STC SERIES 66 FINAL #1 AND 2 COMPLETE
VERIFIED QUESTIONS AND ANSWERS
A client purchases an equity-indexed annuity contract that guarantees a 4% return or 80% of the
performance of the S&P 500, whichever is greater. The index declines over the course of the next year.
What return will your client receive? - ANS-4%
An equity-indexed annuity guarantees the contract owner a minimum interest rate or the performance
of a stock index such as the S&P 500 Index. If the return on this index is less than the guaranteed rate,
the owner receives the guaranteed rate. If the index return is greater than the guarantee, the owner
receives the greater return. (62437)
The investment policy statement of a qualified retirement plan states that no more than 50% of the
plan's assets may be invested in stocks. The investment manager places 65% of the plan's assets in
stocks in order to take advantage of a bull market and increase the value of the plan's assets. Has the
investment manager violated the fiduciary responsibility provisions of ERISA? - ANS-Yes, since the
investment manager did not follow the stipulations of the investment policy statement
This is an actual court case. The plan's trustees sued the investment manager who was held liable even
though the plan's assets increased. (62146)
All of the following choices are required to be included in a trade blotter, EXCEPT: - ANS-The amount of
interest or dividends the investor will receive
Broker-dealers and investment advisers are required to keep certain books and records. One of them is
a blotter, which is a daily record of all purchases and sales of securities. The trade blotters contain
information concerning the transaction such as the account in which the trade was executed, the trade
date, the unit value and total value of the transaction, the name and amount of securities, and whom
the securities were bought from or sold to. Blotters are also required when a firm receives or delivers
securities as well as receives or disburses cash.
Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is: - ANS-
Five years
The statute of limitations for criminal violations under the Act is five years. (62943)
A small, single-office investment advisory firm has $4 million in assets under management. The firm is
located in Texas. According to the Uniform Securities Act, which of the following persons associated with
,the firm will NOT fall under the definition of an investment adviser representative? - ANS-An in-house
accountant who tabulates investment results for client accounts
IA representatives are persons who are associated with an IA and make recommendations, manage
accounts, solicit or negotiate the sale of IA services, or supervise any persons who engage in these
activities. Persons who perform clerical functions (e.g., accountants) are not considered IA
representatives. There is no requirement for a person to be an employee or to be solely dedicated to
sales to meet the definition of IA representative.
Under the Securities Exchange Act, a customer confirmation is NOT required to disclose: - ANS-The time
of the trade execution
The Securities Exchange Act requires broker-dealers to make specific disclosures on customer
confirmations. Some of the required information includes the capacity in which the broker-dealer is
acting (i.e., agency or principal), the amount of commission received by the broker-dealer for executing
an agency trade, and the settlement date of the trade. The time of the trade execution is not required to
be disclosed on a customer confirmation; however, it may be provided if the customer makes a specific
request.
Under the Uniform Securities Act, an Administrator may deny registration to an agent because of
findings that indicate the agent had been convicted of a felony within the past: - ANS-10 years
The Administrator may deny an agent's registration if she finds the individual has been convicted of a
felony within the past 10 years. (62109)
NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser
Representatives, and Federal Covered Advisers states that any fee arrangement based on capital gains
or portfolio appreciation may only be used if which of the following disclosures is made in writing? -
ANS-That the arrangement may cause the adviser to recommend strategies that encourage a client to
take greater-than-normal risks
As opposed to other fee arrangements, performance-based fees are more likely to encourage an adviser
to take greater risks with a client's money in order to generate more fees. While performance-based
fees are generally prohibited under the Uniform Securities Act, some state Administrators make
exceptions. (67684)
Susan is a high-ranking official in the Comptroller's Office of Zanzibar Securities. Her title is Executive
Vice President. Under the Uniform Securities Act, Susan is: - ANS-Not considered an agent since she is
not involved in sales or trading
Only personnel engaged in securities transactions are agents. Officers can be considered agents, but it
depends on their particular job function. (79474)
,Which of the following securities is NOT considered exempt under the Uniform Securities Act? - ANS-
Securities issued by an automobile company
Under the Uniform Securities Act, any security issued by Canada or a Canadian Province, or savings and
loan association, or any railroad company is considered an exempt security. There is an exemption
under the Act for common carriers but an automobile company does not qualify for this exemption. (
Value investors would be interested in companies that have - ANS-Low price earnings ratios
Value investing is a method of identifying securities that are undervalued based on company
fundamentals. Value stocks tend to have low stock prices in relationship to their earnings, a higher
dividend yield than their industry peers, and, typically, trade at a price closer to or at a discount to the
book value than their competitors. Value investors believe that the most undervalued companies should
rebound and outperform the market. This, of course, assumes that the company is financially sound.
(63012)
As an investment adviser, you are required to record and keep a record of every transaction in a security
for a client's account within: - ANS-10 days of the end of each quarter, excluding direct obligations of the
U.S. government
Under both the Investment Advisers Act and the Uniform Securities Act, investment advisers are
required to keep a record of every securities transaction within 10 days of the end of the quarter in
which the transaction took place. Transactions in direct obligations of the U.S. government are excluded
from this requirement.
What is the benefit of discounting the cash flows of a fixed-income security? - ANS-It compares the price
of a bond against the sum of the present values of the bond's future payouts
A discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a
present value, based on a rate of return. This makes it possible to evaluate a bond's value against the
investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of
the bond's principal, determines the total value of the bond. By comparing this value to the current
price of the bond, the adviser will be able to determine if the bond is an attractive investment for a
client.
Based on the past performance of XYZ stock, an investment adviser has determined that there is a 25%
chance that in a bull market, XYZ stock will return 20%. In a flat market (50% probability), the return
should be 5%. The likelihood of a bear market is 25%, and expected returns would be a loss of 10%.
What is the expected return for XYZ stock? - ANS-5%
, According to modern portfolio theory, the expected return is the sum of the weighted average of an
investment's return. To find each weighted return, multiply the return by the likelihood of that return.
For XYZ stock, the expected return is as follows.
Return
Likelihood
Weighted Return20%x25%=5%5%x50%=2.5%(10%)x25%=(2.5%)
Expected return = 5% (5% + 2.5% - 2.5%)
Your client is considering purchasing a fund of hedge funds. Which of the following statements
concerning this investment is TRUE? - ANS-These securities are not liquid investments
A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds. Although
hedge funds are not required to register with the SEC, funds of hedge funds typically do not have this
exemption available to them. Since funds of funds are invested in illiquid securities, hedge funds, they
do not typically offer investors the opportunity to sell on a daily basis. (Traditional mutual funds offer
this feature.) Liquidity means an investor can efficiently sell or convert her investment into cash.
Which of the following is/are regulated under the Investment Company Act of 1940?
Investment companies investing money into other investment companies
The firm that serves as a mutual fund's custodian and holds its assets
The minimum rate of return required to remain registered as a fund
The performance of the investment company - ANS-I and II only
The Investment Company Act of 1940 regulates investment companies, their investment advisers,
custodian banks, and distributors. The Investment Company Act of 1940 does not regulate performance
and it does not require minimum rates of return in order to maintain registration. (32401)
Which types of investments have historically shown a great deal of exposure to regulatory risk? - ANS-
Limited partnerships
Regulatory risk is the possibility that changes in the law or regulations can have an adverse impact on
the value of investments. Although all kinds of investments can be subject to regulatory risk, limited
VERIFIED QUESTIONS AND ANSWERS
A client purchases an equity-indexed annuity contract that guarantees a 4% return or 80% of the
performance of the S&P 500, whichever is greater. The index declines over the course of the next year.
What return will your client receive? - ANS-4%
An equity-indexed annuity guarantees the contract owner a minimum interest rate or the performance
of a stock index such as the S&P 500 Index. If the return on this index is less than the guaranteed rate,
the owner receives the guaranteed rate. If the index return is greater than the guarantee, the owner
receives the greater return. (62437)
The investment policy statement of a qualified retirement plan states that no more than 50% of the
plan's assets may be invested in stocks. The investment manager places 65% of the plan's assets in
stocks in order to take advantage of a bull market and increase the value of the plan's assets. Has the
investment manager violated the fiduciary responsibility provisions of ERISA? - ANS-Yes, since the
investment manager did not follow the stipulations of the investment policy statement
This is an actual court case. The plan's trustees sued the investment manager who was held liable even
though the plan's assets increased. (62146)
All of the following choices are required to be included in a trade blotter, EXCEPT: - ANS-The amount of
interest or dividends the investor will receive
Broker-dealers and investment advisers are required to keep certain books and records. One of them is
a blotter, which is a daily record of all purchases and sales of securities. The trade blotters contain
information concerning the transaction such as the account in which the trade was executed, the trade
date, the unit value and total value of the transaction, the name and amount of securities, and whom
the securities were bought from or sold to. Blotters are also required when a firm receives or delivers
securities as well as receives or disburses cash.
Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is: - ANS-
Five years
The statute of limitations for criminal violations under the Act is five years. (62943)
A small, single-office investment advisory firm has $4 million in assets under management. The firm is
located in Texas. According to the Uniform Securities Act, which of the following persons associated with
,the firm will NOT fall under the definition of an investment adviser representative? - ANS-An in-house
accountant who tabulates investment results for client accounts
IA representatives are persons who are associated with an IA and make recommendations, manage
accounts, solicit or negotiate the sale of IA services, or supervise any persons who engage in these
activities. Persons who perform clerical functions (e.g., accountants) are not considered IA
representatives. There is no requirement for a person to be an employee or to be solely dedicated to
sales to meet the definition of IA representative.
Under the Securities Exchange Act, a customer confirmation is NOT required to disclose: - ANS-The time
of the trade execution
The Securities Exchange Act requires broker-dealers to make specific disclosures on customer
confirmations. Some of the required information includes the capacity in which the broker-dealer is
acting (i.e., agency or principal), the amount of commission received by the broker-dealer for executing
an agency trade, and the settlement date of the trade. The time of the trade execution is not required to
be disclosed on a customer confirmation; however, it may be provided if the customer makes a specific
request.
Under the Uniform Securities Act, an Administrator may deny registration to an agent because of
findings that indicate the agent had been convicted of a felony within the past: - ANS-10 years
The Administrator may deny an agent's registration if she finds the individual has been convicted of a
felony within the past 10 years. (62109)
NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser
Representatives, and Federal Covered Advisers states that any fee arrangement based on capital gains
or portfolio appreciation may only be used if which of the following disclosures is made in writing? -
ANS-That the arrangement may cause the adviser to recommend strategies that encourage a client to
take greater-than-normal risks
As opposed to other fee arrangements, performance-based fees are more likely to encourage an adviser
to take greater risks with a client's money in order to generate more fees. While performance-based
fees are generally prohibited under the Uniform Securities Act, some state Administrators make
exceptions. (67684)
Susan is a high-ranking official in the Comptroller's Office of Zanzibar Securities. Her title is Executive
Vice President. Under the Uniform Securities Act, Susan is: - ANS-Not considered an agent since she is
not involved in sales or trading
Only personnel engaged in securities transactions are agents. Officers can be considered agents, but it
depends on their particular job function. (79474)
,Which of the following securities is NOT considered exempt under the Uniform Securities Act? - ANS-
Securities issued by an automobile company
Under the Uniform Securities Act, any security issued by Canada or a Canadian Province, or savings and
loan association, or any railroad company is considered an exempt security. There is an exemption
under the Act for common carriers but an automobile company does not qualify for this exemption. (
Value investors would be interested in companies that have - ANS-Low price earnings ratios
Value investing is a method of identifying securities that are undervalued based on company
fundamentals. Value stocks tend to have low stock prices in relationship to their earnings, a higher
dividend yield than their industry peers, and, typically, trade at a price closer to or at a discount to the
book value than their competitors. Value investors believe that the most undervalued companies should
rebound and outperform the market. This, of course, assumes that the company is financially sound.
(63012)
As an investment adviser, you are required to record and keep a record of every transaction in a security
for a client's account within: - ANS-10 days of the end of each quarter, excluding direct obligations of the
U.S. government
Under both the Investment Advisers Act and the Uniform Securities Act, investment advisers are
required to keep a record of every securities transaction within 10 days of the end of the quarter in
which the transaction took place. Transactions in direct obligations of the U.S. government are excluded
from this requirement.
What is the benefit of discounting the cash flows of a fixed-income security? - ANS-It compares the price
of a bond against the sum of the present values of the bond's future payouts
A discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a
present value, based on a rate of return. This makes it possible to evaluate a bond's value against the
investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of
the bond's principal, determines the total value of the bond. By comparing this value to the current
price of the bond, the adviser will be able to determine if the bond is an attractive investment for a
client.
Based on the past performance of XYZ stock, an investment adviser has determined that there is a 25%
chance that in a bull market, XYZ stock will return 20%. In a flat market (50% probability), the return
should be 5%. The likelihood of a bear market is 25%, and expected returns would be a loss of 10%.
What is the expected return for XYZ stock? - ANS-5%
, According to modern portfolio theory, the expected return is the sum of the weighted average of an
investment's return. To find each weighted return, multiply the return by the likelihood of that return.
For XYZ stock, the expected return is as follows.
Return
Likelihood
Weighted Return20%x25%=5%5%x50%=2.5%(10%)x25%=(2.5%)
Expected return = 5% (5% + 2.5% - 2.5%)
Your client is considering purchasing a fund of hedge funds. Which of the following statements
concerning this investment is TRUE? - ANS-These securities are not liquid investments
A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds. Although
hedge funds are not required to register with the SEC, funds of hedge funds typically do not have this
exemption available to them. Since funds of funds are invested in illiquid securities, hedge funds, they
do not typically offer investors the opportunity to sell on a daily basis. (Traditional mutual funds offer
this feature.) Liquidity means an investor can efficiently sell or convert her investment into cash.
Which of the following is/are regulated under the Investment Company Act of 1940?
Investment companies investing money into other investment companies
The firm that serves as a mutual fund's custodian and holds its assets
The minimum rate of return required to remain registered as a fund
The performance of the investment company - ANS-I and II only
The Investment Company Act of 1940 regulates investment companies, their investment advisers,
custodian banks, and distributors. The Investment Company Act of 1940 does not regulate performance
and it does not require minimum rates of return in order to maintain registration. (32401)
Which types of investments have historically shown a great deal of exposure to regulatory risk? - ANS-
Limited partnerships
Regulatory risk is the possibility that changes in the law or regulations can have an adverse impact on
the value of investments. Although all kinds of investments can be subject to regulatory risk, limited
