Series 66- Unit 1 & 2
Which of the following would most likely limit the amount of interest earned on an index annuity? A) The cap rate B) The participation rate C) The CDSC D) The annuity reset rate
A Most index annuities have a cap rate. That represents the maximum return that can be credited to the annuity, regardless of the performance of the index. Yes, the participation rate does affect how much can be credited, but, if there is no cap, there is theoretically no limit on the earnings. This is an example where you have to select the best answer. Reference: 8.1.2.3 in the License Exam Manual
The NASAA Model Rule dealing with business continuity plans is NOT concerned with A) office relocation in the event of temporary or permanent loss of a principal place of business B) ensuring that the investment adviser continues to generate profits during a business interruption C) assignment of duties to qualified individuals in the event of the death or unavailability of key personnel D) the protection, backup, and recovery of the investment adviser's books and records
B Although it would be nice if the IA could continue to be profitable, that was not NASAA's concern when drafting this Model Rule. All of the other choices are important concerns. Reference: 3.24 in the License Exam Manual
An agent of a broker-dealer is currently doing business in one state and would like to conduct business in another state. When checking with the firm's compliance department, the agent would be told which of the following? A) No registration is necessary in the other state provided the agent's activities are limited exclusively to effecting transactions in certain exempted securities. B) If the agent is a partner, officer, or director and held that position at the time the broker-dealer was registered in that state, the individual need not register separately. C) No registration is necessary if no commission or other remuneration is paid or given directly or indirectly. D) Registration is required only if an offer is directed, accepted, and paid for in that state.
B Both the broker-dealer and the agent must be registered in the state where business is to be transacted, unless they both qualify for an exemption from registration in that state (e.g. they have no place of business in the state and their only clients are institutions, issuers, or other broker-dealers). At the time the broker-dealer is registered, officers, directors, or partners of the firm who act as agents will be automatically registered as agents. Reference: 2.3.1.2 in the License Exam Manual
An investment adviser representative may share in the profits and losses of a customer's account: A) as long as both the customer and the representative's employer agree and the sharing is done based on proportionate contributions to the account. B) under no conditions. C) if the investment adviser representative deducts the advisory fee charged the customer from any profits earned. D) as long as a written contract is executed between the investment adviser and the client.
B Investment adviser representatives are not allowed to share in the capital appreciation or depreciation of their customers' accounts in the same manner as are agents. Reference: 2.11.26.3 in the License Exam Manual
MT Securities is a broker-dealer registered in 42 states. MT Securities makes a market in over 100 different stocks and participates in the underwriting of approximately 22 IPOs per year. Which of the following actions would be prohibited under NASAA's Statement of Policy on Dishonest and Unethical Business Practices of Broker-Dealers and Agents? A) Adding to its inventory of a stock in which it makes a market, hoping to gain from market appreciation. B) Acquiring shares of an IPO as part of the underwriting syndicate and holding a small portion for the firm's investment account, hoping to gain from market appreciation. C) Purchasing shares of a security in which it makes a market from a client at one price and then reselling those shares to another client at a higher price. D) Purchasing shares of an IPO from the issuer and then reselling those shares to the public at a higher price. Explanation
B Members of the underwriting syndicate on an IPO are prohibited from withholding shares of that issue in their own accounts; they must make a bona fide public offering. As a market maker, the firm is permitted to adjust the size of its inventory to take advantage of market conditions. All underwriters purchase new issue shares at one price and then resell at the public offering price, and market makers buy at the bid and sell at the ask. Reference: 2.11.18 in the License Exam Manual
Your 55-year-old client owns a nonqualified variable annuity. He originally invested $50,000 four years ago. The annuity has grown to value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? A) $4,500.00 B) $4,000.00 C) $3,000.00 D) $0.00
B Since this is a nonqualified annuity (with no tax deduction), the client pays taxes only on the growth portion or, in this case, $10,000. The tax on this amount is $3,000. However, because the client is not yet age 59-½ when making the withdrawal, he also pays a 10% tax penalty, or $1,000. This makes a total of $4,000 tax and tax penalty paid on the random withdrawal. Reference: 8.1.5.1 in the License Exam Manual
A sales agent who is only registered in Nebraska works for a broker-dealer that is registered in all 50 states. A customer who is a resident of North Dakota calls the representative in Nebraska and offers to purchase securities. Under the Uniform Securities Act, the agent should: A) accept the order because her broker-dealer is registered in all 50 states. B) accept the order because she received it in Nebraska. C) reject the order because she is not registered in North Dakota. D) accept the order because it is unsolicited
C Both the broker-dealer and the agent must be registered in each state where they plan to do business. Although the broker-dealer is properly registered, in order for the agent to accept the order, she must be registered in North Dakota. Even though the order is unsolicited, making this an exempt transaction, agents must still be licensed in the state where the client is a resident. Reference: 2.3.2.3 in the License Exam Manual
The Uniform Securities Act requires that broker-dealers and investment advisers maintain certain records relating to their business operations. If the firm wished to upgrade to a modern system, such as disk storage: A) they must keep their records in paper form. B) they must obtain approval from the Administrator prior to determining their method of record retention. C) they could do so if the system met certain requirements including that the information on the disk could not be altered. D) the most modern form currently permitted is microfilm or microfiche.
C Computer disk storage is acceptable provided that a printed copy can be readily obtained and the information on the disk cannot be overwritten. Reference: 3.8.2 in the License Exam Manual
Which of the following qualifies under the Section 28(e) safe harbor provisions for soft-dollar compensation? A) Reimbursement for travel expenses incurred to attend a seminar on the latest compliance trends for registered investment advisers. B) Providing access to the broker-dealer's computerized accounting system, allowing the investment adviser to prepare its financial statements. C) Clearance and settlement services provided by the broker-dealer. D) Rent-free use of unused space in the broker-dealer's office.
C Section 28(e) of the Securities Exchange Act of 1934 provides a safe harbor for research and brokerage services provided in exchange for directed transactions. Clearance and settlement of trades is a qualifying brokerage service. Reference: 3.18 in the License Exam Manual
When discussing the purchase of a scheduled premium variable life insurance policy with a client, it would be CORRECT to state that: A) you will receive a statement of your death benefit no less frequently than semiannually. B) premiums will vary based upon performance of the separate account. C) by surrendering the policy, its cash value may be obtained. D) if a policy loan exceeds the policy cash value, the deficiency must be remedied within ten business days to keep the policy from lapsing
C Surrender of the contract requires the insurance company to pay out its cash value. Death benefit is adjusted annually. Reference: 8.2.4 in the License Exam Manual
An agent employed at First XYZ Securities produces his own research reports and provides them to a select group of personal clients. The agent has written permission from his employer to engage in this activity, provided the time spent on the project is conducted after working hours. Under the Investment Advisers Act of 1940, if the agent does not charge fees for the research but receives commissions from his employing broker-dealer for trades executed through the firm, A) the broker-dealer must register as an investment adviser, and the agent as an investment adviser representative B) the agent must register as an investment adviser representative C) neither the agent nor his employing broker-dealer need register as an investment adviser D) the agent must register as an investment adviser, because the research is being done after hours
C The exclusion from the definition of investment adviser is lost only when an agent (or broker-dealer) receives special compensation for rendering investment advice. In this case, the agent is only receiving commissions when the clients make a trade. If there are no trades, there is no compensation for the advice. It is only when the compensation is not transaction-based that it becomes special. Reference: 3.2.2 in the License Exam Manual
Which of the following persons is required to register with the SEC as a federal covered adviser? A) A publisher that gives incidental investment advice only. B) A person that manages assets of $95 million. C) A person that gives advice to registered investment companies only. D) A person who gives advice only related to U.S. Government securities
C Persons that act as advisers to investment companies registered under the Investment Company Act of 1940, regardless of their size, are required to register with the SEC. At $100 million, advisers are eligible to register with the SEC; at $110 million, they must. Persons who only give advice related to U.S. government securities are specifically excluded from the definition of investment adviser under the Investment Advisers Act of 1940. Reference: 3.3.2 in the License Exam Manual
If an investor was of the opinion that the market was going to have a bad day, to maximize that investor's gains, you might recommend A) a leveraged ETF B) selling a call option on the S&P 500 Index C) an inverse ETF D) an inverse leveraged ETF
D An inverse ETF should go up if the market goes down. Adding leverage to it means moving by a factor of 2x or 3x, so to maximize the potential gain, we combine leverage to the inverse and suggest the inverse leveraged ETF. Reference: 7.1.10 in the License Exam Manual
After an investigation, the Administrator wishes to have the registration of a broker-dealer revoked. In order to do so, all of the following are true EXCEPT A) the broker-dealer has a right to a hearing B) the Administrator must be able to point to specific facts of law violated by the broker-dealer C) an appeal may be filed within 60 days of the final order D) the broker-dealer may elect to cancel its registration
D Cancellation is a form of non-punitive termination and cannot be employed once an investigation has begun. Reference: 2.15.3 in the License Exam Manual
A broker-dealer registered in multiple states must meet the record retention requirements of: A) the state with the most stringent requirement. B) the state where the b/d is incorporated. C) the state where the principal office of the broker-dealer is located. D) the SEC.
D One of the effects of the NSMIA was to establish the pre-emption of federal law over state law. A broker-dealer registered in multiple states is going to be registered with the SEC as well. NSMIA amended the Securities Exchange Act of 1934 (the 34 Act) to add section 15(h)(1) which reads as follows: "No law, rule, regulation, or order, or other administrative action of any State or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title." However, had this question been dealing with an investment adviser registered on the state level, then it would have been the requirements of the state where the principal office of the adviser is located. Reference: 2.4.5.1 in the License Exam Manual
Which of the following statements is CORRECT regarding an unsolicited trade in an unregistered nonexempt security? A) The transaction is exempt if the broker-dealer does not maintain an office in the state from which the order is received. B) It is only an exempt transaction if it is an order to buy; orders to sell an unregistered, nonexempt security would not be an exempt transaction. C) The Administrator may, by order, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period. D) The Administrator may, by rule, require that the customer acknowledge, upon a specified form, that the sale was unsolicited and that a signed copy of each such form be preserved by the broker-dealer for a specified period.
D The USA specifically grants the Administrator the authority to make a rule requiring written acknowledgement of unsolicited orders be recorded on a designated form. It is important for you to understand the difference between a rule and an order. Rules apply to everyone; orders apply to a specific broker-dealer. The Administrator could not require one broker-dealer to keep these forms but not another. Reference: 2.8.2 in the License Exam Manual
A registration statement may be amended after its effective date so as to change which of the following? A) Changes may not be made by amendment; filing of a new registration statement is required. B) The underwriter's discounts and commissions. C) The public offering price. D) The number of shares to be offered.
D The Uniform Securities Act permits filing an amendment to an existing registration increasing the number of shares to be offered and sold, if the public offering price and underwriter's discounts and commissions remain unchanged. Reference: 2.7.3.1 in the License Exam Manual
Question ID: 635961 Which of the following investments is the most liquid? A) Oil drilling limited partnership interest B) Common stock in a small oil drilling corporation that is quoted on the OTC Link C) Municipal revenue bond issued by a township D) Long-term municipal bond fund
D The long-term municipal bond fund is the most liquid because it is a mutual fund (a redeemable security), and the investor is assured of a buyer that will exchange money for the redeemed fund shares within seven days of the redemption request. Municipal bonds of a township, especially those that are from extremely small issuers, may have thin markets where sellers have difficulty finding willing buyers. There is not an active secondary market for reselling interests in limited partnerships. Stock of a small corporation that trades on the OTC Link (formerly known as the "Pink Sheets") may also have a thin market. Reference: 10.2.3 in the License Exam Manual
Anyone who represents an issuer in effecting transactions between the underwriter and the issuer: A) must be registered as an agent. B) must be registered as an administrator. C) must be registered as an investment adviser. D) is excluded from the definition of agent under the Uniform Securities Act.
D 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. Reference: 2.3.2.2.2 in the License Exam Manual
One of your clients invested $10,000 into a mutual fund. The client elected to reinvest all dividends. As a consequence of this: A) the dividends will be taxed as capital gains once the shares are liquidated. B) the reinvestments will purchase shares at a discount from the NAV. C) taxes are deferred until those shares are redeemed. D) the investor's basis is increased by the amount of the reinvested dividends.
D Since the reported dividends are taxed each year, when the shares are ultimately liquidated, they have already been taxed. So, the investors cost basis is increased by the amount of the reinvestment. Reference: 7.1.4 in the License Exam Manual
Which of the following statements are TRUE? I.When an investment adviser representative begins or terminates employment with an adviser registered under the USA, only the investment adviser must notify the Administrator. II.When an investment adviser representative begins or terminates employment with a federal covered adviser, only the investment adviser representative must notify the Administrator. III.When an agent of a broker-dealer leaves the firm, only the broker-dealer must notify the Administrator. IV.When an investment adviser representative or a registered agent of a broker-dealer terminates employment, notice must be given to the Securities and Exchange Commission.
I & II When an investment adviser representative begins or terminates employment with a state registered IA, the employing investment adviser must promptly notify the Administrator. In the case of a federal covered IA, only the IAR gives notice to the Administrator. However, when an agent of a broker-dealer begins or terminates employment, both the agent and the broker-dealer must promptly notify the Administrator. Notice to the SEC is not required. Reference: 3.7.3 in the License Exam Manual
The Uniform Securities Act considers which of the following to be investment advisers subject to registration in the state? I.An adviser with no place of business in the state who advises wealthy individuals in the state on a fee basis only II.An adviser with a place of business in the state whose total fee income in the state amounts to $150 III.A person with a place of business in the state who only provides advice on fixed annuities IV.An adviser with a place of business in the state who only provides advice to open-end investment management companies registered under the Investment Company Act of
I & II Unless the adviser is federal covered, any adviser with a place of business in the state, no matter to whom the advice is sold, is required to register with the state. An adviser with no place of business in the state is only exempt if the advice is given to certain institutional type clients, such as insurance companies and banks, not individuals, wealthy or not. Since fixed annuities are not securities, advising on them does not require registration. Remember, if any of your clients are registered investment companies, you must be a federal covered adviser making registration with state non-applicable. Reference: 3.4 in the License Exam Manual
Which of the following statements concerning hedge funds are TRUE? I.Purchasers of hedge funds are generally required to be accredited investors. II.Short sales by the fund are not allowed. III.It is not uncommon for there to be a lock-up period that may last for as long one year or even longer. IV.It would be unusual for the fund managers to have an ownership interest in the fund.
I & III Purchasers of hedge funds are usually required to be accredited investors. Hedge funds often have high liquidity risk due to the lock-up provision which can restrict an investor's ability to liquidate the position. An advantage of hedge funds is their ability to sell securities short during bear markets, adopt risky arbitrage strategies, and otherwise take direct steps to maximize returns in both up and down markets. In almost all cases, the fund managers have a significant ownership position in the fund, or as the phrase goes, they have "skin in the game." Reference: 10.1 in the License Exam Manual
ABC Securities is a broker-dealer registered with the SEC and domiciled in Missouri. ABC Securities would not be defined as a broker-dealer in Nebraska under the Uniform Securities Act if it had no offices in Nebraska and: I.its only clients were insurance companies. II.it had contact with fewer than 6 Nebraska residents in any 12-month period. III.its only solicitation of Nebraska residents was through radio advertisements originating in Missouri but received in Nebraska. IV.it occasionally engaged in firm commitment underwriting with issuers based in Nebraska.
I & IV A broker-dealer with no office in the state is not defined as a broker-dealer in that state if its only business is with institutions, other broker-dealers, and issuers when engaged in underwriting their securities. There is no de minimis exemption, and any solicitation of individuals into the state, whether in person or by radio, television, or any publication, requires registration in the state. Reference: 2.3.1.1.1 in the License Exam Manual
Question ID: 632694 XYZ Securities, Inc., a FINRA member broker-dealer, is registered in all 50 states. XYZ has its principal office in New York and a branch office in Arizona. If the Utah Administrator wished to examine certain of XYZ's financial records, the Administrator: I.could do so during normal business hours without prior notice. II.can only examine those records located in the state of Utah. III.could ask the New York Administrator to perform the examination. IV.could ask FINRA to perform the examination.
I,III, IV If a broker-dealer is registered in his state, the Administrator can examine that firm's books and records during normal business hours without prior notice. To minimize expenses, Administrators usually ask the Administrator of the state in which the broker-dealer has its principal office to ask on their behalf. Alternatively, the Administrator may call on an SRO like FINRA to examine one of its member firms on behalf of the Administrator. Reference: 2.14.2 in the License Exam Manual
An agent discovers that he has sold a customer an unregistered, nonexempt security that he thought was exempt. The broker-dealer offers to buy it back on behalf of the agent. Under the Uniform Securities Act: I.a customer rejecting the offer within 30 days forfeits the right to sue. II.this is legal and is called rescission. III.the offer also must include interest. IV.this cannot be done under any circumstances.
II & III Provided the agent sold the security with no intent to defraud, rescission may be offered. Rescission is the return of the customer's money, plus interest, less any income received from the investment. The customer has 30 days to accept or reject the offer. After that, all rights of recovery are forfeited. Reference: 2.15.1.4 in the License Exam Manual
Federal covered securities, as defined under the Uniform Securities Act I.must be registered with the SEC before they can be offered in the state II.must be registered in the state before they can be offered within the state III.include shares of an investment company registered with the SEC under the Investment Company
III It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are not required to be separately registered in each state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings. Reference: 2.6.2 in the License Exam Manual
Under the Securities Exchange Act of 1934, the SEC is granted the power to regulate the activities of: I.custodian banks. II.federal covered investment advisers. III.securities information processors. IV.transfer agents.
III & IV Securities information processors (SIPs) and transfer agents are regulated by the SEC under powers granted by the Securities Exchange Act of 1934. The power to regulate federal covered investment advisers is found in the Investment Company Act of 1940 and the NSMIA. Reference: 1.6.2.5 in the License Exam Manual
The Investment Advisers Act of 1940 requires that investment advisers make certain disclosures to their customers through the delivery of the adviser's brochure. However, there are instances where the Act grants an exemption if the client is I.a broker-dealer II.an insurance company III.an investment company IV.a person receiving impersonal advice for which the annual fee is less than $500
III & IV There are two exemptions from the brochure rule. The first is if the client is an investment company. The other is if the advice being rendered is impersonal and the charge is less than $500 ($500 as well under the USA) per year. Reference: 3.10.3.4 in the License Exam Manual
Under the NASAA Model Custody Rule, an investment adviser would be permitted to take or have custody of any securities or funds of any client if: A) customer permission was obtained prior to entering into the contract. B) notification was given to the Administrator that he has or may have custody and custody was not prohibited by that state's rules. C) permission was obtained from the Administrator and custody was not prohibited by that state's rules. D) the IA maintained adequate net worth or a surety bond.
It is unlawful for any investment adviser to take or have custody of any securities or funds of any client if 1.The Administrator, by rule, prohibits custody; or 2.in the absence of rule, the investment adviser fails to notify the Administrator that he has or may have custody. It is true that there is a minimum net worth or bond required, but that is not part of NASAA's Custody Rule - those requirements are found in Model Rule 202(d)-1, NASAA's Minimum Financial Requirements For Investment Advisers. Reference: 3.11 in the License Exam Manual
