66 Deck 1.0 Flashcards

Question

Which of the following best describes the death benefit provision of a variable annuity? A)Upon death, the proceeds pass to the beneficiary free of federal income tax. B)if death should occur prior to age 59½, the 10% early withdrawal penalty does not apply. C)Upon death, the beneficiary has a choice of settlement options. D)The principal amount at death is the greater of the total of premium payments or the current market value.

Answer 1

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

Answer 2

1; This is the basic definition of discounted cash flow, a useful tool in determining the value of debt securities. The discount rate used is based on that estimate of future inflation (which impacts interest rates). Using this tool, we arrive at the estimated present value (PV) of the security. Once we know the PV we compare that to the actual market value to arrive at the net present value (NPV). The dividend discount model is only used with securities that pay dividends; debt securities pay interest. In the case of yield to maturity, rather than an estimated discount rate, the actual coupon rate is used.

Answer 3

3; The Statement of Policy determines whether the trading is excessive by evaluating the client's investment objectives, financial resources, and the character of the client's account. While such trading activity is not suitable for everyone, there are some clients for whom such activity would be suitable. Having client approval for each trade does not necessarily eliminate the requirement to only make suitable recommendations, nor does it excuse excessive trading. A security may be a suitable purchase for a client, but not be suitable for rapid trading. To be sure, there is a greater likelihood of a churning case when the client has lost money, but there have been many cases where even when a profit has been made, churning has been the verdict.

Answer 4

3; One of the reasons why few large businesses are organized as sole proprietorships is the fact that all personal assets, not just those of the business, are placed at risk if the business fails. In each of the other choices, the maximum potential loss is the amount of the investment.

Answer 5

3; This is the basic definition of a market maker. Specialists perform essentially the same service on the listed exchanges.

Answer 6

1; Some variable annuity separate accounts have 50 or more subaccounts to choose from. There are no guarantees as far as the amount of payout.

Answer 7

3; A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.

Answer 8

2; The agent acted lawfully in all cases because there does not appear to be any conflict of interest.

Answer 9

4; The discounted cash flow method is just a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices. The discount rate here is the current market rate of 7%. Because this investor’s debenture is paying at a rate of 6%, its cash flow is less valuable than a 7% bond; therefore, it will sell at a discount (below par).

Answer 10

2; All decisions are ultimately up to the client, but there is nothing wrong with the IAR attempting to educate the client, especially when it could lead to greater investment success.

Answer 11

2; When describing an asset class, we are not looking at a specific security. IBM common stock is considered as an equity security—it is not an asset class by itself. Brady bonds are considered a debt security, but not an asset class. Brady bonds are issued by a developing country as a result of a restructuring of its defaulted bank debt. They are government obligations issued after the debtor nation negotiates with the creditor banks’ advisory committee to restructure loans that are no longer performing. The creditor banks exchange the nonperforming loans for various Brady bonds offered by the debtor government.

Answer 12

2; Preservation of capital is almost always a sign that the client needs CDs. Sure, the U.S. Government bonds will pay back the principal when due, but, with long-term maturities, there will be plenty of interest rate risk that could affect the client if he needs the capital prior to maturity.

Answer 13

1; When a bond can be purchased for less than its present value, it has a positive net present value (NPV). For example, if the present value of a bond is $600 and it can be purchased for $565, it has an NPV of $35 and should be an attractive investment. Every bond selling at a discount has a market price that is less than its future value (par), so that doesn’t tell us anything about its NPV.

Answer 14

3; A Roth IRA may be opened by anyone with earned income as long as the individual falls within the earnings limits imposed by Congress.

Answer 15

4; Among its exemptions, the Investment Advisers Act of 1940 grants an exemption from registration for those investment advisers whose only clients are insurance companies. The de minimis requirement only applies to foreign advisers.

Answer 16

3; When one's registration has been revoked by another state's Administrator, any other Administrator will deny registration in their state. The securities-related violation occurred more than 10 years ago, and the misdemeanor is only a problem if it is securities or money related.

Answer 17

1, 2, 3 & 4 (in that order); For a client seeking income, preferred stock, especially one that is cumulative, would likely be the most suitable of the choices given. Convertible preferred stock generally pays a lower dividend rate than other preferreds because of the attraction of the convertibility. Although there are some categories of common stock, e.g., utility stocks, that pay liberal dividends, unless specifically mentioned, you can assume that preferred stock dividends are higher than those for common stock of the same issuer. Warrants never provide any income.

Answer 18

2; With over $110 million in assets under management, Kapco is a federal covered adviser. In that case, the IAR is the one who notifies the Administrator of being terminated.

Answer 19

3& 4; A person who conducts business exclusively with banks and savings institutions is a broker-dealer under the USA if he has a place of business in the state. Had the person no place of business in the state and conducted business exclusively with banks and savings institutions, he would not be considered a broker-dealer subject to the regulatory control of the state Administrator. Under the NSMIA, any person excluded from the definition of investment adviser under the Investment Advisers Act of 1940 is considered a federal covered adviser. Therefore, regardless of the amount of money under management, the state has no jurisdiction. A federal covered adviser may be subject to payment of state filing fees. Broker-dealers who supply investment advice incidental to their business and receive no special compensation for it are not investment advisers.

Answer 20

1; A PO Box is never acceptable without a physical address.

Answer 21

2 & 3; The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and the securities firms who do the trading. While the Securities Act of 1933 covers requirements relating to new issues, the Securities Exchange Act of 1934 covers almost everything else in the securities industry. Its greatest impact is on the securities firms and the people who sell securities (i.e., broker-dealers and their agents) in the secondary market. Of the choices listed, new issues would be regulated by the Securities Act of 1933.

Answer 22

3; Because of the limited secondary market for life settlements, any firm that engages in these transactions should obtain several bids to ensure the customer receives a fair price for her policy.

Answer 23

2 & 3; The act prohibits reference to any formula, charting, or graphing device without disclosing the difficulties or limitations in their use. The number of years used is not required.

Answer 24

1; A security is registered by coordination when there is a simultaneous federal and state registration. Under normal circumstances, once the SEC has declared the registration effective, it is also effective in those states where the registration was coordinated.

Answer 25

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

Answer 26

2; Margin trading and selling short are techniques commonly found in hedge funds, rather than in open-end or closed-end management funds or ETFs.

Answer 27

2; A capital needs analysis attempts to determine money that would be needed in the event of an individual’s sudden passing. Included would be any outstanding debt obligations, regardless of when they are due (they will have to be paid off sometime). However, an asset, such as the 401(k), is not a need; it is something that will help meet the need.

Answer 28

2; The general consensus is that companies with a market capitalization between $300 million and $2 billion are considered small-cap. Less than that is micro-cap; larger is either mid-cap or large-cap.

Answer 29

4; Under the Investment Advisers Act of 1940, registrations become effective 45 days after filing, unless delayed by the SEC, and remain effective until withdrawn by the adviser or canceled, suspended, or revoked by the SEC. The SEC will cancel a registration if the adviser is no longer in existence or in the business. Although the ADV-W is the form for withdrawal, it becomes effective upon acceptance by the IARD, provided however that the investment adviser’s registration continues for a period of 60 days after acceptance solely for the purpose of commencing a proceeding regarding any violation of the Act.

Answer 30

1; The Investment Company Act of 1940 defines an interested person as someone employed by or has a material business relationship with the fund, its adviser, or underwriter. Someone who owns 5% or more of the outstanding shares (an affiliated person) is also considered "interested". Merely sitting on the board does not make someone an interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person.

Answer 31

1, 3 & 4; Transactions between an issuer and an underwriter, isolated nonissuer transactions (Mr. Jones), and unsolicited nonissuer transactions (SPGH) are exempt under the Uniform Securities Act. Transactions in federal covered securities (listed on national exchanges or the Nasdaq Stock Market) are transactions in an exempt security, but, because the sales are being made to individual clients, the transactions might not be exempt.

Answer 32

2; The UPIA is the legal guide for fiduciaries, who must act with skill and caution in the best interest of their clients.

Answer 33

4; The USA explicitly states that no provision of the act may be waived, whether the client consents to the waiver or not.

Answer 34

1 & 2; A website is considered advertising, and the Investment Advisers Act of 1940 requires that a file copy be maintained of all advertisements that will be seen by 10 or more persons. Whenever the site is changed, it is considered new advertisement copy and must be placed into the firm's advertising file. Advertisements are never filed with the SEC.

Answer 35

1 & 3; A money market instrument is a high-quality, short-term debt security with maturity of less than 1 year. American Depositary Receipts (ADRs) are equity, and corporate bonds are long-term debt instruments.

Answer 36

1, 2 3 & 4; The Uniform Securities Act exempts all of the securities listed from registration and disclosure requirements. Banks and common carriers are under the regulatory supervision of other government agencies.

Answer 37

3; The Administrator will require the filing of a consent to service of process with any securities registration. If required by the Administrator, notice filing is the procedure followed by federal covered securities. Any security may be registered by qualification, and coordination is the simultaneous registration with the SEC and the states.

Answer 38

3; Advisers must disclose to clients any outside interest or potential conflicts of interest involved in their recommendations or transactions for those clients. Failure to disclose additional compensation related to the advisory function would be considered fraudulent. If an advisory firm is also a broker-dealer and will enjoy transaction-related compensation if the advisory client acts on the adviser's recommendation, this must be disclosed in writing and the client must consent in writing. There is no requirement that an adviser disclose to its clients the number of its other clients. The adviser is required to disclose disciplinary actions taken by regulatory authorities, but not the absence of such actions. The adviser is not required to disclose its consistent transactions, but must make disclosure if its transactions are not consistent with the advice given.

Answer 39

4; Commissions can be received only by those with the appropriate registrations. A nonregistered person cannot participate in transaction-based compensation.

Answer 40

3; Most studies have indicated that seniors with insufficient retirement savings attempt to compensate by being tempted to reach for higher yields to maximize retirement income without full consideration of the increased risk that comes along with the possibility of higher returns.

Answer 41

4; Under both federal and state laws, appeals must be filed within 60 days of the order. In the case of an SEC hearing, the appeal is filed with the U.S. Court of Appeals for the district in which the original hearing was held.

Answer 42

1, 2 & 3; Administrators have the power to issue cease and desist orders, apply to a court for a temporary or permanent injunction, or apply to a court for restitution to investors or to have the court appoint a receiver for a violator's assets. In issuing the cease and desist order, the Administrator may do so with prior notice and hearing or may issue the order summarily (without such notice and hearing).

Answer 43

4; The only security that does not have reinvestment risk (the risk that periodic interest payments cannot be reinvested at the same yield as the bond providing the interest payments) is a zero-coupon bond such as Treasury STRIPS. With a zero-coupon bond, there are no periodic interest payments to reinvest, so a yield can be locked in. The interest rate that discounts the redemption price (par) to the discounted purchase price is the locked-in yield, which is the same as the internal rate of return, also referred to as the yield to maturity.

Answer 44

1 & 3; Exchange-traded notes are unsecured debt securities issued by financial institutions, such as banks. Their prices can be impacted by changes in the credit rating of the issuer, and they are not insured by the FDIC.

Answer 45

3; An example of what the regulators have determined to be a recommendation would be if a broker-dealer provides a portfolio analysis tool that allows a customer to indicate an investment goal and input personalized information such as age, financial condition, and risk tolerance. The broker-dealer then sends the customer a list of specific securi¬ties the customer could buy or sell to meet the investment goal the customer has indicated.

Answer 46

4; The Securities Exchange Act of 1934 empowered the Federal Reserve Board (FRB) to set margin requirements and regulate the use of credit to purchase securities. The FRB determines what issues may be purchased on margin and what percentage of the purchase price must be deposited by the purchaser.

Answer 47

1; Discounted cash flow evaluates the expected cash flow from an investment and then factors in the time value of money. Obviously, if there is no predictable cash flow (as there is with the interest payments on a bond), there are no reliable numbers to plug into the formula.

Answer 48

1 & 2; Any state or Canadian province, or political subdivision thereof, is considered an exempt issuer. Foreign governments with whom the United States has diplomatic relations, but not their political subdivisions, are considered exempt issuers. SEC-registered investment companies are non-exempt issuers under the USA. That is, the act does not include them in the list of exempt issuers. However, under the NSMIA, they are federal covered securities and, as such, do not register with the states other than filing a notice. All the more so, hedge funds that are NOT registered with the SEC would not be exempt issuers.

Answer 49

2 & 4; Under the USA, when a security is registered, the registration is valid for one year after the effective date. However, the act provides that if the issuer or underwriter still has unsold shares from the offering, the effective date may be extended so this is a more accurate choice. The act also allows the registration statement to be amended to allow for an increase in the number of shares to be offered as long as the public offering price and the underwriter’s compensation is not changed.

Answer 50

all of them; None of the above are included in the term "investment adviser" as used in the Uniform Securities Act. Federal covered advisers are regulated by the Securities Exchange Commission (SEC). The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits dual registration of investment advisers by federal and state authorities. If federal covered advisers were defined as investment advisers under the USA, then they would be subject to the same state registration procedures as local or state investment advisers.

Answer 51

4; When an account is opened as tenants in common (TIC), upon the death of one of the cotenants, that individual’s share now becomes part of the deceased’s estate. It might be that Agatha or Sally’s spouse are beneficiaries named in Sally’s will, but we don’t know that

Answer 52

2; Flow-through is the term commonly used to describe that any income or loss generated by a direct participation program “flows through” to the owner(s). In the case of a REIT, the only thing that passes through is income or gains, never losses.

Answer 53

4; Although not illegal, it is generally considered inappropriate to include tax-exempt securities, such as municipal bonds (whether individual bonds or in a fund), in a tax-deferred retirement plan.

Answer 54

4; One of the characteristics of interactive content, as opposed to static content, is that persons other than the original author may make comments.

Answer 55

4; While current income and cash flow requirements are ordinarily important considerations, in this question we are being asked about the investment of a lump sum, not periodic additional investments. The amount of income required will determine the types of investments and how they must be structured in order to achieve the retirement income desired. The client's age is necessary to determine the time horizon. That is, if the client is currently 35 and wishes to retire at age 50, the money will have to last a lot longer than if we are dealing with a 55-year-old who wishes to retire in 15 years at 70. A client's tolerance toward risk is among the most important non-financial considerations in determining investment suitability.

Answer 56

4; Under no circumstances can an investment adviser avoid fiduciary responsibility.

Answer 57

1 & 4; Fiduciary transactions and unsolicited orders, regardless of the security being purchased or sold, are always exempt transactions under the USA. Preorganization certificates are limited to a maximum of 10 subscribers, whether individuals or institutions. A gift of securities is not a sale, so no transaction has taken place.

Answer 58

4; Among the list of exempt transactions are sales made by a sheriff or marshal. It is possible that the attorney could be acting in the role of a fiduciary and, if so, the transaction would be exempt. From a test-taking standpoint, if you have to read something into an answer to make it correct, as we just did with the attorney, don't do it; go for the straightforward choice.

Answer 59

2; 100 shares sold for $120 per share that were purchased for $100 per share results in a capital gain of $2,000. Because the holding period did not exceed one year, the gain is considered short-term for tax purposes.

Answer 60

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

Answer 61

1; Laura Smith, as an employee of AAA Investment Advisers, Inc., must register in the state as an investment adviser representative. As the sole owner of a financial planning practice and an investment advisory proprietorship, Laura must register as an investment adviser representative of her investment advisory firm. Please note that registration of the investment adviser entity automatically registers officers, partners, and so forth, as IARs. When Laura functions as a sales agent for a broker-dealer, she must register as an agent, not an investment adviser representative.

Answer 62

2 & 3; There is no requirement that advisory contracts be renewed on an annual basis. Contracts can be written for any length agreed upon. Advisory contracts must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated and must prohibit assignment without the client's consent.

Answer 63

2; The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same.

Answer 64

3; The advantage of term life is that it provides large amounts of protection for a relatively low premium for those under ages 45-50. On the basis of the information given, the 35-year-old physician with three children would appear to have the greatest income replacement needs in the event of premature death. Although it is possible that the spouse of the corporate executive might need extensive life insurance for estate purposes, that need might not arise for many years and, at age 60, term insurance starts to get very expensive.

Answer 65

3; Every investment adviser registered or required to be registered under the act must make and keep true, accurate, and current a file containing a copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication, including by electronic media, that the investment adviser circulates or distributes, directly or indirectly, to 2 or more persons (other than persons connected with the investment adviser).

Answer 66

3; Credit risk is the risk of default, found only with debt instruments. Although debentures are issued strictly on the issuer's credit rating, they have the advantage over any zero-coupon bond in that interest payments begin approximately six months after issuance while in a zero-coupon bond, nothing is paid until maturity date.

Answer 67

4; Notice filing is the procedure by which federal covered securities, most commonly registered investment company securities, receive clearance for their securities to be sold in a specific state. No formal registration is required, but payment of fees and filing of certain documents may be.

Answer 68

4; Although a small-cap stock will generally possess a higher degree of business risk than a large-cap stock, business (unsystemic) risk is one that can be diversified away. Most analysts would agree that having all of your eggs in one basket, even a AAA rated company, leads to the highest business risk. Of course, there is no business risk in a Treasury bond, and up to $250,000 of bank CDs is insured by the FDIC

Answer 69

4; A discounted cash flow (DCF) technique is one that takes into account the time value of money. Holding period return (HPR) is the total of the income cash flows and capital growth earned by an investment during the period for which it is held. It does not take into account the time value of money. Both net present value (NPV) and internal rate of return (IRR) take the time value of money into account.

Answer 70

4; State securities Administrators are not registered with the SEC, but the SEC requires securities issuers, transfer agents, securities information processors, as well as major stock exchanges, and the Nasdaq Stock Market to be registered.

Answer 71

2, 3 & 4; In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees.

Answer 72

4; Neither Karen nor Jack provides investment advice, and futures contracts are not securities. In Ellen's case, there is no compensation for the investment advice. Harry is a person providing investment advice as part of a regular business for compensation, which is the definition of investment adviser. The fact that investment advice is a minor part of that business is irrelevant.

Answer 73

2; The statute of limitations for civil cases is 2 years after discovery or 3 years after the event, whichever is sooner. The death of neither the adviser nor the client removes a cause of action for civil liability, and clients may not waive an adviser's compliance with the rules.

Answer 74

1; The statute of limitations for civil cases is 2 years after discovery or 3 years after the event, whichever is sooner. The death of neither the adviser nor the client removes a cause of action for civil liability, and clients may not waive an adviser's compliance with the rules.

Answer 75

1, 2 & 3; With a long time horizon before retirement, equity securities such as common stock would offer the highest potential return and cash would be least suitable. Given purchasing power risk, bonds would not provide the returns associated with common stock.

Answer 76

1 & 4; Mere verbal assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A PO Box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver's license or passport.

Answer 77

Registered investment companies are similar to other publicly registered entities in that an annual audited report must be filed with the SEC.

Answer 78

1; It is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent.

Answer 79

2 & 4; CAPM is built on the theory that investors must receive a return commensurate with the amount of risk taken over a specified period of time.

Answer 80

4; Agents of broker-dealers are in the business of securities-related transactions on behalf of clients of the firm. A free market report is not a security, so this individual is not soliciting securities business.

Answer 81

4; This is the basic definition of the Monte Carlo simulation.

Answer 82

3; Under the Investment Advisers Act of 1940, lawyers, accountants, teachers, and engineers (LATE) giving investment advice that is incidental to their professions are not considered investment advisers. If they receive a fee for the advice, hold themselves out to the public as doing so, or offer excessive advice that is no longer incidental to their practice (as 30% of the practice would indicate), they lose this exclusion and must register as investment advisers.

Answer 83

1; Even though municipal bond interest is reported on line 8b of the 1040, it is specifically not included in AGI. Paying alimony is a deduction, while receiving it is considered income. Qualifying dividends merely means the tax rate is limited to a maximum of 15% (except for very high income earners - not tested).

Answer 84

2; A federal covered investment adviser refers to a natural person or firm registered under the Investment Advisers Act of 1940 or excluded from the definition of investment adviser under that act. A person registered under the Investment Advisers Act of 1940 is exempt from state registration or licensing requirements of state securities Administrators under the Uniform Securities Act. Federal covered investment advisers are not exempt from the antifraud provisions of the USA. Investment advisers, whether state or federal registered, do not register with NASAA.

Answer 85

1; SEC Commissioners may have no other business or employment other than their commission seat. They must also refrain from any securities trading other than in securities issued (or guaranteed) by the U.S. government. However, experience as an attorney is not a qualification. Commissioners are not elected but are appointed by the president and confirmed by the senate. Political party affiliation is a consideration, since no more than 3 of the 5 Commissioners may belong to the same party.

Answer 86

2; Prior to allowing associated persons to use social media for business purposes, a firm’s policies and procedures must provide for personnel training and education relating to the parameters of permitted use. Both supervisory personnel and agents need to understand the difference between interactive and static content, between business and nonbusiness communications. A firm should consider requiring training in the use of social media prior to permitting use. At a minimum, a firm that permits use of social media sites must hold annual training as part of its continuing education obligations.

Answer 87

2; A limited partnership with him as general partner would allow for additional investment capital without giving up management control. C corporations do not allow deductibility of losses; S corporations do not allow guaranteed debt to be included in the taxpayer's basis. General partnerships could allow the other partners to more easily control the day-to-day operations than a limited partnership, in which the other investors (presumably limited partners) would not be permitted to take a role in the running of the business.

Answer 88

4; The USA explicitly states that no provision of the act may be waived, whether the client consents to the waiver or not.

Answer 89

2; A certified financial planner selling NYSE-listed securities to numerous individual clients, regardless of their net worth, might be engaged in a nonexempt transaction, not an exempt transaction. This would not be true if the financial planner's clients were all financial institutions rather than individuals. Transactions by an administrator and an executor are exempt transactions, as are unsolicited nonissuer transactions. When securities that have been pledged as collateral for a loan, if that loan goes into default, the liquidation of that collateral is an exempt transaction.

Answer 90

4; The most appropriate vehicle for the emergency fund is the money market mutual fund because of its safety and high degree of liquidity. A money market mutual fund does not have a fixed rate of return. A common stock fund is too volatile and not appropriate for an emergency fund. A bond fund is subject to market volatility

Answer 91

1, 2 & 3; The adviser must send clients quarterly, itemized statements listing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. Unless using a qualified custodian, the adviser must deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held. The adviser must also arrange for an annual, surprise audit by an independent public accountant of client funds and securities. The adviser must notify the Administrator that the adviser has or may have custody of client securities or funds.

Answer 92

3; Lawyers, accountants, engineers, teachers, and broker-dealers who do not charge a separate fee for investment-related advice, when such advice is solely incidental to the practice of their profession, are excluded from the definition.

Answer 93

1; Under the Dodd-Frank Bill, investment advisers with less than $100 million in assets under management must register with the states. If the adviser manages a registered investment company, the adviser must be federal covered. If the person serves as a pension consultant with $200 million or more in AUM, the person has the option of registering with the SEC. A person whose sole advice deals with U.S. government securities is excluded from the federal definition of investment adviser and, therefore, under the NSMIA, is considered a federal covered adviser.

Answer 94

1; Unless an exception is granted by the Administrator, it is prohibited for an agent to share commissions with any person not also registered as an agent for the same or affiliated broker-dealer.

Answer 95

3; Loss of a civil lawsuit, lack of experience, or being registered as an investment adviser does not cause statutory disqualification to be associated with a member of a self-regulatory organization such as FINRA. However, administrative sanctions, findings of criminal wrongdoing, court injunctions, etc., are cause for statutory disqualification.

Answer 96

2; Court ordered alimony is taxable to the payee (and tax deductible to the payor). Therefore, receiving it is considered compensation for purposes of an IRA contribution

Answer 97

4; Contributions to a Keogh must be based on self-employment income.

Answer 98

2; Even when the IAR is convinced that the optimal recommendations have been made, the final decision is always that of the client. However, there is nothing in the laws or policies dealing with ethical conduct that prohibit the IAR from attempting to "sell" the client, especially through an educational approach.

Answer 99

1; At least annually, and sometimes more frequently, a portfolio manager who follows strategic asset allocation will examine the relative proportion of the selected asset classes and, based on market performance, rebalance the portfolio to bring it back to its ideal. Active (also called tactical) asset allocation attempts to time the market and doesn’t pay the same amount of attention to proportionate holdings as does strategic asset allocation. By its very nature, buy and hold can go years without a portfolio change.

Answer 100

1 & 3; Unlike a C corporation, operating income or losses of a partnership flow through directly to the partners. There are several easy ways to dissolve a partnership. However, they do not offer the limited liability protection of a corporation. The corporate form of business is generally the most suitable for raising additional capital.

Answer 101

2; If a client insists that a trade be done, then the agent should execute it. The firm may choose to protect itself by having the customer sign a nonsolicitation letter before effecting the trade.

Answer 102

1; A written agreement between the registered investment adviser and the solicitor must contain the name of the solicitor, the name of the investment adviser, the nature of the relationship, and the affiliation between the two parties. A statement that the solicitor is compensated for solicitation services, the terms of the compensation arrangement, and any amount the client will be charged, in addition to the advisory fee used to cover the costs of soliciting his account, must be disclosed to clients.

Answer 103

``` 2; The CML provides an expected return for a portfolio based on the expected return of the market, the risk-free rate of return, and the standard deviation of the portfolio in relation to the standard deviation of the market. The equation for the CML uses the •expected return of the portfolio •risk-free rate •return on the market •standard deviation of the market •standard deviation of the portfolio ```

Answer 104

2; In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the third year of coverage.

Answer 105

1; When a variable life insurance policy is surrendered, any cash value received in excess of the premiums paid into the policy is taxed as ordinary income. There is never a tax liability on money received as a result of a loan and if there is a partial withdrawal of funds, taxation is on a FIFO basis (unlike LIFO of variable annuities). The death benefit, at least for exam purposes, is always income tax free.

Answer 106

4; The death benefit must be calculated annually and the cash value monthly.

Answer 107

4; Alpha is obtained by comparing how a security actual performed to the performance one would have expected based upon its beta. A beta of 1.0 is used to indicate the expected volatility of the overall market. Because Security C has a beta of 1.0, its 13% return matches that of the “market”. With a beta of .8, one would expect Security L to produce a lower return, but how much lower? Its return should be 80% of the “market” or, in this case, 80% of 13% which computes to 10.4%. However, its actual return fell short of that by 0.3% giving it a negative alpha of 0.3. Had its actual return been 10.7%, it would have had a 0.3 positive alpha. Although this question doesn’t ask it, based upon the criteria given, the IAR would have selected Security C.

Answer 108

2; Under the NSMIA, state Administrators are not prohibited from enforcing the antifraud provisions of state and federal securities laws. Investment companies and SEC-registered advisers are exempt from state registration but they may be required to pay state filing fees.

Answer 109

2; Agents may accept unsolicited orders from clients, institutional or not, in unregistered nonexempt securities. If the transaction is with an institutional client, it can be solicited. In the case of unsolicited orders, the Administrator may demand written acknowledgement from the client that, in fact, the order was unsolicited.

Answer 110

1; Under state law, a private placement can be offered to no more than 10 noninstitutional investors in 12 consecutive months.

Answer 111

4; Under MPT, an efficient portfolio is one that manages risk to provide the optimum return. That is, for any given amount of return, the portfolio achieves that return with the lowest possible risk. Conversely, it can be stated that you receive the highest possible return with the lowest possible risk. Analysts using MPT are seeking a high Sharpe ratio.

Answer 112

2 & 3; An asset is something that is owned. Jewelry is part of the family's assets, as is the value of any retirement plan. A loan is a liability (the car is the asset), and salary represents income.

Answer 113

4; Most loans from a 401(k) plan are required to be repaid within 5 years. This rule does not apply to loans taken for a home purchase.

Answer 114

2; Under state law, the publication of investment advice that does not provide advice based on the specific investment situation of each client excludes the publisher from the definition of an investment adviser. The investment adviser representatives of a federal registered adviser are required to register in Feach state in which they have a place of business. The act provides a de minimis standard exemption from state registration for advisers who have no place of business in a state and have fewer than six clients resident in that state. A person employed and supervised by an investment adviser who is not an investment adviser representative with natural person clients and whose work is confined to clerical or administrative functions is not required to register with state Administrators.

Answer 115

4; Although state law may allow for periods longer than 24 months, federal law requires a two-year conversion privilege.

Answer 116

4; Investing the same amount at regular intervals is the formula method of investing known as dollar cost averaging. It ensures that more shares are purchased when the price is low and fewer when the price is high; thus resulting in a lower average cost per share than average price paid per trade.

Answer 117

2; Alpha is the extent to which a security’s performance exceeds (or falls short of) what would be expected based on its beta. A stock with a beta of 1.4 would be expected to perform 40% better in an up market than one with a beta of 1.0. Because XYZ with a beta of 1.0 gained 12%, ABC should return 140% of that or 16.8% (12% x 1.4). With an actual return of 18.8%, ABC beat the expected by 2% and that is its alpha.

Answer 118

1; Tenure in the job can be an important consideration when evaluating and comparing mutual funds. All funds must redeem in 7 days, and no fund can levy a sale charge on reinvested capital gains.

Answer 119

3; In almost all circumstances, certainly for short-to-immediate time periods, term life will be the least expensive form of insurance. A 20-pay life is a permanent policy where the premiums are paid in a 20-year period rather than until death. Variable annuities are not life insurance policies even though they are issued by life insurance companies.

Answer 120

1; While some states make exceptions for filings late in the year, under the USA there is no pro-rating of filing fees. The full year's fee must be paid with the initial registration request

Answer 121

4; Injunctions may only be issued by a court of competent jurisdiction.

Answer 122

2; In the case of a sole proprietorship, the owner reports any income on his personal Form 1040, Schedule C. The other entities do not pay tax themselves - any income flows through to the members (LLC), stockholders (S corp) and partners (ltd. Partnership).

Answer 123

1; The common requirements are to pay filing fees, post a surety bond, and consent to service of process for all three of these designations. For broker-dealers and state-registered investment advisers, an additional net capital or net worth requirement has to be met.

Answer 124

2; The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification to the President of the United States and may summarily suspend securities trading in a registered security that is listed on a stock exchange for up to ten days if it believes such action to be in the public interest.

Answer 125

1; Because the report has been published, the analyst's assessment of the stock is already public information. Thus, the analyst may recommend the stock to clients and prospects. However, the analyst must disclose whether he or his firm holds a position in the stock.

Answer 126

1; The Uniform Securities Act specifically exempts transactions between an issuer and an underwriter. There is no exemption for investment clubs or transactions that result in a loss. Rule 501 defines an accredited investor, but, when an individual (as mentioned here), there is no exemption as there would be with an institution.

Answer 127

2; Since these types of compensation agreements may only be entered into with clients meeting minimum financial standards, the SEC assumes that clients understand the increased risks they are being exposed to. The minimum net worth requirement is $2.1 million, or a client is qualified if he has at least $1 million under management with the adviser. Any performance fee must take into consideration gains and losses, both realized and unrealized, and the performance period must be no less than one year. Please note - state covered investment advisers must make this "incentive" disclosure so if the question asked about them, there would be no exception.

Answer 128

2; This investment has quadrupled in 10 years. Using the Rule of 72, we know how to compute the rate of return when an investment doubles. This one has doubled every 5 years. Dividing 72 by 5 years gives us an approximate rate of 14.4%.

Answer 129

4; Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $.50 (one quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for three months - one quarter. Multiply that by 4 to get the annual rate.

Answer 130

Institutional investors include banks, insurance and investment companies, and employee benefit plans. Although each of these is included in the term accredited investor, that term, as used in federal law (the term is not found in the USA), also includes certain individuals, and they would never be considered institutional investors under the USA.

Answer 131

A sales assistant who takes orders on behalf of agents in a branch office is required to register under the Uniform Securities Act. An administrative assistant who provides securities quotes to clients is not functioning as an agent and need not register. An individual who sells securities of an issuer to the issuer's employees without earning a commission need not register under the terms of the USA. Remember, a broker-dealer is excluded from the definition of an agent under the USA.

Answer 132

Most would agree that with a regularly scheduled commitment for tuition and other expenses associated with a college education, there is a need for not only income, but also (and perhaps more importantly) assurance that when the bills are due, the principal will not have fluctuated. That would be best accomplished through a laddered portfolio where each year there are T-notes maturing.

Answer 133

2 & 3; The NSMIA streamlined much of federal and state securities law and specifically prevented dual regulation. As a result, states may not impose capital, custody, and recordkeeping requirements that exceed requirements under federal securities law. States can register securities and investment advisers that are not covered by the registration requirements of federal legislation.

Answer 134

4; Those investment advisers registered with and regulated by the Securities and Exchange Commission (SEC) must adhere to SEC Rule 204-2 regarding the maintenance of records. The rule states the required records must be kept for five full years from the end of the fiscal year during which the last entry was made on the record. The first two years, records must be kept in the principal office of the adviser and the balance of the time, easily accessible. They are subject to SEC examination at any time.

Answer 135

1 & 2; If an investment adviser charges performance-based fees to qualified clients, the fees may be based on the accounts' actual performance relative to a benchmark such as the S&P 500 Index or the Russell 2000. The previous years' performance or the performance of other accounts is not a valid basis for the calculation of performance-based fees.

Answer 136

4; Part 2 of the Form ADV may be used to meet the IA's brochure delivery requirements.

Answer 137

1; The Administrator will require the filing of a consent to service of process with any securities registration. If required by the Administrator, notice filing is the procedure followed by federal covered securities. Any security may be registered by qualification, and coordination is the simultaneous registration with the SEC and the states.

Answer 138

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

Answer 139

4; In deposit terminology, the term demand deposit account, (sometimes referred to as DDA), refers to a type of account held at banks and financial institutions that may be withdrawn at any time by the customer. The majority of such demand deposit accounts are checking and savings accounts. With the immediate availability of funds, it is appropriate to look at these as short-term money and, as is usually the case, the shorter the length, the lower the return.

Answer 140

1; Hardship withdrawals are not permitted from IRAs. They are a feature permitted in 401(k) plans, but generally do not escape the 10% tax penalty.

Answer 141

4; Internal rate of return (IRR), is not a component of modern portfolio theory as are the other three terms.

Answer 142

1; It is not permissible to trade this account on a performance basis; the investment adviser representative must be paid on commission or through a fixed fee arrangement. Under the Investment Advisers Act of 1940, performance fees are allowed only for clients with a minimum of $1 million invested or a minimum net worth of $2.1 million.

Answer 143

all of them; Securities issued by nonprofit organizations, federal savings and loans, and the U.S. government (i.e., Treasury bills, Treasury bonds) are exempt from the registration requirements of the Uniform Securities Act. Unit investment trusts that are registered under the Investment Company Act of 1940, are federal covered securities and, therefore, are exempt.

Answer 144

4; To suspend all trading on an exchange, the SEC must first notify the President of the United States. The SEC may summarily suspend trading in any nonexempt security for up to 10 days without prior notice.

Answer 145

1; There are a number of funds that invest exclusively (or predominately) in the shares of companies domiciled (and traded) in a single country. Not all securities markets are as liquid as those in the U.S. and many countries have currency restrictions limiting the amount of money that may be taken out of the country at any one time. Therefore, organizing as a mutual fund is not very practical. With no need to redeem share, closed-end companies are the obvious solution.

Answer 146

1; The current discount rate represents market interest rates. At 3%, each of these bonds should sell at a premium (their coupon rates are higher than 3%). When a bond is paying interest at a rate higher than the current market rate, the longer the investor will be receiving that higher rate, the higher the premium. Therefore, the 5% bond with 25 years to maturity will have the highest present value using the DCF.

Answer 147

1 & 3; It is always easier to remember the things that are not a security-retirement plans, nonvariable insurance policies, collectibles, commodities, condominiums, and currencies.

Answer 148

2; The discounted cash flow, DCF, is used to assess the value of a fixed income security is by looking at the future expected free cash flow and discounting it to arrive at a present value. This is basically nothing more than taking the income payments you are scheduled to receive over a given future period and adjusting that for the time value of money.

Answer 149

2; As you know from being here right now, this test is required by the Administrator. What about the Idaho Administrator? Well, maybe the IARs are making 5 or fewer calls in any 12 month period. Maybe they are calling institutional clients domiciled in Idaho. In any event, if you have to choose between an answer that is 100% right all of the time (qualification exams), and one that is right only some of the time, go for the 100%.

Answer 150

2 & 3; The Administrator may deny, suspend, or revoke a registration for many reasons, but they must be in the interest of the public. The Administrator may determine that an applicant, in his initial application for registration for an investment adviser, is not qualified to act as an adviser and thus limit the registration to that of a broker-dealer. The Administrator can also take into consideration whether the registrant will work under the supervision of a registered investment adviser or broker-dealer when approving an application. Lack of experience is insufficient reason for denial.

Answer 151

3; This is just an example of the risk/reward philosophy. Taking payments for life only (which can end rather suddenly) exposes the annuitant to greater risk than period certain and joint payout so the rewards are higher.

Answer 152

4; All open-end investment companies sell at NAV plus sales charge (if any). Therefore, the asking price can never be less than the NAV. Closed-end company asking prices are determined by supply and demand, so their prices are independent of the fund’s NAV.

Answer 153

3; This is the method of computing holding period return.

Answer 154

4; A testamentary trust is one that is created in the grantor's will ("last will and testament") and that does not become effective until the grantor dies. A trust expressly created during the grantor's life is a living trust.

Answer 155

3; Solicited trades with individuals are not exempt transactions, even when the security being traded is exempt. Transactions between issuers and underwriters or between underwriters are exempt from registration and advertising filing requirements. A bona fide pledge of securities is not a transaction and this question is looking for a nonexempt transaction. Transactions with banks, savings and loan associations, and other financial institutions are exempt from registration and advertising filing requirements.

Answer 156

all of them; Every person who signed the registration statement is liable under the Securities Act of 1933. In addition, any director, whether or not that individual's signature is on the registration statement; the attorney; the accountant; and the underwriter. Among the required signatures is that of the CEO.

Answer 157

3; ERISA Section 404 (c) describes a safe harbor for 401(k) plan fiduciaries. Among the requirements is to provide at least three different investment alternatives with a range of risk and provide account access no less frequently than quarterly.

Answer 158

4; One of the distinguishing characteristics of the Roth IRA is that contributions may be continued past age 70 ½ as long as the participant has earned income.

Answer 159

3; Internal rate of return (IRR) is a discount rate at which the net present value (NPV) of an investment is equal to zero. IRR can be used to measure return on bonds because of their even cash flows and on those stocks that pay stable dividends for the same reason. IRR accounts for the time value of money. If the IRR is higher than the cost of borrowing to fund the investment, the investment should be profitable.

Answer 160

4; High quality dividend paying preferred stocks will give her a reasonable income without great risk. Options are not income vehicles and are not income producing. Municipal bonds are not generally appropriate for low income clients because there would be little after-tax benefits. Oil and gas programs are speculative and not appropriate.

Answer 161

1 & 4; Fiduciary transactions and unsolicited orders, regardless of the security being purchased or sold, are always exempt transactions under the USA. Preorganization certificates are limited to a maximum of 10 subscribers, whether individuals or institutions. A gift of securities is not a sale, so no transaction has taken place.

Answer 162

1 & 4; Fiduciary transactions and unsolicited orders, regardless of the security being purchased or sold, are always exempt transactions under the USA. Preorganization certificates are limited to a maximum of 10 subscribers, whether individuals or institutions. A gift of securities is not a sale, so no transaction has taken place.

Answer 163

2; Securities that do not require registration under the USA are exempt securities. Although the securities are exempt from registration, thereby making the solicitation permitted, the agent who makes the solicitation and the broker-dealer must be registered. An agent may not make an untrue statement of a material fact, omit a material fact, or deliberately fail to follow a customer's instructions.

Answer 164

1; With less than $25 million under management, Peterson Financial Planning is considered a “small” investment adviser and must register with the state. Advisers managing at least $25 million but less than $100 million are considered “mid-size” investment advisers and, unless qualifying for an exception, must also register with the state. Investment advisers with at least $100 million in AUM, but not as much as $110 million, may register with the SEC or remain with the state. Once $110 million is reached, SEC registration is mandatory.

Answer 165

1; The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital.

Answer 166

3; If a temporary or permanent injunction is issued against any securities professional, upon request of the Administrator, a receiver or conservator may be appointed over the defendant's assets. The Administrator cannot arrest, but can seek a warrant. In order to deny a registration, not only must it be in the public interest, but there must be some other issue, such as insolvency, incomplete application, etc. Although the maximum prison sentence under the USA is three years, it is the courts that do the sentencing, not the Administrator.

Answer 167

3; An adviser's recommendations to a client are not impacted by the degree of someone else's investment experience or knowledge. In this case, one could expect some resentment towards holding shares of a tobacco company when the cause of a loved one's death is lung cancer.

Answer 168

4; For a security to be sold, it must be exchanged for value. Fixed annuities and precious metals are not securities, so no security sale took place. Donating a security does not qualify as a sale.

Answer 169

4; The primary difference between strategic and tactical asset allocation comes down to the belief by those following the strategic style that it is not possible, over a long period of time, to beat the market.

Answer 170

2; Investment constraints are limitations on the ability to make use of particular investments. They can be liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances (ethical objectives or social responsibility considerations). The easiest way to determine if it is a constraint or a capital need is if a dollar amount is stated. When a specific sum is mentioned, it is a capital need. The education may be funded through a Section 529 Plan, and this may be part of the client’s IPS, but neither of those answers the question posed.

Answer 171

3; Annuities offer a guarantee of income that will last for a client's lifetime. The other statements, while true, represent disadvantages of annuitization. Annuitization does limit liquidity and flexibility.

Answer 172

4; The catch-up provision is for individuals who reach age 50 before the close of the taxable year. This provision allows these individuals to contribute an additional amount per year to a qualified retirement plan or IRA. A 529 plan is not a retirement plan.

Answer 173

2 & 3; An advertisement containing a formula for making investment decisions must also prominently disclose its limitations and the difficulty of using it.

Answer 174

3; As limited as Alice’s activity appears to be, this would be considered arranging for a securities transaction “away” from her broker-dealer. This would be permitted if Alice had received written authorization in advance from her employing broker-dealer.

Answer 175

3; The best choice is to have the customer contact a qualified attorney to set up a trust.

Answer 176

1 & 2; Because the offer was made from Illinois to a person in California, the state Administrators of both states have jurisdiction. The state from which payment was mailed and the state in which the checking account or money-market fund is based are irrelevant for the purpose of determining an Administrator's jurisdiction.

Answer 177

1; The current yield on a bond is calculated by dividing the annual interest payment by the current market price of the bond.

Answer 178

4; In the absence of any denial order or pending proceedings, registrations of federal covered investment advisers (and broker-dealers) will become effective on the 45th calendar day after the date of filing (the date received in the SEC's office). The SEC may specify an earlier date.

Answer 179

2; All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust's DNI.

Answer 180

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

Answer 181

4; The Insider Trading and Securities Fraud Enforcement Act of 1988 provides that the SEC may seek treble (triple) damages through the courts for violations of the insider trading rules. This means that the SEC may seek court action that imposes civil penalties of 3 times the profit gained or 3 times the loss avoided as a result of inside information.

Answer 182

3; An investment adviser need not register in a state if it has no place of business in the state and advises such institutional clients as insurance companies or banks. The number of clients is irrelevant as long as they all are of an institutional nature. Without exception, the USA requires an investment adviser to register in a state if it has a place of business in the state. With no place of business in the state, registration would not have been required regardless of the number of banks who were clients. With 5 or fewer noninstitutional clients, regardless of their net worth, no registration would be necessary under the de minimis provisions of the USA.

Answer 183

2 & 4; The 457 plan is a nonqualified deferred compensation plan for municipal employees as well as for independent contractors performing services for those entities.

Answer 184

1; Most advisers would agree that even when the employer's 401(k) plan permits retirees to continue to maintain their account, it is better for the client to move the assets to a self-directed IRA. Because of the immediate tax liability, it generally does not make sense to take a lump-sum distribution. Section 1035 exchanges are only allowable between insurance contracts.

Answer 185

1; Private placements involve the sale of nonexempt securities to investors without the need for registration. There is no numerical limit to the number of offers that may be made to institutional buyers. However, offers to noninstitutional buyers are limited to a maximum of ten in any 12-month period. Rights offerings are only exempt if there is no compensation, and only unsolicited orders are exempt transactions.

Answer 186

2; The agent should recommend that the Smiths open a joint account with right of survivorship and complete a transfer of death registration form. The joint tenancy account gives the Smiths joint ownership in the securities in the account. The surviving joint tenant immediately becomes the owner of the whole property upon the death of the other joint tenant (right of survivorship). The transfer upon death registration identifies the beneficiaries to receive the securities upon the death of the last joint tenant. Only individual and JTWROS accounts may be opened with a TOD provision.

Answer 187

3; Generally speaking, those bonds with the highest coupons have the shortest duration, therefore, are the least subject to interest rate risk. STRIPS, which are zero-coupon bonds, are the most volatile since they have the longest duration. The actual calculation of the duration of each of the other bonds given is beyond the scope of this exam.

Answer 188

all of them; Under the Uniform Securities Act, the basic rule is that an adviser cannot be compensated on the basis of a share of the capital gains or capital appreciation in a client's account. Although there are exceptions to the basic rule, the question does not address the exceptions. An adviser may be compensated based on the total value of a client's account averaged over a specific period. An adviser that is a partnership must notify its clients of changes in a minority of the partners within a reasonable period of time. If it is a majority or material change in partners, it is treated as an assignment and would require consent of the clients.

Answer 189

1; Because the sisters are married, it is most likely that, upon death, each would like their share to pass to their respective estates. Tenants-in-common provides that the deceased tenant's share passes to the estate and the remaining tenant is a co-tenant with the estate. Joint tenants with right of survivorship (JTWROS) provides that the entire account passes to the other tenant upon the death of one of the tenants.

Answer 190

3 & 4; Unless the question states that it relates to the exception for wealthy investors ($1 million under management of the adviser or $2.1 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted.

Answer 191

1 & 2; Under the Investment Advisers Act of 1940, the following are excluded from the definition of investment adviser: banks or bank holding companies; publishers of bona fide publications of general and regular circulation, such as newspapers and magazines; persons advising about government issues; and persons whose advice is incidental to their profession and for which they receive no separate compensation.

Answer 192

all of them; ABC Manufacturing Corp. is an issuer raising debt capital whereas Dot.Com, Inc., is an issuer raising equity capital. YYY Corp. is an issuer raising equity capital by selling additional new shares in a public primary offering. XYZ Corp. is an issuer despite its failure to sell any shares. The USA defines an issuer as a person that issues or proposes to issue a security. It is not necessary that an issuer actually issue the shares it proposes to issue.

Answer 193

2; This question is dealing with interest-rate (or money-rate) risk. That risk refers to the inverse relationship between the price of fixed-income investments and interest rates. That is, when interest rates go up, the price of fixed-income securities falls (and vice versa). However, this risk only affects investments that are marketable (those with a fluctuating market price). Bank CDs are non-negotiable (we’re not referring to the negotiable jumbo CDs with a maturity of 1 year or less) and, as a result, will not fluctuate in price, regardless of changes to interest rates. In this case, interest rate risk is eliminated. That is one of the reasons why the exam’s first choice for capital preservation is insured bank CDs. Will a laddered bond portfolio reduce interest rate risk? Yes, but it will not eliminate it. Is a convertible preferred (or bond) less subject to changes in interest rates than one without the conversion feature? Yes, but the risk is still there. Does a 30-year T-bond with 5 years remaining to maturity have a short duration and, therefore, a reduced interest rate risk? Yes, but the price of the bond will still be affected by changes in the market interest rates.

Answer 194

1; The USA specifically states in Section 303 that any security for which a registration statement has been filed under the Securities Act of 1933 in connection with the same offering may be registered by coordination. There are no net worth, operating history, or minimum number of market makers required.

Answer 195

2 & 3; When opening a new account, the agent normally would request information about the customer's financial condition, investment objectives, and other relevant personal information.

Answer 196

4; EIAs almost always come with a cap rate, a ceiling beyond which earnings cannot be credited to the investor’s account. There is, theoretically, no limit as to how much one could earn with a variable annuity. Both are issued by life insurance companies, and only the EIA offers a guaranteed floor (minimum return). Based on court rulings in effect at this time, the equity index annuity is not considered a security.

Answer 197

2 & 3; Under the USA, the Administrator can revoke any transaction exemption, except those involving federal covered securities. When it comes to revoking a security’s exemption, the only two where the Administrator has to power to do so are those issued by non-profit organizations and in connection with an employee benefit plan.

Answer 198

1, 2 & 3; The Administrator has jurisdiction from the state in which the offer was made, (ND), received, (WY), and accepted, (ID). Mailing of the certificate is of no consequence.

Answer 199

2; Investment constraints are obstacles or restrictions that must be met in order to meet objectives. In this case, we are dealing with a liquidity constraint—in 7 months, cash will be necessary to make the purchase.

Answer 200

2; An associated person of a broker-dealer includes any partner, branch manager, officer, or director of a broker-dealer, including outside directors. It also includes employees such as account executives or sales representatives who are not clerks or ministerial personnel, and anyone who controls, is controlled by, or is under common control with the broker-dealer. Being a client of a broker-dealer or owning shares of the firm's stock does not make one an associated person, unless something in the choice indicated that this ownership put Robert into a position of control.

Answer 201

4; One popular estate planning technique is to have life insurance owned by (and premiums paid by) someone other than the insured. In that case, proceeds are generally excluded from the gross estate of the deceased. If the trust was irrevocable, that same benefit might be achieved, but not with one that is revocable. There is an exclusion for income tax purposes on the sale of a primary residence, but that has nothing to do with the estate. Finally, when property is owned tenants in common, the percentage belonging to the deceased is part of the gross estate.

Answer 202

2; An agent of a broker-dealer must register with the state as an investment adviser representative to offer a wrap fee program to clients.

Answer 203

4; As a volunteer, the teacher is not in the business of providing investment advice and does not receive compensation for such advice. A person who places himself before the public through advertising as an investment adviser and who provides advice is an adviser. A person in the business of providing investment advice does not have to receive compensation directly from the beneficiary of the service to be considered an adviser.

Answer 204

3 & 4; One of the risks facing senior investors who are retired is that, unlike those still employed, loss of principal can be devastating. With today's medical advances, a 72 year-old can be looking at 15 to 20 additional years of life. Therefore, recommendations must be made to maximize the probability of the client's assets lasting that long. Effective with the Dodd-Frank Bill of 2010, this investor is no longer accredited because the value of the primary residence must be excluded from the net worth computation. And, even if he were, eligibility does not equal suitability.

Answer 205

1, 2 & 4; Under the USA, the registration exemption for bank-issued securities is justified by strict financial requirements imposed on banks by banking industry regulators such as the FDIC, the Comptroller of the Currency, and the Federal Reserve. Both federal and state banks and federal savings and loan associations are subject to such regulation. However, bank holding companies (as separate legal or corporate entities) are subject to state registration if not otherwise exempt. Thus, securities issued by bank holding companies are not exempt securities under the act.