S66-1

Question 0

What are 3 exemptions from registration that are available at the Uniform Securities Act, but not at the SEA of 1933?

Answer 0

Foreign government securities are exempt under the Uniform Securities act, but not the SEA of 1933
Federal covered securities listed on National exchanges are exempt under the Uniform Securities act, but not the SEA of 1933
Securities issued by Insurance co. are exempt under the Uniform Securities act, but not the SEA of 1933

Question 1

Securities that are exempt from registration are:

Answer 1

Security issued or guarranteed by the United States, any State or any political subdivision.
Any commercial paper with maturities no more than 270 days
Issued by not-for profit such as church, educational.
Any interest in Railroad equipment trust
Any security issued by a federal or state bank, savings and loan.

Question 2

Rule 147 issue is exempt at the federal level but will have to register at the state level. Why?

Answer 2

Is an issue of security that occurs within the state and the state alone. Offered exclusively to residents of the state.
At least 80% of the issuers gross revenues occur within the state
At least 80% of the proceeds of the offering will be used within the state.
At least 80% of the issuers assets are located within the state

Question 3

A registration statement may become effective when?

Answer 3

Not earlier than the 20 day cooling off period after the issuer files a registration statement with the SEC

Question 4

During the cooling off period, can sales be solicited?

Answer 4

No sales can be solicited during the cooling off period, but indications of interest can be solicited with a Red Herring.

Question 5

It is unlawful for a company to sell securities before the effective date of the registration statement. True or False

Answer 5

True

Question 6

Sec rule 482 is?

Answer 6

Omitting Prospectus rule is used by mutual fund advertisements where they must conform to several restrictions, including disclaimers

Question 7

Regulation D contains Sec rule 506

Answer 7

Provides exemption for offers and sales to no more than 35 purchasers ( unsophisticated investors) so long as they are represented ( lawyer, accountant, or financial adviser), and an unlimited amount of accredited investors. The law prohibits any general solicitation or general advertising.

Question 8

Accredited investors as to Rule 501 are:

Answer 8

Institutional investor (banks, BD, insurance co., investment co, investment advisers and employee benefit plans in excess of $5mm.) directors, executive officers and general partners of the issuer.  Individual with income in excess of $200,000 in two most recent years , with spouse $300,000.  Or net worth excluding residence in excess of $1mm. 
Entities made up of accredited investors.

Question 10

Exercising investment discretion requires the decision as to:

Answer 10

The security being purchased
The quantity being purchased
The type, wheather Buy or Sell
Written requirement does not normally include decision as to time and price.

Question 11

Schedule 13d filings

Answer 11

SEC requires the filing of reports (schedule 13D) within 10 days of becoming beneficial owner of more than 5% of a class of equity securities registered under the SEA of 1934

Question 12

Schedule 13f is used for what?

Answer 12

By institutional investors who manage $100mm or more on a discretionary basis to report quarterly within 45 days, significant holdings in their portfolios.

Question 13

What is shedule 13G used for?

Answer 13

It is the equivalent of filing 13D but from a passive investor that has no intention of influencing control of the issuer

Question 14

Insiders are required to file transaction reports under section 16(a) within how many days of an insider transaction?

Answer 14

Before the end of the second day following the day the transaction has been executed.

Question 15

Withdrawals from variable life policies are considered …

Answer 15

Partial withdrawals are considered return of Premium first (they were contributed after tax) and are Tax Free, and then taxable earnings. Deferred compensation
Loans against cash value are tax free

Question 16

Regulation D under Rule 503 an issuer must:

Answer 16

Must file Form D with the SEC no later than 15 days after the first sale.

Question 17

Registration by coordination would most likely be used by which one of the following issuers?

a. Mutual funds
b. An initial public offering
c. Nasdaq securities
d. Intrastate offerings

Answer 17

Under normal circumstances, the method of registration most often used by the new issuers of securities is registration by coordination. Mutual funds are federal covered securities. All listed securities, such as Nasdaq securities, are also federal covered and, therefore, exempt from registration with the states. Intrastate offerings are commonly registered by qualification. (62444)

Question 18

Which of the following securities is NOT considered exempt under the Uniform Securities Act?

a. Securities issued by an automobile company
b. Securities issued by a Canadian Province
c. Savings and loan association securities
d. Railroad trust certificates

Answer 18

Under the Uniform Securities Act, any security issued by Canada or a Canadian Province, or savings and loan association, or any railroad company is considered an exempt security. There is an exemption under the Act for common carriers but an automobile company does not qualify for this exemption. (62683)

Question 19

Which of the following statements is TRUE regarding the state securities Administrator?

a. The Administrator may issue an injunction against a registered agent of a broker-dealer
b. The Administrator may issue a cease-and-desist order to an agent of a broker-dealer without a hearing
c. For due cause, the Administrator, may enjoin, or legally block, an agent’s ability to conduct business in a particular state
d. The Administrator may arrest any registered employee of a broker-dealer

Answer 19

Under the Uniform Securities Act, the state Administrator does not have the authority to issue an injunction or an enjoining order, nor may the Administrator arrest anyone or send him to jail. These orders must come strictly from a judge or court of law. The Administrator may, however, issue a cease-and-desist order to an entity under its jurisdiction. (62474)

Question 20

Are professional sports managers advisors?

Answer 20

Yes, if they provide investment advice as part of their services according to SEC release 1092 which states that sports and entertainment representatives who provide investment advice to their clients are investment advisers and subject to the Investment Advisers Act.

Question 21

IA’s are to keep records of all transactions. The regulations state that this must be done within how many days of the close of the quarter?

Answer 21

10 days from the close of the quarter. Direct U.S. government obligations are excluded from this.

Question 22

The state administrator may deny registration to which type of securities?

Answer 22

Generally, states are not permitted to revoke an exemption that has been granted under the Securities Act of 1933. However, nonprofit securities, exchange-listed securities, and investment contracts for employee-benefits plans may be denied registration by the state Administrator.

Question 23

Tax sheltered annuities under section 403(b) of the IRS are available to whom?

Answer 23

Employees of public school systems and to employees of certain nonprofit organizations registered under IRS code 501(c)(3)

Question 24

What are other names for a Whole Life Insurance Policy?

Answer 24

Permanent Life
Ordinary Life
Straight Life

Question 25

Lower grade bonds or Junk Bonds start at what rating and below?

Answer 25

BB, Ba, or lower.

Investment Grade Bonds are (BBB, Baa, or higher)

Question 26

Which of the following persons can contribute to a 457 Plan?

a. A computer programmer who works for IBM
b. A public school teacher
c. A local government employee
d. All of the above, since these plans are entirely self-funded with no employer contribution

Answer 26

C.
A Section 457 is a type of retirement plan used by many public sector workers. These plans grow tax-deferred and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Series 66 students may encounter all three types on the examination. All have similar tax features and contribution allowances. The difference is in who may use them. 401(k) plans are used by for-profit employees, 403(b) plans by nonprofit and public school employees, while 457 plans are designed for the benefit of some local government workers.

Question 27

Contributions to a 401k or 403(b) plan are made on a pre-tax basis or post-tax basis?

Answer 27

Pre-tax basis

Question 28

Under the Uniform Securities Act, an Administrator may deny registration to an agent because of findings that indicate the agent had been convicted of a felony within the past:

Answer 28

10 years

Question 29

According to the Uniform Securities Act, the Administrator may require federal covered advisers to give notice or notice file in any state where they transact business with six or more individual retail clients

Answer 29

TRUE

Question 30

What method is most commonly used registration by an initial public offering?

Answer 30

Registration by coordination. Intrastate offerings are commonly registered by qualification

Question 31

Bert and Berti are both 60 years old and earned $150,000 jointly last year. They contribute to their 401(k) plans but would like to save more for their retirement. The most suitable type of plan for an IAR to recommend is a:

Answer 31

Roth IRA, in which each may contribute $6,500 per year

The maximum annual contribution to either a traditional or Roth IRA is $5,500, per individual. However, for people age 50 or older, the maximum annual contribution is $6,500. Bert and Berti’s gross income does not exceed Roth income eligibility requirements, so the Roth is typically a better choice compared to a traditional IRA, since withdrawals from a Roth are tax-free. With the traditional IRA, any earnings are taxed as ordinary income upon distribution, plus the contributions may be taxed if contributions were made on a pretax basis. Given the clients’ ages, income, and the tax-free withdrawals, the Roth is the better investment choice.

Question 32

Rule of 72. If an investment doubled in 5 years, what is the rate of return?

Answer 32

To determine the rate of return at which an investment would double in value, use the rule of 72. Divide 72 by the amount of years it took for the investment to double. i.e. 72/5 = 14.4%

Question 33

Rule of 72. If an investment earns 14.4% how long would it take to double?

Answer 33

To determine the time at which an investment would double in value, use the rule of 72. Divide 72 by the rate of return, it would result in the time it would take to double i.e. 72/14.4% = 5 years

Question 34

Under the Uniform Securities Act, in the absence of fraud, when must action be taken for recovery on a transaction made in violation of a state registration provision?

Answer 34

Within three years of occurrence and two years of discovery, whichever comes first.
If an agent unknowingly (without fraud) sells a security in violation of a state registration provision, her customer must take action for recovery within three years of the occurrence of the violation, or within two years of discovery of the violation, whichever comes first.

Question 35

Under which conditions of the USA act are investment advisers and IAR exempt from registration in a state?

Answer 35

Under the Uniform Securities Act, investment advisers and investment adviser representatives are exempt from registration in a state if they have no place of business in the state and all of their clients are institutional investors. Examples of institutional investors include broker-dealers, banks, insurance companies, qualified employee trusts, and other investment advisers. Remember, there is no registration exemption for advisers simply based on the fact that their clients are wealthy or have a high net worth.

Question 36

What is the regulations position on loans to IAR from clients?

Answer 36

Loans, even from family members who are clients are considered unethical.

Question 37

For an investment contract to be considered a security it has to pass a test referred to as a Howey Test which consists:

Answer 37

An investment of money
An expectation of Profits
A common enterprise
Efforts made by third party

Question 38

An advantage of a Coverdell ESA over a 529 plan is:

Answer 38

More educational options

The maximum annual contribution to a Coverdell ESA is $2,000. Contributions to a 529 plan are substantially higher. Although there is no annual limit on a 529 plan, contributions exceeding the annual gift limits of $14,000 per year may be subject to the payment of gift taxes. Lump-sum contributions of up to $70,000 over a five-year period are permitted by single individuals and up to $140,000 if the contribution is made from joint property. Qualified distributions from the account are tax-free in both cases. Funds in the Coverdell ESA may be used for elementary school as well as for higher education, whereas distributions from a 529 plan may only be used for higher education. Income limits apply to Coverdell ESA contributors, but do not apply to 529 plans. (62715)

Question 39

What is the regulations on transfer of ownership of an Investment Adviser?

Answer 39

An investment adviser may not assign a client’s contract to another investment adviser without the client’s consent. An assignment includes the acquisition of the majority of the adviser’s stock by another entity.

Question 40

According to NASAA’s Prohibited Conduct of IAs, IARs, and federal covered IAs, Model Rule, publicly distributed, written materials are defined as any written materials distributed to:

Answer 40

35 or more persons who pay for the materials
According to NASAA Model Rule 502(b)(1)(4), any written materials distributed to 35 or more persons who pay for the material are defined as publicly distributed, written materials, such as research reports.

Question 41

When securities are inherited, what is the cost basis and the holding period?

Answer 41

According to the IRS, when securities are inherited, the recipient’s cost basis is the market value of the securities at the time of the deceased’s death. The recipient’s holding period for the stock will be long-term, regardless of the deceased’s actual holding period.

Question 42

What is the maximum amount a couple can contribute to each grandchildren’s 529 college plan without incurring federal gift tax liability?

Answer 42

As a married couple they may contribute $28,000 annually to each of their grandchildren’s 529 savings plans without incurring gift taxes. They may also compact five years of contributions into one and contribute $140,000 to each grandchild’s 529 plan without incurring gift taxes. If they choose to aggregate their contributions into one large lump sum, they may not contribute more for the following five years without incurring gift taxes.

Question 43

Beneficiaries of a variable annuity contract are taxed on the proceeds or do they receive the proceeds tax-free?

Answer 43

Although partial surrenders of variable life insurance policies are first treated as a return of principal up to the amount of basis, variable annuities are subject to interest-first taxation. Only life insurance proceeds pass to beneficiaries tax-free. Beneficiaries of variable annuity contracts are taxed on the proceeds in the same manner as the annuitant. (62018)

Question 44

Can investment advisers act on a discretionary basis without written authorization?

Answer 44

Investment advisers may act in a discretionary capacity based on verbal authorization for up to 10 days, but thereafter written authorization is required. (67717)
With regards to third party, third-party trading authorization must always be in written form.

Question 45

What are forms:
ADV-H 
ADV-E 
ADV-NR 
ADV-W

Answer 45

Submission of Form ADV-E with the SEC is required if the adviser has custody of client funds and securities. The form is filed by an independent public accountant hired by the adviser who has audited the adviser’s records. Form ADV-H is filed by an adviser seeking an exemption for a temporary or continuing hardship. Form ADV-NR is filed by a nonresident general partner or nonresident managing agent of a U.S. registered investment adviser. Form ADV-W is filed by an adviser that is either seeking a partial or full withdrawal from registration. (62547)

Question 46

Can an IA use testimonials? Can a BD?

Answer 46

A broker-dealer may use testimonials as long as they disclose whether more than a nominal fee was paid for them. An investment adviser may not use testimonials in its advertising. (62843)

Question 47

529 plan contributions are limited to what amounts?

Answer 47

Single up to $14,000 per year ($28,000 couple). An investor may aggregate 5 years worth into one contribution and give $70,000 lump sum ($140,000 couple) however, may not give for another 5 years.

Question 48

What is an advantage of Universal Life Insurance?

Answer 48

Since the client is conservative, with unpredictable income, universal life may be more suitable, since the premiums can be increased, decreased, or skipped, by using the cash value to fund the policy. The insurance company guarantees a minimum return on the cash value, which can be used to increase the death benefit. With whole life or term life, any premiums not paid may result in a lapse of the policy. Variable life would not be suitable for a conservative client, as the cash value may increase or decline based on the performance of the separate account. If a client is single with no dependents, life insurance may not be a concern for the client when creating the plan. (62246)

Question 49

Under the Uniform Securities Act, an institutional investor is designated?

Answer 49

Under Sec. 201(c) of the USA, an institutional investor is designated by rule or order of the Administrator. (62781)

Question 50

Randy has inherited his father’s IRA. According to IRS rules, Randy must withdraw the entire account by:

Answer 50

According to the IRS, a beneficiary who is an individual may be required to withdraw the entire account by the end of the fifth year following the year of the owner’s death. No distribution is required for any year before the fifth year. (63122)

Question 51

A broker-dealer is a syndicate member involved in a firm-commitment underwriting of a highly anticipated upcoming initial public offering (IPO). During the underwriting, the broker-dealer holds onto some of the shares in order to sell them at a later date since the shares are expected to rise in value. The broker-dealer’s conduct is:

Answer 51

Unethical and prohibited under the Uniform Securities Act
This situation is known as withholding and is prohibited by both the Uniform Securities Act and the Securities Act of 1933. When a broker-dealer participates in a firm-commitment underwriting, it must sell the shares at the public offering price (POP) as soon as possible. (67598)

Question 52

Under securities exemptions, which supercedes the state or the federal regulation?

Answer 52

A security can be exempt under federal law but not state law, and vice versa. When the rules overlap, the most restrictive rule applies. (62482)

Question 53

Under the USA, what is the statute of limitations to file a claim?

Answer 53

The statute of limitations for civil liabilities under the USA is three years from the sale or rendering of investment advice, or within two years of discovery. Therefore, the suit may be filed and the customer may recover damages. (The client still has one year left to file.) (62616)

Question 54

About renewal of Investment Advisers registration, when must it be done?

Answer 54

Under the Investment Advisers Act of 1940, all IAs are required to renew their registration within 90 days of the end of their fiscal year. However, under the Uniform Securities Act, all registrations expire at the end of the calendar year and then must be renewed. The federal regulation of IAs is based on a fiscal year, while the state law is based on a calendar year. (67652)

Question 55

Contributions to a 529 Savings plan are tax deductible?

Answer 55

Not at the federal level. Some states do allow their residents to deduct part or all of their contributions to 529 plans from their state income taxes, provided they invest in a plan sponsored by the state in which they live. (62757)

Question 56

The jurisdiction of the administrator encompasses an offer that is?

Answer 56

The Administrator has authority over any offer to buy or sell that is originated, accepted, or directed in the Administrator’s state. A sale need not be made in order to meet the definition of an offer to sell. (62433)

Question 57

Which of the following is dissolved when an owner dies? 
A corporation 
A general partnership 
An S Corporation 
A trust

Answer 57

A general partnership.
General partnerships generally dissolve when an owner becomes mentally incapacitated or dies. All of the other entities listed have continuity of life. (67549)

Question 58

According to modern portfolio theory (MPT), the expected return of an investment is the:

Answer 58

MPT defines the expected return of an investment as the possible returns on the investment weighted by the likelihood that return will occur. (62112)

Question 59

How long does a firm need to keep electronic communications?

Answer 59

All investment adviser records must be maintained for not less than five years, the first two years in the principal office of the adviser, including those made by electronic media (Web sites, e-mail, etc.) if directly or indirectly sent to two or more persons. The Investment Advisers Act of 1940 defines advertising as any communication sent to one or more persons. (62786)

Question 60

According to the Uniform Securities Act, when do all broker-dealer registrations expire?

Answer 60

Under the Uniform Securities Act, all registrations expire annually on December 31. Thereafter, they must be renewed by the firm. (67693)

Question 61

An advantage of a Coverdell Education Savings Account versus a 529 plan is:

Answer 61

A custodian has greater control over the investments
With a Coverdell Education Savings Account, the custodian has greater control of the selection of investments (i.e., individual stocks, bonds, or mutual funds). There is a maximum contribution of $2,000 per year in a Coverdell. In a 529 plan, an investment is made in the state plan without the benefactor’s input. Depending on the state, a 529 plan may allow a substantially larger contribution (exceeding $200,000 in some states). Both plans offer tax-free growth if the funds are used for qualified educational expenses. Funds in a Coverdell Education Savings Account (ESA) must be used within 30 days of reaching the age of 30. There is no specific age requirement for funds to be withdrawn from a 529 plan. (62766)

Question 62

Mammoth Investments is a federal covered investment adviser with offices in 42 states. Which of the following statements concerning the firm’s registration is TRUE?

Answer 62

Mammoth’s federal registration is sufficient to do business in all states and state registration of the firm is not required
The federal government and the states have divided the responsibility for regulating investment advisers. In general, an adviser must be registered with either the SEC or with one or more states. There is no requirement to register at both the federal and state levels. The basis for the federal/state division is usually the amount of assets under management. If an investment adviser has $110 million or more under management, registration with the SEC as a federal covered adviser is mandatory. Smaller advisers generally register with one or more states. (Note: An IA may also choose to register with the SEC if it has AUM of $100 million up to $110 million.)

Question 63

A multi-state adviser must file a Form ADV-W to withdraw from federal registration if the number of states in which it is required to register is less than:

Answer 63

15.
A person, who is required to register as an investment adviser based on the laws of 15 or mores states, is considered a multi-state adviser and, therefore, must register with the SEC. If the number of states in which the adviser is required to register falls below 15, the adviser is required to file Form ADV-W indicating a partial withdrawal at the time of filing its annual updating amendments. (63127)

Question 64

Paul works as a registered representative for Broker-Dealer Y. He also works as a financial planner within Broker-Dealer Y’s control. Paul’s only source of compensation is commissions. According to the Investment Advisers Act:

Answer 64

Neither Paul nor Broker-Dealer Y requires registration as an investment adviser
According to SEC Release 1092, if a registered representative of a broker-dealer is held out to the public as a financial planner, the exemption from registration as an investment adviser is valid, provided the following conditions are met:
- The broker-dealer does not charge a special fee for rendering investment advice.
- The broker-dealer does not maintain discretionary authorization over the account.
- The agent providing the advice is under the control and supervision of a broker-dealer. (62073)

Question 65

Under the USA, What does the term Agent mean?

Answer 65

Under the Uniform Securities Act, agent means any individual (other than a broker-dealer) who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities. Excluded from the definition is an individual who represents an issuer in effecting transactions in certain exempt securities or who represents an issuer in exempt transactions. If you represent an issuer and sell commercial paper in denominations of at least $50,000 that matures within nine months of the date of issuance, you are exempt from the definition of agent. There is no specific exemption if you represent an issuer and sell corporate debt or equity securities. If you represent an issuer and sell securities to institutional investors or fiduciaries, you would not meet the definition of agent. (62663)

Question 66

If a client requests an unaudited financial statement from an IA, it must be made available within how many days?

Answer 66

7

Any requests for materials from an IA must be met within seven days. (62866)

Question 67

What characteristic generally makes universal life insurance policies more attractive than other forms of life insurance?

Answer 67

The biggest benefit of a universal life insurance policy is the flexibility of the death benefit. If policyowners need additional coverage, they may increase the death benefit. Similarly, they may lower the coverage if their insurance needs decrease. (67702)

Question 68

Quick Asset Ratio is?

Answer 68

The quick ratio formula is (current assets - inventories) / current liabilities. (67475)

Question 69

An IA must notify the SEC of any material changes in its ADV within:

Answer 69

Any material changes in the IA’s ADV would require that an amendment be filed with the SEC within 30 days. Nonmaterial changes in information in the ADV are amended within 90 days of the end of the IA’s fiscal year. (62867)

Question 70

Can employees of a self-employed person be covered under a Keogh plan?

Answer 70

Employees of self-employed persons with a Keogh plan must be covered by the plan if they have worked for the employer for one year and are at least 21. (62497)

Question 71

What forms must an IA file in order to register with one or more states?

Answer 71

A firm must file Form ADV to register as an investment adviser. Generally, this is done electronically through the Investment Adviser Registration Depository (IARD), which forwards the forms to the appropriate regulator(s). The first section of the form consists of Parts 1A and 1B. Part 1A is completed by all firms regardless of their status as a state or federal adviser. Part 1B is completed only by firms that are registering at the state level. Form ADV also contains a separate section (Part 2), which is filed by both federal and state advisers. Part 2 contains the information about the investment adviser’s business. Information contained in this section may be copied directly to, or used as, the basis for investor disclosure information found in the investment adviser’s investor brochure. (62630)

Question 72

Concerning Federal Income tax on gifting and inheriance of stock

Answer 72

The deduction a donor may claim on a gift of stock to a charity is the market value of the stock at the time of the gift. The donor would benefit if the stock price had risen, since he would avoid paying capital gains tax. In the event that the shares are gifted to a charity, the cost basis is the original purchase price or the current market price, whichever is less. If the stock has increased in value, the gift will take the original purchase price as its basis. If the stock has fallen in value, the gift will take the market value at the time of the gift as its basis. If shares are inherited, the cost basis of the recipient is the market value of the shares on the date of the decedent’s death. (67676)

Question 73

A client, age 61, has invested $200,000 in after-tax dollars in a variable annuity. His annuity is currently worth $380,000. The client decides to draw down $50,000 from the contract. How will the distribution be taxed?

Answer 73

The entire distribution will be taxable at ordinary income rates

This question discusses a nonqualified annuity. In a nonqualified annuity, the investment is made with after-tax dollars. When a client makes a single (irregular) withdrawal from a contract, the IRS requires that a last in, first out (LIFO) method be used when calculating tax liability. This means earnings (the last in) come out first. In this case, the $50,000 is taken out of the $180,000 of earnings and would be fully taxable as ordinary income. Annuities never generate long-term capital gains. (62345)

Question 74

Performance based compensation for IA is allowed for Qualified clients in which Act?

Answer 74

Under the USA, performance based compensation is typically prohibited. However, under the Investment Advisers Act of 1940 it is allowed for Qualified Clients. ($1mm with the adviser and at least $2mm in NW)

Question 75

What is a Top-heavy Plan?

Answer 75

A top-heavy retirement plan is any nonqualified plan in which highly compensated employees may participate without limit of income, such as deferred compensation plans. (62805)

Question 76

When is a Testamentary Trust used?

Answer 76

A testamentary trust may be used when a donor wishes to control trust assets during his lifetime. John’s will, when executed, will direct the executor to fund the trust with assets contained within the estate. This process does not avoid probate or reduce a potential tax liability levied on the donor’s estate. (62177)

Question 77

A Complex Trust is permitted or not from retaining some of its investment income?

Answer 77

A complex trust is permitted to retain some of its investment income. (In a simple trust, this income must be distributed to the beneficiaries in the year received.) Trustees of a complex trust are also empowered to distribute principal. The term complex has nothing to do with the number of beneficiaries of the trust, the use of derivatives within the trust, or the employment of an outside portfolio manager by the trustee. (62679)

Question 78

With regard to the details of nonpublic administrative investigations, are they shared with the public, or disclosed in any form?

Answer 78

The Administrator will not provide the details of the investigation to any member of the public.

According to the Uniform Securities Act, no provision of the Act authorizes the Administrator or any of her officers or employees to disclose information except among themselves, or when necessary in a proceeding or investigation under the Act that was not made public. (62979)

Question 79

What is defined as retail communication? What is defined as Correspondence?

Answer 79

A retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. A retail communication containing an investment or financial recommendation, or promoting a product or service of the member firm, must be preapproved by a principal of the firm. Since this question makes no mention of the RR promoting a product or service in the instant messages, the communication is subject to review, but not approval.

Correspondence is defined as any written or electronic message that is sent by a member firm to 25 or fewer retail investors within a 30-calendar-day period. Correspondence does not require principal preapproval. For correspondence, the method of delivery—whether by e-mail, instant message, or text message—is not relevant. Instead, the important factor is who receives the communication. (75805)

Question 80

Current Ratio is?

Answer 80

Current assets / Current Liabilities

Question 81

What are the following forms?
1040
1041
1065
K-1

Answer 81

1040: used for Personal tax returns
1041: used by Trust
1065: used by Partnerships
K-1: Distributed by Partnerships to its partners for use in preparing their 1040

Question 82

What is the difference between a Living Trust and a Testamentary Trust?

Answer 82

Living Trust or Inter-Vivos Trust is established during the donor’s lifetime. A Testamentary Trust is established through instructions left in the donor’s will.

Question 83

Variable annuities are taxed as ordinary income when withdrawn or as long term capital gains?

Answer 83

Variable annuities’ earnings are taxed as ordinary income when withdrawn.

Question 84

In a Money Purchase Plan, the annual maximum contribution is

Answer 84

The lesser of 25% of compensation or $51,000
A Money Purchase Plan is a defined contribution plan, since the employer is required to contribute on behalf of all eligible employees. It is unlike a profit-sharing plan, which does not require employer contributions if the company is not profitable. (66202)

Question 85

After occurrence of the event for which a filing is required, when must a Form 8-K be filed?

Answer 85

Four days
Unless otherwise specified, Form 8-K must be filed or furnished within four business days after the occurrence of the event for which the filing is made. Form 8-K is required by the SEC to announce certain significant changes in a public company, such as a merger or acquisition, a name or address change, bankruptcy, change of auditor or accountant, or any other information that may be reasonable for a potential investor to know. (67753)

Question 86

Contributions in a Coverdell Education Savings Account (CESA) are tax-deductible?

Answer 86

No.
Contributions to a Coverdell Education Savings Account (CESA) are limited to $2,000 annually and are never tax-deductible. Additionally, contributions are not allowed if the contributor’s income exceeds a certain amount. Withdrawals from the account are tax-free if used for qualified educational expenses. (67689

Question 87

If an adviser has custody of customer funds and securities, the submission of Form ADV-E must be performed by:

Answer 87

Submission of Form ADV-E with the SEC is required if the adviser has custody of client funds and securities. The form must be filed by an independent accountant, not the adviser, within 30 days after the completion of the audit. (62575)

Question 88

According to the Investment Advisers Act of 1940, when is an investment adviser required to provide a balance sheet to its clients?

Answer 88

When the adviser requires the prepayment of a fee that is greater than $1,200, six months or more in advance of providing service

Under the provisions of the Investment Advisers Act of 1940, an investment adviser must provide clients with its balance sheet if it requires the prepayment of a fee in excess of $1,200, six months or more in advance of the service. For questions regarding the requirement to send a balance sheet, it is important to identify whether it is referencing state or federal law. At the state level, a balance sheet is provided for collecting/soliciting a prepaid fee of greater than $500, and also for maintaining custody or discretionary control of clients’ assets. However, at the federal level, a balance sheet is provided only if the adviser is collecting/soliciting a prepaid fee of greater than $1,200. (67751)

Question 89

Which of the following return calculations removes the distortions caused by the deposit and withdrawal of capital from an investment account over time?

Answer 89

Time-weighted return
Time-weighted returns eliminate biases caused by the inflow or outflow of investor money. It is often used to compare the performance of money managers. On the other hand, dollar-weighted returns provide a better idea of how an individual investor has done over time by eliminating the biases caused by superior performance in one year or inferior performance in another. (67709)

Question 90

Howie is both a registered investment adviser and a licensed real estate agent. He recently prepared a financial plan for Bob. In this plan, Howie recommended that Bob increase his life insurance coverage and also consider putting a portion of his portfolio in hard assets, such as real estate. Howie knew of a property called Blackacre that was currently for sale and told Bob about it. Bob eventually purchased Blackacre using Howie as his real estate agent and Howie received a commission for the purchase. Would Howie’s commission for selling Blackacre be considered compensation under the Investment Advisers Act?

Answer 90

SEC Release 1092 states that investment adviser compensation includes “any economic benefit.” It can include commissions generated by the sale of nonsecurities products such as insurance or real estate. Thus, Howie’s commission for Blackacre would be considered investment adviser compensation within the meaning of the Investment Advisers Act. (62414)

Question 91

The advantages of investing in a limited partnership include:

Answer 91

The ability to limit risk
A limited partner is risking only the amount she invests in the partnership. The potential for assessments (demands for more money from investors) and the lack of control over the management of the venture are considered disadvantages of limited partnerships. Tax losses generated by the partnership are passed on to investors, but they may only be used to reduce income generated by other passive activities. They may not be used to reduce earned income (wages and salaries) or income from most other types of investments. (63049)

Question 92

Under IRS rules, which of the following items are exempt from the definition of earned income?

1 Unemployment benefits 
2 Alimony 
3 Child support 
4 Income received from investments in property 
5 Net earnings from self-employment

Answer 92

The IRS defines earned income as compensation received for personal services actually rendered. According to the IRS, all of these items are considered earned income.
-Wages, salaries, and tips
-Union strike benefits
-Long-term disability benefits received prior to minimum retirement age
-Net earnings from self-employment.
Unemployment, alimony, and child support are not considered earned income. Income received from investments in property are defined as passive income, which is different from earned income, and treated separately by the IRS. (62748)

Question 93

According to NASAA and FINRA guidelines, the maximum that may be charged for organizational and offering expenses is:

Answer 93

The guideline for offering compensation and expenses is 10.5%. The guideline for organizational and offering expenses is 15%. Organizational costs include filing fees and marketing costs, such as printing a prospectus. (62425)

Question 94

Which of the following choices is most applicable for investments in a bypass trust?

a. Government securities are advisable to preserve the value of assets passing to the beneficiaries
b. Growth stocks are advisable, since long-term capital gains tax rates will apply to the beneficiaries, but would not apply to the estate
c. Municipal securities would provide tax-free income to the beneficiaries
d. Short-term maturities are most suitable, given the grantor’s age

Answer 94

b. Growth stocks are advisable, since long-term capital gains tax rates will apply to the beneficiaries, but would not apply to the estate.

The tax rates for estates can be significantly higher than the maximum long-term capital gains tax rate of 20%. In a Credit Shelter Trust (also known as a bypass trust, family trust, or B trust), when an individual dies, his assets flow into the trust in the amount of the estate-tax exemption. Although this amount is subject to tax, an individual can apply his unified credit to the amount and the trust is free from estate taxes in the future. The growth of the trust is not part of the estate. The beneficiaries pay taxes as capital gains, but this is often a far lower rate than estate tax rates. Growth stocks are often appropriate because of the significant difference between the two tax rates. (62027)

Question 95

Which statements are TRUE regarding nonqualified annuities?
10% penalty on withdrawals? or not?
Distributions must be taken by age 70 1/2? or not?

Answer 95

Whether an annuity is qualified or nonqualified, the 10% penalty for withdrawals before 59 1/2 would apply to any taxable amount withdrawn. If it is qualified, all of the money received will be taxable as income and subject to the 10% penalty. If it is nonqualified, only the tax-deferred earnings, which come out first, are taxable and subject to the 10% penalty. Withdrawal of the cost basis (after-tax contributions) is tax-free and penalty-free. On the other hand, the IRS does not require that distributions from a nonqualified annuity be started by age 70 1/2, as it typically does with qualified annuities. (63061)

Question 96

Can a 529 plan be rolled over to a Coverdell ESA?

Answer 96

A 529 plan cannot be rolled over into a Coverdell ESA

Question 97

The key to softdollar arrangements, is what ?

Answer 97

That it must benefit the IAR’s clients…

Question 98

What kind of records are required to be kept by an IA ?

Answer 98

include a record of any violation of the investment adviser’s code of ethics, all written agreements entered into by the investment adviser and clients, and originals of all written communications sent by the adviser relating to recommendations. The adviser is required to keep a copy of each notice, circular, advertisement, investment letter, or other communication that is circulated to 10 or more persons. If the communication recommends the purchase or sale of a specific security, but does not state the reason for it, a memorandum must be prepared indicating the reason for the recommendation. (62615)

Question 99

According to the Form ADV, a felony, as compared to a misdemeanor, is defined by all the following choices:

Answer 99

• An offense punishable by a sentence of at least a one-year imprisonment
• An offense punishable by a fine of at least $1,000
• A general court martial

Question 100

Distributions from a 401(k) plan can be rolled over into an IRA, Roth IRA, and / or another 401(k) plan?

Answer 100

Distributions may be rolled over into a traditional IRA or another employer’s 401(k) plan and continue to defer taxes. A distribution from a 401(k) (or another qualified retirement plan, such as a 403(b) or 457 plan) may also be rolled over into a Roth IRA. However, it would require to pay taxes that year on the distributions. The same rules that apply to conversions from traditional IRAs to Roth IRAs also apply when investors take money from qualified employer-sponsored retirement plans and put it into Roth IRAs.

Question 101

According to NASAA’s Prohibited Conduct of IAs, IARs, and federal covered IAs, Model Rule, publicly distributed, written materials are defined as any written materials distributed to:

Answer 101

35 or more persons who pay for the materials
According to NASAA Model Rule 502(b)(1)(4), any written materials distributed to 35 or more persons who pay for the material are defined as publicly distributed, written materials, such as research reports. (62835)

Question 102

Treatment of inherited assets. The shares are valued at what price, and the holding period is what?

Answer 102

The recipient’s cost basis is the value of the shares at the time of the deceased’s death, and the holding period is long term.

Question 103

According to the USA a Private Placement may be offered to no more than 10 persons, 35 persons, that are not insitutional investors?

Answer 103

A Private Placement may be offered to no more than 10 persons in that state during a 12 month period.

Question 104

What is an equity-indexed annuity ?

Answer 104

An equity-indexed annuity is a type of fixed (nonvariable) annuity. There is no SEC registration requirement for these contracts. The owner receives a guaranteed minimum interest rate. The upside potential exists since the rate of return is tied to an index such as the Standard & Poor’s (S&P) Index. If the index underperforms, the client receives the minimum rate. If the index performs well, investors will receive the indexed return up to a maximum capped rate. (62334)

Question 105

According to the Uniform Securities Act, a registration will become effective at:

Answer 105

Noon on the 30th day after filing

Question 106

According to the NASAA Recordkeeping Requirements for Investment Adviser Model Rule, an IA is required to keep a record of the names and addresses of any person who is sent any notice, circular, advertisement, offering, report or publication, when the number of persons the material is sent to is:

Answer 106

10 or fewer
If sent to more than 10 persons, the IA does not need to maintain a record of names and addresses. Note: Any communications sent to two or more persons must be kept on file with the IA for five years. If sent to more than one person, it is considered advertising. (62852)

Question 107

What are exempt transactions?

Answer 107

• Any transactions by trustees involved in a bankruptcy–sheriffs, marshals, guardians, and other fiduciaries are considered exempt transactions.
• Unsolicited nonissuer transactions whether with retail or institutional investors and transactions executed by a bona fide pledgee are also considered exempt transactions.
• However, transactions between issuers and retail investors are not exempt from registration.
• A transaction between an issuer and underwriter would be an exempt transaction. (62396)

Question 108

According to the Securities Exchange Act of 1934, which items are required to be included on the confirmation statement for a bond trade?

Answer 108

• Disclosure of the bond’s yield at the time of the trade
• Disclosure of the bond’s yield-to-maturity
• Disclosure of the bond’s purchase price

But not disclosure of the bond’s rating unless the bond is not-rated in which case you have to disclose that it is unrated.

Question 109

What is the ABC test for an IA?

Answer 109

Advice
Business
Compensation

Question 110

Is an Endowment Policy a Security

Answer 110

No.

Question 111

Howey Decision of the Supreme Court is a test to determine if an investment instrument is a security. What is that test?

Answer 111

• Invest money in a common enterprise
• Expectation of profits
• Profit efforts from the promoter or third party

Question 112

If a client fails to pay for a security within the 5th business day from trade date, the clients account will be: Closed, Forzen for 90 days, Restricted for 90 days, Suspended for 90 days,

Answer 112

Frozen for 90 days.

Question 113

According to SEC Release 1092, if a registered representative of a broker-dealer is held out to the public as a financial planner, the exemption from registration as an investment adviser is valid, provided the following conditions are met.

Answer 113

• The broker-dealer does not charge a special fee for rendering investment advice.
• The broker-dealer does not maintain discretionary authorization over the account.
• The agent providing the advice is under the control and supervision of a broker-dealer. (62073)