Series 65

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

b (It is not necessary to list the total amount of the security to be offered in all states. However, for filing fee purposes the amount to be sold in this state must be disclosed.)

The prohibited practice of an investment adviser placing the same security in the accounts of all of the firm's clients is known as A) matched orders B) blanket recommendations C) discretionary misrepresentation D) churning

b (When the same security is recommended to all or most of an IA's clients, the regulators considered this to be an unethical practice known as "blanket recommendations" because the same security will almost never be suitable for everyone)

Proponents of which of the following technical theories assume that small investors are usually wrong? A) Short interest B) Breadth of market C) Odd lot D) Volume of trading

c (Odd lots are usually traded by small investors; some analysts believe small investors are generally wrong.)

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

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

With respect to the fiscal policy of the United States, the annual budget request is submitted by the A) Congress B) Federal Reserve Board C) Internal Revenue Service D) president

d (The president of the United States is responsible for submitting the country's annual budget request to Congress for their approval and ultimately sent back to the president for signature.)

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

a

Under SEC rules, Form 8-K must be filed A) within 4 business days of the event B) within 15 business days of the event C) within 10 business days of the event D) promptly

a (Form 8-K is used to report newsworthy events to the SEC. The reporting time limit is 4 business days.)

All of the following are tools that may be employed by the Federal Reserve in an effort to control the economy EXCEPT A) the prime rate B) the discount rate C) open market operations buying and selling Treasury securities D) the reserve requirements

a (The prime rate is set by the banks. All of the others are under the control of the Fed.)

The measurement of a portfolio's actual or realized return in excess of (or deficient to) the expected return calculated by the capital asset pricing model (CAPM) is known as A) alpha B) NPV C) beta D) IRR

a (This is the textbook definition of alpha. Portfolio managers strive for a positive alpha (returns in excess of the expected return).)

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

c (It was the Howey case in 1946 where the decision ruled that an investment contract meeting the 4 prongs: (1) an investment of money, (2) into a common enterprise, (3) with the expectation of profit, and (4) due to the managerial efforts of others, is a security)

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

d (Although it is not the general practice, the federal law does permit oral contracts, whereas the USA requires that all initial and renewal contracts be in writing)

A fixed-income investor notices that the short, intermediate, and long ends of the yield curve reflect a similar return. This would be typical of A) an inverted yield curve B) a normal yield curve C) a positive yield curve D) a flat yield curve

d (If you were to plot this curve, what would it look like? It would be a flat line because, regardless of the maturities, all of the yields are the same. In an inverted (or negative) yield curve, the short end of the curve has higher yields than the long end. A normal (or positive) yield curve slopes upwards, with lower yields at the short end and higher yields at the long end.)

John was convicted 5 years ago of failure to pay child support, a misdemeanor in his home state. John would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state will A) disregard that conviction when determining John's qualifications for registration B) consider granting registration to John, but only if he receives heightened supervision C) consider John to be statutorily disqualified because in this state his crime is a felony D) determine John's status on the basis of the extent to which his child support payments are being paid

a (The conviction on John's record is for a non-securities-related misdemeanor. The fact that the same crime is a felony in another state is not relevant to John's application for registration in that state.)

Great Research & Analysis Brokers (GRAB) is an SEC registered broker-dealer with its principal office in State X. One of GRAB's clients vacations for 3 months during the winter in State Y. Under the registration requirements of the Uniform Securities Act, A) GRAB is permitted to accept only unsolicited orders from the client in order to be exempt B) GRAB is not defined as a broker-dealer in State Y if it does not have a place of business in the state C) GRAB is not defined as a broker-dealer in State Y due to the de minimis exemption D) the presence of a single client in State Y requires GRAB to register in that state

b

You note that an article in the Wall Street Journal points out that the money supply has been increasing. This economic measure is A) a lagging indicator B) a leading indicator C) a GDP deflator D) a coincident indicator

b (Among the list of leading indicators is the money supply.)

In order to be in compliance with SEC reporting rules, a company will typically file a Form 10-Q how many times during its fiscal year? A) 2 times B) 3 times C) 4 times D) 1 time

b (The Form 10-Q is used for quarterly financial reporting. However, even though there are 4 quarters in an accounting year, only 3 forms are filed. This is because the Form 10-K, the annual report, takes the place of the 4th quarterly report.)

Under the Investment Advisers Act of 1940, which of the following would be excluded from the definition of an investment adviser? A) The publisher of an investment advisory newsletter that plans issues based on market events B) A broker-dealer that managed clients' portfolios for a fee C) A bank that charged a fee for providing investment advice D) An individual who made recommendations regarding which types of securities would meet a client's investment objectives but who did not recommend specific securities

c

Under the USA, an agent may file for a review of an Administrator's revocation order within how many days of revocation? A) 270 days B) 90 days C) 60 days D) 30 days

c

Which of the following phrases best describes a prudent investor? A) The custodian for a minor under the Uniform Transfers to Minors Act B) A person in a fiduciary capacity who invests in a prudent manner C) A trustee who invests with reasonable care, skill, and caution D) An investment adviser representative (IAR) handling a discretionary account

c (Although all of these may have a fiduciary responsibility, the definition, as expressed in the Uniform Prudent Investor Act of 1994, requires reasonable care, skill, and caution.)

Under the USA, all of the following statements are true regarding investment advisory contracts EXCEPT A) they can only allow fees to be performance related under certain limited circumstances B) they cannot be assigned without customer approval C) they must be in writing D) they cannot allow for prepaid advisory fees

d (Nothing in the USA prohibits prepaid advisory fees. The contract must describe the nature of these fees and the circumstances, if any, under which any or all of the prepaid fee may be returned in the event of early cancellation of the contract. The USA requires initial and renewal contracts to be in writing and state that assignment may take place only with the client's consent. There are certain circumstances, such as an investor with a net worth of at least $2 million, where performance-based fees are permitted.)

A fiduciary, acting in accordance with the UPIA, would choose investments on the basis of all of the following EXCEPT A) general economic conditions B) needs for liquidity, regularity of income, and preservation or appreciation of capital C) other resources of the beneficiaries D) transaction costs

d (Under the Uniform Prudent Investor Act, transaction costs are not a primary factor in a trustee's determination of which investments to choose for the trust. They may be a factor in determining where to execute the transactions. The key for the prudent investor is to use skill and caution examining all of the factors involved to meet the stated objectives.)

Under the net present value (NPV) method of evaluating investments, an investment is attractive if the net present value of the expected returns is A) greater than the risk-adjusted return B) less than zero C) equal to zero D) greater than zero

d (Under the net present value (NPV) approach, an investment is attractive only if the net present value of the expected returns is greater than the amount of the investment outlay. In other words, an investment is attractive (it considered to be underpriced) if the net present value is greater than zero. On the other hand, if the NPV is negative (less than zero), it would not be an attractive investment (it is considered to be overpriced) and should not be undertaken.)

An investor using yield curve analysis would expect to view bonds of A) a single issuer over varying maturities B) varying quality of similar maturities C) varying quality over a number of maturities D) similar quality over varying maturities

a (The most common yield curves are drawn using U.S. Treasury securities. The curve is plotted using maturities ranging from the short-term T-bills to the long bonds. There are other curves drawn with bonds from other sectors, such as corporate bonds, to show the yield spread, but that is going beyond the scope of this question.)

Which of the following would NOT be considered an investment adviser under Release IA-1092? A) A pension consultant who advises a defined contribution plan on alternative methods of funding the plan and the relative merits of a selected list of investment managers B) The president of an investment club who provides research and advice to the members of his club on a regular basis as an integral part of his duties C) An agent for an athlete who negotiates contracts for a baseball player, as well as advises the client on securities, but does not have discretionary authority over the athlete's securities account D) A retired banker who solicits business and advises former clients on a monthly basis as to the specific investment merits of banking securities and receives compensation for his services

b

Senior Wealth Advisers (SWA) is registered as an investment adviser in North and South Carolina with offices in Charlotte, North Carolina and Charleston, South Carolina. On occasion, 1 of their investment adviser representatives meets with clients who reside in North Augusta, South Carolina in a hotel room in Augusta, Georgia. The registration requirements of the Uniform Securities Act would A) require that both SWA and the IAR register with the Georgia Administrator B) not require registration of either person with the Georgia Administrator C) require that SWA register with the Georgia Administrator D) require that the IAR register with the Georgia Administrator

b (The hotel room located in Georgia is being used only to meet with existing clients, so no registration in Georgia is necessary. If prospects were invited, registration of both persons would be required. What if only 1 or 2 prospects were invited? Wouldn't the de minimis exemption apply? No, because the moment a person who is not an existing client is involved, the hotel room becomes a place of business in the state and that eliminates use of the de minimis rule.)

As long as properly disclosed, a broker-dealer would be permitted to charge a fee for all of these EXCEPT A) wiring funds to the client's bank B) solicitation of proxies C) issuing a stock certificate D) annual maintenance fees

b (Broker-dealers are not permitted to charge for soliciting proxies—the issuer is responsible for reimbursing the broker-dealer for any of its expenses. All of the other charges are permitted if fully disclosed to clients. This is a case where you answer the question correctly because you know the other choices are permitted charges.)

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

b (Risk elimination can be achieved if two securities with a perfect negative correlation are combined. That is, when one goes up, the other goes down by the same amount. In other words, one is the antipode of the other.)

When a company recognizes a sale only when payment is made, it is using which form of accounting? A) Cash B) Accrual C) Double entry D) Audited

a (Cash and accrual are the two major forms of accounting. In the cash method, sales and expenses are recognized when the money changes hands. With accrual accounting, it is the date of the transaction that is used.)

When investors tend to increase their investments in debt securities on the short end of the spectrum, it generally leads to A) short-term yields that exceed long-term yields B) an inverted yield curve C) a positive yield curve D) a flat yield curve

c (Investors buying short-term debt rather than long-term debt will have the effect of driving the prices of short-term instruments up and, as a result, their yields down. This will produce a normal, or positive, yield. It is when the demand for bonds on the long end of the spectrum exceed demand for those in the near term that short-term yields exceed those of long-term yields. This creates an inverted or negative yield curve.)

A customer requests information on a new mutual fund and asks her agent to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted A) if accompanied by an unmarked prospectus B) without restriction C) if approved by a principal D) under no circumstances

d (the prospectus is a legal document and must not be altered in any way)

An IAR concludes a successful meeting with a client by receiving oral authority to begin exercising discretion in the client's account. The IAR leaves the appropriate paperwork with the client and urges him to return it in the postage paid envelope as soon as possible. After returning to the office, the IAR enters the first discretionary order for this account, a purchase of $10,000 of CANCO common stock. Six days later, CANCO reports that it is going to miss its earnings estimates and the stock begins to fall. The IAR realizes that the best thing to do for the client is take the loss and get out before it gets worse, but the client has not yet returned the signed paperwork. In this case, A) the investment adviser firm should apply to the Administrator for an extension of time B) the IAR has acted improperly from the outset by making the purchase prior to receiving the signed paperwork C) the IAR must wait for the signed paperwork to be received D) the IAR may exercise his discretion as authorized and sell the CANCO

d (Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, oral discretionary authority is permitted to be used in a customer's account for the first 10 business days after the date of the first transaction. Following that 10 days, the rule requires written authorization to be on hand for any future discretionary trading.)

The term exempt reporting adviser refers to A) broker-dealers who are considered investment advisers solely because they offer wrap fee accounts B) advisers that rely on either the venture capital fund adviser exemption or the private fund adviser exemption C) advisers who are registered on the state level, but who file their Form ADVs through the IARD D) advisers whose only clients are insurance companies

b

A broker-dealer sends an email to all of its clients stating that anyone purchasing at least 100 shares of an IPO that has just become effective will receive, at no additional cost, a bonus of 10 shares of a Nasdaq traded stock. Under the Uniform Securities Act, delivery of this stock to a qualifying client would represent A) a prohibited transaction B) a sale C) an offer D) a gift

b (The USA states that, "any security given or delivered with, or as a bonus on account of, any purchase of securities or any other thing is considered part of the subject of the purchase and to have been offered and sold for value.")

An analyst using the dividend growth model would take into account all of the following factors EXCEPT A) the growth of the dividend B) the investor's required rate of return C) the current dividend D) the current earnings per share

d (The dividend growth model is a stock valuation model that deals with dividends and their growth, discounted to today. The value of the stock equals next year's dividends divided by the difference between the required rate of return and the assumed constant growth rate in dividends.)

Although many advisers to private funds are exempt from registration, larger ones generally register with the SEC. SEC-registered investment advisers with at least $150 million in private fund assets under management use which form to report information about the private funds that they manage? A) Form 13F B) Form ADV Part 1A C) Form PF D) Form D

c

With respect to the recordkeeping rules under the USA, which of the following statements is NOT correct? A) Investment adviser representatives have no recordkeeping responibiilties. B) Investment advisers must maintain records of electronic communications for a minimum of 5 years. from the end of the year in which the communication was made. C) Following termination of the business, investment advisers organized as corporations must maintain copies of their articles of incorporation for a minimum of 5 years. D) Investment advisers must maintain copies of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the adviser for a minimum of 5 years.

c

The dividend discount model is A) the inverse of the price/earnings ratio B) primarily used by technical analysts C) an analytical tool used to value a common stock using the present value of future dividends D) based on the dividend payout ratio

c (There are two widely accepted forms of common stock price valuation using dividends—the dividend discount model and the dividend growth model. Neither would be used by technicians because they rely on fundamentals.)

Investing in an emerging market mutual fund subjects the investor to all of the following risks EXCEPT A) market volatility B) political instability C) currency fluctuations D) liquidity

d (Although direct investment in emerging market securities would have liquidity risk, the benefit of doing so through a mutual fund is that, under federal regulations, the fund must redeem at NAV upon request)

A security that your client has been following has a historical average annual return of 11% and a standard deviation of 6%. Knowing this, it would be expected that 95% of the time, your client could expect a return within the range of A) −1% and +23% B) −7% and +30% C) −66% and +66% D) +5% and +17%

a (Ninety-five percent of the time, a stock will range within 2 standard deviations of its historical return. In this case, 2 times 6% means that the range will be down 12% from the historical 11% and up 12% from the historical 11%)

According to most fundamental analysts, examining a company's price/earnings ratio gives an indication of A) how much investors value the stock as a function of the company's market price to its earnings B) the parity price of the issuer's convertible bonds C) current cash flows D) the degree to how liberal the company's dividend policies are

a (The two components of the price/earnings ratio are the current market price and the earnings per common share. When a company has a high P/E ratio, it means that investors are placing greater value on expected growth in earnings. That is one of the reasons why growth stocks carry higher P/E's than value stocks.)

The Administrator, with proper notice, may examine the financial records of which of the following persons registered in his state? A) Only broker-dealers B) Broker-dealers and investment advisers C) Broker-dealers, agents, and investment advisers D) Only investment advisers

b

Liquidity risk would be greatest for an investor whose portfolio was primarily composed of A) ADRs listed on the NYSE B) municipal bonds C) Nasdaq stocks D) municipal bond UITs

b (Any stock listed on the NYSE or traded on Nasdaq has high liquidity. Municipal bonds tend to be thinly traded, thereby exposing their holders to a higher degree of liquidity risk. UITs, regardless of their portfolio, stand ready to redeem their units so liquidity is not a problem for the investor.)

Investing in emerging market stocks is least likely to expose your client to which of the following risks? A) Liquidity B) Interest rate C) Political D) Currency

b (Interest rate risk applies primarily to fixed income securities. Stock, unless it specifies preferred stock, are not normally considered to have interest rate risk. However, any foreign investment incurs currency risk and, when dealing with emerging markets, there is a higher degree of liquidity and political risk than with developed economies.)

All of the following ratios are measures of the liquidity of a corporation EXCEPT A) quick ratio B) debt/equity ratio C) current ratio D) acid-test ratio

b (Liquidity ratios measure a firm's ability to meet its current financial obligations and include the current ratio and acid-test (quick) ratio. However, the debt/equity ratio is a capitalization ratio and measures the amount of leverage compared to equity in a company's overall capital structure.)

The duties and responsibilities of a fiduciary are spelled out in A) the Investment Advisers Act of 1940 B) the Uniform Prudent Investors Act of 1994 C) the Uniform Gift to Minors Act D) the Summary Plan Document of the DOL

b (The UPIA is the legal guide for fiduciaries, who must act with skill and caution in the best interest of their clients.)

Which of the following correlations would represent 2 assets that tend to move in tandem with one another? A) −0.11 B) +0.81 C) −0.68 D) +0.16

b (The correlation coefficient ranges from −1.0 to +1.0 and measures the varying relationship of assets (or securities) to one another. A correlation close to +1.0 would indicate that the assets should move in tandem. A correlation close to 0 would indicate that the assets would have little relationship to one another, and a correlation of -1.0 would indicate that the assets should exhibit virtually opposite behavior)

A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee A) must register as an agent if sales-related compensation will be received by the employee, either directly or indirectly B) need not register as an agent of the issuer because the offering is limited to current employees of the issuer C) may receive commissions, but not a salary, without registration D) must register as an agent of the issuer

a

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

a

States may require investment advisers who are registered with the SEC to do each of the following EXCEPT A) pay state notice filing fees B) file any documents with the state that are filed with the SEC C) file a consent to service of process D) maintain net capital requirements

d

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

a (The acid-test ratio, also known as the quick asset ratio, is computed by subtracting the inventory from the total current assets and then dividing that remainder by the total current liabilities. In this case, that would be $10 million minus $4 million ($6 million) divided by $8 million, or .75%.)

Ownership in a corporation is evidenced by holding share of the company's A) warrants B) common or preferred stock C) common stock only D) bonds with a first mortgage on the property

b (If you have equity in a corporation, it means you have an ownership interest. Equity securities, common and preferred stock, represent ownership in a corporation. A mortgage bond is a debt security and a warrant gives the holder to acquire equity, but, in itself, is not equity.)

To stimulate a sluggish economy using fiscal policy measures, policymakers would A) increase the money supply B) reduce income taxes C) increase income taxes D) reduce the money supply

b (Reducing income taxes is a fiscal policy tool intended to increase overall demand for goods and services. Adjusting the money supply is a monetary policy tool.)

If your client is primarily concerned about the rising cost of living but wishes to limit his exposure to business risk, which of the following securities is most appropriate? A) Small-cap stock fund B) S&P 500 index fund C) AAA intermediate-term corporate bond D) Tax-free municipal bond

b (S&P index funds are growth-oriented investment vehicles that have traditionally outpaced inflation and, because of their diversification, tend to limit business risk. Small-cap stock funds should also outpace inflation but carry too much risk for a client who wishes to limit business risk. Bonds, whether corporate or municipal, as fixed income investments, are generally not suitable for clients whose primary concern is protecting themselves against the rising cost of living.)

Proponents of the concept of inflation inertia believe that A) prices will remain the same for a protracted period of time B) prices will rise slowly and then begin to increase at a faster rate C) prices will rise rapidly and then begin to contract D) the rate of inflation will parallel the CPI

b (The concept of inflation inertia is that prices will rise slowly during an initial period of inflation and then begin to "pick up steam" as a result of some economic shock.)

The residual right of common stockholders refers to their right to A) receive all announced dividends in accordance with the number of shares held B) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid C) examine the corporation's annual reports and other reports, and take legal action if irregularities are found D) vote in elections for the board of directors and in other important business decisions, such as changes to the charter

b (The residual right of common shareholders refers to their position in the event of bankruptcy.)

in a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable rate preferred stock, changes in interest rates would be most likely to affect the market price of the A) adjustable rate preferred stock B) convertible preferred stock C) straight preferred stock D) common stock

c (Fixed income securities, such as straight preferred stock, are the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable rate preferred stock is usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates.)

When the value of the U.S. dollar decreases, A) domestic manufactures will likely not be affected B) domestic manufacturers will likely increase their imports C) domestic manufacturers will likely increase their exports D) foreign manufacturers will likely export more to the United States

c (When the U.S. dollar decreases against other currencies, foreign goods become more expensive. On the other hand, domestically produced goods are cheaper for those buying with foreign currencies so we can expect the exporting of U.S. made goods to increase)

One characteristic found in equity securities issued by a corporation is A) a history of keeping pace with inflation B) preemptive rights C) cumulative dividends D) limited liability

d (Equity securities include common and preferred stock. Both have the benefit of limited liability; the investor can never be held liable for debts of the corporation. Only common stock has preemptive rights and the potential for growth to keep pace with inflation. It is preferred stock that can have the cumulative feature regarding its dividends.)

KAPCO common stock is listed on the New York Stock Exchange. If an executive vice president of the company buys 400 shares of the company's stock on the NYSE, she A) may sell under Rule 144 only after a 6-month holding period B) may not sell until she leaves the company C) may sell immediately without restriction D) may sell immediately subject to Rule 144 volume limitations

d (If purchased in the open market, such as on the NYSE, the transaction is not a private placement and the stock does not have a holding period restriction. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations under Rule 144.)

Under the Uniform Securities Act, which of the following would be included in the definition of an investment adviser representative? A) An employee whose only role is soliciting new investment advisory clients for the firm B) An employee, highly skilled in evaluating securities, who performs administrative or clerical functions for an investment adviser C) An individual who renders fee-based advice on precious metals D) An agent who offers incidental advice on securities and whose sole compensation is from commissions on transactions

a

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? A) $6 B) $8 C) $16 D) $12

a (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.)

In a group of returns, the central value of observations arranged in order of lowest to highest is known as the A) median B) range C) mode D) mean

a (The median in any group of numbers is the number in the middle. That is, the number with an equal set above and below. The mean is the average, the mode is the most common return, and the range is the distance between the extremes)

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

b

Which of the following equations correctly shows the relationship between the items on a company's balance sheet? A) Assets = stockholders' equity − liabilities B) Assets = liabilities + stockholders' equity C) Assets = liabilities − net worth D) Assets + liabilities = net worth

b (The stockholders' equity, sometimes referred to as net worth, equals the difference between the company's assets and its liabilities (assets − liabilities = stockholders' equity). This formula is often restated as assets = liabilities + stockholders' equity.)

The discount rate that makes the NPV of all cash flows from a security equal to zero is A) the present value return B) the cash flow adjusted return C) the median return D) the internal rate of return

d (The internal rate of return, (IRR), is the interest rate that makes the net present value zero. It reflects the yield to maturity of a bond because a bond's current market value should equal the present value of that bond when considering the future interest payments and return of principal at maturity. That is why bond prices fall when interest rates rise and the reverse.)

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

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

Which of the following individuals does not come under the supervisory regimen of an investment adviser? A) A CFA® preparing the firm's research reports B) An individual in the mailroom who has fewer than 6 retail advisory clients C) The CPA engaged to perform the annual audit D) A financial planner registered with the firm as an IAR, but maintaining a separate financial planning practice as an independent contractor

c

LinkedIn is a popular social media tool for business people. The nature of the information posted poses risks for investment advisers because of the prohibition against testimonials. A step that advisers should consider taking to minimize the risk of an improper endorsement appearing on their page is A) only allow clients to endorse an adviser for a new skill that does not already appear on the adviser's profile B) only allow unsolicited recommendations from clients to be shown on the page C) only allow clients to endorse an adviser for a skill that is already listed on his profile D) to select "No" for the "I want to be endorsed" feature under the "Skills and Expertise" section on their LinkedIn profile

d (If you do a good job, it is only natural that your clients want to say good things about you. Unfortunately, that can lead to a violation of the rule against testimonials for IAs and IARs. The LinkedIn service allows people to either endorse a listed individual's skills (or add new ones) or post recommendations. Either of these would not be acceptable. The safest thing to do is turn off the ability to endorse skills)

Under the Uniform Securities Act, which of the following would be included in the definition of an investment adviser representative? A)An employee whose only role is soliciting new investment advisory clients for the firm B)An employee, highly skilled in evaluating securities, who performs administrative or clerical functions for an investment adviser C)An individual who renders fee-based advice on precious metals D)An agent who offers incidental advice on securities and whose sole compensation is from commissions on transactions

a

Under the USA, which of the following is considered a broker-dealer in a state? A) ABC broker-dealer with no place of business in the state who only does business with other broker-dealers in the state B) First Federal Trust Company, specializing in underwriting new municipal issues C) XYZ broker-dealer with an office in the state whose only clients are insurance companies D) An agent effecting transactions for a broker-dealer

c

An analyst reviewing a company's financial statements would examine the footnotes to A) compute the net worth B) identify the authors of quoted information C) discover any pending legal action against the company D) determine the average age of the receivables

c (Footnotes to the financial statements are used to convey "off-book" information such as pending lawsuits.)

Under the Uniform Securities Act, an investment adviser is exempt from registration if he has no place of business in a state and his only clients are any of these EXCEPT A) other investment advisers B) broker-dealers C) investment companies D) individuals meeting the accredited investor standard

d

An agent has a conservative investor looking for income. The agent recommends a bond of a company the investor has never heard of. To allay the client's fear of loss, the agent states that the payment of interest and principal is guaranteed by a well-known blue chip company. Under the Uniform Securities Act, A) a guaranteed security only guarantees payment of interest or dividends B) agents should always recommend securities that are familiar to the investor C) the agent is possibly committing fraud D) the agent is describing a guaranteed security

d (A guaranteed security is one where the interest and principal (in the case of a bond) are guaranteed by a third party. If a guaranteed stock, it is the dividends that are the subject of the third-party guarantee. With tens of thousands of publicly traded securities, it is unlikely that your client will be familiar with most of them, but that doesn't prohibit the agent from making the recommendation if suitable.)

An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of KAPCO common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the KAPCO stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case the agent acted A) improperly; the order should have been placed on Thursday B) improperly; the order cannot be placed without prior written authorization allowing discretion C) properly because the agent saved the client money D) properly because the agent used discretion as to price and time

a (In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time and or price. However, time and/or price discretion are only good for that day—those are considered "day" orders, so the agent is able to use judgment, but the order must be placed during the day it was received.)

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

a (Internal rate of return (IRR) best measures investments with a known price and maturity. The internal rate of return is the discount rate that makes the future value of an investment equal to its present value. The yield to maturity on a bond is actually its internal rate of return.)

An investment adviser may borrow from all of the following clients EXCEPT A) a mortgage broker who helped the adviser negotiate mortgage terms for its office building B) a commercial bank in conjunction with a mortgage on the office building from which the advisory operates C) a broker-dealer in conjunction with a margin account D) a savings and loan association that has offered to finance new computers for the adviser's office

a (Mortgage brokers are not in the business of lending money; they help parties negotiate terms of a loan, which is why they are called brokers. The bank, brokerage, and savings and loan association are in the normal business of lending. Advisers are limited to borrowing money from clients that are in the normal business of lending or entities that are affiliated with the IA.)

All of the following statements regarding incentive stock options (ISOs) are correct EXCEPT A) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise B) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain C) upon the exercise of an ISO, income for AMT purposes is created D) the exercise of ISOs does not create taxable income

a (The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of exercise or 2 years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT.)

An investment adviser prepares a slick advertising piece containing the relevant information from the firm's Form ADV - Part 2. One of the firm's IARs secures a contract with a new client and presents the brochure at that time. While explaining the terms of their agreement, the IAR mentions that the client may withdraw within the first 48 hours without any penalty. Upon returning to the office, the IAR realizes that he forgot to have the client sign a receipt for the disclosure document. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, A) the IAR has acted in an unethical manner by giving incorrect information regarding the penalty-free withdrawal privilege B) there is a violation because the brochure must be delivered at least 48 hours prior to entering into the contract. C) there is a violation because the IAR failed to obtain the signed receipt. D) there is no violation as long as the customer signs a waiver agreeing to these terms.

a (The problem here is that the client has 5 days to withdraw, not 48 hours. Under Rule 203(b)-1 of the Uniform Securities Act, an investment adviser, or investment adviser representative must deliver the brochure to an advisory client or prospective advisory client not less than 48 hours prior to entering into any investment advisory contract with such client or prospective client; or at the time of entering into any such contract, if the advisory client has a right to terminate the contract without penalty within 5 business days after entering into the contract. A signed receipt is not necessary and waivers are never allowed.)

An investment adviser representative of a federal covered investment adviser that provides advisory services to State A would not trigger the "pay-to-play" prohibition against the firm receiving compensation from that state for advice as long as the IAR contributed no more than A) $350 per election cycle for a candidate that IAR was eligible to vote for B) $250 per election cycle for a candidate that IAR was ineligible to vote for C) $500 per election cycle for a candidate that IAR was eligible to vote for D) $350 per election cycle for a candidate that IAR was ineligible to vote for

a (There is a de minimis level that is considered an exception from the pay-to-play restriction on investment advisers for political contributions. If the covered employee can vote for the person, the maximum contribution is $350 per election cycle. If the covered employee cannot vote for the person, the maximum contribution is $150 per election cycle.)

In 1986, a sweeping change was made to the U.S. tax code. This change had a severe effect upon those who had been investing in certain limited partnership tax shelters. This is an example of A) legislative risk B) market risk C) business risk D) regulatory risk

a (What happened here was a legislative change severely limiting expenses that could be deducted from income. Changes wrought by government action are legislative in nature.)

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

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

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 A) directing a securities transaction to an affiliated broker-dealer B) shares held in the account of an advisory client are purchased by the investment adviser C) engaging in an agency cross transaction D) the trade was being executed by an officer or partner of the firm

b (There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from the client who owns them places the IA in the position of being 1 of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. Although not mentioned here, consent of the client is also necessary to act in this fashion. In agency cross transactions, the firm is acting as an agent—that's the reason for the term)

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

b (Net worth must be $1,000,000 excluding the primary residence)

The procedures to be followed by an investment adviser whose power was lost due to an earthquake would be found in A) the firm's emergency planning manual B) the advice given by the local FEMA (Federal Emergency Management Agency) representative C) the firm's business continuity plan D) the firm's succession plan

c (NASAA has a Model Rule dealing with business continuity in the event of natural or other disasters that affect the ability of an investment adviser to protect customers and allow the firm to minimize disruptions to its business.)

An investor reviewing the performance of a security reads that its returns for the past 9 years are +9%, -4%, +13%, +6%, +2%, -8%, +11%, +2%, +5%. Using this information, which of the following is NOT a correct statement? A) Mean is 4% B) Mode is 2% C) Range is 11% D) Median is 5%

c (The range is the difference between the highest number (+13%) and the lowest number (-8%). That is a range of 21%. The mode is the number that appears most frequently. The only return that appears more than once is 2%. The mean is the arithmetic average. The total of the returns (including the negative returns) is 36%. Dividing by the 9 years equals a mean of 4%. The median is the number with as many above as below and that is 5%)

A properly licensed agent in Illinois, Missouri, and Iowa has a client who moves from Illinois to Michigan on July 1, 2014. On September 1 of that year, the agent sells him 100 shares of a nonexempt security in a nonexempt transaction. On October 1, 2015, the client discovers that the agent's firm never licensed him in Michigan and that the agent is subject to civil liability to the purchaser. The statute of limitations for this sale runs out on A) September 1, 2016 B) October 1, 2018 C) September 1, 2017 D) October 1, 2017

c (The statute of limitations for civil liability is the earlier of 3 years after the date of the sale or 2 years after discovery of the violation. In this case, the earliest date is 3 years after the sale on September 1, 2014.)

The MNO Manufacturing Company, headquartered in Springfield, has just filed for bankruptcy. Under federal bankruptcy law, holders of which of the following would have highest priority with the bankruptcy trustee? A) Class A common stock B) Guaranteed bonds C) First lien, senior preferred stock D) Mortgage bonds

d (Holders of a bond secured by mortgages on real property are senior creditors and have the highest priority claim in a bankruptcy. Guaranteed bonds have their principal (and interest) guaranteed by a party other than the issuer. The guarantee is only as strong as the guarantor and, because there is no collateral securing the obligation, these are in the category of general creditors. No matter how many adjectives are placed ahead of preferred stock, it always comes after everyone else who is owed money. Common stock, regardless of "class," is always the last in line.)

If the required rate of return is less than anticipated in a present value calculation, the effect would be that the A) future value would be lower B) present value would be lower C) yield to maturity (YTM) would decrease D) present value would be higher

d (The present value computation is used to determine how much money must be deposited now (present) to reach a specified future goal when you know how many years you have to reach that goal. One critical component of the formula is the rate of return used in the formula. As a simple example, if you need $100,000 18 years from now for your newborn's college education and you expect to earn 8%, you'll have to deposit approximately $25,000 now (present value) to reach the goal. However, if it turns out that the earnings rate is less than anticipated, say only 4%, then you would have to deposit twice as much presently. Therefore, we answer this question by indicating that a lower rate of return will require a higher present value.)

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

d (A security issued by a life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads under the jurisdiction of other state or federal regulators carry an exemption from state securities registration for their equipment trust certificates, but if the railroad is not regulated (the case here), the exemption does not apply. The commercial paper would qualify if the denomination was $50,000 instead of $10,000. The exemption for foreign government securities only applies to those countries with which the United States maintains diplomatic relations. At the time of this writing, North Korea is on a very short list of countries who do not qualify.)

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, an investment adviser must register with the SEC if it A) would be required to register in 15 or more states B) has $35 million in client assets invested in cash or money market funds and $75 million of client assets invested in long-term bonds under management C) its only place of business is outside of the United States, deals with fewer than 15 U.S.-based clients, and has less than $25 million in AUM in the United States D) limited its clients to insurance companies only

b

Following the advice of its portfolio managers, the Rising Tide hedge fund executes most of its securities transactions through Momentum Securities, a registered full-service broker-dealer. In order to compensate for the commissions charged, Momentum Securities allows employees of Rising Tide to use its furniture and facility at a discounted rate. Under the soft-dollar provisions of Section 28(e), A) this would not fall under the safe harbor provisions unless the employees were those who directed the transactions to Momentum Securities B) this would not fall under the safe harbor C) this would fall under the safe harbor D) as long as the discounted rate reflected the volume of business done by Rising Tide, this would be permitted

b (The use of furniture or office facilities is not included in the list of safe harbor items, regardless of the roles employees of the fund play.)

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

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

Under current law, which of the following would NOT be required to register as an investment adviser in a state? A) A person who limits advisory services exclusively to issuers of securities in that state while maintaining no office therein B) A person whose home office is in the state and who manages less than $90 million in assets C) A person who deals exclusively with broker-dealers in that state, but maintains no place of business within the boundaries of the state D) A person who has directed advice relating to securities to 6 individuals in that state within the past 12 months, even though he has no place of business within the state

c

When it comes to safeguarding confidential information pertaining to the account(s) of an individual customer or family, the rules deal primarily with what is called a covered account. A key factor in determining if an account meets the definition is A) if the customer owns the underlying security on which the call option is sold B) that the account is in the name of an institutional customer C) the ability of the customer to move funds out of the account on multiple occasions D) the ability of the customer to make a one-time wire to a foreign bank account owned by a family member

c (A covered account is an account, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions. Where the money goes is less of a factor than the frequency of transactions. The only time when a single transaction account might be covered is if there is reason to believe that the identity of the customer is at risk—not likely when wiring to a family member. Institutions are not included in the definition and owning the stock underlying the sale of a call option means the option is covered—totally different from the topic here)

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

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

Under the Investment Advisers Act of 1940, an investment adviser that becomes registered may A) tell a client its qualifications have been approved by the SEC B) state in a brochure that its registration is approved by the SEC C) state on its stationery that it is registered with the SEC D) place the abbreviation RIA after its name on their business card

c (It is illegal to imply in any way that the SEC sponsors or approves the adviser. The title in no way indicates that the adviser's abilities or qualifications have been approved. However, a statement that the adviser is registered with the SEC is appropriate. An abbreviated title after a person's name must be used to recognize educational or professional (e.g.,CFP® or ChFC®) designations only.)

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

a