NASAA Series 65 — All Questions

A client states that she is comfortable with large market swings, but she has minimal savings and a highly variable income. The adviser should recognize that her:

• a.Risk capacity is low even though her stated risk tolerance is high✓
• b.Investment objective should therefore be aggressive capital growth
• c.Time horizon removes any need to evaluate her financial capacity
• d.Risk tolerance is low even though her financial capacity is high

Risk tolerance is a psychological willingness to accept volatility; risk capacity is the objective financial ability to absorb a loss without derailing the plan. When the two conflict, the lower of the two governs the recommendation, because a client with thin reserves and unstable income may be forced to sell at the worst possible moment. Documenting both is part of a fiduciary's duty of care.

Four bonds mature in ten years and carry identical credit quality. Which one has the longest duration?

• a.The 8% coupon bond, because its large coupons are reinvested each period
• b.The zero-coupon bond, because the holder receives no cash until maturity✓
• c.The floating-rate note, because its coupon resets with short-term rates
• d.The 5% coupon bond callable in two years at a premium above par value

Duration is the weighted average time until a bond's cash flows are received. A zero-coupon bond has only one cash flow, at maturity, so its duration equals its maturity of ten years, the maximum available in this group. Coupon bonds return cash sooner, which pulls duration below maturity, and the higher the coupon the shorter the duration. A floating-rate note reprices at each reset, so its interest-rate duration is very short.

Under the Investment Advisers Act of 1940, which of the following is excluded from the definition of investment adviser?

• a.A pension consultant who advises plans on choosing money managers
• b.A bank or bank holding company that is not itself an investment company✓
• c.A financial planner who charges an hourly fee for advice on securities
• d.A sports agent who advises athletes on selecting specific mutual funds

Section 202(a)(11) of the Advisers Act lists specific exclusions, and banks and bank holding companies that are not investment companies are among them, because banking regulators already supervise them. Anyone else who gives securities advice as a business for compensation meets the three-prong test, and neither an unusual job title nor an institutional clientele defeats it.Investment Advisers Act of 1940

The primary purpose of a written investment policy statement is to:

• a.Guarantee that the portfolio will achieve its stated annual rate of return
• b.Satisfy the requirement that every advisory contract be reduced to writing
• c.Document the objectives, constraints, and guidelines that govern the portfolio✓
• d.Replace the periodic account statements delivered by the qualified custodian

An investment policy statement records return objectives, risk parameters, time horizon, liquidity needs, tax posture, permitted asset classes, and rebalancing rules. It disciplines both adviser and client during market stress and gives a written standard against which decisions can be reviewed. It is not a performance guarantee, and it does not substitute for the advisory contract or for custodial statements.

A broker-dealer loses its exclusion from the definition of investment adviser under the Investment Advisers Act of 1940 when it:

• a.Publishes research reports distributed free to all of its brokerage clients
• b.Executes unsolicited orders for customers in listed equity securities
• c.Receives special compensation for advice beyond ordinary brokerage charges✓
• d.Employs registered agents who are compensated solely through commissions

A broker-dealer is excluded only when its advice is solely incidental to its brokerage business AND it receives no special compensation for that advice. Charging a separate advisory or wrap fee is special compensation, so the firm must register as an investment adviser for that activity. Commission-only compensation for executing trades keeps the exclusion intact.Investment Advisers Act of 1940

A bond portfolio has a modified duration of 7. If market yields rise by one percentage point, the portfolio's value is expected to:

• a.Decline by approximately 7%✓
• b.Decline by approximately 0.7%
• c.Increase by approximately 7%
• d.Increase by approximately 1%

The duration approximation is: percentage price change is roughly the negative of modified duration multiplied by the change in yield. Here that is -7 x 1.00% = -7%. On a $1,000,000 portfolio the estimated loss is about $70,000. Prices and yields move inversely, so a rate increase must produce a price decline, and duration tells you how large it should be.

A portfolio has an expected return of 8% and a standard deviation of 10%, with normally distributed returns. Approximately 95% of annual outcomes should fall between:

• a.0% and +16%
• b.-12% and +28%✓
• c.-22% and +38%
• d.-2% and +18%

About 95% of a normal distribution lies within two standard deviations of the mean. Two standard deviations equal 2 x 10% = 20%. So the range is 8% - 20% = -12% on the low side and 8% + 20% = +28% on the high side. One standard deviation (-2% to +18%) captures roughly 68%, and three standard deviations (-22% to +38%) capture roughly 99%.

Rising consumer prices that are driven by higher raw-material and wage costs rather than by stronger buyer demand are best described as:

• a.Deflation, in which the general level of prices actually falls from period to period
• b.Disinflation, in which the rate of price increases slows while prices still rise
• c.Cost-push inflation, in which higher input and labor costs are passed along in prices✓
• d.Demand-pull inflation, in which total spending outruns the economy's productive capacity

Cost-push inflation originates on the supply side: energy, materials, or wage costs rise, producers' margins compress, and they raise selling prices. Demand-pull inflation originates on the demand side, when spending exceeds what the economy can produce. Disinflation is a slowing of the inflation rate, and deflation is an outright decline in the price level. Knowing which force is at work matters because cost-push inflation can coexist with weak growth, which limits how aggressively a central bank can ease.

The brochure supplement, Form ADV Part 2B, must be delivered to a client and describes the:

• a.Custodian's procedures for safeguarding client funds and securities
• b.Performance record of every model portfolio the firm currently manages
• c.Background of the individuals who actually provide advice to that client✓
• d.Firm's fee schedule, advisory services, and disciplinary history

Part 2A is the firm brochure covering services, fees, conflicts, and disciplinary history. Part 2B is the supplement, and it covers the specific supervised persons who formulate advice for or have discretion over that client: their education, business experience, disciplinary events, other business activities, and who supervises them. Clients receive the supplement for their own adviser, not for the entire staff.Investment Advisers Act of 1940

When the Federal Open Market Committee buys U.S. government securities from banks in the open market, the most direct effect is that:

• a.Bank reserves and the money supply expand, putting downward pressure on short-term rates✓
• b.Bank reserves contract and short-term interest rates are pushed sharply higher
• c.The federal budget deficit is reduced because the Treasury retires outstanding public debt
• d.Commercial banks are required to hold a larger percentage of their deposits in reserve

Open market operations are the Federal Reserve's primary monetary tool. When the Fed buys securities it pays the selling banks by crediting their reserve accounts, so reserves and the money supply grow and the cost of overnight money tends to fall. Selling securities drains reserves and pushes rates up. Retiring public debt is a Treasury (fiscal) function, and reserve requirements are a separate tool set by the Fed, not a consequence of a purchase.

An analyst assigns a 30% probability to a 20% return, a 50% probability to a 10% return, and a 20% probability to a -5% return. The expected return is:

• a.8.3%
• b.6.0%
• c.10.0%✓
• d.11.5%

Expected return is the probability-weighted average of the outcomes: (0.30 x 20%) = 6.0%, plus (0.50 x 10%) = 5.0%, plus (0.20 x -5%) = -1.0%. Adding the three gives 6.0 + 5.0 - 1.0 = 10.0%. The 8.3% trap is the simple average of the three returns, which ignores how likely each scenario is.

Form CRS, which is Part 3 of Form ADV, is a relationship summary that a registered adviser must:

• a.Give to every advisory client, retail or institutional, once each year
• b.File with the SEC and deliver only if a retail investor asks for it
• c.Provide to retail investors in place of the Part 2A firm brochure
• d.Deliver to retail investors in plain English at the start of the relationship✓

Form CRS is a short, plain-English relationship summary for retail investors covering the relationships and services offered, fees and costs, standard of conduct, conflicts, disciplinary history and questions to ask. An adviser must deliver it to each retail investor before or at the time the investor enters into the advisory contract, post it on its website, and redeliver it at certain triggers such as opening a different type of account or recommending a rollover. It is not an annual mailing, it is not limited to requests, and it supplements rather than replaces the Part 2A brochure.17 CFR 275.204-5 (Form CRS delivery); Form ADV Part 3

A portfolio has a beta of 0.7. If the broad market declines 10%, the portfolio's expected change is:

• a.An increase of about 7%
• b.A decline of about 7%✓
• c.A decline of about 14%
• d.A decline of about 10%

Beta measures sensitivity to market moves: expected change = beta x market change = 0.7 x -10% = -7%. A beta below 1.0 means the portfolio is expected to move less than the market in both directions, so it falls less in a decline and also rises less in a rally. Beta explains only systematic risk and says nothing about company-specific risk.

Convexity in a bond portfolio describes the fact that:

• a.The price-yield relationship is curved rather than a straight line✓
• b.Credit spreads always widen when the general level of rates rises
• c.Coupon income is reinvested at a constantly increasing interest rate
• d.Duration and maturity are identical for every fixed-coupon security

Duration is a straight-line estimate, but the actual price-yield curve bends. With positive convexity, a bond gains more when yields fall than it loses when yields rise by the same amount, so duration alone understates gains and overstates losses. That curvature matters most for large rate moves and for long-duration bonds.

A registered investment adviser must file an annual updating amendment to Form ADV within:

• a.12 months of the date of its last filing
• b.90 days of the end of its fiscal year✓
• c.120 days of the end of its fiscal year
• d.30 days of the end of its fiscal year

The annual updating amendment is due within 90 days after the adviser's fiscal year end and confirms or corrects the information in Form ADV, including assets under management and the number of clients. This is separate from the brochure delivery obligation, under which an updated brochure or a summary of material changes must reach clients within 120 days of the fiscal year end.Investment Advisers Act of 1940

Under widely used rating scales, the lowest rating that is still considered investment grade is:

• a.BB+ from Standard & Poor's, or Ba1 from Moody's
• b.A- from Standard & Poor's, or A3 from Moody's
• c.B from Standard & Poor's, or B2 from Moody's
• d.BBB- from Standard & Poor's, or Baa3 from Moody's✓

Investment grade runs from AAA/Aaa down through BBB-/Baa3. The first rung below that line, BB+/Ba1, begins the speculative or high-yield tier. The distinction is not cosmetic: many fiduciary and institutional mandates prohibit holding below-investment-grade paper, so a downgrade across the line can force selling.

Portfolio X returned 10% with a standard deviation of 8%. Portfolio Y returned 14% with a standard deviation of 16%. With a 2% risk-free rate, which performed better per unit of total risk?

• a.Neither, because Sharpe ratios cannot be compared directly
• b.Portfolio Y, whose Sharpe ratio of 1.50 exceeds X's 1.25
• c.Portfolio Y, because its higher absolute return dominates
• d.Portfolio X, whose Sharpe ratio of 1.00 exceeds Y's 0.75✓

Sharpe ratio = (portfolio return - risk-free rate) / standard deviation. For X: (10% - 2%) / 8% = 8/8 = 1.00. For Y: (14% - 2%) / 16% = 12/16 = 0.75. X delivers more excess return for each unit of total volatility, so it is superior on a risk-adjusted basis even though Y's raw return is higher. Comparing raw returns without adjusting for risk is the error being tested.

A sinking fund provision in a bond indenture requires the issuer to:

• a.Repurchase its own common shares whenever the bonds trade below par
• b.Set aside money each year to retire portions of the issue before maturity✓
• c.Pledge specific plant and equipment as collateral for the outstanding debt
• d.Increase the stated coupon rate whenever its credit rating is downgraded

A sinking fund forces the issuer to accumulate cash and redeem a portion of the bonds on a schedule. That reduces default risk near maturity, which is why sinking fund bonds usually yield slightly less than comparable bonds without one. The trade-off for the investor is that a specific bond may be called away early through the sinking fund draw.

When information in Form ADV Part 1 about an adviser's disciplinary history becomes materially inaccurate, the adviser must:

• a.Notify only the clients affected by the specific disciplinary event
• b.Disclose the change orally to clients but make no regulatory filing
• c.File a promptly amended Form ADV rather than wait for the annual update✓
• d.Wait for the annual updating amendment due within 90 days after the fiscal year ends

Form ADV General Instruction 4 requires prompt other-than-annual amendments when answers to certain Part 1A items, including Item 11 (disciplinary information), become inaccurate in any way, instead of waiting for the annual updating amendment due within 90 days after fiscal year-end. Notifying only some clients or telling clients orally does not satisfy the filing obligation. Delay can also be treated as a material omission under the antifraud provisions.Form ADV General Instruction 4; 17 CFR 275.204-1(a)

A put feature attached to a corporate bond benefits the investor most when:

• a.Interest rates fall, because the issuer must then increase the stated coupon
• b.Inflation declines, because the principal amount is adjusted upward yearly
• c.Interest rates rise, because the bond can be sold back to the issuer at par✓
• d.The issuer's rating improves, because the bond will be called at a premium

A put bond lets the holder force redemption at par on set dates. When rates rise, an ordinary bond falls in price, but the put holder can hand the bond back at par and reinvest at the new higher rates, so the put limits the downside. A call feature is the mirror image and benefits the issuer when rates fall.

The capital asset pricing model indicates a required return of 11% for a fund, and the fund actually returned 14.5%. Its alpha is:

• a.+3.5%✓
• b.-3.5%
• c.+1.32
• d.+14.5%

Alpha is realized return minus the return the model says the fund should have earned for the risk taken: 14.5% - 11.0% = +3.5%. Positive alpha suggests the manager added value beyond what beta exposure alone would explain. A ratio such as 1.32 would be a Sharpe or Treynor figure, not alpha, which is expressed in percentage points.

A Treasury note is quoted at 99-16. For a bond with $1,000 par value, the dollar price is:

• a.$991.60
• b.$1,001.60
• c.$995.00✓
• d.$999.16

Government notes and bonds are quoted in points and 32nds of a point. The '16' means 16/32, which is 0.50 of a point, so the quote is 99.50% of par: 0.9950 x $1,000 = $995.00. Reading the digits after the hyphen as cents or as hundredths is the classic trap in this question type.

Under the Investment Advisers Act of 1940, an advisory contract may not be assigned to another adviser without:

• a.The client's consent to the assignment✓
• b.Written notice to clients after the assignment, with a right to cancel within 30 days
• c.The SEC's prior written approval of the assignment, after a review of the new adviser
• d.A new Form ADV filed by each of the new adviser's investment adviser representatives

Section 205(a)(2) requires every advisory contract to provide that it may not be assigned without the client's consent, because the client chose a particular adviser and the advisory relationship is personal. After-the-fact notice with a right to cancel does not satisfy the consent requirement, the SEC does not approve assignments, and representatives' filings are unrelated. A change in control of the firm can count as an assignment.Investment Advisers Act of 1940 Section 205(a)(2)

A long-term U.S. Treasury bond held to maturity by an investor is generally:

• a.Free of purchasing power risk but exposed to reinvestment risk
• b.Free of both default risk and interest rate risk at all maturities
• c.Free of interest rate risk but fully exposed to default risk
• d.Free of default risk but fully exposed to interest rate risk✓

Treasuries carry the full faith and credit of the U.S. government, so credit or default risk is treated as negligible. They are not risk-free in a broader sense: a long-maturity Treasury has substantial duration, so its market price falls when yields rise, and its fixed coupons lose real value if inflation accelerates. Treasury interest is taxable federally but exempt from state and local income tax.

The security market line differs from the capital market line because the security market line plots expected return against:

• a.Standard deviation, which measures total risk
• b.Beta, which measures systematic risk only✓
• c.The correlation coefficient with the market
• d.The portfolio's realized dollar-weighted return

The capital market line applies to efficient portfolios and uses total risk, measured by standard deviation, on the horizontal axis. The security market line comes from the capital asset pricing model, applies to any individual security or portfolio, and uses beta, which captures only nondiversifiable market risk. A security plotting above the security market line is offering more return than its beta requires.

Which date determines the shareholders who are entitled to receive a declared cash dividend?

• a.The settlement date of the investor's most recent purchase
• b.The payable date, on which the distribution is actually made
• c.The declaration date, on which the board announces the dividend
• d.The record date, on which the issuer identifies its shareholders✓

The board declares a dividend on the declaration date, fixes a record date, and pays on the payable date. Only holders on the issuer's books as of the record date receive the payment. The ex-dividend date is the market convention that identifies when a buyer no longer purchases the right to that dividend, and the stock's price typically adjusts downward by roughly the dividend amount on that day.

If an investment adviser organized as a partnership experiences a change in a minority of its partners, the firm must:

• a.File a new initial registration application with the state Administrator
• b.Terminate all existing advisory contracts and negotiate new agreements
• c.Obtain each client's written consent before the change takes effect
• d.Notify its advisory clients of the change within a reasonable time✓

Section 205(a)(3) draws a line at the majority. A change in a MINORITY of the partners requires only that clients be notified within a reasonable period. A change in a MAJORITY of the partners is treated as an assignment of the advisory contracts, which requires client consent. Candidates should keep the notice rule and the consent rule paired but distinct.Investment Advisers Act of 1940

The federal funds rate is best defined as the interest rate at which:

• a.Banks lend excess reserve balances to one another on an overnight basis✓
• b.Banks charge their most creditworthy corporate customers for short-term loans
• c.The U.S. Treasury borrows for terms of one year or less through bill auctions
• d.The Federal Reserve lends directly to member banks through the discount window

The fed funds rate is the market rate on overnight interbank loans of reserve balances, and the FOMC steers it toward a target range. The discount rate is charged by the Fed itself when it lends at the discount window. The prime rate is what banks charge their best commercial customers. Treasury bill yields are set by auction in the government securities market.

An individual has $9,000 of net capital losses for the year and realized no capital gains. For federal income tax purposes the investor may:

• a.Deduct the entire $9,000 against ordinary income for this year
• b.Deduct $3,000 against ordinary income and carry $6,000 forward✓
• c.Carry the full $9,000 back and amend the two prior-year returns
• d.Deduct nothing until an offsetting capital gain is actually realized

Net capital losses offset capital gains first. With no gains, an individual may deduct up to $3,000 of net capital loss against ordinary income in a year. The remainder, $9,000 - $3,000 = $6,000, is carried forward indefinitely to offset future gains or another $3,000 of ordinary income each year. Individuals may not carry capital losses back to prior years.

An advisory contract provision stating that the adviser is not liable for any client losses except in cases of gross negligence is generally:

• a.A misleading hedge clause that may violate the antifraud provisions✓
• b.Acceptable whenever the client initials the paragraph at account opening
• c.A provision that NASAA rules require in discretionary contracts
• d.An enforceable limitation permitted for all state-registered advisers

Section 215 of the Advisers Act voids any provision purporting to waive compliance with the Act. Regulators view hedge clauses as misleading because they lead clients to believe they have surrendered nonwaivable rights, including rights under the antifraud provisions and the adviser's fiduciary duty. A client signature does not cure the problem, since the rights are not the client's to waive.Investment Advisers Act of 1940

An investor realizes a $12,000 long-term capital gain and a $5,000 long-term capital loss in the same tax year. The reportable result is:

• a.A net long-term capital gain of $7,000✓
• b.A net long-term capital loss of $5,000
• c.A net long-term capital gain of $12,000
• d.A net short-term capital gain of $7,000

Gains and losses of the same character are netted against each other first: $12,000 - $5,000 = $7,000 of net long-term capital gain, taxed at preferential long-term rates. Only after long-term and short-term categories are netted internally are the two categories combined. Character is preserved, so the netted result here remains long-term.

An economy's annual inflation rate falls from 5% to 2% over two years while the price level continues to rise. This is best described as:

• a.Disinflation, a slowing in the rate at which prices increase✓
• b.Hyperinflation, an accelerating collapse in the value of money
• c.Deflation, a sustained decline in the general price level
• d.Stagflation, high inflation combined with stagnant output

Disinflation means inflation is decelerating: prices are still going up, just more slowly. Deflation requires the price level itself to fall, which would be a negative inflation rate. Stagflation pairs high inflation with weak growth and high unemployment. Hyperinflation is extreme, accelerating inflation. Candidates lose points by treating any decline in the inflation rate as deflation.

An investment adviser that inadvertently receives a client's check made payable to a third party can avoid being deemed to have custody by:

• a.Holding the check until the client's next quarterly review meeting
• b.Endorsing the check over to the adviser's affiliated broker-dealer
• c.Forwarding the check to the third party within three business days✓
• d.Depositing the check in the adviser's own operating account promptly

An adviser that holds client funds or securities, or has authority to obtain possession of them, has custody and triggers the qualified custodian, notice, statement, and surprise examination requirements. Inadvertent receipt of a third-party check is not custody if the adviser forwards it to the third party within three business days and keeps a record. Depositing it or holding it defeats the safe harbor.Investment Advisers Act of 1940

Cumulative voting for directors differs from statutory voting because cumulative voting allows a shareholder to:

• a.Cast one vote per share for every candidate standing for election that year
• b.Carry unused votes forward and apply them at the next annual meeting
• c.Buy newly issued shares first to keep the same percentage of ownership
• d.Concentrate all available votes on one or a few candidates for the board✓

Under statutory voting a holder may cast up to one vote per share for each open seat, and votes cannot be shifted between candidates. Cumulative voting pools the same total votes (shares times open seats) and lets the holder pile them on a single nominee, which is why it favors minority shareholders, who can occasionally elect one director. Votes cannot be carried to a later meeting, and buying new shares first to maintain ownership percentage is the preemptive right, a different shareholder protection.

Dividends from a mutual fund held in a taxable account that are automatically reinvested in additional shares:

• a.Are tax-deferred until the additional shares are eventually sold
• b.Are taxable in the year paid and increase the investor's cost basis✓
• c.Have no effect on cost basis because no cash was ever received
• d.Are taxed only when the fund distributes long-term capital gains

A reinvested distribution is treated as if the investor received cash and then bought shares, so it is taxable in the year of the distribution. Because tax was already paid, the reinvested amount is added to cost basis. Investors who forget this step overstate their gain and pay tax twice on the same dollars when the shares are finally sold.

An adviser with custody of client assets is generally subject to an annual surprise examination performed by:

• a.An independent public accountant at a time not known in advance✓
• b.The qualified custodian that holds the client funds and securities
• c.The state Administrator's examination staff on a published schedule
• d.The adviser's own chief compliance officer each calendar quarter

The custody rule requires client assets to be held by a qualified custodian, requires account statements to go directly to clients from that custodian, and adds an annual verification of client funds and securities by an independent public accountant on a surprise basis. Surprise is essential: an examination the adviser can anticipate does little to detect misappropriation. Pooled vehicles may substitute an annual audit distributed to investors.Investment Advisers Act of 1940

An investor sells a municipal bond for more than its purchase price. The gain is:

• a.Taxed as ordinary income regardless of the holding period involved
• b.Subject to federal capital gains tax, unlike the bond's interest✓
• c.Exempt from federal tax, just as the bond's interest payments are
• d.Exempt from federal tax only if the bond was issued inside the state

The federal exemption for municipal bonds covers INTEREST, not price appreciation. If the bond is sold above cost, the difference is a capital gain, long-term or short-term based on the holding period, and it is fully taxable federally. In-state issuance affects state and local taxation, not the federal treatment of a capital gain.

The Producer Price Index differs from the Consumer Price Index because the Producer Price Index measures:

• a.The total value of all finished goods and services produced within a nation
• b.Prices received by domestic producers for their output at the wholesale level✓
• c.Prices paid by urban households for a fixed basket of retail goods and services
• d.The average hourly wage paid across the private nonfarm business sector

The PPI tracks selling prices from the producer's point of view, which is why it is often watched as an early warning of consumer inflation still working its way through the supply chain. The CPI tracks what households actually pay at retail. Total output is measured by GDP, and wage data come from separate labor statistics releases.

Under NASAA model rules, a state-registered adviser that exercises discretion but does not have custody must generally maintain a minimum net worth of:

• a.$35,000
• b.$50,000
• c.$5,000
• d.$10,000✓

The NASAA model financial requirements set a minimum net worth of $35,000 for an adviser with custody and $10,000 for an adviser that has discretionary authority but no custody. An adviser that accepts prepayment of more than $500 in fees six or more months in advance must maintain a positive net worth. A surety bond in the required amount may generally be posted in lieu of the net worth.Uniform Securities Act

An exchange-traded note differs from an exchange-traded fund principally because the note:

• a.Must distribute at least 90% of its net investment income every calendar year
• b.Holds a portfolio of the underlying securities in a segregated custody account
• c.May be redeemed each day at net asset value directly with the sponsoring fund
• d.Is an unsecured debt obligation that exposes the holder to issuer credit risk✓

An ETN is a senior unsecured note that promises the return of an index; it owns no basket of securities. If the issuing bank fails, the investor is a general creditor, so tracking is precise but credit risk is real. An ETF holds actual portfolio assets at a custodian, which is the structural protection an ETN lacks.

For a distribution of earnings from a Roth IRA to be both tax-free and penalty-free, the owner generally must:

• a.Be at least 55 and have owned a Roth IRA for five years
• b.Have held the account for at least ten years regardless of age
• c.Be at least 59 1/2 and have contributed to the account in each of the last five years
• d.Be at least 59 1/2 and have held a Roth IRA for five tax years✓

A qualified Roth IRA distribution comes after the five-tax-year period that starts with the first year any Roth IRA contribution was made, and on or after age 59 1/2 (or on account of disability, death, or a first-home purchase up to $10,000). Contributions can always be withdrawn tax-free, but earnings taken before both tests are met are taxable and may carry the 10% additional tax. Age 55 is a workplace-plan separation rule, not an IRA rule. Ten years of ownership is not the test and does not replace the age requirement. The five years are counted from the first contribution year, not from a streak of annual contributions.IRS Pub. 590-B, Roth IRAs: What Are Qualified Distributions?

A daily leveraged or inverse ETF is generally unsuitable as a long-term holding because:

• a.It resets exposure daily, so compounding causes results to diverge over time✓
• b.It has a stated maturity date, so principal is lost if shares are held past expiration
• c.It resets its leverage only once a year, so it cannot track the index during the year
• d.It may be sold only to accredited investors who satisfy net worth standards

These funds are engineered to deliver a multiple of an index's return for one day. Because the leverage is rebalanced daily, the path of returns matters: in a volatile but flat market a 2x fund can lose money even though the index ends where it started. Over months, results can differ sharply from twice the index's cumulative move, which is why they function as short-term trading tools. They have no maturity date, they reset daily rather than yearly, and they are not restricted to accredited investors, although firms must apply heightened suitability scrutiny when selling them.

Under the code of ethics rule adopted by the SEC for investment advisers, the firm's access persons must:

• a.Refrain from owning individual securities of any kind whatsoever
• b.Report their personal securities holdings and transactions periodically✓
• c.Disclose their personal net worth to clients in the firm brochure
• d.Obtain client approval before trading in any personal account

Rule 204A-1 requires every SEC-registered adviser to adopt a written code of ethics setting a standard of business conduct, requiring compliance with securities laws, and requiring access persons to submit an initial and annual holdings report plus quarterly transaction reports. Personal trading is not banned; it is monitored so the firm can detect front running and conflicts with client trades.Investment Advisers Act of 1940

The fundamental accounting equation reflected on a corporation's balance sheet states that:

• a.Net income equals total revenue minus the cost of the goods sold
• b.Working capital equals current assets plus current liabilities
• c.Total assets equal total liabilities plus total shareholders' equity✓
• d.Total assets equal total revenues minus total operating expenses

A balance sheet balances because everything the company owns was financed either by creditors or by owners: Assets = Liabilities + Shareholders' Equity. Revenue minus expenses produces net income on the income statement, not assets. Working capital is current assets MINUS current liabilities, not the sum of them.

Catch-up contributions to an IRA or a 401(k) plan may generally begin in the year the participant reaches age:

• a.59 1/2
• b.55
• c.65
• d.50✓

The Internal Revenue Code permits additional catch-up contributions above the regular annual limit starting in the calendar year the participant turns 50, letting savers accelerate late in their careers. Age 55 relates to the separation-from-service exception for employer plans, 59 1/2 is when the 10% early distribution penalty generally ends, and 65 is a common but not universal normal retirement age.

Under the Insider Trading and Securities Fraud Enforcement Act, a person who trades on material nonpublic information may face a civil penalty of up to:

• a.Twice the profit gained or the loss avoided, plus any commissions earned
• b.The greater of $1 million or three times the profit gained or loss avoided
• c.Only the profit gained or the loss avoided, returned through disgorgement
• d.Three times the profit gained or the loss avoided✓

Section 21A(a)(2) of the Exchange Act, added by the Insider Trading and Securities Fraud Enforcement Act of 1988, lets a court impose a civil penalty on the person who committed the violation of up to three times the profit gained or loss avoided, in addition to disgorgement and possible criminal prosecution. The greater-of-$1-million-or-three-times figure is the cap for a controlling person, such as a firm that failed to maintain and enforce reasonable policies, not for the trader. Two times is not a statutory figure, and disgorgement alone is not the maximum penalty.Securities Exchange Act of 1934 s.21A(a)(2) (15 U.S.C. 78u-1)

A retiree's traditional IRA held $600,000 on the prior December 31, and the applicable IRS life expectancy factor is 25.0. The required minimum distribution is:

• a.$15,000
• b.$60,000
• c.$25,000
• d.$24,000✓

The required minimum distribution equals the prior year-end account balance divided by the applicable life expectancy factor: $600,000 / 25.0 = $24,000. The distribution is ordinary income to the retiree, and failing to take the full amount triggers an excise tax on the shortfall. As the factor shrinks in later years, the required percentage of the account rises.

A closed-end investment company differs structurally from an open-end fund because a closed-end fund:

• a.Issues a fixed number of shares that afterward trade between investors✓
• b.May not use leverage or issue any senior securities under any condition
• c.Issues new shares continuously and redeems them at net asset value
• d.Must invest at least 75% of its assets in U.S. government securities

A closed-end fund raises capital once in a public offering, after which the share count is essentially fixed and shares change hands on an exchange at whatever price supply and demand set, often a discount or premium to net asset value. An open-end fund continuously issues and redeems at net asset value. Closed-end funds may also use leverage, which open-end funds are largely restricted from doing.

A firm that conducts both investment banking and advisory business maintains information barriers primarily to:

• a.Segregate customers' fully paid securities from the firm's own assets
• b.Spare the firm from disclosing conflicts between its departments to clients
• c.Let investment banking staff review analysts' reports before publication
• d.Prevent material nonpublic information from reaching trading personnel✓

An information barrier, historically called a Chinese wall, separates departments that receive confidential deal information from those that trade or advise. Its purpose is to stop material nonpublic information from reaching trading personnel, and it supports the written policies against misuse of that information that Advisers Act Section 204A requires, backed by restricted lists, watch lists, and surveillance of employee and firm trading. Segregating customer securities from firm assets is a custody and net-capital protection, a different rule. A barrier does not excuse conflict disclosure. Letting bankers review research before publication would pull the wall down, not build it.Advisers Act s.204A (15 U.S.C. 80b-4a)

Under current federal law, the owner of a traditional IRA must generally begin required minimum distributions after reaching age:

• a.73✓
• b.59 1/2
• c.80
• d.70 1/2

The SECURE 2.0 Act raised the required beginning age to 73, and it is scheduled to rise to 75 in 2033. Age 70 1/2 was the old rule and remains a common distractor, and 59 1/2 is when the early distribution penalty generally ends, not when distributions become mandatory. Roth IRAs are not subject to lifetime required distributions.