Units 5,9,11,14,18,21

For purposes of safeguarding customer information, which of the following would be considered a covered account? A) A margin account in the name of Mary Beth Simmons B) An account in the name of the Wells Morgan Bank C) An account in the name of the State of X employee pension fund D) A margin account in the name of the Interglobal Hedge Fund

A) A margin account in the name of Mary Beth Simmons The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies.

If the current risk-free rate is 4%, and the expected return from the market is 10%, what return should we expect from a security that has a beta of .9? A) 9% B) 9.4% C) 13% D) 6.4%

B) 9.4% Required return = 4% + ([10% - 4%] × .9) = 4% + (6% x .9) = 4% + 5.4% = 9.4%.

When an investment adviser prepares a BCP, what should it be based on? 1. The size of the firm 2. The firm's annual net income 3. The number of locations of the firm 4. The types of services provided A) I, II, III, and IV B) I, III, and IV C) I and III D) III and IV

B) I, III, and IV The amount of an investment adviser's net income is not relevant to a BCP.

Included in the Uniform Securities Act's definition of broker-dealer would be A) savings institutions. B) a broker-dealer with a place of business in the state whose only clients are insurance companies. C) issuers of securities. D) individuals who are registered as agents.

B) a broker-dealer with a place of business in the state whose only clients are insurance companies. When the firm has a place of business in the state, regardless of its clientele, it is a broker-dealer. Exclusions from the definition include agents, issuers, and most financial institutions, such as banks and savings institutions. Also excluded are broker-dealers with no place of business in the state who only deal with institutional clients, such as banks and insurance companies.

A portfolio manager who believes equity securities are overvalued in the short term reduces the weight of equities in her portfolio to 35% from its longer term target weight of 40%. This decision is best described as an example of A) rebalancing. B) tactical asset allocation. C) strategic asset allocation. D) contrarian investing.

B) tactical asset allocation. Tactical asset allocation refers to deviating from a portfolio's target asset allocation weights in the short term to take advantage of perceived opportunities in specific asset classes. Strategic asset allocation is determining the target asset allocation percentages for a portfolio and remaining there. Rebalancing is periodically adjusting a portfolio back to its target asset allocation. In this question, the portfolio manager changed the target allocation - no rebalancing is necessary. Contrarian investing is doing the opposite of what most others are doing.

Each of the following terms is commonly found in modern portfolio theory except A) the efficient set B) the internal rate of return C) the capital asset pricing model D) the feasible set

B) the internal rate of return Internal rate of return (IRR) is not a component of modern portfolio theory as are the other 3 terms.

All of the following are features of limited partnership direct participation programs except A) the general partner controls the business activities of the partnership. B) the limited partners may participate in the management of the partnership. C) the general partner determines when distributions are made to the limited partners. D) the limited partners have limited liability.

B) the limited partners may participate in the management of the partnership. Should a limited partner assume a management role, there is the danger that the limited liability protection will be lost and that partner will now have the same unlimited liability of a general partner. It is the general partner who manages the program; the limited partner is a passive investor.

Which of the following risks most likely would be reduced as a result of the addition of tangible assets to an investor's portfolio? A) Nonsystematic B) Market C) Inflation D) Liquidity

C) Inflation An asset allocation model that includes tangible assets, such as real estate and commodities, tends to provide inflation protection. These assets may have limited liquidity.

USATrade Securities, a FINRA member broker-dealer, is registered in 10 Midwest states. Regarding financial requirements, USATrade must meet those of A) FINRA. B) the state in which the principal office of the member is located. C) the SEC. D) the state with the most stringent financial requirements.

C) the SEC. It may be assumed that a broker-dealer member of FINRA is also registered with the SEC. As such, when it comes to financial requirements, bonding, recordkeeping, and so forth, the SEC's requirements always trump those of the states.

An individual wishing to register as an agent with a broker-dealer may have to do which of these? 1. Pass an examination. 2. Post a bond. 3. Maintain minimum net capital. 4. Meet minimum state educational requirements. A) I and III B) III and IV C) II and III D) I and II

D) I and II In almost all cases, an individual wishing to register as an agent must pass an examination. Many Administrators require that all agents post a bond, whereas others only require bonding for those with investment discretion in customer accounts. Minimum net capital requirements apply to broker-dealers, not agents.

As defined in the Uniform Securities Act, the term person would include: 1. a limited partnership. 2. a political subdivision. 3. an unincorporated association. 4. the executor of an estate for a deceased individual. A) I, II, and III. B) I and IV. C) II and III. D) I, II, III, and IV.

D) I, II, III, and IV. All of these would be included in the USA's definition of person. Not included are a minor, a deceased person, or someone judged mentally incompetent.

A client is covered by a noncontributory pension plan. If his employer has terminated the pension plan and made lump-sum distributions, which of the following actions should the client take? A) Purchase municipal bonds to avoid tax B) Roll over the distribution into an IRA within 60 days to maintain tax-deferred status C) Place the distribution in a Section 529 account to avoid tax D) Purchase a single premium annuity to maintain tax-deferred status

B) Roll over the distribution into an IRA within 60 days to maintain tax-deferred status To maintain the tax-deferred status, the distributions should be rolled over into an IRA within 60 days. Wouldn't it be better to do a direct transfer? That option is not available because the employer has already made the distribution.

The contribution limit has to be aggregated when participating in both A) a 457 and a Roth IRA B) a 401(k) and a 403(b) C) a 403(b) and a 457 D) a 401(k) and a 457

B) a 401(k) and a 403(b) Contributions to a 457 plan do not have to be aggregated with other retirement plans. That is, if eligible, one could contribute the maximum to a 401(k), a 403(b), or an IRA (traditional or Roth) and could also contribute the maximum to a 457 plan.

Which of the following may not be used to fund an individual retirement account (IRA)? A) Mutual funds B) Bank accounts C) Stocks D) Life insurance

D) Life insurance There are many funding options available to investors who open an IRA. IRA contributions can be invested in stocks, mutual funds, bank accounts, and annuities. They cannot be invested in life insurance, however.

Which of the following is the primary advantage to the employer who offers a nonqualified plan when compared to one that offers a qualified plan? A) The nonqualified plan allows for an immediate employer deduction for contributions. B) The qualified plan costs less to administer than the nonqualified plan. C) The qualified plan is permitted to discriminate in favor of key employees. D) The nonqualified plan is permitted to discriminate in favor of highly compensated employees.

D) The nonqualified plan is permitted to discriminate in favor of highly compensated employees. Unlike a qualified plan, a nonqualified plan is permitted to discriminate in favor of highly compensated employees. Because there are so few regulations involved, the administrative costs of a nonqualified plan are much lower than those for a qualified plan. The nonqualified plan, typically deferred compensation, allows for a tax deduction when the money is ultimately paid out to the employee or beneficiary.

An employer offers its employees the opportunity to use tax-deductible funds to pay for health costs, as long as they enroll in a high-deductible health plan. This would be a description of A) an ETF. B) a TSA. C) a FSA. D) an HSA.

D) an HSA. A health savings account (HSA) requires that the employee enroll in a health insurance plan with a high deductible. The flexible spending account (FSA) makes no stipulation regarding the deductible.

A client invests $100,000 in a commercial real estate venture taking a 10% interest as a limited partner. Unfortunately, the demand for new office space deteriorates and the partnership is unable to meet the mortgage payments. The end result is foreclosure with a net loss of $2 million. This would have the effect of: A) requiring the client to pay his share of the loss to the creditors. B) giving the client a passive loss of $200,000. C) a potential claim against the agent who sold the client this program. D) giving the client a passive loss of $100,000.

D) giving the client a passive loss of $100,000. The most the client can lose is the amount of the investment, in this example, $100,000. Because DPPs are considered passive investments, the loss may only be deducted against passive income. As a limited partner, the loss is "limited" to the original investment. Sure, the client could always make a claim against the agent, but nothing in this question indicates that the agent did anything wrong so that would not be the "best" answer.

The powers of the Administrator include the ability to determine A) minimum net worth requirements for investment advisers. B) surety bond requirements for investment advisers who do not exercise discretion or maintain custody. C) minimum net worth requirements for agents who exercise discretion. D) maximum net capital requirements for broker-dealers.

A) minimum net worth requirements for investment advisers. The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. If the investment adviser does not exercise discretion (or maintain custody), no surety bond is required. Agents who exercise discretion may need a surety bond, but not a minimum net worth.

Which of the following would NASAA consider to be a substantial prepayment of fees? A) $600 covering the next calendar quarter B) $600 covering the entire contract year C) $1,000 covering the next month D) $500 covering the next six months

B) $600 covering the entire contract year NASAA defines a substantial prepayment of fees to be more than $500 six or more months in advance. A payment of $600 covering a full year qualifies on both points; it is more than $500 and for more than six months. A payment of $500 covering the next six months meets the time requirement, but it is not more than $500. Payments of $600 for the next quarter or $1,000 for the next month meet the dollar amount but not the time requirement.

Which of the following would an investor who believes in MPT probably select for a client? A) DEF, with a return of 13% and a standard deviation of 18 B) JKL, with a return of 15% and a standard deviation of 15 C) GHI, with a return of 13% and a standard deviation of 20 D) ABC, with a return of 11% and a standard deviation of 15

B) JKL, with a return of 15% and a standard deviation of 15 Modern portfolio theory (MPT) proponents believe that the most appropriate investments are those that offer the greatest return with the lowest risk. JKL has delivered the highest return with a standard deviation (risk) equal to that of ABC (which has a much lower return).

If an individual leaves her current employer and takes a new job, which of the following cannot be done with the assets in her 401(k) plan? A) Roll them over into a traditional IRA. B) Keep them in the plan. C) Roll them over into the new employer's 401(k) plan. D) Roll them over into a variable life insurance policy.

D) Roll them over into a variable life insurance policy. Qualified distributions from a 401(k) plan cannot be rolled over into a a life insurance policy, variable or not.

An employer whose 401(k) plan complies with ERISA Section 404 is placing investment risk with the A) Securities and Exchange Commission B) employer C) Internal Revenue Service D) plan participant

D) plan participant In a 401(k) plan, a plan sponsor can shift investment risk to the employee by complying with ERISA Section 404(c) rules. In this case, the employee is making the investment decisions rather than the investment managers employed by the plan.

An agent must obtain written verification of an investor's net worth for which of the following investments? A) Direct participation programs B) Variable contracts C) Real estate investment trusts D) Unit investment trusts

A) Direct participation programs DPPs require complete financial disclosure because of minimum suitability standards set by the states in which they are sold. REITs, unit investment trusts, and variable contracts do not have specific net worth suitability requirements for investors.

Which of the following investment activities are acceptable for a fiduciary acting under the prudent expert rule? 1. Purchasing AAA-rated debentures 2. Purchasing a growth mutual fund 3. Purchasing new issues of a AAA-rated issuer 4. Writing covered calls on dividend-paying stocks A) I, II, III, and IV B) II and IV C) I and II D) II and III

A) I, II, III, and IV The prudent expert rule permits a fiduciary to invest in securities that a prudent expert might buy. These investments are nonspeculative, low to moderate risk, and likely to be considered prudent if they are used in a way consistent with modern portfolio theory (MPT).

Prohibited investments in an IRA would include all of the following except A) artwork. B) municipal bonds. C) stamps. D) gems.

B) municipal bonds. Although municipal bonds are considered an inappropriate investment in an IRA, they are not prohibited, as is the case with collectibles such as the other three choices.

Which of the following is not a fraudulent business practice when committed by a registered broker-dealer? A) Trading securities between house accounts and customer accounts to create trading volume or the appearance of interest in a security B) Engaging in trades between other broker-dealers to increase or decrease the price of securities C) Acting as agent for both buyer and seller on a transaction D) Conducting transactions that do not result in the transfer of ownership between buyers and sellers

C) Acting as agent for both buyer and seller on a transaction A broker-dealer may act as agent for both buyer and seller in a transaction. In other words, the BD can have one client sell and another client buy and act as the go-between. All the other activities represent market manipulation and are therefore fraudulent practices.

Two contrasting styles of portfolio management are growth and value. Which of the following pairs best describes the contrast? A) Dividend yield/dividend payout ratio B) High P/E ratio/low current ratio C) Earnings momentum/book value D) Capital structure/earnings per share

C) Earnings momentum/book value One of the important metrics to growth managers is the rate at which the company is growing. Earnings momentum is an excellent indicator of that. On the other hand, the primary tool of the value manager is the company's financial statements. Value managers frequently look for companies whose market price is less than their book value. Perhaps you misread "low current ratio" as "low P/E ratio" (which would have been a correct contrast). This is why you have to read each word carefully.

Andrew voluntarily leaves his position as an agent with Gibraltar Securities. Which of the following best describes the reporting requirements relative to this termination? A) Both Andrew and the firm must notify the Administrator of Andrew's resignation promptly. B) Only the firm must notify the Administrator, and it must do so within 30 days of Andrew's resignation. C) Only Andrew must notify the Administrator, and it must do so within 30 days of his resignation. D) Notification to the Administrator is not required, presuming that Andrew was not terminated for cause. Explanation

A) Both Andrew and the firm must notify the Administrator of Andrew's resignation promptly. On termination of an agent from a firm with which he is registered, both the agent and the firm must notify the Administrator of such termination promptly.

Which of the following statements regarding loans from 401(k) plans is not correct? A) They must be made available to highly compensated employees in amounts greater than that made available to other employees. B) They must bear a reasonable rate of interest. C) They must be made in accordance with the loan provisions stipulated in the 401(k) plan. D) They must be adequately secured.

A) They must be made available to highly compensated employees in amounts greater than that made available to other employees. Loans must be repaid with interest, generally within 5 years. They must be secured and made in accordance with plan provisions. Loans may not be made available to highly compensated employees in amounts greater than that made available to other employees.

Which of the following statements describes a person who provides investment advice on a regular basis but does not charge fees, yet would be considered an adviser under Release IA-1092? A) A financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space. B) A retired chief investment officer of a well-known investment management company, without compensation, writes a column in a general circulation newspaper commenting on the value of investing in equity securities; many readers find his advice useful and become clients of his former investment management company.

A) A financial planner sold his business and spends his time consulting with pension plans on whether to retain or hire new investment managers based on their performance. He does not charge fees; however, those managers retained as a result of his recommendations routinely provide him with noncash benefits such as vacations, computers, and office space. If an individual is in the business of providing advice and receives any economic benefit, such benefit is considered compensation under Release IA-1092. Because the financial planner is in the business of giving advice to pension plans, actually provides that advice, and is compensated for it, he meets all three elements in the definition of an adviser. The noncash benefit, as in this case, need not come directly from the beneficiary of the services to be considered compensation. The college professor, the chief investment officer, and the secretary of the Treasury do not receive separate compensation, nor are they in the business of providing investment advice.

Which of the following statements regarding an investment adviser's use of a full-service broker for an account over which the adviser has investment discretion is true? A) A full-service broker may be used if the charges are reasonable in relation to the advice, analyses, or other services provided. B) Sales incentives, such as free vacations, may be taken into consideration by the adviser in determining whether to use a full-service broker. C) A full-service broker may be used only if the broker is not affiliated with the adviser. D) A full-service broker may not be used for any transaction that could be done by a discount broker.

A) A full-service broker may be used if the charges are reasonable in relation to the advice, analyses, or other services provided. Use of a full-service broker to effect transactions for an account over which an adviser has investment discretion is not a breach of fiduciary duty, provided the full-service broker's charges are reasonable in view of the services provided. Services include advice, analyses, research, and custodial services, but not sales incentives offered to the adviser; investment advisers are required to disclose this fact on Form ADV, Part 2A.

In which of the following funds would a buy-and-hold style most likely be used by the manager? A) Equity index fund B) Options income fund C) Market timing fund D) Information technology fund

A) Equity index fund A manager of an equity index fund would use a buy-and-hold style. As the composition of the index changes through stock distributions or recapitalizations, the fund manager would buy or sell the issues to keep them in proportion to their position in the index prior to the distribution or recapitalization. By its nature, an options fund would require the active purchase and sale of securities or options to take advantage of market conditions. A market timing fund must be prepared to buy or sell securities as perceptions of the market change. An information technology fund has to buy and sell shares actively in response to the development of new technologies.

Which of the following statements regarding the growth style of investing is correct? A) Growth managers focus on the denominator in the P/E ratio, searching for firms and industries where high expected earnings growth will drive the stock price up even higher. B) Growth managers focus on the numerator in the P/E ratio, desiring a low stock price relative to earnings or book value of assets. C) Growth managers believe that, although a firm's earnings are depressed now, the earnings will rise in the future as they revert to the historical range. D) Growth managers look for a high-dividend yield and often take a contrarian approach.

A) Growth managers focus on the denominator in the P/E ratio, searching for firms and industries where high expected earnings growth will drive the stock price up even higher. High P/E ratios are one of the keynotes of growth investing. The other choices here all relate to the value style.

Which of the following must be considered in evaluating the suitability of a DPP investment for a customer? 1. Risk tolerance 2. Other holdings 3. Financial situation 4. Age A) I, II, III, and IV B) I and IV C) I and II D) II and III

A) I, II, III, and IV The key here is to recognize that with DPPs, the customer's age is a relevant consideration in determining suitability. DPPs are long-term, illiquid, high-risk investments. It is unlikely that DPPs would be suitable for a customer near retirement age, regardless of the customer's financial situation.

Which of the following practices is fraudulent? A) Marking up a security by 5%, but indicating to the client that the markup is only 2% B) Selling a security to a customer with a commission that exceeds industry standards C) Failing to state all the facts related to a security D) Marking up a security by 10% more than industry standards with the customer's knowledge and consent

A) Marking up a security by 5%, but indicating to the client that the markup is only 2% Fraud is the willful deception of a client. Stating that the markup will be 2% and then effecting a 5% markup is a fraudulent act. Marking up a security by more than industry practices is a prohibited practice but is not necessarily fraudulent. It is not necessary to state all the facts; only those that are material are required.

Which of the following statements is not true of investment advisers under the Uniform Securities Act? A) Only written advice concerning investments is covered by the act. B) Compensation is a key factor in determining whether a person is required to register as an investment adviser. C) A natural person may register as an investment adviser. D) Investment advice includes advice regarding the value of securities, as well as recommendations to buy or sell.

A) Only written advice concerning investments is covered by the act. One of the three prongs defining an investment adviser under both state and federal law is the giving of investment advice. That advice can be in written or oral form. Any person, as defined in the USA, may register as an investment adviser. Even though we tend to think of the investment adviser as the company you will be working for, a significant percentage of state-registered investment advisory firms are sole proprietorships (one-person shops). Investment advice includes advice as to the value of securities, as well as recommendations to buy or sell. Compensation is another one of the three prongs in determining whether a person is defined as an investment adviser.

Which of the following statements regarding an agent's registration is correct? A) Revocation of the registration of that agent's broker-dealer will result in that agent's effective registration being put on hold. B) Agents may be licensed in a state even if their broker-dealer is not. C) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator and the agent will be required to register with an active broker-dealer within 30 days. D) If the broker-dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and may not acquire any new ones until registered with an active broker-dealer.

A) Revocation of the registration of that agent's broker-dealer will result in that agent's effective registration being put on hold. An agent of a broker-dealer is active only when that broker-dealer's registration is in force. The exam may refer to the agent's registration being placed into suspense or canceled; any of these has the same effect.

One of your clients has just completed a divorce. The client is a participant in a 401(k) and has a traditional IRA. The divorce settlement includes a QDRO providing for half of the client's account to go to the ex-spouse. The ex-spouse also receives half of the client's IRA. With regard to the ex-spouse, which of the following statements is correct? A) Withdrawals from the IRA prior to age 59½ may be subject to the 10% penalty. B) The name of the former spouse must appear on the ex-spouse's IRA. C) The ex-spouse has 60 days to rollover the distribution. D) Withdrawals from the 401(k)prior to age 59½ may be subject to the 10% penalty.

A) Withdrawals from the IRA prior to age 59½ may be subject to the 10% penalty. QDROs apply only to qualified plans and, therefore, if the ex-spouse withdraws funds from the 401(k) prior to age 59½, it will generally qualify for the exemption from the 10% penalty. In the case of withdrawals from the IRS, unless due to one of the allowable exceptions (death, disability) the 10% tax penalty applies. When there is a divorce and an IRA is split, the ex-spouse now has an IRA in his or her name with no mention of the previous owner. There is technically no distribution so there is nothing to rollover.

All of the following are eligible to open an IRA except A) a divorced individual whose sole source of income is $10,000 per month in child support B) a corporate officer not covered by his company's pension plan C) a self-employed person covered by a Keogh plan D) a corporate officer covered by his company's pension plan

A) a divorced individual whose sole source of income is $10,000 per month in child support Anyone with earned income may open an IRA. However, child support is not considered earned income. If the corporate officer's (covered by the pension plan) earnings exceed a certain limit, the officer is subject to limitations on the amount of the deduction that may be taken for IRA contributions, but the contribution may still be made.

Under the Uniform Security Act, all of the following persons with no place of business in the state are exempt from registration as an investment advisers EXCEPT: A) advisers who have conducted business with no more than 6 individual clients in the state within the last 12 months. B) advisers who deal exclusively with investment companies registered under the Investment Company Act of 1940. C) advisers who deal exclusively with savings banks located in the state. D) advisers who deal exclusively with federal covered investment advisers located in the state.

A) advisers who have conducted business with no more than 6 individual clients in the state within the last 12 months. The de minimis rule for a registered investment adviser who has no place of business in the state is fewer than 6 retail clients. Doing business with 6 clients within the last 12 months exceeds this de minimis amount and, therefore, the exemption from registration does not exist. All others listed as possible answers are institutional or professional type of investment clients. If a registered investment adviser works only with this type of client, an exemption from registration in that state exists as long as the registered investment adviser has no place of business in that state.

Holly is an IAR with Remington, Fairchild, and Hume, a federal covered investment adviser. Holly's manager tells her that he will be busy for a couple of hours working on completing Form ADV-E. This tells Holly that her firm A) maintains custody of customer funds and securities. B) is undergoing a special evaluation by its clients. C) will be changing to state registration. D) is reporting certain errors discovered by management.

A) maintains custody of customer funds and securities. Form ADV-E (E for Examination) must be completed by investment advisers (IAs) that have custody of client funds or securities and that are subject to an annual surprise examination. Then the IA gives this form to the independent public accountant, who examines client funds and securities in the custody of the investment adviser, in compliance with the Investment Advisers Act of 1940 or applicable state law.

It has been a great year at Capital Funding, Inc., an SEC-registered broker-dealer that is also registered in 22 states. The company decides to share its good fortune with employees by paying a year-end bonus equal to 31% of annual salary. In order for clerical personnel to receive this bonus: A) they must be employees of the broker-dealer. B) they must be licensed as agents. C) the bonus must be sales related. D) they must be licensed as investment adviser representatives.

A) they must be employees of the broker-dealer. Unregistered personnel may be paid a bonus as long as it is not directly related to any specific sales activity.

Shibboleth Research Associates (SRA) meets the definition of an investment adviser and wishes to register with the Securities and Exchange Commission. Assuming the firm meets the requirements, registration is accomplished by filing A) Form ADV-W. B) Form ADV Part 1A. C) Form ADV Part 1A and Part 1B. D) Form ADV Parts 1 and 2.

B) Form ADV Part 1A. Form ADV Part 1A is the form filed by all applicants for registration as an investment adviser. If the applicant is registering on the state level, Part 1B is also required. Part 2A is the brochure, and Part 2B is the brochure supplement. Both Part 2A and 2B are filed with the Administrator when registering in a state. But when registering with the SEC, those forms are not filed with the SEC but are maintained in the principal office of the adviser. Form ADV-W is used when withdrawing from registration.

Advisers that manage $110 million or more in customer assets are required to do which of the following? 1. Register with the Securities Exchange Commission. 2. File notice with FINRA. 3. Post a bond in an amount specified by the appropriate regulatory body. 4. File notice with the state in which their principal office is located if notice filing is required by the Administrator. A) II and IV B) I and IV C) II and III D) I and III

B) I and IV Advisers that manage $110 million or more in customer assets are federal covered advisers and are required to register with the SEC under the Investment Advisers Act of 1940. In addition, they are normally required to file notice in each state where they conduct business. There are no bonding requirements for federal covered advisers.

Under the Investment Advisers Act of 1940, persons who provide a variety of services, including investment advisory services, are considered to have received compensation for their advice when they receive which of these? 1. Any economic benefit 2. A fee paid directly for the investment advice portion of their services 3. A commission on the sale of real estate when the agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists A) I and III B) I, II, and III C) II and III D) I and II

B) I, II, and III The question is not asking, "Who is an investment adviser?" It is focusing on the compensation prong. Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. An example of that holds for the real estate agent—she doesn't give advice unless you list your home with her.

The Investment Advisers Act of 1940 excludes from the definition of "investment adviser" persons whose advice: 1. relates solely to municipal issues. 2. relates solely to issues issued by or guaranteed by the U.S. Treasury. 3. is solely incidental to their professional practice as an aeronautical engineer. 4. is limited to insurance companies only. A) I, II, and IV. B) II and III. C) I, II, III, and IV. D) III and IV.

B) II and III. Among the exclusions from the definition of" investment adviser "under both state and federal regulations is the case where certain professionals, including engineers, render the advice in a manner solely incidental to the practice of their professions. Unique to the federal law is the exclusion granted to those persons whose advice deals exclusively with federal government issued or guaranteed issues. Advice to solely insurance companies qualifies one for an exemption from registration, but does not exclude the person from the definition of IA.

It would not be a violation of the Uniform Securities Act for an applicant for registration as an agent to do which of the following while the application is pending? A) Use a preliminary prospectus to obtain indications of interest for a new issue but wait until he is registered before accepting any orders B) Sell fixed annuities C) Conduct seminars on asset allocation D) Limit his sales activity to immediate family members only

B) Sell fixed annuities While registration as an agent is pending, the applicant can take no active role in the sale or offering of securities. However, because fixed annuities are not securities, registration as an agent is not required. Yes, we know that an insurance license would be required, but apparently NASAA doesn't care about that.

Which of the following would not be considered evidence of custody of a client's funds or securities? A) Client funds and securities are kept at a qualified custodian. B) The investment adviser has discretionary authority over the client's account. C) The adviser writes checks on the client's account to pay for the client's securities. D) The client makes a partial purchase, and the broker-dealer holds the securities until full payment is made.

B) The investment adviser has discretionary authority over the client's account. Custody means possession (even temporary possession) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement but does not include the acceptance by the adviser of prepaid advisory fees or discretionary authority.

Under the Uniform Securities Act, which of the following statements is true regarding registration of an investment adviser if the application has not been amended? A) Unless specified earlier, registration becomes effective no later than 90 days after the application is filed. B) Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application. C) Unless specified earlier, registration becomes effective no sooner than 15 days after the application is filed. D) Unless specified earlier by the Administrator, the registration becomes effective at noon on the 60th day after application.

B) Unless specified earlier by the Administrator, the registration becomes effective no later than noon on the 30th day after application. While the Administrator may specify an earlier date, absent any denial orders or pending proceedings, registrations become effective at noon on the 30th calendar day after the date of filing. The application is considered to be filed on the date received in the offices of the Administrator, not the date of mailing by the applicant.

To comply with ERISA Section 404(c), a 401(k) plan must satisfy all the following requirements except A) plan participants must have the ability to transfer assets among investment options at least quarterly. B) plan participants must be provided with the services of a Certified Financial Planner at least annually to assist them with investment decision making. C) plan participants must have access to at least 3 core diversified investment options. D) sufficient information must be provided to plan participants about investment alternatives available under the plan to permit informed decision making.

B) plan participants must be provided with the services of a Certified Financial Planner at least annually to assist them with investment decision making. Section 404(c) relieves a plan fiduciary from liabilities associated with losses stemming from employee investment choices. To qualify for this protection, the plan must provide at least 3 core diversified investment options, participants must have the ability to transfer assets among investment options at least quarterly, and sufficient information must be provided to participants to allow for informed decision making.

An investment adviser affiliated with a broker-dealer would be considered to be maintaining custody when A) charging fees on an hourly basis. B) receiving a check made payable to that broker-dealer. C) receiving performance-based compensation. D) having the power to make buy-and-sell decisions in an account.

B) receiving a check made payable to that broker-dealer. Under the NASAA Model Rule on Custody Requirements for Investment Advisers, when an investment adviser (IA) uses an affiliated broker-dealer as its qualified custodian, the IA is considered to be maintaining custody. Therefore, receipt of a check made payable to the broker-dealer is acceptable (it does not have to be forwarded).​ Discretion is not custody, and the method of compensation has nothing to do with custody. Don't confuse that with the case where the IA can debit the client's account for fees—that would be custody; whether the fees are hourly, performance based, or any other method is not related to custody.

Prohibited business practices under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents would not include A) sharing commissions with an agent of a nonaffiliated broker-dealer. B) sharing in the profits and losses in a client's account without making a financial contribution to the account. C) making specific investment recommendations to the group attending a free lunch seminar. D) borrowing money for graduate school tuition from a client who happens to be the agent's father.

B) sharing in the profits and losses in a client's account without making a financial contribution to the account. Unlike the FINRA rule, agents may share in the profits and losses in a client's account without making a financial contribution; all that is required is consent of the client and the employing broker-dealer. The so-called free lunch seminars are typically promoted as educational, and in any case, how can the agent make specific recommendations to a group without having suitable information on each attendee? Borrowing money from a client, regardless of the purpose, is not permitted unless the lender is in the business of lending money. Sharing commissions with an agent licensed with the same or affiliated broker-dealer is permitted, but one with which there is no affiliation is not permitted.

An investor wishes to use funds in his IRA to purchase a condominium for personal use. Under current regulations, A) real estate, such as a personal condominium, would be a permitted investment. B) this would be a prohibited transaction. C) real estate, like life insurance, cannot be purchased in an IRA. D) this would not be a prohibited transaction unless the investor personally used the property more than 14 days per year.

B) this would be a prohibited transaction. An IRA may invest in real estate if it is for business purposes only. If done improperly, serious problems with the IRS can result. If it is done as a truly hands-off investment, it is unlikely that there will be an issue. However, the moment the participant derives any personal benefit from the property, it becomes a prohibited transaction. We have not heard of it being tested at this level, but here is how serious this is. Generally, if an IRA owner or his or her beneficiaries engage in a prohibited transaction in connection with an IRA account at any time during the year, the account stops being an IRA as of the first day of that year. The effect of this is the account is treated as distributing all its assets to the IRA owner at their fair market values on the first day of the year. If the total of those values is more than the basis in the IRA (usually zero if the contributions were tax deductible), the IRA owner will have a taxable gain that is includible in his or her ordinary income.

An investor begins contributing $600 on the third day of each month to a purchase plan for the KAPCO Total Return Fund. For the first six months, the per share prices were: $10 $12 $15 $20 $12 $8 What is this investor's breakeven point? A) $12.50 per share B) $12.83 per share C) $11.80 per share D) $8.00 per share

C) $11.80 per share This is a dollar cost averaging question. This investor has purchased a total of 305 shares with a total cost of $3,600. Here's the math: Month 1- $600 divided by $10 = 60 shares Month 2 - $600 divided by $12 = 50 shares Month 3 - $600 divided by $15 = 40 shares Month 4 - $600 divided by $20 = 30 shares Month 5 - $600 divided by $12 = 50 shares Month 6 - $600 divided by $8 = 75 shares The total expenditure was $3,600 (6 months××$600) and the total number of shares purchased was 305. That makes the average cost per share $11.80 ($3,600 divided by 305). With the investor's average cost per share being $11.80, a sale of the shares at that price will cause the investor to break even.

When applying for registration as an agent, which of the following must be disclosed? A) Residential history for the past three years B) Highest educational level achieved and the institution attended C) Certain financial information such as any unsatisfied judgments or liens against the applicant D) Complete employment history for the past five years

C) Certain financial information such as any unsatisfied judgments or liens against the applicant This question probably contains more detailed information than will be covered on the exam. Negative financial information, such as unsatisfied judgments or liens and bankruptcy filings, must be disclosed. Employment history for the past 10 years and residential history for the past 5 years must be shown. If, during the past 10 years, the applicant was a full-time student, then that must be shown, but that is the extent of educational information required.

Which of the following investments is not registered under the Investment Company Act of 1940? A) UITs B) FACCs C) ETNs D) ETFs

C) ETNs Exchange-traded notes, sometimes called equity-linked notes, are registered under the Securities Act of 1933 as debt instruments. All of the other choices are registered as investment companies under the Investment Company Act of 1940.

Which of the following portfolio management styles would most likely incur the highest transaction costs? A) Buy and hold B) Indexing C) Tactical asset allocation D) Strategic asset allocation

C) Tactical asset allocation A tactical allocation strategy calls for active trading of a portfolio and will likely incur the highest transaction costs. Passive styles, such as buy and hold and index, have relatively low transaction costs.

Which of the following would be considered when determining whether excessive trading has occurred in a client's account? A) The performance of the account in comparison to other client's accounts B) The number of years the account has been opened C) The nature of the client's financial objectives D) The size of the companies issuing the securities

C) The nature of the client's financial objectives An agent is engaging in unethical conduct if she induces a client to trade securities too frequently in view of the financial resources, investment objectives, and character of the client's account. Frequent trading and trading in large amounts is not necessarily wrong. It is only wrong if the trades are not suitable for a particular client. Thus, the only factor listed that must be considered in determining whether trading is excessive is the nature of the client's financial objectives.

Allowable investments in an IRA would include A) cash value life insurance B) rare stamps C) U.S. government-issued silver eagles D) collectible art

C) U.S. government-issued silver eagles There are certain coins minted by the U.S. Treasury that are eligible for inclusion in an IRA. No life insurance is allowed (though annuities, both fixed and variable, are allowed), and collectibles, such as art and stamps, are prohibited.

All of the following permit investments into various securities, such as stocks, bonds, and mutual funds except A) an HSA. B) a traditional IRA. C) an FSA. D) a Roth IRA.

C) an FSA. Flexible spending accounts (FSAs) allow deductions from an employee's paycheck. That money is held by the company and is used to pay allowable claims by the employee. A health savings account (HSA) permits the employee to invest in a wide variety of securities. IRAs, traditional and Roth, have always permitted investment flexibility.

If an investor was of the opinion that the market was going to have a bad day, to maximize that investor's gains, you might recommend A) an inverse ETF. B) selling a call option on the S&P 500 Index. C) an inverse leveraged ETF. D) a leveraged ETF.

C) an inverse leveraged ETF. An inverse ETF should go up if the market goes down. Adding leverage to it means moving by a factor of 2x or 3x, so to maximize the potential gain, we combine leverage to the inverse and suggest the inverse leveraged ETF.

All of the following statements regarding technical analysis are correct except A) technical analysts rely on charts to predict the future prices of stocks. B) technical analysts attempt to predict the future movement of stock prices based on past trends. C) technical analysts rely heavily on financial ratios in their analysis of stocks. D) technical analysts use terms such as trendline, support, and resistance in analyzing stocks.

C) technical analysts rely heavily on financial ratios in their analysis of stocks. Technical analysts do not rely on financial ratios in their analysis of stocks. Instead, they rely on charts of past price history and volume to predict future price movements. It is fundamental analysis where financial ratios are important.

Create A Large Legacy, Inc., (CALL) is a state-registered investment adviser with offices in States X, Y, and Z. CALL currently does not have a place of business in State W but does have five retail clients who are residents there. Opening an account for which of the following prospective clients domiciled in State W would now require CALL to register in State W? A) A county in State W desiring advice on investment over $250,000 of surplus funds B) An insurance company account with an opening balance of $750,000 C) A small community bank depositing $500,000 D) A trust having four minor children as beneficiaries with total trust assets of $5 million

D) A trust having four minor children as beneficiaries with total trust assets of $5 million Regardless of the assets involved, a trust account, unless one for an employee benefit plan with at least $1 million in assets, is considered a retail rather than institutional client. Once the investment adviser goes over the de minimis limit of five, registration with the state is required. Regardless of the assets involved, institutional clients, such as insurance companies, banks, and government instrumentalities, do not count toward the de minimis limit.

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

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

Prosperity Financial Investments (PFI), a broker-dealer with its principal office in State A, just applied for registration in State C. Which of the following individuals registered as agents in State A will be automatically registered as agents in State C? A) The individual serving as the receptionist in the new State C office B) An individual registered as an IAR with PFI C) An individual registered as an agent with PFI D) An individual serving as an officer of PFI

D) An individual serving as an officer of PFI The automatic registration provision of the USA applies to those officers, directors, or partners functioning as agents for the BD (or IARs if the question is about an investment adviser). The provision does not apply to any agent, just those who are officers, directors, or partners. The provision does not apply to any officer, etc., only to those who function as agents (or IARs if appropriate to the question).

A new client's principal objective is income with a moderate degree of capital preservation. When reviewing his existing portfolio, you notice that the client's bond holdings are evenly split between those maturing in the next 1 to 2 years and those maturing in the next 10 to 11 years. This indicates that the client has been using which of the following strategies? A) Ladder B) Bullet C) Contrarian D) Barbell

D) Barbell The barbell strategy gets its name from the fact that the holdings are split into two maturity ranges. About half is near term and balance is at the long end of intermediate-term with nothing in between. The bullet strategy has all of the bonds maturing at the same time; some target date in the future. Laddering a bond portfolio has bonds maturing every year, just like the steps on a ladder. Contrarian is most often an equity strategy.

An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, which of the following assets would be included? 1. A sofa in the reception area 2. The value of the copyright on an investment manual authored by the investment adviser 3. The reputation of the investment adviser 4. Patents held by the investment adviser on a stock-tracking software program A) IV only B) I, II, and III C) II, III, and IV D) I only

D) I only For purposes of this rule, the term net worth means an excess of assets over liabilities. But net worth does not include the following as assets: goodwill, franchise rights, patents, copyrights, marketing rights, and all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what's the deal with the sofa? Because the choice specifically says that it is in the reception area, we must assume that it is not a "home" furnishing; rather, it's one in the office, and those are not excluded assets.

Under the Uniform Securities Act, the Administrator can require which of the following from broker-dealers and investment advisers? 1. Filing of sales literature 2. Maintaining of records 3. Filing of financial statements 4. Filing of amendments to registrations A) I and II B) II, III, and IV C) II and III D) I, II, III, and IV

D) I, II, III, and IV The act requires the filing of sales literature and advertising (as well as a prospectus) addressed to or intended for clients or prospective clients, unless exempt under the act. In addition, it requires that books and records be kept for a minimum of three years for broker-dealers and five years for investment advisers and provides that an Administrator may require the filing of financial reports regarding the net worth of the firm. The act also requires broker-dealers and investment advisers to update any information filed with the state regarding any material change that takes place. Even federal covered investment advisers may be required to file copies of their SEC registration and amendments with state Administrators, along with filing fees.

Which of the following investment adviser compensation arrangements is permitted under the Uniform Securities Act? 1. The value of a client's account at the start of the year is subtracted from the value at the end of the year. The adviser's compensation is 5% of the difference. 2. The adviser charges an annual fee of $2,000, but the agreement calls for a waiver of the fee if the client's portfolio value has not increased by at least $20,000. 3. The adviser charges a fee of 1% of the average value of the account portfolio during the year. 4. The adviser charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the client's assets increase to $200,000 or more. A) III only B) I and IV C) I and II D) III and IV

D) III and IV Unless the question states that it relates to the exception for wealthy investors ($1.1 million under management of the adviser or more than $2.2 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted.

Among the differences between an investment in a limited partnership offering and in a corporation is that A) limited partners take a more active role in the management of the enterprise than do stockholders of a corporation. B) only corporations are organized to run a business. C) only corporations issue securities. D) limited partnership offerings do not pay dividends; corporations do.

D) limited partnership offerings do not pay dividends; corporations do. One of the key features of a limited partnership investment is the concept of flow-through of operating results. If the business operates at a loss, the limited partner's share of that loss is treated as a passive loss on the investor's tax return. If the business is profitable, the limited partner's share of the profit is treated as passive income. Corporations issue securities, primarily stocks and bonds, while limited partnerships issue units representing the limited partner's interest in the venture. Those units are investment contracts and, as taught in Unit 4, LO4, securities. Limited partners who take an active role in the partnership lose their limited status.

In general, a broker-dealer is required to register with the SEC. An exception to that requirement would apply to a broker-dealer who A) is registered with the Administrator of the states in which it does business and only deals with issuers of the securities it trades. B) is currently registered with the SEC as an investment adviser. C) does not have a place of business in the state and limits its clientele to institutional clients. D) maintains a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange.

D) maintains a place of business in a single state, only deals with residents of that states, and does not execute transactions in securities traded on a national exchange. The only exemption from SEC registration applies to broker-dealers functioning strictly on an intrastate basis. Many broker-dealers are registered with the SEC as both broker-dealers and IAs—one does not suffice for the other. The exemptions from state registration as a broker-dealer are much broader and would include the cases where the broker-dealer does not have a place of business in the state and its only clients are institutions or it effects transactions in this state exclusively with or through the issuers of the securities involved in the transactions.

A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee A) need not register as an agent of the issuer under any circumstances. B) may receive commissions without registration. C) must register as an agent of the issuer. D) must register as an agent only if he will receive commissions or remuneration, either directly or indirectly related to the volume of sales.

D) must register as an agent only if he will receive commissions or remuneration, either directly or indirectly related to the volume of sales. Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if commissions or other remuneration related to the sale are paid. Therefore, there are cases where the employee would have to register as an agent. When the individual is paid a straight salary for this work, no registration is required.

You have a 62-year-old client who opened a Roth IRA with your firm one year ago. The account was funded with a $6,500 deposit and the account's value is now $7,500. The client has another Roth, opened eight years ago at another firm. The client would like to withdraw $7,000 from this account rather than the one at the other firm. The tax consequences of this withdrawal would be A) ordinary income tax on the $500 that exceeds the original cost. B) ordinary income tax on the $1,000 growth because the account has not been open for 5 years. C) ordinary income tax on the entire amount because the account has not been open for 5 years. D) no tax.

D) no tax. An individual can always withdraw the initial principal in a Roth without tax or penalty - it is only the earnings that will be subject to tax if not meeting the requirements of the Internal Revenue Code. In order for withdrawals of earnings from a Roth IRA to be free of any tax, there are two primary requirements: The first is that the owner be at least 59½ years of age. The second is that it is at least 5 years since the first deposit to a Roth IRA in the individual's name. Both of those conditions are met here. The client is 62 and the initial Roth IRA deposit was made 8 years ago. It is irrelevant which account the money is taken from as long as there is an account that has been open for at least 5 years.

You have a client who wishes to allocate a portion of his funds to investment real estate in an attempt to generate additional income. That goal could be reached by investing in any of the following except A) rental real estate. B) real estate limited partnerships. C) REITs. D) raw land.

D) raw land. Raw land does not generate income; it is most often held for future capital appreciation.

There are several popular investment styles and, in many cases, portfolio managers use a blended approach to security selection. If a portfolio manager adhered to a pure value style, he would put most of his focus on A) lagging indicators B) using technical analysis C) projecting future earnings based on past earnings D) the company's financial statements

D) the company's financial statements The value style of portfolio management looks for stocks that are undervalued. For example, the current market price is near or less than book value per share. The only way to find that out is by looking at the company's balance sheet.

If the risk and return profiles of all the possible risky portfolios were plotted on a graph, those portfolios that would be the most attractive to investors would lie on A) the capital market line B) the security market line C) the y-axis D) the efficient frontier

D) the efficient frontier An efficient portfolio is one that offers the most return for a given amount of risk, or the least risk for a given amount of return. The collection of efficient portfolios is called the efficient set or efficient frontier. This efficient frontier is plotted as a curve.

Certain documents belonging to a federal covered investment adviser must be kept for a period of time after the enterprise closes. Those documents are A) sent to the Administrator for safekeeping. B) sent to the SEC for safekeeping. C) required to be shredded. D) the responsibility of the investment adviser.

D) the responsibility of the investment adviser. Broker-dealers and investment advisers must keep certain records for a period of three years after the termination of the business. How and where those records are maintained is the responsibility of the firm, not the regulators. This is a separate requirement from the one that has active broker-dealers keeping records for three years and investment advisers for five.