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Which of the following is (are) NOT exempt from registration as an investment adviser representative in the state in which they conduct business? A Certified Financial Planner who prepares financial plans and whose only compensation is commissions An insurance agent who prepares comprehensive financial plans and receives commissions on any insurance products purchased by his clients A broker-dealer with extensive business in the state A mutual fund company with offices and clients in the state A) III and IV B) I, II, III, and IV C) I and II D) I only

C A Certified Financial Planner who prepares financial plans for commissions must register in the state as an investment adviser representative. An insurance agent who prepares comprehensive financial plans for commissions is also acting in the capacity of an investment adviser representative and must register accordingly. In both cases, these individuals are holding themselves out as offering investment advice because, at least in the eyes of the USA, there is no such thing as a comprehensive financial plan that does not involve securities. The commissions they receive are considered indirect compensation for the rendering of investment advice. Broker-dealers and mutual fund companies are not investment advisers under the Uniform Securities Act.

The common stock of companies within which industry sector would be most adversely affected by an increase in the general level of interest rates? A) The clothing industry B) The food industry C) The utilities industry D) The electronics industry

C Utilities are generally very heavily funded with debt. If interest rates go up, their new debt will be at higher interest rates, causing lower earnings available for common stocks.

Investment policy statement constraints

TTLLU -time horizon -taxes -liquidity -laws -unique

stop

becomes a market order if the stock reaches or goes through the strop price

stop limit

entered as a stop order and changed to a limit order if the stock hits or goes through the trigger price

limit order

limits the amount paid or received for securities

To be in compliance with the Securities Act of 1933, the sale of which of the following securities would require delivery of a prospectus? Primary offering of a closed-end investment company registered under the Investment Company Act of 1940 Primary offering of 5-year U.S. Treasury notes sold to an individual investor Private placement sold under the provisions of Regulation D Sale of shares of an open-end investment company whose first public offering was 23 years ago

B Any primary offering, unless the security is exempt, requires timely delivery of a prospectus. Treasury notes and private placements are exempt.

If a stock has a beta of less than 1.0, the stock's price will A) increase more than the market when the market is up B) not increase as much as the market when the market is up C) decrease more than the market when the market is down D) decrease regardless of whether the market is up or down

B Beta compares a stock's price history to the movement of a total market index for the same period. A beta of less than 1 means that the stock's price does not swing as widely, up or down, as the average for the entire market.

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of A) the fund's investment adviser B) a majority of the outstanding shares C) a majority of the board of directors D) no one because they do not need approval

B Changes in investment policy require a vote of the majority of outstanding shares for approval.

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

B ERISA never permits transactions of this type for a plan trustee. As an IAR handling some of the plan's investments, you would be placed in a fiduciary position and could not violate that trust.

Under NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following is NOT considered when determining excessive trading in a client's account? A) Character of the account B) Length of association with the agent C) Investment objectives of the client D) Client's financial status

B If the agent induces a client to trade securities in transactions that are excessive in size or frequency in view of the financial resources, investment objectives, and character of the client's account, the agent has engaged in unethical conduct. Remember, the suitability provisions of NASAA's policy require that, before making recommendations, agents make reasonable inquiry as to the client's financial situation, investment objectives, and needs. The recommendation must be suitable in light of any information known to the agent. The length of association with the agent is not relevant to these requirements.

Which of the following investments would provide the highest after-tax income to your client in the 35% federal income tax bracket? A) 7% bond issued by Canadian Province M B) 8% debenture issued by the LMN Corporation C) 6% U.S. Treasury bond D) 5% general obligation municipal bond issued by State H

B Only the State H bond is exempt from federal income tax. Using the tax equivalent yield formula of the muni coupon divided by (100% minus the investor's tax bracket %) we get 5% divided by 65% or 7.7%. That's a better deal than receiving 6% on the Treasury and paying taxes as well as 7% on the Canadian bond (although you learned that securities issued by Canadian provinces were exempt from registration under the Uniform Securities Act, that has nothing to do with U.S. income taxes). However, with a TEY of 7.7%, your client would take home more with the 8% taxable corporate security. You can also work backward to get the correct answer. Simply subtract 35% tax from each of the choices (other than the muni) and see which is the highest. In this case, 8% minus a 35% tax equals 5.2%—just a bit higher than the 5% coupon on the municipal bond.

Lamar is an investment adviser representative for Southeast Retirement Advisers (SRA), a wholly owned subsidiary of Southeast Retirement Solutions (SRS), a broker-dealer registered in a number of southeastern states. Lamar is also a registered agent with SRS. If one of Lamar's advisory clients sends a check made payable to SRS for a stock purchase, under NASAA's Model Rule on Custody A) Lamar would have to post a surety bond in the amount of $35,000 B) SRA is considered to be maintaining custody of client funds and securities C) SRA would be in violation of the NASAA requirement to use a qualified custodian D) Lamar is considered to be maintaining custody of client funds and securities

B Under the NASAA Model Rule, when an investment adviser uses an affiliated broker-dealer as its qualified custodian, the adviser is considered to be maintaining custody. Therefore, receipt of a check made payable to the BD is acceptable (it does not have to be forwarded). IARs would never take custody, and there is no bonding requirement for IARs.

A nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees is called A) a payroll deduction plan. B) a defined benefit plan. C) a SERP. D) a defined contribution plan.

C A supplemental executive retirement plan (SERP) is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees. It is probably not a testable point, but these are frequently funded with cash value life insurance policies. Defined benefit and defined contribution plans are qualified - the question states, nonqualified. A payroll deduction plan is usually nonqualified, but that is most often used by lower income employees; it is definitely not an executive's plan.

Which of the following statements regarding derivative securities is NOT true? A) An option contract is a derivative security because it has no value independent of the value of an underlying security. B) Derivative securities can be sold on listed exchanges or in the over-the-counter market. C) An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date). D) An option contract's price fluctuates in relationship to the time remaining to expiration as well as with the price movement of the underlying security.

C An owner of a put has the right, not the obligation, to sell, not purchase, a security at a designated price (the strike price) before a specified date (the expiration date). Although this exam deals exclusively with listed equity options, there are options traded in the OTC market. Two of the factors affecting the market price of an option (its premium) are the length of time until expiration (the longer the time, the greater the time value) and whether or not the option has intrinsic value (the difference between the stock price and the market price).

Creative Wealth Management (CWM), an investment adviser registered in five states, has a preferred brokerage arrangement with Bullish Bobbie Brown Securities (BBBS), a FINRA member broker-dealer. If one of CWM's clients chooses to use a broker-dealer other than BBBS, CWM must disclose that in a client-directed brokerage account, the client may pay higher brokerage commissions because the IA may not be able to aggregate orders to reduce transaction costs the advisory contract is in danger of not being renewed if the client insists on using anyone other than BBBS for trade execution the client may receive less favorable prices because the IA has arranged a preferred commission rate with a preferred broker-dealer using BBBS assures the client of receiving research ahead of those clients who trade elsewhere A) III and IV B) I and II C) I and III D) II and IV

C Because of preferred arrangements between the IA and the BD, it is likely that larger orders will be combined (with a concurrent cost saving) and there may be a better commission schedule available for the adviser's clients. This would not be a cause for the adviser to refuse to renew the contract, and it would be an unfair business practice to make research available to certain clients ahead of others.

Which items change when a company pays a cash dividend? Working capital Total assets Total liabilities Shareholders' equity A) I, II, and III B) I and IV C) II and III D) II, III, and IV

C From an accounting standpoint, once a corporation declares a cash dividend, it becomes a current liability on the company's balance sheet. When that dividend is paid, cash, a current asset, is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth).

In the construction of a qualified retirement plan portfolio, which of the following investment vehicles would be considered generally inappropriate? A guaranteed investment contract (GIC) A municipal bond fund A leveraged real estate limited partnership A corporate bond rated A or higher A) I and II B) III and IV C) II and III D) I and IV

C GIC's and investment-grade corporate bonds (A- or higher-rated bonds) are considered appropriate investments for a qualified plan. A municipal bond fund will potentially convert tax-free income into ordinary income and using leveraged investments in retirement plans is generally prohibited.

Which of the following are disadvantages of index investing relative to active portfolio management? Indexed portfolios have higher transaction costs. Indexed portfolios have lower management fees. Indexed portfolios restrict the universe of potential investments. Indexed portfolios may not represent optimal performance for a specific investor. A) II and IV B) I and III C) III and IV D) II, III, and IV

C Indexing means that it is only possible to select securities that are within the index, meaning that the universe of investable securities is restricted. An index may not represent optimal performance if the index does not adequately match the investor's objectives. That is, a conservative investor should not be in a small-cap index and, conversely, the S&P 500 Index would be a poor choice for an aggressive one. There are lower, not higher, transaction costs, and lower management fees are certainly not a disadvantage.

John Law is the owner of Mississippi Advisory Services (MAS), an independent financial planning organization. Law is registered as an investment adviser representative of SSC Securities and Investments, registered as a broker-dealer, and an investment adviser with the SEC. Supervision over Law's advisory activities is the responsibility of A) MAS's CCO. B) the SEC. C) SSC's CCO. D) John Law.

C It is common for independent financial planners to establish their own business entity and "hang" their registration as an IAR with another firm (as is the case in this question). The rules emphasize that these independent contractors are under the supervision of the carrying firm's CCO in the same way that inhouse IARs are.

Under the Uniform Securities Act, an investment adviser may legally have custody of money or securities belonging to a client if the investment adviser has insufficient net worth or is not appropriately bonded Administrator has not issued a rule prohibiting custody investment adviser does not also have discretionary authority over the account investment adviser has notified the Administrator that custody is maintained A) II, III and IV only B) I and III C) II and IV D) II only

C The Administrator may, by rule, prohibit advisers from having custody of client funds or securities. If no such prohibition applies, the Administrator must be notified in writing if an adviser has custody. In almost all jurisdictions, a bond or sufficient net worth is required to maintain custody. Discretionary authority does not affect an adviser's ability to have custody.

The James Henry Company (JHC), an SEC-registered securities broker-dealer with offices in Chicago and Los Angeles, limits its clientele to banks and trust companies. JHC makes a sale of U.S. government securities to the Wall Street Bank located in New York City. Which of the following statements is (are) TRUE under the Uniform Securities Act? The security itself is exempt from registration. The transaction is exempt. The broker-dealer is not required to be registered in the state of New York. A) II only B) I and II C) I, II, and III D) I only

C The sale involves a U.S. government security, which is exempt from the registration requirements under the act. The transaction itself is also exempt because it involves a sale to a financial institution. Remember, in an exempt transaction, the security subject of the transaction need not be registered with the state in which the transaction takes place. In this example, the security was already exempt, but that does not diminish the fact that the transaction is exempt. The fact that the firm limits its clientele to financial institutions, such as banks, and that the broker-dealer has no office in New York means that, under the Uniform Securities Act, the firm is not considered a broker-dealer in that state. Therefore, the broker-dealer is not required to be registered in the state of New York.

During your annual review with your clients, Matt and Sally Eberhart, they indicate that they think it is time to start putting away some money for college for their 3-year-old son. They ask you to describe the advantage of using an UTMA account over a Coverdell ESA. You would likely point out all of the following as advantages EXCEPT A) there are no earnings limits for making UTMA contributions B) withdrawals for other than qualified education expenses are not subject to any penalties C) contributions to the UTMA are made with after-tax dollars D) there is no limit to the amount that can be contributed to an UTMA

C We're looking for a feature possessed by the UTMA that is not found in an ESA, but in both cases, contributions are made with after-tax dollars. Therefore, you would not describe that as an advantage. Unlike the ESA where couples earning in excess of $220,000 per year are not eligible to contribute, no such ceiling is imposed on those donating or transferring property to an UTMA. Unlike the ESA, where there is a 10% tax penalty on the earnings withdrawn for nonqualified educational expenses, no such penalty applies to an UTMA. Unlike the ESA, which has a $2,000 per year per child limit, there is no limit to the amount that one can give to an UTMA. However, unlike the ESA, where all earnings are tax free if used for qualified educational expenses, earnings in an UTMA are taxable and, if over a certain amount, might be taxed at the parent's top marginal rate.

Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend?

C moving averages To avoid the volatility frequently present in stock price trends, analysts will frequently use moving averages. These averages reduce short-term distortions to a minimum.

Under the Uniform Securities Act, which of the following is NOT an offer or a sale? A) The sale of a warrant B) A gift of assessable stock C) A broker-dealer offering 10 shares of XYZ common stock as a free gift to any client who invests at least $10,000 in mutual funds D) 100 shares of ABC stock received in exchange for 200 shares of XYZ stock as a result of a corporate merger

D In order for a sale to occur, there must be some financial consideration. In the case of the merger, shares are exchanged without any payment of funds. Any bonus offered in connection with a sale of another security is a sale. A gift of assessable stock is always considered a sale; gifts of nonassessable stock are not sales.

Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? 125 shares 100 shares Cost basis of $25 Cost basis of $20 A) II and III B) II and IV C) I and II D) I and IV

D Remember that the ex-date is the first day on and after which, a purchaser of a stock is not entitled to a previously declared dividend (cash or stock). That means the owner of the stock on and after the ex-date (Julie) is the one who receives the cash or, in this case, the additional stock. The payment of a stock dividend causes the number of shares owned to increase while the cost per share decreases. The total value of the position will always remain unchanged. She had 100 shares at $25 per share, or $2,500, and now has 125 shares × $20 = $2,500.

Which of the following has the power to close a stock exchange for up to 90 days? A) The president of that stock exchange B) The president of the United States C) The Administrator in the state where that stock exchange is located D) The SEC

D The Securities Exchange Act of 1934 granted the SEC the power to close any registered stock exchange for up to 90 days. All that is required is notice to the president of the United States.

An investment advisory firm advertises a stock-picking system that helps investors choose the timing and selection of securities for purchase. Under the Investment Advisers Act of 1940, which of the following must be disclosed in the advertisement? The number of years the system has been used successfully The difficulty of using the system The limitations of the system

D The act prohibits reference to any formula, charting, or graphing device without disclosing the difficulties or limitations in their use. The number of years used is not required.

Those investors wishing to examine a document that would probably give them the most information about a corporation's current and planned operations would seek out A) the Form 10-K B) the investor's brochure C) the balance sheet D) the annual report

D The annual report to shareholders is going to contain not only a complete financial report of the prior year's operations but will also include statement from key personnel dealing with the company's future plans. The Form 10-K does not include discussion of future business plans - it is a report of "what has happened over the previous fiscal year."

An investor purchases 100 shares of RIF common stock. In the year following the purchase, the RIF shares appreciated by 12% and paid a 2% dividend. If inflation, as measured by the CPI, was at a 4% rate, the investor's total return on the RIF shares is closest to A) 10% B) 12% C) 8% D) 14%

D This question is asking for the total return, which is 14% (12% appreciation + 2% dividend). Had the question asked for the inflation-adjusted return, (which it doesn't), that is 14% minus the 4% CPI.

A man divorces his spouse after 10 years of marriage and remarries. If the man is the sole provider, what part of the worker's Social Security benefits is the new spouse entitled to? A) She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage. B) The new spouse is entitled to more benefits than the ex-spouse. C) The new spouse is entitled to splitting the benefits with the ex-spouse. D) She is entitled to the same Social Security benefits as the ex-spouse.

D When an individual remarries, the new spouse is entitled to full Social Security benefits. As long as the previous marriage lasted at least 10 years, that ex-spouse (if not remarried) is also entitled to full benefits. That means it is possible for 2 people to receive full benefits at the same time.

market order

executed immediately ay yhr market price with no restrictions

The following numbers (in %) represent the returns from an investment fund over the past seven years: 2014: 13%, 2015: 11%, 2016: 2%, 2017: 6%, 2018: 5%, 2019: 8%, 2020: 6%. Using the range measure would indicate that the seven-year returns from the fund had a range of A) 11%. B) 2%. C) 4%. D) 9%.

A

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

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

Which of the following retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements? A) Payroll deduction plan B) Profit-sharing plan C) Defined benefit pension plan D) Keogh plan

A A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.

A sales assistant employed by a full service broker-dealer would be required to register as an agent when accepting orders for A) direct participation programs. B) gold coins. C) commodity futures contracts. D) fixed annuities.

A An individual employed by a broker-dealer who is involved in the sale of securities must register as an agent. The security here is the DPP.

Jimmy Merchant is an agent with FLATT securities, a registered broker-dealer. When Jimmy submits an order ticket to purchase securities for a client, all of the following would appear EXCEPT A) the current market price of the security B) the broker-dealer's name C) the account number D) Jimmy's name

A Any order ticket submitted by an agent for execution at a broker-dealer will always include the account number, the agent's name, and that of the BD. All order details must be listed (e.g., the number of shares, limit or market, etc.), but the current market price is never included. Once the order is executed, the execution price is entered.

The long party is a futures contract that has entered the contract as A) a buyer. B) a seller. C) a liquidity provider. D) a market maker.

A Long is the industry term describing the buyer of a futures contract. The long is committed to buying the underlying asset at the pre-agreed price on the specified future date. Short is the industry term describing the seller of the futures contract. The short is committed to delivering the underlying asset in exchange for the pre-agreed price on the specified future date. Market maker is a term used for securities, not futures, and liquidity provider is a concept that is not tested (as is the case with many incorrect answer choices).

An individual purchased a variable life insurance policy 10 years ago with a guaranteed death benefit of $100,000. The annual premium for this policy was $2,000 per year. The individual dies and, due to outstanding performance of the separate account, leaves a death benefit to the beneficiary of $121,000. What are the income tax consequences to that beneficiary? A) No tax is due. B) There is a long-term capital gain of $1,000. C) Ordinary income tax is due on the $1,000 that exceeds the original cost. D) Ordinary income tax is due on $21,000.

A One of the nice things about life insurance proceeds is that even when the death benefit is increased due to separate account performance, it is still free of income tax.

Which of the following statements are generally TRUE of the buy-and-hold strategy? Equities would grow relative to fixed income Lower taxes and transactional costs Easy to manage The portfolio would more accurately demonstrate the client's investment objectives and risk tolerance A) I, II, and III B) I and II C) III and IV D) II, III, and IV

A Over the long run, using the buy-and-hold strategy with equity securities has outperformed the rate of return on fixed income investments. With few transactions, there are almost no commissions and capital gains taxes. Of all strategies, this is the easiest to follow. There is no way to determine the client's objectives or risk tolerance based on the decision to buy and hold. The portfolio might contain small-cap stocks or large-cap stocks. It might contain 90% equities or 75% debt securities. Investors with differing goals and risk tolerance can use this strategy.

Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. B) because Sharon's client is a bank, she does not have to register as an IAR in State X. C) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X. D) because Sharon has a client in State X, registration as an IAR would be required in State X.

A The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there. The fact that the client is a bank is of no relevance nor is the location of her employer's principal office.

When does a customer have to receive the OCC Options Disclosure Document? A) Before accepting the customer's first order to trade options covered by the ODD B) With the confirmation of the first options transaction C) Within 15 days of account approval by the firm's designated options supervisor D) Within 5 business days of the first options trade

A When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account or accepts the customer's first order to trade the listed options covered by the ODD.

One of the assumptions underlying the capital asset pricing model is that A) inflation must be taken into consideration. B) there are no transaction costs or taxes. C) only whole shares are available. D) each investor has a unique time horizon.

B The CAPM assumes frictionless markets, i.e., no taxes or transaction costs. Among the other assumptions of the CAPM are that all investors have the same time horizon and that all investments are infinitely divisible into fractional shares. The CAPM assumes that there is no inflation.