S66 - Practice Test 2

Renewal registration fees are NOT required of which of the following registered applicants? [A] A broker-dealer who is filing for a successor [B] Investment adviser representatives (IARs) [C] Agents of a broker-dealer [D] Federal-covered advisers

A A broker/dealer filing for a successor would apply the unused portion of the existing registration to the new (successor) firm.

If an agent terminates his employment with one broker/dealer and has not yet been hired by another broker/dealer, the agent's registration: [A] is no longer effective [B] continues to be effective for 120 days [C] continues to be effective on an incentive basis [D] continues to be effective without restriction

A An agent's registration is no longer effective when the agent is no longer associated with a broker/dealer.

Which of the following would conflict with an IA's advertisement targeting the general public and stating that it is a "fee only" IA? [A] A fee that is solely based on performance [B] Hourly fees for financial planning [C] An initial evaluation fee by the IA [D] A fee that is based on the assets that are under management

A As a general rule, performance-based fees (i.e., fees based on a share of capital appreciation) are not permitted, unless the client satisfies specific requirements (client must be a "qualified client"). An advertisement that targets the general public (not accredited investors) would not be allowed if the IA charges fees based solely on performance.

During the "pay-out" period of a variable annuity the units are referred to as [A] annuity units. [B] pay-in units. [C] accumulation units. [D] pay-out units.

A During the pay-out period of a variable annuity the units received by the investor are referred to as annuity units.

An investment adviser (IA) and an investment adviser representative (IAR) must use the utmost good faith in conducting business with clients and must fully disclose all material facts. Which of the following best defines this statement? [A] This defines an IAs fiduciary duties to a client [B] This is the prudent investor rule [C] This is the suitability rule [D] This is the preferred practice rule

A IAs and IARs act in a fiduciary capacity in their dealings with clients pursuant to the Investment Advisers Act of 1940. This means that they must act solely in the best interests of the client and must make full disclosure of all material facts.

A broker/dealer is registered in all 50 states but only has offices located in State A. The Administrator in State B has notified the BD that he is going to audit the BD's books and records. Does the Administrator in State B have authority to audit the books? [A] Yes, because the BD is registered in State B [B] Yes, because the Administrator has authority over all BDs [C] No, because the BD has no offices in the state [D] No, because the books and records are located in State A

A If a BD is doing business in a state and is registered in the state, the Administrator of that state may examine the books and records at any time in or out of the state, even if the broker/dealer does not have an office in that state.

Under the Securities Exchange Act of 1934, reports filed by issuers with the SEC must be made available to the public: [A] Immediately [B] Within 30 days after SEC review. [C] 10 days after filing. [D] 30 days after filing.

A Reports required by the SEC are made public immediately. One of the main purposes of the SEC is to attempt to see that full and fair disclosure is made to the public.

According to the Uniform Securities Act, all of the following are true of registration of securities by filing EXCEPT: [A] The total net worth of the issuer must be $2 million and the issuer also must have achieved net income from operations before allowances for a minimum of 3 of the last 4 preceding fiscal years. [B] The issuer must have a total net worth of $4 million or more. [C] At least one class of securities must be carried by the issuer and held by 500 people or more. [D] For a minimum of 36 months, the issuer must be actively engaged in business operations within the United States.

A Section 302 of the Uniform Securities Act requires an issuer to be actively in business in the United States for at least 36 consecutive months immediately before the filing of the registration statement. The issuer must have a net worth of $4 million, securities held by 500 or more people, or net income from operations before allowances for at least 2 of the 3 preceding fiscal years, NOT 3 OF 4.

Under the Investment Company Act of 1940, which of the following would the shareholders in a mutual fund not have a right to? [A] receive notice from the investment advisor of the changes in the fund's portfolio as they occur [B] elect the fund's Board of Directors [C] approve any major change in the fund's investment policy [D] approve the contract of the investment advisor with the fund

A Shareholders would NOT be advised of changes in the funds portfolio as they OCCUR. That would impossible for the fund to disseminate on an on-going basis.

All of the following are characteristics of Whole Life insurance EXCEPT: [A] The death benefit is adjustable. [B] The cash value is based on a schedule of fixed amounts. [C] Policy loans are available up to the amount of the cash value. [D] Premium payments are deposited into the General Account of the insurance company.

A The death benefit is fixed; however; universal life provides an adjustable death benefit.

Which of the following answers is information that need not be included on an order ticket from a broker-dealer? [A] The client's state of residence [B] When the order was received and when it was entered [C] Identification of the agent responsible for managing the account [D] The order's conditions and terms

A The state of residence of the client may be important when determining investment objectives and tax consequences, but such information is not relevant to and need not be included on an order ticket.

What is a client's total return on his portfolio after one year if he invests $10,000 in each of three stocks, X,Y, and Z? He received $200 in dividends from company X, no dividend from company Y, and $300 in dividends from company Z. After one year the stock price of company X has increased 10%, the stock price of company Y has decreased 15%, and the stock price for company Z has remained unchanged and all three stocks are sold by the client. [A] 0% [B] 1.6% [C] 3.3% [D] 5.0%

A The total return includes dividends and capital gains or losses on the investment. (It is also known as Holding Period Rate of Return). Dividends = $200 + $300 = $500, Capital Gains = $1000 - $1500 = -$500, total is $0.00.

A current and updated amendment to an Investment Advisor's registration must be electronically filed with the SEC according to the Investment Advisers Act of 1940 how often? [A] within 90 days from the close of the Investment Adviser's fiscal year [B] within 30 days from the beginning of the Investment Adviser's fiscal year [C] within 90 days from the close of the Investment Adviser's calendar year [D] within 30 days from the beginning of the Investment Adviser's calendar year

A Under the Investment Advisers Act of 1940 investment advisers are required to send an electronic filing of an annual updated registration amendment within 90 days after the close of its fiscal year.

Under the Uniform Securities Act, registered agents may hire assistants who are unregistered to do which of the following? [A] Posting and updating the records of accounts under the direction and supervision of the registered agent. [B] Execute orders for other registered agents or for previously existing customers. [C] Cold calling or soliciting new customers for the registered agent. [D] Accepting and executing unsolicited transactions for the registered agent.

A Unregistered employees may not accept orders, execute orders, or perform solicitation of new customers on behalf of registered agents. However, they may update and post customer account records under the direction and supervision of the registered agent.

According to the Investment Company Act of 1940, all of the following statements are true except [A] The compensation to be paid to a mutual fund's investment adviser must be included in the written advisory contract and approved by a majority of the fund's shareholders. [B] An affiliated person of a mutual fund is prohibited from investing in the fund's shares. [C] A mutual fund must file reports with the SEC at a minimum of annually and send semi-annual reports to all shareholders. [D] Investment companies are prohibited from owning more than 3% of another investment company's shares without getting an exemption from the SEC.

B According to the Investment Company Act of 1940, investment companies are required to file annual reports with the SEC and semi-annual reports with all shareholders, they are prohibited from owning more than 3% of another investment company, and compensation to be paid must be in writing. However, an affiliated person is not prohibited from investing in the fund's shares.

According to the Uniform Securities Act, all the following must be included in a written advisory contract except: [A] that the investment advisor will not receive compensation based on the profit or loss in the account [B] that the investment advisor has been qualified by examination, experience or training to be an investment advisor [C] that the investment advisor will not assign the contract without the client's consent [D] that the investment advisor of a partnership will notify the client within a reasonable period of time of any change in the membership of the partnership

B All choices except "B" are true statements regarding an investment advisory contract. "B" is incorrect because investment advisory contracts would not include registration information.

When representing an issuer, an individual would fall under the USA's definition of "agent" when performing which of the following? [A] The sale of securities that have been issued by a state bank. [B] The sale of a limited partnership to an individual investor. [C] The sale of a promissory note to an insurer. [D] The sale of the issuer's securities to the issuer's president in which no sales commissions are paid.

B An agent who represents an issuer must be registered only if he or she sells non-exempt securities. Exempt securities include bank securities. An agent is also exempt from registration of he or she represents the issuer in an exempt transaction such as sales to officers of the issuer or to institutional investors. Therefore, in the sale of the limited partnership, the person would be acting as an agent.

Certain requirements apply to the retention of email communications by Investment Advisers under the Investment Advisers Act of 1940. Which statement is true with regard to such e-mail communication regulations? [A] All e-mails, business related or not must be maintained as correspondence [B] Business related emails are required to be maintained as correspondence [C] Retention of email communications are kept at the discretion of the investment advisor [D] Emails are not required to be preserved

B Email communications related to the IA's business books and records are required to be retained as correspondence by the IA. (SEC Rule 204-2 of the IIA' 1940). Personal emails do not have to be retained.

Under the Uniform Securities Act, investment adviser's (IA's) applications for registration may be denied by a state Administrator for any of the following reasons EXCEPT: [A] The IA willingly violated several provisions of the Act. [B] The IA has been convicted of a misdemeanor, unrelated to securities, in the last 10 years. [C] The IA has been suspended or enjoined from working in the securities business by any court with jurisdiction. [D] The IA has proven to be insolvent.

B Felons are not allowed to be IA's. Also, the Administrator may deny approval if a misdemeanor has been committed within the last 10 years that is related to the securities business. All of the other answers provide reasonable grounds for denial by the state Administrator.

Under the Securities Act of 1933, members of an underwriting group must receive payment in full on sales of a new issue within [A] 5 days [B] 35 days [C] 40 days [D] 45 days

B Members of the underwriting group must receive payment in full within 35 days of the purchase of a new issue.

The Dividend Discount Model is used to determine which of the following items? [A] Preferred stock values [B] Common stock values [C] A common stock's growth rate and cash flows [D] A preferred stock's growth rate and cash flows

B The Dividend Discount Model provides a tool for establishing the value of a common stock using the dividends paid as well as a given rate less the anticipated growth rate of dividends

The interest rate stated on the face of a bond is also known as the [A] Current yield [B] Nominal yield [C] Yield to maturity [D] Inflation-adjusted yield

B The coupon rate or interest rate on the face of the bond is known as the nominal yield.

Of the following types of returns listed, which best defines the following equation? (Final Value - Initial Cost + Income) / Initial Cost = ? [A] The Internal Rate of Return of an investment/project [B] The Holding Period Rate of Return of an investment/project [C] The Average Yearly Rate of Return of an investment/project [D] The Average Rate of Return of an investment/project after adjustment for inflation

B The equation listed is used to calculate an investment's or project's Holding Period Return. It takes into consideration the initial cost of the investment, the ending value upon sale, and the cash inflows from dividends and/or interest associated with the investment during the time that the investment is held.

Private Placements under the Uniform State Securities Act: [A] Are not governed but are covered under the 1933 Act. [B] Have an exemption that is narrower in scope than the Federal exemption. [C] State that if you qualify under the 1933 Act, the transaction is automatically qualified in every state. [D] Are not governed but are covered by the Securities and Exchange Act of 1934.

B The exemption under the Uniform Securities Act is limited to no more than 10 persons other than institutional investors. The exemptions under the Securities Act of 1933 and the SEC Regulation D permits an unlimited number of accredited investors.

If you were to invest in a $1,000 Treasury Bond with a 5.5% coupon and you buy the bond at par, holding it to maturity, what will your real rate of return be over the holding period if the CPI is 2% and the IRR is 3%? [A] 2.5% [B] 3.5% [C] 5.5% [D] 7.5%

B The real rate of return (aka - the inflation adjusted rate of return) equals the coupon rate of return (5.5% in this case) minus the rate of inflation (CPI = 2%). The IRR is the Internal Rate of Return and is the rate that will discount future cash flows to the present value (market price). The IRR is irrelevant in this particular question.

According to the Securities Exchange Act of 1934, which of the following statements is true? [A] "Market Maker" is another term for underwriter. [B] Clearing agencies that register transfers of ownership solely with respect to options contracts they issue are excluded from the definition of "transfer agent." [C] "Securities information processor" includes any newspaper that publishes information on securities transactions or quotations. [D] An "exchange" is a place where the physical exchange of securities certificates and cash takes place, per the buyer's and seller's agreement reached previously on a trading floor.

B The term "transfer agent" does not apply to a clearing agency performing functions solely with respect to options contracts.

An investor purchases stock for $25,000. Three years later, the investor sells the stock for $40,000. What is the investors after tax return on investment if the long term capital gains rate is 20%? [A] 30% [B] 40% [C] 48% [D] 60%

C 40,000-25,000=15,000 Return 15,000*.20=3,000 tax 15,000-3000=12,000 after tax return 12,000/25,000=48%

From a tax perspective which of the following factors for an investor in a high income tax bracket would be least important when designing his portfolio? [A] how much to allocate to cash equivalent [B] actively managed funds vs. passively managed funds [C] the investment strategies of a prospective, active fund manager [D] the relative merits of taxable vs. tax exempt portfolio

C A high income tax bracket investor will want to minimize his taxes in his taxable portfolio. Cash equivalents are fully taxable. Actively managed funds have more taxable capital gains than passively managed funds. The strategies of a prospective, active fund managers would not matter since you are just considering using them and have not actually hired them yet.

According to the Uniform Prudent Investor Act, a trustee's investment and management decisions should be evaluated: [A] Both as part of a beneficiary's investment strategy, and as an individual transaction. [B] Both as part of the trustee's overall investment strategy, and as an individual transaction. [C] Both as part of the trustee's overall investment strategy, and as part of the entire portfolio. [D] Both as part of the beneficiary's investment strategy and as part of the entire portfolio.

C A trustee's investment and management decisions with respect to individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as part of an overall investment strategy.

According to the Securities Exchange Act of 1934, which of the follow items would be required on an order ticket for a securities transaction? The account number The designation of the IA, if the order is enter by an IA on behalf of a client The price of the security at the time the order is entered The terms and conditions of the order [A] I, II, III, IV [B] I, III, IV [C] I, II, IV [D] I & IV only

C All choices offered would be required on an order ticket except that you would NOT need the price of the security at the time the order is entered.

The Uniform Securities Act provides that which of the following statements is/are correct with regard to post registration provisions for registered IA's whose principal place of business is in a given state? The IA is responsible for scheduling the annual state examination of books and records with the Administrator. The filing of financial statements with the state may be a requirement. By rule or order, the IA must maintain certain records per the Administrator. If the Form ADV becomes materially inaccurate, it is the IA's responsibility to update the form. [A] I and IV only [B] I, III, and IV only [C] II, III, and IV only [D] I, II, III, and IV

C All records required to be kept may be examined by the Administrator at any time within or outside of the state. IAs do not schedule their own annual examinations!

An investor plans on retiring in six months. She wants to use her portfolio in its entirety to pay off a mortgage at the time of retirement. The best asset allocation for her portfolio is currently [A] 20% REITS, 30% equities, 20% money market, 30% bonds [B] 60% bonds, 40% equities [C] 100% money market [D] 60% bonds, 40% money market

C At this point the investment objective of the client is to maintain the amount of capital in the account. The investor also needs the money to be available in 6 months. Both the investment objective and the short term needs of the client signal that the client should not be investing in equities (most volatile), REITS (usually long term investment), or bonds (longer maturity). Investing solely in money market accounts allows liquidity and maintenance of capital.

When evaluating a project, the project manager determines that the minimum required rate of return is 12%. The NPV is positive. Based on this information the estimated IRR of this project would be [A] zero. [B] equal to 12%. [C] greater than 12%. [D] not able to be calculated.

C Because the minimum desired return is 12% and the NPV is positive, meaning it is greater than 0, that would result in the IRR being greater than 12%.

The state Administrator receives notice from an IA firm that the firm's net capital has fallen below the Administrator's minimum requirement. NASAA regulations pertaining to this scenario require immediate filing of which of the following? The contact information for qualified custodians handling client funds. A balance sheet calculated up to the present. A tally of client ledger balances in aggregate A statement that shows all non-segregated funds and securities of all clients [A] I only [B] I, II, and III only [C] II, III, and IV only [D] I, II, III, and IV

C Each of the items listed must be provided other than the contact information for any qualified custodian handling client funds. This information would already be on file with the Administrator prior to the net capital falling below required levels. According to NASAA Rule 202, the IA would have to submit a trial balance of all ledger accounts (balance sheet), a statement of all funds and securities belonging to clients that are not segregated, a computation showing the aggregate amount of ledger debit balances belonging to clients, and a statement as to the number of client accounts held.

Which of the following would NOT have an effect on the interest rate that is credited to an equity-indexed annuity contract? [A] The participation rate related to the index [B] Margin fees associated with the contract [C] The payout option selected on the contract [D] The cap placed on the interest rate credited to the contract

C FINRA warns investors that "Some EIAs (equity-indexed annuities) allow the insurance company to change participation rates, cap rates, or spread/asset/margin fees." This adversely affects returns for investors. The payout option would not be included in this list.

All of the following are TRUE about using futures contracts for hedging purposes EXCEPT: [A] A long hedge would be used to protect against rising prices. [B] A short hedge would be used to protect against falling prices. [C] Hedging is typically used by speculators. [D] Hedging is typically used by the producers or consumers of the underlying commodity.

C Hedging is typically used by the producers or consumers of the underlying commodities to protect against the risk of future adverse price movements. Speculators are the counterparties who are willing to assume the risk to make a profit if they bet right as to the direction of prices.

Which of the following is a feature that is specific to a tenancy in common entity? [A] If one owner of the entity dies, the probate process is skipped for the remaining owners. [B] This type of ownership is only permitted for equal 50/50 ownership between two married individuals. [C] In general, each individual's interest in this type of agreement is more freely transferrable due to the nature of the agreement. [D] This type of agreement provides for the direct transfer of one individual's assets to the other owner/owners in the event of a death of the owner.

C In a tenancy in common, interests pass on to the estate of the deceased individual upon death. For this reason, such agreements provide for more freely transferrable interests in the entity/partnership. These arrangements can be between non-spouses, the assets do not bypass the probate process, and this is not similar to a Joint Tenants with Rights of Survivorship agreement where assets pass directly to remaining owners.

An Investment advisor recommends that a client's portfolio include 12% of small cap securities. The customer strongly rejects the recommendation. The IA's most appropriate response would be to [A] ask the client to have faith in their judgement [B] explain to the client the benefits of portfolio diversification [C] eliminate the small cap exposure from the plan [D] invest 6% in small cap stocks since the 12% recommendation was rejected

C In any situation, the wishes of the customer must be recognized. In this case, avoiding small cap stocks would not put the portfolio in any jeopardy, and thus the rejection of the customer to the small cap exposure must be noted and followed by the investment adviser. Keeping the client in the small cap securities would be unethical since the client has rejected the small cap exposure.

An analyst on a financial television program reports that despite strong performance, personnel at technology companies expect a downturn in that sector. Which of the following risks explain this situation? [A] interest rate [B] business risk [C] market risk [D] liquidity risk

C In this scenario, the fluctuations in pricing of stocks throughout an entire industry would most likely be attributed to market risk for that industry. It is unlikely that all businesses in an industry would have substantial business risk or be thinly-traded. Interest-rate risk would not cause an industry-wide fall in stock prices.

A new client wants to establish an investment portfolio with an investment adviser. Before the adviser opens the account, all of the following actions should be taken by the client EXCEPT: [A] The client must have insurance adequate to cover needs such as car, home, and/or life insurance. [B] The client should have some short-term and long-term financial goals. [C] The client must pay off all credit cards completely. [D] The client should be advised to have an account open with savings in place for emergency purposes.

C It is not a requirement for clients to have a zero balance on all credit cards prior to establishing accounts with investment advisers. It is advisable that client have an emergency fund, long and short-term goals, and required that the client has insurance that is adequate.

All of the following choices adhere to the NASAA Model Rule on Unethical Business Practices of Investment Advisers EXCEPT when an investment adviser: [A] decides to borrow funds with a promissory note in writing from a client, who is also a controlling shareholder. [B] decides to borrow funds with a promissory note in writing from an institutional lending facility, who also happens to be a client. [C] decides to borrow funds with a promissory note in writing from an individual client. [D] decides to borrow funds through a margin account from a broker-dealer who also just happens to be a client.

C It is unacceptable for advisers to borrow money from individual clients.

An SEC-Registered IA has five clients in State X. Prior to entering into any advisory contracts, it would be necessary for the IA to make a notice filing when entering into such an agreement with [A] A state statute authorized investment council involved in the investment of state funds [B] A trust company using the IA to manage $100,000 of accounts [C] A testamentary trust account that is set up for minors [D] An investment company with assets of $500,000 and 150 investors

C More than 5 clients in a state would normally require a notice filing by the investment adviser in the state, but financial institutions (e.g. a trust company), other investment advisers (e.g. the investment counsel), and investment companies are excluded when counting clients. A testamentary trust account set up for a minor would count as an additional client.

Non-exempt issuers are required to file registration statements with which of the following entities under the 1933 Act? [A] Such issuers must file with the state in which the business is located. [B] Such issuers must file with the state in which the securities will be sold. [C] Such issuers must file with the Securities Exchange Commission (SEC). [D] Such issuers must file with the Financial Industry Regulatory Authority (FINRA).

C Non-exempt issuers would be just normal issuers. Issuers that do not qualify for any exemptions would have to register at the Federal Level with the SEC according to the Securities Act of 1933.

ABC Corporation's common stock has been fluctuating dramatically over the last month due to unsubstantiated rumors about the popularity of the company's products in the marketplace. An investment advisor does some investigation of the company and finds that the company's sales and earnings are above where they were expected to be. The investment advisor decides to call all of his clients holding positions in ABC and tell them that what is going on is simply [A] business risk [B] interest rate risk [C] market risk [D] risk associated with a lack of liquidity in the stock

C Of the choices listed market risk is the best choice. The company has strong financials, so the volatility is not in relation to the company's financial viability. Interest rate risk and risks associated with liquidity are not pertinent in this case.

A 62 year old client calls you to report that they have received news that they have earned $5,000 on a $30,000 fixed annuity. Your client is wondering what the tax ramification will be on the $5,000. Your client is in the 28% tax bracket. Which of the following is correct with regard to this situation? [A] They will pay $750 on the long-term gain. [B] They will pay $1,400 on the earnings. [C] They will pay no tax unless the clients withdraw the earning from the annuity. [D] They will pay $2,500 on the earnings.

C Of the choices offered the best answer is "C". There will be no current tax liability unless the client withdraws the earnings from the annuity.

According to the Uniform Securities Act, which of the following is defined as an investment adviser (IA)? [A] Broker-dealers who give advice to clients that is incidental only to the activities performed as a broker-dealer. [B] One who publishes a financial newsletter containing several articles on securities [C] One who only gives advice on U.S. Government securities. [D] One who regularly publishes reports containing advice not directed toward any individual client or situation.

C Publishers of financial newspapers, broker-dealers acting solely as broker-dealers would fall under exemption from the definition of an investment adviser. In choice "C" the person who gives advice on U. S. Government securities would be considered to be an Investment Advisor under the USA but make sure you do not confuse this with the Investment Advisors Act of 1940 where persons who give advice about U. S. Government securities only would be exempt from the definition of Investment Advisor.

According to NASAA Regulations, an IA that has and maintains custody of a client's funds must: [A] submit to an independent audit by the Administrator at least annually [B] notify the client of the location of the funds within 3 months of taking custody [C] hold bank accounts in the name of the IA as agent or trustee for the benefit of the client [D] give prior verbal notice to the Administrator of the IA's intention to take custody

C The IA must notify the client promptly in writing as to the location of the funds. It must also give prompt written notice of any change of location. The annual audit of the funds must be done by an independent public accountant, not the Administrator. The IA must notify the Administrator promptly in writing when it takes custody.

You are computing the anticipated portfolio return on a client's portfolio. The formula that you are using incorporates the cash inflows and outflows in the portfolio. Which return calculation are you most likely using? [A] The expected return calculation [B] The risk-adjusted return calculation [C] The internal rate of return calculation [D] The holding period return calculation

C The Internal Rate of Return (IRR) is the interest rate that will discount future cash inflows and outflows of an investment to its present value (i.e. - the market price). For example, the yield-to-maturity (or basis) of bonds discounts all of the bond's cash flows to its present value (the current market price).

An IA recommends that a client purchase a 20-year Treasury Bond at par with a coupon of 6%. The IA tells the client that he will "earn a 6% return per year if the bond is held to maturity." This statement is [A] allowed so long as the return to the client was disclosed. [B] allowed because the Treasury guarantees the coupon payment. [C] not allowed because IA's cannot guarantee specific returns. [D] not allowed because it is possible for the client to sell the security before maturity.

C The Model Rules prohibit an IA from guaranteeing an investment result. Even though the likelihood of default is extremely low when dealing with US Treasury Securities, it is possible that the treasury could default on an interest or principal payment.

According to Federal Regulations, the SEC would have to issue an exemptive order before a mutual fund may [A] Adopt a 12b-1 plan. [B] Change its investment objectives [C] Employ as an investment adviser a person who has been convicted within the past 10 years of a crime involving the securities business. [D] Do any of the above

C The SEC would have to issue an exemptive order before a mutual fund may employ a person as an investment adviser who has been convicted within the past 10 years of a crime involving the securities business.

If the rate of inflation remains the same at 2% during the 5-year life of a TIPS bond with a coupon of 3%, what would the nominal value of the bond be at maturity to the nearest dollar? [A] $1,000 [B] $1,060 [C] $1,104 [D] $1,160

C The formula is: Future Value = Principal x (1 + the inflation rate)^(#of years). Here the formula would be X = $1,000 x (1+.02)^5 or $1,104.

Governed by the NASAA Model Rule on Unethical Business Practices of Investment Advisers and Federal Covered Advisers, investment advisers, when writing memorandums pertaining to buy and sell orders of securities must include all of the following EXCEPT: [A] The memo must identify the broker-dealer which executed the order for the IA. [B] Any person making a recommendation regarding the trade to the client must be identified. [C] The IA's officers and directors must be identified. [D] The person placing the order must be identified.

C The memo must include all of the above except for the IA's officers and directors. Such information is not relevant to the trade. All of the other information is relevant to the trade.

The written disclosure document that must be furnished by a solicitor to a client under the Investment Advisors Act of 1940 must include all of the following except [A] any service that the solicitor will be providing to the client [B] the compensations that the solicitor will receive [C] the name of the broker dealer that will affect the trades [D] the name of the investment advisors that will be providing advisory service

C The name of the broker-dealer used to affect the trades is not required to be in the disclosure document.

A company is going to be performing an initial offering. The offering will be limited to one state. The company has no intention of registering at the federal level. How would this offering typically be registered according the Uniform Securities Act? [A] This company should go through the coordination process in order to register. [B] This company should perform a notice filing with the state in which the offering is taking place. [C] This company should go through the qualification process in order to register. [D] This company should file with the state in which the offering is taking place.

C This company would register by following the qualification process. In instances where a company is registering in one state and will not be registering at the federal level, the qualification process is the appropriate form of registration. Each of the other forms of registration hinges upon federal registration, either simultaneously (coordination) or prior (filing or notice filing).

An article is released detailing how Tech Company A has created software that is currently the best on the market. Tech Company A is expected to gain a major portion of market share for this type of software. One of your clients reads the article and buys a sizeable amount of the stock of Tech Company A. Six months later, an article is released which details a new form of software released by Tech Company Z. The new software may revolutionize the industry currently dominated by Tech Company A. As a result, Tech Company A's stock drops significantly. Which best describes this scenario? [A] This is an example of event risk. [B] This is an example of market risk. [C] This is an example of competitive risk. [D] This is an example of business risk.

C This is an example of competitive risk. Competitive risk is the risk that a firm will not remain competitive with other firms in terms of technology, products, or general competition. Here, the tech firm expects a majority of market share and falls victim to a new technology.

Which of the following investment advisers may, by law, transact business in a state according to the Uniform Securities Act? A registered adviser An investment adviser, who is not registered in a State or with the SEC, whose advice relates solely to exempt securities An adviser registered in State X who has no place of business in State Y and directs business communications to 5 or fewer clients in State Y over the past 12 months. [A] I only [B] I and II only [C] I and III only [D] I, II, and III

C Under the Uniform Securities Act, an investment advisor must register when giving advice on any security, exempt or not. In the Investment Advisors Act of 1940, an exemption exists for federal covered advisors who give advice on government securities only, but this question is specific to the Uniform Securities Act. The five client exemption applies here, so remember that an IA with 5 or fewer clients (also can be stated "less than 6") could transact business in a state without registering in that state.

A non-issuer transaction, according to the Uniform Securities Act, is best described by which of the following? [A] Nobody other than the issuer has purchased the security. [B] Anyone other than the issuer has purchased the security. [C] A private offering is made by a corporation and the offering is exempt. [D] Any sale in which the issuer does not directly or indirectly benefit from the transaction.

D A non-issuer transaction would include a shareholder selling shares that they own to another investor. Therefore there would not be any benefit to the issuer.

According to the Investment Company Act of 1940, which of the following may purchase mutual fund shares at a discount from the public offering price: a plan company a qualified retirement plan an officer of the fund's investment advisor [A] I, II [B] I, III [C] II, III [D] I, II, III

D According to the Investment Company Act of 1940, all three choices offered represent situations where the purchaser may qualify for a discount from the public offering price, either due to a quantity discount or prior written agreement. Plan Companies, Qualified Retirement Plans, and an Officer of the Funds Investment Advisor all qualify for discounts from the Public Offering Price according to the Investment Company Act of 1940 and SEC Rules.

All of the following would not be included in an advertisement of services by an IA EXCEPT: [A] A testimonial by a satisfied customer [B] A chart that can be used to determine which stocks to buy or sell the coming year [C] A telephone number to call to obtain a list of all the recommendations made in the last month [D] A non-obligation offer to furnish a free report on all recommendations made in the last 2 years

D Advertisements may not refer to past recommendations unless the IA offers to provide a list of all recommendations made over at least the last year.

A newly formed, unregistered investment advisor (IA) wants to register with the SEC. It is true to say that the IA [A] may register with the SEC without restrictions [B] may not register with the SEC without first registering with the state(s). [C] may not register with the SEC until it has been in business for at least one year. [D] may not register with the SEC until it has at least $25 million under management.

D An IA who manages $25 million or more may register with the SEC. Under $25 million, an IA must register with the state.

Under the Uniform Securities Act (USA), an agent of a broker-dealer who violates the USA may be subject to which of the following consequences? The agent may face an injunction The agent may face civil liabilities The agent may face criminal penalties The agent may face revocation of registration [A] I and III only [B] II and IV only [C] I, II, and IV only [D] I, II, III, and IV

D An agent of a broker-dealer could be subject to "All" choices offered if violations occur.

According to the Securities Exchange Act of 1934, securities listed on a National Exchange must include information on the issuer and: any person directly or indirectly controlling the issue any person directly or indirectly controlled by the issuer any person under direct or indirect common control with the issuer [A] I, II [B] I, III [C] II, III [D] I, II, III

D Any person is directly or indirectly controlled by or under common control with an issuer must have information disclosed with the SEC which is then made available to the public. All three choices are items of information required to be disclosed in the information filed with the SEC on securities listed on a National Stock Exchange.

Under the Uniform Securities Act, every investment advisory contract must be in writing and must include [A] that assignment of the contract is prohibited [B] that the IA's liability is limited [C] that the IA's compensation is based on a share of capital gains [D] the specific time period for which services are contracted

D Assignment of the contract is permitted with the written consent of the client. The IA may not limit its liability or as a general rule share in the capital gains of the accounts of clients.

Lapsed life insurance policies may be reinstated [A] on a guaranteed basis. [B] with evidence of insurability only. [C] with payment of unpaid premiums only. [D] with both evidence of insurability and the payment of unpaid premiums.

D Both evidence of insurability and the payment of the back unpaid premiums are required.

For a high income tax bracket investor, which of the following is NOT likely to be a tax consideration for his/her taxable investment portfolio? [A] How much of the portfolio is allocated to cash flow [B] The use of actively-managed funds versus passively-managed funds [C] The relative points of tax exempt versus taxable bonds [D] The investment philosophy and disciplines of a prospective, actively-managed fund manager.

D Current tax considerations could include all choices except investigation of the merits of a "prospective" manager.

An IA may be liable for civil damages to a client if: The IA fails to disclose a material fact in soliciting the clients The IA fails to disclose that the IA will sell a recommended security from its own account. The IA fails to reasonably supervise an employee who becomes civilly liable to clients for negligent investment advice. [A] I and II only [B] I and III only [C] II and III only [D] I, II, and III

D Failure to disclose a material fact is fraud. An IA is liable for the negligence of its employees.

According to the USA's post-registration provisions, which of the following would be true? An Administrator may only do an on-site examination of an investment adviser if the IA has an office in that Administrator's state. Record-keeping requirements are only required of broker-dealers that carry customer accounts. Investment advisers may not be required to maintain the same books and records as a broker-dealer. Administrators must be informed "promptly" of any documents filed with the Administrator when they become inaccurate or incomplete. [A] I and II [B] I and III [C] II and IV [D] III and IV

D Investment advisers and broker-dealers both have record keeping requirements, but the requirements are not the same. If any information in a registration statement becomes inaccurate or incomplete, an amendment must be promptly filed.

Pass-through of profits and losses, along with protection from liability, is provided by which type of business entity? [A] These are features of a sole proprietorship. [B] These are features of a C-Corporation. [C] These are features of a general partnership. [D] These are features of a limited partnership.

D Limited partnerships provide limited liability to limited partners while passing through profits and losses to investors. Sole proprietorships and general partnerships do not provide liability protection and C-Corporations do not pass through profits and losses to shareholders.

According to the Uniform Securities Act, which of the following would be specifically excluded in the definition of a Broker-Dealer? [A] Investment Advisers and Investment Advisor Representatives [B] Accountants [C] Lawyers [D] Issuers

D Of the choices offered the only one that is "specifically" excluded from the definition of Broker-Dealer is an issuer.

All of the following are characteristics of Universal Life insurance EXCEPT: [A] The cash values are interest sensitive (sometimes with a guaranteed minimum). [B] Policyholders do not choose the underlying investments. [C] Flexible premium payments are available. [D] Premium payments are deposited into the Separate Account of the life insurance company.

D Premium payments are deposited into the General Account of the life insurance company. Policyholders do not have control over the investments.

Which of the following are exempt from the sections of the Uniform Securities Act which require registration and filing of advertising materials? Common and preferred stock issued by a corporation and sold over-the-counter Debt securities issued by the United States as well as those issued by the Canadian Government Bonds and debentures issued by a corporation and sold over-the-counter Securities such as common stock that are listed on a stock exchange such as the NYSE [A] I and II only [B] II and III only [C] III and IV only [D] II and IV only

D The Uniform Securities Act provides exemptions for US Government Securities, securities issued or guaranteed by the country of Canada, and securities that are listed on national exchanges such as the New York Stock Exchange, American Stock Exchange, and the Midwest Stock Exchange. Corporate equity and debt securities that are sold over-the-counter (not listed) are not necessarily exempt from the registration and filing of advertising, unless these securities qualify for some other exemption. In this case, these corporate securities are not exempt.

Which of the following best fits the Uniform Securities Act definition of a federal covered adviser? [A] A federal covered adviser only gives recommendations relating to securities that are federally covered. [B] A federal covered advisor has clients in at least two states. [C] A federal covered adviser only gives recommendations relating to U.S. Government Securities. [D] A federal covered adviser is one registered as such under the Investment Advisers Act of 1940.

D The Uniform Securities Act states that a Federal Covered Adviser is an investment adviser who comes within the definition of an IA under the federal Investment Advisers Act of 1940.

Wayne is looking at buying a block of stock for his portfolio. He is evaluating one stock in particular, which has a beta of 1.15. Wayne is using the S&P 500 as his benchmark, and it has a beta of 1.0. If the S&P 500 returned 5% in the previous year and the stock that Wayne is evaluating returned 7.5%, what is the alpha of the stock that Wayne is evaluating? [A] The alpha of the stock is 8.625%. [B] The alpha of the stock is 6.35%. [C] The alpha of the stock is 2.5%. [D] The alpha of the stock is 1.75%.

D The formula for alpha is: Alpha = Realized Return - (Market Return x Beta) Alpha = 0.075 - (0.05 x 1.15) Alpha = 0.075 - 0.0575 Alpha = 0.0175 or 1.75%

A registered representative who engages in private securities transaction is required to do all of the following except: [A] give written notice of the BD employing the RR [B] receive approval from the BD employing the RR [C] record the transactions on the books of the BD if the RR receives a commission [D] give written notice to the issuer of the securities of the BD's policy regarding private securities transactions.

D The issuer does not need notification of such transactions.

Under the Securities Act of 1933, which of the following could be found liable for omission or misstatements of material fact in a registration statement? Officers of the issuer. Lawyers for the issuer. Accountants for the issuer. Board of Directors of the issuer. [A] I and IV only [B] II and III only [C] I, II, III [D] I, II, III, IV

D Under the Securities Act of 1933 all of the choices of issuers would be liable for omission or misstatements of material fact in a registration statement.

When a bond or debt security is traded at a broker/dealer firm, which of the following items must be disclosed to the client on their purchase confirmation? The date and time of the transaction The identity of the debt security being traded The yield to maturity of the bond The actual yield based on the purchase price [A] I & II only [B] II & III only [C] I, II & III only [D] All of the above

D Under the Securities Exchange Act of 1934 when a customer confirmations require the following information to be disclosed to customers at or before completion of a transaction: * Date of the transaction * Identity of the Security * Price of the security * Number of shares traded * Principal amount traded if it is a bond or debt security * Whether the broker/dealer acted in the capacity of an agent or principal * Yield to Maturity * Yield at which the trade was effected Note: The bond's rating would not be required on the confirmation

Under which of the following circumstances may an investment adviser (IA) act as a principal and sell a security to a client according to the Uniform Securities Act? [A] Only when a security has been listed on a national exchange [B] The customer's monthly statement shows the sale as a principal transaction [C] The price is fair and reasonably related to the current market price [D] Only after written disclosure of the IA's status is provided and the client consents

D When an Investment Advisor Acts as principal, it must be disclosed to the client in writing before completion of the transaction.

Which of the following ratios will give an indication of how financially leveraged a company or entity is? [A] The Current Ratio = Current Assets / Current Liabilities [B] Return on Assets = Income / Tangible Assets [C] Capital Turnover = Sales / Capital [D] Debt to Capital Ratio = Debt / Capital

D When determining how financially leveraged a company might be, debt will always play a key role. Debt to Equity is the most common form of gauge when figuring how leveraged a company may be, but debt to capital can also be used.

State Administrators may, according to the Uniform Securities Act, require the application for registration as an investment adviser to include which of the following? [A] A list of the past 5 years of records of currently employed and previously employed investment adviser representatives (IARs). [B] A record of client securities and the location and manner in which they are held or will be held. [C] The compliance procedures of the IA [D] The financial condition and history of the IA

D When filing an application for registration, an Investment Advisor must include their financial condition and history. Once the IA is registered, the IA would have to comply with other requirements.

An investment advisor holds more than 5% of an equity security registered under the Securities Exchange Act of 1934. Which is true of the advisor's obligation to report beneficial ownership with the Securities and Exchange Commission? [A] The advisor must file a report only if it acquired the securities for its own account. [B] The advisor must file a report only if it acquired the securities for its clients. [C] The advisor must file a report only if it intends to effect changes in control of the issuer. [D] The advisor must file a report.

D Whenever an investor, be it an individual or an investment advisor, owns 5% or more of the outstanding securities of one company, they must file (Form 13-D) with the SEC.