66 - Missed Practice Exam Questions

An investment adviser representative of a federal covered investment adviser registers with A) the FINRA. B) the SEC. C) the NASAA. D) the Administrator.

=D) the Administrator. Registration of IARs is done solely on the state level. IARs register with the Administrator of each state in which they are required to be registered.

The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is NOT true? A) This may be done, but only if the entire account is rolled over. B) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. C) If there is a distribution of the assets, the rollover must be completed within 60 days. D) Even though these plans are generally under state control, the rollover rules are federal law.

A This may be done, but only if the entire account is rolled over. Partials are permitted

Two securities with which of the following correlation coefficients could be combined to create a risk-free portfolio? A) -0.5 B) -1.0 C) +1.0 D) 0.0

B) -1.0 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.

Which of the following is NOT an accredited investor? A) Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million. B) An individual with a net worth, including the value of her primary residence, that is greater than $1 million. C) An individual whose income was greater than $200,000 in each of the 2 most recent years with a reasonable expectation of reaching that level again this year. D) A registered open-end investment company with net assets of $600,000.

B) An individual with a net worth, including the value of her primary residence, that is greater than $1 million.

Which of the following pairs of assets provides the greatest level of diversification? A) Assets 3 and 4, with a correlation coefficient of 0.0 B) Assets 1 and 2, with a correlation coefficient of -0.78 C) Assets 5 and 6, with a correlation coefficient of -0.42 D) Assets 7 and 8, with a correlation coefficient of +0.37

B) Assets 1 and 2, with a correlation coefficient of -0.78 The greatest level of diversification will occur when the correlation coefficient is closest to -1.0. Therefore, Assets 1 and 2 offer the greatest level of diversification.

When a client is interested in investing in commodities, you would expect to discuss A) investment-grade coins B) soybeans, wheat, and corn C) oil drilling programs D) museum-quality art

B) soybeans, wheat, and corn Agricultural products, including soybeans and other grains, are popular commodities

The statute of limitations for criminal offenses under the USA is A) 3 years B) 2 years C) 5 years D) 10 years

C) 5 years Remember the sequence 5-5-3: 5-year statute of limitations, $5,000 maximum fine, and imprisonment for up to 3 years.

Included in the definition of derivative would be all of the following EXCEPT A) options B) futures C) leveraged ETFs D) rights

C) leveraged ETFs

A client investing $50,000 into the KAPCO Growth Fund would most likely be eligible for a breakpoint if purchasing A) the closed-end shares B) the Class C shares C) the Class A shares D) the Class B shares

C) the Class A shares Breakpoints for quantity purchases are available on shares that carry a front-end load. Those are Class A shares. Class B shares have a back-end load, Class C shares are considered level load, and when one purchases shares of a closed-end company, commissions are charged, as would be on any stock purchase. U14LO4

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

D) The representative must notify the Administrator.

Under the Investment Advisers Act of 1940, which of the following is considered an investment adviser? A) A person who publishes a regular newsletter of advice on U.S. Treasury bonds and other U.S. government 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 lawyer who specializes in consulting on investing in securities

D) A lawyer who specializes in consulting on investing in securities Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment 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.

Which of the following would not be justification for the Administrator to cancel the registration of an agent? A) The agent violated several provisions of the Uniform Securities Act B) The agent has been reported as deceased C) The Administrator's repeated attempts to contact the agent were futile D) A court has declared the agent mentally incompetent

A) The agent violated several provisions of the Uniform Securities Act Cancellation is a form of nonpunitive termination. If an agent dies, is declared mentally incompetent, or mail is returned with no forwarding address, registration will be canceled. Violation of the Act is cause for disciplinary action, not cancellation.

Which of the following would NASAA consider to be a substantial prepayment of fees? A) $500 covering the next six months B) $600 covering the entire contract year C) $1,000 covering the next month D) $600 covering the next calendar quarter

B) $600 covering the entire contract year NASAA defines a substantial prepayment of fees to be more than $500 six or more months in advance. A payment of $600 covering a full year qualifies on both points; it is more than $500 and for more than six months. A payment of $500 covering the next six months meets the time requirement, but it is not more than $500. Payments of $600 for the next quarter or $1,000 for the next month meet the dollar amount but not the time requirement.

Under the Investment Advisers Act of 1940, which of the following would NOT meet the criteria of persons associated with an investment adviser? A) A manager in an investment advisory firm who supervises 5 investment adviser representatives B) An individual whose only function is posting trades to client accounts C) The individuals responsible for bringing new clients to an advisory firm D) An individual whose only connection to the firm is a position on the board of directors

B) An individual whose only function is posting trades to client accounts Persons associated with an investment adviser include members of the board of directors, officers, partners, or managers of an investment advisory firm. Sales representatives and other employees whose duties are not limited to clerical or ministerial functions are included as well. In most, but not all, cases, associated persons are required to register as investment adviser representatives.

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) asset allocation B) growth C) value D) passive

B) growth

Under the USA, an individual would not be considered an agent while representing the issuer in any of the following transactions EXCEPT A) promissory notes, such as commercial paper, with a maturity of nine months or less B) nonexempt, initial public offerings C) investment contracts issued in connection with an employee's stock purchases, savings, pension, profit-sharing, or similar employee benefit plan D) issuers in exempt transactions

B) nonexempt, initial public offerings Persons who represent nonexempt issuers of new securities, are agents under the USA unless it is stated that the transaction is exempt. Representing issuers in exempt transactions excludes the person from the definition of agent.

If an investment adviser representative commits a criminal violation of the Uniform Securities Act, she is subject to legal action for A) 10 years after the alleged violation B) the sooner of two years after discovery or three years after the violation C) 5 years after the alleged violation D) 3 years after the alleged violation

C) 5 years after the alleged violation This is a perfect example of how important it is to read the question very carefully. Notice that this is a criminal violation, not a civil one. Under the criminal provisions of the Uniform Securities Act, the statute of limitations is five years after the alleged violation. Do not confuse this five years with the maximum prison sentence of three years. Further, this is different from the statute of limitations for a civil case. That is the sooner of two years after discovery or three years after the infraction. Under federal law, the civil statute of limitations is slightly different. For federal civil cases, it is the sooner of one year after discovery or three years after the infraction. U5LO4

A corporation calls in a portion of its long-term debt at 101. This will have the effect of decreasing working capital increasing working capital decreasing net worth increasing net worth A) II and IV B) I and IV C) I and III D) II and III

C) I and III Working capital is computed by subtracting current liabilities from current assets. Using a current asset, like cash, to call in the bonds, reduces those assets with no corresponding reduction to current liabilities. Whenever a bond is called at a premium, net worth is reduced by that premium.

A mutual fund must redeem its tendered shares within how many days after receiving a request for their redemption? A) 10 B) 3 C) 5 D) 7

D) 7

If a client in the 30% marginal income tax bracket can earn an after-tax rate of return of 7% when the estimated inflation rate during the holding period of an investment is 4%, the client's real rate of return is A) less than 7% B) 10% C) 7% D) more than 7%

A) less than 7% Real return reduces nominal return by an inflation factor. Thus, the client's real return must be less than 7%.

An investment adviser wishes to engage the services of a third party to solicit new clients for the firm. To be in compliance with the Investment Advisers Act of 1940, the solicitor must be registered as an IAR compensation may not be sales related the solicitor must not be subject to statutory disqualification disclosure of the solicitation arrangement must be made to clients upon request A) II and III B) I and III C) I and IV D) II and IV

A) II and III Third-party solicitors are not required to be registered as IARs and therefore may not receive sales-related compensation. However, they must not be subject to statutory disqualification that would prevent them from becoming registered. Disclosure is necessary, whether or not it is requested.

An individual with a place of business in State A manages client assets on behalf of a covered investment adviser. This individual wishes to expand his client base by working 1 day per week out of the firm's office in State B. Which of the following actions must this individual take to practice within that particular state? A) Register as an investment adviser representative in State B B) Become licensed as a broker-dealer C) Comply with the notice filing requirements of the state D) Pass an oral or written examination

A) Register as an investment adviser representative in State B Individuals managing client assets while employed by federal covered investment advisers must register as investment adviser representatives if they maintain a place of business in the state. Working on a regular schedule in the firm's office in State B, even if only once per week, constitutes maintaining a place of business in the state. Because this individual is already registered in State A, it is not necessary to pass another exam to become registered in another state. It is the investment adviser who may be required to notice file with the Administrator.

An investor invests $1,000 into the shares of the Stratford Growth and Income Fund, an open-end investment company registered under the Investment Company Act of 1940. On the purchase application, the investor checked the boxes signifying that dividends were to be paid out in cash and capital gains were to be reinvested. During year, the fund pays dividends of $20 and distributes a $250 capital gain. At the end of the year, the fund's value is $1,300. The total return to this investor was A) 25% B) 32% C) 27% D) 30%

B) 32% Total return is all distributions plus/minus appreciation/depreciation. In this question, the $1,300 includes the $250 capital gain so all we add is the $20 dividend. $320 divided by $1,000 equals 32% total return.

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

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

Each of the following persons is able to issue securities EXCEPT A) a corporation B) an individual C) a partnership D) a credit union

B) an individual

The NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents includes prohibitions against certain practices designed to manipulate market prices of securities. An activity that would fall within the spectrum of the prohibitions would be A) churning customer accounts B) wash trades C) guaranteeing customers against loss D) front running

B) wash trades Performing wash trades involves the simultaneous or near-simultaneous selling and repurchase of the same security for the purpose of generating the appearance of trading activity and increasing the price. This is one of the most common forms of market manipulation. Churning, front running, and guaranteeing customers against loss, although prohibited practices, are not considered market manipulation.

In order to be in compliance with the rules, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) directing securities transactions to an affiliated broker-dealer B) the trade is being executed by an officer or partner of the firm C) purchasing shares directly from advisory clients D) engaging in an agency cross transaction

C) purchasing shares directly from advisory clients There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent—that's the reason for the term.

The U.S. Supreme Court case resulting in the decision than an investment contract is a security is the A) Muller case B) Golub case C) Steiner case D) Howey case

D) Howey case

Which of the following investment strategies is used to determine an appropriate allocation based on the long-term goals and risk tolerance of the client? A) Efficient market allocation B) Top-down fundamental analysis C) Tactical asset allocation D) Strategic asset allocation

D) Strategic asset allocation In strategic asset allocation, once the allocation is determined, it remains relatively constant until some change to the investor's objectives occurs. Periodically, the portfolio is re-balanced to reflect any changes in market conditions.

All of the following must be specified in the state registration statement of the security EXCEPT A) all other states where the security is currently registered or will be registered B) a stop order from any other state that affects the offering of the security within that state C) the total amount of security that will be offered in this state D) the total amount of the security that will be offered in each state

D) the total amount of the security that will be offered in each state

One of the major financial decisions to be made by a family is the amount and type of life insurance to purchase. The form of insurance that offers flexible premiums without a fixed cash value is A) variable life. B) whole life. C) term life. D) universal life

D) universal life A unique feature of universal life is that the premiums are flexible. That is, if the client wishes to pay more or less than the target premium, that may be done. However, the nature of the universal life product is such that cash values can fluctuate. Cash values can fluctuate in variable life, but unless the policy is UVL (universal variable life), premiums are scheduled (fixed). Typically there are no cash values with term insurance and the premiums are fixed and whole life has both fixed premiums and guaranteed cash values

A registered broker-dealer is under common control with a registered investment adviser. An individual who is an agent of the broker-dealer and an investment adviser representative of the adviser has a client with $250,000 under an asset management program. The terms of the account call for discretionary power to be given for the account and all required forms have been received. In the opinion of the IAR, the purchase of 500 shares of RMBM common stock is an appropriate addition to the portfolio. The broker-dealer is a market maker in RMBM, and the sale will be made as a principal, a fact that is disclosed to the client on the trade confirmation. In this situation, the registered person has acted A) lawfully in that the disclosure of capacity was made on the confirmation B) lawfully in that disclosure of capacity is not necessary when executing trades in managed accounts C) unlawfully in that any stock the broker-dealer is a market maker in is probably not suitable for a managed money client D) unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity

D) unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity The rules regarding investment advisers and account trading are much stricter than those for broker-dealers because of the fiduciary responsibility of the adviser. Even though the firm has discretionary power, any action that results in a transaction in which the firm or an affiliate acts in either a principal or agent capacity requires the adviser to provide written disclosure of that fact to the client and obtain approval from the client prior to completion of the transaction.

Which of the following statements is CORRECT? A) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. B) Federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. C) Both state-registered and federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. D) A state-registered investment adviser collecting fees of $500 for 6 months or more in advance, is considered to be receiving a substantial prepayment.

A) State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients. It is only state-registered investment advisers who must provide audited balance sheets to clients for whom they maintain custody. In order to be considered a substantial prepayment of fees, state laws require that they be more than $500 for 6 or more months in advance.

Which of the following attributes of common stock best describes why internal rate of return (IRR) is not generally used to determine the return on common stock? A) Uneven cash flows and no maturity B) No net present value C) Uneven cash flows, no maturity date and price D) Uneven cash flows

C) Uneven cash flows, no maturity date and price Internal rate of return (IRR) best measures investments with a known price and maturity. The internal rate of return is the discount rate that makes the future value of an investment equal to its present value. The yield to maturity on a bond is actually its internal rate of return.

Under the antifraud provisions of the Uniform Securities Act, agents are prohibited from all of these EXCEPT A) engaging in any fraudulent or deceitful practice in the normal course of business B) engaging in any practice that the Administrator defines by rule as unethical C) failing to state nonmaterial facts D) employing any device, scheme, or artifice to defraud

C) failing to state nonmaterial facts Nonmaterial facts are those that do not impact an investor's decision-making process. Omitting them would not be a fraudulent activity, as would be the case if the facts were material.

A customer buys a 10-year 6% AAA bond at par when it was issued. Two years later, if the CPI has increased from 2% to 4%, the price of the bond most likely A) has stayed at par B) cannot be determined C) has declined D) has increased

C) has declined When inflation is on the rise, interest rates often rise. When interest rates increase, bond prices may be expected to decline.

The agreement between an investment adviser and client is the advisory contract. To be in compliance with the law, contracts under the USA differ from those under the Investment Advisers Act of 1940 in that they A) must disclose the amount or method of calculation of the adviser's fee B) typically are renewed on an annual basis C) must be in writing D) generally do not provide for discretion

C) must be in writing

James Stillman is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. Stillman works out of an office in State P and has 4 retail clients there. In addition, Stillman has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Stillman would be required to register as an investment adviser representative in A) States P and O. B) States D and M. C) States P, D, and M. D) State P.

D) State P. As an IAR for a federal covered investment adviser, Stillman is only required to register in those states in which he (Stillman) has a place of business. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state.

An investment adviser has legal access to a broker-dealer's confidential research document and uses the information to support a recommendation to a client. The investment is successful. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the adviser A) must notify the client that the recommendation was based on the broker-dealer's research document B) must share the commission with the broker-dealer that prepared the research document C) must provide the client with a copy of the research document D) need not disclose the source of the information

D) need not disclose the source of the information If an adviser provides its clients with reports or recommendations prepared by a third party without disclosure of the source, the adviser has acted unethically. There is, however, an exception to this rule, which happens to apply here. If the adviser uses third-party reports as a basis for its own recommendation or as a support to its own recommendation to its client, it does not have to disclose this information. U7LO4

First Securities Advisers, Inc., a subsidiary of First Securities Broker-Dealers, Inc., requires customers to have a minimum of $250,000 under management and charges them 1% in advisory fees based on the amount of assets in their accounts. Clients also pay commissions for securities transactions in their accounts. First Securities Advisers, Inc., has A) violated the Uniform Securities Act by charging excessive advisory fees B) violated the prohibition against charging performance fees C) violated the Uniform Securities Act by charging commissions in addition to advisory fees D) not violated the prohibition against performance fees

D) not violated the prohibition against performance fees First Securities Advisers, Inc., has not violated the prohibition against charging performance fees because it did not base its fees on a share of capital gains or losses in their clients' accounts. First Securities charged on the basis of assets under management. The 1% in advisory fees charged appears reasonable. The commissions charged by the affiliated broker-dealer have nothing to do with the question. The client would have to pay commissions wherever the transactions were executed.

Which of the following is required for a preorganization subscription to be an exempt transaction? A) No commission has been paid. B) Full payment has been made. C) There may be no more than 15 subscribers. D) Prior notification of intent to incorporate must be given to the Administrator.

A) No commission has been paid. A preorganizational subscription is an exempt transaction if there are no more than 10 subscribers and no commissions are paid, either directly or indirectly. The subscribers make no payments until they purchase the underlying security.

An investor has arranged with her bank to have $1,000 sent to the KAPCO Balanced Fund on the same day each month. For the first 4 months of this arrangement, the prices of the fund have been: Month 1 - $10.00 per share Month 2 - $12.50 per share Month 3 - $15.00 per share Month 4 - $13.25 per share What is the difference between the investor's average cost per share and average cost per transaction?

A) The average cost per share is approximately $0.27 less. When investing $1,000 per month, the investor acquired 100 shares the first month, 80 shares the second month, 66.667 shares the third month, and 75.472 shares the fourth month. That is a total of 322.139 shares purchased for a total cost of $4,000. That is an average cost per share of $12.42 per share. The average of the four transaction prices ($10, $12.50, $15, and $13.25) is $12.69. That is $0.27 higher than the cost per share. This demonstrates the advantage of dollar cost averaging.

A closed-end investment company is registered under the Investment Company Act of 1940. Its shares trade on the Nasdaq Stock Market. To qualify their shares for sale in the state, they would probably use A) notice filing B) qualification C) coordination D) supplementation

A) notice filing Regardless of where shares of this closed-end investment company trade, like all investment companies registered under the Investment Company Act of 1940, it is a federal covered security. The company is basically exempt from state registration and is only required to follow a procedure known as notice filing.

Fearing loss of a potential sale, an agent omits facts that a prudent investor requires to make informed decisions. Under the Uniform Securities Act, this action is A) fraudulent for exempt securities only B) fraudulent for both exempt and nonexempt securities C) fraudulent for nonexempt securities only D) not fraudulent if there was willful intent to omit the information

B) fraudulent for both exempt and nonexempt securities

If an agent unknowingly sold securities that were not properly registered in the state, the agent has committed fraud is subject to civil action is subject to criminal sanctions for up to 5 years from the date of sale engaged in a prohibited business practice A) II and III B) I and IV C) II and IV D) I and III

C) II and IV For an agent to commit fraud, the agent must knowingly deceive a client. Because the agent unknowingly sold securities that were not properly registered, the agent did not commit a crime and is not subject to criminal sanctions or the 5-year statute of limitations for criminal offenses. The sale of unregistered nonexempt securities is a prohibited business practice subjecting the agent to potential civil and administrative action, even when done unknowingly.

A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be A) disclosed in the summary of material changes in the annual updating amendment to the SEC B) disclosed promptly to the Administrator of the state where the IA maintains its principal office C) disclosed promptly to all customers by amending the brochure D) disclosed promptly only to those customers who will be affected by the change through an amended brochure

D) disclosed promptly only to those customers who will be affected by the change through an amended brochure Because this will only affect new clients, the brochure (or Part 2A of the ADV) must be amended to reflect this new method of operation and made available promptly to these clients and to the SEC; it cannot be part of the end-of-year amendments. The state has no cause to receive a copy of a federal covered adviser's brochure.

A securities analyst reviewing a corporation's financial statements notes that the enterprise has total current assets of $10 million, inventory of $4 million, cash on hand of $2 million, total current liabilities of $8 million, and net income of $15 million. The company's acid-test ratio is closest to A) 0.75 to 1 B) 1.00 to 1 C) 1.50 to 1 D) 1.25 to 1

A) 0.75 to 1 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. In this case, that would be $10 million minus $4 million ($6 million) divided by $8 million, or .75%.

Which of the following persons is required to register with the SEC as a federal covered adviser? A) An adviser that gives advice to registered investment companies only B) An adviser that manages assets of $90 million or more C) An adviser who gives advice only related to U.S. government securities D) A publisher that gives incidental investment advice only

A) An adviser that gives advice to registered investment companies only Investment advisers that act as advisers to investment companies registered under the Investment Company Act of 1940, regardless of their size, are required to register with the SEC. Don't be tricked by the $90 million. Only those with at least $110 million under management (using AUM as the deciding factor) are required to register with the SEC. Once that level has been reached, the IA may remain SEC registered as long as its AUM does not drop below $90 million.

A portfolio manager with a growth style would probably diversify by A) devoting a portion of the portfolio to securities with a negative correlation B) placing a portion of the portfolio into high-yield bonds C) concentrating in stocks in 1 or 2 industries D) attempting to build a portfolio with a very high correlation

A) devoting a portion of the portfolio to securities with a negative correlation

A sales agent who is only registered in State A works for a broker-dealer that is registered in all 50 states. A customer who is a resident of State B calls the agent in State A and offers to purchase securities. Under the Uniform Securities Act, the agent should A) reject the order because she is not registered in State B B) accept the order because she received it in State A C) accept the order because her broker-dealer is registered in all 50 states D) accept the order because it is unsolicited

A) reject the order because she is not registered in State B Both the broker-dealer and the agent must be registered in each state where they plan to do business. Although the broker-dealer is properly registered, in order for the agent to accept the order, she must be registered in State B. Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident.

You have a client who wishes to manage his own portfolio of individual stocks. The simplest style for him to follow would be A) indexing B) buy and hold C) tactical D) core

B) buy and hold When it comes to individual stocks, nothing is simpler than buy and hold. If the client wished to have the simplest overall portfolio and didn't want to manage things, then indexing would be the answer.

An investment adviser is sued by a client. If the client is successful in the civil proceeding, under the Uniform Securities Act, the client may be awarded A) any losses resulting from the advice plus interest, costs, and attorney's fees B) the money paid for the advice, any losses resulting from the advice plus interest, costs, and attorney's fees, less any revenue gained from the advice C) the money paid for the advice, any losses resulting from the advice, and all costs and attorney's fees D) the money paid for the advice and all costs and attorney's fees

B) the money paid for the advice, any losses resulting from the advice plus interest, costs, and attorney's fees, less any revenue gained from the advice Securities professionals may be sued by their clients under civil law if they lose money and the securities professional has violated the Uniform Securities Act in connection with the loss. In the case of an investment adviser (or IAR) the client is entitled to recover the consideration (money) paid for such advice and any loss due to such advice, together with interest at the state's legal rate from the date of payment of the consideration plus costs and reasonable attorney's fees, less the amount of any income received from such advice.

The terms "offer," "offer to sell," "sale," and "sell" include which of the following? A) A stock dividend for which the stockholders give nothing of value B) Any bona fide pledge or loan C) Preemptive rights D) An act incidental to a class vote by stockholders pursuant to the applicable corporate statute on a merger

C) Preemptive rights The preemptive right frequently given to common stockholders allowing them to purchase shares of a forthcoming issue is considered to be an offer of that upcoming issue. The terms "sale" or "sell" include every contract of sale, contract to sell, or any disposition of a security for value. A gift of a security is not considered a sale. The terms "offer" and "offer to sell" represent any effort to dispose of a security for value. This does not include bona fide loans, stock dividends, or dispositions pursuant to corporate statutes. U5LO1

Under which of the following circumstances does NASAA allow an investment adviser to charge performance-based fees? The client must initially have $1 million under management or a net worth in excess of $2.1 million. Compensation paid in this way must be for gains reduced by losses. Disclosure must be made that the fee arrangement may create an incentive for the investment adviser to make investments that are riskier or more speculative than would be the case in the absence of a performance fee. A) II and III B) I and II C) I only D) I, II, and III

D) I, II, and III The NASAA Model Rule permits performance-based fees if the client has at least $1 million in assets under management or a net worth in excess of $2.1 million, provided the compensation is based on gains and losses. Unlike the Investment Advisers Act of 1940, under the NASAA Model Rule, state-registered advisers must make additional disclosures, including the incentive to take additional risk.

Which of the following corporate actions would have an effect on the company's working capital? A) Calling in a portion of a 20-year bond at par B) Declaring a 15% stock dividend C) Paying a utility bill D) Borrowing money from the bank on a 90-date note

A) Calling in a portion of a 20-year bond at par Working capital is the difference between the corporation's current assets and its current liabilities. When a bond (long-term liability) is called in, current assets are reduced, but there is no offsetting reduction to current liabilities. This causes working capital to decrease. Taking out a short-term loan increases the current liabilities, but the borrowed money is a current asset of an equal amount. Paying a utility bill reduces current assets with an equal reduction to current liabilities. Declaration of a stock dividend has no effect on current assets or liabilities because the payment will be of additional shares, not cash.

A registered investment adviser has been investigated by the Administrator for fraudulent misrepresentations purportedly made to several clients. If the IA is found to have been in violation of the Uniform Securities Act, this may result in a $10,000 fine per violation a receiver being appointed over the adviser's assets a prison term of 5 years per violation the requirement that the investment adviser make restitution to the victims A) III and IV B) I and III C) II and IV D) I and II

C) II and IV The Administrator may request that the court appoint a receiver over the investment adviser's assets and require the IA to make restitution to the victim. The maximum fine for a violation of the USA is $5,000, and the maximum prison term is 3 years.

A broker-dealer (BD) registered in multiple states must meet the record retention requirements of A) the state where the principal office of the BD is located B) the state where the BD is incorporated C) the SEC D) the state with the most stringent requirement

C) the SEC One of the effects of the NSMIA was to establish the preemption of federal law over state law. A broker-dealer registered in multiple states is going to be registered with the SEC as well. NSMIA amended the Securities Exchange Act of 1934 (the 34 Act) to add section 15(h)(1), which reads as follows: No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title. However, had this question been dealing with an investment adviser registered on the state level, then it would have been the requirements of the state where the principal office of the adviser is located.

Washington, Adams, and Jefferson, Inc. (WAJI) is an investment adviser whose principal and only office is in Alexandria, VA. WAJI's sole business is advising institutional investors. Rutherford Buchanan is employed by the firm in the main office and has the responsibility of servicing the firm's bank and insurance company clients. Which of the following statements is correct regarding Rutherford's licensing requirements? A) Rutherford cannot register as an IAR of WAJI because providing advice exclusively to institutions exempts the firm from registration. B) Rutherford must register as an IAR of WAJI with the state of Virginia. C) Rutherford is exempt from registration because his only clients are institutions. D) Rutherford is exempt from registration because he has fewer than 6 retail clients.

B) Rutherford must register as an IAR of WAJI with the state of Virginia. Regardless of whom the clients are, Rutherford has a place of business in Virginia and that requires registration with the Administrator as an IAR. If WAJI does business in other states where it does not have a place of business, it is exempt from registration because the only clients are institutions. If WAJI is not registered in the state, Rutherford can't register as their IAR. The de minimis exemption for fewer than 6 retail clients only applies when there is no place of business in the state.

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

D) with a primary business of rendering investment advice 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.

Which of the following statements are TRUE? An agent must register in the state in which he advertises and solicits a security. To make sales, an agent need not register in a state in which the broker-dealer is already registered. Under no circumstances may an agent register with two unrelated broker-dealers. A secretary for a broker-dealer who, as a courtesy, takes orders for the broker-dealer's clients must be registered. A) I and IV B) I and II C) II and III D) III and IV

A) I and IV An agent must be registered in the state in which a security is advertised and solicited. A secretary who takes orders for the broker-dealer's clients must be registered. If the state Administrator specifically grants an exception, an agent may be registered with two unrelated broker-dealers. The fact that a broker-dealer is registered in a state does not qualify the agent for sales unless he is also properly licensed in that state.

MT Securities is a broker-dealer registered in 42 states. MT Securities makes a market in over 100 different stocks and participates in the underwriting of approximately 22 IPOs per year. Which of the following actions would be prohibited under NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents? A) Adding to its inventory of a stock in which it makes a market, hoping to gain from market appreciation B) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation C) Purchasing shares of a security in which it makes a market from a client at one price and then reselling those shares to another client at a higher price D) Purchasing shares of an IPO from the issuer and then reselling those shares to the public at a higher price

B) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation Members of the underwriting syndicate on an IPO are prohibited from withholding shares of that issue in their own accounts; they must make a bona fide public offering. As a market maker, the firm is permitted to adjust the size of its inventory to take advantage of market conditions. All underwriters purchase new issue shares at one price and then resell at the public offering price, (that is their underwriting compensation), and market makers buy at the bid and sell at the ask earning the spread.

Which of the following actions by an investment adviser registered in 3 states is permitted? A) Guaranteeing a rate of return equivalent to a 5-year insured bank CD or waiving their yearly fees B) Announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year C) Delivering the brochure within 48 hours after signing of the contract, as long as there is a 5-day, penalty-free withdrawal provision D) Stating in the advisory contract that fees will be reimbursed if account performance is less than agreed upon

B) Announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year This is not considered discrimination, because the discount applies equally to all (if they are among the first 50). Fee reimbursement or waivers are not permitted. The 5-day withdrawal provision applies to state-registered investment advisers when the brochure is not delivered at least 48 hours prior to (not after) the signing of the contract.

An investor has $50,000 to invest in bonds. Currently, 10-year bonds are offering very attractive yields, but the client is concerned that in a few years, rates will be even higher. What would you suggest? A) Bullet bonds B) Barbell bonds C) Laddering D) Diversifying

B) Barbell bonds With the barbell strategy, the investor would place $25,000 into bonds maturing in 10 years and the other half into bonds maturing in two years. This makes $25,000 available for reinvestment in two years enabling the investor to take advantage of the higher rates (if they materialize).

Investors with a short time horizon most likely will invest in which class of mutual fund shares? A) Class A shares B) Class C shares C) Class A shares, then convert to Class B shares D) Class B shares

B) Class C shares Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares makes them unattractive for short-term investors. A shares do not convert to B shares; it goes the other way.

A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use? A) Charitable remainder trust B) Complex trust C) Simple trust D) Charitable lead trust

B) Complex trust Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.

If Brokers, Inc., a broker-dealer registered in this state, refuses to comply with the Administrator's order to retain records for 2 years longer than required by the Securities Exchange Act of 1934, which of the following statements are TRUE? The securities Administrator cannot require registrants to retain books and records longer than required by the SEC. Brokers, Inc., is not in violation of the Securities Exchange Act of 1934. Both the securities Administrator and Brokers, Inc., are in violation of both the Securities Exchange Act of 1934 and the Uniform Securities Act. Brokers, Inc., must comply with orders issued by state securities regulators whether or not the orders are in compliance with the NSMIA. A) II and IV B) I and II C) I and III D) II and III

B) I and II The securities Administrator is in violation of the National Securities Markets Improvement Act of 1996 (NSMIA), which prohibits state securities regulators from establishing requirements in addition to those required by the Securities Exchange Act of 1934.

A new client indicates a desire to avoid investing in mid-cap stocks because of large losses suffered several years ago. What type of consideration would this be? A) Systematic B) Nonfinancial C) Financial D) Unsystematic

B) Nonfinancial There are 2 basic investment considerations, financial and nonfinancial. The former deals largely with quantifiable items and the latter with attic attitudinal ones. Wanting to avoid a certain type of asset is generally considered to be attitudinal. The fact that the mid-cap stocks lost money is probably a systematic risk, but that isn't what the question is asking.

Which of the following statements regarding an agent's registration is most accurate? A) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator and the agent will be required to register with an active broker-dealer within 30 days. B) Revocation of the registration of that agent's broker-dealer will result in cancellation of that agent's effective registration. C) Registration of a broker-dealer in a specific state automatically registers all the firm's agents in that state as well. D) If the broker-dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and may not acquire any new ones until registered with an active broker-dealer.

B) Revocation of the registration of that agent's broker-dealer will result in cancellation of that agent's effective registration. The registration of an agent is not effective during any period when he is not associated with a particular broker-dealer registered under the Uniform Securities Act. Therefore, when the broker-dealer's registration is revoked, the agent's license is no longer in effect. The Administrator does not "hold" licenses. Agents must register in each state in which they wish to do business; there is no automatic registration other than for certain officers and partners when the firm first registers.

James Stillman is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. Stillman works out of an office in State P and has 4 retail clients there. In addition, Stillman has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Stillman would be required to register as an investment adviser representative in A) States P, D, and M. B) State P. C) States P and O. D) States D and M.

B) State P. As an IAR for a federal covered investment adviser, Stillman is only required to register in those states in which he (Stillman) has a place of business. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state.

Because of failing economic conditions, KAPCO Advisers, an adviser with slightly less than $120 million in assets under management, lays off a registered investment adviser representative. In this case, who would notify the state Administrator of the termination? A) The IAR's new employer B) The IAR C) Both KAPCO and the IAR D) KAPCO Advisers

B) The IAR With more than $110 million in assets under management, KAPCO is a federal covered adviser. In that case, the IAR is the one who notifies the Administrator of being terminated

The Uniform Securities Act permits amendments to a registration statement after its effective date so as to change which of the following? A) The underwriter's discounts and commissions B) The number of shares to be offered C) The public offering price D) Changes may not be made by amendment; filing of a new registration statement is required.

B) The number of shares to be offered The Uniform Securities Act permits filing an amendment to an existing registration, increasing the number of shares to be offered and sold, if the public offering price and underwriter's discounts and commissions remain unchanged.

Federal covered securities, as defined under the Uniform Securities Act, A) must be registered with the SEC before they can be offered in the state B) include shares of an investment company registered with the SEC under the Investment Company Act of 1940 C) would not include securities senior to a common stock listed on the NYSE D) must be registered in the state before they can be offered within the state

B) include shares of an investment company registered with the SEC under the Investment Company Act of 1940 It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are exempt from registration in any state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings to be sold in the state. If the common stock is a covered security, as one listed on the NYSE would be, then any security with a senior claim, such as preferred stock or bonds, would also be considered federal covered.

Advisers that manage $110 million or more in customer assets are required to do which of the following? Register with the Securities Exchange Commission File notice with FINRA Post a bond in an amount specified by the appropriate regulatory body File notice with the state in which their principal office is located if notice filing is required by the Administrator A) II and IV B) I and III C) I and IV D) II and III

C) I and IV Advisers that manage $110 million or more in customer assets are federal covered advisers and are required to register with the SEC under the Investment Advisers Act of 1940. In addition, they are normally required to file notice in each state where they conduct business. There are no bonding requirements for federal covered advisers.

A client of your broker-dealer accepts your recommendation and turns in a market order to purchase 600 shares of MNOP Corporation common stock. Based on the following market maker quotes, it would be expected that the firm's trader would direct the market order to A) MMC: 22.10 - 22.28, 10 x 6. B) MMB: 22.08 - 22.25, 6 x 5. C) MMD: 22.11 - 22.30, 6 x 6. D) MMA: 22.05 - 22.25, 10 x 8.

D) MMA: 22.05 - 22.25, 10 x 8. A market order to buy should be done at the best possible (lowest) ask (offering) price. That is $22.25 (MMA and MMB), but MMB is only firm for up to 500 shares and the client's order is for 600 shares. Therefore, it would be sent to the lowest price that is firm for at least 600 shares and that is MMA.

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

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

An Administrator has jurisdiction over an offer to sell securities if it is made in a newspaper published out of state A) with at least ½ of its circulation in the state B) with at least ⅔ of its circulation in the state C) with at least ⅓ of its circulation in the state D) under no circumstances

D) under no circumstances An offer to sell or to buy is not made in the state when the publisher circulates or there is circulated on their behalf in the state any bona fide newspaper or other publication of general, regular, and paid circulation which is not published in the state, or which is published in the state but has had more than ⅔ of its circulation outside the state during the past 12 months.

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) when informed by the Administrator that the representative's registration is effective B) within 48 hours C) immediately D) when informed by the investment adviser that the representative's registration is effective

D) when informed by the investment adviser that the representative's registration is effective Passing the exams does not automatically give one an effective investment adviser representative's license. Notice is received by the investment adviser from the appropriate state and/or federal authorities and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual.

Which of the following must register as an agent when representing a broker-dealer? A) An employee who accepts unsolicited orders from institutional clients B) A partner of a broker-dealer who has no securities sales functions C) The telephone switchboard operator who directs orders to the appropriate extension D) An individual who represents an underwriter only in transactions between an issuer and the underwriter

A) An employee who accepts unsolicited orders from institutional clients An employee of a broker-dealer who accepts orders must register as an agent. The fact that it is unsolicited and/or from an institution (making them exempt transactions) has no bearing on the requirement for the individual to register as an agent. A partner of a broker-dealer with no securities sales functions and an individual who represents an underwriter only in transactions between an issuer and the underwriter need not register. Individuals whose function is strictly clerical do not register as agents.

Which of the following statements is an accurate description of dollar cost averaging? A) An investor averages the costs of his shares purchased and then enters limit orders to purchase additional shares at the average price. B) An investor invests a set amount of money each interval to buy more shares when the prices are low and fewer shares when prices are high. C) An investor buys the same number of shares each interval, averaging his purchase prices over time. D) An investor sells shares when the market rises and buys shares when the market declines in order to average his costs.

B) An investor invests a set amount of money each interval to buy more shares when the prices are low and fewer shares when prices are high. Dollar cost averaging involves investing a set amount of money each interval. If the market fluctuates, the client will buy more shares when the prices are low and fewer shares when prices are high. The result of this is a lower average cost per share than average price paid. An investor who sells shares when the market rises and buys shares when the market declines is not dollar cost averaging, but using another system, such as a constant ratio or constant dollar plan. An investor who averages the cost of the shares purchased and then enters limit orders to purchase additional shares at the average price is not engaged in a dollar cost averaging program. In dollar cost averaging, the same dollar amount is invested each interval.

Which of the following would be considered an issuer transaction as defined in the Uniform Securities Act? A) Ken, the largest shareholder in ABC Corporation, sells 100,000 shares in a registered secondary transaction. B) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm. C) In its capacity as a market maker, LMN Securities Co. sells 200 shares of GEMCO common stock to the corporate treasurer of GEMCO, buying for the company's investment account. D) Barb, the largest shareholder in XYZ Corporation, purchases an additional 50,000 shares on the NYSE.

B) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm.

The primary purpose of the securities registration requirements of the Uniform Securities Act is to ensure that proper disclosure is made available to potential investors. However, not all securities are required to register. Which of the following qualify for an exemption from registration under the act? A) Bonds that are obligations of the People's Republic of North Korea B) Equipment trust certificates issued by railroads whose rates are not subject to regulation by a state or federal agency C) Common stock issued by life insurance companies authorized to conduct insurance sales in that state D) Commercial paper with no more than 9 months to maturity that is in 1 of the 3 highest ratings by a nationally recognized rating agency and in a minimum denomination of $10,000

C) Common stock issued by life insurance companies authorized to conduct insurance sales in that state

An agent would be engaged in a prohibited practice if he split commissions with other agents of his broker-dealer sold a nonexempt, unregistered security to a CPA who specialized in auditing financial institutions shared both the gains and losses in a client's account with written approval of both the client and the employing broker-dealer aggressively traded a discretionary account on a daily basis with long-term growth as an objective A) I and II B) I, II, III, and IV C) II and IV D) I and IV

C) II and IV An agent cannot lawfully sell an unregistered, nonexempt security unless in an exempt transaction. The sale to the CPA is not an exempt transaction, as would be the sale to a financial institution. Day trading in an account with long-term growth as an objective would constitute unsuitable activity and, therefore, is prohibited under USA. Sharing commissions is only permitted with agents of the same or affiliated broker-dealers. Remember that investment adviser representatives may never share in the gains and losses in a customer's account in the same fashion that agents can.

Which of the following statements regarding Section 529 plans is CORRECT? A) Funds not used for qualified expenses by age 30 must be distributed or rolled over. B) Qualified expenses would include all residence costs incurred by a full-time student. C) Residents of some states receive a deduction on their federal income tax returns. D) Qualified expenses could include tuition for attendance at a foreign university.

D) Qualified expenses could include tuition for attendance at a foreign university. As of the date of this question, there are approximately 330 institutions of higher learning located outside of the United States where Section 529 plans may be used to pay qualified expenses. The expense for room and board (residence cost) qualifies only to the extent that it isn't more than the greater of the following 2 amounts: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution It is the Coverdell ESA that has the age 30 requirement and some states offer deduction on the state income tax return, not the federal one.

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of A) the majority vote of the board of directors B) the majority vote of the noninterested directors C) the majority vote of the outstanding shares D) the majority vote of the outstanding shares and a majority of that portion of the board of directors that is considered noninterested members

D) the majority vote of the outstanding shares and a majority of that portion of the board of directors that is considered noninterested members The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the noninterested members of the board of directors. It is renewed annually by either a majority of the board or a majority of the outstanding shares. In addition, as with all contracts, initial and renewal, it requires a majority of the noninterested board members.

At age 18, Joan's trust fund becomes available to pay for her higher education. There is $100,000 in the fund, all invested in fixed income securities with an average coupon of 6%. If the estimated cost of college for the next 4 years is $30,000 per year paid at the beginning of the school year, how long will the money last? A) 3 years with approximately $17,863 available for the 4th year B) 3 years with approximately $28,000 available for the 4th year C) 3 years with approximately $25,009 available for the 4th year D) 4 years with approximately $4,000 remaining

A) 3 years with approximately $17,863 available for the 4th year Here is how to do this with the simple calculator available at the testing center. Beginning sum is $100,000 with $30,000 taken out to start the school year. The remaining $70,000 earns 6%, so multiply $70,000 × 106% to arrive at $74,200 at the end of the 1st year. Then, subtract $30,000 and multiply by 106% again resulting in an end of 2nd year total of $46,852. Subtract the $30,000 again and multiply the remainder by 106%, which results in $17,863 remaining at the end of the 3rd year.

In addition to the normal required filings, an investment adviser who maintains custody of client funds and/or securities will be required to complete A) Form ADV Part 1 B) Form ADV-E C) Form ADV-W D) Form ADV Appendix 1

B) Form ADV-E The Form ADV-E (E for Examination) is completed by every investment adviser who maintains custody of client assets. Then, the form is used by the independent accountant who performs the surprise annual examination of the adviser's records. The accountant is the one who submits the ADV-E to the SEC (or the state, if appropriate).

When it comes to borrowing and lending money, the Uniform Securities Act (USA) prohibits activity that would compromise the objectivity of securities professionals. Which of the following is (are) NOT a prohibited practice(s)? A broker-dealer lending money to a client to purchase additional securities An agent taking out a car loan from a bank whose branch manager is a client of that agent An investment adviser borrowing money from an affiliated broker-dealer An investment adviser lending money to a client to enable that client to maintain the minimum required asset level in the account A) I, II, III, and IV B) I, II, and III C) I and III D) II and IV

B) I, II, and III Borrowing and lending is generally permitted when the lender is in the business of lending money and when the borrower borrows from someone in the business of lending money. Banks are the most common lenders, but broker-dealers are also in that business. When a client has a margin account, the broker-dealer is lending money to that customer to purchase additional securities. The fact that the bank branch manager is a client of the agent who is borrowing money does not change this situation because the loan is from the bank, not the manager. Loans are also permitted between affiliates

Which of the following statements are TRUE? A) When an investment adviser representative begins or terminates employment with a state-registered investment adviser, only the investment adviser representative must notify the Administrator. B) When an investment adviser representative begins or terminates employment with a state-registered investment adviser, only the investment adviser must notify the Administrator. C) When an investment adviser representative or a registered agent of a broker-dealer terminates employment, notice must be given to the Securities and Exchange Commission. D) When an investment adviser representative begins or terminates employment with a federal covered adviser, only the investment adviser must notify the Administrator.

investment adviser representative must notify the Administrator. B) When an investment adviser representative begins or terminates employment with a state-registered investment adviser, only the investment adviser must notify the Administrator.

The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? An adviser with no place of business in the state who advises wealthy customers in the state on a fee basis only An adviser with a place of business in the state whose total fee income in the state amounts to $150 An adviser with no place of business in a state who only provides advice on fixed annuities An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of 1940 A) I and II B) I only C) I, II, and III D) I, II, and IV

A) I and II Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional-type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable.

Under the Uniform Securities Act, in which of the following circumstances may the Administrator take action against an advisory firm? Nine years ago, the Administrator of another state found that the president of the firm violated the securities laws of that other state. The firm has liabilities that exceed its assets. A minority shareholder with no management role in an investment adviser organized as a corporation cannot meet his financial obligations as they come due. A) I and II B) I only C) I, II, and III D) II and III

A) I and II Violation of another state's securities laws within the past 10 years by the president of the firm might be cause for action against an investment adviser. So is insolvency, defined as having liabilities in excess of one's assets or the inability to meet financial obligations as they come due. However, the personal financial situation of a minority, nonmanaging shareholder does not have a bearing on the financial situation of a corporate firm.

Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is TRUE? A) An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings. B) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration. C) If it is determined that an investment adviser is insolvent, the SEC may revoke the registration. D) Revocation would occur, with appropriate notice, when a firm's annual updating amendment was received by the SEC 120 days after the end of the registrant's fiscal year.

B) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration Failure to supervise, if proven, is one of the most common causes for disciplinary action against a broker-dealer or investment adviser. Insolvency is not a cause for revocation under the Investment Advisers Act of 1940, but it is for a state-registered investment adviser (it's tough to keep these straight; please see Appendix A). A late ADV annual updating amendment might be cause for some action but almost certainly not a revocation; it is not that serious an offense. The balance sheet would only have to be part of the disclosure statement (brochure) given to those from whom substantial prepayment of fees is received.

Which of the following statements is NOT true concerning the wrap fee programs brochure under the Uniform Securities Act? A) It lists the services provided under the program, including the types of portfolio management services. B) It contains a statement that the program will generally cost the client less than purchasing these services separately. C) Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. D) The disclosure document must contain the information required by Appendix 1 of Form ADV Part 2A.

B) It contains a statement that the program will generally cost the client less than purchasing these services separately. The wrap fee brochure must contain a statement that the program may cost the client more or less than purchasing these services separately. The brochure must be filed with the Administrator and must contain the information required by Appendix 1 of Form ADV Part 2A. Nonmaterial changes to wrap fee disclosure documents must be filed with the Administrator within 90 days of fiscal year end. U6LO4

Patrice has an investment portfolio with the following characteristics: Portfolio actual return: 9% Market actual return: 12% Portfolio standard deviation: 4% Market standard deviation: 7% Portfolio beta: 0.65 Risk-free rate of return: 3% What is her portfolio's alpha? Did her portfolio outperform the market on a risk-adjusted basis? A) With an alpha of -0.15%, her portfolio underperformed the market. B) With an alpha of 0.15%, her portfolio outperformed the market. C) With an alpha of 5.10%, her portfolio outperformed the market. D) With an alpha of -5.10%, her portfolio underperformed the market.

B) With an alpha of 0.15%, her portfolio outperformed the market. As with most computation questions, there is more than one way to arrive at the answer. Using the steps in the LEM (U10LO4), Alpha - (total portfolio return minus risk-free rate) minus (portfolio beta times [market return minus risk-free rate]). Plugging in the numbers, we have (9% - 3%) - (.65 times [12% minus 3%]) = 6% - (.65 x 9%) = (6% - 5.85% = 0.15% An alternative method simply moves the parentheses a bit. If this is easier for you, use it. Alpha = 9% − [3% + 0.65 (12% − 3%)] = 9% - [3% + .65 (9)] = 9% - (3% + 5.85) = 9% - 8.85 = 0.15%. A positive alpha indicates that the portfolio outperformed the market on a risk-adjusted basis. Did you notice that the standard deviation was irrelevant to our computation? It is not unusual for the exam to include information that is extraneous to the question just to confuse you.

An agent employed at First XYZ Securities produces his own research reports and provides them to a select group of personal clients. The agent has written permission from his employer to engage in this activity, provided the time spent on the project is conducted after working hours. Under the Investment Advisers Act of 1940, if the agent does not charge fees for the research but receives commissions from his employing broker-dealer for trades executed through the firm, A) the agent must register as an investment adviser because the research is being done after hours B) neither the agent nor his employing broker-dealer need register as an investment adviser C) the agent must register as an investment adviser representative D) the broker-dealer must register as an investment adviser and the agent as an investment adviser representative

B) neither the agent nor his employing broker-dealer need register as an investment adviser The exclusion from the definition of investment adviser is lost only when an agent (or broker-dealer) receives special compensation for rendering investment advice. In this case, the agent is only receiving commissions when the clients make a trade. If there are no trades, there is no compensation for the advice. It is only when the compensation is not transaction-based that it becomes special.

The Uniform Securities Act provides for a number of cases where an investment adviser representative is not defined as such in a specific state. One of those cases is when A) the individual represents a federal covered investment adviser and has two retail clients in a state in which she has no place of business. B) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has fewer than six retail clients in State B. C) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has six or fewer retail clients in State B. D) the individual maintains an office in State B, but his only clients in that state are institutions.

B) the individual is registered in State A as a representative of a state-registered adviser, has no place of business in any other state, and has fewer than six retail clients in State B. Those individuals representing a state-registered investment adviser (IA) can take advantage of the de minimis exemption. That is, if the individual has no place of business in a state and conducts business with no more than five retail clients in the state, registration is not required. Be sure you understand that "no more than five," "fewer than six," and "five or fewer" mean the same thing. Six or fewer is too many. The representative of the covered IA would not have to register; but that is not part of the USA, it is part of the federal law. There are never any exceptions for those with a place of business in the state.

Which of the following activities would NOT be considered a prohibited practice under the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents? A) In order to meet production quotas, an agent opens several accounts under fictitious names B) An agent purchases a suitable stock for a client's account prior to receiving written discretionary authorization C) An agent shares in the profits and losses in a customer's account without making a financial contribution to the account D) An agent opens a brokerage account at his employing broker-dealer in his wife's maiden name in order to purchase an IPO being underwritten by the firm

C) An agent shares in the profits and losses in a customer's account without making a financial contribution to the account As long as the agent has the consent of the customer and the employing broker-dealer, profits and losses may be shared and no financial contribution is required of the agent. No purchases can be made by an agent in a discretionary account prior to receipt of the written trading authorization. Opening accounts in fictitious names or a spouses name in order to hide improper purchases are prohibited practices. Please note: The correct choice does not include the consent requirements so the statement is only partially correct. But, the other answers are definitely prohibited actions so you pick the best answer when you get something like this on the exam.

KAPCO Advisers is registered as an IA with the SEC. Their only office is in New Jersey and all IARs are registered there. IAR Claire has 10 clients who reside in Ohio; IAR Sean has 6 clients who live in Kentucky; and IAR Felicia has 3 clients who are Georgia residents. In addition, Felicia conducts a quarterly presentation at the Augusta, Georgia National Golf Club where she discusses current market developments. The seminar is restricted to club members only. Which of the following is CORRECT? A) Sean must register in Kentucky. B) Claire must register in Ohio. C) Felicia must register in Georgia. D) Because all 3 are registered in the state where KAPCO maintains its principal office, no further registrations are necessary for these IARs.

C) Felicia must register in Georgia. Under Section 203A of the Investment Advisers Act of 1940, any IAR with a federal covered adviser who has no place of business in a state is not required to register in that state even when the number of clients they have in a state exceeds the de minimis level. Holding a public seminar on a quarterly basis in the same location would be considered having a place of business in Georgia (even though attendance is limited to club members only—they are still members of the general public).

An agent of a broker-dealer is currently doing business in one state and would like to conduct business in another state. When checking with the firm's compliance department, the agent would be told which of the following? A) No registration is necessary if no commission or other remuneration is paid or given directly or indirectly. B) Registration is required only if an offer is directed, accepted, and paid for in that state. C) If the agent is a partner, officer, or director and held that position at the time the broker-dealer was registered in that state, the individual need not register separately. D) No registration is necessary in the other state provided the agent's activities are limited exclusively to effecting transactions in certain exempted securities.

C) If the agent is a partner, officer, or director and held that position at the time the broker-dealer was registered in that state, the individual need not register separately. Both the broker-dealer and the agent must be registered in the state where business is to be transacted, unless they both qualify for an exemption from registration in that state (e.g., they have no place of business in the state and their only clients are institutions). At the time the broker-dealer is registered, officers, directors, or partners of the firm who act as agents will be automatically registered as agents.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following practices is appropriate for an adviser who does not have custody or discretion over clients' assets? A) Vanessa discusses a security with a client who agrees it is a good buy. A short time later, she learns shares are available and purchases them for the client. B) Without authority, Shawna trades a security that is losing heavily for a similar security that she had recently discussed with her client. C) Chris purchases shares of a stock without discussing it with his client. The client had previously agreed to buy another stock, but at the time of purchase, it was losing heavily. To spare his client from a loss, Chris purchased the stock. D) Tom manages 35 clients who suffer financial loss while he is trying to contact them for authorization to trade.

D) Tom manages 35 clients who suffer financial loss while he is trying to contact them for authorization to trade. An investment adviser must have a client's authority before placing an order for a purchase or a sale. Discretionary authority must be in written form with two exceptions. First, if the client has determined the specific security and the amount to be transacted, leaving discretion as to price and timing only; and second, if the client has agreed to give the adviser written authority over the account within 10 business days by way of an advisory contract or discretionary agreement. Neither of these cases applies to Vanessa, Shawna, or Chris, who all traded without proper client authority. Only Tom acted properly.

​Oscar and Hilda, a married couple, are collecting Social Security. They speak to their financial planner for advice on taxation of those benefits. At what level do their benefits become subject to income tax?​ A) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $25,000 B) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $32,000 C) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $25,000 D) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000

D) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000 These are the current numbers used by the IRS to determine if Social Security benefits are taxable. It is interesting that the computation indirectly can cause tax-exempt interest to become taxable. Once the couple's income under this computation exceeds $44,000, 85% of it is taxable. If the question dealt with a single person, the limit would be $25,000 rather than $32,000.