Series 7 - Mastery Exam III #1 (Q73 - Q108)

A prospective options customer must receive which of the following at, or before, the time that sales literature that includes recommendations is sent to the client? I Options Disclosure Document II Options Agreement III Broker-dealer financial statement A I only B II only C I and II D I, II, III

The best answer is A. A customer who receives any options communication that makes a recommendation; shows past performance; or includes a performance projection; must get the latest Options Disclosure Document (ODD) at or prior to the receipt of the material. There is no requirement to give the customer a new account form or a broker-dealer financial statement.

A couple has a joint net worth of $12,000,000. If one dies in 2021, the taxable amount of the estate is: A $0 B $300,000 C $11,700,000 D $12,000,000

The best answer is A. An unlimited marital exclusion applies to spouses when 1 party dies. Thus, if a husband dies, no estate taxes are paid at that point by the surviving spouse. When that person dies, the estate is subject to tax, with an estate tax exclusion on the first $10,000,000, adjusted for inflation annually. For 2021, the adjusted exclusion amount is $11,700,000.

Which of the following securities is NOT exempt from the Securities Act of 1933? A Industrial Company issues B Benevolent Association issues C Small Business Investment Company issues D Common Carrier issues

The best answer is A. Industrial companies are not exempt from the Securities Act of 1933. Common carriers, small business investment companies, and benevolent associations are all exempt.

To make a public offering of a Direct Participation Program, which statements are TRUE? I The offering must be registered with the SEC II The offering does not have to be registered with the SEC III The offering is subject to regulation by FINRA IV The offering is not subject to regulation by FINRA A I and III B I and IV C II and III D II and IV

The best answer is A. Public offerings of direct participation programs are "non-exempt" offerings under the Securities Act of 1933, and must be registered. FINRA oversees and regulates the offering of these securities.

Which statement is TRUE regarding Commercial Paper? A Commercial Paper may be sold without a prospectus B Commercial Paper must be sold with a prospectus C Commercial Paper must be sold with an Official Statement D Commercial Paper must be sold with an Offering Memorandum

The best answer is A. Since Commercial Paper is an exempt security under the Securities Act of 1933, it may be sold without a prospectus. The prospectus is the disclosure document for new issues that are not exempt from registration. The Official Statement is the disclosure document for municipal bonds (which are an exempt issue). An Offering Memorandum is the disclosure document for a private placement - which is a security sold in an exempt transaction.

Trades of foreign currencies in the interbank market settle: I Spot II Cash III Forward IV Future A I and III B III and IV C I and IV D II and III

The best answer is A. Trades of foreign currencies either settle "spot" - with settlement taking place in 1 or 2 days (the more actively traded currencies settle next day; the less actively traded currencies settle 2 business days) or on a "forward" basis, with settlement taking place on an agreed upon date in the future. There is no "cash" settlement (same day settlement) for foreign currencies as there is for stocks; and there is no such thing as future settlement.

Under Rule 10b-5-1, pre-arranged trading plans by insiders are: I permitted only if the provisions cannot be altered during the plan's life II permitted only if the provisions can be altered during the plan's life III given a safe harbor to officers and directors against an "insider trading" prosecution if the plan is followed IV given a right of rescission for any trades that are deemed to be a violation of the insider trading rules A I and III B I and IV C II and III D II and IV

The best answer is A. We all know that insiders are prohibited from trading based on material non-public information. In 2000, the SEC issued a "safe-harbor" rule that permits statutory insiders (officers, directors and 10% shareholders) to set up a written plan for trading that company's securities. Such a written plan specifies the future date with amount on which securities are to be bought and sold; or specifies the algorithm to be used for determining the amount and date of future purchases or sales. Once the plan is in force, the "insider" cannot have any further influence on trades effected under the plan. As long as the insider adheres to such a written trading plan, that person is given a "safe harbor" from being accused of using "inside information" as the basis for the trades that occur based on adhering to the plan.

A customer buys 100M of a newly issued municipal bond in the primary market at 90. The bond has 20 years to maturity. If the bond is held to maturity, the customer will have: A no taxable gain or loss B a $1,000 capital gain C a $10,000 capital gain D a $100,000 capital gain

The best answer is A. The customer is buying a new issue of bonds at a discount. The discount on original issue discount bonds must be accreted. Every year, a portion of the discount is "earned" and is taxed as interest income. In this case, since municipal issues are exempt from Federal income tax, no tax is due. As the bond is accreted, its basis is increased yearly by the accretion amount. At maturity, the bond's cost basis has been accreted to par. Since it is redeemed at par, there is no capital gain or loss at maturity.

A 13D notice would be filed when a(n): A corporation has a change in its Board of Directors B investor accumulates a 5% or greater position in the common stock of an issuer C corporation reports its annual results to the Securities and Exchange Commission D investor wishes to sell shares of restricted stock in the public market

The best answer is B. Investors who accumulate a 5% or greater position in the common stock of one registered issuer are required to file a 13D notice with the SEC within 10 business days of date that the 5% threshold was passed. This information is made public (and is of great interest to the management of the company, since the new large stockholder will probably want a say in how the company is being run!). Choice A would require the filing of an 8K by the corporation. Choice C would require the filing of a 10K by the corporation. Choice D would require the filing of a Form 144 by the seller

A registered representative has managed the account of her client for over 10 years. The client recommends her mother to the registered representative as a potential client. Mom, age 65, has just moved out of her house into a smaller condominium, and has netted a $200,000 profit from doing this. The client tells the representative that her mother should invest conservatively. When the representative reaches out to the mother, she tells her that she is retired and that her current pension, plus social security that will be received in a few years, will give her more income than she needs. She wants to invest the $200,000 for growth, with the intention of leaving that money to her grandchildren when she dies. What would be the best recommendation? A Zero-coupon bonds B Aggressive growth fund C Intermediate term bond fund D Corporate income fund

The best answer is B. Since it is the mother's money and the mother's account, the investment objective to be followed is that of the mother - she wants the money invested for growth, with that investment going to her grandchildren when she dies. The investments that provide growth are equities, and an aggressive growth fund would invest more heavily in technology and emerging industries. That is fine for long-term investing, with an investment time horizon that is actually determined by the grandchildren's needs after the grandmother dies. Choices C and D are fixed income funds - they do not offer growth. Zero coupon bonds are not a bad choice but the "imputed income" is taxable each year, even though no money is received from the issuer until maturity. These are really only suitable for retirement accounts, where the holding vehicle is tax deferred. That is not the case with this investment account.

Which of the following are violations of FINRA rules? I Recommending the purchase of put options to protect a stock position from a downwards market move II Sharing in the profits and losses of a customer's account III Selling exempted securities to a customer with a written agreement to buy back the securities at a later date IV Orally guaranteeing to buy back customer securities at a preset price A I and III B II and IV C I, II, IV D I, II, III, IV

The best answer is B. A registered representative cannot guarantee a customer's account against loss nor share in the account unless he or she opens a joint account with the customer; contributes capital proportional to any sharing agreement; and obtains the approval of a principal for the account. Selling exempted securities such as U.S. Governments with a written agreement to buy them back at a later date is a "repurchase" agreement, and is allowed (however, such repurchase agreements are typically for very large amounts, and are entered into by U.S. Government securities dealers). Recommending the purchase of a put option to protect against a downwards market move is perfectly acceptable, since that is what the option will do, and thus does not violate FINRA rules.

Accelerated depreciation deductions: I increase reported income in later years II decrease reported income in later years III increase reported expenses in later years IV decrease reported expenses in later years A I and III B I and IV C II and III D II and IV

The best answer is B. Accelerated depreciation deductions, when compared to straight-line depreciation deductions, are "front loaded." The depreciation deduction is higher in earlier years; but the deduction is lower in later years (as compared to straight line depreciation). Because there are higher deductions in the earlier years, this will reduce reported income in those years; while the lower deductions in later years will increase reported income for those years.

A registered representative at a member firm only deals in stocks and other equity investments. The registered representative helps an associate at that firm negotiate an underwriting of municipal bonds with a municipal issuer official that he knows very well from other business dealings. He does this as a 1-time event and is paid a finder's fee for his help. Which statement is TRUE? A. Because this was a 1-time event, the registered representative is not considered to be a Municipal Finance Professional and is not subject to the political contribution rule B. The registered representative is considered to be a Municipal Finance Professional and is subject to the political contribution rule C. Any registered representative at a member firm is defined as Municipal Finance Professional and is subject to the political contribution rule D. Any registered representative at a member firm is excluded from the definition of a Municipal Finance Professional and is exempt from the political contribution rule

The best answer is B. An "MFP" - a Municipal Finance Professional - is an associated person who solicits business from municipal issuers, renders financial advisory services to municipal issuers, or who performs research or writes reports on municipal issues. Because the representative was paid a finder's fee for helping get the municipal underwriting business from the issuer, that registered representative is defined as an MFP and comes under the $250 political contribution limit.

Net tangible asset value of common stock is synonymous with which of the following? A Stated Value B Book Value C Par Value D Market Value

The best answer is B. Book value of a company is synonymous with Net tangible asset value - which is all assets minus intangibles and minus all liabilities. Net Tangible Asset Value = All Assets - (All Liabilities + intangibles) It is a measure of liquidation value of the company.

Enforcement of MSRB rules for bank dealers is performed by all of the following EXCEPT the: A Office of Comptroller of Currency B Municipal Securities Rulemaking Board C Federal Reserve Board D Federal Deposit Insurance Corporation

The best answer is B. Enforcement of MSRB rules for bank dealers that are not registered as broker-dealers with FINRA is performed by the bank regulatory bodies - the Office of Comptroller of Currency; the Federal Reserve; and the Federal Deposit Insurance Corporation. Note that the MSRB writes rules for municipal market participants; but cannot enforce its own rules. It relies on the existing enforcement network for this.

A high P/E stock would be a suitable investment for which of the following investors? A. A recent college graduate who is currently renting an apartment and who wishes to buy a house in 5 to 10 years B. A recently retired client who has a comfortable level of income from her pension, does not need additional income and is looking for aggressive investing C. A young married couple with 3 children ages 10, 12, and 14, who have minimal savings but wish to start putting away money to pay for their kids' college education D. A middle-aged single man who was just diagnosed with a disabling medical condition that will likely require him to need nursing care for his remaining lifespan that is not covered by his medical insurance

The best answer is B. High P/E stocks are risky. These are high growth stocks that typically pay minimal dividends, and which are expected to grow rapidly in the future. If their growth starts to slow, the price of these stocks can fall dramatically - a risk that should not be assumed in Choices A, C, and D. In Choice B, the customer has plenty of income and wants to take on risk - so a high P/E stock recommendation meets her objective.

If a new issue municipal bond is purchased at a discount, which statement is TRUE? A The basis of the bond stays the same throughout the life of the bond B The basis of the bond increases proportionately throughout the life of the bond C The basis of the bond decreases proportionately throughout the life of the bond D The basis of the bond changes in response to market interest rate movements

The best answer is B. If a customer buys a new issue municipal bond at a discount, the discount must be accreted. Every year, a portion of the discount is "earned." As the bond is accreted, its cost basis is increased proportionately every year by the accretion amount. At maturity, the bond's cost basis has been accreted to par.

A customer has a $1,000,000 portfolio that is invested in the following: $200,000 Blue Chip Stocks $200,000 Technology Stocks $200,000 Long Term Investment Grade Bonds $200,000 High Yield Bonds $200,000 REITs The portfolio is LEAST susceptible to: A interest rate risk B political risk C market risk D default risk

The best answer is B. Notice that the portfolio has no foreign stocks and only has US stocks. Thus, the portfolio is least susceptible to political risk. Foreign stocks have political risk - e.g., you have bought stocks in companies based in Russia, and the Russian government decides to nationalize some of your stock holdings! U.S. stock holdings do not have political risk. This portfolio has interest rate risk because it holds long term bonds. It has market risk because it holds stocks. And it has a good deal of default risk because it holds high yield (junk) bonds.

The "Monetary Environment" is a reflection of all of the following EXCEPT: A money supply levels B stock price levels C monetary policy D fiscal policy

The best answer is B. The "Monetary Environment" is a reflection of whether credit is easy or tight, as shown by interest rate levels, money supply levels, and current economic policies of the Government - that is, fiscal policy.

The Regulatory Element component of the "Continuing Education" requirement must be completed: I on the registrant's 2nd anniversary of registration II on the registrant's 3rd anniversary of registration III every 2 years after the initial review IV every 3 years after the initial review A I and III B I and IV C II and III D II and IV

The best answer is B. The Regulatory Element of the Continuing Education requirement must be completed by registered persons on their 2nd anniversary of registration and every 3rd year thereafter. This involves completing a computerized "training experience" that covers relevant rules and regulations.

The ultimate authority for determining the amount of the discount that must be accreted on municipal market discount bonds is (the): A MSRB - Municipal Securities Rulemaking Board B IRS - Internal Revenue Service C SEC - Securities and Exchange Commission D FINRA - Financial Industry Regulatory Authority

The best answer is B. The final determination of the amount of discount that must be accreted on any (municipal, corporate, and Government) original issue discount bond is made by the Internal Revenue Service.

When an individual sells stock short that the individual owns, this is termed: A shorting the stock B short against the box C long against the short D long against short exempt

The best answer is B. When an individual sells stock short which he owns, this is termed "short against the box." This locks in a capital gain, however, under 1997 tax law revisions, any gain is taxable at this point. Thus this strategy generally cannot be used to defer taxation of a gain.

ABC corporation has 18,000,000 shares outstanding. An officer of ABC wishes to sell ABC stock on November 15th under Rule 144. The prior weeks' trading volumes are: Week Ending Volume Nov. 12th 175,000 shares Nov. 5th 185,000 shares Oct. 30th 180,000 shares Oct. 23rd 170,000 shares Oct. 16th 205,000 shares If the Form 144 is filed on November 15th, the maximum sale is: A 175,000 shares B 177,500 shares C 180,000 shares D 185,000 shares

The best answer is C. Rule 144 limits public sales of restricted shares to the greater of 1% of the outstanding shares; or the weekly average of the prior 4 weeks' trading volume. 1% of outstanding shares = 1% of 18,000,000 = 180,000 shares OR: 175,000 + 185,000 + 180,000 + 170,000 = 710,000 / 4 weeks = 177,500 shares The greater amount, 180,000 shares, can be sold during the next 90 days.

Which statement is TRUE about capital gains taxes? A gain on a security held over: A 6 months is taxed at a lower rate than a gain on a security held over 3 months B 9 months is taxed at a lower rate than a gain on a security held over 6 months C 12 months is taxed at a lower rate than a gain on a security held over 9 months D 15 months is taxed at a lower rate than a gain on a security held over 12 months

The best answer is C. The maximum tax rate on short term capital gains (a gain on an asset held 12 months or less) is 37% (the maximum individual tax rate). For assets held over 12 months, the maximum tax rate drops to 15%. (Note that this rate is raised to 20% for taxpayers in the highest tax bracket.)

Under IRS rules, if a customer selling shares of stock wishes to use specific identification instead of FIFO for cost basis reporting, the broker-dealer effecting the trade must be notified of this no later than: A Trade Date B Confirmation Date C Settlement Date D Statement Date

The best answer is C. If a customer says nothing at the time of a stock sale, IRS rules requires that FIFO be used to determine which shares are sold. If the customer wishes to use specific identification instead, this must be chosen by the customer no later than settlement date.

In 2021, a person gives a $100,000 gift to a neighbor. How much of the gift is taxable? A 0 B $15,000 C $85,000 D $100,000

The best answer is C. If a gift is given to anyone other than a spouse (in this case a neighbor), the first $15,000 is excluded from gift tax in 2021. On any amount above this, the donor must pay gift tax. Since this was a $100,000 gift, $85,000 is subject to gift tax. Also note that the amount excluded from tax is indexed for inflation annually.

Which of the following is NOT considered to be a cyclical stock? A Home appliance manufacturer B Automobile manufacturer C Natural gas producer D Home builder

The best answer is C. Natural gas production and consumption in homes and factories is fairly constant and is not cyclical. Durable goods manufacturers and home builders are in notoriously cyclical industries - these are deferrable purchases in bad times.

An investor originally invested $10,000 in a mutual fund. Over the course of two years, the fund distributed $200 of dividends and $150 of capital gains, which have been automatically reinvested in additional shares. The fund is now worth $17,500 and the customer wishes to liquidate his holding. What is the aggregate cost basis of the mutual fund holding? A $10,000 B $10,200 C $10,350 D $17,500

The best answer is C. The investor's cost basis of the shares is the original purchase price plus all reinvested dividends and capital gains. This makes sense, since every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return. Since the monies have already been taxed, the cost basis will include all reinvested distributions (so that there is no double taxation). The investor's cost basis is $10,350.

The usual order of the economic cycle is: A expansion, recession, recovery, peak B recession, recovery, peak, expansion C expansion, peak, recession, recovery D peak, recession, expansion, recovery

The best answer is C. The normal sequence of the economic cycle is a period of expansion, followed by an economic peak (prosperity), followed by a decline in economic activity (recession), followed by an economic recovery leading to further expansion, etc

An individual who made a profit of $1,000,000 from insider trading would be subject to a civil penalty of: A $1,000,000 B $2,000,000 C $3,000,000 D $4,000,000

The best answer is C. If an individual is found guilty of insider trading, he or she must pay back the profit achieved or loss avoided, and in addition must pay a penalty equal to 3 times that amount. This is called "treble damages."

Which of the following individuals is an "accredited" investor under Regulation D? I Person with an annual income of $200,000 this year and for the preceding 2 years II Person with a Net Worth of $200,000 this year and for the preceding 2 years III An institution making the investment IV An officer of the issuer making the investment A I and II only B III and IV only C I, III, IV D I, II, III, IV

The best answer is C. To be an accredited investor under Regulation D, a person must either: earn $200,000 per year ($300,000 for a married couple); have a net worth of $1,000,000 (exclusive of residence); be an officer or director of the issuer; or be an institution buying the issue. Otherwise, the person counts towards the 35 non-accredited investor limit.

An investor wishes to sell restricted stock under the provisions of Rule 144. The company has 30,000,000 shares outstanding. The Form 144 is filed on Monday, September 28th. The previous weeks' trading volumes are: Week Ending Volume Aug 30th 260,000 shares Sept 6th 300,000 shares Sept 13th 280,000 shares Sept 20th 310,000 shares Sept 27th 330,000 shares Assuming that all other requirements of the rule are met, the maximum permitted sale amount is: A 275,000 shares B 295,000 shares C 300,000 shares D 305,000 shares

The best answer is D. Rule 144 permits the sale of the greater of 1% of the shares outstanding or the weekly average of the preceding 4 weeks' trading volume. 1% of 30,000,000 shares = 300,000 shares. The weekly average of the preceding 4 weeks' trading volume is: Week Ending Volume Sept 6th 300,000 shares Sept 13th 280,000 shares Sept 20th 310,000 shares Sept 27th 330,000 shares 1,220,000 shares / 4 = 305,000 shares The greater amount, 305,000 shares, can be sold during the next 90 days.

If the rate of inflation as measured by the Consumer Price Index rises greatly, then which of the following is likely to happen? I Interest rates will fall II Interest rates will rise III Stocks become a more attractive investment IV Money market instruments become a more attractive investment A I and III B I and IV C II and III D II and IV

The best answer is D. A rising inflation rate is a "lose-lose" situation for both the stock and long term bond markets. If the inflation rate rises, then interest rates are likely to rise, with short term rates rising more than long term rates (the yield curve "flattens" as the Fed tightens credit to tame inflation, with short term rates rising more than long term rates). If interest rates rise, then long term bond prices will fall fastest, and long bondholders will have large losses on their positions. Furthermore, during periods of inflation, corporate earnings tend to fall, because companies are not able to keep raising prices at the same pace as their costs rise. This lowered earnings outlook depresses stock prices. Thus, both stock and long bond prices tend to fall in inflationary periods. Instead, during these periods of high inflation, investors "flee to safety" - they abandon the stock and long term bond markets, and put money in short term money market instruments, which offer safety and relatively high interest rates during inflationary periods; and they also put money into real estate and other "hard" assets that tend to keep pace with inflation.

Which of the following activities are prohibited during the "cooling off" period? I Sale of the issue to the public II Acceptance of an indication of interest III Distribution of a preliminary prospectus IV Distribution of an advertisement A I and II only B III and IV only C II and III only D I and IV only

The best answer is D. During the cooling off period, an offer or sale of the issue is prohibited, as are recommendations of the issue or the advertising of the issue. Sending a preliminary prospectus or accepting an indication of interest does not constitute an "offer" under the Securities Act of 1933 and thus is permitted.

Which of the following persons MUST be registered under State "Blue Sky" Laws? I Brokers soliciting customers in that State II Dealers soliciting customers in that State III Salespersons soliciting customers in the State IV Investment advisers soliciting customers in that State A III only B I and II only C I, II, III D I, II, III, IV

The best answer is D. Under the Blue Sky laws of each state, any broker, dealer, or agent (registered representative) that solicits in that State must be registered. Agents must pass the Series 63 exam to comply with this requirement in most states. In addition, the laws require that any Investment Adviser in the State be registered as well. In many states, these persons must pass the Series 65 examination.

A customer switches from a growth fund to an income fund within the same "family of funds." Which statement is TRUE? A No tax liability is incurred because this is treated as a "wash sale" B No tax liability is incurred because this is treated as a "like kind exchange" of assets C Tax must be paid on any amount by which the Net Asset Value of the new fund exceeds the old fund's Net Asset Value D The sale results in a "taxable event" on which tax on any gain is due, and the purchase establishes a new cost basis

The best answer is D. When the shares of one fund are sold, unless the monies are reinvested in the same fund, (resulting in a non-taxable "like-kind" exchange), capital gains tax is due on the sale proceeds versus the cost basis in the shares. The purchase of the new (different) shares results in a new cost basis.