WILEY SERIES 66 EXAM REVIEW 2013

WILEY FINRA SERIES

Th is series includes the following titles:

Wiley Series 4 Exam Review 2013 + Test Bank: Th e Registered Options Principal Qualifi cation Examination

Wiley Series 6 Exam Review 2013 + Test Bank: Th e Investment Company Products/Variable Contracts Limited Representative Examination

Wiley Series 7 Exam Review 2013 + Test Bank: Th e General Securities Representative Examination

Wiley Series 9 Exam Review 2013 + Test Bank: Th e General Securities Sales Supervisor Qualifi cation Examination

Wiley Series 10 Exam Review 2013 + Test Bank: Th e General Securities Sales Supervisor Qualifi cation Examination

Wiley Series 24 Exam Review 2013 + Test Bank: Th e General Securities Principal Qualifi cation Examination

Wiley Series 26 Exam Review 2013 + Test Bank: Th e Investment Company Products/Variable Contracts Limited Principal Qualifi cation Examination

Wiley Series 55 Exam Review 2013 + Test Bank: Th e Equity Trader Qualifi cation Examination

Wiley Series 62 Exam Review 2013 + Test Bank: Th e Corporate Securities Limited Representative Examination

Wiley Series 63 Exam Review 2013 + Test Bank: Th e Uniform Securities Examination

Wiley Series 65 Exam Review 2013 + Test Bank: Th e Uniform Investment Advisor Law Examination

Wiley Series 66 Exam Review 2013 + Test Bank: Th e Uniform Combined State Law Examination

Wiley Series 99 Exam Review 2013 + Test Bank: Th e Operations Professional Qualifi cation Examination

For more on this series, visit the website at www.wileysecuritieslicensing.com.

WILEY SERIES 66 EXAM REVIEW 2013

The Uniform Combined State Law Examination

The Securities Institute of America, Inc.

Cover Design: WileyCover Image: © iStockphoto.com / LuisB

Copyright © 2013 by Th e Securities Institute of America, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Previous editions published by Th e Securities Institute of America, Inc. Published simultaneously in Canada.

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ISBN 9781118671122 (Paperback)ISBN 9781118675694 (ePDF)ISBN 9781118675632 (ePub)

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

Contents

ABOUT THE SERIES 66 EXAM XIII

ABOUT THIS BOOK XVII

ABOUT THE TEST BANK XIX

ABOUT THE SECURITIES INSTITUTE OF AMERICA XXI

CHAPTER 1DEFINITION OF TERMS 1

Security 1Person 3Broker Dealer 4Agent 4Issuer 5Nonissuer 5Investment Adviser 6Pension Consultants 6Form ADV 7Investment Adviser Representative 8Solicitor 8Institutional Investor 8Accredited Investor 9

vi Contents

Qualifi ed Purchaser 9Private Investment Company 9Off er/Off er to Sell/Off er to Buy 9Sale/Sell 10Guarantee/Guaranteed 10Contumacy 10Federally Covered Exemption 10Option Contracts 11Call Options 11Put Options 11Futures and Forwards 12Secondary Market Orders 12Market Orders 13Buy Limit Orders 13Sell Limit Orders 13Stop Orders/Stop Loss Orders 14Buy Stop Orders 14Sell Stop Orders 14Pretest 15

CHAPTER 2SECURITIES INDUSTRY RULES AND REGULATIONS 21

The Securities Act of 1933 21The Securities Exchange Act of 1934 23Public Utilities Holding Company Act of 1935 25Financial Industry Regulatory Authority (FINRA) 25The Trust Indenture Act of 1939 26Investment Advisers Act of 1940 26Investment Company Act of 1940 26Retail Communications/Communications with the Public 27FINRA Rule 2210 Communications with the Public 28Blind Recruiting Ads 30Generic Advertising 30

Contents vii

Tombstone Ads 30Testimonials 31Free Services 32Misleading Communications 32Securities Investor Protection Corporation Act of 1970 (SIPC) 32The Securities Acts Amendments of 1975 34The Insider Trading and Securities Fraud Enforcement Act of 1988 34Firewall 35The Telephone Consumer Protection Act of 1991 35National Securities Market Improvement Act of 1996 36The Uniform Securities Act 36Pretest 39

CHAPTER 3CUSTOMER RECOMMENDATIONS, PROFESSIONAL CONDUCT, AND TAXATION 43

Professional Conduct by Investment Advisers 44The Uniform Prudent Investors Act of 1994 44Fair Dealings with Clients 45Periodic Payment Plans 49Disclosure of Client Information 50Borrowing and Lending Money 50Developing the Client Profi le 50Investment Objectives 52Risk vs. Reward 54Alpha 57Beta 57Fundamental Analysis 63Capitalization 66Tax Structure 67Investment Taxation 68Calculating Gains and Losses 68Cost Base of Multiple Purchases 69

Deducting Capital Losses 70Wash Sales 70Taxation of Interest Income 70Inherited and Gifted Securities 71Donating Securities to Charity 71Trusts 71Gift Taxes 72Estate Taxes 72Withholding Tax 73Corporate Dividend Exclusion 73Alternative Minimum Tax (AMT) 73Taxes on Foreign Securities 74Pretest 75

CHAPTER 4VARIABLE ANNUITIES AND RETIREMENT PLANS 79

Annuities 79Equity-Indexed Annuities 82Annuity Purchase Options 83Accumulation Units 83Annuity Units 84Annuity Payout Options 84Factors Aff ecting the Size of the Annuity Payment 85The Assumed Interest Rate (AIR) 85Taxation 86Sales Charges 86Variable Annuity vs. Mutual Fund 87Retirement Plans 87Individual Plans 87Individual Retirement Accounts (IRAS) 88529 Plans 91IRA Contributions 91IRA Accounts 91

viii Contents

IRA Investments 91It Is Unwise to Put a Municipal Bond in an IRA 92Rollover vs. Transfer 92Keogh Plans (HR-10) 93Contributions 93Tax-Sheltered Annuities/Tax-Deferred Account 94Contributions 95Tax Treatment of Distributions 95Corporate Plans 96Non-Qualifi ed Corporate Retirement Plans 96Payroll Deductions 96Deferred Compensation Plans 96Qualifi ed Plans 97Types of Plans 97Rolling Over a Pension Plan 98Employee Retirement Income Security Act of 1974 (ERISA) 99ERISA 404C Safe Harbor 101Pretest 103

CHAPTER 5REGISTRATION OF BROKER DEALERS, INVESTMENT ADVISERS, AND AGENTS 107

Registration of Broker Dealers 107Financial Requirements 108Agent Registration 108Registering Agents 110Changes in an Agent’s Employment 111Mergers and Acquisitions of Firms 111Renewing Registrations 111Canadian Firms and Agents 111Investment Adviser State Registration 112The National Securities Market Improvement Act of 1996 (The Coordination Act) 112Investment Adviser Representative 113

Contents ix

State Investment Adviser Registration 114Capital Requirements 114Exams 115Advertising and Sales Literature 115Brochure Delivery 116The Role of the Investment Adviser 117Additional Compensation for an Investment Adviser 117Agency Cross Transactions 117Disclosures by an Investment Adviser 118Investment Adviser Contracts 119Additional Roles of Investment Advisers 120Private Investment Companies/Hedge Funds 120Fulcrum Fees 120Wrap Accounts 121Soft Dollars 121Pretest 123

CHAPTER 6SECURITIES REGISTRATION, EXEMPT SECURITIES, AND EXEMPT TRANSACTIONS 129

Exempt Securities 129Securities Registration 130Exempt Securities/Federally Covered Exemption 133Exempt Transactions 134Pretest 139

CHAPTER 7STATE SECURITIES ADMINISTRATORS AND THE UNIFORM SECURITIES ACT 145

Actions by the State Securities Administrator 145Actions Against an Issuer of Securities 147Rule Changes 147Investigations 149Civil and Criminal Penalties 149

x Contents

Jurisdiction of the State Securities Administrator 150Administrator’s Jurisdiction over Securities Transactions 150Right of Rescission 152Statute of Limitations 153Pretest 155

ANSWER KEYS 161

GLOSSARY OF EXAM TERMS 171

INDEX 237

Contents xi

About the Series 66 Exam

Congratulations! You are on your way to becoming licensed to represent both a broker dealer and an investment adviser in all states that require the Series 66. Th e Series 66 exam will be presented in a 100-question multiple-choice format. Each candidate will have two and a half hours to complete the exam. A score of 75% or higher is required to pass.

Th e Series 66 is as much a knowledge test as it is a reading test. Th e writ-ers and instructors at Th e Securities Institute have developed the Series 66 textbook, exam prep soft ware, and videos to ensure that you have the knowl-edge required to pass the test and to make sure that you are confi dent in the application of that knowledge during the exam. Th e writers and instructors at Th e Securities Institute are subject-matter experts as well as a Series 66 test experts. We understand how the test is written, and our proven test-taking techniques can dramatically improve your results.

TAKING THE SERIES 66 EXAM

Th e Series 66 exam is presented in multiple-choice format on a touch-screen computer known as the PROCTOR system. No computer skills are required, and candidates will fi nd that the test screen works in the same way as an ordinary ATM machine. Each test is made up of 100 questions that are ran-domly chosen from a test bank of several thousand questions. Th e test has a time limit of two and one half hours and is designed to provide enough time for all candidates to complete the exam. Each Series 66 exam will have

xiv WILEY SERIES 66 Exam Review 2013

10 additional questions that do not count towards the fi nal score. Th e Series 66 is composed of questions that focus on the following areas:

Economic factors & business information 5 questions 5%Investment vehicle characteristics 15 questions 15%Client recommendations & strategies 30 questions 30%Laws, regulations, & unethical business practices 50 questions 50%TOTAL 100 questions 100%

HOW TO PREPARE FOR THE SERIES 66 EXAM

For most candidates, the combination of the textbook, exam prep soft ware, and video class instruction proves to be enough to successfully complete the exam. It is recommended that the candidate spend at least 40 to 50 hours preparing for the exam by reading the textbook, underlining key points; watching the video class; and completing as many practice questions as pos-sible. We recommend that candidates schedule their exam no more than one week aft er completing their Series 66 exam prep.

Test-Taking Tips

□ Read the full question before answering. □ Identify what the question is asking. □ Identify key words and phrases. □ Watch out for hedge clauses, such as except and not. □ Eliminate wrong roman numeral answers. □ Identify synonymous terms. □ Be wary of changing answers.

WHY DO I NEED TO TAKE THE SERIES 66 EXAM?

In order to conduct fee-based securities business, most states require that an agent successfully complete the Series 66 registration, as well as the Series 7 registration.

WHAT SCORE IS NEEDED TO PASS THE EXAM?

A score of 75% or higher is needed to pass the Series 66 exam.

ARE THERE ANY PREREQUISITES FOR THE SERIES 66?

A candidate is not required to have any other professional qualifi cations prior to taking the Series 66 exam. However, the Series 7 is a corequisite to becoming registered to conduct securities business.

HOW DO I SCHEDULE AN EXAM?

Ask your fi rm’s principal to schedule the exam for you or to provide a list of test centers in your area. If you are not with a FINRA member fi rm, you must fi ll out and submit Form U10 prior to making an appointment to take the test. Th e Series 66 exam may be taken any day that the exam center is open.

WHAT MUST I TAKE TO THE EXAM CENTER?

A picture ID is required. All other materials will be provided, including a calculator and scratch paper.

HOW SOON WILL I RECEIVE THE RESULTS OF THE EXAM?

Th e exam will be graded as soon as you answer your fi nal question and hit the Submit for Grading button. It will take only a few minutes to get your results. Your grade will appear on the computer screen, and you will be given a paper copy at the exam center.

If you do not pass the test, you will need to wait 30 days before taking it again. If you do not pass on the second try, you will need to wait another 30 days. If you fail a third time, you must wait six months to take the test again.

About the Series 66 Exam xv

About This Book

Th e writers and instructors at Th e Securities Institute have developed the Series 66 textbook, exam prep soft ware, and videos to ensure that you have the knowledge required to pass the test and to make sure that you are confi -dent in the application of that knowledge during the exam. Th e writers and instructors at Th e Securities Institute are subject-matter experts as well as Series 66 test experts. We understand how the test is written, and our proven test-taking techniques can dramatically improve your results.

Each chapter includes notes, tips, examples, and case studies with key information, hints for taking the exam, and additional insight into the topics. Each chapter ends with a practice test to ensure that you have mastered the concepts before moving on to the next topic.

About the Test Bank

Th is book is accompanied by a test bank of more than 150 questions to further reinforce the concepts and information presented here. Th e access card in the back of this book includes the URL and PIN code you can use to access the test bank. Th is test bank provides a small sample of the questions and features that are contained in the full version of the Series 66 exam prep soft ware.

If you have not purchased the full version of the exam prep soft ware with this book, we highly recommend that you do so to ensure that you have mastered the knowledge required for your Series 66 exam. To purchase the exam prep soft ware for this exam, visit Th e Securities Institute of America online at www.SecuritiesCE.com or call 877-218-1776.

About The Securities Institute of America

Th e Securities Institute of America, Inc. helps thousands of securities and insurance professionals build successful careers in the fi nancial services industry every year.

Our securities training options include:

• Onsite training classes.• Private tutoring. • Classroom training.• Interactive online video training classes.• State-of-the-art exam preparation soft ware.• Printed textbooks.• Real-time tracking and reporting for managers and training directors.

As a result, you can choose a securities training solution that matches your skill level, learning style, and schedule. Regardless of the format you choose, you can be sure that our securities training courses are relevant, tested, and designed to help you succeed. It is the experience of our instructors and the quality of our materials that make our courses requested by name at some of the largest fi nancial services fi rms in the world.

To contact Th e Securities Institute of America, visit us on the Web at www.SecuritiesCE.com or call 877-218-1776.

CHAPTER 1

Defi nition of Terms

INTRODUCTION

In order to successfully complete the Series 66 exam, it is important to

have an in-depth understanding of the terms used within the securities

industry—specifi cally within the framework of the Uniform Securities

Act (USA). The terms used by the USA, also known as The Act, may have

broader meanings than we are accustomed to in everyday usage.

SECURITY

A security is anything that can be exchanged for value that involves a risk to the holder. A security also represents an investment in an entity managed by a third party. Th e Supreme Court used the Howey test to determine a security. Th e Howey test states that a security must meet the following four characteristics:

1. It must be an investment of money.2. It must involve a common enterprise.3. It must give the investor an expectation of a profi t.4. It must entail the management of a third party.

Th e following are examples of securities:

• Stocks• Bonds• Notes

2 WILEY SERIES 66 Exam Review 2013

• Debentures• Evidence of indebtedness• Transferable shares• Warrants, rights, or options for securities

Oft entimes when you see the term certifi cate, you have a security that is a:

• Certifi cate of interest in a profi t sharing or partnership agreement.• Preorganization certifi cate.• Collateral trust certifi cate.• Voting trust certifi cate.• Certifi cate of interest in oil or a gas mining title.• Certifi cate of deposit for a security, such as an American depositary receipt

(ADR) or an American depositary share (ADS).

Th e term variable will also identify a security, as in:

• Variable annuity• Variable life insurance• Variable contract

Th e phrase interest in is another key to identifying a security on the Series 66 exam. All of the following are securities:

Interest in:

• Farmland and animals.• Whiskey warehouse receipts.• Commodity options (not futures).• Insurance company separate accounts.• Real estate condominiums or cooperatives.• Merchandise marketing programs, franchises, or schemes.• Multilevel distributorships, such as Amway.

Th e term option is also a good way to identify a security, such as:

• Stock option• Index option

CHAPTER 1 Defi nition of Terms 3

• Futures option• Commodity futures option

Th e following are not considered securities:

• Real estate• Retirement plans, such as IRAs and 401(k)s• Bank accounts• Collectibles• Precious metals• Fixed annuities/fi xed contracts• Whole and term life policies• Antiques• Futures contracts (commodities)• Trade confi rmations• Prospectuses

Th e term future, as it appears alone, is an indication that a security is not involved. If the question is asking about a commodity future option, however, then a security is involved. Also, the term fi xed is a good indication that a security is not involved.

PERSON

Th e term person, as it is used in the USA, refers to any entity that may enter into a legally binding contract. Any entity that can enter into a legally bind-ing contract may transact business in the securities markets. Agreeing to buy or sell a security represents a legally binding contract. For the Series 66, a person is any of the following:

• Natural person• Corporation• Trust• Government organization• Partnership