Practice Exam #1

Which of the following would you most likely consider characteristics of a growth stock? A) High P/E and low dividend yield B) High P/E and high dividend yield C) Low P/E and high dividend yield D) Low P/E and low dividend yield

A) High P/E and low dividend yield Growth stocks generally have high P/E ratios and low (or no) dividends. Value stocks normally have low P/E ratios with higher dividend payouts.

If a federal covered adviser's fiscal year ends on October 31, 2017, it must file its annual updating amendment to its Form ADV no later than A) January 29, 2018 B) March 30, 2018 C) December 31, 2017 D) February 28, 2018

A) January 29, 2018 The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end.

Which of the following commodities is least likely to be affected by the weather? A) Silver B) Orange juice C) Pork bellies D) Wheat

A) Silver

Which of the following statements is correct? A) When a risk-averse investor is confronted with two investment opportunities having the same expected return, the investor will take the opportunity with the lower risk. B) The efficient frontier represents portfolios that have the lowest expected return for each level of risk. C) As the correlation coefficient moves from +1 to zero, the potential for diversification diminishes. D) The efficient frontier represents individual securities.

A) When a risk-averse investor is confronted with two investment opportunities having the same expected return, the investor will take the opportunity with the lower risk. It is expected that investors will always choose the lower risk investment if both generate the same return. The other statements are incorrect. As the correlation coefficient declines, the potential for greater diversification increases. Efficient portfolios, not individual securities, lie on the efficient frontier. The efficient frontier contains portfolios with the highest expected return at each level of risk.

Included in the USA's definition of an exempt transaction would be any transaction by any of the following EXCEPT A) a trustee of an irrevocable trust B) a trustee in bankruptcy C) a guardian D) a marshal

A) a trustee of an irrevocable trust Although the term trustee is found in the list of persons engaged in exempt transaction, the USA limits it to trustees in bankruptcy.

All of the following are progressive taxes except A) excise taxes on cigarettes. B) estate taxes. C) gift taxes. D) personal income taxes.

A) excise taxes on cigarettes. Progressive taxes are those where the tax rate increases as the amount being taxed increases. The opposite of that is the regressive tax where the rate remains the same regardless of the dollar amount being taxed. Excise taxes, such as those on cigarettes, are a prime example. Whether someone purchases a pack, a carton, or a case, the tax rate is constant.

If a country's current account shows a trade deficit, it is most likely that A) imports are greater than exports. B) net exports are greater than zero. C) short-term flows are greater than long-term flows. D) tax payments are greater than tax receipts.

A) imports are greater than exports.

A buy stop order may be used for all of the following EXCEPT A) to protect a profit in a long position B) to protect against loss in a short position C) to acquire a long position as a stock breaks through resistance D) to protect a profit in a short position

A) to protect a profit in a long position Buy stop orders go into effect when the price of the security reaches or exceeds the specified "stop" price. As such, they are commonly used by short sellers who either wish to protect a profit they've already made, or protect against a loss if the stock should go up. Buy stops can also be used by those wishing to acquire stock when it breaks through a resistance level. However, when one is already long the stock, turning in an order to buy more is not going to offer any protection.

A stock traded on the Nasdaq Stock Market has a beta of 1.20. One could expect that the stock's volatility compared to the S&P 500 would be A) too variable to tell B) 20% more volatile C) negatively correlated to the S&P D) 20% less volatile

B) 20% more volatile Beta is a measurement of a security's volatility when compared with the overall market, best measure by the S&P 500. The "market" is assigned a beta of 1.00, so when the beta is higher than 1.00, the stock has greater volatility and when lower than 1.00, the volatility is less.

Which of the following would fall under the USA's definition of exempt transaction? A) An agent accepts an order from a client after having sent a research report dealing with that security B) An issuer sells a new issue to a broker-dealer C) An investment adviser purchases securities from the issuer D) A real estate partnership sells interests to the public with no commission charge

B) An issuer sells a new issue to a broker-dealer Transactions between issuers and broker-dealers (but not investment advisers) are exempt transactions. As long as the sale is to the public, regardless of commissions charged (or not charged), the transaction is nonexempt. Don't be lured into thinking that accepting an order from a client is unsolicited. That's not true in this case because it is as the result of the research report.

The USA would permit an agent to use the term "guaranteed" to refer to a security that is backed by the U.S. government a bond that is backed by the taxing power of a governmental body a bond whose interest and principal payments are guaranteed by someone other than the issuer a stock whose dividend payments are guaranteed by someone other than the issuer A) I and III B) III and IV C) I and II D) II and IV

B) III and IV Under the USA, the term "guaranteed" refers to a guarantee of interest, principal, or dividends by a party other than the issuer.

When reviewing a corporation's financial statements, shareholders' equity is computed by A) subtracting current liabilities from current assets. B) subtracting total liabilities from total assets. C) adding together retained earnings, preferred and common stock, and long-term debts. D) multiplying the current market price per share times the number of outstanding shares.

B) subtracting total liabilities from total assets.

When referring to municipal bonds, the formula of (1 − tax bracket) is found in the computation of A) yield to maturity B) tax-equivalent yield C) return on investment D) current yield

B) tax-equivalent yield The computation for the tax-equivalent yield of a municipal bond is performed by dividing the bond's coupon rate by (1 − the investor's tax bracket). If the bond has a coupon of 4% and the investor is in the 20% bracket, the tax-equivalent yield is 4% divided by (1 − 0.20) or 4% divided by 0.80 = 5%

A client of yours comes to the office and shows you some sales literature from a mutual fund that has him very excited. According to the material, the fund's average annual return over the past 10 years has been in excess of 15% and it has achieved the highest rating from the major fund rating services. Before recommending this fund to your clients, the first thing you would probably check for in the fund's prospectus is A) the fund's expense ratio. B) the portfolio manager's tenure. C) the fund's objectives. D) the fund's sales charge.

B) the portfolio manager's tenure. Because this client has been "sold" on past performance, you need to verify if the manager achieving those results is still on the job. That is the prime reason why the regulations require disclosure of the fund manager's tenure; it is important for investors to know if the current manager was the one who had the winning streak or if that manager just came on board. The other choices are something to look at, but in this instance, they take a back seat to checking on the manager's tenure. Sure, the expense ratio is important, but the past performance is after expenses so that has already been taken into consideration.

Under the minimum distribution rules, Jason is required to take a minimum distribution of $10,000 this year from his IRA. However, a distribution of only $8,000 has been made. What is the dollar amount of penalty that may be assessed in this situation? A) $2,000 B) $4,000 C) $1,000 D) $200

C) $1,000 The penalty for failure to make the correct amount of required minimum distribution is 50% of the difference between the minimum required amount and the actual distribution. In this case, this would be 50% of $2,000 ($10,000 − $8,000) or $1,000.

Dan is the owner of a mutual fund that returned him a before-tax return of 15% last year. Inflation is running at an annual rate of 3%, and Dan is in a 27% marginal income tax bracket. What has been Dan's approximate inflation-adjusted after-tax return on the fund over the course of the last year (rounded to the nearest 2 decimal points)? A) 10.95% B) 8.76% C) 7.95% D) 12.00%

C) 7.95% First, compute Dan's after-tax rate of return of 10.95% as follows: .15 × (1 − .27), or .73 = .1095. Then, compute Dan's inflation-adjusted, or real, rate of return by subtracting the 3% inflation rate from his 10.95% after-tax return.

It is often said that the backbone of the over-the-counter market is the market maker. A good description of a market maker would be A) an investment banker who participates in a firm underwriting B) a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded on a listed exchange C) a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market D) a member of FINRA

C) a broker-dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market This is the basic definition of a market maker. Specialists perform essentially the same service on the listed exchanges. Although all OTC market makers are members of FINRA, being a FINRA member does not define a broker-dealer as a market maker.

Under the USA, the term "security" refers to all of the following EXCEPT A) bonds B) put, call, straddle, or option C) commodity futures contract D) certificate of deposit for a security

C) commodity futures contract Commodities and futures contracts on commodities are not securities. Just remember the short list of items that are not securities.

As a bond's duration changes, A) the income received by the bondholder changes. B) its rating might be affected. C) its sensitivity to changes in interest rates changes. D) its maturity date changes.

C) its sensitivity to changes in interest rates changes. A bond's duration measures its sensitivity to changes in market interest rates. The longer the duration, the greater the sensitivity (bigger the price swings). As a bond approaches its maturity date, its duration gets shorter and shorter. The rate of income on a bond is set at issuance. The nominal (coupon) yield never changes - that is why bonds are known as fixed-income investments. Duration has nothing to do with a bond's rating and, as is the case with the coupon, a bond's maturity date is set when the bond is issued.

Trade confirmations sent by broker-dealers to their customers must always include A)the current market price of the security traded B)the tax identification number of the customer C)the amount of commission charged D)the amount of markup or markdown charged

C) the amount of commission charged Commissions must always be disclosed. Markup or markdown has to be disclosed under certain, but not all, situations. The trade price, not the current market price, is always disclosed.

Under the Investment Advisers Act of 1940, an adviser's registration usually becomes effective how many days after it is filed? A) 30 B) 20 C) 10 D) 45

D) 45 In the absence of any denial order or pending proceedings, registrations of federal covered investment advisers (and broker-dealers) will become effective on the 45th calendar day after the date of filing (the date received in the SEC's office). The SEC may specify an earlier date.

Which of the following is unlikely to be issued at a discount? A) Zero-coupon bond B) Treasury bill C) Commercial paper D) Jumbo CD

D) Jumbo CD Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.

Which types of accounts are billed a single fee that includes a group of services, such as execution of transactions and advice? A) Margin accounts B) Discretionary accounts C) Option accounts D) Wrap fee accounts

D) Wrap fee accounts Wrap fee accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap fee accounts are generally considered investment advisory accounts.

A client buys 100 shares of a mutual fund on December 28, 2016, for $4,000 and receives a capital gains distribution of $2.40 per share on March 6, 2017, which is taken in cash. He sells his 100 shares for $4,300 on June 19, 2017. For tax purposes, this transaction will result in A) a $60 short-term capital gain B) a $240 long-term capital gain and a $60 short-term capital gain C) a $240 long-term capital gain D) a $300 short-term capital gain

D) a $300 short-term capital gain The June sale of the shares purchased in December results in a short-term capital gain of $300. The distribution represents a long-term gain of $240, but this question only deals with the client's transaction.

Under the Uniform Securities Act, an agent who deliberately gives a fictitious quote to a customer A) is committed to selling or buying only 100 shares at that price B) must execute at the price quoted, regardless of the market C) is guilty of a felony and subject to criminal penalties D) has committed a fraudulent and unlawful business practice

D) has committed a fraudulent and unlawful business practice Disseminating false or misleading quotes is a fraudulent practice under the USA but is not necessarily a felony. Trades must be executed at market prices, not fictitious or fabricated prices.

An investment adviser who has no office in a state is exempt from registration in a state if, during any 12-month period, he has no more than how many retail clients in the state? A) 35 B) 10 C) 20 D) 5

5 There are provisions for exclusions from the definition of investment adviser in the Uniform Securities Act. Out-of-state advisers who have no place of business in the state are not defined as investment advisers if they have no more than 5 noninstitutional clients in this state in a 12-month period. This is known as the de minimis exemption.

Which of the following documents would aid an investment adviser in its responsibility to fully understand the needs of a client when making investment recommendations? A) An investment policy statement. B) A communications agreement. C) A restricted list. D) A proxy voting policy.

A) An investment policy statement.

An investment adviser representative specializes in the senior market. A number of his clients have reached the age where they are contemplating selling their homes and moving into an assisted living facility. The profit made on the sale of their homes will be used to defray the costs of their new residence. Under current tax laws, which of the following are TRUE? A single person pays no tax on the first $250,000 of net profit realized on the sale of a primary residence that has been occupied for at least 2 of the past 5 years. A single person pays no tax on the first $500,000 of net profit realized on the sale of a primary residence that has been occupied for at least 2 of the past 5 years. A married couple pays no tax on the first $250,000 of net profit realized on the sale of a primary residence that has been occupied for at least 2 of the past 5 years. A married couple pays no tax on the first $500,000 of net profit realized on the sale of a primary residence that has been occupied for at least 2 of the past 5 years. A) I and IV B) II and III C) I and III D) II and IV

A) I and IV When a primary residence that has been lived in for at least 2 of the 5 years is sold at a profit, the first $250,000 for an individual and the first $500,000 for a married couple is not subject to taxation. Everything in excess of that is taxed as capital gain on Schedule D of the Form 1040.

Which of the following constitutes a sale of stock? Solicitation of a tender offer by a corporation Gift of assessable stock Purchase of shares through the exercise of a warrant Exchange of shares in a corporate reorganization, such as a merger A) II and III B) III and IV C) I and II D) I, II, and IV

A) II and III A gift of assessable stock constitutes a sale under the USA because the corporation that issues assessable stock can bill shareholders for cash representing the par value shortfall at a future date. Upon the exercise of a warrant, the holder of the warrant purchases stock and the issuing corporation sells the stock. Under the Uniform Securities Act, the solicitation of tender offers by corporations and exchange of shares in corporate reorganizations are not sales.

A registered investment adviser recommends a stock that will be sold to his client in a principal transaction. The broker-dealer that will sell the stock is also registered as an investment adviser and employs the investment adviser as an agent. This transaction A) requires both written disclosure to and the consent of the client prior to the completion of the transaction B) is prohibited C) requires the consent of the client D) requires written disclosure to the client

A) requires both written disclosure to and the consent of the client prior to the completion of the transaction Under normal circumstances, when a broker-dealer acts as a principal in a trade, that fact is noted on the confirmation. However, in this case, because it is an investment adviser who is recommending the transaction, both written disclosure by the adviser and consent by the client are required prior to completion of the transaction, even when an adviser sells securities through an affiliated firm in a principal transaction.

Which of the following is an example of dollar cost averaging? A) Investing $100 into the XYZ Fund each month on the 20th of the month B) Maintaining a constant ratio plan C) Buying 20 shares of the XYZ Fund each month on the 20th of the month D) Rebalancing your portfolio each quarter on the 20th of the month

A)Investing $100 into the XYZ Fund each month on the 20th of the month Dollar cost averaging is that formula method of investing that contemplates investing a fixed amount of money, in this case $100 at regular intervals, in this case on the 20th of each month, regardless of price swings in the market. By doing so, more shares are bought when the price is low and fewer when the price is high.

The Straitened Corporation has filed for bankruptcy. One of your clients held a mortgage secured by the corporation's building. When the building was sold, the proceeds were less than the mortgage balance creating a deficiency balance. Where does this investor's claim stand? A) After the unsecured creditors B) As a general creditor on a pro rata basis C) After the secured creditors D) There is no further claim once the building has been sold

B) As a general creditor on a pro rata basis Secured creditors, such as those holding mortgage bonds, always have priority in a liquidation. If it happens, as in this question, that the asset(s) securing the debt are insufficient to satisfy the claim, the balance is considered to be an unsecured debt. In that case, those bondholders are considered general creditors and share in any remaining assets proportionate to the amount of the deficiency. The Latin legal term for this is pari passu, but we don't expect you'd see that on the exam.

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

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

The SEC has determined that advertising regarding past recommendations made by investment advisers is misleading if results do not reflect the deduction of fees actual market conditions during the referenced period are not disclosed the advertisement did not reflect performance for a minimum period of 3 years the advertisement did not disclose that it applied to only a specific group of clients A) II and IV B) I, II, and IV C) I, II, III, and IV D) I and II

B) I, II, and IV Advertising that reflects past performance must show a minimum period of 1 year, not 3. All investment advisers' advertising must reflect deduction of fees; disclose the specific group of clients to which it applies, if applicable; and state actual market conditions during the referenced period.

The Uniform Securities Act defined many terms. Among them is the term sale. Which of the following would be included in the definition of sale? An offer of common stock in a new issue properly registered or exempt from registration in the state A gift of assessable stock An investor exercising preemptive rights previously received directly from the issuer A corporation distributes 10 million new shares as part of a 2 for 1 stock split to all holders of its $1.00 par common stock A) III and IV B) II and III C) I and II D) I and IV

B) II and III A gift of assessable stock is always considered both an offer and a sale. Although the receipt of preemptive rights is not a sale, the exercise of them is. An offer does not become a sale until the exchange of consideration, and receiving additional shares as part of a stock split is not a sale because, unless stated otherwise, there is never any payment involved with a stock split.

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 IV B) II and III C) I and II D) III and IV

B) II and III 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.

An agent of a broker-dealer has a client who lost her job but will be starting a new job in 3 weeks. The client is in need of $900 for the 3-week gap. Under what circumstances may the agent arrange a loan for the client? A) If the loan is less than $1,000 B) If the client has $5,000 in her brokerage account C) If the client is agent's niece D) If the loan is repaid within 30 days

B) If the client has $5,000 in her brokerage account Loans may be made to clients if the person making the loan is in the lending business. Broker-dealers are permitted to lend money against securities held in client's portfolios. This is known as a margin loan. In fact, with $5,000 in the account, current regulations would permit a loan of up to $2,500.

All of the following securities transactions are exempt under the USA EXCEPT A) a purchase of stock by an underwriter from the issuer in a firm commitment underwriting B) a sale of private placement securities to 25 noninstitutional investors in a state C) an offer of preorganization certificates made to 25 persons that involves no commission or payment D) a sale of stock to a pension trust

B) a sale of private placement securities to 25 noninstitutional investors in a state Private placements are exempt under the USA if they are offered to no more than 10 general public (retail) investors in a 12-month period. Institutional investors are not included in the numerical limitations. Transactions involving issuers and underwriters, pension trusts, and other financial institutions are also exempt. The sale of preorganization certificates is exempt if there is no commission for solicitation or payment by subscribers and no more than 10 subscribers; there is no limit to the number of offers that may be made.

If the Administrator were examining the actions of a particular agent to determine whether the agent engaged in churning a client's account, focus would be placed upon A) the length of time the account had been opened B) the client's objectives, financial resources, and the character of the account C) the amount of profits generated in the client's account D) the number of complaints received relating to that agent

B) the client's objectives, financial resources, and the character of the account Churning is the practice of generating commissions through excessive trading in a client's account. To determine what is excessive, the regulators will look at the client's investment objectives, financial resources, and the character of the account.

Tammy Jones is retiring from her company next month on her 62nd birthday. Her 401(k) has $300,000 and offers her 4 different mutual funds. After calculating what she will receive from Social Security, she concludes that she will need an additional $500 a month to retain her current lifestyle. Which of the following would be the most appropriate recommendation? A) Leave the money in her current 401(k) account B) Roll the money into a traditional IRA C) Take a lump-sum distribution of the entire $300,000 D) Roll the money into a mutual fund withdrawal plan

B) Roll the money into a traditional IRA It would benefit Ms. Jones most to roll the money into a traditional IRA. By doing this she would defer paying taxes on the $300,000—something she could not avoid if she took the lump-sum distribution or rolled the money into a mutual fund withdrawal plan. Although the decision to roll over into a self-directed IRA or leave the funds in the 401(k), if permitted, is one worthy of consideration, with only 4 mutual funds being offered in Ms. Jones's 401(k) account, most would agree that the increased options available in the IRA make that the better choice.

The Securities Act of 1933 covers all of the following except A) full and fair disclosure B) prospectus requirements C) blue-sky laws D) liabilities for misleading filings

C) blue-sky laws The purpose of the Securities Act of 1933 is to provide investors with full disclosure about a new securities issue. Misleading information can lead to civil and perhaps even criminal liability. The act is federal in scope, whereas blue-sky laws refer to state securities regulations.

A securities analyst's stock selection method is to begin by looking for superior companies, regardless of their industry sector or the condition of the overall economy. In so doing, this analyst is using A) the business cycle approach. B) the optimal portfolio approach. C) the bottom-up approach. D) the top-down approach.

C) the bottom-up approach. This is the basic approach of bottom-up analysis. Rather than focusing the attention on the overall market (the "macro" view of the economy) or the sectors that are likely to outperform, this approach seeks to identify, usually based on the company's fundamentals, the most attractive individual stocks.

Aaron is a client of XYZ Financial Services. Over the past several years, Aaron has been suspicious of possible churning of his account, but has taken no action because account performance has been outstanding. After reviewing his most recent statement, Aaron suspects that excessive transactions have occurred. He consults his attorney, who informs him that under the Uniform Securities Act any lawsuit for recovery of damages must commence within A) 2 years of occurrence or 3 years of discovery, whichever occurs last B) 2 years of occurrence C) 1 year of occurrence D) 3 years of occurrence or 2 years of discovery, whichever occurs first

D) 3 years of occurrence or 2 years of discovery, whichever occurs first Under the USA, the lawsuit for recovery of damages must commence within the sooner of 3 years of occurrence of the offense or 2 years of its discovery.

Which of the following does NOT benefit both the employee and the employer? A) A defined benefit plan B) A SEP IRA C) A SERP D) A traditional IRA

D) A traditional IRA There is no employee-employer relationship in a traditional (or Roth) IRA. A SEP IRA is different in that the employer makes the contribution, gets the tax deduction, and the employee's account is enriched by that contribution. The same is true for the defined benefit plan and the SERP. A supplemental executive retirement plan is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly compensated employees.

The general rules dealing with a broker-dealer extending credit for a customer to purchase securities are found in Regulation T of the Federal Reserve Board. However, Regulation T does NOT address A) initial margin requirements B) loan value of securities C) mixed margin accounts D) maintenance margin

D) maintenance margin Maintenance margin levels are set by the SROs, such as FINRA. They are currently 25% for long accounts and 30% for short accounts (you will not have to calculate these).

Strategic Capital Asset Managers (SCAM) is an investment adviser registered with the SEC. Registration as an investment adviser representative would be required of an employee who A) supervises the activities of clerical staff who file individual clients' transaction reports B) cleans the office on weekends C) presents seminars on the benefits of whole life insurance D) provides recommendations on securities to the firm's bank clients

D) provides recommendations on securities to the firm's bank clients Any employee of an investment adviser (SEC or state-registered) who makes recommendations of securities, regardless of the client, must register as an IAR. Supervisors only need to register when those they supervise are IARs, and clerical staff members are generally exempt from registration. Someone who presents a seminar on a nonsecurities product is not an IAR (although the individual would probably need an insurance license).

All of the following actions must be completed prior to customers entering their first option trade EXCEPT A) receipt of a completed options agreement B) delivery of the options disclosure document (ODD) C) approval by a designated options supervisor D) completion of the new account form

A) receipt of a completed options agreement Customers do not have to complete (sign) the options agreement prior to entering an order; under current rules, the agreement must be signed and returned by the customer within 15 days of account approval.

Investors wishing to employ a passive strategy for their bond portfolios would most likely elect which of the following? A) Bullet B) Buy and hold C) Laddering D) Barbell

B) Buy and hold Among investing strategies, it is hard to find one more passive than buy and hold—nothing is traded until maturity. Each of the other strategies involves some degree of activity. For example, with the barbell strategy of owning only short-term and long-term bonds (no intermediate-term ones), as those short-term bonds mature and the long-term become intermediate, they must be replaced. That is active management. With the bullet strategy, the only thing staying constant is the year of maturity. Each year bonds are purchased with that target maturity date. That is active management. With the laddering strategy, just as climbing a ladder is active, so is the reinvestment into new bonds as each step of the ladder matures.

The sole proprietor of an insurance business that exclusively provides advice on fixed-income annuity contracts A) must register as a broker-dealer with the SEC B) must register as an investment adviser representative under the USA C) must register as an investment adviser under the Investment Advisers Act of 1940 D) need not register under any securities laws

D) need not register under any securities laws

The Investment Advisers Act of 1940 requires delivery of a brochure containing information about the adviser's background and business practices in all of the following situations EXCEPT when the service provided is an individual supervisory service when the client is an investment company when the contract is for an impersonal advisory service requiring payment of less than $500 when the client is an individual with a net worth of more than $1 million A) II and III B) II, III, and IV C) I, III, and IV D) I and II

A) II and III A disclosure brochure is not required to be delivered if the client is a registered investment company, or if the advisory service is of an impersonal nature and costs less than $500. A brochure is required when the service provided is an individual supervisory service and the client's net worth has no bearing on brochure delivery requirements.

Two portfolios have the same expected return of 10%. Portfolio A has a standard deviation of 5% and Portfolio B has a standard deviation of 18%. Under modern portfolio theory (MPT), A) Portfolio A would be preferred by investors because the portfolio has the same return as Portfolio B but bears less risk B) neither portfolio would be acceptable because the risk is too high for the expected return C) neither portfolio would be preferred because both portfolios have the same 10% expected return D) Portfolio B would be preferred by investors because its standard deviation is more than 3 times that of Portfolio A

A) Portfolio A would be preferred by investors because the portfolio has the same return as Portfolio B but bears less risk Portfolio A would be preferred by investors because it has the same return (10%) as Portfolio B but bears less risk. One of the assumptions of MPT is that investors prefer less risk rather than more risk per unit of return. Because Portfolio A has a smaller standard deviation than that of Portfolio B, it has less risk. Standard deviation measures the volatility of a security. The larger the standard deviation, the larger the security's returns are expected to deviate from its average return and, hence, the greater the risk.

The owners' equity portion of a corporation's balance sheet would contain all of the following except A) net income. B) paid-in capital. C) preferred stock. D) Treasury stock.

A) net income. Net income is only found on the income statement. The other three are part of stockholders' equity (net worth). Treasury stock is company stock that has been issued to the public and then re-acquired by the issuer (the company). It appears as a negative number so it reduces the net worth (owners' equity). Note, even though the Treasury stock reduces the owner's equity, the question is asking for the items you would see in the owners' equity section on the balance sheet and, if it exists, it would appear there as a deduction.

One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan, and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to use the net unrealized appreciation (NUA) approach when taking the distribution of the company stock, the tax treatment would be A) ordinary income on the $25,000 cost basis, long-term capital gain on the appreciation when sold B) ordinary income on the entire $125,000 C) ordinary income on the $25,000 cost basis, short-term capital gain on the appreciation when sold D) long-term capital gain on the entire $125,000

A) ordinary income on the $25,000 cost basis, long-term capital gain on the appreciation when sold Under IRS rules, if part of your retirement plan assets includes company stock, taking that as a distribution (not rolling it over into an IRA) subjects the cost basis to ordinary income tax and any unrealized appreciation is taxed as long-term capital gain when sold.

In order to compute a client's realized holding period return, it is not necessary to know A) paper losses B) value at the end of the holding period C) income received during the holding period D) the original investment

A) paper losses The question is asking for realized return. That means that we ignore paper losses, (just another term for unrealized loss).

A 47-year-old investor purchases a single premium deferred variable annuity from the ABC Insurance Company with an initial premium payment of $25,000. Six years later, a 1035 exchange is made to an annuity offered by the XYZ Insurance Company when the value of the account is $35,000. Seven years later, the account has a current value of $50,000 and the investor withdraws $20,000. The tax consequence of this withdrawal is A) ordinary income tax on $15,000. B) ordinary income tax on $20,000. C) ordinary income tax on $20,000 plus a 10% penalty. D) no tax until the withdrawal exceeds $25,000.

B) ordinary income tax on $20,000. Withdrawals from nonqualified annuities (all annuities on the exam are nonqualified unless otherwise specified) are taxed on a LIFO basis. That is, the last money in (the earnings) is considered the first money withdrawn. The investor's cost is $25,000. The 1035 exchange doesn't affect the cost basis because it is nontaxable. Therefore, with the account currently valued at $50,000, the first $25,000 withdrawn is from the earnings. That makes all of the $20,000 in this question taxable as ordinary income. What about the 10% tax penalty for early withdrawal? If you add the years together (47 + 6 + 7), the investor is 60 and, once reaching 59½, there no longer is the tax penalty.

The Uniform Securities Act specifically exempts certain issues from the registration and advertising filing requirements of the act. Which of the following securities does NOT carry that exemption? A) Canadian government bond B) 6-month commercial paper C) Bank holding company stock D) Tax-free municipal bond

C) Bank holding company stock The securities of banks, trust companies, and savings institutions are exempt; the securities of bank holding companies are not. Commercial paper with a maturity of 270 days or less is also included in the list of exempted securities.

Under the Uniform Securities Act, which of the following persons is responsible for proving that a securities issue is exempt from registration? A) Underwriter B) State Administrator C) Issuer D) No need to prove eligibility for an exemption

C) Issuer The burden of proof for claiming eligibility for an exemption falls to the person claiming the exemption. In the event the registration statement was filed by someone other than the issuer, such as selling stockholders or a broker-dealer, that person must prove the claim.

A customer buys a 5% bond at par. The bond is callable in 5 years at par and matures in 10 years. Which of the following statements is TRUE? A) YTC is higher than YTM. B) Nominal yield is higher than either YTM or YTC. C) YTC is the same as YTM. D) YTC is lower than YTM.

C) YTC is the same as YTM. If a bond is trading at par, the nominal yield (coupon rate) = current yield = yield to maturity = yield to call (unless the call price is at a premium in which case the YTC would be higher). YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.

When making recommendations to an advisory client, which of the following carry the most weight? The client's risk tolerance Past performance of the adviser representative's recommendations The client's investment needs and objectives The client's previous investment experience with other advisers A) II and IV B) I and IV C) II and III D) I and III

D) I and III Investment objectives and risk tolerance should determine recommendations to an individual advisory client.

Which of the following are required to execute orders in a customer's discretionary account? 1. The customer must authorize each transaction in writing. 2. Trades must be in accordance with the account holder's investment objectives. 3. The rules relating to best execution are the same as for a nondiscretionary account. 4. Discretionary orders must take place before nondiscretionary orders. A) III and IV B) I and II C) I and IV D) II and III

D) II and III If a customer provides discretionary authority in writing to an agent, written consent is not required for each transaction. Execution of discretionary orders, like all orders, is expected to be done at the best price available and to be in accordance with the customer's means and investment objectives.

All of the following industry violations would probably constitute fraud EXCEPT A) charging unreasonable commissions B) inaccurate market quotations C) misrepresentation of the status of a client's account D) omitting material facts in the offer/sale of securities

A) charging unreasonable commissions Charging an unreasonable commission (or markup or markdown) is a prohibited practice, but it is not considered fraud. It would be fraudulent to make inaccurate statements regarding the amount of commission being charged, such as, when acting as a principal, telling the customer that there was no commission being charged when, in fact, there is a markup or markdown built into the price.

Under the Uniform Securities Act, an Administrator who believes a violation has occurred or is about to occur may issue a cease and desist order without a prior hearing bring action to obtain an injunction and have a receiver appointed over the alleged violator's accounts seek a court order requiring the alleged violator to make restitution to others A) I and II B) I, II, and III C) I and III D) II and III

B) I, II, and III Administrators have the power to issue cease and desist orders, apply to a court for a temporary or permanent injunction, or apply to a court for restitution to investors or to have the court appoint a receiver for a violator's assets. In issuing the cease and desist order, the Administrator may do so with prior notice and hearing or may issue the order summarily (without such notice and hearing).

Your client, Jane, died, and her 53-year-old son, Patrick, is the beneficiary of her IRA account. There is $750,000 in the account at the time of her death. All contributions were made with pre-tax dollars. Ten years later, the account has grown to $1.2 million, and Patrick begins to take distributions. The distributions will be A) taxable on the growth and earning since Jane's death B) 100% taxable on the amount over $1 million C) taxed on the amount withdrawn in a given year D) tax free because the estate paid the taxes at the time of Jane's death

C) taxed on the amount withdrawn in a given year The account beneficiary is responsible for the taxes due on the funds that are withdrawn. One hundred percent of the distribution is taxable in the tax year the withdrawal is made.

One year ago, ABC Widgets, Inc., funded an expansion to its manufacturing facilities by issuing a 20-year first mortgage bond. The bond is secured by the new building and land and is callable at par 15 years after the issue date. The bond was issued with a 5.5% coupon and is currently rated Aa. If the current market price of the bond is 105, A) the nominal yield is lower than the current yield. B) the yield to call is higher than the current yield. C) the yield to maturity is higher than the current yield. D) the yield to call is lower than the yield to maturity.

D) the yield to call is lower than the yield to maturity. When a bond is selling at a premium (105 means 105% of $1,000 or $1,050), the order, from highest to lowest yield is: nominal (coupon) yield, current yield, YTM, and YTC. If the bond is callable at a premium, the order could be changed, but it is highly unlikely that the exam will present that situation in a question.

A term used to describe the results of subtracting a corporation's liabilities from its assets is A) owners' equity. B) retained earnings. C) operating income. D) net income.

owners' equity. There are several terms used on the exam to express the results of the balance sheet formula. In most cases, it will be shown as: assets minus liabilities equals net worth. Net worth can also be expressed as owners' equity or shareholders' equity. Income has nothing to do with assets and liabilities, and retained earnings is a component of owners' equity.

ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders this year, each preferred share must be paid a dividend of A) $10.00 B) $15.00 C) $25.00 D) $5.00

A) $10.00 This stock has a par value of $100 and a dividend rate of 10%. That means the annual dividend will be 10% of the $100 par, or $10. Because this is noncumulativepreferred stock, the company must pay only this year's full stated dividend of $10 per share before paying dividends to the common shareholders. Any dividends from previous years that were not paid are ignored. If this had been a cumulative preferred stock, all of the dividends in arrears (past unpaid) would have to be paid before the common shareholders could get a dividend. In that case, it would have been $10 for two years ago, $5 for the balance of last year's dividend, and $10 for this year's (a total of $25).

One of the most significant risks taken by bond investors is interest rate risk. All of these steps could be used to mitigate the effects of this risk EXCEPT A) buying bonds of highest quality B) holding bonds to maturity C) buying bonds with short-term maturities D) laddering the portfolio

A) buying bonds of highest quality Quality has no substantial impact on interest rate risk. When interest rates rise, all bonds fall in price. However, those that are closer to their maturity date are impacted less (they have a shorter duration). If one can hold the bonds until maturity, there is no interest rate risk because, regardless of the prevailing market, you receive par value. One very effective way to lessen this risk is to ladder the maturities. That means that the portfolio is spread among a series of maturities, some near, some mid-term, and some long-term.

Which of the following statements is not true? A) Transaction exemptions must be established before each transaction. B) Exempt securities must reestablish their exemptions at least annually. C) Federal covered securities include securities listed on national exchanges. D) Federal covered securities include those registered under the Investment Company Act of 1940.

B) Exempt securities must reestablish their exemptions at least annually. Exempt securities need not reestablish their exemptions annually or otherwise. Exempt securities are exempt because their issuers are exempt while the basis for an exemption for a transaction must be established before each transaction. Neither the exempt security nor the transaction exemptions are mutually exclusive and a security or transaction may qualify for 2 or more of these exemptions. The term "federal covered securities" includes registered investment companies as well as securities listed on national exchanges.

If an investment adviser places an advertisement in a newspaper offering a free brochure to those who call, under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, what may the adviser require from callers as a condition of receiving the brochure? A) The names of three friends who might be interested B) None, because no obligation may be placed on the callers C) A purchase D) A financial profile

B) None, because no obligation may be placed on the callers It is unethical to offer free services unless the offer is free of any obligation, monetary or otherwise.

An investment adviser who has not been given discretionary authority notices a stock's value declining in a client's portfolio. The adviser is unable to contact the client and sells the stock to prevent the loss. Which of the following statements is TRUE regarding this situation? A) The investment adviser acted unethically by purchasing the stock in the first place. B) The investment adviser is acting unethically by selling the stock without the client's permission. C) It is proper to make the transaction provided the loss would have been more than $5,000. D) It is proper to make the transaction to prevent the loss.

B) The investment adviser is acting unethically by selling the stock without the client's permission. Unauthorized trading, as is the case when discretionary authority has not been given, is unethical conduct. Unless discretionary authorization has been granted, trading the stock is not allowed. Best intentions aside, the adviser's actions were unauthorized and illegal.

An investment adviser to a private fund wishes to qualify for the exemption offered under the Uniform Securities Act when the fund has no more than 100 investors. In order to qualify, A) neither the private fund adviser nor any of its advisory affiliates have been convicted of a felony within the past 12 years B) every investor must have either at least $1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, in excess of $2.1 million C) the fund's outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are individuals with at least $5 million in investments D) the private fund adviser must have less than $110 million in private fund assets under management

B) every investor must have either at least $1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, in excess of $2.1 million The 100 or less investors is technically known as advising a 3(c)(1) issuer. In that case, all the investors must be qualified by meeting the net worth or assets managed by the adviser as stated. The $5 million is the requirement under federal law for an adviser seeking the federal exemption for a 3(c)(7) fund, which is not limited to 100 investors. Conviction of a felony within the past 10 years, not 12, will generally make one a "bad actor" and cause the exemption to be forfeited. Private fund advisers must keep the AUM under $150 million, not $110 million.

Under the Uniform Securities Act, which of the following are NOT considered investment advisers or investment adviser representatives in this state? An individual who sells advisory services in several states, including this one, for AAA Advisers, Inc. United Trust Company of America An agent for a broker-dealer advising customers for a fixed separate fee stated as a percentage of the customer's assets under management An investment adviser with no office in the state that does business exclusively with other investment advisers located in the state A) IV only B) I, II, III, and IV C) II and IV D) I and II

C) II and IV An agent for a broker-dealer advising customers for a fixed fee, stated as a percentage of the customer's assets under management, is acting as an investment adviser representative. An individual who sells advisory services for AAA Advisers, Inc., is an investment adviser representative. A trust company is not an investment adviser under the USA. An investment adviser with no office in the state and does business exclusively with other investment advisers located in that state is also excluded as an investment adviser under the USA.

Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract is NOT true? A) The contract must be terminable upon no more than 60 days' notice. B) The renewal must state the adviser's compensation. C) The renewal may be executed orally, provided it is done within 2 years of the initial contract. D) The renewal must be approved by either majority vote of the board or majority vote of the outstanding shares, as well as majority vote of the noninterested members of the board.

C) The renewal may be executed orally, provided it is done within 2 years of the initial contract.

All of the following activities could result in the revocation of an agent's registration EXCEPT A) borrowing from retail customers B) excessively trading for the purpose of generating commissions C) failing to state all known facts about an investment when presenting it to a client D) making recommendations based on material nonpublic inside information

C) failing to state all known facts about an investment when presenting it to a client Failure to state all known facts about an investment is not a violation of the Uniform Securities Act; omitting material facts, however, would be a violation of the act. Excessive trading, making recommendations on material nonpublic information, and borrowing from retail customers are prohibited business practices that could result in revocation of a registration.

If you are registered as an agent for a broker-dealer in State Y and you conduct business as an agent of theirs in State Z, a state in which you are not registered as their agent, you expose yourself and your employer to disciplinary action by State Z expose yourself to a possible fine may obligate your broker-dealer to offer your client the right to rescind the sale may have your registration in State Y revoked A) II, III, and IV B) I, II, and III C) II and III D) I, II, III, and IV

D) I, II, III, and IV Agents must be registered in each state where selling or offering to sell securities unless an exemption is available. Failure to do so exposes the agent and the broker-dealer to fines and possible disciplinary action. In addition, the individual could have his registration revoked where he is registered, and the broker-dealer could be required to offer customers the right to rescind any securities transactions.

Among the options available to replace the lost income of an employed individual who becomes unable to work due to a disability would be any of these EXCEPT A) Social Security disability payments B) workers' compensation C) disability income insurance D) proceeds of a life insurance policy

D) proceeds of a life insurance policy Those injured on the job are usually eligible for workers' compensation. Those who have enough eligible credits may apply for Social Security disability benefits. If the individual owns private disability insurance and/or is covered under an employer-sponsored policy, he may claim benefits. Although there is a trend toward making life insurance benefits available for use in certain instances, for test purposes the proceeds are generally only available upon the death of the insured.

Although not required by DOL regulations, if a plan administrator prepared a written investment policy statement meeting ERISA requirements, you would expect to find all of the following EXCEPT A) performance measurement parameters B) methods to be used for determining how the plan will meet future cash flow needs C) investment philosophy D) the identity of the specific securities to be chosen for the portfolio

D) the identity of the specific securities to be chosen for the portfolio Although not required by law, most qualified plans have an IPS. One thing not found in that statement is a listing of specific securities to be selected. The method for determining how they are selected will be there, but not the specific securities.

Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $15,000 B) $30,000 C) Unlimited D) $60,000

$60k The current gift tax exclusion (2019) is $15,000 per donor to each recipient. A married couple can give $30,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $30,000 to their son and $30,000 to their daughter-in-law without paying any gift tax.

Which of the following statements about systematic and unsystematic risk is most accurate? A) As an investor increases the number of stocks in a portfolio, the unsystematic risk will remain constant. B) Systematic risk can be eliminated through diversification. C) Total risk equals market risk plus company-specific risk. D) The unsystematic risk for a specific firm is similar to the unsystematic risk for other firms in the same industry.

C) Total risk equals market risk plus company-specific risk. Total risk equals systematic (market) plus unsystematic (company-specific) risk. The unsystematic risk for a specific company is not similar to the unsystematic risk for other firms in the same industry. Unsystematic risk is firm-specific or unique risk, such as business risk, financial risk, or credit risk. Generally, systematic risk cannot be eliminated and remains relatively constant regardless of the number of securities within a portfolio; however, unsystematic risk can be reduced by adding securities to a portfolio.

A stock has been in a downtrend for several days. When its price decreases to near $30, many investors enter orders to buy the stock and the price increases to $31. This is most likely an example of A) a change in polarity. B) a reversal. C) a support level. D) a resistance level.

C) a support level. The downtrend reached a support level where buying demand sustained the price. A resistance level is a price at which selling pressure emerges that stops an uptrend.

Tamika is an investment adviser representative with Financial Engineers, LLC, a covered investment adviser. The firm uses an investment policy statement to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat 7 months from now. When using the IPS, this would be considered A) an investment goal B) a financial objective C) an investment constraint D) a capital need

C) an investment constraint Investment constraints are obstacles or restrictions that must be met in order to meet objectives. In this case, we are dealing with a liquidity constraint—in 7 months, cash will be necessary to make the purchase.

An agent is registered with a broker-dealer whose principal office is located in State X, but who also does business in State Y. However, the agent is only licensed in State Y and confines her business to residents of that state. The Administrator of State X has what kind of authority over this agent? A) Cannot check the records of the agent in state Y because it is not State X's jurisdiction B) Can check the records of the agent in state Y with no prior notification C) Can only take action against this agent when she is physically present in State X D) Can check the records of the agent in state Y only with proper prior notification

A) Cannot check the records of the agent in state Y because it is not State X's jurisdiction Even though the broker-dealer is registered in State X, the agent in question is not; she is only registered in State Y. Therefore, the Administrator has no jurisdiction over the activities of this agent in a state other than his own.

A state-registered investment adviser with discretionary authority over client accounts discovered on Monday, that the firm's net worth is below the required amount. He must notify the administrator and then file a report no later than the A) close of business Monday, close of business Wednesday B) close of business Monday, close of business Friday C) close of business Tuesday, close of business Wednesday D) close of business Tuesday, close of business Friday

C) close of business Tuesday, close of business Wednesday Unless otherwise exempted, every investment adviser registered or required to be registered under the Act shall by the close of business on the next business day notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day a report with the Administrator of its financial condition.

When operating a Keogh plan, a self-employed individual must make contributions for A) all employees scheduled to work for 1,000 hours per year or more B) part-time employees who have worked for the company for 3 or more years C) full-time employees who are at least 21 years old and have worked for the company for 1 or more years D) all employees

C) full-time employees who are at least 21 years old and have worked for the company for 1 or more years Employees must be covered under a Keogh plan if they are at least 21 years old, have been employed a minimum of 1 year, and work full time (at least 1,000 hours per year). Keogh plans do not include employees who are under 21 or have just started working with the employer.

A 3X leveraged fund priced at $42 tracks an index that is up 2% one day and then down 3% on the next day. What should this fund be approximately priced at following these 2 volatile days? A) $43.18 B) $45.86 C) $41.55 D) $40.50

D) $40.50 Starting with the $42 purchase price, a 2% increase to the index on day 1 equals $0.84 up (0.02 × $42 = $0.84). Given the 3X leverage, this would equate to a $2.52 increase on day one (3 × $0.84 = $2.52). At the start of day 2, the fund would be priced at $44.52 ($42 + $2.52 = $44.52). On day 2, the index falls by 3%. A 3% decrease in the fund equals $1.34 [0.03 × $44.52 ($1.3356 rounds up to 1.34)]. Again due to the 3X leverage structure of the fund, the $1.34 decrease equates to a $4.02 drop in the fund price (3 × $1.34 = $4.02). Therefore, after the 2 volatile days, the fund should be priced at approximately $40.50.

A variable annuity annuitant bears all of the following risks EXCEPT A) market risk B) inflationary risk C) interest rate risk D) mortality risk

D) mortality risk The insurance company issuing the variable annuity bears mortality risk, or the danger that some annuitants will live to surpass their average life expectancy. The investor in a variable annuity bears inflationary risk, market risk, and interest rate risk.

Which of the following statements about investment constraints is least accurate? A) Unwillingness to invest in tobacco stocks is a constraint. B) Diversification efforts can increase tax liability. C) Investors with short time horizons are not likely to worry about liquidity. D) Being an accredited investor increases investment opportunities.

C) Investors with short time horizons are not likely to worry about liquidity. Investors with a time horizon constraint may have little time for capital appreciation before they need the money. The need for money in the near term is a liquidity constraint. Time horizon and liquidity constraints often go hand-in-hand. Diversification often requires the sale of an investment and the purchase of another. Those transactions may trigger tax liability. Attitudes are unique to the client and one of those could be an aversion to certain "sin" products. As an accredited investor, the law permits one to participate in many offerings not available to others.

Which of the following statements is TRUE regarding the civil liability provisions of the Uniform Securities Act? A) The statute of limitations for civil suits is 3 years from the date of discovery. B) Purchasers may waive their rights to suit under the civil liability provisions if done so by the purchase contract. C) Only those who actually signed the registration statement are exposed to potential liability. D) If the registration statement contains misrepresentations that were made deliberately, criminal penalties, in addition to civil ones, may be levied.

D) If the registration statement contains misrepresentations that were made deliberately, criminal penalties, in addition to civil ones, may be levied. Under state law, civil suits must be filed within 2 years of the date of discovery of the improper action or 3 years after the sale, whichever comes sooner. Purchasers may not waive their rights under the act for any provision. Although those who signed are liable, there is a list of others who also might be, including members of the board of directors, legal counsel, accountants, et cetera.

Under the NASAA Model Rule on financial requirements for investment advisers, investment advisers who have custody of customer funds are usually required to have a net worth in the amount of A) $50,000 B) $35,000 C) $5,000 D) $10,000

$35k The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an investment adviser with custody of customer funds or securities to have a minimum net worth in the amount of $35,000. If the adviser does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000. In the event the adviser wishes to post a bond​ because it doesn't meet the net worth requirement​, ​it must be an amount determined by the Administrator based upon the number of clients and the total assets under management of the investment adviser.

According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is NOT true? A) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. B) Advisers must send statements to clients no less frequently than annually that identify the total number of these transactions during the period and the total amount of commissions received. C) Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction. D) These transactions are allowed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price.

A) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. An agency cross transaction occurs when an investment adviser acts as a broker for one or both sides of a transaction involving an advisory client. Investment advisers cannot recommend cross transactions to both buyer and seller, even if written consent is given. These transactions can be executed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price. Disclosure is also required. The adviser must send a statement on at least an annual basis identifying the total number of these transactions during the period covered and the total amount of commission received. Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction.

Regarding performance-based fees charged by ​covered ​investment advisers, all of the following statements are correct EXCEPT A) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods B) to determine performance, the results of the client's investment portfolio must be compared against an appropriate index or benchmark C) performance-based fees are generally prohibited D) performance-based fees may be charged against the assets of a closed-end investment company listed on the NYSE

A) it must be disclosed that performance-based fees may motivate the investment adviser to assume greater investment risk than would apply with other compensation methods ​Covered advisers are those under federal jurisdiction rather than state. ​ The SEC assumes that any investor meeting the qualifications is aware of the greater risk entailed, so no disclosure is necessary. Although performance-based investment adviser compensation is generally prohibited, it is permitted under certain circumstances on the basis of the nature of the client. Charges of this type may be made to clients who are registered investment companies. When charging performance-based compensation, the results of the client's portfolio must be compared against an appropriate index or benchmark. ​ Please note that the NASAA Model Rule on Performance-based Compensation would require the risk disclosure.​

Which of the following individuals would be considered a noninterested person in a mutual fund? A) A member of the board of directors who is also employed as the investment adviser B) A member of the board of directors who does not hold another position within the investment company C) A person who holds a position with the fund's underwriter D) A shareholder who owns 10% of the fund's shares

B) A member of the board of directors who does not hold another position within the investment company The Investment Company Act of 1940 defines an interested person as someone employed by or who has a material business relationship with the fund, its adviser, or underwriter. Someone who owns 5% or more of the outstanding shares (an affiliated person) is also considered "interested." Merely sitting on the board does not make someone an interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person.

An Administrator may deny or revoke a security's exemption A) if the Administrator determines that an exemption applicable to federal covered securities is inconsistent with state securities law B) if the Administrator, in a court of competent jurisdiction, proves that a security does not qualify for an exemption C) for a federal covered security if its issuer is in violation of state law D) without a hearing if the issuer is given an opportunity for a hearing after the revocation

D) without a hearing if the issuer is given an opportunity for a hearing after the revocation An Administrator may deny or revoke a security's exemption without a hearing if the issuer is given an opportunity for a hearing after the revocation. The issuer requesting an exemption must prove the exemption; this is not the responsibility of the Administrator. The Administrator may not revoke exemptions of federal covered securities.

An agent and a broker-dealer maintain wrap fee accounts for several of their customers. Which of the following registrations is required? A) The agent must be registered as an investment adviser. B) Neither the broker-dealer nor the agent is required to have any license other than their regular securities license. C) The firm must register as an investment adviser. D) Only the registered principal would need to be registered in the state(s) in which they do business.

C) The firm must register as an investment adviser. Once a broker-dealer handles wrap fee accounts, it loses the exclusion from the definition of investment adviser. Therefore, the firm must be registered with either the state or the SEC. Any agents handling these accounts would be registered as investment adviser representatives.

Which of the following statements concerning investment advisers are true? An investment adviser who is exempt from registration is also exempt from the antifraud provisions of the Uniform Securities Act. The SEC can cancel the registration of a federal covered investment adviser if it finds that the adviser is no longer in business. An investment adviser who represents that their qualifications and methods of security analysis have been passed on by the SEC has violated the act. A) I and II B) I, II and III C) I and III D) II and III

D) II and III As long as a security is involved, no one is ever exempt from the USA's antifraud provisions on the exam. The SEC may cancel the registration of an adviser for one of several reasons, no longer being in business is one of them. It is always a violation to claim that the SEC (or the Administrator) has approved of your methods of doing business.

Which of the following situations would require registration as an investment adviser? A broker-dealer provided investment research services to a customer and charged a fee for the service. An agent of a broker-dealer recommends the purchase of ABC securities to a customer, who then purchases 100 shares, and the agent earns a commission. A broker-dealer has its agents prepare complete financial plans for customers for a nominal fee. The plans recommend specific securities transactions, and when the customers place orders, the agents earn commissions on those securities transactions. A broker-dealer charges its customers for collecting dividends and maintaining their accounts in addition to commission charges for transactions executed. A) I only B) I and III C) I, II, III, and IV D) I, III, and IV

B) I and III Under the Uniform Securities Act, broker-dealers and their agents are not defined as investment advisers if their performance is solely incidental to the conduct of a brokerage business, and no special compensation is received for the advisory services. A broker-dealer charging for research advice is charging for advisory services, which would require registration as an investment adviser. Preparing a complete financial plan for a customer goes beyond being solely incidental to conducting a brokerage business and would require registration as an investment adviser because a fee was charged, even if only a nominal one. Although not asked in this question, those agents would also have to register as IARs. Recommendations of securities purchases are incidental to conducting a brokerage business and would not require registration as an investment adviser if no fees are charged for the advice. Broker-dealers may charge for clerical services provided to customers, but clerical services are not considered investment advisory services.

Automated Performance Advisers (APA), a registered investment adviser in 3 states, has spent several years and in excess of $1 million developing the software for a computerized program that APA believes will allow the model portfolios it designs for its clients to consistently outperform the market. In the first year of beta testing the program, returns have ranged from 40% to 60% above the relevant benchmarks. Because of this success, and in an effort to recoup some of the development costs, APA is now charging, in addition to their standard 25 basis points per quarter, a performance-based fee of 10% of the increase of value in a client's portfolio. In so doing, APA would be A) subject to disciplinary action by the SEC B) in violation of the Uniform Securities Act C) permitted to charge performance-based fees D) in violation of the Investment Advisers Act of 1940

B) in violation of the Uniform Securities Act First of all, this is a state-registered investment adviser, so the Investment Advisers Act of 1940 and the SEC have no jurisdiction. Then, we look at this quote from the USA: "Except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client." Even though we know that there are conditions under which performance-based compensation is permitted, unless the question specifically refers to that exception, the answer is that it is not permitted.

A state-registered investment adviser suddenly incurs a liability that materially affects its net worth, causing it to drop below the required minimum. Which of the following statements is TRUE? A) The investment adviser must notify the Administrator promptly. B) The ​investment adviser ​must increase its surety bond to make up the deficiency. C) The ​investment adviser is not required to file​ ​an amendment to its registration with the Administrator. D) The​ ​investment adviser must notify the Administrator​ by the close of business on the following business day​.

D) The​ ​investment adviser must notify the Administrator​ by the close of business on the following business day​. Although most notifications involving emergency type situations require prompt notification, when an investment adviser's net worth is below the requirement, the NASAA Model Rule is a bit different. Unless otherwise exempted, as a condition of the right to transact business in the state, every investment adviser registered with the state shall, by the close of business on the next business day, notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day after that, a report with the Administrator of its financial condition.

In general, a broker-dealer is required to register with the SEC. An exception to that requirement would apply to a broker-dealer who A) is currently registered with the SEC as an investment adviser. B) does not have a place of business in the state and limits its clientele to institutional clients. C) is registered with the Administrator of the states in which it does business and only deals with issuers of the securities it trades. D) maintains a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange.

D) maintains a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange. The only exemption from SEC registration applies to broker-dealers functioning strictly on an intrastate basis. Many broker-dealers are registered with the SEC as both BDs and as IAs - one does not suffice for the other. The exemptions from state registration as a broker-dealer are much broader and would include the cases where the BD does not have a place of business in the state and its only clients are institutions or it effects transactions in this state exclusively with or through the issuers of the securities involved in the transactions.

All of the following statements regarding the role of the chief compliance officer of an investment adviser are correct EXCEPT A) the chief compliance officer should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser B) the identity of an investment adviser's chief compliance officer must be disclosed on the Form ADV C) the chief compliance officer should be competent and knowledgeable regarding the applicable federal securities laws D) the chief compliance officer should have a minimum of 5 years' experience in securities compliance in matters involving public customers or accounts

D) the chief compliance officer should have a minimum of 5 years' experience in securities compliance in matters involving public customers or accounts There is no specific experience requirement for the chief compliance officer of an investment adviser; he should be competent and knowledgeable regarding the applicable federal securities laws. Additionally, the chief compliance officer should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser.