65 Flashcards
Under the IA Act of 1940, when must a balance sheet be provided to a client?
A balance sheet must be provided if the IA collects prepaid fees of $1,200 or more, six months or more in advance.
Under the USA, are banks and bank holding companies excluded from the IA definition?
No. Banks, savings institutions, and trust companies are excluded, but bank holding companies are not.
For how long must an IA maintain records?
FIve years
Does the de minimis exemption apply to BDs that have no place of business in a state?
No. The de minimis exemption only applies to IAs and IARs.
When must a federal adviser file an updated amendment to determine continued eligibility for SEC registration?
Within 90 days of the end of the adviser’s fiscal year.
IAs file their applications electronically through the ___________________________________.
IA’s file their applications electronically through the Investment Adviser Registration Depository (IARD).
When are non-material (routine) changes to Form ADV required to be filed?
Routine items require an amendment within 90 days after the end of the IA’s fiscal year.
Who operates the IARD?
FINRA
True or False: An agent of a BD who solicits client trades is not considered an IAR under the USA.
True. There is no indication that the agent is managing accounts and charging a fee.
When does the SEC require an adviser to include its balance sheet in its ADV Part 2?
If the firm has custody of a client’s funds or collects prepaid fees of $1,200 or more, six months or more in advance
If an IA is no longer eligible for SEC registration, it has ____ days to file ADV-W and register at the state level.
If an IA is no longer eligible for SEC registration, it has 180 days to file ADV-W and register at the state level.
An IAR of a federal covered adviser has no office in NY, but has six clients who live in NY. Must he register in NY?
No. IARs of federal covered advisers are only required to register in states in which they have an office.
What is the purpose of an annual updating amendment?
To determine if an IA is eligible for continued SEC registration; it is filed within 90 days of its fiscal year end
What is a client’s right if an IA does not deliver the required brochure 48 hours prior to the signing of the contract?
The client may terminate the contract without penalty within five business days from the signing of the contract.
Does an IA that only accepts clients with at least $1 million under management need to register?
Yes. There is no exemption on the state or federal level if all of an IA’s clients have $1 milllion under management.
True or False: According to the USA, a BD providing asset allocation plans to its clients for a fee is an IA.
True. Since the BD is receiving specific compensation for its advice, it is considered an IA.
Identify the acronym: LATE
Lawyers, Accountants, Teachers and Engineers—these are the professionals excluded from the IA definition.
When does the de minimis exemption from registration apply for an IA that has no place of business in a state?
When an IA has no more than five non-institutional clients who are residents of the state (measured over 12 months)
What is Part 2 of Form ADV?
The portion of an IA’s application that may be used to satisfy the Brochure Rule (disclosure requirement)
An IA is required to deliver the brochure to its clients by no later than the __________ of the contract.
An IA is required to deliver the brochure to its clients by no later than the signing of the contract.
If an IA meets the IA definition in a state, when is it exempt from registration under the USA?
If it has no office in the state and it has institutional clients only OR five or fewer retail clients in the last 12 months
When does an Administrator require an adviser to include its balance sheet in its ADV Part 2?
If the firm has custody of a client’s funds or collects prepaid fees of $500 or more, six months or more in advance
In general, does the USA allow an adviser to charge performance-based fees?
No. However, such fee arrangements may be permitted by rule or order of the Administrator.
True or False: The USA defines a bank providing investment recommendations to its clients as an IA.
False. Banks are excluded from the IA definition.
An IAR with no place of business in a state must register in the state if he has more than ____ retail clients there.
An IAR with no place of business in a state must register in the state if he has more than five retail clients there.
True or False: A BD making recommendations about investing in various securities is an IA under the USA.
False. Since the BD is not charging a fee for the advice, it is excluded from the IA definition.
What is updated at the annual renewal of an IA’s registration?
Assets under management, the number of accounts, clients, employees, and IA representatives
May the Administrator set minimum net worth requirements for IAs?
Yes, but no state may impose a requirement that exceeds the requirement of the IA’s home state.
True or False: An IA must physically deliver its brochure to clients at least annually.
False. At a minimum, the IA must (in writing) offer to deliver its brochure annually.
Under the USA, the de minimis exemption limits an IA to no more than ____ clients within the previous ___ months.
Under the USA, the de minimis exemption limits an IA to no more than five clients within the previous 12 months.
Under the Investment Advisers Act of 1940, when must an IA renew its registration?
Within 90 days from the IA’s fiscal year-end
What’s notice filing?
The process in which information that is filed with the SEC is also filed or shared with the Administrator.
What is required of an IA if there has been a minority change in firm ownership?
Provide written notification to clients and the Administrator
Is an adviser to a mutual fund considered an IA under the USA?
No, mutual funds advisers are federally covered and are excluded from the IA definition at the state level.
What is Form ADV-NR?
Form required for IAs with general partners who are non-U.S. residents; gives the SEC the right to receive legal papers
Identify some of the changes that would be considered routine changes to an adviser’s ADV.
Change in the number of discretionary and non discretionary accounts, or change in assets under management
Give some examples of institutional investors.
Banks,
S&Ls,
insurance or investment companies,
investment advisers,
or entities with at least $50 million in assets
Is there a registration exemption for IARs doing business in a state if employed by an IA registered in another state?
Yes, if the IAR has no office in the state and has five or fewer retail clients in the state in the past 12 months.
What is Form ADV?
The form filed by investment advisers for registration
List some of the records that must be retained by an IA for five years.
Journals,
blotters,
ledgers,
position records,
and trade confirmations
When and by whom is Form ADV-E filed?
It is filed within 120 days from the completion of an audit of the IA’s books; filed by the auditor.
True or False: Similar to the responsibility of an IA, BDs must deliver a disclosure brochure to clients.
False
Define assignment
The transfer of an advisory contract by the adviser or any change in the overall management of the advisory firm.
In what type of account is reverse churning most likely found?
A fee-based (wrap) account
Under the IA Act of 1940, an IA may charge performance fees to clients with at least $_________ under management.
Under the IA Act of 1940, an IA may charge performance fees to clients with at least $1,100,000 under management
Regardless of assets under management, IAs must register with the SEC if any client is a ______________________________.
Regardless of assets under management, IAs must register with the SEC if any client is a registered investment company.
For an IA to act as both an adviser and broker-dealer, what must be disclosed to clients before trades are effected?
The fact that the IA may be collecting both advisory fees and commissions
True or False: Under the IA Act of 1940, performance fees are allowed for persons who are not residents of the U.S.
true
Is registration with the SEC required of an adviser that manages $87 million of assets?
No. An established FCA must register with the state Administrator if the AUM falls below $90 million.
True or False: A mutual fund asset allocation program requires a special wrap program disclosure document.
False. These programs charge a percentage of assets to manage a portfolio of no-load mutual funds.
May investment adviser’s advertising refer to testimonials?
Yes. Provided the testimonial is not misleading and certain disclosures are made.
The private placement disclosure document is the _____________________.
The private placement disclosure document is the Offering Memorandum.
What is the federal law that governs investment advisers?
The Investment Advisers Act of 1940
Identify the acronym: NRSRO
Nationally Recognized Statistical Ratings Organization
Does a solicitor for an IA provide securities recommendations?
No. Solicitors only solicit new clients; they do not recommend or approve transactions.
True or False: IAs are permitted to charge different fees to different clients for the same service.
True. Provided proper disclosure is made, charging clients different fees is permitted.
The IA Act of 1940 considers any communication that is directed to more than ___ person(s) to be advertising.
The IA Act of 1940 considers any communication that is directed to more than one person to be advertising.
True or False: According to the IA Act of 1940, delivery of a disclosure document is required for all IA contracts.
False. A brochure is not required for investment company contracts or impersonal advisory services priced below $500.
True or False: Bank holding companies are excluded from the IA definition under the USA.
False
True or False: A person soliciting for an IA must annually provide a disclosure regarding the IA’s performance.
False. However, at the time of contact, the solicitor must provide clients with a solicitor disclosure document.
True or False: According to the USA, investment advisers may generally charge performance-based fees.
False. Unless the Administrator deems the client qualified, performance-based fees are prohibited.
Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $____________.
Under the IA Act of 1940, an IA may charge performance fees to clients with a net worth of at least $2,200,000
What duties does an IAR have according to the “know your customer” rules?
Make a reasonable inquiry into a customer’s background and provide suitable advice based on known information.
If an IA maintains custody of a client’s funds or securities, how often must account statements be provided to clients?
Statements must be sent quarterly.
The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to ____________________.
The IA Act of 1940 requires IAs to retain notices, ads, or other communications circulated to more than one person.
An IA with offices in _____ or more states must register with the SEC.
An IA with offices in 15 or more states must register with the SEC.
Is an organization that provides ratings of securities and is nationally known considered an IA under the USA?
NO!
When an IA has custody, with whom are the assets held?
Assets are held by a qualified custodian. Clients must be notified of custodian’s name, address, and manner of holding.
Will a client always pay lower fees in a wrap account?
No. Depending on the frequency of the client’s trading, he may ultimately pay more than if the fees are paid separately.
Due to SEC Release 1092, what other candidates are included in the expanded IA definition?
Sports and entertainment reps, pension consultants and financial planners
Is an IAR who is employed by a federal covered adviser required to register in the state?
Yes. IARs of federal covered advisers must register in any state in which they have a place of business.
True or False: If a conflict of interest exists, an IA must always terminate a relationship with a client.
False. An IA must always disclose a conflict, but they don’t necessarily need to end the relationship.
Define the local exemption from SEC registration for an IA.
The IA’s clients reside in the state in which its office is located and its advice is not related to exchange-listed securities
An IAR leaves his firm and his clients are distributed to other IARs. Is this an assignment of the contracts?
No. The contracts are still with the original IA firm. The change of IAR does not constitute an assignment.
For how long does the registration of an adviser that is registered with the SEC remain in effect?
Until it has been withdrawn, cancelled, or revoked by the SEC.
Define fiduciary.
A person who acts on behalf of another, which gives rise to a relationship of trust and confidence.
Is office furniture (e.g., a desk chair) included in an IA’s net worth?
Yes, provided it is fully owned by the IA.
True or False: A pension consultant that advises a plan regarding the accountant it should hire must register as an IA.
False. IA registration is not required if a consultant provides incidental advice that is not securities-related.
When is a pension consultant required to register as an investment adviser?
When it is being paid to provide securities-related investment advice
How do nonmanaged, fee-based accounts differ from wrap accounts?
A fee is charged to cover transaction costs (often a percentage of assets), but no management is performed.
True or False: A pension consultant being paid to create an asset allocation program for a plan must register as an IA.
True. The consultant must register as an IA since it is providing securities-related advice for compensation.
For what reasons would a person be subject to statutory disqualification?
A conviction of any felony or securities-related misdemeanor within the last 10 years
Define impersonal advisory services.
Services costing less than $500 per year that are not tailored to meet the investment objectives of a specific client
When an adviser files Form ADV with the SEC, when does registration become effective?
Within 45 days of filing, the SEC will either grant the registration or institute denial proceedings.
True or False: An IA that has full discretion over a client’s account at a separate BD is considered to have custody.
True
If a client gives little information when opening an account, what securities may an agent recommend to the client?
Only securities that are suitable based on the information the client did provide
Is an exculpatory provision in an advisory contract permitted?
No. An exculpatory provision would serve to absolve an adviser from blame or liability and is prohibited.
True or False: Bank holding companies are not considered IAs under the USA.
False. They are excluded from the definition under the IA Act of 1940, not under the USA.
An IA is established as a partnership and two of its five partners retire. Is this considered an assignment?
No, since it is only a minority change of partners. A majority must retire for it to be considered an assignment.
What document is required for an IAR to be authorized to pay his client’s bills?
A full power of attorney
Identify some permissible uses of soft-dollar arrangements.
Soft dollars are permitted for obtaining research reports, software, and fees for attending conferences/seminars.
Geo is hired as a rep, and given a hiring bonus in the form of a forgivable loan. Geo’s
firm is prohibited from basing forgiveness of the loan on Geo’s:
A. Sales of all equity securities
B. Sales of all mutual funds
C. Sales of a particular IPO
D. Total sales
Regulation Best Interest prohibits sales contests, sales quotas, bonuses, and non-cash
compensation that are based on the sales of specific securities, or specific types of
securities like stocks from a particular industry. However, incentives based on sales of
general categories of securities (such as all equity securities or all mutual funds) are
allowed.
Hiring bonuses that take the form of forgivable loans are included in this prohibition.
Forgiveness of the loan cannot be based on the sales of specific securities or specific
types of securities.
In examining the suitability of a particular investment recommendation for a client, you
are expected to consider all of the following except:
A. The client’s tax status and the tax laws of his state of residence.
B. Information about the client which is commonly known but which the
client refuses to disclose.
C. The client’s investment objectives and expectations.
D. The client’s financial status and past investment experience with other
advisors.
You are expected to know the client’s financial status, tax status and investment
objectives. You are not expected to know information the client refuses to disclose.
Terrence, an agent at IRS Investments, is meeting with Bradley to discuss mutual
funds. Bradley indicates that he is determined to avoid any fund that has front-end
charges. Terrence knows of several funds that consist of B-shares, which do not carry an
up-front charge and he discusses these funds with Bradley. The funds do, however,
come with back-end charges. In discussing these funds, what should Terrence disclose
to Bradley?
a. He should only tell him that there are no front-end charges since that is
what Bradley cares about
b. As long as Terrence highlights the back-end charges in the prospectus,
that is considered full disclosure
c. He should disclose the back-end charges to Brad
d. As long as Terrence tells Bradley to read through the prospectus he has
offered proper disclosure
As an agent, Terrence is responsible for revealing everything that Bradley would need to
know in order to make a proper investment decision. Even though Brad has only
expressed an interest in avoiding front-end charges that does not mean Terry should
avoid telling him about other charges that are part of a particular mutual fund. Thus he
should disclose the back-end charges during their meeting. Additionally, remember that
simply providing a client with a mutual fund prospectus does not constitute full
disclosure, and highlighting any part of prospectus is prohibited.
Income that is received by a trust is considered:
A. non-taxable
B. always deductible from the income taxes owed by the trust
C. taxable
D. always non-taxable if the income is automatically reinvested
A trust is considered to be a legally separate entity. Income received by a trust is taxable
to the trust, to the beneficiary, or to the grantor of the trust, unless there is a specific
exemption in the Internal Revenue Code for which the trust qualifies.
Wealth Management (WM) is a broker-dealer participating in a new issue of securities
from a popular new tech company called Hot Air. WM, as one of the underwriters
handling the public offering, has been allotted a certain amount of shares of Hot Air’s
stock. WM has already sold a number of shares to interested customers but now wants
to keep a few shares. WM wants to see if the price will rise before selling any more
shares. According to the NASAA, WM’s conduct:
I. Is a prohibited practice referred to as backing away
II. Is an unethical trading practice
III. Is a prohibited practice referred to as making matched purchases
IV. Is a prohibited practice referred to as failing to make a bona fide public offering
A. II and IV
B. II and III
C. I and II
D. I
The NASAA outlines a number of unethical practices relating to the purchase or sale of
securities through professionals and their firms. Failing to make a bona fide public
offering of all of the securities that were allotted to a broker-dealer is one such
unethical trading practice. During a public offering, broker-dealers are allotted a certain amount of shares to be sold to investors; it is a violation to hold back these shares for
their own account in the hopes that the price will rise in the future.
Manipulating market prices through unnecessary trading among agents is also a
violation, often referred to as making matched purchases. Backing away refers to a
broker-dealer’s failure to honor a quote. It is a violation for a broker-dealer to offer to
buy or sell a security at a particular price with no intention of actually buying or selling
the security at that price.
When a stock hits its “resistance level” which of the following is a technical trader most
likely to do?
a. Hold onto all shares in the stock
b. The course of action taken by an investor is dependent on how high or
low the resistance level is set
c. Sell the stock
d. Buy the stock
The resistance level is the price that technical traders think a stock will have trouble
exceeding. So when a stock’s price reaches this level, those traders will typically sell it
off. The price level itself does not determine the action taken. This means that if a
technical trader thinks a stock will have trouble pushing past a relatively low value, he
will sell when it reaches that value; if he thinks a stock will have trouble pushing past a
relatively high value, he will likewise sell when the stock reaches that level.
As a landlord, which of the following rental property expenses would you most likely
not be able to deduct from your taxes?
A. Having a deck added to the back of the house
B. Having the broken air conditioner replaced
C. Buying a new refrigerator to replace the one that leaks
D. Having the hedges trimmed to prevent them from blocking the driveway
When renting a property, you are allowed to deduct expenses like repairs and
maintenance. This does not include building improvements. Having a deck added to the
house would be considered a building improvement.
In how many specified newspapers may the Administrator require an applicant for initial
registration to publish an announcement of the application?
a. One or more, unless the applicant meets the de minimis exemption
b. No more than one
c. None
d. One or more
The correct answer is D. “The [Administrator] may by rule or order
require an applicant for initial registration to publish an announcement of the application in one or more specified newspapers published in this state.” The de minimis
exemption allows an investment adviser to avoid registering in the state altogether.
How is investing in limited partnerships different from investing in stocks?
a. Limited partnerships offer limited liability to investors, while stocks do
not
b. Limited partnerships pass through all gains and losses directly to
investors, while stocks do not
c. Limited partnerships offer the potential for high returns, while stocks do
not
d. Limited partnerships offer tax-free income to investors, while stocks do
not
Answer is B All gains and losses associated with an LP are passed through directly to investors. On
the other hand, while issuing companies pay dividends as a sort of pass-through gain to
investors, they do not pass losses through to shareholders. Limited partnerships provide
the potential for high gains to investors, but stocks can also provide the potential for
high gains. Neither limited partnerships nor stocks offer tax-free income to investors.
Finally, both limited partnerships and stocks offer limited liability to investors; stocks
provide limited liability to all investors, while LPs provide limited liability to limited
partners.
Moe works in a clerical capacity for the city of Redwing. One day while manning the
phones at the city’s administrative building, Moe receives a call from Donald, who tells
her that he would like to purchase general obligation bonds recently issued by the
city. The agent who normally takes orders for these bonds is away from his desk, so
Moe enters the order specifications for Donald. Which of the following is true?
a. Since Donald’s order is unsolicited, Moe is allowed to take it without
registering as an agent
b. Moe is allowed to take Donald’s order without registering as an agent no
matter where he is calling form
c. As long as Donald is calling from a different state, Moe is allowed to take
his order without registering as an agent
d. Moe is not allowed to take customer securities orders unless she is
registered as an agent
Correct answer is A. Since municipal securities are considered to be exempt, Molly, or any other person
employed by Redwood, can sell its securities without registering as an agent. This also
means that she can take orders for the sale of those securities without registering as an
agent. Had she been employed by a broker-dealer, Molly would not have been allowed
to take securities orders under any circumstances unless she was also registered as an
agent.
All of the following activities are prohibited by the Investment Advisers Act of 1940
EXCEPT?
a. An investment adviser representative states that he is provides
“investment counsel” on his business cards when he does not actively
manage accounts
b. An investment adviser representative uses someone else’s information
when recommending a stock, but she discloses this fact to the client.
c. An investment adviser representative tells a client that she has been
approved by the state administrator
d. A firm names itself AAA investments and states that it is AAA rated
Correct answer is B. An investment adviser representative is expressly prohibited by the Investment Advisers
Act of 1940 from claiming that she has been recommended by the SEC. A firm cannot
choose a name that suggests that they are better than other firms, such as AAA
Investments. A firm cannot put investment counsel on their business cards unless it’s
primary business is actively managing accounts. An investment adviser rep is allowed to
use someone else’s information when making a recommendation, as long as she informs
the client that the information was provided by a third party.
Which of the following does a broker-dealer file with a state securities administrator as
part of its initial state registration process?
a. A Form U4
b. A consent to service of process
c. Form BDW
d. Form CRS
Correct answer is B. As part of its registration with a state securities administrator, a broker-dealer must file
a consent to service of process. This document allows the administrator to receive legal
papers on behalf of the broker-dealer. Form U4 is the registration form for associated
persons who are applying for FINRA registration. Form CRS is the relationship summary
that must be delivered to all new customers of a broker-dealer when they open an
account with the firm. Finally, Form BDW is the form that a broker-dealer files when it
wishes to withdraw its registration.
An investment banker mentions to his brother that he’s working on the long-anticipated
IPO for Solar Car Company. The IPO is not yet public knowledge. The banker does not
normally talk about his job with his brother, and his brother doesn’t know much about
investing.
However, it is common knowledge that Solar only uses Great-month panels, and the
banker’s brother decides to buy stock in Great-month. When the IPO is announced,
Great-month’s stock price spikes, and the brother makes a quick profit. The brother is later charged with insider trading. Which of the following defenses could
the brother reasonably use?
a. Insider trading laws do not apply to the brother, since he is not a
securities professional.
b. The brother did not breach a duty of trust or confidence.
c. The banker did not breach a duty of trust or confidence.
d. Knowledge of the IPO was not material nonpublic information.
Correct Answer is B. One of the issues that arises in insider trading cases is whether a person who shared
and/or traded on material nonpublic information breached a “duty of trust or
confidence” by doing so. According to Rule 10b5-2, a duty of trust or confidence exists
when the person receiving the information knows or should know that the person
passing on the information expects it to be kept confidential. There are several factors
that go into whether the recipient should know that confidentiality is expected,
including the nature of the relationship and the extent to which the person who shared
the information has in the past relied on the recipient to keep information confidential.
In this case, the banker does not normally talk about his job with his brother.
Additionally, because the brother doesn’t know much about investing, he might not
have understood that the information was supposed to be confidential. Therefore, the
brother could argue that he had no duty of trust or confidence. Whether this defense
would work depends on many factors, but of the choices presented, it is the only
reasonable one.
With regard to the other choices, Rule 10b5-2 also says that a duty of trust or
confidence exists when a person has agreed to keep the information confidential, as the
investment banker would have had to do in order to work on the IPO. Insider trading
laws apply generally, not just to securities professionals. Finally, knowledge of the IPO
was both material and nonpublic, since a person could reasonably conclude that the
announcement of a well-known automaker’s IPO could have a positive effect on the
stock price of its major suppliers.
Which of the following methods can be used to permanently terminate an investment
adviser’s registration?
I. Revocation
II. U5 filing
III. ADV-W
IV. Suspension
a. III and IV
b. I and III
c. II and IV
d. I and II
An investment adviser’s registration can be terminated by an administrator’s revocation
or voluntarily through filing a Form ADV-W. A U5 is filed to terminate an investment
adviser representative’s registration, and suspension by an administrator implies a
temporary halt of operations rather than termination.
Jane is long 1,000 shares of Apple Inc. Apple is currently trading at 495. She doesn’t
expect the stock to rise much in the near future and would like to earn some extra
income. What is a strategy that would accomplish this?
a. Write 5 AAPL 500 calls at 7
b. Buy 5 AAPL 500 puts at 7
c. Write 5 AAPL 500 puts at 7
d. Buy 5 AAPL 500 calls at 7
Correct answer is A. If Jane writes 5 covered calls, she will be able to take in $3,500 of extra income. If the
calls are exercised she can use 500 of her shares to cover the calls.
PQDS Corp. issued a dividend of $.25 per share last quarter. This quarter, its profits have
declined and the Board of Directors is not likely to approve a dividend. Jessica owns two
hundred shares of preferred stock in PDQS Corp. and is depending on a dividend this
quarter to help her buy a new software system for her business. What options does
Jessica have in requiring the Board to give out dividends this quarter?
a. Send a letter to the CEO demanding dividends be issued
b. Complain to the SEC because dividends are always guaranteed to
preferred stockholders
c. None
d. Exercise her voting rights and use her 200 votes to vote for a dividend
The correct answer is C. The Board of Directors decides whether to issue dividends, not the stockholders.
Stockholders have no voting rights regarding dividends nor do they have any recourse
should the Board decide not to issue them, even if the company has issued them in the
past.
Which of the following statements is an agent allowed to make when meeting with a
prospective client?
I. “You will be happy to know that I am FINRA certified.”
II. “As you can see from these charts, my clients on average experienced a 15% growth
in their investments last year.”
III. “Here is a list of testimonials from current clients.”
IV. “As you can see from this data, my clients last year experienced an average of 10%
of growth from their investments last year. So if you invest with me, you can expect a
similar return.”
a. I and IV
b. I and III
c. II and IV
d. II and III
Correct answer is D. Agents are not allowed to tell clients that they are certified to sell securities, by FINRA or
anyone else. An agent is registered, but that in no way constitutes certification as a
securities professional. Agents are also prohibited from making any promises or
inferences that a client working with the agent will experience any level of
performance. Statistics detailing past client performance can be utilized by an agent;
however, they cannot be used as a means to predict future results. Unlike an
investment adviser, for whom their use is restricted, an agent can typically provide
testimonials to clients.
In which case is an issuing company allowed to state that the SEC has approved the
merits of the shares in their offering?
a. Never. This is considered a misrepresentation under any circumstances
b. When listing and fulfillment of a listed exchange’s requirements have
been completed. (Example: NYSE)
c. If the statement is accompanied by a proper disclosure and all filings are
in good standing
d. Once the second consecutive annual report has been filed, provided the
company is in good standing
The SEC does not approve the merits of an investment under any circumstances. This
would be considered an unlawful representation.
Which of the following are exempt from registration under the Uniform Securities Act?
I. Bonds issued by the government of Canada
II. Bonds issued by the US government
III. Bonds issued by the Mexican government
a. I and II only
b. I, II, and III
c. II only
d. none of the choices listed
Correct Answer is B. Under the Uniform Securities Act, securities issued by Canadian government (Item I),
securities issued by other foreign governments with which the US maintains diplomatic
relations (Item III), and securities issued by the US government (Item II), are exempt
from registration.
In many cases, a possible conflict of interest for an investment adviser can be easily
resolved by:
A. arbitration
B. mediation
C. disclosure
D. giving the client a discount
Simply disclosing a possible conflict of interest to a client can resolve many conflicts of
interest.
All of the following are options for an investor to receive payment for an annuity,
except:
A. Lump sum
B. Monthly payments
C. When the Fed raises or lowers interest rates
D. Random withdrawals
Correct answer is C. Annuitants can receive payments through random withdrawals, which is when an
annuitant requests sums at random times, in a lump sum, which is when an annuitant
requests the payment all at once, and through monthly payments, which is when an
annuitant annuitizes the contract.
Under the Uniform Securities Act, which of the following is true regarding investment
advisers taking custody of client accounts?
a. Advisers typically try to get custody of client accounts since it is more
convenient for them.
b. An adviser must notify the Administrator in writing of the custody.
c. A CPA must audit an account an adviser has custody over each year in a
pre-scheduled visit.
d. The Administrator must allow advisers to have custody, but may impose
higher minimum net capital requirements.
An adviser must notify the Administrator in writing that it is taking custody of a client
account. Maintaining custody of a client account is a big responsibility that comes with a
lot a regulation attached to it, so advisers typically try to avoid becoming custodians,
allowing “qualified custodians,” such as banks, to do the job. Requirements for an
adviser to become a custodian include paying for a CPA to make an surprise annual
audit (not a pre-scheduled one). Under the Uniform Securities Act, an Administrator
may or may not allow custody. Note if the Administrator allows custody, the
Administrator may impose a higher minimum net capital requirement.
As a partial owner of a company, why do stockholders have limited liability?
a. corporations are required to buy back stock from investors in the event
of bankruptcy
b. corporations do not give stockholders any decision-making power
c. corporations are set up as separate legal entities
d. corporations hold bondholders higher than their stockholders
Correct answer is C. A corporation is a business entity that is legally set up as a separate entity from the
owners of the company and the people who run it. Due to the fact that a corporation is
a separate legal entity, the stockholders are not responsible for the company’s debts.
The only liability that a stockholder has is the amount invested. If the company should
go bankrupt, the investor’s loss is limited to the amount that was invested in the
company.
When would an issuer wish to redeem a callable bond?
A. Anytime, as interest rates do not affect callable bonds
B. After its maturity date
C. When interest rates drop
D. When interest rates rise
Correct answer is C. A callable bond can be redeemed prior to its maturity date. An issuer may wish to
redeem a callable bond when interest rates drop significantly so the company can pay
off the bonds and issue new ones at a lower interest rate.
Which of the following is a reason that a municipal government might issue a revenue
bond instead of a general obligation bond?
A. The issuer wishes to pay less interest to the bondholders
B. The issuer has met its statutory debt limit and does not want to seek
voter approval for the issue
C. The issuer has the ability to impose taxes
D. The issuer wants the bond to have a higher credit rating
Revenue bonds may be issued when voter approval for general obligation bonds cannot
be attained. Or revenue bonds may be used to finance projects when statutory or
constitutional debt limitations prevent a municipality from issuing GO bonds. Because
bond payments are contingent on a project’s success and have little access to tax
revenues, revenue bonds are riskier and require higher yields than GO bonds to entice
buyers.
In order for a disclaimer to be “qualified” it must:
I. Be in writing
II. Be revocable
III. Be approved by the executor
IV. Be delivered to the person making the transfer or the transferor’s representative
a. I, II
b. III, IV
c. II, III
d. I, IV
Correct answer is D. Refusing to accept a gift or an inheritance is a way for assets to bypass one beneficiary
in favor of another and is an established method of reducing estate taxes. In order for
such a disclaimer to be acceptable to the IRS, it must be “qualified” per IRS code section
2518 and those rules include the following: the disclaimer must be “irrevocable and
unqualified,” it must be in writing, it must be delivered to the person who is making the
transfer or is the transferor’s legal representative (most likely the executor), it must be
made before the recipient has accepted the asset and the disclaimer must be made
within nine months “after the date of transfer creating the interest disclaimed or nine
months after a minor disclaimant reaches age 21.” A recipient of a gift or a bequest
cannot direct where the property will go, rather the asset must bypass the individual
making the disclaimer otherwise, the disclaimer will not be considered valid by the IRS.
Approval of the executor is not required in order for a disclaimer to be considered
qualified.
Discretionary authorization for an agent (registered rep) must be:
a. Filed with the SEC
b. Filed with the state securities administrator
c. Used only when the client is incapacitated
d. Given in writing
Discretionary authorization for an agent must be provided in writing. It should be kept
on record, but there is no requirement to file the authorization with the SEC or the state
securities administrator. Discretionary authorization may be used at any time; the client
does not need to be incapacitated.
If a broker-dealer has no place of business in a state
a. Then they must register in the state if they have more than five non-
institutional clients
b. Then they must register in the state if they have more than five
institutional clients
c. Then they must register in the state if they have any non-institutional
clients
d. Then they never need to register in the state
Correct answer is C. Any time a broker-dealer has no place of business in the state they must register in that
state if they have any non-institutional clients.
Jeanne is an investment adviser representative working for DC Financial, a dual
brokerage and investment advisory firm. She recommends that a client purchase a
particular security. The client agrees and Jeanne effects the transaction. However,
Jeanne never mentioned to the client that the security was purchased from her firm’s
account. Thinking that she may have made a mistake, Jeanne goes to her firm’s compliance department the next day to discuss the situation. What is her compliance
officer likely to tell her?
a. Not to worry about it. The firm is a broker-dealer, so trading from its
inventory is perfectly acceptable
b. As an IAR, Jeanne is never allowed to trade securities from the firm’s
account
c. For an IAR, selling from a firm’s account is a conflict of interest. As a
result, Jeanne should have informed the client of that fact and received
the client’s consent by the date the transaction was completed
d. For an IAR, selling from a firm’s account is a conflict of interest. As a
result, Jeanne should have informed the client of that fact by the date
the transaction was completed
Correct answer is C. Whenever a securities professional has a material conflict of interest, they must inform
clients of that conflict. For IAs or IARs, selling a customer securities out of the firm’s
account is a conflict of interest. As a result, the IAR should inform the customer and get
written approval from that customer by the date the transaction is complete.
According to the Uniform Securities Act, which of the following must register as an
investment adviser?
A. An investment adviser representative who is paid a fee to offer
investment advice to customers
B. A firm which manages investments, has no public office in the state, and
has had six retail customers in the state during the past year
C. The publisher of a financial newsletter that offers general investment
advice to an audience composed primarily of wealthy investors
D. An accountant who periodically makes investment suggestions to clients
Correct answer is B. If an IA has no office in the state and has had no more than five retail clients in that
state during the preceding twelve-month period, it does not need to register
there. However, having six clients in the past year would not allow the IA to meet the
exception requirement. Exceptions to the definition of investment adviser include
investment adviser representatives, accountants whose offering of investment advice is
incidental to their jobs, and publishers of media that does not consist of rendering
specific investment advice.
Mega Mutual Fund contains securities valued at $8,000,000 and liabilities of $400,000.
Mega Mutual Fund has 2,000,000 outstanding shares. Calculate the NAV per share:
a. $3.80 / share
b. $3.60 / share
c. $4.40 / share
d. $8.40 / share
The correct answer is A. The net asset value (NAV) of a mutual fund is the book value of the fund. It is calculated
by determining the fair market value of the securities in the fund, adding other assets
(such as cash from interest or dividends), and then subtracting the fund’s liabilities. The
book value is then divided by the number of shares in the fund to yield the NAV per
share. In this example, Mega Mutual Fund has a total market value of $8,000,000.
Subtracting the assets and liabilities yields the book value ($8,000,000 - $400,000 =
$7,600,000). Dividing the total book value or net asset value by the number of
outstanding shares yields the NAV per share ($7,600,000 / 2,000,000 = $3.80 / share).
You place an order to buy 300 UDP at 72 stop, but not over 75. This is a
a. market order
b. buy stop limit order
c. buy limit order
d. buy stop order
72 s your trigger price, and you will not pay over 75. This is a stop limit
order.
Which of the following are true of an investment adviser’s code of ethics?
I. It must be handed to all clients before they begin receiving investment advice from
the firm
II. A description of it must be included in an IA’s Form ADV
III. It is the same for all investment advisers
IV. It must be furnished to clients upon request
A. I and III
B. I and II
C. III and IV
D. II and IV
Correct answer is D. The SEC requires that IAs adopt and enforce a code of ethics for all supervised
persons. That code of ethics does not need to be standardized, and the SEC mandates
that each firm develop its own standards. While the adviser must describe its code of
ethics to clients, it is not required to offer clients a copy of that code before they receive
investment advice. However, an IA must furnish a copy of its ethics code to clients upon
request. Finally, an IA must include a description of the ethics code in Form ADV.
Robb Advisor offers an app that provides investment advisory services to small investors
via the internet. Robb Advisor has users in every state but it has just one office in one
state. Its founder likes to tell people that Robb Advisor is located “in the cloud.”
Although growing fast, it has assets under management of less than $100 million. What
is the best answer regarding Robb Advisor’s registration options?
A. Robb Advisor must register in each state where it has more than 5 non-
institutional customers.
B. Robb Advisor may qualify for an exemption to the state registration
requirement as long as it hasn’t provided investment advice directly to
more than 14 customers in the preceding year.
C. Robb Advisor must register at both the state and federal level.
D. Robb Advisor qualifies for an exemption to the federal registration
requirement and must register at the state level.
Correct Answer is B.
Generally, if an investment adviser has less than $100 million in client assets under its
care, it must register at the state level. However, in order to reduce the significant
regulatory burden of having to register in multiple states, the SEC permits advisers who
provide investment advice exclusively through interactive web sites to register at the
federal level if they wish. Additionally, an adviser relying on this rule may provide
investment advice to fewer than 15 clients through other means during the preceding
12 months.
All of the following are investment companies, except:
A. Management Company
B. Investment adviser
C. Mutual fund
D. Unit investment trust
Investment advisers and investment companies are two different things. An investment
adviser is a firm that advises others with regard to investing in securities. An investment company is a company, such as a mutual fund, that pools people’s money to invest in a
fund of securities.
The Investment Company Act of 1940 divides investment companies into three types:
face-amount certificate companies, unit investment trusts (UITs), and management
companies. Mutual funds are a type of management company.
Which of the following would need to register as a broker-dealer in a given state?
a. A bank that does business in the state as well as in several others
b. A brokerage firm that has a place of business in the state and does
business exclusively with other broker-dealers and financial institutions
c. An individual who works for a firm selling securities and offering
investment advice for a fee
d. A large corporation that issues common stock
Correct answer is B. Any firm that engages in effecting securities transactions and has an office in a given
state must register in that state as a broker-dealer. It does not matter whether or not
that firm’s only clients are institutional clients, such as other broker-dealers or banks, it
must still register. On the other hand, an individual who effects securities transactions
for a firm is defined as an agent and must register in that capacity, not as a broker-
dealer. Given that the agent in question is also compensated for offering investment
advice, he must register as an investment adviser as well. Both securities issuers and
banks are excluded from the definition of broker-dealer at the state level and thus do
not need to register as such
Ellen wants to invest and to grow her investment to make sure she has enough money
for retirement. She was hoping to invest with the large broker-dealer where her friend
Robert works but needs advice regarding securities that might be right for her. So she
thinks she will need to invest with an investment adviser or IAR who can give her the
needed advice. Then she heard that the broker-dealer charges wrap fees. Of what
significance to Ellen is this news about wrap fees?
A. A wrap fee generally provides a discount from the fees it encompasses;
that is, the amount of the wrap fee is less than the total of the individual
fees it contains.
B. The amount of the wrap fee is proprietary information and does not have
to be disclosed to the client.
C. A wrap fee is a flat fee that includes payment for securities advice
provided by the broker-dealer.
D. Wrap fees are charged by investment advisers and IARs for wrapping up
deals that are negotiated by broker-dealers.
Correct answer is C. Wrap fees are charged by broker-dealers and include payment for securities advice, so
the broker-dealer Ellen wants to invest with can offer her the advice she needs. The
broker-dealer would have to be registered as an investment adviser, and any agent
providing advice, and accepting fees for this advice, would have to be registered as an
IAR. Wrap fees can cost the client more than if the services were purchased individually
(this is a testable point!), so Ellen must be provided with that disclosure and others.
Which of the following is an accurate statement about a mortgage bond?
A. A mortgage bond is never issued by corporations.
B. A mortgage bond secures the bond debt by pledging corporate property
that bondholders may sell in case of default.
C. A mortgage bond is a type of equity security.
D. A mortgage bond provides the company less incentive to pay its debt
than a debenture bond.
Correct answer is B. mortgage bond is secured by the company pledging corporate property if the
company defaults, giving the bondholders the right to sell property if they are not paid.
They are issued by corporations and provide more incentive to pay than a debenture
bond because a debenture bond is an unsecured debt (meaning there are no
ramifications for default). All bonds are types of debt securities, not equity securities.
Which of the following are allowable forms of compensation from a broker-dealer to an
adviser?
I. Research
II. Computers
III. Clearing services
IV. Office overhead
a. I, II, III, and IV
b. I and III only
c. II and IV only
d. I, III, and IV only
Correct answer is B. The question deals with soft dollars, which is compensation received from broker-
dealers that is not in the form of money. Research (Item I), software aiding in research,
and custodial and clearing services (Item III) are allowable forms of soft dollar
compensation. Not allowed is anything that clearly benefits the adviser but not the
client, including office overhead (Item IV), computers (Item II), salaries, vacations, and
cell phones.
Which of the following are necessary disclosures with a registration by qualification?
I. any litigation, existing or threatened
II. legal opinion of counsel
III. statement of the issuer’s competitiveness
IV. capitalization and long-term debt of the issuer
A. I, II, III, and IV
B. I and II
C. I, II, and IV
D. II, III, and IV
Correct answer is C. The issuer is not required to disclose its own competitiveness. Rather, it must prepare a
disclosure of general competitive conditions in the industry or business in which it is or
will be engaged.
Getting a list of a client’s current investments and strategies can help an adviser to
determine all of the following except:
A. the client’s historic success with investments
B. the client’s time horizon
C. the client’s asset allocation
D. the client’s risk tolerance
Correct answer is C. While seeing a client’s current asset allocation may give some indication as to how the
client’s investments have performed historically, it also may not. The current allocation
may be relatively new, with the previous investments being unsuccessful.
Net Income is not affected by?
A. Interest payments
B. Operational expenses
C. Taxes
D. Dividend payments
Correct answer is D. Net income is calculated by starting with sales and deducting cost of goods sold,
operational expenses, interest payments and taxes. Dividend payments are taken out
after net income has been calculated.
Barring receives 100 shares of ABC Co. as a gift. The shares were originally purchased at
$10/share. When Barring receives the shares, they are worth $30/share.
When Barring eventually sells the shares, they are worth $50/share. What
is Barrings cost basis when he sells the shares?
A. $3,000
B. $5,000
C. $2,000
D. $1,000
Correct answer is D. Shares received as a gift maintain their original cost basis. So Barry’s shares remain at a
basis of $10/share, resulting in a cost basis of $1,000 for the whole position.
Shares in a closed-end fund sold yesterday for $28, but today shares in the same fund
sold for $30 and the shares had an NAV of $27.50. Which of the following is the best
answer?
A. Yesterday shares in the fund sold for a premium of $2
B. Yesterday shares in the fund sold for a discount of $0.50
C. Today shares in the fund sold at a discount of $0.50
D. Today shares in the fund sold for a premium of $2.50
Correct Answer is D. Since shares in the fund are trading for more than the NAV (net asset value) we know
the fund is trading at a premium. Since we don’t know the NAV for yesterday, we can
only calculate for today. To find out how much of a premium, we subtract the NAV from
the trading price: $30 - $27.50 = $2.50.
Closed end funds (CEFs) have the following characteristics:
* Fixed number of shares, issued in an IPO.
* Not redeemable, instead traded on secondary market, often on an exchange
* May trade at a premium or discount to NAV
* CEF portfolios are generally actively managed by an investment advisor
* Higher expenses, often over 1%
* Often use leverage, which is accomplished by issuing auction rate securities, preferred
stock, long-term debt, or reverse-repurchase agreements.
* Leverage a fund uses is expressed as a percent of total fund assets (e.g. if it has a 25%
leverage ratio, that means that for each $100 of total assets under management, $75 is
equity and $25 is debt).
* Can invest in a variety of assets, including debt, equity and derivatives
* May pay dividends monthly rather than quarterly
* Are subject to SEC registration and regulation under both the Securities Act of 1933
and the Investment Company Act of 1940
* May use options to boost income, for example equity CEFs may sell call options
against their stock portfolio
* CEFs trade on exchanges like ETFs, but because institutional buyers may redeem
shares of an ETF for creation units (a basket of the fund’s underlying assets) ETF prices
do not stray far from the NAV price. CEFs have no such arbitrage reduction mechanism
built in, they are priced purely by supply and demand in the secondary market which
means that CEF prices can and do vary substantially from their NAV.
Which of the following are true of the Efficient Market Hypothesis?
I. Strong form encourages active management
II. Semi-strong form encourages passive management
III. Weak form encourages active management
IV. Investors cannot earn returns above the market in any model
a. I and II
b. II and III
c. I, III, and IV
d. III only
Correct answer is B. Both strong and semi-strong forms encourage passive management, as neither believes
that investors can outperform the market based on the available information. Weak
form encourages active management and holds to the possibility that investors can
outperform the market.
Which of the following is not an automatic stabilizer with respect to the government’s
regulation of the economy?
A. Unemployment insurance
B. Consumer price index
C. Welfare payments
D. Food stamps
Correct answer is B. Automatic stabilizers are programs whose expenditures fluctuate automatically
depending on the economy. In a recession, food stamp payments, unemployment
insurance and welfare payments all increase as unemployment deepens. The consumer
price index is an indicator of how well an economy is doing, but it does not affect the
economy in any way.
Growth investing is characterized by all of the following EXCEPT:
a. Above-average dividends
b. Not as concerned with fundamentals and share price
c. Focus on sales
d. Reinvestment of earnings
Correct answer is B. Growth investors believe that if a company is growing at an above average rate, that
growth will raise the stock price. A growth investor believes that the share price today
and dividends are less important. Fundamental analysis of financials is not as relevant
either as the growth rate of sales and earnings (profits). Growth investing, by definition,
looks to the future so growth investors generally take a longer-term outlook since the
passage of time (and the hoped for growth of their shares) is the only way they can
profit.
Which of the following would be considered prohibited practices under the Uniform
Securities Act?
I. failing to follow a client’s specific instructions
II. borrowing funds from a client (subject to some exceptions)
III. splitting commissions with another agent in the same firm
IV. giving a mutual fund prospectus to a client before selling the mutual fund
A. I, II, III and IV
B. I and II
C. I, II and III
D. II and III
Correct answer is B. In looking out for the best interests of clients, the Uniform Securities Act prohibits
investment advisers from certain practices that would have a detrimental effect on the
client, such as failing to follow a client’s specific instructions or taking a loan from a
client’s account.
Which of the following is true of the brochure rule as it relates to investment advisers?
A. Under its provisions, an IA can decide if and when to provide information
to clients
B. Under its provisions, an IA must provide a brochure to clients only upon
request
C. Its provisions only apply to federal covered advisers
D. Under its provisions, an IA should provide a brochure to clients prior to
entering into a contractual relationship
The brochure rule states that investment advisers subject to state registration may be
required to provide certain basic information about their business to prospective
clients. The disclosure statement or brochure should be delivered to clients at least 48
hours before an advisory contract is signed. Since the rule only applies to advisers
subject to state registration, federal covered advisers are not subject to its provisions.
Given the following assumptions for stock ABC, what is its expected return using the
Capital Asset Pricing Model (CAPM)? Risk Free Rate: 1%, Expected Return on general
stock market: 7%, Beta: 1.5, Sharpe Ratio: 2.
A. 13%
B. 15%
C. 10%
D. 11.5%
The correct Answer is C. The formula for the Capital Asset Pricing Model (CAPM) is given by the following: Return
on Stock = Risk Free Rate + Beta of Stock x (Return on Market - Risk Free Rate). Plugging
in for Stock ABC gives Return on Stock ABC = 1% + [1.5 x (7% - 1%) = 10%]. Note the
Sharpe Ratio is not used in the CAPM formula.
Identify the differences between a broker-dealer and an IA.
A. A broker-dealer is transaction-based and an IA is fee-based.
B. all of the choices listed
C. A broker-dealer is covered by the Securities Exchange Act of 1934 and
the IA is covered by the Investment Advisors Act of 1940.
D. A broker-dealer can use testimonials provided directly from a client and
an IA cannot.
Correct answer is B. Broker-dealers are in the transaction-based business and are regulated by the Securities
Exchange Act of 1934, sometimes called the “People Act.” Investment Advisers are in
the fee-based business and are regulated by the Investment Advisers Act of 1940.
Broker-dealers are, in fact, allowed to use client testimonials provided directly from a client in the promotion of their services. Recent recent rules changes now allow an IA to
use testimonials originally published on an independent third-party website as long as
all such testimonials (positive and negative) from that site are included. However, it is
still the case that an IA can never use testimonials provided directly from a customer.
Which of the following are considered retirement savings vehicles?
I. CESAs
II. IRAs
III. 401(k)s
IV. 529s
a. II and III
b. I and II
c. I and IV
d. III and IV
IRAs and 401(k)s are retirement savings vehicles as defined by the IRS. 529s and CESAs
are college savings plan.
Which of the following parties is considered to have the strongest fiduciary duty to their
clients?
a. Broker-dealers
b. Investment advisers
c. Broker-dealers and Investment advisers have equally strong fiduciary
duties
d. Agents
In general, investment advisers are held to the highest fiduciary standards in the
financial industry, because there is an intangible element of good faith that they must
adhere to that is not technically required from the other choices listed.
Which of the following is the least common method of investing in commodities?
A. Futures and forward contracts
B. Index funds
C. Mutual funds
D. By the pound or bushel (for agricultural products)
Correct answer is D. While investors can purchase commodities directly in bulk, most investors trade
commodities on exchanges through futures and forward contracts. Investors can also
purchase commodities through an index fund or a mutual fund that specializes in a
particular type of commodity.
The annual gift tax exclusion is currently:
a. $14,000
b. $17,000
c. $19,000
d. $16,500
Correct Andwer is B. A gift tax applies to money or property that is given to other persons, if the gifts meet
certain conditions. Gifts to a single person in a single year not in excess of $17,000 (as of
2023) do not need to be reported to the IRS and are not taxed. This amount is called the
annual gift tax exclusion.
Sam is an agent with Sound Brokers, a broker-dealer. Sam received a cease and desist
order from the state securities administrator on September 1. The administrator’s order
prohibited Sam from engaging in any securities-related business pending the outcome
of an investigation into a complaint the administrator received from one of Sam’s
former clients. The order did not contain any specific findings of fact or conclusions of
law or any other information. Sam protested to the administrator that he had not been
granted a hearing before the order was issued. Which of the following is true of this
scenario?
A. Sam is correct and the administrator’s action was improper because the
administrator failed to set a hearing within 15 days
B. The administrator’s action was not proper because it failed to give Sam
prior notice of his right to an opportunity for a hearing
C. The administrator’s action was proper
D. The administrator’s action was not proper because it failed to provide
written findings of fact and conclusions of law
Correct answer is C. A state securities administrator has a bunch of tools at its disposal to ensure that
securities professionals, firms, and issuers operating in their state do what they are
supposed to. One of these tools is the administrative order. An order that denies,
suspends, or revokes a person’s or security’s registration can only be given with prior
notice to all interested parties, opportunity for a hearing, and written findings of fact
and conclusions of law. These are not required for temporary actions (summary orders)
against a registration, nor are they required for cease and desist orders.
However, if a hearing is not indicated as part of the initial contact received from the
state, a professional or firm may request a hearing. If a person requests a hearing
regarding a summary or temporary order, the state administrator must set a date within
15 days of receiving the request. Since Sam made no request for a hearing before the
administrator issued his order, however, the administrator’s action was proper. Sam, of
course, may request a hearing in the matter.
One of the main advantages that a profit-sharing plan offers to employers is the:
a. option to pay employees entirely in company stock
b. option to waive making a contribution if no profit is made in a given year
c. option to contribute more for executives than employees
d. none of these choices
Correct Answer is B. One of the main advantages for employers is that they do not have to make a
contribution to their employees’ accounts in a year where no profit has been made,
although they can if they so choose.
Broker is an agent in Indiana. While attending a gathering in Chicago, Illinois, he meets
Billie, a resident of Chicago. Billie tells Broker about his investment preferences, several
of which match up well with funds that are sold by Brokers firm. Since Broker thinks
that he can help Billie meet his goals, he invites him to visit his office, 35 miles away in
Indiana. One week later, Billie visits Broker at his firm and decides to purchase several
securities from the firm’s inventory. Which of the following is true of this situation?
a. It is permitted as long as Bryant’s brokerage has given its approval
b. It is permitted since it took place in Indiana
c. It is permitted only if Bryant is registered in Illinois
d. It is not permissible unless Bryant’s brokerage also has an office in Illinois
Correct Answer is c. An agent must be registered in each state in which any new retail clients reside in order
to do business with those clients. This means that Bryant must be registered in
Illinois. It makes no difference where a specific transaction involving a new retail client
who lives in a different state occurs; the agent must be registered in that out-of-state
client’s home state in order to effect any transaction for him. Likewise, whether or not
Bryant’s firm has an office in Illinois is irrelevant to the fact that once he begins effecting
trades for a retail client from Illinois he must be registered in Illinois. Finally, a firm can
never approve a trade made by an agent who is not properly registered to make it.
Which of the following are true of bonds with high credit risk?
I. They are less likely to default than bonds with low credit risk.
II. They typically pay higher yields than bonds with low credit risk.
III. They can include municipal bonds.
IV. When credit risk rises, the bond’s price will also rise.
a. III and IV
b. II and III
c. I and II
d. I and IV
Correct answer is B. Credit risk, also known as default risk, is the risk that a bond issuer will fail to make
payments when they are due. Bonds and issuers with lower credit ratings are seen as
more likely to fall victim to this situation and thus they are considered to have high
risk. The credit rating for a bond indicates its creditworthiness as determined by a
ratings agency. Thus a bond with a low credit rating, and a high credit risk, would be more likely to default than a bond with a low credit risk and a higher rating. On the
other hand, bonds with high credit risk typically come with higher coupon rates in order
to entice investors into a risky investment. Such bonds can include municipal and
corporate bonds. Finally, when credit risk rises, a bond’s price typically falls; when
credit risk falls, a bond’s price typically rises.
When should Form BD be updated?
A. Quarterly
B. When the minimum net capital requirement for the firm changes
C. Annually
D. Whenever the information on the form becomes inaccurate
Form BD should be updated whenever any information on the form becomes
inaccurate.
Which of the following are not true of REITs?
A. At least 75% of their gross income annually must be real estate-related
income.
B. At least 95% of their gross income annually must be real estate-invested
income and dividends and interest from any source.
C. They must distribute at least 95% of their income annually to their
shareholders.
D. At least 75% of their total assets must be invested in real estate.
Correct answer is D. Annually, at least 75% of a real estate investment trust’s (REIT) gross income must be
real estate-related income, and 95% of gross income must be real estate-related and
dividends and interest from any source. At least 75% of the REIT’s total assets must be
invested in real estate. And annually, the REIT must distribute 90%, not 95%, of its
income to shareholders.
John is an associated person discussing potential investments with Kudos. Which of the
following makes a difference as to whether this discussion is subject to Regulation Best
Interest?
a. Whether John’s firm is a broker-dealer, an investment adviser, or both
b. Whether Kudos is a current customer or potential customer
c. Whether Kudos is an accredited investor
d. Whether what John says to Kudos constitutes a recommendation
Regulation Best Interest (Reg BI) requires associated persons to act in retail customers’
best interest when making investment recommendations. Reg BI applies to
recommendations about any securities transaction or investment strategy involving
securities. It doesn’t matter whether the recommendation is made to a current or
potential customer. Nor does it matter whether the customer is an accredited investor. Finally, it doesn’t matter whether the associated person is employed by a broker-dealer,
an investment adviser, or a firm with dual registration.
However, Reg BI only applies to a communication that rises to the level of an actual
recommendation. Merely inviting a potential customer to discuss investment options is
not considered a recommendation, nor is an “educational” statement such as letting a
customer know the annual contribution limit of her retirement account. The more that a
communication emphasizes a certain type of investment, the more likely it is to be
considered a recommendation. Statements involving a “call to action” are generally
considered recommendations.
An annuitant wishes to take out a loan on his annuity. Assuming the investor is 55 years
old, the annuity is in the accumulation phase, and the loan amount is taken from
earnings, which of the following are true?
I. The annuitant will pay capital gains taxes on the loan.
II. The annuitant will pay ordinary income taxes on the loan.
III. The annuitant will not pay an early withdrawal fee on the loan.
IV. The annuitant will pay a 10% early withdrawal fee on the loan.
a. I and IV
b. II and III
c. II and IV
d. I and III
A loan taken against an annuity is considered a withdrawal. When earnings from an
annuity are withdrawn, they are taxed at the annuitant’s ordinary tax rate. Additionally,
withdrawals made before an annuitant reaches age 59.5 are assessed a 10% early
withdrawal fee.
On a company’s income (or earnings) statement, ________ get depreciated, while
_________ get amortized.
a. tangibles; intangibles
b. credits; debits
c. assets; liabilities
d. receivables; payables
Correct answer is A. Capital equipment tends to wear out over time, and for that reason it’s value declines
each year. Earnings statements must reflect this fact, and so tangible assets get
depreciated, while intangible assets get amortized. Most of the other answers don’t
make much sense.
If OTP Corporation decides to decrease its inventory and keep a correspondingly larger
cash holding, which of the following will occur?
a. Its acid-test will decrease, but its current ratio will remain unchanged
b. Both its acid-test and its current ratio will decrease
c. Its acid-test will increase, but its current ratio will remain unchanged
d. Both its acid-test ratio and its current ratio will increase
Correct Answer is C. (Note: If cash + Acc Rec. + Securities increase) ( Quick ratio increases) ( If current liabilities Increase) ( Quick Ratio Decreases) To demonstrate this, pretend that XYZ Corporation has $200,000 in cash, $200,000 in
inventory, $100,000 in accounts receivable, and $400,000 in current liabilities.
XYZ Corporation decides to reduce it’s inventory by $100,000 and increase its cash
holdings by a corresponding $100,000.
How will this change the acid-test ratio? Using the formula below, the acid-test ratio
was formerly .75 = ($200,000 + $100,000)/$400,000. But with the reduction in inventory
and increase in cash, it increases to 1.0 = ($300,000 + $100,000)/$400,000.
How will this change the current ratio? Using the formula below the current ratio was
1.25 = ($200,000 + $200,000 + $100,000)/$400,000. With a reduction in inventory and
an addition in cash it stays at 1.25 = ($300,000 + $100,000 + $100,000)/$400,000.
Acid-test ratio = (cash + accounts receivable + marketable securities)/current liabilities.
The quick ratio measures how quickly a company’s assets can be converted to cash. The
acid-test ratio is also known as the quick ratio. Another formula for the acid-test ratio =
(the total of current assets - inventory)/current liabilities.
Current ratio = current assets (including inventory) divided by current liabilities. The
current ratio measures a company’s ability to meet its short-term obligations. The
current ratio is also called the working capital ratio.
Which of the following common stockholder rights ensures that the investor’s assets are
not at risk for the company’s debts?
a. Right to a residual claim
b. Right to transfer
c. Right to limited liability
d. Preemptive rights
Correct answer is C. A defining feature of a corporation is that it offers limited liability to its investors,
meaning that investors are held liable for only the amount of money they invest in the
company. All stock certificates have the words “fully paid and non-assessable” printed
on them to assure stockholders of this right. This means that investors’ other assets are
not at risk for the company’s debts; nor are investors personally liable for any lawsuits
that might be brought against the company. The most they can ever lose by the
purchase of a company’s stock is its purchase price. This is true not just for holders of
common stock, but for any investor in a corporation.
All of the following are possible structural classifications of mutual funds EXCEPT:
a. diversified and non-diversified
b. all the choices are correct
c. equity and bond
d. open-ended and closed-ended
Correct answer is D. Mutual funds can only be open-ended. A closed-end fund is a type of investment
company but it is not considered to be a type of mutual fund.
Mutual funds can also be diversified or non-diversified. A diversified fund has three
primary rules:
A. 75% or more of its assets are invested in securities
B. No more than 5% of its assets are invested in any one security
C. Contains no more than 10% of the outstanding shares for any one security
Equity funds invest in stocks, while bond funds invest in corporate or government debt.
Which of the following is not subtracted from sales when calculating operating income?
A. Cost of goods sold (COGS)
B. Taxes
C. Selling, general, and administration (SG&A) expenses
D. Depreciation
Correct answer is B. Operating income is calculated by subtracting selling, general, and administration
(SG&A) expenses; research and development; and depreciation and amortization from
gross profit. Gross profit is sales minus COGS. Once operating income is determined,
interest expenses are subtracted to calculate earnings before taxes (EBT). Only then are
taxes subtracted from the EBT to arrive at net income.
The Uniform Prudent Investor Act mandates which of the following criteria for prudent
investing:
I. Prudence is applied to each portfolio and not by separate securities
II. The risk-to-reward tradeoff is critical
III. Some categories of investments are unconditionally prohibited
IV. Portfolio diversification is critically important
A. II, III and IV
B. I, II, III, and IV
C. I, II and III
D. I, II and IV
Correct answer is D. Blanket prohibition of investment categories is not mandated under this Act. This Act
specifies that virtually any category of securities can be appropriate, but fiduciary care
needs to be taken in recommending securities from a given category, regardless of its
inherent level of risk.
Unlike ETFs, ETNs may not be suitable for many retail investors due to their complexity
and volatility. Which of the following is NOT a primary risk to ETN investors?
a. Interest rate
b. Market
c. Credit/default
d. Liquidity
Correct answer is C. Exchange Traded Notes (ETNs) are unsecured debt usually issued by a bank that
promises to track an index, minus fees. ETN investors do not have a claim to any
securities, instead they receive a promise from the issuer to repay their loan at a future
date based on the performance of the index being tracked. This difference means that
ETNs do not suffer from any tracking risk at all, but in return the ETN investor is relying
on the issuer to be around in the future, thus the credit risk. Additional ETN risks include
the following: Credit risk – the risk that issuer could default, Market risk – performance
risk of the underlying index or benchmark, Price volatility – market price vs indicative
value based on index - may sell at a premium or discount, Liquidity risk – risk of low
trading volume.
Mary is an investment adviser. Her business is increasing so fast she can’t keep up, and
she wants to hire an investment adviser representative. Her college friend Sarah is
qualified, has passed her exams, and is looking for work. Mary knows that if she hires
Sarah a Form U4 must be submitted to the state Administrator and the applicant must
give permission for a background check and sign a “consent to service of process.” Mary
tells Sarah to fill out the paperwork and submit it as soon as possible. Sarah, glad to
have a job, agrees and starts working on it. What does Mary need to know about this
process?
A. The “consent to service of process” means that Sarah will be able to
receive legal papers on behalf of Mary.
B. Mary will need to submit Sarah application for registration.
C. Sarah’s application for registration as an investment adviser
representative will become effective at noon on the 30th day after Sarah
initially files it.
D. Sarah actually needs to file a Form ADV, not a Form U4, with the
Investment Adviser Registration Depository (IARD) system.
Correct answer is B. The IAR can fill out the paperwork and needs to give her consent for the background
check and service of process related to the application, but the investment adviser, not
the IAR, must submit the entire application to the IARD.
All of the following are terms that apply to the purchase of an existing closed-end funds
EXCEPT:
a. NAV
b. POP
c. Discount
d. Premium
There is no POP (public offering price) associated with closed-end funds. These funds
trade at a discount or premium to NAV, per supply and demand.
Which of the following is true of par value for a common stock?
a. It is a more effective valuation metric than market value
b. Though little used by investors, it is significant to securities professionals
when they make recommendations
c. It has no relation to the stock’s market value
d. It is the same as its market value
Correct answer is C. In general, par value is an accounting artifact with little relevance for the investor. It is
not influenced by the market value of the stock and thus is not related to that price. For
the exam, know that for investors in common stock, the par value of a share is set
arbitrarily, has no relation to market value, and thus has little to no significance.
An index fund is unlike most other types of mutual funds in which of the following
ways?
a. It is not actively managed.
b. It is traded on the secondary market.
c. Its shares are usually neither purchased nor sold with a sales charge.
d. Its investors receive no dividends.
Correct answer is A. Index funds operate by many of the same principals as other types of funds. Included
among these principals, index funds are not traded on the secondary market, their
shareholders may receive dividends, and they typically come with either a front- or
back-end sales charge. Unlike most other types of mutual funds, however, index funds
are not actively managed. Instead, a portfolio manager selects investments meant to
track and index and then does not actively buy for or sell from the fund.
Which of the following is true of dividend-paying common stocks?
a. Investors are quick to sell these positions in a market downturn
b. They have higher P/Es compared to non-dividend stocks
c. They are best for capital appreciation
d. They can help insulate a portfolio against a market downturn
Correct answer is D. Dividend-paying common stocks typically have higher dividend yields and lower P/E
ratios than other stocks. They are a good choice for income investing or to diversify a
portfolio. They can help insulate a portfolio against a market downturn as the earnings
of the income-bearing stock can offset losses in the portfolio. Furthermore, dividend-
paying stocks tend to retain their value, as investors are often reluctant to sell these
positions in a market downturn.
Jessica, an investment adviser representative, neglected to mention a fact that is
relevant to the past financial performance of a security’s issuing company to Melissa, a
client who is interested in purchasing the security. Outside of that one piece of
information, though, Jessica offers a thorough review of the investment. Largely based
on the information that Jessica provides, Melissa makes the investment. Three months
later she sells her shares in the company for a significant profit. Which of the following
is true?
a. As long as all of the facts she offered to Melissa were true, Jessica
offered proper disclosure
b. Since she omitted a material fact when discussing the potential
investment, Jessica did not offer proper disclosure to Melissa
c. Since Jessica has provided Melissa with all of the current information
related to the issuing company, she provided proper disclosure
d. Since she mentioned most of the important facts related to the potential
investment, Jessica offered proper disclosure to Melissa
Correct Answer is B. A securities professional must always offer full disclosure to a client when discussing any
potential investment. As part of the disclosure process, the professional is not allowed
to misrepresent or omit any material facts. A material fact is defined as something that
a reasonable person would need to know in advance of making an investment
decision. The past financial performance of a securities issuer constitutes a material
fact, so Jill is guilty of omission here. That means she did not offer proper disclosure to
Mikala. In terms of offering proper disclosure, it does not matter whether or not most
of the important facts or all current information about the company were revealed
truthfully to a client. Additionally, the fact that the client made money on an
investment is irrelevant to whether or not proper disclosure was offered.
All of the following are types of money market securities, except:
a. Banker’s acceptances
b. PPNs
c. T-bills
d. Money market funds
Correct answer is B. Principle protection note. Money market securities are the most liquid investment vehicles with very short-term
maturities. They also tend to be very safe investments, which is why they are sometimes
referred to as cash equivalents. Some of the more common money market securities are
T-bills, commercial paper, banker’s acceptances, and money market funds. Certificates
of deposit (CDs) are not considered securities, but are still considered part of the money
market.
A principal-protected note (PPN) is a long-term investment combining elements of debt
and equity securities. It is not considered as low-risk as money market securities.
Which of the following is not a security?
a. An investment contract
b. A futures contract option
c. Interest in an oil well
d. A futures contract on orange juice
Correct answer is D. Futures contracts on commodities are not considered securities. Options are always
securities, even if they are on futures contracts. An investment contract and an interest
in an oil well would both be considered a security.
Marcus is a representative for EBIC Securities. He has a client named Jennessa who
would like to trade 10,000 shares of ELD, a stock with little trading volume. The last
large-block trade for the stock was several days ago, and it is currently trading at
$5.50/share. Because Jennessa is so eager to sell her shares, Marcus suggests that she
offer it for a price significantly below $5.50 in order to gauge interest in such a large
trade. She agrees, and they offer the stock for $5.30/share. Within minutes an investor
offers to buy the shares at $5.30. At that time, Marcus and Jennessa agree to hold out
for a higher offer. Which of the following is true of Marcus’s course of action?
a. It is allowed since his client did not promise to sell at $5.30
b. It is prohibited because representatives must always trade a security at
its market rate
c. It is prohibited because he and his client are not allowed to back away
d. It is allowed as long as Mark and Jennifer do not later sell the shares for
$5.30 or less
Correct answer is c. Under FINRA rules, member firms and their employees are prohibited from making
offers to buy or sell at a stated price unless they are prepared to buy or sell at that
stated price. If a broker or an rep fails to honor a quote, it is called backing away, and it
is considered a rule violation. Mark’s actions in this instance constitute backing away,
and as such they are prohibited.
Investment advisers that take custody of client securities must do all of the following
except:
a. provide written notification to the Administrator within 30 days via Form
ADV that custody has been taken
b. make sure account statements are sent on at least a quarterly basis
c. properly hold the securities in custody with a qualified custodian
d. provide custodian contact information to all clients, as well as how the
securities will be held
Correct answer is A. NOT 30 days but propyl! There are many requirements for investment advisers that take custody of client
securities. They must physically keep the securities in the care of a qualified custodian,
such as a bank or broker-dealer. They must provide the qualified custodian’s contact
information to their clients. They must ensure that account statements are sent to their
clients at least quarterly, either by the qualified custodian or the investment adviser.
The Administrator must be notified promptly in writing using Form ADV of when the
adviser takes custody of the securities, not 30 days later. There are other requirements
as well, such as a higher minimum net capital requirement.
A broker-dealer has a place of business in states A and B, has institutional clients in
states B and C, and has non-institutional clients in state A. Where must the broker-
dealer register?
a. States A, B, and C
b. States A and B
c. State A
d. States B and C
A broker-dealer must always register in any state in which they have a place of business.
They must also register in any state in which they have any non-institutional clients. This
means the broker-dealer must register in states A and B. The broker-dealer does not
need to register in state C because they do not have a place of business there or any
non-institutional clients in that state.
A REIT must derive at least ______________ of its gross income from its real estate
sources and from dividends or interest from any source.
A. 95%
B. 75%
C. 90%
D. 0%
Correct Answer is C 90%. A Real Estate Investment Trust is a company that owns and operates income-producing
real estate, such as office buildings, apartments, malls, hotels and resorts. They differ
from other real estate companies in that they are required to operate the properties
they develop after they have built them, rather than selling them off. Most REITs
specialize in a single type of real estate.
To qualify as a REIT, it must:
1) Invest at least 75% of its assets into real estate or cash
2) Distribute at least 90% of its taxable income to shareholders annually in the form of
dividends
3) Be a corporation, trust, or association that would be taxable as a domestic
corporation except for its status as a REIT.
4) Be managed by a board of directors and have ‘unit’ shares that are fully transferable
5) Have a minimum of 100 shareholders after its first year of operation, and no more
than 50% of its shares may be held by five or fewer individuals during the last half of any
taxable year
6) Derive at least 75% of its gross income from its real estate sources
7) Derive at least 95% of its gross income from those real estate sources mentioned
above and dividends and interest from other sources
8) Have no more than 25% of its assets in securities of taxable REIT subsidiaries
By annually distributing at least 90% of taxable income to shareholders, REIT income is
not taxed at the entity level. This is huge benefit to the REIT. However, because this income has never been taxed, dividend distributions to shareholders are not considered
“qualified dividends,” instead REIT dividends are generally taxed as ordinary income at
the investor’s top marginal rate.
A registered representative heard from an administrative assistant within a corporation
that the corporation was about to offer a 401(k) plan to employees although this has
not been publicly announced. If the registered representative shares this information
with others or trades in the company stock, is he liable for insider trading?
A. He is liable because this information came from a corporate employee
B. He is not liable because the information did not come from a corporate
officer
C. He is not liable because the information is not material
D. He is liable because the information was non-public
Two elements are needed for insider trading liability are (1) awareness of material non-
public information and (2) trading on that information before public disclosure. The
offering of a 401(k) plan to employees will have no effect in and of itself on stock prices.
Which of the following savings programs have income eligibility limits?
a. UGMA/UTMAs & 403(b) retirement plans
b. Traditional IRAs & 529 college savings plans
c. Roth IRAs & Education savings bonds
d. Any kind of IRA
Correct Answer is C.
Roth IRAs are a type of individual retirement account that allow after-tax contributions
to grow tax-free. Educational savings bonds are certain EE and I savings bonds that have
tax-exempt interest when used for qualified educational expenses (in the same calendar
year the bond is redeemed). Both these programs are not available to high-income
taxpayers. Traditional IRAs and 403(b) retirement plans are retirement plans that do not
have income eligibility requirements. 529 college savings plans is a qualified educational
savings plan without income eligibility requirements. Finally, UGMA/UTMAs allow an
adult custodian to manage a savings account for the future needs of a minor. Again, no
income eligibility limits apply to these accounts.
Lorden purchases 100 shares of ABC at $20/share. He later sells his shares at
$23/share. For both buy and sell transactions he pays a 2% commission. What is his
total cost basis for the shares?
a. $2,300
b. $2,000
c. $2,040
d. $2,086
Correct answer is D. An investor’s cost basis (also known as tax basis) is the amount he pays for the securities
plus any commissions paid. Louis pays $2,000 for his ABC shares (100 shares x $20/share = $2,000). His commission is 2% of his sale value, making it $40 ($2,000 x
0.02 = $40), and thus his cost basis is $2,040 ($2,000 + $40 = $2,040).
Please note that the commission that Louis pays when he sells his ABC shares is
subtracted from the total amount he receives from the sale to calculate his sale
proceeds.
Which of the following is true of using an options account to make investments?
a. It is a choice that is usually available to all investors
b. It is generally considered to be a low-risk investment method
c. Because such an account offers limited choices, investors can only expect
a moderate level of profit
d. A customer must provide a good deal of documentation and information
to his broker-dealer before opening such an account
Correct Answer is D. Because options are speculative they come with significant risk to investors. As a result,
investors must provide financial information, define their investment objectives, and
document previous investment experience before opening this type of account, and
they most likely to be used only by experienced investors. The last point means that
newer and less experienced investors typically cannot open an options
account. Additionally, since options provide high risk but also high reward, investors
using them do not generally expect low levels of profit.
Which of the following governs the use of testimonials in advertisements by state-
registered investment advisers?
a. The SEC Marketing Rule
b. NASAA Model Rules
c. The specific standards set by each state’s administrator
d. Regulation S-P
Correct answer is B. Standards for state-registered investment adviser advertisements are set by NASAA
model rules. Standards for federal covered adviser advertisements are set by the SEC
Marketing Rule. Regulation S-P is a federal regulation that deals with customer
confidentiality.
All of the following statements are true regarding mortgage-backed bonds EXCEPT:
a. All are secured by the “full faith and credit” of the U.S. government
b. Can be sold by private entities such as financial institutions
c. Mostly sold by U.S. governmental agencies
d. They are secured by pooled real estate loans
Correct answer is A. Mortgage-backed securities are bonds that are secured by a pool of real estate loans.
While these bonds are mostly sold by U.S. governmental agencies, **only GNMA securities
are secured by the “full faith and credit” of the U.S. government.
Pension consultants that advise employee benefit plans worth $30 million must register
with:
a. the state only
b. the SEC only
c. either the SEC or the state
d. both the SEC and the state
Correct Answer is A. Pension consultants must advise plans with at least $200 million in assets before they
are required to register with the SEC. Consultants to plans below this asset level must
register at the state level.
The threshold for pension consultants increased from $50 million in plan assets under
management to $200 million in plan assets under management on September 19, 2011.
Last month, Dena bought a put on stock XYZ and a call on stock ABC. In both cases the
strike price is $50 and the premium is $4. On the expiration date, both XYZ and ABC are
trading at $45. Which of the following is true?
I. The put is $5 in the money
II. The call is $5 in the money
III. The put will make a $1 profit
IV. The call will make a $1 profit
a. II and IV
b. I and IV
c. II and III
d. I and III
Correct Answer is D. A put option is in the money when the price of the underlying asset is below the strike
price. An option being in the money is good for the holder, not the writer. At $45, XYZ is
$5 in the money. Diana has the right to buy 100 shares of XYZ at $45, “put” the shares in
the writer’s hand and require the writer to buy them from Diana at $50 a share.
But this does not necessarily mean Diana will make a profit. The premium she paid in
order to buy the put must be taken into account.
A put’s breakeven point is the difference between the strike price and the premium.
When the price falls below this, the holder turns a profit and the writer loses money. For
Diana’s put, the breakeven is $50 - $4 = $46. The price of the stock is $1 below the
breakeven point, so when Diana makes the writer buy those shares at $50, her profit is
$1/share. A call option is in the money when the price of the underlying asset is above the strike
price. Again, being in the money is good for the holder, not the writer. At $45, ABC is
actually $5 out of the money, not in the money. If Diana tried to exercise this option, the
writer would be forced to buy 100 shares of ABC at $45 and sell them to Diana at $50.
Since it is not in Diana’s interest to force a transaction where she would lose $5 a share,
the call option will expire worthless.
A call’s breakeven point is the sum of the strike price and the premium, which in this
case is $50 + $4 = $54. In order for statement IV to be true, ABC would need to be at
$55.
Melbourne wants to take out an annuity contract that offers him the maximum monthly
payouts. He is unmarried and doesn’t wish to include a beneficiary in his contract.
Which would be most appropriate?
a. Joint life with last survivor
b. Life income
c. Life with period certain
d. Life with amount certain
Mel should select life income. He will receive the largest monthly check, because this
option is likely the shortest amount of time for receiving payments, therefore the least
expensive for the insurance company. It is also the only option that does not provide for
a beneficiary to continue to receive payments. With the life with period certain, Mel
would receive a medium sized monthly payment and could designate a beneficiary. Life
with amount certain is not a payout option.
Which of the following is an example of systematic risk?
a. Business risk
b. Currency risk
c. Credit risk
d. Purchasing power risk
Correct answer is D. Purchasing power risk is the risk that inflation will negatively affect investments in a
portfolio. Inflation affects all securities within a market, and thus it is considered
systematic rather than unsystematic risk.
As the adviser of record for your client’s non-discretionary account, you are free to
make decisions on his behalf with regard to:
a. asset
b. time/price
c. action
d. amount
Correct answer is B. A discretionary account allows you to decide all of these things, but a non-discretionary
allows you to decide only “when” and “at what price.”
A technical analyst would use all of the following to evaluate a stock EXCEPT:
a. index comparisons
b. market trends
c. chart patterns
d. P/E ratios
Correct Answer is D. Technical analysts use items such as market trends, index comparisons, and historical
returns to predict future performance of securities. In doing so, a technical analyst does
not look at fundamentals such as the company’s financials (e.g., P/E ratios).
Pick two of the following are true for broker-dealers operating within bank settings?
I. They should offer their services in an area separate from where retail banking takes
place
II. They must disclose that any securities sold are not guaranteed by the bank
III. The broker-dealer is not allowed to borrow money from the bank
IV. Client funds can never be held by the bank
a. III and IV
b. I and II
c. II and IV
d. I and III
Broker dealers operating in a bank setting must offer their services in an area separate
from the location where retail banking activities take place. They must also disclose the
fact that securities purchased or sold by the broker-dealer are not guaranteed by the
bank. The other choices represent normal banking functions and as such are permitted
whether a broker-dealer is located on a bank’s premises or not.
Which of the following investments would be most suitable for a high-income investor
who wishes to avoid increasing his tax obligation in the next year?
a. A high-yield bond fund
b. A growth fund
c. A value fund
d. A large-cap stock fund
Correct Answer is B. Investments that provide income will lead to higher taxes for someone who is in a high
tax bracket. That is because, unless the investments are tax-exempt, the investor will taxes on all dividends or interest received from those investments. Value funds contain
stocks that often pay dividends, which would be taxed. The same is true of large-cap
stock funds. Bond funds contain bonds, which make interest payments. Unless the bond
funds are municipal bond funds, the interest payments received from them will be
taxed. Growth funds typically contain stocks that make low or no dividends. That means
an investor in one of these funds will most likely have fewer tax obligations from his
investment than he would from any of the other answer choices.
Which of the following is a type of earned income?
a. Unemployment benefits
b. Social security benefits
c. Child support
d. Taxable compensation
Correct Answer is D. Earned income is considered taxable compensation to the IRS, but in laymen terms it is
wages. Social security benefits, child support, and unemployment benefits are types of
unearned income in addition to dividends, capital gains and interest on securities.
Earlier this year your client bought shares of a hot IPO. The stock has nearly tripled in
value and now she wants to donate the stock to a charity. If she does this, which of the
following will be true?
a. Your client will be permitted to take a charitable deduction on the fair
market value of the position.
b. Your client will be permitted to take a charitable deduction on the cost of
the position.
c. Your client will be responsible for capital gains taxes on the transfer.
d. Your client will be responsible for any gift taxes above the annual gift
exclusion.
Correct Answer is B. If a stock has been held for more than a year and it is donated to a charity, then the
donor is permitted to take a charitable deduction on his/her income taxes for the fair
market value of the stock, provided the amount is no more than 50% of adjusted gross
income. In this case, the donor owned the stock for less than a year and as a result she is
permitted to take a charitable income tax deduction on the cost of the shares, not the
fair market value. Had she held the shares for more than a year, she would have been
able to deduct the fair market value of the shares. Gifts to charities are not taxed
provided the receiving entity is a “qualified organization.” Moreover, to deduct a
charitable contribution, a donor must itemize rather than take the standard deduction.
The annual gift exclusion applies to gifts made to individuals only.
Which of the following options lists orders in size from smallest to largest?
a. One round lot, mixed lot, odd lot
b. Odd lot, one round lot, mixed lot
c. Mixed lot, one round lot, odd lot
d. Mixed lot, odd lot, one round lot
Correct Answer is B. round lot is the normal unit of trading for a security on Nasdaq (usually 100 shares),
and a round lot order is an order for a multiple of the normal unit of trading. An odd lot
is less than the normal unit of trading, and a mixed lot is more than a normal unit of
trading without being a multiple of the normal unit of trading. An odd lot order would
normally be an order for less than 100 shares, while a mixed lot order could be for any
number of shares greater than 100, as long as the order is not for a multiple of 100
shares. An order for one round lot is typically an order for 100 shares.
Salina would like to start saving for college for her son. She would not like her
son to have control of the assets when he reaches the age of majority. In their plain
vanilla form, which of the following investment vehicles would be least likely to meet
her goal?
a. 529 plan
b. I bond
c. EE bond
d. CESA
Correct Answer is D. Unless it is specifically modified in the original account, ownership of the assets in a
Coverdell Education Savings Account (CESA) will transfer to the beneficiary when the
beneficiary reaches the age of majority (age 18 in most states). So a CESA is the correct
answer because it would not meet her goal. A 529 plan is not the correct answer
because it would meet not her goal. This is because the custodian will keep control of
the assets in the plan after the beneficiary reaches the age of majority. EE and I bonds
are also not the correct answer because they belong to an owner and will be redeemed
by the owner, so Sally could keep them in her own name.
Because Corporation has 15 million authorized shares, 8 million issued shares,
and 1.5 million treasury shares. If its shares are currently trading at $30/share, what is
Because Corporation’s market capitalization?
a. $405,000,000
b. $165,000,000
c. $240,000,000
d. $195,000,000
Correct answer is D. Market capitalization is calculated by multiplying total shares outstanding by share
price. Shares outstanding is the number of issued shares minus the number of treasury
shares, which in this example is 6.5 million (8,000,000 – 1,500,000 =
6,500,000). Multiplying that number of shares by B Corporation’s $30 share price gives
a market capitalization of $195,000,000 (6,500,000 x $30 = $195,000,000).
All of the following statements regarding rebalancing are true except:
a. Rebalancing should be done at least once a year to keep an investor’s
portfolio in line with her risk tolerance and time horizon
b. Rebalancing should be done whenever the market goes up or down by
3%
c. Rebalancing can be done by either selling securities or buying additional
securities to bring an investor’s portfolio back to an investor’s original
asset allocation mix
d. Rebalancing is necessary when investments within a portfolio grow and
no longer follow an investor’s original asset allocation mix.
Correct Answer is B. Rebalancing needs to be done at least once a year, and when the investment advisor
thinks that the client’s current asset allocation is out of line with the original asset
allocation mix. There are no rules, however, tied to specific changes in the market (such
as 3%). Rebalancing can be done by either selling securities or buying additional
securities to bring an investor’s portfolio back to a client’s original asset allocation mix
The Trust Indenture Act of 1939 is concerned with and protects investors in
which type of security:
a. unit investment trusts
b. indentures
c. trusts
d. debt securities
Correct Answer is D. The Trust Indenture Act of 1939 protects investors in debt securities, i.e., bonds,
collateralized debt obligations, etc. Trusts and indentures are legal entities not
investments. The Trust Indenture Act of 1939 applies to bond offerings that are in
excess of $50 million issued over 1 year that mature in more than 270 days. Companies
that issue bonds that are in excess of $50 million issued over 1 year and mature in more
than 270 days must sell these bonds under an indenture or contract. The indenture is
with an outside trustee who represents the bondholder’s interests. The company must
appoint this outside trustee. If the company goes bankrupt, the role of the trustee is to
try to recoup the bondholder’s money through bankruptcy court. Government issued
debt such as treasury bonds and municipal bonds are not covered under the Act.
A federal covered adviser publishes an advertisement stating, “All of our
representatives have been advising clients for at least 10 years!” In order to make this
statement under the Marketing Rule, the adviser must:
a. Disclose the names of each of the representatives
b. Provide a fair and balanced discussion of the results of the
representatives
c. Attach a disclosure with a list of how long each representative has been
advising
d. Have proof that each representative has been advising for ten years
Correct Answer is D. The Marketing Rule requires that any material facts can be substantiated, or proven to
be true. In this case, any claims about the experience of representatives must be
accurate. A federal covered adviser must be able to reference proof that each
representative has been advising for at least ten years, should the SEC ask for it. The
other answers are not necessary for this statement.
Your client is long 200 XOM and has a deathly fear of options. What could she do
to protect her investment that doesn’t involve puts or calls or straddles or spreads?
a. She could enter a buy stop for XOM above the current price of the stock.
b. She could enter a buy stop for XOM below the current price of the stock.
c. She could enter a sell stop for XOM below the current price of the stock.
d. She could enter a sell stop for XOM above the current price of the stock.
Entering a sell stop somewhere below the current price protects her from a sharp drop
in the price of the stock. Sell stops cannot be entered above the stock price, and buy
stops do nothing to protect her investment.
Which of the following practices is permitted for an agent of a broker-dealer?
a. Telling a customer that because he passed licensing exam, he has been
approved by the state administrator
b. Providing a customer with a copy of the final prospectus for shares of an
IPO that were first issued within the past 25 days on the date of purchase
confirmation
c. Making unprovable claims to a client about a good investment
opportunity
d. Neglecting to disclose facts that might deter a client from making an
unsuitable investment
Corect Answer is B. Agents must always be sure to offer proper disclosure to customers about
investments. Proper disclosure means that an agent, among other things, can never
misrepresent or omit any facts that would persuade a customer to either approve or
deny a potential transaction. Even if an agent thinks the investment will be suitable for
the customer, he cannot misrepresent or omit important facts related to that
security. Additionally, a securities professional is never allowed to say that he has been
‘approved’ by the state administrator. By passing his licensing exam registering in his
state, he has simply done those two things: ‘passed’ the exam and ‘registered’ as an
agent. He has not gained the state administrator’s ‘approval’, and to say so is
unethical. Finally, when a customer purchases shares of an IPO issued within the past
25 days, an agent must delivery a copy of the preliminary prospectus no later than 48
hours before purchase and a copy of the final prospectus no later than the due date of
trade confirmation.
Under the USA, an investment adviser representative is exempt from registration
in State A if the IAR has no office in State A and up to how many non-institutional clients
in the state?
a. The IAR cannot have any non-institutional clients in a state if he wishes
to avoid state registration requirements.
b. Five
c. Six
d. Ten
An IAR with no office in a given state and no more than five non-institutional clients in
that state does not need to register there. Whenever the IAR has more than five non-
institutional clients in the state over a 12-month period, however, he must register
there.
Johanna has a portfolio of corporate bonds. If interest rates drop, how will his
portfolio be affected?
a. Its value will increase
b. Its value will decrease
c. It will depend on the types of bonds John has in his portfolio
d. It will have no effect
The value of bonds has an inverse relationship with interest rates. When interest rates
go up, the value of bonds in the secondary market decreases because people could now
invest in bonds that pay higher interest rates. When interest rates fall, the value of
bonds increases because now these bonds have pay higher interest payments that
newly issued bonds.
All of the following are reasons to create a trust except:
a. Privacy
b. Guarantee probate
c. Minimize taxes
d. Provide for minor children
A trust can help provide for minor children, it can minimize estate taxes and because it’s
a private entity it limits public disclosure. Probate, the legal proceeding after death in
which a court oversees the distribution and dissolution of an estate, is a public process.
Assets in trust are typically excluded from the probate process thereby limiting probate.
An investor purchasing 1,000 shares of a certain mutual fund that has a maximum sales charge of 81⁄2 % and a NAV of $10.30 at the time of purchase will pay a total sales charge of (rounding to the nearest dollar)
A) 875
B) 96
C) 957
D) 88
Alternative Inv: Sales charge 8 1/2%
(8.5 -100 = 91.5) = NSC
NAV 10.3% (10.3 / 91.5 = 11.256 or 11.26% POP) POP - NAV = .957 (11.26 - 10.30 = .957)
POP - NAV = .957
Total Sales Charge = .957 x 1000 shares = $957
______ is the willful or intentional act of deceiving another person for gain or profit.
Fraud is the willful or intentional act of deceiving another person for gain or profit.
What restrictions exist in describing a fund as no-load?
It may have no front-end or deferred sales charge, and a 12b-1 fee may not exceed .25
When may the Administrator cancel a registrant’s registration?
f the registrant has died, ceased doing business, been declared mentally incompetent or cannot be located
True or False: A warrant attached to the sale of a bond is considered a sale of the warrant.
True
True or False: A warrant attached to the sale of a bond is considered a sale of the warrant.
True
It is a violation of the USA for an IA to act as a broker-dealer for a buyer of securities without _______ ___________.
It is a violation of the USA for an IA to act as a broker-dealer for a buyer of securities without written disclosure.
Transactions should be executed at a price that is reasonably related to the ________ _______ price.
Transactions should be executed at a price that is reasonably related to the current market price.
True or False: If churning in a client’s account generates large profits, it is not considered a violation.
False
Is an adviser required to disclose the source of raw data that is used to determine the recommendations to its customers?
No. Disclosure is not required if the IA’s recommendations are based on its own independent conclusions.
Is being charged with a felony or securities-related misdemeanor grounds for statutory disqualification?
No. Statutory disqualification is due to conviction for any felony or securities-related misdemeanor in the past 10 yrs.
What action may an Administrator take on receipt of a complaint regarding an ad that originated from another state?
Investigate the complaint
For an agent to exercise discretion over a client’s account, the client must have signed a ________ ____ ____________.
For an agent to exercise discretion over a client’s account, the client must have signed a power of attorney.
An IAR may exercise discretion over a client’s account based on the client’s oral authorization for up to ___ days.
An IAR may exercise discretion over a client’s account based on the client’s oral authorization for up to 10 days.
True or False: A gift of assessable stock is considered both an offer and sale.
True
If the Administrator believes a person has violated or is about to violate the USA, may a stop order be issued?
Yes
Define an insider.
Officers, directors, partners, greater than 10% owners, and immediate family members of all listed
When does a standard power of attorney become automatically cancelled?
At the time of either the grantor’s death or declaration of grantor’s incompetence
List the access persons of an investment adviser.
Officers, directors, partners, or persons with access to client investment positions or investment company holdings
May an adviser borrow money from a client?
Yes, if the client is in the business of lending money, or if the client is an affiliate of the adviser, or is a BD.
An agent encourages a customer to buy a stock due to an upcoming dividend. Is this a legal practice?
No, this is a prohibited action known as selling dividends.
True or False: An Administrator may cancel a registration without the opportunity for a hearing.
True. Cancellation may be due to the death of an agent or a firm no longer being in business.
What is required of an IA that uses third-party research?
The IA must disclose the source of the research to its client.
Does the Administrator require proof of wrongdoing to initiate an investigation?
No, but she does need to be able to refer to a rule or order when starting the investigation.
True or False: The Administrator may confiscate records.
False. The Administrator may inspect records, but cannot confiscate them.
The statute of limitations for criminal violations of the USA is ____ years.
The statute of limitations for criminal violations of the USA is five years.
May the Administrator levy fines on a registrant?
No
May an agent and a client share in an account?
Yes, if both the firm and customer provide approval and all sharing is proportionate to each party’s investment.
True or False: Principals must approve discretionary orders prior to entry
False. The orders must be approved promptly afterward.
With newspaper offers, no offer is made if more than __________ of the circulation is outside of the publishing state.
With newspaper offers, no offer is made if more than two-thirds of the circulation is outside of the publishing state.
When will an offer fall under an Administrator’s jurisdiction?
If the offer originated in, was directed in, or was accepted in the Administrator’s state
Identify the acronym: POA
Power of Attorney
A holdings report filed by an access person must be current as of ___ days prior to the date the report is submitted.
A holdings report filed by an access person must be current as of 45 days prior to the date the report is submitted.
What three items must be specified on a not held order?
Action (buy/sell), Amount (quantity), and Asset (security)
A person subject to an order by an Administrator may appeal the order to the state court within _____ days.
A person subject to an order by an Administrator may appeal the order to the state court within 60 days.
True or False: If a registration statement has not been filed with the SEC, BDs may not discuss new issue information.
True
What are some reasons for the Administrator denying the registration statement for a securities offering?
Filing false registration documents, issuer’s business is illegal, spread is unfair, or failing to pay the filing fee.
True or False: A power of attorney given to an agent (RR) must be renewed.
False. Powers of attorney do not have to be renewed.
True or False: BDs may accept oral permission from clients to exercise discretion in their accounts.
False. The client’s prior written authorization is required.
An ________ is any attempt or solicitation to acquire or dispose of a security for value.
An offer is any attempt or solicitation to acquire or dispose of a security for value.
May the books and records of a federal covered adviser be subject to inspection by an Administrator?
YES
A customer must respond to a letter of rescission within _____ days or lose the right to sue.
A customer must respond to a letter of rescission within 30 days or lose the right to sue.
True or False: An unsolicited transaction of an unregistered, non-exempt security to a client is a violation of the USA.
False. Unsolicited transactions are exempt transactions.
Are advisory fees fixed and are they subject to administrative review?
Fees are not fixed, but must be in line with other advisers. Fees are subject to administrative review.
May the Administrator initiate criminal or civil liability action against a registrant?
Yes. An Administrator may initiate action, but may not impose fines or penalties for violations.
True or False: It is an unethical practice for a BD to delay the delivery of securities purchased by a customer.
True
True or False: Agents of a broker-dealer must disclose material facts about a stock they are recommending.
**True. **Agents should make a good-faith effort to disclose all material facts to an investor.
What is needed for a BD to exercise discretion over a client’s account?
BD need the client’s prior written authorization.
If an offer is made using the mail, where is the offer considered to have been made?
In the state from which it originated and the state to which it is directed
What is a letter of rescission?
An offer to buy back a security from a client when that security was sold in violation of the USA
Define jurisdiction.
The power to interpret and apply the law or the territorial range of authority or control.
May the Administrator revoke the registration of a federally covered adviser?
No. However, she may require the IA to notice file.
True or False: Access persons must file transactions reports annually.
False. Transactions reports are filed within 30 days of the end of each calendar quarter.
If an agent (RR) received a power of attorney seven years ago, could she still trade that customer’s account?
Yes, powers of attorney do not need to be renewed.
What is selling away?
An agent executing securities transactions for compensation and not recording the trades on the BD’s books and records.
An _______ is any attempt or solicitation to dispose of a security for value.
An offer (offer to sell) is any attempt or solicitation to dispose of a security for value.
True or False: A stock dividend is considered a sale.
False
If a client has been defrauded by an BD or IA, the firm may be required to ________ commissions/fees.
If a client has been defrauded by an BD or IA, the firm may be required to disgorge commissions/fees.
Define commingling.
The prohibited act of mixing client funds with those of the BD
__________ is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).
Pegging is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).
True or False: The exercise of convertible securities is considered a sale under the USA.
False
True or False: Agents of a broker-dealer must disclose all facts about a stock they are recommending.
False. Agents only need disclose material facts, not all facts.
What step must an IA complete when faced with a conflict of interest?
The conflict must be disclosed to the client. If disclosure is insufficient, the IA must abstain from the action.
What is the annual fee levied against a fund’s assets and used to pay expenses of commissions and retail communications?
12b-1 fee
An agent of a BD lends $5,000 to his brother, is this acceptable?
Yes, lending to immediate family members is permissible.
If an agent has been enjoined (forced to cease activity) and a hearing is requested, when must the hearing be held?
Within 15 days of the receipt of a written request from the agent
If a cease-and-desist order is issued against an agent, the agent may file an appeal within _____ days.
If a cease-and-desist order is issued against an agent, the agent may file an appeal within 60 days.
Does this order require prior discretionary authorization? “Buy 300 shares of DMB this week”
Yes, since it is NOT a not held order. Not held orders are only good for a trading day, and this order is for the week.
Is an agent allowed to recommend the sale of a fund’s shares in order to buy another fund’s shares with the same objective?
No. This is a prohibited practice and is considered an unsuitable recommendation.
May an agent share in the profits of a client’s account?
Yes, in a joint account with proportionate sharing. Permission is required from both the client and the firm.
Define churning.
Excessive trading in a customer’s account for the primary purpose of generating commissions and other fees
Firms must keep client information confidential unless disclosure is authorized by the _______ or a __________ _________.
Firms must keep client information confidential unless disclosure is authorized by the client or a regulatory authority.
True or False: An Administrator may require a mutual fund to file its advertising.
False. Mutual fund advertising is filed with FINRA, not the Administrator.
When selling mutual fund shares, an agent must adequately disclose the ______ _______.
When selling mutual fund shares, an agent must adequately disclose the sales charge.
Statute of limitations for USA civil violations is _____ yrs. of occurrence or ___ yrs. of discovery, whichever is first.
Statue of limitations for USA civil violations is three yrs. of occurrence or two yrs. of discovery, whichever is first.
True or False: Registration may be denied due to ANY misdemeanor convictions.
False. Registration may be denied for ANY felony conviction or securities-related misdemeanor conviction.
The maximum criminal penalty for violations of the USA is _____ years in prison and/or up to a $______ fine.
The maximum criminal penalty for violations of the USA is three years in prison and/or up to a $5,000 fine.
May the Administrator audit the books and records of a registered firm?
Yes. The Administrator may subpoena, audit, and inspect the books and records of registered firms.
Can a BD punish one of its agents for responding to a subpoena?
No. This is a prohibited action.
An IA directs transactions to a BD who rebates 15% of the commissions to the IA for the business. Is this acceptable?
Yes, provided the IA provides written disclosure (often in Form ADV) to clients.
Does this order require prior discretionary authorization? “Buy some ABC shares today if its price begins to fall.”
Yes. This is NOT a not held order since the client did not specify the quantity of shares to be purchased.
A firm promises a refund to all clients who invest in an IPO if shares fail to rise 20%. Is this permitted?
No. This is unethical since it is considered a guarantee against loss.
When must an access person file a holding report?
Within 10 days of becoming an access person and at least once every 12 months thereafter
Does the appeal of an administrative order act as a stay of the order?
No. The order remains in effect until the outcome of the hearing.
Next week ABC plans to announce its earnings. If ABC’s CEO wants to sell some of her shares now, is the sale restricted?
Yes. Insiders are required to wait until an earnings report is released publicly before selling shares.
True or False: Registration denial orders issued by an Administrator are final, binding, and may not be appealed.
False. If denied, a person is entitled to written notification and findings of fact and an opportunity for a hearing.
True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.
False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.
The appeal of an administrative order is made before a court of _________________________.
The appeal of an administrative order is made before a court of competent jurisdiction (state court).
True or False: The Administrator may enjoin (issue an injunction) a registered individual or firm.
False. The Administrator may only issue a cease and desist order. The Administrator may not issue an injunction.
A registration withdrawal is effective ____ days after filing.
A registration withdrawal is effective 30 days after filing.
A registration withdrawal is effective 30 days after filing.
No, since discretion is limited to time and/or price for not held orders.
May an Administrator subpoena records in another state to investigate potential violations that occurred in his own state?
Yes, the Administrator has broad inspectorial power, which stretches beyond his own state.
What three details must a client provide for an agent to make a time and/or price decision without written authorization?
Action (buy/sell), asset, and amount. Time and/or price may remain the agent’s discretion without written authorization.
What are the two reports that an access person of an investment adviser must file?
The transaction report and the holding report
If an agent has been given time and price discretion on a client order, is written power of attorney required?
No. If the client determines the action (buy/sell), amount, and asset, power of attorney is not required.
For how long may a not held order be maintained?
A not held order is considered a day order.
True or False: The Administrator may bring a case in a civil court.
True. Both the Administrator and a private citizen may bring a case in civil court.
Not held orders are considered to be in effect for _____ trading day(s).
Not held orders are considered to be in effect for one trading day.
Define conversion.
The prohibited act of an agent using client funds for personal use.
A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?
Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.
True or False: An agent may be arrested by the Administrator for refusing to cooperate with an investigation.
False. The Administrator does not have the authority to arrest a person who violates state law.
True or False: The Administrator may issue an injunction.
False. Only a court may issue an injunction; however, the Administrator may issue a cease and desist order.
The Administrator has the power to issue a _____ ___ ______ order, but not an __________.
The Administrator has to power to issue a cease and desist order, but not an injunction.
Yes, since this is a material fact, it must be disclosed before the customer buys the stock.
Yes, since this is a material fact, it must be disclosed before the customer buys the stock.
True or False: A gift of non-assessable stock is considered a sale.
False. However, the gift of assessable stock IS considered both an offer and a sale.
To whom are written or electronically-sent grievances (complaints) forwarded?
An immediate supervisor
May an agent of a BD effect personal trades in a stock two days before her firm releases a research report on the stock?
No. Employees of a broker-dealer may not trade ahead of their firm’s research report.
At the state level, who may appoint an officer to lead an investigation?
The AdministratorThe Administrator
Does an IA need written consent before executing each agency cross trade with an advisory client?
No, the client must provide written consent initially, but not for every trade.
True or False: A BD may withhold shares of an IPO for the purpose of later selling them to customers at a higher price.
False
True or False: To provide full and fair disclosure during a solicitation, an agent only needs to offer a prospectus.
The agent must also disclose any material facts of which he may be aware.
securities and client securities must be segregated; in other words, they may not be ______________.
BD securities and client securities must be segregated; in other words, they may not be commingled.
John and Sam are continually trading QRS stock between their accounts to cause the price to rise. Is this permitted?
No, this prohibited practice is referred to as “painting the tape.”
Trading on material, non-public information is considered ________ ________.
Trading on material, non-public information is considered insider trading.
May an agent use a new issue prospectus to create a marketing piece and only include positive details about the issue?
No. Material provided to clients must include all facts about the issue, not just the positive ones.
True or False: Forward-looking statements regarding mutual fund performance may be used when soliciting clients.
False. Past performance is not indicative of future results.
True or False: The conversion of a bond into stock is an offer and sale.
False. Converting a bond into stock is neither an offer nor a sale.
For any securities that are delivered to a BD, an agent must ____________ provide the customer with a receipt.
For any securities that are delivered to a BD, an agent must immediately provide the customer with a receipt.
Joe places an order to sell 10,000 shares of ABC whenever it’s best. Is written discretionary authority required?
No. Since discretion is limited to time and/or price, written authority is not required.
True or False: Administrators are permitted to issue summary orders denying certain exemptions.
True
What is a not held order?
An order giving agents discretion as to execution time/price. Clients must specify buy/sell, security, and quantity.
When is an offer subject to a specific state’s securities laws?
When it originates in, is directed to and received in, or is accepted in the state
The statute of limitations for criminal violations of the Uniform Securities Act is ____ years.
The statute of limitations for criminal violations of the Uniform Securities Act is five years.
May an adviser release account information to the spouse of a client?
No, not without the client’s written authorization.
A prospectus is mailed by an agent in one state to a client in another state. In which state(s) is the offer being made?
Both states
If the Administrator believes a person has violated or is about to violate the USA, may he issue an injunction?
No. The Administrator may not issue an injunction. Injunctions may only be issued by a court of competent jurisdiction.
_____________ is the prohibited practice of a BD trading for its own account ahead of a customer’s block order.
Front-running is the prohibited practice of a BD trading for its own account ahead of a customer’s block order.
May an IAR and a client share in an account?
No. However, an agent may share in a client’s account.
What are the justifiable reasons for denying an individual’s registration?
Conviction for any felony or securities-related misdemeanor within the last 10 years
Does this order require prior discretionary authorization? “Buy 500 shares of DMB sometime today.”
No, this is a not held order. The customer specified the action (buy), the amount (500 shares), and the asset (DMB).
The maximum criminal penalties under the USA are a fine of $_______ and ____ years in prison.
The maximum criminal penalties under the USA are a fine of $5,000 and 3 years in prison.
When conducting an investigation of wrongdoing, is the Administrator limited to state boundaries?
The Administrator may subpoena books, records, and witnesses from inside and outside the state.
If an offer is made using television or radio, where is the offer considered to have been made?
In the state in which the broadcast or telecast originated
True or False: An Administrator may issue a cease-and-desist order before a violation has occurred.
True
May an IAR solicit both sides of an agency cross transaction?
No, one side must be unsolicited.
True or False: An Administrator may not retroactively enforce orders and revocations.
True
Churning is described as _____________________ designed to _____________________.
Churning is described as excessive trading designed to generate commissions.
A person may appeal a stop order that is issued by the Administrator within _____ days.
A person may appeal a stop order that is issued by the Administrator within 60 days.
When must an access person file a transaction report?
Within 30 days of the end of each calendar quarter
True or False: Charging an unreasonably high commission is acceptable if disclosure is made to the client.
False
How may the failure to pay the proper filing fee be corrected?
By paying the appropriate amount
May a wife enter trades in a husband’s account?
Yes, with written third-party authorization.
A _______ is any agreement or contract to dispose of a security for value.
A sale is any agreement or contract to dispose of a security for value.
If shares of stock are freely given with the purchase of a bond, is this considered an offer and sale?
Yes
Under the Uniform Securities Act, the statute of limitations for fraud is ____ years.
Under the Uniform Securities Act, the statute of limitations for fraud is five years.
An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is ____________.
An IA that is also a BD may execute agency cross trades, earning commission on both sides, if one side is unsolicited.
________ stock is the repeated practice of placing stock in the account of a person who is not the rightful owner.
Parking stock is the repeated practice of placing stock in the account of a person who is not the rightful owner.
When does a durable power of attorney become automatically cancelled?
At the time of death of the grantor of the POA
Under the provisions of the USA, a hearing will be held ____ days after a written request.
Under the provisions of the USA, a hearing will be held 15 days after a written request.
If a client has been defrauded by her BD or IA, what costs may she sue to recover?
The cost of the security or the cost of the advice, commissions, legal fees, interest, less any income received
True or False: Access persons must file holdings reports annually.
True
True or False: An agent of a broker-dealer may loan money to his son-in-law.
True. In-laws are considered immediate family members; therefore, the loan would be acceptable.
Define assessable stock.
Stock that allows the issuing entity to demand additional funds from existing stockholders
True or False: All illegal activities are intentional.
False. Some accidental or unintentional actions are considered unethical and, therefore, illegal.
Sam buys stock on one exchange and sells it short on another at a slightly higher price. Is this permitted?
Yes. Sam is engaging in arbitrage.
__________ is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).
Capping is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).
True or False: An agent may trade a stock two days prior to a research report on the stock being released by his employer.
False. This is an example of trading ahead and is prohibited.
True or False: In certain cases, fraud may be unintentional.
False
True or False: If FINRA issues an order against a firm, an Administrator may take action against a BD’s registration.
True
If found civilly liable for violating the USA, what is the penalty?
The original amount paid, plus the legal rate of interest, attorney fees, and court costs, minus any cash received
Define the prohibited practice of shadowing.
After executing a large block order, but before the trade is reported, a BD trades for its own account.
Define front running.
A firm/individual executing trades for its own account with knowledge of an impending large block customer order.
If an agent has withdrawn registration, the Administrator may still take action for ___ year(s) after the withdrawal.
If an agent has withdrawn registration, the Administrator may still take action for one year after the withdrawal.
An agent makes this statement to a client: “Go with us; we’re approved by the Administrator and SEC.” Is it acceptable?
No. Neither the SEC nor the Administrator provide approval for securities or securities professionals.
Administrative cease-and-desist orders may be appealed in a state court if application is made within _____ days.
Administrative cease-and-desist orders may be appealed in a state court if application is made within 60 days.
Define selling away.
The execution of transactions by an associated person outside his employment with a member firm
True or False: To revoke registration, Administrators must send registrants all documents created in the investigation.
False. The Administrator must provide written findings of fact. However, providing all documents is not required.
Is an agent permitted to execute securities trades for compensation and not record the trades on his BD’s books and records?
No. This is referred to as “selling away.”
May an adviser or BD lend money to a client?
Yes, if the adviser or BD is in the business of lending money.
True or False: If an agent disagrees with a customer’s order, he may disregard the order.
False. Agents and IARs must follow all customer requests, even those with which they disagree.
Define painting the tape.
Traders effecting transactions back and forth to create a misleading appearance of activity
What’s a no load fund?
A mutual fund with no front-end sales charge, no deferred sales charge, and no 12b-1 fee exceeding .25% per year.
What is needed for an investment adviser to exercise discretion over a client’s funds?
An adviser may exercise discretion for 10 days with the client’s oral authorization as long as it is followed up in writing.
May an agent and a client share in an account?
Yes. However, client and firm approval is required and the sharing must be proportionate to each person’s investment.
Is the payment of a stock dividend considered an offer or sale?
NO
True or False: An individual may be denied registration due to lack of experience.
False. However, a lack of training, knowledge, and experience may be grounds for denial.
What is required of a BD controlled by/affiliated with an issuer of a security being sold to/purchased by a customer?
Both oral and written disclosure of the relationship
Define an agency cross transaction.
A trade executed by a financial firm that is acting as a broker for both the buyer and seller.
What is required of a BD controlled by/affiliated with an issuer of a security being sold to/purchased by a customer?
Both oral and written disclosure of the relationship
True or False: If a BD receives a written complaint from a client, it may be ignored if the complaint seems baseless.
False. Failing to respond to a formal written complaint is prohibited.
True or False: An Administrator is not required to provide written findings of fact when revoking a registration.
False. The Administrator must provide written notification, written findings of fact, and an opportunity for a hearing.
What is required for an agent to open a joint account with a customer?
Written approval of the client and the BD and any sharing must be proportionate to each person’s contribution.
For how long does the Administrator maintain jurisdiction over a registrant after a withdrawal of registration?
One year
Which market is considered negotiated?
The over-the-counter (OTC) market in which market makers negotiate prices (e.g., Pink Market)
True or False: When conducting a client’s financial analysis, liquid investments would be considered long-term assets.
False. Liquid investments would be considered current assets.
How are withdrawals from a Traditional IRA treated for tax purposes?
If all contributions were deductible, then the entire withdrawal is taxed as ordinary income.
What is the benefit of establishing a revocable trust?
It avoids probate.
An investor buys 100 shares of RST at 30 and sells 1 RST October 35 call at 2. What is the reason for selling the call?
To provide premium income on stable stock. Also note the premium provides a partial hedge against downside risk.
What is an advantage to being formed as a corporation as opposed to a partnership?
Partnerships are dissolved due to the death of any of the partners, while corporations may continue.
Grandparents who contribute to a grandchild’s 529 plan may give how much money and still avoid gift tax consequences?
Front-loading five years of contributions is allowed; therefore, each could contribute $90,000 for a total of $180,000.
True or False: A defined contribution plan provides employees with a fixed monthly payment at retirement.
False. This statement describes a defined benefit plan.
With options, what terms are synonymous with a seller?
Writer, short
What are the general characteristics of a Joint Tenants in Common (JTIC) account?
It has multiple owners and each has trading rights. If one owner dies, his account value passes to his estate.
Sales tax is an example of ____________________ tax.
Sales tax is an example of regressive/flat tax.
May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan?
Yes, provided the Keogh contribution is solely based upon the employee’s self-employment income.
Sell limit orders are placed ________ the market.
Sell limit orders are placed above the market.
Ann invests $15,000 in a non-qualified annuity. At age 64, she withdraws all $22,000. What’s Ann’s basis; what’s taxed?
Her basis is $15,000 since the annuity is funded after-tax and the $7,000 of earnings would be taxed as ordinary income.
What business structure does not provide for flow-through tax treatment?
C Corporations
In a qualified annuity, how is the payout taxed?
The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.
An investor holds 1 XYZ January 80 Put at 5. What is her strategy?
Bearish (to find strategy for put buyers, use the phrase PUT DOWN)
Define an estate.
The total of all assets and liabilities of a decedent
Income and estate tax are examples of a ___________ or __________ tax.
Income and estate tax are examples of a progressive or graduated tax.
True or False: Investors sell covered options in order to generate income.
True. By selling the option, the seller is immediately credited with the premium.
Income and estate tax are examples of a progressive or graduated tax.
Progressive Tax
When a limited partnership’s assets are sold for a capital gain, the gain is taxed when ________, not when ___________.
When a limited partnership’s assets are sold for a capital gain, the gain is taxed when realized, not when distributed.
How are withdrawals from Roth IRAs treated for tax purposes?
Withdrawals are tax-free if the account is open for at least five years and is not considered an early withdrawal.
Describe the tax treatment of contributions made to a 529 Plan.
They are after-tax contributions that may possibly grow tax-free.
Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____ ______.
Stop and stop-limit orders are triggered when a round lot trades at, or through, the stop price.
A limited partnership could be formed by a minimum of how many individuals?
Two (one general partner and one limited partner)
What may be done if an investor has realized net capital losses in a tax year?
Deduct up to $3,000 of the losses against ordinary income and carry forward the remainder to the next tax year.
A _______-based index measures the movement of a particular sector or industry.
A narrow-based index measures the movement of a particular sector or industry.
List some of the common financial goals.
Income, growth, preservation of capital, liquidity, tax relief, and speculation
If a corporation executes a stock split, is there a resulting gain or loss for existing stockholders?
No, the overall position stays the same. Forward = more shares at lower price; Reverse = fewer shares at higher price.
What is the balance sheet equation?
Assets = Liabilities + Shareholders’ Equity
An investor buys an OEX May 475 call at 10. What is his strategy?
Bullish on the S&P 100 Index
____________ stock is stock that was issued and repurchased by the issuing corporation.
Treasury stock is stock that was issued and repurchased by the issuing corporation.
True or False: S-Corporations may have foreign residents as owners.
False. All owners of an S-Corporation must be U.S. citizens or resident aliens.
Retirement goals, future college tuition, and remaining mortgage payments are examples of _______ needs.
Retirement goals, future college tuition, and remaining mortgage payments are examples of capital needs.
Progressive taxes are also referred to as ____________ taxes.
Progressive taxes are also referred to as graduated taxes.
What does the Partnership Agreement define?
The rights, liabilities, and obligations of each partner
Name some examples of a progressive tax?
Federal income tax, estate tax, gift tax
In calculating an IA’s net worth, what assets are NOT included?
Homes, home furnishings, automoblies, goodwill, and pre-paid expenses are not included.
When may American-Style options be exercised?
On any business day up to the expiration date
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
Regarding clients, list some of the non-financial considerations an IAR must consider?
Age, occupation, time horizon, investment experience, and social values
What corporate structure provides flow-through tax treatment and has a P&L reported on the owner’s personal tax return?
An S Corporation
The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________
The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)
Who is eligible for a 457 plan?
Employees of state and local governments
When investing for an estate, the most suitable investments are normally _______-term.
When investing for an estate, the most suitable investments are normally short-term.
Prior to selling a DPP, passive losses can only be used as deductions against ____________________.
Prior to selling a DPP, passive losses can only be used as deductions against passive income.
If an investor is short stock, a buy stop order can be used to limit _________ risk.
If an investor is short stock, a buy stop order can be used to limit upside risk.
An investor buys 100 shares of IBM at 91 and also 1 IBM Nov 90 put at 2. Is the investor bullish or bearish on IBM?
Bullish since they are long the stock. The put is purchased to protect downside risk.
What is the tax consequence for an investor who receives a stock dividend?
Her cost basis must be adjusted.
True or False: When managing assets in a trust, the trustee should consider the grantor’s tax status.
False. Generally, the trustee should act in the best interests of the beneficiary, not the grantor.
Where may quotes for non-Nasdaq (OTC) stocks be found?
Pink Market
Under Regulation T, does the payment date requirement apply to cash or to margin accounts?
Both. Payment is due within three business days for a cash account (100% payment) and a margin account (50% payment).
What is the advantage existing stockholders receive through rights offerings?
The ability to maintain their percentage of ownership and buy additional shares at a discount.
Existing stockholders receive ______ right for every one share owned.
Existing stockholders receive one right for every one share owned.
If long stock, a put option can be used to limit ___________ risk.
If long stock, a put option can be used to limit downside risk.
What document is filed with the state of legal domicile to create a partnership?
Certificate of Limited Partnership
True or False: Forward contracts are exchange traded.
False. Futures, not forwards, trade on the exchanges.
S&P /Fitch
Moody’s Grades Rating
Future Value Formula
Compounding Increases Investment for Future Value
Present Value Formula
Discounting is used to determine present value
Present Value of a Perpetuity
Payment in Perpetuity / Discount Rate
(PV of Perpetuity = Payment / Dis. Rate)
For each child $1,000 /month x 12 /months x 3 children = $36,000 / 3% = $1,200,000
An investor writes an uncovered RST May 25 put for a premium of 4. When RST is at 16, the put option
is exercised. If the stock is immediately sold at the current market price, what is the investor’s profit
or loss?
A. $500 loss
B. $500 profit
C. $900 loss
D. $900 profit
CORRECT ANSWER A
If the stock is put to the writer, he would be required to buy the stock for $2,500. His cost basis for tax
purposes would be $2,100 ($2,500 strike price - $400 premium received). Since he then sold the stock for
$1,600, he would have a net $500 loss ($2,100 - $1,600).
