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Published by , 2017-04-28 13:53:06

Exam

Exam

Uniform Investment Adviser
Law Exam

Series 65

10th Edition

Securities License Exam Manual

At press time, this edition contains the most complete and accurate
information currently available. Owing to the nature of license examinations,
however, information may have been added recently to the actual test that
does not appear in this edition. Please contact the publisher to verify that you
have the most current edition.
This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding
that the publisher is not engaged in rendering legal, accounting, or other
professional services. If legal advice or other expert assistance is required, the
services of a competent professional should be sought.

SERIES 65 UNIFORM INVESTMENT ADVISER LAW EXAM, 10TH
EDITION
©2016 Kaplan, Inc.
The text of this publication, or any part thereof, may not be reproduced in any
manner whatsoever without written permission from the publisher.
If you find imperfections or incorrect information in this product, please visit
www.kaplanfinancial.com and submit an errata report.
Published in July 2016 by Kaplan Financial Education.
Revised January 2017.
Printed in the United States of America.
ISBN: 978-1-4754-4148-2

Contents

Introduction v
U N I T 1 Laws, Regulations and Guidelines, Including

Prohibitions on Unethical Business Practices  1
Session 1 Federal Securities Regulations  3
Session 2 State Regulation Under the Uniform Securities Act (USA)  45
Session 3 Federal and State Regulation of Investment Advisers and Their

Representatives 153
Unit 1 Test  248
U N I T 2 Investment Vehicle Characteristics  271
Session 4 Types and Characteristics of Equity Securities Including Methods

Used to Determine Their Value  273
Session 5 Types and Characteristics of Fixed Income (Debt) Securities and

Methods Used to Determine Their Value  297
Session 6 Types and Characteristics of Cash and Cash Equivalents  333
Session 7 Pooled Investments  341
Session 8 Insurance-Based Products  371
Session 9 Types and Characteristics of Derivative Securities  397
Session 10 Alternative Investments and Other Assets  413
Unit 2 Test  425
U N I T 3 Economic Factors and Business Information  437
Session 11 Basic Economics and Financial Reporting  439
Session 12 Methods of Quantitative Analysis  477
Session 13 Types of Investment Risks  495
Unit 3 Test  507

iii

iv C ontents

U N I T 4 Client Investment Recommendations and
Strategies 513

Session 14 Type of Client  515
Session 15 Client Profile   535
Session 16 Portfolio Management Styles, Strategies, and Techniques  549
Session 17 Tax Considerations  569
Session 18 Trading Securities  595
Session 19 Performance Measures  613
Session 20 Retirement Plans and Educational Funding Programs  627
Unit 4 Test  685

Appendix A: Federal vs. State Comparison Chart  703
Appendix B: NASAA Model Rule on Unethical Business
Practices of Investment Advisers, Investment Adviser
Representatives, and Federal Covered Advisers [with
review annotation notes]  705
Appendix C: Abbreviations, Dates, and Calculations for
the Series 65 Exam  711
Glossary 717
Index 751

Introduction

❚ INTRODUCTION

Thank you for choosing Kaplan for your educational needs and wel­come to the Series 65
License Exam Manual (LEM). This manual applies adult learning principles to give you the
tools you’ll need to pass your exam on the first attempt.

Why Do I Need to Pass the Series 65 Exam?

Most states require passing a qualification examination by those who give investment
advice, or perform certain related functions. The North American Securities Administrators
Association (NASAA) has created the Series 65 Uniform Investment Adviser Law Exam as
one of the options that may be used to meet that requirement.

Are There Any Prerequisites?

There are no prerequisites to sit for the Series 65 exam. However, the test assumes that
the applicant has a broad range of knowledge or experience with investments. Because a sig­
nificant percentage of our students come to us without that background, this manual attempts
to cover all of the basics as well as the more advanced material tested. Those of you with a
Series 6 or Series 7 registration will find these basics a good review that will help set the stage
for learning the intricate topics you will need to know.

Examination Waivers

Passing the Series 65 or Series 66 (in conjunction with the Series 7) normally is a prereq­
uisite to getting licensed as an investment adviser representative. However, most states will
allow an individual to substitute one of the following certifications for passing the exam:
■■ CFP®—CERTIFIED FINANCIAL PLANNERTM (granted by the CFP Board of Stan­

dards);
■■ CIC—Chartered Investment Counselor (granted by the Investment Adviser Associa­

tion);
■■ ChFC®—Chartered Financial Consultant® (granted by the The American College of

Financial Services);
■■ PFS—Personal Financial Specialist (granted by the American Institute of Certified Public

Accountants); and
■■ CFA®—Chartered Financial Analyst® (granted by the Chartered Financial Analyst Insti­

tute).
The individual applicant still has to go through other state licensing requirements, such as
filing a Form U-4 or Form U-10 and payment of fees.

v

vi Introduction

What Is the Series 65 Exam Like?

The Series 65 is a 3-hour, 140-question exam (130 questions scored) prepared by the North
American Securities Administrators Association (NASAA) and administered by FINRA. It is
offered as a com­puter-based exam at Prometric testing centers around the country.

What Score Must I Achieve to Pass?

You need a score of at least 72% (94 questions correct of the 130 scored) on the Series
65 exam to pass and become eligible for registration as a Registered Investment Adviser
Representative.

What Topics Will I See on the Exam?

The questions you will see on the Series 65 exam do not appear in any particular order.
The computer is programmed to select a new, random set of questions for each exam taker
according to the preset topic weighting of the exam. Each Series 65 candidate will see the
same number of questions on each topic but will see a different mix of questions. The Series
65 exam is divided into 4 critical function areas.

1.  Economic Factors and Business Information Number of Percentage
Questions of Exam
2.  Investment Vehicle Characteristics
20 15
3.  Client Investment Recommendations and Strategies
32 25
4. Laws, Regulations, and Guidelines, including Prohibitions on
Unethical Business Practices 39 30

39 30

When you complete your exam, you will receive a printout that identifies your perfor­
mance in each area.

❚ PREPARING FOR THE EXAM

How Is the License Exam Manual Organized?

The License Exam Manual consists of four units (chapters). Each of these units corre­
sponds to one of the function areas tested. Furthermore, each of the units is divided into ses­
sions covering specific areas within the unit. The introduction to each session indicates the
number of questions you can expect the exam to ask about that session’s material. For students
attending one of our classes, live or online, the class lecture will follow the sequence of these
sessions.

There will be a test at the end of each unit. These questions have been selected to repeat
and reinforce the information presented in the reading.

Introduction vii

In order that the material being presented is properly explained, it sometimes happens that
a term or phrase is used prior to its formal introduction in the course. In almost all cases, you
can consult the glossary for the definition or the index to locate a more complete discussion.

In addition to the regular text, the LEM also has some unique features designed to help
with quick understanding of the material. When additional emphasis is valuable to your com­
prehension, the following distinctions are made:

✓T A K E N O T E Each Take Note provides special information designed to amplify important points.
!T E S T T O P I C A L E R T
Each Test Topic Alert reviews content that is especially likely to appear on the exam.
*QE X A M P L E
Examples provide practical applications that convert theory into understanding.
QUICK QUIZ
Quick Quizzes are a quick interactive review of what you just read. These ensure
you understand and retain the material.

Additional Study Resources

To accompany and supplement your License Exam Manual, your study package may con­
tain additional study resources. Be sure to spend some time on your homepage, view the best
practices video, and understand all that is available to help you study.

SecuritiesPro™ Qbank
Coordinating with the LEM, the SecuritiesPro QBank includes a large number of ques­
tions that are similar in style and content to those you will encounter on the exam. You may
use it to generate tests by a spe­cific unit or combination of units. The QBank also allows you to
create weighted mock exams that mimic your test. There is no limit on the number of QBank
exams you can create.
Another important point is that the online questions are “live.” That is, unlike this man­
ual, which, once printed, can’t be changed, our questions can be updated with a moment’s
notice. This enables us to keep current with rule changes and, to the extent possible, with new
topics as they are added to the Series 65 exam. When we author questions covering new mate­
rial that is not in this manual, there will be an asterisk (*) placed after the reference number,
indicating the general area where this topic belongs and that there is no specific information
dealing with it other than this (or similar) questions and the exam tips and content updates
link.
Practice and Mastery Exams
Depending on the study package purchased, you may also have a fixed practice exam or a
fixed practice and mastery exam. These exams are designed to closely replicate the true exam

viii Introduction

experience, both in terms of the degree of difficulty and topical coverage. They provide scores
and diagnostic feedback, but you will not be given access to, or be able to obtain from Kaplan,
correct answers or question explanations. The practice and mastery exams are sound indica­
tors of potential actual exam scores—the better you do on these exams, the more likely you
are to pass your actual exam. These may only be taken once each.

Video Library
You may also have access to various topics from our video library. These short, engaging
videos cover key topics from your manual. If your package includes access to our video library,
please review the topics as you complete your reading assignments in the study manual.
Of particular importance, especially if you don’t have a securities license (Series 6 or
Series  7), are the four classroom videos—Equity Securities, Debt Securities, Investment
Company Securities, and Economic Factors and Business Information. These four are unique
to the Series 65 and, for optimal results, should be viewed prior to attending class (live or
OnDemand).
Because the other videos are not exam specific, you may encounter material that is not
covered in your License Exam Manual. Just skip ahead until the slide shows something familiar.
Exam Tips & Content Updates Link
Don’t forget to monitor your Exam Tips & Content Updates (located on your homep­
age)—when rules and regulations change, or we want to share new information regarding your
exam, it is posted there.
And one more thing. In addition, try as we may, in a text this large, errors are difficult to
avoid. When we become aware of them, we acknowledge them in the Corrections tab, also
located on your homepage.

What Topics Are Covered in the Course?

The License Exam Manual consists of four units, each devoted to a particular area of
study that you will need to know to pass the Series 65. Each unit is divided into study sessions
devoted to more specific areas with which you need to become familiar.

The Series 65 License Exam Manual addresses the following topics:

Unit Topic
1 L aws, Regulations, and Guidelines, including Prohibitions on
Unethical Business Practices
2 Investment Vehicle Characteristics
3 Economic Factors and Business Information
4 Client Investment Recommendations and Strategies

How Much Time Should I Spend Studying?

Plan to spend approximately 60–120 hours reading the material and carefully answering
the questions. Spread your study time over the 4–5 weeks before the date on which you are
scheduled to take the Series 65 exam. Your actual time may vary depending on your reading
rate, comprehension, professional background(those with a securities background will gener­

Introduction ix

ally require less time and that is the reason for the wide range in recommended study hours),
and study environment.

What Is the Best Way to Structure My Study Time?

The following schedule is suggested to help you obtain maximum retention from your
study efforts. Remember, this is a guideline only, because each individual may require more or
less time to complete the steps included.

Step 1. Read a unit, session by session, and complete all exercises. Review rationales for
all questions whether you got them right or wrong (time will vary based on the size of the
unit).

Step 2. In the SecuritiesPro QBank, create a minimum of two 40 question exams for
each unit as you go. Carefully review all rationales. Use the reference number to locate ad­
ditional or related information on the test topic in your LEM if needed (3–4 hours per unit).
■■ Do not become too overwhelmed or bogged down in any one unit. You don’t want to lose

sight of the finish line because you’re having trouble with one hurdle. Keep moving for­
ward. It’s a steady pace that wins the race.
■■ View rationales after each question initially and spend time studying each rationale in
order to learn the concepts. Later, you will want to create exam scenarios in which scores
and rationales are viewed at the end of each exam.
■■ Perfection is not the goal during the reading phase; a score in the high-60s to low 70’s is
good initially.

Step 3. When you have completed all the units in the License Exam Manual and their
unit tests, using the SecuritiesPro QBank, concentrate on comprehensive exams covering
all the material. With your comprehensive testing it is best to view correct answers and
rationales only after the test is completed. Plan to spend at least one week testing prior to a
scheduled class (4 hours for every 130 questions).
■■ You should complete at least five weighted mock exams prior to class. Review all of your

answers and rationales. Also, review your LEM and video library as needed.
■■ Your goal is to consistently score in the 80s.

Step 4. Complete online practice and mastery exams. You should complete each exam
while observing the time limits for the actual exam. Upon completing the exam, you will
receive a diagnostic report that identifies topics for further review (3 hours per exam). We
recommend taking the practice exam prior to a scheduled class and the mastery exam after­
ward.

How Well Can I Expect to Do?

The exams prepared by NASAA are not easy. You must display considerable under­
standing and knowledge of the topics presented in this course to pass the exam and qualify for
registration.

If you study diligently, complete all sections of the course, and consistently score in the 80s
on the tests, you should be well prepared to pass the exam. However, it is important for you
to realize that merely knowing the materials will not enable you to pass unless you can apply

x Introduction

your knowledge to the questions you are given and understand the essence of the information
behind the question.

❚ TEST-TAKING TIPS

Passing the exam depends not only on how well you learn the subject matter, but also on
how well you take exams. You can develop your test-taking skills, and improve your score, by
learning a few test-taking techniques.
■■ Read the full question.
■■ Avoid jumping to conclusions—watch for hedge clauses.
■■ Interpret the unfamiliar question.
■■ Look for key words and phrases.
■■ Identify the intent of the question.
■■ Memorize key points.
■■ Use a calculator.
■■ Beware of changing answers.
■■ Pace yourself.

Each of these pointers is explained below, including examples that show how to use them
to improve your performance on the exam.

Read the Full Question

You cannot expect to answer a question correctly if you do not know what it is asking. If
you see a question that seems familiar and easy, you might anticipate the answer, mark it, and
move on before you finish reading it. This is a serious mistake. Be sure to read the full question
before answering it. Mistakes are often made when assuming too much (or too little).

Avoid Jumping to Conclusions—Watch for Hedge Clauses

The questions on NASAA exams are embellished with distractors as choices. To avoid
being misled by seemingly obvious answers, make it a practice to read each question and
each answer twice before selecting your choice. Doing so will provide you with a much better
chance of doing well on the exam.

Watch out for hedge clauses embedded in the question. Examples of hedge clauses include
the terms if, not, all, none, and except. In the case of if statements, the question can be answered
correctly only by taking into account the qualifier. If you ignore the qualifier, you will not
answer correctly.

Qualifiers are sometimes combined in a question. Some that you will frequently see
together are all with except and none with except. In general, when a question starts with all or
none and ends with except, you are looking for an answer that is opposite to what the question
appears to be asking.

Introduction xi

Interpret the Unfamiliar Question

Do not be surprised if some questions on the exam seem unfamiliar at first. If you have
studied your material, you will have the information to answer all the questions correctly. The
challenge may be a matter of understanding what the question is asking.

Very often, questions present information indirectly. You may have to interpret the mean­
ing of certain elements before you can answer the question. Be aware that the exam will
approach a concept from different angles.

Look for Key Words and Phrases

Look for words that are tip-offs to the situation presented. For example, if you see the word
prospectus in the question, you know the question is about a new issue. Sometimes a question
will even supply you with the answer if you can recognize the key words it contains. Few ques­
tions provide blatant clues, but many do offer key words that can guide you to selecting the
correct answer if you pay attention. Be sure to read all instructional phrases carefully. Take
time to identify the key words to answer this type of question correctly.

Identify the Intent of the Question

Many questions on NASAA exams supply so much information that you lose track of
what is being asked. This is often the case in story problems. Learn to separate the story from
the question.

Take the time to identify what the question is asking. Of course, your ability to do so
assumes you have studied sufficiently. There is no method for correctly answering questions if
you don’t know the material.

Memorize Key Points

Reasoning and logic will help you answer many questions, but you will have to memorize
a good deal of information. Some memorization will be automatic as you go over the material
and answer questions; some you will simply have to do systematically.

Use of a Calculator

For the most part, there are only a few questions that will require the use of a calculator.
Any math will be simple math; add, subtract, multiply, and divide. We recommend using a
calculator for math. A calculator will be supplied upon request.

Avoid Changing Answers

If you are unsure of an answer, your first hunch is the one most likely to be correct. Do not
change answers on the exam without good reason. In general, change an answer only if you:
■■ discover that you did not read the question correctly; or
■■ find new or additional helpful information in another question.

xii Introduction

Pace Yourself

Some people will finish the exam early and some do not have time to finish all the ques­
tions. Watch the time carefully (your time remaining will be displayed on your computer
screen) and pace yourself through the exam.

Do not waste time by dwelling on a question if you simply do not know the answer. Make
the best guess you can, mark the question for Record for Review, and return to the question if
time allows. The easiest questions are generally at the beginning and the end of the test; make
sure that you have time to read all the questions so that you can record the answers you do
know.

❚ THE EXAM

How Do I Enroll in the Exam?

To obtain an admission ticket to a NASAA exam, you or your firm must file an application
form and processing fees with FINRA. To take the exam, you should make an appointment
with a Prometric Testing Center as far in advance as possible of the date on which you would
like to take the exam.

You may schedule your appointment at Prometric 24 hours a day, 7 days a week, on the
Prometric secure website at www.prometric.com. You may also use www.prometric.com to
reschedule or cancel your exam, locate a test center, and get a printed confirmation of your
appointment. To speak with a Prometric representative by phone, please contact the Prometric
Contact Center at 1-800-578-6273.

What Should I Take to the Exam?

Take one form of personal identification with your signature and photograph as issued
by a government agency. No personal items, food, or drink, including coffee and water, are
permitted inside the testing room. Personal items include, but are not limited to, pens, pagers,
cellular phones, watches, hats, non-medical electronic devices, outerwear, purses, and wallets.
Personal items must be kept in your assigned locker or returned to your car prior to the start
of your exam. As the testing vendor is not responsible for any personal items, they encourage
you to bring only your identification into the center.

Erasable note boards and pens will be provided to you upon admittance to the testing
room. If you need additional note boards or pens, please alert your proctor. The note boards
and pens must be returned at the end of your exam.

If you need a calculator for your testing session, please see the test center administrator.
You will be provided with a non-programmable, non-printing calculator.

Additional Trial Questions

During your exam, you will see 10 extra trial questions (that is why the test is 140 ques­
tions long). These are potential exam-bank ques­tions being tested during the course of the
exam. These questions are not identified as such and are not included in your final score.












































































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