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An investment adviser representative advises a client in a low income tax bracket to purchase municipal securities. Which of the following statements best describes this action?
a. The advice by the representative is unethical
b. Advice concerning tax-free securities is excluded from the provisions of the Investment Advisers Act of 1940
c. The action constitutes fraud
d. The Administrator has no jurisdiction over municipal securities unless the securities are out-of-state bonds

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a. The advice by the representative is unethical

The action taken by the representative is unethical rather than fraudulent. Municipal securities provide federally exempt interest income. This is advantageous to individuals in higher tax brackets. Recommending the security to an individual in a lower tax bracket is not suitable. There is no indication that an intent to deceive the client was employed; therefore, an assertion of fraud is inappropriate.

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At Moore Advisers in Venice Beach, California, Othello is a registered investment adviser representative. Othello's accountant, Iago, has expressed an interest in directing accounting clients to Othello for investment advisory services. Iago wants a referral fee for his efforts. Which of the following statements are TRUE regarding this arrangement?
I. There must be a written agreement between Othello and Iago.
II. Othello may not pay more than $250 for each client referral.
III. Iago must not have been convicted of any felonies or securities-related misdemeanors.
IV. Iago must be fingerprinted and a copy filed with the state securities Administrator.
a. I and III only
b. II and III only
c. I, II, and III only
d. I, II, III, and IV

a. I and III only

In order for someone to act as a solicitor for an investment adviser, three conditions must be met: (1) the adviser must be licensed (which Othello is), (2) the agreement between the solicitor and the adviser must be in writing, and (3) the solicitor must not have been statutorily disqualified from association with an investment adviser either because he was convicted of a felony or securities-related misdemeanor during the last 10 years or by order of the SEC.
The solicitor must also disclose the nature of his relationship with the adviser to clients. The exact form that this disclosure must take depends on the nature of the arrangement between the solicitor and the adviser. Note also that the adviser must retain a copy of the agreement between it and the solicitor for its records.

According to modern portfolio theory (MPT), the expected return of an investment is the:
a. Income, such as bond interest, that has been guaranteed by the issuer
b. Income, including dividends and/or interest, that is more than 50% likely to be paid by the issuer in the next year
c. Possible returns on the investment weighted by the likelihood that return will occur
d. Standard deviation of gains and losses over the life of the investment

c. Possible returns on the investment weighted by the likelihood that return will occur .

An investment adviser representative is preparing a financial plan for a client. As part of this process, he is making a personal balance sheet and income statement. The income statement should include all of the following items, EXCEPT:
a. Commissions and bonuses
b. Depreciation on the primary residence
c. Interest income
d. Mutual fund dividends

b. Depreciation on the primary residence

Any appreciation or depreciation in real estate that the client owns would be included on the client's balance sheet, not his personal income statement. Choices (a), (c), and (d) are all sources of income that should be included on the client's income statement.

According to the Uniform Securities Act, which of the following entities or persons must register as a broker-dealer in State A?
a. The trust department of a bank located in State A
b. A broker-dealer located in State B, that conducts transactions for customers vacationing in State A
c. A person located in State A, who is in the business of providing advice relating to securities
d. A person located in State A who effects securities transactions for her own account or the account of others

d. A person located in State A who effects securities transactions for her own account or the account of others