Series 65 Pass

Which of the following accounts could be opened with a TOD designation? I Individual II Joint tenants in common III Joint tenants with rights of survivorship IV UTMA A) I and III B) I, III, and IV C) II and IV D) I and II

A not D Explanation The only types of accounts that may have the Transfer on Death (TOD) designation are individual, JTWROS, and TBE accounts. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased's estate.

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is A) reported as a separate line item on the balance sheet. B) the net change in the cash position of the firm for the reporting period. C) reported as cash income on the income statement. D) an integral part of the footnotes to the balance sheet required by generally accepted accounting principles.

B not A Explanation The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows, which is a separate financial statement.

All of the following have legal standing as persons under the Uniform Securities Act except A) joint-stock companies. B) unincorporated organizations. C) trusts where the interests of the beneficiaries are evidenced by a security. D) minor children.

D not B Explanation The definition of a person under the act includes, among others, individuals, joint-stock companies, unincorporated organizations, and trusts where the interests of the beneficiaries are evidenced by a security. Minor children are not persons under the act.

** A bond investor's portfolio consists of the following 3 bonds: ABC First Mortgage bond, current market value of $4 million with a duration of 5 years. DEF Debenture, current market value of $5 million with a duration of 8 years. U.S. Treasury bond, current market value of $1 million with a duration of 10 years. What is the average duration of the portfolio? A) 3.04 years B) 7 years C) 7.67 years D) 6.54 years

B not A Explanation It is unlikely that you will have a question this complicated on the exam, but, just in case, we wanted to show you the way to do it. Computing average duration of a bond portfolio involves taking each bond and figuring the proportion of the portfolio its duration represents. In this question, ABC is 40% of the portfolio so we take 40% of its 5-year duration (2). Then, we do the same with the other two bonds. DEF is 50% of 8 (4) and the Treasury bond is 10% of 10 (1). When we add the 3 numbers together, it results in an average duration of 7 years.

When comparing a clearing firm to an introducing firm, it would be expected that A) the fully disclosed firm must comply with the customer protection rule (15c3-3). B) the clearing firm has higher financial requirements. C) the fully-disclosed firm will generally have clearing arrangements with many carrying firms. D) the clearing firm holds funds but not securities belonging to the customers of the introducing firm.

B not C Explanation Because of the added risk (maintaining possession of customer funds and securities) the net capital requirements of a carrying (clearing) firm are substantially higher than those of an introducing firm. That is why the clearing firm must always comply with Rule 15c3-3, the customer protection rule, while the introducing firm is exempt. It would be unusual for a fully disclosed firm to have clearing arrangements with more than one BD; that would be like having two completely different back offices.

** A bond investor's portfolio consists of the following 3 bonds: ABC First Mortgage bond, current market value of $4 million with a duration of 5 years. DEF Debenture, current market value of $5 million with a duration of 8 years. U.S. Treasury bond, current market value of $1 million with a duration of 10 years. What is the average duration of the portfolio? A) 3.04 years B) 7 years C) 7.67 years D) 6.54 years

B not C Explanation It is unlikely that you will have a question this complicated on the exam, but, just in case, we wanted to show you the way to do it. Computing average duration of a bond portfolio involves taking each bond and figuring the proportion of the portfolio its duration represents. In this question, ABC is 40% of the portfolio so we take 40% of its 5-year duration (2). Then, we do the same with the other two bonds. DEF is 50% of 8 (4) and the Treasury bond is 10% of 10 (1). When we add the 3 numbers together, it results in an average duration of 7 years.

SSS Corporation's total assets amount to $780,000, of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is SSS Corporation's shareholders' equity? A) $1,150,000 B) $410,000 C) $980,000 D) $170,000

B not C Explanation Total assets minus total liabilities equals shareholders' equity ($780,000 − $370,000 = $410,000).

A 50-year-old client with modest means wants to construct an investment program. He has no investment experience, his major consideration is saving for retirement, and he has limited risk tolerance. Which of the following would you recommend? A) Aggressive growth mutual funds B) Growth and income mutual funds C) Call options on the S&P 500 Index D) High-grade bond fund

B not D Explanation Mutual funds that offer growth and income best meet the client's needs, offering growth for retirement and current income. A high-grade bond fund would not offer the growth that the client needs for retirement, although the fund would supplement the modest income of the client. A client of modest means may not be able to sustain the risk of principal that accompanies an aggressive growth fund; in addition, this alternative is unsuitable because the client has limited risk tolerance. Index options are a speculative investment.

An investor is trying to decide whether to purchase $10,000 face amount of a U.S. Treasury bond or a highly rated corporate bond. The price of the Treasury bond is 102.20 while the price of the corporate bond is 99 3/8. If the investor decides to purchase the Treasuries, disregarding commissions, the price difference is A) $32.50. B) $28.25. C) $325.00. D) $282.50.

C Explanation The first step is remembering that Treasuries are quoted in 32nds. That means that 102.20 is 102 and 20/32 which is 102 5/8. Subtract 99 3/8 from 102 5/8 to get 3 2/8 or 3 1/4. On a $1,000 bond, that is $32.50. Then, note that this investor is purchasing 10 bonds, so the difference in price is $32.50 times 10 or $325.

Which of the following securities trade on regulated stock exchanges with their prices being determined by supply and demand? I Closed-end investment companies II Exchange-traded funds III Face-amount certificate companies IV Mutual funds A) II and III B) III and IV C) I and II D) I and III

C not A Explanation Both closed-end funds and exchange-traded funds (ETFs) trade on stock exchanges with their prices being determined by supply and demand just like any other stock.

The real interest rate of a fixed income investment is A) the coupon interest payment B) interest earned adjusted for the investment's premium or discount price C) the interest earned after inflation D) interest earned after taxes

C not A Explanation The real interest rate is the interest received minus the inflation rate.

An economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs—at which time, the rate of inflation changes—is known as A) stagflation. B) stagnation. C) inertial inflation. D) price controls.

C not A Explanation This is a definition of inertial inflation. Just like it sometimes takes a shock to get people moving (lack of inertia), it can require a shock to move the economy. It is unlikely that any of the other terms shown here will appear as a correct answer on your exam.

When the 91-day Treasury bill rate is 3%, an investor decides to purchase a 20-year corporate bond at par with a coupon of 8%. If the corporate bond does not pay as expected, the investor's potential loss is considered A) duration risk B) market cost C) opportunity cost D) purchasing power risk

C not A Explanation When an investor forgoes the risk-free returns of the 91-day Treasury bill in favor of another investment, anything lost is considered the opportunity cost of passing up the sure thing.

Regarding the treatment of estates by the IRS, it would not be correct to state any of the following except A) estates may be valued either at date of death or 9 months later using the alternative valuation option. B) income received by the estate is reported on Form 1040. C) the maximum tax rate on estates is the same as that on gifts. D) a deceased person may reduce the value of the estate by taking advantage of the annual gift tax exclusion.

C not D Explanation The maximum tax rate on estates and gifts is 40% (the number is not tested; only that the rates are the same). The alternative valuation date is 6 months after death; nine months after death is when the tax is due. Dead people can't make gifts and any income received by the estate before it is liquidated is reported on Form 1041.

Under the Investment Advisers Act of 1940, as amended by the Marketing Rule for Investment Advisers, advertising done by investment advisers prohibits which of these? I The use of testimonials II Reference only to specific past recommendations III Untrue statements A) III only B) I and III C) I only D) II and III

D not A Explanation Amendments effective in 2021 to SEC Rule 206(4), issued under the Investment Advisers Act of 1940, permit the use of testimonials under certain conditions. The rule still prohibits untrue statements of material fact and reference only to specific past recommendations.

Using industry jargon, the tax on the last dollar of income is at A) the effective rate. B) the average rate. C) the final rate. D) the marginal rate.

D not A Explanation The IRS defines marginal tax rate as "the highest rate that you will pay on your income." Basically, as you make more money, you pay tax at a higher rate incrementally. The effective tax rate is the average that you pay on all of your income.

** What new benefit did the TCJA of 2017 bring to 529 plans effective 2018? A) Tax-deductible contributions of up to $10,000 per year to pay for K-12 tuition B) Qualified withdrawals of up to $10,000 per year to pay for K-12 expenses C) Withdrawals may be made for qualified expenses at certain foreign educational institutions. D) Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition

D not C Explanation The big change was the ability to use a 529 plan for K-12 expenses. However, the only expense that qualifies is tuition and there is a maximum limit of $10,000 per year. No contribution to any 529 is tax deductible. The use of the 529 for foreign educational institutions pre-dates the TCJA of 2017.

U.S. Treasury bonds are generally subject to all of the following risks except A) liquidity risk. B) inflation risk. C) reinvestment risk. D) purchasing power risk.

A not C Explanation The market for U.S. Treasury bonds is highly liquid. As safe and as liquid as they are, they, like all fixed-income investments, are subject to purchasing power (also known as inflation) risk and reinvestment risk.

A bond with a par value of $1,000 and a coupon rate of 5%, paid semiannually, is currently selling for $1,200. The bond matures in 10 years and is callable in six years at 103. In the computation of the bond's yield to call, which of the following would be a factor? A) Future value of $1,200 B) Interest payments of $25 C) 20 payment periods D) Present value of $1,030

B not A Explanation The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 5% coupon will make $25 semiannual interest payments. With a six-year call, there are only 12 payment periods, not 20. The present value is $1,200 and the future value is $1,030, the reverse of the numbers indicated in the answer choices.

Which of the following reasons is appropriate justification for selling a stock short? A) To cut losses on a long position B) To benefit from a decline in the price of the stock C) To seek a modest potential reward with limited risk D) To benefit from a rise in the price of the stock

B not A Explanation The appropriate time to sell short is when (one believes) a stock price is about to drop. The investor sells borrowed stock at current prices and then buys the stock later at a lower price to replace the borrowed stock. Selling short does not reduce the risk of a long position; the investor is selling borrowed, not owned, stock. If the stock moves up, the short investor can lose a great deal of money. If the stock price moves up, the risk of loss is unlimited.

Among the characteristics of leveraged exchange-traded funds is that A) they can only be sold to accredited investors. B) leveraged ETFs may be purchased on margin. C) they are generally suitable for investors with a long time horizon. D) leveraged ETFs generally obtain the leverage through bank borrowing.

B not D Explanation Because an exchange-traded fund is purchased and sold on an exchange, the rules generally applying to all exchange products, such as purchasing them on margin, would apply. Leveraged funds use derivative products to generate the leverage, not bank borrowing. When it comes to suitability, they are for aggressive investors, but there is no requirement that they meet the accredited investor standard. However, the very nature of the product is that it is designed for short-term trading, not long-term trading.

Reasons why a corporation might issue a convertible preferred stock would include A) giving those shareholders the ability to convert into the issuer's bonds. B) a lower cost to the issuer than would be incurred by the issuance of convertible bonds. C) giving those shareholders an opportunity to participate in the future success of the company. D) tax savings to the issuer.

C not B Explanation The benefit of any convertible security, debt security, or preferred stock is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond, and because preferred dividends are an after-tax outlay, there are no tax savings, as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.

A REIT and a direct participation program are similar because they both A) can be described as a limited partnership. B) are traded actively in the secondary market. C) pass through losses to investors. D) are operated by a centralized management.

D not C Explanation Both a REIT and a DPP are run by centralized management. A REIT may not pass through losses to its investors, and it is not a limited partnership. A DPP cannot be easily traded in the secondary market.

An investor buys 10M 6.6s of 10 at 67. The investor will receive annual interest of A) $670. B) $820. C) $1,000. D) $660.

D not C Explanation Interpret "10M" as "$10,000 worth of." The investor receives the nominal yield of the bonds, which is 6.6% of $10,000. The M is from the roman numeral for 1,000.

** Concerning index annuities and their method of crediting interest, which of the following is true? A) On average, annual reset has a higher participation rate than point to point. B) Annual reset offers the best return regardless of market fluctuations. C) Point to point offers the best return when the market has had a single drastic decline during the period. D) High-water mark with look back offers the best return during periods of high volatility.

D not C Explanation Using the annual high-water mark with look back will generally result in the highest return during periods of high volatility. The reason is because under this method, the highest anniversary value is used to determine the gain. In a volatile market, there is likely to be a high spike sometime during the period and that is the value used. The problem with point to point when there is a single drastic decline during the period is that the decline might occur at or just prior to the annual crediting computation. Annual reset does ignore the daily market fluctuations, but if the index is lower at the end of the year, there is nothing credited. In reality, annual reset has a lower participation rate than point to point.

What new benefit did the TCJA of 2017 bring to 529 plans effective 2018? A) Tax-deductible contributions of up to $10,000 per year to pay for K-12 tuition B) Qualified withdrawals of up to $10,000 per year to pay for K-12 expenses C) Withdrawals may be made for qualified expenses at certain foreign educational institutions. D) Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition

D not C Explanation The big change was the ability to use a 529 plan for K-12 expenses. However, the only expense that qualifies is tuition and there is a maximum limit of $10,000 per year. No contribution to any 529 is tax deductible. The use of the 529 for foreign educational institutions pre-dates the TCJA of 2017.

All of the following statements regarding incentive stock options (ISOs) are correct except A) the exercise of ISOs does not create taxable income B) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise C) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain D) upon the exercise of an ISO, income for AMT purposes is created

B not A Explanation The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of exercise or 2 years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT.

Those investors wishing to examine a document that would probably give them the most information about a corporation's current and planned operations would seek out A) Form 10-K. B) the annual report. C) the balance sheet. D) the investor's brochure.

D not B Explanation The annual report to shareholders contains not only a complete financial report of the prior year's operations but also a statement from key personnel dealing with the company's future plans. Form 10-K does not include discussion of future business plans—it is a report of what happened over the previous fiscal year.

Your client turns in a buy limit order for 100 shares of ABC at $58. Following the entry of the order, trades occur at 59, 59, 58.80, 58.20, 58.40, 57.95, 57.85. At what price was this limit order triggered? A) The order was not triggered. B) $57.85. C) $58.20. D) $57.95.

A not D Explanation This is a perfect example of how important it is to read the question. The subject of the question is a limit order and then it asks for the trigger price. Stop orders are the only orders that have triggers so there is no trigger for this limit order. If the question had asked about the execution price, a buy limit order will be executed at the limit price or better (lower). In this case, the first trade at $58 or lower is $57.95. When you have a question like this on your exam, don't say to yourself, "But what if there is stock ahead?" We never want to overcomplicate a question by looking for something that isn't mentioned.

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

B not D Explanation 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.

A client of Wall Street Wealth Management (WSWM), a federal covered investment adviser, calls the IAR handling the account and gives instructions to use some of the surplus cash in the account to purchase 500 shares of RMBM, a small-cap stock traded on the Nasdaq Stock Market. Prior to submitting the order, the IAR checks with a supervisor and learns that WSWM has 1,000 shares of RMBM in its proprietary account and is looking to halve the position. If, instead of forwarding the order to the broker-dealer who normally handles trade executions for this client, WSWM filled the order out of its own account, A) WSWM would be engaging in a prohibited practice. B) because it was an unsolicited transaction, the only required disclosure would be the firm's capacity on the trade confirmation. C) it would be permissible as long as consent was obtained and written disclosure of the firm's capacity was disclosed prior to the

C not A Explanation In almost every case, an IA acting as a principal (out of inventory) or agent in a trade with an advisory client must obtain client consent and provide written disclosure of the IA's capacity in the trade no later the completion of the trade. If the IA is also a broker-dealer and the transaction with the advisory client was not generated through a recommendation (generally an unsolicited order), the only disclosure necessary is the firm's capacity on the confirmation. In this question, we can't assume that WSWM is also a broker-dealer.

An employer whose 401(k) plan complies with ERISA Section 404(c) is placing investment risk with A) the plan participant B) the plan fiduciary C) the Internal Revenue Service D) the Securities and Exchange Commission.

A not B Explanation In a 401(k) plan, a plan sponsor can shift investment risk to the employee by complying with ERISA Section 404(c) rules.

Among the advantages of forming an S corporation rather than a C corporation for a new business enterprise is A) any losses flow through to the investors. B) shareholders' losses are limited to the amount of their investment. C) unlike the C corporation, which is limited to 100 investors, there is no such limit for an S corporation. D) the ease in raising substantial amounts of capital.

A not D Explanation An S corporation offers the benefit of flow-through of both income and losses (losses being a particular benefit for a start-up because they usually take some time to become profitable). It is the S corporation rather than the C corporation that is limited to 100 investors. Both offer the benefit of limited liability. The C corporation is superior for raising large amounts of capital.

An investment adviser who is affiliated with a broker-dealer recommends only products that are provided through that broker-dealer. This is A) permitted following disclosure of the potential conflict of interest. B) prohibited and a violation. C) prohibited only if the adviser participates in commissions in conjunction with sales of the proprietary products. D) permitted without restriction.

A not B Explanation It is not prohibited for an investment adviser to limit recommendations to proprietary products available through an affiliated broker-dealer. However, the fact that this is a potential conflict of interest must be disclosed to the client.

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

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

Which of the following statements regarding hedge funds is correct? A) Hedge funds are usually structured as a limited partnership. B) Hedge funds are passively managed in an attempt to provide predictable returns for investors. C) Hedge funds are typically favored by inexperienced investors to hedge against losses they may experience as they become investment savvy. D) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management.

A not D Explanation Hedge funds are usually structured as a partnership, with the general partner as investment manager and the investors as limited partners. Hedge funds are actively and aggressively managed, seeking superior returns, and are best suited for wealthy, sophisticated investors. Under the typical 2% + 20% fee schedule, hedge fund managers are largely compensated for performance, not assets under management.

One measure of a corporation's liquidation value is its book value per share. When performing this computation, which of the following must be taken into consideration? I Goodwill II Long-term debt III Retained earnings IV Par value of the preferred stock A) I, II, III, and IV B) II, III, and IV C) I and II D) II and III

A not D Explanation The computation of book value per share is basically net tangible worth per share of common stock. Included in the net worth are all assets and liabilities (such as long-term debt), as well as the stockholders equity (par value of the preferred stock and par + paid in surplus of the common stock and retained earnings). Subtracted from this to get tangible book value would be the par value of the preferred stock and the value of intangible assets such as goodwill.

Under the Uniform Securities Act (USA), requirements for registration as an investment adviser in a state include which of the following? I Included in the registration requirements is the filing of Form ADV Part 1B. II There are 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) I and III B) I and II C) II and III D) I, II, and III

A not D Explanation Unlike registration for federal covered investment advisers, state registration includes the filing of Form ADV Part 1B. 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.

** Under the Securities Exchange Act of 1934, which of the following statements regarding reports required to be filed with the SEC is true? A) Institutional investment managers who manage accounts valued at $100 million or more of 13(f) securities must file reports quarterly. B) Institutional investment managers who exercise discretion over accounts valued at $100 million or more of 13(f) securities must file reports quarterly. C) An investment adviser's access persons must each submit a holdings report no later than 30 days after the person becomes an access person. D) An investment adviser's access persons must submit to the chief compliance officer or other persons designated in the firm's code of ethics annual securities transactions reports within 30 days of the end of the year.

B not C Explanation The SEC regularly publishes a list of 13(f) securities. Institutional investment managers that use the United States mail (or other means or instrumentality of interstate commerce) in the course of their business and that exercise investment discretion over $100 million or more in Section 13(f) securities must file Form 13F on a quarterly basis. A key requirement is that the money manager must exercise discretion, not simply manage that large amount of securities. Those associated with investment advisers who meet the definition of access person file the holdings report no later than 10 days after becoming an access person. Access persons must submit their transaction reports within 30 days of the end of each quarter.

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

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

Several years ago, an investor purchased an investment-grade bond with a 6% coupon. Today, that bond is priced to yield 4.6% to maturity in five years. If the bond is called at par in one year, the bond's yield will be A) 4.6%. B) the coupon rate of 6% because it is called at par value. C) less than 4.6%. D) more than 4.6%.

C not A Explanation Let's take things in order. If a bond with a 6% coupon is showing a YTM below 6%, the bond must be selling at a premium. When bonds selling at a premium are called in advance of the maturity date, the loss (the difference between the premium and the par value) is recognized sooner than expected. This results in a yield to call (YTC) that is less than the YTM.

Which of the following compensation arrangements is typically not allowed under the Investment Advisers Act of 1940? A) An adviser charges clients a percentage of assets under management. B) An adviser charges all clients a set fee, regardless of how long it takes to generate a recommendation or a recommendation's results. C) An adviser waives a client's fee if the client experiences a loss for the year. D) An adviser varies fees according to the time spent managing the account.

C not D Explanation A fee in which payment is contingent on investment results is prohibited unless the client meets certain financial standards; advisers are permitted to charge by the hour.

Under the 1940 Investment Company Act, an investment company may take all of the following forms except A) a unit investment trust. B) a closed-end investment company. C) an open-end investment company. D) a limited partnership with partners as passive investors.

D not B Explanation An investment company is not a limited partnership. Investment companies are organized as open-end companies (mutual funds), closed-end companies, unit investment trusts, or face-amount certificate companies.

Which of the following statements relating to Form ADV-E are correct? I The form is completed by an investment adviser who maintains custody of customer funds and/or securities. II The form is completed by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. III The form is submitted by the independent public accountant who examines the funds and/or securities in the custody of an investment adviser. IV The form may be used to amend the investment adviser's registration. A) I, II, and IV B) I, III, and IV C) I and II D) I and III

D not B Explanation Form ADV-E (E for Examination) must be completed by investment advisers (IAs) that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this form to the independent public accountant, who examines client funds and securities in the custody of the IA, in compliance with the Investment Advisers Act of 1940 or applicable state law. The independent public accountant performing the surprise examination must submit this form within 120 days of the time chosen by the accountant for the surprise examination.

The Uniform Securities Act provides an exemption from registration for certain securities and for certain transactions. However, the Administrator is not empowered to deny an exemption from state registration to which of these? I U.S. government securities II Private placement transactions III A transaction with an insurance company IV Municipal bonds issued by another state A) II and III B) II and IV C) I and III D) I and IV

D not B Explanation Other than in a transaction involving a federal covered security, the Uniform Securities Act gives the power to the Administrator to deny an exemption to any exempt transaction, such as private placements or transactions with professional investors (e.g., insurance companies or bank trust departments). However, when it comes to a security's exemption, the Administrator may only deny exempt security status to an issue of a nonprofit organization or an investment contract issued in connection with an employee benefit plan, never a U.S. government security or one issued by another state.

In the field of portfolio management, there are a number of different management styles. One of those styles involves committing additional capital to the market when others are reducing their exposure, or eliminating positions while others are increasing theirs. This style is generally referred to as A) growth B) value C) active D) contrarian

D not B Explanation The contrarian style of portfolio management takes positions opposite those of the market as a whole. They are buying when others are selling and selling when others are buying.

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

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

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

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

Concerning index annuities and their method of crediting interest, which of the following is true? A) On average, annual reset has a higher participation rate than point to point. B) Annual reset offers the best return regardless of market fluctuations. C) Point to point offers the best return when the market has had a single drastic decline during the period. D) High-water mark with look back offers the best return during periods of high volatility.

D not C Explanation Using the annual high-water mark with look back will generally result in the highest return during periods of high volatility. The reason is because under this method, the highest anniversary value is used to determine the gain. In a volatile market, there is likely to be a high spike sometime during the period and that is the value used. The problem with point to point when there is a single drastic decline during the period is that the decline might occur at or just prior to the annual crediting computation. Annual reset does ignore the daily market fluctuations, but if the index is lower at the end of the year, there is nothing credited. In reality, annual reset has a lower participation rate than point to point.

Under the Investment Advisers Act of 1940, the exclusion for providing investment advice that is solely incidental to the practice of a profession is not available to A) engineers. B) real estate agents. C) teachers. D) attorneys.

B not A Explanation In the Investment Advisers Act of 1940 and the subsequent releases explaining the act, there is no specific exemption for real estate agents who give investment advice that is incidental to their practice. Engineers, teachers, accountants, and lawyers are specifically excluded if their advice is incidental to their practice.

** SSS Corporation's total assets amount to $780,000, of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is SSS Corporation's shareholders' equity? A) $1,150,000 B) $410,000 C) $980,000 D) $170,000

B not C Explanation Total assets minus total liabilities equals shareholders' equity ($780,000 − $370,000 = $410,000).

According to the Uniform Securities Act, a state-registered investment adviser may have custody of a customer's funds and securities if A) it does not share in the capital gains and losses of the account. B) it has received the permission of the Administrator. C) the Administrator has been notified of the custody arrangement. D) it has received permission from the state banking authorities.

C not B Explanation As long as retaining custody of funds is not prohibited, an investment adviser may have custody of a customer's account after providing notice to the Administrator. Performance-based compensation is not related to the custody rules.

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 quantity. B) the time for delivery. C) the market price. D) the quality.

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

Which of the following are characteristics of negotiable jumbo CDs? I Issued in amounts of $100,000 to $1 million or more II Typically pay interest on a monthly basis III Always mature in one to two years with a prepayment penalty for early withdrawal IV Trade in the secondary market A) II and III B) II and IV C) I and III D) I and IV

D Explanation Negotiable jumbo CDs are issued for $100,000 to $1 million or more and trade in the secondary market. Most jumbo CDs are issued with maturities of one year or less. Being negotiable, there is no prepayment penalty. These CDs generally pay interest on a semiannual basis, not monthly.