Series 65 Practice Exam 2
A registration statement has been filed using the process known as qualification. Under normal circumstances, this registration will become effective A) when the Administrator says so. B) once the appropriate filing fees have been paid, accompanied by a consent to service of process. C) at noon of the 30th day after filing. D) when the SEC says so.
A) A unique characteristic of registration by qualification is that it is the only method where the effective date is declared by the Administrator.
Publicly traded corporations are subject to an annual audit of their financial records. Those audits must comply with generally accepted accounting principles (GAAP). When preparing to recommend a stock to a customer, you would most likely want to see that the auditor gave A) an unqualified opinion. B) a qualified opinion. C) a certified opinion. D) a comprehensive opinion.
A) An unqualified or clean opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements.
The National Securities Markets Improvement Act of 1996 (NSMIA) allows state administrators to A) enforce their antifraud provisions against federal covered securities. B) impose state registrations and net capital requirements on federal covered investment advisers. C) require registered open-end investment companies wishing to offer securities in their state to coordinate their registrations with the SEC. D) accept filing fees on behalf of the SEC.
A) Antifraud provisions may be enforced by any regulatory agency or authority. If it has to do with securities, no one or nothing is exempt from the antifraud provisions. Registered investment companies do not register in the state but may be required to notice file and pay fees.
Which of the following items will affect a corporation's cash flow? Cash Depreciation Net sales Accounts receivable A) II and III B) III and IV C) I and IV D) I and II
A) Cash flow is basically net income plus depreciation. Net sales is the beginning of the company's income. Cash and accounts receivable are assets, and cash flow comes from the income statement, not the balance sheet.
When investors tend to increase their investments in debt securities into those on the long end of the spectrum rather than those with short-term maturities, it generally leads to A) an inverted yield curve. B) a positive yield curve. C) long-term yields that greatly exceed short-term yields. D) a flat yield curve.
A) Investors buying long-term debt rather than short-term debt will have the effect of driving the prices of long-term instruments up and, as a result, their yields down. This will give the inverted or negative yield curve.
An early distribution from a traditional IRA can avoid the 10% tax penalty in all of the following cases except A) a QDRO. B) reaching age 59½ . C) death. D) payments made under IRS Rule 72(t).
A) The 10% early distribution tax penalty can be avoided through use of a qualified domestic relations order (QDRO) only in the case of a qualified plan, not an IRA.
A good-til-canceled (GTC) order is entered to buy 500 LMN at 24.35. By the close, the firm has acquired 100 shares at 24.25 and 200 at 24.35. The remainder is unfilled. What is the outcome? A) The customer must accept the execution for 300 shares, and the remainder of the order remains open until filled or canceled. B) The customer may demand that the firm deliver the remaining shares at 24.35. C) The customer may reject the incomplete order unless the remainder can be filled within two business
A) The term GTC is a delimiter to any order entered into the marketplace. It indicates that the order should remain valid until the order is entirely filled or is canceled by the entering party. If the order is not completed on the day it was entered, it will stay in effect for as many days as it takes to complete. This order is also a limit order in that the client is indicating that he is not willing to pay anything more than $24.35 per share. A total of 300 shares have been purchased at that price or better. The order will remain open until the final 200 shares are purchased within that price limit or until the client cancels the remainder of the order.
XYZ Securities is a broker-dealer based in Wisconsin with offices in no other state. In addition to its Wisconsin clients, XYZ has 30 retail customers living in Illinois. During the winter, if 10 existing customers vacation in Florida for up to seven weeks at a time, XYZ Securities is a broker-dealer in A) Wisconsin and Illinois. B) all states having enacted the USA. C) Wisconsin only. D) Wisconsin, Illinois, and Florida.
A) Under the Uniform Securities Act (USA), XYZ Securities is a broker-dealer in Wisconsin because it maintains an office there. XYZ Securities is also a broker-dealer in Illinois because with 30 Illinois retail (noninstitutional) customers, registration is required even if there is no physical office in Illinois. Because none of XYZ's clients has taken up residence in Florida, such clients are transients rather than residents.
The NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents deals with the topic of commission sharing. Under that policy, in order for two agents to be able to share in commissions, which of the following must be true? The client must give consent to the sharing. Both agents must be licensed with the same or affiliated broker-dealers. The administrator must approve of the sharing arrangement. The broker-dealer must agree to permit the sharing.
A) he only requirements are that both agents be properly licensed with the same or affiliated broker-dealers, and of course, as with any compensation arrangement, it must meet with the firm's approval.
Under Section 401 of the Uniform Securities Act, the term agent does not include an individual who represents an issuer in effecting transactions in a security A) issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state. B) issued by any person organized and operated not for private profit but exclusively for religious, e
An individual representing an issuer in the sale of that issuer's security is not defined as an agent if the security is issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state, issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency of the foregoing, any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor, a promissory note, draft, bill of exchange, or bankers' acceptance that evidences an obligation to pay cash within nine months after the date of issuance, is issued in denominations of at leas
It would be most unusual to see which one of the following issued at a discount? A) Zero-coupon bond B) Jumbo CD C) Treasury bill D) Commercial paper
B)
American depository receipt Based on the current price of the company's stock, the dividend yield is 2.5%. Sven hopes to hold the stock for several years and experience a capital gain. It would be true to state that Sven will A) pay foreign taxes on the dividend income and the investment is not subject to exchange rate risk. B) pay foreign taxes on the dividend income and the investment is subject to exchange rate risk. C) not pay foreign taxes on the dividend income and the investment is not su
B) An ADR is a convenient way for U.S. investors to own foreign securities without having to open foreign brokerage accounts. A U.S. investor in an ADR does not eliminate any of the consequences of owning foreign securities just because he holds an ADR instead of the foreign security itself. Therefore, foreign taxes are deducted from dividend payments, and the investor experiences exchange rate risk during the holding period. In most cases, the U.S. investor receives a credit against U.S. taxes for the foreign taxes paid.
If an economist was describing defensive issues, he would probably not include companies that produce A) tobacco products. B) building materials. C) food products. D) clothing.
B) Defensive issues are issues that are defensive against a downturn in the economy. Building materials are usually susceptible to downturns when the economy is bad.
Which of the following offenses are grounds for the denial, suspension, or revocation of an issuer's registration? A) Persons filing the registration statement engaged a third party to assist in the preparation of the registration statement. B) The registration statement was filed without the appropriate fees. C) The registrant engaged in business operations outside of the United States. D) The registrant's underwriting fees are considered reasonable by the administrator.
B) Failure to pay the requisite filing fees can cause the suspension, denial, or revocation of the registration of a security to be offered or sold in the state. It is perfectly acceptable for the issuer to do business outside of the United States or to have a third party file the registration statement on its behalf. If an issuer's underwriting fees are considered reasonable, that would obviously be acceptable.
Which of the following statements is true regarding Social Security retirement benefits? A) Spousal benefits can be paid to an ex-spouse as long as the marriage lasted at least 15 years. B) Social Security rewards people who wait to claim with an 8% annual increase for every year beyond full retirement age they delay receiving benefits. C) Social Security retirement benefits are taxable only when they exceed the individual's cost basis. D) Under current tax law, a couple will not have to pay f
B) If the recipient waits past normal full retirement age (currently 67) to begin receiving payments, benefits will increase by 8% each year until age 70. Social Security benefits are taxable once a single person's base income (IRS computation) exceeds $25,000 and a married couple's exceeds $32,000. Once that income exceeds $34,000 (single) or $44,000 (couple), as much as 85% of the Social Security benefit is subject to income tax. An ex-spouse can qualify for benefits on the former spouse's account as long as the marriage lasted at least 10 years.
An investment adviser is considered to maintain custody of customer assets when A) the investment adviser exercises discretion over an advisory account. B) the investment adviser has a list of customer user names and passwords. C) the investment adviser receives a check for advisory fees. D) customer funds and securities are kept by a nonaffiliated broker-dealer.
B) NASAA's Account Access Model Rule prohibits investment advisers from accessing client accounts using the client's own unique identifying login information (such as the client's user name and password). Ultimately, such access generally rises to the level of having custody if the investment adviser has any authority to obtain possession of (or the ability to appropriate) client funds or securities. A check for advisory fees is the adviser's money, not the client's. Discretion is not the same as custody, and a nonaffiliated broker-dealer is considered a qualified custodian.
Providential Asset Allocation Services (PAAS) is a covered investment adviser offering wrap free programs. As a result, PAAS must provide new clients with A) appendix 1 of Form ADV Part 2A within 120 days after entering into the advisory agreement. B) appendix 1 of Form ADV Part 2A no later than entering into the advisory agreement. C) Form ADV Part 2A unless there have been no material changes since the last brochure. D) Form ADV Part 2A no later than entering into the advisory agreement.
B) New clients must always receive a copy of the adviser's brochure. In the case of a wrap fee program, that brochure is appendix 1 of Form ADV Part 2A.
A client interested in fixed income is viewing different bonds with the same rating and a coupon of 5%. Using the discounted cash flow method, which bond should have the lowest market value? A) 12-year maturity when the discount rate is 3% B) 12-year maturity when the discount rate is 7% C) 6-year maturity when the discount rate is 3% D) 6-year maturity when the discount rate is 7%
B) Remember, the discount rate is just another way of stating the current interest rate in the marketplace. If the discount rate is higher than the coupon rate, the present value (the expected market price) will be below par. Conversely, if the discount rate is lower than the coupon rate, the present value will be above the par value. As learned with duration, when interest rates change, the longer the time to maturity is, the greater the effect on the market price of a bond.
Investment advisers must disclose any material disciplinary action to all current and prospective clients. The broadest definition of material would include any actions taken against the firm or management persons by a court or regulatory authority within the past 10 years. Fines levied by any SRO require disclosure if they were in excess of A) $5,000. B) $2,500. C) $10,000. D) $1,000.
B) SRO proceedings in which the adviser or management person received a fine in excess of $2,500 meet the definition of material disciplinary action and require disclosure.
An investment adviser representative would be permitted to borrow money from which of the following clients? A) The XYZ Short-Term Bond Fund B) The Amalgamated Dock Workers Credit Union C) ABC Mortgage Brokers D) The investment adviser representative's father for graduate school tuition
B) Securities professionals are quite limited in their ability to borrow money from clients. The prime exception is when the client is in the money-lending business, such as a credit union. Mortgage brokers do not lend money; they put borrowers and lenders together.
Reinvestment of mutual fund distributions has all of the following benefits except A) compounding of returns. B) tax deferral until the acquired shares are sold. C) reinvestment of capital gains at NAV. D) reinvestment of dividends at NAV.
B) Taxes on reinvested distributions are due in the year received.
In order to qualify for the private fund adviser exemption, a domestic investment adviser must limit its assets under management in the United States to less than A) $25 million. B) $150 million. C) $100 million. D) $110 million.
B) The Dodd-Frank Act replaced the old private adviser exemption with narrower exemptions for advisers who advise exclusively venture capital funds and advisers solely to private funds with less than $150 million in assets under management in the United States.
With regard to advisory clients, under the NASAA Brochure Rule Requirements for Investment Advisers, an investment adviser, unless qualifying for an exemption, must deliver A) within 90 days of the end of its fiscal year a free, updated brochure and related brochure supplements that include or are accompanied by a summary of material changes. B) within 120 days of the end of its fiscal year a free, updated brochure and related brochure supplements that include or are accompanied by a summary of
B) The rule calls for delivery within 120 days of the end of the fiscal year. The 48-hour rule is not mandatory; if the adviser waits until the signing of the advisory contract, there is a five-day penalty-free withdrawal privilege granted to the customer. If there are no material changes, delivery of an annual brochure is not required. There is a 90-day requirement, but that is delivery to the regulators (the SEC for a covered adviser and the appropriate states for a state-registered adviser).
Under certain conditions, investment advisers registered with the state must maintain a specified minimum net worth. Under NASAA's Model Rules, assets included in the computation of the net worth of an adviser structured as a sole proprietorship would exclude all of the following except A) goodwill. B) the sofa in the office reception room. C) an automobile owned by the adviser. D) the table in the owner's dining room.
B) When it comes to individual advisers (sole proprietorships), the home, home furnishings, automobile(s), and any other personal items not readily marketable are not included as assets in the net worth computation. However, office furnishings, such as a sofa in the reception room or a conference table, even though of questionable marketability, are considered assets of the business.
Which of the following stocks would be the least suitable for an aggressive, risk-tolerant investor? A) Large-cap international manufacturing company B) Large-cap in a countercyclical industry C) Mid-cap utility company D) Small-cap pharmaceutical company
C)
One of your customers has a substantial savings account at the local S&L. The customer has several grandchildren and wants the flexibility of being able to change the beneficiary allocations as their financial conditions change. You should recommend that the customer investigate the use of A) an UTMA account. B) a durable power of attorney. C) a Totten trust. D) an irrevocable trust.
C) A Totten trust allows for the transfer of ownership of a bank account to a beneficiary or beneficiaries after the owner's death. It is the predecessor of today's pay on death (POD) and transfer on death (TOD) accounts. Beneficiary names and/or percentages can be changed at will. An irrevocable trust can't be changed; there is no flexibility. In an UTMA account, once the money has been allocated, the decision is irrevocable. (Also note that the question doesn't specify whether the grandchildren are minors.) The durable power of attorney gives a designated person the authority to manage the affairs of the account, and this customer wants the control
Which of the following items would be found on a family balance sheet? A) Dividends and interest received B) Annual salary C) Spouse's engagement ring D) Income taxes paid
C) A balance sheet, whether for a family or a business, shows assets and liabilities, not income and expenses. The ring is certainly an asset; the others are income or expenses.
It would be considered an unethical business practice for an agent of a broker-dealer to A) offer registered nonexempt securities to clients. B) sell unregistered exempt securities. C) fail to disclose the amount of commission being charged on an exempt transaction involving an exempt security. D) accept unsolicited orders from individual clients for unregistered nonexempt securities.
C) Any trade involving a commission, regardless of the type of security, must have that commission disclosed.
A FinCEN Form 112 would need to be filed when a client A) initiates a wire transfer of $3,000 or more. B) initiates a wire transfer in excess of $3,000. C) makes a cash deposit in excess of $10,000. D) makes a cash deposit of $10,000 or more.
C) FinCEN Form 112 is used only for large cash deposits (amounts in excess of $10,000). Wire transfers of $3,000 or more must be reported, but not on Form 112.
Holders of certain professional qualifications may be granted a waiver from taking the Series 65. However, that waiver would not apply to an individual holding which of the following designations? A) CFP® B) CFA® C) CLU® D) ChFC®
C) In addition to the three above, the CIC and PFS designations also qualify. However, none of them will waive the requirement to pass the Series 66.
For a profitable and rapidly growing firm, holders of preference shares are least likely to benefit from the firm's growth if the preference shares are A) common stock B) convertible. C) cumulative. D) participating.
C) Preferred stock shares (sometimes called preference shares) are cumulative if any dividends in arrears must be paid before the firm pays any common dividends. A profitable and rapidly growing firm is unlikely to be in arrears on its preferred dividends. Just as important is that the return on those shares is fixed and, regardless of the growth in the company's earnings, the dividend will remain the same. Participating preferred shares may receive additional dividends if the firm's profits exceed a stated level. Convertible preferred shares can benefit from the firm's growth because of the ability to convert to common shares. The question is asking about preferred stock; do not make a silly error and choose common stock
Under the Uniform Securities Act, the state administrator has the authority to deny an investment adviser's registration for A) conviction for a nonsecurities-related misdemeanor five years ago. B) lack of experience as a broker-dealer. C) violation of another state's securities law within the previous five years. D) being charged with for a securities-related felony eight years ago.
C) Statutory disqualification will be put into place if you have been found to be convicted of a securities-related misdemeanor or any felony within the past 10 years. If you were convicted over 10 years ago, there is no longer a statutory disqualification even though the state securities commissioner could still deny the registration. However, being charged with a felony means nothing unless the charge was followed with a conviction. A nonsecurities-related misdemeanor (e.g., a traffic ticket) will not create a statutory disqualification.
The assumptions underlying the efficient market hypothesis (EMH) lead its proponents to believe that stock market prices react rapidly to newly released information and, therefore, limit the ability of the investor to achieve abnormal gains. Which of the forms of EMH concludes that an investor cannot achieve abnormal gains using fundamental analysis? A) Weak form B) Strong form C) Semistrong form D) Spring form
C) The semistrong form of the EMH holds that security prices rapidly adjust to the arrival of all new public information. As such, current security prices fully reflect all publicly available information. The semistrong form says security prices include all security market (price, volume) and nonmarket (financial statements) information to the public.
As part of a comprehensive financial plan, a registered investment adviser representative of All-Star Advisory Services recommends the purchase of several stocks from the inventory of All-Star's affiliated broker-dealer. Under the Investment Advisers Act of 1940, this activity A) requires advance written disclosure to the client. B) requires the written consent of the client. C) requires the consent of and written disclosure to the client prior to completion of the transaction. D) is prohibited.
C) Unlike broker-dealers, prior to completion of the transaction, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client.
Which of the following statements regarding investment companies is true? A) The only two types of investment companies provided for in the Investment Company Act of 1940 are open-end and closed-end management investment companies. B) When investors sell or redeem their open-end fund shares, they receive the net asset value (NAV) as of the previous day's close. C) An investment company can offer investors two ways of participating in the fund under management: through the purchase of closed-end
D) Among the restrictions placed on the operations of investment companies is the 3% limitation on ownership of another investment company's shares. The Investment Company Act of 1940 classifies investment companies as face-amount certificates, unit investment trusts, or management investment companies (open end and closed end). When mutual fund shares are sold, you receive the NAV that is next computed, not the previous day's NAV.
Which of the following statements regarding a mutual fund are true? Class A shares have no front-end sales charge and no 12b-1 fee. Class B shares have a contingent deferred sales charge and a 12b-1 fee. Class A shares are generally not eligible for breakpoint reductions. Class C shares are generally referred to as level load. A) I and III B) III and IV C) I and II D) II and IV
D) Class B shares are sometimes called back-end loaded because they carry a contingent deferred sales charge. Their operating expenses are higher than those for Class A shares, usually because of higher 12b-1 fees. Class C shares have no front-end load and a level 12b-1 charge; hence, the term level load is used to describe them. Class A shares have a front-end sales charge, and if they have a 12b-1 fee, it is lower than that charged for Class B shares.
You have a client who is subject to the AMT. As a result, the client would not receive the full benefit of investing in A) ADRs. B) cumulative preferred stock. C) tax-exempt private purpose bonds. D) nonqualified stock options.
D) Included in the list of tax preference items that are subject to the alternative minimum tax (AMT) is the interest received on tax-exempt private purpose bonds. Therefore, someone investing in these bonds does not receive the full benefit of their tax-exempt status. It is the incentive stock options (ISOs) where an AMT issue can arise, not the nonqualified stock options (NSOs).
A popular strategy for income investors who wish to take advantage of potentially higher interest rates when reinvesting maturing securities, while at the same time mitigating against interest rate risk, is A) barbelling. B) bulleting. C) rebalancing. D) laddering.
D) Laddering involves investing a sum at one time but in securities with different maturities. As each bond (or CD) matures, it is reinvested at current rates and then becomes the longest maturity in the portfolio. A case could be made for barbell. The major difference is that there is a soft underbelly (industry term) with the barbell where the account is subject to interest rate risk. Let us explain. A typical barbell will have half of the portfolio maturing in no more than three years and the other half in no less than 10 years. If rates should increase during those first two to three years, the maturity proceeds can be invested at higher rates (if the market is going in that direction). Years four through nine are that soft underbelly where nothing is maturing and changes to market interest rates can hurt (if rates are going up). These years don't provide cash flow to the investor to be able to invest at higher rates. Because a laddered portfolio has the portfolio divided among bon
The Uniform Prudent Investor Act identified a number of fundamental changes in the former criteria for prudent investing. Which of the following statements does not state one of these changes correctly? A) The tradeoff between risk and return in all investing is the fiduciary's central consideration. B) Delegation of trust investment and management functions is permitted, subject to safeguards. C) Prudent investing requires that fiduciaries diversify their investments. D) The standard of prude
D) Prior to the Uniform Prudent Investor Act, the focus was on individual investment choices, which made it very difficult to focus on the risk and return of the entire portfolio. The benefits of diversification have now been firmly established, and the standard of prudence is now applied to any investment as part of the total portfolio rather than to that investment individually. Another key change was the ability to delegate the portfolio management decisions to others (who must be qualified).
The Prudent Investor Rule applies to which of these? An investment adviser representative with full discretionary authorization A client executing orders in a joint account with an adult son A court-appointed guardian for an adult with dementia An executor appointed by a court for a decedent's estate A) II and III B) I and III C) II and IV D) I, III, and IV
D) The Prudent Investor Rule applies to those investment professionals who are acting as fiduciaries, such as an investment adviser representative with investment discretion, a guardian with investment discretion over anyone's account, and an executor appointed by a court.
Economic indicators are used by analysts in an attempt to forecast future economic conditions. Which of the following would reveal an indication of a lowering of the inflation rate? A) Increased consumer demand B) A reduction in interest rates C) An increase in manufacturers' orders for durable goods D) High unemployment
D) The unemployment figure is a leading indicator, a predictor of the future. With high unemployment, there is less money to go around in the economy, which tends to cause a decreased demand for goods and services. This demand is one of the leading causes of inflation. Changes to interest rates are a result of inflation, not a cause or a predictor.
The characteristics of an exchange-traded futures contract would include all of the following except A) the delivery price and month of delivery. B) the quantity and quality of the commodity. C) the location of delivery of the underlying asset. D) a high likelihood that the contract will be exercised.
D) Unlike forward contracts, only a small percentage (some estimate only 2%) of futures contracts are ever exercised. All of the other items are part of a standard futures contract.
Which of the following statements is not true of Regulation SP? A) Customers must be given annual privacy disclosures on a separate piece of paper. B) Consumers need not be given an annual privacy notice. C) Consumers must be given an initial privacy notice. D) Customers may be provided with privacy information on internet pages.
a) A customer with an ongoing relationship with a member must receive both an initial and an annual privacy notice. The annual privacy notice may be included in other documents but must be clear and conspicuous. Consumers have a one-off relationship, so there is no requirement to provide them or former customers with annual disclosures.
