Series 66 Exams Flash Cards
A 45-year-old client has just received an inheritance and would like to invest $100,000 into a growth mutual fund offered by your firm. The client intends to use the money to supplement retirement. You should probably recommend the purchase of
Class A shares At a purchase level of $100,000, a breakpoint will be reached which should bring the front-end load to a low level. Combine that with the generally lower operating expenses and the expected long-term holding period and the regulators would like to see the investment in Class A shares. There is nothing wrong with a fixed annuity except the client wants a mutual fund.
An investment adviser representative's business card containing which of the following designations would be in violation of the NASAA policy on advertising?
IAR The term investment adviser representative may appear, but not the abbreviation IAR. As long as certain academic designations have been earned, such as MBA or JD, they may be used. Certain professional designations (if earned) may also be used. The LEM has a list of the most common ones.
Which of the following are restrictions on the operations of registered open-end investment companies under the Investment Company Act of 1940?
No investment company may own more than 3% of the voting stock of another registered investment company. No investment company may purchase portfolio securities on margin. Investment companies are restricted from owning more than 3% of the voting stock of another registered investment company. Unless an exception is stated, no margin purchases may take place for the fund's portfolio. The act requires an investment company to have a minimum of $100,000 in initial capital, not $1 million.
Under federal law, the brochure rule requires:
delivery of a brochure, or summary of material changes, to all clients within 120 days of the end of the adviser's fiscal year. The brochure, or a summary of material changes, must be delivered to clients on an annual basis. It must be delivered not later than the entering into the agreement. The ADV Part 2A and 2B may be used as the brochure.
Assume you own KAPCO Stock Fund that returned 14% over the past five years, during which the stock market returned 12%. This fund has a beta of 1.1 and the risk-free rate of return is 4%. What is the fund's alpha?
+1.2 14 − [4 + (12 − 4) 1.1] = 14 − [4 + 8.8] = 14 − 12.8 = 1.2. This positive result indicates that the fund manager outperformed the market by 1.2% on a risk adjusted basis.
Current market interest rates are 6%. Using the discounted cash flow method of valuation, you would expect to arrive at the highest valuation for which of the following?
10% coupon maturing in 10 years The discounted cash flow method considers the future expected free cash flow (the interest payments plus the eventual return of the principal) and discounting it to arrive at a present value. In its simplest iteration, this is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money. In general, bonds with higher coupons will have the greatest value because they will clearly produce the most cash flow, and zero-coupon bonds will produce the lowest because they have no cash flow other than the return of the face value at maturity.
An investment of $5,000 made 16 years ago is now worth $20,000. Using the Rule of 72, the approximate compounded annual rate of return is
9.0%. This investment has quadrupled in 16 years. Using the Rule of 72, we know how to compute the rate of return when an investment doubles. This one has doubled every 8 years. Dividing 72 by 8 years gives us an approximate rate of 9%.
Wynifred is an investment adviser representative for an SEC-registered investment adviser. She lives in State X and receives a letter from a former boyfriend requesting a contribution to the friend's political campaign for governor of State X. As it happens, Wynifred's firm provides advisory services to State X's employee retirement fund and Wynifred actively solicits business from other state agencies. Which of the following actions would be permitted to Wynifred under the SEC's pay-to-play rule without causing any concerns to her firm?
Donating a maximum of $350 to the campaign Wynifred's solicitation activities define her as a covered employee. The rule allows covered employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections. Because the friend is running for governor in a state in which Wynifred can vote, the upper limit applies.
A client of yours purchased a periodic payment variable annuity 10 years ago. Each month, the client invested $200 and then died suddenly when the account contained 1,355 accumulation units with a value of $16.23 each. Which of the following statements is CORRECT?
The beneficiary will receive $24,000. There is no income tax liability on the part of the beneficiary. The death benefit provides that the investor, or his heirs, will never receive less than the amount invested. In this case, since $24,000 was the investment, even though the current value is less, the beneficiary will receive that higher amount. Because the proceeds did not exceed the cost, there is no income tax liability. Had the account performed such that the death proceeds would have greater than the cost, there would have been ordinary income tax due on the excess, but, in no event would the beneficiary be liable for the 10% since that is waived in the case of death.
As defined in the Uniform Securities Act, in which of the following cases would an investment adviser NOT be considered to be maintaining custody?
The investment adviser receives a check made payable to the IA and returns it within 3 business days Please remember the following: There are 3 cases that would not be custody revolving around the 3-business-day rule. They are as follows: 1. Receiving a check made payable to a 3rd party and forwarding that to the 3rd party within 3 business days 2. Receiving a check made payable to the IA and returning it within 3 business days 3. Receiving securities from a client and returning them within 3 business days If the IA has direct or indirect control over any client assets, that would be custody. Holding securities in street name is direct control. Discretion is not custody because the IA doesn't have any physical control, only the ability to make buy-and-sell decisions in the account.
Under rules of the SEC, any institutional investment manager that exercises investment discretion over an equity portfolio with a market value of $100 million or more in certain securities on the last trading day in any of the preceding 12 months must file
a Form 13F. Those certain securities are 13(f) securities and the form used is 13F. Form ADV-E is used for the independent examination of an IA who maintains custody. Form 13D is not tested and deals with changes to holdings of corporate insiders. Form 112 is the FinCEN form for reporting large cash transactions.
When preparing a client profile, it is prudent to investigate the prospect's non-financial considerations. Included would be that client's:
age. attitudes. experience with investments. values. These are included in the list of non-financial considerations when constructing a client profile.
The antifraud provisions of the Uniform Securities Act would apply to all of the following EXCEPT
an individual employed by a registered broker-dealer whose sole function is selling commodity futures contracts. The Uniform Securities Act's antifraud provisions deal with securities; commodities are not a security. Even if one is exempt from registration due to meeting the de minimis exemption, or is excluded from the definition of investment adviser under the publisher's exclusion, the antifraud provisions still apply. The same is true for those Canadian securities professionals who do business in the United States by using the limited registration option available to them.
XYZ Brick Company wishes to raise capital by issuing some securities in its home state. The CEO of the company feels that registration with the Administrator is unnecessary because the issue is exempt. Should XYZ be served with a court order, the burden of proving its issue is exempt is on the:
company. In any case where there is a question as to the legality of a specific exemption, the burden of proof is always on the party requesting the exemption (the company, not the CEO).
Because investment advisers generally act in a fiduciary capacity, they need to follow the provisions of the Uniform Prudent Investors Act (UPIA). When handling client's assets, the investment adviser must consider the objectives and goals as well as the risks. The adviser can satisfy the standard of prudent management by
exercising reasonable care, skill, and caution. The UPIA specifically states that those in a fiduciary capacity must handle the money of others by exercising reasonable care, skill, and caution. It would not be expected that the investment adviser would delegate the investment decisions elsewhere. In fact, frequently trustees will delegate that function to the investment adviser. One of the features of the UPIA is that it views the portfolio as a whole, recognizing that proper allocation of assets may involve certain individual securities with a higher risk profile. The legal list applies to those few states that have not yet adopted the UPIA.
An investment adviser representative has constructed a portfolio for a client that is 20% U.S. government bonds, 20% corporate bonds, 20% preferred stock, 15% common stock in public utilities, 10% in cash and 15% in small cap stocks. From this, you could safely assume that the client's investment objective is:
income. 85% of this portfolio is generating income. The only appreciation or growth is coming from the small cap stocks, but they are too small a percentage to be significant. However, with 50% of the portfolio in equities (20% preferred, 15% utilities and 15% small caps) one could not expect preservation of capital to be primary.
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
liquidity risk A portfolio of listed common stocks will have little to no liquidity risk, as listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living.
When an investment adviser representative terminates employment with a federal covered investment adviser and immediately accepts employment performing the same functions with a different federal covered investment adviser in the state where the individual resides
only the investment adviser representative must notify the Administrator promptly If you are working for a registered investment adviser within a specific state, that state securities administrator wants to know who you are. The problem becomes a question of who is responsible for notifying the State Securities Administrator of your employment. A federal registered investment adviser is exempt from registration at the state level, and therefore, has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the State Securities Administrator that you are working there, as well as when you terminate.
One of your customers has inherited $100,000 of Kemach Farm Products, Inc. (KFPI), guaranteed bonds. Being wary of the term guaranteed, you are asked for its meaning in this context. You would explain
the interest and final principal payment on this bond are guaranteed by someone other than the issuer. The Uniform Securities Act defines a guaranteed security as one whose interest and principal (if a debt security) and dividends (if an equity security) are guaranteed by someone other than the issuer. Bondholders do not redeem their bonds prior to maturity—they sell them at the current market price. The principal guaranteed is only when held to maturity.
Without prior authorization from the client, an investment adviser could release information relating to the client's account:
when requested by the IRS. upon the receipt of a subpoena from a court of competent jurisdiction. Without the prior consent of the client, an IA may disclose information relating to specific accounts only when requested by the IRS or by court order.