Series 66 QBank Missed Questions Set 2
Performance guarantees are prohibited under state and federal regulations. Which of the following is an example of a performance guarantee offered by a broker-dealer?
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Securities industry rules require that securities professionals disclose all potential conflicts of interest to their clients. Examples of potential conflicts of interest include which of these? i. Offering a proprietary product ii. An agent having a financial interest in a recommended security iii. A broker-dealer publishing a favorable research report after underwriting the issuer's stock offering iv. The sponsor of a mutual fund offering a trip to Key West for all agents reaching a minimum sales level of any of the sponsor's funds
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Terry Bolton employs his two sons in the family gardening business. Josh is 12 years old and was paid $2,000 for the year. Drake is 14 years old 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 his parents' marginal rate. iv. Drake's income is taxed at his parents' marginal rate.
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The Investment Advisers Act of 1940 addresses the issue of investment advisers (IAs) maintaining custody of client funds and/or securities. In which of the following cases would that act consider the IA to have custody? i. Possession of client funds or securities ii. Any arrangement under which the IA is authorized or permitted to withdraw client funds or securities maintained with a custodian upon the IA's instruction to the custodian iii. Any capacity that gives the IA or a supervised person legal ownership of or access to client funds or securities iv. Receipt of a check made out to a third party
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The Investment Advisers Act of 1940 contains the basic definition of persons who are investment advisers. Which of the following persons would be included in the listing of those who must register? i. A person who gives advice to investors on collectibles that are most likely to appreciate in value in the next 10 years ii. A chemical engineer who gave advice on new product ideas that was solely incidental to the practice of the profession and for which no compensation was received
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Under the Investment Company Act of 1940, which of the following qualify for a discount in a mutual fund's sales charge? i. Mr. and Mrs. Jones each purchase $5,000 worth of shares; the fund offers a volume discount for a single purchase of $10,000. ii. Neighbors Jan, Mickey, and Lee form an investment club; Jan places an order for $10,000 worth of shares to be held in their three names. The fund offers a volume discount for a $10,000 purchase. iii. Allen is the vice president of a firm under contract to provide investment advice to a mutual fund. He buys shares of that fund.
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Under the National Securities Markets Improvement Act of 1996, the federal covered security exemption from state registration includes which of these? i. Securities issued by investment companies registered under the Investment Company Act of 1940 ii. Securities traded on the Nasdaq Stock Market iii. Securities traded on the New York Stock Exchange iv. Securities traded on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX])
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Which of these features are common to both variable annuities and scheduled premium variable life insurance? i. Income earned in the separate account is tax deferred. ii. Separate account performance below the AIR causes a reduction in cash value. iii. Fixed contributions are required. iv. Contract owners have voting rights.
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Under Section 303 of the Uniform Securities Act, in order for an issue to register using coordination, it must simultaneously register under the provisions of A) the Securities Exchange Act of 1934. B) the Securities Act of 1933. C) the Investment Company Act of 1940. D) the Uniform Securities Act.
B) the Securities Act of 1933. Registration by coordination is a form of state registration that coordinates state registration of a security with simultaneous federal registration of that security. Securities are registered at the federal level under the Securities Act of 1933.
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) 28.6% B) 64.3% C) 22.2% D) 40%
A) 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.
A) I, II, III, and IV B) I, III, and IV C) I and III D) II and IV
A) I, II, III, and IV All of these represent the potential for a conflict of interest that must be disclosed to clients.
A) I, II, III, and IV B) II and III C) III and IV D) I and II
A) I, II, III, and IV Federal covered securities refer to securities exempt from registration because they are regulated, or covered by federal legislation. The National Securities Markets Improvement Act of 1996 (NSMIA) eliminated dual regulation of securities by both federal and state securities legislation. The term federal covered security also refers to any security listed on a national securities exchange, any security equal to or senior in standing to one listed on a national securities exchange, or a right or warrant to purchase a security listed on a national securities exchange.
A) III and IV B) I and II C) I, II, and IV D) III only
A) III and IV It is not necessary to recommend specific stocks, bonds, or other investment products by name to be included in the definition of investment adviser. Although a person receiving a fee to suggest gold coins to clients would not be an IA, in this case, the financial planner is giving securities advice (liquidate the bonds) to invest in a nonsecurities asset.
A) Our firm is so confident that this recommendation will perform as predicted that it has established an escrow account with the administrator to protect investors against loss. B) Our firm is so confident that this recommendation will perform as predicted that it has purchased 1,000 shares for the firm's investment account. C) Our firm's research department has set a 12-month price target on this recommendation of $50 per share. D) Our firm is so confident that this recommendation will perform as predicted that it will buy this security back from any customer at the prevailing market price.
A) Our firm is so confident that this recommendation will perform as predicted that it has established an escrow account with the administrator to protect investors against loss. The classic performance guarantee states that the customer cannot lose money. That is prohibited. Buying shares of a recommended security is simply a case of the firm putting its money where its mouth is. There is nothing wrong with setting a price target; nothing is guaranteed. Buying back a security at the prevailing market price (the price on the day the customer wishes to sell) does not guarantee against loss.
Which of the following would not be included in the USA's definition of exempt transaction? A) Sales of registered nonexempt securities by agents to their individual clients B) Isolated nonissuer transactions C) Transactions initiated by fiduciaries D) Limited offerings to no more than 10 retail clients in the state during a 12-month period
A) Sales of registered nonexempt securities by agents to their individual clients The term exempt transaction includes sales by fiduciaries, private placements, and isolated nonissuer transactions. Any solicited sale to an individual client, even of a properly registered security, is not an exempt transaction.
An exchange specialist is A) a dealer on the New York Stock Exchange who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks B) an electronic brokerage concern that executes trades online and through specialized trading order executing services C) a trader who makes a market in OTC stocks and ADRs D) a floor broker on the New York Stock Exchange who only executes trades for other brokers in return for commissions
A) a dealer on the New York Stock Exchange who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks A specialist (more accurately a designated market maker - DMM, but NASAA may not use the current term on the exam) is a dealer on the NYSE who executes orders for other brokers and who also acts as a market maker with the responsibility of keeping an orderly market in designated stocks. A specialist must have sufficient capital to buy and sell from his own account in order to maintain a liquid and orderly market.
The Investment Advisers Act of 1940 requires every registered investment adviser to have a chief compliance officer (CCO). This individual is responsible for ensuring compliance with the firm's Code of Ethics by all of these except A) a nonaffiliated broker-dealer through whom the majority of the firm's trades are executed. B) clerical and ministerial employees of the firm. C) investment adviser representatives who are independent contractors. D) investment adviser representatives employed by the firm.
A) a nonaffiliated broker-dealer through whom the majority of the firm's trades are executed. The CCO is responsible for compliance with the firm's Code of Ethic by every employee, registered or not, and any nonemployee who is registered with the firm, such as independent contractors. Broker-dealers the investment advisory firm uses for trade execution are beyond the scope of the IA's supervision.
Under the USA, all the following statements regarding the registration of agents are true except A) if a broker-dealer's registration is revoked by a state, it has no effect on the agent's registration. B) a nonresident agent can solicit business in another state only if the agent and the broker-dealer are registered in that state. C) an agent can only sell securities that have been registered in a state or that are exempt from registration. D) if an agent resigns and affiliates with another broker-dealer, both firms and the agent must notify the Administrator.
A) if a broker-dealer's registration is revoked by a state, it has no effect on the agent's registration. If a broker-dealer's (or investment adviser's) registration is revoked by a state, the registrations of all its agents (or IARs) are suspended. That is, those individuals can no longer function in a registered capacity until they register with another active firm.
An Administrator can deny an investment adviser's registration for all of the following reasons except A) planning to exercise discretion over customer accounts while maintaining a net worth of only $10,000. B) claiming to be qualified as the result of experience as a broker-dealer. C) filing an incomplete application. D) failure to pass a written exam.
A) planning to exercise discretion over customer accounts while maintaining a net worth of only $10,000. The minimum net worth for an investment adviser exercising discretion is $10,000, so this firm cannot be denied because of lack of capital. The Administrator must consider that an applicant for registration as an investment adviser is not necessarily qualified solely on the basis of experience as a broker-dealer.
If an investment adviser tells a client that a stock has doubled in the past year and, even though past performance is no assurance of future results, he is sure it will double, this statement is A) prohibited as a likely exaggeration. B) prohibited because the investment is not suitable for the client. C) permissible if the adviser has performed due diligence on the stock. D) permissible due to the disclaimer of future performance.
A) prohibited as a likely exaggeration. Regardless of disclosure of the uncertainty of future performance of an investment, an investment adviser may not make potentially exaggerated claims.
One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that A) they are not registered as investment companies. B) their advisers are exempt from filing reports on Form ADV. C) they have no more than 100 investors. D) they have assets of less than $150 million.
A) they are not registered as investment companies. Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file Form ADV Part 1 answering most of the questions on the form.
A) I, II, III, and IV B) I, II, and III C) I and II D) I and III
B) I, II, and III One of the things that makes the federal rules on custody different from the USA is that receipt of a check made out to a third party other than the IA is not considered to be custody.
An individual works for an accounting firm that does offer a retirement plan. She is paid $18,000 per year. During her spare time, she is a commercial artist and earned $16,000 doing this work last year. What is the basis for her contribution under a Keogh plan (HR-10)? A) $34,000 B) $16,000 C) $18,000 D) $0
B) $16,000 Contributions to a Keogh must be based solely on self-employment income; the salary at the accounting firm is not considered self employment.
Which of the following firms would be a federal covered adviser? A) DEF Fund Managers, a corporation managing an unregistered hedge fund with $20 million in assets B) ABC Money Managers, a partnership with $112 million under management C) GHI Consultants, a sole proprietorship managing $15 million belonging to high-net-worth individuals D) XYZ Broker-Dealer with custody over $50 million of clients' invested assets
B) ABC Money Managers, a partnership with $112 million under management The structure of the adviser is irrelevant; if assets under management equal $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply. A broker-dealer is excluded from the definition of investment adviser if investment advice is incidental to its business. Custody has nothing to do with giving advice.
Under the Uniform Securities Act, which of the following statements about federal covered securities is not true? A) Federal covered securities include securities sold under Regulation D of the Securities Act of 1933. B) Federal covered securities must be registered with the states. C) A security issued by an investment company registered under the Investment Company Act of 1940 is a federal covered security. D) The issuer of a federal covered security may be required to pay fees to the states.
B) Federal covered securities must be registered with the states. Federal covered securities are not required to be registered with the states, but issuers of federal covered securities may be required to pay fees to the states (notice filing). Private placements (Regulation D) and investment companies both describe types of federal covered securities.
If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability? A) He pays federal estate taxes only on the amount that exceeds the estate tax credit. B) He pays no estate tax. C) He pays federal estate taxes on the entire balance. D) He pays federal estate taxes on $12.5 million.
B) He pays no estate tax. Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.
One measure of a corporation's liquidation value is its book value per share. When performing this computation, the value of which of the following would normally be subtracted from the corporation's net worth? i. Cash ii. Wages payable iii. Patents iv. Preferred stock A) II and III B) III and IV C) I and IV D) I and II
B) III and IV The computation of book value per share is basically net tangible worth per share of common stock. Therefore, we subtract both the par value of the preferred stock and the value listed on the balance sheet for the intangible assets, such as patents.
Which of the following statements regarding Roth IRAs is not true? A) Roth IRAs do not have required distributions. B) Roth IRAs have higher contribution limits than traditional IRAs. C) Distributions prior to age 59½ may be subject to penalty. D) There is no age limit on making contributions to Roth IRAs.
B) Roth IRAs have higher contribution limits than traditional IRAs. An individual with earned income may choose to have either or both a traditional and a Roth IRA (as long as he falls within the Roth's income limitations). The maximum contribution under current regulations is $6,500 (+ $1,000 catch-up for those age 50 or older) and can be split however desired so long as no more than a total of $6,500 ($7,500 with catch-up) is contributed.
Under the provisions of the Internal Revenue Code, which of the following business forms is not required to file a separate tax return? A) LLC B) Sole proprietorship C) Limited partnership D) S corporation
B) Sole proprietorship In the case of a sole proprietorship, any tax consequences (income or loss) are reported on the owner's personal Form 1040, Schedule C. The other entities file either a Form 1065 (limited partnership and LLC) or a Form 1120S (S corporation). Although a one member LLC is treated like a sole proprietorship, unless that was stated as a choice, the LLC has multiple members.
Which of the following statements regarding the general partner (GP) in a direct participation program (DPP) is not true? A) The GP is the active investor in a limited partnership and assumes responsibility for all aspects of the partnership's operations. B) The GP, as the active manager of the partnership, does not maintain a financial interest in the partnership and only receives income distributions from profits on the business prior to the limited partners. C) A GP has a fiduciary relationship to the limited partners (LPs). D) The GP cannot borrow from the partnership, compete with the partnership, or commingle personal funds with partnership funds.
B) The GP, as the active manager of the partnership, does not maintain a financial interest in the partnership and only receives income distributions from profits on the business prior to the limited partners. General partners (GPs) must maintain a financial interest in the partnership and generally do not receive distributions from profits before those paid to the limited partners (LPs). The GP is the active investor in a limited partnership and assumes responsibility for all aspects of the partnership's operations and has a fiduciary relationship to the LPs. The GP, as a fiduciary, cannot borrow from the partnership, compete with the partnership, or commingle personal funds with partnership funds.
An investment adviser (IA) 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 each physician has a unique contract. B) This would be permitted as long as a disclosure is made in the IA's brochure that fees are negotiable. C) This would be permitted as long as the adviser is not a patient of any of the physicians in that group. D) This would be permitted if all the physicians had a minimum net worth of at least $1.5 million.
B) This would be permitted as long as a disclosure is made in the IA's brochure that fees are negotiable. Item #5 on 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.
Registration as an investment adviser or investment adviser representative under the Uniform Securities Act is required of A) an agent of a broker-dealer who recommends model portfolios to clients in exchange for them executing their trades through him. B) an economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis, for which he charges a nominal fee. C) a tax attorney who, as an incidental part of his tax practice, recommends that his high-tax-bracket clients investigate the use of municipal bonds in their portfolios. D) an officer of a trust company handling investments for trust accounts.
B) an economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis, for which he charges a nominal fee. If you are putting yourself out to the public as providing investment advice and charging a fee for doing so, you must register. The exceptions to this are if your giving of investment advice is incidental to your primary reason of doing business and if you are not charging specifically for the giving of that advice. Trust companies and their employees are specifically excluded from the definition of investment adviser. A tax attorney making recommendations incidental to his legal practice and not charging specifically for the making of those recommendations is also not an investment adviser. The professor would have also been exempt from registration except for the fact that compensation was received for securities-related advice. Agents who are compensated only on the basis of recommended trades are not receiving special compensation and are, therefore, not considered to be in the business of giving advice.
A closed-end investment company is registered under the Investment Company Act of 1940. Its shares trade on the Nasdaq Stock Market. To qualify their shares for sale in the state, they would probably use A) qualification. B) notice filing. C) coordination. D) supplementation.
B) notice filing. Regardless of where shares of this closed-end investment company trade, like all investment companies registered under the Investment Company Act of 1940, it is a federal covered security. The company is basically exempt from state registration and is only required to follow a procedure known as notice filing.
During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from A) the spouse. B) the person appointed as administrator of the estate. C) the person named as executor of the estate. D) the person with a durable power of attorney.
B) the person appointed as administrator of the estate. Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.
Present value is a computation frequently used to determine the amount of deposit needed now to meet a future need, such as a college education. If an investor uses an expected return of 8%, but the actual return over the period is 6%, A) the accumulated value will meet the objectives B) the present value was insufficient to meet the objective C) the yield to maturity will be lower than anticipated D) the future value will not be able to be computed
B) the present value was insufficient to meet the objective Present value is the amount deposited to meet a future goal based on an expected rate of return. If the return is lower than expected, the amount deposited will not grow to the required amount (a bad thing).
The long party to a put option contract has A) the obligation to sell the underlying asset. B) the right to sell the underlying asset. C) the right to buy the underlying asset. D) the obligation to buy the underlying asset.
B) the right to sell the underlying asset. Being long a put option means owning the option. Owners have rights, while sellers have obligations. A put option gives the owner the right to sell the underlying asset at the exercise price. The seller of the put option is obliged to take delivery and pay the exercise price if the buyer exercises the option.
All of the following must be specified in a security's state registration statement except A) a stop order from another state that affects the offering of the security within that state. B) the total amount of the security that will be offered in other states. C) the expected use of the projected proceeds of the offering. D) the amount of securities to be offered in the state.
B) the total amount of the security that will be offered in other states. The total amount of the security to be offered in other states need not be specified, although identifying those states is required. The amount of the security to be offered in the state of registration is required, as it generally provides the basis on which the registration fee is calculated. A stop order from another state that affects the offering of the security within the state must be included. The registration statement will always describe the intended use of the proceeds.
In a qualified plan, if the employer makes all the contributions, the employee's cost basis is A) the increase in value only B) zero C) one-half of the contributions made D) the value of the contributions
B) zero Because the employee has not made any contributions, the cost basis is zero. In any qualified plan, if all of the contributions are in pre-tax dollars, the cost basis is zero no matter who contributes the money.
Sortel Industries has preferred stock outstanding that pays annual dividends of $3.75 a share. If an investor wants to earn a rate of return of 8.5%, how much should she be willing to pay for a share of Sortel preferred stock? A) $33.89 B) $42.10 C) $44.12 D) $31.88
C) $44.12 This is a middle school math question. It is asking, 3.75 is 8.5% of what number? The computation is: 3.75 ÷ 0.085 = $44.12.
Which of the following investment advisers would be permitted to use the term investment counsel? A) An investment adviser who has been admitted to the bar in the state in which the firm's principal office is located B) A financial planner offering a wide range of services to his clients, including tax planning, estate planning, insurance planning, and investment advice C) A firm whose exclusive business is placing clients' assets into model portfolios D) A professional providing a market timing service with an annual subscription fee of $995, with this service attempting to maximize profits by suggesting entry and exit points for over 100 listed stocks
C) A firm whose exclusive business is placing clients' assets into model portfolios In order for the term investment counsel to be used, two criteria must be met. First, the principal business of the adviser must be the rendering of investment advice. Second, the nature of the advice must meet the definition of investment supervisory service. That means giving continuous investment advice to clients based on their individual needs. That is frequently accomplished by selecting model portfolios most appropriate to the client's needs. The financial planner clearly is not principally in the business of offering investment advice because he describes his service as offering a wide range of services, of which advice is only a part. The exam frequently uses that wording to indicate that advice is not the principal activity. While the publisher's principal business activity may be offering advice, nothing about the description indicates that individual client accounts are being monitored.
Olga holds XYZ stock. The stock recently increased in value by 50%. She would like to preserve as much of this gain as possible and retain the potential for additional price increases. Which strategy best meets Olga's goal? A) Buy a call option B) Short the stock C) Buy a put option D) Write a call option
C) Buy a put option Buying a put option would allow Olga to hold the stock for additional gain but reserve the right to sell at or near the current value if the stock price plummets. Shorting the stock would lock in Olga's gain but not allow her to take advantage of additional price increases; additional price increases would be offset by the cost of replacing the shorted stock. Writing a call option would provide some offset to a drop in price but would not allow for potential gain in value. Buying a call option would not provide any downside protection.
An investment adviser new to the business is engaged by an elderly client who, on the grounds of privacy, refuses to disclose his annual income or net worth. The client merely asks the adviser to establish and manage a $50,000 portfolio. If the client brings a cashier's check for $50,000 to the initial meeting, which choice reflects the best action on the part of the adviser? A) Accept the client but acknowledge in writing the client's refusal to provide financial information. B) Accept the client but only allocate his funds to money market-type securities. C) Decline the client, recognizing that you cannot effectively determine suitability in the absence of financial information. D) Decline the client because he is difficult to work with.
C) Decline the client, recognizing that you cannot effectively determine suitability in the absence of financial information. An investment adviser cannot perform effectively for a client who refuses to provide information necessary for determining the suitability of investments or a portfolio. Unlike the broker-dealer, who may act merely as an order filler, the investment adviser has a fiduciary responsibility and is obligated to determine suitability.
An agent learns of material, inside information regarding a company that is publicly held. Which of the following with respect to the information would not violate the Uniform Securities Act? A) Discussing the information at a seminar but not making an investment recommendation B) Trading for the agent's personal account based on this information C) Discussing the situation with a superior or compliance officer in the agent's firm D) Soliciting orders based on this information
C) Discussing the situation with a superior or compliance officer in the agent's firm Discussing the situation with a superior or compliance officer is the appropriate action. An agent may not solicit or trade on the basis of material inside information. Discussing material inside information in a public forum is prohibited, regardless of investment recommendations.
A) II and III B) I and II C) I and III D) I, II, and III
C) I and III A husband and wife and all children under 21 qualify as a single person for the purposes of obtaining a quantity discount, as do corporations formed for a purpose other than obtaining such a discount and employee benefit plans. But other associations acting collectively, such as the members of an investment club, do not qualify as a single person for such a purpose. Discounts may also be made to directors, officers, partners, employees, or sales representatives of the fund, its investment adviser, or its principal underwriter.
A) III and IV B) I and II C) I and IV D) II and III
C) I and IV All variable products offer tax deferral of earnings in the separate account. Unit holders of a variable annuity vote on the basis of the number of units they own; holders of variable life insurance receive 1 vote for each $100 of cash value. With variable life insurance, AIR applies only to the death benefit of a variable life policy, not to cash value. Variable annuities earning more or less than the AIR affects the value of the accumulation unit. Scheduled premium variable life has premiums that are fixed, but no such requirement exists with variable annuities.
A) II only B) I only C) I, II, and III D) I and III
C) I, II, and III Investment advisers must disclose the amount of compensation received, or to be received, from any third party in connection with recommendations made to a client. This would include compensation from any broker-dealer, issuer, and nonsecurities entity (e.g., insurance companies, REALTORS®, and coin dealers).
What information is required on an application for registration as an agent? i. The form of business (corporation, partnership, LLC, etc.) ii. Felony convictions, whether securities related or not iii. A statement of financial condition iv. Citizenship information A) I and III B) I and II C) II and IV D) III and IV
C) II and IV Applicants for registration as agents must include any felony conviction (misdemeanors are limited to those that are securities related) and a statement of citizenship. Agents can only be individuals, not business entities, and it is only broker-dealers and investment advisers that must submit financial information.
A) I and IV B) II and III C) II and IV D) I and III
C) II and IV Both exchange-traded funds (ETFs) and closed-end investment companies are traded on exchanges; therefore, investors pay a commission when purchasing and liquidating shares. Only closed-end investment companies have a limited number of shares. Closed-end funds may trade at significant premiums or discounts from their NAV, while ETFs rarely stray far from the NAV.
A) Jack's application will likely be accepted because his violation of investment-oriented regulations occurred 5 years prior to his application. B) Jack's application will likely be accepted because he has not violated any securities law. C) Jack's application will likely be denied because he violated the Commodity Exchange Act within the 10-year period prior to his application. D) Jack's application will likely be denied because he has little experience in the securities industry.
C) Jack's application will likely be denied because he violated the Commodity Exchange Act within the 10-year period prior to his application. Jack's application will probably be denied because he was found guilty of violating the Commodity Exchange Act within the 10-year period prior to his application. Registration as an investment adviser will be denied to any party that has been convicted, within the 10-year period prior to application, of a violation of federal securities acts or the Commodity Exchange Act. Such statutory denial will also impact those enjoined under domestic or foreign court orders from engaging in the business of investing, presuming such orders were made in the 10-year period prior to the application date.
When completing an individual tax return on Form 1040, one of the most important numbers is the adjusted gross income (AGI). Which of the following would not be included in AGI? A) Salary and commissions B) Alimony received from pre-2019 divorce decree C) Tax-exempt interest received from municipal bonds D) Qualifying dividends on common stock
C) Tax-exempt interest received from municipal bonds Even though municipal bond interest is reported on line 8b of the 1040, it is specifically not included in AGI. Paying alimony is a deduction, while receiving it is considered income. Qualifying dividends merely means the tax rate is limited to a maximum of 15% (except for very high-income earners—not tested). Please note: Effective January 1, 2019, there were changes to the tax treatment of alimony for all divorce agreements entered on and after that date (no changes to those already in existence).
Which of the following accounts can only be opened by spouses? A) Tenants in common B) TOD accounts C) Tenants in the entirety D) Tenants with right of survivorship
C) Tenants in the entirety The unique characteristic of a tenants in entirety account is that it can only be opened by spouses. Each of the others can be opened jointly by any legal persons.
An investor is of the opinion that the recent bull market has run its course, and she wants to protect her portfolio consisting largely of equities with a market cap of less than $1 billion. Her best choice would be to A) sell futures on the Russell 2000. B) buy puts on the S&P 500. C) buy puts on the Russell 2000. D) sell puts on the S&P 500.
C) buy puts on the Russell 2000. When a bull market runs out of steam, a decline usually follows. The best way to protect her positions is purchasing a put option on a benchmark that represents her holdings. Because this investor's portfolio is so heavily invested in small-cap stocks, the appropriate benchmark for hedging would be the Russell 2000.
ABC's stock has paid a regular dividend every quarter for the past several years. If the price of the stock has remained the same over the past year but the dividend amount per share has increased, it may be concluded that ABC's A) yield to maturity has gone up. B) current yield per share has been unaffected. C) current yield per share has increased. D) current yield per share has decreased.
C) current yield per share has increased. The current yield would have increased because current yield is the income (dividend) divided by price. A higher dividend divided by the same price results in a higher yield. Stocks do not have a yield to maturity.
A) fraudulently, because the customer could easily discern that the price quoted by the agent did not match readily available quotes in the financial media B) properly, because he prevented the customer from losing a profit opportunity C) fraudulently, because accurate quotes must be provided to the customer at all times D) properly, because the interim price fluctuation did not impact the customer's results
C) fraudulently, because accurate quotes must be provided to the customer at all times The agent must provide customers with accurate market quotes at all times. Deliberately giving an incorrect price quote is a fraudulent activity.
When operating a Keogh plan, a self-employed individual must make contributions for A) all employees scheduled to work for 1,000 hours per year or more B) part-time employees who have worked for the company for 3 or more years C) full-time employees who are at least 21 years old and have worked for the company for 1 or more years D) all employees
C) full-time employees who are at least 21 years old and have worked for the company for 1 or more years Employees must be covered under a Keogh plan if they are at least 21 years old, have been employed a minimum of 1 year, and work full time (at least 1,000 hours per year). Keogh plans do not include employees who are under 21 or have just started working with the employer.
A) not breached your fiduciary duty. B) misrepresented a material fact. C) to disclose the amount of commission on the trade confirmation. D) committed a prohibited practice.
D) committed a prohibited practice. Under both federal and state law, it is required to disclose to the client that the bonds will be sold from the firm's inventory, from one of the firm's accounts, often called a proprietary account. However, when selling from inventory, there would never be a commission. The charge, if any, would be a markup.
A customer buys 200 shares of a common stock at $30 per share. On a day when the stock's price is down $5, the customer calls her agent and inquires as to its current price, and the agent tells her the price is around where she bought it. In the next few weeks, the stock's price turns around and the customer liquidates the shares at $35 per share realizing a $5 per share profit excluding commission. In the above situation, the agent has acted
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The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 10%, and a particular stock's beta is 1.5 with a standard deviation of 3.2, the expected return would be A) 18.2% B) 12% C) 15% D) 14%
D) 14% The formula for this computation is as follows: 10% (the return on the market is a beta of 1.0) minus the risk-free rate of 2%, or 8%. Then, multiply that by the beta of this stock (1.5) to arrive at 12%. That is, the stock should return 12% above the risk-free rate of 2%, or 14%. The standard deviation is not relevant to this computation.
The Zxion Corporation has just distributed a 7½ to 1 split of its common stock. Prior to the split, Zxion had EPS of $15, the market price of Zxion common stock was $225 per share, and the price of its $75 par preferred stock was $82.50. As a result of the split, the price-to-earnings (P/E) ratio is now A) 7.5 x 1. B) 2 x 1. C) 6 x 1. D) 15 x 1.
D) 15 x 1. A stock split does not change the P/E ratio because both the stock's price and its earnings decline by the same proportion. In this question, after the 7.5 to 1 split, the market price will drop to $30 per share ($225 ÷ 7.5) and the earnings per share are now $2 per share ($15 ÷ 7.5). That 30:2 is still a 15-to-1 P/E ratio. The information about the preferred stock is extraneous.
Given the following annual returns, what are the median and mode returns, respectively? A) 5.00%; 5.00% B) No median exists; no mode exists C) 2.00%; 3.00% D) 2.00%; no mode exists
D) 2.00%; no mode exists Median: Arrange the return values from largest to smallest and take the middle value: -7%, 0%, 2%, 5%, 15%. The middle value is 2.00%. Mode: The mode is defined as the value that most often shows up in a distribution. Because no return value shows up more than once, this distribution has no mode.
Moonglow Specialties, Inc., is currently trading at $20 per share. Recently, the company reported net income of $1 million. The company is capitalized with 200,000 common shares and $5 million of 20-year debentures with a coupon of 4%. Given the data, Moonglow's price-to-earnings (P/E) ratio is closest to A) 3 times. B) 2 times. C) 5 times. D) 4 times.
D) 4 times. P/E ratio = market price per share ÷ earnings per share. Earnings per share = net income ÷ shares = $1 million ÷ 200,000 shares = $5. P/E = 20 ÷ 5 = 4. The net income is after all expenses including the interest on the debentures. As is frequently the case, the question includes information irrelevant to the answer.
An investment of $5,000 made 16 years ago is now worth $20,000. Using the Rule of 72, the approximate compounded annual rate of return is A) 4.5%. B) 18%. C) 25%. D) 9.0%.
D) 9.0%. This investment has quadrupled in 16 years. Using the Rule of 72, we know how to compute the rate of return when an investment doubles. This one has doubled every 8 years. Dividing 72 by 8 years gives us an approximate rate of 9%.
There are several financial models that refer to the "risk-free" rate of return. Which of the following instruments is used to measure that rate? A) Federal funds B) 30-year Treasury bond C) 1-year CD D) 91-day Treasury bill
D) 91-day Treasury bill The standard benchmark used to measure the "risk-free" rate of return is the 91-day (13 week) Treasury bill.
Under the Uniform Securities Act, when may an investment adviser legally have custody of money or securities belonging to a client? i. If the Administrator has not prohibited this practice ii. If the investment adviser has notified the Administrator that it has custody iii. Only as long as the adviser does not also have discretionary authority over the account
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Under which of the following circumstances will a private placement fail to qualify for exemption from registration under the Uniform Securities Act? A) A bank holding company purchases the offering for trading purposes rather than investment purposes. B) The offer is directed to only five individuals during any 12-month period. C) The seller reasonably believes that individual purchasers are buying for investment purposes rather than immediate resale. D) A modest commission is paid to the agents who sell the offering to noninstitutional clients.
D) A modest commission is paid to the agents who sell the offering to noninstitutional clients. A private placement will lose its exemption if those who sell the offering are paid commissions on sales to noninstitutional clients. For a private placement to be exempt, the offer cannot be directed to more than 10 persons during a 12-month period. In the case of noninstitutional buyers, the seller must reasonably believe (nice to have it in writing, but not required) they are purchasing the offering for investment purposes only. Institutional purchasers do not have to purchase the offering for investment purposes.
Which of the following would meet the USA's definition of federal covered adviser? A) An investment adviser who serves as a consultant to pension funds with assets of $500 million B) An investment adviser who does business on an interstate basis C) An investment adviser who gives advice on federal covered securities D) An investment adviser who is registered under Section 203 of the Investment Advisers Act of 1940
D) An investment adviser who is registered under Section 203 of the Investment Advisers Act of 1940 All investment advisers registered under the Investment Advisers Act of 1940 are federal covered advisers. Doing business in more than one state (interstate) does not necessarily mean that the investment adviser is required to register with the SEC. As long as the AUM is under $100 million, the adviser registers with the appropriate states. Pension consultants are eligible to register with the SEC once their AUM reaches $200 million, but it is not mandatory.
From your meetings with Avery, you realize there is a tendency to follow the actions of a larger group of people when making financial decisions. It makes no difference if those actions are rational or not. Choose the behavioral finance theory that explains Avery's behavior. A) Anchoring B) Overconfidence C) Confirmation bias D) Herding
D) Herding This is an excellent example of herding (following the herd). Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions, while disregarding accurate, unsupportive information. Overconfidence occurs when investors consider their abilities to be much better than they actually are. Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.
A) II and III B) III and IV C) I and IV D) I and II
D) I and II Because the money paid is earned income, it is not subject to the child tax rules, regardless of age. If, however, there is unearned income, anything over $2,500 in 2023 (an amount that isn't tested) is taxed at the parents' marginal (top) tax rate.
A) I and III B) I only C) II and III D) I and II
D) I and II The Administrator may prohibit advisers from having custody of client securities or funds. If no such prohibition applies, the Administrator must be notified in writing that the adviser has custody. There is no relationship between having discretion and having custody. An investment adviser can have either, both, or none.
Terms used to describe the practice of buying and selling securities to create the appearance of active trading volume include: i. wash trades. ii. matching orders. iii. front running. A) II and III. B) I, II, and III. C) I and III. D) I and II.
D) I and II. Fictitious trades executed to create the appearance of activity in a stock are referred to as wash trades or matching orders. Both are forms of market manipulation. Although front running is a prohibited practice, it does not constitute market manipulation.
A) I and II B) II and III C) III and IV D) I and IV
D) 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.
Under the Uniform Securities Act, which of the following statements is true regarding civil liability of advisers and broker-dealers? The statute of limitations for civil liability is five years. A lawsuit against a broker-dealer or adviser can be avoided if restitution, costs, and interest are paid to a client. If restitution is made to a client by a broker-dealer, the Administrator may not prosecute the securities violation. A) I only B) II and III C) I and II D) II only
D) II only Do not confuse the statute of limitations for criminal prosecution (five years) with the statute of limitations for civil liability (three years from the date of the event or two years from discovery, whichever occurs first). Because civil liability under the act is limited to restitution, costs, and reasonable interest, a lawsuit could be avoided by a return of the investor's funds plus interest. Payment of restitution to a client does not prevent the Administrator from prosecuting a violation of the provisions of the act.
What is the proper course of action for the fiduciary of a trust that has a portfolio made up of 10% cash and 90% stock of one company that has recently experienced a 40% market gain? A) Use the cash to acquire more shares of the stock B) Increase the cash position to 25% by taking some of the profits off the table C) Begin diversifying the equity portfolio D) Maintain the current allocation if, while acting in the capacity of trustee, he believes it aligns with the goal of the trust
D) Maintain the current allocation if, while acting in the capacity of trustee, he believes it aligns with the goal of the trust In almost every trust question, the correct answer will be that the trustee (fiduciary) has to follow the terms of the trust and meet the trust's goals and objectives.
An intrastate offering is exempt from A) blue-sky registration. B) all registrations. C) state registration. D) federal registration.
D) federal registration. An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration.
An agent made written disclosure to her employing broker-dealer that she intends to execute a series of private securities transactions with individuals who do not have accounts with her broker-dealer. The agent did not acquire express written permission from the broker-dealer and did not receive compensation for executing the transactions, but she did receive written acknowledgment of receipt of the agent's notice. In this case, the agent A) is required to register as a broker-dealer. B) engaged in an agency cross transaction. C) performed a matched order. D) is guilty of selling away.
D) is guilty of selling away. When selling securities, agents are prohibited from enacting transactions that are not recorded on the broker-dealer's books unless the transactions are authorized in writing by the broker-dealer prior to execution. Failure to do this is known as selling away. Receipt of notification is not the same as authorization.
Under the Uniform Securities Act, the Administrator may designate another officer to A) set recordkeeping requirements. B) issue a cease and desist order. C) grant registration exemptions. D) serve subpoenas.
D) serve subpoenas. An official designated by the Administrator may serve subpoenas because that is basically an administrative function; however, an Administrator may not designate another official to grant registration exemptions or issue cease and desist orders. The recordkeeping requirements are set by law and cannot be altered by the Administrator.
The time value of money is part of the computation for A) the after-tax return B) the risk-adjusted return C) the real rate of return D) the internal rate of return
D) the internal rate of return One of the unique features of IRR is that it is a compounded rate using the time value of money.
An investment adviser should develop an investment policy based on the needs and objectives of the client. When the client is a business entity structured as a general partnership, the investment policy would have to consider A) the liability of the general partner. B) the number of limited partners. C) the mean requirement of the wealthiest and the poorest partner. D) the objectives of all the partners on a collective basis.
D) the objectives of all the partners on a collective basis. Because all income and gains pass through to the partners, and because there is unlimited personal liability for all general partners, we must examine the objectives of each of them to determine proper suitability.
A client of yours comes to the office and shows you some sales literature from a mutual fund that has him very excited. According to the material, the fund's average annual return over the past 10 years has been in excess of 15% and it has achieved the highest rating from the major fund rating services. Before recommending this fund to your clients, the first thing you would probably check for in the fund's prospectus is A) the fund's expense ratio. B) the fund's objectives. C) the fund's sales charge. D) the portfolio manager's tenure.
D) the portfolio manager's tenure. Because this client has been "sold" on past performance, you need to verify if the manager achieving those results is still on the job. That is the prime reason why the regulations require disclosure of the fund manager's tenure; it is important for investors to know if the current manager was the one who had the winning streak or if that manager just came on board. The other choices are something to look at, but in this instance, they take a back seat to checking on the manager's tenure. Sure, the expense ratio is important, but the past performance is after expenses, so that has already been taken into consideration.
Which of the following statements correctly describe similarities between exchange-traded funds and closed-end investment companies? i. There are a limited number of outstanding shares. ii. They are traded on registered stock exchanges. iii. They trade at prices that are not dependent upon but are close to their net asset value. iv. Investors pay commissions to purchase and liquidate their positions.
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In which of the following third-party transactions would an investment adviser be required to make disclosure to the client of compensation received? i. An investment adviser recommends an affiliated REALTOR® to a client and receives compensation from the REALTOR®. ii. An investment adviser, who is also an agent for an insurance company, sells policies from the company to his clients. iii. An adviser who is affiliated with a broker-dealer receives commissions on sales recommended to clients through the broker-dealer.
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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.
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Your high-net-worth advisory client has a large cash position in his money market account and is considering using the cash to purchase an investment property. You believe that the real estate investment will not provide the same returns that can be realized by investing in bonds, so you prepare a proposal that estimates the income stream and potential capital growth of a portfolio of convertible bonds currently in the firm's inventory. The recommendation is quite suitable for the client based on his current objectives. If the transaction is completed and you fail to both disclose that the bonds were sold in a proprietary transaction and receive client consent, you would have
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iii. A person, while receiving compensation, described the advantages of certain types of managed investments, such as mutual funds and REITs, but did not recommend a specific investment iv. A fee-based financial planner who, on the basis of current economic forecasts, had many of his clients liquidate their investment-grade bonds and purchase gold coins with the proceeds
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Jack, who is proficient in both fundamental and technical analysis, would like to become an investment adviser. Although Jack is fairly new to the securities business, he worked in the commodities business for many years. Five years ago, Jack's commodity pool operators license was suspended by the Commodity Futures Trading Commission for having willfully violated or willfully failed to comply with any provision of the Commodity Exchange Act. Which of the following best describes how Jack's application to open an investment advisory business will be handled under the Investment Advisers Act of 1940?
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