Series 65 Questions

Which of the following would be of least interest to a chartist? A) The relationship between the current market price of an issuer's common stock and most recently reported earnings per share B) The advance/decline line C) The volume of shares traded during the past month D) The short interest

A A chartist is interested in the volume of shares traded, and the short interest for that particular stock. The advance/decline line is another technical indicator. The price-to-earnings ratio is used in fundamental as opposed to technical (charting) analysis.

Defalcator Investment Advisers (DIA), registered in States A, K, and R, would be required to provide a balance sheet as part of its brochure if it charged fees of A) $1,000 for the next year's advisory service. B) $1,000 for the next three months of advisory service. C) $500 for the next three months of advisory service. D) $500 for the next six months of advisory service.

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

An investment adviser would be least likely to gather information about a new client A) from social media. B) during a face-to face interview. C) on a smartphone app. D) by using a questionnaire.

A There are many different ways to gather the necessary information about a new client, but it is highly unlikely that an investment adviser would rely on social media posts.

An investor wants to moderate overall portfolio risk and return profile with assets that have a low correlation to traditional asset classes. Which of the following is an appropriate asset class for the investor? A) Small-cap shares B) Private equity C) Corporate bonds D) Treasury bills

B Alternative asset classes like hedge funds, private equity, and commodities help moderate overall portfolio risk and different return profiles from traditional asset classes like stocks and bonds.

Which of the following is not a type of life insurance policy? A) Endowment policy B) Term to 65 policy C) Variable annuity policy D) Universal life policy

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

When reviewing a corporation's financial statements, shareholders' equity is computed by A) subtracting current liabilities from current assets. B) adding together retained earnings, preferred and common stock, and long-term debts. C) subtracting total liabilities from total assets. D) multiplying the current market price per share times the number of outstanding shares.

C Shareholders' equity is the corporation's net worth, sometimes called owners' equity. It is computed by subtracting the total liabilities from the total assets. Current assets minus current liabilities is the working capital. Taking all of the equity capital, including retained earnings, and adding the long-term debt to that is the company's total capitalization, and the market price per share times the number of outstanding shares is the company's market capitalization.

As a result of an SEC hearing, an investment adviser's penalty is $5,000 and a 50-day suspension. If the investment adviser wishes to appeal this verdict, a request for review must be filed with A) the SEC within 45 days of the order. B) the U.S. Court of Appeals within 45 days of the order. C) the U.S. Court of Appeals within 60 days of the order. D) the Administrator within 60 days of the order.

C Under both federal and state laws, appeals must be filed within 60 days of the order. In the case of an SEC hearing, the appeal is filed with the U.S. Court of Appeals for the district in which the original hearing was held.

You have a 70-year-old client who is in excellent health. Both parents lived into their late 90s and the client is concerned about outliving her money. One product that should be considered to alleviate this concern is A) whole life insurance. B) an index fund. C) a 30-year term policy. D) an annuity.

D One of the unique characteristics of an annuity (variable or fixed) is that it guarantees monthly payments for the life of the annuitant. Life insurance provides a death benefit, but not income. An index fund carries no guarantees.

Which of the following are examples of systematic risk? I) Business risk II) Market risk III) Interest rate risk IV) Credit (default) risk A) II, III, and IV B) II and III C) I and III D) I, II, III, and IV

B Systematic risk affects entire groups of investments. Market risk and interest rate risk affect stock and bond markets overall, respectively, and are therefore systematic. It generally helps to remember the acronym PRIME representing the five tested systematic risks: Purchasing power; Reinvestment; Interest rate; Market; Exchange rate.

In this industry, many words have similar meaning. Which of the following choices consists of a pair which are not properly considered synonyms? A) Inflation risk—purchasing power risk B) Liquidity risk—marketability risk C) Financial risk—market risk D) Interest rate risk—money rate risk

C Financial risk is an unsystematic risk; generally, the concern that an issuer will be unable to meet its debt obligations as they come due. It could be paired with either credit risk or default risk. Market risk is a systematic risk.

If a client has realized a capital gain from the sale of a municipal bond, to reduce tax liability, the capital gain can be offset against a capital loss in which of these? I) GOs II) Equity securities III) Corporate bonds IV) REITs A)I and II B)II and III C)I only D)I, II, III, and IV

D A realized capital gain on a security may be offset by a capital loss realized from the sale of any type of security, including municipal bonds, equities, corporate bonds, or REITs.

Which of the following has the least exposure to inflation risk? A) Preferred stock B) Fixed annuity C) Cash D) Common stock

D The returns on common stock have historically outperformed inflation, making them less vulnerable to loss of purchasing power among the choices presented. Cash is a store of present purchasing power that inflation will erode. Fixed annuities have more exposure to inflation than common stock because their payments are fixed in nominal dollars. Preferred stock has the same exposure to inflation risk as do all fixed-income instruments.

Which of the following statements are true of a discretionary account at a broker-dealer? I) It must be approved by a designated supervisory individual of the firm. II) It must be reviewed frequently to minimize the chances that the account has been churned. III) A discretionary order may be placed once the customer has placed a power of attorney in the mail. IV) It must be approved by the Administrator of the state of residence of the client. A)II and IV B)I and III C)III and IV D)I and II

D A new discretionary account must first be approved by a designated supervisory person, and the account must be reviewed frequently for suitability and avoidance of churning. The written discretionary power must be "in hand," not in the mail, before discretion may commence.

An agent must obtain written verification of an investor's net worth for which of the following investments? A) Direct participation programs B) Unit investment trusts C) Variable contracts D) Real estate investment trusts

A DPPs require complete financial disclosure because of minimum suitability standards set by the states in which they are sold. REITs, unit investment trusts, and variable contracts do not have specific net worth suitability requirements for investors.

Serendipity Asset Planning (SAP) is a covered investment adviser doing business in 48 states. Alicia Adams is an IAR with SAP and splits her time between an office in state X and state Z. Adams has retail clients as follows: I) 10 clients in state W II) 30 clients in state X III) 65 clients in state Y IV) 4 clients in state Z Adams would have to register as an IAR in A) states X and Z. B) states W and Z. C) states W, X, and Y. D) states X and Y.

A In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis exemption would not apply to state Z because the IAR has a place of business there).

Barzell Manufacturing Works (BMW) produces structural steel. To raise additional capital to modernize its plant, BMW decides to go public by issuing shares. Doing so would make BMW A) an issuer. B) a manufacturer. C) a commodities dealer. D) a broker-dealer.

A When a company issues shares to the public, it is an issuer. Yes, BMW is also a manufacturer, but the question asks about the effect of issuing shares—answer the question being asked

Which of the following is considered an advantage of annuitization? A) Payments under a variable annuity could be reduced if there is a declining market. B) It guarantees income that will last for the client's lifetime. C) Once annuitized, the client's draw from the annuity is limited to the annuity payment. D) A fixed, level periodic payment tends to lose buying power over time due to inflation.

B Annuities offer a guarantee of income that will last for a client's lifetime. The other statements, while true, represent disadvantages of annuitization. Annuitization does limit liquidity and flexibility.

Under the Uniform Securities Act, all of the following are excluded from the definition of an investment adviser except A) broker-dealers and their agents. B) a person providing advice on municipal bonds. C) banks. D) a federal covered adviser.

B Providing advice on municipal bonds (even though they are exempt securities) does not entitle a person to an exclusion from the definition of an investment adviser.

Insurance agents frequently use a capital needs analysis to help determine the correct amount of life insurance needed by their clients. That analysis would look at all of these except A) the inflation rate B) life expectancy C) market volatility D) future earnings

C Can't predict the market, so why worry about it Of these choices, the only one that we cannot in anyway predict is market volatility. We can factor in an estimated inflation rate, project future earnings, and look at the mortality tables to obtain life expectancy. But nothing can project market volatility with any degree of accuracy.

Investors with a short time horizon most likely will invest in which class of mutual fund shares? A) Class B shares B) Class A shares, then convert to Class B shares C) Class A shares D) Class C shares

C Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares make them unattractive for short-term investors. Class A shares do not convert to Class B shares; it goes the other way.

If the dollar weakens, which of the following statements is true? A) The dollar buys more foreign currency. B) Foreign securities denominated in their domestic currency decrease in value to the U.S. investor. C) A rise in U.S. interest rates might strengthen the dollar. D) U.S. exports will fall.

C If U.S. interest rates rise, foreign investors would invest in U.S. dollar-denominated securities, thereby increasing the demand for dollars and causing the dollar to strengthen.

One of your clients purchases a European-style put option on a stock. The premium is $3 and the exercise price is $35. If the price of the underlying asset is $40 on the exercise date, the client has A) lost $200. B) made $200. C) made $500. D) lost $300.

D This option is out of the money and is therefore worthless. Remember, European-style options are exercisable only at expiration, and a $35 put is worth nothing unless the market price of the underlying asset is less than $35. As is the case with any long option position, the maximum loss is the premium paid.

Formula methods of investing that involve selling equities in rising markets and buying them in falling markets would include I)constant dollar plan II)constant ratio plan III)dollar cost averaging IV) DRIPs A) II and III B) I and IV C) III and IV D) I and II

D both a constant dollar plan and a constant ratio plan, the goal is to maintain a balance between equity and debt securities in the portfolio. This is done by selling equities as their price rises (the proportion has now changed) and buying equities when the prices fall to get back to the constant dollar or ratio. Both dollar cost averaging and dividend reinvestment programs (DRIPs) involve buying securities at regular intervals, not buying and selling based on the direction of the market.

Present value is a computation that is frequently used to determine the amount of a deposit needed now to meet a future need, such as a college education. If an investor uses an expected return of 8% but the actual return over the period is 10%, the future value will be A) higher than anticipated B) lower than anticipated C) the same as anticipated D) too varying to tell

A Present value is the amount deposited to meet a future goal based on an expected rate of return. If the return is higher than expected, the ending result will be greater (a good thing).

Which of the following is not associated with passive investment management approaches? A) The belief that the market can be timed B) Belief in the random walk theory C) Belief in efficient markets D) Use of index investing

A Proponents of passive-management approaches believe in the random walk theory (market movements are unpredictable) and efficient markets (any information that could affect a stock's value is quickly reflected in its price). As a result, they feel it is impossible to consistently beat the market.

A client owns 300 shares of BACH common stock in a margin account. The stock was originally purchased at a price of $40 per share and the Reg. T call was met. If the BACH is now selling for $50 per share, disregarding interest charges, the client's equity is now A) $9,000 B) $3,000 C) $1,000 D) $6,000

A Purchasing 300 shares at $40 per share is a total of $12,000. The Reg. T call of 50% requires a deposit of $6,000 with the remaining $6,000 the loan from the broker-dealer. If the market price of the shares increases to $50, the current market value of the account is $15,000. With a debit balance (the amount borrowed from the BD) of $6,000, the equity is $9,000. If you answered $3,000, you probably forgot the investor owned 300 shares, not 100.

John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? A) $130,000 B) $138,000 C) $122,000 D) $150,000

A The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for.

An investor would be unlikely to use internal rate of return to analyze the potential return for which of the following investments? A) Common stock B) Treasury notes C) Direct participation programs (DPPs) D) Municipal bonds

A The internal rate of return (IRR) is the discount rate that makes the future value of an investment equal to its present value. Because this computation involves the time value of money, in order to reasonably compute present value, there must be either a maturity date or some other kind of ending date, such as that which is usually projected in a DPP. Common stock has nothing comparable to that.

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a lagging economic indicator? A) Prime interest rate B) Nonagricultural employment C) Building permits (housing starts) D) Manufacturers' new orders for consumer goods

A The prime interest rate is a lagging indicator. Nonagricultural employment is a coincident indicator. The other two choices are leading indicators.

Mary bought 1,000 shares in the morning and sold 1,000 shares of the same security in the afternoon. Under the Securities Exchange Act of 1934's rules dealing with the regulation of the use of manipulative and deceptive devices, which of the following statements is true? A) She has violated the act only if she was trying to create market activity for the security to give a misleading appearance. B) Her broker has violated the act. C) She has violated the act. D) She has violated the act if a profit was made.

A The purchase and sale of the same security on the same day are permissible as long as the investor is not attempting to create the appearance of market activity. There is nothing in the act prohibiting "day trading"; only trading made for the purpose of manipulating market prices.

Although all new accounts must be approved by a designated supervisor before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be A) an IRA B) an options account C) a discretionary account D) a margin account

B Because trading options (puts and calls) generally involves a higher degree of risk than stocks, bonds, or mutual funds, a designated supervisory person with knowledge about options must approve the account opening.

Core inflation is best described as an inflation rate A) that includes food and energy prices. B) that excludes certain volatile goods prices. C) for producers' raw materials. D) the central bank views as acceptable.

B Core inflation is measured using a price index that excludes food and energy prices. The primary reason for that is the volatility of those two.

Among the reasons why a corporation might choose to utilize a deferred compensation plan for retirement planning would be A) compliance with ERISA B) employees who leave the company prior to retirement would not receive benefits C) the plans are nondiscriminatory D) current tax savings on money contributed to fund the plan

B Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited. These plans are discriminatory and there is no current tax saving, hence the term "deferred." As nonqualified plans, they do not have to comply with ERISA.

Which of the following agency securities is guaranteed by the U.S. government? A) Fannie Mae B) Freddie Mac C) Ginnie Mae D) Federal Home Loan Bank

C Only Ginnie Mae securities are backed by the full faith and credit of the U.S. government. Other agency securities have lines of credit at the Treasury, but this credit does not constitute a full guarantee.

If a technician believed in the importance of volume, which of the following would indicate bullish sentiment? A) Prices decrease on heavy volume. B) Prices increase on light volume. C) Prices increase on heavy volume. D) Prices decrease on light volume.

C Technicians watch volume changes along with price movements as an indicator of changes in supply and demand. A price increase on heavy volume relative to the stock's normal trading volume is interpreted as an indication of bullish activity.

A bond analyst notices that the yield spread between corporate bonds and government bonds is widening. This is typically predictive of A) an economic slowdown. B) an expanding economy. C) increasing interest rates. D) increased concern over the national debt.

A A widening yield spread shows that the difference in yield between corporate bonds and U.S. Treasury bonds is increasing. This is usually caused by a flight to quality, the pattern of investors moving their investments to the safety of Treasury securities. This is commonly felt to be a prediction of a future recession or economic slowdown. During a slowdown, interest rates generally decline.

Under the Uniform Securities Act, a consent to service of process must accompany which of the following? I) An agent's application for renewal of registration II) A civil complaint against a broker-dealer III) An agent's initial registration application A) III only B) II and III C) I only D) I, II, and III

A All initial applications for registration must be accompanied by a consent to service of process. This is not required for renewal applications.

A client of an investment adviser (IA) needs a bridge loan and approaches the IA to see if the firm is interested. Because the IA is not in the business of lending money, a special agreement is drawn up specifying the terms of the loan. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the loan A) could only be made after the advisory contract was terminated. B) could be made if the client was an institutional investor. C) could be made if the IA was affiliated with a bank. D) would not be permitted under any circumstances.

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

All of the following debt instruments pay interest semiannually except A) Ginnie Mae pass-through certificates. B) municipal revenue bonds. C) industrial development bonds. D) municipal general obligation bonds.

A Ginnie Maes pay interest monthly, not semiannually.

A person is excluded from the definition of investment adviser under the Investment Advisers Act of 1940 if the investment advice and reports are restricted to A) bank and insurance company securities. B) U.S. government securities. C) securities listed on a national stock exchange. D) foreign securities.

B Explanation Among the exclusions found in the act is one for persons whose advice relates exclusively to securities issued or guaranteed by the U.S. government.

One of the best sources of financial information is found in the reports required to be filed with the SEC by publicly traded companies. The easiest way to access this information is by A) writing a letter to the company. B) using EDGAR. C) making an appointment to meet with the company's CFO. D) visiting the SEC's offices.

B One of the best sources of financial information is found in the reports required to be filed with the SEC by publicly traded companies. The easiest way to access this information is by A) writing a letter to the company. B) using EDGAR. C) making an appointment to meet with the company's CFO. D) visiting the SEC's offices.

An interest in which of the following is a security under the Uniform Securities Act? I) Evidence of indebtedness II) Certificate of deposit for a security III) Oil and gas drilling program IV) Cattle feeding program A) II and III B) I, II, III, and IV C) III only D) I only

B The best strategy is to memorize the short list of things that are not securities rather than try to remember all of the things that are. An example of a certificate of deposit for a security is an ADR. Oil and gas drilling programs and cattle feeding programs are types of DPPs. A common example of an evidence of indebtedness is a bond or a debenture.

You have a 70-year-old client with a $500,000 whole life insurance policy purchased 25 years ago. The policy currently has a cash value of approximately $150,000. With all of the children on their own and successful, the client no longer feels the need for the insurance and asks you if there is any option that might result in netting more than surrendering the policy for its cash value. You might recommend A) keeping the policy because the cash value will continue to grow. B) canceling the policy but leaving the cash value with the insurance company with interest. C) engaging in a life settlement. D) using IRS Section 1035 to transfer the cash value into a deferred annuity.

C A life settlement involves selling an existing life insurance policy for an amount in excess of the cash value but less than the death benefit. Exact numbers are hard to compute without knowing all the details of the type of policy and health of the insured, but it would certainly be well above the $150,000 cash value. If the question indicates a terminally ill individual, the answer would be a viatical. An IRS Section 1035 transfer to an annuity will not put any additional cash in the client's hands.

The responsibility for administering the Investment Advisers Act of 1940 lies with A) FINRA. B) the Investment Advisers Association (IAA). C) the SEC. D) the Administrator.

C The Investment Advisers Act of 1940 is federal law, and that comes under the jurisdiction of the SEC.

A client of a broker-dealer who sold 200 shares of XYZ stock short, A) must repay the money borrowed to effect the short sale. B) might consider purchasing put options on XYZ as protection. C) is obligated to return the 200 shares borrowed. D) has a bullish outlook on XYZ stock.

C There is an old saying, attributed to the mid-19th century financier, Daniel Drew, "He who sells what isn't his'n, must buy it back or go to pris'n." It refers to short-sellers and their obligation to return the borrowed stock or have legal problems. This client's obligation is to return the borrowed shares. Short-sellers are bearish, not bullish. It is true that short sales must take place in a margin account, but there is no money borrowed, only stock. Protecting a short stock position is done with long calls, not puts.

Concerning index annuities and their method of crediting interest, which of the following is true? A) Point to point offers the best return when the market has had a single drastic decline during the period. B) Annual reset offers the best return regardless of market fluctuations. C) High-water mark with look back offers the best return during periods of high volatility. D) On average, annual reset has a higher participation rate than point to point.

C Using the annual high-water mark with look back will generally result in the highest return during periods of high volatility. The reason is because under this method, the highest anniversary value is used to determine the gain. In a volatile market, there is likely to be a high spike sometime during the period and that is the value used. The problem with point to point when there is a single drastic decline during the period is that the decline might occur at or just prior to the annual crediting computation. Annual reset does ignore the daily market fluctuations, but if the index is lower at the end of the year, there is nothing credited. In reality, annual reset has a lower participation rate than point to point.

Under the Securities Act of 1933, which of the following securities is required to register with the SEC? A) GNMA pass-through certificates B) Tupelo Mississippi Bridge revenue bonds C) 5-year Treasury notes D) Debentures of First Newtown Bank Holding Corporation

D Bank holding company securities are not exempt from registration requirements under the Securities Act of 1933. Treasury securities, agency securities (such as GNMA pass-through certificates), and municipal securities (such as revenue bonds) are exempt from registration requirements under the act.

An employer whose 401(k) plan complies with ERISA Section 404(c) is placing investment risk with A) the plan participant B) the Internal Revenue Service C) the plan fiduciary D) the Securities and Exchange Commission.

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

What is the proper course of action for the fiduciary of a trust that has a portfolio made up of 10% cash and 90% stock of one company that has recently experienced a 40% market gain? A) Maintain the current allocation if, while acting in the capacity of trustee, he believes it aligns with the goal of the trust B) Use the cash to acquire more shares of the stock C) Increase the cash position to 25% by taking some of the profits off the table D) Begin diversifying the equity portfolio

A In almost every trust question, the correct answer will be that the trustee (fiduciary) has to follow the terms of the trust and meet the trust's goals and objectives.

An advisory client of yours discusses a business project she is involved with where the partnership is using accelerated depreciation to maximize losses in the early years. It would be prudent of you to inform the client that A) accelerated depreciation could trigger the alternative minimum tax. B) a maximum of $3,000 in losses can be taken against ordinary income in any year. C) accelerated depreciation leads to a reduction in the partnership's cash flow. D) a maximum of $3,000 in losses can be taken against passive income in any year.

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

Under the Investment Advisers Act of 1940 (as amended by the NSMIA of 1996 and the Dodd-Frank Act of 2010), an adviser is required to be registered with the SEC if A) the adviser's advice relates solely to securities issued or guaranteed by the U.S. government. B) the adviser's clients are investment companies registered under the Investment Company Act of 1940. C) the adviser's clientele is exclusively federal credit unions and the adviser has less than $100 million in assets under management. D) the adviser is the publisher of a news magazine of general and regular circulation.

B Advisers to registered investment companies are required to be SEC-registered. Under the Advisers Act, as modified by the Dodd-Frank Act, advisers are exempt from SEC registration if they manage less than $100 million in assets and have no investment company clients. Persons are excluded from the Advisers Act definition of investment adviser if they are publishers of news or business/financial publications of general and regular circulation or if their advice relates solely to U.S. government securities.

When preparing a client profile, it is prudent to investigate the prospect's non-financial considerations. Included would be that client's: I) age. II) attitudes. III) experience with investments. IV) values. A) I and III. B) I, II, III, and IV. C) I, II, and IV. D) II and IV.

B These are included in the list of non-financial considerations when constructing a client profile.

Which of the following statements are not true? I) The kiddie tax applies to any income received by a child under the age of 19. II) IRAs have advantages over other estate assets when left to charity. III) Simple trusts have to distribute income annually. IV) For U.S. citizens, there is an unlimited marital estate tax deduction. A) I, II, III, and IV B) II, III, and IV C) I and II D) I, II, and III

C The kiddie tax applies to unearned income only such as that received in an UTMA account. Leaving IRA assets to a charity offers the same estate tax benefits as any other asset. Simple trusts must distribute income annually, and there is an unlimited marital estate tax deduction between spouses who are U.S. citizens.

An investor purchases 100 shares of Kapco stock at $50 per share. At the time of the purchase, the stock is paying a quarterly dividend of $0.25. The dividend increases 5% each year over the next five years. The purchaser sells the 100 shares five years after purchase for $82 per share. What is the total return for the investor over the five-year holding period? A) 74% B) 11% C) 10% D) 75%

D Total return includes capital appreciation plus income. The capital gain realized was $32 per share. The income was $1.00 per share (four quarterly dividends of $0.25) the 1st year, 5% higher the 2nd year ($1.05) and 5% higher each successive year. The total of the dividends received is $5.53. Adding that to the $32, we compute by dividing $37.53 by $50 resulting in a 75% total return.

What is the term used to describe a person on the floor of a stock exchange who stands ready to buy or sell shares of specified stocks? A) Arbitrageur B) Specialist C) Member D) Floor broker

B This is the basic definition of the specialist. If the question had said the over-the-counter market, it would have been a market maker. A more correct answer would be the DMM (designated market maker), but sometimes NASAA is slow to make changes. Although the specialist is a member of the Exchange, only a small number of members act as DMMs (specialists)

A customer in the 25% tax bracket bought 200 shares of ABC at $93 per share plus commission of $50. Considering the customer's cost basis, when she sold 100 shares six months later at $96 per share, less commission of $50, her after-tax net was A) $56.25. B) $300.00. C) $150.00. D) $168.75.

D Because the purchase and sale were of different lots, you must compute the net proceeds on a per share basis. Dividing the cost of $93 + commission of $0.25 ($50 ÷ 200 shares) gives you a total per share cost of $93.25. Selling for $96.00 - $0.50 ($50 ÷ 100 shares) = $95.50 proceeds per share. $95.50 - $93.25 = $2.25. $2.25 multiplied by 100 shares sold = $225.00. In a 25% tax bracket, this is a taxable short-term gain and 25% of $225.00 = $56.25. Therefore, her after-tax net was $168.75 ($225.00 - 56.25).

One of your clients wishes to invest in a fund of hedge funds. You could tell him which of the following? A) Shares of these funds are easy to redeem. B) He can expect to make a profit whether the markets trend up or trend down. C) These funds purchase a large amount of preferred stock. D) Expenses for these funds tend to be higher than those for other funds.

D Funds of hedge funds purchase interests in a variety of hedge funds, which typically use risky strategies to generate profit regardless of market direction. Redemption may be difficult with these funds, and the steps management must take to try to generate profits incur higher expenses than traditional mutual funds.

A policyowner could surrender a whole life insurance policy and choose from all the following except A) purchasing a reduced coverage whole life policy B) taking the cash value C) purchasing an extended term life policy D) transferring the policy to another person

D Life insurance policies are nontransferrable. Upon surrender, the cash value may be taken or used to purchase extended term insurance or a reduced value, paid-up, whole life policy.

Included in the Uniform Security Act's definition of an exempt transaction would be any transaction by any of the following except A) a trustee of an irrevocable trust. B) a trustee in bankruptcy. C) a guardian. D) a marshal.

A Although the term trustee is found in the list of persons engaged in exempt transactions, the USA limits it to trustees in bankruptcy.

An investor in a high tax bracket who invested in a DPP should have which of the following characteristics? I) Need for tax benefits II) Substantial liquid assets III) Ability to identify both risks and merits of the program IV) Ability to commit money for a long time A) I, II, III, and IV B) II, III, and IV C) II and III D) I and II

A DPPs are appropriate for investors who can benefit from substantial tax deductions or credits, are not bothered by illiquidity, understand the business risks and benefits involved, and can stay in the program until completion.

An investor purchases a Treasury note and the confirmation shows a price of $102.25. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $102.25. B) $1,027.81. C) $1,020.25. D) $1,022.50.

B Treasury notes are quoted in 32nds, where each 32nd equals $0.3125. The 102 in the quote equals $1,020 and the 25/32 is an additional $7.81, bringing the total to $1,027.81.

An investor purchased a bond with a 6% coupon rate exactly three months after its most recent interest payment. As a result, I) the buyer will pay $15 accrued interest. II) the buyer will receive $15 accrued interest. III) the seller will pay $15 accrued interest. IV) the seller will receive $15 accrued interest. A)I and III B) II and III C) II and IV D) I and IV

D First of all, a 6% bond pays $30 semiannually (half of $60 per year). Therefore, the accrued interest on this bond purchased halfway between interest payments is half of $30 or $15. That $15 dollars is added to the purchaser's cost and will be paid to the seller as it represents the interest the seller earned for holding the bond for three months. At the next interest payment date, the purchaser will receive the full $30 payment representing the accrued interest paid to the seller plus the interest earned for the three months the purchaser held the bond.

Jasper is considered an affiliated person of the Tahor Clean Energy Mutual Fund. Under the Investment Company Act of 1940, Jasper is prohibited from all of the following except A) being elected to the fund's board of directors. B) selling stock to the fund for its portfolio. C) buying securities from the fund's portfolio. D) borrowing from the fund (money or property).

A There is no problem with an affiliated person being elected to the fund's board of directors. Under the act, as many as 60% of the board members may be affiliated persons (the law states that at least 40% must be noninterested parties). Affiliated persons may not have any dealings with the investment company (outside of contractual obligations and the purchase or redemption of shares of the investment company), such as buying securities, furniture, real estate, or other property from the company or selling such property to the company.

An investor purchases a 6% callable senior lien mortgage bond at par. Exactly two years later, the bond is called at 102½. The investor's total return is A) 14.5%. B) 8.5%. C) 9.5%. D) 7.25%.

A Total return consists of income plus gain. Buying this bond at par and having it called at 102½ ($1,025) results in a $25 gain. With a 6% coupon, there will be four semiannual interest payments of $30 in a two-year holding period. Adding the $25 + $120 = $145 total return on an investment of $1,000 which = 14.5%. Please note that the question didn't ask for the annualized rate of return. That would be approximately 7.25% per year.

A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use? A) Simple trust B) Charitable remainder trust C) Charitable lead trust D) Complex trust

D Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.

Which of the following statements regarding the time value of money is not correct? A) Future value of an ordinary annuity is the future amount to which a series of deposits of equal size will increase. B) Future value is the future amount to which a sum of money today will increase on the basis of a defined interest rate and period. C) Compound interest is interest earned on the initial investment. D) Compound interest is interest earned on interest.

C Compound interest is interest earned on interest that has been added to the original principal. For example, $1,000 earning 5% compounded annually earns $50 the first year and then 5% of $1,050 or $52.50 the 2nd year.

Which of the following is not an exempt transaction as defined in Section 402 of the Uniform Securities Act? A) Corporate bond sale to an insurance company B) Sale of XYZ common stock, traded on the OTCQB, to an individual investor by the executor of an estate C) Isolated sale of a corporate bond on behalf of the bond's issuer D) Sale of common stock by the county sheriff at the request of the state securities Administrator

C First of all, don't panic when you see a section number—just answer the question based on the specific topic—in this case, the definition of an exempt transaction. An isolated sale of a corporate bond on behalf of the bond's issuer is not exempt. Under the USA, only isolated nonissuer transactions are exempt. In this question, the transaction is on behalf of the issuer, so this transaction is not exempt. The sale of a corporate bond to an insurance company is the sale of a security to a financial institution; this is an exempt transaction. A sale of common stock by the executor of an estate or by the county sheriff is considered a fiduciary transaction and is exempt, regardless of the client or the type of security.

Written discretionary authorization is not required for an agent to choose which of the following order instructions? I) Security to be bought or sold II) Number of shares to be bought or sold III)Time of execution IV) Price of execution A)I and II B)II and IV C)III and IV D)I and III

C If an agent chooses price or timing of an order only, that order is not a discretionary order, and a written discretionary authorization is not required. To be discretionary, the agent must choose one or more of the following: the action (buy or sell), the asset (the specific security), or the amount (number of shares).

The Uniform Securities Act (USA) considers certain securities to be exempt from the registration requirements of the act. Under the USA, which of the following is an exempt security? A) Preferred stock B) Corporate bonds C) Equipment trust certificate issued by a railroad that is regulated by a state's regulatory body D) Commercial paper with a term of more than one year

C Several types of securities are specifically exempt under the act, including equipment trust certificates issued by a state-regulated or federally regulated railroad. High-quality (receives a rating in one of the three highest rating categories from a nationally recognized statistical rating organization) commercial paper is exempt if the term is nine months or less and it is issued in denominations of $50,000 or more.

A customer has just died. If his wife asks you what amount of federal estate tax will be imposed on the transfer of their personal property to her name, which of the following responses would be best? A) The amount may be prorated over the next four years. B) The amount of tax will depend on the size of the estate to be transferred. C) Consult a qualified tax specialist. D) The amount of tax will depend on your late husband's tax bracket.

C Specific tax advice should be referred to a qualified tax adviser such as an accountant or tax attorney. No federal estate tax is imposed as a result of the marital exclusion as long as the spouse is a U.S. citizen.

One of your clients just inherited some money and wishes to invest $250,000 into the GEMCO International Equity Fund. The client is attracted to the Class B shares because there is no up-front sales charge on them, while the Class A shares have a 3% front-end load. The appropriate response would be that A) you feel so strongly that the Class A shares represent a more attractive solution for the client that you will rebate your share of the commissions. B) as long as the client will hold the Class B shares no longer than four years, the higher 12b-1 fees will be much less than the load paid on the Class A shares. C) the client is doing the smart thing by avoiding the sales charge, even though you will be losing out on the opportunity to earn a nice commission. D) because of the higher 12b-1 charges levied against the Class B shares as well as the CDSC, Class A shares are recommended for a purchase of this size.

D In the real world, there is probably no fund group that would accept a $250,000 order for Class B shares; more than likely, no fund group would even accept one above $100,000. That is because at that level, the reduced front-end load available on the Class A shares due to reaching a breakpoint, combined with the lower (or lack of) 12b-1 charge and no redemption charge (CDSC), makes them a better deal than the Class B shares. Rebating of commissions is not permitted, and even at the four-year holding period, there still is a CDSC.

One of the rights of being a common stockholder is the ability to vote on important corporate matters, such as the election of members to the board of directors. The date that determines which shareholders are eligible to vote is A) the last day of the company's fiscal year. B) the election date. C) the ex-dividend date. D) the record date.

D The record date is a date announced by the company as the official date you must be an owner on the company's records in order to participate in the annual meeting and corporate election. A fact not tested is there is no standard regarding how far in advance of the voting date this should be other than it must be at least the normal settlement period, currently two business days.

Which of the following is not exempt from registration as an investment adviser representative in the state in which they conduct business? I) A CERTIFIED FINANCIAL PLANNER™ who, while affiliated with a broker-dealer and an investment adviser, prepares comprehensive financial plans and whose only compensation is commissions generated from the purchase of recommended securities II) An insurance agent affiliated with the company's advisory division, who prepares comprehensive financial plans and receives compensation only on insurance products purchased by his clients III) A broker-dealer with extensive business in the state IV) A mutual fund company with offices and clients in the state A) I and II B) III and IV C) I, II, III, and IV D) I only

A A CERTIFIED FINANCIAL PLANNER™ (CFP®) who prepares comprehensive (the exam could say detailed) financial plans and is compensated by the commissions earned when the customer purchases the recommended securities must register in the state as an investment adviser representative of the advisory firm. This is considered indirect compensation because the regulators take the stance that the CFP® would not go through the effort to prepare the plan (which contains securities advice) without receiving the compensation from the trades. Note that the CFP®is affiliated with both a broker-dealer and an investment adviser. That's how the CFP® can earn commissions on the securities sales. An insurance agent affiliated with an investment adviser, who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the USA.

A pooled investment fund buys all the shares of a publicly-traded company. The fund takes the company private, reorganizes the company, and replaces its management team. Three years later, the fund exits the investment through an initial public offering of the company's shares. This pooled investment fund is best described as A) a private equity fund. B) a hedge fund. C) a leveraged ETF. D) a venture capital fund.

A A private equity fund or buyout fund is one that acquires entire public companies, takes them private, and reorganizes the companies to increase their value. A hedge fund will rarely get involved with reorganizing an existing company. Venture capital funds invest in start-up companies. Leveraged ETFs do not take part in the management of their investments.

A state-registered investment adviser offers wrap fee programs to certain clients. Which of the following statements about wrap fee arrangements is not true? A) Because this investment adviser offers wrap fee programs, it must make certain annual disclosures to the SEC. B) Nonmaterial changes to wrap fee programs must be disclosed to the Administrator within 90 days of fiscal year-end. C) Material changes to wrap fee programs must be filed promptly with the Administrator. D) Information in Appendix 1 of Form ADV, Part 2A must also be contained in client disclosure documents.

A As a state-registered investment adviser, all filings are with the Administrator, not the SEC. In the case of wrap fees, the form used is Appendix 1 of Form ADV, Part 2A. Every investment adviser, state-registered or federal covered, must update the information on file within 90 days of the end of the adviser's fiscal year. One of the most important parts of this is the annual updating amendment regarding eligibility to register with the SEC or remain state-registered. Even nonmaterial information is included. However, the customer brochure, or a summary, needs to be delivered only if there are material changes.

Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A) $6,500 long-term capital gain. B) $2,500 long-term capital gain plus $1,000 short-term capital gain. C)$4,000 long-term capital gain. D)$6,000 long-term capital gain plus $500 short-term capital gain.

A Gifted stock carries the donor's cost basis. In this case, 100 shares at $10 per share is $1,000. The stock split means there are now 200 shares, but that doesn't change the total cost basis. When that stock is sold at $35 per shares, the proceeds of $7,000 exceed the cost basis by $6,000, all of which is long-term capital gain. Inherited stock receives a stepped-up basis. That is, the cost basis is at date of death. In this case, the cost per share is $30. When that 100 shares is sold at $35 per share, a $500 profit is realized. In one of the quirks in the Internal Revenue Code, stock received as an inheritance always has a long-term holding period, even when, as in this question, the actual holding period was short-term. Adding the $6,000 of gain from the gift and the $500 of gain from the inheritance gives a total of $6,500 long-term capital gain.

When opening an account at a broker-dealer, if the most recent copy of the firm's fee schedule is not available, NASAA recommends that the client A) not place any assets in the account until it is provided. B) select another broker-dealer and open the account there. C) promptly notify the Administrator of the firm's failure to comply. D) go ahead with the account opening but refrain from trading until its receipt.

A It is proper for fees to be disclosed at the time a customer account is opened. If not presented, clients should ask for the fee schedule and make sure it's up to date. If it is not readily available, clients should not place any assets into the account until it is provided. NASAA believes that clients have the right to know the fees in advance.

The capital asset pricing model (CAPM) is based on several limiting assumptions. Which of the following statements is correct regarding the CAPM? A) The CAPM assumes that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios. B) The CAPM assumes that investors' expectations regarding risk and return are not identical but normally distributed. C) The CAPM does not assume that the expected excess returns for the market are known. D) The CAPM does not assume that investors have access to the same information.

A The CAPM assumes that investors should construct a portfolio with the highest Sharpe ratio because that offers the highest risk-adjusted return. It also assumes that the expected excess returns for the market are assumed to be known in that investors have access to the same information. As well, it assumes that returns are normally distributed and investors' expectations for risk and return are identical.

All of the following factors have an inverse relationship to a bond's duration except A) time to maturity. B) coupon rate. C) current yield. D) yield to maturity.

A The relationship between the time to maturity (length) and duration is a linear one. That is, the longer the time until the bond matures, the higher (longer) the duration - it is a direct relationship. Yields, on the other hand, have an inverse relationship with duration. That is, the higher the yield, the lower (shorter) the duration. An example would be comparing a bond with an 8% coupon rate to one with a 6% coupon rate. All other things beging equal, the bond with the 8% coupon rate will have a shorter duration than the one with a 6% coupon; the relationship is inverse rather than linear.

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

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

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) liquidity risk B) inflation risk C) systematic risk D) business risk

A) A portfolio of listed common stocks will have little to no liquidity risk because 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. Historically, common stock has offered protection against inflation. There are no guarantees, but a portfolio consisting largely of common stock is the most likely to keep pace with the rising cost of living.

Howard is an investment adviser representative with Hughes & Company, a state-registered investment adviser having its principal office in State O and offices in States P and D. Howard works out of an office in State P and has 4 retail clients there. In addition, Howard has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Howard would be required to register as an investment adviser representative in A) States D and M. B) States P, D, and M. C) State P. D) States P, D, M, and O.

B Individuals working as IARs for state-registered investment advisers must register in any state in which they (the IAR) maintain a place of business, as well as any other state in which they serve more than five retail clients (the de minimis exemption). With an office in State P, registration is required there, regardless of the number of clients. In both States D and M, the de minimis has been exceeded, so registration is required there. The fact that the IA's principal office is in State O has no bearing on Howard, and with only one retail client there, he qualifies for the de minimis exemption.

Which of the following securities of Synergy, Inc., an issuer whose stock trades on the Nasdaq Stock Market, does not have an exemption from registration with the state? A) Synergy, Inc., senior bonds B) Synergy's oil and gas limited partnership units (Synergy, Inc., is the general partner) C) Synergy, Inc., preferred stock D) Synergy, Inc., debentures

B Synergy's oil and gas limited partnerships are not issued by Synergy, Inc.; Synergy is only the general partner. The oil and gas partnerships are issued by separate legal entities; they do not have the blue-sky exemptions. They must be registered in the states in which they are sold, unless they have some other exemption. Any security equal or senior in claim to an exempted common stock is exempted as well. The company's preferred stock, senior bonds, and debentures all have blue-sky exemptions from state registration because the company's common stock is traded on the Nasdaq Stock Market.

The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax through the use of various tax preference items. Those preference items are added back to the taxpayer's ordinary income on IRS Form 6251 and would include A) long-term capital gains in excess of $3,000 annually. B) interest received from specified private-purpose municipal revenue bonds. C) straight-line depreciation taken on investment real estate. D) intangible drilling costs in connection with an oil drilling program.

B The Internal Revenue Code provides that interest on specified private activity bonds is an item of tax preference. Therefore, this interest must be added to a taxpayer's regular taxable income in order to compute the taxpayer's AMTI. Accelerated depreciation and excess intangible drilling costs are preference items. In the real world, it is not only those with high incomes that are caught by the AMT, but the exam is not likely to go that deep.

Annuity companies offer a variety of purchase options to owners. Which of the following definitions regarding these annuity options is not true? A) A periodic payment deferred annuity allows a person to make periodic payments over time; the contract holder can invest money on a monthly, quarterly, or annual basis. B) A single premium deferred annuity is a lump sum investment, with payment of benefits deferred until the annuitant elects to receive them. C) An accumulation annuity allows the investor to accumulate funds in a separate account prior to investment in an annuity. D) An immediate annuity allows an investor to deposit a lump sum with the insurance company; payout of the annuitant's benefits starts immediately (usually within 60 days).

C Accumulation does not refer to a purchase option. The pay-in period for an annuity is known as the accumulation stage. A single premium deferred annuity is an annuity with a lump-sum investment, with payment of benefits deferred until the annuitant elects to receive them. Periodic payment deferred annuities allow a person to make periodic payments over time. Immediate annuities allow an investor to deposit a lump sum, with the insurance company payout of the annuitant's benefits starting immediately (usually within 60 days).

A Canadian broker-dealer is registered in Province Q. The firm has clients who vacation in several New England states, and they would like to continue to do business with them while on their holidays. Under the Uniform Securities Act, A) the broker-dealer may only accept unsolicited orders from their existing clients while they are vacationing in the United States. B) this would only be permitted if the trades were executed through an affiliated domestic broker-dealer who is licensed in those states. C) this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states where their clients are vacationing. D) this is permissible only if the broker-dealer is registered with the SEC.

C Canadian broker-dealers and their agents must be registered in any state in which they wish to do business with exisiting clients who are temporarily in the state. The Uniform Securities Act provides for a form of limited registration for Canadian broker-dealers wishing to do business with their clients who are vacationing or otherwise traveling through the United States. In order to qualify for the limited registration, the broker-dealer must be properly licensed in its home province and its only dealing in the states is with an existing client.

A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among five different mutual funds within two fund families, as opposed to purchasing just one fund. Consequently, the agent made the following purchase recommendations: XYZ Emerging Growth Class B $495,000 XYZ Research Class B $310,000 XYZ Investors Growth Stock Class B $495,000 ABC Capital Enterprise Class B $495,000 ABC Capital Opportunity Class B $310,000 Total $2,105,000 These recommendations are A) unsuitable because the investments are not equal in amount. B) suitable because the customer fully understands all of the ramifications and is satisfied. C) unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near zero percent. D) suitable because they achieve the diversification the customer seeks.

C Class A shares, in most mutual funds, provide breakpoint sales charge discounts, so there is no sales charge when purchasing $1 million worth of shares (or less in some cases). Class A shares also have lower operating expenses than Class B shares. This retired investor would be subject to back-end loads with Class B shares if the funds were needed unexpectedly within a few years.

Which of the following are exempt securities under the Uniform Securities Act? I) Common stock, not listed on any regulated exchange, purchased by an open-end investment company registered under the Investment Company Act of 1940 II) Preferred stock issued by an insurance company authorized to do business in this state III) Municipal bonds issued by Toronto, Ontario IV) Private placements A) I and III B) I and II C) II and III D) II, III, and IV

C Common stock not listed on any regulated exchange and purchased by an open-end investment company is an exempt transaction, but that common stock is not an exempt security. Securities issued by insurance companies and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to do business in this state is exempt. Qualifying private placements are exempt transactions, not exempt securities.

The SEC requires that reporting companies (those registered with the SEC) file certain information within specified time limits. Which of the following reports carries the shortest time limit? A) Annual report B) Form 10-K C) Form 8-K D) Form 10-Q

C Form 8-K is used to report newsworthy events to the SEC, thereby making them available to the public. These reports must be filed within four business days of the event. Form 10-Q is a quarterly report and, depending on the size of the company, is filed within 40 to 45 days of the end of the quarter. Form 10-K is the annual report, and once again, the filing time depends on the size of the company and ranges from 60 to 90 days after the end of the fiscal year. The annual report is technically Form 10-K, although most major corporations publish an additional expanded document with pretty pictures and other information about the company.

A person providing which of the following services to an ERISA plan would be performing in a fiduciary capacity? A) Changing the level of employer contributions B) Determining the age at which benefits are to be provided C) Selecting and monitoring third-party service providers D) Amending the plan

C The issue here is the distinction between fiduciary functions and something called settlor functions. ERISA defines fiduciary not in terms of formal title but rather in functional terms of control and authority over the plan. ERISA provides that a person is a fiduciary with respect to an employee benefit plan to the extent that such a person does any of the following: exercises any discretionary authority or control over the management of a plan or over the management or disposition of plan assets; renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of such plan; or has any discretionary authority or discretionary responsibility in the administration of such plan including appointing other plan fiduciaries or selecting and monitoring third-party service providers. The other choices given in the question are known as settlor functions. The most common settlor functions are design decisions involving: establishment of the plan, defining who are the covered employees and benefits to be provided, and amending or terminating the plan. Because the likelihood of an IAR ever performing settlor functions is quite remote (usually they are done by employees of the sponsoring employer), I cannot fathom why NASAA would ask something like this on the exam, but, just in case.

A new client indicates a desire to avoid investing in mid-cap stocks because of large losses suffered several years ago. What type of consideration would this be? A) Unsystematic B) Financial C) Systematic D) Nonfinancial

D Consideration!! those are financial and non-financial. Unsystematic and Systematic are risks!! There are 2 basic investment considerations, financial and nonfinancial. The former deals largely with quantifiable items and the latter with attic attitudinal ones. Wanting to avoid a certain type of asset is generally considered to be attitudinal. The fact that the mid-cap stocks lost money is probably a systematic risk, but that isn't what the question is asking.

There are a number of exclusions from the definition of investment adviser. Which of the following would not qualify for an exclusion under the Uniform Securities Act? A) A financial planner who conducts seminars for the local PTA, where he presents the benefits of term life insurance B) A lawyer who charges an hourly fee for preparing trust documents for individuals referred to her by an investment adviser C) An accountant who conducts seminars on the tax benefits of contributing to IRAs, both traditional and Roth D) A teacher at the local high school who receives nominal compensation for giving investment advice to engineers

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

Mr. Adam Samuels suffers a massive heart attack and dies at the age of 62. As part of his estate, there is an IRA with a current value of $170,000. A review of the IRA documents reveals that Mrs. Eve Samuels, the wife, is the primary beneficiary and their 2 children have been named as contingent beneficiaries. Eve is 50 years old and does not need the income from the IRA and would like to preserve the IRA for her children to inherit. Which of the following steps would you recommend Mrs. Samuels take? A) Cash in the IRA because as a spouse of a deceased, she will avoid the 10% tax penalty. B) Disclaim the IRA and let it pass to the contingent beneficiaries. C) Execute a rollover into an inherited IRA. D) Execute a rollover into an IRA in her name.

D This is a highly complicated question and there is room for disagreement. However, if a question similar to this were to appear on your exam, the answer selected is the one that NASAA would mark as the correct one on its test. The key to this question is the word "preserve." By executing a rollover into an IRA in her name, tax deferral of the assets continues and RMDs are not required until after Mrs. Samuels turns 72. Thus, the assets are preserved for at least 20+ years. If she took the distribution, she would not have to pay the penalty tax, but there would be ordinary income tax due and this would not meet her objective of preservation of the IRA. If she disclaimed, the assets would then go to the children, but they would have to begin taking RMDs over a 10-year period. Not a bad choice, but the assets are being distributed and taxed, not preserved. The benefit of rolling over into an inherited IRA (sometimes called a beneficiary IRA) instead of one in her own name is that she can begin taking distributions right now without the 10% penalty, even though she is only 50. However, the question stated that she did not need the income, and RMDs must begin at the time they would have been required for Mr. Samuels, 12 years earlier than if she chooses to rollover into her own IRA.

Registration with the state as an investment adviser would be required for a person with an office in this state who A) serves as a pension consultant to the XYZ Employees Retirement Plan, covering 1,200 employees with total assets of $278 million. B) manages the portfolio of the KPF Balanced Fund, a registered open-end investment company with $22 million in net assets. C) only gives advice on securities issued by or guaranteed by the government of the United States. D) manages $13 million in assets for four clients.

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

One of your clients has a margin account. There is a drop in the value of the stock owned in the account, and additional funds are required based on the terms of the firm's margin agreement. This would be known as A) a sellout B) a margin call C) a Regulation T call D) a house call

D When additional funds are required, it is known as a house or maintenance call. If based on the firm's stricter requirement, it is a house call; if based on the requirement of the SRO, it is a maintenance call. The initial or Regulation T call (the margin call) occurs at the time of the purchase. If any call for funds is not met, then there will be a sellout. Remember the three important margin terms: Margin call: Set by the Federal Reserve Board under Regulation T. This is the initial 50% deposit required when purchasing securities on margin. Minimum maintenance: Set by the SROs. This is the minimum equity that must be maintained in a margin account. Should the equity fall below the minimum required, a maintenance call (sometimes called maintenance margin) will go out demanding an immediate deposit of enough equity to bring the account above the required level. House maintenance: Set by the individual broker-dealer firm. As a cushion, and to reduce the possible sellout caused by failure to meet a maintenance call, most firms set a minimum equity level above the SRO minimum. Falling below this amount triggers a house call.

Which of the following is not related to the variability of a portfolio's returns? A)Market timing B)Asset allocation C)Security selection D)Total return

D Let's analyze the question. A portfolio's future returns can vary, that is, fluctuate based on investment decisions made by the investor or adviser. The way the portfolio assets are allocated between different classes of securities will have an impact on the returns. The same is true with the timing of purchases or sales (buying stock when bad economic news is announced is probably not a good time). Finally, the specific securities selected will certainly impact the returns of the portfolio. That leaves total return. Total return is a measurement of the investor's past return on the portfolio. It measures what has happened and has no effect on future variability.

A significant increase in the importing of goods into the United States would likely have what effect on the strength of the U.S. dollar? A) Strengthen B) Fluctuation both ways C) Weaken D) No effect

C Currency rates tend to ebb and flow as the balance of payments shift from positive to negative. A significant increase in imports represents a large outflow of U.S. dollars, which results in a negative trade balance. As this builds, the value of the dollar falls against those currencies that have a positive trade balance.

Which of the following statements accurately captures the significance of the Sharpe ratio? A) Its use is limited to portfolios rather than individual securities. B) It measures the degree to which the fund's performance can be attributed to the index against which it is benchmarked. C) It measures the dispersion of the fund's returns over a period of years. D) The higher the Sharpe ratio is, the better the risk-adjusted performance of the portfolio.

D The Sharpe ratio measures the fund's return over and above the risk-free rate. The higher the Sharpe ratio, the better the risk-adjusted performance of the portfolio and the greater the implied level of active management skill.

A TIPS bond pays interest at the rate of 4%. If the annual inflation rate is 5%, what is the principal value after the fourth year? A) $1,200.00 B) $1,169.86 C) $1,171.66 D) $1,218.40

D A TIPS bond's principal increases every six months based on the inflation (not the coupon) rate. An annual inflation rate of 5% means the adjustment every six months is 2.5% of the principal. At the test center, enter $1,000 and then multiply by 102.5%. Take that result and continue to multiply by102.5% a total of eight times (there are eight six-month periods in four years). If you remember our shortcut, you simply take the annual inflation rate, multiply that by the number of years, and then take that percentage of the $1,000 par value. That would be 5% × 4 years = 20% of $1,000 = $200 principal adjustment. That would make the principal $1,200, and we said to take the next highest answer and that will be correct.

An agent's recommendation for the purchase of a municipal security to a customer who wants fixed income and is in a relatively low tax bracket would in most cases be I) unsuitable and unethical II) a securities felony III) grounds, in extreme cases, for suspension or revocation of the agent's license IV) outside regulatory jurisdiction A) I and III B) I only C) II and III D) IV only

A Municipal bonds provide a fixed income, but they are generally suitable only for high-tax-bracket individuals. In this case, such a recommendation is probably unethical and could result in suspension or revocation of the registered agent's license. For test purposes, municipal bonds are a suitable recommendation only when the question indicates that the client is in a high tax bracket. The words high tax bracket or low tax bracket will be used; don't look for a specific percentage.