Series 66 Example Questions
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Under the Uniform Securities Act, an investment advisory contract could contain all of the following compensation arrangements EXCEPT:
A ) Monthly fees based on a percentage of the total value of all assets being managed
B ) Yearly fees based on a percentage of all assets being managed, inclusive of any capital gains achieved
C ) Fixed fee levels depending on the total value of assets being managed
D ) Fees based solely on capital gains achieved
Rationale: It is prohibited for an investment adviser to be compensated on the basis of capital gains achieved. It is allowable for the adviser to get a percentage of all assets under management (even if this value includes capital gains achieved) or for a fixed fee arrangement to be established.
An investment adviser has an institutional customer that wishes to sell 5,000 shares of ABC Stock. The adviser believes that ABC Stock would be a suitable investment for another institutional client. The adviser wishes to arrange a trade between the 2 institutions at the current market price, for which the adviser would charge a token fee. Because there will be no brokerage commissions, the institutional customers will get a better execution price. Which statement is TRUE about this?
A ) This is permitted only if the adviser discloses that it is acting as a broker, discloses its fee and gets written consent from each client
B ) This is not permitted because of the conflict of interest that exists if an investment adviser that recommends a transaction as a fiduciary then acts as the broker, executing that transaction for a fee
C ) This is permitted because both of the customers are getting a better execution than if they went to the market for a fill
D ) This is not permitted because a fee is being charged
Rationale: This is an agency cross transaction. If an investment adviser wishes to effect an agency cross transaction for a customer, it cannot have recommended the transaction to both the buyer and the seller - which is the case here. To effect the transaction, the adviser must obtain written consent of the customer; must disclose the remuneration that will be received from the transaction; and must send the customer an annual statement identifying the total number of agency cross transactions effected by the adviser and the remuneration received.
Which statements are TRUE about variable annuity contracts?
I A variable annuity contract is defined as an “insurance” product that is regulated under State insurance laws only
II A variable annuity contract is defined as a “security” product that is regulated under both Federal securities laws and
State insurance laws only
III The issuer of a variable annuity contract bears the investment risk
IV The purchaser of a variable annuity contract bears the investment risk
A ) I and III
B ) I and IV
C ) II and III
D ) II and IV
Rationale: With a variable annuity, the insurance company collects a premium from the purchaser and invests it in a "separate account" (a legally separate account of investments that is segregated from the insurance company's general account). The separate account buys shares of a designated mutual fund. The performance of the investments held in the separate account determines the amount of the annuity that the purchaser will receive - the annuity payments will vary. Thus, the purchaser bears the investment risk in this product, which is why it is defined as a "security" under Federal law. Also note that because insurance companies are regulated separately by each State, their products, including variable annuities, are also subject to State insurance regulation.
To determine the present value of an investment, which of the following is NOT considered?
A ) The interest rate to be used to discount the annual payments received
B ) The amount of cash expected to be generated each year by the investment
C ) The time horizon of the expected investment returns
D ) The required sum needed at the end of the investment’s life
Rationale: Present value takes the annual cash flows that are expected to be generated by an investment and discounts them at the market rate of interest to their "present value." Thus, the present value formula determines what those cash flows are worth today. In contrast, future value takes the cash flows generated by an investment and compounds them at the market rate of interest to their value at a set future date.