Series 66 Practice Exam.
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1. A firm is budgeting registration expenses for a new representative who must take the Series 66. What is the cost of the examination?
- A. $177
- B. $155
- C. $127
- D. $200
Show answer & explanation
Answer: A
The cost of the Series 66 exam is $177. The remaining figures are distractors and do not represent the official fee.2. A client holds a bond portfolio and is concerned that rising market interest rates will reduce the value of her holdings. This concern is MOST directly a description of which risk?
- A. Interest-rate risk
- B. Liquidity risk
- C. Currency risk
- D. Credit (default) risk
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Answer: A
Interest-rate risk is the risk that a bond's market price will decline when prevailing interest rates rise, because existing bonds with lower coupons become less attractive relative to newly issued bonds.3. An advisor explains to a client that a mutual fund's net asset value (NAV) per share is calculated by:
- A. Subtracting the sales load from the public offering price
- B. Dividing total fund assets minus liabilities by the number of shares outstanding
- C. Multiplying the number of outstanding shares by the current market price
- D. Adding the fund's expense ratio to its dividend yield
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Answer: B
A mutual fund's NAV per share equals the total value of the fund's assets, less its liabilities, divided by the number of shares outstanding. Open-end fund shares are priced at NAV (plus any applicable sales charge).4. A municipal bond's interest is generally exempt from federal income tax. For an investor, this feature is MOST relevant when evaluating:
- A. The number of shares outstanding
- B. The bond's credit rating relative to Treasuries
- C. The bond's par value at issuance
- D. The after-tax yield compared to a taxable bond of similar risk
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Answer: D
Because municipal bond interest is typically exempt from federal income tax, the appropriate comparison is the bond's tax-equivalent (after-tax) yield against a comparable taxable bond, which is especially meaningful for investors in higher tax brackets.5. A client nearing retirement wants to minimize the chance of losing principal but accepts a lower expected return. Which product characteristic aligns BEST with this objective?
- A. A concentrated position in a single growth stock
- B. A short-term, high-credit-quality debt instrument with low price volatility
- C. A leveraged derivative position
- D. A speculative small-company equity fund
Show answer & explanation
Answer: B
A short-term, high-credit-quality debt instrument generally has lower price volatility and lower credit risk, aligning with a conservative investor's goal of preserving principal while accepting a modest return. The other choices carry substantially higher risk of principal loss.6. Which statement BEST captures why longer-maturity bonds are generally more sensitive to changes in interest rates than shorter-maturity bonds of the same credit quality?
- A. Maturity has no relationship to a bond's price sensitivity
- B. A longer stream of future cash flows means a given change in rates has a larger cumulative effect on present value, increasing price sensitivity
- C. Shorter-maturity bonds have no exposure to interest-rate movements
- D. Longer-maturity bonds always pay higher coupons, offsetting rate changes
Show answer & explanation
Answer: B
The longer a bond's maturity, the longer the stream of fixed cash flows exposed to discounting. A change in market interest rates therefore has a larger cumulative effect on the bond's present value, making longer-maturity bonds more price-sensitive (greater interest-rate risk) than otherwise comparable shorter-maturity bonds.7. An investor is comparing two fixed-income securities. Which characteristic BEST distinguishes a zero-coupon bond from a traditional coupon-paying bond?
- A. It is sold at a discount and pays no periodic interest, returning face value at maturity
- B. It guarantees a floating rate tied to a benchmark index
- C. It has no maturity date and pays a perpetual dividend
- D. It pays interest semiannually until maturity
Show answer & explanation
Answer: A
A zero-coupon bond makes no periodic interest payments; it is purchased at a discount to par and the investor's return is the difference between the discounted purchase price and the face value received at maturity.8. Which statement BEST describes the primary difference between common stock and preferred stock with respect to income and claims?
- A. Preferred stockholders typically receive a fixed dividend and rank ahead of common stockholders in liquidation
- B. Common stockholders receive a fixed dividend and have priority over preferred stockholders in liquidation
- C. Preferred stock always carries greater voting power than common stock
- D. Both classes have identical voting rights and dividend priority
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Answer: A
Preferred stock generally pays a fixed dividend and holds a senior claim to common stock on dividends and on assets in the event of liquidation, while common stock typically carries voting rights and residual claims.9. Which of the following features is characteristic of a variable annuity, as distinguished from a fixed annuity?
- A. The account value and payout fluctuate based on the performance of underlying subaccount investments
- B. The insurer guarantees a fixed rate of return for the life of the contract
- C. The contract carries no investment risk to the owner
- D. Payments are backed solely by the FDIC
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Answer: A
In a variable annuity, the contract owner bears investment risk because the account value and the eventual payout vary with the performance of the underlying subaccounts, unlike a fixed annuity where the insurer guarantees a set rate.10. A client asks why diversifying a stock portfolio across many unrelated companies does not eliminate ALL risk. The BEST response is that diversification reduces:
- A. Systematic (market) risk but not unsystematic risk
- B. Both systematic and unsystematic risk completely
- C. Unsystematic (company-specific) risk but not systematic risk
- D. Neither type of risk, because risk is fixed regardless of holdings
Show answer & explanation
Answer: C
Diversification reduces unsystematic (company- or industry-specific) risk by spreading exposure across many holdings, but it cannot remove systematic (market) risk, which affects the market as a whole and cannot be diversified away.11. An investor buys a call option on a stock. Which statement BEST describes the buyer's rights and maximum loss?
- A. The buyer must exercise the option at expiration regardless of price
- B. The buyer has the right, not the obligation, to buy the stock at the strike price, with maximum loss limited to the premium paid
- C. The buyer's maximum loss equals the full market value of the underlying stock
- D. The buyer is obligated to sell the stock and may lose an unlimited amount
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Answer: B
A call option gives the buyer the right, but not the obligation, to purchase the underlying stock at the strike price before expiration. If the option expires worthless, the buyer's loss is limited to the premium paid for the option.12. A client's portfolio gained 12 percent while inflation ran at 4 percent. What was the approximate real return?
- A. About 16 percent
- B. About 8 percent
- C. About 12 percent
- D. About 3 percent
Show answer & explanation
Answer: B
Real return approximates nominal return minus inflation, so 12 minus 4 gives about 8 percent of genuine purchasing power gain. The precise calculation divides one plus the nominal rate by one plus inflation and subtracts one, which yields about 7.7 percent, but the subtraction approximation is standard for client discussion.13. A client establishes a trust during her lifetime and retains the right to amend or revoke it at any time. What is the general treatment of the trust assets for estate tax purposes at her death?
- A. Half the assets are included and half excluded
- B. The assets are excluded because the trust is a separate legal entity
- C. The assets are excluded if the trust was funded more than three years before death
- D. The assets are included in her gross estate because she retained control
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Answer: D
A revocable living trust avoids probate and provides incapacity management, but retained power to revoke means the grantor never gave up control, so the assets remain in the gross estate. An irrevocable trust properly structured can remove assets from the estate, which is the trade-off: estate exclusion in exchange for surrendering control.14. A trust is required to distribute all of its income currently and makes no distributions of principal. How is this trust classified for income tax purposes?
- A. A charitable remainder trust
- B. A grantor trust
- C. A complex trust
- D. A simple trust
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Answer: D
A simple trust must distribute all income currently, makes no charitable contributions and distributes no principal in the year. A complex trust may accumulate income, distribute principal or make charitable gifts. A grantor trust is one where the grantor retains sufficient control that its income is taxed to the grantor personally.15. An account is opened under the Uniform Transfers to Minors Act. Which statement is accurate?
- A. The custodian may reclaim the assets at any time
- B. The account is an irrevocable gift to the minor, who takes control at the age of majority set by state law
- C. The account may have joint custodians and multiple minors
- D. The minor may direct trades in the account before reaching majority
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Answer: B
A UTMA gift is irrevocable and belongs to the minor, who receives control at the statutory age. There may be only one custodian and one minor per account, and the custodian, not the minor, directs the account until transfer. Assets are also counted as the student's on financial aid formulas, which weighs against UTMA for education funding.16. A client wants to fund a grandchild's college education with tax-free growth for qualified education expenses and retain the ability to change the beneficiary. Which vehicle best fits?
- A. A UTMA account
- B. A Roth IRA in the grandchild's name
- C. A Section 529 plan
- D. A revocable living trust
Show answer & explanation
Answer: C
A 529 plan provides tax-free growth and withdrawals for qualified education expenses, allows the account owner to retain control and to change the beneficiary to another family member, and permits front-loading several years of annual exclusion gifts. A UTMA is irrevocable and vests in the minor, and a Roth IRA requires the beneficiary to have earned income.17. Two individuals form a business in which both have unlimited personal liability for business debts and income flows through to their personal returns. Which entity is this?
- A. A limited partnership with two limited partners
- B. A C corporation
- C. A general partnership
- D. A limited liability company
Show answer & explanation
Answer: C
A general partnership passes income through to the partners and exposes each to unlimited joint liability. A C corporation provides limited liability but is taxed at the entity level, creating double taxation on dividends. An LLC combines pass-through taxation with limited liability, and a limited partnership must have at least one general partner with unlimited liability.18. A client owns a C corporation and is comparing it to an S corporation election. What is the principal tax difference?
- A. A C corporation is taxed at the entity level with dividends taxed again to shareholders, while an S corporation generally passes income through once
- B. Both are taxed identically; the difference is only in liability protection
- C. Neither entity pays any federal income tax
- D. An S corporation is taxed twice while a C corporation is taxed once
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Answer: A
The C corporation pays corporate tax and shareholders pay again on dividends, the classic double taxation. An S corporation election passes income, losses, deductions and credits through to shareholders, avoiding entity-level tax, but imposes eligibility limits on the number and type of shareholders and permits only one class of stock.19. An adviser distinguishes a client's risk tolerance from her risk capacity. What does risk capacity measure?
- A. The client's emotional comfort with portfolio volatility
- B. The client's stated preference on a questionnaire
- C. The standard deviation of the client's current portfolio
- D. The client's objective financial ability to absorb loss without derailing her goals
Show answer & explanation
Answer: D
Risk capacity is objective: time horizon, income stability, liquidity needs, existing assets and the consequences of falling short. Risk tolerance is psychological willingness to endure volatility. The two frequently diverge, and the binding constraint is whichever is lower, since a client who can afford risk but panics and sells will not realize the expected return.20. A retiree selects a straight life annuity payout rather than a joint and survivor option. What is the consequence?
- A. A lump sum is paid to the estate at death
- B. Payments continue to a named survivor for life
- C. The largest periodic payment, but payments cease entirely at the annuitant's death
- D. The smallest periodic payment, with a guaranteed minimum number of payments
Show answer & explanation
Answer: C
A straight life or life-only payout produces the highest income because the insurer's obligation ends at the annuitant's death with nothing to beneficiaries. Adding a period certain, a refund feature or a joint and survivor provision each reduces the payment in exchange for continuing benefits. This trade-off is central to a retirement income recommendation.21. A client takes a distribution from a traditional IRA at age 52 that does not meet any exception. What is the tax consequence?
- A. Long-term capital gains tax only
- B. No tax, because IRA distributions are always tax free
- C. Ordinary income tax on the taxable amount plus a 10 percent additional tax
- D. A 50 percent excise tax on the distribution
Show answer & explanation
Answer: C
Distributions before age 59 and a half generally incur ordinary income tax plus a 10 percent additional tax unless an exception applies, such as disability, substantially equal periodic payments, certain medical expenses or a first-time home purchase up to the statutory limit. The 50 percent figure historically related to failing to take a required minimum distribution, a different penalty.22. A client asks whether contributions to a traditional IRA are deductible. What determines the answer?
- A. Whether the IRA is held at a bank or a broker-dealer
- B. Deductibility is unlimited for all taxpayers
- C. Whether the client is older than 50
- D. Whether the client or spouse is covered by an employer retirement plan, and the client's modified adjusted gross income
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Answer: D
Deductibility phases out based on modified adjusted gross income when the taxpayer or spouse is covered by an employer plan. Without such coverage the deduction is generally available regardless of income. Age affects the catch-up contribution amount rather than deductibility, and the custodian type is irrelevant.23. An adviser reviews a client's life insurance and finds a policy where the death benefit and cash value vary with the performance of separate account subaccounts. What type of policy is this, and what license does selling it require?
- A. Universal life; it requires only a securities registration
- B. Term life; it requires only an insurance license
- C. Whole life; it requires only an insurance license
- D. Variable life; it requires both an insurance license and a securities registration
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Answer: D
Variable life and variable universal life pass investment risk to the policyholder, making them securities as well as insurance contracts, so a producer must hold both an insurance license and the appropriate securities registration. Whole life and traditional universal life have insurer-guaranteed elements and are insurance products only.24. A client asks about the tax treatment of a life insurance death benefit paid to a named individual beneficiary. What is the general rule?
- A. The death benefit is generally received income tax free by the beneficiary
- B. The death benefit is subject to the 10 percent early distribution tax
- C. The full death benefit is taxed as ordinary income
- D. The death benefit is taxed as long-term capital gain
Show answer & explanation
Answer: A
Life insurance death proceeds are generally excluded from the beneficiary's gross income. That is an income tax rule, not an estate tax rule: if the insured owned the policy or held incidents of ownership, the proceeds are still includable in the gross estate, which is why an irrevocable life insurance trust is a common planning structure.25. An adviser participates in a wrap fee program in which a single fee covers advisory services and execution. What special disclosure obligation applies?
- A. Written client consent before each trade
- B. Delivery of a wrap fee program brochure describing the program's services, fees and conflicts
- C. No special disclosure, since the fee is bundled
- D. Only an annual statement of trades executed
Show answer & explanation
Answer: B
Sponsors of wrap fee programs must deliver a specific wrap brochure, Form ADV Part 2A Appendix 1, because the bundled structure creates distinct conflicts: an adviser paid a flat fee has an incentive to trade less, and the client may pay for execution capacity they do not use. Suitability of the wrap structure itself must be evaluated for each client.26. An investment adviser compensates a third party for referring clients. Under the current marketing framework, what is generally required?
- A. Prior approval of each referral by the state Administrator
- B. Disclosure of the compensation and the promoter's status, a written agreement in most cases, and adviser oversight
- C. The promoter must independently register as an investment adviser in every case
- D. Nothing, because referral fees are outside the adviser's regulatory obligations
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Answer: B
Paid endorsements and solicitations require clear and prominent disclosure of the compensation and any material conflicts, generally a written agreement with the promoter, adviser oversight of compliance, and disqualification screening. Very small compensation arrangements have reduced conditions, but disclosure of the paid relationship remains the core requirement.27. Under state law, an investment advisory contract must generally include which provision?
- A. A guarantee of a minimum annual return
- B. Authorization for the adviser to take custody of all client assets
- C. A description of services, the fee and the term, with no assignment without client consent
- D. A waiver of the client's right to sue the adviser
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Answer: C
Advisory contracts must state the services, the formula for compensation, the term, and provide that no assignment occurs without client consent, with notice of changes in partnership membership where applicable. Hedge clauses purporting to waive client rights are prohibited, and any provision waiving compliance with the securities laws is void.28. An adviser's brochure contains a clause stating the adviser is not liable for any loss regardless of cause. What is the problem?
- A. It is a prohibited hedge clause that misleads clients about their non-waivable rights
- B. It is permissible only for institutional clients
- C. It is permissible if the adviser carries errors and omissions coverage
- D. Nothing, provided the client initials the clause
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Answer: A
Hedge clauses that suggest a client has waived non-waivable rights of action are misleading and prohibited, because federal and state securities law rights cannot be waived. Client initials do not cure it, since the defect is the misleading impression the clause creates rather than the absence of consent.29. An investment adviser representative discovers she will receive a bonus for placing client assets in her firm's proprietary funds. What must she do?
- A. Nothing, because the bonus is paid by her employer rather than the client
- B. Decline the bonus but continue recommending the funds without disclosure
- C. Disclose the compensation arrangement to clients so they can evaluate the conflict
- D. Disclose only if a client specifically asks about her compensation
Show answer & explanation
Answer: C
Compensation that varies with the product recommended is a material conflict requiring full and fair disclosure, whoever pays it. The fiduciary standard requires informed consent, which a client cannot give without knowing the incentive. Waiting to be asked is not disclosure, and quietly declining the bonus does not address the proprietary product conflict itself.30. An adviser aggregates several clients' orders for the same security into a single block trade. What is required for this to be acceptable?
- A. A written allocation policy applied fairly, with each participating account receiving the average price
- B. Nothing, since block trading always benefits clients
- C. Allocation of the best fills to the largest accounts
- D. Allocation of the best fills to the adviser's own account first
Show answer & explanation
Answer: A
Bunching orders can lower costs, but it must operate under a disclosed written policy allocating fills fairly, typically at the average execution price, with partial fills allocated pro rata. Cherry-picking, assigning favorable executions to preferred or proprietary accounts after the fact, is a serious violation and a recurring enforcement theme.31. An adviser executes trades for a client's account and must consider more than commission rate when selecting a broker. What is this obligation called?
- A. Directed brokerage, which requires the client to select the broker
- B. Payment for order flow, which requires routing to the highest bidder
- C. Best execution, which considers execution quality, speed, reliability and cost together
- D. Lowest commission, which requires selecting the cheapest broker in every case
Show answer & explanation
Answer: C
Best execution requires seeking the most favorable terms reasonably available under the circumstances, weighing price, speed, likelihood of execution, settlement reliability and total cost. It is not a mandate to pay the lowest commission, and advisers must periodically and systematically evaluate the brokers they use against alternatives.32. A client directs the adviser to use a specific broker-dealer for all trades. What must the adviser disclose?
- A. That directed brokerage may prevent the adviser from obtaining best execution or aggregating orders, potentially costing the client more
- B. Nothing, because the client made the choice
- C. That the client must first liquidate the account
- D. That the adviser will receive soft dollar credits in every case
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Answer: A
When a client directs brokerage, the adviser may be unable to negotiate rates, aggregate the client's orders with others, or select the venue offering the best terms, and the client may therefore receive worse execution or pay more. The adviser must disclose these consequences so the direction is an informed choice.33. An adviser maintains a code of ethics. Which requirement is a standard component under the Advisers Act?
- A. A requirement that all employees invest only in the adviser's own funds
- B. Annual disclosure of every employee's salary to clients
- C. Reporting of personal securities holdings and transactions by access persons
- D. A prohibition on all personal securities ownership by employees
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Answer: C
The code of ethics rule requires a standard of business conduct, compliance with securities laws, reporting of personal holdings and transactions by access persons, pre-approval of investments in initial public offerings and limited offerings, and prompt internal reporting of violations. It regulates personal trading rather than banning it.34. A client's account has been managed for three years and the client's circumstances have changed substantially after a divorce. What does the adviser's duty of care require?
- A. Waiting for the client to request a review
- B. Continuing the original strategy because it was suitable when adopted
- C. Updating the client profile and reassessing whether the strategy remains suitable
- D. Liquidating the account to cash pending new instructions
Show answer & explanation
Answer: C
For an ongoing advisory relationship, the duty of care includes providing advice that remains suitable over time, which requires periodic updating of the client's objectives, circumstances and risk profile. A material life event such as divorce, job loss or inheritance is precisely the trigger for reassessment rather than something to await a client request about.35. A married couple holds a joint account. One spouse calls and asks to change the mailing address and add a new bank link for withdrawals. What should the firm do?
- A. Process it immediately, since either joint owner may act alone in all respects
- B. Refuse all changes on joint accounts
- C. Verify the instruction under the firm's procedures, which typically require confirmation from both owners for changes affecting disbursements
- D. Process it and notify the other spouse a month later
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Answer: C
Although either joint owner may generally trade, changes to address and disbursement instructions are a classic elder-abuse and account-takeover pattern, so firms apply heightened verification and commonly require both owners to authorize them. Silent processing followed by delayed notification defeats the control's purpose.36. An adviser receives a client's instruction by email to wire 50,000 dollars to a new overseas account, and the email address matches the client's file. What is the appropriate step?
- A. Process the wire and then confirm by email reply
- B. Process the wire because the email address matches
- C. Verify the request through a separate channel, such as a call to a known phone number, before acting
- D. Forward the request to the custodian without review
Show answer & explanation
Answer: C
Email accounts are routinely compromised, so a matching address proves nothing, and replying by email reaches whoever controls the inbox. Out-of-band verification using contact details already on file is the standard control, and a first-time overseas wire to a new destination is among the highest-risk patterns a firm encounters.37. An adviser is required to have written policies reasonably designed to safeguard client records and information. Which regulation imposes this?
- A. Regulation SHO
- B. Regulation S-P
- C. Regulation M
- D. Regulation T
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Answer: B
Regulation S-P requires privacy notices and, through its safeguards provision, written policies to protect customer records against unauthorized access and to dispose of consumer report information properly. Regulation SHO governs short sales, Regulation M addresses distribution manipulation, and Regulation T sets margin credit terms.38. An adviser wants to recommend that a client liquidate a variable annuity purchased four years ago and buy a new one. What is the primary concern?
- A. The only requirement is that the new contract have a higher death benefit
- B. There is no concern because a 1035 exchange is always tax free
- C. Surrender charges, a new surrender period and lost benefits may make the exchange unsuitable; the comparison must be documented
- D. Annuity exchanges are prohibited outright
Show answer & explanation
Answer: C
Replacing an annuity commonly triggers a surrender charge, restarts a multi-year surrender schedule and can forfeit accrued living or death benefit guarantees. A Section 1035 exchange addresses income tax deferral only and says nothing about suitability, so the adviser must compare costs and features and document why the replacement benefits the client.39. A client is 70 and wants inflation-adjusted lifetime income with no exposure to market losses. Which product characteristic best matches the objective?
- A. A deferred variable annuity with aggressive equity subaccounts
- B. An immediate annuity with a cost of living adjustment rider
- C. A concentrated dividend stock position
- D. A portfolio of long-dated zero-coupon corporate bonds
Show answer & explanation
Answer: B
An immediate annuity converts a lump sum into guaranteed lifetime income, and a cost of living rider addresses purchasing power erosion, at the cost of a lower starting payment and loss of liquidity. Variable subaccounts and equity concentration reintroduce market risk, and zero-coupon bonds pay nothing until maturity, providing no income at all.40. A client's stated objective is current income with modest growth and low volatility, but the adviser places 70 percent of the portfolio in small-cap growth funds. Which duty has been breached?
- A. The duty of care, because the advice lacks a reasonable basis for this client
- B. No duty is breached if the funds subsequently perform well
- C. The duty to disclose the adviser's fee schedule
- D. The duty of confidentiality
Show answer & explanation
Answer: A
The duty of care requires advice with a reasonable basis in light of the client's objectives and circumstances, tested at the time the advice is given. Subsequent performance does not cure an unsuitable recommendation; a strategy inconsistent with a stated income and low-volatility objective is a breach whether it makes money or loses it.41. Which of the following most clearly constitutes an unethical business practice by an investment adviser under NASAA model rules?
- A. Recommending a no-load mutual fund
- B. Declining to accept a client whose objectives the adviser cannot serve
- C. Exercising discretion without written authority beyond the permitted grace period
- D. Charging an hourly fee disclosed in the advisory contract
Show answer & explanation
Answer: C
Exercising discretion without documented authority beyond the limited grace period is an enumerated unethical practice, alongside unsuitable recommendations, churning, misrepresenting qualifications, borrowing from clients and failing to disclose conflicts. Disclosed hourly fees, no-load recommendations and declining an unsuitable engagement are all proper conduct.42. An adviser tells a prospective client that she is a Certified Financial Planner although her certification lapsed two years ago. What violation is this?
- A. Misrepresentation of qualifications, a prohibited practice
- B. A permissible marketing statement if she intends to recertify
- C. A recordkeeping violation only
- D. No violation, since certifications are voluntary credentials
Show answer & explanation
Answer: A
Misstating professional designations, qualifications, experience or the nature of services is a prohibited practice and is treated seriously because clients rely on credentials in choosing an adviser. Intent to recertify is irrelevant, and using a lapsed mark also typically violates the certifying body's own rules.43. A state-registered adviser wishes to charge a fee of 1,200 dollars payable in advance for a financial plan to be delivered in nine months. What consequence does this create?
- A. No consequence; prepayment is always permitted without condition
- B. The adviser must register with the SEC instead
- C. Collecting substantial prepaid fees more than six months in advance generally triggers a balance sheet requirement and heightened financial conditions
- D. The fee must be refunded in full at the client's request at any time
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Answer: C
State rules treat an adviser that collects substantial fees, commonly more than 500 dollars, six or more months in advance as holding client funds in a sense, and require an audited or unaudited balance sheet with the ADV filing plus compliance with minimum net worth conditions. The concept tested is that prepayment carries financial-responsibility consequences.44. Under the Uniform Securities Act, an investment adviser that has no place of business in a state and directs communications to no more than five non-institutional clients there during a twelve-month period may rely on what?
- A. A permanent exemption regardless of the number of clients
- B. Automatic federal covered adviser status
- C. A de minimis exemption from registration in that state
- D. An exemption from the antifraud provisions
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Answer: C
The de minimis standard exempts an adviser with no place of business in the state that has had no more than five non-institutional clients there in the preceding twelve months. Opening an office in the state defeats it regardless of client count, and no exemption ever reaches the antifraud provisions.45. An adviser's client base includes a pension plan subject to ERISA. Which standard applies to the adviser's conduct for that account?
- A. The standard applicable to broker-dealer principal trades
- B. No standard beyond the advisory contract terms
- C. A suitability standard only
- D. ERISA fiduciary standards, including the prudent expert rule and exclusive benefit requirement
Show answer & explanation
Answer: D
ERISA imposes duties of loyalty and prudence measured against a prudent expert familiar with such matters, requires acting for the exclusive benefit of participants and beneficiaries, mandates diversification and prohibits specified transactions with parties in interest. It is a demanding standard layered on top of the adviser's own fiduciary duty.46. An adviser holds a limited power of attorney permitting trading but not withdrawals, and the custodian sends statements directly to clients quarterly. Does the adviser have custody?
- A. Yes; any power of attorney constitutes custody
- B. Yes; sending statements through a custodian creates custody
- C. No; custody can never arise for a state-registered adviser
- D. No; discretionary trading authority without withdrawal power is not custody
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Answer: D
Custody turns on the ability to obtain possession of client assets, so trading authority alone does not create it. Deducting advisory fees directly from the account, serving as trustee, or holding client login credentials that permit transfers generally do. Independent custodian statements sent directly to clients are a control against misappropriation rather than a source of custody.47. A client tells an adviser he believes markets always revert to the mean and refuses to sell a losing position, insisting it will recover. Which behavioral tendency is most evident?
- A. Confirmation of the efficient market hypothesis
- B. Overconfidence in the adviser's ability
- C. Loss aversion combined with anchoring to the purchase price
- D. Herding behavior
Show answer & explanation
Answer: C
Loss aversion makes realizing a loss psychologically costly, and anchoring fixes the client on the purchase price as the reference point rather than the position's forward prospects. Recognizing the pattern lets the adviser reframe the decision around whether the client would buy the position today, which is the economically relevant question.48. An adviser recommends a portfolio with an expected return of 7 percent and a standard deviation of 12 percent. Assuming a normal distribution, roughly what range covers about two-thirds of annual outcomes?
- A. Negative 17 percent to positive 31 percent
- B. Negative 5 percent to positive 19 percent
- C. Positive 5 percent to positive 9 percent
- D. Negative 12 percent to positive 12 percent
Show answer & explanation
Answer: B
About 68 percent of outcomes fall within one standard deviation of the mean, so the range is 7 minus 12 to 7 plus 12, or negative 5 to positive 19 percent. Two standard deviations covers roughly 95 percent, giving negative 17 to positive 31 percent. Framing volatility this way makes an abstract statistic concrete for a client.49. An adviser calculates that a client needs 1,000,000 dollars in 15 years and can earn 6 percent annually. Which time value concept determines the required lump sum today?
- A. Internal rate of return on the existing portfolio
- B. Future value, compounding the current balance forward
- C. Net present value of the client's income stream
- D. Present value, discounting the future amount back at the assumed rate
Show answer & explanation
Answer: D
Present value answers what amount today grows to a known future sum at a given rate over a given period, which is the standard goal-funding calculation. Future value runs the other direction. Internal rate of return solves for the rate that equates cash flows, and net present value evaluates a series of cash flows against an initial outlay.50. Which statement about a limited partnership interest in a direct participation program is accurate?
- A. Limited partners have unlimited liability for partnership debts
- B. Income and losses flow through to the partners, and limited partners' liability is generally capped at their investment
- C. The partnership pays entity-level federal income tax on its profits
- D. Interests are freely and readily tradable on a national exchange
Show answer & explanation
Answer: B
A DPP passes income, gains, losses and credits through to investors without entity-level tax, and a limited partner's liability is generally limited to the amount invested provided they do not participate in management. The general partner bears unlimited liability. DPP interests are typically illiquid with restricted transferability, which is a central suitability concern.51. A client asks about hedge funds. Which characteristic is most accurate?
- A. They must publish holdings weekly to all investors
- B. They are typically private offerings to accredited or qualified investors with limited liquidity and performance-based compensation
- C. They are registered investment companies redeemable daily at NAV
- D. They are prohibited from using leverage or short selling
Show answer & explanation
Answer: B
Hedge funds rely on private placement exemptions, restrict participation to accredited investors or qualified purchasers, impose lock-ups and redemption gates, and charge management plus performance fees. They may use leverage, derivatives and short selling. The transparency and daily liquidity of a registered fund are precisely what they do not offer.52. An exchange-traded fund and an open-end mutual fund track the same index. What is a structural difference relevant to a client recommendation?
- A. The ETF must be redeemed directly with the sponsor by retail investors
- B. The mutual fund trades intraday while the ETF prices once daily
- C. Neither may be held in a retirement account
- D. The ETF trades intraday at market prices and can be bought on margin or sold short, while the mutual fund transacts once daily at NAV
Show answer & explanation
Answer: D
ETFs trade like stocks throughout the session, so they carry bid-ask spreads and can trade at premiums or discounts to NAV, and they support margin and short sales. Mutual fund orders receive the next computed NAV. The creation and redemption mechanism operates between the sponsor and authorized participants, not retail investors.53. A mutual fund charges a sales load at purchase. Which share class characteristic does this describe?
- A. A level asset-based distribution fee with no sales charge at any time
- B. A contingent deferred sales charge declining over time
- C. A redemption fee paid to the fund itself
- D. A front-end load, typically associated with Class A shares and often subject to breakpoints
Show answer & explanation
Answer: D
A front-end load is deducted at purchase and is reduced at breakpoints as investment size increases, with a letter of intent or rights of accumulation allowing an investor to reach a breakpoint. A contingent deferred sales charge applies at redemption and declines with holding period. Failing to apply available breakpoints is a well-known sales practice violation.54. An adviser recommends that a client purchase Class B shares of a fund for a very large investment rather than Class A shares that would qualify for a substantial breakpoint. What is the concern?
- A. There is no concern because share classes are economically identical
- B. The recommendation may be unsuitable because it forgoes an available breakpoint discount and imposes higher ongoing expenses
- C. Class B shares always cost less over any holding period
- D. Breakpoints apply only to fixed income funds
Show answer & explanation
Answer: B
Steering a large purchase into a share class with no breakpoint and higher continuing distribution fees increases the investor's total cost and can increase the representative's compensation, a conflict regulators pursue directly. The suitability analysis must compare total cost over the client's expected holding period across available classes.55. A client places an order to buy a stock at no more than 30 dollars per share. Which order type is this?
- A. A buy limit order, executable at 30 dollars or lower
- B. A sell limit order at 30 dollars
- C. A buy stop order, triggered at 30 dollars or higher
- D. A market order with a 30 dollar guideline
Show answer & explanation
Answer: A
A buy limit sets a ceiling and executes at the limit or better, meaning lower, but may not execute at all if the price never reaches it. A buy stop sits above the market and is used to enter on a breakout or to protect a short position. Limit orders control price and risk non-execution; market orders guarantee execution and risk price.56. An adviser's client is a corporation. Who may open the account and provide trading instructions?
- A. The corporation's outside auditor
- B. Only individuals authorized in a corporate resolution or equivalent authorizing document
- C. Any officer of the corporation, without documentation
- D. Any shareholder holding more than 10 percent
Show answer & explanation
Answer: B
Entity accounts require documentation establishing who may act: a corporate resolution, partnership agreement or LLC operating agreement, together with beneficial ownership information under AML rules. Title alone does not confer authority, and accepting instructions from an undocumented officer exposes the firm to liability if the transaction is later disputed.57. An adviser is asked to serve as trustee for a client's irrevocable trust while continuing to manage the trust's investments for a fee. What issue arises?
- A. No issue arises because trusteeship is unrelated to advisory activity
- B. The adviser is automatically exempt from custody requirements as a trustee
- C. The arrangement eliminates the adviser's fiduciary duty to the beneficiaries
- D. Serving as trustee gives the adviser custody and creates additional conflicts requiring disclosure and safeguards
Show answer & explanation
Answer: D
A trustee has authority over trust assets, which constitutes custody and triggers qualified custodian, notice and surprise examination obligations. It also layers trust fiduciary duties owed to beneficiaries on top of advisory duties and creates a conflict where the adviser both selects and is paid for the investment management.58. A client gifts appreciated stock to an adult child. What is the child's basis for computing gain on a later sale?
- A. Zero
- B. The fair market value on the date of the gift
- C. The average of the donor's basis and the gift-date value
- D. The donor's original basis, carried over
Show answer & explanation
Answer: D
Gifted property carries over the donor's basis for computing gain, so the built-in appreciation transfers with the asset. A special dual-basis rule applies where the asset has declined: for computing a loss, the basis is the lower of carryover basis or fair market value at the gift date. Inherited property, by contrast, gets a step-up.59. An adviser learns that an IAR has been named in a customer arbitration alleging unsuitable recommendations. What generally must occur?
- A. Nothing until an award is issued against the individual
- B. The matter must be reported and the individual's Form U4 amended as required
- C. The firm must settle the claim within thirty days
- D. The individual's registration is automatically revoked
Show answer & explanation
Answer: B
Reportable customer complaints, arbitrations and civil suits meeting the disclosure criteria require timely Form U4 amendment, generally within 30 days of learning of the event, so the information appears in public disclosure records. Reporting is triggered by the allegation meeting the criteria, not by an eventual finding of liability.60. Which action by an investment adviser most clearly constitutes fraud under the antifraud provisions, even absent a completed transaction?
- A. Recommending a security that subsequently declines in value
- B. Charging a fee higher than a competitor's
- C. Declining to provide advice outside the adviser's expertise
- D. Making a materially false statement to induce a client to invest
Show answer & explanation
Answer: D
The antifraud provisions reach any device, scheme or artifice to defraud and any materially untrue statement or omission in connection with the offer or sale, so the misstatement itself is the violation whether or not the client acts. Investment losses, competitive pricing and declining engagements outside one's competence are not fraud.61. An adviser's client dies and the adviser holds discretionary authority over the account. What happens to that authority?
- A. It converts into a trusteeship over the estate
- B. It terminates at death; the adviser must await instructions from the legally appointed representative
- C. It continues until the estate is closed
- D. It transfers automatically to the surviving spouse
Show answer & explanation
Answer: B
A power of attorney and discretionary authority granted by an individual terminate on that person's death, so continuing to trade afterward is unauthorized. The adviser freezes discretionary activity, obtains a death certificate and letters of appointment, and takes direction only from the executor or administrator once appointed.62. An adviser wishes to advertise past performance of client accounts. Which presentation is most consistent with the marketing rule?
- A. Only the adviser's best-performing account
- B. Net performance shown with at least equal prominence to gross performance, over prescribed time periods
- C. Gross performance alone, with a footnote noting fees exist
- D. Performance of a hypothetical portfolio with no disclosure of assumptions
Show answer & explanation
Answer: B
The marketing rule requires that gross performance never be shown without net performance presented with at least equal prominence and calculated over the same period and methodology, with prescribed time periods. Cherry-picking a single favorable account and presenting undisclosed hypothetical results are both prohibited as misleading.63. A state Administrator requests an adviser's client records during an examination. What is the adviser's obligation?
- A. Produce the records; required books and records are subject to examination at any time
- B. Refuse until each client individually consents
- C. Produce records only under a court-issued subpoena
- D. Produce only records the adviser considers relevant
Show answer & explanation
Answer: A
Records advisers are required to make and keep are subject to examination by the Administrator at any time, without client consent or a subpoena, and obstructing an examination is itself a violation. Confidentiality obligations to clients do not override the regulator's inspection authority over required records.64. Gross domestic product grows for two consecutive quarters after having contracted for the prior two quarters. Which business cycle phase does this pattern MOST likely indicate?
- A. Continued recession
- B. Recovery or expansion following a trough
- C. Trough followed by continued contraction
- D. Peak
Show answer & explanation
Answer: B
Two consecutive quarters of GDP decline is a commonly cited indicator of recession, and renewed growth immediately afterward signals that the economy has passed its low point and entered a recovery or expansion phase, rather than remaining in contraction or reaching a cyclical peak.65. An economist notes that short-term interest rates have risen above long-term interest rates on the Treasury yield curve. This condition is best described as:
- A. A humped yield curve
- B. A flat yield curve
- C. A normal yield curve
- D. An inverted yield curve
Show answer & explanation
Answer: D
An inverted yield curve occurs when short-term yields exceed long-term yields, often signaling that investors expect slower growth or falling rates ahead; a normal curve slopes upward because investors typically demand more yield for tying up money longer, so the scenario described does not match that shape.66. The Federal Reserve raises the reserve requirement for member banks. All else equal, what is the MOST likely effect on the money supply?
- A. It contracts as banks must hold more funds in reserve
- B. It expands because deposit insurance increases
- C. It expands as banks lend more
- D. It stays constant since reserves are unrelated to lending
Show answer & explanation
Answer: A
Raising the reserve requirement forces banks to hold a larger portion of deposits in reserve rather than lending them out, which reduces the money multiplier and shrinks the amount of money circulating in the economy; the other outcomes describe the opposite effect or an unrelated mechanism.67. A company sells shares of stock directly to the public for the first time to raise capital for expansion. This transaction takes place in which market?
- A. The over-the-counter dealer market only
- B. The primary market
- C. The secondary market
- D. The futures market
Show answer & explanation
Answer: B
The primary market is where issuers sell new securities directly to investors to raise capital, such as through an initial public offering; the secondary market is where investors subsequently trade already-issued shares among themselves, which is not what is described here.68. A convertible bond allows the holder to exchange the bond for a fixed number of shares of the issuer's common stock. Which statement about convertible bonds is accurate?
- A. They pay dividends instead of interest
- B. They cannot be called by the issuer prior to maturity
- C. They always trade at a fixed price regardless of the underlying stock price
- D. They typically offer a lower coupon rate than comparable non-convertible bonds because of the conversion feature's value
Show answer & explanation
Answer: D
Because the conversion feature gives bondholders potential upside tied to the issuer's stock price, convertible bonds are generally priced with a lower coupon than a comparable straight bond, compensating investors with equity-like appreciation potential instead of a higher fixed income stream; the other statements misdescribe how convertibles trade, whether they can be called, and how they pay income.69. A client purchases a put option on a stock she does not own. Which statement BEST describes her position?
- A. She has the right to sell the stock at the strike price, profiting if the price falls below that level
- B. She is obligated to purchase the stock if the option is exercised
- C. Her maximum loss is unlimited
- D. She has the right to buy the stock at the strike price
Show answer & explanation
Answer: A
A put option gives its buyer the right, but not the obligation, to sell the underlying stock at the strike price, so the position gains value as the stock price falls; buying a put does not create an obligation to purchase shares, does not grant a right to buy, and the buyer's maximum loss is limited to the premium paid, not unlimited.70. A money market mutual fund seeks to maintain a stable share price. Which of the following is a characteristic of this type of fund?
- A. It is designed primarily for long-term capital appreciation
- B. It invests in short-term, high-quality debt instruments to preserve stability and liquidity
- C. It invests primarily in long-term corporate bonds
- D. It guarantees principal through FDIC insurance
Show answer & explanation
Answer: B
Money market funds pursue price stability and liquidity by holding short-term, high-quality instruments such as Treasury bills and commercial paper; they are not federally insured and are not structured for long-term growth or heavy exposure to long-duration bonds, which would work against their stability objective.71. An investor purchasing a Treasury Inflation-Protected Security (TIPS) is primarily seeking protection against which risk?
- A. Purchasing power (inflation) risk
- B. Reinvestment risk
- C. Liquidity risk
- D. Default risk
Show answer & explanation
Answer: A
TIPS adjust their principal value based on changes in the Consumer Price Index, which helps preserve the investor's purchasing power as inflation rises; they are backed by the U.S. government so default risk is minimal, and the inflation adjustment feature does not specifically address liquidity or reinvestment concerns.72. A Real Estate Investment Trust (REIT) is required to distribute a substantial majority of its taxable income to shareholders annually in order to maintain special tax treatment. What is a consequence of this requirement for investors?
- A. REITs typically produce relatively high current income distributions
- B. REIT distributions are always tax-free to the shareholder
- C. REITs cannot own income-producing real estate directly
- D. REIT shares cannot be traded on an exchange
Show answer & explanation
Answer: A
Because REITs must pass through most of their taxable income to retain favorable tax status, they tend to generate meaningful current income for investors; REITs commonly do own real estate directly, many trade on exchanges, and their distributions are generally taxable, not tax-free, so those alternatives misstate REIT characteristics.73. A client owns a callable bond trading at a premium to par. Interest rates have fallen sharply since issuance. What risk is this investor MOST exposed to?
- A. Currency risk
- B. Call risk, since the issuer may redeem the bond early and the client would need to reinvest at lower rates
- C. Purchasing power risk
- D. Legislative risk
Show answer & explanation
Answer: B
When rates fall well below a bond's coupon, the issuer has a strong incentive to call the bond and refinance at a lower rate, leaving the investor to reinvest proceeds in a lower-rate environment; the other risks listed relate to inflation, changes in law, or currency exposure, none of which is the primary concern created by a falling-rate, premium-priced callable bond.74. Which of the following BEST describes a characteristic unique to preferred stock dividends compared to bond interest payments?
- A. Preferred dividends are always higher than bond interest
- B. Preferred dividends are tax-deductible to the issuing corporation
- C. Preferred dividends are legally guaranteed obligations of the issuer
- D. Preferred dividends may be omitted at the board's discretion without triggering default
Show answer & explanation
Answer: D
Unlike bond interest, which is a contractual obligation whose nonpayment constitutes default, preferred dividends can be skipped at the discretion of the issuer's board without triggering a default, though cumulative preferred shares require missed dividends to be paid before common shareholders receive anything; preferred dividends are also paid from after-tax income, not deducted like interest.75. A client invests in a fund of hedge funds. Compared to a single hedge fund, what is a distinguishing characteristic of a fund of funds structure?
- A. It provides daily liquidity comparable to a mutual fund
- B. It eliminates all layers of fees
- C. It adds an additional layer of management fees on top of the underlying funds' fees
- D. It guarantees positive returns through diversification
Show answer & explanation
Answer: C
A fund of hedge funds allocates capital across multiple underlying hedge funds and charges its own management fee in addition to the fees charged by each underlying fund, resulting in layered costs; it does not eliminate fees, cannot guarantee returns, and typically still carries limited liquidity similar to the underlying funds rather than daily redemption.76. A client wants exposure to a broad stock index but wants to be able to buy and sell shares throughout the trading day at market-determined prices. Which product BEST meets this need?
- A. An open-end mutual fund priced once daily
- B. An exchange-traded fund (ETF)
- C. A certificate of deposit
- D. A unit investment trust redeemed only at termination
Show answer & explanation
Answer: B
ETFs trade on an exchange throughout the day at prices that fluctuate with market supply and demand, unlike open-end mutual funds, which transact only once daily at the calculated net asset value; a UIT and a CD do not offer the intraday, market-priced trading flexibility the client is seeking.77. A client holds a structured note whose return is linked to an equity index but includes a stated principal protection feature if held to maturity. Which risk remains significant despite the protection feature?
- A. Credit risk of the issuing institution, since the protection is only a promise to repay backed by that issuer
- B. Currency risk if the note is denominated in dollars and the investor is a U.S. resident
- C. Interest rate risk on the underlying index
- D. Reinvestment risk from monthly coupon payments
Show answer & explanation
Answer: A
A structured note's principal protection is only as strong as the creditworthiness of the issuing bank or financial institution, since the guarantee is an unsecured obligation of that issuer rather than a government backstop; if the issuer defaults, the promised protection may not be honored, making issuer credit risk the most significant remaining exposure despite the stated protection feature.78. A client asks about the difference between a general obligation (GO) municipal bond and a revenue bond. Which statement is accurate?
- A. There is no meaningful difference between the two bond types
- B. GO bonds are backed by the issuer's taxing authority, while revenue bonds are backed by income from a specific project or source
- C. GO bonds are backed only by fees generated from a specific project
- D. Revenue bonds are backed by the full taxing power of the issuer
Show answer & explanation
Answer: B
General obligation bonds are secured by the issuer's pledge to use its taxing power to make debt service payments, while revenue bonds rely on income generated by a specific revenue-producing project, such as a toll road or utility, making the source of repayment the key distinction between the two structures.79. A client's fixed annuity guarantees a minimum interest rate credited to the contract value. What type of risk does this feature primarily protect the annuity owner against?
- A. The risk that credited interest could fall to an unacceptably low level in a falling-rate environment
- B. Credit risk of the insurer
- C. Liquidity risk
- D. Longevity risk
Show answer & explanation
Answer: A
The minimum guaranteed interest rate in a fixed annuity ensures the contract value grows by at least that stated floor rate regardless of how the insurer's general account performs, protecting the owner from receiving an unacceptably low crediting rate; it does not address how long the owner will live, how easily funds can be accessed, or the separate concern of insurer solvency.80. An investor compares a bond fund's average duration of 7 years to another bond fund's average duration of 3 years. All else equal, what does this comparison suggest?
- A. The fund with the 3-year duration has greater interest rate sensitivity
- B. The fund with the 7-year duration will experience a larger price change for a given change in interest rates
- C. Duration has no relationship to interest rate sensitivity
- D. Both funds will react identically to rate changes because duration only measures average maturity
Show answer & explanation
Answer: B
Duration approximates a bond fund's price sensitivity to interest rate changes, so a fund with a longer duration of 7 years will see a proportionally larger price swing for a given change in rates than a fund with a shorter duration of 3 years; duration is not equivalent to reacting identically across funds, and the fund with the shorter duration is actually the less rate-sensitive one.81. A representative recommends frequent in-and-out trading in a client's account primarily to generate commissions, without regard to the client's investment objectives. This practice is known as:
- A. Front running
- B. Window dressing
- C. Marking the close
- D. Churning
Show answer & explanation
Answer: D
Churning refers to excessive trading in a customer's account for the primary purpose of generating commissions rather than serving the client's investment objectives; front running involves trading ahead of a large pending order, marking the close involves trading near market close to affect a security's closing price, and window dressing refers to portfolio managers adjusting holdings before a reporting date to appear favorable.82. A client places an order instructing her representative to sell 100 shares immediately at the best available price. What type of order is this?
- A. A good-till-canceled order
- B. A stop order
- C. A limit order
- D. A market order
Show answer & explanation
Answer: D
A market order instructs the broker to execute immediately at the best price currently available, prioritizing speed of execution over a specific price; a limit order sets a specific price threshold, a stop order becomes a market order only once a trigger price is reached, and good-till-canceled describes an order's duration rather than its execution type.83. A representative executes a trade in a client's account without first obtaining the client's authorization for that specific transaction, and the account agreement does not grant discretionary authority. What has occurred?
- A. A legitimate exercise of time and price discretion
- B. A permissible block trade
- C. Unauthorized trading, a prohibited practice absent discretionary authority
- D. A routine rebalancing transaction
Show answer & explanation
Answer: C
Without either the client's specific authorization for the transaction or documented discretionary trading authority on file, executing a trade in the account is unauthorized trading, a serious violation; time and price discretion is a narrow exception that still requires prior general authorization for the security and side of the trade, which is not described here.84. An agent wants to exercise discretion over the time and price of executing a client's order on a single day, without written discretionary authority on file. Under industry practice, is this permitted?
- A. No, all discretion requires written authority regardless of scope
- B. Yes, limited time-and-price discretion for a specific order on the day it is given is generally permitted without written authority, but broader discretion requires it
- C. Yes, without any limitation on duration
- D. Yes, but only for options trades
Show answer & explanation
Answer: B
A narrow exception allows an agent to use judgment about the timing and price of executing an order the client has already authorized as to security and action, limited to the same business day, without triggering the written discretionary authorization requirement; any broader discretion over which security, whether to buy or sell, or the amount requires prior written authority.85. A broker-dealer's registered representative recommends that an elderly client with limited income and a short time horizon concentrate his entire portfolio in speculative micro-cap stocks. This recommendation MOST likely violates which standard?
- A. The suitability obligation, which requires recommendations to align with the client's financial situation, objectives, and risk tolerance
- B. The disclosure requirements for wrap fee programs
- C. The prohibition on front running
- D. The best execution obligation
Show answer & explanation
Answer: A
Suitability requires that a recommendation align with the customer's financial situation, needs, risk tolerance, and time horizon; concentrating an elderly client with limited income and a short horizon in speculative micro-cap stocks disregards those factors, whereas best execution concerns trade pricing, front running concerns trading ahead of orders, and wrap fee disclosure concerns fee-bundled advisory programs, none of which is the issue here.86. A client wants to open a brokerage account that allows either party to enter orders and, upon the death of one owner, automatically vests full ownership in the survivor. Which account registration accomplishes this?
- A. Joint tenants with right of survivorship (JTWROS)
- B. A UTMA custodial account
- C. Tenants in common
- D. A sole proprietorship account
Show answer & explanation
Answer: A
Joint tenants with right of survivorship provides that upon the death of one owner, that owner's interest passes automatically to the surviving joint owner outside of probate; tenants in common instead allows a deceased owner's share to pass to their estate rather than the co-owner, and the other options describe custodial or single-owner arrangements that do not fit a two-party account with survivorship.87. An adviser representative recommends a client switch from one share class of a mutual fund family to another, incurring a new sales charge, without any change in the client's investment objective or a corresponding benefit. This practice is generally known as:
- A. Switching, a prohibited practice when it lacks a legitimate justification for the client
- B. Rebalancing
- C. Tax-loss harvesting
- D. Dollar-cost averaging
Show answer & explanation
Answer: A
Switching describes moving a client between similar products or share classes primarily to generate new sales charges or commissions without a legitimate investment reason, which is a prohibited practice; it differs from rebalancing, which realigns a portfolio to target allocations, and from dollar-cost averaging or tax-loss harvesting, which serve distinct, legitimate investment purposes unrelated to unnecessary sales charges.88. A representative learns material nonpublic information about an upcoming corporate merger from a client who works at the target company, and trades the client's account based on this information ahead of the public announcement. This conduct is:
- A. A prohibited practice constituting insider trading, regardless of whose account is used
- B. Permissible because the trade was for the client's own account
- C. Only a violation if the representative also personally profits
- D. Permissible time and price discretion
Show answer & explanation
Answer: A
Trading on material nonpublic information obtained through a breach of duty is prohibited insider trading regardless of whether the trade benefits the client's account rather than the representative personally, and regardless of whether the representative individually profits; using such information to trade any account ahead of a public announcement violates antifraud provisions.89. A firm receives a customer's buy order for a thinly traded stock and, before executing the customer's order, the firm's trading desk buys the same stock for its own inventory. This practice is known as:
- A. Hedging
- B. Best execution
- C. Arbitrage
- D. Trading ahead (frontrunning) of a customer order, a prohibited practice
Show answer & explanation
Answer: D
Trading ahead, or frontrunning, occurs when a firm executes proprietary trades ahead of a customer's pending order in the same security to benefit from the anticipated price impact of that order, which is a prohibited practice because it disadvantages the customer; it is unrelated to best execution obligations, arbitrage strategies, or legitimate hedging activity.90. A client wants to buy securities using funds borrowed from her broker-dealer, pledging the securities purchased as collateral for the loan. This type of account is known as:
- A. An omnibus account
- B. A cash account
- C. A discretionary account
- D. A margin account
Show answer & explanation
Answer: D
A margin account permits a client to borrow funds from the broker-dealer to purchase securities, using the securities in the account as collateral for the loan, which allows leveraged buying power; a cash account requires full payment for purchases, a discretionary account concerns trading authority rather than borrowing, and an omnibus account is a broker-level pooled account structure, neither of which describes purchasing on borrowed funds.91. A representative guarantees a client that a recommended stock will not lose value and promises to personally reimburse any losses. This conduct is:
- A. Permitted if the client signs a waiver
- B. A prohibited practice, since representatives may not guarantee against loss
- C. Permitted if put in writing
- D. Permitted only for institutional clients
Show answer & explanation
Answer: B
Guaranteeing a customer against loss in a securities account is a prohibited practice regardless of whether it is documented in writing, limited to certain client types, or accompanied by a signed waiver, because it misrepresents the inherent risk of securities investing and can induce clients to take on inappropriate risk based on a false sense of protection.92. A firm splits a large customer order into several smaller orders across multiple days solely to generate additional commissions, when a single execution would have better served the client. This practice is best described as:
- A. Best execution
- B. Dollar-cost averaging
- C. Laddering
- D. A form of churning/excessive trading designed to increase commissions
Show answer & explanation
Answer: D
Deliberately breaking up an order into unnecessary pieces solely to generate extra commissions, rather than to serve a legitimate execution purpose for the client, is a form of excessive trading similar to churning; it is not dollar-cost averaging, which is a client-directed periodic investment strategy, nor is it laddering or a best execution practice, both of which serve legitimate purposes unrelated to commission generation.93. A representative recommends that a client sell a mutual fund position at a loss and simultaneously repurchase substantially the same fund in an IRA to preserve market exposure while claiming a tax loss in the taxable account. What issue does this raise?
- A. It may run afoul of wash sale principles because repurchasing a substantially identical position in an IRA within the restricted window can disallow the loss, and permanently in this case since IRA basis cannot be adjusted
- B. It is a permissible tax strategy with no restrictions
- C. It is only a concern if the fund is index-based
- D. It guarantees the client a larger refund
Show answer & explanation
Answer: A
Wash sale rules disallow a loss when a substantially identical security is repurchased within the restricted window, and repurchasing inside an IRA is treated even more harshly because the disallowed loss cannot later be added to the IRA's cost basis, effectively losing the tax benefit permanently; this is not a guaranteed refund strategy, is not unrestricted, and the concern applies regardless of whether the fund tracks an index.94. Under the Uniform Securities Act, which of the following is generally included within the definition of a 'security'?
- A. A fixed life insurance policy
- B. A certificate of deposit issued by a bank
- C. An investment contract, such as an interest in a common enterprise with an expectation of profit derived from the efforts of others
- D. A whole life insurance death benefit
Show answer & explanation
Answer: C
An investment contract, characterized by an investment of money in a common enterprise with an expectation of profits derived primarily from the efforts of others, falls within the statutory definition of a security; fixed insurance products and bank certificates of deposit are generally excluded from that definition because they are regulated under separate insurance or banking frameworks rather than as securities.95. Under the Uniform Securities Act, an individual who represents a broker-dealer in effecting securities transactions with the public is generally required to be registered as a(n):
- A. Issuer
- B. Agent
- C. Administrator
- D. Federal covered adviser
Show answer & explanation
Answer: B
A person who represents a broker-dealer or issuer in effecting securities transactions with the public is defined as an agent and must generally register in that capacity in the states where they do business; the Administrator is the state regulatory official, the issuer is the entity that created the security, and a federal covered adviser is a distinct category of investment adviser regulated primarily at the federal level.96. A security is exempt from the registration requirements of the Uniform Securities Act. What does this exemption affect?
- A. It exempts any agent selling it from registration
- B. It exempts the security from the antifraud provisions as well
- C. It automatically exempts the issuer from all state oversight
- D. It exempts only the security itself from registration requirements; the antifraud provisions still apply, and agents generally still must register
Show answer & explanation
Answer: D
An exemption from registration under the Uniform Securities Act relieves the security from the specific registration process, but it does not exempt transactions involving that security from the antifraud provisions, which apply broadly, and agents effecting transactions in the exempt security are generally still required to be registered unless a separate exemption applies to them.97. A state Administrator has reasonable grounds to believe an agent has violated the Uniform Securities Act. Which of the following actions may the Administrator take?
- A. Take no action unless a criminal conviction has already occurred
- B. Immediately imprison the agent without a hearing
- C. Deny, suspend, or revoke the agent's registration after appropriate notice and opportunity for a hearing
- D. Only refer the matter to federal prosecutors, with no independent state authority
Show answer & explanation
Answer: C
State Administrators have authority under the Uniform Securities Act to deny, suspend, or revoke registrations when there are reasonable grounds for such action, subject to the due process protections of notice and an opportunity for a hearing; the Administrator does not have criminal sentencing authority and is not limited to referring matters elsewhere or waiting for a prior criminal conviction before acting administratively.98. An investment adviser manages 150 million dollars in assets under management and otherwise meets the criteria for SEC registration. How is this adviser generally treated under the dual state/federal regulatory framework?
- A. As a federal covered adviser, registered with the SEC rather than each individual state, though states may still require notice filings
- B. As required to register separately in every state where it has a client
- C. As ineligible for SEC registration because of its asset level
- D. As exempt from all regulatory oversight due to its size
Show answer & explanation
Answer: A
Investment advisers that meet the asset threshold for SEC registration become federal covered advisers, registering with the SEC instead of registering individually in each state, although states can still require notice filings and collect fees for advisers doing business within their borders; large advisers are not exempt from oversight altogether, nor are they required to register state-by-state once federal covered status applies.99. A person provides advice about securities but does so solely through a publication of general and regular circulation that does not give advice tailored to specific individual client situations. Under the Uniform Securities Act, this person is:
- A. Required to register as an investment adviser regardless of the publication's content
- B. Generally excluded from the definition of investment adviser under the bona fide publication exclusion
- C. Prohibited from operating without SEC approval
- D. Automatically classified as a broker-dealer
Show answer & explanation
Answer: B
The definition of investment adviser generally excludes a person who publishes advice through a bona fide newspaper, magazine, or similar publication of general and regular circulation, so long as the publication does not provide advice tailored to the specific circumstances of individual subscribers; that person is not automatically deemed a broker-dealer nor barred from operating, and this exclusion means adviser registration is not required based solely on that publishing activity.100. A broker-dealer wishes to register in a state under the Uniform Securities Act. Which of the following is typically part of the registration process?
- A. Filing an application with the Administrator, which may include consent to service of process and payment of a filing fee
- B. Registration is granted only after five years of operating history
- C. Only a verbal notification to the Administrator is required
- D. Registration is automatic upon formation of the entity
Show answer & explanation
Answer: A
Broker-dealer registration under the Uniform Securities Act generally requires filing an application with the state Administrator, which can include a consent to service of process authorizing the Administrator to receive legal notices on the firm's behalf, along with payment of the applicable filing fee; registration is not automatic, is not satisfied by a verbal notice, and is not conditioned on a minimum number of years in operation.101. Which entity is generally responsible for administering and enforcing the Uniform Securities Act within a given state?
- A. The Securities and Exchange Commission
- B. The state Administrator
- C. The Municipal Securities Rulemaking Board
- D. FINRA
Show answer & explanation
Answer: B
The state Administrator, typically housed within a state securities regulatory agency, is charged with administering and enforcing the Uniform Securities Act within that state; the SEC operates at the federal level, FINRA is a self-regulatory organization overseeing broker-dealers, and the MSRB writes rules for municipal securities dealers, none of which serves as the state-level administering authority.102. An issuer sells securities in a transaction that qualifies as an isolated non-issuer transaction under state law. What is the general effect of this type of exemption?
- A. It exempts that specific transaction from state registration requirements without exempting the security itself in future transactions
- B. It permanently exempts the security from registration in all future sales
- C. It exempts the transaction from antifraud liability
- D. It applies only to transactions involving mutual funds
Show answer & explanation
Answer: A
A transactional exemption, such as an isolated non-issuer transaction, applies to the specific transaction being conducted rather than granting the underlying security a permanent exempt status, meaning future transactions in that same security may still require registration unless another exemption applies; transactional exemptions also do not eliminate antifraud liability, and this type of exemption is not limited to mutual fund transactions.103. A state-registered investment adviser wants to know when it may take custody of client funds or securities. Which statement BEST reflects the general regulatory approach to adviser custody?
- A. Custody requires no special safeguards as long as the client consents verbally
- B. Custody is always prohibited for state-registered advisers under all circumstances
- C. Advisers with custody are generally subject to heightened requirements, such as using a qualified custodian and providing account statements or audits
- D. Custody is permitted only for advisers managing pension plans
Show answer & explanation
Answer: C
When a state-registered adviser has custody of client funds or securities, regulators generally impose heightened safeguards, such as requiring assets to be held with a qualified custodian and ensuring clients receive regular account statements or that the adviser undergo an independent audit, to protect against misappropriation; custody is not blanket-prohibited, verbal consent alone does not satisfy safeguard requirements, and these rules are not limited to pension plan advisers.104. An agent moves from one broker-dealer to another. What is generally required regarding the agent's registration under the Uniform Securities Act?
- A. Only the new broker-dealer needs to notify the Administrator, with no action needed from the agent
- B. The agent's registration is generally terminated with the former broker-dealer and a new registration or transfer must be filed reflecting the new employing firm
- C. No action is required since agent registration follows the individual, not the firm
- D. The agent may continue effecting transactions under the prior firm's registration indefinitely
Show answer & explanation
Answer: B
Because agent registration under the Uniform Securities Act is tied to the sponsoring broker-dealer, a change in employment generally terminates the registration associated with the former firm, requiring a new filing to register the agent under the new broker-dealer before the agent may effect transactions on its behalf; the agent cannot continue operating under the old firm's registration, and both the departure and the new registration typically require appropriate filings.
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Key facts: Series 66 exam
The Series 66 is administered by NASAA, with 100 scored questions, a 2 hours 30 minutes time limit and a passing score of 73%.
This free Series 66 practice test has 104 original questions written to NASAA's official content outline, last checked against it on July 18, 2026. Every question shows a worked explanation, and nothing here requires a signup.
As of 2026, the Series 66 exam fee is $177.
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Official sources
Primary documents used to verify the exam details shown on this page.
- Series 66 Exam OverviewNASAAfinra.org
- NASAA Exams – Series 63, 65 and 66NASAAnasaa.org
- FINRA Continuing Education RequirementsFINRAfinra.org
- FINRA Qualification Exams OverviewFINRAfinra.org
- NASAA Industry Resources – Exams (Series 63/65/66)NASAAnasaa.org
- Series 66 – Uniform Combined State Law ExaminationFINRAfinra.org
Last verified against the official exam content outline:
Frequently asked questions
Do these free Series 66 practice questions match the real exam?
Yes, the questions are written to mirror the real exam's multiple-choice format and its mix of state law, regulations, ethics, and investment-vehicle topics. You'll see the same style of scenario-based items the actual test favors, including the "which of the following is true EXCEPT" phrasing that trips up unprepared candidates. No practice bank is the real thing, but the goal is that nothing on test day feels unfamiliar.
How many Series 66 practice questions should I do before test day?
Most successful candidates work through several hundred to over a thousand practice questions before sitting for the exam. Quality matters more than raw volume: reviewing every miss carefully beats speeding through extra sets. Spread your practice over daily sessions rather than cramming, so the rules stay fresh across the whole content outline.
How should I use the answer explanations?
Read the explanation for every question, including the ones you got right. Knowing why the wrong choices are wrong is what separates recognizing an answer from understanding the rule, and the Series 66 loves testing the same rule from a new angle. When you miss a question, write down the underlying rule and retest yourself on that topic a few days later.
How do I know I'm ready to sit for the Series 66?
A good readiness signal is consistently scoring comfortably above the passing bar on full-length, timed practice sets you have not seen before. Since the real exam requires 73 correct out of 100 scored questions, many candidates aim to score around 80 percent or higher on fresh practice exams before booking. If your scores swing widely by topic, keep drilling your weakest areas first.
Are these Series 66 practice questions really free? Do I need an account?
Yes, the practice questions are completely free, and you don't need to create an account or hand over an email address to use them. You can start a set right now and see explanations for every answer. Free practice is a low-risk way to gauge where you stand before deciding whether to invest in a paid course.