NASAA Series 65, Uniform Investment Adviser Law Examination flashcards

A U.S. Treasury bond that is indexed to inflation to protect investors from the erosion of purchasing power.

• Principal value adjusts semi-annually based on the Consumer Price Index (CPI).
• Coupon rate is fixed, but interest payments vary as they are applied to the adjusted principal.
• At maturity, investors receive the greater of the original or adjusted principal.
• Provides a hedge against inflation.

Memory trick: TIPS: Treasury's Inflation Protection Shield.

An Investment Adviser Representative (IAR) who is also licensed to sell insurance products (dual registration) may receive commissions for the sale of those products, provided that the compensation arrangement is fully and clearly disclosed to the client, and the recommendation is suitable.

• Dual registration is permitted.
• Commissions for insurance products are allowed if properly licensed.
• Full and clear disclosure of all compensation is mandatory.
• Fiduciary duty still applies; recommendations must be suitable.

Memory trick: Dual Roles, Dual Pay: Disclose All, Come What May!

Debt securities issued by state and local governments or their agencies to finance public projects, known for offering interest income that is exempt from federal income tax, and sometimes state and local taxes.

• Federally tax-exempt interest.
• Often triple tax-exempt for in-state residents.
• Generally considered relatively safe investments.

Memory trick: Muni bonds are 'Money' that's 'No-Tax' for the 'City'.

A derivative contract where two parties agree to exchange future interest payments based on a notional principal amount, often used to hedge interest rate risk.

• Exchanges fixed for floating interest payments (or vice-versa).
• Used to manage interest rate risk.
• A type of derivative security.

Memory trick: Interest Rate Swaps 'swap' your rate worries away.

Pre-dispute arbitration clauses in investment advisory agreements are generally enforceable for resolving client disputes, but they cannot waive a client's right to file a complaint or participate in an investigation by a state Administrator or other regulatory body.

• Arbitration clauses are common in advisory agreements.
• Generally enforceable for resolving disputes between IA and client.
• Cannot waive client's right to file regulatory complaints.
• Client must be informed about non-waivable regulatory complaint rights.

Memory trick: Arbitrate disputes, but REGULATORS still hear complaints!

When an investment adviser has custody of client assets that are held by a qualified custodian, the IA's statements to clients must include a specific legend advising clients to compare those statements with the independent statements received directly from the qualified custodian.

• Applies when IA has custody and uses a qualified custodian.
• Legend appears on the IA's statements to clients.
• Purpose is fraud prevention and client verification.
• Requires clients to cross-reference statements.

Memory trick: Custodian's Legend: Compare Your Statements, Check for Discrepancies, No Debates!

A debt security that pays a fixed interest rate for an initial period, after which the coupon rate increases (steps up) at predetermined dates, often to compensate investors for extending maturity or to incentivize holding.

• Fixed rate initially, then increases at intervals.
• Designed to incentivize holding or adjust to market rates.
• Can be callable by the issuer.

Memory trick: A Step-Up bond's coupon 'steps up' over time.

State-registered investment advisers are required to maintain specific records for a prescribed period, typically five years, and ensure they are readily accessible for regulatory examination.

• Records include client communications, contracts, and financial statements.
• Minimum retention period is usually five years.
• Records must be easily retrievable for regulators.

Memory trick: Keep records safe, five years and clear, for administrator's watchful peer!

An options strategy where an investor owns shares of a stock and sells (writes) call options against those shares, generating income via the premium.

• Generates income (premium) from selling the call.
• Limits upside potential on the stock if it rises above the strike price.
• Provides partial downside protection up to the premium received.
• Investor is obligated to sell the stock if the option is exercised.

Memory trick: Covered Call max profit: Stock gain to strike + premium.

The SEC Marketing Rule allows investment advisers to use testimonials in advertising, provided they include clear disclosures regarding compensation, client status, and material conflicts of interest related to the testimonial provider.

• Superseded the old ban on testimonials.
• Requires disclosure of compensation for the testimonial.
• Requires disclosure if the person is a client and any material conflicts.
• Applies to all forms of advertising, including social media and websites.

Memory trick: Testimonials are allowed now, but 'disclose, disclose, disclose' is the vow.

A debt security that pays a fixed coupon for an initial period, after which the coupon rate 'resets' to a new, often higher, fixed rate or a rate tied to a benchmark for subsequent periods.

• Combines features of fixed-rate and floating-rate bonds.
• Offers investors some protection against rising interest rates after the initial fixed period.
• Can be attractive to issuers wanting to attract initial investors with a fixed rate.
• The reset mechanism is defined in the bond's indenture.

Memory trick: Coupon's Story: Fixed first, then it Resets or Floats.

Under the Uniform Securities Act (USA), a state-registered investment adviser is exempt from registration in another state if it has no place of business in that state AND has fewer than 6 non-institutional clients in that state during any 12-month period.

• Applies to state-registered IAs.
• Requires no physical office in the new state.
• Allows up to 5 non-institutional clients without registration.
• Institutional clients (e.g., banks, other IAs) do not count towards the limit.

Memory trick: De Minimis: No Office, Under Six Clients, No Registration Fights!

An IAR's fiduciary duty to provide suitable advice persists even when a client directs an unsolicited, unsuitable trade. While the client has final say, the IAR must adequately advise and document, and cannot simply ignore blatant unsuitability.

• Fiduciary duty is paramount for IARs.
• Client-directed trades don't automatically absolve liability.
• Adequate advice and documentation are critical.
• IAR must attempt to prevent clearly detrimental actions.

Memory trick: Advise, Document, but DUTY endures!

Specific conditions that mandate an investment adviser's registration with the Securities and Exchange Commission (SEC), regardless of AUM thresholds.

• Advising a registered investment company.
• Managing $100 million or more in AUM.
• Advising a business development company.
• Operating in 15 or more states.

Memory trick: State or SEC, it's about the scope and size, you see.

Investment advisers must ensure their client complaint handling policies do not restrict or fail to inform clients of their right to contact state or federal securities regulators directly regarding complaints, regardless of internal or arbitration processes.

• Clients always retain the right to contact regulators.
• Firms cannot mandate internal resolution or arbitration as the sole first step.
• Policies should clearly communicate clients' rights.
• Regulatory bodies can investigate complaints independently.

Memory trick: Listen to complaints, offer solutions, but always point to the regulator's door.

Essential components that an investment adviser's cybersecurity policy should include to protect client data and comply with regulatory expectations.

• Risk assessment.
• Incident response plan.
• Employee training.
• Data breach notification.

Memory trick: Cybersecurity needs Plans, People, and Prevention, not always a CISO.

The rules governing how an Investment Adviser Representative can handle client non-public personal information when moving between firms.

• Requires client consent.
• Consent must be written (generally).
• Protects client privacy (Regulation S-P).
• Fiduciary duty applies.

Memory trick: Moving firms? Client data needs written permission, always.

Under the Dodd-Frank Act, an investment adviser that exclusively advises 'qualified purchasers' (as defined in the Investment Company Act of 1940) may be exempt from SEC registration, allowing them to remain state-registered.

• A 'qualified purchaser' is an individual or family-owned business that owns at least $5 million in investments.
• This exemption is related to, but distinct from, the private fund adviser exemption.
• If exempt from SEC registration, the IA must register at the state level (unless another state exemption applies).
• Helps manage regulatory burden for advisers serving sophisticated investors.

Memory trick: AUM is the primary gatekeeper, but 'Qualified' clients can open another door.

An IAR's fiduciary duty extends to ensuring that actions taken with a client's investment assets, even for private transactions not directly managed by the IAR, are suitable for the client's overall financial situation and objectives.

• Fiduciary duty applies to all client asset decisions.
• Liquidating securities is an advisory action.
• Suitability must be considered for the use of funds.
• IAR is not absolved by 'private' nature of transaction.

Memory trick: Even private funds need SUITABLE financial plans!

The general prohibition for Investment Adviser Representatives from lending money to or borrowing money from clients.

• Prevents conflicts of interest.
• Maintains professional boundaries.
• Protects clients from potential exploitation.
• A core aspect of fiduciary duty.

Memory trick: Fiduciary's financial lines must never be crossed with clients.

Raw materials or primary agricultural products that can be bought and sold, often used in portfolios for diversification, inflation hedging, and their low correlation with traditional asset classes.

• Low correlation with stocks and bonds.
• Potential inflation hedge.
• Can be volatile but offers diversification benefits.

Memory trick: Commodities are the 'core' alternative for diversification and inflation.

Investment advisers are generally prohibited from using testimonials in their advertisements, especially if compensated, as they can be misleading and not representative of all client experiences.

• Prohibited under both federal (SEC) and state (USA) rules.
• Applies to client endorsements or statements of satisfaction.
• Compensation for testimonials is a clear red flag.
• Aims to prevent misleading advertising about performance or service.

Memory trick: Don't Testify, Hypothesize with Care, or Mislead!

The risk that a bond issuer will be unable to make its promised interest payments or repay the principal amount at maturity.

• Higher for bonds issued by companies or governments with lower credit ratings.
• Investors demand higher yields (risk premium) for bonds with higher default risk.
• Can lead to partial or total loss of invested capital.
• Assessed by credit rating agencies like S&P, Moody's, Fitch.

Memory trick: Bonds face DIM Lags: Default, Interest Rate, Market, Liquidity.

Under fiduciary duty, an investment adviser representative must ensure that all investment recommendations are suitable for the client, meaning they align with the client's financial situation, investment objectives, and risk tolerance.

• Applies to all advisory services and recommendations.
• Requires understanding the client's full financial profile.
• Goes beyond simply disclosing risks; requires acting in the client's best interest.

Memory trick: Fiduciary's Duty: Always Act with Care, Loyalty, and Put Client First, Everywhere!

A type of pooled investment that continually offers new shares and redeems existing shares, with transactions priced at the Net Asset Value (NAV) once per day.

• Continuously offered and redeemable.
• Priced once daily at NAV.
• Professionally managed.
• Offers diversification.

Memory trick: Open-End Mutual Fund: Always open for business, daily NAV.

Financial contracts whose value is dependent on or derived from the value of an underlying asset, group of assets, or benchmark.

• Value derived from an underlying asset.
• Used for hedging or speculation.
• Can provide significant leverage.
• Examples include options, futures, forwards, and swaps.

Memory trick: Derivatives: DERIVED from something else, like a puzzle piece.

A stock with a high degree of risk but also a high potential for substantial returns, often associated with companies undergoing significant change or operating in volatile industries.

• High risk, high reward.
• Often associated with distressed or emerging companies.
• Significant capital appreciation potential if successful.

Memory trick: Speculative stocks are like 'spec-tacular' gambles for big gains.

A type of mutual fund that invests in high-quality, short-term debt instruments, providing high liquidity and generally stable value.

• Invests in short-term debt (e.g., T-Bills, commercial paper, CDs).
• Maintains a stable net asset value (typically $1.00 per share).
• Offers daily liquidity (can withdraw funds easily).
• Yields fluctuate with prevailing interest rates.

Memory trick: Money Market Fund: Liquid cash, decent yield, like a flexible money pot.

Investment adviser advertising rules require that performance figures be presented fairly and not be misleading. This includes accurately reflecting the deduction of advisory fees and other expenses, and providing clear disclosures about past performance.

• Performance must be net of fees.
• Disclosures about market conditions and limitations are required.
• Past performance is not indicative of future results must be stated.
• Hypothetical performance has strict limitations.

Memory trick: Performance Ads: Show Net, Disclose, Don't Be Deceptive!

Specific rules and practices required for investment advisers who have physical possession or control over client funds or securities.

• Qualified custodian required.
• Quarterly statements to clients.
• Annual surprise examination.
• Segregated client accounts.

Memory trick: Custody means Care: Segregate, Statements, Surprise, and Safeguard.

An IA's BCP is a written plan outlining procedures to ensure continuous operations and client service during significant business disruptions. It's a regulatory requirement for both state and SEC-registered IAs.

• Mandated by regulatory bodies.
• Must address data backup, client communication, and operational continuity.
• Must be reviewed periodically and updated as needed.

Memory trick: BCP: Keep Clients Connected, Data Protected, and Operations Uninterrupted!

Specific professionals (Lawyers, Accountants, Teachers, Engineers) who are excluded from the definition of an Investment Adviser Representative if their investment advice is solely incidental to their primary profession and they receive no special compensation for it.

• Advice must be incidental.
• No special compensation for advice.
• Applies to LATE professionals.
• Mirrors IA exclusion.

Memory trick: IARs advise for pay, unless they're LATE and incidental.

An option strategy where an investor who owns a stock buys a put option on that same stock to protect against a decline in its price, while retaining the potential for upside gains.

• Provides downside protection (a floor).
• Retains unlimited upside potential.
• Cost is the premium paid for the put option.

Memory trick: Buying a Put is like 'putting' a safety net under your stock.

A mandatory disclosure on investment adviser-generated client statements when the IA has custody, advising clients to compare these statements with those from the qualified custodian.

• Required when IA sends its own statements.
• Promotes transparency and fraud detection.
• Ensures clients cross-reference information.
• Part of NASAA's Model Rule on Custody.

Memory trick: Statements from IA need a 'compare me' note.

A type of permanent life insurance with a flexible premium and adjustable death benefit, offering a cash value component that grows tax-deferred and allows for investment choice.

• Flexible premiums and death benefit.
• Cash value grows tax-deferred.
• Offers investment choices within sub-accounts.
• Provides a death benefit.

Memory trick: Universal Life is Universally Flexible for your future.

An insurance contract that provides a series of guaranteed, fixed payments that begin almost immediately after a lump-sum premium is paid.

• Income payments start within one year (often 30 days) of premium payment.
• Payments are fixed and guaranteed, regardless of market performance.
• Suitable for clients needing immediate, predictable income.
• Often used for retirement income planning.

Memory trick: Annuity choices: Immediate or Deferred, Fixed or Variable, Indexed for a twist.

An options strategy where an investor buys a put option on a stock they already own to protect against a decline in the stock's price.

• Acts like an insurance policy for the stock holding.
• Limits potential losses to the strike price minus the premium paid.
• Allows the investor to retain ownership of the stock and benefit from any upside.
• Suitable for investors who are bullish long-term but bearish short-term.

Memory trick: Protective Put: 'P'rotects your 'P'ortfolio when prices fall.

Investment vehicles primarily chosen for their ability to generate a regular and predictable stream of income for investors, often with a focus on capital preservation or moderate growth.

• Examples include bonds, preferred stocks, dividend-paying common stocks, and REITs.
• Often favored by retirees or investors with specific income needs.
• Risk profiles can vary widely within income-oriented assets.

Memory trick: Income's consistent flow, moderate risk in tow.

A measure of a bond's interest rate sensitivity, representing the weighted average time until a bond's cash flows are received.

• Higher duration means greater price sensitivity to interest rate changes.
• Used by investors to manage interest rate risk in bond portfolios.
• Modified duration is a common method for approximating price change.

Memory trick: Bonds have 'DURATION' for sensitivity.

An investment portfolio designed to generate regular cash flow (income) for the investor, often through dividends, interest, or rental payments.

• Prioritizes cash distributions over capital growth.
• Common investments: bonds, preferred stocks, REITs, dividend stocks.
• Important for retirees or those needing living expenses.
• Tax implications are a key consideration.

Memory trick: High tax bracket? Think smart income, not just high income.

An asset pricing model that expands on the Capital Asset Pricing Model (CAPM) by adding size risk (SMB) and value risk (HML) factors to the market risk factor (beta) to explain stock returns.

• SMB (Small Minus Big): accounts for the historical outperformance of small-cap stocks.
• HML (High Minus Low): accounts for the historical outperformance of value stocks (high book-to-market ratio).
• Aims to explain a greater proportion of portfolio returns than CAPM alone.

Memory trick: Fama-French: Market, Small, Value – a triple threat.

Reducing the unsystematic risk associated with a large holding in a single stock, often through diversification or hedging strategies.

• Diversification (selling and reinvesting) is the most direct way to reduce unsystematic risk.
• Hedging (e.g., options) can protect against downside but doesn't eliminate concentration risk.
• Concentrated positions carry significant company-specific risk.

Memory trick: Diversify the basket, don't just patch a hole.

The annual income (coupon payment) from a bond divided by its current market price, indicating the return an investor would receive if they purchased the bond today.

• Current Yield = Annual Interest Payment / Current Market Price.
• Different from coupon rate (based on par value) and yield to maturity (takes into account capital gains/losses).
• Used to compare the income return of various bonds.

Memory trick: Current yield: Cash in hand, price right now.

The risk inherent in a company's operations, management, and industry, which can impact its profitability and stock price.

• A form of unsystematic risk.
• Can be mitigated through diversification.
• Examples include management incompetence, product obsolescence, or labor disputes.

Memory trick: Risks are like 'BAD' news: Business, Averse, Diversifiable.

An investment objective focused on protecting the initial investment amount from loss, often prioritizing safety and liquidity over growth.

• Primary goal is to avoid loss of principal.
• Typical investments include cash, CDs, T-bills.
• Returns are generally low.
• Suitable for very risk-averse investors or short-term needs.

Memory trick: Objectives guide the journey: preserve, grow, or earn income.

An investment objective focused on generating a steady stream of income while protecting the original investment principal from loss.

• Often suitable for retirees or those needing regular cash flow.
• Prioritizes stability over aggressive growth.
• Typically involves lower-risk assets like bonds, dividend stocks, and money market instruments.

Memory trick: Retirees need a 'SAFE' income stream: Stable, Accessible, Funded, and Enduring.

The total return on an investment over a specified period, including all income and capital gains (realized and unrealized).

• Formula: (Ending Value - Beginning Value + Income) / Beginning Value.
• Can also be calculated as (Income + Capital Gains) / Beginning Value.
• A simple measure of performance over a single period.

Memory trick: Performance is about 'RETURNS': Realized, Total, Unrealized, Net.

An investment strategy focused on maximizing capital appreciation by investing in companies expected to grow at an above-average rate.

• Targets companies with high growth potential, often reinvesting earnings.
• Typically involves higher risk and volatility.
• Suitable for investors with a long-term horizon and higher risk tolerance.

Memory trick: Growth's long game, high stakes, high gain.

A statistical measure of the dispersion of data points around the mean, used in finance to compare the relative variability of different investment options.

• Calculated as Standard Deviation / Expected Return.
• Measures risk per unit of return.
• A lower CV indicates a more favorable risk-adjusted return.

Memory trick: CV: Compare Volatility, value returns.

A portfolio management strategy that increases bond allocation (reduces equity risk) in the years leading up to and immediately following retirement to mitigate sequence of returns risk, then gradually decreases bond allocation thereafter.

• Specifically targets sequence of returns risk.
• Increases fixed income before and after retirement.
• Aims to protect capital during critical withdrawal years.
• Assumes a long post-retirement horizon.

Memory trick: Smooth the ride: don't let early retirement drops derail your wealth.

Also known as specific risk or idiosyncratic risk, it is the risk inherent to a specific company, industry, or asset, which can be reduced or eliminated through diversification.

• Unique to a particular investment.
• Examples: management changes, product recalls, company-specific lawsuits.
• Can be diversified away.
• Not correlated with overall market movements.

Memory trick: Risks: Some you can dodge, some you cannot avoid.

A rider on a variable annuity that guarantees a certain percentage of a 'benefit base' can be withdrawn annually for life, even if the underlying account value drops to zero.

• Provides guaranteed income for life.
• Allows participation in market growth through underlying investments.
• Benefit base often steps up with market gains but doesn't decline with losses.
• Offers flexibility as the principal remains accessible (though withdrawals reduce the benefit base).

Memory trick: GLWB: It's like a guaranteed 'W'ithdrawal for 'L'ife, even if your 'B'alance goes down.

A long-term portfolio management strategy that establishes target asset allocation percentages and periodically rebalances the portfolio to maintain those targets, often based on the belief in mean reversion.

• Long-term focus.
• Rebalances to original target percentages.
• Assumes mean reversion of asset class returns.

Memory trick: Strategic: Stick to your long-term plan, rebalance.

An individual or institution that meets specific income or net worth requirements, making them eligible to participate in certain private market investments.

• Allows participation in private placements and other unregistered securities offerings.
• Criteria include $1M+ net worth (excluding primary residence) or $200K+ annual income ($300K joint) for 2+ years.
• Designed to ensure investors can bear the financial risk of less regulated investments.

Memory trick: Accredited investors need 'BIG' money or 'SMART's: Size, Money, Ability, Regulation, Tests.

A measure of portfolio performance that eliminates the distorting effects of cash inflows and outflows, reflecting the compound growth rate of the portfolio.

• Used to compare investment managers.
• Calculated by geometrically linking sub-period returns.
• Unaffected by client deposits or withdrawals.

Memory trick: Measure true growth, ignore the client's cash flow streams.

An employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary on a pre-tax or Roth basis, often with an additional matching contribution from the employer.

• Pre-tax contributions reduce current taxable income.
• Employer match is 'free money'.
• Tax-deferred growth (for traditional 401k).

Memory trick: Start early with free employer money in your 401(k).

The annual percentage of profit earned on an investment, adjusted for inflation. It measures the true increase in an investor's purchasing power.

• Adjusts nominal return for inflation.
• Indicates the actual increase in purchasing power.
• Calculated using the Fisher Equation: ((1+Nominal)/(1+Inflation)) - 1.

Memory trick: Real return: It's the 'true' gain after inflation eats away your money's power.

The yield a taxable bond would need to offer to provide the same after-tax return as a tax-exempt bond.

• Formula: Tax-Equivalent Yield = Tax-Free Yield / (1 - Marginal Tax Rate).
• Used to compare municipal bonds with corporate bonds.
• Considers both federal and, if applicable, state and local tax rates.

Memory trick: Muni bonds are 'TAX' smart: Tax-Exempt, After-tax calculation, X-factor (yield).

A rider on a variable annuity that guarantees the annuity holder can withdraw a specified percentage of their initial investment (or highest account value) each year for life, even if the account value drops to zero due to market performance.

• Provides a guaranteed income stream for life.
• Protects against market downturns impacting income.
• Typically comes with additional fees.

Memory trick: GMWB: Get My Withdrawal, Baby!

Exchange-Traded Products (ETPs), such as ETFs or ETNs, that provide investors with exposure to commodity prices or indices without requiring direct ownership of physical commodities or active management of futures contracts.

• Offer diversification across various commodities.
• Trade like stocks on exchanges, providing liquidity.
• Provide transparency of holdings (ETFs) or underlying index (ETNs).

Memory trick: ETP: Easy Trade, broad exposure, transparent.