Series 66

An agent lives in Montana and is registered in Montana and Idaho. His broker-dealer is registered in every state west of the Mississippi River. The agent's client, who lives in Montana, decides to enroll in a 1-year resident MBA program in Philadelphia, Pennsylvania. During the 1-year period, when the client is in Philadelphia, the agent may A) conduct business with the client as usual. B) only accept unsolicited orders. C) not deal with the client until the broker-dealer registers in Pennsylvania. D) not conduct any business with the client.

A) Conduct business with the client as usual Even though the college program is called a resident program, that does not make that the client has changed his state of residence. Although neither the firm nor the agent is registered in Pennsylvania, the agent may continue to conduct business with the client. This is because both the agent and his firm are properly registered in the client's state of permanent residence. Think about if you went to an out of state university after high school. Did you have to change your diver's license to that state's? Probably not. It's the same concept here.

Which of the following offers the opportunity to realize a capital gain rather that ordinary income? A) Stock dividends B) Section 529 plans C) Deferred annuities D) Cash dividends

A) Stock dividends Stock dividends, unlike cash dividends, are not taxable in the year of receipt Instead, they reduce the owner's cost basis and, when sold at a price above the cost basis, are treated as a capital gain rather than ordinary income. Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in not taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty.

Using the net present value method, a potential investment should be undertaken if the present value of all cash inflows minus the present value of all cash outflows (which equals the net present value) is A) greater than zero B) less than zero C) positively correlated D) equal to zero

A) greater than zero NPV compares the value of a dollar today to the value of the same dollar in the future, taking inflation and returns into account. If the NPV investment is positive, it should be accepted. However, if NPV is negative, the investment should probably be rejected because cash flows will also be negative.

An analyst computing a stock's Sharpe ration would need to know the stock's A) standard deviation. B) alpha. C) beta coefficient. D) correlation coefficient.

A) standard deviation The formula for the Sharpe ration is: actual returns - the risk free rate which is then divided by the standard deviation

Which of the following would constitute political risk that might affect a security? A) A strike by the union representing the company's employees B) New tariffs are levied against the company's major product C) New environment regulations D) A bad decision by the company's CEO

B) New tariffs are levied against the company's major product Political risk involves political activities, and of the choices given, the only one that is the result of actions by a political body is the decision to raise tariffs. A strike has nothing to do with politics (theoretically), and environmental regulations create regulatory risk.

Which of the following is true regarding ETNs? A) They are noncallable prior to maturity. B) Their value can be impacted by changes in the issuer's credit rating. C) As fixed-income investments, they do not have market risk. D) They are suitable for conservative investors seeking income.

B) Their value can be impacted by changes in the issuer's credit rating ETNs are unsecured debt obligations carrying credit risk based on the issuer's credit rating. Fixed-income investments have the market risk more commonly referred to as interest rate risk, and they are usually callable. These are sophisticated instruments that are not suitable for conservative investors.

The Sharpe ration measures a stock's A) excess return earned compared to its unsystematic risk. B) excess return earned compared to its total risk. C) return earned compared to its total risk. D) excess return earned compared to its systematic risk.

B) excess return earned compared to its total risk. The Sharpe ratio is defined as a fund's excess return (fund's return exceeding the risk-free rate) divided by the total risk (standard deviation).

Caroline considers her investment skills to be much greater than they actually are. She takes credit for many decision that have positive results but blames the economy when her investment do poorly. Caroline's behavior is an example of A) confirmation bias. B) overconfidence. C) regret aversion. D) anchoring.

B) overconfidence Confirmation bias is paying attention to information that supports preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Regret aversion is when the investor prepares herself in such a way as to avoid distress over an adverse outcome.

An investor's required rate of return is 6%. If the internal rate of return of the investment offered is 6.32%, then the NPV is A) negative B) positive C) zero D) between 6% and 6.32%

B) positive Anytime an investment's IRR is more than the required rate of return, the NPV is positive (and should probably be selected). The NPV is expressed as a dollar amount. It is the IRR which is expressed as a percentage.

An investment adviser hires two individuals to solicit new customers for the firm's wealth management service. Under the Uniform Securities Act A) soliciting is generally prohibited. B) registration as investment adviser representatives is required. C) they may begin soliciting as soon as they have passed their licensing examinations. D) each of them would have to register as an investment adviser.

B) registration as investment adviser representatives is required The definition of investment adviser representative includes individuals who solicit for the firm's advisory business. Passing the exam is only one of several requirements before formally becoming registered as an IAR.

A securities market investment theory that attempts to derive the expected return on an asset based upon the asset's systematic risk is A) the random walk theory. B) the capital asset pricing model (CAPM). C) the efficient market hypothesis (EMH). D) the Monte Carlo simulation.

B) the capital asset pricing model The capital asset pricing model (CAPM) attempts to describe the relationship between the systematic risk and the expected return of the asset in an effort to determine the asset's appropriate price

An investor holding which of the following equity securities would not expect to have preemptive rights? A) Control stock B) Common stock acquired in a private placement C) Preferred stock D) Common stock

C) Preferred Stock Preferred stockholders do not have preemptive rights. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage of ownership.

Beta is most frequently measured against which of the following? A) S&P 100 B) Nasdaq Composite Index C) S&P 500 D) Dow Jones Industrial Average

C) S&P 500 The index most commonly used to analyze the beta of an individual security or portfolio is the S&P 500. Companies (portfolios) with a beta of 1.0 would be expected to move in tandem with the market, while companies with a beta greater than 1.0 would be more volatile than the market as a whole. Companies with a beta less that 1.0 should show a rate of change less than that of the market as a whole.

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions except A) the formula used to calculate compensation includes realized capital losses and unrealized depreciation. B) the client must meet certain minimum financial standards. C) disclosure that the performance compensation may create an incentive for the adviser to take greater risks. D) compensation is based on gains, less losses, for a period of no less than one year.

C) disclosure that the performance compensation may create an incentive for the adviser to take greater risks Because these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to. The minimum net worth requirement is over $2.2 million, or a client is qualified if he has at least $1.1 million under management with the adviser. Any performance fee must take into consideration gains and losses, both realized and unrealized, and the performance period must be no less than one year. Please note: State-registered investment advisers must make this "incentive" disclosure so if the question asked about them, there would no exception.

Under the Investment Advisers Act of 1940, a registered investment adviser may A) imply SEC approval or sponsorship because of registration. B) imply SEC approval or sponsorship because of passing an exam. C) use the statement "registered with the SEC" in advertisements. D) use the initials RIA after its name on a business card.

C) use the statement "registered with the SEC" in advertisements Although an investment adviser registered with the SEC may state that fact, a registered adviser may not use the title in any way to suggest or imply that the SEC sponsors or approves the adviser. The title in no way indicates that the adviser's abilities or qualifications have been approved. Because RIA is not an academic designation, it may not be used as such.

Which of the following attributes best describes a tactical asset allocation portfolio style? A) Employs a passive management style B) Has an aggressive growth objective C) Employs a strategic management style D) Employs an active management style

D) Employs an active management style Tactical asset allocation managers actively manage their portfolios switching the percentage of holding in each asset category according to the performance of the asset class. An aggressive growth manager would actively pursue specific growth securities such as stocks and not allocate funds between bonds, real estate, or other asset categories. A passive or strategic style is relatively inactive rather than active.

Which of the following bonds is most likely to exhibit the greatest volatility due to interest rate changes? A bond with A) a high coupon and a short maturity. B) a high coupon and a long maturity. C) a low coupon and a short maturity. D) a low coupon and a long maturity.

D) a low coupon and a long maturity Other things equal, a bond with a low coupon and long maturity will have the longest duration and therefore the greatest price volatility.

In general, a broker-dealer will disclose its fee schedule A) when requested by the client. B) to its agents, who are then responsible for sharing it with the client. C) within 30 days following any changes in fees or charges. D) at the time of the account opening.

D) at the time of the account opening Although there are no specific industry requirements, a broker-dealer's fee schedule is disclosed at the time an account is opened. Changes are disclosed by giving notification before the change is made.

Sharon is an investment adviser representative (IAR) 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 not 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 Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X. C) because Sharon's client is a bank, she does not have to register as an IAR in State X. D) because Sharon has no place of business in State X, she does not have to register as an IAR in State X.

D) 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 the employer's principal office.

The primary responsibility for supervising the activities of an investment adviser representative (IAR) who is affiliated with a federal covered investment adviser lies with A) the Administrator. B) the IAR. C) the SEC. D) the investment adviser the IAR represents.

D) the investment adviser the IAR represents It is the obligation of every registered investment adviser, whether SEC or state registered, to supervise its representatives.

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.

Which items would change if a company declared a cash dividend? I. Working capital II. Total assets III. Total liabilities IV. Shareholders' equity

I, III, IV The key word is 'declared'. Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is pending obligation) and reduce shareholders' equity because retrained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid

Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? I. Registered securities held by a control person II. Unregistered securities held by a noncontrol person III. Registered securities held by a noncontrol person IV. Unregistered securities held by a control person

II and IV The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is

Your client who owns a DPP that generated a $10,000 passive loss for the year could A) deduct $3,000 against ordinary income and carry over the rest. B) only deduct the passive loss against passive income. C) deduct $10,000 against ordinary income. D) deduct $10,000 against capital gains.

b) only deduct the passive loss against passive income Passive losses, such as those generated by limited partnership investments, are only deductible against passive income.

Which of the following is not a market-cap weighted index? A) Dow Jones Industrial Average B) FTSE 100 and FTSE All-Share C) S&P 500 D) Morgan Stanley Capital International

A) Dow Jones Industrial Average The Dow Jones is a price-weighted index. All other options are market cap weighted index

A portfolio manager considers adding an asset to the portfolio. The manager decides between 4 equally-risky assets: W, X, Y, Z. The correlations of each asset with the portfolio are: Asset W: +0.90 Asset X +0.80 Asset Y +0.40 Asset Z +0.20 To achieve the optimal diversification benefits, which of the assets should be selected by the manager?

Asset Z Correlation runs from + 1.0 to - 1.0. A the higher the correlation, the more the securities move in tandem. That lessens the diversification. The reverse is true when the correlation is low or negative. Asset Z has the lowest correlation with the portfolio and will therefore provide the largest reduction in the portfolio risk. Even better diversification would be obtained if there was a choice with a negative correlation.

The weak form of efficient market hypothesis A) implies that inside traders cannot earn superior risk-adjusted returns. B) implies that technical analysis is not worthwhile. C) reinforces the value of technical analysis. D) implies that fundamental analysis is not worthwhile.

B) implies that technical analysis is not worthwhile The weak form implies that information contained in historical stock prices is fully incorporated into current stock prices; therefore, technical analysis (the study of historical prices and volume) is not worthwhile in predicting future prices. This form neither refutes fundamental analysis nor implies that traders using insider information cannot ear superior profits.

Bob, age 60, has invested $17,000 in his nonqualified variable annuity over the years. The total value has reached $26,000. He wishes to withdraw $15,000 to send his son to college. What is his tax consequence on the withdrawal? A) $6,500 is nontaxable; $8,500 is taxable. B) The entire amount is taxable. C) $9,000 is taxable; $6,000 is nontaxable. D) The entire amount is nontaxable.

C) $9,000 is taxable; $6,000 is nontaxable Because this is a nonqualified annuity, the $17,000 invested is after-tax dollars. Under the tax code, the taxable portion is considered to be withdrawn first in any lump-sum distribution. Therefore, the first dollars withdrawn are all taxable until the amount of withdrawal meets or exceeds the growth in the account. Because Bob is over 59 1/2, there is no 10% tax penalty on his withdrawals.

The statistical measurement of the total risk of a security or portfolio is known as A) beta. B) duration. C) standard deviation. D) Sharpe ratio.

C) Standard Deviation Standard deviation is the statistic that measures both systematic and unsystematic risk (total risk). An investment with a high standard deviation tends to have a higher level of risk that an investment with a low standard deviation. Beta is a measure of systematic risk, and duration is an indication of interest rate risk. The Sharpe ratio measures the risk-adjusted return.

Which of the following securities are exempt from registration at the state level? I. Issue of a savings and loan association authorized to do business in this state II. General obligation municipal bond III. Bond issued by a company that has common stock listed on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX])

I, II, and III The USA exempts a number of different issues from registration, including securities issued by a bank, or anything that functions like a bank (e.g., a savings and loan or credit union). Securities issued by a governmental unit are always exempt. Securities listed on the NYSE American LLC (formerly known as the American Stock Exchange) are part of a group known as federal covered securities that also include those listed on the New York Stock Exchange and Nasdaq Stock Market issues. If the common stock is listed, then any security of that issuer that is equal or senior to the common is also considered exempt.

Which of the following statements best describes rights of rescission under the USA? A) An investor who believes he has been wronged in conjunction with a violation of the USA may be entitled to restore his former financial condition as if the transaction had not occurred. B) Rights of rescission are not generally available to public customers under the USA, although such rights may be made available to institutional investors. C) Any investor who loses money in a securities transaction can be made financially whole under the rights of rescission. D) An agent who unknowingly violated the USA may be imprisoned for up to five years.

A) An investor who believes he has been wronged in conjunction with a violation of the USA may be entitled to restore his former financial condition as if the transaction had not occurred. An investor who believe he has been wronged in conjunction with an investment transaction may have recourse under rights of rescission to restore his original financial condition. Rescission is not available just because the investor lost money; there had to be some wrongdoing on the part of the BD and/or agent. Generally, an investor exercising rights of rescission is entitled to recover the amount of the initial investment, a reasonable rate of interest on the amount, and attorney's fees, if any, less any income received on the security. An agent may not be imprisoned for unknowingly violating the USA.

A bond with a par value of $1,000 and coupon rate of 5%, paid semiannually, is currently selling for $1,200. The bond matures in 10 years and is callable in six years at 103. In the computation of the bond's yield to call, which of the following would be a factor? A) Interest payments of $25 B) Present value of $1,030 C) 20 payment periods D) Future value of $1,200

A) Interest payment of $25 The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, and the current price. A price with a 5% coupon will make $25 semiannual interest payments. With a six-year call, there are only 12 payment periods, not 20. The present value is $1,200 and the future value is $1,030, the reverse of the numbers indicated in the answer choices.

If Wallace resigned his position as an agent with Rockland Securities to work for Gibraltar Securities, which of the following parties must notify the Administrator of Wallace's move? A) Rockland, Gibraltar, and Wallace B) Wallace and Rockland C) Rockland and Gibraltar D) Gibraltar and Wallace

A) Rockland, Gibraltar, and Wallace When an agent with one BD resigns and affiliates with another, both BDs and the agent must notify the Administrator of the change in registration. Notification is accomplished by filing Forms U5 and U4 with FINRA's CRD.

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

A) Tactical Tactical asset allocation, also know as active asset allocation, attempts to time the market. As such, there is a relatively high amount of in and out trading, causing commission expense to be a significant factor.

Under the Securities Exchange Act of 1934, which body regulates the extension of credit for nonexempt securities? A) The Federal Reserve Board B) The SEC C) The Comptroller of Currency D) The New York Stock Exchange

A) The Federal Reserve Board The Securities Exchange Act of 1934 empowered the Federal Reserve Board (FRB) to set margin requirements and regulate the use of credit to purchase securities. The FRB determines what issues may be purchased on margin and what percentage of the purchase price must be deposited by the purchaser.

Which of the following statement regarding modern portfolio theory is NOT correct? A) The optimal portfolio will always lie above the efficient frontier. B) The optimal portfolio offers the highest return for a given level of risk. C) The optimal portfolio for an investor depends upon the investor's ability to assume risk. D) The optimal portfolio has the lowest risk for a given level of return.

A) The optimal portfolio will always like above the efficient frontier. The optimal portfolio for an investor will always lie on the efficient frontier. That is where, for any given level of risk, the return is the highest. Stated another way, for a given level of return, the risk is the lowest.

Hal and Amy are covered by a pension plat at Benson Industries, Inc., where they are both employed as executives. Their incomes total $300,000 per year, and they file a joint tax return. Which of the following best describes what they can do in a regular IRA program for the year 2024? A) They may contribute $7,000 each, but they cannot take a deduction. B) They may make a $14,000 deductible contribution. C) They cannot have an IRA because they are covered by a pension plan. D) They may each make a $7,000 deductible contribution.

A) They may contribute $7,000 each, but they cannot take a deduction. They may each contribute to their won IRA and enjoy tax-deferred growth within their IRAs, but neither may take the $7,000 annual contribution as a deduction to taxable income on a tax return. For married couples covered by retirement plans at work, the 2024 phaseout begins at a joint modified adjusted gross income (MAGI) after $123,000 and is complete at $143,000. These numbers will never be tested because the amounts change yearly. Also, don't ask yourself, "What if one or both are age 50 or older?" You can safely assume that if a contributor can qualify for the catch-up provision, age will be given in the question. For 2024, the IRA limit is increased to $7,000

Protection of the investing public is one of the major objectives of the SEC. Much of the protection comes from the disclosure requirements enveloping the industry. Among the disclosure forms used is Form 13F. To come under the SEC's requirement to file Form 13F, an institutional manager must have discretion over A) a portfolio of at least $100 million of 13(f) securities. B) a portfolio of at least $100 million. C) a portfolio of at least $50 million. D) more than 10% of the outstanding voting securities of a reporting company.

A) a portfolio of at least $100 million of 13(f) securities. An institutional money manager with at least $100 million in 13(f) securities under discretionary management is required to file Form 13F. This form must be filed within 45 days of the end of the quarter. How does the money manager know which securities are 13F? The SEC publishes a quarterly list.

Yield curve analysis play an important role as a benchmarking and forecasting tool for the future direction of interest rates. In most cases, this analysis involves examining bonds of A) a single issuer over varying maturities. B) varying quality over a number of maturities. C) varying quality of similar maturities. D) similar quality over varying maturities.

A) a single issuer over varying maturities The most common yield curves are drawn using US Treasury securities. The curve is plotted using maturities ranging from the short-term T-bills to the long bonds. There are other curves drawn with bonds from other sectors, such as corporate bonds, to show the yield spread, but that is going beyond the scope of this question.

An agent registered with a broker-dealer in this state would be permitted to do all of the following except A) borrow money, with written permission of the customer and the broker-dealer, from an immediate family member who is a client. B) solicit transactions in unregistered exempt securities. C) split commissions with another agent at an affiliated broker-dealer. D) share in the profits in an account with a customer with written permission of the customer and the broker-dealer.

A) borrow money, with written permission of the customer and the broker-dealer, from an immediate family member who is a client Money may never be borrowed from a client, unless something in the question indicates that the client is in the business of lending money or is an affiliate of the firm. As a testing matter, that will only be banks or broker-dealers in margin accounts. Exempt securities are unregistered because they are exempt and solicitations for trades are not problem. Sharing in the profits in an account with a customer is permitted under these conditions, and splitting commissions with agents of the same broker-dealer or different broker dealers under common control is permitted. However, two registered agents representing nonaffiliated broker-dealers may never share commissions.

In general, the Administrator would require that a broker dealer's social media policies be A) committed to writing and communicated firmwide. B) left up to the manager of each branch office. C) updated at least once every three years. D) limited to defining the responsibilities of supervisory personnel.

A) committed to writing and communicated firmwide. Although NASAA does not yet have a Model Rule dealing with social media, individual states have developed policies, and most of them mirror FINRA's, which requires that a firm's social media policies be in writing and make known to all in the company. It is not just supervisory personnel who must know the policy; any employee is subject to it. Updating every three years is not nearly frequent enough in this dynamically changing industry.

An investment adviser who trades on material nonpublic information is A) in violation of the antifraud provisions of the Uniform Securities Act. B) engaging in the unethical business practice known as front running. C) generally going to increase the returns in client accounts. D) straddling a commingled arbitrage.

A) in violation of the antifraud provisions of the Uniform Securities Act Using inside information is a fraudulent act under both state and federal law. Front running, an unethical business practice, is when a securities professional "runs in front" of a client order to take advantage of the impact that client order will have on the security's price. Even if the use of the material nonpublic information increases client returns, the ends don't justify the means.

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

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

While attending a seminar given by one of the firm's analysts, you hear the term, feasible set. That would bean the discussion was dealing with the topic of A) the efficient frontier B) opportunity cost C) convexity D) a range of returns

A) the efficient frontier The feasible set of portfolios represents all portfolios that can be constructed from a given set of stocks. An efficient portfolio is a feasible portfolio that provides the greatest expected return for a given amount of risk, or equivalently, the least risk for a given amount of expected return. This is also called an optimal portfolio. The efficient frontier is the set of all efficient portfolios. Obviously, and investor should choose a portfolio among the efficient frontier.

An investor purchased 200 shares of Affinage Refining Company common stock at $63 per share. Over the next 6 months, two quarterly qualified dividends of $0.50 per share were paid. The investor liquidated the position at $66 per share. If the investor is in the 32% federal income tax bracket, the approximate after-tax return is A) 4.3%. B) 4.6%. C) 3.9%. D) 5.4% .

B) 4.6% The qualified dividend is taxed at 15%, and the short-term capital gain is taxed at the 32% rate. The total dividend return is 200 shares * $1.00 (two fifty-cent quarterly dividends) or $200. The short-term capital gain is $600 ($66 - cost of $63) = 200 shares * $3 = $600. After the 15% tax on the dividends, the investor has $170. After the 32% tax on the gain, the investor has $408. That is a total of $578 after tax. Dividing that by the original cost of $12,600 (200 shares * $63) results in an after-tax return of approximately 4.6%

Which of the following statements regarding an investment adviser's use of a full-service broker for an account over which the adviser has investment discretion is true? A) A full-service broker may be used only if the broker is not affiliated with the adviser. B) A full-service broker may be used if the charges are reasonable in relation to the advice, analyses, or other services provided. C) Sales incentives, such as free vacations, may be taken into consideration by the adviser in determining whether to use a full-service broker. D) A full-service broker may not be used for any transaction that could be done by a discount broker.

B) A full-service broker may be used if the charges are reasonable in relation to the advice, analyses, or other services provided. Use of a full-service broker to effect transactions for an account over which an adviser has investment discretion is not a breach of fiduciary duty, provided the full service broker's charges are reasonable in view of the services provided. Services include advice, analyses, research, and custodial services, but not sales incentives offered to the adviser, investment advisers are required to disclose this fact on Form ADV. Part 2A

Under the Uniform Securities Act, which of the following would be included in the definition of an investment adviser representative? A) An agent who offers incidental advice on securities whose sole compensation is from commissions on transactions B) A solicitor for an investment advisory firm who is compensated for the service rendered C) An employee, highly skilled in evaluating securities, who performs administrative or clerical functions for an investment adviser D) An individual who renders fee-based advice on precious metals

B) A solicitor for an investment advisory firm who is compensated for the service rendered

Under the Uniform Securities Act, which of the following would be included in the definition of an investment adviser representative? A) An agent who offers incidental advice on securities whose sole compensation is from commissions on transactions B) A solicitor for an investment advisory firm who is compensated for the service rendered C) An individual who renders fee-based advice on precious metals D) An employee, highly skilled in evaluating securities, who performs administrative or clerical functions for an investment adviser

B) A solicitor for an investment advisory firm who is compensated for the service rendered A solicitor is considered an investment adviser representative under the Uniform Securities Act. An employee who performs only clerical or administrative functions is not an investment adviser representative. Precious metals are not securities; therefore, a person advising on them is not considered an investment adviser representative. An agent is a representative of a broker-dealer, and as long as the only form of compensation is sales commissions based upon transactions, registration as an investment adviser representative is not required. Please not that under federal law, the term solicitor has been replaced with promoter and, in general, registration as an IAR is not required. However, this policy has not been adopted by the states so, unless the question specifies the SEC's Marketing Rule for Investment Advisers or some other wording indicating federal law solicitors on the state level will register as IARs.

If Maria turned 73 on August 16, 2023, when must she make the first required minimum distribution from her IRA? A) December 31, 2023 B) April 1, 2024 C) December 31, 2024 D) April 1, 2025

B) April 1, 2024 The SECURE Act 2.0 requires that RMDs commence no later than April 1 of the year following the year that the owner of the IRA turned 73 years old. Maria turned 73 on August 16, 2023. Therefore, distributions must commence by April 1, 2024

Which of the following actions taken by an agent is NOT prohibited? A) Backdating confirmations for the benefit of the client's tax reporting B) Borrowing money from a bank that is the agent's client C) Failing to follow a customer's order to buy a stock in an attempt to prevent a loss in the value of the client's account D) Selling speculative issues to a retired couple of modest means on a fixed income

B) Borrowing money from a bank that is the agent's client One of the few times an agent can borrow money from a client is when the client is in the money-lending business, such as a bank (no a banker). Selling speculative issues to a retired couple of modest means is an unsuitable transaction because it is not consistent with the objectives of the client. An agent must follow a customer's trading order, even if the agent believes the order in an unwise one. An agent may not backdate confirmations for the benefit of the client.

Which of the following is responsible for administration of the Bank Secrecy Act? A) Department of Health and Human Services B) Financial Crimes Enforcement Network C) Security Services D) Securities and Exchange Commission

B) Financial Crimes Enforcement Network Fin CEN is responsible for administration of the Bank Secrecy Act

If a married couple establishes a JTWROS account with a balance of $25 million and wife dies, what is the husband's estate tax liability? A) He pays federal estate taxes on $12.5 million. B) He pays no estate tax. C) He pays federal estate taxes on the entire balance. D) He pays federal estate taxes only on the amount that exceeds the estate tax credit.

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.

A client purchases 1,000 shares of the ABC Global Growth Fund when the NAV is $8.75 and the POP is $9.21. Three years later, the clients make a gift to her daughter when NAV is $9.50 and POP is $10.00, and the daughter elects to receive all distributions in cash. Two years later, she sells all shares when the NAV is $14.25 and POP is $15.00. What are the tax consequences? A) Long-term capital gain of $5,500 B) Long-term capital gain of $5,040 C) Long-term capital gain of $4,750 D) Long-term capital gain of $5,000

B) Long-term capital gain of $5,040 In the case of a gift of securities, the donee acquires the donor's cost basis, $9.21 per share. Sale (redemption) takes place at the NAV ($14.25) for a profit of $5.04 per share (times 1,000 shares)

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 $13 million in assets for four clients. C) manages the portfolio of the KPF Balanced Fund, a registered open-end investment company with $22 million in net assets. D) serves as a pension consultant to the XYZ Employees Retirement Plan, covering 1,200 employees with total assets of $278 million.

B) Manages $13 million in assets for four clients Under the Dodd-Frank bill, investment advisors with less than $100 million in assets under management must register with the states. If the advisor manages a registered investment company, the advisor 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 the US government securities is excluded from the federal definition of investment adviser and, therefore, under the NSMIA, is considered a federal covered adviser.

Which of the following statements is NOT true? A) The sale of open-end investment company shares is a continuous public offering and must be accompanied by a prospectus. B) Open-end investment companies must have a minimum of $1 million in assets to have a public offering. C) Mutual fund shares may not be purchased on margin because their shares are always public offerings of new shares. D) Mutual funds may be used as collateral in a margin account if they have been owned for more than 30 days.

B) Open-end investment companies must have a minimum of $1 million in assets to have a public offering Minimum assets of $100,000 are required

What is the appropriate procedure to follow when a customer fails to sign the form provided by the investment adviser stating that he has received a copy of the investment adviser's brochure? A) Only unsolicited orders may be accepted until the signed receipt is received. B) Proceed with the account, but make a supervisory person aware of this. C) Proceed with the account; the signature is not required. D) Don't do anything with the account until the customer's signature acknowledging receipt of the brochure is received.

B) Proceed with the account, but make a supervisory person aware of this. Although it is true that there is no legal requirement for a client to sign acknowledging receipt of the brochure, if it is the adviser's practice, the account may proceed, but only with notice to the appropriate supervisory person.

One of your clients wishes to reallocate the assets in his 401(k) plan. Specifically, he plans to assist his parents in the purchase of a retirement home. He claims that it makes sense to have about 10% of his plan assets in real estate. A) This would only be permitted if the home were for his personal use. B) This is not permitted because a prohibited party will benefit. C) This is prohibited as qualified plans cannot own real estate. D) An asset allocation model would not have 10% in real estate.

B) This is not permitted because a prohibited party will benefit There are two problems here. First of all, any investment in a qualified plan (or IRA), must be for future use (or else it would be considered a distribution subject to tax). Second, real estate may be used prior to your retirement, but not by "related" parties. These are defined as your spouse and lineal members of your family (ancestor or descendant of their spouse). So, because the parents will be using the property, they are considered prohibited persons.

Which of the following bonds would be the least price sensitive to changes in market interest rates? A) 4.5% Treasury bond due in 20 years with a YTM of 4.1% B) Zero due in one year with a YTM of 6% C) 6% AA bond due in 18 years with a YTM of 6.8% D) 10% BB bond due in 21 years with a YTM of 8.7%

B) Zero due in on year with a YTM of 6% In almost every question like this, the zero will have the longest duration and the greatest price sensitivity to interest rate changes. This is the odd case where the zero is due so soon that its duration is by far the shortest of any of the choices. Shorter duration means less price sensitivity.

A securities analyst reviewing the financial statements of the XYZ Corporation observes that the company's total liabilities are in excess of its total assets. From this information, the analyst could conclude that XYZ has A) a high current ratio. B) a negative book value per share. C) a low price-to-earnings ratio. D) a highly leveraged capital structure.

B) a negative book value per share When the liabilities exceed the assets, there is a negative net worth. By extension, that means a negative book value per share. We don't know anything about the current assets and current liabilities, so we can't measure the current ratio. We also don't know if the debt is from borrowing or just an excess of payables over receivables, so we don't know if financial leverage has been employed. Likewise, we have no information about the company's earnings, so we can't compute the PE ratio. It is likely that is low, but if this is a start-up enterprise, it is possible that the PE could be rather high. In any event, when faced with two choices that could be correct, always go with the one that is correct without any exceptions.

Under state law, all of the following investment advisers are exempt from registration except A) foreign private advisers with no place of business in the United States and less than $25 million in assets under management. B) advisers whose only clients are insurance companies. C) advisers solely to venture capital funds. D) advisers solely to private funds with less than $150 million in assets under management in the United States.

B) advisers whose only clients are insurance companies It is the federal law, the Investment Advisers Act of 1940, that exempts investment advisers from registration if their only clients are insurance companies. State law does not have that exemption. Among other exemptions, the Uniform Securities Act exempts investments advisers whose only clients are private funds. This would include the foreign private advisers and advisers to venture capital funds. Please note that if the choice had said the investment adviser has no place of business in the state and the adviser's only clients were insurance companies (or several of the other institutional investors where the exemption applies), registration would not be required.

An agent who carefully evaluates a client's risk tolerance, financial situation, and investment objectives engages in an unethical practice when he A) fails to discuss a company's working capital position (because the client does not want to be bothered by details) if the securities are fundamentally suitable for his portfolio. B) automatically recommends securities that are highly regarded by other agents in the office. C) underestimates a company's interest rate risk as a result of cautious accounting practices recently adopted by the company. D) buys or sells securities with exceptionally high commissions or transaction costs.

B) automatically recommends securities that are highly regarded by other agents in the office It is a prohibited practice to automatically recommend securities without having a reasonable basis for the recommendation; other agents recommending the security is not a reasonable basis for recommendation. Purchasing securities with high transaction costs is not prohibited, provided that disclosure is made to the client. An agent is not required to describe all facts surrounding an investment, but he must present all those that are material. Regarding estimates of a company's interest rate risks, the representative did not misrepresent a material fact that would have otherwise precluded the client from purchasing the security.

When a security is being registered under coordination, all of the following are required except A) payment of the appropriate fee. B) filing with the Administrator of a statement of the maximum and minimum proposed offering prices and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC. C) a description of the proposed use of the proceeds of the underwriting. D) prompt filing with the Administrator of any amendments filed with the SEC.

B) filing with the Administrator of a statement of the maximum and minimum proposed offering prices and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC. The statement of the maximum and minimum proposed offering prices and the maximum underwriting compensation must be filed at least two full business days before the effective date, not with the initial filing.

ADRs are used to facilitate A) the domestic trading of U.S. government securities. B) the domestic trading of foreign securities. C) the foreign trading of domestic securities. D) the foreign trading of U.S. government securities.

B) the domestic trading of foreign securities An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities.

ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $0.25 per share and capital gains of $0.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund was $28.50, and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be A) 27.20% B) 3.85% C) 3.33% D) 83.00%

C) 3.33% The current yield on mutual funds is calculated by dividing the annualized dividend yield ($0.25 x 4 = $1) by the POP. $1 / $30 = 0.0333 x 100 - 3.33%. In calculating the current yield, the law prohibits the inclusion of capital gains and growth.

The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket? A) Account number, customer address, time of order entry, and terms and conditions of the order B) Customer name, customer address, execution price, and time of execution or cancellation C) Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order D) Customer name, execution price, time of order entry, and time of execution or cancellation

C) Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order This is one of the questions where the best way to find the answer is by determining what is NOT correct. Customer name and/or address would never be on an order ticket and that knocks out three of the choices. The account number (not name), the execution price (once the order is completed), the time of entry and execution (or cancellation if it is a day order that is not executed), and the terms and conditions (limit, market, stop, etc.) are all on the order ticket.

Under the Uniform Securities Act, which of the following statements regarding the consent to service of process is not true? A) Investment advisers and investment adviser representatives must file a consent to service of process to become registered. B) A consent to service of process makes legal process served on the Administrator legally binding as process served on the registrant personally. C) Only applicants whose principal office is in another state need to file a consent to service of process. D) A consent to service of process does not need to be supplied each time a registrant's registration is renewed.

C) Only applicants whose principal office is in another state need to file a consent to service of process. All applicants for registration must file a consent to service of process, regardless of where their principal office is located. A consent to service of process grants legal authority for the Administrator to receive legal notices on behalf of the registrant and applies to all securities professionals. The document is part of the initial registration and, once filed, does not have to be renewed.

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

C) Our firm is so confident that this recommendation will perform as predicted that it has established an escrow account with the administrator to protect investors against loss 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 a loss.

Which of the following is NOT among the powers granted to the Administrator under the Uniform Security Act (USA)? A) The power to audit the books of a federal covered adviser with clients in his state if he suspects fraudulent business behavior B) The power to permit an investment adviser to charge performance-based fees on an account of a client with a net worth of $750,000 and an account balance of $200,000 C) The power to require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in his state as long as the investment adviser has a place of business in the state D) The power to require a federal covered adviser who has individual clients in his state to file with the Administrator, prior to acting as a federal covered adviser in his state, any documents that have been filed with the Securities and Exchange Commission that the Administrato

C) The power to require individuals associated with federal covered advisers in the capacity of investment adviser representatives to register as such in this state as long as the individual adviser has a place of business in the state. IARs associated with federal covered advisors are only required to register in a state in which they (the IAR) have a place of business. Although federal covered advisers are generally exempt from state regulation, the USA does give the administrator the power to investigate when there is suspicion of fraud. Even though the USA sets certain standards for performance-based fees, there is a provision that grants the administrator the authority to waive those limits when deemed appropriate. Unless the federal covered adviser has not office in the state and only deals with institutional clients or other federal covered advisers, the Administrator has the power to demand to see relevant information that been filed with the SEC.

If an investment adviser representative of a federal covered adviser that transacts business in a state terminates employment with that investment adviser, which of the following statements is true? A) The investment adviser must notify the Administrator. B) Both the representative and the investment adviser must notify the Administrator. C) The representative must notify the Administrator. D) No notice to the Administrator is required.

C) The representative must notify the Administrator If is the investment adviser representative's responsibility to notify the Administrator. The advisory firm is not registered with the state; only the representative is registered.

Investment advisers who manage investment portfolios that total less than $100 million must register with A) the SEC only. B) both a state and the SEC. C) a state only. D) neither the SEC nor a state.

C) a state only Investment Advisers who manage less that $100 million of investment assets are prohibited from registering with the SEC and are required to register with a state Administrator unless exempt under the laws of that state. Please not not confuse this with an SEC-registered IA whose AUM may drop to as low as $90 million with continued SEC registration allowed. Any question about the rule will state that AUM as "dropped".

A portfolio that maximizes an investor's preferences with respect to return and risk is called A) a diversified portfolio B) an uncorrelated portfolio C) an optimal portfolio D) the efficient frontier

C) an optimal portfolio An optimal portfolio will generally lie on the efficient frontier (which is a graph, not a portfolio). The special nature of an optimal portfolio is that it may not always be the most efficient portfolio (offering the greatest return for the least risk) because it takes into consideration the specific preferences of the individual investor, which might create bias.

Under the Uniform Securities Act, an investment adviser is exempt from registration if he has not place of business in a state and his only clients are any of these except A) other investment advisers B) broker-dealers C) individuals meeting the accredited investor standard D) investment companies

C) individuals meeting the accredited investor standard Provided his clients are institutional investors and the adviser has no place of business in a state, he is not required to register as an investment adviser. Other than the de minimis or snowbird exemptions, there are no other cases where an IA serving individuals would not have to register.

As a registered investment adviser, you have managed $10million of a customer's funds for several years. The customer asks you to prepare a trust for his children, to transfer $3 million of his funds into the trust, and to trade the trust with the same objectives as the existing account. You should A) prepare the trust, transfer funds, and begin investing. B) explain to the customer that trusts cannot be traded. C) refer the customer to an attorney that can set up the trust. D) tell the customer to contact a tax specialist.

C) refer the customer to an attorney that can set up the trust

Greater Wealth Managers (GWM) is an investment adviser registered in States A, B, C, and D. An individual was recently hired to solicit new advisory accounts for the firm. This person will not be engaged in giving advice of any kind, and all activities will be closely supervised by senior personnel of the firm. Under Section 201 of the Uniform Securities Act, A) no registration is required, because this individual is not rendering investment advice and is being closely supervised. B) no registration is required, because this individual is not rendering investment advice. C) registration as an investment adviser representative is required for this individual. D) registration as an investment adviser representative and as an agent is required for this individual.

C) registration as an investment adviser representative is required for this individual Because GWM is registered on the state level, it comes under the provisions of the Uniform Securities Act. Under the USA, the definition of investment adviser representative includes, among others, those who solicit for the services of the investment adviser. Therefore, these individuals must register as IARs.

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 state in which its principal office is located. B) the state with the highest net capital requirements of the states in which it does business. C) the SEC, even if one or more of the states in which they are registered has a higher net capital standard. D) each state in which they do business.

C) the SEC, even if one of 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.

XYZ Corporation's A-rated convertible debenture is currently selling for 90. If the bond's conversion price is $40, what is the parity price of the stock? A) $44.00 per share B) $40.00 per share C) $22.50 per share D) $36.00 per share

D) $36.00 per share If the bond's conversion price is $40, it means the bond is convertible into 25 shares ($1,000 par value divided by the $40 conversion price). Parity means equal, so what does each share have to be worth so that 25 of them are equal to $900? Remember, bonds are quoted as a percentage of $1,000 par value, so a price of 90 means $900. Dividing $900 by 25 shares results in a parity price of $36. That does not mean the stock is selling for $36 per share (probably a bit less), but at $36, holding the bond, or converting into the stock, gives the investor equal value. Some students quickly see that the bond is 10% below its par value, so the stock - to be equal- must be 10% below the conversion price. Take 10% off $40 and the result is $36. Either way works.

Which of the following individuals would be considered a noninterested person in mutual fund? A) A person who holds a position with the fund's underwriter B) A member of the board of directors who is also employed as the investment adviser C) A shareholder who owns 10% of the fund's shares D) A member of the board of directors who does not hold another position within the investment company

D) A member of the board of directors who does not hold another position within the investment company. The Investment Company Act of 1940 defines an interested person as someone employed by or who has a material business relationship with the fun, its adviser, or the underwriter. Someone who owns 5% of more of the outstanding share (an affiliated person) is also considered interested. Merely sitting on the board does not make someone an interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person.

Although generally prohibited, there are conditions under which a state-registered investment adviser is permitted to charge performance based fees. Which of the following meets the necessary criteria? A) Charging a performance-based fee to an individual with a qualifying net worth in excess of $10 million without describing that there is an incentive for the adviser to take greater risks B) Charging a performance-based fee to an individual who meets the definition of an accredited investor C) Charging a performance-based fee to an aggressive entrepreneur whose net worth, excluding the equity in the principal residence, is $1.8 million and who has $500,000 under the adviser's management D) Charging a performance-based fee to an elderly client whose net worth, excluding the equity in the principal residence, is $2.3 million, with only $150,000 under the adviser's management

D) Charging a performance-based fee to an elderly client whose net worth, excluding the equity in the principal residence, is $2.3 million, with only $150,000 under the adviser's management. Performance fees may be charged, regardless of the client's age, to anyone with a qualifying net worth in excess of $2.2 million or with at least $1.1 million under management with the firm. This client with $2.3 million, exclusive of the equity in the principal residence, in net worth meets the qualification. An individual reaches accredited investor status with a qualifying net worth of at least $1 million, not enough to qualify. Additionally, one way in which the states differ from federal law is the requirement to disclose the incentive to take greater risks.

An agent is registered in New York and Vermont. While working in his New York office, he places a call to the cell phone of one of his New York clients and learns that the client happens to be on vacation in Ohio. After describing the reasons for a particular stock recommendation, the client asks the agent to call back tomorrow. The agent does so and reaches the client in Indiana. The client decides to purchase 100 shares of the stock. When the client arrives home, he notices that he has already received his stock certificate from the transfer agent located in Illinois. In this case, Administrators of which states do NOT have jurisdiction? A) New York and Indiana B) Ohio and Indiana C) Indiana and Illinois D) Illinois and Ohio

D) Illinois and Ohio The Administrator has jurisdiction from the state in which the offer originated (New York) and was accepted (Indiana). Mailing of the certificate is of no consequence. Ohio does not have jurisdiction because the client was merely traveling and the call was directed to the New York number. When the Uniform Securities Act was written in 1956, obviously, there were no cell phones, but there was a situation similar to this. The USA addresses the issue of forwarded mail and rules that the original address is what counts, not the state to which the mail is forwarded. NASAA applies that logic when an agent contacts a client on a cell phone. It is the home location of the owner of the phone that counts, not where the call is received. That changes when the client actively participates in the transaction from another state - in this case, Indiana.

Serenity Strategic Investments is an investment adviser registered in four states. SSI's most previous annual updating amendment showed AUM of $108 million. Six months later, a favorable market resulted in SSI's AUM growing to $120 million. Unfortunately, several large clients left, so at the end of SSI's year, its AUM was down to $94 million. Which of the following statements is correct? A) SSI may remain SEC registered as long as AUM is at $90 million or more. B) SSI has the choice of remaining state-registered or registering with the SEC. C) SSI must become registered with SEC within 90 days of exceeding $110 million. D) SSI remains state registered because its AUM is less than $100 million.

D) SSI remains state registered because its AUM is less than $100 million The key to answering this question is remembering that, for purposes of SEC registration, it is AUM (technically known as the RAUM - regulatory AUM) shown on the annual updating amendment to Form ADV that is the determining factor. We are told that SSI is state registered, something permitted when reported AUM is $108 million, although it was eligible to register with the SEC. The midyear increase has no effect on registration, only that at the end of the year. Because SSI will report $94 million on the next annual update, it will remain state registered and does not have the option to register with the SEC because AUM is below $100 million. The only time the $20 million buffer down to $90 million enables an investment adviser to remain registered with the SEC is just that - the IA is already registered with the SEC and can stay there.

Howard is an investment adviser representative with Hughes & Company, a state-registered investment adviser having its principal office in State O and offices in States P and D. Howard works out of an office in State P and has 4 retail clients there. In addition, Howard has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Howard would be required to register as an investment adviser representative in A) States P, D, M, and O. B) States D and M. C) State P. D) States P, D, and M.

D) States P, D, and M Individuals working as IARs for state-registered investment advisers must register in any state in which they (the IAR) maintains a place of business, as well as any other state in which they serve more than 5 retail clients (the de minimis exemption). With as office in State P, registration is required there, regardless of the number of clients. In both States D and M, the de minimis has been exceeded, so registration is required there. The fact that the IA's principal office is in State O has no bearing on Howard, and with only one retail client there, he qualifies for the de minimis exemption.

Under the Investment Company Act of 1940, which of the following statements is true about an investment company that wishes to contract with an outside investment adviser to manage its portfolio? A) The contract must provide for a minimum notice of at least two weeks if the contract is to be terminated. B) The initial contract must be approved by either the board of directors or a majority vote of the outstanding shares. C) The investment adviser must be under common control with the investment company. D) The contract between the investment company and the investment adviser must be in writing.

D) The contract between the investment company and the investment adviser must be in writing. One of the requirements of the Investment Company Act of 1940 is that the contract between a management investment company (open- or closed-end) must be in writing. The initial contract must be approved by the majority vote on the outstanding shares or the board of directors, as well as a majority of the directors who are considered to be noninterested parties. If the adviser and investment company has to be under common control, then there would be no way to engage an outside adviser. The contact must call for a maximum 60-day termination clause; there is no minimum.

Under the Uniform Securities Act, which of the following statements is true regarding registration of an investment adviser if the application has not been amended? A) Unless specified earlier, registration becomes effective no later than 90 days after the application is filed. B) Unless specified earlier, registration becomes effective no sooner than 15 days after the application is filed. C) Unless specified earlier by the Administrator, the registration becomes effective at noon on the 60th day after application. D) Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application.

D) Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application While the Administrator may specify an earlier date, absent any denial orders or pending proceedings, registrations become effective at noon on the 30th calendar day after the date of filing. The application is considered to be filed on the date received in the offices of the Administrator, not the date of mailing by the applicant.

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

D) 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 that completion of the trade. However, in a case like this, where the transaction is strictly based on the BD relationship rather than an advisory one, no consent is necessary. Blanket permission is never permitted for this type of transaction. Do not confuse this with the prospective consent given for agency cross transactions, which is a different relationship.

Under the Investment Advisers Act of 1940, which of the following is considered an investment advisor? A) A syndicated columnist who gives weekly reports and recommendations on investments B) The trust officer of a commercial bank who manages investment accounts for clients C) A person who publishes a regular newsletter of advice on U.S. Treasury bonds and other U.S. government securities D) A lawyer who specializes in consulting on investing in securities

D) a lawyer who specialize in consulting on investing in securities Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment advisor. Under the federal law, anyone giving advice dealing only with US government securities is excluded from the definition, as are those who work for bank and trust companies. The lawyer is not excluded because the advice provided is not incidental to the profession; it is the lawyer's specialty.

While an application for registration as an agent of a broker-dealer is still pending, that person would be permitted to A) limit her acceptance of orders to those from the broker-dealer's existing clients. B) engage in no activity at the office other than studying for the exam. C) accept unsolicited orders only. D) assist registered employees of the firm by doing research on securities they are following.

D) assist registered employees of the firm by doing research on securities they are following While registration as an agent is pending, the applicant can take no active role in the sale or offering of securities. However, performing research on an internal basis does not involve contact with the public in a sales effort and would be permitted.

A grantor retained annuity trust is a planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize A) income taxes. B) excise taxes. C) property taxes. D) estate taxes.

D) estate taxes A GRAT is an estate planning tool designed to pass assets to beneficiaries in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor.

An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of Kapco common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the Kapco stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case, the agent acted A) improperly; the order should have been placed on Monday. B) properly because the agent used discretion as to price and time. C) properly because the agent saved the client money. D) improperly; the order should have been placed on Thursday.

D) improperly; the order should have been place on Thursday In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time or price. However, time or price discretion are only good for that day - those are considered "day" orders, so the agent is able to use judgment, but the order must be placed during the day it was received.

Tax preference items are used for purpose of computing the alternative minimum tax. They include all of the following except A) excess intangible drilling costs. B) accelerated depreciation. C) certain incentive stock options. D) straight-line depreciation.

D) straight-line depreciation Straight-line depreciation is not a preference item. All of the other choices are included in the IRS listing of a tax preference items. In the case of the ISO, it is a preference item to the extend that the fair market value of the employer's stock is in excess of the strike price of the option. As a test-taking tip, when you see two opposites as answer choices, it is likely that one of them is the correct answer. In this case, we have straight-line and accelerate depreciation, only one of which is a preference item.

A corporation issued a bond with a coupon of 6%, callable at 103. The bond matures in 2059. Current interest rates are 8%. It is most likely that A) the bond will be called. B) the bond will go into default. C) the coupon will be increased. D) the bond is selling at a discount.

D) the bond is selling at a discount There is excess information in this question. We don't need to know the call price of the maturity date. We have a 6% bond when current market interest rates are 8%. The inverse relationship between interest rates and bond prices teaches us that this bond is going to be selling at a discount. Bonds are called when interest rates go down, not when they rise. The coupon on a bond is fixed

Which of the following are regulated under the Securities Exchange Act of 1934? I. Broker-dealers II. Investment advisers III. Pension plans IV. OTC markets

I and IV The Securities Exchange Act of 1934 regulates BDs and the securities marketplaces (exchanges and OTC). Investment advisers 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.

A customer purchased a 5% US government bond yielding 6%. A year before the bond matures, new US government bonds are being issued at 4%, and the customer sells the 5% bond. The customer probably did which of the following? I. Bought it at a discount II. Bought it at a premium III. Sold it at a discount IV. Sold it at a premium

I and IV The customer purchased the 5% bond when it was yielding 6% (at a discount). The customer sold the bond when other bonds of like kind, quality, and maturity were yielding 4%. The bond is now at a premium. Therefore, the customer realized a capital gain.

Under which of the following circumstances does NASAA allow an investment adviser to charge performance-based fees? I. The client must initially have $1.1 million under management or a net worth in excess of $2.2 million. II. Compensation paid in this way must be for gains reduced by losses. III. Disclosure must be made that the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee.

I, II, and III The NASAA Model Rule permits performance-based fees if the client has at least $1.1 million in assets under management or a net worth in excess of $2.2 million, provided the compensation is based on gains and losses. Unlike the Investment Adviser Act of 1940, under the NASAA Model Rule, state-registered advisers must make additional disclosures, including the incentive to take additional risk.

As a client's only child is about to complete her college education, it is obvious that the 529 plan used to accumulate funds has been overfunded. Which of the following might me suggested to minimize tax consequences. I. Encourage the daughter to go to graduate school and use the money for qualified expenses there. II. Roll over the funds to a member of the beneficiary's family. III. Roll over the funds to a Coverdell ESA. IV. Roll over the funds to the donor's traditional IRA.

I. & II. When there is money remaining in a Section 529 plan after a student has completed college, withdrawal of that excess will result in the portion representing earnings being taxed at ordinary income tax rates plus a 10% penalty. Those taxes and penalties can be avoided if the funds are properly used for graduate school expenses for the original beneficiary of be designating a new beneficiary who is an immediate family member (as defined in the law) and rolling over the funds. There is no such thing as a rollover to a Coverdell ESA. Beginning in 2024, unused funds in a 529 plan (subject to a number of limitations) may be rolled over into a Roth IRA in the name of the beneficiary, not a traditional IRA and not the donor (unless the donor and beneficiary are the same).

Under the Uniform Securities Act, which of the following are elements in the definition of an investment adviser? I. Advice as to investments must be in writing, not given orally. II. Advice must relate to the value of securities or recommendations to purchase or sell securities. III. There must be compensation for services rendered.

II and III An investment adviser provides advice related to securities for compensation. The advice may be given orally or in writing.

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

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 BDs and investment advisers that must submit financial information.

Under which of the following conditions does NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers permit an investment adviser to divulge personal information about a specific client? I. When it will be used in a testimonial regarding the advisory services offered II. When the investment adviser has received a subpoena from a court of competent jurisdiction III. When the client has given the investment adviser specific permission to do so IV. With the approval of the Administrator

II. and III Investment advisers are generally prohibited from divulging any information about their clients unless required by law or the courts. However, if the client specifically approves, the IA may act within the limits stated by the client. Testimonials are given by the client. And it is not the investment adviser who would be divulging personal information; it would be the client.

Which of the following activities are prohibited practices under the principles of the Uniform Securities Act? I. Buying and selling the same stock on the same day on different exchanges II. Offering shares of an unregistered, nonexempt security to retail customers III. Offering a Canadian government bond to a resident of a state in which the agent of a broker-dealer is not registered

II. and III. Unless qualifying for an exemption, BDs and agents must be registered in each state where offer of sales occur. Also, every security must be registered unless it is an exempt security. Buying a security on one exchange and selling it on another is an arbitrage activity and not a violation of the USA. Although the Canadian government bond is an exempt security, the agent must be properly licensed in each state in which an offer to sell is being made.

When does the Investment Advisers Act of 1940 NOT require delivery of a brochure containing information about the adviser's background and business practices? I. When the service provided is an individual supervisory service II. When the client is an investment company III. When the contract is for an impersonal advisory service requiring payment of less than $500 IV. When the client is an individual with a net worth of more than $1 million

II. and III. A disclosure brochure is not required to be delivered if the client is a registered investment company of if the advisory service is of an impersonal nature and costs less than $500. A brochure is required when the service provided is an individual supervisory service, and the client's net worth has no bearing on brochure delivery requirement.

A BD with an office in this state would be defined as an investment adviser if it charges which of these? I. Commissions for selling securities II. Commissions for selling securities while offering investment advice incidental to the sale of the securities III. A fee for selling investment research and additional fees in the form of commissions for the sale of securities IV. Fees for investment research sold exclusively to institutions located in this state

III. and IV. A BD would be considered an investment adviser if it has a place of business in this state and if it charges a fee for selling investment research of any other from of investment advice, even to institutions. If a person is in the business of selling research for a fee, that person or firm meets the definition of an investment adviser. If a BD charges commissions for selling securities and offers investment advice incidental to the sale of the securities, the BD is not an investment adviser because it is not compensated for the research.