Special Cards that need to be studied

Question 1

If you terminate/withdraw your registration who notifies who?

Answer 1

Agent - notification to Administrator by both agent AND broker/dealer
IAR - with State IA, IA notifies Administrator
IAR - with Federal covered IA, IAR notifies Administrator

Effective at noon of 30th day, but Administrator retains jurisdiction for one year

Question 2

What happens if Joe leaves BrokerDealer B and goes to Z who notifies who?

Answer 2

BrokerDealer B and Joe notify the Administrator that he has left the firm
BrokerDealer Z and Joe tells the Administrator that he has joined the firm.

Question 3

If a state registered IAR is fired who notifies the administrator?

Answer 3

The IA would tell the administrator.

Question 4

If a Federally covered adviser fires a state-registered IAR who notifies the administrator?

Answer 4

The IAR tells the administrator (because the IA doesn’t communicate with the State much)

Question 5

Can an IA be registered with the SEC and the state?

Answer 5

No. They are only registered with one or the other.

Question 6

If you notify the administrator that you have dropped below the net capital requirements… the next day you need send a report to the administrator that includes what?

Answer 6

You must send the administrator a financial report that includes a statement as to the number of client accounts that you have.

Question 7

What happens if there is a successor firm through a merger, acquisition or sale?

Answer 7

A new application is filed, effective for the remainder of the year. There is not a need to pay for another fee for THAT year.

Question 8

No person can lawfully offer or sell any security in the state unless

Answer 8

1. The security is exempt from registration under the act (exempt security)
2. The security is a federally covered security
3. The transaction is exempt under the act
4. The security is registered under the USA

Question 9

What are the requirements for a Short-term notes/debt obligations to be an exempt security?

Answer 9

Maturity of 270 days or less
Minimum $50,000 denominations
In the 3 highest ratings of commercial paper

Question 10

Securities issued by exempt issuers:

Answer 10

US government and agencies
Municipalities
Canadian government (federal and political sub divisions but not corporations)
Issued or guaranteed by foreign national governments with diplomatic relations (but not their municipalities)

Question 11

What are the limitations of exempt securities issued by banks?

Answer 11

1. If its a state chartered savings and loan then it must be authorized to do business in the state for its securities to be exempt from registration
2. If there is a Federal credit union or any other credit union then it must be supervised under the laws of this state.

Question 12

What did securities did the NSMIA make Federally Covered?

Answer 12

A federally covered security is a security with a federally imposed exemption from state registration these include:

• Securities listed or authorized for listing on recognized exchanges or quoted on NASDAQ stock market
• Investment companies registered under the Investment company act

Question 13

Municipals are not exempt from registration in what state?

Answer 13

Municipals are not exempt securities in the state that they are issued. It is not federally covered, but it may be state exempt depending on the state.

Question 14

In which of the following cases is the exemption from registration with the SEC not based on the value of assets under management?

A) An investment adviser that acts as an adviser solely to private funds and has assets under management in the United States of less than $150 million

B) An investment adviser that acts as an adviser solely to one or more national banks

C) An investment adviser that acts as an adviser solely to one or more venture capital funds

D) An investment adviser with assets under management of less than $25 million

Answer 14

It is only in the case of the adviser to venture capital funds where there is no dollar limitation on AUM. Private fund advisers with AUM of $150 million or more must register, and “small” investment advisers, those with less than $25 million in AUM, are generally prohibited from SEC registration. If the investment adviser’s only clients are insurance companies, the adviser is exempt from SEC registration even if the firm has billions in AUM, but that exemption does not apply when the only clients are banks.

U1LO4

Question 15

Among the differences between a Coverdell Education Savings Account and Section 529 plans are

1. one has adjusted gross income limits, the other does not
2. one has contribution limits set by federal law, the other by the individual state
3. if the money is not used, money reverts back to the donor in one and to the beneficiary in the other

Answer 15

1,2, and 3

The Coverdell may only be used by persons who fall within certain income limits—no such limits apply to the 529 plan. The Coverdell has contribution limits set by federal law; each state sets its own 529 limit. If the money is not used for education, it reverts back to the donor in a 529 plan but to the beneficiary in a Coverdell.

U24LO6

Question 16

The powers of the Administrator include the ability to determine

A)minimum net worth requirements for agents who exercise discretion

B)surety bond requirements for investment advisers who do not exercise discretion or maintain custody

C)maximum net capital requirements for broker-dealers

D)minimum net worth requirements for investment advisers

Answer 16

D)minimum net worth requirements for investment advisers.

The Administrator can determine minimum, not maximum, net capital for broker-dealers (but not in excess of SEC requirements) and, for investment advisers, net worth. If the investment adviser does not exercise discretion (or maintain custody), no surety bond is required. Agents who exercise discretion may need a surety bond, but not a minimum net worth.

U1LO5

Question 17

If your clients, spouses both age 50, are interested in long-term growth and are willing to accept a moderate amount of risk, you should recommend

A)a large-cap stock fund

B)a money market fund

C)a municipal bond fund

D)an equity/income fund

Answer 17

A)a large-cap stock fund

A mutual fund investing in large-cap stocks (see Glossary of Terms) has relatively moderate risk with likely growth potential.

U19LO6

Question 18

TIP bond principal calculation

Answer 18

The $1000 * 1+ inflation rate ^ time

Example 8% inflation over 2 years. What is value of principal?

$1000*1.08^2 = $1,169

Question 19

ABC corporation has just uncovered a major accounting scandal with regard to the annual audited financial report it files with the SEC. What form will be filed to disclose this information?

Answer 19

Form 8-K… for a material current event.

By filing that with the SEC also tells the market place that there is a material current event.

Question 20

The discount rate used in a discounted cash flow computation is equal to the

Answer 20

Current market interest rate for that level of risk.

Question 21

Investors in which of the following business entities would not receive a Schedule K-1?

Answer 21

C Corporation.

Schedule K-1 is used to track the pass through of gains and losses to the owners

Question 22

Static content

Answer 22

Company website, white papers, Company blog posts (not considered interactive)

Usually requires pre-approval because its considered retail communication

Question 23

Entanglement

Answer 23

The firm or associated person has paid for or been involved in the preparation of the content

Question 24

Adoption

Answer 24

The firm or associated person has explicitly or implicitly endorsed or approved the content

Question 25

Hyperlinks

Answer 25

Cant link to a third party if the firm knows of red flags indicating that it contains false or misleading content

Question 26

Testimonial disclosures

Answer 26

Generally permitted for broker-dealers and their associated persons if the following are stated: The fact that the testimonial may not be presentative of the experience of other customers The fact that the testimonial is no guarantee of future performance or success If more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial **NEVER PERMITTED FOR INVESTMENT ADIVERS or THEIR IARs** * A “like” on Facebook is considered a testimonial

Question 27

John Johnson was convicted 5 years ago of failure to pay child support, a misdemeanor in his home state. Mr. Johnson would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state will:

Answer 27

disregard that conviction when determining Mr. Johnson's qualifications for registration ## Footnote The conviction on Mr. Johnson's record is for a non-securities-related misdemeanor. The fact that the same crime is a felony in another state is not relevant to Mr. Johnson's application for registration in that state. U5LO2

Question 28

Ways in which a Section 529 plan differs from a Coverdell ESA include 1. tax-free distributions when the funds are used for qualifying educational expenses. 2. higher contribution limits 3. no earnings limitations 4. contributions that may be made by someone other than a parent or legal guardian

Answer 28

2 and 3. 529 plans have higher contribution limits and have no earnings limitations. ## Footnote Contributions to an ESA are limited to $2,000 per beneficiary per year, while the 529 limit is set by the plan sponsor, sometimes as high as $300,000. Unlike the ESA where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 plans and Coverdell ESAs enjoy tax-free distributions, and plans may be established by almost anyone. U24LO6

Question 29

Are there any financial requirements for an Investment Adviser Representative?

Answer 29

No. ## Footnote There are no financial requirements placed on IARs, only the IA. Investment advisers must meet the financial requirements of the state where the firm's principal office is located. U2LO3

Question 30

If the administrator of a corporate 401(k) plan ensures that a wide variety of investment alternatives are available to employees along with the ability for the employees to monitor their accounts and make frequent changes as needed, ERISA:

Answer 30

**shifts the responsibility for account performance to the employee.** ## Footnote Under Section 404(c) of ERISA, when the employees have adequate control of their own investments and sufficient alternatives, the responsibility for account performance is shifted from the administrator to the employee. U24LO5

Question 31

One of your clients is a widow with three grown children. She wants the assets in her account to go to her children upon her death—50% to her daughter and 25% to each of her sons. She does not want the estate to have to deal with probate on these assets. How should her account be set up?

Answer 31

Transfer on death, or **TOD** as it is usually called, would be the appropriate choice here. I**t avoids probate, but not estate taxes**. It allows the account owner to specify different percentages for each beneficiary if desired. U18LO5

Question 32

An investment adviser representative with a state-registered investment adviser reads an article in the newspaper about a local company that has had a surge in demand for its product line. If the representative's supervisor gives approval, posting the article on her social media accounts would constitute

Answer 32

**adoption.** ## Footnote Two important terms regarding social media are *adoption* and *entanglement*. **Adoption occurs when the securities professional posts something created by a third party where the poster had no input into the creation of the material.** Entanglement occurs when the poster took part in the creation. U6LO5

Question 33

One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to

Answer 33

**verify that the investment adviser still qualifies for SEC registration** ## Footnote In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information. U1LO5

Question 34

In designing a client's portfolio, a registered investment adviser representative of **Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer**. Under the Investment Advisers Act of 1940 this activity requires written:

Answer 34

Unlike broker-dealers, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client. **SEC Release IA-1732 requires that this be accomplished before the completion of the transaction, where completion is defined as settlement date.** U6LO1

Question 35

One of your customers passed away recently. The customer had an IRA with you and had his sister listed as the beneficiary. Other assets included the home and furnishings and a brokerage account at another firm. The titling on that brokerage account was the customer and his son, JTWROS. The customer's will specified that 100% of his assets should pass to his daughter. Based on this information, the estate settlement will have

Answer 35

READ THE FUCKING QUESTION. I didn't realize there were 3 people. I only thought son and daughter. the daughter getting the home and furnishings, the son the brokerage account, and the sister the IRA. ## Footnote **A will can designate the disposition of an estate's assets only to the extent that they are not previously assigned.** A JTWROS account specifies that the assets go to the survivor and that overrules any will. An IRA (or any qualified retirement plan) always has a designated beneficiary and that supersedes any will. Anything other than the assets in the JTWROS account or the IRA will go to the daughter. U24LO1

Question 36

Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction? **A)** The sale of ABCD common stock, listed on the OTC Bulletin Board, to an insurance company. **B)** An agent sells U.S. treasury bonds to an individual client. **C)** The sale of an unregistered nonexempt security to an individual client at that client's request. **D)** An executor liquidates the estate's portfolio.

Answer 36

**B)** An agent sells U.S. treasury bonds to an individual client. Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, or sales by fiduciaries, or unsolicited transactions are all exempt. U4LO3

Question 37

In which business entities does the term "member" refer to the owners?

Answer 37

Owners of **LLCs** are called **members.** U18LO3

Question 38

Special tax treatment is afforded to REITs if they

Answer 38

**distribute at least 90% of their taxable income to their investors** ## Footnote **The IRS requires REITs to distribute at least 90% of the taxable income to investors and receive at least 75% of their income from real estate.** Losses do not flow through. U14LO9

Question 39

Both state and federal law will permit an investment adviser to engage in agency cross transactions provided the advisory client executes a written consent prospectively authorizing the investment adviser to effect agency cross transactions for such clients and the adviser discloses all of the following **except** ## Footnote **A)** the adviser will be receiving commissions from both sides of the trade. **B)** no transaction is effected in which the same investment adviser or an investment adviser and any person controlling, controlled by, or under common control with that investment adviser recommended the transaction to both any seller and any purchaser. **C)** on at least a biennial basis, the adviser will furnish a statement or summary of the account identifying the total number of such transactions and the total amount of all remuneration from these transactions. **D)** there is a potential conflict of interest because of the division of loyalties to both sides.

Answer 39

C) **on at least a biennial basis, the adviser will furnish a statement or summary of the account identifying the total number of such transactions and the total amount of all remuneration from these transactions.** ## Footnote The untrue statement here is the biennial statement. The law requires the statements at least annually, not every two years. U6LO1

Question 40

Three sisters are interested in forming a business together. They have three initial concerns: 1. Maximizing their benefits from the fact that the business is not expected to earn money for at least the first two years; 2. Making sure that the business will be able to continue in the event that one or two of the sisters dies; and 3. Minimizing their personal liability for the obligations of the business. On the basis of the sister's concerns, which form of business is appropriate for the situation?

Answer 40

**LLC.** ## Footnote The limited liability company (LLC) will allow losses to flow through to the sisters, continue in the event one or two sisters should die, and have the same type of liability protection as offered by a C corporation. U18LO3

Question 41

As defined in the Uniform Securities Act, in which of the following cases would an investment adviser NOT be considered to be maintaining custody?

Answer 41

The investment adviser receives a check made payable to the IA and returns it within 3 business days Please remember the following: There are 3 cases that would not be custody revolving around the 3-business-day rule. They are as follows: 1. Receiving a check made payable to a 3rd party and forwarding that to the 3rd party within 3 business days 2. Receiving a check made payable to the IA and returning it within 3 business days 3. Receiving securities from a client and returning them within 3 business days If the IA has direct or indirect control over any client assets, that would be custody. Holding securities in street name is direct control. Discretion is not custody because the IA doesn't have any physical control, only the ability to make buy-and-sell decisions in the account. U7LO2

Question 42

What are the 3 cases that would not be custody revolving around the 3-business day rule?

Answer 42

1. Receiving a check made payable to a 3rd party and forwarding that to the 3rd party within 3 business days 2. Receiving a check made payable to the IA and returning it within 3 business days 3. Receiving securities from a client and returning them within 3 business days If the IA has direct or indirect control over any client assets, that would be custody. Holding securities in street name is direct control. Discretion is not custody because the IA doesn't have any physical control, only the ability to make buy-and-sell decisions in the account. U7LO2

Question 43

The Investment Advisers Act of 1940 **excludes** from the definition of "investment adviser" persons whose advice: 1. relates solely to municipal issues. 2. relates solely to issues issued by or guaranteed by the U.S. Treasury. 3. is solely incidental to their professional practice as an aeronautical engineer. 4. is limited to insurance companies only.

Answer 43

READ THE FUCKING QUESTION. All of them! Among the exclusions from the definition of" investment adviser "under both state and federal regulations is the case where certain professionals, including engineers, render the advice in a manner solely incidental to the practice of their professions. Unique to the federal law is the exclusion granted to those persons whose advice deals exclusively with federal government issued or guaranteed issues. Advice to solely insurance companies qualifies one for an exemption from registration, but does not exclude the person from the definition of IA. U1LO3

Question 44

Which of the following items does NOT fall within the Section 28(e) safe harbor? **A)** Research reports prepared by a third party other than the broker-dealer **B)** Proprietary research reports analyzing the performance of a specific industry **C)** Software used to simplify the investment adviser's preparation of its tax returns **D)** Software used to analyze client's portfolios

Answer 44

**C)**Software used to simplify the investment adviser's preparation of its tax returns ## Footnote Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyze securities is also permissible since that benefits the client. T**ax preparation software benefits the adviser, but not the client.** U7LO1

Question 45

Can ETF be sold short?

Answer 45

Yes. ## Footnote **ETFs trade like stock and can be sold short.** They are tax efficient compared to mutual funds, and large investors conduct trades by making in-kind exchanges, whereby they give or receive shares of stock that are in the fund. Perhaps you did not know that fact, but this is an example of the exam throwing in something very technical where the correct answer is quite simple. **ETFs generally trade near net asset value (NAV), if not at NAV.** U14LO8

Question 46

Mid range calculation

Answer 46

(Max-min)/2 I have never seen this before.

Question 47

Which of the following are restrictions on the operations of registered open-end investment companies under the Investment Company Act of 1940? 1. No registered investment company may commence a public offering with less than $1 million of capital. 2. No investment company may own more than 3% of the voting stock of another registered investment company. 3. No investment company may purchase portfolio securities on margin.

Answer 47

2 and 3. ## Footnote Investment companies are restricted from owning more than 3% of the voting stock of another registered investment company. Unless an exception is stated, no margin purchases may take place for the fund's portfolio. The act requires an investment company to have a minimum of $100,000 in initial capital, not $1 million. U14LO1

Question 48

What are the restrictions placed on registered open-end investment companies?

Answer 48

1. No registered investment company may commence a public offering with less than $100,000 of capital 2. No investment company may own more than 3% of the voting stock of another registered investment company. 3. No investment company may purchase portfolio securities on margin.

Question 49

Wynifred is an investment adviser representative for an SEC-registered investment adviser. She lives in State X and receives a letter from a former boyfriend requesting a contribution to the friend's political campaign for governor of State X. As it happens, Wynifred's firm provides advisory services to State X's employee retirement fund and Wynifred actively solicits business from other state agencies. Which of the following actions would be permitted to Wynifred under the SEC's pay-to-play rule without causing any concerns to her firm?

Answer 49

**Donating a maximum of $350 to the campaign** ## Footnote Wynifred's solicitation activities define her as a covered employee. The rule allows *covered* employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections. Because the friend is running for governor in a state in which Wynifred can vote, the upper limit applies. U7LO6

Question 50

Can Unregistered personnel be paid a bonus?

Answer 50

Yes as long as it is not directly related to any specific sales activity.

Question 51

Under rules of the SEC, any institutional investment manager that exercises investment discretion over an equity portfolio with a market value of $100 million or more in certain securities on the last trading day in any of the preceding 12 months must file

Answer 51

a Form 13F. ## Footnote Those certain securities are 13(f) securities and the form used is 13F. Form ADV-E is used for the independent examination of an IA who maintains custody. Form 13D is not tested and deals with changes to holdings of corporate insiders. Form 112 is the FinCEN form for reporting large cash transactions. U7LO6

Question 52

Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of 1. the Securities Exchange Act of 1934 2. the Investment Company Act of 1940 3. the Investment Advisers Act of 1940 4. the Uniform Securities Act

Answer 52

2 and 4 ## Footnote The requirement for written advisory contracts is found in both the Investment Company Act of 1940 for those advising registered investment companies and the Uniform Securities Act for state-registered advisers. Oddly, there is no mention made of this requirement in the Investment Advisers Act of 1940. Sure, it makes good sense, but it is not required. There is nothing in the Securities Exchange Act of 1934 that relates to investment advisers, much less their contracts with clients. U6LO4

Question 53

To be in compliance with the rules under the Investment Advisers Act of 1940, which two of the following statements are **correct** regarding a registered investment adviser's relationship with promoters engaged to solicit for advisory business? 1. An individual who is subject to statutory disqualification from registration as an investment adviser representative may be compensated to solicit clients for the adviser when employed by a third-party promoter. 2. If the compensation exceeds a de miminis amount, there must be a written agreement between the investment adviser and the solicitor. 3. While the sales script used may be written by the promoter, making sure that its content is fair and reasonable is the responsibility of the investment adviser. 4. Cash referral fees to promoters hired to solicit may be paid only in the case of impersonal advisory services.

Answer 53

All relationships between registered investment advisers and a promoter where compensation is involved must be in writing. **It is important to note that compensation is defined as more than $1,000 over a 12 -month period.** Making sure that the content of any scripts is fair and balanced is the responsibility of the investment adviser, regardless of who prepared them. Those subject to statutory disqualification ("bad actors") may not be used as solicitors if compensation is to be received. Cash referral fees to promoters are not restricted to impersonal advisory services. U7LO1

Question 54

When discussing a stock exchange, a specialist is **A)** an electronic brokerage concern that executes trades online and through specialized trading order executing services **B)** a trader who makes a market in OTC stocks and ADRs **C)** a floor broker on the New York Stock Exchange who only executes trades for other brokers in return for commissions **D)** a member of the New York Stock Exchange who executes orders for other members and who also acts as a market maker charged with the responsibility of keeping an orderly market in designated stocks

Answer 54

**D)** a member of the New York Stock Exchange who executes orders for other members and who also acts as a market maker charged with the responsibility of keeping an orderly market in designated stocks ## Footnote A specialist is a member of the NYSE who executes orders for other members and who also acts as a market maker charged with the responsibility of keeping an orderly market in designated stocks. A specialist must have sufficient capital to buy and sell from his own account in order to maintain a liquid and orderly market. **The term** ***specialist*** **has been replaced by** ***designated market maker (DMM)*****, but it seems that specialist may still be in use on the exam.** A trader who makes a market in OTC stocks and ADRs is a market maker in the OTC market and not a specialist on an exchange. A specialist executes trades on an exchange. U22LO3

Question 55

Under the Securities Exchange Act of 1934, which of the following is (are) TRUE regarding the authority of the SEC to suspend trading? 1. The SEC may suspend all trading on a specific exchange for up to 90 days. 2. The SEC may summarily suspend trading on a particular nonexempt security for up to 10 days. 3. The SEC may suspend trading on exempt securities.

Answer 55

1 and 2 ## Footnote **The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification of the president of the United States** **and may summarily suspend securities trading in a registered security listed on a stock exchange for up to 10 days. The SEC does not have the authority to suspend trading in exempt securities.** U22LO3

Question 56

It is generally accepted that agents and IARs will give greater consideration to which of the following when making recommendations to their senior clients? 1. Age 2. Life stage 3. Retirement savings 4. Tax status

Answer 56

**II and III** ## Footnote All of these are important suitability considerations for all customers. **But when it comes to seniors, it is felt that life stage (including whether the customer is employed, retired, or nearing retirement) and current retirement savings relate particularly to seniors.** U19LO5

Question 57

An investor owns a long-term U.S. Treasury bond with a 5% coupon and 15 years to maturity. The client wishes to sell and receives a quote from a dealer of 104.22. This number represents

Answer 57

**the bid price** ## Footnote **If you are looking to sell, the dealer will pay you his bid price. Had the question said the client wanted to buy, then the quote would have been the offer (ask) price.** What does the 5% coupon and the 15 years to maturity have to do with the question? NOTHING. **And, knowing that treasuries are quoted in 32nds has nothing to do with it either.** And, one more thing. The price quote is above 100, so it is at a premium, BUT the better answer is bid price because the question is referring to the quote. U22LO5

Question 58

The main purpose of dividend reinvestment in a mutual fund accumulation plan is to

Answer 58

**compound the growth of a mutual fund investment** ## Footnote Reinvesting dividends compounds the growth of the fund with periodic purchases of new shares. Taxes are due on dividends whether or not they are reinvested. **Avoiding commissions or sales charges is not the main rationale for reinvesting dividends, even though sales charges are not applied to reinvested dividends.** U21LO2

Question 59

An investor purchases shares of ABC stock at $50 per share. One year later, ABC is selling for $54 per share and, at the end of the 2nd year, the price is $52 per share. ABC has paid dividends of $2 per year. Upon liquidation, the investor would have earned a return of

Answer 59

READ THE FUCKING QUESTION **D)**$6 per share The investor paid $50 and sold it for $52 for a $2 per share gain. During the 2-year holding period, $4 in dividends were paid. That is a total return of $6 per share. U23LO2 I got the dividend part right but didnt see that the shares were sold.

Question 60

One of your clients has recently turned 72 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from two previous employers. When computing the RMDs, 1. the RMD from each IRA is computed and may be made from one or both of them. 2. the RMD from each IRA is computed and must be paid from that IRA. 3. both 401(k)s are combined to compute the required distribution which may be made from one or both of them. 4. the RMD from each 401(k) is computed and must be paid from that 401(k).

Answer 60

1 and 4 ## Footnote **For RMD purposes, each IRA is figured separately and the distribution can be made from one or all of them. That is not the case with a 401(k) plan. Each account has a RMD that can only be paid from that account.** U24LO4

Question 61

For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis? ## Footnote **A)**C corporation **B)** Pension plan **C)** Sole proprietorship **D)** General partnership

Answer 61

D) General partnership ## Footnote **Because all the partners in a general partnership share collective liability, the investment policy to be followed in the business's account is based on the collective suitability of all partners.** Although the suitability is based on the owner of a sole proprietorship, there is only one owner, so a question asking about collective suitability doesn't ring true for that. U19LO2

Question 62

Ebony sets up a **revocable** trust, naming her daughter, Sylvia, as the sole beneficiary. Ebony has appointed the Pacific Atlantic Trust Institution (PATI) as the trustee. Any income to the trust will be taxable to

Answer 62

**C)**the grantor In almost all cases, income received into a revocable (grantor) trust, whether distributed or not, is taxable to the **grantor**. Things are different when the trust is irrevocable, but much more complicated and not likely to be tested. U21LO5

Question 63

You have a client who is not covered under an employer-sponsored retirement plan and has been contributing the maximum to her traditional IRA. She has just informed you that she won $1 million in the lottery, plans to continue working, and would like to continue to contribute to her IRA. Which of the following statements is **correct**?

Answer 63

**She may continue to contribute and her contribution will be tax deductible.** ## Footnote **The only time that there is an earnings limit is when the individual (or spouse) is covered under an employer-sponsored retirement plan. That is not the case here. It is important to note that the client intends to continue in her job because lottery winnings are not considered earned income for an IRA contribution.** U24LO4

Question 64

A customer who follows a strict dollar cost averaging program to acquire shares in a diversified common stock mutual fund should achieve

Answer 64

**C)lower average cost to acquire fund shares relative to the fund's average price over the buying period** ## Footnote By investing a constant amount of dollars at regular intervals, the investor buys fewer shares when the fund's price rises and more shares when the share price drops, thereby lowering the average cost. U20LO11

Question 65

KapCo Balance Fund has a NAV of $9.50 and POP of $10. Over the past 12 months, it distributed dividends totaling $.75 and capital gains totaling $1.00. What is KapCo's current yield?

Answer 65

**7.5%** This question gives you excess information. The first point is that capital gains are not included in calculation of a mutual fund's current yield. **You must also remember that the NAV is not involved.** The calculation is: $0.75 (annual dividend) = 7.5%$10.00 (POP) U23LO2

Question 66

Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio?

Answer 66

**Time-weighted return** ## Footnote **Time-weighted returns are used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals.** Dollar-weighted return is more commonly used for evaluating investor performance. U23LO2

Question 67

What is time-weighted return?

Answer 67

Time-weighted returns are used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals.

Question 68

What is dollar-weighted return?

Answer 68

Dollar-weighted return is more commonly used for evaluating investor performance where determining the internal rate of return is done by using the influence of additional investor deposits or withdrawals to or from the portfolio

Question 69

Financial Risk

Answer 69

Financial risk concerns itself with financing, particularly debt, so it is related to credit risk

Question 70

Market risk

Answer 70

Market risk is the uncertainty that the market price of a stock will drop even when earnings are strong. Most stocks follow the "market" and this would appear to be no exception.

Question 71

The present value of a dollar

Answer 71

indicates how much needs to be invested today at a given interest rate to equal a specific cash value in the future

Question 72

An analyst using the dividend growth model would take into account all of the following factors EXCEPT **A)** the current earnings per share **B)** the current dividend **C)** the investor's required rate of return **D)** the growth of the dividend

Answer 72

**A)** the current earnings per share ## Footnote **The dividend growth model is a stock valuation model that deals with dividends and their growth, discounted to today.** **The value of the stock equals next year's dividends divided by the difference between the required rate of return and the assumed constant growth rate in dividends.** U12LO6

Question 73

The board of directors of DDC omitted dividends in 2016 on their $100 par 6% noncumulative preferred stock. In 2017, a $2 preferred dividend was paid. For DDC, 2018 has been a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2018 in order to pay a common dividend?

Answer 73

$6 ## Footnote Because this preferred stock is noncumulative, any missed dividends need not be paid before common dividends can be declared. If this were a cumulative issue, any dividends not fully paid would go into arrears and accumulate until paid to the preferred cumulative stockholder. During this time, common dividends could not be declared or paid until the cumulative holders were paid in full. A 6% dividend on a $100 par means a $6 dividend each year per share. U12LO2

Question 74

Fraud would include the willful omission of

Answer 74

**A)**any material fact ## Footnote In order for the action to be fraud, it must be willful. But not all willful acts are fraudulent, depending on what is and is not a material fact. Material facts are those that a potential investor uses to make an investment decision. Nonmaterial facts may be omitted because they don't affect the selection process. If they are not pertinent, they are not material. The preliminary prospectus (red herring) does not include the public offering price, so there is nothing being omitted. U7LO6

Question 75

All of the following statements regarding the role of the chief compliance officer of an investment adviser are correct EXCEPT **A)** the chief compliance officer should be competent and knowledgeable regarding the applicable federal securities laws **B)** the chief compliance officer should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser **C)** the identity of an investment adviser's chief compliance officer must be disclosed on the Form ADV **D) the chief compliance officer should have a minimum of 5 years’ experience in securities compliance in matters involving public customers or accounts**

Answer 75

**D)the chief compliance officer should have a minimum of 5 years’ experience in securities compliance in matters involving public customers or accounts** ## Footnote **There is no specific experience requirement for the chief compliance officer of an investment adviser;** he should be competent and knowledgeable regarding the applicable federal securities laws. Additionally, the chief compliance officer should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the adviser. U7LO6

Question 76

An agent has a new client who is prone to **tergiversation**. As such, it would probably make sense to:

Answer 76

**B)accept unsolicited orders only** ## Footnote **Those who tergiversate repeatedly change their attitude or opinions. As a consequence, the client who likes an agent's recommendation one day may quickly change his mind the next.** Therefore, the agent could be placed in an untenable position, being unable to satisfy the client. To avoid this possibility, it would be most sensible to leave all the decisions to the client and only accept unsolicited orders. U7LO4

Question 77

Which of the following would be considered unethical under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? **A)**An investment adviser discloses in its brochure that, from time to time, it may sell securities recommended to clients directly out of the firm's inventory. **B)**A loan is made to an investment adviser representative by one of her clients who happens to be the chief loan officer where she maintains her principal banking relationship. **C)**An investment adviser representative receives an order to buy XYZ stock from an advisory client and simultaneously recommends that another advisory client sell that stock in an agency cross transaction. **D)**An investment adviser varies the annual fee based upon each client's assets under management, charging less for those with higher balances and more for those meeting the account minimum.

Answer 77

B)A loan is made to an investment adviser representative by one of her clients who happens to be the chief loan officer where she maintains her principal banking relationship. ## Footnote **It is an unethical and prohibited business practice for investment advisers and their representatives to borrow money from clients who are not in the business of lending money. In this case, the loan officer is the one who is doing the lending, not the bank.** IAs are permitted to base their fees on the amount of assets under management, generally charging a lower percentage to those with higher balances. IAs are permitted to act as principals in recommended trades, but appropriate disclosure must be made. In an agency cross transaction, a recommendation may be made to either, but not both, parties to the trade. U7LO4

Question 78

What is a covered account?

Answer 78

The term *covered account* does not apply to institutional customers, such as banks, pension funds, and investment companies. U7LO7 Example: A margin account in the name of Mary Beth Simmons

Question 79

The Investment Advisers Act of 1940 requires advisers to prepare and adhere to a code of ethics. Which of the following is charged with the responsibility of enforcing that code?

Answer 79

Chief compliance officer of the IA ## Footnote Each federal covered investment adviser must have an individual designated as the chief compliance officer (CCO). It is that person's responsibility to make sure that the code of ethics is being followed. Although each individual IAR must follow that code, it is the CCO with the supervisory responsibility. U7LO6

Question 80

Twenty-five individuals have formed an investment company. They have heard wonderful things about you as an investment adviser and ask if you would be interested in managing their portfolio. You reply that you would be interested but will only take the account if you can structure a compensation arrangement that calls for you to receive a base fee plus 18% of the profits to the extent that the account's performance exceeds a standard benchmark. Under the Uniform Securities Act, this type of agreement is allowable if **A)** the individual in charge of the investment company is a qualified investor **B)** the contract is signed by one of the investors who is an accredited investor **C)** a majority of the shareholders in the investment company are qualified investors **D)** the investment company has net worth of at least in excess of $2.1 million or will place at least $1 million in assets under management with the IA

Answer 80

**D)** the investment company has net worth of at least in excess of $2.1 million or will place at least $1 million in assets under management with the IA An investment adviser may enter into, extend, or renew an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds, or any portion of the funds, of the client if the client entering into the contract is: 1. a natural person or a company who, immediately after entering into the contract, has at least $1 million under the management of the investment adviser; or 2. a person who the investment adviser and its investment adviser representatives reasonably believe, immediately before entering into the contract, is a natural person or a **company whose net worth**, at the time the contract is entered into, exceeds $2,100,000. Do not be confused by thinking this is an institutional client (a registered investment company)—they need at least 100 investors and registration with the SEC. U7LO1

Question 81

A major stockholder of XYZ Corporation makes frequent purchases and sales of this stock on the open market to give the impression that it is actively traded. This unethical practice is best described as

Answer 81

wash trades

Question 82

Form ADV Part 1A includes

Answer 82

Business name, Past 5 years business and current affiliations of control persons Educational background Nature of business Balance sheet certified by public accountant Scope of authority over client funds Compensation arrangements Criminal record of partners Portion of business devoted to providing investment advice

Question 83

Form ADV Part 1B is for state covered or federal IAs?

Answer 83

Form ADV part 1B is for State covered advisers ONLY

Question 84

When do state covered investment advisers registrations become effective?

Answer 84

Effective noon of the 30th day for USA

Question 85

When do federally covered IAs registrations become effective?

Answer 85

On the 45th day for the SEC. It does not specify at noon like state registration does.

Question 86

What is the purpose of updating Form ADV annually?

Answer 86

This is to show AUM to verify continued SEC registration, must have at least $90 million in AUM This must be updated to the SEC 90 days of fiscal year's end It is also used to show a change in management, state of location ,or form of business requires the IA to file an amended form ADV promptly

Question 87

If an adviser wants to withdrawal what form do they file? Also what is the effective withdrawal time for state/SEC?

Answer 87

Withdrawal is done on ADV-W * Effective 30th day for USA * Effective 60th day for SEC

Question 88

Form ADV part 2A and 2B describes what?

Answer 88

These are the brochure sections of ADV, Part 2A describes the firm Supplemented by Part 2B describes the personnel - the people who are making the investment decisions. This brochure uses the required “disclaimer” - this says that info is sent to the SEC/administrator, but it isn't approved by anyone

Question 89

UNDER THE USA, it says that if you deliver the contract prior to 48 hours before it is signed… then there is not a what?

Answer 89

5 day free look. This is not federal!

Question 90

If the IA indicates in their brochure that they are taking a substantial prepayment of fees of $\_\_\_ (USA) or $\_\_\_ (SEC) or HAS CUSTODY (USA only) then what must you include in your brochure (2 things)?

Answer 90

$500 USA $1200 SEC There must be a balance sheet and a disclosure of material legal or disciplinary action within past 10 years, including fines of $2,500 or more.

Question 91

What are the two cases where a state registered IA must provide a balance sheet in their brochure?

Answer 91

They require prepayment of fees of $500 or more 6 months or more in advance OR they have custody of client funds For SEC… the balance sheet is only necessary for substantial prepayment of fees of $1,200 or more in advance.

Question 92

There are two types of clients where you do not need to brochure if the advisory clients are limited to the following:

Answer 92

* Investment companies * Impersonal advice (subscriptions) that cost under $500

Question 93

Define custody for an state registered IA

Answer 93

* Holds customer cash or securities * Authority to disburse funds from bank account without client's consent * Automatic fee payments (if this is the only thing the IA has… then they are not required to meet the stricter bonding requirements.

Question 94

If an IA uses a qualified custodian what must the IA have?

Answer 94

The IA must be subject to an **annual surprise independent** audit

Question 95

Debt to equity ratio is really

Answer 95

Long term debt-to-total-capital ratio Long term debt / total capitalization (assets minus liabilities)

Question 96

A client owns an investment-grade bond with a coupon of 7%. If similarly rated bonds are being issued today with coupons of 5%, and the market is efficient, it would be expected that the client's bond

Answer 96

has a zero net present value ## Footnote With a discount rate of 5% (the discount rate in a present value computation is the current market interest rate), a debt instrument with a 7% coupon rate will be selling at a premium (interest rates down, prices up). If the market is efficiently pricing that bond, i**ts market price should be equal to its present value, resulting in an NPV of zero.** U10LO1

Question 97

If a company successfully gets the owners of its long-term bond issue paying 7% annual interest to exchange them on a dollar-for-dollar basis with the company's preferred stock paying a 7% annual dividend, what is the effect on EPS?

Answer 97

**Decrease** ## Footnote The 7% interest payment is moved from a pre-tax deduction to an after-tax dividend payment. This increases the amount of taxable income, thereby increasing the company's tax liability. The 7% payment remains the same. With an increased tax burden and everything else remaining the same, the EPS will decrease. U10LO7

Question 98

XYZ Corporation common stock has a market price of $45 per share and earnings per share of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings ratio of XYZ stock will be

Answer 98

15 Before the split, the stock had a P/E ratio of 15 ($45 per share ÷ $3). After the split, the price per share and the EPS drop in the same proportion, leaving the P/E ratio unchanged (new price = $15, new EPS = $1). U10LO7

Question 99

An individual is employed by a federal covered investment adviser for the sole purpose of giving advice related to monitoring investment portfolios, but only to qualified employee benefit plans. Under the Uniform Securities Act, this individual is

Answer 99

defined as an IAR because the individual is rendering investment advice ## Footnote Regardless of whom the advice is given to, unless there is some kind of exemption involved, individuals working for IAs (state or federal) must register as IARs in at least one state. It makes no difference if the plan is qualified or not. U2LO1

Question 100

An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients

Answer 100

**when informed by the investment adviser** that the representative's registration is effective ## Footnote Passing the exams does not automatically give one an effective investment adviser representative's license. **Notice is received by the investment adviser from the appropriate state and/or federal authorities and then, in accordance with that firm's procedures, advisory activity may start. The Administrator does not have direct contact with the individual.** U2LO3

Question 101

An investment adviser is sued by a client. If the client is successful in the civil proceeding, under the Uniform Securities Act, the client may be awarded

Answer 101

the money paid for the advice, any losses resulting from the advice plus interest, costs, and attorney's fees, less any revenue gained from the advice ## Footnote Securities professionals may be sued by their clients under civil law if they lose money and the securities professional has violated the Uniform Securities Act in connection with the loss. In the case of an investment adviser (or IAR) the client is entitled to recover the consideration (money) paid for such advice and any loss due to such advice, together with interest at the state's legal rate from the date of payment of the consideration plus costs and reasonable attorney's fees, less the amount of any income received from such advice. U5LO3

Question 102

**Under the Investment Advisers Act of 1940**, what is the maximum fine that may be imposed for violating the act?

Answer 102

**Any person who violates the act or SEC rules is subject to a fine of up to $10,000 and/or a prison term of up to 5 years.** Note that this is different than the Uniform Securities Act, which provides for penalties of 3 years and $5,000. U5LO4

Question 103

There are several ways that a securities professional's registration can be terminated. Nonpunitive termination of a securities professional's registration could be done through 1. cancellation 2. suspension 3. revocation 4. withdrawal

Answer 103

1 and 4 ## Footnote Cancellation and withdrawal are nonpunitive methods of termination of a person's registration. Suspension, revocation, and denial are considered forms of punishment. U5LO2

Question 104

An agent unintentionally sells nonexempt securities that have not been registered. Under the Uniform Securities Act, the broker-dealer may write a letter and offer to buy back the security plus interest, minus any income received. The client gives up the right against the firm to bring action in court if he does not respond within how many days of receipt of the letter?

Answer 104

**30 days** ## Footnote The right of rescission under the Uniform Securities Act allows the customer 30 days to respond to a rescission letter from a broker-dealer offering to buy back securities sold illegally. If the customer does not accept or reject the offer, the customer waives his right to bring court action against the adviser for the improper sale. U5LO3

Question 105

SYZ Corporation is having a rights offering that will enable existing shareholders to acquire 1 share of SYZ common stock for each 10 shares they currently own. Under the Uniform Securities Act, this would be considered 1. an offer of SYZ rights 2. a sale of SYZ rights 3. an offer of SYZ common stock 4. a sale of SYZ common stock

Answer 105

**A)** I and III ## Footnote This is obviously an "offer" of the rights (that's what the question says). In addition, the USA states that any offer of a right or warrant that gives the holder the ability to subscribe to another security is also an offer of that security. U5LO1