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Series 65: Uniform Investment Adviser Law Exam

Prepare for Series 65: Uniform Investment Adviser Law Exam with practice questions covering 30 topics. Build your knowledge, track your progress, and study effectively with GoFINRA.

Questions
3,554
Units
4
Topics
30

What’s in it.

4 units

Sample questions

3 of many

A few questions from this module, with the answer and a full explanation. The complete bank is available when you start practising.

  1. An investment adviser is comparing two corporate bonds for a client: Bond A has a $1,000 par, 6% semi-annual coupon, 10-year maturity, currently trading at $920. Bond B has a $1,000 par, 3% semi-annual coupon, 15-year maturity, currently trading at $750. Which bond has the higher current yield, and which has the higher sensitivity to interest rate changes?

    • Bond B has the higher current yield (4.0% > 6.52%) and Bond A has higher sensitivity due to its higher coupon.
    • Both bonds have the same interest rate sensitivity because they are both corporate bonds of similar credit quality.
    • Bond A has the higher current yield (6.52% vs. 4.0%); Bond B has higher interest rate sensitivity because it has longer maturity and lower coupon, producing greater duration.
      Correct answer
    • Bond A has both higher current yield and higher interest rate sensitivity because of its larger coupon payments.
    Explanation

    Current yield = Annual coupon / Current price. Bond A: ($1,000 × 6%) / $920 = $60 / $920 = 6.52%. Bond B: ($1,000 × 3%) / $750 = $30 / $750 = 4.00%. Bond A has the higher current yield. Interest rate sensitivity (duration): Bond B has longer maturity (15 vs. 10 years) AND a lower coupon rate (3% vs. 6%), both of which increase duration. Lower coupon bonds return less cash flow early, making the investor wait longer for cash flows, which magnifies price sensitivity to rate changes. Bond B's duration is significantly higher. A 1% rate increase would cause a larger price decline in Bond B than Bond A.

  2. What is the net capital rule for broker-dealers and what is its purpose?

    • A regulation requiring broker-dealers to maintain a minimum level of liquid capital at all times to ensure they can meet financial obligations to customers; it protects customers if the firm fails
      Correct answer
    • A regulation requiring broker-dealers to maintain a ratio of equity to debt of at least 2:1 at all times
    • A regulation that limits broker-dealers' total indebtedness to 5 times their net capital
    • A regulation requiring broker-dealers to maintain net capital equal to at least 25% of their total assets
    Explanation

    The net capital rule (Securities Exchange Act Rule 15c3-1 at the federal level; mirrored or amplified by state rules) requires broker-dealers to maintain a minimum level of net capital — liquid assets minus liabilities — at all times. The rule protects customers by ensuring the firm has sufficient financial resources to pay obligations and liquidate customer accounts in an orderly manner if it ceases operations. There are two standards: the 'aggregate indebtedness standard' (total indebtedness no more than 15x net capital) and the 'alternative 2% standard' (net capital at least 2% of aggregate debit items). Specific minimum dollar amounts also apply depending on the type of broker-dealer.

  3. Are affiliated (employee) solicitors subject to the same written agreement requirements as outside third-party solicitors under Rule 206(4)-3?

    • Affiliated solicitors are completely exempt from Rule 206(4)-3 as long as they are salaried employees.
    • No, affiliated solicitors (employees of the adviser) are generally subject to reduced requirements; the rule primarily applies to outside solicitors who are not supervised persons of the adviser.
      Correct answer
    • Affiliated solicitors are subject to more stringent requirements than outside solicitors because their conflict of interest is more direct.
    • Yes, affiliated solicitors must comply with identical requirements as outside solicitors, including written agreements and separate client disclosure documents.
    Explanation

    Rule 206(4)-3 was designed primarily to address the conflict of interest created when outside parties with no ongoing supervision are paid for referrals. Employees and affiliated persons of the adviser are supervised persons subject to the adviser's compliance programme and are generally excluded from the most stringent Rule 206(4)-3 requirements, though they must still comply with general conflict disclosure obligations.