Which of the following statements are TRUE concerning certain federal covered security?
I. The Administrator may require the issuer to pay a filing fee.
II. The Administrator may bring enforcement action if fraud is involved.
III. The Administrator may re
C. I, II, and III only
The Uniform Securities Act sets limits on the powers of the Administrator concerning federal covered securities. The Administrator may require the filing of a registration fee, the filing of a consent to service of process, and the
Which of the following transactions are exempt from the antifraud provisions of the Uniform Securities Act (USA)?
a. Unsolicted transactions involving a private placement
b. Unsolicited nonissuer transactions
c. Transactions with financial institutions
d.
d. None of the above
Certain transactions may be exempt from the registration requirements of the USA; however, no transaction is ever exempt from the antifraud provisions of the Act.
All of the following transactions are considered exempt under the Uniform Securities Act, EXCEPT:
a. A nonissuer transaction effected through a broker-dealer on an unsolicited basis
b. Any transaction directed to a maximum of 15 retail (noninstitutional)
b. Any transaction directed to a maximum of 15 retail investors
Choice (b) may appear to be a private placement however, the maximum number of retail (noninstitutional) investors is 10, not 15. Any nonissuer transaction of a security registered under the
Which of the following choices is a broker-dealer in State B?
a. An agent in State A who contacts a client in State B
b. A corporation that sells commercial paper every other week in State B
c. A broker-dealer registered in State A, where its only office
c. A broker-dealer registered in State A, where its only office is located, which has three individual clients in State B.
Agents, issuers, and banks are not broker-dealers. Also, a person with no place of business in a state, who deals only with institut
With reference to the Uniform Securities Act, when does an agent's registration become effective?
a. December 31
b. 60 days after filing the application
c. 30 days after filing the application
d. As soon as the agent passes the exam
c. 30 days after filing the application
Under the Uniform Securities Act, registrations become effective at noon on the 30th day after filing the application.
Under the Uniform Securities Act, an employee of a municipal issuer selling securities to the public is considered:
a. An agent of the issuer and is subject to registration
b. An agent of the issuer and is not subject to registration
c. An agent of a brok
d. not an agent
A person representing a municipal issuer is not considered an agent and would not be subject to registration. If the securities were not exempt, the employee would be subject to registration.
Which of the following statements is TRUE regarding the Consent to Service of Process?
a. It must be renewed every year.
b. It is used for receiving and processing noncriminal complaints.
c. Filing is optional.
d. None of the above
b. it is used for receiving and processing noncriminal complaints.
The Consent to Service of Process appoints the state Administrator to serve as the applicant's attorney for the purpose of receiving and processing noncriminal complaints. It is required o
Under the Uniform Securities Act, which of the following statements is TRUE concerning the registration of an investment adviser?
a. An investment adviser who maintains an office in a state and whose clients are all savings and loan associations is exempt
d. An investment adviser who does not maintain an office in a state who has seven clients who are residents of that state is exempt from registration.
An investment adviser is exempt from registration if the adviser has no office in a state and has client
XYZ broker-dealer is located in State A, where it maintains its corporate headquarters. Under the Uniform Securities Act, XYZ would not meet the definition of a broker-dealer in State B if it:
a. Has no office in State B and only sells securities to an in
a. Has no office in State B and only sells securities to an investment company located in State B
Under the USA, the term broker-dealer does NOT include a person that has no place of business in the state AND only transacts business with issuers, other br
William is an agent with a broker-dealer and is registered presently in three states. One of William's clients informs him that he is moving to a state where neither William nor his firm is registered. Which of the following statements is TRUE regarding W
d. William is not eligible to register in the new state until his broker-dealer is registered in that state.
An agent may transact business in a state in which he is not currently registered under certain circumstances. The employing broker-dealer must be
Under the Uniform Securities Act, which of the following statements is TRUE concerning the state registration of an agent?
a. An agent may only sell securities that have been properly registered.
b. An agent's registration to sell securities in a given st
b. An agent's registration to sell securities in a given state expires at the end of the calendar year.
The licenses of all agents, broker-dealers, investment advisers, and investment adviser representatives expire on December 31 each year and must be ren
A firm, located in State Y, has been hired to evaluate the investment manager of a pension plan whose office is in State Z. The firm must advise the pension plan whether to retain the investment manager or hire a new one. Under the Uniform Securities Act,
d. No, because the firm is servicing an institutional investor
Under the Uniform Securities Act, an adviser that has no place of business in a state and whose clients are only institutional investors (e.g., pension plans), are exempt from the registration
William is an IA Rep. His firm has created a brochure that contains the same information as his firm's Form ADV Part 2. William gives this brochure to one of his new clients, who has verbally agreed to the contract. He has not previously provided her with
a. William's firm is in compliance with the Brochure Rule of the Investment Advisers Act.
The Brochure Rule permits advisers to give a disclosure brochure to clients at the time they enter into contracts. For federal covered advisers, the brochure must be
H M Advisers (HMA) is a small investment adviser with $19 million under management. The firm is the adviser for a start-up, Micro Cap Mutual Fund. HMA:
a. Is considered an exempt adviser and is not required to register until its assets exceed $10 million
d. Must register as a federal adviser
The federal government and the states have a division of responsibility when regulating investment advisers. In general, an adviser must be registered with either the SEC or with one or more states. There is no requir
If a federal covered adviser changes its fee:
I. The investment adviser must file an amended ADV Part 2 with the state Administrator
II. The investment adviser must file an amended ADV Part 2 with the SEC
III. The new fee must be reflected in the Brochure
d. I, II, III, and IV.
All of the statements listed are correct concerning the actions a federal covered adviser is required to take if the fees charged to clients are changed.
Ben is an agent for a broker-dealer. One of Ben's clients is going on a business trip and is interested in adding a pharmaceutical stock to her portfolio, but is unsure of which one of three stocks to choose. The client fears that the most appropriate tim
a. I and II only
Broker-dealers and their agents are prohibited from exercising discretionary authority in a customer's account without first obtaining written authority from the customer, except when the customer provides verbal discretion to select the
Betty owns and operates Right Choice Advisers, a small investment advisory firm registered with the states of Oregon, Washington, and California. Betty decides to sell 60% of her shares to another investment adviser and retire. This transaction would requ
d. Right Choice's clients
An investment adviser may not assign a client's contract to another investment adviser without the client's consent. An assignment includes the acquisition of the majority of the adviser's stock by another entity.
Under SEC Release 1092, who would NOT be exempt from the definition of investment adviser?
a. A marketing firm whose investment advice is solely incidental to its profession
b. An accounting firm whose investment advice is solely incidental to its profess
a. A marketing firm whose investment advice is solely incidental to its profession
According to SEC Release 1092, the professional exclusion provided by the Advisers Act is only available to lawyers, accountants, engineers, and teachers. A person engaged
Chris is a customer who has very little understanding of financial markets. Chris has custodial power over his children's accounts and is concerned that his lack of investment experience could hurt his children's investment returns. He is considering allo
d. Custodians may delegate discretion to any competent person
Under the UPIA, a custodian is permitted to delegate investment functions to any competent third party. Minors have no say in this decision. Note: In the past, the UPIA specifically prohibited
Which of the following investments are prohibited under the UPIA?
a. Speculative option positions
b. Penny stock investments
c. Junk bonds
d. None of the above
d. None of the above
No type or class of investment is specifically banned under the Uniform Prudent Investor Act (UPIA). The Act looks at the portfolio as a whole and makes an assessment as to the risk/reward trade-off of the investments selected when de
According to the Disclose or Abstain Principle, an IA must disclose all of the following actions, EXCEPT:
a. Using contracts that include hedge clauses.
b. Providing clients with research prepared by a third-party.
c. Acting as a broker-dealer and/or secu
a. Using contracts that include hedge clauses
If disclosed, an investment adviser may provide clients with third-party research as a resource, act as a broker-dealer or securities agent, or effect agency cross transactions provided one side of the trade i
Which of the following persons would meet the definition of an investment adviser according to SEC Release 1092?
a. A broker-dealer that provides the public with asset allocation tools
b. An accountant who holds herself out to the public as a provider of
d. A lawyer who holds himself out to the public as a provider of financial planning advisory services.
According to SEC Release 1092, lawyers who hold themselves out to the public as providers of financial planning services would meet the definition of an
According to the Investment Advisers Act of 1940, which of the following individuals would need to register as an investment adviser?
a. An attorney who determines the fair market value of the assets inside of an estate
b.An accountant who recommends a ta
d. An individual who sells a market timing newsletter that advises clients when to buy and sell exchange-traded potions
Broker-dealers are excluded from the definition of an investment adviser, as are certain professionals, such as attorneys, and engineer
According to the Investment Advisers Act of 1940, the definition of an investment adviser includes which of the following choices?
I. Pension consultants
II. Broker-dealers
III. Bank holding companies
IV. U.S. government securities advisers
a. I only
b. I
a. I only
Pension consultants may provide securities-related advice as an integral part of other financial services and may be considered investment advisers under SEC Release 1092. The other choices are all specifically excluded from the definition of an
ABC Investment Advisers purchases quarterly research reports from XYZ Brokerage and sends the report to clients. Which of the following statements, if printed on the research reports, would violate NASAA guidelines on Unethical Business Practices of Inves
c. This research report was created for your benefit by ABC Investment Advisers
Choice (c) gives the impression that the third-party research report was actually created by ABC. This would be a misleading statement.
An investment advisory firm has three partners and ten associates. While all of the partners have earned a CFP (Certified Financial Planner) designation, the associates are attending CFP classes, but have not yet earned the designation. The advisory firm
c. This is acceptable since the statement is literally true.
Under NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers, it is unethical to misrepresent the qualifications of the adviser or any employee. Advisers must conside
Under the Investment Advisers Act of 1940, which of the following statements is/are TRUE concerning an investment adviser's use of a solicitor?
I. The cash fee paid to a solicitor must be disclosed.
II. A partner, officer, director, or employee cannot per
c. I, III, and IV only
Some advisers pay solicitors to obtain clients. If the services of a solicitor are used, various disclosures must be made to the client. In addition to ADV Part 2, there must be a separate solicitor disclosure document that describe
Which of the following individuals has/have limited liability?
a. The shareholders of an S Corporation
b. The shareholders of a C Corporation
c. A general partner
d. The owners of an LLC
e. A sole proprietor
f. A limited partner
a. The shareholders of an S Corporation
b. The shareholders of a C Corporation
d. The owners of an LLC
f. A limited partner
An agent in Maine calls a prospective client in New Hampshire and recommends the purchase of a security. Under the Uniform Securities Act, the offer is made in:
a. Maine only
b. New Hampshire only
c. Both Maine and New Hampshire
d. No offer is made unless
c. Both Maine and New Hampshire
Under the USA, an offer is made in a particular state when the offer either: (1) originates from the state, or (2) is directed by the person making the offer (the agent) to the state, and is received in the place to which i
Jim and Tammy decide to start a new broker-dealer and establish themselves as the sole shareholders. What facts may be used by the Administrator as grounds for denying their application?
I. Six years ago, Jim pled guilty to one felony count of criminal tr
a. I only
When an application is made for a broker-dealer license, the application may be denied based on the history and condition of the applicant (the broker-dealer) or its controlling persons (Jim and Tammy), officers, or directors. The fact that Jim
The last dollar that a client earns would be taxed at their:
a. Capital gains rate
b. Marginal tax rate
c. Internal tax rate
d. Base rate
b. Marginal tax rate
Earned income is taxed at an individual's personal income tax rate or marginal rate. The last dollar that you earn each year is taxed at your marginal rate.
Under the Uniform Securities Act, which of the following transactions would be considered a sale?
a. The exercise of a call option
b. A gift of assessable stock
c. A stock dividend
d. Lending stock to short-sellers
b. a gift of assessable stock
Gifts are generally not considered sales. However, since assessable stock may require the person who receives the gift to provide additional money or capital, it is considered a sale. Loans and pledges of securities as well a
According to the Uniform Securities Act, which of the following statements is TRUE?
a. When an agent's registration is suspended in a state, the broker-dealer would no longer be able to conduct business in that state.
b. When an investment adviser represe
c. When a broker-dealer is suspended, the agent's registration is no longer in effect.
If an agent's registration is suspended, the broker-dealer's registration remains intact. However, an agent's registration is only effective when the broker-dealer's re
According to the Securities Exchange Act of 1934, which of the following organizations is NOT accountable to the SEC?
a. National exchanges
b. The MSRB
c. FINRA
d. National banks
d. National banks
The SEC does not regulate national banks, but it does have oversight over the MSRB, FINRA, and exchanges.
Under the Investment Company Act, which TWO of the following statements are NOT TRUE regarding the redemption of mutual fund shares?
I. The investor will receive the net asset value as previous day's close.
II. The investor will receive the next computed
b. I and IV
Share redemption of mutual funds is based on forward pricing, which means that the investor will receive the next computed net asset value. This value is normally computed at the end of the business day. The client must be paid within seven ca
An agent recommends that a client purchase a particular security. The agent believes the client has the resources to pay for the transaction. Three days after the trade is executed, the client indicates that he cannot meet his financial obligation to the
b. the agent has acted in an unethical manner
This is unethical behavior, not fraud. An agent may not borrow funds from, or lend funds to, a client.
One of the most common uses for a bypass trust is to:
a. Provide capital to pay estate taxes
b. Bypass capital gains taxes but pay ordinary income taxes on the assets
c. Bypass all tax obligations on income paid to the beneficiaries
d. Pass assets from th
b. Pass assets from the second deceased parent to his children
One of the most common uses for a bypass trust is to pass assets from parents to their children upon the death of the second parent.
According to ERISA 404(c) guidelines, which of the following actions is considered a prohibited practice?
a. Failing to properly diversify the plan
b. Managing plan assets
c. Exercising discretion over plan assets
d. Disposing of or liquidating plan asset
a. failing to properly diversify the plan
Plan fiduciaries provide services to the plan. They might manage plan assets or provide safekeeping services. Buying and selling plan assets is a normal business practice. Plan administrators are prohibited from e
A state Administrator has suspended a broker-dealer. Which of the following statements concerning the broker-dealer is TRUE?
a. The firm is allowed to accept unsolicited orders.
b. The only activity the firm may not participate in is new issue distributio
d. The firm may apply to the state court for a review of the order.
Although the firm may apply to the state court to review the Administrator's order, there is no stay of the order. The firm is still suspended during the appeal process and may not partic
Which of the following actions may be taken by the Administrator?
I Limit or restrict the functions or activities of the registrant
Administer an oath
II Cancel registration if the registrant cannot be located III after a reasonable search
a. I and II onl
d. I, II, and III
The Administrator is given the authority to take all these actions.
Ten years ago a client transferred her 401(k), worth $80,000, into an IRA. Her account has grown to $120,000 and she takes a distribution of $10,000 at age 52. The tax consequences of her actions would be:
a. $10,000 long-term capital gain plus a 10% pena
c. $10,000 long=term capital gain plus a 15% penalty.
Withdrawals from an IRA prior to age 59 1/2 will result in a 10% penalty and be added to income for tax purposes. The penalty will not be incurred if the withdrawal is made due to physical disability o
An investment adviser representative manages a portfolio for a client on a discretionary basis. The client's objective is conservative growth. According to prudent investor standards, which of the following statements is TRUE regarding the inclusion of op
c. Options strategies may be appropriate as part of a conservative portfolio
Prudent investor standards are applied to the client's total portfolio, not on an investment-by-investment basis. Rather than restricting individual investments, anything might b
Which of the following choices is NOT a characteristic of equity-indexed annuities?
a. A guaranteed minimum rate of return
b. A rate of return that varies along with the underlying index
c. A rate of return that is determined by the subaccounts that the c
c. A rate of return that is determined by the subaccounts that the contract owner selects
In an equity-indexed annuity, the insurance company guarantees the contract owner a minimum rate of return. The insurance company usually guarantees that the investo
A futures contract is different than a cash forward contract because the futures contract is:
I. A personal transaction between the buyer and the seller
II. For a standard amount of the commodity rather than for a specific amount and quality of the cash c
d. II and IV only
A futures contract is a standardized contract whose terms are set by the exchange it trades on. Buyers and sellers of futures contracts are not required to take delivery of the underlying commodity. Instead, futures positions can be offs
Which TWO of the following statements are NOT TRUE regarding the investment risk of a life insurance policy?
I. Whole life policy writers bear the risk that the general account return will not meet the guaranteed rate.
II. Whole life policy owners bear th
c. II and III
Since the writer of a whole life policy guarantees the return, the insurer bears the risk that general account returns will not meet the guaranteed rate. In a variable account, the writer does not guarantee increases in death benefits and ca
An advisory client is pessimistic and believes that the economy is about to go into a recession. He instructs his adviser to sell his holdings in housing and technology stocks and purchase utilities and consumer staples. This strategy is known as:
a. Dive
b. Sector rotation
Sector rotation is a strategy often used in anticipation of changes in the business cycle. If it is believed the economy is about to slow, profitable sectors to invest in would be consumer staples, or defensive stocks.
During the first quarter, TJG common stock paid a $.75 dividend. The stock's price fell from $75 per share at the beginning of the quarter to $67.50 per share at the end of the period. Based on these results, what is the stock's annualized total return?
a
d. -36%
The total return for a security is found by taking the ending value minus the beginning value plus any income. In this example, the ending value of the stock was $67.50 minus the beginning value of $75.00 plus $0.75 in dividends. Dividing this sum
Which of the following items are listed on a balance sheet?
I. Assets
II. Liabilities
III. Retained earnings
IV. Operating expenses
a. I only
b. I and III only
c. I, II, and III only
d. I, II, III, and IV
c. I, II, and III only
Assets, liabilities, and retained earnings are balance sheet items and are not represented on the income statement. Retained earnings are the funds that a company earned that it did not pay out in the form of cash dividends.
The top-down approach to investing generally includes the idea that:
a. The price of a stock is based on external factors, such as the economy, not just facts about the company itself
b. The management team of a company is usually a reliable gauge as to h
a. The price of a stock is based on external factors, such as the economy, not just facts about the company itself
One of the factors involved in the evaluation of stocks in the top-down approach is the economic climate. All of the other choices are chara
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63.
The
c. 18.50
After the order was activated by the round-lot sale of 18.25, the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and would be the execution price.
Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend?
I. A GTC order to sell 100 XYZ at $50
II. A GTC to buy 100 XYZ at $50 stop
III. A GTC to buy 100 XYZ at $50
IV. A GTC to sell 100 XYZ at $50 stop
a. I and II
b. II a
d. II and IV
Open or good-until-cancelled (GTC) orders that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked Do Not Reduce (DNR). Orders that are placed below the current market at the time of en
Which TWO of the following types of insurance have fixed premiums?
I. Whole life insurance
II. Universal life insurance
III. Variable life insurance
IV. Variable universal life insurance
a. I and II
b. I and III
c. II and IV
d. III and IV
b. I and III
Universal life policies, including variable universal life, have flexible premiums. Variable universal life is sometimes called flexible-premium variable life insurance. Whole life and variable life insurance policies have fixed premiums.
Under which of the following circumstances will the payout from a variable annuity increase?
a. The rate of inflation exceeds the AIR.
b. The performance of the separate account exceeds the rate of inflation.
c. The performance of the separate account exc
c. The performance of the separate account exceeds the AIR.
Whether the payment from a variable annuity changes depends on the relationship between the performance of the separate account and the assumed interest rate (AIR) in the contract. If the account
A client invested $100,000 in an Equity Indexed Annuity. The participation rate is 90% with a cap rate of 15%. In year one, the index increased by 20%. In year two, the index lost 5%. In year three, the index gained 10%. What is the value of the annuity a
d. $125,350
- An Equity Indexed Annuity is credited with the lesser of the participation rate or the cap rate, based on the performance of an index such as the S&P 500. In year one, the index increased by 20%. 90% of the gain is equal to 18%, but since th
Which of the following statements is TRUE regarding funds of hedge funds?
a. They are generally illiquid investments.
b. The parent company invests in a number of mutual funds representing different asset classes.
c. They have lower expenses than most mut
a. They are generally illiquid investments.
A fund of hedge funds is a type of registered investment product in which the parent fund invests in a number of hedge funds. They are usually illiquid investments. Funds of funds tend to have higher expenses th
Which of the following statements is TRUE in relation to the buyer of a call option?
a. The investor has limited risk.
b. The investor has a limited potential profit.
c. The investor is entitled to all dividends paid on the underlying stock.
d. The invest
a. The investor has limited risk.
A purchaser of a call option would have limited risk with the potential for unlimited profit. The risk is the possibility of losing the entire premium (cost of the option). The owner of the call option is not an equity ow
When reviewing a corporation's financials, an agent would find which of the following items on the balance sheet?
I. Cost of goods sold
II. EBIT (earnings before interest and taxes)
III. Taxes paid
IV. Accounts payable
a. II only
b. IV only
c. II and III
b. IV only
The only item listed that is included on the balance sheet is
choice (IV). All the other choices are found on the income statement. On your exam, you would need to be able to contrast items that are found on a balance sheet, such as accounts pa
A client has $20,000 to invest, a 10-year time horizon, and a desire to have $50,000 at the end of the investment period. The rate of return that must be earned to arrive at $50,000 is called the:
a. Expected return
b. Internal rate of return
c. Current y
b. Internal rate of return
The rate of return that a sum P0 (present value) must earn over n periods to produce a final (future) value of Pn is the internal rate of return. It is represented by the quantity r in the basic time value of money equation:
Pn
A corporation has the following financial information.
$1 million in cash
$2 million in accounts receivable
$5 million of inventory
$10 million of equipment
$3 million in short-term debt
$50 million in long-term debt
$2 million accounts payable
What is th
a. 1.6
The current ratio is found by dividing the current assets by the current liabilities. In this question, current assets include cash, accounts receivables, and inventory, totaling $8 million. Current liabilities include short-term debt and accounts
XYZ Corporation's common stock has the same beta as ABC Company's common stock. However, XYZ stock, on the average, produces better returns than ABC. Which of the following would explain this difference?
a. XYZ stock has a higher alpha than ABC stock.
b.
a. XYZ stock has a bigger alpha than ABC stock
While a stock's beta measures its performance as it relates to the overall market, alpha measures that part of a stock's return that is independent of the market. It is influenced by factors that are unique t
A firm that is expecting to take its shares public has recently hired a new employee to assist in selling shares to investors. According to the Uniform Securities Act, which of the following statements is TRUE?
a. The employee does not have to be register
d. The employee would be required to register in any state
The Administrator may require an investment adviser to file which of the following documents along with its initial ADV application?
a. A list of all customer securities and the location where they are held
b. A list of all of its recommendations for the
d. The firm's current financial condition
Of the items listed, a new adviser would only be required to file a statement regarding its financial condition.
Which of the following is the LEAST important factor when planning for college?
a. The parents' net worth
b. The current cost of tuition
c. A historical growth rate
d. When the money will be needed
a. The parents' net worth
This question assumes that the formula for determining future value will be used, as shown below:
FV = PV (1 + r) t
For purposes of this question:
FV is the future value, which is what a person will need in order to pay for colle
What is the biggest advantage of investing in a general partnership?
a. Income is only taxed once
b. Each partner has limited liability
c. Each partner shares equally in the partnership's profits
d. It is easy to dissolve or liquidate the partnership
a. income is only taxed once
Partnerships are tax-advantaged investments since the income they generate is taxed only once. A partnership's income passes through to its partners and is, therefore, taxed at each partner's level. In general partnerships, si
Susan is a high-ranking official in the Comptroller's Office of Zanzibar Securities. Her title is Executive Vice President. Under the Uniform Securities Act, Susan is:
a. An agent since all officers of a securities firm are considered agents
b. Not consid
b. Not considered an agent since she is not involved in sales or trading
Only personnel engaged in securities transactions are agents. Officers can be considered agents, but it depends on their particular job function.
A corporation has current assets of $150,000 and current liabilities of $75,000. The corporation uses cash to pay $35,000 in current liabilities. Which of the following statements is TRUE?
a. The current ratio increases
b. Working capital increases
c. Bon
a. The current ratio increases
When the $35,000 in current liabilities is paid in cash, current assets fall to $115,000 and liabilities fall to $40,000. The result is an increased current ratio of 2.875, compared to 2 before the payment. Working capital a
When considering the tax consequences of trading securities within a trust, the trustee should examine:
a. Other taxable income that is generated by the trust
b. The taxable assets of the trustee
c. The taxable assets of the grantor
d. The taxable income
a. Other taxable income that is generated by the trust
A trust is managed for the benefit of the beneficiary; however, any income that is generated by the trust is taxable to the trust. For that reason, an examination of the tax consequences of a trust mu
An adviser is constructing a bond portfolio for a client whose goals are stable income and return of principal. The adviser determines that the appropriate benchmark to compare this portfolio's performance is the Wheyman Intermediate-term Government Bond
d. Any returns of this portfolio that exceed the performance of the benchmark are measured by the beta of the portfolio
When constructing a portfolio, an adviser typically starts by considering the securities in the benchmark and will then determine what
When dealing with a customer, a broker-dealer is quoting an offering price of $10.00 per share on a stock that is currently trading in the market at $6.00 per share. If the broker-dealer does not disclose the difference in prices to the customer, this wou
b. An unethical business practice since the quoted price is not related to the current market price
This question contains an example of providing a quote that is not based on the contemporaneous market price. Even with proper disclosure, this is consider
Bob is a business manager for professional athletes. As manager, he negotiates their contracts, pays their bills, and provides them with tax advice. When trying to minimize their tax liabilities, Bob will periodically provide advice relating to securities
d. Yes, SEC Release 1092 states that the Advisers Act applies to people who provide investment advise to athletes and entertainers
SEC Release 1092 states that sports and entertainment representatives who provide investment advice to their clients are inv
Which of the following statements is TRUE about indexing?
a. It measures the performance of an IA versus an index.
b. It is an active management strategy.
c. It may result in a portfolio that does not accurately track the index.
d. It is a strategy in whi
c. It may result in a portfolio that does not accurately track the index.
Indexing is a passive, not an active, management strategy. When using this passive strategy, an IA attempts to build a portfolio that will mirror or match the performance of a speci
A client and his wife purchased their home for $300,000. They have occupied their home for the last 26 years and have made $80,000 of improvements over the years. The home was recently put on the market for $800,000, but eventually sold for $770,000. Upon
b. $0
Upon the sale of a primary residence, a portion of any capital gains are excluded from taxation. If filing a single tax return, the first $250,000 of gains from the sale are excluded. If filing a joint tax return, the first $500,000 in gains are exc
Under the Uniform Securities Act, which of the following sales is considered a non-issuer transaction?
a. The sale of an outstanding security on the New York Stock Exchange
b. A primary offering being sold by a broker-dealer
c. The sale of a security bein
a. The sale of an outstanding security on the NY-Stock Exchange
Choices (d), (b), and (c) are examples of issuer transactions (i.e., the proceeds of the offering are for the issuer's benefit). On the other hand, a non-issuer transaction (secondary market
Warren is a growth-oriented investor who is bullish on the long-term prospects of the U.S. stock market. He has diversified his portfolio in the following ways: individual stocks from various sectors, an S&P 500 Index fund, an aggressive growth fund, a fu
c. Systematic Risk
Systematic risk is market risk. This is the risk that a decline in the overall market will cause a similar decline in an individual's portfolio. Systematic risk cannot be diversified away. Warren owns many kinds of stocks, in many diffe
Jack has a substantial amount of cash value built up in his variable life insurance policy. He would like to use some of it for a home renovation project. Which TWO of the following choices would be used to explain to Jack his options for accessing his ca
b. II and IV
Any withdrawal of cash value from a life insurance policy is considered a return of premiums first, which would be tax-free. Withdrawals above the amount of premiums paid will be considered interest and, therefore, taxable as income. Policyho
During the day, Big Block Traders has taken down 100,000 shares of Vantage Holdings at $6.33, another 200,000 shares at $6.17, and then 327,000 shares at $6.54. When distributing these shares to its discretionary clients, which of the following allocation
c. All clients should be given shares at a price that is near the firm's average daily cost
When examining a firm's method of allocating trades among its clients, the regulators main focus is on fairness. Of the given choices, the best approach is to give
Which of the following statements is accurate regarding dollar cost averaging?
a. It is a systematic, fixed-dollar method of investing
b. If employed, the average price will be less than the average cost
c. It can only be set up through a payroll deductio
a. It is a systematic, fixed-dollar method of investing
Dollar cost averaging is a systematic approach in which an investor periodically contributes a constant dollar amount over a fixed period. Buying more shares when prices are low and fewer when prices
According to the USA, if the ownership of a registrant changes, it must do which of the following?
a. Notify the Administrator at the time of renewal
b. Promptly file a new application with the Administrator
c. Promptly file a correcting amendment with th
c. Promptly file a correcting amendment with the administrator
Whenever there is a material change of ownership for a registrant, a correcting amendment to its registration must be filed with the Administrator promptly. While registrants are not required
Which of the following statements about barbell strategies is NOT TRUE?
a. The strategy consists of purchasing bonds with both short and long maturities, but no intermediate-term securities are included
b. The short-term bonds will provide for quick cash
d. Gains from the short-term maturities will offset losses in the long-term maturities
A barbell strategy consists of buying short-term and long-term bonds, but not intermediate-term bonds. The purchase of long-term bonds allows an investor to capture hig
Who would NOT be exempt from the definition of agent under the Uniform Securities Act?
A NYC official who sells investment-grade GO bonds to the public
A finance V.P. of a major appliance manufacturer who sells AAA bonds to the public
A finance officer of
b. A finance VP of a major appliance manufacturer who sells AAA bonds to the public
Sometimes employees of an issuer selling securities may be considered agents. Generally, an employee of an issuer selling stock to the public would be considered an agent
Buy and hold and systematic rebalancing are examples of passive approaches to asset allocation, and based on the theory known as:
a. Efficient Market Hypothesis
b. Sector Rotation
c. CAPM
d. Modern Portfolio Theory
a. efficient Market Hypothesis
Efficient Market Hypothesis (Theory) states that financial markets are efficient and that the prices of securities reflect all known information; therefore, it is impossible to outperform or time the market. Sector rotation
When selecting a value stock, an agent would look for which of the following characteristics?
I. High earnings per share
II. Low price/earnings ratio
III. Low price to book value
IV. High dividend yield
a. I and II only
b. I and III only
c. I, II, and III
d. I, II, III, and IV
A value stock is one that tends to trade at a lower price relative to its fundamentals (i.e., dividend yield, earnings per share, sales, price/earnings ratio, market price to book value) and is, therefore, considered undervalued by a
What is the benefit of discounting the cash flows of a fixed-income security?
a. It will measure the degree of price volatility that a bond will exhibit if interest rates increase
b. An adviser can focus on a company's long-term growth potential and its a
d. It compares the price of a bond against the sum of the present values of the bond's future payouts
A discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a present value, based on a rate of return. This makes it
Action Advisers creates financial plans for clients. It generally implements these plans through Packaged Products Producers (PPP), a limited broker-dealer owned by Action. PPP offers a mix of mutual funds and variable annuities, but does not engage in tr
a. A statement that the implementation of client financial plans may be limited because of the incomplete product selection available through PPP
According to SEC Release IA-1092, an IAR/RR who intends to implement a plan using only products offered by a
Under the Uniform Securities Act, for an investment adviser to be able to maintain custody of client assets, it must meet all of the following conditions, EXCEPT:
a. Obtaining written discretionary authority from each client for whom it is holding funds a
a. Obtaining written discretionary authority from each client for whom it is holding funds and/or securities
It is important to recognize that this is an EXCEPT question. Essentially, an adviser may maintain custody of a client' regardless of whether disc
Under the USA, which of the following choices is considered an offer of securities?
a. An investor purchased bonds and received a warrant as a bonus
b. An investor receives additional shares due to a stock split
c. An investor receives a stock dividend
d.
a. An investor purchased bonds and received a warrant as a bonus
According to the Uniform Securities Act, any security that an investor receives as a bonus for purchasing another security is considered an offer of that security. The USA specifically state
An investment adviser's client is considering acquiring a company for $10 million. The company's expected future cash flows are $2 million in the first year, $4 million in the second year, and $8 million in the third year. Which of the following measures
b. Internal rate of return (IRR)
This is really a question about the present and future values of the company. The present value of the company is simply the purchase price of $10 million, while the future values are the cash flows of $2 million, $4 milli
Registration by coordination would most likely be used to register what type of offering?
a. A new issue of mutual fund shares
b. An initial public offering
c. A new issue of shares listed on Nasdaq
d. An intrastate offering
b. An initial public offering
Under normal circumstances, the method of registration most often used by the new issuers of securities is registration by coordination. Mutual funds are federal covered securities. All listed securities, such as Nasdaq secur
An agent is terminated by his broker-dealer. Who must notify the Administrator and when?
a. The agent, promptly
b. The broker-dealer within 30 days
c. The agent, within 30 days
d. Both the agent and broker-dealer, promptly
d. Both the agent and broker-dealer, promptly.
Upon termination, both the agent and the broker-dealer must notify the Administrator, promptly. If the agent is subsequently employed by another broker-dealer, both the employer and the agent must also notify
Under the Securities Exchange Act, a customer confirmation is NOT required to disclose:
a. The amount of commission to be received by the broker-dealer for executing an agency transaction
b. The settlement date of the trade
c. The capacity in which the br
d. The time of the trade execution
The Securities Exchange Act requires broker-dealers to make specific disclosures on customer confirmations. Some of the required information includes the capacity in which the broker-dealer is acting (i.e., agency or pri
Diminutive Advisers is a small, single-office investment advisory firm with $4 million in assets under management. The firm is located in Texas. According to the Uniform Securities Act, which of the following persons associated with the firm would NOT fal
c. An in-house accountant who tabulates investment results for client accounts
IA representatives are persons who are associated with an IA and make recommendations, manage accounts, solicit, or negotiate the sale of IA services, or supervise any persons
Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is:
a. One year
b. Three years
c. Five years
d. There is no time limit for criminal violations
c. Five years
The statute of limitations for criminal violations under the Act is five years.
Under the Uniform Securities Act, which of the following statements is/are TRUE regarding the registration of securities?
I. A security is considered registered for one year from the effective date of its registration statement
II. Once the registration s
b. I and IV only
Under the USA, a registration statement is effective for one year from its effective date and may be filed by the issuer, a registered broker-dealer, or any other person on whose behalf the offering is being made. The filing of quarterly
Which of the following events would NOT require a public company to file a Form 8-K report?
a. A minority owned subsidiary changes locations
b. The auditors of the company resign
c. The company acquires a controlling interest in another company
d. The com
a. A minority owned subsidiary changes locations
Form 8-K is the report that companies must file with the SEC to announce material corporate events that shareholders should know about. A change in the location of a minority owned subsidiary, choice (a) is
All of the following statements regarding discounted cash flow are NOT TRUE, EXCEPT:
a. It is used to calculate the volatility of the market
b. It is used to determine the attractiveness of an investment
c. It can only be used to determine the value of a
b. It is used to determine the attractiveness of an investment
Discounted cash flow (DCF) analysis is a method of estimating the fair market price of an investment. If the investment is trading at a value lower than its discounted cash flow value, this wo
Under NASAA's Statement of Policy on Unethical Business Practices, which of the following statements is TRUE regarding investment advisory fees charged to customers?
a. There is no limit on the fee charged, provided the customer agrees to the method of co
c. Advisers may not charge fees that are unreasonably high in relation to fees charged by other advisers for similar services.
Although it is difficult to compare the advisory services provided to clients of different advisers, a general standard of reaso
The Administrator of the state of Wisconsin has designated the Investment Adviser Registration Depository (IARD) as the approved method for filing registration applications in that state. All filings must be done electronically through the IARD. Under whi
b. I and III
In states where the Administrator has designated the IARD as the method for filing registration applications electronically, two exemptions are available. The exemptions are given in cases where the form that is filed cannot be accepted by th
Which of the following statements BEST describes the similarities between an S Corporation and a general partnership?
a. Both provide limited personal liability
b. Both require full personal liability
c. Both do not provide flow-through of losses
d. Both
d. Both provided flow-through of losses
An S Corporation provides limited liability to its shareholders, but a general partnership involves full liability of all the partners. (A limited partnership would provide limited liability to the limited partners.
A technology company's stock is listed on an exchange and is also traded over-the-counter by a small number of market makers. The stock is considered by the Administrator to be a:
a. Non-exempt security and subject to registration by coordination
b. Feder
b. Federal covered security and not subject to registration wit h the Administration.
Securities that are listed on the NYSE, Nasdaq, or other national exchanges are considered federal covered securities and exempt from registration with the Administrator
If Jane Brown annuitizes her nonqualified variable annuity, how will the series of payments be taxed?
a. LIFO
b. FIFO
c. Part of each payment is taxable earnings and part is a tax-free cost basis
d. All taxable earnings first, then all cost basis
c. Part of each payment is taxable earnings and part is a tax-free cost basis
A nonqualified annuity has a cost basis consisting of the after-tax dollars invested, as well as earnings that are tax-deferred. If it is annuitized, the cost basis is returned
Which of the following is TRUE concerning the private placement of securities being distributed under Rule 506(c) of Regulation D?
a. The securities may only be offered to accredited investors.
b. The securities may only be sold to no more than 35 non-acc
d. General advertising is permitted, but all investors must be accredited
Under Rule 506(c) of Regulation D, issuers may raise an unlimited amount of capital and they may solicit all types of investors; however, the issuer can only accept accredited inves
A registered representative has written an electronic marketing piece that recommends the purchase of a new variable annuity being offered by his firm. He wants to send it by e-mail to 40 retail clients. If the product is suitable for each of the clients
C. The e-mail must be approved by a principal.
Since the communication is being sent to more than 25 retail investors, it is considered a retail communication. A retail communication containing an investment or financial recommendation, or promoting a pro
Kevin is an agent of CMP Broker-Dealers which is registered in 10 states. Kevin is currently registered in five states, but only transacts business with institutional clients. Due to recent mergers, some of Kevin's clients will be relocating to North Caro
a. Both Kevin and CMP are required to be registered in North Carolina
This is a tricky question, but the main concept is that a broker-dealer is not required to register in a state if it has "no place of business in the state." However, since CMP is openi
Those investors, who believe markets are not perfectly efficient, may use an active strategy in which the asset mix of a portfolio is altered in anticipation of economic events. This market timing approach is known as:
a. Tactical Asset Allocation
b. Stra
a. Tactical Asset Allocation
Tactical Asset Allocation is used to identify and buy into sectors that are anticipated to outperform the market. Strategic asset allocation is used to assemble an investment portfolio based on the client's risk tolerance and
Mrs. Smith sets up a grantor trust where the income is used to pay the premiums on her husband's life insurance policy. Mr. and Mrs. Smith file their taxes as married but filing separately. The tax on the income generated by the trust is:
a. Paid by the t
c. Paid by the wife
A grantor trust is one in which the grantor retains a right to any income generated by the trust, as well as the power to revoke the trust. The income generated by the trust must be included in the grantor's taxable income. The grantor
An investment adviser is registered in State X. A new employee is recently hired as an investment adviser representative (IAR), but had previously worked for an adviser in State Y. The IAR still directs client communications with 22 of her clients from St
c. Highly qualified wealthy investors with a net worth of more than $1 million
Under the Uniform Securities Act, investment advisers and investment adviser representatives are exempt from registration in a state if they have no place of business in the st
Which of the following elements are required for an investment contract to be considered a security?
I. An investment of money
II. An expectation of profits
III. A common enterprise
IV. Efforts made by a third party
a. I and II only
b. I, II, and III only
d. I, II, III, and IV
The test of whether an investment meets the definition of a security was established by a Supreme Court case (referred to as the Howey Test). All of the four choices listed are required parts of the test.
Which of the following persons would be subject to statutory disqualification under the Securities Exchange Act of 1934?
a. A person accused of insider trading
b. A person who pleaded guilty to stock manipulation five years ago
c. A person who was the def
b. a person who pleaded guilty to stock manipulation five years ago
A statutory disqualification is the denial of an applicant for registration based on the past transgressions of the applicant, including violations of any securities or commodities law. B
Under IRS rules, which of the following items are exempt from the definition of earned income?
I. Unemployment benefits
II. Alimony
III. Child support
IV. Income received from investments in property
V. Net earnings from self-employment
a. I, II, and III
b. I, II, III, and IV
The IRS defines earned income as compensation received for personal services actually rendered. According to the IRS, all of these items are considered earned income.
- Wages, salaries, and tips
- Union strike benefits
- Long-term di
A client of an IAR is 35 years old and single with three children, ages 7, 9, and 12. She has 15 years remaining on her home mortgage. She would like to ensure her children will be able to attend college and that the mortgage will be paid off in the event
b. a 15-yr. term life insurance policy
Based on the client's future obligations and lack of discretionary income, term life offers the least expensive policy for the period she needs it for. A whole life policy charges higher premiums. A whole life policy
Which of the following securities is most susceptible to interest-rate risk?
a. Common stock
b. Commercial paper
c. T-bills
d. T-bonds
d. t-bonds
Long-term bond prices are more sensitive to interest-rate risk than short-term bonds. For example, if an investor owns a bond with a 5% coupon and interest rates rise to 7%, he would be earning less than new investors. If the investor only need
An 81-year-old father is establishing a bypass trust for his two adult children who are both in their 40s. His investment adviser is evaluating the risks and benefits of numerous investment vehicles. Which of the following choices is MOST appropriate inve
b. growth stocks, since the beneficiaries will not need the funds for several years
A Bypass Trust (or Credit Shelter Trust) is a type of irrevocable trust and is most commonly used to pass assets from parents to children at the time of the second parent'
Which of the following bonds have the MOST credit risk?
a. Equipment trust certificates
b. Mortgage bonds
c. Industrial development bonds
d. General obligation bonds
c. Industrial development bonds
Although they are issued by municipalities, industrial development bonds (IDBs) are unsecured and often issued to finance the creation of certain types of industrial facilities. IDBs are more subject to credit risk than the
The possibility that a company may perform poorly, causing its stock to decline in value is called:
a. Selection risk
b. Market risk
c. Opportunity risk
d. Business risk
d. Business risk
Business risk is the possibility that a corporation's business will not do well, causing its stock to drop in value, or even become worthless, if the company declares bankruptcy.
One of the main differences between futures contracts and forward contracts is that:
a. Forward contracts do not involve commodities
b. Forward contracts may not be offset without permission
c. Futures contracts are always used to speculate
d. An investor
b. Forward contracts may not be offset without permission
One of the main differences between futures contracts and forward contracts is that future contracts may be offset (bought or sold). Indeed, most buyers and sellers of future contracts never actual
According to modern portfolio theory, a diversified portfolio should be comprised of assets that are:
a. Highly liquid
b. Optimally efficient
c. Largely uncorrelated
d. Alternative investments
c. Largely uncorrelated
Ideally, a diversified portfolio should be composed of assets that are largely uncorrelated--i.e., do not move in the same direction.
Under the Uniform Securities Act, which of the following activities of an investment adviser would constitute impersonal advisory services?
a. Telling a client to buy municipal bonds in order to reduce her tax liability
b. Providing clients with a recomme
c. Giving a client a list of mutual funds with the lowest expense ratios for the past five years
Impersonal advisory services are those activities of an investment adviser that do not meet the specific needs or objectives of a client, or which do not rend
If an adviser wanted to determine a company's ability to pay debts that would be maturing in one year, the adviser would be most interested in the:
a. Current ratio
b. Acid-test ratio
c. Inventory turnover
d. Debt-to-equity ratio
a. Current ratio
The current ratio is a comparison of current assets to current liabilities for a one-year period. The acid-test ratio excludes inventories and usually is for a one- to three-month period.
Which TWO of the following statements are TRUE regarding non-qualified annuities?
a. There is a 10% penalty on any taxable withdrawals that are taken before age 59 1/2
b. There is no 10% penalty on any taxable withdrawals that are taken before age 59 1/2
b. I and IV
Non-qualified annuities are funded with after-tax (non-deductible) contributions. If funds are withdrawn before age 59 1/2, the earnings portion will be subject to taxation and a 10% penalty. However, since non-qualified annuities are funded a
If a company registers its offering with a state Administrator using coordination, it would also file a registration statement under which federal act?
a. The Securities Act of 1933
b. The Securities Exchange Act of 1934
c. The Investment Company Act of 1
a. The Securities Act of 1933
Under the Uniform Securities Act, registration by coordination is generally used for initial public offerings (IPOs). New issues, including IPOs, are required to register with the SEC under the Securities Act of 1933.
You are interviewing prospective clients, Jack and Jill. They tell you they have approximately $10,000 to invest and would like to earn the type of returns that equity investments exhibit over the long term. However, they do not want their portfolio to be
d. They cannot expect to earn the type of returns that equities produce over the long term without assuming a corresponding amount of risk.
One of the basic principles of investing is that risk and return are closely related. Historically, equities such a
According to the Form ADV, a felony, as compared to a misdemeanor, is defined by all the following choices, EXCEPT:
a. An offense punishable by a sentence of at least one-year imprisonment
b. An offense punishable by a fine of at least $1,000
c. An offens
c. An offense punishable by a fine of at least $500
All the choices are applicable except choice (c). A felony is an offense punishable by a sentence of at least one year imprisonment and/or a fine of at least $1,000. The term also includes a general cour
An adviser could recommend the purchase of a bond to a client, if its:
a. Present value is less than its current market value
b. Present value is more than its current market value
c. Net present value is less than zero
d. Future value is less than its cu
b. Present value is less than its current market value
In evaluating the value of fixed-income securities, one method is discounted cash flow (DCF). Each future cash flow (interest payments and principal) is discounted to its present value and the present
When determining the risk premium on an investment, an investor would analyze the difference between:
a. The total return and the risk-free rate of return
b. The mean return and dollar-weighted return
c. The total return and annualized rate of return
d. T
a. The Total return and the risk-free rate of return
Total return - risk-free rate of return = risk premium. The risk premium is the amount of return earned in excess of the risk-free rate of return (i.e., the return on a T-bill).
A 6% coupon bond is selling at a basis of 6.20. If interest rates in the market decline below 6%, the bond's basis will:
a. Increase
b. Remain the same
c. Increase or decrease, depending on its maturity
d. Decline
d. Decline
A bond's basis is synonymous with its yield-to-maturity. Interest rates and yield-to-maturity on a bond will move in the same direction. If market interest rates decline, it means that yields (including the yield-to-maturity) will also decline.
A broker-dealer has offices in States X and Y. One of its agents is registered in State X where the agent's primary office is located. The agent often travels to State Y and uses the broker-dealer's office there to meet with clients. The agent:
a. Is exem
C. Must register in State Y, since the agent uses an office there.
The agent must register in State Y since the agent has a place of business (office) in State Y.
Foresight Advisers does not have an office in New Mexico. Under the Uniform Securities Act, in which of the following situations would the firm be required to register as an investment adviser in that state?
I. Foresight limits its practice to wealthy ind
b. I and III only
Firms with no office in a state would not be required to register as an investment adviser in the state provided the firm deals exclusively with institutions such as broker-dealers or government entities, but not individual investors. An
An investor is negotiating a contract with an investment adviser. The adviser wants to charge the investor a 2% management fee plus 20% of any appreciation that is realized in any given quarter. Although the investor is not opposed to the idea, in order t
b. Have assets under management of at least $1 million or a net worth of more than $2.1 million
Investment advisers may only charge performance-based fees to persons who are categorized as qualified clients. A qualified client is defined as a person that
According to the Uniform Securities Act, which of the following securities are exempt from registration?
Stock issued by a FINRA member firm
Debentures issued by a Canadian bank
Stock issued by a state-regulated railroad company
Preferred stock sold to in
c. Stock issued by a state-regulated railroad company
Common carriers, such as railroads and shipping companies, are exempt from registration under the Uniform Securities Act. While securities issued in the same state in which the firm is incorporated may
Biff and Muffy want to contribute the maximum amount to each of their grandchildren's 529 college savings plans. What is the most that they can give each grandchild without incurring federal gift tax liability?
a. $2,000 annually or $10,000 every 5 years
c. $28,000 annually or $140,000 every 5 years
As a married couple, Biff and Muffy may contribute $28,000 annually to each of their grandchildren's 529 savings plans without incurring gift taxes. They may also compact five years of contributions into one a
Your client, Ms. Fabozzi, would like to invest in a fixed-income security for her portfolio. She understands there is a tradeoff between risk and return; however, she prefers to avoid speculative-grade investments. Which of the following bonds is MOST sui
d. BBB collateral trust certificate, present value = $1,251, market price = $1,148
In order to answer this question you must compare each bond's current market value to its present value. The present value of each bond has been calculated by discounting t
What type of risk does NOT apply to the holder of a zero-coupon bond?
a. Reinvestment risk
b. Credit risk
c. Purchasing-power risk
d. Market risk
a. Reinvestment Risk
Zero-coupon bonds are issued at a discounted price and do not pay semiannual interest. Since there are no interest payments to reinvest, the bond has no reinvestment risk. When investing in fixed-income securities, one of the uncertai
Carrie has been a client of an investment adviser that is established as a partnership for four years and is happy with the performance of her account. If she wants to renew her contract with the firm, which of the following provisions is NOT required in
c. notification if the investment adviser representative, who manages Carrie's assets, leaves to start a new advisory firm.
One of the provisions that is required in investment advisory contracts is that the adviser will notify its clients of any change i
The rate of return that a mortgage company may earn over the life of a loan to a customer is the:
a. Holding period rate of return
b. Real rate of return
c. Risk-free rate of return
d. Expected rate of return
a. Holding period rate of return
The return that is earned over the life of an investment and/or a loan is referred to as the holding period rate of return. Since the question asks for the return over the life of the investment (i.e., the loan), the holdi
According to Sarbanes-Oxley, a public corporation's financial statements must be certified by the corporation's:
I. Chief auditor
II. Chief executive officer
III. Legal counsel
IV. Chief financial officer
V. Compliance officer
a. I only
b. I and II only
c
c. II and IV only
Sarbanes-Oxley is a federal law that, among other things, requires a corporation's annual and quarterly financial reports to be certified by the CEO and CFO of the corporation.
Mary Smith is setting up an investment advisory business in the town in which she grew up. She has known the mayor of the community since childhood. She places an advertisement in the local newspaper that quotes the mayor saying, "I have known Mary Smith
c. A violation of the IA Act of 1940 and, therefore, prohibited.
A broker-dealer may use testimonials as long as they disclose whether more than a nominal fee was paid for them. An investment adviser may not use testimonials in its advertising.
Two of your clients, Bruce and Gary, are forming their own company. They are planning to incorporate and want to know which corporate entity would be best from a tax perspective. Which of the following entities would have the MOST tax disadvantages?
a. A
a. A C Corporation
A C Corporation would be the worst option from a tax perspective. The corporation would first need to pay corporate taxes on any profits it generated. Its shareholders (owners) would then be required to pay personal income taxes on anyt
The major advantage of an S Corporation versus a C Corporation is that an S Corporation:
a. Provides its owners with limited liability
b. Has greater access to the capital markets
c. Is exempt from state corporate income taxes
d. May elect to be treated l
d. May elect to be treated like partnerships for federal tax purposes.
For most businesses, the major advantage of forming an S Corporation (or a limited liability company), rather than a regular C Corporation, is that S Corporations may elect to be taxed
In which of the following situations does the registration of a broker-dealer result in an Administrator automatically registering an individual of the firm as an agent?
a. The individual is an attorney who represents the firm
b. The individual is a direc
b. The individual is a director of the broker-dealer and is actively engaged in the business of the firm
The registration of a broker-dealer in a state will automatically constitute the registration of an individual as an agent if this person is actively
A client sells shares of an S&P 500 company's common stock. The proceeds are reinvested in an S&P 500 Index fund. The client has reduced which of the following risks?
a. Business
b. Market
c. Economic
d. Political
a. Business
By selling the shares, the client is no longer subject to the risks that may affect a single company. By investing in the S&P 500 Index, the client has greater diversification.
On Tuesday, June 3, an IA discovers its net worth has fallen below the minimum requirement. When must the IA file a report of its financial condition with the Administrator?
a. On Tuesday, June 3
b. On Wednesday, June 4
c. On Thursday, June 5
d. On Friday
c. On Thursday, June 5
If an IA's net worth is less than the required minimum, it must notify the Administrator by the close of the next business day (in this question, Wednesday, June 4). After notification is made, the IA must file a report of its finan
An individual represents an issuer in the sale of the issuer's securities to its employees, but does not earn commissions on the transactions. The individual is:
a. Not considered to be an agent of the issuer
b. Considered to be an agent of the issuer
c.
a. Not considered to be an agent of the issuer
An agent is an individual who represents a broker-dealer or an issuer in effecting securities transactions. However, an individual who represents an issuer in a transaction with existing employees and does no
Under the Uniform Securities Act, which of the following transactions is NOT exempt from state registration?
a. The sale of securities by a sheriff
b. An isolated, non-issuer transaction
c. A transaction executed on a national securities exchange
d. A Rul
d. A Rule 147 offering
The Rule 147 (intrastate) exemption is a federal or SEC exemption and does not apply to the Uniform Securities Act. For that reason, an issuer conducting an offering of securities in one state is required to register the offering in
An investment adviser would like to send an e-mail to potential clients and include a report which contains a listing of all of its recommendations. Is this an unethical business practice?
a. It is, since an adviser is not permitted to use electronic comm
d. It is not, provided the first page of the report bears a legend stating that future recommendations will not always be as profitable as those that were made in the past
NASAA's Statement of Policy on Unethical Business Practices of Investment Advisers
Under the Investment Advisers Act of 1940, which of the following is required to register with the SEC?
a. An investment adviser with clients in 13 states
b. An investment adviser that recommends exchange-traded securities
c. An investment adviser that ma
C. an investment adviser that manages more than $110 million ($110 MM) in assets
Unless exempt from registration, advisers are required to register with either the state Administrator or the SEC, but not both. An adviser has a choice and may register with
Randy inherited his father's IRA. If his father died at the age of 69 and Randy did not choose to take a lump-sum distribution, he must withdraw the entire account:
a. By no later than the fifth year following the owner's death
b. And rollover the funds i
a. by no later than the fifth year following the owner's death
According to IRS rules regarding inherited IRAs, a non-spouse who inherits an IRA and the decedent had not yet reached the age of 70 1/2, may take a lump-sum distribution, have the funds distr
Section 15 of the Securities Exchange Act of 1934 regulates:
a. Exchange-listed securities transactions
b. Broker-dealer registration
c. The sale of equity securities by insiders
d. The delivery of prospectuses for nonexempt securities
b. Broker-dealer registration
Section 15 of the Securities Exchange Act of 1934 requires broker-dealers to register with the SEC.
Which of the following statements is TRUE regarding discounted cash flow?
a. It is used to calculate the volatility of the market
b. It is used to determine the attractiveness of an investment
c. It can only be used to determine the value of a bond
d. It
b. It is used to determine the attractiveness of an investment
Discounted cash flow (DCF) analysis is a method of estimating the fair market price of an investment. If the investment is trading at a value lower than its discounted cash flow value, this wo
According to the Uniform Securities Act, which of the following statements is NOT TRUE concerning a private placement offering?
a. The offer may not be made to more than 10 retail investors in the state during any 12-month period.
b. The offer may not be
Under the Uniform Securities Act, a private placement offering is one that involves no more than 10 retail investors; however, there may be an unlimited number of institutional investors. The offering is considered an exempt transaction if the following c
Under the Uniform Securities Act, what information would NOT need to be disclosed when filing a registration by qualification?
a. A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary comp
a. A statement analyzing the issuer's profit margin over the last three years compared to the profit margins of its primary competitors
An analysis of the issuer's profit margin as compared to its competitors would not be required. All other items listed
An agent solicits the purchase of MPH, Inc, a nonexempt, unregistered security. The agent requests the client sign a document, acknowledging the security's status. The document also includes an exculpatory provision absolving the agent and the broker-deal
c. Null and void
Agents must not solicit nonexempt, unregistered securities nor should they request a client sign documents absolving the agent or broker-dealer from wrongdoing. Such statements are sometimes called exculpatory clauses and are prohibited.
Who would NOT be exempt from the definition of agent under the Uniform Securities Act?
a. A NYC official who sells investment-grade GO bonds to the public
b. A finance V.P. of a major appliance manufacturer who sells AAA bonds to the public
c. A finance o
b. a finance VP of a major appliance manufacturer who sells AAA bonds to the public
Sometimes employees of an issuer selling securities may be considered agents. Generally, an employee of an issuer selling stock to the public would be considered an agent
Why would an investment adviser perform a capital needs analysis for a client?
a. To determine how much income the client will need at retirement
b. To determine how to best reduce the client's tax liability
c. To determine how much disposable income the
d. To determine how much insurance the client needs in order to fund future financial goals
A capital needs analysis is used to determine the amount of insurance a client needs to purchase today in order to fund her future financial goals. For example, if
A broker-dealer is a syndicate member involved in a firm-commitment underwriting of a highly anticipated upcoming initial public offering (IPO). During the underwriting, the broker-dealer holds onto some of the shares in order to sell them at a later date
b. Unethical and prohibited under the Uniform Securities Act
This situation is known as withholding and is prohibited by both the Uniform Securities Act and the Securities Act of 1933. When a broker-dealer participates in a firm-commitment underwriting, i
Under the Investment Advisers Act of 1940, when is a firm's registration required to be renewed?
a. Within 30 days of the calendar year-end
b. Within 90 days of the adviser's fiscal year-end
c. Within 30 days of the adviser's fiscal year-end
d. Within 90
b. Within 90 days of the adviser's fiscal year-end
This is a tricky question because federal regulation of IAs is based on fiscal year, while state regulation is based on calendar year. According to the Investment Advisers Act of 1940, IAs are required to
An equity-indexed annuity is linked to the S&P 500 Index and has a spread of 2.5%. If the S&P returns 7.5% in one year, the annuity's rate of return will be:
a. 2.5%
b. 5.0%
c. 7.5%
d. 10%
b. 5.0%
Some equity-indexed annuities have a spread, margin, or asset fee. These represent the amount that will be deducted from the returns generated by the underlying index to determine the contract's returns. If the annuity had a spread of 2.5% and its
According to modern portfolio theory (MPT), the expected return of an investment is the:
a. Average return including realized and unrealized gains and losses, plus income over a measured time period
b. Market return on the investment adjusted by the beta
c. Possible returns on the investment weighted by the likelihood that return will occur.
MPT defines the expected return of an investment as the possible returns on the investment weighted by the likelihood that return will occur.
A father makes a gift of XYZ stock to his daughter. Two years ago, the father purchased the stock for $5,000 and, at the time of the gift, the stock was worth $10,000. If the daughter sells the stock 10 months later for $12,000, what is the tax implicatio
a. A long-term capital gain of $7,000
When a person receives a gift of stock, the recipient's cost basis is the donor's cost basis or the stock's current market value, whichever is less. The stock was originally purchased by the father for $5,000, but was
An equity-indexed annuity is a type of:
a. Variable annuity that tracks the S&P 500 Index
b. Variable annuity that tracks the DJIA
c. Fixed annuity that tracks the performance of a designated mutual fund
d. Fixed annuity that offers the potential for grea
d. Fixed annuity that offers the potential for greater returns
An equity-indexed annuity is a type of fixed (non-variable) annuity; therefore, SEC registration is not required for these contracts. The owner receives a guaranteed minimum rate of return, bu
When calculating a fixed-income security's discounted cash flow, which of the following statements is/are TRUE?
I. A bond trading at a discount to its discounted cash flow value is undervalued.
II. A bond trading at a premium to its discounted cash flow v
d. I, II, III, and IV.
Discounted cash flow analysis is a way of estimating the fair market value of an investment based upon its projected cash flows. If the market price of a bond is trading at a price greater than the value predicted based on the disco
All of the following are characteristics of forward contracts, EXCEPT:
a. Delivery and settlement of the contracts occurs immediately
b. The contracts are negotiated off of an exchange
c. The contracts cannot be offset
d. The amount and type of the delive
a. Delivery and settlement of the contracts occurs immediately.
A forward contract is an agreement to buy and sell commodities at a future time and place. Forwards are over-the-counter contracts that will be negotiated off of a futures exchange. All aspec
The disadvantages of limited partnerships include:
a. Inflation risk
b. Potential assessments
c. Double taxation of distributions
d. Limited liability
b. Potential assessments
An investor in a limited partnership may receive an assessment--a demand that he contribute additional capital to the partnership. Many partnerships invest in assets such as real estate that may actually be a hedge against inflati
All of the following risks are considered types of unsystematic risk, EXCEPT:
a. Political risk
b. Business risk
c. Credit risk
d. Market risk
d. Market risk
Remember, market risk is a form of systematic risk and cannot be avoided by securities investors. For example, if the overall stock market is declining, this will negatively affect all of the stocks in the market. Conversely, unsystematic r
According to the Uniform Securities Act, which of the following investment adviser representatives (IARs) is considered to have custody of customer funds?
a. An IAR who receives a customer check in the mail that is made payable to a broker-dealer
b. An IA
d. An IAR who has been hired by a customer to act as the trustee
Trustees are responsible for the care, custody, and control of the assets of someone else. An IAR acting as a trustee has check-writing privileges in his customer's account and is considered
All of the following statements are NOT TRUE, EXCEPT:
a. Variable life, as with universal life, gives the policyholder the flexibility to change the death benefit and the premium payments
b. Universal life, as with variable life, gives the policyholder fl
d. Variable life, as with whole life, has fixed premiums paid at fixed intervals
While universal life allows the policy owner to change the premiums and/or the death benefit, variable life has fixed premiums and a fixed minimum death benefit. The actual d
According to the Uniform Securities Act, if the Administrator wishes to revoke a firm's registration, which of the following statements is/are TRUE?
a. Revocation may not be started until the firm has had a hearing with the Administrator and the State's E
c. II and III only
The Administrator may revoke a registration without providing the opportunity for a prior hearing but, if requested, the Administrator will grant a hearing within 15 days. The firm has 60 days to apply for legal (judicial) review of the
All of the following would be considered an investment adviser representative under the Uniform Securities Act, EXCEPT a(n):
a. Portfolio manager for Winners Asset Management Co
b. Broker-dealer offering wrap accounts to its clients
c. A partner of Winner
b. Broker-dealer offering wrap accounts to its clients
An investment adviser representative is any person who is associated with an investment adviser and makes recommendations, manages accounts, provides advice, solicits advisory services, negotiates the
Six months ago, an investor purchased shares of a mutual fund and he recently received a long-term capital gain distribution from the fund. What is the tax implication of the distribution?
a. The distribution is taxed as a short-term capital gain since he
d. The distribution is taxed as a long-term capital gain regardless of the fact that the investor has owned the shares for less than one year.
When a mutual fund distributes a capital gain, the tax implication is based on the fund's holding period, NOT th
Which of the following are characteristics of zero-coupon bonds?
I. They can be purchased at a deep discount
II. There is no reinvestment risk
III. Tax consequences occur only at maturity
IV. The investor is taxed annually
a. I and III only
b. I and II on
d. I, II, and IV only
Zero-coupon bonds are issued at a deep discount and mature at par value; therefore, they require a minimal capital outlay. Also, due to the fact that zeros do not pay interest on a semiannual basis, they have no reinvestment risk (th
Under the Uniform Securities Act, all of the following individuals meet the definition of an agent, EXCEPT:
a. A person selling stocks that are listed on the NYSE
b. A person advising clients about securities for compensation
c. A person effecting securit
b. A person advising clients about securities for compensation
An agent is an individual who represents a broker-dealer or an issuer in effecting securities transactions. The person in choice (b) is not an agent since she is providing advice and not effec