Practice Test Review Series 65

the market maker

A dealer who stands ready to buy or sell a specific security or securities at all times In the OTC (They perform the dealer function)

Under the provisions of Regulation S-P, a person who has an investment advisory contract with a registered investment adviser is known as A) a consumer B) a customer C) a cohort D) a client

B

Looking at the balance sheet, a corporation builds its capital structure with all of the following except A) capital stock. B) cash. C) long-term debt. D) retained earnings.

B A corporation's capital structure consists of its long-term debt plus shareholders' equity.

All of the following would decrease the U.S. balance of payments deficit EXCEPT A) an increase in exports of domestic goods from the U.S. B) a decrease in purchases of U.S. securities by foreign investors C) a decrease in imports of foreign goods into the U.S. D) a decrease in dividend payments by U.S. companies to foreign investors

B Anything that will bring foreign money to the U.S. will decrease the balance of payments. Foreign investors pulling their money out of the U.S. or investing less in the U.S. will increase the deficit.

NASAA's Model Rule on Business Continuity and Succession Planning requires that each investment adviser establishes a plan that provides for each of the following EXCEPT A) assurance of continued profitability B) office relocation in the event of a temporary loss of a place of business C) assignment of duties to qualified persons in the event of unavailability of key personnel D) minimizing service disruptions and client harm

A Although NASAA would like to see registered IAs be financially successful, the BCP is not designed to assure profits.

What is the term generally given by analysts to the number generated by the addition of a company's annual depreciation expense to its net income? A) Book value per share B) Cash flow C) Dividend payout ratio D) Working capital

B Cash flow from operations is the sum of net income plus non-expended business expenses such as depreciation.

A client's portfolio consists of holdings in long-term U.S. Treasury bonds and Treasury notes. Of least concern to this investor would be A) interest rate risk B) market risk C) credit risk D) purchasing power risk

C Securities issued by the U.S. Treasury are, at least for exam purposes, free of default or credit risk, but, as with all fixed-income securities, are subject to interest rate risk and inflation or purchasing power risk. Any marketable security is subject to market risk.

If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A) AAA bonds B) Fixed annuities C) Tangible assets D) Preferred stock

C Tangible assets, such as real estate, precious metals, and other commodities, tend to keep pace with inflation. Fixed-dollar investments do not.

Averaging techniques would include all of the following EXCEPT A) maintaining a DRIP with a stock listed on the NYSE B) dollar cost averaging C) reinvesting all distributions from an open-end investment management company D) maintaining a constant ratio plan

D Averaging techniques involve some form of regular investing; a constant ratio plan involves buying and selling different asset classes to keep the ratio between them at a static percentage.

Under the Uniform Securities Act, the State Administrator has the authority to deny an investment adviser's registration for A) conviction for a nonsecurities-related misdemeanor 5 years ago B) violation of another state's securities law within the previous 5 years C) lack of experience as a broker-dealer D) being charged with for a securities-related felony 8 years ago

B Statutory disqualification will be put into place if you have been found to be convicted of a securities-related misdemeanor or any felony within the past 10 years. If you were convicted over 10 years ago there is no longer a statutory disqualification even though the State Securities Commissioner could still deny the registration. However, being charged with a felony means nothing unless the charge was followed with a conviction. A nonsecurities-related misdemeanor (e.g., a traffic ticket) will not create a statutory disqualification.

A portfolio manager who follows the value style of investing would most likely focus her attention on A) financial statements B) moving averages C) market capitalization D) 52-week highs and lows

A Value managers look for value, as found on the company's financial statements.

Which of the following statements regarding a Roth IRA is TRUE? A) Nonqualified distributions of earnings before the age of 59½ are subject to both penalty and taxation. B) The income and capital gains earned in the account are always taxed when withdrawn. C) Distributions without tax obligation must begin by the age of 72. D) For the tax year 2021, a Roth IRA allows a maximum tax-deductible annual contribution of $6,000 per individual or $12,000 per couple as long as neither has reached the age of 50.

A Unless qualifying for an exception (death, disability, and so forth), distributions representing earnings taken from a Roth IRA before the age of 59½ are subject to both penalties and taxation. Contributions to a Roth IRA are never deductible and there are no RMDs at any age.

In the investment industry, the term "2&20%" most commonly refers to A) the sales commission paid on an equity index annuity B) the minimum acceptable return in a bull market C) the fees charged by hedge fund managers D) a strategy involving buying and selling options on the same underlying asset

C Hedge funds are known for their higher management fees. A typical example is 2% of the assets under management plus 20% of the profits.

An investor is concerned that interest rates will be volatile over the next few years. Which of the following would eliminate interest rate risk? A) Insured bank CDs B) Cumulative preferred stock C) TIPS bonds D) Zero-coupon bonds

A Any negotiable instrument that has a yield component will be subject to interest rate risk. The insured bank CD cannot be traded and, therefore, will not be affected by changes in market interest rates. TIPS protect against inflation, and zero-coupon bonds have the greatest interest rate risk.

Plymouth Standard's common stock has an average return of 12%; its returns fall within a range of -2% to +26% approximately 68% of the time. Which one of the following numbers is closest to the standard deviation of returns of Plymouth Standard's stock? A) 14% B) 28% C) 19% D) 8%

A A standard deviation of 14% means an investor can expect a return on an investment to vary ±14 from the average return approximately 68% of the time. A return of +26% minus the 12% average return equals 14%. Likewise, the difference between the -2% return and the average of 12% is also 14%.

Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) State licensing fee B) Form U-4 C) Renewal notice to the SEC D) Consent to service of process

A All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.

Irving Wilson works for Wall Street Limited (WSL), a registered investment adviser. He limits his advice exclusively to equity securities listed on the NYSE. Under the Uniform Securities Act, Irving A) must register as an IAR B) need not register as an IAR C) would need registration as a federal covered IAR D) is not covered by the anti-fraud rules, as these are federal covered securities

A Because Irving works for a registered investment adviser and provides advice on securities (where they are traded is irrelevant), he must register as an IAR, regardless of the nature of the securities that are the subject of his advice. There is no such thing as a federal covered IAR, only a federal covered IA. If the advice relates to securities, no one is exempt from the anti-fraud rules.

An index annuity has no cap on gains, but guarantees a minimum return of 3.35% with an 80% participation rate. If the index increases by 15%, what is the rate of return to the investor? A) 12% B) 15% C) 18.35% D) 2.68%

A If the annuity contract calls for an 80% participation rate with no cap, then the investor will receive 80% of the performance of the index. In this case, 80% of a 15% return is 12%.

The technical market theory that measures the breadth of the market is A) the advance/decline B) the short interest C) the support/resistance D) the odd-lot

A The advance/decline theory compares the number of stocks advancing versus those declining, generally on the New York Stock Exchange. Because it uses such a large sample, it is used as an example of the breadth of the market.

What does a bond's yield to maturity (YTM) indicate? A) Discounted rate that equates a bond's cash flow to its current price B) Annual interest rate a bond purchaser receives C) Interest an issuer pays on a bond issued at a premium D) Annual interest rate an issuer pays on a bond relative to the issuer's dividend

A The yield to maturity is the discounted rate that educates (discounts) a bond's cash flow to its current price.

When comparing futures and forwards, it would be correct to state that A) futures are considered securities, while forwards are not B) forwards are exchange-listed, while futures are not C) futures are more commonly used by speculators than forwards D) forwards are more likely to be closed out prior to expiration

C The nature of futures, being standardized with a fluid secondary market, makes them more suitable for speculators than forwards. In fact, it is futures that are almost always closed out prior to expiration.

Investors seeking current income would benefit from A) buying periodic payment variable annuities B) buying LEAPS C) selling call options D) buying U.S. Treasury STRIPS

C When an investor sells an option, put, or call, the premium is received, generating immediate income. LEAPS are long-term options and, like all long options positions, do not generate any income. A periodic payment variable annuity will not begin any payout until the end of the deferral period.

Prudent Asset Construction Enterprises (PACE) has offices in states X, Y, and Z. On their last annual updating amendment, they reported AUM of $218 million. In which of the following instances would PACE be receiving a substantial prepayment of fees? A) $10,000, paid monthly B) $1,600, paid at the first of each quarter C) $600, paid six or more months in advance D) $1,600, paid one year in advance

D First of all, this is an SEC registered IA, so we have to go by the federal numbers. Those are more than $1,200, six or more months in advance. The $600 would have been substantial if PACE was state-registered. Although the other two choices are above $1,200, they are not prepaid for at least six months.

Which of the following statements regarding REITs are TRUE? Investors receive flow-through benefits of income as well as loss. Hybrid REITs own properties as well as making loans on others. Equity REITs are prohibited from using leverage to acquire properties. Most REITs are easily traded in the secondary market. A) I and IV B) III and IV C) I and III D) II and IV

D It is not true that REITs offer flow-through of losses; they are not DPPs. As with most real estate purchasers, leverage, usually in the form of a mortgage, is used to acquire property. A hybrid REIT contains the features of both an equity REIT and a Mortgage (Debt) REIT and most REITs trade on the exchanges or Nasdaq.

Which of the following business structures is most appropriate for retaining money in the business? A) A sole proprietorship B) An S corporation C) An LLC D) A C corporation

D Only in the case of a C corporation is money retained not subject to tax on the personal level. In all of the other choices, any income is passed through to the owners making it inefficient to accumulate funds in the business.

With regard to the NASAA Model Brochure Rule Requirements for Investment Advisers, which of the following are not exempt from the delivery requirements of that rule? A) An adviser whose only clients are closed-end investment companies B) An adviser whose only clients are exchange-traded funds C) An adviser who only provides impersonal advisory services at an annual charge of less than $500 D) An adviser who deals with qualified clients only

D There are only two exemptions from NASAA's (and the SEC's) brochure delivery rule. They are when the client is a registered investment company and when the adviser's clients receive only impersonal advice and pay less than $500 in fees per year. Qualified clients, those with at least $1.1 million in assets with the investment adviser or net worth of at least $2.2 million, may be charged performance fees, but that has nothing to do with brochure delivery.

The SEC has determined that sales literature regarding past recommendations made by investment advisers is misleading if results reflect the maximum deduction of fees actual market conditions during the referenced period are not disclosed the sales literature reflects performance for a minimum period of only 1 year the sales literature did not disclose that it applies to only a specific group of clients A) II and IV B) I, II, III, and IV. C) II, III, and IV D) I and II

A

If a customer enters a market order to buy 100 shares of GFT, the trade will be executed at the A) highest ask B) lowest offer C) lowest bid D) highest bid

B A market order mandates that a trade must be executed at the best execution (price) that can be attained for the client. This question is meant to find out your knowledge of the difference between a bid and an offer and what an inside market is. The inside bid is the highest price a dealer is willing to pay to someone who wants to sell this stock. The inside offer, usually referred to as the ask, is the lowest price made available by a dealer to those wishing to buy this stock.

Under which of the following asset allocation programs is it most likely that commission expense will have a significant impact on portfolio performance? A) Buy and hold B) Tactical C) Rebalancing D) Strategic

B Tactical asset allocation, also known as active asset allocation, attempts to time the market. As such, there is a relatively high amount of in and out trading, causing commission expense to be a significant factor.

Which of the following items does NOT fall within the Section 28(e) safe harbor? A) Research reports prepared by a third party other than the broker-dealer B) Software used to analyze client's portfolios C) Software used to simplify the investment adviser's preparation of its tax returns D) Proprietary research reports analyzing the performance of a specific industry

C Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyze securities is also permissible since that benefits the client. Tax preparation software benefits the adviser, but not the client.

One of the responsibilities of the fiduciary handling a qualified retirement plan is providing an investment policy statement. Which one of the following is NOT typically included in that document? A) Risk tolerance B) Current income needs C) Investment objectives D) Investment selection

D The investment policy statement is generally a written document that sets forth the objectives and constraints on a managed portfolio. Income needs and risk tolerance are included in determining the objectives, and time horizon is a constraint. Investment selection is not stated in any policy; selections are made on the basis of the policy.

A corporation with a 10%, $100 par cumulative preferred paid $5 to preferred stockholders last year. This year the company wants to pay common dividends. How much must it pay each preferred share outstanding before paying common shareholders? A) $15 B) $0 C) $5 D) $10

A A 10% cumulative preferred stock with a $100 par value would pay an annual dividend of $10 ($100 × 10%). Cumulative preferred requires all dividends that have previously been skipped be paid before any dividends paid to common stock. The $5 that was paid last year left $5 in dividends in arrears. Therefore, this year requires that a $15 dividend be paid to the preferred shareholders before any common dividend paid to common shareholders.

Which of the following clients of a federal covered investment adviser are NOT exempt from the delivery requirements of the brochure rule? A) An employee benefit plan with assets of at least $5 million B) A closed-end investment company traded on the New York Stock Exchange C) An open-end investment company with less than $25 million in assets D) An individual investor purchasing the IA's newsletter with an annual subscription price of $410

A The only exemptions from the IA brochure rule are registered investment companies (both open and closed-end) and impersonal advice costing less than $500 per year.

Which of the following is the primary advantage to the employer who offers a nonqualified plan when compared to one that offers a qualified plan? A) The nonqualified plan is permitted to discriminate in favor of highly compensated employees. B) The qualified plan is permitted to discriminate in favor of key employees. C) The qualified plan costs less to administer than the nonqualified plan. D) The nonqualified plan allows for an immediate employer deduction for contributions.

A Unlike a qualified plan, a nonqualified plan is permitted to discriminate in favor of highly compensated employees. Because there are so few regulations involved, the administrative costs of a nonqualified plan are much lower than those for a qualified plan. The nonqualified plan, typically deferred compensation, allows for a tax deduction when the money is ultimately paid out to the employee or beneficiary.

When a prospective client opens a new brokerage account, the broker-dealer's fee disclosure document would be least likely to contain A) late settlement fees B) the commission schedule C) account transfer fees D) account maintenance fees

B The NASAA template of broker-dealer fee disclosures does not include commissions, markups and markdowns, or advisory fees.

Which of the following activities might result in a positive yield curve in the bond market? A) A parallel upward shift in interest rates B) Investors buying long-term bonds and selling short-term bonds C) Investors buying short-term bonds and selling long-term bonds D) A parallel downward shift in interest rates

C A positive yield curve is the normal condition and occurs when long-term rates are higher than short-term rates. Buying short-term bonds tends to drive their prices up and their yields down, while selling long-term bonds has the opposite effect.

If a client wishes to open a margin account, the most important warning you should give is that A) the cost of the money borrowed to carry the account is not fixed and has no upper limit B) not all stocks can be purchased on margin C) because of the leverage involved, the client can lose more than the original amount invested D) the Fed has the power to change margin requirements at any time

C Although the other choices are true, the most important caveat to explain to a client is that buying on margin could lead to a loss equal to or greater than the investor's original principal.

Reinvestment of mutual fund distributions has all of the following benefits EXCEPT A) reinvestment of capital gains at NAV B) reinvestment of dividends at NAV C) tax deferral until the acquired shares are sold D) compounding of returns

C Taxes on reinvested distributions are due in the year received.

The discounted rate that equates a bond's cash flow to its current price is known as the bond's A) current yield B) coupon rate C) yield to maturity D) duration

C The yield to maturity of a bond considers the accretion of any discount or amortization of any premium as well as the annual coupon rate, taking into consideration the time value of money.

Which of the following stocks would be the least suitable for an aggressive risk tolerant investor? A) Large-cap in a counter-cyclical industry B) Large-cap international manufacturing company C) Small-cap pharmaceutical company D) Mid-cap utility company

D An aggressive investor with high risk tolerance would not be interested in a mid-cap utility company.

Which of the following items will affect a corporation's cash flow? Cash Depreciation Net sales Accounts receivable A) I and IV B) I and II C) III and IV D) II and III

D Cash flow is basically net income plus depreciation. Net sales is the beginning of the company's income. Cash and accounts receivable are assets, and cash flow comes from the income statement, not the balance sheet.

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

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

As the number of stocks in a portfolio increases, the portfolio's systematic risk A) decreases at a decreasing rate B) increases at a decreasing rate C) decreases at an increasing rate D) can increase or decrease depending on the beta of the added stocks

D When you increase the number of stocks in a portfolio, unsystematic risk will decrease at a decreasing rate. However, the portfolios systematic risk can be increased by adding higher-beta stocks or decreased by adding lower-beta stocks.

LMN, Inc., is preparing to report its net income for the past year. An increase in which of the following would NOT cause a decrease in the reported net income? A) Allowance for bad debts B) Year-end bonuses to employees C) Cash dividends D) Corporate income tax rate

C Cash dividends are paid out of the company's net income, so an increase or decrease will not impact that net income. Net income is a calculation determined by current operations, so an increase in the amount set aside as an allowance for bad debts will reduce operating income. Because net income is always after taxes, raising the company's income tax rate will obviously decrease the net income of the corporation. One of the major expenses for most corporations is labor so any increase, whether in the form of raises or bonuses, will decrease the net income.

Which of the following is a prohibited action under the Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) Notifying the Administrator that the adviser intends to maintain custody of customer securities B) Depositing securities or cash with the Administrator in lieu of a required surety bond C) Claiming that advisory fees are negotiable, but maintaining a fixed fee schedule D) Determining the price and time of execution of customer orders without written discretionary authority

C If an adviser states that fees are negotiable but charges his fixed rates, that would be an unfair business practice. Time and price are not considered discretion.

You have a client who is subject to the AMT. As a result, the client would not receive the full benefit of investing in A) cumulative preferred stock B) nonqualified stock options C) tax-exempt private purpose bonds D) ADRs

C Included in the list of tax preference items that are subject to the AMT is the interest received on tax-exempt private purpose bonds. Therefore, someone investing in these bonds does not receive the full benefit of their tax-exempt status. It is the incentive stock options (ISOs) where an AMT issue can arise, not the NSOs.

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) JKL 4s of 2022 B) GHI 7s of 2052 C) ABC 5s of 2050 D) DEF 6s of 2051

C The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2050 through 2052, the bond with the lowest coupon will have the longest duration. The 4s of 2022 have a relatively short duration, even though their coupon is low.

A corporation with a 6%, $25 par cumulative preferred paid $.50 to preferred stockholders last year. This year, the company wants to pay common dividends. How much must it pay each preferred share? A) $2.50 B) $1.50 C) $11.50 D) $0.50

A A 6% cumulative preferred stock with a $25 par value would pay an annual dividend of $1.50 ($25 × 6%). Cumulative preferred requires all dividends that have previously been skipped be paid before any dividends paid to common stock. The $.50 that was paid last year left $1 in dividends in arrears. Therefore, this year requires that a $2.50 dividend be paid to the preferred shareholders before any common dividend paid to common shareholders.

An investor purchased a 2x leveraged ETF at a price of $100 per share. On the first day, the index was up 10%. On the next day, it was down 10%. The investor's share value is now A) $96. B) $101. C) $100. D) $99.

A On the first day, the value increased by twice the 10% the ETF gained (20% × 100 = 20). That makes the share value $120. On the second day, the value decreased by twice the 10% the ETF lost, (20% × 120 = 24). That makes the current value $96.

For a profitable and rapidly growing firm, holders of preference shares are leastlikely to benefit from the firm's growth if the preference shares are A) cumulative. B) participating. C) common stock D) convertible.

A Preferred stock shares, sometimes called preference shares, are cumulative if any dividends in arrears must be paid before the firm pays any common dividends. A profitable and rapidly growing firm is unlikely to be in arrears on its preferred dividends. Just as important, the return on those shares is fixed and, regardless of the growth in the company's earnings, the dividend will remain the same. Participating preferred shares may receive additional dividends if the firm's profits exceed a stated level. Convertible preferred shares can benefit from the firm's growth because of the ability to convert to common shares. The question is asking about preferred stock - do not make a silly error and choose common stock.

Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a 5-day penalty free withdrawal. B) federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. C) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. D) state-registered advisers who do not deliver the brochure at least five days prior to contract signing must offer a 48 hour penalty free withdrawal.

A State-registered investment advisers who do not deliver the brochure at least 48 hours prior to entering the contract must offer a penalty-free withdrawal of five days. There is nothing comparable to that in the federal law. Both have the 120-day delivery requirement, and state-registered investment advisers cannot have investment companies as clients.

Once reaching the age of 72, required minimum distributions must be taken for retired individuals who were participants in all of the following EXCEPT A) Roth IRAs B) Keogh plans C) SEP IRAs D) traditional IRAs

A The Roth IRA is the only one of these where there are no required minimum distributions once reaching age 72. If still employed by the sponsor of a qualified plan, RMDs are not required from that plan, but the question would have to state that.

A U.S. Treasury bond's price has moved from 96.18 to 96.22. An investor's account holding 10 of these bonds would show an increase of A) $12.50 B) $.40 C) $1.25 D) $4.00

A U.S. Treasury bonds are quoted in 32nds, where the difference between 96.22 and 96.18 represents an increase of 4/32nds per bond. That is one-eighth, or $1.25, times 10 bonds, or $12.50

The characteristics of an exchange-traded futures contract would include all of the following EXCEPT A) a high likelihood that the contract will be exercised B) the quantity and quality of the commodity C) the location of delivery of the underlying asset D) the delivery price and month of delivery

A Unlike forward contracts, only a small percentage (some estimate only 2%) of futures contracts are ever exercised. All of the other items are part of a standard futures contract.

You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is A) business risk B) liquidity risk C) systematic risk D) inflation risk

B A portfolio of listed common stocks will have little to no liquidity risk, as listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living.

Early in the year, an investor purchased 100 shares of KAP common stock at a price of $60 per share. Just prior to the end of the year, after receiving three quarterly dividends of $1, the investor liquidated all of the KAP at a price of $59 per share. If the Consumer Price Index (CPI) increased by 3%, the investor's total return over the holding period was A) .33% B) 3.33% C) 5% D) 2%

B An investor's total return percentage is calculated by adding together income plus capital gain (or loss) and dividing that total by the initial cost. The math looks like this: three quarterly dividends of $1 each is $300. Selling the stock at $59 per share represents a loss of $1 per share or $100. The net positive return is $200 which, when divided by the original cost of $60 per share, results in a total return of 3.33% Even though the CPI is given, the question is not asking for inflation adjusted or real rate of return; it is just another example of a question containing unnecessary information.

Which of the following is a direct commitment between one buyer and one seller? A) Forward contract B) Option contract C) Futures contract D) Settlement contract

A A forward contract is a direct commitment between one buyer and one seller. The forward seller is obligated to make delivery; the forward buyer is obligated to take delivery. Unlike futures or options where parties other than the two who originated the contract may take the role of the "other side," with a forward contract it is only the two originators who are involved.

As defined in the Uniform Securities Act (USA), which of the following would be considered an exempt transaction? A) A sale of stock by an administrator of an estate B) A purchase of stock by an accredited investor under Rule 506(b) C) A sale of U.S. Treasury bonds to a retail investor D) A purchase of bonds by a trustee of an irrevocable trust

A A sale by certain fiduciaries, such as an executor or administrator of an estate, is an exempt transaction under the USA. Even though the Treasury bonds are an exempt security, the sale to an individual is not an exempt transaction. Rule 506(b) is the federal transaction exemption not found in the USA, and only a trustee in bankruptcy is considered for the exemption.

An estate-planning technique often recommended for those with large taxable estates is the use of A) an irrevocable life insurance trust (ILIT) B) a testamentary trust C) the capital needs analysis D) the alternative valuation date

A For those with large taxable estates, the purchase of life insurance to cover the potential estate tax liability is frequently recommended. The use of the ILIT will generally keep the proceeds out of the estate. The alternative valuation date only helps if the value of the estate drops sometime during the six months after death. A testamentary trust does little, if anything, to reduce estate taxes, and the capital needs analysis is used to determine the replacement value needed in the event of premature death—unlikely to have a need with this large of an estate.

Richard, Tim, Sam, and Fred have a regular golf foursome every weekend. During one of their outings, they decide it is time they did something constructive with their money by opening an account with a brokerage firm. If the account is opened tenants in common, suitability information would be required on A) each of the four individuals B) whichever person has been designated by the group as its spokesman C) only that individual with the authorization to trade the account D) each of the individuals, and if married, their spouses

A On any joint account, it is required to obtain suitability information on all of the account owners.

A diversified open-end investment company's portfolio consists of holdings in U.S. equities, foreign equities, investment-grade U.S. corporate bonds, and U.S. Treasury bonds. An investor owning shares of this company would be subject to business or financial risk default or credit risk interest rate risk systematic risk A) I and III B) I, II, III, and IV C) I, III, and IV D) I and IV

B Any portfolio with equities is subject to business or financial risk. Likewise, any portfolio with debt securities is subject to interest rate risk. The corporate bonds possess default risk, and all securities are subject to systematic risk.

A corporate bond with an A rating is currently selling for 105. If the bond has a coupon of 6% and matures in 10 years, its yield to maturity is closest to A) 5.71% B) 5.37% C) 6.34% D) 6.19%

B Any time a bond is selling at a premium above par, the yield must be lower than the coupon rate. In this case, the correct answer must be less than 6%. The current yield is 5.71% ($60 divided by $1,050), and because the yield to maturity on a bond purchased at a premium is always less than the current yield, by process of elimination, the answer must be 5.37%. It is calculated by taking the coupon of $60, subtracting the average loss per year of $5 ($50 premium divided by 10 years), and then dividing that $55 result by the average of today's price and par ($1,025).

Under the Investment Company Act of 1940, a closed-end management investment company is required to do all of the following EXCEPT A) have a stated investment objective B) redeem its shares upon request C) publish its management fees D) issue shares with voting privileges

B Closed-end management investment company shares trade in the open market (either listed or OTC) once the primary offering is done. The selling price is determined by supply and demand within the market. A redeemable share would be characteristic of an open-end management investment company (mutual fund).

Which of the following would offer your client check-writing privileges and FDIC insurance coverage? A) GIC B) DDA C) Negotiable CD D) Government securities money market fund

B DDA stands for demand deposit account, most commonly, a bank checking account. It, like all other bank accounts, carries FDIC insurance. GICs offer neither. Money market funds offer check-writing, but no FDIC coverage; negotiable CDs offer FDIC coverage, but no check-writing.

When an investment adviser prepares a financial plan and distributes research reports prepared by several different third parties, which of the following statements is TRUE? A) An adviser must disclose the source of any information used in making a recommendation to a client whenever requested by the client. B) An adviser may not use specific research reports that are prepared by an outside third party without disclosure of the source. C) An adviser is prohibited from distributing someone else's work. D) An adviser is required to disclose all sources of information used in making a recommendation to a client.

B If you distribute reports prepared by outside sources when generating investment recommendations, disclosure as to the source of those reports is necessary.

Providential Asset Allocation Services (PAAS) is a covered investment adviser offering wrap free programs. As a result, PAAS must provide new clients with A) Form ADV Part 2A unless there have been no material changes since the last brochure B) appendix 1 of Form ADV Part 2A no later than entering into the advisory agreement C) appendix 1 of Form ADV Part 2A within 120 days after entering into the advisory agreement D) Form ADV Part 2A no later than entering into the advisory agreement

B Providential Asset Allocation Services (PAAS) is a covered investment adviser offering wrap free programs. As a result, PAAS must provide new clients with A) Form ADV Part 2A unless there have been no material changes since the last brochure B) appendix 1 of Form ADV Part 2A no later than entering into the advisory agreement C) appendix 1 of Form ADV Part 2A within 120 days after entering into the advisory agreement D) Form ADV Part 2A no later than entering into the advisory agreement

A portfolio manager with a growth style would probably diversify by A) concentrating in stocks in one or two industries B) devoting a portion of the portfolio to securities with a negative correlation C) attempting to build a portfolio with a very high correlation D) placing a portion of the portfolio into high-yield bonds

B Securities with a negative correlation add diversification to a growth portfolio because they move in the opposite direction of the balance of the holdings. Therefore, losses are offset by gains.

When an investment adviser representative terminates employment with a federal covered investment adviser and then registers with a state-registered investment adviser in the state where the individual maintains a place of business, A) only the state-registered investment adviser must notify the Administrator B) the investment adviser representative must give notification of the termination, and the state-registered adviser must give notification of the employment, to the Administrator promptly C) only the investment adviser representative must notify the Administrator promptly D) the investment adviser representative and the federal covered adviser must notify the Administrator promptly

B This is a relatively obtuse rule. If you are working for a registered investment adviser within a specific state, that State Securities Administrator wants to know who you are. The problem becomes who is responsible for notifying the State Securities Administrator of your employment. A federal covered investment adviser is exempt from registration at the state level, and therefore, has very little contact with the state. If you go to work for a federal covered investment adviser, it becomes your duty to notify the State Securities Administrator that you are working there as well as when you terminate. If you go to work for a state-registered investment adviser who has contact with the State Securities Administrator, that firm will advise the state that you work there.

Sven Johannson purchased an American depository receipt (ADR) on a Swedish corporation. Based on the current price of the company's stock, the dividend yield is 2.5%. Johannson hopes to hold the stock for several years and experience a capital gain. It would be true to state that Johannson will A) not pay foreign taxes on the dividend income, and the investment is subject to exchange rate risk. B) not pay foreign taxes on the dividend income, and the investment is not subject to exchange rate risk. C) pay foreign taxes on the dividend income, and the investment is subject to exchange rate risk. D) pay foreign taxes on the dividend income, and the investment is not subject to exchange rate risk.

C An ADR is a convenient way for U.S. investors to own foreign securities without having to open foreign brokerage accounts. The U.S. investor in an ADR does not eliminate any of the consequences of owning foreign securities just because he or she holds an ADR instead of the foreign security itself. Therefore, foreign taxes are deducted from dividend payments and the investor experiences exchange rate risk during the holding period. In most cases, the U.S. investor receives a credit against U.S. taxes for the foreign taxes paid.

Your client wishes to begin a self-funded retirement plan that will enable him to make contributions until he is 75 years of age with no required minimum distributions. Which of the following would be your recommendation? A) Traditional IRA B) 401(k) C) Deferred compensation plan D) Roth IRA

D A Roth IRA would be your best choice in this instance. Unlike the traditional IRA and qualified retirement plans, a Roth IRA has no required age to begin distributions. You must begin distribution of a traditional IRA and 401(k) by no later than April 1 of the year following the year you turn 72. With a Roth, because the withdrawals will be tax exempt, the IRS does not care when you begin taking your money out. Therefore, with no required distribution age, you can make contributions for as long as you have earned income. The term self-funded plan will always refer to an IRA.

A life insurance policy with benefits tied to the performance of a separate account that allows the policyholder to skip premium payments is called A) a scheduled premium variable life insurance policy B) a fixed premium variable life insurance policy C) a universal life insurance policy D) a flexible premium variable life insurance policy

D Flexible premium means that the policyholder can elect to skip premium payments. This is a feature of all universal life policies, but only in the case of the universal variable life does the performance of the separate account impact benefits.

Current market interest rates are 6%. Using the discounted cash flow method of valuation, you would expect to arrive at the highest valuation for which of the following? A) 10% coupon maturing in 10 years B) 7% coupon maturing in 9 years C) 5% coupon maturing in 20 years D) Zero-coupon bond maturing in 11 years

A The discounted cash flow method considers the future expected free cash flow (the interest payments plus the eventual return of the principal) and discounting it to arrive at a present value. In its simplest iteration, this is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money. In general, bonds with higher coupons will have the greatest value because they will clearly produce the most cash flow, and zero-coupon bonds will produce the lowest because they have no cash flow other than the return of the face value at maturity.

John purchased 100 shares of DEF common stock at a price of $25 per share on August 4, 2015. On December 1, 2017, with the stock selling for $29 per share, he passed away, leaving the stock to his daughter. She subsequently sold the stock nine months later for $32 per share. Her tax consequence is A) $300 long-term capital gain B) $300 short-term capital gain C) $700 long-term capital gain D) $700 short-term capital gain

A The laws for inheriting stock are that the beneficiary will receive the stock with a stepped up basis. In this instance, the daughter's cost basis would be the market price at the time of death ($29). The holding period for inherited stock is always considered long-term. Therefore, a $300 ($32-$29) long-term capital gain results from the sale by the daughter.

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of the Securities Exchange Act of 1934 the Investment Company Act of 1940 the Investment Advisers Act of 1940 the Uniform Securities Act A) II and IV B) I and III C) II, III, and IV D) I, II, and III

A The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940. Sure, it makes good sense, but it is not required. There is nothing in the Securities Exchange Act of 1934 that relates to investment advisers, much less their contracts with clients.

In which of the following cases does exercise not involve the issuer of the underlying asset? A) An option B) A right C) A convertible bond D) A warrant

A When an option is exercised, the seller (writer) of the option is the one who must deliver (call) or purchase (put). In all of the other choices, the issuer is the one who delivers the stock.

Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that A) the initial contract is for a maximum of one year and then may be renewed on either an annual or biannual basis B) no contract may be terminated with more than 60 days' written notice C) unless a specific exemption applies, the fund may not engage in margin trading D) the contract should be in writing

B Contracts between funds and their advisers may not be terminated with more than 60 days' written notice, and these contracts must—not should—be in writing. The initial contract is for a two-year period and then renewed on an annual basis. Whether or not the fund can trade on margin is not a function of the management contract.

Which of the following statements is TRUE regarding Social Security retirement benefits? A) Spousal benefits can be paid to an ex-spouse as long as the marriage lasted at least 15 years. B) Social Security rewards people who wait to claim with an 8% annual increase for every year beyond full retirement age they delay receiving benefits. C) Under current tax law, a couple will not have to pay federal income taxes on benefits received until their base income exceeds $50,000. D) Social Security retirement benefits are only taxable when they exceed the individual's cost basis.

B If the recipient waits past normal full retirement age (currently 66) to begin receiving payments, benefits will increase by 8% each year until age 70. Social Security benefits are taxable once a single person's base income (IRS computation) exceeds $25,000 and a married couple's exceeds $32,000. Once that income exceeds $34,000 (single) or $44,000 (couple), as much as 85% of the Social Security benefit is subject to income tax. An ex-spouse can qualify for benefits on the former spouse's account as long as the marriage lasted at least 10 years.

An investor in the 15% income tax bracket is considering purchasing either a 5.5% municipal bond or an 8.5% corporate bond. Which of the following statements regarding the two bonds' after-tax yields is TRUE? A) The two bonds' yields are equivalent. B) The corporate after-tax yield is higher than the municipal yield. C) The municipal yield is higher than the corporate yield. D) The yield difference cannot be determined.

B In questions such as this, you must have a method of making the yield on the two bonds equal on the basis of the same assumptions. This means you must either take a municipal bond's yield and translate it into an equivalent taxable yield or take the corporate yield and translate it into a tax- free equivalent yield. The corporate yield to tax-free equivalent = Corp % × (1 - tax bracket of investor). The tax-free yield to taxable equivalent = Muni % / (1 - tax bracket of investor). The tax-free yield = 5.5%, whereas the corporate tax-free equivalent = 8.5% × (1 - 0.15), or 8.5% × (0.85) = 7.22%. The corporate bond will offer a better return to this investor. The higher the taxpayer's tax bracket, the more likely the computation will result in a higher return on municipal bonds than on corporate bonds.

The Uniform Prudent Investor Act identified a number of fundamental changes in the former criteria for prudent investing. Which of the following statements incorrectly states one of these changes? A) Prudent investing requires that fiduciaries diversify their investments. B) The standard of prudence is applied to each investment individually. C) The trade-off between risk and return in all investing is the fiduciary's central consideration. D) Delegation of trust investment and management functions is permitted, subject to safeguards.

B Prior to the Uniform Prudent Investor Act, the focus was on individual investment choices, which made it very difficult to focus on the risk and return of the entire portfolio. The benefits of diversification have now been firmly established, and the standard of prudence is now applied to any investment as part of the total portfolio rather than to that investment individually. Another key change was the ability to delegate the portfolio management decisions to others (who must be qualified).

Listed options are also known as standardized options. Which of the following choices is not one of the standardized terms of a listed option? A) The underlying asset B) The premium C) The exercise price D) The expiration date

B Supply and demand in the marketplace sets the premium of a listed option. All of the other choices are standardized.

A 57-year-old investor who earns $26,000 contributes $6,500 to an IRA for the year 2021. What amount of the contribution will be subject to the 6% penalty levied on excess contributions? A) $6,500 B) $0 C) $500 D) $1,000

B The amount of contribution for 2021is limited to 100% of earned income, to a maximum of $6,000. To help people over the age of 49, EGTTRA of 2001 allows any person aged 50 years or older to contribute an additional $1,000 per year as a catch-up provision. Therefore, because the investor is 57 years old, the maximum contribution for the year 2021 without an excess contribution penalty is $7,000.

John Johnson was convicted five years ago of failure to pay child support—a misdemeanor in his home state. Johnson would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state A) will consider Johnson to be statutorily disqualified since in this state, his crime is a felony B) will disregard that conviction when determining Johnson's qualifications for registration C) will determine Johnson's status based upon the extent to which his child support payments are being paid D) will consider granting registration to Johnson, but only if he receives heightened supervision

B The conviction on Johnson's record is for a misdemeanor. The fact that the same crime is a felony in another state is not relevant to his application for registration in that state.

A GTC order is entered to buy 500 LMN at 24.35. By the close, the firm has acquired 100 shares at 24.25 and 200 at 24.35. The remainder is unfilled. What is the outcome? A) The customer may demand that the firm deliver the remaining shares at 24.35. B) The customer must accept the execution for 300 shares and the remainder of the order remains open until filled or canceled. C) The customer may reject the incomplete order unless the remainder can be filled within two business days. D) The customer may reject the incomplete order unless the broker-dealer can guarantee filling the remainder by the end of the day.

B The term GTC (good-till-canceled) is a delimiter to any order entered in to the market place. It indicates that the order should remain valid until it is entirely filled or is canceled by the entering party. If the order is not completed on the day it was entered, it will stay in effect for as many days as it takes to complete. This order is also a limit order in that the client is indicating that he is not willing to pay anything more than $24.35 per share. A total of 300 shares have been purchased at that price or better. The order will remain open until the final 200 shares are purchased within that price limit or until the client cancels the remainder of the order.

One would not normally place convertible bonds in the portfolio of an investor A) seeking a position senior to that of common stock B) seeking capital gains C) seeking to maximize current income D) who is bullish on the future for a specific issuer's common stock

C A conversion feature is a benefit to the bondholder. It allows the bondholder a choice to either continue holding the debt represented by the bond or to convert the bond into shares of common stock of the underlying issuer. Everything that is done in the securities industry has to be a win-win situation. The win for the bondholder in this instance is the ability to take advantage of the capital appreciation potential the common stock may offer, and the win for the issuer is that by offering something extra to the bond purchaser, the bond purchaser is willing to accept a lower interest rate on the bond (as compared to a nonconvertible bond), and therefore, giving the issuer a lower cost of capital.

Under Section 401 of the Uniform Securities Act, the term agent does not include an individual who represents an issuer in effecting transactions in a security A) issued by and representing an interest in or a debt of, or guaranteed by, any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in this state B) issued or guaranteed by any federal credit union or any credit union, industrial loan association, or similar association organized and supervised under the laws of this state C) issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state D) issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association

C An individual representing an issuer in the sale of that issuer's security is not defined as an agent if the security is issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state; issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency of the foregoing; any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor; a promissory note, draft, bill of exchange or bankers' acceptance that evidences an obligation to pay cash within 9 months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization; or any investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing thirty days before the inception of the plan. It is not just any exempt security that qualifies the individual for the exemption—only the five listed above. A confusing point is that the individual is not an agent when the sales are made in any exempt transaction with no exceptions.

Wrap fee account programs offered by broker-dealers are often an attractive option for clients looking for advice and trade execution all in a single package. Shirley Schwartz is both an agent and an IAR. Prior to placing one of her brokerage clients into one of these, Shirley should be reasonably assured that her client A) recognizes the need to monitor the performance of the account on a regular basis B) understands the additional risks involved when opening a wrap fee account C) will be able to use enough of the services offered to justify the program's fees D) will be able to hold securities positions long enough to minimize the effect of commissions

C Before moving an existing brokerage account into a wrap fee program, the IAR should be reasonably assured that enough of the services offered will be used; otherwise, the costs/benefit ratio will be too high.

A client interested in fixed income is viewing different bonds with the same rating and a coupon of 5%. Using the discounted cash flow method, which bond should have the lowest market value? A) 6 year maturity when the discount rate is 7% B) 6 year maturity when the discount rate is 3% C) 12 year maturity when the discount rate is 7% D) 12 year maturity when the discount rate is 3%

C Remember, the discount rate is just another way of stating the current interest rate in the marketplace. If the discount rate is higher than the coupon rate, the present value, the expected market price, will be below par. Conversely, if the discount rate is lower than the coupon rate, the present value will be above the par value. As learned with duration, when interest rates change, the longer the time to maturity, the greater the effect on the market price of a bond.

Which of the following investors would be exempt from filing Form 144 when selling securities they own? A) An affiliated person selling unregistered shares. B) An investor selling shares acquired in a Regulation D private placement. C) An employee of the company selling registered shares purchased in the open market. D) An employee of the company selling unregistered shares.

C Rule 144 regulates the sale of control or restricted securities. Securities bought in a registered public offering are not restricted and therefore an employee of the company selling registered shares need not file Form 144. Unregistered shares or securities purchased in a private placement are restricted and Rule 144 would apply.

Wanda Adams is 17 years old and is in the process of applying to colleges for next year. When completing the FAFSA Form, which of the following assets would be included at the highest percentage of actual value? A) ESA B) 529 plan C) UTMA D) QTP

C The Free Application for Federal Student Aid (FAFSA) is filed with the U.S. Department of Education. Two of the primary purposes behind filing this form are to determine eligibility for financial aid, grants, or both, and evaluating the expected family contribution (EFC). For the latter, taken into consideration are a number of assets held by both the parents and the student. Although you will not have to know the exact number, money in UTMA (or UGMA) accounts is assessed at 20% of its value, while the assets of an ESA or 529 plan (QTP is the legal name for a 529 plan) only face a 5.64% assessment.

If the executor of an estate containing a substantial stock portfolio is of the opinion that the economy is about to enter a down cycle, estate taxes could be reduced by A) liquidating the portfolio in advance of the market downturn B) asking for an extension to file the return C) using the alternative valuation date D) reallocating the assets to less risky securities

C The executor of an estate has the option of valuing the assets either as of the date of death or six months later (the alternative valuation date). If stock prices fall, then the estate will shrink, resulting in lower estate taxes.

Your client notices that the listing for the CDL $100 par common stock in the Wall Street Journal indicates that the current yield of the stock is 4%. If the last trade was at $40 per share, more than likely, CDL is paying quarterly dividends of A) $1.00 B) $1.60 C) $.40 D) $4.00

C The par value of the common stock is irrelevant to this question. In order for a stock selling at $40 to have a current yield of 4%, the annual dividend must be $1.60. Because common stock dividends are typically paid quarterly, more than likely, the quarterly dividend is $.40 per share.

The standard deviation of returns is the measure of the A) relationship of the co-movement of two securities with respect to each other B) degree to which the returns of securities are correlated C) dispersion of a security's returns from its average return D) volatility of a security with respect to the overall market

C The standard deviation calculates the dispersion of a security's return from its own average return or mean. Around 68% of the average returns for a security are one standard deviation away from the mean in either direction. About 95% of the returns are two standard deviations away from the mean. And about 99% of the returns are three standard deviations.

Which of the following items would be found on a family balance sheet? A) Dividends and interest received B) Income taxes paid C) Annual salary D) Spouse's engagement ring

D A balance sheet, whether for a family or a business, shows assets and liabilities, not income and expenses. The ring is certainly an asset; the others are income or expenses.

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

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

he Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would NOT be entitled to claim: A) court costs B) attorney's fees C) interest at the state's legal rate less any income received on the security D) the original consideration paid for the security or the current market value, whichever is greater

D In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees.

With regard to nonqualified stock options (NSO) and incentive stock options (ISO), which of the following statements is incorrect? A) AMT is only an issue for those exercising ISOs. B) A tax deduction for the employer is generally only available with NSOs. C) Board of director approval is required for both NSOs and ISOs. D) Capital gain treatment is only available with NSOs.

D It is only the ISO where the employee can possibly receive capital gain treatment

As a result of the Dodd-Frank Act of 2010, which of the following firms or individuals would be required to register with the federal regulatory authorities? A) J. Haines Investment Consultant, a sole proprietor with $75 million in assets under management B) Westlake Fund Managers, Inc., the manager of venture capital fund with $200 million under management C) Retirement Specialists, Inc., a firm offering consulting services to qualified pension plans with aggregate assets of $150 million D) Riverbend Partners, money managers with $110 million in assets under management

D The NSMIA created a new category of investment adviser known as a federal covered adviser. Its purpose was to rid the industry of the duplication of efforts in registration and regulation of investment advisers. The Dodd-Frank Act of 2010 went further and requires a registered investment adviser with less than $100 million in assets under management to register with the individual states in which it wants to do business and not with the SEC. If a registered investment adviser has $110 million or more in assets under management, it is required to register with the SEC. If an adviser has at least $100 million but less than $110 million in assets under management, it may register with either the state or the SEC. Managers of venture capital funds are not required to register with the SEC.

When analyzing a company's financial position, an investor could determine which of the following from the company's balance sheet? A) The average number of days it takes for inventory turnover B) Gross revenues for the year C) The amount of cash and cash equivalents expended during the first half of the fiscal year as opposed to the second half D) The net worth of the firm at the end of the reporting period

D Under balance sheet accounting: Assets = liabilities + net worth. Net worth can then be determined as assets minus liabilities. Although inventory is a balance sheet item, the turnover ratio requires knowing the annual sales, an income statement entry.

Each of the following would be exempt from the definition of an agent under the Uniform Securities Act EXCEPT A) Florence, an employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients B) Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio C) Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the next quarter D) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees

D When an individual receives compensation for selling employer stock to employees, that person is defined as an agent and must register as such. Managing a pension plan (and getting paid for it, naturally) does not make one an agent; she is not being compensated for the trades. Because banks and trust companies are excluded from the definition of a broker-dealer, their employees cannot be considered agents.