Series 66 Mastery / Practice Exam

Following the publication of a tombstone advertisement relating to an issue undergoing registration with SEC, an agent of a broker/dealer receives a call from a client who expresses the desire to purchase 100 shares at the best available price. The agent is permitted to: A) send a preliminary prospectus. B) submit a pending order. C) send published articles about the issuer. D) send in-house research.

A

If a natural person files his first application for registration as an agent in the state in late October, the agent's license will expire: A) on December 31 of the same year. B) on every anniversary date of the initial registration. C) automatically within 30 days after the withdrawal of registration if the state securities Administrator has initiated proceedings against the registrant. D) on December 31 of the following year.

A

In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must offer plan participants at least three different investment alternatives ensure that plan participants are insulated from control over their portfolios allow plan participants to change their investment options no less frequently than quarterly permit immediate vesting of employer contributions. A) I and III B) I and IV C) II and III D) II and IV

A

Market conditions are deteriorating and your client, who owns a plumbing business, is looking for a safe haven that will also provide some income. Which of the following would most likely be your recommendation? A) Rental real estate B) High-yield bonds C) Commodity futures D) Precious metals

A

When a market maker publishes a quote, what prices will be shown? Bid Market Offer Spread A) I and III B) II and IV C) III and IV D) I and II

A

Which of the following securities are NOT exempt from state registration? A) Securities issued by Jones Corporation, whose shares are publicly traded in Kansas and entirely owned by Kansas residents. B) Securities issued by the Japanese government. C) Securities issues by the Episcopal diocese of Cleveland, Ohio. D) An investment contract issued by the pension fund of ABC Corporation, a large manufacturing corporation whose shares are traded on the New York Stock Exchange.

A

Which of the following would NOT be considered by an Administrator to determine whether churning had occurred in a client's account? A) Client's state of residency. B) Frequency of trades in the account. C) Size of the trades in the account. D) Character of the account.

A

For a profitable and rapidly growing firm, holders of preference shares are least likely to benefit from the firm's growth if the preference shares are A) common. B) convertible. C) participating. D) cumulative.

A *Common Stock is not a "preference share". *Investopedia: four main types of preference shares are callable shares, convertible shares, cumulative shares, and participatory shares.

An investment adviser would be most likely to be the contra-party to a trade when acting as A) a principal. B) a broker. C) an investment counsel. D) an agent.

A *Page 110 LEM "when acting in a principal capacity"

Which of the following are nonfinancial considerations that need to be factored into a client's investment profile and recommendations? 1. Sources of income. 2. Age of dependent children. 3. Real estate holdings. 4. Investment experience. A) II and IV. B) II and III. C) I and IV. D) I and III.

A 2 & 4

In which of the following business structures does the owner(s) assume full liability? 1. S corporation. 2. LLC. 3. Sole proprietorship. 4. General partnership. A) III and IV. B) I and IV. C) I and II. D) II and III.

A: 3 & 4

A company has two outstanding bond issues, both with a coupon rate of 10%. Bond A will mature in 3 years while Bond B will mature in 20 years. If interest rates were to decrease to 8%, which of the following statements is correct? A) Both bonds will be selling at a discount. B) Bond B will be selling at a greater premium than Bond A. C) Bond B will be selling at a greater discount than Bond A. D) The issuer will attempt to call in Bond A.

B

A long term client contacts you to inform you that his lawyer has drafted a trust agreement and wants to name you trustee. You accept, and several months later, the beneficiary of the trust approaches you with a request for a disbursement that is contrary to the provisions of the trust document. In accordance with the provisions of the Uniform Prudent Investor Act, you should A) have a court of competent jurisdiction amend the trust B) follow the terms of the trust C) contact the client D) follow the wishes of the beneficiary

B

XYZ Brick Company wishes to raise capital by issuing some securities in its home state. The CEO of the company feels that registration with the Administrator is unnecessary because the issue is exempt. Should XYZ be served with a court order, the burden of proving its issue is exempt is on the: A) CEO. B) company. C) Administrator. D) court.

B

Adnan is an investment adviser representative associated with a state-registered investment adviser. He is registered in several states. To be in compliance with the Uniform Securities Act, Adnan A) must meet the financial requirements of the state in which the investment adviser's principal office is located. B) has no financial requirements with regard to a minimum net worth. C) must meet the financial requirements of all of the states in which he does business. D) must meet the financial requirements of the state with the most stringent requirements.

B

An investment adviser representative has constructed a portfolio for a client that is 20% U.S. government bonds, 20% corporate bonds, 20% preferred stock, 15% common stock in public utilities, 10% in cash and 15% in small cap stocks. From this, you could safely assume that the client's investment objective is: A) capital appreciation. B) income. C) growth with income. D) preservation of principal.

B

Carmen Lobianco, who has been highly successful in business, has a thirty-year-old son. The son has been a quite a spendthrift. Lobianco is afraid the son will not be able to live within his means. To protect this from happening, Lobianco places $2,500,000 into a trust for the benefit of the son. To provide added safety, Lobianco arranges for the Amalgamated Bank and Trust Company to have total control over the assets. In this case, which of the following is not correct? A) Carmen's son is the beneficiary. B) Carmen is the trustee. C) Amalgamated Bank and Trust Company is the trustee. D) Carmen is the grantor.

B

If the goal of a business is to raise substantial amounts of capital, it will probably be organized as a (an): A) LLC. B) C corporation. C) S corporation. D) General partnership.

B

Ways in which a Section 529 plan differs from a Coverdell ESA include 1. tax-free distributions when the funds are used for qualifying educational expenses. 2. higher contribution limits 3. no earnings limitations 4. contributions that may be made by someone other than a parent or legal guardian A) II and IV B) II and III C) I and II D) I and IV

B

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

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

The basis of modern portfolio theory (MPT) depends on certain assumptions regarding investor behavior. Which of the following statements most accurately reflect the Markowitz assumptions about investor behavior? 1. Given two investments with equal expected returns, investors prefer the one with the higher risk. 2. Given two investments with equal risk, investors prefer the one with the greater expected return. 3. Given two investments with equal expected returns, investors prefer the one with the lower risk. 4. Given two investments with equal risk, investors prefer the one with the lower expected return. A) I and IV B) II and III C) III and IV D) I and II

B: 2 & 3

Assume you own KAPCO Stock Fund that returned 14% over the past five years, during which the stock market returned 12%. This fund has a beta of 1.1 and the risk-free rate of return is 4%. What is the fund's alpha? A) +9.1 B) +6.0 C) +1.2 D) +2.0

C

Bachelier and Louis Associates, BALA, is an investment adviser registered in States W, X, and Y. BALA is completing the Form ADV to register in State Z. Which of these would be automatically registered as an agent in State Z simultaneously with BALA's effective registration? A) Wilson, the company's legal counsel B) Thomas, an IAR currently registered in States W, X, and Y C) Louise, vice president of the company's sales department D) Janice, the director of the company's information technology (IT) department

C

Individuals who operate an investment advisory firm as a sole proprietorship would not be able to include on their business cards or stationery the initials A) CPA. B) MBA. C) RIA. D) CFA®.

C

Parker Abernathy is a partner at Abernathy and Wilkins Advisers (AWA), an investment advisory firm registered in three states. Parker's primary responsibility is supervising the firm's investment adviser representatives. On a personal level, Parker has no advisory clients and never has dealings with the public. Under the Uniform Securities Act, Parker A) is exempt from registration because there are no dealings with the public. B) must register as an investment adviser principal due to having supervisory responsibilities. C) must register as an investment adviser representative. D) must register as an investment adviser.

C

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

C

Rank the following bonds in order of shortest to longest duration. ABC 8s of 2035. DEF 9s of 2034. GHI 5s of 2036. JKL zeros of 2033. A) III, I, II, IV. B) IV, II, I, III. C) II, I, III, IV. D) IV, III, I, II.

C

Under the Uniform Security Act, all of the following persons with no place of business in the state are exempt from registration as an investment advisers EXCEPT: A) advisers who deal exclusively with savings banks located in the state. B) advisers who deal exclusively with investment companies registered under the Investment Company Act of 1940. C) advisers who have conducted business with no more than 6 individual clients in the state within the last 12 months. D) advisers who deal exclusively with federal covered investment advisers located in the state.

C

When an investment adviser representative terminates employment with a federal covered investment adviser and immediately accepts employment performing the same functions with a different federal covered investment adviser in the state where the individual resides A) the investment adviser representative and each of the federal covered advisers must notify the Administrator promptly 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) only the terminating investment adviser must notify the Administrator.

C

When discussing direct ownership of investment real estate with a client, an agent should point out that A) the use of leverage usually has the effect of reducing potential returns B) real estate tends to be a hedge against deflation C) investment real estate is generally illiquid when compared to listed stocks D) real estate prices tend to mirror those of the overall stock market

C

When it comes to evaluating the appropriate use of social media, the regulators are primarily concerned with A) the technology. B) personal devices. C) the content. D) the time of day it is use

C

Which of the following are restrictions on the operations of registered open-end investment companies under the Investment Company Act of 1940? 1. No registered investment company may commence a public offering with less than $1 million of capital. 2. No investment company may own more than 3% of the voting stock of another registered investment company. 3. No investment company may purchase portfolio securities on margin. A) I and III B) I and II C) II and III D) I, II, and III

C

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) DEF 6s of 2051 B) GHI 7s of 2052 C) ABC 5s of 2050 D) JKL 4s of 2022

C

Which of the following statements correctly describes the relationship between annuity units and their value during the payout period of a variable annuity? A) the number of units varies, the unit value remains constant. B) the number of units remains constant, the unit value remains constant. C) the number of units remains constant, the unit value varies. D) the number of units varies, the unit value varies.

C

Which of the following municipal bonds would be most subject to interest rate risk? A) 7s '28 on a 7½% basis B) 7.8s '35 on a 7.4% basis C) 8s '40 on a 7.8% basis D) 7.5s '29 on a 7.2% basis

C *The longer the duration of a bond, the greater the interest rate risk. The 8s '40 on a 7.8% basis, (YTM), is a bond with a 2040 maturity, which is the longest maturity (without a substantially higher coupon) of the choices available. Remember, duration is a function of coupon and length to maturity. If the coupons are relatively close, the longest maturity is the one with the longest duration (and greatest sensitivity to changes in interest rates). There is a giveaway to this answer if you look carefully. The greater the risk, the greater the reward and the 8s '40 have the highest yield, indicating that investors are demanding a higher return for the greater risk.

An investment adviser would be in violation of the USA if he charged: performance-based fees to qualified individual investors. flat fees based on realized capital gains. reduced fees for underperformance. percentage-based fees based on assets under management. A) I and IV. B) I and III. C) II and IV. D) II and III.

D

An investor purchased a 20-year bond with a duration of 11 years for $1,323.18. Which of these statements is correct? A) The coupon rate is higher than the YTM, and the YTM is higher than the current yield. B) The current yield is higher than both the coupon rate and the YTM. C) The coupon rate is lower than the YTM, and the current yield should be higher than the coupon rate. D) The yield to maturity (YTM) is less than both the current yield and the coupon rate.

D

As the number of stocks in a portfolio increases, the portfolio's systematic risk A) decreases at an increasing rate B) increases at a decreasing rate C) decreases at a decreasing rate D) can increase or decrease depending on the beta of the added stocks

D

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

D

In preparing a research report, an investment adviser reviewing the returns on a specific stock over the past 10 years, notices that the median is lower than the mean. The most probable cause for this is A) a majority of the returns are greater than the mean B) the returns are symmetrical C) a majority of the returns are less than the mean D) the distribution of the returns is skewed to the left

D

It has been a great year at Capital Funding, Inc., an SEC-registered broker-dealer that is also registered in 22 states. The company decides to share its good fortune with employees by paying a year-end bonus equal to 31% of annual salary. In order for clerical personnel to receive this bonus: A) they must be licensed as investment adviser representatives. B) the bonus must be sales related. C) they must be licensed as agents. D) they must be employees of the broker-dealer.

D

One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of A) a small-cap stock B) a AAA corporate bond C) a preferred stock D) a large-cap stock

D

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

D

Some investment advisers offer technical analysis as a tool in managing personal investment accounts. When advertising these systems, it is imperative that the investment adviser promoting the program A) keeps the subscription cost below $500 annually to avoid the need to send an annual brochure. B) be registered with the SEC. C) shows past performance for a period of no less than the previous 12 months. D) indicates that there are limitations and difficulties inherent in using such programs.

D

The assumptions underlying the efficient market hypothesis (EMH) lead its proponents to believe that stock market prices react rapidly to newly released information and, therefore, limit the ability of the investor to achieve abnormal gains. Which of the forms of EMH concludes that an investor cannot achieve abnormal gains using fundamental analysis? A) Weak form B) Spring form C) Strong form D) Semi-strong form

D

The prohibited practice of an investment adviser placing the same security in the accounts of all of the firm's clients is known as: A) discretionary misrepresentation. B) matched purchases. C) churning. D) blanket recommendations.

D

Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction? A) An executor liquidates the estate's portfolio. B) The sale of ABCD common stock, listed on the OTC Bulletin Board, to an insurance company. C) The sale of an unregistered nonexempt security to an individual client at that client's request. D) An agent sells U.S. treasury bonds to an individual client.

D

What type of risk prevents an investor from being able to convert an investment into cash without delay? A) Reinvestment B) Market C) Currency D) Liquidity

D

Which of the following actions is a form of market manipulation? A) Front running B) Arbitrage C) Wash sales D) Matched orders

D

Which of the following could NOT be an open-end fund? A) PQR Fund ask price 17-NAV 17 B) RST Fund ask price 45.25-NAV 44.80 C) LMN Fund ask price 7.75-NAV 7.50 D) WXY Fund ask price 10.50-NAV 11.25

D

Your client has turned bearish on the market, but does not have a margin account. Which of the following securities would probably best meet your client's needs? A) A balanced mutual fund B) A long call option C) An interest rate swap D) An inverse fund

D

An analyst wishing to measure the sensitivity of a debt security when faced with changes in interest rates will compute the security's A) nominal yield B) sensitivity ratio C) yield to maturity D) duration

D *Page 247 LEM

An agent is discussing a specific bond that would be a good addition to the client's portfolio. The client comments that the nominal yield is lower than its current yield. The agent would explain that the bond is A) selling at discount B) selling at a premium C) a high-yield bond D) issued by an unseasoned company, and the market hasn't yet realized how well secured the debt is

A

An investment adviser representative's business card containing which of the following designations would be in violation of the NASAA policy on advertising? A) IAR B) CLU® C) MBA D) CFP®

A

Applicants who pass the Series 66 exam after having also passed the Series 7 exam can tell prospects, A) "I am a FINRA registered representative and an investor adviser representative." B) "I am now a licensed fiduciary." C) "I have passed two national exams qualifying me to serve clients nationwide." D) "My qualifications have been reviewed and accepted on both the state and federal level."

A

Averaging techniques would include all of the following EXCEPT A) reinvesting all distributions from an open-end investment management company B) maintaining a DRIP with a stock listed on the NYSE C) dollar cost averaging D) maintaining a constant ratio plan

A

When preparing a client profile, the least important concern would be: A) educational background. B) disability coverage. C) current income. D) retirement plans.

A

Under federal law, the brochure rule requires: A) delivery of a brochure, or summary of material changes, to all clients within 120 days of the end of the adviser's fiscal year. B) concurrent delivery of the Form ADV Part 1A. C) delivery no later than 48 hours before entering into an investment advisory contract. D) delivery no later than 5 business days after the formalizing of the advisory.

A *Each year you must (i) deliver, within 120 days of the end of your fiscal year, to each client a free updated brochure that either includes a summary of material changes or is accompanied by a summary of material changes, or (ii) deliver to each client a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure. See SEC rule 204-3(b) and similar state rules.

The Uniform Securities Act prohibits broker-dealers from engaging in activity that has the effect of manipulating stock market prices. These would include: A) matched orders. B) higher than reasonable commissions or markups. C) selling unregistered nonexempt securities. D) churning.

A *Page 173 LEM.

Which of the following statements are accurate when describing preferred stock? 1. Owners of convertible preferred stock have an opportunity to participate in the growth of the company. 2. Unlike any other securities the company may issue, the return on preferred stock is fixed. 3. Issuing preferred stock confers certain tax benefits to the company. 4. In general, preferred stock does not have a maturity date. A) I and IV B) II and III C) I and II D) III and IV

A *Page 226: Convertible preferred issued w/ lower yield vs. nonconvertible because the investor may have the OPPORTUNITY to convert to common shares and enjoy greater capital gain potential. *Page 220 LEM: Preferred stock rate of return is FIXED rather than subject to variation as with common stock. *Preferred's technically have an unlimited life because they have no fixed maturity date, but they may be called by the issuer after a certain date

A technical analyst who wishes to smooth out the fluctuations of stock market prices would probably chart A) the 100-day moving average B) the support and resistance levels C) the trendlines D) the short interest

A *Page 230 LEM: To avoid volatility frequently present in stock price trends, analysts will use the moving average. A moving average attempts to modify the fluctuations of a stock prices into a "SMOOTHED" trend.

All of the following are considered to be equity securities EXCEPT A) equity-linked notes B) warrants C) unit investment trusts D) exchange-traded funds

A *Page 325 LEM -ETN's or ELN's are unsecured debt obligations.

Lower maintenance costs would be least likely to be found when using which of the following management styles? A) Tactical. B) Buy and hold. C) Strategic. D) Rebalancing

A *Page 376 LEM -Most active management style. Therefore, "lower maintenance cost" would LEAST likely be found using this method.

Halethorpe has had a difficult time passing the Series 66 examination. He just tried again and failed for the fourth time. He will be eligible to try again in A) 180 days. B) 90 days. C) 30 days. D) 6 months.

A *Page 43 LEM

In determining suitability for a client who has recently opened a new account, an agent should NOT: A) interview the client personally. B) make assumptions on behalf of the client if he refuses to supply financial information. C) have his assistant interview the client. D) send the client a questionnaire to fill out.

B

When a variable annuity is annuitized A) the number of accumulation units redeemed each payment period remains constant B) the number of annuity units redeemed each payment period remains constant C) the number of accumulation units redeemed each payment period varies based upon the performance of the separate account D) the number of annuity units redeemed each payment period varies based upon the performance of the separate account

B

Your client wishes to begin a self-funded retirement plan that will enable him to make contributions until he is 75 years of age with no required minimum distributions. Which of the following would be your recommendation? A) Deferred compensation plan B) Roth IRA C) Traditional IRA D) 401(k)

B

A corporate bond with a BB rating is currently selling for 95. If the bond has a coupon of 6% and matures in 10 years, its yield to maturity is closest to A) 5.71% B) 6.67% C) 6.32% D) 5.37%

B *CY: $60 / $950 = 6.32 %. *Discount bonds, YTM > CY. Therefore, must be B, 6.67%.

The antifraud provisions of the Uniform Securities Act would apply to all of the following except A) persons availing themselves of the de minimis exemption. B) an individual employed by a registered broker-dealer whose sole function is selling commodity futures contracts. C) newsletter publishers who do not give advice to subscribers on the subscriber's specific investment situation. D) a broker-dealer registered pursuant to the limited registration option available to Canadian broker-dealers and their agents.

B *Uniform Securities Act's antifraud provisions deal with securities; commodities are not a security.

Social media can be static or interactive. Examples of static content typically available through social networking sites include all of the following except A) video recordings of public appearances. B) an online seminar. C) banner ads. D) biographical information.

B- online seminar is an example of interactive because the presenter and viewers can talk or "interact" with one another" -STATIC: remains posted until changed by the person who established the account on the site. Generally accessible to all visitors to the site. -INTERACTIVE: inputer from both the creator and the viewer. Example: Facebook, Twitter, Instagram, or Linkedin.

Broker-dealers and their agents can have their licenses suspended or revoked for engaging in business practices in violation of NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. Which of the following activities would NASAA consider an unethical or prohibited practice? 1. Hypothecating a customer's securities in a margin account without written consent from the customer 2. Executing a margin transaction in new customer accounts before receiving written margin agreements from the customers 3. Charging unreasonable fees for custody and securities transfer services A) II and III B) I and III C) I and II D) I, II, and III

B: 1 & 3 *Page 421 LEM: -USA: margin document must be received after the first INITIAL transactions.

An agent receives a check in the mail from a client. The check was made out to the agent in error and the client who has left the country cannot be reached for several weeks. To prevent a margin call, the agent deposits the check in his personal account and simultaneously deposits a check for the same amount into the client's account. The state Administrator would consider this action to be which of the following? 1. Prohibited. 2. Permissible. 3. Commingling. 4. Borrowing. A) II and IV. B) I and IV. C) I and III. D) II and III.

B: 1 & 4

Which of the following measures the risk-reward trade-off? A) Alpha. B) Correlation. C) Sharpe ratio. D) Standard deviation.

C *Page 445 LEM

As defined in the Uniform Securities Act, in which of the following cases would an investment adviser NOT be considered to be maintaining custody? A) The investment adviser keeps client securities in street name B) The investment adviser has direct control over the client's securities C) The investment adviser receives a check made payable to the IA and returns it within 3 business days D) The investment adviser has indirect control over the client's securities

C

The firm engaged to manage the portfolio of an investment company registered under the Investment Company Act of 1940 must: A) provide notice to SEC. B) offer to provide a brochure to the investment company no less frequently than annually. C) register with SEC. D) register with the Administrator in each state in which the fund's shares will be offered.

C

The management style that is most similar to buy and hold is: A) contrarian. B) tactical management. C) strategic management. D) active management.

C

To make a quantitative evaluation using the future value computation, which of the following is NOT needed? A) Account value at the start of the period. B) Rate of return anticipated. C) Account value at the end of the period. D) Time period involved.

C

Under federal law, all of the following investment advisers are exempt from registration EXCEPT A) advisers solely to venture capital funds B) advisers solely to private funds with less than $150 million in assets under management in the United States C) advisers whose only clients are banks whose deposits are insured by the FDIC D) foreign private advisers with no place of business in the United States and less than $25 million in assets under management

C

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

C

Which of the following statements regarding credit risk is not true? A) Credit risk can be assessed by referring to the independent credit rating agencies. B) Credit risk is the probability of the issuer defaulting on their payment obligations. C) An A-rated mortgage bond has less credit risk than an AA-rated debenture. D) A rating downgrade may or may not result in a lower market price for a bond.

C

You are viewing three securities to place in a client's portfolio. Security X has an expected return of 15%, security Y has an expected return of 20%, and security Z has an expected return of 10%. If you were to place 40% of the portfolio into security X, 40% into security Y, with the balance going into security Z, the probable return of the portfolio is A) 17%. B) 15%. C) 16%. D) 14%.

C

The Investment Advisers Act of 1940 as further modified by SEC Release IA-1092, includes all of the following in the definition of an investment adviser EXCEPT A) a financial representative for a professional athlete B) a financial representative for a celebrity C) an adviser who only gives advice on U.S. government securities D) a pension consultant offering advisory services to employee benefit plans

C *Page 8 LEM: -Pension consultants offering advisory services to employee benefit plans are considered IA's by the SEC.

Which of the following statements regarding the filing requirements for institutional investment managers with investment discretion over portfolios with an aggregate value of $100 million or more of 13(f) securities are TRUE? 1. Form 13D must be filed. 2. Form 13F must be filed. 3. Filing must occur within 10 days of the month-end. 4. Filing must occur within 45 days of the quarter-end. A) I and III. B) I and IV. C) II and IV. D) II and III.

C: 2 & 4 *Page 175 LEM

A broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter (OTC) market is a description of A) a specialist B) an arbitrageur C) an investment banker D) a market maker

D

A corporation offering securities registered under the Securities Act of 1933 may make which of the following statements? A) The SEC has endorsed our securities for sale to the public. B) The SEC has passed on the merits of these securities as an investment. C) The SEC has passed on the adequacy of the information in our prospectus. D) The SEC has declared this prospectus effective.

D

Richard, Tim, Sam, and Fred have a regular golf foursome every weekend. During one of their outings, they decide it is time they did something constructive with their money by opening an account with a brokerage firm. If the account is opened tenants in common, suitability information would be required on A) only that individual with the authorization to trade the account B) each of the individuals, and if married, their spouses C) whichever person has been designated by the group as its spokesman D) each of the four individuals

D

Which of the following actions by an investment adviser representative would NOT be an unethical practice under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) Splitting commissions with a sales assistant who is not registered and works for the same firm. B) Failing to disclose that the representative will only recommend proprietary products. C) Failing to tell a customer that the investment being recommended will be sold from the inventory of the investment adviser representative's firm. D) A representative with discretionary authority enters a sell order for a security when its price is falling.

D

Which of the following would be most useful information for an IAR attempting to determine the ability of a client to have the necessary funding to purchase an investment with a $25,000 minimum entry level? A) Cash flow statement. B) Marginal tax bracket. C) Income tax return. D) Family balance sheet.

D

While enjoying some après-ski after a long day vacationing out of state on the slopes, Gervaise, an investment adviser representative with a federal covered investment adviser, spots several existing advisory customers. They invite Gervaise to join them for some spirits, and the invitation is warmly accepted. After about an hour, some of these customers and their friends ask Gervaise if it would be possible to have a lesson on what specific stocks should be considered under current market conditions. To make this presentation, Gervaise A) must not receive any compensation, direct or indirect. B) does not have to be registered in the state as long as the only participants are these existing customers. C) must be registered in this state because the advice being given is specific rather than general. D) does not have to be registered in the state because, as a representative of a covered adviser, registration is required only in those states where a place of business is maintained.

D

Many corporations make available dividend reinvestment plans for their shareholders. Among the benefits of using DRIPS are: 1. allowing the investment to compound. 2. discounts from the current market price. 3. reduced taxation. 4. the ability to accept the dividend in cash or in additional shares of stock. A) II and IV. B) I and III. C) I and IV. D) I and II.

D *Page 400 LEM -DRIPS: allow the individual to take their CASH dividend and purchase additional shares often at a discount.

One of your customers asks you to interpret her observation that the short interest in a stock she owns has been rapidly increasing over the past 4 months. Aligning with the short interest theory, you would tell her that this is a A) bearish indicator B) indication of predictable stability in the stock C) indication of predictable volatility in the stock D) bullish indicator

D *Pg 230 of LEM: -HIGH short interest is a BULLISH indicator.

The Investment Advisers Act of 1940 requires that firm and customer records of an investment adviser be: maintained in the principal office of the adviser for 2 years maintained in the principal office of the adviser for 3 years readily accessible for 2 years readily accessible for 5 years A) I and III B) II and IV C) II and III D) I and IV

D: 1 &4 *Page 32 LEM

A broker-dealer registered in all 50 states, using both radio and television advertisements to promote its services, directs prospects to a toll-free number that will connect them with a registered agent. An existing customer living in New York calls and is connected to an agent in Cleveland who is registered in Ohio, Michigan, and Pennsylvania. The client asks the agent to recommend something that would fit the existing account's stated investment objectives. Under the Uniform Securities Act, the agent: A) can make a recommendation because the call was received in Ohio, a state in which the agent is registered. B) should transfer the call to an agent who is registered in New York. C) can make a recommendation because the call was made on an unsolicited basis from an existing client. D) can only recommend securities that are exempt from registration.

A

One of the major goals of most hedge funds is to A) use long and short strategies to provide a stable return in both up and down markets. B) generate higher fees for their advisers C) generate liberal tax write-offs for their investors D) appeal to the sophisticated investor

A *Page 269 LEM: -Primary aim of a hedge fund is to reduce risk and volatility while attempting to preserve capital and deliver returns under all market conditions.

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

A *Regulation S-P defines a customer relationship as a continuing relationship between a consumer and a financial institution. Examples of a customer relationship include an individual who has an advisory contract with an investment adviser.

When preparing a client profile, it is prudent to investigate the prospect's non-financial considerations. Included would be that client's: 1. age. 2. attitudes. 3. experience with investments. 4. values. A) I, II, III, and IV. B) II and IV. C) I, II, and IV. D) I and III.

A -Page 357 LEM: All four of these are included in nonfinancial considerations. -Example of Finanical Considerations: current expenditures, debt obligations, tax status, income sources and balance sheets items.

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

A -Preservation of capital - bank insured CD's.

If the administrator of a corporate 401(k) plan ensures that a wide variety of investment alternatives are available to employees along with the ability for the employees to monitor their accounts and make frequent changes as needed, ERISA: A) shifts the responsibility for account performance to the employee. B) might find the administrator to be shirking his fiduciary responsibility. C) removes the requirement for "top-heavy" testing. D) removes the requirement for the plan to provide employees with quarterly reports.

A or C? *Pg. 487 of LEM. Safe Harbor Provisions. *ERISA: 401(k) plans. Safe Harbor from liability for the trustee if certain conditions are met. Fiduciary is NOT LIABLE for losses to the plan resulting from the participant's selection of investment in his own account. *TOP-HEAVY TESTING: Term used to describe a 401(k) plan that offers a disproportionate benefit to KEY employees. Testing must be done on an annual basis unless the plan qualifies as a safe harbor 401(k).

Both state and federal law will permit an investment adviser to engage in agency cross transactions provided the advisory client executes a written consent prospectively authorizing the investment adviser to effect agency cross transactions for such clients and the adviser discloses all of the following except A) on at least a biennial basis, the adviser will furnish a statement or summary of the account identifying the total number of such transactions and the total amount of all remuneration from these transactions. B) the adviser will be receiving commissions from both sides of the trade. C) no transaction is effected in which the same investment adviser or an investment adviser and any person controlling, controlled by, or under common control with that investment adviser recommended the transaction to both any seller and any purchaser. D) there is a potential conflict of interest because of the division of loyalties to both sides.

A- ANNUAL basis the IS will furnish a statement of summary, not "beinnial". *B -the adviser will be receiving commissions from both sides of the trade D-there is a potential conflict of interest b/c of the division of loyalties to both sides -Aon at least an annual basis, the adviser will furnish a statement or summary of the account identifying the total number of such transactions and the total amount of all remuneration from these transactions -in a conspicuous manner, indicates that this arrangement may be terminated at any time -Cno transaction is effect in which the same investment adviser or an investment adviser and any person controlling, controlled by, or under common control with that investment adviser recommended the transaction to both any seller and any purchaser

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

B

One of the terms found in the Securities Exchange Act of 1934 is that of a "person associated with a broker-dealer." Included in that definition would be all of the following EXCEPT A) an individual registered with the broker-dealer as an agent who does not maintain a place of business in the state B) an individual whose sole duties are ministerial in nature C) the individual managing the firm's smallest branch office D) any person directly or indirectly controlling, controlled by, or under common control with the broker-dealer

B

Performance guarantees are prohibited under state and federal regulations. Which of the following is an example of a performance guarantee offered by a broker-dealer? A) Our firm's research department has set a 12-month price target on this recommendation of $50 per share. B) Our firm is so confident that this recommendation will perform as predicted that it will buy this security back from any customer at the prevailing market price. C) Our firm is so confident that this recommendation will perform as predicted that it has established an escrow account with the Administrator to protect investors against loss. D) Our firm is so confident that this recommendation will perform as predicted that it has purchased 1,000 shares for the firm's investment account.

B

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

B

All of the following terms are found in a typical equity index contract EXCEPT A) participation rate B) inflation rate C) settlement options D) cap rate

B *Page 286 LEM

Mr. Peabody Fawcett and his sister, Ms. Gwenyth Paige-Newberry open a brokerage account at your firm with an initial deposit of $11 million. The account is opened as tenancy in common (TIC) with Peabody owning 40% and Gwenyth the balance. Several years later, Peabody is fatally injured while playing polo. As a result A) the account will be frozen until the results of the probate court are released B) 40% of the value of the account will be transferred to an estate account in his name and 60% will be transferred into an individual account in her name C) the account will be frozen until receiving instructions from the executor of Mr. Fawcett's account D) Mr. Fawcett's share will be transferred to his sister and an individual account will be opened in her name

B *Page 337 LEM *Assets pass to tenants estate upon death.

There are numerous benefits to opening an account at a brokerage firm with a transfer on death (TOD) designation. One of those is A) simplification of the transfer of assets held at multiple brokerage firms. B) probate is avoided. C) estate taxes are reduced. D) the owner of the account may change beneficiaries with the permission of the court.

B *Page 351 LEM

Financial planners frequently assist their clients with budgeting. One can't really prepare a budget without knowing the family's cash flow. In preparing a family cash flow statement, all of the following items would appear except A) salary B) assets C) interest on saving accounts D) taxes

B *Page 356 LEM: Balance sheet only includes assets and liabilites, not income, such as salary, dividends, or interest, or amounts paid for expenses.

A popular strategy for income investors who wish to take advantage of potentially higher interest rates when reinvesting maturing securities is A) bulleting B) laddering C) barbelling D) rebalancing

B *Page 385 LEM

Which of the following is an exempt security under the Uniform Securities Act? A) Common stock traded on the London Stock Exchange. B) Negotiable certificates of deposit with $100,000 denominations. C) Shares of a U.S.-based insurance company not authorized to sell policies in that particular state. D) Commercial paper maturing in 12 months.

B *Page 69 LEM: To be exempt, commercial paper (promissory note), cannot exceed 270 days.

An investor who resides in New York reads a newspaper ad for advisory services in a newspaper published in New Jersey. More than 80% of the newspaper's circulation is in the state of New York. According to the Uniform Securities Act, an offer has been made in A) New Jersey and New York B) neither New Jersey nor New York C) New Jersey D) New York

B *Page 93 LEM. -Once more than 2/3rd of the paper circulates outside of the state where it originated NEITHER states have jurisdiction. -If the circulations was less than 2/3rd, then New Jersey ADMIN would have jurisdiction.

An investment adviser representative with a state-registered investment adviser reads an article in the newspaper about a local company that has had a surge in demand for its product line. If the representative's supervisor gives approval, posting the article on her social media accounts would constitute A) entanglement. B) acceptance. C) adoption. D) fraud.

C

Under the safe harbor provisions of the Securities Exchange Act of 1934, section 28(e), advisers may engage in soft-dollar arrangements to receive: research from a third party. season tickets to the opera. financial planning software. computer equipment. A) I and IV. B) II and IV. C) I and III. D) II and III.

C

Without prior authorization from the client, an investment adviser could release information relating to the client's account: in order to comply with the brochure delivery requirements of the USA. 1. when requested by the IRS. 2. for the purpose of furnishing information for a statistical survey 3.being compiled by the Administrator. 4.upon the receipt of a subpoena from a court of competent jurisdiction. A) II and III. B) I, II, III, and IV. C) I, III, and IV. D) II and IV.

C

The following numbers (in %) represent the returns from an investment fund over the past seven years: 2014: 13%, 2015: 11%, 2016: 2%, 2017: 6%, 2018: 5%, 2019: 8%, 2020: 6%. Using the range measure would indicate that the seven-year returns from the fund had a mid-range of A) 2%. B) 4%. C) 7.5%. D) 11%.

C *(The midrange of any group of numbers occurs between the highest and lowest in the group. In this example, the highest number is 13% and the lowest is 2%. The number in the middle of those two is 7.5%)

Financial ratios derived from a corporation's balance sheet can be useful tools for investors. Someone looking to determine the company's liquidity would most likely to ignore its A) quick asset ratio B) current ratio C) debt to equity ratio D) acid-test ratio

C *Page 203 LEM: Debt-to-equity ratio measure the amount of financial leverage being used by the company. The other ratios focus on the company's liquidity.

The term that best describes a person entrusted with the duty of acting for the benefit of another party is A) an investment adviser. B) a trustor. C) a fiduciary. D) a principal.

C *Page 345 LEM

Many corporations make available dividend reinvestment plans for their shareholders. Among the benefits of using these plans are all of these EXCEPT: A) the ability to add additional funds to the dividend. B) reduced or eliminated commissions. C) avoiding taxation until the shares are sold. D) discounts from the current market price.

C *Page 400 LEM: Shareholders automatically purchase additional shares DIRECTLY from the issuer. -Paying LITTLE OR NO commission and -often a discount from market price. -Most companies permit investors in these plans to add money along with reinvested dividends. -They are TAXED in the year of receipt as with any cash dividend.

Under the Uniform Securities Act, it is unlawful for any investment adviser to take or have custody of any securities or funds of any client unless: 1. the investment adviser receives written authorization from the Administrator before accepting custody. 2. the securities of each client are segregated, marked to identify the particular client having the beneficial interest therein, and held in safekeeping in some place reasonably free from risk of destruction or other loss. 3. immediately after accepting custody or possession of funds or securities from any client, the investment adviser notifies the client in writing of the place where and the manner in which the funds and securities will be maintained. 4. at least once every 6 months, the investment adviser sends each client an itemized statement showing the funds and securities in the investment adviser's custody at the end of such period and all debits, credits, and transactions in the client's account during such period. A) I and II. B) III and IV. C) II and III. D) I and IV.

C: 2 & 3 *Page 153 LEM

Your client purchased a call option on KLN Corporation common stock for $800. The exercise price was $35, and the market price of KLN stock was $38. Six months later, the market price of KLN stock was $40 and the client sold the call for $1,250. What was the holding period return on this investment? A) 63.82% B) 8.57% C) 14.28% D) 56.25%

D

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

D *. 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.

One of your customers has inherited $100,000 of Kemach Farm Products, Inc. (KFPI), guaranteed bonds. Being wary of the term guaranteed, you are asked for its meaning in this context. You would explain A) the interest and final principal payment on this bond are guaranteed by KFPI. B) the interest payments on this bond are guaranteed to increase to keep pace with inflation. C) bondholders may redeem their bonds at the face value at any time prior to maturity. D) the interest and final principal payment on this bond are guaranteed by someone other than the issuer.

D *A guaranteed bond is a debt security that offers a secondary guarantee that interest and principal payments will be made by a third party, should the issuer default due to reasons such as insolvency or bankruptcy. A guaranteed bond can be of either the municipal or corporate variety.

Under which of the following structures is it likely to have the largest number of owners? A) Sole proprietorship. B) JTWROS. C) S corporation. D) Limited liability company.

D *Google Search: -A standard LLC has no upper limit when it comes to the number of members the business can have.

Which of the following would be included in the USA's definition of an agent? A) An individual employed by an issuer. B) A sales assistant of an agent who is responsible for mailing trade confirmations to the agent's clients. C) A broker-dealer selling nonexempt securities to its customers. D) A research analyst for a broker-dealer who maintains a limited retail customer base.

D *Regardless of the primary function of a broker-dealer employee, if the employee engages in sales activity, that employee must beregistered as an agent.

A bullish client invests into a 3x leveraged fund based on the S&P 500 Index. If the index should rise by 10%, your client's investment would be expected to A) increase by 20% B) increase by 50% C) decrease by 30% D) increase by 30%

D -10%--> 20% is 2x. 20% --> 30% is 3x.

Which of the following statements regarding the private placement exemption under the USA are TRUE? 1. There may be no more than ten offers to noninstitutional purchasers during any consecutive 12-month period. 2. The seller reasonably believes that the retail buyer is purchasing for investment only. 3. No investors may resell stock acquired in a private placement without a prescribed holding period. 4. Commissions may be paid on sales to noninstitutional purchasers. A) I and III. B) II and III. C) III and IV. D) I and II.

D: 1 & 2 *Private placements are transactions resulting from offers to no more than ten noninstitutional persons in 12 months for investment purposes only. The offeror must be convinced that buyers are purchasing for investment. This means no immediate resale intentions are allowed on the buyer's part. No commissions may be paid, directly or indirectly, for these transactions. However, sales to institutional purchasers are exempt from the limitations regarding number of sales, resale restrictions, and commissions. They may, therefore, be offered to more than ten persons. (Remember that the term person is defined very broadly in the act.)

Which of the following statements regarding estates are CORRECT? 1. Estate taxes are due on April 15 of the first year following the death of the deceased 2. Estate taxes are due 9 months after the date of death of the deceased 3. Assets are valued based on their market value as of the date of death, or, alternatively, 6 months later 4. Assets are valued based on their cost, or, alternatively, 6 months after the date of death A) I and IV B) II and IV C) I and III D) II and III

D: 2 & 3

Although there are others that may be used in construction of a portfolio, the primary asset classes used in asset class allocation include: bonds. cash. commodities. stock. A) I, II, and IV. B) II and III. C) I and IV. D) I, II, III, and IV.

A

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

A

Terms used to describe the practice of buying and selling securities to create the appearance of active trading volume include: 1. wash trades. 2. matching orders. 3. front running. A) I and II. B) I and III. C) II and III. D) I, II, and III.

A

Among the major stock averages and indexes, only one is price-weighted. That would be A) the Dow Jones Industrial Average. B) the Standard and Poor's 500 Composite Index. C) the Russell 2000 Index. D) the Wilshire 5000 Total Market Index.

A *The Dow Jones Industrial Average is an index of 30 "blue chip" stocks of U.S. industrial companies. The Index includes a wide range of companies—from financial services companies, to computer companies, to retail companies—but excludes transportation and utility companies, which are included in separate indices. Unlike many other indices, the DJIA is not a "weighted" index, meaning it does not take market capitalization into account.

Wynifred is an investment adviser representative for an SEC-registered investment adviser. She lives in State X and receives a letter from a former boyfriend requesting a contribution to the friend's political campaign for governor of State X. As it happens, Wynifred's firm provides advisory services to State X's employee retirement fund and Wynifred actively solicits business from other state agencies. Which of the following actions would be permitted to Wynifred under the SEC's pay-to-play rule without causing any concerns to her firm? A) Donating a maximum of $350 to the campaign B) Sending a letter to the friend indicating that the rules would not permit her to contribute to the campaign C) Donating a maximum of $150 to the campaign D) Donating a maximum of $250 to the campaign

A *The rule allows covered employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections. 3.21.1.1 in the License Exam Manual

An investment adviser whose primary business is the rendering of investment advice providing investment supervisory services is entitled to use the term: A) investment counsel. B) senior adviser. C) pension consultant. D) financial planner.

A *Under the Investment Advisers Act of 1940, the term "investment counsel" may only be used by an investment adviser if the giving of advice is the primary business of the firm.

The GHIJ Corporation has a 3% convertible debenture outstanding with a conversion price of $40. The bond's current market price is 126. The most probable reason for this is A) GHIJ's earnings have risen since the debenture was issued B) the current market price of the GHIJ common stock is approximately $50 per share C) the current market price of the GHIJ common stock is approximately $35 per share D) interest rates have risen since the debenture was issued

B

On a scheduled premium variable life insurance policy, the insured is guaranteed: A) nothing. B) at least 100% of the stated death benefit. C) that premiums may be reduced due to better than projected performance in the separate account. D) at least 100% of the stated cash value.

B *ExplanationA scheduled premium variable life contract is issued with a guaranteed minimum death benefit. If the individual is concerned about having the minimum guarantee, you should recommend the scheduled contract.U15LO7

A 45-year-old client has just received an inheritance and would like to invest $100,000 into a growth mutual fund offered by your firm. The client intends to use the money to supplement retirement. You should probably recommend the purchase of A) a fixed annuity B) Class A shares C) Class B shares D) Class C shares

B **Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load, but do have a higher asset-based sales charge. Class C shares always have a 12b-1 charge. -Class A: Better for wealthy investors, long time horizon. -Class B: Better for investors with little cash investments and long time horizon. (At least 5-8 years.) -Class C: Better for retail investors with a short time horizon. (Usually 1-3 years).

In which one of these business entities does the term "member" refer to the owners? A) S corporation. B) Sole proprietorship. C) Limited liability company. D) Limited partnership.

C *LLC owners are referred to as members and there can be an unlimited number of them in this business entity. The primary benefit of an LLC business formation is this liability protection. If a business is sued, the plaintiff can only go after the LLC's business assets and not the owner's personal assets.

Under the Investment Advisers Act of 1940, the exclusion for providing investment advice that is solely incidental to the practice of a profession is available to all of the following EXCEPT: A) teachers. B) attorneys. C) economists. D) accountants.

C *Page 10 LEM *L.A.T.E.

Both the Investment Advisers Act of 1940 and SEC Release IA-1092 specifically exclude from the definition of "investment adviser" certain persons who provide investment advice solely incidental to the practice of their profession. Which of the following would NOT by definition qualify for this exclusion? 1. An accountant who provides high tax bracket clients with a useful chart showing them how to compute the tax equivalent yield for municipal bonds 2. A divorce attorney who, after obtaining settlements for clients, provides them with a list of suggested investment alternatives encouraging them to be prudent with their newfound wealth 3. A university professor who provides investment advice for a substantial fee to fewer than 15 clients during any consecutive 12-month period, none of whom is an investment company 4. An economist who consults with very large corporate employee benefit plans on how to best invest their funds A) I and II B) I and IV C) II and III D) III and IV

D *L.A.T.E. *Lawyers, accountants, engineers, teachers, and broker-dealers whose advice is incidental to their profession and who do not charge a separate fee for investment-related advice are excluded from the definition under the Investment Advisers Act of 1940.

Which of these is the best example of a venture capital investment? A) There is an investment in an immature, negative cash flow firm where it is possible to lose 100% of the investment. B) There is an investment in a mature firm that needs capital to start a joint venture with another mature firm. The return will be based only on the success of the new venture and not the success of the rest of the firm. C) There is a debt investment in an immature firm that provides financing beyond what secured lenders are willing to lend but without significantly diluting the firm's outstanding equity. Real assets or capital are used to back the investment, and a minimum return is locked in. D) There is an investment in a mature firm that needs capital to start a new venture. The return will be based on a function of the return of the new venture above the risk-free rate. If the new venture is not successful, the firm will return the capital.

A

A farmer who produces soybeans believes that this year's crop will be the biggest ever. The farmer would most likely hedge this risk by A) going long soybean futures B) going short soybean forwards C) going short soybean futures D) going long soybean forwards

B *A big crop means more supply and lower prices when the crop is harvested. Hedging involves taking an opposite position (benefiting if prices fall). If the farmer is correct, selling short at today's price will enable delivery in the future at that higher price. Because this is a producer who will have product to deliver, forwards are likely to be more appropriate than futures.U16LO4

Section 401(b) of the Uniform Securities Act defines an agent as an individual who represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. However, the term agent would not include an individual: A) employed by a broker-dealer selling securities on behalf of an issuer. B) employed by an issuer to research industry trends. C) representing a non-exempt issuer in the sale of the issuer's securities in a non-exempt transaction. D) employed by the investment banking firm engaged to underwrite a new issue of nonexempt securities.

B 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.

Earnings momentum would be important to an analyst using which of the following portfolio management styles? A) Growth B) Tactical C) Buy and hold D) Value

A *Page 381 LEM

To be in compliance with the rules under the Investment Advisers Act of 1940, which two of the following statements are correct regarding a registered investment adviser's relationship with solicitors? 1.An individual who is subject to statutory disqualification from registration as an investment adviser representative may solicit clients for the adviser as an employee of a third-party solicitor. 2.There must be a written agreement between the investment adviser and the solicitor. 3.While the sales script used may be written by the solicitor, its content is the responsibility of the adviser. 4.Cash referral fees to solicitors may only be paid in the case of impersonal advisory services. A) III and IV B) II and III C) I and IV D) I and II

B

The Administrator may by order deny, suspend or revoke any registration, or bar or censure any registrant or any officer, director, partner or person occupying a similar status or performing similar functions for a registrant, from employment with a registered broker-dealer or investment adviser, or restrict or limit a registrant as to any function or activity of the business for which registration is required in this state, if he finds that the order is in the public interest and that the applicant or registrant A) is permanently or temporarily enjoined by any court of competent jurisdiction from engaging in or continuing any conduct or practice involving any aspect of the securities business B) has been charged, within the past ten years, with any misdemeanor involving a security or any aspect of the securities business, or any felony C) has engaged in honest or ethical practices in the securities business D) is not qualified solely on the basis of lack of experience

B

Delta Advisers is registered in Alabama, Mississippi, and Louisiana. Billy Joe works for Delta Advisers rendering investment advice to individual clients. He works out of Delta's Jackson, MS office and has 3 clients in Mississippi, 6 clients in Alabama and 4 in Louisiana. Billy's friend, Bobby Ray, works for Biloxi Investments, a federal covered adviser with offices in several cities in Mississippi. Bobby Ray works out of the Tupelo, MS office and has 45 retail clients in Tennessee, 4 in Georgia, and 6 in Alabama. With regards to registration as an IAR, which of the following statements is TRUE? A) Billy Joe must register in AL and Bobby Ray must register in MS, TN, and AL. B) Billy Joe must register in MS and AL and Bobby Ray must register in MS. C) Billy Joe must register in MS and AL and Bobby Ray must register in MS, TN, and AL. D) Billy Joe and Bobby Ray must register in MS only.

B

Quick and Fast Executions, Inc., a broker-dealer registered with the Administrator, maintains a website describing the services offered by the firm. Which of the following statements would be in compliance with the requirement to maintain certain books and records? A) Because websites tend to be fluid, Administrators only require that they be available for spot-checking. B) The original website design must be retained for a period of at least three years from initial use. C) Retention of any revised design must be kept for a period of at least three years after the initial design's retention period ends. D) The original website design must be retained for a period of at least five years from initial use.

B

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

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

An investment adviser is required to disclose any financial condition that is reasonably likely to impair its ability to meet contractual commitments to their clients in any of the following cases EXCEPT when the adviser A) maintains custody B) charges performance-based fees to qualified clients C) has discretionary authority D) requires substantial prepayment of fees

B *Discretionary authority *Custody of client funds or securities *Requires or solicits substantial prepayment of fees

As used in the Uniform Securities Act, which of the following entities would be included in the term "institutional investor"? 1. Individuals who are accredited investors 2. Closed-end investment companies traded on the OTC Link (formerly known as the Pink Sheets) 3. Insurance companies 4. Open-end investment companies A) I and IV B) II and III C) I, II, III and IV D) II, III and IV

D *Page 14 LEM:

An individual is currently registered as an agent with a broker-dealer. The firm recently began offering wrap fee programs to select clients. If the agent would like to offer these 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 have to become registered as an investment adviser representative C) the agent would have to become registered as an investment adviser D) the broker-dealer would have to be registered as an investment adviser

C *An agent of a broker-dealer must register with the state as an investment adviser representative to offer a wrap fee program to clients.

If the Administrator were examining the actions of a particular agent to determine whether the agent engaged in churning a client's account, focus would be placed upon the: A) length of time the account had been opened. B) number of complaints received relating to that agent. C) client's objectives, financial resources, and the character of the account. D) amount of profits generated in the client's account.

C *Churning is the practice of generating commissions through excessive trading in a client's account. To determine what is excessive, the regulators will look at the client's investment objectives, financial resources, and the character of the account.

As part of a comprehensive financial plan, a registered investment adviser representative of All-Star Advisory Services recommends the purchase of several stocks from the inventory of All-Star's affiliated broker-dealer. Under the Investment Advisers Act of 1940, this activity A) requires the written consent of the client B) is prohibited C) requires advance written disclosure to the client D) requires the consent of and written disclosure to the client prior to completion of the transaction

D *Page 110 of LEM -Written disclosure is required PRIOR to the completion of the transaction.

There are occasions when an investment adviser plays a role in a securities transaction with or for an advisory customer. In which of these situations is prior written consent of the customer required? A) A transaction where the investment adviser sells from its own inventory B) A transaction directed to a broker-dealer of the adviser's choosing C) A transaction where the investment adviser buys for its own inventory D) Agency cross transactions

D *Page 111 LEM

An investment adviser executes a transaction for a client who has a contract for advisory services. The adviser also represents the person who is the contra party in the sale and is paid a commission. Which of the following best describes this transaction? 1. A riskless and simultaneous transaction. 2. An agency cross transaction. 3. Not permitted under any circumstances. 4. Permitted with prior written disclosure and consent. A) II and III. B) I and IV. C) II and IV. D) I and III.

C: 2 & 4

The GHIJ Corporation has a 3% convertible debenture outstanding with a conversion price of $40. The bond's current market price is 126. The most probable reason for this is A) interest rates have risen since the debenture was issued B) GHIJ's earnings have risen since the debenture was issued C) the current market price of the GHIJ common stock is approximately $35 per share D) the current market price of the GHIJ common stock is approximately $50 per share

D *Page 238 LEM

Because investment advisers generally act in a fiduciary capacity, they need to follow the provisions of the Uniform Prudent Investors Act (UPIA). When handling client's assets, the investment adviser must consider the objectives and goals as well as the risks. The adviser can satisfy the standard of prudent management by A) limiting the choice of investments to those appearing on the state's legal list. B) ensuring that no single security carries a risk greater than that of the overall portfolio. C) delegating the investment decisions to a trustee. D) exercising reasonable care, skill, and caution.

D -UPIA: The Prudent Investor Ruel. Fiduciary act with reasonable care, skill and caution. Page 162 and 484 LEM.

A client invests $100,000 in a commercial real estate venture taking a 10% interest as a limited partner. Unfortunately, the demand for new office space deteriorates and the partnership is unable to meet the mortgage payments. The end result is foreclosure with a net loss of $2 million. This would have the effect of: A) requiring the client to pay his share of the loss to the creditors. B) a potential claim against the agent who sold the client this program. C) giving the client a passive loss of $200,000. D) giving the client a passive loss of $100,000.

D-LP'scannotlosemorethantheyinvested.PrimarybenefitofinvetinginLP

Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are 1. mutual funds are only allowed to maintain joint accounts with other funds that are members of the same "family" of funds 2. no public offering may commence unless the fund has at least $100,000 in net assets 3. no registered investment company may own more than 3% of the voting shares of another registered investment company 4. shares of the fund will not have any margin loan value until the 30th day after purchase A) III and IV B) I and III C) II and IV D) II and III

D: 2 & 3 *Page 155-256: LEM: $100K minimum, 3% max rule w/ owning another investment company, no margin buying allowed with open-ended companies.

John Johnson was convicted 5 years ago of failure to pay child support, a misdemeanor in his home state. Mr. Johnson would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state will: A) disregard that conviction when determining Mr. Johnson's qualifications for registration. B) determine Mr. Johnson's status on the basis of the extent to which his child support payments are being paid. C) consider Mr. Johnson to be statutorily disqualified since in this state his crime is a felony. D) consider granting registration to Mr. Johnson, but only if he receives heightened supervision.

A *The conviction on Mr. Johnson's record is for a non-securities-related misdemeanor. The fact that the same crime is a felony in another state is not relevant to Mr. Johnson's application for registration in that state.

One of your customers passed away recently. The customer had an IRA with you and had his sister listed as the beneficiary. Other assets included the home and furnishings and a brokerage account at another firm. The titling on that brokerage account was the customer and his son, JTWROS. The customer's will specified that 100% of his assets should pass to his daughter. Based on this information, the estate settlement will have A) the daughter getting the home and furnishings and the brokerage account, with the sister getting the IRA. B) the daughter getting the home and furnishings, the son the brokerage account, and the sister the IRA. C) the daughter receiving everything as stated in the will. D) the daughter getting the home and furnishings and the IRA, with the son getting the brokerage account.

B *A will can designate the disposition of an estate's assets only to the extent that they are not previously assigned. A JTWROS account specifies that the assets go to the survivor and that overrules any will. An IRA (or any qualified retirement plan) always has a designated beneficiary and that supersedes any will. Anything other than the assets in the JTWROS account or the IRA will go to the daughter.

An agent with a nationally known broker-dealer has been opening new accounts with middle-income clients. When asked for the reason for the success, the agent replies that prospects are offered a money-back guarantee. That is, if any security the agent recommends fails to increase in value by at least 25% in six months, the agent will make up the difference. This type of guarantee A) must have been approved by the agent's supervisor before the agent began using it. B) is an unethical and prohibited practice. C) is permitted only if the guarantee is coming from a third party other than the agent. D) would be considered fraudulent activity.

B *Page 118 LEM

One of the potential effects of a mutual fund's portfolio manager having poor investment results might be A) failure to renew the bi-annual management contract. B) net redemptions. C) the redemption price of the fund shares dropping below their net asset value per share. D) a restriction on the sale of new shares.

B *Page 276 LEM

An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated the position for $55 per share while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, the investor's real rate of return is closest to: A) 1%. B) 14%. C) 11%. D) 4%.

C *Page 443 LEM example.

In which of the following cases would an individual representing an issuer in a transaction with a client be excluded from the Uniform Securities Act's definition of an agent? A) The individual sells shares of a federal credit union. B) The individual sells shares of a security issued by and representing an interest in a federal savings and loan association. C) The individual successfully solicits an order from an insurance company to purchase 10,000 shares of the issuer's stock. D) The individual sells shares of a public utility regulated in respect of its rates and charges by a governmental authority of the United States or any state.

C *The securities issued by national banks, state-chartered banks, and federal credit unions are exempt from registration under the USA. Federal savings and loan associations are as well. But, those savings and loan associations organized under state laws are only exempt if the S&L is authorized to do business in this state. *Unit #3 in LEM

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

C *The tactical style is an active one; the other choices are all passive. Obviously, the more active the management, the more trading in the account. That means that commissions are going to be higher.

Value investing is one of the popular portfolio management styles. Those who adhere to the value style to select stocks would be most likely to spend most of their effort A) charting the stock's market price using moving averages B) analyzing both micro and macroeconomic trends. C) seeking companies that are in the forefront of new technology D) analyzing the issuer's financial statements

D *Page 381 LEM -Value investors primary source of information is a companies financial statements.

All of the following statements regarding a Section 529 QTP are true EXCEPT A) the plan owner can rollover the assets into a different plan no more frequently than once every 12 months. B) the plan owner can rollover any unused funds to a member of the beneficiary's immediate family without incurring any tax liability as long as the rollover is completed within 60 days of the distribution. C) a beneficiary may be covered under both a Coverdell ESA and a Section 529 QTP. D) agents selling a Section 529 Plan must deliver a currently effective prospectus.

D *Page 496 LEM:

Under rules of the SEC, any institutional investment manager that exercises investment discretion over an equity portfolio with a market value of $100 million or more in certain securities on the last trading day in any of the preceding 12 months must file A) a Form 112. B) a Form 13D. C) a Form ADV-E. D) a Form 13F.

D *Section 139f) filings. Any institutional investment manager that exercises investment discretion over an equity portfolio with a market value on the last trading dat in any of the preceding 12 months of $100million or more in 13(f) securites MUST file FORM 13(f) with the SEC quarerly, within 45 days of the end of each quarter.

KAPCO has an outstanding 6% $100 par preferred stock issue as well as a $1 par common stock. If KAPCO's last reported earnings per share for the year were $3 and the market price of the preferred stock is $120 and the common is $45, it would be correct to state that A) the preferred stock is selling at a price above its book value B) the price-to-earnings ratio is 15:1 C) the price-to-earnings ratio is 40:1 D) the current yield on the common stock is greater than that of the preferred

B *Page 206 LEM: P/E Ratio -Current Market price of COMMON // EPS

A state-registered investment adviser organized as a corporation is required to preserve a copy of its articles of incorporation A) for 3 years after the end of the fiscal year in which the most recent entry was made. B) easily accessible for 2 years in the firm's principal office. C) for 5 years after the end of the fiscal year in which the most recent entry was made. D) for 3 years after the termination of the enterprise.

D *NASAA's Model Rule on record keeping requires partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, to be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.

Three sisters are interested in forming a business together. They have three initial concerns: How to maximize their benefits from the fact that the business is not expected to earn money for at least the first 2 years Making sure that the business will be able to continue in the event one or two of the sisters dies Minimizing their personal liability for the obligations of the business On the basis of the sister's concerns, which form of business is appropriate for the situation? A) LLC. B) General partnership. C) C corporation. D) Limited partnership.

A

Serendipity Asset Planning (SAP) is a covered investment adviser doing business in 48 states. Alicia Adams is an IAR with SAP and splits her time between an office in state X and state Z. Adams has retail clients as follows: 10 clients in state W 30 clients in state X 65 clients in state Y 4 clients in state Z Adams would have to register as an IAR in A) states X and Y. B) states W, X, and Y. C) states X and Z. D) states W and Z.

C *If the individual represents a covered investment adviser, there is a special exemption under section 203A of the 1940 act. Those performing as IARs for federal covered advisers, IAR registration is ONLY required in those states where that individual has a place of business. *If the individual represents a STATE-IA, there is a DE MINIMIS exemption. Same as IA, the IAR must NOT maintain a place of business in that state AND during the preceding 12-month period has NO MORE than five retail clients. -Pg: 39 LEM

An investment adviser representative with a registered investment adviser would like to structure an arrangement for a new advisory account in which profits and losses in the account will be shared with the client. Under the USA, which of the following statements is TRUE? A) In order for an investment adviser representative to share in the profits and losses in an advisory account, written authorization must be given by both the client and the employing investment adviser. B) Sharing may only occur if the client has a net worth of at least $2 million or at least $1 million in assets under management with the firm. C) This arrangement must be agreed upon before the opening of the account. D) An investment adviser representative may not share in the profits and losses in an advisory client's account.

D *Page 167 LEM

A registered representative presenting a variable life insurance policy proposal to a prospect must disclose which of the following about the insured's rights of exchange of the VLI policy? A) Within the first 18 months, the insured may exchange the VLI policy for either a whole life or universal variable policy issued by the same company with no additional evidence of insurability. B) The insurance company will allow the insured to exchange the VLI policy for a traditional whole life policy within 45 days from the date of the application or 10 days from policy delivery, whichever is longer. C) The insured may request that the insurance company exchange the VLI policy for a traditional whole life policy issued by the same company within 2 years. The insurance company retains the right to have medical examinations for underwriting purposes. D) Federal law requires the insurance company to allow the insured to exchange the VLI policy for a form of permanent life insurance issued by the same company for 2 years with no additional evidence of insurability.

D *Page 303 LEM -Contract exchange privilege must be made available for two years. -No medical underwriting is required for the exchange.

A state-registered investment advisory firm that plans to take custody of clients' securities must do which of the following? 1. Receive permission from the state Administrator. 2. Give notice to the state Administrator. 3. Provide a copy of its balance sheet to clients. 4. Provide a custody brochure to clients. A) II and IV. B) I and IV. C) I and III. D) II and III.

D. 2 & 3 *Pg. 28 LEM. -State-registered IA's maintaining custody must include an audited balance sheet w/ ADV part 2A.

The following set of data represents a sample from a normally distributed population of prices of a stock traded on the Nasdaq Stock Market over a one-month period: $28, $36, $32, $30, $34, $32. Which of the following statements about this sample is least accurate? A) The median equals $31. B) The mean equals $32. C) The mode equals $32. D) The range equals $8.

A

When dealing with suitable recommendations to clients, it is important to distinguish between investment objectives and investment constraints. Which of the following would be an investment objective rather than a constraint? A) Need for liquidity B) Current income C) Tax considerations D) ESG investing

B -Pg. 360 LEM. Investment Objective (goals) Examples: Current Income, capital preservation, capital growth, speculation, . -Investment Constraints (obstacles) Examples: liquidity, tax considerations, ESG investing or values, time horizon, laws and regulations.

The term that best describes a person entrusted with the duty of acting for the benefit of another party is A) a principal. B) a trustor. C) a fiduciary. D) an investment adviser.

C *A fiduciary duty is the obligation a party has to act in another party's best interest *GOOGLE SEARCH: Fiduciary: A person who undertakes to act on behalf of and primarily for the benefit of another. For example, a trustee for a trust.

In most cases, the front cover of a prospectus for a registered stock offering must contain a statement to the effect that the SEC, or state if an intrastate offering, had not approved or disapproved of the security. This statement is known as A) the tombstone. B) the warning. C) the disclaimer. D) the caveat.

C *Page 117 of LEM -Front page of every prospectus is a statement called the DISCLAIMER.

If an individual leaves her current employer and takes a new job, which of the following can she NOT do with the assets in her 401(k) plan? A) Roll them over into a traditional IRA. B) Roll them over into the new employer's 401(k) plan. C) Keep them in the plan. D) Roll them over into a variable annuity using a 1035 exchange.

D *Page 284 LEM -1IRS 035 exchange is for annuities, not for employer sponsored 401(k) plans.

On a scheduled premium variable life insurance policy, the insured is guaranteed: A) at least 100% of the stated cash value. B) nothing. C) that premiums may be reduced due to better than projected performance in the separate account. D) at least 100% of the stated death benefit.

D *Page 298 LEM

The term used to describe investment vehicles whose value is based on an underlying asset is: A) funded debt. B) parity. C) separate account. D) derivative.

D *Page 305 LEM: Derivative securities derive their value from an underlying instrument, such as a stock, stock index, interest rate or foreign currency.

Walter and Wanda Willingham are new client's. While reviewing their holdings, you notice an account at a local bank titled, "Walter Willingham, in Trust for Walter Willingham, Jr." The account provides that, upon Walter's death, the assets in the account will pass to his son. This is an example of A) an UTMA account B) an account opened JTWROS C) a testamentary trust D) a Totten trust

D *Page 352 LEM: TOTTEN TRUST: Allow for transfer of ownership of a bank account to a beneficiary's after the owner's death.

If the Administrator believes that a violation of the act has occurred or is about to occur, the Uniform Securities Act grants the office the power to issue a cease and desist order seek an injunction against the alleged violation seek to have a receiver appointed over the violator's assets seek to have the violator make restitution to investors A) I, II, and III B) III and IV C) I and II D) I, II, III, and IV

D *The Administrator has the power to issue cease and desist orders, apply to courts for temporary or permanent injunctions or restitution to investors, or have the court appoint receivers over a violator's assets.

NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents states that it is unethical for an agent registered with a broker-dealer to 1.personally lend money to the broker-dealer firm with which the agent is registered. 2.personally lend money to a bank that is a client of the broker-dealer firm with which the agent is registered. 3.split commissions with an agent registered with a broker-dealer that is under common control. 4.borrow money from a mortgage broker who is a client of the agent. A) I and IV. B) II and III. C) II and IV. D) I and III.

C *Borrowing and lending is generally permitted when the lender is in the business of lending money and when the borrower borrows from someone in the business of lending money. Banks are the most common lenders, but broker-dealers are also in that business. When a client has a margin account, the broker-dealer is lending money to that customer to purchase additional securities. The fact that the bank branch manager is a client of the agent who is borrowing money does not change this situation as the loan is from the bank, not the manager. Loans are also permitted between affiliates. *Page 166 LEM: When it comes to borrowing or lending money, you cannot borrow from any client (including your mother), unless that client is a lending institution such as a bank or credit union. BE CAREFUL, mortgage brokers are NOT in the business of lending money. *IAR: you can NEVER lend money to any client unless the client has come kind of affiliation with your firm.

Compliance with delivery requirements pertaining to an adviser's brochure under the Uniform Securities Act would require an adviser to: A) furnish clients with a copy of the brochure on an annual basis even if there have been no material changes. B) file a copy of the brochure with SEC on an annual basis. C) furnish clients with a copy of the brochure at least 48 hours before entering into the agreement. D) furnish clients with a copy of the brochure within 120 days of the end of the adviser's fiscal year unless there have been no material changes.

C *Page 126 LEM

Under the Uniform Securities Act, a private placement is considered an exempt transaction if: A) no payment is made with any purchase. B) the sale is unsolicited. C) the number of noninstitutional offers is limited to a maximum of 10 in any 12-month period. D) the security is rated in the top three grades by a recognized rating agency.

C *Private placements involve the sale of nonexempt securities to investors without the need for registration. There is no numerical limit to the number of offers that may be made to institutional buyers. However, offers to noninstitutional buyers are limited to a maximum of 10 in any 12-month period. Rights offerings are only exempt if there is no compensation, and only unsolicited orders are exempt transactions. *Page 70 LEM: EXEMPT Transactions called a PRIVATE PLACEMENT directed or OFFERED at no more than 10 persons during the previous 12 consecutive months. (FEDERAL law restricts # of purchasers, U.S.A. restricts # on OFFERS).

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

C *See example on pagr 250 in LEM.

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

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

When attempting to determine the appropriate life insurance coverage to meet a client's goals and objectives, a tool that is frequently used is a: A) Monte Carlo simulation. B) irrevocable life insurance trust. C) capital needs analysis. D) current rate book.

C *page 363 LEM. -Capital needs analysis is a tool to determine the appropriate amount of life insurance.

All of the following are requirements to be a salesman of variable products EXCEPT A) affiliation with a registered investment adviser B) possession of a valid FINRA registration C) possession of a valid life insurance license D) affiliation with a registered broker-dealer

A

An agent registered with a broker-dealer personally owns 100 shares of ABCD common stock, thinly traded on the OTC Bulletin Board. This agent is in the process of writing an order ticket to liquidate his position in ABCD when he receives a telephone call from a customer wishing to sell 200 shares of ABCD currently held in her account. The appropriate action for this agent is to: A) discuss the suitability of the client owning such a large position in a thinly traded stock. B) place the sell order for the customer first and then place his order. C) complete the sell order for his stock because he was in the process of doing so before the customer's call. D) enter an order for 300 shares and then allocate 2/3 of the proceeds to the client and 1/3 to his account.

B

An investor contacts you somewhat puzzled over the fact that she saw a newspaper listing for the KAPLOW Fund where the net asset value per share was $10.27 and the asking price was $14.14 per share. She wants to know why the difference between the two is so great. You would respond, saying A) the KAPLOW Fund is being investigated by the SEC for being sold with a sales charge in excess of the 8.5% maximum limit B) the KAPLOW Fund is a closed-end company whose selling price is not based upon NAV, as is the case with an open-end fund C) that this is probably an unregistered hedge fund not subject to SEC rules D) there is probably a misprint in the paper and, more than likely, the asking price is $11.22, making the sales charge 8.5%

B

Which of the following are methods of portfolio rebalancing? You can sell off investments from over-weighted asset categories 1.and use the proceeds to purchase investments for under-weighted asset categories. 2.You can purchase new investments for under-weighted asset categories. 3.If you are making continuous contributions to the portfolio, you can alter your contributions so that more investments go to under-weighted asset categories until your portfolio is back into balance. 4.You can purchase new investments for better performing asset categories. A) I and III. B) I, II, and III. C) III and IV. D) I, III, and IV.

B

In designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under the Investment Advisers Act of 1940 this activity requires written: A) disclosure to the client. B) consent of the client. C) disclosure to the client and consent prior to completion of the transaction. D) consent of and the disclosure to the client prior to execution of the transaction.

C -The client receives full written disclosure as to the capacity in which the adviser proposes the act. -Client CONSENT is obtained.

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

D A- Time and price discretion can be oral. (Day only) B- IA's must notify the ADMIN if they intend to maintain custody of securities. C- Page 57 LEM: In lieu of a surety bond, the ADMIN will accept deposits of cash or securities.

Special tax treatment is afforded to REITs if they A) distribute at least 75% of their taxable income to their investors B) agree to flow-through losses to their investors C) distribute at least 90% of their taxable income to their investors D) receive at least 90% of their income from real estate

C

The Investment Advisers Act of 1940 excludes from the definition of "investment adviser" persons whose advice: relates solely to municipal issues. relates solely to issues issued by or guaranteed by the U.S. Treasury. is solely incidental to their professional practice as an aeronautical engineer. is limited to insurance companies only. A) III and IV. B) I, II, and IV. C) I, II, III, and IV. D) II and III.

C

The board of directors of DDC omitted dividends in 2016 on their $100 par 6% noncumulative preferred stock. In 2017, a $2 preferred dividend was paid. For DDC, 2018 has been a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2018 in order to pay a common dividend? A) $12.00 B) $8.00 C) $6.00 D) $16.00

C

An investment of $5,000 made 16 years ago is now worth $20,000. Using the Rule of 72, the approximate compounded annual rate of return is A) 25%. B) 4.5%. C) 9.0%. D) 18%.

C *shortcut method to determine the # of years it takes for an investment to double. *Page 190 LEM

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of 1. the Securities Exchange Act of 1934 2. the Investment Company Act of 1940 3. the Investment Advisers Act of 1940 4. the Uniform Securities Act A) II, III, and IV B) I and III C) II and IV D) I, II, and III

C -Investment Company act of 1940 -U.S.A. Act.

The regulators require securities professionals to make disclosure of any potential conflict of interest. Which of the following cases would be least likely to present a conflict of interest? A) Recommending a specific stock to a customer that has been the subject of a recent underwriting managed by the broker-dealer B) Offering a limited partnership in an oil and gas drilling program where the general partner is the brother of the manager of the branch office handling that customer's account C) Encouraging customers of the broker-dealer to purchase shares of a specific stock after the agent has taken a long position in call options on that stock D) Recommending a specific mutual fund to a customer because of the fund's outstanding past performance

D -A: recommending a stock to a customer that was recently underwritten by your BD. -B: offering a security where there is a relationship with a control or affiliated person. -C: Front Running -D: recommending this is permitted IF the IAR gives a following disclosure. "past performance is not a guarantee of future results. Page 136 LEM.

According to standard terminology used in the securities industry, when a person sells securities out of inventory, that person is acting in the capacity of a (an): A) agent. B) investor. C) principal. D) broker.

C

All of these are reasons a corporation might choose to establish a nonqualified plan rather than a qualified plan except A) the employer can take a tax deduction at the time the contribution is made to the plan. B) the corporation can exclude rank-and-file employees from a nonqualified plan. C) a nonqualified plan typically has lower administrative costs. D) a nonqualified plan has more design flexibility than a qualified plan.

A - Why? discriminating employees, lower costs and more flexibility is a benefit for the companies. Waiting to take a tax deduction until contribution is made is not a reason why they would establish a nonqualified plan. *Page 452 LEM: Employer can discriminate, no tax advantages. *Page 476 LEM: nonqualified plan DOES NOT allow the employer a current tax deduction for contributions until PAID to the participant. *Google Search: "Administrative costs, for example, are lower with a nonqualified plan than for similar qualified plans".

A client wishing to hedge a long stock position would be most likely to: A) sell a put on that stock. B) sell a call on that stock. C) buy a put on that stock. D) buy a call on that stock.

C

A client approaches the investment adviser representative handling the advisory account with a request to find a preferred stock that will offer a 5.4% income return. The IAR suggests a stock paying a $1.73 quarterly dividend. That stock will meet the income objective if it has a current market price of A) $128.15. B) $32.04. C) $37.37. D) $78.03.

A

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

A

Which of the following does NOT constitute market manipulation under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A) Excessive trading in a client's account for the sole benefit of increasing commission income. B) Deliberately responding to a request for a quote with inaccurate information. C) Entering numerous buy orders at the close of the trading day to prevent a stock from closing lower. D) Engaging in transactions that would cause an appearance of increased market activity when no beneficial change of ownership actually occurs.

B

A company has two outstanding bond issues, both with a coupon rate of 10%. Bond A will mature in 3 years while Bond B will mature in 20 years. If interest rates were to decrease to 8%, which of the following statements is correct? A) Both bonds will be selling at a discount. B) The issuer will attempt to call in Bond A. C) Bond B will be selling at a greater premium than Bond A. D) Bond B will be selling at a greater discount than Bond A.

C

All of the following are characteristics of exchange-traded funds except A) they usually trade at or near their net asset value. B) large investors known as authorized participants buy or sell shares on an in-kind basis. C) they may not be sold short. D) they are generally tax efficient.

C

An investment adviser receives a favorable research report on a company he believes will increase substantially in value over the next few months. He places 100 shares in the account of each of his clients for whom he has written discretionary authorization. This activity is: A) a breach of fiduciary duty. B) permitted if disclosed to the clients. C) a prohibited action under the blanket recommendation rule. D) permitted without restriction.

C

An investment adviser representative is meeting with a potential advisory client. Among the items of information the IAR needs to obtain in order to develop the proper plan are the prospect's anticipated number of years until retirement location of current bank and brokerage accounts current savings and investments college alma mater A) III and IV B) I and II C) I and III D) II and IV

C

Form ADV-E A) may be used to amend any information included in an investment adviser's registration statement (e.g., business address) B) is only used by those advisers not subject to an annual surprise examination C) must be completed by investment advisers that have custody of client funds or securities D) is used to claim an exemption from registration

C

Given below are the EPS for the previous four quarters for four different companies being analyzed by your research department. Which of these companies is exhibiting earnings momentum? A) DEF - Q1: $0.58; Q2: $0.52; Q3: $0.50; Q4: $0.49 B) JKL - Q1: $0.82; Q2: $0.90; Q3: $0.83; Q4: $0.92 C) GHI - Q1: $0.25; Q2: $0.27; Q3: $0.30; Q4: $0.36 D) ABC - Q1: $0.58; Q2: $0.61; Q3: $0.64; Q4: $0.67

C

An investment adviser with custody of customer funds and securities discovers that its net worth has dropped below the required minimum under the rules of the State Administrator. Under NASAA rules, the adviser must 1. notify the administrator by the close of business the day after discovery 2. file a report of its financial condition with the Administrator no later than the close of business 1 day after notification including a statement as to the number of client accounts 3. cease doing business 4. notify all clients and make plans for the return of the funds and securities A) I and II B) I, II, and IV C) I, II, III, and IV D) I, II, and III

A *Page 30 LEM: State-reg IA must notify the ADMIN by the CLOSE of business on THE NEXT business day. After sending the notice, the IA must send a financial report to the ADMIN by the close of the NEXT business day. *Example: Monday: IA realizes he is below the required minimum net worth. Tuesday: IA must notify the ADMIN. Wednesday: IS must send the ADMIN a financial statement.

The Uniform Securities Act prohibits an investment: A) adviser from disclosing the identity and investments of clients when required by law without the client's written consent. B) advisory subsidiary of a broker-dealer from charging performance-based fees to all retail clients without reference to the assets placed with the broker-dealer or the client's net worth. C) adviser from loaning money to an affiliate of the adviser. D) adviser from providing, with appropriate disclosure of the source, a securities recommendation prepared by someone other than the adviser.

B

Mr. J.B. Rich founded Rich, Inc. and owns a substantial block of stock with a very low cost basis. Which of the following statements are true regarding the disposition of Mr. Rich's stock? 1. If it is given away, the recipient of the gift assumes Mr. Rich's cost basis. 2. If it is given away, the recipient of the gift receives a stepped-up basis to the market value as of the date of the gift. 3. If it is inherited, the beneficiary will assume Mr. Rich's cost basis. 4. If it is inherited, the beneficiary receives a stepped-up basis to the market value as of the date of Mr. Rich's death. A) II and III. B) I and IV. C) I and III. D) II and IV.

B 1. Given securites results in the CB passing to the recipient. 4. Inharited securites receive step-up basis to the MV as of the date of death of the donor.

If a client prefers owning an investment company whose portfolio consists primarily of companies that have a history of paying regular dividends, rather than companies reinvesting their earnings for the purpose of generating capital appreciation, what type of mutual fund would you recommend? A) A government bond fund B) A growth fund C) An income fund D) An index fund

C

A client of yours purchased a periodic payment variable annuity 10 years ago. Each month, the client invested $200 and then died suddenly when the account contained 1,355 accumulation units with a value of $16.23 each. Which of the following statements is CORRECT? 1. The beneficiary will receive 21,991.65. 2. The beneficiary will receive $24,000. 3. There is no income tax liability on the part of the beneficiary. 4. If the beneficiary is younger than 59½, there is a 10% tax penalty on any distribution. A) I and III. B) II and IV. C) I and IV. D) II and III

C *1,355 x $16.23 = $21,991.65 *Pg 282 LEM: Money deposited into a VARIABLE ANNUITY is deposited into one or more subaccounts of the company's separate account. *Payouts may vary considerably because an annuity's net worth fluctuates with the value of the subaccoutns. *If an annuity contract has a death-benefit provision, the owner can designate a beneficiary to inherit the remaining annuity payments after death. The earnings on an inherited annuity are taxable.

To protect the benefits of plan participants and beneficiaries, ERISA prescribes standards for the execution of the plan fiduciary's duties and responsibilities. Which of the following CORRECTLY describes those standards? 1. The standard of prudence applies to responsibilities relating to the investment of the plan assets but not to the responsibilities relating to the administration and management of the plan. 2. Participants must be offered a broad range of investment options. 3. The rules prohibit transactions between the plan and persons who have conflicts of interest with the plan even though a particular transaction may benefit the plan participants. 4. ERISA requires the plan fiduciaries to adopt and adhere to an investment policy that must be communicated in writing to all participants. A) I and IV. B) II and III. C) III and IV. D) I and II.

C: 3 & 4