NASAA Series 65 (Uniform Investment Adviser Law) — practice for people who will be paid for advice

Rising prices caused primarily by higher input and wage costs being passed through to consumers are BEST described as:

1. Demand-pull inflation.
2. Disinflation.
3. Deflation.
4. Cost-push inflation.

Answer: D — Cost-push inflation.

D) Correct — cost-push inflation originates from rising production costs squeezing supply. A) Demand-pull inflation stems from excess demand outpacing supply, a different mechanism. B) Disinflation is a slowing rate of inflation, not a cause of rising prices. C) Deflation is a sustained decline in prices, the opposite condition.

Treasury Inflation-Protected Securities (TIPS) are designed to protect investors from inflation risk by:

1. Paying a fixed coupon rate on a principal amount that adjusts periodically based on changes in the CPI.
2. Guaranteeing a minimum 10% annual return regardless of inflation.
3. Eliminating all interest rate risk entirely.
4. Paying interest only if inflation falls below zero.

Answer: A — Paying a fixed coupon rate on a principal amount that adjusts periodically based on changes in the CPI.

A) Correct — TIPS pay a fixed coupon rate applied to a principal balance that is periodically adjusted for CPI changes, so both principal and resulting interest payments respond to inflation. B) There's no such fixed 10% guaranteed annual return feature. C) TIPS still carry interest rate risk; they primarily address inflation risk, not rate risk generally. D) TIPS pay interest as inflation-adjusted principal accrues, not only during periods of deflation.

A persistent U.S. trade deficit (imports exceeding exports) tends to put ______ pressure on the U.S. dollar, all else equal.

1. Strong upward.
2. No.
3. Only brief, non-lasting.
4. Downward.

Answer: D — Downward.

D) Correct — a trade deficit means more dollars flow abroad to pay for imports than flow in from exports, a dynamic that tends to weaken the currency over time. A) This reverses the actual directional effect. B) Trade flows are a recognized driver of currency values, so 'no pressure' is inaccurate. C) The pressure can persist as long as the deficit persists, not merely briefly.

A recession is commonly defined as:

1. One quarter of falling stock prices.
2. Inflation exceeding 4% under the applicable rule.
3. Two consecutive quarters of GDP decline.
4. Yield curve steepening under the applicable rule.

Answer: C — Two consecutive quarters of GDP decline.

A) Stocks aren't the GDP definition. B) Inflation is a separate signal. C) Correct — the classical shorthand for a recession. D) Steepening often follows recession.

The discount rate is:

1. The rate the Fed charges banks at the discount window.
2. The rate banks charge each other overnight.
3. The yield on 10-year Treasuries under the applicable rule.
4. The retail savings rate under the applicable rule.

Answer: A — The rate the Fed charges banks at the discount window.

A) Correct — discount rate applies to Fed lending at the discount window. B) That's fed funds. C) Different maturity and market. D) Retail rates are set by banks.

A growth stock generally has:

1. High dividend yield under the applicable rule.
2. Junk credit rating under the applicable rule.
3. Below-market P/E under the applicable rule.
4. Above-average earnings growth under the applicable rule.

Answer: D — Above-average earnings growth under the applicable rule.

A) That describes income stocks. B) Credit ratings apply to bonds.C) That's a value trait. D) Correct — growth stocks are characterized by above-average earnings growth.

Standard deviation, as used in portfolio analysis, MOST directly measures:

1. The correlation between two securities' returns.
2. The total dispersion of returns around the average, capturing both systematic and unsystematic risk.
3. Only the downside risk of a security.
4. The sensitivity of a security's return to market movements.

Answer: B — The total dispersion of returns around the average, capturing both systematic and unsystematic risk.

B) Correct — standard deviation captures total volatility (dispersion of returns), reflecting both systematic and unsystematic components. A) Correlation is a separate statistic describing how two securities move relative to each other. C) Standard deviation reflects both upside and downside dispersion, not downside alone. D) Sensitivity to market movement is what beta measures, not standard deviation.

Unlike an open-end mutual fund, a closed-end fund's shares can trade in the secondary market at a price that is:

1. Always exactly equal to its NAV.
2. Determined solely by the fund's board of directors.
3. Fixed for the life of the fund.
4. Above or below its NAV, depending on supply and demand.

Answer: D — Above or below its NAV, depending on supply and demand.

D) Correct — closed-end fund shares trade based on market supply and demand and can deviate from NAV as a premium or discount. A) Trading exactly at NAV is not guaranteed; premiums/discounts are common. B) Market price is set by trading activity, not board decree. C) Market price fluctuates continuously; it is not fixed.

Premiums allocated to the investment (sub-account) portion of a variable annuity are held in the insurer's:

1. Separate account, segregated from the insurer's general account and invested in underlying investment options chosen by the contract owner.
2. General account, commingled with the insurer's other corporate assets.
3. FDIC-insured deposit account.
4. SIPC-insured brokerage account.

Answer: A — Separate account, segregated from the insurer's general account and invested in underlying investment options chosen by the contract owner.

A) Correct — variable annuity assets sit in a separate account, distinct from the insurer's general corporate assets, reflecting the contract owner's investment choices and risk. B) Commingling with the general account describes fixed annuities, not the variable sub-account structure. C) Annuity separate accounts are not FDIC-insured deposits. D) Annuities are insurance contracts, not SIPC-covered brokerage accounts.

A municipal bond's tax equivalent yield formula is:

1. Muni yield × (1 − tax rate).
2. Muni yield × tax rate.
3. Muni yield ÷ (1 − tax rate).
4. Muni yield + tax rate.

Answer: C — Muni yield ÷ (1 − tax rate).

A) Multiplying by (1 − t) understates the equivalent. C) Correct — TEY = muni yield / (1 − marginal tax rate). B) Multiplying by t is wrong. D) Adding rates is not the formula.

Inflation risk primarily erodes:

1. Nominal returns only.
2. Estate tax exemptions.
3. Tax deferral only.
4. Real purchasing power.

Answer: D — Real purchasing power.

A) Nominal returns can still be positive even as real returns are negative. B) Estate exemptions are unrelated.C) Deferral is a tax concept. D) Correct — inflation reduces real purchasing power of future cash flows.

Under the SEC's Marketing Rule, an investment adviser's advertisement that includes hypothetical performance results is generally required to:

1. Be sent to every prospect regardless of relevance, with no restrictions.
2. Include policies and procedures reasonably designed to ensure the content is relevant to the likely financial situation and objectives of the intended audience.
3. Avoid all disclosure of assumptions used.
4. Be limited exclusively to institutional investors under all circumstances with no other conditions.

Answer: B — Include policies and procedures reasonably designed to ensure the content is relevant to the likely financial situation and objectives of the intended audience.

B) Correct — the Marketing Rule imposes specific conditions on hypothetical performance, including relevance safeguards and required disclosures about assumptions and limitations. A) Untargeted, unrestricted distribution is inconsistent with the rule's relevance safeguards. C) Disclosure of assumptions and criteria is required, not avoided. D) While hypothetical performance is more freely usable with certain sophisticated audiences, the rule's core requirement is the relevance and disclosure framework, not a blanket institutional-only limitation.

Cash-value life insurance offers tax deferral on:

1. Inside build-up of cash value under the applicable rule.
2. Premium payments under the applicable rule under the applicable rule.
3. Death benefit only under the applicable rule under the applicable rule.
4. Loan repayments under the applicable rule under the applicable rule.

Answer: A — Inside build-up of cash value under the applicable rule.

A) Correct — inside build-up accumulates tax-deferred. B) Premiums are not tax-deferred; they're after-tax. C) Death benefit is generally tax-free, a separate feature. D) Loan repayments have no tax event.

Required Minimum Distributions currently begin at:

1. Age 59½.
2. Age 70½.
3. Age 73.
4. Age 80.

Answer: C — Age 73.

A) 59½ is the early-withdrawal penalty threshold, not RMD. B) Pre-SECURE age; superseded. C) Correct — SECURE 2.0 sets RMD age at 73 (rising to 75 in 2033). D) Not a statutory RMD age.

The safe withdrawal rate rule of thumb for retirement is often cited as:

1. 2%.
2. 12%.
3. 8%.
4. 4%.

Answer: D — 4%.

A) Overly conservative. B) Rapidly depletes principal.C) Historically unsustainable for a 30-year retirement. D) Correct — the Bengen '4% rule' is the classical baseline.

Form ADV Part 1 is filed primarily with the:

1. SEC and/or state securities Administrators through the IARD system, as a regulatory disclosure filing.
2. Client directly, as the firm brochure.
3. IRS, as a tax filing.
4. FDIC, as a deposit insurance filing.

Answer: A — SEC and/or state securities Administrators through the IARD system, as a regulatory disclosure filing.

A) Correct — Form ADV Part 1 is filed electronically through IARD with the SEC and/or applicable states, capturing regulatory, business, and disciplinary information. B) Part 1 is a regulatory filing; the narrative brochure delivered to clients is Part 2. C) It has no tax-filing function with the IRS. D) The FDIC has no role in adviser registration filings.

U.S. government and municipal securities are generally treated under the Uniform Securities Act as:

1. Exempt securities, meaning they are exempt from state registration requirements but still subject to the Act's antifraud provisions.
2. Entirely outside the scope of the Act, including its antifraud provisions.
3. Required to register with each state before any sale, with no exemption available.
4. Prohibited from being sold to retail investors under state law.

Answer: A — Exempt securities, meaning they are exempt from state registration requirements but still subject to the Act's antifraud provisions.

A) Correct — these exempt securities avoid state registration requirements, but the antifraud provisions of the Act still apply to their offer and sale. B) Exemption from registration doesn't mean exemption from antifraud coverage; that protection remains in force. C) The entire point of exempt-security status is that state registration is not required for them. D) There's no such blanket prohibition on retail investors purchasing these securities.

Front-running by an IA involves:

1. Trading ahead of a client's pending order.
2. Executing at the market open under the applicable rule.
3. Buying and holding long-term under the applicable rule.
4. Placing limit orders only under the applicable rule.

Answer: A — Trading ahead of a client's pending order.

A) Correct — trading personally ahead of a client's known pending order. B) Open executions are timing, not front-running. C) Buy-and-hold has no timing conflict. D) Order type is unrelated.

Under the Uniform Securities Act, a state Administrator's authority to issue a cease-and-desist order:

1. Requires a prior criminal conviction before any such order can be issued.
2. Is limited exclusively to federal covered advisers, not state-registered advisers.
3. Generally allows the Administrator to act summarily, without a prior court order, when it appears a violation is occurring or about to occur.
4. Can never be issued without the respondent's prior written consent.

Answer: C — Generally allows the Administrator to act summarily, without a prior court order, when it appears a violation is occurring or about to occur.

C) Correct — Administrators generally have summary authority to issue cease-and-desist orders when a violation appears to be occurring, is about to occur, or has occurred, subject to the respondent's right to a subsequent hearing. A) A prior criminal conviction isn't a prerequisite for this administrative remedy. B) This authority reaches state-registered advisers directly; federal covered adviser oversight is more limited to notice-filing and fraud matters. D) The respondent's consent isn't required to issue the order in the first instance.

Under the USA, dishonest or unethical business practices include:

1. Charging any advisory fee.
2. Recommending index funds.
3. Providing account statements.
4. Guaranteeing against loss.

Answer: D — Guaranteeing against loss.

A) Fees themselves aren't unethical. B) Product neutrality is not the issue.C) Statements are required, not unethical. D) Correct — guarantees against loss are prohibited.

What are the contribution limits for Traditional/Roth IRAs?

$7,000 (2024). $8,000 if age 50+. Combined limit across all IRA accounts.

What is Rule 144?

Governs resale of restricted and control securities. Holding period: 6 months (reporting) / 1 year (non-reporting). Volume limits and filing requirements.

What is a qualified plan distribution?

A distribution from a qualified plan (401k, IRA) that meets IRS requirements for favorable tax treatment. Early distributions before 59½ incur a 10% penalty.

What is tactical asset allocation?

Short-term deviations from strategic targets to exploit market opportunities. Active strategy requiring market timing skill.

What is the after-tax return on a 7% taxable bond for someone in the 24% bracket?

5.32%. After-tax return = 7% × (1 − 0.24) = 7% × 0.76 = 5.32%.

A stock has beta 1.5, Rf = 3%, Rm = 10%. CAPM expected return?

13.5%. E(R) = 3% + 1.5(10% − 3%) = 3% + 10.5% = 13.5%.