Series 66 3.0 Flashcards Preview

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Flashcards in Series 66 3.0 Deck (95):

True or false: Typically, an agent, when representing the broker-dealer to solicit securities transactions, must register in every state where business is conducted even if the securities or the transactions are exempt.



Which one, if any, of these transactions will be treated as a prohibited transaction under the provisions of the ERISA legislation?

A)The furnishing of office space to a plan trustee for reasonable compensation and fair rental value.

B)The plan fiduciary permitting a plan participant to use part of his vested interest to purchase commercial real estate.

C)An investment adviser using the interest from plan assets to cover the adviser's office expenses.

D)A loan between a 401(k) plan and plan participant.

3; An investment adviser, as a fiduciary and disqualified person under the plan, is prohibited from using plan assets in payment of personal obligations (such as outstanding office expenses). Loans from a 401(k) plan to a participant are not prohibited transactions. The plan trustee may rent space from the plan (one of the plan’s assets is an office building). Speaking of real estate, participants in a retirement plan may purchase real estate with their funds provided that the real estate is not used for the benefit of any related person.


One of your clients just inherited some money and wishes to invest $250,000 into the GEMCO International Equity Fund. The client is attracted to the Class B shares because there is no upfront sales charge on them while the Class A shares have a 3% front-end load. The appropriate response would be that

A)because of the higher 12b-1 charges levied against the Class B shares as well as the CDSC, Class A shares are recommended for a purchase of this size

B)the client is doing the smart thing by avoiding the sales charge, even though you will be losing out on the opportunity to earn a nice commission

C)as long as the client will hold the Class B shares no longer than 4 years, the higher 12b-1 fees will be much less than the load paid on the Class A shares

D)you feel so strongly that the Class A shares represent a more attractive solution for the client that you will rebate your share of the commissions

1; In the real world, there is probably no fund group that would accept a $250,000 order for Class B shares; more than likely, no fund group would even accept one above $100,000. That is because at that level, the reduced front-end load available on the Class A shares due to reaching a breakpoint, combined with the lower (or lack of) 12b-1 charge and no redemption charge (CDSC), makes them a better deal than the Class B shares. Rebating of commissions is not permitted and, even at the 4-year holding period, there still is a CDSC.


A bond is paying $100 per year in annual interest and is selling at par. If the discount rate is 10%, the net present value is



C)the same as the coupon


2; A bond paying $100 in interest per year has a coupon rate of 10%. Whenever the coupon rate is equal to the discount rate, the NPV is zero. That is, the present value of a bond paying 10% interest when the current market rate is demanding a 10% interest rate is the bond’s par value (as is the case with this bond).


True or false: Testimonials are prohibited under any circumstances for investment advisers and their representatives. Agents and broker-dealers are permitted to use testimonials if they meet FINRA standards.

true; an IAR may only use a testimonial from an existing client


A customer who is changing jobs has how many days to roll over a lump sum from a qualified pension plan into an IRA?

A)15 days.

B)30 days.

C)90 days.

D)60 days.

4; Rollovers must be completed within 60 days of the distribution date to avoid unfavorable tax consequences.


Unless done under a specific exemption described in the law, it would generally be prohibited for an investment adviser to:

A)charge fees in advance of services performed.

B)charge commissions.

C)charge fees based on performance.

D)have discretion over a clients assets.

3; Section 102(c)(1) of the Uniform Securities Act states that, except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client.


Among investor objectives is preservation of capital. Which of the following would be most appropriate for inclusion in the portfolio of this kind of investor?

A)Blue chip stocks.

B)A money market fund.

C)International funds.

D)U.S. Treasury bonds.

2; Preservation of capital means no fluctuations. Money market funds are the only logical choice here. True, the treasury bonds do not have default risk, but, because they can have maturities as long as 30 years, they are subject to interest rate risk.


A client interested in fixed income is viewing different bonds with the same rating and a coupon of 5%. Using the discounted cash flow method, which bond should have the highest market value?

A)6 year maturity when the discount rate is 3%

B)12 year maturity when the discount rate is 3%

C)12 year maturity when the discount rate is 7%

D)6 year maturity when the discount rate is 7%

2; Remember, the discount rate is just another way of stating the current inter­est rate in the marketplace. If the discount rate is higher than the coupon rate, the expected market price, (the present value), will be below par. Conversely, if the discount rate is lower than the coupon rate, the present value will be above the par value. As we’ve learned with duration, when interest rates change, the longer the time to maturity, the greater the effect on the market price of a bond.


Which of the following statements best describes the risk-free rate of interest?

A)The rate of interest earned on a corporate bond that is guaranteed by a highly rated insurance company.

B)Rate of interest in excess of the pure time value of money.

C)The rate of interest earned on short-term U.S. Treasury securities.

D)Rate of interest on a municipal security.

3; The rate of interest earned on short-term U.S. Treasury securities, generally the 90-day T-bill, is referred to as the risk-free rate. The rate of interest in excess of the pure time value of money is called the risk premium, not the risk-free rate.


Which of the following activities are prohibited practices under the principles of the Uniform Securities Act? I.Buying and selling the same stock on the same day on different exchanges.
II.Offering shares of an unregistered, nonexempt security to customers.
III.Offering a Canadian government bond to a resident of a state in which the agent of a broker-dealer is not registered.

2 & 3; Unless qualifying for an exemption, broker-dealers and agents must be registered in each state where offers or sales occur. Also, every security must be registered unless it is an exempt security. Buying a security on one exchange and selling it on another is an arbitrage activity and not a violation of the USA. Although the Canadian government bond is an exempt security, the agent must be properly licensed in each state in which an offer to sell is being made.


Margin regulations are determined by the Board of Governors of the Federal Reserve System. The authority for them to do so is found in the:

A)Securities Act of 1933.

B)Maloney Act of 1938.

C)Securities Exchange Act of 1934.

D)Federal Reserve Act of 1913.

3; The Securities Exchange Act of 1934 contains the authorization for the FED to regulate the use of credit in the securities business.


According to the Uniform Securities Act, which of the following must be registered as an investment adviser representative? I.John, who opens an investment advisory firm where he devotes his time exclusively to management responsibilities as the sole proprietor of the firm.
II.Paul, who works for a firm soliciting investment management accounts on behalf of several different investment managers.
III.Margaret, who works as a commission sales agent for a broker-dealer.
IV.Mark, an employee of AAA Broker-Dealers, who solicits brokerage clients for commissions on the basis of research conducted by his firm's securities analyst.

1 & 2; Paul, who works for a firm soliciting investment management accounts for several investment managers, must register as an investment adviser representative because he is acting in the capacity of a sales agent for investment advisers. John, as the owner, will be automatically registered as an investment adviser representative when his advisory firm registered as an investment adviser. Margaret need not register as an investment adviser representative because she functions as a registered agent for a broker-dealer. If she sold investment advice for the broker-dealer's investment management subsidiary, she then would have to register as an investment adviser representative. An agent of a broker-dealer, earning commissions on security sales, is not an IAR even if his primary selling tool for the brokerage business is the firm's outstanding research department.


Under the exchange provision, within the first 24 months, a variable life policy may be converted into a

A)permanent form of life insurance policy

B)term insurance policy

C)variable annuity

D)mutual fund shares

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


One measure of an investor's total return is called holding period return. The computation includes both income and appreciation and is used for both debt and equity securities. An investor's holding period return would be less than the bond's yield to maturity if

A)the bond was called at a discount

B)the bond was redeemed at a premium

C)the investor purchased a put option on the bond

D)the coupons were reinvested at a rate below the yield to maturity

4; The calculation of yield to maturity assumes reinvestment of the bond's interest at the coupon rate. Therefore, if the investor was only able to do less than that, the holding period return would be decreased. This is part of the concept of internal rate of return (IRR), which takes into consideration the time value of money (compounding). It is tempting to choose the answer “a call at a discount,” but bonds are never called at a price below par. Just keep it simple: If the question says you can earn less than the YTM, your return will be lower than the quoted YTM.


Which of the following investments gives the investor the least exposure to reinvestment risk?

A)Treasury STRIPS/zero-coupon bonds.

B)Treasury notes.

C)Common stock in an electric utility.

D)Preferred stock in a growth company.

1; Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are zero-coupon bonds paying no interest. Thus, there is no income to reinvest during the holding period and therefore no reinvestment risk.


Which of the following is a method of compensation available to investment advisers under contract to registered investment companies that is not normally available to those who advise individual investors?

A)Hourly rate.

B)Performance fees.


D)Percentage of assets under management.

2; Advisers under contract to registered investment companies may be compensated on a performance-fee basis. This form of compensation is only permissible when managing the accounts of certain qualified individual investors.


A bond's duration is:

A)an indication of a bond's yield that ignores its price volatility.

B)longer for a 10-year bond with a 5% coupon than it is for a 10-year bond with a 10% coupon.

C)identical to its maturity for an interest-bearing bond.

D)expressed as a percentage.

2; Duration measures a bond's price volatility by weighting the length of time it takes for a bond's cash flow to pay for itself. If two bonds with differing coupon rates have identical maturities, the one with the lower coupon has the longer duration. The cash flow from an interest-bearing bond makes its duration shorter than its maturity. Bonds with longer duration carry greater price volatility. Duration is expressed in years (time) rather than in percentage.


An agent is registered in Illinois and Ohio. One of her substantial clients has just moved from Ohio to Arizona, and the agent would like to continue to do business with her. Under the Uniform Securities Act, which of the following statements is TRUE? I.The agent's broker-dealer must already be registered in Arizona or complete the Arizona registration process within a time period specified by the act.
II.The agent must complete the Arizona registration process within a time period specified by the act.
III.The agent must ask the Ohio Administrator to request reciprocal registration from the Arizona Administrator.
IV.The agent must suggest that the client maintain a mailing address, such as a post office box, in Ohio.

1 & 2; The USA permits broker-dealers and their agents to continue to do business with existing customers who change their state of residence, as long as registration in the new state takes place within a reasonable period of time. This time period varies from state to state but is generally 30 days. Since an agent's registration is not valid without a broker-dealer, the agent and the agent's broker-dealer must be registered in Arizona for the relationship with this customer to continue. There is no such thing as reciprocal registration.


The Uniform Securities Act does NOT require registered broker-dealers to:

A)keep all customer information for seven years.

B)file and update financial reports.

C)report promptly all new agents associated with the broker-dealer.

D)file copies of advertisements and sales literature.

1; The USA specifies that most broker-dealer records must be maintained for three years.


What is the smallest order that can be placed for an institutional account?

A)There is no limit on institutional order sizes.

B)$100,000 or 5,000 shares.

C)$100,000 or 2,500 shares.

D)$50,000 or 1,000 shares.

1; There is no upper or lower limit on the size of an order executed in an institutional account, although institutional investors typically trade very large blocks of securities.


The most advantageous tax benefit available to a taxpayer is:

A)a tax deduction.

B)a tax credit.

C)a short-term capital loss.

D)straight-line depreciation.

2; A tax credit permits a dollar-for-dollar reduction in a person's tax liability. A tax deduction only reduces the client's taxable income by the amount of the deduction; it is not a dollar-for-dollar reduction in tax liability. Straight-line depreciation functions like a tax deduction in reducing taxable income only. A capital loss, short or long term, may be used to reduce capital gains and, if losses are greater, reduce income up to $3,000 per year. But, once again, that is a deduction, not a credit.


The process of making changes to an asset allocation model over time, in an effort to adapt for any allocation percentages that are no longer in tandem with the original portfolio allocation model, is called:


B)portfolio modification.

C)corrective adaptation.

D)allocation adjustment theory.

1; Adjusting a portfolio to keep it in alignment with the original portfolio allocation percentages is called rebalancing. Rebalancing is necessary in the event that the performance of the different assets causes some classes to represent a larger percentage than originally intended, and others to represent a smaller percentage than intended. By rebalancing the portfolio, the client will be back at their original risk/reward level on the efficient frontier. It should be noted that some fluctuation from the original model might be advisable so that the client may capitalize to some degree on a higher-performing asset category.


true or false; The death of neither the adviser nor the client removes a cause of action for civil liability



Under the USA, an investment adviser's current clients must be delivered a brochure

A)annually whether or not the adviser has custody or discretion

B)within 48 hours of renewal

C)quarterly if the adviser has both discretion and custody

D)annually​, but only​ if the adviser has neither custody nor discretion

1; Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients,(except those who are exempt from the brochure delivery requirements {impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940}), within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing.


With regard to investment advisers, the term ERA means

A)ERISA retirement adviser

B)equal rights adviser

C)eligible registered adviser

D)exempt reporting adviser

4; Exempt reporting advisers (ERAs) are advisers that are exempt from registration relying on either the venture capital fund adviser or private fund adviser ex¬emption. Although exempt from registration, an ERA is subject to certain reporting, recordkeeping, and other obligations.


One measure of a corporation's intrinsic value is its book value per share. When performing this computation, the value of which of the following would normally be subtracted from the corporation's net worth? I.Cash
II.Wages payable
IV.Preferred stock

3 & 4; The computation of book value per share is basically net tangible worth per share of common stock. Therefore, we subtract both the par value of the preferred stock and the value listed on the balance sheet for the intangible assets, such as patents.


characteristics of a C corp

The investors would form a C corporation. The advantages of the C corporation are stockholders are not liable for corporate debt; it is easier to raise money by issuing stock; it is easier to transfer ownership; and unlike a partnership or proprietorship, a C corporation has a continuous life because it does not terminate on the death of shareholders, officers, or directors. An S corporation is limited to 100 investors.


Which of the following is among the most important reasons to form an S corporation?

A)Ability to enjoy corporate tax rates

B)Avoiding the double taxation of dividends

C)Ability to retain and reinvest earnings in a growing business

D)Enjoying the same legal status of a general partner in a partnership

2; One of the most beneficial features of the S corporation is that the earnings pass through to the shareholders in proportion to their share of ownership and are taxed at the individual level (as opposed to the corporate level). Dividend distributions are not taxed twice as with the regular form of corporate ownership (C corp).


An advantage of being a bondholder compared to owning common stock in the same corporation is that

A)common stock has priority over the bond in the event of liquidation

B)income payments are more reliable

C)the bondholder can select the optimum time to have the issuer redeem the bond

D)there is limited liability

2; Even though bond interest is semiannual, while dividends are typically paid quarterly, the payment of interest is an obligation that comes ahead of the payment of any dividend. Companies can elect to skip or reduce their dividends, but not their interest payments.


The Uniform Securities Act contains a number of exemptions from registration of securities. Which of the following do not qualify for any of those exemptions? I.A debenture issued by a corporation.
II.A bond issued by the city of Athens, Greece.
III.A bond issued by the province of Manitoba.
IV.A security issued by a credit union authorized to do business in the state.

1 & 2; Securities issued by political subdivisions of countries other than the U.S. and Canada, are not exempt unless guaranteed by their federal government (and that government has diplomatic relations with the U.S.). The only way the corporate debenture would be exempt is if it was issued by a company whose common stock was federal covered. Since the question does not tell us that, we must assume it is not.


Which of the following best describes the death benefit provision of a variable annuity?

A)The principal amount at death is the greater of the total of premium payments or the current market value.

B)Upon death, the beneficiary has a choice of settlement options.

C)Upon death, the proceeds pass to the beneficiary free of federal income tax.

D)If death should occur prior to age 59½, the 10% early withdrawal penalty does not apply.

1; The death benefit insures that the investor will never receive back less than the original amount contributed to the account. Unlike life insurance proceeds, with annuities, anything above the cost basis is taxed as ordinary income.


Which of the following individuals may not open a joint account?

A)Three sisters.

B)Business colleagues.

C)Parent and a minor.

D)Two spouses.

3; Any two or more persons can have a joint account, but a minor is specifically excluded from the definition of a person.


A client of yours dies, leaving an estate valued at $1.8 million. Of the total estate, there was a brokerage account at your firm with a value of $1.2 million. You will:

A)inform the executor that you need to keep sufficient liquid funds in the account because estate taxes will be due in 6 months.

B)notify the executor of the estate that any rebalancing of the portfolio may take place without concern for income taxes.

C)tell the executor that he might wish to take advantage of an anticipated decline in the stock market by using the alternative valuation date of 6 months after death.

D)offer to assist the executor in determining cost basis of the securities so that the heirs will be better able to determine their potential capital gains taxes.

3; The IRS permits an estate to value assets either as of date of death or 6 months later. In either case, estate taxes (if any) are due 9 months after the date of death. Cost basis is irrelevant because heirs acquire securities on a stepped-up basis. However, trading by the executor in the account is taxed in the same manner as any other person; only the heirs receive the tax break.


If an investment adviser is registered in another state and has no place of business within an Administrator's state, the adviser is exempt from registration under the Uniform Securities Act if:

A)the adviser has no more than 14 customers within the state during the year.

B)the adviser has no more than five clients who are residents of the state during the year.

C)most of the adviser's customers are municipalities.

D)most of the adviser's clients are accredited investors.

2; If an adviser has no more than 5 clients who are residents of the state during the year, the adviser does not have to register with the state. This is the de minimis exemption; advisers with no place of business in this state must register if they have more than 5 noninstitutional clients in the state.


An investment adviser hires two individuals to solicit new customers for the firm's wealth management service. Under the USA:

A)registration as investment adviser representatives is required.

B)they may begin soliciting as soon as they have passed their licensing examinations.

C)each of them would have to register as an investment adviser.

D)soliciting is generally prohibited.

1; The definition of investment adviser representative includes individuals who solicit for the firm's advisory business.


One popular method used to predict the expected return of a stock is the Capital Asset Pricing Model. Analysts using CAPM rely on all of these EXCEPT the:

A)beta coefficient of the stock.

B)expected return on the market.

C)risk-free rate available in the market.

D)standard deviation of the stock.

4; Under the CAPM, using the SML, we can determine the expected return of any given stock by taking the risk-free rate and adding to that the product of that stock's beta coefficient and the difference between the expected return on the market and the risk-free rate. Standard deviation is not a factor in this computation.


You have a client who wishes to invest $100 per month into something that will give him the opportunity to share in the long-term growth prospects of the overall economy. Which of the following would probably be the most cost efficient investment vehicle?

A)A fund of hedge funds.

B)An exchange traded fund (ETF) that mimics the S&P 500.

C)Class A shares of a large-cap growth fund.

D)A no-load index mutual fund that mimics the S&P 500.

4; Although there is possible room to argue, we'll go with what the exam would choose. The only other logical choice is the ETF, but, since each purchase involves a commission and, on $100 purchases investors don't get any real break, most experts agree that ETFs are not suitable for dollar cost averaging plans (unless the periodic investments were substantial).


Which of the following is considered to be the best indicator of a stock's volatility?




D)Standard deviation.

4; Standard deviation measures security's volatility versus its own historical performance. Two-thirds of the time, a stock can be expected to generate a return within one standard deviation; 95% of the time, within two


An investment policy statement would likely include I.expected returns of the recommended strategy and the expected range of these returns
II.recommended allocations among differing asset classes
III.strategies used for selecting specific stocks in the equity portion of the portfolio
IV.disclosure of the fees that the adviser will earn for implementing the recommended strategy

1, 2 & 3; An investment policy statement prepared for clients delineates the allocation percentages for each asset class and the expected returns from each class, and outlines strategies that may be used for timing the market and choosing specific investments within each class, but fees the adviser may earn are not included in the policy statement; they are disclosed separately.


A portfolio that maximizes an investor’s preferences with respect to return and risk is called

A)a diversified portfolio

B)an uncorrelated portfolio

C)the efficient frontier

D)an optimal portfolio

4; An optimal portfolio will generally lie on the efficient frontier (which is a graph, not a portfolio). The special nature of an optimal portfolio is that it may not always be the most efficient portfolio (offering the greatest return for the least risk) because it takes into consideration the specific preferences of the individual investor, which might create a bias.


A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be I.specific security selection
II.methods of performance measurement
III.determination for meeting future cash flow needs
IV.the summary plan description

2 & 3; The IPS will include methods of performance measurement (if it is meeting objectives) and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities to be purchased, but will include the types that may be placed in the portfolio. The Summary Plan Description (SPD) is a Department of Labor (DOL) required document that gives employees a summary of the plan and its features. It has nothing to do with determining how the money is invested.


As an investment adviser, you feel that RAN common stock is an appropriate addition to the portfolio for several of your clients. You enter an order to purchase 1,000 shares and receive two 500 share confirmations, but they are not at the same price. Which of the following is the proper procedure for you to follow:

A)allocate using the random selection method.

B)allocate using the average of the two prices.

C)allocate the lowest price shares to those clients who have been with you the longest.

D)allocate the lowest price shares to those clients with the greatest amount of assets under management.

2; This is the only fair thing to do.


Strategic asset allocation involves:

A)market timing.

B)long-term client objectives.

C)a short-term outlook.

D)heavy reliance on technical analysis.

2; Strategic asset allocation involves the deployment of customer investment capital to meet long-term objectives, while tactical asset allocation is an active style using market timing.


Which of the following transactions on the NYSE in ABC common stock would meet the minimum size requirement to be considered a block trade?

A)10,000 shares

B)200,000 shares

C)$100,000 total market value

D)100,000 shares

1; A block trade is defined as at least 10,000 shares of stock or a trade with a total market value of at least $200,000.


Of the following securities, which is most commonly recommended to fund a child's college education?

A)Treasury bills.

B)Investment-grade corporate bonds.

C)Municipal bonds.

D)Zero-coupon Treasury bonds.

4; Zero-coupon bonds, particularly those carrying the guarantee of the US Treasury, are a favored investment vehicle for saving for a child's higher education. They have the advantage of providing a certain, quantifiable sum at a certain date in the future.


An analytical tool used to predict the future price of a common stock using projected dividends is the:

A)price/earnings ratio.

B)future value computation.

C)dividend discount model.

D)dividend payout ratio.

3; There are two widely accepted forms of common stock price projection using dividends – the dividend discount model and the dividend growth model.


Which of the following would be considered fraud under the Uniform Securities Act?

A)An agent has a large number of clients in a security in which she trades frequently for her own account with no attempt to create an inaccurate impression of trading volume.

B)Using a private subscription to an online Internet legal records service, an agent discovers that a company is about to file for bankruptcy and immediately calls her clients recommending they liquidate their holdings.

C)An agent knowingly sold a nonregistered security because he thought it would eventually become registered.

D)An agent knowingly sells securities in a publicly traded company in which his family has a beneficial ownership.

3; Fraud occurs when a person covered under the USA knowingly violates a provision of the law; the agent knew the security was not registered and fraudulently sold it.


Which of the following is among the most important reasons to form an S corporation?

A)Ability to retain and reinvest earnings in a growing business

B)Ability to enjoy corporate tax rates

C)Enjoying the same legal status of a general partner in a partnership

D)Avoiding the double taxation of dividends

4; One of the most beneficial features of the S corporation is that the earnings pass through to the shareholders in proportion to their share of ownership and are taxed at the individual level (as opposed to the corporate level). Dividend distributions are not taxed twice as with the regular form of corporate ownership (C corp).


An applicant for registration as an IAR in this state was convicted four years ago of a nonfinancially related crime in another state. Under that state's laws, the crime was a misdemeanor, but under this state's laws, it is a felony. When viewing this IAR's application, the Administrator will:

A)treat the crime as a nonfinancial misdemeanor.

B)treat the crime as a nonfinancial felony.

C)treat the crime as any felony.

D)censure the investment adviser for even thinking of employing this individual.

1; Even though the crime is a felony in the state where registration is being sought, the applicant's record shows a misdemeanor and, therefore, this individual would not be subject to statutory disqualification.


Which of the following statements are TRUE?I. A federal covered adviser sells federal covered securities only.
II. Federal covered advisers are advisers with federally imposed exemptions from state registration as investment advisers.
III. A federal covered security is exempt from registration with the SEC.
IV. Federal covered securities include those issued by investment companies registered under the Investment Company Act of 1940.

2 & 4; A federal covered adviser is an adviser with a federally imposed exemption from state registration. Securities issued by investment companies registered under the Investment Company Act of 1940 are included in the definition of a federal covered security.


Which of these features are common to both variable annuities and scheduled premium variable life insurance?I. Income earned in the separate account is tax deferred.
II. Separate account performance below the AIR causes a reduction in cash value.
III. Fixed contributions are required.
IV. Contract owners have voting rights.

1 & 4; All variable products offer tax deferral of earnings in the separate account. Unit holders of a variable annuity vote on the basis of the number of units they own; holders of variable life insurance receive one vote for each $100 of cash value. With variable life insurance, AIR applies only to the death benefit, not to cash value.


Under the Uniform Securities Act, the Administrator may require the filing of advertising and sales literature in which of the following offerings?

A)Sale of the bonds of AAA insurance company organized under the laws of the state.

B)Sale of a U.S. Treasury bond maturing in more than 10 years.

C)Sale of an IPO limited to residents of the state.

D)Sale of preferred stock of a long-established company registered with the SEC whose common shares trade on the New York Stock Exchange.

3; The state securities Administrator may require the filing of advertising and sales literature of an IPO limited to residents of the state. The other choices are securities of exempt issuers or, in the case of the NYSE-listed issuer, federal covered securities. The Administrator may not require exempt and federal covered securities to file advertising and sales literature.


A client of a broker-dealer calls his agent and submits an order to purchase 1,000 shares of a Chilean silver mining company. As the order ticket is being prepared, the agent notices that this is a non-exempt unregistered stock. The agent should

A)continue to process the order because this is an exempt security.

B)continue to process the order because this is an exempt transaction.

C)inform the client that no orders for this stock may be accepted until it is properly registered in the state.

D)wait for firm approval before processing the order.

2; Because the client initiated the process, this is an unsolicited order. As such, it is included in the USA's definition of exempt transaction. Even when the security is non-exempt, registration is not required when the transaction is exempt. Therefore, this order may be taken as placed.


Which of the following statements regarding an S corporation owner and an owner of an LLC are TRUE? I.Creditors have very limited recourse rights to the owners.
II.They may not be nonresident aliens.
III.They both are considered stockholders.
IV.Both receive the tax benefit of owning flow-through entities.

1 & 4; Creditors don't have recourse to the owners of either entity unless the owners have specifically allowed it. Both are flow-through or conduit entities. Owners of S corporations are stockholders, whereas those in an LLC are members. Nonresident aliens may not own an S corporation.


Registration of an investment adviser automatically confers registration on: I.officers, partners and directors of the firm who are functioning as IARs.
II.any employee who is functioning as an IAR.
III.clerical employees handling back office operations. employee who will be soliciting clients for the adviser.

1; Under Section 202(a) of the Uniform Securities Act, registration of an investment adviser automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions. This only applies to those individuals who are listed on the firm’s Form ADV Part 1, so we’re limited to officers, partners, directors or anyone else doing that type of job, regardless of what this IA has chosen to use as the title.


Which of the following items is NOT necessary to establish before helping a client open an investment account?

A)Adequate life insurance.

B)Established short- and long-term investment goals.

C)Emergency fund.

D)Zero balance on all credit cards.

4; Although credit card debt may carry a high interest rate, no investment plan should be started without an emergency fund, adequate life insurance, and a set of goals. In fact, it is possible that the client is carrying the balance because of a very low promotional rate.


Margin is borrowing money from a broker-dealer to buy a stock using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer’s stock?

A)The securities pledge agreement

B)The loan consent agreement

C)The hypothecation agreement

D)The credit agreement

3; The hypothecation agreement gives permission to the broker-dealer to pledge a customer’s margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the broker-dealer on the basis of the loan value of these securities.


One method used by some analysts to estimate the future value of a stock is the dividend growth model. This model would probably be most useful in the case of a:

A)AAA corporate bond.

B)small-cap stock.

C)large-cap stock.

D)cumulative preferred stock.

3; The dividend growth model is a method to value the common stock of a company on the basis of assumed constant growth of dividends in the future. Therefore, it can only be applied to a corporation whose dividends might be expected to increase. It is far more likely that a large-cap stock will be paying dividends than a small-cap. Bonds don't pay any dividends and, in any event, their interest, just like the dividends on preferred stock, is fixed; there is no growth possible.


Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following regarding an adviser's authority to place orders for a client's account is TRUE?

A)An adviser may, without the client's approval, place a sell order for the purpose of avoiding losses but may not place an order to buy securities unless the client has authorized the purchase.

B)An adviser is not required to obtain authorization to place orders for a client's account unless a conflict of interest is involved.

C)The client's oral approval is sufficient for a specific order.

D)Clients must give written approval for an order involving a stated amount of a specified security.

3; For a specific order, oral authority is sufficient. An adviser may not place any order for a client's account without proper authority.


A customer with liquid net worth of $25,000 tells an agent that she has $1,000 to invest. Explaining how diversification can reduce risk, the agent recommends that the customer purchase eight different over-the-counter stocks, each trading at approximately $1 per share. With regard to the above situation:I. the recommendation is suitable for the customer because the agent recommends a diversified stock portfolio.
II. high-risk penny stocks are not suitable recommendations for this low net worth customer.
III. the agent may be exhibiting a pattern of excessive commissions (churning) in his customer's account.
IV. once the customer agrees to the agent's recommendation, it is no longer considered an unsolicited transaction.

2; Regardless of diversification, low-priced stocks are not suitable for a low net worth customer. Risk is not necessarily diversified away by simply increasing the number of risky securities. Risk is only reduced by diversifying many securities whose patterns of returns are not correlated. Churning is not indicated here because there is no trading shown other than the initial purchases.


If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio?

A)AAA bonds.

B)Preferred stock.

C)Tangible assets.


3; Tangible assets, such as real estate, precious metals, and other commodities, tend to keep pace with inflation. Fixed dollar investments do not.


All of the following are money market instruments EXCEPT:

A)newly issued Treasury notes.

B)jumbo (negotiable) CDs.

C)commercial paper.

D)Treasury bills.

1; Money market securities have a maximum maturity of 1 year. Treasury notes are issued with maturities of 2 to 10 years. Treasury bills are money market instruments with maturities of 6 months or less. Jumbo CDs are issued by banks and have maturities of 1 year or less. Commercial paper (issued by corporations) is unsecured short-term debt with maturities of 270 days or less.


Under the Uniform Securities Act, an offer to sell would NOT include:I. stock acquired through a merger.
II. the issuance of warrants or convertible securities.
III. the issuance of stock rights to existing shareholders.

1; An offer to sell is any activity in an effort to dispose of a security for value. The issuance of warrants or convertible securities to anyone or stock rights to existing shareholders is considered an offer to sell the underlying security because, unlike stock dividends, mergers, and bona fide loans, they involve the payment of money to acquire the stock, thereby making them an offer to sell.


Your client purchases 100 shares of XYZ Electric Auto Company on the assumption that rising fuel costs will create more interest in this more efficient means of transportation. If he is wrong, the resulting drop in the market price of that stock would be due to:

A)money rate risk.

B)business risk.

C)purchasing power risk.

D)market risk.

2; This question refers to a client who is investing in the success of a specific company. The failure of this company does not mean that all securities will be affected; therefore, he is not subjected to market risk. The failure of XYZ would be due to the fundamentals of the company itself and considered business risk.


Under the NASAA Model Rule on financial requirements for investment advisers, investment advisers who have custody of customer funds are usually required to have a net worth in the amount of





1; The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an investment adviser with custody of customer funds or securities to have a minimum net worth in the amount of $35,000. If the adviser does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000. In the event the adviser wishes to post a bond​ because it doesn't meet the net worth requirement​, ​it must be an amount determined by the Administrator based upon the number of clients and the total assets under management of the investment adviser.


Which of the following statements is TRUE concerning variable life separate account valuation?

A)Unit values are computed weekly and cash values are computed monthly.

B)Unit values are computed monthly and cash values are computed weekly.

C)Unit values are computed daily and cash values are computed monthly.

D)Unit values are computed monthly and cash values are computed daily.

3; Unit values are computed each day. Policy cash values are a monthly computation.


Surrender charges may cause a reduction to all of the following EXCEPT

A)the redemption value of Class B mutual fund shares

B)the cash value of a variable life insurance policy

C)the liquidation value of a variable annuity

D)the death benefit of a variable life insurance policy

4; Surrender charges never apply in the case of a death benefit. There may be a surrender charge in the case of early surrender of a variable annuity, taking out the cash value of a variable life policy, or redemption of Class B (back-end load) mutual fund shares.


All of the following statements about an agent's need to be registered in a state are correct EXCEPT:

A)registration is not required in a state where the agent has no place of business and only deals with existing clients who are vacationing in that state.

B)registration is required in each state in which the employing broker-dealer has a place of business.

C)registration is required when they limit their activity to the sale of exempt securities.

D)registration is required if they solicit the sale of securities by telephone to fewer than 6 individuals residing in that state.

2; The fact that the broker-dealer does business in a state has nothing to do with a specific agent. Many broker-dealers are registered in all states; very few agents are. Agents must register in each state where they are selling or offering securities, even if the security or the transaction is exempt. That exemption only applies to the need for the security to be registered, not the agent. Soliciting the sale of securities by telephone is considered making an offer and there is no de minimis exemption available. Finally, registration is not required when making use of the "snowbird" exemption.


An agent under the USA is a(n): I.individual who represents an issuer in nonexempt transactions.
II.registered broker-dealer that deals in registered securities.
III.individual who sells nonexempt securities as a representative of a registered broker-dealer.
IV.individual who has no place of business in the state and sells securities to an existing client who is not a resident of the state.

1 & 3; Agents generally work for and represent a broker-dealer in conducting securities sales or transactions but are excluded from the definition of an agent if they have no place of business in the state and sell securities to an existing client who is not a resident of the state. Individuals employed by issuers to sell in nonexempt transactions are also included in the definition of "agent".


In general, the most common form of organization chosen by hedge funds is

A)an LLC

B)a limited partnership

C)an S corporation

D)a business development company

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


Which of the following vehicles make use of the unified estate tax credit? I.bypass trust.
II.generation skipping trust. trust.
IV.simple trust.

1 & 2; Both the bypass trust and the generation skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.45 million for 2016) to heirs other than the spouse, usually grandchildren in the case of the GST.


A "margin account" is a type of brokerage account in which the broker-dealer lends the investor cash to purchase securities using marginable securities in the account as collateral. Which of the account documents authorizes the use of those securities as collateral for that loan?

A)The credit agreement

B)The hypothecation agreement

C)The loan consent agreement

D)The secured agreement

1; It is the credit agreement, sometimes referred to as the margin agreement, which authorizes the broker-dealer to use the value of the securities in the account as collateral for the margin loan to the client. The hypothecation agreement permits the broker-dealer to pledge the client's margin securities as collateral for a loan that the BD takes out. It is the credit agreement that, in addition to all of the other terms of the loan, contains the stipulation that the broker-dealer may use the client's margin securities as collateral for the loan that it makes to the client. In simple terms, there are two loans taking place: 1.The loan from the BD to the client with the client's securities used as collateral. That is covered in the credit agreement
2.The loan from a bank to the BD with the client's securities used as collateral for the BD's loan. The authorization for the BD to use those securities is found in the hypothecation agreement.


A client is completing a new account form that contains questions about the investor’s investing experience and knowledge. More than likely, what type of account is being opened?





4; One question asked on a new options account form that is not required on a normal brokerage account opening is investment experience and knowledge (e.g., number of years, size, frequency, and type of transactions) for options, stocks and bonds, commodities, and other financial instruments.


Which of the following measures the risk-adjusted return of an asset or a portfolio?

A)Sharpe ratio.

B)Beta coefficient.

C)Correlation coefficient.

D)Standard deviation.

1; The Sharpe ratio is a measure of the risk-adjusted returns of a portfolio. Standard deviation by itself is not a risk-adjusted return; it is an absolute measure of an asset's volatility around its mean. However, the standard deviation of the portfolio or asset is used in the denominator when calculating the Sharpe ratio.


True or false: The rate of interest earned on short-term U.S. Treasury securities, generally the 90-day T-bill, is referred to as the risk-free rate. The rate of interest in excess of the pure time value of money is called the risk premium, not the risk-free rate.



A customer would like to set aside some money for his grandson's college education in an Education IRA. Which of the following regarding an Education IRA is TRUE?

A)The customer may make annual contributions until the grandson graduates from college.

B)The maximum contribution permitted is $2,000 annually per donor.

C)The customer may take a deduction for the amount contributed.

D)The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over to an ESA established in the name of a family member.

4; The maximum annual contribution to an Education IRA, better known as a Coverdell ESA, is $2,000 per beneficiary (child). Contributions are not deductible and must cease when the beneficiary reaches age 18. If the accumulated value in the account is not used by age 30, the funds must be distributed and the earnings are subject to income tax and a 10% penalty. Taxes and penalties can be avoided if the account is rolled over into a different Coverdell ESA for another family member.​


The Securities Exchange Act of 1934 granted the SEC the power to regulate all of the following EXCEPT:

A)margin requirements.

B)securities information processors (SIPs).

C)transfer agents.


1; The Securities Exchange Act of 1934 granted the Board of Governors of the Federal Reserve System the power to regulate margin requirements.


If interest rates decline sharply, which of the following bonds is likely to appreciate the most?

A)15-year zero coupon bond trading on a 7.80 basis

B)15-year 8% bond trading on an 8.10 basis

C)15-year 8% bond trading on a 7.90 basis

D)15-year 7% bond trading at par

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


Under which of the following circumstances would a premature distribution from a traditional IRA be exempt from the premature distribution penalty?

A)A distribution taken to satisfy the terms of a court-ordered property settlement.

B)When the account is fully funded with nondeductible contributions.

C)A distribution taken at age 55 if the owner is retired.

D)When the distribution is paid in equal annual amounts over the owner's life.

4; A distribution from an IRA taken in equal annual amounts over the owner’s life is not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs. The exception for qualified domestic relations orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs.


What is the appropriate procedure to follow when an advisory client delivers a stock certificate to the office of a broker-dealer?

A)Accept the certificate and give the customer a receipt.

B)File a currency transaction report if the current market value of the stock represented by the certificate exceeds $10,000.

C)Accept the certificate and send the customer a receipt within 24 hours of the delivery.

D)Instruct the client to send the certificate to the transfer agent because you cannot accept it.

1; When a client delivers a stock certificate to the firm's office, the appropriate procedure is to furnish the customer with a receipt on the spot.


Which of the following is included in the definition of a broker-dealer under the Uniform Securities Act?

A)Out-of-state broker-dealer with no office in this state that services only other broker-dealers located in this state.


C)Issuer of securities.

D)One who effects securities transactions for his own account or on behalf of others.

4; Only one who is in the business of effecting transactions for his account or on behalf of others fits the definition of a broker-dealer. All of the other choices are specifically excluded from the definition.


Which of the following are exempt securities under the Uniform Securities Act? I.A security issued by a bank.
II.A Canadian government bond.
III.A security listed on the American Stock Exchange.
IV.A security issued by a charitable or other nonprofit organization.

all of them; The securities exempt from the registration requirements of the Uniform Securities Act include securities issued by the US or Canadian government or any state, province, or political subdivision; securities issued or guaranteed by any foreign government with which the US has diplomatic relations; securities issued by banks, savings and loans, insurance companies, and credit unions; securities issued or guaranteed by common carriers and public utilities (e.g., railroads); securities listed on national exchanges (e.g., NYSE, AMEX, Nasdaq); securities issued by nonprofit, religious, or charitable organizations; commercial paper; investment contracts issued in connection with employee benefit plans; and any securities issued by cooperatives or associations.


According to North American Securities Administrators Association's (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following practices is NOT unethical?

A)To protect the client in a declining market, an agent sold all shares in the client's account when the client had only authorized the sale of 30% of the shares.

B)An agent sold shares at a price less than authorized by a client.

C)An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without expressed written discretionary authority.

D)Within the first ten days of a client's initial transaction, an agent accepted oral discretion and purchased securities on behalf of the client.

3; An agent of a broker-dealer may exercise discretion in deciding the time or the price at which a sale takes place during the trading day without express written discretionary authority. Such action is not unethical because time and price are not considered true discretion. An agent may not exercise discretion over the number of shares to be sold without prior written discretionary authority. Oral discretion is only permitted for investment advisers and their representatives, (never broker-dealers or agents), during the first 10 business days after the initial discretionary transaction in the account.


Which of the following statements is NOT correct?

A)Net present value (NPV) is the difference between the initial cash outflow (investment) and the future value of discounted cash flows.

B)Net present value analysis (NPV) is a commonly used time value of money technique employed by businesses and investors to evaluate the cash flows associated with capital projects and capital expenditures.

C)Time-weighted returns show performance without the influences of additional investor deposits or withdrawals from the account.

D)Internal rate of return (IRR) is a method of determining the exact discount rate to equalize cash inflows and outflows, thus allowing comparison of rates of return on alternative investments of unequal size and investment amounts.

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


If ABC Brokers, Inc., has its license canceled, an agent for ABC may:

A)not sell any securities because her license is automatically canceled with that of her broker-dealer.

B)continue to conduct business until employed by another broker-dealer, who will then renew her license.

C)continue to conduct business because ABC's license was canceled, not hers.

D)continue to sell only exempt securities until employed by a properly registered broker-dealer.

1; An agent for ABC may not sell any securities because her license is automatically canceled with that of ABC Brokers, Inc. Agents cannot sell securities unless they are associated with a licensed broker-dealer.


The Securities and Exchange Commission does NOT have any regulatory jurisdiction over which of the following?

A)National securities exchanges.

B)Municipal Securities Rulemaking Board.


D)Federal Reserve Board.

4; The Federal Reserve Board is not regulated by the SEC.


Which of the following statements concerning the sale of securities by issuers to financial institutions is TRUE?

A)It is a nonexempt transaction.

B)It is an exempt transaction.

C)It is an exempt security.

D)It is a nonissuer transaction.

2; Any offer or sale to a bank, savings institution, trust company, insurance company, investment company, or other financial institution, institutional buyer, or broker-dealer is an exempt transaction. Because the type of issuer (i.e., corporation, bank) was not stated, it is not known whether the security is exempt.


Which of the following qualified retirement plans offer tax advantages to both the employer and the employee? I.Individual retirement arrangements (IRAs)
II.401(k) plans
III.Deferred compensation plans
IV.Defined benefit plans

2 & 4; In both 401(k) plans and defined benefit plans, tax advantages accrue to both the employer and the employees. Employer contributions are deductible, and earnings growth tax-deferred to the employee. IRAs offer no benefit to the employer (note that the answer choice did not say “SEP IRA”), and deferred compensation plans are nonqualified.


Under which of the following circumstances will a private placement fail to qualify for exemption from registration under the USA?

A)The offer is directed to only five individuals during any 12-month period.

B)The seller reasonably believes that individual purchasers are buying for investment purposes rather than immediate resale.

C)A modest commission is paid to the agents who sell the offering to noninstitutional clients.

D)A bank holding company purchases the offering for trading purposes rather than investment purposes.

3; A private placement will lose its exemption if those who sell the offering are paid commissions on sales to noninstitutional clients. For a private placement to be exempt, the offer cannot be directed to more than 10 persons during a 12-month period. In the case of noninstitutional buyers, the seller must reasonably believe (nice to have it in writing, but not required), they are purchasing the offering for investment purposes only. Institutional purchasers do not have to purchase the offering for investment purposes.


According to the Uniform Securities Act, the Administrator has the power to require persons wishing to register as an agent to:

A)have minimum net capital, pay filing fees, pass an exam, and post a surety bond.

B)post a surety bond, pay filing fees, and pass an exam.

C)have minimum net capital, post a surety bond, and pass an exam.

D)post a surety bond and pass an exam.

2; The Administrator may require that, as a condition of registration, the agent post a surety bond (if given discretion by clients over their accounts) pay filing fees, and pass an examination that may be written, oral, or both. Minimum net capital orders apply to broker-dealers, not their agents.


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

1 & 2; Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member.


A registered broker-dealer is under common control with a registered investment adviser. An individual who is an agent of the broker-dealer and an investment adviser representative of the adviser has a client with $250,000 under an asset management program. This individual calls the client and suggests the purchase of 500 shares of RMBM common stock as an appropriate addition to the portfolio. The broker-dealer is a market maker in RMBM, and the sale will be made as a principal, a fact that is disclosed to the client on the trade confirmation. In this situation, the registered person has acted:

A)lawfully in that the disclosure of capacity was made on the confirmation.

B)unlawfully in that investment advisers are required to make written disclosure as well as receive the advisory client's consent prior to completion of a trade where the firm or an affiliate will be acting in a principal capacity.

C)lawfully in that disclosure of capacity is not necessary when executing trades in managed accounts.

D)unlawfully in that any stock the broker-dealer is a market maker in is probably not suitable for a managed money client.

2; The rules regarding investment advisers and account trading are much stricter than those for broker-dealers because of the fiduciary responsibility of the adviser. Any action that results in a transaction in which the firm or an affiliate acts in either a principal or agent capacity requires the adviser to provide written disclosure of that fact to the client and obtain approval from the client prior to completion of the transaction.


Which one of the following would NOT be considered a fraudulent or prohibited business practice?

A)Larger than ordinary commissions without prior disclosure to the client.

B)Attempting to solicit a trade in unregistered exempt securities with an individual client.

C)Omitting a material fact because the agent felt the client would not understand the information involved.

D)Submitting a trade order for a potential client who has promised that the new account would be opened tomorrow.

2; Even though the security is unregistered, because it is exempt, no registration is required. Material information must be disclosed, even if the client doesn't understand its meaning. No trades can take place until an account is opened, and although there are circumstances that permit larger than ordinary commissions, that fact must be disclosed to the client.


A bond with a par value of $1,000 and a coupon rate of 6%, paid semiannually, is currently selling for $1,200. The bond is callable in 6 years at 103. In the computation of the bond’s yield to call, which of the following would be a factor?

A)Future value of $1,200

B)Present value of $1,030

C)Interest payments of $30

D)20 payment periods

3; The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 6% coupon will make $30 semiannual interest payments. With a 6-year call, there are only 12 payment periods, not 20. The present value is $1,200 and the future value is $1,030, the reverse of the numbers indicated in the answer choices.