Series 66 Flash Cards
A "matched order," sometimes known as "painting the tape," is defined as when trades are coordinated for the purchase or sale of a security. Essentially an order is placed with the knowledge that another order (or orders) of substantially the same size, at substantially the same time, and at substantially the same price, has been or will be entered. The effect is to cause an appearance of market activity and price movement that is not market driven.
"painting the tape," is defined as when trades are coordinated for the purchase or sale of a security. Essentially an order is placed with the knowledge that another order (or orders) of substantially the same size, at substantially the same time, and at substantially the same price, has been or will be entered. The effect is to cause an appearance of market activity and price movement that is not market driven.
Alpha (total portfolio return minus risk-free rate) minus (portfolio beta times [market return minus risk-free rate]).
(total portfolio return minus risk-free rate) MINUS (portfolio beta times [market return minus risk-free rate]).
The statute of limitations for criminal offenses under the USA is
5 years Remember the sequence 5-5-3: 5-year statute of limitations, $5,000 maximum fine, and imprisonment for up to 3 years.
Except as limited by the Securities Exchange Act of 1934, the state securities Administrator may require, by rule or order, that broker-dealers make or maintain which of the records....
Account ledgers Correspondence Papers and memoranda Blotters and books The Administrator may require broker-dealers to keep and maintain account ledgers, correspondence, papers and memoranda, and blotters and books, provided the state requirements do not exceed federal requirements under the Securities Exchange Act of 1934.
Which of the following are prohibited practices?
An investment adviser transferred a client's account to a brokerage house because the account went below the firm's minimum size and then informed the client. An investment adviser organized as a partnership did not notify its clients of the departure of a partner who had only a very small interest in the firm. Transfer or assignment of an advisory account without prior client consent is always prohibited. An investment adviser need not inform clients of departures of employees, senior or otherwise, from investment advisory firms that are incorporated. Clients must, however, be informed of the departure or addition of any minority partner if the firm is organized as a partnership. The legal requirement for this notification is "within a reasonable period of time," but there is nothing prohibited about doing it promptly.
What is the difference between an offer and a sale?
An offer is the attempt to sell, and a sale is a binding contract to transfer a security for value. An offer is made in an attempt to sell; a sale is the binding contract to sell a security for value. An offer will not require a principal's approval, but a designated supervisory individual must approve all sales on the date the order is executed.
Micro-Cap
Below $300 million
CAPM Formula
Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)
The benchmark used for International stock is the
EAFE / Europe Australasia and Far East See how it contains Asia?
Sales made under the provisions of Rule 506(b) of Regulation D must be reported on
Form D. Form D is the form that must be filed electronically with the SEC no later than 15 days after the first sale of securities in the offering.
The cash value of a variable life policy must be calculated at least
Monthly! Stop getting this one wrong!
Price/Earnings (P/E) Ratio
P/E ratio = Current market price of common share / earnings per share (EPS)
Under the Uniform Securities Act, as a result of a hearing, the disciplinary actions that may be taken by the Administrator include
Permanent revocation of a registration Bar from employment with any registrant Restriction on a registrant's performance of any activity in the advisory or brokerage business
If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio?
Tangible assets Tangible assets, such as real estate, precious metals, and other commodities, tend to keep pace with inflation. Fixed dollar investments do not.
Internal Rate of Return (IRR)
The discount rate that sets the net present value of an investment equal to zero.
With respect to the specific commodity that is the subject of the contract, all of the following are standardized parts to an exchange-traded futures contract
The time for delivery The quantity The quality
Which of the following would be an agent as the term is defined in the Uniform Securities Act?
Under the USA, only individuals can be agents. A person who sells securities for a broker-dealer is an agent. An administrative person, such as the assistant to the president of a broker-dealer, is considered an agent if he takes securities orders from clients. Corporate entities are excluded from the definition of an agent. Broker-dealers and issuers are not agents.
Under the Uniform Securities Act, the term "nonissuer" refers to
a person other than the issuer Under the Uniform Securities Act, a nonissuer is any person (as defined under the act) that is not the issuer of the security. This would include an individual investor or a securities dealer selling from inventory.
Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following
accelerated depreciation. excess intangible drilling costs. certain incentive stock options.
There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are:
commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.
UTMAs are not permitted to be used for the basic necessities, such as
food, clothing, and shelter.
Section 529 plans are technically considered
municipal fund securities.
If a security has an anticipated return of 8.7% and a standard deviation of 14.6%, you would expect the returns to have a 95% probability (assuming a normal distribution) of falling between
−20.5 and +37.9% A security with a normal distribution has a 95% probability of falling within 2 standard deviations of its anticipated return. In this case, that would be −20.5% and +37.9%, which is computed by calculating return movements of 29.2% (14.6 × 2) in either direction.
In order to be considered a block trade, an order for common stock must be for at least
10,000 shares In the industry, the term block trade refers to a common stock transaction involving at least 10,000 shares.
Under the Investment Advisers Act of 1940, an adviser's registration usually becomes effective how many days after it is filed?
45 In the absence of any denial order or pending proceedings, registrations of federal covered investment advisers (and broker-dealers) will become effective on the 45th calendar day after the date of filing (the date received in the SEC's office). The SEC may specify an earlier date.
As a rule, loans from a 401(k) plan must be repaid within how many years?
5 Most loans from a 401(k) plan are required to be repaid within 5 years. This rule does not apply to loans taken for a home purchase.
Remember the sequence 5-5-3:
5-year statute of limitations, $5,000 maximum fine, and imprisonment for up to 3 years.
A customer who is changing jobs has how many days to roll over a lump-sum distribution from a qualified pension plan into an IRA?
60 days Rollovers must be completed within 60 days of the distribution date to avoid unfavorable tax consequences.
Which of the following are regulated under the Securities Exchange Act of 1934?
Broker-dealers Transfer agents
It is generally accepted that agents and IARs will give greater consideration to which of the following when making recommendations to their senior clients?
Life stage Retirement savings All of these are important suitability considerations for all customers. But when it comes to seniors, it is felt that life stage (including whether the customer is employed, retired, or nearing retirement) and current retirement savings relate particularly to seniors.
What happens to outstanding fixed-income securities when interest rates decline?
Prices increase When interest rates drop, prices will rise, decreasing effective yield. Thus, there is an inverse relationship between interest rates and bond prices.
The benchmark used for Mid-Cap is the
S&P400 and must have Stocks with a market capitalization of $2 billion to $10 billion.
The alternative valuation date is ____ months after death
Six
Total risk is measured by
Standard Deviation Unlike beta, which only measures systematic risk, standard deviation reflects both systematic and unsystematic risk, revealing the total risk of the investment.
Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser?
State licensing fee 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.
Large-Cap
Stocks with a market capitalization of $10 billion or more.
Mid-Cap
Stocks with a market capitalization of $2 billion to $10 billion.
Small-Cap
Stocks with a market capitalization of $300 million to $2 billion.
Examples of exempt transactions include
Transactions by executors and estate administrators 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.
A Schedule K-1 would be received by an individual with an ownership interest in all of the following
a partnership. an S corporation. an LLC.
All of the following are potential benefits of high frequency trading (HFT)
arbitrage opportunities increase market efficiency. lower costs for institutional purchasers. increased liquidity, especially in very active stocks.
In reviewing prospectuses and registration statements, the SEC
does not approve or disapprove of the issue The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue.
A person who renders investment advice solely with respect to securities issued by the U.S. government
is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements A person who renders advice solely with respect to securities issued or guaranteed by the U.S. government is excluded from the definition of investment adviser under the Advisers Act and is therefore a federal covered adviser under the NSMIA of 1996.
All of the following statements regarding a closed-end investment company whose shares are listed on the NYSE are true
it differs from a mutual fund it sells at the market price based on supply and demand it is a type of management company
The Uniform Securities Act prohibits broker-dealers from engaging in activity that has the effect of manipulating stock market prices. These would include:
matched orders only matched orders are an attempt to manipulate market prices.
Differences between static and interactive content on social media include
only static content needs preapproval only interactive content can be commented on by others
Securities regulators have taken a strong position on the need for registered broker-dealers to disclose the fees they charge. Among the most common ways for making this disclosure are
presenting a chart with all of the fees preparing a list of all of the fees displaying the fees in tabular form Whether using a table, a chart, or a list, broker-dealers must make sure that it is easy for customers to determine what the fees and charges are and how they are computed.
Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must
send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year Whether the firm is a state or federal covered investment adviser, if there have been material changes, a copy of the IA's brochure, or a summary of the changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year. AGAIN 120 days!
Investment advisers are regulated under
the Investment Advisers Act of 1940 (and, to a certain extent, the Investment Company Act of 1940)
A popular tool used by analysts is discounted cash flow (DCF). Most use this tool to evaluate
the present value of future cash flows to determine an appropriate current value. The principle behind a DCF computation is that an investment made currently is worth an amount equal to the sum of all the future cash flows expected to be received. These future cash flows are discounted to arrive at a fair value.
For larger accounts, a broker-dealer is least likely to waive its normal fee for
transferring the account to another broker-dealer Although there is no official standard, larger accounts tend to have many of the smaller fees waived. However, if the client is moving the account to another firm, it is likely that the transfer fee will be charged.
All of the following statements about the price-earnings (PE) ratio are true
young, fast-growing companies generally have higher P/E ratios than mature, slower-growth companies a company's P/E ratio may also be called its multiple it is computed by dividing the current market price of the common stock by the earnings per share A company's P/E ratio, also called its multiple, may indicate investors' expectations about the company's earnings potential. A higher PE generally indicates that investors have high expectations for the company's future growth. Young, fast-growing companies generally have higher P/E ratios than mature companies.
Under the Uniform Securities Act, if sent to 2 or more persons, a file must be maintained containing a copy of these
Bulletins Newspaper articles Notices Websites
Under the Investment Advisers Act of 1940, which of the following statements regarding custody of a client's funds is (are) TRUE?
Clients must be kept informed in writing of the location of their funds and securities and of any changes. Clients must receive quarterly statements from the adviser itemizing the funds and securities in custody and all transactions on the account during the period.
Earning per share (EPS) formula
Earning available to common / Number of shares outstanding
One measure of a corporation's liquidation value is its book value per share. When performing this computation, the following must be taken into consideration
Goodwill Long-term debt Retained earnings Par value of the preferred stock
A Schedule K-1 would be received by an individual with an ownership interest in all of the following except
a C corporation. C corporations pay tax on their earnings; the other business types listed here flow through the income to their owners. The owner's share of income (or loss) is reported to them on the Schedule K-1. A shareholder in a C corporation who receives dividends will have that reported on a Form 1099.
Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include
a charge when a client requests that a stock certificate be issued in his name the interest charged by the firm on money owed by customers in their margin accounts
Your client often makes irrational financial decisions because she bases her decisions on information that should have no influence on the decision at hand. The client's behavior is known as
anchoring. Making irrational decisions based on information that should have no influence on the decision at hand is known as anchoring. Herd mentality is the tendency to follow the actions of a larger group, whether rational or not. Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers her abilities to be much better than they actually are.
Among the reasons to consider investing in a variable annuity would be all of the following
basically, no limit on the amount that can be contributed avoiding probate upon the death of the investor a guaranteed death benefit for death before annuitization
Working capital is equal to
current assets − current liabilities Current means cash or assets that would be exchanged for cash in the ordinary course of business in the current year. In the case of liabilities, current means maturing or falling due within the current year. The net of current assets less the current liabilities implies the company has cash availability of the remainder with which to work.
The unethical business practice of purchasing and selling a security for the purpose of creating an appearance of market activity is known as
matched orders A "matched order," sometimes known as "painting the tape," is defined as when trades are coordinated for the purchase or sale of a security. Essentially an order is placed with the knowledge that another order (or orders) of substantially the same size, at substantially the same time, and at substantially the same price, has been or will be entered. The effect is to cause an appearance of market activity and price movement that is not market driven.
The holding period return (HPR) on a share of stock is equal to
the capital appreciation plus the dividend income received over the period To compute holding period return, you calculate the total return for that holding period. Total return combines any dividend income plus appreciation (or minus depreciation).
A securities market investment theory that attempts to derive the expected return on an asset based upon the asset's systematic risk is
the capital asset pricing model (CAPM). The capital asset pricing model (CAPM) attempts to describe the relationship between the systematic risk and the expected return of the asset in an effort to determine the asset's appropriate price.
An analytical tool used to project the current value of a common stock using projected future dividends is
the dividend discount model There are two widely accepted forms of common stock price projection using dividends—the dividend discount model and the dividend growth model.
During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from
the person appointed as administrator of the estate Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.
The benchmark used for Large-Cap is the
S&P 500 and must have a market capitalization of $10 billion or more.
Which of the following would NOT be considered evidence of custody of a client's funds or securities?
The investment adviser has discretionary authority over the client's account. "Custody" means possession (even temporary possession) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but does not include the acceptance by the adviser of prepaid advisory fees or discretionary authority.
True or False? the maximum tax rate on estates is the same as that on gifts
True The maximum tax rate on estates and gifts is 40% (the number is not tested; only that the rates are the same). The alternative valuation date is 6 months after death; 9 months after death is when the tax is due. Dead people can't make gifts and any income received by the estate before it is liquidated is reported on Form 1041.
All of the following statements regarding a closed-end investment company whose shares are listed on the NYSE are true except
it may redeem its own shares A closed-end investment company does not redeem its own shares. The term "mutual fund" refers to an open-end management investment company that issues redeemable shares. Although there is a category of closed-end funds that do redeem their shares, (interval funds), those do not trade in the secondary markets like the NYSE.
All of the following are general principles of the prudent investor standard
reasonable expected returns liquidity of investment diversification The prudent investor standard does not require a guarantee of profit, but it does include using skill and caution to achieve diversification, liquidity, and the goal of obtaining a reasonable return based on a reasonable amount of risk.
Under the Investment Advisers Act of 1940, as amended by the Market Rule for Investment Advisers, advertising done by investment advisers prohibits
reference only to specific past recommendations untrue statements Amendments effective in 2021 to SEC Rule 206(4), issued under the Investment Advisers Act, permit the use of testimonials under certain conditions. The rule still prohibits untrue statements of material fact and reference only to specific past recommendations.
An investment adviser representative of a federal covered investment adviser registers with
the Administrator. Registration of IARs is done solely on the state level. IARs register with the Administrator of each state in which they are required to be registered.
The YTC computation involves knowing
the amount of interest payments to be received, the length of time to the call, the current price, and the call price.
Each of the following terms is commonly found in modern portfolio theory EXCEPT
the internal rate of return Internal rate of return (IRR) is not a component of modern portfolio theory as are the other 3 terms.
A taxpayer's marginal tax rate is
the rate of taxation on any additional taxable income received Marginal tax rate is defined as the rate of taxation on any additional taxable income received. It is sometimes referred to as the tax on the "next" dollar or the "last" dollar of income. The effective tax rate is the overall rate paid on the total taxable income.
When advisers have custody, 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.
Under the Uniform Securities Act, which of the following are prohibited actions?
A investment adviser selling securities as a principal to an advisory client without receiving consent of the client prior to the completion of the trade The USA prohibits an investment adviser from acting as principal or agent in a transaction with an advisory client without approval prior to completion (settlement) of the trade. There is nothing wrong with agency cross transactions as long as disclosure is made and the trade is recommended to only one of the parties by the adviser. Anytime a broker-dealer acts in an agency capacity, the amount of the commission must be disclosed on the trade confirmation and there is no prohibition against an individual being an IAR of an investment adviser and an agent of a totally unrelated broker-dealer.
Which of the following stocks would probably be most appealing to a value investor?
A stock with a relatively high price-to-book value ratio Value investors look for stocks in companies that have been overlooked or undervalued by other investors. They often focus on stocks with relatively low P/E ratios or price-to-book value ratios or on stocks with relatively high dividend yields compared to other stocks in the same industry.
True or False? Preferred stockholders do not have the right to subscribe to a rights offering.
False Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.
To be in compliance with the Securities Act of 1933, the sale of which of the following securities would require delivery of a prospectus?
Primary offering of a closed-end investment company registered under the Investment Company Act of 1940 Sale of shares of an open-end investment company whose first public offering was 23 years ago Any primary offering, unless the security is exempt, requires timely delivery of a prospectus. Treasury notes and private placements are exempt.
The benchmark used for Small Cap is the
Russell 2000 and must have Stocks with a market capitalization of $300 million to $2 billion.
The statement, "Stock prices fully reflect all information from public and private sources," can be attributed to which form of the efficient market hypothesis (EMH)?
Strong form This statement is the definition of the strong form EMH. Private sources include insider information, such as persons holding non-public access to information relevant to the company. Weak includes historical pricing and volume information. Semi-strong includes all publicly-available information, such as earnings reports. There is no such thing as semi-weak.
An agent has a new client who is prone to tergiversation. As such, it would probably make sense to:
accept unsolicited orders only Those who tergiversate repeatedly change their attitude or opinions. As a consequence, the client who likes an agent's recommendation one day may quickly change his mind the next. Therefore, the agent could be placed in an untenable position, being unable to satisfy the client. To avoid this possibility, it would be most sensible to leave all the decisions to the client and only accept unsolicited orders.
If an agent, broker-dealer, investment adviser or investment adviser representative is found to be in violation of the provisions of the Uniform Securities Act, penalties could include
administrative action fines imprisonment Those securities professionals found guilty of violating the USA could face various sanctions from the Administrator, including a fine and/or jail sentence if mandated by the courts.
Probable return is
an estimate of all of the possible returns an investment is expected to yield The probable return is computed by taking the various likely returns for an investment and adding them together. The difference between an investment's present value and its cost is the NPV. The current worth of future income discounted to today is used to determine present value. The one discount rate that equates the future value of an investment with its NPV is the internal rate of return (IRR).
The study of why people often make decisions using rules of thumb rather than rational analysis, basing those decisions on factors economists traditionally don't consider, such as fairness, past events, and aversion to loss, is known as
behavioral finance Today, through the study of behavioral finance, it is accepted that behavioral biases can cause investors to make financial decisions that are irrational.
Among the reasons to consider investing in a variable annuity would be all of the following EXCEPT
capital gains treatment on any realized gains upon withdrawal In return for granting tax deferral on all gains in the account, the IRS taxes everything over the investor's cost basis as ordinary income. There is never a capital gain with a variable annuity.
The Sharpe ratio measures a stock's
excess return earned compared to its total risk. The Sharpe ratio is defined as a fund's excess return (fund's return exceeding the risk-free rate) divided by the total risk (standard deviation).
When using the dividend discount model,
future expected dividends are discounted to compute the present value of the stock This method of common stock valuation takes the investor's expected future dividend returns and then discounts that amount by the expected rate of return to arrive at the supposed present value. Expected (or required) rate of return is a component of both the dividend discount model and the dividend growth model, and only the DDM is used for preferred stocks because the dividend can never increase. When using any dividend model, the greater the regularity of dividends, the more accurate the forecast.
Under the NSMIA, the term "federal covered adviser" includes a person
registered with the SEC under the Investment Advisers Act of 1940 excluded from the definition of investment adviser under the Investment Advisers Act of 1940 The NSMIA defines "federal covered adviser" as a person who is either required to register with the SEC under the Investment Advisers Act of 1940 or who is specifically excluded from the definition of "investment adviser" under that act. Registration with the state Administrator is not required of a federal covered adviser. If an investment adviser who otherwise would not qualify for SEC registration would be required to register in 15 or more states, the Dodd-Frank Act makes that adviser eligible for federal registration.
The basis of an asset received from a decedent's estate is referred to as a stepped-up basis. This means that the asset's basis is generally
the fair market value of the asset on the day the decedent died Generally, a taxpayer's basis in an asset is the amount the taxpayer paid for the asset. When an asset is acquired by inheritance, however, the asset's basis is generally the fair market value of the asset on the date of the decedent's death (or 6 months after the date of death if the estate elects the alternate valuation date). Because this value is often higher than the price the decedent originally paid for the asset, this kind of basis is called a stepped-up basis.
The rate that produces a net present value of a series of discounted cash flows equal to zero is called
the internal rate of return (IRR). The internal rate of return is the rate that produces a net present value of a series of discounted cash flows equal to zero. If the NPV is above zero (positive NPV), then the IRR is greater than the required return; if below zero (negative NPV), then the IRR is less than the required return.
With respect to the specific commodity that is the subject of the contract, all of the following are standardized parts to an exchange-traded futures contract except
the market price.
Among the differences between C corporations and S corporations is
the number of allowable shareholders the tax treatment of the corporation's earnings residency requirements of shareholders A feature common to both C and S corporations is the limited liablity of the investor. That is, the investor is not liable for the debts of the business and cannot lose more than the original investment. Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.
