65

An example of a regressive tax is

(sales) tax

anchoring bias

a tendency to fixate on initial information, from which one then fails to adequately adjust for subsequent information

What net worth do State-registered IA's need to maintain to have discretion over client accounts

10k

The Investment Advisors Act requires certain records to be kept on site for __ years and just keep for __ years

2 and 5

State-registered investment advisers who maintain custody of customer funds or securities must have a min net worth of __ dollars`

35k

Under the Uniform Securities Act, requirements for registration as an investment adviser in a state include which of the following? The Administrator may require an announcement of the application for registration in one or more newspapers in the state. Minimum financial requirements for federal covered advisers with a place of business in the state who have custody of customer funds and/or securities, or have discretionary authority over customer accounts. For those needing a surety bond, it must provide that any customer who can prove a violation is entitled to collect against the bond. A) I and III B) I and II C) I, II, and III D) II and III

A A published announcement may be required by the Administrator. The Administrator may not impose any financial requirements upon federal covered advisers (other than to pay a fee when notice filing). The USA has specific wording requiring that customers who can prove they were the subject of a violation by the IA are entitled to collect against the bond.

A state-registered investment adviser suddenly incurs a liability that materially affects its net worth, causing it to drop below the required minimum. Which of the following statements is TRUE? A) The​ ​investment adviser must notify the Administrator​ by the close of business on the following business day​. B) The ​investment adviser ​must increase its surety bond to make up the deficiency. C) The investment adviser must notify the Administrator promptly. D) The ​investment adviser is not required to file​ ​an amendment to its registration with the Administrator.

A Although most notifications involving emergency type situations require prompt notification, when an investment adviser's net worth is below the requirement, the NASAA Model Rule is a bit different. Unless otherwise exempted, as a condition of the right to transact business in the state, every investment adviser registered with the state shall, by the close of business on the next business day, notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day after that, a report with the Administrator of its financial condition.

An investment adviser representative is required to make disclosure to the client when the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale transactions recommended to a specific client are inconsistent with those for other clients with objectives that are identical to that particular client transactions recommended to the client are inconsistent with those for the IAR's own account A) II and IV B) II, III, and IV C) I and III D) I, II, and III

A An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This will include the case where a recommended product will generate a commission or other source of income to the adviser, as well as full disclosure, if a recommendation is not consistent with the adviser's own activity in his own account. The adviser can use any source of information to create his own analysis, disclosure of source only being required if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same objectives would purchase or have recommended for purchase the same securities.

When completing an individual tax return on Form 1040, one of the most important numbers is the adjusted gross income (AGI). Which of the following would NOT be included in AGI? A) Tax-exempt interest received from municipal bonds B) Alimony received from pre-2019 divorce decree C) Qualifying dividends on common stock D) Salary and commissions

A Even though municipal bond interest is reported on line 8b of the 1040, it is specifically not included in AGI. Paying alimony is a deduction, while receiving it is considered income. Qualifying dividends merely means the tax rate is limited to a maximum of 15% (except for very high-income earners—not tested). Please note: Effective January 1, 2019, there are changes to the tax treatment of alimony for all divorce agreements entered on and after that date (no changes to those already in existence). Questions on the exam (and our q-bank) will reflect those changes on, but not before, the effective date.

An investment adviser cannot adequately advise a client without knowing the client's financial status. When determining that status, it is important to differentiate between financial and nonfinancial considerations. Which of the following would be considered a financial consideration rather than a nonfinancial one? A) Client's stamp collection B) Client's marital status C) Fact that both parents were smokers who died of lung cancer D) Client's membership in Greenpeace

A Financial considerations are those which can be categorized as an asset or a liability (something that can be assigned monetary value). Although a stamp collection would not be considered a very liquid asset, it is nonetheless something of monetary value. The other choices are nonfinancial because you really can't put a number on them. The Greenpeace membership and the lung cancer deaths of the parents are likely indicators of certain investments that would probably not be suitable due to the values of the client.

Under the Uniform Securities Act, the recordkeeping requirements established by the Administrator for out-of-state investment advisers wishing to register in his state are subject to the limitations of A) the requirements set by the Administrator of the adviser's home state B) the Investment Advisers Act of 1940 C) the Securities and Exchange Act of 1934 D) the requirements set by each individual state

A For state-registered investment advisers, requirements set by the Administrator are subject to the limitations of the requirements set by the Administrator of the adviser's home state. Covered advisers don't register in any state, only with the SEC (and come under the SEC's requirements set forth in the Investment Advisers Act of 1940).

One of your clients currently holds a long position in DEF common stock. Which of the following types of orders is designed to offer the client protection against loss? A) Sell stop B) Buy stop C) Buy limit D) Sell limit

A The risk to a long stock position is to the downside. The stock can, at least theoretically, fall to zero. To protect against a decline in the stock's price beyond the point the investor is willing to lose, it is wise to enter a sell stop order at that price. If the stock should fall to that price, the order is triggered, a market order is entered, and the stock is sold. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money.

One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that A) they are not registered as investment companies B) they have no more than 100 investors C) they have assets of less than $150 million D) their advisers are exempt from filing reports on Form ADV

A Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file a Form ADV Part 1 answering most of the questions on the Form.

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

A Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment adviser. Under the federal law, anyone giving advice dealing only with U.S. government securities is excluded from the definition, as are those who work for banks and trust companies. The lawyer is not excluded because the advice provided is not incidental to the profession; it is the lawyer's specialty.

An investor bought a parcel of raw land for $50,000 several years ago. A developer has offered to exchange another property, currently valued at $100,000, with this investor. Under Section 1031 of the Internal Revenue Code, the investor's tax consequences would be A) $0.00. B) $50,000 ordinary income. C) $50,000 short-term capital gain. D) $50,000 long-term capital gain.

A Section 1031 permits a tax-free exchange of one property for another. This has the effect of deferring any gain until final disposition of the property. This is a parallel to Section 1035 for annuity products

Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) Stock dividends B) State income tax refunds C) Wages and tips D) Income from a sole proprietorship

A Stock dividends (dividends paid as additional shares of stock rather than in cash) adjust the investor's cost basis and don't come into play until the stock is sold.

Which of the following statements are TRUE? The Uniform Securities Act is not the actual law of any state or territory of the United States. The National Securities Markets Improvement Act of 1996 requires states and the federal government to have identical registration requirements. The state securities Administrator has responsibility for the enforcement and administration of a state's securities law. A) I and III B) I and II C) II and III D) I, II, and III

A The Uniform Securities Act is not the actual law of any state or territory. Rather, it is model legislation that states use as a guide in drafting their own securities laws. Those laws give the responsibility to the state Administrator for enforcement and administration of those laws. The NSMIA's purpose is to eliminate dual registration, not to require identical laws.

The USA places a number of recordkeeping requirements on investment advisers. Records required to be kept by all state-registered investment advisers include all of the following EXCEPT A) a record by security showing each client's interest and location thereof B) bank records C) a list of discretionary accounts D) emails

A The key to this question is the requirement for all advisers. A security record is only required for those advisers who have custody of client assets.

The Conference Board releases information about the economy on a periodic basis. Included are a number of different indicators. These indicators can be used to predict how the economy as a whole might change. Which of the following would be considered a leading indicator? A) Stock prices as measured by a broad index such as the S&P 500 B) Gross domestic product C) CPI for services D) Industrial production

A The stock market, which anticipates economy activity, is a leading economic indicator. Industrial production is a coincident, or current, economic indicator. CPI for services is a lagging indicator. GDP is not included in the Conference Board's list of economic indicators.

Abel Kane is an agent for Garden City Securities, a broker-dealer registered with the SEC and all 50 states. It would be considered an unethical or dishonest business practice for Kane to fail to make prompt delivery of certificates when requested by the customer fail to obtain written authorization for a discretionary account prior to the first trade in that account accept an order from a client's spouse without written trading authorization prior to receiving the order share commissions with another agent registered with Garden City Securities A) II and III B) I, II, and III C) I and IV D) III and IV

A This question is tricky. The key here is that agents have no responsibility for delivering customer securities. That is an obligation of the broker-dealer.

Judy is in the business of giving general investment advice, suggesting appropriate asset allocation percentages, but not recommending specific securities. George's business model is giving investment advice and recommending specific securities. Assuming that both receive compensation, who must register as an investment adviser under the Uniform Securities Act? A) Both B) Only George C) Neither D) Only Judy

A Two of the 3 critical elements in the definition of investment adviser are whether the person provides advice regarding securities and receives compensation for doing so. (The third element is "being in the business" and the question states that both are). Even without recommending specific securities, the fact that Judy suggests asset allocation percentages constitutes investment advice. Both Judy and George provide advice regarding securities for compensation and must register, unless specific exemptions apply.

Your high-net-worth advisory client has a large cash position in his money market account and is considering using the cash to purchase an investment property. You believe that the real estate investment will not provide the same returns that can be realized by investing in bonds, so you prepare a proposal that estimates the income stream and potential capital growth of a portfolio of convertible bonds currently in the firm's inventory. The recommendation is quite suitable for the client based on his current objectives. If the transaction is completed and you fail to disclose that the bonds were sold in a proprietary transaction and receive client consent, you would have A) committed a prohibited practice B) to disclose the amount of commission on the trade confirmation C) not breached your fiduciary duty D) misrepresented a material fact

A Under both federal and state law, it is required to disclose to the client that the bonds will be sold from the firm's inventory, from one of the firm's accounts, often called a proprietary account. However, when selling from inventory, there would never be a commission. The charge, if any, would be a markup.

The USA provides either an exclusion from the definition or an exemption from registration as an investment adviser for certain persons. Which of the following would be required to register? A) A CFP® who provides a full range of financial planning to clients on a fee-only basis B) A bank trust officer with less than $250 million in assets under management C) An engineer employed by an oil company selling limited partnership interests to public investors who provides estimates of recoverable reserves D) A teacher who teaches a course in the local high school on consumer economics

A Unless excluded or exempted, anyone charging a fee for investment advice must register. Banks and their employees are excluded. Engineers and teachers fall under the late exclusion as long as the advice is incidental to their profession and no special compensation is received.

A client owns an investment-grade bond with a coupon of 7%. If similarly rated bonds are being issued today with coupons of 5%, and the market is efficient, it would be expected that the client's bond A) has a zero net present value B) has a negative net present value C) has a positive net present value D) will be selling at a discount from pa

A With a discount rate of 5% (the discount rate in a present value computation is the current market interest rate), a debt instrument with a 7% coupon rate will be selling at a premium (interest rates down, prices up). If the market is efficiently pricing that bond, its market price should be equal to its present value, resulting in an NPV of zero.

Of the following securities, which is most commonly recommended to fund a child's college education? A) Zero-coupon Treasury bonds B) Investment-grade corporate bonds C) Treasury bills D) Municipal bonds

A Zero-coupon bonds, particularly those carrying the guarantee of the U.S. Treasury, are a favored investment vehicle for saving for a child's higher education. They have the advantage of providing a certain, quantifiable sum at a certain date in the future.

In a life settlement, the seller receives more than the premiums paid into the policy but less than A) the cash value. B) the face amount. C) the accumulated dividends. D) the future premiums payable.

B

An 8% corporate bond is offered on a 8.25 basis. Which of the following statements are TRUE? Nominal yield is higher than YTM. Current yield is higher than nominal yield. Nominal yield is lower than YTM. Current yield is lower than nominal yield. A) II and IV B) II and III C) I and IV D) I and III

B A bond offered on an 8.25 basis is the same as at a YTM of 8.25%. Because the yield quoted is higher than the 8% coupon, the bond is trading at discount to par. For discount bonds, the nominal yield is lower than both the current yield and the yield to maturity.

Which of the following statements is (are) true? A person with a place of business in the state who transacts business exclusively with banks and savings institutions is not an investment adviser under the Uniform Securities Act. A person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 who offers investment advice to individual investors residing in this state, and has less than $25 million in assets under management, is subject to the jurisdiction of the state Administrator. A person included in the definition of an investment adviser under the Investment Advisers Act of 1940, who manages funds on a regular basis as a business headquartered in a state, is subject to payment of filing fees required by the state Administrator. Broker-dealers who supply incidental investment advice and make securities recommendations to customers who pay commissions for the execution of their trades are not investment advisers subject to state or federal registration. A) II and III B) III and IV C) I and II D) I and IV

B A person who conducts business exclusively with banks and savings institutions is an investment adviser under the USA if he has a place of business in the state. Had the person no place of business in the state and conducted business exclusively with banks and savings institutions, he would not be considered a broker-dealer subject to the regulatory control of the state Administrator. Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of state filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not investment advisers.

An investor reading the open-end investment company section of today's The Wall Street Journal sees that Bull in the Teashop Fund has a NAV of $10.65 and an offering price of $11.15. He knows that he would have received which of the following if his redemption order had been received by the fund prior to yesterday's market close? A) $11.15, less redemption fee, if any B) $10.65, less redemption fee, if any C) $10.65, less commission D) $10.65

B An investor redeeming his shares will receive the NAV less any redemption fee that may be described in the prospectus. Investors redeeming through the fund are not charged a commission.

Which of the following factors determine(s) whether a person is considered an investment adviser under the Investment Advisers Act of 1940? The specificity of the advice The business engaged in Whether compensation is received A) I and III B) I, II, and III C) II only D) I and II

B Any person who, for compensation, engages in the business of advising others concerning the purchase or sale of securities either directly or through publications is defined by the act as an investment adviser. The factors that make up the definition include whether the person advises others on securities; whether he does it as a regular business or as part of a business; and whether he receives compensation for doing so.

Which of the following does NOT meet the compensation test for defining investment advisers under SEC Release 1A-1092? A) An insurance agent sells a life insurance policy and receives a commission on that policy. During the sale of the insurance policy, the agent provides some securities investment advice B) Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do C) Subscription payments received by a publisher of a newsletter providing impersonal securities-related advice D) A real estate agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists

B Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. The commission on the insurance policy is considered indirect compensation covering the investment advice given by the insurance agent. The same logic holds for the real estate agent—she doesn't give advice unless you list your home with her. Nothing in the neighbor's advice involves compensation.

Which of the following is NOT required under ERISA Section 404(c)? A) Individual accounts must be provided for each plan participant. B) All plan participants must have been employed by the plan sponsor for a minimum of 3 years. C) Plan participants must have access to a broad range of investment alternatives. D) Each plan participant must have the ability to exercise independent control over assets in her account.

B ERISA Section 404(c) relieves the employer of fiduciary responsibility for investment decisions made by employees. To qualify for this protection, employees must enjoy the benefits and risks of their decisions (individual accounts), have the right to exercise independent control over the account, and have a sufficiently broad range of choices to make the right of control meaningful. Section 404(c) has nothing to do with the employee's length of employment.

Registration as an investment adviser or investment adviser representative under the Uniform Securities Act is required of A) an officer of a trust company handling investments for trust accounts B) an economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee C) an agent of a broker-dealer who recommends model portfolios to clients in exchange for them executing their trades through him D) a tax attorney who, as an incidental part of his tax practice, recommends that his high-tax-bracket clients investigate the use of municipal bonds in their portfolios

B If you are putting yourself out to the public as providing investment advice and charging a fee for doing so, you must register. The exceptions to this are if your giving of investment advice is incidental to your primary reason of doing business and if you are not charging specifically for the giving of that advice. Trust companies and their employees are specifically excluded from the definition of "investment adviser." A tax attorney making recommendations incidental to his legal practice and not charging specifically for the making of those recommendations is also not an investment adviser. The professor would have also been exempt from registration except for the fact that compensation was received for securities-related advice. Agents who are compensated only on the basis of recommended trades are not receiving special compensation and are, therefore, not considered to be in the business of giving advice.

The final responsibility for ensuring that investment adviser representatives are adequately supervised is that of A) the Administrator. B) the chief compliance officer. C) each investment adviser representative's immediate supervisor. D) the managing principal.

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

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 long maturity. B) a low coupon and a long maturity. C) a low coupon and a short maturity. D) a high coupon and a short maturity.

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

Which of the following is an example of a regressive tax? A) Estate tax B) Sales tax C) Gift tax D) Income tax

B Regressive taxes are those where the rate remains the same, regardless of the cost of the item subject to the tax. For example, if your state has a 6% sales tax, it makes no difference if you are buying an item for $1.00 or one for $10,000, the tax rate is the same 6%. The other choices given are progressive taxes where the tax rate increases as the dollar amount being taxed increases.

An investment adviser has its home office in Wisconsin. Its only business is with trust companies, large employee benefit plans, and insurance companies. It has no place of business in Colorado but provides investment advice to two Denver banks, both chartered under Colorado banking laws. There is a new Administrator in Colorado, and it is his opinion that this IA should be required to register in his state. A careful reading of Section 201 of the Uniform Securities Act would indicate that A) as long as the IA does not have an office in Colorado, there are no conditions that would mandate registration there B) the firm does not have to register because it has no place of business in the state and its only clients are registered financial institutions C) this firm would be exempt from registration with the Colorado Administrator because it is doing business in more than one state D) the Administrator is correct and the firm must register

B Section 201 of the Uniform Securities Act specifies the conditions under which one is an investment adviser in the state. Specifically excluded are those IAs with no place of business in the state who confine their advisory activities in the state to other investment advisers, federal covered advisers, broker-dealers, banks, trust companies, savings and loan associations, insurance companies, employee benefit plans with assets of not less than one million dollars ($1,000,000), and governmental agencies or instrumentalities. If, however, in addition to the two banks, the firm did advisory business with more than 5 retail clients who were residents of Colorado, then even with no place of business in the state, it would have to register.

Transparent Investment Advisers (TIA) is registered in 3 states and has $55 million in assets under management. TIA maintains custody of customer securities. TIA's chief financial officer reports that the net worth of the firm has suddenly fallen to $28,000. This would require TIA to A) obtain a surety bond in the amount of $7,000. B) obtain a surety bond in the amount of $10,000. C) issue $7,000 of stock. D) borrow $7,000 from the owners.

B State-registered investment advisers who maintain custody of customer funds or securities must have a minimum net worth of $35,000. If the net worth should fall below that amount, the firm must immediately obtain a surety bond rounded to the next $5,000 to meet that level. In this case, the firm's deficiency is $7,000, and the next $5,000 that will cover that is a bond for $10,000. Borrowing money does not increase net worth and, even if TIA is a corporation, it would probably take too long to issue additional stock.

The Investment Advisers Act of 1940 requires every registered investment adviser to have a chief compliance officer (CCO). This individual would be responsible for ensuring compliance with the firm's Code of Ethics by all of these EXCEPT A) clerical and ministerial employees of the firm B) a nonaffiliated broker-dealer through whom the majority of the firms trades are executed C) investment adviser representatives who are independent contractors D) investment adviser representatives employed by the firm

B The CCO is responsible for compliance with the firm's Code of Ethic by every employee, registered or not, and any nonemployee who is registered with the firm, such as independent contractors. Broker-dealers the investment advisory firm uses for trade execution are beyond the scope of the IA's supervision.

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that A) the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box B) the CIP requires date of birth while the regulators only require proof of legal age C) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts D) the CIP requires a statement of the customer's goals while the regulators only require current financial information

B The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts.

Under the provisions of the Securities Exchange Act of 1934, the SEC may suspend trading on a national exchange by notifying A) the Board of Governors of the Federal Reserve Bank. B) the president of the United States. C) the president of that exchange. D) the chairperson of a joint House/Senate committee on banki

B The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification to the president of the United States and may summarily suspend securities trading in a registered security that is listed on a stock exchange for up to 10 days if it believes such action to be in the public interest.

Which of the following persons must register as an investment adviser under the Uniform Securities Act? A) An investment adviser representative with no place of business in the state who has dealt with 7 retail clients during the most recent 12 month period B) An investment adviser who only serves institutional clients and whose only office is in this state C) An investment adviser whose advice is limited to securities issued or guaranteed by the U.S. government and who has 3 places of business in the state D) An accountant who makes no pretense of providing investment advisory services but gives incidental advice to clients as a small part of accounting services provided

B The Uniform Securities Act requires those defined as investment advisers to register with the state. Accountants are excluded when their advice is incidental to their profession and no additional compensation is charged. Advisers whose only advice is on securities issued or guaranteed by the government are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. This means they are federal covered investment advisers, not required to register with the Administrator even with offices in the state. As long as there is an office in the state, unless the adviser is federal covered (as described in the previous sentence), there is no exemption from registration in that state. The IAR has exceeded the de minimis limits and would have to register in the state, but as an IAR, not as an IA.

According to the Investment Advisers Act of 1940, how can records of the investment adviser's business be stored during the first 2 years? In written form on site On microfilm on site On magnetic tape or computer on site On computer disks at an offsite storage facility that requires 30 days' notice to retrieve A) I, II, III, and IV B) I, II, and III C) II and III D) I only

B The act requires certain records of business activities to be kept for 5 years (the first 2 in a readily accessible place subject to SEC examination at any time). Records originated on paper may be microfilmed or microfiched, and records originated on computer may be stored electronically. The USA has the same rule, and in both cases, the key point is that any storage vehicle used must be able to generate a "hard" copy while the examiner is present. One other requirement applies to computer disks and that is that they cannot be rewritten.

Small corporations that satisfy certain criteria can elect not to pay income tax at the corporate level but instead pass their earnings through to their shareholders. These corporations are known as A) Q corporations B) S corporations C) C corporations D) R corporations

B The type of small corporation that can elect not to be taxed at the corporate level but to pass its earnings through to its shareholders is an S corporation. The term "S corporation" comes from the subchapter of the Internal Revenue Code that governs these corporations (Subchapter S). The other type of corporation—the C corporation—is one that has not elected to be treated under Subchapter S. Its earnings are taxed at the corporate level and again at the individual level when they are paid out as dividends.

When Felicity died, she left her estate, including her IRA, to her daughter, Courtney. Because of her financial circumstances, Courtney decided to abjure the inheritance. This would lead to her A) becoming the executrix of the estate B) disclaiming the IRA C) contesting the estate D) accepting the estate

B When one wishes to refuse the receipt of an IRA, the procedure is known as disclaiming the IRA.

It would not be a violation of the Uniform Securities Act for an applicant for registration as an agent to do which of the following while the application is pending? A) Limit his sales activity to immediate family members only B) Sell fixed annuities C) Use a preliminary prospectus to obtain indications of interest for a new issue but wait until he is registered before accepting any orders D) Conduct seminars on asset allocation

B While registration as an agent is pending, the applicant can take no active role in the sale or offering of securities. However, because fixed annuities are not securities, registration as an agent is not required. Yes, we know that an insurance license would be required, but apparently NASAA doesn't care about that.

Which of the following would best describes a Yankee bond? A) U.S. dollar-denominated bond issued by a non-U.S. entity outside the United States B) U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States C) U.S. dollar-denominated bond issued by a U.S. entity inside the United States D) U.S. dollar-denominated bond issued by a U.S. entity outside the United States

B Yankee bonds are issued by non-U.S. entities in marketplaces inside the United States. The bonds are issued in U.S. dollars meaning these foreign issuers will have currency risk if the dollar drops in value against their local currency.

IIs an officer of a trust company handling investments for trust accounts an IA

No, because trust companies and their employees are specifically excluded from the deffinition

What must a state registered IA keep on record

Bank records, emails, list of discretionary accounts

Which of the following statements are TRUE? A federal covered adviser sells federal covered securities only. Federal covered advisers are advisers with federally imposed exemptions from state registration as investment advisers. A federal covered security is exempt from registration with the SEC. Federal covered securities include those issued by investment companies registered under the Investment Company Act of 1940. A) I and III B) I and II C) II and IV D) III and IV

C A federal covered adviser is an adviser with a federally imposed exemption from state registration. Securities issued by investment companies registered under the Investment Company Act of 1940 are included in the definition of a federal covered security.

A sale or offer to sell would NOT include A) a stock dividend that requires only a nominal payment by the shareholder B) any security given or delivered with, or as a bonus on account of, any purchase of securities C) a purported gift of nonassessable stock D) a sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer

C A gift of assessable stock would be an offer or a sale, but a gift of nonassessable stock is just a gift.

Which of the following statements regarding an S corporation owner and an owner of an LLC are TRUE? Creditors have very limited recourse rights to the owners. They may not be nonresident aliens. They both are considered stockholders. Both receive the tax benefit of owning flow-through entities. A) II and IV B) I and III C) I and IV D) II and III

C Creditors don't have recourse to the owners of either entity unless the owners have specifically allowed it. Both are flow-through or conduit entities. Owners of S corporations are stockholders, whereas those in an LLC are members. Nonresident aliens may not own an S corporation.

A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true EXCEPT A) the adviser must state that the client may be subject to certain limitations because of this arrangement B) the adviser may collect fees for investment advice and commissions for executing trades C) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment D) this practice is ethical if full disclosure is made to all clients

C Disclosures are required, but written consent is not. If the client does not agree with these arrangements, he can take his business elsewhere. There are cases, such as agency cross transactions, where prior written consent of the client is needed.

Form PF must be filed by A) state-registered private fund managers, regardless of the amount of assets under management B) SEC-exempt reporting advisers C) SEC-registered advisers with at least $150 million in private fund assets under management D) SEC-registered advisers with no more than $150 million in private fund assets under management

C Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC.

Phocine and Ursus, LLC, a covered investment adviser, has a client with a large short position in PQR common stock. Their chief analyst believes that PQR is an attractive target for an acquisition. Based on this information, it might be wise for the firm to suggest this client A) sell call options on PQR. B) take a long position in PQR. C) purchase call options on PQR. D) purchase put options on PQR.

C If the analyst is correct, a takeover usually occurs at significant premium to the current market. That would be bad news for the client with a short position because covering the short would be at that higher price. The best protection for a short stock position is buying a call because that fixes the future purchasing price. In the event the analyst is wrong, or the takeover bid fails, the client has maintained the short position and is only out the premium paid for the "insurance".

Typical broker-dealer fees that must be disclosed as part of a fee disclosure document would include a charge when a client requests that a stock certificate be issued in his name a commission charge when a client buys a security on a listed exchange the interest charged by the firm on money owed by customers in their margin accounts fees for providing advisory services to high-net-worth individuals A) I and IV B) II and III C) I and III D) III and IV

C If we know what charges are not included in the fee disclosure, it is easy to recognize those that are. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

Which of the following persons does NOT meet the definition of providing investment advice as a business outlined in SEC Release IA-1092? A) A financial planner who provides specific investment advice as part of his fee- based services and also makes specific securities recommendations to his clients in his capacity as an agent for a broker-dealer B) Accountant who charges clients an additional fee for providing investment advice C) A management consultant whose only investment advice is suggesting to a couple of small business clients who had invested their surpluses in speculative securities that they should find something less risky D) Attorney who advertises the availability of investment advice

C The management consultant's advice to clients is more like personal opinion than investment advice as a business. In the other 3 choices, investment advice is offered as part of the individual's regular business. Lawyers, accountants, teachers, and engineers (LATE) are not generally considered investment advisers provided the advice is incidental to their regular profession.

Peterson Financial Planning is a small personal financial planning partnership in Missouri that has $10 million in assets under management. As a result of the Dodd-Frank Act, which of the following statements best describes the registration requirement for Peterson Financial Planning? A) Peterson Financial Planning is required to register as an investment adviser with the SEC and to notify the Administrator of the Missouri Department of Securities of its operation. B) Peterson Financial Planning is required to register as an investment adviser with the SEC but has no requirement to register with the Administrator of the Missouri Department of Securities. C) Peterson Financial Planning is required to register as an adviser with the Administrator of the Missouri Department of Securities. D) Peterson is required to register as an adviser with both the SEC and the Administrator of the Missouri Department of Securities.

C With less than $25 million under management, Peterson Financial Planning is considered a "small" investment adviser and must register with the state. Advisers managing at least $25 million but less than $100 million are considered "mid-size" investment advisers and, unless qualifying for an exception, must also register with the state. Investment advisers with at least $100 million in AUM, but not $110 million, register with the SEC or the state. Once the $110 million level is reached, SEC registration is mandatory.

Who must keep a record by security showing each client's interest and location thereof

Custodians

If a new joint tenants with rights of survivorship account is opened by two related individuals, all of the following statements are true EXCEPT A) mail may be sent to either party (with the permission of each party) B) in the event of death, the decedent's interest in the account goes to the other party C) orders may be given by either party D) checks may be drawn in the name of either party

D

Under the Investment Advisers Act of 1940, for which of the following is an investment adviser required to disclose to clients the amount of compensation he will receive? Commissions on recommended securities transactions Commissions on insurance sales Incentives from the issuer of a recommended security A) I and III B) II and III C) I and II D) I, II, and III

D

A client calls to say he has just read about a European option and doesn't know what it is. You would explain that it is a derivative because A) the currency used is generally something other than the U.S. dollar B) intrinsic value does not affect the premium C) it can only be exercised on the expiration date D) its value is based on some underlying asset

D Although the unique characteristic of a European option is that it can only be exercised on its expiration date, that doesn't answer this question. It is a derivative like any other option because its value is based on the underlying asset.

If interest rates were to decline sharply, which of the following securities is likely to appreciate the most? A) 20-year mortgage-backed security currently trading at a small discount B) 20-year municipal bond currently trading at par C) 20-year corporate bond currently trading at a small premium D) 20-year zero-coupon Treasury bond currently trading at a deep discount

D As a rule, the longer the duration, the greater the price appreciation. In this case, all the fixed-income securities have 20-year maturities. Another general rule is that the lower the coupon on the bond, the longer the duration. The zero-coupon bond has the lowest coupon and would likely appreciate the most.

The main difference between the current ratio and the quick ratio is that the quick ratio excludes A) goodwill. B) cost of goods sold. C) assets. D) inventory.

D Current ratio = (current assets ÷ current liabilities) = [cash + marketable securities + receivables + inventory] ÷ current liabilities. Quick ratio = [cash + marketable securities + receivables] ÷ current liabilities. Thus, quick ratio excludes inventory, which current ratio does include. Both ignore goodwill and cost of goods sold.

The term "private fund", as defined under federal and state law, would not apply to A) a venture capital fund. B) a hedge fund. C) an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that act. D) a leveraged ETF.

D ETFs are publicly traded. Hedge funds and venture capital funds meet the definition of a private fund which is, "an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that act."

If the current risk-free rate is 3% and the expected market risk premium is 6%, what return should we expect from a security that has a beta of 2? A) 18% B) 9% C) 12% D) 15%

D In most questions of this type, we are given the market return. Here, there is a trick. We are told there is a market risk premium of 6%. That means that the market return must be 6% above the risk-free rate, or 9%. Now, we can plug in the formula. Expected return = 3% + ([9% -3%] × 2) = 3% + (6% x 2) = 3% + 12% = 15%. In this question, because we're already given the risk premium, we can avoid the first step. That would be 3% + (6% x 2) = 3% + 12% = 15%.

With respect to the specific commodity that is the subject of the contract, all of the following are standardized parts to an exchange-traded futures contract except A) the quality. B) the time for delivery. C) the quantity. D) the market price.

D It is the delivery price which is standardized, not the market price (that is continuously fluctuating). Exchange-traded futures contracts offer standardized quantities and qualities (grade of the commodity) as well as a standardized time for delivery.

If an agent feels that his secretary is underpaid and decides to split his commissions on an 80%/20% basis, this practice is A) a violation under all circumstances B) permitted if the secretary is also registered as an agent C) a violation in certain states D) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement

D Just as with any other individual, splitting commissions can only be done with those having the proper registration, in this case, that of an agent. Because compensation is determined and processed by the employing broker-dealer, any splitting would need the approval of the appropriate supervisor.

Which of the following could NOT participate in a Keogh plan? A) Employee of a self-employed individual B) Self-employed individual who owns an IRA C) Spouse of a self-employed individual who works for the business D) Limited partner who does not contribute any personal services to the partnership but has invested money

D Keogh plan participants must work for the business. This may include a sole proprietor, a partner who works in the business, or an employee, but not a limited partner who contributes no personal services (meaning there is no compensation paid).

Management style is a phrase that is often used to describe the methodology employed by a particular portfolio manager. If the manager under discussion used earnings momentum to select stocks, it could be said that the style being used was A) value B) asset allocation C) passive D) growth

D Momentum

An agent and a broker-dealer maintain wrap fee accounts for several of their customers. Which of the following registrations is required? A) Neither the broker-dealer nor the agent is required to have any license other than their regular securities license. B) Only the registered principal would need to be registered in the state(s) in which they do business. C) The agent must be registered as an investment adviser. D) The firm must register as an investment adviser.

D Once a broker-dealer handles wrap fee accounts, it loses the exclusion from the definition of investment adviser. Therefore, the firm must be registered with either the state or the SEC. Any agents handling these accounts would be registered as investment adviser representatives.

All of the following statements concerning the types of risk are correct except A) business risk is the uncertainty regarding operating income. B) financial risk is the risk that a firm's financial structure will negatively affect the value of an equity investment. C) default risk is the potential inability of a debt issuer to make timely interest and principal repayments. D) reinvestment rate risk is the risk that proceeds available for reinvestment must be reinvested at a higher rate than that of the investment vehicle that generated the proceeds.

D Reinvestment rate risk is the risk that proceeds available for reinvestment might be reinvested at a lower rate than that of the investment vehicle that generated the proceeds. The computation of a bond's yield to maturity assumes that the coupon interest will be reinvested at the coupon rate. Reinvestment risk is the uncertainty of that happening.

Foster Advisers, based in New Jersey, manages $135 million in funds for New Jersey-based clients. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following statements best describes the registration requirement for Foster Advisers? A) Foster Advisers is required to register as an adviser with the SEC and has no requirement to notify the Administrator of the New Jersey Department of Securities. B) Foster Advisers is required to register with both the SEC and the Administrator of the New Jersey Department of Securities. C) Foster Advisers is required to register with the Administrator of the New Jersey Department of Securities. D) Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.

D Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment advisers with $110 million or more in assets under management must register with the SEC. These advisers are called federal covered advisers. Investment managers who manage less than $100 million must register with the state Administrator. Advisers with at least $100 million but less than $110 million of assets under management have the option to register with either their state Administrator or with the SEC. Once the $110 million level is reached, registration with the SEC is mandatory. With $135 million under management, Foster Advisers must register with the SEC. Foster Advisers is subject to the additional requirement of notifying the administrators of the securities departments of states in which it maintains offices or clients of its operations. At the state level, a notification fee (but not registration) is generally required. One aim of the NSMIA was to eliminate dual registration of investment advisers with the states and the SEC. Investment advisers are not required to register at both state and federal levels.

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

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

Which of the following securities of Synergy, Inc., (an issuer whose stock trades on the Nasdaq Stock Market), does NOT have an exemption from registration with the state? A) Synergy's oil and gas limited partnership units (Synergy, Inc., is the general partner) B) Synergy, Inc., senior bonds C) Synergy, Inc., preferred stock D) Synergy, Inc., debentures

D Synergy's oil and gas limited partnerships are not issued by Synergy, Inc.; Synergy is only the general partner. The oil and gas partnerships are issued by separate legal entities; they do not have the blue-sky exemptions. They must be registered in the states in which they are sold, unless they have some other exemption. Any security equal or senior in claim to an exempted common stock is exempted as well. The company's preferred stock, senior bonds, and debentures all have blue-sky exemptions from state registration because the company's common stock is traded on the Nasdaq Stock Market.

ERISA, a federal retirement law, was created to protect which of the following? A) Banks and insurance companies B) Individual retirement accounts (IRAs) C) Employees in the public sector D) Employees in the private sector

D The Employees Retirement Income Security Act of 1974 (ERISA) is designed to cover employees in the private sector. In this context, private sector means corporate employees; public sector means government employees.

Which of the following statements is (are) TRUE regarding the jurisdiction of the SEC under the Securities Exchange Act of 1934? The SEC has jurisdiction over exchanges and SROs. The SEC has jurisdiction over broker-dealers, investment advisers, and associated persons that are required to be registered under federal law. The SEC has jurisdiction over banks and savings and loans regarding their securities activities. A) II only B) I, II, and III C) I only D) I and II

D The SEC was created by the Securities Exchange Act of 1934 and has the responsibility of administering all federal securities laws. The SEC has jurisdiction over exchanges, SROs, and all persons required to be registered under federal law. The SEC does not enforce state securities statutes, nor does it have jurisdiction over banks or savings and loans regarding their securities activities. Banking authorities, such as the Federal Reserve Board, the Federal Deposit Insurance Corporation, and others, regulate banks and savings and loans.

A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is A) 2% B) not determinable from the information given C) 10% D) 5%

D The current yield formula is annual dividends per share divided by current market price. The dividends per share are $36 million ÷ 20 million shares = $1.80 per share. Current yield is $1.80 ÷ $36.00 = 5%.

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding, the net asset value per share is closest to A) $36.38 B) $34.46 C) $26.11 D) $32.55

D The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the net assets are the $100 million portfolio value minus the liabilities of $10 million for the unpaid securities plus the $5 million in accrued management fees. That leaves $85 million divided by the 2,611,437 shares outstanding which is approximately $32.55.

Under IA-1092, an investment adviser makes advice his principal activity makes advice his regular activity is compensated directly for advice is compensated directly or indirectly for advice A) II and III B) I and III C) I and IV D) II and IV

D Under the SEC's release, the rendering of advice does not have to be a person's principal activity. Rather, it must be a regular activity, and compensation may be received directly or indirectly.

A customer in his 20s, who is not risk averse, is in the market for life insurance. His main worry is that what looks like a generous death benefit today may not be sufficient for a beneficiary 40 or 50 years from now. An investment adviser representative might consider recommending A) whole life insurance with the option of purchasing additional coverage B) an aggressive, long-term strategy of investment in small-cap stocks C) term life insurance D) variable life insurance

D Variable life insurance has the advantage of offering possible inflation protection for the death benefit. The insured assumes investment risk for this benefit, but pays a fixed scheduled premium for the life of his contract.

When an agent transfers employment from a broker-dealer registered with the SEC to a broker-dealer registered solely in this state A) only the agent and the state-registered broker-dealer must notify the Administrator B) only the agent and the SEC-registered broker-dealer must notify the Administrator promptly C) only the agent must notify the Administrator promptly D) the agent, the former broker-dealer, and the current broker-dealer must all notify the Administrator

D When an agent transfers employment from any broker-dealer to any other broker-dealer, both the agent and the broker-dealers must notify the state securities Administrator.

ABC Corporation's 5% mortgage bond is currently trading at a premium. The bond is callable at par in 10 years and matures in 15 years. When comparing the returns available to an investor, it would be accurate to state A) the yield to call is higher than the current yield. B) the current yield is higher than the nominal yield. C) the yield to maturity is higher than the current yield. D) the yield to maturity is higher than the yield to call.

D Whenever a bond is selling at a premium, the return, in descending order is: nominal yield, current yield, YTM, and YTC. It is the reverse order when the bond is selling at a discount. When the bond is at par, all are the same (if the call is at par).

The term "investment counsel" can be used by investment advisers A) who are also attorneys B) who are also registered as broker-dealers C) who are registered with the SEC under the Investment Advisers Act of 1940 D) with a primary business of rendering investment advice

D While this choice is only half correct, under the Investment Advisers Act of 1940, the term "investment counsel" may be used by any adviser that meets two standards: the adviser performs investment supervisory services, and the adviser provides advice as the primary business of the firm. No other special qualifications or registrations are needed.

The lower the coupon and longer the maturity the (lower/higher) the duration

HIGHER - The highest interest rate volatility

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Interactive content

S Corporations Advantages

Limited liability of owners, avoids double taxation, continues, easy transfer of ownership, pass through earnings to shareholders

State-registered investment advisers who maintain custody of customer funds or securities net worth drops from 62k to 26k what must they do?

Obtain a surety bond for 10k you would think it would have to be 9k because that's 35k right? wrong, why? because this exam makes no fvcking sense because you have to round up to the nearest 5k multiple. so if you dropped to i dont know 17k you'd have to get a surety bond for 20k

What part of the ADV satisfies the Brochure requirement?

Part 2 ADV

Brochure Delivery

The rule calls for delivery within 120 days of the end of the fiscal year. The 48-hour rule is not mandatory; if the adviser waits until the signing of the advisory contract, there is a five-day penalty-free withdrawal privilege granted to the customer. If there are no material changes, delivery of an annual brochure is not required.

T/F Banks and their employees are excluded from the definition of an IA

True

T/F If an investment adviser has no office in the state, and renders advice solely to broker-dealers, insurance companies, banks, investment companies, governmental agencies, or employee benefit plans with assets of $1 million or more, the adviser is exempt from registration with the state.

True

When a bond is selling at a discount

YTC, YTM, Current Yield, Nominal Yield

There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are

commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

Bond selling at par

coupon rate = current yield = YTM

When is the only case an administrator can impose requirements (financial) on a federal covered advisor

filing fee

Whenever a bond is selling at a premium, the return, in descending order is

nominal yield, current yield, YTM, and YTC.

What is form PF used for

private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold.

What does section 1031 mean

tax-free exchange of one property for another. This has the effect of deferring any gain until final disposition of the property. This is a parallel to Section 1035 for annuity products

two standards of Investment Council

the adviser performs investment supervisory services, and the adviser provides advice as the primary business of the firm.