Green light 1

The risk-adjusted return of an investment is most closely associated with: a. Alpha b. Beta c. Internal rate of return d. Standard deviation

a. Alpha

Which of the following factors would be the most important when attempting to diversify a stock portfolio? a. Correlation b. Asset allocation c. Beta d. Delta

a. Correlation Correlation is the measure of how a security's price moves in relation to other securities. The greatest diversification benefit is found when a security is negatively correlated.

All of the following types are forms of qualified retirement plans, EXCEPT: a. 401(k) plans b. 403(b) plans c. 457 plans d. Profit-sharing plans

c. 457 plans A 457 plan is a form of nonqualified deferred compensation plan available to some state, local, and nonprofit organization employees.

According to the Uniform Securities Act, which of the following entities or persons must register as a broker-dealer in State A? a. The trust department of a bank located in State A b. A broker-dealer located in State B, that conducts transactions for customers vacationing in State A c. A person located in State A, who is in the business of providing advice relating to securities d. A person located in State A who effects securities transactions for her own account or the account of others

d. A person located in State A who effects securities transactions for her own account or the account of others

Which of the following choices is/are disadvantage(s) of investing in a C Corporation? I. Shareholders are taxed on dividends received. II. The corporation is taxed on its income. III. Shareholders may not deduct their share of the corporation's losses on their personal tax return. IV. Shareholders are paid last if the corporation liquidates. a. I only b. I and II only c. II, III, and IV only d. I, II, III, and IV

d. I, II, III, and IV

Regarding the influence of market risk on personal investments, an investor can: a. Avoid market risk by investing in low-risk, low-return investments such as cash equivalents b. Eliminate market risk with a diversified portfolio c. Eliminate market risk by investing in blue-chip stocks d. Avoid market risk by investing in companies with a beta of more than one

a. Avoid market risk by investing in low-risk, low-return investments such as cash equivalents. Market risk, also called systematic risk, refers to the risk inherent in all securities due to market volatility. Market risk can be avoided by individual investors by investing in low-risk, low-return instruments like cash equivalents

The valuation method that will provide the most accurate representation of the true return of a mortgage-backed security is: a. Discounted cash-flow yield b. Yield to average life c. Yield to maturity d. Effective duration

a. Discounted cash-flow yield

An agent inadvertently misrepresents the risks associated with U.S. Treasury bonds. Under the Uniform Securities Act, which of the following consequences may result? a. The activity would constitute fraud b. This is an unethical activity c. There is no violation since the action was inadvertent d. There are no risks associated with U.S. Treasury bonds and, therefore, there is no violation of the USA

b. This is an unethical activity Misrepresenting the investment risks of a security could lead to civil liabilities, as clients have the right to sue to recover their losses. U.S. Treasury bills, bonds, and notes are securities and the fact that they are exempt securities is irrelevant if misrepresentations are made. Since the action was inadvertent, it would not constitute fraud.

A Kentucky resident buys an Ohio GO municipal bond with a 4% yield. The investor is in the 30% federal tax bracket and the state imposes a 5% tax. What is the bond's taxable equivalent yield? a. 13.33% b. 5.20% c. 5.71% d. 9.00%

c. 5.71% To calculate the taxable equivalent yield for a tax-free bond, the formula is nominal yield / (100% - Tax Rate %). 4% / (100% - 30%) = 5.71%.

According to the Uniform Securities Act, which of the following actions are permitted by persons NOT located in a state, or registered in a state? a. A person who represents a broker-dealer receives commissions for the sale of exempt securities to customers who are residents of a state b. A person represents a broker-dealer and offers nonexempt securities to noncustomers located in a state in which the person is not registered c. A person sells unlisted securities to an institution that is located in a state in which that person is not registered d. A person who represents an issuer receives compensation for the sale of the issuer's securities to nonemployees of the issuer

c. A person sells unlisted securities to an institution that is located in a state in which that person is not registered. A person who effects securities transactions for institutions and is not located in the state is not defined as a broker-dealer within the state. Registration is not required within the state under these conditions.

Which TWO of the following actions would fall under the jurisdiction of a state securities Administrator? I. The purchase of options through the Internet by a state resident II. The sale of long-term certificates of deposit by a bank III. The delivery of securities to a customer who is a resident of a particular state IV. The offer of securities by an out-of-state broker-dealer to a resident of the state a. I and II b. I and III c. I and IV d. III and IV

c. I and IV State securities Administrators have jurisdiction over securities transactions that are directed to their state, originate in their state, or are paid for in their state. The simple delivery of securities to a state does not fall under an Administrator's jurisdiction, nor do general commercial banking transactions.

Under NASAA's Statement of Policy on Unethical Business Practices, unethical activities of an investment adviser include: I. Exercising discretion for a limited period based on oral instructions II. Charging a client an excessively high advisory fee, if the client agrees to the terms III. Failing to disclose compensation arrangements connected with advisory services a. I and II only b. I and III only c. II and III only d. I, II, and III

c. II and III only NASAA's Statement of Policy on Unethical Business Practices prohibits unreasonable fees. Administrators can research the competitiveness of fees and advisory services provided to make this determination. Even if the client does not object to the size of the fees, excessive fees are not permitted. Advisers must disclose, in writing, any material conflict of interest that could impair the rendering of unbiased and objective advice. Oral discretion is permitted for up to 10 business days.

Under NASAA's Statement of Policy on Unethical Business Practices, an adviser is considered to have exercised discretionary power with respect to a customer order if the client has NOT specified: I. The price of execution II. The specific security or number of shares to be bought or sold III. Whether to buy or sell a. I and II only b. I and III only c. II and III only d. I, II, and III

c. II and III only The term discretionary power, as part of an amendment to the Securities Exchange Act of 1934, does not include discretion as to the price or time of the transaction if the client has directed or approved the purchase or sale of a definite amount of a specific security.

During the first quarter, XYZ common stock paid a $1 dividend. The stock's price fell from $50 per share at the beginning of the quarter to $48 per share at the end of the period. Based on these results, what is the stock's annualized total return? a. 8% b. 2% c. -2% d. -8%

d. -8% The total return from a security includes the cash flow from dividends or interest, plus appreciation or minus depreciation. In this case, the $1 dividend compared to the initial price of $50 per share is a 2% dividend return. The $2 loss in share price from a $50 initial value is a 4% loss. The total return for the quarter is 2% + (-4%) = (-2%). To annualize this quarterly result, multiply by four. [4 x (-2%) = (-8%).]

The retention requirements for the maintenance of books and records of investment advisers and broker-dealers are: I. Five years for a broker-dealer with two years' easy accessibility II. Three years for investment advisers with two years' easy accessibility III. Three years for a broker-dealer with two years' easy accessibility IV. Five years for an investment adviser with two years' easy accessibility a. I and II only b. I and IV only c. II and III only d. III and IV only

d. III and IV only The requirements for maintaining books and records specify three years for a broker-dealer and five years for an investment adviser. In each case, broker-dealers and investment advisers must maintain the most recent two years of records in an easily accessible location and in their original condition.

Sovereign wealth funds are subject to: a. The Securities Act of 1933 b. The Securities Exchange Act of 1934 c. The Investment Company Act of 1940 d. None of the above

d. None of the above Sovereign wealth funds are investment pools created by government entities. Many countries have their own investment portfolios (e.g., Dubai World Holdings), and some state governments do as well (e.g., California's Public Employees -- CalPERS). These investment portfolios are typically exempt from the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940.

Broker-Dealer X is registered as an investment adviser in State A. Some of Broker-Dealer X's clients are not advisory clients. Broker-Dealer X would like to sell stock from its own account to a non-advisory client. Which of the following statements is TRUE? a. Prior to the completion of this transaction, X must notify all its advisory clients that it is acting in a principal capacity b. Prior to the completion of this transaction, X must notify the client that it is acting in a principal capacity and then obtain the client's written consent c. A firm that is dually registered as a broker-dealer and investment adviser must operate under the same rules for all clients, whether advisory or not d. The rule regarding principal transactions by advisers does not apply in this case since X is acting solely as a broker-dealer and not as an investment adviser

d. The rule regarding principal transactions by advisers does not apply in this case since X is acting solely as a broker-dealer and not as an investment adviser. Normally, an investment adviser that wishes to act as a principal for its own account must: 1. Disclose the capacity in which it is acting prior to the completion of the transaction, and 2. Obtain the client's written consent. However, this rule does not apply to broker-dealers when they are not acting as investment advisers, as is the case in this question.

When forming a limited partnership, which of the following documents is filed with the state in which the partnership operates? a. A certificate of limited partnership b. An agreement among the partners c. A subscription agreement d. A private offering memorandum

a. A certificate of limited partnership Most states require the filing of the certificate of limited partnership, which discloses the nature of the business, the names of all partners, etc. The agreement among the partners spells out the rights, duties and obligations of all partners and is often a part of the certificate of limited partnership. The subscription agreement is used to establish the investor's suitability for investing in various limited partnerships, such as income and net worth. It also serves as confirmation of their investment. A private offering memorandum is given to investors as the disclosure document for partners that invest in a private placement.

An investment adviser has registered with the state Administrator in State A. The fee structure, disclosed in the form, indicated a flat fee per year. What is the responsibility of the investment adviser representatives to disclose the fee structure? a. Clients must be provided with a copy of ADV Part 2 at the time, or before, the advisory services commence b. Clients must be provided with a copy of the investment adviser's Form ADV five days before the contract becomes effective c. Verbal disclosure is sufficient according to the USA d. A copy of the disclosure form must be provided no later than with the client's first confirmation

a. Clients must be provided with a copy of ADV Part 2 at the time, or before, the advisory services commence. The investment adviser's disclosure document, also known as the Brochure, must be a copy of Form ADV Part 2, or a document created by the investment adviser containing the information from ADV Part 2. This document must be provided to the client at, or before, the time the advisory contract becomes effective. It is not required to send to the client the entire Form ADV as indicated in choice (b)

In which TWO of the following cases will the Uniform Securities Act exempt an investment adviser from sending a written disclosure document to clients? I. The firm advises only investment companies. II. An investment adviser charges $250 per year for financial news articles that are available online to subscribers. III. An investment adviser has no office in that state. IV. The investment advisory component of a broker-dealer only advises institutional investors. a.I and II b.I and IV c.II and III d.II and IV

a. I and II According to the Uniform Securities Act, an investment adviser must give a client or prospective client a disclosure document (usually Form ADV Part 2) at least 48 hours before or at the time of opening an account. Exceptions to this rule include an adviser whose clients are only investment companies or where the contract is for impersonal services for which the client pays a fee of less than $500.

The investment adviser of the ABC Fund usually invests a high percentage of the fund's assets in growth stocks. He has now turned bearish on the market. Which TWO of the following strategies would be employed based on the IA's bias? I. Buy puts on his growth stocks II. Buy calls on his growth stocks III. Raise cash levels in the portfolio IV. Reduce cash levels in the portfolio a. I and III b. II and III c. II and IV d. III and IV

a. I and III

A client purchases a 2% TIPS and the CPI is 3%. Which TWO of the following statements are TRUE? I. The client will receive a 2% coupon rate. II. The client will receive a 5% coupon rate. III. The client will receive a 2% return on the principal. IV. The client will receive a 5% return on the principal. a. I and III b. I and IV c. II and III d. II and IV

a. I and III Treasury Inflation-Protected Securities (TIPS) are U.S. government securities that are inflation-adjusted based on the Consumer Price Index (CPI). With TIPS, the rate of interest is fixed. This fact makes choice I correct. The principal amount upon which interest is paid will vary based on the CPI. Because the principal is adjusted for inflation, the return will still be 2% on the principal; however, that principal may be higher or lower than par because of the adjustments. This fact makes choice III correct. The Treasury does pay the greater of par or the adjusted principal value upon maturity of the TIPS. They are usually purchased as protection against inflationary or purchasing-power risk.

At Moore Advisers in Venice Beach, California, Othello is a registered investment adviser representative. Othello's accountant, Iago, has expressed an interest in directing accounting clients to Othello for investment advisory services. Iago wants a referral fee for his efforts. Which of the following statements are TRUE regarding this arrangement? I. There must be a written agreement between Othello and Iago. II. Othello may not pay more than $250 for each client referral. III. Iago must not have been convicted of any felonies or securities-related misdemeanors. IV. Iago must be fingerprinted and a copy filed with the state securities Administrator. a. I and III only b. II and III only c. I, II, and III only d. I, II, III, and IV

a. I and III only In order for someone to act as a solicitor for an investment adviser, three conditions must be met: (1) the adviser must be licensed (which Othello is), (2) the agreement between the solicitor and the adviser must be in writing, and (3) the solicitor must not have been statutorily disqualified from association with an investment adviser either because he was convicted of a felony or securities-related misdemeanor during the last 10 years or by order of the SEC. The solicitor must also disclose the nature of his relationship with the adviser to clients. The exact form that this disclosure must take depends on the nature of the arrangement between the solicitor and the adviser. Note also that the adviser must retain a copy of the agreement between it and the solicitor for its records.

Which of the following activities is considered a prohibited business practice by a broker-dealer? a. Stating to a client that the offering price of a security is the current market price, if the broker-dealer is the only market maker in that security b. Stating to a client that the offering price is the current market price, if the broker-dealer is part of an underwriting syndicate in that security c. Stating that the price at which it is offering to sell a security to a client is the current market price if the broker-dealer is one of five registered market makers in that security d. Stating that the price at which it is offering to sell a security to a client is the current market price if the security is listed on the New York Stock Exchange

a. Stating to a client that the offering price of a security is the current market price, if the broker-dealer is the only market maker in that security . If a broker-dealer represents that a security is being offered at a price that represents the current market price, the broker-dealer must have reasonable grounds for making this statement to a client. If the broker-dealer is the only person that is willing to buy or sell a security, the prices it is quoting may not be considered the current market price. If a broker-dealer made this statement to a client without proper disclosure of this fact, it would be considered an unethical business practice.

An investment adviser representative advises a client in a low income tax bracket to purchase municipal securities. Which of the following statements best describes this action? a. The advice by the representative is unethical b. Advice concerning tax-free securities is excluded from the provisions of the Investment Advisers Act of 1940 c. The action constitutes fraud d. The Administrator has no jurisdiction over municipal securities unless the securities are out-of-state bonds

a. The advice by the representative is unethical The action taken by the representative is unethical rather than fraudulent. Municipal securities provide federally exempt interest income. This is advantageous to individuals in higher tax brackets. Recommending the security to an individual in a lower tax bracket is not suitable. There is no indication that an intent to deceive the client was employed; therefore, an assertion of fraud is inappropriate.

Cornel, an IAR with G.P. Advisers, has just completed a discounted cash flow (DCF) analysis. Which of the following statements will reassure Cornel he should recommend the investment to his client? a. The calculation results in the current value of the future cash flows exceeding the current market value b. The evaluation provides the exact current market value of the fixed-income investment c. The evaluation provides Cornel with the amount of additional income the investor will receive from the investment d. The evaluation of cash flows results in the fixed-income investment trading at a premium

a. The calculation results in the current value of the future cash flows exceeding the current market value

Yesterday Cedric, an investment advisory client of Ralph, brought in a common stock certificate for 100 shares of Scottish Wool Company. Cedric inherited the shares from a relative and would like Ralph to have someone appraise the security. If Ralph still has the certificate in his possession today, which of the following statements is TRUE? a. The investment advisory firm is deemed to have custody b. Ralph must return the certificate to the customer by the end of the day c. If Ralph returns the certificate within three business days of receiving it, the firm is not considered to have custody d. If the value of the securities is less than $10,000, the firm is not considered to have custody

a. The investment advisory firm is deemed to have custody The custody rule (in the Investment Advisers Act) states that custody includes the possession of client funds or securities, unless the firm receives the securities inadvertently and the securities are returned to the sender promptly (within three business days of receiving them). In this case, Ralph's acceptance of the securities was not inadvertent. The firm has custody

Mrs. Nordhagen wants an insurance contract in which she can accumulate a market-competitive return on the cash value in her insurance contract. She also wants the ability to pay fixed premiums. She should buy a: a. Variable life policy b. Whole life policy c. Term policy d. Pure insurance policy

a. Variable life policy A variable life insurance policy charges level premiums, while allowing for the possibility of higher returns than a whole life policy

An investor pays $100 per share for 1,000 shares of a 6% cumulative preferred stock with one year's dividends in arrears. At the end of one year, the issuer has paid its normal preferred dividend, plus the dividends in arrears. The investor then sells the preferred stock when the market value is $104 per share. What is the investor's total return on the preferred stock for the period? a.16% b.12% c.10% d.6%

a.16% The total return of an investment takes into account the cash flow from dividends or interest, plus any appreciation or less depreciation in the value of the investment. In this example, the cash flow consists of the normal 6% dividend, plus the additional 6% dividend that was in arrears. The stock also increased in value by 4%, for a total return of 16% (6% + 6% + 4%).

Which of the following fee structures is NOT permitted for broker-dealers that offer investment advisory services to retail customers? a. Commissions for each trade and a separate fee for each research report sent to the customer b. A fee based on a percentage of the profits of the account c. An initial set-up fee, a fee based on the assets under management, and commissions for each trade d. Commissions and service charges

b. A fee based on a percentage of the profits of the account

Which of the following choices is a characteristic of equity-indexed annuities? a. A guaranteed minimum rate of return equal to that of the underlying index b. A rate of return that varies along with the underlying index c. A rate of return that is determined by the subaccounts that the contract owner selects d. A standardized rate of return set annually by the National Association of Insurance Companies (NAIC)

b. A rate of return that varies along with the underlying index In an equity-indexed annuity, the insurance company guarantees the contract owner a minimum rate of return. This guaranteed return, however, is never as high as the return of the actual index, choice (a). The insurance company usually guarantees that the investor will receive most of her premium payments back plus a fixed return based on current interest rates. The investor's ultimate returns may be higher than the minimum guaranteed rate depending on the performance of the index to which the contract is linked, choice (b).

John Donner works for B and B Financial in Summerfield, Massachusetts. John is semiretired and has a second home in southern Florida, where he spends the winter months. John has put his Florida address and phone number on his business cards along with B and B's Summerfield address, because he intends to service his Massachusetts clients while he is in Florida this winter. B and B Financial does not have an office in the state. Which of the following statements is TRUE? a. Neither John nor B and B Financial need to be registered in Florida because they are only doing business with clients whose residence is in Massachusetts b. Both John and B and B need to be registered in Florida because John's Florida residence is considered an office since it is listed on his business card c. John needs to register in Florida, but not B and B Financial d. B and B Financial needs to register in Florida, but John does not since neither he nor his clients are residents of the state

b. Both John and B and B need to be registered in Florida because John's Florida residence is considered an office since it is listed on his business card.

An investment adviser representative is preparing a financial plan for a client. As part of this process, he is making a personal balance sheet and income statement. The income statement should include all of the following items, EXCEPT: a. Commissions and bonuses b. Depreciation on the primary residence c. Interest income d. Mutual fund dividends

b. Depreciation on the primary residence Any appreciation or depreciation in real estate that the client owns would be included on the client's balance sheet, not his personal income statement. Choices (a), (c), and (d) are all sources of income that should be included on the client's income statement.

Needy Capital Corporation is a Nasdaq issuer. If 1,000,000 shares of common stock are to be offered by the company in State A, the state Administrator may: I. Not require registration of the stock in State A II. Require notice filing by the issuer III. Require a payment of a fee by the issuer IV. Investigate the underwriter for possible fraud in connection with the offering a. I and III only b. I and IV only c. II and III only d. II and IV only

b. I and IV only Securities listed on Nasdaq are federal covered securities and, therefore, a state may not require registration. Furthermore, If the federal covered security is listed on an exchange (such as Nasdaq, the NYSE, or AMEX), the state may not require the issuer to pay a fee, submit a notice filing, or consent to service of process. The states may, however, investigate any broker-dealer (including the underwriter) who participate in the offering for fraud or deceit and file an enforcement action if warranted.

If an agent of a broker-dealer is granted a durable power of attorney, which of the following statements are TRUE? I. The broker-dealer is considered to have discretion over the client's account. II. The broker-dealer is considered to have custody of the client assets. III. The client must be an institution. IV. The agent has the authority to manage the grantor's finances if that person becomes incapacitated. a. I and IV only b. I, II, and IV only c. II and III only d. I, II, III, and IV

b. I, II, and IV only The durable power of attorney gives someone else the power to manage the grantor's financial affairs if that individual becomes incapacitated. The agent of the broker-dealer may make financial decisions on behalf of the grantor (discretion) and may withdraw funds from the account for the benefit of the grantor (custody). A regular power of attorney terminates if the grantor becomes incapacitated.

A registered investment adviser provides safekeeping of securities as part of its client services. Which of the following statements are TRUE regarding the safekeeping services provided by the firm? I. The securities may be held in a vault maintained by the firm. II. The securities must be deposited with a qualified custodian. III. A notice must be sent to the clients indicating the secure location or custodian of the securities. IV. Annual statements must be sent to each client of the investment adviser. a. I and II only b. II and III only c. I, II, and III only d. II, III, and IV only

b. II and III only According to Rule 206(4)-2 of the Investment Advisers Act, it is a deceptive trade practice to have custody of client cash and securities unless a qualified custodian maintains those funds and securities. When an account is opened with a qualified custodian, the client must be informed of the name and address of the custodian. Account statements must be sent at least quarterly.

An investment adviser representative tells his compliance officer that he believes Bionic Irrigation, a recent initial public offering, shows great promise for a price increase. The representative plans to purchase significant amounts for his clients. He also plans to buy it for his personal account. The research department of the investment advisory representative's firm does not follow Bionic Irrigation. Would this proposed course of action violate the investment advisory representative's fiduciary responsibilities to his clients? a. It would not, since he is not discriminating among his clients and he is also buying the stock for his personal account b. It would, since he does not have a reasonable basis for his recommendation, and this purchase may not be suitable for all his clients c. It would not, not if the stock is a suitable investment for all his clients d. It would, since the research department of his firm does not follow the stock

b. It would, since he does not have a reasonable basis for his recommendation, and this purchase may not be suitable for all his clients.

Securities that are registered through qualification may be sold only: a. Upon effective SEC registration b. Once declared effective by the Administrator c. The day after being approved by the Administrator d. Upon completion of the 20-day cooling-off period

b. Once declared effective by the Administrator

All of the following choices are disadvantages of investing in a hedge fund, EXCEPT: a. Lock-up periods may require that an investor wait before she is able to withdraw all or part of her investment b. Proper disclosure is provided only to high net worth investors, based on registration requirements c. Hedge funds may have complex tax consequence that may cause the investor to delay filing her taxes d. Investors are unable to obtain regular pricing information and share value

b. Proper disclosure is provided only to high net worth investors, based on registration requirements. A hedge fund is an unregistered investment pool. Therefore, it is not required to provide proper disclosure to an investor. Hedge funds are illiquid investments where a fund may limit withdrawals to certain times each year. When an investor purchases a hedge fund, she may be subject to a lock-up period and may be required to wait years before she can withdraw her investment. Since many hedge funds and funds of hedge funds have complex tax structures, investors may receive pertinent tax information late. This can result in the need to file for an extension

A Canadian broker-dealer may continue to effect transactions for its Canadian clients who are in the U.S. temporarily, provided it does which of the following? a.Establishes an office in the appropriate state b.Registers with the appropriate state c.Limits its business to trading Canadian securities d.Limits its business to trading exempt securities

b. Registers with the appropriate state. According to the Uniform Securities Act, a Canadian broker-dealer may continue to transact business with its existing Canadian clients who are in a state temporarily (less than 183 days), provided it registers with the state. The agent who is handling the clients' accounts must register with the state as well.

Which of the following statements regarding private securities transactions by state-registered investment advisers is TRUE? a. Reports must be made to the state Administrator within 10 business days from the end of the month b. Reports must be made to the state Administrator within 10 business days from the end of the quarter c. Reports must be made to the state Administrator within 30 calendar days from the end of the quarter d. Reports are not required to be sent to the state Administrator

b. Reports must be made to the state Administrator within 10 business days from the end of the quarter Reports must be made to the state Administrator within 10 business days from the end of the quarter in which the transaction occurred. A total of four such reports may be required in a calendar year.

An investment adviser representative and a client have similar financial resources, investment goals, and risk tolerance. However, although the IAR recommends penny stocks as a small part of her client's portfolio, she would never consider investing in such securities herself. Which of the following statements is TRUE? a. As long as the recommendations to her clients are suitable for them, it does not matter what the IAR chooses to include in her portfolio b. The IAR should tell her client that the recommendation is inconsistent with her own investment policy c. An IAR is not allowed to reveal to a client what is in her personal portfolio d. Penny stocks are never suitable investments

b. The IAR should tell her client that the recommendation is inconsistent with her own investment policy. An investment adviser whose personal investing is inconsistent with recommendations made to clients generally has an obligation to disclose this to them.

Mary was a child star on a popular sitcom years ago. Rumor in the small Connecticut town in which she lives holds that Mary is well-off as a result of her early stardom and has substantial real estate holdings. Mary opens an account with a local advisory firm. She deposits $100,000 in the account and says that she wants to trade aggressively, but refuses to give additional information about her income or net worth. Under these circumstances, what is the MOST appropriate action for the investment adviser to take? a. The investment adviser should consider Mary's real estate holdings when making investment recommendations b. The investment adviser must presume that Mary has no other assets except the $100,000 in her account c. The investment adviser should invest Mary's assets aggressively since that is her objective d. The investment adviser should invest Mary's account in growth stocks in order to earn the highest rate of return

b. The investment adviser must presume that Mary has no other assets except the $100,000 in her account The investment adviser cannot presume that Mary has any other assets or sources of income besides the $100,000 in her account. Rumors are not enough on which to base suitability judgments. There is little that the investment adviser will be able to do for Mary unless she agrees to be more forthcoming.

Sean, a registered investment adviser, recommends the wrap fee program of a third-party adviser. Sean receives compensation based on the client's participation. Which of the following disclosures is NOT required in the wrap fee brochure? a. The person recommending the program will be compensated b. The specific amount of compensation the person will receive must be spelled out c. The wrap fee and compensation received might be more than the amount the client would pay if the client paid separately for the services d. The adviser may have a financial incentive for recommending the program over other programs

b. The specific amount of compensation the person will receive must be spelled out SEC rules require that if an adviser receives compensation based on a client's participation in a recommended wrap fee program, it must disclose that the person recommending the program will be compensated, that the amount of compensation may be more than the adviser would receive if the client participated in other programs, and that the adviser then has a financial incentive to recommend the program over other programs and services. The specific amount of compensation does not need to be disclosed.

Which of the following items is a derivative? a. A UIT b. A hedge fund c. A swap d. A REIT

c. A swap Of the given choices, only a swap is considered a derivative. While there are many types of swaps, such as interest-rate swaps, currency swaps, and credit default swaps, the basic premise is that two parties agree to the exchange of a stream of cash flows against another stream.

One of the advantages of investing in an oil limited partnership exploratory program is that the program: a. Provides immediate cash flow and minimal risk b. Offers investors a depreciation allowance to offset gains c. Allows investors to reduce their taxable income d. Will have a predictable income stream

c. Allows investors to reduce their taxable income Exploratory programs tend to provide significant tax advantages and are appropriate for investors seeking to reduce their taxable income. Since exploratory programs search for oil in unproven areas, investors will not receive immediate cash flow or a predictable income stream. The investor must be willing to accept a high degree of risk.

Which of the following types of businesses would probably be LEAST affected by an increase in interest rates? a. Manufacturing b. Utilities c. Cosmetics d. Automotive

c. Cosmetics When interest rates are rising, industrial corporations that market big-ticket items, and utilities, which are heavy borrowers, would be adversely affected. Cosmetic companies, due to the nature of the business and the low cost of their products, are not affected by rising interest rates.

Under the Uniform Securities Act, amendments to an investment adviser's Form ADV must be filed promptly. On August 31, your firm closes one of its branch offices and, therefore, you must file an amendment. What would constitute a prompt filing with the IARD? a. Filing the notice by December 31 of the current year b. Filing the notice by October 31 of the current year c. Filing the notice by September 30 of the current year d. Filing the notice by the end of your firm's fiscal year

c. Filing the notice by September 30 of the current year Amendments to Form ADV are required to be filed promptly with the Investment Adviser Registration Depository, and will be considered filed promptly if filed within 30 days of the event that caused the filing requirement

Under the Uniform Securities Act, certain advisers are exempt from registration. This exemption would apply if the adviser: a.Does not hold itself as an investment adviser in the state and has fewer than 5 individual investors during a 12 month period b.Directs communications to no more than 15 individual investors over the last 12 months c.Has no place of business in the state and their only clients are institutional investors, and /or the adviser does not direct communications to more than 5 non-institutional investors within 12 consecutive months d.Has a place of business in the state, but only advises institutional clients located outside the state

c. Has no place of business in the state and their only clients are institutional investors, and /or the adviser does not direct communications to more than 5 non-institutional investors within 12 consecutive months. The de minimis exemption for advisers under the Uniform Securities Act provides for an exemption from registration if the adviser (1) has no place of business in the state and only advices institutional clients, or (2) has no place of business in the state and directs communications to no more than 5 (not fewer than 5) non-institutional clients within 12 consecutive months. There is no longer a de minimis exemption under the Investment Adviser Act.

In which of the following cases would an investment adviser provide a balance sheet when filing Form ADV Part 2? I. An investment adviser requires prepayment of advisory fees of $800 seven months in advance. II. An investment adviser has custody over clients funds and securities. III. An investment adviser inadvertently received client securities and returns them after two business days. IV. An investment adviser has authority to take action in an account where a client has beneficial interest. a. I and II only b. I and IV only c. I, II, and IV only d. I, II, III and IV

c. I, II, and IV only Investment advisers that require prepayment of fees of more than $500 six months or more in advance would need to include a balance sheet when filing Form ADV Part 2 (choice (I)). In choice (II), the investment adviser has custody, which also requires that a balance sheet be included when filing Form ADV Part 2. The investment adviser in choice (III) has three business days to return the securities before custody is established. Since the adviser returned the securities in two business days, custody was not established so no balance sheet is required. The investment adviser in choice (IV) has authority to take action in an account that belongs to a client. Therefore, the adviser has discretion over the account and would be required to provide a balance sheet when filing Form ADV Part 2

An agent inadvertently sold a nonexempt unregistered security to a client. Under the Uniform Securities Act, which of the following actions may the agent take to remedy the situation? I. Have the security registered as soon as possible II. Buy the security back from the customer III. Pay the customer 6% interest per year (or the maximum legal rate) less dividend or interest income received from the date of purchase a. I and II only b. I and III only c. II and III only d. I, II, and III

c. II and III only If an agent discovers that she has inadvertently sold an unregistered nonexempt security to a customer, the agent may repurchase the security from the customer through an offer of rescission and/or pay the customer 6% interest (or the maximum legal rate) less dividend or interest income received from the date of purchase. The customer must respond to the letter of rescission within 30 days or she waives the right to sue

Mr. Roberts and Mr. Ed have offices in the same building. Mr. Ed is registered with Horse Sense Investment Advisers and provides advice tailored to clients' individual financial requirements. Mr. Roberts is a CPA with Morton and Pulver. Mr. Ed often pays Mr. Roberts a cash referral fee for clients sent to Horse Sense, but otherwise the firms are not affiliated in any way. All the following statements are TRUE, EXCEPT: a. Mr. Roberts must give Mr. Ed's brochure to the clients he refers to Mr. Ed b. Mr. Roberts must give a separate disclosure document to any clients he refers to Mr. Ed c. Mr. Ed must give each client he acquires through Mr. Roberts another copy of the separate solicitor disclosure document at the time the client agrees to retain his services d. Mr. Ed must make a bona fide effort to make sure that Mr. Roberts is giving the clients whom he refers copies of Ed's Brochure and the separate solicitor disclosure statement

c. Mr. Ed must give each client he acquires through Mr. Roberts another copy of the separate solicitor disclosure document at the time the client agrees to retain his services. Mr. Ed is not required to give clients another copy of the separate solicitor disclosure document. Mr. Ed is required to obtain a written acknowledgment from any client that Mr. Roberts refers that he received Mr. Ed's Brochure and the separate solicitor disclosure statement before or at the time the client enters into a contract for Mr. Ed's services. Mr. Ed must also make a bona fide attempt to determine if Mr. Roberts is complying with the terms of their agreement which requires Mr. Roberts to provide these documents to any clients he solicits on Mr. Ed's behalf. An adviser must perform these activities any time he is paying cash compensation to an unaffiliated solicitor.

According to modern portfolio theory (MPT), the expected return of an investment is the: a. Income, such as bond interest, that has been guaranteed by the issuer b. Income, including dividends and/or interest, that is more than 50% likely to be paid by the issuer in the next year c. Possible returns on the investment weighted by the likelihood that return will occur d. Standard deviation of gains and losses over the life of the investment

c. Possible returns on the investment weighted by the likelihood that return will occur .

Under the Uniform Securities Act, all the following transactions are classified as exempt, EXCEPT: a. Transactions in equity securities between an issuer and an underwriter b. The pledge of securities to collateralize a loan c. The sale of U.S. government securities to a public customer d. Unsolicited transactions in nonexempt securities

c. The sale of U.S. government securities to a public customer Choices (a), (b), and (d) are exempt transactions, whereas choice (c) is an exempt security, but not an exempt transaction

Andrew is an agent employed by Mayberry Securities. His client would like to sell some of his shares of XYZ to his daughter at a price far below the market value of the stock. Andrew agrees to handle the transaction for a small fee. Which of the following statements is TRUE? a.The transaction does not need to be recorded on the books of the broker-dealer, since the price does not relate to the fair market value of the securities b.The transaction does not need to be recorded on the books of the broker-dealer, since the contract was between family members c.The transaction would need to be recorded on the books of the broker-dealer, since Andrew is receiving compensation d.The transaction is fraudulent

c. The transaction would need to be recorded on the books of the broker-dealer, since Andrew is receiving compensation.

Lewis and Clark Financial Planners is registered in the state of Nebraska as an investment adviser. The company provides financial planning, analysis, research, portfolio management, and custodial services to its advisory clients. Bill Lewis conducts and supervises insurance sales and is registered to sell insurance and securities. Bill's business card states he is Senior Vice President, Financial Planning. Which of the following statements is TRUE about his business card? a.It is proper because he is registered in both securities and insurance, and works for a financial planner b.It is proper because he is able to sell both insurance and securities products c.It is misleading because he is in the sales department and not in the financial planning department d.It is misleading because he has not indicated his qualifications as a financial planner

c.It is misleading because he is in the sales department and not in the financial planning department The Uniform Securities Act states that the use of the term financial planner by a person engaged only in product sales may constitute a deceptive sales practice

Under the Uniform Securities Act, an investment adviser must deliver a disclosure document to a client: a.Five business days prior to signing the contract, with the client having two business days to rescind the contract without penalty b.Within three business days of an existing client's request c.With each statement, but at least on a quarterly basis d.At least 48 hours prior to signing the contract, or at the time of the contract signing with the customer having five days to rescind the contract

d. .At least 48 hours prior to signing the contract, or at the time of the contract signing with the customer having five days to rescind the contract.

A whole life insurance policy would be most appropriate for which of the following individuals? a. A 65-year-old man, whose objective is to accumulate enough money to pay for an elaborate funeral b. A 72-year-old grandmother who wants to insure that funds will be available for her grandchildren's education c. A 27-year-old single man who wants to pay the lowest premium for his life insurance d. A married 29-year-old woman with a successful career and two small children who is concerned about their future if she should die before they reach adulthood

d. A married 29-year-old woman with a successful career and two small children who is concerned about their future if she should die before they reach adulthood

Which of the following persons would require registration as an agent in State A? a. A person representing a broker-dealer, effecting interstate securities transactions for a client who is temporarily vacationing in a State A b. An employee of the Federal Reserve Board located in State A, who executes orders to buy and sell Treasury bills for the account of her employer c. A person representing an issuer domiciled in State A, who effects securities transactions for an intrastate institutional account d. A person representing a broker-dealer located in State A, who solicits securities transactions on an intrastate basis for clients' accounts

d. A person representing a broker-dealer located in State A, who solicits securities transactions on an intrastate basis for clients' accounts

All the following activities by an investment adviser representative are considered unethical, EXCEPT: a. Lending money to a client who has sustained an investment loss b. Informing a client that the price of a stock will increase after the release of a positive research report on a company c. Executing trades of frequency and size that exceed a client's risk tolerance, but result in a higher return than the client expected d. Arranging a loan for a client conducted through an affiliated broker-dealer of the investment adviser for the purpose of paying for stock recommended by the investment adviser representative

d. Arranging a loan for a client conducted through an affiliated broker-dealer of the investment adviser for the purpose of paying for stock recommended by the investment adviser representative. A broker-dealer is permitted to lend money. The situation described in choice (d), is a margin account. It is prohibited for an investment adviser representative to loan money to a client who sustained investment losses—choice (a). Telling a client that the price of a stock will increase is a promissory statement and is prohibited—choice (b). Trades of excessive size or frequency that disregard a client's objectives or risk tolerance are not permitted regardless of the returns—choice (c)

The Administrator in State A has conducted an investigation into the activities of an investment adviser representative. The Administrator believes that the IAR has engaged in fraudulent activities. The IAR claims no knowledge of any wrongdoing and documents his recommendations by cross-referencing a list of recommended securities provided by a third-party research firm. What action would the Administrator most likely take in this situation? a.Impose a fine and prison sentence b.Impose a fine but not a prison sentence c.Bring an action in court to impose a fine and prison sentence d.Bring an action in court to impose a fine but not a prison sentence

d. Bring an action in court to impose a fine but not a prison sentence. Any person who willfully violates the Uniform Securities Act may be fined up to $5,000 and imprisoned for up to three years. However, if the person proves that he had no knowledge of the fraudulent activities or that he was not aware or could not have been reasonably aware of what was going on, then a prison sentence may not be imposed.

According to the Investment Advisers Act, a successor adviser may file an amendment instead of a new application under which of the following circumstances? I. A change in the state of incorporation II. A change in the partnership III. A change from a partnership to a corporation a. I and II only b. I and III only c. II and III only d. I, II, and III

d. I, II, and III A successor adviser can file an amendment to an original investment adviser registration in lieu of filing a new application if the changes relate to a: • Form of organization • State of incorporation • Partnership

According to NASAA's Statement of Policy on Unethical Business Practices, what information would need to be included in the renewal of an investment advisory contract? I. The investment advisory fee II. A statement that no assignment of the contract will be made by the investment adviser without the consent of the client III. A statement regarding the amount of prepaid fees that must be returned if the contract is terminated a. I and II only b. I and III only c. II and III only d. I, II, and III

d. I, II, and III NASAA's Statement of Policy on Unethical Business Practices provides that the renewal of an investment advisory contract would have to include disclosure of: • All fees and services provided • A formula for computing the advisory fee • The amount of prepaid fees to be returned in the event of an early termination of the contract • The fact that no assignment of the contract will be made without the consent of the client.

Empire State Financial Advisers' sole office is located in New York City. Empire has only one client, the New York State Triple Tax Free Municipal Bond Fund. Empire exercises discretion over the investments of the fund, and also performs safekeeping services for the fund. Which of the following statements is/are TRUE? I. Empire must register with New York State as an investment adviser. II. Empire must meet the minimum net worth requirement of the Uniform Securities Act or New York State, whichever is higher, since it has discretion over a client's funds. III. Empire must meet the minimum net worth requirement set by the Uniform Securities Act or New York State, whichever is higher, since it maintains custody of a client's funds and securities. IV. Empire does not need to post a bond or meet net worth requirements because there are no such requirements under the Investment Advisers Act. a. I only b. I and II only c. I, II, and III only d. IV only

d. IV only Empire is acting as an investment adviser for the New York State Triple Tax Free Municipal Bond Fund, which is an investment company under the Investment Company Act of 1940. Empire, by definition, is a federal adviser subject to registration with the SEC (not New York State). There are no net worth requirements under the Investment Advisers Act.

An IAR is comparing the advantages and disadvantages of an S Corporation and a limited partnership for a client. What is one advantage of investing in an S Corporation that is not found in a limited partnership? a. There is unlimited personal liability b. An S Corporation pays higher dividends c. An S Corporation allows for an unlimited number of shareholders d. Investors have more control over management decisions

d. Investors have more control over management decisions An S Corporation is limited to 100 shareholders. Like a limited partnership, its gains and losses "flow through" to its investors, there is no way to determine which will pay more since flow-through will be based on the performance of the specific vehicle's management. Both provide investors with limited liability. The shareholders of an S Corporation have voting rights, which provides some control over management decisions. In a limited partnership, taking part in management decisions jeopardizes an investor's status as a limited partner, and may result in being considered by creditors a general partner who has unlimited personal liability for debts of the partnership

An IAR has recommended a convertible debenture to a client, with a market value of $1,200. The bond is convertible at $20. If the preferred stock of the company is currently trading at $22 per share, what is the parity price of the bond? a. $1,100 b. $440 c. Par value d. It cannot be determined

d. It cannot be determined Since the question only gives the price of the preferred stock, not the common, parity cannot be determined. Sometimes regulatory examinations ask trick questions much like this one. The best way to solve a question like this is to read the question closely, often twice, to confirm that you have considered all the details provided

Which of the following statements best describes an equity-indexed annuity? a. It is a variable annuity that tracks a major index b. It is a variable annuity that guarantees a minimum return c. It is a fixed annuity that mirrors the performance of a designated index d. It is a fixed annuity that offers the potential for greater returns.

d. It is a fixed annuity that offers the potential for greater returns. An equity-indexed annuity is a type of fixed (nonvariable) annuity. There is no SEC registration requirement for these contracts. The owner receives a guaranteed minimum interest rate. The upside potential exists since the rate of return is tied to an index such as the Standard & Poor's (S&P) Index. If the index underperforms, the client receives the minimum rate. If the index performs well, investors will receive the indexed return up to a maximum capped rate.

Which of the following types of risk is MOST associated with the purchase of a 5-year Treasury bond? a. Legislative b. Market c. Liquidity d. Money-rate

d. Money-rate Money-rate risk is also called interest-rate risk. If interest rates rise, the price of the Treasury notes will fall. If the investor needs to liquidate the investment prior to maturity, rising interest rates would reduce the value received in the secondary market. Market risk is associated with common stock. The secondary market in Treasuries is very active, so liquidity risk is not a factor. Legislative risk (changes in the law) could create diminished value for the instruments, but it is not likely to occur.

Which of the following designations are acceptable on a business card? I. RIA for an investment advisory firm registered with the SEC II. RIA for an investment advisory firm registered with a state Administrator III. IAR for an investment adviser representative who has passed the appropriate qualifying exam a. I and II only b. II and III only c. I, II, and III d. None of the above

d. None of the above

According to the Uniform Securities Act, the application process for an investment adviser may include: a. Meeting a capital requirement equal to at least 2% of the assets managed b. Filing contracts with the Administrator c. Making a daily determination of the value of each account d. Posting a notice in a newspaper that the adviser is an applicant for registration

d. Posting a notice in a newspaper that the adviser is an applicant for registration.

If material information on file with a state Administrator is no longer accurate, when does an amendment need to be filed? a. Within 15 days of the change b. No later than 30 days after the fiscal year-end of the broker-dealer or investment adviser c. No later than December 31 of the same year d. Promptly

d. Promptly A change of material information requires prompt notification to the Administrator. Some examples of material information include: the address of the firm, the fee structure of the firm, and whether the firm maintains custody of customer cash or securities.

An investor in California owns a 6%, 20-year corporate bond. The investor is in the 35% federal tax bracket and 10% state tax bracket. What is the investor's after-tax yield on this bond? a.9.2% b.6% c.3.9% d.3.3%

d.3.3% The interest on corporate bonds is taxed at both the federal and state level. To determine the investor's yield after paying taxes, multiply the coupon by 100% less the combined tax brackets. 6% x (100% - 45%) = 3.3%.