Series 66

According to the Investment Advisers Act of 1940, how can records of the investment adviser's business be stored during the first two years? In written form on site On microfilm on site On magnetic tape or a computer on site On computer disks at an offsite storage facility that requires 30 days' notice to retrieve A) II and III B) I, II, III, and IV C) I, II, and III D) I only

C) I, II, and III The act requires certain records of business activities to be kept for five years (the first two in a readily accessible place subject to SEC examination at any time). Records originated on paper may be microfilmed or microfiched, and records originated on computer may be stored electronically. The USA has the same rule, and in both cases, the key point is that any storage vehicle used must be able to generate a hard copy while the examiner is present. One other requirement applies to computer disks, and that is that they cannot be rewritten.

Which of the following statements regarding investment adviser compliance rules is true? A) If the chief compliance officer conducts appropriate annual compliance reviews, an interim review is generally not necessary. B) Compliance procedures should review the accuracy of disclosures made to clients and investors, although it is not necessary that they review disclosures made to regulators. C) Compliance procedures should be designed to prevent violations, as well as detect existing violations. D) The chief compliance officer must have at least three years' experience in securities industry compliance.

Compliance procedures should be designed to prevent violations, as well as detect existing violations. Although the CCO should conduct annual compliance reviews, the CCO should also recognize the necessity for interim reviews in light of such events, including changes in business arrangements and regulatory developments. There is no specific experience requirement that the CCO must fulfill; however, the CCO should be knowledgeable in securities law. Compliance procedures should review the accuracy of disclosures made to regulators, clients, and investors.

An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend? A) Ginnie Mae fund B) Municipal unit investment trust C) Money market mutual fund D) Mid-cap common stock mutual fund

D) Mid-cap common stock mutual fund Mid-cap stocks (see Glossary of Terms) have historically provided good hedges against inflation making them appropriate for an investor seeking long-term growth and inflation protection. There are several key words here to remember for the exam. Whenever you see "low tax bracket," the answer cannot be a municipal bond. Likewise, whenever you see "inflation protection," the answer will be common stock (unless a TIPS is given as a choice).

The term derivative would not apply to which of the following? A) Futures B) Forwards C) Warrants D) REITs

D) REITs REITs are not based on the value of something other than their own assets. Warrants (and rights) derive their value from the underlying security. Futures and forwards are contracts whose value is based on some underlying asset.

Regarding open-end investment companies, which of the following sales charges is based on the NAV per share? A) Sales load B) 12b-1 fee C) Commission D) Redemption fee

D) Redemption fee If the fund has a redemption charge (CDSC), it is based on the NAV per share, not the public offering price (POP). That is, if the client liquidated shares when the NAV was $10 per share and the POP was $10.50, the CDSC would be charged based on the $10 rather than the $10.50. Commission is not a term used with mutual funds. The 12b-1 fee is a charge against overall assets of the fund; it is not considered to be a charge related to the buying or selling of fund shares.

Which of the following is not a type of diversification that is achieved by investing in international equities? A) Geographic B) Asset class C) Currency D) Style

D) Style Following a value or a growth style, or using a buy-and-hold strategy, is independent of the continent of domicile of the issuer. Investing in different countries diversifies investments among various currencies, other than the client's domestic currency. Different geographic areas have different types of industries whose performance may vary on the basis of regional resources. International equities are considered another asset class for purposes of asset allocation in one's portfolio.

One of your clients wishes to reallocate the assets in his 401(k) plan. Specifically, he plans to assist his parents in the purchase of a retirement home. He claims that it makes sense to have about 10% of his plan assets in real estate. A) An asset allocation model would not have 10% in real estate. B) This is prohibited as qualified plans cannot own real estate. C) This would only be permitted if the home were for his personal use. D) This is not permitted because a prohibited party will benefit.

D) This is not permitted because a prohibited party will benefit. There are two problems here. First of all, any investment in a qualified plan (or IRA), must be for future use (or else it would be considered a distribution subject to tax). Second, real estate may be used prior to your retirement, but not by "related" parties. These are defined as your spouse and lineal members of your family (ancestor or descendant or their spouse). So, because the parents will be using the property, they are considered prohibited persons.

Which of the following is not associated with passive investment management approaches? A) Belief in efficient markets B) Belief in the random walk theory C) Use of index investing D) Goal of beating the market

Goal of beating the market Proponents of passive-management approaches believe in the random walk theory (market movements are unpredictable) and efficient markets (any information that could affect a stock's price is quickly reflected in its price). As a result, they feel that it is impossible to consistently beat the market. Index investing is a commonly used passive-management approach.

One of your prospective clients is considered a key employee at his place of business. This individual has a net worth of almost $6 million, currently earns in excess of $500,000 per year, and is married with 2 teenage children. He currently has a little over $1 million in his 401(k), more than half of which is invested in his employer's common stock. The company is the beneficiary of a $1.5 million key person life insurance policy on his life. Given these facts, what is your greatest concern as his adviser? A) Inadequate funding for college savings B) Alternative minimum tax C) Inadequate life insurance coverage D) Too high a percentage of the retirement plan invested in the company's stock

Inadequate life insurance coverage Because the client's only life insurance seems to be that with the company as beneficiary, it does not appear that he has adequately planned for his premature death and the potential estate taxes.

Which of the following financial statement entries is eliminated when calculating the quick ratio? A) Cost of goods sold B) Accounts receivable C) Notes payable D) Inventory

Inventory The quick ratio (sometime referred to as the quick asset ratio or the acid test ratio) is calculated by subtracting the current liabilities from the quick assets. The quick assets are all of the current assets with the exception of the inventory. Cost of goods sold is an income statement item and is irrelevant here.

Regarding open-end investment companies, which of the following sales charges is based on the NAV per share? A) Sales load B) Redemption fee C) Commission D) 12b-1 fee

Redemption fee If the fund has a redemption charge (CDSC), it is based on the NAV per share, not the public offering price (POP). That is, if the client liquidated shares when the NAV was $10 per share and the POP was $10.50, the CDSC would be charged based on the $10 rather than the $10.50. Commission is not a term used with mutual funds. The 12b-1 fee is a charge against overall assets of the fund; it is not considered to be a charge related to the buying or selling of fund shares.

An investment adviser may state which of the following in the advisory contract? A) The investment adviser may be compensated on the basis of capital gains, provided assets in the account are below $250,000. B) The advisory contract may be assigned to another party only after adequate compensation. C) The advisory contract may be assigned to another party only with the consent of the client. D) The adviser may be compensated on the basis of a reasonable share of the capital gains.

The advisory contract may be assigned to another party only with the consent of the client. Explanation An investment advisory contract may be assigned to another adviser only with the client's consent. Advisers are not allowed to be compensated solely on the basis of capital gains, regardless of how reasonable the share appears to be. Performance-based compensation is not generally allowed unless the client has a minimum under management (currently $1.1 million) or a substantial net worth (currently in excess of $2.2 million).

Your clients, a married couple, are trying to decide whether to open an account as joint tenants with right of survivorship or tenants by the entirety. You might point out to them that one of the differences to consider is that: A) only the JBE account avoids probate upon the death of the first tenant. B) a JTWROS account requires the consent of both parties to make a trade. C) a JBE account requires the consent of both parties to make a trade. D) any 2 people can open a JBE account, while JTWROS accounts are limited to married couples.

a JBE account requires the consent of both parties to make a trade. Explanation One of the unique characteristics of the joint by the entirety (JBE) account is that the consent of the other party is necessary in order for one of the parties to enter a trade. With a JTWROS account, either party can enter trades independently. Both JTWROS and JBE avoid probate and the JBE is limited to married couples only.

An issuer properly files Form D in accordance with Rule 503 of Regulation D of the Securities Act of 1933. As such, the securities that are the subject of any transaction are A) required to register with the state(s) in which they are sold. B) federal covered securities. C) required to register with the SEC. D) available only to institutional purchasers.

federal covered securities. Securities sold under Regulation D of the Securities Act of 1933 are private placements and, under the NSMIA, are considered federal covered securities.

Included in the definition of derivative would be all of the following except A) rights. B) futures. C) leveraged ETFs. D) options.

leveraged ETFs. ETFs, whether leveraged or not, are investment companies and are not included in the definition of derivative.

In order to compute an investor's real rate of return on a common stock holding, all of the following are necessary except A) dividends B) appreciation C) marginal tax bracket D) inflation rate

marginal tax bracket The real rate of return is another term for inflation-adjusted return. It is the total return, which is appreciation plus income (dividends), which is then adjusted for the inflation rate as expressed by the CPI. Tax bracket is necessary to compute after-tax return.

Jay is an investment adviser representative with a state-registered investment adviser. Jay operates out of an office in State Y. He would be required to register in State Z if, during the previous 12 months, he had A) fewer than six retail clients who were residents of State Z. B) five or fewer retail clients who were residents of State Z. C) six or fewer retail clients who were residents of State Z. D) no more than five retail clients who were residents of State Z.

six or fewer retail clients who were residents of State Z. The de minimis exemption applies when, during the preceding 12-month period, the IAR has had no more than five retail clients. There are three ways of stating that: No more than five Five or fewer Fewer than six Therefore, with six or fewer retail clients who are residents of State Z, Jay is one over the limit and must register.

A technical analyst who wishes to smooth out the fluctuations of stock market prices would probably chart A) the trendlines B) the 100-day moving average C) the support and resistance levels D) the short interest

the 100-day moving average A major benefit of charting moving averages is that it takes short-term market fluctuations and smooths them out.

You have a client whose income from a real estate limited partnership is $11,000. During the same year, your client has net capital losses of $2,000 and losses from an oil and gas drilling program of $6,000. The effect of this investment activity would be to increase the client's taxable income by A) $5,000. B) $3,000. C) $11,000. D) $9,000.

3000 The $11,000 passive income is offset by the $6,000 of passive loss, giving the client $5,000 of passive income. Because capital losses up to $3,000 are deductible from taxable income, we can deduct the $2,000 in net losses, giving a net increase to taxable income of $3,000.

Which of the following are characteristics of commercial paper? Backed by money market deposits Negotiated maturities and yields Issued by insurance companies Not registered with the SEC A) II and IV B) III and IV C) I and II D) I and III

A) II and IV Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Most commercial paper is sold to institutions, and the borrower and lender negotiate the terms. Those terms include the interest rate (the yield because they're discounted) and whether these are overnight, 30-day, or longer maturities. Because commercial paper is issued with maturities of no more than 270 days, it is exempt from registration under the Securities Act of 1933.

An employer wishing to offer a retirement plan with a goal of retaining key employees would probably start with A) a deferred compensation plan B) a SEP IRA C) a payroll deduction plan D) a defined benefit plan

A) a deferred compensation plan Because the deferred compensation plan allows the employer to discriminate, it is a popular choice for offering special benefits to retain key employees. Defined benefit plan will be the answer to a question dealing with offering maximum benefits to older employees.

The DERP Corporation has an outstanding convertible bond issue that is convertible into eight shares of stock. If the current market price of the bond is 80, the parity price of the stock is A) $64 per share. B) $100 per share. C) $125 per share. D) $80 per share.

B) $100 per share. Explanation Parity means equal. With a conversion ratio of eight shares per bond, the investor can convert the bond into eight shares. If the bond is currently selling for $800, then, to be of equal value (parity), the eight shares must be selling at $100 each.

Which of the following statements about capital gains are true? The minimum holding period required to qualify for long-term capital gains treatment is 1 day longer than 12 months. The highest federal income tax rate on long-term capital gains is less than the highest federal income tax rate on ordinary income. If an investor holds stock for 12 months or less and has no other transactions, any gain on the sale of the stock is taxed at the same rate as ordinary income. A) I and III B) I, II, and III C) II and III D) I and II

B) I, II, and III If an investor holds stock for more than 12 months and sells it for a gain, the gain will be treated as a long-term capital gain. The advantage of long-term capital gains is that the maximum tax rate on long-term capital gains is lower than the maximum rate on ordinary income. If an investor holds stock for 12 months or less, though, any gain will be considered a short-term capital gain and will be taxed at the same rate as ordinary income.

If an economist were to describe defensive issues, he would probably not include companies that produce A) food products. B) building materials. C) clothing. D) tobacco products.

B) building materials. Defensive issues are issues that are defensive against a downturn in the economy. Building materials are usually susceptible to downturns when the economy is bad.

An investment adviser representative of a federal covered investment adviser registers with A) the SEC. B) the Administrator. C) NASAA. D) FINRA.

B) the Administrator. Registration of IARs is done solely on the state level. IARs register with the Administrator of each state in which they are required to be registered.

A client is meeting with you to discuss the best way to invest today to meet the goal of funding their child's college expenses. The least important information needed to determine the amount to deposit is A) parent's salary B) current college costs C) expected inflation rate D) age of the child

This is the type of present value question you are apt to have on the exam. The client is basically asking, "How much do I have to deposit now to have enough for college in x years?" The number of years depends on the age of the child. The future cost depends on today's cost plus expected inflation. Those numbers are entered into the present value calculation and result in the amount that must be deposited today to reach the future goal. When looking for a lump sum, salary is not relevant.

One of your customers has been told that an irrevocable trust is something to consider. Probably the most significant reasons for this type of trust is that A) the donor has the ability to change the beneficiary as desired. B) it generally avoids estate tax. C) it allows the grantor to serve as trustee. D) the assets in the trust pass directly to the beneficiary following probate.

it generally avoids estate tax. A properly constructed irrevocable trust removes the grantor's assets from the estate thereby eliminating estate tax on them. The grantor no longer has the power to change the beneficiary and cannot serve as trustee. The assets pass directly to the beneficiary without going through probate.

A U.S. citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports A) a tax credit on the investor's Canadian tax return. B) a reduction in the investor's ordinary income. C) a tax credit on the investor's U.S. tax return. D) a nonrecoverable loss on the investor's U.S. tax return.

C) a tax credit on the investor's U.S. tax return. An investor receives a credit for taxes withheld on investments by countries with which the United States has diplomatic relations; the tax credit directly decreases the investor's American tax liability.

An agent is discussing a specific bond that would be a good addition to the client's portfolio. The client comments that the nominal yield is lower than its current yield. The agent would explain that the bond is A) issued by an unseasoned company, and the market hasn't yet realized how well secured the debt is B) a high-yield bond C) selling at a premium D) selling at discount

D) selling at discount Anytime the current yield on a bond is higher than its nominal or coupon rate, the bond must be selling at a discount.

Which of the following statements are not true? The kiddie tax applies to any income received by a child under the age of 19. IRAs have advantages over other estate assets when left to charity. Simple trusts have to distribute income annually. For U.S. citizens, there is an unlimited marital estate tax deduction. A) II, III, and IV B) I and II C) I, II, III, and IV D) I, II, and III

I and II The kiddie tax applies to unearned income only such as that received in an UTMA account. Leaving IRA assets to a charity offers the same estate tax benefits as any other asset. Simple trusts must distribute income annually, and there is an unlimited marital estate tax deduction between spouses who are U.S. citizens.

An investment adviser runs an advertisement in the business section of the local newspaper. The ad describes the nature of the firm's model portfolio and indicates that it has outperformed the overall market by 800% over the past 10 years, and the firm therefore guarantees that clients will more than keep pace with inflation. At the bottom of the ad, in smaller print, is the following statement: "Results are not guaranteed. Past performance is not indicative of future results. These results are not normal and cannot be expected to be repeated." This is an example of A) a wrap fee account. B) a violation of an investment adviser's fiduciary responsibility. C) a properly worded disclaimer. D) an improper hedge clause.

D) an improper hedge clause. Hedge clauses may not be used to disclaim statements that are inherently misleading.

Which of the following statements regarding discretionary accounts is true? A) A branch manager must approve discretionary orders before entry. B) A principal must approve discretionary orders before entry. C) The rules regarding churning of accounts do not apply to discretionary accounts. D) An order in which an investor designates the security's name, the number of shares, and whether to buy or sell and gives the agent discretion as to time and price only is not considered discretionary.

An order in which an investor designates the security's name, the number of shares, and whether to buy or sell and gives the agent discretion as to time and price only is not considered discretionary. An order is discretionary only if an agent selects the size of the trade, the security, or whether to buy or sell. Selecting only price and/or time does not constitute discretion. Churning rules apply to discretionary accounts, and a principal must approve order tickets after the trades, not before.

Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except A) the holder of an ISO can recognize capital gain (loss) as a result of exercise, whereas ordinary income (loss) is the result with an NSO. B) ISOs may only be granted to employees, while NSOs may be given to virtually anyone. C) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO. D) the recipient of the grant of the ISO has no income tax consequences at the time of the grant.

D) the recipient of the grant of the ISO has no income tax consequences at the time of the grant.

Which of the following vehicles make use of the unified estate tax credit? Bypass trust Generation-skipping trust Living trust Simple trust A) I and IV B) III and IV C) II and III D) I and II

I and II Both the bypass trust and the generation-skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.34 million for 2014) to heirs other than the spouse, usually grandchildren in the case of the GST.

Which of the following statements is not correct? A) Net present value (NPV) is the difference between the initial cash outflow (investment) and the future value of discounted cash flows. B) Time-weighted returns show performance without the influences of additional investor deposits or withdrawals from the account. C) Net present value analysis (NPV) is a commonly used time value of money technique employed by businesses and investors to evaluate the cash flows associated with capital projects and capital expenditures. D) Internal rate of return (IRR) is a method of determining the exact discount rate to equalize cash inflows and outflows, thus allowing comparison of rates of return on alternative investments of unequal size and investment amounts.

Net present value (NPV) is the difference between the initial cash outflow (investment) and the future value of discounted cash flows. Net present value (NPV) is the difference between the initial cash outflow (investment) and the present value of discounted cash flows (NPV = PV of CF − cost of investment). That is why it is called net present value instead of net future value.

Taxation is an important part of investment planning. In general, it is correct to state that a taxpayer's effective tax rate A) is more important than the marginal tax rate when considering tax-deductible contributions. B) is lower than the marginal tax rate. C) and the marginal tax rate are the same. D) is based on a different tax table than the marginal tax rate.

is lower than the marginal tax rate. The marginal tax rate is the rate you pay on each additional dollar you receive as income. The effective tax rate, however, is the overall rate of tax you pay on your total taxable income. Because income tax in the U.S. is progressive, as your earnings increase, so does the tax rate. Because the effective tax rate is the average rate, with very rare exceptions, it will always be lower than the marginal rate. Only the marginal tax rates are shown in the IRS tables. When money is spent on a tax-deductible basis, whether it is a donation to a charity or a contribution to a retirement plan, it is the marginal rate that is used to calculate the tax savings.

If an index annuity has a participation rate of 80%, it means A) the investor's account will be charged with 80% of the amount lost by the index. B) the investor's account will participate in 80% of the gains and losses of the index. C) the investor's account will never be less than 80% of the initial investment. D) the investor's account will be credited with 80% of the growth of the index.

the investor's account will be credited with 80% of the growth of the index. The participation rate of an index annuity is the percentage of the growth of the index credited to the investor's account. For example, if the index had a return of 10% and the participation rate is 80%, the investor's account is credited with 8% growth. This may be limited by a cap (a maximum), but unless a cap rate is stated in the question, there isn't one. One of the benefits of an index annuity is that it only shares in the growth, never any losses.

Which of the following terms best describes ETNs and leveraged ETFs? A) Alternative investments B) Forms of hedge funds C) Registered investment companies D) Speculative investments

A) Alternative investments These are two popular alternative investments. Are they speculative? Yes, but there are many other speculative investments that are not considered alternative investments. The question asks for the best description and, although it might seem like a close call, these are "alts." The leveraged ETF is a registered investment company, but the ETN is not.

Bryan, an agent registered with a broker-dealer, buys 1,000 shares of XYZ Corp. in his own account. In recommending XYZ Corp. to his customers, Bryan informs them that he believes in the company so much that he put his own money in the stock. This practice is A) only unethical if investors lose money in the investment B) not an unethical sales practice C) only unethical if Bryan sells his shares after informing his clients of his intention to do so D) an illegitimate sales tactic

B) not an unethical sales practice This practice is ethical, providing it is accurate and not employed in a coercive manner. It would be expected that when Bryan decides to sell his position, he would not do so prior to notifying his clients with a position in that stock. Otherwise, this would be an ethical problem.

Which of the following statements regarding the time value of money is not correct? A) Future value is the future amount to which a sum of money today will increase on the basis of a defined interest rate and period. B) Future value of an ordinary annuity is the future amount to which a series of deposits of equal size will increase. C) Compound interest is interest earned on the initial investment. D) Compound interest is interest earned on interest.

Compound interest is interest earned on the initial investment. Compound interest is interest earned on interest that has been added to the original principal. For example, $1,000 earning 5% compounded annually earns $50 the first year and then 5% of $1,050 or $52.50 the 2nd year.

In the investment industry, the term spread has many different meanings. When used in a discussion about bonds, which of the following would be most appropriate? A) Inverse spread B) Calendar spread C) Credit spread D) Debit spread

Credit spread Explanation A credit spread refers to the difference between yields of bonds with similar maturities but different ratings. For example, a bond analyst might compare the yield of a 10-year Treasury note with a AAA rated bond with 10 years to maturity. Wider spreads generally indicate a concern about the economy (investors are seeking the safety of the Treasury issue), while narrow spreads generally indicate economic optimism. Debit spread and calendar spread refer to options (as does credit spread, but our question asks about bonds). Bond prices and interest rates have an inverse relationship, but that isn't called an inverse spread.

Which of the following would be considered an unethical business practice? A) Agents exercising discretion in discretionary accounts B) Agents correcting execution orders in their customer's accounts C) Broker-dealers charging larger-than-ordinary commissions on certain transactions D) Broker-dealers sending retail clients an email 30 days in advance of a change to fees

Agents correcting execution orders in their customer's accounts When a good-faith error is made, only the firm can make the correction; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm's website).

Which of the following transactions is not exempt from registration? A) A bona fide pledge of securities B) Transactions between an issuer and underwriter or between underwriters C) A sale of an exempt security to an individual customer as a result of an agent's solicitation D) Transactions with banks, savings and loan associations, and other financial institutions

A sale of an exempt security to an individual customer as a result of an agent's solicitation Solicited trades with individuals are not exempt transactions, even when the security being traded is exempt. Transactions between issuers and underwriters or between underwriters are exempt from registration and advertising filing requirements. A bona fide pledge of securities is not a transaction and this question is looking for a nonexempt transaction. Transactions with banks, savings and loan associations, and other financial institutions are exempt from registration and advertising filing requirements. LO 8.d

Which of the following statements regarding Coverdell Education Savings Accounts are true? After-tax contributions of up to an indexed maximum per student per year are allowed. Unless a special needs beneficiary, contributions may not be made for students past their 18th birthday. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. Distributions are always taxable. A) I and II B) I and III C) II and IV D) III and IV

I and II Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member. When the beneficiary is a special needs beneficiary (an individual who because of a physical, mental, or emotional condition requires additional time to complete their education), there are no age restrictions. Furthermore, unless something in the question refers to this beneficiary, always use the age 18 and 30 restrictions.

Out-of-state investment advisers with no office in this state are not required to be registered if only advising A) on stocks listed on the NYSE. B) insurance companies. C) on growth issues. D) on preferred stock.

insurance companies. It is not the securities they advise on but their clients that count. Out-of-state investment advisers with no office in this state must be registered under the Uniform Securities Act unless their only clients are insurance companies, registered investment companies, banks or other institutional investors, broker-dealers, and other investment advisers.

Applicants who pass the Series 66 exam after having also passed the Series 7 exam can tell prospects, A) "I am now a licensed fiduciary." B) "My qualifications have been reviewed and accepted on both the state and federal level." C) "I have passed two national exams qualifying me to serve clients nationwide." D) "I am a FINRA registered representative and an investor adviser representative."

"I am a FINRA registered representative and an investor adviser representative." Passing these two exams (and getting the OK from your firm) means you have three licenses. The first is as a registered representative with a FINRA member firm. The second is as an agent with that firm, but on the state level. The third is as an IAR with a registered investment adviser. No claims can ever be made implying approval or endorsement of your qualifications. There is no such term as a licensed fiduciary. The IAR registration generally places you in a fiduciary capacity and, under certain conditions, the agent or RR registration can do so as well. Although these are national exams, licensing on a state level is usually required.

Which of the following regarding the registration of investment advisers and their representatives is true? A) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly. B) ABC Advisers, Inc., is an investment advisory firm registered with the Administrator; therefore, its representatives need not be registered with the Administrator. C) XYZ Advisers, Inc., is a federal covered investment advisory firm registered with the SEC; therefore, its representatives need not be registered with the Administrator. D) An investment adviser representative terminated his employment with ABC Advisers, Inc., a state-registered investment adviser and, six months later, was employed as an advisory representative by KLM, a federal covered adviser. Each firm is required to notify the Administrator of each event.

A) ABC Advisers, Inc., registered with the Administrator, employs an investment adviser representative who left the employment of another investment advisory firm six months ago. ABC must notify the Administrator of this association promptly. Only state-registered investment advisory firms are required to notify the appropriate state Administrator when employment is terminated or begun. In the case of investment adviser representatives of federal covered advisers, notification is the responsibility of the adviser representative. Investment adviser representatives of both state and federal registered investment advisers must be registered with the appropriate state Administrator(s), unless otherwise exempted. In the case of agents, not only the broker-dealers but also the agents must notify the Administrator.

A state-registered investment advisory firm that plans to take custody of clients' securities must do which of the following? Receive permission from the state Administrator. Give notice to the state Administrator. Provide a copy of its balance sheet to clients. Provide a custody brochure to clients. A) II and IV. B) I and IV. C) I and III. D) II and III.

II and III. For a state-registered investment adviser to take custody of customer funds and securities, it must give notice to the state Administrator and provide those customers with a copy of its balance sheet. Permission from the state Administrator is not required and there is no such thing as a custody brochure.

Among the differences between C corporations and S corporations is the liability assumed by the shareholders the number of allowable shareholders the tax treatment of the corporation's earnings residency requirements of shareholders A) I, II, III, and IV B) II, III, and IV C) I and IV D) II and III

II, III, and IV A feature common to both C and S corporations is the limited liablity of the investor. That is, the investor is not liable for the debts of the business and cannot lose more than the original investment. Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident 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.

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of the majority vote of A) the outstanding shares and a majority of that portion of the board of directors that is considered noninterested members. B) the noninterested directors. C) the board of directors. D) the outstanding shares.

the outstanding shares and a majority of that portion of the board of directors that is considered noninterested members. When it comes to retaining the services (hiring) of a person (or persons) to manage the portfolio of a mutual fund, there are three parties involved in the approval process. Those three parties are the shareholders, the fund's board of directors, and that portion of the fund's board consisting of noninterested members. (Remember, the board must be at least 40% noninterested, which is sometimes stated as a maximum of 60% interested.) This question asks about the initial contract. That contract is always for two years and requires the approval of a majority vote of the outstanding shares (the shareholders) and a majority vote of that group of board members who are noninterested. You should also know that, when it comes to renewal (done annually after the initial two-year contract), once again, a majority vote of that group of board members who are noninterested is required, along with either a majority of the total board or a majority of the outstanding shares. The one constant is the approval of the noninterested board members.

One would look at the average maturities when doing a cash flow analysis for A) Brady bonds B) mortgage-backed pass-through securities C) revenue bonds D) subordinated debentures

mortgage-backed pass-through securities Mortgage-backed pass-through securities pass through interest and principal payments to their investors. The rate at which the cash flows are generated depends, among other things, on the rate at which the mortgages mature as well as prepayments. Therefore, unlike most fixed income securities that have generally even cash flows, mortgage-backed securities use the average maturities to analyze cash flow.

Which of the following does not violate the ethical requirements of the Investment Advisers Act of 1940? A) An IA tells clients that the time is right to convert shares of a money market fund to shares of a growth stock mutual fund family. Without telling clients, he makes a similar conversion for his own account. B) An IA is affiliated with a broker-dealer but does not tell clients that the investment advice he offers is outside the scope of his employment with that broker-dealer. C) An IA intends to implement a financial plan using only products available through a broker-dealer with whom she is associated, but she does not make this intention known to the client. D) An IA's financial plan uses products available through a number of different broker-dealers. In implementing a portion of the plan, the IA intends to act as an agent of a broker-dealer with whom he is associated, but he does not make this intention known to his client.

A) An IA tells clients that the time is right to convert shares of a money market fund to shares of a growth stock mutual fund family. Without telling clients, he makes a similar conversion for his own account. Making personal investments consistent with recommendations to clients is not a violation of the Investment Advisers Act of 1940. Release of IA-1092 does not impose an obligation on an investment adviser representative to disclose this fact to clients. The investment adviser representative is obligated to disclose any plans to act as an agent of a broker-dealer with whom the individual is associated. An investment adviser representative must disclose to clients that the investment advice rendered is outside the scope of employment with the broker-dealer, if that is the case. Finally, if the investment adviser representative only offers that broker-dealer's products, that fact must be disclosed.

The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket? A) Account number, customer address, time of order entry, and terms and conditions of the order B) Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order C) Customer name, execution price, time of order entry, and time of execution or cancellation D) Customer name, customer address, execution price, and time of execution or cancellation

Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order This is one of those questions where the best way to find the answer is by determining what is not correct. Customer name and/or address would never be on an order ticket and that knocks out three of the choices. The account number (not name), the execution price (once the order is completed), the time of entry and execution (or cancellation if it is a day order that is not executed), and the terms and conditions (limit, market, stop, etc.) are all on the order ticket.

A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences except A) liquidity. B) suitability requirements. C) fees and expenses. D) regulatory oversight.

C) fees and expenses. The internal operating costs of a REIT, such as management fees and administrative expenses, have nothing to do with where units of the REIT are traded. One of the major risks inherent in an unlisted REIT is lack of liquidity. As a result, there is a greater stringency when it comes to suitability, and this leads to stronger oversight by the regulators.

A company's current ratio is 0.5:1. This could be an indication A) the company is highly leveraged. B) the company's current assets are twice its current liabilities. C) the company's working capital is sufficient to meet daily needs. D) the company may have trouble paying its bills.

D) the company may have trouble paying its bills. The formula for current ratio is the current assets divided by the current liabilities. A 0.5:1 ratio means that the company has current liabilities that are twice its current assets. This would also mean a negative working capital (current assets minus current liabilities) and would probably mean that the company is going to have a difficult time paying its bills. A highly leveraged company is one whose long-term debt, such as bonds, represents more than 50% of the company's total capital. Nothing in this question relates to long-term debt or capitalization.

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is A) selling at a premium. B) selling at NAV. C) selling at a discount. D) an open-end investment company.

selling at a premium. When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the assets are the $100 million portfolio value and the liabilities are $10 million for the unpaid securities plus the $5 million in accrued management fees. Subtracting the $15 million in liabilities from the $100 million in assets leaves $85 million. Divide that by the 2,611,437 shares outstanding, and the quotient is approximately $32.55. Once we know the NAV, it is clear that the price of $36.38 is a premium over the NAV. And, we know that this can't be an open-end investment company because if it was, the $3.83 sales charge represents 10.5% of the asking price ($3.83 ÷ $36.38), which is well in excess of the maximum 8.5% permitted.

A federal covered investment adviser employs the services of a third-party promoter to solicit business for the firm. The Investment Advisers Act of 1940 would require the solicitor to deliver a copy of A) the investment adviser's Form ADV, Part 1. B) the solicitor's script. C) the solicitor's brochure. D) the promoter's agreement when above the de minimis compensation limit.

the promoter's agreement when above the de minimis compensation limit. Third-party solicitors (promoters) must provide a copy of the written agreement between the promoter and the investment adviser (IA) when the compensation exceeds $1,000 during the preceding 12 months (de minimis). There is no requirement for a promoter's brochure. Because the IA has a reasonable responsibility to ensure that the solicitor follows the rules, it would not be unusual for the script to be approved by the IA. The prospect would not be entitled to a copy. Finally, only the SEC receives a copy of the Form ADV Part 1, not the prospect or customer.

Which of the following must register as an agent when representing a broker-dealer? A) A partner of a broker-dealer who has no securities sales functions B) The telephone switchboard operator who directs orders to the appropriate extension C) An employee who accepts unsolicited orders from institutional clients D) An individual who represents an underwriter only in transactions between an issuer and the underwriter

An employee who accepts unsolicited orders from institutional clients An employee of a broker-dealer who accepts orders must register as an agent. The fact that it is unsolicited and/or from an institution (making them exempt transactions) has no bearing on the requirement for the individual to register as an agent. A partner of a broker-dealer with no securities sales functions and an individual who represents an underwriter only in transactions between an issuer and the underwriter need not register. Individuals whose function is strictly clerical do not register as agents.

Which of the following would be permitted to contribute to an IRA? An individual whose sole income consists of dividends and capital gains A divorced mother whose sole income is alimony and child support under the terms of a divorce agreement signed on October 31, 2018 A self-employed attorney who has a Keogh plan A corporate officer covered by 401(k) A) I, II, III, and IV B) II, III, and IV C) I and II D) III and IV

II, III, and IV An IRA contribution can only be made by someone who has earned or otherwise eligible income. Earned income is defined as salary, wages, commissions, and tips. Alimony (but not child support) is considered eligible income for an IRA as long as the divorce decree was signed prior to January 1, 2019. Individuals can contribute to an IRA even if they are covered by a corporate pension plan or Keogh plan. Although a contribution can be made, it may or may not be deductible depending on the individual's income. Dividends and capital gains are not considered earned income.

The National Securities Markets Improvement Act of 1996 (NSMIA) A) defined the term federal covered adviser. B) overcame the restrictions of selling securities in interstate commerce. C) created the concept of fraud, as used in the Uniform Securities Act. D) created a national market system.

defined the term federal covered adviser. The NSMIA defined the term federal covered adviser, referring to advisers who must register with the SEC or who are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. Fraud is a legal concept and is prohibited by the Uniform Securities Act. Selling securities in interstate commerce is not fraudulent, provided the antifraud provisions of securities laws are observed. The roots of a national market system began with the Securities Amendments Act of 1975.

A customer within 1 year of retirement informs his agent that he wants to use the equity in his house to make enough money within the year to fully fund his retirement. According to the Uniform Securities Act, the agent should A) construct a growth-oriented portfolio B) invest in an ultraconservative portfolio of municipal bonds C) invest the money in high-tech securities because of their unlimited potential D) urge the customer to reconsider his investment strategy

urge the customer to reconsider his investment strategy Making unsuitable recommendations to customers is prohibited, and this investor's time frame is unrealistic because the customer cannot meet his objectives in the time allotted. Investment in high-tech securities is unsuitable. Advising the customer to invest in an ultraconservative portfolio of municipal bonds will not meet the customer's objective of capital growth. The agent should advise the customer to reconsider his investment objectives.

If an agent recommends the purchase of a technology company with an impressive growth record but fails to inform the client that the company's technology will become obsolete pending the approval of a competitor's patent, the agent has A) not committed a prohibited business practice. B) not violated the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents because no untrue statements were made. C) committed a prohibited business practice by selling an unsuitable investment. D) violated the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.

violated the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. The agent has violated the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents by failing to inform the client of the potential downside in the sale of a security.