STC SERIES 66 MAIN EXAMINATION SHEET UPDATED
QUESTIONS AND ANSWERS GRADED A+
✔✔Two friends are starting their own business and are trying to decide whether to
organize this new business as an S Corporation or a general partnership. What is a
significant advantage of an S Corporation compared to a general partnership? -
✔✔Limited liability
(original and wrong answer was favorable tax treatment, which is an advantage of a
partnership, S corp has limited liability due to more shareholders, general partners have
unlimited liability)
If they form a general partnership, both partners are fully liable for the partnership's
debts. (Limited partners are not fully liable; however, the question gives no indication
that one of the partners will be a limited partner.) In an S Corporation, the owners are
not fully liable for the company's debts—they have only limited liability. As for choice (a),
both entities receive favorable federal tax treatment. Since both business entities are
pass-through vehicles for tax purposes, all losses and profits are passed through to the
owners.
✔✔Under the Uniform Securities Act, an investment adviser is required to provide a
balance sheet when it files Form ADV Part 2 in all of the following situations, EXCEPT
when: - ✔✔The investment adviser inadvertently received client securities, but returned
them after two business days.
In choice (c), the investment adviser has three business days to return the securities
before custody is established. Since the adviser returned the securities in two business
days, custody was not established and no balance sheet is required. Under the USA,
investment advisers that require the prepayment of fees of more than $500, six months
or more in advance, are required to include a balance sheet when they file Form ADV
Part 2 (choice [a]). In choice (b), the investment adviser has custody, which also
requires the inclusion of a balance sheet when it files Form ADV Part 2. In choice (d),
the investment adviser has authority to execute transactions in an account that belongs
to a client; therefore, the adviser has discretion over the account and is required to
provide a balance sheet when it files Form ADV Part 2.
✔✔An investment adviser's sole office is located in State A and its only client is the
State A Triple Tax-Free Municipal Bond Fund. The adviser exercises discretion over the
fund's investments and also performs safekeeping services for the fund. Which of the
following statements is TRUE? - ✔✔The investment adviser is not required to meet the
net worth requirements or post a bond since it is regulated at the federal level.
Since the investment adviser's only client is an investment company (a mutual fund), it
is considered a federal covered adviser. A federal covered adviser is not required to
register at the state level and is not subject to state requirements (e.g., maintaining a
minimum net worth requirement). Additionally, the Investment Advisers Act of 1940
(which is the appropriate regulation for federal covered advisers) does not impose
minimum net worth requirements.
,✔✔An investment adviser representative is preparing a financial plan for a client. As
part of this process, he's helping her create a personal balance sheet and income
statement. The income statement should include all of the following items, EXCEPT: -
✔✔Depreciation on the primary residence
Any appreciation or depreciation in real estate that the client owns is included on the
client's balance sheet, not her personal income statement. Commissions, bonuses,
interest, and dividends are all sources of income that should be included on the client's
income statement.
✔✔If an adviser inadvertently receives client funds and/or securities, it can avoid the
implication that it is maintaining custody of the assets by returning them to the sender
within: - ✔✔Three business days of receiving them
An investment adviser that holds clients' cash and/or securities, even temporarily, puts
those assets at risk of misuse or loss. For an investment adviser to avoid the implication
of having custody after inadvertently receiving client funds or securities, it must return
them to the sender within three business days of receiving them
✔✔According to NASAA's Model Rule on Unethical Business Practices of IAs and IARs,
all of the following are prohibited, EXCEPT - ✔✔Charging the customer a reasonable
advisory fee.
Charging customers a reasonable fee is not prohibited. However, all of the other
choices are considered unethical according to NASAA's model rule.
✔✔An investment adviser maintains its home office in State A and is also registered
there. State A has a minimum financial (net worth) requirement of $70,000. The firm
intends to open an office and provide advisory services in State B, which has a
minimum financial requirement of $80,000. Is any action required for the adviser to open
the office in State B? - ✔✔No, it is only required to satisfy the requirement of its home
state.
According to the Uniform Securities Act, an investment adviser's minimum financial
requirement is set by the state in which the adviser maintains its principal place of
business. No other state may impose higher requirements than the adviser's home
state. For that reason, this adviser is only required to satisfy the $70,000 requirement of
its home state (State A).
✔✔When a limited partnership is formed, which of the following documents is filed with
the state in which the partnership operates? - ✔✔A certificate of limited partnership
To establish a limited partnership, most states require the filing of the certificate of
limited partnership. The certificate of limited partnership discloses the existence of the
partnership, the nature of the business, and the names of all partners. The articles of
incorporation is filed to establish a corporation, not a partnership. The subscription
agreement is used to establish the investor's suitability for investing in a limited
partnerships, such as the income and net worth standards; it ultimately serves as a
confirmation of their investment. A private placement memorandum is the disclosure
document for partners that invest in a private placement.
,✔✔When is a mutual fund's prospectus required to be delivered? - ✔✔When a client is
solicited to buy mutual fund shares
Agents selling mutual fund shares are required to deliver a prospectus when they
attempt to sell to prospective investors (i.e., at or before solicitation). In some instances,
agents of broker-dealers can use a summary prospectus when selling, but only if the full
prospectus is delivered at the confirmation of the sale. (62597)
✔✔Which of the following business types is the LEAST likely to be affected by an
increase in interest rates? - ✔✔Cosmetics
When interest rates are rising, industrial corporations that sell expensive items (e.g.,
manufacturing and automotive) and banks are heavy borrowers and will be adversely
affected. However, cosmetic companies—due to the relative inexpensive nature of their
business and the low cost of their products—are not as affected by rising interest rates.
✔✔A person is interested in investing in the oil and gas sector because she anticipates
an increase in demand as the economy moves out of a recession. The person's IAR
advises her on various vehicles to gain exposure to this sector, such as oil and gas
mutual funds, oil and gas futures, options on the Oil and Gas Index, and oil and gas
limited partnerships. When comparing these choices, what is one disadvantage of a
limited partnership investment? - ✔✔A limited partnership's interest is less liquid.
Since limited partnership interests generally do not trade in the secondary market,
investors may find it difficult to sell their interests if the need arises. On the other hand,
mutual funds shares are redeemable, and options and futures can be closed out
(traded) in the secondary market. Partnership interests can be used as collateral and
can be offered to any type of investor. Only if partnership interests are offered through a
private placement conducted under Reg. D is there is a limit on the number and types of
investors that may participate.
✔✔A client contacts an investment adviser representative to discuss the possibility of
incorporating. Which of the following is a disadvantage of forming a C Corporation? -
✔✔Double taxation
The major disadvantage of a C Corporation is that its shareholders (owners) are taxed
twice. The corporation must first pay taxes on its earnings at the corporate level, then its
shareholders must pay personal income taxes on any income they receive from the
corporation in the form of dividends
✔✔A resident of State A buys a 4% general obligation bond offered by State B. The
investor is in the 30% federal tax bracket and State A imposes a 5% tax. What is the
bond's taxable equivalent yield? - ✔✔5.71%
The interest derived from a municipal bond is exempt from federal taxes, but is typically
subject to state income tax. Since the State B bond is being purchased by a resident of
State A, the interest must be declared as income and is subject to state income taxes.
On the other hand, if the issuing municipality is located within the state in which the
investor files her return, interest on the bond is exempt from state taxes as well. The
, formula for calculating the taxable equivalent yield for a tax-free bond is: Tax-free yield
÷ (100% - Tax rate %). For this question, the taxable equivalent yield is 5.71% (4% ÷
[100% - 30%]).
✔✔An agent is implementing a $500-per-month dollar cost averaging strategy for his
client who is purchasing stock. The price of the stock decreases from $10 per share to
$5 per share. How much will the client invest next month if he wishes to continue with
this strategy? - ✔✔$500
When implementing a dollar cost averaging strategy, the same dollar amount is
contributed over a fixed period. In this example, the client implemented the strategy by
investing $500 per month. Regardless of whether the price rises or falls, the client will
continue to contribute the same dollar amount
✔✔Which of the following persons is required to register as an agent in State A? - ✔✔A
person who represents a broker-dealer that is located in State A and solicits securities
transactions on an intrastate basis for clients' accounts.
A person who represents a broker-dealer in securities transactions is defined as an
agent. An agent who is located in State A is required to be registered in that state. Note
the use of the term intrastate which in this case does not involve an issue of securities,
but rather, securities solicitations that occur only within one state. As an exclusion from
registration, agents who are not registered in a state may execute transactions for
existing customers who are temporarily in that state. A person who represents an issuer
in a securities transaction is not defined as an agent provided she is only dealing with
exempt securities or involved in exempt transactions (e.g., a transaction between the
issuer and its underwriter). The same is true for an employee of the government who
effects securities transactions on behalf of the government
✔✔What is the name of the process by which an investor calculates the sum of the
present values of projected cash flows to determine the fair market value of an
investment? - ✔✔Discounted cash flows
When an investor takes an investment's future cash flows (e.g., dividends or interest
payments) and calculates their present value, she is using discounted cash flow
analysis. The process is referred to as discounting since the present value formula
takes the future value and divides by the time value of money term, i.e., (1+r)t. Net
present value takes the process a step further by subtracting the actual market price of
an investment by the fair market value that is found in the discounted cash flow analysis
✔✔Two clients of an IAR are forming their own business entity and plan to incorporate.
Which of the following entities has the MOST tax disadvantages? - ✔✔A C corporation
Please note that the question is asking not asking about tax advantages; it is asking
about tax disadvantages. From a tax perspective, a C Corporation is the least
advantageous. The corporation is first required to pay corporate taxes on any profits it
generates; thereafter, its shareholders (owners) are required to pay personal income
taxes on anything that is distributed to them in the form of dividends. All of the other
choices are flow-through entities for tax purposes, which makes them more tax efficient.
QUESTIONS AND ANSWERS GRADED A+
✔✔Two friends are starting their own business and are trying to decide whether to
organize this new business as an S Corporation or a general partnership. What is a
significant advantage of an S Corporation compared to a general partnership? -
✔✔Limited liability
(original and wrong answer was favorable tax treatment, which is an advantage of a
partnership, S corp has limited liability due to more shareholders, general partners have
unlimited liability)
If they form a general partnership, both partners are fully liable for the partnership's
debts. (Limited partners are not fully liable; however, the question gives no indication
that one of the partners will be a limited partner.) In an S Corporation, the owners are
not fully liable for the company's debts—they have only limited liability. As for choice (a),
both entities receive favorable federal tax treatment. Since both business entities are
pass-through vehicles for tax purposes, all losses and profits are passed through to the
owners.
✔✔Under the Uniform Securities Act, an investment adviser is required to provide a
balance sheet when it files Form ADV Part 2 in all of the following situations, EXCEPT
when: - ✔✔The investment adviser inadvertently received client securities, but returned
them after two business days.
In choice (c), the investment adviser has three business days to return the securities
before custody is established. Since the adviser returned the securities in two business
days, custody was not established and no balance sheet is required. Under the USA,
investment advisers that require the prepayment of fees of more than $500, six months
or more in advance, are required to include a balance sheet when they file Form ADV
Part 2 (choice [a]). In choice (b), the investment adviser has custody, which also
requires the inclusion of a balance sheet when it files Form ADV Part 2. In choice (d),
the investment adviser has authority to execute transactions in an account that belongs
to a client; therefore, the adviser has discretion over the account and is required to
provide a balance sheet when it files Form ADV Part 2.
✔✔An investment adviser's sole office is located in State A and its only client is the
State A Triple Tax-Free Municipal Bond Fund. The adviser exercises discretion over the
fund's investments and also performs safekeeping services for the fund. Which of the
following statements is TRUE? - ✔✔The investment adviser is not required to meet the
net worth requirements or post a bond since it is regulated at the federal level.
Since the investment adviser's only client is an investment company (a mutual fund), it
is considered a federal covered adviser. A federal covered adviser is not required to
register at the state level and is not subject to state requirements (e.g., maintaining a
minimum net worth requirement). Additionally, the Investment Advisers Act of 1940
(which is the appropriate regulation for federal covered advisers) does not impose
minimum net worth requirements.
,✔✔An investment adviser representative is preparing a financial plan for a client. As
part of this process, he's helping her create a personal balance sheet and income
statement. The income statement should include all of the following items, EXCEPT: -
✔✔Depreciation on the primary residence
Any appreciation or depreciation in real estate that the client owns is included on the
client's balance sheet, not her personal income statement. Commissions, bonuses,
interest, and dividends are all sources of income that should be included on the client's
income statement.
✔✔If an adviser inadvertently receives client funds and/or securities, it can avoid the
implication that it is maintaining custody of the assets by returning them to the sender
within: - ✔✔Three business days of receiving them
An investment adviser that holds clients' cash and/or securities, even temporarily, puts
those assets at risk of misuse or loss. For an investment adviser to avoid the implication
of having custody after inadvertently receiving client funds or securities, it must return
them to the sender within three business days of receiving them
✔✔According to NASAA's Model Rule on Unethical Business Practices of IAs and IARs,
all of the following are prohibited, EXCEPT - ✔✔Charging the customer a reasonable
advisory fee.
Charging customers a reasonable fee is not prohibited. However, all of the other
choices are considered unethical according to NASAA's model rule.
✔✔An investment adviser maintains its home office in State A and is also registered
there. State A has a minimum financial (net worth) requirement of $70,000. The firm
intends to open an office and provide advisory services in State B, which has a
minimum financial requirement of $80,000. Is any action required for the adviser to open
the office in State B? - ✔✔No, it is only required to satisfy the requirement of its home
state.
According to the Uniform Securities Act, an investment adviser's minimum financial
requirement is set by the state in which the adviser maintains its principal place of
business. No other state may impose higher requirements than the adviser's home
state. For that reason, this adviser is only required to satisfy the $70,000 requirement of
its home state (State A).
✔✔When a limited partnership is formed, which of the following documents is filed with
the state in which the partnership operates? - ✔✔A certificate of limited partnership
To establish a limited partnership, most states require the filing of the certificate of
limited partnership. The certificate of limited partnership discloses the existence of the
partnership, the nature of the business, and the names of all partners. The articles of
incorporation is filed to establish a corporation, not a partnership. The subscription
agreement is used to establish the investor's suitability for investing in a limited
partnerships, such as the income and net worth standards; it ultimately serves as a
confirmation of their investment. A private placement memorandum is the disclosure
document for partners that invest in a private placement.
,✔✔When is a mutual fund's prospectus required to be delivered? - ✔✔When a client is
solicited to buy mutual fund shares
Agents selling mutual fund shares are required to deliver a prospectus when they
attempt to sell to prospective investors (i.e., at or before solicitation). In some instances,
agents of broker-dealers can use a summary prospectus when selling, but only if the full
prospectus is delivered at the confirmation of the sale. (62597)
✔✔Which of the following business types is the LEAST likely to be affected by an
increase in interest rates? - ✔✔Cosmetics
When interest rates are rising, industrial corporations that sell expensive items (e.g.,
manufacturing and automotive) and banks are heavy borrowers and will be adversely
affected. However, cosmetic companies—due to the relative inexpensive nature of their
business and the low cost of their products—are not as affected by rising interest rates.
✔✔A person is interested in investing in the oil and gas sector because she anticipates
an increase in demand as the economy moves out of a recession. The person's IAR
advises her on various vehicles to gain exposure to this sector, such as oil and gas
mutual funds, oil and gas futures, options on the Oil and Gas Index, and oil and gas
limited partnerships. When comparing these choices, what is one disadvantage of a
limited partnership investment? - ✔✔A limited partnership's interest is less liquid.
Since limited partnership interests generally do not trade in the secondary market,
investors may find it difficult to sell their interests if the need arises. On the other hand,
mutual funds shares are redeemable, and options and futures can be closed out
(traded) in the secondary market. Partnership interests can be used as collateral and
can be offered to any type of investor. Only if partnership interests are offered through a
private placement conducted under Reg. D is there is a limit on the number and types of
investors that may participate.
✔✔A client contacts an investment adviser representative to discuss the possibility of
incorporating. Which of the following is a disadvantage of forming a C Corporation? -
✔✔Double taxation
The major disadvantage of a C Corporation is that its shareholders (owners) are taxed
twice. The corporation must first pay taxes on its earnings at the corporate level, then its
shareholders must pay personal income taxes on any income they receive from the
corporation in the form of dividends
✔✔A resident of State A buys a 4% general obligation bond offered by State B. The
investor is in the 30% federal tax bracket and State A imposes a 5% tax. What is the
bond's taxable equivalent yield? - ✔✔5.71%
The interest derived from a municipal bond is exempt from federal taxes, but is typically
subject to state income tax. Since the State B bond is being purchased by a resident of
State A, the interest must be declared as income and is subject to state income taxes.
On the other hand, if the issuing municipality is located within the state in which the
investor files her return, interest on the bond is exempt from state taxes as well. The
, formula for calculating the taxable equivalent yield for a tax-free bond is: Tax-free yield
÷ (100% - Tax rate %). For this question, the taxable equivalent yield is 5.71% (4% ÷
[100% - 30%]).
✔✔An agent is implementing a $500-per-month dollar cost averaging strategy for his
client who is purchasing stock. The price of the stock decreases from $10 per share to
$5 per share. How much will the client invest next month if he wishes to continue with
this strategy? - ✔✔$500
When implementing a dollar cost averaging strategy, the same dollar amount is
contributed over a fixed period. In this example, the client implemented the strategy by
investing $500 per month. Regardless of whether the price rises or falls, the client will
continue to contribute the same dollar amount
✔✔Which of the following persons is required to register as an agent in State A? - ✔✔A
person who represents a broker-dealer that is located in State A and solicits securities
transactions on an intrastate basis for clients' accounts.
A person who represents a broker-dealer in securities transactions is defined as an
agent. An agent who is located in State A is required to be registered in that state. Note
the use of the term intrastate which in this case does not involve an issue of securities,
but rather, securities solicitations that occur only within one state. As an exclusion from
registration, agents who are not registered in a state may execute transactions for
existing customers who are temporarily in that state. A person who represents an issuer
in a securities transaction is not defined as an agent provided she is only dealing with
exempt securities or involved in exempt transactions (e.g., a transaction between the
issuer and its underwriter). The same is true for an employee of the government who
effects securities transactions on behalf of the government
✔✔What is the name of the process by which an investor calculates the sum of the
present values of projected cash flows to determine the fair market value of an
investment? - ✔✔Discounted cash flows
When an investor takes an investment's future cash flows (e.g., dividends or interest
payments) and calculates their present value, she is using discounted cash flow
analysis. The process is referred to as discounting since the present value formula
takes the future value and divides by the time value of money term, i.e., (1+r)t. Net
present value takes the process a step further by subtracting the actual market price of
an investment by the fair market value that is found in the discounted cash flow analysis
✔✔Two clients of an IAR are forming their own business entity and plan to incorporate.
Which of the following entities has the MOST tax disadvantages? - ✔✔A C corporation
Please note that the question is asking not asking about tax advantages; it is asking
about tax disadvantages. From a tax perspective, a C Corporation is the least
advantageous. The corporation is first required to pay corporate taxes on any profits it
generates; thereafter, its shareholders (owners) are required to pay personal income
taxes on anything that is distributed to them in the form of dividends. All of the other
choices are flow-through entities for tax purposes, which makes them more tax efficient.
