NASAA Series 66 Uniform Combined State Law Exam
3. Client/Customer Investment Recommendations and Strategies: practice questions
Our Series 66 bank has 90 questions on this topic. Here are 5 of them with answers; the full mock exam draws from every topic, like the real one.
Question 1
The alternative minimum tax:
- Is a minimum tax on capital gains only
- Is a parallel tax calculation that adds back certain preferences and requires the higher of regular tax or AMT
- Applies only to corporations
- Replaces the regular income tax for everyone whose income is above $200,000
Show the answer
B. Is a parallel tax calculation that adds back certain preferences and requires the higher of regular tax or AMT — AMT recalculates income with fewer deductions and adds preference items such as the ISO spread and private activity bond interest. The taxpayer pays whichever is higher.
Question 2
Property left outright to a surviving U.S. citizen spouse is:
- Taxed at the top estate tax rate
- Deductible in full under the unlimited marital deduction
- Limited to $19,000 a year
- Excluded from the estate only if the couple held it in joint tenancy
Show the answer
B. Deductible in full under the unlimited marital deduction — The unlimited marital deduction defers estate tax on transfers to a U.S. citizen spouse until the survivor's death.
Question 3
High-frequency trading refers to:
- Computer algorithms placing very large numbers of orders in fractions of a second
- A client making more than four trades a year in a brokerage account
- An adviser rebalancing every quarter
- Mutual funds trading once a day
Show the answer
A. Computer algorithms placing very large numbers of orders in fractions of a second — HFT firms use speed and automated strategies, often as market makers or arbitrageurs. It is not a technique for individual clients.
Question 4
A client in the 24% federal bracket earns 5% on a taxable bond. The after-tax return is:
- 1.2%
- 6.6%
- 3.8%
- 5%
Show the answer
C. 3.8% — After-tax return = pretax return x (1 - tax rate) = 5% x 0.76 = 3.8%.
Question 5
Payment for order flow is:
- Compensation a broker receives for routing customer orders to a particular market maker
- A fee customers pay for fast execution
- The commission charged on each trade
- Interest earned by the firm on customers' uninvested cash balances
Show the answer
A. Compensation a broker receives for routing customer orders to a particular market maker — PFOF creates a conflict of interest, so firms must disclose it and still seek best execution.