Series 66 Final Exam #2
A farmer who is worried about declining corn prices should: A. Buy a futures contract B. Sell a futures contract C. Sell a put option on a futures contract D. Buy a call option on a futures contract
A farmer is a producer of the crop and is long the physical commodity (corn). One way to hedge (protect) against a future price declines is to sell a futures contract - the farmer has a contract that protects him against a price decline, since the future sale price is established in the contract. If the price of the commodity declines, either the farmer can close the contract at a profit since the price of the commodity has fallen or can deliver the commodity for the higher contract price. Also note that buying a put on a futures contract would also act as a hedge, since it establishes a fixed price at which the commodity can be sold. In contrast, buying futures contracts, buying calls on futures contracts and selling puts on futures contracts are all strategies that profit if the price rises. They are unprofitable if the price falls.
Which statements are TRUE about ETNs? I. ETNs are a structured product II. ETNs are an investment company product III. ETNs are suitable for investors seeking income IV. ETNs are suitable for investors seeking long-term capital gains
An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. ETNs make no interest or dividend payments, so they are not suitable for an investor seeking income. Their value grows as they are held based on the growth of the benchmark index, with any gain at sale or redemption currently taxed at capital gains rates. Thus, they are tax-advantaged as compared to conventional debt instruments.
Under the Uniform Securities Act, which individual is defined as an "agent"? A. A principal of a broker-dealer B. A secretary who takes customer orders C. A clerk who solely performs clerical functions D. A silent partner of a Broker-dealer
An agent is defined as any individual who represents an issuer or broker- dealer in effecting securities transactions. A sales representative who makes recommendations or who writes customer orders falls under the definition. The definition excludes principals of broker-dealers; clerical employees who do not take customer orders; and silent partners
An issuer has filed a registration statement in the State proposing to offer 500,000 shares in a combined primary and secondary distribution, consisting of 300,000 newly issued shares and another 200,000 shares being offered by the officers of the firm. Under the Uniform State Law, the 200,000 shares being sold by selling shareholders are a(n); A. Issuer distribution B. Non-Issuer distribution C. Commingling of securities D. Exempt Transaction
An issuer transaction is one where the proceeds of the offering go to the issuer - the primary distribution of 300,000 shares meets this definition. A "non-issuer" transaction is one where the proceeds of the offering go to someone other than the issuer. The secondary offering of 200,000 shares where the proceeds are going to selling shareholders (officers of the company) meets this definition.
An older customer with failing eyesight requests that his mail be delivered to the agent's brokerage firm branch office rather than to his home. He also requests that his agent be the one to read, on at least a monthly basis, his statements to him. If the agent cannot commit to this, the customer wishes that the agent's secretary be the one to read the mail. Which of the following actions may be taken? A. As long as written authorization is received from the customer's doctor detailing the customer's ailment, the customer's request may be honored. B. Upon written confirmation from the customer, the customer's request may be honored. C. As long as the action is not prohibited by the State Administrator, the customer's request may be honored. D. The agent must refuse the customer's request because all mail must be sent to the customer's address or P.O. Box
Customer mail must be sent to the customer's home address or to a post office box designated by the customer. It cannot be forwarded to a brokerage firm branch office, because then the customer would not know what was going on in the account. The customer can arrange for someone at home to read his or her mail. The registered representative cannot be the "reader" since, if the statement shows that the account value has declined, the registered representative might omit this information (intentionally or unintentionally)
Dollar Weighted Average Return: I. Is the return measure used for mutual fund performance charts II. Takes into account the timing of investment inflows and outflows III. Is the same as Time Weighted Average Return IV. Measures the performance achieved by a specific investor in a fund as opposed to the overall performance of that fund
Dollar weighted average return is most often used when evaluating a specific investor's mutual fund return. It is the return achieved, accounting for the timing of all cash flows (deposits) into the fund and all cash redemptions from the fund made by that investor. It is the same as the Internal Rate of Return, and will vary with the timing of each investor's deposits and withdrawals. Because investors often "chase" past performance, they will buy a fund "too late" (after the fund has posted its best performance and now enters a period of lesser performance) and will sell "too soon". Thus, for the individual investor, dollar weighted average return is often lower than time weighted average return. In contrast, time weighted average return is the measure used for mutual fund performance charts (Total Return, which shows dividends and capital gains as continually reinvested). It reflects the growth that would be achieved from a 1-time investment into the fund and then holding that investment over time - this is a buy and hold strategy. This method is consistent when comparing one fund's performance to another fund's performance.
Filing of advertising with the Administrator is NOT required for: I. U.S. Government securities II. Municipal securities III. Investment company securities IV. Options Clearing Corporation Securities
Filing of advertising with the State cannot be required for exempt securities; exempt transactions; or for federal covered securities. U.S. Governments and municipals are exempt securities. NYSE listed, NASDAQ listed and investment company securities are federal covered securities. Options are non-exempt securities and are not federal covered, so the Administrator can require filing of advertising for those
Which of the following would be an unethical practice under the Uniform Securities Act? A. Telling a customer that the price of a security is $25 per share if the broker-dealer is the sole market maker in the stock B. Telling a customer that the price of a security is $25 per share if the source of the quote is the NASDAQ system C. Telling a customer that the price of a security is $25 per share if this is the P.O.P. of the issue in a syndicate distribution D. Telling a customer that the price of a security is $25 per share if the source of the quote is the NYSE
If a broker-dealer is the sole market maker in a stock, then there is no true independent market- the price is whatever the broker-dealer says it is! In such a case, the rule is that the price is "contemporaneous cost" - meaning that the last price at which the broker actually bought the stock. On the other hand, the last price reported from the NYSE or NASDAQ is a true market price and can be quoted. Finally, all prospectus offerings are fixed price sales made at the P.O.P. - Public Offering Price, with the price stated in the prospectus. Quoting this price is just fine.
When will the rules of intestate succession be followed? A. Upon the death of the holder of an individual account - POD where the owner dies without leaving a will B. Upon the death of a tenant in a joint account held as tenants in common where the tenant dies without leaving a will C. Upon the death of a tenant in joint account held with rights of survivorship where the tenant dies without leaving a will D. Upon the death of any owner of an individual securities account or any tenant in a joint securities account
If an owner of an individual account or a tenant in a joint account held as tenants in common dies, then that person's assets are passed by will. If the individual dies without leaving a will, then the rules of "intestate succession" are followed. This is established by each State, and the estate's assets are distributed to the closest living relatives, with a surviving spouse being first in line to get the assets; then the children; then the siblings; etc If an individual account is held as POW (payment on death, which specifies the name of the beneficiary to whom the account assets go on death), then the account assets are distributed based on the instructions in the deceased individual's will. If a tenant in a joint account held as "joint tenants with rights of survivorship" dies, then the other tenand now 100% owns the account.
All of the following events would result in an advisory contract being considered to have been transferred EXCEPT: A. A majority partner in the advisory firm dies B. A minority partner in an advisory firm sells his interest to another individual C. A controlling block of stock in the investment adviser is sold to another individual D. The contract is pledged as collateral for a loan
If there is an assignment of an advisory contract, then the customer must approve. A "so-Called" involuntary assignment occurs if the adviser is a partnership and a majority of the partners are changed. Such an event would require the customer to sign a new contract. A minority of the partners being changed is not considered to be "involuntary assignment." If the adviser is a corporation, a change in the majority ownership of the corporation would be an "Involuntary assignment." Finally, if the contract is pledged as collateral for a loan - then legally, title is now being held by the person to whom the contract is pledged. This is another version of an "involuntary assignment" of the contract.
Which of the following statements are TRUE regarding non-revocable trusts? I. Income is taxed at the rate scheduled for the grantor II. Income is taxed at the rate scheduled for the trusts III. The grantor has the right to reassume control over the assets of the trust IV. The trustee has the right to manage the assets of the trust
Income in a non-revocable trust is taxed at the rates scheduled for trusts - these are the similar to the rates as for individuals but the brackets "ratchet up" faster to a maximum rate of 37% (in 2019). In contrast, income in a revocable trust is taxed at the grantor's tax bracket (since the grantor has the right to take back the assets that generate the income). Contributions cannot be taken out of the trust by the grantor (as the gifts were irrevocable).
Which statements are TRUE about registration of investment advisers? I. An adviser with no place of business in the State that limits its clientele to insurance and investment companies is exempt from registration II. Broker-dealers can act as investment advisers without registering as such if any advice given is solely incidental to the business of the Broker-dealer III. Investment Advisers must register with the State
Investment advisers with no place of business in a State that limit their clientele to insurance companies and investment companies are exempt from registration because they are dealing with professionals - not the general public. Note that if an adviser is physically located in a State, then it still must register If a broker-dealer is registered as such with the state, then a second registration is not required for that firm to act in the capacity of an "Investment adviser" - as long as such investment advice is solely incidental to the broker-dealer's business. This avoids the dual registration of these firms. Please note that if this firm were to actually sell investment advice, it would be required to register in the state as an investment adviser. Investment advisers must register in the state unless an exemption is available.
A Registered Investment Adviser that trades securities on the behalf of customers is required to keep a record of the transaction that includes all of the following information EXCEPT the name of the: A. Investment Adviser Representative (IAR) who placed the order. B. Broker-dealer to which the order was sent for execution C. person at the Investment Adviser who recommended the transaction D. Agent at the broker-dealer who executed the transaction
NASAA States that Investment Adviser order tickets must contain: Name of the person at the IA who recommended the transaction; Name of the person who placed the order; Date of order entry; Name of account for which order was entered; Name of broker-dealer or bank to which the order was sent for execution; Whether the order was discretionary
An investment of $1,000 is projected to give an annual return of $100 for 5 years, at which point the $1,000 invested will be returned. The comparable market rate of return for 5-year investments is 5%. Based on this information, the NPV of the investment; A. Will be + B. Will be - C. Will be 0 D. Cannot be determined
NPV of an investment takes the projected cash flows from an investment and discounts them back to today's present value, using the market rate of return as the discount factor. Since this investment is generating a 10% annual rate of return; but these returns are discounted by a 5% market rate of return, the NPV, in percentage terms, will be 5%. As long as the NPV is positive, the investment is projected to generate a better than market rate of return and should be made.
An investment adviser has 3 managing partners and 3 investment adviser representatives. All of the partners have completed the Certified Financial Planner (CFP) program and received the designation. The 3 IARs have been enrolled in a CFP preparation course and are scheduled to take the next CFP exam. The IA publishes an advertisement that states: "All of our partners are Certified Financial Planners." This advertisement is: A. Fraudulent and misleading B. Unethical because an advertisement cannot include the qualifications of the firm's principals C. Permitted since it is true D. Permitted only after the IARs pass their CFP exams
Since the 3 partners of the firm all have their CFPs, this is a true statement and is not misleading
An IAR has been retained to manage the brokerage account of an estate. When examining the account statement, the IAR sees the following holdings: $9,000,000 ABC Corp. AA-rated long term bonds $1,000,000 XYZ Money Market Funds Over the past year, the ABC bond position has appreciated by 30% due to falling interest rates. The IAR notes that the yield curve has steepened its positive slope and believes that the Federal Reserve will start tightening credit to reduce the risk of inflation. The BEST action for the IAR to take is to: A. Do nothing because the account assets must be distributed to the heirs within 9 months B. Sell the appreciated bond position and reinvest the proceeds in a growth mutual fund C. Sell the appreciated bond position and reinvest the proceeds in the money market fund D. Either hold or sell the appreciated bond position using the prudent investor rule as a guideline
One of the advantages built into estate taxes is that the assets are valued at market value as of the date of death, and if there was any asset appreciation, this is not taxed as capital gains (this is called a "stepped up" basis). The goal of the IAR is to maximize investment returns using a time horizon of a maximum of 9 months (which is when estate tax is due). Because the IAR believes that interest rates will start rising, he or she should sell the appreciated long-term bond position (it has risen a lot!), locking in the gain without any capital gains tax due. Choice B is not good, because if the Fed tightens credit, then the equities market is likely to perform poorly. Choice D seems good and it also mentions "prudent man" - but the fact is that the greatly appreciated long-term bond position should not be held if the IAR believes that interest rates are going to rise. If the position were to be held untouched, it could lose a lot of its value in a falling market, and this is hardly the action that a "prudent man" would take
To register as an investment adviser under the Investment Advisers Act of 1940, all of the following are required EXCEPT : A. Payment of a filing fee B. Filing of Form ADV Part I C. Filing of a form ADV Part 2 D. Posting of a surety bond
Posting a surety bond is only required for State registration. To register as an investment adviser with the SEC, a Form ADV Part 1 and 2 must be filed, along with a non-refundable filing fee.
Which statement is TRUE about the retention of Internet advertising by broker-dealers? A. There is no requirement to retain copies of Internet advertising B. Only the current web pages must be retained by the broker-dealer C. All web pages created and displayed within the past 2 years must be archived D. All web pages that have ever been created and displayed must be archived
The Administrator can request filing of all web pages that have ever been created - so they must be retained and archived
An investor buys 1,000 shares of XYZ stock at $34. It goes to $43 in the next year and pays a $3 dividend. At the end of the year following, the stock is trading at $40 and the stock pays another $3 dividend. What is the total return? A. 15% B. 17.7% C. 30 % D. 35.5%
Total Return must be presented on an annualized basis. This stock paid a $3 dividend during each of the last 2 years. Over these 2 years, the stocks price went from $34 original cost to $40 at the end of the second year, for a total capital gain of $6 over 2 years = $3 capital gain per year. Total Return = (Income + Capital Gain ****annualized)/ Cost of security => $3 dividend + $3 Capital Gain / $34 per share = 17.7%
An investment adviser is ready to open an account for a new customer. In the advisory contract, the adviser has included a clause that the customer has 48 hours to rescind the contract. The adviser gives the customer the brochure, takes payment from the customer, but forgets to have the customer sign the contract. Which statement is TRUE? A. Even though the customer did not sign the contract, he or she still has 48 hours to rescind the contract B. Even though the customer did not sign the contract, he or she has 5 business days to rescind the contract C. The contract is null and void D. The contract is binding and the customer cannot rescind the contract
Under NASAA rules, the brochure is required to be delivered to clients no less than 48 hours prior to entering into a written or verbal contract to provide advisory services. As an alternative to the "2 day free look," the customer can be given the brochure at the time of contract signing, as long as the contract provides for a 5 business day period following signing where the customer can terminate without penalty. In this case, the customer was not given the brochure 48 hours prior to entering into the contract. By giving the adviser a check, the customer has "entered into a contract" to buy the advisory services. So this customer has 5 business days under NASAA rules to rescind the contract.
Under the provisions of the Uniform Securities Act, if an investment adviser wishes to take custody of client funds, the RIA Must: A. Take out a surety bond B. Have a minimum net worth of $2 million C. Also Be registered as a broker-dealer D. File a consent to service of process
Under State Law, if an investment adviser will not take custody of a client's funds, there is no surety bond requirement. However, if the adviser will take custody, it must have a minimum net worth or minimum surety bond coverage of $35,000
A single individual buys a house for $150,00. After living in the house for 10 years, he sells it for $750,000. The taxable gain is. A. $100,000 B. $250,000 C. $350,000 D. $500,000
When a residence is sold, the first $250,000 of gain (for an individual) is excluded from tax ($500,000 is excluded for a married couple). The sale of this residence resulted in a capital gain of $600,000 ($750,000 sale proceeds - $150,000 cost basis). Since $250,000 of the gain is excluded from tax, $350,000 is taxable.
What happens to the rate of return calculation on a non-callable bond if the rate of interest stays the same and the time intervals are changed? I. Shortening the time intervals will increase the rate of return II. Shortening the time intervals will decrease the rate of return III. Lengthening the time intervals will increase the rate of return IV. Lengthening the time intervals will decrease the rate of return
When the question is stating that the "time intervals shorten," this means that the time period between each interest payment received shortens. When the question is stating that the "time intervals lengthen," this means that the time period between each interest payment received lengthens For example, assume that a 10% bond will pay interest semi-annually, instead of annually. At the end of each 6 months, $50 of interest will be received, instead of receiving $100 every 12 months. Because the first $50 interest payment received can immediately be reinvested over the next 6 months until the second $50 payment is received, this will produce a higher rate of return than receiving the $100 payment at the end of the year. Thus, the actual rate of return will increase if time intervals shorten, because the interest is actually being received more quickly, and can be reinvested faster, increasing the rate of return. Conversely, if the time intervals lengthen, because the actual interest payments are being received more slowly and are reinvested more slowly, the rate of return declines
A retired elderly customer lives off the earnings from his modest retirement account, in addition to small pension payments that he receives from his former employer. The Customer's nephew, who works at an electronics company that trades sporadically in the Pink Sheets, tells him that the company is coming out with a great new product and the stock would be a good investment. The customer wants your advice about buying some shares of the electronics company. The BEST advice would be to tell the customer that because: A. The recommendation came from a relative, it is probably a good one and he should buy the stock B. The recommendation came from an employee of the subject company, it is probably a good one and he should buy the stock C. Of the customer's advanced age and limited resources, this type of speculative investment is not appropriate D. The recommendation did not originate from the brokerage firm, you cannot give the customer any guidance on this proposed transaction
While it may be the case that this stock will be a good investment, it is not appropriate for an elderly investor who relies on investments for income to live on.