Series 66 Checkpoint exam QnA

*A client holding a 20-year Treasury bond notices that the bond purchased at a price of 98.12 is now selling for 98.20. This means that the price of the bond has A) increased by $2.50. B) increased by $8.00. C) increased by $0.25. D) increased by $0.80.

A Reason U.S. Treasury bonds are quoted in 32nds where 1/32 of $10 = $0.3215. The difference between 98.12 and 98.20 is 8/32. Therefore, multiply $0.3125 by 8, or recognize that 8/32 = ¼ and you come up with $2.50. U13LO2

*Over the past 5 years, a stock has had returns of +16%, +5%, -4%, +12% and +8%. The mid-range value of this stock's returns is A) +6.0%. B) +8.2%. C) +7.4%. D) +9.0%.

A Reason The range of a stock's performance is the low to the high, in this case -4% to +16%. The mid-range is that number that is exactly in the middle of the range. With a range of 20 points, the midpoint is going to be the high minus 10 or the low plus 10. +6.0% is 10 points higher than the low and 10 points lower than the high. U10LO2

*A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees except A) commissions on unsolicited trades. B) charges for wiring funds. C) account maintenance fees. D) account transfer fees.

A Reason There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are commissions; markups and markdowns; and advisory fees for those firms that are also registered as investment advisers. U6LO1

A bond analyst who determines the value of a debt security by adding the present value of the future coupons to the present value of the maturity value is using which of the following valuation methods? A) Discounted cash flow B) Dividend discount C) Present value D) Future value

A Reason This type of question sometimes appears on the exam. There is a second answer that could be correct, but is not scored as such. In this example, a case could be made for present value, but the better choice is discounted cash flow; it is more correct. U13LO12

The NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Investment Advisers prohibits certain activities of investment adviser representatives that are permitted by the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. Among those prohibitions is A) sharing in the profits and losses in a customer's account. B) exercising discretion in a client's account. C) splitting compensation. D) borrowing money from a client who is not in the lending business.

A Reason Agents are permitted to share in the profits and losses in customer accounts with the written approval of the customer and the employing broker-dealer. No such activity is permitted of investment adviser representatives. Neither can borrow money from a client who is not in the lending business, and neither are prohibited from exercising discretion or splitting compensation. U7LO4

Which of the following would not be a description of a fiduciary? A) A person who acts as an agent for another B) A person who renders investment advice in a professional capacity C) A person who maintains discretion over the assets of another D) A person who oversees assets for the benefit of another

A Reason Although there can be exceptions, the law of agency does not put one into the position of a fiduciary. U7LO1

*Exchange-traded funds have become a very popular pooled investment vehicle in recent years. One disadvantage of ETFs when compared with mutual funds is A) the possibility of selling the ETF at a price lower than the NAV. B) you can sell ETFs short or purchase them on margin. C) it takes longer to receive the proceeds from the sale of an ETF than the sale of a mutual fund. D) ETFs tend to be less tax efficient than mutual funds.

A Reason Because ETFs trade based on supply and demand, it is always possible that an investor could liquidate at a price below (or above) the NAV. That can never happen with a mutual fund. ETFs are known for their high, not low, tax efficiency, and because they are exchange traded, they may be sold short and purchased on margin. Another advantage of trading similar to a stock is that sales settle in 2 business days. Mutual funds must send redemption proceeds no later than 7 days after the request. U14LO10

*One way in which variable annuities differ from mutual funds is that variable annuities A) must register with the state insurance department. B) must register with the SEC. C) use an offering document rather than a prospectus. D) generally have a lower expense ratio.

A Reason Because variable annuities are an insurance and securities product, they must register with the state insurance regulators, as well as the SEC. Mutual funds register with the SEC as well, and both must deliver a prospectus to clients. One negative about variable annuities is that their expense ratio is generally higher than that for mutual funds with a similar objective. U15LO2

All of the following statements regarding an investment's internal rate of return (IRR) are true except A) IRR can easily be calculated for investments with uneven cash flows. B) IRR is the one rate of return that results in an investment having a net present value (NPV) of zero. C) investments are acceptable when their internal rates of return exceed the investor's required rate of return. D) IRR expresses the rate of interest that matches the initial investment with the present value of future cash flows.

A Reason IRR is the rate of interest that equates the initial investment with the present value of future cash flows; it is the rate of return that results in an investment having a net present value of zero. It is possible, although difficult, to calculate IRR for investments with uneven cash flows. That is why it is used primarily with debt securities and common stocks with stable dividends. U10LO1

Under NASAA 's disclosure rules for investment advisers and their associated persons, which of the following statements about material conflicts of interest is true? A) Material conflicts of interest must be disclosed in writing before rendering advice. B) Material conflicts of interest must be disclosed either orally or in writing within 10 days after rendering advice. C) All conflicts of interest relating to the adviser, adviser representative, or adviser employees must be disclosed in writing before rendering advice. D) Clients may waive the right to disclosure.

A Reason Investment advisers must disclose any material conflicts of interest in writing before rendering advice. Material conflicts of interest include any compensation to be received regarding recommendations to the client from other sources, in addition to the advisory fee charged, and affiliations between the adviser and suppliers of related services or other investment products. It is only in the case of discretionary authority where there is a 10-day period to wait for the written documents. The requirement for disclosure only applies to material conflicts, not all potential ones and, at least on the exam, waivers will never be permitted. U6LO1

A state-registered investment adviser is deemed to be maintaining custody under the Uniform Securities Act when A) client securities are held at the investment adviser's principal office. B) client funds are kept by a broker-dealer unaffiliated with the investment adviser. C) the adviser has been granted discretion over the account. D) the adviser maintains a net worth of not less than $35,000 or has a surety bond in an amount specified by the Administrator.

A Reason Possession of a client's securities is considered custody. Although an IA must maintain a minimum net worth of $35,000 (or a surety bond) if custody is maintained, the mere fact that the IA has that level of net worth does not mean that custody is involved. The USA considers that funds and securities held at an affiliated broker-dealer are not under the custody of the IA. U7LO2

Which of the following is a characteristic of a private equity fund? A private equity fund A) normally invests in private, non-publicly traded companies and businesses. B) is a class of hedge fund. C) is not required to disclose its holdings to its investors. D) attempts to profit from sharp swings in the market.

A Reason Private equity funds are managed investment funds that pool money, and they normally invest in private, non-publicly traded companies and businesses. This is not a hedge fund, although there are certain similarities, such as the general requirement that all investors be accredited. The investment managers of a private equity fund invest the money for a longer period than hedge fund managers. U14LO5

One defining characteristic of a private fund is that Section 3(c)(1) of the Investment Company Act of 1940 limits the number of investors to A) 100 B) 10 in any 12 month period C) 35 in any 12 month period D) 150

A Reason Private funds are pooled investment vehicles that are excluded from the definition of investment company under the Investment Company Act of 1940 by Section 3(c)(1) or 3(c)(7) of that Act. It is Section 3(c)(1) that limits the number of investors to 100. The limited offering exemption of the Uniform Securities Act exempts from registration, as security where there has been no more than 10 offers to noninstitutional clients during any 12-month period. It is Rule 506(b) of Regulation D of the Securities Act of 1933, where you find the limitation of 35 investors. U14LO5

*Which of the following investments would be probably have the least liquidity? A) Private equity fund B) Closed-end bond fund C) No-load mutual fund D) Municipal bond UIT

A Reason The investment managers of a private equity fund invest the money for a long period, usually in businesses that do not have publicly traded stock. Therefore, the private equity investor's money is not very liquid and returns are achieved when the investment is sold or goes public. Open-end companies must redeem shares at NAV upon presentation of the redemption request, and the same is basically true of UITs. Closed-end shares are publicly traded and, as such, may be sold immediately. U14LO5

Under the Uniform Securities Act, a person engaged in the business of effecting transactions in securities for the account of others or for his own account is defined as a broker-dealer. Each of the following would be specifically excluded from that definition except A) a person engaged in the business exclusively with other broker-dealers. B) a bank with a place of business in the state. C) an issuer of securities who offers a dividend reinvestment plan. D) an agent with over 100 clients in the state.

A Reason The only time a person is not a broker-dealer when dealing exclusively with other broker-dealers is when that person has no place of business in the state. Banks, issuers, and agents are specifically excluded under the Act. U3LO2

Under both state and federal law, a domestic investment adviser qualifies for the private adviser exemption by limiting its clientele to A) private funds and having less than $150 million in assets under management without regard to the number of private funds being managed. B) closed-end investment management companies and having less than $150 million in assets under management without regard to the number of funds being managed. C) venture capital funds and having less than $110 million in assets under management without regard to the number of venture capital funds being managed. D) private funds and having less than $25 million in assets under management without regard to the number of private funds being managed.

A Reason The private fund exemption applies to domestic (based in the United States) investment advisers who deal solely with private funds (check your LEM for the definition of a private fund) having less than $150 million in AUM. There is a $25 million AUM limit for foreign advisers and a limit on the number of clients. Another exemption applies to venture capital fund advisers, but there is no dollar limitation on the AUM. U1LO4

*One way in which unit investment trusts differ from open-end investment companies (mutual funds) is A) UITs have a termination date. B) they are not required to redeem units. C) they do not compute a net asset value. D) UITs are required to register on the state level.

A Reason UITs are organized with a fixed termination date, usually in the 5-to-10-year range. Both UITs and open-end companies are federal covered securities, exempt from registration on the state level. UITs have the same requirement as open-end investment companies; the NAV must be computed at least once daily, usually as of the close of the market. U14LO7

As a portfolio becomes increasingly well diversified, which of the following will be driven toward zero? A) Unsystematic risk B) Total risk C) Systematic risk D) Market risk

A Reason When you see diversification, think about reducing unsystematic risk. Systematic risk, of which market risk is the most common, cannot be diversified away. Total risk includes both risks, so diversification will help with the unsystematic risk but not the systematic. U11LO2

*A customer has expressed interest in exchange-traded funds (ETFs) and wishes to discuss them with you. You could tell him all of the following except A) ETFs have a NAV, calculated at the end of the trading day, that serves as the trading price until the next NAV is calculated B) a share of an ETF represents an entire portfolio, or a specific selection, of securities C) selling short and trading on margin are available transactions with ETFs D) real-time quotes are available for ETFs

A Reason While a NAV can be calculated for an exchange-traded fund, the price is set by the market and changes throughout the trading day. U14LO8

While an application for registration as an agent of a broker-dealer is still pending, that person would be permitted to: A) assist registered employees of the firm by doing research on securities they are following. B) engage in no activity at the office other than studying for the exam. C) limit her acceptance of orders to those from the broker-dealer's existing clients. D) accept unsolicited orders only.

A Reason While registration as an agent is pending, the applicant can take no active role in the sale or offering of securities. However, performing research on an internal basis does not involve contact with the public in a sales effort and would be permitted. U3LO4

*A corporation's balance sheet reveals cash of $100,000, accounts receivable of $20,000, and equipment of $300,000, resulting in total assets of $420,000. The document also shows accounts payable of $100,000, long-term liabilities of $200,000, and equity of $120,000. From this information you would determine the working capital to be A) $20,000. B) $200,000. C) $320,000. D) $120,000.

A Reason Working capital is computed by subtracting current liabilities (accounts payable) from current assets (cash plus accounts receivable). In this case, it is $120,000 − $100,000 = $20,000. U10LO7

Which of the following is most likely to be excluded from the definition of an adviser under the Investment Advisers Act of 1940? A) A commercial bank that regularly handles the financial affairs of its customers B) An adviser who recommends government securities but also issues research reports on corporate securities C) A teacher who makes reference to specific securities in a course on corporate finance and accepts compensation from those who seek his advice as a result of his course D) An accountant who, as part of his practice, offers specific securities advice

A Reason: Commercial banks are regulated by the Comptroller of the Currency, not the SEC, and therefore are excluded from the definition. Once the accountant and the teacher accept compensation for advice, they lose their exclusion. If the adviser had limited advice to U.S. government securities, the exclusion would have remained intact. U1LO3

*Under the Uniform Securities Act, the Administrator may do all of the following except A) revoke a previously allowed exemption. B) issue an injunction to force compliance with an Administrator's rule. C) issue a cease and desist order without a prior hearing. D) issue a stop order to revoke the effectiveness of a registration statement.

B Reason Administrators cannot issue injunctions, but they may petition a court to issue an injunction against certain activities. An Administrator may issue a stop order to revoke the effectiveness of a registration, issue a cease and desist order without a prior hearing, and also revoke a previously allowed exemption. U5LO2

Which of the following would not be an issuer? A) A governmental agency borrowing money for short-term needs B) A corporation selling certificates of interest in a mining lease C) An investment company D) A partnership selling partnership interests

B Reason Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer. Even though the choice does not indicate how the governmental agency is borrowing, we can assume it is issuing a short-term note. U4LO2

*Which of the following does not contain an offer of common stock? A) A sale of a convertible bond B) A sale of a put option C) A sale of warrants D) A sale of a convertible preferred stock

B Reason Although the seller of a put option is obligated to purchase the underlying stock if the option is exercised, this is not considered to be an offering of that stock. In each of the other cases, the USA says that every sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer, as well as every sale or offer of a security which gives the holder a present or future right or privilege to convert into another security of the same or another issuer, is considered to include an offer of the other security. U16LO2

*You have a client who wishes to invest $100 per month into something that will give him the opportunity to share in the long-term growth prospects of the overall economy. Which of the following would probably be the most cost-efficient investment vehicle? A) An exchange-traded fund (ETF) that mimics the S&P 500 B) A no-load index mutual fund that mimics the S&P 500 C) Class A shares of a large-cap growth fund D) A fund of hedge funds

B Reason Although there is possible room to argue, we'll go with what the exam would choose. The only other logical choice is the ETF, but because each purchase involves a commission—and on $100 purchases investors don't get any real break—most experts agree that ETFs are not suitable for dollar cost averaging plans (unless the periodic investments were substantial). Although there has recently been a move to commission-free trading, including ETFs, don't assume that to be the case on the exam. U14LO8

*In general, the most common form of organization chosen by hedge funds is A) a business development company. B) a limited partnership. C) an S corporation. D) an LLC.

B Reason Among the primary reasons for hedge funds organizing as limited partnerships is that, as long as the number of investors is fewer than 100, current SEC rules do not require registration. U14LO6

*Under the Securities Exchange Act of 1934, which of the following would NOT be considered associated with XYZ Corp., a broker-dealer? A) Paula, who is on XYZ's board of directors but who has no other connection with the firm B) Robert, a client who owns 1,000 shares of XYZ's voting stock C) Arvin, one of XYZ's agents D) Brian, an XYZ vice president

B Reason An associated person of a broker-dealer includes any partner, branch manager, officer, or director of a broker-dealer, including outside directors. It also includes employees such as account executives or sales representatives who are not clerks or ministerial personnel, and anyone who controls, is controlled by, or is under common control with the broker-dealer. Being a client of a broker-dealer or owning shares of the firm's stock does not make one an associated person, unless something in the choice indicated that this ownership put Robert into a position of control. U3LO4

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) make a short-term loan to a client for the purchase of securities. 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) charge an unreasonable fee based on outstanding performance results on past recommendations.

B Reason 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. U7LO4

All of the following are exempt from state registration except A) fixed-income securities issued by a bank. B) variable annuities issued by a major insurance company. C) common stock in Mutual Savings Bank. D) fixed annuities issued by a small insurance company.

B Reason Fixed annuities are not securities, so there is no registration required. Of the other choices listed, only variable annuities are required to be registered. U4LO3

Which of the following conditions would most likely meet compliance standards of state regulators? A) At a minimum, a firm that permits use of social media sites must hold biannual training as part of its continuing education obligations. B) Both supervisory personnel and agents need to understand the difference between interactive and static content. C) Only those in a supervisory role need to recognize the difference between business and nonbusiness communications. D) Maintaining an under-the-radar system of monitoring social media use by its agents is permissible when determining compliance with NASAA's rules.

B Reason Prior to allowing associated persons to use social media for business purposes, a firm's policies and procedures must provide for personnel training and education relating to the parameters of permitted use. Both supervisory personnel and agents need to understand the difference between interactive and static content, between business and nonbusiness communications. A firm should consider requiring training in the use of social media prior to permitting use. At a minimum, a firm that permits use of social media sites must hold annual training as part of its continuing education obligations. U6LO5

Under federal law, the brochure rule requires A) delivery no later than 5 business days after the formalizing of the advisory. B) a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. C) delivery of the Form ADV Part 1 prior to entering into the advisory contract. D) delivery no later than 48 hours before entering into an investment advisory contract.

B Reason SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The form ADV Part 2A and 2B may be used as the brochure and it is the brochure that must be delivered prior to entering into the contract, not the Form ADV Part 1A. U6LO4

The Administrator can bring a case against an agent and have the court require the agent to A) resign from his current employment. B) pay back a client. C) move out of the state. D) retake an exam.

B Reason The Administrator may bring a case to court, where the agent is found civilly liable. In that case, restitution may be ordered by the court. The Administrator does not have to go to court to require the agent to retake a qualification exam. U5LO3

One of your clients, a married couple with a nine-year-old child, realizes that it is a bit late to start saving for college. The clients anticipate enrollment at age 18 and an expected need of $50,000. If they have $25,000 to invest today, using the Rule of 72, what earnings rate is necessary for them to reach their goal? A) 9% B) 8% C) 16% D) 4%

B Reason The Rule of 72 tells us the approximate rate of return required to double an investment if we know the number of years until withdrawal. Simply divide the number 72 by the number of years, and the resulting quotient is the required interest rate. In this example, dividing 72 by 9 years results in a needed rate of return of 8%. U10LO1

An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor A) the Value Line Index. B) the advance/decline line. C) the betas of the S&P 500 stocks. D) the DJIA.

B Reason The advance/decline line, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline. U12LO6

*Which of the following risk measurement tools would most likely be used to determine the degree to which a specific equity portfolio is diversified? A) Beta B) Correlation coefficient C) Duration D) Standard deviation

B Reason The correlation coefficient ranges from -1.0 to +1.0 and reveals the degree to which two or more variables relate to each other. A high degree of correlation means that the portfolio is not well diversified. Well-diversified portfolios contain some elements of negative correlation. Although a bond portfolio will frequently be diversified by including bonds of varying duration, this question specifies an equity portfolio so correlation is the appropriate choice. U10LO6

*An investor has unexpectedly received $20,000 from an old debt he had written off. This money will come in handy for a business venture planned for two years from now. Meanwhile, he would like to generate some income on the money with as little risk as possible while keeping expenses to a minimum. Which of the following recommendations is likely to be the most suitable for this customer? A) Class C shares of the XYZ High-Yield Bond Fund B) Class C shares of the ABC Investment-Grade Bond Fund C) Class B shares of the ABC Investment-Grade Bond Fund D) Class A shares of the ABC Investment-Grade Bond Fund

B Reason The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best because the customer would pay no front-end sales charge and no CDSC after a short time, probably one year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the two years of his investment. Although the Class B shares would also not have a front-end sales charge, there would be a CDSC, which if redeeming after 2 years, could be rather substantial. U14LO4

Which of the following is a method for determining the appropriate market price of a common stock based on the present value of all future dividends to be paid on that stock? A) Price/earnings ratio B) Dividend discount model C) Net present value D) Dividend payout ratio

B Reason The dividend discount model (DDM) calculates the present value of the future dividends that a company is expected to pay its shareholders. It uses that calculation to arrive at a reasonable current market value of the common stock. U12LO6

*An uncle wants to provide $500 per month in income in perpetuity to a nephew. With a 5% projected rate of return, what amount does the grandparent need to invest? A) $10,000 B) $120,000 C) $12,000 D) $100,000

B Reason The first step is to annualize the payments. $500 per month is $6,000 per year. When you divide $6,000 by 5% the quotient is $120,000. You can check backwards by simply taking 5% of each of the answer choices to see which one delivers $6,000. U10LO3

*The measurement that compares a stock's price history to the movement of a total market index for the same period is known as A) duration. B) standard deviation. C) beta. D) R-squared.

B Reason 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. U10LO4

It is not uncommon for a federal covered investment adviser to employ the services of a third-party solicitor. The Investment Advisers Act of 1940 requires the delivery of a solicitor brochure containing each of the following except A) the name of the solicitor. B) the location of the investment adviser. C) the nature of the relationship between the solicitor and the IA. D) the fact that the solicitor will receive compensation, the terms of the compensation arrangement, and indicate whether the client will pay a specific charge or a higher advisory fee because the solicitor recommended the IA to the client.

B Reason The name of the investment adviser for whom the solicitor is acting must be disclosed in the brochure, but not the location. This is a separate document from the adviser's brochure, which would contain the adviser's location, of course. U6LO4

All of the following statements regarding unit investment trusts are true except A) they do not have a board of directors. B) they do not issue redeemable securities. C) their portfolios are not actively managed. D) they do not employ an investment adviser.

B Reason The only untrue statement is that UITs do not issue redeemable securities. A UIT typically issues redeemable securities (or "units"), like a mutual fund, which means that the UIT will buy back an investor's "units," at the investor's request, at their approximate net asset value. U14LO7

*When an analyst subtracts the inventory from a company's current assets and divides the remainder by the current liabilities, the result is A) the net worth. B) the quick ratio. C) the working capital. D) the current ratio.

B Reason The quick ratio, sometimes called the acid-test ratio, is computed by taking a company's current assets minus the inventory and then dividing that by the current liabilities. U10LO7

*Under the exchange provision, within the first 24 months, a variable life policy may be converted into A) a mutual fund shares. B) a permanent form of life insurance policy. C) a variable annuity. D) a term insurance policy.

B Reason The variable life exchange provision allows a policyholder to convert the variable policy into a permanent form of life insurance policy within the first 24 months of variable policy ownership. The insurance company must use the initial contract date and cannot require proof of insurability. U15LO7

*As defined in SEC Release IA-1092, which of the following is a pension consultant? A) A person who charges a fee for advising retirees on how to maximize their pension payouts B) Persons suggesting portfolio managers to administrators of employee benefit plans C) A person who provides securities-related advice for compensation D) A person who prepares a plan for a client's future based on analyzing needs, objectives, tax situations, and resources

B Reason: Pension consultants provide various forms of investment advice to administrators of employee benefit plans. They might manage the assets or, as in this case, provide suggestions of portfolio managers. U1LO2

*Peter Smith, a prominent securities lawyer living in Connecticut, conducts his securities law practice full time in New York State. He must register as an investment adviser in New York State if A) he advises his wife, who also has an office in New York, that her investment in 15 technology stocks is too high. B) Smith's clients, none of whom are residents of New York, receive investment advice as an integral part of Smith's legal services. C) the clients of Smith's law firm are all residents of Connecticut but conduct their business with Smith in New York. D) the clients of Smith's law firm are New York residents and seek advice on the construction of trust documents that may be helpful in reducing taxes on the securities in their estates.

B Reason: Smith must register as an investment adviser in New York when or if he is offering investment advice as an integral part of his practice. Because his place of business is in New York, he must register in New York as an investment adviser, even though his clients are not themselves residents of the state. If Smith advises his wife, who also has an office in New York, that her investment in 15 technology stocks is too high, he need not register in New York because he is not charging his wife a fee for investment advice. Smith, as a securities lawyer, need not register in New York as an investment adviser when he advises clients on the construction of trust documents. U1LO3

Under the Uniform Securities Act, investment advisers will generally not be required by the Administrator to A) renew all investment advisory contracts in writing. B) meet minimum net worth requirements or post a surety bond if they do not maintain custody or do not have investment discretion over client accounts. C) promptly file a correcting amendment to any document on file with the Administrator that has become inaccurate or incomplete in any material respect. D) furnish or disseminate any information the Administrator finds is necessary to the public interest or for the protection of investors and advisory clients.

B Reason: The question asks for something that is not required by the Administrator. Under most circumstances, minimum net worth or a surety bond is only required of an adviser who either maintains custody of customer funds or securities or who has investment discretion over the account. U1LO5

*Jim is buying stock through a private placement. Under the Securities Act of 1933, which of the following statements is true? A) Jim will receive a letter stating his ownership. B) The stock need not be registered with the SEC. C) Jim must notify the SEC that he is buying private placement securities. D) The stock must first be fully registered with the SEC.

B reason Private placements are exempt transactions under Regulation D of the Securities Act of 1933 and are therefore exempt from registration. U4LO3

*Investment companies must send financial reports to shareholders A) annually. B) monthly. C) semiannually. D) quarterly.

C Reason Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report. We don't know if the exam will update for the change allowing this information to be available on the fund's website. U14LO1

*Benefits of investing in mutual funds rather than doing it yourself would include all of these except A) professional management. B) low minimum investment. C) lower expenses. D) diversification.

C Reason Mutual funds have operating costs that an individual investor would not have. But those are generally offset by the benefit of the professional management (usually the largest of those operating costs) and the ability of the fund to diversify. Furthermore, many funds will accept investments of $100 or less once the account has been opened; that is generally not economical when investing in individual securities. U14LO10

*All of the following are redeemable securities except A) mutual funds. B) variable annuities. C) REITs. D) unit investment trusts.

C Reason A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. REITs trade in the secondary markets either on exchanges or OTC. U14LO9

A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus was that long-term interest rates were about to increase sharply, which of the following actions to the portfolio would most likely be taken? A) Liquidate and begin to move into cash or cash equivalents B) Ladder the maturities C) Nothing D) Shorten the average duration

C Reason A unique feature about the portfolio of a unit investment trust is that it is fixed once it has been constructed. Therefore, it does not change in reaction to market conditions. U14LO7

*An IAR is comparing an investment in two securities by computing the net present value of each. The available funds for investment are $20,000, and the present value of choice A is $21,223, while that of choice B is $18,946. Based on this information, it would be correct to state that A) choice B would result in a capital gain. B) choice B would result in an increase in present wealth if held to maturity. C) choice A would be the more attractive choice. D) choice A would result in a capital loss.

C Reason Anytime the present value is higher than the cost of the investment, the NPV is positive and you will have made a profitable investment. Therefore, purchasing choice A would result in an increase to the investor's present wealth because buying something for $20,000 that has a present value of $21,223 gives the investor that added value. U10LO1

Which of the following statements best describes a hedge fund? A) An investment pool, generally unregistered, that, through the use of sophisticated market tools, offers investors returns that generally exceed those available elsewhere B) A closed-end investment company employing leverage through the use of debt and preferred stock financing C) A private and unregistered investment pool that accepts investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets D) An investment company, registered under the Investment Company Act of 1940, that charges higher than usual management fees and employs sophisticated investment techniques in an attempt to provide level returns during periods of market uncertainty

C Reason As of the date of this course, hedge funds are not registered with the SEC (their managers generally are) and are invariably sold in private offerings, usually under Regulation D of the Securities Act of 1933. Hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets are some of the primary techniques used by these funds. U14LO6

Which of the following debt instruments would most likely carry the lowest interest coupon? A) TSR Chemical Corporation debentures with a Standard and Poor's rating of A+ B) WVU Manufacturing Company first-lien mortgage bonds with a Moody's rating of Aa C) ZYX Railroad equipment trust certificates with a Moody's rating of Aaa D) QPO Bank with a Standard and Poor's rating of BBB

C Reason Because investors demand more compensation for taking higher risk, those debt securities with the highest ratings will generally be issued with lower coupons than those with ratings that are not as high. U13LO4

*Violations of the Uniform Securities Act carry a criminal penalty of imprisonment for up to how many years? A) 3 years B) 10 years C) 5 years D) 1 year

C Reason Conviction for willful violations of the Act or for knowingly filing a fraudulent document under the Act carries maximum penalties of 3 years in jail and/or $5,000 in fines. U5LO4

*You have a client who is researching various investment options. One of these is a security whose issuer is organized as a partnership. Most likely, this investment is A) a closed-end investment management company. B) an ETF. C) a hedge fund. D) a REIT.

C Reason For various reasons (most of them to avoid having to register), hedge funds are organized as PARTNERSHIPS U14LO6

*An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing A) short-term bonds when interest rates are low. B) long-term bonds when interest rates are low. C) long-term bonds when interest rates are high. D) short-term bonds when interest rates are high.

C Reason If an investor purchases bonds when market interest rates are high, a drop in interest rates will lead to a corresponding increase in bond value. Long-term debt instruments will fluctuate to a greater degree than those with short-term interest rates. Thus, long-term debt offers the greater chance at gain. U13LO11

*Which of the following would be least likely to meet the cybersecurity definition of a covered account? A) A customer with an automobile loan at a bank B) An account with a registered investment company that permits the owner to wire funds to a third party C) An account held by a company listed on the NYSE D) A customer with a margin account at a broker-dealer

C Reason In general, business accounts are not included in the term covered account. There could be an exception for a sole proprietorship or other small business where there is a reasonably foreseeable risk to customers due to the inability of the customer to provide adequate internal safeguards. That is unlikely to be the case with a listed company. U7LO7

Elizabeth has the opportunity to buy 1,000 shares of Clear Skies Satellite at $50 per share, with an expected rate of return of 9%, or invest in an equivalent dollar amount of Treasury bills with a yield of 5%. If Clear Skies Satellite only returns 2%, her opportunity cost is A) 5%. B) 2%. C) 3%. D) 4%.

C Reason Opportunity cost is the return given up as a result of a specific investment selection. In this example, Elizabeth chose the investment with the potentially higher return by giving up the opportunity to invest in Treasury bills that yield 5%. In this case, her opportunity cost is 3%, the difference she gave up in order to invest in an alternative investment. U11LO3

When analyzing a preferred stock, an investment adviser would give the most credence to A) the company's short-term debt obligations. B) earnings per share. C) the ability of the company to pay the stated dividend. D) book value per share.

C Reason Preferred stock is purchased primarily as an income security based on its fixed dividend. Therefore, any analysis would tend to place the ability of the issuer to meet that dividend paramount. Earnings per share and book value per share are computations relevant to common stock only. U12LO2

*A) 15-year 7% bond trading at par B) 15-year 8% bond trading on a 7.90 basis C) 15-year zero coupon bond trading on a 7.80 basis D) 15-year 8% bond trading on an 8.10 basis

C Reason Prices of zero coupon bonds tend to be more volatile than prices of interest-bearing bonds because of their longer duration. U13LO11

The statistical measurement that indicates how much an investment's returns have fluctuated, compared to its average return, over a period of time is known as A) correlation. B) beta. C) standard deviation. D) alpha.

C Reason Standard deviation is the statistic that indicates how much an investment's returns have fluctuated, compared to its average returns, over a given period of time. An investment with a high standard deviation tends to have a higher level of risk than an investment with a low standard deviation. U10LO5

The Administrator of a state's securities department strongly believes that the registration statement for a security contains a substantial amount of misleading information and that investing in the security is likely to cause immediate and egregious harm to its investors. Under the following circumstances, the Administrator may A) revoke the registration statement, denying the applicant a hearing for an unlimited amount of time. B) not summarily revoke or deny the registration statement until a hearing takes place. C) issue a stop order denying or revoking the registration statement. D) revoke or deny the registration statement and must schedule a hearing within 30 days of issuing the order.

C Reason The Administrator may issue a stop order denying or revoking the registration statement, but no stop order may be entered (unless in a summary proceeding) without (1) appropriate prior notice to the applicant or registrant, the issuer, and the person on whose behalf the securities are to be or have been offered, (2) opportunity for hearing, and (3) written findings of fact and conclusions of law. U5LO2

*Which of the following sales would be exempt from the antifraud provisions of the Uniform Securities Act? A) Sale of an exempt security B) Sale of a nonexempt security C) Sale of an index annuity D) Sale of an exempt security in an exempt transaction

C Reason The antifraud statutes of the USA apply only to securities. Index annuities are not a security. However, the sale would be subject to the antifraud provisions of the state insurance code. U4LO4

*All of the following factors would be considered if an investor was trying to minimize the market risk of investing in a particular stock except A) the period of time the investment can be held. B) the timing of the purchase of the stock. C) the earning power of the company. D) the price behavior of the stock.

C Reason The earning power of the company is not a measurement of the stock market (market risk), while the other factors here are. That is a fundamental strength and protects against business or financial risk. Because market risk is a systematic risk, some of the ways to protect yourself are by being able to hold the security for a long period (long time horizon) or by timing your purchase when the market is at or near a bottom. Obviously, stocks whose trading pattern indicates wide fluctuations in market price are going to have greater market risk, so staying away from them will reduce the overall market risk of the portfolio. U11LO1

*A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A) $8.57 B) $7.80 C) $8.30 D) $8.42

C Reason The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge. U14LO3

*If an investment adviser representative is engaged in criminal activity while violating a rule under the Uniform Securities Act, but had no knowledge of the rule violated, the maximum penalty that may be imposed is A) a 3 years in prison and a fine of 3 times the amount of the loss. B) a $5,000 fine and 3 years in prison. C) a $5,000 fine. D) a $10,000 fine and 2 years in prison.

C Reason The maximum penalty for criminal violations is $5,000 and/or 3 years' imprisonment. However, no prison sentence can be imposed if the person can prove he had no knowledge of the rule being violated. U5LO4

*Ms. Libby Ralling sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11¼% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Ralling's concerns about the issue could include A) the new barges might sink, and the collateral would be gone. B) nothing, because the bonds will be first in liquidation. C) the issue may be junior-in-lien to another security issue. D) the company might demand that she accept common stock for her bond.

C Reason The word "subordinated" is the key to the question. A subordinated bond has other debt holders ahead of it in the event of liquidation. The barges do not serve as collateral because the bonds are identified as debentures, and having to convert to common stock is not a threat because she is the one that will exercise the conversion privilege if she desires. U11LO4

A bond is trading at a premium. Rank the following in descending order of yield. A) Yield to maturity, current yield, nominal yield B) Current yield, nominal yield, yield to maturity C) Nominal yield, current yield, yield to maturity D) Current yield, yield to maturity, nominal yield

C Reason Trading at a premium means the bond is selling above its par (face) value. This indicates that current interest rates are lower than when the bonds were issued (as interest rates go down, bond prices go up). Ranking in descending order means from the highest to the lowest. The nominal (coupon) yield is the highest, followed by the current (annual income) yield, then the yield to maturity (basis). U13LO10

*You inform a customer that you are not allowed to solicit an order for a stock but will accept that customer's buy order if placed. This is A) an offer to purchase. B) an unsolicited transaction. C) an offer to sell. D) an offer to sell only if it is accepted.

C Reason Under the Uniform Securities Act, the term "offer" is the solicitation of an offer. In this example, the agent is soliciting an offer from the customer to buy a security. A solicitation is considered to have occurred even if the customer fails to act on the solicitation. U5LO1

If a state-registered investment adviser moves to another location, the Administrator must be notified A) within 30 days. B) within 15 days. C) promptly. D) within 7 days.

C Reason: An address change must be communicated promptly to the Administrator. The Uniform Securities Act does not define promptly; that is simply the correct answer. U1LO5

*An investor has purchased an index annuity with a participation rate of 80%, a cap of 10%, and a minimum guaranteed return of 3%. At the end of the annuity period, the index has shown 9% annual growth. What will be the annuitant's annual return? A) 8% B) 2.7% C) 9% D) 7.2%

D Reason The annuitant will be credited with the participation rate multiplied by the index's return, that is, 80% × 9%, which is 7.2%. U15LO3

*As defined in the Uniform Securities Act, the term agent A) means any person engaged in the business of effecting transactions in securities for the account of others or for his own account. B) means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. C) means any individual employed by or associated with an investment adviser that is registered or required to be registered under the Act and who makes any recommendations or otherwise renders advice regarding securities. D) means any person who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities.

D Reason Agents can only be individuals (the term person is too broad) and they represent broker-dealers or issuers as they attempt to engage in securities transactions. The phrase "in the business" would be referring to a broker-dealer, and those working for investment advisers are IARs, not agents. U3LO3

An individual has been employed by a broker-dealer to solicit new subscriptions for the firm's free monthly stock market report. The individual is paid a salary plus bonus based on his success rate with signing up subscribers. Under the Uniform Securities Act, this person would A) only be allowed to contact existing clients of the broker-dealer. B) have to be registered as an agent of the broker-dealer. C) have to be registered as an investment adviser representative. D) not have to be registered as an agent of the broker-dealer.

D Reason Agents of broker-dealers are in the business of securities-related transactions on behalf of clients of the firm. A free-market report is not a security, so this individual is not soliciting securities business. U3LO4

*Under the Uniform Securities Act, the term broker-dealer would include A) an issuer distributing its own common stock offering. B) a trust company. C) an agent registered under the Act who from time to time sells stock from personal inventory. D) a person with no office in the state who directs offers to no more than 5 individual residents of the state in any 12-month period.

D Reason Although a person has no office in the state, offers are directed to residents of the state. Under the USA, this person is defined as a broker-dealer. There is no de minimis exemption for broker-dealers. A person is exempt from the definition of broker-dealer if there is no office in the state and offers are directed to institutional clients or existing individual clients that are not residents of that state. The agent is merely selling his own stock as would any other individual; that does not make one a broker-dealer. U3LO2

*Which of the following is defined as a security under the Uniform Securities Act? A) Commodity futures contracts B) A guaranteed, lump-sum payment to a beneficiary C) Fixed, guaranteed payments made for life or for a specified period D) An investment contract

D Reason As a result of the Howey decision, investment contracts are defined as (and often serve as a synonym for) a security under the Uniform Securities Act. A guaranteed, lump-sum payment to a beneficiary is an endowment policy excluded from the definition of a security. Fixed, guaranteed payments made for life or for a specified period are fixed annuity contracts not defined as securities. Commodity futures contracts and the commodities themselves are not securities. U4LO1

*Which of the following is NOT classed as a security under the Uniform Securities Act? A) Promissory notes B) Options on stocks C) Bonds issued by a foreign country D) Heating oil futures

D Reason Commodity futures on items such as gold, silver, wheat, heating oil, and pork bellies are not securities. Options on stocks and on stocks and bonds are securities. U4LO1

*An investment adviser's advertising is permitted to state that A) the Administrator has approved of the adviser's qualifications. B) all our employees who render advice are RIAs. C) we have developed a charting system for timing the market that makes investing simple for anyone. D) we are offering our monthly stock market report free of charge for the next 6 months to the first 100 people who email us their name and address.

D Reason If, in fact, the offer is free, this is a permitted statement. The initials RIA are prohibited, as is making any kind of statement relating to approval of qualifications by the Administrator. Any advertisement mentioning that any graph, chart, formula, or other device being offered can in and of itself be used to determine which securities to buy or sell, or when to buy or sell them must always describe the limitations and difficulties of using that chart or formula. U6LO5

*According to the Uniform Securities Act, each of the following is a security except A) a U.S. Treasury bill. B) an interest in a condominium project with a rental pool. C) a limited partnership in an oil and gas exploration program. D) a contract in soybean futures.

D Reason Interests in a condominium complex that has a rental pool feature, U.S. Treasury bills, and limited partnership interests in oil and gas exploration programs are securities under the USA. The USA excludes certain financial instruments from the term "security," such as term and whole insurance policies, commodity futures contracts, and collectibles. U4LO1

*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 Highwater Securities is registered in all 50 states, Sharon must also be registered in all of them. C) 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. D) Sharon must be registered in State X in order to accept the order.

D Reason Regardless of whether the security is exempt or the transaction is exempt, one must be licensed in any state that 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. U3LO5

How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940? A) Semiannually B) Monthly C) Quarterly D) Annually

D Reason Registered investment companies are similar to other publicly registered entities in that an annual audited report must be filed with the SEC. U14LO1

In response to an evolving marketplace, the SEC, through Release IA-1092, expanded the coverage of the definition of investment adviser to include A) life insurance agents and pension consultants. B) broker-dealers offering wrap fee programs and financial planners. C) broker-dealers offering wrap fee programs and life insurance agents. D) financial planners and pension consultants.

D Reason SEC Release IA-1092 added financial planners, pension consultants, and sports and entertainment representatives to the list of potential IAs. Unless the life insurance agent is offering investment advice, the agent does not meet the definition of investment adviser. The release did not address wrap fee programs because the exclusion for broker-dealers is part of the Investment Advisers Act of 1940; once special compensation in the form of wrap fees is received, the exclusion is lost. U1LO2

*Which of the following would be reviewed in an effort to reduce a client's exposure to default risk of a debt security? A) Beta B) Investment return compared to the inflation rate C) Earnings history D) S&P rating

D Reason Standard and Poor's and Moody's are both rating services that rate an issuer's bonds. These ratings give an investor an indication of likelihood that a company will be able to pay its debt service. To lower the investor's exposure to credit risk, you should raise the average rating in his portfolio. U13LO4

*Your father has been an advisory client of yours for several years. Unfortunately, he needs a medical procedure that is not covered by insurance and, rather than liquidating a portion of his portfolio during a down market, comes to you asking for a $25,000 loan. Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, A) the loan would never be permitted. B) the loan would be permitted because it is for a medical need. C) the loan would be permitted because of the family relationship. D) the advisory contract with your father would have to be terminated before you would be permitted to make the loan.

D Reason The NASAA Policy is that loans to clients from a securities professional are prohibited unless that person is in the lending business. The only practical time that applies is a broker-dealer lending money on margin accounts. However, there is no restriction on lending to or borrowing from persons who are not clients. So, terminate the client/adviser relationship with your Dad, lend the money, and pray the procedure is successful. U7LO4

According to the Uniform Securities Act, which of the following is NOT an exempt transaction? A) The executor of an individual's estate liquidates individual stocks and invests the proceeds in a money market account at a bank. B) Bonds with a rating below investment grade are sold to the ABC High-Yield Bond Fund. C) A broker-dealer sells an entire new issue to 15 bank clients. D) A broker-dealer makes an offer of private placement securities to 15 individual investors within a 30-day period.

D Reason The Uniform Securities Act defines a private placement as an offering made to no more than 10 noninstitutional investors in a 12-month period. If a private placement complies with this restriction, it is an exempt transaction. Transactions with fiduciaries, and institutions, such as banks and investment companies, are exempt. U4LO3

*One of your clients owns an equity index annuity with a participation rate of 85% and a cap of 11%. During the past 12 months, the index used in the computation showed a gain of 12.80%. As a result, the client's account value was credited with a gain of A) 12.80%. B) 9.35%. C) 11.00%. D) 10.88%.

D Reason The client is entitled to participate in 85% of the 12.80% gain with a maximum (capped) limit of 11%. Computing 85% of 12.80% gives us 10.88%, which is below the 11% cap. U15LO3

*The Uniform Securities Act states that anyone who represents an issuer in effecting transactions between the underwriter and the issuer A) must be registered as an investment adviser. B) must be registered as an administrator. C) must be registered as an agent. D) is excluded from the definition of agent.

D Reason Under the Uniform Securities Act, a person representing an issuer in securities transactions between an underwriter and an issuer is not deemed an agent and is exempt from the agent registration requirements of the Act. U3LO4

*When your client mentions an article to you that claims an investment the client is following has good marketability, you could explain that means the investment has little A) interest rate risk. B) business risk. C) inflation risk. D) liquidity risk.

D Reason When something is marketable, it is easily bought and sold without great price disruption. This is a way of saying that the investment has good liquidity. U11LO2

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