Series 65: Practice Exam

Prudent Asset Construction Enterprises (PACE) has offices in States X, Y, and Z. On their last annual updating amendment, they reported assets under management (AUM) of $218 million. In which of the following instances would PACE be receiving a substantial prepayment of fees? A. $600, paid six or more months in advance B. $1,600, paid one year in advance C. $1,600, paid at the first of each quarter D. $10,000, paid monthly

$1,600, paid one year in advance First of all, this is an SEC-registered investment adviser, so we have to go by the federal numbers. Those are more than $1,200, six or more months in advance. The $600 would have been substantial if PACE was state registered. Although the other two choices are above $1,200, they are not prepaid for at least six months.

A U.S. Treasury bond's price moved from 96.18 to 96.22. An investor's account holding 10 of these bonds would show an increase of A. $0.40. B. $4.00. C. $12.50. D. $1.25.

$12.50 U.S. Treasury bonds are quoted in 32nds, where the difference between 96.22 and 96.18 represents an increase of 4/32 per bond. That is ⅛, or $1.25, times 10 bonds, or $12.50.

One of your clients has a marginal tax rate of 32%. The 35% tax bracket begins in another $30,000 of income. Should the client receive a bonus of $50,000, the federal income tax due on that would be A. $17,500. B. $15,600. C. $16,600. D. $16,900.

$16,600 A taxpayer's marginal tax rate is the rate at which an additional dollar of income is taxed. If enough additional money is earned, it moves the taxpayer into the next bracket. In our question, the first $30,000 of the bonus is taxed at 32%, and the next $20,000 is taxed at the next bracket of 35%. The math is $30,000 times 32% = $9,600. To that we add $20,000 times 35% = $7,000. That gives us a total of $16,600 in tax.

While reviewing the financial statements of the ABC Corporation, you notice that the company has $5 million in cash on hand and $6 million in inventory. If the current assets total $15 million, the total assets are $22 million, and the current liabilities are $6 million, the quick asset ratio is A. 1.5:1. B. 2.33:1. C. 2.66:1. D. 3.0:1.

1.5:1 The quick asset ratio is current assets minus inventory divided by the current liabilities. In this question, it is $15 million - $6 million = $9 million ÷ $6 million = 1.5:1.

Current market interest rates are 6%. Using the discounted cash flow method of valuation, you would expect to arrive at the highest valuation for which of the following? A. 10% coupon maturing in 10 years B. Zero-coupon bond maturing in 11 years C. 5% coupon maturing in 20 years D. 7% coupon maturing in 9 years

10% coupon maturing in 10 yrs The discounted cash flow method considers the future expected free cash flow (the interest payments plus the eventual return of the principal) and discounts it to arrive at a present value. In its simplest iteration, this is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money. In general, bonds with higher coupons will have the greatest value because they will clearly produce the most cash flow, and zero-coupon bonds will produce the lowest because they have no cash flow other than the return of the face value at maturity.

What is the tax-equivalent yield of a 7% municipal bond to an investor in the 35% federal income tax bracket? A. 4.55% B. 20.00% C. 9.45% D. 10.77%

10.77% The computation for tax-equivalent yield is found by dividing the municipal bond's coupon rate (7%) by (100% - tax bracket) or (100% - 35%). When dividing 7% by 0.65, the result is closest to 10.77%. In other words, an investor would have to receive a taxable return in excess of 10.77% to put more money in the pocket than owning this 7% municipal bond.

What is the current yield on ABC common stock that is selling for $60 per share with a semiannual dividend of $0.75 per share? A. 5.00% B. 2.50% C. 7.50% D. 1.25%

2.5% The formula for current yield is annual current dividend divided by current market value. The trick with this question is that you are given a semiannual dividend as information. You must multiply the dividend by 2 to find the annual dividend. Therefore, $ 0.75 × 2 = $1.50 annual dividend and $1.50 ÷ $60 = 2.50%.

An investor indicates that her objective is long-term growth. Income is of secondary importance. While she is basically quite conservative, she feels her time horizon is long enough to give her a bit more risk tolerance. Which of the following common stock mutual fund selections would probably be most suitable? A. 50% large cap, 25% small cap, 25% investment-grade bonds B. 75% large cap, 25% small cap C. 100% large cap D. 100% small cap

75% large cap, 25% small cap The large-cap stocks are generally the most conservative when looking for growth. Adding 25% small-cap stocks to the mix adds the small extra risk the investor indicated she was willing to assume. Although the mix with the investment-grade bonds might be a good one, please note that the question specifically asks about common stock funds.

Under the provisions of Regulation SP, a person who has an investment advisory contract with a registered investment adviser is known as A. a consumer. B. a client. C. a cohort. D. a customer.

A customer Regulation SP uses two terms: customer and consumer. The customer is one with an ongoing relationship, such as would be the case with an advisory contract. A consumer is basically a one-shot deal

A life insurance policy with benefits tied to the performance of a separate account that allows the policyholder to skip premium payments is called A. a scheduled premium variable life insurance policy. B. a fixed premium variable life insurance policy. C. a flexible premium variable life insurance policy. D. a universal life insurance policy.

A flexible premium variable life insurance policy Flexible premium means that the policyholder can elect to skip premium payments. This is a feature of all universal life policies, but only in the case of universal variable life insurance does the performance of the separate account impact benefits.

As defined in the Uniform Securities Act (USA), the term person would include which of the following? 1. A limited partnership 2. A political subdivision 3. An unincorporated association 4. The executor of an estate for a deceased individual

A limited partnership, a political subdivision, an unincorporated association, and the executor of an estate for a deceased individual All of these would be included in the USA's definition of person. Not included are a minor, a deceased person, or someone judged as mentally incompetent.

Which of the following is most commonly used when the author wants to express end-of-life wishes? A. A testamentary trust B. A revocable trust C. A living will D. A living trust

A living will Sometimes referred to as a medical directive or advanced care directive, a living will is used to express the author's end-of-life wishes, such as organ donation plans, desired medical treatment, and so forth.

A company with no operations that is formed to raise capital through an initial public offering for the purpose of acquiring a private company or business to be identified after the IPO is A. a sponsored investment company. B. a direct participation program. C. a special purpose acquisition company. D. an open-end investment company.

A special purpose acquisition company Special purpose acquisition companies (SPACs) are usually shell companies. Rule 405 of the Securities Act of 1933 (not tested) defines a shell company as a registrant that has no or nominal operations and assets. The SPAC has an initial public offering and, under the direction of the SPAC's sponsor, determines the private company or companies to be acquired. If the acquisition is successful, the formerly private company is now publicly owned and investors can buy and sell interest in the company through shares of the SPAC.

An investment adviser wishes to advertise a proprietary charting system used to time the market. In order to be in compliance with the Investment Advisers Act of 1940, A. results obtained by using the system must be shown using a time period of no less than 12 months. B. authorship of the system must be prominently disclosed. C. a statement reflecting the limitations and difficulties of using the system must be included in the ad. D. the advertisement must be filed with the appropriate SRO within 10 business days of first use.

A statement reflecting the limitations and difficulties of using the system must be included in the ad An advertisement describing a charting system or any type of formula must always state that there are limitations and difficulties to using the system.

An investor purchased one ABC October 50 call at 3 and one ABC October 50 put at 2. This position is A. a combination. B. an iron condor. C. a spread. D. a straddle.

A straddle When an investor is not sure which direction the market will move but has a strong opinion that there will be dynamic movement, a strategy that might be employed is the purchase of a straddle. This is the combining of a put and a call on the same stock with the same exercise price and expiration date.

In which of the following cases does exercise not involve the issuer of the underlying asset? A. A warrant B. An option C. A convertible bond D. A right

An option When an option is exercised, the seller (writer) of the option is the one who must deliver (call) or purchase (put). In all of the other choices, the issuer is the one who delivers the stock.

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A. JKL 4s of 2022 B. GHI 7s of 2052 C. ABC 5s of 2050 D. DEF 6s of 2051

ABC 5s of 2050 The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2050 through 2052, the bond with the lowest coupon will have the longest duration. The 4s of 2022 have a relatively short duration, even though their coupon is low.

In order to make a quantitative evaluation using the present value computation, which of the following is not needed? A. Anticipated rate of return of the portfolio B. Account value at the beginning of the period C. Time period involved D. Account value at the end of the period

Account value at the beginning of the period Present value is calculated to determine the amount required now to have a specified value at some time in the future. It is what we are looking for, so we don't have it now.

Under the Uniform Securities Act, all of the following persons with no place of business in the state are exempt from registration as an investment adviser except A. advisers who deal exclusively with federal covered investment advisers located in the state. B. advisers who deal exclusively with savings banks located in the state. C. advisers who have conducted business with no more than six clients, other than institutions, in the state within the past 12 months. D. advisers who deal exclusively with investment companies registered under the Investment Company Act of 1940.

Advisers who have conducted business w/ no more than 6 clients, other than institutions, in the state within the past 12 months The de minimis rule for a registered investment adviser who has no place of business in the state is fewer than six retail clients. Doing business with six clients within the past 12 months exceeds this de minimis amount, and therefore, the exemption from registration does not exist. All others listed as possible answers are institutional- or professional-type investment clients. If a registered investment adviser works with only this type of client, an exemption from registration in that state exists as long as the registered investment adviser has no place of business in that state. In fact, if the investment adviser deals exclusively with registered investment companies, the adviser is federal covered and must register with the SEC rather than with any states.

A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim A. ahead of the common stock, the preferred stock, and the bonds. B. ahead of the common stock and the preferred stock but after the bonds. C. ahead of the common stock but after the preferred stock and the bonds. D. behind the bonds, the preferred stock, and the common stock.

Ahead of the common stock and the preferred stock but after the bonds Any debt security, even a subordinated debenture, has a claim ahead of all equity. However, they are subordinated to all other debt

Which of the following clients of a federal covered investment adviser are not exempt from the delivery requirements of the brochure rule? A. An open-end investment company with less than $25 million in assets B. A closed-end investment company traded on the New York Stock Exchange C. An employee benefit plan with assets of at least $5 million D. An individual investor purchasing the investment adviser's newsletter with an annual subscription price of $410

An employee benefit plan w/ assets of at least $5 million The only exemptions from the investment adviser brochure rule are registered investment companies (both open- and closed-end) and impersonal advice costing less than $500 per year.

In order to come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over A. an equity portfolio of at least $100 million. B. an equity portfolio of at least $50 million in 13(f) securities. C. an equity portfolio of at least $100 million in 13(f) securities. D. more than 10% of the outstanding voting securities of a reporting company.

An equity portfolio of at least $100 million in 13(f) securities Form 13F must be filed by institutional money managers with at least $100 million in 13(f) equity securities under discretionary management.

If a client prefers owning an investment company whose portfolio consists primarily of companies that have a history of paying regular dividends rather than companies reinvesting their earnings for the purpose of generating capital appreciation, what type of mutual fund would you recommend? A. An income fund B. A government bond fund C. A growth fund D. An index fund

An income fund Income funds invest in companies that tend to be more liberal in their dividend payout, thus enabling the fund to provide income to the investor. Be careful. The question did not ask about a fund that paid regular dividends; it was the portfolio securities that were the dividend payers, and that could not be a bond fund.

Increasing inflation is likely to accompany all of the following except A. an increase in consumer prices. B. an increase in government spending. C. an increase in purchasing power. D. an increase in interest rates.

An increase in purchasing power Inflation is the enemy of purchasing power. Interest rates and government spending almost always increase. Consumers feel the effects through higher prices for most of their purchases.

As specified in the Dodd-Frank Act of 2010, which of the following would not qualify for the private fund exemption? A. An investment adviser who limits her advisory services to private funds with less than $150 million in assets under management in the United States B. An investment adviser who limits her advisory services to insurance companies C. A non-U.S.-based investment adviser with no place of business in the United States and less than $25 million in assets under management belonging to U.S. clients D. An investment adviser who limits her advisory services to venture capital funds

An investment adviser who limits her advisory services to insurance companies The Dodd-Frank Act tells us that we're referring to federal law. Although investment advisers dealing solely with insurance companies are exempt from registration under the Investment Advisers Act of 1940, that is not the private fund exemption found in the Dodd-Frank Act of 2010 the question is asking about.

An estate-planning technique often recommended for those with large, taxable estates is the use of A. the alternative valuation date. B. a testamentary trust. C. an irrevocable life insurance trust (ILIT). D. the capital needs analysis.

An irrevocable life insurance trust (ILIT) For those with large, taxable estates, the purchase of life insurance to cover the potential estate tax liability is frequently recommended. The use of the ILIT will generally keep the proceeds out of the estate. The alternative valuation date helps only if the value of the estate drops sometime during the six months after death. A testamentary trust does little, if anything, to reduce estate taxes. The capital needs analysis is used to determine the replacement value needed in the event of premature death—which is unlikely to be needed with this large of an estate.

Under the provisions of the Uniform Securities Act, which of the following statements about unsolicited orders is true? A. If the order ticket is appropriately marked, the administrator may not challenge a broker-dealer's assertion that the order was unsolicited. B. A client may not purchase, at his own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order. C. Under certain conditions, an administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders. D. An unsolicited order from a noninstitutional client for an unregistered, nonexempt security is considered a transaction exempt from the registration and advertising filing requirements of the act.

An unsolicited order from a noninstitutional client for an unregistered, nonexempt security is considered a transaction exempt from the registration and advertising filing requirements of the act Clients have the right to buy or sell whatever they desire. The issue becomes a question of who initiates the trade. An unsolicited transaction may be executed by an agent if it is the client who asks for the trade. The trade ticket should be marked as unsolicited. The state securities administrator has the right to seek verification from the client that the trade was, in fact, unsolicited. The security involved in the trade can be one that is nonexempt and unregistered in the state.

An investment adviser representative (IAR) is meeting with a potential advisory client. Which of the following are among the items of information the IAR needs to obtain about the prospect in order to develop the proper plan? 1. Anticipated number of years until retirement 2. Location of current bank and brokerage accounts 3. Current savings and investments 4. College alma mater

Anticipated number of yrs until retirement and current savings and instruments Proper investment planning involves saving for retirement, and the steps taken to reach that goal are influenced by the time remaining. Future plans are developed using current assets as the starting point. An IAR doesn't care where the assets are, just what they are.

During your initial interview with a couple who are potential advisory clients, you obtain the following information. He is 58, and she is 56. They both plan to continue working until she reaches 65 and is eligible for Medicare. As you begin to develop a plan for this couple, you would probably project their time horizon as A. 16 years. B. approximately 30 years. C. 7 years. D. 9 years.

Approximately 30 yrs An investor's time horizon is the length of time the planned investment strategy is designed to serve. In the case of a couple looking ahead to retirement, the time horizon is their life expectancy.

NASAA's Model Rule on Business Continuity and Succession Planning (BCP) requires that investment advisers (IA) establish a plan that provides for each of the following except A. assurance of continued profitability. B. minimizing service disruptions and client harm. C. office relocation in the event of a temporary loss of a place of business. D. assignment of duties to qualified persons in the event of unavailability of key personnel.

Assurance of continued profitability Although NASAA would like to see registered IAs be financially successful, the BCP is not designed to assure profits.

If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A. AAA bonds B. Preferred stock C. Fixed annuities D. Tangible assets

Tangible assets Tangible assets—such as real estate, precious metals, and other commodities—tend to keep pace with inflation. Fixed-dollar investments do not.

An individual has just received an inheritance of $15,000 and has the goal of preservation of capital and income. The client is in a low tax bracket. Which of the following would be the most suitable choice? A. Public utility stocks B. Bank-insured CDs C. Insured municipal bonds D. Newly issued U.S. Treasury bonds

Bank-insured CDs When preservation of capital is a goal and one of the choices is an insured bank CD, choose that answer. When the question refers to a low tax bracket, municipal bonds will never be the correct choice. Newly issued Treasury bonds have maturities of at least 10 years. During that time, changes to interest rates in the marketplace would cause the market price of those bonds to fluctuate. Although the public utilities will offer income frequently higher than the CD, there are no guarantees the principal will remain intact. (Some public utilities have gone bankrupt.)

Low risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor? A. Banks B. Trusts C. Foundations D. Defined benefit pension plans

Banks As with so many suitability questions, students frequently have to sit back and try to find a logical answer. Although the risk tolerance for all of these choices tends to be on the lower end of the scale, banks are different when it comes to liquidity needs. Banks tend to have high liquidity needs because they must be ready to meet the withdrawals of depositors at any time. The nature of foundations, trusts, and defined benefit pension plans is such that it is usually easier to predict their liquidity needs. Pension funds have a pretty good idea when participants will be retiring. Trusts and foundations generally schedule their distributions well in advance.

A technical analyst who has been charting the common stock of Kloud Information Storage Systems (KISS) would most likely sell KISS stock short when the market price of the stock is A. above the resistance level. B. just above the support level. C. below the support level. D. just below the resistance level.

Below the support level The support level of a stock is the historic repeating bottom. That is, whenever the stock gets that low, it brings out the buyers and pushes the price up. However, when a stock breaks through the support level, it is usually an indication that the support has dried up and there is going to be further decline. That is good for the short seller.

To assist broker-dealers with compliance, NASAA prepared a fee disclosure template. Based on the template, all of the following broker-dealer charges would be disclosed except A. account transfer fees. B. account maintenance fees. C. brokerage commissions. D. fees for issuance of stock certificates.

Brokerage commissions Not included in the fee disclosure documents are commissions, markups and markdowns, and advisory fees.

An options strategy that would be most useful for an investor with a long position in a stock who is concerned that a proposed management change will negatively impact the stock's price would be to A. buy a call on that stock. B. sell a call on that stock. C. sell a put on that stock. D. buy a put on that stock.

Buy a put on that stock This investor is looking to hedge his risk of loss. The best way to hedge a long position is to buy a put option.

Which of the following forms of joint ownership is most associated with ownership of real estate? A. Tenancy by the entirety B. Tenants in common C. Totten trust D. Joint tenants with right of survivorship

Tenancy by the entirety Tenancy by the entirety is most commonly used for ownership of real property (real estate).

Historically, common stock has been shown to protect against A. systematic risk. B. inflation risk. C. market risk. D. business risk.

Inflation risk Over long periods of time, a diversified portfolio of common stock has been proven to be an effective hedge against inflation. However, ownership of stock does entail business and market risk. Systematic risk and market risk are synonymous.

With regard to nonqualified stock options (NQSOs) and incentive stock options (ISOs), which of the following statements is not correct? A. Capital gain treatment is available only with NQSOs. B. Board of director approval is required for both NQSOs and ISOs. C. A tax deduction for the employer is generally available only with NQSOs. D. AMT is an issue only for those exercising ISOs.

Capital gain treatment is available only w/ NQSOs Only the ISO offers the employee a capital gain treatment.

A balance sheet shows that a corporation builds its capital structure with all of the following except A. retained earnings. B. cash. C. capital stock. D. long-term debt.

Cash A corporation's capital structure consists of the capital raised through the issuance of long-term debt securities (bonds), equity securities (stocks), and money reinvested in the business (retained earnings)

LMN, Inc., is preparing to report its net income for the past year. An increase in which of the following would not cause a decrease in the reported net income? A. Year-end bonuses to employees B. Cash dividends C. Corporate income tax rate increase D. Allowance for bad debts

Cash dividends Cash dividends are paid out of the company's net income, so an increase or decrease will not impact that net income. Net income is a calculation determined by current operations, so an increase in the amount set aside as an allowance for bad debts will reduce operating income. Because net income is always after taxes, raising the company's income tax rate will obviously decrease the net income of the corporation. One of the major expenses for most corporations is labor, so any increase (whether in the form of raises or bonuses) will decrease the net income.

What is the term generally given by analysts to the number generated by the addition of a company's annual depreciation expense to its net income? A. Dividend payout ratio B. Cash flow C. Working capital D. Book value per share

Cash flow Cash flow from operations is the sum of net income plus nonexpended business expenses such as depreciation.

Fiscal policy, as implemented by Congress and the administration, would entail all of the following except A. increasing military spending. B. running a budget deficit. C. changing tax rates. D. changing the discount rate.

Changing the discount rate Changing the discount rate is a function of the Federal Reserve Board in implementing monetary policy.

It would be considered an unethical business practice for a state-registered investment adviser to A. determine the price or time of execution of customer orders without written discretionary authority. B. notify the administrator that the adviser intends to maintain custody of customer securities. C. deposit marketable securities or cash with the administrator in lieu of a required surety bond. D. claim that advisory fees are negotiable but maintain a fixed fee schedule.

Claim that advisory fees are negotiable but maintain a fixed-fee schedule If an adviser states that fees are negotiable but charges fixed rates, that would be an unethical business practice. Time and price are not considered discretionary. State-registered investment advisers must notify the administrator if they wish to maintain custody, and surety bond requirements may be met with a deposit of cash or marketable securities.

Which of the following classes of mutual fund shares would be appropriate for an investor who doesn't mind paying some sales charges on a purchase but wants to minimize operating expenses over a long-term holding period? A. Class C shares B. Class B shares C. Class A shares D. No load shares

Class A shares Class A shares have a front-end load, but their operating expense ratio is usually lower than that of any other class. Because the question states that the investor is willing to pay a sales charge, no load shares is an inappropriate choice

Which of the following risks would most likely be minimized through portfolio diversification? A. Market risk B. Interest rate risk C. Credit risk D. Purchasing power risk

Credit risk Only those risks that are unsystematic can benefit from diversification.

All of the following statements relating to ADRs are true except A. trading takes place on domestic secondary markets. B. dividends are paid in U.S. dollars. C. the issuer is a domestic bank. D. currency risk is avoided.

Currency risk is avoided Even though everything relating to ADRs is done in English using U.S. dollars on domestic stock markets, there is still currency risk since the ultimate value of the stock and its dividends are based on the foreign company's home currency.

An investor is concerned that interest rates will be volatile over the next few years. Which of the following would eliminate interest rate risk? A. Zero-coupon bonds B. Insured bank CDs C. TIPS bonds D. Cumulative preferred stock

Insured bank CDs Any negotiable instrument that has a yield component will be subject to interest rate risk. The insured bank CD cannot be traded and, therefore, will not be affected by changes in market interest rates. TIPS protect against inflation, and zero-coupon bonds have the greatest interest rate risk.

Daphna works for Automated Asset Allocators (AAA), an investment adviser that has offices in States D, E, and F and is registered with the SEC. Daphna spends most of her time in an office in State D, but once every other week, she goes to the branch in State E. Daphna would be exempt from registration as an investment adviser representative (IAR) in which of the following states? A. Daphna would have to register in all three states. B. Daphna would be exempt in State E, where she has no retail clients. C. Daphna would be exempt in States E and F. D. Daphna would be exempt in State F, where she has 227 retail clients.

Daphna would be exempt in State F, where she has 227 retail clients As an IAR with a federal covered investment adviser, Daphna has to register only in those states in which she maintains a place of business. That means registering in States D and E. The number of clients is irrelevant.

Which of the following would offer your client check-writing privileges and FDIC insurance coverage? A. Guaranteed investment certificates (GIC) B. Government securities money market fund C. Negotiable certificate of deposit (CD) D. Demand deposit account (DDA)

Demand deposit account (DDA) DDA stands for demand deposit account, most commonly a bank checking account. It, like all other bank accounts, carries FDIC insurance. GICs offer neither. Money market funds offer check writing but not FDIC coverage; negotiable CDs offer FDIC coverage but not check writing.

In October 1987, the SEC promulgated Release IA-1092, which had the effect of broadening the definition of investment adviser. As a result of the release, which of the following is included in the definition? 1. Commercial banks offering comprehensive financial planning for their high net worth clients 2. Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate 3. Persons being compensated for assisting employee benefit plan administrators in selecting investment managers for the plan's assets 4. Lawyers who prepare trust agreements for clients with large securities holdings, with a goal of minimizing estate taxes

Entertainment agents earning a fee for negotiating contracts for their clients and then placing a portion of the client's royalties into investment-grade bonds or large-cap stocks as market conditions dictate and persons being compensated for assisting employee benefit plan administrators in selecting investment managers for the plan's assets Once the entertainment agent makes investment decisions for a client who is paying fees for overall services rendered, that agent comes under the IA-1092 definition of investment adviser (IA). In a like manner, any person who is compensated for giving investment-related advice to employee benefit plans is considered a pension consultant, requiring registration under IA-1092. Banks are never IAs, and the lawyer is merely doing legal and tax work.

Which of the following statements regarding REITs are true? 1. Equity REITs offer possible income and capital appreciation. 2. Investors receive interest and principal payments periodically. 3. In order to receive favorable tax benefits, the REIT must pay out at least 90% of its taxable income in the form of dividends. 4. Interests in REITs offer the benefit of flow-through of income or loss.

Equity REITs offer possible income and capital appreciation and in order to receive favorable tax benefits, the REIT must pay out at least 90% of its taxable income in the form of dividends REITs are pooled tangible real estate assets. Owning an equity REIT gives the investor beneficial ownership of tangible real estate with the possibility of both income and capital appreciation. Most REITs trade in the open market, and their price is determined by supply and demand; there is no redemption by the issuer. REITs pay distributions in the form of dividends and not a pass-through of principal and interest, as is the case with a mortgage-backed security, such as those issued by GNMA. Although REITs pass-through at least 90% of their taxable income, there is no flow-through of losses as is the case with direct participation programs (DPPs).

Gerald has been a client of yours for more than a decade. Over that period, the relationship expanded from business to socializing, including attending events with your spouses. One afternoon, Gerald's wife called, explaining that she just got off the phone with Gerald. Before hanging up, he asked her to contact you with a sell order in his account. Having had extensive social contact, you recognize her voice and know that their marriage is on strong footing. You should A. contact your compliance department, explain the relationship, and wait for further instructions. B. email a copy of the trading authorization form and ask her to sign electronically for Gerald and return it so that you can place the order. C. explain that you cannot accept an order from anyone other than the account holder without having written trading authorization. D. accept the order because you know the wife and understand that this is something that would be fine with Gerald.

Explain that you cannot accept an order from anyone other than the account holder w/o having written trading authorization Orders from anyone other than the account owner need written trading authorization prior to acceptance

A portfolio manager who follows the value style of investing would most likely focus her attention on A. 52-week highs and lows. B. financial statements. C. moving averages. D. market capitalization.

Financial statements Value managers look for value as found on the company's financial statements.

When comparing futures and forwards, it would be correct to state that A. forwards are more likely to be closed out prior to expiration. B. forwards are exchange listed, while futures are not. C. futures are considered securities, while forwards are not. D. futures are more commonly used by speculators than forwards.

Futures are more commonly used by speculators than forwards The nature of futures—being standardized with a fluid secondary market—makes them more suitable than forwards for speculators. In fact, futures are almost always closed out prior to expiration.

Section 529 plans differ from Coverdell ESAs in that Section 529 plans offer which of the following? 1. Tax-free distributions when the funds are used for qualifying educational expenses 2. Higher contribution limits 3. No earnings limitations 4. Contributions that may be made by someone other than a parent or legal guardian

Higher contribution limits and no earnings limitations Contributions to an ESA are limited to $2,000 per beneficiary per year, while the 529 limit is set by the plan sponsor and is sometimes as high as $500,000. Unlike the ESA where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 plans and Coverdell ESAs enjoy tax-free distributions, and plans may be established by almost anyone.

An investor would be entitled to a breakpoint on quantity purchases made together with all of the following accounts except A. shares of that fund held in his 401(k) that were purchased with employer-matching funds. B. a custodian account under UTMA for his child. C. his brother with whom he regularly shares investment ideas. D. his wife's personal account.

His brother w/ whom he regularly shares investment ideas The breakpoints allow for combinations from a number of family accounts, but the accounts have to be with a spouse or dependent children, not brothers.

Which of the following statements regarding agent registration under the Uniform Securities Act is true? A. The administrator may initiate a disciplinary action within two years of an agent's withdrawal of registration. B. If, before the effective date of the registration, the administrator requires amendments to the application, the registration will be considered to have first been filed as of the original filing date. C. In the absence of any action by the administrator, the effective date of a registration is noon on the 30th day after the filing of a complete application. D. The administrator may request that the agent furnish a statement of assets and liabilities.

In the absence of any action by the administrator, the effective date of a registration is noon on the 30th day after the filing of a complete application Typically, registration of persons becomes effective at noon on the 30th day following filing. If the administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Agents do not have financial requirements, and the administrator has a maximum of one year after termination to initiate any actions.

You are explaining to an advisory client that the U.S. economy goes through somewhat repeatable phases over a period of time. Which of these terms does not describe one of those business cycles? A. Contraction B. Peak C. Inflation D. Expansion

Inflation The four phases of the business cycle are expansion, peak, contraction, and trough. Although inflation typically increases during expansion and reduces during contraction, inflation is not a term used to describe one of the phases.

One respect in which advertising by investment advisers differs from that of broker-dealers is that A. investment adviser advertising is regulated by federal law while advertising by broker-dealers is regulated by FINRA. B. investment advisers are not permitted to use the internet while broker-dealers can. C. investment advisers are permitted to conduct seminars while broker-dealers cannot. D. investment advisers are permitted to refer to charting systems in their advertisements while broker-dealers cannot.

Investment adviser advertising is regulated by federal law while advertising by broker-dealers is regulated by FINRA When it comes to investment advisers, state registered or federal covered, any advertisement that does not comply with the SEC's Investment Adviser Marketing Rule as found in the Investment Advisers Act of 1940 (federal law) would be prohibited. On the other hand, broker-dealers must comply with FINRA's rule on communication with the public as well as the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.

Which of the following are reasons an investor might purchase an ETF tracking a broad market index instead of selecting individual securities? A. It is a simple way to hedge the investor's existing stock portfolio against a market decline. B. It reduces the level of systematic risk. C. It is the best way to be fully diversified against unsystematic risk. D. Historically, a broad-based index offers greater potential for abnormal gains than that offered by the purchasing of individual securities.

It is the best way to be fully diversified against unsystematic risk Buying an exchange-traded fund (ETF) that tracks a broad-based index avoids the risk associated with any one company (business risk). A disadvantage of investing in a broad-based index is that it virtually eliminates the opportunity for outsized gains. The performance of one or two highfliers is subsumed by the large portfolio. If one wants to hedge, you take the opposite position. Buying an index ETF or fund is essentially doubling down on the bullish bet the investor has already made. Diversification reduces unsystematic risk, not systematic risk.

When discussing the suitability of investing in direct participation programs, particular attention should be focused on which risks? 1. Legislative 2. Liquidity 3. Market 4. Purchasing power

Legislative and liquidity Two of the major risks faced by direct participation program (DPP) investors are the lack of liquidity and the possibility of legislative change.

A broker-dealer with no place of business in a state is not required to be registered in that state if the broker-dealer A. is registered in the state where its principal office is located. B. is a member of the New York Stock Exchange. C. is a federal covered broker-dealer. D. limits its clientele to employee benefit plans with assets of at least $1 million.

Limits its clientele to employee benefit plans w/ assets of at least $1 million A broker-dealer must be registered in every state in which it sells or offers to sell securities unless an exemption is available. If a broker-dealer has no office in a particular state and no business is done in that state other than with institutional clients, registration there is not required. There is no such term as federal covered broker-dealer. The term federal covered applies to certain investment advisers and securities.

You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is A. business risk. B. inflation risk. C. liquidity risk. D. systematic risk.

Liquidity risk A portfolio of listed common stocks will have little to no liquidity risk as listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living.

KAPCO, Inc., has 100 million shares of $1 par common stock outstanding. If the current market price of the KAPCO common stock is $33 per share, KAPCO would be considered a A. small-cap stock. B. mid-cap stock. C. large-cap stock. D. micro-cap stock.

Mid-cap stock By doing the arithmetic, we see that the market capitalization of KAPCO common stock is $3.3 billion. Stocks with a market cap in the range of $2 to $10 billion are considered mid cap.

One form of commodity investing is the purchase of precious metals. An investor in precious metals would be least likely to purchase A. palladium. B. molybdenum. C. platinum. D. gold.

Molybdenum When the exam asks about precious metals, remember that there are only four. They are gold, silver, platinum, and palladium.

Irving Wilson works for Wall Street Limited (WSL), a registered investment adviser. He limits his advice exclusively to equity securities listed on the NYSE. Under the Uniform Securities Act, Irving A. is not covered by the antifraud rules, as these are federal covered securities. B. must register as an IAR. C. need not register as an IAR. D. would need registration as a federal covered IAR.

Must register as an IAR Because Irving works for a registered investment adviser and provides advice on securities (where they are traded is irrelevant), he must register as an investment adviser representative (IAR), regardless of the nature of the securities that are the subject of his advice. There is no such thing as a federal covered IAR, only a federal covered investment adviser. If the advice relates to securities, no one is exempt from the antifraud rules.

Which of the following would probably be the best indicator of where the economy is headed? A. Number of permits for construction of new housing units B. Average prime rate C. Rate of industrial production D. Average duration of unemployment

Number of permits for construction of new housing units The question is looking for a leading indicator. Of those listed, only new building permits fits. Industrial production is a coincident indicator, while the other two choices are lagging indicators.

When an investor who is reviewing a brokerage account asks what else she could have done with her money, the investor is asking about which risk? A. Credit risk B. Inflation risk C. Market risk D. Opportunity risk

Opportunity risk Opportunity risk arises when an investor makes a choice between two or more investments. To the extent that the chosen investment underperforms the rejected alternatives, the investor's loss is the opportunity cost of making a bad decision.

Which of the following statements is accurate when describing preferred stock? 1. Owners of convertible preferred stock have an opportunity to participate in the growth of the company. 2. Unlike any other securities the company may issue, the return on preferred stock is fixed. 3. Issuing preferred stock confers certain tax benefits to the company. 4. In general, preferred stock does not have a maturity date.

Owners of convertible preferred stock have an opportunity to participate in the growth of the company and in general, preferred stock doesn't have a maturity date The ability to convert their stock into the company's common stock enables holders of convertible preferred stock to participate in the company's growth. With rare exception, there is no maturity date on preferred stock. Preferred stock does offer a fixed return, but so does any debt security issued by the company. Only debt securities offer the issuer a tax benefit because the interest is a tax-deductible expense.

Which of the following is required for annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A. Sending a renewal notice to the SEC B. Filling out the consent to service of process C. Paying the state licensing fee D. Filling out Form U4

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

A state-registered investment adviser maintaining custody of customer funds and securities discovers that the firm's net worth is $32,000. Which of the following steps would not be required? A. Reporting to the administrator the number of client accounts being served by the investment adviser B. Returning the customer funds and securities within three business days of the discovery C. Filing a financial report with the administrator by the close of business on the next business day following notice D. Notifying the administrator of the deficiency by the close of business on the next business day

Returning the customer funds and securities within 3 business days of the discovery Once the firm's net worth is below $35,000, notifications and reports must be sent to the administrator. Unless ordered by the administrator, there is no requirement to return client assets to clients.

A portfolio manager looking to create alpha would most likely use which of the following? A. Tactical asset allocation B. Strategic asset allocation C. Buy and hold D. Indexing

Tactical asset allocation Alpha is the extent to which a portfolio outperforms its expected returns. Expected returns are based on the systematic risk of the portfolio (its beta). In order to exceed those returns, one must generally construct a portfolio that deviates from the market allocations. With tactical asset allocation, the manager either overweights or underweights the portfolio allocations based on near-term expectations of returns on those assets classes. The other choices are all basically the same, with little or no attempt to time the market's ups and downs.

Which of the following statements regarding an agent's registration is correct? A. Agents may be licensed in a state even if their broker-dealer is not. B. If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the administrator and the agent will be required to register with an active broker-dealer no later than 30 days following the revocation. C. Individuals whose only securities activity with a broker-dealer is trading for the firm's proprietary account are not required to register as agents. D. Revocation of the registration of an agent's broker-dealer will result in placing that agent's effective registration in suspense.

Revocation of the registration of an agent's broker-dealer will result in placing that agent's effective registration in suspense The registration of an agent is not effective during any period when he is not associated with a particular broker-dealer registered under the Uniform Securities Act or a particular issuer.

Upon reaching the age of 72, required minimum distributions (RMDs) must be taken by retired individuals who were participants in all of the following except A. Roth IRAs. B. traditional IRAs. C. Keogh plans. D. SEP IRAs

Roth IRAs The Roth IRA is the only one of these for which there are no required minimum distributions beginning at age 72. If the individual is still employed by the sponsor of a qualified plan, RMDs are not required from that plan, but the question would have to state that.

One would not typically place convertible bonds in the portfolio of an investor A. who is bullish on the future for a specific issuer's common stock. B. seeking a position senior to that of common stock. C. seeking to maximize current income. D. seeking capital gains.

Seeking to maximize current income A conversion feature is a benefit to the bondholder. It allows the bondholder a choice either to continue holding the debt represented by the bond or to convert the bond into shares of common stock of the underlying issuer. Everything that is done in the securities industry has to be a win-win situation. The win for the bondholder in this instance is the ability to take advantage of the capital appreciation potential the common stock may offer. The win for the issuer is that by offering something extra to the bond purchaser, the bond purchaser is willing to accept a lower interest rate on the bond (compared to a nonconvertible bond), therefore giving the issuer a lower cost of capital.

Your client has a long position in a security that has had considerable appreciation since the date of purchase. The client is concerned that speculation that the company's CEO may retire could have negative implications for the stock. Wishing to protect those unrealized gains, which of the following orders would be appropriate? A. Sell limit B. Buy limit C. Sell stop D. Buy stop

Sell stop Sell stop orders are frequently referred to as stop loss orders and are used either when a security is purchased to offer downside protection or, as in this case, to preserve a gain that has not yet been realized. Buy stops are used to protect against loss or to preserve the gain on a short position.

Investors seeking current income would benefit from A. buying U.S. Treasury STRIPS. B. selling call options. C. buying periodic payment variable annuities. D. buying LEAPS.

Selling call options When an investor sells an option, put, or call, the premium is received, generating immediate income. LEAPS are long-term options and, like all long options positions, do not generate any income. A periodic payment variable annuity will not begin any payout until the end of the deferral period. A commonsense way to answer this question is to ask yourself, "How do many people generate their income?" They do so by selling something.

Under the Uniform Securities Act, an investment adviser would have to disclose that the firm was acting in a principal capacity when A. the trade was being executed by an officer or partner of the firm. B. selling shares from its proprietary account to an advisory client. C. directing a securities transaction to an affiliated broker-dealer. D. engaging in an agency cross transaction.

Selling shares from its proprietary account to an advisory client There are two principals in every securities trade: the buyer and the seller. In this case, selling shares directly to the client from its own account places the investment adviser in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent rather than a principal; that's the reason for the term.

A client with a bearish outlook on a particular stock would be able to benefit from taking which of the following actions? A. Entering a sell limit order B. Buying the stock on margin C. Entering a market order to sell D. Selling the stock short

Selling the stock short Selling short is a technique used by investors who are of the opinion that the market price of a stock is going to fall.

Which of the following items does not fall within the Section 28(e) safe harbor? A. Software used to simplify the investment adviser's preparation of its tax returns B. Research reports prepared by a third party other than the broker-dealer C. Software used to analyze clients' portfolios D. Proprietary research reports analyzing the performance of a specific industry

Software used to simplify the investment adviser's preparation of its tax returns Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyze securities is also permissible since that benefits the client. Tax preparation software benefits the adviser but not the client.

Which of these forms of business structure carries the greatest personal liability? A. LLC B. S corporation C. Sole proprietorship D. Limited partnership

Sole proprietorship When a business is set up as a sole proprietorship, the owner carries unlimited personal liability for all of the company's debts. In each of the other choices, the liability is basically limited to the amount invested.

You have a client who is interested in a preferred stock with guaranteed dividends. What is likely the reason for using the term guaranteed? A. Someone other than the issuer has guaranteed the payment of those dividends. B. The issuer has a AAA rating that is tantamount to dividend payments being a sure thing. C. A previous investment adviser representative has improperly used that term in an effort to make a sale. D. As a fixed income security, the dividends are guaranteed to never increase.

Someone other than the issuer has guaranteed the payment of those dividends In the Uniform Securities Act, guaranteed means guaranteed as to payment of principal, interest, or dividends by some third party other than the issuer.

Which of the following actions by an agent would be an unethical practice under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A. Splitting commissions with a customer service representative who is not registered but works for the same firm B. Recommending securities that result in major losses in the customer's account C. Entering a buy order, with discretionary authority, for a security when its price is rising D. Telling a customer that the investment being recommended will be sold from the inventory of the broker-dealer and indicating on the trade confirmation that the firm acted in a principal capacity

Splitting commissions w/ a customer service representative who is not registered but works for the same firm Commissions can be received only by those with the appropriate registrations. A nonregistered person cannot participate in transactional-based compensation.

Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A. state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a five-day, penalty-free withdrawal. B. federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. C. state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. D. state-registered advisers who do not deliver the brochure at least five days prior to contract signing must offer a 48-hour, penalty-free withdrawal.

State-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a five-day, penalty-free withdrawal. State-registered investment advisers who do not deliver the brochure at least 48 hours prior to entering the contract must offer a penalty-free withdrawal of five days. There is nothing comparable to that in the federal law. Both have the 120-day delivery requirement, and state-registered investment advisers cannot have investment companies as clients.

An investor concerned about liquidity would be least likely to invest in A. cumulative preferred stock. B. ADRs. C. common stock listed on the New York Stock Exchange. D. stock subject to Rule 144.

Stock subject to Rule 144 In most cases, stock subject to Rule 144 is stock that cannot be immediately resold. That is why it is known as restricted stock.

In which of the following instances would an investment adviser representative (IAR) be exempt from the antifraud rules of the Uniform Securities Act (USA)? A. The IAR is also an agent of a broker-dealer and, in that capacity, makes a recommendation to a nonadvisory client. B. Since the IAR understands how nervous a particular client is, he never admits a loss in the account to that client. C. In an effort to avoid possible conflicts of interest, the IAR only does personal trades through an account set up with a fictitious name. D. The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities.

The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities Since fixed annuities are not securities, a presentation dealing solely with that topic is not covered under the antifraud statutes of the USA.

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of which of the following? 1. The Securities Exchange Act of 1934 2. The Investment Company Act of 1940 3. The Investment Advisers Act of 1940 4. The Uniform Securities Act

The Investment Company Act of 1940 and The Uniform Securities Act The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940. Sure, it makes good sense, but it is not required. Nothing in the Securities Exchange Act of 1934 relates to investment advisers, much less their contracts with clients.

An investor contacts you to say he is somewhat puzzled over the fact that he saw a newspaper listing for the KAPLOW Fund where the net asset value per share was $10.27 and the asking price was $14.14 per share. He wants to know why the difference between the two is so great. You would respond, saying A. the KAPLOW Fund is being investigated by the SEC for being sold with a sales charge in excess of the 8.5% maximum limit. B. that this is probably an unregistered hedge fund not subject to SEC rules. C. the KAPLOW Fund is a closed-end company with a selling price based not on NAV, as is the case with an open-end fund. D. there is probably a misprint in the paper, and more than likely, the asking price is $11.22, making the sales charge 8.5%.

The KAPLOW is a closed-end company w/ a selling price based not on NAV, as is the case w/ an open-end fund Closed-end investment company shares trade like any other stock on the exchanges or Nasdaq. That is, the price is determined by supply and demand, not by NAV.

The technical market theory that measures the breadth of the market is A. the odd-lot theory. B. the support/resistance theory. C. the short-interest theory. D. the advance/decline theory.

The advance/decline theory The advance/decline theory compares the number of stocks advancing versus those declining, generally on the New York Stock Exchange. Because it uses such a large sample, it is used as an example of the breadth of the market

In the over-the-counter market, the person who performs the dealer function that a DMM is responsible for on an exchange is A. the OTC trader. B. the floor broker. C. the broker-dealer. D. the market maker.

The market maker On an exchange, the specialist (now called the DMM or designated market maker) performs both an agency and a dealer function. That action of buying and selling from inventory is performed by market makers in the over-the-counter (OTC) market.

The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would not be entitled to claim A. attorney's fees. B. court costs. C. the original consideration paid for the security or the current market value, whichever is greater. D. interest at the state's legal rate less any income received on the security.

The original consideration paid for the security or the current market value, whichever is greater In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market value, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees.

Listed options are also known as standardized options. Which of the following choices is not one of the standardized terms of a listed option? A. The underlying asset B. The premium C. The exercise price D. The expiration date

The premium Supply and demand in the marketplace set the premium of a listed option. All of the other choices are standardized.

Popular strategies used by bond investors to mitigate the effects of changes in interest rates include any of the following except A. the laddering strategy. B. the strategy of lengthening the maturities of their holdings. C. the bullet strategy. D. the barbell strategy.

The strategy of lengthening the maturities of their holdings For those concerned about the effects of interest rate fluctuations on their portfolio, increasing the length of the maturities would increase, rather than decrease, the risk.

A significant difference between an account for a trust and an account for an estate is A. only the estate has beneficiaries. B. banks can be named as trustees for a trust but not as an executor. C. the trust account will generally be active for a much longer period of time. D. the standard of prudent investing applies to trusts but not to executors.

The trust account will generally be active for a much longer period of time Trusts can be set up to run for many years; the executor's job is over once the estate has been settled.

It would be reasonable to expect an increase in exports from the U.S. if which of the following happen? 1. The dollar strengthened against the euro. 2. The yen strengthened against the dollar. 3. The Swiss franc weakened against the dollar. 4. The dollar weakened against the British pound.

The yen strengthened against the dollar and the dollar weakened against the British pound U.S. exports should increase when foreigners have greater purchasing power. That occurs when their currency is stronger than the dollar.

The issuance of new common stock will affect which of the following balance sheet items? 1. Total assets 2. Current liabilities 3. Retained earnings 4. Net worth

Total assets and net worth Issuing stock brings in new capital in the form of cash. This raises the assets and, since stock is equity, raises the net worth by the same amount.

Each of the following would be exempt from the definition of an agent under the Uniform Securities Act except A. Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the next quarter. B. Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees. C. Florence, an employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients. D. Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio.

Violet, an employee of the Widget Spinners Corporation, who is paid on a commission on sales of the company stock to fellow employees When an individual receives compensation for selling employer stock to employees, that person is defined as an agent and must register as such. Managing a pension plan (and getting paid for it, naturally) does not make one an agent; she is not being compensated for the trades. Because banks and trust companies are excluded from the definition of a broker-dealer, their employees cannot be considered agents.

When is an investment adviser representative (IAR) required to make disclosure to the client? 1. When the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated 2. When the IAR recommends a specific insurance policy for the client's overall financial plan where a commission will be received on that sale 3. When transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that particular client 4. When transactions recommended to the client are inconsistent with those for the IAR's own account

When the IAR recommends a specific insurance policy for the client's overall financial plan where a commission will be received on that sale and when transactions recommended to the client are inconsistent with those for the IAR's own account An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This includes the case where a recommended product will generate a commission or other source of income to the adviser as well as full disclosure if a recommendation is not consistent with the adviser's activity in his own account. The adviser can use any source of information to create his own analysis, with disclosure of the source being required only if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same or similar objectives would purchase or have recommended for purchase the same securities.

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

Will disregard that conviction when determining John's qualifications for registration The conviction on John's record is for a misdemeanor. The fact that the same crime is a felony in another state is not relevant to his application for registration in that state.