Wrong answers (corrected)

Which of the following may be included in an advertisement created by an investment adviser (IA)?

A no-strings-attached offer to furnish a list of all the recommendations made by the IA in the last two years Investment adviser advertisements may not make reference to past recommendations unless they offer to furnish all of the recommendations made over at least the last year. Also, specific investment advice and the use of testimonials are generally not permitted in IA advertising.

Which of the following allocations would be the LEAST suitable for an investor with a 30-year time horizon, moderate risk tolerance, and the goal of long-term growth?

50% money-market funds, 50% long-term government bond funds An investor with a long time horizon and a goal of growth should have some part of her portfolio in equity securities. An allocation with 50% money- market funds and 50% long-term government bonds is unlikely to meet this investor's goal. **this was easy if you read the word LEAST**

In order to form a limited partnership, two or more people must:

File a certificate with the appropriate state or local official The only way to create a limited partnership is by filing a certificate (or other document) with a state or local agency. A general partnership, in contrast, is created whenever two or more people agree to form a partnership. The agreement does not even need to be in writing.

Harold has established a revocable trust. His son Stanley is the trustee and his daughter Dora and her children are the beneficiaries. The income is currently taxable to:

Harold Since this is a revocable trust, all the income produced by the trust must be included in Harold's (the grantor's) tax returns. The trust income would not normally be taxable to the trustee unless the trustee is also the grantor or one of the beneficiaries. Note, however, that the trustee would be responsible for making certain that the proper tax payments were made. If the trust is irrevocable, then the income is generally taxed to the trust or the beneficiaries.

All of the following statements regarding discounted cash flow are NOT TRUE, EXCEPT:

It is used to determine the attractiveness of an investment Discounted cash flow (DCF) analysis is a method of estimating the fair market price of an investment. If the investment is trading at a value lower than its discounted cash flow value, this would suggest it is attractive or undervalued. Research analysts use discounted cash flow analysis to determine the value of many different investment opportunities in the marketplace.

If an adviser is using a sector rotation strategy, which of the following asset classes would they rotate into when the economy appears to be ready for recovery?

Technology During recovery, the sectors that perform the best are technology, industrial, and cyclicals. During a recession, the sectors that perform the best are consumer staples, utilities, service, and financial industries.

Under the Uniform Securities Act, all of the following are exempt from registration as an investment adviser EXCEPT an IA:

That has five or fewer clients in the state, but is actively soliciting for more clients If an investment adviser actively solicits more than five individual customers in a state, registration is required there. There are a number of situations in which a person may provide advice and yet not be required to register as an investment adviser. Some examples include professionals (e.g., the CPA in this question) whose advice is incidental, advisers whose only clients are insurance companies or other institutions, and firms that do not receive compensation (i.e., nonprofits).

All the following statements apply to a rule of the Administrator, EXCEPT:

The Administrator is not required to publish rules All rules of the Administrator must be published. The rules of the Administrator are not part of the law, but interpret the state's laws. To change a state's securities laws, approval from the state legislature (Congress) is required.

If an investment adviser sells a security that it owns to an advisory client, which of the following scenarios would violate the Uniform Securities Act?

The IA acts as a broker-dealer to the buyer of the securities without written consent and disclosure When an investment adviser sells securities directly to a client (i.e., principal trade), the firm must provide disclosure and obtain the client's consent before completing the transaction.

An investment adviser's (IA's) only client is a 3(c)(1) fund that has $110 million in assets under management (AUM). Which of the following statements regarding the registration requirements of the IA is TRUE?

The investment adviser is an exempt reporting adviser (ERA) and is not required to register with the SEC, but must notice file with the state Administrator(s) and pay a fee. The IA is an exempt reporting adviser (ERA) and is exempt from registration, but must notice file with the state Administrator(s) and pay a filing fee. ERAs are exempt from registration with the SEC if they manage private funds that have less than $150 million in AUM. Private funds are typically referred to as hedge funds. Unlike mutual funds, private funds are exempt from SEC registration if they have 100 or fewer investors. This exemption for private funds is provided in Section 3(c)(1) of the Investment Company Act of 1940.

An investment adviser's computer system was hacked and customer data was compromised. At the time of the breach, the firm was in the process of establishing procedures which required password and data protection. Is the firm at fault?

yes, there should have been digital protection protocols in place.

Which of the following statements is FALSE?

When securities are gifted, the donor may claim a deduction that is equal to his original cost basis. When securities are gifted, the deduction that a donor may claim is equal to the market value of the securities at the time of the gift. The donor will benefit if the stock price has risen, since he will avoid paying capital gains tax. If the shares are gifted to an individual, the recipient's cost basis is the original purchase price or the current market price, whichever is less. On the other hand, if shares are inherited by an individual, the beneficiary's cost basis is the market value of the shares on the date of the decedent's death.

Mark purchases an equity-indexed annuity contract that guarantees a 5% return with an 80% participation rate and a 12% interest-rate cap. The index to which the funds are tied rises in value by 10% this year. What return does Mark receive?

8% In an equity-indexed annuity, the owner receives a guaranteed minimum interest rate with potential upside based on the performance of the designated index. If the return on this index is less than the guaranteed rate, the owner receives the minimum. If the index return is greater than the guarantee, the owner receives the greater return up to the capped maximum. Many contracts only pay a portion of the index return. In this example, the client is entitled to 80% of the index return capped at a 12% maximum. The index increased by 10%, so the client's contract is credited with 80% of that amount, or 8%.

A court has appointed a person to be the guardian for an incompetent individual. To open a guardianship account with a broker-dealer, which of the following court-issued documents is required?

A certificate of incumbency A certificate of incumbency is a court-issued document that provides the legal authority of a court-appointed guardian to act on behalf of another person. The certificate serves as evidence that the listed person is authorized to act as a fiduciary for another person (the account holder) or any unincorporated entity (i.e., business, club, association, or organization). On the other hand, a durable power of attorney authorizes a person to manage the affairs of an individual who is in good health and remains in force if the individual is declared incompetent or becomes incapacitated. It is important to note that a power attorney is not issued by a court; instead, it is issued by one person to another person

Schedule 13D is required to be filed with the SEC by any person, or those acting together, who acquire more than 5% of the voting stock of a public corporation. Which of the following statements is NOT TRUE regarding Schedule 13D?

A copy must be given to the current shareholders All of the choices are true except the statement that a copy must be given to the shareholders.

Which of the following communications must be filed with the Administrator?

A final prospectus for a security that's registered using qualification Advertising and promotional materials that relate to exempt securities or exempt transactions are NOT required to be filed with the Administrator. Municipal bonds, U.S. Treasury bonds, and registered investment companies are all exempt under the Uniform Securities Act; therefore any advertisements related to these securities don't need to be filed with the Administrator. A prospectus that's used for a security being registered using qualification must be filed with the Administrator.

Which of the following firms would be required to register as an investment adviser in the state of Utah?

A firm with $90 million in assets under management and an office in Utah that deals exclusively with four small institutional customers Advisers are not required to register as investment advisers in a state if they have no office in the given state and deal only with institutions in the state or send communications to five or fewer non-institutional customers in the state within a 12-month period. If a firm has a place of business in a state, but has assets under management (AUM) between $100 million and $110 million, it can choose to register with the either the state Administrator OR the SEC. If a firm has a place of business in a state and has AUM of less than $100 million, it must register with the state. Lastly, if a firm has AUM of more than $110 million, it must register with the SEC. These large advisers are referred to as federal covered investment advisers and are not required to register in any state.

If employed by a federal covered adviser, which of the following individuals would be required to register as an IAR in State A?

A person who works at the home office in state A however all of his clients are institutions located in State A and State B If an IAR is employed by a federal covered adviser, the de minimis exemption—limiting the number of retail clients—does not apply. The IAR may exceed the five-client threshold in a state as long as he does not have a place of business. However, when an IAR is employed by a federal covered adviser and has an office in the state, the IAR would be required to register in that state, regardless of the number or type of clients being serviced. Remember, IARs of federal covered advisers are required to register in the state(s) in which they maintain an office. For that reason, a person who works at the home office in State A is required to register there. This is true regardless of the type of clients that the IARs may have in State A

Under the Uniform Securities Act, which of the following transactions is NOT exempt from state registration?

A rule 147 offering The Rule 147 (intrastate) exemption is a federal or SEC exemption and does not apply to the Uniform Securities Act. For that reason, an issuer conducting an offering of securities in one state is required to register the offering in that state. On the other hand, a transaction by a fiduciary, such as an executor, sheriff, marshal, guardian, trustee in bankruptcy, is exempt from state registration. Additionally, isolated, non-issuer transactions and transactions executed on the New York Stock Exchange, Nasdaq, or any other recognized national or regional exchanges are exempt from state registration.

A client would like to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations would be most suitable?

An S&P 500 Index Mutual Fund Although all these investments would be suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund would be the most cost-effective method for an investor who has $250 a month to invest to accomplish this goal. The closed-end fund and ETFs are purchased on an exchange, and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge, (i.e., they are no-load). If the investor were purchasing a large dollar amount at one time, any of these funds might be appropriate.

All of the following accounts would be considered institutional, EXCEPT:

An account with a total value in excess of $1 million Under the USA, there is no minimum size that defines an institutional account. The simple fact that an account value in excess of $1 million does not make it an institutional account.

Which of the following is NOT a required element of a trust?

An attorney A trust always consists of several elements. The first is the settlor's intention to create the trust. This could be done through a written or oral trust agreement. In addition, all trusts require a subject matter, which is often referred to as the "trust res" or corpus. In many trusts, the subject of the trust is a financial asset, real estate, or money that the settlor wants to give to the beneficiary. The last two elements of a trust are the trustee to act as a fiduciary and the beneficiary who will benefit from the trust. Although attorneys often write trust agreements, a trust can be created without an attorney.

Which of the following transactions would NOT be considered exempt under the Securities Act of 1933?

An initial public offering of an investment company's common stock With the exception of the public offering of investment company shares, all of the transactions listed are exempt from the Securities Act of 1933. Generally, when investment company shares are offered to the public, they must be registered and sold with a prospectus.

The Administrator may require the filing of advertisements related to which of the following securities?

An oil lease certificate of interest A certificate of interest is a security regulated by the Administrator along with its advertising. Advertisements sent to existing stockholders, as well as those related to investments issued by an insurance company, are exempt from filing. Also, mutual fund advertising is regulated by FINRA, not by a state Administrator.

Under the Investment Advisers Act of 1940, offering which of the following goods or services would be a violation of soft-dollar practices if the broker-dealer provides them to the adviser in exchange for executing transactions?

Assistance concerning its compliance responsibilities An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. Some examples of allowable services would include traditional and third-party research reports and other related publications, discussions with research analysts concerning the securities they cover, portfolio analysis software, attendance at a conference or seminar where corporate executives discuss their company's performance, market and economic data services, and certain trading software. The permissible uses of soft dollars do not include compliance or administrative assistance, advertising and marketing, the adviser's travel expenses, meals or entertainment, overhead and administrative expenses, employee salaries, marketing, professional licensing fees, computer terminals, and the correction of trading errors.

Your client dies and leaves a sizable investment portfolio. Within two weeks of his death, the executor of his estate presents the proper documentation to you. She has you sell off the decedent's portfolio, investing the proceeds in money-market instruments in anticipation of the distribution to the heirs of the estate. The value of the holdings declines substantially in the period between his death and their sale. For estate tax purposes, the assets will be valued:

At the time of death For estate tax purposes, assets are normally valued at the time of death. The date on which the assets are sold is not relevant.

The original asset allocation of an investment portfolio was 10% cash, 40% bonds, and 50% stocks. A recent bear market, however, has altered this allocation to 10% cash, 50% bonds, and 40% stocks. The client's investment objectives and risk tolerance have not changed. The adviser recommends that the portfolio be systematically rebalanced by selling:

Bonds and buying stocks with the proceeds Systematic rebalancing is the process of buying and selling securities within a portfolio to restore its original asset allocation. Systematic rebalancing may be done either periodically (annually, quarterly, or monthly) or whenever market forces or different rates of return cause a significant change in the original asset allocation. In this case, a bear market has caused the value of the stocks in the portfolio to shrink so that this asset class now represents only 40% of the total portfolio. The adviser would rebalance the portfolio by selling bonds and buying stocks with the proceeds.

Zemo, a new company engaged in green technologies, has announced its IPO will trade on the NYSE. Frank, an adviser with Einstein Advisory Services, plans to purchase a large block of the stock and allocate shares only to his largest discretionary clients. One regulatory concern would be:

Breach of fiduciary duty A primary issue is hard to obtain in certain cases. Many clients desire IPOs that are greatly anticipated by the market. Providing only the largest clients with an allocation is unfair to smaller clients and represents a breach of the adviser's fiduciary duty to those clients. Liquidity is not a major issue as the stock will be listed on the NYSE. Plus, the additional stock allotment to clients would further diversify their investments. Since the shares purchased by Frank were reallocated to his clients, he is not front-running.

Which of the following statements is NOT TRUE concerning the registration requirements of securities professionals?

Broker-dealers with no place of business in a state who limit their agents to selling exempt securities in a state need not register There is no exemption from registration for broker-dealers that have no place of business in a state and who limit their agent's activities to selling exempt securities. It is the securities that are exempt, not the agents selling those securities. Investment advisers that have no place of business in a state may still do business in that state without registering provided they limit their advice to institutional clients or no more than five noninstitutional clients in that state. There is no de minimis exemption for broker-dealers that have no place of business in a state and a limited number of noninstitutional clients.

A client sells shares of an S&P 500 company's common stock. The proceeds are reinvested in an S&P 500 Index fund. The client has reduced which of the following risks?

Business By selling the shares, the client is no longer subject to the risks that may affect a single company. By investing in the S&P 500 Index, the client has greater diversification.

Which of the following terms BEST describes the process for calculating future value?

Compounding To calculate future value, cash flows are compounded to determine the expected value at a future date. The process of compounding involves periodically reinvesting earnings on the principal. Amortization is an accounting term that's used to describe how a company recognizes certain costs/expenses over multiple years. Annualizing is a situation in which a return for a certain period is projected out over the year. Since interest is not always compounded on an annual basis, compounding is the best answer.

All of the following are characteristics of forward contracts, EXCEPT:

Delivery and settlement of the contracts occurs immediately A forward contract is an agreement to buy and sell commodities at a future time and place. Forwards are over-the-counter contracts that will be negotiated off of a futures exchange. All aspects of the contract are negotiated between the buyer and seller, including the price, type of commodity, and amount, as well as the time and place of delivery.

Which of the following is a characteristic of a Money Purchase Plan?

Employers must make mandatory contributions A Money Purchase Plan is a type of defined contribution plan to which an employer makes mandatory contributions, regardless of the company's profitability. For tax purposes, the employer is able to deduct the contributions.

A publicly traded corporation has 20,000,000 shares of common stock outstanding and an investor buys 1,400,000 of the shares in the open market. Which of the following forms is the investor required to file with the SEC?

Form 13D Any investor that acquires more than 5% of the common stock of a reporting company is required to file Form 13D with the SEC. Since the client has acquired 7% of the 20,000,000 outstanding common shares ($1.4 million ÷ $20 million), he is subject to the filing requirement. Form 13F is filed by institutional investment managers that exercise investment discretion over $100 million or more in equity securities. Form 144 is filed when an investor intends to sell restricted (private placement) stock or when an insider intends to sell control stock.

An investor wants to know how much money he will have in 10 years if he invests $100,000 in a variable annuity today, assuming an annual average return of 6%. This investor needs to calculate the:

Future value of money The investor is trying to determine the future value of money. He wants to know how much he will have in 10 years if he invests $100,000 today with an annual return of 6%.

Which of the following is TRUE concerning the private placement of securities being distributed under Rule 506(c) of Regulation D?

General advertising is permitted, but all investors must be accredited. Under Rule 506(c) of Regulation D, issuers may raise an unlimited amount of capital and they may solicit all types of investors; however, the issuer can only accept accredited investors. In other words, general advertising/solicitation is allowed, but only accredited investors may purchase the securities. Under Regulation D, issuers may also sell securities privately through a 506(b) offering. Two key differences between 506(c) and 506(b) are that 506(b) offerings do not allow for general advertising/solicitation and the issuer may sell to an unlimited number of accredited investors, but no more than 35 non-accredited (yet still sophisticated) investors.

Which of the following is TRUE concerning the private placement of securities being distributed under Rule 506(c) of Regulation D?

General advertising is permitted, but all investors must be accredited. Under Rule 506(c) of Regulation D, issuers may raise an unlimited amount of capital and they may solicit all types of investors; however, the issuer can only accept accredited investors. In other words, general advertising/solicitation is allowed, but only accredited investors may purchase the securities. Under Regulation D, issuers may also sell securities privately through a 506(b) offering. Two key differences between 506(c) and 506(b) are that 506(b) offerings do not allow for general advertising/solicitation and the issuer may sell to an unlimited number of accredited investors, but no more than 35 non-accredited (yet still sophisticated) investors. (

Under the Investment Company Act of 1940, which of the following situations requires shareholder approval? A mutual fund enters into a contract with an underwriter. A mutual fund adviser wants to deviate from its investment policy. A mutual fund wants to terminate the existing contract with its investment adviser. A mutual fund wants to use the fund's assets to pay for the cost of distributing shares.

II and IV only The Investment Company Act of 1940 requires shareholder approval for a company to make changes to its investment policy statement or to have the cost of underwriting or distributing shares paid from the fund's assets (12b-1 fees). The other two choices involve decisions that are made by the fund's board of directors. To terminate its contract with an adviser, the board must approve of the action. On the other hand, to establish a contract with an underwriter, approval by a majority of the board's disinterested members is required.

While acting in a fiduciary capacity, what must an investment adviser provide to a customer who's intends to make an investment?

Information this particular investor needs in order to make an investment decision As fiduciaries, investment advisers have a duty of loyalty to their clients. In addition to providing suitable advice, fiduciaries must provide their clients enough information for them to make informed investment decisions. Fiduciaries are required to make recommendations based on what a "prudent investor" would do. However, if a particular client needs additional disclosures, a fiduciary must provide them. A fiduciary that advises a more experienced client is able to tailor the information to that client's specific needs. In many cases, an adviser is not required to provide all of the information that a beginning or average investor would need.

Which of the following statements BEST describes a Chinese Wall?

Internal controls designed to protect the exchange of information between different departments of a broker-dealer that could create a conflict of interest. Chinese Walls, which may also be referred to as information barriers, are designed to separate two departments of a broker-dealer. These barriers (which may be real or virtual) are commonly used to prevent the sharing of information between investment banking employees and the employees who execute trades for a broker-dealer. Since investment bankers often have access to non-public information (e.g., an upcoming IPO), sharing information with employees who execute trades can be used to generate illegal profits.

Your client would like to invest her traditional IRA contribution for long-term growth, but in such a way as to maximize diversification and minimize costs. Which of the following investments would be the best recommendation for her?

Invest in a mutual fund that mirrors the S&P 500 Index A major advantage of investing in a variable annuity is the ability to participate in the earnings that the market offers while deferring tax on those earnings. Since an IRA is tax-deferred investment, the client could achieve this by investing the IRA contributions directly into a mutual fund. This would result in lower fees for the client, since variable annuities have a number of additional fees (e.g., mortality and expense risk fees) on top of the typical mutual fund expenses for each subaccount. Buying stock from 10 different sectors, the client would not have as much diversification as a portfolio that models the S&P 500 Index (a broad market index). The IRS does not permit IRA contributions to be used to purchase life insurance. Also, a life insurance policy should never be recommended to a person who does not need the insurance, since its cost will be subtracted from the cash value in addition to the usual mutual fund expenses for each subaccount.

Which of the following is NOT a type of systematic risk?

Liquidity risk Liquidity risk is an example of unsystematic or diversifiable risk. Systematic risk is one that affects all asset classes in the same manner. Examples of systematic risk include market risk, interest-rate risk, and inflation risk. If there is an overall decline in the stock market, it will cause stock prices to go down (market risk). If market interest rates rise, it will cause bond prices to decline (interest-rate risk). And finally, an increase in the rate of inflation will generally cause the overall bond market to decline. The decline in the bond market is essentially tied to the market's anticipation of Federal Reserve Board action (i.e., raising interest rates).

All of the following are TRUE regarding option positions, EXCEPT:

Long puts will hedge short stock positions Options may be used in many different ways to augment a stock portfolio. When seeking to add income, investors will sell covered options. For example, a client who owns 100 shares of XYZ at $34 may sell an XYZ Oct 40 call for a premium of 3. If the stock remains stable, the investor will be able to keep the stock and have a $300 gain for the premium. If the stock rises and the call is exercised, the investor will simply sell the shares he currently owns. The investor's profit is based on the difference between his purchase price ($34) and the option strike price ($40), plus the option premium ($3). Investors interested in hedging stock positions must buy options. Long calls are a hedge for short positions, while long puts are a hedge for long stock positions.

An adviser is permitted to store records on:

Microfilm or microfiche Books and records must be maintained in an easily accessible place for five years. During the first two years, the records must be maintained in an appropriate office of the investment adviser. Records may be preserved on microfilm, microfiche, or any similar media. They may, but are not required to, be kept on various electronic storage media such as CD-ROMs, provided the disks are tamper-evident, i.e., the information cannot be easily altered. This means that any attempt to alter the records would be easily determined upon examining them. These files do not need to be password-protected, but the adviser must be able to limit access to the records to authorized personnel and the regulators.

With a simple trust, the trust:

Must distribute its annual investment earnings A simple trust is required to distribute all its income to beneficiaries in the year received. The body (corpus or principal) of the trust may not be distributed by the trustee. The term simple has nothing to do with the number of beneficiaries in the trust or the investment profile of the assets contained therein.

A broker-dealer has offices in States X and Y. One of its agents is registered in State X where the agent's primary office is located. The agent often travels to State Y and uses the broker-dealer's office there to meet with clients. The agent:

Must register in State Y, since the agent uses an office there The agent must register in State Y since the agent has a place of business (office) in State Y.

One of your clients has heard that the use of leverage can increase his portfolio's return. This client normally buys securities that have high dividend payout ratios and uses the dividends to supplement his income. He wants to open a margin account and asks you to use his existing securities as collateral to purchase additional shares of the same stocks that you have in your portfolio. You should:

Not recommend this strategy since buying on margin may not increase the return received by this client A margin account will allow a client to buy more securities by leveraging or borrowing additional funds. A client is only required to deposit half of the funds required to execute a transaction and profits if the stock rises. By purchasing more shares, a client can increase her profit, but will also be exposed to a larger loss if the stock purchased declines in value. This client purchased securities primarily for the dividend income, not for speculation or trading purposes. Therefore, buying stock on margin would not be suitable in this situation. A brokerage firm will charge a client interest on the funds the client borrows when trading on margin. The increased dividend income from the additional shares in a margin account would not be sufficient to pay for the interest expense on the borrowed funds.

Carrie has been a client of an investment adviser that is established as a partnership for four years and is happy with the performance of her account. If she wants to renew her contract with the firm, which of the following provisions is NOT required in the contract?

Notification if the investment adviser representative, who manages Carrie's assets, leaves to start a new advisory firm One of the provisions that is required in investment advisory contracts is that the adviser will notify its clients of any change in the partnership (ownership) within a reasonable period. Whether a partner who leaves or dies is responsible for managing a client's assets is irrelevant to the notification provision. If the IAR that manages Carrie's account leaves to start a new advisory firm, notification is not required since the IAR is not a partner of the firm. However, it is certainly a good practice for the advisory firm to notify Carrie that her IAR has left the firm.

A broker-dealer advertises on a radio program that is broadcast from a bank. Which of the following would be prohibited by the Administrator?

Omitting the name of the broker-dealer in any 30-second ads during the show Broker-dealers and agents are not allowed to publish a blind ad unless it is a recruiting advertisement for a new hire. The name of the broker-dealer that approved the ad is generally required on all advertisements. Broker-dealers are allowed to mention that they are affiliated with or subsidiaries of banks. They must make the distinction that the products they offer are neither deposits nor are they guaranteed.

An investment adviser representative manages a portfolio for a client on a discretionary basis. The client's objective is conservative growth. According to prudent investor standards, which of the following statements is TRUE regarding the inclusion of options in his portfolio?

Options strategies may be appropriate as part of a conservative portfolio Prudent investor standards are applied to the client's total portfolio, not on an investment-by-investment basis. Rather than restricting individual investments, many securities may be appropriate as part of a portfolio if the investment helps the portfolio achieve specific objectives. For example, writing covered calls or buying protective puts could be part of a conservative growth portfolio. Whenever a reference is made to a position being "uncovered," this means that the option has been sold and the investor either doesn't own the stock (if a call has been sold) or doesn't have the necessary cash available (if a put has been sold). There's no such thing as the "purchase of uncovered options."

A married couple just received a small inheritance and want to use a portion of it to pay off their mortgage in the future. They ask their investment adviser representative how much of the inheritance they need to invest based on an estimated rate of return of 7% annually to be able to pay off their mortgage balance in 15 years. The adviser tells them $18,122. This amount is referred to as the payoff amount's:

Present value The amount of money that must be invested at an expected rate over a specified number of periods to produce a sum of money is referred to as the present value. In this question, if the married couple invests $18,122 today with a 7% annual return, they will have $50,000 in 15 years. Obviously, the setup of the question did not provide the future mortgage payoff amount, but based on a present value of $18,122 and a 7% return, it's $50,000. The formula for calculating present value from a known future value is: P0 = Pn / (1 + r)n In this example, P0 = Pn / (1 + r)n = $50,000 / (1 + .07)15 = $50,000 / 2.759 = $18,122

A pension fund manager wants to protect the fund's diversified stock portfolio against a market downturn. To best meet this objective, she should purchase:

Puts on a comparable index Index options would move in the same direction as the market as a whole and, therefore, provide a better hedge for a diversified portfolio than individual stock options.

An initial public offering (IPO) is being sold in one state only and is not being submitted for registration with the SEC under the Securities Act of 1933. According to the provisions of the Uniform Securities Act, what method of registration would be used for this offering?

Qualification The notification and coordination methods of state registration may only be used when the issuer also files a federal registration statement under the Securities Act of 1933. The qualification method of registration may be used in any state for any issuer that is not seeking federal registration. KEY WORD IS NOT, *******

The Investment Advisers Act of 1940 would consider an individual to be in the business of providing investment advice if:

She provides mutual fund timing and sector rotation advice to her clients Investment advisers provide advice that is timed and tailored to each client. An investment adviser's advice is not general, isolated, or occasionally offered. An adviser is considered in the business of providing advice when it holds itself out as an adviser or makes recommendations that are client-specific.

A client purchases 1,500 shares of Bergman's Basketballs, an IPO that was underwritten by Broker-Dealer X. If the salesperson who sold the shares to the client is employed by Broker-Dealer Z, a member of the selling group, the client:

Should receive the prospectus from Broker-Dealer Z Failing to furnish a client who has purchased shares of a new issue with a prospectus is an unethical and/or dishonest business practice by a broker-dealer and/or an agent. The responsibility to furnish this document falls on the broker-dealer that sold the security to the client.

Regarding equity-indexed annuities, which of the following statements is FALSE?

Supervision of the firm's sales practices is not required since these are insurance products Although they are insurance products, equity-indexed annuities are subject to many FINRA rules. Broker-dealers must always have adequate controls in place to supervise the sales activities of their RRs. The product is issued with both a floor (that limits loss on the downside) and a cap (that limits the gain on the upside). (67494) Equities are funky

Which of the following statements about variable annuities is FALSE?

The annuity feature protects investors from capital losses Variable annuity assets are directed into a separate account and invested in a portfolio that fluctuates with the market. Therefore, an investor's principal will fluctuate over time as it remains invested in a variable annuity. Mutual funds are often an investment choice within an annuity. If an investor is interested in principal protection and a guaranteed rate of return, he should consider a fixed annuity.

Which of the following statements is TRUE according to ERISA section 404(b)?

The fiduciary may maintain the indicia of ownership of assets of the plan outside the jurisdiction of the district courts of the U.S. if authorized by the Secretary of the Department of Labor The rules according to ERISA section 404(b) prohibits fiduciaries from maintaining the indicia or evidence, of ownership of plan assets outside the jurisdiction of U.S. courts, unless allowed by the Secretary of the Department of Labor

An investment company has entered into a contract with an investment adviser. The investment adviser seeks to have an exculpatory provision included in the contract. According to the Investment Advisers Act of 1940, which of the following statements is TRUE?

The investment adviser is an exempt reporting adviser (ERA) and is not required to register with the SEC, but must notice file with the state Administrator(s) and pay a fee. The IA is an exempt reporting adviser (ERA) and is exempt from registration, but must notice file with the state Administrator(s) and pay a filing fee. ERAs are exempt from registration with the SEC if they manage private funds that have less than $150 million in AUM. Private funds are typically referred to as hedge funds. Unlike mutual funds, private funds are exempt from SEC registration if they have 100 or fewer investors. This exemption for private funds is provided in Section 3(c)(1) of the Investment Company Act of 1940.

A broker-dealer owns 100 shares of ABCO stock which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base the markup on:

The lowest offer on the Nasdaq system When selling stock to a customer, a markup should be based on the lowest offer on the Nasdaq system, not the price the dealer paid to purchase the stock (dealer's inventory cost).

An agent of a broker-dealer is soliciting investors for a Regulation D offering. A non-accredited investor asks if he can invest less than the minimum required amount. Which of the following statements is TRUE?

The non-accredited investor must invest at least the minimum required amount. Securities that are sold under Regulation D are not required to be registered if they're sold to accredited investors and/or up to 35 non-accredited investors. If investors want to purchase securities being distributed through a Regulation D offering (regardless of whether the investors are accredited or non-accredited), they're required to invest the minimum required amount that's established by the broker-dealer selling the securities. Investors are not permitted to invest less than the minimum required amount.

In the past year, a client reported earnings of $3,000 in dividends, $6,000 in long-term capital gains, and salary of $190,000. The client also had a loss of $8,000 from a limited partnership investment. For tax purposes, how is the limited partnership loss treated?

The partnership loss is only deductible against passive income A limited partner's share of profits from a limited partnership are considered a form of passive income and taxed as ordinary income. A partner's share of the partnership's losses are considered passive losses (not capital losses), which are deductible against passive income only. Since the client did not report any passive income, the loss is suspended and carried forward.

When considering estate planning needs, what can be said regarding Section 529 plans?

The plan participant maintains control of how the funds are distributed One of the advantages of a Section 529 plan is that the plan participant, the parent, etc. is the account owner and maintains control of how the funds in the plan are distributed and to whom. The beneficiary does not have to pay federal taxes on qualified withdrawals and the assets in the plan are generally not considered part of the participant's estate for federal estate tax purposes.

If an investment adviser recommends tIf an investment adviser recommends that its clients diversify their investments by purchasing gold coins, gold certificates, or gold futures, which of the following risks is the adviser trying to avoid?hat its clients diversify their investments by purchasing gold coins, gold certificates, or gold futures, which of the following risks is the adviser trying to avoid?

The risk of some investments losing value or performing poorly due to inflation Commodities investments, including futures, are a way to hedge against inflation risk. The risk that a single stock will perform poorly is referred to as business risk and may be diversified by purchasing stocks of multiple companies.

A broker-dealer registered in Colorado sells a security listed on a national securities exchange. The transaction takes place in the secondary market and both clients are residents of Colorado. Under the USA, which of the following statements is TRUE

The security is not required to be registered in Colorado This is an example of an exempt transaction since it is considered a nonissuer transaction executed by a registered broker-dealer where the security is listed on a national securities exchange. If the issuer were selling securities that were listed on a national securities exchange, this might qualify as an exempt security.

Under the Uniform Securities Act, which of the following BEST describes the term inspectorial power?

The state Administrator's power to subpoena records inside and outside of the state Inspectorial power refers to a state Administrator's ability to inspect or review any records that are located both inside and outside of the state in order to carry out the provisions of the Uniform Securities Act.

When making recommendations to senior investors, which of the following features is the LEAST important consideration?

The state in which the client has her primary residence FINRA published a notice discussing the suitability issues of senior investors. Some of the important questions advisers should ask prior to recommending a securities product are: What is the client's current employment status and what are her primary expenses? Does the client still make mortgage payments? How much income does she need and what are her sources of income? How important is liquidity, health care, and insurance? What are the client's investment goals? While the state in which the client has her primary residence may be important for tax and estate considerations, it should not be a primary concern of the adviser.

Under the Securities Exchange Act, a customer confirmation is NOT required to disclose:

The time of the trade execution The Securities Exchange Act requires broker-dealers to make specific disclosures on customer confirmations. Some of the required information includes the capacity in which the broker-dealer is acting (i.e., agency or principal), the amount of commission received by the broker-dealer for executing an agency trade, and the settlement date of the trade. The time of the trade execution is not required to be disclosed on a customer confirmation; however, it may be provided if the customer makes a specific request.

Which of the following statements is TRUE concerning the posting of a bond by a broker-dealer?

There is no bond requirement if the broker-dealer does not have custody or discretionary authority over client funds or securities The Administrator may require broker-dealers to post bonds if they have custody of or discretionary authority over client funds or securities. The bond may be waived if the broker-dealer's net capital exceeds a specified amount. The Administrator may determine this amount.

An investment adviser charges fees based on a percentage of the assets being managed by the firm for the client. The schedule of fees reveals that the more assets the firm manages for the client, the lower the advisory fee. For customers with more than $5 million under management, the firm's advisory fees are negotiable. Which of the following statements is TRUE?

This fee structure is acceptable as long as the resulting fees are reasonable It is unethical for an investment adviser to charge an unreasonable advisory fee. State Administrators may conduct surveys of investment adviser fees to determine what is reasonable. Negotiable fees are acceptable as long as the resulting fee is reasonable.

Why would an investment adviser perform a capital needs analysis for a client?

To determine how much insurance the client needs in order to fund future financial goals A capital needs analysis is used to determine the amount of insurance a client needs to purchase today in order to fund her future financial goals. For example, if the client dies prematurely and the value of her investments are not sufficient to pay for her child's college education, life insurance is needed to fund the difference.

Broker-Dealer A is a publicly traded company listed on the New York Stock Exchange. Which of the following statements is TRUE regarding an agent of Broker-Dealer A who wants to sell securities of his company to a client?

This is acceptable if the agent discloses the relationship verbally prior to the transaction and in writing before the settlement date Failing to disclose that a broker-dealer is affiliated with or controlled by an issuer of securities is considered a dishonest and/or unethical business practice. The agent would need to disclose the affiliation before entering into any contract with a customer to buy or sell securities. The disclosure may be made verbally prior to the trade if written disclosure is made at or before the completion of the transaction (usually the settlement date). The disclosure would need to be made to any account of a broker-dealer.

An investment adviser is the manager of a mutual fund and several of its IARs are also registered representatives of an affiliated broker-dealer. The adviser executes portfolio trades through the affiliated broker-dealer and the broker-dealer receives commissions from these trades. According to the Investment Advisers Act, which of the following statements is TRUE?

This represents a conflict of interest, but is permitted if disclosure is made in the brochure There may be situations in which investment advisers will receive compensation in addition to the investment advisory fee that clients are being charged. Although this action may be deemed a conflict of interest, it is not prohibited. In order to alleviate any perceived unethical behavior, clients should be provided with disclosure regarding the additional compensation

An investment adviser is the manager of a mutual fund and several of its IARs are also registered representatives of an affiliated broker-dealer. The adviser executes portfolio trades through the affiliated broker-dealer and the broker-dealer receives commissions from these trades. According to the Investment Advisers Act, which of the following statements is TRUE?

This represents a conflict of interest, but is permitted if disclosure is made in the brochure There may be situations in which investment advisers will receive compensation in addition to the investment advisory fee that clients are being charged. Although this action may be deemed a conflict of interest, it is not prohibited. In order to alleviate any perceived unethical behavior, clients should be provided with disclosure regarding the additional compensation.

The Smiths have little investment experience, but are interested in saving for retirement and their children's college education. They consult an investment adviser representative about purchasing mutual funds. The IAR recommends that they purchase variable life insurance instead, even though the Smiths already have large life insurance policies. The IAR discloses that he will earn a higher commission by selling a variable insurance policy instead of mutual funds. Given these circumstances, has the IAR violated his fiduciary responsibilities?

Yes, a variable life insurance policy is not a suitable recommendation for the Smiths A variable life insurance policy is not a suitable recommendation for the Smiths, given their expressed interest in an investment other than insurance. The primary purpose of life insurance is protection against premature death, not investment. Furthermore, the fact pattern in this question indicates that the Smiths have already satisfied their life insurance needs. There is nothing to indicate that their coverage is inadequate. The IAR's disclosure of the conflict of interest does not make up for the fact that the investment recommendation is not suitable.

Stephen Gigs is about to retire and is concerned about having enough income to supplement his Social Security retirement savings. He would like to buy a conservative investment that can help offset inflation. Mr. Gigs takes the advice of his agent and purchases Treasury Inflation-Protected Securities (TIPS) with a face value of $100,000 and a coupon rate of 2 3/4%. Six months later, he reads that the CPI is up 3 1/2%. What is the approximate amount of Mr. Gigs' next interest payment?

$1,423 The CPI rose 3 1/2% and, therefore, the principal of the TIPS will increase by 3 1/2% ($100,000 + [$100,000 x 3.5%]) = $103,500. Mr. Gigs' interest will be calculated by multiplying the new face amount by the coupon rate of 2 3/4%, then dividing by two since interest is paid semiannually. ($103,500 x 2.75%) / 2 = $1,423.13. Remember, the stated rate is an annual rate and will not change.

If a corporation had annual earnings per share of $2.40, and $1.60 was retained by the corporation, the annual dividend payout ratio is what percentage of earnings?

33% To determine the annual dividend payout ratio, first determine the dividend, which is the earnings per share of $2.40, minus the retained earnings of $1.60 or $.80. Then divide the dividend of $.80 by the $2.40 of earnings per share to determine the percentage of earnings paid to the shareholders, 33%.

An investor purchased $50,000 worth of a 6% bond that was issued by a Brazilian company. If the bond is held to maturity, what will the investor receive at the maturity date?

51,500 Brazilian reals Bonds that are issued by foreign (e.g., Brazilian) companies pay interest and principal in the issuer's currency (e.g., Brazilian reals). At maturity, the bondholder will receive both the $50,000 principal amount plus the final $1,500 semiannual interest payment (i.e., $50,000 x 6% ÷ 2). Therefore, the total payment at maturity is 51,500 Brazilian reals

An advisory client is interested in starting a small business. After getting details from the client, it is obvious that he will not be required to obtain a specific license for his business activities and that there will be very limited liabilities. If he is interested in the simplest business form, what is the best recommendation?

A sole proprietorship For a person interested in establishing a small company that will carry few liabilities, the simplest business form is a sole proprietorship. All of the other forms of business would require more extensive paperwork and administration.

Which of the following actions by an agent of a broker-dealer is prohibited?

Determining the type of joint account that a client should open An agent is in the business of representing a broker-dealer in effecting securities transactions for her firm's account and the accounts of others. Providing a general description of the details and characteristics of brokerage products and accounts is acceptable. On the other hand, determining or suggesting the best type of account for a customer to open has legal ramifications and should be provided by an attorney.

If an IA or any advisory affiliate pleads nolo contendere to a felony that was committed in a foreign jurisdiction, this action is:

Disclosed to clients on Form ADV Part 2 An investment adviser is required to provide clients with disclosure of certain disciplinary events on Form ADV Part 2 and then must complete a Disclosure Reporting Page (DRP) to provide details regarding the event. DRPs provide information to the public and/or to regulators about specific criminal, regulatory, and civil actions. Any felony or misdemeanor charges or convictions against an IA must be reported on a Criminal Action DRP. For any actions that are taken by the SEC, state, or a foreign financial regulatory authority, reporting is done on a Regulatory Action DRP. For proceedings in a civil court, reporting is done on a Civil Judicial DRP. Although advisers must also include DRPs in Form ADV Part 1, that disclosure is for the applicable regulator (i.e., the SEC or state Administrator), but not for individual clients.

One of your clients, John Smith, would like to buy one share of ToyKids Inc. for each of his 12 grandchildren. The average transaction cost on these trades would be 16% based on your firm's minimum commission schedule. What action should you take?

Do the trades, provided you have already informed the client of the higher-than-normal commissions Anytime a client will be subject to higher-than-normal charges, he should be informed of this fact prior to execution. Opening a wrap account for each child is not practical since these accounts typically have minimum asset requirements.

Which of the following statements is TRUE regarding tenancy in common?

Due to the nature of the agreement, each individual's interest is generally more freely transferable In an account with a tenancy-in-common arrangement, the assets may or may not be equally divided. When an owner dies, his ownership interest in the account is included in his estate and is subject to probate. The benefit of a tenancy-in-common arrangement is that it makes it easier to transfer assets to other investors when one person dies. There is no requirement that the owners of a tenancy-in-common account be a married couple.

Both variable life insurance and variable annuities have all of the following features, EXCEPT:

Guaranteed cash values Variable life insurance and variable annuity products do not provide guaranteed cash values. When investors buy variable products, they invest in a separate account and assume market risk.

Nelson is an advisory client of XPert Capital Management, a registered investment adviser. Nelson is the sole trustee of an irrevocable trust for which his son, Tad, is the beneficiary. The trust was created and funded by Bertha, Tad's well-to-do aunt, and Nelson's sister. Nelson has hired XPert Capital to manage the trust's investment portfolio. Which of the following choices would be considered fiduciaries in this situation? Nelson XPert Capital Bertha

I and II only As an investment adviser, XPert Capital has a fiduciary duty to its client, which in this case is the trust. Although Nelson has hired XPert to manage the portfolio, he is still a fiduciary as the sole trustee. Although Bertha (the grantor or donor) created the trust, she no longer has control over it and is not a fiduciary.

Which TWO of the following choices are not considered an asset class? Annuities Stocks Cash The S&P 500 Index Real estate

I and IV Asset classes include stocks, bonds, cash (money-market instruments), commodities, and real estate, but not annuities or indexes.

Which bonds would have the greatest sensitivity to interest rate changes? Bonds with long durations Bonds with short durations Bonds with high coupons Bonds with low coupons

I and IV Duration is a measure (expressed in terms of years) of a bond's price sensitivity to small changes in interest rates. The longer a bond's duration, the greater its price sensitivity. Also, bonds with low coupons are more sensitive to interest changes than bonds with high coupons. Therefore, a change in rates will result in a greater percentage change in a bond's value if it has a low coupon.

A broker-dealer would be required to register in Pennsylvania if the broker-dealer: Has an office in Pennsylvania and executes nonissuer transactions of securities listed on a national securities exchange Has no office in Pennsylvania and executes nonissuer transactions of securities listed on a national securities exchange with clients that are residents of Pennsylvania Has an office in Pennsylvania and executes transactions of municipal securities with clients that are not residents of Pennsylvania Has no office in Pennsylvania and executes transactions of municipal securities with clients that are residents of Pennsylvania

I, II, III, IV In all four choices, the broker-dealer would be required to register in Pennsylvania. A nonissuer transaction of a security listed on a national securities exchange is an exempt transaction and a municipal security is an exempt security. A broker-dealer executing a transaction in an exempt security or exempt transaction is required to register, unless it is exempt from the definition of a broker-dealer in that state. Since the broker-dealer either has an office in Pennsylvania or is transacting business with residents of that state, it would be required to register.

According to SEC Release 1092, an attorney is excluded from the definition of an investment adviser in all the following circumstances, EXCEPT: The attorney charges a separate fee for investment advice and offers these services only to existing legal clients The attorney's website indicates that he is available to offer investment advice on any judgments that his clients win The investment advice being offered by the attorney is incidental to his law practice The income that the attorney generates from providing investment advice is less than 1% of his gross income

I, II, and IV only According to SEC Release 1092, lawyers, accountants, teachers, and engineers are excluded from the investment adviser definition, as long as the advice being provided is incidental to their professional activities (Choice III). The advice being provided by the professionals is not considered to be incidental if they charge a separate fee for the investment advice (Choice I) or advertise publicly that they provide investment advisory services (Choice II). Choice (IV) indicates the attorney derives less than 1% of his gross income from investment advice, but there is no dollar amount or percentage of income that is identified as incidental service. If an attorney is involved in the activities that are referenced by choices I, II and IV, he is required to register his business as an investment adviser.

Limited partnerships are offered to the public or are sold through private placement. To avoid registration with the SEC, partnership interests can only be sold to which of the following persons? Any number of accredited investors No more than 35 nonaccredited investors No more than 35 accredited investors Both accredited and nonaccredited investors

I, II, and IV only In a private placement under Regulation D, the securities are exempt from registration with the SEC, provided all investors are accredited investors and/or, no more than 35 nonaccredited investors. To be accredited, the investor must be a financial institution, or an individual with a net worth of at least $1 million, or at least $200,000 of annual income ($300,000 if married).

Which of the following are characteristics of zero-coupon bonds? They can be purchased at a deep discount There is no reinvestment risk Tax consequences occur only at maturity The investor is taxed annually

I, II, and IV only Zero-coupon bonds are issued at a deep discount and mature at par value; therefore, they require a minimal capital outlay. Also, due to the fact that zeros do not pay interest on a semiannual basis, they have no reinvestment risk (there is nothing to reinvest). For tax purposes, the IRS requires zero coupon investors to accrete (upwardly adjust) their basis. The result of accretion is that each year a portion of the discount is reported as taxable interest income.

Rigid Advisers supervises a number of aggressively managed portfolios for a collection of high net worth clients. The firm requires written discretionary authority as part of its contract with any new customer. Which TWO of the following statements are TRUE regarding such discretionary authorization? The authorization relieves the adviser of having to make a suitability determination when executing transactions due to the blanket indemnity provisions contained within a standard POA. Each transaction the adviser executes for a customer must be suitable based on the objectives and risk tolerance of a given client. The adviser must keep a copy of the written discretionary authorization for its records. The adviser must get a new POA signed by each client at least annually.

II and III Written discretionary authority to manage the client's account does not relieve an adviser of any suitability requirements. All transactions executed by the adviser must still be suitable for the individual customer. In addition, the adviser must maintain a copy of the written authorization for its client account records. A new power of attorney (POA) is not required each year.

Under the Uniform Securities Act, all the following are considered to meet the definition of agent, EXCEPT: A sales representative of a broker-dealer who sells only securities that are covered under a federal exemption An assistant to a sales agent who accepts orders when the agent is unavailable A subsidiary of a bank that is registered as a broker-dealer and sells non-exempt securities to the public A broker-dealer that sells only exempt securities within the state

III and IV only By definition, a sales representative of a broker-dealer is an agent. This is true regardless of whether the securities being sold are covered under a federal exemption. Also, a sales assistant is considered an agent if she is authorized to accept client orders. Choices (III) and (IV) describe activities involving the broker-dealer (firm) and not an agent (individual).

Which of the following statements are TRUE regarding a limited partnership? There must be only one general partner. There must be more than one limited partner. There is undivided interest in equity that does not pay income taxes. It is a form of ownership that passes its profits and losses through to its participants.

III and IV only Limited partnerships provide a form of ownership in which there is undivided interest in equity that does not pay income taxes and passes its profits and losses through to its participants. There are no rules that limit the number of general partners or limited partners in a limited partnership however, there must be at least one of each

In a down market, which of the following is a risk of using dollar cost averaging (DCA)?

Investments are not protected against losses Dollar cost averaging involves making periodic investments of a fixed dollar amount into stocks or mutual funds. When prices fall, more shares will be purchased at a lower cost, which ensures that an investor's average cost will be less than his average price. This will increase performance when the market once again rises. However, investors should not sell and must continue making purchases during down markets. When prices fall, investors are not protected against losing money.

Jack purchased 100 shares of XTRO at $20. After nine years, he gave the shares to his nephew Sam when the fair market value of XTRO was $16 per share. Sam held the stock for seven months and then sold the shares for $23 per share. What is the tax consequence for Sam?

Long-term capital gain of $300 If securities are received as a gift, any tax implication is delayed until the securities are subsequently sold. For the recipient, the two details that should be determined are 1) the donor's cost basis and 2) the fair market value (FMV) at the time of the gift. One of these two will represent the recipient's basis for determining a capital gain or loss at the time of sale (referred to as dual basis), as described below: If the securities are later sold for a price that is higher than the donor's cost, the seller's basis is the donor's cost and the donor's holding period is included. If the securities are later sold for a price that is lower than the FMV at the time of receiving the gift, the seller's basis will represent the FMV and the holding period begins on the day after the gift is received. When securities are given as a gift after they had appreciated in value and the recipient subsequently sells them for a gain, the recipient's basis is the lesser of the donor's cost or the fair market value at the time of the gift (i.e., always the donor's cost). However, this is a tricky question since the securities were gifted at a time when the fair market value ($16) is less than the donor's cost ($20). Sam later sold the stock for a price that was higher than Jack's cost. For that reason, Sam will use the $20 cost as his basis against the proceeds of $23 on the sale, which results in a capital gain of $3 per share, or $300. In this situation, Sam is able to add Jack's holding period to his own (nine years plus seven months) to establish a long-term holding period and therefore he realizes a long-term gain.

While presenting a financial plan to a customer, an IAR talks about different types of risk. One of the primary risks mentioned by the IAR relates to the impact of current events, consumer confidence, and the general political climate. This risk is called:

Market risk Of the choices available, market risk is the best fit. Market risk is the general risk of investing in a given market or economy. Inflation is a form of systematic risk that affects all bonds. Nonsystematic, inflation, and reinvestment risks are not broad enough to cover the events mentioned.

An investor lives in New Jersey and is opening a 529 college savings plan that's sponsored by the state of Montana for his daughter's benefit. His initial contribution is $75,000. Which of the following statements is TRUE?

Neither the investor nor his daughter will be liable for gift taxes on the $75,000 contribution. The investor may contribute up to $75,000 at one time to his daughter's 529 plan without incurring federal gift taxes. The IRS allows donors to aggregate five years' worth of gifts under the annual gift exclusion ($15,000) into one lump-sum contribution (5 x $15,000). Some states do allow donors to deduct a portion of contributions made to 529 plans from their state income taxes, but only if the donor contributes to a plan that's sponsored by his home state. (REMEMBER single people can do 15x 5 = 75,000 lump sump, married people can do 30 x 5 = 150,000 lump sum to avoid tax consequence)

An investment adviser representative was the subject of a customer complaint two years ago in the state of Idaho and resigned his position as a result. The Administrator conducted an investigation, the results of which were not made public. He is currently applying for a mortgage for a new home in Boise. The bank where he is applying requests his employment history and contacts the investment adviser for verification. The personnel manager at the firm is reluctant to give the bank any information about its former employee and directs the bank to contact the state Administrator. When the bank calls the Administrator, what information can it expect to receive?

The Administrator will not release any details of the complaint According to the Uniform Securities Act, no provision of the Act authorizes the Administrator or any of his officers or employees to disclose information except among themselves or, when necessary, in a proceeding or investigation under the Act that was not made public.

An investment adviser representative has recommended a real estate limited partnership to a high net worth client who wants some real estate exposure in his portfolio. While the client is considering the investment, the IAR reads in the local press that the previous development that the general partner sponsored has gone bankrupt. What action must the IAR take?

The IAR must disclose this information to the prospective investor One of the most important factors in evaluating the merits of a limited partnership is the track record of the general partner. The bankruptcy of the previous project is material information that must be disclosed to the investor when in doubt, DISCLOSE

Under the Uniform Securities Act, in order for an issuer to be eligible to use registration by coordination, the issuer must also register with the SEC under:

The Securities Act of 1933 The Securities Act of 1933 regulates the federal registration of newly issued securities. Under the Uniform Securities Act, in order to register a security using registration by coordination, the security must also be registered with the SEC under the Securities Act of 1933. (67470) Think alphabetical and chronological

When an accounting firm is auditing an issuer's balance sheet and income statement, which of the following auditor's opinions is the BEST?

Unqualified Unqualified opinions of auditors are typically considered the best, since they're issued without reservation. On the other hand, a qualified opinion is issued when an auditor questions at least one part of a company's finances (e.g., unusual expense). Adverse opinions are issued when an auditor doesn't believe that a company's finances represent the true results.

Rather than utilizing a custodian, an investment adviser chooses to maintain custody of customer assets. According to the Investment Advisers Act of 1940, the adviser is required to:

Verify client funds and submit to an unannounced annual audit by a CPA If an IA acts as a qualified custodian and holds customer cash and securities, the assets must be subject to an unannounced annual audit by a CPA (not by the SEC). At the completion of the audit, the CPA (not the IA) must file Form ADV-E. (32466)

Under the Investment Advisers Act of 1940, when is a firm's registration required to be renewed?

Within 90 days of the adviser's fiscal year-end This is a tricky question because federal regulation of IAs is based on fiscal year, while state regulation is based on calendar year. According to the Investment Advisers Act of 1940, IAs are required to renew their registration within 90 days of their fiscal year-end. On the other hand, the Uniform Securities Act requires registration renewal to be completed at the end of the calendar year.

Your client owns a portfolio of blue-chip equity securities and would like to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to:

Write covered calls The most conservative strategy for the investor to achieve his objective is to write covered calls. The call premium received will increase the yield on his portfolio of stocks because it will add to the income generated by the dividends received from the stock

An investment adviser develops and publishes a spreadsheet that it claims may be used to generate winning buy and sell decisions. According to SEC advertising rules, the advertisement must:

Yes, Howie's commission for Blackacre would be considered part of his compensation as an investment adviser SEC Release 1092 states that investment adviser compensation includes "any economic benefit." It can include commissions generated by the sale of nonsecurities products such as insurance or real estate. Thus, Howie's commission for Blackacre would be considered investment adviser compensation within the meaning of the Investment Advisers Act.