Series 66 Benchmark exam wrong questions
An Administrator may deny or revoke a registration if he finds a broker/dealer I. is insolvent II. has no agents in its employ III. was convicted of a felony 9 years ago IV. is under an injunction from another state
I, III and IV For an Administrator to deny or revoke a registration it must have 2 reasons to do so, with one of the reasons being that it is in the public's best interests. Reasons include insolvency (meaning the firm cannot meet its financial obligations), conviction of a securities or money related crime within the last 10 years, or if another state prohibits the firm from participating in the securities industry. There is no specific rule that authorizes the Administrator to deny or revoke a registration if it does not employ any agents.
Registered agents employed with a broker/dealer registered in California regularly mail sales material to 4 clients in Oregon. The California broker/dealer I. need not register in Oregon until it has 5 or more clients in Oregon II. must register in California III. must register in Oregon IV. must register in all states from which it receives any mail from clients
II and III Broker-dealers are required to register in the state if they have an office in the state or if they have a single resident client in the state, without exception. Note that Investment Advisers can avoid registration in a state if they do not have an office in the state and have fewer than 6 retail clients in a given year.
According to the Uniform Securities Act, agents may I. act as custodian of a customer's funds and securities II. share commissions from the purchase or sale of securities with any agent registered as an agent for the same broker/dealer, or for a broker/dealer under direct or indirect common control III. share in the profits and losses of an account with written consent of the client and confirming authorization from a principal of the broker/dealer IV. imply that a conservative investment strategy will guarantee a specific investment result will be achieved
II and III Permissible activities of a broker-dealer include sharing commissions in the same office to build the most effective team for a given client. It also includes sharing in the profits and losses in a customer's account, ONLY with the permission of the firm and the client. Agents may never guarantee a client a specific result. Also, broker-dealers maintain custody of client funds and securities, not agents.
Which of the following is NOT a violation of the Uniform Securities Act? I. An investment advisory partnership admits an economist to a major partnership position without announcing the appointment to the general public or communicating the change to clients who invest funds with the partnership. II. An investment advisory partnership severs a majority partner from the firm without informing the general public or clients who invest funds with the partnership. III. A brokerage corporation that manages client funds on a discretionary basis hires a prominent portfolio manager to oversee discretionary accounts without informing clients or the investing public. IV. An investment advisory partnership assigns accounts to another firm when the accounts fall below a minimum level. The assigned accounts are informed of the assignment by the new investment adviser.
III The Uniform Securities Act requires that clients be notified of a change in minority interest within a partnership. It also requires that clients consent to maintaining their accounts upon a change of majority interest in a partnership. Also, client's accounts cannot be assigned to other investment advisers without consent prior to doing so.
Which of the following are true about the trusted contact person listed on a customer's new account form? I. It is required for all new accounts II. It is required for all new accounts of customers age 65 or older III. A firm may contact the trusted contact person to disclose potential financial exploitation of the customer IV. A firm may contact the trusted contact person to confirm the customer's current health status, mental capacity, and legal guardianships
III and IV Customers of all ages are able, but none are required, to provide firms with a trusted contact person when opening a new account (a trusted contact can also be added after account opening). Firms are then authorized to communicate with the trusted contact and disclose account information in certain circumstances, such as possible financial exploitation, elder abuse, or fraud. In addition, the trusted contact can confirm the account holder's current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney. The intent of a trusted contact person is to help protect the investor, with an emphasis on those age 65 and older.
A client inquires about the liquidity risk associated with pooled-investment vehicles. An adviser could accurately state each of the following except
Mutual funds have liquidity risk because they cannot be sold between willing buyers and sellers or on exchanges. While it is true that mutual funds cannot trade directly between investors or on exchanges, they are required by law to be redeemable by the mutual fund company at the NAV. Because the fund is required to redeem its shares, investors in mutual funds do not have liquidity risk. Each of the other statements is true.
A client would like assistance evaluating a hedge fund's performance results. The fund returned 8% which doubled its benchmark index's 4% annual return. Targeting aggressive investors, the fund highlighted its beta of 2.5. Which of the following statements best describes the fund's performance?
Negative alpha of -2.0 and underperformed given the risk taken. This fund manager generated negative alpha of 2.0. Based on the fund's beta of 2.5 the risk-adjusted return should have more than doubled the market. alpha = (portfolio return) (beta x market return) = (8%) - (2.5 x 4%) = (8%) - (10%) = -2.0 *Note that the risk-free rate was not given and can therefore be excluded from the analysis.
Under the Uniform Securities Act or the North American Securities Administrators Association (NASAA) statements of policy, which of the following would NOT be a fraudulent or prohibited action by an investment adviser?
Not providing the Administrator with a surety bond because the adviser does not maintain custody or exercise discretion over client assets Investment advisers are only required to post a surety bond when they maintain custody or have discretionary authority. A surety bond allows customers to collect against the bond if their assets are stolen by the firm or its employees. If the firm does not maintain custody or have discretion, there is no risk of theft, and thus no surety bond is required. For the first choice, while it is true that Federal Covered Securities are exempt from state registration, they are never approved by the SEC. The SEC clears securities for public distribution.
Which of the following statements regarding withdrawal of registration by broker/dealers is NOT true?
Once a broker/dealer withdraws its registration, it may not reregister in the future. A broker-dealer may withdraw their registration with the Administrator when it wishes to leave the business. Withdrawal of a registration does not imply wrongdoing, nor does it preclude the firm from registering again at some point in the future. Withdrawal of a registration will not however, shield a firm from investigation or disciplinary action. The Administrator can initiate disciplinary proceedings for up to 1 year after the firm has withdrawn their registration.
An elderly investor covers living expenses with the income produced from her diversified long-term bond portfolio. Most of the bonds were purchased 3-5 years ago, when interest rates were higher than they are today. The investor is concerned that the prevailing market rates may impact her investments and ability to maintain her standard of living. All of the following are true statements except
Quotes for her bonds would show a yield to maturity that is above their nominal yield. A portfolio of bonds purchased when interest rates were higher than they are now will be premium bonds (e.g. the purchased bonds pay 6% and similar bonds are now being issued at 4%). The portfolio's bonds, however, will continue to pay the same fixed coupons until they mature, regardless of prevailing interest rates. The risk that will be faced is reinvestment rate risk as the coupons will need to be redeployed into a market that is offering lower returns. Answer choice(D) is incorrect in that the premium bonds will show yield to maturity quotes that are lower than their nominal yield because the bonds will be priced above par.
A client is well-diversified across domestic and international stocks and bonds but is interested in exploring other asset classes. In presenting opportunities to consider, an adviser would most likely make which of the following statements?
Real estate can generate rental income and depreciation expenses. Investments in real estate assets (buying residential, commercial or other real property) can produce investment income in the form of rental payments as well as depreciation expenses. Depreciation is a tax deduction allowing for the recovery of the cost for the wear and tear, deterioration, or obsolescence of the asset. Precious metals are speculative as their value is based on what others will pay for the commodity. They do not generate cash flow or provide depletion expenses. Oil and gas DPPs are illiquid investments (which is why this choice is wrong), but they do provide for depletion expenses (depletion is the using up of natural resources by mining, drilling, or cutting timber). Precious metal ETFs are pooled investments that allow for exposure to precious metals but in liquid exchange-traded securities. Unlike actual metal they do not carry high storage or transaction costs (owning ETFs is just like owning stocks).
Which type of entity provides for pass-through taxation, unlimited personal liability, and files its business information on a schedule C?
Sole proprietor A sole proprietor is the simplest business structure but offers no limitation to the owner's personal liability. All the business's income is reported on Schedule C of the owner's personal tax return (Form 1040), operating as a pass-through and avoiding any corporate income tax.
An investment adviser has built a robust and seasoned team of experienced investment professionals. Each member of the team brings unique analysis and insight to the overall group who collectively weigh the evidence and then make recommendations to their clients to invest in or divest from specific securities, asset classes, or structure of their overall portfolio allocation. What term best describes this type of advice?
Tactical asset allocation Tactical asset allocation describes investment advice and portfolio allocation based on current market conditions and an adviser's specific view of which investments will perform best. Here, the advice is based on the specific views of the assembled advisory team. Strategic allocation describes how to allocate across asset classes at large and does not depend on the specific short-term view of how that asset class will perform. Special situation investing looks to more unusual investment opportunities, such as in distressed instruments, M&A, or other "special" circumstances.
Technical analysis:
Technical analysis evaluates a stock's price based on market and pricing data. This is in contrast to fundamental analysis which considers the specific business and financial aspects of a company. Accordingly, an analysis that reviews a company's income and cash flow statements would be a fundamental analysis, not technical. Each of the other statements accurately describes technical analysis.
A client purchases shares of a mutual fund in early December. A few weeks later the investor receives a $2.00 dividend. After year end the funds sends the investor a Form-1099 categorizing the dividend as: - $1.50 of long-term capital gains - $0.50 of short-term capital gains Which of the following most accurately describes the investor's tax consequences?
The $1.50 portion of the dividend will be treated as a long-term gain and $0.50 will be treated as a short-term capital gain, regardless of the investor's holding period of the mutual fund shares. An investor's taxation of dividends from mutual funds carries the mutual fund's (not the investor's) tax characteristics. Here, even though the investor had only held the fund for a few weeks, the investor is able to report long-term capital gains because the fund earned a long-term capital gain. Likewise, the short-term capital gains will be passed to the investors as short-term, even if an investor had held the shares for more than one year.
ABC's stock has appreciated dramatically over the past few years and is trading at $1,000 per share. A client who purchased 100 shares of ABC years earlier at a much lower price still believes in the company's management and products, but thinks the stock is overvalued at $1,000 per share. If ABC executed a 10:1 stock split, which of the following statements would be most accurate?
The client should not purchase the post-split ABC shares if he believed the pre-split ABC shares were overvalued. A stock split does not create or destroy value; therefore, the stock split should not have any impact on the client's decision to purchase stock. After the split the value of one $1,000 share ($1,000 in value) will be exactly the same as the value of ten $100 shares ($1,000 in value). Therefore, if the client thought the stock was overvalue at $1,000 he must also think ten shares of $100 are overvalued and should not be purchased.
An adviser recommends a security to her clients who are seeking growth and capital appreciation. She makes a recommendation for a stock that costs $20 per share. Many of her clients accepted the recommendation and make the purchase. Shortly thereafter, the company's board declares a 10% stock dividend. Which of the following statements accurately describes this investment?
The clients' basis in the shares will be adjusted downwards to account for the stock dividend. A stock dividend does not change the economics of an investment; the investor now holds the same value, but it is spread across more shares (here 10% more shares). Because the investment is now spread across more shares the cost basis of each share must be adjusted downwards. This will happen at the time of the dividend, though no tax is payable unless and until those shares are sold. Receiving a stock dividend does not result in a gain to the investor, nor is it an option or right to purchase more shares.
If an automobile dealer offers registered securities as an integral part of the price of the automobiles he sells, the dealer is engaged in which of the following?
The sales of securities and must be registered under the Uniform Securities Act According to the definition of a sale, a security offered as a bonus with the purchase of a retail item would be considered a sale. This sale would thus be subject to the provisions of the Uniform Securities Act.
A trustee of a section 401(k) corporate retirement plan is seeking to reduce potential liability resulting from investment losses. Which of the following would provide the trustee a safe harbor from liability from plan participants?
The trustee provides plan participants at least three investment options of varying risk/reward levels and the ability to exercise independent control over their assets. Under section 404(C) of ERISA a trustee of a corporate retirement plan can limit and reduce potential liability by providing plan participants the means and opportunity to self-direct their retirement assets. The three main criteria that must be met are: 1. Investment selection: the trustee must provide at least three investment choices at different risk/return levels (e.g. a conservative, moderate, and aggressive option) 2. Investment control: the plan must permit participants to exercise independent control of their investments (i.e. make trades as the participant sees fit) 3. Communications: plan documentation and investment information must be available. Plan participants must have real-time access to account information (online or telephone). Should the plan meet these requires the trustee will not be held liable for investment losses in any plan participant's account.
A client is interested in viatical investments and life settlements. In describing these to the client, an adviser might make each of the following statements except
The viatical market has an active secondary market that helps ensure fair pricing of policies. Viatical investments or life settlements describe the sale of a life insurance policy (or the sale of the right to receive a death benefit) to a party other than the issuing insurance company (selling the policy back to the life insurance company is called surrendering the policy). In doing so the insured can access the value of the death benefit while still alive. For example, the owner of a million-dollar policy may sell the right to that one-million-dollar death benefit for $600,000 today. NASAA considers all viatical investments to be securities that require proper registration. Because there is no or a very limited secondary market for these instruments it can be difficult to determine their fair value. Best practices suggest advisers obtain multiple quotes when assisting clients who buy or sell viaticals.
In a rising interest rate environment, a fund manager is pursuing an investment strategy of identifying and purchasing discount bonds with call provisions. If the purchased bonds are called the fund will generate
a higher rate of return than if the bonds are not called. When discount bonds are called they produce a higher yield than if they are not, as the owner earns the difference between the price paid (less than par) and par value more quickly. By accelerating this gain over a shorter number of years, and being able to redeploy the capital at the higher interest rates (it is given that interest rates are rising), the fund will see higher returns than if the bonds were not called.
State securities Administrators can require
agents to post a surety bond if they have discretion over client funds and securities Agents are required to post a bond if they maintain discretionary accounts. Agents are not subject to net worth or minimum net capital requirements. Investment Advisers are subject to net worth requirements while B/Ds are subject to net capital requirements. The Administrator cannot require firms to post a bond exceeding that required by the SEC.
An analyst that subscribes to the weak-form of the efficient markets hypothesis would most likely claim that positive risk-adjusted returns
are achievable with fundamental, but not technical analysis. The weak-form of the efficient market hypothesis provides that a security's price includes all currently available security market data (such as pricing, volume, and trendlines). Because these data are already incorporated into the current price technical analysis cannot offer guidance on whether to buy or sell a security. Under the weak-form theory, however, fundamental analysis, can produce positive risk-adjusted returns because the specific viewpoint or insight an analyst holds regarding a business, it management team, or product offering is not public "market data," and thus could result in outperformance.
A valuation that considers a bond's future interest payments and the return of principal, and converts them into their present value is best described as a
discounted cash flow analysis. A discounted cash flow (DCF) analysis takes the future cash flows of a bond and discounts them to their present value. A net present value analysis would compare the present value of the bond with the bond's price. A future value calculation takes present dollar amount and projects its value in the future. The rule of 72 provides an estimate of how long it will take an investment to double in value.
When issuers are engaged in intrastate offerings, their registration statements
may be amended after their effective dates as to the amount of securities to be issued, provided underwriting fees and initial offering price are not changed Intrastate offerings are effective for 1 year from the effective date (note that registration of personnel expires annually on December 31st). Throughout the offering process, the issuer may update the amount of securities being sold while maintaining the same fees and offering price.
In pursuing dollar-cost averaging a client seeks to
reduce the average cost per share as compared to the average price per share. Dollar cost averaging is a strategy that invests the same dollar amount in each investment period. In doing so, more shares will be purchased when the price is low and fewer shares are purchased when the price is high. Over time, the investor will purchase more shares at lower prices resulting in a lower average cost per share (what the investor paid on average for all the shares) as compared to the average price per share (the average price of each acquisition). This strategy helps reduce, but does not eliminate, timing risk (the risk that an investor makes a large transaction at the top or bottom of the market).
An individual is registered as an agent with a broker/dealer that has recently begun offering wrap fee programs to its clients. To offer such wrap accounts to the public, the agent must
register with the state as an investment adviser representative Under a wrap fee program, a firm charges a customer one fee for the cost of trading (brokerage services) and the cost of advice. By selling both brokerage and advice the firm is required to register as both a broker-dealer and an investment adviser. The firm's employees, who are offering the programs, are required to register as investment adviser representatives. Registration as an investment adviser representative is always at the state level. Knopman Note: A fee-based account is not the same as a wrap account and would not require registration as an IA or IAR.
Under the Uniform Securities Act, an individual must register as an investment adviser or investment adviser representative if he does any of the following EXCEPT
sells securities as a commission-based sales agent for a registered broker/dealer An investment adviser is defined as a person that offers securities related advice on a regular basis for a fee. The term investment adviser representative refers to the individual employed by an investment adviser to provide advice to clients. An agent that earns a commission upon executing transactions for a broker-dealer does not charge a fee for the advice, and therefore is not required to register. The investment advice provided by agents is said to be incidental to their course of business. Note that if the agent charged a fee for advice and was paid regardless of whether a trade was made, the agent would be required to register. At that point the advice is no longer considered incidental.
Under the USA, an individual is NOT an agent if he is employed by a broker/dealer and only
serves as a partner, officer, or director of the firm with exclusive responsibility for information technology Partners, officers, and directors of a broker-dealer are considered agents if they are involved in the purchase or sale of securities. They are also required to register if they supervise agents. All individuals who are employed by the broker-dealer and are involved in securities transactions are required to register as agents of the broker-dealer.
The USA permits the Administrator to do all of the following EXCEPT
suspend an agent's registration without an opportunity for a hearing The powers of the Administrator include conducting investigations inside and outside of their own state, issuing subpoenas and continuing investigations at their own discretion. However, if an Administrator suspends or revokes a registration it must offer the opportunity for a hearing within 15 days of written request by a respondent. If the Administrator suspects fraud has occurred or is about to occur, a cease and desist order can be issued without a hearing
An adviser explaining equity-indexed annuities to a potential client would state that most of these products carry each of the following attributes except
tax deductibility of contributions, tax deferral of earnings and growth. An equity-indexed annuity is a complex product offering a variety of features. These include a minimum guarantee that is credited to the account each year (e.g. 1-3% of the premiums paid), a participation rate that determines how much of the index's return is credited to the account (e.g. 80%), and interest rate caps that limit the account's total return per year (e.g. 8% per year). The equity-indexed annuity does not offer tax deductible contributions as a 403(b) or 401(k) contribution might.
Company XYZ is a mature company in an established industry. The company has experienced increased demand for its products, and the CEO and Chairman of the Board will jointly announce an increase in its long-standing dividend of 2.5% per year on a going forward basis. An analyst valuing Company XYZ's stock should
use the dividend growth model as it will produce the best valuation To value a company's stock price when it pays a growing dividend, the dividend growth model is most appropriate. It is more important to know when to deploy this formula as opposed to the formula itself. The dividend discount model is most appropriate shares that are paying a stable (non-growing) dividend. All things being equal, the dividend growth model will produce a higher valuation than the dividend discount model. Both of these valuations are fundamental in nature. Two technical analyses are the advance/decline line and moving averages. The advance/decline line indicates overall market movements by plotting the number of stocks that have gained value versus lost value on a daily basis. A moving average plots the average price of a stock over a historical period, e.g. the average price of a stock during the past 50, 100, or 200 days.
An individual meets the USA's definition of an agent in all of the following cases EXCEPT
when acting on behalf of an issuer of an exempt security in an underwriting and receiving no compensation related to the sale Agents of a broker-dealer are always required to register. If an agent represents an issuer in selling its securities, it can avoid registration if it sells exempt securities, or securities in exempt transactions. Agents of issuers can also avoid registration by selling securities to employees
A client owns an equity index annuity with the following characteristics: • 10% cap rate • 85% participation rate • 2% minimum annual guarantee The client purchased the annuity with an initial investment of $100,000. In the first year the underlying index returned +18%. In the second year, the market return was negative 4%, and in year three it returned +6%. What is the value of the annuity at the end of year three?
$117,922 It is important to be able to compute the ending value of an equity index annuity. Here, the annual returns must account for the annuities features of the 10% cap, 85% participation, and 2% annual guarantee given market returns of +18%, ?4%, and +6%. To solve this type of question one must determine what amount will be credited to the account at the end of each year. In year one, the 18% market return is limited to a 10% return ($10,000) due to the cap rate. Year two then begins with $110,000 in the account and the market returns ?4%, resulting in the application of the 2% minimum annual guarantee, for a credit of $2,200. The end of year two and beginning of year three value is therefore $112,200. In year three the market returned 6%, but the annuity will only be credited 85% of that, namely, $112,200 × 0.06 × 0.85 = $5,722. The balance in the account at the end of the three years is therefore, $117,922.
A client buys 100 shares of stock for $30 a share. Two years later, the client has earned $200 in dividends and sells the stock for $36 per share. What is the client's return on investment?
26.7% The return on investment is calculated as the total gain, divided by the total cost. Total gains include capital gains and dividends. ROI = Total gain/Original Investment Capital gains: $600 (100 shares purchased at $30, sold at $36) Dividends: $200 Total gain: $800 Initial investment: $3000 (100 shares at $30) ROI = Total gain/Original Investment = $800/$3000 = 26.7%
A client asks his adviser to calculate a variety of returns on his portfolio. The portfolio posted returns of 10%, with the CPI at 4%, and the investor is in a 22% tax bracket. What is the investor's real rate of return?
6% The real rate of return subtracts the rate of inflation, as measured by the consumer price index (CPI), from the portfolio's return. Here, the portfolio returned 10% less the 4% CPI rate which equals a 6% real rate of return. Another potential return one could calculate here is the after-tax rate of return which is the portfolio's return of 10% less the 22% taxes owed = 10% × (1 - 22%) = 7.8%
An 8% M&S bond with ten years left until maturity is quoted 103 x 104. A client enters a market order to buy and receives prompt execution. What is the current yield on the investment?
7.7% The current yield of a bond is calculated as the annual income divided by the current market price. Here, the 8% bond pays $80 in annual interest, and the bond can be purchased at the offered quote of 104, which is 104% of par, $1040. Current Yield = Annual Interest/Current Market Price = $80/$1040 = 7.69%
Which of the following persons, natural or corporate, fall under the definition of a broker/dealer under the Uniform Securities Act?
A corporation that sells interests in an oil and gas limited partnership to qualified investors A broker-dealer is a person that buys and sells securities for its own account and for the accounts of others. Agents, issuers, and commercial banks (which include credit unions, savings and loans, and thrifts), are specifically excluded from the definition of a broker-dealer.
Each of the following statements comparing growth and value investors is true except
A growth investor looks for a large cash surplus, whereas a value investor looks for lower cash holdings. A value style investor seeks firms that hold a large cash surplus. A growth investor would typically seek firms that are reinvesting and deploying most of their cash to grow the business. Each of the other statements accurately describes the view of growth versus value investors.
A brokerage client places an order to trade 100 shares of XYZ stock. The executing broker-dealer is a large firm that also offers advisory services with managed and wrap accounts. Which of the following would best describe how the client would pay for the execution of the transaction? A) A spread, if the trade is executed on an agency basis. B) A commission, if the trade is executed on a principal basis. C) An advisory fee, if the trade is executed on an agency basis. D) A mark-up / mark-down, if the trade is executed on a principal basis.
A mark-up / mark-down, if the trade is executed on a principal basis. The client here is a brokerage, not advisory client, and will therefore pay brokerage fees when entering securities transactions. A broker-dealer is able to execute orders on a brokerage (agent) or dealer (principal) basis. If the transaction is executed on a dealer or principal basis the fee is a mark-up (when clients are purchasing) or mark-down (when clients are selling). Had the firm executed the trade in a broker (agent) capacity the fee would be a commission. Had the client held a wrap or managed account, the client would likely pay a single fee (often a percentage of assets under manage) for both the advisory and brokerage services being received.
Which of the following activities would require the registration of the security being solicited?
A registered representative calls a client to encourage her to purchase shares in a bank holding company. This question refers to exempt transactions. Transactions with investment companies, unsolicited orders, and transactions in exempt securities (such as fixed annuities), are all examples of exempt transactions. Transactions where a registered representative solicits a trade with a retail client are non-exempt.
Which of the following transactions is NOT exempt from the registration requirements of the Uniform Securities Act?
A solicitation by an agent to clients occurs and results in the purchase of securities registered by qualification Exempt transactions include transactions with fiduciaries (including trustees, legal guardians, and executors of estates), unsolicited brokerage transactions, and transactions between issuers and underwriters. Solicitation by agents to retail clients would be a non-exempt transaction and would be subject to the registration requirements of the Uniform Securities Act
Which of the following activities accurately reflects the Uniform Securities Act's policy on sharing profits and losses?
An agent may share in the profits and losses of a joint account with a client, providing the representative has received permission of all owners of the account as well as permission of the firm. An agent may only share in a client's account with the permission of his or her firm and the consent of the client. Note that Investment Adviser Representatives can never share in a client's account, though could charge a performance fee to Qualified Clients with at least $1 million in assets under management or more than $2.1 million in net worth, excluding their primary residence.
An agent is registered with XYZ Discount Brokers, a wholly owned subsidiary of the XYZ Bank Holding Company. The holding company also owns XYZ Capital Markets, a full-service broker/dealer. This agent would NOT be permitted to split commissions with which of the following?
An agent registered with Big Capital, an independent broker/dealer in the state Agents can split commissions with other registered agents in the same company, including subsidiaries and affiliated companies. Agents who work for different firms cannot share commissions.
In preparing a comprehensive financial plan for a client, an adviser needs all of the following to produce a personal balance sheet and net worth statement except
Annual income When creating a personal balance sheet or determining net worth all assets and liabilities must be accounted for. This includes assets that are securities (whether in retirement accounts or not) as well as those that are not (precious metals, real estate, automobiles, jewelry). Net worth is then calculated by subtracting the sum of all liabilities (loans, mortgages, etc.) from the sum all the assets. Annual income is not a part of a balance sheet. The cash that a client accumulates from unspent income could be carried on the balance sheet as cash, but the actual income figure would not.
An advisor is explaining different mutual fund share classes to a client. Which of the following statements would be a misrepresentation?
Class B shares are the most cost-efficient way to own mutual funds over a long investment horizon. Class B shares are not the most cost-efficient way to own a mutual fund. While the deferred sales charge may decline after several years of ownership (even all the way to zero), class B shares carry much higher annual 12b-1 fees. Accordingly, long-term investors are generally better off purchasing Class A shares, despite a higher up-front charge, because the annual 12b-1 fees will be lower, and it is Class A shares that offer breakpoints, letters of intent, and rights of accumulation that can lower the sales charge.
Which of the following securities is NOT exempt from state registration and advertising filing requirements?
Common stock of a foreign corporation domiciled in a country that maintains diplomatic relations with the United States While debt issued by a foreign government that maintains diplomatic relations with the United States is exempt from registration, securities issued by foreign corporations are not. If an issuer is exempt from registration, its securities are also exempt from registration. Any securities that are traded on the New York Stock Exchange or Nasdaq Market are federal covered securities and are therefore exempt from registration
An adviser is helping a new, young client understand the ways to save for retirement. The client informs the adviser that he earns $55,000 per year, is not yet eligible for his employer's corporate retirement plan, and is willing to take on more risk given the long-time horizon associated with saving for retirement. The adviser suggests that the client consider a Roth IRA as a part of the overall strategy. Which of the following best describes the tax consequences?
Contributions will not affect his current taxable income, the investments will grow tax-deferred, and the entire amount will be distributed tax-free. A Roth IRA accepts post-tax contributions which do not reduce current taxable income. Put differently, Roth contributions are not tax deductible. Once the money is invested into the Roth the earnings and growth are tax-deferred, and provided that the account received its first contribution more than five years ago, and the owner is older than 59.5, all distributions (both contributions and earnings and growth) are entirely tax-free.
Measuring how much the price of a bond will change based on the movement of prevailing market interest rates is an analysis of the bond's
Duration Duration is one measure of how much a bond's price will move due to changes in prevailing interest rates in the market. The longer a bond's duration number, the more sensitive it's price will be to changes in interest rates. Short duration, however, does not mean low-risk. Bonds, regardless of duration, may be subject to inflation risk, call risk, default risk and other risk factors. Convexity is a related term that measures the changes in the duration as interest rates change. It is most useful when evaluating price volatility of a bond when interest rates change significantly.
An adviser is describing a security registered under the Securities Act of 1933 that offers exposure to an underlying index or asset class without actual ownership of those assets. The security also carries market and credit risk. Which product is most likely being described?
Exchange Traded Note An exchange traded note (ETN) is an unsecured debt instrument issued by an investment bank and registered under the Securities Act of 1933. The ETN product offers investors a return based on the performance of an underlying asset class or index (e.g. the S&P 500), though it does not own the actual underlying assets (i.e. the ETN does not own any of the stocks in the S&P 500). Because these are issued by banks their risks include credit risk (if the issuer fails the ETN may default), market risk (the ETN's performance is often tied to the market's performance), liquidity risk (while ETNs may trade on exchanges, a market may not develop for the product).
A client wishes to evaluate a mutual fund's returns over the past five years. Reviewing the prospectus, she finds the returns were 2%, 5%, 9%, 1%, and 12%. Which of the following would be the most meaningful calculation for her to perform?
Geometric mean When evaluating investment returns the geometric mean is a more meaningful calculation than the arithmetic mean or average. For exam purposes, it is more important to know which calculation to perform than how to actually perform it. Notably, the arithmetic mean will always be higher than the geometric mean unless all the numbers in the set are the same (e.g. 5, 5, and 5).
Which of the following characteristics describe a futures contract? I. Exchanged-traded II. SEC regulated III. The long party can walk away from the contract if it is economically advantageous to do so
I A futures contract is an exchanged-traded obligation for a specific commodity. The parties to the contract must perform at expiration (unlike an option contract which allows the buyer to decide whether to exercise or not). Futures are not securities and do not fall under SEC jurisdiction.
In which of the following situations is an agent most likely to be in violation of the Uniform Securities Act? I. The agent loans his personal funds to clients only when they are suffering financial difficulties. II. A customer instructs an agent to purchase shares in XYZ Company, a company the agent knows is experiencing financial difficulty. The agent purchases ABC stock, a financially sound company, instead. When the change was discovered, the client was pleased. III. An agent on behalf of his clients purchases shares in an oversubscribed initial public offering. IV. The agent registers in states in which he has no clients.
I and II An agent is prohibited from making a loan to a client unless the client is a financial institution in the business of lending money (e.g. a bank). If a customer instructs an agent to purchase a particular security, the agent must execute the transaction regardless of their opinion of the investment (with the only exception being if the transaction would be illegal). An agent can purchase IPO shares on behalf of a client and can register in any state he/she wants, even if no clients reside in the particular state.
A client is evaluating a potential bond investment. The bond is XYZ's 20-year zero coupon bond. Which of the following statements are true? I. The bond has a long duration II. The bond has a short duration III. The bond will be volatile IV. The bond will not be volatile
I and III A bond's duration measures its sensitivity to changes in prevailing market interest rates. Bonds with low coupons and long maturities have long durations which are associated with greater price volatility. Thus, a 20-year bond with a zero coupon would have a long duration and be very volatile.
Which of the following statements regarding an investment adviser is TRUE? I. Other than in certain circumstances, an adviser may not be compensated based on capital gains or losses in the account. II. All individuals employed by the investment adviser must meet the written or oral exam qualification standards set forth by the Administrator. III. An adviser whose only clients in this state are insurance companies located in the same city as his office is not an investment adviser under the USA. IV. If, during a 12-month period, an investment adviser directed communications to no more than 5 individuals in this state and did not maintain an office in this state, no registration is required.
I and IV Investment advisers may only be compensated based on capital gains in accounts with a balance of at least $1.0 million or where the client has net worth of $2.0 million, excluding the client's primary residence. Investment advisers are exempt from registration at the state level if they do not have an office in the state and have fewer than 6 resident clients in a 12-month period. This is the state de minimus exemption. Not all employees of an investment adviser are required to meet qualification standards, examples include clerks and individuals in administrative roles only. Investment advisers must register in any state in which they maintain an office, no exceptions.
Broker-dealers and their agents can have their licenses suspended or revoked for engaging in business practices in violation of NASAA's policy statements on unethical and prohibited practices. Which of the following activities would NASAA consider an unethical or prohibited practice? I. Hypothecating a customer's securities in a margin account without written consent from the customer II. Exercising discretionary power and effecting securities transactions within the first 10 business days of a customer's account with verbal authority from the customer III. Charging unreasonable fees or commissions for brokerage execution services IV. Retaining an insufficient number of clerical personnel to handle current customer transactional activities
I, II and III Hypothecation is the process by which customers pledge their securities as collateral for a loan. Hypothecation can only be done with the customer's consent. Broker-dealers and agents are always required to have written authority to exercise discretion. IA and IARs have 10 business days upon account opening to exercise discretionary power obtained verbally from the customer. After 10 business days a IA or IAR must obtain written discretionary authority from the customer. Firms must always charge reasonable fees and expenses. Retaining an insufficient number of clerical personnel is not a violation according to NASAA policy.
