Wiley series 65 exam review 2016 test bank the uniform investment advisor law examination

WILEY SERIES 65
EXAM REVIEW 2016


WILEY FINRA SERIES
This series includes the following titles:
Wiley Series 3 Exam Review 2016 + Test Bank: National Commodities
Futures Examination
Wiley Series 4 Exam Review 2016 + Test Bank: The Registered Options
Principal Examination
Wiley Series 6 Exam Review 2016 + Test Bank: The Investment Company
and Variable Contracts Products Representative Examination
Wiley Series 7 Exam Review 2016 + Test Bank: The General Securities
Representative Examination
Wiley Series 9 Exam Review 2016 + Test Bank: The General Securities Sales
Supervisor Examination—Option Module
Wiley Series 10 Exam Review 2016 + Test Bank: The General Securities Sales
Supervisor Examination—General Module
Wiley Series 24 Exam Review 2016 + Test Bank: The General Securities
Principal Examination
Wiley Series 26 Exam Review 2016 + Test Bank: The Investment Company
and Variable Contracts Products Principal Examination
Wiley Series 55 Exam Review 2016 + Test Bank: The Equity Trader
Examination
Wiley Series 62 Exam Review 2016 + Test Bank: The Corporate Securities
Representative Examination
Wiley Series 63 Exam Review 2016 + Test Bank: The Uniform Securities
State Law Examination
Wiley Series 65 Exam Review 2016 + Test Bank: The Uniform Investment

Adviser Law Examination
Wiley Series 66 Exam Review 2016 + Test Bank: The Uniform Combined
State Law Examination
Wiley Series 99 Exam Review 2016 + Test Bank: The Operations Professional
Examination
For more on this series, visit the website at www.wileysecuritieslicensing.com.


WILEY SERIES 65
EXAM REVIEW 2016
The Uniform Investment
Adviser Law Examination

The Securities Institute of America, Inc.


Cover Design: Wiley
Cover Image: © iStockphoto.com / LuisB
Copyright © 2016 by The Securities Institute of America, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
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Published simultaneously in Canada.
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Printed in the United States of America
10  9  8  7  6  5  4  3  2  1


Contents

ABOUT THE SERIES 65 EXAM

xxi

ABOUT THIS BOOK

xxv

ABOUT THE TEST BANK

xxvii

ABOUT THE SECURITIES INSTITUTE OF AMERICA

xxix

CHAPTER 1
EQUITY SECURITIES1
What Is a Security?
1
Equity = Stock
2
Common Stock
2
Corporate Time Line
2
Values of Common Stock
4
Book Value
4
Par Value
5
Rights of Common Stockholders
5
Preemptive Rights
5
Characteristics of a Rights Offering

6
Determining the Value of a Right Cum Rights
7
Determining the Value of a Right Ex Rights
7
Voting8


vi

Contents

Limited Liability
9
Freely Transferable
9
The Transfer Agent
10
The Registrar
10
CUSIP Numbers
11
Inspection of Books and Records
11
Residual Claim to Assets
11
Why Do People Buy Common Stock?
11
Income11
What Are the Risks of Owning Common Stock?

12
How Does Someone Become a Stockholder?
13
Preferred Stock
14
Features of All Preferred Stock
14
Types of Preferred Stock
16
Callable Preferred
17
Types of Dividends
17
Dividend Distribution
18
Taxation of Dividends
20
Selling Dividends
20
Dividend Disbursement Process
21
Warrants21
How Do People Get Warrants? 
21
American Depositary Receipts (ADRs)/American Depositary Shares (ADSs)
22
Currency Risks
23
Functions of the Custodian Bank Issuing ADRs
23

Real Estate Investment Trusts/REITs
23
Direct Participation Programs and Limited Partnerships 
24
Limited Partnerships
24
Tax Reporting for Direct Participation Programs
28
Limited Partnership Analysis
28
Tax Deductions vs. Tax Credits
28
Other Tax Considerations
29
Dissolving a Partnership
29
Pretest31


Contents

vii

CHAPTER 2
CORPORATE AND MUNICIPAL DEBT SECURITIES

35

Corporate Bonds
35

Types of Bond Issuance
36
Bond Pricing
37
Par Value
38
Discount38
Premium38
Corporate Bond Pricing
38
Bond Yields
39
Yield to Maturity: Premium Bond
40
Yield to Maturity: Discount Bond
41
Calculating the Yield to Maturity
41
Calculating the Yield to Call
42
Realized Compound Yield Returns 
42
Yield Spreads
43
The Real Interest Rate
43
Bond Maturities
43
Series Issue
44

Types of Corporate Bonds
44
Guaranteed Bonds
46
Convertible Bonds
46
Converting Bonds into Common Stock
47
Parity Price
47
Advantages of Issuing Convertible Bonds
48
Disadvantages of Issuing Convertible Bonds
48
Convertible Bonds and Stock Splits
48
The Trust Indenture Act of 1939
49
Bond Indenture
49
Ratings Considerations
49
Exchange Traded Notes (ETNs)
50
Euro and Yankee Bonds
50
Variable Rate Securities
51
Retiring Corporate Bonds
51

viii

Contents

Municipal Bonds
53
Types of Municipal Bonds
54
Taxation of Municipal Bonds
58
Tax-Equivalent Yield
58
Purchasing a Municipal Bond Issued in the State in Which the Investor Resides
59
Triple Tax Free
59
Original Issue Discount (OID) and Secondary Market Discounts
59
Amortization of a Municipal Bond’s Premium
60
Bond Swaps
60
Analyzing Municipal Bonds
60
Analyzing General Obligation Bonds
61
Duration61
Convexity62

Bond Portfolio Management
62
Pretest65

CHAPTER 3
GOVERNMENT AND GOVERNMENT AGENCY ISSUES69
Series EE Bonds
Series HH Bonds
Treasury Bills, Notes, and Bonds
Purchasing Treasury Bills
Treasury Notes
Treasury Bonds
Treasury Bond and Note Pricing
Treasury STRIPs
Treasury Receipts
Treasury Inflation Protected Securities (TIPS)
Agency Issues
Government National Mortgage Association (GNMA)
Federal National Mortgage Association (FNM)
Federal Home Loan Mortgage Corporation (FHLMC)
Federal Farm Credit System
Collateralized Mortgage Obligation (CMO)

69
70
70
70
71
71
71

72
72
73
74
74
75
75
76
76


Contents

ix

CMOs and Interest Rates
76
Types of CMOs
77
Pretest79

CHAPTER 4
INVESTMENT COMPANIES
Investment Company Philosophy
Types of Investment Companies
Open End vs. Closed End
Diversified vs. Nondiversified
Investment Company Registration
Registration Requirements
Investment Company Components

Mutual Fund Distribution
Selling Group Member
Distribution of No-Load Mutual Fund Shares
Distribution of Mutual Fund Shares
Mutual Fund Prospectus
Characteristics of Open-End Mutual Fund Shares
Mutual Fund Investment Objectives
Other Types of Funds
Bond Funds
Alternative Funds
Valuing Mutual Fund Shares
Sales Charges
Other Types of Sales Charges
Recommending Mutual Funds 
Calculating a Mutual Fund’s Sales Charge Percentage
Finding the Public Offering Price
Sales Charge Reductions
Breakpoint Schedule
Letter of Intent
Breakpoint Sales
Rights of Accumulation

81
81
82
83
84
85
85
87

89
89
90
90
90
91
92
94
94
96
96
98
100
100
101
102
102
103
103
104
104


x

Contents

Automatic Reinvestment of Distributions
105
Other Mutual Fund Features

105
Dollar Cost Averaging
106
Mutual Funds Voting Rights
108
Mutual Fund Yields
109
Portfolio Turnover 
109
Pretest111

CHAPTER 5
VARIABLE ANNUITIES AND RETIREMENT PLANS

115

Annuities115
Bonus Annuity 
117
Equity-Indexed Annuity
118
Recommending Variable Annuities 
119
Annuity Purchase Options
120
Accumulation Units
121
Annuity Units
121
Annuity Payout Options

122
Factors Affecting the Size of the Annuity Payment
123
The Assumed Interest Rate (AIR)
123
Taxation124
Types of Withdrawals
124
Annuitizing the Contract
125
Sales Charges
125
Investment Management Fees
125
Variable Annuity vs. Mutual Fund
125
Retirement Plans 
126
Individual Plans
126
Individual Retirement Accounts (IRAs)
126
Corporate Plans
135
Types of Plans
136
Rolling Over a Pension Plan
138
Employee Stock Options
138

Contents

xi

Employee Retirement Income Security Act of 1974 (ERISA)
139
Erisa 404C Safe Harbor
140
Life Insurance
141
Tax Implications of Life Insurance 
143
Pretest145

CHAPTER 6
FUNDAMENTAL AND TECHNICAL ANALYSIS

149

Fundamental Analysis
149
Balance Sheet
150
Capitalization152
Changes in the Balance Sheet
152
The Income Statement
156

Industry Fundamentals
158
Top-Down and Bottom-Up Analysis 
158
Dividend Valuation Models 
159
Technical Analysis
159
Market Theories and Indicators
163
Efficient Market Theory
164
Statistical Analysis 
165
Market Capitalization
166
Pretest167

CHAPTER 7
ECONOMIC FUNDAMENTALS

169

Gross Domestic Product
169
Recession171
Depression171
Economic Indicators
171
Schools of Economic Thought 

173
Economic Policy
174
Tools of the Federal Reserve Board
174
Interest Rates
174


xii

Contents

Reserve Requirement
176
Changing the Discount Rate
176
Federal Open Market Committee
176
Money Supply
177
Disintermediation178
Moral Suasion
178
Fiscal Policy
178
International Monetary Considerations
180
London Interbank Offered Rate / Libor
180

Yield Curve Analysis 
181
Pretest183

CHAPTER 8
RECOMMENDATIONS, PROFESSIONAL CONDUCT, AND TAXATION

187

Professional Conduct by Investment Advisers
188
The Uniform Prudent Investors Act of 1994
188
Fair Dealings with Clients
189
Recommending Mutual Funds
193
Periodic Payment Plans
193
Disclosure of Client Information
194
Borrowing and Lending Money
194
Developing the Client Profile
194
Types of Advisory Clients
195
Investment Objectives
200
Capital Asset Pricing Model (CAPM)

202
Risk vs. Reward
203
Alpha205
Beta205
Expected Return
206
Time Value of Money
207
Weighted Returns 
209
Modern Portfolio Theory
211


Contents

xiii

Predicting Portfolio Income 
212
Tax Structure 
214
Investment Taxation214
Calculating Gains and Losses 
214
Cost Base of Multiple Purchases 
215
Deducting Capital Losses
216

Wash Sales 
216
Taxation of Interest Income
217
Inherited and Gifted Securities 
217
Donating Securities to Charity
217
Trusts218
Gift Taxes
220
Estate Taxes220
Withholding Tax
221
Corporate Dividend Exclusion
221
Alternative Minimum Tax (AMT)
221
Taxes on Foreign Securities 
221
Pretest223

CHAPTER 9
SECURITIES INDUSTRY RULES AND REGULATIONS 

227

The Securities Act of 1933
227
The Prospectus

228
The Final Prospectus
228
SEC Disclaimer
229
Misrepresentations229
The Securities Exchange Act of 1934
230
The Securities Exchange Commission (SEC)
230
Extension of Credit
231
Public Utilities Holding Company Act of 1935
231
Financial Industry Regulatory Authority (FINRA)
231
The Trust Indenture Act of 1939
232


xiv

Contents

Investment Advisers Act of 1940
232
Investment Company Act of 1940
233
FINRA Member Communications with the Public
233

FINRA Rule 2210 Communications with the Public
234
Corporate Websites 
236
Blind Recruiting Ads
237
Generic Advertising
237
Tombstone Ads
238
Testimonials238
Free Services
239
Misleading Communications
240
Securities Investor Protection Corporation Act of 1970 (SIPC)
240
Net Capital Requirement
240
Customer Coverage
241
Fidelity Bond
241
The Securities Acts Amendments of 1975
242
The Insider Trading and Securities Fraud Enforcement Act of 1988
242
Firewall243
The Telephone Consumer Protection Act of 1991
243

Exemption from the Telephone Consumer Protection Act of 1991
244
National Securities Market Improvement Act of 1996
244
The Uniform Securities Act
245
Currency Transactions
245
The Patriot Act
246
Pretest249

CHAPTER 10
TRADING SECURITIES253
Types of Orders
The Exchanges
Priority of Exchange Orders
The Role of the Specialist/DMM
The Specialist/DMM Acting as a Principal

253
257
257
257
258


Contents

xv

The Specialist/DMM Acting as an Agent
258
Crossing Stock
260
Do Not Reduce (DNR)
261
Adjustments for Stock Splits
261
Stopping Stock
262
Commission House Broker
263
Two-Dollar Broker
263
Registered Traders 
263
Super Display Book (SDBK) 
263
Short Sales 
264
Regulation of Short Sales/Regulation SHO
264
Rule 200 Definitions and Order Marking
264
Rule 203 Security Borrowing and Delivery Requirements
265
Over the Counter/Nasdaq
266
Market Makers

267
Nasdaq Subscription Levels
267
Nasdaq Quotes268
Nominal Nasdaq Quotes
269
Nasdaq Execution Systems
269
Nasdaq Market Center Execution System (NMCES) 
269
Nasdaq Opening Cross
270
Non-Nasdaq OTCBB
270
Pink OTC
270
Third Market
270
Fourth Market
271
Broker vs. Dealer
271
FINRA 5% Markup Policy
272
Markups/Markdowns When Acting as a Principal
272
Riskless Principal Transactions
273
Proceeds Transactions
274

Arbitrage274
Pretest275


xvi

CHAPTER 11
OPTIONS 

Contents

279

Option Classification
279
Option Classes
280
Option Series
280
Bullish vs. Bearish
280
Possible Outcomes for an Option
281
Characteristics of All Options
282
Managing an Option Position
282
Buying Calls
283
Maximum Gain Long Calls

283
Maximum Loss Long Calls
283
Determining the Breakeven for Long Calls
284
Selling Calls
284
Buying Puts
286
Selling Puts
287
Option Premiums
289
In-the-Money Options
289
At-the-Money Options
289
Out-of-the-Money Options
290
Intrinsic Value and Time Value
290
Using Options as a Hedge
291
Long Stock Long Puts/Married Puts
291
Long Stock Short Calls/Covered Calls
293
Short Stock Long Calls
295
Short Stock Short Puts

298
Futures and Forwards 
301
Correlation301
Pretest303

CHAPTER 12
DEFINITION OF TERMS

307

Security307
Person309


Contents

xvii

Broker Dealer
310
Agent311
Issuer311
Nonissuer312
Investment Adviser
312
Pension Consultants 
312
Investment Counsel 
313

Form ADV
313
Investment Adviser Registration Database IARD 
314
Investment Adviser Representative
315
Solicitor315
Access Person 
315
Institutional Investor
316
Accredited Investor
316
Qualified Purchaser
317
Private Investment Company
317
Offer/Offer to Sell/Offer to Buy
317
Sale/Sell317
Guarantee/Guaranteed318
Contumacy318
Federally Covered Exemption
318
Power of Attorney 
319
Negotiable Certificate of Deposit 
319
Pretest321

CHAPTER 13
REGISTRATION OF BROKER DEALERS, INVESTMENT ADVISERS,
AND AGENTS
Registration of Broker Dealers and Agents
Changes in an Agent’s Employment
Mergers and Acquisitions of Firms
Renewing Registrations
Canadian Firms and Agents
Investment Adviser Registration

327
327
332
332
332
332
333


xviii

Contents

Advertising and Sales Literature
337
Brochure Delivery
338
The Role of the Investment Adviser
339
Additional Compensation for an Investment Adviser

339
Agency Cross Transactions
340
Disclosures by an Investment Adviser
340
Investment Adviser Contracts
343
Additional Roles of Investment Advisers
343
Private Investment Companies/Hedge Funds
344
Fulcrum Fees
344
Wrap Accounts
344
Soft Dollars
344
Pretest347

CHAPTER 14
SECURITIES REGISTRATION, EXEMPT SECURITIES, AND
EXEMPT TRANSACTIONS

353

Exempt Securities
353
Securities Registration
354
Exempt Securities/Federally Covered Exemption

357
Exempt Transactions
358
Private Placements/Regulation D Offerings
358
RULE 144
359
RULE 147 Intrastate Offering
360
Transactions with Financial Institutions
360
Transactions with Fiduciaries
361
Transactions with Underwriters
361
Unsolicited Orders
361
Transactions in Mortgage-Backed Securities
361
Pledges362
Offers to Existing Securities Holders
362
Preorganization Certificates
362
Isolated Nonissuer Transactions
362


Contents

xix

Nonissuer Transactions
363
Pretest365

CHAPTER 15
STATE SECURITIES ADMINISTRATOR: THE UNIFORM SECURITIES ACT369
North America Securities Administrators Association 
369
Actions by the State Securities Administrator
370
Cancelation of a Registration
371
Withdrawal of a Registration
371
Actions Against an Issuer of Securities
371
Rule Changes
372
Administrative Orders 
372
Interpretive Opinions
373
Administrative Records
373
Investigations374
Civil and Criminal Penalties
374
Jurisdiction of the State Securities Administrator375

Administrator’s Jurisdiction over Securities Transactions
376
Radio, Television, and Newspaper Distribution 
378
Right of Rescission
378
Statute of Limitations
379
Pretest381

ANSWER KEYS

387

GLOSSARY OF EXAM TERMS

401

INDEX467



About the Series 65 Exam

Congratulations! You are on your way to becoming licensed as an investment
adviser in all states that require the Series 65 license. The Series 65 exam will
be presented in a 130-question multiple-choice format. Each candidate will
have three hours to complete the exam. A score of 72% or higher is required
to pass.
The Series 65 is as much a knowledge test as it is a reading test. The writers and instructors at The Securities Institute have developed the Series 65

textbook, exam prep software, and videos to ensure that you have the knowledge required to pass the test, and to make sure that you are confident in the
application of the knowledge during the exam. The writers and instructors
at The Securities Institute are subject-matter experts as well as Series 65 test
experts. We understand how the test is written and our proven test-taking
techniques can dramatically improve your results.

TAKING THE SERIES 65 EXAM
The Series 65 exam is presented in multiple-choice format on a touch-screen
computer known as the PROCTOR system. No computer skills are required
and candidates will find that the test screen works in the same way as an ordinary ATM machine. Each test is made up of 130 questions that are randomly
chosen from a test bank of several thousand questions. The test has a time
limit of three hours and is designed to provide enough time for all candidates
to complete the exam. Each Series 65 exam will have 10 additional questions
that do not count toward the final score. The Series 65 exam comprises questions that focus on the following areas:


xxii

WILEY SERIES 65  Exam Review 2016

Ethics and legal guidelines

40 questions

31%

Investment strategies

40 questions

31%

Investment vehicles

31 questions

24%

Economics and analysis

19 questions

14%

TOTAL

130 Questions

100%

HOW TO PREPARE FOR THE SERIES 65 EXAM?
For most candidates the combination of reading the textbook, watching the
videos, and using the exam prep software is enough to successfully complete
the exam. It is recommended that the individual spend at least 40 hours preparing for the exam by reading the textbook, underlining key points, watching the video class, and by taking as many practice questions as possible. We
recommend that a student schedule his or her exam no more than one week
after completing the Series 65 exam prep.
Test-Taking Tips
□□Read the full question before answering.
□□ Identify what the question is asking.
□□ Identify key words and phrases.

□□ Watch out for hedge clauses, for example, except and not.
□□ Eliminate wrong roman numeral answers.
□□ Identify synonymous terms.
□□ Be wary of changing answers.

WHY DO I NEED TO TAKE THE SERIES 65 EXAM?
In order to conduct fee-based securities business, most states require that
an agent successfully complete the Series 65 exam. Passing the Series 65
exam will allow an agent to receive asset-based management and other
advisory fees. The Series 65 is often taken in addition to obtaining a Series
6, 7, or 62 registration, which allow an agent to receive transaction-based
compensation.


  About the Series 65 Exam

xxiii

WHAT SCORE IS NEEDED TO PASS THE EXAM?
A score of 72% or higher is needed to pass the Series 65 exam.

ARE THERE ANY PREREQUISITES
FOR THE SERIES 65 EXAM?
A candidate is not required to have any other professional qualifications prior
to taking the Series 65 exam.

HOW DO I SCHEDULE AN EXAM?
Ask your firm’s principal to schedule the exam for you, or for a list of test
centers in your area. You may be self-sponsored to take the exam. You must
fill out and submit form U10 prior to making an appointment. The Series 65

exam may be taken any day that the exam center is open.

WHAT MUST I TAKE TO THE EXAM CENTER?
A picture ID is required. All other materials will be provided, including a
calculator and scratch paper.

HOW SOON WILL I RECEIVE THE RESULTS OF THE EXAM?
The exam will be graded as soon as you answer your final question and hit
the Submit for Grading button. It will take only a few minutes to get your
results. Your grade will appear on the computer screen and you will be given
a paper copy from the exam center.
If you do not pass the test, you will need to wait 30 days before taking
it again. If you do not pass on the second try, you’ll need to wait another
30 days. After that, you are required to wait 6 months to take the test again.