Series 65

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

D) II and III When a dividend is paid, total assets are decreased as are total liabilities. The liabilities were increased at declaration time and are now decreased to reflect the payout. The two accounts affected would be decrease cash and decrease dividend payable.

A widower wants to fund a Section 529 plan for his daughter. What is the maximum amount he may initially contribute in 2019 without having to pay gift taxes? A) $75,000 B) $15,000 C) An unlimited amount because a gift occurs only when he irrevocably changes the beneficiary D) $150,000

A) $75,000 A special rule under Section 529 allows the donor to load front-end load contributions and avoid paying gift taxes. Five years' worth may be used under this method (5 × $15,000 = $75,000). If he remarries, his wife may also consent to gift split, thereby doubling this amount to $150,000. Please note: The annual exclusion was increased to $15,000 effective January 1, 2018.

How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940? A) Annually B) Monthly C) Semiannually D) Quarterly

A) Annually Registered investment companies are similar to other publicly registered entities in that an annual audited report must be filed with the SEC.

The Uniform Securities Act specifically exempts certain issues from the registration and advertising filing requirements of the act. Which of the following securities does NOT carry that exemption? A) Bank holding company stock B) Canadian government bond C) 6-month commercial paper D) Tax-free municipal bond

A) Bank holding company stock The securities of banks, trust companies, and savings institutions are exempt; the securities of bank holding companies are not. Commercial paper with a maturity of 270 days or less is also included in the list of exempted securities.

Which type of risk is a mortgage-backed security most likely to experience? A) Reinvestment risk B) Market risk C) Exchange rate risk D) Business

A) Reinvestment risk A mortgage-backed security, such as a Ginnie Mae, is most likely to experience reinvestment rate risk. As mortgages are paid off early and refinanced in the event of declining interest rates, the interim cash flows received from the obligation must be reinvested in lower-yielding securities. This is the practical effect of prepayment risk.

Jim is buying stock through a private placement. Under the Securities Act of 1933, which of the following statements is TRUE? A) The stock need not be registered with the SEC. B) Jim must notify the SEC that he is buying private placement securities. C) The stock must first be fully registered with the SEC. D) Jim will receive a letter stating his ownership.

A) The stock need not be registered with the SEC. Private placements are exempt transactions under Regulation D of the Securities Act of 1933 and are therefore exempt from registration.

Investment companies must send financial reports to shareholders A) semiannually B) annually C) quarterly D) monthly

A) semiannually Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report.

ne business succession issue that applies to virtually all investment advisers is A) permanent disability of a member of the board of directors B) departure of a partner holding a majority interest C) death of the sole proprietor D) loss of the designated regulatory contact person

All investment advisers must have a designated regulatory contact person. Only sole proprietorships are affected by the death of that sole person. Disability or death of a member of the board of directors will probably have no effect on succession, and only partnerships are concerned with a partner (of any size) leaving. D) loss of the designated regulatory contact person

The economic theory that says economic growth results from lower tax rates and lower government spending is A) Keynesian theory B) supply-side theory C) monetary theory D) demand-side theory

B) supply-side theory Supply-side economics is the theory of Arthur Laffer, who believed that heavy taxing and government intervention have a negative effect on the economy.

Who is obligated for the payment of taxes in an UTMA account? A) Custodian B) Donor C) Child D) Parent

C) Child UTMA and UGMA accounts are custodial accounts. They are for the benefit of the child and bear the child's Social Security number. Although in practice the taxes are usually paid by the parent or legal guardian, they are the responsibility of the beneficial minor (child).

If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely A) It cannot be determined from the information given B) decrease C) increase D) remain unchanged

C) increase Most mutual funds do not have 100% of their assets in securities, and they continually receive new money from investors. Any increase in the general interest rate would allow the fund to purchase new, higher-yielding instruments, which would increase the fund's income.

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) share in the profits of an account in relation to the amount of time devoted to the account C) take custody of a client's securities and funds, in the absence of a rule on custody by the state Administrator D) unilaterally transfer an account to another firm if the assets fall below a minimum level

C) 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.

The Uniform Securities Act defines a guaranteed security as one A) where a party other than the issuer offers a guarantee that investors are assured of never receiving less than their original investment B) involving a guarantee of a minimum profit by a party other than the issuer C) where the payment of interest and principal (bond) or dividend (stock) is guaranteed by a party other than the issuer D) that may only be sold to institutional investors

C) where the payment of interest and principal (bond) or dividend (stock) is guaranteed by a party other than the issuer This is simply the definition of a guaranteed security. The one thing not guaranteed is a profit (capital gain).

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

B) 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.

Under federal law, the statute of limitations for civil liability is A) 2 years after the action B) 2 years after discovery or 3 years after the action, whichever is sooner C) 1 year after discovery of the action D) 1 year after discovery or 3 years after the action, whichever is sooner

D) 1 year after discovery or 3 years after the action, whichever is sooner In the federal regulations, the statute of limitations for a civil action is the sooner of 1 year after discovery or 3 years after the action. Under the USA, it is the sooner of 2 years after discovery or 3 years after the action.

Which one of the following statements regarding a characteristic or use of a Roth IRA is CORRECT? A) Like regular IRAs, Roth IRA contributions may not be made after the participant attains age 70½. B) Roth IRAs are not subject to the minimum distribution rules until the death of the owner-participant of the plan. C) Like regular IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan. D) Roth IRA withdrawals are tax-deferred in their entirety regardless of the participant's age at withdrawal.

Unlike the regular or traditional form of IRA, Roth IRAs are not subject to the minimum distribution rules upon the participant attaining age 70½. Rather, distributions need not be made until the death of the owner/participant. For a Roth IRA withdrawal to be entirely tax free, it must be made after a 5-year holding period and after the participant reaches age 59½. B) Roth IRAs are not subject to the minimum distribution rules until the death of the owner-participant of the plan.

According to North American Securities Administrators Association's (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following practices is NOT unethical? A) An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without expressed written discretionary authority. B) An agent sold shares at a price less than authorized by a client. C) To protect the client in a declining market, an agent sold all shares in the client's account when the client had only authorized the sale of 30% of the shares. D) Within the first 10 days of a client's initial transaction, an agent accepted oral discretion and purchased securities on behalf of the client.

A) An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without expressed written discretionary authority. An agent of a broker-dealer may exercise discretion in deciding the time or the price at which a sale takes place during the trading day without express written discretionary authority. Such action is not unethical because time and price are not considered true discretion. An agent may not exercise discretion over the number of shares to be sold without prior written discretionary authority. Oral discretion is only permitted for investment advisers and their representatives (never broker-dealers or agents) during the first 10 business days after the initial discretionary transaction in the account.

The Conference Board releases information about the economy on a periodic basis. Included are a number of different indicators. These indicators can be used to predict how the economy as a whole might change. Which of the following would be considered a leading indicator? A) Stock prices as measured by a broad index such as the S&P 500 B) Gross domestic product C) CPI for services D) Industrial production

A) Stock prices as measured by a broad index such as the S&P 500 The stock market, which anticipates economy activity, is a leading economic indicator. Industrial production is a coincident, or current, economic indicator. CPI for services is a lagging indicator. GDP is not included in the Conference Board's list of economic indicators.

Which of the following statements regarding nonqualified annuities is CORRECT? A) Because only insurance companies issue variable annuities, they are not considered securities. B) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. C) The exclusion ratio applies to accumulation units only. D) Because taxes on earnings are deferred, all money withdrawn will be subject to income tax when received.

B) It is possible to receive distributions from an annuity before age 59½ without incurring tax penalties. Nonqualified annuities, fixed or variable, are those where contributions are made with after-tax dollars. Withdrawals due to death or disability or taking substantially equal annuity distributions over the life of the insured can begin before age 59½ without being subject to a tax penalty. The exclusion ratio only applies during the payout period. Even though taxes on earnings are deferred, that portion of the withdrawal that represents a return of principal on a nonqualified annuity, is not subject to tax or penalty.

The main purpose of dividend reinvestment in a mutual fund accumulation plan is to A) avoid commissions or sales charges B) protect against capital loss C) compound the growth of a mutual fund investment D) avoid taxes

C) compound the growth of a mutual fund investment Reinvesting dividends compounds the growth of the fund with periodic purchases of new shares. Taxes are due on dividends whether or not they are reinvested. Capital gains or losses will occur whether or not dividends are reinvested. The purchase of additional shares with reinvested dividends may increase the capital gain or loss in proportion to the dividends reinvested. Avoiding commissions or sales charges is not the main rationale for reinvesting dividends, even though sales charges are not applied to reinvested dividends.

To make a quantitative evaluation using the present value computation, which of the following is NOT needed? A) Anticipated rate of return of the portfolio B) Account value at the end of the period C) Time period involved D) Account value at the beginning of the period

D) Account value at the beginning of the period Present value is calculated to determine the amount required now to have a specified value at some time in the future. It is what we are looking for so we don't have it now.

A U.S. citizen purchases a bond issued by the government of Sweden. The interest payments received are taxed at which of the following levels? Federal State Local A) II and III B) II only C) I only D) I, II, and III

D) I, II, and III Interest on foreign bonds is taxed in the United States by federal, state, and local governments.

One of your clients is discussing various options for funding his IRA. Current tax law would permit investing in which of the following vehicles? Collectible stamps issued by the U.S. Postal Service Gold or silver coins minted by the U.S. Treasury Department Fixed annuities REITs A) II and IV B) I and III C) I, II, III, and IV D) II, III, and IV

D) II, III, and IV In general, investments in collectibles are not permitted in IRAs. The one major exception is U.S. gold and silver coins minted by the Treasury Department. Although some might object to placing an annuity into a tax-deferred plan because it is already tax deferred, there could be a good reason for its inclusion and, more important for this question, it is permitted.

One of the major financial decisions to be made by a family is the amount and type of life insurance to purchase. The form of insurance that offers flexible premiums without a fixed cash value is A) term life. B) variable life. C) whole life. D) universal life

D) universal life A unique feature of universal life is that the premiums are flexible. That is, if the client wishes to pay more or less than the target premium, that may be done. However, the nature of the universal life product is such that cash values can fluctuate. Cash values can fluctuate in variable life, but unless the policy is UVL (universal variable life), premiums are scheduled (fixed). Typically there are no cash values with term insurance and the premiums are fixed and whole life has both fixed premiums and guaranteed cash values.

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) it may contribute a specified percentage of the employee's pay to the Roth 401(k) B) it may contribute a specified percentage of the employee's pay to a regular 401(k) C) current tax law does not permit matching contributions to be made on behalf of any employee participating in a Roth 401(k) plan D) 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 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.

If the required rate of return is higher than anticipated in a present value calculation, the effect would be that? A) the future value would be higher B) the present value would be lower C) the present value would be higher D) the yield to maturity would increase

B) the present value would be lower Try to follow me on this one. The present value computation is used to determine how much money must be deposited now (in the present) to reach a specified future goal when you know how many years you have to reach that goal. One critical component of the formula is the rate of return. As a simple example, if you need $100,000 in 18 years for your newborn's college education and you expect to earn 4%, using the rule of 72, you'll have to deposit $50,000 now (present value) to reach the goal. However, if it turns out that the earnings rate is higher than anticipated—say, 8%—you would only need to deposit half as much today ($25,000). Therefore, we answer this question by indicating that a higher rate of return will require a lower present value (deposit).

Registration with the state as an investment adviser would be required for a person with an office in this state who A) manages the portfolio of the KPF Balanced Fund, a registered open-end investment company with $22 million in net assets B) serves as a pension consultant to the XYZ Employees Retirement Plan, covering 1,200 employees with total assets of $278 million C) manages $13 million in assets for 4 clients D) only gives advice on securities issued by or guaranteed by the government of the United States

C) manages $13 million in assets for 4 clients Under the Dodd-Frank Bill, investment advisers with less than $100 million in assets under management must register with the states. If the adviser manages a registered investment company, the adviser must be federal covered. If the person serves as a pension consultant with $200 million or more in AUM, the person has the option of registering with the SEC. A person whose sole advice deals with U.S. government securities is excluded from the federal definition of investment adviser and, therefore, under the NSMIA, is considered a federal covered adviser.

According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, in which of the following situations has an agent acted improperly in placing a client's order? A) A client sends a letter about an extended business trip stating that in her absence, she wants the agent to accept orders from her husband, which the agent does. B) An elderly client with an individual account is in the hospital, and her daughter calls the agent to request a liquidation of assets to provide $10,000 for the payment of medical expenses. The agent refuses to place the order. C) After a client's death, an agent receives instruction from a court-appointed administrator to liquidate the account; the agent sells all securities in the account at a loss. D) A client asks the agent to buy 1,000 shares of a specific high-quality technology stock this week for her nondiscretionary account. The agent places an order promptly for 1,500 shares because the market has begun to take off. By the end of the day, the stock is 5 points higher than the purchase price.

D) A client asks the agent to buy 1,000 shares of a specific high-quality technology stock this week for her nondiscretionary account. The agent places an order promptly for 1,500 shares because the market has begun to take off. By the end of the day, the stock is 5 points higher than the purchase price. The agent exercised unauthorized discretion by changing the client's order for 1,000 shares without having trading authorization or power of attorney. This is a violation of ethics. In the first situation, the client authorized in writing a third party, the husband, to make decisions in her account. In the second situation, the administrator has been properly authorized, by the court, to manage the assets and make decisions. In the fourth situation, the agent acted correctly in refusing the order from someone other than the owner. The daughter had neither been legally authorized by the client to act in the account, nor had a court appointed her as guardian. This is a common problem when an account owner becomes incapacitated.

The XYZ Corporation's income statement contains the following information: Total revenue $200,000 Cost of goods sold 60,000 Administrative expenses 30,000 Depreciation 10,000 Miscellaneous expenses 3,000 Taxes paid 5,000 Based on this information, XYZ's gross profit is A) $97,000 B) $140,000 C) $110,000 D) $100,000

Gross profit is sales (or revenues) minus the cost of goods sold (COGS). When the depreciation expense relates to the equipment used directly in the production of the sales, it is included in COGS. In this question, there is no choice of $130,000 (which would include depreciation in COGS). Clearly, by not including that choice, NASAA is taking the position that depreciation is excluded from COGS. B) $140,000

Both the Investment Advisers Act of 1940 and SEC Release IA-1092 specifically exclude from the definition of "investment adviser" certain persons who provide investment advice solely incidental to the practice of their profession. Which of the following would NOT by definition qualify for this exclusion? An accountant who provides high-tax-bracket clients with a useful chart showing them how to compute the tax-equivalent yield for municipal bonds A divorce attorney who, after obtaining settlements for clients, provides them with a list of suggested investment alternatives encouraging them to be prudent with their newfound wealth A university professor who provides investment advice for a substantial fee to fewer than 15 clients during any consecutive 12-month period, none of whom is an investment company An economist who consults with very large corporate employee benefit plans on how to best invest their funds A) III and IV B) I and II C) I and IV D) II and III

The university professor loses the exclusion as soon as the advice is no longer incidental to the practice of the profession (which it clearly is here, regardless of the number of clients). The list of professions qualifying for the exclusion does not include an economist, who in this case would be included in the definition as a pension consultant. The key to remember is the acronym "LATE"—lawyer, accountant, teacher, and engineer. A) III and IV