Series 66: Mock Exam 1

In addition to the normal required filings, an IA who maintains custody of client funds and/or securities will be required to complete A) Form ADV Appendix 1 B) Form ADV-W C) Form ADV Part 1 D) Form ADV-E

D) Form ADV-E Form ADV-E (E for Examination) is completed by every IA who maintains custody of client assets. Then, the form is used by the independent accountant who performs the surprise annual examination of the adviser's records. The accountant is the one who submits the ADV-E to the SEC (or the state, if appropriate)

Which of the following retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements? A) Defined benefit pension plan B) Profit-sharing plan C) Keogh plan D) Payroll deduction plan

D) Payroll deduction plan A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards. U24LO3

Which of the following would best describe working capital? A) The amount of money available to the corporation that is currently being held in cash or cash equivalents B) The value per share available to shareholders in the event of bankruptcy C) The corporation's net worth D) The amount of money a corporation has available to work with if it liquidates its current assets and pays off all of its current liabilities

D) The amount of money a corporation has available to work with if it liquidates its current assets and pays off all of its current liabilities

An investment adviser representative of a federal covered investment adviser registers with A) the SEC. B) the FINRA. C) the NASAA. D) the Administrator.

D) the Administrator. Registration of IARs is done solely on the state level. IARs register with the Administrator of each state in which they are required to be registered. U2LO3

Terry Bolton employs his 2 sons in the family gardening business. Josh is 12 and was paid $2,000 for the year and Drake is 14 and was paid $3,000 for the year. Which of the following are correct statements regarding the taxation of the income? I. Josh's income is taxed at his tax rate II. Drake's income is taxed at his tax rate III. Josh's income is taxed at trust tax rates IV. Drake's income is taxed at trust tax rates

I and II As the money paid is earned income, it is not subject to the kiddie tax rules, regardless of age (U24LO7)

Which of the following statements are true regarding the jurisdiction of the SEC under the Securities Exchange Act of 1934? I. The SEC has jurisdiction over exchanges and SROs II. The SEC has jurisdiction over BDs, IAs, and associated persons that are required to be registered under federal law III. The SEC has jurisdiction over banks and savings and loan associations regarding their securities activities

I and II The SEC was created by the Securities Exchange Act of 1934 and has the responsibility of administering all federal securities laws. The SEC has jurisdiction over exchanges, SROs, and all persons required to be registered under federal law. The SEC does not enforce state securities statutes, nor does it have jurisdiction over banks or savings and loans regarding their securities activities. Banking authorities, such as the FRB, the FDIC, and others, regulate banks and S&Ls

An unintentional omission of material facts when offering or selling a security may result in I. civil liabilities II. criminal liabilities III. criminal penalties

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

An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks? I. Loss of principal II. Price volatility of preferred stock is closely related to interest rates III. Preferred stock cannot be traded as readily as bonds IV. If the stock is callable, the client's income can be suddenly lowered

I, II, and IV Because bonds have seniority over any equity security, there is a greater risk of loss of principal with preferred stock than with bonds. The price volatility of preferred stocks, like bonds, is impacted by interest rate changes. Unlike bonds, however, preferred stock does not have a maturity date. This means that preferred shares may never return to their par value, as bonds do at maturity date. Because the preferred stock may have a callable feature, the company can redeem its shares anytime after the call protection period (if any) is over. This usually happens when interest rates have declined, so the client whose stock was called will not be able to reinvest the proceeds at the same rate and could, therefore, suffer an unexpected drop in income. Preferred shares, particularly those listed on the exchanges, are generally easier to trade than corporate bonds (and certainly no worse). U12LO2

Which of the following statements are TRUE regarding the registration of IAs? I. If they are required to be registered with the state, they must also be registered with the SEC II. If they are registered with the SEC, state registration is not required III. Whether a person is registered with the state or the SEC depends on the type and scope of the person's advisory business

II and III Registration with the state only or with the SEC only depends on the type and scope of the person's advisory business

An investment adviser with $20 million under management exercises investment discretion over client portfolios. If the firm's accounting manager were to discover that the firm's net worth was only $8,500, the USA would require the firm to I. cancel all discretionary powers II. immediately raise an additional $1,500 III. send notice to the Administrator before the close of business on the day following discovery IV. send a financial report to the Administrator before the close of business on the day following the sending of notice

III and IV State-registered investment advisers maintaining discretion over client accounts must maintain a minimum net worth of $10,000. Any advisory firm whose net worth falls below required minimums is required to send notice to the Administrator no later than the close of business on the day following discovery. This notice must be followed up no later than the next business day with a complete financial report to the Administrator. U1LO5

William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate? A) $175,000 B) $750,000 C) $0; it is below the $11.4 million exemption equivalent D) $625,000

A) $175,000 The question is asking for the net estate, not the amount of estate tax due. The market value of all assets that William has an incident of ownership in will be included in the gross estate. All assets left to the spouse and the debts/expenses are allowable reductions to arrive at the net, or taxable estate. In this case, the $1.1 million gross estate is reduced by the $850,000 left to his wife and then by the $75,000 in debt and expenses. That leaves a net estate of $175,000. That is well below the estate tax exemption of $11.4 million in assets for 2019. U21LO5

Under the current gift tax marital deduction, how much can an individual give a spouse who is a U.S. citizen without incurring a gift tax? A) An unlimited amount B) No more than $30,000 per year C) No more than $152,000 per year D) No more than $15,000 per year

A) An unlimited amount The gift tax marital deduction permits an individual to give a spouse an unlimited amount of property without incurring a gift tax. However, if the spouse is not a U.S. citizen, the maximum marital gift is $155,000 (2019). U21LO5

The underwriter, issuer, BD, IA, and agent agree to defraud customers. Which of the following is subject to civil and criminal penalties? I. the underwriter II. the issuer III. the BD IV. the IA A) I, II, III, and IV B) II and IV C) I, II, and III D) I, III, and IV

A) I, II, III, and IV Any person who violates the USA may be subject to civil and criminal penalties. In this situation, all parties have agreed to fraud violations of the act; therefore, all involved may have both criminal and civil penalties imposed upon them. (U5LO4)

KAPCO Securities is a broker-dealer registered with the SEC doing business throughout the Midwest. KAPCO must meet the net capital requirements of A) the SEC, even if one or more of the states in which they are registered has a higher net capital standard B) the state in which its principal office is located C) the state with highest net capital requirements of the states in which it does business D) each state in which they do business

A) the SEC, even if one or more of the states in which they are registered has a higher net capital standard SEC rules preempt those of the states. As long as the broker-dealer complies with the SEC's net capital rule, all state requirements are satisfied. It is state-registered investment advisers who must meet the net worth (or capital) requirements of the state in which their principal office is located. U3LO5

Which one, if any, of these transactions will be treated as a prohibited transaction under the provisions of the ERISA legislation? A) The furnishing of office space to a plan trustee for reasonable compensation and fair rental value B) An investment adviser using the interest from plan assets to cover the adviser's office expenses C) None of these transactions constitute a prohibited transaction under the provisions of the legislation D) A loan between a 401(k) plan and plan participant

B) An investment adviser using the interest from plan assets to cover the adviser's office expenses An investment adviser, as a fiduciary and disqualified person under the plan, is prohibited from using plan assets in payment of personal obligations (such as outstanding office expenses). Loans from a 401(k) plan to a participant are not prohibited transactions. The plan trustee may rent space from the plan (one of the plan's assets is an office building). U24LO5

A bond analyst who determines the value of a debt security by adding the present value of the future coupons to the present value of the maturity value is using which of the following valuation methods? A) Future value B) Discounted cash flow C) Dividend discount D) Present value

B) Discounted cash flow U13LO12

Which of the following does not benefit both the employee and the employer? A) SERP B) Traditional IRA C) SEP-IRA D) Defined benefit plan

B) Traditional IRA There is no employee/employer relationship in a traditional (or Roth) IRA. A SEP-IRA is different in that the employer makes the contribution, gets the tax deduction, and the employee's account is enriched by that contribution. The same is true for the defined benefit plan and the SERP. A supplemental executive retirement plan is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees.

Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Sharon has a client in State X, registration as an IAR would be required in State X. B) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. C) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X. D) because Sharon's client is a bank, she does not have to register as an IAR in State X.

B) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there. The fact that the client is a bank is of no relevance nor is the location of her employer's principal office. U2LO2

The type of analysis to value securities by examining general economic trends and the growth potential and productivity of individual companies is A) technical analysis B) fundamental analysis C) credit analysis D) holding period analysis

B) fundamental analysis There are two main approaches to valuing securities. Fundamental analysis takes the approach described in the question. The other approach, technical analysis, relies on charts of past performance to forecast future price movements (U12LO6)

The final responsibility for ensuring that IARs are adequately supervised is that of A) each IAR's immediate supervisor B) the CCO C) the Administrator D) the managing principal

B) the CCO It is the CCO who has the ultimate responsibility for ensuring that the firm has, and properly implements, adequate supervisory procedures. The immediate supervisor has the "first-line" responsibility, but the "buck stops" with the CCO.

One of the features of an index annuity is the ability for the principal value to increase based on the performance of the specified index. Which of the following is NOT used as a method to compute the amount of interest to be credited to the account? A) Participation rate B) Annual reset C) High-water mark D) Point to point

A) Participation rate Although the participation rate is a component of the computation, it is not a method of computing the interest credit. In the annual reset index method, interest, if any, is determined each year by comparing the index value at the end of the contract year with the index value at the start of the contract year. Interest is added to the annuity each year during the term. Using the high-water mark, the index-linked interest, if any, is decided by looking at the index value at various points during the term, usually the annual anniversaries of the date the annuity was purchased. The interest is based on the difference between the highest index value and the index value at the start of the term. Interest is added to the annuity at the end of the term. And finally, with the point-to-point method, the index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to the annuity at the end of the term. In each of these, the insurance company will specify the participation rate (what percentage of the increase will be credited) and a cap rate (the maximum amount to be credited). U15LO3

Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond's internal rate of return is A) 8%. B) 6%. C) 0%. D) 4%.

B) 6% The internal rate of return of a bond is the interest rate that makes the NPV of the investment equal to zero. When a bond is selling at its present value, the NPV is zero. A bond's present value should be equal to a market price giving a yield to maturity equal to the current market interest rates. Therefore, when current market interest rates are 6%, a bond with an 8% coupon should be selling at a price producing a YTM, or IRR of approximately 6%. U13LO10

Searching Out New Growth (SONG) is a venture capital fund. As such, all of the following statements are true EXCEPT A) SONG only issues securities which are, except in extraordinary circumstances, non-redeemable B) SONG must have less than $150 million in assets in the fund C) SONG is not registered under the Investment Company Act of 1940 D) SONG's investment adviser is exempt from registration

B) SONG must have less than $150 million in assets in the fund Although venture capital funds are included in the general definition of private funds, unlike the private equity fund, there is no ceiling on the size of the fund before the adviser loses the exemption. Advisers to VC funds are exempt from registration. The funds themselves do not register with the SEC under the Investment Company Act of 1940 (and don't register with the states as well). These investments do not offer ready liquidity. U1LO5

Under the USA, all of the following are excluded from the definition of an IA EXCEPT: A) banks B) an individual providing advice on municipal bonds C) a federal covered adviser D) BDs and their agents

B) an individual providing advice on municipal bonds Providing advice on municipal bonds (even though they are exempt securities) does not entitle one to an IA exclusion (U1LO3)

Under the USA, an investment adviser's current clients must be delivered a brochure A) within 48 hours of renewal B) annually whether or not the adviser has custody or discretion C) quarterly if the adviser has both discretion and custody D) annually​, but only​ if the adviser has neither custody nor discretion

B) annually whether or not the adviser has custody or discretion Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients [except those who are exempt from the brochure delivery requirements (impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940)] within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing. U6LO4

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their BD. The template has BDs disclose all of the following fees EXCEPT: A) the cost of overnight delivery services B) markups and markdowns on trades done as a principal C) safekeeping of customer funds and securities D) interest on debit balances in margin accounts

B) markups and markdowns on trades done as principal There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1. commissions 2. markups and markdowns 3. advisory fees for those firms that are also registered as investment advisers

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

B) the interest earned after inflation The real interest rate is the interest received minus the inflation rate (U23LO2)

A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences EXCEPT A) regulatory oversight B) suitability requirements C) fees and expenses D) liquidity

C) fees and expenses The internal operating costs of a REIT, such as management fees and administrative expenses, have nothing to do with where units of the REIT are traded. One of the major risks inherent in an unlisted REIT is lack of liquidity. As a result, there is a greater stringency when it comes to suitability, and this leads to stronger oversight by the regulators. U14LO10

One of your advisory clients indicates that he would like to sell forward contracts in soybeans. It would be wise to warn the client that he will be facing the following risks: I. Liquidity II. Creditworthiness of the buyer III. Lack of assurance that the delivery price will remain stable IV. The location for the delivery may change

I and II Because there is no standardization for forward contracts, they are considered to be illiquid. Because there is no entity backing up the contract (as the OCC does with listed options), a seller must always be concerned about the ability of the buyer to pay. Although the market price probably will change, the delivery price is always agreed upon at the time of the contract, as is the method, location, and time of delivery. U16LO5

Under the Uniform Securities Act, an agent registered in one state may transact business in another state in which he is not registered with which of the following? I. An existing client visiting the state for a 2-week period II. An existing client who moved to the state 6 months ago III. An existing client who moved to the state less than 30 days prior IV. An acquaintance from another state who requests that the agent execute transactions on his behalf

I and III An agent may conduct business in a state in which he is not registered if an existing client is visiting in that state or if the client has moved to the state within the past 30 days. U3LO4

Which two of the following statements are CORRECT? I. Time-weighted returns are generally of more use than dollar-weighted returns to evaluate portfolio manager performance. II. Time-weighted returns are generally of more use than dollar-weighted returns to evaluate individual investor performance. III. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate portfolio manager performance. IV. Dollar-weighted returns are generally of more use than time-weighted returns to evaluate individual investor performance.

I and IV Because dollar-weighted returns reflect the individual investor's cash deposits and withdrawals from the investment account, it is the preferred measure of return for them. On the other hand, time-weighted returns are generally a more important tool to show portfolio manager performance. U23LO2

Which of the following are regulated under the Securities Exchange Act of 1934? I. BDs II. IAs II. Pension plans IV. Transfer agents

I and IV The Securities Exchange Act of 1934 regulates BDs and transfer agents. IAs are regulated under the Investment Advisers Act of 1940 (and, to a certain extent, the Investment Company Act of 1940), whereas pension plans in the private sector are regulated under ERISA.

The Uniform Securities Act authorizes the state Administrator to require I. either oral or written qualification examinations of investment adviser representatives and officers of investment adviser partnerships or corporations II. officers of investment advisers to pass a qualification examination III. an applicant for initial registration to publish an announcement of the application in one or more specified newspapers published in the state IV. investment adviser representatives to pass a qualification examination

I, II, III, IV The state Administrator may require qualification examinations for officers of investment advisers, as well as its representatives, and may require them to publish an announcement in one or more newspapers published in the state. The Administrator may also require either an oral or written examination. U2LO3

Under the Investment Advisers Act of 1940, advertising done by investment advisers prohibits I. the use of testimonials II. reference only to specific past recommendations III. untrue statements

I, II, and III SEC Rule 206(4), issued under the Investment Advisers Act, prohibits untrue statements of material fact; testimonials; reference only to specific past recommendations; references to charts, formulas, or devices used to forecast securities prices without setting forth the difficulties or limitations in their use; offerings of free services without the intent or ability to perform; and guarantees of future performance. U6LO5

In order to achieve its goals, an inverse ETF uses A) derivatives and debt B) arbitrage C) short selling D) preemptive rights

A) derivatives and debt An inverse ETF will almost always use derivatives, such as options and, in the case of a leveraged ETF, will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to take advantage of temporary imbalances between the ETF's NAV and market price. (U17LO3)

Kellie is a senior equity analyst for a large brokerage firm. She primarily uses fundamental analysis techniques to assist her in picking stocks for her firm's clients. Today, she is reviewing the XYZ Corporation. The company is a manufacturer of computer keyboards and is currently going through an expansion phase. Which of the following techniques would Kellie be least likely to use to determine whether to buy, sell, or hold this company's stock? A) She may calculate the intrinsic value of the stock using one or more of the stock valuation models. B) She may review the company's stock 200-day moving average. C) She may examine the overall state of the economy, the computer industry, and then XYZ Corporation. D) She may consider trends towards tablets and smart phones.

B) She may review the company's stock 200-day moving average. Reviewing the company's stock 200-day moving average is a technique used by technical analysts (chartists). All of the other techniques are used by fundamental analysts. The process of examining the economy, the specific industry, and the specific company is a reflection of top-down fundamental analysis. U12LO6

A 61-year old wanting to take a lump-sum from his Keogh will A) incur a 10% penalty tax B) be taxed at ordinary income rates C) incur a 50% penalty tax D) be taxed at long-term capital gains rates

B) be taxed at ordinary income rates The distribution described here would be taxed as ordinary income

A major stockholder of XYZ Corporation makes frequent purchases and sales of this stock on the open market to give the impression that it is actively traded. This unethical practice is best described as A) front running B) wash trades C) positioning D) pegging

B) wash trades A wash trade occurs when there is no real change in beneficial ownership. Purchases and sales are offset, but the volume of trading creates the illusion of substantial interest in the stock. U7LO5

Which of the following would not be unlawful for an investment adviser under the Uniform Securities Act? A) Signing an investment advisory contract that did not outline the compensation arrangements B) An owner of a majority of the stock in the IA pledging that stock as collateral to a bank for a personal loan C) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees D) Failing to notify the Administrator that the adviser has custody of a client's securities or funds, even though the Administrator has no rule that prohibits such custody

C) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees Investment advisory contracts must outline compensation provisions and indicate the amount to be refunded, if any, if the contract is terminated. Nothing in the USA requires that there be a refund, only that the terms must be disclosed. The Uniform Securities Act also requires investment advisers to notify the Administrator if they have or will have custody of customers' funds. The USA considers that a pledge of a majority interest in an IA is considered an assignment of the IA's contracts. U6LO4

Janice is investing in stocks that are temporarily neglected by the market and often have high-dividend yields. Which of the following investment styles might she be following? A) Contrarian B) Momentum C) Value D) Growth

C) Value Value is the oldest style and is based on the premise that deep and rigorous analysis can identify businesses whose value is greater than the price placed on them by the market. By buying and holding such shares for long periods, a higher return than the market average can be achieved. Managers of equity income or income and growth funds often adopt this style, since out-of-fashion stocks often have high-dividend yields. Why isn't this contrarian? A key is the high-dividend yield. Contrarians invest opposite the general market consensus without regard to dividends. U20LO5

Among the reasons why deferred variable annuities might not be a suitable investment for seniors are all of the following EXCEPT A) potential capital fluctuation B) surrender charges C) improper subaccount selection D) potential inflation protection

D) potential inflation protection Variable annuities do offer potential inflation protection due to their participation in the equity market. The tradeoff is potential capital fluctuation, particularly if the portfolio selected is too aggressive. In addition, they typically carry high surrender charges. U15LO1

Which of the following investment advisers would be required to register with the state? A) An IA whose annual updating amendment showed a drop in AUM from $109 million to $87 million B) An IA who expects to have $132 million in AUM within 120 days C) An IA whose annual updating amendment showed a drop in AUM from $141 million to $99 million D) An IA who is under contract to manage a registered investment company

A) An IA whose annual updating amendment showed a drop in AUM from $109 million to $87 million No IA can remain registered with the SEC with assets under management (AUM) of less than $90 million (except those who manage registered investment companies). It takes $100 million in AUM to be able to initially register with the SEC; thereafter, the IA must maintain at least $90 million to remain SEC-registered. U1LO5

Which of the following statements best represents a bond's present value? A) present value is the sum of all the discounted future payments B) present value represents the IRR of the bond C) present value is the sum of all the discounted future interest payments D) present value is the discounted future repayment of principal

A) present value is the sum of all the discounted future payments The correct answer is the standard textbook statement. There are two future cash flows from a bond. First is the periodic interest payments and second is the repayment of principal at maturity. The PV of the bond is the sum of the discounted value of both.

Assume that a corporation issues a 5% Aaa/AAA-rated debenture at par. Two years later, similarly rated debt issues are being offered in the primary market at 5.5%. Which of the following statements regarding the outstanding 5% debenture are TRUE? I. The current yield on the debenture will be higher than 5%. II. The current yield on the debenture will be lower than 5%. III. The dollar price per bond will be higher than par. IV. The dollar price per bond will be lower than par. A) II and III B) I and IV C) II and IV D) I and III

B) I and IV Because interest rates have risen after the issue of the 5% debenture, the bond's price will be discounted to result in a higher current yield (computed as annual income divided by current market price). Accordingly, the discounting of the issue will make the 5% debenture competitive with new issues offered with a 5.5% coupon. U13LO10

Of the following bonds, which has the greatest price volatility? A) Zero-coupon bond with 5 years to maturity B) Zero-coupon bond with 15 years to maturity C) AA corporate bond with 7 years to maturity D) Corporate bond fund

B) Zero-coupon bond with 15 years to maturity The longer the duration of a bond, the greater the volatility will be of its market price when interest rates change. Because zero-coupon bonds do not make interest payments but are priced at a deep discount to par value, they are more volatile than coupon-bearing bonds. U13LO11

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

B) an adviser waives a client's fee if the client experiences a loss for the year A fee in which payment is contingent on investment results is prohibited unless the client meets certain financial standards; advisers are permitted to charge by the hour.

Charlie Mindel is the portfolio manager for the Steady Yield Bond Fund. If Charlie was of the opinion that interest rates were going to fall, he would A) decrease the average duration of the portfolio. B) increase the average duration of the portfolio C) keep the average duration the same. D) move more of the portfolio into cash.

B) increase the average duration of the portfolio As interest rates go down, prices of bonds rise. Those with the longest duration will have the greatest price increase. To benefit from this move, managers of bond portfolios will lengthen the average duration of the portfolio. The reverse action would be taken if Charlie thought that interest rates were going to rise. Of course, if interest rates move in the opposite direction of that the manager expects, the fund might start looking for a new manager. U13LO11

Among the reasons why a corporation might choose to utilize a deferred compensation plan for retirement planning would be A) compliance with ERISA B) the plans are nondiscriminatory C) employees who leave the company prior to retirement would not receive benefits D) current tax savings on money contributed to fund the plan

C) employees who leave the company prior to retirement would not receive benefits Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited. These plans are discriminatory and there is no current tax saving, hence the term "deferred." As nonqualified plans, they do not have to comply with ERISA. U24LO3

If an agent has secured a signed statement from a customer that waives the customer's right to sue for a transaction in violation of the USA, the agreement is A) legal B) legal but only in a criminal case C) null and void D) legal but only in a civil case

C) null and void The USA explicitly states that no provision of the act may be waived, whether the client consents to the waiver or not (U6LO4)

Disregarding any potential redemption or CDSC fees, an investor tendering shares of an open-end investment company for redemption will receive A) the next computed POP B) the last computed NAV C) the next computed NAV D) the next computed NAV plus a portion of the sales load

C) the next computed NAV When an investor redeems (or purchases) open-end investment company shares, the investor receives the next computed NAV of those shares. This is known as the forward pricing rule (U14LO3)

The risk to bondholders that bonds may lose value during periods of increasing inflation is known as A) credit risk B) reinvestment risk C) marketability risk D) interest rate risk

D) interest rate risk Interest rate risk is the risk that as interest rates rise, bond prices fall. Periods of inflation are accompanied by rising interest rates. Another risk in this scenario, but not an answer choice, is purchasing power risk; each semiannual interest payment has less purchasing power due to inflation, and, of course, the purchasing power of the principal at maturity will be far less as well. U11LO1

A famous tennis player offers to record a testimonial for an IA for use in a television commercial. Under the USA, the IA may A) use the testimonial with the approval of the Administrator B) use the testimonial and pay the athlete C) use the testimonial, provided the athlete receives no compensation D) not use the testimonial

D) not use the testimonial Testimonials promoting IA's services are prohibited under both state and federal law, regardless of whether a spokesperson receives compensation. This is in contrast to FINRA rules, which do permit testimonials as part of advertising, as long as proper disclaimers are made (U6LO5)

An investment adviser representative has a client who prefers the safety of securities guaranteed by the U.S. Government, yet is concerned about volatility due to uncertainties in the future direction of interest rates. Which of the following recommendations would best address these concerns? A) Treasury STRIPS, maturing in 2036 B) 8% Treasury bond maturing in 2036 C) 5% Treasury bond, maturing in 2037 D) 6% Treasury bond maturing in 2035

B) 8% Treasury bond maturing in 2036 Generally speaking, those bonds with the highest coupons have the shortest duration, therefore, are the least subject to interest rate risk. STRIPS, which are zero-coupon bonds, are the most volatile because they have the longest duration. The actual calculation of the duration of each of the other bonds given is beyond the scope of this exam. U13LO11

A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock would benefit by converting if the price of the common stock was A) above $18.20 per share B) above $22 per share C) above $20 per share D) below $22 per share

B) above $22 per share With a conversion price of $20 and a par value of $60, this preferred stock is convertible into 3 shares of the company's common stock. We divide the current price of the preferred ($66) by the 3 shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace. U13LO9

Under the USA, the Administrator may do all of the following EXCEPT A) conduct hearings in public, unless at the Administrator's discretion and with agreement of all parties, the Administrator decides otherwise B) mandate the method used to maintain and file records C) take jurisdiction over any person who sells or offers to sell either when the offer is made in the state or when an offer to buy is made and accepted in the state D) prescribe form and content of financial statements required under the act

B) mandate the method used to maintain and file records The Uniform Securities Act does not grant the Administrator the power to make any specific bookkeeping method mandatory. The only requirement is that the books and records must accurately reflect the nature of the firm's business. U3LO5

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

B) strategic management A strategic management style, sometimes referred to as passive, is less apt to have a high degree of portfolio turnover than active or tactical management. Contrarian style generally involves taking positions that are currently out of favor in the market place, but would incur somewhat frequent activity. U20LO3

Which of the following individuals employed by an investment adviser would be required to be registered as an IAR? A) The night watchman B) An intern who receives no compensation whatsoever C) A chief compliance officer (CCO) who has no sales duties D) The vice president of human resources

C) A chief compliance officer (CCO) who has no sales duties Any individual performing the functions of an investment adviser representative must be so registered. Among those duties is supervisory responsibility, and the CCO has the job of ensuring that the firm and all of its employees follow the rules. Although executive officers are generally automatically registered as IARs, that is only the case when the job function is one involving activities relevant to IARs (and human resources is not one of them). U2LO3

A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use? A) Charitable lead trust B) Charitable remainder trust C) Complex trust D) Simple trust

C) Complex trust Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are. U18LO4

An investment adviser is servicing a group of physicians and will offer a discounted fee to the doctors in that particular partnership. In what way would this be considered ethical? A) This would be permitted as long as the adviser is not a patient of any of the physicians in that group. B) This would be permitted as long as each physician has a unique contract. C) This would be permitted as long as a disclosure is made in the IA's brochure that fees are negotiable. D) This would be permitted if all the physicians had a minimum net worth of at least $1.5 million.

C) This would be permitted as long as a disclosure is made in the IA's brochure that fees are negotiable. Item #5 on the Form ADV Part 2A asks about the adviser's fee schedule. The adviser can indicate what types of fees are charged and whether or not they are negotiable. In a manner similar to a mutual fund breakpoint, when a group, not formed for the purpose of investing, contracts with an investment adviser, the adviser may choose to consider it one very large client rather than several smaller ones. This will generally result in a reduction in the percentage charged. U6LO1

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt-to-equity ratio is A) 40% B) 64.3% C) 22.2% D) 28.6%

D) 28.6% The debt-to-equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%. As we point out in the LEM, this is really a misnomer—it should be called the debt-to-total-capital ratio, but probably will not be shown that way on the exam. U10LO7

You have determined that the net present value (NPV) of your client's investment is positive. If your client's required rate of return is 8%, which of the following is most likely the investment's internal rate of return (IRR)? A) 8% B) 4% C) 0% D) 9%

D) 9% If the NPV is a positive number, the investment's IRR must be greater than the investor's required rate of return. In this question, the required rate of return is 8% so the IRR (actual return) must be higher than that. There is only one choice higher than 8%. Remember, when the NPV is positive, it is a good investment. U10LO1

For purposes of safeguarding customer information, which of the following would be considered a covered account? A) A margin account in the name of the Interglobal Hedge Fund B) An account in the name of the State of X employee pension fund C) An account in the name of the Wells Morgan Bank D) A margin account in the name of Mary Beth Simmons

D) A margin account in the name of Mary Beth Simmons The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies. U7LO7

A benefit of waiting until the age of 70 to claim Social Security benefits is that A) Medicare benefits are increased. B) the income tax rate is reduced once the claimant reaches 70. C) a higher percentage of the monthly benefit is exempt from income taxes. D) benefits are increased by 8% for each year from the full retirement age.

D) benefits are increased by 8% for each year from the full retirement age. If an individual delays taking Social Security until age 70, the benefit is increased by 8% for each year from the full retirement age. If full retirement age is 66, four years at 8% means the payout is 132% of the base amount. Medicare (Part A) goes into effect at 65 and income tax rates do not change at 70. U19LO5

USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of A) FINRA B) the state with the most stringent financial requirements C) the state in which the principal office of the member is located D) the SEC

D) the SEC It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states. U3LO5

Which of the following would NOT constitute custody of a client's account under the Investment Advisers Act of 1940? I. Client prepayment of $1,000 of advisory fees, 6 months in advance II. Having temporary custody of a client's securities III. Depositing client funds in bank accounts accessible by the investment adviser

I only "Custody" means possession (even temporarily) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but it does not include the acceptance by the adviser of prepaid advisory fees. U7LO2

With respect to liquidity and potential for diversification, in comparing alternative investments to exchange-traded stocks, the markets for alternative investments are generally: A) more liquid and provide less opportunity for diversification. B) less liquid and provide more opportunity for diversification. C) more liquid and provide more opportunity for diversification. D) less liquid and provide less opportunity for diversification.

B) less liquid and provide more opportunity for diversification Alternative investments can provide exposure to unique risks and trading strategies and thus provide good diversification to a stock and bond portfolio. The markets for alternative investments are generally less liquid than most listed stocks.

If a broker-dealer offers or recommends products for which the firm receives greater fees or compensation than other products, it would be considered A) churning B) potential conflict of interest C) arbitrage D) misrepresenting the registration status of a security

B) potential conflict of interest There are certain products that carry higher compensation rewards to the broker-dealer than do others of a similar nature. This presents a potential conflict of interest, should the firm recommend these over others. There is nothing illegal about doing so, as long as disclosure of the conflict is made to the client. U6LO1

An individual has been employed by a BD to make cold calls to solicit prospects for the firm's new wrap fee program. Under the USA, it is true to state that this individual A) does not need supervision because he is only making cold calls B) would be defined as an investment adviser representative C) is not defined as an investment adviser representative because he is only making cold calls D) would be permitted to use the term investment counsel

B) would be defined as an investment adviser representative As we know, when a BD offers wrap fee programs, the exclusion from the definition of an investment adviser is lost. Any individual soliciting for that program would be considered an IAR and would need adequate supervision. Cold calling is about as far as you can get from the role of investment counsel (U2LO1)

As a result of an SEC hearing, an investment adviser's penalty is $5,000 and a 50-day suspension. If the IA wishes to appeal this verdict, a request for review must be filed with A) the U.S. Court of Appeals within 45 days of the order B) the Administrator within 60 days of the order C) the U.S. Court of Appeals within 60 days of the order D) the SEC within 45 days of the order

C) the U.S. Court of Appeals within 60 days of the order Under both federal and state laws, appeals must be filed within 60 days of the order. In the case of an SEC hearing, the appeal is filed with the U.S. Court of Appeals for the district in which the original hearing was held. U5LO4

In a scheduled premium variable life insurance policy, all of the following are guaranteed EXCEPT A) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months B) a minimum death benefit C) the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years D) a minimum cash value

D) a minimum cash value In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy into a comparable form of permanent insurance and the 75% cash value loan minimum applies after the 3rd year of coverage. (U15LO7)

An investment adviser registered with the SEC could use the term investment counsel if I. its principal business consists of rendering investment advice II. a substantial portion of its business involves investment supervisory services III. it maintains full investment discretion

I and II These are the 2 requirements for use of the term investment counsel. Although it can be a factor, exercising discretion is not a requirement of the definition. Many investment advisers exercise discretionary power over client accounts, but do not meet the two principal requirements for use of the term, investment counsel. U1LO1

A U.S. citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports A) a tax credit on the investor's U.S. tax return B) a nonrecoverable loss on the investor's U.S. tax return C) a reduction in the investor's ordinary income D) a tax credit on the investor's Canadian tax return

A) a tax credit on the investor's U.S. tax return An investor receives a credit for taxes withheld on investments by countries with which the United States has diplomatic relations; the tax credit directly decreases the investor's American tax liability. U21LO2

An agent is using social media to try to build her business. If her Facebook page allows for followers to "like" her, that would be considered A) static content B) misleading content C) interactive content D) illegal content

C) interactive content One of the things that differentiate interactive content from static content is the ability for persons other than the originator of the content to have access. Posting a like to a Facebook page is an example of this. U6LO5

Included in the Uniform Securities Act's definition of broker-dealer would be A) individuals who are registered as agents. B) savings institutions. C) issuers of securities. D) a broker-dealer with a place of business in the state whose only clients are insurance companies.

D) a broker-dealer with a place of business in the state whose only clients are insurance companies. When the firm has a place of business in the state, regardless of its clientele, it is a broker-dealer. Exclusions from the definition include agents, issuers, and most financial institutions, such as banks and savings institutions. Also excluded are broker-dealers with no place of business in the state who only deal with institutional clients, such as banks and insurance companies. U3LO2

Which of the following are defined as securities under the Uniform Securities Act? I. Real estate investment trust certificates II. Preorganization subscription agreements III. Shares of treasury stock IV. Voting-trust certificates issued by a corporation undergoing a reorganization

I, II, III, IV All the choices listed are defined as securities under state law. We believe the best thing for you to do is remember those few things that are not securities. U4LO1

Which of the following statements is correct? A) Beta is a measure of relative systematic risk for stock or portfolio returns. B) Beta is a measure of relative unsystematic risk for stock or portfolio returns. C) A stock or portfolio's beta increases as its alpha declines. D) Portfolio managers have a goal of reaching zero alpha.

A) Beta is a measure of relative systematic risk for stock or portfolio returns. Beta is used to measure the variability between a particular stock's (or portfolio's) movement and that of the market in general. That refers to systematic rather than unsystematic risk. When it comes to alpha, the goal is a positive alpha and there is no correlation between the beta and alpha of a stock or portfolio. U10LO4

Which of the following statements regarding a state-registered investment adviser with custody of customer assets is TRUE? A) Every three months, the adviser must send an itemized account statement to each customer whose assets are held in custody. B) The Administrator must give written approval before the adviser may hold customer assets in custody. C) Customer assets may be commingled with assets of the investment adviser. D) An adviser who has discretion over customer accounts faces a higher net worth requirement than an adviser who has custody.

A) Every three months, the adviser must send an itemized account statement to each customer whose assets are held in custody. Customer assets held in custody by an investment adviser must be segregated, and the adviser must send a statement every 3 months. The Administrator does not approve custodial accounts. If there is no rule prohibiting custody, the Administrator must be notified that the adviser has custody. Advisers with custody of customer assets have a higher net worth requirement than advisers with discretionary authority, not the other way around. Commingling (mixing together) of client and firm assets is never permitted. U7LO2

Damon Raymond is an agent with ABC Investment Planning, a registered BD and IA. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity? A) When the trade that is made is unrelated to the advisory relationship B) When the client has given ABC blanket permission to engage in this type of transaction C) Never D) Only if the client terminates the advisory relationship

A) When the trade that is made is unrelated to the advisory relationship Under normal circumstances, when acting in an advisory capacity, client consent must be obtained no later than completion of the trade. However, in a case like this where the transaction is strictly based on the BD relationship rather than the advisory one, no consent is necessary (U6LO1)

A high-risk investment strategy is the short sale of stock. Each of the following is a method of offering some degree of protection EXCEPT A) buying a put on the short stock. B) buying a call on the short stock. C) entering a buy stop order for the short stock. D) selling a put on the short stock.

A) buying a put on the short stock. The risk in selling a stock short is that the price of the stock will rise rather than fall. Those who purchase put options have the same market view as those who sell short—they will profit if the price of the security declines. Buying a put would be the equivalent of "doubling down" on your bet. The best way to hedge (protect) a short stock position is to purchase a call option on the security because that gives you a guaranteed "buy-back" price regardless of how high the stock's price rises. If you sell a put on the stock and the price rises, the put will expire and the seller will have the premium to partially offset any loss. If the short seller enters a buy stop order, once the price rises (or goes through) the stop price, a market order to buy the stock will be entered and the position will be closed out preventing any further loss. U20LO12

Alpha Electronics Company wishes to raise capital by issuing some securities in its home state. They have been advised by their legal counsel that registration with the Administrator is unnecessary because the issue is exempt. Should Alpha be served with an order, the burden of proving its issue is exempt is on the A) company B) lawyers C) court D) Administrator

A) company In any case where there is a question as to the legality of a specific exemption, the burden of proof is always on the party requesting the exemption. U4LO3

A BD having no place of business in a state is not required to be registered in that state if the BD A) does no business in that state other than with institutional clients B) is licensed/registered in its state of residence C) is a member of the NYSE D) is a member of FINRA

A) does no business in that state other than with institutional clients A BD must be registered in every state where it sells or offers to sell securities, unless an exemption is available. If a BD has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required.

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of BDs and Agents contains an extensive list of prohibited practices. However, it would NOT be considered a violation A) for two individuals employed by the same BD and with the same category of license to share in commissions without telling the client B) if a properly registered agent were to share in the profits and losses in a customer's account proportionate to the amount of time the agent devoted to handling the account C) to borrow money from a client who is not in the lending business D) when a BD sells a security out of inventory to a retail customer and indicates on the confirmation that the firm acted in an agency capacity

A) for two individuals employed by the same BD and with the same category of license to share in commissions without telling the client Properly registered individuals employed by the same or affiliated BDs are permitted to split their commissions. Because there is no additional cost to the client, this action does not have to be reported. Sharing with clients may only be done with the written consent of the client and the agent's BD. It has nothing to do with the time spent on the account. A BD selling out of inventory must disclose that the firm acted in a principal capacity. No BD or agent may ever borrow money from a client who is not in the money-lending business unless that client is an affiliated person.

Among the benefits of an HSA is A) funds not used for health expenses may be invested in mutual funds and other securities. B) up to $10,000 per year may be accumulated. C) funds may be used for various medical expenses once the low deductible has been met. D) the amount that may be contributed is based on the number of dependents.

A) funds not used for health expenses may be invested in mutual funds and other securities. Unlike an FSA (flexible spending account), employee contributions to a health savings account (HSA) not used for medical expenses may be invested in a wide variety of securities. Although mutual funds are the most common, many providers offer the opportunity to invest in stocks and bonds. Remember, one of the eligibility requirements for an HSA is a high, not low, deductible. Currently, the maximum contribution is $3,450 for an individual or $6,850 if family coverage, regardless of the number of dependents covered. U24LO8

When using the dividend discount model, A) future expected dividends are discounted to compute the present value of the stock B) the discount rate is generally lower than the expected rate of return C) the degree of accuracy in forecasting the price of preferred stock is less​ than​ that ​obtained by using the dividend growth model D) best results are obtained from stocks that pay irregular dividends

A) future expected dividends are discounted to compute the present value of the stock This method of common stock valuation takes the investor's expected future dividend returns and then discounts that amount by the expected rate of return to arrive at the supposed present value. Expected (or required) rate of return is a component of both the dividend discount model and the dividend growth model, and ​only the DDM is used for preferred stocks because the dividend can never increase. When using any dividend model, the greater the regularity of dividends, the more accurate the forecast. U12LO6

An investor is considering a 10-year stripped U.S. Treasury and a 10-year U.S. Treasury note, both with a yield to maturity of 4.8%. Compared to the note, the strip has A) less reinvestment risk and more interest rate risk. B) more reinvestment risk and less interest rate risk. C) more liquidity risk and less interest rate risk. D) more interest rate risk and less liquidity risk.

A) less reinvestment risk and more interest rate risk. The strip is a zero-coupon security so it has no cash flows to reinvest and therefore no reinvestment risk. However, it has more interest rate risk (longer duration) than the Treasury note. Remember, the duration of a zero-coupon bond is its maturity date while any debt security paying periodic interest (Treasury notes pay semiannually) will always have a duration shorter than its length to maturity. U13LO11

Active Technicians is a state-registered IA. In its brochure supplement, it would include information relating to each of the following individuals EXCEPT: A) members of AT's BOD who are active in the firm's business B) those providing investment advice and having direct contact with institutional clients in the state C) those providing investment advice and having direct contact with retail clients in the state D) those exercising discretion over assets of clients in this state, even if no direct contact is involved

A) members of AT's BOD who are active in the firm's business Unless the individual has direct contact with clients (retail or institutional) or exercises discretion, a copy of the Part 2B brochure supplement for each individual is not required. This would include officers and member of the BOD. Of course, if any of these individuals had direct client contact or exercised discretion, a supplement for them would need to be prepared.

A securities analyst who recommends allocating to industries based on changes to the business cycle would most likely be said to be A) sector rotating B) a contrarian C) laddering D) a tactician

A) sector rotating Sector rotation is the practice of changing investment emphasis based on patterns to the business cycle. Yes, this could be a form of tactical management, and if the analyst is investing opposite the cycle, the analyst could be contrarian. However, on the exam, you will sometimes have to choose from several answers that could be correct by selecting the one that is most likely to be correct. U20LO5

One way in which an investment adviser acting in the capacity of an agent in a transaction with a client differs from a broker-dealer performing the same task is that the investment adviser A) shall obtain client consent before completion of the transaction B) may not charge a commission on the transaction C) shall notify the Administrator of its capacity in the proposed transaction D) shall disclose the agency capacity before the transaction

A) shall obtain client consent before completion of the transaction In order to act as an agent (or principal) in a trade with an advisory client, there are 2 requirements: 1) The client receives full written disclosure as to the capacity in which the adviser proposes to act 2) Consent of the client Both of these are required before the completion of the transaction. U6LO1

A banner on a broker-dealer's website is considered A) static content B) interactive content C) entanglement D) adoption

A) static content In most cases, a broker-dealer's website is static. That is, only the firm can make changes and those changes are infrequent. Certainly a banner ad on the website fits that description. Entanglement and adoption are terms applying to a securities professional making use of third-party information on social media. U6LO5

All of the following are exempt from the registration requirements of the USA EXCEPT A) stock issued by a Canadian company that provides actuarial services to insurance companies B) a closed-end investment company registered under the Investment Company Act of 1940, but not traded on a recognized stock exchange C) a registered open-end investment company whose portfolio consists exclusively of Georgia municipal bonds D) a Canadian Government bond

A) stock issued by a Canadian company that provides actuarial services to insurance companies Securities issued by Canadian governmental entities, such as the federal government or the provincial governments and their municipalities, are exempt from registration under the USA in the same fashion as U.S. government and municipal securities. However, Canadian corporate issuers do not enjoy an exemption unless qualifying under special conditions, such as being listed on the NYSE or Nasdaq and, therefore, are a federal covered security. Investment companies registered under the Investment Company Act of 1940, regardless of where they trade, are exempt from registration because they are federal covered securities. U4LO3

Which of the following investors aligns most closely with the strong form of the efficient market hypothesis? A) An investor using dollar cost averaging to purchase shares in growth mutual funds having the highest portfolio turnover B) An investor using a buy and hold strategy dollar cost averaging into an S&P 500 index fund C) An investor who researches corporate annual reports and industry publications to uncover buy and sell opportunities within an industry or individual security D) An investor who uses stock charts to predict price movements and capitalize on buy and sell opportunities

B) An investor using a buy and hold strategy dollar cost averaging into an S&P 500 index fund The strong form of EMH maintains that there is no information, public or private, that can assist an investor in achieving consistently superior investment returns. The strong form holds that stock prices follow a random walk and no technical analysis (price charting) or fundamental analysis (annual report or industry publication research) is of value in obtaining superior results. Dollar cost averaging is a passive strategy, which a subscriber to the strong form may use, but using a buy and hold strategy by dollar cost averaging into an index fund is more aligned with the strong form than investing in a fund with the highest portfolio turnover (U20LO10)

In an effort to benefit from the economies of scale, LAMI and SAMCO, both registered with the Administrator as IAs, have merged into a new firm with the name of SLAMCO. This would A) require the filing of a new Form ADV along with the proper registration fee B) be considered an assignment of the advisory contracts and would require consent of the clients C) be an unethical business practice D) require notification to the clients within a reasonable period of time

B) be considered an assignment of the advisory contracts and would require consent of the clients A change of management control is deemed to be considered an assignment of the advisory contracts held by LAMI and SAMCO. In order for those contracts to be continued by SLAMCO, consent of the clients is required. It is only when a change in the minority interest in an advisory firm organized as a partnership that notification within a reasonable period of time is required. Although SLAMCO would have to register with a new Form ADV, as a successor company, no registration fees would be due until renewal on December 31st (U6LO4)

One of your ultra-high net worth clients has extensive real estate holdings and is concerned about his children being forced to liquidate some of them in order to pay the estate taxes after his death. One tool that could be suggested to solve this problem would be A) placing the properties into a living trust. B) purchasing a life insurance policy using an ILIT. C) using a TOD account. D) registering the properties as JTWROS.

B) purchasing a life insurance policy using an ILIT. Estate taxes must be paid within 9 months of death. If the client doesn't want to have to liquidate his real estate holdings, then another source for the tax payment must be found. A frequently-used tool is the irrevocable life insurance trust (ILIT) where a policy is purchased on the life of the client, but owned by the trust. When properly structured, this means that the death benefit is not included in the estate and passes tax free to the beneficiaries. Those funds can then be used to pay the estate taxes and the real estate assets pass to the beneficiaries. A living trust won't work because the only way the policy's proceeds aren't considered part of the estate is when the trust is irrevocable. TOD and JTWROS avoid probate, but do not avoid estate taxes. U21LO5

Which of the following would not constitute a conflict of interest between the plan and a fiduciary? A) A fiduciary offers reduced commissions to the plan for transactions that are executed through his employing financial institution B) A fiduciary sells a real estate investment to the plan at the current market rate C) The fiduciary receives fees for acting as a trustee to the plan D) A fiduciary participates in a transaction on the plan's behalf that involves a party with interests adverse to those of the plan in order to ensure favorable terms for the plan

C) The fiduciary receives fees for acting as a trustee to the plan A fiduciary can receive compensation from the sponsor of the plan for acting as a trustee, if fees are reasonable and consistent with duties performed. A fiduciary may not sell a real estate investment to the plan at the going market rate. Such self-dealing presents a conflict of interest regardless of the terms of the transaction. A fiduciary may not participate in a transaction on the plan's behalf that involves a party with interests adverse to those of the plan in order to ensure favorable terms for the plan. The situation is self-dealing and presents a conflict of interest prohibited under ERISA. Offers of reduced commissions to the plan for transactions that are executed through his employing financial institution are prohibited and a conflict of interest.

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

C) manages $13 million in assets for 4 clients Under the Dodd-Frank Bill, investment advisers with less than $100 million in assets under management must register with the states. If the adviser manages a registered investment company, the adviser must be federal covered. If the person serves as a pension consultant with $200 million or more in AUM, the person has the option of registering with the SEC. A person whose sole advice deals with U.S. government securities is excluded from the federal definition of investment adviser and, therefore, under the NSMIA, is considered a federal covered adviser. U1LO5

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

C) the agent would be defined as an investment adviser Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would become required to register on either the state or federal level. The agent would now become an IAR of the firm and, as such, would now carry the additional fiduciary responsibility incurred in the advisory business. U2LO1

The agreement that the Administrator can receive subpoenas on behalf of a registered agent, broker-dealer, or investment adviser involved in any securities sale that violates the Uniform Securities Act is A) the right of rescission B) the agreement to actionable offenses C) the consent to service of process D) the right of retribution

C) the consent to service of process Every applicant for registration and every issuer must file an irrevocable consent to service of process appointing the Administrator as attorney to receive service of any lawful process in any civil suit, action, or proceeding. It has the same legal effect as if the person had been served personally. U1LO5

Under the Uniform Securities Act, a state-registered investment adviser whose only office was in State N would NOT have to register in State O if its only clients were A) individual accredited investors B) 6 or fewer retail clients C) trust companies D) complex trusts

C) trust companies A state-registered investor can make use of the de minimis exemption if it has no place of business in a state and its only clients are institutions, such as bank and trust companies, investment companies, and insurance companies. Don't confuse a trust with a trust company—trusts are not institutions unless it specifically states a pension or profit-sharing trust, and even then, it only qualifies if it has assets of not less than $1 million. No individual, regardless of wealth, is an institution and the de minimis limit is fewer than 6 (sometimes shown as 5 or fewer). U1LO3

When it comes to advertising by investment advisers and their representatives, which of the following would be most likely to be acceptable to the Administrator? A) A "like" from a client on an investment adviser representative's Facebook page with a comment on the wonderful service the client received B) Showing past performance over the past 12 months of a group of securities selected from all of the adviser's recommendations C) Offering prospective clients a free 3-month trial to the investment adviser's special investment formula that assures success D) A "like" from a client on an investment adviser representative's Facebook page post that announced the birth of her most recent child

D) A "like" from a client on an investment adviser representative's Facebook page post that announced the birth of her most recent child Although investment advisers and their representatives are prohibited from using testimonials from clients, it has been determined that a Facebook "like" commenting on something of a non-business-related manner, such as the birth of a child, a wedding anniversary, admiring photos posted of a vacation, and so forth, is not considered a testimonial. Commenting on the IAR's service would be a testimonial. When showing past performance, an investment adviser cannot "cherry-pick" the ones it wishes to show—all recommendations of similar types of securities (all common stock, or all bonds) must be shown. No securities professional can ever assure investment success—that would be considered a performance guarantee. U6LO5

Why are ERISA Section 404(c) and the accompanying Department of Labor regulations important for an employer who sponsors a Section 401(k) retirement plan and who offers at least 3 diversified categories of investments with materially different risk and return characteristics? A) This section permits the employer to avoid certain coverage and participation rules that would otherwise apply to a qualified plan. B) If followed, the employer need not provide a Summary Plan Description (SPD) to any employees participating in the plan. C) Union-negotiated contracts are exempt from Department of Labor review under this safe harbor section. D) If followed, the employer is relieved of fiduciary liability for any unsatisfactory investment results experienced by the employee.

D) If followed, the employer is relieved of fiduciary liability for any unsatisfactory investment results experienced by the employee. The importance of ERISA Section 404(c) to an employer sponsoring a Section 401(k) plan with self-directed investment or earmarking provisions is the relief from fiduciary responsibility for unsatisfactory investment results experienced by the employee. U24LO5

An agent of a broker-dealer has a client who lost her job but will be starting a new job in 3 weeks. The client is in need of $900 for the 3-week gap. Under what circumstances may the agent arrange a loan for the client? A) If the client is agent's niece B) If the loan is repaid within 30 days C) If the loan is less than $1,000 D) If the client has $5,000 in her brokerage account

D) If the client has $5,000 in her brokerage account Loans may be made to clients if the person making the loan is in the lending business. Broker-dealers are permitted to lend money against securities held in client's portfolios. This is known as a margin loan. In fact, with $5,000 in the account, current regulations would permit a loan of up to $2,500. U22LO2

Which of the following statements regarding a unit investment trust is not true? A) It charges no management fee. B) It invests according to stated objectives. C) It is considered an investment company. D) Overall responsibility for the fund rests with the board of directors.

D) Overall responsibility for the fund rests with the board of directors. A unit investment trust has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio. U14LO7

Which of the following statements regarding the Sharpe ratio is TRUE? A) Portfolios with lower Sharpe ratios provided higher excess returns per unit of risk assumed than those with higher Sharpe ratios. B) The Sharpe ratio cannot be used to measure risk-adjusted performance for a single security. C) The Sharpe ratio uses beta in its formula. D) The Sharpe ratio is often used to measure risk-adjusted return of an entire portfolio.

D) The Sharpe ratio is often used to measure risk-adjusted return of an entire portfolio. The Sharpe ratio is used to measure risk-adjusted performance of either a portfolio or an individual security. The Sharpe ratio uses standard deviation as the denominator in its formula: the higher the Sharpe ratio, the better the portfolio or security has performed on a risk-adjusted basis. U23LO2

All of the following statements concerning the EMH are correct except A) the weak form of market efficiency involves market data, whereas the semi-strong and strong form involve the assimilation of all public and private information, respectively. B) an efficient market is one in which the prices of securities quickly and fully reflect all currently-available security market information. C) the efficient market hypothesis states that securities markets are efficient, with the prices of securities reflecting their current economic value. D) investors usually react slowly to new and random information pertaining to all currently-available security market information.

D) investors usually react slowly to new and random information pertaining to all currently-available security market information. The efficient market hypothesis (EMH) posits that an efficient market is one in which the prices of securities quickly and fully reflect all currently-available security market information. Therefore, there is little chance that an investor can "beat the market". The weak form uses historical market data, such as price and volume movements; semi-strong involves financial information which is publicly available; strong involves inside information. But, according to adherents, none of that really helps. U20LO10

Each of these would be considered an advantage of using a 529 plan rather than a Coverdell ESA to fund a child's future education except A) the 529 plan has no earnings limitation on the donor. B) the 529 plan has no age limits. C) the 529 plan allows for higher contribution levels. D) the 529 plan is counted at a lower percentage of assets when applying for financial aid.

D) the 529 plan is counted at a lower percentage of assets when applying for financial aid. Funds in both plans are counted as assets of parents at 5.64% if owner is a parent or dependent student, so there is no difference. The 529 plan allows for far greater contribution levels and there is no income limitation on the donor as exists with the Coverdell ESA. The funds in the ESA must be used by the time the beneficiary is 30; no such age restrictions apply to the 529 plan. U24LO6

Under which of the following circumstances can an agent conduct customer transactions without the activity being recorded on the books and records of his BD employer? A) the securities are exempt under the USA B) the agent will receive no compensation C) the customer is a member of the agent's immediate family D) the transactions are authorized in writing by the BD before execution of the transaction

D) the transactions are authorized in writing by the BD before execution of the transaction Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of BDs and Agents, it would be considered contrary to the standards imposed for an agent to effect securities transactions not recorded on the regular books or records of the BD that the agent represents, unless the transactions are authorized in writing by the BD before execution of the transaction.

Which of the following are NOT exempt from registration as an IAR in the state in which they conduct business? I. A CFP who prepares financial plans and whose only compensation is commissions II. An insurance agent who prepares comprehensive financial plans and receives commissions on any insurance products purchased by his clients III. A BD with extensive business in the state IV. A mutual fund company with offices and clients in the state

I and II A CFP who prepares financial plans for commissions must register as an IAR. An insurance agent who prepares comprehensive financial plans for commissions is also acting in the capacity of an IAR and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. BDs and mutual fund companies are not IAs under the USA (U2LO2)

According to the ethical guidelines set forth in the NASAA Statements of Policy and Model Rules, which of the following statements regarding discretion is CORRECT? I. An agent of a broker-dealer must have written prior discretionary authorization prior to effecting discretion in a client's account. II. An agent of a broker-dealer must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account. III. An investment adviser representative must have written prior discretionary authorization before effecting discretion in a client's account. IV. An investment adviser representative must receive written discretionary authorization within 10 business days of the first discretionary transaction in the account.

I and IV One way in which the use of discretionary authority differs between agents and IARs is that agents may never exercise discretion without prior written authority. IARs must receive the written consent no later than 10 business days after the first discretionary transaction in the account. U7LO2

When it comes to borrowing and lending money, the Uniform Securities Act (USA) prohibits activity that would compromise the objectivity of securities professionals. Which of the following is (are) NOT a prohibited practice(s)? I. A broker-dealer lending money to a client to purchase additional securities II. An agent taking out a car loan from a bank whose branch manager is a client of that agent III. An investment adviser borrowing money from an affiliated broker-dealer IV. An investment adviser lending money to a client to enable that client to maintain the minimum required asset level in the account

I, II, and III Borrowing and lending is generally permitted when the lender is in the business of lending money and when the borrower borrows from someone in the business of lending money. Banks are the most common lenders, but broker-dealers are also in that business. When a client has a margin account, the broker-dealer is lending money to that customer to purchase additional securities. The fact that the bank branch manager is a client of the agent who is borrowing money does not change this situation because the loan is from the bank, not the manager. Loans are also permitted between affiliates. U7LO4

One of the terms defined in the Uniform Securities Act is "broker-dealer." Which of the following is NOT included in that definition? I. An individual employed by a corporate entity to open new customer accounts for the purpose of trading securities II. A business entity seeking to raise additional capital using the regulated securities markets III. A person whose primary function is buying securities for his own account and for the accounts of others IV. A person whose primary function is providing advice on what assets belong in clients' investment portfolios

I, II, and IV A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the account of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser. U3LO2