Series 65 Exam
Your customer opens a Coverdell ESA for his niece. In order to meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be A) taxable to the uncle, the donor to the plan B) automatically reinvested back into the plan C) taxable to the niece, the beneficiary of the plan D) nontaxable to either party
Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution. Reference: 20.7.1 in the License Exam Manual
One of your clients is 10 years away from retirement and is trying to decide what would be a suitable investment for this year's IRA contribution. You would probably NOT recommend A) leveraged ETFs B) target date mutual funds C) conservative growth mutual funds D) broad market ETFs
Because most leveraged funds reset daily, they are best utilized by investors with a very short time horizon. Reference: 7.1.10 in the License Exam Manual
A registered investment adviser hires his friend to act as an adviser solicitor on his behalf. The friend asks if he is required to identify his affiliation with the adviser when contact is made to potential customers. If the adviser says that such disclosure is not required, he is not in violation of provisions of the Investment Advisers Act of 1940, which require disclosure of a relationship between an investment adviser and an investment adviser solicitor, if: A) There are no exceptions. B) the solicitations are for impersonal advisory services. C) the friend is a client of the adviser's firm. D) the friend is an employee of the advisory firm.
Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves impersonal advisory services only. An example of an impersonal advisory service is a newsletter that makes the same general recommendations to all readers. Reference: 3.16 in the License Exam Manual
A broker-dealer is NOT considered an investment adviser if the:
Excluded from the definition of investment adviser are financial institutions, publishers, investment adviser representatives, and certain professionals, including broker-dealers, whose advice is incidental to their profession and who are not compensated for it.
An employee is offered a non-qualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee:
In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee. Reference: 4.1.8 in the License Exam Manual
An investor in the 28% income tax bracket is considering purchasing either an 8% municipal bond or a 10% corporate bond. Which of the following regarding the bonds is TRUE?
Investors are interested in their return after taxes (what they get to keep). The 2 bonds must be compared on a tax-equivalent basis. For example, the tax-equivalent yield of a municipal bond equals tax-free yield divided by 100% minus tax rate. The tax equivalent rate in this case is .08 ÷ .72 (100% − 28%) = 11.11%. In other words, a client in the 28% tax bracket would have to invest in a taxable bond that yields 11.11% to get the same after-tax return that the 8% tax-free bond offers.
It is a violation of the Uniform Securities Act if an agent: A) offers or sells any security unless it is registered. B) files a fraudulent application. C) makes any material representation in the offer or sale of a security. D) splits commissions with another agent in the office and fails to disclose this to clients.
It is a violation of the Uniform Securities Act to file a fraudulent or misleading application for registration as a securities industry professional (agent, broker-dealer, or investment adviser). An agent may always make material representation in the sale of a security; it is a material misrepresentation that is not permitted. An unregistered security may be sold in an exempt transaction and an exempt security does not need registration. One of the few things that does not have to be disclosed to clients is a commission sharing arrangement with another agent in the office. Reference: 2.4.1 in the License Exam Manual
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) loan value of securities B) maintenance margin C) mixed margin accounts D) initial margin requirements
Maintenance margin levels are set by the SROs. Reference: 18.1.2.3 in the License Exam Manual
George and Martha Washington are both in their mid-70s, very active in their community, and both work part-time at the local community bank. They would like to contribute a small portion of their earnings to some form of retirement plan. Which of the following choices would be the most appropriate for this couple?
One of the distinguishing characteristics of the Roth IRA is that contributions may be continued past age 70 ½ as long as the participant has earned income. Reference: 20.1.2.1 in the License Exam Manual
Under the USA, which of the following fits the definition of a sale? A) Contract to dispose of a security. B) Issuing a prospectus. C) Attempt to dispose of a security for value. D) Solicitation of an offer to buy a security for value.
Sales involve any contract or disposition for value; solicitations and attempts to dispose are offers. Reference: 2.12.1.1 in the License Exam Manual
If a group of money managers were having a discussion and the term LIBOR was mentioned, the topic would most likely be: A) current economic conditions in Liberia. B) short-term borrowing rates. C) contract negotiations with the employee's union. D) long-term borrowing rates.
The British Banker's Association LIBOR is the most widely used benchmark or reference rate for short-term interest rates world-wide. The acronym stands for London Interbank Offered Rate. Reference: 6.1.1.4 in the License Exam Manual
Which of the following permits the highest annual contributions? A) A SEP IRA. B) A traditional spousal IRA for which the contribution has been deducted. C) A Coverdell Education Savings Account. D) A traditional nondeductible IRA.
Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs. Reference: 20.1.3 in the License Exam Manual
All of the following statements regarding a closed-end investment company are true EXCEPT: A) it is a type of management company. B) it sells at the market price based on supply and demand. C) it differs from a mutual fund. D) it may redeem its own shares.
A closed-end investment company does not redeem its own shares. The term "mutual fund" refers to an open-end management investment company that issues redeemable shares. Reference: 1.10.2 in the License Exam Manual
Which of the following is most likely to be regarded as a defensive stock? A) A stock selling at an extremely high PE ratio. B) A food company stock. C) A stock with a strong cash position and little debt. D) An aerospace stock.
A defensive stock maintains future earnings that are likely to withstand an economic downturn. Typical examples are stocks of those firms that supply basic consumer necessities such as foodstuffs. A stock selling at an extremely high PE ratio is indicative of a speculative company or one that can decline in value rapidly. Reference: 11.1.2.1 in the License Exam Manual
Under the Uniform Securities Act, which of the following are defined as sales?
A sale is a contract or transaction for value. Therefore, when a security is given as a bonus in connection with the sale of another security, it is also considered a sale. Because an assessable stock may require a payment made by the recipient, the gift is considered a sale. The gift of a non-assessable stock is not a sale as it is not a contract for value. An offering of securities is not a transaction or sale of securities until the offer is accepted.
Under the Investment Advisers Act of 1940, an adviser is required to be registered with the SEC if:
Advisers to registered investment companies are required to be SEC-registered. Under the Advisers Act, as modified by the Dodd-Frank Act, advisers are exempt from SEC registration if they manage less than $100 million in assets and have no investment company clients. Persons are excluded from the Advisers Act definition of investment adviser if they are publishers of news or business/financial publications of general and regular circulation or if their advice relates solely to U.S. government securities.
Many investors use trusts to avoid probate. However, not all trusts are designed to do so. Those that would avoid probate include irrevocable trusts revocable trusts living trusts testamentary trusts A) I, II, and III B) II and III C) I and IV D) I and II
Although there can be exceptions, especially when the trust document is poorly written, in most cases, assets in an irrevocable trust, a revocable trust, and a living trust (generally, the terms revocable trust and living trust mean the same thing) avoid probate. A testamentary trust, which goes into effect after death, does not avoid probate.
Under the Securities Act of 1933, the sale of stock of a state bank is exempt from which of the following? Prospectus requirements. Antifraud provisions. Registration requirements. A) I and III. B) I only. C) I, II and III. D) II and III.
Both the Uniform Securities Act and the Securities Act of 1933 exempt securities issued by banks, trusts, or savings and loans. While the security is exempt under both acts from registration and prospectus delivery requirements, it is never exempt from the antifraud provisions of the acts. Reference: 1.2 in the License Exam Manual
Angela, a wealthy client of yours, has a constructed her portfolio with individual common stocks that closely match the weighting of the S&P 500 index. In so doing, Angela has significantly reduced her (what type of risk)?
By matching the composition of the S&P 500 index, the client has broadly diversified her portfolio. One of the primary benefits of diversification is the reduction of business risk, an unsystematic risk. Market risk, one of the systematic risks, is not reduced through diversification. Default (or credit) risk, would apply when the portfolio contains debt securities. Reference: 13.2.2 in the License Exam Manual
A corporate bond valued at $1,012.50 is shown in the Standard & Poor's Bond Guide as: A) 101.25. B) 101-4/16. C) 101-¼. D) 101-8/32.
Corporate bonds are quoted as a percentage of par in eighths. The quote of 101-¼ = $1,012.50 is correct. This represents $1,010 (101% of par) + $2.50 (¼ of $10). Each point in a corporate bond is equal to $10. Reference: 5.3.2 in the License Exam Manual
An investor is considering the purchase of $100,000 maturity value of zero-coupon AAA rated corporate bonds scheduled to mature in 20 years. Among the risks that this investor will be assuming are Default risk. Interest rate risk. Pre-payment risk. Reinvestment risk. A) I and II. B) I and IV. C) III and IV. D) II and III.
Even though these bonds are rated AAA, 20 years is a long time and it is possible that this corporation may not even exist when the maturity date arrives. Adding to the risk is the fact that there are no interest payments in the interim. That is why the most commonly recommended zero-coupon bonds are those issued or guaranteed by the U.S. Treasury. Since zero-coupon bonds have the longest duration for their maturity of any bonds, they have the greatest exposure to interest rate changes. Pre-payment risk is only found with mortgage-backed securities and one of the benefits of zeroes is that there is no reinvestment risk. Reference: 5.3.2.4 in the License Exam Manual
A fixed-income investor notices that the short, intermediate, and long ends of the yield curve reflect a similar return. This would be typical of A) an inverted yield curve B) a positive yield curve C) a flat yield curve D) a normal yield curve
If you were to plot this curve, what would it look like? It would be a flat line because, regardless of the maturies, all of the yields are the same. In an inverted (or negative) yield curve, the short end of the curve has higher yields than the long end. A normal (or positive) yield curve slopes upwards, with lower yields at the short end and higher yields at the long end. Reference: 11.2.1.6 in the License Exam Manual
If the return on Treasury bills is 3% and the equity risk premium is 4%, the expected equity returns should be:
The expected return on an equity investment is the risk-free (for example, T-bill) rate of return added to the equity risk premium (3% + 4% = 7%). Reference: 19.2.7.1 in the License Exam Manual
Among the differences between C corporations and S corporations is:
Unlike C corporations, there is a limit placed on the number of shareholders in an S corp. At the time of this printing, that maximum is 100, none of whom may be a non-resident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid. Reference: 14.3.6 in the License Exam Manual
Which of the following statements regarding Roth IRAs is TRUE? A) Roth IRA withdrawals are tax free in their entirety regardless of the participant's age at withdrawal. B) Like traditional IRAs, Roth IRA contributions may not be made after the participant reaches age 70-½. C) Roth IRAs are not subject to the minimum distribution rules until the death of the owner/participant of the plan. D) Like traditional IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan.
Unlike traditional IRAs, Roth IRAs are not subject to the minimum distribution rules regarding a participant's age (70-½). Rather, distributions need not be made until the death of the owner/participant. For a Roth IRA withdrawal to be entirely tax free, it must be made following a 5-year holding period after the first contribution and after the participant reaches age 59-½. Reference: 20.1.4 in the License Exam Manual
As defined in the Uniform Securities Act, which of the following is NOT a security? A) Common stock of ABC National Bank that is a member of the Federal Reserve System B) Annuity providing a fixed monthly payout C) Interest in a merchandising marketing program D) Options on a federal covered security
Variable annuities are securities while fixed annuities are not. Options contracts, interests in merchandising marketing programs, and common stock are securities under the USA. The key to questions like this is to remember those things that are not securities. Reference: 2.5.1.1 in the License Exam Manual
Which of the following statements is TRUE about futures and forwards?
Futures contracts are traded on exchanges and, therefore, have standardized terms. In forwards, the terms of each contract are separately negotiated. Reference: 9.2.1 in the License Exam Manual
One of the prohibited practices under the Uniform Securities Act is market manipulation. Which of the following are examples of a broker-dealer engaging in that practice? Arbitrage. Churning. Matched orders. Wash trades. A) III and IV. B) I and II. C) I and IV. D) II and IV.
Matched orders occur when one or more broker-dealers engage in buying and selling between themselves for the purpose of creating the misleading appearance of increased activity in a security. A wash trade is an attempt to manipulate a security's price by creating an apparent interest in the security that really does not exist. Arbitrage is the simultaneous buying and selling of the same security in different markets to take advantage of different prices. It is not a form of market manipulation. Churning is a prohibited activity, but has nothing to do with the market, just a client's account. Reference: 2.11.13 in the License Exam Manual
Interest payments on a revenue bond are backed by A) taxes on a specific project B) the good faith of the issuer C) revenue from a specific project D) revenue received by the state's bond account
These are called revenue bonds because the source of funds for interest, and ultimately principal, payments are derived from revenue from the specific project named in the bond's indenture. Reference: 5.1.3.2 in the License Exam Manual
If a client owns 1,000 shares in a growth company and receives a 25% stock dividend, according to the Uniform Securities Act, this would be considered a(n): A) secondary transaction. B) offer. C) neither a sale nor an offer. D) sale.
With the typical stock dividend, the stockholder receives additional shares of stock without furnishing money or other valuable consideration in exchange for the stock. A sale must entail exchange of consideration. A stock dividend is not an offer; the stockholder did not choose whether to acquire the additional shares acquired through the stock dividend. Reference: 2.12.1 in the License Exam Manual
Jake Aaron is registered as an agent with ABC Securities, a broker-dealer registered with the SEC doing business in 34 states. In addition, Mr. Aaron has his own investment advisory business, Jake's Money Advisers, and is registered with the SEC. To comply with all appropriate regulations, which of the following would have to be stated on the business card for Jake's Money Advisers? Jake Aaron, RIA. Jake's Money Advisers, RIA. Jake's Money Advisers, registered investment adviser. Securities offered through ABC Securities. A) I and III. B) III and IV. C) II and IV. D) I, III and IV.
It is not permissible to use the initials RIA, but one would properly describe the fact that the firm is a registered investment adviser. If one is registered as an agent with a broker-dealer, that fact always must be stated on your business card. Reference: 3.13 in the License Exam Manual
Which of the following statements reflects the monetarist economic position? A) The amount of money in the economy is not significant because economic activity reflects the value of real goods and services, therefore the Federal Reserve should not attempt to manage the money supply. B) The total amount of money in the economy is the result of the level of interest rates. C) The best way to control the money supply is to raise taxes which will reduce the amount of money in the economy and lower prices. D) The amount of money in the economy determines the overall price level over time, therefore the Federal Reserve should control the growth in the amount of money in the economy in a gradual and predictable way.
Monetarists believe that the economy and inflation are best controlled through the management of the money supply rather than through fiscal policy stimulation. Reference: 11.1.1.3 in the License Exam Manual
Sharon Smith is an agent for Highwater Securities, a broker-dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act, A) because Sharon has no place of business in State X and the order is unsolicited, Sharon may accept the order without registering in State X. B) because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X. C) because Highwater Securities is registered in all 50 states, Sharon must also be registered in all of them. D) Sharon must be registered in State X in order to accept the order.
Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state which is the domicile of a client placing an order. One does not have to be registered as an agent in every state the BD is, only in those where she expects clients to reside. Reference: 2.3.2.3 in the License Exam Manual
Stock prices in the over-the-counter market are determined by: A) negotiation. B) the five percent markup policy. C) an auction. D) a competitive bid.
The five percent markup policy regulates commissions and markups, not prices. The OTC market is considered to be a negotiated market in contrast to a stock exchange, which is an auction market. Reference: 18.2.1.2 in the License Exam Manual
Which of the following investment adviser compensation arrangements is (are) permitted under the Uniform Securities Act? The value of a client's account at the start of the year is subtracted from the value at the end of the year. The adviser's compensation is 5% of the difference. The adviser charges an annual fee of $2,000, but the agreement calls for a waiver of the fee if the client's portfolio value has not increased by at least $20,000. The adviser charges a fee of 1% of the average value of the account portfolio during the year. The adviser charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the client's assets increase to $200,000 or more. A) III and IV B) I and IV C) III only D) I and II
Unless the question states that it relates to the exception for wealthy investors ($1 million under management of the adviser or $2.1 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted. Reference: 3.14 in the License Exam Manual
If interest rates are dropping, an investor with a maturing bond will be most concerned with: A) the quality declining with the yield. B) a negative yield curve. C) a positive yield curve. D) the difficulty in finding another investment with a like yield.
When interest rates decline, investors with maturing bonds will have to accept a lower return on their reinvested principal. This is often referred to as reinvestment risk. Although zero-coupon bonds avoid this risk until maturity, once the bond matures, just like any other bond, the matured principal will have to be invested at current market yields.
Under ERISA Section 404(c), plan participants must be able to reallocate plan assets: A) daily. B) once every week. C) annually. D) once every 3 months.
Although many 401(k) plans provide for daily reallocation of plan assets, Section 404(c) requires that plan participants be able to reallocate plan assets, through Internet trading or other methods, at least once every 3 months. Reference: 20.1.4 in the License Exam Manual
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may borrow money from which of the following clients? A broker-dealer not affiliated with the adviser. A bank not affiliated with the adviser. A mutual fund not affiliated with the adviser. A corporation affiliated with the adviser. A) II and III. B) I, II, III and IV. C) I, II and IV. D) I and IV.
An adviser may only borrow from a client that is in the business of loaning money, such as a bank or broker-dealer, or a client that is affiliated with the adviser. Reference: 3.17 in the License Exam Manual
In a scheduled premium variable life insurance policy, all of the following are guaranteed EXCEPT A) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months B) a minimum cash value C) the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years D) a minimum death benefit
In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the third year of coverage. Reference: 8.2.4.6 in the License Exam Manual
In an agency trade, the selling customer pays a A) commission B) markdown C) load D) markup
In an agency trade, the customer-buyer or seller-pays a commission. In a principal trade the buying customer pays a markup, the seller a markdown. The acquisition cost of a mutual fund is the sales load. Reference: 18.2.2 in the License Exam Manual
A client purchased an index annuity from you three years ago and made an initial deposit of $100,000. The contract calls for a 90% participation rate with a 15% cap. The index had a return of + 20% in the first year, - 5% the second year, and +10% the third year. The investor's current value is approximately A) $125,350 B) $128,620 C) $117,829 D) $126,500
In the first year, the index gained 20%. With a 90% participation rate, the investor might have earned 18%, but was limited by the 15% cap. So, after one year the value was $115,000. In the second year, the index lost money. However, with an index annuity there are never any reductions in a down market so the account remained at $115,000. In the third year, the investor received 90% of the 10% growth and that increased the account value to $125,350. This resulted in an overall gain of 25.35%, or an average return of almost 8.5% per year. Reference: 8.1.2.3 in the License Exam Manual
In the secondary market, Treasury bond prices are most influenced by the: A) primary dealers. B) prime rate. C) Treasury department. D) inflation rate.
In the secondary market, the rate of inflation has the greatest influence on all bond prices. Reference: 5.3.2.3 in the License Exam Manual
A financial ratio used by some analysts to help determine if a company's stock is over or undervalued is A) the price to book value ratio B) the quick asset ratio C) the current ratio D) the dividend payout ratio
The price to book value ratio compares the company's market price to its book value per share. The higher the ratio, the greater premium the public is willing to pay over the intrinsic value of the enterprise. Usually, a ratio of less than 1 indicates an undervalued company. Reference: 12.3.2 in the License Exam Manual
Under the National Securities Markets Improvement Act of 1996 (NSMIA), investment companies registered under the Investment Company Act of 1940 are required to register: A) as securities at the state level only. B) as exempt securities, at neither state nor federal levels. C) as securities at the federal level only. D) as securities at both state and federal levels.
The NSMIA requires that the SEC, rather than individual states, assume responsibility for the registration and regulation of federal registered mutual funds and other investment companies. Thus, these federal registered investment companies are no longer required to register at the state level; however, they will likely have to pay state filing fees by going through the notice filing procedure. Reference: 2.7.1 in the License Exam Manual
An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt to equity ratio is
The debt to equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%. As we point out in the LEM, this is really a misnomer—it should be called the debt to total capital ratio, but probably will not shown that way on the exam. Reference: 11.4.1.5 in the License Exam Manual
The Federal Reserve Board foresees the probability of an overheated economy and the resumption of double-digit inflation. Therefore, the FRB takes actions to slow down the economy, including increasing the discount rate. Which of the following are likely effects of these moves? An increase in the prime rate. An increase in bond yields and an accompanying decrease in bond prices. A slowdown in corporate growth. A decrease in corporate earnings. A) III and IV. B) I, III and IV. C) I, II, III and IV. D) I and II.
The FRB attempts to slow down the economy and decrease the money supply with a corresponding increase in interest rates. When interest rates rise, the prime rate increases, bond yields rise, and bond prices drop. Higher interest rates have a tendency to slow down corporate growth, with a resulting slowdown in earnings; these events occur in this approximate sequence. Reference: 11.2 in the License Exam Manual
Three years ago, a customer bought 200 shares of ABC for $60.50 per share. Upon her death, she left the shares to her husband when ABC was trading at $98.25. If her husband sells the shares for $99.25, what is his cost basis for tax purposes? A) $79.38. B) $98.25. C) $60.5. D) $99.25.
This is the STEP UP PROVISION. The cost basis to the recipient of inherited securities is the fair market value on the date of the owner's death. In this case the fair value is the market value of $98.25. The step up provision DOES NOT APPLY when INHERITING annuities Reference: 17.2.7 in the License Exam Manual
A bond with a par value of $1,000 and a nominal yield of 6% paid semi-annually is currently selling for $1,300. The bond matures in 25 years and is callable in 15 years at $1,080. In the computation of the bond's yield to call, which of these would be a factor? A) Future value of $1,300 B) Interest payments of $30 C) 50 payment periods D) Present value of $1,080
The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. With a 15-year call, there are only 30 semiannual interest payment periods, not 50. The present value is $1,300 and the future value is $1,080; the reverse of the numbers indicated in the answer choices. Reference: 5.3.1.4 in the License Exam Manual
Under the Securities Act of 1933, when registering securities with the SEC, who must sign the registration statement? The chief executive officer (CEO). The chief operating officer (COO). A majority of the board. The chief financial officer (CFO).
The principal executives of the company involved with money and a majority of the board of directors are required to sign the registration statement attesting to the facts presented as being true to the best of their knowledge and belief. This includes the chief executive officer, chief financial officer, and a majority of the board, but not the chief operating officer. Reference: 1.4 in the License Exam Manual
Under the Uniform Securities Act, an investment adviser would be exempt from registration in a state in which he has no place of business if he: A) is registered as a broker-dealer. B) had no more than 5 clients in that state within the past 12 months. C) had no more than 10 clients in that state within the past 12 months. D) had no more than 15 clients in that state within the past 12 months.
An adviser who had no more than 5 clients in a state within the prior 12-month period or deals exclusively with institutions is not required to register in a state in which he has no place of business. Reference: 3.4 in the License Exam Manual
According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, it is considered ethical for an investment adviser to: A) charge an unreasonable fee based on outstanding performance results on past recommendations. B) borrow securities from a client that is an affiliate of the investment adviser. C) accept an order from a client's wife because the client is out of town and has instructed her to contact the adviser; there is no trading authorization on file. D) make a short-term loan to a client for the purchase of securities.
An investment adviser is only permitted to borrow securities from clients if the client is in the business of lending securities or is an affiliate of the adviser. In all other circumstances, borrowing from and lending to clients is prohibited. An investment adviser may not charge unreasonable fees based on outstanding performance. Also, an investment adviser may not take orders from anyone other than the account owner without express written trading authority from the client. Reference: 3.17 in the License Exam Manual
As defined in the Investment Company Act of 1940, the term "investment company" would NOT include a: A) face amount certificate company. B) holding company. C) management company. D) unit investment trust.
Holding companies are not included in the definition of "investment company". Reference: 1.10.1 in the License Exam Manual
According to the Efficient Market Hypothesis, one using fundamental analysis would most likely be of the opinion that he could do better than one following A) semi-strong form market efficiency B) strong-form market efficiency C) charts D) weak-form market efficiency
In weak-form market efficiency, current stock prices fully reflect available security market information such as volume and price movements. Investors cannot achieve excess returns using tech analysis, but may benefit from using fundamental analysis which looks deeper into the company's potential by examining its financial statements. Reference: 16.5.5 in the License Exam Manual
Which of the following activities would violate the Uniform Securities Act? An investment advisory partnership admits a renowned securities analyst to the partnership without informing its clients of this highly desirable addition. An investment adviser incorporated in California fails to inform its clients of the departure of the chief financial officer who did not have an equity position in the firm. An investment advisory firm incorporated in Illinois charges clients a share of the capital gains on the basis of a guaranteed performance level above a designated benchmark. An investment advisory firm assigns those accounts that fall to a low level to other firms willing to accept them with the consent of the account holder. A) I and III. B) II and III. C) I and II. D) I, III and IV.
Investment advisers who are partnerships must inform their clients of any change in the membership of the partnership within a reasonable period. Unless the question refers to a specific exemption, it is a violation of the USA for an advisory firm to charge on the basis of performance. An investment advisory firm may assign accounts to another firm with the consent of the client. Reference: 3.14 in the License Exam Manual
Individuals who supervise employees whose role is the giving of investment advice must be registered as A) investment advisers B) principals C) investment adviser representatives D) compliance officers
The definition of investment adviser representative includes individuals who supervise the activities of other IARs. Because IAR registration is done on a state rather than federal level, the term registered principal has no meaning—that is a FINRA term. Reference: 3.7 in the License Exam Manual
The Uniform Securities Act authorizes the state Administrator to require: either oral or written qualification examinations of investment adviser representatives and officers of investment adviser partnerships or corporations. officers of investment advisers to pass a qualification examination. an applicant for initial registration to publish an announcement of the application in one or more specified newspapers published in the state. investment adviser representatives to pass a qualification examination. A) III and IV. B) I and II. C) I only. D) I, II, III and IV.
The state Administrator may require qualification examinations for officers of investment advisers, as well as its representatives, and may require them to publish an announcement in one or more newspapers published in the state. The Administrator may also require either an oral or written examination. Reference: 2.4 in the License Exam Manual
Because of the decline in sales revenues, a company that had forecasted an earnings growth of 25% now forecasts growth of only 12%. This is an example of what type of risk in the investment of securities? A) Market risk. B) Purchasing power risk. C) Interest rate risk. D) Business risk.
In this question, we have a company that did not perform as it had anticipated, which represents the business risk of investing in this particular security. The fact that their earnings growth was only half their original projections had nothing to do with the market. Interest rate risk applies to the uncertainty that the market price of a security might change solely due to the changes in the cost of money. Purchasing power risk is the uncertainty that a dollar will represent less buying power in the future. Reference: 13.2.1 in the License Exam Manual
The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents describes many actions considered by NASAA to be prohibited under the intent of the USA, as amended. Under that Statement of Policy, which of the following actions would be a prohibited practice? Stating material facts in such a manner that they may be easily understood by a prospective client. Making unsuitable investment recommendations even when the client agrees with your assessment. Exercising discretion without previous written authority. Using inside information, but only if the client makes money as a result of the trade. A) II and III. B) I and III. C) III and IV. D) I and II.
No broker-dealer or agent may exercise discretion in a client's account without having received prior written authorization. Read choice IV carefully. The use of inside information is a prohibited practice under all circumstances, not only if the client makes money. Win or lose, it is still prohibited. It is appropriate to disclose material information in such manner as to make it easily understandable and all recommendations must be suitable, whether or not the client agrees with them. Reference: 2.11.5 in the License Exam Manual
A nurse has been participating in her employer's Keogh plan. Upon leaving the clinic, she wishes to know what options she has that will keep the money growing tax-deferred without current tax consequences. You would tell her that she may arrange for a transfer of the Keogh assets into an IRA she may rollover the assets into an IRA as long as it is completed within 30 days she may rollover the assets into an IRA as long as it is completed within 60 days her only option is to withdraw the funds, pay the taxes and begin a new IRA A) III and IV B) II and IV C) I and II D) I and III
Normally, a transfer is the best option for an individual leaving a qualified plan because there are no current taxes and no limit on the number of transfers that may be done. A rollover is also an option, but it must be completed within 60 days and is limited to one per 12-month period. Please note—on the exam, when the term rollover is used without a descriptive adjective, it is always a traditional IRA. Anytime a Roth IRA is an option, it will say Roth. Reference: 20.1.5.5.3 in the License Exam Manual
Which of the following statements is(are) TRUE about the investigative power of the Administrator under the Uniform Securities Act? The Administrator may conduct public or private investigations to determine if violations are about to occur or have occurred. Persons could find themselves subject to contempt of court charges for failing to obey a subpoena issued by an Administrator. The Administrator may proceed against an entire firm for the actions of any principal of the firm. A) III only. B) I, II and III. C) II and III. D) I only.
The Administrator may conduct public or private investigations in pursuing suspected or actual violations and may do so within or outside the state. Administrators may issue subpoenas in conducting their investigations, and if persons fail to obey them, the Administrator may apply to the courts for a court order. If the persons then fail to obey the court order, they may be subject to contempt of court charges. The Administrator may take such action against an entire firm as a result of the actions of any principal of the firm. Reference: 2.14.3 in the License Exam Manual Previous Next
Under the NSMIA, the term "federal covered adviser" includes a person: registered with the SEC under the Investment Advisers Act of 1940. registered as an investment adviser in two or more states. excluded from the definition of an investment adviser under the Investment Advisers Act of 1940. required to register with the state Administrator. A) II and III. B) II and IV. C) I and III. D) I and IV.
The NSMIA defines a "federal covered adviser" as a person who is either required to register with the SEC under the Investment Advisers Act of 1940 or who is specifically excluded from the definition of investment adviser under that act. Registration with the state Administrator is not required of a federal covered adviser. If an investment adviser who otherwise would not qualify for SEC registration would be required to register in 15 or more states, the Dodd-Frank Act makes that adviser eligible for federal registration. Reference: 3.3.2 in the License Exam Manual
Under the Securities Exchange Act of 1934, which of the following is (are) TRUE regarding the authority of the SEC to suspend trading? The SEC may suspend all trading on a specific exchange for up to 90 days. The SEC may summarily suspend trading on a particular nonexempt security for up to 10 days. The SEC may suspend trading on exempt securities. A) I and II. B) I and III. C) I, II and III. D) I only.
The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification of the President of the United States and may summarily suspend securities trading in a registered security listed on a stock exchange for up to 10 days. The SEC does not have the authority to suspend trading in exempt securities. Reference: 1.8 in the License Exam Manual
According to North American Securities Administrators Association's (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following practices is NOT unethical?
The THREE A's: Action, Amount, Asset An agent of a broker-dealer may exercise discretion in deciding the time or the price at which a sale takes place during the trading day without express written discretionary authority. Such action is not unethical because time and price are not considered true discretion. An agent may not exercise discretion over the number of shares to be sold without prior written discretionary authority. Oral discretion is only permitted for investment advisers and their representatives, (never broker-dealers or agents), during the first 10 business days after the initial discretionary transaction in the account. Reference: 2.11.5 in the License Exam Manual
The measurement that compares a stock's price history to the movement of a total market index for the same period is known as:
The measurement that compares a stock's price history to the movement of the total market index for the same period is beta. Standard deviation indicates how much an investment's returns have fluctuated from its average returns over a period of time, while R-squared measures whether an investment's returns tend to go up and down at the same time as the markets. Duration measures how sensitive a bond will be to small changes in interest rates. Reference: 12.2.4 in the License Exam Manual
Under the Investment Advisers Act of 1940, which of the following statements regarding custody of a client's funds is (are) TRUE? Funds may be deposited in any account as long as the adviser is named as trustee for the client and adequate records are maintained. Clients must be kept informed in writing of the location of their funds and securities and of any changes. Clients must receive quarterly statements from the adviser itemizing the funds and securities in custody and all transactions on the account during the period. A) I and II. B) II and III. C) I and III. D) I only.
The specifications for the account are such that using the term "any account" is incorrect. When advisers have custody, they must (1) ensure the safekeeping of client securities through segregation and identification by client; (2) deposit client funds into bank accounts containing only client funds, naming the adviser as trustee; (3) keep adequate records of all funds, securities, and transactions; (4) provide written notification of the location of securities and funds and changes in the same; (5) report quarterly to the client, itemizing the funds or securities in possession and any transactions that have taken place; and (6) arrange for an annual surprise audit by an independent public accountant that reports the results to the SEC. Reference: 3.11 in the License Exam Manual
Which of the following would be the most important reason for an investor interested in adding foreign stocks to his portfolio to do so by purchasing an international mutual fund? A) He would have the benefit of the portfolio managers picking the stocks instead of having to rely on his own efforts. B) Purchasing foreign stocks through a mutual fund saves on foreign taxation. C) The voting rights granted to a mutual fund shareholder are much stronger than those to the holder of an ADR. D) He could select a fund whose portfolio had the proper mix of foreign and domestic stocks to maximize his diversification.
There are two primary benefits to purchasing any mutual fund: professional management and diversification. However, an international fund has NO domestic securities in the portfolio (that would be a global fund) so there would be no mix for diversification as indicated in that choice. There are no special tax breaks for investing in foreign securities via a mutual fund and the voting rights have nothing to do with the securities in the portfolio. Reference: 7.1.5.1 in the License Exam Manual
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include which of the following? They must be renewed on an annual basis. They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated. They must prohibit assignment of the contract without the client's consent. A) I and III. B) I, II and III. C) I and II. D) II and III.
There is no requirement that advisory contracts be renewed on an annual basis. Contracts can be written for any length agreed upon. Advisory contracts must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated and must prohibit assignment without the client's consent. Reference: 3.14 in the License Exam Manual
If the required rate of return is higher than anticipated in a present value calculation, the effect would be that A) the yield to maturity would increase B) the present value would be lower C) the future value would be higher D) the present value would be higher
Try to follow me on this one. The present value computation is used to determine how much money must be deposited now (in the present) to reach a specified future goal when you know how many years you have to reach that goal. One critical component of the formula is the rate of return. As a simple example, if you need $100,000 18 years from now for your newborn's college education and you expect to earn 4%, using the rule of 72, you'll have to deposit $50,000 now (present value) to reach the goal. However, if it turns out that the earnings rate is higher than anticipated—say, 8%—you would only need to deposit half as much today ($25,000). Therefore, we answer this question by indicating that a higher rate of return will require a lower present value (deposit). Reference: 12.1.1.2 in the License Exam Manual
MaryBeth is an agent with QuickTrade Securities, a subsidiary of QuickLoan Bankcorp, a holding company that also owns QuickIssue Capital Markets, an underwriter specializing in bringing new issues to market. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, MaryBeth would be permitted to split commissions resulting from securities transactions with any of the following individuals EXCEPT
Under the NASAA Policy, in order to split commissions, both individuals must be licensed as agents with either the same broker-dealer, or ones under common control (ownership). What about sharing with your principal? Why not? In fact, many managers (principals) have commission overrides as a fundamental part of their compensation package. Remember, as we state in your License Exam Manual, under the Uniform Securities Act, there is no separate principal registration as there is with FINRA; all principals are registered as agents (or IARs as the case may be), just the same as you. Reference: 2.11.26.4 in the License Exam Manual
Under the Uniform Securities Act, one method of securities registration is Qualification. When that method is used, which of the following statements is CORRECT? The registration is valid for one year from the effective date. The registration is valid for one year from the effective date unless the underwriter or issuer still has some unsold shares. The registration is valid until the next December 31st. The registration statement may be amended to increase the number of shares in the offering as long as the public offering price and the underwriter's compensation is not changed. A) I and IV. B) I and III. C) II and IV. D) II and III.
Under the USA, when a security is registered, the registration is valid for one year after the effective date. However, the act provides that if the issuer or underwriter still has unsold shares from the offering, the effective date may be extended so this is a more accurate choice. The act also allows the registration statement to be amended to allow for an increase in the number of shares to be offered as long as the public offering price and the underwriter's compensation is not changed. Reference: 2.7.3.1 in the License Exam Manual
Under the Investment Advisers Act of 1940, which of the following are exempt from the requirements for registration? Foreign investment advisers with fewer than 15 clients per year who do not hold themselves out as investment advisers to the public and have less than $25 million in AUM in the United States. Investment advisers who conduct all of their business in 1 state and who do not provide advice on securities listed on an exchange and have no private funds as clients. Investment advisers whose only clients are banks. A) II only. B) I only. C) I, II and III. D) I and II.
Usually, anyone who meets the federal definition of investment adviser must be registered with the SEC. Some investment advisers are not excluded from the definition but are exempt from the registration requirements of the SEC. One example is an adviser whose clients are all residents of the state in which the adviser maintains its principal office who renders no advice on any exchange-listed security and does not give advice to any private funds. Advisers whose clients are limited to insurance companies are exempt from registration, as are foreign advisers who limit themselves to fewer than 15 clients a year (none of whom can be investment companies), do not advertise or hold themselves out to be investment advisers and have less than $25 million in AUM in the U.S. There is no exclusion for advisers whose only clients are banks. Reference: 3.3.1 in the License Exam Manual
According to the Uniform Securities Act, which of the following would not be an unlawful activity for an investment adviser? A) Entering into an investment advisory contract that does not mention the compensation arrangements. B) Entering into an investment advisory contract that provides specifically for compensation based on a share of capital appreciation of the customer's funds. C) Notifying clients within a reasonable amount of time of the departure of a minority partner of the firm. D) Taking custody of a customer's securities or funds without notifying the Administrator, even though the Administrator has no rule that prohibits such custody.
When an IA organized as a partnership has a change involving a minority of the partners, notification to all clients must be sent within a reasonable amount of time. NASAA does not define reasonable, but that is the correct term to use. Although there are cases where performance-based compensation is permitted, unless the question specifically refers to that exception, the action is prohibited. Reference: 3.14 in the License Exam Manual
During an economic downturn, one would expect to see A) higher unemployment B) manufacturer's inventories to decline C) bond prices fall D) a rising CPI
When the economy enters the contraction portion of the business cycle, employers cut costs by letting employees go, thus increasing the number of unemployed persons. With less money in the economy, the CPI will generally remain level or even decline. Manufacturing sales will slow, so their inventories will rise as it takes longer to move product and, we can expect a reduction in interest rates, which will cause bond prices to rise. Reference: 11.3.2 in the License Exam Manual
An IAR handling the portfolio of a senior citizen with diminished mental capacity is deemed to be acting as a fiduciary and, therefore, bound by the provisions of the Uniform Prudent Investor Act. Compliance with the act would require the IAR to: make sure that the investment allocation is done prior to the renewal date of the contract. use skill and caution in making investment recommendations. carefully consider the risks of all investments. seek to meet the client's objectives with minimum risk. A) II, III and IV. B) II and IV. C) I, II, III and IV. D) III only.
The UPIA requires that fiduciaries act with skill and caution in an effort to meet their clients objectives. In so doing, they should attempt to maximize returns while minimizing risks. What does making the allocation prior to contract renewal have to do with properly serving your client? Reference: 20.1.1 in the License Exam Manual
Under the Uniform Securities Act, an investment adviser who has custody of client securities or funds must do which of the following?
The adviser must send clients quarterly, itemized statements listing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. Unless using a qualified custodian, the adviser must deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held. The adviser must also arrange for an annual, surprise audit by an independent public accountant of client funds and securities. The adviser must notify the Administrator that the adviser has or may have custody of client securities or funds. Reference: 3.11 in the License Exam Manual
John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? A) $130,000. B) $122,000. C) $150,000. D) $138,000.
The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for. Reference: 15.2 in the License Exam Manual
The currency reporting threshold for cash and equivalent instruments is: A) over $5,000. B) over $3,000. C) over $10,000. D) over $25,000.
The currency reporting threshold for cash and equivalent instruments is over $10,000. These transactions must be reported on a CTR (currency transaction report) (FinCEN Form 112). The Form 112 is electronically filed with the Department of the Treasury. Reference: 1.11 in the License Exam Manual
A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable? A) ETFs B) ETNs C) Treasury bonds D) Insured bank CDs
The question describes an individual with a low risk tolerance, so the Treasury bonds and CDs would certainly be considered appropriate. Because ETNs are a debt security backed solely by a single issuer while an ETF based on a specific index of debt securities represents a large group of issuers, they are only suitable for those who can understand and take the risks involved. Reference: 7.1.8 in the License Exam Manual
