Series 66 Practice Exam

Updated: July 1, 2016. The Uniform Combined State Law Examination is called the Series 66 Exam. It was designed for candidates that need to register in certain states as investment adviser representatives or as securities agents. Topics include providing investment advice and completing securities transactions for clients. The test was developed by NASAA, and is administered by FINRA. Working through Series 66 sample questions is great for test prep. Start now with our free Series 66 practice exam. All questions have been updated for the new 2016 version of this exam.


Series 66 Practice Questions

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Question 1
The NSMI Act of 1996 set forth for the first time a set of criteria by which to differentiate IA registration responsibilities. Choose from the below the most accurate statement describing these impact of these criteria.

I.      AUM is the most significant of the differentiating criteria.

II.     An IA filing Form ADV showing expected aggregate client portfolio assets in excess of $100,000,000 will register with the SEC.

III.    An IA filing Form ADV showing expected aggregate client portfolio assets in excess of $30,000,000 will register with the SEC.

IV.    Performance-based IA fee structures are no longer permitted absent special dispensation from the appropriate regulatory agency.

A
I only
B
I and II
C
I and III
D
III and IV
Question 1 Explanation: 
Assets Under Management, AUM, is the defining determinant between Fed-covered and State-covered Investment Advisory firms, as originally set forth in the National Securities Markets Improvement Act of ’96. Though initially the figure of $30 million was used as the threshold to become an SEC ‘fed’ covered advisor, the threshold number was increased as part of the Dodd-Frank bill (July, 2010) to $110,000,000. No portion of the law was designed to prohibit performance-based compensation by IAs.
Question 2
The principal difference between a listed REIT and an unlisted REIT is:

A
the liquidity to the investor
B
the suitability standards applied to investors
C
the regulatory scrutiny
D
all of the above are key differences
Question 2 Explanation: 
Unlisted/non-traded REITs are quite illiquid with no regular trading bid and ask price, as listed REITs would have. The suitability criteria are more rigid and regulators have a higher level of concern re: non-traded REITs than found with ordinary listed ones.
Question 3
The phase of the business cycle immediately preceding recovery is:

A
the trough
B
the peak
C
contraction
D
expansion
Question 3 Explanation: 
Recovery follows the Trough, therefore the trough precedes recovery.
Question 4
When the long end of the yield curve is yielding a similar return to the intermediate and short end of the curve, analysts describe this as a:

A
normal yield curve
B
positive yield curve
C
inverted yield curve
D
flat yield curve
Question 4 Explanation: 
When the short, intermediate and long term debt instruments are yielding approximately the same percentage return, the yield curve is referred to as ‘flat.’
Question 5
Variable life insurance has a number of similarities to the variable annuity. Among those would be:

A
guaranteed cash value
B
tax free proceeds to beneficiary upon death of the insured
C
money deposited into a separate account
D
all of the above
Question 5 Explanation: 
Variable annuities have no ‘cash value’ to begin with. Only life insurance policies have cash value. Variable annuities can have a taxable portion upon the death of the annuitant during the accumulation phase. But both products place client monies into a ‘separate account’ managed by the insurance company.
Question 6
Under the USA, when an Administrator wishes to conduct an inspection of an office of a broker-dealer or IA,

A
he may do so without prior notice
B
he is required to give at least 5 business days advance notification
C
he is required to give at least 3 business days advance notification
D
none of the above
Question 6 Explanation: 
In most cases, the state Administrator does not inform a brokerage firm or an investment advisory firm that a physical ‘visitation’ is about to take place. Most such ‘visits’ are done on an unannounced, surprise, basis.
Question 7
Under the Investment Advisor Act of 1940, exclusions from the definition of investment adviser include:

A
lawyers
B
accounts
C
teachers
D
all of these
Question 7 Explanation: 
The acronym LATE is helpful to recall the excluded professionals from the definition of an IA: lawyers, accountants, teacher, and engineers.
Question 8
The Brochure Rule applies to:

A
all business entities operating as registered investment advisers
B
all broker-dealers with the exception of sole proprietorships
C
both A and B
D
neither A nor B
Question 8 Explanation: 
This is a bit tricky. Answer A looks good on the surface, but there are certain IAs that do not have to provide a Brochure, such as those who manage mutual funds or are in the impersonal advisory business (newsletters). Broker dealers never need a brochure. Therefore, neither A nor B is the correct choice.
Question 9
When an IA fills a client order to buy as principal:

A
this is permitted.
B
this is permitted so long as the client is provided with full disclosure.
C
this is permitted only with consent from the Administrator.
D
this is considered a violation of state and/or federal law.
Question 9 Explanation: 
Answer B is the ‘best’ choice, though answer A also says it’s permitted. You must go with the best answer, which is the one that specifies full disclosure to the client.
Question 10
If the projected return of a portfolio is that over the next 12 months, there is a 40% likelihood it will return 15%, there is a 30% likelihood it will return 8%, and there is a 30% likelihood it will return minus 5%, what is the expected return of this portfolio over the next 12 months?

A
6.9%
B
9.9%
C
18.0%
D
Not enough information to determine
Question 10 Explanation: 
The math solution is:
15% return times 40% chance = 6.0%
8% return times 30% chance = 2.4%
Negative 5% return times 30% change = 1.5% loss
Add them up and you get 6.0 + 2.4 − 1.5 = 6.9%
Question 11
When looking at an investment grade debt instrument with a 15 year maturity, the risk to which it has the greatest exposure in the early years of holding the investment is:

A
credit risk
B
inflation risk
C
non-systematic risk
D
interest rate risk
Question 11 Explanation: 
The key here is that in the early years, credit risk is highly unlikely, inflation is small, and the likelihood that the business will suffer a serious business reversal (non-systematic risk is business risk) is very small. However, if interest rates are cranked up by the Fed in the next 12 to 24 months (the early years after issuance), the bond’s price might drop dramatically. Interest rate risk is the greatest in the early years.
Question 12
Which of the below are not considered securities?

A
529 plans
B
Equity indexed annuities
C
Whiskey warehouse receipts
D
All of the above
Question 12 Explanation: 
Equity indexed annuities are not defined as securities. 529 plans are considered municipal fund securities, and whiskey warehouse receipts are on the list of securities in the USA.
Question 13
When a bank liquidates securities that have been hypothecated as loan collateral due to a default by the borrower:

A
it qualifies as an exempt transaction under the USA
B
it is not considered a sale under the USA
C
it is an exempt transaction under the USA only if the collateral is an exempt security under the USA
D
the bank would have to be registered as a broker/dealer in order to effect this liquidation of collateral in the form of securities.
Question 13 Explanation: 
When a bank liquidates collateral due to a loan default, whether it’s an automobile, a home (called a foreclosure), or securities pledged as collateral for the loan, the state Administrator has no jurisdiction – it is an exempt transaction.
Question 14
Each of the following entities may claim an exclusion from being defined as an investment adviser with the exception of:

A
securities attorney
B
certified public accountant specializing in auditing publicly traded corporations
C
a public school employee
D
geological engineer
Question 14 Explanation: 
Public school employees who are Teachers would be excluded. Public school employees who work in the cafeteria, are grounds-keepers, etc., would not be excluded.
Question 15
As interest rates rise, which of the below is least likely to decline in value?

A
Treasury bond
B
Treasury note
C
Aaa-rated GO bond
D
NYSE listed corporation’s convertible bond
Question 15 Explanation: 
Convertible bonds tend to follow the price of the underlying common stock of the corporate issuer. Therefore they tend not to follow the general rule that as interest rates rise, bond prices fall.
Question 16
Financial service businesses, including but not limited to broker-dealers and investment advisory firms, are required to have in place disaster and other significant negative event plans in place to at least in part, enable communications with customers, regulators, vendors, and employees. Collectively these plans are referred to by the regulatory authorities as:

A
event readiness plans
B
disaster plans
C
business continuity plans
D
data back-up and emergency contact plans
Question 16 Explanation: 
They are called Business Continuity Plans.
Question 17
Certain of the self regulatory authorities require periodic disclosure of political contributions made by investment professionals to the campaigns of candidates seeking election to positions of influence over the allocation of federal, state and/or local financial business, including securities underwriting business. When such contributions are made, which of the following statements is accurate?

I.      Disclosure is only required if the contributions exceed a minimum dollar level.

II.     Disclosure to the regulatory authorities is required on a quarterly basis at a minimum.

III.    The dollar limits place upon such contributions is a per election standard, not an annual standard.

IV.    Any individual making contributions without providing his or her firm disclosure is considered statutorily disqualified from being an RR or an IAR for a minimum of 10 years after the violation.

A
all of the above
B
I and III
C
II and IV
D
II and III
Question 17 Explanation: 
If any political contribution is made to the campaign of a candidate who, if elected, can influence the granting of underwriting or other profitable business to an IA or BD, disclosure by the employee making the contribution to his or her firm is necessary. Quarterly reporting to the regulators at a minimum is true, and the dollar limits imposed in the rules apply ‘per election’ not per calendar year. Failure to comply does not automatically lead to termination, or a 10 year ban.
Question 18
Regulation S-P allows financial industry firms to obtain personal private information about customer/clients in all the following ways except:

A
internet cookies
B
private investigator
C
account application
D
credit reporting agencies
Question 18 Explanation: 
Firms cannot hire a private investigator to check into the background of potential customers/clients. All other methods listed are acceptable and don’t violate the privacy rule, Regulation S-P.
Question 19
No agent or IAR may represent his or her professional credentials as including any form of ‘senior’ specialization or certification absent:

A
evidence that such a senior designation is bona fide and approved by a principal of the firm
B
the designation appearing on an approved SEC or State list
C
the representative having taken and passed the so-called Baby Boomer credentialing course given by AARP and other similar organizations
D
all of the above
Question 19 Explanation: 
Calling oneself a senior specialist could rise to the level of a fraudulent misrepresentation unless there is bona fide proof that such specialist claim is genuine. One’s firm would have to allow an agent or IAR to make such a claim. Some agencies may have an ‘approved’ list but it certainly doesn’t preclude using legitimate designations that aren’t currently on such a list.
Question 20
An IA client of yours is CEO of a publicly-traded corporation. Among the rules with which you need to be familiar when servicing clients such as this include each of the below except:

A
13D
B
Form 4
C
Rule 144
D
Reg. T
Question 20 Explanation: 
Regulation T says, among its many facets, that purchases of securities have to be paid for in a timely way. And Reg. T also governs buying common stock on margin. Reg. T has nothing to say about CEOs.

13D is filed when a certain level of beneficial ownership is attained; Form 4 is filed when any change in beneficial ownership takes place; Rule 144 is filed when control stock is sold by an officer of the firm — all three can impact a CEO.
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Series 66 Study Material

Series 66 Exam

On the FINRA Series 66 Exam there are 110 multiple choice questions. Only 100 of these questions are scored, and the other 10 are pretest questions that may be used on future exams. You will be given 150 minutes to answer all of these questions. To get your Series 66 license you will need to get a passing test score, which is 75%.

This is a closed book exam and you will be provided only with scratch paper and a basic electronic calculator. You are not allowed to bring in any outside notes, books, or calculators. Scores are provided immediately after you finish your test. No prerequisites are needed to take this exam, but you will need to pass the Series 7 before you can register with a state.

Here are the topics covered along with the percentage of questions on each topic:

  • Economic Factors and Business Information (5%)
  • Investment Vehicle Characteristics (15%)
  • Client Investment Recommendations and Strategies (30%)
  • Laws, Regulations, and Guidelines, including Prohibition on Unethical Business Practices (50%)

For a complete outline of each topic, you can review the Exam Specifications Outline that is published by NASAA.

This is a hard test, so you will want to spend a lot of time on your Series 66 exam prep. Working through sample questions and carefully reading the explanations is a great way to learn this material. Start your test prep right now with our free Series 66 practice questions.