66 Incorrect Q's 8/23

Asset-based sales charges will generally be lowest when holding which of the following mutual fund share classes? A) Class A shares B) Class R shares C) Class B shares D) Class C shares

A) Class A shares Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load but do have a higher asset-based sales charge. Class R shares can have a 12b-1 charge as high as 0.60%, more than Class A, but less than Classes B and C.

An investment adviser would be most likely to be the contra-party to a trade when acting as A) a principal. B) an investment counsel. C) an agent. D) a broker.

A) a principal. The term contra-party means the other side of the trade. There are always two parties (the principals) to any transaction: the buyer and the seller. When an investment adviser is selling a security out of, or purchasing a security for its proprietary account, it is one of the principals.

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

B) the chief compliance officer. 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 firms would be a federal covered adviser? A) XYZ Broker-Dealer with custody over $50 million of clients' invested assets B) DEF Fund Managers, a corporation managing an unregistered hedge fund with $20 million in assets C) ABC Money Managers, a partnership with $112 million under management D) GHI Consultants, a sole proprietorship managing $15 million belonging to high-net-worth individuals

C) ABC Money Managers, a partnership with $112 million under management The structure of the adviser is irrelevant; if assets under management equal $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply. A broker-dealer is excluded from the definition of investment adviser if investment advice is incidental to its business. Custody has nothing to do with giving advice.

Which of the following would be most useful information for an IAR attempting to determine the ability of a client to have the necessary funding to purchase an investment with a $25,000 minimum entry level? A) Marginal tax bracket. B) Cash flow statement. C) Family balance sheet. D) Income tax return.

C) Family balance sheet. Some clients invest in a lump sum, others with periodic payments and others do both. Since this is lump sum question, the balance sheet indicates the ability to commit funds at one time.

A broker-dealer publishes a list of securities it approves for inclusion in IRAs. This means A) the broker-dealer has consulted with the regulatory bodies and has received approval from them to recommend these securities for IRAs. B) the broker-dealer has committed an unethical business practice because use of the word approved is prohibited. C) the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning. D) an agent for the broker-dealer can place these in clients' IRAs knowing that the suitability requirements have been met.

C) the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning. Approved is an odd word in this industry. It can never be used with reference to any regulator commenting on the status of a security or an individual. However, a broker-dealer creating an approved list of securities is not unethical or prohibited as long as it is clear that it is the broker-dealer and not any regulator granting the approval. Even though the firm has listed these securities as suitable for IRAs, that does not relieve the individual agent of verifying the suitability for each client for whom they are recommended.

If a company with 10 million shares outstanding with total earnings of $50 million pays a $2 dividend, the dividend payout ratio is A) 20% B) 4% C) 25% D) 40%

D) 40% Dividend payout ratio is determined by dividends paid per share divided by earnings per share. In this case, earnings per share (EPS) is $50 million ÷ 10 million shares = $5 per share. The company paid out in dividends $2 for each $5 earned for a 40% payout ratio ($2 ÷ $5).

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, which of the following are violations of the requirements for advisers who have custody of client securities or funds? An adviser deposits client funds into its own bank account, making a careful record of the amount of funds belonging to each client. An adviser allows a CPA to make an unscheduled audit of all client securities and funds in the adviser's custody. Once a year, an adviser sends each client a report on the securities and funds in the adviser's custody. A) I, II, and III B) II and III C) I and II D) I and III

D) I and III Client funds must be deposited in separate bank accounts. Each year, accounts must be audited by an independent public accountant in an unannounced examination. Clients must receive statements quarterly (not yearly). Clients must also be notified in writing of the location of their property and any change in that location. Client securities must be properly segregated and identified.

Which of the following statements regarding a 100% stock dividend are true? The share price is reduced by half. The total market value of the outstanding stock decreases. The total market value of the outstanding stock may increase or decrease as a result of the split. The number of shares doubles. A) II and IV B) II and III C) I and III D) I and IV

D) I and IV In a 100% stock dividend, the number of outstanding shares is doubled and the price is reduced by half. The total market value (market cap) of the issuer's stock remains the same.

Among the clients of a broker-dealer could be A) an individual declared mentally incompetent. B) a minor. C) a deceased individual. D) a foundation.

D) a foundation. Clients could include any person, as defined in the Uniform Securities Act. Minors, deceased individuals, and mentally incompetent individuals are not persons.

During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from A) the person named as executor of the estate. B) the person with a durable power of attorney. C) the spouse. D) the person appointed as administrator of the estate.

D) the person appointed as administrator of the estate. Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.

Differences between static and interactive content on social media include which of these? Only static content can be reused by others. Only static content needs preapproval. Only static content can be changed by the person who originated it. Only interactive content can be commented on by others. A) II and IV B) II and III C) I and III D) I and IV

A) II and IV Static content requires preapproval. Interactive content can be reused by others and can be commented on by others. Both static and interactive content can be changed by its originator, but static can be changed only by its originator and interactive by the originator or others.

Which of the following does not provide for a change of beneficiary? A) UTMA account B) Section 529 plan C) Coverdell ESA D) Roth IRA

A) UTMA account The nature of an UTMA (or UGMA) account is that the donor or custodian cannot change the beneficiary of the account. All transfers (or gifts) to minors are irrevocable, making a change legally impossible. In the case of the education plans (ESA or 529), if the beneficiary does not use the money, a family member may be named as the beneficiary for the remaining balance. The beneficiary of an IRA, Roth or traditional, can always be changed by the owner. And, please don't read into the question - "But what about if the ex-spouse is named beneficiary in the divorce decree?" If that is what the question wants, it will be mentioned.

For purposes of the maximum allowable annual contribution, an individual would have to aggregate contributions made to A) a 401(k) and a 403(b). B) a 403(b) and a 457. C) a 401(k) and a 457. D) a 401(k) and a Roth IRA.

A) a 401(k) and a 403(b). Disregarding the catch-up provision for those age 50 and older, the maximum annual contribution in 2023 for the employer-sponsored plans is $22,500 (never tested). An individual covered by a 401(k) or a 403(b) may contribute that plus another $22,500 to the 457. Likewise, contributing to an employer-sponsored plan does not affect the Roth IRA limit. What is tested is knowing that maintaining a 401(k) and a 403(b) is similar to maintaining a Traditional and Roth IRA. The maximum is not doubled; it is aggregated.

The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 3%, the current return on the market is 10%, and a particular stock's beta is 1.6 with a standard deviation of 2.2, the expected return would be A) 16.0%. B) 14.2%. C) 12.2%. D) 11.2%.

B) 14.2%. The formula for this computation is as follows: 10% (the return on the market is a beta of 1.0) minus the risk-free rate of 3% equals 7%. Then, multiply that result by the beta of this stock (1.6) to arrive at 11.2%. That is, the stock should return 11.2% above the risk-free rate of 3%, or 14.2%. The standard deviation is not relevant to this computation.

An investment of $2,000 made 10 years ago is now worth $8,000. Using the Rule of 72, the approximate compounded annual rate of return is A) 25% B) 14.4% C) 40% D) 7.2%

B) 14.4% This investment has quadrupled in 10 years. Using the Rule of 72, we know how to compute the rate of return when an investment doubles. This one has doubled every 5 years. Dividing 72 by 5 years gives us an approximate rate of 14.4%.

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

C) a purported gift of nonassessable stock. A gift of assessable stock would be an offer or a sale, but a gift of nonassessable stock is just a gift. As long as no payment is required, a stock dividend is not considered a sale or offer to sell. Any payment, even a nominal one, changes the situation.

The risk known as opportunity cost is often measured by A) the tax-equivalent yield. B) whether the investment had positive or negative returns. C) comparing the investor's actual return to the return on the 91-day Treasury bill. D) comparing the yield to maturity to the nominal yield.

C) comparing the investor's actual return to the return on the 91-day Treasury bill. In economic terms, opportunity cost is defined as the highest valued alternative that must be sacrificed as a result of choosing among alternatives. It is common to use the 91-day T-bill as the risk-free alternative. If the selected investment does not outperform the risk-free one, the investor has lost out on the guaranteed return.

Arthur M. Munger is the sole owner of Munger's Meritorious Planning (MMP). MMP does full service financial planning, including investment securities. Arthur is registered as an agent with Fast Execution Brokers (FEB) and directs all client securities transactions to FEB. Arthur decided it is time to get registered as an investment adviser representative so that he can earn fees for giving advice. Arthur is a good friend of the manager of the local branch of National Investment Advisers, Inc. (NIAI), and decided to speak to his friend about becoming an IAR. Under the provisions of the Uniform Securities Act, Arthur would be told B) if he wishes to become an investment adviser representative, he should affiliate with the broker-dealer where he is already an agent. C) if he wishes to become an investment adviser representative, he must affiliate with a registered investment adviser.

C) if he wishes to become an investment adviser representative, he must affiliate with a registered investment adviser. Investment adviser representatives are, as the term implies, representatives of an investment adviser, not a broker-dealer. If Munger's BD is not also a registered IA, then Munger can register with any IA he wishes. In the real world, most BDs would require any agent to receive permission before registering as an IAR at a non-affiliated investment adviser, but there is no law prohibiting doing so.

Under ERISA, a pension portfolio manager may engage in writing covered options A) at no time; writing options is too high a risk B) under any circumstances C) only if it fits with the objectives of the plan D) only during declining markets

C) only if it fits with the objectives of the plan Writing covered options is appropriate as long as it matches investment objectives. While writing covered calls is sometimes done to generate income, writing uncovered, or naked, calls is not appropriate for a pension plan because of the unlimited risk potential.

An investment adviser with custody of customer funds and securities must send the customer a statement of account activity no less frequently than A) annually. B) monthly. C) quarterly. D) with every transaction.

C) quarterly. An investment adviser in possession of customer assets must send a statement to the customer at least every three months. The statement must list the securities and funds held by the adviser and their location, and it must show all transactions in the account since the last statement date.

An investment adviser affiliated with a broker-dealer would be considered to be maintaining custody when A) charging fees on an hourly basis. B) having the power to make buy-and-sell decisions in an account. C) receiving a check made payable to that broker-dealer. D) receiving performance-based compensation.

C) receiving a check made payable to that broker-dealer. Under the NASAA Model Rule on Custody Requirements for Investment Advisers, when an investment adviser (IA) uses an affiliated broker-dealer as its qualified custodian, the IA is considered to be maintaining custody. Therefore, receipt of a check made payable to the broker-dealer is acceptable (it does not have to be forwarded).​ Discretion is not custody, and the method of compensation has nothing to do with custody. Don't confuse that with the case where the IA can debit the client's account for fees—that would be custody; whether the fees are hourly, performance based, or any other method is not related to custody.

The issuance of a long-term debt instrument, such as a bond, by a company would have an immediate effect on which of the following balance sheet items? Total assets Total liabilities Working capital Shareholders' equity A) II, III, and IV B) I, II, and IV C) I, III, and IV D) I, II, and III

D) I, II, and III The cash received from the sale of the bonds is a current asset of the company and, as such, would increase assets and working capital on the balance sheet. The bonds are debt of the company and would increase the liabilities of the company. Shareholders' equity is only affected by gains, losses, new invested capital, and the declaration of cash distributions (dividends) to shareholders.

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

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

A TIPS bond with a par value of $1,000 has a coupon rate of 6%. During Year 1, the inflation rate was 8%. How does this affect the TIPS bond in Year 2? A) The coupon increases to 8%. B) There is no effect until the third year. C) The market price increases to approximately $1,080. D) The interest payment will be approximately $65.

D) The interest payment will be approximately $65. On a semiannual basis, the principal value of a TIPS bond is increased by that year's inflation rate. A TIPS bond adjusts principal every six months based on the inflation rate. With an annual rate of 8%, the first semiannual adjustment was half of that, or 4%. That increased the principal value to $1,040. The next six months added 4% to the $1,040, bringing the end-of-year value to $1,081.60. The 6% coupon rate will be applied to the new principal, giving us approximately $65 in interest paid during the second year. Technically, we would also have to know the inflation rate for the first six months of Year 2 because that will impact the amount of interest paid on the second semiannual payment date. If that information is not given, just go with it as we have it here. As noted in the solution, the principal value has increased to a bit over $1,081, but the market price is determined by supply and demand and could be higher or lower.

Under the Uniform Securities Act, before a corporation can issue a security in a state, that security must be A) registered in one other state and with the SEC. B) exempt from registration in other states in which it is issued. C) registered with the SEC and in the state of issue. D) registered in the state or exempt from registration in the state.

D) registered in the state or exempt from registration in the state. Before issuing a security in a state, the issuer must either register the security in the state or be exempt from registration under the Uniform Securities Act.

All of the following are eligible to open an IRA except A) a divorced individual whose sole source of income is $10,000 per month in child support B) a corporate officer not covered by his company's pension plan C) a corporate officer covered by his company's pension plan D) a self-employed person covered by a Keogh plan

A) a divorced individual whose sole source of income is $10,000 per month in child support Anyone with earned income may open an IRA. However, child support is not considered earned income. If the corporate officer's (covered by the pension plan) earnings exceed a certain limit, the officer is subject to limitations on the amount of the deduction that may be taken for IRA contributions, but the contribution may still be made.

One of the terms defined in the Uniform Securities Act is broker-dealer. Which of the following are not included in that definition? I. An individual employed by a corporate entity to open new customer accounts for the purpose of trading securities II. A business entity seeking to raise additional capital using the regulated securities markets III. A person whose primary function is buying securities for his own account and for the accounts of others IV. A person whose primary function is providing advice on what assets belong in clients' investment portfolios A) III and IV B) I, II, and IV C) I, II, III, and IV D) II and III

B) I, II, and IV A broker-dealer is defined as a person in the business of effectuating securities transactions for its own account or the account of others. Those employed to open new accounts are defined as agents. Those seeking to raise new capital are issuers, and a person who provides investment advice is an investment adviser.

In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the release, which of the following would be included in the definition? I. Commercial banks offering comprehensive financial planning for their high-net-worth clients II. Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate III. Persons who receive a nominal fee for assisting employee benefit plan administrators with selecting investment managers for the plan's assets IV. Lawyers who prepare trust agreements for clients with large securities holdings with a goal of minimizing estate taxes A) I and II B) II and III C) I and IV D) II and IV

B) II and III Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent now comes under the IA-1092 definition of investment adviser. Similarly, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant and is required to register under IA-1092. Banks are never IAs, and the lawyer is merely doing legal and tax work.

DEF Investment Advisers, organized as a partnership, is currently registered with State Y. Marjorie is one of the partners and is registered as an IAR. If DEF were to register with State Z, A) Marjorie's registration as an IAR in State Z would become effective after passing the Series 65 or Series 66 exam. B) Marjorie would automatically be registered as an IAR in State Z. C) because DEF is a state-registered investment adviser, Marjorie could only register in State Z if she is a resident of the state. D) Marjorie would be required to complete an application for IAR registration with State Z.

B) Marjorie would automatically be registered as an IAR in State Z. When DEF's registration becomes effective in State Z, those individuals included in the filing are granted automatic registration—they don't have to file an individual Form U4. That filing includes the names and other pertinent information about all of the partners, officers, or directors who are already acting as IARs. Please note, it is not any IAR, it is only those listed or, as the rule states, those occupying a similar status, et cetera, who receive this treatment.

Federally registered investment advisers are obligated to maintain certain books and records as specified by the SEC. Which of the following statements regarding adviser recordkeeping is not true? A) Records originally created on a computer may be stored in electronic media. B) Records must be kept for six years. C) Written records may be reduced to microfilm. D) Records are subject to surprise audits by the SEC.

B) Records must be kept for six years. Records of an adviser must be maintained for five years. Records are subject to surprise audits by the SEC, written records may be reduced to microfilm, and records originally created on a company's computer may be stored in electronic media.