S66 Bank

Which of the following is likely to be characterized by no management fees and a portfolio consisting of municipal or corporate bonds?

UITs. Only management companies, (open- and closed-end) have management fees.

In a scheduled premium variable life insurance policy, all of the following are guaranteed EXCEPT

a minimum cash value. In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the 3rd year of coverage.

An investment advisory contract is considered assigned if an adviser formed as

a partnership with 2 partners and adds five partners. If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval is required.

A sale or offer to sell would NOT include

a purported gift of nonassessable stock. A gift of assessable stock would be an offer or a sale, but a gift of nonassessable stock is just a gift.

An agent has a new client who is prone to tergiversation. As such, it would probably make sense to:

accept unsolicited orders only. Those who tergiversate repeatedly change their attitude or opinions. As a consequence, the client who likes an agent's recommendation one day may quickly change his mind the next. Therefore, the agent could be placed in an untenable position, being unable to satisfy the client. To avoid this possibility, it would be most sensible to leave all the decisions to the client and only accept unsolicited orders.

An investment adviser is registered in States A and B with its principal office in State B. The Administrator of State A can request to see

advertisements run in State A. The Administrator of State A can request that advertisements placed in his state be filed because that is business relating to his state. As long as the IA meets the "home" state's financial and recordkeeping requirements, that is good everywhere.

A state securities Administrator does NOT require the filing of

advertising and sales literature relating to the sale of exempt securities. A state securities Administrator may require the filing of advertising and sales literature relating to the sale of nonexempt securities, financial reports from broker-dealers and investment advisers, and pamphlets and marketing letters used by broker-dealers in an attempt to increase their business. Exempt securities are not required to register with the state Administrator and, therefore, are exempt from the filing requirements for advertising and sales literature.

The Investment Advisers Act of 1940 would consider each of the following investment advisers to be exempt from registration EXCEPT

an adviser whose only clients are banks. Advising banks only does not qualify one for the exemption. Advisers who only service insurance companies or venture capital funds are exempt, as are advisers performing intrastate who do not give advice to private funds or on listed securities.

You have a 37-year-old client whose wife has just given birth to triplets. Because of the added responsibilities, he wants to maximize the amount of life insurance he can acquire. Which of the following types of insurance will give him the greatest amount of coverage for the lowest initial premium?

annual renewable term. At any given age, term insurance always carries the lowest premium and, of the term policies available, annual renewable term always has the lowest initial premium. Of course, because the premium tends to increase each year the policy is renewed, at older ages it can become unaffordable. But, remember, this question is only asking about initial cost.

How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940?

annually. Registered investment companies are similar to other publicly registered entities in that an annual audited report must be filed with the SEC.

Which of the following is not included in the definition of broker-dealer as found in the Uniform Securities Act?

banks. In the Uniform Securities Act, it specifically states: "Broker-dealer" means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. "Broker-dealer" does not include (1) an agent, (2) an issuer, (3) a bank, savings institution, or trust company. Attorneys are excluded from the definition of investment adviser, as long as their advice is incidental to their legal practice, but that exclusion does not apply to the term "broker-dealer". Even though credit unions engage in banking activity, they are not included in the exclusion. Being an investment adviser does not exclude a person from the need to register as a broker-dealer if that person is performing the functions of a BD.

Section 402(a) of the Uniform Securities Act contains a lengthy list of securities that are exempt from the registration and advertising filing requirements of the Act. Included in that list would be all of the following EXCEPT

bonds issued by the city of Berlin, Germany. Securities exempt from state registration include those issued by a U.S. or Canadian governmental unit, such as municipal bonds, and securities issued by nonprofit and charitable organizations, such as church bonds. However, bonds issued by a non-sovereign foreign government (cities, etc.) are not considered exempt securities unless guaranteed by the sovereign (German, in this case) government. Even before the NSMIA created the exemption for federal covered securities, those listed on the NYSE received what was called the "blue-chip" exemption.

Which of the following could accelerate a rise in a bull market?

buy stop. Buy stop orders are placed above the market, and as prices increase, the stops are hit, creating additional buying.

A high-risk investment strategy is the short sale of stock. Each of the following is a method of offering some degree of protection EXCEPT

buying a put on the short stock. The risk in selling a stock short is that the price of the stock will rise rather than fall. Those who purchase put options have the same market view as those who sell short—they will profit if the price of the security declines. Buying a put would be the equivalent of "doubling down" on your bet. The best way to hedge (protect) a short stock position is to purchase a call option on the security because that gives you a guaranteed "buy-back" price regardless of how high the stock's price rises. If you sell a put on the stock and the price rises, the put will expire and the seller will have the premium to partially offset any loss. If the short seller enters a buy stop order, once the price rises (or goes through) the stop price, a market order to buy the stock will be entered and the position will be closed out preventing any further loss.

Which of the following investments would NOT be considered an exchange-traded derivative?

forwards. Forwards are never traded on an exchange; the other 3 choices can be traded OTC or on an exchange.

Reasons why a corporation might issue a convertible preferred stock would include

giving those shareholders an opportunity to participate in the future success of the company. The benefit of any convertible security, bond or preferred stock, is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond, and because preferred dividends are an after-tax outlay, there are no tax savings, as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.

Grandma has decided to give her grandson some stock that she bought many years ago. When the grandson sells the stock, how is the tax liability figured?

her cost basis and date of purchase is used. When stock is given as a gift, the donee (recipient) takes over the cost basis and the holding period of the donor.

Charlie Mindel is the portfolio manager for the Steady Yield Bond Fund. If Charlie was of the opinion that interest rates were going to fall, he would

increase the average duration of the portfolio. As interest rates go down, prices of bonds rise. Those with the longest duration will have the greatest price increase. To benefit from this move, managers of bond portfolios will lengthen the average duration of the portfolio. The reverse action would be taken if Charlie thought that interest rates were going to rise. Of course, if interest rates move in the opposite direction of that the manager expects, the fund might start looking for a new manager.

Under the USA, each of the following is specifically excluded from the definition of a broker-dealer EXCEPT an

investment adviser. The USA specifically excludes agent/issuers and banks, international or domestic, from the definition of a broker-dealer. Investment advisers also may have to register as broker-dealers if their method of operation requires it.

Your firm's market analyst believes the current bullish market in equities will continue. Which of the following would be most suitable for a growth-oriented investor?

large-cap stock fund. A mutual fund investing in large-cap stocks (see Glossary of Terms) would be a reasonable investment for a growth-oriented investor in a bullish economic environment. Bonds are not a growth-oriented investment vehicle, GNMAs provide monthly income (not the growth that the client seeks), and preferred stocks are appropriate for income-oriented investors.

Under Section 401 of the Uniform Securities act, the term "agent" does not include an individual who represents an issuer in effecting transactions in a security

issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state. An individual representing an issuer in the sale of that issuer's security is not defined as an agent if the security is: issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state; issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency of the foregoing; any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor; a promissory note, draft, bill of exchange or bankers' acceptance that evidences an obligation to pay cash within 9 months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization; or any investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan. It is not just any exempt security that qualifies the individual for the exemption—only the five listed above. A confusing point is that the individual is not an agent when the sales are made in any exemption transaction with no exceptions.

A portfolio manager who routinely shifts portfolio assets to take advantage of the business cycle is said to be engaging in

sector rotation. Sector rotation is the practice of moving out of those industries that are heading for a decline and into those whose fortunes are likely to rise as the economy follows the business cycle.

Which of the following is not included in adjusted gross income on an individual's federal income tax return?

stock dividends. Stock dividends (dividends paid as additional shares of stock rather than in cash) adjust the investor's cost basis and don't come into play until the stock is sold.

Under the USA, what are the maximum penalties for a securities-related felony?

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

Violations of the Investment Advisers Act of 1940 are punishable by a fine of up to $10,000 a prison term of up to 20 years suspension of registration

I and III. Criminal penalties for violations of the Advisers Act include a $10,000 fine and 5 (not 20) years in prison. Administrative penalties, such as revocation or suspension of registration, may also be imposed.

The STU Corporation has issued common stock, preferred stock, promissory notes, and mortgage bonds. Should STU enter bankruptcy proceedings, the order of payment against claims would be

the mortgage bonds, the promissory notes, the preferred stock, and the common stock. In a bankruptcy, secured creditors, such as those with a mortgage against real property, have the first priority. They are followed by unsecured creditors, such as holders of promissory notes, with stockholders coming last. Preferred stock is "preferred" over common in both liquidation priority and payment of dividends.

Under the Securities Act of 1933, securities issued by a charitable organization are exempt if

the organization is nonprofit. The Securities Act of 1933 exempts securities issued by charitable or religious organizations from the registration and prospectus delivery requirements as long as the organizations are nonprofit.

An employer whose 401(k) plan complies with ERISA Section 404(c) is placing investment risk with

the plan participant. In a 401(k) plan, a plan sponsor can shift investment risk to the employee by complying with ERISA Section 404(c) rules.

One of the reasons why the discounted cash flow method of valuation is useful in assessing the value of fixed income instruments is

the predictability of income. Discounted cash flow evaluates the expected cash flow from an investment and then factors in the time value of money. Obviously, if there is no predictable cash flow (as there is with the interest payments on a bond), there are no reliable numbers to plug into the formula.

If an investment adviser representative of a federal covered adviser that transacts business in a state terminates employment with that investment adviser, which of the following statements is TRUE?

the representative must notify the administrator. It is the investment adviser representative's responsibility to notify the Administrator. The advisory firm is not registered with the state; only the representative is registered.

If an investor buys a utility stock with a stable 5% dividend, and after a year the investor's total return in the stock is 10%, the most likely reason for this is

the stock appreciated by 5%. The most likely cause for the total return was an increase in the stock price.

Under UTMA, which of the following are allowable distributions for the benefit of the minor?

The cost to attend a summer camp. You cannot use UTMA (or UGMA) money for the basics of food, clothing and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, sports league registration, would be permitted.

One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken?

trustee and beneficiary. Under trust law, the grantor of a trust, sometimes referred to as the settlor, may also be the beneficiary and the trustee.

Which of the following is the risk that diminishes through portfolio diversification?

unsystematic risk. Unsystematic risk (diversifiable risk) is the risk that can be reduced or even eliminated when the investor builds a well-diversified portfolio. Interest rate risk and purchasing power risk are examples of systematic (nondiversifiable risk).

The Uniform Securities Act invests a great deal of power in the Administrator. These powers include all of the following EXCEPT

citing a witness for contempt of court for failing to appear at a hearing. Only an official of the court (such as a judge) can find someone in contempt of court.

An individual meets the USA's definition of an agent in all of the following cases EXCEPT

when acting on behalf of an issuer of an exempt security in an underwriting and receiving no compensation related to the sale. Agents of a broker-dealer are always required to register. If an agent represents an issuer in selling its securities, it can avoid registration if it sells exempt securities, or securities in exempt transactions. Agents of issuers can also avoid registration by selling securities to employees

An investment strategy where a higher price is paid for a stock based on expected returns is

growth investing. A growth investor purchases shares that have exhibited faster-than-average gains in earnings over the past few years that is likely to continue to show high levels of margin. Over the long run, growth stocks tend to outperform the market but are riskier than most other stocks and generally pay little or no dividend.

If an investor is looking for an open-end investment company with an objective of providing current income to its shareholders, she would most likely choose

income fund. Income funds provide the highest current income of the choices offered. The other choices would generally not hold many income-producing securities in their portfolios.

When computing a company's quick ratio, which of the following assets is NOT counted?

inventory. The formula for the quick ratio takes the quick assets (all current assets other than inventory) and then divides that by the current liabilities. Or, it takes all of the current assets, subtracts the inventory, and divides the remainder by the current liabilities.

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients

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

Among the differences between an investment in a limited partnership offering and in a corporation is that

limited partnership offerings do not pay dividends; corporations do.

Under the USA, a guaranteed security is protected by someone other than the issuer against loss of all of these EXCEPT

principal on equity issues. Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not provide against market loss. Please note that capital gains are never included in this type of guarantee.

An investment adviser is acting as the principal for its own account in a transaction involving an advisory account. Under the Investment Advisers Act of 1940, the adviser must disclose this fact

to the client and receive the client's written approval before the transaction. Investment advisers are required to disclose their capacity in executing transactions to a client before entering the order. This is different than the requirement for broker-dealers, who disclose their capacity on the confirmation upon trade execution

Your 55-year-old client owns a nonqualified variable annuity. He originally invested $50,000 4 years ago. The annuity has grown to a value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS?

$4,000. Because this is a nonqualified annuity (with no tax deduction), the client pays taxes only on the growth portion or, in this case, $10,000. The tax on this amount is $3,000. However, because the client is not yet age 59½ when making the withdrawal, he also pays a 10% tax penalty, or $1,000. This makes a total of $4,000 tax and tax penalty paid on the random withdrawal.

An investor buys 5 put contracts with a strike price of $55 per share. The current price of the underlying stock is $60 and the option premium is $7. The commission schedule is shown as follows: Trade AmountCommission Rate≤ $2,500$35 + 0.9% of trade amount$2,501 to $11,999$35 + 0.7% of trade amount≥ $12,000$35 + 0.5% of trade amount Using the information above, what is the total commission cost based for this trade?

$59.50. The cost per contract is $7 x 100 shares, or $700. That makes the total trade amount $700 x 5 contracts, or $3,500, which qualifies for the commission rate of $35 + 7% of the trade amount. $35 + 0.7% of $3,500 = $35 + $24.50 = $59.50 total charge.

The board of directors of DDC omitted dividends in 2016 on their $100 par 6% noncumulative preferred stock. In 2017, a $2 preferred dividend was paid. For DDC, 2018 has been a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2018 in order to pay a common dividend?

$6.00. Because this preferred stock is noncumulative, any missed dividends need not be paid before common dividends can be declared. If this were a cumulative issue, any dividends not fully paid would go into arrears and accumulate until paid to the preferred cumulative stockholder. During this time, common dividends could not be declared or paid until the cumulative holders were paid in full. A 6% dividend on a $100 par means a $6 dividend each year per share.

Registration statements for securities under the Uniform Securities Act are effective for

1 year from the effective date

An 8% M&S bond with ten years left until maturity is quoted 103 x 104. A client enters a market order to buy and receives prompt execution. What is the current yield on the investment?

7.7%. The current yield of a bond is calculated as the annual income divided by the current market price. Here, the 8% bond pays $80 in annual interest, and the bond can be purchased at the offered quote of 104, which is 104% of par, $1040. Current Yield = Annual Interest/Current Market Price = $80/$1040 = 7.69%

The USA provides either an exclusion from the definition or an exemption from registration as an investment adviser for certain persons. Which of the following would be required to register?

A CFP® who provides a full range of financial planning to clients on a fee-only basis. Unless excluded or exempted, anyone charging a fee for investment advice must register. Banks and their employees are excluded. Engineers and teachers fall under the late exclusion as long as the advice is incidental to their profession and no special compensation is received.

Which of the following is NOT an issuer under the USA?

A broker-dealer trading securities as an agent for the account of others. A broker-dealer that trades securities as an agent for its clients is not acting in the capacity of an issuer. If the broker-dealer were offering its own shares to the public through underwriting, it would then be an issuer. A corporation that proposes to issue securities but has not as yet done so is, for purposes of the act, an issuer. A company offering its shares to the public in an IPO is an issuer. A company whose shares trade on the NYSE is an issuer whose shares are now trading in the secondary market.

Which of the following statements regarding unsolicited orders is TRUE?

A client may purchase, at his own initiative, securities trading in the secondary market through an agent who otherwise is prohibited from soliciting the order. If a client requests the purchase of a security that an agent is prohibited from soliciting, the agent can accept the order and mark the order unsolicited. This is the most common of the exempt transactions.

Under both state and federal law, there are a number of exclusions from the definition of investment adviser. Which of the following would not qualify for an exclusion?

A publisher of a newsletter that is paid to make reports to be used in the sale of specific securities. Although there is an exclusion for publishers, it must be of general and regular circulation and not be the recipient of compensation from the issuers of any securities covered.

There are a number of exclusions from the definition of investment adviser. Which of the following would NOT qualify for an exclusion under the Uniform Securities Act?

A teacher at the local high school who receives nominal compensation for giving investment advice to engineers. The LATE exclusion applies when advice is given by one of the listed professionals on an incidental basis. When a teacher (or any of the others) is compensated specifically for giving advice, regardless of the amount, the exclusion is lost. To be defined as an investment adviser, one must give advice on securities; term life insurance is not a security. Similarly, preparing trust documents is not securities advice, even if the clients are referred by an investment adviser. Finally, one of the roles of an accountant is giving tax advice, and IRAs are not securities.

Which of the following statements regarding exemptions is TRUE?

An exemption for a transaction must be established on an individual basis before each transaction. Exempt securities must establish their exemption at the time the securities are issued. An exempt transaction is done on a transaction-by-transaction basis.

Which of the following statements best describes an investment supervisory service as described by the Investment Advisers Act of 1940?

An investment adviser provides continuous advice based on the client's individual needs. An investment supervisory service is an individualized service delivered to a specific client on a continual basis. General nonspecific advice given across the board is deemed impersonal advisory services. Only when an investment adviser provides investment supervisory service, and the adviser's principal business activity is the giving of advice, may the term "investment counsel" be used.

An investor has been following the price movements of ABC common stock and believes that the stock is positioned for a significant upward move in the very near term. If the investor's goal is capital gains, which of the following would be the most appropriate position for this investor to take?

Buy ABC call options. When an investor is expecting the price of a security to rise, we say that investor has a bullish outlook. Bulls buy call options, especially when the expected market move is anticipated shortly. Put options are purchased by investors who are of the belief that a stock's price will decline in the near term. Selling options is done for income (the premium), not for capital gains.

Which of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held more than 1 year?

Class C shares. It is the Class C shares that have no front-end load, but they do have a 1% CDSC for a period of 1 year.

Which of the following statements regarding the correlation coefficient is not correct?

Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio. Watch out for the double negatives here. Combining assets with less than perfect positive correlation can reduce the total risk of the portfolio. The further the correlation coefficient between the two assets is away from +1.0, the greater the diversification benefits that may be attained.

Liquidity ratios measure the solvency of a firm or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio?

Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm. Gross profit divided by net sales is a profitability ratio that measures the gross profitability of the firm's business operations, not its liquidity. Net income divided by average total equity is the return on stockholders' equity, which measures the efficiency of common shareholders' investment or equity in the firm. Dividend amount divided by earnings per share is the dividend payout ratio which measures how much of a company's earnings are distributed to common stockholders.

Which of the following is not a market cap-weighted index?

Dow Jones Industrial Average.

Which of the following statements regarding taxation is NOT true?

Earned income includes salary, bonus, and income as an owner of a limited partnership. Earned income includes salary and bonus but not income as an owner of a limited partnership. Passive income is derived from rental property, limited partnerships, and enterprises in which an individual is not actively involved. Each of the other choices is true.

A unique requirement for those investment advisers who maintain custody of customer assets is the filing of

Form ADV-E. The Form ADV-E is used as the cover page for the annual surprise audit performed by the independent accountant on all IAs who maintain custody of customer assets.

Which of the following would NOT be considered a nonissuer transaction as defined in the Uniform Securities Act?

Gemco, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in Gemco stock. The stock was donated to Gemco by a former officer of the firm. A nonissuer transaction is one in which the issuer does not receive the proceeds of the sale. When a stockholder sells his shares, he is the one who receives the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in. When an issuer sells shares, whether in a primary or secondary transaction (as is the case with the donated shares), if it receives the proceeds, it is an issuer transaction.

Which of the following entities are considered to be exempt issuers under the Uniform Securities Act? State of Michigan City of Calgary, Alberta City of Birmingham, UK Kapco Leveraged Partners, an unregistered hedge fund whose adviser is registered with the SEC

I and II. Any state or Canadian province, or political subdivision thereof, is considered an exempt issuer. Foreign national governments with which the United States has diplomatic relations, but not their political subdivisions, are considered exempt issuers. SEC-registered investment companies are exempt issuers, but unregistered hedge funds are not, regardless of with whom their advisers are registered.

In which of the following circumstances has John, employed at AAA Securities Corporation, made an offer as defined in the USA?

I and II. Under the USA, the term "offer" includes an attempt to dispose of securities for value, or a solicitation of an offer to buy a security. Gifts, whether legal or not, are not considered an offer except when dealing with gifts of assessable stock.

Under the Uniform Securities Act, which of the following are defined as sales? A gift of an assessable stock A gift of a nonassessable stock A security given as a bonus for purchasing a bond An offer of securities

I and III. A sale is a contract or transaction for value. Therefore, when a security is given as a bonus in connection with the sale of another security, it is also considered a sale. Because an assessable stock may require a payment made by the recipient, the gift is considered a sale. The gift of a nonassessable stock is not a sale because it is not a contract for value. An offering of securities is not a transaction or sale of securities until the offer is accepted.

In defining an investment adviser under SEC Release 1A-1092, which of the following would meet the business standard? A person who advertises himself as an investment adviser A person who provides securities-related advice on a frequent or regular basis A person who receives separate or additional compensation for securities-related advice

I, II, and III. To meet the business standard, persons must meet 3 criteria. First, they must hold themselves out (advertise) as persons who provide investment advice. Second, they must provide such advice on a frequent or regular basis, but it need not be their principal business activity. Third, they must receive separate or additional compensation for doing so.

Which of the following statements regarding preemptive rights is TRUE?

Preferred stockholders do not have the right to subscribe to a rights offering. Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.

Which of the following statements regarding ERISA and qualified plans is correct?

Qualified plans must meet the requirements of ERISA. ERISA regulations are primarily focused on the non-tax aspects of qualified plans, such as non-discrimination rules and fiduciary obligations. ERISA requires that the fiduciary exercise the care, skill, and diligence of a prudent person acting solely in the interest of plan participants and beneficiaries. The fiduciary is not required to specifically invest for maximum gain. All corporate qualified plans are covered under ERISA.

Which of the following statements regarding state registration of securities is TRUE?

Registration by coordination is effective concurrent with federal registration. Coordination is the method used to register a security simultaneously under the Securities Act of 1933 and under the USA in a state. If the security's federal registration is pending and the Administrator has received all of the required material, the two registrations can be declared effective at the same time.

An agent with a broker-dealer is suddenly called out of town on a personal family matter. While away, the agent's unregistered sales assistant receives a phone call from an existing client wishing to purchase 200 shares of a listed stock. What would be the most appropriate action for the sales assistant to take?

Route the call to a licensed agent in the office. The fact that the order is unsolicited does not preclude the rule that under no circumstances may an unregistered individual accept and place orders.

Margin regulations are determined by the Board of Governors of the Federal Reserve System. The authority for them to do so is found in

The Securities Exchange Act of 1934. The Securities Exchange Act of 1934 contains the authorization for the Fed to regulate the use of credit in the securities business.

Impressed by a televised interview with a fund manager, a client calls an adviser at 10 AM to purchase shares. The fund's NAV per share is $30.00 and there is a 5.00% sales charge. Which of the following statements is true?

The adviser can accept the order and fill it at the end of the day at $31.58, if the NAV remains at $30.00.

With regard to ERISA and a qualified retirement plan, which of the following would NOT constitute a conflict of interest between the plan and a fiduciary?

The fiduciary receives fees for acting as a trustee to the plan. A fiduciary may receive compensation from the plan's sponsor for acting as a trustee, if fees are reasonable and consistent with duties performed. When one is acting as a fiduciary for a retirement plan, no self-dealing is permitted. That means no buying from or selling to the plan.

Under the Investment Advisers Act of 1940, which of the following is excluded from the definition of a person associated with an investment adviser?

A clerk in an investment advisory firm. Employees with no investment advisory functions, such as clerks and administrative personnel, are excluded from the definition of associated person.

Under the Uniform Securities Act, which of the following is a broker-dealer?

A corporation that sells interests in an oil and gas limited partnership to investors with the proceeds going to the issuer. A broker-dealer is any person that buys or sells for the accounts of others or for his own account. In this case, an entity structured as a corporation is selling , on behalf of the issuer, a security in the form of limited partnership units and is therefore a broker-dealer. A broker-dealer is not an issuer or an agent.

If an agent has been given limited power of attorney to exercise discretion in an account by the account holder, which of the following statements is TRUE?

A designated supervisory individual must frequently review the account. All discretionary accounts are subject to frequent review by a designated supervisory individual with the firm. Each order need not receive the prior approval of the agent's manager before it is entered; orders are reviewed after execution. There is no requirement that the power of attorney be renewed annually by the account holder, although some firms make it their policy. The account holder is permitted to enter new orders independently.

Each of the following statements comparing growth and value investors is true except

A growth investor looks for a large cash surplus, whereas a value investor looks for lower cash holdings. A value style investor seeks firms that hold a large cash surplus. A growth investor would typically seek firms that are reinvesting and deploying most of their cash to grow the business. Each of the other statements accurately describes the view of growth versus value investors.

Many fixed-income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk?

Aa-rated corporate debenture. A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk.

Which of the following would be considered an unethical business practice?

Agents correcting execution orders in their customer's accounts. When a good-faith error is made, only the firm can make the correction; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm's website).

Which of the following persons must register as an investment adviser under the Uniform Securities Act?

An investment adviser who only serves institutional clients and whose only office is in this state. The Uniform Securities Act requires those defined as investment advisers to register with the state. Accountants are excluded when their advice is incidental to their profession and no additional compensation is charged. Advisers whose only advice is on securities issued or guaranteed by the government are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. This means they are federal covered investment advisers, not required to register with the Administrator even with offices in the state. As long as there is an office in the state, unless the adviser is federal covered (as described in the previous sentence), there is no exemption from registration in that state. The IAR has exceeded the de minimis limits and would have to register in the state, but as an IAR, not as an IA.

Which of the following actions by an investment adviser registered in 3 states is permitted?

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

There are waivers from the Series 65 exam requirement for certain professional designations. Among those qualifying for the waiver are individuals who are

CFPs. This is tricky. CFPs do qualify for the waiver. ChFCs (not CLUs) also qualify and those with the PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants), but not solely a CPA, qualify. MBA is not a professional designation. In general, the following designations allow for a waiver of the exam requirement: CFP®—CERTIFIED FINANCIAL PLANNER™ (granted by the CFP Board of Standards); CIC—Chartered Investment Counselor (granted by the Investment Adviser Association); ChFC®—Chartered Financial Consultant® (granted by the American College of Financial Services); PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants); and CFA®—Chartered Financial Analyst® (granted by the Chartered Financial Analyst Institute).

A couple explains to their financial adviser that they are seeking investments to preserve and increase their buying power over the inflation rate with a medium to long time horizon. Which of the following best describes their customer profile and suitable investments?

Capital growth through equity investments. Investors seeking to increase their buying power and outpace inflation would be best served with equity investments. Achieving this with equities is less risky and speculative than using options (whether individual stock options or stock index options). Equities, as compared to options, also allows for the long-term growth as opposed to the options trades needing to be closed and re-established. Nothing in the question indicates that they need to generate portfolio income or use fixed-income products. Watch out for answer choices that include buzzwords here the Treasury Inflation Protected Securities includes the word inflation but these would not be suitable for this investment goal (TIPS are very conservative and typically match, but do not exceed, the inflation rate).

Which of the following statements is TRUE?

Dividends have a significant influence on the value of the corporation's stock. Dividends play a large role in what someone is willing to pay for the stock. For example, the dividend discount model (DDM) values a stock as the discounted present value of future dividends. A company is not required to pay dividends. A growth company will tend to pay no cash dividends but rather use the money for expansion.

The Uniform Securities Act empowers the Administrator to begin proceedings to revoke the registration of an investment adviser when certain violations are suspected. Which of the following are considered serious enough to warrant a revocation?

Failure to supervise the activities of investment adviser representatives. Among the many violations justifying a revocation is failure to supervise. Maintaining custody of customer funds or securities requires notification to the Administrator, not approval. It is only a conviction, not being charged of a crime, which would be cause for revocation.

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

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

When saving money for a child's college education, one consideration is the impact that those savings will have on the child's eligibility for financial aid. Funds saved in which of the following vehicles has the most detrimental effect on financial aid?

UTMA. Assets held in custodial accounts (UTMA or UGMA) are counted at 20% of their value, which compares unfavorably with the 5.64% valuation of Section 529 or Coverdell ESA assets. Please note: It is highly unlikely that you will need to know the percentages - but you will need to know that custodial accounts do not receive as beneficial treatment when applying for financial aid.

The owner of a fixed annuity is protected against

longevity risk. Because a fixed annuity promises a fixed monthly payment for life, longevity risk is not a concern. However, the fixed payments are subject to purchasing power risk, also known as inflation risk. One other risk is that of dying after only receiving payments for several months after having chosen the life only option.

Which of the following terms best describes ETNs and leveraged ETFs?

alternative investments. These are two popular alternative investments. Are they speculative? Yes, but there are many other speculative investments that are not considered alternative investments. The question asks for the best description and, although it might seem like a "close call", these are "alts". The leveraged ETF is a registered investment company, but the ETN is not.

The main purpose of dividend reinvestment in a mutual fund accumulation plan is to

compound the growth of a mutual fund investment.

An investment constraint that is unique to private foundations is the requirement to

distribute 5% of its assets each year as qualifying distributions. Under Section 4942 of the Internal Revenue Code, a private foundation must pay out each year an amount equal to 5% of its net investment assets in "qualifying distributions". There is no legal requirement on how much must be invested each year, and having an investment policy statement is not unique to foundations. Likewise, there is nothing unique about the requirement to have a board of directors and that isn't an investment constraint.

One method of securities registration under the Uniform Securities Act is Qualification. The effective date of a security registered using this method is

when so ordered by the Administrator. Registration by qualification becomes effective on the date set by the Administrator

The term "investment counsel" can be used by investment advisers

with a primary business of rendering investment advice. While this choice is only half correct, under the Investment Advisers Act of 1940, the term "investment counsel" may be used by any adviser that meets two standards: the adviser performs investment supervisory services, and the adviser provides advice as the primary business of the firm. No other special qualifications or registrations are needed.

Which of the following would NOT be considered a fraudulent practice under the Uniform Securities Act?

An adviser correctly advises a client, but the client ends up losing money. There is no fraud in the case of an adviser whose clients lose money in the absence of any willful violations. Examples of fraud under the Uniform Securities Act include inaccurate market quotations; incorrect statements of earnings or projected earnings; inaccurate statements of commissions, markups, markdowns, or other charges; implying approval by the SEC or Administrator; using rumors or inside information to induce transactions; indicating approval of a security by a regulatory body; and failure to describe important facts or risks.

In which of the following situations did an agent commit fraud?

An agent knowingly sold a nonexempt, nonregistered security to a retail client who could well afford the risk involved. Fraud requires the intent to deceive. The agent knowingly deceived the client by selling unregistered securities, therefore committing a securities fraud. An agent is not required to discuss all information, only that which is material information. The term retail client refers to individual or noninstitutional clients.

A corporation sponsors a defined benefit pension plan. The assets of the plan are invested in a diversified portfolio of large-cap stocks. Which of the following options positions would be most appropriate if the corporation wished to protect their ability to meet their obligations to employees?

Buy S&P 500 index puts. In a defined benefit plan, the corporation is assuming the investment risk. Regardless of the security, the best way to protect a long position is to buy a put, either on that security or on an index with a close correlation. In this case, with a portfolio of large-cap stocks, the S&P 500 index would seem to be the appropriate option to use.

Which of the following statements best defines inflation risk?

The uncertainty that the value of an investor's assets will decrease as measured by real dollar purchasing power. Inflation risk is the uncertainty that an investment's purchasing power will decrease due to the shrinking value of the currency. An investor's real rate of return is the nominal rate less the inflation rate.

Under the NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, investment advisers who have discretionary powers but NOT custody of customer funds are usually required to have a net worth in the amount of

$10,000. The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an adviser who does not have custody of customer funds or securities but has discretionary power over customer accounts to have a minimum net worth of $10,000.

ABD Corporation's income statement reports net sales of $100 million, cost of goods sold of $60 million, administrative costs of $20 million, and interest on debt of $5 million. Based on this information, ABD's gross margin is

40%. Gross margin is computed by subtracting the cost of goods sold (COGS) from the net sales (or revenues) and dividing the remainder by the net sales. In this case, the computation is $100 million minus $60 million which equals $40 million and then dividing that by the $100 million resulting in a gross margin (or margin of profit) of 40%. Administrative costs and interest are not included in COGS.

Which of the following is not an assumption of the capital market theory?

All market participants borrow and lend at different risk-free rates. One of the assumptions of the capital market theory is that all market participants borrow and lend at the same risk-free rate. The other choices are all true statements (and might be tested).

Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction?

An agent sells U.S. treasury bonds to an individual client. Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, or sales by fiduciaries, or unsolicited transactions are all exempt.

Which of the following does NOT meet the USA's definition of an exempt transaction?

An agent sells shares of an IPO listed on the NYSE to an individual customer. Transactions by a fiduciary, such as the executor of an estate, are included in the definition of an exempt transaction, as are transactions with certain institutional clients like investment companies and insurance companies. The OTC Bulletin Board is an electronic medium for the trading of highly speculative, thinly capitalized issues. Because the order is unsolicited, the transaction is exempt. Sale of a new issue of stock to an individual client would not be an exempt transaction, regardless of where the stock is traded. It is important to distinguish between an exempt transaction and an exempt security.

In which of the following cases is the exemption from registration with the SEC not based on the value of assets under management?

An investment adviser that acts as an adviser solely to 1 or more venture capital funds. It is only in the case of the adviser to venture capital funds where there is no dollar limitation on AUM. Private fund advisers with AUM of $150 million or more must register, and "small" investment advisers, those with less than $25 million in AUM, are generally prohibited from SEC registration.

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year?

He will offset $1,000 ordinary income this year. Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward.

Under the Investment Company Act of 1940, which of the following statements regarding the investment objective of a mutual fund are TRUE? Only the board of directors needs to approve changes in the investment objective. The majority of outstanding shares must vote to approve changes in the investment objective. The SEC must approve all changes in the investment objective. The investment adviser does not set, but tries to meet, the investment objective.

II and IV. A majority of the outstanding shares must vote to approve any change in investment objective or policy. The investment adviser's job is to try to achieve the investment objective.

Under the Investment Company Act of 1940, SEC Rule 12b-1 allows a fund to charge distribution and sales expenses to net assets as a percentage of the total assets. Normally, the cost of distribution of the shares is paid by the underwriter out of the sales load paid by the individual purchaser. For a fund to impose 12b-1 charges, which of the following conditions apply (applies)? The board of directors has sole approval authority. The majority of the outstanding shares has sole approval authority. Both the board and the majority of outstanding shares must approve it. A distribution plan must be written.

III and IV. For the fund to impose 12b-1 charges, the distribution plan must be in writing and approved by a majority of the outstanding shares, as well as a majority of the board of directors, including a majority of directors classified as outside directors.

One of the prohibited practices under the Uniform Securities Act is market manipulation. Which of the following are examples of a broker-dealer engaging in that practice? Arbitrage Churning Matched orders Wash trades

III and IV. Matched orders occur when one or more broker-dealers engage in buying and selling between themselves for the purpose of creating the misleading appearance of increased activity in a security. A wash trade is an attempt to manipulate a security's price by creating an apparent interest in the security that really does not exist. Arbitrage is the simultaneous buying and selling of the same security in different markets to take advantage of different prices. It is not a form of market manipulation. Churning is a prohibited activity, but has nothing to do with the market, just a client's account.

One measure of a corporation's liquidation value is its book value per share. When performing this computation, the value of which of the following would normally be subtracted from the corporation's net worth? Cash Wages payable Patents Preferred stock

III and IV. The computation of book value per share is basically net tangible worth per share of common stock. Therefore, we subtract both the par value of the preferred stock and the value listed on the balance sheet for the intangible assets, such as patents.

Which of the following statements is TRUE regarding the civil liability provisions of the Uniform Securities Act?

If the registration statement contains misrepresentations that were made deliberately, criminal penalties, in addition to civil ones, may be levied. Under state law, civil suits must be filed within 2 years of the date of discovery of the improper action or 3 years after the sale, whichever comes sooner. Purchasers may not waive their rights under the act for any provision. Although those who signed are liable, there is a list of others who also might be, including members of the board of directors, legal counsel, accountants, et cetera.

A client of yours owns some convertible preferred stock. She notices an article in the business section of her local newspaper that reports the company is going to pay a 20% stock dividend on their common stock. She wants to know how this will affect her?

If there is an antidilution clause, her conversion privilege will permit her to acquire 20% more shares than before the stock dividend. Most convertible securities are sold with antidilutive clauses that provide for an adjustment in the number of shares based on stock splits or stock dividends.

If a federal covered adviser's fiscal year ends on October 31, 2017, it must file its annual updating amendment to its Form ADV no later than

January 29, 2018. The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end.

Which of the following is not a characteristic of a Monte Carlo simulation?

Large changes in the projected rate of return will make small differences in the outcome. Small changes in the projected rate of return will make large differences in the outcome.

Which of the following statements is most accurate regarding the net present value (NPV) and internal rate of return (IRR) on a bond?

NPV assumes the cash flows can be reinvested at market interest rates. The first step in finding the NPV is to compute the present value (PV). The PV is computed by taking the future cash flows and discounting them by a "discount" rate. That rate is the current market interest rate. So, if NPV is based on PV and PV assumes reinvestment at the discount rate, that assumption must hold true for figuring NPV. In the case of the IRR, that is the yield to maturity of a bond and assumes that the cash flows are reinvested at that IRR. For example, a bond with a YTM of 7% assumes that all reinvestments will be made at that 7% rate. The periodic cash flow on a bond comes from the semiannual interest payments making reinvestments semiannually, not annually.

If an agent recommends that a client invest a portion of his portfolio in an international stock fund and is asked whether she should compare the performance of the fund against the S&P 500 Index, how should the agent respond?

No, it is preferable to compare the fund against the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index because it covers international securities. It is important that a particular mutual fund be compared against the appropriate benchmark. An international fund's performance should be compared against an index of foreign stocks such as the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index.

What is the appropriate procedure to follow when a customer fails to sign the form provided by the investment adviser stating that he has received a copy of the investment adviser's brochure?

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

An elderly investor covers living expenses with the income produced from her diversified long-term bond portfolio. Most of the bonds were purchased 3-5 years ago, when interest rates were higher than they are today. The investor is concerned that the prevailing market rates may impact her investments and ability to maintain her standard of living. All of the following are true statements except

Quotes for her bonds would show a yield to maturity that is above their nominal yield. A portfolio of bonds purchased when interest rates were higher than they are now will be premium bonds (e.g. the purchased bonds pay 6% and similar bonds are now being issued at 4%). The portfolio's bonds, however, will continue to pay the same fixed coupons until they mature, regardless of prevailing interest rates. The risk that will be faced is reinvestment rate risk as the coupons will need to be redeployed into a market that is offering lower returns. Answer choice(D) is incorrect in that the premium bonds will show yield to maturity quotes that are lower than their nominal yield because the bonds will be priced above par.

Form PF must be filed by

SEC-registered advisers with at least $150 million in private fund assets under management. Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC.

Which of the following does NOT have a federally imposed exemption from registration with the SEC?

Shares of bank holding companies traded on the New York Stock Exchange. Under the Securities Act of 1933, shares of bank holding companies listed on the NYSE are not exempt securities and they must be registered with the SEC. However, securities of commercial banks are exempt because they are regulated by the Controller of the Currency or some other banking agency. What might be confusing is that these NYSE-listed shares are federal covered securities, which makes them exempt from registration with the states. Securities issued or guaranteed by the U.S. government are exempt from registration under federal law. All securities issued or guaranteed by a state or political subdivision of a state qualify for a federal exemption. Promissory notes and bankers' acceptances with maturities of 9 months or less where the proceeds are used for working capital purposes rather than the purchase of fixed assets also have federally imposed exemptions.

An investment adviser has built a robust and seasoned team of experienced investment professionals. Each member of the team brings unique analysis and insight to the overall group who collectively weigh the evidence and then make recommendations to their clients to invest in or divest from specific securities, asset classes, or structure of their overall portfolio allocation. What term best describes this type of advice?

Tactical asset allocation. Tactical asset allocation describes investment advice and portfolio allocation based on current market conditions and an adviser's specific view of which investments will perform best. Here, the advice is based on the specific views of the assembled advisory team. Strategic allocation describes how to allocate across asset classes at large and does not depend on the specific short-term view of how that asset class will perform. Special situation investing looks to more unusual investment opportunities, such as in distressed instruments, M&A, or other "special" circumstances.

Which of the following statements regarding investment theory is not correct?

The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. Beta is a measure of systematic risk, not unsystematic risk. The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume systematic risk. Diversifiable risk (unsystematic risk) can be brought down to zero with proper diversification. Including securities with negative correlation is a prime method of reducing overall risk (expressed by the portfolio's standard deviation) and the closer the correlation coefficient gets to zero (and 0.14 is close), the more random the relationship between the returns earned by two securities.

An agent for a broker-dealer receives a buy order from an investment advisory firm on behalf of its clients. The order is to purchase 5,000 shares of XYZ common stock at the market. The adviser informs the agent that once the purchase is completed, the account numbers and quantities for each individual client will be supplied. The buy is completed, but at various prices. How is the order allocated to the adviser's accounts?

The order is reallocated to the investment adviser's clients by using the average cost basis. This is not an uncommon practice where an investment adviser has the ability to direct clients' orders to a specific broker-dealer. In many instances, the adviser will be purchasing (or selling) the same security for a number of different clients and, rather than turning in a large number of small orders, enters the trade as one large order. If, as in this case, the order is filled at different prices (particularly prevalent today with decimal pricing), then both state and federal rules require that an average price method be used.

A young, recently married couple is seeking investment advice to help them prepare to purchase their first home. They plan to use all of their savings and investments for a down payment in the next few years. Their adviser ascertains that they both have stable jobs, can meet all their current obligations, and can fully contribute to their retirement plans. In terms of their risk tolerance, they indicate they are aggressive. Given these characteristics which of the following statements is most accurate?

The short-term need for capital must take precedence over their aggressive risk tolerance resulting in a conservative portfolio. Clients who wish to deploy their capital in the short-term, often considered anything under 5 years, should transition those assets into conservative investments to ensure there are sufficient assets to achieve their desired goal. For example, it is unsuitable to take significant market risk and timing risk with funds earmarked for a home purchase.

Which of the following statements about systematic and unsystematic risk is most accurate?

Total risk equals market risk plus company-specific risk. Total risk equals systematic (market) risk plus unsystematic (company-specific) risk. Standard deviation is the tool that measures total risk. The unsystematic risk for a specific firm is not similar to the unsystematic risk for other firms in the same industry. Unsystematic risk is company-specific or unique risk, and when more stocks are added, the risk will change. The systematic risk of a portfolio can be changed up or down by adding high-beta or low-beta stocks.

Which of the following does not provide for a change of beneficiary?

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

According to the USA, under what circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent?

Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent. It is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent.

Your client has the following bonds in her portfolio: XYZ 3s of 44. TUV 6s of 45. QRS 9s of 43. NOP 12s of 42. If interest rates were to suddenly rise, which of her bonds would suffer the greatest decline in market price?

XYZ 3s of 44. The technical method for answering this question is to compare the duration of each of the bonds. The one with the longest duration will be impacted the most by a change in interest rates. Invariably, when the length of time to maturity is relatively close (as is the case here), the bond with the lowest coupon rate will have the longest duration. It should be easy to spot that the bond with the shortest duration is the NOP 12s of 42 - they have both the highest coupon and the nearest maturity and would be the correct answer if the question had asked for the bond suffering the smallest decline in market price.

Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be

a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund. The allocation of 50% municipal bond fund, 40% government bond fund, and 10% large-cap common stock is appropriate for a high-income person of age 75 who is not concerned with liquidity. The 10% large-cap fund provides some inflation protection with very moderate downside risk.

Duration is

a measure of a bond's price sensitivity with respect to a change in interest rates. Duration measures a bond's sensitivity to a change in interest rates. The longer the duration, the greater the change in a bond's price with respect to interest rate changes.

An investment adviser sends a notice offering a research report she has recently prepared to a group of 25 new members of the local Lions Club. Under the NASAA Model Rule on recordkeeping for investment advisers, the firm must keep a copy of the notice along with

a memorandum describing the list and its source. If an investment adviser sends any notice, circular, or other advertisement offering any report, analysis, publication, or other investment advisory service to more than 10 persons, the investment adviser shall not be required to keep a record of the names and addresses of the persons to whom it was sent, except if the notice, circular, or advertisement is distributed to persons named on any list, then the investment adviser shall retain with the copy of the notice, circular, or advertisement a memorandum describing the list and its source.

As a federal covered security, the KAPCO Growth Fund is required to notice file under the laws of State A. State A's Administrator can require the issuer to provide copies of

a report of the amount of the federal covered security sold in the state. Because those companies that are required to notice file are levied a fee based on the amount of securities sold in the state, information relating to the amount of sales in the state must be reported.

Under the Investment Company Act of 1940, SEC rules permit mutual funds to make sales charge discounts available to each of the following EXCEPT

an individual acting as agent for an investment club. Discounts for quantity purchases of mutual fund shares are not permitted for investment clubs. SEC and FINRA rules do permit sales charge discounts for individual purchasers making large purchases, tax-exempt organizations (e.g., pension plans, employee benefit plans), and directors, officers, employees, underwriters, and other persons affiliated with the fund.

In the Howey decision, the U.S. Supreme Court held that in order for an investment contract to be considered a security, it must represent

an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others. In the Howey decision, the U.S. Supreme Court held that a security must represent an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others.

Which of the following insurance company products is likely to have the longest time for which a surrender charge will be levied?

bonus annuity. One of the characteristics of bonus annuities is that their surrender charges tend to be higher for a longer time than other insurance company products. When you see Class B shares on the exam, it will be referring to mutual funds, not insurance company products.

Which of the following orders would be used to protect a short sale profit?

buy stop. For a short sale to earn a profit, the current market value must be lower than the sale price. An investor must buy the stock at a lower price to realize a profit. To protect denotes buying if the market starts to rise. Therefore, a buy stop would be entered above the current market value to protect the profit and trigger a purchase in the event the market starts to rise.

Centripetal Investment Advisers (CIA) has its principal office in State X and is also registered in States Y and Z. CIA would be considered to be maintaining custody of client assets in all of the following cases EXCEPT

checks made out to 3rd parties are forwarded within 3 business days. When a check made payable to a 3rd party is received by the investment adviser, it will not be deemed to be custody under the Uniform Securities Act if the check is forwarded within 3 business days. When a check is made payable to the investment adviser, it must be returned to the sender within 3 business days or it will be considered maintaining custody. Authority to withdraw funds or securities from the custodian or automatic deduction for fee payments are forms of custody.

Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment?

closed-end investment company. A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market.

An IAR is viewing the balance sheet of a corporation. Included in the computation of the company's working capital are all of the following EXCEPT

convertible bonds it has issued. The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital.

In order to achieve its goals, an inverse ETF uses

derivatives and debt. An inverse ETF will almost always use derivatives, such as options and, in the case of a leveraged ETF, will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to take advantage of temporary imbalances between the ETF's net asset value and market price.

A valuation that considers a bond's future interest payments and the return of principal, and converts them into their present value is best described as a

discounted cash flow analysis. A discounted cash flow (DCF) analysis takes the future cash flows of a bond and discounts them to their present value. A net present value analysis would compare the present value of the bond with the bond's price. A future value calculation takes present dollar amount and projects its value in the future. The rule of 72 provides an estimate of how long it will take an investment to double in value.

With respect to taxation, an investment adviser representative should NOT

draft tax and estate documents to ensure compliance with current law to provide substantial after-tax returns. An investment adviser representative must not draft legal documents; they should only be drafted by an attorney because doing so constitutes practicing law. An investment adviser representative should, however, discuss all relevant tax implications of recommended investments, including how the recommended investments might improve a client's after-tax returns.

It would be considered a prohibited activity for an agent to engage in any of the following activities EXCEPT

executing a transaction in a nonexempt security in a discretionary account.

The Investment Company Act of 1940 requires certain types of investment companies to compute their net asset value on a regular basis. Excluded from that requirement are

face-amount certificate companies. The two investment companies offering redeemable securities, open-end funds, and UITs, must compute their NAV on a daily basis. Closed-end funds can do it daily; many compute every Friday. The concept of NAV makes no sense with a FACC.

Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her?

general partnership. Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. While an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.

Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can

have a check drawn on the account payable to the trustee for trustee expenses. The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts (not to be confused with custodian for minors), not in noncustodial accounts.

As interest rates rise, the opportunity cost of holding cash

increases. At higher interest rates, the opportunity cost of holding cash increases, and firms and households will desire to hold less cash and more interest-bearing financial assets.

With regard to a state-registered investment adviser using Form ADV Part 2 as its brochure, it would be correct to state that

its filed through the IARD system. The Investment Adviser Registration Depository (IARD) is an electronic filing system that facilitates investment adviser registration, regulatory review, and the public disclosure information of investment adviser firms. The IARD is used for filing Form ADV Parts 1 and 2. If the "brochure" is not delivered at least 48 hours before (not after) the signing of the agreement, the client has a 5-day penalty-free withdrawal right. Annually, the Part 2 (brochure), or a summary of material changes, must be delivered within 120 days of the end of the adviser's fiscal year (unless there have been no material changes). The brochure does not have to be delivered to all clients; those purchasing impersonal advice for less than $500 per year are exempted. There is also an exemption for delivery to investment company clients, but that would not apply here because if the adviser had any of those, it would have to be federal covered rather than state-registered.

Someone who wishes to invest in precious metals would consider any of the following EXCEPT

lead. Lead is not considered a precious metal.

Several years ago, an investor purchased an investment-grade bond with a 6% coupon. Today that bond is priced to yield 4.6% to maturity in 5 years. If the bond is called at par in one year, the bond's yield would be

less than 4.6%. Let's take things in order. A bond with a 6% coupon is showing a YTM below 6%, the bond must be selling at a premium. When bonds selling at a premium are called in advance of the maturity date, the "loss" (the difference between the premium and the par value") is recognized sooner than expected. This results in a yield to call (YTC) that is less than the YTM.

If a client in the 30% marginal income tax bracket can earn an after-tax rate of return of 7% when the estimated inflation rate during the holding period of an investment is 4%, the client's real rate of return is

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

When issuers are engaged in intrastate offerings, their registration statements

may be amended after their effective dates as to the amount of securities to be issued, provided underwriting fees and initial offering price are not changed. Intrastate offerings are effective for 1 year from the effective date (note that registration of personnel expires annually on December 31st). Throughout the offering process, the issuer may update the amount of securities being sold while maintaining the same fees and offering price.

The Sharpe ratio is the average annual return of a security

minus the risk-free rate for the period divided by the security's standard deviation. The Sharpe ratio is the average annual return of a security less the risk-free rate divided by the security's standard deviation. In other words, the Sharpe ratio is a risk-adjusted return because it measures the amount of return per unit of risk taken; the most common risk-free rate is that paid by 91-day U.S. Treasury bills.

Under adverse market conditions, it is not unusual for mutual fund investors who had been investing on a regular basis to cease or reduce their level of financial commitment. This can have the effect of

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

One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to rollover the entire account into an IRA, the tax treatment would be

no current tax, but any withdrawals would be taxed as ordinary income. As with any rollover from a qualified plan to an IRA, there is no current tax, but withdrawals are taxed at ordinary income tax rates. This client would have saved had he taken advantage of the NUA (net unrealized appreciation) approach. In that case, taking the company stock and putting it into a taxable account would have resulted in ordinary income tax on the $25,000 cost basis, and long-term capital gain rates on the appreciation whenever the stock was sold.

An individual has been employed by a broker-dealer to solicit new subscriptions for the firm's free monthly stock market report. The individual is paid a salary plus bonus based on his success rate with signing up subscribers. Under the USA, this person would

not have to be registered as an agent of the broker-dealer. Agents of broker-dealers are in the business of securities-related transactions on behalf of clients of the firm. A free-market report is not a security, so this individual is not soliciting securities business.

Under the USA, a person who is in the business of providing advice on trading futures contracts in addition to advising clients on securities issued or guaranteed by the U.S. government is

not required to be a registered investment adviser in the state. This question is referring to a federal covered adviser. The futures contracts are not securities, but, of course, the U.S. government securities are. However, the Investment Advisers Act of 1940 specifically excludes from the definition of "investment adviser" a person whose securities advice is confined to securities issued or guaranteed by the Treasury. The fact that this person is excluded under the Investment Advisers Act of 1940 makes that person federal covered under the NSMIA and not subject to state regulation as an investment adviser.

First Securities Advisers, Inc., a subsidiary of First Securities Broker-Dealers, Inc., requires customers to have a minimum of $250,000 under management and charges them 1% in advisory fees based on the amount of assets in their accounts. Clients also pay commissions for securities transactions in their accounts. First Securities Advisers, Inc., has

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

When contrasting call options, preemptive rights, and warrants, it would be correct to state

only preemptive rights and warrants are issued by the underlying corporation. Corporations issue preemptive rights (if called for in the corporate charter) when issuing additional shares. Warrants are issued by corporations usually as a sweetener to make a bond issue more attractive. Call options are issued by the options exchanges, not the underlying corporation. All three of these products trade on listed exchanges and all of them have time value with warrants generally having the longest expiration date.

Amie Lear is a securities analyst employed by Empyreal Benefits, Inc., a registered broker-dealer. She is assigned to cover a number of different equity and debt investments. One of the investments is Taylor, Inc. (Taylor), a manufacturer of a wide range of children's toys. Based on her extensive analysis, she determines that her expected return on the stock, given Taylor's risks, is 10%. In applying the capital asset pricing model (CAPM), the result is a 12% rate of return. Based on Lear's analysis, Taylor's stock is

over valued. The CAPM gives us the expected rate of return. That return is 12%. Taylor's expected return is 10% which is lower than the required return indicating that the stock is overpriced.

A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are

partially a tax-free return of capital and partially taxable/ The investor has already paid tax on the contributions, but the earnings have grown tax deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.

Hexagon Portfolio Advisors (HPA) believes that the market is semi-strong efficient. The firm's portfolio managers most likely will use

passive portfolio management strategies. If the market is semi-strong efficient, portfolio managers should use passive management because they believe neither technical analysis nor fundamental analysis will generate positive abnormal returns on average over time. A semi-strong proponent opines that private (inside) information can work (beat the market), but because that information is generally prohibited from use, portfolio managers can't claim that as their investment strategy.

An investor purchased 100 shares of GRA stock at $100 per share in a margin account. Two years later, the GRA was sold for $120 per share. If the investor's account was charged $700 in margin interest, it would be proper to state that this is an example of

positive margin. Positive margin means that, after taking into consideration the interest paid on the borrowed money in a margin account, a specific transaction was profitable (negative margin is the reverse). In this case, the sale resulted in a gain of $2,000 which is $1,300 more than the interest cost.

An investor holding which of the following equity securities would NOT expect to have preemptive rights?

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

As a registered investment adviser, you have managed $10 million of a customer's funds for several years. The customer asks you to prepare a trust for his children, to transfer $3 million of his funds into the trust, and to trade the trust with the same objectives as the existing account. You should

refer the customer to an attorney that can set up the trust. The best choice is to have the customer contact a qualified attorney to set up a trust.

Whippet Bus Lines, Inc., serving most of the country, has just been informed by the Surface Transportation Board of the United States that all of its buses must be retrofitted with expensive safety equipment. The effect of this will be a significant drop in Whippet's net income. To an investor in Whippet Bus Lines, Inc., this would be an example of

regulatory risk. When an action by a regulatory agency, such as the STB, leads to increased costs and lower income, that is regulatory risk.

If general interest rates increase, the interest income of a bond unit investment trust will probably:

remain the same. Because the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.

A transactional exemption would be available under the Uniform Securities Act when an agent for a broker-dealer

sells a large block of an unregistered nonexempt security to an insurance company that is not authorized to do business in this state. The sale of a security to an institution, such as an insurance company, is considered an exempt transaction. The fact that the company is not authorized to do business in the state only means that its securities would not be exempt, but that does not change the fact that this is a sale to an institution and is, therefore, exempt. The term accredited investor is meaningless here, only institutions qualify for exempt treatment, not rich people. The T-bonds are an exempt security, but the sale to a retail client is not an exempt transaction. Heating oil contracts are a commodity, not a security.

A terminally ill client wishing to access a portion of the cash value in his whole life insurance policy while still providing a death benefit for his beneficiaries could do so by

taking out a policy loan. One of the benefits of whole life insurance is the ability to borrow against the guaranteed cash value in the policy. At death, the amount of the loan is paid off from the death benefit, but the remainder is then paid to the beneficiaries of the policy. Surrendering the policy cancels the death benefit, and the purchaser of the viatical is now the one who determines the beneficiaries. You can't convert permanent insurance to term (and the exam will not consider the situation of leaving the cash value to purchase extended term insurance, which wouldn't work here anyway).

Which of the following is NOT a characteristic of owning a limited partnership?

tax free income. The income from limited partnerships is not tax exempt. An investor, however, may use a tax loss from a partnership to offset the income from another passive investment. In limited partnerships, the investor enjoys the advantages and disadvantages of owning a business without having to actually manage one. Limited partnerships are vulnerable to legislative changes that adversely affect ownership of such investments.

All of the following statements regarding the registration of an investment adviser in a state are true EXCEPT

the annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process. The consent to service is a permanent document that remains on file with the Administrator; it need not be resubmitted for yearly renewal. The initial application for registration must include a consent to service of process along with Form ADV and the appropriate fees. If the investment adviser is not an individual, all officers or partners of the business entity that play an active role in the giving or supervision of giving advice are automatically registered as IARs.

An analytical tool used to project the current value of a common stock using projected future dividends is

the dividend discount model. There are two widely accepted forms of common stock price projection using dividends—the dividend discount model and the dividend growth model.

Twenty-five individuals have formed an investment company. They have heard wonderful things about you as an investment adviser and ask if you would be interested in managing their portfolio. You reply that you would be interested but will only take the account if you can structure a compensation arrangement that calls for you to receive a base fee plus 18% of the profits to the extent that the account's performance exceeds a standard benchmark. Under the Uniform Securities Act, this type of agreement is allowable if

the investment company has net worth of at least in excess of $2.1 million or will place at least $1 million in assets under management with the IA. An investment adviser may enter into, extend, or renew an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds, or any portion of the funds, of the client if the client entering into the contract is: a natural person or a company who, immediately after entering into the contract, has at least $1 million under the management of the investment adviser; or a person who the investment adviser and its investment adviser representatives reasonably believe, immediately before entering into the contract, is a natural person or a company whose net worth, at the time the contract is entered into, exceeds $2,100,000. Do not be confused by thinking this is an institutional client (a registered investment company)—they need at least 100 investors and registration with the SEC.

The total return of a mutual fund is equal to

the return attained by reinvestment of all dividend and capital gains distributions plus unrealized gains or minus unrealized losses. As with all securities, total return includes unrealized gains or losses. In the case of mutual funds, the total return also assumes reinvestment of all dividend and capital gains distributions.

One reason why employers like using deferred compensation plans is that

they can be structured so that the employee's benefits are forfeited upon termination with cause. Deferred compensation plans frequently provide that employees leaving before a certain period of time, going to the competition, or being terminated for cause forfeit plan benefits. There are no current tax deductions, the plans discriminate, and because they are nonqualified, there is no IRS approval.

An individual may NOT act as an agent for more than one broker-dealer

unless the Administrator, by rule or order, authorizes such employment. An individual may only act as an agent for multiple broker-dealers that are affiliated with each other. If the broker-dealers are unrelated, an agent may not work for them unless the state securities Administrator, by rule or order, authorizes such employment.

Defalcator Investment Advisers (DIA), registered in States A, K, and R, would be required to provide a balance sheet as part of its brochure if it charged fees of

$1000 for next year's advisory clients. State-registered investment advisers, who charge substantial prepayment of advisory fees, must include a balance sheet with their brochure. The definition of a substantial prepayment is: more than $500, 6 or more months in advance. The correct choice is the only one meeting both requirements. Remember, it isn't $500 or more, it is more than $500 and it must be for at least 6 months of service to count.

An investor purchases a 5% callable convertible subordinated debenture at par. Exactly one year later, the bond is called at $104. The investor's total return is

9%. Total return consists of income plus gain. Buying a bond at par and having it called at $104 results in a $40 gain. With a 5% coupon, there will be two semiannual interest payments of $25 in a one-year holding period. Adding the $40 + $50 = $90 total return on an investment of $1,000 which = 9%.

A stock has been in a downtrend for several days. When its price decreases to near $30, many investors enter orders to buy the stock and the price increases to $31. This is most likely an example of

a support level. The downtrend reached a support level where buying demand sustained the price. A resistance level is a price at which selling pressure emerges that stops an uptrend.

If an agent solicits a client to purchase nonexempt, unregistered securities, and the solicitation results in a sale, which of the following statements is NOT true?

The employing broker-dealer must offer the right of rescission within 30 days of discovery. There is no specified time limit on when the right of rescission must be offered. The 30-day period is the length of time the client has, after receiving the notice, to accept or reject the offer. Agents are prohibited from soliciting sales for unregistered, nonexempt securities and any broker-dealer who employs an agent who does so may be sued. The agent may also be subject to civil penalties. Both agents and their broker-dealers may be sued when a sale results from an improper solicitation. If money is made, the client may keep it.

A client has recently revised her will to reflect that all her assets should transfer to her son, with nothing passing to her daughter. When the client passes away, the executor of the estate contacts a brokerage firm that holds an account of the deceased and learns the account had a transfer-on-death registration that designates the daughter as the beneficiary. What would most likely happen with the assets in the brokerage account?

The firm will transfer ownership of the assets to the daughter as indicated by the transfer-on-death designation. A brokerage firm will adhere to the instructions as provided specifically to the firm in a transfer on death (TOD) plan. This remains the case even if the plan conflicts with the client's wishes in other estate documentation such as a will. Here, the firm would transfer the assets to the daughter as per the TOD and would not transfer the assets to the son. Because the account carries the TOD it avoids probate and no court ruling is required prior to the firm making a distribution.

Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation?

$60,000. The current gift tax exclusion (2019) is $15,000 per donor to each recipient. A married couple can give $30,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $30,000 to their son and $30,000 to their daughter-in-law without paying any gift tax.

A hedge fund with a 2-plus-20% fee structure has equal probabilities of a 10% loss or a 30% gain in its first year. The probable return to an investor in the fund for the first year is closest to

5.2%. To our knowledge, the exam has never asked a question this complicated. But, things can always change so we wanted you to get the "flavor" of combining probable return (which is tested) with hedge fund performance fees. With a 30% gain, the fund would earn fees of 2% + 0.20(30% - 2%) = 2% + 0.20 (28%) = 2% + 5.6% = 7.6%. With a 10% loss, the fund would only earn its management fee of 2%. To the investor, the expected return is 0.5(-10% - 2%) = 0.5 (-12%) = -6% + 0.5(30% - 7.6%) = -6% + 0.5 (22.4%) = -6% + 11.2% = 5.2%.

If the current risk-free rate is 4%, and the expected return from the market is 10%, what return should we expect from a security that has a beta of .9?

9.4%. Required return = 4% + ([10% - 4%] × .9) = 4% + (6% x .9) = 4% + 5.4% = 9.4%.

Which of the following situations violates the contractual requirements for investment advisory partnerships under the Uniform Securities Act?

A partner with a 5% interest in an advisory firm leaves the firm and the remaining partners do not inform their clients because the departing partner held a minority interest in the firm. An investment advisory partnership must notify clients of any change in membership within a reasonable time. The death of a minority partner does not constitute assignment of contract. A partnership may assign contracts with written consent of clients. A contract renewal does require written repetition that an adviser shall not be compensated on the basis of a share of capital gains, not assign a contract without consent, and notify clients of any change in membership of partnership.

Which of the following statements regarding grantor trusts is NOT correct?

The grantor may be taxed on trust income only if the grantor actually received the income. As long as the grantor has the power directly or indirectly to control the trust, he is treated as the owner. The grantor may be taxed on trust income if the grantor either actually or constructively receives the income.

A middle-aged couple with no children, two stable government jobs, and a conservative risk tolerance meet with their financial adviser. Which of the following would be the most appropriate investments for them?

Treasuries and money-market instruments, aiming for a very low risk of loss, with limited upside. A conservative outlook is one with the primary goal to maintain a very low risk profile yet still achieve some return on investment. Treasuries and money market instruments would therefore be appropriate. This outlook permits greater risk than a very conservative risk tolerance which would aim to avoid all investment risk by holding assets in cash or CDs (note, however, this exposes the client to inflation risk). Utilities and blue-chip stocks still carry risk, as does gold and other precious metals (even if they are not securities).

Although certain common stocks, known as federal covered securities, are exempt from state registration, the Administrator has the power to request from the issuer all of the following EXCEPT

a contact person located within the state for purposes of legal service. The consent to service of process eliminates the need for any local representation for legal purposes.

A transactional exemption would be offered when a sale is made by

a court-appointed guardian for a minor. Among the list of exempt transactions are sales made by fiduciaries, such as court-appointed guardians. Because there is no legal paperwork required, the custodian for a minor under UTMA (or UGMA) is not considered a fiduciary for purposes of this rule.

Under the USA, an investment adviser's current clients must be delivered a brochure

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

In order to qualify as a REIT,

at least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities. A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its income to investors, not 75%.

Under the Securities Act of 1933, the SEC

attempts to make certain that all pertinent information is fully disclosed. Every prospectus carries the SEC disclaimer on the front cover in bold type. All the SEC can hope for is full disclosure of the pertinent information.

An investment adviser representative is prohibited from

charging a fee for investment advice and then earning commissions on recommended trades without disclosing the nature of the dual relationship. When acting as a representative of an investment adviser, as well as a broker-dealer, the relationship must be disclosed. IARs are permitted to recommend proprietary products only but must make disclosure of that fact.

If an agent thought that a technology stock was undervalued and actively solicited purchase order from all of her customers, the agent

committed an unethical business practice. Agents must always determine suitability before soliciting purchases or sales. The key here is that the agent solicited buy orders for this stock from all of her clients. One investment cannot be suitable for all of your clients.

As a rule, loans from a 401(k) plan must be repaid within how many years?

5. Most loans from a 401(k) plan are required to be repaid within 5 years. This rule does not apply to loans taken for a home purchase.

A client owns an equity index annuity with the following characteristics: • 10% cap rate • 85% participation rate • 2% minimum annual guarantee The client purchased the annuity with an initial investment of $100,000. In the first year the underlying index returned +18%. In the second year, the market return was negative 4%, and in year three it returned +6%. What is the value of the annuity at the end of year three?

$117,922. It is important to be able to compute the ending value of an equity index annuity. Here, the annual returns must account for the annuities features of the 10% cap, 85% participation, and 2% annual guarantee given market returns of +18%, ?4%, and +6%. To solve this type of question one must determine what amount will be credited to the account at the end of each year. In year one, the 18% market return is limited to a 10% return ($10,000) due to the cap rate. Year two then begins with $110,000 in the account and the market returns ?4%, resulting in the application of the 2% minimum annual guarantee, for a credit of $2,200. The end of year two and beginning of year three value is therefore $112,200. In year three the market returned 6%, but the annuity will only be credited 85% of that, namely, $112,200 × 0.06 × 0.85 = $5,722. The balance in the account at the end of the three years is therefore, $117,922.

An investor purchases 100 shares of Shilaf Baby Products, Inc. (SBPI) at $60 per share. SBPI pays quarterly dividends of $.55. One year after the purchase, SBPI is at $66 per share, and after the second year, its market price is $63 per share. If the investor were to close out the position at this time, the total return would be

12.33%. Total return combines income and gains. In this question, the total income for the two-year holding period is $440 ($.55 per quarter = $2.20 per year x 100 shares). The sale is at $63 which is a $3 per share gain. That makes the total return $440 + $300 which equals $740. Dividing that by the original $6,000 cost results in a total return of 12.33%.

If the Administrator has summarily suspended an investment adviser representative's registration, the registrant may request a hearing by written request and the hearing will be granted within

15 days. When an Administrator summarily suspends a registration, the registrant has a right to a hearing if the request is made in writing. The hearing must be granted within 15 days of receipt of the request. Registration of professionals takes place at noon of the 30th day and an appeal for review of an Administrator's order must be filed within 60 days.

An investment adviser representative is evaluating ABC stock to see if it is a good fit for a client's portfolio. Using the security market line (SML), what is the expected return for ABC when the return on the market is 20%, the 91-day Treasury bill is yielding 4%, ABC's beta is 0.70, and the inflation rate, as measured by the CPI, is 3%?

15.2%. The formula for this computation is as follows: 20% (the return on the market is a beta of 1.0) minus the risk-free rate of 4%, or 16%. Then, multiply that by the beta of this stock (0.7) to arrive at 11.2%. That is, the stock should return 11.2% over the risk-free rate of 4%, or 15.2%. Inflation rate is only important if we are looking for the real (inflation-adjusted) return, not the expected return.

Without the need to meet any special conditions, a participant in which of the following retirement plans would be able to withdraw funds prior to age 59½ and not incur a 10% tax penalty?

457. The 457 plan allows participants to withdraw funds at any time, not just after age 59½, without incurring the 10% tax penalty. Income taxes would, of course, be due, but no penalty.

Which of the following activities would NOT be considered a prohibited practice under the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents?

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

An investment adviser is analyzing 4 bonds of similar quality for a client. Bond A has a coupon of 6%, matures in 12 years, and is currently priced at 50. Bond B has a coupon of 8%, matures in 9 years, and is currently priced at 50. Bond C has a coupon of 4%, matures in 18 years, and is priced at 45. Bond D has a coupon of 12%, matures in 6 years, and is priced at 50. Based on NPV, which of these bonds represents the better value?

Bond C. Because you don't have the proper calculator to do a real PV calculation, NASAA expects you to use the rule of 72. Remember, under that rule, dividing 72 by the interest rate tells you the number of years it will take for a deposit to double. Or, if you divide 72 by the number of years, it will tell you the interest rate required for a present deposit to double. Finally, a positive NPV is when you can buy the bond for less than its present value. So, let's look at all 4 choices. Bond A, at 6%, takes 12 years to double. That's exactly the time to maturity, so the PV of this bond should be approximately $500 (a quote of 50). The same is true of bonds B and D—their PV should be approximately $500 (72 ÷ 8% = 9 years; 72 ÷ 12% = 6). Because their price is the same as the PV, the NPV is zero. However, with bond C, 72 divided by 4% equals 18 years, so this bond also has a PV of approximately $500 (50), but it can be purchased for less than that: 45 ($450). Therefore, with an NPV of $50, bond C is the best value. One final point: If you are stuck and have to guess, note that 3 of the 4 bonds are selling for $500 with the other priced at $450. If they are all going to mature at $1,000, a good guess would be that the cheapest one is the best deal.

In which of the following situations is an agent most likely to be in violation of the Uniform Securities Act? I. The agent loans his personal funds to clients only when they are suffering financial difficulties. II. A customer instructs an agent to purchase shares in XYZ Company, a company the agent knows is experiencing financial difficulty. The agent purchases ABC stock, a financially sound company, instead. When the change was discovered, the client was pleased. III. An agent on behalf of his clients purchases shares in an oversubscribed initial public offering. IV. The agent registers in states in which he has no clients.

I and II. An agent is prohibited from making a loan to a client unless the client is a financial institution in the business of lending money (e.g. a bank). If a customer instructs an agent to purchase a particular security, the agent must execute the transaction regardless of their opinion of the investment (with the only exception being if the transaction would be illegal). An agent can purchase IPO shares on behalf of a client and can register in any state he/she wants, even if no clients reside in the particular state.

Under the Uniform Securities Act, an Administrator has which of the following powers? The power to seek court orders for the payment of restitution against any violators of the act The power to issue a cease and desist order with or without prior hearings The power to impose a prison sentence of up to 3 years for violations of the act

I and II. The Administrator may issue cease and desist orders to stop persons from violating the act, with or without a prior hearing, as long as notice is given that a hearing will be granted upon written request. The Administrator may apply to a court for a temporary or permanent injunction, restitution to investors, or to have the court appoint a receiver for a violator's assets; or refer charges to the state attorney general or district attorney for prosecution. The Administrator does not have the power to impose a prison sentence; that power is reserved for the courts.

To be defined as an investment adviser under the Uniform Securities Act, which of the following must apply? Compensation must be received. Advice is provided regarding securities. Advice must be provided through direct written communication.

I and II. This question contains 2 of the 3 key "prongs" of the definition of investment adviser. Those are that the person provides advice on securities and that the person receives compensation for rendering that advice. The advice may be provided orally or in writing. The third prong, not included here, is that the person must be "in the business" of providing investment advice.

Which of the following transactions are exempt from registration under the Uniform Securities Act? A trustee of a corporation in bankruptcy liquidates securities to satisfy debt holders. An offer of a securities investment is directed to 10 individuals in the state during a 12month consecutive period. A sale of securities by the trustee of the Lorgan Family Children's Trust. Agents for an entrepreneur offer pre-organization certificates to fewer than 10 investors in the state for a modest commission.

I and II. Transactions by fiduciaries, such as a trustee in a bankruptcy reorganization, are exempt from registration. But only a trustee in bankruptcy is afforded this exemption, not for a family trust. An offer of a securities investment to 10 or fewer individuals (called a private placement) is also exempt from registration. Offers of pre-organization certificates are not exempt when compensation is paid.

Under the Uniform Securities Act, which of the following would be considered an exempt transaction? An existing client calls his agent with an order to purchase 1,000 shares of a common stock that is not registered in this state At the suggestion of the agent handling her account, a client purchases some U.S. Treasury bonds for inclusion in her IRA Shares of a technology company's IPO are sold to an institutional client Shares of an insurance company's IPO are sold to an individual client

I and III. A client calling to purchase stock is an unsolicited transaction, probably the most common of the exempt transactions. Any sale to an institutional client is an exempt transaction, whereas those to individuals, unless unsolicited, generally are not. Please note, even though the Treasury bonds are an exempt security, because the transaction was solicited by an agent to an individual client, it is not an exempt transaction.

Creative Wealth Management (CWM), an investment adviser registered in five states, has a preferred brokerage arrangement with Bullish Bobbie Brown Securities (BBBS), a FINRA member broker-dealer. If one of CWM's clients chooses to use a broker-dealer other than BBBS, CWM must disclose that in a client-directed brokerage account, the client may pay higher brokerage commissions because the IA may not be able to aggregate orders to reduce transaction costs the advisory contract is in danger of not being renewed if the client insists on using anyone other than BBBS for trade execution the client may receive less favorable prices because the IA has arranged a preferred commission rate with a preferred broker-dealer using BBBS assures the client of receiving research ahead of those clients who trade elsewhere

I and III. Because of preferred arrangements between the IA and the BD, it is likely that larger orders will be combined (with a concurrent cost saving) and there may be a better commission schedule available for the adviser's clients. This would not be a cause for the adviser to refuse to renew the contract, and it would be an unfair business practice to make research available to certain clients ahead of others.

Which of the following statements regarding REITs are NOT true? Investors receive flow-through benefits of income as well as loss. Hybrid REITs own properties, as well as make loans on others. Equity REITs are prohibited from using leverage to acquire properties. REITs are easily traded in the secondary market.

I and III. It is not true that REITs offer flow-through of losses; they are not DPPs. As with most real estate purchasers, leverage, usually in the form of a mortgage, is used to acquire property. A hybrid REIT contains the features of both an equity REIT and a mortgage (debt) REIT, and most REITs trade on the exchanges or Nasdaq. Note: Even though there has been an increase in the number of non-traded REITS, unless something in the question indicates that, the question will be dealing with publicly traded REITS.

One of your clients is in the process of forming a new business venture with a friend and is considering whether to operate as a general partnership or a C corporation. Among the advantages of operating as a general partnership are ease of dissolution ease of raising additional capital flow-through of income or loss limited liability

I and III. Unlike a C corporation, operating income or losses of a general partnership flow through directly to the partners. There are several easy ways to dissolve a partnership. However, they do not offer the limited liability protection of a corporation. The corporate form of business is generally the most suitable for raising additional capital.

A corporation calls in a portion of its long-term debt at 101. This will have the effect of decreasing working capital increasing working capital decreasing net worth increasing net worth

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

Credible Investment Specialists (CIS) is a state-registered investment adviser with its only offices in State A. In which state(s) would registration be required? State A where the only clients are large pension plans State B where the only clients are banks State C where the only clients are insurance companies State D where there are 6 or fewer retail clients over any 12 month period

I and IV. For those investment advisers who are not federal covered, registration is always required in any state in which the firm maintains a place of business, regardless of the nature of its clientele. If there is not a place of business in the state, registration is not required when the clientele is limited to institutions, such as banks, insurance companies, and large employee benefit plans (at least $1 million in assets). Once the adviser has more than 5 retail clients in a state over a 12-month period, the de minimis exemption is lost and registration is required.

Which of the following characteristics describe a futures contract? I. Exchanged-traded II. SEC regulated III. The long party can walk away from the contract if it is economically advantageous to do so

I only. A futures contract is an exchanged-traded obligation for a specific commodity. The parties to the contract must perform at expiration (unlike an option contract which allows the buyer to decide whether to exercise or not). Futures are not securities and do not fall under SEC jurisdiction.

The Uniform Securities Act authorizes the state Administrator to require either oral or written qualification examinations of investment adviser representatives and officers of investment adviser partnerships or corporations officers of investment advisers to pass a qualification examination an applicant for initial registration to publish an announcement of the application in one or more specified newspapers published in the state investment adviser representatives to pass a qualification examination

I, II, III, IV. The state Administrator may require qualification examinations for officers of investment advisers, as well as its representatives, and may require them to publish an announcement in one or more newspapers published in the state. The Administrator may also require either an oral or written examination.

Which of the following securities are federal covered and exempt from state registration? Bonds of an issuer whose common stock is listed on the NYSE Bonds of an issuer whose common stock is listed on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) Stock traded on Nasdaq Registered investment company securities

I, II, III, and IV. All securities of an issuer whose common stock is listed on any national exchange or any tier of the Nasdaq Stock Market are exempt from state registration, including any securities of the same issuer senior to such securities. All registered investment company securities are also exempt from state registration.

Which of the following statement(s) regarding gift taxes for a gift made in 2019 are TRUE? Gifts of $15,000 per person per year can be given without a tax liability. Gifts in excess of $15,000 per person per year may be subject to tax. The donor, not the recipient, is responsible for any tax liability. The tax rate increases with the size of the gift.

I, II, III, and IV. In accordance with current gift tax regulations, an individual may give a gift of up to $15,000 per person in 1 year with no gift tax liability. If the gift exceeds $15,000, it is the donor who is responsible for any tax. The gift tax is a progressive tax, which means that as the size of the gift increases, the percentage of applicable tax will also increase.

Under the provisions of the Uniform Securities Act, securities exempt from registration requirements include securities issued by the U.S. government securities issued by a building and loan association organized under the laws of any state and authorized to do business in this state bonds issued by an insurance company organized under the laws of any state and authorized to do business in this state

I, II, and III. Securities exempt from registration requirements include securities issued by the state or U.S. government; securities issued by foreign governments with whom the U.S. maintains diplomatic relations; and any securities issued by savings and loan or building and loan associations, insurance companies, and credit unions authorized to do business in this state.

The James Henry Company (JHC), an SEC-registered securities broker-dealer with offices in Chicago and Los Angeles, limits its clientele to banks and trust companies. JHC makes a sale of U.S. government securities to the Wall Street Bank located in New York City. Which of the following statements is (are) TRUE under the Uniform Securities Act? The security itself is exempt from registration. The transaction is exempt. The broker-dealer is not required to be registered in the state of New York.

I, II, and III. The sale involves a U.S. government security, which is exempt from the registration requirements under the act. The transaction itself is also exempt because it involves a sale to a financial institution. Remember, in an exempt transaction, the security subject of the transaction need not be registered with the state in which the transaction takes place. In this example, the security was already exempt, but that does not diminish the fact that the transaction is exempt. The fact that the firm limits its clientele to financial institutions, such as banks, and that the broker-dealer has no office in New York means that, under the Uniform Securities Act, the firm is not considered a broker-dealer in that state. Therefore, the broker-dealer is not required to be registered in the state of New York.

Which of the following persons are excluded from the definition of, or exempt from registration as, a broker-dealer under the Uniform Securities Act? A broker-dealer with no office in the state that effects trades exclusively with other broker-dealers in the state A trust company with an office in the state that deals with the general public A broker-dealer with no office in the state that has no more than 5 retail clients resident in the state within the past year A broker-dealer with no office in the state that effects securities trades exclusively with trust companies or other broker-dealers

I, II, and IV. As long as a broker-dealer does not have an office in the state, it is possible to qualify for exclusion from the definition. The primary requirement for the exclusion is that the broker-dealer confine trading to financial institutions or other broker-dealers. Unlike with investment advisers, there is no de minimis exemption for broker-dealers. Trust companies are excluded from the definition of broker-dealer.

Which of the following statements regarding IRAs are CORRECT? One may have both a Roth IRA and a traditional IRA, contributing the maximum to each one. One may have both a Roth IRA and a Roth 401(k) contributing the maximum to each one. Both traditional IRAs and Roth 401(k) plans have RMDs at age 70½. If one is a participant in a Roth 401(k) plan, the earnings limits are waived for opening a Roth IRA.

II and III. A Roth IRA and Roth 401(k) are 2 separate items, and maximum allowable contributions may be made to both. This is unlike the IRAs, where one can maintain both but the total contribution is the annual limit (currently $6,000 with a $1,000 catch-up). One of the things about a Roth 401(k) that is different from the Roth IRA is that RMDs must start at the same time as with traditional IRAs. Although one may participate in a Roth 401(k) without regard to AGI limits, that is not so with the Roth IRA.

Which of the following constitutes a sale of stock? Solicitation of a tender offer by a corporation Gift of assessable stock Purchase of shares through the exercise of a warrant Exchange of shares in a corporate reorganization, such as a mergerI

II and III. A gift of assessable stock constitutes a sale under the USA because the corporation that issues assessable stock can bill shareholders for cash representing the par value shortfall at a future date. Upon the exercise of a warrant, the holder of the warrant purchases stock and the issuing corporation sells the stock. Under the Uniform Securities Act, the solicitation of tender offers by corporations and exchange of shares in corporate reorganizations are not sales.

Which of the following statements concerning investment advisers are true? An investment adviser who is exempt from registration is also exempt from the antifraud provisions of the Uniform Securities Act. The SEC can cancel the registration of a federal covered investment adviser if it finds that the adviser is no longer in business. An investment adviser who represents that their qualifications and methods of security analysis have been passed on by the SEC has violated the act.

II and III. As long as a security is involved, no one is ever exempt from the USA's antifraud provisions on the exam. The SEC may cancel the registration of an adviser for one of several reasons, no longer being in business is one of them. It is always a violation to claim that the SEC (or the Administrator) has approved of your methods of doing business.

Which of the following statements concerning conflicts of interest under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers are TRUE? Where a conflict of interest exists, an adviser must decline taking on the client. A conflict of interest is defined as anything that may impair the impartiality of the advice being rendered. An investment adviser who receives a fee for investment advice, and whose investment adviser representatives are paid commissions from broker-dealers, presents a conflict of interest that must be disclosed.

II and III. Conflicts of interest could impair the rendering of unbiased and objective advice. This includes, but is not limited to, receiving compensation from sources other than clients' fees (such as a salary or commission from a broker-dealer) as a result of providing investment advice. Such conflicts of interest must be disclosed to a client in writing before the investment advisory contract is signed.

William and Kat, a married couple, are advisory clients of yours. Each is employed and covered by a qualified plan. Which of the following statements are CORRECT? Employees covered by a qualified plan are not eligible to open Roth IRAs. Employees covered by a qualified plan are eligible to open Roth IRAs. Distributions from a qualified plan may be rolled over into a Roth IRA. Distributions from a qualified plan may not be rolled over into a Roth IRA.

II and III. Eligibility for a Roth IRA is not affected by participation in a qualified plan, and effective January 2008, distributions may be rolled over into a Roth.

An investment adviser representative is required to make disclosure to the client when the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale transactions recommended to a specific client are inconsistent with those for other clients with objectives that are identical to that particular client transactions recommended to the client are inconsistent with those for the IAR's own account

II and IV. An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This will include the case where a recommended product will generate a commission or other source of income to the adviser, as well as full disclosure, if a recommendation is not consistent with the adviser's own activity in his own account. The adviser can use any source of information to create his own analysis, disclosure of source only being required if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same objectives would purchase or have recommended for purchase the same securities.

Among the many exempt transactions under the Uniform Securities Act are the private placement and the preorganization certificate or subscription. While these two exemptions have several requirements in common, they have which of the following differences? The private placement exemption places a limit on the number of sales to retail investors, while the preorganization certificate places a limit on the number of offers to all investors.​ Payment for the purchase may be made in the case of a private placement, while no money changes hands in a preorganization subscription. It is expected that noninstitutional buyers of the private placement are purchasing for investment only, while no such requirement exists for the investors in a preorganization certificate. Commissions may be paid on the sale of a private placement to noninstitutional clients, while no remuneration is payable on the sale of a preorganization subscription.

II and III. No money changes hands in the sale of a preorganization certificate or subscription, while the seller receives payment in the case of a private placement. The state will consider a private placement an exempt transaction if it is anticipated that individual (noninstitutional) investors are purchasing for investment only, not immediate resale. No holding period restrictions are placed on preorganization certificates. Only in the case of a sale of a private placement to an institutional client is it permissible to pay commissions. Finally, choice I has it backwards. When referring to retail (noninstitutional) investors, there is a limit to the number of offers (10), while in the preorganization certificate, the number of sales (subscribers) is limited to 10 regardless of whether they are retail or institutional.

Abel Kane is an agent for Garden City Securities, a broker-dealer registered with the SEC and all 50 states. It would be considered an unethical or dishonest business practice for Kane to fail to make prompt delivery of certificates when requested by the customer fail to obtain written authorization for a discretionary account prior to the first trade in that account accept an order from a client's spouse without written trading authorization prior to receiving the order share commissions with another agent registered with Garden City Securities

II and III. This question is tricky. The key here is that agents have no responsibility for delivering customer securities. That is an obligation of the broker-dealer.

The Uniform Securities Act contains a number of security exemptions. The Act empowers the Administrator to revoke the exemption for which of the following? Any security listed or approved for listing upon notice of issuance on the Nasdaq Stock Market; any other security of the same issuer which is of senior or substantially equal rank; any security called for by subscription rights or warrants so listed or approved; or any warrant or right to purchase or subscribe to any of the foregoing Any security issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association Any investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan Any security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state

II and III. Under the USA, the Administrator can revoke any transaction exemption, except those involving federal covered securities. When it comes to revoking a security's exemption, the only 2 where the Administrator has to power to do so are those issued by nonprofit organizations and in connection with an employee benefit plan.

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

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

According to the Investment Advisers Act of 1940, which of the following statements regarding Part 2 of Form ADV are TRUE? It must be filed with the state Administrator. A balance sheet must be submitted if the adviser collects prepaid fees of more than $1,200, 6 or more months in advance. Certain minimum business and education qualifications must be met before an investment adviser can file. It may be used to satisfy the brochure requirements of the act.

II and IV. An investment adviser required to register with the SEC under the Investment Advisers Act of 1940 must submit its Form ADVs to the SEC. In some cases, the Form ADV will also be filed with the state Administrator, but that is state law, not a federal requirement. A balance sheet must be submitted with Part 2 if the adviser receives "substantial" prepayments of fees. Part 2 may be used as an investment adviser's disclosure brochure to clients.

A registration of an IAR can be denied or revoked if it is in the public interest and the registrant fails to include the fact that he had been convicted of a non-securities-related misdemeanor within the last 2 years the registrant has willfully violated the securities laws of a foreign jurisdiction the registrant is qualified on the basis of knowledge and training but lacks requisite experience the registrant has engaged in dishonest or unethical practices in the securities business

II and IV. Just cause for denial, suspension, or revocation of an IAR's license would include engaging in dishonest or unethical practices in the securities business and willfully violating the securities laws of a foreign jurisdiction. Failure to include convictions for a securities-related misdemeanor (or any felony) constitutes filing an incomplete or misleading application and that too would be just cause for taking action. Don't confuse this with the 10-year rule. These convictions must always be disclosed; 10 years is the time period during which it is almost a sure thing that the application will be denied. An Administrator may not deny a registration solely on the basis of lack of experience.

Without prior authorization from the client, an investment adviser could release information relating to the client's account in order to comply with the brochure delivery requirements of the USA when requested by the IRS as part of litigation against the client for the purpose of furnishing information for a statistical survey being compiled by the Administrator upon the receipt of a subpoena from a court of competent jurisdiction

II and IV. Without the prior consent of the client, an IA may disclose information relating to specific accounts only when requested by the IRS or by court order.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following is (are) required to register as investment adviser in a particular state? An adviser who manages client accounts in excess of $100 million in value An adviser who manages client accounts with less than $100 million in value An adviser to investment companies registered under the Investment Company Act of 1940 An adviser who acts as pension consultant to employee benefit plans with assets of $200 million or more

II only. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, only advisers who manage client assets that total less than $100 million are required to register with the state Administrators. Those who manage client assets of at least $110 million or advise registered investment companies are required to register with the SEC and are exempted from state registration. The pension consultant in this question would not be required to register with the state because those who act as pension consultants and have at least $200 million in assets under management have the option to register with the SEC. There is a corridor between $100 and $110 million in which the adviser also has a choice of state or federal registration.

With an annuity, taxes on earned dividends, interest, and capital gains are paid annually until the owner withdraws money from the contract. random withdrawals are taxed on a LIFO basis. money invested in a nonqualified annuity represents the investor's cost basis. upon withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income.

II, III, and IV. Money randomly withdrawn (not annuitized) is handled under LIFO tax rules. Money invested in an annuity represents the investor's cost basis and on withdrawal, the amount exceeding the investor's cost basis is taxed as ordinary income. Taxes on earned dividends, interest, and capital gains are not paid annually. They are deferred and paid later, when the owner withdraws money from the contract.

Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15? Sole proprietorship Single-member LLC Multiple-member LLC electing to be treated as a corporation​ S corporation

III and IV. For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline. For C corporations, the due date is the 15th day of the 4th month following the close of the corporation's year; this date is April 15 for a calendar-year filer.

A bond with a par value of $1,000 and a coupon rate of 8% paid semiannually, is currently selling for $1,150. The bond is callable in 10 years at $1,100. In the computation of the bond's yield to call, which of these would be a factor?

Interest payments of $40. The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with an 8% coupon will make $40 semiannual interest payments. With a 10-year call, there are only 20 payment periods, not 60. The present value is $1,150 and the future value is $1,100, the reverse of the numbers indicated in the answer choices.

Which of the following investments is the most liquid?

Long-term municipal bond fund. The long-term municipal bond fund is the most liquid because it is a mutual fund (a redeemable security), and the investor is assured of a buyer that will exchange money for the redeemed fund shares within 7 days of the redemption request. Municipal bonds of a township, especially those that are from extremely small issuers, may have thin trading markets where sellers have difficulty finding willing buyers. There is not an active secondary market for reselling interests in limited partnerships. Stock of a small corporation that trades on the OTC Link (formerly known as the "Pink Sheets") may also have a thin trading market.

Mr. Hawkins sets up a revocable trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to

Mr. Hawkins as the donor. Because Mrs. Hawkins has an economic interest, this is a grantor trust. Thus, all income will be taxed to the donor, Mr. Hawkins.

Under the Uniform Gifts to Minors Act, Ralph wants to give some stock to his brother's son, Jose. His nephew's father, Bob, is the legal guardian. If Ralph wants to name himself as custodian, which of the following needs to be done?

Ralph must open the account and name himself as the custodian. Under UTMA or UGMA, no special documentation is required. The account is opened in the name of the minor with the minor's Social Security number and the name of the adult listed as custodian.

You have a client who is not covered under an employer-sponsored retirement plan and has been contributing the maximum to her traditional IRA. She has just informed you that she won $1 million in the lottery, plans to continue working, and would like to continue to contribute to her IRA. Which of the following statements is correct?

She may continue to contribute and her contribution will be tax deductible. The only time that there is an earnings limit is when the individual (or spouse) is covered under an employer-sponsored retirement plan. That is not the case here. It is important to note that the client intends to continue in her job because lottery winnings are not considered earned income for an IRA contribution.

Allowable investments in an IRA would include

U.S. government-issued silver eagles. There are certain coins minted by the U.S. Treasury that are eligible for inclusion in an IRA. No life insurance is allowed (though annuities, both fixed and variable, are allowed), and collectibles, such as art and stamps, are prohibited.

ABC's stock has appreciated dramatically over the past few years and is trading at $1,000 per share. A client who purchased 100 shares of ABC years earlier at a much lower price still believes in the company's management and products, but thinks the stock is overvalued at $1,000 per share. If ABC executed a 10:1 stock split, which of the following statements would be most accurate?

The client should not purchase the post-split ABC shares if he believed the pre-split ABC shares were overvalued. A stock split does not create or destroy value; therefore, the stock split should not have any impact on the client's decision to purchase stock. After the split the value of one $1,000 share ($1,000 in value) will be exactly the same as the value of ten $100 shares ($1,000 in value). Therefore, if the client thought the stock was overvalue at $1,000 he must also think ten shares of $100 are overvalued and should not be purchased.

Under the Uniform Securities Act, which of the following constitutes an offer of a security?

The delivery of a prospectus to a prospective purchaser. A prospectus is the document that offers a security for sale. A tombstone advertisement always states that in and of itself, it is not an offer to sell, that such an offer may only be made by prospectus, and where a prospectus may be obtained. The key to this question is that the delivery is being made to a prospective purchaser; that is what makes it an offer.

As year-end approaches a trustee is reviewing a trust's principal and the net investment income it produced during the year. The trustee is considering how to best distribute those assets in accordance with the trust documents. Which of the following statements regarding the trust are true?

The trustee must distribute all trust net income, if it is a simple trust. The main difference between a simple and complex trust is whether all net income must be distributed on an annual basis. A simple trust requires all net income be distributed annually, whereas a complex trust permits the retention of net investment income year over year. With respect to the distribution of trust principal, the trustee of a simple trust is not authorized to distribute trust principal, whereas the trustee of a complex trust is authorized, but not required, to do so. The answer choice that indicates the trustee of a complex trust "must" distribute trust principal it is false, as this is permissible, but not required.

A client is interested in viatical investments and life settlements. In describing these to the client, an adviser might make each of the following statements except

The viatical market has an active secondary market that helps ensure fair pricing of policies. Viatical investments or life settlements describe the sale of a life insurance policy (or the sale of the right to receive a death benefit) to a party other than the issuing insurance company (selling the policy back to the life insurance company is called surrendering the policy). In doing so the insured can access the value of the death benefit while still alive. For example, the owner of a million-dollar policy may sell the right to that one-million-dollar death benefit for $600,000 today. NASAA considers all viatical investments to be securities that require proper registration. Because there is no or a very limited secondary market for these instruments it can be difficult to determine their fair value. Best practices suggest advisers obtain multiple quotes when assisting clients who buy or sell viaticals.

A retired couple indicates that capital preservation and principal protection are very important to them. Which of the following best describes why structured notes may be an appropriate investment for the couple?

They can expect to receive a return of at least the note's par value at maturity. Structured notes are customized products that allow investors to achieve a specific investment objective. Many structured notes offer principal protection, which promise the return of the principal plus a return based on an underlying asset or index (e.g. the S&P 500). In exchange for limiting the downside risk and offering principal protection, many notes also cap or limit the potential return at maturity. The structured note product typically does not hold the actual underlying assets that will determine the note's return, instead derivatives are used to produce the capital to payout the investors. In addition, these instruments have significant liquidity risk (there is often a penalty or surrender fee to exit prior to maturity) and credit risk (if the issued broker-dealer fails the investor because an unsecured creditor of the firm). As an unsecured creditor, the investor would not be assured to obtain the return of the principal. The fact that they are SEC registered securities with SIPC coverage does not address why these securities would be appropriate for these clients.

An investment adviser representative is researching a security and notices that its beta is zero. Which of the following securities is probably the subject of that research?

a 91-day US treasury bill. A beta of zero means an investment whose price does is not generally impacted by fluctuations in the stock market. One could say that makes them free of market risk. The traditional example of that is the 91-day T-bill. All of the other choices would typically have a low beta, but none would have a beta of zero.

The prospectus of a Class A share mutual fund would most likely describe charges to investors as

a front-end load upon purchase and an annual expense fee. Class A shares of a mutual fund most likely assess a front-end load and an annual expense ratio. The front-end load is used to compensate the sales force that sells the shares (e.g. the registered rep or financial adviser) as well as other sales related expenses. The expense ratio is collected to pay for the management and operation of the fund (e.g. portfolio managers and trading commissions). All mutual funds charge some expense ratio, though there are funds that do not carry any sales load. A back-end load is a fee assessed when selling mutual fund shares. Funds do not charge both front and back end loads.

In a rising interest rate environment, a fund manager is pursuing an investment strategy of identifying and purchasing discount bonds with call provisions. If the purchased bonds are called the fund will generate

a higher rate of return than if the bonds are not called. When discount bonds are called they produce a higher yield than if they are not, as the owner earns the difference between the price paid (less than par) and par value more quickly. By accelerating this gain over a shorter number of years, and being able to redeploy the capital at the higher interest rates (it is given that interest rates are rising), the fund will see higher returns than if the bonds were not called.

One of your clients has a margin account. There is a drop in the value of the stock owned in the account, and additional funds are required based on the terms of the firm's margin agreement. This would be known as

a house call. When additional funds are required, it is known as a house or maintenance call. If based on the firm's stricter requirement, it is a house call; if based on the requirement of the SRO, it is a maintenance call. The initial or Regulation T call occurs at the time of the purchase. If any call for funds is not met, then there will be a sellout.

Under the USA, it is unlawful to sell

a nonexempt, nonregistered security issued by a foreign corporation from a country with which the U.S. government maintains diplomatic relations. Nonexempt, nonregistered securities cannot be lawfully sold in a state unless in an exempt transaction (and nothing in the question indicates that is the case). The fact that they are issued by a foreign corporation is irrelevant; nonexempt securities must be registered. A federal covered security need not be registered in a state. Securities issued by banks, not bank holding companies, are always exempt securities.

An advisory client of yours discusses a business project she is involved with where the partnership is using accelerated depreciation to maximize losses in the early years. It would be prudent of you to inform the client that

accelerated depreciation could trigger the alternative minimum tax. Accelerated depreciation is a tax preference item and could result in requiring this client to pay the AMT. These would be passive losses and they can only be taken against passive income. There is no limit to the amount of passive loss that can be deducted against passive income. Because the most common way for a company to compute cash flow is: net income plus depreciation, the reduction to net income is zeroed out by the increased depreciation added back in.

A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclosing which of the following fees?

account closing fees. It is very common for a broker-dealer to charge a fee for processing the closing of an account. There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers.

All of the following situations are exempt transactions complying with the requirements of the USA EXCEPT

broker-dealer B offers a private placement to 15 regular public customers and closes the offering at the end of 30 days. Under the Uniform Securities Act, an unregistered private placement may be offered to no more than 10 prospective purchasers, with the exception of financial institutions and other broker-dealers. Transactions by executors, the sheriff, marshals, receivers, trustees in bankruptcy, guardians, or conservators are exempt. Sales to financial institutions, such as mutual funds and insurance companies, are also exempt.

A bond analyst who determines the value of a debt security by adding the present value of the future coupons to the present value of the maturity value is using which of the following valuation methods?

discounted cash flow. This type of question sometimes appears on the exam. There is a second answer that could be correct, but is not scored as such. In this example, a case could be made for present value, but the better choice is discounted cash flow; it is more correct.

All of the following industry violations would probably constitute fraud EXCEPT

charging unreasonable commissions. Charging an unreasonable commission (or markup or markdown) is a prohibited practice, but it is not considered fraud. It would be fraudulent to make inaccurate statements regarding the amount of commission being charged, such as, when acting as a principal, telling the customer that there was no commission being charged when, in fact, there is a markup or markdown built into the price.

All of the following statements regarding futures contracts are correct except

completing a futures contract requires the delivery of the commodity. In almost all cases, the holder of the futures contract will purchase an offsetting contract canceling the original position or sell the contract prior to expiration. In isolated cases, delivery of the commodity may be made, but is not required. Futures contracts can be written on financial assets such as currencies and stock indexes as well as on commodities such as agricultural products or precious metals. As with anyone taking a short position, the value goes up when the price of the underlying asset declines. And, just as purchasing a stock or bond, a long position represents one of ownership.

A similarity between the capitalization of closed-end and open-end management investment companies is that both

compute net asset value per share. The only similarity here is that both kinds of management investment companies compute NAV. Open-ends must do it daily and closed-ends can compute daily or even weekly. It is only the open-end company where the capital is raised through a continuous offering of new shares. Closed-end funds generally have a single IPO of common stock and may, if they wish, also have a preferred stock issue. Open-end funds are limited to one class of equity security (not to be confused with different classes for sales charge purposes). There is no secondary market trading in open-end funds, only closed-ends.

An advisory client of yours dies in 2019, and you transfer the $1.4 million of securities in the individual's name to the estate account. You will

continue to manage the account unless the advisory contract called for termination upon death or informed otherwise by the executor. Unless the advisory contract has a termination upon death provision or the executor wishes to assume management of the account, the investor adviser may continue to manage the account of the estate. Trades made in the account must take into consideration tax implications as with any other account. Estate taxes are due 9 months after death, and unless there are other assets not listed here, no tax is due because this estate is less than $11.4 million (the amount exempt from taxation for 2019).

In the field of portfolio management, there are a number of different management styles. One of those styles involves committing additional capital to the market when others are reducing their exposure, or eliminating positions while others are increasing theirs. This style is generally referred to as

contrarian. The contrarian style of portfolio management takes positions opposite those of the market as a whole. They are buying when others are selling and selling when others are buying.

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions EXCEPT

disclosure that the performance compensation may create an incentive for the adviser to take greater risks. Because these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to. The minimum net worth requirement is over $2.1 million, or a client is qualified if he has at least $1 million under management with the adviser. Any performance fee must take into consideration gains and losses, both realized and unrealized, and the performance period must be no less than 1 year. Please note: State-registered investment advisers must make this "incentive" disclosure so if the question asked about them, there would be no exception.

One of the risks found in equity investing is known as unsystematic risk. The most common way to reduce this risk is?

diversification. Unlike systematic (market) risk, unsystematic or nonsystematic risk can be reduced through diversification.

Under the Uniform Securities Act, all of the following are exempt from state registration as investment advisers EXCEPT

financial planners who provide fee-based investment advisory services to clients. Financial planners who provide fee-based investment advisory services to the public generally must register with their state securities Administrator, as long as their total assets under management are less than $100 million. Investment advisers with no office in the state, who only advise employee benefit plans with assets of more than $1 million, need not register with state securities Administrators. Investment adviser representatives do not register as investment advisers but as investment adviser representatives. Financial publishers who do not publish specific investment advice are exempt from state registration.

For which of the following is there no active secondary market?

forwards contracts. One of the disadvantages when investing in forward contracts is that there is no active secondary market. Because each contract is between one buyer and one seller and there is no standardization, no exchange trading is possible.

Under which of the following conditions may an agent sell an unregistered nonexempt security?

if the order was unsolicited. Agents may accept unsolicited orders from clients, institutional or not, in unregistered nonexempt securities. If the transaction is with an institutional client, it can be solicited. In the case of unsolicited orders, the Administrator may demand written acknowledgment from the client that, in fact, the order was unsolicited.

In general, the most passive investment style for a portfolio would be

indexing. This is a close call between indexing and buy and hold. We believe that the NASAA philosophy on this would be that buy and hold does require some management after the portfolio is set up. That is, some companies go out of business or are merged into other entities or go private and that requires making new decisions. The same can happen with the companies in an index, but the investor doesn't have to make the changes. When you invest in an index, it is sort of like (with credit to Ron Popeil) "set it and forget it". Clearly, the other two choices are not passive in the same way.

The term "federal covered investment adviser" would apply to a person who

is registered as such under the Investment Advisers Act of 1940. Only federal covered investment advisers register under the Investment Advisers Act of 1940. Even if the person only gives advice on exchange-listed securities (which are federal covered securities), that does not make the person federal covered. After all, if the AUM is under $100 million, registration is only possible with the state(s), unless meeting an exception. Although the term "federal covered adviser" does apply to those who limit their advice to securities issued or guaranteed by the U.S. government, it would not apply if advice is given on political subdivisions (states, cities, etc.).

In general, one would prefer to purchase a bond when its current market price is

less than its present value. When a bond can be purchased for less than its present value, it has a positive net present value (NPV). For example, if the present value of a bond is $600 and it can be purchased for $565, it has an NPV of $35 and should be an attractive investment. Every bond selling at a discount has a market price that is less than its future value (par), so that doesn't tell us anything about its NPV.

Which of the following entities would issue a Schedule K-1?

limited partnerships. Schedule K-1s are issued to owners of partnerships (limited or general), LLCs with more than one member, and S corporations. Sole proprietors use a Schedule C, C corporations report dividends and/or interest paid on a Form 1099, and the same is true for distributions from a REIT.

The state securities Administrator has the authority to

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

Registration with the state as an investment adviser would be required for a person with an office in this state who

manages $13 million in assets for 4 clients. Under the Dodd-Frank Bill, investment advisers with less than $100 million in assets under management must register with the states. If the adviser manages a registered investment company, the adviser must be federal covered. If the person serves as a pension consultant with $200 million or more in AUM, the person has the option of registering with the SEC. A person whose sole advice deals with U.S. government securities is excluded from the federal definition of investment adviser and, therefore, under the NSMIA, is considered a federal covered adviser.

A client has invested $25,000 into a variable annuity which has grown to $150,000 over the accumulation period. At age 60, the account is liquidated. The tax treatment of the withdrawal would be

ordinary income tax on $125,000. Any increase in the value of a variable annuity is taxed as ordinary income, never capital gain. In this case, there is no 10% penalty tax because the client is over 59½ years old. You can safely assume that any annuity is non-qualified unless something in the question says it is.

One way in which universal life and variable life are similar is that both

permit loans against the cash value. As long as the policy has cash value, loans are permitted. Neither of these has a fixed minimum cash value, and only universal life has flexible premiums. Only variable life is considered a security.

A country decides to nationalize its sugar industry. This is an example of

political risk. The decision to take over private enterprise is a political one. The nationalization of the sugar industry happened in Cuba after the Castro regime took over. Business risk is generally related specifically to actions taken by the company, such as bad management decisions. Financial risk is also company related, such as when the company incurs more debt than it can handle. Sovereign risk is when the investment is made in the country itself (buying its bonds) not private enterprise.

Many sophisticated investors have added alternative investments to their portfolios. Benefits in doing so would include

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

Which of the following mutual funds should an investment adviser representative recommend to a client whose objective is current income with moderate risk?

preferred stock fund. Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.

An investment adviser representative is assuring clients of steady returns on an investment. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, this activity is

prohibited because the IAR is guaranteeing a profit. Assuring a steady rate of return is considered to be guaranteeing performance, a practice prohibited under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers. Even in the case of investment-grade bonds, returns can never be "assured."

Which of the following industries is most exposed to regulatory risk?

public utilities. Most industries are subject to the regulation of their business through regulatory activity. Of the companies listed, public utilities are the most highly regulated. Their prices, production processes, and the economic returns are all subject to various regulators. Publishing companies experience little regulatory interference because of the nature of the products and services they offer. They face legal issues such as copyright infringement and libel suits, but enjoy relatively little interference from regulatory bodies. Entertainment companies do not have the same level of exposure to regulatory risk as the others listed. Retailers are middlemen in the product production process and face less legislative risk than other industries.

A risk-averse client, living in the United States, holding a high proportion of his assets in cash and cash equivalents in U.S. dollars, is exposed to which of the following risks?

purchasing power risk. Although cash and cash equivalents (money market instruments) may assist in managing liquidity risk, they do have purchasing power, or inflation risk, because they have limited opportunity for capital appreciation. Exchange rate (currency risk) risk does not apply because this is a U.S. client with investments denominated in dollars. There is no market risk to cash and virtually none to cash equivalents. There is nothing to reinvest with cash and the returns and maturities on cash equivalents are such that reinvestment risk is not a concern.

All of the following statements concerning the types of risk are correct except

reinvestment rate risk is the risk that proceeds available for reinvestment must be reinvested at a higher rate than that of the investment vehicle that generated the proceeds. Reinvestment rate risk is the risk that proceeds available for reinvestment might be reinvested at a lower rate than that of the investment vehicle that generated the proceeds. The computation of a bond's yield to maturity assumes that the coupon interest will be reinvested at the coupon rate. Reinvestment risk is the uncertainty of that happening.

Included among the powers of the Administrator is the ability to

request the court to appoint a receiver to freeze the bank accounts of a broker-dealer who is the subject of an injunction. If a temporary or permanent injunction is issued against any securities professional, upon request of the Administrator, a receiver or conservator may be appointed over the defendant's assets. The Administrator cannot arrest but can seek a warrant. In order to deny a registration, not only must it be in the public interest, but there must be some other issue, such as insolvency, incomplete application, et cetera. Although the maximum prison sentence under the USA is 3 years, it is the courts that do the sentencing, not the Administrator.

KAPCO Advisers, a registered investment adviser, recommends the purchase of 100 shares of GEMCO common stock to one of its advisory clients. The client accepts the recommendation and the sale is made from KAPCO's inventory. This transaction

requires both written disclosure to and the consent of the client prior to the completion of the transaction. Industry rules require that investment advisers make disclosure when acting as principals (from inventory) or agents in a transaction with an advisory client. This disclosure must be made in writing—furthermore, client consent to acting in this capacity must be obtained prior to the completion of the transaction.

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is

selling at a premium. When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the net assets are the $100 million portfolio value minus the liabilities of $10 million for the unpaid securities plus the $5 million in accrued management fees. That leaves $85 million divided by the 2,611,437 shares outstanding, which is approximately $32.55. Once we know the NAV, it is clear that the price of $36.38 is a premium over the NAV. And, we know that this can't be an open-end investment company because if it was, the $3.83 sales charge represents 10.5% of the asking price, well in excess of the maximum 8.5% permitted.

Which efficient market hypothesis suggests that an investor can achieve above-market returns by only utilizing insider information?

semi-strong. The semi-strong form suggests that fundamental analysis is of no value and only through the use of insider information can an investor achieve above-market returns. The weak form suggests that technical analysis is of no value and the strong form suggests that nothing has any value - efficient markets are totally random.

Associated Wealth Managers (AWM) is registered with the SEC as a registered investment adviser. As a consequence, if there have been any material changes, AWM must

send a copy of its brochure, or a summary of the changes, to all clients within 120 days of the end of its fiscal year. Whether the firm is a state or federal covered investment adviser, if there have been material changes, a copy of the IA's brochure, or a summary of the changes, must be sent to all clients no later than 120 days after the close of the IA's fiscal year.

Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan, and after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral,

she would be engaging in an prohibited practice. Although there are circumstances under which cash payments may be made to solicitors, none of the required conditions found in the Investment Advisers Act of 1940 appear to be met here. A formal written agreement must be in effect, not just a one-time reward.

An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several that she feels are equally suitable for the client, but one of the companies is offering a trip for 2 to Las Vegas for reaching certain sales goals. She continues by stating that this sale will put her over the goal and win her the trip. If the client purchases that annuity, the agent

should pack her bags for the trip; she earned it. The annuity recommended by the agent is offering an incentive. The agent is clearly disclosing that fact to the client and, if the client goes ahead and makes the purchase, it is with full knowledge of the potential conflict of interest. The question states that the agent considers this annuity, along with others, to be suitable.

Which of the following items would be found on a family balance sheet?

spouse's engagement ring. A balance sheet, whether for a family or a business, shows assets and liabilities, not income and expenses. The ring is certainly an asset; the others are income or expenses.

One element of the formula used to compute the Sharpe ratio is

standard deviation. Standard deviation is used as the denominator in the formula used to compute the Sharpe ratio, a risk-adjusted rate of return. Standard deviation generally reflects the variability of portfolios that are not well diversified, while beta generally reflects the volatility of portfolios that are well diversified. Net present value measures the theoretical intrinsic value of an investment having uneven cash flows.

The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax. This is done by adding back to the taxpayer's ordinary income, items such as accelerated depreciation and excess intangible drilling costs. The term used to describe these items used to arrive at the taxpayer's alternative minimum taxable income (AMTI) is

tax preference items. The proper term is "tax preference items." Those would include the following: Deductions taken for accelerated (but not straight-line) depreciation; Excess intangible drilling costs; Capital gains on incentive stock options; and Otherwise tax-exempt interest from specified private activity bonds.

In order for a security to lawfully be sold or offered under the USA, it must meet at least one of the following requirements EXCEPT

that it is registered with the SEC. It is unlawful to sell a security in a state unless the security is a federal covered security, exempt from registration under the USA, sold in an exempt transaction, or registered under the act. There is no requirement that a security be registered with the SEC; that is the primary purpose of registration by qualification—registering a security on the state level that is not SEC-registered.

USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of

the SEC. It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.

The final responsibility for ensuring that investment adviser representatives are adequately supervised is that of

the chief compliance officer. It is the CCO who has the ultimate responsibility for ensuring that the firm has, and properly implements, adequate supervisory procedures. The immediate supervisor has the "first-line" responsibility, but the "buck stops" with the CCO.

A company's current ratio is 0.5:1. This could be an indication

the company may have trouble paying its bills. The formula for current ratio is the current assets divided by the current liabilities. A 0.5:1 ratio means that the company has current liabilities that are twice its current assets. This would also mean a negative working capital (current assets minus current liabilities) and would probably mean that the company is going to have a difficult time paying its bills.

Suzie McQueen has a very successful interior design shop she has run as a sole proprietorship. She has just celebrated her 60th birthday and has been giving thought to an eventual sale of the business. She wants your opinion on whether she should incorporate or change to a partnership. You might respond that

the corporate form of business structure would be the easiest for ultimate transfer of ownership. In general, the corporate form of business leads to the easiest transfer of ownership. Because Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. If Suzie wanted to reorganize as a partnership, she would have to bring in at least one additional individual, ending her total ownership of the business. Even then, a partnership interest is not as easy to sell as stock.

When an agent submits an order ticket to purchase securities for a client, all of the following would appear EXCEPT

the current market price of the security. Any order ticket submitted by an agent for execution at a broker-dealer will always include the agent's name and that of the BD. All order details must be listed (e.g. the number of shares, limit or market, etc.), but the current market price is never included.

Surrender charges may cause a reduction to all of the following EXCEPT

the death benefit of a variable life insurance policy. Surrender charges never apply in the case of a death benefit. There may be a surrender charge in the case of early surrender of a variable annuity, taking out the cash value of a variable life policy, or redemption of Class B (back-end load) mutual fund shares.

While attending a seminar given by one of your firm's analysts, you hear the term, feasible set. That would mean the discussion was dealing with the topic of

the efficient frontier. The feasible set of portfolios represents all portfolios that can be constructed from a given set of stocks. An efficient portfolio is a feasible portfolio that provides the greatest expected return for a given amount of risk, or equivalently, the least risk for a given amount of expected return. This is also called an optimal portfolio. The efficient frontier is the set of all efficient portfolios. Obviously, an investor should choose a portfolio along the efficient frontier.

In a life settlement, the seller receives more than the premiums paid into the policy but less than

the face amount. The sale price of a life settlement is always more than the cash value and less than the face value.

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

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

An investor has been comparing several different mutual funds with the same objectives. When making the decision as to which fund to purchase, which of the following factors would be the most important?

the fund manager's tenure. The fund manager's tenure (the number of years that manager has been managing that fund's portfolio) is important because, although past performance is no guarantee of the future, in general, investors prefer someone who has performed well over the years instead of a manager with only a year or two at the helm. Because investors in mutual funds invariably purchase in a dollar amount rather than by the number of shares, the NAV per share is not a factor. That is, if you invest $10,000, what difference does it really make if the NAV per share is $10 or $100? No mutual funds are traded on the listed exchanges and why would someone buy a fund based on the date of the annual meeting?

Margin is borrowing money from a broker-dealer to buy a stock using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer's stock?

the hypothecation agreement. The hypothecation agreement gives permission to the broker-dealer to pledge a customer's margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the broker-dealer on the basis of the loan value of these securities. The credit agreement contains the terms of the loan, including the method of computing interest on the borrowed money. The loan consent agreement, granting permission to the broker-dealer to lend out the customer's securities, is optional.

An investment adviser is approached by an investment company that has 25 investors. The company would like to employ the adviser to manage its account. The IA is willing to do so, but proposes a compensation agreement that provides for a 20% share of the profits if performance exceeds a certain benchmark. In order for this to be acceptable,

the investment company must have net worth in excess of $2.1 million or at least $1 million in assets under management with the IA. In 1987, NASAA followed the lead of the SEC and permitted performance-based compensation when the investor (or company) had at least $500,000 in AUM with the IA, or had a net worth in excess of $1 million. In 1998, the SEC raised the threshold to $750,000 and $1.5 million, respectively. Then, in July, 2011, the bar was raised again by the SEC to $1 million and $2 million. On April 15, 2013, NASAA caught up and the numbers were unified. Most recently, on August 16, 2016, the net worth requirement was raised to in excess of $2.1 million (the $1 million in AUM remained the same). By the way, this is not a registered investment company under the Investment Company Act of 1940—those need at least 100 investors.

A client of an investment adviser needs a bridge loan and approaches the IA to see if the firm is interested. Because the IA is not in the business of lending money, a special agreement is drawn up specifying the terms of the loan. Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers

the loan could only be made after the advisory contract was terminated. First of all, a "bridge" loan has nothing to do with a bridge. The client is not trying to cross over anything. The term is used to refer to a short-term loan to provide funds until permanent financing may be arranged. Now that we've got that out of the way, we can answer the question. Loans may never be made to clients unless the firm is in the business of lending money. Because this IA states that it is not their business model, the only way this loan could be made is if there was no adviser/client relationship.

A bond of standard size has a nominal yield of 6%, paid in the customary fashion. The bond matures in 10 years, is callable at $105 in 5 years, and is currently priced at $110. An investor calculating the bond's yield to call would include

the semiannual interest payments of $30. The yield to call computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 6% coupon (nominal yield) will make $30 interest payments twice each year. Remember, unless otherwise stated, bonds have a par value of $1,000 and customarily pay interest semiannually. With a 5-year call, there are only 10 payment periods, not 20. The loss at call is $50 ($1,100 - $1,050); there is no gain and the loss at maturity of $100 is only relevant for YTM, not YTC.

A pension consultant who advises corporate retirement plans with assets of $135 million must register with which of the following?

the state. Under the Dodd-Frank Bill, until a pension fund manager has at least $200 million in AUM, registration with the states is required. Once the $200 million level is reached, SEC registration becomes an option.

All of the following must be specified in a security's state registration statement EXCEPT

the total amount of the security that will be offered in other states. The total amount of the security to be offered in other states need not be specified although identifying those states is required. The amount of the security to be offered in the state of registration is required, as it generally provides the basis on which the registration fee is calculated. A stop order from another state that affects the offering of the security within the state must be included. The registration statement will always describe the intended use of the proceeds.

A client of an investment adviser is thrilled with her portfolio's results and posts a note on her bridge club's cork board suggesting that some of the other members would probably benefit from the adviser's skills. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers,

this would be permissible because it was done without the knowledge of the adviser. There is a limit as to how far an investment adviser or IAR can go to prevent clients from giving testimonials. After all, as in so many businesses, referrals are a key to growth. As long as this note was posted without any knowledge of the IA (or IAR), there is no problem. However, once the IA (or IAR) finds out about it, a request must be made to remove it. The prohibition on testimonials is not limited to social media.

Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio?

time-weighted return. Time-weighted returns are used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals. Dollar-weighted return is more commonly used for evaluating investor performance.

It would be correct to state that an inverse ETF

utilizes derivatives to achieve its objectives. Inverse, or short, ETFs move in the opposite direction of the index being tracked. To achieve their goals, various types of derivatives are used. This type of ETF is used only for short-term investments, rarely as long as a single month. These are registered investment companies, not private.

An investor reading the open-end investment company section of today's The Wall Street Journal sees that Bull in the Teashop Fund has a NAV of $10.65 and an offering price of $11.15. He knows that he would have received which of the following if his redemption order had been received by the fund prior to yesterday's market close?

$10.65, less redemption fee, if any. An investor redeeming his shares will receive the NAV less any redemption fee that may be described in the prospectus. Investors redeeming through the fund are not charged a commission.

There are various ways in which an investment adviser may be compensated for services rendered. All of the following would be permitted under the Uniform Securities Act EXCEPT

1% of the increase in account value over the next quarter. Unless the question specifically references the allowable exception, investment advisers are not permitted to receive performance-based compensation.

According to the Investment Advisers Act of 1940, the SEC must either grant investment adviser registration or begin proceedings to determine whether registration should be denied within how many days of filing?

45. The SEC is required by the Investment Advisers Act of 1940 to either grant an adviser registration or begin proceedings to determine whether the registration should be denied within 45 days of application.

Mitch purchased a 30-year bond for 97¾ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Mitch receives semiannual coupon payments and expects to hold the bond to maturity?

8.67%. No calculation is necessary here. Why not? Because anytime a bond is purchased at a discount from par (97¾% is a discount), the YTM must be greater than the nominal (coupon) rate. There is only one choice greater than 8.5%. It isn't about your computational skills; it is about your understanding the relationship between prices and yields.

There are a number of requirements placed upon investment advisers found in both the Uniform Securities Act and NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. Which of the following is NOT included in those requirements?

Advisory clients must receive the adviser's brochure at least 48 hours before entering into an advisory contract. Under both state and federal law, new clients must receive the adviser's brochure no later than the time of entering into the advisory contract, not in advance. The 48-hour rule (state only) refers to the provision that if the brochure is not delivered at least 48 hours in advance, the client has the right to a penalty-free withdrawal from the agreement. The USA requires all initial and renewal investment advisory contracts to be in writing. If a specific securities report or recommendation has been prepared by someone other than the adviser, disclosure must be made to clients. In order to accept instructions from a third party (someone other than the client), the proper written authorization must be present.

Which of the following statements relating to termination of registration of a securities professional registered under the USA is TRUE?

An Administrator may cancel the registration of a securities professional if mailings addressed to that registrant are returned with the notification "no forwarding address." Cancellation of a registration will generally result when mail is returned without a forwarding address. A person may request a withdrawal of a registration. Withdrawals become effective after 30 days if there are no revocation or denial proceedings in process. An Administrator may not deny a registration solely on the basis of an individual's lack of experience. An Administrator does not revoke the registration of a person who is declared mentally incompetent but cancels such registration; this is a nonpunitive administrative action.

Who of the following are NOT exempt from registration as an investment adviser under the Investment Advisers Act of 1940?

An adviser in State F with 10 State F resident individuals and who specializes in New York Stock Exchange listed issues. The intrastate exemption has no numerical limitation, only that all of the clients be residents of the state and none of the clients can be private funds. However, no advice may be given on securities traded on a national stock exchange which causes this State F adviser to lose the exemption. Under the federal law, an exemption from registration applies if the adviser's only clients are insurance companies. And, if an adviser's only clients are private funds (regardless of how many) and AUM in the United States is less than $150 million, that adviser is exempt as well.

Which of the following would fall under the USA's definition of exempt transaction?

An issuer sells a new issue to a broker-dealer. Transactions between issuers and broker-dealers (but not investment advisers) are exempt transactions. As long as the sale is to the public, regardless of commissions charged (or not charged), the transaction is nonexempt. Don't be lured into thinking that accepting an order from a client is unsolicited. That's not true in this case because it is as the result of the research report.

When a customer wants income from an annuity and chooses the option of life with 20-year period certain, how will distributions be taxed?

As ordinary income based on an exclusion ratio. Life with 20-year period certain is an annuitization option. When an annuity is annuitized, ordinary income taxes are paid based on an exclusion ratio (cost basis divided by expected return = how much of the distribution is a return of cost basis (the original principal invested), and not subject to income taxes). Testing note: Unless the question specifically mentions that the annuity is qualified, or gives you a clue, such as it is in a 403(b) plan, the annuity is always nonqualified.

Investments in which of the following offer the best long-term protection against inflation?

Common stocks. Common stocks have historically offered returns that outpace inflation over the long term.

Many investors consider purchasing an equity exchange-traded fund (ETF) to increase portfolio diversification. All of the following are reasons for investors to purchase this investment except

ETFs offer tax benefits similar to a limited partnership. Equity ETFs are often organized as regulated open-end investment companies and rarely as limited partnerships (never on the exam). Therefore, they must distribute at least 90% of their net investment income and capital gains. However, the method by which those capital gains are realized by the ETF is different from that of a mutual fund and, in almost all cases, results in lower taxable capital gains distributions. Unlike limited partnerships, there is no flow-through of losses. Expenses are generally lower as well and ETFs trade during the day just like any stock.

When a sale violates provisions of the Uniform Securities Act, which of the following statements regarding civil liabilities is (are) TRUE? A buyer may not sue for compensation later than 3 years after the sale. A rescission offer must include interest. A rescission offer must be at the current market price.

I and II. Rescission must occur by the earlier of 2 years after the discovery of the facts or 3 years after the occurrence. The offer of rescission is based on the price originally paid for the security plus interest at a rate determined by the Administrator (less any income received from that security).

Adell, a retiring social worker, has some money to invest. An agent suggests she look into investing in a private placement security that is raising money to build apartment buildings in Puerto Rico. According to the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents building projects are not appropriate for retirees who typically need immediate income private placements are not usually appropriate for retiring individuals because they are not liquid no rule has been violated because the customer has only been offered the product if the customer lives in Puerto Rico, the proposed investment may be suitable because there may be a ready market

I and II. This is not a suitable recommendation for a social worker about to retire. Based on the information given, one would expect that her objectives would be income with a high degree of safety, yet this building project will give her neither. Additionally, the private placement suffers from a lack of liquidity, something that could be an important factor in Adell's future.

Bail Bonds, Inc., might issue warrants in connection with a bond issue for which of the following reasons? As an inducement to make the bonds more marketable To lower their interest cost on the issue To increase the marketability of their common stock To increase the number of common shares outstanding

I and II. Warrants permit the purchase of common stock of the issuer at a fixed price. A bond with warrants attached has more value than a straight bond and is more attractive (marketable) to investors. Attaching warrants to a bond issue usually permits the bonds to be issued with a lower interest rate.

Under the USA, which of the following are considered a sale or an offer to sell? The gift of assessable common stock The gift of nonassessable stock The sale of a warrant to purchase stock

I and III. The gift of assessable stock (a rarity) is considered both an offer and a sale under the USA because the recipient could be assessed in the event of company bankruptcy. The sale of a warrant is legally no different from the sale of the stock.

Under the Uniform Securities Act, an offer to sell would NOT include stock acquired through a merger the issuance of warrants or convertible securities the issuance of stock rights to existing shareholders

I only. An offer to sell is any activity in an effort to dispose of a security for value. The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an offer to sell the underlying security because, unlike stock dividends, mergers, and bona fide loans, they involve the payment of money to acquire the stock, thereby making them an offer to sell.

As defined in the NSMIA, federal covered securities would include open-end investment companies registered under the Investment Company Act of 1940 closed-end investment companies registered under the Investment Company Act of 1940 that trade on the OTC Bulletin Board bonds listed on the OTC Link where the company's common stock trades on Nasdaq bonds issued by the Province of Ontario

I, II and III. Under the NSMIA, federal covered securities include all investment companies registered under the Investment Company Act of 1940, regardless of where they trade. Any stock listed on Nasdaq is federal covered, and that makes any security equal to or senior (like their bonds) also federal covered, regardless of where they trade. Canadian government and municipal securities are not federal covered (although under the Uniform Securities Act, they are exempt securities).

Which of the following must be considered in evaluating the suitability of a DPP investment for a customer? Risk tolerance Other holdings Financial situation Age

I, II, III, IV. The key here is to recognize that with DPPs, the customer's age is a relevant consideration in determining suitability. DPPs are long-term, illiquid, and high-risk investments. It is unlikely that DPPs would be suitable for a customer near retirement age, regardless of the customer's financial situation.

Under the Uniform Securities Act, an offer and sale does NOT exist if it is the result of a class vote by stockholders regarding a merger or consolidation a bona fide pledge or loan an act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares a gift of nonassessable securities

I, II, III, and IV. The Uniform Securities Act specifically excludes all 4 choices from the definition of an offer and a sale.

Which of the following statements is (are) TRUE regarding investment advisory contracts under the Uniform Securities Act? The adviser cannot be compensated on the basis of a share of the capital gains or capital appreciation in a client's account. The advisory contract may not be assigned without the consent of the client. If the adviser is a partnership, the adviser must notify clients with whom the adviser has contracts of any changes in the partnership within a reasonable time. An adviser may be compensated based on the total value of a client's account averaged over a specific period.

I, II, III, and IV. Under the Uniform Securities Act, the basic rule is that an adviser cannot be compensated on the basis of a share of the capital gains or capital appreciation in a client's account. Although there are exceptions to the basic rule, the question does not address the exceptions. An adviser may be compensated based on the total value of a client's account averaged over a specific period. An adviser that is a partnership must notify its clients of changes in a minority of the partners within a reasonable period of time. If it is a majority or material change in partners, it is treated as an assignment and would require consent of the clients.

Under SEC Release 1A-1092, which of the following has (have) met the test of providing advice or analysis concerning securities? A stockbroker calls a client and recommends the purchase of a certain stock. A lawyer recommends against purchasing shares of a mutual fund in favor of another investment. A publisher of an investment newsletter provides general information and recommendations concerning specific securities.

I, II, and III. Any person who gives advice (positive or negative, specific or general) or issues reports or analyses concerning specific securities meets the criterion of providing advice. This does not mean that these examples qualify for the definition of investment adviser. They only qualify for the first criterion. For example, a lawyer may be exempt from the definition if she provides advice incidental to the profession and does not receive compensation, but may still meet the first criterion. Likewise, if the stockbroker's only compensation is commissions from securities transactions, the exclusion is in effect.

Under the Investment Advisers Act of 1940, persons who provide a variety of services, including investment advisory services, are considered to have received compensation for their advice when they receive: any economic benefit a fee paid directly for the investment advice portion of their services a commission on the sale of real estate when the agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists

I, II, and III. The question is not asking "who is an investment adviser?" It is focusing on the compensation prong. Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. An example of that holds for the real estate agent—she doesn't give advice unless you list your home with her.

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

I, II, and IV. Advertising that reflects past performance must show a minimum period of 1 year, not 3. All investment advisers' advertising must reflect deduction of fees; disclose the specific group of clients to which it applies, if applicable; and state actual market conditions during the referenced period.

A registered investment adviser has a fiduciary duty to disclose all real and potential conflicts of interests to clients. Which of the following are examples of conflicts that would require disclosure? A registered investment adviser spends about 25% of its time on investment advisory activities and the balance on managing rental real estate projects A registered investment adviser spends about 25% of its time supervising the activities of its investment adviser representatives An investment adviser representative, who is also an insurance agent, may decide to recommend a particular insurance product based on an incentive to sell the product An investment adviser representative, who is also an agent with an unaffiliated broker-dealer, directs transactions to that firm

I, III, and IV. There is nothing wrong with an investment adviser devoting time, even a majority of the time, to nonadvisory pursuits, as long as it is disclosed. Recommending products based on an incentive is fine as well, as long as disclosure is made. Finally, IARs can be agents of affiliated or nonaffiliated broker-dealers, but the existence of that relationship must be disclosed. One would hope that the investment adviser devotes enough time to supervising its IARs, but that is not something that is disclosed to clients.

Civil liability may arise under the Uniform Securities Act if an agent acting on behalf of an issuer fails to guarantee the safety of a new issue of debt securities rated BBB or higher uses an artifice or scheme that could reasonably be considered misleading in connection with a securities offering effects a sale of a nonexempt new issue of securities before filing a registration statement in that state fails to disclose an immaterial fact

II and III. An agent who deliberately misleads or uses some artifice to deceive customers is in violation of the law. An agent selling a nonexempt security prior to registration in a state is also violating the law. Guaranteeing customers against loss is prohibited, and an agent who fails to guarantee is acting within the law and rules of the Uniform Securities Act. Failure to disclose an immaterial fact is acceptable. Failure to disclose a material fact is fraudulent.

Currently, a company issues 5% Aaa/AAA debentures at par. Two years ago, the corporation issued 4% AAA-rated debentures at par. Which of the following statements regarding the outstanding 4% issue are TRUE? The dollar price per bond will be higher than par. The dollar price per bond will be lower than par. The current yield on the issue will be higher than the coupon. The current yield on the issue will be lower than the coupon.

II and III. Interest rates in general have risen since the issuance of the 4% bonds, so the bond's price will be discounted to produce a higher current yield on the bonds. Remember that as interest rates go up, the price of outstanding debt securities goes down.

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

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

When a broker-dealer engages in a customer transaction from its own account, which of the following statements are TRUE? Partners of the broker-dealer are trading in their personal accounts. The broker-dealer is trading from its inventory with customers. The broker-dealer must disclose its capacity as a principal in the transaction. The broker-dealer must disclose its capacity as agent in the transaction.

II and III. The Uniform Securities Act defines a broker-dealer as a legal person (entity) engaging in the business of effecting securities transactions for the account of others or for its own account. In this context, trading for its own account means that the broker-dealer is trading from its inventory with customers. The broker-dealer has an ethical responsibility to disclose its capacity as a principal in the transaction. When trading for its own account, a broker-dealer is functioning as a principal or dealer. When trading for the accounts of others with no participation as a direct party to the trade, a broker-dealer functions in an agency capacity.

Which of the following statements regarding the Uniform Securities Act are TRUE? Criminal penalties for violations of the USA are punishable by fines of up to $10,000, imprisonment for up to 5 years, or both. If the sale of a security is in violation of the USA, the buyer may sue the selling broker-dealer to recover the money paid for the security. If the seller of a security discovers that he made an illegal sale, he may offer to repurchase the security at the price paid less interest charges. The buyer of securities may not sue if within 30 days of receipt, he failed to accept or reject a written offer from the seller to rescind the trade and to refund the money with interest added

II and IV. If the sale of a security is in violation of the USA, the buyer may sue the seller to recover the money paid for the security. If the seller of a security discovers that he made an illegal sale, he may offer to repurchase the security at the price paid plus, not less, interest charges. This offer of rescission is held open for 30 days. The buyer of the securities may not sue if he failed to accept or reject the offer within that time period. Criminal penalties for violations of the USA are punishable by fines of up to $5,000, imprisonment for up to 3 years, or both.

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that it is unethical for an investment adviser to lend money to an investment adviser representative registered with the firm lend money to a bank that is a client of the advisory firm earn a fee that is based on a sliding scale depending on the amount of assets under management borrow money from a mortgage broker who is an advisory client of the firm

II and IV. Investment advisers may lend money only to persons affiliated with the firm (as the IAR is) or if the adviser is in the money-lending business. We borrow money from banks because they are in the business of lending money, but we don't lend money to the money lenders. An IA may only borrow from lending entities, and a mortgage broker does not lend money; the broker arranges the loan but does not act as a principal. Most investment advisers base their fee on a sliding scale. That is, the more money under management, the lower the percentage charged.

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, under which of the following circumstances may an investment adviser disclose a client's account performance? Under no circumstances If the IRS has issued a summons for the client's records For a promotional campaign on the firm's track record of successful recommendations If a divorce court has issued a subpoena for the records and the client has given written permission

II and IV. Investment advisers must keep client records confidential unless the client provides consent or disclosure is required by law.

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

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

Which of the following is NOT considered to be in the business of investment advising?

Insurance agents who discuss the merits of whole life insurance verses nonsecurities financial instruments and who receive commissions on the sale of life insurance only. Please note that this question is not asking "who is an investment adviser?" It is asking about one of the 3 prongs - being in the "business". The insurance agent who discusses the merits of whole life insurance does not sell investment advice or securities, only insurance policies. The insurance agent does not hold herself out as an adviser nor does she provide advice on securities. If a person advertises as one who provides investment advice or engages in providing investment advice or analyses on a regular basis (even if not the person's principal business activity), the person is considered in the business of giving investment advice. If the person receives any compensation that represents a clearly definable charge, commission, or fee for such advice (whether paid separately or not), she is considered in the business. If the person engages in other financial activities in connection with the advice, it cannot be used to avoid the business standard.

An agent sells his client 10 U.S. government bonds due to mature in 30 years. According to NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents, which of the following statements may the agent legally make?

The bonds are guaranteed as to principal and interest payments by the U.S. government. Stating that the bonds are guaranteed as to principal and interest payments by the U.S. government is an accurate statement of fact. A client can lose money on government bonds should interest rates rise after he purchases the bonds. The government does not guarantee that the principal and interest will keep up with inflation.

Under the Investment Company Act of 1940, which of the following statements about advisory contracts between an investment company and an outside adviser is TRUE?

The contract may not be unilaterally assigned to another adviser. All contracts between an investment company and an outside adviser must be in writing and must contain certain provisions; these include that the contract may not be unilaterally assigned to another adviser. The initial contract may be for 2 years, but it is subject to annual reapproval by a majority vote of the outstanding shares or the board of directors, as well as a majority of the directors who are considered to be noninterested parties.

To which of the following situations does the transaction exemption apply?

The sale of an estate's holding of IBM shares by an executor. An exempt transaction relieves the security from any state advertising or registration requirements. Transactions by executors and estate administrators are examples of exempt transactions. Municipal and government bonds are exempt securities, and whether or not they are exempt transactions depends on to whom or how they are sold (that information is not given in this question). The sale of the unregistered stock is not an exempt transaction (private placement) because the USA only permits offers to a maximum of 10 noninstitutional investors over a 12-month period.

Which of the following could NOT be an open-end fund?

WXY Fund ask price 10.50-NAV 11.25. Although closed-end fund shares may have an ask price below NAV, this is not true of an open-end fund. The ask price (POP) of an open-end fund is either the NAV (a no-load fund) or the NAV plus a sales charge.

The Administrator of a state securities department conducted a hearing regarding misconduct by an investment adviser registered at the state level. The Administrator required the adviser, as well as several clients who had lodged complaints against the adviser, to take a sworn oath that their testimony was true. Does the Administrator have the power to require sworn oaths?

Yes, because the Administrator is empowered to administer oaths as provided in the Uniform Securities Act, as enacted in the Administrator's state of jurisdiction.

A registered investment adviser advertises that it is offering a free 6-month subscription to their advisory newsletter. Which of the following qualifiers is acceptable under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers?

Your free subscription will start once we have received your name and mailing or email address. A free offer must not only be free of financial cost, it must be free of any other burden or commitment.

Each of the following is not a prohibited practice under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT

a broker-dealer failing to disclose that the firm is affiliated with the issuer of a recommended security. Watch out for the negatives. The question is looking for the prohibited practice, and failing to disclose the affiliation with the issuer of a recommended security violates the requirement to disclose any potential conflict of interest. Each of the other choices complies with the rules and would be permitted.

In a scheduled premium variable life insurance policy, which of the following are guaranteed?

a minimum death benefit. In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance, but no physical is required. The 75% cash value loan is a minimum, not a maximum, and applies after the 3rd year of coverage.

Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment?

closed-end investment company.

Under the Uniform Securities Act, it is NOT considered fraudulent if an agent

actively solicited orders in unregistered exempt securities. Securities that do not require registration under the USA are exempt securities. Although the securities are exempt from registration, thereby making the solicitation permitted, the agent who makes the solicitation and the broker-dealer must be registered. An agent may not make an untrue statement of a material fact, omit a material fact, or deliberately fail to follow a customer's instructions.

A type of fraud using social media where the fraudsters pretend to be member of a group, sometimes using respected leaders of the group to spread the word about the scheme is known as

affinity fraud. This is a classic definition of how affinity fraud operates. Although it is frequently aimed at ethnic groups, there is no such term as ethnic fraud.

An investor is looking for a packed product that can provide rental income as well as potential capital gains. You would most likely recommend

an equity REIT. When you see "rental," you immediately think of renting real estate. Of the two basic types of REITs, an equity REIT is the one that owns property. Rental income is received from the users of those properties. As an owner of real estate, there is always potential to sell the property for a gain. Think of the difference between an equity REIT and a mortgage REIT as the difference between a stock and a bond. A stock offers the possibility of income through dividends and a bond through interest. But, it is only the stock (equity) where there is a real potential for capital gain.

Under the Securities Act of 1933, the definition of prospectus includes

an offer of a security made in a personal letter. A prospectus is a communication made in writing or by radio or TV that offers a security for sale. An oral offer would therefore not be a prospectus. Tombstone advertisements are specifically excluded from the definition of prospectus. If such a letter were not preceded or accompanied by an official prospectus that contained all the required information, the sender of the letter would have violated the Securities Act of 1933.

As used in the Uniform Securities Act, which of the following entities would NOT be included in the term "institutional investor"?

any accredited investor. Institutional investors include banks, insurance and investment companies, and certain employee benefit plans. Although each of these is included in the term "accredited investor," that term as used in federal law (the term is not found in the USA) also includes certain individuals, and they would never be considered institutional investors under the USA.

A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to

buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee. If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares. But, you ask, we don't know what the CDSC is for the Class B shares—it isn't given. It doesn't have to be because the CDSC for redemptions in the first year would never be lower than the Class A front-end load (4% in this question and certainly higher than the 1% on the Class C shares).

When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be CORRECT to state that

by surrounding the policy, its cash value may be obtained. Surrender of the contract requires the insurance company to pay out its cash value. Death benefit is adjusted annually.

Under the Uniform Securities Act, all of the following are exempt from registration EXCEPT

common stock only sold intrastate. Local companies that issue common stock sold only within the state must register their securities with the state Administrator. Airport authority bonds, airplane equipment trust certificates, and securities issued by religious organizations are exempt from registration with the state Administrator.

It is a violation of the Uniform Securities Act if an agent

files a fraudulent application. It is a violation of the Uniform Securities Act to file a fraudulent or misleading application for registration as a securities industry professional (agent, broker-dealer, or investment adviser). An agent may always make material representation in the sale of a security; it is a material misrepresentation that is not permitted. An unregistered security may be sold in an exempt transaction and an exempt security does not need registration. One of the few things that does not have to be disclosed to clients is a commission sharing arrangement with another agent in the office.

SEC Release IA-1092 requires an investment adviser representative to make each of the following disclosures EXCEPT

highest post-secondary educational level attained, the name of the institution, and the date of graduation or final attendance. Educational information is generally only required of executive personnel listed on Form ADV Part 1. It is also required on Form ADV Part 2 for those rendering advice who have no high school education and no formal education after high school (post-secondary education).

Automated Performance Advisers (APA), a registered investment adviser in 3 states, has spent several years and in excess of $1 million developing the software for a computerized program that APA believes will allow the model portfolios it designs for its clients to consistently outperform the market. In the first year of beta testing the program, returns have ranged from 40% to 60% above the relevant benchmarks. Because of this success, and in an effort to recoup some of the development costs, APA is now charging, in addition to their standard 25 basis points per quarter, a performance-based fee of 10% of the increase of value in a client's portfolio. In so doing, APA would be

in violation of the Uniform Securities Act. First of all, this is a state-registered investment adviser, so the Investment Advisers Act of 1940 and the SEC have no jurisdiction. Then, we look at this quote from the USA: "Except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client." Even though we know that there are conditions under which performance-based compensation is permitted, unless the question specifically refers to that exception, the answer is that it is not permitted.

An agent made written disclosure to his employing broker-dealer that he intends to execute a series of private securities transactions with individuals who do not have accounts with his broker-dealer. The agent did not acquire express written permission from the broker-dealer and did not receive compensation for executing the transactions, but did receive written acknowledgment of receipt of the agent's notice. In this case, the agent

is guilty of selling away. When selling securities, agents are prohibited from enacting transactions that are not recorded on the broker-dealer's books unless the transactions are authorized in writing by the broker-dealer prior to execution. Failure to do this is known as selling away. Receipt of notification is not the same as authorization.

Written policies and procedures reasonably designed to safeguard customer information from cyber security threats would include all of the following EXCEPT

maintaining the minimum required cybersecurity insurance coverage.

Which of the following types of investments would have the lowest liquidity risk?

money market funds. Money market funds offer check-writing privileges permitting their investors to cash out virtually immediately.

An agent in this state would be acting illegally if he sold

nonexempt securities properly registered in a neighboring state but not registered in this state

It would not be considered a prohibited or unethical business practice for an investment adviser to

pay a nominal fixed fee to certain professionals as a form of thanking them for client referrals. Referral fees (not cash fees for full-time soliciting) may be paid to certain professionals (lawyers, accountants, insurance agents, and so forth) as long as the fee is both a nominal amount (up to several hundred dollars) and is the same amount for any referral. That is, it is not based on the size of the account. In order to charge a performance-based fee, investors must have a net worth in excess of $2.1 million while they can meet the accredited investor standard when their net worth exceeds only $1 million. Finally, under both state and federal law, investment advisers may never use testimonials from clients, even with disclaimers.

Under the Investment Advisers Act of 1940, cash payment to a broker-dealer from an investment adviser in return for client referrals is

permitted if the investment adviser makes certain disclosures to the clients and meets other requirements

An investor who is long XYZ stock would consider going long an XYZ call to

protect against an increase in the market price of XYZ stock. Going long a call means that you have bought it. Only sellers of options generate income. If you wish to hedge your long stock position, you buy a put, not a call. That leaves us with two choices that are polar opposites. Good test-taking skills teach us that, in almost all cases, when we see that, one of those must be the right answer. Buying a call is bullish. Forget the first part (you are long the stock). You would buy a call so that, if the price of the stock went up, you could exercise at the lower strike price of your call option.

Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when

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

Fairweather Securities Corp. (FSC), a registered broker-dealer, has invited several IARs from Econometric Advisory Services (ESA), a registered invested adviser that directs transactional business to FSC, to a seminar featuring a disquisition on current economic trends being presented by a leading economist. It would be permitted for FSC to cover which of the following expenses?

registration fees for the seminar. Payment for seminar fees is permitted under the safe harbor provisions in Section 28(e) of the Securities Exchange Act of 1934.

A state-registered investment adviser maintains custody of client funds and securities. On Thursday, the chief financial officer of the firm informs the chief compliance officer that their net worth is $31,578. Under the provisions of the Uniform Securities Act, the firm would

send a detailed financial report to the Administrator by the close of business Monday. A state-registered investment adviser who maintains custody of client assets must maintain net worth of at least $35,000 or a bond of the same amount (not both). If the net worth should fall below the minimum, by the close of the next business day after discovery (Friday in our example), notice of the deficiency must be sent to the Administrator of the state in which the principal office of the adviser is located. Then, by the close of business the day after that (Monday in our example), a detailed financial report, including the number of clients served by the adviser, must be sent to the Administrator. The firm would need to increase their net worth, not the bond.

In contrast with a typical forwards contract, futures contracts have:

standardized terms. Futures are contracts that trade on exchanges and have standardized terms, in contrast with forwards contracts, which are customized instruments. A futures clearinghouse reduces counterparty risk by guaranteeing the performance of buyers and sellers. Because futures contracts trade on organized exchanges and have standardized terms, they are more liquid than forwards contracts.

Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser?

state licensing fee. All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.

All of the following statements regarding technical analysis are correct except

technical analysts rely heavily on financial ratios in their analysis of stocks. Technical analysts do not rely on financial ratios in their analysis of stocks. Instead, they rely on charts of past price history and volume to predict future price movements. It is fundamental analysis where financial ratios are important.

Under the Uniform Securities Act, all of the following would cause an agent's registration to be canceled by the Administrator EXCEPT

the agent is found by a court to have violated a securities statute. The key word is canceled. The Administrator would cancel an agent's registration in the event of death or mental incompetence of the registrant. Failure to locate an agent, such as mail being returned without a forwarding address, is also a cause for cancellation. Cancellation carries no connotation of wrongdoing; the Administrator may revoke a registration for violations.

A corporation issued a bond with a coupon of 6%, callable at 103. The bond matures in 2059. Current interest rates are 8%. It is most likely that

the bond is selling at a discount. There is excess information in this question (a favorite trick of the test authors). We don't need to know the call price or the maturity date. Simple, we have a 6% bond when current market interest rates are 8%. The inverse relationship between interest rates and bond prices teaches us that this bond is going to be selling at a discount. Bonds are called when interest rates go down, not rise. The coupon on a bond is fixed.

A contract between an investment adviser and a customer may be assigned to another investment adviser, provided

the client consents to the assignment. Except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that no assignment of the contract may be made by the investment adviser without the consent of the other party to the contract.

All of the following statements regarding the disclosure investment adviser brochure rule of the Uniform Securities Act are true EXCEPT

the disclosure brochure must be signed by an officer or partner of the firm. An officer or partner of the firm need not sign the disclosure brochure. The investment adviser's disclosure brochure must contain the relevant information from Form ADV Part 2A and, for those where it applies, Part 2B. The rule does permit advisers to deliver the brochure when the client enters the contract, providing the client is allowed to cancel the contract without penalty within 5 business days; otherwise, the brochure must be delivered no later than 48 hours before entering into an advisory contract.

An analyst would use the discounted cash flow method in an attempt to find

the fair value of a security. DCF uses the present value of future cash flows, based on a specified discount (interest) rate, to evaluate the price that a security should be selling for in the market. If the current market price of the security is less than this value, it has a positive net present value (NPV) and should be a good investment. The opposite is true if there is a negative NPV (the market price is higher than that computed under the DCF method).

One reason for including commodities in an investment portfolio is because they have a high correlation to

the inflation rate. Commodity prices tend to have a high correlation with the inflation rate. As inflation goes up, the value of the dollar generally falls. The relationship is inverse, a characteristic of negative correlation. As inflation increases, interest rates invariably do the same leading to a decrease in bond prices. Stock prices have a random correlation to commodities, generally negative.

The primary responsibility for supervising the activities of an investment adviser representative who is affiliated with a federal covered investment adviser lies with

the investment adviser the IAR represents

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of

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

When a security is registered with the Administrator, it means that

the security may be legally sold in the state. We can never misrepresent a security's registration. The Administrator, in registering a security, declares that the security is legal for sale in the state. Never use the word approved when referring to registration of a security or a securities professional. Only exempt securities and exempt transactions are exempt from the advertising filing requirements, and federal covered securities don't register with the Administrator; they notice file.

Which of the following is not a type of life insurance policy?

variable annuity policy. Although a variable annuity may have a death benefit provision, it is not considered a life insurance policy. One key to that is, among other things, there is no health questionnaire when purchasing an annuity. Perhaps you have never heard of an endowment policy (it is not mentioned in the LEM). This type of situation may come up on the actual exam where one of the choices is something unfamiliar to you. Don't let that cause you to lose your focus. Annuities are issued by life insurance companies, but they are not life insurance policies, so select the correct answer and move on.