STC - Test 9

The Uniform Securities Act considers which of the following to be an investment adviser representative (IAR)? 1. A CPA with an office in a state who charges a fee for advice that is more than just incidental to his profession 2. A clerical employee of an advisory firm that has a place of business in the state 3. An officer or director of a federal covered adviser who has clients in a state, but has no office in that state 4. A CPA who gives occasional advice in connection with his tax service, but charges no additional fees

1. A CPA with an office in a state who charges a fee for advice that is more than just incidental to his profession According to the Uniform Securities Act, an individual who solicits, sells, or negotiates investment advisory services is defined as an investment adviser representative (IAR). The rule excludes any person serving in a clerical or administrative position or any employee of a federal covered adviser who does not have an office in the state. Professionals (lawyers, accountants, teachers, and engineers) qualify for the exemption if their advice is incidental to their profession and no additional fee or charge is assessed for the advice.

Mirage Adviser, a registered investment adviser, receives referrals from Ted, a retired businessman. Mirage gives Ted $500 for every client he refers who opens an account with Mirage. Which of the following documents must Mirage's personnel collect from any client Ted refers who opens an account with them? 1. A signed and dated acknowledgment that the client received Mirage's Brochure and a separate solicitor's disclosure document from Ted 2. A copy of the contract that the client signed with Ted 3. Mirage's Form ADV Part 2 4. A copy of Ted's driver's license or other identification

1. A signed and dated acknowledgment that the client received Mirage's Brochure and a separate solicitor's disclosure document from Ted An unaffiliated solicitor who receives cash compensation for referring clients to an investment adviser must furnish these clients with both the investment adviser's Brochure and a separate written disclosure document. The separate disclosure document describes the terms of the solicitor's arrangement with the investment adviser including the compensation that the solicitor receives for referrals. The adviser must receive a signed and dated acknowledgment from the client confirming receipt of the adviser's Brochure and the solicitor's disclosure document. The acknowledgment must be collected before the client enters into a contract to retain the adviser's services or at the time this agreement is entered into.

A corporate bond is purchased at its par value of $1,000 and later sold at a discount. This would be indicative of which of the following risks? I. Opportunity risk II. Credit risk III. Currency risk IV. Interest-rate risk 1. I only 2. II and IV only 3. III only 4. I and III only

2. II and IV only The most likely the reason for the bond's price decline is that interest rates have risen. The risk of interest rates moving against a bond investor is referred to as interest-rate risk. Another possible explanation for the bond losing value is that its credit rating fell (credit risk).

What's net present value? 1. A way to evaluate investments using cash inflows and outflows, as well as a discount rate. 2. A way to evaluate investments using past pricing trends, including moving average prices. 3. The discount rate that makes the present value of an investment's cash flows equal to the investment's market value. 4. A measurement of the efficiency of a stock portfolio, comparing the portfolio's risk-adjusted return with the portfolio's risk.

1. A way to evaluate investments using cash inflows and outflows, as well as a discount rate. Net present value (NPV) is a way to price or value an investment. NPV takes the present value of an investment's cash inflows (e.g., future dividends) and deducts the present value of the investment's outflows (e.g., purchase price). In order to calculate the present value, a discount rate is needed.

All of the following are paid compensation for giving investment advice. Under the Investment Advisers Act, which one is not provided with a general exemption from the definition of an investment adviser? 1. An agent for an athlete 2. A publisher 3. An accountant providing incidental investment advice 4. A trust company

1. An agent for an athlete Any person in a profession that does not have an exclusion from the definition of an investment adviser and who meets the three-prong test of SEC Release 1092 would be considered an investment adviser. When determining status, the regulators look at a person's activities, not her title.

According to the Uniform Securities Act, which of the following investment advisory practices is prohibited? 1. An investment advisory firm is purchased by a large broker-dealer and all client contracts are automatically amended to reflect the broker-dealer ownership 2. A client's portfolio increases in value from $100,000 to $150,000 over a one-year period, so the adviser charges the client a fee based on the total value of the account 3. A client terminates an advisory relationship with an investment adviser halfway through the contract and the advisory firm refunds 50% of all prepaid fees, as called for in the contract 4. An investment advisory firm appoints three new portfolio managers but does not disclose this to clients of the firm

1. An investment advisory firm is purchased by a large broker-dealer and all client contracts are automatically amended to reflect the broker-dealer ownership It is perfectly acceptable to refund advisory fees if an advisory contract is terminated and to charge a fee based on the total value of the account ($150,000). There is no requirement to notify clients if three new portfolio managers (who are not partners or owners) are hired by the firm.

Which of the following statements is TRUE of using a UGMA or UTMA account to save for college tuition compared with using a 529 plan? 1. Assets in the account are considered the property of the minor. 2. Growth in the account is tax-deferred. 3. Contributions are exempt from the gift tax limit. 4. Withdrawals from the account are tax-free if they're used for qualified education expenses.

1. Assets in the account are considered the property of the minor. Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts are a way for minors to own securities. Any money or investment directed to an UGMA or UTMA account is the property of the minor; however, UGMA or UTMA accounts are not provided with tax breaks. Since qualified withdrawals from 529 plans are not taxed, they're typically a better way to save for college. In a 529 plan, assets are owned by the donor (i.e., parent or grandparent who funded the account), not by the minor. Large gifts that are made to UGMA accounts, UTMA accounts, and 529 plans are subject to the gift tax.

According to NASAA provisions, an investment adviser that maintains custody of a client's funds must: 1. Be subject to a surprise audit by an independent accountant 2. Provide prior verbal notification to the Administrator of its intention to take custody of the client's funds 3. Notify the client of the location of the funds within 30 days of taking custody 4. Notify the client of the location of the funds within 90 days of taking custody

1. Be subject to a surprise audit by an independent accountant If an investment adviser maintains custody of its clients' funds, it must provide prompt written notification as to the location of where the funds are being held as well as whether the location is changed. The notification of taking custody of client funds must be provided in written form, not verbal. Any audit of the records must be performed by an independent accountant, not by the Administrator

An IAR who is registered in State A decides to conduct a series of investment seminars in State B. One of the clients who attends the seminar in State B invests with the IAR, and loses a significant part of his investment. If the client wanted to alert the regulators, which Administrator would have the ability to initiate an investigation and take action? 1. Both Administrators may investigate the IAR 2. The Administrator in State A would be able to, since that is where the IAR is registered 3. The Administrator in State B would be able to, since that is where the client resides 4. Neither Administrator will investigate since it is only a customer complaint

1. Both Administrators may investigate the IAR The Uniform Securities Act provides the Administrator with the ability to investigate investor complaints within the state or from outside the state if the investor has done business with an individual or business within the state. Since the customer resides within State B, the Administrator in that state has jurisdiction. The Administrator in State A also has jurisdiction since the IAR is located within his state. The Administrator's role is to protect potential investors within its state and to prevent professionals within its state from acting in a way that could harm other potential investors.

According to dividend discount model, if a stock's current market value is less than the stock's present value, an investor should: 1. Consider buying the investment 2. Consider selling the investment 3. Not buy the investment 4. Sell the investment short

1. Consider buying the investment The Dividend Discount Model is a way to calculate the present value of a stock using expected (i.e., future) dividend payments. If a stock's current market price is less than the value found using the Dividend Model, the stock represents a good investment. For example, if the Dividend Discount Model's value of a stock is $60 (i.e., the present value), but it can be currently purchased for $50 (i.e., the current market value), the net present value (NPV) is +$10. Since the NPV is positive, the stock is undervalued and an investor should consider purchasing it.

For a person to be eligible for a Health Savings Account (HSA), he must be: 1. Covered under a high deductible health plan (HDHP) 2. A joint owner with his spouse 3. Covered under a qualified retirement plan 4. Enrolled in Medicare

1. Covered under a high deductible health plan (HDHP) To be eligible for a Health Savings Account (HSA), a person must be covered under a high deductible health plan (HDHP), not a qualified retirement account. Also, to be eligible for an HSA, individuals cannot be enrolled in Medicare or be claimed on another person's income taxes. Each eligible spouse must open a separate HSA, since joint HSAs are prohibited. Withdrawals taken from an HSA are tax-free if the funds are used to pay qualified medical expenses.

Which of the following statements is NOT TRUE regarding a SEP-IRA? 1. Employees are permitted to make contributions to the account. 2. An employer makes contributions to an employee's SEP-IRA. 3. Employees are immediately vested for any contributions that are made to the account. 4. An employer is not required to make annual contributions.

1. Employees are permitted to make contributions to the account. A simplified employee pension plan (SEP-IRA) does not allow employees to make contributions. Instead, SEPs are funded by employer contributions only and these contributions are elective (discretionary).

Which of the following statements is/are TRUE of an investment adviser who takes custody of cash and securities belonging to its customers? I. The funds must be deposited into one or more separate accounts that only contain customer funds. II. The adviser may combine customer cash with its own if proper disclosure is made. III. The adviser must also be registered as a broker-dealer with the Administrator. IV. The adviser must disclose to its clients both the location and manner in which the securities are held. 1. I and IV only 2. II, III and IV only 3. II only 4. I and III only

1. I and IV only Firms that maintain custody of customer assets must satisfy these guidelines: (1) Customer funds must be segregated, (2) The location of assets must be disclosed in writing and, (3) The records must be audited annually. When a firm has custody of customer cash and securities, it is required to be a qualified custodian. Broker-dealers, banks, and trust companies may be recognized as qualified custodians and may, therefore, hold cash and securities belonging to customers. Since these different entities may serve as qualified custodians, it is incorrect to state, as in choice (III) that the adviser may only maintain custody if it is also registered as a broker-dealer.

Which of the following must be included in a solicitor disclosure document? I. The manner in which the solicitor will be paid by the registered investment adviser II. The amount of the client's fee that is related to soliciting activities III. The details of the agreement between the solicitor and the registered investment adviser IV. The business history of the solicitor 1. I, II, and III only 2. I and III only 3. I, III, and IV only 4. I, II, III, and IV

1. I, II, and III only In the solicitor disclosure document, investment advisers must disclose how they intend to pay the solicitor, how much of the client's fee will be paid to the solicitor, and a description of the relationship between the solicitor and the investment adviser. However, a full history of the solicitor is not required to be disclosed.

An insurance agent works in an office building down the hall from a broker-dealer. They are not affiliated. What compensation may the agent receive from the broker-dealer in exchange for referrals? 1. Insurance referrals 2. Commissions 3. 12b-1 fees 4. Discounted commissions

1. Insurance referrals Only individuals who are registered agents may receive monetary compensation from a broker-dealer based on the sale of a security. In this scenario, the insurance agent is not licensed and may not receive compensation in the form of commissions or fees, or soft-dollar compensation (no cash compensation) in the form of discounted commissions. If a broker-dealer wants to refer its clients to an insurance professional, this is permitted. Only licensed insurance professionals may be compensated for the sale of life insurance.

What main characteristic qualifies an American-style equity option to be described as a derivative security? 1. Its value is based on the valuation of another asset 2. As consistent with many other derivatives, it is risky 3. It may be exercised at the owner's discretion 4. Its pricing is based solely on its time value

1. Its value is based on the valuation of another asset Derivative contracts (e.g., options) obtain their value from the price/value of an underlying asset. Derivatives are often priced based on both intrinsic and time value. Futures and swaps are types of derivatives whose owners have no exercise rights. Simply being risky does not qualify a security as a derivative. American-style options are able to be exercised by the owner at any time prior to its expiration. However, European-style options may only be exercised by the owner on the last trading day prior to expiration.

Perry is a 27-year-old paralegal who makes $35,000 annually. His law firm has a 401(k) plan and the firm matches employee contributions, but Perry does not participate in it, although he is eligible. He wants to save for retirement and is considering a variable annuity. Perry consults an investment adviser representative. The most appropriate advice that the IAR can give Perry is that he should: 1. Join his employer's 401(k) plan 2. Buy a variable life insurance policy 3. Invest as much as he can in a variable annuity every month 4. Wait until he is older to save for retirement

1. Join his employer's 401(k) plan By joining the 401(k), Perry can save for retirement on a pretax basis. In addition, his employer matches his contributions, which will help his savings grow faster. Payments to a variable annuity would have to be made on an after-tax basis. Generally, people investing for retirement should exhaust their ability to contribute to vehicles (such as 401(k)s or IRAs) that allow them to save money on a pretax or tax-deductible basis before investing in variable annuities.

An agent solicits the purchase of MPH, Inc, a nonexempt, unregistered security. The agent requests the client sign a document, acknowledging the security's status. The document also includes an exculpatory provision absolving the agent and the broker-dealer from any liability or wrongdoing. The waiver the client signed is: 1. Null and void 2. Acceptable with the Administrator's approval 3. Acceptable 4. Subject to civil liability and criminal penalty

1. Null and void Agents must not solicit nonexempt, unregistered securities nor should they request a client sign documents absolving the agent or broker-dealer from wrongdoing. Such statements are sometimes called exculpatory clauses and are prohibited. These documents would be null and void under the Uniform Securities Act.

When considering implementing a buy-and-hold strategy for a bond portfolio, a manager should consider which of the following? 1. Selecting bonds based on certain criteria and determining their appropriateness by comparing their prices to similar bonds 2. Only selecting callable bonds 3. Only selecting investments with high ratings and yields 4. Selecting bonds that mature on the same date

1. Selecting bonds based on certain criteria and determining their appropriateness by comparing their prices to similar bonds When implementing a buy-and-hold strategy with bonds, portfolio managers generally consider whether the bonds are valued fairly in comparison to other similar bonds. Also, since the portfolio is comprised of bonds, the manager would focus only on bonds, not other general investments. Selecting only bonds that are callable or bonds with the same maturity is not desirable. Instead, laddered (staggered) maturities would generally be a better approach for the manager.

A married couple are both in their mid-30s and want to invest $75,000 jointly. If they need the money to purchase a home in two years, which of the following is the MOST suitable investment for the couple? 1. Short-term corporate bonds 2. Long-term U.S. government bonds 3. A 529 plan 4. A diversified portfolio of U.S. stocks

1. Short-term corporate bonds The couple in this question should invest in money-market securities, which are defined as short-term debt instruments. Since their investment needs to be available in a short period, stocks and long-term bonds are too risky. Also, 529 plans are used to save for future education expenses, which is not a current concern for this couple.

An investment adviser representative and a client have similar financial resources, investment goals, and risk tolerance. However, although the IAR recommends penny stocks as a small part of her client's portfolio, she would never consider investing in such securities herself. Which of the following statements is TRUE? 1. The IAR should tell her client that the recommendation is inconsistent with her own investment policy 2. As long as the recommendations to her clients are suitable for them, it does not matter what the IAR chooses to include in her portfolio 3. Penny stocks are never suitable investments 4. An IAR is not allowed to reveal to a client what is in her personal portfolio

1. The IAR should tell her client that the recommendation is inconsistent with her own investment policy An investment adviser whose personal investing is inconsistent with recommendations made to clients generally has an obligation to disclose this to customers.

Which of the following statements is TRUE regarding SEC Release IA-1092? 1. The Release noted that an individual who provides advice about securities in general may meet the definition of investment adviser 2. It effectively overrode the definition of adviser found under the now antiquated ABC test 3. Investment advisers are considered to be rendering advice only in cases where they recommend a specific individual security or mutual fund 4. IA-1092 has deemed the Investment Advisers Act of 1940 definitions to be moot, null, and void

1. The Release noted that an individual who provides advice about securities in general may meet the definition of investment adviser SEC Release IA-1092 was created to provide guidance to the industry on how existing statutes (the Investment Advisers Act of 1940 and the Uniform Securities Act) applied to some of the newer types of advisory services being offered (e.g., wrap accounts, etc.). The Release was not intended to replace either the Investment Advisers Act or the USA.

Which of the following would NOT be an important consideration when conducting a capital needs assessment for a client? 1. The amount of anticipated volatility in the marketplace 2. The client's future anticipated earnings 3. The client's life expectancy and retirement needs 4. The rate of inflation

1. The amount of anticipated volatility in the marketplace A capital needs assessment analyzes a client's future goals and needs. Retirement planning, college funding, and the risk of death before meeting a savings goal are all considered. A client's life expectancy, the rate of inflation, and her earnings will all affect the capital needs assessment. Market volatility may influence the securities on which recommendations are based, but not the capital needs assessment.

Which of the following is FALSE regarding a Health Savings Account (HSA)? 1. The distributions that are used for non-qualified medical expenses are subject to a 50% penalty 2. The contributions are tax-deductible 3. The earnings in the account are tax-free 4. The distributions are tax-free if they are used to pay for qualified medical expenses

1. The distributions that are used for non-qualified medical expenses are subject to a 50% penalty The distributions that are used for non-qualified medical expenses are subject to a 20% tax, not a 50% penalty. All of the other statements are true.

An investment adviser is the manager of a mutual fund and several of its IARs are also registered representatives of an affiliated broker-dealer. The adviser executes portfolio trades through the affiliated broker-dealer and the broker-dealer receives commissions from these trades. According to the Investment Advisers Act, which of the following statements is TRUE? 1. This represents a conflict of interest, but is permitted if disclosure is made in the brochure 2. The commission is considered a hidden charge and is prohibited 3. This is permitted, but only if transaction charges are disclosed on confirmations, and records of the confirmations are maintained for the life of the firm 4. This is a conflict of the adviser's fiduciary responsibilities and is prohibited by FINRA rules

1. This represents a conflict of interest, but is permitted if disclosure is made in the brochure There may be situations in which investment advisers will receive compensation in addition to the investment advisory fee that clients are being charged. Although this action may be deemed a conflict of interest, it is not prohibited. In order to alleviate any perceived unethical behavior, clients should be provided with disclosure regarding the additional compensation.

Which of the following insurance contracts have the elements of term insurance, a cash value that is not market-based, and a flexible death benefit? 1. Universal life 2. Whole life 3. Variable life 4. Modified endowment policy

1. Universal life Universal life is an insurance contract that allows the customer to select the amount of coverage and the size of the premium. Additionally, it has a cash value that grows at a minimum guaranteed rate. However, the performance of the cash value is not market-based.

When is an investment adviser NOT required to provide a balance sheet to its clients? 1. When the adviser requires the prepayment of a $150 initial advisory fee 2. When the adviser has taken custody of the client's funds or securities 3. When the adviser has discretionary control over a client's funds or securities 4. When the adviser requires the prepayment of a fee that is greater than $500, six months or more in advance of providing service

1. When the adviser requires the prepayment of a $150 initial advisory fee NASAA's model rules require an adviser to file a balance sheet whenever the adviser requires the prepayment of fees in excess of $500, six or more months in advance of providing any services. The filing would also be required if an investment adviser maintains custody of customer funds and securities. Remember, an IA that has full discretion (i.e., the ability to withdraw funds or check-writing privileges) is considered to have custody.

A portfolio manager is interested in purchasing bonds, but is concerned about an increase in interest rates. In order to make the portfolio less price sensitive to yield changes, the manager does which TWO of the following? I. Buy bonds with a long duration II. Buy bonds with a short duration III. Buy bonds with a high coupon IV. Buy bonds with a low coupon 1. II and IV 2. II and III 3. I and III 4. I and IV

2. II and III Bonds with short durations and high coupons are less price sensitive to changing interest rates. On the other hand, bonds with long durations and low coupons have more price volatility as interest rates fluctuate.

What's the formula for calculating the net asset value (NAV) of a fund? 1. There is no formula, since the NAV is based on supply and demand for the fund's shares. 2. (Assets - Liabilities) ÷ Number of Shares Outstanding 3. (Current Assets - Current Liabilities) ÷ Current Assets 4. (Fund Return - Risk-Free Rate) ÷ Standard Deviation of Returns

2. (Assets - Liabilities) ÷ Number of Shares Outstanding A mutual funds' net asset value must be calculated daily by taking the fund's assets, subtracting liabilities, and then dividing by the number of shares outstanding. The fund's Sharpe Ratio is found by taking the fund's return, subtracting the risk-free rate, and then dividing by the standard deviation of the fund's returns. The quick asset ratio is calculated by taking a company's current assets, subtracting its current liabilities, and dividing by its current assets.

An investor is in the 20% marginal tax bracket and has a yield of 10% on a portfolio. If the CPI is 5%, what's the investor's after-tax inflation-adjusted return? 1. 4% 2. 2.86% 3. 8% 4. 9.5%

2. 2.86% The first step is to adjust the investor's yield for taxes. The formula for finding After-Tax Yield is: Nominal Yield x (100% - Tax Rate%). In this case, the investor's after-tax yield equals 8% [10% x (100% - 20%)]. The next step is to adjust the after-tax yield of 8% for inflation. The formula for finding Inflation-Adjusted Return is: [(1 + After-Tax Yield) ÷ (1 + Inflation Rate)] - 1. For this question, the inflation-adjusted return equals 2.86% [(1 + .08) ÷ (1 + .05)] - 1. An alternative method for calculating the inflation-adjusted return is: After-Tax Return - Inflation Rate, which equals 3% (8% - 5%). Obviously, this method is not as precise, but it's a more simple calculation. For exam purposes, it may be helpful to be prepared to calculate it using both methods to definitively find the correct answer. Returns that are adjusted for inflation are also referred to as "real returns".

If a corporation had annual earnings per share of $2.40, and $1.60 was retained by the corporation, the annual dividend payout ratio is what percentage of earnings? 1. 2.5% 2. 33% 3. 80% 4. 6.6%

2. 33% To determine the annual dividend payout ratio, first determine the dividend, which is the earnings per share of $2.40, minus the retained earnings of $1.60 or $.80. Then divide the dividend of $.80 by the $2.40 of earnings per share to determine the percentage of earnings paid to the shareholders, 33%.

Which of the following securities would NOT be considered federal covered, but would still be considered exempt under the Securities Act of 1933? 1. An exchange-traded futures contract 2. A municipal bond issued by a state and sold only in that state 3. A certificate issued by a court-approved trustee 4. A variable annuity contract subject to the insurance commissioner's oversight

2. A municipal bond issued by a state and sold only in that state While a municipal bond is considered an exempt security under the Securities Act of 1933, it is NOT a federal covered security. Federal covered securities include those listed on a national exchange (NYSE, AMEX, or Nasdaq) and those issued by a registered investment company. There is no federal exemption for either variable annuities or trust certificates.

An investment adviser representative charges his clients both advisory fees and commissions when they buy and sell various investments. Under the Uniform Securities Act, this practice is: 1. Prohibited unless a waiver is granted by the Administrator in writing 2. Allowed if the clients receive the proper disclosures 3. Prohibited in all instances 4. Allowed if the commissions and fees do not exceed 10% per year

2. Allowed if the clients receive the proper disclosures An investment adviser's fees may take many different forms. Fees, commissions, and soft-dollar arrangements are all allowed, provided the customer receives a brochure disclosing the nature of the fees and how they are calculated. A soft-dollar arrangement is one in which an adviser receives research or other services from a broker-dealer in exchange for executing its clients' trades through the firm. The arrangement is acceptable provided the compensation the adviser receives in return for the directed transactions benefits the advisory client. Under the Uniform Securities Act, there is no limit as to how large advisory fees may be. However, fees in excess of 2.5% of the assets under management would generally be considered excessive.

Under the Uniform Securities Act, which of the following advisers meets the definition of a federal covered adviser? 1. An adviser whose recommendations are solely based on U.S. government securities 2. An adviser who is registered with the SEC under the Investment Advisers Act of 1940 3. An adviser who has a place of business in only two states 4. An adviser whose recommendations are solely based on exchange-traded securities

2. An adviser who is registered with the SEC under the Investment Advisers Act of 1940 If an investment adviser registers with the SEC, it is considered federal covered under the Uniform Securities Act. Based on the information provided, the other advisers would not necessarily be federal covered investment advisers. The Investment Advisers Act of 1940 specifically excludes U.S. government securities advisers from the definition of an investment adviser. Therefore, these advisers are required to register at the state level.

Under the Uniform Securities Act, all of the following persons are considered investment adviser representatives, EXCEPT: 1. A minority partner of an advisory firm established as a partnership 2. An employee of an advisory firm who provides administrative services that relates to portfolio selection 3. An employee of an advisory firm who performs managerial functions that relates to portfolio selection 4. A majority partner of an advisory firm established as a partnership

2. An employee of an advisory firm who provides administrative services that relates to portfolio selection The Uniform Securities Act defines an investment adviser representative (IAR) as an employee, partner, officer, or director of the adviser, who performs research, makes recommendations, manages portfolios, or solicits advisory services. However, employees who perform administrative, clerical, and/or ministerial functions are excluded from the definition of an IAR.

A new investment advisory firm registers with the Administrator on June 1. Just before its one- year anniversary on June 1 of the following year, the firm renews its registration and the registrations of each of its investment adviser representatives. Which of the following statements is TRUE? 1. The firm effectively renewed prior to the deadline, but the representatives did not 2. Both the firm's and its IARs' registrations lapsed on December 31 of the prior year 3. The representatives are properly registered, but the firm's registration has lapsed 4. The firm has complied with the Uniform Securities Act since registrations are valid for one year from the initial registration (June 1)

2. Both the firm's and its IARs' registrations lapsed on December 31 of the prior year Under the Uniform Securities Act, all registrations expire on December 31 and then must be renewed. In this situation, both the firm and the investment adviser representatives have allowed their registrations to lapse.

An approach to investing that selects stocks based on a company's financial health, management team, product offerings, and then compares the market price of the stock to similar companies to determine if the company is undervalued is generally referred to as: 1. Linear sequencing 2. Bottom-up investing 3. Horizontal modeling 4. Top-down investing

2. Bottom-up investing The bottom-up analysis method examines stocks based on a variety of factors, including fiscal health, management team, competitive market position, and current and prospective future product offerings. The market price of the stock is then compared to similar companies to ascertain if the company is undervalued in the investor's mind.

What's the best way to hedge a long stock position? 1. Take a long futures position 2. Buy a put option 3. Buy a call option 4. Sell a call option

2. Buy a put option The most effective way to hedge a long stock position is to buy a put on that stock. If the price of the shares fall, the long put option gives the owner the ability to sell the shares at the predetermined strike price. A short call option doesn't give the investor control over when the option is exercised and is not an effective hedge. Buying a call option is a bullish position and gives the investor the ability to buy more shares, which doesn't provide any protection if the price of the stock falls. Taking a long futures position is also bullish and doesn't provide protection if the price of the stock falls.

Which of the following entities pays federal income taxes? 1. Trust 2. C Corporation 3. Sole proprietorship 4. S Corporation

2. C Corporation In the U.S., a C Corporation is taxed separately from the owners of the business. After the C Corporation has paid income taxes, it can pay their shareholders a dividend; however, this payment is then taxable to the shareholder (i.e., double taxation). Both S Corporations and sole proprietorships are not taxable entities. In other words, all of their income passes through and is taxed to the owners (i.e., single taxation). Taxation of trusts is more complicated, but in some instances, income from a trust is only taxable to the beneficiary. Since C Corporations are always taxed, it's the best answer to this question.

Currently, many economic indicators are pointing to an imminent decline in the market. If an investor chooses to ignore the negative sentiment and increases her investment positions, she is using what style of investing? 1. Sector rotation 2. Contrarian 3. Bottom up 4. Market timing

2. Contrarian An investor who uses the contrarian style of investing is going against market trends and conventional wisdom. Many contrarians search for stocks that are out of favor and have low P/Es.

Which ratio measures the amount of leverage that a company maintains? 1. Current 2. Debt-to-Equity 3. Quick Asset 4. Price-to-Earnings

2. Debt-to-Equity Leverage is another term for borrowing or debt. The debt-to-equity ratio measures the leverage of a firm. The current and quick asset ratios measure liquidity or, put another way, the short-term financial health of a company. The price-to earnings (PE) ratio measures the value of a company (i.e., its stock price) relative to the profitability (i.e., earnings per share

One of your clients, John Smith, would like to buy one share of ToyKids Inc. for each of his 12 grandchildren. The average transaction cost on these trades would be 16% based on your firm's minimum commission schedule. What action should you take? 1. Advise Mr. Smith to do the trades elsewhere, as your compensation would violate the USA 10% threshold 2. Do the trades, provided you have already informed the client of the higher-than-normal commissions 3. Do the trades 4. Advise Mr. Smith to open a wrap account for each child to avoid commissions

2. Do the trades, provided you have already informed the client of the higher-than-normal commissions Anytime a client will be subject to higher-than-normal charges, he should be informed of this fact prior to execution. Opening a wrap account for each child is not practical since these accounts typically have minimum asset requirements.

If an individual forms a broker-dealer as a sole proprietorship, what information needs to be provided to the Administrator? 1. Annual tax returns 2. Financial statements 3. Net income figures 4. Tax returns for the past three years

2. Financial statements The USA requires a broker-dealer to file its financial statements with the Administrator annually and, in some cases, quarterly.

An advisory firm has 30 individuals who are registered as IARs. What record is the investment adviser required to keep in regard to its IARs? 1. A copy of each IAR's fingerprints that have been obtained from law enforcement 2. Form U4 for each IAR 3. The securities screening and background check for each IAR 4. A copy of the driver's license or passport for each IAR

2. Form U4 for each IAR Under the NASAA Recordkeeping Requirements for Investment Advisers Model Rule, an IA is required to maintain all documents which are filed with the state and/or federal regulators that relate to the firm and its IARs (e.g., Form U4, amendments, and renewal filings). IARs are not required to obtain fingerprints from law enforcement.

An investment adviser wants to enter into an advisory relationship with a client in a state without being registered there. Legally, the relationship may be established if the advisory firm has no place of business in the state and all of its clients are: I. Insurance companies II. Banks and/or trust companies III. Investment advisers IV. Broker-dealers 1. II, III, and IV only 2. I, II, III, and IV 3. I and II only 4. III and IV only

2. I, II, III, and IV The Uniform Securities Act does not require the registration of an IA if it has no place of business in the state and all of its clients are institutional investors. For purposes of this rule, broker-dealers, trusts, insurance companies, banks, and other investment advisers are all considered institutional investors.

An investor purchases a mutual fund in a joint brokerage account and receives a dividend, which the investor decides to reinvest in the fund. Which TWO of the following statements are TRUE regarding the tax consequences of this transaction? I. Reinvested dividends are not subject to taxation. II. Reinvested dividends are subject to taxation. III. Any dividend received, whether reinvested or not, is subject to taxation. IV. Qualified dividends are not subject to taxation. 1. I and III 2. II and III 3. II and IV 4. I and IV

2. II and III All dividends, interest, and capital gains distributed from a mutual fund are subject to taxation unless the investment is purchased within a tax-sheltered account such as a 401(k) or individual retirement account. Qualified dividends are subject to taxation.

Regarding the taxation of an estate, which of the following statements is TRUE? 1. If income from an estate is distributed, it's taxable to the beneficiary. 2. In a revocable trust, assets are included in the estate for federal estate tax purposes. 3. Property that's inherited by a spouse is subject to estate taxes. 4. In an irrevocable trust, assets are included in the estate for federal estate tax purposes.

2. In a revocable trust, assets are included in the estate for federal estate tax purposes. In a revocable trust, assets are typically included in an estate for estate tax purposes. One of the advantages of an irrevocable trust is that its assets are excluded from the estate for estate tax purposes. Property that's left to a spouse is not subject to the estate tax. If an estate is subject to tax, taxes are paid by the estate itself, rather than the beneficiaries.

The purchase of which of the following securities by an investment adviser for its own account would MOST likely involve a conflict of interest? 1. Treasury bonds being auctioned by the Fed 2. Initial public offerings 3. Index mutual funds 4. General Motors common stock in the secondary market

2. Initial public offerings Initial public offerings (IPOs) are often available only in limited amounts. If such offerings are available to the adviser and are also suitable for accounts of certain customers, these customers should be given priority.

Which of the following statements about net present value is TRUE? 1. Investors should buy securities that have a net present value that's less than 0. 2. Investors should buy securities that have a net present value that's greater than 0. 3. Net present value is only based on cash flows that occurred in the past. 4. If the discounted cash flows are greater than the current market price of an investment, the net present value is negative.

2. Investors should buy securities that have a net present value that's greater than 0. Net present value is the difference between the present value of an investment's cash flows (e.g., interest payments), MINUS the market value of the investment (i.e., NPV = PV Cash Flows - Market Price). Investments with a positive NPV (i.e., the present value of the cash flows is greater than the current market price) represent a buying opportunity because the investment is undervalued. The present value of an investment is always based on the future cash flows, rather than on cash flows that have already occurred.

Which of the following is the BEST hedging strategy if a client is long 1,000 shares at $42? 1. Short 40 calls 2. Long 40 puts 3. Long 45 calls 4. Short 45 puts

2. Long 40 puts If the investor wants to hedge against downside moves in a stock, he should buy put options. Purchasing the out-of-the-money put options is cost-effective (lower premium) and therefore is an efficient hedging strategy. Buying calls on stock owned is considered a bullish strategy. Selling or shorting call options only provides downside protection to the extent of the premium received.

A mathematical technique that uses randomly generated scenarios, known as simulations, to determine the probability of possible returns, is known as the: 1. Random Walk Theory 2. Monte Carlo Theory 3. Sharpe Ratio 4. Capital Asset Pricing Model

2. Monte Carlo Theory Monte Carlo is a technique which uses randomly generated scenarios, called simulations, to attempt to determine the probability of possible returns. It is one of several computer programs that has been developed recently to give investors different tools to help them manage their portfolios.

An IA may charge a client an investment advisory fee for rendering investment advice while receiving compensation for effecting securities transactions related to such advice: 1. But may only retain the greater amount of the two 2. Only if disclosed to the client 3. Under no circumstances 4. Only if the IA is also an agent of a broker-dealer

2. Only if disclosed to the client Under NASAA's Model Rule on Prohibited Conduct of IAs, IARs, and federal covered advisers, this practice is acceptable if it is disclosed to the client before effecting transactions pursuant to the advice.

An investment adviser is both registered in and located in State A. One of the firm's IARs has three non-institutional clients and one institutional client in State B. A different IAR of the firm has four non-institutional clients in State B. If the investment adviser does NOT have an office in State B, who must register in State B? 1. Neither the IARs nor the investment adviser 2. Only the investment adviser 3. Only the IARs 4. The IARs and the investment adviser

2. Only the investment adviser An advisory firm that has more than five non-institutional clients residing in a state is required to register in that state. Since one IAR of the firm has three non-institutional clients and the another IAR of the firm has four non-institutional clients in State B, the investment adviser has a total of seven non-institutional clients in the state and must register there. However, since neither IAR has more than five non-institutional clients in the state, neither one needs to register in State B. Notice that all persons (the IA and both of the IARs) need to be registered in State A.

Which of the following statements is FALSE about universal life insurance policies? 1. Cash values may vary based on interest-rate fluctuation 2. Premiums are always invested in a separate account of the insurance company 3. Policyholders may not choose how premiums are invested 4. Premiums may fluctuate

2. Premiums are always invested in a separate account of the insurance company In universal life insurance policies, all premiums are deposited in the insurance company's general account. Variable policies/contracts use a separate account. Universal policies also have flexible premiums that may be increased or decreased over the life of the policy. While universal policies may have a guaranteed minimum rate of return, the return may fluctuate above the minimum.

An advisory client owns a small business and inquires about whether he should set up his business as a partnership or as a C Corporation. Which of the following would be the BEST reason to set the business up as a partnership? 1. The owners have limited liability 2. Setting up a partnership is easier than establishing a corporation 3. There is free and unrestricted transfer of shares 4. It is easy to raise capital and attract new investors in a partnership

2. Setting up a partnership is easier than establishing a corporation A partnership is easier to establish and operate than a C Corporation, which requires more reporting and administration. Partnerships generally do not allow for the free transfer of shares and if a partner manages the business, he may be liable for the debts of the partnership.

An IAR is asked to create a financial plan for a client. Although implementing the plan may generate a significant tax liability for the client, the IAR believes the plan fully meets the client's investment objectives. What should the IAR do? 1. Suggest the client go to another investment adviser because the IAR could not reconcile the objective and tax liability conflict of interest 2. Suggest that the client seek the advice of a qualified tax professional 3. Since the IAR is not a CPA, he should give the plan to the client and let her resolve the tax liability issue 4. Rework the plan to reduce the client's tax liability

2. Suggest that the client seek the advice of a qualified tax professional Since the plan fits the client's investment objectives, it should not be changed. However, the IAR does not seem to have tax expertise, so he should recommend that his client seek outside tax help. It would violate the IAR's fiduciary duty to let the client handle the issue by herself.

Which of the following statements about variable annuities is FALSE? 1. The portfolio may be invested in shares of other mutual fund companies 2. The annuity feature protects investors from capital losses 3. The assets in a separate account are managed with a specific investment objective 4. A change in investment objectives requires voter approval

2. The annuity feature protects investors from capital losses Variable annuity assets are directed into a separate account and invested in a portfolio that fluctuates with the market. Therefore, an investor's principal will fluctuate over time as it remains invested in a variable annuity. Mutual funds are often an investment choice within an annuity. If an investor is interested in principal protection and a guaranteed rate of return, he should consider a fixed annuity.

If a mutual fund shareholder decides to reinvest the dividends that are paid by the fund and purchase additional shares, what is the tax treatment? 1. The dividend is not taxed if it is reinvested and used to buy additional shares 2. The dividend is taxed even if it is reinvested 3. The dividend is only taxed when the shares are redeemed 4. The dividend reduces the cost basis of the shares that are purchased through reinvestment

2. The dividend is taxed even if it is reinvested When a mutual fund makes a dividend distribution, an investor is able to reinvest the distribution and use the funds to buy additional shares at their net asset value. However, the dividend is still taxed as ordinary income for the investor.

Which of the following is a valuation model used to calculate the anticipated return for a portfolio of securities? 1. The holding period return 2. The expected rate of return 3. The internal rate of return 4. The real rate of return

2. The expected rate of return The expected rate of return is used to estimate or anticipate the performance of a portfolio by averaging all of the possible returns and the probability that they will occur.

Registration of a security in a state is not required for ALL of the following reasons, EXCEPT: 1. The security is offered in an exempt transaction 2. The security has been registered with the Securities and Exchange Commission under the Securities Act of 1933 3. The instrument does not meet the definition of a security 4. The security is exempt

2. The security has been registered with the Securities and Exchange Commission under the Securities Act of 1933 Under the Uniform Securities Act, a security is not required to be registered if: The security is exempt; or The security is non-exempt, but is being offered in an exempt transaction; or The security is a federal covered security; or The instrument does not meet the definition of a security Whether a security has been registered with the SEC (under the Securities Act of 1933) has no bearing on the state registration requirement.

Which of the following is TRUE regarding the difference between owning property under community property compared to joint tenants with rights of survivorship? 1. In a joint tenants with rights of survivorship account, after the death of one owner, ownership of property is not transferred to the surviving owner. 2. With a community property agreement, when one owner dies the cost basis of all of the assets steps-up to the market value, thereby reducing potential capital gains 3. Community property is available in all states, while joint tenants with rights of survivorship is only available in a few states 4. Joint tenants with rights of survivorship is only available to married couples, while community property is available to any person

2. With a community property agreement, when one owner dies the cost basis of all of the assets steps-up to the market value, thereby reducing potential capital gains Community property is a type of joint ownership that's only available to married couples and only in select states. On the other hand, joint tenants with rights of survivorship is available in all states and the joint owners don't need to be married. With both forms of ownership, assets will be transferred to the surviving owner(s) after the death of one owner. With community property, the cost basis of all of the assets is stepped-up after the death of one owner in a manner that's similar to inheriting securities. However, with joint tenants with rights of survivorship, the decedent's portion of the assets are stepped-up, but the surviving owner's assets basis remains the same.

A portfolio has a beta of 1.0 and an expected return of 12%. What would the alpha of the portfolio be if the beta was 1.4 and the actual return was 18.8%? 1. -6.80% 2. 6.80% 3. 2.00% 4. -2.00%

3. 2.00% Alpha is the difference between the portfolio's actual return (which is given) and expected return. The expected return can be determined by using the Capital Asset Pricing Model (CAPM). Since this question doesn't provide a risk-free rate, the calculation of expected return is simply beta multiplied by the market return (Expected Return = Beta x Market Return). As this question begins, a portfolio with a beta of 1.0 will have the same expected return as the market return. In other words, both the expected and market returns are 12% (Beta of 1.0 x Market Return of 12% = 12%). However, if the beta changes to 1.4, the expected return will rise to 16.8% (Beta of 1.4 x Market Return of 12%). The question specifically states that the actual return of the portfolio was 18.8%. Therefore, the alpha can then by calculated by taking the actual return on the portfolio minus the expected return (actual return of 18.8% - expected return of 16.8% = +2.00% alpha).

Which TWO of the following types of risk cannot be mitigated by diversifying into various sectors? I. Systematic risk II. Nonsystematic risk III. Nondiversifiable risk IV. Business risk 1. II and IV 2. II and III 3. I and II 4. I and III

4. I and III Systematic or nondiversifiable risk (market risk) is the risk associated with the entire market. The assumption is that, regardless of how many different securities an investor may hold, if the overall market declines, no amount of diversification will reduce the risk of loss. Business risk is the risk that circumstances or factors may have a negative impact on the operation or profitability of a given company. For example, a company may suffer due to increased competition, a decrease in demand for its goods or services, or adverse economic conditions.

Mark purchases an equity-indexed annuity contract that guarantees a 5% return with an 80% participation rate and a 12% interest-rate cap. The index to which the funds are tied rises in value by 10% this year. What return does Mark receive? 1. 5% 2. 12% 3. 8% 4. 10%

3. 8% In an equity-indexed annuity, the owner receives a guaranteed minimum interest rate with potential upside based on the performance of the designated index. If the return on this index is less than the guaranteed rate, the owner receives the minimum. If the index return is greater than the guarantee, the owner receives the greater return up to the capped maximum. Many contracts only pay a portion of the index return. In this example, the client is entitled to 80% of the index return capped at a 12% maximum. The index increased by 10%, so the client's contract is credited with 80% of that amount, or 8%.

The portfolio manager of a growth fund is analyzing potential common stocks. Generally, the manager will give which of the following the MOST consideration? 1. A stock's current dividend yield 2. A company's short-interest 3. A company's year-to-year earnings momentum 4. A company's low price-to-book value

3. A company's year-to-year earnings momentum For growth investors, a key consideration is a company's earnings momentum (growth). A growth company will typically have a significant year-over-year increase in its earnings. On the other hand, value investors will look for stocks that have a low price-to-book value and high current yield.

Which of the following styles of options can be exercised sooner than the others? 1. Capped-style options 2. European-style options 3. American-style options 4. Uncovered options

3. American-style options America-style options may be exercised at any time before expiration. European-style options may only be exercised on a certain day. Capped style options are automatically exercised at the cap price. Uncovered options are a type of option, not a style, which may only be exercised by the holder.

If an investment adviser is currently advising a mutual fund, how must it be registered? 1. It's not required to register because it qualifies as an exempt reporting adviser (ERA) 2. As a state-registered investment adviser in the state in which its main office is located 3. As a federal covered adviser with the SEC 4. With both the SEC and state Administrators as a dually registered investment adviser

3. As a federal covered adviser with the SEC If an investment adviser is providing advice to, or directly managing, a registered investment company (e.g., mutual fund), it must register with the SEC because it's considered a federal covered adviser.

The advantages of a living (inter vivos) trust include: 1. Avoiding gift taxes on all intrafamily asset transfers over $1,000,000 2. Receiving tax credits 3. Avoiding probate 4. Avoiding estate taxes

3. Avoiding probate A living (inter vivos) trust is a trust created while the grantor is still alive. One of the main advantages of a trust is that it allows the estate to avoid probate. Trusts do not allow people to avoid estate taxes, but they can be used to reduce them in certain circumstances. (Most living trusts are revocable which means the grantor may rescind them at any time. The assets of a revocable trust must be included in the estate when calculating the estate taxes due.)

If an analyst wants to measure the degree to which a company or partnership is leveraged, he would calculate the: 1. Return on equity, which is net income / average stockholders' equity 2. Current ratio, which is current assets / current liabilities 3. Debt-to-total capital ratio, which is debt / total capital 4. Quick asset test, which is (current assets - inventories) / current liabilities

3. Debt-to-total capital ratio, which is debt / total capital The debt-to-capital and debt-to-equity ratios both measure the amount of a company's capital that is financed with debt (i.e., its degree of leverage). The quick asset test and current ratio both measure a company's liquidity or short-term financial health.

In order to form a limited partnership, two or more people must: 1. Elect to be taxed under Subchapter S 2. File a registration statement with the SEC under Regulation A 3. File a certificate with the appropriate state or local official 4. Agree to operate a business together

3. File a certificate with the appropriate state or local official The only way to create a limited partnership is by filing a certificate (or other document) with a state or local agency. A general partnership, in contrast, is created whenever two or more people agree to form a partnership. The agreement does not even need to be in writing.

To determine the fair market value of a bond, an adviser would calculate the: 1. Present value of the future principal 2. Future value of the principal 3. Future cash flows discounted to their present value 4. Present value of the bond, compounded until maturity

3. Future cash flows discounted to their present value Discounted Cash Flow (DCF) can be used to determine the fair value of a bond. The future cash flows (interest payments and principal) are discounted to their present value and then converted into a single net present value.

A stock that is traded on the NYSE has a high P/E ratio, a low dividend payout ratio, and a high level of retained earnings? What type of stock is it? 1. Mid-cap 2. Small-cap 3. Growth 4. Value

3. Growth Growth stocks are characterized by high P/E ratios, low dividend payout ratios and high levels of retained earnings. Therefore, the stock described in the question is most likely a growth stock. Value stocks, are characterized by low P/E ratios, high dividend payout ratios, and low price-to-book ratios.

Which of the following statements is FALSE regarding discounted cash flow methods used to evaluate an investment? 1. Net present value is a discounted cash flow method 2. Discounted cash flow calculations consider cash inflows, outflows, and the time value of money 3. Holding period return is a discounted cash flow method 4. Internal rate of return is a discounted cash flow method

3. Holding period return is a discounted cash flow method Holding period return does not discount or compound cash flows. Holding period return is calculated by adding any income, plus capital gains, minus capital losses, and dividing by the value of the initial investment.

Which TWO of the following statements are TRUE regarding the buyer and writer of a straddle? I. The buyer of a straddle expects the market to fluctuate. II. The writer of a straddle expects the market to fluctuate. III. The buyer of a straddle expects the market to remain stable. IV. The writer of a straddle expects the market to remain stable. 1. I and II 2. II and III 3. I and IV 4. II and IV

3. I and IV The writer (seller) of a straddle (call and put) believes the stock's price will remain stable. The buyer of a straddle expects that the market price of the underlying stock will be volatile.

An IAR is analyzing various fixed-income securities for a client's portfolio. She notes that the yield curve is normal. This indicates that: I. Short-term bonds are yielding more than long-term bonds II. Short-term bonds are yielding less than long-term bonds III. The economy is expanding too rapidly IV. Long-term bonds are yielding more than short-term bonds V. Short-term bonds and long-term bonds are moving toward parity 1. V only 2. I and IV only 3. II and IV only 4. III and V only

3. II and IV only A normal yield curve occurs when yields on long-term bonds are greater than yields on short-term bonds. Another way to understand normal yield curves is to remember that the longer the maturity of a bond, the more the yield investors demand for the additional time risk. Normal yield curves are generally understood to indicate a healthy economy. Alternate terms for a normal yield curve are positive, ascending, or upward sloping.

A complex trust: 1. Uses derivatives as part of its assets 2. Must have multiple beneficiaries 3. Is permitted to retain some of its annual investment income 4. Uses an outside portfolio manager

3. Is permitted to retain some of its annual investment income A complex trust is permitted to retain some of its investment income. (In a simple trust, this income must be distributed to the beneficiaries in the year received.) Trustees of a complex trust are also empowered to distribute principal. The term complex has nothing to do with the number of beneficiaries of the trust, the use of derivatives within the trust, or the employment of an outside portfolio manager by the trustee.

Which of the following is TRUE of a structured note? 1. It's a trust owned by a large number of small investors which contains a basket of equity securities 2. It's a bond issued by a municipality in order to raise funds for an infrastructure project 3. It's a bond issued by a financial services company which offers a rate of return that's linked to other securities 4. It's a contract between an individual and insurance company which guarantees income for remainder of the individual's life

3. It's a bond issued by a financial services company which offers a rate of return that's linked to other securities A structured note is typically a debt instrument (e.g., note or bond) which offers a rate of return that's linked to an underlying security, basket of securities, or derivative product (e.g., an option). Since the structured note is linked to another underlying security, the rate of return will fluctuate based on the performance of that security. Exchange traded notes (ETNs) are one of the most well known structured notes.

Market makers engage in all of the following activities, EXCEPT: 1. Stand ready to buy and sell shares of stock 2. Place large bid and asks in the market 3. Maintain an absolute inventory of shares 4. Stand at their post ready and willing to make trades

3. Maintain an absolute inventory of shares Market makers are broker-dealers that provide liquidity on stock exchanges. They do this by placing buy (i.e., bids) and sell (i.e., ask/offer) orders at their trading posts. Under exchange rules, market makers must always be ready to accept and execute orders to buy and sell stocks. Although market makers often maintain an inventory of stocks, they're not required to have a minimum or maximum absolute inventory.

An IA receives rebates from a broker-dealer for placing client orders with the broker-dealer. Such rebates may be used by the IA for all the following purposes, EXCEPT: 1. Attending an industry seminar out of state 2. Acquiring research reports from the broker-dealer 3. Paying the salary of a new assistant to help in processing customer orders 4. Acquiring software to run Monte Carlo simulations

3. Paying the salary of a new assistant to help in processing customer orders Rebates or soft dollars may be used to acquire or pay for services or other expenses that assist the adviser in rendering investment advice. Paying the salary of any employee does not benefit the adviser's clients and soft dollars may not be used for that purpose. The other choices are expenses for items that can be used in providing advice to clients.

An firm has been hired to be the investment adviser of the Western Vistas family of funds. The fund family is the firm's only advisory client and it currently has $18 million under management. Which of the following statements concerning the adviser's registration is TRUE? 1. It is required to register only in the states in which the fund family has clients. 2. It must register with both the SEC and each state in which it conducts business until its assets under management exceed $100 million. 3. Since it is a federal covered adviser, it must register with the SEC. 4. Under the de minimis exemption, it is exempt from registration at both the federal and state levels since it only services one mutual fund complex.

3. Since it is a federal covered adviser, it must register with the SEC. Investment advisers are ultimately required to be registered at either the federal level with the SEC or at the state level with the state Administrator; there is no requirement for them to register at both levels. Although there are exceptions, the typical basis for determining whether state or federal registration is required is the amount of assets under management (AUM) for the adviser. However, an important exception applies to firms that serve as advisers to registered investment companies. Regardless of the amount of assets under management for the adviser, any adviser of an investment company is considered a federal covered adviser and is only required to register with the SEC. In this question, the Western Vista family of funds is an investment company.

All the following statements apply to a rule of the Administrator, EXCEPT: 1. The Administrator may not, by rule, change state securities laws 2. A rule of the Administrator is not part of the Uniform Securities Act 3. The Administrator is not required to publish rules 4. Rules are used to provide interpretations of the law

3. The Administrator is not required to publish rules All rules of the Administrator must be published. The rules of the Administrator are not part of the law, but interpret the state's laws. To change a state's securities laws, approval from the state legislature (Congress) is required.

Which of the following statements about testamentary trusts is NOT TRUE? 1. The trust goes into effect after the creator dies. 2. The trustee manages the assets in the trust. 3. The donor manages the assets in the trust. 4. The assets must go through probate before they're placed in the trust.

3. The donor manages the assets in the trust. A testamentary trust goes into effect after the donor passes away. The assets are required to go through the probate process. Once the assets are put into the trust, the trustee (not the donor) manages the assets for the beneficiaries.

An agent of a broker-dealer refers a customer to another agent. Both agents want to split commissions on the customer's transactions. The agents work for different broker dealers, but the two firms are under the same control. Also, both broker-dealers are registered in the state in which the client resides. According to the Uniform Securities Act, are the agents allowed to split commissions? 1. Only if the agents were both related to the customer. 2. No, because the agents work for different broker-dealers. 3. Yes, because the agents' broker-dealers are under common control. 4. No, splitting commissions is strictly prohibited under the Uniform Securities Act.

3. Yes, because the agents' broker-dealers are under common control. Agents are able to split commissions with one another if they're employed by the same broker-dealer or their broker-dealers are under common control. In addition, the agents and broker-dealers must be registered in the state in which the client resides.

Under the Uniform Securities Act, which of the following is exempt from the definition of an investment adviser? 1. An insurance company that provides investment advice to clients for a fee 2. A company that provides investment advice to non-profit organizations and municipalities for a fee 3. A firm that solely provides advice on municipal bonds for a fee 4. A trust company that provides investment advice to trust clients for a fee

4. A trust company that provides investment advice to trust clients for a fee Under the Uniform Securities Act, a trust company is exempt from the definition of an investment adviser. The other persons that are exempt from the definition include: Banks and/or savings institutions Lawyers, accountants, teachers, and engineers (remember L,A,T,E) whose advice is incidental to their profession Broker-dealers whose advisory services are incidental to their business Bona fide publishers Federal covered advisers Any other person that is designated by the Administrator

If an IA has recently changed the number of partners, but not control of the firm, the IA registration must be amended within 30 days. Since there is no change in control or ownership of the firm, a Form ADV-W is not filed. This type of change, however, is known as succession by: 1. Partners 2. Application 3. Majority 4. Amendment

4. Amendment This is an example of succession by amendment, as the ADV is simply amended to reflect the new control structure. If the advisory firm were sold, then a change in ownership occurs and the new firm must submit a new application or ADV. Once effective, a Form ADV-W is filed to withdraw the registration of the acquired adviser.

Under the Investment Advisers Act, which of the following statements is TRUE? 1. If an IA is given brokerage discretion by a client, the IA may not choose a full-service broker-dealer due to the higher fee schedule 2. Since an IA is prohibited from exercising brokerage discretion, the client must choose a broker-dealer through whom the trades will be executed 3. Commissions may not be levied on transactions if the client is paying an advisory fee 4. An adviser who has investment discretion may not always have brokerage discretion

4. An adviser who has investment discretion may not always have brokerage discretion The client can decide which firm will execute the trades, or the client can give the investment adviser brokerage discretion. If given the authority to select a broker, the investment adviser has the flexibility to select either a full-service broker or a discount broker. Information regarding these arrangements is found in Form ADV Part 2.

Which of the following advisory fees is prohibited? 1. Charging a client an hourly rate for managing the account 2. Charging a fee based on a percentage of an account's balance as the first of each month 3. A $5,000 fee for creating a financial plan 4. Charging a fee of 5% on the highest value of the account each month

4. Charging a fee of 5% on the highest value of the account each month Advisory fees must be appropriate for the service being provided. Charging a flat fee, regardless of how much management has been provided by the adviser, is prohibited. Investment advisers are allowed to charge flat fees for creating financial plans, as well as hourly fees or fees that are based on assets under management, provided they're not excessive for the service being provided. Charging a 1% fee based on assets under management is roughly the industry average; however, charging 5% is most likely prohibited under both state and federal law.

Which of the following statements is TRUE regarding tenancy in common? 1. If an owner dies, the assets bypass the probate process 2. If an owner dies, the assets are directly transferred to the other owner(s) 3. This form of ownership is only permitted for equal ownership between two married individuals 4. Due to the nature of the agreement, each individual's interest is generally more freely transferable

4. Due to the nature of the agreement, each individual's interest is generally more freely transferable In an account with a tenancy-in-common arrangement, the assets may or may not be equally divided. When an owner dies, his ownership interest in the account is included in his estate and is subject to probate. The benefit of a tenancy-in-common arrangement is that it makes it easier to transfer assets to other investors when one person dies. There is no requirement that the owners of a tenancy-in-common account be a married couple.

Which of the following statements is TRUE about ETNs? 1. Similar to ETFs, ETNs are suitable for passive investors. 2. ETNs are suitable for investors who want to capture long-term growth. 3. ETNs are unsecured bonds and investors are secured creditors if the issuer declares bankruptcy. 4. ETNs may lose value even if the underlying index remains stable.

4. ETNs may lose value even if the underlying index remains stable. Unlike an ETF which is backed by an independent pool of securities, an ETN is an unsecured bond that's issued by a financial institution. That company promises to pay ETN holders the return on some index over a certain period and return the principal of the investment at maturity. However, if something happens to the issuing company (e.g., bankruptcy) and it's unable to make good on its promise to pay, ETN holders could be left with a worthless investment.

The potential loss for a limited partner in a real estate limited partnership is limited to: 1. Only her initial investment 2. Only the amount of money that is borrowed by the partnership 3. Her initial investment plus any real estate that is shared by the partners 4. Her initial investment plus any unpaid amounts to which she had committed to pay

4. Her initial investment plus any unpaid amounts to which she had committed to pay In a limited partnership, the liability for a limited partner may not exceed her initial investment amount plus any unpaid amounts to which she has agreed to pay. Generally, limited partners are not liable for the debts that are incurred by the partnership. However, when a limited partner cosigns a loan for the partnership and agrees to be responsible for a portion of the loan, the limited partner's liability is increased.

A client purchases a TIPS with a 4% coupon at par. If the CPI indicates that the rate of inflation has increased by 5%, which TWO of the following statements are TRUE? I. The client will receive a 4% coupon rate II. The client will receive a 9% coupon rate III. The client will receive a 5% increase in his next payment IV. The client will receive a 1% increase in his next payment 1. I and IV 2. II and IV 3. II and III 4. I and III

4. I and III Treasury Inflation-Protected Securities (TIPS) are U.S. government securities that have a principal amount that is adjusted for inflation (based on the Consumer Price Index or CPI). Choice (I) is correct since the coupon rate on a TIPS is fixed. The principal amount on which interest is based will change according to any increase in the rate of inflation, which has increased by 5% in this question; choice (III). The investor's coupon payment will represent 4% of the adjusted principal amount.

Under ERISA, which of the following transactions are prohibited between a fiduciary and a party in interest? I. The fiduciary is involved in the sale of property of the plan to a party in interest. II. The fiduciary extends credit between the plan and a party in interest. III. The fiduciary furnishes goods or services between the plan and a party in interest. IV. The fiduciary transfers plan assets to a party in interest. 1. II, III, and IV only 2. I and II only 3. I only 4. I, II, III, and IV

4. I, II, III, and IV All are prohibited transactions under ERISA.

An advisory client has a portfolio that consists of a diversified group of domestic securities with different maturities. Diversification protects the client from which of the following risks? I. Business risk II. Financial risk III. Liquidity risk IV. Market risk 1. I, III, and IV only 2. I, II, and IV only 3. I only 4. I, II, and III only

4. I, II, and III only A diversified portfolio that focuses its investments domestically is subject to market risk. In order to reduce this systematic (market) risk, an investor must invest in assets that do not trade in the same marketplace (such as foreign markets). If the U.S. bond or stock market declines, all of the securities within that marketplace will be affected. This portfolio is protected from all of the other risks mentioned.

Ken is an IAR who manages the portfolio of a prominent local oncologist. The doctor's last few investments have been winners. The doctor has just instructed Ken to buy 100,000 shares of Bio-Transmedia, a thinly traded biotechnology micro-cap stock specializing in cancer research. Based on the doctor's prior record, Ken decides to purchase a few hundred shares for his personal account. Which of the following statements is TRUE? 1. If Ken buys the stock, he will be guilty of insider trading 2. Ken is prohibited from purchasing any stock held by a client account 3. Ken's action is permissible since the size of his purchase is considered inconsequential under the de minimis exception 4. If Ken buys the stock, he may be violating his obligation as an adviser

4. If Ken buys the stock, he may be violating his obligation as an adviser Advisers have a fiduciary responsibility to act in the best interests of their clients. In this case, Ken may be guilty of trading ahead of his client. Trading ahead is the practice of buying or selling stock with the knowledge of a pending client order, which could move the market. Ken is hoping that he could purchase stock cheaply and the doctor's large order will subsequently drive up the stock's price. Ken's purchase would not be considered insider trading since he has no indication that the doctor is in possession of material, nonpublic information.

When determining the risk tolerance of a client, which of the following choices will an investment adviser representative consider to be the LEAST important? 1. The client's history and experience with investments 2. The client's long-term goals 3. The client's income and living expenses 4. Information about the client's life insurance policies

4. Information about the client's life insurance policies When determining a client's risk tolerance, the least important factor (of the choices given) for an IAR to consider is information regarding the client's life insurance policies. However, all of the other choices could potentially influence a client's risk tolerance, such as the person's financial status, goals/objectives, and investment experience. For example, experienced clients who have invested in different, unique types of securities are better able to understand how the various types of risk will affect a security's value.

According to the NASAA Custody Requirements for Investment Advisers Model Rule, an investment adviser that intends to send account statements directly to its clients: 1. Is permitted to do so if the IA provides the statements on a monthly basis 2. Is permitted to do so if the IA has been approved by the Administrator 3. Will be committing a violation 4. Is permitted to do so if the IA is audited by an independent CPA

4. Is permitted to do so if the IA is audited by an independent CPA According to the NASAA Custody Requirements for Investment Advisers Model Rule, an investment adviser that intends to send account statements directly to its clients is permitted to do so if the IA is audited by an independent public accountant. Advisory clients must be provided with account statements on a quarterly (not monthly) basis.

Regarding the yield-to-maturity of a bond, all of the following are TRUE, EXCEPT: 1. A central consideration is the time value of money 2. The internal rate of return is used in its calculation 3. The calculation uses the nominal yield, the price, par value, and time left until maturity 4. It is always equal to the yield-to-call

4. It is always equal to the yield-to-call Callable bonds are able to be repurchased by the issuer earlier than anticipated (i.e., they will not reach maturity). Investors buying callable bonds must be aware of both the yield-to-maturity and the yield-to-call. If the bond is trading at its par value, the two yields will be the same. However, if the bond is trading at a discount or premium, the two yields will be different.

If a broker-dealer is publishing both bid and ask prices for securities in the secondary market, it's acting as a: 1. Agent 2. Designated specialist 3. Broker-dealer 4. Market maker

4. Market maker Market makers are firms that act as dealers in offering to buy and sell securities in the secondary market. When doing so, market makers assume their own risk.

Joshua is employed by JTR Investments. He holds Series 7 and 66 registrations. He also recently organized his own corporation through which he plans to sell promissory notes. Before he begins selling these notes to investors, Joshua must: 1. Pass Series 24 or Series 9/10 and become registered as a principal 2. Notify JTR Investments by simply amending his U4 3. Have JTR Investments file an amended application with the state Administrator 4. Notify JTR Investments in writing and receive its written permission

4. Notify JTR Investments in writing and receive its written permission Joshua must notify JTR about these proposed transactions in writing and receive its written permission before he begins selling promissory notes. (Some registered representatives have tried to argue that promissory notes are not truly securities and, therefore, do not require them to notify their firms and receive written permission). The regulators have rejected this argument warning registered representatives that financial instruments such as leasing arrangements or promissory notes count as securities for the purpose of this rule.

If an offer is broadcast over television or radio, which state Administrator has jurisdiction? 1. The Administrator(s) in the state(s) in which the broadcast is directed 2. The Administrator(s) in the state(s) in which the broadcast is heard or seen 3. The Administrator(s) in the state(s) in which the broadcast is received 4. Only the Administrator in state in which the camera or microphone is located

4. Only the Administrator in state in which the camera or microphone is located Offers that are made using TV or radio are unique because the only Administrator that has jurisdiction is the Administrator of the state in which the camera or microphone is located. For offers that are mailed or received through a newspaper or magazine, there may be multiple state Administrators who have jurisdiction.

A portfolio manager has recently shifted his investment focus from utilities, consumer goods, and financial firms to technology and automobiles. What's this style of investment management called? 1. Technical analysis 2. Efficient market hypothesis 3. Passive asset allocation 4. Sector rotation

4. Sector rotation Sector rotation is an active asset management approach in which investments are moved from defensive (e.g., utilities) and into cyclical (e.g., automobiles) stocks when the economy is expanding. When the economy is heading for a recession, investors will move from cyclical to defensive stocks.

According to the Uniform Securities Act, an Administrator may NOT impose which of the following requirements on an investment adviser? 1. The types of books and records to be maintained at the IA's location 2. The inspection of books and records of the IA both inside and outside of the state 3. The length of time for preserving books and records at the IA's location 4. That a federal covered adviser must keep books and records beyond the time period stated by the SEC

4. That a federal covered adviser must keep books and records beyond the time period stated by the SEC Federal covered advisers must only comply with SEC requirements. State requirements cannot supersede those of the federal government for federal covered advisers.

Which of the following statements is TRUE regarding the details of nonpublic administrative investigations? 1. The Administrator will provide the details of the investigation to any interested party, if requested in writing 2. Nonpublic investigations are not permitted according to the Uniform Securities Act 3. The details of nonpublic investigations are available to anyone, once the investigation has concluded 4. The Administrator will not provide the details of the investigation to any member of the public

4. The Administrator will not provide the details of the investigation to any member of the public According to the Uniform Securities Act, no provision of the Act authorizes the Administrator or any of her officers or employees to disclose information except among themselves, or when necessary in a proceeding or investigation under the Act that was not made public.

An investor who resides in State Y is visiting State X. Before returning to his home, he meets with a friend who is an agent and is registered in State X. While at a restaurant in State X, the agent convinces the client to immediately buy a specific security, rather than waiting until the client gets home. The client pays for the purchase and is told that the confirmation will be sent to his home in State Y. If the agent sold this client an unregistered, non-exempt security, which of the following statements is TRUE? 1. The Administrator of every state in which the agent is registered may take action against the agent. 2. Only the Administrator of State Y may take action against the agent. 3. Only the Administrator of State X may take action against the agent. 4. The Administrators of State X and State Y may take action against the agent.

4. The Administrators of State X and State Y may take action against the agent. An Administrator has jurisdiction over every offer or offer to sell that is made or accepted in a state. In this question, an offer was made and accepted in state X however, the client resides in state Y. Though the Administrator in state X has jurisdiction, action can be taken by the administrator of both states.

Sharon Smith is a registered investment adviser who frequently recommends the purchase of limited partnership interests to her clients. Her personal financial condition and objectives are similar to her clients' but she does not purchase limited partnership interests for her own account. According to the Investment Advisers Act, which of the following statements is TRUE? 1. An adviser should not purchase for her own account securities that are recommended to customers 2. An adviser's personal investment practices are only required to be disclosed if the adviser receives performance-based fees 3. The adviser need not disclose information about her personal investment practices regardless of whether commissions are received for the products sold 4. The adviser must disclose the fact that her personal securities transactions are inconsistent with the advice given to clients

4. The adviser must disclose the fact that her personal securities transactions are inconsistent with the advice given to clients An investment adviser generally must disclose that her personal securities transactions are inconsistent with the advice given to clients, regardless of whether the adviser receives performance-based fees.

The limited registration provision available to Canadian broker-dealers conducting business in a state permits which of the following actions? 1. The broker-dealer transacts business with existing clients who move to a state 2. The broker-dealer transacts business with accredited investors 3. The broker-dealer solicits all residents of a state 4. The broker-dealer transacts business with Canadian residents with whom the broker-dealer had an existing relationship

4. The broker-dealer transacts business with Canadian residents with whom the broker-dealer had an existing relationship The provisions allowing Canadian broker-dealers to transact business in a state are limited. A broker-dealer may effect transactions with a person from Canada who is temporarily in the state if there was an existing broker-dealer-client relationship before the person entered the United States.

A broker-dealer registered in Colorado sells a security listed on a national securities exchange. The transaction takes place in the secondary market and both clients are residents of Colorado. Under the USA, which of the following statements is TRUE? 1. The broker-dealer would be required to register the security in Colorado 2. The Administrator in Colorado may not require any filing of information about the broker-dealer or issuer 3. The issuer would be required to register the security in Colorado 4. The security is not required to be registered in Colorado

4. The security is not required to be registered in Colorado This is an example of an exempt transaction since it is considered a nonissuer transaction executed by a registered broker-dealer where the security is listed on a national securities exchange. If the issuer were selling securities that were listed on a national securities exchange, this might qualify as an exempt security.

Under the Uniform Securities Act, which of the following BEST describes the term inspectorial power? 1. The state Administrator's power to have special investigators review the records of registered investment advisers 2. The state Administrator's power to delegate responsibility to a self-regulatory organization 3. The state Administrator's power to apply the stop-order test 4. The state Administrator's power to subpoena records inside and outside of the state

4. The state Administrator's power to subpoena records inside and outside of the state Inspectorial power refers to a state Administrator's ability to inspect or review any records that are located both inside and outside of the state in order to carry out the provisions of the Uniform Securities Act.

An investment adviser representative (IAR), who is also a member of a tennis club, offers club members discounted fees if they hire his firm to manage their money. The adviser makes full disclosure of this fact in both the brochure and in its ADV Part 2. Which of the following statements is TRUE? 1. This arrangement would be a violation since the fees paid by nonmembers would be excessively higher than the fees paid by members 2. Discounted fee arrangements are allowed, but not in this case since nonclub members are being discriminated against 3. Discounted fee arrangements are a violation of the Uniform Securities Act 4. This is an ethical practice since the details of the discounts have been properly disclosed in the brochure and ADV Part 2

4. This is an ethical practice since the details of the discounts have been properly disclosed in the brochure and ADV Part 2 It is not a violation of the Uniform Securities Act to offer discounted fees to advisory clients provided the nature of the discounts are fully disclosed to both the Administrator and clients.

In a retirement plan, if key employees own more than 60% of the plan's assets, it is considered a: 1. Non-qualified plan 2. Qualified plan 3. Special ERISA plan 4. Top-Heavy plan

4. Top-Heavy plan A top-heavy plan is one in which key employees own more than 60 percent of the plan's assets. If a plan is determined to be top heavy, there are certain steps that an employer can take to maintain the tax-advantaged status of the plan.