Your FREE Series 65 (Uniform Investment Adviser Law Exam) Practice Test 2026 – 670+ Q&A

Series 65 Practice Questions

1. Over time, a country's trade deficit will lead to a decline in the value of its currency because
   • Imports exceed exports, so heavy selling pressure hits the currency
   • The money supply contracts, so borrowing costs climb for households
   • Domestic prices surge, so foreign buyers abandon the export markets
   • Interest rates increase, so overseas capital floods the bond market

   Correct answer: Imports exceed exports, so heavy selling pressure hits the currency

   A trade deficit means the country buys more abroad than it sells abroad. Paying for that excess of imports requires selling the home currency to obtain foreign currency, so the deficit produces continuous selling pressure and the exchange rate falls. A contracting money supply tightens credit but tends to support a currency rather than weaken it. Rising domestic prices do discourage foreign buyers, but that is a consequence of a weaker currency reversing, not the cause of the decline. Higher interest rates attract capital from abroad and lift the currency instead of depressing it.

2. A free trade agreement is entered into between Country A and Country B. As time goes on, the value of Country A's currency increases while that of Country B's decreases. The effect of this will likely be that
   • The free trade agreement will be abrogated
   • Country A’s exports to Country B will increase
   • Country A’s imports from Country B will increase
   • Country B’s imports from Country A will increase

   Correct answer: Country A’s imports from Country B will increase

   As a country's currency increases in value, its exports become more expensive, so they will fall. On the other hand, with a stronger currency, the country's citizens will have a greater buying power, and this will cause imports to increase.

3. If the dollar weakens, which of the following statements is TRUE?
   • The dollar buys more foreign currency.
   • Foreign securities denominated in their domestic currency decrease in value to the U.S. investor.
   • An increase in U.S. interest rates might strengthen the dollar.
   • U.S. exports become less competitive.

   Correct answer: An increase in U.S. interest rates might strengthen the dollar.

   When U.S. interest rates rise, foreign investors invest in U.S. dollar-denominated securities, thereby increasing the demand for dollars and causing the dollar to strengthen.

4. All of the following actions will increase the deficit in the U.S. balance of payments EXCEPT
   • Foreign aid payments sent overseas by the federal government
   • New plants built overseas by American manufacturers of goods
   • Purchases of American Treasury issues made by foreign buyers
   • Imported Japanese cars bought by domestic families each year

   Correct answer: Purchases of American Treasury issues made by foreign buyers

   A debit in the balance of payments occurs when money leaves the country. Foreign aid sent abroad, plants built overseas by domestic manufacturers, and imported automobiles all send dollars out and enlarge the deficit. When foreigners purchase American Treasury issues the money flows in, which is a credit that reduces the deficit rather than adding to it.

5. A significant increase in the importing of goods into the United States would likely have what effect on the strength of the U.S. dollar?
   • No effect
   • Fluctuation both ways
   • Weaken
   • Strengthen

   Correct answer: Weaken

   Currency rates tend to ebb and flow as the balance of payments shift from positive to negative. A significant increase in imports represents a large outflow of U.S. dollars which results in a negative trade balance. As this builds, the value of the dollar falls against those currencies who have a positive trade balance.

6. If a country's current account shows a trade deficit, it is most likely that
   • Short-term flows are greater than long-term flows
   • Tax payments are greater than tax receipts
   • Net exports are greater than zero
   • Imports are greater than exports

   Correct answer: Imports are greater than exports

   A trade deficit occurs when imports are greater than exports.

7. The primary function of the Federal Reserve System (the Fed) is to
   • Carry out monetary policy
   • Implement fiscal policy
   • Manage the revenues and expenditures of the federal government
   • Issue bonds to the general public

   Correct answer: Carry out monetary policy

   The Federal Reserve controls the money supply, enabling it to significantly affect interest rates. The Fed will follow a loose, or easy, monetary policy when it wants to increase the money supply to expand the levels of income and employment. In times of inflation, when it wants to constrict the money supply, the Fed will follow a tight monetary policy. The U.S. Treasury issues bonds to the general public to finance the budget deficits of the federal government.

8. A research analyst studying the performance of ABC Industries compares that with reports from other analysts reviewing other companies in other industries. This is known as
   • Fundamental analysis
   • Bottom-up analysis
   • Top-down analysis
   • Sector analysis

   Correct answer: Bottom-up analysis

   Bottom-up analysis starts by attempting to find superior performing companies, regardless of the industry. Those analysts believe that these companies will provide attractive returns even if they are in an industry sector that is in a negative position in the economic cycle.

9. XYZ Aircraft Manufacturing Corporation, based in the United States, announces a multibillion dollar order for its new jumbo jet from Fly Airlines, a Japanese-based carrier. When the sale is completed, there will be
   • A debit to the current account of the United States
   • No effect on the balance of trade
   • A credit to the current account of the United States
   • A credit to the current account of Japan

   Correct answer: A credit to the current account of the United States

   Whenever money from a foreign source enters the United States, it becomes a credit item in the U.S. balance of payments.

10. When a bank that is a member of the Federal Reserve System borrows from another member bank, the rate that is charged is known as
    • The federal funds rate
    • The call loan rate
    • The discount rate
    • The prime rate

    Correct answer: The federal funds rate

    Loans between banks, usually on an overnight basis, are made at the federal funds rate. It is the most volatile of the money market rates. The discount rate is the rate charged when banks borrow directly from the Federal Reserve.

11. A securities analyst's approach is to look at the overall economy and try to forecast which industry will outperform. Then, the analyst searches for those individual companies within that industry that appear to have the best expected return and add those to the recommended list. In so doing, this analyst is using
    • The bottom-up approach
    • The optimal portfolio approach
    • The top-down approach
    • The business cycle approach

    Correct answer: The top-down approach

    This is the basic approach of top-down analysis—start with the "big picture" and narrow it down to the most attractive individual stocks.

12. An expansionary fiscal policy would usually result in
    • A government decreasing government spending to slow down economic activity
    • A government operating a balanced budget
    • A government increasing government spending to stimulate economic activity
    • A government increasing taxes in the economy

    Correct answer: A government increasing government spending to stimulate economic activity

    An expansionary fiscal policy is one that is deliberately implemented to boost demand. Increased spending would be an expansionary policy.

13. A securities analyst's stock selection method is to begin by looking for superior companies, regardless of their industry sector or the condition of the overall economy. In so doing, this analyst is using
    • The business cycle approach
    • The top-down approach
    • The optimal portfolio approach
    • The bottom-up approach

    Correct answer: The bottom-up approach

    This is the basic approach of bottom-up analysis. Rather than focusing the attention on the overall market (the "macro" view of the economy) or the sectors that are likely to outperform, this approach seeks to identify, usually based on the company's fundamentals, the most attractive individual stocks.

14. Among the responsibilities of the Federal Reserve (the Fed) is influencing the supply of money and credit in the economy. When performing this function, adjusting which of the following is not a tool at its disposal?
    • The discount rate
    • The prime rate
    • The activities of the Federal Open Market Committee
    • The reserve requirements

    Correct answer: The prime rate

    The prime rate is set by the banks. All of the others are under the control of the Fed.

15. A securities analyst's approach is to look at the overall economy and try to forecast which industry will outperform. Then, the analyst searches for those individual companies within that industry that appear to have the best expected return and add those to their recommended list. In so doing, this analyst is using the
    • Bottom-up approach
    • Top-down approach
    • Optimal portfolio approach
    • Business cycle approach

    Correct answer: Top-down approach

    This is the basic approach of top-down analysis – start with the "big picture" and narrow it down to the most attractive individual stocks.

16. Final approval of the annual operating budget for the United States is given by
    • The president
    • The Conference of Governors
    • The Congress
    • The Cabinet

    Correct answer: The Congress

    The United States Congress is responsible for voting approval of the budget submitted by the president.

17. An analyst uses a stock selection method that involves analyzing a specific corporation, followed by evaluating where it fits in its industry and then viewing the overall economy. The term that best describes this method is
    • Efficient frontier
    • Bottom-up
    • Capital asset pricing model
    • Top-down

    Correct answer: Bottom-up

    The bottom-up method of stock selection goes from micro to macro—that is, identify the specific company and then working up through the overall economy. It is the opposite of top-down.

18. Country A develops a new product that is in high demand around the world. The likely effect of this would be
    • A trade surplus for Country A
    • A trade deficit for Country A
    • An increase in the income tax rates of Country A
    • A decrease in the value of the currency of Country A

    Correct answer: A trade surplus for Country A

    When exports exceed imports (the likely case here), it leads to a trade surplus. Invariably, that causes a positive balance of payments, which has the tendency to increase the value of that country's currency relative to others. There is no way to know how this new product will impact the tax legislation of Country A.

19. A securities analyst's stock selection method is to begin by looking for superior companies, regardless of their industry sector or the condition of the overall economy. In so doing, this analyst is using the
    • Optimal portfolio approach
    • Bottom-up approach
    • Top-down approach
    • Business cycle approach

    Correct answer: Bottom-up approach

    This is the basic approach of bottom-up analysis. Rather than focusing the attention on the overall market (the "macro" view of the economy) or the sectors that are likely to outperform, this approach seeks to identify, usually based on the company's fundamentals, the most attractive individual stocks.

20. Which of the following statements best describes what will happen when the value of the American dollar rises in relationship to foreign currencies?
    • Foreign goods and services will become more expensive for Americans.
    • The risk of stagflation will increase.
    • Shares of foreign stock will be worth more in terms of American dollars.
    • Foreign goods and services will become less expensive for Americans.

    Correct answer: Foreign goods and services will become less expensive for Americans.

    When the value of the dollar rises, it will buy more foreign money, making foreign goods and services less expensive for Americans. Because foreign securities are valued in foreign currencies, shares of foreign stock will be worth fewer American dollars when the value of the dollar increases.

21. Overnight loans between banks are made at
    • The discount rate
    • The federal funds rate
    • The prime rate
    • The call loan rate

    Correct answer: The federal funds rate

    When a bank borrows from another bank on an overnight basis, it is at the federal funds rate. When a bank borrows from the Federal Reserve, it does do at the discount rate. The prime rate is charged by the banks to their stronger borrowers, and the call loan rate is what broker-dealers pay on stock market collateral pledged for margin accounts.

22. Which of the following statements reflects the monetarist economic position?
    • The amount of money in the economy sets the price level, so the Federal Reserve should raise it gradually and predictably
    • The amount of money in the economy matters little, and the Federal Reserve should not attempt to control the money supply
    • The amount of money in the economy is established by the prevailing levels of borrowing costs, not by the Federal Reserve
    • The amount of money in the economy shrinks whenever taxes increase, so raising tax rates is the surest cure for inflation

    Correct answer: The amount of money in the economy sets the price level, so the Federal Reserve should raise it gradually and predictably

    Monetarists hold that the quantity of money determines the general price level over time, so they want the money stock expanded at a gradual and predictable rate rather than managed reactively. Holding that money is unimportant and should be left alone is the opposing position, which credits real goods and services instead. Treating the money stock as merely the product of interest rates reverses the causation monetarists assert. Raising tax rates is fiscal policy, which monetarists regard as the wrong instrument for controlling inflation.

23. Which of the following statements describes the federal funds rate?
    • The charge on credit granted by the Federal Reserve to member depository institutions
    • The benchmark charge on lending extended by money center lenders to corporate clients
    • The charge on reserves lent among commercial banks overnight in million dollar blocks
    • The charge on credit advanced by creditors to brokers against listed stock collateral

    Correct answer: The charge on reserves lent among commercial banks overnight in million dollar blocks

    The federal funds rate is the interest charged on reserves traded among commercial banks for overnight use, in amounts of one million dollars or more. Credit granted by the Federal Reserve to member depository institutions is the discount rate. The benchmark charge on lending to corporate borrowers by large money center banks is the prime rate. Credit advanced to brokers against listed stock collateral is the broker call loan rate.

24. Which of the following is a component of U.S. fiscal policy?
    • Taxes and budgeting
    • Money supply
    • Reserve requirements
    • Discount rate

    Correct answer: Taxes and budgeting

    U.S. fiscal policy is determined by the president and Congress through budgeting and taxation. The other 3 choices are monetary policies employed by the Fed.

25. Which school of economists encourages a government to spend money to move the economy into an expansionary phase?
    • Supply side
    • Classical
    • Monetarist
    • Keynesian

    Correct answer: Keynesian

    Keynesians advocate government intervention in the workings of the economy through increased government spending, which in turn increases aggregate demand.

26. When analyzing the business cycle, you would expect which phase to occur before reaching the trough?
    • Contraction phase
    • Expansionary phase
    • Recovery period
    • Prosperity peak

    Correct answer: Contraction phase

    The business cycle moves through expansion, peak, contraction and trough. The contraction phase is the stretch of declining activity that ends at the trough, so it is the phase reached immediately before it. An expansionary phase and a recovery period both follow the trough, and the prosperity peak comes before the contraction begins.

27. Which term refers to the taxation, expenditures, and debt management of the federal government?
    • Open market operations
    • Revenue code procedures
    • Monetary policy
    • Fiscal policy

    Correct answer: Fiscal policy

    The primary components of a government's fiscal policy are taxes and expenses.

28. Which of the following is not a characteristic of expansionary monetary policy?
    • The reserve requirement will be increased.
    • Interest rates may decline.
    • More funds are available for banks to lend to borrowers.
    • The money supply will increase.

    Correct answer: The reserve requirement will be increased.

    Expansionary monetary policy is also referred to as easy monetary policy. The Federal Reserve follows an easy monetary policy when it wants to expand the level of income and employment. The Federal Reserve may decrease rather than increase the reserve requirement affording banks the opportunity to loan more money to borrowers.

29. A free trade agreement is entered into between Country A and Country B. As time goes on, the value of Country A's currency decreases while that of Country B increases. The effect of this will likely be that
    • Country A’s imports from Country B will increase
    • Country A’s exports to Country B will decrease
    • Country B’s imports from Country A will increase
    • The free trade agreement will be abrogated

    Correct answer: The free trade agreement will be abrogated

    As a country's currency decreases in value, its exports become less expensive so they will rise. On the other hand, with a weaker currency, the country's citizens will have less buying power, and this will cause imports to decrease.

30. When a bank's reserve account is running low, it might choose to borrow from the Fed. When doing so, the bank will be charged
    • The prime rate
    • The discount rate
    • The federal funds rate
    • The call loan rate

    Correct answer: The discount rate

    When a bank borrows from the Federal Reserve, it does so at the discount rate. When borrowing from another bank, it is at the federal funds rate. The prime rate is charged by the banks to their stronger borrowers, and the call loan rate is what broker-dealers pay on stock market collateral pledged for margin accounts.

31. The economic theory that says economic growth results from lower tax rates and lower government spending is
    • Keynesian theory
    • Monetary theory
    • Demand-side theory
    • Supply-side theory

    Correct answer: Supply-side theory

    Supply-side economics is the theory of Arthur Laffer, who believed that heavy taxing and government intervention have a negative effect on the economy.

32. If the U.S. dollar has been appreciating against foreign currencies, all of the following statements are true EXCEPT
    • The U.S. dollar buys more of foreign currencies
    • U.S. goods become more expensive in foreign countries
    • Foreign goods become cheaper in the United States
    • U.S. exports become more competitive

    Correct answer: U.S. exports become more competitive

    The U.S. exports will cost more to foreigners and become less competitive. The dollar is worth more in terms of foreign currencies and will purchase more foreign goods per dollar.

33. Which of the following would lead to a debit to our foreign account balance?
    • U.S. residents taking vacations abroad
    • Foreign governments repaying loans to U.S. banks
    • An increase in exports
    • Residents of other countries buying apartments here

    Correct answer: U.S. residents taking vacations abroad

    When our foreign account balance is debited, that creates a negative action. It is like a charge on your credit card – your account is debited. On the other hand, a credit to your card account is money coming to you. Our foreign accounts balance will be debited whenever our money goes out rather than coming in. When U.S. residents take vacations abroad, our money is being spent on hotel, restaurants, and other items in foreign countries. The other choices represent a credit to our foreign account balance. When exports increase, more foreign money comes in. When foreigners buy property here, we get their money, and when loans are repaid here, once again, foreign money comes into the U.S.

34. Which of the following industries would be least cyclical?
    • Heavy equipment
    • Leisure products
    • Supermarket chain
    • Automobile manufacturing

    Correct answer: Supermarket chain

    Industrial activity usually follows business cycles, which have more impact on some industries than others. The food industry is one for which the demand is not generally based on economic conditions.

35. If an economist were to describe defensive issues, he would probably not include companies that produce
    • Cigarette products
    • Bottling companies
    • Electric utilities
    • Building materials

    Correct answer: Building materials

    Defensive issues are those whose sales hold up when the economy weakens. Cigarettes, bottled beverages and electric utilities are all bought in much the same volume in bad times as in good. Building materials depend on construction, which contracts sharply when the economy slows, so those companies are cyclical rather than defensive.

36. During the past 2 quarters, the GDP declined by 3%, unemployment rose by 0.7%, and the Consumer Price Index fell off by 1.3%; this economic condition is called
    • Inflation
    • Depression
    • Stagflation
    • Recession

    Correct answer: Recession

    Two consecutive quarters of economic decline is termed a recession.

37. Economists have determined that the economy is slowing down. Orders for durable goods have been declining and unemployment, while not a reason for concern, has been steadily increasing over the past year. Given the information provided, what phase of the business cycle is the economy currently experiencing?
    • Deflation
    • Trough
    • Contraction
    • Expansion

    Correct answer: Contraction

    The contraction phase is characterized by business sales falling, unemployment increasing, and the gross domestic product (GDP) growth falling. DUPLICATE

38. Gross Domestic Product (GDP) is increasing. Real interest rates are relatively high. Consumer sentiment is strong, as are auto and retail sales. Labor productivity is declining. What state of the business cycle is the economy likely experiencing?
    • Expansion to peak
    • Trough to recovery
    • Peak to contraction
    • Recovery to expansion

    Correct answer: Expansion to peak

    When the economy is moving from expansion to peak, labor productivity starts to decline and interest rates are at a level where the Federal Reserve Board usually starts to contract or slow economic activity.

39. While reviewing nationwide industrial production figures, an analyst notices that inventories have been rising. From that information, one would gather that the economy is most likely in which phase of the business cycle?
    • The expansionary stage
    • The recovery period
    • The prosperity peak
    • The contraction phase

    Correct answer: The contraction phase

    Inventories build up when goods are produced faster than customers buy them, which is what happens once demand weakens. That is the contraction phase. During an expansionary stage and a recovery period demand is strong and inventories are drawn down, and at the prosperity peak activity is still running at its highest level.

40. Which of the following industries would tend to be the most cyclical?
    • Cigarette manufacturers
    • Detergent manufacturers
    • Margarine manufacturers
    • Appliance manufacturers

    Correct answer: Appliance manufacturers

    Cyclical industries sell big-ticket goods that buyers can postpone until times improve, and household appliances are exactly that, so appliance manufacturers swing with the business cycle. Cigarettes, detergent and margarine are consumer staples that households keep buying whatever the economy is doing, so those manufacturers are noncyclical.

41. Which of the following is considered the most accurate method of measuring GDP?
    • As a function of GNP
    • Eurodollars
    • Actual dollars
    • Constant dollars

    Correct answer: Constant dollars

    Constant dollars are mathematically adjusted to remove the effects of inflation, so when economists compare the gross domestic product of one period with that of another, they measure economic activity rather than inflation.

42. If the Consumer Price Index (CPI) is down but consumer demand is up, the economy is likely in which stage of the business cycle?
    • Contraction to trough
    • Peak to contraction
    • Recovery to expansion
    • Recovery to trough

    Correct answer: Recovery to expansion

    As prices trend downward and consumer demand increases, the economy is moving from recovery to expansion. As demand continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak. DUPLICATE

43. Which of the following is most likely to be regarded as a defensive stock?
    • A stock selling at an extremely high PE ratio
    • A stock with a strong cash position and little debt
    • A food company stock
    • An aerospace stock

    Correct answer: A food company stock

    A defensive stock maintains future earnings that are likely to withstand an economic downturn. Typical examples are stocks of those firms that supply basic consumer necessities such as foodstuffs. A stock selling at an extremely high PE ratio is indicative of a speculative company or one that can decline in value rapidly.

44. In comparing the change in the GDP from 1 year to another, to arrive at an accurate figure, each year's GDP should be converted to which of the following?
    • Constant dollars
    • International dollars
    • Dollars in terms of gold bullion
    • Dollars valued by exchange with foreign currencies

    Correct answer: Constant dollars

    The GDP must be adjusted for inflation to get an accurate comparison from 1 year to the next.

45. An investment strategy that is designed to minimize risk and preserve the investor's principal is
    • A growth investment strategy
    • A defensive investment strategy
    • A market capitalization investment strategy
    • An aggressive investment strategy

    Correct answer: A defensive investment strategy

    An investment strategy can be either defensive or aggressive. A defensive strategy is one that is intended to minimize risk, preserve capital, and provide a somewhat stable income. An aggressive investment strategy is designed to maximize returns and assume greater risks.

46. The contraction phase of the business cycle is least likely accompanied by
    • Decreasing inflation pressure
    • Decreasing unemployment
    • Decreasing business and consumer expenditures
    • Low or negative economic growth

    Correct answer: Decreasing unemployment

    An economic contraction is likely to feature increasing unemployment (i.e., decreasing employment), along with declining economic output and decreasing inflationary pressure. Watch out for the double negatives.

47. Interest rates are rising. An analyst would be most likely to state that the business cycle is in which stage?
    • Contraction
    • Trough
    • Peak
    • Expansion

    Correct answer: Expansion

    It is during periods of economic expansion that interest rates tend to increase. They tend to fall during contractions.

48. Interest rates are declining. An analyst would be most likely to state that the business cycle is in which stage?
    • An expansionary period
    • A prolonged recovery
    • A contraction stage
    • A cyclical peak

    Correct answer: A contraction stage

    Interest rates fall when demand for loans is weak, and loan demand is weak while business activity is shrinking, so declining rates point to a contraction stage. Rates tend to rise through an expansionary period and through a prolonged recovery as credit demand builds, and they are typically at or near their highest at a cyclical peak.

49. Which of the following would NOT be considered a defensive security?
    • Steel company stock
    • Tobacco stock
    • Food chain stock
    • Utility company stock

    Correct answer: Steel company stock

    Steel is cyclical and is not considered defensive; defensive stocks are generally less affected by the business cycle.

50. To determine the amount of change in the GDP from 1 year to another, both years' GDP should be converted into
    • The exchange value of the dollar, as compared with major foreign currencies
    • The current dollar price of gold bullion
    • International depositary receipts
    • Constant dollars

    Correct answer: Constant dollars

    To compare GDP from 1 year to another, and thus to compare the amount of actual economic activity, economists use constant dollars to eliminate distortions caused by inflation.

51. The Conference Board, a nongovernmental nonprofit organization, regularly publishes a list of economic indicators. Which of the following would be included in their list of leading indicators?
    • Weekly initial claims filed for jobless benefits
    • Manufacturing and retail trade sales per quarter
    • Average duration of unemployment in recent years
    • Average prime borrowing rate at commercial banks

    Correct answer: Weekly initial claims filed for jobless benefits

    Weekly initial claims for jobless benefits is one of the Conference Board's leading indicators, because layoffs register in claims before they register in output. Manufacturing and trade sales is a coincident indicator that moves with the economy. The average duration of unemployment and the average prime rate are both lagging indicators, turning only after the economy has already turned.

52. An investor purchasing gold bullion is most likely looking for an investment that is
    • Countercyclical
    • Cyclical
    • Income producing
    • Exchange traded

    Correct answer: Countercyclical

    Countercyclical assets are those whose prices tend to move in the opposite direction of the overall economy. Historically, the price of precious metals, especially gold (and stock in gold mining companies), moves up when the economy enters the contraction phase and moves in the reverse direction during expansion. Cyclical stocks follow the cycle. There is no "gold bullion exchange". It is a dealer market with bullion dealers all over the world setting their own spreads. A bar of gold does not provide income.

53. The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a lagging economic indicator?
    • Nonagricultural employment
    • Manufacturers’ new orders for consumer goods
    • Building permits (housing starts)
    • Average prime rate

    Correct answer: Building permits (housing starts)

    Both the S&P 500 and housing permits are leading economic indicators, as is the measure of hours worked because it reflects changes in the average workweek during the current period. The average prime rate is a lagging indicator because, in an economic downturn, the longer rates stay low, the quicker the recovery should be.

54. If the Consumer Price Index (CPI) is up and consumer demand is also up, the economy is likely in which stage of the business cycle?
    • Peak to contraction
    • Contraction to trough
    • Recovery to trough
    • Expansion to peak

    Correct answer: Expansion to peak

    As prices trend higher and consumer demand increases, the economy is moving from expansion to a peak. As demand continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak.

55. If a customer purchases a food company stock and a utility stock, the customer's portfolio is
    • Balanced
    • Cyclical
    • Diversified
    • Defensive

    Correct answer: Defensive

    Food company stocks and utilities are defensive investments. Defensive investments are those that tend to hold up well in economic downturns.

56. The economy has gone through 3 consecutive quarters of economic decline with no immediate end in sight, and therefore could be said to be
    • In a recovery
    • Lagging
    • In a depression
    • In a recession

    Correct answer: In a recession

    Recession is defined as 2 or more consecutive quarters of economic decline. It would have to be at least 6 quarters to be considered a depression.

57. Which of the following statements about the Consumer Price Index (CPI) is NOT true?
    • The CPI is the most widely quoted indicator of consumer price inflation in America
    • The CPI is a consumer price statistic that a national agency publishes every month
    • The CPI compares consumer price levels and the wholesale prices that drive them up
    • The CPI is assembled from a consumer basket of food, housing, medical and clothing

    Correct answer: The CPI compares consumer price levels and the wholesale prices that drive them up

    The CPI does not relate consumer prices to wholesale prices. It measures retail prices only, and says nothing about whether wholesale costs are passed through to the consumer, so that statement is the one that is not true. The other three are accurate: the CPI is the most commonly quoted measure of inflation or deflation in the United States, it is compiled and released monthly by a federal statistical agency, and it is built from a broad basket covering food, housing, medical care and clothing.

58. An economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs, at which time, the rate of inflation changes is known as
    • Creeping inflation
    • Secular stagnation
    • Inertial inflation
    • Imported inflation

    Correct answer: Inertial inflation

    This is the definition of inertial inflation: the rate of price increase settles at a stable equilibrium and stays there until a shock to the system moves it. Creeping inflation describes a low rate of increase, not a rate that is anchored until shocked. Secular stagnation describes prolonged weak growth. Imported inflation describes price increases arriving through the higher cost of goods bought abroad.

59. Which of the following best describes the economic phase in which unemployment increases and businesses operate at their lowest capacity levels?
    • Contraction
    • Expansion
    • Trough
    • Peak

    Correct answer: Trough

    A trough in a business cycle occurs at the end of a contraction phase when businesses are operating at their lowest capacity levels.

60. Expansions in the business cycle are characterized by
    • Rising household debts, growing unsold inventories, and falling factory order backlogs quickly
    • Rising consumer demand, growing industrial output, and climbing stocks and property valuations
    • Rising college enrollment, growing military enlistment, and longer spells of adult joblessness
    • Rising newspaper want ads, shrinking nonfarm payrolls, and dropping monthly overtime schedules

    Correct answer: Rising consumer demand, growing industrial output, and climbing stocks and property valuations

    An expansion shows increasing consumer demand for goods and services, increasing industrial production, and rising stock and property values; business activity is simply expanding. Unsold inventories piling up while order backlogs fall is the signature of weakening demand, not expansion. College enrollment and military enlistment tend to climb when jobs are scarce, and longer spells of joblessness point the same way. Shrinking payrolls and shorter overtime also describe a contraction.

61. To reflect a more accurate picture of economic results, gross domestic product is adjusted
    • To include bank reserves
    • For inflation
    • To match foreign GDP
    • Downward by the balance of payments

    Correct answer: For inflation

    By adjusting GDP for inflation, one can measure economic activity with less distortion. A constant dollar adjustment is made to remove the effects of inflation.

62. A business reporter claims that we are suffering from inertial inflation. This means
    • The current inflation rate will hold steady until a shock arrives
    • The aggregate price level is about to fall into deflation shortly
    • The business cycle is headed steadily toward its next trough soon
    • Prices are climbing much faster with each passing month this year

    Correct answer: The current inflation rate will hold steady until a shock arrives

    Inertial inflation means the rate of inflation is expected to stay where it is until some economic event shakes things up and moves it higher or lower. It carries no forecast of deflation, it says nothing about where the business cycle sits relative to its trough, and it is the opposite of an inflation rate that accelerates month after month.

63. Increases in which of the following indicators are regarded as predictors of the level of business activity?
    • Levels of inventories
    • Corporate profits
    • Personal incomes
    • Building permits

    Correct answer: Building permits

    Increases in building permits are indicative of increased future business activity and therefore are considered a leading economic indicator. Increases in personal income reflect current, not future, activity and is therefore considered a coincident indicator. Increases in inventories indicate that goods are not being sold in anticipated quantities and functions as a disincentive to manufacturing. Buildup in inventories is a lagging economic indicator. Corporate profits are not included in the Conference Board's list of economic indicators.

64. Which of these industries would be considered defensive in the face of a recession?
    • Food producers
    • Automobile manufacturing
    • Trucking
    • Real estate construction

    Correct answer: Food producers

    Defensive industries are least affected by normal business cycles. Companies in defensive industries generally produce nondurable consumer goods, such as food, pharmaceuticals, tobacco, and energy. Public consumption of such goods remains fairly steady throughout the business cycle. During recessions and bear markets, stocks in defensive industries generally decline less than stocks in other industries.

65. Under the concept of inertial inflation,
    • Prices sit at exactly the same level until the system receives an economic shock
    • Prices climb at a steady annual rate until the system receives an economic shock
    • Prices swing wildly up and then down until the system receives an economic shock
    • Prices fall at a fixed constant pace until the system receives an economic shock

    Correct answer: Prices climb at a steady annual rate until the system receives an economic shock

    Under inertial inflation prices keep increasing at a steady rate, and that rate persists until the system receives an economic shock, at which point the rate changes. Prices sitting at exactly the same level would mean no inflation at all. Prices swinging up and then down would mean there is no stable rate to be inertial. Prices falling at any pace is deflation, which is the opposite of the condition described.

66. Which of the following is a NOT a leading economic indicator?
    • Orders for durable goods
    • New housing permits
    • Duration of unemployment
    • Money supply

    Correct answer: Duration of unemployment

    The average amount of time it takes for an unemployed person to find a new job is a lagging indicator, not a leading one. Employment is usually one of the last things to pick up as the economy enters a period of expansion. Layoffs are one of the last resorts for companies when the economy turns down.

67. The gross domestic product (GDP) for the United States is composed of
    • The sum of all goods, services, and incomes turned out by American owned firms abroad
    • The sum of all consumer goods, capital goods, and services made here plus net exports
    • The sum of all goods, services, and imports bought here from sellers in other nations
    • The sum of all the final goods, services, and houses built here minus federal outlays

    Correct answer: The sum of all consumer goods, capital goods, and services made here plus net exports

    Gross domestic product comprises all consumer goods, capital goods and services produced inside the United States, plus net exports, meaning exports less imports. Output produced abroad by American owned firms belongs to gross national product, not to gross domestic product. Imports are subtracted in the net export term rather than added. Government purchases are a component of domestic product, so subtracting federal outlays understates it.

68. All of the following are leading indicators for economic growth EXCEPT
    • Stock prices as measured by the S&P 500 index
    • Orders for durable goods
    • Average weekly initial claims for state unemployment compensation
    • Average prime rate

    Correct answer: Average prime rate

    The average prime rate is a lagging indicator. The duration of unemployment is also a lagging indicator, but the number of initial unemployment claims is a leading indicator. The S&P 500 index and orders for durable goods are leading economic indicators.

69. Which of these is a definition of inflation?
    • An increase in the buying power of the dollar
    • A decline in the total demand from the public
    • A rise in the general level of interest rates
    • A reduction in the value of the monetary unit

    Correct answer: A reduction in the value of the monetary unit

    Inflation is a reduction in the value, or purchasing power, of the monetary unit in use, so each unit of money buys less than it did. An increase in buying power is the opposite condition. A fall in consumer demand tends to slow inflation rather than define it; inflation is commonly driven by increased demand. Rising interest rates often accompany inflation but they are not what the word means.

70. The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a coincident economic indicator?
    • Stock market prices as measured by the S&P 500
    • Industrial production
    • Machine tool orders
    • Agricultural employment

    Correct answer: Industrial production

    Industrial production is a coincident indicator. The stock indices and manufacturing orders are leading indicators; economists do not use agricultural employment as an indicator.

71. The Conference Board releases information about the economy on a periodic basis. Included are a number of different indicators. These indicators can be used to predict how the economy as a whole might change. Which of the following would be considered a leading indicator?
    • A reading of goods made in factories
    • A price gauge for all service trades
    • A broad index of common stock prices
    • A tally of the whole economy's value

    Correct answer: A broad index of common stock prices

    The stock market anticipates economic activity, so a broad index of common stock prices is a leading indicator. A reading of factory output is industrial production, which is a coincident indicator moving with the economy. A price gauge for the service trades is a lagging indicator. And a tally of the whole economy's output, gross domestic product, is not part of the Conference Board's indicator list at all.

72. An investor regularly reads financial blogs on the Internet and they are filled with articles suggesting that the economy is headed for a slump. Some are even saying that there will be price deflation. If these projections are accurate, the best place for the investor to place funds would probably be
    • U.S. Treasury bonds
    • Common stock
    • Commercial real estate
    • Gold

    Correct answer: U.S. Treasury bonds

    When the economy is headed downward, safety is the imperative and nothing is as safe (at least for exam purposes) as U.S. Treasuries. Gold, and most other commodities, are a hedge against inflation, not deflation. In "down" times, real estate, both residential and commercial, usually underperforms.

73. Which of the following is a coincident economic indicator?
    • Machine tool orders
    • Agricultural employment
    • Stock market prices as measured by the S&P 500
    • Industrial production

    Correct answer: Industrial production

    Industrial production is a coincident indicator. The stock indexes and manufacturing orders are leading indicators. Economists do not use agricultural employment as an indicator.

74. All the pundits are predicting bad times ahead—not only a recession but a period where prices actually fall (deflation). If they are right, the best place for your client would probably be
    • Industrial equities
    • Commercial property
    • Treasury securities
    • Bullion investments

    Correct answer: Treasury securities

    When investors expect both recession and falling prices they make a flight to safety, and Treasury securities carry the full guarantee of the federal government. Bullion and other commodities rise in inflationary periods, not deflationary ones. Commercial property and industrial equities both perform when business is strong and suffer in a recession.

75. Which of the following CORRECTLY defines the Consumer Price Index (CPI)?
    • The average cost of goods and services (market basket) in domestic currency, compared to the cost of those same goods and services in another country
    • The average cost of goods and services (market basket) purchased by consumers, compared to those same goods and services purchased during a base period
    • The wholesale cost of goods and services purchased by manufacturers, compared to those same goods and services purchased during a base period
    • The average increase in the general price level over a defined period of time

    Correct answer: The average cost of goods and services (market basket) purchased by consumers, compared to those same goods and services purchased during a base period

    The Consumer Price Index (CPI) is the average cost of goods and services (market basket) purchased by consumers as compared to those same goods and services purchased during a base period. The CPI compares price inflation in one country and does not reflect the relative price changes of goods and services in one country with those of another. CPI measures retail prices not wholesale costs.

76. During an economic downturn, one would expect to see
    • Higher unemployment
    • Manufacturer’s inventories to decline
    • Bond prices fall
    • A rising CPI

    Correct answer: Higher unemployment

    When the economy enters the contraction portion of the business cycle, employers cut costs by letting employees go, thus increasing the number of unemployed persons. With less money in the economy, the CPI will generally remain level or even decline. Manufacturing sales will slow, so their inventories will rise as it takes longer to move product and we can expect a reduction in interest rates, which will cause bond prices to rise.

77. Your client calls you after reading a story in the business section of his local newspaper. It seems that the article focused on changes to the core CPI and the client wants to know how that is different from the normal CPI. You should explain that it is
    • The Consumer Price Index excluding energy and food prices
    • The total of the leading indicators, excluding stock prices
    • The figure used to determine annual increases, if any, to Social Security benefits
    • The Consumer Price Index excluding housing and automobiles

    Correct answer: The Consumer Price Index excluding energy and food prices

    Because of their high volatility, economists exclude energy and food prices from core inflation figures. Social Security adjustments (and many others as well) are based upon the CPI itself, not the core.

78. Stock market indices have a variety of uses. Which of the following is least accurate regarding the use of stock market indices?
    • They act as the basis of ETFs.
    • They help in portfolio performance measurement.
    • They act as a market barometer.
    • They are a lagging indicator of an economy’s corporate performance.

    Correct answer: They help in portfolio performance measurement.

    The stock market and market indices are leading indicators of the economy's corporate and financial performance.

79. What generally happens to outstanding fixed-income securities when the rate of inflation slows?
    • Short-term securities are affected the most.
    • Coupon rates go up.
    • Yields go up.
    • Prices go up.

    Correct answer: Prices go up.

    When the rate of inflation slows and is expected to remain stable, coupons on new issue bonds will often decline to offer lower yields. The prices of outstanding bonds will go up to adjust to the lower yields on bonds of similar quality.

80. Core inflation is best described as an inflation rate
    • The central bank views as acceptable
    • For producers’ raw materials
    • That excludes certain volatile goods prices
    • That includes food and energy prices

    Correct answer: That excludes certain volatile goods prices

    Core inflation is measured using a price index that excludes food and energy prices. The primary reason for that is the volatility of those two.

81. An economic indicator that has turning points which tend to occur after the turning points in the business cycle is classified as a
    • Trailing indicator
    • Lagging indicator
    • Coincident indicator
    • Leading indicator

    Correct answer: Lagging indicator

    Lagging indicators have turning points that occur after business cycle turning points. That is why they are called lagging indicators. Leading indicators are ahead of the cycle and coincident indicators parallel the cycle.

82. In the secondary market, U.S.Treasury bond prices are most influenced by
    • The Treasury Department
    • The prime rate
    • The primary dealers
    • The inflation rate

    Correct answer: The inflation rate

    There are two major influences on the price of bonds in the secondary market. One of those is the amount of credit risk (chances that the issuer won't be able to pay the interest and/or principal). That is not considered a risk with U.S. Treasury securities. The other, and generally stronger influence, is the inflation rate. Inflation eats away at the fixed income and principal of bonds. To compensate, the bonds must offer a higher return. That is either in the form of a new bond carrying a higher coupon rate, or, as this question refers to, trading in the secondary market at a lower price. Remember the inverse relationship between interest rates and bond prices. Interest rates follow the inflation rate, so when inflation rises, so must the yield on bonds. The yield on outstanding bonds increases as the market price decreases.

83. Ana is a bond analyst who notices a wider credit spread between Treasury bonds and AAA corporate debt. From this, she would be most likely to infer
    • The economy is weakening
    • Interest rates on Treasury bonds are increasing
    • Corporate bond prices are increasing
    • Corporate earnings are reaching record highs

    Correct answer: The economy is weakening

    The reason the spread gets wider is that investors are getting out of corporate bonds and getting into Treasuries. Why would they do that? Because, as the industry says, "it is an escape to quality." When there are economic clouds on the horizon, like a recession, you would much rather have your money invested in U.S. Treasuries because you know they will pay off. Higher corporate yields come from lower market prices.

84. As current interest rates go up, the market price of existing corporate bonds bearing lower interest rates will
    • Decrease
    • Change in unpredictable ways
    • Increase
    • Stay the same

    Correct answer: Decrease

    There is an inverse relationship between interest rates and bond prices. This means that as current interest rates go up, the market price of existing bonds will go down.

85. A bond analyst reports that there is currently an inverted yield curve. That would mean
    • The closer the bond is to its maturity date, the higher the yield
    • The closer the bond is to its maturity date, the lower the yield
    • The further the bond is from its maturity date, the higher the yield
    • Bonds with intermediate maturities have the highest yields

    Correct answer: The closer the bond is to its maturity date, the higher the yield

    An inverted yield curve shows near-term maturities with higher yields than those of long-term maturities. Sometimes called a negative yield curve, it is usually an indication that interest rates are near a peak and the trend should soon reverse.

86. Yield curve analysis plays an important role as a benchmarking and forecasting tool for the future direction of interest rates. In most cases, this analysis involves examining
    • Bonds of varying quality of similar maturities
    • Bonds of a single issuer over varying maturities
    • Bonds of similar quality over varying maturities
    • Bonds of varying quality over a number of maturities

    Correct answer: Bonds of a single issuer over varying maturities

    The most common yield curves are drawn using U.S. Treasury securities. The curve is plotted using maturities ranging from the short-term T-bills to the long bonds. There are other curves drawn with bonds from other sectors, such as corporate bonds, to show the "yield spread", but that is going beyond the scope of this question.

87. While listening to a commentator on cable TV, you hear the statement "the flight to quality has ended." What would you expect the effect of this to be?
    • Yield spreads are widening.
    • Pessimism is spreading.
    • Airline stocks are in for a beating.
    • Yield spreads are narrowing.

    Correct answer: Yield spreads are narrowing.

    The term yield spread refers to the difference in yield between very-high-quality debt instruments, such as U.S. government bonds, and those with lower ratings. The spread compensates for the additional risk. When investors perceive that the risk has lessened, they won't demand as much in return from the lower-rated instruments.

88. An inverted yield curve results in part by
    • Declining interest rates
    • Investors buying short-term bonds and selling long-term bonds
    • Rising interest rates
    • Investors buying long-term bonds and selling short-term bonds

    Correct answer: Investors buying long-term bonds and selling short-term bonds

    The demand for longer-term bonds is higher than that of short-term bonds and causes a negative slope in the yield curve. If investors were buying short-term bonds in greater demand, the rates of short-term bonds would decline rather than rise.

89. In the investment industry, the term spread has many different meanings. When used in a discussion about bonds, which of the following would be most appropriate?
    • Inverse spread
    • Calendar spread
    • Debit spread
    • Credit spread

    Correct answer: Credit spread

    A credit spread refers to the difference between yields of bonds with similar maturities but different ratings. For example, a bond analyst might compare the yield of a 10-year Treasury note with a AAArated bond with 10 years to maturity. Wider spreads generally indicate a concern about the economy (investors are seeking the safety of the Treasury issue) while narrow spreads generally indicate economic optimism. Debit spread and calendar spread refer to options (as does credit spread, but our question asks about bonds). Bond prices and interest rates have an inverse relationship, but that isn't called an inverse spread.

90. A common measurement used to evaluate attitudes regarding future economic conditions is the difference in yields between U.S. Treasury bonds and corporate bonds. This is known as
    • Business cycle
    • Consumer Price Index.
    • Yield spread
    • Yield curve

    Correct answer: 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.

91. During an economic recession, which of the following items will most likely increase?
    • Bond prices
    • Interest rates
    • Inflation
    • Consumer confidence and profits

    Correct answer: Bond prices

    During a recessionary period, inflation and interest rates generally decline. This causes bond prices to increase because they are inversely related to the change in interest rates. Consumer confidence and profits are declining at this point in the economic cycle.

92. Which of the following would probably not be an attractive investment during periods of rising inflation?
    • Energy equities
    • Corporate bonds
    • Rental property
    • Precious metals

    Correct answer: Corporate bonds

    Interest rates tend to rise with inflation, and rising rates drive down the value of every fixed income security, which is why corporate bonds are unattractive while inflation is climbing. Precious metals, energy shares and rental property are real or resource assets whose values tend to rise along with the general price level.

93. A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This is an example of
    • A normal yield curve
    • An algorithmic yield curve
    • An inverted yield curve
    • A positive yield curve

    Correct answer: An inverted yield curve

    An inverted, or negative, yield curve is one that results when debt with short-term maturities has higher yields than those with maturities that are longer. A positive, or normal, yield curve results when the yields increase as maturities do.

94. Which of the following statements about equity securities is NOT true?
    • Preferred stock pays a fixed dividend.
    • Preferred stock is an equity security while common stock is a hybrid.
    • Common stock is less sensitive to interest rate risk than preferred stock.
    • Preferred stock is usually nonvoting.

    Correct answer: Preferred stock is an equity security while common stock is a hybrid.

    Both common and preferred stock are equity securities. Common stock is never referred to as a hybrid; there are times when preferred stock is because of those features that are similar to a debt security. The dividend on preferred stock is fixed, and shares do not have voting rights. The price of a common share generally doesn't fluctuate with changes to interest rates in the same manner as that of preferred stock.

95. Which of the following statements concerning equity securities is not correct?
    • Preferred stock is an equity security with an intermediate claim (between the bondholders and the common stockholders) on a firm's assets and earnings.
    • Equity securities represent a lending interest in a corporation.
    • Common stock is an equity security representing an ownership interest in a corporation.
    • Equity securities provide a residual claim, after payment of all obligations to fixed-income claims, on the income and assets of a corporation.

    Correct answer: Equity securities represent a lending interest in a corporation.

    Equity securities represent an ownership interest in a corporation. Preferred stock, as a senior security, has a claim ahead of common, but behind debt securities.

96. The primary defining characteristic of an equity security is
    • It represents ownership in a corporation
    • The ability to keep pace with inflation
    • It pays dividends, usually quarterly
    • Voting rights

    Correct answer: It represents ownership in a corporation

    What does the term "equity" mean? It means ownership and that is the single most significant fact about an equity security, whether common or preferred stock. Many pay dividends, but that is not at the core of being an equity security. Equity securities include preferred stock, which, with its fixed dividend, does not offer inflation protection and does not have voting rights.

97. An investor in an equity security
    • Has a say in the day-to-day operations of the business
    • Acquires an ownership interest in the companyq
    • Is assured of a minimum rate of return
    • Becomes a creditor of the company

    Correct answer: Acquires an ownership interest in the companyq

    Equity means ownership, and this is a characteristic shared by both common and preferred stock. Holders of debt securities are creditors, and, there are no guarantees when it comes to returns on equity securities. Only common stockholders have voting rights, but, even then, those rights don't deal with daily operations because the vote is generally used at the annual meeting to vote for members of the board of directors.

98. All of the following represent ownership in corporation except
    • Mortgage bonds
    • Common stock
    • Convertible preferred stock
    • Preferred stock

    Correct answer: Mortgage bonds

    Ownership in a corporation resides in its equity securities. All stock is equity while all bonds are debt.

99. Which of the following statements regarding international investing is NOT correct?
    • An emerging market is a market in a developed economy with stable political institutions
    • An American depositary receipt is one common way to invest in foreign company securities
    • An international investor takes on currency risk and country risk beyond the usual risks
    • An allotment to foreign equities can add diversification and the chance of rising yields

    Correct answer: An emerging market is a market in a developed economy with stable political institutions

    Emerging markets are markets in lesser developed countries, where political and social institutions are typically less settled, so describing one as a developed economy with stable institutions is not correct. The other three statements are accurate: American depositary receipts are a common route into foreign shares, an investor abroad does carry currency risk and country risk on top of ordinary market risk, and foreign equities can add diversification and the potential for higher returns because those markets are not fully correlated with the United States.

100. An ADR is used to
     • Neutralize the currency risk that arises with carrying shares of European issuers
     • Finance shipments of goods between exporters and importers active in global trade
     • Permit overseas buyers to carry shares of domestic issuers through brokers abroad
     • Let American investors buy shares of foreign companies on United States exchanges

     Correct answer: Let American investors buy shares of foreign companies on United States exchanges

     An American depositary receipt exists to make trading in foreign securities easier for United States investors in United States markets. It is not a currency hedge: the holder still bears the exchange rate risk on the underlying foreign shares. Financing shipments between exporters and importers is the work of instruments such as bankers' acceptances. And a receipt allowing overseas buyers to hold domestic shares through brokers abroad runs in the opposite direction from an ADR.

101. A client is considering the purchase of American depositary receipts (ADRs). The client is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle?
     • ADRs are denominated and pay dividends in U.S. dollars.
     • They are not subject to exchange rate, or currency, risk.
     • ADRs are both liquid and marketable.
     • Information regarding the foreign company is more easily attainable than if directly purchased.

     Correct answer: They are not subject to exchange rate, or currency, risk.

     Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. The bank furnishes information about the underlying security in English rather than the foreign language and ADRs are traded like any domestic stock.

102. Which of the following statements concerning international investing is correct?
     • The rates of return on foreign securities are generally less than those available from U.S. markets.
     • Information is not as readily available on foreign investments as on domestic ones.
     • The addition of foreign securities to a portfolio may result in increased portfolio risk due to the different movements of foreign markets and U.S. markets.
     • Foreign markets are usually mature and offer no growth advantages.

     Correct answer: Information is not as readily available on foreign investments as on domestic ones.

     In general, foreign investments don't have the transparency of domestic ones. Investors may earn higher returns in foreign markets and including foreign securities in an investment portfolio may lower risk through greater diversification. This is because there may be a low correlation with U.S. markets. Although securities markets in most developed economies are mature, that doesn't mean they can't grow and the markets in emerging economies offer great potential growth commensurate with their greater risk.

103. A technical analyst would be most interested in which of the following?
     • Working capital
     • 200-day moving averages
     • Capitalization ratios
     • Price-to-earnings ratios

     Correct answer: 200-day moving averages

     Technical analysts try to predict the market by examining price and volume trends. They expect the market to act in the future as it has in the past. Technical analysts are not interested in the fundamental aspects of a company, such as its financial statement ratios.

104. An investor may expect to receive dividends from
     • A put option
     • An ADR
     • A call option
     • A warrant

     Correct answer: An ADR

     An American depositary receipt (ADR) represents ownership in a foreign corporation, and dividends declared by the corporation are paid to the ADR owner. The currency conversion is performed by the issuing domestic bank. Options and warrants do not grant the holder the right to receive dividends on the underlying stock.

105. A technical analyst would be least concerned with
     • Book value per share
     • The short sale ratio
     • Odd lot trading data
     • Daily new highs data

     Correct answer: Book value per share

     A technical analyst is not concerned with the fundamental aspects of a company, and book value per share comes straight off the balance sheet, so it is the item of least concern. The short sale ratio, odd lot trading data and the daily count of new highs are all market generated statistics that technical analysts watch closely.

106. A risk-averse investor, who had only invested funds in bank certificates of deposits, was informed by his investment adviser representative that higher returns with safety could be achieved by investing in U. S. Treasury notes with a 10-year maturity. The adviser representative assured his client that investment in federal government-backed securities is riskless. In this situation, the representative acted
     • Properly, because Treasury notes present no default risk upon the invested principal
     • Unethically, because Treasury notes are unsuitable for this customer who avoids risk
     • Properly, because Treasury notes satisfy the stated goals of a conservative customer
     • Unethically, because nobody disclosed the interest rate risk in these Treasury notes

     Correct answer: Unethically, because nobody disclosed the interest rate risk in these Treasury notes

     Treasury securities carry no default risk, since principal and interest are guaranteed by the federal government, but they are still exposed to interest rate risk: if rates rise the price of a ten year note falls, and a client who sells before maturity loses principal. Calling the investment riskless without disclosing that exposure is unethical. The absence of default risk does not make the recommendation proper, and Treasury notes are not inherently unsuitable for a conservative client either; the failure was the missing disclosure.

107. Which of the following debt instruments does not make periodic interest payments?
     • T-bonds
     • TIPS
     • T-bills
     • T-notes

     Correct answer: T-bills

     Treasury bills are always issued at a discount from their face value. At maturity, the investor receives the face value. The other choices pay interest semiannually. What makes TIPS different from the others is that the principal adjusts for inflation every six months. That means the fixed interest rate is paid on a varying principal.

108. An investor interested in monthly interest income should invest in
     • Utility company stock
     • GNMAs
     • Treasury bonds
     • Corporate bonds

     Correct answer: GNMAs

     GNMAs pay monthly interest and principal, treasury bonds pay semiannual interest, utility stocks pay quarterly dividends, and corporate bonds pay semiannual interest.

109. An investor purchases a Treasury note and the confirmation shows a price of $102.25. Rounded to the nearest cent, the investor's cost, excluding commissions, is
     • $1,022.50.
     • $1,027.81.
     • $102.25.
     • $1,020.25.

     Correct answer: $1,027.81.

     Treasury notes are quoted in 32nds where each 32nd equals $.3125. The 102 in the quote equals $1,020 and the 25/32 is an additional $7.81 bringing the total to $1,027.81.

110. Your client in the 28% federal income tax bracket currently owns some U.S. government bonds with a coupon yield of 6%. In order to receive the same income after taxes, she would need to buy municipal bonds with a coupon of
     • 7.68%
     • 1.68%
     • 4.32%
     • 6.00%

     Correct answer: 4.32%

     Because the 6% on the government bond is fully taxable on a federal basis, the client receives a net of 4.32% ($60 per bond less 28% in taxes {$16.80}, or $43.20 per year). Interest on municipal bonds is tax free, so a 4.32% coupon will result in the same amount of after-tax income.

111. A client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal and your client is in a 28% marginal income tax bracket, which bond do you tell the client to purchase and why?
     • The municipal bond because its equivalent taxable yield is 6.3%
     • The municipal bond because its equivalent taxable yield is 6.6%
     • The corporate bond because the after-tax yield is 4.5%
     • The corporate bond because the after-tax yield is 6.25%

     Correct answer: The municipal bond because its equivalent taxable yield is 6.6%

     If we compute the tax-equivalent yield of the muni, we see that it is 6.6%, which is a higher return than the 6.25% on the corporate bond. The formula to get this starts by taking the investor's tax bracket and subtracting that from 100%. 100% − 28% = 72%. We then divide the muni coupon of 4.75% by the 72% and the result rounds off to 6.6%.

112. A client is in the 28% marginal federal income tax bracket, and the 3% state income tax bracket. Which of the following investments would produce the highest after-tax yield for the client?
     • A U. S. Treasury note yielding 7%
     • An A-rated corporate mortgage bond yielding 8.0%
     • A triple-A-rated debenture yielding 7.75%
     • A public purpose municipal bond yielding 6%

     Correct answer: A public purpose municipal bond yielding 6%

     Because your client is in the 28% tax bracket, he has to earn more than the 6% on a taxable bond for the yield to be equal to, or higher than, the tax-free bond. That number can easily be calculated because 72% of the taxable amount must be equal to or greater than the 6% return (6% ÷ 72% = 8.33%). The 8.33% is higher than the return on the other bonds listed, so the public purpose municipal bond would produce the highest retained return. This would be even more appropriate if the issue was tax exempt in the client's state.

113. An analyst uses the dividend growth model to assist in determining appropriate stocks to recommend. This analyst would consider all of the following factors EXCEPT
     • Required rate of return
     • Growth of the dividend
     • Market capitalization
     • Current dividend

     Correct answer: Market capitalization

     The classic definition of the dividend growth model is "a stock valuation model that deals with dividends and their growth, discounted to today." The market capitalization is the number of outstanding shares multiplied by the current market price per share and has nothing to do with the company's dividend policies.

114. All of the following statements regarding technical analysis are correct except
     • Technical analysts rely heavily on financial ratios in their analysis of stocks
     • Technical analysts attempt to predict the future movement of stock prices based on past trends
     • Technical analysts use terms such as trendline, support, and resistance in analyzing stocks
     • Technical analysts rely on charts to predict the future prices of stocks

     Correct answer: Technical analysts rely heavily on financial ratios in their analysis of stocks

     Technical analysts do not rely on financial ratios in their analysis of stocks. Instead, they rely on charts of past price history and volume to predict future price movements. It is fundamental analysis where financial ratios are important.

115. Your client in the 25% federal income tax bracket lives in a state where his earnings place him in the 6% bracket for state income tax purposes. If he were to purchase a 4% bond issued by a political subdivision of another state, his total tax-equivalent yield would be
     • 4%
     • Slightly more than 5.33%
     • Approximately 12.90%
     • Slightly less than 5.33%

     Correct answer: Slightly less than 5.33%

     When an individual owns a municipal bond issued in a state other than his state of residence, although the interest is tax free on a federal basis, it is taxable (at least in all cases on the exam) in that state. Therefore, the tax-equivalent yield here is slightly lower than it would be if we only computed using the federal tax rate. Because that would be 4.0% divided by 0.75 (100% minus the 25% tax bracket) or 5.33%, paying the state income taxes would decrease the yield slightly.

116. When an investor divides the coupon rate of a municipal bond by the complement of her tax rate, she is computing the bond's
     • Discounted cash flow
     • Inflation-adjusted return
     • After-tax rate of return
     • Tax-equivalent yield

     Correct answer: Tax-equivalent yield

     The computation for the tax-equivalent yield of a municipal bond is performed by dividing the bond's coupon rate by the complement of the investor's tax rate (1 – the investor's tax bracket). If the bond has a coupon of 4% and the investor is in the 20% bracket, the tax-equivalent yield is 4% divided by (1 – .20) or 4% divided by .80 = 5%.

117. Sortel Industries has preferred stock outstanding that pays annual dividends of $3.75 a share. If an investor wants to earn a rate of return of 8.5%, how much should she be willing to pay for a share of Sortel preferred stock?
     • $31.88
     • $44.12
     • $42.10
     • $33.89

     Correct answer: $44.12

     This is a middle school math question. It is asking, 3.75 is 8.5% of what number? The computation is: $3.75 \div 0.085$ = $44.12.

118. Securities issued by which of the following agencies offer direct government backing?
     • Federal Home Loan Mortgage Corporation (Freddie Mac)
     • Federal National Mortgage Association
     • Government National Mortgage Association
     • Federal Intermediate Credit Bank

     Correct answer: Government National Mortgage Association

     FNMA, FHLMC, and FICB are considered GSEs (government-sponsored enterprises), and although their securities are quite safe, they do not have the direct backing of the Treasury. It is important to remember for the exam that the only security without the word Treasury in its name that is backed by the U.S. government is a GNMA.

119. A common stockholder's rights include all of the following EXCEPT
     • The receipt of dividends, if declared by the board of directors
     • Electing the board of directors
     • The right to determine the par value of the stock
     • Preemptive rights

     Correct answer: The right to determine the par value of the stock

     Par value is an accounting decision made by the company when the stock is first issued and is not something voted on by shareholders. Common stockholders are the owners of a corporation. This basic form of ownership entitles them to all of the privileges discussed here. It also allows them to transfer their ownership, inspect company records, vote on corporate objectives, and lay claim to any residual assets in the event of a liquidation.

120. Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except
     • There is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO
     • The holder of an ISO can recognize capital gain (loss) as a result of exercise, whereas ordinary income (loss) is the result with an NSO
     • ISOs may only be granted to employees while NSOs may be given to virtually anyone.
     • The recipient of the grant of the ISO has no income tax consequences at the time of the grant

     Correct answer: The recipient of the grant of the ISO has no income tax consequences at the time of the grant

     Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. ISOs can only be granted to employees while the NSO can also be granted to members of the board of directors and even to vendors. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least 1 year from the date of exercise and at least 2 years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the option within 10 years of the grant, it is treated as an NSO for tax purposes.

121. Investments in which of the following offer the best long-term protection against inflation?
     • Government bonds
     • Fixed annuities
     • Corporate bonds
     • Common stock

     Correct answer: Common stock

     Common stocks have historically offered returns that outpace inflation over the long term.

122. A company's dividend on its common stock is
     • Determined by its board of directors
     • Voted on by shareholders
     • Specified in the company charter
     • Mandatory if the company is profitable

     Correct answer: Determined by its board of directors

     A common stock's dividend payment and amount are determined by the company's board of directors.

123. A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the 2 previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders?
     • $16.00
     • $8.00
     • $24.00
     • $0.00

     Correct answer: $24.00

     If the company is going to pay a common stock dividend, it must pay the preferred dividends first. A cumulative preferred stockholder must also receive all dividends in arrears. There are $16 due in back dividends, in addition to $8 this year, for a total of $24.

124. Reasons why a corporation might issue a convertible preferred stock would include
     • Giving those holders the option to exchange their shares into corporate bonds
     • Giving those shareholders a chance to share in the company's future expansion
     • Giving the issuer a cheaper deal than issuing convertible debentures would be
     • Giving the issuer a tax deduction against profits for the dividends disbursed

     Correct answer: Giving those shareholders a chance to share in the company's future expansion

     The benefit of any convertible security is that the conversion privilege lets those investors participate in the potential future growth of the company, and that is why a corporation attaches it. Convertible preferred converts into the issuer's common stock, never into its bonds. Preferred dividends are an after-tax outlay, so they produce no deduction the way bond interest does. And because preferred ranks below debt in claim, its dividend rate has to exceed the interest rate on convertible bonds, so it is not the cheaper route.

125. Which of the following has the least exposure to inflation risk?
     • Cash
     • Common stock.
     • Fixed annuity
     • Preferred stock

     Correct answer: Common stock.

     The returns on common stock have historically outperformed inflation, making them less vulnerable to loss of purchasing power among the choices presented. Cash is a store of present purchasing power that inflation will erode. Fixed annuities have more exposure to inflation than common stock because their payments are fixed in nominal dollars. Preferred stock has the same exposure to inflation risk as do all fixed income instruments.

126. ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders this year, each preferred share must be paid a dividend of
     • $15.00
     • $10.00
     • $5.00
     • $25.00

     Correct answer: $10.00

     This stock has a par value of $100 and a dividend rate of 10%. That means the annual dividend will be 10% of the $100 par, or $10. Because this is noncumulative preferred stock, the company must pay only this year's full stated dividend of $10 per share before paying dividends to the common shareholders. Any dividends from previous years that were not paid are ignored. If this had been a cumulative preferred stock, all of the dividends in arrears (past unpaid) would have to be paid before the common shareholders could get a dividend. In that case, it would have been $10 for two years ago, $5 for the balance of last year's dividend, and $10 for this year's (a total of $25).

127. One of the rights of those owning common stock is the opportunity to vote on issues brought up at the corporation's annual meeting. To be eligible to cast a vote,
     • The stockholder must be a natural person
     • The company must be current on its dividends to preferred stockholders
     • The stock must be paid for in full before the annual meeting
     • Ownership must be established by the record date

     Correct answer: Ownership must be established by the record date

     Only stockholders who are on the company's books by the record date are eligible to vote.

128. An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer
     • Listed stock options
     • Non-qualified stock options
     • Incentive stock options
     • Portable stock options

     Correct answer: Incentive stock options

     Assuming the time limit conditions are met, exercise of an ISO can result in long-term capital gains while non-qualified options are always treated as ordinary income.

129. Which of the following statements about dividends on common stock is NOT true?
     • Only those who are owners of the stock on the record date will receive dividends
     • Corporations are contractually obligated to pay dividends to their shareholders each year
     • Dividends represent a pro rata distribution of corporate profits to shareholders
     • Dividends may be paid in cash, property, or stock

     Correct answer: Corporations are contractually obligated to pay dividends to their shareholders each year

     Dividends are the share of a corporation's profits that the corporation pays to shareholders as owners of the corporation. Dividends are not paid to shareholders automatically, and shareholders have no contractual right to receive dividends. Instead, dividends must be declared by the corporation's board of directors. The board of directors may elect to pay a dividend in cash, property, or stock.

130. A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has
     • A proportionately decreased interest in the company
     • Greater exposure
     • No effective change in the value of the position
     • A proportionately increased interest in the company

     Correct answer: No effective change in the value of the position

     When a stock splits, the number of shares each stockholder has either increases or decreases (in the case of a reverse split). The customer experiences no effective change in position because the proportionate interest in the company remains the same.

131. One of the features of convertible preferred stock is that
     • The owner has the opportunity to convert the stock into the issuer’s bonds
     • The holder is able to select the conversion price
     • The dividend is paid ahead of all other securities
     • The owner has the opportunity to participate in the growth of the company

     Correct answer: The owner has the opportunity to participate in the growth of the company

     Any convertible security, preferred stock or debenture, is convertible into the issuer's common stock. As a result, if the business is successful, the common stock's price will rise to the point where conversion is a wise idea. Although the investor can generally select when to convert, the conversion price or ratio is set at the time of issuance. Interest on debt securities is paid before the dividends on any stock. When it comes to preferred stock, there is frequently a "pecking order", such as a prior lien preferred or first preference preferred that would come ahead of the other preferred shares.

132. Which of the following statements best describes cumulative preferred stock?
     • Owners forfeit every claim to payments, which the directors resolve to skip in one year
     • Owners may vote for directors, which they must do using the cumulative method each year
     • Owners keep a claim to all unpaid dividends, which must be paid before common dividends
     • Owners may get an extra dividend, which is always paid among the ordinary share holders

     Correct answer: Owners keep a claim to all unpaid dividends, which must be paid before common dividends

     Owners of cumulative preferred stock retain a continuing claim to dividends the directors pass. Those arrears accumulate and must all be paid, together with the current preferred dividend, before any dividend can go to common stock. Forfeiting every claim to a skipped payment describes noncumulative preferred instead. Voting for directors by the cumulative method is an unrelated use of the same word. Sharing an extra dividend alongside the ordinary holders describes participating preferred.

133. Which of the following statements regarding preemptive rights is TRUE?
     • Both common and preferred stockholders have the right to subscribe to a rights offering.
     • Common stockholders do not have the right to subscribe to a rights offering.
     • Preferred stockholders do not have the right to subscribe to a rights offering.
     • Neither common nor preferred stockholders have the right to subscribe to a rights offering.

     Correct answer: Preferred stockholders do not have the right to subscribe to a rights offering.

     Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.

134. If a customer owns 7% of a publicly-traded company's stock and his spouse owns 6% and wants to sell her shares, which of the following statements is true?
     • The spouse is not an affiliate and Rule 144 does not apply.
     • The spouse is an affiliate and Rule 144 does not apply.
     • The spouse is not an affiliate and Rule 144 applies.
     • The spouse is an affiliate and Rule 144 applies.

     Correct answer: The spouse is an affiliate and Rule 144 applies.

     Together, the client and wife own 13% of the company's stock, so the spouse is considered an affiliate and is bound by Rule 144. If there is a 10% or more ownership interest among members of an immediate family living at the same residence, then all members are considered control persons (affiliates) subject to Rule 144. For exam purposes, assume that spouses share the same residence.

135. One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that
     • The bargain element of the ISO is an AMT preference item
     • The bargain element of the ISO is reported as wages on the tax returns of the employer and the employee
     • There is a maximum 5-year limit for exercise on the ISO while the time limit on the NQSO is 10 years
     • Gains on an ISO are always short-term while those on an NQSO are long-term

     Correct answer: The bargain element of the ISO is an AMT preference item

     The only true statement here is that the bargain element (the difference between the current market price at the time of exercise and the strike price) of the ISO (but not the NQSO) is one of the preference items for the alternative minimum tax. It is the bargain element of the NQSO which is reported as wages and it is possible, although difficult, to have long-term capital gains on both. Only the ISO has a maximum time limit and it is 10 years, not 5.

136. A corporation would like to offer their employees an opportunity to participate in the future growth of the company. Among the methods you might suggest are
     • Voting-trust certificates
     • Employee stock options
     • Subordinated debentures
     • Preemptive rights

     Correct answer: Employee stock options

     One of the most popular ways to give employees the chance to benefit from an increase in the value of the employer's stock is through employee stock options.

137. An investor holding which of the following equity securities would NOT expect to have preemptive rights?
     • Preferred stock
     • Common stock acquired in a private placement
     • Control stock
     • Common stock

     Correct answer: Preferred stock

     Preferred stockholders do not have preemptive rights. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership.

138. Which of the following is not a characteristic of American depositary receipts (ADRs)?
     • Because ADRs are traded on the exchanges, they are relatively liquid and marketable investments.
     • ADR holders may surrender ADRs in exchange for receiving the shares of the non-U.S. company.
     • Dividends are declared in the foreign currency, so exchange rate, or currency, risk is completely eliminated.
     • ADRs are denominated and pay dividends in U.S. dollars, not foreign currencies, thus saving the investor transaction costs with respect to converting currencies.

     Correct answer: Dividends are declared in the foreign currency, so exchange rate, or currency, risk is completely eliminated.

     ADRs are receipts issued by a U.S. bank for shares of a foreign company purchased and held by a foreign branch of the bank. Dividends are declared in the local currency, so exchange rate, or currency, risk is not completely eliminated. They are generally traded on one of the major exchanges ensuring liquidity. They are an alternative to investing directly in foreign companies or foreign mutual funds. If the investor desires the foreign shares, the ADR may be surrendered and the exchange made.

139. One of the rights of being a stockholder is the ability to vote on important corporate matters, such as the election of members to the board of directors. The date that determines which shareholders are eligible to votes is
     • The ex-dividend date
     • The last day of the company’s fiscal year
     • The record date
     • The election date

     Correct answer: The record date

     The record date is a date announced by the company as the official date you must be an owner on the company's records in order to participate in the annual meeting and corporate election. A fact not tested is there is no standard regarding how far in advance of the voting date this should be other than it must be at least the normal settlement period, currently 2 business days.

140. A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle?
     • ADRs are traded on exchanges and the OTC markets.
     • They are not subject to exchange rate, or currency, risk.
     • ADRs are denominated in and pay dividends in U.S. dollars.
     • Information regarding the foreign company is easily attainable.

     Correct answer: They are not subject to exchange rate, or currency, risk.

     Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. In order to trade in the U.S. markets, information about the foreign company must be available to investors. ADRs representing the best known companies typically trade on the NYSE or the Nasdaq stock market while lesser companies trade OTC.

141. An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee
     • Has a capital gain of $10 per share
     • Is taxed on $30 per share as if it were salary
     • Is taxed on $20 per share as if it were salary
     • Is taxed on $10 per share as if it were salary

     Correct answer: Is taxed on $10 per share as if it were salary

     In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee.

142. A company that has issued cumulative preferred stock
     • Pays the preferred dividend before paying the coupons due on its outstanding bonds
     • Forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends
     • Pays past and current preferred dividends before paying dividends on common stock
     • Pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common

     Correct answer: Pays past and current preferred dividends before paying dividends on common stock

     Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest is always paid before dividends. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid.

143. ADRs are used to facilitate
     • The domestic trading of foreign securities
     • The domestic trading of U.S. government securities
     • The foreign trading of domestic securities
     • The foreign trading of U.S. government securities

     Correct answer: The domestic trading of foreign securities

     An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities.

144. Which of the following is a risk faced by investors in foreign stocks that is not found when investing in domestic issues?
     • Business risk
     • Currency risk
     • Systemic risk
     • Industry risk

     Correct answer: Currency risk

     An investor in foreign stocks holds the foreign currency as well as the stock, so movements in the exchange rate change the return measured in dollars. That currency risk has no counterpart in a purely domestic holding, which is what makes it the unique risk here. Business risk, systemic market risk and industry risk all attach to domestic issues exactly as they attach to foreign ones.

145. An American depositary receipt (ADR) is
     • A document showing title to the American stock deposited at a foreign bank
     • A contract used to speculate on the swings in the foreign currency markets
     • A receipt for the foreign currency deposits sitting at a big American bank
     • A certificate for ownership of a foreign security held at an American bank

     Correct answer: A certificate for ownership of a foreign security held at an American bank

     An American depositary receipt is a certificate representing ownership of a foreign security that is on deposit at a United States bank. ADRs trade on American exchanges, are quoted and pay dividends in dollars, and carry the shareholder protections of American securities. A document of title to American stock deposited at a foreign bank runs the other way. An ADR is neither a currency speculation contract nor a receipt for a deposit of foreign currency.

146. A fundamental analyst would be most interested in which of the following?
     • The support and resistance levels marked on a daily price chart
     • The price to earnings ratios of the big industrial stock issues
     • The two hundred day moving average of an individual share price
     • The short interest still open across the whole share market now

     Correct answer: The price to earnings ratios of the big industrial stock issues

     Fundamental analysts study earnings and value, and the price to earnings ratio is the central fundamental measure, so applying it to the big industrial issues is fundamental work. Support and resistance levels, moving averages and open short interest are all technical tools drawn from price and volume behaviour rather than from company results.

147. An analytical tool used to project the current value of a common stock using projected future dividends is
     • The price-to-earnings ratio
     • The dividend payout ratio
     • The dividend discount model
     • The future value computation

     Correct answer: The dividend discount model

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

148. Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend?
     • Consolidation
     • Trend lines
     • Support and resistance
     • Moving averages

     Correct answer: Moving averages

     To avoid the volatility frequently present in stock price trends, analysts will frequently use moving averages. These averages reduce short-term distortions to a minimum.

149. When reviewing potential securities to select for an investor's portfolio, a technical analyst would be most likely to evaluate
     • The price-to-book ratio
     • The price-to-earnings ratio
     • The management tenure
     • The daily trading volume

     Correct answer: The daily trading volume

     A technical analyst charts price and volume over time. The other choices are of interest to a fundamental analyst.

150. All the following factors support fundamental analysis while assessing a wide range of qualitative factors except
     • The company’s competitive position
     • The company’s stock price trend
     • The company’s management team’s quality and experience
     • The company’s business model

     Correct answer: The company’s stock price trend

     The company's stock price trend is important to technical analysis. Remember that a technician "charts prices and volume over time". The others are factors to consider in fundamental analysis.

151. Which of the following might be used by an analyst to approximate a reasonable price for a common stock?
     • A consolidated book value
     • A dividend discount model
     • A constant maturity yield
     • The outstanding par value

     Correct answer: A dividend discount model

     The simplest model for valuing equity is the dividend discount model: the value of a stock is the present value of the dividends expected from it, which approximates a reasonable price. A constant maturity yield belongs to debt securities with a fixed maturity date. The par value of a common stock is an arbitrary bookkeeping figure with nothing to do with its market price. Book value, even on a consolidated basis, generally has little or no bearing on the current market price of the shares.

152. Which of the following statements is TRUE?
     • A stock split increases the owner’s proportionate share of the company.
     • A growth company would be more likely to pay a cash dividend than a stock dividend.
     • Dividends have a significant influence on the value of the corporation's stock.
     • A corporation is required to pay a cash dividend to stockholders if the earnings are sufficient, especially if it is of preferred stock.

     Correct answer: Dividends have a significant influence on the value of the corporation's stock.

     Dividends play a large role in what someone is willing to pay for the stock. For example, the dividend discount model (DDM) values a stock as the discounted present value of future dividends. A company is not required to pay dividends. A growth company will tend to pay no cash dividends but rather use the money for expansion.

153. During the analysis of XYZ stock, a technical analyst concludes that XYZ's support level has been broken. Being a technician, the most appropriate decision should be to
     • Rate the stock as a hold
     • Rate the stock as a sell
     • Rate the stock as a buy
     • Purchase additional shares of the stock

     Correct answer: Rate the stock as a sell

     If a support level is broken, this provides a sell signal. Once the stock has lost its support, expectations are that it will continue to fall. The breaking of a resistance level, as the price of the asset gathers momentum to the upside, indicates a buying opportunity.

154. To a technical analyst, the resistance level signifies the price at which a stock's supply would be expected to
     • Increase substantially
     • Decrease substantially
     • Cause the stock price to ""break out""
     • Remain constant

     Correct answer: Increase substantially

     This is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down. The lower limit to these fluctuations is called a support level – the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level – the price range where a stock appears expensive and initiates increased selling. This selling represents an oversupply of the stock which results in downward pressure on the stock.

155. If a technician believed in the importance of volume, which of the following would indicate bullish sentiment?
     • Prices increase on heavy volume.
     • Prices decrease on heavy volume.
     • Prices decrease on light volume.
     • Prices increase on light volume.

     Correct answer: Prices increase on heavy volume.

     Technicians watch volume changes along with price movements as an indicator of changes in supply and demand. A price increase on heavy volume relative to the stock's normal trading volume is interpreted as an indication of bullish activity.

156. A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's
     • Resistance level
     • Previous high
     • Support level
     • 200-day moving average

     Correct answer: Support level

     Sell stops are entered below the market. They are used to turn an order into a market order if the current market value falls below the stop level. In technical analysis, support levels are theoretical levels where the market supports the stock price (keeps it from falling below the stated level). A technical analyst who makes investment decisions by watching the technical graphs and numbers would enter a sell stop below a support level in order to sell out if the support level is breached. A breakthrough of a support level is believed to forecast a major market price decline.

157. Which of the following would NOT be of interest to a technical analyst?
     • Moving averages
     • Volume
     • P/E ratio
     • Advance/decline line

     Correct answer: P/E ratio

     A technical analyst charts movement in market price and volume over a period of time. The price-to-earnings ratio is a tool used by fundamental analysts.

158. A fundamental analyst researching a stock is concerned with all of the following EXCEPT
     • Management efficiency
     • Capitalization ratio
     • The stock's market price as a multiple of the company's earnings
     • Volume of shares traded

     Correct answer: Volume of shares traded

     A fundamental analyst is concerned with the economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and financial statement ratios, such as the P/E ratio. A technical analyst is concerned with trading volumes or market trends and prices.

159. In the technical analysis of the value of securities, which of the following items is NOT important?
     • A prevailing market trend in response to shifts in supply and demand
     • The amount of a company's past earnings
     • Resistance and support levels
     • The breadth of market volume

     Correct answer: The amount of a company's past earnings

     The amount of a company's past earnings is a factor used in the fundamental analysis of securities, but not technical analysis. Technicians rely on market trends and supply and demand factors, as well as chart indications such as resistance and support levels.

160. The type of analysis that attempts to value securities by examining general economic trends and the growth potential and productivity of individual companies is
     • Holding period analysis
     • Credit analysis
     • Fundamental analysis
     • Technical analysis

     Correct answer: Fundamental analysis

     There are two main approaches to valuing securities. Fundamental analysis takes the approach described in this question. The other approach—technical analysis—relies on charts of past performance to forecast future price movements.

161. A fundamental analyst would be interested in all of the following EXCEPT
     • Statistics of the U.S. Department of Commerce on disposable income
     • Innovations within the automotive industry
     • Corporate annual reports
     • Daily trading volumes on the NYSE

     Correct answer: Daily trading volumes on the NYSE

     Trading volume interests the technical analyst, who looks at fluctuations in the market, not at fundamental economic values.

162. A technical analyst is least likely to consider which of the following when selecting securities?
     • Short interest ratio
     • Trend lines
     • Advance/decline line
     • Corporate earnings

     Correct answer: Corporate earnings

     Corporate earnings would be of least interest to a technical analyst, who is interested in market statistics indicative of future buying, market statistics that could reflect price or market trends, and trading volume.

163. A stock has been in a downtrend for several days. When its price decreases to near $30, many investors enter orders to buy the stock and the price increases to $31. This is most likely an example of
     • A change in polarity
     • A resistance level
     • A support level
     • A reversal

     Correct answer: A support level

     The downtrend reached a support level where buying demand sustained the price. A resistance level is a price at which selling pressure emerges that stops an uptrend.

164. Which of the following is not included in fundamental analysis of a company?
     • The study of the historical prices and volumes of stock trading
     • The study of the direction and strength of the national economy
     • The study of the annual financial statement of the issuing firm
     • The study of the firm's position within its own industry sector

     Correct answer: The study of the historical prices and volumes of stock trading

     Studying historical prices and trading volume is technical analysis, not fundamental analysis. Fundamental analysis is concerned with the earnings potential and the risk of a particular firm, which requires looking at the direction of the whole economy, at the firm's audited financial statements, and at the firm's position within its industry.

165. Which of the following would be of least interest to a chartist?
     • The recorded volume in those shares during several sessions
     • The advance-decline line drawn for the broader stock market
     • The share price measured against the last reported earnings
     • The short interest carried for the shares still outstanding

     Correct answer: The share price measured against the last reported earnings

     A chartist works only from market-generated data: price and volume history, breadth measures and sentiment measures such as short interest. Comparing the share price with the issuer's most recently reported earnings is a fundamental measure taken from the financial statements, so it is the one a chartist has least use for. Recorded trading volume is the classic confirmation of a price move. The advance-decline line is a breadth indicator built entirely from price action. Short interest is watched for the buying pressure a squeeze creates.

166. A support level is the price range at which a technical analyst would expect
     • The supply of a stock to decrease substantially
     • The demand for a stock to increase substantially
     • The demand for a stock to decrease substantially
     • The supply of a stock to increase substantially

     Correct answer: The demand for a stock to increase substantially

     Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level, the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level. Generally, a support level will develop after a stock has experienced a steady decline from a higher price level. Technicians believe that at some price during the decline, those investors who have been waiting for a reversal to get into the stock will now buy. When the price reaches this support price, demand surges, and price and volume begin to increase again. Other terms that may be used in this context are overbought and oversold. Overbought generally refers to the resistance level. Interest in buying the stock has begun to dry up and the price of the stock plateaus. Oversold is when the opposite occurs: there are few sellers to be found and the price of the stock bottoms. In either case, the next move is a reversal: down when the stock is overbought and up when oversold.

167. As defined in the Securities Exchange Act of 1934, the term municipal security would include all of the following EXCEPT
     • A City of Chicago school district bond
     • 50-year bonds issued by the Tennessee Valley Authority
     • A U.S. Treasury bill
     • A Province of Ontario library construction bond

     Correct answer: A City of Chicago school district bond

     Under federal law, municipal bonds are those issued by any domestic political body or subdivision from the state level on down. Treasury bills and TVA issues are defined as government securities, not municipal securities. Under federal law, Canadian cities (or provinces) are not municipal securities.

168. Municipal bonds are often called tax-exempts. This refers to the exemption of their income from
     • Federal income taxes
     • Federal estate taxes
     • State income taxes
     • State, federal, and inheritance taxes

     Correct answer: Federal income taxes

     Although municipal bonds are sometimes exempt from state income tax (if issued in the state of residence of the taxpayer), all references to tax exemption refer to their exemption from federal income taxes.

169. Kate, age 59, has an investment portfolio exceeding $250,000. She considers herself a moderate to conservative investor. To generate additional income, she is anticipating adding bonds to her portfolio. She lives in a state that does not have an income tax and she is in the 28% federal income tax bracket. Which of the following bonds would be the best recommendation for her portfolio?
     • Bond A, A-rated corporate debenture with a 6.5% coupon rate
     • Bond C, CCC-rated corporate debenture with an 8% coupon rate
     • Bond D, AAA-rated Treasury note with a 2.55% coupon rate
     • Bond B, BBB-rated municipal bond with a 3.75% coupon rate

     Correct answer: Bond A, A-rated corporate debenture with a 6.5% coupon rate

     Even though Bond C has the highest after-tax rate of return, this bond would not be appropriate for Kate based on her risk tolerance. Therefore, Bond A would be the best choice. Calculations: Bond A: $6.5 \times (1 - 0.28) = 4.68\%$ Bond B: 3.75% Bond C: $8\% \times (1 - 0.28) = 5.76\%$ Bond D: $2.55\% \times (1 - 0.28) = 1.84\%$

170. Your client in the 25% federal income tax bracket lives in a state where his earnings place him in the 6% bracket for state income tax purposes. If he were to purchase a 4% bond issued by a political subdivision of his state, his total tax-equivalent yield would be
     • Slightly more than 5.33%
     • Approximately 12.90%
     • Slightly less than 5.33%
     • 4%

     Correct answer: Slightly more than 5.33%

     When an individual owns a municipal bond issued in his state of residence, not only is the interest tax free on a federal basis, but (at least in all cases on the exam) it is nontaxed in that state. Therefore, the tax-equivalent yield here is slightly higher than it would be if we only computed using the federal tax rate. Because that would be 4.0% divided by 0.75 (100% minus the 25% tax bracket) or 5.33%, saving on state income taxes would increase the yield slightly.

171. A client in the 28% marginal federal income tax bracket invests in a corporate bond with an 8% coupon. To calculate the client's after-tax rate of return,
     • Divide 0.08 by 0.28
     • Divide 0.08 by 0.72
     • Multiply 0.08 by 0.28
     • Multiply 0.08 by 0.72

     Correct answer: Multiply 0.08 by 0.72

     To determine a taxable bond's after-tax rate of return, multiply the coupon rate by the complement of the client's marginal federal income tax bracket. The client's tax bracket is 28% (0.28), so the complement is 100% − 28% (1.00 − 0.28) = 0.72.

172. Your client in the 35% federal income tax bracket currently owns some corporate bonds with a coupon yield of 7%. In order to receive the same income after taxes, he would need to buy municipal bonds with a coupon of
     • 7.00%
     • 2.45%
     • 9.45%
     • 4.55%

     Correct answer: 4.55%

     Because the 7% on the corporate bond is fully taxable, the client receives a net of 4.55% ($70 per bond less 35% in taxes {$24.50}, or $45.50 per year). Interest on municipal bonds is tax free, so a 4.55% coupon will result in the same amount of after-tax income.

173. Which of the following choices offers the highest tax-equivalent yield?
     • 5.8% municipal bond to an individual in the 25% tax bracket
     • 5.5% municipal bond to an individual in the 28% tax bracket
     • 5% municipal bond to an individual in the 35% tax bracket
     • 6.2% municipal bond to a corporation in the 21% tax bracket

     Correct answer: 6.2% municipal bond to a corporation in the 21% tax bracket

     Corporations receive the same tax break on municipal bonds as do individuals. Therefore, receiving a 6.2% return in the 21% tax bracket is equivalent to 7.85% before tax. A 5% bond to someone in the 35% bracket is equivalent to 7.69%; a 5.5% coupon to someone in the 28% bracket is equivalent to 7.64%; and a 5.8% coupon to someone in the 25% bracket is equivalent to 7.73%.

174. Which of the following investments would provide the highest after-tax income to your client in the 35% federal income tax bracket?
     • 6% U.S. Treasury bond
     • 5% general obligation municipal bond issued by State H
     • 7% bond issued by Canadian Province M
     • 8% debenture issued by the LMN Corporation

     Correct answer: 8% debenture issued by the LMN Corporation

     Only the State H bond is exempt from federal income tax. Using the tax equivalent yield formula of the muni coupon divided by (100% minus the investor's tax bracket %) we get 5% divided by 65% or 7.7%. That's a better deal than receiving 6% on the Treasury and paying taxes as well as 7% on the Canadian bond (although you learned that securities issued by Canadian provinces were exempt from registration under the Uniform Securities Act, that has nothing to do with U.S. income taxes). However, with a TEY of 7.7%, your client would take home more with the 8% taxable corporate security. You can also work backward to get the correct answer. Simply subtract 35% tax from each of the choices (other than the muni) and see which is the highest. In this case, 8% minus a 35% tax equals 5.2%—just a bit higher than the 5% coupon on the municipal bond.

175. When a corporation domiciled in the U.K. issues U.S. dollar-denominated bonds in the United States, it is issuing
     • Yankee bonds
     • Eurodollar bonds
     • Bulldog bonds
     • Global bonds

     Correct answer: Yankee bonds

     A Yankee bond is issued inside the United States, in U.S. dollars, by a foreign issuer, which is exactly what the stem describes. Eurodollar bonds are dollar-denominated but are placed outside the United States, so the location of the offering is wrong. Bulldog bonds are the British counterpart: sterling-denominated bonds sold in the United Kingdom by a foreign issuer, and the issuer's own domicile does not determine the label. A global bond is offered simultaneously in the Eurobond market and one or more domestic markets, not solely in the United States.

176. An investor interested in investing in sovereign debt would most likely purchase
     • Bonds backed by gold sovereigns
     • European Central Bank debt issues.
     • Sweden 2.5s of 2032.
     • Bonds issued by the Bank of the United States

     Correct answer: Sweden 2.5s of 2032.

     Sovereign debt refers to bonds and other debt instruments issued by a specific country. The European Central Bank manages the currency of the 19 countries who have adopted the Euro. There is no such thing as the Bank of the United States and gold sovereigns are coins – they are not used to back debt.

177. Which of the following statements represents an advantage of a municipal general obligation bond over a revenue bond?
     • A GO bond is not charged against the municipality's borrowing limits.
     • A GO bond issuer is required to conduct a feasibility study.
     • Only a facility's users pay for a GO bond.
     • A GO bond generally involves less risk to the investor.

     Correct answer: A GO bond generally involves less risk to the investor.

     GO bonds are generally less risky than revenue bonds because they are backed by taxes rather than revenues.

178. Which of the following would best describes a Yankee bond?
     • U.S. dollar-denominated bond issued by a U.S. entity inside the United States
     • U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States
     • U.S. dollar-denominated bond issued by a non-U.S. entity outside the United States
     • U.S. dollar-denominated bond issued by a U.S. entity outside the United States

     Correct answer: U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States

     Yankee bonds are issued by non-U.S. entities in marketplaces inside the United States. The bonds are issued in U.S. dollars meaning these foreign issuers will have currency risk if the dollar drops in value against their local currency.

179. Which of the following would best describe a Yankee bond?
     • A U.S. dollar–denominated bond issued by a U.S. entity outside the United States.
     • A U.S. dollar–denominated bond issued by a non-U.S. entity outside the United States.
     • A U.S. dollar–denominated bond issued by a non-U.S. entity inside the United States
     • A U.S. dollar–denominated bond issued by a U.S. entity inside the United States.

     Correct answer: A U.S. dollar–denominated bond issued by a non-U.S. entity inside the United States

     Yankee bonds are issued by non-U.S. entities in marketplaces inside of the United States. The bonds are issued in U.S. dollars, meaning these foreign issuers will have currency risk if the dollar drops in value against their local currency.

180. Of the following securities, which is most commonly recommended to fund a child's college education?
     • Zero-coupon Treasury bonds
     • Investment-grade corporate bonds
     • Treasury bills
     • Municipal bonds

     Correct answer: Zero-coupon Treasury bonds

     Zero-coupon bonds, particularly those carrying the guarantee of the U.S. Treasury, are a favored investment vehicle for saving for a child's higher education. They have the advantage of providing a certain, quantifiable sum at a certain date in the future.

181. The call feature available on some bonds
     • Allows the issuer the option to escape high interest rates if market rates decline
     • May be used to convert the bond into preferred shares
     • Allows bond issuers to extend the life of the bond
     • Allows the issuer to refinance the debt if interest rates rise above the call rate

     Correct answer: Allows the issuer the option to escape high interest rates if market rates decline

     Many bonds have a call feature that allows the issuer to call in the bonds, assuming the issuer has the cash available to pay them off, and escape high interest rates if market interest rate declines. If the company does not have the cash, it may issue a new bond at the lower prevailing interest rates and use that money to pay off the old bonds. This is known as refunding and, in essence, is no different from refinancing the mortgage on a home.

182. If a corporate bond is a convertible bond, this means that
     • The owner of the bond may exchange it for a set number of shares of stock
     • The owner of the bond may exchange it for a bond paying a higher coupon rate
     • The owner of the bond may exchange it for a debenture
     • The corporation may redeem the bond before its maturity date

     Correct answer: The owner of the bond may exchange it for a set number of shares of stock

     A convertible bond is usually a debenture that allows the owner to exchange it for a set number of shares of stock.

183. Which of the following statements regarding callable bonds is correct?
     • They offer lower yields than comparable noncallable bonds.
     • They usually provide a call risk premium.
     • They are only issued by government entities.
     • They are unaffected by changes in market yields.

     Correct answer: They usually provide a call risk premium.

     Callable bonds are normally called only when interest rates fall. The call premium (a percent above par value that the issuer will pay when called) helps to compensate bondholders for the lower interest rate at which they will be able to reinvest the proceeds. Callable bonds have greater risk for investors (call risk) and therefore offer higher yields than noncallable bonds.

184. Which of the following statements regarding convertible debentures is TRUE?
     • The issuer pays a higher rate of interest, compared with a comparable nonconvertible debenture.
     • The debenture holders receive a variable rate of interest.
     • The issuer has the right to convert the debentures during the time period specified in the indenture.
     • When compared with similar nonconvertible debentures, convertible debentures are issued with a lower coupon rate.

     Correct answer: When compared with similar nonconvertible debentures, convertible debentures are issued with a lower coupon rate.

     A conversion feature is a benefit to the debtholder. It allows the debtholder a choice to either continue holding the debt represented by the debenture or to convert it into shares of common stock of the underlying issuer. Everything that is done in the securities industry has to be a win/win situation. The win for the debtholder in this instance is the ability to take advantage of the capital appreciation potential the common stock may offer, and the win for the issuer is that by offering something extra to the debenture purchaser, that purchaser is willing to accept a lower interest rate on the debt (as compared to a nonconvertible debenture) and therefore giving the issuer a lower cost of capital. It is the debtholder, not the issuer who determines when and if to convert.

185. A U.S. dollar-denominated bond issued by a non-American company (or government), sold outside the United States and the issuer's country, but for which the principal and interest are stated and paid in U.S. dollars is best described as
     • A Brady bond
     • A Yankee bond
     • A Eurosterling bond
     • A Eurodollar bond

     Correct answer: A Eurodollar bond

     A Eurodollar bond is stated and paid in U.S. dollars yet is sold outside both the United States and the issuer's own country, which is the description given. A Yankee bond is also dollar-denominated but is sold inside the United States, so its placement fails the stem. A Eurosterling bond has the same offshore placement but is denominated in pounds rather than dollars. Brady bonds are dollar-denominated instruments created to restructure defaulted sovereign bank loans, not a general description of an offshore issue by a company.

186. When a U.S. resident investor purchases foreign bonds,
     • Depreciation of the bonds and appreciation of the foreign currency benefit the domestic investor
     • Appreciation of both the bonds and the foreign currency benefits the domestic investor
     • Depreciation of both the bonds and the foreign currency benefits the domestic investor
     • Appreciation of the bonds and depreciation of the foreign currency benefit the domestic investor

     Correct answer: Appreciation of both the bonds and the foreign currency benefits the domestic investor

     In the same manner that purchasing foreign equities adds diversification to a portfolio, purchasing foreign bonds does as well. As with any security, if the value goes up (it appreciates), that is a benefit to the investor. When foreign securities are involved, there is another concern—currency risk. Because the foreign bond is denominated in the local currency, an increase in that currency's value versus the U.S. dollar means the semiannual interest payments will translate into more dollars. At maturity, the return of principal will be higher as well. Of course, it can go the other way if the market value or the foreign currency depreciates against the dollar.

187. If your customer wants to set aside $40,000 for when his child starts college, but does not want to endanger the principal, you should recommend
     • Long-term municipal bonds chosen for their tax exemption
     • Zero-coupon bonds backed by the United States government
     • Investment-grade corporate bonds that pay a fixed coupon
     • A balanced fund holding blue-chip dividend paying stocks

     Correct answer: Zero-coupon bonds backed by the United States government

     A zero-coupon obligation backed by the U.S. government carries no default risk and matures at a known amount on a known date, which is what a parent needs when a fixed sum must be available at enrollment and the principal cannot be put at risk. Municipal bonds carry interest-rate and credit risk, and their tax exemption buys nothing inside a college-funding goal. Corporate bonds still carry credit risk and throw off current interest this goal does not need. A fund built on equities exposes the principal to market risk however sound the underlying companies are.

188. The term "eurodollars" refers to
     • European currency held in U.S. banks
     • A worldwide currency system that is expected to someday replace existing currency systems
     • Obsolete currency that was formerly backed by the gold standard
     • American dollars held by banks in other countries, especially in Europe

     Correct answer: American dollars held by banks in other countries, especially in Europe

     American dollars held in international banks, especially, but not exclusively, in Europe, are known as eurodollars.

189. Which of the following investments gives the investor the least exposure to reinvestment risk?
     • Treasury STRIPS/zero-coupon bonds
     • Preferred stock in a growth company
     • Treasury notes
     • Common stock in an electric utility

     Correct answer: Treasury STRIPS/zero-coupon bonds

     Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are zero-coupon bonds paying no interest. Thus, there is no income to reinvest during the holding period and therefore no reinvestment risk.

190. Your customer owns $100 par $5\frac{1}{2}\%$ callable convertible preferred stock convertible into 4 shares of common stock at $25. What should she be advised to do if the board of directors were to call all the preferred at 106 when the common stock is trading at $25.50?
     • Convert her preferred stock into common stock because it is selling above parity.
     • Hold the preferred stock to continue the $5\frac{1}{2}\%$ yield.
     • Present the preferred stock for the call because the call price is $4 above the parity price.
     • Place irrevocable instructions to convert the preferred stock into common stock and sell short the common stock immediately.

     Correct answer: Present the preferred stock for the call because the call price is $4 above the parity price.

     If the preferred stock is called, the client will receive $106. Tendering the preferred stock will provide the highest value. The value of converting the preferred stock into 4 shares of common is worth $102 (4 $\times$ $25.50 = $102), which is less than the call value of $106. The dividends will cease on the call date if the preferred stock is held beyond the call date.

191. An investor interested in acquiring a convertible bond as part of his investment portfolio would
     • Be interested in tax advantages available to convertible debt securities
     • Seek to minimize changes in the bond price during periods of steady interest rates
     • Want the safety of a fixed-income investment along with potential capital appreciation
     • Want the assurance of a guaranteed dividend on the underlying common stock

     Correct answer: Want the safety of a fixed-income investment along with potential capital appreciation

     An investor who wants the safety of a fixed-income investment with the potential for capital gains would be most interested in purchasing a convertible bond. However, because convertible bonds can be exchanged for common stock, their market price tends to be more volatile during times of steady interest rates than other fixed-income securities.

192. When does a customer have to receive the OCC Options Disclosure Document?
     • Within 15 days following the account approval date for options
     • Before the firm accepts the customer's first order for options
     • Along with the confirmation of that first listed options trade
     • Within 5 business days after the first listed options purchase

     Correct answer: Before the firm accepts the customer's first order for options

     The options disclosure document must reach the customer no later than the time the account is approved for options or the firm accepts the customer's first options order, whichever comes first. The fifteen-day window belongs to the signed options agreement the customer must return after approval, not to the disclosure document. Delivering the document with the first confirmation is too late, because the customer would already have traded without the risk disclosure, and a window measured from the first trade fails for the same reason.

193. An investment adviser registered in 4 states would be permitted to enter into an advisory contract with all of the following prospective clients except
     • An unregistered investment fund
     • A private charitable foundation
     • A regional university endowment
     • A registered investment company

     Correct answer: A registered investment company

     Advising a registered investment company requires registration with the SEC, and an adviser registered only with the states may not enter that contract. A private fund that is not itself registered as an investment company is an ordinary advisory client and creates no such bar. Charitable foundations and university endowments are institutional clients a state-registered adviser may contract with freely.

194. An investment adviser would be able to enter into an advisory contract with all of the following except
     • A minor
     • A philanthropic foundation
     • Three brothers in a joint account
     • A closed-end investment company

     Correct answer: A minor

     Investment advisers can only enter into advisory contracts for those who are persons, as defined in the Uniform Securities Act. There are three nonpersons: minors, deceased persons, and those declared mentally incompetent. How do we know the brothers are adults? Because it doesn't say they are minors – don't read something into a question to make it more difficult.

195. A registered broker-dealer would not be able to open an account for
     • A person deemed mentally incompetent
     • The CEO of a company whose stock is NYSE-traded
     • Two unrelated individuals
     • The estate of a deceased individual

     Correct answer: A person deemed mentally incompetent

     A broker-dealer can only open an account with a legal person. Those deemed mentally incompetent are not persons under the law. Deceased individuals are not persons either, but their estate is so an account may be opened in the name of the estate. Although the CEO's account would have to be monitored for any hint of insider trading, one's position in a listed company is not an impediment to opening a brokerage account. There is no legal requirement that the owners of a joint account be related; friends are fine as are business partners.

196. A broker-dealer would not be able to open an account for
     • A trust
     • The estate of a deceased person
     • A city
     • A deceased person

     Correct answer: A deceased person

     Broker-dealers can only open accounts for those who are persons, as defined in the Uniform Securities Act. There are three nonpersons: minors, deceased persons, and those declared mentally incompetent. Remember, the term "person" is very broad and includes political subdivisions such as cities and states. Even though the deceased individual is not a person, that individual's estate is.

197. Among the clients of a broker-dealer could be
     • A minor
     • A deceased individual
     • A foundation
     • An individual declared mentally incompetent

     Correct answer: A foundation

     Clients could include any person, as defined in the Uniform Securities Act. Minors, deceased individuals, and mentally incompetent individuals are not persons.

198. Ms. Abbot has a joint account with her sister. She enters a sell order in the account and instructs that the proceeds check be made out to her only. If your firm sends the check but makes it payable to both Ms. Abbot and her sister, this is an example of
     • Not following instructions, a prohibited practice under the Uniform Securities Act
     • An unlawful practice because the transaction was unauthorized
     • An unfortunate error that can be reconciled with the broker-dealer through a process called reclamation
     • The proper joint account procedure

     Correct answer: The proper joint account procedure

     In joint accounts, either party may act. However, by law, all checks must be made payable to all owners, so the firm is following required procedure.

199. One respect in which an LLC differs from an S corporation is that
     • There is no statutory limit on the number of investors in an LLC
     • An LLC can be formed with as little as a single investor
     • There is more favorable tax treatment afforded to members of an LLC
     • Not only income, but losses, if generated, pass through to investors in an LLC

     Correct answer: There is no statutory limit on the number of investors in an LLC

     There is no limit to the number of investors (members) in an LLC, while current regulations limit the number of investors (shareholders) in an S corporation to 100. The tax treatment is the same, and both can be formed with a single owner.

200. An S corporation is characterized by
     • Flow-through tax treatment
     • Limited lifetime
     • More than 100 shareholders
     • Unlimited personal liability

     Correct answer: Flow-through tax treatment

     Shareholders of an S corporation have limited liability, are limited to no more than 100 shareholders, and receive flow-through tax treatment.

201. In an account opened by 2 individuals as joint tenants with rights of survivorship, all of the following are true EXCEPT
     • In the event of death, the other party assumes full ownership of the account
     • Orders may be entered by either party
     • Mail may be directed to the joint owner agreed upon by both parties to the account
     • Stock certificates may be delivered in the name of either party

     Correct answer: Stock certificates may be delivered in the name of either party

     In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of 1 party in a 2-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account.

202. Suzie McQueen has a very successful interior design shop she has run as a sole proprietorship. She has just celebrated her 60th birthday and has been giving thought to an eventual sale of the business. She wants your opinion on whether she should incorporate or change to a partnership. You might respond that
     • The partnership form of business structure would be the easiest for ultimate transfer of ownership
     • The partnership form of business structure would enable Suzie to maximize her sale price
     • The corporate form of business structure would be the easiest for ultimate transfer of ownership
     • The corporate form of business structure would be the least expensive to form

     Correct answer: The corporate form of business structure would be the easiest for ultimate transfer of ownership

     In general, the corporate form of business leads to the easiest transfer of ownership. Because Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. If Suzie wanted to reorganize as a partnership, she would have to bring in at least one additional individual, ending her total ownership of the business. Even then, a partnership interest is not as easy to sell as stock.

203. Under the provisions of the Internal Revenue Code, which of the following business forms is not required to file a separate tax return?
     • S corporation
     • Limited partnership
     • LLC
     • Sole proprietorship

     Correct answer: Sole proprietorship

     In the case of a sole proprietorship, any tax consequences (income or loss) are reported on the owner's personal Form 1040, Schedule C. The other entities file either a Form 1065 (limited partnership and LLC) or a Form 1120S (S corporation). Although a one member LLC is treated like a sole proprietorship, unless that was stated as a choice, the LLC has multiple members.

204. A man is planning to start his own glass-sculpturing business. He wants to be able to deduct his anticipated losses for the first 2 years. He anticipates that the enterprise will borrow money from lenders and is willing to personally guarantee the debt. He also wants to attract other investors but does not want to give up control of the day-to-day business decisions. What business form do you recommend?
     • Limited partnership
     • S corporation
     • General partnership
     • C corporations

     Correct answer: Limited partnership

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

205. A form of business structure that exposes all personal assets of the owner to creditors is
     • The LLC
     • The limited partnerships
     • The C corporation
     • The sole proprietorship

     Correct answer: The sole proprietorship

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

206. If 150 investors want to form a corporation to limit their financial liability to the amount of money they invest and do not want to be responsible for any debt that the corporation incurs, they would most likely form
     • A C corporation
     • An S corporation
     • A general partnership
     • A proprietorship

     Correct answer: A C corporation

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

207. Among the advantages of forming an S corporation rather than a C corporation for a new business enterprise is
     • Shareholders’ losses are limited to the amount of their investment
     • Any losses flow through to the investors
     • Unlike the C corporation, which is limited to 100 investors, there is no such limit for an S corporation
     • The ease in raising substantial amounts of capital

     Correct answer: Any losses flow through to the investors

     An S corporation offers the benefit of flow-through of both income and losses (losses being a particular benefit for a start-up because they usually take some time to become profitable). It is the S corporation rather than the C corporation that is limited to 100 investors. Both offer the benefit of limited liability. The C corporation is superior for raising large amounts of capital.

208. The type of business organization in which one person owns the entire business and there is no legal distinction between that individual and the business is
     • A corporation
     • A sole proprietorship
     • A limited partnership
     • A general partnership

     Correct answer: A sole proprietorship

     A sole proprietorship is the simplest form of business organization, because one person owns the entire business and there is no legal distinction between the owner and the business. This means that the owner is personally responsible for the business's debts. A partnership always requires 2 or more owners. Although 1 person can own an entire corporation, a corporation is a legal entity separate and distinct from its owner(s).

209. Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative can
     • Have a check drawn on the account payable to the trustee for expenses
     • Place the securities in the trust fund in a noncustodial brokerage account
     • Have funds withdrawn from the account at the direction of the beneficiary
     • Arrange to have the trust's funds pledged to support a loan for the trustee

     Correct answer: Have a check drawn on the account payable to the trustee for expenses

     The trustee can be reimbursed for expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can withdraw funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial or trust accounts, not in noncustodial accounts.

210. Alvin's spouse is a trustee of a trust established by Henrietta Flood, which directs income from the trust be paid to Alvin, for as long as he lives. Alvin's son, Floyd, will receive the principal upon Alvin's death. Floyd would like to receive some of the principal before Alvin's death, and Alvin does not object. How should his spouse, the trustee, act in this situation?
     • Follow the trust terms, paying Alvin the income and Floyd the principal
     • Distribute part of the principal now, reducing the income paid to Alvin
     • Follow Alvin's own wishes, releasing part of the principal to Floyd now
     • Amend the payment terms, giving Floyd his principal and Alvin an income

     Correct answer: Follow the trust terms, paying Alvin the income and Floyd the principal

     A trustee has only the powers the instrument grants. This trust directs the income to Alvin for life and the principal to Floyd at Alvin's death, and nothing in the facts gives the trustee discretion to accelerate that. Handing Floyd part of the principal now invades the income beneficiary's interest, and Alvin's willingness to go along does not matter because beneficiaries cannot rewrite the terms by agreement. The trustee likewise has no authority to change the payment terms in favour of either of them.

211. Your advisory client is an 86-year-old woman who is presently in the hospital, unable to communicate due to a severe stroke. For the past 6 years, she has followed the practice of making annual gifts of stock to her children and grandchildren on her birthday. Because her 87th is coming up later this month, her oldest son approaches you and asks you to continue the policy.
     • With 6 years of prior history, you know this is what she would want you to do so you go ahead as in previous years.
     • Without a proper durable power of attorney being produced, you cannot do anything.
     • You should go to the hospital and see if she can blink her eyes to indicate yes or no.
     • You may only follow the provisions of her will.

     Correct answer: Without a proper durable power of attorney being produced, you cannot do anything.

     Unless proper written authorization has been provided, such as with a durable power of attorney, you cannot do anything without the client's consent. If she fails to recover and passes away, then the terms of the will must be followed by the executor.

212. A feature of which of the following business entities is limited liability but no flow-through of earnings or losses?
     • Sole proprietorship
     • Corporation
     • Limited partnership
     • LLC

     Correct answer: Corporation

     The corporation (always assume C corporation unless it says different on the test) offers limited liability to its shareholders, but there is no flow-through of income or loss. LLCs and limited partnerships offer both and the sole proprietorship has unlimited liability.

213. When a trustee is managing the trust assets, which of the following is the most important consideration?
     • The steady income each beneficiary of the trust needs
     • The preservation of the capital the trust still holds
     • The purposes spelled out in the trust document itself
     • The reduction of the expenses this trust keeps paying

     Correct answer: The purposes spelled out in the trust document itself

     Under the prudent investor standard the trustee's governing reference is the trust itself: its purposes, its terms and its distribution requirements. Every other objective is judged inside that framework. The income the beneficiaries need, the preservation of the capital and the control of expenses are all genuine factors a trustee weighs, but each of them is weighed against what the document requires, so none of them can outrank it.

214. In a trust account, the person who makes the account management decisions is
     • The investment adviser representative
     • The trustee
     • The nontrustee custodian
     • The beneficiary

     Correct answer: The trustee

     A trust is a legal entity that designates a person (the trustee) to manage the trust's assets for the benefit of another person (the beneficiary or beneficial owner).

215. One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that
     • The CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box
     • The CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts
     • The CIP requires a statement of the customer’s goals while the regulators only require current financial information
     • The CIP requires date of birth while the regulators only require proof of legal age

     Correct answer: The CIP requires date of birth while the regulators only require proof of legal age

     The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts.

216. One of the portions of the USA PATRIOT Act of 2001that affects the opening of an account for a new customer is
     • The customer identification program
     • The “know-your-customer rule
     • The Transportation Security Administration (TSA)
     • The requirement to obtain suitability information

     Correct answer: The customer identification program

     The customer identification program (CIP) is mandated by the PATRIOT Act and requires that broker-dealers (and other financial institutions) obtain certain specified information about new customers. The "know-your-customer" rule was written many decades before the PATRIOT Act. The PATRIOT Act, through the CIP, is concerned with validating identity, not suitability.

217. All the following information must be obtained from new individual customers EXCEPT
     • Educational background
     • Social Security number
     • Date of birth
     • Physical address

     Correct answer: Educational background

     A customer's educational background is not required to open a new account. In the case of an account opened in the name of a business, the business address and tax identification number are required.

218. A woman wants to buy from an agent who is not registered in her state. She decides to use a friend's address in the state in which the agent is licensed. This action is
     • Acceptable as long as she has her friend's permission to use the address
     • Acceptable because the agent can do business only with those who have a residence address in those states in which he is registered
     • Not acceptable because the other party does not know you are using the address
     • Not acceptable because there are no circumstances under which you are permitted to use someone else's address as yours

     Correct answer: Not acceptable because there are no circumstances under which you are permitted to use someone else's address as yours

     Use of a fictitious home address is not only a red flag, it is illegal under the federal customer identification program (CIP).

219. Which of the following is NOT a characteristic of a corporation?
     • It is considered an entity apart from its owners.
     • Ownership interests are evidenced by shares of stock.
     • Owners have no personal liability for corporate debts.
     • Existence terminates when an owner dies.

     Correct answer: Existence terminates when an owner dies.

     A corporation is an entity that has an existence separate from its owners. Therefore, the existence of a corporation does not terminate when an owner dies. Also, because the owners and the corporation are distinct entities, the owners are not personally liable for the corporation's debts.

220. Two sisters might wish to open an account as tenants in common (TIC) rather than JTWROS in order to
     • Keep each sister's undivided share in all of the account assets
     • Require both sisters to sign before either one takes any assets
     • Let each sister's spouse use the account with her prior consent
     • Let each sister's share pass to those heirs she chooses herself

     Correct answer: Let each sister's share pass to those heirs she chooses herself

     In a tenancy in common each cotenant's share passes to her own estate and from there to the heirs she has named, while in a joint account with right of survivorship it passes automatically to the surviving sister. That difference is the reason to choose the tenancy in common. Both forms give each cotenant an undivided interest in the whole account, so that is no ground for preferring one. Neither form requires both signatures for a withdrawal, and neither gives a spouse access; only the named cotenants have it.

221. If a new joint tenants with rights of survivorship account is opened by two related individuals, all of the following statements are true EXCEPT
     • Orders may be given by either party
     • Mail may be sent to either party (with the permission of each party)
     • In the event of death, the decedent's interest in the account goes to the other party
     • Checks may be drawn in the name of either party

     Correct answer: Checks may be drawn in the name of either party

     While either party may enter an order, any money or securities delivered out of the account must be in the names of both owners.

222. All of the following statements relating to an account registered as tenants in common are true EXCEPT
     • Cotenants may own unequal percentages of the assets held in this account
     • Each cotenant has an undivided interest in every asset the account holds
     • A deceased cotenant's share goes by law to the other surviving cotenants
     • Married couples use joint accounts instead of this form of holding title

     Correct answer: A deceased cotenant's share goes by law to the other surviving cotenants

     In a tenancy in common the share of a cotenant who dies passes to that person's estate, not to the other cotenants. Automatic survivorship is the feature of a joint account with right of survivorship, so that statement is the false one. The other three are accurate: cotenants may hold unequal percentages; each holds an undivided interest in the whole portfolio rather than in designated securities; and married couples do generally choose survivorship registration over this form.

223. If a businessowner's goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate?
     • A subchapter S corporation
     • A limited liability company
     • A general business partnership
     • A family limited partnership

     Correct answer: A limited liability company

     Of these forms the limited liability company can take in capital most freely, because it places no ceiling on the number of owners and no restriction on their nationality. A subchapter S corporation is capped at 100 shareholders and none of them may be a nonresident alien. A general partnership needs the consent of the existing partners for a new one and leaves every partner with unlimited liability. A family limited partnership exists to hold assets within one family, not to raise outside money.

224. The customer identification program (CIP) requires that certain information relating to new customers be obtained. Included in that requirement for individual clients who are citizens of the United States are all of the following EXCEPT
     • The customer's employment status
     • The customer's residence address
     • The customer's taxpayer number
     • The customer's precise birthdate

     Correct answer: The customer's employment status

     For a United States individual the customer identification program requires a name, a date of birth, a street address and a taxpayer identification number. Employment status is routinely collected on a new account form for suitability purposes, but it is not one of those items, which is why it is the exception here. A residence address, a taxpayer number and a date of birth are each required.

225. Which of the following documents would aid an investment adviser in its responsibility to fully understand the needs of a client when making investment recommendations?
     • A proxy voting policy.
     • A restricted list.
     • A communications agreement.
     • An investment policy statement.

     Correct answer: An investment policy statement.

     The IPS is the key document that defines an investor's risk and return objectives and any constraints for their investment.

226. With respect to taxation, an investment adviser representative should NOT
     • Draft the trust and estate papers the client's tax plan needs
     • Explain how a recommended security gets taxed when it is sold
     • Prepare a summary of the adjusted cost basis of every holding
     • Show the after-tax return and tax due on two similar holdings

     Correct answer: Draft the trust and estate papers the client's tax plan needs

     Drafting a trust or a will is the practice of law, and a representative who prepares those documents is practising law without a licence however sound the tax reasoning behind them. Explaining how a recommended security is taxed when it is sold is ordinary suitability work. Preparing a cost-basis summary is record-keeping rather than legal drafting. Comparing the after-tax outcome of two candidate holdings is exactly what a representative is expected to do.

227. If an investment adviser's client wishes to save current income taxes by placing certain investments in a charitable trust, ethically, the investment adviser should
     • Recommend the client consult with a qualified attorney
     • Refuse to discuss the trust with the client because the adviser is not an attorney
     • Help the client draft the appropriate documents following a discussion of the advantages of the arrangement
     • Urge the client to consult with an attorney who pays a referral fee to the investment adviser

     Correct answer: Recommend the client consult with a qualified attorney

     Presuming the adviser is not a licensed attorney, he should recommend the client see a qualified attorney. However, it is ethical to discuss the nature of a charitable trust with the client.

228. One of your clients dies. You could legally take instructions regarding the individual's estate from
     • A CPA who prepared the deceased’s tax return
     • The spouse of the deceased
     • A person with durable power of attorney
     • The administrator in intestacy

     Correct answer: The administrator in intestacy

     If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power.

229. A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use?
     • Charitable lead trust
     • Simple trust
     • Complex trust
     • Charitable remainder trust

     Correct answer: Complex trust

     Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.

230. An estate account is opened with Family Asset Protectors (FAP) a registered investment adviser. Management decisions regarding the account must be made at the direction of the
     • Attorney with guardianship over the surviving children
     • Investment adviser
     • Estate’s executor or administrator
     • Estate creditors

     Correct answer: Estate’s executor or administrator

     Only the estate executor (or administrator when the individual dies intestate) can make investment management and distribution decisions. This does not mean that the executor must make the investment decisions for the account, only that decisions as to who will do the management are within his purview. A guardian with authority over the children does not necessarily have power over the estate unless the guardian is also the administrator or the executor of the estate.

231. The distributable net income (DNI) of a simple trust would not include
     • Dividends received
     • Interest received on municipal bonds
     • Interest received on corporate bonds
     • Realized capital gains

     Correct answer: Realized capital gains

     It is capital gains that are reinvested in the corpus (body) of a simple trust which are not part of DNI. Although the interest on municipal bonds in not taxable, it is still included as part of the DNI.

232. If a customer who has granted a durable power of attorney to her son dies, which of the following statements regarding the power of attorney is TRUE?
     • It is canceled on the death of either principal.
     • It remains in effect until the son cancels it.
     • It remains in effect until the executor of the estate cancels it.
     • It remains in effect only if the son is the sole heir to the estate.

     Correct answer: It is canceled on the death of either principal.

     When the customer or her son dies, the power of attorney also expires. However, a durable power of attorney will survive a declaration of mental incompetence and is useful in those cases where a parent suffers from dementia.

233. As a registered investment adviser, you have managed $10 million of a customer's funds for several years. The customer asks you to prepare a trust for his children, to transfer $3 million of his funds into the trust, and to trade the trust with the same objectives as the existing account. You should
     • Prepare the trust yourself and invest it on the same terms
     • Refer him to an attorney who will draft the trust document
     • Refer him to an accountant who can create the trust papers
     • Let your own compliance officer draw up the new trust form

     Correct answer: Refer him to an attorney who will draft the trust document

     Only a licensed attorney may draft a trust instrument, so the adviser's task is to send the customer to one. Preparing the trust yourself is the unauthorised practice of law. An accountant can advise on the tax consequences of a trust but has no more authority to draft it than the adviser does. A compliance officer supervises the firm's own conduct and has no authority to prepare a customer's legal documents.

234. Increasingly, many institutional investors, especially those in the philanthropic arena, are using ESG factors when considering where to invest their funds. Those factors are most accurately described as
     • Exchange, sales, and general
     • Exchange, sensitivity, and growth
     • Earnings, systematic, and governmental
     • Environmental, social, and governance

     Correct answer: Environmental, social, and governance

     The ESG business factors that should be considered when analyzing a firm are a company's environmental, social, and governance risk exposures.

235. One of your longtime advisory clients has been critically injured in an automobile accident. The client is in the ICU at the local hospital, unable to communicate. You would be able to accept orders for the account
     • The agent acting under this client's health care proxy
     • The executor named under the client's most recent will
     • The person holding a written durable power of attorney
     • The spouse who owns another brokerage account with him

     Correct answer: The person holding a written durable power of attorney

     While the client is incapacitated, orders may be accepted only from someone whose written authority survives that incapacity, which is what a durable power of attorney provides. A health care proxy authorises medical decisions and reaches nothing in a brokerage account. An executor has no authority at all until the client has died and the will is admitted. A spouse who happens to own a different account has no authority over this one.

236. If a client wishes the assets in her account to pass directly to specific beneficiaries after her death, her account should be titled
     • TIC
     • Testamentary account
     • JTWROS
     • TOD

     Correct answer: TOD

     TOD (transfer on death) provides that, upon the death of the account holder, the assets pass to the named beneficiary or beneficiaries without going through probate.

237. One of your customers has a substantial savings account at the local S&L. The customer has several grandchildren and wants the flexibility of being able to change the beneficiary allocations as their financial conditions change. You should recommend that the customer investigate the use of
     • A durable power of attorney (POA)
     • A Totten trust
     • An irrevocable trust
     • A Uniform Transfers to Minors Act (UTMA) account

     Correct answer: A Totten trust

     A Totten trust allows for the transfer of ownership of a bank account to a beneficiary or beneficiaries after the owner's death. It is the predecessor of today's POD (pay on death) and TOD (transfer on death) accounts. Beneficiary names and/or percentages can be changed at will. An irrevocable trust can't be changed; there is no flexibility. In an UTMA account, once the money is allocated, the decision is irrevocable (and who says the grandchildren are minors). The durable POA gives a designated person the authority to manage the affairs of the account, and this customer wants the control.

238. One of your existing clients wishes to open a new account in the name of his spouse and enter orders on her behalf.
     • This action is prohibited unless the customer signs a trading authorization on behalf of his spouse.
     • This practice is ordinary and acceptable.
     • This action is prohibited unless the spouse signs a trading authorization.
     • The agent could be liable if the stock declines in value.

     Correct answer: This action is prohibited unless the spouse signs a trading authorization.

     Effecting transactions without specific written authority from the beneficial owner of the account is prohibited. This customer cannot sign trading authorization on behalf of his spouse. The spouse must sign the authorization.

239. An advantage of structuring a business operation as an S corporation rather than a C corporation would be
     • The C corporation is limited to a maximum of 100 shareholders while no such limit exists for the S corporation
     • Limited liability
     • Simplicity when raising capital through a public offering
     • Avoiding double taxation

     Correct answer: Avoiding double taxation

     Because an S corporation is taxed like a partnership, all earnings (or losses) flow directly through to the shareholders. This avoids the double taxation inherent in receiving a share of the profits (through dividends) from a C corporation. It is the S corporation that is limited to 100 shareholders. That is why it is not suitable for raising capital through a public offering. The shareholders of both S and C corporations enjoy the benefit of limited liability.

240. A feature of which of the following business entities is limited liability for owners, as well as flow-through of income?
     • Sole proprietorship
     • Limited partnership
     • C corporation
     • General partnership

     Correct answer: Limited partnership

     Limited partnership interests offer both flow-through of income (or loss) along with limited liability. The general partnership has full liability, as does the sole proprietorship. C corporations have limited liability, but no flow-through.

241. Although all new accounts must be approved by a designated supervisor before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be
     • A discretionary account
     • An IRA
     • A margin account
     • An options account

     Correct answer: An options account

     Because trading options (puts and calls) generally involves a higher degree of risk than stocks, bonds, or mutual funds, a designated supervisory person with knowledge about options must approve the account opening.

242. Which of the following actions should be taken by an agent when a client decides to open an options account?
     • Assure that an options agreement has been signed prior to the first trade taking place
     • Provide an options disclosure document no later than 15 days after the first trade
     • Review with the client the risks involved when trading options before the first options trade
     • Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade

     Correct answer: Review with the client the risks involved when trading options before the first options trade

     It is imperative that suitability and risk be addressed with the client before allowing option trading to take place. The ODD must be delivered no later than with account opening, and the options agreement must be returned no later than 15 days after the account opening. An options account must be approved by a designated supervisor prior to any trading takes place in the account.

243. Mr. Hawkins sets up a revocable trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to
     • Mr. Hawkins as the donor
     • The trust because it is a separate legal entity
     • Mrs. Hawkins as the contingent beneficiary
     • Madeleine as the primary beneficiary

     Correct answer: Mr. Hawkins as the donor

     Because Mrs. Hawkins has an economic interest, this is a grantor trust. Thus, all income will be taxed to the donor, Mr. Hawkins.

244. Under industry rules, customers who wish to trade options must receive a copy of the options disclosure document (ODD)
     • At or before the mailing of the confirmation representing the first options trade
     • At or before the mailing of the next monthly statement
     • Within 15 days of account approval
     • At or before account approval

     Correct answer: At or before account approval

     All prospective options customers must receive a copy of the ODD at or before the time the account is approved to trade options. It is the options account agreement that must be signed and returned to the broker-dealer within 15 days of account approval.

245. Which of the following individuals may NOT open a joint account?
     • Business colleagues
     • Parent and a minor
     • Two spouses
     • Three sisters

     Correct answer: Parent and a minor

     Any 2 or more persons can have a joint account, but a minor is specifically excluded from the definition of a person.

246. All of the following actions must be completed prior to customers entering their first option trade EXCEPT
     • Receipt of a completed options agreement
     • Delivery of the options disclosure document (ODD)
     • Approval by a designated options supervisor
     • Completion of the new account form

     Correct answer: Receipt of a completed options agreement

     Customers do not have to complete (sign) the options agreement prior to entering an order; under current rules, the agreement must be signed and returned by the customer within 15 days of account approval.

247. Obtaining all of the following complies with the regulations regarding customer identification programs (CIPs) EXCEPT
     • The full legal name stated at the time of application
     • The taxpayer number given by the customer on the form
     • The date of birth given by the customer when applying
     • The post office box given instead of a street address

     Correct answer: The post office box given instead of a street address

     A post office box may be kept as a mailing address, but the customer identification program requires a physical street address as well, so taking the box in place of one does not comply. The other three are required items and obtaining them does comply: the customer's full legal name, the taxpayer identification number and the date of birth.

248. Which of the following would likely be stressed in a socially responsible fund?
     • Avoidance of foreign securities
     • Lower than average expenses
     • Higher-than-average returns
     • Ethical and moral investing

     Correct answer: Ethical and moral investing

     Socially responsible investing (SRI) is an impact investment strategy which seeks to consider both financial return and social good. In general, socially responsible investors encourage highly ethical corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity.

249. The type of trust created by a will that becomes operative at death is
     • A Q-tip trust
     • A revocable trust
     • A living trust
     • A testamentary trust

     Correct answer: A testamentary trust

     As in "last will and testament."

250. Small corporations that satisfy certain criteria can elect not to pay income tax at the corporate level but instead pass their earnings through to their shareholders. These corporations are known as
     • S corporations
     • Q corporations
     • R corporations
     • C corporations

     Correct answer: S corporations

     The type of small corporation that can elect not to be taxed at the corporate level but to pass its earnings through to its shareholders is an S corporation. The term "S corporation" comes from the subchapter of the Internal Revenue Code that governs these corporations (Subchapter S). The other type of corporation—the C corporation—is one that has not elected to be treated under Subchapter S. Its earnings are taxed at the corporate level and again at the individual level when they are paid out as dividends.

251. One of the ways in which a simple trust differs from a complex trust is that simple trusts
     • May accumulate income and settle the resulting tax at the trust level
     • May release part of the trust corpus to the beneficiaries in addition
     • Must pay out their entire net income to their beneficiaries each year
     • Must have at least one charitable beneficiary named in the trust deed

     Correct answer: Must pay out their entire net income to their beneficiaries each year

     A simple trust must pay out all of its distributable net income to the beneficiaries every year, and that mandatory annual payout is what makes it simple rather than complex. A trust that accumulates income and pays the tax at the trust level is by definition complex. A simple trust may not distribute corpus. And a trust with a charitable beneficiary is complex as well, so having one is not a feature of a simple trust.

252. One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken?
     • Beneficiary
     • Trustee and beneficiary
     • As the grantor, no other roles may be taken
     • Trustee

     Correct answer: Trustee and beneficiary

     Under trust law, the grantor of a trust, sometimes referred to as the settlor, may also be the beneficiary and the trustee.

253. As with all investors, it is important that trusts have an investment policy statement (IPS). If the beneficiary of a trust requests that the trustee use trust assets to enter an order that is considered a prohibited transaction under the IPS, the trustee should
     • Ask the grantor to waive that restriction in writing
     • Amend the policy statement and then accept the order
     • Decline the order and resign the trusteeship at once
     • Refuse the order since that policy statement bars it

     Correct answer: Refuse the order since that policy statement bars it

     A trustee is a fiduciary, and the investment policy statement is drawn up to carry out the grantor's wishes, so an order the statement prohibits must be declined however the beneficiary presses. Seeking a waiver leaves the prohibited transaction on the table and does not answer the request the trustee is holding. Amending the statement so the order can be entered defeats the purpose of having one. Resigning is an overreaction: refusing the order fully discharges the duty.

254. Which of the following is most commonly used when the author wants to express end of life wishes?
     • A testamentary trust
     • A living will
     • A living trust
     • A revocable trust

     Correct answer: A living will

     Sometimes referred to as a medical directive or advanced care directive, a living will is used to express the author's end-of-life wishes such as organ donation, when to withdraw life-prolonging treatment, and so forth.

255. A customer has just died. If his wife asks you what amount of federal estate tax will be imposed on the transfer of their personal property to her name, which of the following responses would be best?
     • The amount of tax will depend on your late husband's tax bracket.
     • The amount of tax will depend on the size of the estate to be transferred.
     • Consult a qualified tax specialist.
     • The amount may be prorated over the next 4 years.

     Correct answer: Consult a qualified tax specialist.

     Specific tax advice should be referred to a qualified tax adviser such as an accountant or tax attorney. No federal estate tax is imposed as a result of the marital exclusion as long as the spouse is a U.S. citizen.

256. A living will is used to
     • Eliminate, or at least reduce, estate taxes
     • Ensure that the author’s assets are properly distributed after death
     • Express the author’s end-of-life wishes
     • Avoid the cost and time of probate

     Correct answer: Express the author’s end-of-life wishes

     Sometimes referred to as a medical directive or advanced care directive, a living will is used to express the author's end-of-life wishes, such as organ donation, "pulling the plug," and so forth. It has nothing to do with a last will and testament describing the distribution of assets after death.

257. When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as
     • Asset allocation
     • Program-related investing
     • Engineered investing
     • Impact investing

     Correct answer: Impact investing

     Impact investing can be defined as the intentional allocation of capital to generate a positive social or environmental impact.

258. In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account, is
     • Demand deposit account (DDA)
     • Totten trust
     • Revocable trust
     • Passbook savings account

     Correct answer: Totten trust

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

259. A wealthy individual has set up a GRAT. Should she die during the time the trust is active, how are the remaining assets in the trust taxed?
     • No tax is due if the grantor should die during the term of the trust.
     • The original value plus any appreciation passes to the beneficiaries but is subject to gift tax.
     • The original value plus any appreciation is taxed as part of the grantor’s estate.
     • The original value plus any appreciation passes to the beneficiaries and is taxed as ordinary income.

     Correct answer: The original value plus any appreciation is taxed as part of the grantor’s estate.

     One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3–10 years), the assets put in the GRAT, plus any appreciation, are included in her estate.

260. One of the situations that investment adviser representatives may encounter is the death of a client. When that happens, orders may be accepted from
     • The trustee in intestacy
     • An individual with a durable power of attorney
     • The deceased client’s spouse
     • The deceased client’s children

     Correct answer: The trustee in intestacy

     In most cases, your clients will have a will. (Editorial comment – not on the exam, but you are acting in your clients' best interest when you strongly urge them to prepare a proper will.) When the deceased has not written a will, he is considered to have died intestate. The appointment of the person who will administer the estate is based on state law. That person may be called the administrator of the estate or the trustee in intestacy. The spouse may be appointed to that role, but would be acting as the trustee, not as the spouse and same is true of the children. A durable power of attorney is dissolved upon the death of either principal to the power.

261. When a will calls for property to be distributed per stirpes, it means that
     • The property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants
     • The property is divided into as many equal shares as there are surviving children and grandchildren of the designated ancestor
     • All living descendants of the ancestor receive equal shares in the property remaining after all estate expenses are paid
     • The property is divided into as many equal shares as there are surviving children of the designated ancestor, with nothing going to surviving descendants of deceased children

     Correct answer: The property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants

     When a will calls for a per stirpes distribution of assets, it provides that if any named beneficiary predeceases the testator (the maker of the will), surviving children of that individual share in the share that the individual would have received. For example, if the testator had 3 children and 1 of them died first, any children of the deceased would share in their parent's portion (they would split one-third of the estate between them).

262. A major benefit of a revocable trust is that
     • The settlor cannot also be the beneficiary
     • The grantor retains control of the assets
     • The grantor saves on income taxes
     • The assets are not included in the grantor’s estate

     Correct answer: The grantor retains control of the assets

     Among the benefits of a revocable trust is that the grantor (settlor) retains all control over the assets. There are no tax benefits, and the grantor can be the beneficiary (and trustee) if the trust is set up that way.

263. If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable?
     • Municipal GOs
     • Treasury receipts
     • Money market instruments
     • High-yield bonds

     Correct answer: Municipal GOs

     The interest on municipal GOs is exempt from federal income tax and perhaps state income tax, depending on the investor's residency.

264. An investment adviser using an insurance approach to capital needs analysis would
     • Estimate the income the portfolio has to earn each year in retirement
     • Compute the life coverage needed to complete the stated goal at death
     • Buy the bonds and shares that a life insurance company has guaranteed
     • Base the coverage amount on how much investing this customer has done

     Correct answer: Compute the life coverage needed to complete the stated goal at death

     The insurance approach to capital needs analysis asks how much life insurance would be required to complete the client's objective if the client died before it was funded, so it is that coverage figure the adviser computes. Projecting the income a portfolio must earn in retirement is the capital utilisation exercise, a different question. Buying bonds and shares an insurer has guaranteed is a product choice, not a needs calculation. Sizing the coverage from the client's investing history confuses suitability information with the size of the shortfall being insured.

265. Many investment advisers prepare an investment policy statement (IPS) when counseling their clients. Which of the following should least likely be included as a constraint in an investment policy statement?
     • Asset classes the client specifically forbids or limits based on past experience
     • Constraints put on investment activities by regulatory agencies
     • How the funds are spent after being withdrawn from the portfolio
     • Any unique needs or preferences an investor may have

     Correct answer: How the funds are spent after being withdrawn from the portfolio

     How funds are spent after withdrawal would not be a constraint of an IPS. Anything that might be an obstacle to reaching the goals, such as regulatory restrictions and specific investor preferences, are considered constraints.

266. Parker and Mary have recently divorced. For Mary to receive Social Security benefits based on Parker's earnings, which of the following conditions must exist?
     • Parker must already be at full retirement age.
     • Mary must have worked at least 40 quarters to be eligible for benefits.
     • The marriage must have lasted at least 10 years.
     • Parker must not be remarried.

     Correct answer: The marriage must have lasted at least 10 years.

     The marriage of these two must have lasted at least 10 years. In addition, Mary cannot be remarried (Parker can be). It is Parker who must have at least 40 quarters to earn Social Security benefits. As long as Parker is drawing benefits, and one can start before full retirement age, benefits will be available as long as all of the conditions are met.

267. Liquidity risk is the risk that when an investor wishes to dispose of an investment, no one will be willing to buy it, or that a very large purchase or sale would not be possible at the current price. With that in mind, which of the following would likely have the lowest degree of exposure to liquidity risk?
     • Money market mutual funds
     • Investment-grade municipal bonds
     • REITs
     • RELPs

     Correct answer: Money market mutual funds

     RELPs (real estate limited partnerships) would have high liquidity risk because there is generally no secondary market for them. Municipal bonds, even highly rated ones, can have liquidity issues. Even though many REITs are listed on exchanges, there are a growing number of non-traded ones where liquidity can be an issue. However, money market funds with their check-writing privilege, are about as liquid as you can get.

268. A client with 25 years until retirement should invest primarily in
     • Private placements
     • Preferred stocks
     • Bonds
     • Common stocks

     Correct answer: Common stocks

     This client's time horizon is quite long. With 25 years until retirement, the customer should invest primarily in stocks. Historically, over long time periods, equity securities have provided the greatest returns.

269. A married couple in their early 50s saving for retirement would most likely have which of the following objectives?
     • Moderate risk, moderate safety, low liquidity
     • High risk, moderate safety, low liquidity
     • Low risk, high safety, high liquidity
     • Moderate risk, low safety, high liquidity

     Correct answer: Moderate risk, moderate safety, low liquidity

     A middle-aged couple planning for their retirement is most likely interested in moderate risk, moderate safety, and low liquidity. A couple of their age should be planning for retirement and the demands for liquidity should be low; they need to take moderate risk to earn above-inflation returns. Moderate safety is appropriate for a middle-aged couple. Additionally, a middle-aged couple should not be invested in high-risk securities.

270. An investor has just received an inheritance of $100,000 and has decided to use the money to buy a new home. Because it will take time to decide where to buy, it is expected that the purchase will not be made for another 6–9 months. If this investor placed the money into a broad market index ETF, the primary risk taken would be
     • Market risk
     • Unsystematic risk
     • Business risk
     • Interest rate risk

     Correct answer: Market risk

     A major risk involved with investing in equities, even through a broad market index ETF (or mutual fund), is the systematic risk known as market risk. The shorter the time horizon (and less than 1 year is certainly a short time horizon), the greater the market risk. An advantage of the broad market index investment is the reduction to business risk, one of the most significant unsystematic risks. At least for exam purposes, interest rate risk will only apply to fixed income securities.

271. An elderly widow with no independent income wishes to invest the proceeds from her recently deceased husband's life insurance. Which of the following would be the most suitable recommendation?
     • Municipal bonds
     • Call options
     • Oil and gas exploration program that you know is going to strike
     • High-grade corporate bond mutual fund

     Correct answer: High-grade corporate bond mutual fund

     This customer needs income. Of the answers provided, the bond fund would be the most suitable because it would provide income while maintaining relative safety. While the municipal bonds are probably safer, the benefits of their tax-free income would probably be lost on a client with no independent income.

272. Which of the following situations would most likely cause an individual's application for a disability income insurance policy to be denied?
     • Working full time in a hazardous industry
     • Reaching the age of fifty-five next month
     • Recording a body mass index around thirty
     • Managing type 2 diabetes using oral drugs

     Correct answer: Working full time in a hazardous industry

     Underwriters decline disability income coverage outright when the work itself carries a high risk of injury, because the hazard is the very thing the policy would insure. Advancing age raises the premium rather than closing the door. An elevated body mass index and type 2 diabetes managed with oral medication are ordinarily rated, meaning the applicant pays a surcharge, but neither is normally a ground for refusing the application.

273. Tamika is an investment adviser representative with Financial Engineers, LLC, a covered investment adviser. The firm uses an investment policy statement to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat 7 months from now. When using the IPS, this would be considered
     • A capital need
     • An investment goal
     • An investment constraint
     • A financial objective

     Correct answer: An investment constraint

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

274. An investor who purchases stock in two technology companies with high projected earnings and growth potential but little performance history is considered
     • A conservative investor
     • An aggressive investor
     • A defensive investor
     • A passive investor

     Correct answer: An aggressive investor

     An investor is taking an aggressive investment posture in investing in a growth company with little history and is willing to take on high risk for high potential returns.

275. A benefit of waiting until the age of 70 to claim Social Security benefits is that
     • A larger share of the monthly benefit avoids the federal income tax
     • The monthly check grows 8% for each year beyond full retirement age
     • The federal payroll tax on earned income after 70 no longer applies
     • The Medicare Part B premium is waived once benefits are finally due

     Correct answer: The monthly check grows 8% for each year beyond full retirement age

     Postponing a claim past full retirement age earns a delayed retirement credit of 8% for each year of delay, up to age 70, and that increase is permanent. Income tax rates do not change with age, and the taxable share of the benefit turns on provisional income rather than on when the claim is made. Payroll tax continues to apply to earned income at any age. Medicare Part B premiums are not waived either; they are ordinarily deducted from the benefit.

276. Which of the following is least likely to be considered an investment constraint when preparing an investment policy statement?
     • Tax concerns
     • Legal and regulatory factors
     • Risk tolerance
     • Liquidity needs

     Correct answer: Risk tolerance

     The commonly tested investment constraints are: liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences. Risk tolerance is used to help determine what investment objectives will best meet the investor's goals.

277. In projecting future cash requirements, one of the tools is a capital needs analysis. When doing one, all of the following would be considered capital needs EXCEPT
     • A $100,000 loan for law school with a due date in 10 years
     • Rolling over a 401(k) into an IRA
     • A home equity loan with a $15,000 balance
     • A $20,000 loan for undergraduate school with a due date in 6 years

     Correct answer: Rolling over a 401(k) into an IRA

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

278. Years ago, following your advice, a client opened a 529 Plan to save for their son's college education. The child is now about 3 years from beginning his freshman year. The client, believing that the stock market is currently undervalued, wishes to reallocate the plan assets so that most of the funds are in a broad stock market index portfolio. At this time, your advice would probably be against this allocation because of
     • Interest rate risk
     • Liquidity risk
     • Market risk
     • Business risk

     Correct answer: Market risk

     This short time horizon is a serious constraint and a portfolio that is largely equities, subjects the account to too much market risk. If the child had been 5 years of age, giving the client a 13-year time horizon, this would have made more sense.

279. For a trust account not seeking appreciation, which of the following would be recommended?
     • Large-cap common and preferred stocks
     • Common stock, preferred stock, and debentures
     • Highly rated, fixed-income securities
     • Common stock in small, highly profitable companies

     Correct answer: Highly rated, fixed-income securities

     The only choice that is prudent and does not have a goal of appreciation is the purchase of highly rated, fixed-income securities.

280. Your married customers are both 42 years old, have 2 children ages 14 and 12, and have spent the past 10 years accumulating money to provide for their children's education. Their oldest child will enter college in 4 years, and the customers are very cautious investors. If they need a safe investment that provides regular income to help them meet tuition payments, which of the following mutual funds is the most suitable for these customers?
     • ATF Overseas Opportunities Fund
     • RST Balanced Fund
     • LMN Investment-Grade Bond Fund
     • ABC Stock Index Fund

     Correct answer: LMN Investment-Grade Bond Fund

     These clients cannot afford a downturn in the stock market between now and the time they want to send their children to college. An investment-grade bond fund will provide the income and safety required for accumulating additional funds for college expenses.

281. 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 large-cap stock fund
     • A municipal bond fund
     • An equity/income fund
     • A money market fund

     Correct answer: 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.

282. Your elderly client has $10,000 to invest and seeks preservation of capital and a moderate income stream. If she has never invested in mutual funds before and all of her savings are in bank CDs and saving accounts, you should recommend
     • A government bond fund
     • A T-bill
     • A money market fund
     • A tax-exempt bond fund

     Correct answer: A money market fund

     A money market fund is the most appropriate for an elderly person seeking preservation of capital and some income on a regular basis. A T-bill, although safe, provides interest income only at maturity. Because the client has never invested in mutual funds before, she may be uncomfortable with the potential fluctuations in principal of the bond funds. This exam will not want you to go so far as to claim, "but if the client purchased 4-week T-bills, there would be the ultimate safety and income every 28 days." No client with this background is going to be trading every month—don't go there.

283. You are doing an investment plan for a new client, age 55, who plans to retire at age 70. The client is somewhat risk averse and wants to preserve capital while at the same time not falling prey to possible inflation. Which of the following portfolios would probably be most suitable?
     • 60% high-grade bonds; 30% large-cap stocks; 10% cash equivalents
     • 20% high-grade bonds; 70% large-cap stocks; 10% cash equivalents
     • 80% high-grade bonds; 10% large-cap stocks; 10% cash equivalents
     • 50% high-yield bonds; 30% large-cap stocks; 20% cash equivalents

     Correct answer: 60% high-grade bonds; 30% large-cap stocks; 10% cash equivalents

     A risk-averse client fifteen years from retirement needs the principal protected and still needs enough equity to outrun inflation, and a 60% weighting in high-grade bonds with 30% in large-cap stocks and 10% in cash equivalents does both. Tilting the portfolio toward equities exposes a risk-averse client to far more market risk than the objective allows. Cutting the equity sleeve to a token holding protects the principal but leaves the plan exposed to inflation over fifteen years. High-yield bonds carry equity-like default risk and have no place here at all.

284. An investment adviser representative has a 78-year-old prospect living on $26,400 per year from Social Security plus investment income. The individual's net worth is $141, 000 including the equity in her primary residence. Her net worth was higher until recently, but the aggressive fund she owns in the KAPCO family of funds is down over $20,000 in value. Which of the following would you recommend to her?
     • Sell her fund shares and reinvest in a vehicle offering her deferred accumulation
     • Liquidate the fund shares and put the proceeds in a bank CD
     • Invest in a municipal bond fund
     • Switch to a more conservative fund in the same family of funds

     Correct answer: Switch to a more conservative fund in the same family of funds

     Clearly the municipal bond fund is inappropriate because this client's income does not put her into one of the higher tax brackets where the tax exemption on the bond's interest is beneficial. Just as obvious is the poor choice of moving her assets to a deferred accumulation vehicle, such as an annuity, where there would probably be surrender charges and no income. That leaves using the exchange privilege where she can move her investment to a more conservative fund without paying a sales charge or buying a bank CD. Because this is an exam for representatives of an investment adviser and one of the requirements to be defined as an investment adviser is that advice be given on securities, the answer on the exam should be a security (bank CDs are not securities).

285. An investor concerned about preservation of capital would be most apt to purchase
     • Speculative-grade corporate debt
     • Over-the-counter equity warrants
     • Thinly-traded speculative shares
     • Investment-grade corporate bonds

     Correct answer: Investment-grade corporate bonds

     Investment-grade corporate bonds carry the least capital risk of these choices, because the issuer is legally obliged to repay the principal and bondholders rank ahead of shareholders if the issuer fails. Speculative-grade corporate debt carries a materially higher risk of default. Warrants are wasting assets that can expire worthless in a short time. Thinly-traded speculative shares sit at the bottom of the capital structure and hold only a residual claim.

286. Your customer, age 60, is retired and living at home with a fully paid-off mortgage. Her portfolio contains growth stocks and high-quality bonds, and she is a longtime investor and comfortable with moderate risk. Her objective is a moderate level of current income to supplement her corporate pension plan distributions and the earnings from her IRA. Which of the following mutual funds is the most suitable for this customer?
     • ABC Equity Income Fund
     • QRS Capital Appreciation Fund
     • XYZ Biotechnology Fund
     • LMN Stock Index Fund

     Correct answer: ABC Equity Income Fund

     An equity fund that aims to achieve both current income and growth of income best suits the objectives and investment profile of the client. A stock index fund does not offer the current income that the client requires. The capital appreciation and biotechnology funds not only fail to provide income; they are too risky for this retired person.

287. If a customer is in the 15% federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend?
     • A local tax-free municipal bond
     • A new zero-coupon Treasury bond
     • A single-A rated corporate bond
     • A five-year Treasury note issue

     Correct answer: A single-A rated corporate bond

     In a low bracket the yield surrendered for a tax exemption is never recovered, so a taxable corporate bond delivers the most spendable income while remaining suitable, and an issue rated single-A is still investment grade. A tax-free municipal bond is the classic mismatch for an investor in a low bracket. A zero-coupon bond pays no current income at all, which defeats the stated objective. A Treasury note is safe but yields less than a corporate bond of similar maturity.

288. Under the Uniform Securities Act, a person whose business model is selling reports on a subscription basis concerning specific securities to investors based on their individual objectives will be defined as
     • A broker-dealer house
     • An excluded publisher
     • A commissioned broker
     • An investment adviser

     Correct answer: An investment adviser

     Selling securities reports to subscribers escapes the definition of investment adviser only where the publication is of general and regular circulation. Reports written around each subscriber's own objectives are individualised advice for compensation, which makes the person an investment adviser under the Uniform Securities Act. A broker-dealer effects transactions rather than sells advice for a fee. The publisher's exclusion fails for exactly the reason just given. And a commissioned broker represents a broker-dealer in executing trades.

289. There are waivers from the Series 65 exam requirement for certain professional designations. Among those qualifying for the waiver are individuals who are
     • MBAs.
     • CLUs.
     • CPAs.
     • CFP®s.

     Correct answer: CFP®s.

     This is tricky. CFPs do qualify for the waiver. ChFCs (not CLUs) also qualify and those with the PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants), but not solely a CPA, qualify. MBA is not a professional designation. In general, the following designations allow for a waiver of the exam requirement: CFP®—CERTIFIED FINANCIAL PLANNER™ (granted by the CFP Board of Standards); CIC—Chartered Investment Counselor (granted by the Investment Adviser Association); ChFC®—Chartered Financial Consultant® (granted by the American College of Financial Services); PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants); and CFA®—Chartered Financial Analyst® (granted by the Chartered Financial Analyst Institute).

290. The responsibility for administering the Investment Advisers Act of 1940 lies with
     • FINRA
     • The Administrator
     • The Investment Advisers Association (IAA)
     • The SEC

     Correct answer: The SEC

     The Investment Advisers Act of 1940 is federal law, and that comes under the jurisdiction of the SEC.

291. Under the Investment Advisers Act of 1940, which of the following is TRUE about the use of the term "investment counsel" by investment advisers?
     • Only advisers registered with the Commission rather than a state may use it
     • Only advisers whose main work is offering clients ongoing advice may use it
     • Only advisers who have earned a designation of national standing may use it
     • Only advisers holding over one hundred million dollars of assets may use it

     Correct answer: Only advisers whose main work is offering clients ongoing advice may use it

     The term investment counsel may be used only when two conditions are met together: rendering investment advice must be the person's principal business, and a substantial part of that business must consist of investment supervisory services, meaning continuous advice built on each client's individual needs. Whether the adviser is registered federally or with a state has nothing to do with it. No professional designation is required or sufficient. And no amount of assets under management earns the right to the term.

292. Which of the following investment advisers would be permitted to use the term "investment counsel"?
     • A professional providing a market timing service with an annual subscription fee of $995, with this service attempting to maximize profits by suggesting entry and exit points for over 100 listed stocks
     • An investment adviser who has been admitted to the bar in the state in which the firm's principal office is located
     • A financial planner offering a wide range of services to his clients, including tax planning, estate planning, insurance planning, and investment advice
     • A firm whose exclusive business is placing clients' assets into model portfolios

     Correct answer: A firm whose exclusive business is placing clients' assets into model portfolios

     In order for the term "investment counsel" to be used, two criteria must be met. First, the principal business of the adviser must be the rendering of investment advice. Second, the nature of the advice must meet the definition of investment supervisory service. That means giving continuous investment advice to clients based on their individual needs. That is frequently accomplished by selecting model portfolios most appropriate to the client's needs. The financial planner clearly is not principally in the business of offering investment advice because he describes his service as offering a wide range of services, of which advice is only a part. The exam frequently uses that wording to indicate that advice is not the principal activity. While the publisher's principal business activity may be offering advice, nothing about the description indicates that individual client accounts are being monitored.

293. Which of the following is NOT a person as defined by the Uniform Securities Act?
     • XYZ Dry Cleaners, Inc., whose shareholders all work on the premises and also offer financial advice to customers who request it.
     • A small unincorporated investment club.
     • A child prodigy for whom his mother, as custodian, opened an account at a major securities firm.
     • Guelph, a small city outside of Toronto, Ontario, that maintains an investment account at a brokerage house to invest surplus funds.

     Correct answer: A child prodigy for whom his mother, as custodian, opened an account at a major securities firm.

     Under the Uniform Securities Act, the term "person" has a specific meaning. "Person" refers to an individual, corporation, association, joint-stock company, trust, unincorporated organization, government, or political subdivision of a government. A minor child, is not a person legally capable of entering into contracts. Adults must open custodial accounts on behalf of minor children.

294. The term "investment counsel" can be used by investment advisers
     • Who are registered with the SEC under the Investment Advisers Act of 1940
     • Who are also attorneys
     • Who are also registered as broker-dealers
     • With a primary business of rendering investment advice

     Correct answer: With a primary business of rendering investment advice

     While this choice is only half correct, under the Investment Advisers Act of 1940, the term "investment counsel" may be used by any adviser that meets two standards: the adviser performs investment supervisory services, and the adviser provides advice as the primary business of the firm. No other special qualifications or registrations are needed.

295. Which of the following is NOT included in Form ADV Part 2A?
     • The states where this adviser registers to do business
     • The types of securities the adviser tends to recommend
     • The schedule by which this adviser calculates its fees
     • The investment policy the adviser uses for its clients

     Correct answer: The states where this adviser registers to do business

     Part 2A is the client brochure. It describes the adviser's fees, its methods, its investment policies and the types of securities it recommends. The list of states in which the adviser is registered or intends to register belongs on Part 1A instead, which is why it is the item excluded here. The types of securities recommended, the fee schedule and the investment policy applied to client accounts are all brochure disclosures.

296. The chief compliance officer (CCO) of a registered investment adviser would generally not have responsibility for the actions of
     • Ministerial personnel of the firm
     • An investment adviser representative of the firm
     • An agent registered with an affiliated broker-dealer
     • Supervisory personnel of the firm

     Correct answer: An agent registered with an affiliated broker-dealer

     The CCO of an investment adviser is responsible for compliance with all relevant rules and procedures applying to all personnel of the investment adviser. Agents with an affiliated broker-dealer come under the supervisory jurisdiction of the compliance officer of that BD.

297. A federal covered registered investment adviser who receives compensation for advice and whose business is primarily as an investment adviser may describe its business as investment counsel if
     • A substantial part of his business is providing investment supervisory services
     • It maintains custody of customer funds and/or securities
     • It maintains its registration by filing an updating amendment to its Form ADV annually
     • It receives SEC approval to use the definition

     Correct answer: A substantial part of his business is providing investment supervisory services

     The Investment Advisers Act of 1940 prohibits the use of the term "investment counsel," unless the principal business of the person is as an investment adviser and a substantial part of the business is providing investment supervisory services (i.e., continuous advice for individual client portfolios).

298. According to the Investment Advisers Act of 1940, the SEC must either grant investment adviser registration or begin proceedings to determine whether registration should be denied within how many days of filing?
     • 45
     • 90
     • 60
     • 30

     Correct answer: 45

     The SEC is required by the Investment Advisers Act of 1940 to either grant an adviser registration or begin proceedings to determine whether the registration should be denied within 45 days of application.

299. Included in the Investment Advisers Act of 1940 are a number of different recordkeeping requirements. Wealth Preservation Specialists is a covered adviser that is organized as a partnership. If the firm were to dissolve, partnership agreements must be kept for
     • 3 years after the dissolution
     • 5 years after the dissolution
     • 5 years from the date of organization
     • The lifetime of the firm

     Correct answer: 3 years after the dissolution

     Both the Investment Company Act of 1940 (applicable here because this is a covered adviser) and the NASAA Model Rule on Recordkeeping require that investment advisers maintain certain records, such as partnership agreements and corporate articles of incorporation, for a period of no less than 3 years after dissolution.

300. Registration as an investment adviser is required for any firm in the business of giving advice on the purchase of
     • Gold coins
     • Apartments undergoing a conversion to condominiums
     • Convertible bonds
     • Rare convertible automobiles

     Correct answer: Convertible bonds

     Only those individuals in the business of giving advice on securities are required to register as investment advisers; only the convertible bonds are securities.

301. John Law is the owner of Mississippi Advisory Services (MAS), an independent financial planning organization. Law is registered as an investment adviser representative of SSC Securities and Investments, registered as a broker-dealer, and an investment adviser with the SEC. Supervision over Law's advisory activities is the responsibility of
     • MAS’s CCO.
     • SSC’s CCO.
     • John Law.
     • The SEC

     Correct answer: SSC’s CCO.

     It is common for independent financial planners to establish their own business entity and "hang" their registration as an IAR with another firm (as is the case in this question). The rules emphasize that these independent contractors are under the supervision of the carrying firm's CCO in the same way that inhouse IARs are.

302. The Investment Advisers Act of 1940 requires every registered investment adviser to have a chief compliance officer (CCO). This individual would be responsible for ensuring compliance with the firm's Code of Ethics by all of these EXCEPT
     • The clerical and ministerial employees usually on the payroll
     • The investment adviser representatives hired by the same firm
     • The outside broker-dealer executing most of the firm's trades
     • The outside contractors acting as representatives of the firm

     Correct answer: The outside broker-dealer executing most of the firm's trades

     The chief compliance officer answers for compliance with the code of ethics by the firm's supervised persons: employees of every kind, registered or not, and non-employees such as independent contractors who are registered through the firm. An unaffiliated broker-dealer used to execute trades is a separate firm with its own supervisory structure and lies outside the adviser's reach. Clerical and ministerial employees are supervised persons, and so are the firm's own investment adviser representatives and its independent-contractor representatives.

303. In which of the following cases could revocation of the registration of an IAR lead to disciplinary action against the investment adviser employing that individual?
     • The IAR was found guilty of first degree murder.
     • The IAR failed to make full disclosure of a previous felony conviction on the Form U4.
     • The firm supplied the IAR with a copy of its Code of Ethics and administered regular training on its contents.
     • The firm was found guilty of failure to supervise.

     Correct answer: The firm was found guilty of failure to supervise.

     In most cases, disciplinary action against an investment adviser representative (unless the individual is filling an executive position) will not have a direct impact on the investment advisory firm. The major exception is when the IAR's actions leading to the revocation can be shown to have be aided by the firm's failure to supervise.

304. Leslie is an IAR with Financial Visions (FV), a federal covered investment adviser. Leslie operates Innovative Financial Solutions (IFS), a separate financial planning company with its own office in State W. Should Leslie be found guilty of fraudulent business activities, FV would
     • Face discipline in State W if it failed to oversee Leslie's separate firm
     • Stay clear of State W discipline since it remains registered with the SEC
     • Perhaps have its registration in State W revoked once the fraud is proven
     • Escape State W liability since Leslie's own firm stands as its own entity

     Correct answer: Face discipline in State W if it failed to oversee Leslie's separate firm

     An investment adviser answers for the conduct of its representatives, including one who runs a separate planning business as an independent contractor, and a state administrator keeps jurisdiction over a federal covered adviser where fraud is involved. Federal covered status therefore does not put the firm beyond the state's antifraud authority. A federal covered adviser has no state registration for the administrator to revoke, because it files a notice rather than registering. And the separate identity of the planning company does not lift the duty to supervise.

305. Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is TRUE?
     • If it is determined that an investment adviser is insolvent, the SEC may revoke the registration.
     • An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings.
     • Revocation would occur, with appropriate notice, when a firm’s annual updating amendment was received by the SEC 120 days after the end of the registrant’s fiscal year.
     • Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm’s registration.

     Correct answer: Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm’s registration.

     Failure to supervise, if proven, is one of the most common causes for disciplinary action against a broker-dealer or investment adviser. Insolvency is not a cause for revocation under the Investment Advisers Act of 1940, but it is for a state-registered investment adviser (it's tough to keep these straight; please see Appendix A). A late ADV annual updating amendment might be cause for some action but almost certainly not a revocation; it is not that serious an offense. The balance sheet would only have to be part of the disclosure statement (brochure) given to those from whom substantial prepayment of fees is received.

306. Under the Uniform Securities Act, which of the following is an investment adviser?
     • Tom writes a newspaper column that reviews and picks stocks for the public
     • Jane advises clients about the value of rare gold and silver bullion coins
     • Jill is an attorney who charges a separate fee to design client portfolios
     • The trust division of a chartered bank gives advice to its trust customers

     Correct answer: Jill is an attorney who charges a separate fee to design client portfolios

     An attorney is excluded from the definition of investment adviser only while the advice is solely incidental to the practice of law and brings no special compensation. Charging a separate fee to construct portfolios destroys both conditions, so she meets the definition. A columnist who publishes general recommendations to the public falls inside the publisher's exclusion. Coins are not securities, so advising on their value is not investment advice. And a bank, including its trust department, is excluded from the definition outright.

307. To register a sole proprietorship as an investment adviser in a state, the application for initial registration (Form ADV) must be filed with the appropriate party. This application must include all of the following except
     • The appropriate fees
     • A consent to service of process
     • Any information to be furnished or disseminated to any client or prospective client
     • A copy of the articles of incorporation for the business

     Correct answer: A copy of the articles of incorporation for the business

     Articles of incorporation only apply to corporations. Sole proprietorships are not incorporated. To register as an investment adviser in a state, Form ADV is filed with the Administrator or with a central registration depository designated by the Administrator. The application must include, among other things, a consent to service of process, appropriate fees, and the brochure or any other information that will be used to solicit clients.

308. Under the Uniform Securities Act, which of the following qualifies as an investment adviser representative?
     • An agent who offers incidental advice on securities as part of his sales commissions
     • An individual who renders fee-based advice on precious metals
     • A solicitor for an investment advisory firm who is paid a fee for his services
     • An employee, although highly skilled in evaluating securities, solely performs administrative or clerical functions for an investment adviser

     Correct answer: A solicitor for an investment advisory firm who is paid a fee for his services

     If the goal is obtaining clients for the investment adviser, a solicitor is considered an investment adviser representative under the Uniform Securities Act. An employee who performs clerical or administrative functions only is not an investment adviser representative. Precious metals are not securities, and a person advising on them is not considered an IAR. An agent is a representative of a broker-dealer.

309. The final responsibility for ensuring that investment adviser representatives are adequately supervised is that of
     • The managing principal
     • The Administrator
     • The chief compliance officer
     • Each investment adviser representative’s immediate supervisor

     Correct answer: The chief compliance officer

     It is the CCO who has the ultimate responsibility for ensuring that the firm has, and properly implements, adequate supervisory procedures. The immediate supervisor has the "first-line" responsibility, but the "buck stops" with the CCO.

310. Under the Uniform Securities Act, if no denial or proceedings are pending, when does an investment adviser registration become effective?
     • When the Administrator so orders, but not to exceed 90 days
     • When the Administrator so orders, but not to exceed 30 days
     • No sooner than 15 days
     • 60 days after application or an amendment is filed

     Correct answer: When the Administrator so orders, but not to exceed 30 days

     Registrations become effective at noon on the 30th calendar day after the date of filing if there are no denial orders or pending proceedings.

311. Kapco Advisers, a federal covered investment adviser operating on a calendar-year basis, published a list of recommended securities in January 2015. A copy of this must be maintained until at least
     • January 31, 2020
     • January 31, 2017
     • December 31, 2017
     • December 31, 2020

     Correct answer: December 31, 2020

     Investment adviser records, including copies of advertisements, must be kept for at least 5 years from the end of the fiscal year in which the record originated—in this case, 5 years from the end of 2015.

312. The primary responsibility for supervising the activities of an investment adviser representative who is affiliated with a federal covered investment adviser lies with
     • The investment adviser representative alone
     • The federal covered adviser itself
     • The Securities and Exchange Commission
     • The Administrator in each state

     Correct answer: The federal covered adviser itself

     Every investment adviser, whether registered with the SEC or with a state, must supervise its own representatives, so the primary responsibility rests with the federal covered adviser the representative is affiliated with. A representative cannot be his own primary supervisor. The Securities and Exchange Commission registers and examines the adviser but does not supervise its individual representatives. A state administrator retains authority over the representative's conduct but that authority does not transfer the supervisory duty either.

313. Which of the following is required to register in a state under the Uniform Securities Act?
     • ABC State Bank, which provides investment advice in its branches throughout the state
     • A broker-dealer who has no place of business in the state and whose only clients in the state are limited to insurance companies, banks, and broker-dealers
     • An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers
     • An investment adviser who has no place of business in the state and communicates with only 5 advisory clients in the state for the year

     Correct answer: An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers

     Because the investment adviser has a place of business within the state and is acting as investment adviser in the state, it must register, regardless of the fact that the only clients are financial institutions. Notice that the state registration rules are different for broker-dealers and investment advisers. Banks are exempt from registration as broker-dealers or as investment advisers, as are investment advisers with no place of business in the state and fewer than 6 clients in the state in a 12-month period (de minimis standard).

314. Which of the following does NOT meet the compensation test for defining investment advisers under SEC Release 1A-1092?
     • An insurance agent sells a life insurance policy and receives a commission on that policy. During the sale of the insurance policy, the agent provides some securities investment advice
     • Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do
     • Subscription payments received by a publisher of a newsletter providing impersonal securities-related advice
     • A real estate agent advertises that she will give free advice regarding investing the proceeds from the sale of any home she lists

     Correct answer: Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do

     Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. Compensation does not have to be direct. The commission on the insurance policy is considered indirect compensation covering the investment advice given by the insurance agent. The same logic holds for the real estate agent—she doesn't give advice unless you list your home with her. Nothing in the neighbor's advice involves compensation.

315. A person is excluded from the definition of investment adviser under the Investment Advisers Act of 1940 if the investment advice and reports are restricted to
     • Securities listed on a national stock exchange
     • U.S. government securities
     • Bank and insurance company securities
     • Foreign securities

     Correct answer: U.S. government securities

     Among the exclusions found in the act is one for persons whose advice relates exclusively to securities issued or guaranteed by the U.S. government.

316. Written policies and procedures reasonably designed to safeguard customer information from cyber security threats would include all of the following EXCEPT
     • Maintaining minimum cyber liability insurance coverage
     • Encrypting stored personally identifiable client files
     • Performing periodic assessments of cybersecurity risks
     • Installing firewalls between internal network segments

     Correct answer: Maintaining minimum cyber liability insurance coverage

     Encrypting stored client data, running periodic risk assessments and placing firewalls between network segments are all standard elements of the written cybersecurity policies a broker-dealer or investment adviser is expected to adopt. No SEC, state or SRO rule sets a floor for the amount of cyber liability insurance a firm must carry, so an insurance minimum is not part of the required program.

317. The USA provides either an exclusion from the definition or an exemption from registration as an investment adviser for certain persons. Which of the following would be required to register?
     • A bank trust officer with less than $250 million in assets under management
     • A teacher who teaches a course in the local high school on consumer economics
     • A CFP® who provides a full range of financial planning to clients on a fee-only basis
     • An engineer employed by an oil company selling limited partnership interests to public investors who provides estimates of recoverable reserves

     Correct answer: A CFP® who provides a full range of financial planning to clients on a fee-only basis

     Unless excluded or exempted, anyone charging a fee for investment advice must register. Banks and their employees are excluded. Engineers and teachers fall under the late exclusion as long as the advice is incidental to their profession and no special compensation is received.

318. Under the SEC Release IA-1092, who of the following would be considered to be in the business of rendering investment advice?
     • A financial planner who charges no fee for developing a financial plan, but takes commissions on recommended trades
     • An accountant who provides investment advice to clients as an incidental part of the business
     • An agent who receives no separate compensation for investment advice but who takes commissions on recommended trades
     • An individual who provides investment advice to family members, but receives no compensation

     Correct answer: A financial planner who charges no fee for developing a financial plan, but takes commissions on recommended trades

     A financial planner who takes commissions from a broker-dealer on recommended trades is considered to be compensated for giving advice and is therefore in the business of rendering investment advice. Agents and broker-dealers who do not charge separately for advice are excluded from the definition of investment adviser. Lawyers, accountants, teachers, and engineers are not considered to be in the business of rendering investment advice, as long as any advice given is incidental to the practice of the profession.

319. Under the Uniform Securities Act, which of the following statements relating to the registration requirements of investment advisers is TRUE?
     • Effectiveness arrives automatically upon the thirtieth day even though a stop order is still pending
     • Any amendment filed afterward takes effect only fifteen days after the Administrator has received it
     • A securities professional's registration lapses one year after the date on which it became effective
     • Registration becomes effective at noon on the thirtieth day provided no denial proceeding is pending

     Correct answer: Registration becomes effective at noon on the thirtieth day provided no denial proceeding is pending

     Under the Uniform Securities Act an application becomes effective at noon on the thirtieth day after filing, but only when no denial order or stop order proceeding is pending, so effectiveness is conditional rather than automatic. A later amendment restarts the clock and takes effect thirty days after it is filed, not fifteen. Registrations of securities professionals expire on December 31 each year unless renewed, rather than one year after the effective date.

320. After diligently studying for the exams, Greg Gossett completed the series of exams for the Certified Financial Planner (CFP®) designation. Now, Greg would like to expand his horizons by becoming a registered investment adviser. In order to do so, Greg would have to do all of the following EXCEPT
     • Pay a filing fee
     • Pass the Series 65 examination
     • Provide a consent to service of process
     • Submit a Form ADV

     Correct answer: Pass the Series 65 examination

     There are several professional qualifications that qualify for a waiver of the examination. CFP® is one of them.

321. A consent to service of process required by an Administrator is
     • A formal statement declaring that an investment adviser will comply with all advertising requirements of the USA
     • An agreement to perform all services and duties that the Uniform Securities Act (USA) requires of those individuals covered by the USA
     • An agreement whereby a registrant will be bound by any legal action or subpoena served on the Administrator as if it had been served on the registrant
     • A legal procedure that authorizes the Administrator to issue injunctions

     Correct answer: A legal procedure that authorizes the Administrator to issue injunctions

     A consent to service is a formal legal agreement whereby a registrant will be bound by a legal action or subpoena served on the Administrator as if it had been served on the registrant. A consent to service is not an authorization to issue an injunction.

322. When filing the consent to service of process, which of the following is TRUE?
     • It must be filed annually on the dates specified by the Administrator.
     • It is not required of investment adviser representatives, only investment advisers.
     • It expires simultaneously with the registration on December 31.
     • It is supplied with the initial registration and remains on file permanently.

     Correct answer: It is supplied with the initial registration and remains on file permanently.

     The consent to service of process is supplied with the initial registration and remains on file permanently.

323. Peterson Financial Planning is a small personal financial planning partnership in Missouri that has $10 million in assets under management. As a result of the Dodd-Frank Act, which of the following statements best describes the registration requirement for Peterson Financial Planning?
     • Peterson Financial Planning is required to register as an investment adviser with the SEC but has no requirement to register with the Administrator of the Missouri Department of Securities.
     • Peterson Financial Planning is required to register as an investment adviser with the SEC and to notify the Administrator of the Missouri Department of Securities of its operation.
     • Peterson Financial Planning is required to register as an adviser with the Administrator of the Missouri Department of Securities.
     • Peterson is required to register as an adviser with both the SEC and the Administrator of the Missouri Department of Securities.

     Correct answer: Peterson Financial Planning is required to register as an adviser with the Administrator of the Missouri Department of Securities.

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

324. Which of the following investment advisers, with no place of business in the state, does not qualify for the de minimis exemption?
     • An investment adviser who, during the preceding twelve-month period, has had no more than 6 retail clients.
     • An investment adviser who, during the preceding twelve-month period, has had 5 or fewer retail clients.
     • An investment adviser who, during the preceding twelve-month period, has had fewer than 6 retail clients.
     • An investment adviser who, during the preceding twelve-month period, has had no more than 5 retail clients.

     Correct answer: An investment adviser who, during the preceding twelve-month period, has had no more than 6 retail clients.

     The de minimis exemption limits the number of retail clients to a maximum of 5 during the preceding 12 months. There are 3 ways to say that: Fewer than 6. Five or fewer. No more than 5.

325. A pension consultant who advises corporate retirement plans with assets of $135 million must register with which of the following?
     • SEC
     • Either the state or the SEC
     • Both the state and the SEC
     • The state

     Correct answer: The state

     Under the Dodd-Frank Bill, until a pension fund manager has at least $200 million in AUM, registration with the states is required. Once the $200 million level is reached, SEC registration becomes an option.

326. Foster Advisers, based in New Jersey, manages $135 million in funds for New Jersey-based clients. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which of the following statements best describes the registration requirement for Foster Advisers?
     • Foster Advisers is required to register as an adviser with the SEC and has no requirement to notify the Administrator of the New Jersey Department of Securities.
     • Foster Advisers is required to register with both the SEC and the Administrator of the New Jersey Department of Securities.
     • Foster Advisers is required to register with the Administrator of the New Jersey Department of Securities.
     • Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.

     Correct answer: Foster Advisers is required to register as an adviser with the SEC and notify the Administrator of the New Jersey Department of Securities of its operation.

     Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, investment advisers with $110 million or more in assets under management must register with the SEC. These advisers are called federal covered advisers. Investment managers who manage less than $100 million must register with the state Administrator. Advisers with at least $100 million but less than $110 million of assets under management have the option to register with either their state Administrator or with the SEC. Once the $110 million level is reached, registration with the SEC is mandatory. With $135 million under management, Foster Advisers must register with the SEC. Foster Advisers is subject to the additional requirement of notifying the administrators of the securities departments of states in which it maintains offices or clients of its operations. At the state level, a notification fee (but not registration) is generally required. One aim of the NSMIA was to eliminate dual registration of investment advisers with the states and the SEC. Investment advisers are not required to register at both state and federal levels.

327. Defalcator Investment Planning (DIP) has $175 million in AUM and has offices in States A, K, and R. DIP would be required to provide a balance sheet as part of its brochure if it charged fees of
     • $1,200 for the next 6 months of advisory service.
     • $1,500 for the next year’s advisory service.
     • $1,500 for the next 3 months of advisory service.
     • $600 for the next 6 months of advisory service.

     Correct answer: $1,500 for the next year’s advisory service.

     Federal covered investment advisers, who charge substantial prepayment of advisory fees, must include a balance sheet with their brochure. The definition of a substantial prepayment is: more than $1,200, 6 or more months in advance. The correct choice is the only one meeting both requirements. Remember, it isn't $1,200 or more, it is more than $1,200 and it must be for at least 6 months of service to count. Please notice that with $175 million in AUM, DIP must be SEC registered; the location of its offices is irrelevant to the question.

328. A broker-dealer is NOT considered an investment adviser if
     • The firm charges one combined wrap fee covering both the investment advice and trade executions
     • The firm counsels fewer than fifteen clients and never advertises itself publicly as an adviser
     • The firm is registered with the Commission as a broker-dealer under the Securities Exchange Act
     • The advisory work is incidental to its brokerage business and brings in no special compensation

     Correct answer: The advisory work is incidental to its brokerage business and brings in no special compensation

     A broker-dealer keeps its exclusion from the definition of investment adviser only while the advice stays incidental to brokerage and no special compensation is taken for it. A wrap fee is special compensation, so charging one destroys the exclusion however the fee is described. The old private adviser count of fewer than fifteen clients never applied to broker-dealers and has been repealed. Registration as a broker-dealer under the Securities Exchange Act says nothing about adviser status.

329. A state-registered investment adviser maintains custody of client funds and securities. On Thursday, the chief financial officer of the firm informs the chief compliance officer that their net worth is $31,578. Under the provisions of the Uniform Securities Act, the firm would
     • Need to increase the amount of their surety bond
     • Do nothing, as their net worth is far in excess of the minimum requirement of $10,000
     • Send a detailed financial report to the Administrator by the close of business Friday
     • Send a detailed financial report to the Administrator by the close of business Monday

     Correct answer: Send a detailed financial report to the Administrator by the close of business Monday

     A state-registered investment adviser who maintains custody of client assets must maintain net worth of at least $35,000 or a bond of the same amount (not both). If the net worth should fall below the minimum, by the close of the next business day after discovery (Friday in our example), notice of the deficiency must be sent to the Administrator of the state in which the principal office of the adviser is located. Then, by the close of business the day after that (Monday in our example), a detailed financial report, including the number of clients served by the adviser, must be sent to the Administrator. The firm would need to increase their net worth, not the bond.

330. With regard to the keeping of records, the Uniform Securities Act states that investment advisers must keep records for
     • 5 years
     • 5 years, the first 2 in the principal office of the adviser
     • 3 years
     • 3 years, the first 2 in the principal office of the adviser

     Correct answer: 5 years, the first 2 in the principal office of the adviser

     For state-registered investment advisers, records must be kept for a total of 5 years. For the first 2 of those years, they must be located in the principal office of the adviser.

331. An investment adviser to a private fund wishes to qualify for the exemption offered under the Uniform Securities Act when the fund has no more than 100 investors. In order to qualify,
     • Every investor owns at least $5 million in investments at the time that the fund shares are bought
     • The adviser must prove that all the assets in the private funds it manages stay below $110 million
     • Neither the adviser nor an advisory affiliate has been convicted of a felony or barred in 12 years
     • Every investor holds at least $1 million managed by that adviser or a net worth above$2.1 million

     Correct answer: Every investor holds at least $1 million managed by that adviser or a net worth above$2.1 million

     A fund with no more than 100 investors is a 3(c)(1) issuer, and the model exemption requires every one of its investors to be a qualified client: at least $1 million in assets managed by the adviser, or a net worth above$2.1 million excluding the primary residence. The $5 million investments test is the qualified purchaser standard for a 3(c)(7) fund, which is not capped at 100 investors. The private fund asset ceiling is$150 million rather than $110 million, and the disqualifying felony look-back runs 10 years, not 12.

332. MidWest Advisory Services has $175 million in assets under management and has offices in 10 Midwest states. Regarding recordkeeping requirements, MidWest must meet those of
     • The SEC
     • Each state in which it has a place of business
     • The state in which its principal office is located
     • The state with the most stringent financial requirements

     Correct answer: The SEC

     With $175 million in AUM, MidWest is a federal covered adviser. As such, all financial requirements, bonding, recordkeeping, and so forth requirements are those of the SEC, not any of the states.

333. Under the Uniform Securities Act, if not denied, an application for registration as investment adviser will generally become effective how soon after filing?
     • 30 days
     • 15 days
     • Immediately
     • 10 days

     Correct answer: 30 days

     If not denied and no disciplinary proceedings are instituted, an application for registration becomes effective at noon on the 30th day after being filed.

334. Under the Investment Advisers Act of 1940, who is not excluded from the definition of investment adviser when their investment advice is solely incidental to the individual's profession?
     • Teachers who run economics classes
     • Engineers who design bridge cables
     • Agents who sell insurance policies
     • Attorneys who draft estate filings

     Correct answer: Agents who sell insurance policies

     The Investment Advisers Act of 1940 excludes lawyers, accountants, teachers and engineers whose investment advice is solely incidental to their profession, so the attorney handling estates, the engineer designing structures and the teacher running a classroom each keep the exclusion. Insurance agents are absent from that list, so an insurance agent who gives incidental investment advice cannot claim the professional exclusion.

335. An investment adviser sends a notice offering a research report she has recently prepared to a group of 25 new members of the local Lions Club. Under the NASAA Model Rule on recordkeeping for investment advisers, the firm must keep a copy of the notice along with
     • The date the Administrator approved the research report
     • A memorandum describing the list and its source
     • A copy of the full roster of the local chapter
     • The names of those members to whom the report was sent

     Correct answer: A memorandum describing the list and its source

     If an investment adviser sends any notice, circular, or other advertisement offering any report, analysis, publication, or other investment advisory service to more than 10 persons, the investment adviser shall not be required to keep a record of the names and addresses of the persons to whom it was sent, except if the notice, circular, or advertisement is distributed to persons named on any list, then the investment adviser shall retain with the copy of the notice, circular, or advertisement a memorandum describing the list and its source.

336. Under the Investment Advisers Act of 1940, the exclusion for providing investment advice that is solely incidental to the practice of a profession is NOT available to
     • Teachers who mark classroom homework
     • Engineers who survey highway bridges
     • Accountants who audit annual ledgers
     • Agents who sell residential property

     Correct answer: Agents who sell residential property

     The professional exclusion in the Investment Advisers Act of 1940 reaches lawyers, accountants, teachers and engineers whose investment advice is solely incidental to their practice, so the accountant, the engineer and the teacher each stay outside the definition. Neither the statute nor the releases interpreting it names real estate agents, so an agent selling residential property has no exclusion available.

337. If a federal covered adviser's fiscal year ends on November 30, 2017, it must file its annual updating amendment to its Form ADV no later than
     • February 28, 2018
     • March 30, 2018
     • December 31, 2017
     • January 18, 2018

     Correct answer: February 28, 2018

     The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end.

338. Under the Uniform Securities Act, investment advisers are exempt from registration in a state where they have no office if they direct business communications with no more than 5 retail clients within
     • 6 months
     • 12 months
     • 30 days
     • 2 years

     Correct answer: 12 months

     If investment advisers have no office in a state, they are not defined as investment advisers and are exempt from registration if either of the following conditions applies: their only clients within the state are other investment advisers or broker-dealers, financial institutions (banks, savings and loans, trusts), institutional investors (certain pension funds, insurance companies, investment companies), or government agencies or other political entities; and they have no more than 5 clients within the state in a 12-month period (de minimis exemption).

339. Under all of the following circumstances, the USA requires investment advisers with no place of business in the state to register EXCEPT
     • When an adviser only provides investment advice to 401(k) plans with assets of $250,000 or more
     • When an adviser only provides advice to registered investment companies
     • When an adviser has maintained assets of $100 million or more for 7 out of the last 10 years
     • When an adviser with numerous clients in the state has not been subject to disciplinary action within any state within the last 10 years

     Correct answer: When an adviser only provides advice to registered investment companies

     An adviser that only provides investment advice to investment companies registered under the Investment Company Act of 1940 is federal covered and does not have to register in a state, regardless of whether or not it has a place of business there. An adviser that provides advice only to 401(k) plans or other tax qualified employee benefit plans with $1 million in assets (not $250,000) is not required to register in a state in which it does not have a place of business. The assets of the adviser is not what determines becoming a federal covered adviser; it is assets under management and the determining factor is the AUM now, not the range over the previous 10 years.

340. What is the official designation of the person or agency that enforces the USA in each state?
     • Issuer
     • Registrar
     • Transfer agent
     • Administrator

     Correct answer: Administrator

     The USA specifies that a state's securities Administrator has the authority to enforce the act in that state. A transfer agent is the person or corporation responsible for recording the names and holdings of registered security owners.

341. There are a number of exclusions from the definition of investment adviser. Which of the following would NOT qualify for an exclusion under the Uniform Securities Act?
     • An accountant who conducts seminars on the tax benefits of contributing to IRAs, both traditional and Roth
     • A lawyer who charges an hourly fee for preparing trust documents for individuals referred to her by an investment adviser
     • A teacher at the local high school who receives nominal compensation for giving investment advice to engineers
     • A financial planner who conducts seminars for the local PTA, where he presents the benefits of term life insurance

     Correct answer: A teacher at the local high school who receives nominal compensation for giving investment advice to engineers

     The LATE exclusion applies when advice is given by one of the listed professionals on an incidental basis. When a teacher (or any of the others) is compensated specifically for giving advice, regardless of the amount, the exclusion is lost. To be defined as an investment adviser, one must give advice on securities; term life insurance is not a security. Similarly, preparing trust documents is not securities advice, even if the clients are referred by an investment adviser. Finally, one of the roles of an accountant is giving tax advice, and IRAs are not securities.

342. The Uniform Securities Act's definition of investment adviser would include
     • An investment adviser representative of an advisory firm who makes securities recommendations on a regular basis for compensation
     • Any person who is a federal covered investment adviser
     • A person who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities
     • A temporary employee hired to assist in administrative responsibilities of an advisory firm

     Correct answer: A person who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities

     A person who, on a regular basis for compensation, offers specific investment advice to clients as to the value of securities meets the 3-prong test as an investment adviser.

343. Under the Uniform Securities Act, which of the following persons has to register as an investment adviser?
     • An agent of a broker-dealer who gives investment advice within the course of his duties with the firm for which a fee is charged
     • A broker-dealer who gives advice for which he charges a specific fee
     • A broker-dealer who gives investment advice that is incidental to the course of its business and for which no special compensation is received
     • An attorney who writes a legal opinion for a municipal bond indenture

     Correct answer: A broker-dealer who gives advice for which he charges a specific fee

     Broker-dealers need not register as investment advisers unless they charge a separate fee for providing investment advice. If the advice is strictly incidental and without a separate charge, the BD is not an investment advisor. Attorneys are not investment advisers provided their investment advice is incidental to their practice. Giving a legal opinion on a municipal security indenture is not investment advice. Agents giving advice for which a fee is charged must register as investment adviser representatives and their BDs as investment advisers.

344. Which of the following would have to register as an investment adviser under the Uniform Securities Act?
     • A senior accountant who advises tax clients about investments now and then
     • A tenured professor who lectures business groups about the market for free
     • A retired engineer who charges a fee for seminars about aerospace equities
     • A trust company that manages investment accounts for many of its customers

     Correct answer: A retired engineer who charges a fee for seminars about aerospace equities

     The Uniform Securities Act excludes banks and trust companies, publishers, investment adviser representatives, and lawyers, accountants, teachers and engineers whose advice is incidental to their profession and carries no separate charge. The retired engineer no longer practises engineering and is paid specifically for securities advice, so neither prong of the professional exclusion is satisfied and registration is required. The accountant's advice is incidental to tax work, the professor charges nothing for his remarks, and a trust company is excluded outright.

345. An investment adviser has its home office in Wisconsin. Its only business is with trust companies, large employee benefit plans, and insurance companies. It has no place of business in Colorado but provides investment advice to two Denver banks, both chartered under Colorado banking laws. There is a new Administrator in Colorado, and it is his opinion that this IA should be required to register in his state. A careful reading of Section 201 of the Uniform Securities Act would indicate that
     • The firm must register because the new Administrator has just decided its advice is aimed at the state
     • The firm need not register because it has no office there and its only clients are financial companies
     • The firm need not register because an adviser without any offices in that state can never be compelled
     • The firm must register because both of the banks it serves hold charters issued or renewed in Colorado

     Correct answer: The firm need not register because it has no office there and its only clients are financial companies

     Section 201 of the Uniform Securities Act excludes from state registration an adviser with no place of business in the state whose clients there are limited to other advisers, federal covered advisers, broker-dealers, banks, trust companies, savings and loans, insurance companies, large employee benefit plans and government units. Two Colorado-chartered banks are exactly such clients, so where the charter came from is irrelevant and the Administrator's opinion cannot override the statute. The absence of an office is not conclusive on its own either: more than five retail clients in the state would still force registration.

346. The Uniform Securities Act would NOT provide an exemption from registration as an investment adviser to an investment adviser who
     • Has no place of business in the state and limits its clientele to banks or insurance carriers
     • Has no place of business in the state and limits its clientele to fewer than twelve residents
     • Has no place of business in the state and deals only with the savings banks chartered locally
     • Has no place of business in the state and limits its clientele to large state trust companies

     Correct answer: Has no place of business in the state and limits its clientele to fewer than twelve residents

     An adviser with no place of business in a state stays exempt while its clients there are institutional: banks, insurance companies, savings institutions, trust companies and other investment advisers. The de minimis allowance for ordinary clients is no more than five in any 12-month period, so an adviser reaching eleven residents of the state has passed the limit and the exemption is lost.

347. Under the USA, a person who is in the business of providing advice on trading futures contracts in addition to advising clients on securities issued or guaranteed by the U.S. government is
     • Not required to be a registered investment adviser in the state
     • Required to be a registered investment adviser representative in the state
     • Required to be a registered agent in the state
     • Required to be a registered investment adviser in the state

     Correct answer: Not required to be a registered investment adviser in the state

     This question is referring to a federal covered adviser. The futures contracts are not securities, but, of course, the U.S. government securities are. However, the Investment Advisers Act of 1940 specifically excludes from the definition of "investment adviser" a person whose securities advice is confined to securities issued or guaranteed by the Treasury. The fact that this person is excluded under the Investment Advisers Act of 1940 makes that person federal covered under the NSMIA and not subject to state regulation as an investment adviser.

348. Under the Uniform Securities Act, which of the following statements is TRUE about an investment adviser who does not have an office in a state and solicits no more than 5 clients in that state?
     • He is not liable under the antifraud rules of that state's securities act
     • He is exempt from advertising rules that the state places on its advisers
     • He is not required to register as an investment adviser within that state
     • He must file a consent to service of process with the state Administrator

     Correct answer: He is not required to register as an investment adviser within that state

     An adviser with no place of business in a state and no more than five clients there in any 12-month period falls outside that state's definition of investment adviser, so no registration is required; this is the de minimis exemption. The exemption is narrow. Antifraud authority follows the conduct rather than the registration, so the Administrator may still act on fraudulent advertising or sales practices, and a consent to service of process is filed by applicants and notice filers rather than by an adviser who never registers.

349. Under the Uniform Securities Act, an investment adviser would be exempt from registration in a state in which he has no place of business if he
     • Is registered as a broker-dealer
     • Had no more than 5 clients in that state within the past 12 months
     • Had no more than 10 clients in that state within the past 12 months
     • Had no more than 15 clients in that state within the past 12 months

     Correct answer: Had no more than 5 clients in that state within the past 12 months

     An adviser who had no more than 5 clients in a state within the prior 12-month period or deals exclusively with institutions is not required to register in a state in which he has no place of business.

350. Which of the following persons must register as an investment adviser under the Uniform Securities Act?
     • An investment adviser who only serves institutional clients and whose only office is in this state
     • An accountant who makes no pretense of providing investment advisory services but gives incidental advice to clients as a small part of accounting services provided
     • An investment adviser representative with no place of business in the state who has dealt with 7 retail clients during the most recent 12 month period
     • An investment adviser whose advice is limited to securities issued or guaranteed by the U.S. government and who has 3 places of business in the state

     Correct answer: An investment adviser who only serves institutional clients and whose only office is in this state

     The Uniform Securities Act requires those defined as investment advisers to register with the state. Accountants are excluded when their advice is incidental to their profession and no additional compensation is charged. Advisers whose only advice is on securities issued or guaranteed by the government are excluded from the definition of investment adviser under the Investment Advisers Act of 1940. This means they are federal covered investment advisers, not required to register with the Administrator even with offices in the state. As long as there is an office in the state, unless the adviser is federal covered (as described in the previous sentence), there is no exemption from registration in that state. The IAR has exceeded the de minimis limits and would have to register in the state, but as an IAR, not as an IA.

351. Alpha-Beta Advisers (ABA) has its principal office in State X. ABA limits its clientele to insurance companies that are authorized to do business in State X. Which of the following best describes the registration requirements for ABA?
     • Both the SEC and State X
     • SEC only
     • State X only
     • Neither the SEC nor State X

     Correct answer: State X only

     Dealing exclusively with insurance companies makes this advisory firm exempt from registering with the SEC. However, unlike those who are excluded from the definition of investment adviser, being exempt does not make ABA a federal covered adviser. Although advisers dealing solely with institutions, such as insurance companies, are not deemed to be investment advisers in the state, that only applies when there is no place of business in the state. Obviously, with its home office in State X, that does not apply to ABA, so it would have to register in that state.

352. Registration with the state as an investment adviser would be required for a person with an office in this state who
     • Manages $13 million in assets for 4 clients
     • Only gives advice on securities issued by or guaranteed by the government of the United States
     • Manages the portfolio of the KPF Balanced Fund, a registered open-end investment company with $22 million in net assets
     • Serves as a pension consultant to the XYZ Employees Retirement Plan, covering 1,200 employees with total assets of $278 million

     Correct answer: Manages $13 million in assets for 4 clients

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

353. Who of the following is not exempt from registration as an investment adviser under the Investment Advisers Act of 1940?
     • An adviser running $125 million for seven private funds that sit inside the United States and nobody else
     • An adviser serving insurance carriers only, holding $200 million and working out of a single State H site
     • An adviser having $125 million, its only State F office, and 110 residents who buy exchange listed stocks
     • An adviser whose single office and entire clientele sit inside State J, none of them owning listed shares

     Correct answer: An adviser having $125 million, its only State F office, and 110 residents who buy exchange listed stocks

     The intrastate exemption under the Investment Advisers Act of 1940 carries no client limit, but it is lost the moment the adviser gives advice on securities listed on a national exchange, which is what the State F adviser does for its 110 resident clients; with $125 million under management it would in any event have to register with the SEC. An adviser whose only clients are insurance companies is exempt whatever its size. An adviser whose only clients are private funds stays exempt while United States assets remain under$150 million, so $125 million across seven funds still qualifies. The State J adviser keeps the intrastate exemption because it stays inside the state and its clients hold no exchange-listed securities.

354. Which of the following parties is most likely to be considered an investment adviser under the Investment Advisers Act of 1940?
     • A CPA who manages investment accounts for 50 clients and charges hourly fees for the service
     • Dow Jones, Inc., publisher of The Wall Street Journal
     • An expert in fixed-income securities whose only clients are individuals and whose only recommendations deal with securities issued or guaranteed by the U.S. Treasury
     • The trust department of Citibank, which handles billions of dollars in trust assets

     Correct answer: A CPA who manages investment accounts for 50 clients and charges hourly fees for the service

     The Investment Advisers Act of 1940 excludes accountants providing investment advice from the definition of investment adviser only when the advice is given on an incidental basis and with no specific compensation. A publisher of periodicals of general circulation, whether or not the publication covers financial matters, is excluded from the definition, as is an adviser whose advice is exclusively limited to U.S. government securities. Banks are also excluded from the definition of investment adviser under the act.

355. Under the Uniform Securities Act, all of the following persons with no place of business in the state are exempt from registration as an investment advisers EXCEPT
     • Advisers who have dealt exclusively with 6 individual clients resident in that state
     • Advisers who have dealt exclusively with 4 federal covered advisers inside the state
     • Advisers who have dealt exclusively with those savings banks chartered in that state
     • Advisers who have dealt exclusively with mutual funds registered under a federal law

     Correct answer: Advisers who have dealt exclusively with 6 individual clients resident in that state

     The de minimis allowance for an adviser with no place of business in the state stops at five clients in a 12-month period, so dealing with 6 individual clients passes it and registration is required. The other three describe institutional and professional clients. Federal covered advisers, savings banks and federally registered investment companies all sit on the list of clients an adviser may serve without registering, provided it keeps no place of business in that state.

356. Under the Uniform Securities Act, all of the following persons may provide investment advice incidental to their normal business without requiring registration as an investment adviser EXCEPT
     • An engineer
     • A lawyer
     • An economist
     • A teacher

     Correct answer: An economist

     The Uniform Securities Act does not grant an economist exemption from registration, but it does offer an exemption to teachers, lawyers, and engineers if the investment advice is incidental to their business; thus the acronym LATE for lawyers, accountants, teachers, and engineers.

357. Long-Term Financial Solutions, Inc. (LTFSI), an investment adviser registered in five states, files a Form ADV-W indicating the business is closing. It is being acquired by another federal covered adviser, Gold and Sylver Advisers, LLC. Which of the following statements is correct?
     • Gold and Sylver will not have to amend their Form ADV Part 1 until the filing of their annual updating amendment.
     • Gold and Sylver must notify all clients of LTFSI that their advisory contracts have been assigned.
     • LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least three years after the acquisition.
     • As the successor firm, Gold and Sylver Advisers must keep copies of the LTFSI corporate charter for at least three years after LTFSI’s acquisition.

     Correct answer: LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least three years after the acquisition.

     When an investment adviser ceases to exist, either through going out of business or being succeeded by another firm (as is the case here), it is their responsibility to ensure that articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor be preserved until at least three years after termination of the enterprise. Although it is true the contracts have been assigned to the successor firm (Gold and Sylver), the consent for that had to be obtained by LTFSI. A change of this nature requires prompt amendment to the Form ADV Part 1.

358. Reticent Asset Management (RAM) is claiming an exemption from registration with the state because it is an adviser to private funds. One of the requirements to qualify for this exemption is
     • All investors must be qualified clients
     • Private fund assets under management cannot exceed $110 million
     • All investors must be accredited
     • There can be no more than 10 investors during any 12-month period

     Correct answer: All investors must be qualified clients

     On the state level, the exemption requires that all investors meet the USA's definition of qualified client. That means the investor must have a net worth of at least $2.1 million dollars or at least $1 million in assets under management with the adviser. This is a more stringent test than that for accredited investors. In addition, accredited investor is a federal term, and this question is about state law. There is no limit placed on the number of investors (don't confuse this with the private placement exemption for registration of the security). The limit on AUM is $150 million (this is not to be confused with the AUM limits on becoming registered with the SEC).

359. A state-registered investment adviser suddenly incurs a liability that materially affects its net worth, causing it to drop below the required minimum. Which of the following statements is TRUE?
     • The adviser must apprise the Administrator at once upon discovery of that net worth loss
     • The adviser must increase its posted surety bond by the entire amount of that deficiency
     • The Administrator must receive notice by the close of business on that next business day
     • The adviser must transmit its written report of financial condition on the day of notice

     Correct answer: The Administrator must receive notice by the close of business on that next business day

     The model rule departs from the usual prompt-notice standard when net worth is the problem. A state-registered adviser whose net worth falls below the minimum must get notice to the Administrator by the close of business on the next business day, and must then file a report of its financial condition by the close of business on the business day after that, not on the same day as the notice. Increasing a surety bond does nothing to cure a net worth deficiency, and immediate notice is not what the rule asks for.

360. Under the Uniform Securities Act, which of the following investment advisers with no place of business in the state must register with the state as an investment adviser?
     • An adviser rendering advice to no more than 10 individual clients within a 12-month period
     • An adviser rendering advice solely to broker-dealers
     • An adviser rendering advice to employee benefit plans with at least $1 million in assets
     • An adviser managing more than $110 million in assets

     Correct answer: An adviser rendering advice to no more than 10 individual clients within a 12-month period

     An investment adviser with no office in the state would be exempt from registration in the state if the adviser renders advice to no more than 5 noninstitutional clients (not 10) in a 12-month period. If an investment adviser has no office in the state, and renders advice solely to broker-dealers, insurance companies, banks, investment companies, governmental agencies, or employee benefit plans with assets of $1 million or more, the adviser is exempt from registration with the state. If the adviser manages assets of $110 million or more, the adviser would be required to register with the SEC, not the state.

361. If a federal covered adviser's fiscal year ends on October 31, 2017, it must file its annual updating amendment to its Form ADV no later than
     • January 29, 2018
     • February 28, 2018
     • December 31, 2017
     • March 30, 2018

     Correct answer: January 29, 2018

     A federal covered (and state-registered) adviser must file the annual updating amendment to its Form ADV within 90 days after the end of its fiscal year. A fiscal year ending October 31, 2017 puts the deadline at January 29, 2018.

362. Form PF must be filed by
     • SEC-registered advisers with at least $150 million in private fund assets under management
     • SEC-exempt reporting advisers
     • SEC-registered advisers with no more than $150 million in private fund assets under management
     • State-registered private fund managers, regardless of the amount of assets under management

     Correct answer: SEC-registered advisers with at least $150 million in private fund assets under management

     Form PF is the form used by those private fund managers who are registered with the SEC and whose private fund AUM reaches or exceeds the $150 million threshold. Exempt reporting advisers are, as the term implies, exempt from reporting. State-registered advisers don't report on the form because, among other things, if they reached the $150 million mark, they'd have to register with the SEC.

363. A discussion referring to blue-sky laws would include all of the following EXCEPT
     • Forms requiring issuers selling securities in the state to comply with state securities laws
     • The Securities Act of 1933 and Securities Exchange Act of 1934
     • A state securities law that grants state securities Administrators the power to deny or revoke a broker-dealer's or an agent's registration within its state
     • State laws that are designed to protect the public against fraud in securities sales within a state

     Correct answer: The Securities Act of 1933 and Securities Exchange Act of 1934

     Blue-sky laws are state securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 are federal securities laws.

364. Which of the following must register as an investment adviser under the Investment Advisers Act of 1940?
     • A person who advises collectors acquiring old coins and antique furniture as tangible property
     • A person who advises insurance companies about the investing of their general account reserves
     • A person who publishes an investment newsletter of general and regular circulation for readers
     • A person who advises investors buying mutual funds registered under the Investment Company Act

     Correct answer: A person who advises investors buying mutual funds registered under the Investment Company Act

     The Investment Advisers Act of 1940 reaches any person who, for compensation, is in the business of advising others about securities. Shares of an investment company registered under the Investment Company Act are securities, so advising clients who buy mutual funds requires registration. Coins and antique furniture are tangible property rather than securities, an adviser whose only clients are insurance companies is exempt by statute, and a bona fide publisher of a newsletter of general and regular circulation is excluded from the definition.

365. The SEC requires investment advisers registered under the Investment Advisers Act of 1940 to maintain certain books and records for a minimum of
     • 3 years
     • 5 years
     • 1 year
     • 6 years

     Correct answer: 5 years

     Investment advisers must keep most records for 5 years from the end of the fiscal year in which the record was created. The first 2 years, the records must be kept easily accessible in the principal office of the IA. Broker-dealers have a requirement of 3 years rather than 5 years.

366. Which of the following is specifically excluded from the definition of an investment adviser providing the investment advice is solely incidental to the business in which the person is engaged?
     • Pension manager
     • Movie star's business manager who handles the star's investment portfolio
     • Industrial engineer
     • Sports representative who advises on securities for a fee

     Correct answer: Industrial engineer

     Lawyers, accountants, engineers, teachers, and broker-dealers whose advice is incidental to their profession and who do not charge a separate fee for investment-related advice are excluded from the definition under the Investment Advisers Act of 1940.

367. Under the provisions of the Uniform Securities Act, it is NOT necessary for an investment adviser to register when it
     • Has a place of business in the state but deals exclusively with federal covered advisers
     • Has a place of business in the state but has conducted business with 3 individual investors during the preceding 12 consecutive months
     • Is headquartered in a state where it conducts most of its business with broker-dealers only
     • Has no place of business in the state and deals with savings and loan associations only

     Correct answer: Has no place of business in the state and deals with savings and loan associations only

     An adviser who has no place of business in the state and deals only with savings and loan associations is not required to register with the state securities Administrator. An adviser with a place of business in the state must register with the Administrator whether clients are exclusively broker-dealers or federal covered advisers and regardless of the number of clients.

368. A federal covered IA files a petition for bankruptcy. The firm must
     • Notify all of its clients immediately
     • Notify the Administrator immediately
     • Do nothing until the court decides the disposition of the firm's assets
     • Notify the SEC immediately

     Correct answer: Notify the SEC immediately

     As a federal covered investment adviser, the responsible regulatory body is the SEC.

369. Under the Uniform Securities Act, who must register as an investment adviser?
     • A financial planner with no place of business in a state and who advises only trust companies
     • A registered broker-dealer who receives compensation for providing investment advice
     • A bank that provides investment advice
     • An accountant who provides advice solely incidental to the business

     Correct answer: A registered broker-dealer who receives compensation for providing investment advice

     Registered broker-dealers that provide advice only incidentally to their business are exempt from the definition if they do not receive compensation. However, a broker-dealer that receives compensation for investment advice must register. A financial planner with no place of business in a state and who advises only trust companies is exempt from registration. Out-of-state advisers (with no office in the state) are not defined as investment advisers within a state if their only clients within the state are other investment advisers or broker-dealers, financial institutions, or institutional investors. Banks are excluded from the definition of investment adviser, as are accountants who provide advice only incidentally to their business.

370. The sole proprietor of an insurance business that exclusively provides advice on fixed-income annuity contracts
     • Need not register under any securities laws
     • Must register as an investment adviser under the Investment Advisers Act of 1940
     • Must register as an investment adviser representative under the USA
     • Must register as a broker-dealer with the SEC

     Correct answer: Need not register under any securities laws

     The sole proprietor of an insurance business need not register under the Uniform Securities Act or Investment Advisers Act. He provides advice on fixed-income annuities only, which are insurance products, not securities. Regulations under the USA, as well as federal securities laws, only apply to securities.

371. An investment adviser with no place of business in the state is exempt from registration with the state when making recommendations to all of the following EXCEPT
     • Commercial banks chartered under the laws of the state buying registered securities
     • Accredited individual residents of the state who buy newly issued exempt securities
     • Nonprofit endowment funds located within the state that hold many exempt securities
     • Corporate issuers located in the state that pick underwriters for exempt securities

     Correct answer: Accredited individual residents of the state who buy newly issued exempt securities

     The Uniform Securities Act lets an adviser with no place of business in a state serve institutional clients there without registering: banks, insurance companies, investment companies, large benefit plans and nonprofit endowments all qualify, and advising an issuer on the quality of prospective underwriters is not advice about securities at all. Wealthy individuals are not institutions, so recommendations made to accredited investors who live in the state defeat the exemption even when the securities recommended are themselves exempt from registration.

372. Under the Investment Advisers Act of 1940, which of the following is considered an investment adviser?
     • A person who publishes a regular newsletter of advice on U.S. Treasury bonds and other U.S. government securities
     • The trust officer of a commercial bank who manages investment accounts for clients
     • A syndicated columnist who gives weekly reports and recommendations on investments
     • A lawyer who specializes in consulting on investing in securities

     Correct answer: A lawyer who specializes in consulting on investing in securities

     Publishers and writers of general, regular, paid circulation publications (newspapers and magazines) are excluded from the definition of investment adviser. Under the federal law, anyone giving advice dealing only with U.S. government securities is excluded from the definition, as are those who work for banks and trust companies. The lawyer is not excluded because the advice provided is not incidental to the profession; it is the lawyer's specialty.

373. Federally registered investment advisers are obligated to maintain certain books and records as specified by the SEC. Which of the following statements regarding adviser recordkeeping is NOT true?
     • Records originally created on computer may be stored in electronic media.
     • Records must be kept for 6 years.
     • Written records may be reduced to microfilm.
     • Records are subject to surprise audits by the SEC.

     Correct answer: Records must be kept for 6 years.

     Records of an adviser must be maintained for 5 years. Records are subject to surprise audits by the SEC, written records may be reduced to microfilm, and records originally created on a company's computer may be stored in electronic media.

374. Under the Uniform Securities Act, a state-registered investment adviser whose only office was in State N would NOT have to register in State O if its only clients were
     • Trust companies
     • Individual accredited investors
     • Complex trusts
     • 6 or fewer retail clients

     Correct answer: Trust companies

     A state-registered investment adviser can make use of the de minimis exemption if it has no place of business in a state and its only clients are institutions, such as bank and trust companies, investment companies, and insurance companies. Don't confuse a trust with a trust company—trusts are not institutions unless it specifically states a pension or profit-sharing trust, and even then, it only qualifies if it has assets of not less than $1 million. No individual, regardless of wealth, is an institution and the de minimis limit is fewer than 6 (sometimes shown as 5 or fewer).

375. Martin holds both the CPA and the CFP designations. Within the previous year, if he has provided portfolio advice to approximately 40 clients, is Martin required to register as an investment adviser?
     • Yes, because he provides investment advice on a more than incidental basis.
     • Yes, because he could receive commission income from investment clients.
     • No, because he falls under the de minimis exemption having relatively few clients.
     • No, because he is a CPA.

     Correct answer: Yes, because he provides investment advice on a more than incidental basis.

     Although Martin is an accountant, he provides investment advice on a more than incidental basis (typically regarded as more than 10 client contacts per year). Nothing indicates that Martin will be executing commissionable trades; only providing advice.

376. Under the Investment Advisers Act of 1940, an adviser is required to be registered with the SEC if
     • The adviser's clients are investment companies registered under the Investment Company Act of 1940
     • The adviser's advice relates solely to securities issued or guaranteed by the U.S. government.
     • The adviser is the publisher of a news magazine of general and regular circulation
     • The adviser's clientele is exclusively federal credit unions and the adviser has less than $100 million in assets under management

     Correct answer: The adviser's clients are investment companies registered under the Investment Company Act of 1940

     Advisers to registered investment companies are required to be SEC-registered. Under the Advisers Act, as modified by the Dodd-Frank Act, advisers are exempt from SEC registration if they manage less than $100 million in assets and have no investment company clients. Persons are excluded from the Advisers Act definition of investment adviser if they are publishers of news or business/financial publications of general and regular circulation or if their advice relates solely to U.S. government securities.

377. A state-registered investment adviser with discretionary authority over client accounts discovered on Monday, that the firm's net worth is below the required amount. He must notify the administrator and then file a report no later than the
     • Close of business Tuesday, close of business Wednesday
     • Close of business Tuesday, close of business Friday
     • Close of business Monday, close of business Friday
     • Close of business Monday, close of business Wednesday

     Correct answer: Close of business Tuesday, close of business Wednesday

     Unless otherwise exempted, every investment adviser registered or required to be registered under the Act shall by the close of business on the next business day notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day a report with the Administrator of its financial condition.

378. Platinum Investment in Growth Group, Inc. (PIGGI) is registered in and has its principal office in State W. PIGGI has near-term plans to open offices in State A and B. In an effort to test the waters, PIGGI mails several hundred flyers to prospects in those 2 states. Under the Uniform Securities Act,
     • These flyers could not be mailed until PIGGI was registered in States A and B
     • As long as PIGGI did not maintain an office in either of these states, the flyers could be mailed
     • As a federal covered investment adviser, the flyers would need filing with the SEC
     • These flyers could be mailed, but no accounts can be opened until PIGGI is registered in States A and B

     Correct answer: These flyers could not be mailed until PIGGI was registered in States A and B

     Any attempt to hold oneself out as offering investment advice as part of a business would require the person to be registered in the state, unless that person qualifies for an exclusion or exemption. Nothing in this question implies that an exclusion or an exemption applies. We know that PIGGI is not a federal covered investment adviser (and therefore does not need to file its flyers with the SEC) because we are told it is registered in State W—federal covered advisers don't register in any state.

379. Bulaan Advisory Services, Inc. (BAS), an investment adviser registered in 5 states, was found to have been untruthful in its performance reporting. Once this news was released, most of its clients terminated their advisory contracts. As a result, BAS shuttered its doors on July 18, 2018. Minutes of shareholder meetings must be preserved until at least
     • July 18, 2023.
     • December 31, 2018.
     • December 31, 2023.
     • July 18, 2021.

     Correct answer: July 18, 2021.

     NASAA's Model Rule on record keeping by investment advisers requires that partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, shall be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.

380. If an investment adviser files an initial registration with a state on June 30, which of the following statements regarding the filing fee to be paid is TRUE?
     • The full year's fee must be paid.
     • The fee will be prorated from the filing date.
     • The fee will be prorated from the effective date.
     • No filing fee is required until December 31.

     Correct answer: The full year's fee must be paid.

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

381. Under the Uniform Securities Act, which of the following statements is TRUE regarding registration of an investment adviser if the application has not been amended?
     • Unless the applicant withdraws the request, the registration takes effect at noon on the sixtieth day
     • Unless the Administrator asks for data, the registration takes effect thirty days after it was mailed
     • Unless the Administrator sets an earlier date, registration takes effect at noon on the thirtieth day
     • Unless a stop order has already been entered, registration takes effect fifteen days after the filing

     Correct answer: Unless the Administrator sets an earlier date, registration takes effect at noon on the thirtieth day

     Absent a denial order or a pending proceeding, a registration becomes effective at noon on the 30th calendar day after the application is filed, and while the Administrator may name an earlier date, no other event moves that deadline. The sixty-day and fifteen-day periods appear nowhere in the statute. An application is filed on the day the Administrator's office receives it, so posting the application does not start the clock.

382. The term "federal covered investment adviser" would apply to a person who
     • Is registered as such under the Investment Advisers Act of 1940
     • Limits the advice offered strictly to securities listed on the New York Stock Exchange (NYSE)
     • Is registered as such under the Investment Company Act of 1940
     • Limits the advice offered strictly to securities issued or guaranteed by the U.S. government or 1 of its political subdivisions

     Correct answer: Is registered as such under the Investment Advisers Act of 1940

     Only federal covered investment advisers register under the Investment Advisers Act of 1940. Even if the person only gives advice on exchange-listed securities (which are federal covered securities), that does not make the person federal covered. After all, if the AUM is under $100 million, registration is only possible with the state(s), unless meeting an exception. Although the term "federal covered adviser" does apply to those who limit their advice to securities issued or guaranteed by the U.S. government, it would not apply if advice is given on political subdivisions (states, cities, etc.).

383. On April 15, ABC Advisers, Inc., made application for registration as an investment adviser with State X. Absent a denial or stop order, registration will become effective
     • April 15
     • May 1
     • May 15
     • April 30

     Correct answer: May 15

     If no denials or stop orders are in effect and no proceedings are pending to do so, registration automatically takes effect at noon on the 30th day after the application was filed.

384. USAAdvisers is registered in 10 Midwest states. Regarding financial requirements, USAAdvisers must meet those of
     • Each state in which it has a place of business
     • The state in which its principal office is located
     • The state with the most stringent financial requirements
     • The SEC

     Correct answer: The state in which its principal office is located

     Unlike broker-dealers, investment advisers register with either the SEC or the state(s), but never both. Therefore, we know this must be a state-registered adviser not under the jurisdiction of the SEC. Under the Uniform Securities Act, when it comes to financial requirements, bonding, recordkeeping, and so forth, as long as the adviser meets the requirements of the state in which the principal office is located, the other states have no further claim.

385. ABC Advisers changes its name to XYZ Advisers and also changes its location. Under the Investment Advisers Act of 1940, it must
     • Notify the Administrator
     • Notify FINRA within seven days
     • Amend Form ADV promptly
     • Amend Form ADV in advance

     Correct answer: Amend Form ADV promptly

     If information on certain parts of Form ADV becomes out of date, a federal covered adviser must file a prompt amendment with the SEC (a state-registered adviser would have to do the same with the Administrator under the USA). Information requiring immediate amendment includes name, address, telephone number, organization type changes (corporation, sole proprietorship, and partnership), degree of control over clients' funds, sources of funding, management organization, or any information relating to disclosure to clients. If any other information on the form changes (nonmaterial information), the SEC requires the form to be amended within 90 days of the end of the adviser's fiscal year.

386. Under the NASAA Model Rule on financial requirements for investment advisers, investment advisers who have custody of customer funds are usually required to have a net worth in the amount of
     • $5,000
     • $10,000
     • $50,000
     • $35,000

     Correct answer: $35,000

     The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an investment adviser with custody of customer funds or securities to have a minimum net worth in the amount of $35,000. If the adviser does not have custody of customer funds or securities but does have discretionary power over customer accounts, the minimum net worth amount is reduced to $10,000. In the event the adviser wishes to post a bond because it doesn't meet the net worth requirement, it must be an amount determined by the Administrator based upon the number of clients and the total assets under management of the investment adviser.

387. The USA places a number of recordkeeping requirements on investment advisers. Records required to be kept by all state-registered investment advisers include all of the following EXCEPT
     • A list of all the accounts over which the adviser exercises discretionary trading control
     • Copies of every written recommendation the adviser sends to more than one advisory client
     • A journal recording all of the cash receipts and disbursements in that adviser's business
     • A record for each security showing every client's interest and its full physical location

     Correct answer: A record for each security showing every client's interest and its full physical location

     Every state-registered adviser must keep a list of the accounts it manages on a discretionary basis, copies of written communications and recommendations including email, and journals of cash receipts and disbursements. A security-by-security record showing each client's interest and where the security is held is required only of advisers that have custody of client funds or securities, so it is not a record that all advisers must maintain.

388. All of the following have legal standing as persons under the Uniform Securities Act EXCEPT
     • Minor children
     • Trusts where the interests of the beneficiaries are evidenced by a security
     • Joint-stock companies
     • Unincorporated organizations

     Correct answer: Minor children

     The definition of a person under the act includes, among others, individuals, joint-stock companies, unincorporated organizations, and trusts where the interests of the beneficiaries are evidenced by a security. Minor children are not persons under the act.

389. Blue-sky laws pertain to all of the following EXCEPT
     • The registration of securities within a state
     • The regulation of securities transactions in a state
     • The registration of securities salespeople in a state
     • The regulation of securities trading in other countries

     Correct answer: The regulation of securities trading in other countries

     Blue-sky (Uniform Securities Act) laws refer to state securities regulation in the state. Blue-sky laws require new securities to be registered with the state and regulate trading of securities in a state.

390. Under the Uniform Securities Act, which of the following is included in the definition of an investment adviser?
     • A publisher paid a yearly subscription fee for a newsletter carrying nonspecific market reports
     • A commercial bank offering portfolio or investment advice to the wealthiest depositors it holds
     • A broker-dealer paid a flat fee for studying objectives and recommending a securities portfolio
     • An adviser's representative paid a salary for recommending securities to the firm's own clients

     Correct answer: A broker-dealer paid a flat fee for studying objectives and recommending a securities portfolio

     A broker-dealer is excluded from the definition only while its advice is incidental and it takes no special compensation, so a flat fee charged for studying a customer's objectives and recommending a portfolio is special compensation and makes the firm an investment adviser. Publishers of general circulation newsletters carrying nonspecific advice are excluded, banks are excluded outright under the Uniform Securities Act, and an investment adviser representative is excluded because the adviser is the representative's employer.

391. Under the Uniform Securities Act, an accountant who charges hourly fees for securities recommendations in the regular course of his accounting practice is
     • Included in the definition because he is compensated for securities advice in the regular course of business
     • Excluded from the definition because the advice that he gives is only incidental to this accounting practice
     • Included in the definition because accountants are not among those groups which the statute chose to exclude
     • Excluded from the definition because an hourly fee for his securities advice is not any special compensation

     Correct answer: Included in the definition because he is compensated for securities advice in the regular course of business

     An accountant who charges hourly fees for securities recommendations made in the regular course of business satisfies the advice, business and compensation prongs and is an investment adviser under the Uniform Securities Act. The professional exclusion is available only while the advice stays incidental to the practice, and regular paid securities recommendations are not incidental, so the exclusion does not save him. Accountants are in fact named among the excluded professionals, and the form of payment is irrelevant, since an hourly rate is compensation just as a commission would be.

392. Which of the following statements best describes an investment supervisory service as described by the Investment Advisers Act of 1940?
     • An investment advisory firm offers nondiscretionary services on a non-client-specific basis.
     • An investment adviser sends monthly newsletters to 200 clients offering nonspecific advice.
     • An investment adviser provides continuous advice based on the client's individual needs.
     • No actions are taken in client accounts without first being approved by a senior supervisory person.

     Correct answer: An investment adviser provides continuous advice based on the client's individual needs.

     An investment supervisory service is an individualized service delivered to a specific client on a continual basis. General nonspecific advice given across the board is deemed impersonal advisory services. Only when an investment adviser provides investment supervisory service, and the adviser's principal business activity is the giving of advice, may the term "investment counsel" be used.

393. An investment adviser whose primary business is the rendering of investment advice providing investment supervisory services is entitled to use the term
     • Senior adviser
     • Pension consultant
     • Investment counsel
     • Financial planner

     Correct answer: Investment counsel

     The term investment counsel may only be used by those advisers whose primary function is the rendering of investment advice with individual continuous monitoring of the accounts.

394. There are waivers from the Series 65 exam requirement for certain professional designations. Among those qualifying for the waiver are individuals who have which of the following designations?
     • CIMA
     • Ph.D. in economics
     • ChFC®
     • MBA in finance

     Correct answer: ChFC®

     There are waivers from the Series 65 exam requirement for certain professional designations. In general, the following designations allow for a waiver of the exam requirement: CFP®—CERTIFIED FINANCIAL PLANNER™ (granted by the CFP Board of Standards); CIC—Chartered Investment Counselor (granted by the Investment Adviser Association); ChFC®—Chartered Financial Consultant® (granted by the American College of Financial Services); PFS—Personal Financial Specialist (granted by the American Institute of Certified Public Accountants); and CFA®—Chartered Financial Analyst® (granted by the Chartered Financial Analyst Institute).

395. The purpose of the Investment Advisers Act of 1940 is to provide
     • Minimum standards of performance for those registered as investment advisers
     • Regulation for investment companies and their operations
     • Standards at the federal level for the regulation of investment advisers
     • Standards among the various states for the regulation of investment advisers

     Correct answer: Standards at the federal level for the regulation of investment advisers

     The purpose of the Investment Advisers Act of 1940 is to provide federal standards for the regulation of investment advisers. Providing standards among the various states for the regulation of investment advisers is the purpose of the Uniform Securities Act. Providing regulation for investment companies and their operations is the purpose of the Investment Company Act of 1940.

396. Which of the following statements is not true of investment advisers under the Uniform Securities Act?
     • Compensation is a key factor in determining whether a person is required to register as investment adviser.
     • Only written advice concerning investments is covered by the act.
     • A natural person may register as an investment adviser.
     • Investment advice includes advice regarding the value of securities, as well as recommendations to buy or sell.

     Correct answer: Only written advice concerning investments is covered by the act.

     One of the three prongs defining an investment adviser under both state and federal law is the giving of investment advice. That advice can be in written or oral form. Any person, as defined in the USA, may register as an investment adviser. Even though we tend to think of the investment adviser as the company you will be working for, a significant percentange of state-registered investment advisory firms are sole proprietorships (one-person shops). Investment advice includes advice as to the value of securities, as well as recommendations to buy or sell. Compensation is another one of the three prongs in determining whether a person is defined as an investment adviser.

397. When, if ever, would a broker-dealer be required to register as an investment adviser?
     • If it charges a separate fee for advice or for account management
     • If it takes discretion over an account and makes no extra charges
     • If it puts out research reports that name a particular bond issue
     • If it earns commissions on the trades it recommends to the client

     Correct answer: If it charges a separate fee for advice or for account management

     A broker-dealer loses its exclusion from the definition of investment adviser when it imposes a distinct charge for advice or for managing an account, because that charge is special compensation. Taking discretion without charging for it, publishing research that names particular securities, and earning ordinary transaction commissions are all incidental to the brokerage business and are paid for through commissions rather than an advisory fee, so none of them on its own requires registration as an investment adviser.

398. Which of the following persons does NOT meet the definition of providing investment advice as a business outlined in SEC Release IA-1092?
     • A management consultant whose only investment advice is suggesting to a couple of small business clients who had invested their surpluses in speculative securities that they should find something less risky
     • Attorney who advertises the availability of investment advice
     • A financial planner who provides specific investment advice as part of his fee- based services and also makes specific securities recommendations to his clients in his capacity as an agent for a broker-dealer
     • Accountant who charges clients an additional fee for providing investment advice

     Correct answer: A management consultant whose only investment advice is suggesting to a couple of small business clients who had invested their surpluses in speculative securities that they should find something less risky

     The management consultant's advice to clients is more like personal opinion than investment advice as a business. In the other 3 choices, investment advice is offered as part of the individual's regular business. Lawyers, accountants, teachers, and engineers (LATE) are not generally considered investment advisers provided the advice is incidental to their regular profession.

399. Under the Investment Advisers Act of 1940, which of the following is included in the definition of an investment adviser?
     • A bank that advertises to the public that it offers a complete line of trust services
     • A lawyer who advertises to the public that he offers comprehensive legal and investment advice to high-net-worth individuals
     • A professional research analyst who holds himself out to the public as an expert in trading the Euro and other foreign currencies
     • A research service that offers advice on the value of gold

     Correct answer: A lawyer who advertises to the public that he offers comprehensive legal and investment advice to high-net-worth individuals

     Lawyers are the "L" in the LATE exclusion from the definition of investment adviser, but that is true only when any investment advice is strictly incidental. Once the lawyer advertises the offering of investment advice, it is not longer an incidental activity and the exclusion is lost. Banks are always excluded. The advice must be on securities to meet the definition. Neither the gold nor the foreign currencies are securities so the research service and the research analyst are not defined as investment advisers.

400. Under SEC Release IA-1092, a financial planner would not be considered an investment adviser when
     • There is an up-front fee charged for creating a comprehensive financial plan, even when the plan is not put into place
     • He is a licensed insurance agent and credits the commission earned on the sale of insurance policies included in a comprehensive financial plan against the fee charged for the plan
     • The extent of his planning is limited to wills, estates and trust creation
     • He does financial planning as part of offering a wrap fee program as a licensed agent of a broker-dealer

     Correct answer: The extent of his planning is limited to wills, estates and trust creation

     Wills, estates, and trusts are not securities, so any advice given on them does not make one an investment adviser. Look for the term "comprehensive financial plan" because that always includes securities advice and, as long as a fee is charged, even when the advice is not followed, registration as an IA (or perhaps IAR) is required. Wrap fee programs may only be offered by IAs or IARs.

401. Harrison is a Certified Financial Planner (CFP®) with an office in the state and a telephone directory listing under the category "Financial Planners." Harrison has, for fees, written more than 100 comprehensive financial plans for various individual clients. However, only 20% of the plans' content entails advice regarding securities and investments. Which of the following statements best describes Harrison's status as an investment adviser under the USA?
     • Harrison need not register because his securities advice is incidental to his tax and estate planning tasks
     • Harrison must register because he regularly gives paid securities advice and holds himself out as a planner
     • Harrison need not register because securities matters make up merely twenty percent of the plans he authors
     • Harrison must register with the Commission rather than that state because he drafted above a thousand plans

     Correct answer: Harrison must register because he regularly gives paid securities advice and holds himself out as a planner

     Under the Uniform Securities Act a person who, in the regular course of business, advises others about securities for compensation and holds himself out as doing so is an investment adviser. Harrison is listed in the directory as a financial planner, writes plans for fees, and every plan contains securities advice, so all three prongs are met. The securities work is a routine part of the service rather than an incidental one, and the fact that it is a fifth of the content does not change that. The number of plans he has written does not make him federal covered, so the Commission is not where he registers.

402. Under the Securities Act of 1933, the term "person" would NOT refer to which of the following?
     • A subdivision of a government
     • A deceased individual
     • A nonprofit, charitable corporation
     • An unincorporated amateur athletic club

     Correct answer: A deceased individual

     There are 3 specific "nonpersons" on this exam. They are 1) deceased individuals, 2) an individual declared mentally incompetent, and 3) a minor. A person can be almost any entity, including a corporation, partnership, unincorporated association, subdivision of a government, trust that issues shares of ownership (such as a unit investment trust), or a natural person (an individual).

403. If an investment adviser is registered in another state and has no place of business within an Administrator's state, the adviser is exempt from registration under the Uniform Securities Act if
     • The adviser has no more than 14 customers doing business in the state during that year
     • The adviser has no clients in that state other than the 20 accredited investors it has
     • The adviser has no more than 5 clients residing in the state during the preceding year
     • The adviser has accepted no more than 5 new customers based within the state this year

     Correct answer: The adviser has no more than 5 clients residing in the state during the preceding year

     An adviser registered elsewhere and with no place of business in the Administrator's state may serve up to 5 clients who are residents of that state in any 12-month period without registering there; this is the de minimis exemption. The number is 5 clients, not 14 customers, and the count takes in every client served during the period rather than only the ones newly signed, so a cap on new business does not create the exemption. Wealth is equally irrelevant, because the Uniform Securities Act grants no exemption for advising accredited investors.

404. Which of the following statements describes a person who provides investment advice on a regular basis but does not charge fees, yet would be considered an adviser under Release IA-1092?
     • A professor who lectures on sound investing, names specific stocks drawn from his own quantitative model, and takes no fees
     • A planner who advises pension plans on hiring managers and takes vacations, computers, and office space from the ones hired
     • A Treasury official who comments on market conditions and the investment outlooks they suggest as part of his public duties
     • A retired chief investment officer who writes a newspaper column on equities, steering readers to the firm he once directed

     Correct answer: A planner who advises pension plans on hiring managers and takes vacations, computers, and office space from the ones hired

     Release IA-1092 treats any economic benefit as compensation, and the benefit need not come from the person advised. The planner is in the business of advising pension plans, actually renders that advice, and is paid for it in vacations, equipment and office space supplied by the managers he recommends, so all three prongs of the definition are satisfied. The professor, the Treasury official and the retired officer each receive nothing of value for the advice itself, and none of the three is in the business of giving it.

405. Which of the following would be excluded from the definition of investment adviser under the Uniform Securities Act?
     • A broker-dealer charging a separate fee for investment advice
     • The publisher of a weekly newsmagazine, sold on newsstands, that contains at least 5 stock recommendations per issue
     • A finance teacher at a local community college who offers weekend seminars on comprehensive financial planning at a very reasonable price
     • A civil damages attorney who advertises that he is available to assist clients in suggesting appropriate investments for their successful claims

     Correct answer: The publisher of a weekly newsmagazine, sold on newsstands, that contains at least 5 stock recommendations per issue

     Publishers of general circulation newspapers and magazines are excluded from the definition of investment adviser. A broker-dealer loses its exclusion the moment it offers advice for a separate charge, as does an attorney who holds himself out as offering investment advice. Normally, a teacher is excluded, but not when charging for advice, as would appear to be the case here. On this examination, the term "comprehensive financial planning" always includes securities advice.

406. Under the Uniform Securities Act, a person who exclusively provides advice on commodities is
     • A registered insurance agent
     • An options representative
     • A registered investment adviser representative
     • Not a registered investment adviser

     Correct answer: Not a registered investment adviser

     A person who only provides advice on commodities is not a registered investment adviser. To be an investment adviser under the Uniform Securities Act, advice must be given on securities. The act specifically excludes commodities from the definition of security.

407. Which of the following is among the items of information that must be entered on a new account form?
     • Names of all persons who will have access to the account
     • Names of other broker-dealer firms already holding accounts for the prospective customer
     • What educational degree(s) the accountholder has earned
     • Names and addresses of at least 2 of the prospective customer's neighbors as personal references

     Correct answer: Names of all persons who will have access to the account

     The facts that are required on a new account form are aimed at facilitating the operation of the account, properly identifying the customer, and guarding against money laundering and other illegal activities. Of the choices offered, only the names of those with access to the account would help with these goals, so this item of information is the only one on the list that is required.

408. The federal legislation that requires broker-dealers to verify the identity of any person opening an account is
     • The Insider Trading and Securities Fraud Enforcement Act of 1988
     • The Uniform Securities Act of 1956
     • The USA PATRIOT Act of 2001
     • The Securities Exchange Act of 1934

     Correct answer: The USA PATRIOT Act of 2001

     The USA PATRIOT Act (the full title is Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) requires firms to obtain identifying information on each new customer, verify the identity of each new customer, maintain records relating to identity verification, and determine if any new customer appears on a list of known or suspected terrorist groups compiled by the Office of Foreign Assets Control (OFAC). This is accomplished through the customer identification program (CIP).

409. Your clients, a married couple, are trying to decide whether to open an account as joint tenants with right of survivorship or tenants by the entirety. You might point out to them that one of the differences to consider is that:
     • Only the JBE account avoids probate upon the death of the first tenant
     • A JBE account requires the consent of both parties to make a trade
     • Any 2 people can open a JBE account, while JTWROS accounts are limited to married couples
     • A JTWROS account requires the consent of both parties to make a trade

     Correct answer: A JBE account requires the consent of both parties to make a trade

     One of the unique characteristics of the joint by the entirety (JBE) account is that the consent of the other party is necessary in order for one of the parties to enter a trade. With a JTWROS account, either party can enter trades independently. Both JTWROS and JBE avoid probate and the JBE is limited to married couples only.

410. Which of the following types of businessowners has unlimited liability for the business's debts?
     • Member of a limited liability company (LLC)
     • Owner of a sole proprietorship
     • Shareholder of a corporation
     • Limited partner

     Correct answer: Owner of a sole proprietorship

     The owner of a sole proprietorship has unlimited personal liability for the debts of the business, and this is one of the main disadvantages of sole proprietorships. Limited partners, members of limited liability companies, and shareholders of corporations are not personally liable for the debts of the business.

411. There are many different legal ways to structure a new business entity. One of these is the general partnership. Among the benefits of using this structure would be
     • Ease of formation
     • Limited liability
     • The 50% dividends received exclusion
     • Substantial capital can be raised with little effort and low cost

     Correct answer: Ease of formation

     Compared with a corporation, it is generally easier to form (and dissolve) a partnership. General partners have full liability and there is no 50% dividends received exclusion for partnerships; that only applies to corporations. C corporations are the entity for raising a lot of capital.

412. Which of the following business accounts does not require considering the suitability of the owners?
     • S corporations
     • General partnership
     • Sole proprietorship
     • C corporations

     Correct answer: C corporations

     Because the C corporation is an entity separate from its shareholders, suitability for a C corporation account is based solely on the company itself. All of the others provide flow-through of income and loss to the individual owners so it is important to view the collective suitability of the individual owners (or single owner in the case of the sole proprietorship).

413. A client is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened?
     • Discretionary
     • Retirement
     • Options
     • Margin

     Correct answer: Options

     One question asked on a new options account form that is not required on a normal brokerage account opening is investment experience and knowledge (e.g., number of years, size, frequency, and type of transactions) for options, stocks and bonds, commodities, and other financial instruments.

414. A customer and his spouse own shares in the ABC Fund as joint tenants with rights of survivorship. If the customer dies, what happens to the shares in the account?
     • The account would be frozen until the estate was settled.
     • Ownership of the shares must be determined by probate court.
     • The spouse would own all the shares.
     • Half the shares would belong to the spouse, and the remaining half would be distributed to the customer's estate.

     Correct answer: The spouse would own all the shares.

     In a JTWROS account, securities pass to the surviving owner. The account does not have to be frozen but can continue to enter orders.

415. Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her?
     • S Corporations
     • General Partnership
     • Limited Partnership
     • C Corporations

     Correct answer: General Partnership

     Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. While an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.

416. Kellie is a senior equity analyst for a large brokerage firm. She primarily uses fundamental analysis techniques to assist her in picking stocks for her firm's clients. Today, she is reviewing the XYZ Corporation. The company is a manufacturer of computer keyboards and is currently going through an expansion phase. Which of the following techniques would Kellie be least likely to use to determine whether to buy, sell, or hold this company's stock?
     • She may review the company’s stock 200-day moving average.
     • She may consider trends towards tablets and smart phones.
     • She may calculate the intrinsic value of the stock using one or more of the stock valuation models.
     • She may examine the overall state of the economy, the computer industry, and then XYZ Corporation.

     Correct answer: She may review the company’s stock 200-day moving average.

     Reviewing the company's stock 200-day moving average is a technique used by technical analysts (chartists). All of the other techniques are used by fundamental analysts. The process of examining the economy, the specific industry, and the specific company is a reflection of top-down fundamental analysis.

417. An investor believes that he can study the history of security trades and security markets in order to identify buying opportunities. Furthermore, he prepares and studies charts on the past prices of the securities he is most interested in purchasing for his portfolio. He uses these charts to try to predict the future activity of a particular stock. What type of strategy is this investor using to make his investment decisions?
     • Technical analysis
     • Fundamental analysis
     • Tactical asset allocation
     • Ratio analysis

     Correct answer: Technical analysis

     Technical analysis is an attempt by an analyst to predict the direction of a security's future market price. Such terms as moving average, trendline, and support and resistance level are then used by an analyst to determine when the time is right to purchase (or sell) the security.

418. When using the dividend discount model,
     • the degree of accuracy in forecasting the price of preferred stock is less than that obtained by using the dividend growth model
     • Future expected dividends are discounted to compute the present value of the stock
     • Best results are obtained from stocks that pay irregular dividends
     • The discount rate is generally lower than the expected rate of return

     Correct answer: Future expected dividends are discounted to compute the present value of the stock

     This method of common stock valuation takes the investor's expected future dividend returns and then discounts that amount by the expected rate of return to arrive at the supposed present value. Expected (or required) rate of return is a component of both the dividend discount model and the dividend growth model, and only the DDM is used for preferred stocks because the dividend can never increase. When using any dividend model, the greater the regularity of dividends, the more accurate the forecast.

419. Which of the following analyze corporate financial statements and trends in sales and income?
     • Trend followers
     • Fundamentalists
     • Technicians
     • Chartists

     Correct answer: Fundamentalists

     Fundamentalists — fundamental analysts — are the group that works from corporate financial statements. They read the balance sheet, income statement and statement of cash flows, and they track trends in sales, earnings and margins, in order to estimate what a security is actually worth. Technicians are the opposite discipline: they study past market data, primarily price and volume, on the premise that prices already reflect everything the financial statements would tell them, so they do not analyze those statements at all. Chartists are technicians who work specifically from price charts, reading support, resistance and pattern formations — price history, not sales and income. Trend followers likewise trade on the direction and momentum of price rather than on reported financial results. The dividing line is consistent: fundamental analysis looks at the company, technical analysis looks at the market.

420. Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can
     • Arrange to have the trust’s funds pledged to support a loan for the trustee
     • Have funds withdrawn from the account at the direction of the beneficiary
     • Place the securities in the trust fund in a noncustodial brokerage account
     • Have a check drawn on the account payable to the trustee for trustee expenses

     Correct answer: Have a check drawn on the account payable to the trustee for trustee expenses

     The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts (not to be confused with custodian for minors), not in noncustodial accounts.

421. In a trust, the person who establishes the trust and decides on its terms is
     • The fiduciary
     • The trustee
     • The grantor
     • The beneficiary

     Correct answer: The grantor

     The grantor, sometimes called the settlor, is the person who establishes the trust and specifies its terms. The person who administers the trust is the trustee, and the person who receives distributions from the trust is the beneficiary. Interestingly, trust law would permit the grantor to also be the beneficiary and/or the trustee.

422. One of your clients has named you as the trustee for a trust he has established. The beneficiary of the trust approaches you with a request for a disbursement that is contrary to the provisions of the trust document. In accordance with the provisions of the Uniform Prudent Investor Act, you should
     • Do nothing
     • Follow the terms of the trust
     • Follow the wishes of the beneficiary
     • Contact the grantor

     Correct answer: Follow the terms of the trust

     Trust law requires that the trustee act in accordance with the terms of the trust document at all times.

423. Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated?
     • An incapacitated will
     • A living trust
     • A durable power of attorney
     • A living will

     Correct answer: A living will

     The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to "pull the plug." There is no such thing as an incapacitated will. A living trust deals with how assets are distributed, and a durable power of attorney grants authorization to a person to legally act on behalf of someone who cannot do so.

424. A trust document's investment policy emphasizes that the fiduciary must follow SRI. When you are asked by the trustee to explain what that means, you would reply,
     • Socially responsible investing
     • Sustainable reasonable investing
     • Safe responsible investing
     • Systemic responsible investing

     Correct answer: Socially responsible investing

     Socially responsible investing (SRI) is an impact investment strategy which seeks to consider both financial return and social good. In general, socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. You might also see SRI referred to as sustainable responsible (not reasonable) investing.

425. An investment constraint that is unique to private foundations is the requirement to
     • Distribute 5% of its net investment assets each year as qualifying distributions
     • Reinvest 5% of its entire investment assets each year in program-related lending
     • Distribute 5% of its entire investment income each year to independent charities
     • Withhold 5% of its net investment assets every year within unrestricted reserves

     Correct answer: Distribute 5% of its net investment assets each year as qualifying distributions

     Section 4942 of the Internal Revenue Code requires a private foundation to pay out each year an amount equal to 5% of its net investment assets in qualifying distributions, and that payout requirement is the constraint unique to foundations. The measure is assets rather than income, so distributing 5% of investment income does not satisfy it. Nothing in the Code compels a foundation to place a set share of its portfolio in program-related investments or to hold back an unrestricted reserve.

426. When comparing a private equity fund to a public one, it would be incorrect to state that the private fund has
     • Stronger governance
     • Higher risk
     • Less liquidity
     • Lower reporting costs

     Correct answer: Stronger governance

     The first step is to notice that the question is looking for the statement that is not correct. Corporate governance is an area where public shareholders look to ensure that the management is performing in ways that not only maximize operating results, but also represent high standards of business ethics. In the case of private funds, there are very few shareholders and they generally take less of an interest in ESG (environment, social, and corporate governance) matters. Private funds are not liquid and because they are private, they do not have the costs of regular reporting to the SEC. In general, private funds are considered a higher-than-average risk investment.

427. During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from
     • The person the probate court selects to administer the estate
     • The person the deceased had designated to execute that estate
     • The person named under the client's durable power of attorney
     • The person the deceased had married before the account opened

     Correct answer: The person the probate court selects to administer the estate

     Dying intestate means there is no valid will, so the probate court appoints an administrator and only that administrator may give instructions on the account. Without a will there is no executor to act. A durable power of attorney ends at the death of either party, so the attorney-in-fact loses every power the document gave. A surviving spouse has no authority over an individual account unless it was registered jointly with right of survivorship.

428. State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the Uniform Securities Act?
     • Broker-dealers receiving special compensation
     • Investment adviser representatives
     • Bank subsidiary offering investment advice
     • Economists whose advice is strictly incidental to their professional activity

     Correct answer: Investment adviser representatives

     The USA specifically excludes IARs from its definition of investment adviser. Excluded are banks but not subsidiaries offering investment advice. Once broker-dealers receive special compensation, such as in a wrap fee program, they lose their exclusion. Economists are not included in the list of exclusions.

429. Under both state and federal law, there are a number of exclusions from the definition of investment adviser. Which of the following would not qualify for an exclusion?
     • A personal injury attorney who recommends that clients consult with a CFP® for advice on how to deal with the large settlements they receive
     • A publisher of a newsletter that is paid to make reports to be used in the sale of specific securities
     • An economist who teaches a course in fundamental analysis at a local community college
     • A CPA who gives high tax bracket clients a chart showing the tax-equivalent yield of municipal bonds

     Correct answer: A publisher of a newsletter that is paid to make reports to be used in the sale of specific securities

     Although there is an exclusion for publishers, it must be of general and regular circulation and not be the recipient of compensation from the issuers of any securities covered.

430. Under the Uniform Securities Act, all of the following may provide investment advice incidental to their normal business without requiring registration as an investment adviser EXCEPT
     • An economist
     • A teacher
     • A lawyer
     • An engineer

     Correct answer: An economist

     The Uniform Securities Act, (and the Investment Advisers Act of 1940 as well), does not exclude economists from the definition of investment adviser as it does lawyers, accountants, teachers, and engineers who give advice that is incidental to the practice of their profession. Remember the acronym LATE—lawyers, accountants, teachers, and engineers. Do not be fooled by the E in economist.

431. Which of the following is specifically excluded from the definition of investment adviser under the Investment Advisers Act of 1940, when that person's investment advice is solely incidental to the practice of their profession?
     • Financial planner
     • Athlete's financial manager
     • Aeronautical engineer
     • Pension consultant

     Correct answer: Aeronautical engineer

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

432. An investment adviser need not register in a state if it has
     • A place of business in the state and only advises employee benefit plans with more than $1 million
     • No place of business in the state, does not direct business communications in the state, and advises more than 5 high-net-worth individuals located in the state
     • No place of business in the state and only advises 3 insurance companies located in the state
     • A place of business in the state and advises fewer than 5 banks

     Correct answer: No place of business in the state and only advises 3 insurance companies located in the state

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

433. Under the Uniform Securities Act, all of the following are excluded from the definition of an investment adviser EXCEPT
     • A bank that is chartered and supervised under state law
     • A broker-dealer and the agents it employs in that state
     • A federal covered adviser that has filed a state notice
     • A person who gets paid for advice about municipal bonds

     Correct answer: A person who gets paid for advice about municipal bonds

     Banks, broker-dealers and their agents, and federal covered advisers are all outside the state definition of investment adviser. Municipal bonds are exempt securities, but the exemption belongs to the security and not to the person advising on it, so someone compensated for recommending municipal bonds is an investment adviser and has no exclusion to rely on.

434. The Investment Advisers Act of 1940 lists several specific exclusions from the definition of investment adviser. Which of the following are included in that listing?
     • Publishers whose investment newsletters are issued only in response to market events
     • Attorneys whose investment advice is incidental to the practice of their professions
     • Consultants whose investment advice helps pension plans to hire their asset managers
     • Agents whose investment advice helps athletes and entertainers to handle their money

     Correct answer: Attorneys whose investment advice is incidental to the practice of their professions

     Lawyers, accountants, teachers and engineers are excluded by name from the definition of investment adviser when the advice they give is solely incidental to their profession, so attorneys belong on the statutory list. The publisher exclusion demands a publication of general and regular circulation, and a newsletter issued in reaction to market events fails that test. Pension consultants and sports and entertainment representatives were brought inside the definition by Release IA-1092 rather than excluded from it.

435. Which of the following would NOT be considered to be in the business of an investment adviser?
     • A person compensated for investment advice, but who provides the advice only to institutions
     • A person compensated for investment advice, although this service is not a primary part of the business
     • An accountant who provides occasional investment advice but receives no separate fee for the service
     • A person who provides investment advice but is compensated only through commissions on the sale of stock

     Correct answer: An accountant who provides occasional investment advice but receives no separate fee for the service

     In applying the business standard, the following criteria are used: (1) Does the person hold himself out as an investment adviser, or does he provide investment advice on a frequent or regular basis? (2) Does the person receive any compensation, regardless of whether it is paid separately or included in any other compensation? (3) If the person engages in other financial service activities in connection with the advice, it cannot be used to avoid the business standard. In looking at these criteria, it would appear that all choices listed are considered investment advisers. However, under exclusions from the definition, accountants who give advice solely incidental to the conduct of their profession and who receive no special compensation for this advice are excluded from the definition along with lawyers, engineers, teachers, and broker-dealers.

436. Which of the following is NOT considered to be in the business of investment advising?
     • Insurance agents who dispense investment advice regularly although it makes up a minimal portion of their overall business
     • Insurance agents who compare whole life policies with products that are not securities and earn only insurance commissions
     • Research writers who prepare comprehensive general reports about all securities markets for anyone willing to pay for them
     • Financial planners who advise on many instruments including securities and earn commissions on the life policies they sell

     Correct answer: Insurance agents who compare whole life policies with products that are not securities and earn only insurance commissions

     The question turns on the business prong rather than on the whole definition. An agent who only compares whole life insurance with other nonsecurities products, and is paid solely through insurance commissions, neither advises on securities nor holds herself out as an adviser, so she is not in the business of investment advising. Giving securities advice regularly counts even when it is a small share of the work, preparing reports about securities markets is itself advisory activity, and a planner who covers securities is in the business however the compensation is labelled.

437. As defined in the Investment Advisers Act of 1940, all of the following would be considered investment advisers EXCEPT
     • A portfolio manager who limits advice to municipal securities exclusively
     • A civil engineer making investment decisions for $5 million held in escrow while a bridge for which she is the project manager is being constructed
     • A professional plumber with excellent stock market skills who as a hobby and without pay, manages portfolios for 8 of his neighbors
     • A tax attorney who manages investment portfolios for 50 clients

     Correct answer: A professional plumber with excellent stock market skills who as a hobby and without pay, manages portfolios for 8 of his neighbors

     The plumber would not be considered an investment adviser because two of the three "prongs" are missing—advice is not being given as part of a regular business and there is no compensation. While an exclusion from the definition applies to advisers limiting advice to U.S. government securities, no such exclusion operates for advisers limiting advice to municipal securities. Similarly, there is an exclusion for attorneys providing investment advice on an incidental basis, but 50 clients is not incidental. Engineers are excluded from the definition, provided their advice is incidental to their profession, but making investment decisions on the money in escrow is clearly not incidental.

438. Which of the following persons is NOT excluded from the definition of investment adviser if their advice given is incidental to the individual's profession?
     • Teachers
     • Lawyer
     • Economist
     • Engineers

     Correct answer: Economist

     The exclusion applies to lawyers, accountants, engineers, and teachers, provided there is no separate fee for their investment-related advice. Economists are not specifically named in the exclusion.

439. Both state and federal law contain a number of exclusions from the definition of investment adviser. Which of the following choices is unlikely to qualify for an exclusion?
     • A retired mechanical engineer who charges a fee to advise fewer than 25 people about securities
     • A bank that buys and sells securities for the custodial accounts it maintains for its customers
     • A magazine columnist who writes each week about the business and the economic function of banks
     • A lawyer with 20 years of investment experience who advises clients about securities at no cost

     Correct answer: A retired mechanical engineer who charges a fee to advise fewer than 25 people about securities

     An engineer is one of the LATE professionals, but the exclusion covers only advice that is incidental to practising the profession. A retired engineer charging a fee for investment advice is doing precisely what an investment adviser does, and the size of the clientele is irrelevant, so serving fewer than 25 people does not help him. Banks are excluded outright, a columnist writing for a magazine of general circulation is a bona fide publisher, and the lawyer takes no compensation, so the compensation prong fails and the definition is not met.

440. Registration as an investment adviser or investment adviser representative under the Uniform Securities Act is required of
     • An officer of a trust company handling investments for trust accounts
     • An economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee
     • An agent of a broker-dealer who recommends model portfolios to clients in exchange for them executing their trades through him
     • A tax attorney who, as an incidental part of his tax practice, recommends that his high-tax-bracket clients investigate the use of municipal bonds in their portfolios

     Correct answer: An economics professor at a local community college who gives lectures in the evenings to public groups about portfolio analysis for which he charges a nominal fee

     If you are putting yourself out to the public as providing investment advice and charging a fee for doing so, you must register. The exceptions to this are if your giving of investment advice is incidental to your primary reason of doing business and if you are not charging specifically for the giving of that advice. Trust companies and their employees are specifically excluded from the definition of "investment adviser." A tax attorney making recommendations incidental to his legal practice and not charging specifically for the making of those recommendations is also not an investment adviser. The professor would have also been exempt from registration except for the fact that compensation was received for securities-related advice. Agents who are compensated only on the basis of recommended trades are not receiving special compensation and are, therefore, not considered to be in the business of giving advice.

441. An investment adviser registered in State A who has no office in State B is exempt from registration in that state if, during any 12-month period, the adviser limits its retail clients in State B to no more than
     • 5
     • 10
     • 35
     • 20

     Correct answer: 5

     Under the Uniform Securities Act, an investment adviser registered in at least one state (State A) is exempt from registering in another state (State B) if the adviser meets the requirements of the de minimis exemption. That exemption applies when the investment adviser has no place of business in the state (State B) and has no more than 5 noninstitutional clients in that state in a 12-month period.

442. Under which of the following circumstances may attorneys and accountants claim an exclusion from the definition of investment adviser under the Investment Advisers Act of 1940?
     • They charge a separate fee for the provision of investment advice from that received for their professional services.
     • They advertise that they are available to provide investment advice.
     • The investment advisory activities have grown to represent 30% of their business.
     • The advice is incidental to the practice of their profession.

     Correct answer: The advice is incidental to the practice of their profession.

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

443. Out-of-state investment advisers with no office in this state are not required to be registered if only advising
     • On preferred stock
     • On growth issues
     • On stocks listed on the NYSE
     • Insurance companies

     Correct answer: Insurance companies

     It is not the securities they advise on but their clients that count. Out-of-state investment advisers with no office in this state must be registered under the Uniform Securities Act unless their only clients are insurance companies, registered investment companies, banks or other institutional investors, broker-dealers, and other investment advisers.

444. Under the Investment Advisers Act of 1940, which of the following are excluded from the definition of an investment adviser?
     • Banks and trust companies
     • Insurance companies
     • Accountants who advise on securities (only) for a fee
     • Attorneys who advise on securities (only) for a fee

     Correct answer: Banks and trust companies

     The act excludes the following from the definition: banks or trust companies; publishers of bona fide publications of general circulation (newspapers and magazines); persons advising about certain securities (U.S. government or agency issues); broker-dealers not receiving special compensation for giving advice; and persons whose advice is incidental to their profession, such as lawyers, accountants, engineers, and teachers

445. Which of the following is responsible for the administration of the USA in a state?
     • Executive department
     • State judiciary system
     • The Administrator
     • Securities and Exchange Commission

     Correct answer: The Administrator

     On this exam, the chief state regulator is the Administrator. The Securities and Exchange Commission is the federal agency, not state agency, that oversees and regulates securities on a national level.

446. A person who renders investment advice solely with respect to securities issued by the U.S. government
     • Is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements
     • Must be registered both with the SEC and the state
     • Need not be federal registered under the Investment Advisers Act of 1940 but must register in any state in which it has an office
     • Is exempt from state registration under the Uniform Securities Act but must be federal registered under the Investment Advisers Act of 1940

     Correct answer: Is excluded from the definition of investment adviser under federal law and is, therefore, exempt from state registration requirements

     A person who renders advice solely with respect to securities issued or guaranteed by the U.S. government is excluded from the definition of investment adviser under the Advisers Act and is therefore a federal covered adviser under the NSMIA of 1996.

447. A client has a TIPS with a coupon rate of 3.5%. The inflation rate has been 4% for the last year. What is the inflation-adjusted return?
     • 7.50%
     • –0.50%
     • 3.50%
     • 4.00%

     Correct answer: 3.50%

     Treasury Inflation Protected Securities (TIPS) adjust the principal value each 6 months to account for the inflation rate. Therefore, the real rate of return will always be the coupon.

448. The longest initial maturity for U.S. T-bills is:
     • 52 weeks.
     • 13 weeks.
     • 39 weeks.
     • 2 years.

     Correct answer: 52 weeks.

     As money market instruments, the longest initial maturity of Treasury Bills is 52 weeks. Those bills are auctioned once per month. T-bills of shorter maturities are auctioned weekly. The shortest initial maturity is 4 weeks.

449. An investor purchases a TIPS bond with a 4% coupon. If during the first year the inflation rate is 9%, the approximate principal value of the security at the end of that year will be
     • $1,040.
     • $1,045.
     • $1,092.
     • $1,090.

     Correct answer: $1,092.

     The principal value of a TIPS bond is adjusted semiannually by the inflation rate. The exact calculation would be $1,000 x 104.5% x 104.5% which equals $1,092.025. Each six months, the interest is paid on that adjusted principal and that is why the security keeps pace with inflation. Obviously, the answer must be something a bit higher than $1,090 because of the semiannual compounding.

450. All of the following are true of government agency bonds EXCEPT
     • Older ones have coupons attached, new ones are book entry
     • They are direct obligations of the U.S. government
     • They trade openly
     • They are considered relatively safe investments

     Correct answer: They are direct obligations of the U.S. government

     The only government agency that is a direct obligation of the U.S. government is the Ginnie Mae security. All of the others are moral obligations.

451. Which of the following is a direct obligation of the U.S. government?
     • Bank for Cooperatives bonds
     • Fannie Maes
     • Government bond mutual funds
     • Ginnie Maes

     Correct answer: Ginnie Maes

     Ginnie Maes are backed by the full faith and credit of the United States. Other agencies have a moral, but not direct, government backing. Government bond mutual funds are not backed by the U.S. government.

452. A TIPS bond pays interest at the rate of 4%. If the annual inflation rate is 5%, what is the principal value after the 4th year?
     • $1,169.86
     • $1,200.00
     • $1,171.66
     • $1,218.40

     Correct answer: $1,218.40

     A TIPS bond's principal increases every 6 months based on the inflation (not the coupon) rate. An annual inflation rate of 5% means the adjustment every 6 months is 2.5% of the principal. At the test center, enter $1,000 and then multiply times 102.5%. Take that result and continue to multiply times 102.5% a total of 8 times (there are 8 six-month periods in 4 years). If you remember our shortcut, you simply take the annual inflation rate, multiply that by the number of years, and then take that percentage of the $1,000 par value. That would be 5% x 4 years or 20% of $1,000 = $200 principal adjustment. That would make the principal $1,200, and we said "take the next highest answer" and that will be correct.

453. Which of the following agency securities is guaranteed by the U.S. government?
     • Freddie Mac
     • Federal Home Loan Bank
     • Fannie Mae
     • Ginnie Maes

     Correct answer: Ginnie Maes

     Only Ginnie Mae securities are backed by the full faith and credit of the U.S. government. Other agency securities have lines of credit at the Treasury, but this credit does not constitute a full guarantee.

454. A TIPS bond with a par value of $1,000 has a coupon rate of 4%. During years 1 and 2, the inflation rate has been 6%. What effect will this have on the TIPS $2\frac{1}{2}$ years later?
     • The principal value will be $1,080.
     • The next interest payment will be $23.19.
     • The next interest payment will be $20.00.
     • The next interest payment will be $46.37.

     Correct answer: The next interest payment will be $23.19.

     On a semiannual basis, the principal value of a TIPS is increased by that year's inflation rate. A TIPS bond adjusts principal every 6 months based on the inflation rate. With an annual inflation rate of 6%, each 6 months the principal will increase by 3% compounded. Because the question is asking about $2\frac{1}{2}$ years later, there will be 5 periods (2 each year plus the first half of the 3rd year). Using the calculator at the testing center, you would enter the $1,000 initial par value and then multiply that times 103% five times to arrive at $1,159.27. Then, multiply that times the semiannual coupon rate (2%) and the result is $23.19. In almost every case, the "shortcut" will work. That is, if it was not a TIPS bond, then the interest would simply be 2% of $1,000, or $20. That will always be one of the choices—you look for the one that is a bit higher.

455. Treasury bills are
     • Issued in book entry format
     • Issued in the bearer format
     • Issued at par with interest
     • Callable at the fixed price

     Correct answer: Issued in book entry format

     Every Treasury security, the bill included, is issued in book entry form, so ownership is recorded electronically rather than by certificate. The Treasury has not issued bearer paper for decades. A Treasury bill carries no coupon and is sold at a discount from face value rather than at par, and no Treasury bill may be called before maturity.

456. GNMA mortgage-backed securities are
     • Available to investors through a minimum purchase of $5,000
     • Exempt from federal income tax for the interest payments received by the bondholders
     • Backed exclusively by a pool of mortgages
     • A direct obligation of the U.S. government

     Correct answer: A direct obligation of the U.S. government

     GNMA securities are a direct obligation of the U.S. government and are backed by a pool of mortgages. The monthly payments are partially a return of principal and partially taxable interest, which is subject to state and federal income tax. GNMA pass-through securities are available to investors with a minimum issue price of $25,000.

457. Which of the following U.S. government securities do NOT bear a stated interest rate but are sold at a discount through weekly auctions?
     • TIPS
     • Treasury bills
     • Treasury notes
     • Treasury bonds

     Correct answer: Treasury bills

     Treasury bills bear no stated interest rate. They are sold at a discount through weekly auctions and are actively traded in the money market. Treasury notes and Treasury bonds both carry stated interest rates.

458. All of the following are true about GNMAs EXCEPT
     • They provide funds for residential mortgages
     • Interest is paid semiannually
     • They are backed by the U.S. government
     • Interest on GNMAs is not exempt from state and local taxes

     Correct answer: Interest is paid semiannually

     GMNAs make payment monthly, unlike virtually all other debt securities, which make payments semiannually

459. Which type of risk is a mortgage-backed security most likely to experience?
     • Market risk
     • Reinvestment risk
     • Business risk.
     • Exchange rate risk

     Correct answer: Reinvestment risk

     A mortgage-backed security, such as a Ginnie Mae, is most likely to experience reinvestment rate risk. As mortgages are paid off early and refinanced in the event of declining interest rates, the interim cash flows received from the obligation must be reinvested in lower-yielding securities. This is the practical effect of prepayment risk.

460. A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the amount of the final semiannual interest check?
     • $42.66
     • $17.50
     • $21.33
     • $35.00

     Correct answer: $21.33

     The semiannual interest of a TIPS bond is computed on the basis of the inflation-adjusted principal. Because the principal increases with the inflation rate, at the end of the 5-year term, it has grown to $1,219 ($1,000 $\times 102\%$ ten times). Therefore, the final interest check is for $1,219 $\times 1.75\%$ (remember that it is a semiannual check).

461. A respected analyst reports that last week's T-bill rate at 6% is lower than the rate for the preceding week and lower than the average for the past month. Which of the following is TRUE?
     • The general level of interest rates is increasing.
     • Investors are paying less for T-bills.
     • Investors are paying more for T-bills.
     • The yield curve is inverted.

     Correct answer: Investors are paying more for T-bills.

     When the rate is lower, the price has gone up; this means investors are paying more as interest rates are going down.

462. A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the principal value of the bond at the end of 5 years?
     • $1,200
     • $1,440
     • $1,219
     • $1,000

     Correct answer: $1,219

     In addition to paying interest, a TIPS bond increases its principal value semiannually by the amount of inflation. If the inflation rate is 4% for 5 years, the principal value of the bond increases semiannually by that inflation rate. Allowing for compounding, the best choice would be the $1,219. This is computed by multiplying $1,000 by 102% 10 times.

463. An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6%, and during the first year, the inflation rate is 9%. How much interest would be paid for the year?
     • $64.11
     • $90.00
     • $65.40
     • $60.00

     Correct answer: $64.11

     TIPS bonds have a fixed coupon rate with a principal that varies each 6 months based on the inflation rate. With an annual inflation rate of 9%, each 6 months, the principal increases by 4.5% (half of the annual rate). Each semiannual coupon is half of the 6% rate times the new principal. The arithmetic is: $1,000 $\times 104.5\%$ = $1,045 $\times 3\%$ = $31.35 plus, $1,045 $\times 104.5\%$ = $1,092 $\times 3\%$ = $32.76. Adding the 2 interest payments together results in a total of $64.11 for the year.

464. All of the following debt instruments pay interest semiannually EXCEPT
     • Ginnie Mae pass-through certificates
     • Municipal general obligation bonds
     • Industrial development bonds
     • Municipal revenue bonds

     Correct answer: Ginnie Mae pass-through certificates

     Ginnie Maes pay interest on monthly, not semiannually.

465. Ginnie Mae pass-throughs will pay back both principal and interest
     • Monthly
     • Quarterly
     • Semiannually
     • Annually

     Correct answer: Monthly

     Ginnie Mae (GNMA) securities are called pass-through certificates because the monthly home mortgage payments, which consist of both principal and interest, pass through to the GNMA investor monthly.

466. One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that
     • Agency issues typically escape federal income tax while Treasury issues are still wholly taxable
     • Agency issues typically yield more than Treasury issues because they lack direct federal support
     • Agency issues typically arrive at markets in much larger dollar amounts than Treasury securities
     • Agency securities customarily change hands on the New York Stock Exchange unlike Treasury issues

     Correct answer: Agency issues typically yield more than Treasury issues because they lack direct federal support

     With a handful of exceptions such as GNMA, agency securities do not carry the direct backing of the Treasury, and investors demand a slightly higher yield for that weaker credit support. Interest on both agency and Treasury debt is taxable at the federal level. Agency offerings are almost always smaller than Treasury offerings, and neither agency nor Treasury securities trade on a stock exchange, since both change hands over the counter.

467. A mortgage-backed security (MBS), such as a Ginnie Mae, makes a combination principal and interest payment to an investor. This payment will be
     • Ordinary income on the interest and on the returned principal also
     • Ordinary income on the interest and a capital gain upon prepayment
     • Ordinary income on the interest and a tax-free return of principal
     • Ordinary income on the interest and a simple deferral on principal

     Correct answer: Ordinary income on the interest and a tax-free return of principal

     A mortgage-backed security passes through both interest and principal. The interest portion is taxable as ordinary income, while the principal portion is the investor's own capital coming back and is not taxed again. Treating the entire payment as ordinary income overtaxes the investor, because a return of principal is not income at all. The principal portion is not a capital gain either: repayment of principal at par, whether scheduled or early, produces no gain. Nor is it merely deferred; a return of basis is never taxed.

468. Which of the following usually does NOT pay interest semiannually?
     • Treasury bonds
     • Treasury notes
     • Public utility bonds
     • GNMA

     Correct answer: GNMA

     GNMA pass-through certificates pay principal and the interest monthly. All other choices usually pay interest semiannually.

469. To protect against possible inflation, your clients purchase some TIPS with a 2.5% coupon. If, over the next 6 years, the annual inflation rate is 6%, the principal value of each TIPS will be closest to
     • $1,150
     • $1,360
     • $1,161
     • $1,426

     Correct answer: $1,426

     The principal of a TIPS is adjusted every 6 months for the inflation rate. With an inflation rate of 6%, that means a 3% adjustment, twice per year. With the simple calculator provided at the test center, you would take the initial $1,000 and multiply that times 103% and continue to do that 12 times (there are 12 semiannual periods in 6 years).

470. An investor buys a zero-coupon Treasury STRIP at a discount and holds it to maturity. How is the annual accretion of that discount treated for federal income tax purposes?
     • It is reported as taxable interest income each year, even though no cash is received.
     • It is reported as a long-term capital gain in the year the STRIP is finally redeemed.
     • It is exempt from federal income tax because the issuer is the U.S. Treasury.
     • It is not reported at all until the investor sells the STRIP or it matures.

     Correct answer: It is reported as taxable interest income each year, even though no cash is received.

     A Treasury STRIP is a zero-coupon obligation: it pays no current interest and is bought at a discount to the par value paid at maturity. The annual accretion of that discount is original issue discount, and the holder must report it as interest income every year even though no cash arrives until maturity — the reason zeros are called “phantom income” securities and are usually held in tax-deferred accounts. It is not a long-term capital gain when it is redeemed; each year’s accretion raises the investor’s cost basis, so a STRIP held to maturity generally produces no gain at all. It is not exempt from federal income tax either — Treasury interest is exempt from state and local income tax, not federal. And the income cannot be deferred until sale or maturity, because the OID rules require it to be taken into account annually as it accrues.

471. Which of the following are true of Ginnie Maes but NOT of other agency mortgage-backed securities?
     • Carry the full faith and credit of the federal government
     • Offer a yield greater than that of similar Treasury bonds
     • Are secured by a pool of residential first mortgage loans
     • Pass through both the income and principal to the holders

     Correct answer: Carry the full faith and credit of the federal government

     Ginnie Mae is the only mortgage-backed agency security carrying the full faith and credit of the U.S. government. Fannie Mae and Freddie Mac issues do not carry it. The other three statements describe every agency mortgage-backed security, not Ginnie Maes alone: all of them yield more than comparable Treasury debt, all are secured by pools of residential mortgages, and all pass interest and principal through to the holder. Because the stem asks what is true of Ginnie Maes but not of the others, none of those three can be the answer.

472. All of the following statements regarding Government National Mortgage Association (GNMA) pass-through securities are true EXCEPT
     • Investors own an undivided interest in a pool of mortgages
     • GNMAs are considered to be the riskiest of the agency issues
     • Investors receive a monthly check representing both interest and a return of principal
     • The minimum initial investment is $25,000

     Correct answer: GNMAs are considered to be the riskiest of the agency issues

     GNMA securities, which are backed by the full faith and credit of the U.S. government, are considered to be the safest of the agency issues.

473. A TIPS bond with a par value of $1,000 has a coupon rate of 6%. During year 1, the inflation rate is 8%. How does this affect the TIPS in year 2?
     • The interest payment will be approximately $65.
     • There is no effect until the 3rd year.
     • The market price increases to approximately $1,080.
     • The coupon increases to 8%.

     Correct answer: The interest payment will be approximately $65.

     On a semiannual basis, the principal value of a TIPS is increased by that year's inflation rate. A TIPS bond adjusts principal every 6 months based on the inflation rate. With an annual rate of 8%, the first semiannual adjustment is half of that, or 4%. That increased the principal value to $1,040. The next 6 months adds 4% to the $1,040 bringing the end-of-year value to $1,081.60. The 6% coupon rate will be applied to the new principal giving us approximately $65 in interest paid during the 2nd year. Technically, we would also have to know the inflation rate for the first 6 months of year 2 because that will impact the amount of interest paid on the 2nd semiannual payment date. If that information is not given, just go with it as we have it here. As noted in the solution, the principal value has increased to a bit over $1,081, but the market price is determined by supply and demand and could be higher or lower.

474. Which type of individual account allows for investments held in that account to go straight to a named beneficiary outside of probate?
     • Account titled JTWROS
     • TOD account
     • Testamentary account
     • Advisory account

     Correct answer: TOD account

     A simple way for an individual account owner to ensure that the assets in the account pass directly to the named beneficiary is to use the Transfer on Death (TOD) option. Although the assets in a JTWROS account pass to the survivor without probate, the question specifies an individual, not a joint account.

475. If the Smiths want to open a joint account at AAA Securities Corporation and have their securities transferred to their 3 daughters upon the death of the last surviving account holder, their agent should recommend that the Smiths open
     • A joint tenancy account with no beneficiary designated for it
     • A tenancy in common carrying a transfer on death registration
     • A joint tenancy account with a trading authorization in place
     • A joint tenancy account with a transfer on death registration

     Correct answer: A joint tenancy account with a transfer on death registration

     A joint tenancy account gives the surviving spouse immediate ownership of the whole account, and a transfer on death registration then names the daughters as the beneficiaries who take when the last joint tenant dies. Both pieces are needed. A joint tenancy account with no beneficiary designated stops at the second spouse's death and then passes under a will. A tenancy in common carries no survivorship, and a transfer on death registration may be added only to individual and joint-with-survivorship accounts, so pairing it with a tenancy in common does not work. A trading authorization merely lets someone place orders; it ends at death and transfers nothing.

476. Mr. and Mrs. Williams are a retired couple receiving most of their income from a diversified portfolio of high-quality bonds and preferred stock. One of the reasons that life insurance might be a useful addition to their overall planning is that
     • It supplies a death benefit, escaping all of the federal estate taxes
     • It supplies cash at death, avoiding a forced sale of taxable holdings
     • It supplies each yearly dividend as a deduction on the federal return
     • It supplies a cash value that accumulates entirely free of income tax

     Correct answer: It supplies cash at death, avoiding a forced sale of taxable holdings

     The couple's income comes from the portfolio itself, so the danger at death is being forced to sell bonds and preferred stock to pay final expenses and settlement costs. A death benefit supplies that cash instead, and the income-producing assets stay intact. The other three statements are untrue. Proceeds are included in the insured's gross estate when the insured owns the policy, so they are not exempt from federal estate tax. Neither premiums nor policy dividends are deductible on the owner's return. And cash value builds tax deferred, not free of income tax, since a surrender above basis is taxable.

477. A client with a sizable estate would probably find it most efficient to pay estate taxes with
     • Cash
     • Proceeds from the liquidation of a tax-deferred retirement plan
     • Proceeds from a life insurance policy
     • Proceeds from the liquidation of a diversified portfolio

     Correct answer: Proceeds from a life insurance policy

     In general, people with estates where there is a potentially large estate tax liability find that the most efficient way to pay those taxes is through a life insurance policy.

478. A grantor retained annuity trust is a planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize
     • Property taxes
     • Income taxes
     • Excise taxes
     • Estate taxes

     Correct answer: Estate taxes

     A GRAT is an estate planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor.

479. A client of yours is getting older and is concerned about having her wishes met relating to medical issues when she is no longer capable of communicating them. The most appropriate vehicle for her would be
     • An incapacitation will
     • A joint and survivors will
     • A life support will
     • A living will

     Correct answer: A living will

     A living will, more commonly known as an advance health care directive or medical directive, is used to convey the individual's wishes for life support and other similar issues involving end-of-life matters. The other terms are bogus.

480. Rendering investment advice requires knowing certain information about your client. Which of these would be the least reliable source of that information?
     • Your firm’s confidential planning questionnaire
     • Client’s income tax returns
     • Face-to-face meeting with the client
     • Client’s Facebook page

     Correct answer: Client’s Facebook page

     There are a number of ways to gather information about your client's financial resources, but it is highly unlikely that a social media page would be one of them.

481. In general, the first step an investment adviser should take with a new client is
     • Information gathering
     • Making suitable recommendations
     • Monitoring the portfolio
     • Explaining the risks of investing

     Correct answer: Information gathering

     Until the investment adviser has gathered the necessary information, no recommendations can be made. An explanation of the risks comes after gathering the information because that informs the IA of the investor's risk tolerance and investing experience.

482. In administering a joint account, a member firm's responsibilities concerning suitability determination and information disclosure apply to
     • The person with the greatest capital contribution
     • All persons who jointly own the account
     • The person with trading authority for the account
     • The person whose Social Security number is on the account

     Correct answer: All persons who jointly own the account

     Suitability rules apply to all owners in a joint account.

483. An investment adviser would be least likely to gather information about a new client
     • By using a questionnaire
     • On a smartphone app
     • During a face-to face interview
     • From social media

     Correct answer: From social media

     There are many different ways to gather the necessary information about a new client, but it is highly unlikely that an investment adviser would rely on social media posts.

484. One of the tasks of an investment adviser representative is gathering information to complete a client financial profile. Among the sources of this information would be all of the following except
     • The client’s social media accounts
     • The client’s tax returns
     • The client’s life insurance policies
     • The client’s bank and brokerage statements

     Correct answer: The client’s social media accounts

     Although there are some people who divulge a great deal of personal information on their social media accounts, those are not the most reliable sources of the financial numbers an IAR needs to properly evaluate a client's financial position. Tax returns, bank and brokerage account statements, and life insurance policies (especially those with cash value) are a window to the client's assets.

485. An adviser always inquires into her clients' investment objectives, financial situations, and needs. The investment adviser is
     • Violating her ethical obligation regarding confidentiality of client information
     • Determining whether she has any inherent conflicts of interest with her clients
     • Obtaining the information required to fulfill her professional obligation regarding suitability
     • Giving herself an unethical advantage regarding how much the client can afford to spend on an advisory fee

     Correct answer: Obtaining the information required to fulfill her professional obligation regarding suitability

     Investment advisers are under a professional obligation to inquire into a client's investment objectives, financial situation, and needs, and to make recommendations consistent with that information. Conflicts of interest would not arise based on an individual client's suitability profile. Conflicts of interest result from actions of the adviser, regardless of the needs of the client.

486. An investment advisory firm requires all new clients to complete a 4-page questionnaire before conducting the first meeting. This would be known as
     • The investment adviser’s brochure
     • The client disclosure document
     • Fulfilling the requirements of the CIP
     • The information-gathering stage

     Correct answer: The information-gathering stage

     The first step in any adviser's relationship with a client is information gathering. A popular way of doing this is by using a questionnaire.

487. John and his sister, Alice, open a margin account as JTWROS. John contributes $50,000, and Alice contributes $25,000. They have agreed that Alice will trade the account, and they will share in the profits and losses equally. As their agent, you would gather information regarding suitability for
     • Either, because in a JTWROS account the owners share equally
     • Alice, because she will be trading the account
     • John, because he has made the larger contribution
     • Both, because information regarding all owners is relevant

     Correct answer: Both, because information regarding all owners is relevant

     When determining suitability and making recommendations to the owners of a joint account, it is the agent's responsibility to know each and every customer, regardless of their contribution or participation level.

488. Your firm onboards a new investment advisory client. Which of the following would be the most appropriate way to obtain information about the client's objectives and constraints?
     • A face-to-face interview held at the client's own home
     • A brief look at the client's year-end account holdings
     • A credit report on the client's current consumer debts
     • A photocopy of the client's most recent federal return

     Correct answer: A face-to-face interview held at the client's own home

     Objectives and constraints are personal facts that have to come from the client, so a face-to-face interview is the way to gather them, and meeting in the client's own home shows the adviser how the client actually lives. The other choices are real records an adviser may see, but none of them states what the client wants. Account holdings show what was bought, not why. A credit report shows borrowing history. A tax return shows last year's income and deductions. Each is evidence about the past; none is a statement of objectives or constraints.

489. If an investment adviser uses a client questionnaire to determine a client's financial situation, the adviser is
     • Acting unethically, as this information may be used to determine how large an advisory fee to charge
     • Acting ethically, as the information is necessary to determine the suitability of recommendations
     • Acting correctly to determine if a conflict of interest exists
     • Acting unethically, as client information is confidential

     Correct answer: Acting ethically, as the information is necessary to determine the suitability of recommendations

     Advisers must make reasonable inquiry into the client's needs, investment objectives, and financial situation to make suitable recommendations. Advisers must keep client information confidential and not disclose the information to any third party without the client's consent. Conflicts of interest must be disclosed, but that is not the reason for obtaining client information. The adviser's fee may be based on the services performed, advice provided, and/or assets under management, but not on the client's financial situation.

490. Several investors open an account in joint tenancy. Financial information is required on which of the following investors?
     • The majority of the investors
     • All the investors
     • Only the one authorized to trade the account
     • The largest investor only

     Correct answer: All the investors

     When a joint account is opened, financial information should be obtained on all the account owners.

491. An investment adviser would be least likely to gather financial planning information about a client from
     • The client’s Tweets
     • A detailed financial planning questionnaire
     • A 2-hour lunch meeting
     • An hour-long WhatsApp chat

     Correct answer: The client’s Tweets

     There are a number of ways to gather information about your client's financial resources, but it is highly unlikely that a social media page would be one of them.

492. An individual's net worth is
     • The figure disclosed on the individual's personal income statement
     • The accumulated market value of property and investments possessed
     • The surplus of the individual's earnings over regular expenditures
     • The difference between the individual's assets and the liabilities

     Correct answer: The difference between the individual's assets and the liabilities

     Net worth is what remains after every liability is subtracted from every asset, and it is read off the personal balance sheet. The personal income statement reports income and expenses over a period and never produces net worth. The surplus of earnings over regular expenses is discretionary cash flow, a different figure entirely. Adding up property and investments gives gross assets, and leaving the debts out overstates the client's position: someone can own a great deal and still have a negative net worth.

493. For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis?
     • Pension plan
     • Sole proprietorship
     • General partnership
     • C corporations

     Correct answer: General partnership

     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.

494. To maintain the proper portfolio balance for a client, it would be most appropriate to review the portfolio at least
     • Annually
     • Client and portfolio review is not necessary
     • Every 10 years
     • Every two years

     Correct answer: Annually

     Most advisers would suggest that a client's life situation and portfolio should be reviewed at least annually. More frequently would not be inappropriate.

495. Which of the following items is NOT necessary to establish before helping a client open an investment account?
     • Emergency fund
     • Adequate life insurance
     • Zero balance on all credit cards
     • Established short- and long-term investment goals

     Correct answer: Zero balance on all credit cards

     Although credit card debt may carry a high interest rate, no investment plan should be started without an emergency fund, adequate life insurance, and a set of goals. In fact, it is possible that the client is carrying the balance because of a very low promotional rate.

496. An investment adviser representative is preparing a financial plan for a new client. As part of the data collection process, the IAR needs to collect the relevant information to analyze the client's cash flow. Included in the cash flow statement would be all of the following EXCEPT
     • Assets
     • Interest on savings
     • Income taxes
     • Salary

     Correct answer: Assets

     The income statement is the basis for an individual's cash flow statement. Rather than assets and liabilities, as would be found on a balance sheet, the concern is measuring income and expenses.

497. Searching Out New Growth (SONG) is a venture capital fund. As such, all of the following statements are true EXCEPT
     • SONG only issues securities which are, except in extraordinary circumstances, non-redeemable
     • SONG’s investment adviser is exempt from registration
     • SONG must have less than $150 million in assets in the fund
     • SONG is not registered under the Investment Company Act of 1940

     Correct answer: SONG must have less than $150 million in assets in the fund

     Although venture capital funds are included in the general definition of private funds, unlike the private equity fund, there is no ceiling on the size of the fund before the adviser loses the exemption. Advisers to VC funds are exempt from registration. The funds themselves do not register with the SEC under the Investment Company Act of 1940 (and don't register with the states as well). These investments do not offer ready liquidity.

498. The term "private fund", as defined under federal and state law, would not apply to
     • An issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that act
     • A hedge fund
     • A venture capital fund
     • A leveraged ETF

     Correct answer: A leveraged ETF

     ETFs are publicly traded. Hedge funds and venture capital funds meet the definition of a private fund which is, "an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of that act."

499. The Investment Advisers Act of 1940 would consider each of the following investment advisers to be exempt from registration EXCEPT
     • An adviser whose only clients are insurance companies
     • An adviser whose only clients are venture capital funds
     • An adviser whose only clients are banks
     • An adviser who maintains an office in only one state, advises only residents of that state (none of whom is a private fund), and gives advice relating solely to securities not traded on any national exchange

     Correct answer: An adviser whose only clients are banks

     Advising banks only does not qualify one for the exemption. 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.

500. In which of the following cases is the exemption from registration with the SEC not based on the value of assets under management?
     • An investment adviser that acts as an adviser solely to one or more national banks
     • An investment adviser with assets under management of less than $25 million
     • An investment adviser that acts as an adviser solely to one or more venture capital funds
     • 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

     Correct answer: An investment adviser that acts as an adviser solely to one or more venture capital funds

     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.

501. One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that
     • They have assets of less than $150 million
     • They are not registered as investment companies
     • Their advisers are exempt from filing reports on Form ADV
     • They have no more than 100 investors

     Correct answer: They are not registered as investment companies

     Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file a Form ADV Part 1 answering most of the questions on the Form.

502. On last year's annual updating amendment filed with the SEC, Alpha Investment Advisers indicated that it had more than $140 million in assets under management. Due to a reduction in the size of the firm, this year's annual updating amendment shows that assets under management have fallen to the $75 million level and are expected to remain there. Which of the following actions are required for Alpha?
     • Withdraw from SEC registration within 180 days of the adviser's fiscal year-end
     • Do nothing and continue as a federal covered adviser
     • Withdraw from SEC registration immediately
     • Withdraw from SEC registration within 90 days of the adviser's fiscal year-end

     Correct answer: Withdraw from SEC registration within 180 days of the adviser's fiscal year-end

     If an adviser reports on its annual updating amendment that it has less than $90 million under management and it is not otherwise eligible to register with the SEC, it must withdraw from SEC registration within 180 days of the adviser's fiscal year-end by filing Form ADV-W. The adviser could consult the securities departments of states in which it maintains offices or conducts business to determine the appropriate state registration requirements.

503. Under current regulations, registration with the SEC is optional for all of the following investment advisers EXCEPT
     • Midwestern Asset Managers, an advisory corporation with $53 million registering in 17 states
     • CEF Investment Managers, a partnership that advises a registered $90 million closed-end fund
     • Grand Visions Advisers, a sole proprietorship that manages $104 million for retail customers
     • Employee Benefit Specialists, a pension consultant holding $225 million in ERISA plan assets

     Correct answer: CEF Investment Managers, a partnership that advises a registered $90 million closed-end fund

     An adviser to a registered investment company must register with the SEC, so it is the one firm here with no choice, which makes it the exception the stem asks for. The size of the fund is beside the point; even at $90 million the adviser registers federally. For the other three, SEC registration is available but optional. A mid-size adviser that would otherwise have to register in 15 or more states may register federally instead. An adviser with at least$100 million but under $110 million may choose either the states or the SEC. A pension consultant becomes eligible once it reaches$200 million in plan assets.

504. An investment adviser is registered in States A and B with its principal office in State B. The Administrator of State A can request to see
     • Internal communications regarding the company's participation in a local charitable event
     • Proof that the IA meets State A's financial and recordkeeping requirements
     • Advertisements run in State A
     • Sales records relating to clients who are residents of State B

     Correct answer: Advertisements run in State A

     The Administrator of State A can request that advertisements placed in his state be filed because that is business relating to his state. As long as the IA meets the "home" state's financial and recordkeeping requirements, that is good everywhere.

505. Which of the following firms would be a federal covered adviser?
     • GHI Consultants, a sole proprietorship managing $15 million belonging to high-net-worth individuals
     • ABC Money Managers, a partnership with $112 million under management
     • DEF Fund Managers, a corporation managing an unregistered hedge fund with $20 million in assets
     • XYZ Broker-Dealer with custody over $50 million of clients' invested assets

     Correct answer: ABC Money Managers, a partnership with $112 million under management

     The structure of the adviser is irrelevant; if assets under management equal $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply. A broker-dealer is excluded from the definition of investment adviser if investment advice is incidental to its business. Custody has nothing to do with giving advice.

506. A firm is registered as an investment adviser under the Investment Advisers Act of 1940. It has decided to raise its annual management fee from $1,500 to $1,800 and require that it be paid 1 year in advance instead of quarterly. The firm would
     • Continue doing business as before because the firm was already charging more than $1,200 per year
     • Be in violation of the law that prohibits pre-payments more than 6 months in advance
     • Need SEC permission to make this change
     • Now come under the requirement to include a balance sheet as part of its brochure

     Correct answer: Now come under the requirement to include a balance sheet as part of its brochure

     For federal covered investment advisers, a prepayment in excess of $1,200 and for periods of 6 months or more in advance (substantial prepayment) requires the adviser to submit an annual audited balance sheet as part of its ADV Part 2 (and brochure). Previously, even though the firm's fee was in excess of $1,200, because it was collected on a quarterly basis, the firm did not fall under the balance sheet rule. Had this been a state-registered IA, the answer would have been the same, even though the dollar limit is $500 rather than $1,200. That is for the reason given above—the former fee was charged quarterly and the substantial prepayment definition requires both exceeding a stated dollar amount ($500 or $1,200) and it being for 6 months or more in advance.

507. Which of the following firms in the business of rendering investment advice for compensation would be considered a federal covered adviser?
     • JKL Pension Consultants, a management firm providing services to employee benefit plans, and currently has $179 million under management
     • DEF Fund managers, a corporation managing an unregistered hedge fund with $10 million in assets
     • ABC Money Managers, a partnership with $115 million under management
     • GHI Consultants, a sole proprietorship, managing $82 million belonging to high-net-worth individuals

     Correct answer: ABC Money Managers, a partnership with $115 million under management

     It makes no difference what the structure of the adviser is. As long as the assets under management are $110 million or more, SEC registration is required. If the investment company is registered under the Investment Company Act of 1940, the adviser must be registered, regardless of size. The hedge fund is an unregistered fund, so the rule does not apply to it. Pension consultants are not eligible for SEC registration until their AUM reaches $200 million.

508. Under the Uniform Securities Act, Paul must register as a state-registered investment adviser if he
     • Opens an investment advisory business as a sole proprietor in New Jersey with the intention of advising individual clients on the advisability of investing in securities. Paul will have $100 million in AUM within 120 days of opening.
     • Opens an investment advisory business as a sole proprietor in New Jersey with the intention of advising individual clients on the advisability of investing in securities. Paul will have $90 million in AUM within 120 days of opening.
     • Becomes a full-time employee of AAA Investment Advisers, Inc., where he will advise clients whose assets under his discretion will exceed $200 million
     • Sells registered securities on a commission basis for a registered broker-dealer

     Correct answer: Opens an investment advisory business as a sole proprietor in New Jersey with the intention of advising individual clients on the advisability of investing in securities. Paul will have $90 million in AUM within 120 days of opening.

     Being in the business of advising individual clients on the advisability of investing in securities requires one to register as an investment adviser, either with the state or the SEC. The key is the assets under management. If a new IA reasonably believes that he will have AUM of at least $100 million within the first 120 days of registering, he is permitted to register with the SEC. Of course, if it reaches $110 million, then SEC registration is required. Reaching $90 million is not enough and, therefore, registration with the state would be the only option here. As a full-time employee of AAA Investment Advisers, Inc., he would have to register as a registered investment adviser representative and will not be a registered investment adviser (the firm). Selling registered securities under the supervision of a broker-dealer would require an agent registration with the state and the SEC.

509. Which of the following statements is CORRECT?
     • A state-registered investment adviser collecting fees of $500 for 6 months or more in advance, is considered to be receiving a substantial prepayment.
     • State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients.
     • Federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients.
     • Both state-registered and federal covered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients.

     Correct answer: State-registered investment advisers who have custody of clients' securities are required to provide audited balance sheets to their clients.

     It is only state-registered investment advisers who must provide audited balance sheets to clients for whom they maintain custody. In order to be considered a substantial prepayment of fees, state laws require that they be more than $500 for 6 or more months in advance.

510. A federal covered investment adviser is a person
     • Registered, or exempt from registering, under the state Uniform Securities Act
     • Registered, or given a waiver, by the North American Securities Administrators
     • Registered, or excluded from the definition, under the Investment Advisers Act
     • Notice filed with the securities Administrator wherever it maintains an office

     Correct answer: Registered, or excluded from the definition, under the Investment Advisers Act

     A federal covered investment adviser is one registered with the SEC under the Investment Advisers Act of 1940, or one excluded from that Act's definition of investment adviser. State registration under the Uniform Securities Act is the opposite status, and being exempt from state registration does not confer federal covered status either. NASAA is the association of state administrators; no adviser registers with it or receives a waiver from it. Notice filing is something a federal covered adviser may have to do once it already holds that status, so it describes a consequence rather than the definition.

511. An investment adviser (IA) has its primary office in State A. They have branches in states B and C, and they advertise in states D, E, and F. What net capital requirements must they meet?
     • Where its principal office is located
     • All the states combined
     • Whichever state is the highest
     • The state where the largest number of its clients reside

     Correct answer: Where its principal office is located

     The Administrator of every state, other than State A, follows the rule that every investment adviser that has its principal place of business in a state other than his state need maintain only the minimum capital as required by the state in which the investment adviser maintains its principal place of business, provided the investment adviser is licensed in that state (State A) and is in compliance with that state's minimum capital requirement.

512. Under the Investment Advisers Act of 1940, an adviser's registration usually becomes effective how many days after it is filed?
     • 10
     • 45
     • 30
     • 20

     Correct answer: 45

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

513. All of the following statements regarding the registration of an investment adviser in a state are true EXCEPT
     • The adviser's registration expires on December 31 each year
     • The initial application must include a consent to service of process along with Form ADV and the appropriate fees
     • The annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process
     • If the investment adviser is not an individual, any officer or partner active in the advisory business is automatically registered as an investment adviser representative

     Correct answer: The annual renewal process involves payment of the appropriate fees and refiling of the consent to service of process

     The consent to service is a permanent document that remains on file with the Administrator; it need not be resubmitted for yearly renewal. The initial application for registration must include a consent to service of process along with Form ADV and the appropriate fees. If the investment adviser is not an individual, all officers or partners of the business entity that play an active role in the giving or supervision of giving advice are automatically registered as IARs.

514. Under the Uniform Securities Act, when must a consent to service of process be filed with the Administrator?
     • With the original application and renewal
     • With the original application only
     • When a case is pending
     • It need not be filed, unless requested by the Administrator

     Correct answer: With the original application only

     Initial applications for registration must be accompanied by a consent to service of process. This document becomes a permanent part of the application and appoints the Administrator to accept subpoenas on behalf of the applicant.

515. Bond prices are quoted as a percentage of
     • Market value
     • Conversion value
     • Par value
     • Stated value

     Correct answer: Par value

     Bond prices are quoted as a percentage of par value. On the exam, the par value of bonds is always $1,000.

516. Mr. Beale buys 10M RAN 6.6s of 32 at 67. What is his total purchase price?
     • $10,200
     • $6,700
     • $6,600
     • $10,000

     Correct answer: $6,700

     For those of you not familiar with bond listings, this means that Beale bought $10,000 (10M) of the RAN Corporation bonds with a 6.6% coupon (interest rate stated on the face of the bond) that mature in 2032 (32). The price is 67, which represents 67% of $10,000, or $6,700.

517. An investor purchases a Treasury note and the confirmation shows a price of $102.21. Rounded to the nearest cent, the investor's cost, excluding commissions, is
     • $1,022.10.
     • $102.21.
     • $1,022.21.
     • $1,026.56.

     Correct answer: $1,026.56.

     Treasury notes are quoted in 32nds where each 32nd equals $.3125. The 102 in the quote equals $1,020 and the 21/32 is an additional $6.56 bringing the total to $1,026.56.

518. A bond selling for $20 above par would be quoted
     • 120
     • 1,020.00
     • 102
     • 1,200.00

     Correct answer: 102

     Bonds are quoted in percentages of $1,000 (par) (1% of $1,000 = $10). The proper quote would be 102; 102 is 102% of $1,000.

519. The Straitened Corporation has filed for bankruptcy. One of your clients held a mortgage secured by the corporation's building. When the building was sold, the proceeds were less than the mortgage balance creating a deficiency balance. Where does this investor's claim stand?
     • As a general creditor on a pro rata basis
     • After the unsecured creditors
     • There is no further claim once the building has been sold
     • After the secured creditors

     Correct answer: After the unsecured creditors

     Secured creditors, such as those holding mortgage bonds, always have priority in a liquidation. If it happens, as in this question, that the asset(s) securing the debt are insufficient to satisfy the claim, the balance is considered to be an unsecured debt. In that case, those bondholders are considered general creditors and share in any remaining assets proportionate to the amount of the deficiency. The Latin legal term for this is pari passu, but we don't expect you'd see that on the exam.

520. Which of the following is the most significant difference between corporate secured debt and unsecured debt?
     • Secured debt generally has longer maturities than unsecured debt.
     • Secured debt has specific collateral pledged to protect the lender’s interest.
     • Secured debt is rarely callable while unsecured debt is generally callable.
     • Secured debt will carry a higher coupon than that issuer’s unsecured debt.

     Correct answer: Secured debt has specific collateral pledged to protect the lender’s interest.

     The key difference between secured debt and unsecured debt of a corporation is the concept of security. Secured debt gets its name from the fact that some asset, or assets, of the issuer are pledged as collateral for the loan. Unsecured debt does not have that pledge – the lender is relying on the general credit standing of the borrower. The length of maturities is not related to the debt being secured or unsecured and the same is true about the call feature. The increased safety resulting from the pledge of the collateral results in the secured debt carrying a lower interest cost than the unsecured debt because of the additional safety.

521. Corporate bonds are considered safer than common stock issued by the same company because
     • Bonds place the issuer under an obligation but stock does not
     • The par value of bonds is generally higher than that of stock
     • If there is a shortage of cash, dividends are paid before interest
     • Bonds and similar fixed-rate securities are guaranteed by the FDIC

     Correct answer: Bonds place the issuer under an obligation but stock does not

     A bond represents a legal obligation to repay principal and interest by the company. Common stock carries no such obligation. FDIC coverage is for bank deposits, not securities.

522. An unsecured long-term debt security issued by a corporation is known as
     • A debenture
     • An equipment trust certificate
     • A mortgage bond
     • A collateral trust bond

     Correct answer: A debenture

     A debenture is a long-term debt security issued by a corporation with no specific asset pledged as security for the loan.

523. Corporate long-term debt securities that are issued on the general credit of the issuer and are NOT otherwise secured are called
     • Prior lien bonds
     • Debentures
     • General obligation bonds
     • Preferred stock

     Correct answer: Debentures

     Debentures are corporate long-term debt securities issued on the general credit of the corporation and are not backed by any specific assets. The term prior lien means there is a secured claim against a specific asset. Preferred stock is not a debt security, and general obligation bonds are municipal, not corporate, securities.

524. An investment in which of the following would expose the investor to the greatest capital risk?
     • Preferred stock
     • Debentures
     • Common stock
     • Mortgage bonds

     Correct answer: Common stock

     Capital risk is the risk of losing capital. Of the choices given, the greatest risk of losing capital is the common stock, as common shareholders come last in liquidation under bankruptcy proceedings.

525. In general, from the choices given, the type of security offering the greatest degree of safety to an investor is
     • Common stock
     • Preferred stock
     • A mortgage bond
     • A debenture

     Correct answer: A mortgage bond

     Debt securities, because they are an obligation of the issuer, are generally considered safer than equity securities. Secured debt is safer than unsecured debt. The only one of these debt obligations with pledged assets as security for the loan is the mortgage bond. Debentures are unsecured corporate debt obligations.

526. An advantage of being a bondholder compared with owning common stock in the same corporation is that
     • Income payments are more reliable
     • There is limited liability
     • The bondholder can select the optimum time to have the issuer redeem the bond
     • Common stock has priority over the bond in the event of liquidation

     Correct answer: Income payments are more reliable

     Even though bond interest is semiannual, while dividends are typically paid quarterly, the payment of interest is an obligation that comes ahead of the payment of any dividend. Companies can elect to skip or reduce their dividends, but not their interest payments.

527. Bright-Lite Incandescent Bulb, Inc., has recently suffered significant operating losses and is planning a bankruptcy filing. Which of the following debt issues have the most junior claim?
     • Common stock
     • Mortgage bonds
     • Senior notes
     • Debentures

     Correct answer: Debentures

     Although the most junior claim of all is that of the common stockholder (equity), this question is about the priority of debt issues. In that case, the most junior (last in line) of the creditors are the holders of the company's debentures.

528. An investor is analyzing various risks related to corporate and government bonds. She is interested in finding a risk that is more specific to corporate bonds than to government bonds. Which of the following options correctly defines that risk?
     • Purchasing power risk
     • Default (credit) risk
     • Liquidity risk
     • Interest rate risk

     Correct answer: Default (credit) risk

     Default risk — also called credit risk — is the risk that the issuer fails to make timely interest payments or to repay principal at maturity, and it is the risk that genuinely separates corporate bonds from government bonds. U.S. Treasury securities are backed by the full faith and credit of the U.S. government and are generally deemed free of default risk, while most other bonds, corporates included, carry some degree of credit risk; that is why corporate issues are rated and graded and Treasuries effectively are not. Interest rate risk is not specific to corporates: every bond carries it, and when rates rise the price of an outstanding Treasury falls just as a corporate’s does — long-maturity Treasuries are in fact among the most rate-sensitive bonds in the market. Purchasing power (inflation) risk affects both alike as well, since it is the erosion of the real value of a fixed coupon regardless of who issued it. Liquidity risk differs only in degree: Treasuries trade in the deepest market in the world, but many corporate bonds are exchange listed or actively quoted, so liquidity does not define the corporate-versus-government distinction the way credit risk does.

529. A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim
     • Ahead of the common stock, but after the preferred stock and the bonds
     • Ahead of the common stock and the preferred stock, but after the bonds
     • Behind the bonds, the preferred stock, and the common stock
     • Ahead of the common stock, the preferred stock, and the bonds

     Correct answer: Ahead of the common stock and the preferred stock, but after the bonds

     Any debt security, even a subordinated debenture, has a claim ahead of all equity. However, it is subordinated to all other debt.

530. With respect to safety of principal, of the following investments, the least risky is
     • Equity options
     • Corporate AA debentures
     • Common stock
     • Exchange-listed warrants

     Correct answer: Corporate AA debentures

     The least risky investment listed is the corporate debenture because, as a debt instrument, it has priority over the others.

531. Many fixed-income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk?
     • Aa-rated corporate debenture
     • Baa-rated municipal revenue bond
     • A-rated general obligation municipal bond
     • Ba-rated corporate mortgage bond

     Correct answer: Aa-rated corporate debenture

     A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk.

532. High-yield bonds are frequently called junk bonds. Which of the following expresses the highest rating that would apply to a junk bond?
     • CC
     • BB
     • CCC
     • BBB

     Correct answer: BB

     Investment-grade bonds run from a highest Standard and Poor's rating of AAA (Aaa − Moody's) down to BBB (Baa − Moody's). When the rating gets to BB (or Ba) the bond is considered high yield, or a junk bond.

533. One of the likely consequences of a rating downgrade on a bond is
     • A reduction in the current yield that the bond will pay
     • An increase in the coupon rate the bond issuer must pay
     • A narrowing of the spread it earns over a Treasury bond
     • A decrease in the market price at which the bond trades

     Correct answer: A decrease in the market price at which the bond trades

     A downgrade tells the market the issuer is riskier, so buyers demand a higher yield, and because the coupon is fixed the only way the yield can rise is for the price to fall. Current yield is the coupon divided by the price, so a falling price pushes current yield up rather than down. The coupon rate is set at issuance and the issuer cannot raise it in response to a downgrade. And the spread over Treasury debt widens on a downgrade instead of narrowing, since that extra yield is exactly the compensation investors now demand for the added credit risk.

534. Which of the following would be least likely for an investment adviser representative to consider before recommending a municipal security to a customer?
     • The customer's highest education level
     • The customer's state of residence
     • The customer's tax status
     • The municipal security's rating

     Correct answer: The customer's highest education level

     The customer's state of residence and tax status are essential when determining suitability for a municipal security. The security's rating is also critical because it measures the safety and quality of the bond. The investor's education level rarely enters into the suitability equation.

535. Which of the following statements about municipal bonds is NOT true?
     • Municipal bonds are generally considered riskier than corporate bonds.
     • Municipal bonds generally carry lower coupon rates than corporate bonds of the same quality.
     • The interest on municipal bonds is usually not subject to federal income tax.
     • Municipal bonds are bonds issued by governmental units at levels other than the federal.

     Correct answer: Municipal bonds are generally considered riskier than corporate bonds.

     Municipal bonds are generally considered second only to treasury instruments in relative safety.

536. If a resident of New York City purchases an Albany, New York, general obligation bond that yields $600 of interest during the course of the year, how is the interest taxed?
     • Taxation is deferred until the bond matures.
     • It is subject to state income tax at ordinary rates.
     • It is not subject to federal income tax.
     • It is subject to federal income tax at ordinary rates.

     Correct answer: It is not subject to federal income tax.

     Interest from municipal bonds is exempt from federal income tax. While municipal bond interest is usually taxed at the state level, most states have an internal rule that exempts interest on their state and local municipal bonds.

537. Which of the following is a characteristic of an investment-grade general obligation municipal bond?
     • The bond's main source of investment risk is financial risk.
     • The bond retains a direct claim on specific property.
     • The taxing authority of the issuing government or municipality backs the issue's repayment.
     • The bond's periodic interest is paid to investors only when sufficient revenue is collected by the municipality.

     Correct answer: The taxing authority of the issuing government or municipality backs the issue's repayment.

     General obligation bonds are backed by the full faith and credit of the government issuing the debt and are repaid through taxes collected by the government body. The main source of investment risk for a municipal security is interest rate risk. General obligation bonds do not retain a claim on specific property. The government issuing the bonds uses its taxing authority to pay the interest and repay the principal. Revenue bonds, not general obligation bonds, are dependent on revenue collected from the financed project.

538. An investment adviser should develop an investment policy based on the needs and objectives of the client. When the client is a business entity structured as a general partnership, the investment policy would have to consider
     • The liability of the general partner
     • The mean requirement of the wealthiest and the poorest partner
     • The number of limited partners
     • The objectives of all the partners on a collective basis

     Correct answer: The objectives of all the partners on a collective basis

     Because all income and gains pass through to the partners, and because there is unlimited personal liability for all general partners, we must examine the objectives of each of them to determine proper suitability.

539. John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities?
     • $138,000
     • $122,000
     • $130,000
     • $150,000

     Correct answer: $130,000

     The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for.

540. Which of the following items would be found on a family balance sheet?
     • Annual salary
     • Spouse’s engagement ring
     • Income taxes paid
     • Dividends and interest received

     Correct answer: Spouse’s engagement ring

     A balance sheet, whether for a family or a business, shows assets and liabilities, not income and expenses. The ring is certainly an asset; the others are income or expenses.

541. The Jones family has scheduled an initial visit with a financial planner. Mr. Jones has an annual salary of $70,000, and this is their first attempt at financial planning. Which of the following should be the first step taken by the financial planner?
     • Establish an emergency fund
     • Pay off credit card debt
     • Set goals and dates for reaching them
     • Determine a reasonable fee for designing the plan

     Correct answer: Pay off credit card debt

     There are many questions on the exam where you will be forced to choose between two possible answers, only one of which is correct. In many cases, it is strictly a matter of opinion, but only NASAA's opinion counts. This is one of them. Goal setting is important, but the regulators feel that the first step in any plan is making sure that there is a "rainy day" fund. We can argue about that because some will say that a good plan can be used to establish that fund where none has existed before. But, please go with the right choice.

542. An individual owns assets worth $500,000 and has debts of $300,000. What is the individual's net worth?
     • $500,000.00
     • $300,000.00
     • $200,000.00
     • $800,000.00

     Correct answer: $200,000.00

     An individual's net worth equals the individual's assets minus his liabilities. Therefore, if someone has assets of $500,000 and debts of $300,000, the person's net worth is $200,000.

543. A business organized as a sole proprietorship wishes to open an advisory account. When preparing an investment policy statement, the IA would have to consider the objectives of
     • The business partners
     • The sole proprietor
     • The voting members
     • The equity holders

     Correct answer: The sole proprietor

     A sole proprietorship has exactly one owner, so the investment policy statement is built around that one person's objectives, time horizon and risk tolerance. Partners belong to a partnership, members to a limited liability company, and equity holders to a corporation. None of those roles exists in a sole proprietorship, so none of them has objectives for the adviser to weigh here.

544. A client of an investment adviser excitedly calls the adviser with the news that he is now going to handle his own investments. "I just read some great investment books, and now I know what to do." Based on the study of behavioral finance, it would appear that this individual is
     • Conservative
     • Overconfident
     • Anchored
     • Following the herd

     Correct answer: Overconfident

     The behavioral finance bias of overconfidence refers to the observation that experienced (and even some "rookie") investors tend to overestimate their ability and the accuracy of the information available to them.

545. Tactical Evaluation and Research (TEAR), a federal covered investment adviser, suggests the purchase of stock in a major tobacco company. The client explains that he doesn't want to invest in tobacco stocks because his father passed away from lung cancer. What kind of reason is this?
     • Geographic
     • Values
     • Economic
     • Environmental

     Correct answer: Values

     Because of the negative association with tobacco, this client's values are such that he would avoid owning stock in a tobacco company. Why not environmental? That isn't specific enough because growing tobacco is not an environmental issue and this client's personal experience has shaped his values. DUPLICATE

546. When it comes to creating a client profile, the information obtained is divided into 2 basic categories: objective and subjective. Which of the following is considered to be subjective information?
     • Salary
     • Attitude
     • IRA value
     • Net worth

     Correct answer: Attitude

     Subjective information is that which cannot be quantified. The investor's attitude is an example of this, while the other choices are all objective (you can attach a number to them).

547. Carol is opening an investment account with her agent and will be expected to disclose all the following items of financial or personal information EXCEPT
     • Employment information
     • Investment experience
     • Educational background
     • Financial objectives

     Correct answer: Educational background

     When an agent opens an account for a broker-dealer, the new account record captures the customer's employment information, investment experience and financial objectives, along with date of birth, annual income and net worth. Educational background is not on that list. Schooling says little about how much risk a customer can carry or what the account is meant to achieve, so it is not information the customer is asked to disclose.

548. A new client indicates a desire to avoid investing in mid-cap stocks because of large losses suffered several years ago. What type of consideration would this be?
     • Nonfinancial
     • Financial
     • Unsystematic
     • Systematic

     Correct answer: Nonfinancial

     There are 2 basic investment considerations, financial and nonfinancial. The former deals largely with quantifiable items and the latter with attic attitudinal ones. Wanting to avoid a certain type of asset is generally considered to be attitudinal. The fact that the mid-cap stocks lost money is probably a systematic risk, but that isn't what the question is asking.

549. Your client often makes irrational financial decisions because she bases her decisions on information that should have no influence on the decision at hand. The client's behavior is known as
     • Confirmation bias
     • Herd mentality
     • Overconfidence
     • Anchoring

     Correct answer: Anchoring

     Making irrational decisions based on information that should have no influence on the decision at hand is known as anchoring. Herd mentality is the tendency to follow the actions of a larger group, whether rational or not. Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers her abilities to be much better than they actually are.

550. The study of why people often make decisions using rules of thumb rather than rational analysis, basing those decisions on factors economists traditionally don't consider, such as fairness, past events, and aversion to loss, is known as
     • Behavioral finance
     • Systematic risk
     • Risk tolerance
     • Irrational finance

     Correct answer: Behavioral finance

     Today, through the study of behavioral finance, it is accepted that behavioral biases can cause investors to make financial decisions that are irrational.

551. Tammy has a strong feeling about a particular investment's future performance. She is constantly seeking information to validate her belief that this investment will greatly appreciate. However, she is dismissing any information which is contradictory to this stance. This is an example of which of the following?
     • Confirmation bias.
     • Herd theory
     • Anchoring effect
     • Prospect theory

     Correct answer: Confirmation bias.

     This scenario is an example of the confirmation bias which states that investors tend to look for information that supports their previously-established decisions and beliefs. Herd theory, or "following the herd", is when an investor jumps on the bandwagon following the lead of others. The anchoring effect is when you base your decisions on initial information received and find it difficult to move away from that decision.

552. Pemberton bought a stock share at $50 and wants to earn a profit, so he decided he will never sell it below $52. The company has now underperformed for multiple quarters as per street analysts, and the stock is down to $48. Pemberton continues to hold the stock in line with his original plan. In this case, Pemberton may be exhibiting
     • Herding bias
     • Anchoring bias
     • Overconfidence bias
     • Regret aversion bias

     Correct answer: Anchoring bias

     In behavioral finance, an anchoring bias is when people tend to base their decisions on reference points that are often arbitrarily chosen. In this case, Pemberton "anchored" his selling price to the $50 he paid for it and will not recognize changes in the market.

553. An investment adviser cannot adequately advise a client without knowing the client's financial status. When determining that status, it is important to differentiate between financial and nonfinancial considerations. Which of the following would be considered a financial consideration rather than a nonfinancial one?
     • Fact that both parents were smokers who died of lung cancer
     • Client’s membership in Greenpeace
     • Client’s marital status
     • Client’s stamp collection

     Correct answer: Client’s stamp collection

     Financial considerations are those which can be categorized as an asset or a liability (something that can be assigned monetary value). Although a stamp collection would not be considered a very liquid asset, it is nonetheless something of monetary value. The other choices are nonfinancial because you really can't put a number on them. The Greenpeace membership and the lung cancer deaths of the parents are likely indicators of certain investments that would probably not be suitable due to the values of the client.

554. One of your clients has a tendency to follow the actions of a larger group of people when making financial decisions, whether those actions are rational or not. The client's behavior is an example of
     • Herd mentality
     • Overconfidence
     • Anchoring
     • Confirmation bias

     Correct answer: Herd mentality

     This behavior is known as herd mentality. Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions, while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers his abilities to be much better than they actually are. Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.

555. All of the following statements regarding a client's attitudes, beliefs, and values are correct except
     • The IAR should give little weight to a client's beliefs when gathering data
     • The IAR should treat the opinions a client holds strongly as guiding values
     • The IAR should revisit the values that a client states as conditions change
     • The IAR should record the attitude a client shows along with financial data

     Correct answer: The IAR should give little weight to a client's beliefs when gathering data

     This is the statement that is not correct. Attitudes, beliefs and values shape what a client will actually accept, so the IAR has to weigh them throughout the information gathering process and carry them into every recommendation. The other three are accurate. Opinions a client holds strongly are precisely what we call values. Values shift as a client's conditions shift, so they must be revisited rather than recorded once. And these nonfinancial notes belong in the file beside the financial data, because a recommendation that ignores them will not be followed.

556. Which economic concept attempts to explain why investors behave irrationally?
     • Behavioral finance
     • Efficient market hypothesis (EMH)
     • Modern portfolio theory (MPT)
     • Laffer curve

     Correct answer: Behavioral finance

     There is a premise that investors are irrational when it comes to making investment decisions. The study of this is known as behavioral finance.

557. When interviewing a new client, the discussion leads to the damage done to the environment by oil spills. The client mentions the names of some large petroleum companies and says that she does not want stocks like that in her portfolio. In so doing, she is expressing
     • Nonfinancial consideration; her values
     • Financial consideration; she already has enough money
     • Nonfinancial consideration; her knowledge
     • Financial consideration; those companies don’t pay dividends

     Correct answer: Nonfinancial consideration; her values

     One of the nonfinancial considerations that must be reckoned with is the client's values. These are shaped by life experiences and will often influence investment decisions. If the client believes in saving the environment, then the IA (or IAR) needs to know what investments to avoid.

558. Caroline considers her investment skills to be much greater than they actually are. She takes credit for many decisions that have positive results but blames the economy when her investments do poorly. Caroline's behavior is an example of
     • Confirmation bias
     • Overconfidence
     • Regret aversion
     • Anchoring

     Correct answer: Overconfidence

     Caroline's behavior is an example of overconfidence. Confirmation bias is paying attention to information that supports a preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Regret aversion is when the investor prepares herself in such a way as to avoid distress over an adverse outcome.

559. From your meetings with Avery, you realize there is a tendency to follow the actions of a larger group of people when making financial decisions. It makes no difference if those actions are rational or not. Choose the behavioral finance theory that explains Avery's behavior.
     • Herding
     • Anchoring
     • Overconfidence
     • Confirmation bias.

     Correct answer: Herding

     This is an excellent example of herding (following the herd). Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions, while disregarding accurate, unsupportive information. Overconfidence occurs when investors consider their abilities to be much better than they actually are. Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.

560. A client excitedly calls his investment adviser with the news that he is now going to handle his own investments. "I just read some great investment books and now I know what to do." Based on the study of behavioral finance, it would appear that this individual is
     • Following the herd
     • Overconfident
     • Conservative
     • Anchored

     Correct answer: Overconfident

     The behavioral finance bias of overconfidence refers to the observation that experienced (and even some "rookie") investors tend to overestimate their ability and the accuracy of the information available to them.

561. The tendency of people to follow the actions of a larger group when making financial decisions, whether those actions are rational or not, is known as
     • Herd mentality
     • Overconfidence
     • Anchoring
     • Confirmation bias

     Correct answer: Herd mentality

     Each of the choices describes a form of behavior listed in the science of behavioral finance. The behavior in this question is known as herd mentality. Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions, while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers his abilities to be much better than they actually are. Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.

562. Which of the following is the least significant consideration in making an investment recommendation to a client?
     • Liquidity requirements
     • Educational background
     • Investment objectives
     • Financial situation

     Correct answer: Educational background

     Suitability rests on the client's financial situation, investment objectives and liquidity requirements, together with age, net worth and risk tolerance. Educational background is the weakest of the four, because it says nothing directly about capacity to bear loss or about what the money is for. A client with no degree may be highly experienced with markets, while a client holding an advanced degree in an unrelated field may not be.

563. You are onboarding a new client. Which of the following is the least important indicator of the client's risk tolerance?
     • Attitude toward taking a loss
     • Current age
     • Highest education level
     • Expected retirement date

     Correct answer: Highest education level

     Although those with more education might be able to understand the concept of risk versus reward, it is far more important to know the client's age, time horizon (expected retirement date helps there), and attitude toward taking a loss.

564. When developing a client profile, it is important to note both the financial and nonfinancial considerations. These can be categorized as those that are objective and those that are subjective. Included in the list of subjective considerations would be
     • Risk tolerance
     • Cash value of life insurance
     • The family balance sheet
     • Balance on the home mortgage

     Correct answer: Risk tolerance

     Subjective considerations are the nonfinancial ones—the ones that can't be expressed in monetary terms. Risk tolerance is one of the key subjective considerations to be evaluated.

565. An IAR has set up the initial meeting with a prospective advisory client. An important part of that meeting is gathering client data. Of the following items, which is generally considered to be the most important for preparing suitable recommendations?
     • Assets available for investment
     • Age of the prospect
     • Life stage
     • Risk tolerance

     Correct answer: Risk tolerance

     Although each of the choices represents information that is part of the data gathering process, an IA cannot make suitable recommendations without knowing the investor's risk tolerance.

566. What is among the most important nonfinancial considerations in determining the suitability of investments for a client?
     • Tolerance for risk
     • Assets under management
     • Rate of interest on Treasury bills
     • Client's income needs

     Correct answer: Tolerance for risk

     A client's risk tolerance is among the most important nonfinancial considerations when recommending an investment. The risk-free rate or the Treasury bill rate has no reference to the client's investment profile, but it serves as a comparison to evaluate the additional return expected versus additional risk taken. A client's income need is a financial, not a nonfinancial, consideration, and must be considered when determining the suitability of investments. The amount of assets the client has with the investment adviser representative is a financial, not a nonfinancial, consideration.

567. Low risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor?
     • Defined benefit pension plans
     • Trusts
     • Banks
     • Foundations

     Correct answer: Banks

     As with so many suitability questions, students frequently have to sit back and try to find a logical answer. Although the risk tolerance for all of these choices tends to be on the lower end of the scale, banks are different when it comes to liquidity needs. Banks tend to have high liquidity needs because they must be ready to meet withdrawals at any time by depositors. The nature of foundations, defined benefit pension plans, and trusts is such that they typically have lower liquidity needs than banks.

568. Which of the following is a factor that must be considered when constructing a portfolio?
     • Performance measurement
     • Client’s risk tolerance
     • Category of investment service required
     • Verification of the client’s identity

     Correct answer: Client’s risk tolerance

     While forming a portfolio or investment policy statement (IPS), gauging a client's risk tolerance is the key task.

569. Among investor objectives is preservation of capital. Which of the following would be most appropriate for inclusion in the portfolio of this kind of investor?
     • International funds
     • U.S. Treasury bonds
     • A money market fund
     • Blue-chip stocks

     Correct answer: A money market fund

     Preservation of capital means no fluctuations. Money market funds are the only logical choice here. True, the Treasury bonds do not have default risk, but because they can have maturities as long as 30 years, they are subject to interest rate risk.

570. Under the Investment Advisers Act of 1940, for how many years must records be kept after the end of the fiscal year in which an entry was made?
     • 1 year
     • 5 years
     • 10 years
     • 2 years

     Correct answer: 5 years

     Records must be kept for a full 5 years — the first 2 years in a in the firm's principal office — and are subject to SEC examination at any time. The 5-year requirement governs records of business activities. Additional rules require the articles of incorporation or partnership documents of the advisory firm and other business organizational documents to be kept for 3 years after termination of the enterprise.

571. Defalcator Investment Advisers (DIA), registered in States A, K, and R, would be required to provide a balance sheet as part of its brochure if it charged fees of
     • $500 for the next 3 months of advisory service.
     • $1,000 for the next year’s advisory service.
     • $500 for the next 6 months of advisory service.
     • $1,000 for the next 3 months of advisory service.

     Correct answer: $1,000 for the next year’s advisory service.

     State-registered investment advisers, who charge substantial prepayment of advisory fees, must include a balance sheet with their brochure. The definition of a substantial prepayment is: more than $500, 6 or more months in advance. The correct choice is the only one meeting both requirements. Remember, it isn't $500 or more, it is more than $500 and it must be for at least 6 months of service to count.

572. An agent and a broker-dealer maintain wrap fee accounts for several of their customers. Which of the following registrations is required?
     • Neither the broker-dealer nor the agent is required to have any license other than their regular securities license.
     • The agent must be registered as an investment adviser.
     • Only the registered principal would need to be registered in the state(s) in which they do business.
     • The firm must register as an investment adviser.

     Correct answer: The firm must register as an investment adviser.

     Once a broker-dealer handles wrap fee accounts, it loses the exclusion from the definition of investment adviser. Therefore, the firm must be registered with either the state or the SEC. Any agents handling these accounts would be registered as investment adviser representatives.

573. Create A Large Legacy (CALL), Inc., is a state-registered investment adviser with offices in States X, Y, and Z. CALL currently does not have a place of business in State W, but does have 5 retail clients who are residents there. Opening an account for which of the following prospective clients domiciled in State W would now require CALL to register in State W?
     • An insurance firm that wants to invest $750,000 of its cash
     • A county in State W investing $2 million of surplus revenue
     • A trust for 4 minor children holding $1.5 million in assets
     • A local bank that wants to place its $500,000 into reserves

     Correct answer: A trust for 4 minor children holding $1.5 million in assets

     A trust that is not an employee benefit plan is a retail client however large it is, so opening it would be the sixth retail account in State W and would carry CALL past the de minimis limit of five. Registration in State W would then be required. The four minor beneficiaries and the $1.5 million of trust assets do not change that. Insurance companies, banks and government bodies are institutional clients and do not count toward the de minimis limit at all, so an insurer, a county and a bank could each be taken on without triggering registration.

574. Which of the following is required to register as an investment adviser with the state securities Administrator?
     • The author of a book on money and banking that was sold to residents of the state in which it is published
     • An investment advisory firm that opens an office in the state with less than $100 million in assets under management
     • A person with no office in the state whose only advisory clients are investment companies and banks in the state
     • A newly formed investment advisory firm with $145 million in assets under management

     Correct answer: An investment advisory firm that opens an office in the state with less than $100 million in assets under management

     An investment adviser must register in a state if it manages less than $100 million in assets. Publishers of general circulation books are exempt from state registration, as are advisers with no offices in the state whose only customers are institutions, such as banks and investment companies, in the state. Investment advisers with $110 million or more in assets under management must register with the SEC, not the state Administrator.

575. Judy is in the business of giving general investment advice, suggesting appropriate asset allocation percentages, but not recommending specific securities. George's business model is giving investment advice and recommending specific securities. Assuming that both receive compensation, who must register as an investment adviser under the Uniform Securities Act?
     • Only Judy
     • Both
     • Only George
     • Neither

     Correct answer: Both

     Two of the 3 critical elements in the definition of investment adviser are whether the person provides advice regarding securities and receives compensation for doing so. (The third element is "being in the business" and the question states that both are). Even without recommending specific securities, the fact that Judy suggests asset allocation percentages constitutes investment advice. Both Judy and George provide advice regarding securities for compensation and must register, unless specific exemptions apply.

576. Perpetual Prosperity Advisers (PPI), a state-registered investment adviser, files an application to withdraw its registration as a registered investment adviser. Records pertaining to client accounts must be
     • Sent to the Administrator of the state in which PPI maintained its principal office
     • Destroyed once the withdrawal has become effective
     • Retained for the time period specified in the NASAA Model Rule on record keeping
     • Sent to the Administrator of the state in which the client was a resident

     Correct answer: Retained for the time period specified in the NASAA Model Rule on record keeping

     The NASAA Model Rule on record keeping requires that records relating to an investment adviser's clients be retained for a period of 5 years from the end of the fiscal year in which the record was made. Those records must be retained even though the firm is no longer in business.

577. Under the terms of the Uniform Securities Act, which of the following is an investment adviser for purposes of state regulatory jurisdiction?
     • A bank holding company's advisory subsidiary that manages $20 million
     • An accountant who offers incidental securities guidance to 12 clients
     • A commercial bank with three in-state offices advising its depositors
     • A federal covered adviser serving 40 clients inside this jurisdiction

     Correct answer: A bank holding company's advisory subsidiary that manages $20 million

     The Uniform Securities Act excludes banks, savings institutions and trust companies from the definition of investment adviser, but that exclusion does not reach a bank holding company's advisory subsidiary, so a subsidiary managing $20 million is an investment adviser subject to state jurisdiction. A commercial bank advising its own depositors falls squarely inside the bank exclusion. An accountant is excluded where securities advice is solely incidental to the practice and no special compensation is taken for it. A federal covered adviser performs advisory functions but is excluded from the state definition to avoid duplicate regulation.

578. Registration with the SEC as an investment adviser would be required for a person who
     • Limits the advice offered strictly to securities issued or guaranteed by the U.S. government
     • Acts as the investment adviser to an investment company registered under the Investment Advisers Act of 1940
     • Acts as the investment adviser to an investment company registered under the Investment Company Act of 1940
     • Limits the advice offered strictly to securities listed on the New York Stock Exchange (NYSE)

     Correct answer: Acts as the investment adviser to an investment company registered under the Investment Company Act of 1940

     If a person acts under contract to an investment company registered under the Investment Company Act of 1940 (investment companies do not register under the Advisers Act; only advisers do) is required to register with the SEC. Excluded from the definition of investment adviser are those whose only advice deals with securities issued or guaranteed by the U.S. government. With the exception of managing a registered investment company, registration with the SEC is based on assets under management (AUM), not the type of security advised on. A person whose advice relates solely to securities on the NYSE is required to register with the SEC only if AUM reaches $110 million.

579. Under certain conditions, the Uniform Securities Act provides that an Administrator may require a minimum net worth standard be met by an investment adviser. Which of the following would be an allowable asset in the computation of an investment adviser's net worth?
     • Accounts payable
     • Advances or loans to partners in the case of an IA organized as a partnership
     • Accounts receivable
     • Copyrights

     Correct answer: Accounts receivable

     For purposes of the USA, the term "net worth" means an excess of assets over liabilities, as determined by generally accepted accounting principles. Accounts receivable are a current asset, while accounts payable are a current liability. The USA specifically disallows intangibles, such as copyrights and goodwill, and advances or loans to partners (or officers if a corporation) are excluded as well.

580. Which of the following would meet the USA's definition of federal covered adviser? An investment adviser who
     • Is engaged in any interstate business under the Uniform Securities Act
     • Is consulting for several pension plans holding $500 million in assets
     • Is counseling all of its clients only about federal covered securities
     • Is registered under section 203 of the federal Investment Advisers Act

     Correct answer: Is registered under section 203 of the federal Investment Advisers Act

     Federal covered adviser means an adviser registered with the SEC under section 203 of the Investment Advisers Act of 1940, or one excluded from that Act's definition. Being engaged in interstate business does not by itself require SEC registration; an adviser under $100 million in assets under management registers with the states however many of them it operates in. A pension consultant becomes eligible for SEC registration at$200 million in plan assets, but eligibility is not registration, so holding $500 million does not by itself confer the status. And advising on federal covered securities describes the securities, not the adviser.

581. According to the Investment Advisers Act of 1940, for how many years must books and records be maintained for an account after the end of the year in which the last transaction occurred?
     • 10 years
     • 2 years
     • 1 year
     • 5 years

     Correct answer: 5 years

     Those investment advisers registered with and regulated by the Securities and Exchange Commission (SEC) must adhere to SEC Rule 204-2 regarding the maintenance of records. The rule states the required records must be kept for 5 full years from the end of the fiscal year during which the last entry was made on the record. The first 2 years, records must be kept in the principal office of the adviser and the balance of the time, easily accessible. They are subject to SEC examination at any time.

582. Transparent Investment Advisers (TIA) is registered in 3 states and has $55 million in assets under management. TIA maintains custody of customer securities. TIA's chief financial officer reports that the net worth of the firm has suddenly fallen to $28,000. This would require TIA to
     • Obtain a surety bond in the amount of $7,000
     • Obtain a surety bond in the amount of $28,000
     • Obtain a surety bond in the amount of $10,000
     • Obtain a surety bond in the amount of $35,000

     Correct answer: Obtain a surety bond in the amount of $10,000

     A state-registered adviser that maintains custody must keep a minimum net worth of $35,000. At$28,000 the firm is $7,000 short, and the bond that cures a deficiency is written for the shortfall rounded up to the next$5,000, which is $10,000. A bond for exactly the$7,000 shortfall ignores the rounding rule. A bond of $28,000 mirrors the firm's current net worth and a bond of$35,000 mirrors the minimum requirement itself; neither is the figure the rule calls for.

583. A person may NOT engage in business as an investment adviser in a state unless
     • The person has transmitted a consent to service of process in that jurisdiction
     • The person limits its client roster to investment companies listed with the SEC
     • The person maintains one office or other standing place of business for clients
     • The person is registered as an adviser or is otherwise exempt from registration

     Correct answer: The person is registered as an adviser or is otherwise exempt from registration

     Registration is the general rule: a person may not do business as an investment adviser in a state unless the person is registered there or an exemption or exclusion applies. Filing a consent to service of process is one piece of an application, not a substitute for registering. Limiting the client list to registered investment companies makes an adviser federal covered and so exempt from state registration, but that is one route among several and cannot be the condition every adviser must meet. And keeping an office or other standing place of business affects how registration works, not whether it is required.

584. Under the Investment Advisers Act of 1940, for how many years must an investment adviser maintain the records required by regulation?
     • 1 year
     • No requirement
     • 3 years
     • 5 years

     Correct answer: 5 years

     The Investment Advisers Act requires records to be kept readily accessible for a period of 5 years from the end of the fiscal year in which the record was made. The records must be kept in the principal office of the firm for the first 2 years and are subject to SEC examination at any time.

585. Under the Uniform Securities Act, which of the following must register with the state securities Administrator?
     • Advisers with one in-state office and less than $100 million of assets
     • Advisers with no office in the state whose customers are only insurers
     • Advisers managing $125 million of assets and based in two other states
     • Advisers to a fund that is registered under the Investment Company Act

     Correct answer: Advisers with one in-state office and less than $100 million of assets

     An adviser that keeps a place of business in the state and manages less than $100 million registers with the state Administrator, whoever its clients happen to be. An adviser with no office in the state whose only customers are insurance companies is not an investment adviser in that state at all. An adviser managing$125 million is above the federal threshold and is a federal covered adviser, so it registers with the SEC rather than the states. So is an adviser to a fund registered under the Investment Company Act of 1940, whatever its size.

586. Which of the following investment advisers would be required to register with the state?
     • An IA whose annual updating amendment showed a drop in AUM from $141 million to $99 million
     • An IA who expects to have $132 million in AUM within 120 days
     • An IA who is under contract to manage a registered investment company
     • An IA whose annual updating amendment showed a drop in AUM from $109 million to $87 million

     Correct answer: An IA whose annual updating amendment showed a drop in AUM from $109 million to $87 million

     No IA can remain registered with the SEC with assets under management (AUM) of less than $90 million (except those who manage registered investment companies). It takes $100 million in AUM to be able to initially register with the SEC; thereafter, the IA must maintain at least $90 million to remain SEC-registered.

587. Each of the following statements about postregistration provisions is true EXCEPT
     • A registered adviser shall file an amendment when a filing is not accurate
     • A registered adviser with no office in the state cannot be examined onsite
     • A registered adviser must keep every book and record that the rules demand
     • A registered adviser may be asked to file all the advertisements it issues

     Correct answer: A registered adviser with no office in the state cannot be examined onsite

     This is the statement that is not true. An Administrator may conduct an onsite examination of any adviser registered in the state, and the absence of a place of business there is no bar. The other three describe genuine postregistration duties. An amendment must be filed when information already on file becomes inaccurate or incomplete. Advisers must make and keep the books and records the rules require. And an Administrator may require the filing of the advertising and sales literature an adviser issues.

588. The powers of the Administrator include the ability to determine
     • Minimum net worth requirements for investment advisers
     • Maximum net capital requirements for broker-dealers
     • Minimum net worth requirements for agents who exercise discretion
     • Surety bond requirements for investment advisers who do not exercise discretion or maintain custody

     Correct answer: 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.

589. An investor in the 28% income tax bracket is considering purchasing either an 8% municipal bond or a 10% corporate bond. Which of the following regarding the bonds is TRUE?
     • The municipal bond yields more after tax in the 28% bracket
     • The corporate bond nets 7.2% after tax and thus comes first
     • The municipal bond has an equal taxable yield of just 5.76%
     • The two bonds deliver equal returns once all taxes are paid

     Correct answer: The municipal bond yields more after tax in the 28% bracket

     Compare the two on a tax-equivalent basis. The 8% municipal is worth 8% divided by 100% minus 28%, or 11.11% of taxable yield, which is well above the corporate bond's 10% coupon. Put the other way, the corporate bond keeps only 10% times 0.72, or 7.2%, after tax, which is less than the 8% the municipal pays free of federal tax, so the corporate does not come out ahead. Multiplying instead of dividing is the step people miss: 8% times 0.72 gives 5.76%, a figure with no meaning here. The two are not equivalent; that would take a 20% bracket.

590. A client in the 30% tax bracket owns a 5% XYZ, Inc., debenture due to mature shortly. What yield in a municipal will give him the same after-tax return that he now has with his debenture?
     • 5.30%
     • 3.50%
     • 1.50%
     • 2%

     Correct answer: 3.50%

     The client's tax rate is 30%; 70% of 5% is 3.5%. A nontaxable municipal bond with a 3.5% yield would give the client the same return.

591. When referring to municipal bonds, the formula of (1 − tax bracket) is found in the computation of
     • Return on investment
     • Tax-equivalent yield
     • Current yield
     • Yield to maturity

     Correct answer: Tax-equivalent yield

     The computation for the tax-equivalent yield of a municipal bond is performed by dividing the bond's coupon rate by (1 − the investor's tax bracket). If the bond has a coupon of 4% and the investor is in the 20% bracket, the tax-equivalent yield is 4% divided by (1 − 0.20) or 4% divided by 0.80 = 5%

592. The most common collateral securing a Brady bond is
     • The credit standing that the sovereign issuing nation itself has
     • U.S. Treasury zero-coupon bonds that mature with the Brady issue
     • Hard currency reserves deposited with the World Bank as security
     • Oil and mineral export receivables pledged by the issuing nation

     Correct answer: U.S. Treasury zero-coupon bonds that mature with the Brady issue

     Brady bonds were collateralized most often by zero-coupon U.S. Treasury securities chosen to mature at the same time as the Brady issue, so a third-party paying agent holds the principal on the maturity date even if the sovereign defaults. The sovereign's own credit standing is exactly what the collateral exists to replace, so it is not the collateral. Hard currency reserves lodged with a multilateral lender were often the source of the money used to buy the Treasury strips, but they were not themselves pledged. Pledges of oil and mineral export receivables appeared in a few restructurings as value recovery rights, never as the common form of principal collateral.

593. Which of the following statements regarding a zero-coupon corporate bond is TRUE?
     • Bonds selling at a premium have a yield lower than the coupon rate.
     • The investor reports the difference between the purchase price and maturity value as ordinary income at maturity.
     • The investor has phantom income, which must be reported on an annual basis.
     • These bonds have higher reinvestment risk as to interest than bonds paying semiannual interest.

     Correct answer: The investor has phantom income, which must be reported on an annual basis.

     On a taxable zero-coupon bond, the annual imputed interest is reported for tax purposes. Because this income is not actually received annually, it is referred to as phantom income. Zero coupon bonds always sell at a discount from their maturity value – never at a premium and one risk that zero coupon bonds avoid is reinvestment risk because there are no interest payments to reinvest.

594. An individual investor specifies to her investment adviser representative that her portfolio must produce a minimum amount of cash each year. This would be considered
     • A tax constraint
     • A legal and regulatory constraint
     • A unique circumstance
     • A liquidity constraint

     Correct answer: A liquidity constraint

     Liquidity constraints arise from an investor's need for spendable cash.

595. An investment adviser has a client who wants to save for college for her child. The child will be entering college in 5 years. This would be an example of
     • Planning too late
     • An investment constraint
     • Tactical asset allocation
     • A capital need

     Correct answer: An investment constraint

     The goal is having money for college. The investment constraint (obstacle in the way of meeting the goal) is the short time horizon. It may be true that the client has started too late, but that is not what the exam would be looking for as the correct answer.

596. One of your prospective clients is considered a key employee at his place of business. This individual has a net worth of almost $6 million, currently earns in excess of $500,000 per year, and is married with 2 teenage children. He currently has a little over $1 million in his 401(k), more than half of which is invested in his employer's common stock. The company is the beneficiary of a $1.5 million key person life insurance policy on his life. Given these facts, what is your greatest concern as his adviser?
     • Inadequate funding for college savings
     • Alternative minimum tax
     • Inadequate life insurance coverage
     • Too high a percentage of the retirement plan invested in the company's stock

     Correct answer: Inadequate life insurance coverage

     Because the client's only life insurance seems to be that with the company as beneficiary, it does not appear that he has adequately planned for his premature death and the potential estate taxes.

597. It would be CORRECT to state that when an investor has a shorter time horizon,
     • The exposure to inflation risk is increased
     • The greater the duration
     • The need for liquidity is more important
     • The risk level is raised

     Correct answer: The need for liquidity is more important

     When the time horizon is short, there is a greater need for access to the funds now. Therefore, liquidity is a major consideration. With a short time horizon, the investor can take less risks (and won't have to because there will be less exposure to inflation risk).

598. Relatively high portfolio volatility is most tolerable to investors with
     • A diversified portfolio
     • An intermediate-term time horizon
     • A long-term time horizon
     • A short-term time horizon

     Correct answer: A long-term time horizon

     Relatively high portfolio volatility is generally associated with stocks whose long-term returns outpace less volatile investments. Therefore, high portfolio volatility is suitable for investors with a long-term time horizon.

599. A private foundation is required by statute to pay out a minimum percentage of its asset value each year as qualifying distributions. This investment constraint is best classified as
     • Liquidity
     • Unique circumstances
     • Time horizon
     • Legal and regulatory

     Correct answer: Legal and regulatory

     Legal and regulatory constraints are those that apply to an investor by law. We haven't heard of it being tested, but IRS requirements are that a foundation must generally payout 5% of its assets each year as qualifying distributions. This legal requirement to make distributions places constraints on how the foundation's money is to be invested.

600. What would be the time horizon for a 65-year-old client who has just retired?
     • It depends on the individual's available assets.
     • None, because 65 is the age for retirement.
     • It depends on the individual's insurance company's actuarial tables.
     • It depends on the individual's life expectancy.

     Correct answer: It depends on the individual's life expectancy.

     The time horizon for an individual who has just retired is the balance of expected life.

601. A man divorces his spouse after 10 years of marriage and remarries. If the man is the sole provider, what part of the worker's Social Security benefits is the new spouse entitled to?
     • The new spouse is entitled to more benefits than the ex-spouse.
     • The new spouse is entitled to splitting the benefits with the ex-spouse.
     • She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage.
     • She is entitled to the same Social Security benefits as the ex-spouse.

     Correct answer: She is entitled to the same Social Security benefits as the ex-spouse.

     When an individual remarries, the new spouse is entitled to full Social Security benefits. As long as the previous marriage lasted at least 10 years, that ex-spouse (if not remarried) is also entitled to full benefits. That means it is possible for 2 people to receive full benefits at the same time.

602. One problem facing agent and client alike is determining how much life insurance is necessary to meet future needs. One tool that is useful for making that determination is
     • A basic life insurance mortality table for each client
     • A net cost index used for competing insurance policies
     • A cash surrender value schedule for this life contract
     • A life insurance capital needs analysis for the family

     Correct answer: A life insurance capital needs analysis for the family

     A capital needs analysis works out what the survivors will need, nets that against the resources already in place, and prices the gap as a face amount, which is exactly the determination the stem describes. A mortality table gives the probability of death at a given age, which prices a premium rather than sizing a benefit. A net cost index compares the cost of competing policies once the amount of coverage is already known. A cash surrender value schedule projects what a policy is worth if it is given up, which says nothing about the family's future needs.

603. Which of the following mutual funds should an investment adviser representative recommend to a client whose objective is current income with moderate risk?
     • Preferred stock fund
     • Money market fund
     • Aggressive growth fund
     • High-yield bond fund

     Correct answer: Preferred stock fund

     Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.

604. Construction of an investment policy statement (IPS) requires identifying the client's objectives and constraints. Which of the following would not be in the list of constraints?
     • Time horizon
     • Liquidity risk
     • Taxes
     • Risk tolerance

     Correct answer: Risk tolerance

     When constructing an investment policy statement (IPS) risk tolerance is an objective, not a constraint. Time horizon, taxes, and liquidity are all constraints. An easy way to remember the five constraints is TTLLU (time horizon, taxes, liquidity, laws, unique).

605. Which of the following statements about investment constraints is least accurate?
     • A decision to diversify can cause a large new tax liability
     • A refusal to own any tobacco holdings is a valid constraint
     • A short time horizon does not make liquidity a real concern
     • A person who is not accredited cannot buy any private deals

     Correct answer: A short time horizon does not make liquidity a real concern

     This is the least accurate statement. A short time horizon usually brings a liquidity constraint with it, because money needed soon cannot sit in assets that take time or a price concession to sell; the two constraints normally travel together. The other three are sound. Selling holdings in order to diversify realizes gains and can generate a tax liability. A client's unwillingness to own an entire industry is a genuine constraint on the portfolio. And investors who are not accredited are shut out of private offerings, which is itself a constraint.

606. A couple, ages 63 and 66, are long-time clients of your firm and are in good health. They plan to retire from gainful employment in 4 years and wish to discuss decumulation strategies. One of the important factors to consider is the time horizon for this couple. Which of the following would be the best estimate to use?
     • 8 years
     • 4 years
     • 10 years
     • 25 years

     Correct answer: 25 years

     Decumulation is the opposite of accumulation. Instead of focusing on how to increase the assets, the focus is on how to make sure they last as long as required. Just how long is that time horizon? Until the death of the second party. Today's statistics would indicate that a couple of these ages would likely have at least one of the two live another 25 years.

607. Insurance agents frequently use a capital needs analysis to help determine the correct amount of life insurance needed by their clients. That analysis would look at all of these EXCEPT
     • Life expectancy
     • Future earnings
     • The inflation rate
     • Market volatility

     Correct answer: Market volatility

     Of these choices, the only one that we cannot in anyway predict is market volatility. We can factor in an estimated inflation rate, project future earnings, and look at the mortality tables to obtain life expectancy. But nothing can project market volatility with any degree of accuracy.

608. Among the options available to replace the lost income of an employed individual who becomes unable to work due to a disability would be any of these EXCEPT
     • Proceeds of a life insurance policy
     • Social Security disability payments
     • Disability income insurance
     • Workers' compensation

     Correct answer: Proceeds of a life insurance policy

     Those injured on the job are usually eligible for workers' compensation. Those who have enough eligible credits may apply for Social Security disability benefits. If the individual owns private disability insurance and/or is covered under an employer-sponsored policy, he may claim benefits. Although there is a trend toward making life insurance benefits available for use in certain instances, for test purposes the proceeds are generally only available upon the death of the insured.

609. Mary Huggins is the ex-wife of Charlie Huggins. They were married for 12 years and then finalized a divorce. Charlie is now 70 and has begun taking his Social Security benefits. Mary remarried last year. It would be correct to state that
     • Mary is entitled to Charlie’s Social Security benefits only when she reaches full retirement age.
     • Mary is entitled to Charlie’s Social Security benefits or those of her new husband, whichever is the greater.
     • Mary is entitled to full spousal benefits because they were married for at least 10 years.
     • Mary is not entitled to any of Charlie’s Social Security benefit.

     Correct answer: Mary is not entitled to any of Charlie’s Social Security benefit.

     When a couple has been married for at least 10 years, the ex-spouse is entitled to full spousal Social Security benefits unless remarried. By remarrying, Mary no longer has any claim on Charlie's Social Security benefits.

610. A 74-year-old widower has been your client since his early 50s. He is a well-informed investor and has always seemed capable of understanding most investment concepts you have presented. At least twice a year, the 2 of you meet to evaluate his current financial situation and objectives. In your last meeting, it seemed to you that he was distracted and somewhat forgetful. It would be appropriate for you to do all of the following EXCEPT
     • Take detailed notes on future conversations and meetings with him
     • Wait to see if there are further causes for concern about his capabilities
     • Ask him to invite a friend or family member to accompany him to appointments with you
     • Inform your supervisor of your concerns about his memory loss

     Correct answer: Wait to see if there are further causes for concern about his capabilities

     Taking action in advance could help protect you and your firm should a client subsequently indicate that he does not remember having agreed to a recommendation. Taking detailed notes can help verify what has been discussed in conversations or at meetings. Having others present may help to verify what has been discussed and agreed upon.

611. It would be correct to state that when an investor has a longer time horizon,
     • The need for liquidity is less important
     • The exposure to inflation risk is lessened
     • The risk level is lowered
     • The greater the initial deposit to reach a projected future goal

     Correct answer: The need for liquidity is less important

     When the time horizon is long, there is little need for access to the funds now. Therefore, liquidity is a minor consideration. With a long time horizon, the investor can take greater risks (and should because it will be necessary to combat the higher inflation risk).

612. A customer has a financial commitment of $200,000 that will come due in 2 years. In the interim, the customer wishes to invest the $200,000 to maximize income and have the money available for the obligation in 2 years. You should recommend investments in
     • Large-cap stocks
     • Municipal bonds purchased at par with 20-year maturities
     • Preferred stock purchased in a private placement
     • Government securities with two year maturities

     Correct answer: Government securities with two year maturities

     The Uniform Securities Act requires that all recommendations to a customer be consistent with that customer's investment objectives and financial situation. This particular customer needs to have principal available in 2 years and wants to invest for income in the interim. Time horizon is one of the most important constraints an investment adviser must consider. Of the choices listed, only government securities with 2-year maturities meet both criteria.

613. In which of the following cases would the Uniform Securities Act require registration of an investment adviser who had no place of business in the state?
     • Under no circumstances is registered required if there is no place of business in the state.
     • He had more than 5 institutional clients domiciled in the state.
     • His website was seen by residents of the state.
     • He had more than 5 noninstitutional clients who were residents of the state.

     Correct answer: He had more than 5 noninstitutional clients who were residents of the state.

     The de minimis exemption applies when there is no place of business in the state and the adviser has no more than 5 noninstitutional (retail) clients in the state during any 12-month period.

614. The National Securities Markets Improvement Act of 1996 (NSMIA)
     • Defined the term ""federal covered adviser""
     • Created the concept of fraud, as used in the Uniform Securities Act
     • Created a national market system
     • Overcame the restrictions of selling securities in interstate commerce

     Correct answer: Defined the term ""federal covered adviser""

     The NSMIA defined the term "federal covered adviser," referring to advisers who must register with the SEC or who are excluded from the definition of "investment adviser" under the Investment Advisers Act of 1940. Fraud is a legal concept and is prohibited by the Uniform Securities Act. Selling securities in interstate commerce is not fraudulent, provided the antifraud provisions securities laws are observed. The roots of a national market system began with the Securities Amendments Act of 1975.

615. The document that gives the Administrator the right to process complaints against a registrant is known as
     • A surety bond filed by firms
     • A notice filing of federal status
     • An escrow agreement with the state
     • A consent to service of process

     Correct answer: A consent to service of process

     The consent to service of process is filed with the application and appoints the Administrator as the applicant's attorney to receive legal process, so a complaint served on the Administrator has the same effect as personal service on the registrant. A surety bond secures the applicant's obligations; it does not accept service. A notice filing is how a federal covered adviser or a covered security is put on record with the state. An escrow agreement holds offering proceeds or promoters' shares. None of those three gives the Administrator any power to receive complaints.

616. Investment advisers who manage investment portfolios that total less than $100 million must register with
     • The SEC only
     • Neither the SEC nor a state
     • A state only
     • Both a state and the SEC

     Correct answer: A state only

     Investment advisers who manage less than $100 million of investment assets are prohibited from registering with the SEC and are required to register with a state Administrator unless exempt under the laws of that state. Please do not confuse this with an SEC-registered IA whose AUM may drop to as low as $90 million with continued SEC registration allowed. Any question about that rule will state that AUM has "dropped."

617. Jefferson, Adams, and Washington (JAW) is a pension consulting firm whose only office is on Constitution Avenue in Washington, D.C. JAW has only one advisory client—a U.S. government employees pension fund with assets of $4 billion. What are this firm's registration requirements?
     • It must register with the SEC because the AUM is so high.
     • It may choose to register with either the D.C. Administrator or the SEC.
     • It can only register with the SEC because the District of Columbia is not a state.
     • It does not have to register because its only client is the U.S. government.

     Correct answer: It may choose to register with either the D.C. Administrator or the SEC.

     Under the provisions of the Dodd-Frank Act of 2010, pension consultants providing advisory services to employee benefit plans having at least $200 million of assets may register with the SEC (even though the consultant does not itself have those assets under management). JAW's only client has $4 billion in assets, well in excess of the minimum of $200 million required to allow the firm to choose between state or SEC registration. Under the USA, the District of Columbia (along with Puerto Rico and any U.S. territory or possession) is included in the definition of state. If an investment adviser only gives advice on securities issued or guaranteed by the U.S. government, it is excluded from the definition of investment adviser and doesn't register anywhere, but that is not the same as having the government as your only client.

618. Serenity Strategic Investments (SSI) is an investment adviser registered in four states. SSI's most previous annual updating amendment showed AUM of $108 million. Six months later, a favorable market resulted in SSI's AUM growing to $120 million. Unfortunately, several large clients left, so at the end of SSI's year, its AUM was down to $94 million. Which of the following statements is CORRECT?
     • SSI may remain SEC registered as long as AUM is at $90 million or more.
     • SSI must become registered with SEC within 90 days of exceeding $110 million.
     • SSI has the choice of remaining state-registered or registering with the SEC.
     • SSI remains state-registered because its AUM is less than $100 million.

     Correct answer: SSI remains state-registered because its AUM is less than $100 million.

     The key to answering this question is remembering that, for purposes of SEC registration, it is the AUM (technically known as the RAUM – Regulatory AUM) shown on the annual updating amendment to the Form ADV that is the determining factor. We are told that SSI is state registered, something permitted when reported AUM is $108 million, although it was eligible to register with the SEC. The mid-year increase has no effect on registration, only that at the end of the year. Because SSI will report $94 million on the next annual update, it will remain state registered and does not have the option to register with the SEC because its AUM is below $100 million. The only time the $20 million buffer down to $90 million enables an investment adviser to remain registered with the SEC is just that—the IA is already registered with the SEC and can stay there.

619. An investment adviser is eligible to register with the SEC if it
     • Expects to reach $100 million in assets within the next 120 days
     • Would be obliged to register in at least 10 separate states soon
     • Has offered guidance to more than 15 customers in the prior year
     • Has had at least $25 million of assets under its sole management

     Correct answer: Expects to reach $100 million in assets within the next 120 days

     An adviser that reasonably expects to have at least $100 million under management within 120 days of filing may register with the SEC now, on the strength of that expectation. The state-count exception is set at 15 states or more, not 10, so an adviser facing registration in 10 states does not qualify on that basis. The number of clients advised has nothing to do with SEC eligibility; that figure belonged to a private adviser exemption that no longer exists. And$25 million was the pre-Dodd-Frank threshold, which today leaves the adviser with the states.

620. Under the Uniform Securities Act, most books and records of investment advisers must be maintained for
     • 3 years, the first 2 in the firm’s principal office
     • 5 years, the first 2 in the firm’s principal office
     • 2 years
     • 1 year

     Correct answer: 5 years, the first 2 in the firm’s principal office

     With few exceptions, the accounting records, correspondence, and advertising of investment advisers must be kept for a minimum of 5 years after the end of the year in which they were created, the first 2 years in the firm's principal office (on premises).

621. Emmet opened an investment advisory service 3 years ago and raised $50 million in capital from family, friends, and contacts and then closed to new investors. If Emmet's stock picks expanded assets under management to $110 million, Emmet
     • Must update his registration with the state Administrator
     • Is not required to take any action
     • Must register for the first time with the state Administrator
     • Must register with the SEC

     Correct answer: Must register with the SEC

     When the annual updating amendment filed by a state-registered investment advisory firm indicates that the $110 million threshold has been reached, the firm has 90 days to register with the SEC.

622. Under the NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, investment advisers who have discretionary powers but NOT custody of customer funds are usually required to have a net worth in the amount of
     • $10,000.00
     • $50,000.00
     • $35,000.00
     • $5,000.00

     Correct answer: $10,000.00

     The NASAA Model Rule on financial requirements for investment advisers, unless an exception exists, requires an adviser who does not have custody of customer funds or securities but has discretionary power over customer accounts to have a minimum net worth of $10,000.

623. Under both state and federal law, the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser is properly referred to as
     • The office of supervisory jurisdiction (OSJ)
     • The home office
     • The registered office
     • The principal office and place of business

     Correct answer: The principal office and place of business

     This is the way it is defined in the act. It is generally the home office, but you must chose the answer that best meets the terminology referred to in the question. Office of supervisory jurisdiction (OSJ) is a FINRA term and is not applicable on this exam.

624. Certain documents belonging to a federal covered investment adviser must be kept for a period of time after the enterprise closes. Those documents are
     • Sent to the Administrator for safekeeping
     • Sent to the SEC for safekeeping
     • The responsibility of the investment adviser
     • Required to be shredded

     Correct answer: The responsibility of the investment adviser

     Broker-dealers and investment advisers must keep certain records for a period of 3 years after the termination of the business. How and where those records are maintained is the responsibility of the firm, not the regulators. This is a separate requirement from the one that has active broker-dealers keeping records for 3 years and investment advisers for 5.

625. ABC Advisers, a federal covered investment adviser, is moving the firm's headquarters to a new office park in the suburbs. ABC is required to file this change with the SEC
     • Promptly
     • Within 60 days
     • Within 90 days
     • Within 30 days

     Correct answer: Promptly

     Any material change that affects an investment adviser's ADV must be filed promptly with the SEC (or Administrator if state-registered) and a change of address would certainly be material.

626. Under the Uniform Securities Act, all of the following are exempt from state registration as investment advisers EXCEPT
     • Investment adviser representatives
     • Investment advisers with no office in the state who only advise employee benefit plans with assets of more than $1 million
     • Financial planners who provide fee-based investment advisory services to clients
     • Publishers of financial publications that are not addressed to clients' specific individual investment situations

     Correct answer: Financial planners who provide fee-based investment advisory services to clients

     Financial planners who provide fee-based investment advisory services to the public generally must register with their state securities Administrator, as long as their total assets under management are less than $100 million. Investment advisers with no office in the state, who only advise employee benefit plans with assets of more than $1 million, need not register with state securities Administrators. Investment adviser representatives do not register as investment advisers but as investment adviser representatives. Financial publishers who do not publish specific investment advice are exempt from state registration.

627. All of the following are exempt from registration requirements with the SEC under the Investment Advisers Act of 1940 as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 EXCEPT
     • An adviser with 50 clients, none of whom is a private fund, all within one state, that furnishes no advice on exchange-listed securities
     • Investment advisers with $110 million or more in assets under management
     • Investment advisers whose only clients are insurance companies
     • Someone who gave investment advice to 11 private funds throughout the Midwest last year and has total assets under management of $120 million

     Correct answer: Investment advisers with $110 million or more in assets under management

     Investment advisers with $110 million or more of assets under management are subject to registration with the SEC under the Investment Advisers Act of 1940 and the Dodd-Frank Act. Federal exemptions apply to advisers whose clients are all in one state, whose principal office is in that state, and whose clients (none of whom are private funds) are not furnished advice on exchange-traded securities. Private fund managers are exempt from SEC registration until their AUM in the U.S. reaches $150 million.

628. The agreement that the Administrator can receive subpoenas on behalf of a registered agent, broker-dealer, or investment adviser involved in any securities sale that violates the Uniform Securities Act is
     • The consent to service of process
     • The agreement to actionable offenses
     • The right of retribution
     • The right of rescission

     Correct answer: The consent to service of process

     Every applicant for registration and every issuer must file an irrevocable consent to service of process appointing the Administrator as attorney to receive service of any lawful process in any civil suit, action, or proceeding. It has the same legal effect as if the person had been served personally.

629. Under the Uniform Securities Act, the recordkeeping requirements established by the Administrator for out-of-state investment advisers wishing to register in his state are subject to the limitations of
     • The rules in operation in every state where a customer resides
     • The books and records rule of the 1940 Investment Advisers Act
     • The rules set by the Administrator of the adviser's home state
     • The model rules on records that NASAA has published for states

     Correct answer: The rules set by the Administrator of the adviser's home state

     Under the Uniform Securities Act, a state may not impose recordkeeping requirements on an out-of-state adviser that exceed what the Administrator of the adviser's home state requires, and that is the ceiling the stem is asking about. The rules of every state where a customer happens to live are not the limit; if they were, an adviser would have to satisfy the strictest state in the country. The books and records rule under the Investment Advisers Act of 1940 governs federal covered advisers, which register with the SEC and not with any state. NASAA publishes model rules, but a model binds only where a state adopts it.

630. All of the following information is required on the SEC registration Form ADV EXCEPT
     • The particular name under which the adviser transacts business
     • The personal security holdings of the adviser's own principals
     • The form of business organization this adviser has established
     • The arrangement through which the adviser shall be compensated

     Correct answer: The personal security holdings of the adviser's own principals

     Form ADV does not ask for a list of what the firm's officers, directors and partners personally own. It does ask for the name under which the adviser transacts business, the form of business organization it has adopted, and how the adviser is compensated, with fee schedules and the basis of every charge set out in the brochure. The Form identifies control persons, but identifying them is not the same as inventorying their portfolios, so personal holdings is the item the stem is looking for.