Series 66 Missed Practice Exam Questions

An investment adviser has legal access to a broker-dealer's confidential research document and uses the information to support a recommendation to a client. The investment is successful. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the adviser A) must share the commission with the broker-dealer that prepared the research document. B) must notify the client that the recommendation was based on the broker-dealer's research document. C) must provide the client with a copy of the research document. D) need not disclose the source of the information.

D) need not disclose the source of the information. If an adviser provides its clients with reports or recommendations prepared by a third party without disclosure of the source, the adviser has acted unethically. There is, however, an exception to this rule, which happens to apply here. If the adviser uses third-party reports as a basis for its own recommendation or as support for its own recommendation to its client, it does not have to disclose this information.

Which of the following bonds is most likely to exhibit the greatest volatility due to interest rate changes? A bond with A) a low coupon and a long maturity. B) a high coupon and a short maturity. C) a high coupon and a long maturity. D) a low coupon and a short maturity.

A) a low coupon and a long maturity. Other things equal, a bond with a low coupon and long maturity will have the longest duration and therefore greatest price volatility.

The weak form of the efficient market hypothesis A) implies that technical analysis is not worthwhile. B) implies that fundamental analysis is not worthwhile. C) implies that inside traders cannot earn superior risk-adjusted returns. D) reinforces the value of technical analysis.

A) implies that technical analysis is not worthwhile. The weak form implies that information contained in historical stock prices is fully incorporated into current stock prices; therefore, technical analysis (the study of historical prices and volume) is not worthwhile in predicting future prices. This form neither refutes fundamental analysis nor implies that traders using insider information cannot earn superior profits.

Which of the following could accelerate a rise in a bull market? A) Sell limit B) Buy stop C) Buy limit D) Sell stop

B) Buy stop Buy stop orders are placed above the market, and as prices increase, the stops are hit, creating additional buying.

Which of the following statements are true? The Uniform Securities Act is not the actual law of any state or territory of the United States. The National Securities Markets Improvement Act of 1996 requires states and the federal government to have identical registration requirements. The state securities Administrator has responsibility for the enforcement and administration of a state's securities laws. A) I and II B) I and III C) I, II, and III D) II and III

B) I and III The Uniform Securities Act is not the actual law of any state or territory. Rather, it is model legislation that states use as a guide in drafting their own securities laws. Those laws give the responsibility to the state Administrator for enforcement and administration of those laws. The NSMIA's purpose is to eliminate dual registration, not to require identical laws.

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

B) II and IV An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This includes the case where a recommended product will generate a commission or other source of income to the adviser as well as full disclosure if a recommendation is not consistent with the adviser's activity in his own account. The adviser can use any source of information to create his own analysis, with disclosure of the source being required only if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same or similar objectives would purchase or have recommended for purchase the same securities.

Which of the following statements pertaining to the types of risk is not correct? A) Reinvestment rate risk is the uncertainty that surrounds the rate of return that can be earned on reinvested coupon income. B) Interest rate risk is the risk that the market price of an investment will decline as the result of changes in market interest rates. C) Business risk is the uncertainty of price fluctuations in the stock market. D) Exchange rate risk is the variability in returns on securities caused by currency fluctuations.

C) Business risk is the uncertainty of price fluctuations in the stock market. Business risk is the uncertainty of operating income. It is market risk that is the uncertainty of stock market price fluctuations.

Your client turns in a buy limit order for 100 shares of ABC at $58. Following the entry of the order, trades occur at 59, 59, 58.80, 58.20, 58.40, 57.95, 57.85. At what price was this limit order triggered? A) $58.20. B) $57.85. C) The order was not triggered. D) $57.95.

C) The order was not triggered. This is a perfect example of how important it is to read the question. The subject of the question is a limit order and then it asks for the trigger price. Stop orders are the only orders that have triggers so there is no trigger for this limit order. If the question had asked about the execution price, a buy limit order will be executed at the limit price or better (lower). In this case, the first trade at $58 or lower is $57.95. When you have a question like this on your exam, don't say to yourself, "But what if there is stock ahead?" We never want to overcomplicate a question by looking for something that isn't mentioned.

Which of the following hedge fund characteristics is least accurate? A) Most can borrow funds and use derivatives. B) They require large entry-level investment amounts. C) They are heavily regulated by capital market authorities. D) Their investment style is generally aimed at producing "absolute" returns.

C) They are heavily regulated by capital market authorities. Hedge funds are unregulated collective investment vehicles. This means they cannot be generally marketed to private individuals because they are considered too risky for investors who are less financially sophisticated. The initial outlay is usually quite high. Financial leverage and derivatives are a common practice with hedge funds. By hedging, the portfolio manager attempts to produce returns in both up and down markets.

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

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

GEMCO Manufacturing Co. has appointed the company's CFO as the trustee for their employee retirement plan. You are an IAR and you advise a substantial portion of the plan's assets. You are contacted by the CFO requesting a short-term loan from the plan assets for which he will pay the plan prime + 2%. Your best course of action would be to A) permit the loan because the CFO is the plan trustee B) refuse to allow this to happen because the plan assets will suffer C) refuse to allow this to happen because it would be a violation of your fiduciary responsibility D) permit the loan once you have been satisfied that there is adequate collateralization in place

C) refuse to allow this to happen because it would be a violation of your fiduciary responsibility ERISA never permits transactions of this type for a plan trustee. As an IAR handling some of the plan's investments, you would be placed in a fiduciary position and could not violate that trust.

Which of the following is considered the most accurate method of measuring GDP? A) Eurodollars B) As a function of GNP C) Actual dollars D) Constant dollars

D) Constant dollars Constant dollars are mathematically adjusted to remove the effects of inflation, so when economists compare the gross domestic product of one period with that of another, they measure economic activity rather than inflation.

Which of the following would not be unlawful for an investment adviser under the Uniform Securities Act? A) An owner of a majority of the stock in the investment adviser pledging that stock as collateral to a bank for a personal loan B) Signing an investment advisory contract that did not outline the compensation arrangements C) Failing to notify the Administrator that the adviser has custody of a client's securities or funds, even though the Administrator has no rule that prohibits such custody D) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees

D) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees Investment advisory contracts must outline compensation provisions and indicate the amount to be refunded, if any, if the contract is terminated. Nothing in the USA requires that there be a refund, only that the terms must be disclosed. The USA also requires investment advisers (IAs) to notify the Administrator if they have or will have custody of customers' funds. The USA considers that a pledge of a majority interest in an IA is an assignment of the IA's contracts.

A preferred stock with which one of the following features would be most likely to maintain a relatively stable market price when interest rates are rising? A) Convertible B) Adjustable rate C) Cumulative D) Callable

B) Adjustable rate Preferred stock is generally thought of as a fixed-income investment. That is because the dividends are typically stated as a fixed percentage of the stock's par value or, in the case of a no-par stock, a stated dollar amount. Therefore, the market price of preferred stock is interest rate sensitive. As interest rates increase, the price of the preferred stock will decrease and vice versa. There is an exception in the case of the adjustable rate preferred. Periodically, the dividend rate is adjusted to meet current market interest rates. These adjustments have the effect of maintaining a relatively stable market price.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following must be included in an advisory contract? Whether the contract grants discretionary power to the adviser The term of the contract A clause preventing assignment without consent The formula used for computing the fee A) II only B) I, II, III, and IV C) I, II, and IV D) I and II

B) I, II, III, and IV Written advisory contracts must disclose services provided; the term of the contract; the amount of the fee or the formula used to compute it; the amount of the fee to be refunded, if any, if the advisory fee is prepaid and the contract is terminated; provisions as to whether the adviser has discretionary authority and to what extent; and provisions requiring consent of the client to assign the contract.

All of the following statements regarding incentive stock options (ISOs) are correct except A) the exercise of ISOs does not create taxable income B) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain C) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise D) upon the exercise of an ISO, income for AMT purposes is created

C) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of exercise or 2 years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT.

Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is A) called for redemption. B) selling at a premium. C) selling at par. D) selling at a discount.

B) selling at a premium. A bond's NPV is most likely to be zero when its IRR is equal to the current market interest rate. In this case, that would be 6%. The only way for a bond with an 8% coupon to have a yield to maturity of 6% is if the bond is selling at a premium.

​In terms of being considered compensation for determining the allowable contribution to an IRA, receipt of which of the following would be included? A) Deferred compensation B) Child support C) Alimony received as part of a divorce decree signed in 2018 D) Taxable interest income

C) Alimony received as part of a divorce decree signed in 2018 For divorce decrees entered into before January 1,2019, court-ordered alimony is taxable to the payee (and tax deductible to the payor). Therefore, receiving it is considered compensation for purposes of an IRA contribution. Please note: Effective January 1, 2019, there are changes to the tax treatment of alimony for all divorce agreements entered on and after that date (no changes to those already in existence).

Under IA-1092, which of these are true regarding an investment adviser? He makes advice his principal activity. He makes advice his regular activity. He is compensated directly for advice. He is compensated directly or indirectly for advice. A) I and IV B) II and IV C) II and III D) I and III

B) II and IV Under the SEC's release, the rendering of advice does not have to be a person's principal activity. Rather, it must be a regular activity, and compensation may be received directly or indirectly.

GEMCO Securities, a registered broker-dealer, has a policy of hiring unpaid interns from top business schools. GEMCO is currently the lead underwriter on a new issue and has assigned three of its interns to specific tasks. One is entering the data as indications of interest are received, the second is calling clients to offer to deliver their prospectus via email instead of mail, and the third is calling clients to describe the new issue and accept indications of interest. Which of the interns would need to register as agents? A) All of the interns would need to register. B) Only the third intern would have to register. C) The second and third interns would be required to register. D) Because they are not being compensated, none of the interns need to register.

B) Only the third intern would have to register. When an individual representing a broker-dealer contacts clients to obtain indications of interest for a new securities offering, that person is performing a function requiring registration as an agent. Employees of a broker-dealer, permanent or temporary, compensated or not, do not have to register if their only function is clerical or administrative. Compiling data is clerical, and following up with clients to determine how they wish to receive documents for a purchase they've already made is simply an administrative task.

Which of the following statements regarding preemptive rights is true? A) Neither common nor preferred stockholders have the right to subscribe to a rights offering. B) Preferred stockholders do not have the right to subscribe to a rights offering. C) Both common and preferred stockholders have the right to subscribe to a rights offering. D) Common stockholders do not have the right to subscribe to a rights offering.

B) Preferred stockholders do not have the right to subscribe to a rights offering. Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.

An investor is looking to add some bonds to her portfolio. One of the bonds she is analyzing has a 3% coupon and the other a 6% coupon. Assuming both bonds have the same maturity date, a change in interest rates will have a more profound effect upon the market price of which bond? A) Changes in interest rates affect both bonds equally B) The 3% coupon C) The bond with the lower rating D) The 6% coupon

B) The 3% coupon The longer a bond's duration, the more its price is affected by changes to interest rate. When bonds have the same maturity, the one with the lowest coupon has the longest duration. Ratings have little or nothing to do with price changes caused by interest rate changes.

Which of the following business entities files a tax return on the 15th day of the 4th month after the end of the calendar (or fiscal) year? A) C corporations on Form 1120 B) S corporations on Form 1120s C) Multiple member LLCs on Form 1065 D) Partnership returns on Form 1065

A) C corporations on Form 1120 Of this group, the C corporation is the only one filing on the 15th day of the 4th month (April 15 for a calendar-year filer). The other three all file their returns along with a Schedule K-1 for each partner, member, or shareholder on the 15th day of the 3rd month, typically, March 15.

Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is true? A) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration. B) If it is determined that an investment adviser is insolvent, the SEC may revoke the registration. C) Revocation would occur, with appropriate notice, when a firm's annual updating amendment was received by the SEC 120 days after the end of the registrant's fiscal year. D) An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings.

A) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration. Failure to supervise, if proven, is one of the most common causes for disciplinary action against a broker-dealer or investment adviser. Insolvency is not a cause for revocation under the Investment Advisers Act of 1940, but it is for a state-registered investment adviser (it's tough to keep these straight; please see Appendix A). A late ADV annual updating amendment might be cause for some action but almost certainly not a revocation; it is not that serious an offense. The balance sheet would only have to be part of the disclosure statement (brochure) given to those from whom substantial prepayment of fees is received.

Strategic Capital Asset Managers (SCAM) is an investment adviser that is registered in five states. In lieu of preparing a fancy brochure, SCAM is permitted to provide its clients with a copy of its A) Form ADV, Part 2A and Part 2B. B) Form ADV, Part 1 and Part 1B. C) Form ADV, Part 2, Appendix 1. D) annual renewal form provided to the SEC.

A) Form ADV, Part 2A and Part 2B. Form ADV, Part 2 (both parts) is acceptable for use as the firm's brochure. Part 1 is for registration purposes, and Part 1B is only used by state-registered advisers (as this firm is). Part 2, Appendix 1 is used for investment advisers who offer wrap fee programs. As a state-registered investment adviser, SCAM does not file any forms with the SEC.

Which of the following statements are true? When an investment adviser representative begins or terminates employment with an adviser registered under the Uniform Securities Act, only the investment adviser must notify the Administrator. When an investment adviser representative begins or terminates employment with a federal covered adviser, only the investment adviser representative must notify the Administrator. When an agent of a broker-dealer leaves the firm, only the broker-dealer must notify the Administrator. When an investment adviser representative or a registered agent of a broker-dealer terminates employment, notice must be given to the Securities and Exchange Commission. A) I and II B) I and III C) III and IV D) II and IV

A) I and II When an investment adviser representative (IAR) begins or terminates employment with a state registered investment adviser (IA), the employing IA must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. However, when an agent of a broker-dealer begins or terminates employment, both the agent and the broker-dealer must promptly notify the Administrator. Notice to the SEC is not required.

Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are mutual funds are only allowed to maintain joint accounts with other funds that are members of the same "family" of funds no public offering may commence unless the fund has at least $100,000 in net assets no registered investment company may own more than 3% of the voting shares of another registered investment company shares of the fund will not have any margin loan value until the 30th day after purchase A) II and III B) I and III C) II and IV D) III and IV

A) II and III The minimum capitalization requirement for a new fund is $100,000 in net assets. A further restriction placed by the act is limiting one fund's holdings to a maximum of 3% of the voting shares of another fund. Because the shares of an open-end company are always considered a new issue, the shares may not be purchased on margin, but, as with other new issues, do have a loan value once owned at least 30 days. However, this restriction is part of the Securities Exchange Act of 1934, not the Investment Company Act of 1940.

Miranda is an employee of the First National Bank of State D. The bank is raising additional capital through an offering of 1 million new shares of common stock. Miranda will be paid a generous commission on all retail sales of the stock. Under the Uniform Securities Act, A) Miranda is excluded from the definition of an agent. B) Miranda must register as an agent in order to receive commissions. C) First National Bank of State D must register as a broker-dealer in order to pay employees a commission based on the sale of securities. D) Miranda must limit her sales to existing customers of the bank.

A) Miranda is excluded from the definition of an agent. The USA provides an exclusion from the definition of agent for those individuals selling securities on behalf of certain issuers. Included on that list are banks. The receipt of sales-based compensation is irrelevant, and there are no limits placed on who Miranda can approach about purchasing the stock. Banks are specifically excluded from the definition of a broker-dealer.

Which of the following statements is correct regarding an unsolicited trade in an unregistered, nonexempt security? A) The Administrator may, by rule, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. B) The Administrator may, by order, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. C) The transaction is exempt if the broker-dealer does not maintain an office in the state from which the order is received. D) It is an exempt transaction only if it is an order to buy; an order to sell an unregistered, nonexempt security is not an exempt transaction.

A) The Administrator may, by rule, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. The USA specifically grants the Administrator the authority to make a rule requiring written acknowledgment of unsolicited orders be recorded on a designated form. It is important for you to understand the difference between a rule and an order. Rules apply to everyone; orders apply to a specific broker-dealer. The Administrator could not require one broker-dealer to keep these forms but not another.

In an effort to benefit from the economies of scale, Liquid Assets Management, Inc., (LAMI) and Strategic Assets Management Company (SAMCO)—both registered with the Administrator as investment advisers—have merged into a new firm with the name of Strategic and Liquid Assets Management Company (SLAMCO). This would A) be considered an assignment of the advisory contracts and would require consent of the clients. B) be an unethical business practice. C) require notification of the clients within a reasonable period of time. D) require the filing of a new Form ADV along with the proper registration fee.

A) be considered an assignment of the advisory contracts and would require consent of the clients. A change of management control is considered an assignment of the advisory contracts held by LAMI and SAMCO. In order for those contracts to be continued by SLAMCO, consent of the clients is required. It is only when a change is to a minority interest in an advisory firm organized as a partnership that notification within a reasonable period of time is required. Although SLAMCO would have to register with a new Form ADV, as a successor company, no registration fees would be due until renewal on December 31.

You have been following GEMCO stock for the past couple of months and notice a recent increase in the stock's volatility. In the past month, several negative reports have been published about GEMCO's product line. This has caused a drop in the market price of the stock even though the GEMCO has just reported earnings that exceeded analyst's projections. This is an example of A) market risk B) volatility risk C) purchasing power risk D) financial risk

A) market risk Market risk is the uncertainty that a stock's price will move in a manner unrelated to the company's fundamentals. A prime example of this is when earnings go one way and the stock price the other. What we are not told in the question is the performance of the stock market. It is likely that the overall market has declined over this period (and that must be assumed here—poor test question writing). Financial risk is, as the name indicates, related to financing circumstances. This typically occurs when a company is overleveraged and may not be able to cover its debt service. Another financial risk is lack of cash flow, but nothing in this question indicates that situation.

An agent employed at First XYZ Securities produces his own research reports and provides them to a select group of personal clients. The agent has written permission from his employer to engage in this activity, provided the time spent on the project is conducted after working hours. Under the Investment Advisers Act of 1940, if the agent does not charge fees for the research but receives commissions from his employing broker-dealer for trades executed through the firm, A) neither the agent nor his employing broker-dealer need register as an investment adviser. B) the agent must register as an investment adviser representative. C) the broker-dealer must register as an investment adviser and the agent as an investment adviser representative. D) the agent must register as an investment adviser because the research is being done after hours.

A) neither the agent nor his employing broker-dealer need register as an investment adviser. The exclusion from the definition of investment adviser is lost only when an agent (or broker-dealer) receives special compensation for rendering investment advice. In this case, the agent is receiving commissions only when the clients make a trade. If there are no trades, there is no compensation for the advice. It is only when the compensation is not transaction based that it becomes special.

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A) when informed by the investment adviser that the representative's registration is effective. B) immediately. C) when informed by the Administrator that the representative's registration is effective. D) within 48 hours.

A) when informed by the investment adviser that the representative's registration is effective. Passing the exams does not automatically give one an effective investment adviser representative's license. Notice is received by the investment adviser from the appropriate state and/or federal authorities, and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual.

Two years after their wedding, Pam and Jim became the proud parents of child. Both grandparents want to help ensure educational funds for their new grandchild by using the Coverdell ESA. Assuming they are within the earnings limitations, which of the following would be permitted? A) $2,000 from Pam's mother, $2,000 from Pam's father, $2,000 from Jim's mother, and $2,000 from Jim's father B) $1,000 from Pam's parents and $1,000 from Jim's parents into separate ESAs C) $2,000 from Pam's parents and $2,000 from Jim's parents into a single ESA D) $2,000 from Pam's parents and $2,000 from Jim's parents into separate ESAs

B) $1,000 from Pam's parents and $1,000 from Jim's parents into separate ESAs Any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions. There's no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can't exceed $2,000.

An investor is looking at purchasing $10,000 face of bonds. One choice is U.S. Treasury bonds priced at 104.24, and the other choice is AAA-rated corporate bonds priced at 103⅜. How much more will the Treasuries cost? A) $8.65 B) $137.50 C) $13.75 D) $86.50

B) $137.50 If you chose $13.75, you understood the math but didn't remember this investor purchased $10,000 instead of $1,000 of bonds. If you didn't choose the correct answer, remember that Treasuries are quoted in 32nds, so 104.24 is $1,040 plus 24/32 or ¾ of the way to $1,050. That works out to be $1,047.50. The corporate bond is 103⅜% of 1,000, or $1,030 plus ⅜ of the way to 1,040. Each ⅛ is $1.25, so 3 of them is $3.75. That prices this bond at $1,033.75. The difference between them is $13.75. With 10 bonds, the total price difference is $137.50.

A bond has a conversion price of $100 and is currently selling at 145. What is the parity price of the common stock? A) $100.00 per share B) $145.00 per share C) $1.45 per share D) $14.50 per share

B) $145.00 per share With a conversion price of $100, the bond is convertible into 10 shares ($1,000 divided by $100). The bond and stock are at parity when the market value of those two are equal. If 10 shares are going to be equal to $1,450, the price of each must be $145. Invariably, the convertible will sell at a price somewhat above parity, or phrased in the reverse, the common stock will sell at a price somewhat below parity. In our question here, if the bond is selling for $1,450, the stock should be selling for something a bit lower than $145 per share.

Which of the following is not considered to be in the business of investment advising? A) A financial planner who provides advice on many types of financial instruments, including securities, and receives commissions on the sale of life insurance B) An insurance agent who discusses the merits of whole life insurance verses nonsecurities financial instruments and who receives commissions on the sale of life insurance only C) An insurance agent who provides investment advice regularly, but such advice represents a small portion of her business D) A person who prepares reports about securities in general

B) An insurance agent who discusses the merits of whole life insurance verses nonsecurities financial instruments and who receives commissions on the sale of life insurance only Please note that this question is not asking, "Who is an investment adviser?" It is asking about one of the three prongs—being in the "business." The insurance agent who discusses the merits of whole life insurance does not sell investment advice or securities, only insurance policies. The insurance agent does not hold herself out as an adviser, nor does she provide advice on securities. If a person advertises as one who provides investment advice or engages in providing investment advice or analyses on a regular basis (even if not the person's principal business activity), the person is considered in the business of giving investment advice. If the person receives any compensation that represents a clearly definable charge, commission, or fee for such advice (whether paid separately or not), she is considered in the business. If the person engages in other financial activities in connection with the advice, it cannot be used to avoid the business standard.

An individual has just received a bonus of $12,473 and wishes to generate some income without risking loss of capital. Assuming the client is in a low tax bracket, which of the following would be the most suitable choice? A) Growth stocks B) Bank-insured CDs C) Public utility stocks D) Insured municipal bonds

B) Bank-insured CDs The only choice here with no risk to capital is the bank-insured CD. Although the insured municipal bond is guaranteed to repay principal at maturity, the bond will still be subject to interest rate risk and, with the client in a low tax bracket, municipal bonds are generally unsuitable investments.

The Uniform Securities Act grants exemptions to the securities of a number of issuers. If you were the Administrator, which of the following securities would not be eligible for an exemption in your state? A) Equipment trust certificates issued by a regulated common carrier B) Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state but not authorized to do business in your state C) Common stock issued by the XYZ Trust Company, organized under the laws of a neighboring state but not authorized to do business in this state D) Bonds issued by the Province of Alberta

B) Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state but not authorized to do business in your state Any issue from a state or Canadian province is always exempt. Equipment trust certificates issued by any regulated common carrier are always exempt. Banks, savings institutions, and trust company securities are also exempt as long as they are organized under the laws of the United States or any state. However, securities issued by a savings and loan or building and loan are only exempt if the issuer is authorized to do business in this state.

The Jones family has scheduled an initial visit with a financial planner. Mr. Jones has an annual salary of $70,000, and this is their first attempt at financial planning. Which of the following should be the first step taken by the financial planner? A) Determine a reasonable fee for designing the plan B) Establish an emergency fund C) Set goals and dates for reaching them D) Pay off credit card debt

B) Establish an emergency fund There are many questions on the exam where you will be forced to choose between two possible answers, only one of which is correct. In many cases, it is strictly a matter of opinion, but only NASAA's opinion counts. This is one of them. Goal setting is important, but the regulators feel that the first step in any plan is making sure that there is a "rainy day" fund. We can argue about that because some will say that a good plan can be used to establish that fund where none has existed before. But, please go with the right choice.

NASAA has a Model Rule dealing with investment adviser brochures. If an advisory client wanted information about each individual providing investment advice and having direct contact with clients in the state, that information would be found in A) Form ADV Part 1B. B) Form ADV Part 2B. C) Form ADV Part 1A. D) Form ADV Part 2A.

B) Form ADV Part 2B. Form ADV Part 2B is called the brochure supplement and includes information about the specific individuals acting on behalf of the investment adviser who actually provide the investment advice and interact with the client. Part 2A is the brochure itself, and Parts 1A and 1B are used when initially registering and when amendments are necessary.

ABCO Materials, Inc., is in the process of raising money from the public for the first time. Which of the following must be disclosed in ABCO's registration statement filed with the Administrator? Biographical sketches of each of the members of the board of directors, as well as ABCO's principal officers Expected use of the proceeds of the offering Performance of the company's stock over the last five years or since the founding of the company, whichever is the shorter period Expected range of the public offering price A) I and IV B) I, II, and IV C) II and III D) III and IV

B) I, II, and IV A registration statement will always include the expected use of the proceeds of the offering, as well as short biographies of the members of the board of directors (and key officers as well). This question stated that it was the company's IPO, so there could not be any previous stock performance; although the public offering price is not determined until the effective date, the expected range is indicated to the state(s).

Among the many exempt transactions under the Uniform Securities Act are the private placement and the preorganization certificate or subscription. While these two exemptions have several requirements in common, they have which of the following differences? The private placement exemption places a limit on the number of sales to retail investors, while the preorganization certificate places a limit on the number of offers to all investors.​ Payment for the purchase may be made in the case of a private placement, while no money changes hands in a preorganization subscription. It is expected that noninstitutional buyers of the private placement are purchasing for investment only, while no such requirement exists for the investors in a preorganization certificate. Commissions may be paid on the sale of a private placement to noninstitutional clients, while no remuneration is payable on the sale of a preorganization sub

B) II and III The term sale means that there has been an exchange of value. No money changes hands in the case of a preorganization certificate or subscription. It is simply a commitment to invest when the corporation's charter has been granted. On the other hand, a private placement is a sale because the seller receives payment—value is exchanged. The state will consider a private placement an exempt transaction if it is anticipated that individual (noninstitutional) investors are purchasing for investment only, not immediate resale. No holding period restrictions are placed on preorganization certificates. Only in the case of a sale of a private placement to an institutional client is it permissible to pay commissions. Finally, Choice I has it backwards. When referring to retail (noninstitutional) investors, there is a limit to the number of offerees (10), while in the preorganization certificate, the number of subscribers is limited to 10, regardless of whether they are retail or institutional.

Investors looking for current income may find that bonds and preferred stock provide that. One of the differences between these two investments is which of these? A) Bonds are issued with a fixed rate of return while preferred stock carries a variable rate of return. B) Income from preferred stock is generally received quarterly while that from bonds is received semiannually. C) Bonds can be callable while preferred stock can be convertible. D) A corporation's prior lien preferred stock has liquidation priority over its subordinated debentures.

B) Income from preferred stock is generally received quarterly while that from bonds is received semiannually. At least for exam purposes, dividends on equity securities (common and preferred stock) are always paid quarterly, while bond interest is always paid semiannually. Both are issued with a fixed rate. The nominal yield (coupon rate) on a bond is fixed at issuance as a percentage of par, and the dividend rate on preferred is fixed at a stated dollar amount or percentage of par. No equity security, regardless of the adjectives, has priority over a debt security, regardless of how far down the line the debt security is. While the question is looking for differences, both bonds and preferred stock can have the callable or convertible features.

Under the Uniform Securities Act, which of the following statements regarding the consent to service of process is not true? A) A consent to service of process makes legal process served on the Administrator legally binding as process served on the registrant personally. B) Only applicants whose principal office is in another state need to file a consent to service of process. C) A consent to service of process does not need to be supplied each time a registrant's registration is renewed. D) Investment advisers and investment adviser representatives must file a consent to service of process to become registered.

B) Only applicants whose principal office is in another state need to file a consent to service of process. All applicants for registration must file a consent to service of process, regardless of where their principal office is located. A consent to service of process grants legal authority for the Administrator to receive legal notices on behalf of the registrant and applies to all securities professionals. The document is part of the initial registration and, once filed, does not have to be renewed.

Under the Uniform Securities Act, which of the following types of transactions can be entered into legally with unregistered, nonexempt securities? A) Rights offering to existing shareholders with underwriting compensation of $0.05 per share to the soliciting broker-dealers B) Private placement offered to more than 50 institutional purchasers in the state C) Solicited transactions with individual clients located within the state D) Public offering of stock in a new corporation

B) Private placement offered to more than 50 institutional purchasers in the state Private placements involve the sale of nonexempt securities to investors without the need for registration. There is no numerical limit to the number of offers that may be made to institutional buyers. However, offers to noninstitutional buyers are limited to a maximum of 10 in any 12-month period. Rights offerings are only exempt if there is no compensation, and only unsolicited orders are exempt transactions.

Which of the following actions by an agent would not constitute fraud as defined in the Uniform Securities Act? A) Executing a trade for a customer without the customer's knowledge B) Purchasing a security for the account of a client and then buying 100 shares of it for her own account C) Executing a trade for a customer at a price that is unrelated to the current market D) Purchasing a security on an exchange and simultaneously selling it on another exchange to create the impression of increased trading volume.

B) Purchasing a security for the account of a client and then buying 100 shares of it for her own account There is nothing illegal about an agent purchasing stock for her own account after a trade in that security is made in a customer's account. Depending on the circumstances, it could be a problem if the agent bought first and then executed customer orders. The other activities are all fraudulent.

Which of the following regarding customer accounts is not true? A) In some cases, a TOD account is referred to as a POD account. B) Stock held in a custodial account may be registered in the name of the minor. C) Asset held under JTWROS goes to the survivor(s) in the event of the death of one of the tenants. D) Margin trading in a fiduciary account requires special documentation.

B) Stock held in a custodial account may be registered in the name of the minor. The reason behind UTMA (or UGMA) accounts is because securities may not be registered in the name of a minor. Trading on margin is generally not permitted in fiduciary accounts except under special circumstances and with the appropriate documentation. TOD and POD are essentially the same. TOD is the preferred term in the securities business while banks generally use POD.

Market interest rates rise by 50 basis points. If each of these bonds has about the same maturity date, which of the following would decline the least? A) Treasury bond issued at par carrying a 6% coupon B) Treasury bond issued at par carrying a 7% coupon C) AA corporate bond carrying a 7% coupon D) AAA corporate bond carrying a 6% coupon

B) Treasury bond issued at par carrying a 7% coupon All other factors being equal, bonds of higher quality experience less price volatility than do bonds of lower quality. Treasury securities have higher quality than other debt securities due to the elimination of default risk. When market interest rates rise, bonds having higher coupons will decline less than bonds having lower coupons. LO 20.b

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

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

One area of paramount importance to state Administrators is seeing that investment advisers make all material disclosures to their advisory clients. An example of a failure to disclose is when the adviser has a financial condition that is reasonably likely to impair the ability of the adviser to meet contractual commitments to those clients. That disclosure would not need to be made in the case where the investment adviser A) accepts prepayment of more than $500 six or more months in advance. B) engages in agency cross transactions. C) has discretionary power over the account. D) maintains custody of the account's assets.

B) engages in agency cross transactions. Numerous disclosures are required when an investment adviser (IA) engages in agency cross transactions, but this is not one of them. The potential impairment must be disclosed if the IA maintains custody, exercises discretion, or accepts a substantial prepayment of fees. For state-registered advisers, that is more than $500 six or more months in advance. For federal covered advisers, the dollar amount is more than $1,200. How do we know this question is about state-registered investment advisers? The question refers to Administrators, not the SEC.

XYZ Securities, Inc., a FINRA member broker-dealer, is registered in all 50 states. XYZ has its principal office in State C and a branch office in State A. If the State U Administrator wishes to examine certain financial records of XYZ's, the Administrator would be able to do all of the following except A) do so during normal business hours without prior notice. B) examine those records located in State U. C) ask FINRA to perform the examination. D) ask the State C Administrator to perform the examination.

B) examine those records located in State U. This broker-dealer does not have a place of business in State U, so there are no records located there. How can an Administrator examine records that don't exist? All records are kept in the principal office, and those pertaining to branch operations are kept in the branch office. If a broker-dealer is registered in her state, the Administrator can examine that firm's books and records during normal business hours without prior notice. To minimize expenses, Administrators usually ask the Administrator of the state in which the broker-dealer has its principal office to ask on their behalf. Alternatively, the Administrator may call on a self-regulatory organization (SRO) like FINRA to examine one of its member firms on behalf of the Administrator.

Under the Uniform Securities Act, an investment advisory contract must contain (in writing) all of the following provisions except A) the investment adviser's compensation shall not be based on capital gains in client accounts. B) on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account. C) no assignment of the investment advisory contract may be made without the client's consent. D) the adviser, if a partnership, must notify the client of any change in the partnership's membership.

B) on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account. Investment advisers organized as corporations are under no obligation to inform their clients of changes to shareholders. However, if an investment adviser is a partnership, clients must be notified of any change in the membership of the partnership. Keep in mind the distinction between notification and assignment. Investment partnerships must notify clients of any change in the partnership's membership, no matter how insignificant the partner's position in the firm. However, the death of a minority partner does not constitute an assignment (transfer) of the account, although the information must be communicated to clients. A change in a majority interest in the partnership would be an assignment of the account that requires client consent.

Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) the trade is being executed by an officer or partner of the firm. B) purchasing shares from advisory clients that were originally acquired as a result of the adviser's previous buy recommendation. C) directing securities transactions to an affiliated broker-dealer. D) engaging in an agency cross transaction.

B) purchasing shares from advisory clients that were originally acquired as a result of the adviser's previous buy recommendation. There are two principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent—that's the reason for the term.

Esther Watson has recently been hired by Robinson, Ibbotson, Carlson, and Hanson (RICH), an investment adviser registered with the SEC. RICH has offices in 17 states and Esther works in the branch located in State A. If no exemption is available, Esther will have to register as an IAR with A) the Administrators of each of the 17 states. B) the Administrator of State A. C) the SEC because RICH operates in more than 15 states. D) FINRA.

B) the Administrator of State A. Unless qualifying for an exemption, employees of investment advisers must register as IARs in any state in which they have a place of business. This is a state-level registration, so the SEC and FINRA are not involved in any way.

If having discretion over $100 million or more in 13(f) securities, which of the following would be exempt from filing Form 13F? A) An investment adviser that manages mutual fund assets B) A trustee C) A natural person who exercises investment discretion over her own account D) A natural person who exercises investment discretion over the account of any other natural person or entity

C) A natural person who exercises investment discretion over her own account An institutional investment manager is also a natural person or an entity that exercises investment discretion over the account of any other natural person or entity. For example, an investment adviser that manages private accounts, mutual fund assets, or pension plan assets is an institutional investment manager; so is the trust department of a bank. A trustee is an institutional investment manager, but a natural person who exercises investment discretion over her own account is not an institutional investment manager.

Which of the following activities would not be considered a prohibited practice under the NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents? A) An agent opens a brokerage account at his employing broker-dealer in his wife's maiden name in order to purchase an IPO being underwritten by the firm. B) In order to meet production quotas, an agent opens several accounts under fictitious names. C) An agent shares in the profits and losses in a customer's account without making a financial contribution to the account. D) An agent purchases a suitable stock for a client's account prior to receiving written discretionary authorization.

C) An agent shares in the profits and losses in a customer's account without making a financial contribution to the account. As long as the agent has the consent of the customer and the employing broker-dealer, profits and losses may be shared and no financial contribution is required of the agent. No purchases can be made by an agent in a discretionary account prior to receipt of the written trading authorization. Opening accounts in fictitious names or a spouse's name in order to hide improper purchases is a prohibited practice. Please note: The correct choice does not include the consent requirements, so the statement is only partially correct. But the other answers are definitely prohibited actions, so you pick the best answer when you get something like this on the exam.

Which of the following actions by an investment adviser registered in three states is permitted? A) Stating in the advisory contract that fees will be reimbursed if account performance is less than agreed upon B) Delivering the brochure within 48 hours after signing of the contract, as long as there is a 5-day, penalty-free withdrawal provision C) As long as the firm's brochure indicates that fees are negotiable, announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year D) Guaranteeing a rate of return equivalent to a 5-year insured bank CD or waiving their yearly fees

C) As long as the firm's brochure indicates that fees are negotiable, announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year This is not considered discrimination, because the discount applies equally to all (if they are among the first 50). The regulators consider this to be a negotiated fee. Fee reimbursement or waivers are not permitted. The five-day withdrawal provision applies to state-registered investment advisers when the brochure is not delivered at least 48 hours prior to (not after) the signing of the contract.

It would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified? A) Equity mutual funds B) Common stock C) Bond mutual funds D) Preferred stock

C) Bond mutual funds Qualified dividends are those eligible for reduced income tax rates. Those rates can be as low as 0% and as high as 23.8%, with most falling within the 15% to 20% bracket. We don't expect the exam to test on the requirements for a dividend to be considered qualified or how you reach that 23.8% rate. Dividends on bond funds and money market funds are not qualified because the majority of those dividends represent interest earned by the fund and the tax break does not apply to earnings from interest.

Which of the following qualifies under the Section 28(e) safe harbor provisions for soft dollar compensation? A) Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers B) Rent-free use of unused space in the broker-dealer's office C) Clearance and settlement services provided by the broker-dealer D) Providing access to the broker-dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements

C) Clearance and settlement services provided by the broker-dealer Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service. The safe harbor under Section 28(e) applies to services that benefit the customers of the investment adviser. Rent-free use of office space benefits the investment adviser (IA), not the customer. An accounting system that allows the IA to prepare its financial statements benefits the IA, not the customer. Seminar fees are permitted but not reimbursement for travel expenses.

A unique requirement for those investment advisers who maintain custody of customer assets is the filing of A) Form ADV, Part 1. B) Form ADV-H. C) Form ADV-E. D) Form ADV, Appendix 1.

C) Form ADV-E. Form ADV-E is used as the cover page for the annual surprise audit performed by the independent accountant on all IAs who maintain custody of customer assets.

When would it not be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to divide or otherwise split the agent's commissions, profits, or other compensation from the purchase or sale of securities? As long as the other person is also registered as an agent for the same broker-dealer As long as the other person is also registered as an agent for a broker-dealer under direct or indirect common control As long as the arrangement is in writing As long as the client has approved of the sharing arrangement A) III and IV B) I, II, III, and IV C) I and II D) I, II, and III

C) I and II NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents permits commission sharing as long as the agents are properly registered with the same broker-dealer or one under common control. There is no requirement for the arrangement to be in writing, and the customer has no say so in this matter.

Among the differences between C corporations and S corporations is the liability assumed by the shareholders the number of allowable shareholders the tax treatment of the corporation's earnings residency requirements of shareholders A) II and III B) I and IV C) II, III, and IV D) I, II, III, and IV

C) II, III, and IV A feature common to both C and S corporations is the limited liablity of the investor. That is, the investor is not liable for the debts of the business and cannot lose more than the original investment. Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.

One of the prohibited practices under the Uniform Securities Act is market manipulation. Which of the following are examples of a broker-dealer engaging in that practice? Arbitrage Churning Matched orders Wash trades A) II and IV B) I and IV C) III and IV D) I and II

C) III and IV Matched orders occur when one or more broker-dealers engage in buying and selling between themselves for the purpose of creating the misleading appearance of increased activity in a security. A wash trade is an attempt to manipulate a security's price by creating an apparent interest in the security that really does not exist. Arbitrage is the simultaneous buying and selling of the same security in different markets to take advantage of different prices. It is not a form of market manipulation. Churning is a prohibited activity, but has nothing to do with the market, just a client's account.

In discussing a direct participation program with your customer, rank the following items in order of importance from most to least. Tax write-offs Liquidity and marketability Potential for economic gain A) III, II, I B) II, III, I C) III, I, II D) I, II, III

C) III, I, II The reason why the program's economic viability is the first priority in the assessment of DPPs is that the IRS considers programs designed solely to generate tax benefits to be abusive tax shelters. This can lead to tax penalties. During an audit, the first thing the IRS agent will examine is if the program has a reasonable expectation of generating a profit. As the IAR recommending the program to your client, you want to do your best due diligence to make sure to limit the potential audit exposure. Assuming this program passes that test, you want to examine the potential tax benefits. Finally, because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority.

One of your prospective clients is considered a key employee at his place of business. This individual has a net worth of almost $3 million, currently earns in excess of $540,000 per year, and is married with two teenage children. He currently has a little over $1 million in his 401(k), slightly more than half of which is invested in his employer's common stock. The company is the beneficiary of a $1.5 million key person life insurance policy on his life. Given these facts, what is your greatest concern as his adviser? A) Alternative minimum tax B) Inadequate funding for college savings C) Inadequate life insurance coverage D) Too high a percentage of the retirement plan invested in the company's stock

C) Inadequate life insurance coverage Because the client's only life insurance seems to be that with the company as beneficiary, it does not appear that he has adequately planned for his premature death.

Which of the following statements is most accurate regarding the net present value (NPV) and internal rate of return (IRR) on a bond? A) IRR assumes the cash flows are reinvested annually. B) IRR assumes the cash flows are reinvested at market interest rates. C) NPV assumes the cash flows can be reinvested at market interest rates. D) NPV assumes that cash flows can be reinvested at the bond's IRR.

C) NPV assumes the cash flows can be reinvested at market interest rates. The first step in finding the NPV is to compute the present value (PV). The PV is computed by taking the future cash flows and discounting them by a "discount" rate. That rate is the current market interest rate. So, if NPV is based on PV and PV assumes reinvestment at the discount rate, that assumption must hold true for figuring NPV. In the case of the IRR, that is the yield to maturity of a bond and assumes that the cash flows are reinvested at that IRR. For example, a bond with a YTM of 7% assumes that all reinvestments will be made at that 7% rate. The periodic cash flow on a bond comes from the semiannual interest payments making reinvestments semiannually, not annually.

The Investment Advisers Act of 1940 provides for an exemption from registration to investment advisers whose clients are residents of the state in which the adviser has its principal office and only place of business and who do not give advice dealing with securities listed on any national exchange (e.g., New York Stock Exchange). This exemption is denied to any investment adviser meeting all of the requirements but having as a client A) a bank. B) an accredited investor. C) a private fund. D) an insurance company.

C) a private fund. The intrastate exemption offered under the Investment Advisers Act of 1940 does not apply to an investment adviser (IA) with even a single private fund as a client. What about the insurance company exemption? First of all, that applies only when all of the IA's clients are insurance companies. Second, the question is asking about the intrastate exemption, not exemptions in general. Another point is that although there are cases where an investment adviser without a place of business in a state whose only clients are institutions like banks and insurance companies qualifies for an exemption under state law, this question deals with federal law. In addition, the question points out that this particular exemption (intrastate exemption) applies only when the client resides in the same state as the IA's principal office. LO 9.b

Under securities industry regulations, all of the following are prohibited when attempting to make a sale except A) an agreement by the agent to repurchase the security from the customer for the same price at a future date. B) telling a client that he is trading commission free when, in actuality, your firm is acting as a principal and placing a markup on his trades. C) a statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so. D) telling a client that her stock is a sure candidate for a takeover bid.

C) a statement by the agent that the security will be listed on an exchange within a year after the company announced its intention to do so. An agent cannot guarantee to buy back the securities at the same price, cannot claim there are no transaction costs when the firm charges a markup, and cannot make exaggerated statements relating to future activity in a security. However, the agent may state that the company intends to list its shares on an exchange if this is a fact.

Transparent Investment Advisers, Inc. (TIA), is registered in three states and has $55 million in assets under management. TIA maintains custody of customer securities. TIA's chief financial officer reports that the net worth of the firm has suddenly fallen to $28,000. This requires TIA to A) borrow $7,000 from the owners. B) issue $7,000 of stock. C) obtain a surety bond in the amount of $10,000. D) obtain a surety bond in the amount of $7,000.

C) obtain a surety bond in the amount of $10,000. State-registered investment advisers who maintain custody of customer funds or securities must have a minimum net worth of $35,000. If the net worth should fall below that amount, the firm must immediately obtain a surety bond rounded to the next $5,000 to meet that level. In this case, the firm's deficiency is $7,000, and the next $5,000 that will cover that is a bond for $10,000. Borrowing money does not increase net worth, and even though TIA is a corporation, it would probably take too long to issue additional stock.

Amie Lear is a securities analyst employed by Empyreal Benefits, Inc., a registered broker-dealer. She is assigned to cover a number of different equity and debt investments. One of the investments is Taylor, Inc. (Taylor), a manufacturer of a wide range of children's toys. Based on her extensive analysis, she determines that her expected return on the stock, given Taylor's risks, is 10%. However, when applying the capital asset pricing model (CAPM), the result is a 12% rate of return. Based on Lear's analysis, Taylor's stock is A) undervalued. B) neither overvalued nor undervalued. C) overvalued. D) correctly valued.

C) overvalued. The CAPM gives us the expected rate of return on an investment. It is sometimes referred to as the required rate of return. That is, based on the risks, the CAPM reveals the return that should be earned. In this example, that return is 12%.Lear's computation expects the return to be only 10%. Therefore, Lear is showing that instead of providing the required return of 12%, she believes the stock will only return 10%. That makes the stock overpriced (a lower price will generate a higher rate of return). As a result, Lear would not recommend this stock because her calculations indicate it will not return as much as it should for the risk being taken.

What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer? A) File a currency transaction report if the current market value of the stock represented by the certificate exceeds $10,000. B) Instruct the client to send the certificate to the transfer agent because you cannot accept it. C) Accept the certificate and send the customer a receipt within 24 hours of the delivery. D) Accept the certificate and give the customer a receipt.

D) Accept the certificate and give the customer a receipt. When a client delivers a stock certificate to the broker-dealer's office, the appropriate procedure is to furnish the customer with a receipt on the spot. Broker-dealers are far more likely to have custody arrangements than are investment advisers.

An investment adviser that has custody of customer funds and securities discovers that its net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must do which of the following? Notify the Administrator by the close of business on the day after discovery File a report of its financial condition with the Administrator no later than the close of business on the day after notification Cease doing business A) I, II, and III B) I and III C) II and III D) I and II

D) I and II When an investment adviser fails to meet its minimum financial requirements, it must notify the Administrator by the end of business on the day after discovery and then must file a report of its financial condition by the end of the next business day. Included in the report must be the number of client accounts. LO

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

D) I and IV Normally, registration of persons becomes effective at noon of the 30th day following filing. If the Administrator requires the filing of amendments, the clock starts over again with the filing of those amendments. Agents do not have financial requirements, and the Administrator has a maximum of one year after termination to initiate any actions.

Which of the following would be prohibited practices under state securities law? Soliciting orders for exempt securities Making recommendations on the basis of nonpublished analysts' reports Failing to inform a client of unusually high commissions because the client does not complain Failing to obtain prior written authorization for orders from a third party A) I, II, and III B) I and II C) I and III D) III and IV

D) III and IV Failing to inform a client of unusually high commissions and not obtaining prior written approval for orders from a third party are prohibited practices. Soliciting orders for a security that is exempt from registration is a normal business practice. An agent may use the nonpublished reports of the firm's securities analysts as a basis for recommendations, provided the nonpublished reports do not contain inside information.

Which of the following activities would have an effect on the NAV of a mutual fund? The sale of securities from the portfolio Automatic reinvestment of dividends by the shareholders Market appreciation of portfolio securities Market decline in the value of portfolio securities A) I, III, and IV B) I, II, III, and IV C) I and II D) III and IV

D) III and IV The formula to determine NAV is assets minus liabilities divided by shares outstanding. The sale of securities from the portfolio will replace the asset (securities) with an equal value of the asset (cash) and will have no effect on the NAV. The reinvestment of dividends will also not affect the NAV, because the shares going out are offset equally by the cash coming in. Market appreciation or decline will, however, affect the NAV because asset value will either increase or decrease, but liabilities and shares outstanding will remain unchanged.

Under the Uniform Securities Act, the term broker-dealer would include A) an agent registered under the act who, from time to time, sells stock from personal inventory. B) an issuer distributing its own common stock offering. C) a trust company. D) a person with no office in the state who directs offers to no more than five individual residents of the state in any 12-month period.

D) a person with no office in the state who directs offers to no more than five individual residents of the state in any 12-month period. Although a person has no office in the state, offers are directed to residents of the state. Under the USA, this person is defined as a broker-dealer. There is no de minimis exemption for broker-dealers. A person is exempt from the definition of broker-dealer if there is no office in the state and offers are directed to institutional clients or existing individual clients who are not residents of that state. The agent is merely selling his own stock as would any other individual; that does not make one a broker-dealer.

MaryBeth is an agent with QuickTrade Securities, a subsidiary of QuickLoan Bankcorp, which is a holding company that also owns QuickIssue Capital Markets, an underwriter specializing in bringing new issues to market. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, MaryBeth would be permitted to split commissions resulting from securities transactions with any of the following individuals except A) an agent registered with QuickIssue Capital Markets. B) another agent registered with QuickTrade Securities. C) the principal supervising her activities at QuickTrade Securities. D) an agent properly registered with USATrade Securities.

D) an agent properly registered with USATrade Securities. Under the NASAA policy, in order to split commissions, both individuals must be licensed as agents with either the same broker-dealer or ones under common control (ownership). What about sharing with your principal? Why not? In fact, many managers (principals) have commission overrides as a fundamental part of their compensation package. Remember, under the Uniform Securities Act, there is no separate principal registration as there is with FINRA; all principals are registered as agents (or IARs, as the case may be), just the same as you.

A REIT and a direct participation program are similar because they both A) are traded actively in the secondary market. B) pass through losses to investors. C) can be described as a limited partnership. D) are operated by a centralized management.

D) are operated by a centralized management. Both a REIT and a DPP are run by centralized management. A REIT may not pass through losses to its investors, and it is not a limited partnership. A DPP cannot be easily traded in the secondary market.

Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except A) ISOs may only be granted to employees, while NSOs may be given to virtually anyone. B) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO. C) the holder of an ISO can recognize capital gain (loss) as a result of exercise and sale, whereas ordinary income (loss) is the result with an NSO. D) at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation.

D) at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation. Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. ISOs can only be granted to employees, while the NSO can also be granted to members of the board of directors and even to vendors. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least one year from the date of exercise and at least two years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the option within 10 years of the grant, it is treated as an NSO for tax purposes.

As a fiduciary, the investment adviser representative (IAR) owes his clients an affirmative duty of utmost good faith, as well as full and fair disclosure of all material facts. This affirmative duty of disclosure is required by the IAR in all of the following situations except A) he receives compensation from his employing broker for transactions that are executed through the brokerage house. B) the advice he is providing is outside the scope of his brokerage employment and is not under the control or supervision of his employer. C) his family has a beneficial interest in a private medical equipment firm that he recommends to the client. D) he has donated funds to a nonprofit medical research institute that owns securities that he has recommended.

D) he has donated funds to a nonprofit medical research institute that owns securities that he has recommended. The investment adviser representative (IAR) need not disclose that he donated funds to a nonprofit research institute. No conflict of interest is present that requires an affirmative duty to disclose. The fact that the institute owns securities consistent with the IAR's recommendations is not relevant to the IAR's relationship with the client. The IAR has an affirmative duty to disclose all material facts in all the other choices.

Investors in exchange-traded funds (ETFs) find they offer several attractive advantages over mutual funds. All of the following would be advantages that ETFs typically have over mutual funds except A) the ability to buy on margin. B) greater tax efficiency. C) intraday pricing for active traders. D) lower trading costs for active traders.

D) lower trading costs for active traders. Please note that this is an except question; the correct answer will be the statement that is not true. ETFs, being traded on exchanges, are generally subject to commissions on buys and sells just like any other actively traded security in the secondary markets. That has the effect of increasing the costs for an active trader. Mutual funds are not actively traded. Even when a front-end load fund is purchased, there are generally no costs when the investor wishes to redeem. Because prices are not set after the market closes, the intraday trading of ETFs can be an advantage to the trader when there are significant market swings. Margin trading can increase profits due to the leverage. The nature of an ETF's operation tends to generate fewer taxable consequences to investors. Please note that recently, many ETF sponsors have offered commission-free trading to their investors.

A state-registered investment adviser maintains custody of client funds and securities. On Thursday, the chief financial officer of the firm informs the chief compliance officer that their net worth is $31,578. Under the provisions of the Uniform Securities Act, the firm would A) do nothing, as their net worth is far in excess of the minimum requirement of $10,000. B) need to increase its net worth. C) send a detailed financial report to the Administrator by the close of business Friday. D) send a detailed financial report to the Administrator by the close of business Monday.

D) send a detailed financial report to the Administrator by the close of business Monday. A state-registered investment adviser who maintains custody of client assets must maintain net worth of at least $35,000 or a surety bond of the same amount (not both). If the net worth should fall below the minimum, by the close of the next business day after discovery (Friday in our example), notice of the deficiency must be sent to the Administrator of the state in which the principal office of the adviser is located. Then, by the close of business the day after that (Monday in our example), a detailed financial report, including the number of clients served by the adviser, must be sent to the Administrator. When a state-registered investment adviser who has custody or discretion of client funds or securities does not meet the minimum net worth standard of $10,000 for discretion or $35,000 for custody, a surety bond of a sufficient amount must be posted.

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 is the publisher of a news magazine of general and regular circulation. B) the adviser's advice relates solely to securities issued or guaranteed by the U.S. government. 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's clients are investment companies registered under the Investment Company Act of 1940.

D) the adviser's clients are investment companies registered under the Investment Company Act of 1940. 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.

A customer bought a 10-year 6% AAA bond at par when it was issued. Two years later, if the CPI has increased from 2% to 4%, the price of the bond most likely A) has stayed at par. B) cannot be determined. C) has declined. D) has increased.

C) has declined. When inflation is on the rise, interest rates often rise. When interest rates increase, bond prices may be expected to decline.

If applicable, disclosure of payment for order flow is required A) when the trade is in an exempt security. B) on the customer order ticket. C) if requested by the customer. D) on the customer trade confirmation.

D) on the customer trade confirmation. If the broker-dealer executing the customer's trade received payment for order flow, it must be disclosed on the customer trade confirmation. This is not an optional disclosure.

If an investment adviser representative of a federal covered adviser that transacts business in a state terminates employment with that investment adviser, which of the following statements is true? A) The representative must notify the Administrator. B) Both the representative and the investment adviser must notify the Administrator. C) The investment adviser must notify the Administrator. D) No notice to the Administrator is required.

A) The representative must notify the Administrator. It is the investment adviser representative's responsibility to notify the Administrator. The advisory firm is not registered with the state; only the representative is registered.

A company currently has earnings of $4.00 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield? A) 5.00% B) 1.25% C) 10.00% D) 15.00%

A) 5.00% The quarterly dividend is $0.50, so the annual dividend is $2.00; $2 ÷ $40 (market price) = 5% annual yield (current yield).

What is the total return on a 1-year, newly issued (365 days to maturity) zero-coupon bond priced at 950? A) 5.26% B) 5.26% plus the implied coupon rate C) 5.00% D) The return cannot be determined without knowing current interest rates

A) 5.26% To determine the total return on this zero-coupon bond, the $50 capital appreciation is divided by the cost of the bond (in this case, $50 divided by $950 equals a total return of 5.26%). Total return of a zero-coupon bond is made up entirely of the difference between the cost of the bond and the sale or maturity price of the bond.

DERP Corporation has issued 5% convertible debentures maturing in 2040. The conversion price is $40 and the common is currently trading at $48 per share. One would expect the DERP debentures to be selling somewhat A) above $1,200. B) below $1,200. C) above $1,000. D) below $1,000.

A) above $1,200. The first step here is to compute the parity price. A conversion price of $40 means the debenture is convertible into 25 shares of the common stock (par of $1,000 divided by $40 = 25 shares). With a current market price of $48 per share, the parity price of the convertible would be $1,200 (25 × $48). Because convertible securities generally sell at a slight premium over their parity price, the debentures should have a current market value a bit higher than $1,200.

A manufacturer of soybean oil is concerned that the price of soybeans will increase over the next six months. The best strategy to employ would probably be A) a short hedge. B) a long hedge. C) a neutral hedge. D) a trimmed hedge.

B) a long hedge. The concern is that the price will go up. Just as with options, when we are concerned that the price of something will go up, we go long that item. With options, it would be a long call; with futures, it is simply hedging by going long (buying) the soybean futures. The soybean farmer who would be concerned about a decline in the price would go short soybean futures.

A state-registered investment adviser would like to employ the services of an individual as a solicitor to help bring in more business. The solicitor will be compensated by receiving a percentage on all assets placed under management. In order to do this, all of the following must be complied with except A) the solicitor is considered a supervised person. B) the client must sign the advisory contract at the same time that the investment adviser's brochure is delivered. C) the solicitor must be registered as an investment adviser representative in order to receive compensation based upon advice. D) the terms of the investment adviser's compensation must be spelled out.

B) the client must sign the advisory contract at the same time that the investment adviser's brochure is delivered. The investment advisor's (IA's) brochure must be delivered prior to or at the time of the initial sales presentation. As a practical matter, the signing of the contract generally won't take place until the prospective client decides to engage the services of the IA. Any individual employed by an investment adviser whose role is soliciting for advisory clients must be registered as an IAR. Do not confuse this with unaffiliated third parties who are endorsing the investment adviser for compensation.

A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust? A) $1,500 B) $4,500 C) $6,500 D) $10,000

C) $6,500 All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust's DNI. The computation is: $1,500 in taxable interest + $2,000 in dividends (reinvestment means nothing here) + $3,000 in tax-exempt interest. This is a total of $6,500 of DNI. When distributed, only $3,500 will be taxable.

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

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

Components of a company's net worth would include all of these except A) inventory. B) fixed assets. C) operating income. D) goodwill.

C) operating income. Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.

If an employed client has $12,000 of capital gains and $15,000 of capital losses in the most recent taxable year, how much unused loss, if any, is carried forward by the client to the following tax year? A) $12,000 B) $3,000 C) $15,000 D) $0

D) $0 In this question, the client had $12,000 of capital gains and $15,000 of capital losses. Step 1: Offset the capital gains with the capital losses ($15,000 - $12,000). This leaves $3,000 remaining in capital losses. Step 2: Note that the client can apply up to a maximum of $3,000 of any remaining losses against ordinary income. Once all $3,000 in remaining losses is used to reduce ordinary income, this would leave $0 to carry forward to the next year. Therefore, the reason you would not carry $3,000 to the next year is that it would be used to reduce ordinary income for the current year. It can be safely assumed than an employed client of a broker-dealer makes at least $3,000 per year.

What is the maximum amount of bitcoin that will ever be in circulation? A) 21 billion coins B) 194,425 coins C) Indefinite number of coins D) 21 million coins

D) 21 million coins The maximum amount of bitcoin that will ever be in circulation is 21 million coins. This is a feature of the bitcoin protocol, which is designed to create a finite supply of the cryptocurrency, which will prevent inflation on BTC.

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) 11% B) 10% C) 74% D) 75%

D) 75% 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.

USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of A) the state in which the principal office of the member is located. B) the state with the most stringent financial requirements. C) FINRA. D) the SEC.

D) the SEC. It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.

Under the Uniform Securities Act, the state Administrator may by order deny, suspend, or revoke an investment adviser's registration for A) lack of experience as an investment adviser. B) conviction of a securities-related misdemeanor more than 15 years ago. C) conviction of a non-securities-related felony more than 15 years ago. D) violation of another state's securities laws within the last 10 years.

D) violation of another state's securities laws within the last 10 years. A violation of any state or federal securities or commodities law within the last 10 years is grounds for denial, suspension, or revocation of registration by order. This means that no hearing is required. Convictions are grounds for administrative action only if they occurred within the past 10 years. Lack of experience is not sufficient cause for revoking or denying registration.