Series 66 Test 9
Which of the following entities pays federal income taxes? A. C Corporation B. S Corporation C. Sole proprietorship D. Trust
A In the U.S., a C Corporation is taxed separately from the owners of the business. After the C Corporation has paid income taxes, it can pay their shareholders a dividend; however, this payment is then taxable to the shareholder (i.e., double taxation). Both S Corporations and sole proprietorships are not taxable entities. In other words, all of their income passes through and is taxed to the owners (i.e., single taxation). Taxation of trusts is more complicated, but in some instances, income from a trust is only taxable to the beneficiary. Since C Corporations are always taxed, it's the best answer to this question.
An firm has been hired to be the investment adviser of the Western Vistas family of funds. The fund family is the firm's only advisory client and it currently has $18 million under management. Which of the following statements concerning the adviser's registration is TRUE? A. Since it is a federal covered adviser, it must register with the SEC. B. It must register with both the SEC and each state in which it conducts business until its assets under management exceed $100 million. C. It is required to register only in the states in which the fund family has clients. D. Under the de minimis exemption, it is exempt from registration at both the federal and state levels since it only services one mutual fund complex.
A Investment advisers are ultimately required to be registered at either the federal level with the SEC or at the state level with the state Administrator; there is no requirement for them to register at both levels. Although there are exceptions, the typical basis for determining whether state or federal registration is required is the amount of assets under management (AUM) for the adviser. However, an important exception applies to firms that serve as advisers to registered investment companies. Regardless of the amount of assets under management for the adviser, any adviser of an investment company is considered a federal covered adviser and is only required to register with the SEC. In this question, the Western Vista family of funds is an investment company.
Registration of a security in a state is not required for ALL of the following reasons, EXCEPT: A. The security has been registered with the Securities and Exchange Commission under the Securities Act of 1933 B. The security is offered in an exempt transaction C. The security is exempt D. The instrument does not meet the definition of a security
A Under the Uniform Securities Act, a security is not required to be registered if: The security is exempt; or The security is non-exempt, but is being offered in an exempt transaction; or The security is a federal covered security; or The instrument does not meet the definition of a security Whether a security has been registered with the SEC (under the Securities Act of 1933) has no bearing on the state registration requirement.
While a customer who resides in State A is traveling through State B, he is solicited to purchase a security by an agent who is registered in both State A and State B. The customer pays for the security while he is in State B, but then later, the agent sends the confirmation to the customer's home address in State A. Which Administrator(s) has/have jurisdiction over the transaction? A. The Administrator of State B only B. The Administrator of State A only C. The Administrators of State A and State B D. Neither the Administrator of State A or State B if the agent is unregistered
A Under the Uniform Securities Act, an Administrator has jurisdiction over any offer to buy or sell that is made and/or accepted in its state. In this question, the customer was solicited while he was in State B (i.e., the offer was made in State B) and the offer was also accepted while the customer was in State B. For those reasons, the Administrator in State B has jurisdiction over the transaction.
If an investment adviser recommends that its clients diversify their investments by purchasing gold coins, gold certificates, or gold futures, which of the following risks is the adviser trying to avoid? A. The risk associated with projecting returns over multiple asset classes B. The risk of some investments losing value or performing poorly due to inflation C. The risk of the stock market losing liquidity during a market downturn D. The risk that a single stock will perform poorly and cause the portfolio to lose value
B Commodities investments, including futures, are a way to hedge against inflation risk. The risk that a single stock will perform poorly is referred to as business risk and may be diversified by purchasing stocks of multiple companies.
The portfolio manager of a growth fund is analyzing potential common stocks. Generally, the manager will give which of the following the MOST consideration? A. A company's low price-to-book value B. A company's year-to-year earnings momentum C. A company's short-interest D. A stock's current dividend yield
B For growth investors, a key consideration is a company's earnings momentum (growth). A growth company will typically have a significant year-over-year increase in its earnings. On the other hand, value investors will look for stocks that have a low price-to-book value and high current yield.
Which of the following must be included in a solicitor disclosure document? I. The manner in which the solicitor will be paid by the registered investment adviser II. The amount of the client's fee that is related to soliciting activities III. The details of the agreement between the solicitor and the registered investment adviser IV. The business history of the solicitor A. I and III only B. I, II, and III only C. I, III, and IV only D. I, II, III, and IV
B In the solicitor disclosure document, investment advisers must disclose how they intend to pay the solicitor, how much of the client's fee will be paid to the solicitor, and a description of the relationship between the solicitor and the investment adviser. However, a full history of the solicitor is not required to be disclosed.
A portfolio has a beta of 1.0 and an expected return of 12%. What would the alpha of the portfolio be if the beta was 1.4 and the actual return was 18.8%? A. 6.80% B. -6.80% C. 2.00% D. -2.00%
C Alpha is the difference between the portfolio's actual return (which is given) and expected return. The expected return can be determined by using the Capital Asset Pricing Model (CAPM). Since this question doesn't provide a risk-free rate, the calculation of expected return is simply beta multiplied by the market return (Expected Return = Beta x Market Return). As this question begins, a portfolio with a beta of 1.0 will have the same expected return as the market return. In other words, both the expected and market returns are 12% (Beta of 1.0 x Market Return of 12% = 12%). However, if the beta changes to 1.4, the expected return will rise to 16.8% (Beta of 1.4 x Market Return of 12%). The question specifically states that the actual return of the portfolio was 18.8%. Therefore, the alpha can then by calculated by taking the actual return on the portfolio minus the expected return (actual return of 18.8% - expected return of 16.8% = +2.00% alpha).
An investment adviser is registered and located State A. One of the IAR's has three non-institutional clients and one institutional client in State B. A different IAR has four non-institutional clients in State B. If the investment adviser does NOT have an office in State B, who must register in that state? A. Only the IARs B. The IARs and the investment adviser C. Only the investment adviser D. Neither the IARs nor the investment adviser
C An advisory firm that has more than five non-institutional clients residing in a state is required to register in that state. Since one IAR has three clients and the other has four clients, the investment adviser has seven clients total and must register. However, since neither IAR has more than five non-institutional clients, neither one needs to register in State B. Notice that all persons (the IA and IARs) need to be registered in State A.
A portfolio manager is interested in purchasing bonds, but is concerned about an increase in interest rates. In order to make the portfolio less price sensitive to yield changes, the manager does which TWO of the following? I. Buy bonds with a long duration II. Buy bonds with a short duration III. Buy bonds with a high coupon IV. Buy bonds with a low coupon A. I and III B. I and IV C. II and III D. II and IV
C Bonds with short durations and high coupons are less price sensitive to changing interest rates. On the other hand, bonds with long durations and low coupons have more price volatility as interest rates fluctuate.
What main characteristic qualifies an American-style equity option to be described as a derivative security? A. Its pricing is based solely on its time value B. As consistent with many other derivatives, it is risky C. Its value is based on the valuation of another asset D. It may be exercised at the owner's discretion
C Derivative contracts (e.g., options) obtain their value from the price/value of an underlying asset. Derivatives are often priced based on both intrinsic and time value. Futures and swaps are types of derivatives whose owners have no exercise rights. Simply being risky does not qualify a security as a derivative. American-style options are able to be exercised by the owner at any time prior to its expiration. However, European-style options may only be exercised by the owner on the last trading day prior to expiration.
Which of the following statements is FALSE regarding discounted cash flow methods used to evaluate an investment? A. Net present value is a discounted cash flow method B. Internal rate of return is a discounted cash flow method C. Holding period return is a discounted cash flow method D. Discounted cash flow calculations consider cash inflows, outflows, and the time value of money
C Holding period return does not discount or compound cash flows. Holding period return is calculated by adding any income, plus capital gains, minus capital losses, and dividing by the value of the initial investment.
According to the Uniform Securities Act, which of the following investment advisory practices is prohibited? A. A client's portfolio increases in value from $100,000 to $150,000 over a one-year period, so the adviser charges the client a fee based on the total value of the account B. An investment advisory firm appoints three new portfolio managers but does not disclose this to clients of the firm C. An investment advisory firm is purchased by a large broker-dealer and all client contracts are automatically amended to reflect the broker-dealer ownership D. A client terminates an advisory relationship with an investment adviser halfway through the contract and the advisory firm refunds 50% of all prepaid fees, as called for in the contract
C Investment advisory contracts must provide that: The adviser will not be compensated on the basis of a share of the capital appreciation of the account. The adviser may not assign client contracts without the consent of the client. If the adviser is a partnership, clients will be notified of changes in the partnership within a reasonable period. It is perfectly acceptable to refund advisory fees if an advisory contract is terminated and to charge a fee based on the total value of the account ($150,000). There is no requirement to notify clients if three new portfolio managers (who are not partners or owners) are hired by the firm.
Which of the following statements is TRUE regarding SEC Release IA-1092? A. Investment advisers are considered to be rendering advice only in cases where they recommend a specific individual security or mutual fund B. It effectively overrode the definition of adviser found under the now antiquated ABC test C. The Release noted that an individual who provides advice about securities in general may meet the definition of investment adviser D. DIA-1092 has deemed the Investment Advisers Act of 1940 definitions to be moot, null, and void
C SEC Release IA-1092 was created to provide guidance to the industry on how existing statutes (the Investment Advisers Act of 1940 and the Uniform Securities Act) applied to some of the newer types of advisory services being offered (e.g., wrap accounts, etc.). The Release was not intended to replace either the Investment Advisers Act or the USA. One of the issues that IA-1092 examines is how the ABC test is met by someone who provides general advice about securities investing but does not recommend specific investments. Under the Release, persons who give generalized advice about investing in securities, as a business, and for compensation, are deemed to be investment advisers.
If an IA has recently changed the number of partners, but not control of the firm, the IA registration must be amended within 30 days. Since there is no change in control or ownership of the firm, a Form ADV-W is not filed. This type of change, however, is known as succession by: A. Majority B. Application C. Amendment D. Partners
C This is an example of succession by amendment, as the ADV is simply amended to reflect the new control structure. If the advisory firm were sold, then a change in ownership occurs and the new firm must submit a new application or ADV. Once effective, a Form ADV-W is filed to withdraw the registration of the acquired adviser.
An IA may charge a client an investment advisory fee for rendering investment advice while receiving compensation for effecting securities transactions related to such advice: A. Under no circumstances B. But may only retain the greater amount of the two C. Only if disclosed to the client D. Only if the IA is also an agent of a broker-dealer
C Under NASAA's Model Rule on Prohibited Conduct of IAs, IARs, and federal covered advisers, this practice is acceptable if it is disclosed to the client before effecting transactions pursuant to the advice.
A new investment advisory firm registers with the Administrator on June 1. Just before its one- year anniversary on June 1 of the following year, the firm renews its registration and the registrations of each of its investment adviser representatives. Which of the following statements is TRUE? A. The firm has complied with the Uniform Securities Act since registrations are valid for one year from the initial registration (June 1) B. The firm effectively renewed prior to the deadline, but the representatives did not C. Both the firm's and its IARs' registrations lapsed on December 31 of the prior year D. The representatives are properly registered, but the firm's registration has lapsed
C Under the Uniform Securities Act, all registrations expire on December 31 and then must be renewed. In this situation, both the firm and the investment adviser representatives have allowed their registrations to lapse.
Which of the following statements is NOT TRUE regarding a SEP-IRA? A. An employer makes contributions to an employee's SEP-IRA. B. An employer is not required to make annual contributions. C. Employees are immediately vested for any contributions that are made to the account. D. Employees are permitted to make contributions to the account.
D A simplified employee pension plan (SEP-IRA) does not allow employees to make contributions. Instead, SEPs are funded by employer contributions only and these contributions are elective (discretionary).
According to NASAA provisions, an investment adviser that maintains custody of a client's funds must: A. Notify the client of the location of the funds within 90 days of taking custody B. Provide prior verbal notification to the Administrator of its intention to take custody of the client's funds C. Notify the client of the location of the funds within 30 days of taking custody D. Be subject to a surprise audit by an independent accountant
D If an investment adviser maintains custody of its clients' funds, it must provide prompt written notification as to the location of where the funds are being held as well as whether the location is changed. The notification of taking custody of client funds must be provided in written form, not verbal. Any audit of the records must be performed by an independent accountant, not by the Administrator.
********106. An investor owns a TIPS worth $1,000 that has a coupon of 3.5%. Over a three-year period, the annual inflation rate is 4%. What is the total return after three years? A. 3.50% B. 4.00% C. 11.36% D. 23.85%
D The formula for calculating total return is an investment's ending value minus its beginning value plus any income received (interest and/or dividends) divided by the beginning value. Since this question involves TIPS, part of the challenge is calculating the ending value. To calculate the ending value, the principal amount is upwardly adjusted each year based on the rate of inflation and this amount is then multiplied by the fixed coupon rate to determine the annual interest. To solve this problem, the following method may be used: Beginning value of the TIPS: $1,000 Coupon Rate: 3.5% Annual Inflation Rate: 4%
Which of the following terms BEST describes the process for calculating future value? A. Annualizing B. Discounting C. Amortizing D. Compounding
D To calculate future value, cash flows are compounded to determine the expected value at a future date. The process of compounding involves periodically reinvesting earnings on the principal. Amortization is an accounting term that's used to describe how a company recognizes certain costs/expenses over multiple years. Annualizing is a situation in which a return for a certain period is projected out over the year. Since interest is not always compounded on an annual basis, compounding is the best answer.
Under the Uniform Securities Act, which of the following is exempt from the definition of an investment adviser? A. An insurance company that provides investment advice to clients for a fee B. A company that provides investment advice to non-profit organizations and municipalities for a fee C. A firm that solely provides advice on municipal bonds for a fee D. A trust company that provides investment advice to trust clients for a fee
D Under the Uniform Securities Act, a trust company is exempt from the definition of an investment adviser. The other persons that are exempt from the definition include: Banks and/or savings institutions Lawyers, accountants, teachers, and engineers (remember L,A,T,E) whose advice is incidental to their profession Broker-dealers whose advisory services are incidental to their business Bona fide publishers Federal covered advisers Any other person that is designated by the Administrator A firm that provides advice about securities (even if they are municipal bonds) for a fee is considered an investment adviser.
