Series 66 Missed Practice Qs

A registered representative would ask a potential client which of the following when doing a suitability determination? A. "With the funds that you have available, is it better for you to buy a new car or put the funds into an IRA?" B. "Do you need to set aside funds to take a vacation this year? If this is the case, you will have less to invest." C. "Do you want me to select the investments in the account? If so, you must sign a power of attorney giving me discretion." D. "Do you own your own home and if so, do you have adequate homeowner's insurance?"

A. Suitability means that the recommended security meets the customer's investment objective, risk tolerance level, and investment time horizon. It also means that it makes sense within the customer's existing portfolio of investments. Only Choice A makes a recommendation of a security - the IRA investment. Choice B impacts the amount available for investment - but it does not recommend one. Choice C asks whether the customer wants the agent to exercise discretion when selecting investments - again, it is not recommending a security. Finally, Choice D has nothing to do with recommending a security.

A customer who is retired wants to select an investment that is liquid, marketable, and that provides regular income. The BEST choice would be to recommend: A. Treasury Bills B. Treasury Notes C. Preferred Stock D. Certificates of Deposit

B. Certificates of Deposit are non-negotiable - they are non-marketable, so this does not meet the client's needs. Preferred stock is marketable, but not as marketable as Treasury securities, making Treasury securities the better choice. So we are left with either a T-Bill or a T-Note. Treasury notes pay interest semi-annually; while Treasury Bills do not provide a regular income stream, so a T-Note is the better choice. (One could argue that buying T-Bills at a discount and letting them mature at par and then rolling over the original investment amount into a new T-Bill purchase will also provide an income stream, but this requires continuous reinvestment on the part of the customer. Buying a T-Note is a completely passive investment in terms of the customer's needs.)

An account is opened for three individuals as "Tenants in Common". If one of the individuals dies, the: A. account must be liquidated to facilitate the division of assets among the surviving tenants and the deceased's estate B. estate assumes the tenancy of the deceased individual in the account C. account becomes the property of the two remaining survivors as Tenants in Common D. account becomes the property of the two remaining survivors as Joint Tenants with Rights of Survivorship

B. In an account opened "Tenants in Common," if one participant dies, that person's share in the account goes to the estate. The disposition of the deceased person's interest is handled by the estate. There is no requirement to liquidate the account, nor does the account become the sole property of the remaining tenants. (This would be the case if the account were owned as "Joint Tenants with Rights of Survivorship.")

A married customer who has an individual account dies. The broker who handles the account learns that one of the major holdings in the account is likely to miss its earnings projections and is thus likely to fall sharply in value. The broker should: A. sell the stock immediately B. contact the customer's spouse immediately and get permission to sell the stock C. wait for the appointment of an executor over the account before taking any action D. get approval from the branch manager and then sell the stock

C. If a customer dies, the account must be frozen. Nothing can be done until the appropriate documentation is obtained, permitting the transfer of the account into the name of a beneficiary or an executor. Such documentation includes a copy of the death certificate; a copy of the will (which names the beneficiaries and the executor); and inheritance tax waivers.

All of the following information must be recorded on an order ticket EXCEPT: A. time of order receipt B. customer account name/number C. name of person entering the order D. time and date of execution

D. Time and date of execution is only recorded on an order ticket if it is executed - which may never happen! The name of the customer and account number must be recorded as well as an identifier of the person who prepared the order ticket. The order ticket must be stamped with time of order receipt; time of order execution (if it is executed) and time of order cancellation (if it is canceled.)

The term "issuer" applies to a: A. person who proposes to sell a security B. director of a company that is selling new shares to the public C. trader executing trades off an exchange floor D. market maker in a security traded over-the-counter

A. An "issuer" is defined as any person who issues, or proposes to issue, a security. Directors of companies that are selling new issues are not issuers. However they can be defined as "agents" of the issuer. Traders execute trades in the secondary market and have nothing to do with issuers. Market makers also trade stocks for their own accounts in the secondary market and have nothing to do with issuers.

An investor's securities portfolio has depreciated by $6,000 this year. How much of the loss can the investor deduct on this year's tax return? A. 0 B. $2,000 C. $3,000 D. $6,000

A. An investor cannot deduct depreciation of an asset that is currently held as a capital loss. To recognize the loss for tax purposes, he must first sell those securities. Investors can only deduct $3,000 of net realized capital losses per year.

Under the Uniform Securities Act, when is an agent permitted to use the term "approved" when discussing his or her registration with a customer? A. If the agent solely states that such approval relates only to the agent meeting the Administrator's qualification requirements B. If the agent provides the customer with a written statement that he or she has been approved by the Administrator C. If the agent passes the Series 63 or Series 66 examination D. If the agent makes this disclosure to fewer than 10 customers in a 12 month period

A. As a general rule, an agent cannot state that he or she is approved by the Administrator; he or she is simply registered in the State. However, it can be stated that the agent has passed the required qualification examination (the Series 63 or Series 66), since this is a true statement. (Please note that the wording in this question is not that precise; but all of the other choices are absolutely wrong).

Years ago, a bond was issued at par with a 7% coupon. This year, new issue bonds of similar credit quality are being issued at 10%. Which statement is TRUE? A. The new bonds will be issued at a premium to the current price of the 7% bonds B. The new bonds will be issued at a discount to the current price of the 7% bonds C. The new bonds will be issued at the same price as the current price of the 7% bonds D. There is no relationship between the prices of the 2 bond issues

A. Because interest rates have risen from 7% to 10%, any new issue bonds will come out at par with a 10% coupon; while the prices of outstanding bonds with lower coupons will drop in the market. Thus, new bonds will be selling at a premium to the current price of existing bonds that have lower coupons.

A customer who buys a 10 year zero coupon bond with the intention of holding it to maturity would be MOST concerned with: A. inflation risk B. liquidity risk C. market risk D. business risk

A. Bonds with low coupons and long maturities are most affected by interest rate risk and purchasing power risk (risk of inflation). If market interest rates rise (due to Fed policy actions or rising rates of inflation), then this bond's price would drop sharply. This is the major risk for a long term zero coupon obligation.

If a representative that transacts business in a State terminates employment with an investment adviser, notice must be given to the Administrator by the: I. Investment Adviser II. Officer or Director of the Investment Adviser III. Investment Adviser Representative A. I only B. I and III C. II and III D. I, II, III

A. If a representative of an investment adviser terminates employment, the adviser must notify the Administrator promptly. Notice that this is different than the requirement for a broker-dealer, where both the terminated agent and the broker-dealer must notify the Administrator. Also note that this is different than the requirement for a federal covered adviser, where only the investment adviser representative must notify the State Administrator.

Registration by Qualification can be stopped by the Administrator if it is in the public interest and the: A. applicant cannot show that the registration is not incomplete in any material respect B. applicant can show that the registration is incomplete in any material respect C. Administrator cannot show that the registration is not incomplete in any material respect D. Administrator can show that the registration is incomplete in any material respect

A. In a Registration by Qualification or Filing, there is no concurrent SEC registration. The security is only being registered in the State. In such a case, the Administrator can issue a stop order "if it is in the public interest" and the applicant cannot prove that the offering would not be illegal in the State (the burden of proof is on the applicant). On the other hand, Registration by Coordination in a State permits the applicant to coordinate an SEC registration with the registration requirement in each State. Essentially, the State accepts the SEC registration statement as the State filing document. Registration becomes effective in the State when the SEC registration is effective. In such a registration, the State Administrator can only issue a stop order if "it is in the public interest" and the Administrator can prove that the offering would be illegal in the State, is not complete, or required filing fees have not been paid (thus, the burden of proof is on the Administrator).

An investment adviser, age 33 and married, needs cash for the down payment to buy her first house. She asks her father if he can "help out" with the down payment. Her father is one of her advisory clients. Which statement is TRUE about this situation? A. The investment adviser can accept the money from her father if he gives it as a gift B. The investment adviser can accept the money from her father if he gives it as a loan C. The investment adviser cannot accept the money from the father, whether given as a loan or a gift D. The investment adviser can only accept the money from her father if there is a written agreement that details the terms and conditions

A. Investment advisers cannot lend money to customers or borrow money from customers. The only exception is if the customer is a bank, broker-dealer, or affiliated company of the adviser. Note that an investment adviser can accept a gift!

Which of the following statements is TRUE regarding the compensation of an unlicensed solicitor for referring a customer to an investment adviser? A. A referral fee cannot be paid to an unlicensed solicitor B. A referral fee may be paid to an unlicensed solicitor only if there is a prior written agreement detailing work to be performed and compensation to be paid C. A fixed fee may be paid to an unlicensed solicitor only if the investment adviser is a "federal covered adviser" D. The referral fee can be paid as long as the amount is fair and reasonable

A. Investment advisers do not earn commissions, and the prohibition on sharing commissions with unlicensed persons is not applicable. Investment advisers are permitted to pay referral fees to individuals who solicit business for the adviser, however the State defines the solicitor as an investment adviser representative that must be registered (licensed) with the State. So a referral fee can only be paid to a licensed solicitor; not to an unlicensed solicitor.

Reports filed by issuers with the SEC under the Securities Exchange Act of 1934 are made available to the public: A. immediately B. after SEC review C. after 10 days have elapsed from filing D. after 30 days have elapsed from filing

A. Issuer filings (10K, 10Q, 8K reports) filed with the SEC are made public immediately. The SEC has a website from which these can be accessed; and has a reading room in Washington, D.C. where these reports are made available to the public when the filing is received from the issuer.

Which securities can be purchased on margin? A. NASDAQ issues B. Pink Sheet issues C. Options D. Open End Fund Shares

A. NYSE, AMEX (NYSE American) and NASDAQ listed issues are marginable. These are actively traded stocks. New issues are not marginable for 30 days, and every share of a mutual fund (an open-end fund) is a newly issued share. The purchase of listed options cannot be done on margin - full payment is required because these have a maximum life of 9 months. Purchases of OTCBB and Pink Sheet issues are not marginable because they are thinly traded issues.

Prior to the filing of a registration statement, which of the following activities is (are) permitted? I. A member firm signing a syndicate agreement to become part of the underwriting group for the issue II. A member firm distributing preliminary prospectuses for the issue to customers III. A member firm taking indications of interest for the issue from customers IV. A member firm selling the issue to customers A. I only B. II and III only C. I, II, III D. I, II, III, IV

A. Prior to the filing of a registration statement, the issue cannot be promoted in any manner - so the use of a preliminary prospectus to take indications of interest is prohibited; as is selling the issue. Once the registration statement is filed, the issue enters the 20-day cooling off period. At this point, a preliminary prospectus can be used to take indications of interest, but the issue cannot be sold. Once the registration is effective, the issue can be sold with the prospectus. There is no prohibition on the underwriter joining the syndicate or selling group prior to the filing of the registration statement, since this does not involve offering the issue to the public.

An investment adviser sends quarterly account statements to each of its clients instead of having the statements sent by the qualified custodian. Under the Investment Advisers Act of 1940, this is permitted as long as the: A. adviser is subject to an annual surprise audit by an independent public accountant B. SEC or State Administrator conducts an annual inspection of the investment adviser C. adviser files a Form ADV-E with the SEC indicating that it will send out customer account statements D. adviser certifies on an ADV-E filing that it has notified the qualified custodian that it takes responsibility for mailing customer account statements

A. Rule 206(4)-2 of the Investment Advisers Act of 1940 requires that investment advisers that are registered under the Act maintain custody of client funds with a "qualified custodian." The rule requires customer account statements to be sent out at least quarterly, and this can be done by either the qualified custodian or the investment adviser. If the adviser sends account statements, an independent auditor must conduct surprise audits at least once a year verifying all funds and securities. Within 120 days of completion, the auditor must file a certificate with the SEC on Form ADV-E (as in "Exam").

An investment adviser representative obtains a list of all 263 members of the local Kiwanis Club and sends a coupon to 52 leads on the list, along with a letter, offering a 20% discount on services to new clients that are club members. Aside from retaining a copy of the letter, under the provisions of the Investment Advisers Act of 1940, the investment adviser MUST keep: A. a memorandum describing the list and the source of the list B. a record of the names and addresses of the persons to whom the offer was made C. the worksheets that estimate the net worth of leads and the standards used to determine which leads were to receive the offer D. a record of the names and addresses of all of the Kiwanis Club members on the list

A. The Investment Advisers Act of 1940, under Rule 204-2 on Recordkeeping, requires that if an investment adviser sends any notice, circular or other advertisement to more than 10 persons, the adviser is not required to keep a record of the names and addresses of the persons to whom it was sent. But if the notice is distributed to persons named on any list, the adviser must "retain, along with a copy of such notice, a memorandum describing the list and the source thereof."

All of the following are defined as investment advisers who have been compensated under SEC Release IA-1092 EXCEPT a(n): A. estate planner receives a fee for setting up an investment trust for a client B. financial planner who receives a fee for providing a master financial plan without rendering specific investment advice C. insurance agent who receives a commission for selling life insurance that was part of an overall financial plan for which there was no charge to the client D. investment newsletter that charges a subscription fee for reports issued on specific securities

A. The SEC views subscription investment newsletters as "investment advisers" that must register with the SEC. It does not view these as "general circulation" media, such as financial magazines, that are excluded from the definition. The insurance agent that prepares a no-fee plan, but who takes commissions on recommended insurance purchases arising from that plan, is "compensated" by those commissions and comes under the definition of an "investment adviser." Creators of master financial plans that do not render specific investment advice also come under the SEC's interpretation of an "investment adviser." An estate planner who charges a fee for setting up a trust is not charging for "investment advice" and does not come under the definition of an "investment adviser."

An investment adviser has its principal office in State X. It also has offices in States Y and Z. The recordkeeping requirements of State Y are more stringent than those of State X and the recordkeeping rules of State Z are the most stringent of all. The investment adviser is required to maintain its records in accordance with the rules of: A. State X B. State Y C. State Z D. each State separately under that State's rules

A. The Uniform Securities Act states that if an adviser complies with the provisions of the Act as adopted in the State where the adviser has its principal office, then other States cannot impose more stringent recordkeeping requirements or minimum net worth requirements on that investment adviser, even if the adviser has offices in those States.

A customer buys a 6.50% municipal bond at par in the State. The customer is in the 30% Federal Tax Bracket and the 10% State Tax Bracket. After considering taxes, the customer's yield will be: A. 6.50% B. 5.90% C. 4.60% D. 3.90%

A. The question is not explicit about whether the municipal bond was issued by the State in which the customer has his or her primary residence. But this should be assumed, based on the "nature" of the question. The interest earned on municipal bonds is exempt from Federal income tax; and also from State and Local income taxes when the bond is purchased by a resident of the State of issuance. So a municipal bond yielding 6.50% will not be taxable at the Federal or State level if purchased by a resident of the issuing State.

Under the Investment Advisers Act of 1940, which statements is (are) TRUE regarding the use of advertising? I. Past performance may be shown in advertising II. Prior recommendations may be shown in advertising III. Testimonials may be shown in advertising A. I only B. I and II C. II and III D. I, II, III

A. Under the Investment Advisers Act of 1940, testimonials are prohibited in advertising; and the showing of prior recommendations is prohibited in advertising. However, past performance can be shown in advertising as long as there is an accompanying statement about general market conditions during this period; and a disclaimer is included that "past performance does not predict future results."

When an agent changes employment from one broker-dealer to another, the agent's registration must be transferred: A. immediately B. within 10 days C. within 30 days D. at renewal time

A. When an agent changes his employer, the registration must be transferred promptly. (Please note, in contrast, that notification to the Administrator when an investment adviser representative is terminated is only given by the investment adviser; or if the representative is associated with a federal covered adviser, the notice is only given by the representative.)

A $1,000 par TIPS is issued with 3 years to maturity. The coupon rate on the bond is 2.50%. If the inflation rate for the next 3 years is 1.50%, the bond will be worth how much in 3 years? A. $1,000 B. $1,046 C. $1,077 D. $1,125

B. A TIPS is a Treasury Inflation Protection Security. Aside from receiving the 2.50% coupon ($25 annual interest) paid to the bondholder, the principal is adjusted upwards by the inflation rate each year, and at maturity, the holder receives the inflated principal amount. $1,000 inflated by 1.50% annually equals: $1,000 x 1.015 x 1.015 x 1.015 = $1,046.

A 60 year old man wishes to receive an annuity payment for himself and his beneficiary for at least 15 years. The recommended payout option is: A. life annuity B. life annuity - period certain C. life annuity - unit refund D. installments for a designated amount

B. A life annuity-period certain will pay for one's life, however if that person dies early, the annuity will still pay for a designated period. In this case, the period certain would be 15 years. A life annuity simply pays for one's life. Once that person dies, payments cease. A unit refund annuity pays the remaining balance as a lump sum if the annuitant dies "early." The annuity option that chooses installments for a designated amount allows the annuitant to choose the monthly amount to be received. Payments continue for that amount until the account is exhausted.

The advantage of buying a foreign index fund as compared to direct investing in foreign stocks is that it: A. minimizes the risk of changing currency values B. is easier than individually investing in foreign stocks C. reduces tax liability when dividends are distributed D. minimizes the business risk of the investments

B. Buying a foreign stock index fund is much simpler than trying to buy foreign stocks directly. The holder is still subject to the risk that the companies invested in do poorly - this is business risk. The holder of a foreign stock index fund is still subject to exchange rate risk (the risk that the value of the foreign currency in which the stocks are denominated falls versus the U.S. dollar, so that when the currency value is converted into U.S. dollars, it buys fewer U.S. dollars). Finally, all dividend distributions from mutual funds are taxable (with the exception of distributions from municipal bond funds).

Which of the following persons is LEAST likely to be defined as an investment adviser? A. A Certified Public Accountant who makes recommendation to customers of portfolio allocations in their 401(k) accounts after preparing their tax returns B. The publisher of an investment newsletter specializing in making small cap stock recommendations that is distributed to paid subscribers monthly C. A lawyer who offers financial planning services only to its existing customers at a discounted rate as compared to the rate charge to the customers for legal services D. A financial planner that sets up a website that includes a retirement calculator that, based on customer input to a series of questions, creates a basic financial plan at no charge to the customer; the site includes advertisements placed by brokerage firms and insurance companies.

B. Choice C is clearly an investment adviser because the lawyer is separately charging for financial planning services. Choice D is also an investment adviser, because a financial plan is being created that is unique to each customer and the adviser is being paid for the advice (by the advertisers instead of the customers, but the law doesn't care about this distinction - the fact is the planner is being compensated). Choice A is a bit vague - it doesn't say if the CPA is separately charging for the recommendation, so this choice could go either way. Choice B is more clear - this is a newsletter that is not making recommendations based on specific client situations, so it is not an "investment adviser." It is the best of the choices offered.

Which statement is TRUE regarding family limited partnerships? A. At least 1 parent and 1 child must be general partners in the venture B. The venture must have a legitimate business purpose other than tax avoidance C. Both the general partner(s) and limited partner(s) can assume a management role D. Only intangible financial assets can be held in the partnership

B. Family limited partnerships, like all partnerships, must have a least 1 general partner and 1 limited partner - but there is no stipulation on who must be the general and who must be the limited partner(s). The partnership cannot be formed just to avoid taxes - it must have a legitimate business purpose. Only a general partner can assume a management role - the limited partner(s) remain as passive investors. Finally, any assets can be held in the partnership - real estate is common - not just financial assets.

Securities traded on the Midwest (Chicago) Stock Exchange are NOT exempt from which requirement of the Uniform Securities Act? A. Registration B. Anti-fraud C. Filing of advertising and sales literature D. All of the above

B. If a security is exempt (exchange listed issues are exempt from under the State law "blue chip" exemption), then the issue is exempt from the registration requirement in that State. Furthermore, if a security or transaction is exempt, then it is also exempt from any rules that the Administrator may impose regarding the filing of advertising in that State. However, the anti-fraud provisions of the Act cover all offerings, whether exempt or non-exempt.

Under the provisions of the Uniform Securities Act, which statements are TRUE? I. An investment adviser with a place of business in the State, need not register in that State if it is only dealing with insurance companies II. A broker-dealer with no place of business in the State, need not register in that State if it is only dealing with insurance companies III. If a broker-dealer is registered with the Financial Industry Regulatory Authority, then it is also registered in that State IV. If a broker-dealer has its registration revoked, then the registration of its agents will also be revoked A. I and III B. II and IV C. I, II, IV D. I, II, III, IV

B. If an investment adviser has no place of business in a State, and only deals with "professional investors" in that State, then it would be exempt from registration in that State. However, in Choice I, the adviser has a place of business in the State, and hence, must register. Once the adviser has an office in the State, it makes no difference who the adviser deals with - the adviser must register. Broker-dealer registration requirements are similar to the rules outlined above. If a broker-dealer has no place of business in a State, and transacts only with other broker-dealers and institutional investors, it is exempt (making choice II correct). Once a broker-dealer has an office in the State, it must register - it makes no difference who the firm's customers are. If a broker-dealer is registered with FINRA, this does not mean that the firm is registered in the State. FINRA member firms are required to register under Federal Law (Securities Exchange Act of 1934). Federal registration requirements have no bearing on State registration requirements for broker-dealers (though this is not the case with federal covered advisers!). Thus Choice III is incorrect. Finally, Choice IV is true. If a broker-dealer has its registration revoked, then its agents' registrations are also revoked (since an agent can only register through a registered broker-dealer). Note, conversely, that if an agent's registration is revoked, this has no bearing on the status of the broker-dealer's registration.

Under the Uniform Securities Act, if the Administrator prohibits an investment adviser from taking custody of customer funds or securities, the investment adviser would be permitted to: A. buy securities for a customer using the investment adviser's monies, and then delay delivery of those securities to the customer B. buy securities for a customer who has given a limited power of attorney to the adviser using monies deposited by that customer to an account established by the adviser specifically for that purpose C. hold customer funds in accounts established and maintained by the adviser that have been segregated and properly identified D. accept a prepaid advisory fee of $500 from the client covering a period of up to 1 year

B. If the adviser is prohibited from taking custody of client funds or securities by the State Administrator, the adviser can trade the customer account under a limited power of attorney - this is normal practice. So Choice B is the correct answer. The adviser cannot buy securities for a customer and then delay delivery of the securities to the client - this is an unethical practice. If an adviser is prohibited from taking custody, it cannot hold customer funds and securities, making Choice C incorrect. There is nothing precluding an adviser from taking a prepaid advisory fee, but if the adviser accepts $500 or more of prepaid fees, 6 months or more in advance of rendering services, this is defined as "taking custody" under NASAA rules.

An investment portfolio indexed to the S&P 500 Index produced a return for the year of 12% with a beta of +1. Investment Manager "A" has an actively managed stock portfolio that produced at return for the year of 14.8% with a beta of 1.4. The "alpha" produced by Investment Manager "A" is: A. + 2% B. - 2% C. +2.80% D. -2.80%

B. Investment Manager "A" produced a 14.8% return by assuming 40% more "risk" as measured by beta than if the portfolio was invested in a benchmark stock index with a beta of 1. To compare "apples with apples," a portfolio with a beta of 1.4 should return 1.4 times the benchmark index return of 12% = 1.4 x 12% = 16.80%. This manager produced a return of 14.8%, so the "alpha" (value of the active manager's expertise over investing in an index fund) is actually negative. This manager did worse, producing a negative alpha of -2%.

Investment advisers are prohibited from doing all of the following EXCEPT: A. assigning a customer's contract without permission B. charging a retainer fee C. charging commissions on trades effected for the client D. changing partnership management without notifying clients

B. Investment advisers cannot assign (transfer) an advisory contract without the customer's permission. Charging commissions on trades effected for the client is prohibited since the adviser is compensated based on a percentage of assets under management. However, if the adviser has a separate broker-dealer, the broker-dealer entity can handle the trades and earn the commissions, as long as this conflict of interest is disclosed to the client when the contract is signed. Investment advisers are obligated to notify clients if the management of the investment adviser changes (when the investment adviser is structured as a partnership). There is no prohibition on an investment adviser charging a retainer fee.

All of the following are examples of market manipulation EXCEPT: A. disseminating rumors B. churning C. painting the tape D. wash trades

B. Market manipulation means that the price of a security is being manipulated in the market away from the true market value. Disseminating rumors to get people to buy or sell that stock, especially if it is thinly traded, will certainly get the price moving! "Painting the tape" is a term for doing rapid-fire buy/sell trades in that security to show action on the tape, without an actual ownership change. This activity will attract other market participants to trade, again moving the stock's price. Wash trading is another term for "painting the tape." Churning a customer's account is illegal, but it is not market manipulation. Churning is executing trades in a customer account that are excessive in frequency or size, just to generate commission income for that agent.

Which records MUST be retained in a state-registered investment adviser's principal office? I. Customer securities positions II. Correspondence with customers III. Investment adviser's bank statements IV. Records of customer purchase and sales orders A. I and III B. I and IV C. II and III D. II and IV

B. NASAA rules require that State-registered advisers keep, in their principal office, records of: -customer purchases and sales; and customer securities positions (account statements). -The rule requires that the records be kept for 5 years, with the prior 2 years immediately accessible. (Also note that the SEC rule for these records, which applies to broker-dealers and Federal covered advisers, is that these records be kept for 6 years. This rule would not apply to State-registered advisers.) NASAA has an extensive list of other records that advisers must keep, but does not specify the location where they should be kept or the time period they should be kept - so this is left to each State Administrator.

Under the provisions of the Uniform Securities Act, required records for broker-dealers must be kept in accordance with the provisions of the: A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Investment Advisers Act of 1940 D. Uniform Securities Act as adopted in that State

B. Part of NSMIA is that federal law has supremacy over state law when it comes to recordkeeping rules, capital requirements and custody rules. Since the SEC sets broker-dealer recordkeeping rules under the Securities Exchange Act of 1934, the State can only have a rule requiring that records be kept in conformity with the Act of 1934's requirements.

An agent for a broker-dealer, both of which are registered in the State of Illinois, receives a telephone call from an existing customer who is on a layover in the airport in Atlanta, Georgia. The customer directs the agent to buy 1,000 shares of ABCD stock at the market. Which statement is TRUE? A. In order to accept this order, the agent must be registered in the State of Georgia only B. In order to accept this order, the agent must be registered in the State of Illinois only C. In order to accept this order, the agent must be registered in both the State of Georgia and the State of Illinois D. The agent can accept this order without needing registration in any jurisdiction because it was unsolicited

B. Since the agent and broker-dealer are physically located in Illinois, they must be registered in the State of Illinois. This is an existing customer who is calling from an airport in Georgia. There is no requirement for the agent or the broker-dealer to be registered in Georgia to take this order. If the State of Georgia inquired about this transaction, the agent and broker-dealer could claim the exemption available when an existing customer is temporarily located in another State.

Under the provisions of the Prudent Investor Act, all of the following statements are true regarding the management of trust accounts with multiple beneficiaries EXCEPT the fiduciary: A. must manage the trust impartially, taking into account the differing needs of the trust beneficiaries B. must manage the trust to meet the needs of older beneficiaries before considering the needs of the younger beneficiaries C. should seek to maximize portfolio performance and can assume extra risk consistent with the beneficiaries' investment objectives and needs D. is permitted to delegate investment decisions to qualified agents without needing consent of the beneficiaries

B. The "Prudent Investor Act" gives fiduciaries much broader latitude in terms of their ability to allocate trust assets to various investment classes, as compared to the obsolete "prudent man rule" that simply required that investments be of low risk. The concept is that modern portfolio theory can be used to diversify assets and to achieve a greater return that justifies any extra "risk" assumed by the strategy - as long as the strategy is consistent with the investment objectives and needs of the beneficiaries. The fiduciary is judged by overall portfolio performance - not by the performance of each single investment. Since a higher level of expertise may be needed to manage trust assets in this manner, the Act allows the fiduciary to contract with an outside investment adviser to provide asset management. In any trust with multiple beneficiaries, the fiduciary must act impartially and must consider the needs of each beneficiary. Therefore, when there are multiple beneficiaries, the trustee cannot favor any one of them.

Under the Investment Advisers Act of 1940, which statement is TRUE about copies of all advertising, notices and circulars? A. Advertising, notices and circulars must be retained as a record for 5 years if distributed to 5 or more people. B. Advertising, notices and circulars must be retained as a record for 5 years if distributed to 10 or more people. C. Advertising, notices and circulars must be retained as a record for 10 years if distributed to 5 or more people. D. Advertising, notices and circulars must be retained as a record for 10 years if distributed to 10 or more people.

B. The Investment Advisers Act of 1940 requires that copies of advertising, notices and circulars be retained as a record for 5 years if distributed to 10 or more people.

A broker-dealer offers 4 summer passes to an amusement park to each of its agents who sell at least $10,000 of bonds during the month of June. This action is: I. allowed II. not allowed III. considered to be "soft dollar" compensation IV. not considered to be "soft dollar" compensation A. I and III B. I and IV C. II and III D. II and IV

B. There is no prohibition on a broker-dealer compensating its agents with prizes for meeting a sales contest requirement. The broker-dealer will have to report the compensation value as taxable income to the IRS, but this is not part of the question. Soft dollar compensation is where a broker-dealer offers "free" services to a mutual fund or investment adviser in return for "directed brokerage" (which is the mutual fund or investment adviser directing its portfolio trades at full commission rates to that broker-dealer). The SEC requires that mutual funds can only accept soft dollars if the services benefit all shareholders of the fund. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific.

A customer, age 25, is looking to invest in securities with the objective of growth to protect against the effect of long term inflation on his portfolio's value. The customer believes that active asset management, along with its higher fees, is not worthwhile. Which recommendation is MOST suitable for this customer? A. Long-Term U.S. Government Bond Fund B. S&P 500 Index Fund C. High Technology Growth Fund D. Special Situations Fund

B. This customer is looking for long term growth, so common equities are an appropriate investment rather than long term bonds. Since the customer does not believe in active asset management, a passive approach is best - that is, an index fund that has very low ongoing fees.

To protect against identity theft and theft of funds, client instructions received electronically must be: A. encrypted B. authenticated C. monitored D. refused

B. To protect against identity theft and theft of funds, customer instructions received electronically must be authenticated, to make sure that the instruction actually came from that client.

An investment adviser is ready to open an account for a new customer. In the advisory contract, the adviser has included a clause that the customer has 48 hours to rescind the contract. The adviser gives the customer the brochure, takes payment from the customer, but forgets to have the customer sign the contract. Which statement is TRUE under NASAA rules? A. Even though the customer did not sign the contract, he or she still has 48 hours to rescind the contract B. Even though the customer did not sign the contract, he or she has 5 business days to rescind the contract C. The contract is null and void D. The contract is binding and the customer cannot rescind the contract

B. Under NASAA rules, the brochure is required to be delivered to clients no less than 48 hours prior to entering into a written or verbal contract to provide advisory services. As an alternative to the "2 day free look," the customer can be given the brochure at the time of contract signing, as long as the contract provides for a 5 business day period following signing where the customer can terminate without penalty. In this case, the customer was not given the brochure 48 hours prior to entering into the contract. By signing and giving the adviser a check, the customer has "entered into a contract" to buy the advisory services. So this customer has 5 business days under NASAA rules to rescind the contract.

A father is writing his will (the testator) and is naming as beneficiaries his 3 adult sons. Each one will get an equal share "per capita" of the father's estate upon the father's death. Each of the sons has 2 children (the grandchildren of the testator) who are not yet adults. If one of the sons predeceases the testator, then the: A. deceased son's share goes into the son's estate B. deceased son's share passes to his brothers C. deceased son's shares passes to his children D. deceased son's share reverts back to the father's estate

B. When a will is created, the estate can be distributed either "per capita" or "per stirpes." These 2 ways deal with the issue of a named beneficiary dying before the testator. When it is "per capita," (Latin for "by the head") each NAMED beneficiary gets an equal share of the estate. In this will, there are 3 named beneficiaries - the 3 living sons. Assume they are Son A, Son B and Son C - each gets an equal 1/3rd of the father's estate upon the father's death. If Son A dies before the father, the estate is now divided among the 2 remaining living beneficiaries, Son B and Son C, who will now get 1/2 of the estate each upon the father's death. Because the grandchildren are not named, they get nothing. If the testator had NAMED both the 3 adult sons and their children "per capita," things work out differently. Assume that the 3 adult sons had 2 children each. Then there would have been 9 names (the 3 sons and their 6 children), with each getting 1/9th of the estate. If 1 of them predeceased the testator, then the estate would be divided "per capita" 1/8th each among the remaining 8 living descendants.

A customer owns a perpetuity that pays $1,000 per month. Assuming that the market rate of return is 6%, the value of the contract is: A. $16,666 B. $166,666 C. $200,000 D. $240,000

C. A perpetuity makes payments forever. To calculate the value of the contract, you take the annual (not monthly) payment received and divide it by the market rate of interest. $12,000 annual payment received / .06 = $200,000

Which of the following is NOT a benefit of making an investment in an emerging markets fund? A. Diversification B. Liquidity C. Higher investment yield D. Reduced investment risk

C. An emerging markets fund is a type of growth fund (growth investing) that invests in companies in rapidly growing countries (e.g., a "BRIC" Fund - Brazil-Russia-India-China). Investing via a mutual fund structure provides diversification (which reduces investment risk) and provides liquidity, since the fund shares can be redeemed daily at NAV, or if the fund is closed-end, the shares can be sold in the market. What is not a benefit is a higher investment yield - the yield may be higher than making direct investments in these foreign stocks or it may be lower. Furthermore, the expenses of running the fund (which include a high management fee for these types of funds) can be a real drag on returns. So, while the investment return may be better than direct investing, it might also be worse. This is the best of the choices offered.

An investment adviser is considered to be "in the business" of rendering investment advice under SEC Release IA-1092 if: A. advice is rendered on non-exempt securities B. giving advice on securities is one of the businesses of the firm C. the firm advertises its services D. the firm prepares economic reports or analyses

C. An investment adviser is considered to be "in the business" if it advertises itself as an investment adviser; or if giving advice about securities for compensation is a regular business of the firm. It makes no difference if the advice is rendered on exempt or non-exempt securities (with the 1 exception that an adviser who solely gives advice about U.S. Government guaranteed securities is excluded from the definition of an adviser under the Investment Advisers Act of 1940, but not under the Uniform Securities Act).

The yield to maturity on a bond is lower than the current yield. This bond is trading: A. at par B. at a discount C. at a premium D. in the money

C. Current yield only takes into account the income from an investment, whereas yield to maturity also factors in the additional return earned when a bond is purchased at a discount and held to maturity; or the loss that will be suffered when a bond is purchased at a premium and held to maturity. If a bond is purchased at a discount, the yield to maturity will be more than the current yield because of the earning of the discount in addition to interest received. If a bond is purchased at a premium, the yield to maturity will be less than the current yield because of the loss of the premium offsetting interest received.

A 62-year old client makes her first withdrawal from a non-tax qualified annuity. This will result in: A. capital gains taxed at capital gains rates B. ordinary income taxed at ordinary income tax rates that is subject to a penalty C. ordinary income taxed at ordinary income tax rates that is not subject to a penalty D. capital gains taxed at ordinary income tax rates

C. Distributions from non-tax qualified retirement plans are accounted for on a LIFO - Last-In; First-Out basis. The first item that went into the plan was the original non-tax deductible contribution. The next item than went into the plan was the reinvestment of dividends, interest, and capital gains over time - all of which have been building tax deferred. When distributions commence, the first dollars out of the plan are accounted for as the return of the "build-up" - which was never taxed. Thus, the first distributions out of the plan are 100% taxable at ordinary income tax rates. There is no penalty tax (10%) due as long as the money is taken out after reaching age 59½, which is the case here.

Which of the following are included in the taxable income of a corporation? I. Proceeds received from the issuance of common stock II. Dividends received from domestic investments III. Interest received from foreign investments IV. Gain on the sale of a capital asset A. I and IV only B. II and III only C. II, III and IV D. I, II, III, IV

C. Dividends received from any investments (domestic or foreign), and gains on any asset held for investment are taxable. Please note, however, that part of dividends received by corporate investors are subject to an exclusion from tax. Any interest income received (unless it is municipal interest income) is subject to Federal tax. The proceeds received by a corporation from issuing debt or stock are not taxable.

Which of the following terms describe Equity-Indexed Annuities? I. Investment product II. Insurance product III. Principal protected IV. Not principal protected A. I and III B. I and IV C. II and III D. II and IV

C. Equity Indexed annuities are an insurance product and are currently not defined as a "security." They give a return tied to the performance of the Standard and Poor's 500 Index, but this is subject to an annual cap of typically 7-9%. Thus, in a year of sharply rising stock prices, they will not give the return of the index. However, they are protected in a falling market and guarantee a yearly minimum return of 1-3%. Thus, they will give a better return than the Standard and Poor's 500 Index when the market is falling sharply.

Which of the following come under the jurisdiction of the State Administrator? I. A mailing of sales literature to a customer in that State II. A mailing of sales literature to a customer in a neighboring State III. A television broadcast from within that State, received in that State IV. A television broadcast from a neighboring State, received in that State A. I and II only B. III and IV only C. I, II, and III D. I, II, III, IV

C. If an offer of securities is directed into a State, it comes under the jurisdiction of that State Administrator. Thus, Choices I and II clearly fall under the Administrator's jurisdiction. Regarding television broadcasts, the interpretation is that if the broadcast originates in the State; and is received in the State; then it falls under the jurisdiction of State Administrator in the receiving State. If the broadcast originates in another State; and is received in the State; then it does not fall under the jurisdiction of the State Administrator in the receiving State. Simplified, this means that only the Administrator in the State from which the broadcast originated has jurisdiction. Thus, Choice III is correct; and Choice IV is incorrect.

Which of the following are types of joint accounts? I. Tenancy by Entireties account II. Tenancy in Common account III. Joint Tenants with Rights of Survivorship account IV. Partnership account A. I and IV B. II and III C. I, II, III D. I, II, III, IV

C. In a joint account, each owner can trade the account and can draw checks in the account's name. The joint account ownership options are Tenants in Common - each person has a divided interest with a specified ownership percentage for each party; and Joint Tenancy With Rights of Survivorship - each person has an undivided interest with each owning 100% of the account (another name for such an account is "Tenants by Entireties"). Partnership accounts are not joint accounts - only the designated partner(s) authorized in the partnership agreement can trade the account and draw checks - each individual partner is not permitted to do so.

Which statement is TRUE regarding registration requirements under the Uniform Securities Act? A. Minimum net capital can be required for agents, broker-dealers and investment advisers B. Minimum net capital and a surety bond can be required for agents, broker-dealers and investment advisers C. Minimum net capital can be required for broker-dealers and investment advisers D. Minimum net capital and an examination can be required for agents, broker-dealers and investment advisers

C. Minimum net capital can be required for registration as a broker-dealer or investment adviser; it is not required for registration as an agent of a broker-dealer or investment adviser. Surety bond coverage can be required for registration of broker-dealers, their agents, and investment advisers. Note that there is no surety bond requirement for investment adviser representative registration.

Under the Uniform Securities Act, the registration application of an investment adviser must include: A. a listing of the adviser's customers and their financial holdings B. a copy of the adviser's policies and procedures manual C. the adviser's financial condition and business history D. a copy of the adviser's Code of Ethics

C. Part of the registration application with the State is information covering the investment adviser's financial condition and history. There is no requirement to include a client listing, copy of the firm's procedures manual or copy of the firm's Code of Ethics.

Which of the following actions by an investment adviser are prohibited under the Investment Advisers Act of 1940? I. Making a cash payment to a solicitor that is undisclosed to the customer for signing that customer as an advisory client II. Using an advertisement that includes a testimonial from a famous personality III. Entering into an oral advisory contract with the customer IV. Accepting a prepaid advisory fee from a client A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

C. Prepaid advisory fees are permitted, though the contract must explain how much of the fee will be refunded if the contract is canceled prematurely. Making a cash payment to a solicitor for signing a customer to a contract is permitted only if the payment is disclosed to the customer; and if the customer receives a solicitor's "Brochure" as well as the adviser's "Brochure;" and the customer must sign an acknowledgment that both were received. Oral advisory contracts are not permitted under the Investment Advisers Act of 1940 - they must be in writing (Note, however that the "Brochure Rule," under the Investment Advisers Act of 1940, requires delivery of the "Brochure" at, or prior to, entering into either a verbal or written contract, which is contradictory - but this is the rule!). Testimonials are prohibited in investment adviser advertising.

An individual buys a multiple dwelling apartment house for investment purposes. He is hoping that the real estate market will increase in value; however, real estate prices decline by 20% due to an unfavorable tax ruling. This is an example of: A. market risk B. political risk C. regulatory risk D. business risk

C. Regulatory risk is another name for legislative risk - and this is primarily the risk of tax law change negatively affecting the value of an investment. This is an issue for purchasers of tax-advantaged investments, where a negative tax law change could reduce the investment's value.

An investment adviser places trades in different asset classes based on the phases of the business cycle. This is an example of: A. strategic asset allocation B. tactical asset allocation C. sector rotation D. value investing

C. Sector rotation is an investment strategy that attempts to take advantage of the business cycle. Remember that the business cycles has 4 phases - expansion, prosperity (peak), recession and recovery (trough). The industries that have done best in each phase of the cycle are: Recovery: Technology, Transportation Expansion: Basic Materials, Capital Goods Peak: Consumer Staples, Energy Recession: Utilities, Financials An investor using sector rotation would invest in each of the above asset classes only when the economy entered the appropriate phase of the business cycle, rotating out of the investments made in the previous phase of the business cycle - hence, this is called "sector rotation."

An investment policy statement is a document that details the: A. fees, from all sources, that an investment adviser will earn for managing a portfolio B. investment returns that the adviser has achieved for clients over the previous 10 years (or shorter period, if the adviser was not in business for that length of time) C. portfolio balance chosen for the client; along with expected returns and variance of returns D. educational and business background of each of the managers who will be making investment decisions on behalf of the customer

C. The investment policy statement prepared for a client for whom a portfolio is to be constructed details the allocation percentages for each chosen asset class; and the expected returns from each class along with the possible variance of these returns. In addition, it can detail any strategies used for "tactically" timing the market when choosing specific investments within each class. Thus, the customer has a written statement detailing the major aspects of how the portfolio will be constructed and managed. The statement does not include the fees that the adviser will earn. These would be disclosed separately to the customer. It does not include past performance of the adviser; nor does it include the adviser's educational and business background.

Compute the non-compounded annualized inflation adjusted rate of return for the following investment held for 4 years. Initial Investment Value: $4,000 Ending Investment Value: $3,600 Dividends Received Over The Period: $800 Inflation Rate Over The Period: 4% A. -1.00% B. +1.00% C. +1.50% D. +2.50%

C. The original investment is $4,000. Over 4 years, the customer lost $400 on the investment and received $800 in dividends, for a net return of $400, earned over 4 years. Annualized, the customer earned $100 per year on $4,000 invested = 2.50%. However, the rate of inflation over 4 years was 4%, or 1% per year (ignoring compounding). Therefore, the inflation adjusted rated of return over the 3 year period is 2.50% - 1% = 1.50%.

The method for computing return as shown in a mutual fund performance chart is: A. Internal Rate of Return B. Dollar Weighted Average Return C. Time Weighted Average Return D. Expected Rate of Return

C. Time weighted average return is the measure used for mutual fund performance charts (Total Return, which shows dividends and capital gains as continually reinvested). It reflects the growth that would be achieved from a 1-time investment into the fund and then holding that investment over time - this is a buy and hold strategy. This method is consistent when comparing one fund's performance to another fund's performance. In contrast, Dollar weighted average return accounts for all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor's deposits and withdrawals. Because investors often "chase" past performance, they will buy a fund "too late" (after the fund has posted its best performance and now enters a period of lesser performance) and will sell "too soon." Thus, for the individual investor, Dollar weighted average return is often lower than Time weighted average return.

Which statement is TRUE about trust taxation? A. A Form 1025 must be filed reporting income, gain and loss B. A Form 1040 must be filed reporting income, gain and loss C. A Form 1041 must be filed reporting income, gain and loss D. A Form 1065 must be filed reporting income, gain and loss

C. To form a trust, a tax identification number for the trust must be obtained and an annual tax filing on Form 1041 is required. (Remember that the 1040 is the personal income tax return; and the 1065 is a partnership tax return.) There is no such thing as a Form 1025.

To be registered as an agent in a State, the Administrator can require which of the following? I. Minimum Net Capital II. Minimum Surety Bond Coverage III. Minimum grade on a qualification examination IV. Payment of filing fees A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

C. To register as an agent in a State, the Administrator can require the passing of a qualification examination; the payment of filing fees; and the posting of a surety bond. The minimum Net Capital (or Net Worth) requirements are only imposed for registration as a broker-dealer or investment adviser.

Which of the following are defined as "issuers" under the Uniform Securities Act? I. For corporate securities, the corporation itself is the issuer II. For collateral trust certificates, the person performing the functions of depositor under the Trust agreement is the issuer III. For equipment trust certificates, the corporation is the issuer IV. For oil and gas program fractional interests, the owner of the minerals is the issuer A. I only B. II and III only C. I, II, and III only D. I, II, III, IV

C. Under the Uniform Securities Act, issuers of securities must register the issue in the State (unless an exemption is available). The legal definition of the "issuer" depends on the type of security being issued. For corporate securities, the corporation itself is the issuer. For collateral trust certificates, the person performing the functions of depositor under the Trust agreement is the issuer. For equipment trust certificates, the corporation is the issuer. Finally, for oil and gas program fractional interests, the Act states that there is no defined "issuer." (Note: States have been concerned for many years about sales of highly risky oil and gas exploration deals to unsophisticated investors. The legal wording of "no issuer" is a "technicality" that makes a person offering oil and gas units to investors register in the State under the toughest method - Registration by Qualification. The easier methods cannot be used.)

A broker-dealer MUST maintain physical possession of which of the following? A. Convertible bonds issued by corporations B. General obligation bonds issued by municipalities C. Mortgage backed bonds from which CMO derivatives are created D. Mortgage bonds issued by utilities backed by a lien on assets

C. When securities are purchased for a customer by a broker-dealer, they can be held in custody of the broker-dealer (or the broker-dealer's clearing firm); or they can be held by a custodian bank; or they can be transferred and shipped to the customer (some customers still want to put physical certificates under their mattresses!) However, if a customer buys a derivative security (such as a CMO created from underlying mortgage backed pass through securities), he or she cannot get the underlying physical security - it must be held in custody.

Which of the following are deductible from a taxable estate? A. Funeral and administrative expenses B. Claims against the estate and mortgages against real property owned by the estate C. State death taxes D. All of the above

D. A "taxable" estate is one that is valued over $11.2 million (in 2018 - the limit is adjusted for inflation annually). The executor files an estate tax Form 706 for estates where tax is due. When calculating the value of the estate that is taxable, the executor gets to deduct funeral and the executor's administrative expenses, as well as the cost of the estate attorney. Also deductible are any claims made against the estate (for example, unpaid bills) and mortgages on property owned by the estate. Finally, any state estate tax bill (certain states, like New York and California, have a high estate tax - about 10%) is deductible from the federally-taxable estate.

Under the Uniform Securities Act, the registration of a broker-dealer may be revoked for all of the following reasons EXCEPT the firm does not: A. maintain required records B. file financial reports with the Administrator C. file advertising with the Administrator D. file customer complaints with the Administrator

D. A broker-dealer's registration may be revoked if the firm fails to maintain required records, fails to file financial reports with the Administrator or fails to file advertising with the Administrator, if required to do so. There is no requirement under the Uniform Securities Act for customer complaints to be filed with the Administrator.

Which statements are TRUE? I. Traditional 401(k) plans require mandatory annual employer matching contributions II. Safe harbor 401(k) plans require mandatory annual employer matching contributions III. Traditional 401(k) plans require 100% vesting of employer-paid benefits IV. Safe harbor 401(k) plans require 100% vesting of employer-paid benefits A. I and III B. I and IV C. II and III D. II and IV

D. A safe harbor 401(k) relieves the employer of having to perform annual benefits testing to show that the plan does not favor highly compensated employees (a so-called "top-heavy" plan). To get the safe harbor, the employer must agree to make annual matching payments into the plan of either 4% of salary of participating employees or 3% of salary of all eligible employees (it is not mandatory that each eligible employee participate). These employer-paid benefits must 100% vest immediately. In contrast, in a Traditional 401(k), the employer can choose whether to make matching contributions and these can vest over a number of years (typically 5 years). Also, in a traditional 401(k), the employer must complete an annual "top heavy" benefits test.

An administrative assistant works at a for-profit hospital in California that has adopted a 401(k) plan. She earns $45,000 per year plus is eligible for overtime. She would like to increase her tax-deferred retirement savings. Which of the following could be recommended? I. IRA II. Roth IRA III. Fixed Annuity IV. Variable Annuity A. I only B. I and II only C. III and IV only D. I, II, III, IV

D. Anyone with earned income can contribute to an IRA. If an individual is covered by another qualified retirement plan and their income is not too high (which is the case here), then a contribution can be made, but is not tax deductible. Contributions to a Roth IRA are permitted as long as one's income is not too high (which is the case here). Anyone can contribute to either a fixed annuity or a variable annuity contract to supplement their existing retirement plan(s).

All of the following are considered to be an "offer to sell" a security EXCEPT: A. offering to make the gift of an assessable security B. offering to give a security as consideration for the purchase of another security C. the offer of rights to purchase an underlying security D. the giving of a stock dividend to holders of that security

D. Before an "offer to sell" a security is made in a state, the issue must either be registered in that state, or must be sold under an available exemption. A stock dividend given by an issuer is excluded from the definition of an "offer to sell" a security, since the holder really is receiving "nothing" - after the dividend is received, he or she holds more shares, with each one being worth proportionately less. Included in the definition of an "offer to sell" is: - The gift of an assessable security (which obligates the recipient to make future payments) - A security that is "given" in consideration for the purchase of another security, since by tying the "gift" to the purchase of the other security, that person is really buying both, and both must be registered in that State - A rights or warrants offering on an underlying security, since the rights give the holder the right to buy the underlying stock from the issuer at a pre-determined price.

A Registered Investment Adviser has established an enviable track record and decides that it should increase its asset management fee to reflect the increased value of its services. The Adviser amends its contract to include a fee equal to 5% of assets under management, charged each month to the client. This fee structure is disclosed in the Form ADV Part 2 filed with the Administrator and each customer signs a new advisory contract. Which statement is TRUE? A. This action can be taken because the Administrator was notified of the increased fee B. This action can be taken because each customer signed a new contract that disclosed the increased fee C. This action cannot be taken because advisory fees cannot be charged monthly D. This action cannot be taken because the compensation to the Adviser is excessive

D. Charging excessive fees is prohibited and a fee of 5% of assets per month is a 60% annual fee - clearly an unbelievably high fee! The ridiculous fee cannot be justified by including it in an amended Form ADV Part 2 filed with the Administrator (Administrators do not examine the filing information routinely - they just have it on file if they need access to it - so it would likely not be picked up by the Administrator unless there was a customer complaint). The ridiculous fee cannot be justified because the customer signed an advisory contract - he or she may not have known what was being signed. Finally, the adviser can charge fees monthly, quarterly, yearly - the frequency of the payment makes no difference. Rather, it is the amount being paid for the service that is the issue.

All of the following are defined as "giving advice about securities" under IA-1092 EXCEPT a person who: A. advises on the selection of an investment adviser B. prepares a list of securities that may be purchased without making specific recommendations C. prepares an asset allocation plan that specifies percentage investments in stocks, bonds, real estate and insurance D. charts the price movements of stocks and distributes them to subscribers

D. Charting of the price movements of stock is not "investment advice." An investment adviser, under the Investment Advisers Act of 1940, is "a person who receives compensation for advising others about securities, or about the advisability of investing in securities." Under the SEC's interpretations, a person who prepares a "list" of securities is making an implicit recommendation of these securities and is giving advice; a person who prepares asset allocation plans is also giving advice (if one of the assets included is securities). Furthermore, a person who recommends investment advisers is also one who gives advice! A person who prepares and distributes charts of stock price movements is not giving advice. Note, however, that if this information is used by the preparer to determine which securities to buy or sell, it would be considered to be "investment advice."

Which of the following information would be found in a registration statement for a security that is going to be registered by qualification in a State? I. Current equity and debt capital of the issuer II. Description of issuer's business, product lines and competitive environment III. Use of proceeds of the offering IV. Offering terms A. I and III only B. II and IV only C. I, II, III only D. I, II, III, IV

D. Consider this to be a learning question: Any registration statement for a securities offering includes: -Current balance sheet and income statement; -Business description; -Use of proceeds of offering; -Offering Terms; -Legal Opinion; -Accountant's Opinion.

If current liabilities of a company are subtracted from current assets of a company, the result is the company's: A. market value B. net worth C. capitalization D. net working capital

D. Current Assets - Current Liabilities = Net Working Capital (Total assets minus total liabilities equals net worth.)

Filing of advertising with the Administrator is NOT required for: I. U.S. Government securities II. Municipal securities III. Investment company securities IV. NYSE-listed securities A. IV only B. I and II only C. III and IV only D. I, II, III, IV

D. Filing of advertising with the State cannot be required for exempt securities; exempt transactions; or for federal covered securities. U.S. Governments and municipals are exempt securities. NYSE listed, NASDAQ listed and investment company securities are federal covered securities.

An investment adviser makes an offer to send, by mail, a "free" analysis covering his top 50 stock picks in an advertisement. In order for an individual to get the report, the adviser could require that individual to: A. fill out a questionnaire detailing that individual's financial resources B. pay a shipping and handling fee of $38 to get the report sent out C. provide the names and addresses of 3 other persons who would be interested in the adviser's reports D. telephone the adviser and listen to a brief sales pitch before taking the mailing information

D. Free means just that - free. Charging a high shipping fee for the "free" report means that it is not free, so this is prohibited. The offer of a free service cannot be made conditional, so requiring the customer to complete a detailed financial questionnaire crosses the line; as does asking for 3 customer references in order to get the "free" report. Making the individual call the adviser to get the "free" report is OK; and making the customer listen to a brief sales pitch to get the report is OK as well.

A sales representative who sells unregistered securities to customers in non-exempt transactions: I. has committed a felony II. has committed a misleading Act III. is subject to fines and imprisonment IV. is subject to buying back the security at the purchase price plus interest at the legal rate in that State, less any dividend or interest income received on that security A. I and III only B. I and IV only C. II and III only D. II and IV only

D. If a sales representative sells unregistered securities in a non-exempt transaction (these securities should have been registered in the State), he or she is subject to civil liability (this is not serious enough for criminal penalties). In this case, the individual is subject to buying back the security at the original price, plus interest and attorney's costs; less any income received from the security during the period it was held.

Under the Investment Advisers Act of 1940, disclosure of which of the following is required to be made to customers? I. Compensation paid to the adviser by the issuer for recommending that security II. Compensation paid to the adviser by a broker-dealer for recommending the use of that firm to execute portfolio transactions III. Compensation paid to the adviser by an insurance company for the recommendation of insurance products IV. The ability of the customer to use any broker-dealer to execute recommended portfolio transactions A. I and III only B. II and IV only C. I, II, III D. I, II, III, IV

D. If an investment adviser receives compensation from anyone other than the customer; related to the rendering of advisory services to that customer; this must be disclosed to the customer. Thus, Choices I, II and III are true. If the investment adviser recommends the use of a broker-dealer to effect recommended trades, (which it will do if the broker-dealer compensates the adviser for these trades); it must inform the customer that any broker-dealer can perform these transactions. The customer does not have to effect these trades through the broker-dealer favored by the investment adviser.

If a registered investment adviser takes custody of client funds or securities and deposits them with a qualified custodian, which statement is NOT true? A. The customer must be notified promptly in writing of the qualified custodian's name, address and the manner in which the securities are held B. The customer must be sent, at least quarterly, an account statement identifying all positions held and all transactions in the account during that period C. All client funds and securities positions must be verified at least annually by a certified public accountant on a surprise basis D. A written annual statement must be sent to customers detailing where the client funds and securities are being kept

D. If an investment adviser wishes to take custody of client funds or securities: It must notify the Administrator in writing on Form ADV that it has, or may have, custody; -Custody must be kept by a qualified custodian in a separate account under each client name; or in accounts that only contain client funds and securities, held in investment adviser name as trustee for the clients; -Prompt notice must be given to the clients in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained; -Account statements must be sent at least quarterly to clients; -The IA must be audited annually on a surprise basis to verify all customer funds and securities positions.

During the annuity period of a fixed annuity, the insurance company assumes which of the following risks? I. Mortality II. Morbidity III. Expense IV. Investment A. I & II only B. II & III only C. III & IV only D. I, III & IV only

D. In a fixed annuity, the insurance company assumes mortality risk, expense risk and investment risk. -Mortality risk is the risk that the purchaser lives longer than the insurance company expects, and the insurance company is obligated to pay for as long as that person lives. -Expense risk is the risk that the insurance company's expenses increase faster than expected - the insurance company caps the expenses that it can charge against the annuity. If these increase beyond the capped amount, this is the insurance company's problem. -Investment risk is the risk that the insurance company's return on its investments does not keep pace with its payment obligations to fixed annuity holders. If its investments fare poorly, the insurance company does not reduce the amount of the fixed annuity payments. The insurance company does not assume morbidity (the risk of getting sick), which only applies to various types of health insurance.

Which of the following risks is the primary concern when investing in a municipal bond? A. purchasing power risk B. market risk C. credit risk D. legislative risk

D. Legislative (regulatory) risk is the risk of law changes; primarily the risk of tax law changes. Since the interest income from municipal bonds is exempt from Federal income tax, the main risk associated with these securities is that the Federal government may attempt to tax their interest income (this has already happened with certain types of municipal bonds). Also note that these securities are subject to purchasing power risk, market risk, and credit risk; but this is not the "primary" concern with these investments.

An investor is considering making the purchase of a limited partnership unit that requires a $10,000 investment and the signing of a $40,000 recourse note. The partnership is being formed by the former executive of a wireless communications company who believes that there is a business opportunity in buying unused wireless bandwidth that the federal government may put up for auction and then reselling this capacity to wireless start-up companies. Because the auction dates have not yet been set, and the government has the right not to conduct the auctions, investors are guaranteed to be refunded their investment, less a 5% administration fee in such an event. If the auctions do occur, investors may have to wait for 12 months before the company will generate positive cash flow. Which statement is TRUE? A. This investment does not meet the definition of a security because of the refund clause and is not covered under the Uniform Securities Act B. The most important consideration for an investor is purchasing power risk C. This investment does not have regulatory risk because its assets are being purchased from the U.S. Government D. This investment has both regulatory risk and business risk

D. Limited partnerships are securities - it makes no difference if the business plan states that if the partnership cannot acquire the wireless spectrum assets at auction from the federal government, then the partnership is disbanded and the investors get their money back. Purchasing power risk really does not apply - it applies to long term fixed income investments. This investment does have regulatory risk - the auction may or may not occur at the decision of the federal government - that is regulatory risk. It also has business risk - this may be a lousy business idea!

Under NASAA rules for State-registered advisers, transactions must be recorded in customer account records no later than: A. trade date B. settlement date C. 10 business days following the end of the month in which the transaction was effected D. 10 business days following the end of the quarter in which the transaction was effected

D. NASAA rules for State-registered advisers require that customer account records be posted no later than 10 business days following the end of each calendar quarter. Again, note that this is very different than the requirement of Federal securities law that applies to broker-dealers and Federal covered advisers.

An investment adviser is considered to "take custody" of funds or securities from a customer if it: A. exercises discretionary authority by placing trades of securities for that customer B. accepts a check from the customer made payable to the fund custodian to buy a mutual fund C. accepts commissions for effecting trades for that customer's account through an affiliated broker-dealer D. receives quarterly management fees from the custodian by direct deduction with client consent

D. Taking custody means that the adviser is holding customer funds or securities or has access to customer funds or securities. If an adviser is permitted to directly deduct fees from client accounts, it meets this definition because it has the ability to withdraw money from the client's account. Exercising discretionary authority limited to trading or accepting commissions are not "taking custody." This is a limited power of attorney which limits the adviser to trading the customer account, but the adviser has no power to withdraw funds from the client account. Thus, a limited power of attorney is not taking custody. In contrast, if the adviser has a full power of attorney over an account which allows the adviser to withdraw funds, this is considered to be taking custody. Accepting a check to buy a mutual fund made payable to the fund custodian is not taking custody because the check is not being deposited to the adviser's account. It is sent directly to the fund custodian by the adviser. Such third party checks, as long as they are forwarded to the third party within 3 business days of receipt, are not considered to be in "custody."

An investment adviser is considered to "take custody" of funds or securities from a customer if it: A. exercises discretionary authority by placing trades of securities for that customer B. accepts a check from the customer made payable to the fund custodian to buy a mutual fund C. accepts commissions for effecting trades for that customer's account through an affiliated broker-dealer D. is appointed as trustee for a customer's trust account under a legally binding trust document

D. Taking custody means that the adviser is holding customer funds or securities. The securities must either be held in customer name, or held in adviser name, with the adviser being the trustee for the customer. Thus, if the adviser is appointed as trustee over the customer's account, custody has been taken. Exercising discretionary authority limited to trading only and accepting commissions are not "taking custody." Accepting a check to buy a mutual fund made payable to the fund custodian is not taking custody because the check is not being deposited to the adviser's account. It is sent directly to the fund custodian by the adviser. Such third party checks, as long as they are forwarded to the third party within 3 business days of receipt, are not considered to be in "custody."

The Administrator can do all of the following EXCEPT: A. subpoena witnesses within that State B. subpoena witnesses in other States C. issue a cease and desist order to a person in the securities business D. enjoin a person from engaging in the securities business

D. The Administrator has the power to subpoena witnesses (both in and out of that State); can issue a cease and desist order; and can revoke a registration. The Administrator cannot enjoin a person from engaging in the securities business - such an action can only be taken in a court of law.

A customer is invested in a diversified portfolio of small-cap, mid-cap and large-cap stocks of companies based in the United States. Which index fund could the customer use to further diversify this portfolio? A. S&P 500 B. Russell 2000 C. DJIA D. EAFE

D. The EAFE Index stands for Europe, Australasia, and the Far East. It consists of companies of developed countries in these areas - so these are all companies outside of North America. Investing in an EAFE ETF would give the customer international exposure and further diversify his or her U.S. based portfolio against market risk, since companies in international markets would typically be affected by different events than U.S. companies. The S&P 500, DJIA, and Russell 2000 all consist of U.S. companies.

An adviser that takes custody must file a copy of its surprise audit results with the State Administrator within: A. 60 days of year-end B. 60 days of completion of the examination C. 120 days of year-end D. 120 days of completion of the examination

D. The NASAA custody rule requires that each adviser that takes custody be audited on a "surprise" basis annually, so the actual date of the audit is only known to the CPA. After the CPA shows up for the audit and completes the examination, a copy of the auditor's report and financial statements must be filed with the Administrator within 120 days of completion.

Under the Securities Exchange Act of 1934, an investment manager that has discretion over $100,000,000 or more of customer assets must file Form: A. 10K B. 10Q C. 13D D. 13F

D. The Securities Exchange Act of 1934 requires investment managers that have discretion over $100,000,000 or more of customer assets to file a Form 13F with the SEC. The Form 13F is filed 45 days after the quarter ending where the adviser, at the end of any month in that quarter, had $100,000,000 or more of customer assets with discretionary authority.

The State Administrator, as a condition of registration in the State as an investment adviser, can require which of the following: I. An oral examination by the officer of the advisory firm II. Publication of an opening announcement in a local newspaper III. Posting of a surety bond IV. Filing of advertising A. I and III only B. II and IV only C. II, III, IV D. I, II, III, IV

D. The State Administrator can require written or oral exams as a condition of registration; can require an opening announcement published in a local newspaper; can require the posting of a surety bond; and can require the filing of advertising (unless the security or transaction is exempt).

An Investment Adviser Representative (IAR) is helping a client structure a portfolio to pay for the higher education costs of their child. All of the following are items that should be considered in determining the amount of funding needed in the portfolio EXCEPT: A. Tuition cost B. Housing cost C. Anticipated inflation rate D. Parent's income level

D. The goal here is to fund a portfolio to pay for higher education expenses - for tuition, housing, board, books, computers, etc. The anticipated inflation rate is relevant to determine how much this will cost at the estimated future date that schooling will start. Once the amount needed is determined (which is what the question is asking), then how the funding will occur is the next question. This is where the parent's income is relevant.

Under the Uniform Securities Act, posting of cash in lieu of meeting the surety bond requirement is permitted for all of the following EXCEPT: A. Agent registration B. Broker-dealer registration C. Investment adviser registration D. Security registration

D. The posting of a surety bond can only be required by the Administrator for registration as a broker-dealer, investment adviser, or agent. When such a bond is posted, the State, in effect, has money on deposit from the registrant that the Administrator can take to satisfy any claims resulting from a violation of the Act. There is no requirement for the posting of a surety bond for a securities registration.

An agent of a broker-dealer is opening a new client account. The agent has completed the new account application and the suitability determination. The customer has an investment objective of safety of principal and income. The agent makes an initial recommendation of a conservative blue chip stock with a track record of paying a consistent cash dividend. The customer accepts the recommendation. When must the commission charged on the transaction be disclosed to the customer? A. At the time that the order is placed B. At the time when the order is filled C. At the time when the account is opening D. On the confirmation of the transaction

D. There is no requirement to disclose the commission charged to customers at the time of the trade or at the time of account opening. The only requirement is that the commission be disclosed on the trade confirmation. Also remember that any commission charged must be "fair and reasonable."

A lawyer, representing one of your clients who has an individual account, calls and tells you that he has just been given trading authorization to effect securities transactions for the customer. He places an order to buy $10,000 worth of a stock which trades on the NYSE. Which statement is TRUE? A. You can submit the order as given as long as the branch manager approves of the transaction B. You can submit the order as long as you mark the order ticket "unsolicited" C. You can call the customer and, upon verbal confirmation that the lawyer has been given trading authorization, you can submit the order D. You can call the customer and ask him if he wants to buy the $10,000 worth of stock and, upon his verbal authorization, you can submit the order

D. Third party trade authorization must be given in writing - verbal authorization is not legally acceptable. No mention is made of whether the lawyer has been given written trading authorization (third party trading authorization) over the account by the customer. Thus, the customer is the only one who is able to trade the account. Please note that a customer's attorney does NOT have an implicit power of attorney over a customer's account. The customer must give a written power to anyone that the customer wishes to have trade his or her account.

A customer who is concerned with social and environmental issues would minimize which risk when making an investment decision? A. Market B. Opportunity C. Financial D. Regulatory

D. This customer believes in socially responsible investing, and thus would avoid companies such as tobacco, alcohol, fossil fuels, etc. These are companies that are under increasing regulatory pressure, and more stringent regulation is "regulatory risk." Financial risk is simply the risk that a company goes bankrupt. Market risk is the risk that the market falls, taking all stocks with it. There is no such thing as Opportunity Risk - rather there is Opportunity Cost - which is the amount of an investment return that is not earned when an inferior investment is chosen.

An individual who represents an issuer in the sale of that issuer's securities and who earns a commission on each transaction would be defined as an "agent" under the Uniform Securities Act if that individual represents the issuer: A. in sales of specified exempt securities B. effecting exempt transactions C. in sales of covered securities D. effecting sales of securities to employees of the issuer

D. This one is picky! The Uniform Securities Act only excludes individuals who represent issuers in sales of securities to employees of that issuer (say when an employee makes a purchase of the issuer's stock in the issuer's 401(k) plan) as long as no commission is paid. If a commission is paid, then that individual would be defined as an "agent." Note that the requirement that no commission be paid does not apply to the other exclusions from the definition of an agent. Excluded from the definition of an agent are individuals who represent issuers (not broker-dealers) in: -Sales of specified exempt securities such as Treasury, Agency and Municipal debt (but not all exempt securities); -Exempt transactions, such as the sale of securities only to institutions or underwriters; -Sales of specified covered securities (basically private placement issues and sales to persons with investment assets of at least $5,000,000 and investment managers handling assets of at least $25,000,000) - however if the individual is selling federally covered "nationally traded" securities or investment company securities, he or she must register as an agent; and -Sales of securities to employees of that issuer if no remuneration is paid - (the example here is a corporate employee who places company stock into employee 401(k) accounts).

Under the Uniform Securities Act, an unregistered individual employed by a registered broker-dealer may sell securities: A. in exempt transactions only B. if the securities are exempt C. if the public is not solicited D. under no circumstances

D. Unregistered agents are not permitted to sell under the Act, whether or not the securities involved are exempt. The only way for a person to avoid registration as an agent is to be excluded from the definition of an agent. For example, individuals who represent issuers trading exempt securities or effecting exempt transactions are not defined as agents. Individuals who represent broker-dealers effecting securities trades (exempt or non-exempt) are defined as agents under the Act.

If a bond is purchased at a premium, which of the following statements are TRUE? I. Yield to call is higher than the yield to maturity II. Yield to call is lower than the yield to maturity III. Yield to maturity is higher than the current yield IV. Yield to maturity is lower than the current yield A. I and III B. I and IV C. II and III D. II and IV

D. When a bond is purchased at a premium and called prior to its maturity date, the yield to call received will be lower than if the bond is held to maturity since the premium will be lost faster. Yield to maturity will always be lower than current yield for a premium bond because YTM includes the loss of the premium as a reduction of the overall return received from the bond; while current yield ignores this component (it is simply Annual Income / Current Market Price).

Which statement concerning 529 plans is TRUE? A. Contributions are deductible up to $15,000 (for 2018) B. Any plan balance must be distributed to the beneficiary at age 30 C. Distributions used to pay for higher education expenses are subject to income tax D. The beneficiary can be changed to another family member without tax consequences

D. With a 529 plan, the beneficiary can be changed to another family member without tax consequences. Contributions are not deductible. There is no age requirement for distribution of the plan account balance, so this differs from the requirement for Coverdell ESAs that the funds be used by age 30. Distributions from 529 plans to pay for higher education expenses are tax-free.

Changing the mix of a portfolio that has been structured to meet specific financial goals is called: A. Strategic allocation B. Tactical allocation C. Rebalancing D. Risk adjustment

Strategic portfolio management is the determination of the percentage allocation to be given to each investment vehicle within an asset class - for example a portfolio might be strategically allocated as follows: Money Market Instruments 10% Corporate Bonds 30% Large Cap Equities 50% Small Cap Equities 10% Changing these percentages as conditions change is part of ongoing strategic asset management. Tactical asset management is the permitted variance within each allocation percentage. For example, Large Cap equities are allocated 50%, but the manager may be tactically allowed to lower this percentage to, say, 40% or raise it to 60%. Thus, if the manager believes that Large Cap equities will underperform the market, he or she can lower the allocation to 40%; and if the manager believes that they will outperform the market, he or she can raise the allocation to 60%. This gives the manager some ability to "time the market" when conditions are overbought or oversold.

Compute the non-compounded annualized inflation adjusted rate of return for the following investment held for 2 years. Initial Investment Value: $10,000 Ending Investment Value: $9,800 Dividends Received Over The Period: $600 Inflation Rate Over The Period: 6% A. -1% B. +1% C. -2% D. +2%

A. The original investment is $10,000. Over 2 years, the customer lost $200 on the investment and received $600 in dividends, for a net return of $400, earned over 2 years. Annualized, the customer earned $200 per year on $10,000 invested = 2%. However, the rate of inflation over 2 years was 6%, or 3% per year (ignoring compounding). Therefore, the inflation adjusted rated of return over the 2 year period is 2% - 3% = -1%.

The risk adjusted rate of return of an investment is most closely correlated to the investment's: A. alpha coefficient B. beta coefficient C. delta coefficient D. gamma coefficient

A. "Alpha" measures the portion of an investment's return arising from "stock specific" risk - that is, the portion of the return that is not variable with the market as a whole. It takes the risk level assumed by that investment for the return achieved and compares it to the benchmark index return, which is "beta-adjusted" to the same risk level. If the portfolio manager achieved an excess return, this is a "positive" alpha and the portfolio manager added value. If the portfolio achieved a lower return, this is a "negative alpha" and the portfolio manager produced an inferior return as compared to the beta-adjusted benchmark return.

A private placement under the Uniform Securities Act is defined as an offer to: A. 10 persons or less in 12 months B. 35 persons or less in 12 months C. 10 persons or less in 18 months D. 35 persons or less in 18 months

A. A private placement is defined under the Uniform Securities Act as an offer to no more than 10 persons in a year. Private placements are exempt transactions as long as the general public is not solicited and no commissions are paid. Also note that this is a very different from the Federal private placement rule.

Investment advisers that manage $100,000,000 or more of assets are subject to: A. Federal registration only B. State registration only C. Both Federal and State registration D. Neither Federal nor State registration

A. Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. The smaller advisers are only required to be registered at the State level.

The Administrator may summarily deny or revoke the exemption of which type of security? A. Non-Profit Charitable Organization Issues B. Securities guaranteed by a Canadian province C. Federal Credit Union Issues D. Insurance Company Issues

A. Affinity fraud is a "hot button" issue for State Administrators. "Church" bond offerings are typically bought by members of that church who are usually quite trusting individuals, and there have been some big frauds that have occurred because they trusted another member of the church who offered them securities that turned out to be worthless. Therefore, the Administrator has the power to deny or revoke the exemption from registration given these issues under State law. On the other hand, Canadian Government securities, Federal Credit Union issues and Insurance Company issues are all exempt securities under State law where the exemption cannot be summarily denied by the Administrator (either because the issuer is "trusted," like the Canadian Government; or the issuer is regulated under other Federal or State laws, such as insurance companies, credit unions and banking institutions).

The primary advantage of a general partnership structure when starting a business is: A. ease of formation B. pre-set dissolution date C. no limit on the number of owners D. limited liability for each owner

A. Both general partnerships and sole proprietorships are ancient business forms that were used before corporations were invented (which occurred in the 1600s). With either a sole proprietorship or general partnership, the owners simply "go into business." The business entity is not created under State incorporation laws, so there is no limit on liability (the primary advantage of corporate ownership). To get limited liability (which is given to State-formed corporations, limited partnerships and limited liability companies), the entity must be legally-chartered in the State, which is costly and time-consuming. To form a sole proprietorship or general partnership, there is no State origination process, though some States ask that they be "notified." But these business owners have unlimited liability. General partnerships do not have a pre-set dissolution date. They are dissolved and reformed when there is a change in any of the partners. Finally, there is no limit on the number of general partners, but this is not a "primary advantage."

Which of the following BEST describes Limited Liability Companies (LLCs)? LLCs: I. give limited liability to investors II. give unlimited liability to investors III. can be structured to give a flow-through tax benefit IV. cannot be structured to give a flow-through tax benefit A. I and III B. I and IV C. II and III D. II and IV

A. Limited liability companies have no limit on the number of investors. They do give limited liability to the owners; and they can be structured to give a flow-through tax benefit.

An agent accepts an unsolicited telephone order from a new customer to buy 200 shares of a listed common stock. The salesman has the order executed and then forwards the new account form, with the executed order ticket, to the manager. Under the Uniform Securities Act, which statement is TRUE? A. The agent's actions are prohibited since the account must be approved by the manager prior to opening B. The agent's actions are prohibited since the customer must open a new account in person C. The agent's actions are allowed as long as the manager approves of the first trade D. The agent acted properly

A. The procedure to open a new account is to have the manager approve the opening of the account prior to the first trade. It is prohibited for the agent to execute the trade before the manager approves the account's opening.

All of the following life insurance policies offer cash values to the policy owners EXCEPT: A. term life B. universal life C. whole life D. variable universal life

A. Term life insurance is pure insurance with no investment element. For the premium paid, the purchaser is buying life insurance coverage for a fixed time period. At the end of that time period, the policy must be renewed to maintain coverage, typically at a higher premium as the insured individual ages (because of the greater mortality risk). When the purchaser of a term life policy is young, the premium is very low; as that person ages, the premium gets higher and higher. Whole life insurance protects the purchaser for his or her whole life from increasing premiums as that person ages. There are no renewals - the policy is good for that person's life. With a whole life policy, the annual premium is level, and will start out higher than a term life policy. Part of the premium is invested in the insurance company's general account and is guaranteed to grow at a fixed rate. As the general account investment portion grows, the policy builds "cash value" - meaning that part of the investment value can be borrowed against the policy. Any borrowed funds reduce the benefit payment upon death. Universal life combines elements of term life and whole life policies. The premium is broken down into an insurance element (the term component) and a savings element that is invested in the insurance company's general account (savings component). The policy owner's account is credited for the interest income earned on the general account. The rate of return can vary from year to year. The policy owner can use cash value to increase the death benefit or to skip some premium payments. Variable life products invest a portion of the premium in a separate account rather than the general account, and the investment return of the separate account will determine the amount of insurance coverage, which can vary.

A BD application is received by the State Administrator for a new broker-dealer subsidiary of a Swiss securities firm. The application includes the disclosure that the parent firm was suspended from membership on the Deutsche Bourse 6 years ago because of unauthorized trading by its Hong Kong branch. The State Administrator A. cannot deny registration based on the suspension that was imposed by a foreign regulator B. can deny registration based on the suspension by the foreign regulator C. must grant registration because the U.S. subsidiary is a legally separate entity from the parent company that is based in Switzerland D. can deny registration only if the actions of the parent company were a criminal offense

A. The Uniform Securities Act sets a 10 year statute of limitations for securities related violations as a cause for denial of registration. This is based on violations of U.S. law. It also includes a provision regarding violations of the law of a foreign jurisdiction. In this case, it sets a 5 year statute of limitations. (Why? - Who knows!) In this case, the suspension by the foreign regulator happened 6 years ago, so the State Administrator cannot deny registration based on the action taken by the foreign regulator. The wording includes willfully violating the law of a foreign jurisdiction governing any aspect of the securities or banking business within the past 5 years; or being the subject of an action by a foreign regulator in the past 5 years denying, revoking or suspending the right to engage in the securities business as a broker-dealer, investment adviser or agent.

A portfolio that is rebalanced monthly is considered to be: A. Active B. Passive C. Fixed D. Strategic

A. The terms "active" and "passive" are most often used when looking at the management of a stock portfolio. An actively managed portfolio has its investments selected by a professional manager; whereas a passive portfolio has a composition that is matched to a market index. However, "active" and "passive" can also be used to refer to the frequency of portfolio rebalancing. A portfolio that is rebalanced once annually is said to be "passive;" a portfolio that is rebalanced more frequently or as market conditions move is said to be "active." These terms can be combined together to look at both the frequency of rebalancing (active or passive) and the underlying style (active or passive). Therefore: -an annually rebalanced portfolio that is built with index funds is: "Passive/Passive;" -a monthly rebalanced portfolio that is built with index funds is "Active/Passive;" -an annually rebalanced portfolio that is built with actively managed funds is "Passive/Active;" and -a monthly rebalanced portfolio that is built with actively managed funds is "Active/Active."

A young housewife is the beneficiary of a trust, as are her 2 children, who have also been appointed as trustees. What MUST the investment adviser do when managing the assets of the trust? I. The investment adviser should review the trust document thoroughly II. The investment adviser should select the portfolio investments balancing the objectives and needs of the wife and the 2 children III. The investment adviser is limited to selecting portfolio investments that are on the State's legal list IV. The investment adviser is allowed to split the advisory fees with the plan trustees A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

A. The trustee must act in the best interests of the trust's beneficiaries. What is "unusual" about this question is that the children are the trustees, and the implication is that they are minors, since their mother is a "young housewife." A strange but true fact - a minor can be a trustee, but a court must appoint an interim trustee until the minor reaches adult age. Also note that this fact has no bearing on the answer to the question! The investment adviser managing the trust assets should review the trust document thoroughly, specifically looking at the trust's investment objectives, permitted investments and any investment prohibitions. The assets should be managed to meet the needs of all of the beneficiaries. The assets selected are not limited to the State's legal list (typically investment grade bonds) - this is an obsolete concept. The Uniform Prudent Investor Act allows the plan trustee to consider overall portfolio composition when determining whether an investment is prudent, with the goal of diversification. Finally, the plan trustee is a fiduciary and cannot accept "kickbacks" from the investment adviser in the form of part of the advisory fees paid.

The alternate payee under a QDRO can be all of the following EXCEPT: A. spouse B. sibling C. child D. dependent

B. A QDRO (Qualified Domestic Relations Order) is a court order in a divorce or separate agreement that divides the assets of an ERISA pension plan (which can only be in 1 person's name) among an "alternate payee" or "alternate payees." The alternate payee can be the former spouse, a child or a dependent. The alternate payee cannot be a sibling.

A couple owns a home together and they file for bankruptcy. If there is an excess of funds from the sale of the home, where does the extra money go? A. To the secured creditors B. To the additional creditors C. To the couple D. To the lender

B. A home is an asset included in the bankruptcy estate. Typically, the home is sold for less than the amount of the outstanding mortgage - and the entire proceeds of the sale go to pay off the mortgage, with any remaining unpaid principal balance discharged in the bankruptcy. In the case where the home is sold for more than the amount of the mortgage, the mortgage balance is paid in full, so the mortgagee (usually a bank) is repaid in full and has no more claim. Any excess funds go to a State Trustee, and remaining creditors can file claims against these funds. Secured creditors only get the asset pledged as collateral, and their lien on the asset is satisfied when they get the proceeds of the sale of the asset.

An advantage of a variable annuity over a fixed annuity is: A. minimum guaranteed rate of return on investment B. the ability to allocate funds across multiple subaccounts C. protection of initial investment from potential loss D. tax deductibility of investment made into the contract

B. A variable annuity allows the owner to allocate investment to different mutual funds, with each subaccount holding a single mutual fund. The performance of the mutual fund(s) held in the subaccount(s) determines the annuity payment, so it will vary and if the mutual fund(s) lose value, the payments will decrease. In contrast, fixed annuity premiums are invested in the insurance company's general account, which typically holds very safe bond investments. The annuity payment is fixed and guaranteed by the insurance company. This is not the case with a variable annuity. Both fixed and variable annuities are non-qualified retirement plans, so the contribution is not deductible (unless the annuity is purchased in a retirement account).

If a person accumulates a 5% or greater holding in a publicly held company with the intention of being a passive investor: A. Form 13d must be filed within 10 business days B. Form 13g must be filed within 45 calendar days of year end C. Form 10K must be filed within 90 days of year end D. Form S-l must be filed promptly

B. Anyone who accumulates a 5% position in one company and intends to remain a passive investor must make a 13g filing with the SEC within 45 calendar days of year-end.

An individual owns a Traditional IRA from which she has never taken a distribution. Her 70th birthday falls on December 31, 2017. Her first distribution must be taken no later than A. April 1st of 2018 B. April 1st of 2019 C. June 30th of 2020 D. June 30th of 2021

B. Distributions from an Individual Retirement Account must commence by April 1st of the year following the year that the person reaches age 70 1/2. This person turned age 70 at the end of 2017. She will be 70 1/2 on June 30th 2018. Distributions must commence by April 1st of the following year, which is 2019.

Which of the following is covered by ERISA? A. State employee pension plans B. Private employee pension plans C. Individual Retirement Accounts D. Medical Trust Savings Accounts

B. ERISA (Employee Retirement Income Security Act) protects employees in the "private" sector that are covered by employer sponsored pension plans from having their pension benefit reduced or taken away by employer mismanagement of the pension assets. It does not cover public sector (government) retirement plans, since we trust our government more than we trust corporations. It does not apply to Individual Retirement Accounts, since the establishment of these, and the management of the assets in the account, is decided by the beneficiary. ERISA does not apply to Medical Savings Accounts, which are a type of account permitted under the tax code that allows a tax deductible contribution to pay routine medical expenses for persons who are covered by a high deductible medical insurance policy. These are not covered under ERISA because they do not provide a retirement benefit.

All of the following are plan fiduciaries under ERISA EXCEPT the: A. trustee of the plan B. attorney that provides legal advice to the plan C. investment adviser to the plan D. individual that has discretion over the administration of the plan

B. ERISA requires that a fiduciary be named in each plan document. The fiduciary is a person who exercises discretion or control over the plan. There can be multiple plan fiduciaries - for example, the plan trustee, investment adviser(s) and those individuals that exercise discretion in the administration of the plan, are all fiduciaries. The fiduciaries can only act in the best interests of the plan participants - the beneficiaries. Attorneys, accountants and actuaries are not plan fiduciaries when acting solely in their professional capacities - since they don't have discretion or control over plan assets

A value fund manager has decided that her position in ABCD stock should be liquidated. To decide the best time to do this, the manager would use: A. fundamental analysis B. technical analysis C. a combination of both fundamental and technical analysis D. a Monte Carlo simulation

B. Fundamental analysis is used to decide which stocks to buy or sell, based on "fundamental" factors such as earnings, dividends, products, etc. Once that decision is made, it is always best to buy when the price is low or sell when the price is high. Technical analysis uses stock price chart patterns to identify a market "top" or a market "bottom." Once the sell decision is made, it would be best to wait for a market "top" to sell at the highest price possible.

If a representative that transacts business in a State terminates employment with a Federal covered adviser, notice must be given to the Administrator by the: A. Federal Covered Adviser B. Investment Adviser Representative C. both the Federal Covered Adviser and the Investment Adviser Representative D. neither the Federal Covered Adviser nor the Investment Adviser Representative

B. If a representative of a federal covered adviser that transacts business in a State terminates employment, it is the responsibility of the representative to notify the State promptly. Remember that in this case, the advisory firm is not registered with the State; only the representative is registered with the State. Thus, it cannot be the responsibility of the advisory firm to notify the State since it is not registered there. Only the registered representative must notify the State since only the representative is registered in the State.

Which of the following persons is "in the business" of giving investment advice? A. A full service broker-dealer who charges higher commissions than discount brokers because of the value of recommendations made B. An insurance agent that advertises "no-fee" financial planning but who sells insurance for a commission to advisory clients C. A real estate agent who receives a fee from customers to appraise the value of their real estate holdings D. An accountant who charges a fee to customers where the services rendered include tax deferral strategies on securities positions

B. If an insurance agent creates "no-fee" financial plans, and then takes commissions on insurance policies sold to these customers that are part of the plan, then this person is "in the business" of giving advice about "securities" (since the SEC views financial plans are giving advice about securities) and is "compensated," so this person must register. Broker-dealers who do not charge separately for advice are excluded and need not register; real estate agents appraising real estate holdings are not dealing in securities and are excluded; and accountants who do not charge separately are excluded.

An investment adviser is looking to offer advisory services to new clients. Which statement is TRUE regarding delivery of Form ADV Parts 2A and 2B? A. They must be delivered only if the individual becomes a client of the investment adviser B. They must be delivered regardless of whether the individual becomes a client of the investment adviser C. They must be delivered only upon written request of the individual that is considering becoming a client D. They must be delivered only upon receiving a check for the initial investment amount from the client

B. NASAA requires that the investment adviser furnish the Brochure (Form ADV Part 2A) and the Brochure Supplement (Form ADV Part 2B) to an advisory client or a prospective advisory client. The Brochure and Supplement must be furnished: -not less than 48 hours prior to entering into any advisory contract with such client or prospective client; or -at the time of entering into the contract, the advisory client has the right to terminate the contract without penalty within 5 business days.

All of the following statements are true about registration of investment advisers EXCEPT: A. an adviser with no office in the State that limits its clientele to insurance and investment companies is exempt from registration B. an adviser that only renders advice on municipal securities is exempt C. broker-dealers can act as investment advisers without registering as such if any advice given is solely incidental to the business of the broker-dealer D. investment advisers must register with the State

B. Investment advisers with no office in the State that limit their clientele to insurance companies and investment companies are exempt from registration because they are dealing with professionals - not the general public. Note that if an adviser is physically located in a State, then it still must register. There is no exemption from registration under state law for investment advisers that solely give advice on municipal securities - this adviser must register in the state. (Note, however, that if the firm only gives advice about U.S. Government securities, it is exempted from registration under both Federal and State law.) If a broker-dealer is registered as such with the state, then a second registration is not required for that firm to act in the capacity of an "investment adviser" - as long as such investment advice is solely incidental to the broker-dealer's business. This avoids the dual registration of these firms. Please note that if this firm were to actually sell investment advice, it would be required to register in the state as an investment adviser. Investment advisers must register in the state unless an exemption is available.

The principal difference between a structured product and an ETN is: A. investment time horizon B. liquidity risk C. credit risk D. reference index

B. Regarding structured products, each bank's version has different features. They are "buy and hold" securities - there is almost no trading market. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated.

A customer buys a new issue TIPS with a 3% coupon rate. If the CPI during the first year increases by 2%, the customer will receive annual interest the next year of: A. $30.00 B. $30.60 C. $50.00 D. This cannot be determined from the information given

B. TIPS stands for Treasury Inflation Protection Security. The coupon rate at issuance is 3% and the security is issued at par. Each year, the principal amount is adjusted upwards by that year's inflation rate, so that the adjusted principal amount at the end of Year 1 will be: $1,000 x 1.02 = $1,020. The 3% coupon is applied to the adjusted principal amount, so 3% of $1,020 = $30.60 in interest that will be paid in Year 2: If there is inflation each year, the principal is continually adjusted upwards and the annual interest payment will increase. At maturity, the holder is returned the higher adjusted principal amount.

Under the provisions of the Prudent Investor Act, all of the following statements are true regarding the management of trust accounts with multiple beneficiaries EXCEPT the fiduciary: A. must manage the trust impartially, taking into account the differing needs of the trust beneficiaries B. is judged based on the performance of each individual investment chosen in the account C. should seek to maximize portfolio performance and can assume extra risk consistent with the beneficiaries' investment objectives and needs D. is permitted to delegate investment decisions to qualified agents without needing consent of the beneficiaries

B. The "Prudent Investor Act" gives fiduciaries much broader latitude in terms of their ability to allocate trust assets to various investment classes, as compared to the obsolete "prudent man rule" that simply required that investments be of low risk. The concept is that modern portfolio theory can be used to diversify assets and to achieve a greater return that justifies any extra "risk" assumed by the strategy - as long as the strategy is consistent with the investment objectives and needs of the beneficiaries. The fiduciary is judged by overall portfolio performance - not by the performance of each single investment. Since a higher level of expertise may be needed to manage trust assets in this manner, the Act allows the fiduciary to contract with an outside investment adviser to provide asset management. In any trust with multiple beneficiaries, the fiduciary must act impartially and must consider the needs of each beneficiary.

The Securities Act of 1933 requires that new issues of securities be registered with the SEC if the: A. issue will be sold within 1 State only to residents of that State B. mails, or other means of interstate commerce, are used to sell the securities C. value of the securities offering exceeds $5,000,000 D. securities offering will be made to more than 35 accredited investors

B. The Securities Act of 1933 requires that any new issues that are offered "through the mails or other means of interstate commerce" must be registered (unless an exemption is available). Remember, the 1933 and 1934 Acts are Federal law; and the Federal government only has jurisdiction over offers and transactions that cross state lines (interstate).

A Federal Covered Adviser (FCA) located in State A advertises in State B. The Administrator of State B can: A. require the FCA to submit its advertising to the State B Administrator before use B. do nothing C. only require the adviser to meet Federal guidelines for advertising D. require the FCA to submit its advertising to the State B Administrator 10 days prior to use

B. The basic idea behind the partitioning of investment adviser regulation between the SEC and the States was to eliminate duplicate regulation of investment advisers at both the Federal and State level. A Federal Covered Adviser is only subject to SEC regulation and cannot be required to register in a State and is not subject to State regulation. All the State can require is a "notice filing." Supervision of advertising for a Federal Covered Adviser is the responsibility of the SEC - not the State. The only jurisdiction retained by the State over a Federal Covered Adviser is if a fraud is committed. Note, however, that if the Administrator suspected that a deceit or fraud was being committed, it could investigate the Federal Covered Adviser in the State, and as part of the investigation, it could require the production of books and records, including advertising. However, the question makes no mention of a suspected fraud or deceit.

A customer buys a 3-year maturity, 6% coupon bond at par. If market interest rates rise to 8%, then the bond's price will fall by: A. 2% B. 5% C. 10% D. 25%

B. The customer bought this 3-year bond at par with a coupon rate of 6%. If market interest rates rise to 8%, then the present value of the bond's cash flows will fall as follows: Year 1: $60 / 1.08 = $55.55 Year 2: $60 / (1.08)2 = $51.44 Year 3: $1,060 / (1.08)3 = $841.46 Total Present Value = $55.55 + $51.44 + $841.46 = $948.45 The bond will fall in price by $51.55 from $1,000 par, for a fall of 5.155%.

The amount of commission charged to a customer to effect a securities transaction: I. is not required to be disclosed prior to executing the transaction II. must be disclosed prior to executing the transaction III. is not required to be disclosed on the trade confirmation IV. must be disclosed on the trade confirmation A. I and III B. I and IV C. II and III D. II and IV

B. There is no requirement to disclose the amount of commission charged on a trade prior to executing the trade for the customer. The amount of commission must be disclosed on the trade confirmation and it must be "fair and reasonable." The only requirement for disclosure of commission costs is that if a transaction will result in unusually high commission costs, this must be disclosed to the customer prior to executing that trade.

A potential client is 81 years old and has asked his representative for recommendations of speculative "Dot Com" stocks. The customer has a broadly diversified bond and high dividend paying stock portfolio that provides retirement income, in addition to the customer receiving social security. The customer is concerned that his purchasing power is decreasing and wishes to allocate an increased portion of his portfolio to aggressive growth stocks. The BEST recommendation for this customer is to: A. not allocate any of his portfolio to "Dot Com" stocks because they give no current income, which this customer needs B. allocate a portion of the customer's portfolio to "Dot Com" stocks that will not reduce the customer's retirement income below the amount needed for comfortable living C. allocate a portion of the customer's portfolio to "Dot Com" stocks as dictated by the customer, since he is making the investment decision D. tell the customer that aggressive growth stocks are not suitable for a person who is at such a late stage of life

B. This client is elderly, but is worried about the risk of inflation (purchasing power risk). A portion of the customer's portfolio could be reallocated to growth stocks to offset this risk, but only an amount that would not compromise the income needed by the customer to support his current living standard. This would likely result in a fairly small allocation. One could argue that such an elderly customer should not be holding any such stocks, but this customer is concerned about purchasing power risk and the only way to limit this is with investments in either growth stocks or TIPs (Treasury Inflation Protection Securities - which are not considered in this question).

An elderly client of a Registered Investment Adviser has gifted securities to his adult son at the end of each year, in an amount equal to the annual gift tax exclusion. The client has a stroke that has affected his ability to communicate and the RIA is approached by the adult son about continuing the annual giving of the gift. The RIA should: A. go ahead and continue giving the annual gift because this is in accordance with the prior practice in the account B. ask the son if he has a durable power of attorney granted by the father and obtain this prior to giving the annual gift C. follow the instructions in the client's will D. visit with the client and ask him whether he should give the gift, directing the client to squeeze his hand if the answer is "Yes"

B. This client is incapacitated. If the client gave his son a durable power of attorney prior to the stroke, then the son is authorized to act on the father's behalf. (Remember that a durable power of attorney continues on the giver's mental incapacitation; while a non-durable power of attorney ceases upon the giver's mental incapacitation.) Otherwise, the RIA can do nothing. Choice C is wrong because the client is not dead! Choice D is simply amusing.

At the point where a variable annuity separate account interest is "annuitized," the holder of the contract receives a: A. fixed number of annuity units based on the number of accumulation units B. fixed number of annuity units based on the value of the accumulation units C. fixed value for the annuity units as set forth in the original contract D. lump sum payment equal to the value of the units

B. When a variable annuity separate account interest is "annuitized," the value of the separate account interest is divided by an "annuity unit factor" to arrive at the number of annuity units. The number of units is now fixed, but unit values fluctuate with the changes in value of the separate account securities funding the annuity units.

What happens to the rate of return calculation on a non-callable bond if the rate of interest stays the same and the time intervals lengthen? A. The rate of return increases B. The rate of return declines C. The rate of return is unchanged D. The effect on the rate of return cannot be determined

B. When the question is stating that the "time intervals lengthen," this means that the time period between each interest payment received lengthens. For example, assume that a 10% bond will pay interest annually, instead of semi-annually. At the end of each year, $100 of interest will be received, instead of receiving $50 every 6 months. Because the first $50 interest payment received can immediately be reinvested over the next 6 months until the second $50 payment is received, this will produce a higher rate of return than receiving the $100 payment at the end of the year. Thus, the actual rate of return will decline if time intervals lengthen, because the interest is actually being received more slowly, and thus cannot be reinvested as quickly to maintain the investment's rate of return.

Which of the following information MUST be included on a customer confirmation? I. Whether the transaction was solicited or unsolicited II. The exchange where the transaction was effected III. The customer name and account number IV. The price of execution A. I and II B. III and IV C. II, III, IV D. I, II, III, IV

B. Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The exchange where the trade was effected used to be required on the confirmation, but this is no longer the case because all markets are linked and trades must be done at the best price in a given market or routed to the better-priced market for execution. The customer name, account number, size of the trade, price of execution, and any commission charged must all be on the confirmation.

An accountant has a wealthy client base and has developed the trust of his customers over many years by providing tax preparation services and sound tax advice. The accountant has been requested by many of these customers to make suitable securities recommendations. The accountant has decided to offer such services, billing the customers at his regular hourly rate. Under the Uniform Securities Act, the accountant is: A. excluded from the definition of an investment adviser since he is a "professional" that is only giving incidental advice B. excluded from the definition of an investment adviser since he is not charging an advisory fee based on a percentage of assets under management C. included under the definition of an adviser because he is receiving separate compensation for giving advice about securities D. included under the definition of an investment adviser, since "professionals" are not offered an exclusion from the definition of an investment adviser

C. "Professionals" such as lawyers, accountants, engineers, and teachers who only give incidental advice about investing in securities; and who do not separately charge for giving advice; are excluded from the definition of an investment adviser. This accountant is charging for advice; and it is a regular part of his business; thus he falls under the definition and must register with the State.

A nonqualified retirement plan that is established by a non-profit organization is a: A. 401(k) plan B. 403(b) plan C. 457 plan D. 529 plan

C. 457 plans are "add on" plans to government sponsored defined benefit plans and 403(b) plans. 403(b) plans are similar to 401(k)s - they are salary reduction plans that allow employees to contribute up to $18,500 in 2018. 401(k)s are for the corporate sector, while 403(b)s are for the not-for-profit government sector. As an added benefit for higher level employees, not-for-profit employers can establish a 457 plan. This is not a qualified plan because it is discriminatory. An additional $18,500 can be contributed in 2018 as a salary reduction by these higher level employees. 529 plans are college savings plans and are not retirement plans.

An individual that earns $210,000 per year and that is not covered by another qualified retirement plan would be permitted to: A. make a non-deductible contribution to a Roth IRA that was opened years ago B. make a deductible contribution to a new Roth IRA C. convert a Traditional IRA into a Roth IRA after paying taxes due D. convert a Roth IRA into a Traditional IRA after paying taxed due

C. A Traditional IRA can be converted into a Roth IRA. This is done as a "rollover" and, if the contributions previously made into the IRA were deductible; then tax must now be paid on these amounts (but no penalty tax is imposed). The benefit of converting to a Roth IRA is that all distributions are not taxable; and distributions do not have to commence at age 70 1/2 (as compared to a Traditional IRA where distributions are taxable; and distributions must commence at age 70 1/2). This individual earns too much this year to make a Roth IRA contribution (Roths are not available to high earning individuals). All Roth contributions are non-deductible. The "conversion" rule was put into the tax code as a potential "money grab" by the Federal Government. If the government can get people to convert their Traditional IRAs to Roth IRAs, it gets tax dollars NOW, instead of later. And that would help reduce the federal deficit! Also note that there is no earnings limit on those who can convert their Traditional IRAs to Roth IRAs.

Bonds issued by a church located in Sullivan County, in the State of Indiana, are being offered to congregants of affiliated churches in the State of Illinois. Which statement is TRUE? A. The bonds are only exempt securities if the offer is made to church congregants in Illinois and not to the general public B. The bonds are only exempt securities when being offered to residents of the State of Illinois C. The bonds are only exempt securities in either Indiana or Illinois, as long as a notice filing specifying the material terms of the offer is made in the State D. The bonds are non-exempt securities that must be registered in each State where offered

C. Bonds issued by not-for-profit organizations are an exempt security under Uniform State Law. For example, so-called "church" bonds, used to pay for the construction of new churches or church additions, are an exempt security. Please note, however, that there have been many frauds associated with these offerings, where "good people of faith" have been fleeced. Because of this, the Uniform Securities Act provides that, in order to offer a note, bond or debt of a religious, benevolent, fraternal or social organization, the Administrator: -can require the issuer to file a Notice specifying the material terms of the offer in the State and file copies of proposed advertising and sales literature used in connection with the offering -can provide that the exemption becomes effective only if the Administrator does not disallow it within a stated time period (typically 10 business days) -can disallow the exemption, providing the grounds for denial or suspension -can require the issuer to register in the State (used if the Administrator believes that the bond issue is really a "commercial offering" and not a true "charitable" offering)

Exchange Traded Funds (ETFs) are: I. registered under the Investment Company Act of 1940 as closed-end management companies II. registered under the Investment Company Act of 1940 as open-end management companies III. regulated by the SEC and FINRA IV. regulated by FDIC and the Department of Treasury A. I and III B. I and IV C. II and III D. II and IV

C. ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism ensures that the fund shares will not trade at a discount to NAV. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940. Since ETFs are securities, they are regulated by the SEC and FINRA.

A broker-dealer uses summer interns who answer the telephone, give stock quotes, and take orders from clients. The summer interns: A. are not required to be registered in the State as agents because of their temporary status B. are not required to be registered as agents in the State because they are performing clerical functions C. must be registered in the State because they are transacting securities business with the public D. must be registered in the State because they are working for a broker-dealer

C. Even summer interns must be registered, if they are taking orders from customers; soliciting customers; or making recommendations to customers. If they only perform clerical duties, then no registration is required.

An agent owns an ice cream and sweets shop that has been extremely successful. She wants to expand and open new locations, and wants to sell shares of the shop to her friends and other family members. Which statement is TRUE about this activity? A. This is a permitted activity because the shares are not being sold to the general public B. This is the illegal activity known as selling away that is prohibited under NASAA rules C. This is an unethical activity unless the agent obtains permission in writing from her employing broker-dealer to sell the shares D. This activity is permitted because it does not interfere with the agent's employment obligation to her broker-dealer

C. If an agent wishes to sell a security that is not being offered by his or her firm, the agent is "selling away" from the firm. This is prohibited under both FINRA and NASAA rules unless the agent gets written approval of the firm to engage in the transaction. All securities transactions effected by agents must be known to the employing firm and must be supervised by the employing firm. Note that selling away is not illegal - there is no law stating that selling away is prohibited. Rather, it is an unethical practice if an agent "sells away" without the permission of his or her firm.

Arrange the following in order of claim priority in a corporate liquidation: I. Common stockholders II. Preferred stockholders III. Secured bondholders IV. Unsecured bondholders A. III, II, I, IV B. II, III, IV, I C. III, IV, II, I D. I, II, III, IV

C. In a corporate liquidation the priority of claim to assets is: secured bondholders, unsecured bondholders, preferred stockholders, common stockholders.

Which statement is TRUE about a joint account held as "Tenants in Common"? A. Tenants in Common joint account ownership only provides for equal account ownership for each tenant and is typical for a married couple B. If an owner of an account held as Tenants in Common dies, the deceased individual's ownership interest becomes the property of the remaining tenant(s), bypassing the deceased individual's estate and probate C. Each individual's ownership interest in a Tenants in Common account is freely transferable to another person D. The death of an individual owner in a Tenants in Common account terminates the joint account agreement and the remaining tenant(s) must sign a new joint account agreement to keep the account open

C. In a joint account held as tenants in common, each individual owner has a specified percentage. There is no requirement that each party own an equal percentage. This is typical for unrelated parties, such as business partners. If one owner dies, his or her percentage goes to his estate - so the estate becomes the partial owner of the account. Furthermore, anyone can contest an asset transfer that goes through an estate, so the ownership interest must go through probate before it can leave the estate and be inherited by another party. The true statement is Choice C - each owner can transfer his or her ownership interest to someone else while he or she is still alive. This is not the case with an account owned as JTWROS - Joint Tenants with Rights of Survivorship - which is typical for a husband and wife. In a JTWROS account, each person 100% owns the account. If one dies, the other 100% owns the account, with the asset transfer bypassing the estate and bypassing probate.

An unmarried couple wishes to open a new account as "JTWROS." What should the registered representative do? A. Open the account without making any further inquiries B. Explain the risks involved with opening such an account C. Ask why they wish to open this type of account D. Refuse to open the account

C. Joint Tenants with Rights of Survivorship is the account ownership option usually chosen by a married couple. Legally, each 100% owns the account - if 1 dies, the other automatically 100% owns the account. The transfer bypasses the estate and cannot be challenged. If the account is titled as "Tenants in Common," then each tenant owns a stated percentage of the account. If one dies, that percentage goes to that person's estate and is passed by will. The registered representative should inquire as to why this unmarried couple wants JTWROS ownership. The big question is: "Do they understand how it all works?"

Under the NASAA Model Rule covering Investment Adviser records, the adviser's articles of incorporation must be retained for how long after the adviser ceases business operations? A. 1 year B. 2 years C. 3 years D. 5 years

C. NASAA's recordkeeping rule for investment advisers requires that "partnership articles and any amendments, articles of incorporation, charters, minute books and stock certificate books of any investment adviser be preserved for at least 3 years after termination of the enterprise."

Which statements are TRUE regarding variable annuities during the annuity phase? I. Periodic payments of fixed dollar amounts are made II. Periodic payments of varying dollar amounts are made III. Payments are based on a fixed number of units IV. Payments are based on a varying number of units A. I and III B. I and IV C. II and III D. II and IV

C. Once the separate account interest is "annuitized," the accumulation units are turned into a fixed number of annuity units. Since the earnings in the account vary, each payment based on a fixed number of annuity units also varies (hence the term variable annuity).

All of the following would be considered to be securities information processors under the Securities Exchange Act of 1934 EXCEPT: A. NYSE TRF B. Pink Sheets C. The Wall Street Journal D. NASDAQ TRF

C. Securities information processors (SIPs) collect and disseminate price quotes and transaction prices in non-exempt securities. Each exchange has a "TRF" - a Trade Reporting Facility - that is a registered SIP. The NYE TRF reports trades of NYSE listed stocks, wherever the trade occurred. The NASDAQ TRF reports trades of NASDAQ-listed stocks, where the trade occurred. The Pink Sheets is an SIP that distributes bid and ask quotes for over-the-counter stock issues, as does the OTCBB - the Over-The-Counter Bulletin Board. General circulation newspapers are not defined as securities information processors that must register with the SEC under the Securities Exchange Act of 1934.

The statute of limitations on criminal suits from alleged fraudulent violations of the Uniform Securities Act is: A. 1 year B. 3 years C. 5 years D. 10 years

C. Suits alleging criminal violations of the Uniform Securities Act must be brought within 5 years of the occurrence of the alleged violation.

Under the Prudent Investor Act, a fiduciary is: A. not permitted to delegate investment authority over trust assets B. obligated to make investments in securities that are rated "BBB" or better C. obligated to maximize overall portfolio return consistent with the level of risk assumed D. required to register with the Administrator in the State where the trust is formed

C. The "Prudent Investor Act" gives fiduciaries much broader latitude in terms of their ability to allocate trust assets to various investment classes, as compared to the obsolete "prudent man rule" that simply required that investments be of low risk. The concept is that modern portfolio theory can be used to diversify assets and to achieve a greater return that justifies any extra "risk" assumed by the strategy - as long as the strategy is consistent with the investment objectives and needs of the beneficiaries. The fiduciary is judged by overall portfolio performance - not by the performance of each single investment. Since a higher level of expertise may be needed to manage trust assets in this manner, the Act allows the fiduciary to contract with an outside investment adviser to provide asset management. There is no requirement for the trust to be registered with the State Administrator - this is only required for broker-dealers, investment advisers, and their agents.

Which of the following are NOT required to register as investment advisers under the Investment Advisers Act of 1940? Persons who give advice: I. on U.S. Government securities II. solely to insurance companies III. solely to investment companies IV. to customers within one State, where the investment adviser is a resident of that State A. II and III B. III and IV C. I, II, IV D. I, II, III, IV

C. The Investment Advisers Act of 1940 exempts from registration, an adviser that gives advice to insurance companies. It does not exempt an adviser who gives advice to investment companies (which is true under State law). The Investment Advisers Act of 1940 also exempts from registration advisers who only give advice on U.S. Government securities; and advisers who wholly operate within one State, trading securities only in that State. Because such an "intrastate adviser" does not conduct business across State lines, the SEC does not have jurisdiction. For the SEC to have jurisdiction over an adviser, the adviser must operate "interstate."

Which of the following is NOT required to be in an investment advisory contract under NASAA rules? A. The formula for computing the advisory fee B. A clause prohibiting the adviser from assigning the contract without customer consent C. A list of the states in which the adviser is registered D. Disclosure of whether the contract gives the adviser discretionary authority

C. The advisory contract, under NASAA rules, must include: -Description of services provided; -Term of contract; -Formula for computing fees; -Amount of prepaid fees to be returned if contract is terminated early; -Assignment of the contract is not permitted unless the customer approves; -Whether the contract grants discretionary authority to the adviser; and -Disclosure that the fee for managing equity securities may be higher than the fee for managing debt securities.

Which statement is TRUE? A. The rate of return on an investment earned over a 9 month time frame would be more than the annualized rate of return on that investment B. The rate of return on an investment earned over a 2 year time frame would be less than the annualized rate of return on that investment C. The rate of return on an investment earned over a 3 month time frame would be less than the annualized rate of return on that investment D. The rate of return on an investment earned over a 3 year time frame would be less than the annualized rate of return on that investment

C. The best answer is c. Here is the way to think about this question. Assume that an investment earns 1% per month. In Choice A, the investment earns 9% over 9 months and its annualized rate of return is 12% - so the 9-month rate of return is less than the annualized rate of return. In Choice B, the investment earns 24% over 24 months and its annualized rate of return is 12% - so the 24-month rate of return is more than the annualized rate of return. In Choice C, the investment earns 3% over 3 months and its annualized rate of return is 12% - so the 3-month rate of return is less than the annualized rate of return. In Choice D, the investment earns 36% over 36 months and its annualized rate of return is 12% - so the 36-month rate of return is more than the annualized rate of return.

The maximum amount that can be given to a child in a 529 plan is: A. the annual gift tax exclusion amount B. 5 times the annual gift tax exclusion amount C. determined by the limitations established by the State D. unlimited

C. The maximum amount that can be contributed to a 529 plan (State-sponsored college savings plan) is established by each State and the dollar limits can be quite high (around $300,000 for most States, since college is expensive).

A trader who places an order to sell 100 shares of ABC at $64 when the market price of ABC stock is at $68 has placed a(n): A. market order B. limit order C. stop loss order D. open order

C. The trader wants to sell the stock at $64 when the market is at $68. This trader does not want to sell unless the market falls to $64 per share, so he has placed a stop loss order - he is limiting his downside loss on the stock in a falling market. The order cannot be filled unless the market drops to $64 or lower. This order will remain "open" until the market drops to $64; at this point the order will be filled with the stock sold at the prevailing market price.

Which of the following would NOT be included in short term emergency sources of cash? A. Credit card advances B. Margin loans from a broker-dealer C. Cash value of term life insurance D. Home equity line of credit

C. There is no cash value to term life insurance, only to whole life insurance, so this is not a source of emergency cash.

An Investment Adviser is set up as a sole proprietorship. The owner has hired an Investment Adviser Representative (IAR) to market the firm to potential clients. The most important consideration in the firm's Business Continuity and Succession Plan would be: A. the identification of the business model of the Investment Adviser including size of the firm, types of services provided, and the number of locations B. making provision for the Investment Adviser Representative to notify the clients of the Investment Adviser in the event of business interruption caused by the owner's death or unexpected permanent incapacitation C. making provision for the IAR to contact clients to get their permission to assign advisory contracts to a 3rd party in the event that the owner dies or is unexpectedly unavailable D. providing for an appropriate emergency contact person when the investment adviser representative is away on vacation

C. When an Investment Advisor is formed as a sole proprietorship, the client's legal relationship is with the sole proprietor. With the death or permanent disability of the sole proprietor, the sole proprietorship is terminated as a legal entity, as would any advisory contracts. The IA must have a succession plan that immediately addresses this issue if the sole proprietor becomes unavailable. Otherwise, the clients would have no one to manage their funds held at the defunct IA because the existing investment advisory contracts are now void.

Which item is used when computing a corporation's Current Ratio? A. Net Working Capital B. Net Worth C. Sales D. Cash

D. The Current Ratio is: Current Assets / Current Liabilities. It is a measure of liquidity, because it looks at whether the company can pay its current bills as they come due. Cash, Accounts Receivable and Inventory are the primary "Current Assets." Net Working Capital is Current Assets - Current Liabilities. Net Worth is All Assets - All Liabilities. Sales are found on an income statement, not on a balance sheet.

Which of the following statements are TRUE regarding customer funds or securities and broker-dealer's funds or securities? I. Broker-dealers are allowed to commingle customer funds or securities with their own funds or securities positions II. Broker-dealers are prohibited from commingling customer funds or securities with their own funds or securities positions III. An agent can take customer securities into his or her own possession to deliver to the broker-dealer IV. An agent cannot take customer securities into his or her possession to deliver to the broker-dealer A. I and III B. I and IV C. II and III D. II and IV

D. Agents and broker-dealers are prohibited from commingling customer funds and securities with their own funds and securities. The agent cannot take these customer securities into his possession - this is a violation. He can have the customer send them directly to the broker-dealer for delivery on the sale, however.

What rate would NOT be used to find the present value of a TIPS? A. Real Rate of Return at the time the bond was issued B. Nominal Rate of the bond C. Coupon Rate of the bond D. Internal Rate of Return of the bond's cash flows

D. Finding the present value of a TIPS (Treasury Inflation Protection Security) is the same thing as calculating the market price of a TIPS using discounted cash flows. The coupon rate (nominal rate) on a TIPS is the interest rate at issuance that will price the instrument at par. This is the same as the "real rate" of return at that point in time (the real rate has the current inflation deducted out, because there is no "inflation risk" on a TIPS). Assume that the 30-year Treasury Bond is issued with a 3% coupon rate when the inflation rate is 1%. The "real" rate of return is 2%, and this would be the interest rate on a 30-year TIPS issued at that time. Assuming that this interest rate is 2% for a 30 year TIPS. If there is no inflation, the annual cash flow received for each of the next 29 years will be 2% of $1,000 = $20; and in year 30, the customer will receive $1,020 ($1,000 principal without any inflation adjustment plus another $20 of interest). If these cash flows are discounted at the coupon rate of 2%, the price of the bond will be par. If there is inflation, then the principal amount is adjusted upwards in that year for the CPI increase, and the cash flow received in that year also increases, since the 2% coupon is applied against the increased principal amount. Because the cash flows are increasing due to inflation, when they are discounted at the 2% coupon rate, this means that the bond will be valued above par. Conversely, if there is deflation, then the principal amount is adjusted downwards in that year for the CPI decrease, and the cash flow received in that year also decreases, since the 2% coupon is applied against the decreased principal amount. Because the cash flows are decreasing due to deflation, when they are discounted at the 2% coupon rate, this means that the bond will be valued below par.

An investment adviser representative who prepares financial plans for customers is also a registered life insurance agent in that State. If the agent recommends that a customer sell a mutual fund holding and use the proceeds to buy life insurance, all of the following should be disclosed to the customer EXCEPT the fact that the: A. recommendation to purchase life insurance is in no way connected to the services offered by the advisory firm B. agent will earn a commission on the life insurance purchased by the customer C. sale of the mutual funds may result in a taxable event to the customer D. recommendation to buy life insurance does not make the investment advice any less objective

D. Here, the agent is registered to sell financial plans and insurance and there are potential conflicts of interest that must be disclosed. The customer must be informed that the sale of insurance products is in no way connected to the sale of advisory services. The customer must be informed that the agent will earn commissions on the sale of recommended insurance. The customer must be informed that if he sells a mutual fund to buy life insurance, he may have a taxable gain on the mutual funds. Choice D just sort of makes no sense - why would one disclose that the recommendation to buy life insurance will not make the adviser's investment advice any less objective? This is assumed to be the case.

Under SEC Release IA-1092, which of the following would be required to register with the SEC as investment advisers? I. A Certified Financial Planner who only provides general financial planning for a fee; but who does not take commissions on recommended transactions II. An attorney who manages the business affairs of athletes for a fee III. An accountant who manages the business affairs of entertainers for a fee IV. An economist who gives advice to pension plans for a fee on the outlook for the securities markets A. II and III only B. I and IV only C. II, III, IV D. I, II, III, IV

D. Investment adviser Release IA-1092 specifically includes advisers to entertainers and athletes, and advisers to pension plans, as investment advisers that must register with the SEC. In addition, the SEC in this release, states that a financial planner that provides general financial planning for a fee comes under the definition and must register with the SEC. It makes no difference whether or not the financial planner takes commissions on recommended trades - if this person gives general "non-specific" advice for a fee, he or she is still considered to be an "investment adviser" that must register.

An investment adviser representative wants to share in the gain and loss of a customer account. Under NASAA rules, this is: A. permitted if the IAR opens a joint account with the customer; contributes capital; and shares in proportion to the capital contributed B. permitted only if the IAR charges a lower advisory fee to the client C. permitted only if the Investment Adviser does not charge an advisory fee D. prohibited

D. Investment advisers and their representatives are held to a fiduciary standard. If they are making investments personally, they are already investing alongside their clients. Because of this, IAs and IARs cannot share in gain and loss of a customer account. If they are making personal investments, they must be the same as those made for clients, and all will experience the same gain or loss anyway! Note that this completely differs than the rule for broker-dealers and their agents, who are not held to a fiduciary standard.

Under the Uniform Securities Act, an investment adviser may share in the profits of a client's account: A. if the agreement provides for this in writing B. if the Administrator approves C. if the adviser agrees to share equally in any losses in the account D. under no circumstances

D. Investment advisers are prohibited from sharing in the gains of a client's account. Advisory fees are based on a percentage of assets under management.

A 61-year old client wishes to place money with an RIA to plan for retirement. He is still working and expects to retire at age 65. The investment time horizon to be used for the account should be: A. 4 years B. 9½ years C. estimated life expectancy D. estimated life expectancy minus current age

D. Since this person is setting up an investment account to provide for income in retirement, the money should last for the person's expected life. Assume that this person expects to live to age 86. Because he is currently 61, the investment time horizon to be used in the account should be 25 years.

The Administrator CANNOT require which of the following regarding federal covered securities offered in a State? A. Filing of documents relating to the issue in the State B. Notice filing for the issue in the State C. Payment of a filing fee in the State D. Registration of the issue in the State

D. The Administrator cannot require registration of federal covered securities in the State (unless the issuer fails to comply with State requirements for these issues). The State can require a notice filing; can require that the documents filed with the SEC for federal registration (or federal exemption) of the issue be filed in the State; and can require that a filing fee be paid to the State.

The Sharpe ratio measures the: A. level of investment return relative to the dollar amount invested B. level of portfolio volatility relative to a benchmark portfolio C. risk adjusted rate of return relative to the risk free rate of return D. risk adjusted rate of return relative to portfolio volatility

D. The Sharpe ratio measures the incremental rate of return over the risk free rate achieved in a portfolio relative to the standard deviation (volatility) of the portfolio. If the ratio is positive, then there is a real benefit - extra investment return - for assuming the incremental risk. If the ratio is zero (or in exceptionally difficult economic times, such as a major recession or depression, it can even become negative), there is no benefit to assuming additional risk in the portfolio beyond what a risk free investment such as Treasury Bills will give.

ADAP Advisors is a State-registered adviser with 7 IARs. One of the IARs, Mark, leaves the employ of ADAP to join another advisory firm. His accounts are assigned by ADAP to the remaining 6 IARs at ADAP. By taking this action, ADAP: A. is required to notify each of Mark's customers of the change of IAR and get the customer's approval B. is required to send a negative consent letter to each of Mark's clients and if no response is received, the assignment is permitted C. has violated the Investment Advisers Act of 1940 because advisory contracts cannot be assigned D. is not required to take any further action

D. The transfer of an investment adviser account to another investment adviser must be approved by the customer. However, this situation is different. The advisory client's account is being transferred to another IAR at the same firm. This is not an assignment of the account to another adviser. The customer's contract is with the advisory firm; not the IAR. The firm can reassign customer accounts to any IAR at the same firm without notifying the customer.

An agent is employed by First Patriot Bank and Trust Company of Connecticut as a banking representative. The agent is registered in the State with a general securities license through First Patriot Securities, a separate operating subsidiary of First Patriot Holdings - the parent company of the bank. A retired couple that is making their monthly visit to the bank to deposit their social security checks asks the agent about the appropriateness of investing in either mutual funds or certificates of deposit. Which statement is TRUE regarding the actions that the agent may take when giving a response to these customers? A. In order to respond to these customers about either the suitability of investing in mutual funds or certificates of deposit, the agent must be registered in the State as an adviser representative B. The agent can give advice to the couple about investing in mutual funds since he or she has a general securities registration, but cannot give advice about investing in certificates of deposit C. The agent can give advice to the couple about investing in certificates of deposit, but cannot give advice about investing in mutual funds without being registered as an adviser representative in the State D. The agent may give advice to the couple about the suitability of investing in either mutual funds or certificates of deposit

D. This agent is registered with a broker-dealer in that State. The agent can recommend securities such as mutual funds in his or her capacity as an agent of the broker-dealer. There is no separate registration required in the State as an investment adviser representative to do so. Regarding the recommendation of certificates of deposit, these are a bank product. Banks are excluded from the definition of an investment adviser under Uniform State Law (they are also excluded from the definition of a broker-dealer). There is no registration at the State level required to recommend banking products.

Which statements are TRUE regarding the taxation of capital gains? I. A capital gain is first considered to be long term if a position is liquidated at a profit after being held for 1 year or less II. A capital gain is first considered to be long term if a position is liquidated at a profit after being held for over 1 year III. For investors in the maximum tax bracket, any long term capital gains will be taxed at the same tax rate as that bracket IV. For investors in the maximum tax bracket, any long term capital gains will be taxed at a lower rate than that bracket A. I and III B. I and IV C. II and III D. II and IV

D. Under Internal Revenue rules, a capital gain (or loss) is considered to be short term if a position is liquidated after being held for 1 year or less. Short term capital gains are taxed at ordinary income rates with a maximum rate of 37% (the maximum individual tax rate). If the position is held for over 1 year (1 year and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at a maximum rate of 15% (this increases to 20% for individuals earning in the highest tax bracket).