Series 65 final Exam prep *

What is the term generally given by analysts to the number generated by the addition of a company's annual depreciation expense to its net income? A) Cash flow B) Working capital C) Dividend payout ratio D) Book value per share

A (Cash flow from operations is the sum of net income plus non-expended business expenses such as depreciation.)

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

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

Most states have replaced the Uniform Gifts to Minors Act (UGMA) with the Uniform Transfers to Minors Act (UTMA). One of the major advantages of UTMA is A) greater flexibility in the choice of investments B) better tax benefits C) the beneficiary has access to the account at an earlier age D) reduced fiduciary exposure to the custodian

A (While UGMA only permits gifts of cash and securities, other property, such as real estate and limited partnership interests, may be held in UTMA accounts. Taxation is the same, as is the fiduciary liability of the custodian. In most cases, the beneficiary has access to a UTMA account at a later age than was the case with UGMA.)

One of your customers purchased a TIPS bond three years ago. The bond's nominal yield is 4% and inflation has averaged 6% over the holding period. The interest payment at the end of the three years would be closest to A) $23.88 B) $47.76 C) $23.60 D) $33.78

A (With a TIPS bond, the principal is adjusted every six months by the inflation rate. When that rate is 6%, there is a 3% semiannual adjustment. Multiplying the $1,000 par value times 103% six times (there are six semiannual adjustments in three years) results in a principal value just over $1,194. Because the 4% coupon rate is paid semiannually, the payment at the end of three years will be the adjusted principal of $1,194 times 2%, and that equals $23.88. For testing purposes, you can always arrive at the correct answer by using simple instead of compounded interest. That is, with a 6% annual inflation rate, the bond's principal will increase by $60 per year for three years. That would make the adjusted principal $1,180. Take 2% of that and the result is $23.60. The correct answer will always be the next greater number.)

Which of the following is a prohibited action under the Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) Notifying the Administrator that the adviser intends to maintain custody of customer securities B) Claiming that advisory fees are negotiable, but maintaining a fixed fee schedule C) Determining the price and time of execution of customer orders without written discretionary authority D) Depositing securities or cash with the Administrator in lieu of a required surety bond Explanation

B (If an adviser states that fees are negotiable but charges his fixed rates, that would be an unfair business practice. Time and price are not considered discretion.)

The weak form of the efficient market hypothesis A) reinforces the value of technical analysis. B) implies that technical analysis is not worthwhile. C) implies that inside traders cannot earn superior risk-adjusted returns. D) implies that fundamental analysis is not worthwhile.

B (The weak form implies that information contained in historical stock prices is fully incorporated into current stock prices; therefore, technical analysis (the study of historical prices and volume) is not worthwhile in predicting future prices. This form neither refutes fundamental analysis nor implies that traders using insider information cannot earn superior profits.)

Which of the following would offer your client check-writing privileges and FDIC insurance coverage? A) GIC B) DDA C) Government securities money market fund D) Negotiable CD

B (DDA stands for demand deposit account, most commonly, a bank checking account. It, like all other bank accounts, carries FDIC insurance. GICs offer neither. Money market funds offer check-writing, but no FDIC coverage; negotiable CDs offer FDIC coverage, but no check-writing.)

If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A) AAA bonds B) Tangible assets C) Preferred stock D) Fixed annuities

B (Tangible assets, such as real estate, precious metals, and other commodities, tend to keep pace with inflation. Fixed-dollar investments do not.)

Looking at the balance sheet, a corporation builds its capital structure with all of the following except A) retained earnings. B) long-term debt. C) cash. D) capital stock.

C (A corporation's capital structure consists of its long-term debt plus shareholders' equity.)

A client's portfolio consists of holdings in long-term U.S. Treasury bonds and Treasury notes. Of least concern to this investor would be A) purchasing power risk B) interest rate risk C) credit risk D) market risk

C (Securities issued by the U.S. Treasury are, at least for exam purposes, free of default or credit risk, but, as with all fixed-income securities, are subject to interest rate risk and inflation or purchasing power risk. Any marketable security is subject to market risk.)

A portfolio manager who follows the value style of investing would most likely focus her attention on A) moving averages B) 52-week highs and lows C) financial statements D) market capitalization

C (Value managers look for value, as found on the company's financial statements.)

The head of marketing for a regional broker-dealer spots an article in the local newspaper that is an excellent presentation of an investment strategy the firm recommends. If the firm posts a link to the article on its website, it would be known as A) plagiarizing. B) endorsement. C) entanglement. D) adoption.

D (Adoption is the use of content or a link that is solely the creation of someone else; your firm is just using it. Entanglement is when the firm had a role in the creation of the material.)

The term alternative investment would least likely apply to A) inverse ETFs B) leveraged ETFs C) exchange-traded notes (ETNs) D) closed-end funds (CEFs)

D (Although there are closed-end funds that invest in alternative investments, those are in the minority. The other choices are all clearly labeled as alternatives.)

A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim A) behind the bonds, the preferred stock, and the common stock B) ahead of the common stock, but after the preferred and the bonds C) ahead of the common stock, the preferred stock, and the bonds D) ahead of the common stock and the preferred, but after the bonds

D (Any debt security, even a subordinated debenture, has a claim ahead of all equity. However, they are subordinated to all other debt.)

Which of the following classes of mutual fund shares would be appropriate for an investor who doesn't mind paying some sales charges on a purchase, but wants to minimize operating expenses over a long-term holding period? A) Class B shares B) No-load shares C) Class C shares D) Class A shares

D (Class A shares have a front-end load, but their operating expense ratio is usually lower than that of any other class. Because the question states that the investor is willing to pay a sales charge, no-load shares is an inappropriate choice.)

Which of the following statements regarding agent registration under the Uniform Securities Act is TRUE? A) The Administrator may request the agent furnish a statement of assets and liabilities. B) The Administrator may initiate a disciplinary action within two years of an agent's withdrawal of registration. C) If, before the effective date of the registration, the Administrator requires amendments to the application, the registration will be considered to have first been filed as of the original filing date. D) In the absence of any action by the Administrator, the effective date of a registration is noon of the 30th day after the filing of a complete application.

D (Normally, registration of persons becomes effective at noon of the 30th day following filing. If the Administrator requires the filing of amendments, the clock starts over again with the filing of those amendments, not the original filing date. Agents do not have financial requirements, and the Administrator has a maximum of one year after termination to initiate any actions.)

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

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

Which of the following forms of joint ownership is most often associated with ownership of real estate? A) Tenants in common B) Joint tenants with right of survivorship C) Totten trust D) Tenancy by the entirety

D (Tenancy by the entirety is most commonly used for ownership of real property (real estate).)

An investor reviewing a corporation's balance sheet will be able to determine the company's A) profitability B) dividend payout ratio C) productivity D) owner's equity

D (The balance sheet reflects the difference between the company's assets and liabilities. This is the owner's or shareholder's equity. Profits and dividends are on the income statement.)

Which of the following would probably be the best indicator of where the economy is headed? A) Average duration of unemployment B) Average prime rate C) Permits for construction of new housing units D) Industrial production

c (The question is looking for a leading indicator and, of the list, only new building permits fits. Industrial production is a coincident indicator, while the other two choices are lagging.)

As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A sale of stock by an administrator of an estate B) A purchase of bonds by a trustee of an irrevocable trust C) A purchase of stock by an accredited investor under Rule 506(b) D) A sale of U.S. Treasury bonds to a retail investor

A (A sale by certain fiduciaries, such as an executor or administrator of an estate, is an exempt transaction under the USA. Even though the Treasury bonds are an exempt security, the sale to an individual is not an exempt transaction. Rule 506(b) is the federal transaction exemption not found in the USA, and only a trustee in bankruptcy is considered for the exemption.)

A corporation with a 6%, $25 par cumulative preferred paid $.50 to preferred stockholders last year. This year, the company wants to pay common dividends. How much must it pay each preferred share? A) $2.50 B) $0.50 C) $1.50 D) $11.50

A (A 6% cumulative preferred stock with a $25 par value would pay an annual dividend of $1.50 ($25 × 6%). Cumulative preferred requires all dividends that have previously been skipped be paid before any dividends paid to common stock. The $.50 that was paid last year left $1 in dividends in arrears. Therefore, this year requires that a $2.50 dividend be paid to the preferred shareholders before any common dividend paid to common shareholders.)

An investment adviser representative is required to make disclosure to the client when I. the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated II. the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale III. transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that particular client IV. transactions recommended to the client are inconsistent with those for the IAR's own account A) II and IV B) I, II, and III C) I and III D) II, III, and IV

A (An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This will include the case where a recommended product will generate a commission or other source of income to the adviser, as well as full disclosure if a recommendation is not consistent with the adviser's own activity in his own account. The adviser can use any source of information to create his own analysis, with disclosure of source only being required if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same or similar objectives would purchase or have recommended for purchase the same securities.)

LMN, Inc., is preparing to report its net income for the past year. An increase in which of the following would NOT cause a decrease in the reported net income? A) Cash dividends B) Corporate income tax rate C) Year-end bonuses to employees D) Allowance for bad debts

A (Cash dividends are paid out of the company's net income, so an increase or decrease will not impact that net income. Net income is a calculation determined by current operations, so an increase in the amount set aside as an allowance for bad debts will reduce operating income. Because net income is always after taxes, raising the company's income tax rate will obviously decrease the net income of the corporation. One of the major expenses for most corporations is labor so any increase, whether in the form of raises or bonuses, will decrease the net income.)

KAPCO, Inc. has 100,000,000 shares of $1 par common stock outstanding. If the current market price of the KAPCO common stock is $33 per share, KAPCO would be considered a A) mid-cap stock B) large-cap stock C) small-cap stock D) micro-cap stock

A (Doing the arithmetic, we see that the market capitalization of KAPCO common stock is $3.3 billion. Stocks with a market cap in the range of $2 - $10 billion are considered mid-cap.)

Popular strategies used by bond investors to mitigate the effects of changes in interest rates would include any of the following EXCEPT A) the strategy of lengthening the maturities of their holdings B) the laddering strategy C) the barbell strategy D) the bullet strategy

A (For those concerned about the effects of interest rate fluctuations on their portfolio, increasing the length of the maturities would increase, rather than decrease, the risk.)

One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) verify that the investment adviser still qualifies for SEC registration B) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian C) ensure that full disclosure has been made in the adviser's brochure D) provide updated information on those associated persons who are in charge of giving investment advice

A (In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information.)

The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would NOT be entitled to claim: A) the original consideration paid for the security or the current market value, whichever is greater B) interest at the state's legal rate less any income received on the security C) court costs D) attorney's fees

A (In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees.)

Which of the following risks would most likely be minimized through portfolio diversification? A) Credit risk B) Interest rate risk C) Purchasing power risk D) Market risk

A (Only those risks that are unsystematic can benefit from diversification.)

Under the provisions of Regulation S-P, a person who has an investment advisory contract with a registered investment adviser is known as A) a customer B) a client C) a consumer D) a cohort

A (Regulation S-P uses two terms: customer and consumer. The customer is one with an ongoing relationship, such as would be the case with an advisory contract. A consumer is basically a one-shot deal.)

The technical market theory that measures the breadth of the market is A) the advance/decline B) the odd-lot C) the support/resistance D) the short interest

A (The advance/decline theory compares the number of stocks advancing versus those declining, generally on the New York Stock Exchange. Because it uses such a large sample, it is used as an example of the breadth of the market.)

When comparing futures and forwards, it would be correct to state that A) futures are more commonly used by speculators than forwards B) forwards are exchange-listed, while futures are not C) forwards are more likely to be closed out prior to expiration D) futures are considered securities, while forwards are not

A (The nature of futures, being standardized with a fluid secondary market, makes them more suitable for speculators than forwards. In fact, it is futures that are almost always closed out prior to expiration.)

A support level is the price range at which a technical analyst would expect the A) demand for a stock to increase substantially B) supply of a stock to increase substantially C) demand for a stock to remain constant D) demand for a stock to decrease substantially

A (This question is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down within a narrow range. The lower limit to these fluctuations is called a support level - the price point where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price point where a stock appears expensive and initiates selling. Generally, a support level will develop after a stock has experienced a steady decline from a higher price level. Technicians believe that, at some price below the recent peak, other investors will buy who did not buy prior to the first price increase and have been waiting for a small reversal to get into the stock. When the price reaches this support level, demand surges and price and volume begin to increase again.)

One of your clients is a widow with three grown children. She wants the assets in her account to go to her children upon her death—50% to her daughter and 25% to each of her sons. She does not want the estate to have to deal with probate on these assets. How should her account be set up? A) Transfer on death B) Tenants in common C) Joint tenants with right of survivorship D) Tenants in the entirety

A (Transfer on death, or TOD as it is usually called, would be the appropriate choice here. It avoids probate, but not estate taxes. It allows the account owner to specify different percentages for each beneficiary if desired.)

An IAR is attempting to develop an investment plan for a client. The IAR decides to use two different mutual funds in an effort to provide appropriate diversification. Of the four pairs given below, which one would offer the most diversification? A) Portfolio 7 and 8, with a correlation coefficient of -.20 B) Portfolio 3 and 4, with a correlation coefficient of +.20 C) Portfolio 5 and 6, with a correlation coefficient of -.05 D) Portfolio 1 and 2, with a correlation coefficient of +.90

A (If two portfolios have a high correlation coefficient, it means that their performance will be very similar. The purpose of diversification is to have some negative correlation so that losses in one portfolio are offset by gains in the other.)

A broker-dealer having no place of business in a state is not required to be registered in that state if the broker-dealer A) is a federal covered broker-dealer B) limits its clientele to employee benefit plans with assets of at least $1 million C) is registered in the state where its principal office is located D) is a member of the New York Stock Exchange

B (A broker-dealer must be registered in every state it sells or offers to sell securities, unless an exemption is available. If a broker-dealer has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required.)

One would not normally place convertible bonds in the portfolio of an investor A) who is bullish on the future for a specific issuer's common stock B) seeking to maximize current income C) seeking a position senior to that of common stock D) seeking capital gains

B (A conversion feature is a benefit to the bondholder. It allows the bondholder a choice to either continue holding the debt represented by the bond or to convert the bond into shares of common stock of the underlying issuer. Everything that is done in the securities industry has to be a win-win situation. The win for the bondholder in this instance is the ability to take advantage of the capital appreciation potential the common stock may offer, and the win for the issuer is that by offering something extra to the bond purchaser, the bond purchaser is willing to accept a lower interest rate on the bond (as compared to a nonconvertible bond), and therefore, giving the issuer a lower cost of capital.)

During your initial interview with a potential advisory client, you obtain the following information: He is 58, she is 56, and they both plan to continue working until she reaches 65 and is eligible for Medicare. As you begin to develop a plan for this couple, you would probably project their time horizon as A) 9 years B) approximately 30 years C) 7 years D) 16 years

B (An investor's time horizon is the length of time the planned investment strategy is designed to serve. In the case of a couple looking ahead to retirement, the time horizon is their life expectancy.)

Early in the year, an investor purchased 100 shares of KAP common stock at a price of $60 per share. Just prior to the end of the year, after receiving three quarterly dividends of $1, the investor liquidated all of the KAP at a price of $59 per share. If the Consumer Price Index (CPI) increased by 3%, the investor's total return over the holding period was A) 5% B) 3.33% C) 2% D) .33%

B (An investor's total return percentage is calculated by adding together income plus capital gain (or loss) and dividing that total by the initial cost. The math looks like this: three quarterly dividends of $1 each is $300. Selling the stock at $59 per share represents a loss of $1 per share or $100. The net positive return is $200 which, when divided by the original cost of $60 per share, results in a total return of 3.33% Even though the CPI is given, the question is not asking for inflation adjusted or real rate of return; it is just another example of a question containing unnecessary information.)

Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that A) unless a specific exemption applies, the fund may not engage in margin trading B) no contract may be terminated with more than 60 days' written notice C) the contract should be in writing D) the initial contract is for a maximum of one year and then may be renewed on either an annual or biannual basis

B (Contracts between funds and their advisers may not be terminated with more than 60 days' written notice, and these contracts must—not should—be in writing. The initial contract is for a two-year period and then renewed on an annual basis. Whether or not the fund can trade on margin is not a function of the management contract.)

All of the following statements relating to ADRs are true EXCEPT A) trading takes place on domestic secondary markets B) currency risk is avoided C) the issuer is a domestic bank D) dividends are paid in U.S. dollars

B (Even though everything relating to ADRs is done in English using U.S. dollars on domestic stock markets, there is still currency risk since the ultimate value of the stock and its dividends are based upon the foreign company's home currency.)

A state-registered investment adviser maintaining custody of customer funds and securities discovers that its net worth is $32,000. Which of the following steps would NOT be required? A) Reporting to the Administrator the number of client accounts being served by the investment adviser B) Returning the customer funds and securities within three business days of the discovery C) Filing a financial report with the Administrator by the close of business on the next business day following notice D) Notifying the Administrator of the deficiency by the close of business on the next business day

B (Once the firm's net worth is below $35,000, notifications and reports must be sent to the Administrator. Unless ordered by the Administrator, there is no requirement to return client assets to them.)

Which of the following statements regarding REITs are correct? I. Equity REITs offer possible income and capital appreciation. II. Investors receive interest and principal payments periodically. III. In order to receive favorable tax benefits, the REIT must pay out at least 90% of its taxable income in the form of dividends. IV. Interests in REITs offer the benefit of flow through of income or loss. A) I and IV B) I and III C) II and IV D) II and III

B (REITs are pooled tangible real estate assets. Owning an equity REIT gives the investor beneficial ownership of tangible real estate with the possibility of both income and capital appreciation. Most REITs trade in the open market, and their price is determined by supply and demand; there is no redemption by the issuer. REITs will pay distributions in the form of dividends and not a pass-through of principal and interest, as is the case with a mortgage-backed security, such as those issued by GNMA. Although REITs pass through at least 90% of their taxable income, there is no flow-through of losses as is the case with direct participation programs (DPPs).)

A client with a bearish outlook on a particular stock would be able to benefit from taking which of the following actions? A) Entering a sell limit order B) Selling the stock short C) Entering a market order to sell D) Buying the stock on margin

B (Selling short is a technique used by investors who are of the opinion that the market price of a stock is going to fall.)

Under which of the following asset allocation programs is it most likely that commission expense will have a significant impact on portfolio performance? A) Rebalancing B) Tactical C) Strategic D) Buy and hold

B (Tactical asset allocation, also known as active asset allocation, attempts to time the market. As such, there is a relatively high amount of in and out trading, causing commission expense to be a significant factor.)

You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is A) systematic risk B) inflation risk C) liquidity risk D) business risk

C (A portfolio of listed common stocks will have little to no liquidity risk, as listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living.)

Plymouth Standard's common stock has an average return of 12%; its returns fall within a range of -2% to +26% approximately 68% of the time. Which one of the following numbers is closest to the standard deviation of returns of Plymouth Standard's stock? A) 28% B) 8% C) 14% D) 19%

C (A standard deviation of 14% means an investor can expect a return on an investment to vary ±14 from the average return approximately 68% of the time. A return of +26% minus the 12% average return equals 14%. Likewise, the difference between the -2% return and the average of 12% is also 14%.)

Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Renewal notice to the SEC B) Form U-4 C) State licensing fee D) Consent to service of process

C (All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.)

All of the following would decrease the U.S. balance of payments deficit EXCEPT A) an increase in exports of domestic goods from the U.S. B) a decrease in imports of foreign goods into the U.S. C) a decrease in purchases of U.S. securities by foreign investors D) a decrease in dividend payments by U.S. companies to foreign investors

C (Anything that will bring foreign money to the U.S. will decrease the balance of payments. Foreign investors pulling their money out of the U.S. or investing less in the U.S. will increase the deficit.)

Under the provisions of the Uniform Securities Act, which of the following statements about unsolicited orders is TRUE? A) A client may not purchase, at his own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order. B) Under certain conditions, an Administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders. C) An unsolicited order from a noninstitutional client for an unregistered, nonexempt security is considered a transaction exempt from the registration and advertising filing requirements of the act. D) If the order ticket is appropriately marked, the Administrator may not challenge a broker-dealer's assertion that the order was unsolicited.

C (Clients have the right to buy or sell whatever they desire. The issue becomes a question of who initiates the trade. An unsolicited transaction may be executed by an agent if it is the client who asks for the trade. The trade ticket should be marked as unsolicited. The State Securities Administrator has the right to seek verification from the client that the trade was, in fact, unsolicited. The security involved in the trade can be one that is nonexempt and unregistered in the state.)

An estate-planning technique often recommended for those with large taxable estates is the use of A) the alternative valuation date B) the capital needs analysis C) an irrevocable life insurance trust (ILIT) D) a testamentary trust

C (For those with large taxable estates, the purchase of life insurance to cover the potential estate tax liability is frequently recommended. The use of the ILIT will generally keep the proceeds out of the estate. The alternative valuation date only helps if the value of the estate drops sometime during the six months after death. A testamentary trust does little, if anything, to reduce estate taxes, and the capital needs analysis is used to determine the replacement value needed in the event of premature death—unlikely to have a need with this large of an estate.)

With regard to an SEC-registered investment adviser employing the services of a promoter to solicit on its behalf, it would be correct to state that A) referral fees may be paid only if the promoter is also registered with the SEC. B) delivery of the solicitor's brochure must take place within five days after the entry into the advisory contract. C) the investment adviser may not compensate a solicitor who is subject to a statutory disqualification. D) cash referral fees may be paid pursuant to a written or oral agreement to which the investment adviser is a party.

C (One of the important requirements when hiring a promoter to solicit advisory business for compensation is making sure the person is not statutorily disqualified from registration. That is, any person who would be unable to register as a securities professional because of prior conduct cannot act as a solicitor for a registered investment adviser. The industry refers to this person as a "bad actor." Compensation, defined as more than a de miminis amount (more than $1,000 over the previous 12 months), requires a written (not oral) agreement. One of the changes made by the SEC's Investment Adviser Marketing Rule in 2020 was the elimination of the requirement to deliver a solicitor's brochure.)

Under the Uniform Securities Act, all of the following persons with no place of business in the state are exempt from registration as an investment adviser EXCEPT A) advisers who deal exclusively with investment companies registered under the Investment Company Act of 1940 B) advisers who deal exclusively with federal covered investment advisers located in the state C) advisers who have conducted business with no more than six clients, other than institutions, in the state within the past 12 months D) advisers who deal exclusively with savings banks located in the state

C (The de minimis rule for a registered investment adviser who has no place of business in the state is fewer than six retail clients. Doing business with six clients within the past 12 months exceeds this de minimis amount and, therefore, the exemption from registration does not exist. All others listed as possible answers are institutional- or professional-type investment clients. If a registered investment adviser works only with this type of client, an exemption from registration in that state exists as long as the registered investment adviser has no place of business in that state. In fact, if the investment adviser deals exclusively with registered investment companies, the adviser is federal covered and must register with the SEC rather than any states.)

Current market interest rates are 6%. Using the discounted cash flow method of valuation, you would expect to arrive at the highest valuation for which of the following? A) Zero-coupon bond maturing in 11 years B) 7% coupon maturing in 9 years C) 10% coupon maturing in 10 years D) 5% coupon maturing in 20 years

C (The discounted cash flow method considers the future expected free cash flow (the interest payments plus the eventual return of the principal) and discounting it to arrive at a present value. In its simplest iteration, this is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money. In general, bonds with higher coupons will have the greatest value because they will clearly produce the most cash flow, and zero-coupon bonds will produce the lowest because they have no cash flow other than the return of the face value at maturity.)

If the executor of an estate containing a substantial stock portfolio is of the opinion that the economy is about to enter a down cycle, estate taxes could be reduced by A) liquidating the portfolio in advance of the market downturn B) reallocating the assets to less risky securities C) using the alternative valuation date D) asking for an extension to file the return

C (The executor of an estate has the option of valuing the assets either as of the date of death or six months later (the alternative valuation date). If stock prices fall, then the estate will shrink, resulting in lower estate taxes.)

An options strategy that would be most useful for an investor with a long position in a stock who is concerned that a proposed management change will negatively impact the stock's price would be to A) sell a put on that stock B) buy a call on that stock C) buy a put on that stock D) sell a call on that stock

C (This investor is looking to hedge his risk of loss. The best way to hedge a long position is to buy a put option.)

One respect in which advertising by investment advisers differs from that of broker-dealers is that A) investment advisers are permitted to refer to charting systems in their advertisements, while broker-dealers cannot. B) investment advisers are not permitted to use the internet, while broker-dealers can. C) investment adviser advertising is regulated by federal law while advertising by broker-dealers is regulated by FINRA. D) investment advisers are permitted to conduct seminars, while broker-dealers cannot

C (When it comes to investment advisers, state-registered or federal covered, any advertisement which does not comply with the SEC's Investment Adviser Marketing Rule as found in the Investment Advisers Act of 1940 (federal law) would be prohibited. On the other hand, broker-dealers must comply with FINRA's rule on communication with the public as well as the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.)

An individual has just received an inheritance of $15,000 and has the goals of preservation of capital and income. The client is in a low tax bracket. Which of the following would be the most suitable choice? A) Insured municipal bonds B) Newly issued U.S. Treasury bonds C) Bank-insured CDs D) Public utility stocks

C (When preservation of capital is a goal and one of the choices is an insured bank CD, pick it. When the question refers to a low tax bracket, municipal bonds will never be the correct choice. Newly issued Treasury bonds have maturities of at least 10 years. During that time, changes to interest rates in the market place would cause the market price of those bonds to fluctuate. Although the public utilities will offer income frequently higher than the CD, there are no guarantees the principal will remain intact. (Some public utilities have gone bankrupt.))

Daphna works for Automated Asset Allocators (AAA), an investment adviser having offices in States D, E, and F and registered with the SEC. Daphna spends most of her time in an office in State D, but, once every other week, she goes to the branch in State E. Daphna would be exempt from registration as an IAR in which of the following states? A) Daphna would have to register in all three states B) State E, where she has no retail clients C) States E and F D) State F, where she has 227 retail clients

D (As an IAR with a federal covered investment adviser, Daphna only has to register in those states in which she maintains a place of business. That means registering in States D and E. The number of clients is irrelevant.)

Ways in which a Section 529 plan differs from a Coverdell ESA include I. tax-free distributions when the funds are used for qualifying educational expenses. II. higher contribution limits III. no earnings limitations IV. contributions that may be made by someone other than a parent or legal guardian A) I and IV B) I and II C) II and IV D) II and III

D (Contributions to an ESA are limited to $2,000 per beneficiary per year, while the 529 limit is set by the plan sponsor, sometimes as high as $500,000. Unlike the ESA where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 plans and Coverdell ESAs enjoy tax-free distributions, and plans may be established by almost anyone.)

Prudent Asset Construction Enterprises (PACE) has offices in states X, Y, and Z. On their last annual updating amendment, they reported AUM of $218 million. In which of the following instances would PACE be receiving a substantial prepayment of fees? A) $600, paid six or more months in advance B) $1,600, paid at the first of each quarter C) $10,000, paid monthly D) $1,600, paid one year in advance

D (First of all, this is an SEC registered IA, so we have to go by the federal numbers. Those are more than $1,200, six or more months in advance. The $600 would have been substantial if PACE was state-registered. Although the other two choices are above $1,200, they are not prepaid for at least six months.)

In order to come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over A) more than 10% of the outstanding voting securities of a reporting company B) an equity portfolio of at least $100 million C) an equity portfolio of at least $50 million in 13(f) securities D) an equity portfolio of at least $100 million in 13(f) securities

D (Form 13F must be filed by institutional money managers with at least $100 million in 13(f) equity securities under discretionary management.)

The issuance of new common stock will affect which of the following balance sheet items? I. Total assets II. Current liabilities III. Retained earnings IV. Net worth A) II and III B) II and IV C) I and III D) I and IV

D (Issuing stock brings in new capital in the form of cash. This raises the assets and, since stock is equity, raises the net worth by the same amount.)

Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A) federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. B) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. C) state-registered advisers who do not deliver the brochure at least five days prior to contract signing must offer a 48 hour penalty free withdrawal. D) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a 5-day penalty free withdrawal.

D (State-registered investment advisers who do not deliver the brochure at least 48 hours prior to entering the contract must offer a penalty-free withdrawal of five days. There is nothing comparable to that in the federal law. Both have the 120-day delivery requirement, and state-registered investment advisers cannot have investment companies as clients.)

An investor would be entitled to a breakpoint on quantity purchases made together with all of the following accounts EXCEPT A) shares of that fund held in his 401(k) that were purchased with employer-matching funds B) a custodian account under UTMA for his child C) his wife's personal account D) his brother with whom he regularly shares investment ideas

D (The breakpoints allow for combinations from a number of family accounts, but they have to be spouse or dependent children, not brothers)

What is the tax equivalent yield of a 7% municipal bond to an investor in the 35% federal income tax bracket? A) 9.45% B) 4.55% C) 20% D) 10.77%

D (The computation for tax equivalent yield is found by dividing the municipal bond's coupon rate (7%) by (100% - tax bracket) or (100% - 35%). When dividing 7% by.65, the result is closest to 10.77%. In other words, an investor would have to receive a taxable return in excess of 10.77% to put more money in the pocket than owning this 7% municipal bond.)

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of I. the Securities Exchange Act of 1934 II. the Investment Company Act of 1940 III. the Investment Advisers Act of 1940 IV. the Uniform Securities Act A) II, III, and IV B) I, II, and III C) I and III D) II and IV

D (The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940. Sure, it makes good sense, but it is not required. There is nothing in the Securities Exchange Act of 1934 that relates to investment advisers, much less their contracts with clients.)

The dividend discount model is A) a method of determining the appropriate relationship between the price of the corporation's common stock and its preferred stock B) a function of the price to earnings ratio C) the complement of the dividend payout ratio D) an analytical tool used to project the current value of a common stock using projected dividends

D (There are two widely accepted forms of common stock price valuations using dividends—the dividend discount model and the dividend growth model.)

One of the differences between state and federal law involving an investment adviser maintaining custody of customer funds and/or securities relates to the handling of client checks made payable to third parties such as broker-dealers. Which of the following properly expresses that difference? A) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. B) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt. C) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt. D) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt.

D (Under the Uniform Securities Act, if an IA receives a check made payable to an unrelated third party, it will be considered custody unless forwarded within three business days of receipt. Third-party checks are never considered custody under federal law.)

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

a (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.)

On the basis of IRS guidelines, which of the following is most likely eligible to contribute to a Keogh plan? A) A public school teacher who gets paid during her summer vacation to give motivational speeches to training directors at major brokerage firms B) While employed full time for a major department store, a clerk who won $10,000 playing the state lottery C) The CEO of a listed corporation who receives a large bonus after an outstanding year D) A doctor who has formed a professional corporation with three other physicians

a (The speaking income earned by the school teacher is considered self-employment income and is therefore eligible for a Keogh Plan. Remember, corporate employees are not eligible unless they have separate source of self-employment income.)

An investor concerned about liquidity would be least likely to invest in A) cumulative preferred stock B) stock subject to Rule 144 C) common stock listed on the New York Stock Exchange D) ADRs

b (In most cases, stock subject to Rule 144 is stock that cannot be immediately resold. That is why it is known as restricted stock.)

Individuals who pass the Series 65 exam will be able to tell prospects that A) their investments will be offered protection by the anti-fraud statutes of the Uniform Securities Act B) this indicates the regulatory bodies consider them qualified to manage money C) they passed a 130-question examination in order to qualify as an IAR D) by passing the exam, they are now registered as investment adviser representatives with the SEC

c (Passing the exam allows you make no claims other than that it was a requirement for licensure. And you're not registered with the SEC, only with the state(s).)

in which of the following cases does exercise not involve the issuer of the underlying asset? A) A warrant B) A right C) An option D) A convertible bond

c (When an option is exercised, the seller (writer) of the option is the one who must deliver (call) or purchase (put). In all of the other choices, the issuer is the one who delivers the stock.)

Which of the following items does NOT fall within the Section 28(e) safe harbor? A) Software used to analyze client's portfolios B) Research reports prepared by a third party other than the broker-dealer C) Proprietary research reports analyzing the performance of a specific industry D) Software used to simplify the investment adviser's preparation of its tax returns

d (Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyze securities is also permissible since that benefits the client. Tax preparation software benefits the adviser, but not the client.)

As specified in the Dodd-Frank Act of 2010, which of the following would NOT qualify for the private fund exemption? A) An investment adviser who limits its advisory services to private funds with less than $150 million in assets under management in the United States B) A non-U.S. based investment adviser with no place of business in the United States and less than $25 million in assets under management belonging to U.S. clients C) An investment adviser who limits its advisory services to venture capital funds D) An investment adviser who limits its advisory services to insurance companies

d (The Dodd-Frank Act tells us that we're referring to federal law. Although investment advisers dealing solely with insurance companies are exempt from registration, that is not the private fund exemption the question is asking about.)

The discounted rate that equates a bond's cash flow to its current price is known as the bond's A) duration B) coupon rate C) current yield D) yield to maturity

d (The yield to maturity of a bond considers the accretion of any discount or amortization of any premium as well as the annual coupon rate, taking into consideration the time value of money.)

A U.S. Treasury bond's price has moved from 96.18 to 96.22. An investor's account holding 10 of these bonds would show an increase of A) $4.00 B) $1.25 C) $.40 D) $12.50

d (U.S. Treasury bonds are quoted in 32nds, where the difference between 96.22 and 96.18 represents an increase of 4/32nds per bond. That is one-eighth, or $1.25, times 10 bonds, or $12.50)