Finals

The maximum contribution a grandfather and grandmother can make to a 529 plan for a grandchild without gift tax consequence in 2015 is: A. $2,000 B. $5,500 C. $52,000 D. $140,000

$140,000 -donors contributing to a 529 plan can make a 1-time lump sum contribution to a 529 plan equal to 5 years of contributions based on the annual gift tax exclusion of $14,000 (in 2015). Using the 5 year rule, each grandparent may contribute 5 times the annual maximum ($14,000 x 5) or $70,000. A couple could double that amount to $140,000 without gift tax consequences.

A stock is quoted as follows: Bid Ask 52.43 52.45 10 x 10 The spread for a round turn trade is:

$20 -The size of the quote is "10 x 10" = 10 round lots of 100 shares = 1,000 shares both bid and offered. If the dealer sells 1,000 shares at $52.45 and buys 1,000 shares at $52.43 (a round turn trade), the dealer makes a spread of $.02 on 1,000 shares = $20.

The measure of incremental return earned for taking on incremental risk is:

(Total Return - Risk Free Return) / Standard Deviation -The Sharpe Ratio measures incremental return earned for taking on incremental risk

Corporate annual reports are 10K reports which are audited reports. The 10Q is a quarterly report which is unaudited. Corporate annual reports contain the following audited financial statements

- Income Statement; Balance Sheet; Statement of Changes to Retained Earnings; and Statement of Sources and Uses of Cash.

Qualified custodians under NASAA's Custody Rule are:

-FDIC insured deposit taking institutions; -Registered broker-dealers holding customer assets; -Registered futures commission merchants holding customer assets; and -Foreign financial institutions holding financial assets for customers.

Chinese Walls to stop information flow must be maintained between:

-Investment Banking and each of the following: Trading, Sales and Research T-rading and each of the following: Research and Sales

A portfolio increases in value from $1,000,000 to $1,210,000 over 24 months. The annualized rate of return is:

-This question is basically seeing if you understand the time value of money on an annualized basis (that is, compound interest). -This investment grew from $1,000,000 to $1,210,000 over 24 months, or 2 years. The best way to do this is to try each choice given. -The first choice is 10% - so multiply by a factor of 1.1 (1 is the original investment amount; .1 is the interest rate). $1,000,000 x 1.1 = $1,100,000 after the first year. $1,100,000 x 1.1 = $1,210,000 after the second year. -Thus, this investment grew at a 10% annualized rate.

A married couple has a combined net worth of $8,000,000. If one dies in 2015, the taxable amount of the estate to the surviving spouse is: A. 0 B. $1,000,000 C. $2,000,000 D. $3,000,000

0 -An unlimited marital exclusion applies to spouses when 1 party dies. Thus, if a husband dies, no estate taxes are paid at that point by the surviving spouse. When that person dies, the estate is subject to tax, with an estate tax exclusion on the first $5,000,000 (adjusted for inflation annually) applied. For 2015, the adjusted exclusion amount is $5,430,000.

A customer has the following balance sheet: Cash: $ 20,000 Marketable Securities - Money Fund: $50,000 Market Value Retirement Portfolio: $100,000 Market Value - Cars: $ 30,000 Market Value - Home: $400,000 Market Value - Personal Items and Furnishings: $ 60,000 Bills Payable: $ 50,000 Car Loan: $ 15,000 Mortgage on Home: $250,000 The amount that the customer has available for investment, assuming a $20,000 cash reserve, is: A. $0 B. $50,000 C. $70,000 D. $100,000

0 -Both the automobile and home are long-term assets with loans against them - these are excluded from assets that can be invested. Even though there is equity in these long-term assets, they are not liquid and thus not part of the available funds for investment. The retirement portfolio is already invested, so these are not available for investment either. There is $70,000 of cash and equivalents (the money fund shares) available; and $50,000 of short-term liabilities; leaving $20,000 that could be invested, less a cash reserve. Assuming a $20,000 cash reserve, that leaves nothing available for investment.

A married couple purchased their residence 5 years ago for $500,000. For 3 of the last 5 years, they rented out the property for income, and lived in the house of 2 of those years. The clients sell the house for $800,000. How much of the gain is taxable? A. 0 B. $50,000 C. $250,000 D. $300,000

0 -The tax code permits the first $250,000 of capital gain from the sale of a personal residence to be excluded from tax for an individual ($500,000 for a married couple). To qualify, the residence cannot have been rented out for more than 3 of the preceding 5 years (so it must be lived-in for personal use by the owner for 2 of the past 5 years). This property was sold for a $300,000 gain by the married couple, all of which is excluded from capital gains tax, since it meets the personal use test.

A customer has purchased 1,000 shares of ABC stock at $44 per share, paying a commission of $1.00 per share for the transaction. ABC stock declares a 20% stock dividend. When the dividend is paid, the tax status of the investment is:

1,200 shares held at a cost basis of $37.50 per share -The payment of a stock dividend increases the number of shares held by the investor and the cost basis must be reduced accordingly, since each share is theoretically worth less after the stock dividend is paid. The customer will have 1,000 shares x 1.20 = 1,200 shares after the dividend. Each share originally had a cost basis of $45 ($44 price plus $1 commission). After the dividend is paid, the cost basis is adjusted to $45 / 1.20 = $37.50.

If a customer owns a whole life policy for a number of years and wants to get out of the policy because he or she can no longer make the payments (say because he or she is now unemployed), the customer has 3 choices. These are called the "nonforfeiture" options, because the customer will not forfeit the equity (cash value) in the policy. These are:

1.Cash: The customer surrenders the policy for its cash value. The customer gets cash, but no longer has insurance 2.Reduced Paid-Up: The customer gives up the current face value of the policy and uses the cash value to buy a fully-paid whole life policy with a lower face amount. The customer is given the option of reinstating the old higher face amount product, usually for 5 years 3.Extended Term: The customer stops paying premiums and the equity (cash value) is used to purchase a term life policy with the same face amount. The length of the term is usually the number of years that premiums were paid on the previous policy. (This is the default option if a customer stops paying premiums and gives no other instructions.) -Whole life policies can either be non-participating or participating. In non-participating policy, all cash values and death benefits are guaranteed and never change. The insurance company assumes the risk of earning less on its investments than the amount needed to pay the guaranteed benefit. If the insurance company earns a higher return than needed, it keeps the excess. In a participating policy, if the insurance company earns a higher than expected return on investments, it uses the excess to reduce the premium payment or it can be used to buy a higher face amount of insurance.

Under NASAA rules for State-registered advisers, transactions must be recorded in customer account records no later than: A. 10 business days following the end of the month in which the transaction was effected B. 20 business days following the end of the month in which the transaction was effected C. 10 business days following the end of the quarter in which the transaction was effected D. 20 business days following the end of the quarter in which the transaction was effected

10 business days following the end of the quarter in which the transaction was affected. -NASAA rules for State-registered advisers require that customer account records be posted no later than 10 business days following the end of each calendar quarter. Again, note that this is very different than the requirement of Federal securities law that applies to broker-dealers and Federal covered advisers

Under NASAA rules for State-registered advisers, transactions must be recorded in customer account records no later than: A. trade date B. settlement date C. 10 business days following the end of the month in which the transaction was effected D. 10 business days following the end of the quarter in which the transaction was effected

10 business days following the end of the quarter in which the transaction was effected -NASAA rules for State-registered advisers require that customer account records be posted no later than 10 business days following the end of each calendar quarter. Again, note that this is very different than the requirement of Federal securities law that applies to broker-dealers and Federal covered advisers.

Unlike the rule for broker-dealers written by FINRA, where a written power of attorney is required prior to exercising discretion, the NASAA rule for investment advisers is that verbal discretion can be exercised, as long as the written power of attorney is obtained from the customer within ______.

10 business days.

A customer invests $100,000 in an Equity Indexed Annuity contract tied to the Standard and Poor's 500 Index. The contract has a 90% participation rate and a 15% cap. Interest is credited to the contract under the annual reset method and is compounded annually. The performance of the Standard and Poor's Index over the next 3 years is: Year 1: + 20% Year 2: - 5% Year 3: + 10% At the end of year 3, the customer will have a principal balance of: A. $100,000 B. $115,000 C. $125,350 D. $128,620

125,350 The first year increase in the index of 20% with a 90% participation means that 18% would be credited to the account - however, because of the 15% cap, this is the first year credit, so the $115,000 balance is worth $115,000 after the first year. Because this is an insurance product, the customer does not bear investment risk, and the "floor" rate is 0% (unless the product offers a higher floor rate). Because of the 0% floor, the balance stays at $115,000 as of the end of year 2. In year 3, the $115,000 balance will grow by 9% (90% of the 10% growth rate) for a balance of $125,350 at the end of year 3.

A customer has invested in a Direct Participation Program and is a limited partner with a 20% interest. In November of that year, the partnership sold assets and realized a gain. It made a cash distribution to the partners using the proceeds generated from the asset sale in January. How is this reported for tax purposes on the K-1 distributed to the customer/partner? A. 20% of the gain is reported as ordinary income in the year realized B. 20% of the gain is reported as a capital gain in the year realized C. 20% of the gain is reported as ordinary income in the year distributed D. 20% of the gain is reported as a capital gain the year distributed

20% of the gain is reported as a capital gain in the year realized - Under partnership taxation rules, each item of income and loss to the partnership "flows through" directly on a pro-rata basis onto the partner's tax return for that tax year. Because the partnership realized the gain on the sale of the asset in November, it will be reported on the K-1 sent to the limited partner by the partnership for that year ending December 31st. Because this was a gain from the sale of an asset, it is a capital gain. The fact that a cash distribution resulting from the gain was made in the next tax year is irrelevant.

A customer has $20,000 in passive losses from a limited partnership investment. If the customer has $20,000 of passive income for that tax year, the customer may deduct:

20,000 -Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. Since there is $20,000 of passive income for this tax year, the $20,000 of passive losses can be deducted in full.

A customer owns a perpetuity that pays $1,000 per month. Assuming that the market rate of return is 6%, the value of the contract is:

200,000 A perpetuity makes payments forever. To calculate the value of the contract, you take the annual (not monthly) payment received and divide it by the market rate of interest. $12,000 annual payment received / .06 = $200,000

Unless the Administrator allows an earlier date, when an agent withdraws his or her registration, the withdrawal does not become effective for: A. 30 days B. 60 days C. 90 days D. 120 days

30 days If an agent withdraws his or her registration, the withdrawal does not become effective for 30 days unless the Administrator allows an earlier date for withdrawal. Similarly, when a registration application is filed with the Administrator, it does not become effective for 30 days, unless the Administrator allows an earlier date.

A customer buys a new issue TIPS with a 3% coupon rate. If the CPI during the first year increases by 2%, the customer will receive annual interest the next year of: A. $30.00 B. $30.60 C. $50.00 D. This cannot be determined from the information given

30.60 -TIPS stands for Treasury Inflation Protection Security. The coupon rate at issuance is 3% and the security is issued at par. Each year, the principal amount is adjusted upwards by that year's inflation rate, so that the adjusted principal amount at the end of Year 1 will be: $1,000 x 1.02 = $1,020. The 3% coupon is applied to the adjusted principal amount, so 3% of $1,020 = $30.60 in interest that will be paid in Year 2: If there is inflation each year, the principal is continually adjusted upwards and the annual interest payment will increase. At maturity, the holder is returned the higher adjusted principal amount.

An issuer has filed a registration statement in the State proposing to offer 500,000 shares in a combined primary and secondary distribution, consisting of 300,000 newly issued shares and another 200,000 shares being offered by the officers of the firm. Under Uniform State Law, the: A. 500,000 shares being sold is an issuer transaction B. 300,000 shares being sold is an issuer transaction and the 200,000 shares being sold is a non-issuer transaction C. 300,000 shares being sold is a non-issuer transaction and the 200,000 shares being sold is an issuer transaction D. 500,000 shares being sold is a non-issuer transaction

300,000 shares being sold is an issuer transaction and the 200,000 shares being sold is a non-issuer transaction -An issuer transaction is one where the proceeds of the offering go to the issuer - the primary distribution of 300,000 shares meets this definition. A "non-issuer" transaction is one where the proceeds of the offering go to someone other than the issuer. The secondary offering of 200,000 shares where the proceeds are going to selling shareholders (officers of the company) meets this definition.

A 4 1/2% $1,000 par bond is selling in the market for $900. What is the bond's current yield? A. 4 1/2% B. Between 4 1/2% and 5% C. 5% D. Over 5%

5% -Current yield is: Annual Income / Market Price. Since this bond has a coupon rate of 4 1/2%, the annual income is 4.50% x $1,000 par = $45. Since the customer is paying $900 for the bond, the current yield is: $45 / $900 = 5%.

Under the Investment Advisers Act of 1940, if the SEC suspends or revokes the registration of an investment adviser registered, an appeal may be filed in Federal Court within how many days?

60 days

Under NASAA rules, investment advisers must update their Form ADV (State registration form) annually, within ___ days of fiscal year end, to reflect current and accurate information and must send the updated Form ADV to its clients within ___ days of year end if there is a material change. In addition, if there is a significant material change in the ADV information that occurs during the year, the filing must be amended within ___ days.

90, 120, 30 -The Form ADV is stored in the IARD (Investment Adviser Registration Depository) system. It is used to register both State registered advisers and Federal covered advisers, and to send notice filings to States by Federal covered advisers. Also note that while the annual updating amendment required for both Federal covered and State registered advisers must be filed within 90 days of fiscal year end for either; the filing rule for an "other-then-year" end material change notification is "promptly" under SEC rules for Federal covered advisers; while NASAA requires that it be filed within 30 days for State registered advisers.

All of the following are contrarian economic indicators: A. odd lot sales and purchases B. short interest level C. put/call ratio D. price/earnings ratio

A, B, C -Market indicators used by contrarians include the short interest level (a large short interest indicates an "oversold" market, so it's time to buy); the level of odd lot sales versus purchases (the theory is that small investors trade odd lots and they are wrong); and the put /call ratio (a high ratio indicates an oversold market, so it is time to buy). The price/earnings ratio is a fundamental value measure.

Time Weighted Return will be the same as Dollar Weighted Return for an individual customer that has a mutual fund holding if: A. actual cash deposits into the mutual fund and actual withdrawals out of the mutual fund are ignored B. cash deposits into the mutual fund are ignored C. cash withdrawals out of the mutual fund are ignored D. the customer takes all distributions from the fund as a checks and does not reinvest them

A. actual cash deposits into the mutual fund and actual withdrawals out of the mutual fund are ignored -Dollar weighted average return is most often used when evaluating a specific investor's mutual fund return. It is the return achieved, accounting for the timing of all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor's deposits and withdrawals. Because investors often "chase" past performance, they will buy a fund "too late" (after the fund has posted its best performance and now enters a period of lesser performance) and will sell "too soon." Thus, for the individual investor, dollar weighted average return is often lower than time weighted average return. -In contrast, time weighted average return is the measure used for mutual fund performance charts (Total Return, which shows dividends and capital gains as continually reinvested). It reflects the growth that would be achieved from a 1-time investment into the fund and then holding that investment over time - this is a buy and hold strategy. This method is consistent when comparing one fund's performance to another fund's performance. -Time Weighted Average Return and Dollar Weighted Average Return are the same as long as the customer makes a 1-time investment and then automatically reinvests fund distributions, removing the effect on return of additional cash payments into the fund; or cash redemptions out of the fund.

A broker-dealer offers 4 summer passes to an amusement park to each of its agents who sell at least $10,000 of bonds during the month of June. This action: A. is allowed B. is not allowed C. may trigger a "pay to play" disclosure to customers D. may trigger a "soft dollar" disclosure to customers

A. is allowed The best answer is A. There is no prohibition on a broker-dealer compensating its agents with prizes for meeting a sales contest requirement. The broker-dealer will have to report the compensation value as taxable income to the IRS, but this is not part of the question. "Pay to play" refers to the illegal investment adviser practice of "hiring" a third party solicitor (for "pay") who works for, or who has recently left, a government entity such as a government, state or municipal pension plan. For "pay," this person steers that pension plan's advisory business to the adviser (the "play" part of the term). Soft dollar compensation is where a broker-dealer offers "free" services to a mutual fund or investment adviser in return for "directed brokerage" (which is the mutual fund or investment adviser directing its portfolio trades at full commission rates to that broker-dealer). The SEC requires that mutual funds can only accept soft dollars if the services benefit all shareholders of the fund. The SEC requires that investment advisers that accept soft dollars disclose this on Form ADV and the disclosure must be specific.

Under Rule 206(4)-2 covering advisers that take custody of client funds, such advisers must submit to an annual surprise audit by an independent public accountant that verifies the funds and securities held in custody for customers. After completing the examination, the auditor must sign and file Form ______ within _____ days.

ADV-E (as in "Exam") with the SEC within 120 days

Under the Uniform Securities Act, "consent to service of process" means that the:

Administrator is authorized to receive suits on behalf of an agent or broker-dealer -A "consent to service of process" in an initial registration application appoints the State Administrator as attorney for the registrant, authorizing the Administrator to receive any lawsuits on behalf of the registrant. If such occurs, then the Administrator will, in turn, notify the registrant that he or she (or "it" in the case of a corporation or partnership) is being sued.

When comparing the Alternative Minimum Tax calculation to the Regular income tax calculation, which deductions are NOT permitted in the AMT calculation but are permitted in the Regular income tax calculation? A. Personal exemption B. State and local tax deduction C. Miscellaneous itemized deductions D. All of the above

All of the above -When calculating the Alternative Minimum Tax, aside from adding back "tax preferences," many of the basic deductions permitted when calculating Regular income tax are not allowed, increasing the amount of AMT income that is subject to tax. When calculating AMT, there is no deduction for the personal exemption; no deduction for state and local taxes paid (including property taxes paid); no deduction for miscellaneous items such as tax preparation fees; and no standard deduction; among other items.

All of the following terms are synonymous EXCEPT: A. agent B. broker C. dealer D. middleman

An agent is a broker who is middleman in a transaction, earning a commission. A dealer is a market maker, who is a principal in a transaction, earning a mark-up or mark-down. A broke middleman earns a commission*

Which of the following individuals is NOT EXCLUDED from the definition of a "sales representative" under the Uniform Securities Act? A. An individual who represents an issuer in isolated non-issuer transactions B. An individual who represents an issuer in transactions with underwriters C. An individual who represents an issuer in transactions with financial institutions D. An individual who represents an issuer in transactions with investors

An individual who represents an issuer in transactions with investors -The Act defines individuals who represent issuers effecting securities transactions with the public as "agents" who must be registered. Thus, Choice D meets this definition. The Act exempts from licensing as an "agent," those individuals representing issuers who do not deal with the public. Thus, individuals representing issuers (not broker-dealers) who deal solely with underwriters or financial institutions are not defined as "agents" who must be registered. Also, if that individual representing an issuer only performs an exempt transaction, such as an occasional trade ("an isolated non-issuer transaction"), he or she is excluded from being licensed as an "agent."

A customer is told by a bank that his investment will pay interest at the rate of .3% per month. This would be the same as telling the customer that his or her: A. annual real rate of return is 3.6% B. annual percentage yield is 3.6% C. annual percentage rate is 3.6% D. yield to maturity is 3.6%

Annual percentage rate is 3.6% -The bank is paying interest at the rate of .3% per month. This is the same as an annual percentage rate of .3% x 12 months = 3.60%. The annual percentage yield would be somewhat higher than 3.60% due to the fact the compound interest earned on the monthly interest payments received would increase the annual yield slightly.

Investment "A" is purchased in May and sold at a gain in the July following. Investment "B" is purchased in June and sold at a gain in the October following. In order to compare the return of investment "A" to investment "B," which measure should be used? A. Dollar weighted return B. Annualized return C. Holding period return D. Total return

Annualized Return - Investment A has been held for 2 months and then sold at a gain; while Investment B has been held for 4 months and then sold at a gain. To compare them, their returns must be annualized. Dollar weighted return is another name for Internal Rate of Return. Holding period return is a non-annualized rate of return that is earned over the life of the investment. Total return includes the "total" of both dividends and capital gains as the components of investment return.

Which of the following orders would be performed in a discretionary account? A. A customer places an order to sell 100 shares of KO at the market B. A customer places an order to buy as much of GE at $40 as possible during this trading day C. A customer places an order to buy 100 shares of IBM at $125 D. A customer places an order to sell 100 shares of GE when it gets to a certain level or lower

B. A customer places an order to buy as much of GE at $40 as possible during this trading day - If an agent chooses more than price and time of execution for a customer, the trade is considered to be "discretionary." If the agent chooses any more than price or time - that is, the size of the trade or the security to be traded - a power of attorney is required.

Which of the following individuals would be defined as an "agent" under the Uniform Securities Act? A. A secretary who works for an agent taking telephone messages to buy and sell securities B. A sales associate who accepts orders for limited partnership units being offered in a private placement C. An employee of a corporation who processes 401(k) contributions, issuing shares of the company's stock to the company's employees D. A Chief Financial Officer of the issuer that negotiates with an investment banker to set the terms of an additional share offering

B. A sales associate who accepts orders for limited partnership units being offered in a private placement -An "agent" is an individual that represents a broker-dealer or issuer effecting securities transactions. The Act exempts from licensing as an "agent," those individuals who do not deal with the public. Thus, individuals representing issuers who deal solely with underwriters or financial institutions are not defined as "agents" who must be registered, so the CFO negotiating the terms of a share offering with an underwriter is not an agent. The employee who represents the issuer selling securities of that issuer to that issuer's employees (as long as no commissions are paid) is not considered to be an agent, since he or she is not selling to the public. This is the case for the employee that processes 401(k) contributions and distributions. Therefore, we are left with Choices A and B as possibly correct - and arguments can be made for either one! Choice A - the secretary who takes "telephone messages to buy and sell securities" for an agent - sure sounds like a sales assistant that must be registered. Choice B - the sales associate that accepts orders for limited partnership units (which are securities) is clearly an agent. So we must go with Choice B. Note that in the actual exam, you will often be presented with 2 choices that are "close" and you must pick the better one!

An options strategy where the maximum potential loss is equal to the difference between the value of the underlying long securities position and premiums received is a: A. naked call writer B. covered call writer C. naked put writer D. covered put writer

B. Covered call writer -A covered call writer sells a call contract against the underlying stock that is owned by that customer. If the market drops, the call expires unexercised and the customer keeps the premium. However, as the market drops, the customer loses on the long stock position. Thus, the maximum potential loss is the full value of the stock position, net of collected premiums.

Under the Uniform Securities Act, if the Administrator prohibits an investment adviser from taking custody of customer funds or securities, the investment adviser would be permitted to: A. buy securities for a customer using the investment adviser's monies, and then delay delivery of those securities to the customer B. buy securities for a customer who has given a limited power of attorney to the adviser using monies deposited by that customer to an account established by the adviser specifically for that purpose C. hold customer funds in accounts established and maintained by the adviser that have been segregated and properly identified D. accept a prepaid advisory fee of $500 from the client covering a period of up to 1 year

B. buy securities for a customer who has given a limited power of attorney to the adviser using monies deposited by that customer to an account established by the adviser specifically for that purpose - If the adviser is prohibited from taking custody of client funds or securities by the State Administrator, the adviser can trade the customer account under a limited power of attorney - this is normal practice. So Choice B is the correct answer. The adviser cannot buy securities for a customer and then delay delivery of the securities to the client - this is an unethical practice. If an adviser is prohibited from taking custody, it cannot hold customer funds and securities, making Choice C incorrect. There is nothing precluding an adviser from taking a prepaid advisory fee, but if the adviser accepts $500 or more of prepaid fees, 6 months or more in advance of rendering services, this is defined as "taking custody" under NASAA rules.

_____ is a correlation coefficient that measures the correlation of a specific stock's price movement against the movement of a relevant stock index.

Beta

A registered representative with a broker-dealer makes recommendations of securities to a customer, and charges a commission on each trade. Which statement is TRUE? A. This person must register with the State as an investment adviser representative B. This person must register with the State as an investment adviser C. This person is excluded from the definition of an investment adviser D. This person is defined as an investment adviser, but is exempt from registration

Broker-dealers and their registered representatives are excluded from the definition of an investment adviser as long as they do not charge separately for advisory services. Thus, a broker-dealer can charge a commission on each recommended trade and not be defined as an investment adviser that must register in the State (note however, that it must still register as a broker-dealer in that State)

Which business form does NOT allow for flow through of income and loss? A. C Corporation B. S Corporation C. Sole Proprietorship D. General Partnership

C Corporation -A C Corporation must compute net income (or net loss) at the corporate level and pay tax on it. Any distributions to shareholders are made from after-tax income and are then taxed again at the shareholder level. In contrast, S Corporations, sole proprietorships and general partnerships are all not taxable entities. Each item of income and loss from these flows through onto the owner's tax return and is only taxed at the owner level.

A client that is 80 years old comes into the agent's office and tells the agent that he must undergo a gall bladder operation. The client is worried about the amount of time that will be spent in the hospital to recover, and at his advanced age, is also worried about the chances of complications and possible death. The client has physical stock certificates in his home safe and asks the agent for assistance. The agent should: A. Drive the 80 year old customer to his house, pick up the securities, bring them back to the investment adviser's office and place them in the investment adviser's desk drawer for safekeeping B. Go to the customer's home and retrieve the securities and put them into a lock box at a local bank under the client's name C. Drive the 80 year old customer to his house, have the client retrieve the securities and put them into a lock box at a local bank under the client's name D. Refer the customer to the local police for assistance

C. Drive the 80 year old customer to his house, have the client retrieve the securities and put them into a lock box at a local bank under the client's name -The physical certificates cannot be taken by the representative, since then the firm would be deemed to be taking custody of the securities and would have to comply with all of the custody rules (safekeeping by a qualified independent custodian; quarterly account statements must be sent to customers; independent annual audit of the custodian, etc.). It would be acceptable for the representative to drive the customer to his home; have the customer retrieve the securities; and then drive the customer to a bank where the customer places them in a safe deposit box. In this scenario, the adviser is never taking custody. Choice D is also OK, but Choice C is the better answer.

Federal securities laws supersede the provisions of the Uniform Securities in all of the following areas EXCEPT: A. registration requirements applicable to securities offerings B. registration requirements applicable to investment advisers C. investigation and bringing of enforcement actions with respect to unlawful broker-dealer conduct D. broker-dealer capital, custody, financial responsibility and recordkeeping requirements

C. Investigation and bringing of enforcement actions with respect to unlawful broker-dealer conduct -The National Securities Markets Improvement Act of 1996 (NSMIA) was passed to reduce the overlap of Federal and State securities regulation. As a general rule, States have jurisdiction over securities transactions that occur within the State; while Federal legislation applies to "interstate" transactions. In addition, Federal securities law supersedes State securities law - since under the Constitution's "Supremacy Clause," if any State law impedes Federal legislation, the Federal law prevails. NSMIA formalized this structure by defining: •Federal Covered Securities - securities registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). Essentially, these are exchange and NASDAQ listed issues. •Federal Covered Advisers - investment advisers that are registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). These are investment advisers to investment companies and advisers with $100,000,000 or more of assets under management. •Activities That State Law Cannot Preempt - broker-dealer net capital requirements, custody rules, margin rules, financial responsibility rules and recordkeeping rules (all set by the SEC or FRB) cannot be preempted by State rules. However, States are specifically permitted to retain the right to require notice filings; require registration of broker-dealers and their agents; require the registration of advisers with less than $100,000,000 of assets under management; require the registration of all investment adviser representatives (whether the investment adviser is "federally covered" or not); and the State is empowered to "investigate and bring enforcement actions with respect to fraud or deceit; or any unlawful conduct by a broker or dealer or investment adviser; in connection with securities or securities transactions."

Which of the following is NOT required to be in an investment advisory contract under NASAA rules? A. The formula for computing the advisory fee B. A clause prohibiting the adviser from assigning the contract without customer consent C. A list of the states in which the adviser is registered D. Disclosure of whether the contract gives the adviser discretionary authority

C. The advisory contract, under NASAA rules, must include: •Description of services provided; •Term of contract; •Formula for computing fees; •Amount of prepaid fees to be returned if contract is terminated early; •Assignment of the contract is not permitted unless the customer approves; •Whether the contract grants discretionary authority to the adviser; and •Disclosure that the fee for managing equity securities may be higher than the fee for managing debt securities.

A surety bond requirement for registration of a broker-dealer: A. protects each customer against loss of principal in the event of the failure of the broker-dealer B. can be met by using the broker-dealer's existing fidelity bond coverage C. can be used by any person who has an enforceable legal claim against the broker-dealer D. can be met by giving the State a lien on the broker-dealer's real property in lieu of posting cash, securities, or an indemnity policy

C. can be used by any person who has an enforceable legal claim against the broker-dealer -Broker-dealers, as a condition of registration in a State, can be required to post a surety bond. This must be posted as either cash, securities, or an indemnity policy issued by an insurance company. In the event that there is a legal action taken against the broker-dealer in the State, the bond can be used to pay any claims against the broker-dealer that are affirmed by a court of law.

Which of the following option positions is used to hedge a long stock position? A. long call B. short call C. long put D. short put

C. long put -Buying a put allows the owner of stock to sell it a fixed price (strike price) if the market falls. This limits downside risk on the long stock position.

All of the following are considered when evaluating a customer's tax status EXCEPT: A. Income Sources B. Citizenship C. Marginal tax bracket D. State of residence

Citizenship

Under IRS guidelines, which of the following is earned income? A. Alimony B. Municipal bond interest C. Commissions D. Investment income

Commissions Earned income includes wages, salary, tips, commissions, royalties received (such as royalties earned for writing a book), and bonuses. -Social security payments and alimony payments are "transfer payments" that are taxed at the same rate as earned income, but they are not defined as such. Investment income, such as dividends and interest received, is classified as "portfolio" income.

The risk premium is the rate of return on an investment over the: A. holding period return B. stock dividend rate C. current yield D. money market return

D. Money market return The "risk premium" is the excess return that an investment gives over the "risk-free" rate of return. Money market instruments are considered to be almost riskless, so their rate of return approximates the "risk-free" rate of return.

Which item is NOT included in a client's income statement? A. Interest received from corporate bond investments B. Depreciation of the customer's primary residence C. Dividends from mutual funds that are reinvested in additional share purchases D. Year-end bonus received from employer

Depreciation of the customer's primary residence A primary residence, at market value (which reflects asset appreciation or depreciation), is included on the client's balance sheet as an asset. The income statement of the client reflects income (wages, commissions, bonuses, dividends, interest on investments) and expenses (living expenses, taxes, interest paid on loans on a mortgage, insurance expenses, etc.). Note that a dividend received from a mutual fund investment is still income, even if it has been reinvested.

Which of the following would NOT be included in Adjusted Gross Income on a tax return? A. Social security payments B. Foreign bond interest C. Distributions from non-qualified retirement plans attributable to cost basis D. Distributions from mutual funds subject to Subchapter M

Distributions from non-qualified retirement plans attributable to cost basis -Adjusted gross income on a tax return includes all sources of taxable income, including wages, commissions, royalties, alimony, social security payments, pension plan payments (except for payments attributable to the cost basis in non-qualified plans), investment income (and this includes mutual fund distributions and income from foreign investments) and capital gains. Excluded from Adjusted Gross Income is municipal bond interest (which is not federally taxable) and retirement plan distribution amounts from non-qualified plans attributable to the cost basis (non-deductible investment dollars) in the plan.

The formula for Total Return is:

Dividend yield plus growth divided by original investment -Total return takes into account the 2 components of an investor's return - dividend or interest income; and any capital gain or capital loss in the investment (annualized). These dollar values are added and then divided by the original investment amount to arrive at Total Return as a percentage.

_____ measures bond price volatility as market interest rates move.

Duration

Transfer on Death registration would likely be used by which of the following? A. Elderly father and adult son B. Middle age mother and minor daughter C. Unrelated business partners D. Husband and wife

Elderly father and adult son Transfer on Death (TOD) registration is designed for the elderly, who, in the past, would typically register securities with an adult son or daughter as "Joint Tenants with Rights of Survivorship." This led to instances where, for example, an elderly parent with ample resources wished to liquidate securities positions to pay for an expensive cruise and the son, whose name is also registered on the certificates as "JTWROS," refused to sign the certificates, preventing the sale from settling. Transfer on Death (TOD) registration allows the elderly parent to maintain full control over the certificates during his or her lifetime. Only upon the death of the owner do the certificates automatically transfer to the named beneficiary, avoiding probate.

All of the following are included in the footnotes to a corporation's financial statements EXCEPT: A. Estimated unrealized losses on investments B. Estimated legal liabilities C. Deferred tax liabilities D. Open contractual commitments

Estimated unrealized losses on investments -The type of investment will determine how it is valued on a company's financial statements. Securities investments are valued at current market value. Any gain or loss is reflected in the market value. Long term investments in assets are valued at book value less depreciation. Unrealized gains or losses on investments are not detailed in the footnotes. Included in the footnotes are significant accounting policies, upcoming debt repayments; open contractual commitments; outstanding lease obligations; future pension obligations; estimated legal liabilities; deferred tax liabilities and details of discontinued operations charges.

Which security is NOT subject to registration under the Uniform Securities Act? A. Subordinated debentures of a Canadian Paper company B. Preferred stock of a bank holding company C. Equipment trust certificate of a railroad subject to Interstate Commerce Commission regulations D. Limited partnership investing in issues of Federally chartered savings and loans

Exempt securities under the Uniform Securities Act include: •Canadian Government Securities (not common stocks of Canadian companies) •Bank Issues (not securities issued by bank holding companies!) •Savings and Loan issues (not limited partnerships that invest in such securities!)

Which statement is TRUE under NASAA rules? Within 120 days of fiscal year end, the customer must be given a copy of the:

Form ADV Part 2 only if there are material changes

The first $10,000 of 1st time home purchase expenses can be withdrawn from an IRA prior to age 59 1/2 without having to pay the 10% penalty tax. However, regular income tax may still be due.

He is below the income phase-out range for a Roth, so he can contribute. As long as funds are held in a Roth for at least 5 years, and the withdrawal prior to age 59 1/2 is made for a "qualifying reason" (which is the case here), there is no tax due. However, the key to this question is that the individual withdraws from the account after only 3 years. Thus, the withdrawal is subject to tax, but only the portion represented by earnings. The portion represented by the original contribution was not deductible, and can be withdrawn tax-free (as long as it has been in the account for 5 years).

An order ticket to sell may be marked "long" in all of the following circumstances EXCEPT the customer: A. is long a call on that stock that has been exercised B. is short a put on that stock that has been exercised C. holds fully-paid convertible preferred stock of that issuer and has given instructions to convert D. holds fully paid warrants to buy the underlying stock in custody of the broker-dealer

Holds fully paid warrants to buy the underlying stock in custody of the broker-dealer -A customer is "long" if the customer owns an option, right or warrant on that stock and has exercised (so we know that the stock is actually coming in). Similarly, if a customer is short a put and it has been exercised, we know that the customer will be receiving the stock - so the customer is "long." A customer is "long" if the customer owns a convertible security (into that stock) and has given irrevocable instructions to convert. If a customer simply owns a right, call, or warrant; is short a put; or owns a convertible; this is not considered to be "long" the underlying stock until the action is taken to turn that instrument into that stock.

Under the Uniform Securities Act, an offering of a limited partnership made to a bank trust department is: I a transaction that is exempt from registration II exempt from the advertising filing rules III exempt from the anti-fraud rules

I and II -An offering of a limited partnership interest to a bank trust department is an exempt transaction. If the security or transaction is exempt, the State Administrator cannot require filing of advertising related to that offer or sale. However, all transactions are subject to the anti-fraud rules.

A corporate investor may exclude from taxation, part of: I Cash dividends received from common stock investments II Cash dividends received from preferred stock investments III Interest received from convertible bond investments IV Interest received from non-convertible bond investments

I and II -Corporate investors may exclude 70% of dividends received (both common and preferred) from taxation. Interest income received is 100% taxable (unless it is tax free municipal interest income

Which of the following are "preference" items included in the alternative minimum tax computation? I Excess intangible drilling costs II Excess depletion III Straight line depreciation IV Tax credits

I and II -Excess intangible drilling cost deductions, excess depletion, and excess depreciation (amounts over straight line) are all tax preference items included in the Alternative Minimum Tax (AMT). Straight line depreciation is not included, nor are tax credits.

Exempt securities are NOT subject to which provisions of the Uniform Securities Act? I Advertising filing requirements II Registration requirements III Anti-Fraud requirements

I and II only -Both exempt and non-exempt securities; and exempt and non-exempt transactions are subject ot the anti-fraud provisions of the Uniform Securities Act. Exempt securities are not subject to the Act's securities registration and filing of advertising requirements.

Which of the following actions taken by an investment adviser would require consent of the adviser's existing customers? I The investment adviser and its accounts are acquired by a larger, more prestigious firm II The investment adviser acquires a small firm and its accounts to enhance its geographic coverage III The investment adviser wishes to retire and transfer its accounts to another investment adviser

I and III

Which statements are TRUE regarding variable annuities during the annuity phase? I The annuity unit value fluctuates II The annuity unit value remains the same III The annuity check received may be for a different amount at each payment IV The annuity check received will be for the same amount at each payment

I and III -Once the separate account interest is "annuitized", the accumulation units are turned into a fixed number of annuity units. Since the earnings in the account vary, each payment based on a fixed number of annuity units also varies (hence the term variable annuity). So, when the investor receives proceeds from the account each month as an annuity payment, the annuity check can be for a different amount, all depending on the performance of the securities in the separate account.

Delivery of the brochure under the "Brochure Rule" is NOT required for: I impersonal advisory services requiring payment of less than $500 annually II prepaid advisory fees requiring payment in advance of $1,000 or more III advisory contracts with investment companies IV advisory contracts with pension plans

I and III Delivery of the "Brochure" to customers is not required for the sale of impersonal advisory services calling for no more than a $500 annual fee; or for the sale of advisory services to investment companies

The sale of a new issue of securities by a State chartered bank is: I exempt from registration with the SEC II subject to registration with the SEC III exempt from registration in the State IV subject to registration with the State

I and III Securities issued by banks (but NOT bank holding companies) are exempt from both Federal and State registration. Remember, banks are already extensively regulated at both the Federal and State level, so to require registration of their securities is considered to be overkill.

Which statements are TRUE about an investment adviser with an office in State A? I If the investment adviser's only clients are investment companies, the investment adviser must register with the SEC II If the investment adviser's only clients are investment companies, the investment adviser must register in the State III If the investment adviser's only clients are insurance companies, the investment adviser must register with the SEC IV If the investment adviser's only clients are insurance companies, the investment adviser must register in the State

I and IV -Advisers to investment companies are "federal covered" - they must register with the SEC and cannot be required to register in the State (but the State can require a notice filing). The main intent of the Investment Advisers Act of 1940 was to register advisers to investment companies and limit their compensation. Thus, they fall under federal regulation and cannot be regulated by the States. Advisers to insurance companies are not "federal covered" advisers - the Investment Advisers Act of 1940 was not worried about insurance companies being overcharged for investment advice, since they are normally "frugal" and are unlikely to overpay. So, advisers to insurance companies are only required to register at the State level.

A Roth IRA is left to a named beneficiary. Which statements are TRUE? I The value of the Roth IRA is included in the gross estate of the deceased individual II The value of the Roth IRA is not included in the gross estate of the deceased individual III The value of the Roth IRA is taxable income to the beneficiary IV The value of the Roth IRA is not taxable income to the beneficiary

I and IV -All IRA assets are included in one's gross estate - it makes no difference if it is a Traditional IRA or a Roth IRA. The beneficiary who receives the Roth has no tax liability - it is the estate that pays the tax due.

Mutual fund performance charts show: I Time Weighted Average Return II Dollar Weighted Average Return III a return that is affected by investor cash inflows and outflows IV a return that is not affected by investor cash inflows and outflows

I and IV -Time Weighted Average Return is used by mutual funds on their performance charts to show average annual investment returns. It measures how well the fund manager performed in increasing the dollars that have been invested. Additional cash moving into the fund or out of the fund does not affect the computation. This is the average annual return that would be provided from a "buy and hold" strategy. -Dollar Weighted Average Return is the same as the Internal Rate of Return. It is the discount rate that takes all of the cash flows from the investment. Dollar Weighted Return takes into account the impact of cash inflows and outflows from purchases and sales as well as growth in assets. -The classic comparison of these 2 returns is where a fund receives a large cash inflow after a period of superior performance (which attracted the new investors to the fund) and then suffers a period of poor performance. Time Weighted Average Return shown over the following periods will be much higher than the Dollar Weighted Average Return experienced by the new investors.

Which of the following statements are TRUE when comparing a corporation and a limited partnership? I A corporation is a taxable entity II A partnership is a taxable entity III A corporation allows for the flow through of gain and loss IV A partnership allows for the flow through of gain and loss

I and IV -Under IRS rules, a corporation is a taxable entity. If the corporation has net income, the corporation pays tax on that income. If the corporation wishes to distribute cash dividends to shareholders, the dividends received are paid out of after tax income and then the shareholders pay taxes on this, too. If a corporation has a net loss, no corporate tax is owed for that year and the corporation cannot distribute the losses to its shareholders. A partnership is not a taxable entity, rather, each partner is taxed on his or her pro-rata share of income or loss. The losses can be used to offset other "passive income."

A broker-dealer located in State A makes an offer of securities to a customer whose principal residence is in State B. The customer has temporarily moved to State C and has asked the post office in State B to forward the mail to the customer's address in State C. Which State Administrator(s) has (have) jurisdiction over the offer? I State A II State B III State C

I only -Because the broker-dealer is located in State A, that State Administrator has jurisdiction. Normally, if an offer is received in a State (B in this case), then State B's Administrator would have jurisdiction. But the offer was never received in State B because it was forwarded by the post office on to State C. Thus, an offer was never made in State B and that State Administrator does not have jurisdiction. One would think that because the offer was ultimately received in State C, that it would have jurisdiction, but this is not the case either. In this situation, the Uniform Securities Act makes an exception. The issue here is that the broker-dealer had no idea that the mail was forwarded to State C and should not be subject to the law of State C on this offer. The intent is to make sure that an innocent broker-dealer is not "entrapped" by a State and made subject to that State's law when an offer of securities is forwarded into that State by a third party without the broker-dealer's knowledge.

Under the Investment Advisers Act of 1940, which statements is (are) TRUE regarding the use of advertising? I Past performance may be shown in advertising II Prior recommendations may be shown in advertising III Testimonials may be shown in advertising

I only -Under the Investment Advisers Act of 1940, testimonials are prohibited in advertising; and the showing of prior recommendations is prohibited in advertising. However, past performance can be shown in advertising as long as there is an accompanying statement about general market conditions during this period; and a disclaimer is included that "past performance does not predict future results."

Market Capitalization of a company is determined by: I Market value per share II Par value per share III Issued shares IV Outstanding shares

I times IV -Market capitalization of a company is the current market price per share times the number of outstanding shares (issued stock minus treasury stock). The ratings agencies categorize companies by their market capitalization - e.g., micro-cap, small cap, mid-cap, and large cap.

States are NOT permitted to require the registration of a person: I who is excluded from the definition of an investment adviser under the Investment Advisers Act of 1940 II who is registered with the Securities and Exchange Commission as an investment adviser III with no place of business in the State who gives investment advice to fewer than 6 clients who are residents of the state during the preceding 12 months

I, II, III

The Administrator may require a new investment adviser who files a registration application in a State to: I Announce the opening of the advisory firm in the local newspapers II Pass an oral qualification examination III File with the Administrator any advertising or communications to be disseminated to the public

I, II, III -The Administrator can require the passing of an exam (written or oral) as a condition of registration; can require the filing of any advertising; and can require that an opening announcement be published in the local newspapers.

Under the Investment Advisers Act of 1940, which of the following are included in the Form ADV Part 1 filed with the SEC? I A list of the officers of the advisory firm II A list of the shareholders of the advisory firm III The States in which the advisory firm is registered

I, II, III -The Form ADV Part 1 filed with the SEC includes the officers of the firm, the States in which the firm is registered, and if the firm is a partnership, a schedule of the partners' names is included; while if the firm is a stock company (privately held) a schedule of the shareholders in included.

Total Return is an appropriate measure of performance for: I Common stocks II Preferred stocks III Bonds

I, II, III -Total return is the total of income from the investment and capital gains or capital losses on the investment. It is relevant for any security that generates income and that is subject to market risk.

Surety bonds may be required by the State Administrator for the licensing of: I Agents II Broker-Dealers III Investment Advisers IV Investment Adviser Representatives

I, II, III only -The State Administrator can require surety bond coverage for broker-dealers, their agents and investment advisers that wish to register. Note that there is no surety bond requirement for investment adviser representative registration.

Fixed income portfolios are subject to which of the following risks? I Credit risk II Purchasing power risk III Opportunity cost IV Interest rate risk

I, II, III, IV

NASAA has the power to set record retention rules for a State-Registered Adviser that cover which of the following records? I Communications to 2 or more persons II E-mails to clients III Trial balances IV General ledger

I, II, III, IV

Which of the following statements are TRUE regarding defined benefit plans? I Actuarial tables are used to determine contribution rates for each employee II Distributions upon retirement are 100% taxable III Employees with the highest salaries and the fewest years to retirement benefit the most IV Contributions made to the plan can vary from year to year

I, II, III, IV

"Persons", as defined under the Uniform Securities Act, include which of the following? I Joint Ventures II Individuals III Unincorporated businesses IV Municipalities

I, II, III, IV "Persons", as defined under the Uniform Securities Act, include Joint Ventures, Individuals, Unincorporated Businesses, and Municipalities. It is important to know who are defined as "persons", since these entities may then be further defined as "agents" (which can only be individuals), "broker-dealers" (which can be incorporated or unincorporated businesses); or "issuers" (which can be incorporated or unincorporated businesses, joint ventures, municipalities etc.).

Which of the following are deductible from a taxable estate? I Funeral and administrative expenses II Claims against the estate III State death taxes IV Mortgages against real property owned by the estate

I, II, III, IV -A "taxable" estate is one that is valued over $5.43 million -The executor files an estate tax Form 706 for estates where tax is due. When calculating the value of the estate that is taxable, the executor gets to deduct funeral and the executor's administrative expenses, as well as the cost of the estate attorney. Also deductible are any claims made against the estate (for example, unpaid bills) and mortgages on property owned by the estate. Finally, any state estate tax bill (certain states, like New York and California, have a high estate tax - about 10%) is deductible from the federally-taxable estate.

Which of the following are tax preference items included in the Alternative Minimum Tax? I Excess depreciation II Excess depletion III Excess intangible drilling costs IV Private purpose municipal interest income

I, II, III, IV -All of the items listed are "tax preference" items for the Alternative Minimum Tax (AMT) calculation - excess depreciation deductions above straight line; excess intangible drilling cost deductions (IDCs); excess depletion deductions; and non-essential use private purpose municipal interest income.

State "blue sky" laws provide for registration of: I broker-dealers II agents III investment advisers IV investment adviser representatives

I, II, III, IV -State blue sky laws provide for registration of broker-dealers and agents; registration of investment advisers and investment adviser representatives; and registration of securities issues.

The provisions of the Uniform Securities Act include: I Anti-fraud II Common law deceit III Registration of securities IV Registration of broker-dealers, investment advisers, and their agents

I, II, III, IV -The Uniform Securities Act is adopted in each State to prevent fraud in the sale of securities to the public. Aside from the anti-fraud statutes, it also prohibits deceptive practices when offering securities to the public ("common law deceit provisions"). The Act requires that securities offerings be registered in the State (unless an exemption is available); and that broker-dealers, investment advisers, and their agents register in the State (unless an exemption is available).

Under the Uniform Securities Act, which methods of storage are permitted to retain required records? I Microfilm II Microfiche III Digital Storage IV Computer Tapes

I, II, III, IV -The Uniform Securities Act states that any records that must be retained must be kept in compliance with SEC rules on recordkeeping. The SEC updated its recordkeeping rules to allow electronic recordkeeping (but paper records, as well as microfilms or microfiches, are still permitted). Electronic storage is permitted on computer disks, computer tapes, or any other digital storage medium.

The Uniform Securities Act covers: I Registration of securities in each State II Registration of broker-dealers in each State III Registration of investment advisers in each State IV Registration of agents of broker-dealers and investment advisers in each State

I, II, III, IV -The Uniform Securities Act, as adopted in each State, covers the registration of broker-dealers and their agents; investment advisers and their agents; and securities that are sold in the State.

Which of the following are major tax benefits of real estate limited partnerships? I The real estate can be depreciated, even if its market value is increasing II Non-recourse financing is included in the basis III Interest on loans is fully deductible IV Long term capital gains may be achieved when the real estate is sold

I, II, III, IV -The major tax benefits of real estate programs include all of the choices. Once property is ready for occupancy, it can be depreciated over a straight line basis over a 27 1/2 year life (for residential property). Each year, a depreciation deduction is allowed, even if the market value of the property is rising. Non-recourse mortgage financing is included in the basis (real estate is exempt from the "at risk" rule) and increases overall deductions available to the partner. Interest on the mortgage is fully deductible. Finally, when the property is sold, there is the possibility of having a long term capital gain.

The executor of an estate has which of the following fiduciary obligations? I Maintenance of records of transactions involving estate assets II Filing of the will in probate court and filing of tax returns for the estate III Payment of taxes due to State and Federal Governments IV Distribution of assets to beneficiaries of the estate

I, II, III, IV A person that assumes responsibility for managing the assets of another (an estate in this case) is required to carry out his duties with utmost care. The executor must act in the best interests of the estate and must oversee all legal, accounting, investment, and other professionals that render services to the estate. The executor must keep accurate records and must make all appropriate tax filings and payments. Finally, the executor must distribute the remaining assets of the estate to the beneficiaries.

The tax basis for an investor in a limited partnership that establishes the maximum loss deduction includes: I original investment II partnership debt assumed III distributive share of partnership gains IV distributive share of partnership losses

I, II, III, IV An investor in a limited partnership establishes a "tax basis" that sets the limit for permitted tax deductions. The beginning basis is the amount invested, plus that partner's share of any debt assumed by the partnership, For example, if an investor puts down 10,000 and signs a recourse note for 40,000, the investor's beginning tax basis is 50,000. Each year, the basis is adjusted upwards for that partner's share of income earned; and adjusted downwards for that partners share of losses. Thus, the basis keeps changing from year to year.

Under the Securities Act of 1933, signatures will be obtained by which of the following persons involved in an underwriting? I Chief Executive Officer of the issuer II Chief Financial Officer of the issuer III Accountants of the issuer IV Lawyers of the issuer

I, II, III, IV The registration statement is signed by the Officers of the issuer; the Board of Directors of the issuer; and the accountants and lawyers for the issue sign their respective accounting and legal opinions.

To register as an agent or investment adviser in a State, the Administrator can require which of the following? I Agents may have to post a surety bond II Investment advisers may have to post a surety bond III Agents may have to have a minimum amount of net worth or net capital IV Investment advisers may have to have a minimum amount of net worth or net capital

I, II, IV

Which actions taken regarding a universal variable life insurance policy could result in tax liability? I Cash surrender II Partial withdrawal III Loan of up to 95% IV Payout of death benefit

I, II, IV -The only way to get cash out of a variable policy without a potential tax consequence is to borrow against the policy. In general, most "cash value" policies only permit a loan of up to 75% of cash value; but if the policy is fully paid, often the loan amount is raised to 95%

During the annuity period of a fixed annuity, the insurance company assumes which of the following risks? I Mortality II Morbidity III Expense IV Investment

I, III & IV only -In a fixed annuity, the insurance company assumes mortality risk, expense risk and investment risk. •Mortality risk is the risk that the purchaser lives longer than the insurance company expects, and the insurance company is obligated to pay for as long as that person lives. •Expense risk is the risk that the insurance company's expenses increase faster than expected - the insurance company caps the expenses that it can charge against the annuity. If these increase beyond the capped amount, this is the insurance company's problem. •Investment risk is the risk that the insurance company's return on its investments does not keep pace with its payment obligations to fixed annuity holders. If its investments fare poorly, the insurance company does not reduce the amount of the fixed annuity payments. -The insurance company does not assume morbidity (the risk of getting sick), which only applies to various types of health insurance.

Which of the following are exempt securities, or are excluded from the definition of a security, under the Uniform Securities Act? I Common stock of a New York Stock Exchange listed issuer II Common stock of a Canadian mining company III Contracts requiring periodic payments of fixed amounts into fixed annuities IV Endowment contracts

I, III and IV -Common stock of a New York Stock Exchange listed issuer is exempt from registration under State law under the "blue chip" exemption. While Canadian government bonds are also exempt, the issues of Canadian companies are non-exempt and must be registered. Fixed annuities and contracts to buy fixed annuities are not defined as securities. Finally, endowment contracts are excluded from the definition of a security because they are an insurance product and hence, are not registered.

Which of the following items are included as deductible passive losses on the income tax returns of limited partnership investors? I Interest payments on secured debt II Principal payments on secured debt III Intangible drilling costs IV Depletion allowances

I, III, IV -Interest payments on loans, intangible drilling costs (the cost of drilling for oil and gas), and depletion allowances (the recovery of monies paid to buy the oil or gas reserve) are all tax deductible items under the Internal Revenue Code since they are "ordinary and necessary business expenses." Repayment of principal on a loan is not tax deductible.

Excluded from the definition of an investment adviser are

IAR D Prof Publ F Investment adviser representatives; depository institutions; broker-dealers; professionals who only give incidental advice; publishers of general circulation periodicals that do not give investment advice about specific client situations; and federal covered advisers.

The major risks of investing in a Real Estate Limited Partnership (RELP) are: I Interest rate risk II Liquidity risk III Regulatory risk IV Reinvestment risk

II and III

Which of the following statements are TRUE regarding an investment adviser rendering advice solely to an investment company? The investment adviser: I must register with the State II is exempt from registering with the State III must register with the SEC IV is exempt from registering with the SEC

II and III -Advisers that manage $100,000,000 or more of assets; or that render advice to investment companies; or that are not regulated at the State level; must register with the SEC only. These advisers are known as "federal covered" advisers. An investment adviser to an investment company (regardless of the dollar amount) need only register with the SEC; and is exempt from registration in the State. One of main intents of the Investment Advisers Act of 1940 was to register advisers to investment companies and place limits on their compensation.

The sale of a new issue of bonds by an insurance company is: I exempt from registration with the SEC II subject to registration with the SEC III exempt from registration in the State IV subject to registration with the State

II and III -The Securities Act of 1933 exempts insurance company "products" from registration with the SEC - meaning insurance policies and fixed annuities. However, if an insurance company sells its own securities to the public (e.g., common stock, preferred stock or bonds), these are non-exempt securities that must be registered with the SEC and sold with a prospectus. However, insurance company securities are exempt from State registration requirements, because insurance companies are already regulated at the State level by each State Insurance Commission.

A corporation has issued 10% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary market at 8%. Which are TRUE statements about the outstanding 10% issue? I The current yield will be higher than the nominal yield II The current yield will be lower than the nominal yield III The dollar price of the bond will be at a premium to par IV The dollar price of the bond will be at a discount to par

II and III -The bond was issued with a coupon of 10%. Currently, the yield for a similar issue is 8%. Therefore, interest rates have dropped. When interest rates drop, yields on bonds already trading must also drop. What causes this is a rise in the dollar price of the issue - the bond now trades at a premium.

Premiums deposited to a variable annuity contract are invested: I in the insurance company's general account II a separate account III primarily in equity securities IV primarily in fixed income securities

II and III -The premiums paid for either variable life policies or variable annuity contracts are invested in a legally separate entity called a "separate account." The performance of the securities held in the separate account will determine the amount of insurance benefit or annuity payment - so they will vary. The underlying securities are often shares of a designated mutual fund invested in equities. -In contrast, the insurance company's "general account" of investments collects the premiums paid for traditional insurance policies and fixed annuities and invests them to provide a return that will fund these insurance company obligations. If the underlying investments underperform, the insurance company will not reduce the insurance benefit or annuity payments. General account investments are heavily weighted to safer, fixed income securities (bonds and preferred stocks).

Which of the following statements about a 529 plan and a UTMA account are TRUE? I Section 529 plan distributions can be used to pay for qualified educational expenses, but UTMA distributions can only be used to pay for higher education expenses II Section 529 plan contribution and UTMA can be made by high-income taxpayers III Section 529 plans allow rollovers of unused account balances to other family members, but UTMAs do not permit rollovers IV Section 529 plans allow deductions for contributions made, but UTMAs do not

II and III -Whereas funds that are in a 529 plan can only be used to pay for higher education expenses, the assets in a UTMA account can be used for any purpose that benefits the minor. -There are no income phase-out rules for either 529 plans or UTMA accounts. -Only 529 plans allow for rollovers of unused balances to other family members to pay for education expenses - UTMA accounts do not. -Contributions to both 529 plans and UTMA accounts are not deductible.

Investments made prior to annuitization of a variable annuity contract are: I legally owned by the insurance company II legally owned by the purchaser of the contract III held in the general account IV held in the separate account

II and IV

Net capital rules for broker-dealers under the Securities Exchange Act of 1934 set: I Minimum Net Worth amounts II Minimum Liquid Net Worth amounts III Maximum leverage ratios of Debt to Net Worth IV Maximum leverage ratios of Debt to Liquid Net Worth

II and IV -Broker-dealer net capital is the firm's liquid net worth (liquid assets minus all liabilities). It is the money that would be left over if all of the firm's liquid assets were converted to cash and this was used to pay off all liabilities. Minimum net capital amounts for broker-dealers are set under the Securities Exchange Act of 1934. The ratio of debt to net capital is a leverage measure for a broker-dealer, with maximum limits set under the 1934 Act.

Which statements are TRUE about Coverdell Education Savings Accounts? I Contributions are tax deductible II Contributions are not tax deductible III Distributions are taxable IV Distributions are not taxable

II and IV -Contributions to a Coverdell Education Savings Account are limited to $2,000 per year per recipient of the contribution. Contributions are not tax deductible. Earnings in the account build tax deferred and the funds can be withdrawn with no tax due to pay qualified education expenses.

Which statements are TRUE about duration? I The lower a bond's coupon rate, the lower the bond's duration II The higher a bond's coupon rate, the lower the bond's duration III The longer a bond's maturity, the lower the bond's duration IV The shorter a bond's maturity, the lower the bond's duration

II and IV -Duration is a measure of bond price volatility. Bonds with low coupons have large duration numbers; as do bonds with long maturities. These bonds have the most volatile price movements in response to changes in market interest rates. Bonds with high coupons have small duration numbers; as do bonds with short maturities. These bonds do not move much in price as market interest rates move.

An agent tells a customer: "Since I am not registered in your State, I cannot contact you and ask you to buy a security. However, you can call me and ask me to sell it to you, since then I am not soliciting you." Under the Uniform Securities Act: I The agent is soliciting an offer to sell from the customer II The agent is soliciting an offer to buy from the customer III The agent's actions are permitted IV The agent's actions are prohibited

II and IV -If an agent is not registered in a given State, then that agent cannot solicit orders to buy or sell securities in that State. The agent appears to believe that if the transaction is unsolicited, then it is OK to take an order from that customer. However, this exemption only applies to the registration of securities and not to the registration of agents. The agent has attempted to induce an offer to buy (purchase) from the customer. This would be unethical if the agent were not registered in the customer's State.

Which of the following would be defined as an "agent" under the Uniform Securities Act? I A firm that only sells municipal securities of that State to residents of that State II A salesperson who only sells federal covered securities to residents of that State III A wholly owned subsidiary of a bank that is registered as a broker-dealer in the State IV A sales assistant who takes orders from clients when the agent is unavailable

II and IV -To cut through the clutter here, an agent is always an individual, whereas a firm is always a broker-dealer (or an investment adviser). In Choices I and III, the firms are broker-dealers, In Choices II and IV, the individuals are agents who effect securities transactions (it makes no difference if the securities involved are federal covered). Regarding the sales assistant, once he or she takes orders for securities, he or she is an agent.

The Administrator may NOT deny effectiveness to a securities registration if: I the application contains incomplete statements of material fact II an officer of the issuer has previously filed for bankruptcy III the issuer's enterprise is illegal in the State IV the issuer's liabilities exceed assets

II and IV only

Arrange the following in priority of claim in a corporate liquidation: I Unpaid Wages II Secured Bondholders III Subordinated Bondholders IV Debenture Bondholders

II, I, IV, III -In a corporate liquidation, secured bondholders are paid first; then unpaid wages and taxes; then debenture holders; then subordinated bondholders; then preferred stockholders; and finally, common stockholders.

Which of the following are included in the taxable income of a corporation? I Proceeds received from the issuance of common stock II Dividends received from domestic investments III Interest received from foreign investments IV Gain on the sale of a capital asset

II, III and IV

Under the Uniform Securities Act, which of the following are defined as securities? I Mortgages II Mortgage Bonds III Investment Contracts IV Variable Annuity Contracts

II, III, IV -Mortgage bonds are defined as securities; mortgages are not. Investment contracts are defined as securities. -Variable annuities are defined as securities; fixed annuities are not.

403(b) Plans are permitted to invest in which of the following? I Common stocks II Mutual Funds III Fixed Annuities IV Variable Annuities

II, III, IV -The permitted investments are life insurance, fixed annuities, variable annuities and mutual funds. Direct investments in common stocks are not allowed; the investments must be managed by a professional manager.

Which of the following are defined as "portfolio income" under IRS guidelines? I Distributive share of income from limited partnership holdings II Proceeds from the sale of securities in excess of the tax basis of those securities III Interest income received from bond holdings IV Dividends received from preferred stock holdings

II, III, IV Income from partnership interests is defined as "passive income" under IRS rules. Passive income can only be offset by passive losses. Portfolio income consists of dividends, interest, and net capital gains on securities (except for direct participation program interests, which are considered to be passive investments). Portfolio gains can only be offset against portfolio losses.

Which of the following 2 business forms provide a "flow-through" tax benefit and unlimited liability to owners? I C Corporation II S Corporation III General Partnership IV Sole Proprietorship

III and IV Limited liability is only provided by limited partnerships; corporations (whether S or C); and limited liability companies. Sole proprietorships and general partnerships have unlimited liability. Flow-through taxation is provided by S corporations, partnerships, sole proprietorships, and limited liability companies. Thus, the only business entities that provide both unlimited liability and flow-through taxation are general partnerships and sole proprietorships

Which of the following would be defined as "earned income" under IRS regulations? I Social Security payments II Alimony payments III Royalty payments IV Bonus payments

III and IV -Earned income includes wages, salaries, tips, bonuses, royalties for books and self-employment income. Social security payments and alimony payments are "transfer payments" that are taxed at the same rate as earned income, but they are not defined as such.

Which of the following information MUST be included on a customer confirmation? I Whether the transaction was solicited or unsolicited II The exchange where the transaction was effected III The customer name and account number IV The price of execution

III and IV Whether a trade is solicited or not is required on an order ticket, but not on a trade confirmation. The exchange where the trade was effected used to be required on the confirmation, but this is no longer the case because all markets are linked and trades must be done at the best price in a given market or routed to the better-priced market for execution. The customer name, account number, size of the trade, price of execution, and any commission charged must all be on the confirmation

Which statement is true regarding dollar cost averaging? A. If market prices remain constant, the plan will produce a lower average per share cost B. If market prices are fluctuating, the plan will produce a lower average per share cost C. If prices rise, smaller dollar purchases must be made; while if prices fall, larger dollar purchases must be made D. The plan requires that a constant dollar amount be maintained in equity securities, with any excess invested in debt

If market prices are fluctuating, the plan will produce a lower average per share cost -Dollar cost averaging requires that an investor make periodic payments (say monthly) of a fixed dollar amount (say $100 per month) to buy a given security. If the price of the security is fluctuating, the average purchase cost per share will be lower for the investor than the simple mathematical average price of the shares over the same period. Dollar cost averaging does not work if the price of the stock remains fixed, nor does it protect against loss in a falling market.

A 4% coupon bond is being offered on a 3% basis. If interest rates for similar bonds rise above 3%, the basis for this bond will: A. increase B. decrease C. be unaffected D. be volatile

Increase A basis quote is a yield to maturity quote. If market yields are rising, the basis quote will rise, forcing the bond's price down. If market yields are falling, the basis quote will fall, forcing the bond's price up

An older female customer, in the lowest tax bracket, wants an investment that will provide asset growth for retirement. The BEST recommendation would be: A. Emerging markets fund B. Single stock C. Municipal bond D. Index fund

Index Fund

Dollar Weighted Average Return is the same as

Internal Rate of Return -Dollar weighted average return is most often used when evaluating a specific investor's mutual fund return. It is the return achieved, accounting for the timing of all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor's deposits and withdrawals. Because investors often "chase" past performance, they will buy a fund "too late" (after the fund has posted its best performance and now enters a period of lesser performance) and will sell "too soon." Thus, for the individual investor, dollar weighted average return is often lower than time weighted average return -In contrast, time weighted average return is the measure used for mutual fund performance charts (Total Return, which shows dividends and capital gains as continually reinvested). It reflects the growth that would be achieved from a 1-time investment into the fund and then holding that investment over time - this is a buy and hold strategy. This method is consistent when comparing one fund's performance to another fund's performance.

Which statement concerning the AIR of a variable annuity contract is TRUE? A. It is the insurer's best estimate of the future performance for accumulated income retained in the separate account B. It applies during the accumulation period C. It must be adjusted annually for inflation D. It applies only during the annuity period

It applies only during the annuity period -AIR refers to the assumed interest rate used to determine the initial monthly payment to the annuitant - it is set when the contract is annuitized and only applies during the annuity period. Once the first annuity payment is made based on the chosen AIR, if the earnings in the separate account are greater than the AIR, the next payment increases. If the earnings in the separate account are less than the AIR, the next payment decreases. The AIR has no meaning during the accumulation period. Also note that the prospectus has an "AIR Illustration" that is an estimate of the annuity to be paid based on a conservative growth estimate, but the actual AIR is not set until the contract is annuitized.

Which of the following is prohibited in an advisory contract under NASAA rules? A. Custody Provision B. Liquidated Damages Provision C. Non-Assignment Provision D. Discretionary Authority Provision

Liquidated Damages Provision -A "liquidated damages provision" in an advisory contract would state that if the customer suffers a loss, the adviser is responsible. This is no different than a prohibited guarantee against loss and thus is not permitted. Advisory contracts can permit the adviser to take custody (unless that State prohibits this); must have a non-assignment provision, which means that the contract cannot be assigned to another investment adviser without customer consent; and can give the adviser discretion over the customer's account.

Which ratio would be used to measure the financial leverage of a broker-dealer?

Loans to Net Capital -"Leverage" is the use of debt in the capital base of a business. The standard measure of leverage for a business is the Debt to Equity ratio. For a broker-dealer, equity is often measured by the firm's "liquid" equity, called net capital. It is the money that would be left over if all of the firm's liquid assets were converted to cash and this was used to pay off all liabilities. The ratio of debt to net capital would be a leverage measure for a broker-dealer.

When comparing the Alternative Minimum Tax calculation to the Regular income tax calculation, which deduction is permitted in BOTH the AMT calculation and the Regular income tax calculation?

Medical expense deduction

An insurance company that sells an Equity Indexed Annuity (EIA) would use any of the following methods to credit the change in investment value EXCEPT: A. Annual reset B. Point-to-point C. High-water mark D. Moving average

Moving Average -Assume that a client buys an EIA that is based on a 7-year return. The "point-to-point" method compares the index value at purchase date to the value at the end date, 7 years later. Any value fluctuations that occur in-between the 2 measurement dates are irrelevant. Another common valuation method is the "annual reset" method, which would measure the return achieved each year over a 7-year life and add interest to the annuity based on the annual reset. The "high water mark" method looks at the index value yearly as of the anniversary date of purchase, and bases the interest added on the highest index value over the product life (7 years in our example) versus the value at the date of purchase

Which of the following is NOT included in Adjusted Gross Income (AGI)? A. Alimony B. Municipal Interest Income C. Pension Payments D. Dividends

Municipal Interest Income -Municipal interest income is exempt from Federal income tax and is excluded from AGI on the Federal tax return. Alimony payments received are taxable (they are deductible to the maker of the payment). Pension payments received are taxable. Dividends received as taxable as well, but at lower tax rates than ordinary income.

Which investment offers tax benefits? A. Municipal bond funds B. REITs C. International Funds D. Index Funds

Municipal bond funds -Municipal bonds funds offer interest income that is free of federal income tax and free of state and local income taxes when purchased by a resident of that state. Thus, they offer a tax benefit. REITs, International Funds, and Index Funds do not offer an exemption from federal income taxation on either interest or dividend income that is distributed to shareholders.

Which of the following is EXEMPT from the requirement to register as an investment adviser in a State? A. Federal covered adviser B. Investment adviser representative C. Trust company D. Person with no place of business in the State who renders advice solely to Federal covered advisers

Person with no place of business in the State who renders advice solely to Federal covered advisers -This is a very picky question that sees if you know the difference between an exclusion and an exemption. Excluded from the definition of an investment adviser are investment adviser representatives; depository institutions; broker-dealers; professionals who only give incidental advice; publishers of general circulation periodicals that do not give investment advice about specific client situations; and federal covered advisers. Exempt from registration as an investment adviser (meaning these are defined as investment advisers but they do not have to register in the State) is any person with no place of business in the State whose only clients are: other advisers; federal covered advisers; broker-dealers; deposit taking institutions; insurance companies; investment companies; employee benefit plans with assets of at least $1,000,000; and governmental agencies. Also exempt from registration as an investment adviser is any person that has no place of business in the State that has 5 or fewer clients in the State in the past 12 months.

An insurance company that sells an Equity Indexed Annuity (EIA) would use which method to credit the change in investment value? A. Breakeven B. Point-to-point C. Monte Carlo D. Moving average

Point-to-point -EIAs base the annuity payments on the performance of a broad-based index, such as the S&P 500 Index. However, the return is capped and there is a minimum guaranteed return, regardless of the performance of the index. The most common methods of measuring index performance are the: Point-to-point method; Annual reset method; and High-water-mark method. Assume that a client buys an EIA that is based on a 7-year return. The "point-to-point" method compares the index value at purchase date to the value at the end date, 7 years later. Any value fluctuations that occur in-between the 2 measurement dates are irrelevant. Another common valuation method is the "annual reset" method, which would measure the return achieved each year over a 7-year life and add interest to the annuity based on the annual reset. The "high water mark" method looks at the index value yearly as of the anniversary date of purchase, and bases the interest added on the highest index value over the product life (7 years in our example) versus the value at the date of purchase.

Transactions that violate the Uniform Securities Act are voidable at the option of the:

Purchaser -Transactions that violate the Act are voidable by the purchaser. The seller is obligated under civil liabilities to pay the investor the original cost of the securities plus 6% interest.

During the annuity period of a fixed annuity, the insurance company assumes all of the following risks EXCEPT: A. Purchasing Power Risk B. Mortality Risk C. Expense Risk D. Investment Risk

Purchasing Power Risk In a fixed annuity, the insurance company assumes mortality risk, expense risk and investment risk. •Mortality risk is the risk that the purchaser lives longer than the insurance company expects, and the insurance company is obligated to pay for as long as that person lives. •Expense risk is the risk that the insurance company's expenses increase faster than expected - the insurance company caps the expenses that it can charge against the annuity. If these increase beyond the capped amount, this is the insurance company's problem. •Investment risk is the risk that the insurance company's return on its investments does not keep pace with its payment obligations to fixed annuity holders. If its investments fare poorly, the insurance company does not reduce the amount of the fixed annuity payments to be made. -With a fixed annuity, the purchaser assumes purchasing power risk - the risk of inflation. If there is inflation, the monthly annuity payments do not increase, so the annuitant's purchasing power declines over time.

A partner in an investment advisory firm that has been accredited as a Chartered Financial Analyst may use all of the following descriptive terms on his or her business card EXCEPT: A. Managing Partner B. Investment Counsel C. Chartered Financial Analyst D. Registered Investment Adviser

Registered Investment Adviser -Since this individual is a partner in an advisory firm, he or she can use the title "Managing Partner" on a business card. Since this individual has passed the CFA exam, the business card can say "Chartered Financial Analyst." The term "Investment Counsel" is permitted as long as this is the firm's primary business - and this is an investment advisory firm. However, the term Registered Investment Adviser can't be used because it is the "firm" that is the RIA; not the individual associated with the firm.

All of the following are defined as "portfolio income" under IRS guidelines EXCEPT: A. Dividends received from common stock holdings B. Interest income received from bond holdings C. Proceeds from the sale of securities in excess of the tax basis of those securities D. Royalties received from oil and gas limited partnership holdings

Royalties received from oil and gas limited partnership holdings -Income from partnership interests is defined as "passive income" under IRS rules. Royalties from oil and gas limited partnerships are thus "passive income". Passive income can only be offset by passive losses. Portfolio income consists of dividends, interest, and net capital gains on securities (except for direct participation program interests, which are considered to be passive investments). Portfolio gains can only be offset against portfolio losses.

A client of an investment adviser wishes to invest in an index which consists of small capitalization issues. The investment adviser would recommend the: A. Dow Jones Averages B. Value Line Index C. Wilshire Index D. Russell 2000

Russell 2000 -The Russell 2000 index consists of 2,000 small capitalization issues. The Value Line Index consists of some 1,700 stocks followed by the Value Line Investment Survey, spread among NYSE, AMEX (NYSE-MKT) and NASDAQ issues. The Dow Jones Averages consists of 30 industrials, 20 transportation and 15 utilities. The Wilshire Index consists of about 6,000 issues of companies headquartered in the United States that are listed on the NYSE, AMEX (NYSE-MKT), or NASDAQ.

Rule 147 offerings under the Securities Act of 1933 are exempt from: A. SEC registration B. State registration C. Both of the above D. Neither of the above

SEC registration - Rule 147 under the Securities Act of 1933 exempts intrastate offerings from SEC registration - since the transaction never crosses a State line, the SEC does not have jurisdiction. However, such an offering must still be registered in that State.

Broker-dealer registration is required under: A. the Securities Act of 1933 B. Section 10 of the Securities Exchange Act of 1934 C. Section 15 of the Securities Exchange Act of 1934 D. the Investment Advisers Act of 1940

Section 15 of the Securities Exchange Act of 1934 -Section 15 of the Securities Exchange Act of 1934 covers broker-dealer rules, including registration.

"An investment in a common enterprise for profit, with management provided by a third party" is the definition for a(n):

Security

_____ measures the incremental investment return that is achieved for assuming incremental risk.

Sharpe Ratio

Any final order of an Administrator may be appealed to the: A. Securities and Exchange Commission B. State Securities Commission C. State Superior Court D. Federal District Cour

State Superior Court

Which of the following is disclosed in Form ADV Part 1? A. Investment policies of the adviser B. Type of investments made by the adviser C. Investment practices of the adviser D. States in which the adviser is registered

States in which the adviser is registered -The ADV Part 1 is the basic registration information filed with the SEC - such as name of firm, address, phone number, officers, shareholders, States where the adviser is registered, etc. - The ADV Part 2 is broken down into 2 parts. Part 2A is the "Brochure" that must be delivered to customers. It describes the investment adviser's policies, fees, educational, types of investments, types of clients, method of analysis used, conflicts of interest, etc. Part 2B is the "Brochure Supplement" which details the educational and work background of the key personnel who make investment decisions or manage accounts

The "generally recognized" asset classes for investment are:

Stocks; Bonds; Cash; Real Estate; and Commodities.

Changing the mix of a portfolio that has been structured to meet specific financial goals is called: A. Strategic allocation B. Tactical allocation C. Rebalancing D. Risk adjustment

Strategic Allocation -Strategic portfolio management is the determination of the percentage allocation to be given to each investment vehicle within an asset class - for example a portfolio might be strategically allocated as follows: Money Market Instruments 10% Corporate Bonds 30% Large Cap Equities 50% Small Cap Equities 10% Changing these percentages as conditions change is part of ongoing strategic asset management. Tactical asset management is the permitted variance within each allocation percentage. For example, Large Cap equities are allocated 50%, but the manager may be tactically allowed to lower this percentage to, say, 40% or raise it to 60%. Thus, if the manager believes that Large Cap equities will underperform the market, he or she can lower the allocation to 40%; and if the manager believes that they will outperform the market, he or she can raise the allocation to 60%. This gives the manager some ability to "time the market" when conditions are overbought or oversold.

Strategic portfolio management is the selection of the: A. securities in which to invest B. asset classes in which to invest C. target asset allocation for each asset class selected for investment D. variation permitted in target asset allocation for each asset class selected for investment

Strategic asset allocation is the determination of the target percentage to be allocated to each asset class (e.g., 50% Debt; 50% Equities) and then to the investment vehicles within that asset class (e.g., the 50% Debt allocation might be invested 25% in Treasury Bonds and 25% in Corporate Bonds). Tactical asset allocation is the permitted variation around each of the chosen percentages - for example, even though Equities are targeted at 50%, this might be allowed to be dropped to as low as 40% or as high as 60%, depending on market conditions.

At the initial discussion phase with a customer about portfolio planning, which of the following is NOT necessary? A. Testamentary letter B. Listing of customer brokerage accounts C. Life insurance coverage held by the customer D. Listing of assets owned by the customer

Testamentary letter -A "testamentary letter" is a will (as in "last will and testament"). This is not needed to start an asset allocation plan for a customer. A listing of the customer's existing brokerage accounts would certainly be useful; as would a listing of assets owned by the customer, and the life insurance coverage maintained by the customer.

An investment adviser representative has been retained by an estate to manage the estate's financial assets until they can be distributed to the beneficiaries. The account holds the following positions: $8,000,000 ABC Corp. Common Stock $1,000,000 APEX Money Market Fund $1,000,000 XYZ Long-Term Bonds Over past year, the XYZ bond position has appreciated by 30% due to falling interest rates. Also because of falling interest rates, the equities market over the past year has been extremely bullish and the ABC common stock position has appreciated by 50%. If the IAR believes that the market is peaking, the IAR should do which of the following? A. The IAR should not sell either of the appreciated portfolio positions because this would subject them to capital gains tax B. The IAR should sell the common stock position which will not result in a taxable capital gain and reinvest the proceeds into the APEX money market fund C. The IAR should sell the long term bond position which will not result in a taxable capital gain and reinvest the proceeds into the APEX money market fund D. The IAR may either hold or sell either of the appreciated investment positions using the prudent investor rule as a guideline

The IAR should sell the common stock position which will not result in a taxable capital gain and reinvest the proceeds into the APEX money market fund -One of the advantages built into estate taxes is that the assets are valued at market value as of date of death, and if there was any asset appreciation, this is not taxed as capital gains (this is called a "stepped up" basis). The goal of the IAR is to maximize investment returns using a time horizon of a maximum of 9 months (which is when estate tax is due). Because the IAR believes the market is peaking, he or she should sell the appreciated equity position (it has risen a lot!), locking in the gain without any capital gains tax due. Choice C is also a good answer, but Choice B is better because the IAR should lock in the bigger gain (the sale of both appreciated assets is not offered as a choice - if it were, it would be the winner). Choice D seems good and it also mentions "prudent man" - but the fact is that the greatly appreciated stock position should not be held if the IAR believes that the market is peaking. If the position were to be held untouched, it could lose a lot of its value in a falling market, and this is hardly the action that a "prudent man" would take.

Which of the following statements is TRUE regarding an investment adviser that solely follows and recommends NYSE listed securities?

The adviser is subject to either State or Federal registration depending upon the amount of assets under management -There is no exemption from registration for an investment adviser that follows only listed securities, at either the State or Federal level. The adviser must be registered in the State if it manages assets of less than $100,000,000; and if the adviser manages assets of $100,000,000 or more, it must register with the SEC.

An agent of a broker-dealer is effecting non-exempt transactions through a private investment firm owned by his friend. The arrangement has been approved by the broker-dealer, who is not recording the transactions because they are being recorded on the books of the private investment firm. Why is the agent permitted to do this? A. The agent is permitted to do this because the securities involved are non-exempt B. The agent is permitted to do this because the broker-dealer gave approval C. The agent is permitted to do this because an agent is free to engage in securities transactions with any employer once that agent is licensed D. The agent is permitted to do this because the private investment firm is not subject to the provisions of the Investment Company Act of 1940

The agent is permitted to do this because the broker-dealer gave approval An agent is only associated with the broker-dealer with whom he or she is registered. If an agent were to sell securities through another firm, that agent is "selling away" from his or her firm. In order to "sell away," the agent must get permission of his or her firm and also would be required to register as an agent of the "private investment firm." This is so-called "dual registration" - though this is not addressed in the question. The other choices pretty much make no sense!

Which statement is FALSE regarding registration and licensing requirement for broker-dealers and investment advisers in a State? A. A broker-dealer with no place of business in a State that solely offers securities to non-institutional customers must register B. A broker-dealer with no place of business in a State that solely offers municipal securities must register C. An investment adviser with no place of business in a State that only deals with institutional customers must register D. An investment adviser with no place of business in a State that offers its services to a limited number of non-institutional customers must register

The best answer is C. An investment adviser with no place of business in a State that only deals with institutional customers must register Choice A is true - a broker-dealer with no place of business in a State that deals with non-institutional clients in the State (this means the general public) must be registered in the State. Choice B is true - a broker-dealer with no place of business in a State that solely offers exempt securities must also register, as must its agents. "Exempt" only means that the securities being offered are exempt from State registration - the broker-dealers and agents that sell exempt securities must still be registered in the State. Choice C is false - an investment adviser with no place of business in a State that only deals with institutional clients is EXEMPT from registration. If the adviser with no office in the State offers its services to the general public in the State, then it must register. Choice D is true - an adviser with no place of business in a State that offers its services to no more than 5 prospective customers in the State within a 12 month period is exempt from registering (the de minimis exemption).

All of the following are deductible from a taxable estate EXCEPT: A. Funeral and estate administrative expenses B. Claims against the estate and mortgages against real property owned by the estate C. State death tax liability D. The difference between cost basis and fair market value for depreciated assets owned by the estate

The difference between cost basis and fair market value for depreciated assets owned by the estate -A "taxable" estate is one that is valued over $5.43 million (in 2015 - the limit is adjusted for inflation annually). The executor files an estate tax Form 706 for estates where tax is due. When calculating the value of the estate that is taxable, the executor gets to deduct funeral and the executor's administrative expenses, as well as the cost of the estate attorney. Also deductible are any claims made against the estate (for example, unpaid bills) and mortgages on property owned by the estate. Finally, any state estate tax bill (certain states, like New York and California, have a high estate tax - about 10%) is deductible from the federally-taxable estate. All assets in the estate are valued at fair market value at the time of death. There is no calculation of capital gain or capital loss within the estate.

A broker-dealer holds a sales contest that will award a $3,000 trip to Europe to the registered representative in the firm that sells the highest dollar value of mutual funds during the month of September. Which statement is TRUE? A. The holding of a mutual fund sales contest is permitted under NASAA rules B. The holding of a mutual fund sales contest is only permitted if the customer is offered a sales charge reduction C. The holding of a mutual fund sales contest is prohibited because it violates the Anti-Reciprocal rule D. The holding of a mutual fund sales contest is prohibited unless the winner receives a prize that has educational value about securities

The holding of a mutual fund sales contest is permitted under NASAA rules -A broker-dealer can hold a mutual fund sales contest for its representatives. Note that the winner will also have the "prize" reported to the IRS as taxable income.

Under the Investment Advisers Act of 1940, which statement is TRUE regarding an investment adviser's registration renewal?

The investment adviser's registration is renewed annually by filing an electronic amendment to Form ADV Part 1 and Part 2, if there are any changes to the Brochure -The investment adviser's registration is renewed annually; and is accomplished by filing an electronic amendment to Form ADV Part 1 and also Part 2 (the Brochure) if there are any changes, within 90 days of the adviser's fiscal year end. To withdraw from registration, Form ADV-W is filed.

Each of these investments is returning $3,000 over a 3-year time frame. Net present value discounts these annual cash flows to today's value (the reverse of compound interest). Using net present value, the investment that returns the cash earlier is more valuable - choice D. To illustrate this, assume that the market rate of interest is 10%.

The net present value of choice A's cash flows is: Year 1 Year 2 Year 3 $500 (1.1) + $1,000 (1.1)^2 + $1,500 (1.1)^3 = $500 1.1 + $1,000 1.21 + $1,500 1.331 = $2408 The net present value of choice D's cash flows is: Year 1 Year 2 Year 3 $1,500 (1.1) + $1,000 (1.1)^2 + $500 (1.1)^3 = $1,500 1.1 + $1,000 1.21 + $500 1.331 = $2566

A salesperson is offering promissory notes for a company selling coffee at drive-through kiosks. The notes pay a 13% interest rate and mature within 9 months. The salesperson tells a potential investor that the notes are "risk-free" and that the kiosks are collateral that secure the note. The salesperson is not registered in the State and the notes are not registered in the State. Which statement is TRUE? A. There is no requirement for the promissory notes to be registered in the State because they are exempt securities due to the fact that their maturity does not exceed 9 months B. The offer is a violation of State law because the salesperson must be registered or licensed in the State and the promissory notes must be registered in the State C. The offering is fraudulent because the notes pay a rate of interest that is higher than the legal maximum rate permitted under State law D. The offering is a violation of State law because the promissory notes are an unsecured obligation that cannot be backed by collateral

The offer is a violation of State law because the salesperson must be registered or licensed in the State and the promissory notes must be registered in the State -Legitimate promissory notes are marketed to sophisticated, corporate investors that have the ability to thoroughly research the company issuing the notes and determine whether the issuer will be able to repay principal and interest. However, there have been many instances of "promissory note fraud" where unlicensed individuals push bogus promissory notes that are sold as investments that offer above-market fixed interest rates and safeguarding of principal - and most of these are frauds. This is a major concern to State regulators. To offer a promissory note, both the salesperson and the note must be registered in the State. Only promissory notes that have maturities of 9 months or less, that are investment grade, and that are sold in minimum increments of $50,000 are exempt from State registration. Thus, smaller note offerings (under $50,000 amount) to smaller investors are non-exempt and must be registered; and unrated note offerings or non-investment grade rated note offerings must also be registered in the State.

Which statement is TRUE about ERISA's fiduciary requirement? A. There is no requirement to appoint a plan fiduciary as long as the plan assets are held in trust B. The plan fiduciary is a person who exercises control or discretion over the plan C. There can only be one plan fiduciary named in the plan document D. The fiduciary has a dual obligation to act in the interests of the plan sponsor and the plan beneficiaries

The plan fiduciary is a person who exercises control or discretion over the plan -ERISA requires that a fiduciary be named in each plan document. The plan fiduciary is a person who exercises control or discretion over the plan. There can be multiple plan fiduciaries - for example, the plan trustee, investment adviser(s) and those individuals that exercise discretion in the administration of the plan are all fiduciaries. The fiduciaries can only act in the best interests of the plan participants - the beneficiaries.

What is the real rate of return?

The rate of return adjusted by the inflation rate -Any "real" rate of return factors out the effect of inflation. Thus, the real rate of return is the actual rate of return - the current inflation rate.

What is the trading characteristic of a Fixed UIT? A. They trade on exchanges like any other stock B. They are securities which are redeemable with the sponsor C. The sponsor makes an OTC market in trust units D. The securities are illiquid and cannot be traded

The sponsor makes an OTC market in trust units -Fixed Unit Investment Trusts are investment company securities that are initially sold with a prospectus at the POP. Thereafter, the sponsor makes a market in trust units, and will buy back trust units from investors that wish to get out of them. The sponsor will then resell these "used" trust units for their remaining value to other investors. Also note that in the prospectus, the wording covering this typically goes "the sponsor currently makes a market in trust units and intends to continue making a market in trust units, but is under no obligation to make a market in trust units."

A broker-dealer is a subsidiary of a company that is listed on the New York Stock Exchange. An agent of the broker-dealer believes that the parent company's stock is a good investment and wants to recommend it to her customers. Which statement is TRUE about this?

This is permitted only if the agent discloses the existence of the relationship verbally when making the recommendation and it is disclosed in writing on the confirmation -This question does not address reality! As an internal policy, most broker-dealers prohibit their agents from recommending the stock of their publicly traded parent company - because of the inherent conflict of interest. For example, an agent for Merrill Lynch cannot recommend the purchase of Bank of America stock (B of A owns Merrill). -However, let's move to the theoretical and, evidently, the test world. This is a conflict of interest that must be disclosed to clients when making a recommendation. The existence of the relationship must be disclosed verbally when making the recommendation; and also must be disclosed in writing prior to completion of the transaction (this is done by disclosing it in writing on the trade confirmation).

The adviser is really charging 2 layers of management fees for providing a single service of managing the customer's investment portfolio.

This is unethical. Note that if the adviser is truly providing 2 separate services (e.g., receiving the management fee and also receiving brokerage commissions on trade executions), there can be 2 separate charges, as long as this is disclosed in writing to the client.

A car dealership located in State A has been experiencing a period of slow sales and wants to increase business. The general manager wants to do the following promotion: "Buy a new car from us and we will give you 100 shares of our parent company's stock." Which statement is TRUE about this promotion? A. This promotion constitutes an offer to sell securities in the State B. This promotion does not constitute an offer to sell securities because no payment is being made for the securities C. This promotion does not constitute an offer to sell securities because car dealerships are only subject to State franchise laws, not State securities laws D. This promotion is illegal and unethical under State law

This promotion constitutes an offer to sell securities in the State -In this example, the securities are being given as an inducement to get the customer to buy a car. This is not a gift, since the payment made for the car includes a component for the value of the securities. An offer of securities is being made. The car dealer is viewed as an agent acting for the issuer of these securities, and registration with the State is required (unless an exemption is available).

X= 72/Rate of Return is the

Time necessary to double an investment value -This is the formula for the "Rule of 72." This is a "rule of thumb" method to determine how long it takes to double one's money. By dividing the rate of return earned on an investment into 72, the length of time needed to double one's investment value can be roughly determined.

Which of the following is the MOST appropriate investment for an estate account?

Treasury Bills -The objective of an estate account is to preserve principal and to effect a timely distribution of estate assets. The best investment of the choices offered is Treasury Bills - they are liquid and have little market risk. Long term bonds (the 3 other choices), even if they are liquid and safe, are subject to substantial market risk.

Which of the following investments has a known long-term internal rate of return? A. Low grade 7% corporate bond B. Investment grade 5% municipal bond C. Treasury STRIP D. GNMA Pass-Through Certificate

Treasury STRIP -The internal rate of return is the implicit yield to maturity that an investment returns. Securities that have a fixed coupon rate make periodic payments to the holder. These must be reinvested at the same yield as the investment is returning over its life, in order for the yield not to be affected by "reinvestment risk." For example, if a person buys a 10% 20-year bond at par, and over the life of the investment, interest rates are declining, then the rate of return earned on the reinvested interest payments will decline below the 10% that the security is yielding. The compounded rate of return on the investment will fall below 10% in such a case. If one buys a 20-year zero-coupon bond (a Treasury STRIP is "stripped" of coupons and is a zero-coupon obligation), the implicit yield of the investment is "locked in" at purchase and is not affected by reinvestment risk since periodic interest payments are not being made. The interest rate that discounts the redemption price (Par) to the discounted purchase price is the implicit yield of the investment; and is the same as the internal rate of return of the investment. -For example, assume that a 3-year $1,000 par zero-coupon bond can be purchased for $751.31 today. The internal rate of return on this investment is 10%, and will not change over the 3-years that the bond is held. •After the first year, the bond will be worth $751.31 (1.1) = $826.44. •After the second year, the bond will be worth $826.44 (1.1) = $909.09. •After the third year, the bond will be worth $909.09 (1.1) = $1,000.

The Administrator is permitted to modify the Uniform Securities Act in his or her State, and thus, can change any "exempt" transaction. However, the Administrator cannot change the exemption from registration given to the securities specified as exempt under the Act, such as

U.S. Government or municipal bonds.

A customer wants to buy permanent life insurance. He has no desire to participate in the market and may have additional money to add to premiums in the future. The best recommendation for this client is: A. Term life B. Whole life C. Variable life D. Universal life

Universal Life -With a universal life insurance policy, the policy owner can change the schedule of premium payments. After the cash value increases, the owner can skip a premium payment or the policy owner can use the cash value to buy additional insurance. The cash value is not invested in equities, but is invested in the insurer's general account. Any cash value policy is "permanent insurance" - the insurer cannot choose to "non-renew" the policy as long as the premiums are paid. Whole life offers a fixed death benefit that is guaranteed for the insured's entire life. Term life has low premiums for young insured individuals, but the premiums increase with each renewal as that person ages. In addition, it is not permanent insurance - the insurance company can choose to renew; or can choose not to renew, at the end of the term policy's life.

A public company has high cash reserves that are set aside in a "rainy day" fund. The company has a price-earnings ratio of 6:1 while its industry group has a price-earnings ratio of 12:1. The common stock of this company would be classified as: A. blue chip B. growth C. value D. bellwether

Value -A value stock is one that offers good "value." These are companies that are "undervalued" as measured by low price-earnings ratios and low price to book value ratios (a company with a lot of cash and a lower-than-industry-average stock price will have a low price to book value ratio.) The "idea" is that the market will realize that these companies are "undervalued" and their prices will rise accordingly. Blue chip stocks are established industry leader stocks with large market capitalizations; strong management; and strong profitability in good times or bad. A bellwether stock is one that leads its industry segment. A growth stock is one that has higher-than-average growth and a high price-earnings ratio to go along with that.

An adviser is creating a financial plan for retirement using a capital needs approach. Which type of insurance policy would be recommended as part of the plan?

Variable Life -A "capital needs analysis" determines the amount of capital that a person needs to have at retirement in order to meet their anticipated standard of living. Most people need less income in retirement than at other stages of life. A "typical" capital needs analysis might project that to retire comfortably in, say, 20 years, an individual will need 75% of his or her current income level. Then the plan looks at the sources of retirement income that the individual will have 20 years in the future (e.g., social security, retirement plan income, annuity income) and subtracts it from that need. The shortfall (if any) is the income that must be "made up." -Then the plan looks at that individual's current investment holdings, house value, other asset holdings such as variable annuity or whole life policies, and projects their likely growth 20 years hence. After subtracting loans against these assets, the net equity is the asset base that can be used to generate income in retirement to meet any shortfall. Finally, the plan determines the additional investments, if any, that must be made over the next 20 years to offset the current shortfall. -Thus, a capital needs analysis is really looking at the future value of a client's current asset holdings; versus what they will really need as an asset base at retirement at a future date; to support their retirement standard of living. -When recommending investments for capital needs 20 years down the road, an adviser will most likely recommend a variable life policy or variable annuity, since their expected growth is greater because the premiums are invested in a separate account holding an equity mutual fund. A regular insurance policy (term, whole, or universal life) invests premiums in the general account, where only very conservative investments (fixed income) are made.

Which of the following insurance products is developed from the basic design of the whole life insurance policy?

Variable Life -Variable life policies are similar to whole life in that they: •are permanent insurance policies; •have fixed annual premiums: •have an investment component that builds cash value against which owners may take policy loans. -A variable life insurance policy is a whole life product. Like a whole life policy, the VLI policy has a fixed minimum death benefit. The death benefit for a variable life policy will also vary upwards above the minimum if the separate account performs well. A variable life policy has a fixed annual premium like a whole life policy.

Whole life insurance protects the purchaser from increasing premiums as that person ages, and there are no renewals - the policy is good for that person's "whole" life. With a whole life policy, the annual premium is level, and will start out higher than a term life policy. Part of the premium is invested in the insurance company's general account and is guaranteed to grow at a fixed rate. As the general account investment portion grows, the policy builds "cash value" that can be borrowed. Any borrowed funds reduce the benefit payment upon death.

Variable life invests premiums in a separate account and typically invests in equities, whereas both whole life and universal life invest premiums in the general account, which must be heavily invested in fixed income securities

Under the Uniform Securities Act, which of the following securities is non-exempt?

Warrants issued by industrial corporations -Under State law, senior securities (bonds and preferred stock) and "equal" securities (warrants or rights) of companies already listed on a recognized stock exchange are exempt. This is termed a blue chip exemption. Also note that the securities of issuers listed on the major exchanges (NYSE, AMEX (NYSE-MKT) and NASDAQ) are now federal covered securities and cannot be required to be registered in the State. -Securities of issuers subject to ICC regulation (common carriers) are exempt. Issues of banks and savings and loans are exempt (these are regulated by the State banking laws).

Net Present Value discounts the projected cash flows from an investment using the current market interest rate. The initial cash flow is negative - the price paid for the security. The ensuing cash flows are positive - the semi-annual interest payments received over the next 10 years and the final principal repayment of $1,000 (par) to be received at maturity in 10 years.

When all of these cash flows are discounted by the market rate of return, if the net present value is +, which is positive, then the investment should be made. If the net present value is -, which is negative, then the investment should not be made. Volatility has nothing to do with the NPV calculation.

State registration of a security registered by qualification becomes effective: A. when the Administrator so determines B. when the SEC registration becomes effective C. 10 business days after filing D. 20 calendar days after filing

When the administrator so determines -Registration by Qualification is the most difficult method of registering securities in a State. It is used when an issuer is not registering securities with the SEC and is doing its first time registration in the State. The State knows nothing about the issuer, so it must "qualify" to register securities in the State and the registration is effective only when the Administrator so determines. In contrast, Registration by Coordination "coordinates" an SEC registration with the State registration and the State registration is effective when the SEC registration is effective. Finally, the last registration method - Registration by Filing - can be used by issuers that are either doing SEC filings or by issuers that have previously registered issues in the State. Registration by filing generally becomes effective 5 business days after the filing is completed.

Which type of insurance provides a guaranteed cash value?

Whole Life Insurance -The insurance company guarantees the cash value for a whole life policy and includes this guaranteed amount in a schedule in the policy. Term insurance has no cash value. The cash value of variable and variable universal life depends upon the results of the separate account investments, which are not guaranteed.

A capital needs analysis is performed in order to determine the: A. amount of life insurance that should be purchased to meet a future financial goal if the client should die prematurely B. liquid net worth of the client, which represents funds that are available for current investment C. minimum net capital required by a client that wishes to start a business D. income level needed by a customer to have a comfortable retirement

amount of life insurance that should be purchased to meet a future financial goal if the client should die prematurely -The formal name for the determination of a customer's financial goals is a "capital needs" analysis. It is most often used when determining the amount of life insurance that a person should purchase based on the "capital needs" of the surviving family members. It is also used in financial planning to determine the amount of money needed for such capital needs as a kid's college education or the amount of money (capital - not income, so Choice D is incorrect) that must be accumulated by retirement to be comfortable.

Which of the following stocks would be considered cyclical? A. automobile manufacturer B. pharmaceutical manufacturer C. gold mining company D. computer software developer

automobile manufacturer -The performance of cyclical stocks follows the business cycle. In times of GDP expansion, they do well; in times of recession, they do poorly. The classic cyclical stocks are home building, automobile manufacturers and durable goods producers. All of these purchases are deferrable in hard times. Pharmaceutical companies are defensive and are not affected by the business cycle; in good times or bad, people must take prescribed drugs. Gold mining stocks are counter-cyclical. In bad economic times, people "flee to safety" and buy gold stocks. Computer software companies are growth companies.

The provisions of the Uniform Securities Act apply to solicitation of the public to buy or sell securities or advisory services that are made:

by mail or telephone either inside or outside that State and received in that State

In order to establish a retirement financial plan to meet a customer's goals, the most important consideration is:

capital needs -A "capital needs analysis" determines the amount of capital that a person needs to have at retirement in order to meet their anticipated standard of living. Most people need less income in retirement than at other stages of life. A "typical" capital needs analysis might project that to retire comfortably in, say, 20 years, an individual will need 75% of his or her current income level. Then the plan looks at the sources of retirement income that the individual will have 20 years in the future (e.g., social security, retirement plan income, annuity income) and subtracts it from that need. The shortfall (if any) is the income that must be "made up." -Then the plan looks at that individual's current investment holdings, house value, other asset holdings such as variable annuity or whole life policies, and projects their likely growth 20 years hence. After subtracting loans against these assets, the net equity is the asset base that can be used to generate income in retirement to meet any shortfall. Finally, the plan determines the additional investments, if any, that must be made over the next 20 years to offset the current shortfall. -Thus, a capital needs analysis is really looking at the future value of a client's current asset holdings; versus what they will really need as an asset base at retirement at a future date; to support their retirement standard of living.

An existing customer of an agent who is registered in State Z contacts the agent to inquire about selling 1,000 shares of ABCC Corp. - a thinly traded stock that is sometimes quoted in the Pink Sheets. The agent attempts to locate a buyer for the shares for the customer, but cannot find one. One week later, a new customer contacts the agent, asking him to buy 1,000 shares of ABCC Corp. The agent contacts the existing client to see if he is interested in selling these shares. This action is: A. a violation of the Uniform Securities Act B. considered to be an offer to buy made by the agent C. a conflict of interest that must be disclosed to the existing customer D. defined as a contract to sell the shares

considered to be an offer to buy made by the agent -An "offer to purchase" is defined as every attempt to buy a security, or solicitation of an offer to sell a security, for value. The agent has contacted the existing client, to see if he is interested in selling the 1,000 shares that this new customer wishes to buy. Thus, the agent is making an offer to buy the securities from the existing customer.

If a defined benefit plan is terminated due to the bankruptcy of the company, any unfunded pension liability is: A. not covered by any type of insurance B. covered by PBGC C. covered by FDIC D. covered by SIPC

covered by PBGC -Pension Benefit Guaranty Corporation provides insurance for defined benefit plans formed under ERISA that are terminated (typically due to the closing of a company) that have an unfunded pension liability. PBGC will cover pension benefits to a plan participant of up to a maximum of $5,111 per month in 2015. Note that PBGC only covers defined benefit plans; it does not cover defined contribution plans (where an annual contribution is made to a separate account for each employee and the employee decides on the investments to be made).

A married couple that is in the maximum tax bracket has 1 child, age 13. The couple is looking to start a 529 plan to fund the child's college education beginning 5 years from now. To calculate the amount of money needed to pay for college, all of the following are needed

current cost of tuition assumed rate of return expected inflation rate -In this example, we need to determine the capital needed, 5 years from now to pay college tuition. To do so, we would take the current cost of tuition and inflate it over the next 5 years by the expected rate of inflation. Then we need to take this future dollar amount and discount it back by our assumed investment return, to get the dollar amount that must to be invested today to fund this capital need.

A customer, age 55, has a diversified portfolio of blue chip equity investments that pay a reliable cash dividend. The customer would like to retire at age 65. The customer has an expensive lifestyle, and even though he makes a good income, he uses the dividend income from his investments to pay his large monthly bills. The main problem that is evident here is that the: A. portfolio should be rebalanced to include a percentage allocation to fixed income securities because of the customer's age B. customer is unable to take advantage of the compounding effect of reinvesting dividends C. customer increases his tax liability by spending the dividends rather than reinvesting them D. customer needs to change his spending habits

customer is unable to take advantage of the compounding effect of reinvesting dividends -Well - there are so many good correct choices here, and you have to pick only 1 of them! Choice A is pretty good - this guy is 55 and has his whole portfolio allocated to equities and nothing to bonds. If we were to use the simple "Take your age and subtract it from 100 rule" to get the equities allocation, we would get a proper allocation of 45% equities and 55% bonds. Choice B is good too - by continually spending the dividends instead of reinvesting them, the customer gives up the compounding effect of adding to his investments each year, which increases dividends received, which can then be reinvested in more shares, which earns even more dividends, etc. Choice C is clearly wrong - whether cash dividends are spent or reinvested, they are taxable. Choice D is pretty good too - this customer spends too much. Of the 3 remaining possible choices, Choice D is eliminated first, because this is not a psychology test. Getting the customer to change his spending habits is not your role, though you could certainly bring this up in conversation! Choice A is eliminated next because this customer is invested in blue chip, high dividend paying stocks, so based on his age, having a portfolio 100% invested in these is actually reasonable. We are left with Choice B as the best answer - by spending the dividends, this customer is giving up the wonderful, magical effect of compounding of investment returns! (Of course, you knew this was where the question was going from the first reading.......right?)

The "Present Value" of a fixed income security is based on the: A. original price paid by the investor B. sum of all expected future payments to be made by the issuer of the security C. discounting of all expected future payments to be made by the issuer of the security D. current price of the security in the market

discounting of all expected future payments to be made by the issuer of the security -The present value of a fixed income security takes all of the future payments to be made by that security and discounts them at the current market rate of interest (compounded yearly) to arrive at the security's "present value." This is the actual market price of the security at that moment.

An index fund manager, in order to meet its investment objective, attempts to:

exceed the underlying index's return by slightly overweighting securities that he or she expects to outperform the market to cover the fund's expenses -Because there are expenses associated with running a mutual fund, such as management fees, brokerage fees, administrative fees, etc., an index fund manager that is attempting to match the performance of a designated index must actually do "better" than the index return to cover these expenses. To do so, the manager will tactically vary asset allocations from the index percentage by small amounts to "time" the market to achieve a better rate of return.

Under the provisions of the Uniform Securities Act, registration of an agent:

expires if not renewed by December 31st of each year

Exempt from registration as an investment adviser (meaning these are defined as investment advisers but they do not have to register in the State) is any person with no place of business in the State whose only clients are:

f o b d i g i e 5 or fewer past twelve months other advisers; federal covered advisers; broker-dealers; deposit taking institutions; insurance companies; investment companies; employee benefit plans with assets of at least $1,000,000; and governmental agencies.

If a customer of a broker-dealer fails to pay for a securities purchase by the 5th business day from trade date, the customer's account must be:

frozen -If payment is not received, the unpaid position must be sold and the account must be frozen for 90 days. Many firms call this "putting a CUF" on the account - with CUF standing for Cash Up Front. A customer can make purchases in a frozen account, but must deposit the cash amount in advance. If the customer behaves for 90 days, the freeze comes off the account, and the customer is again expected to pay for purchases "promptly," but no later than 5 business days from trade date.

All of the following business forms have an unlimited life EXCEPT: A. General partnership B. Limited liability company C. S corporation D. C Corporation

general partnership -All corporations have an unlimited life; a change in ownership does not dissolve the corporation. Also, limited liability companies have an unlimited life. Any partnership has a limited life; if there is not a fixed life stated in the partnership agreement; then the life of the partnership ends when the partnership composition changes. If a partner leaves, or a new partner is added; the old partnership is dissolved and a new partnership is formed.

The BEST way to maximize the federal death tax exemption for an older husband and a younger wife who have young children is to put: A. all the marital assets into the younger wife's name B. all the marital assets into the older husband's name C. all the marital assets in the names of the children D. half of the marital assets into the name of the husband and half of the marital assets into the name of the wife

half of the marital assets into the name of the husband and half of the marital assets into the name of the wife -The estate tax exclusion ($5,430,000 in 2015) is maximized if 1/2 of the couple's assets are put in the name of the husband and 1/2 of the assets are put into the name of the wife. Then, the exclusion is treated as $5,430,000 for each. If the assets are put into only 1 name, then there is only 1 exclusion. Assets cannot be titled in a child's name.

If an agent changes his place of employment from one broker-dealer to another, the registration must be transferred: A. immediately B. within 10 days C. within 30 days D. within 90 days

immediately -If an agent changes his place of employment, the registration must be transferred promptly under the Act. The best choice given in this question is to transfer the registration immediately. (Please note, in contrast, that notification to the Administrator when an investment adviser representative is terminated is only given by the investment adviser; or if the representative is associated with a federal covered adviser, the notice is only given by the representative.)

An accountant has a wealthy client base and has developed the trust of his customers over many years by providing tax preparation services and sound tax advice. The accountant has been requested by many of these customers to make suitable securities recommendations. The accountant has decided to offer such services, billing the customers at his regular hourly rate. Under the Uniform Securities Act, the accountant is: A. excluded from the definition of an investment adviser since he is a "professional" that is only giving incidental advice B. excluded from the definition of an investment adviser since he is not charging an advisory fee based on a percentage of assets under management C. included under the definition of an adviser because he is receiving separate compensation for giving advice about securities D. included under the definition of an investment adviser, since "professionals" are not offered an exclusion from the definition of an investment adviser

included under the definition of an adviser because he is receiving separate compensation for giving advice about securities - "Professionals" such as lawyers, accountants, engineers, and teachers who only give incidental advice about investing in securities; and who do not separately charge for giving advice; are excluded from the definition of an investment adviser. This accountant is charging for advice; and it is a regular part of his business; thus he falls under the definition and must register with the State.

An investor in a limited partnership generating passive losses can offset these against: A. income generated from direct investments in real estate B. dividends received from blue chip corporations C. capital gains generated from the sale of partnership units D. income generated from investments in municipal bonds

income generated from direct investments in real estate -Under the Tax Code, passive losses can only be offset against passive income. They cannot be offset against portfolio income (interest, dividends, capital gains) or earned income. Passive income and loss is defined as that derived from real estate investments and limited partnership interests. Note that any capital gain on the sale of a partnership unit is "portfolio income;" not passive income.

Active asset managers select investments based primarily upon:

inefficient market pricing of the investment -Active asset managers believe that by performing fundamental analysis, they can find undervalued companies - that is, companies that are not "efficiently priced." Passive asset managers believe that the market is basically efficient, and that one cannot consistently find "undervalued securities" - so why bother. Instead, just invest in an asset that mimics the index - that is, an index fund. This will do as well as the "market" with much lower expenses than those associated with "active" asset management.

A customer who buys a 10 year zero coupon bond with the intention of holding it to maturity would be MOST concerned with:

inflation risk -bonds with low coupons and long maturities are most affected by interest rate risk and purchasing power risk (risk of inflation), then this bond's price would drop sharply. This is the major risk for a long term zero coupon obligation

The cost of money is known as the:

interest rate

The president of a bank wishes to sell the subordinated debentures of that bank to individual investors. Under the provisions of the Uniform Securities Act, the president:

is excluded from the definition of an agent -The exclusions for individuals representing issuers from being defined as an agent are: •individuals who represent issuers in trades of specified exempt securities; •individuals who represent issuers in exempt transactions; •and individuals who represent issuers selling securities to the issuer's employees where no commissions are paid. -The president of the bank comes under the first exclusion. The specified exempt securities are U.S. governments, agencies, municipals, Canadian government issues, bank issues, money market instruments, and money market instruments with no more than 9 months to maturity that are investment grade. Thus, this bank president is selling a specified exempt security because this is a bank issue and is excluded from being defined as an agent of the bank-issuer.

An investment adviser will always be considered to have taken custody if the adviser:

is the trustee for the client in a trust account -Advisers may either take custody of client funds; or they may not take custody of client funds. As a general rule, advisers that take custody must post a higher net worth, must send out quarterly account statements, must keep customer funds or securities at a qualified custodian, and must be audited annually. Generally, acting as a trustee means that the trustee is managing assets for a beneficiary, and in doing so, has taken "custody." Note that broker-dealers are not subject to this rule - it is only for investment advisers. There are other SEC rules covering custody of client assets for broker-dealers. -Having power of attorney or discretionary authority over an account limited to trading only does not mean that an adviser is taking custody because the adviser does not have the ability to withdraw funds. Similarly, a power of attorney that permits an adviser to transfer funds between different accounts for the same client at the custodian is not taking custody because the adviser cannot withdraw funds. In contrast, if the power of attorney were to allow the adviser to withdraw checks from the client account, then the adviser would have custody.

The provisions of the Securities Exchange Act of 1934 apply to all of the following activities EXCEPT: A. trading of corporate bonds B. trading of municipal bonds C. issuance of municipal bonds D. issuance of corporate financial statements

issuance of municipal bonds -The Securities Exchange Act of 1934 relates to the secondary (trading) market; it does not cover the issuance of securities. Trading of both corporate and municipal bonds is covered under the "anti-fraud" provisions of the Act. Corporate financial reporting standards and public disclosure of financial reports is another part of the '34 Act.

A C Corporation is NOT permitted to: A. issue stock B. incur debt C. split its stock D. issue tax-exempt dividends

issue tax-exempt dividends -Dividends received from a C Corporation are taxable. C Corporations can issue stock (either common or preferred); can split their common stock; and can sell bonds. -In contrast, S Corporations can only issue common stock.

An investment adviser is considered to be "in the business" of rendering investment advice under SEC Release IA-1092 if:

it advertises itself as an investment adviser; or if giving advice about securities for compensation is a regular business of the firm

If a broker-dealer is registered with the SEC, and its representatives are registered with the SEC, and if the broker-dealer does not charge separately for advice, then

it is excluded from the definition of an "investment adviser" and need not register as such with the SEC. -However, if the broker-dealer were to charge separately for a financial plan, then it would have to register with the SEC as an investment adviser; and its sales persons would have to register as "investment adviser representatives".

An order to sell 100 shares of ABC at $50 GTC on the Specialist's book (DMM) is a:

limit order -A limit order specifies an execution price ("the limit"). An order to sell at $50 is a limit order. Market orders do not specify a price. Stop orders must state "Stop" with a price.

A customer places an order on the NYSE to buy bonds. The order reads "Buy 5M ABC 9s M '42 @ 90 GTC." The customer has entered a

limit order to buy at 90 -Since a price is specified with no other qualifications, this is a limit order to buy. The customer wants to pay 90% of par or less for "5M" = $5,000 face amount of the bonds. Open buy limit orders are executed if the market drops.

A customer places an order on the NYSE to sell bonds. The order reads "Sell 5M ABC 9s M '42 @ 90 GTC". The customer has entered a:

limit order to sell at 90 -Since a price is specified with no other qualifications, this is a limit order to sell. The customer wants to sell 5m = $5,000 face amount of bonds maturing in 2042 for 90% of par or more. Open sell limit orders are executed if the market rises.

Hedge funds are set up as

limited partnerships with only 99 investors to avoid having to register under the Investment Company Act of 1940 (which requires registration if there are 100 or more investors)

A customer of a broker-dealer is a sophisticated investor and is interested in purchasing the shares of XYZZ Corporation, a company that has recently gone public and is thinly traded in the Pink OTC Market. The customer contacts his agent to buy the shares, but the agent does not see any shares offered in the market so he contacts one of the officers of the company to see if that officer has shares that she wishes to sell. The officer agrees to sell some of her shares under Rule 144, so the broker recontacts the customer to tell him that he has found the shares that the customer wishes to buy. In this scenario, the agent has: A. violated the Uniform Securities Act B. made an offer to sell to the customer C. made an offer to buy to the customer D. effected an exempt transaction with the officer

made an offer to sell to the customer -An "offer" or "offer to sell" is defined as any attempt to offer to dispose of a security, or a solicitation of an offer to buy a security or an interest in a security, for value. The agent has contacted the officer of the company, to see if she is interested in selling the shares that this customer wishes to buy. When the agent contacts the customer with the news that he has found an officer willing to sell the shares, the agent is making an offer to sell the securities to the client.

The Uniform Securities Act authorizes the Administrator to waive the surety bond requirement for an investment adviser if the firm:

maintains a high enough amount of net capital

The settlor of a trust does all of the following EXCEPT: A. donates the assets to the trust B. appoints the trustee C. establishes the purpose of the trust D. manages the assets of the trust

manages the assets of the trust -The "settlor" of a trust is the person who grants property to the trust for the benefit or one or more beneficiaries. The settlor is also called the grantor, donor or trustor. -The trustee is appointed by the settlor to manage the assets of the trust in the best interest(s) of the beneficiaries. The settlor establishes the purpose of the trust and names the beneficiaries. The settlor does not manage the trust assets - this is done by the trustee (who is usually a third party, but in rare cases, the settlor can also act as trustee).

Tactical asset allocation is a method of: A. stock selection B. market timing C. portfolio rebalancing D. portfolio diversification

market timing -Strategic asset allocation is the setting of "strategy" - which is deciding how much of the total investment to allocate to each asset class. Tactical asset allocation permits the manager to vary that allocation upwards by a maximum amount to take advantage of times when market prices for a given asset class are lower than expected; or to reduce exposure to an overvalued asset class. Thus, it permits the manager to "time" the market within the permitted variation.

The Prudent Investor Act requires that fiduciaries manage the assets of their beneficiaries based upon:

modern portfolio theory

An investment adviser makes presentations to existing and prospective clients using a chart that determines when to buy or sell securities. In order to do this, the adviser:

must prominently disclose the limitations of using the chart and the difficulties regarding its use -The Investment Advisers Act of 1940, under Rule 206(4)-1 prohibits an investment from publishing or circulating an advertisement that "makes any direct or indirect representation that a graph, chart, formula, or other device can, in and of itself, determine which securities to buy or sell or when to buy or sell securities, or can assist an individual in making such determinations, without prominently disclosing the limitations thereof and difficulties regarding its use."

Investment advisory contracts must include a: A. power of attorney B. no assignment clause C. consent to service of process D. duplicate copy for the client

no assignment clause -Investment advisory contracts must include a "no assignment clause" - that is, the contract cannot be assigned to another investment adviser unless the customer consents in writing.

Investor likes and dislikes that must be taken into account when making a recommendation to a customer is an example of: A. financial considerations B. non-financial considerations C. investment horizon D. investment style

non-financial considerations -When making a recommendation, taking into account investor likes and dislikes is an example of "non-financial" considerations. For example, a customer may refuse to invest in a gambling stock or a tobacco stock due to ethical concerns.

When performing a suitability determination, the customer informs you that she will not invest in any companies that produce or market tobacco or alcohol products. This is an example of: A. faith-based investing B. non-financial considerations C. investment strategy D. personal customer profiling

non-financial considerations Ethical investing means that the customer uses his or her environmental, religious, or political views as the basis to include or exclude specific stocks or industries from his or her investment possibilities. This is a type of "non-financial" consideration when making recommendations to the customer.

The seller of a futures contract has the:

obligation to sell a specific commodity at a certain price and grade at a specific date and location through an organized futures exchange -A futures contract differs from an options contract because the buyer of an option has the right to exercise, but does not have to do so at expiration, while the holder of a futures contract has agreed to buy the underlying commodity at a fixed price at the expiration date, unless the contract is closed by trading. Similarly, the seller of a futures contract must deliver the underlying commodity at a fixed price at the expiration date, unless the contract is closed by trading

The Investment Advisers Act of 1940 EXEMPTS from registration: A. persons who give advice solely to insurance companies B. persons who give advice solely to investment companies C. persons who give advice solely to depository institutions D. All of the above

persons who give advice solely to insurance companies -The Investment Advisers Act of 1940 exempts from registration advisers who solely render advice to insurance companies. The "idea" is that an insurance company is a professional investor that will not tolerate being overcharged by an investment adviser, therefore such advisers are not required to register with the SEC. The Uniform Securities Act (State law) extends this exemption to most "professional investors" such as investment companies and banks. Note that the Investment Advisers Act of 1940 does not permit such an exemption for advisers who give advice to investment companies, banks, etc.

To register as an investment adviser under the Investment Advisers Act of 1940, all of the following are required EXCEPT: A. payment of a filing fee B. filing of a Form ADV Part 1 C. filing of a Form ADV Part 2 D. posting of a surety bond

posting of a surety bond -Posting a surety bond is only required for State registration. To register as an investment adviser with the SEC, a Form ADV Part 1 and 2 must be filed, along with a non-refundable filing fee.

A 62-year old man owns a non-qualified variable annuity contract. He makes a withdrawal. The amount of the withdrawal is: A. not taxable B. potentially subject to taxation at capital gains rates C. potentially subject to taxation at ordinary income tax rates D. not taxable if used to pay for specified medical expenses

potentially subject to taxation at ordinary income tax rates -Distributions from variable annuity contracts that take place after age 59 1/2 are taxable at ordinary income tax rates. These distributions are 100% taxable and represent all of the tax-deferred earnings that have been reinvested and grown over the years. Once these are depleted, the original investment in the contract is returned with no tax due (since there was no deduction for the contribution amount, these are already "after-tax" dollars.)

Cash value of a universal life insurance policy is: A. premium payments plus cost of insurance B. premium payments minus cost of insurance plus interest C. premium payments, plus or minus growth or loss in the separate account, plus the cost of insurance D. premium payments, plus or minus growth or loss in the separate account, minus the cost of insurance

premium payments minus cost of insurance plus interest -Both whole life and universal life are "cash value" policies. Premiums are invested in the general account (not a separate account, which is the case for a variable life policy, making Choices C and D incorrect). From the premium payments made, the cost of insurance is deducted. The cash balance that is left over earns interest.

The term "Investment Adviser" includes: A. lawyers who give advice about investments as part of an estate tax plan B. depository institutions that recommend bank products as investments C. publishers of reports on securities tailored to client situations D. broker-dealers who make recommendations to clients and charge commissions on the resulting trades

publishers of reports on securities tailored to client situations -An investment adviser is defined as a person who, for compensation, engages in the business of advising others, directly or indirectly, as to the value of securities or the advisability of investing in, buying, or selling, securities. Under this definition, persons who take fees for advising clients about investments; and newsletters that give advice based upon the specific investment situation of clients, are defined as "investment advisers." Excluded from the State definition are: •investment adviser representatives; •professionals such as lawyers and accountants who give incidental advice without taking a fee; •broker-dealers since they also give incidental advice without taking a fee for the advice (instead they earn a commission on the trade); •financial publications that are not tailored to specific client situations; and •depository institutions such as banks, and savings and loans (they are already highly regulated under other laws).

When a manager liquidates securities out of one asset class and invests the proceeds in another asset class to maintain the desired asset allocation percentages as market prices move, the manager is:

rebalancing the portfolio -Once asset allocation percentages are set in a portfolio and funding is complete; the actual percentage composition of the portfolio can shift due to the relative performance of each asset class. For example, assume that equities are set at 30%; and fixed income securities are set at 70%; of the portfolio's value. Also assume that over the next 6 months there is a bull market, and the stock portion of the portfolio rises to 45% of total value; while fixed income investments now are at 55% of total value. The portfolio must be rebalanced by selling equities and investing the proceeds in fixed income securities to bring the relative percentages back to 30/70.

An investor has a broadly diversified portfolio of blue chip stocks. The use of index options to hedge the portfolio: A. reduces non-systematic risk B. reduces systematic risk C. reduces both systematic and non-systematic risk D. cannot be used to reduce any risk since the portfolio is fully diversified

reduces systematic risk -Index options can be used to hedge a portfolio. If index puts are bought, then a drop in the market lowering the portfolio's value will be offset by a gain in the value of the index puts. This strategy hedges against market risk, also known as systematic risk. Non-systematic risk is the risk that any one security will perform poorly. The larger the portfolio, the lower the effect of non-systematic risk.

A trader uses a predetermined strategy where investment funds are moved from one sector to another based on a calendar schedule, using the following sectors as the asset classes: utilities, retailers, consumer staples, technology, and transportation stocks. This is an example of:

rotational investing strategy -"Sector rotating" is an active investment strategy that seeks to use the economic cycle as the basis for making investment decisions. For example, when the economy is entering a recession, funds are allocated to defensive utility and consumer staples stocks that are less affected by a contracting economy. When the economy starts to grow again, these positions are liquidated and investments are made in technology and transportation stocks that perform well in a rapidly growing economy, etc.

The Efficient Market Theory states that:

securities selection based on any type of analytical method is irrelevant -The "Efficient Market" Theory holds that prices of securities in the market fully reflect all publicly available information, so that undervalued or overvalued securities should not exist. Thus, securities selection based on any type of analytical method is irrelevant

A 60-year old man seeks an investment that gives liquidity and income. The best recommendation would be:

short-term treasury note

An investment adviser that solely follows and recommends listed securities is:

subject to either State or Federal registration . There is no exemption from registration for an investment adviser that follows only listed securities, at either the State or Federal level. The adviser must be registered in the State if it manages assets of less than $100,000,000; and if the adviser manages assets of $100,000,000 or more, it must register with the SEC - The Securities Exchange Act of 1934 requires investment managers that have discretion over $100,000,000 or more of customer assets to file a Form 13F with the SEC. The Form 13F is filed 45 days after the quarter ending where the adviser, at the end of any month in that quarter, had $100,000,000 or more of customer assets with discretionary authority.

Contributions to non-tax qualified annuities are ____. Contributions to tax qualified annuities are ____.

taxable (not deductible) Not taxed (deductible)

A 62-year old man takes a distribution from a non-tax qualified variable annuity. The distribution is: A. tax free without any penalty imposed B. taxed at capital gains rates without any penalty imposed C. taxed as ordinary income without any penalty imposed D. taxed in accordance with federal tax law

taxed in accordance with federal tax law -Contributions to non-tax qualified annuities are not deductible. Dividends earned during the accumulation phase must be reinvested and build tax deferred. When distributions commence at retirement age (age 59 1/2 or later), the portion attributable to the never-taxed build up is taxed at ordinary income tax rates, while the portion attributable to the already taxed contribution amounts is returned without tax due. Distributions are taxed on a LIFO basis. This results in the build-up (taxable dollars) coming out first; and once this is depleted, the original investment dollars are returned without tax due. Thus, the best answer to this question is that distributions are taxed "in accordance with Federal tax law."

A client has purchased various insurance policies from different issuers. One policy gives $100,000 of coverage that expires in 5 years. Another gives $100,000 of coverage that expires in 10 years. A third policy also gives $100,000 of coverage and expires in 12 years. The customer has purchased:

term life policies -Term insurance has a fixed "term" at which point it expires and must be renewed at a higher premium since the client is now older. It is not permanent insurance, since it can be canceled at the end of the term and not be renewed by the insurance company. In contrast, whole life, universal life and variable life cover the "whole life" of the insured individual and are permanent insurance (as long as the premium is paid)

The earliest that a European style option can be exercised is:

the business day preceding the expiration of the contract -Contracts expire on the Saturday following the third Friday of the month. The last time to exercise is the third Friday of the month, up until 5:30 PM ET. In contrast, American style options can be exercised anytime prior to expiration. Stock options are American style; the vast majority of index options are European style.

Which statement is FALSE regarding Transfer on Death (TOD) account registration? A. An older person who registers a security "TOD" maintains full control over the asset until death B. Upon death, the security is excluded from the estate of the decedent and avoids probate C. This registration is designed for older customers D. This registration avoids estate tax upon death of the holder

the registration avoids estate tax upon death of the holder -Nothing is so certain in life as death and taxes. One can register securities any way they want. It does not matter to the IRS; estate tax is still due. The other statements about TOD registration are true. This registration is designed for the elderly, who, in the past, would typically register securities with an adult son or daughter as "Joint Tenants with Rights of Survivorship." This led to instances where, for example, an elderly parent with ample resources wished to liquidate securities positions to pay for an expensive cruise and the son, whose name is also registered on the certificates as "JTWROS," refused to sign the certificates, preventing the sale from settling. Transfer on Death (TOD) registration allows the elderly parent to maintain full control over the certificates during his or her lifetime. Only upon the death of the owner do the certificates automatically transfer to the named beneficiary, avoiding probate.

Sector rotation is a strategy that "rotates" investment based on the economic cycle. For example, when the economy is in a period of recession, an investor may have shifted investment assets to cash. Once the economy enters a period of recovery, industrial stocks outperform and the investor could rotate out of cash and into industrial stocks. This is a "tactical" or

timing strategy, that times the investment to the changes in the economic cycle.

A couple owns a home together and they file for bankruptcy. If there is an excess of funds from the sale of the home, where does the extra money go? A. To the mortgagor (debtor) couple B. To the mortgagee (mortgage) holder C. To the additional creditors D. To the secured creditors

to the additional creditors -A home is an asset included in the bankruptcy estate. Typically, the home is sold for less than the amount of the outstanding mortgage - and the entire proceeds of the sale go to pay off the mortgage, with any remaining unpaid principal balance discharged in the bankruptcy. In the case where the home is sold for more than the amount of the mortgage, the mortgage balance is paid in full, so the mortgagee (usually a bank) is repaid in full and has no more claim. Any excess funds go to a State Trustee, and any remaining creditors can file claims against these funds. Secured creditors only get the asset pledged as collateral, and their lien on the asset is satisfied when they get the proceeds of the sale of the asset.

An investor buys a $25,000, 8% corporate bond maturing in 2041 for $30,000. The bond is callable starting in the year 2016. What is the most appropriate measure for calculating yield?

yield to call -This investor is paying $30,000 for an 8% bond with a face value of $25,000. Thus, the investor is paying 20% more than par for the bond. Because of the premium, these bonds are currently yielding 6.66% ($80 annual interest received / $1200 purchase price per bond = 10%). This issuer would call these bonds, since the issuer is paying 8%; yet if the issuer were to sell new bonds in the current market, it would only have to pay 6.66%. This bond is very likely to be called, so using the call date is the appropriate time frame to be used to compute the yield on the bond.

The Prudent Investor Act states that the trustee should consider the following when making investment decisions relevant to the trust or its beneficiaries:

•General economic conditions; •Possible effects of inflation or deflation; •Expected tax consequences of investment decisions or strategies; •The role that each investment plays within the overall trust portfolio; •The expected total return; •Other resources of the beneficiaries; •Needs for liquidity, regularity of income, and preservation or appreciation of capital; and •An asset's special value to one or more of the beneficiaries.

If an investment adviser wishes to take custody of client funds or securities, NASAA requires that:

•It must notify the Administrator in writing on Form ADV (this is the form that advisers use to register with the SEC; and is also used by each State for adviser registration) that it has, or may have, custody; •Custody must be kept by a qualified custodian in a separate account under each client name; or in accounts that only contain client funds and securities, held in investment adviser name as trustee for the clients; •Prompt notice must be given to the clients in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained; and •Account statements must be sent at least quarterly (not monthly) to clients.

Excluded from the definition of an agent are individuals who represent issuers (not broker-dealers) in:

•Sales of specified exempt securities such as Treasury, Agency and Municipal debt (but not all exempt securities); •Exempt transactions, such as the sale of securities only to institutions or underwriters or private placements as defined under State law; •Sales of specified covered securities (basically private placement issues and sales to persons with investment assets of at least $5,000,000 and investment managers handling assets of at least $25,000,000) - however if the individual is selling federally covered "nationally traded" securities or investment company securities, he or she must register as an agent; and •Sales of securities to employees of that issuer if no remuneration is paid - (the example here is a corporate employee who places company stock into employee 401(k) accounts). -In these transactions, either the security being sold is extremely safe (such as governments, agencies or municipals); or the sale is not being made to the general public. If the individual is representing an issuer selling a security that must be registered, including federal covered "nationally traded" stocks and investment company issues, that person must be registered in the State as an agent.

When filing a tax return, a "filing status" must be chosen. There are 5 possible filing statuses:

•Single; •Married Filing Jointly; •Married Filing Separately; •Head of Household; •Qualifying Widow(er) With Dependent Child.

The Broker-Dealer (not the Administrator) must retain responsibility for reviewing and approving the content of any Internet Communication by its agents. The complete requirements for an Internet Communication by an agent to NOT be considered an offering of securities or services in the State where received are:

•The Internet Communication must prominently disclose the affiliation of the BD Agent or IA Agent with the Broker-Dealer or Investment Adviser; •The Broker-Dealer or Investment Adviser retains responsibility for reviewing and approving the content of any Internet Communication by any Agent and authorizes the distribution of information on the particular products and services offered through the Internet Communication; and •The Agent cannot exceed the scope of authority granted by the Broker-Dealer or Investment Adviser in the Internet Communication.

These last 2 get a higher standard deduction and lower tax rates than choosing Single status.

•To get Head of Household status, that person must be unmarried at year end, must pay for at least 1/2 of annual housing expenses; and that home must be the principal home of that person's child. •To get Qualifying Widow(er) with Dependent Child status, that person's spouse must have died within the past 2 years (after 2 years from the spouse's death, this status can no longer be used); that person must pay for at least 1/2 of annual housing expenses; and that person must have a dependent child living at home.