Series 66

Selling Away / Private Securities Transactions

-Secs trx outside the scope of the APs employment -If you are compensated you need permission from firm, supervise the trx (must go through books and records) EX. issue directed sales with promise of future deal -No comp just requires notification to firm EX. raise equity capital for friend's start-up, no fee

clerical; ministerial

________________ and ________________ personnel are specifically excluded from the definition of investment adviser representative. UNIT 1

UNIT INVESTMENT TRUST (UIT)

A ______ ___________________ _____ is a type of investment company whose units are sold in the secondary market and is generally unmanaged, or passively managed. The trust manager initially selects the securities to be included in the portfolio and then holds those securities until they mature, or the______ ___________________ _____ terminates.

D) this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states where their clients are vacationing Explanation Canadian broker-dealers and their agents must be registered in any state in which they wish to do business with exisiting clients who are temporarily in the state. The Uniform Securities Act provides for a form of limited registration for Canadian broker-dealers wishing to do business with their clients who are vacationing or otherwise traveling through the United States. In order to qualify for the limited registration, the BD must be properly licensed in its home province and their only dealing in the states is with an existing client.

A Canadian broker-dealer is registered in Province Q. The firm has clients who vacation in several New England states and they would like to continue to do business with them while on their holidays. Under the Uniform Securities Act, A) the broker-dealer may only accept unsolicited orders from their existing clients while they are vacationing in the United States B) this is permissible only if the broker-dealer is registered with the SEC C) this would only be permitted if the trades were executed through an affiliated domestic broker-dealer who is licensed in those states D) this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states where their clients are vacationing

broker-dealer; broker (accts of others); dealer (its own acct)

A __________-_________ is any person, partner, officer, director, or securities firm engaged in the business of effecting securities transactions for the accounts of others (__________) or for its own account (__________).

D) Both the broker-dealer and the agent must register in State C. Explanation As long as a broker-dealer has at least 1 retail client in a state, registration is required. Furthermore, an agent cannot do business with a client who has become a resident of a state unless she is registered as an agent of a registered broker-dealer in that state. Unlike investment advisers, there is no de minimis exemption for broker-dealers and agents.

A broker-dealer is registered in States A and B. An agent of theirs is registered in State A, and one of the agent's clients moves from State A to State C. If the agent wishes to continue to do business with this client, which of the following statements is CORRECT? A) Only the broker-dealer must register in State C. B) Only the agent must register in State C. C) As long as they have 5 or fewer retail clients in State C, neither the broker-dealer nor the agent must register there. D) Both the broker-dealer and the agent must register in State C.

UNSOLICITED ; SOLICITED

A client calling to buy based on reading a tombstone ad is considered an ________________ order because, under the law, the tombstone ad is neither a solicitation to buy nor an offer to sell. If the agent sends a prospectus out and the client was responding to that with an offer to buy, this would be a _______________ order. U4LO3

A) the present value Explanation This is a present value computation where the future value, time period, and earnings rate are known. U10LO1

A client who wishes to have $50,000 available to help fund a 3-year-old child's college education in 15 years estimates that if the portfolio can earn 7%, a deposit of $18,122.30 will be required today. This deposit is referred to as A) the present value B) the internal rate of return C) the future value D) the net present value

D) variable life insurance Explanation Variable life insurance has the advantage of offering possible inflation protection for the death benefit. The insured assumes investment risk for this benefit, but pays a fixed scheduled premium for the life of his contract. U15LO7

A customer in his 20s, who is not risk averse, is in the market for life insurance. His main worry is that what looks like a generous death benefit today may not be sufficient for a beneficiary 40 or 50 years from now. An investment adviser representative might consider recommending A) whole life insurance with the option of purchasing additional coverage B) an aggressive, long-term strategy of investment in small-cap stocks C) term life insurance D) variable life insurance

A) I and II

A federal covered investment adviser is one who: I. has $110 million or more in assets under management II. manages an investment company registered under the Investment Company Act of 1940 III. limits his advice to securities listed on the NYSE IV. is affiliated with a federally chartered bank A) I and II B) I, II, III and IV C) II and III D) I and III UNIT 1

B) could not sell without being an agent Explanation It is unusual to have an answer set up this way, but it does happen sometimes on the exam—"to comply with"—and then there is no way to comply. First of all, the USA's exclusions from the definition of agent only apply to individuals working for the issuer, never broker-dealers. Then, the exclusion only applies when selling the following exempt securities in nonexempt transactions: -U.S. government and municipal securities; - Securities of governments with which the United States has diplomatic relationships; Securities of U.S. commercial banks and savings institutionsExplanation It is unusual to have an answer set up this way, but it does happen sometimes on the exam—"to comply with"—and then there is no way to comply. First of all, the USA's exclusions from the definition of agent only apply to individuals working for the issuer, never broker-dealers. Then, the exclusion only applies when selling the following exempt securities in nonexempt transactions: U.S. government and municipal securities; Securities of governments with which the United States has diplomatic relationships; Securities of U.S. commercial banks and savings institutions or trust companies (when not engaged in securities-related broker-dealer activities); Commercial paper rated in the top three categories by the major rating agencies with denominations of $50,000 or more with maturities of nine months or less; and Investment contracts issued in connection with employee's stock purchase, savings, pensions, or profit-sharing plans. Selling other exempt securities, such as those issued by a federally chartered credit union, on behalf of the issuer, requires one to become registered as an agent of the issuer. Don't confuse this with the exemption offered in the case of exempt transactions. In that case, regardless of whether the security is exempt or not, if an individual's only sales activity while representing an issuer is in exempt transactions, then the exclusion from the definition of an agent applies. It is obviously a much broader exemption than when selling exempt securities. or trust companies (when not engaged in securities-related broker-dealer activities); Commercial paper rated in the top three categories by the major rating agencies with denominations of $50,000 or more with maturities of nine months or less; and - Investment contracts issued in connection with employee's stock purchase, savings, pensions, or profit-sharing plans. Selling other exempt securities, such as those issued by a federally chartered credit union, on behalf of the issuer, requires one to become registered as an agent of the issuer. Don't confuse this with the exemption offered in the case of exempt transactions. In that case, regardless of whether the security is exempt or not, if an individual's only sales activity while representing an issuer is in exempt transactions, then the exclusion from the definition of an agent applies. It is obviously a much broader exemption than when selling exempt securities.

A federally chartered credit union is domiciled in Texas. The credit union is making an offering of securities in Nebraska. To comply with the Uniform Securities Act's exclusion from the definition of agent, any individual offering the security in Nebraska A) would have to be an employee of a broker-dealer registered in Nebraska B) could not sell without being an agent C) would have to be an employee of a broker-dealer registered in Texas D) would have to receive only nominal commissions UNIT 3

B) $300,000 Explanation One thousand dollars per month is $12,000 per year. Divide that $12,000 by 4% to arrive at $300,000, the principal amount that, at a 4% return, will yield $12,000 per year (or $1,000 per month). U10LO3

A grandparent wants to provide $1,000 per month in income in perpetuity to a great-grandchild. With a 4% projected rate of return, what amount does the grandparent need to invest? A) $25,000 B) $300,000 C) $250,000 D) $30,000

C) Broker-dealer A may solicit this customer in Nevada. Explanation This is an example of the Uniform Securities Act's position that, in certain situations, a broker-dealer is not a broker-dealer. If a broker-dealer registered in one state contacts an existing customer in another state and that customer is not a resident of the other state, the broker-dealer is not defined as a broker-dealer in the state in which the contact is made and is therefore not subject to the laws of that state. Of course, this is only true when the broker-dealer does not have an office in that state. U3LO2

A local customer of broker-dealer A is on vacation in Nevada. Broker-dealer A, who is registered in and maintains offices only in Florida, wishes to make the customer aware of an investment opportunity that has just become available. Which of the following is TRUE? A) Broker-dealer A may not solicit this customer in Nevada unless the broker-dealer has a branch office registered in Nevada. B) Broker-dealer A must notify the Nevada Administrator before calling this customer in Nevada. C) Broker-dealer A may solicit this customer in Nevada. D) Broker-dealer A may not solicit this customer in Nevada unless broker-dealer A and the agent making the call are registered in Nevada.

- banks - trust companies - savings and loan associations

A person buying and selling securities for customers' accounts is deemed a broker-dealer under the Uniform Securities Act. Specifically excluded from the definition of a broker-dealer are:

C) devoting a portion of the portfolio to securities with a negative correlation Explanation Securities with a negative correlation add diversification to a growth portfolio because they move in the opposite direction of the balance of the holdings. Therefore, losses are offset by gains. U10LO6

A portfolio manager with a growth style would probably diversify by A) placing a portion of the portfolio into high-yield bonds B) concentrating in stocks in 1 or 2 industries C) devoting a portion of the portfolio to securities with a negative correlation D) attempting to build a portfolio with a very high correlation

B) −1% and +23% Explanation Ninety-five percent of the time, a stock will range within 2 standard deviations of its historical return. In this case, 2 times 6% means that the range will be down 12% from the historical 11% and up 12% from the historical 11%. U10LO5

A security that your client has been following has a historical average annual return of 11% and a standard deviation of 6%. Knowing this, it would be expected that 95% of the time, your client could expect a return within the range of A) +5% and +17% B) −1% and +23% C) −66% and +66% D) −7% and +30%

$35,000

A state-registered investment adviser must maintain a minimum net worth of $__________, or a bond of the same amount (NOT both) UNIT 1

UNIVERSAL LIFE

A unique feature of ____________ _______ is that the premiums are flexible.

B) how much investors value the stock as a function of the company's market price to its earnings Explanation The two components of the price/earnings ratio are the current market price and the earnings per common share. When a company has a high P/E ratio, it means that investors are placing greater value on expected growth in earnings. That is one of the reasons why growth stocks carry higher P/E's than value stocks. U10LO7

According to most fundamental analysts, examining a company's price/earnings ratio gives an indication of A) the parity price of the issuer's convertible bonds B) how much investors value the stock as a function of the company's market price to its earnings C) the degree to how liberal the company's dividend policies are D) current cash flows

A) Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent. Explanation It is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent.

According to the USA, under what circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent? A) Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent. B) The securities are federal covered securities. C) The transaction is exempt. D) The employee is not paid any commission or salary.

C) I and II Paul, who works for a firm soliciting investment management accounts for several investment managers, would be defined as an investment adviser representative because he is acting in the capacity of a sales agent for investment advisers. John, as the owner of a sole proprietorship, is both an investment adviser and the firm's only investment adviser representative. Margaret would not be defined as an investment adviser representative because she functions as a registered agent for a broker-dealer. If she sold investment advice for the broker-dealer's investment management subsidiary, she then would be defined as an investment adviser representative. An agent of a broker-dealer, earning commissions on security sales, is not an IAR even if his primary selling tool for the brokerage business is the firm's outstanding research department.

According to the Uniform Securities Act, which of the following would be defined as an investment adviser representative? I. John, who opens an investment advisory firm where he devotes his time exclusively to management responsibilities as the sole proprietor of the firm II. Paul, who works for a firm soliciting investment management accounts on behalf of several different investment managers III. Margaret, who works as a commission sales agent for a broker-dealer IV. Mark, an employee of AAA Broker-Dealers, who solicits brokerage clients for commissions on the basis of research conducted by his firm's securities analyst A) I and IV B) II and III C) I and II D) II and IV UNIT 2

Blanket Recommendations

Agents must always determine suitability before soliciting purchases or sales. An investment cannot be suitable for all your clients; therefore, the practice of ______________ __________________________ is unethical.

B) after proper written disclosure, an adviser recommends the transaction to both the seller and the buyer Explanation An adviser cannot recommend a trade to both buyer and seller in an agency cross transaction, a transaction in which the adviser acts on behalf of both buyer and seller. The adviser can act as broker to both parties upon proper written disclosure and consent, provided the adviser did not recommend the transaction to both sides. U6LO1

All of the following activities comply with the requirements for agency cross transactions EXCEPT A) before obtaining a client's written consent in an agency cross transaction, the adviser must disclose that it will receive commissions from both parties and that the transactions involve a conflict of interest B) after proper written disclosure, an adviser recommends the transaction to both the seller and the buyer C) a client consents (in writing) to the adviser's dual role in the transaction as both adviser to the client and broker to the other party D) an adviser sends an annual statement to clients that reveals the total number of agency cross transactions for the client and the total amount of commissions the adviser received from those transactions

C) variable annuities or other variable insurance products offered by an insurance company authorized to do business in the state Explanation A variable annuity (or other variable insurance product) offered by an insurance company is a nonexempt security under the Uniform Securities Act. Securities issued by or guaranteed by an insurance company are covered by extensive state insurance regulations and are exempt from state securities registration. Securities issued by banks are exempt because banks are covered by extensive state and federal banking regulations. U4LO3

All of the following are exempt from state registration under the Uniform Securities Act EXCEPT: A) securities issued by a nonprofit organization B) debt securities issued by or guaranteed by an insurance company licensed to do business in this state C) variable annuities or other variable insurance products offered by an insurance company authorized to do business in the state D) bonds issued by a bank that is a member of the Federal Reserve System

D) debt/equity ratio Explanation Liquidity ratios measure a firm's ability to meet its current financial obligations and include the current ratio and acid-test (quick) ratio. However, the debt/equity ratio is a capitalization ratio and measures the amount of leverage compared to equity in a company's overall capital structure. U10LO7

All of the following ratios are measures of the liquidity of a corporation EXCEPT A) quick ratio B) acid-test ratio C) current ratio D) debt/equity ratio

A) Charging a performance-based fee to an elderly client whose net worth, excluding the equity in the principal residence, is $2.3 million, with only $150,000 under the adviser's management Explanation Performance fees may be charged, regardless of the client's age, to anyone with a qualifying net worth in excess of $2.2 million or with at least $1.1 million under management with the firm. This client with $2.3 million in net worth, exclusive of the equity in the principal residence, meets the qualification. An individual reaches accredited investor status with a qualifying net worth of at least $1 million, not enough to qualify. Additionally, one way in which the states differ from federal law is the requirement to disclose the incentive to take greater risks. U7LO1

Although generally prohibited, there are conditions under which a state-registered investment adviser is permitted to charge performance-based fees. Which of the following meets the necessary criteria? A) Charging a performance-based fee to an elderly client whose net worth, excluding the equity in the principal residence, is $2.3 million, with only $150,000 under the adviser's management B) Charging a performance-based fee to an individual who meets the definition of an accredited investor C) Charging a performance-based fee to an individual with a qualifying net worth in excess of $10 million without describing that there is an incentive for the adviser to take greater risks D) Charging a performance-based fee to an aggressive entrepreneur whose net worth, excluding the equity in the principal residence, is $1.8 million and who has $500,000 under the adviser's management

C) asset turnover ratio Explanation What is the purpose of a security's rating? To inform investors of the financial risk of the investment. The higher the rating, the lower the risk. This is one of those questions that students answer correctly because all of the other choices are incorrect (they are important factors). Remember, this is a negative question: "least likely." Certainly profitability of the issuer is a key factor in assessing the safety of the issue. Liquidity and cash flow are important factors as well. The rate at which assets are turned over is not nearly as important to determining a rating as the other three. U10LO7

Although there may be some slight differences in methodology, when S&P or Moody's evaluate a security in order to assign a rating, they would be LEAST likely to consider the issuer's A) cash flow to debt ratio B) profitability ratio C) asset turnover ratio D) liquidity ratio

highly efficient market

An NPV of zero indicates that there is no difference between the bond's present value and its current market price. That usually indicates a __________ _______________ market.

unintentional = civil liabilities intentional/willful = civil liabilities, criminal liabilities, and criminal penalties

An ______________________ omission of material facts when offering or selling a security would result in civil, but not criminal, liabilities under the USA. If the omission of material facts is willful, it can result in criminal liabilities and penalties.

B) Cannot check the records of the agent in state Y because it is not State X's jurisdiction\ Explanation Even though the broker-dealer is registered in State X, the agent in question is not; she is only registered in State Y. Therefore, the Administrator has no jurisdiction over the activities of this agent in a state other than his own. U5LO1

An agent is registered with a broker-dealer whose principal office is located in State X, but who also does business in State Y. However, the agent is only licensed in State Y and confines her business to residents of that state. The Administrator of State X has what kind of authority over this agent? A) Can check the records of the agent in state Y only with proper prior notification B) Cannot check the records of the agent in state Y because it is not State X's jurisdiction C) Can check the records of the agent in state Y with no prior notification D) Can only take action against this agent when she is physically present in State X

C) conduct business with the client as usual Explanation Even though the college program is called a resident program, that does not mean that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence. U3LO4

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

interstate; investment advisers

For BDs registered in more than one state must be registered with the SEC because they are dealing in ______________ commerce. Unlike _______________ ___________, BDs register with both the SEC and the states (unless it is an intrastate BD).

D) is guilty of selling away. Explanation When selling securities, agents are prohibited from enacting transactions that are not recorded on the broker-dealer's books unless the transactions are authorized in writing by the broker-dealer prior to execution. Failure to do this is known as selling away. Receipt of notification is not the same as authorization. U7LO4

An agent made written disclosure to his employing broker-dealer that he intends to execute a series of private securities transactions with individuals who do not have accounts with his broker-dealer. The agent did not acquire express written permission from the broker-dealer and did not receive compensation for executing the transactions, but did receive written acknowledgment of receipt of the agent's notice. In this case, the agent: A) engaged in an agency cross transaction. B) is required to register as a broker-dealer. C) performed a matched order. D) is guilty of selling away.

A) notify the Administrator in Illinois of his termination Explanation When an agent begins or terminates a connection with a broker-dealer, the agent as well as the broker-dealer must promptly notify the Administrator. The agent has no responsibility to insure that the previous employer has notified the Administrator.

An agent of a broker-dealer registered in Illinois terminates his employment to accept a new position with a broker-dealer who is also registered in Illinois. If his previous employer fails to notify the state Administrator of the termination, the agent must A) notify the Administrator in Illinois of his termination B) notify his new employer that he has terminated his registration C) notify the Administrator only if he learns that his previous employer has failed to notify the Illinois securities Administrator D) not seek employment with another broker-dealer until his registration is renewed

B) both the agent and the employing broker-dealer are properly registered in the other state Explanation An agent holding registration in one state may solicit and/or transact business in another state only if registered in that state and the employing broker-dealer is also registered in that state, unless an exemption is available. U3LO5

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

D) Route the call to a licensed agent in the office Explanation The fact that the order is unsolicited does not preclude the rule that under no circumstances may an unregistered individual accept and place orders.

An agent with a broker-dealer is suddenly called out of town on a personal family matter. While away, the agent's unregistered sales assistant receives a phone call from an existing client wishing to purchase 200 shares of a listed stock. What would be the most appropriate action for the sales assistant to take? A) Accept and place the order because it is unsolicited B) Accept the order because it is from an existing customer C) Explain that the agent is out of town and request the client to call back with the order next week D) Route the call to a licensed agent in the office

C) improperly; the order should have been placed on Thursday Explanation In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time or price. However, time or price discretion are only good for that day—those are considered "day" orders, so the agent is able to use judgment, but the order must be placed during the day it was received. U7LO2

An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of Kapco common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the Kapco stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case, the agent acted: A) improperly; the order should have been placed on Monday B) properly because the agent saved the client money C) improperly; the order should have been placed on Thursday D) properly because the agent used discretion as to price and time

D) the fair value of a security. Explanation DCF uses the present value of future cash flows, based on a specified discount (interest) rate, to evaluate the price that a security should be selling for in the market. If the current market price of the security is less than this value, it has a positive net present value (NPV) and should be a good investment. The opposite is true if there is a negative NPV (the market price is higher than that computed under the DCF method). U13LO12

An analyst would use the discounted cash flow method in an attempt to find A) the current rate of return of a security. B) the cash flow from operations. C) the current market price of a security. D) the fair value of a security.

C) not have to be registered as an agent of the broker-dealer Explanation Agents of broker-dealers are in the business of securities-related transactions on behalf of clients of the firm. A free-market report is not a security, so this individual is not soliciting securities business.

An individual has been employed by a broker-dealer to solicit new subscriptions for the firm's free monthly stock market report. The individual is paid a salary plus bonus based on his success rate with signing up subscribers. Under the USA, this person would A) have to be registered as an agent of the broker-dealer B) have to be registered as an investment adviser representative C) not have to be registered as an agent of the broker-dealer D) only be allowed to contact existing clients of the broker-dealer

balance sheet

For federal covered investment advisers, a prepayment in excess of $1,200 and for periods of 6 months or more in advance (substantial prepayment) requires the adviser to submit an annual audited _____________ _________ as part of its ADV Part 2 (and brochure). UNIT 1

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

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

A) unless the Administrator, by rule or order, authorizes such employment Explanation An individual may only act as an agent for multiple broker-dealers that are affiliated with each other. If the broker-dealers are unrelated, an agent may not work for them unless the state securities Administrator, by rule or order, authorizes such employment.

An individual may NOT act as an agent for more than one broker-dealer A) unless the Administrator, by rule or order, authorizes such employment B) unless the broker-dealers are unrelated C) under any circumstances D) unless the broker-dealers are exchange members

individual

An individual or a firm may be registered as an investment adviser, but only a(n) _______________ can be an investment adviser representative. UNIT 1

agent

An individual representing an issuer in the sale of that issuer's security is not defined as an __________ if the security is: 1. issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state; 2. issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency of the foregoing; 3. any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor; 4. a promissory note, draft, bill of exchange or bankers' acceptance that evidences an obligation to pay cash within 9 months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization; or 5. any investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan.

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

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

- consent to service of process - fee - discretionary powers - custody of client funds/securities

An initial application must contain a consent to ___________ of _____________ and a ________, and it must disclose whether the applicant will have ___________________ powers over, or ____________ of, client funds and/or securities. UNIT 1

QUARTERLY

An investment adviser in possession of customer assets must send a statement to the customer at least _____________. The statement must list the securities and funds held by the adviser and their location, and it must show all transactions in the account since the last statement date. U7LO2

C) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege Explanation The problem here is that the client has 5 days to withdraw, not 48 hours. Under Rule 203(b)-1 of the Uniform Securities Act, an investment adviser, or investment adviser representative must deliver the brochure to an advisory client or prospective advisory client not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client; or at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within 5 business days after entering into the contract. A signed receipt is not necessary and waivers are never allowed. U6LO4

An investment adviser prepares a slick advertising piece containing the relevant information from the firm's Form ADV - Part 2. One of the firm's IARs secures a contract with a new client and presents the brochure at that time. While explaining the terms of their agreement, the IAR mentions that the client may withdraw within the first 48 hours without any penalty. Upon returning to the office, the IAR realizes that he forgot to have the client sign a receipt for the disclosure document. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) there is a violation because the IAR failed to obtain the signed receipt. B) there is no violation as long as the customer signs a waiver agreeing to these terms. C) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege D) there is a violation because the brochure must be delivered at least 48 hours prior to entering into the contract.

B) need not disclose that fact to the clients Explanation It is not necessary to disclose what sources an IAR uses as the basis for recommendations. If the third-party research is distributed to clients, proper attribution is required. U7LO4

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

D) I only Explanation An unintentional omission of material facts when offering or selling a security would result in civil, but not criminal, liabilities under the USA. If the omission of material facts is willful, it can result in criminal liabilities and penalties. U5LO4

An unintentional omission of material facts when offering or selling a security may result in: I. civil liabilities II. criminal liabilities III. criminal penalties A) II and III B) II only C) I, II, and III D) I only

chief compliance officer (CCO)

Any individual performing the functions of an investment adviser representative must be so registered. Among those duties is supervisory responsibility, and the ________ has the job of ensuring that the firm and all of its employees follow the rules, and would be required to register as an investment adviser representative UNIT 2

POSITIVE CORRELATION

________________ correlation between two assets will result in the returns of both of them moving in the same direction (up or down).

internal rate of return

The _____________ _______ ____ ____________ is the earnings rate required to reach a specified future value from an amount that is currently available to invest. This is a future value computation, but there is no such term as future value rate. U10LO1

exempt securities under USA

Any issue from a state or Canadian province is always exempt. Equipment trust certificates issued by any regulated common carrier are always exempt. Banks, savings institutions, and trust company securities are also exempt as long as they are organized under the laws of the United States or any state. However, securities issued by a savings and loan or building and loan are only exempt if the issuer is authorized to do business in this state.

- the internal rate of return is GREATER than the required rate of return and the investment should be made - the internal rate of return is EQUAL to the required rate of return

Any time the net present value is greater than zero (a positive NPV), the internal rate of return is __________ than the required rate of return and the investment should be made. If the net present value is zero, then:

Agents; agents; BD's and IA's

Applicants for registration as _________ must include any felony conviction (misdemeanors are limited to those that are securities related) and a statement of citizenship. _________ can only be individuals, not business entities. It is only ___________-___________ and _______________ ____________ that must submit financial information.

A) An agent represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. Explanation ​The text in Section 401(b) of the Uniform Securities Act reads, "Agent means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities."​ There are cases where an individual representing an issuer would not be considered an agent, such as if the transaction is exempt, but that doesn't change the definition.

As defined in​ the Uniform Securities Act, which of the following statements is TRUE regarding an agent? A) An agent represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. B) If someone meets the definition of an agent, that person is exempt from registration requirements. C) An agent may be an individual or a firm. D) An agent may be a broker-dealer.

impersonal investment advice

As used in the regulations, the term _______________ investment advice refers to investment advisory services provided by means of written material or oral statements that do not purport to meet the objectives or needs of specific individuals or accounts UNIT 1

CUSTODIAL ACCTS

Assets held in ______________ accounts are counted at 20% of their value, which compares unfavorably with the 5.64% valuation of Section 529 or Coverdell ESA assets. Please note: It is highly unlikely that you will need to know the percentages - but you will need to know that _________________ accounts do not receive as beneficial treatment when applying for financial aid.

A) 3 years with approximately $17,863 available for the 4th year Explanation Here is how to do this with the simple calculator available at the testing center. Beginning sum is $100,000 with $30,000 taken out to start the school year. The remaining $70,000 earns 6%, so multiply $70,000 × 106% to arrive at $74,200 at the end of the 1st year. Then, subtract $30,000 and multiply by 106% again resulting in an end of 2nd year total of $46,852. Subtract the $30,000 again and multiply the remainder by 106%, which results in $17,863 remaining at the end of the 3rd year. U10LO3

At age 18, Joan's trust fund becomes available to pay for her higher education. There is $100,000 in the fund, all invested in fixed income securities with an average coupon of 6%. If the estimated cost of college for the next 4 years is $30,000 per year paid at the beginning of the school year, how long will the money last? A) 3 years with approximately $17,863 available for the 4th year B) 4 years with approximately $4,000 remaining C) 3 years with approximately $25,009 available for the 4th year D) 3 years with approximately $28,000 available for the 4th year

accounts receivable; accounts payable copyrights; advances or loans

For purposes of the USA, the term "net worth" means an excess of assets over liabilities, as determined by generally accepted accounting principles. Accounts _________________ are a current asset, while accounts ____________ are a current liability. The USA specifically disallows intangibles, such as __________and goodwill, and _______________ or __________ to partners (or officers if a corporation) are excluded as well. UNIT 1

National Securities Market Improvement Act of 1996 (NSMIA)

The _____________ defined the term "federal covered adviser," referring to advisers who must register with the SEC or who are excluded from the definition of "investment adviser" under the Investment Advisers Act of 1940. UNIT 1

FEDERAL; USA

The ______________ law does permit oral advisory contracts, whereas the _________ requires that all initial and renewal contracts be in writing.

SYSTEMATIC RISK beta = systematic risk; standard dev = systematic + unsystematic risk

BETA is used to measure the variability between a particular stock's (or portfolio's) movement and that of the market in general. That refers to ______________ rather than unsystematic risk.

banks and savings and loans.

Banking authorities, such as the Federal Reserve Board, the Federal Deposit Insurance Corporation, and others, regulate:

client

Being a __________ of a broker-dealer or owning shares of the firm's stock does not make one an associated person, unless something indicated that this ownership put them into a position of control.

SOLICITED trades with individuals are not exempt transactions, even when the security being traded is exempt.

_________________ trades with individuals are not exempt transactions, even when the security being traded is exempt.

accredited investor

___________________ investor is a federal term UNIT 1

90 DAYS

Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within _____ days of fiscal year end. U6LO4

NONPROFIT

Charitable or religious organizations must be ______________ in order to gain exemption from full registration.

$2,000 $250,000

Coverdell ESAs currently permit up to $________ in annual contributions, whereas QTPs (Section 529 plans) allow large contributions reaching as high as $__________ and above.

qualified client

On the state level, the exemption requires that all investors meet the USA's definition of ______________ client. That means the investor must have a _of at least $2.1 million dollars or at least $1 million in assets under management with the adviser UNIT 1

REQUIRED in that state. There is no de minimis exemption for broker-dealers (unlike investment advisers).

Once a BD has 1 retail (noninstitutional) client who resides in the state, registration is:

Marjorie would automatically be registered as an IAR in State Z.

DEF Investment Advisers, organized as a partnership, is currently registered with State Y. Marjorie is one of the partners and is registered as an IAR. If DEF were to register with State Z: UNIT 2

under a court or IRS order or when requested by a joint owner of the account.

Disclosure of confidential account information may be made: under a __________ or _______ order or when requested by a _________ owner of the account.

B) passing State W's qualification exam. Explanation Many years ago, applicants for registration as an agent in a state had to pass that state's exam. Now, because the NASAA exams are uniform exams, they are accepted in every state that requires passage of an exam. A consent to service must be filed with every state in which the person intends to register and, of course, the application must be accompanied by the proper fee.

Dr. David Livingstone is registered as an agent in States H and M with Stanley Securities, a broker-dealer registered in every state. Livingstone would now like to register in State W. In order to do so, all of the following would be required EXCEPT: A) filing a consent to service of process with State W. B) passing State W's qualification exam. C) paying the appropriate fee to State W. D) filing an application for registration with State W.

INVESTMENT ADVISOR (must disclose in writing and receive approval from the client in order to act in principal OR agency capacity)

Even if the __________________ _____________ has discretionary power, any action that results in a transaction in which the firm or an affiliate acts in either a principal or agent capacity requires the adviser to provide written disclosure of that fact to the client and obtain approval from the client prior to completion of the transaction.

B) Only the third intern would have to register. Explanation When an individual representing a broker-dealer contacts clients to obtain indications of interest for a new securities offering, that person is performing a function requiring registration as an agent. Employees of a broker-dealer, permanent or temporary, compensated or not, do not have to register if their only function is clerical or administrative. Compiling data is clerical and following up with clients to determine how they wish to receive documents for a purchase they've already made is simply an administrative task. U3LO5

GEMCO Securities, a registered broker-dealer, has a policy of hiring unpaid interns from top business schools. GEMCO is currently the lead underwriter on a new issue and has assigned three of its interns to specific tasks. One is doing entering the data as indications of interest are received, the second is calling clients to offer to deliver their prospectus via email instead of mail, and the third is calling clients to describe the new issue and accept indications of interest. Which of the interns would need to register as agents? A) All of the interns would need to register. B) Only the third intern would have to register. C) Because they are not being compensated, none of the interns need to register. D) The second and third interns would be required to register.

A) The Uniform Securities Act requires investment adviser representatives employed by federal covered advisers, including solicitors, to register at the state level, regardless of whether the firm is required to register at the state level, as long as the IAR has a place of business in the state. Explanation Certain individuals employed by investment advisers, including those whose only function is to solicit advisory business, are deemed to be investment adviser representatives. Even though the firm does not have to register in any state, IARs must register in each state in which they have a place of business.

Gibraltar Advisers is a federal covered investment adviser with offices in 13 states. However, Nancy, a Gibraltar employee who solicits accounts for Gibraltar out of an office in one of those states, is required to complete the NASAA examination and register at the state level. Why might this occur? A) The Uniform Securities Act requires investment adviser representatives employed by federal covered advisers, including solicitors, to register at the state level, regardless of whether the firm is required to register at the state level, as long as the IAR has a place of business in the state. B) The state securities Administrator has stricter standards than federal standards and requires investment associates to register at the state level. C) The state securities Department is required to register all individuals serving professionally in the investment industry. D) All employees of Gibraltar must register at both the state and federal level.

price-to-book-value ratio

The _______-___-______-________ ratio is calculated by dividing the price per share by the stockholders' equity per share. This ratio shows the relationship between a company's stock price and the company's book value.

C) universal life Explanation A unique feature of universal life is that the premiums are flexible. That is, if the client wishes to pay more or less than the target premium, that may be done. However, the nature of the universal life product is such that cash values can fluctuate. Cash values can fluctuate in variable life, but unless the policy is UVL (universal variable life), premiums are scheduled (fixed). Typically there are no cash values with term insurance and the premiums are fixed and whole life has both fixed premiums and guaranteed cash values. U15LO6

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

NOT considered to be custody

One of the things that makes the federal rules on custody different from the USA is that receipt of a check made out to a third party other than the IA is:

FLEXIBLE

Only universal and universal variable life policies have ____________ premium payments

D) the discounted cash flows are lower than the investment outlay. Explanation A negative net present value of a series of discounted cash flows means the investment outlay exceeds the discounted cash flows. Net present value is the difference between the initial cash flows and the present value of future cash inflows. If the net present value is negative, the present value of future cash flows is less than the initial investment. An investment with a negative net present value is generally an undesirable investment. U10LO1

If the net present value of a series of discounted cash flows is less than zero (negative NPV), one could conclude that A) the return on investment is higher than the internal rate of return. B) the rate of return is higher than the cost of capital. C) the internal rate of return equals the discount rate. D) the discounted cash flows are lower than the investment outlay.

A) Each agent must be registered in the appropriate state before soliciting or taking orders. Explanation Agents must be registered in every state in which they do business. An agent is not automatically registered in a state just because his employer is registered in that state.

If Somerville Discount Securities has its principal office in New Jersey and recently registered a branch office in Minnesota, which of the following statements is TRUE? A) Each agent must be registered in the appropriate state before soliciting or taking orders. B) Agents working in the branch office that are licensed only in Minnesota may take unsolicited orders from New Jersey residents. C) Each agent is automatically registered in both states. D) Agents working in the principal office that are licensed only in New Jersey may take unsolicited orders from Minnesota residents.

B) III and IV Explanation Under the Uniform Securities Act, broker-dealers must register in any state where they engage in securities transactions with individual investors. The net worth of the individual is irrelevant. Broker-dealers with no offices in the state who engage in transactions in the state with certain institutional investors, such as insurance companies or investment companies, need not register in that state. Transactions between the issuer and a broker-dealer are exempt transactions.

If XYZ is a registered broker-dealer with its lone office located in State T, under which of the following circumstances must it also register in State L? I. XYZ's only dealings in State L are directly with issuers of securities in State L. II. XYZ engages in extensive transactions with the largest insurance company in State L. III. XYZ routinely sells nonexempt securities to extremely high net-worth residents of State L. IV. XYZ purchases exempt securities from extremely high net-worth residents of State L for resale to residents of State T. A) I only B) III and IV C) II, III, and IV D) I and II

on December 31

If a natural person files an initial application for state registration as an investment adviser representative on October 1, the registration will most likely expire: UNIT 1

- close of business on the next business day - close of business on the next business day after that

If an IA registered under USA falls below the required net worth, she must notify the state Administrator by: Once notified, the IA must file a report with the state Administrator by: UNIT 1

B) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement

If an agent feels that his secretary is underpaid and decides to split his commissions on an 80%/20% basis, this practice is A) a violation under all circumstances B) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement C) a violation in certain states D) permitted if the secretary is also registered as an agent

A) debt-to-equity ratio Explanation The debt-to-equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. The higher the ratio, the more leverage is being used by the company. U10LO7

If an analyst wished to determine the degree to which leverage was being employed by a subject company, she would most likely examine that issuer's A) debt-to-equity ratio B) price-to-book ratio C) current ratio D) sales-to-debt ratio

at noon on the 30th day after filing

If not denied and no disciplinary proceedings are instituted, an application for state registration becomes effective: UNIT 1

investment adviser representative (IAR)

If the goal is obtaining clients for the investment adviser, a solicitor is generally considered an ______________ ____________ _________________________ under the Uniform Securities Act.

zero

If the market is efficiently pricing that bond, its market price should be equal to its present value, resulting in an NPV of ______.

C) present value would be higher Explanation The present value computation is used to determine how much money must be deposited now (present) to reach a specified future goal when you know how many years you have to reach that goal. One critical component of the formula is the rate of return used in the formula. As a simple example, if you need $100,000 18 years from now for your newborn's college education and you expect to earn 8%, you'll have to deposit approximately $25,000 now (present value) to reach the goal. However, if it turns out that the earnings rate is less than anticipated, say only 4%, then you would have to deposit twice as much presently. Therefore, we answer this question by indicating that a lower rate of return will require a higher present value. U10LO1

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

TESTIMONIALS

In 2021, the Investment Advisers Act of 1940 was amended by the SEC's new marketing rule. That rule permits _________________ (a like on a Facebook page is considered a testimonial) as long as certain disclosures are made.

TESTIMONIALS

In 2021, the Investment Advisers Act of 1940 was amended by the SEC's new marketing rule. That rule permits _________________ (a like on a Facebook page is considered one) as long as certain disclosures are made. U6LO5

D) by notifying clients of the change in advance Explanation Most broker-dealers disclose fee changes at least 30 days in advance, and there is no requirement whatsoever to notify the Administrator. U6LO1

In general, a broker-dealer will disclose any changes to its fee schedule A) within 30 days following the change B) to the Administrator and then to the clients C) when requested by the client D) by notifying clients of the change in advance

1) agent 2) issuer 3) bank, savings institution, or trust company

In the Uniform Securities Act, it specifically states: "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. "Broker-dealer" does NOT include: (1) an __________, (2) an ______________, (3) a __________, _____________ _________, or _________ ________________.

FEDERAL - 1 year after discovery or 3 years after action, whichever is sooner USA - 2 years after discovery or 3 years after action, whichever is sooner

In the ____________ regulations, the statute of limitations for a civil action is the sooner of 1 year after discovery or 3 years after the action. Under the _________, it is the sooner of 2 years after discovery or 3 years after the action. U5LO3

average price basis.

It frequently happens that an IAR will submit an order for a large quantity of a specific security that is to be allocated among several clients. If the order is filled at different prices, the only fair treatment is to distribute the shares on an:

SEC; SEC's

It may be assumed that a broker-dealer member of FINRA is also registered with the ________. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the ________'s requirements always trump those of the states.

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

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

B) The advisory firm must cancel the contract but can keep a proportionate amount of the fee as compensation for services performed by the cancellation date. Explanation Because the brochure was delivered at the time of the signing of the contract, the client may cancel without penalty within 5 business days. The firm must return all the up-front fees collected except for an amount that is proportionate to the time advisory services were rendered. This is commonly known as the 48-hour rule because anytime the client does not receive the adviser's brochure at least 48 hours prior to entering into the contract, this refund right is in effect. U6LO4

Jim Thomas contracts with XYZ Advisory Services for the design of a financial plan and investment advice. He pays an up-front fee when the contract is signed and receives XYZ's disclosure brochure at that time. After 3 days, Jim decides to cancel the investment advisory service with XYZ. According to the Uniform Securities Act, which of the following statements is TRUE? A) The advisory firm must cancel the contract but may keep all fees collected. B) The advisory firm must cancel the contract but can keep a proportionate amount of the fee as compensation for services performed by the cancellation date. C) The advisory firm must cancel the contract and return all fees collected. D) The contract is binding, and XYZ has no obligation to return any fees collected.

B) municipal bonds Explanation Any stock listed on the NYSE or traded on Nasdaq has high liquidity. Municipal bonds tend to be thinly traded, thereby exposing their holders to a higher degree of liquidity risk. UITs, regardless of their portfolio, stand ready to redeem their units so liquidity is not a problem for the investor. U11LO2

Liquidity risk would be greatest for an investor whose portfolio was primarily composed of: A) ADRs listed on the NYSE B) municipal bonds C) municipal bond UITs D) Nasdaq stocks

more than $500, 6 or more months in advance

NASAA defines a substantial prepayment of fees to be:

$200 million

Pension consultants are not eligible for SEC registration until their AUM reaches $_______ million. UNIT 1

HEDGE AGAINST INFLATION

Precious metals are traditionally viewed as a ___________ against ______________. One of their benefits is that they have a low correlation with the stock market. Transaction costs for precious metals tend to be higher than securities—the dealer spreads can be relatively high. One significant negative is that these investments generate no income. U17LO6

register as IAR

Regardless of whom the advice is given to, unless there is some kind of exemption involved, individuals working for IAs (state or federal) must ____________ ____ _______ in at least one state. It makes no difference if the plan is qualified or not. Explanation Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level. The agent would now become an IAR of the firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business.

A) annually Explanation It is the job of the adviser's chief compliance officer (CCO) to review those policies and procedures annually for their adequacy and the effectiveness of their implementation. U7LO6

Review of an SEC-registered investment adviser's policies and procedures designed to prevent violation of the federal securities laws must take place no less frequently than A) annually B) monthly C) quarterly D) semiannually

B) not in violation of any applicable statutes Explanation Provided Sarah does not solicit business, offer advice to customers, or accept orders, she has not committed a violation of any act.

Sarah has passed her Series 6 qualification exam but not the Series 63. As Jack's assistant, Sarah has frequent telephone contact with Jack's customers to whom she provides account information and current stock quotes. In this situation, Sarah is A) in violation of the Securities Exchange Act of 1934 B) not in violation of any applicable statutes C) in violation of the Securities Act of 1933 D) in violation of the Uniform Securities Act

Securities registration statements are generally effective for 1 year from the effective date.

Securities registration statements are generally effective for: U4LO3

S CORPORATION

Shareholders of what type of corporation have limited liability, are limited to no more than 100 shareholders, and receive flow-through tax treatment? U18LO3

investment advisor representative

Soliciting for advisory clients would be done by an _______________ _____________ _____________________, not an agent.

present value

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

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

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

agents registered with an affiliated BD *Agents with an affiliated broker-dealer come under the supervisory jurisdiction of the compliance officer of that BD.

The Chief Compliance Officer (CCO) of an investment adviser is responsible for compliance with all relevant rules and procedures applying to all personnel of the investment adviser. They would NOT have jurisdiction over: UNIT 1

B) II and III Explanation No broker-dealer or agent may exercise discretion in a client's account without having received prior written authorization. Read choice IV carefully. The use of inside information is a prohibited practice under all circumstances, not only if the client makes money. Win or lose, it is still prohibited. It is appropriate to disclose material information in such manner as to make it easily understandable and all recommendations must be suitable, whether or not the client agrees with them. U7LO5

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents describes many actions considered by NASAA to be prohibited under the intent of the USA, as amended. Under that Statement of Policy, which of the following actions would be a prohibited practice? I. Stating material facts in such a manner that they may be easily understood by a prospective client II. Making unsuitable investment recommendations even when the client agrees with your assessment III. Exercising discretion without previous written authority IV. Using inside information, but only if the client makes money as a result of the trade A) III and IV B) II and III C) I and III D) I and II

D) the advisory firm should indicate the educational requirements necessary for employment Explanation Guidelines under SEC rules require (at minimum) that the chief compliance officer of each federal covered investment adviser conduct an annual review of its compliance procedures. Among the duties of the compliance officer is to monitor the consistency of portfolios with guidelines established by clients, disclosures, and regulatory requirements. The firm should implement procedures for allocating investment opportunities such as best executions among clients. If the firm does have internal educational requirements, that would be found in its HR manual, not in its compliance manual. U7LO6

The SEC has enumerated specific items that must be included in Investment Adviser written compliance manuals EXCEPT A) the advisory firm must review policies and procedures at least on an annual basis B) the advisory firm should implement procedures for allocating investment opportunities such as best executions among clients C) the advisory firm must monitor the consistency of portfolios with guidelines established by clients, disclosures, and regulatory requirements D) the advisory firm should indicate the educational requirements necessary for employment

C) the future value of the $25,000 Explanation To determine the money's worth at a future date (in this case, 5 years), the Smiths calculated the future value of the funds. Future value is a compounded rate of return, and in this case, the $25,000 was compounded at 5% per year for 5 years. The present value of an investment is the opposite of future value. U10LO1

The Smiths are saving money for a down payment on a house. The Smiths have $25,000 in cash, and they estimate that in 5 years they will have approximately $31,000 if they deposit their cash in a savings account that compounds interest yearly. To calculate the $31,000 amount, the Smiths determined A) the net present value of the $25,000 B) the present value of $25,000 C) the future value of the $25,000 D) the internal rate of the return on the $25,000

Administrators

The USA empowers ___________________ to administer oaths. Sworn oaths typically occur in conjunction with hearings. U5LO2

consent to service of process

The USA requires that which document accompany an initial application for registration as an agent?

agent

The Uniform Securities Act defines an ___________ as any individual (other than a broker-dealer) who represents a broker-dealer in effecting securities transactions.

agent

The Uniform Securities Act defines an ___________ as: "'any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities."

opportunity cost

When an investor forgoes the risk-free returns of the 91-day Treasury bill in favor of another investment, anything lost is considered the ______________________ _________ of passing up the sure thing. U11LO3

INITIAL application

The consent to service of process is filed with the ___________ application for registration and becomes a permanent part of the registrant's file

initial registration and remains on file permanently

The consent to service of process is supplied with the __________ ___________________ and remains on file ____________________. UNIT 1

B) the internal rate of return Explanation The internal rate of return, (IRR), is the interest rate that makes the net present value zero. It reflects the yield to maturity of a bond because a bond's current market value should equal the present value of that bond when considering the future interest payments and return of principal at maturity. That is why bond prices fall when interest rates rise and the reverse. U10LO1

The discount rate that makes the NPV of all cash flows from a security equal to zero is A) the median return B) the internal rate of return C) the present value return D) the cash flow adjusted return

secured debt holders, unsecured debt holders (including general creditors), holders of subordinated debt, preferred stockholders, and common stockholders.

The liquidation order is as follows: U11LO4

D) alpha Explanation This is the textbook definition of alpha. Portfolio managers strive for a positive alpha (returns in excess of the expected return). U10LO4

The measurement of a portfolio's actual or realized return in excess of (or deficient to) the expected return calculated by the capital asset pricing model (CAPM) is known as A) beta B) NPV C) IRR D) alpha

BLANKET RECOMMENDATIONS

The prohibited practice of an investment adviser placing the same security in the accounts of all of the firm's clients is known as:

$100 million or more of 13(f) securities.

The requirement for institutional investment managers is that they must file reports quarterly (13F) if they exercise discretion over accounts valued at:

10 DAYS

The requirement for reports of beneficial ownership is that anyone who becomes the owner of more than 5% of a security registered under the Securities Exchange Act of 1934 must file a report within ______ days.

EXEMPT TRANSACTIONS

The term "____________ transaction" includes sales by fiduciaries, private placements and isolated nonissuer transactions. Any solicited sale to an individual client, even of a properly registered security, is not an exempt transaction. U4LO3

the number of accumulation units owned multiplied by the value of each unit

The value of a variable annuity during the accumulation period is determined by:

principal vs agency cross transaction

There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from the client who owns them places the IA in the position of being 1 of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. Although not mentioned here, consent of the client is also necessary to act in this fashion. In agency cross transactions, the firm is acting as an ___________

C) 1% of the increase in account value over the next quarter Explanation Unless the question specifically references the allowable exception, investment advisers are not permitted to receive performance-based compensation. U7LO1

There are various ways in which an investment adviser may be compensated for services rendered. All of the following would be permitted under the Uniform Securities Act EXCEPT A) 1% of the average annual assets B) hourly fees C) 1% of the increase in account value over the next quarter D) 0.25% of the asset per quarter

C) issue a warrant for the arrest of a suspected violator Explanation A difference between the Uniform Securities Act and the Securities Act of 1933 is who enforces them. The Uniform Securities Act is enforced by the state Administrators, while the federal acts are enforced by the SEC. In complying with its enforcement responsibilities, the Administrator may make, amend, and rescind rules; issue cease and desist orders; administer oaths; conduct investigations; take evidence; and subpoena witnesses, books, and records. The Administrator may also seek temporary or permanent injunction from the courts, file civil suits, and refer evidence to the attorney general for criminal prosecution, but cannot issue an arrest warrant. We like to remind students that the Administrator does not "wear a badge." U5LO2

To enforce the Uniform Securities Act, the Administrator may do all of the following EXCEPT: A) issue cease and desist orders B) conduct formal investigations C) issue a warrant for the arrest of a suspected violator D) refer evidence to the attorney general for possible criminal prosecution

A) The sale of an estate's holding of IBM shares by an executor Explanation An exempt transaction relieves the security from any state advertising or registration requirements. Transactions by executors and estate administrators are examples of exempt transactions. Municipal and government bonds are exempt securities, and whether or not they are exempt transactions depends on to whom or how they are sold (that information is not given in this question). The sale of the unregistered stock is not an exempt transaction (private placement) because the USA only permits offers to a maximum of 10 noninstitutional investors over a 12-month period. U4LO3

To which of the following situations does the transaction exemption apply? A) The sale of an estate's holding of IBM shares by an executor B) City of Chicago bond offering C) Offering an unregistered security to a maximum of 12 individual customers in a 10-month period D) Canadian government bond offering

C) -1.0 Explanation Risk elimination can be achieved if two securities with a perfect negative correlation are combined. That is, when one goes up, the other goes down by the same amount. In other words, one is the antipode of the other.

Two securities with which of the following correlation coefficients could be combined to create a risk-free portfolio? A) 0.0 B) +1.0 C) -1.0 D) -0.5

90%; 75%; 75%

Under SEC rules, to qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least ____% of its taxable income to shareholders annually in the form of dividends. Don't confuse this with the requirement to have at least ___% of its income from real estate or ____% of its assets invested in real-estate related assets.

federal

Under ____________ law, the balance sheet is only required when the IA requires or charges a substantial prepayment of fees (it is only state registered advisers who must supply balances sheets when maintaining custody). Bonding requirements apply only to state registered investment advisers.

Securities Exchange Act of 1934, which regulates the secondary market and its employees and firms.

Under federal law, which act regulates the activities of broker-dealers and associated persons?

B) 9 months Explanation For exemption under the Securities Act of 1933, commercial paper must mature in 9 months or less. U4LO3

Under the Securities Act of 1933, commercial paper is exempt from the prospectus delivery requirements or registration, unless its maturity is more than how many months? A) 12 months B) 9 months C) 6 months D) 3 months

1) exchanges and SROs 2) broker-dealers, investment advisers, and associated persons that are required to be registered under federal law.

Under the Securities Exchange Act of 1934, the SEC has jurisdiction over:

federal-covered advisers

Under the USA, an investment adviser with a place of business in the state must register with the state securities Administrator, regardless of who the clients are, unless they are ______________ ___________________ advisers UNIT 1

each year on December 31st

Under the USA, every agent, broker-dealer, investment adviser, and investment adviser representative registration expires:

APPENDIX 1 of Form ADV Part 2A

Under the USA, the brochure must be filed with the Administrator and must contain the information required by ________________ ___ of Form ADV Part ____.

Under the USA, the maximum penalty is $5,000 and/or 3 years' imprisonment for a securities-related felony.

Under the USA, the maximum penalty is $________ and/or ____ years' imprisonment for a securities-related felony. U5LO4

statement; more or less

Under the USA, the wrap fee brochure must contain a ________________ that the program may cost the client ________ or _________ than purchasing these services separately.

D) A condominium purchased as a primary residence A personal residence, whether a condominium or other single-family home, is real estate, not a security. U4LO1

Under the USA, which of the following is NOT a security? A) Limited partnership in a cattle-breeding program B) Treasury stock C) Commercial paper with a maximum maturity of 270 days D) A condominium purchased as a primary residence

B) common stock only sold intrastate Explanation Local companies that issue common stock sold only within the state must register their securities with the state Administrator. Airport authority bonds, airplane equipment trust certificates, and securities issued by religious organizations are exempt from registration with the state Administrator. U4LO3

Under the Uniform Securities Act, all of the following are exempt from registration EXCEPT A) airport authority bonds B) common stock only sold intrastate C) securities issued by a 501(c)(3) nonprofit religious organization D) airplane equipment trust certificates

D) I and II Explanation If the Administrator finds any of the following grounds, the Administrator may issue a stop order denying the effectiveness of a registration or may suspend or revoke the effectiveness of a registration if it is in the public interest. To do so, the Administrator must have grounds for action, and it must be in the public interest. Grounds for action include (1) willful violations of the act; (2) illegal business activity by the issuer; (3) an offering that has defrauded or would defraud purchasers; (4) unreasonable compensation by promoters, underwriters, or sellers; (5) registration requirements not being met; and (6) nonpayment of filing fees. U5LO2

Under the Uniform Securities Act, an Administrator may deny, suspend, or revoke the registration of a security if: I. it is in the public interest II. there is cause for action as stipulated in the Uniform Securities Act III. the issuer reports an operating loss for more than 4 quarters IV. it is a preferred stock and defaults on its dividend A) III and IV B) I and IV C) II and III D) I and II

B) must contain a description of fees Explanation Under the USA, all advisory contracts must be in writing and contain descriptions of how fees are determined. Contracts are valid upon signing, need not list all states in which an adviser is registered, and cannot be assigned without the client's approval. However, if the brochure is not delivered at least 48 hours before the signing of the contract, the client has the right to withdraw without penalty for 5 business days. Administrator approval is not required.

Under the Uniform Securities Act, investment advisory contracts A) must list each state in which the adviser is registered B) must contain a description of fees C) are cancelable without penalty for 48 hours after the customer signs D) cannot be assigned without the Administrator's approval

B) file a civil suit against a broker-dealer who has sold an unregistered nonexempt security to a resident of this state. Explanation A civil suit may only be filed by an aggrieved purchaser. The Administrator could take administrative action against the broker-dealer (issuing a cease and desist order, for example) but has no civil powers. U5LO2

Under the Uniform Securities Act, the Administrator is empowered to do all of the following except: A) issue a cease and desist order. B) file a civil suit against a broker-dealer who has sold an unregistered nonexempt security to a resident of this state. C) require an agent to submit a written statement relating to an investigation. D) publish information relating to violations committed in the state.

C) I, II, III, and IV Explanation An Administrator may deny or revoke an agent's registration if the agent engages in practices that are prohibited. Borrowing money from clients who are not in the money-lending business, churning, and manipulating market quotes are all prohibited or fraudulent. The solicitation of a nonexempt security that has not been registered is also a violation. U7LO5

Under the Uniform Securities Act, the Administrator may institute an action if an agent: I. borrows money from his wealthy clients' accounts II. solicits orders for nonexempt unregistered securities III. buys and sells securities in accounts to generate a high level of commissions IV. alters market quotations to induce a client to invest in an attractive growth stock A) I, II, and III B) I and III C) I, II, III, and IV D) I and IV

A) a person with no office in the state who directs offers to no more than 5 individual residents of the state in any 12-month period Explanation Although a person has no office in the state, offers are directed to residents of the state. Under the USA, this person is defined as a broker-dealer. There is no de minimis exemption for broker-dealers. A person is exempt from the definition of broker-dealer if there is no office in the state and offers are directed to institutional clients or existing individual clients who are not residents of that state. The agent is merely selling his own stock as would any other individual; that does not make one a broker-dealer.

Under the Uniform Securities Act, the term broker-dealer would include A) a person with no office in the state who directs offers to no more than 5 individual residents of the state in any 12-month period B) an agent registered under the act who from time to time sells stock from personal inventory C) an issuer distributing its own common stock offering D) a trust company

A) To register, a representative must submit a completed application for registration, a filing fee, and a signed consent to service of process. Explanation In general, representatives are not automatically registered when they become employed by an adviser. To register, they must file an application, a consent to service of process, and a filing fee. Registration is not effective during any period when the representative is not employed by a registered adviser, and the Administrator must be notified when a representative's employment begins or ends. Representatives must be registered in each state in which they do business.

Under the Uniform Securities Act, which of the following is TRUE regarding registration of investment adviser representatives? A) To register, a representative must submit a completed application for registration, a filing fee, and a signed consent to service of process. B) Registration in the state where a representative has his business office enables the representative to do business in any state. C) A representative's registration remains in effect even during a period when the representative is not employed by a registered investment adviser. D) Representatives are automatically registered when they become employed by a registered investment adviser.

A) State registration by coordination is available only if a federal registration statement has been filed under the Securities Act of 1933 in connection with the same offering. Explanation: Registration by coordination becomes effective simultaneously with the federal registration. A prospectus may be delivered at or prior to the time actual delivery of the security is made. The act prohibits any statement or implication that registration involves approval of accuracy of facts by the Administrator. The federal registration statement is what the state registration is being coordinated with. U4LO3

Under the Uniform Securities Act, which of the following is TRUE regarding the registration of securities? A) State registration by coordination is available only if a federal registration statement has been filed under the Securities Act of 1933 in connection with the same offering. B) The Administrator may require that a prospectus be delivered to every purchaser of a registered security no sooner than the time at which the security is delivered. C) Registration by coordination becomes effective on a date ordered by the Administrator. D) The effectiveness of a registration statement assures the accuracy of the information contained in the statement.

The agent, the former employer, and the new employer

Under the Uniform Securities Act, which of the following is responsible for notifying the Administrator when an agent changes his place of employment from one broker-dealer to another?

A) The security ​that is the subject of the private placement ​need not be registered. Explanation Private placements are offers to no more than 10 noninstitutional persons in a 12-month period for investment purposes (not immediate resale), where no commissions are paid, directly or indirectly. Such transactions are exempt from registration requirements. The fraud provisions apply to any person involved with the purchase or sale of a security, whether registered or exempt, and the prospectus delivery requirements apply to registered securities. Please note that when it comes to institutional clients, there are no numerical limitations on offers, no required holding period, and no restrictions on payment of commissions. U4LO3

Under the Uniform Securities Act, which of the following statements regarding private placements is TRUE? A) The security ​that is the subject of the private placement ​need not be registered. B) The offering must be made to fewer than 15 noninstitutional persons. C) Being an exempt transaction, the antifraud provisions do not apply. D) A prospectus must be provided before the offering.

C) Only applicants whose principal office is in another state need to file a consent to service of process. Explanation All applicants for registration must file a consent to service of process regardless of where their principal office is located. A consent to service of process grants legal authority for the Administrator to receive legal notices on behalf of the registrant and applies to all securities professionals. The document is part of the initial registration and, once filed, does not have to be renewed.

Under the Uniform Securities Act, which of the following statements regarding the consent to service of process is NOT true? A) Investment advisers and investment adviser representatives must file a consent to service of process to become registered. B) A consent to service of process makes legal process served on the Administrator as legally binding as process served on the registrant personally. C) Only applicants whose principal office is in another state need to file a consent to service of process. D) A consent to service of process does not need to be supplied each time a registrant's registration is renewed.

greater

Under the net present value (NPV) approach, an investment is attractive only if the net present value of the expected returns is _______________ than the amount of the investment outlay.

D) greater than zero Explanation Under the net present value (NPV) approach, an investment is attractive only if the net present value of the expected returns is greater than the amount of the investment outlay. In other words, an investment is attractive (it considered to be underpriced) if the net present value is greater than zero. On the other hand, if the NPV is negative (less than zero), it would not be an attractive investment (it is considered to be overpriced) and should not be undertaken. U10LO1

Under the net present value (NPV) method of evaluating investments, an investment is attractive if the net present value of the expected returns is A) less than zero B) equal to zero C) greater than the risk-adjusted return D) greater than zero

120 days

Unless an exemption applies (the client is an investment company or the adviser is providing impersonal advisory services costing less than $500 per year), under the Investment Advisers Act of 1940, an investment adviser is required to provide each advisory client with a brochure or a summary of material changes within ______ days of the end of its fiscal year

register as an IAR

Unless subject to an exemption, any employee of an investment adviser (SEC or state-registered) who makes recommendations of securities, regardless of the client, must: UNIT 2

PERFORMANCE-BASED COMPENSATION

Unless the question specifically references the allowable exception, investment advisers are not permitted to receive what type of compensation?

BETA; STANDARD DEVIATION

Unlike ________, which only measures systematic risk, _____________ _________________ reflects both systematic and unsystematic risk, revealing the total risk of the investment.

the bonus is NOT directly related to any specific sales activity

Unregistered personnel of a broker-dealer (i.e., anyone with clerical or ministerial duties) may be paid a bonus as long as:

FULL-SERVICE BROKERAGE FIRMS

WHAT TYPE OF firms often provide research reports, securities and portfolio analysis, and special reports without specific charges, but are usually compensated by their higher commissions?

1. BDs 2. corporate entities 3. issuers

What 3 titles are excluded from the definition of an agent?

Accept the certificate and give the customer a receipt.

What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer?

GUARANTEED SECURITY

What type of security is one where the interest and principal (in the case of a bond) are guaranteed by a third party?

A) the SEC Explanation A security is registered by coordination when there is a simultaneous federal and state registration. Under normal circumstances, once the SEC has declared the registration effective, it is also effective in those states where the registration was coordinated. U4LO3

When a security registers by using coordination, under normal circumstances, the effective date is determined by A) the SEC B) the issuer C) the underwriter D) the Administrator

CUSTODY

When advisers have _________, they must (1) ensure the safekeeping of client securities through segregation and identification by client; (2) deposit client funds into bank accounts containing only client funds, naming the adviser as trustee; (3) keep adequate records of all funds, securities, and transactions; (4) provide written notification of the location of securities and funds and changes in the same; (5) report quarterly to the client, itemizing the funds or securities in possession and any transactions that have taken place; and (6) arrange for an annual surprise audit by an independent public accountant that reports the results to the SEC.

registration as an agent

When an individual representing a broker-dealer contacts clients to obtain indications of interest for a new securities offering, that person is performing a function requiring:

3 years

When an investment adviser ceases to exist, either through going out of business or being succeeded by another firm (as is the case here), it is their responsibility to ensure that articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor be preserved until at least ______ years after termination of the enterprise UNIT 1

C) only the investment adviser representative must notify the Administrator promptly Explanation If you are working for a registered investment adviser within a specific state, that state securities Administrator wants to know who you are. The problem becomes a question of who is responsible for notifying the state securities Administrator of your employment. A federal registered investment adviser is exempt from registration at the state level and therefore has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the state securities Administrator that you are working there, as well as when you terminate.

When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a different federal covered investment adviser in the state where the individual has an office, A) only the terminating investment adviser must notify the Administrator B) the investment adviser representative and the employing adviser must notify the Administrator promptly C) only the investment adviser representative must notify the Administrator promptly D) the investment adviser representative and the federal covered advisers must notify the Administrator promptly UNIT 2

ZERO POSITIVE NEGATIVE

When an investment's IRR equals the required rated of return, the NPV is _______. If the IRR is higher than the required rate of return, the NPV is _____________ if the IRR is lower than the rate of return, the NPV is ______________.

A) Certain financial information such as any unsatisfied judgments or liens against the applicant. Explanation This question probably contains more detailed information than will be covered on the exam. Negative financial information, such as unsatisfied judgments or liens and bankruptcy filings must be disclosed. Employment history for the past 10 years and residential history for the past 5 years must be shown. If, during the past 10 years, the applicant was a full-time student, then that must be shown, but that is the extent of educational information required.

When applying for registration as an agent, which of the following must be disclosed? A) Certain financial information such as any unsatisfied judgments or liens against the applicant. B) Highest educational level achieved and the institution attended. C) Complete employment history for the past 5 years. D) Residential history for the past 3 years.

consent to service of process is only accompanied during the initial registration, and is NOT required for renewal applications

When is a consent to service of process accompanied by registration of an agent?

the deceased party's date of death

When securities are inherited, the heir receives a cost basis calculated as of: U21LO5

C) When the employer is an insurance company Explanation The question is not looking for the exemption - it wants to know when the individual must register. There are two instances where an individual employed by the issuer to sell its securities is not considered an agent. The first is when the issuer is one of 5 specific named cases. That list includes savings institutions (banks), and the federal governments of the United States and Canada, as well as any of their political subdivisions. The list does not include insurance companies. The second case is when the securities are being sold in an exempt transaction. From a practical standpoint, the most common case where this occurs is when the issuer makes a private placement of its shares.

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

promptly

Whenever there is a material change to the information contained in the registration application of a securities professional, when must the Administrator be notified?

C) Coordination Explanation Because the offering will be made in more than one state, registration with the SEC is required. Coordination is concurrent registration with the SEC and the state for public offerings. Notice filing pertains to certain federal covered securities, primarily by investment companies (mutual funds). U4LO3

Which method of securities registration would most likely be used to register an initial public offering that is intended to be offered for sale in several states? A) Qualification B) Registration by publication C) Coordination D) Notice filing

C) I and II Explanation Recordkeeping requirements for broker-dealers are 3 years, and partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of an investment adviser and of any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise. There are no recordkeeping requirements for agents or IARs.

Which of the following are required in order to be in compliance with the recordkeeping requirements of the Uniform Securities Act? I. Broker-dealers must maintain customer ledgers for 3 years. II. Investment advisers must keep partnership records for 3 years after the partnership is terminated. III. Agents must keep customer records for 3 years. IV. Investment adviser representatives must maintain records for 5 years. A) I, II, III, and IV B) III and IV C) I and II D) II and IV

A) Uneven cash flows, no maturity date and price Explanation Internal rate of return (IRR) best measures investments with a known price and maturity. The internal rate of return is the discount rate that makes the future value of an investment equal to its present value. The yield to maturity on a bond is actually its internal rate of return. U10LO1

Which of the following attributes of common stock best describes why internal rate of return (IRR) is not generally used to determine the return on common stock? A) Uneven cash flows, no maturity date and price B) Uneven cash flows C) No net present value D) Uneven cash flows and no maturity

B) +0.81 Explanation The correlation coefficient ranges from −1.0 to +1.0 and measures the varying relationship of assets (or securities) to one another. A correlation close to +1.0 would indicate that the assets should move in tandem. A correlation close to 0 would indicate that the assets would have little relationship to one another, and a correlation of -1.0 would indicate that the assets should exhibit virtually opposite behavior. U10LO6

Which of the following correlations would represent 2 assets that tend to move in tandem with one another? A) −0.11 B) +0.81 C) +0.16 D) −0.68

D) Shares of bank holding companies traded on the New York Stock Exchange Explanation Under the Securities Act of 1933, shares of bank holding companies listed on the NYSE are not exempt securities and they must be registered with the SEC. However, securities of commercial banks are exempt because they are regulated by the Controller of the Currency or some other banking agency. What might be confusing is that these NYSE-listed shares are federal covered securities, which makes them exempt from registration with the states. Securities issued or guaranteed by the U.S. government are exempt from registration under federal law. All securities issued or guaranteed by a state or political subdivision of a state qualify for a federal exemption. Promissory notes and bankers' acceptances with maturities of 9 months or less where the proceeds are used for working capital purposes rather than the purchase of fixed assets also have federally imposed exemptions. U4LO3

Which of the following does NOT have a federally imposed exemption from registration with the SEC? A) Securities issued or guaranteed by the U.S. government B) Securities issued or guaranteed by a state or political subdivision of a state C) Promissory notes and bankers' acceptances with maturities of 9 months or less where the proceeds are not used for capital expenditures D) Shares of bank holding companies traded on the New York Stock Exchange

GROSS MARGIN

_________ __________ is computed by subtracting the cost of goods sold (COGS) from the net sales (or revenues) and dividing the remainder by the net sales. Administrative costs and interest are not included in COGS.

ALPHA

_________ is a measure of risk-adjusted return. It is the return in excess of the compensation for risk. It is often used to assess the performance of active managers.

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

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

D) State licensing fee Explanation 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.

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) Consent to service of process B) Renewal notice to the SEC C) Form U4 D) State licensing fee

D) Accounts payable, wages payable, and short-term debt Explanation Current ratio is computed by dividing current assets by current liabilities. Current assets include cash, accounts receivable, and inventory. Current liabilities include accounts payable, wages payable, dividends payable, and short-term debt. Equipment is a fixed asset, and shareholders' equity is net worth. U10LO7

Which of the following items would be included in a current ratio computation? A) Cash, dividends payable, and shareholders' equity B) Inventory, equipment, and cash C) Accounts receivable, inventory, and long-term debt D) Accounts payable, wages payable, and short-term debt

B) Standard deviation Explanation The standard deviation is a measure of the range of scores within a set of returns over a period of time. The greater the dispersion of the returns from the mean, the greater the volatility of the security. U10LO5

Which of the following measures the variability of an asset's returns over time? A) Alpha B) Standard deviation C) Time-weighted return D) Beta

C) II and IV Explanation With certain exceptions not mentioned in the choices, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, advisers who manage clients with a total of less than $100 million under management are required to register with the state Administrator. Under Dodd-Frank, those who advise registered investment companies are required to register with the SEC and are exempt from state registration. Those who manage at least $100 million, but not $110 million, have the choice of registering with either the state or the SEC. Investment adviser representatives with a place of business in the state register with the state. It makes no difference if they represent a federal coverered or a state-registered investment adviser.

Which of the following persons are required to register in a particular state? I. An investment adviser who manages client accounts in excess of $100 million in value II. An investment adviser who manages client accounts and has less than $25 million in total assets under management III. An adviser to investment companies registered under the Investment Company Act of 1940 IV. An investment adviser representative with a place of business in the state A) I and III B) III and IV C) II and IV D) I and II UNIT 2

B) 91-day Treasury bill rate Explanation The interest rate used as the basis for a risk-free rate of return is the 91-day Treasury bill rate. T-bills are U.S.-government guaranteed, the rate is short-term, and the market risk is minimal. U10LO4

Which of the following rates of return is used by investment professionals as the risk-free rate? A) Prime rate B) 91-day Treasury bill rate C) Discount rate D) Federal funds rate

A) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm 6 months ago. ABC must notify the Administrator of this association promptly. Explanation Only state-registered investment advisory firms are required to notify the appropriate state Administrator when employment is terminated or begun. In the case of investment adviser representatives of federal covered advisers, notification is the responsibility of the adviser representative. Investment adviser representatives of both state and federal registered investment advisers must be registered with the appropriate state Administrator(s), unless otherwise exempted. In the case of agents, not only the broker-dealers but also the agents must notify the Administrator.

Which of the following regarding the registration of investment advisers and their representatives is TRUE? A) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm 6 months ago. ABC must notify the Administrator of this association promptly. B) An investment adviser representative, terminated his employment with ABC Advisers and, 6 months later, was employed as an advisory representative by KLM, a federal covered adviser. Each firm is required to notify the Administrator of each event. C) ABC Advisers, Inc., is an investment advisory firm registered with the Administrator; therefore, its representatives need not be registered with the Administrator. D) XYZ Advisers, Inc., is a federal covered investment advisory firm registered with the SEC; therefore, its representatives need not be registered with the Administrator. UNIT 2

C) I, II, III, and IV Explanation Securities issued by an insurance company organized under the laws of any state and authorized to do business in that state are exempt from registration. NYSE-listed issues are federal covered, and nonprofit organizations and commercial paper with a maturity of 270 days or less in denominations of at least $50,000 and in the top 3 ratings are also exempt. U4LO3

Which of the following securities are exempt from registration requirements under the Uniform Securities Act? Issues of U.S.-based insurance companies authorized to conduct business in the state NYSE traded issues Issues of nonprofit religious organizations Commercial paper meeting certain requirements A) I and III B) III only C) I, II, III, and IV D) II, III, and IV

broker-dealers and mutual fund companies

__________-______________ and ___________ ________ companies are not investment advisers under the USA. UNIT 2

PRIVATE PLACEMENTS

___________ _____________________ are offers to no more than 10 noninstitutional persons in a 12-month period for investment purposes (not immediate resale), where no commissions are paid, directly or indirectly.

A) I, II, and III Explanation The USA exempts a number of different issues from registration, including securities issued by a bank, or anything that functions like a bank (e.g., a savings and loan or credit union). Securities issued by a governmental unit are always exempt. Securities listed on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) are part of a group known as federal covered securities that also includes those listed on the New York Stock Exchange and Nasdaq Stock Market issues. If the common stock is listed, then any security of that issuer that is equal or senior in claim to the common is also considered exempt. U4LO3

Which of the following securities are exempt from the registration provisions of the USA? I. Issue of a savings and loan association authorized to do business in this state II. General obligation municipal bond II. Bond issued by a company that has common stock listed on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) A) I, II, and III B) II only C) I only D) II and III

D) II and III II. An agent must submit separate registrations for each broker-dealer with which he is registered. III. Certain states prohibit agents from dual or multiple registration.

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

A) It contains a statement that the program will generally cost the client less than purchasing these services separately. Explanation The wrap fee brochure must contain a statement that the program may cost the client more or less than purchasing these services separately. The brochure must be filed with the Administrator and must contain the information required by Appendix 1 of Form ADV Part 2A. Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. U6LO4

Which of the following statements is NOT true concerning the wrap fee programs brochure under the Uniform Securities Act? A) It contains a statement that the program will generally cost the client less than purchasing these services separately. B) Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. C) The disclosure document must contain the information required by Appendix 1 of Form ADV Part 2A. D) It lists the services provided under the program, including the types of portfolio management services.

D) II and IV Explanation The consent to service of process is filed with the initial application for registration and becomes a permanent part of the registrant's file. The USA states that all registrations of persons expire on December 31 unless renewed, withdrawn, or canceled.

Which of the following statements referring to renewal of a broker-dealer's registration under the Uniform Securities Act are CORRECT? I. Annual renewal takes place on the anniversary of the registrant's initial registration. II. Each renewal application must be accompanied by the appropriate fee. III. Each renewal application must be accompanied by a consent to service of process signed by an authorized supervisory person of the firm. IV. Registrations expire December 31 unless renewed or canceled. A) II and III B) I and III C) I and IV D) II and IV

B) It is unlawful under the USA for an investment adviser representative to deceive another person when engaged in securities-related sales activities. Explanation It is unlawful under the USA for an investment adviser representative to deceive another person when engaged in securities-related sales activities. The antifraud provisions of the USA apply to any person advising another person for compensation as to the value of securities. Broker-dealers and agents, although not technically defined as advisers, are subject to the same restrictions on prohibited advisory practices when they are engaged in advisory activities. It may be unlawful to deceive another person when engaged in non-securities-related activities, but that would come under other legislation, not the USA. U7LO5

Which of the following statements regarding an investment adviser representative is TRUE? A) It is unlawful under the USA for an adviser to deceive another person when engaged in non-securities-related activities. B) It is unlawful under the USA for an investment adviser representative to deceive another person when engaged in securities-related sales activities. C) The investment adviser representative is not subject to the antifraud provisions of the USA when engaged in securities sales activities. D) The investment adviser representative is exempt from the USA's antifraud provisions if the adviser has fewer than 3 clients residing in the state.

A) The registration is valid for 1 year from the effective date, unless the underwriter or issuer still has some unsold shares. Explanation Every registration statement is effective for 1 year from its effective date, or any longer period during which the security is being offered or distributed by any underwriter or broker-dealer who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution. Furthermore, a registration statement may be amended after its effective date so as to increase the securities specified to be offered and sold, if the public offering price and the underwriters' discounts and commissions are not changed from the respective amounts of which the Administrator was informed. U4LO3

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

C) Transactions with intrastate manufacturing companies Explanation A transaction with a corporation that is not a financial institution is neither an exempt transaction nor exempt from the registration rules. U4LO3

Which of the following transactions are NOT exempt from registration? A) Unsolicited nonissuer transactions B) Isolated nonissuer transactions C) Transactions with intrastate manufacturing companies D) Transactions with pension or profit-sharing trusts

agents; investment adviser representatives

___________ work for broker-dealers, while _________________ _____________ _____________________________ work for investment advisers. The term broker-dealer is used because they sometimes act in an agency capacity (brokers) and other times in a principal capacity (dealers).

A) A sale of an exempt security to an individual customer as a result of an agent's solicitation Explanation Solicited trades with individuals are not exempt transactions, even when the security being traded is exempt. Transactions between issuers and underwriters or between underwriters are exempt from registration and advertising filing requirements. A bona fide pledge of securities is not a transaction and this question is looking for a nonexempt transaction. Transactions with banks, savings and loan associations, and other financial institutions are exempt from registration and advertising filing requirements. U4LO3

Which of the following transactions is NOT exempt from registration? A) A sale of an exempt security to an individual customer as a result of an agent's solicitation B) Transactions between an issuer and underwriter or between underwriters C) A bona fide pledge of securities D) Transactions with banks, savings and loan associations, and other financial institutions

D) Transactions between the issuer and the underwriter Explanation The Uniform Securities Act specifically exempts transactions between an issuer and an underwriter. There is no exemption for investment clubs or transactions that result in a loss. Rule 501 defines an accredited investor, but when an individual (as mentioned here), there is no exemption as there would be with an institution. U4LO3

Which of the following transactions is exempt under provisions incorporated into the Uniform Securities Act? A) Transactions that do not result in a capital gain B) Transactions between an agent and an individual who meets the requirements under Rule 501 of the Securities Act of 1933 C) Transactions involving investment clubs D) Transactions between the issuer and the underwriter

B) Sales of registered nonexempt securities by agents to their individual clients Explanation The term "exempt transaction" includes sales by fiduciaries, private placements and isolated nonissuer transactions. Any solicited sale to an individual client, even of a properly registered security, is not an exempt transaction. U4LO3

Which of the following would NOT be included in the USA's definition of "exempt transaction"? A) Transactions initiated by fiduciaries B) Sales of registered nonexempt securities by agents to their individual clients C) Isolated nonissuer transactions D) Limited offerings to no more than 10 retail clients in the state during a 12-month period

C) I and II Explanation Under the USA, only an individual can be an agent (a person who sells securities for a broker-dealer). An administrative person, such as the assistant to the president of a broker-dealer, is considered an agent if that individual takes securities orders from the public. Corporate entities, broker-dealers, and issuers are all excluded from the definition of an agent. U3LO3

Which of the following would be an agent under the terms of the Uniform Securities Act? I. A sales representative of a licensed broker-dealer who sells secondary securities to the general public II. An assistant to the president of a broker-dealer who, for administrative purposes, accepts orders on behalf of senior partners III. A subsidiary of a major commercial bank registered as a broker-dealer that sells securities to the public IV. An issuer of nonexempt securities that are registered in the state and sold to the general public A) I and IV B) II and III C) I and II D) II and IV

B) A certificate of interest in a real estate limited partnership offering Explanation It is always best to remember what is not a security than try to remember all of the things that are. All insurance contracts, other than variable ones, are not securities. Commodities, including precious metals, are not securities. U4LO1

Which of the following would be considered a security under the provisions of the USA? A) A fixed annuity contract issued by a life insurance company not authorized to do business in the state B) A certificate of interest in a real estate limited partnership offering C) Gold bullion D) An endowment contract issued by a life insurance company licensed to do business in the state

B) assist registered employees of the firm by doing research on securities they are following Explanation While registration as an agent is pending, the applicant can take no active role in the sale or offering of securities. However, performing research on an internal basis does not involve contact with the public in a sales effort and would be permitted.

While an application for registration as an agent of a broker-dealer is still pending, that person would be permitted to A) engage in no activity at the office other than studying for the exam B) assist registered employees of the firm by doing research on securities they are following C) limit her acceptance of orders to those from the broker-dealer's existing clients D) accept unsolicited orders only UNIT 3

D) I and III Explanation An international mutual fund (or ETF) invests in the securities of companies that are not domiciled in the United States. Therefore, we have the benefit of added diversification. These pooled investment vehicles offer investors the specific benefit (whether foreign or domestic) of not having to worry about individual stock selection—the professional managers do that. There are no specific tax benefits to investing through the fund rather than directly and, in most cases, the regulatory controls in other countries do not offer the same degree of investor protection as those of the United States. U14LO10

Why would you suggest a client invest in international mutual funds or ETFs? I. Diversification II. Tax benefits III. Avoids having to pick individual stocks IV. Greater regulatory controls A) I, II, III, and IV B) II and III C) I and IV D) I and III

ALPHA FORMULA

_____________ = (actual return − risk-free rate) - (beta × [market return − RF])]. OR calculate the expected return of the portfolio and subtract this from its actual return

excluded

a broker-dealer is _______________ from the definition of an agent under the USA.

TESTIMONIAL

a like on an IA's Facebook page is considered a:

need not register as an agent under the USA.

an individual who sells securities of an issuer WITHOUT earning a commission:

5 DAYS

how long do clients have to withdrawal from an advisory contract?

1. providing investment advice on securities 2. receiving compensation 3. being in the business of providing investment advice

the 3 elements of having to register as an Investment Adviser are: UNIT 1

matched orders AKA painting the tape

the action of selling shares then rebuying them at the same price so that the stock appears to have more activity.

administrative costs and interest

what 2 factors are not included in the cost of goods sold (COGS)?

investment adviser representative

when a broker-dealer offers wrap fee programs, the exclusion from the definition of investment adviser is lost., and would be considered an __________________ ________________ ____________________ UNIT 1

place of business in the state register in all of the states

when employed by a federal covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a: on the other hand, when employed by a state-registered adviser that covers all 50 states, an IAR would be required to:

the growth portion

with a nonqualified variable annuity (with no tax deduction), the client pays taxes only on: