NASAA Series 66 Uniform Combined State Law Examination flashcards

A contract with an insurance company designed to provide retirement income, offering investment growth potential, tax deferral, a death benefit, but often with higher fees and surrender charges.

• Investment performance depends on underlying subaccounts.
• Growth is tax-deferred until withdrawal.
• Includes a death benefit guarantee (minimum payout to beneficiaries).
• Subject to mortality & expense (M&E) fees, administrative fees, and surrender charges.

Memory trick: Annuities offer tax-deferred growth, death benefit, but beware the fees.

A publicly traded investment company that invests in small and mid-sized private companies, primarily through debt and equity, and is required to distribute a high percentage of its income to shareholders.

• Provides financing to developing companies.
• Offers high income potential due to distribution requirements.
• Distributions may include return of capital.
• Can offer moderate growth and diversified exposure to private companies.

Memory trick: BDCs fund smaller firms, pay big income, sometimes return capital.

A type of mutual fund that invests in high-quality, short-term debt instruments, offering high liquidity and capital preservation.

• Invests in T-bills, commercial paper, CDs, etc.
• Typically maintains a stable Net Asset Value (NAV) of $1 per share.
• Offers daily liquidity and very low investment risk.
• Returns are generally low but stable.

Memory trick: Money markets are for quick, safe cash needs.

A standardized, exchange-traded derivative contract that obligates two parties to exchange cash based on the difference between the contract price and the index value at settlement. Used for hedging or speculation on broad market movements.

• Highly leveraged instruments, requiring margin.
• Cash-settled, no physical delivery of index components.
• Often used by institutional investors for hedging or directional bets.

Memory trick: When the market falls, futures can be your shield.

Debt securities issued by state and local governments or their agencies to finance public projects. Their interest income is often exempt from federal income tax and, for residents, from state and local income taxes.

• Tax-exempt interest is their primary appeal.
• General obligation bonds are backed by the full faith and credit of the issuer.
• Revenue bonds are backed by income from specific projects.

Memory trick: Tax-free income: a shield for your earnings.

A liquidity ratio that measures a company's ability to meet its short-term obligations with its most liquid assets (excluding inventory).

• Formula: (Current Assets - Inventory) / Current Liabilities.
• More conservative than the Current Ratio.
• A ratio of 1.0 or higher is generally considered healthy.

Memory trick: Quick Ratio: Quick Cash, No Inventory Stash.

A profitability ratio that measures the amount of net income returned as a percentage of shareholder equity.

• Formula: Net Income / Shareholder Equity.
• Indicates how efficiently a company uses shareholder investments.
• Higher ROE generally suggests better financial performance.

Memory trick: ROE: Net Income, Shareholder's Delight.

Risk that is unique to a specific company, industry, or geographical region and can be reduced or eliminated through diversification.

• Also known as specific risk or unsystematic risk.
• Examples: regional economic downturn, sector-specific issues.
• Mitigated by diversifying across various assets, industries, and geographies.

Memory trick: Nonsystematic: Niche, Narrow, Neutralized by New Holdings.

A phase of the business cycle characterized by a general slowdown in economic activity, typically marked by falling GDP and rising unemployment.

• Follows a peak.
• Precedes a trough.
• Often defined as two consecutive quarters of negative GDP growth.

Memory trick: Peak then Plunge, Contraction's Run.

A solvency ratio that indicates the relative proportion of shareholders' equity and debt used to finance a company's assets.

• Formula: Total Liabilities / Shareholder Equity.
• Higher ratio implies greater financial leverage and risk.
• Lower ratio indicates less reliance on debt.

Memory trick: Debt-to-Equity: Digging Deep in Debt.

The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

• Primary measure of economic health.
• Includes consumption, investment, government spending, and net exports.
• An increase generally signifies economic growth.

Memory trick: GDP Grows, Prosperity Shows.

A measure of risk-adjusted return, indicating the average return earned in excess of the risk-free rate per unit of total risk (standard deviation).

• Formula: (Portfolio Return - Risk-Free Rate) / Standard Deviation.
• Higher ratio implies better risk-adjusted performance.
• Used to compare portfolios with different risk levels.

Memory trick: Sharpe: Subtract Risk-Free, Divide by Shake.

The risk that a bond's value will decline due to an increase in prevailing interest rates.

• Inverse relationship with bond prices.
• Longer maturity bonds are more sensitive.
• Lower coupon bonds are more sensitive.

Memory trick: Interest Rates Rise, Bond Prices Dive.

At the lowest point of an economic cycle (trough), central banks typically implement expansionary monetary policies to stimulate demand and initiate recovery.

• Actions: Increase money supply, lower interest rates.
• Goal: Encourage borrowing, investment, and spending.
• Aims to move economy from trough into expansion.

Memory trick: Trough Time: Tools for Turnaround.

The combined annual costs associated with owning a mutual fund, typically including the expense ratio (management fees, administrative costs) and any 12b-1 fees (marketing, distribution).

• Expense ratio covers operating costs and management fees.
• 12b-1 fees cover marketing and distribution costs.
• Lower expenses generally lead to better net returns over time.

Memory trick: Fund costs: Expense Ratio + 12b-1, always check the total.

An investment strategy characterized by a high proportion of equities, particularly growth stocks, designed for investors with a long time horizon and high risk tolerance seeking maximum capital appreciation.

• Primarily focused on capital appreciation.
• High exposure to equity market volatility.
• Suitable for long-term goals like early retirement savings.

Memory trick: Allocate assets based on your age, goals, and risk appetite.

When a client moves to a new state, the Investment Adviser Representative (IAR) and their firm may need to register or make a notice filing in that new state to continue servicing the client. The IAR de minimis exemption (often 30 days) typically applies to temporary presence, not ongoing client relationships with a new resident. If not properly registered, the IAR must cease advising the client.

• Registration is required in states where 'transacting business' occurs.
• Client moving to a new state may trigger new registration/notice filing requirements.
• IAR de minimis (e.g., 30 days) is for temporary presence, not ongoing client relationships.
• Failure to register means IAR must stop advising the client.

Memory trick: Client Moves, Check Registration, Stop if Not.

Investment Adviser Representatives (IARs) have a fiduciary duty to act in their clients' best interests and an obligation to recommend suitable investments. To fulfill these duties, IARs must gather comprehensive personal and financial information from clients, including their investment objectives, risk tolerance, financial situation, and experience. This 'Know Your Client' (KYC) information is foundational to providing appropriate advice.

• IARs owe fiduciary duty and suitability to clients.
• Requires understanding client's complete financial profile.
• Information includes objectives, risk tolerance, financial situation, experience.
• Essential for making appropriate recommendations and acting in client's best interest.

Memory trick: Gather the Pieces to Fit the Plan.

The use of hypothetical or back-tested performance results by IARs/IAs is generally prohibited under the Uniform Securities Act due to their inherently misleading nature, even with disclaimers.

• Generally prohibited for IAs/IARs.
• Considered inherently misleading.
• Disclaimers are usually insufficient.

Memory trick: Truth and clarity, always; no 'what ifs' in advertising.

The risk that changes in market interest rates will negatively affect the value of a bond or other fixed-income investment. Bonds with longer maturities and lower coupon rates are more sensitive to interest rate fluctuations.

• Inverse relationship between bond prices and interest rates.
• Longer maturity = higher interest rate risk.
• Lower coupon rate = higher interest rate risk.
• Duration measures a bond's interest rate sensitivity.

Memory trick: Longer term, lower yield, more pain when rates yield.

The procedure an IAR must follow upon a client's death to ensure proper handling of the account and transfer of assets.

• Requires verification of executor's legal authority.
• Mandates obtaining certified legal documents (death certificate, letters testamentary).
• Prevents unauthorized access or disposition of assets.

Memory trick: When a client's account goes quiet, verify the new voice with official papers.

When presenting hypothetical or backtested investment performance, Investment Advisers (IAs) and Investment Adviser Representatives (IARs) must clearly and prominently disclose that the results are hypothetical, do not represent actual trading, and have certain limitations. Failure to do so can be considered misleading and a violation of ethical and regulatory standards.

• Applies to all hypothetical or backtested performance data.
• Requires clear, prominent, and specific disclosures.
• Must state that results are not actual and have limitations.
• Aims to prevent investors from being misled by simulated returns.

Memory trick: Show the Past, Disclose the 'What If' Clearly.

State Administrators have the authority to issue subpoenas to compel the production of documents and testimony during an investigation into potential violations of the Uniform Securities Act.

• Subpoena power is granted by USA.
• Compels documents and testimony.
• Non-compliance can lead to penalties.

Memory trick: The Administrator acts as judge, detective, and record-keeper.

Under the Uniform Securities Act (USA), all communications with the public by broker-dealers and investment advisers must be fair, balanced, and not misleading. This includes advertisements, sales literature, and other promotional materials. Past performance must be clearly qualified with disclosures that it is not indicative of future results, and all material risks must be adequately disclosed.

• Applies to all public communications.
• Prohibits misleading statements, omissions, and exaggerations.
• Requires clear disclosure of risks and limitations of past performance.
• Aims to protect investors from deceptive practices.

Memory trick: Truthful Talk: Fair, Balanced, and Clear.

An IAR must register in a state if they have a place of business there or if they advise more than a de minimis number (typically 5) of resident clients, even if relationships originated elsewhere.

• Applies to IARs, not IAs.
• De minimis exemption for 5 or fewer clients.
• Exceeding 5 clients requires registration.

Memory trick: If you're advising many, or have a spot, you're on the state's registration plot.

The mandatory reporting by Investment Adviser Representatives (and their firms) of suspicious financial transactions to the Financial Crimes Enforcement Network (FinCEN).

• Triggered by 'red flags' of potential money laundering or other illicit activities.
• Overrides client confidentiality.
• Must be filed promptly, typically within 30 days of initial detection.

Memory trick: If money smells fishy, alert the financial police, not the client.

An IAR's ethical and legal obligation to decline executing client-requested trades deemed unsuitable for their financial profile.

• Supersedes client's direct instruction when suitability is violated.
• Requires clear explanation of unsuitability to the client.
• A core component of the fiduciary duty of care and loyalty.

Memory trick: When a client pushes for a bad path, you must be the brakes.

Ethical and regulatory standard requiring all communications with the public to be clear, accurate, and not misleading.

• Prohibits omissions of material facts.
• Requires prominent disclosure of hypothetical performance limitations.
• Applies to all marketing materials, websites, and client correspondence.

Memory trick: Speak clearly, honestly, and with both sides of the story.

Investment Adviser Representatives (IARs) owe a fiduciary duty to their clients, meaning they must act in the client's best interest. This includes ensuring all recommendations and executed trades are suitable for the client's financial situation, risk tolerance, and objectives. If a client insists on an unsuitable trade, the IAR must refuse to execute it.

• IARs have a fiduciary duty to clients.
• Must ensure all recommendations and trades are suitable.
• Must refuse to execute trades that are clearly unsuitable, even if client insists.
• Documentation of suitability analysis and refusal is critical.

Memory trick: Fiduciary First, Refuse Unsuitable, Document Everything.

An IAR must refuse to execute a trade if it is deemed unsuitable for the client, even if the client insists, due to their fiduciary obligation.

• IARs have a fiduciary duty to clients.
• Suitability is paramount.
• Client insistence does not override fiduciary duty.

Memory trick: Always serve the client's best interest, like a loyal guardian.

Under the Uniform Securities Act (USA), state-registered Investment Advisers (IAs) are generally prohibited from charging performance-based fees (fees based on capital gains or appreciation). An exception is made for 'qualified clients' who meet specific thresholds for net worth or assets under management, as defined by SEC Rule 205-3 and adopted by many states, ensuring only sophisticated investors are subject to such fees.

• Generally prohibited for state-registered IAs.
• Exception for 'qualified clients'.
• Qualified client thresholds: currently $1.1 million AUM or $2.2 million net worth (inflation-adjusted).
• Aims to protect less sophisticated investors.

Memory trick: Fees are Flat, Performance is Qualified.

Broker-dealers and Investment Advisers are required to establish and maintain written supervisory procedures for the prompt, fair, and systematic handling of customer complaints. This typically involves logging all complaints (written and verbal), investigating them, communicating with the client, and documenting the resolution.

• Applies to both BDs and IAs.
• Requires written supervisory procedures.
• Includes logging, investigation, and resolution.
• Aims for prompt, fair, and systematic handling of complaints.

Memory trick: Rules to Follow, Protection to Offer, Clients to Serve.

The suitability rule requires agents and IARs to have a reasonable basis to believe that a recommendation is suitable for the client based on the client's investment profile (e.g., age, financial situation, investment experience, risk tolerance, and investment objectives). Recommending products solely for higher commissions without considering client needs is a violation.

• Applies to all recommendations made to clients.
• Requires understanding the client's investment profile.
• Recommendations must be in the client's best interest.
• Violation if recommendations are driven by commissions over client needs.

Memory trick: Know Your Client, Match the Product, Act in Their Best Interest.

An IAR's fundamental obligation to act solely in the best interest of their clients, placing client interests above their own.

• Requires IARs to avoid conflicts of interest.
• Mandates following client's specific instructions.
• Includes seeking the best execution for client trades.

Memory trick: Always serve your client's heart, not just your smarts.

Investment Adviser Representatives (IARs) and agents of broker-dealers are generally prohibited from borrowing money from or lending money to clients. This rule is in place to prevent conflicts of interest, maintain impartiality, and protect clients from potential exploitation. Limited exceptions may exist for immediate family members or if the firm is a bank and the loan is part of its normal commercial lending business.

• Applies to IARs and agents.
• Prohibits both borrowing from and lending to clients.
• Aims to prevent conflicts of interest and maintain fiduciary duty.
• Few, specific exceptions (e.g., immediate family, bank loans).

Memory trick: No Borrow, No Lend, Keep Client Accounts Separate.

An investment adviser (IA) must register in a state if they have a place of business there or if they have more than 5 clients who are residents of that state, unless an exemption applies. The de minimis exemption allows an IA to avoid registration in a state where they have no office, provided they have 5 or fewer non-institutional clients.

• Applies to state-registered IAs.
• Exempts IA from registration in a state without a place of business if they have 5 or fewer clients in that state.
• Does not apply if the IA has a place of business in the state, regardless of client count.

Memory trick: Office or Many Clients? Register!

An IAR, even with discretionary authority, must always adhere to explicit client instructions and restrictions, as violating them constitutes a breach of fiduciary duty.

• Fiduciary duty includes loyalty and obedience.
• Discretionary authority does not override specific client prohibitions.
• Violating instructions is a breach of trust and duty.

Memory trick: Discretion gives power, but client's words are the ultimate law.