Series 66

Question 1

What’s a person?

Answer 1

Person, Corporation, incorporated, unincorporated, nonprofit, religious organizations. What’s not a person? Deceased, incompetent, minor

Question 2

What’s not a person?

Answer 2

Deceased, incompetent, minor.

Question 3

What’s a security?

Answer 3

Investment of money in a common enterprise, with others, for profit managed by someone else.

Trigger words: variable, option, interest in, receipt, certificate (if you this on a question on the test is referring to a security).

Question 4

What’s an issuer?

Answer 4

Person (entity) that issues or proposes to issue a security to raise money.

Question 5

Issuer transaction?

Answer 5

The issuer (whoever is issuing the security) receives money from the sale.

Example: Tesla offers an IPO.

Question 6

Nonissuer transaction?

Answer 6

When the issuer is not receiving the money from the sale. It is another investor. Secondary market transaction

Question 7

What’s a Broker Dealer (BD)?

Answer 7

A firm (can be defined as a person) that executes transactions. Registered with SEC, FINRA, and State

Question 8

What’s an investment Adviser?

Answer 8

Gives advice for compensation. (Does not complete security transactions unless they are registered as well). SEC or State, never registered with both.

IAs do not register with FINRA.

Register with the state if they are between 0 and $110 million. $100 to $110 million they can choose. Over $110 million they have to register with SEC.

When would an IA not need to register with a state? If you have 0 offices and 5 or less retail clients you do not have to register with that state.

Question 9

What’s an agent?

Answer 9

An individual that works for the broker-dealer completing securities transactions. Registers with FINRA and any state they do business in.

Question 10

What is an investment adviser representative?

Answer 10

An individual who works for the investment advisor giving advice on investments on behalf of the investment adviser. Registers on the state where they do business and have 5 or more clients in another state.

Question 11

What’s an agent who works for the issuer?

Answer 11

Agent of the issuer work for the issuer only and not the broker dealer. May have to register whether the security is exempt or not.

Question 12

What’s an administrator?

Answer 12

The regulator for the state. Each state has their own regulator. They enforce the rules their state congress has setup. May have different rules from state to state.

Question 13

What is USA?

Answer 13

Uniform Securities Act. Template for the state regulators (administrators) to start with when making their laws. They write the rules for the state, but they do not enforce them (Administrators enforce the rules)

Question 14

What is NASAA?

Answer 14

Created the test for Series 66.

Question 15

What is the Act of 1939?

Answer 15

Corporate non-exempt bonds

Question 16

What is the investment advisers act of 1940?

Answer 16

For investment advisers when they register with the SEC follow this act. State level advisers register with the individual state.

Question 17

What is the investment company act of 1940?

Answer 17

Face amount certificates, Unit Investment Trusts, Management companies (FUM)

Question 18

What is NSMIA of 1996?

Answer 18

Clearly defines all of the rules between state and federal. Define what state rule and what’s federal. Example: Admins cannot make higher or stricter provisions than federal.

Question 19

What is SEC 1092?

Answer 19

Pension consultants of more than $200 million, and financial planners have to become advisers, and Talent (sports) agents were added to the definition of Financial Advisers.

Question 20

Where do Broker Dealers register?

Answer 20

SEC, Finra, and the state (has an office or a single retail client in that state).

Question 21

What are soft dollars?

Answer 21

Broker Dealer firm gives you (an adviser) research or software or tickets to a seminar for strictly investing for the benefit of customer(s). Has to be a service that allows a customer invest.

Question 22

What is not a broker dealer?

Answer 22

A bank, issuer, IA, IAR, Agent, Firm with no office and no retail clients.

Question 23

When is the effective date after the admin approves the Broker Dealers application?

Answer 23

Noon on the 30th day. (They could extend the effective date). Registrations expire on December 31st and they have to renew every year. If you became effective on December 1st (it expires 30 days later) you have to apply for a renewal. Even when you paid for the fee on December 1st. You will have to repay again on December 31st.

Question 24

What can cause a denial of a broker dealer’s applications? (by admins)

Answer 24

Not paying fees, misleading application, convicted (not indicted) of a felony, securities misdemeanor (convicted) in the last 10 years. DUI misdemeanors DO NOT count. If a broker dealer is bankrupt they cannot register.

Question 25

Where does an agent register?

Answer 25

Agents register with Finra (always with FINRA) and the state (place where they do business). If they have 1 single retail client or a place of business they have to register in that state. (No office, no retail, no register).

If an existing client goes to a different state (temporarily) they do not have to register in that state. If a client moves to another state (and as long as you filed the application to register) you can continue to work with the client for 60 days while your application is processing.

Question 26

When may an agent of an issuer not have to register?

Answer 26

An agent of an issuer might not have to register if the issuer is an exempt issuer or they sell exempt transactions.

Exempt issuers:

• issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state;
• issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency of the foregoing;
• any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency of the foregoing, or any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor;
• a promissory note, draft, bill of exchange, or banker’s acceptance that evidences an obligation to pay cash within nine months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the three highest rating categories from a nationally recognized statistical rating organization;

or

• any investment contract issued in connection with an employee’s stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan.

Question 27

When does an agent have to register?

Answer 27

1 single retail client or an office in the state.

Question 28

Why would an agent’s registration be denied?

Answer 28

Misleading application, no fees paid, misdemeanor in a securities transaction (convicted), Felony conviction, another state denied your application, the agent is suspended. Lack of knowledge (did not pass their test)

Question 29

What is not an agent?

Answer 29

Broker dealer, issuer, Bank, IA, IAR. or an individual who has a client who is temporarily residing in a state.

Question 30

When does an agent’s registration expire?

Answer 30

December 31st. The agent has to renew.

Question 31

What does an investment adviser not give advice on?

Answer 31

Futures, commodities, etc. (non securities).

Question 32

How are IAs paid?

Answer 32

Wrap fees, management fees, paid by the day, the month, the week, the year. (can get paid on commissions if they do transactions). They cannot execute a transactions they have to give it to a broker dealer

They could get paid even if they don’t do transactions. They have a fiduciary responsibility to help the client.

They can get paid as a % of assets. They manage the portfolio and they grow your portfolio .

Question 33

What are not IAs?

Answer 33

Banks, Broker Dealers, IAR, Agent, Issuer, and anyone who is federally covered

Question 34

What is PLATE?

Answer 34

Publishers
Lawyers
Accountants
Teachers
Engineers

Do not have to register when investment advice is incidental to their job and not charging for their advice. If they charge for advice they have to register.

Question 35

What is the Form ADV?

Answer 35

This is the form investment advisers use to register their firm with the regulator.

Part 1A (part 1 as a whole are facts about the firm) - Every adviser has to fill out. Listing clients, money, where we are registered (if state registered it lists the states, if registering SEC it list the 5 largest offices), where the branches are. The facts someone needs to know about the firm.

Part 1B - only state registered advisers have to complete part 1B. Questions each individual state ask. Does not have to be given to the clients.

Part 2A (part 2 is the story, narrative format) - disclosures: how we get compensated, it explains the history of the firm, Brochures. This is something that has to be given to clients at or prior of signing the contract.

Part 2B - About the team or you as an individual. How you manage, your education, prior convictions.

Question 36

What is Form BD?

Answer 36

This is the form Broker Dealers use to register their firm regulator.

Question 37

Under USA investment advisers must keep records for…..

Answer 37

Five years, the first 2 of those years in the principal office of the adviser.

Question 38

Under USA, when do statements for held securities or funds (custody) need to be sent out?

Answer 38

Every 3 months (quarterly). It is an itemized statement showing the funds, and securities in the IA’s custody at the end of such period and all debits, credits, and transactions in the client’s account during such period.

Question 39

What type of clients wound make an IA exempt from registering in a state?

Answer 39

Advisers who only service: Insurance companies or venture capital funds are exempt, as are advisers performing intrastate who do not give advice to private funds or on listed securities. Banks DO NOT qualify.

Question 40

What Federal Securities are exempt from State registration?

Answer 40

Securities listed on national stock exchanges or the NASDAQ stock market, or investment companies registered under the investment company act.

Question 41

What companies must submit a notice filing to the administrator that is registered under the Securities ACt of 1933 and are also registered as an investment company under the investment company act of 1940?

Answer 41

Mutual funds, closed-end investment company, or unit investment trust.

Question 42

When does commercial paper (promissory note) qualify for exemption?

Answer 42

When the minimum denomination is $50k, has a maturity of not more than 270 days, and is rate in one of the three highest rating categories by a nationally recognized rating agency. It may or may not be in book-entry form, but this has nothing to do with exemption for registration.

Question 43

Although it is generally prohibited, when can a state-registered investment adviser charge performance based fees?

Answer 43

When a client has a qualifying net worth in excess of $2.2 million or with at least $1.1 million under management with the firm.

Question 44

What allows an agent to use the term guaranteed?

Answer 44

Under USA, the term guaranteed refers to a guarantee of interest, principal, or dividends by a party other than the issuer.

Question 45

What are the 2 requirements for an IA to be registered with the SEC as investment counsel?

Answer 45

Its principal business consists of rendering investment advice and a substantial portion of its business involves investment supervisory services. Discretionary authority DOES NOT qualify an IA as investment counsel.

Question 46

Who needs to supply a consent to service of process with their registration?

Answer 46

Every legal or natural person seeking registration or making a notice filing must supply a consent to service of process with their registration applications. Examples:

• An agent employed out of state but who seeks registration in a state in which business is conducted
• A federal covered investment company not required to be registered in a state in which business is conducted but required to supply notice filing materials by the state Administrator
• A broker-dealer registered in 14 states that seeks registration in a 15th state
• An investment adviser with less than $25 million of assets under management who is not covered by federal legislation

Question 47

True or false: Broker-dealers must maintain customer ledgers for three years and
Investment advisers must keep partnership records for three years after the partnership is terminated.

Answer 47

True; Recordkeeping requirements for broker-dealers are three years, and partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of an investment adviser and of any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least three years after termination of the enterprise. There are no recordkeeping requirements for agents or IARs.

Question 48

What are referrals from unaffiliated third parties considered?

Answer 48

Endorsements under the investment adviser marketing rule. Disclosures of any potential conflicts of interest must be made, and if there is any compensation paid for the endorsement, it must be noted as well. If the amount of the compensation, cash or non-cash, exceeds $1,000 over the preceding 12 months, a written agreement between the investment adviser and the endorser must be in effect.

Question 49

What is a “ready market?”

Answer 49

When an asset (stock or any other kind) does not have a “Ready Market,” it means it is not easy to find a buyer (if you own the stock) or a seller (if you wish to buy the stock). That is the sign of a lack of liquidity leading to more liquidity risk than stocks readily traded on the exchanges or OTC.

Question 50

Net Present value computation:

Answer 50

Future cash flows discounted to the present, and comparing that to the capital investment necessary to obtain those flows. Or simply the difference between Future and Present Value.

Question 51

When using DCF to assign value to a security why would you want to buy a security when the current market price is below the Present Value (PV)?

Answer 51

Those who use the DCF to value a security would recommend purchasing when the current market price is below the PV - that is, when the Net Present Value is positive.

Question 52

What’s included with book value per share?

Answer 52

The computation of book value per share is basically net tangible worth per share of common stock. Included in the net worth are all assets and liabilities (such as long-term debt), as well as the stockholders equity (par value of the preferred stock and par + paid in surplus of the common stock and retained earnings). Subtracted from this to get tangible book value would be the par value of the preferred stock and the value of intangible assets such as goodwill.

Question 53

When a company pays dividends what changes on their balance sheet?

Answer 53

Total Assets and Total Liabilities. When a cash dividend is declared by the company it becomes a current liability. When the cash dividend is paid, cash - a current asset - is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Total assets and total liabilities are changed by the same amount.

Question 54

This is a measurement used to evaluate attitudes regarding future economic conditions in the differences of yields between US Treasury Bonds and Corporate Bonds.

Answer 54

Yield Spread.

Many analysts compare the difference between yields on bonds with the same maturity but different quality (rating) to get a sense of the market sentiment. A common example of that is comparing the difference between the yield on a U.S. Treasury bond and a highly rated corporate bond. When investor sentiment is positive, the extra safety of the Treasury security is not considered as valuable, so the spread is narrow. When there is “gloom and doom” ahead, investors flock to the safety of the Treasury, causing the spread to widen. This spread is found by comparing the yield curves, but that doesn’t answer the specific question, which is dealing with the difference, and a difference in this industry is called a spread.

Question 55

What affects shareholder’s equity?

Answer 55

AKA net worth, is only affected by the sale of a new equity securities or by any profit or loss generated by the corporation.

Question 56

Example question: A profitable company reports net income of $10 million. A cash dividend of $7 million is declared. From an accounting standpoint, the other $3 million will be credited to which balance sheet account?

Answer 56

Retained earnings are increased to the extent that company profits (net income) are undistributed - in essence, retained.

Question 57

How are deferred tax credits treated on a company balance sheet (what category)?

Answer 57

Liability

Question 58

Under USA, if a corporation sells certificates of interest in a mining lease make the corporation an issuer?

Answer 58

No, Although the corporation issuing its own stocks and/or bonds would be an issuer, under the Uniform Securities Act, selling certificates of interest in mining leases or similar items does not make one an issuer.

Question 59

How long are registration statements valid for a security under USA?

Answer 59

1 year from their effective date or longer if the security is still under distribution by underwriters.

Question 60

Where is cash on hand for a company found?

Answer 60

Balance sheet. Cash is considered an asset.

Question 61

Under the Securities Act of 1933, a registration statement for a security generally becomes effective how many days after it is filed?

Answer 61

20; A registration statement for a security becomes effective 20 days after it is filed, unless the SEC orders a delay.

Question 62

Security offers for a private placement are offered to who?

Answer 62

No more than 10 noninstitutional persons in a 12 month period for investment purposes, where no commissions are paid, directly or indirectly. This type of transaction is exempt from registration.

Question 63

According to federal law, an insurance company under the provisions of the Investment Company Act of 1940 must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of

Answer 63

24 months, Although state law may allow for periods longer than 24 months, federal law requires a 2-year conversion privilege.