Series 66 set 2

On Tuesday, June 3, an IA discovers its net worth has fallen below the minimum requirement. When must the IA file a report of its financial condition with the Administrator?

• 
  On Thursday, June 5

• 
  On Wednesday, June 4

• 
  On Friday, June 6

• On Tuesday, June 3

Answer explanation

If an IA's net worth is less than the required minimum, it must notify the Administrator by the close of the next business day (in this question, Wednesday, June 4). After notification is made, the IA must file a report of its financial condition by the next business (in this question, Thursday, June 5). Thereafter, the Administrator may require the IA to post a bond for the deficiency. (89048)

An agent opens a new account for a client and enters a market order to buy 200 shares of XYZ. At the end of the day, the agent turns in a new account form and a copy of the order ticket for approval by the supervisor. Under the Uniform Securities Act, which of the following statements is TRUE?

• 
  This would be acceptable if the order placed was deemed suitable for the client by the agent's principal

• 
  The agent needed approval for the new account prior to executing the first order

• 
  This would be acceptable, provided the account opened was nondiscretionary and the transaction was unsolicited

• 
  The agent acted properly

Answer explanation

Although prior approval from a supervisor is not required for every order, every new account must be approved by a supervisor prior to executing the first order. (62041)

Mary is setting up an investment advisory business in the town in which she was born and has known the town's mayor since childhood. Mary places an advertisement in the local newspaper that quotes the mayor as stating, "I have known Mary since we were kids and we're fortunate to have someone with her expertise and integrity setting up her investment advisory business in our community." This advertisement is:

• Acceptable only if the mayor received no compensation or benefit for the statement

• Acceptable as long as the advertisement contained a footnote which describes the mayor's qualifications

• Prohibited because a mayor is not qualified to comment on the competence of an investment adviser

• A violation of the Investment Advisers Act of 1940 and, therefore, prohibited

Answer explanation

An investment adviser is permitted to use testimonials in its advertising. Additionally, individuals who provide testimonials may receive compensation for providing a testimonial. However, to ensure that clients are not being misled, both SEC and state rules require advisers to disclose the qualifications of the provider of the testimonial and whether compensation was paid.

An individual recently signed an advisory contract with an investment adviser. The individual runs a consulting business by herself and wants advice on the best retirement account to set up. Her business earns $300,000 per year and she wants to maximize the contributions into the retirement plan in order to retire earlier. What type of retirement account best fits the client's needs?

• Roth IRA

• 
  SIMPLE 401(k)

• 
  529 plan

• 
  Individual 401(k) plan

Answer explanation

Since the client is self-employed and has no employees, a solo (i.e., individual) 401(k) plan is the best choice. A SIMPLE 401(k) plan can be set up by businesses that have fewer than 100 employees, but they have lower contribution limits than solo 401(k) plans. IRAs have the lowest contribution limits of any retirement account and 529 plans are used to save for educational expenses, not retirement.

Two siblings are interested in jointly buying real estate on a beach. Both siblings have their own children and want to leave the property to their children after their deaths. What's the best type of ownership for the sibling's real estate?

• 
  Transfer on death

• 
  Joint tenants in entirety

• 
  Community property

• 
  Joint tenants in common

Answer explanation

Joint tenancy in common (JTIC) permits multiple owners of the same property. In addition, JTIC permits each owner to assign their own beneficiaries to their ownership in the jointly owned property. In this question, the siblings want to leave their interest in the real estate to different individuals (i.e., their own children); therefore, JTIC is the best type of designation. Joint tenants in entirety and community property are only available to married couples and not available to siblings. Transfer on death permits multiple beneficiaries, but is not a type of joint ownership.

Which investment company's shares are transacted at the current bid or asking price on an SEC-registered securities market?

• Unit investment trusts

• An open-end management company

• A closed-end management company

• 
  Variable contracts

Answer explanation

Shares of closed-end funds are exchange-traded and will be bought and sold at their current market prices. The market price of a security is made up of a bid and offer. The bid represents an order to buy on the exchange, while the ask (i.e., offer) represents an order to sell a security. Variable annuities, unit investment trusts (UITs), and open-end funds (i.e., mutual funds) are not exchange-traded.

Ralph has purchased 4.0% TIPS with an original principal amount of $1,000. If the adjusted principal amount is $1,020, how much interest will Ralph receive on his next payment?

• 
  $40.00

• $20.40

• $20.00

• 
  $40.80

Answer explanation

Treasury Inflation-Protected Securities (TIPS) pay a fixed rate of interest, based on inflation-adjusted principal. The adjustment to principal is based on the Consumer Price Index. TIPS pay interest semiannually, based on a fixed rate applied to the adjusted principal. Interest payments are calculated by multiplying the adjusted principal by 1/2 of the annual interest payment. In this question, the 4.0% rate of interest is multiplied against the principal of $1,020 for an annual interest amount of $40.80. Each payment during the year will equal $20.40. (62516)

XYZ Inc. is an investment adviser. One of its institutional clients would like to sell 1,000 shares of ABC stock. XYZ believes that this would be a suitable investment for another institutional client. XYZ proposes to arrange a trade between the two clients and would charge each customer a small fee for its services. This would allow each client to receive a better price than either could obtain in the open market. Which of the following statements is TRUE in this situation?

• This is not permitted under any circumstances unless XYZ waives any fee for arranging the transaction

• 
  This is permitted if XYZ discloses to the buyer that it is representing the seller in the transaction and receives the buyer's written permission

• 
  This is permitted since the two clients are institutional investors, but would be prohibited if they were not

• 
  This is permitted if XYZ discloses to each client that it is acting as a broker for both parties and receives each client's written consent

Answer explanation

An investment adviser that wishes to act as a broker for both parties to a transaction must:

1. Disclose the capacity in which it is acting prior to the completion of the transaction and

2. Obtain the client's written consent. Since both parties to the trade are clients, the disclosure and consent requirements apply to both.

(62919)

Closed-end fund shares:

• 
  Can issue full or partial shares

• 
  May only trade at their net asset value (NAV)

• 
  Trade exclusively in the primary market and not on an exchange

• 
  Are marketable and have fixed capitalization

Answer explanation

Closed-end funds typically issue a large number of shares at the time the fund is created. Thereafter, investors who want to sell their shares are required to sell them on an exchange because the fund will not redeem them directly. Since closed-end funds don't regularly issue and redeem shares, their capitalization remains relatively fixed. Unlike mutual funds, closed-end don't issue partial or fractional shares.

(19962)

All of the following are exempt from the gift tax, EXCEPT:

• Tuition

• Medical expenses

• 
  Gifts to a spouse

• 
  Securities

Answer explanation

The annual gift tax exclusion is $18,000 per person, per year. Gifts of cash or securities that exceed $18,000 per year could be subject to the gift tax. However, medical expenses, tuition payments, and gifts to spouses are exempt from gift tax. This means the gift tax doesn't apply to gifts to a spouse, the payment of tuition, or payment of medical expenses.