commissions, both individuals must be licensed as agents with either the same broker-dealer, or ones under common control (ownership). What about sharing with your principal? Why not? In fact, many managers (principals) have commission overrides as a fundamental part of their compensation package. Remember, as we state in your License Exam Manual, under the Uniform Securities Act, there is no separate principal registration as there is with FINRA; all principals are registered as agents (or IARs as the case may be), just the same as you.

Unit 4. All of the following are exempt transactions under the USA EXCEPT A) initial sale of shares to in-state residents of a local manufacturing company B) a securities transaction by an executor C) a rescission offer, sale, or purchase D) a sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator

A) initial sale of shares to in-state residents of a local manufacturing company 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, and purchase are exempt transactions.

Unit 3. Under the USA, each of the following is specifically excluded from the definition of a broker-dealer EXCEPT an A) investment adviser B) agent C) issuer D) international bank

A) investment adviser The USA specifically excludes agent/issuers and banks, international or domestic, from the definition of a broker-dealer. Investment advisers also may have to register as broker-dealers if their method of operation requires it.

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

A) the present value of the bond's future cash flows increases Bond valuations using discounted cash flow take into consideration the present value of the bond's future cash flows. That is, the greater the value of the interest payments to be received in the future, the higher the price of the bond. When market interest rates decline, because the coupon rate of the existing bond is fixed, the present value of those interest payments increases, creating a higher value for the bond.

Unit 1. A federal covered investment adviser has which of the following obligations regarding the state in which it maintains its principal place of business? I. It must notify the Administrator of its SEC registration. II. It must pay state-required filing fees. III. Its adviser representatives are exempt from state-required exams. IV. It must maintain net worth equal to the higher of federal requirements or those of the state. A) I only B) I and II C) I, II, III, and IV D) II only

B) I and II A federal covered investment adviser is required to notify the Administrator of its federal covered status and pay any state-required fees. The state may require examinations, such as the Series 65 or 66, but not a net worth in excess of that required under federal law.

Which of the following securities is (are) NOT subject to state registration under the Uniform Securities Act? I. Equipment trust certificates issued by a railroad subject to federal regulation II. Preferred stock of a bank holding company listed on the New York Stock Exchange III. Subordinated convertible debentures issued by the Dominion Electric Company of Canada, a public utility regulated by the Canadian federal government IV. Shares of a savings and loan institution authorized to do business in the state A) II and III B) I, II, III, and IV C) I only D) I, II, and III

B) I, II, III, and IV Securities exempt under the USA include bank issues, savings and loan issues, and common carriers or public utilities regulated by the U.S. or Canadian federal government. Securities issued by bank holding companies that trade on SEC-regulated exchanges are federal covered securities and are not subject to state registration.

Unit 4. Which of the following securities is (are) exempt from registration under the Uniform Securities Act? I. Municipal securities II. Government securities III. Stock or bonds issued by an insurance company authorized to do business in this state A) II and III B) I, II, and III C) I only D) I and III

B) I, II, and III All government and municipal securities are exempt from registration requirements under the Uniform Securities Act, as are insurance company securities if the company is authorized to do business in this state.

Under the Uniform Securities Act, which of the following statements are TRUE regarding private placements? I. They are offered to no more than 10 persons in a state in a 12-month period. II. They may be offered to an unlimited number of institutional investors. III. Institutional buyers need not be purchasing for investment. A) I, II, and III B) II and III C) I and III D) I and II

B) II and III Private placements are transactions resulting from offers to no more than 10 noninstitutional persons (retail clients) in 12 months for investment purposes only. The offeror must be convinced that buyers are purchasing for investment. This means no immediate resale intentions are allowed on the buyer's part. No commissions may be paid, directly or indirectly, for these transactions. However, sales to institutional purchasers are exempt from the limitations regarding number of sales, resale restrictions, and commissions. They may, therefore, be offered to more than 10 persons. (Remember that the term person is defined very broadly in the act.)

Joan owns and operates a jewelry store, and she has contracted to purchase 5,000 Swiss watches, paying the watch manufacturer in Swiss francs 3 months from the date of contract. To protect (hedge) her currency risk, she purchases call options on Swiss francs. Which of the following statements best describes her transaction in the Swiss franc calls in light of the USA? A) She has not engaged in a securities transaction because she purchased the options to hedge a business risk. B) She has engaged in a securities transaction because options on foreign currencies are considered to be securities under the USA. C) She has not engaged in a securities transaction because options on foreign currencies are not considered to be securities under the USA. D) She has engaged in a prohibited transaction because American investors are generally prohibited from trading in foreign currencies under the USA.

B) She has engaged in a securities transaction because options on foreign currencies are considered to be securities under the USA. Options, regardless of the underlying asset, are considered securities under the USA. Therefore, Joan engaged in a securities transaction by purchasing call options on the Swiss franc. While there is no prohibition against American investors trading in foreign currency options or futures under the USA, acquiring the currency itself, rather than the option, would not have involved a securities transaction; currency is not a security.

Unit 2. James Stillman is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. Stillman works out of an office in State P and has 4 retail clients there. In addition, Stillman has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Stillman would be required to register as an investment adviser representative in A) States D and M. B) State P. C) States P and O. D) States P, D, and M.

B) State P As an IAR for a federal covered investment adviser, Stillman is only required to register in those states in which he (Stillman) has a place of business. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state.

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

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

Investment adviser representatives are often called upon to help clients select an appropriate mutual fund. When making a recommendation, which of the following would not be a consideration? A) The fund investment objective B) The fund's net asset value per share C) The portfolio manager's tenure D) The fund's expense ratio

B) The fund's net asset value per share The price per share (NAV per share) of a fund is not a relevant factor when considering recommending a mutual fund. The fund's investment objective must align with that of the client and it is important to know if the fund's portfolio manager has just come aboard or has been managing the fund for a number of years. All other things equal, the IAR will generally look for the funds with lower expense ratios.

Unit 3. In which of the following cases would an individual representing an issuer in a transaction with a retail client be excluded from the Uniform Securities Act's definition of an agent? A) The individual sells shares of a public utility regulated in respect of its rates and charges by a governmental authority of the United States or any state. B) The individual successfully solicits an order from an insurance company to purchase 10,000 shares of the issuer's stock. C) The individual sells shares of a security issued by and representing an interest in a federal savings and loan association. D) The individual sells shares of a federal credit union.

B) The individual successfully solicits an order from an insurance company to purchase 10,000 shares of the issuer's stock. Individuals representing issuers in the sale of their securities may or may not be defined as agents. When the transaction is exempt, such as sale to an institution like an insurance company, the individual is not defined as an agent. There are two ways to earn the exclusion. One of them is when the transaction in the issuer's security is exempt. The other is when the issuer is in one of the five categories of exempt security listed in the USA. Each of the other three choices represents an exempt security, but none of the three are included in the USA's list of those where the individual representing the issuer is not an agent.

Unit 4. Which of the following statements relating to the general securities registration provisions of Section 305 of the Uniform Securities Act is most accurate? A) The registration is valid for 1 year from the effective date. B) The registration is valid for 1 year from the effective date, unless the underwriter or issuer still has some unsold shares. C) The registration is valid until the next December 31. D) The registration statement may be amended to increase the number of shares in the offering, as long as the share price is not raised by more than 10%.

B) The registration is valid for 1 year from the effective date, unless the underwriter or issuer still has some unsold shares. Every registration statement is effective for 1 year from its effective date, or any longer period during which the security is being offered or distributed by any underwriter or broker-dealer who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution. Furthermore, a registration statement may be amended after its effective date so as to increase the securities specified to be offered and sold, if the public offering price and the underwriters' discounts and commissions are not changed from the respective amounts of which the Administrator was informed.

Unit 4. Transactions meeting certain conditions are exempt from the Uniform Securities Act's registration and advertising filing requirements. Which of the following transactions does NOT meet those conditions to qualify as an exempt transaction? A) A sale of stock through a rights offering to existing shareholders of the issuing corporation if no commission is paid B) The sale of U.S. government securities to a retail client's IRA by a registered government securities dealer C) An offer of a security for which a registration statement has been filed but has not yet become effective D) A sale of securities by the executor of an estate

B) The sale of U.S. government securities to a retail client's IRA by a registered government securities dealer In the sale of U.S. government securities to a retail client, the security is exempt, but the transaction is not. Had the sale been to an institutional client, it would have been exempt. An offer is not a transaction.

Unit 11. The Federal Reserve Board has just taken action leading to an increase in interest rates. Which of the following industries is most likely to be affected adversely by this action? A) Defensive industries B) Utilities C) Heavy industries such as steel D) Cyclical industries

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

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

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

An investor reading the open-end investment company section of today's The Wall Street Journal sees that Bull in the Teashop Fund has a NAV of $10.65 and an offering price of $11.15. He knows that he would have received which of the following if his redemption order had been received by the fund prior to yesterday's market close? A) $11.15, less redemption fee, if any B) $10.65, less commission C) $10.65, less redemption fee, if any D) $10.65

C) $10.65, less redemption fee, if any An investor redeeming his shares will receive the NAV less any redemption fee that may be described in the prospectus. Investors redeeming through the fund are not charged a commission.

15. In a scheduled premium variable life insurance policy, which of the following are guaranteed? A) The ability to borrow a maximum of 75% of the cash value once the policy has been in force at least 3 years B) The right to exchange the policy for a permanent form of insurance with comparable benefits within the first 24 months of issue, as long as the insured passes a new physical examination C) A minimum death benefit D) A minimum cash value

C) A minimum death benefit In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance, but no physical is required. The 75% cash value loan is a minimum, not a maximum, and applies after the 3rd year of coverage.

Unit 4. Under the Uniform Securities Act, bonds issued by which of the following are nonexempt securities? A) Canadian national government B) Canadian city of Montreal C) ABC, Inc. of Canada, a distributor of beverages in the United States and other countries D) Canadian province of Ontario

C) ABC, Inc. of Canada, a distributor of beverages in the United States and other countries Government bonds issued by nations with which the U.S. maintains diplomatic relations, such as Canada, are exempt securities under the USA. In addition, securities issued by Canadian political subdivisions are also exempt from registration. For example, the province of Ontario and the city of Montreal are Canadian political subdivisions and therefore exempt. No exemption from the USA is available for corporate securities issued in countries with which the U.S. has diplomatic relations.

Unit 1. Under certain conditions, the Uniform Securities Act provides that an Administrator may require a minimum net worth standard be met by an investment adviser. Which of the following would be an allowable asset in the computation of an investment adviser's net worth? A) Copyrights B) Accounts payable C) Accounts receivable D) Advances or loans to partners in the case of an IA organized as a partnership

C) Accounts receivable For purposes of the USA, the term "net worth" means an excess of assets over liabilities, as determined by generally accepted accounting principles. Accounts receivable are a current asset, while accounts payable are a current liability. The USA specifically disallows intangibles, such as copyrights and goodwill, and advances or loans to partners (or officers if a corporation) are excluded as well.

Unit 3. Which of the following must register as an agent when representing a broker-dealer? A) An individual who represents an underwriter only in transactions between an issuer and the underwriter B) The telephone switchboard operator who directs orders to the appropriate extension C) An employee who accepts unsolicited orders from institutional clients D) A partner of a broker-dealer who has no securities sales functions

C) An employee who accepts unsolicited orders from institutional clients An employee of a broker-dealer who accepts orders must register as an agent. The fact that it is unsolicited and/or from an institution (making them exempt transactions) has no bearing on the requirement for the individual to register as an agent. A partner of a broker-dealer with no securities sales functions and an individual who represents an underwriter only in transactions between an issuer and the underwriter need not register. Individuals whose function is strictly clerical do not register as agents.

Unit 7.An investment adviser new to the business is engaged by an elderly client who, on the grounds of privacy, refuses to disclose his annual income or net worth. The client merely asks the adviser to establish and manage a $50,000 portfolio. If the client brings a cashier's check for $50,000 to the initial meeting, which choice below reflects the best action on the part of the adviser? A) Accept the client but acknowledge in writing the client's refusal to provide financial information B) Decline the client because he is difficult to work with C) Decline the client, recognizing that you cannot effectively determine suitability in the absence of financial information D) Accept the client but only allocate his funds to money market type securities

C) Decline the client, recognizing that you cannot effectively determine suitability in the absence of financial information An investment adviser cannot perform effectively for a client who refuses to provide information necessary for determining the suitability of investments or a portfolio. Unlike the broker-dealer, who may act merely as order filler, the investment adviser has a fiduciary responsibility and is obligated to determine suitability.

15. Which of the following statements concerning universal life insurance are CORRECT? I. Universal life has flexible premiums. II. Universal life is based on the assumption that level annual premiums are to be paid throughout the insured's life. III. The death benefit can fluctuate, but never below the guaranteed minimum face amount. IV. Cash values can fluctuate and may even fall to zero. A) I and II B) III and IV C) I and IV D) II and III

C) I and IV Universal life features flexible premiums that add to the cash value account, although there are no guarantees and the cash value can disappear if insufficient premiums are paid. There is no guaranteed minimum death benefit as there is with fixed (scheduled) premium variable life. The assumption that level annual premiums are to be paid throughout the insured's life is associated only with ordinary whole life and scheduled premium variable life policies.

An Administrator has specific authority under the USA to I. suspend the registration of a security if the suspension is in the public interest and the offering has excessive underwriting fees II. issue emergency injunctions to prevent a violation of the act III. enforce subpoenas in the state at request of an Administrator of another state for alleged violations that occurred in another state IV. require that the proceeds from an offering be held in escrow until the issuer receives a certain percentage of the sale of the securities offered A) I only B) II and III C) I, III, and IV D) I, II, and IV

C) I, III, and IV The Administrator may impound the proceeds of an offering in an escrow account until the issuer receives a specified amount. The Administrator may also suspend a security's registration if excessive fees or commissions are charged as part of the offering. State Administrators have the authority to cooperate with each other in enforcing the provisions of USA by ensuring that the subpoenas from other states are enforced. Injunctions are judicial orders that can only be issued by a court of law, not by an administrative agency such as a state securities Administrator.

15. A risk faced by many seniors is longevity risk. What security would be most appropriate to protect against that risk? A) Common stock B) REIT C) Variable annuity D) Fixed annuity

C) Variable annuity Longevity risk is the uncertainty that one will outlive his money. The only instrument that guarantees a payout for as long as one lives is an annuity. Because the question asks for a security, only the variable annuity is correct, otherwise the fixed annuity would also offer protection.

Unit 11. Among the provisions of the Investment Company Act of 1940 designed to protect the interests of investors is the provision that A) for diversification purposes, an investment company may own up to 10% of the shares of another investment company B) communications with the public must be approved by FINRA before its use C) any change in fundamental investment policy must be approved by stockholders D) selection of company investments must be approved by SEC

C) any change in fundamental investment policy must be approved by stockholders One of the requirements of the Investment Company Act of 1940 is that an investment company cannot change its investment policy without approval of a majority vote of the shareholders. For example, the board of directors of a growth fund could not change the fund's investment objective to income without that approval. This has the effect of offering protection to the investors that they won't be "blindsided" by the board or the portfolio manager. On this exam, you shouldn't expect to see anything "approved" by the SEC as a correct answer. An investment company may own up to 3% of another investment company, not 10%. Even though FINRA rules do require approval of investment company communications with the public, such approval is not part of the Investment Company Act of 1940.

Unit 2. An individual is employed by a federal covered investment adviser for the sole purpose of giving advice related to monitoring investment portfolios, but only to qualified employee benefit plans. Under the Uniform Securities Act, this individual is A) defined as an IAR because the plan is qualified B) not defined as an IAR because the plan is considered an institutional client C) defined as an IAR because the individual is rendering investment advice D) not defined as an IAR because the individual works for a federal covered investment adviser

C) defined as an IAR because the individual is rendering investment advice Regardless of whom the advice is given to, unless there is some kind of exemption involved, individuals working for IAs (state or federal) must register as IARs in at least one state. It makes no difference if the plan is qualified or not.

Unit 11. You have been following GEMCO stock for the past couple of months and notice a recent increase in the stock's volatility. In the past month, several negative reports have been published about GEMCO's product line. This has caused a drop in the market price of the stock even though the GEMCO has just reported earnings that exceeded analyst's projections. This is an example of A) volatility risk B) financial risk C) market risk D) purchasing power risk

C) market risk Market risk is the uncertainty that a stock's price will move in a manner unrelated to the company's fundamentals. A prime example of this is when earnings go one way and the stock price the other. What we are not told in the question is the performance of the stock market. It is likely that the overall market has declined over this period (and that must be assumed here—poor test question writing). Financial risk is, as the name indicates, related to financing circumstances. This typically occurs when a company is overleveraged and may not be able to cover its debt service. Another financial risk is lack of cash flow, but nothing in this question indicates that situation.

Unit 3. The Affray Compassionate Finance Company (ACFC) is offering $100 million of 150-day commercial paper for sale in State L. The paper is available in minimum denominations of $100,000 and has been rated AA by a leading rating organization. Who of the following would be required to register as an agent in State L in order to legally sell this security in the state? A) Because this security is exempt from registration, offers and sales can be made without registration as an agent. B) An employee of the Affray Compassionate Finance Company who receives a 1% commission on sales. C) An investment adviser who recommends this security to clients. D) An agent of a broker-dealer registered in the state.

D) An agent of a broker-dealer registered in the state. Those individuals who represent broker-dealers registered in the state must register as agents in that state if they wish to sell securities to that state's residents. It makes no difference what kind of security it is or to whom the security is being sold. Yes, this is an exempt security (less than 270 days' maturity; minimum $50,000 denomination; rating in the top 3 grades), but that only means that the security does not have to register. An exclusion from the definition of agent is given to those who represent issuers of certain exempt securities. Commercial paper is one of the 5 cases where this exclusion applies so ACFC's employee would not be defined as an agent. This is true even though compensation is being received. Investment advisers don't register as agents if all they do is give investment advice.

1. Which of the following statements regarding registration of investment advisers is (are) TRUE under the Investment Advisers Act of 1940? I. If any material information filed in the registration becomes inaccurate, an amendment must be filed promptly. II. If any nonmaterial information filed on Form ADV changes, an amendment must be filed within 90 days of the end of the fiscal year. III.Material information requires a prompt amendment, but nonmaterial changes do not require amendment. A) III only B) II only C) I only D) I and II

D) I and II The SEC requires prompt amendment of any material information changes on Form ADV (e.g., names, location, control, custody, organization) and also requires nonmaterial amendments within 90 days of the end of the adviser's fiscal year.

Unit 1. Under the Uniform Securities Act, requirements for registration as an investment adviser in a state include which of the following? I. The Administrator may require an announcement of the application for registration in one or more newspapers in the state. II. Minimum financial requirements for federal covered advisers with a place of business in the state who have custody of customer funds and/or securities, or have discretionary authority over customer accounts. III. For those needing a surety bond, it must provide that any customer who can prove a violation is entitled to collect against the bond. A) II and III B) I and II C) I, II, and III D) I and III

D) I and III A published announcement may be required by the Administrator. The Administrator may not impose any financial requirements upon federal covered advisers (other than to pay a fee when notice filing). The USA has specific wording requiring that customers who can prove they were the subject of a violation by the IA are entitled to collect against the bond.

Which of the following situations would require registration as an investment adviser? I. A broker-dealer provided investment research services to a customer and charged a fee for the service. II. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. III. A broker-dealer has its agents prepare complete financial plans for customers for a nominal fee. The plans recommend specific securities transactions, and when the customers place orders, the agents earn commissions on those securities transactions. IV. A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed. A) I, II, III, and IV B) I only C) I, III, and IV D) I and III

D) I and III Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. Preparing a complete financial plan for a customer goes beyond being solely incidental to conducting a brokerage business and would require registration as an investment adviser because a fee was charged, even if only a nominal one. Although not asked in this question, those agents would also have to register as IARs. Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.

Unit 4. Under the Securities Act of 1933, when registering securities with the SEC, who must sign the registration statement? I. The chief executive officer (CEO) II. The chief operating officer (COO) III. A majority of the board IV. The chief financial officer (CFO) A) I, II, III, and IV B) I and IV C) I, II, and IV D) I, III, and IV

D) I, III, and IV The principal executives of the company involved with money and a majority of the board of directors are required to sign the registration statement attesting to the facts presented as being true to the best of their knowledge and belief. This includes the chief executive officer, chief financial officer, and a majority of the board, but not the chief operating officer.

Unit 7. Abel Kane is an agent for Garden City Securities, a broker-dealer registered with the SEC and all 50 states. It would be considered an unethical or dishonest business practice for Kane to fail to make prompt delivery of certificates when requested by the customer I. fail to obtain written authorization for a discretionary account prior to the first trade in that account II. accept an order from a client's spouse without written trading III. authorization prior to receiving the order IV. share commissions with another agent registered with Garden City Securities A) III and IV B) I, II, and III C) I and IV D) II and III

D) II and III This question is tricky. The key here is that agents have no responsibility for delivering customer securities. That is an obligation of the broker-dealer.

Unit 4. A notice filing would be most appropriate for which of the following new issues? A) Railroad equipment trust certificate B) Federal credit union shares C) Intrastate offering D) Open-end investment company shares

D) Open-end investment company shares Investment companies registered under the Investment Company Act of 1940 are exempt from registration with the states under the NSMIA. However, most states require notice filing and the payment of fees. Federal credit union shares and railroad equipment trust certificates are exempt securities and intrastate issues would have to register using qualification.