STC - Test 6

When acting as the trustee for a family trust, who does an investment adviser consider for termination benefits? 1. A contingent remainder beneficiary 2. The grantor 3. An income beneficiary 4. The trustee

1. A contingent remainder beneficiary Trust accounts can have different types of beneficiaries. An income beneficiary is one who only has claims on the income, but not the property (i.e., corpus) in the trust. Remainder beneficiaries have the right to receive property if a trust is being dissolved (i.e., terminated). Typically, primary beneficiaries have the first claim to assets if a trust is broken up. Contingent beneficiaries are given property only after the primary beneficiary cannot accept the assets (e.g., the primary beneficiary passed away). Since this question didn't mention a primary beneficiary, the best answer is a contingent remainder beneficiary.

What's an exchange-traded fund (ETF)? 1. A portfolio of securities that's registered as an investment company and can be bought and sold on an exchange. 2. An unsecured bond that's issued by a financial institution and offers a rate of return which is based on a basket of securities. 3. An exchange-traded portfolio that must derive 75% of its gross income from investments in real property. 4. A registered investment company that invests in a fixed portfolio of securities.

1. A portfolio of securities that's registered as an investment company and can be bought and sold on an exchange. Exchange traded funds (ETFs) are registered investment companies and typically mirror an index (similar to an index mutual fund). Unlike standard mutual fund shares, ETF shares are bought and sold on an exchange. Unit investments trusts (UITs) are investment companies that offer investors a fixed portfolio of securities. Real estate investment trusts (REITs) must derive 75% of their gross income from real property.

Which of the following descriptions BEST exemplifies using diversification to lower risk in a portfolio? 1. A representative buys equity securities in both U.S. and foreign markets 2. A representative buys municipal, corporate, and U.S. government bonds 3. A representative buys securities issued by federal, state, and local governments 4. A representative buys equity securities in large-cap companies within the same market sector

1. A representative buys equity securities in both U.S. and foreign markets Diversification is best exemplified by purchasing investments in both U.S. and foreign markets. While all of the other choices would provide some diversification to a portfolio, buying securities from different countries would protect against the widest variety of risks.

Under the Uniform Securities Act, what information would NOT need to be disclosed when filing a registration by qualification? 1. A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors 2. The general character and location of the issuer's business and a statement of the general competitive conditions within the industry or business in which it operates 3. The estimated cash proceeds to be received by the issuer from the offering 4. The capitalization and long-term debt of the issuer and any significant subsidiary

1. A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors An analysis of the issuer's profit margin as compared to its competitors would not be required. All other items listed would be required when filing a registration by qualification.

All of the following items are considered earned income, EXCEPT: 1. Alimony 2. Commissions 3. Tips 4. Net earnings from self-employment

1. Alimony According to the IRS, alimony is not included in the definition of earned income. The IRS defines earned income as compensation received for personal services that have actually been rendered.

According to the Uniform Securities Act, which of the following is a conflict of interest? 1. An agent recommends the stock of the company that employs his spouse. 2. An agent is related to a customer. 3. An agent's supervisor is also registered as an agent. 4. An agent and a customer work for the same broker-dealer.

1. An agent recommends the stock of the company that employs his spouse. If an agent recommends the stock of the company that employs his spouse, this is a conflict of interest that must be disclosed. If the stock performs well, the agent's spouse (and indirectly the agent) could benefit. None of the other answer choices will compromise the agent's judgement and are therefore not conflicts of interest.

Shares of which type of investment company are redeemable? 1. An open-end management company 2. A closed-end management company 3. A fund that's exempt from registration under the Investment Company Act of 1940 4. An investment company that has registered with the SEC

1. An open-end management company Shares of open-end management companies (mutual funds) are redeemable. This means that investors who want to sell their mutual fund shares, must sell them back to the mutual fund, rather than to another investor on a stock exchange. Shares of closed-end funds are exchange-traded. Simply being registered with the SEC doesn't give any indication as to whether a fund's shares are redeemable.

According to the USA, which of the following securities are exempt from registration? 1. Bonds issued by a government-regulated common carrier 2. A variable annuity issued by an insurance company 3. Common stock of a financial subsidiary of an insurance company 4. Common stock of a Canadian mining company

1. Bonds issued by a government-regulated common carrier Exempt securities include those that are issued by a U.S. federal, state, or local government, a railroad, a common carrier, a public utility, or a holding company that is subject to specified regulations. Debt securities issued by insurance companies are exempt but not the stock of their subsidiaries. However, variable annuities issued by insurance companies are subject to registration.

Zemo, a new company engaged in green technologies, has announced its IPO will trade on the NYSE. Frank, an adviser with Einstein Advisory Services, plans to purchase a large block of the stock and allocate shares only to his largest discretionary clients. One regulatory concern would be: 1. Breach of fiduciary duty 2. Diversification 3. Liquidity 4. Front-running

1. Breach of fiduciary duty A primary issue is hard to obtain in certain cases. Many clients desire IPOs that are greatly anticipated by the market. Providing only the largest clients with an allocation is unfair to smaller clients and represents a breach of the adviser's fiduciary duty to those clients. Liquidity is not a major issue as the stock will be listed on the NYSE. Plus, the additional stock allotment to clients would further diversify their investments. Since the shares purchased by Frank were reallocated to his clients, he is not front-running.

Which of the following terms relates to the graph of optimal portfolios resulting from a comparison of risk and return? 1. Efficient frontier 2. Alpha 3. Duration 4. CAPM

1. Efficient frontier According to modern portfolio theory, a graph of optimal portfolios may be created known as an efficient frontier.

When an investor buys a call option, she is considered: I. To have a leveraged position II. To be protected if she is currently short the underlying stock III. To have limited risk IV. To be bullish 1. I, II, III and IV 2. I, III and IV only 3. I and II only 4. I, II and IV only

1. I, II, III and IV When an investor buys a call option (derivative), she has a leveraged position since, for a relatively low cost, the contract allows her to buy 100 shares of stock at a specific price. This ability to buy stock at a preset price makes her bullish (i.e., she wants the stock to rise). If the investor has a short stock position, the purchase of a call option provides her with protection. The protection comes from the fact that she may exercise her call option and use the stock that she receives to cover the short stock position. Since buyers of options cannot lose more than the cost of the option, they have limited liability.

Which of the following features are characteristics of variable life insurance policies? I. Minimum guaranteed death benefits II. Guaranteed separate accounts III. Exposure of policyholders to investment risk IV. Nonguaranteed surrender value 1. I, III, and IV only 2. I and III only 3. II and III only 4. III and IV only

1. I, III, and IV only Variable life policies have a separate account into which premiums are invested. The performance of the separate account is not guaranteed. A variable life policy will pay the beneficiary the greater of the minimum guaranteed death benefit or the value of the separate account.

Your client has decided that he is ready to make some speculative moves with a small portion of his portfolio. His suitability profile supports this move. Which of the following recommendations could you make to meet his new goal? I. Purchase an asset allocation fund with a growth objective II. Buy a biotechnology fund III. Buy calls and puts IV. Invest in utility stocks 1. II and III only 2. II, III and IV only 3. I and II only 4. I, II, III and IV

1. II and III only This question is a bit tricky, due to its wording. We know that the investor wishes to make some speculative moves, and most of the choices in this question could be viewed as aggressive. When evaluating choices (I) and (IV), the key point to focus on is the word speculative. Speculation involves a high degree of risk and volatility. Options clearly have both. A biotechnology fund would also fit in this category. Typically, any sort of sector play would be considered speculative. An asset allocation fund with a growth objective is not speculative. Growth and speculation are two different investment objectives. Utility stocks are purchased for their dividends and, therefore, are not considered speculative.

Who must an adviser notify if they have custody of client assets? 1. State Administrator 2. NASAA 3. FDIC 4. FINRA

1. State Administrator According to NASAA's Custody of Client Funds or Securities by Investment Advisers Model Rule, any investment advisers that maintain custody of client funds and/or securities must notify the state Administrator using Form ADV.

If FINRA issues an order against a broker-dealer, what actions may be taken by the Administrator according to the Uniform Securities Act? 1. The Administrator may suspend a registration if a broker-dealer is subject to a FINRA action 2. The Administrator must suspend the broker-dealer 3. The Administrator may not take action against the firm since it has not been convicted 4. The Administrator may only take action if a law in its state has been violated

1. The Administrator may suspend a registration if a broker-dealer is subject to a FINRA action The Administrator may suspend a broker-dealer's registration if it has violated a law, is about to violate a law, or if the firm is subject to a FINRA order. The Administrator is not required to take action, but will instead decide on the appropriate course on a case-by-case basis.

Which of the following transactions would NOT be considered exempt under the Securities Act of 1933? 1. A private placement 2. An initial public offering of an investment company's common stock 3. An intrastate offering 4. An unsolicited brokerage transaction

2. An initial public offering of an investment company's common stock With the exception of the public offering of investment company shares, all of the transactions listed are exempt from the Securities Act of 1933. Generally, when investment company shares are offered to the public, they must be registered and sold with a prospectus.

An advisory firm is evaluating an investment opportunity for a client. Current projections show that the net present value (NPV) is equal to zero and the client requires an internal rate of return of 6%. Based on this given information, what is the investment's internal rate of return (IRR)? 1. The IRR is equal to 6% 2. The IRR is greater than 6% 3. The IRR is less than 6% 4. The IRR is 0%

1. The IRR is equal to 6% When using net present value (NPV) to evaluate a project, the value of the cash inflow is compared to the cash outflows returned by the project. If the NPV is zero, then the project is assumed to return all of the cash inflow plus the required rate of return.

An adviser who manages $140 million in assets is recommending the sale of Nasdaq-listed securities to a client. Which of the following statements is TRUE? 1. The adviser is a federal covered adviser and exempt from state registration, and the securities are federal covered securities and exempt from state registration 2. The adviser is a federal covered adviser and required to file a notice filing with the SEC, while the securities are exempt from registration with the SEC 3. The adviser is a federal covered adviser and subject to registration with the state Administrator, while the securities are nonexempt and subject to registration with the state Administrator 4. The adviser is a non-federal covered adviser and is exempt from SEC registration, while the securities are federal covered and exempt from registration with the SEC

1. The adviser is a federal covered adviser and exempt from state registration, and the securities are federal covered securities and exempt from state registration Advisers who manage $110 million or more in assets must register with the SEC, not the state Administrator. Those registered with the SEC are federal covered advisers and exempt from state registration, though subject to Notice Filing. Securities listed on an exchange or Nasdaq, are federal covered securities and are exempt from state registration.

A broker-dealer is about to launch a marketing campaign to promote the knowledge and expertise of their employees. The broker-dealer has decided to establish a website on which it will include a significant amount of information regarding securities. According to the Uniform Securities Act, what step(s) should the broker-dealer take to launch its website while also avoiding registration as a broker-dealer in every state? 1. The broker-dealer is permitted to launch the website without registering in every state. 2. The broker-dealer should include a disclaimer on the website to indicate the only state(s) in which its registered to do business. 3. The broker-dealer has no choice and must register in every state. 4. The broker-dealer should only register in the state that hosts the website.

1. The broker-dealer is permitted to launch the website without registering in every state. The Uniform Securities Act defines a broker-dealer as a person that effects securities transactions for the accounts of others or its own account. Since the website does not permit individuals to buy and sell securities, the broker-dealer is not required to register in every state. The broker-dealer is only required to register in the state(s) in which it effects transactions. This typically means the state(s) in which the broker-dealer has an office and the state(s) in which its customers reside.

At the beginning of the year, the price-to-earnings (P/E) ratio of ABC stock was 30, but three months later it fell to 15 because of bad news about the company's future earnings projections. Which of the following explains the company's lower PE ratio? 1. The stock price decreased. 2. Earnings per share increased. 3. Earnings per share decreased. 4. The stock price increased.

1. The stock price decreased. The price to earnings (PE) ratio is typically calculated by taking the current market price of the company's stock and dividing it by the earnings per share (EPS) from the last fiscal year. In this question, downgrading the future projections for the company's earnings will not have any impact on last year's EPS. However, the market price of the stock will fall due to the lower earnings projections, which explains how the P/E ratio fell from 30 to 15.

According to the Uniform Securities Act, sales literature is required to be filed with the Administrator if it relates to: 1. Variable annuities 2. A transaction that is exempt from registration 3. An NYSE-listed stock 4. Fixed annuities

1. Variable annuities Sales literature that relates to exempt securities, exempt transactions, and federal covered securities (e.g., an exchange-listed security) is NOT subject to the filing requirements of the USA. In this question, only the sales literature that relates to variable annuities (considered a security under the USA) is subject to filing requirements under the Act. Since fixed annuities are not securities, they are not covered under the USA

The difference between a corporation's current assets and its current liabilities is called: 1. Working capital 2. Liquid assets 3. Cash flow 4. Current ratio

1. Working capital The formula for working capital is current assets minus current liabilities. Therefore, the difference between a corporation's current assets and its current liabilities is its working capital. Both current assets and current liabilities are found on the balance sheet. Current ratio is found by dividing current assets by current liabilities.

Ralph has purchased 4.0% TIPS with an original principal amount of $1,000. If the adjusted principal amount is $1,020, how much interest will Ralph receive on his next payment? 1. $40.80 2. $20.40 3. $20.00 4. $40.00

2. $20.40 Treasury Inflation-Protected Securities (TIPS) pay a fixed rate of interest, based on inflation-adjusted principal. The adjustment to principal is based on the Consumer Price Index. TIPS pay interest semiannually, based on a fixed rate applied to the adjusted principal. Interest payments are calculated by multiplying the adjusted principal by 1/2 of the annual interest payment. In this question, the 4.0% rate of interest is multiplied against the principal of $1,020 for an annual interest amount of $40.80. Each payment during the year will equal $20.40.

Bill and Jean would like to contribute to a 529 plan for their only child. They figure they can afford to contribute $5,000 per year for the next 15 years. If they are able to maintain their annual contribution, and earn at least 5% on their contributions, what would the future value of the 529 plan be in five years? 1. $10,762.50 2. $29,009.56 3. $22,628.15 4. $16,550.63

2. $29,009.56 $29,009.56. One method of determining the future value of a series of investments, is the compounded growth rate. For each year, determine the amount of principal that is invested. Remember to add any additional payments ($5,000 per year in this example) and then increase the new principal value by the stated rate of return each year.

Which of the following securities would likely have the highest beta coefficient? 1. A zero-coupon, 30-year U.S. Treasury bond 2. A biotechnology company's common stock 3. An electric utility company's common stock 4. A zero-coupon, 10-year U.S. Treasury bond

2. A biotechnology company's common stock Beta is a measurement of a security's volatility as compared to an index such as the S&P 500 Stock Index. A high beta (greater than one) indicates that a company is more volatile than the benchmark index. Utilities and other defensive industry stocks tend to have low betas.

According to NASAA's Recordkeeping Requirements for Investment Advisers Model Rule, investment advisers must maintain books and records that include which of the following? 1. A record of the names and addresses of recipients of any advertising that's sent to more than 10 persons 2. A copy of each advertisement, investment letter, and newspaper article that is sent to two or more persons 3. A copy of all stock certificates that are owned by clients 4. A record of each client's profits and losses

2. A copy of each advertisement, investment letter, and newspaper article that is sent to two or more persons According to NASAA's Recordkeeping Requirements for Investment Advisers Model Rule, an investment adviser must keep a file containing each advertisement, investment letter, newspaper article, or other communication that's distributed to two or more persons. However, advisers are not required to keep a copy of each client's stock certificates or a record of each client's profits and losses. If advertisements are sent to more than 10 persons, the adviser is not required to maintain a record of the names and addresses of the recipients. Under the Investment Advisers Act of 1940 (federal law), investment advisers are required to maintain a copy of any advertising that's sent to 10 or more persons.

Which of the following is not a security as defined by the USA? 1. A certificate of interest in a profit-sharing agreement 2. A futures contract in precious metals 3. A certificate of interest in a mining title 4. A preorganization certificate

2. A futures contract in precious metals Futures and commodity contracts are not securities. However, the Uniform Securities Act includes some seemingly odd instruments as securities, such as interests in mining or drilling titles and preorganization certificates.

Which of the following choices describes a hedge fund? 1. A registered investment company that employs short selling 2. A limited partnership whose primary objective is an absolute positive performance 3. A popular subaccount investment option in a variable annuity 4. An investment trust formed to buy, develop, and manage real estate

2. A limited partnership whose primary objective is an absolute positive performance There is no uniform definition of a hedge fund. However, most hedge funds are formed as limited liability companies or limited partnerships, and they typically seek absolute investment performance. This means they set a definite performance goal (such as 8%) instead of measuring their performance against an index.

According to the Uniform Securities Act, all the following transactions would be considered exempt, EXCEPT: 1. A transaction executed by a guardian appointed by a state court 2. A nonissuer transaction of a security that is regularly quoted on the OTC Bulletin Board 3. A transaction that is executed by a bona fide pledge that is not intended to evade the USA 4. A nonissuer transaction of a security that is quoted on Nasdaq

2. A nonissuer transaction of a security that is regularly quoted on the OTC Bulletin Board A nonissuer transaction of a security that is regularly quoted on the OTC Bulletin Board would not qualify as an exempt transaction. The OTCBB does not have specific listing criteria, whereas national exchanges such as the NYSE and Nasdaq have minimum standards to which issuers must adhere. All the other choices are specifically defined under the USA as exempt transactions.

In which of the following circumstances is an investment adviser required to obtain a client's permission before assigning her contract? 1. The owner of 80% of an advisory firm pledges his home as collateral for a loan he has made to the firm 2. A sole proprietor decides to take on seven partners, while still retaining a 30% ownership stake in the advisory firm 3. The owner of 25% of an advisory firm leaves to start another firm as a sole proprietorship 4. The owner of 40% of an advisory firm dies

2. A sole proprietor decides to take on seven partners, while still retaining a 30% ownership stake in the advisory firm Assignment is defined as the direct or indirect transfer of a client's advisory contract by an investment adviser. Assignment typically occurs when an adviser is sold or acquired by new ownership. If an adviser is a corporation, the acquisition of a majority of the adviser's shares by another entity is considered assignment and requires client consent (i.e., the client's signature). If an adviser is organized as a partnership, the death or resignation of a majority of the partners is considered assignment and client consent is required. Client consent is also required if a sole proprietor sells 70% of his ownership to new partners (i.e., a majority change). If an owner of 40% of an advisory firm dies or if a 25% owner of an advisory firm leaves, it doesn't constitute assignment since it's not majority change. The owner of an advisory firm pledging his home as collateral doesn't constitute assignment.

A married couple in their thirties, with two small children, owns a small business. They have already funded their retirement plans at work. They consult an investment adviser about the best way to save more money for their retirement. Based on this information, which of the following choices would be the most suitable recommendation? 1. A 529 Savings plan 2. A variable annuity 3. A variable life insurance policy 4. A hedge fund

2. A variable annuity This couple's stated investment goal is to save more money for retirement. Annuities provide this feature. Although the couple's circumstances may indicate a need for life insurance coverage, this is not their focus at the moment. A 529 savings plan is used to save money for higher education expenses, not for retirement.

Under the Uniform Securities Act, which of the following would NOT be considered a broker- dealer? 1. A lawyer 2. An issuer 3. An accountant 4. An engineer

2. An issuer Under the Uniform Securities Act, agents, issuers, and banks are excluded from the broker-dealer definition. An exclusion is also available to broker-dealers who have no place of business in a state and only deal with institutional investors in that state. Although professionals who provide incidental advice, such as lawyers, accountants, teachers, and engineers, are specifically excluded from the definition of an investment adviser, these same professionals are not given the same exclusion from the broker-dealer definition.

According to the Uniform Securities Act, a person who is employed by a broker-dealer is NOT considered an agent if she: 1. Sells stock to a qualified investment buyer 2. Answers and forwards phone calls to registered agents 3. Sells a state's GO bonds to the public 4. Sells private placement offerings

2. Answers and forwards phone calls to registered agents Any person who is employed by a broker-dealer and is involved in securities activities is considered an agent and required to register. However, a person employed by a broker-dealer who answers and forwards phone calls to an appropriately registered agent is not considered an agent.

An agent of a broker-dealer is speaking with a customer at her office in New York. The customer informs her that he's moving to a state in which the broker-dealer is not registered. So that he can continue his relationship with the firm, he indicates his plans to use his mother's address in New York. What's the appropriate next step? 1. Only the agent needs to register in the new state. 2. Both the broker-dealer and the agent must register in the new state to continue to do business with the customer. 3. Accept the customer's request to use his mother's New York address and continue to work with client. 4. Only the broker-dealer needs to register in the new state.

2. Both the broker-dealer and the agent must register in the new state to continue to do business with the customer. If a customer moves to a new state, both the broker-dealer and agent who works with the customer must register in the new state. Allowing a person to use another person's address to avoid registration is prohibited, even if it's a family member.

How can investors manage the volatility of option prices? 1. By utilizing the expected return that's calculated in the Capital Asset Pricing Model (CAPM) 2. By using the option's delta and gamma 3. Through the use of discounted cash flows 4. Through an analysis of the option's duration and convexity

2. By using the option's delta and gamma Delta measures the amount by which an option's premium will increase or decrease relative to a change in the underlying stock's price. Gamma measures the rate of change of the option's delta as the underlying stock price changes. Together, delta and gamma can be used to predict and manage the volatility of option prices. This is especially useful for investors who are using options to hedge stock positions. Duration and convexity measure the price volatility of bonds, rather than the price volatility of options. CAPM and discounted cash flow analysis can be used for any investment, but are commonly used to find an estimate of a stock's price.

Under Uniform Securities Act (USA), a person is defined as an investment adviser if it conducts a business of providing advice on all of the following securities, EXECPT: 1. Mutual funds 2. Fixed annuities 3. Federal covered securities 4. Government securities

2. Fixed annuities A firm is considered an investment adviser if it meets the three-prong A-B-C definition (A = advice, B = business, C = compensation). However, an IA's advice must pertain to securities. Of the answers provided, only fixed annuities are not defined as securities. A person that provides advice related fixed annuities doesn't meet the definition of an investment adviser.

In which of the following situations is an adviser required to provide a customer with an annual audited balance sheet? I. The IA has custody of client assets II. The IA receives substantial prepayment of advisory fees III. The IA has limited discretionary authorization over a client's account 1. II and III only 2. I and II only 3. I, II and III 4. I only

2. I and II only An investment adviser is required to provide a customer with an annual audited balance sheet if it has custody of the client's assets or if it receives substantial prepayment of advisory fees. Under the USA (state law), substantial prepayment of fees is considered more than $500 dollars, six months or more in advance. However, under the Investment Advisers Act of 1940 (federal law), substantial prepayment of fees is considered more than $1,200 dollars, six months or more in advance.

Which of the following items may be a sign of churning in an account? I. The size of the transactions II. The frequency of the transactions III. Transactions that are not beyond the client's financial resources IV. Transactions that meet the client's objectives 1. I only 2. I and II only 3. II and III only 4. III and IV only

2. I and II only Under NASAA Model Rules regarding prohibited conduct by IAs and IARs, inducing trading in a client's account that is excessive in size or frequency, in view of the financial resources, investment objectives, and character of the account, is prohibited.

Which TWO of the following items does the IRS consider earned income? I Royalties II. Dividends III. Long-term disability benefits received prior to minimum retirement age IV. Social Security 1. I and IV 2. I and III 3. II and III 4. II and IV

2. I and III The IRS defines earned income as compensation received for personal services actually rendered. Royalties and long-term disability benefits received prior to the minimum retirement age come under the IRS's definition. Dividends and Social Security are not considered earned income. They are still taxable, however.

Why would an investor use a dollar cost averaging strategy to purchase bonds? I. To ensure that the average cost per bond is less than the average of the prices at which the bonds were purchased II. To ensure a profit on the bonds when they are sold III. To reduce timing risk in volatile markets IV. To reduce systematic risk in markets that lack volatility 1. II and IV only 2. I and III only 3. I only 4. I, II, III and IV

2. I and III only Dollar cost averaging produces a cost per bond that is less than the average of the prices at which the bonds were purchased, assuming there was some price fluctuation. This helps reduce timing risk in volatile markets. However, it does NOT guarantee a profit, since the eventual sale price of the bonds could be less than the investor's average cost.

Which TWO of the following choices are not considered an asset class? I. Annuities II. Stocks III. Cash IV. The S&P 500 Index V. Real estate 1. III and V 2. I and IV 3. II and V 4. I and III

2. I and IV Asset classes include stocks, bonds, cash (money-market instruments), commodities, and real estate, but not annuities or indexes.

Which of the following factors would be important when determining a person's tax status? I. The person's age II. The person's place or state of residence III. The person's tax status at the end of the prior year IV. The person's country of citizenship 1. I, II and III only 2. I, II, III and IV 3. I, II and IV 4. I and II only

2. I, II, III and IV All of the items listed may have an effect on a person's tax status. For example, a person's age may affect her property taxes since many states offer homestead exemptions, while a person's country or state of residency may affect the rate at which her income is taxed.

ABC Investment Adviser is a federal covered adviser and requires its IARs to have an MBA degree before they are able to provide advice to its clients. For any of the firm's IARs who provides advice, in what document(s) must their education be disclosed? I. ADV Part 1 II. ADV Part 2 III. Schedule E IV. The adviser's brochure 1. II and III only 2. II and IV only 3. I only 4. I and II only

2. II and IV only If an investment adviser requires a specific level of education or business experience for its IARs to be able to provide advice, it must be disclosed in its ADV Part 2, which may also be used as the adviser's brochure.

A very conservative client has just retired and wants to set aside some money to buy a new car within the next two years. Which of the following investments would be suitable based on this client's situation? I. Treasury bonds maturing in 20 years II. Treasury notes maturing in two years III. Money-market funds IV. Bank-insured certificates of deposit 1. I, II, III and IV 2. II, III and IV 3. I, II and IV only 4. I and II only

2. II, III and IV In this example, the investor is interested in capital preservation and liquidity. With the exception of the 20-year Treasury bond, all of the investments listed are short-term, liquid, and safe. The 20-year bond's maturity would expose the client to excessive interest-rate risk, making the investment less liquid and, therefore, unsuitable.

If a broker-dealer has written procedures that allow for the borrowing and lending of money between agents and customers, in which of the following situations is an agent NOT allowed to borrow money from a customer? 1. If the customer and the agent are both registered with the same firm 2. If a loan is based on a written agreement with the customer and the agent repays the loan in full plus interest 3. If the lending arrangement is based on a business relationship that exists outside of the agent-customer relationship 4. If the customer is a member of the agents immediate family

2. If a loan is based on a written agreement with the customer and the agent repays the loan in full plus interest An agent is allowed to borrow money from or loan money to a client, if the agent's broker-dealer has written procedures in place allowing for the arrangement, plus one of the following situations. The customer and agent are both registered with the same firm, The customer is a member of the agent's immediate family The customer and the agent have either a business or personal relationship that exists outside the brokerage relationship

An investment adviser develops and publishes a spreadsheet that it claims may be used to generate winning buy and sell decisions. According to SEC advertising rules, the advertisement must: 1. Display testimonials from at least two famous athletes or entertainers 2. Indicate that the spreadsheet has limitations and may not be appropriate for all clients 3. Provide or make available a list of companies that have experienced positive returns from the system 4. Indicate that the spreadsheet is the sole property of the IA and that a usage fee must be paid

2. Indicate that the spreadsheet has limitations and may not be appropriate for all clients If an adviser develops investment tools (e.g., charts and spreadsheets), it must make adequate disclosure regarding the tool's limitations and that it may not be appropriate for all clients. If an IA intends to show performance statistics, it is required to provide a list of all recommendations they have made during the previous year. Any disclosure of usage fees is only required to be made if a client opens an account.

A wealthy, married couple, who are both in their 40s, have money that they would like to invest. If their objective is long-term growth with minimum tax liability upon liquidation in 25 years, which of the following investments is the most appropriate? 1. An equity-indexed annuity 2. Individual equity securities 3. A variable annuity 4. Municipal bonds

2. Individual equity securities Of the given choices, investing in individual equities is likely the most appropriate. If the equities rise in value and are then, years later, liquidated, the gains will be taxed at the long-term capital gains rate. Historically, the long-term capital gains tax rate is lower than the highest rate at which ordinary income is taxed. Municipal bonds provide tax-free income, but they offer limited growth potential. A variable annuity and an equity-indexed annuity may provide growth potential, but that growth is taxed as ordinary income when it is withdrawn from the annuity.

The results of discounted cash flow analysis would identify a potential purchasing opportunity when the value arrived at: 1. Is equal to the current cost of the investment 2. Is higher than the current cost of the investment 3. Would not be effective under any circumstances 4. Is lower than the current cost of the investment

2. Is higher than the current cost of the investment When the results of a discounted cash flow calculation are higher than the market value of a potential investment, this signifies that the investment may be undervalued. This would lead to a potential purchasing opportunity.

An investment adviser representative sends a letter to a group of prospective clients that contains a coupon for a free financial plan. The investment adviser must: 1. Keep a copy of the response of each client 2. Keep a copy of the letter and the coupon 3. Only keep a copy of the address of each prospective client 4. Keep a list of the customers' zip codes

2. Keep a copy of the letter and the coupon When an investment adviser representative sends an advertisement to a prospective customer, it must be preapproved and kept on file for a minimum of five years. If any service is described as free, it must be free with no other required purchase. Keeping only the customers addresses is not sufficient since the advertisement was not retained.

Which of the following risks would have the greatest impact on a U.S. Treasury zero-coupon bond with an 18-year maturity? 1. Liquidity risk 2. Market risk 3. Inflationary risk 4. Reinvestment risk

3. Inflationary risk Since a bond's return may not keep pace with the rate of inflation, Treasury securities with long maturities are subject to inflationary risk. This may cause the real rate of return to be less than anticipated over a long period. The Treasury market is very liquid and stable. Zero-coupon bonds protect investors from reinvestment risk, since they do not provide interest payments. Reinvestment risk is defined as the risk that a bond's future coupons will not be reinvested at the same interest rate as when the bond was initially purchased.

Mammoth Investments is a federal covered investment adviser with offices in 42 states. Which of the following statements concerning the firm's registration is TRUE? 1. Mammoth must also register as an adviser in each state in which it has an office 2. Mammoth's federal registration is sufficient to do business in all states and state registration of the firm is not required 3. Mammoth must maintain both federal and state registrations in all states in which it does business with noninstitutional customers 4. Mammoth must maintain dual federal and state registrations in all states in which it does business

2. Mammoth's federal registration is sufficient to do business in all states and state registration of the firm is not required The federal government and the states have divided the responsibility for regulating investment advisers. In general, an adviser must be registered with either the SEC or with one or more states. There is no requirement to register at both the federal and state levels. The basis for the federal/state division is usually the amount of assets under management. If an investment adviser has $110 million or more under management, registration with the SEC as a federal covered adviser is mandatory. Smaller advisers generally register with one or more states. (Note: An IA may also choose to register with the SEC if it has AUM of $100 million up to $110 million.)

Paul works as a registered representative for Broker-Dealer X and also works as a financial planner under Broker-Dealer X's control. Paul's only source of compensation are commissions for trades that are executed. According to the Investment Advisers Act: 1. Paul must be registered as an investment adviser 2. Neither Paul nor Broker-Dealer X are required to registration as an investment adviser 3. Paul does not need to be registered as an investment adviser 4. Broker-Dealer X must be registered as an investment adviser

2. Neither Paul nor Broker-Dealer X are required to registration as an investment adviser According to SEC Release 1092, broker-dealers are not required to register as investment advisers if their advisory service is solely incidental to the conduct of their business as broker-dealers and if they do not receive any special compensation for their advice. This exclusion is also available to a registered representative who acts as a financial planner under the knowledge and control of his broker-dealer.

While meeting with a client, an investment adviser representative (IAR) is asked if she is registered. The client also questions the IAR as to whether being registered indicates that she is qualified to be an IAR. According to the Uniform Securities Act, how should the IAR respond? 1. The IAR should tell the client that if she was unqualified the state would have revoked her registration 2. The IAR should tell her client that being registered does not equate to the Administrator considering her to be capable or qualified to act as an IAR 3. The IAR should tell the client that only qualified representatives may use the IAR designation 4. The IAR should tell the client that she will always act in an ethical and honest manner because she is an IAR

2. The IAR should tell her client that being registered does not equate to the Administrator considering her to be capable or qualified to act as an IAR Being registered does not signify that an individual has all of the necessary skills to be an effective agent or investment adviser representative (IAR). The Administrator has no qualification requirements and being registered does not guarantee that an individual will act ethically.

Registration by Coordination permits the simultaneous registration of securities when the SEC registration statement that is filed under the provisions of: 1. The Securities Exchange Act of 1934 becomes effective 2. The Securities Act of 1933 becomes effective 3. The Uniform Securities Act becomes effective 4. The Investment Company Act of 1940 becomes effective

2. The Securities Act of 1933 becomes effective Registration by Coordination permits simultaneous state registration of securities when the SEC registration statement that is filed under the provisions of the Securities Act of 1933 becomes effective.

Six months ago, an investor purchased shares of a mutual fund and he recently received a long-term capital gain distribution from the fund. What is the tax implication of the distribution? 1. The capital gain distribution is taxed in the same manner as dividend distributions 2. The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year 3. The distribution is taxed as a short-term capital gain since he has owned the shares for less than one year 4. The distribution is not taxed since it represents a return of the investor's capital

2. The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year When a mutual fund distributes a capital gain, the tax implication is based on the fund's holding period, NOT the shareholder's holding period. The question indicates that the distribution was a long-term capital gain; therefore, it is both reported and taxed as a long-term capital gain.

Which of the following is NOT included on a trade confirmation? 1. The execution price 2. The exchange and bond's rating 3. The commission, markup, or markdown 4. The customer's account number

2. The exchange and bond's rating Trade confirmations are sent to customers after the execution of a transaction. Confirmations must include account information, execution price, and transaction fees. Although confirmations also include information on a bond's yield, they don't include a bond's rating or the exchange on which the trade was executed.

A broker-dealer owns 100 shares of ABCO stock which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base the markup on: 1. The highest bid on the Nasdaq system 2. The lowest offer on the Nasdaq system 3. A price that is fair and reasonable 4. The inventory cost of 28

2. The lowest offer on the Nasdaq system When selling stock to a customer, a markup should be based on the lowest offer on the Nasdaq system, not the price the dealer paid to purchase the stock (dealer's inventory cost).

According to the Investment Advisers Act of 1940, if an investment adviser utilizes a solicitor, the solicitor must provide clients with written disclosure of all of the following, EXCEPT: 1. The name of the investment adviser providing the advisory services 2. The name of the broker-dealer that will be executing client trades 3. Compensation agreements between itself and the IA 4. Contract terms between itself and the IA

2. The name of the broker-dealer that will be executing client trades Under the Investment Advisers Act of 1940, a solicitor must disclose the name of the adviser for whom it is soliciting as well as the contract terms and compensation agreement. There is no requirement for a solicitor to disclose the name of the broker-dealer executing the trades. However, before a client signs an advisory contract, the investment adviser (not the solicitor) must disclose the executing broker-dealer's name.

Claire, an agent for a broker-dealer, receives a call from a client who submits an order to sell 500 shares of stock at the market. After hanging up the phone, the agent notices the stock has begun to rebound and decides to hold the order for awhile. After half an hour, the market suddenly reverses and Claire executes the customer's order at a loss. Which of the following statements is TRUE? 1. This is not an unethical practice because the determination of the price and time of a trade does not require discretionary authorization from the client 2. This is an unethical practice because the agent did not follow the client's instructions 3. This is an unethical practice because the client lost money, but would have been acceptable if she had turned a profit for the client 4. This is an acceptable practice, since the agent was acting in good faith in attempting to obtain the best price for the customer

2. This is an unethical practice because the agent did not follow the client's instructions The agent failed to follow the client's instructions. This is an unethical practice under the USA even if the agent believes in good faith that she was acting in her client's best interests.

An investment adviser representative is attempting to land a prospect as a new advisory client. To impress the potential client, the IAR shows him a list of names of her current clients. Which of the following statements is TRUE? 1. This is permissible as long as none of the clients are known to the prospect 2. This is permissible as long as the clients have given the IAR permission to use their names 3. This is permissible as long as the advisory contract allows the IAR to disclose a list of client names 4. This is permissible as long as the IAR does not reveal the investments in the clients' accounts

2. This is permissible as long as the clients have given the IAR permission to use their names It is considered unethical for an investment adviser to disclose the identity, affairs, or investments of any client unless the client consents, or unless the law requires it to do so.

Trading in WXYZ has been particularly heavy and the stock's price has been fluctuating wildly. A customer calls her agent and asks for the current price, since she is considering selling her position in WXYZ. The agent has been extremely busy and last saw a price of 44 on the stock 20 minutes ago. The agent tells the customer, "Last price I have for it is 44." The agent then takes another phone call. Which of the following statements is TRUE regarding the price provided by the agent? 1. Information about stock prices is not guaranteed and, therefore, customers must interpret this information at their own risk 2. This statement is misleading since the rep did not indicate how old the price was and, in a volatile market, it could now be quite different 3. There is nothing wrong with this statement since it is true 4. This statement would be considered misleading only if the customer subsequently sold the stock based on the information

2. This statement is misleading since the rep did not indicate how old the price was and, in a volatile market, it could now be quite different When making statements to clients, agents must consider how their words will be interpreted by clients in the context in which they are stated. The customer in this example would naturally assume that the price given is current. If it is not, the agent should make this clear. In a volatile market, a price that is 20 minutes old could be very inaccurate.

A mutual fund owns stocks with a total market capitalization of $50 million, but also has $3 million in liabilities, and $2 million in cash from dividends paid by stocks that the fund owns. If the mutual fund has 10 million shares outstanding, what's the net asset value? 1. $1.00 per share 2. $5.10 per share 3. $4.90 per share 4. $4.50 per share

3. $4.90 per share The net asset value (NAV) of a fund is the total assets, minus liabilities, divided by the number of shares the fund has issued. The fund's assets include the $50 million market value of the stocks in the portfolio, plus the $2 million of cash, for a total of $52 million. The liabilities are $3 million; therefore, the net assets are $49 million ($52 million assets - $3 million liabilities). After dividing the net assets by the number of shares outstanding, the net asset value (NAV) per share is $4.90 ($49 million net assets ÷ 10 million shares).

Corrine purchases an equity-indexed annuity contract that guarantees a 4% return with a 10% interest-rate cap. The index to which the funds are tied rises 13% in value this year. What return does Corrine receive? 1. 4% 2. 13% 3. 10% 4. 14%

3. 10% In an equity-indexed annuity, the owner receives a guaranteed minimum interest rate with a potential upside based on the performance of the designated equity index. If the return on this index is less than the guaranteed rate, the owner receives the minimum. If the index return is greater than the guarantee, the owner receives the greater return up to the capped maximum. In this case, the index earned 13% but the client only receives the maximum 10% capped rate.

A customer of a broker-dealer has purchased stock in a margin account. The customer's exposure in the account is 50%. If the stock falls by 10%, what's the customer's percentage of loss in the account? 1. 5% 2. 50% 3. 20% 4. 10%

3. 20% If a customer has 50% exposure in a margin account, it means they've only paid for 50% of an investment and borrowed the other 50%. When a customer has 50% exposure, the easiest way to determine the client's percentage loss due to the decline in the stock's value is to double the percentage of decline. In this question, since the stock declined by 10%, the customer has a resulting loss of 20% (i.e., 2 x 10% = 20%).

An investor purchased a 6% bond for $11,000 and it's currently trading at $10,000. The bond is earning 0% in a money market account. What's the bond's current return? 1. 6.67% 2. 0% 3. 6% 4. 5.45%

3. 6% To calculate the current return (i.e., current yield) on a bond, the bond's annual interest payment is divided by its current market price. In this question, the annual interest payment is $600 ($10,000 x 6%) and the current price is $10,000. Therefore, the bond's current return is 6% ($600 ÷ $10,000).

The difference between the current ratio calculation and the quick asset ratio calculation is that the quick asset ratio excludes which of the following? 1. All assets 2. Money-market investments 3. Inventories 4. Current assets

3. Inventories The quick ratio formula is (current assets - inventories) / current liabilities.

A brokerage client buys stock worth $40,000 and sells it three years later for $60,000. If his long-term capital gains rate is 10%, what is his after-tax total return? 1. 40% 2. 33% 3. 30% 4. 45%

4. 45% Calculating after-tax total return starts with determining the capital gain, which is $20,000 ($60,000 - $40,000). If capital gains are taxed at a rate of 10%, then the tax is $2,000 ($20,000 x 10%). The after-tax gain is $18,000 ($20,000 - $2,000). Therefore, the after-tax total return is 45% ($18,000 after-tax gain / $40,000 original investment).

Which of the following choices is considered an offer or an offer to sell securities under the Uniform Securities Act? 1. A used car dealer offers a free bank-issued certificate of deposit (CD) to every person who purchases a car 2. A group of creditors receives stock in a bankrupt company as part of a court-approved reorganization plan 3. A corporation's current shareholders receive the right to purchase additional shares at a predetermined price 4. A corporation's current shareholders receive a stock dividend, rather than a cash dividend

3. A corporation's current shareholders receive the right to purchase additional shares at a predetermined price An issuer that offers additional shares of common stock at a preset price is conducting an offering of stock rights and this is considered an "offer or offer to sell securities" under the USA. The USA doesn't include the receipt of a stock dividend or securities received as a result of a reorganization plan that's been approved by a bankruptcy court as offers or offers to sell. If a car dealer gives a bank-issued certificate of deposit (CD) to every person who purchases a car, the provisions of the USA don't apply since the CD is non-negotiable and not considered a security (it's a banking product). Given the extensive protections that the federal bank regulatory scheme affords depositors, non-negotiable CDs are not regulated by the USA. However, if a car dealer offers securities to every person who purchases a car, the provisions of the USA will apply.

An advantage of a Coverdell Education Savings Account versus a 529 plan is: 1. There are lower tax rates 2. More money may be invested 3. A custodian has greater control over the investments 4. There is a longer holding period

3. A custodian has greater control over the investments With a Coverdell Education Savings Account, the custodian has greater control of the selection of investments (i.e., individual stocks, bonds, or mutual funds). There is a maximum contribution of $2,000 per year in a Coverdell. In a 529 plan, an investment is made in the state plan without the benefactor's input. Depending on the state, a 529 plan may allow a substantially larger contribution (exceeding $200,000 in some states). Both plans offer tax-free growth if the funds are used for qualified educational expenses. Funds in a Coverdell Education Savings Account (ESA) must be used within 30 days of reaching the age of 30. There is no specific age requirement for funds to be withdrawn from a 529 plan.

An investor is interested in finding a pass-through investment in which the investors are able to take an active role in the company as members and the company is able to raise an unlimited amount of capital. What investment would meet these requirements? 1. A Subchapter S corporation 2. A master limited partnership 3. A limited liability company 4. A real estate investment trust

3. A limited liability company A limited liability company is a pass-through investment that is similar to the structure of a limited partnership. A limited liability company is able to raise an unlimited amount of capital and the capital is provided by members who may take an active role.

A client of an IA has over 20% of his assets invested in a coal mining company's stock. The IA recommends greater diversification and indicates that stocks in this sector have been continually declining in value over the last 10 years. The client believes that the stock will eventually recover and refuses to sell it. The client's behavior may be described as: 1. Overconfidence 2. Regret aversion 3. Anchoring 4. Conservationism

3. Anchoring This is an example of anchoring. Anchoring involves a client being attached to the belief in an investment's potential upside despite indications to the contrary.

A bank is effecting corporate securities transactions with investors. The securities being bought and sold are not issued by the bank and the bank is not currently issuing securities. Under the Uniform Securities Act, how must the bank be registered? 1. As an agent of a corporation 2. As an agent of an issuer 3. As a broker-dealer 4. As an investment adviser

3. As a broker-dealer Although banks are often excluded from the definition of a broker-dealer, if a bank sells corporate securities of a different issuer, it must register with the Administrator as a broker-dealer. In this example, the bank is selling the securities of another issuer and must register as a broker-dealer. On the other hand, if a bank does not carry securities accounts and is only selling certificates of deposit, the bank is not required to register as a broker-dealer.

The original asset allocation of an investment portfolio was 10% cash, 40% bonds, and 50% stocks. A recent bear market, however, has altered this allocation to 10% cash, 50% bonds, and 40% stocks. The client's investment objectives and risk tolerance have not changed. The adviser recommends that the portfolio be systematically rebalanced by selling: 1. Stocks and bonds and allocating 10% of the portfolio to alternative investments 2. Stocks and buying bonds with the proceeds 3. Bonds and buying stocks with the proceeds 4. Stocks and bonds and placing the proceeds in cash until market conditions stabilize

3. Bonds and buying stocks with the proceeds Systematic rebalancing is the process of buying and selling securities within a portfolio to restore its original asset allocation. Systematic rebalancing may be done either periodically (annually, quarterly, or monthly) or whenever market forces or different rates of return cause a significant change in the original asset allocation.

All of the following would be considered an investment adviser representative under the Uniform Securities Act, EXCEPT a(n): 1. A partner of Winners Asset Management Co. who supervises investment adviser reps 2. Portfolio manager for Winners Asset Management Co 3. Broker-dealer offering wrap accounts to its clients 4. An accountant who works for Winners Asset Management Co., who provides financial plans for clients

3. Broker-dealer offering wrap accounts to its clients An investment adviser representative is any person who is associated with an investment adviser and makes recommendations, manages accounts, provides advice, solicits advisory services, negotiates the sale of advisory services, or supervises persons engaged in these activities. A broker-dealer offering wrap accounts would be considered an investment adviser, not an investment adviser representative.

Which of the following is NOT an example of dollar cost averaging? 1. A person continuing to invest 20% of his annual earnings in a bond fund when market interest rates are rising. 2. A person investing 15% of his take-home pay every other week. 3. Investing 50% into domestic funds and 50% into international funds. 4. Investing $500 into an exchange-traded fund (ETF) once per month.

3. Investing 50% into domestic funds and 50% into international funds. Investing a fixed amount over fixed intervals takes advantage of dollar cost averaging. By investing the same dollar amount periodically, investors will have a lower average cost compared to their average price. However, investors must continue to invest, even when market prices are falling.

The Grants, a newly retired couple, wish to set up a financial plan. They would like to have income-producing investments but would also like to leave some money to their favorite charities. Mr. Grant suggests a charitable remainder trust; however, their adviser is not familiar with this type of trust. What should the adviser do? 1. Be aware that under continuing education requirements, an IAR is mandated to become familiar with new products, changing regulations, and taxes in order to maintain his professional status as an IAR 2. Suggest that the Grants add this to their financial plan in a couple of years, which would give the adviser a chance to research the topic 3. Consult with an estate planning expert to determine if this would be appropriate for the Grants 4. Inform the Grants of the complexity of this type of trust and advise against establishing one

3. Consult with an estate planning expert to determine if this would be appropriate for the Grants There are a number of ways for financial planners to handle areas in which they lack specialized knowledge. Some advisory firms have their own internal experts who are available for consultations, or the firm might have relationships with outside consultants. As an alternative, the planner might consult with the client's attorney or estate adviser and incorporate the results of the consultation into the plan. What the planner should not do is give the clients misinformation or ignore their questions.

A client is primarily concerned with having enough money to retire in 20 years. All of the following are considerations when making recommendations to the client, EXCEPT: 1. The approximate inflation rate 2. The current amount of available funds 3. Current interest rates 4. The expected return on the client's investments

3. Current interest rates Of the available choices, current interest rates is not a factor when making recommendations to a client with a long-term investment objective. Important considerations include the current amount of available funds and the expected return on the client's investments. Additionally, the approximate rate of inflation is a factor in determining how much the client will need based on the cost of living.

A group of investors are forming a start-up company. The business will have approximately five investors. The investors want the most tax efficient business structure and to avoid paying taxes twice on company profits. Which business structure would allow them to protect their personal assets and also avoid double taxation? I. An S Corporation II. A C Corporation III. A limited liability company IV. A closed corporation 1. II and III only 2. I only 3. I and III only 4. I, II, III and IV

3. I and III only S Corporations and limited liability companies (LLCs) are flow-through entities. Therefore, profits are passed through to the owners and reported on their individual tax returns. C Corporations, however, are subject to two levels of taxation, since they are considered separate entities for tax purposes. They must pay corporate income taxes and their shareholders must also pay individual income taxes on dividends that they receive. Closed corporations (also termed privately held corporations) are companies whose shares do not trade publicly. A closed corporation could be organized as either an S Corporation or a C Corporation. (Note, however, that S Corporations are almost always closed corporations since they may only have a maximum of 100 shareholders.)

An Administrator receives a written notice indicating that an IA has just violated the net capital rule and is currently below the minimum requirement. Which of the following reports would the Administrator demand? I. A current balance sheet II. Contact information for the qualified custodian that handles the clients' funds III. A client ledger IV. A list of all client-owned securities and nonsegregated funds 1. I, II and III only 2. I and II only 3. I, III and IV only 4. I, II, III and IV

3. I, III and IV only According to NASAA rules, if an IA violates the net capital rule, the Administrator may require the adviser to provide its balance sheet, client ledger, and a list of all customer-owned securities and nonsegregated funds. However, the Administrator would not require the qualified custodian's name since that information is already disclosed in the investment adviser's Form ADV.

According to the Uniform Securities Act, if the Administrator wishes to revoke a firm's registration, which of the following statements is/are TRUE? I. Revocation may not be started until the firm has had a hearing with the Administrator and the State's Ethics and Procedures Panel (SEPP). II. The firm may request a hearing with the Administrator within 15 days of the revocation. III. The firm may apply for judicial review of the Administrator's actions within 60 days. IV. All employees of the firm must requalify by examination. 1. I and IV only 2. I only 3. II and III only 4. I, III and IV only

3. II and III only The Administrator may revoke a registration without providing the opportunity for a prior hearing but, if requested, the Administrator will grant a hearing within 15 days. The firm has 60 days to apply for legal (judicial) review of the Administrator's action. Registrations of all persons associated with the firm will become inactive during this period, but they will not need to requalify solely because their employer's registration has been revoked.

Which of the following statements are TRUE regarding a limited partnership? I. There must be only one general partner. II. There must be more than one limited partner. III. There is undivided interest in equity that does not pay income taxes. IV. It is a form of ownership that passes its profits and losses through to its participants. 1. I, II, and III only 2. I, II, and IV only 3. III and IV only 4. II, III, and IV only

3. III and IV only Limited partnerships provide a form of ownership in which there is undivided interest in equity that does not pay income taxes and passes its profits and losses through to its participants. There are no rules that limit the number of general partners or limited partners in a limited partnership however, there must be at least one of each.

Regarding equity-indexed annuities, which of the following statements is TRUE? 1. If the index increases in value, there's no limit as to how much an investor may gain. 2. If the index declines in value, there's no floor as to how much an investor may lose. 3. If the annuitant withdraws money before the surrender period is over, she's required to pay a surrender fee. 4. Since equity-indexed annuities are not securities, they're considered risk-free securities.

3. If the annuitant withdraws money before the surrender period is over, she's required to pay a surrender fee. Although equity-indexed annuities (EIAs) are insurance products, they're subject to many FINRA rules. Broker-dealers must always have adequate controls in place to supervise the sales activities of their RRs. EIAs are generally issued with both a floor (that limits loss on the downside) and a cap (that limits the gain on the upside).

Susan is registered as an investment adviser representative (IAR). Susan asks one of her clients to write positive comments about her firm's services and then post them on a social media site. Is Susan's request considered a violation of the communication rules? 1. No, provided the posts have been preapproved by a supervisor of the IA. 2. Yes, because investment advisers are never permitted to post content that's created by third parties. 3. No, provided the content is not misleading and appropriate disclosures are made. 4. Yes, because testimonials are prohibited under the Investment Advisers Act of 1940.

3. No, provided the content is not misleading and appropriate disclosures are made. Investment advisers that encourage or pay a person to promote their services are using testimonials. Traditionally, testimonials were prohibited under the IA Act of 1940. However, in 2020, the SEC updated its rules and now permit IAs to use testimonials. Keep in mind, IAs that use testimonials are responsible for ensuring that the testimonials are accurate and not materially misleading. In addition, IAs need to provide disclosures about the relationship between the adviser and the person making the testimonial.

A client of an investment adviser representative has just died. If the client did not have a will, from whom may the investment adviser representative accept instructions? 1. The deceased client's spouse 2. Any person with a legally executed power of attorney 3. The intestate Administrator 4. The deceased client's adult child

3. The intestate Administrator If an individual dies without a will and the assets of estate exceed the estate's liabilities, the estate is considered intestate. A probate court will appoint a person to act as the administrator of the estate and distribute the estate's assets to the beneficiaries. A power of attorney is void after a client dies.

In the past year, a client reported earnings of $3,000 in dividends, $6,000 in long-term capital gains, and salary of $190,000. The client also had a loss of $8,000 from a limited partnership investment. For tax purposes, how is the limited partnership loss treated? 1. The partnership loss is only deductible against the salary of $190,000 2. The partnership loss is only deductible against the $6,000 long-term capital gain 3. The partnership loss is only deductible against passive income 4. The partnership loss is only deductible against other income, up to $3,000

3. The partnership loss is only deductible against passive income A limited partner's share of profits from a limited partnership are considered a form of passive income and taxed as ordinary income. A partner's share of the partnership's losses are considered passive losses (not capital losses), which are deductible against passive income only. Since the client did not report any passive income, the loss is suspended and carried forward.

Under which of the following circumstances is an investment adviser relieved of its fiduciary duty to its customers? 1. If its client agreement states that it is not acting as a fiduciary 2. If granted an exemption by the SEC or a state 3. Under no circumstances 4. When providing advice to institutional investors

3. Under no circumstances An investment adviser may not avoid its fiduciary duty by inserting a hedge clause in its contract, nor do regulators provide exemptions. An RIA has a fiduciary responsibility whether it is dealing with retail or institutional clients.

What characteristic generally makes universal life insurance policies more attractive than other forms of life insurance? 1. There are no fees assessed against a universal life insurance policy 2. Universal life insurance policies allow policyholders to lock in short-term rates of return 3. Universal life insurance policies offer the ability to adjust coverage amounts as needs arise 4. Universal life insurance dividends may be reinvested to buy more insurance coverage

3. Universal life insurance policies offer the ability to adjust coverage amounts as needs arise The biggest benefit of a universal life insurance policy is the flexibility of the death benefit. If policyowners need additional coverage, they may increase the death benefit. Similarly, they may lower the coverage if their insurance needs decrease.

A sole proprietor who was registered as a broker-dealer is now charging a separate fee for securities advice. According to the Uniform Securities Act, the sole proprietor: 1. Must register only if the activities are called financial planning 2. Must change from sole proprietor to another business structure in order to become an investment adviser 3. Would need to register as an investment adviser 4. Has an exemption from registration as an investment adviser

3. Would need to register as an investment adviser Any business entity not specifically exempted from registration that charges a separate fee for administering advice is subject to registration as an investment adviser. Broker-dealers are excluded from the definition of investment adviser if they provide only incidental advice with no separate, identifiable charge.

According to the Uniform Securities Act, is an agent of a broker-dealer required to provide its clients with disclosure of a material public fact about an issuer? 1. Yes, firms must provide clients with a written disclosure of all facts for decision-making purposes 2. No, since the agent's broker-dealer must check the fact first and preapprove any disclosure 3. Yes, as the disclosure of material facts is necessary for the client to make an informed investment decision, although the information may be public 4. No, since the fact has already been made public and is in the news

3. Yes, as the disclosure of material facts is necessary for the client to make an informed investment decision, although the information may be public Material facts are the facts that investors need in order to make informed investment decisions. Agents should make a good faith effort to fully and fairly disclose all material facts during sales presentations. While it may not be possible to disclose every fact, omitting a material fact in order to make an investment appear more attractive is a violation.

A multi-state adviser must file a Form ADV-W to withdraw from federal registration if the number of states in which it is required to register is less than: 1. 20 2. 30 3. 5 4. 15

4. 15 A person that's required to register as an investment adviser based on the laws of 15 or more states is considered a multi-state adviser and, therefore, must register with the SEC. If the number of states in which the adviser is required to register falls below 15, the adviser is required to file Form ADV-W, which indicates a partial withdrawal at the time of filing its annual updating amendments.

What's the definition of a no-load mutual fund? 1. A fund that only has a contingent deferred sales charge (CDSC). 2. A fund that doesn't have any management fees. 3. A fund that offers breakpoints at which investors can reduce their front-end load to 0%. 4. A fund that only has a maximum 12b-1 fee of 25 basis points.

4. A fund that only has a maximum 12b-1 fee of 25 basis points. No-load funds cannot assess a front-end or back-end sales charge. Instead, they may assess a 12b-1 fee of up to 25 basis points (0.25%) per year.

Which of the following transactions requires the registration of securities according to the Uniform Securities Act? 1. An agent of a broker-dealer selling a private placement to five retail investors 2. An unsolicited transaction of an exchange-traded stock where the customer normally purchases only investment-grade bonds 3. An offer to sell out-of-state municipal bonds to a bank 4. A purchase of securities offered for sale in an out-of-state newspaper

4. A purchase of securities offered for sale in an out-of-state newspaper Although an offer to sell securities that appears in a newspaper that's published outside a state is not considered an offer in that state, securities sold in a state are subject to registration. Although the sale of equity securities to a client who has only purchased investment grade bonds may not be suitable, the transaction was done on an unsolicited basis and is an exempt transaction. A private placement offering to a maximum of 10 retail investors within a state is also an exempt transaction.

Under the Uniform Securities Act, which individual is considered to be an agent? 1. A person who solely performs clerical functions 2. A principal of a broker-dealer 3. A silent partner of a broker-dealer 4. A secretary who accepts customers' securities orders

4. A secretary who accepts customers' securities orders An agent is defined as a person who represents either a broker-dealer or an issuer in effecting securities transactions. The definition excludes principals of broker-dealers, clerical employees who do not accept customer orders, and silent partners.

What are the advantages of a limited liability company (LLC) compared to an S Corporation? 1. Continuity of life 2. Lower corporate tax rates 3. Limited liability 4. A simpler managerial structure

4. A simpler managerial structure Owners of S Corporations and limited liability companies have limited liability. Both entities also have a flow-through tax structure. Income, capital gains, and capital losses are passed directly on to the investors and reported on their personal income tax returns. Neither entity pays federal corporate taxes on income earned. The advantage of a limited liability company is that its managerial structure is much simpler. There is no need for a board of directors or annual meetings or the other formalities of a corporation. However, unlike an S Corporation that has continuity of life, LLCs are dissolved after an event (e.g., owner dies) or a specific period passes.

Which of the following statements is TRUE regarding Roth IRAs and Coverdell Education Savings Accounts? 1. Both allow tax-deductible contributions. 2. Both allow a catch-up provision if the contribution is made by a person who is over a certain age. 3. Both have the same maximum annual contribution amount. 4. Both are only permitted for individuals whose income is below a certain amount.

4. Both are only permitted for individuals whose income is below a certain amount. Contributions that are made to either a Roth IRA or Coverdell Education Savings Account (ESA) are only permitted for persons whose income is below a certain level. Both allow for tax-free growth if certain conditions are met; however, the contributions are made in after-tax dollars (non-deductible). A Roth IRA allows a catch-up contribution if the person is age 50 or older. A Roth IRA allows for a maximum annual contribution of $6,000, while the maximum annual contribution for a Coverdell ESA is $2,000.

Under ERISA, all the following are prohibited between the plan and parties of interest, EXCEPT: 1. Using plan assets for their own benefit 2. Selling property to the plan 3. Lending money to the plan 4. Charging the plan an advisory fee

4. Charging the plan an advisory fee All choices are strictly prohibited under Rule 404(c), except charging an advisory fee for services rendered to the plan.

What's the formula used to calculate the price to earnings ratio? 1. Current stock price divided by the earnings per share two years ago 2. Current dividend divided by the current stock price 3. Net income minus preferred dividends divided by the number of outstanding shares of common stock 4. Current stock price divided by the earnings per share last year

4. Current stock price divided by the earnings per share last year The price to earnings (PE) ratio is typically calculated by taking the current market price of the company's stock and dividing it by the earnings per share (EPS) from the last fiscal year. The current dividend by the stock price is the dividend yield, which is also called the current yield. Net income minus preferred dividends divided by the common shares outstanding is the formula for earnings per share (EPS).

A client contacts an investment adviser representative to discuss the advantages of incorporating. What are the disadvantages of forming a C Corporation? 1. Flow-through taxation 2. Unlimited liability 3. A limited life span 4. Double taxation

4. Double taxation The major disadvantage of a corporate structure is that its shareholders (owners) are taxed twice. A C Corporation must first pay taxes at the corporate level. Its shareholders must then pay personal income taxes on any income they receive from the corporation in the form of dividends.

Which statement about an investment adviser's annual renewal is TRUE? 1. Form ADV is filed with the SEC within 90 days of the calendar year end, or with the state Administrator(s) within 90 days of the investment adviser's fiscal year end. 2. Form ADV is filed with the SEC within 45 days of a federal covered adviser's fiscal year end, or with the state Administrator(s) within 90 days of investment adviser's fiscal year end. 3. Both state and federal covered advisers are required to renew their registrations by filing Form ADV within 90 days of the calendar year end. 4. Form ADV is filed with the SEC within 90 days of a federal covered adviser's fiscal year end, or with the state Administrator(s) within 90 days of the calendar year end.

4. Form ADV is filed with the SEC within 90 days of a federal covered adviser's fiscal year end, or with the state Administrator(s) within 90 days of the calendar year end. Federal covered advisers are required to renew their registration by filing Form ADV with the SEC within 90 days of their fiscal year end. On the other hand, state registered investment advisers are required to file Form ADV within 90 days of the calendar year end.

Which TWO of the following financial products would be defined as derivatives? i. Collateralized mortgage obligations II. Commercial paper III. Call options IV. Corporate high-yield bonds 1. I and IV 2. II and IV 3. II and III 4. I and III

4. I and III A derivative is a financial product that derives its value from movements in another financial product. If the price of the underlying security changes in value, the price of the derivative will fluctuate. For example, a CMO is a security backed by other mortgage-backed securities. If changes occur to the prices of these securities due to fluctuating interest rates and other factors, the price of the CMO will change. The price of an option contract is based on changes in the underlying security. A call option provides the holder the right to buy a security at a specified price. If the underlying security increases in value, the value of the call option will rise.

Which of the following are characteristics of zero-coupon bonds? I. They can be purchased at a deep discount II. There is no reinvestment risk III. Tax consequences occur only at maturity IV. The investor is taxed annually 1. I and II only 2. I, II, and III only 3. I and III only 4. I, II, and IV only

4. I, II, and IV only Zero-coupon bonds are issued at a deep discount and mature at par value; therefore, they require a minimal capital outlay. Also, due to the fact that zeros do not pay interest on a semiannual basis, they have no reinvestment risk (there is nothing to reinvest). For tax purposes, the IRS requires zero coupon investors to accrete (upwardly adjust) their basis. The result of accretion is that each year a portion of the discount is reported as taxable interest income.

Which TWO of the following are features of 401(k) plans? I. Mandatory employee contributions II. Mandatory employer contributions III. Voluntary employee contributions IV. Voluntary employer contributions 1. I and II 2. II and III 3. I and III 4. III and IV

4. III and IV In a 401(k) plan, both employee and employer contributions are voluntary.

David is the owner of a private company and his firm needs to raise capital in order to expand its e-commerce business. David's company will issue debt securities and has decided to avoid hiring an investment bank. Under the USA, in which situation will David's salespersons be exempt from registration as agents? 1. If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in less than one year 2. If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in two years 3. If the company wants to raise capital and issues debt in minimum denominations of $25,000 that matures in 270 days 4. If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in four months

4. If the company wants to raise capital and issues debt in minimum denominations of $100,000 that matures in four months Under the Uniform Securities Act, agent is defined as any individual who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. However, if an individual represents an issuer in effecting transactions in certain exempt securities or represents an issuer in exempt transactions, the individual is not considered an agent (and need not register). An individual who represents an issuer is not considered an agent if the sale involves short-term debt instruments (i.e., commercial paper). For this provision to apply, the debt securities must have a maximum maturity of nine months, must be issued in minimum denominations of $50,000, and be rated in one of the three highest rating categories of a nationally recognized statistical rating organization (NRSRO).

In determining the loan value of marginable securities, the agent should: 1. Refer to ADV Part 2 2. Use the 20% Rule under the Uniform Securities Act 3. Use the percentage allowed by the state Administrator 4. Multiply the market value by 50%

4. Multiply the market value by 50% The loan value of most marginable securities is determined by multiplying the market value of the securities by Regulation T of the Federal Reserve Board, which is 50%. There is no provision in the Uniform Securities Act that discusses the margin requirement on securities. The percentage is set forth by either the FRB or by certain self-regulatory organizations (SROs) such as the NYSE or FINRA.

While making cold calls on behalf of an investment adviser, an IAR speaks with a prospect who has invested a significant amount of his available funds into one mutual fund. After the client enters into a contract with the advisory firm, the IAR finds another fund with the same risk profile as the client's current investment, but it provides a higher return. What form of risk is presented in this scenario? 1. Financial risk 2. Market risk 3. Liquidity risk 4. Opportunity risk

4. Opportunity risk The best answer to this question is opportunity risk. Opportunity risk is defined as the possibility of loss or diminished return that may arise when money is devoted to one investment followed by a superior investment becoming available. Financial risk and market risk are incorrect because, regardless of which fund is chosen, investors are subject to both of these risks. Since the investor is always able to redeem his mutual fund shares, liquidity risk is not a concern.

Patrick invests in a diversified portfolio of income-producing equity investments. Patrick is investing to achieve the goal of early retirement. He takes all his dividend income and uses it to pay bills. What is the main problem with this type of strategy? 1. By spending the dividends, Patrick incurs a current tax liability each year 2. Patrick should definitely balance his portfolio with some mutual fund investments 3. Bills should always be paid from earnings, not investment income 4. Patrick does not take advantage of compounding (reinvestment of dividends) to increase earnings

4. Patrick does not take advantage of compounding (reinvestment of dividends) to increase earnings By choosing to use his dividend income to pay bills, Patrick loses the opportunity to earn interest on his interest (compounding) and, therefore, loses a powerful tool in achieving his long-term goal of early retirement. Patrick's dividends are currently taxable as ordinary income, regardless of whether he reinvests.

In a soft-dollar arrangement between an adviser and a broker-dealer, the broker-dealer would be permitted to pay: 1. A percentage of the salaries of the adviser's internal research staff 2. The cost of a coach flight for a portfolio manager to attend a conference 3. The cost of computer terminals used to deliver market data services 4. The cost of a conference concerning the future of the computer software industry

4. The cost of a conference concerning the future of the computer software industry An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. The broker-dealer is permitted to pay for the cost of the conference that an adviser attends concerning securities within an industry in which the adviser will be invested. Travel costs and any costs that should be paid by the adviser (e.g., salaries of the adviser's internal research staff) are not covered under a soft-dollar arrangement. Whereas the cost of the computer terminals could not be paid for with soft dollars, the cost of the data services would be covered by soft dollars.

If the net present value of an investment is greater than 0: 1. The investment is overvalued 2. The current market value is more than the discounted cash flows 3. The discount rate used to calculate the present value is the internal rate of return 4. The current market value is less than the discounted cash flows

4. The current market value is less than the discounted cash flows Net present value is the difference between the present value of an investment's cash flows (e.g., interest payments), MINUS the market value of the investment (i.e., NPV = PV Cash Flows - Market Price). If the net present value is greater than 0, the present value of the cash flows is worth more than the purchase price and, therefore, the investment is undervalued (i.e., NPV is greater than 0 if PV of Cash Flows is more than the Market Price).

According to NASAA's model rules, which of the following is NOT required to be disclosed to a client when an investment adviser renews or extends its contract? 1. The formula used to calculate its investment advisory fee 2. Any prepaid fees or penalties assessed to clients who elect to cancel the contract 3. The length of the contract 4. The investment adviser's level of experience

4. The investment adviser's level of experience When renewing an advisory contract, a firm is required to disclose the formula used to calculate its advisory fee, the amount of the fees, and the length of the contract. The adviser's experience level is not required to be disclosed. Advisers are not disciplined or subject to additional disclosures simply because they are new to the industry.

An investment adviser might create a portfolio in the following manner. She would assess conditions in the global economy at the present time and in the near future. With that in mind, industries are selected that would benefit most from the forecasted economic environment. The adviser would now look at selected companies within those industries and perhaps rate them according to various factors, such as management structure and fiscal health. It is from these companies that a portfolio manager might create or diversify a client portfolio. This approach would best be described as: 1. Bottom-up 2. Macro trend selection 3. Balloon structure 4. Top-down

4. Top-down This is the philosophy of the top-down approach to investing. A broad analysis of the economy is first conducted, and then specific industries are identified that would seem to benefit from the economic analysis that was done. Then particular companies are chosen from within those industries and the adviser would make selections based on certain factors.