Free Series 66 Practice Questions with Answers

Correct answer: B. As a short-term capital gain, because the holding period must exceed one year — not merely equal one year — to qualify for long-term treatment

To qualify for long-term capital gains treatment (and the associated preferential tax rates), an asset must be held for MORE than one year — meaning the sale must occur at least one day after the one-year anniversary of purchase. A sale exactly on the one-year anniversary still falls one day short, so the gain is taxed as short-term, at ordinary income tax rates.

• A. A full calendar year having elapsed isn't the controlling test — the tax code requires the holding period to exceed one year, and 'a year has passed' isn't the same as exceeding it.
• B. To qualify for long-term capital gains treatment, the holding period must be more than one year; holding for exactly one year (bought March 1 Year 1, sold March 1 Year 2) still falls one day short and is taxed as short-term.
• C. There is no exemption from capital gains tax based on a 12-month holding period; the distinction is only between short-term and long-term tax rates.
• D. Matching the anniversary date means the holding period equals exactly one year, which does not satisfy the 'more than one year' requirement for long-term treatment.

• Source: IRS Topic No. 409 (Capital Gains and Losses)

Correct answer: C. Is adjusted to remove the effect of price-level changes (inflation)

Real GDP restates nominal GDP in constant dollars by adjusting for inflation, allowing economists to compare economic output across time periods without the distortion of changing price levels. Nominal GDP is measured in current prices and can rise simply due to inflation even if actual output is flat.

• A. Incorrect. Both real and nominal GDP include government spending as a component.
• B. Incorrect. Measuring output at current-year prices describes nominal GDP, not real GDP.
• C. Correct. This is the defining difference between real and nominal GDP.
• D. Incorrect. GDP covers all sectors of the economy, including services and agriculture, and the real/nominal difference is about price adjustment, not sector coverage.

Correct answer: A. In accumulation units, whose value changes with separate account performance

Premiums, net of charges, buy accumulation units in the separate account. Their value rises and falls with portfolio performance, and they convert to annuity units if the owner annuitizes.

• A. Correct: accumulation units measure the owner's interest before payout.
• B. Wrong: annuity units are used in the payout phase, not during accumulation.
• C. Wrong: guaranteed-rate crediting describes a fixed annuity's general account, not a variable annuity.
• D. Wrong: the insurer's separate account owns the fund shares, not the contract owner.

Correct answer: A. Form ADV Part 2A, Appendix 1 (the wrap fee brochure)

Sponsors of wrap fee programs use the specialized wrap fee brochure format — Form ADV Part 2A, Appendix 1 — which describes the program's fees, services, portfolio manager selection, and related conflicts of interest, in place of (or alongside) the standard Part 2A brochure.

• A. Correct: wrap fee programs require disclosure via Form ADV Part 2A, Appendix 1, the wrap fee brochure, which details the program's fees, services, and conflicts.
• B. A FOCUS report is a broker-dealer financial/operational reporting form filed with regulators, unrelated to client-facing wrap fee disclosure.
• C. A mutual fund prospectus discloses a specific fund's terms, not the wrap program sponsor's bundled fee arrangement, even if one is delivered for each underlying fund.
• D. Form U4 is a registration form for individual representatives, not a client disclosure document for a wrap fee program.

Correct answer: B. The stop triggers, but the order may not fill because the market is below the limit price.

A stop-limit order becomes a limit order once the stop price is reached. A sell limit at $47.50 requires $47.50 or better, so a stock opening at $45 cannot fill it and the order stays open unfilled, leaving the client exposed.

• A. Wrong: this describes a plain stop order, which turns into a market order.
• B. Correct: the limit order is activated but cannot execute below $47.50.
• C. Wrong: a gap through the stop price triggers the order, not cancels it.
• D. Wrong: a limit price is a floor for a sale, not a promise of execution at that price.

Correct answer: D. 3.0 times

Interest coverage equals earnings before interest and taxes divided by interest expense: $900,000 / $300,000 = 3.0 times. It shows how comfortably operating earnings cover interest.

• A. Wrong: this inverts the ratio ($300,000 / $900,000).
• B. Wrong: this uses net income, which is already after interest and taxes.
• C. Wrong: this uses EBIT minus interest in the numerator.
• D. Correct: $900,000 / $300,000 = 3.0.

Correct answer: A. Preferred stock

Preferred stock pays a stated, typically fixed dividend and has a claim on assets senior to common stock, but unlike bond interest, an omitted preferred dividend does not constitute a default. Bonds pay contractual interest that, if missed, does trigger default; common stock has no fixed dividend and is subordinate to preferred in liquidation.

• A. Correct. Preferred stock offers a fixed dividend with liquidation priority over common stock, but omitting the dividend does not constitute default.
• B. Convertible bonds are debt instruments; missed interest still constitutes default, unlike a preferred dividend.
• C. Common stock dividends are not fixed and common shareholders are subordinate to preferred shareholders in liquidation.
• D. Bond interest is a contractual obligation; missing a payment constitutes default, which does not match the description in the stem.

Correct answer: D. Act with the skill, prudence, and diligence necessary to develop suitable, well-reasoned advice for the client

The duty of care requires an adviser to provide advice that is in the client's best interest based on a reasonable understanding of the client's objectives, and to monitor the relationship over time, seeking best execution and acting with the competence a prudent professional would exercise. It does not guarantee results or require outsourcing judgment.

• A. Trading frequency isn't dictated by matching peers; recommendations must be suitable for the individual client's circumstances, not tied to other investors' activity or results.
• B. Delegating investment decisions to a client's outside accountant would abdicate the adviser's own fiduciary responsibility rather than fulfill the duty of care owed directly to the client.
• C. Fiduciary duty of care requires a reasonable process and diligence, not a guarantee of outperformance over any period; no adviser can promise investment results.
• D. The duty of care requires the adviser to exercise the skill, prudence, and diligence needed to develop well-founded, suitable recommendations for the client.

Correct answer: B. May not deduct the loss because the repurchase occurred within the 30-day window

The wash sale rule disallows a loss deduction if the investor buys the same or a substantially identical security within 30 days before or after the sale date, creating a 61-day window in total. Because the repurchase here occurred just 10 days later, it falls squarely within the disallowed window, and the loss is disallowed (though it is added to the cost basis of the new position rather than lost forever).

• A. The wash sale rule can apply even when the repurchase happens in a different account, including certain retirement accounts, and whether it is at the same firm is irrelevant; changing account type does not preserve the deduction.
• B. Correct. Repurchasing a substantially identical security within 30 days before or after the sale triggers the wash sale rule, disallowing the loss.
• C. The relevant window is 30 days, not 5; 10 days after the sale still falls within the disallowed period.
• D. The wash sale rule disallows the loss for tax purposes at the time of sale; it is not a partial 50% disallowance.

Correct answer: B. Buy Treasury securities from the market

Open market operations involve the Fed buying or selling government securities. Buying securities injects cash into the banking system, increasing bank reserves and the money supply, and putting downward pressure on interest rates. Selling securities withdraws cash and contracts the money supply.

• A. Incorrect - raising reserve requirements reduces the amount banks can lend, contracting the money supply, and is not an open market operation.
• B. Correct - purchasing securities injects reserves into the banking system, expanding the money supply.
• C. Incorrect - selling securities withdraws money from circulation, contracting the money supply.
• D. Incorrect - raising the discount rate makes borrowing from the Fed more expensive, a tightening action, and is a separate tool from open market operations.

Correct answer: B. The fixed 2% rate applied to the adjusted $1,030 principal

TIPS carry a fixed coupon rate, but the principal is adjusted for CPI changes and interest is paid on the adjusted principal. The inflation adjustment itself is paid at maturity, though it is taxable as it accrues.

• A. Wrong: the coupon is applied to the adjusted, not original, principal.
• B. Correct: 2% x $1,030 gives the interest payment.
• C. Wrong: the inflation adjustment increases principal and is not paid in cash during the term.
• D. Wrong: the coupon rate stays fixed and does not add the inflation rate.

• Source: TreasuryDirect: Treasury Inflation-Protected Securities (TIPS)

Correct answer: A. Favoring the firm's interests over clients and potentially unfair allocation

Favoring a proprietary account over clients breaches the fiduciary duty of loyalty. Advisers need a disclosed, fair allocation policy when firm and client interests intersect.

• A. Giving the firm priority without a disclosed policy favors the adviser over clients.
• B. Price movement does not excuse preferential allocation; fairness in allocation is still required.
• C. Firm accounts have no priority over clients' trades; this ordering would be a conflict.
• D. Advisers are fiduciaries and also face conflicts of interest, including with proprietary accounts.

• Source: Investment Advisers Act Section 206 (15 U.S.C. 80b-6, Prohibited Transactions by Investment Advisers)

Correct answer: D. Discuss the conflict directly with Tom, explaining that his aggressive growth objective is inconsistent with his stated risk tolerance and past selling behavior, and work with him to select a strategy he can realistically maintain through market volatility

When a client's stated objective and stated risk tolerance conflict, the adviser's role is to identify and reconcile the inconsistency with the client rather than unilaterally favoring one data point over the other. Here, an all-equity aggressive strategy would likely trigger the very panic-selling behavior Tom has shown before, which would actually undermine his stated growth objective by locking in losses at the worst possible times; a purely conservative portfolio, chosen without discussion, ignores his stated goals entirely. The suitable path is a candid conversation that helps Tom understand the tradeoff and select a strategy he can realistically stick with.

• A. Incorrect — deferring to the stated growth objective ignores the documented risk-tolerance data and the past selling behavior showing the client cannot hold an all-equity approach.
• B. Incorrect — swinging to the opposite extreme and postponing the early-retirement discussion for years ignores the client's stated goals and isn't a proper reconciliation of the conflicting information.
• C. Incorrect — an adviser has an ongoing duty to provide suitable guidance; suspending the engagement and leaving the client to resolve the conflict alone abdicates that responsibility.
• D. Correct — suitability requires reconciling conflicting inputs by discussing the mismatch directly with the client and arriving at a strategy that's realistic given both goals and demonstrated behavior, not picking one input and ignoring the other.

• Source: NASAA Model Rule USA 2002 502(b) (Prohibited Conduct of Investment Advisers)

Correct answer: C. Consumer Price Index

The Consumer Price Index (CPI) measures the average change in prices paid by urban consumers for a fixed basket of consumer goods and services, and is the most widely cited measure of consumer-level inflation. The Producer Price Index instead measures prices received by domestic producers at the wholesale level, and the GDP Price Deflator reflects prices across the entire economy's output, not a fixed consumer basket.

• A. The GDP deflator measures price changes across all domestically produced goods and services, not a fixed consumer basket.
• B. PPI measures prices received by producers/wholesalers, not prices paid by consumers.
• C. Correct. CPI is specifically defined as tracking prices paid by urban consumers for a fixed basket of goods and services.
• D. The LEI is a composite of forward-looking economic data series, not a price/inflation index.

Correct answer: D. The fund seeks to keep a stable share price, but it is not insured and investors can lose money.

Money market funds invest in short-term, high-quality instruments and many seek a stable $1 share price, but they are securities rather than bank deposits. They carry no FDIC insurance and no sponsor guarantee, so a loss of principal is possible.

• A. Wrong: FDIC insurance covers bank deposits, not mutual fund shares.
• B. Wrong: sponsors may choose to support a fund but have no legal obligation to do so.
• C. Wrong: money market funds hold short-term instruments, and fund shares are redeemed at a daily price.
• D. Correct: the stable price is an objective, not a guarantee or insured.

Correct answer: C. The statement is misleading; federal covered status limits certain state registration requirements but does not remove antifraud duties or make a security risk-free.

Federal covered status limits state registration of the security; it is not a merit approval or a guarantee of safety. State and federal antifraud provisions still apply, so calling it state-approved and guaranteed safe is misleading.

• A. Covered status is not a finding about quality, safety or returns.
• B. Sincere belief does not make a false or misleading statement acceptable under antifraud rules.
• C. Preemption affects registration only; antifraud duties remain and no security is risk-free.
• D. State antifraud authority and investor remedies are preserved for federal covered securities.

• Source: Investment Advisers Act Section 206 (15 U.S.C. 80b-6, Prohibited Transactions by Investment Advisers)

Correct answer: C. Portfolio N, with a Sharpe ratio of approximately 0.67 versus Portfolio M's approximately 0.55, indicating better return per unit of risk despite M's higher absolute return

Sharpe ratio = (portfolio return − risk-free rate) ÷ standard deviation. Portfolio M: (14% − 2%) ÷ 22% = 12% ÷ 22% ≈ 0.55. Portfolio N: (10% − 2%) ÷ 12% = 8% ÷ 12% ≈ 0.67. Despite Portfolio M's higher absolute return, Portfolio N delivered more excess return per unit of risk taken, making it the better risk-adjusted performer — precisely the kind of distinction the Sharpe ratio is designed to reveal.

• A. Incorrect — the two portfolios' Sharpe ratios differ meaningfully, about 0.55 versus 0.67, so Portfolio N does offer a better risk-adjusted return and they are not equivalent.
• B. Incorrect — the Sharpe ratios are misstated; Portfolio M's is approximately 0.55, not 0.75, and Portfolio N's is approximately 0.67, not 0.50, so M's ratio is lower than N's, not higher.
• C. Correct — Sharpe ratio equals return minus the risk-free rate, divided by standard deviation; Portfolio N is (10−2)/12 ≈ 0.67 and Portfolio M is (14−2)/22 ≈ 0.55, so N delivers better risk-adjusted return despite M's higher raw return.
• D. Incorrect — a higher absolute return does not indicate superior performance until risk is factored in; Portfolio M takes on a much higher standard deviation for its extra return.

Correct answer: C. German GDP and U.S. GNP

GDP measures the value of goods and services produced within a country's geographic borders, regardless of who owns the producing entity — so this factory's output counts toward German GDP because production physically occurred in Germany. GNP (Gross National Product) measures output attributable to a country's citizens and companies regardless of where in the world it is produced — so the same output counts toward U.S. GNP because the parent company is American-owned.

• A. Incorrect — this reverses the rule; output produced within Germany's borders counts toward German GDP, not U.S. GDP.
• B. Incorrect — GDP is based on where production occurs, so the German factory's output is not in U.S. GDP; only the GNP half is right.
• C. Correct — GDP measures output produced within a country's borders (so this counts in German GDP), while GNP measures output produced by a country's nationals/companies regardless of location (so it counts in U.S. GNP).
• D. Incorrect — the output does count in German GDP, but GNP follows the nationality of the owner, so it counts toward U.S. GNP rather than German GNP.

Correct answer: D. 270 days

Commercial paper (and similar short-term, prime-quality, exempt notes/drafts/bankers' acceptances) must have a maturity of nine months (270 days) or less and be used to finance current operations to qualify for the registration exemption.

• A. 364 days is the commonly cited threshold for other short-term instruments (like certain money market or Reg D matters), not for this commercial paper exemption, which caps out at 270 days.
• B. 180 days is still short of the actual limit set for this exemption.
• C. 90 days is too short — the exemption allows for a maturity well beyond three months.
• D. 270 days (9 months) is the maximum maturity commercial paper can carry to qualify for the short-term corporate debt exemption from registration.

Correct answer: A. Churning

Churning is excessive trading in a client's account, driven by the agent's motive to generate commissions rather than to serve the client's investment objectives, and is a prohibited practice under state and federal securities law. It differs from front-running (trading ahead of a known pending order), scalping (trading a security ahead of publishing a research recommendation to profit from the anticipated price movement), and free-riding (buying and selling a security without paying for the purchase within the settlement period).

• A. Correct. Excessive trading driven by commission generation is the definition of churning.
• B. Incorrect. Front-running involves trading ahead of a known pending customer order, not excessive trading for commissions.
• C. Incorrect. Free-riding involves buying and selling securities without paying for them within the required settlement period.
• D. Incorrect. Scalping involves trading a security ahead of releasing a research report recommending it.

• Source: NASAA Model Rule: Dishonest or Unethical Business Practices of Broker-Dealers and Agents

Correct answer: A. To restore the portfolio's risk profile to the level consistent with the client's investment policy and stated objectives

Rebalancing is a risk-control discipline, not a return-chasing strategy. When equities outperform, the portfolio's actual risk exposure drifts above the client's intended target, since equities now make up a larger share than planned. Selling the outperforming asset class and buying the underweighted one restores the portfolio to its intended risk level as defined in the investment policy statement — it has nothing to do with predicting future returns or generating tax losses (and here, selling appreciated equities would realize gains, not losses).

• A. Correct: rebalancing back to the 60/40 target restores the portfolio's intended risk profile, which had drifted higher after the equity rally.
• B. This trade sells appreciated equities, which would generally realize gains, not losses, and isn't done for tax-loss harvesting purposes.
• C. Rebalancing after a rally does the opposite of chasing momentum — it trims the outperforming asset class rather than shifting toward it.
• D. Rebalancing back to target weights doesn't change whether the account is discretionary or non-discretionary, whatever the allocation drift.

Correct answer: D. Fiscal policy consists of government taxation and spending decisions made by Congress and the executive branch, while monetary policy is the Federal Reserve's control of the money supply and interest rates.

Fiscal policy is the use of government taxation and spending, set by Congress and the executive branch, to influence the economy. Monetary policy is the Federal Reserve's use of interest rates, reserve requirements, and open market operations to control the money supply and credit conditions. Keeping the actors and tools straight for each is fundamental economic-factors content on the exam.

• A. Incorrect — this reverses the actors. The Fed controls monetary policy, not fiscal policy; Congress controls fiscal policy, not monetary policy.
• B. Incorrect — the two are distinct policy types controlled by different institutions, not synonyms.
• C. Incorrect — both fiscal and monetary policy in this context refer to federal-level actions, not a state/federal split.
• D. Correct — matches each policy type to its correct controlling body and tools.

Correct answer: B. The outstanding loan plus accrued interest is deducted from the death benefit.

Policy loans are secured by the cash value and are not forgiven at death. The insurer subtracts the unpaid loan balance and accrued interest from the death benefit, so the beneficiary receives the net amount.

• A. Wrong: the loan is satisfied from the death proceeds, not paid separately.
• B. Correct: the net death benefit equals the face amount minus the loan and interest.
• C. Wrong: a loan never increases the benefit.
• D. Wrong: the insurer recovers the loan from the proceeds rather than forgiving it.

Correct answer: C. Preserve evidence, investigate and correct inaccurate regulatory submissions rather than concealing changes

The adviser must preserve records, investigate the alteration and correct any inaccurate submissions to regulators. Destroying or backdating records is concealment and violates recordkeeping and antifraud duties.

• A. Destroying original versions is spoliation and obstructs an examination.
• B. Backdating records is falsification.
• C. Preserving evidence, investigating and correcting inaccurate submissions is the compliant response.
• D. Waiting for a complaint ignores the duty to act on a known problem with an exam pending.

• Source: NASAA Model Rule 203(a)-2 / USA 2002 411(c)-1 (Recordkeeping Requirements for Investment Advisers)
• Source: Investment Advisers Act Section 206 (15 U.S.C. 80b-6, Prohibited Transactions by Investment Advisers)