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The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if 1 results do not reflect the deduction of fees. 2 actual market conditions during the referenced period are not disclosed. 3 the advertisement did not reflect performance for a minimum period of three years. 4 the advertisement did not disclose that it applied to only a specific group of clients.

1,2,4 All investment adviser advertising must reflect fees, state actual market conditions during the referenced period, and disclose the specific group of clients to which it applies. However, advertising that reflects past performance must show a minimum period of one year, not three years.

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.

2+4 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.

Under the Uniform Securities Act, which of the following constitutes an offer of a security? A) The delivery of a prospectus to a prospective purchaser. B) Stock dividend distributed to current shareholders. C) Tombstone advertisement. D) Agreement between an issuer and an underwriter.

A A prospectus is the document that offers a security for sale. A tombstone advertisement always states that in and of itself, it is not an offer to sell, that such an offer may only be made by prospectus, and where a prospectus may be obtained.

To stimulate a sluggish economy using fiscal policy measures, policymakers would: A) reduce income taxes. B) increase income taxes. C) reduce the money supply. D) increase the money supply.

A Reducing income taxes is a fiscal policy tool intended to increase overall demand for goods and services. Adjusting the money supply is a monetary policy tool.

All of the following statements regarding incentive stock options (ISOs) are correct EXCEPT: A) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before one year from the date of grant or two years from the date of exercise. B) the exercise of ISOs does not create taxable income. C) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain. D) upon the exercise of an ISO, income for AMT purposes is created.

A The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before one year from the date of exercise or two years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT.

A customer's portfolio has a beta coefficient of 1.1. If the overall market increases by 10%, the portfolio's value is likely to:

A beta of 1.1 means the portfolio is considered to be 1.1 times more volatile than the overall market. If the market is up 10%, the portfolio with a beta of 1.1 is likely to be up 11%.

Defensive Stock

A defensive stock maintains future earnings that are likely to withstand an economic downturn. Typical examples are stocks of those firms that supply basic consumer necessities such as foodstuffs.

The state securities Administrator has the authority to: make, amend, or rescind rules,forms, and orders necessary to administer the USA.

A state securities Administrator may issue a ruling or order to comply with the blue-sky laws of the state and designate the use of certain forms, but does not have authority to amend or alter the Uniform Securities Act itself. All rules and forms of the Administrator must be published. Only the courts can issue injunctions.

Foster Advisers operates as an investment adviser that is registered in a state where the Administrator, by rule, prohibits investment advisers from holding custody of client funds and securities. This means that Foster Advisers may not: A) have physical custody over its clients' monies and certificates. B) manage client accounts on a discretionary basis. C) examine customers' stock certificates. D) refer clients to an affiliated broker-dealer.

A) have physical custody over its clients' monies and certificates. Under the Uniform Securities Act, custody indicates that the adviser has physical possession over its clients' certificates and monies. A prohibition against custody in a given state does not prohibit the adviser from holding investment discretion over clients' accounts, provided such discretion is granted under a suitable authorization or power of attorney. Merely examining customers' stock certificates is certainly not the same as holding custody or possession of such certificates. As long as the affiliation is disclosed, there is nothing improper about an IA referring advisory clients to that BD.

In 1940, Congress passed the Investment Company Act. Among the provisions of this sweeping law was the listing of the classifications of investment companies. Included in that listing would be all of the following EXCEPT: A) holding companies. B) management investment companies. C) unit investment trusts. D) face amount certificate companies.

A) holding companies. Even though holding companies do many of the same things as investment companies (buy stock in other companies to try to make a profit), they are not included in the definition stated in the Investment Company Act of 1940

All of the following are true of negotiable, jumbo certificates of deposit EXCEPT: A) they are secured obligations of the issuing bank. B) they are usually issued in denominations of $100,000 to $1 million. C) they are readily marketable. D) they usually have maturities of 1 year or less.

A) they are secured obligations of the issuing bank. Negotiable CDs are general obligations of the issuing bank; they are not secured by any specific asset. They do qualify for FDIC insurance (up to $250,000), but that is not the same as stating that the bank has pledged specific assets as collateral for the loan.

Those who place bonds in client's portfolios usually focus their attention on yields. For which of the following bonds would the yield to maturity be lower than the yield to call? A) A bond selling at a discount. B) A municipal bond. C) A high-yield bond. D) A bond selling at a premium.

A) A bond selling at a discount. One of the contributing factors to the yield to maturity on a discounted bond is the realization of that discount. If a bond is called prior to maturity, that discount is realized sooner, thus increasing the yield. When the bond is selling at a premium, the reverse is generally true.

One of the most important risk measurement tools is standard deviation. If one were analyzing some mutual funds, the one with the highest standard deviation would most likely be a: A) small-cap fund. B) balanced fund. C) large-cap fund. D) specialized fund concentrating in public utility stocks.

A) small-cap fund. A fund consisting of small-cap stocks will generally have a high standard deviation. Standard deviation of a balanced fund should be relatively low while standard deviation of a large-cap fund will be moderate. If the choice had only said specialized fund, this would have been a more difficult question. However, by stating the fact that the fund invested in public utility stocks, which by their very nature do not have a great deal of volatility, the standard deviation of this fund will not be as high as the small-cap fund.

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, it is NOT a breach of fiduciary duty if investment advisers do not inquire into a client's: A) Social Security or tax ID number. B) specific financial needs. C) investment objectives. D) financial situation.

A. Although there are regulations requiring that a securities professional obtain certain client information, such as the Social Security or tax ID number, that has nothing to do with the fiduciary responsibility to always act in the client's best interest. Advisers must make reasonable inquiry into the client's financial situation, investment objectives, and needs before making recommendations. Recommendations must be suitable in light of any other information known to the adviser.

Which of the following are exempt from registration under the Uniform Securities Act? Preferred stock issued by ZXZ Corporation, whose common stock is traded on the New York Stock Exchange. Common stock issued by a national bank. Equipment trust certificates issued by a railroad company regulated by a state or federal agency. A debenture traded in the over-the-counter market issued by a corporation whose common stock trades on the NYSE.

All the securities listed are exempt from registration under the Uniform Securities Act. Preferred stock issued by corporations whose common stock trades on the NYSE is a federal covered security and is exempt from registration with the states. The same is true for a debenture of a company registered on the NYSE even though the debenture is traded over the counter. The issuers of equipment trust certificates (railroads) are regulated by other agencies, and issuers of bank securities (commercial banks) are regulated by the Federal Reserve and Office of the Comptroller of Currency (OCC); their securities are exempt from registration by the states. The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits dual regulation of securities.

Alternative investments

Alternative investments, such as limited partnership vehicles and hedge funds, have a tendency to add diversification to a traditional stock and bond portfolio. Many alternative investments have little or no regulation and their expenses are typically high.

Referral fees

Although neither the Investment Advisers Act nor the Uniform Securities Act specifically prohibits investment advisers from paying referral fees, both acts require that such fees be appropriately disclosed.

You inform a customer that you are not allowed to solicit an order for a stock but will accept that customer's buy order if placed. This is:

An offer to sell. Under the Uniform Securities Act, the term "offer" is the solicitation of an offer. In this example, the agent is soliciting an offer from the customer to buy a security. A solicitation is considered to have occurred even if the customer fails to act on the solicitation.

Recent studies have shown that much of the performance of a portfolio can be attributed to which of the following factors?

Assett allocation A study conducted by Sharpe and Markowitz revealed that 91.5% of the returns achieved by the average investor were based upon the allocation of assets among various investment classifications. Market timing and security selection did account for some of the remaining percentages, but asset allocation proved to be the most important factor.

Under which of the following circumstances would a premature distribution from a traditional IRA be exempt from the premature distribution penalty? A) A distribution taken to satisfy the terms of a court-ordered property settlement. B) When the distribution is paid in equal annual amounts over the owner's life. C) When the account is fully funded with nondeductible contributions. D) A distribution taken at age 55 if the owner is retired.

B A distribution from an IRA taken in equal annual amounts over the owner's life is not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs. The exception for qualified domestic relations orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs.

All of the following are advantages of universal life insurance EXCEPT: A) ability to adjust the amount of premium payments. B) when the cash value is sufficient, no premium payment is required. C) the policy is guaranteed never to lapse. D) ability to change death benefit amount.

B A universal life policy may lapse if the accumulation fund drops below a specified level and an additional premium is not paid.

Which of the following securities is NOT exempt from the registration procedures of the Uniform Securities Act? A) Bonds issued by a church operating as a nonprofit organization under IRS Code Section 501(c)(3). B) Variable annuities issued by an insurance company authorized to do business in this state. C) General obligation bonds issued by a city located in this state. D) Common stock issued by a public utility company whose rates are subject to state regulation.

B Variable annuities are not exempt from state registration because the payments from the annuity are dependent on the performance of a segregated fund invested in securities. Municipal securities and regulated public utilities are exempt from registration. Securities issued by religious and charitable organizations are exempt from registration under the USA.

Your client, Jane, died, and her 53-year-old son, Patrick, is the beneficiary of her IRA account. There is $750,000 in the account at the time of her death. All contributions were made with pretax dollars. Ten years later, the account has grown to $1.2 million, and Patrick begins to take distributions. The distributions will be: A) tax free because the estate paid the taxes at the time of Jane's death. B) taxed on the amount withdrawn in a given year. C) taxable on the growth and earning since Jane's death. D) 100% taxable on the amount over $1 million.

B The account beneficiary is responsible for the taxes due on the funds that are withdrawn. One hundred percent of the distribution is taxable in the tax year the withdrawal is made.

Registration by qualification is effective: A) 20 days after the filing date. B) when determined by the Administrator. C) no earlier than 10 days after the filing date. D) when the federal registration becomes effective.

B) when determined by the Administrator. Registration by qualification is effective when determined by the Administrator. Qualification is the only form of registration where the timing of the effective date is determined by the Administrator.

Business Risk

Business risk is a nonsystematic (unsystematic) risk—one that diversification can mitigate. That is a benefit of owning an index like the S&P 500. However, when an investor is invested largely in a single security, if that company fails so does the entire portfolio.

One method of securities registration under the Uniform Securities Act is Qualification. The effective date of a security registered using this method is: A) within 2 business days of the filing of maximum and minimum proposed offering prices. B) when the offering is made effective by the SEC. C) when so ordered by the Administrator. D) by Noon of the 30th day following the filing of the application.

C Registration by Qualification becomes effective on the date set by the Administrator

The total return of a mutual fund is equal to: A) the reinvestment of all unrealized dividend and capital gain income. B) annualized fund dividends divided by the current POP. C) the return attained by reinvestment of all dividend and capital gains distributions. D) all realized and unrealized capital appreciation.

C The total return assumes reinvestment of all dividend and capital gains distributions.

Which of the following debt securities does not have a fixed maturity date?

Collateralized mortgage obligations (CMOs) are mortgage-backed securities which are often paid off ahead of the scheduled maturity so the maturity date remains uncertain. The operative word is "fixed"; as opposed to "scheduled".

Under the Investment Advisers Act of 1940, persons who provide a variety of services, including investment advisory services, are considered to have received compensation for their advice when they receive: any economic benefit. a fee paid directly for the investment advice portion of their services. a commission on the sale of real estate when it is part of a total financial plan for a client that includes securities advice.

Compensation may take the form of, but is not limited to, fees, subscriptions, salaries, or commissions. Any economic benefit, whether paid directly or indirectly for the investment advice, meets the test.

Fundamental analysts give significant credence to financial ratios. Which of the following tends to give an indication of the profitability of the enterprise? A) Current ratio. B) Sales to earnings ratio. C) Debt ratio. D) Price to earnings ratio.

D The sales to earnings ratio compares the net sales of the business to its earnings. Companies with a higher percentage of earnings from each dollar of sales are more profitable.

One of the most important definitions found in the Investment Company Act of 1940 is that of "investment company". Included in that definition are all of the following EXCEPT: A) management investment companies. B) face-amount certificate companies. C) unit investment trusts. D) REITs.

D REITs Even though REITs (real estate investment trusts) share many of the same characteristics of investment companies, they are not included in the definition as found in the Investment Company Act of 1940.

The fee charged by some mutual fund companies if shares are redeemed within a specified time after being purchased is known as a: A) breakpoint fee. B) forward pricing fee. C) 12b-1 fee. D) contingent deferred sales charge.

D. Contingent Deferred Sales Charge Some mutual funds impose contingent deferred sales charges on investors who redeem their shares within a specified period after purchasing them. These fees are designed to encourage investors to leave their money in the fund for longer periods. Typically, the amount of the contingent deferred sales charge decreases the longer the investor owns the shares.

KPT, Inc. is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? Tax rate. Cash dividend. Interest charged on bank loans.

Higher taxes mean less net income. Interest charged on loans is an expense item; increasing it lowers operating income. Dividends are paid out of retained earnings and have no effect on the net income the company reports.

Net asset value per share for a mutual fund can be expected to decrease if the:

If dividends are distributed to shareholders, the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, as the money paid out is offset by a reduced number of shares outstanding.

Under the Uniform Securities Act, the Administrator has the power to deny, suspend, or revoke the registration of an issue if it is in the public interest and: the issuer discloses in the prospectus that there is virtually no chance that the company's business model will be successful and investors should anticipate losing their entire investment. the Administrator of another state has revoked the issue's registration. an officer of the registrant has been convicted of a securities related crime. the prospectus contains misstatements of nonmaterial information.

If the Administrator of another state has revoked an issue's registration, the USA considers that just cause for denial in this state. Conviction of an officer of the issuer for a crime related to the securities industry will invariably lead to denial or revocation. Disclosure that the company is not expected to be successful is not a cause for denial; all that is required is full disclosure. Misstatements of material information would be cause for action by the Administrator, but nonmaterial, by definition, does not impact an investor's decision-making process.

imports effect on US Dollar

Importing tends to weaken the dollar because it indicates an outflow of money from the United States to foreign countries. Much of this outflow is in the form of debt. When our debt (deficit in balance of payments) gets too high, there is international concern about our ability to pay our debts and a reluctance in accepting U.S. dollars as payment for goods. Therefore, the dollar weakens.

Net Redemptions

In adverse market conditions, not only do some investors stop putting money in, they liquidate their holdings. If new sales fall while liquidations rise, the effect could be net redemptions. The NAV is not affected by supply and demand and, if anything, the expense ratio would rise because some of the expenses would remain the same, but would be shared by fewer assets. Mutual funds do not receive the sales charges - they go to the underwriter.

Discount rate

In its simplest iteration, discounted cash flow is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money (the discount rate). Parity price is only relevant to convertible bonds.

Money Market Instruments

Money market securities have a maximum maturity of 1 year. Treasury notes are issued with maturities of 2 to 10 years. Treasury bills are money market instruments with maturities of 52 weeks or less. Jumbo CDs are issued by banks and have maturities of 1 year or less. Commercial paper (issued by corporations) is unsecured short-term debt with maturities of 270 days or less.

An investor who resides in New York reads a newspaper ad for advisory services in a newspaper published in New Jersey. More than 80% of the newspaper's circulation is in the state of New York. According to the Uniform Securities Act, an offer has been made in:

Neither New Jersey Nor new york. An offer is not made when a newspaper is circulated but not published in the state, or if it is published in the state but has more than 2/3 of its circulation outside of the state.

Npv

Net present value (NPV) is the difference between the initial cash outflow (investment) and the present value of discounted cash flows (NPV = PV of CF − cost of investment). That is why it is called Net Present Value instead of Net Future Value.

Net worth

Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.

zero coupon corporate bond

On a taxable zero-coupon bond, the annual imputed interest is reported for tax purposes. Because this income is not actually received annually, it is referred to as phantom income. Conversely, because nothing is paid until maturity, the issuing corporation cannot deduct the interest until it is paid at maturity.

trades

Pegging involves entering buy orders for the purpose of supporting a stock price (i.e., to keep it from falling). This is a form of market manipulation and is illegal. Front running involves a representative or firm entering orders ahead of client orders. Straddles are an option position that combines a put and a call on the same stock; there is nothing improper with that strategy. Matched orders involves buying and selling a stock from one hand to the other to create the false appearance of trading volume and is another form of market manipulation.

As interest rates fall, prices of straight preferred stock will..

Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa.

Assets on a balance sheet

Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability.

risk free portfolio

Risk elimination can be achieved if two securities with a perfect negative correlation are combined. That is, when one goes up, the other goes down by the same amount. In other words, one is the antipode of the other. Beta = Covariance of Market Return with Stock Return / Variance of Market Return

A mutual fund must redeem its tendered shares within how many days after receiving a written request for their redemption?

The 7-day redemption rule is required by the Investment Company Act of 1940.

One feature employed by portfolio managers using a passive style is rebalancing. The purpose of this technique is:

The concept of rebalancing a portfolio is just that - bring it back in balance to the original asset allocation percentages. If we were 70% equity, 30% debt and the equities now were 80% of the portfolio, we would sell enough equity and buy enough debt to get back to the 70/30 relationship.

VUL Calculations

The death benefit must be calculated annually and the cash value monthly.

​​​As defined in the Investment Advisers Act of 1940, all of the following would be considered investment advisers EXCEPT A) a tax attorney who manages investment portfolios for 50 clients. B) a civil engineer making investment decisions for $5 million held in escrow while a bridge for which she is the project manager is being constructed. C) a portfolio manager who limits advice to municipal securities exclusively. D) a professional plumber with excellent stock market skills who as a hobby and without pay, manages portfolios for 8 of his neighbors.

The plumber would not be considered an investment adviser because two of the three "prongs" are missing - advice is not being given as part of a regular business and there is no compensation. While an exclusion from the definition applies to advisers limiting advice to U.S. government securities, no such exclusion operates for advisers limiting advice to municipal securities. Similarly, there is an exclusion for attorneys providing investment advice on an incidental basis, but 50 clients is not incidental. Engineers are excluded from the definition provided their advice is incidental to their profession, but making investment decisions on the money in escrow is clearly not incidental.​

Present Value of a Dollar

The present value of a dollar will indicate how much must be invested today at a given interest rate, to equal a cash amount required in the future.

Statement of Cash Flows

The statement of cash flows reported by U.S. companies does not contain an entry entitled "cash flows from accounting changes

What is the term used to describe a person on the floor of a stock exchange who stands ready to buy or sell shares of specified stocks?

This is the basic definition of the specialist. If the question had said the over-the-counter market, it would have been a market maker. A more correct answer would be the DMM (Designated Market Maker), but sometimes NASAA is slow to make changes.

Recession

Two consecutive quarters of economic decline is termed a recession

Fiscal policy

U.S. fiscal policy is determined by the president and Congress through budgeting and taxation. The other three choices are monetary policies employed by the Fed.

Under the USA, what are the maximum penalties for a securities-related felony? 5000 and 3 years prision

Under the USA, the maximum penalty is $5,000 and/or 3 years imprisonment for a securities-related felony.

Assets and liabilities when dividends paid

When a dividend is paid, total assets are decreased as are total liabilities. The liabilities were increased at declaration time and are now decreased to reflect the payout. The two accounts affected would be decrease cash and decrease dividend payable.

5% control of a company

When an individual accumulates a holding of more than 5% in the voting stock of a publicly traded company, notification must be made on Schedule 13D within 10 business days to the SEC, the exchange where the issue is listed, and the issuer's board of directors. Notification to the state securities Administrator is not required.

Mutual fund redemptions

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

Zero-Coupon Bond

Zero-coupon bonds pay no periodic interest and are always issued at a discount from par. The appreciation of the zero from its discounted purchase price to its face value is thought of as interest to the bondholder, but this annual "phantom income", so named because you don't receive it, is taxed as ordinary income on an annual basis. When the bond is purchased, the investor locks in that yield and, with nothing to reinvest, there is no reinvestment risk.

The type of trust created by a will that becomes operative at death is a:

testamentary trust As in "last will and testament".

As referred to in the NSMIA, the term "covered security" would apply to preferred stock in the XYZ Corporation whose common stock is listed on the NYSE common stock in ABCD, Inc., a stock traded on the OTC Link Springfield, Illinois, municipal bonds sold to a resident of Springfield, Illinois Springfield, Illinois, municipal bonds sold to a resident of Springfield, Missouri

1 &4 Any security equal or senior to one listed on the NYSE is a covered security. Municipal bonds are a covered security except in their state of issuance. OTC Link and OTC Bulletin Board securities are not considered federal covered securities.

It would not be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to divide or otherwise split the agent's 1 commissions, profits or other compensation from the purchase or sale of securities with any person also registered as an agent for the same broker-dealer. 2 with any person also registered as an agent for a broker-dealer under direct or indirect common control. 3 as long as the arrangement is in writing. 4 as long as the client has approved of the sharing arrangement

1+2 NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents permits commission sharing as long as the agents are properly registered with the same broker-dealer or one under common control. There is no requirement for the arrangement to be in writing and the customer has no say so in this matter.

An individual purchasing a flexible premium variable life contract should know which of the following? Timing and amount of premiums generally are discretionary. The death benefit will generally be higher than that of a comparable whole life policy. The face amount is fixed at the beginning of the contract. The performance of the separate account directly affects the policy's cash value.

1,4 A flexible premium policy allows the insured to determine the amount and timing of premium payments, provided minimums are met. Depending on the policy, the face amount (death benefit) is recalculated each year. It is intended that the death benefit receive some inflation protection, but this cannot be guaranteed. If separate account performance causes the cash value to drop below an amount necessary to maintain the policy in force, the policy lapses unless the requisite amount is received within 31 days.

Which of the following statements regarding unsystematic risk are TRUE? It is the risk that an individual stock will not perform well. It is the same as market risk. Diversification reduces it. Diversification does not reduce it.

2,4 Unsystematic risk is company risk, the risk that an individual investment will perform poorly. Diversification can reduce most unsystematic risks.

Under the Uniform Securities Act, which of the following statements is (are) TRUE regarding civil liability of advisers and broker-dealers? The statute of limitations for civil liability is five years. A lawsuit against a broker-dealer or adviser can be avoided if restitution, costs, and interest are paid to a client. If restitution is made to a client by a broker-dealer, the Administrator may not prosecute the securities violation.

2 only Do not confuse the statute of limitations for criminal prosecution (five years) with the statute of limitations for civil liability (three years from the date of the event or two years from discovery, whichever occurs first). Since civil liability under the act is limited to restitution, costs, and reasonable interest, a lawsuit could be avoided by a return of the investor's funds plus interest. Payment of restitution to a client does not prevent the Administrator from prosecution for violating the provisions of the act.

A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be 1 specific security selection 2 methods of performance measurement 3 determination for meeting future cash flow needs 4 the summary plan description

2,3 The IPS will include methods of performance measurement (if it is meeting objectives) and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities to be purchased, but will include the types that may be placed in the portfolio. The Summary Plan Description (SPD) is a Department of Labor (DOL) required document that gives employees a summary of the plan and its features. It has nothing to do with determining how the money is invested.

Which of the following actions would constitute a violation of the Uniform Securities Act? 1Purchasing a convertible security and simultaneously selling short the underlying common stock for profit. 2Purchasing a security on an exchange and simultaneously selling it on another exchange to improve trading volume. 3Executing a trade for a customer at a price that is unrelated to the current market. 4Executing a trade for a customer at the best available price without the customer's knowledge

2,3,4 The practice of buying a security on one exchange and simultaneously selling it on another exchange to create an appearance of trading activity is manipulative, not arbitrage. Purchasing a convertible security and simultaneously selling short the underlying common for profit is another form of arbitrage and is perfectly legal. Executing a trade for a customer at a price that is unrelated to the current market, and executing a trade without the knowledge of the customer are prohibited.

According to the ethical guidelines set forth in the NASAA Statements of Policy and Model Rules, which of the following statements regarding discretion is CORRECT? 1 An agent of a broker-dealer must have written prior discretionary authorization prior to effecting discretion in a client's account. 2 An agent of a broker-dealer must receive written discretionary authorization within ten business days of the first discretionary transaction in the account. 3 An investment adviser representative must have written prior discretionary authorization prior to effecting discretion in a client's account. 4 An investment adviser representative must receive written discretionary authorization within ten business days of the first discretionary transaction in the account.

2,4 One respect in which the use of discretionary authority differs between agents and IARs is that agents may never exercise discretion without prior written authority. IARs must receive the written consent no later than ten business days after the first discretionary transaction in the account.

Under the Uniform Securities Act, when may an investment adviser legally have custody of money or securities belonging to a client? 1 When the adviser has a net worth of at least $25,000. 2 When the Administrator has not prohibited custodial arrangements. 3 When the adviser does not have discretionary authority over the account. 4 When the adviser has notified the Administrator that he has custody

2,4 The Administrator may prohibit advisers from having custody of client funds or securities. If no such prohibition applies, the Administrator must be notified in writing if an adviser has custody. In almost all jurisdictions, a surety bond or sufficient net worth ($35,000) is required to maintain custody. Discretionary authority does not affect an adviser's ability to have custody.

Non qualified annuity

26,000 in an annuity. $17,000 invested is after-tax dollars. Under the Tax Code, the taxable portion is considered to be withdrawn first in any lump-sum distribution. Therefore, the first dollars withdrawn are all taxable until the amount of withdrawal meets or exceeds the growth in the account. Because Bob is over 59-½, there is no 10% tax penalty on his withdrawals

What is the term used to describe a common stock issued below its par value? A) Assessable. B) Nonassessable. C) Below book. D) Subpar.

A. Assessable Assessable stock is a stock that is issued below its par or stated value. The issuer and/or creditors have the right to assess the shareholder for the deficiency. All stock issued today is nonassessable.

custody of funds

An adviser who has custody must (1) segregate client securities by client and keep them in a safe place (all clients must be notified in writing of the location of their securities and of any location changes), (2) deposit client funds in bank accounts that contain only the client's funds, naming the adviser as agent or trustee for the client (the funds of all clients may be combined in one account, but complete records must be kept by the adviser; all clients must be notified in writing of the location of their funds and of any location changes), (3) report to clients at least every three months with a written, itemized statement indicating the funds and/or securities in the possession of the adviser and all transaction for the period, and (4) arrange for an unannounced examination (audit) by an independent public accountant at least annually, who will report the audit results to the SEC. The Investment Advisers Act of 1940 does not require surety bonds. The Uniform Securities Act requires surety bonds.

According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is NOT true? A) These transactions are allowed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. B) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. C) Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction. D) Advisers must send statements to clients no less frequently than annually that identify the total number of these transactions during the period and the total amount of commissions received.

B An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commission received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.

Beth Jamison is an agent and an IAR for Consolidated Wealth Planning, a FINRA member broker-dealer and SEC registered investment adviser. An advisory client purchases 300 shares of RMBN and the sale is made from Consolidated's inventory. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, A) selling out of inventory to advisory clients would be considered an unethical business practice B) Beth would not be required to obtain consent for this principal transaction if it was not the subject of a recommendation C) Beth must obtain consent of any advisory client whenever a sale is made as principal D) the amount of commission charged for this transaction must be clearly disclosed

B When acting in the capacity of IA (or IAR), that is, when making recommendations or advising a client to purchase (or sell) a security, any transaction in which the firm is a principal requires disclosure in writing to and consent from the client prior to the completion of the trade. However, if merely accepting a client order (no advice rendered), consent is not required.

Which of the following is NOT included in Form ADV Part 2A? A) Educational background of the adviser. B) States in which the investment adviser is registered or intends to register. C) Investment policy of the adviser. D) Types of investments made by the adviser.

B) States in which the investment adviser is registered or intends to register. ADV Part 2A is the brochure that investment advisers must deliver to clients; it describes the investment adviser's fees, educational background, investment policies, and types of investments made. The states in which the adviser is registered or intends to be registered in are not contained in ADV Part 2A. If the IA is registering with the SEC, on Part 1A, they list only the largest five offices (in terms of numbers of employees). If state registered, they list each state they will be registering in or are already registered in.

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

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

An investment adviser representative meets with a couple who explains that they wish to be able to pay for their daughter's college education. The IAR is told that the child will be starting school in five years. This 5-year time period would be considered A) a Section 529 Plan B) an investment constraint C) an investment policy statement (IPS) D) a capital need

B. Investment constraints are limitations on the ability to make use of particular investments. They can be liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances (ethical objectives or social responsibility considerations). The easiest way to determine if it is a constraint or a capital need is if a dollar amount is stated. When a specific sum is mentioned, it is a capital need. The education may be funded through a Section 529 Plan, and this may be part of the client's IPS, but neither of those answers the question posed.

A client profile is not complete without a family income statement. A typical one would include: dividends. credit card debt. autos. mortgage interest.

Income statements reflect the family's income and expenses, not assets and liabilities. Dividends represent money received and mortgage interest is money paid out. Credit card debt is a liability and autos are assets.

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

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

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

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

An IAR with a state covered adviser would like to employ the services of an individual as a solicitor to help bring in more business. The solicitor will be compensated by receiving a percentage on all assets placed under management. In order to do this, all of the following must be complied with EXCEPT A) disclosure of the arrangement must be made to the client B) the terms of the compensation must be spelled out C) the solicitor must be registered as an IAR in order to receive compensation based upon advice D) the IA and the solicitor brochure must be delivered at least 48 hours prior to entering into the contract

D. In this example, the IA brochure and solicitor brochure are required to be delivered with the sales presentation. The contract is not signed until the client agrees to engage the services of the IA If these are not delivered at least 48 hours prior to signing, the client has a 5-day penalty-free withdrawal option.

One of the important roles of an investment adviser representative is assisting clients in analyzing the performance of securities held in their portfolios. Which of the following is the best measurement of a security's performance? A) Standard deviation B) Yield C) Beta D) Total return

D. Total Return Total return reflects the entirety of a security's performance because it includes both income and capital appreciation. Beta and standard deviation are risk measurements and, while they may be used to evaluate a security's performance when compared to the risk taken, they don't truly provide a measurement as does total return.

Corporate debt securities

Debentures are corporate long-term debt securities issued on the general credit of the corporation and are not backed by any specific assets.â The term, prior lien, means there is a secured claim against a specific asset. Preferred stock is not a debt security and general obligation bonds municipal, not corporate securities.

Which of the following indices or averages is based on the prices of only 65 stocks (30 industrial, 20 transportation, and 15 utility)? A) Value Line. B) S&P Composite. C) Wilshire 5,000. D) Dow Jones Composite Average.

Dow Jones Composite Average. The most widely quoted and oldest measures of changes in stock prices are the Dow Jones averages. They are also the smallest in terms of the number of stocks included in the averages with only 65 stocks.

Exempt securities

Exempt securities need not reestablish their exemptions annually or otherwise. Exempt securities are exempt because their issuers are exempt while the basis for an exemption for a transaction must be established before each transaction. Neither the exempt security nor the transaction exemptions are mutually exclusive and a security or transaction may qualify for 2 or more of these exemptions. The term "federal covered securities" includes registered investment companies as well as securities listed on national exchanges.

NAV Sales Charge

If the fund has a redemption charge (CDSC), it is based on the NAV per share, not the public offering price (POP). That is, if the client liquidated shares when the NAV was $10 per share and the POP was $10.50, the CDSC would be charged based on the $10 rather than the $10.50. Commission is not a term used with mutual funds. The 12b-1 fee is a charge against overall assets of the fund; it is not considered to be a charge related to the buying or selling of fund shares.

1,4 Which of the following statements regarding agent registration under the Uniform Securities Act are TRUE? 1 In the absence of any action by the Administrator, the effective date of a registration is noon of the 30th day. 2 The Administrator may initiate a disciplinary action within 2 years of an agent's withdrawal of registration. 3 The administrator may request the agent furnish a statement of assets and liabilities. 4 If, before the effective date of the registration, the Administrator requires amendments to the application, the registration will be considered to have first been filed upon filing of those amendments.

Normally, registration of persons becomes effective at noon of the 30th day following filing. If the Administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Agents do not have financial requirements and the Administrator has a maximum of 1 year after termination to initiate any actions.

Elizabeth has the opportunity to buy 1,000 shares of Clear Skies Satellite at $50 per share, with an expected rate of return of 9%, or invest in an equivalent dollar amount of Treasury bills with a yield of 5%. If Clear Skies Satellite only returns 2%, her opportunity cost is:

Opportunity cost is the return given up as a result of a specific investment selection. In this example, Elizabeth chose the investment with the potentially higher return by giving up the opportunity to invest in Treasury bills that yield 5%. In this case, her opportunity cost is 3%, the difference she gave up in order to invest in an alternative investment.

One method of diversifying an investment portfolio is by spreading it out among different investment classes. Which of the following would be considered an asset class? A) Automobiles B) Real estate C) Gold jewelry D) A small-cap index fund based on the Russell 2000

Real estate Of the choices, only real estate would be considered an asset class. Gold jewelry is a specific type of the tangible asset class and the index fund is a specific type of the stock (equity) asset class. If the automobiles were collectibles, they would be part of the tangible asset class.

An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, which of the following assets would be included: a sofa in the reception area. the value of the copyright on an investment manual authored by the investment adviser. the reputation of the investment adviser. patents held by the investment adviser on a stock tracking software program.

Sofa only. For purposes of this Rule, the term "net worth," means an excess of assets over liabilities. But net worth does not include as assets: goodwill, franchise rights, patents, copyrights, marketing rights, all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what's the deal with the sofa? Since the choice specifically says that it is in the reception area, we must assume that it is not a "home" furnishing, rather one in the office and those are not excluded assets.

Which of the following attributes best describes a tactical asset allocation portfolio style?

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

Custodian

The Investment Company Act of 1940 requires that investment companies employ the services of a commercial bank as custodian to hold and safeguard the physical assets (cash and investment portfolio) of the fund.

Sec jurisdiction

The SEC is charged with administering the federal securities laws, under which the Municipal Securities Rulemaking Board (MSRB) exists. So the SEC has jurisdiction over the MSRB. However, financial institutions come under the jurisdiction of banking regulatory authorities

Acid test/ Quick asset ratio

The acid-test ratio, also known as the quick asset ratio, is computed by subtracting the inventory from the total current assets and then dividing that remainder by the total current liabilities

Which of the following would best describe working capital?

The amount of money a corporation has available to work with if it liquidates its current assets and pays off all of its current liabilities. Working capital equals current assets minus current liabilities.

A customer determines that he has been sold unregistered, nonexempt securities in a prohibited transaction. In accordance with the USA, he can exercise the right to file a civil suit within: two years from discovery or three years from occurrence, whichever is sooner.

The civil liabilities provisions of the Uniform Securities Act provide for a statute of limitations equal to the sooner of 2 years from the date of discovery or 3 years from the date of the violation.

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term).

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

Inverted Yield Curve-negative slope

The demand for longer term bonds is higher than that of short-term bonds and causes a negative slope in the yield curve. If investors were buying short-term bonds in greater demand, the rates of short-term bonds would decline rather than rise.

Which of the following municipal bonds would be most subject to interest rate risk? A) 8s '30 on a 7.8% basis. B) 7.5s '19 on a 7.2% basis. C) 7s '18 on a 7-½% basis. D) 7.8s '25 on a 7.4% basis.

The longer the maturity of a bond, the greater the interest rate risk. The 8s '30 on a 7.8% basis shows a bond with a 2030 maturity, which is the longest maturity (without a substantially higher coupon) of the choices available.

If your 39-year-old customer is the sole owner of a business, earns $260,000 a year, and makes the maximum contribution to a Keogh plan, how much money may he contribute to his IRA?

The maximum contribution is the lesser of 100% earned income or $5,500; in this case, the amount of the Keogh contribution is irrelevant.

Midrange value

The range of a stock's performance is the low to the high, in this case, -4% to +16%. The mid-range is that number that is exactly in the middle of the range. With a range of 20 points, the midpoint is going to be the high minus 10 or the low plus 10. +6.0% is 10 points higher than the low and 10 points lower than the high.

Right of rescission

The right of rescission under the Uniform Securities Act allows the customer 30 days to respond to a rescission letter from a broker-dealer offering to buy back securities sold illegally. If the customer does not accept or reject the offer, the customer waives his right to bring court action against the adviser for the improper sale.

Net change in cash position

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows which is a separate financial statement.

The Securities Exchange Act of 1934 granted the SEC the authority to register a number of participants in the securities markets. One of those entities is a securities information processor (SIP). Which of the following statements best describes a SIP? Any person engaged in the business of collecting, processing, or preparing for distribution or publication; or assisting, participating in, or coordinating the distribution or publication of information with respect to transactions in or quotations for any nonexempt security.

This answer is taken directly from the Act itself. There is a second part to the definition and that is that a SIP is also any person distributing or publishing (whether by means of a ticker tape, a communications network, a terminal display device, or otherwise) on a current and continuing basis, information with respect to such transactions or quotations.

Under the Uniform Securities Act, the definition of security includes a wide range of items. One of these is a two-party agreement representing a promise to repay a specific sum on a specified date that, if it meets certain requirements, is exempt from registration. This agreement is commonly referred to as a A) loan contract B) debenture C) futures contract D) promissory note

This is the basic definition of a promissory note, and it is one of the many items fitting the definition of a security under the USA.

The Federal Reserve Board has just taken action leading to an increase in interest rates. Which of the following industries is most likely to be affected adversely by this action?

Utility stocks tend to be interest rate sensitive for two reasons. First, they are typically bought for income portfolios and, as such, changes to interest rates impact their price. Second, because utilities are typically the most highly leveraged of all industries, an increase in interest rates could substantially increase their debt service costs and thus reduce earnings.

What happens to outstanding fixed-income securities when interest rates decline?

When interest rates drop, prices will rise, decreasing effective yield. Thus, there is an inverse relationship between interest rates and bond prices.