Series 6
Option contracts can be written on all the following, except: A Stock B Stock market indices C U.S. currency D Bond prices
C. U.S. currency Options exist on stocks, bond yields, bond prices, stock market indices, and foreign currencies.
Which of the following is an example on a non-qualified retirement account? A) HR 10 plan B) 401 K plan C) Profit-sharing plan D) Payroll deduction plan
D) Payroll deduction plan Payroll deduction plans are non-qualified retirement plans. With these plans, employees may deduct a portion of their salaries for retirement savings, but those funds are taxable when earned.
An investor bought shares in an investment company that had an ask price of $12 and a bid price of $10.60. This indicates the company: A Has a $1.40 sales charge B Is open end or closed end C Is open end D Is closed end
D. Is closed end Since the sales charge on the fund exceeds the 8-1/2% FINRA maximum sales charge for a mutual fund, it had to be closed end. An ask price of $12.00 - a bid price of $10.60 creates a difference of $1.40. $1.40 is 11.66% of $12. This would be too high for a mutual fund. Also assume that a fund quoted with bid and ask prices is a closed-end fund. Mutual funds are redeemed at NAV and purchased at POP.
Whenever an individual receives monies from a qualified plan, the IRS allows the individual to place the monies into an IRA without having to pay income tax on the amounts placed into the IRA. What is this procedure? A Sinking fund B Spillover C Qualified transfer D Rollover
D. Rollover A rollover is the proper way to reinvest qualified plan money once it has been received to avoid current income-tax liability. Only one rollover (where the participant receives the funds) is permissible per year. However, an unlimited number of plan trustee to trustee transfers is allowed. A sinking fund is a way of saving to repay a bond. 'Spillover' is a distractor.
Variable Payout based on...?
Principal balance of the contract Annuitant's age Payout option selected Assumed interest rate (AIR)
Stepped-up Death Benefit
This feature guarantees a death benefit based on the account value as of a specified date and may provide for a greater death benefit if the separate account investments have performed well. There is an additional charge for this feature.
Which distributions from a 529 plan are federally income tax-free? A) All used to pay for the beneficiary's qualified college costs B) All C) Those held in the plan for at least five years D) Non-deductible contributions
A) All used to pay for the beneficiary's qualified college costs Distributions from a 529 Plan that are used to pay for the beneficiary's qualified college education costs are federally income tax-free. These include fees for room and board.
Cash value calculation
At least monthly
Life Income Period Certain
Annuity income is payable for life, or for a specified period, whichever is longer. If the annuitant lives beyond the stated period, benefits continue for the life of the annuitant. If the annuitant dies prior to the end of the period certain, a beneficiary receives the balance of the payments for the remaining time period.
Unit Refund Life
Annuity income is payable for the lifetime of the annuitant. Upon death, if an annuitant has not received an amount equal to the total of all payments made into the annuity (not including the growth), the balance is refunded to the beneficiary, either in a lump sum cash refund or in installments.
Life Income (Pure or Straight Life)
Annuity income is payable for as long as the annuitant lives, and upon death all payments cease. This option provides the highest monthly income.
Customer-specific suitability
The features of the variable annuity, such as tax-deferred growth, annuitization, and death benefit would benefit the client. Also, the client would benefit from the underlying subaccounts, contract riders, and any other product enhancements.
Variable life conversion period
24 months
Free look provision
45 days
All the following are considered current assets, except: A Equipment B Inventory C Cash D Accounts receivable
A. Equipment Assets are defined as what is owned by the company and are listed in order of liquidity. Assets are separated into 3 categories: current, fixed, and intangible assets. Current assets include cash and accounts receivable, marketable securities and inventory. Inventory is the least liquid of the current assets.
Which one of the following is not a type of employer-sponsored IRA plan? A) All of these are employer-sponsored plans B) SEP-IRA C) SIMPLE IRA D) Traditional IRA
D) Traditional IRA
A client has invested $100,000 into a variable annuity. At the time of annuitization, the payout option chosen will pay for the life of the annuitant. However, a beneficiary will receive payment for the difference if the annuitant dies before receiving the amount contributed. What payout option was selected? A Life with period certain B Straight life C Joint and last survivor D Life income with refund
D. Life income with refund Under a life income with refund payout option, the annuitant will receive payment for life. If the annuitant dies before at least receiving the amount they contributed, a beneficiary will receive a refund for any remaining value contributions.
Once an annuity is annuitized, who takes ownership of the funds in the annuity? A The insurer B The owner C The beneficiary D The annuitant
A. The insurer Once a contract is annuitized, the insurance company takes ownership of funds in the account.
A preliminary prospectus must be delivered to a potential purchaser no later than A) With the confirmation of sale B) 48 hours prior to the mailing of the confirmation of sale C) Upon settlement of the transaction D) 24 hours prior to the mailing of the confirmation of sale
B) 48 hours prior to the mailing of the confirmation of sale A preliminary prospectus when used in conjunction with an IPO is required to be delivered by the broker-dealer at least 48 hours prior to the confirmation of sale.
To protect an existing short position, an investor would place a A) Sell-stop order B) Market order C) Buy-stop order D) Buy limit order
C) Buy-stop order A buy-stop order would be used to protect a short stock position. A sell-stop order would be used to protect a long stock position.
In a municipal underwriting, the preliminary official statement contains all the following, except: A Intended use of funds B Proposed amount of funds to be raised C Accounting statements D Interest rate of the bonds
D. Interest rate of the bonds The preliminary official statement provides potential investors with all the information surrounding the new bond issue except prices, interest rates, and yields. It contains the same information that can be found in the official statement except those items noted.
Separate account valuation
Daily
A married couple in their early 30s wants to save $25,000 as a down payment on a home, which they hope to purchase in the next year. Their total household income is $200,000, and they are both new to investing. All the following are suitable recommendations, except: A Equity fund B Bank certificate of deposit C Money market funds D Savings account
A. Equity fund This couple will be most concerned with safety and high liquidity. The money market funds, along with bank products such as CDs or savings accounts, would be suitable recommendations. The equity fund will be invested in common and/or preferred stock, with a primary objective of growth. Based on the time horizon for this couple, the equity fund is not suitable.
Which type of qualified plan does not specify a predetermined fixed contribution, but is still classified as a defined contribution plan? A Profit-sharing plan B Tax sheltered annuity C SEP D Corporate pension
A. Profit-sharing plan The employer has no fixed contribution obligation (and may choose not to contribute in certain years). The employer's contributions are dependent upon profits so are not defined. A corporate pension is a defined benefit plan. A tax-sheltered annuity (TSA) is a 403(b) and may or may not have an employer match. If the plan has a match, it is a specified amount which is required. A SEP is for small self-employed companies where the employer contributes a specified amount into an IRA for each employee.
According to FINRA, who is responsible for design and implementation of product specific training, policies, and programs to ensure the RR is complying with the appropriate regulation regarding selling deferred annuities to a customer? A The broker-dealer B The RR C The principal D The SEC
A. The broker-dealer Member firms (broker-dealers) are responsible for designing and implementing the training policies and programs designed to ensure that RRs are disclosing suitability information correctly to customers regarding deferred variable annuities. Registered principals are the ones who conduct the sessions on behalf of the firm.
When dividends and capital gain distributions are reinvested in a mutual fund to buy new shares, the holding period of each new share begins: A The day after the share was purchased B 3 business days after the settlement date C The day the share was purchased D The day before the share was purchased
A. The day after the share was purchased When dividends and capital gain distributions are reinvested in a mutual fund to buy new shares, the holding period of each new share begins the day after the share was purchased. An investor who sells both the original shares and the new shares might have both short-term and long-term gains and/or losses in the same transaction.
Under FINRA rules, communications that are applicable to retail communication rules apply to all the following situations, except: A The member sponsors an investment seminar for the institutional investors B A registered representative sends a form letter to all their clients C A registered representative serves as a guest speaker on investments at a local club meeting D An officer of a member participates in a television program on investments
A. The member sponsors an investment seminar for the institutional investors FINRA's communication rules apply to all forms of retail communication. Institutional communications do not apply.
An employee earned $85,000 working for NOP, Inc. this year. The company does not offer any kind of retirement plan for its employees. If this employee decided to contribute funds into an IRA, which of the following is true? A They can deduct the entire contribution B They cannot contribute due to their income level C They can deduct a portion of the contribution D They cannot deduct any of the contribution
A. They can deduct the entire contribution All individuals with earned income can contribute to a traditional IRA. For individuals who are not active participants in a qualified retirement plan, all IRA contributions into a traditional IRA are tax deductible. For persons who are participating in a qualified plan, deductibility depends on their income level. The specific levels of income that would qualify for a deduction change each tax year. Note: Contributions into a Roth IRA are never deductible regardless of status in a work sponsored plan.
Assumed Interest Rate (AIR)
An arbitrary interest rate used by the insurance company to project the rate of growth of the separate account during the contract's payout period. AIR is a benchmark percentage used in determining the amount of the initial payment and as a comparison when determining future payments. The AIR benchmark remains unchanged throughout the life of the contract.
Which withdrawals from a Traditional IRA are not fully taxable? A) Those made after age 59 ½ B) Those representing a return of non-deductible contributions C) Those taken for bona fide retirement income D) Those representing a plan loan
B) Those representing a return of non-deductible contributions Earnings accumulate in a Traditional IRA on a tax-deferred basis, and withdrawals are fully taxable, unless they represent a return of non-deductible contributions. Withdrawals made before age 59 ½ may be subject to an additional 10% penalty.
Passive management is different from active management in all the following respects, except: A Passive management has lower turnover than active management B Passive management will always have lower returns than active management C Index funds are often used to fund asset class allocations of a portfolio D Passive management has lower expenses than active management
B. Passive management will always have lower returns than active management Active management provides an investment adviser or professional money manager that makes buy and sell decisions for the portfolio or fund. The fee for active management is typically the largest expense of all expenses. Open-end and closed-end funds have professional investment managers. Passive management has no active money manager and therefore will have lower expenses. Turnover (trading securities) is either non-existent or minimal. Efficient market believers tend to prefer investments that provide passive management. Often this type of plan involves using index funds for each of the asset classes.
Variable annuities may have which of the following expenses deducted prior to the premium being invested into the separate account? A Management and administrative expenses B Premium taxes and sales charges C Administrative expenses and premium taxes D Mortality and expense risk charges Oops! The correct answer was B. Variable annuity sales charges, if applicable, are deducted before the premium is invested into the separate account. Additionally, some states impose a state premium tax against the purchase payments. These are deducted before the premium is invested.
B. Premium taxes and sales charges Variable annuity sales charges, if applicable, are deducted before the premium is invested into the separate account. Additionally, some states impose a state premium tax against the purchase payments. These are deducted before the premium is invested.
An investor may consider which of the following factors least important when choosing a mutual fund to invest in? A) Fees B) Investment policies C) Size of the fund D) Investment objectives
C) Size of the fund The size of a particular fund is the least important factor amongst these items when choosing an appropriate mutual fund investment.
Dollar limits on 529 plan contributions per beneficiary are set by A) The federal government B) The Municipal Securities Rulemaking Board C) Various states D) The College Board
C) Various states There are no federal dollar limits on contributions as long as they do not exceed "the amount necessary to provide for the qualified education expenses of the beneficiary." Many states do impose dollar limits on total contributions made on behalf of one beneficiary.
Technical analysis patterns and trends are used to predict short-term price levels for stocks, usually no more than how many weeks into the future? A 9 B 18 C 6 D 12
C. 6 Technical analysis is a method of analyzing the value of securities by studying historical prices, price movement, and the trading volume of a specific security. The tools used by technical analysts involve various charts where price data and volume are plotted on a graph over time. Historical price data that has been plotted, recorded, and charted begins to form patterns and trends. These specific patterns and trends are used to predict short-term price levels for stocks, usually no more than 6 weeks in the future.
All the following are direct expenses of an open-end investment company, except: A Accounting expenses B Advisory fees C Sales charges D Transfer agent fees
C. Sales charges The operating costs include transfer agent fees, advisory fees, accounting fees, and legal fees. Sales charges are not direct charges to the fund.
Why would a customer use a prime brokerage account? A One firm may not be able to handle all the customer's needs B It is a SEC requirement C To consolidate account paperwork D To obtain overall lower transaction costs
C. To consolidate account paperwork A prime brokerage account is usually established by institutions, such as hedge funds, or high net-worth individuals. A prime broker handles the account. The prime broker is a clearing firm that holds customer securities positions that are created by several different executing broker-dealers. The prime broker must sign an agreement with the customer detailing this agreement. The prime broker must also have written agreements with all the executing broker-dealers. The prime broker will then receive all the trade information from the executing broker-dealers and provide consolidated confirmations and statements to the customer. This eliminates the need for separate accounts at each of the executing broker-dealers and allows the consolidation of all confirmations and statements. The account holder may use multiple executing brokers to handle trades, preventing a single firm from seeing the activities and duplicating the strategies. All trades are then settled through the prime broker. A prime brokerage account is required to maintain a minimum of $500,000 in equity.
Why would an underwriter bring in other member broker-dealers in an underwriting? A To meet specific SEC underwriting requirements B It is required by FINRA rules to include other member broker-dealers in any underwriting C To offset any potential capital liability D To guarantee that all shares in the underwriting will be sold to the public
C. To offset any potential capital liability Once the underwriter has used "reasonable care" during its investigation, they might choose to recruit several other broker-dealers to share in the liability of distribution. The managing underwriter, or syndicate manager, will form an underwriting syndicate. A syndicate agreement will be signed between the syndicate manager and syndicate members. In a typical corporate underwriting, each syndicate member is assigned responsibility for distributing a specific batch of shares. If those shares are not sold, that member will own those shares and could potentially lose money if the market price for the issue falls. The syndicate members share compensation of the underwriting. The managing underwriter is compensated for each share sold and for managing the syndicate.
For which students is the cost of room and board a qualified education expense from a 529 plan? A) Undergraduate students only B) Full-time students only C) All students D) At least half-time students only
D) At least half-time students only Room and board is a qualified education expense only if the student is enrolled at least half-time. Expenses may not exceed the college's allowance for room and board.
A schoolteacher has invested $8,000 into a 403(b) plan over a 10-year period. The annuity now has a current value of $12,000. If the teacher completely liquidated this amount, how much may be excluded from taxable income? A $8,000 B $12,000 C $4,000 D $0
D. $0 The $8,000 contributions were made on a pretax basis and the $4,000 was appreciation, so the entire $12,000 is taxable. The question is asking for the amount not subject to taxation.
Which of the following is a non-exempt security under the 1933 Act? A G-note B ABC church bond C NYC municipal bond D XYZ mutual fund
D. XYZ mutual fund Exempt securities include U.S. government and agency issues, municipal issues, money market issues, bank issues, common carrier issues, insurance company issues, and nonprofit or religious organization issues. While an exempt issuer is not required to register its securities with the SEC, it is still subject to the anti-fraud provisions. A non-exempt security is one that must be registered with the SEC. Mutual funds are non-exempt and must be registered with the SEC.
Which two of the following statements correctly state the tax treatment that applies to municipal securities? I. Capital gains are fully taxable II. Capital gains are tax deductible III. Interest payments are generally tax free at the federal level IV. Interest payments are taxable at the federal level but exempt at the state level.
I & III Municipal securities pay interest that is generally tax exempt at the federal level, and may also be exempt at the state tax level. Capital gains are fully taxable.
Partial Surrenders or Withdrawals
Partial surrenders and withdrawals made from an annuity are taxed on a LIFO basis, where earnings will be withdrawn first and subject to ordinary income tax.
Death benefit calculation
Annual basis
Reasonable-basis suitability
The client was provided full and fair disclosure of material information, such as surrender period and charges, potential tax penalties due to premature distributions, fees, risks, and the insurance and investment aspects of the contract.
Quantitative suitability
The features of the variably annuity are not excessive considering the size and character of the customer's account and available assets.
Exclusion ratio
The formula used to determine the portion of each payment that is a return of cost basis, and therefore excluded from taxation.
Highest annuity payment to lowest
1. Life Income 2. Life Income Period Certain 3. Life Income with Refund 4. Joint and Last Survivor
Variable Annuity Contract Life Cycle
1. The premiums are invested in the separate account and used to purchase accumulation units. 2. The owner chooses the mix of subaccounts to invest in. 3. The accumulation units grow on a tax-deferred basis. 4. The contract owner trades the accumulation units in return for a lifetime income stream upon annuitization. 5. The accumulation units are converted into a fixed number of annuity units. 6. The annuitant's payment will fluctuate each month based on the actual performance of the separate account compared to the AIR.
Which of the following statements describes a group net order for a new issue of municipal securities? A) An order in which all members of the syndicate share in the profit according to their participation B) An order from a large institution in which designates two or more members to receive credit for the sale C) An order placed by a member firm for its customers D) An order placed before the syndicate actually purchases the issue from the issuer
A) An order in which all members of the syndicate share in the profit according to their participation There are four types of orders that can be placed with a syndicate. A group order is for the benefit of all members of the syndicate, and proceeds are shared equally among all members of the syndicate. Presale orders are entered before the syndicate wins the bid. Designated orders are usually entered by institutions that identify a member or members of the syndicate to receive the credits. Member orders are placed by a single firm for its own inventory or to fill orders of its customers.
The administrative costs of ownership in a closed-end fund are included in the fund's A) Expense ratio B) 12b-1 charges C) Management fee D) Surrender charges
A) Expense ratio A closed-end fund's expense ratio reflects the costs of ownership in the fund as a percentage of the net asset value. It is included in the fund's prospectus.
The responsibility of the sponsor of a unit investment trust includes which of the following? I. Selection of the securities for the trust II. Organizing the formation of the trust III. Tax reporting for the trust IV. Recordkeeping for the trust A) I and II B) I and IV C) II and IV D) II and III
A) I and II The sponsor of a UIT organizes the trust and is responsible for the selection of the portfolio securities. The trustee handles administrative functions, including the recording keeping, accounting and tax reporting duties.
A selling agreement with the issuing company is required for the distribution of which of the following? I. Open end company shares II. Closed-end company shares III. ETFs A) I only B) II and III only C) I, II, and III D) I and II only
A) I only A selling agreement is required for the distribution of open end company shares only. Because closed-end company shares and ETFs are traded on exchanges, a purchase or sale of these securities can be executed through any brokerage account.
Which of the following statements regarding FINRA limits on gifts and gratuities are true? I. A firm is restricted from employing associated persons of other firms if the value of employment exceeds FINRA's limit on annual gifts and gratuities to persons associated with other firms II. A firm is not restricted from employing persons associated with other firms by FINRA's rule on gifts and gratuities as long as there is a written employment agreement III. A firm may give gifts and gratuities to employees of other firms if they exceed no more than $50 annually IV. A firm may give gifts and gratuities to employees of other firms if they exceed no more than $100 annually A) II and IV B) I and IV C) II and III D) I and III
A) II and IV
When calculating total return on a bond, A) Interest earned is added to any capital gain, and this result is then divided by the initial purchase price B) Interest earned is subtracted from any capital gain, and this result is then divided by the initial purchase price C) Interest earned is divided by the redemption value of the bond D) Interest earned is subtracted from the redemption value of the bond.
A) Interest earned is added to any capital gain, and this result is then divided by the initial purchase price Total return on a bond is determined by adding the interest earned during the time period to any capital gain, then dividing this result by the initial purchase price of the bond.
All of the following taxes may pay debt service on revenue bonds EXCEPT A) Property taxes B) Sales Taxes C) Hotel occupancy taxes D) Fuel taxes
A) Property taxes Property taxes, income taxes and general sales taxes are sources of funding to pay debt service on general obligation bonds. Revenue bonds are backed by user fees or taxes that apply only to users of a specific service, like fuel taxes, hotel occupancy taxes, or sales taxes that apply to the purchase of luxury items.
With regard to municipal taxing authority, which of the following statements is TRUE? A) The taxing authority of municipalities varies widely depending on applicable state or local laws. B) States usually rely on property taxes to back GO bond issues. C) A high debt limit is viewed as a greater sign of safety than a low debt limit. D) Most cities and counties may issue GO bonds without voter referendums.
A) The taxing authority of municipalities varies widely depending on applicable state or local laws. Municipal taxing authority and statutes that address types and amounts of taxes vary considerably. Most local government bond issues require voter approval or referendums before they can be issued. States typically rely on sales or income taxes for backing of bond issues. A low debt limit is typically viewed more favorably because the municipality potentially has less outstanding debt to service.
Which of the following statements is true regarding a community property account? A A community property account can only be established by a married couple B A community property account creates an unequal interest in the account based on a specific allocation or percentage of ownership C All states follow community property laws D A community property account is like a TIC registration
A. A community property account can only be established by a married couple A community property account is like a JTWROS (joint tenants with rights of survivorship) but can only be held by a married couple. This account is opened based on the community property laws of the state in which the couple resides. Both parties have equal ownership and rights to the income and appreciation in the account. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
What is an advantage of a 403(b)? A All money is invested, and the accumulation of growth is tax-deferred until withdrawn B Employees of states, counties, and municipalities may reduce their pay by a specified amount to invest in 1 or more 403(b) investments C They are profit-sharing plans D Distributions are tax-exempt
A. All money is invested, and the accumulation of growth is tax-deferred until withdrawn A 403(b) is designed for employees of nonprofit organizations and public schools under which all contributions and growth are tax-deferred until withdrawn. Funds are taxed at ordinary income rates when withdrawn. 457 plans are traditionally for government employees. Profit-sharing plans are for corporations.
Private placements offered under Regulation D are: A Exempt transactions B Registered with the SEC C Exempt securities D Exempt from anti-fraud regulations
A. Exempt transactions Offerings that are not made public, known as private offerings, are exempt from the registration process so are exempt transactions, not exempt securities. No security offering is exempt from the anti-fraud regulations.
What is the relationship between securities, or asset classes, that have values moving in opposite directions? A Negative correlation B Uncorrelated C Neutral correlation D Positive correlation
A. Negative correlation When a security or asset class is negatively correlated, it will move in the opposite direction of the other. If a security is unrelated or uncorrelated to another security the respective prices of each security will react differently to market movements and will tend to not move in the same direction. A positive correlation means the value of the securities/asset classes move in the same direction.
Which term refers to an existing public corporation issuing a large block of new shares to expand or modernize? A Primary distribution B Secondary distribution C Refinancing or refunding D Initial public offering
A. Primary distribution A corporation's IPO is the first time it issues stock to the public. If the corporation later issues additional shares, this is a primary distribution, but not the IPO. Secondary distributions involve previously issued shares. Refinancing pertains to bonds, not stocks.
Joint and Last Survivor
Annuity income is payable to 2 named annuitants (in one check) while both are living. Upon the death of the first annuitant, survivor benefits continue, either paying the full amount or reduced to 2/3 or 1/2 for the survivor's income until the survivor dies. These options may be referred to as Joint and Full Survivor, Joint and 2/3 Survivor, or Joint and ½ Survivor.
Tax Treatment of an Annuitized Contract
Annuity payments received upon annuitization and 72(q) distributions are a combination of the original principal and earnings. The original principal is distributed tax-free, and the earnings are taxable as ordinary income. The exclusion ratio determines the return of cost basis.
An insurance company's separate account is not directly managed by its investment managers. This separate account is A) Registered as an open-end investment company under the Investment Company Act of 1940 B) Registered as a unit investment trust under the Investment Company Act of 1940 C) Registered as a closed-end investment company under the Investment Company Act of 1940 D) Is not registered under the Investment Company Act of 1940
B) Registered as a unit investment trust under the Investment Company Act of 1940 When the investment management of the insurer passes the responsibility of management to subaccount fund managers, the separate account must be registered as a unit investment trust. When the assets of the separate account of an insurance company are managed by the insurance company's investment company, the account is registered as an open-end investment company.
Which type of advisers must be registered with the SEC? A) Mid-size and small advisers B) Large advisers C) Large and mid-size advisers D) Large, mid-size and small advisers
B) Large advisers Large advisers (with more than $100 million in AUM) are required to register with the SEC unless they qualify for an exemption. Most mid-size and small advisers are prohibited by law from registering with the SEC.
If Margaret exchanges one mutual fund for another in her IRA, what is the tax consequence? A) Tax must be paid on any gain B) None C) Tax basis must be adjusted D) The exchange must be reported to the IRS
B) None IRA owners are free to buy, sell, exchange or trade assets within their accounts without current tax consequences.
UITs and mutual funds are similar in which of the following ways? A) They both sell interests to investors through continuous primary offerings B) They are valued at the end of each business day C) They both trade on exchanges D) They are both created for a specified length of time
B) They are valued at the end of each business day UITs are priced at the end of each business day similar to mutual funds. Only UITs are created with a specified termination date. Mutual funds are continuous primary offerings; UITs have a single IPO. Neither units of UITs or mutual fund shares trade in the secondary market.
All of the following statements are true regarding the sale of unit investment trust units EXCEPT A) Units are packaged and purchased in standard amounts B) Units are usually purchased directly from the trust without a registered representative C) Potential purchasers must receive a prospectus D) There is usually a minimum purchase amount specified
B) Units are usually purchased directly from the trust without a registered representative UIT units are generally distributed through a registered representative of a broker dealer. Investors must usually meet a minimum investment amount when investing in a UIT. UITs are typically packaged in standard amounts, for example, $10 per unit. UITs must be sold with a prospectus.
Of the following, which would FINRA consider a complaint? A A customer calls a partner in the firm and complains about phone calls from registered reps soliciting orders for penny stocks B A customer's lawyer writes a letter to a registered rep of the firm, complaining about his inappropriate recommendations to the customer C Another broker-dealer writes a letter to a principal in the firm, complaining about how the firm handled the settlement on a transaction for the broker-dealer's account D A customer writes a letter to the firm complaining about the investment adviser's handling of a transaction. The adviser does business through an account with the firm
B. A customer's lawyer writes a letter to a registered rep of the firm, complaining about his inappropriate recommendations to the customer To be considered a complaint by FINRA, the communication must be written, must be by or on behalf of a member's customer, and must be about an event or individual under control of the member. In the customer's written letter about their investment adviser, they are referring to an adviser, rather than a broker-dealer. This means that the complaint has nothing to do with the firm that received it and does not qualify as a complaint.
An investor read about the 12b-1 charges of a no-load mutual fund in its prospectus. According to regulation, these fees must be approved by the fund's board of directors at least: A Daily B Annually C Monthly D Quarterly
B. Annually A mutual fund's board of directors, along with a majority of the shareholders, approves the fund's 12b-1 fee. The BOD will review the fee spending on a quarterly basis and approve the fee annually.
Which of the following statements is correct regarding a SIMPLE plan? A SIMPLE plans may be adopted in addition to another qualified plan B Employers with 100 or fewer employees may establish a SIMPLE plan C An employee that already has either a traditional or Roth IRA are not eligible to participate in a SIMPLE plan D Employee contributions are required, and all contributions must be fully vested
B. Employers with 100 or fewer employees may establish a SIMPLE plan A SIMPLE plan can be adopted by small businesses (self-employed, sole proprietors, partnerships, and corporations) that employ 100 or fewer employees and do not have another qualified plan available. SIMPLE plans may be established as either an IRA or a 401(k) plan. Employees may make elective contributions based on a stated percentage within the allowable annual contribution limits. All contributions must be fully vested.
All the following are types of corporate secured bonds, except: A Collateral trust certificates B Income bonds C Mortgage bonds D Equipment trust certificates
B. Income bonds Corporations issue secured bonds that are backed by specific collateral to reduce the risks associated with lending. Examples of secured bonds include mortgage bonds, collateral trust certificates, and equipment trust certificates. Income bonds are issued by a corporation that is under reorganization, coming out of bankruptcy, or trying to avoid bankruptcy. These bonds have no legal obligation to make interest payments and will only pay interest when the corporation earns enough income to do so.
All the following are true regarding automatic reinvestment of capital gains distributions in a mutual fund, except: A Reinvested capital gains are taxable in the year received B It will increase the investor's per share value C The investor will have an increased number of shares D There will be an increase in the number of outstanding shares of the management investment company
B. It will increase the investor's per share value The reinvested capital gains distribution will increase the number of shares the investor owns in the fund, but not the per share value. NAV falls when dividends are distributed. The value of the fund's shares will only increase as the value of the fund's assets increase. Each time an investor invests money in a fund or reinvests distributions, the fund issues new shares. These reinvested distributions will increase the investment company's outstanding shares. Because of the reinvested distribution, the investor owns more shares in the fund. Distributions are taxable in the year received, whether the investor reinvests back into the fund or takes them in cash.
Which of the following statements is false regarding retirement plans? A Qualified retirement plans have a cost basis of zero B Qualified retirement plans grow tax-free C Employer contributions may be tax deductible in the year the contribution is made D Contributions into qualified plans are made with pretax dollars
B. Qualified retirement plans grow tax-free A qualified plan receives certain tax advantages for both the employer and employee. Employees can contribute on a pretax basis and have earnings grow tax deferred. Employer contributions can be deducted for the year in which the contribution was made. All contributions consist of money that has not been taxed by the IRS yet, so the account has a cost basis of zero. The account will grow tax deferred (not tax-free), and upon withdrawal the amount will be taxed at the investor's current ordinary income rate.
All the following statements regarding a SIMPLE plan are true, except: A Employees who earned $5k in any 2 previous years and who are reasonably expected to earn at least $5k in the current year must be eligible to participate in the SIMPLE plan B SIMPLE plans can be adopted by employers with 250 or fewer employees C The plan may be established as an IRA or 401(k) plan D All contributions must be fully vested
B. SIMPLE plans can be adopted by employers with 250 or fewer employees A SIMPLE plan can be adopted by small businesses (self-employed, sole proprietors, partnerships, and corporations) that employ 100 or fewer employees and do not have another qualified plan available. SIMPLE plans may be established as either an IRA or a 401(k) plan. To be eligible, the employee must have earned at least $5,000 in compensation during any 2 years before the current calendar year and is expected to earn at least $5,000 for the current calendar year. Employees may make elective contributions based on a stated percentage within the allowable annual contribution limits. All contributions must be fully vested.
A defined benefit pension plans allows employees to do all the following, except: A Transfer the account balance directly into a life insurance policy B Take a lump-sum payment C Rollover the account balance into an IRA D Receive a pension annuity
B. Take a lump-sum payment Defined benefit pension plans usually give employees the option of receiving a pension annuity or taking a lump-sum payment. A pension annuity is distributed through the pension plan, not an insurance company, but offers the same payout options. A lump-sum distribution is also an option. This allows the retiree to control the assets and gives them the option of continued tax-deferral with a rollover to an IRA. Taxes are due immediately on any cash payout that is not rolled over.
A client invested $40,000 into a nonqualified variable annuity that is worth $200,000 upon retirement. If this client takes a distribution of $100,000, how will the IRS treat that withdrawal? A 20% will be tax-free while 80% will be taxed as ordinary income B The entire $100,000 is taxed as ordinary income C The entire $100,000 is taxed as a capital gain D 20% will be tax-free while 80% will be taxed as a capital gain
B. The entire $100,000 is taxed as ordinary income The IRS would tax the client as if they were taking the earnings out of the contract first. This last in, first out tax treatment (LIFO) means that the entire initial distribution would be taxable as ordinary income. Continued distributions would be taxable until all the $160,000 in earnings have been removed from the account. Eventually, the final $40,000 would be distributed tax-free.
Which of the following statements is true of the cash value in variable life insurance? A There is a minimum cash value guarantee B There is no guarantee of cash value C The full premium is invested in the separate account D The entire cash value may be borrowed
B. There is no guarantee of cash value In a variable policy, only a portion of the cash value may be borrowed, not the entire amount. The net premium, not the full premium, is invested in the separate account. The full premium minus the sales charge, rider charges, and premium tax, if any, is the net premium.
When must investment advisory firms deliver the customer relationship summary form (Form ADV Part 3)? A At the time of any retail customer securities transaction B To retail customers before or at the time the advisory contract relationship is established C At the time of making a recommendation of a retail customer account type D To retail customers prior to placing any orders
B. To retail customers before or at the time the advisory contract relationship is established Investment advisory firms must deliver the document to retail customers before or at the time the advisory contract relationship is established. Broker-dealers must deliver the document to retail customers at the time of making a recommendation of an account type, securities transaction, or an investment strategy involving securities. The document must be delivered before placing an order or opening an account for a retail customer.
A schoolteacher has invested $8,000 into a 403(b) plan over a 10-year period. The annuity now has a current value of $12,000. If the teacher completely liquidated this amount, how much may be excluded from taxable income? A $4,000 B $12,000 C $0 D $8,000
C $0 The $8,000 contributions were made on a pretax basis and the $4,000 was appreciation, so the entire $12,000 is taxable. The question is asking for the amount not subject to taxation.
All of the following are subject to MSRB rules EXCEPT A) An online brokerage firm that executes only unsolicited orders in municipal securities B) A municipal finance department within a general securities broker dealer C) A school district that is issuing GO bonds D) A bank that acts as an underwriter of municipal securities
C) A school district that is issuing GO bonds Note that this is an EXCEPT question. The MSRB does not have authority over issuers of municipal securities issuers. MSRB Rules apply to members and their associated persons, which are defined as broker-dealers and bank dealers that engage in municipal securities sales, trading, underwriting, or financial advice to issuers.
A communication made available to 20 institutional clients and 20 retail clients is classified as A) Retail communication. B) A blog post C) Correspondence. D) Institutional communication.
C) Correspondence. A communication made available to retail investors cannot be classified as institutional. If the number of retail recipients is up to and including 25 persons, it is classified as correspondence. For larger audiences (more than 25 retail persons), it is considered retail communication.
Variable annuities are subject to which of the following securities regulations? I. The Investment Company Act of 1940 II. The Investment Advisers Act of 1940 III. The Securities Exchange Act of 1934 A) II and III only B) I and II only C) I, II and III D) I and III only
C) I, II and III Like mutual funds, variable annuities are subject to most securities regulations. The Securities Act of 1933, The Securities Exchange Act of 1934, The Investment Company Act of 1940 and the Investment Advisors Acct of the 1940 apply to variable annuities.
What is the typical sequence for the order period: I. Designated Orders II. Group Orders III. Member Orders IV. Presale Orders A) IV, III, II, I, B) IV, I, III, II, C) IV, II, I, III, D) I, II, III, IV,
C) IV, II, I, III, The typical sequence during the order period is Presale Orders, then Group Orders, then, Designated Orders, and finally member orders.
All of the following may be used to pay the debt service on general obligation bonds EXCEPT: A) Property taxes B) Income taxes C) Tolls collected for the use of a bridge D) Traffic fines
C) Tolls collected for the use of a bridge General obligation (GO) bonds are backed by the full faith and credit of the municipality, which means its taxing authority. Taxes that back GOs include property taxes, income taxes, sales taxes, traffic fines and license fees. Tolls, concessions and lease rental payments usually back revenue bonds.
A broker-dealer is not subject to investment adviser registration, provided that it A) advises only sophisticated investors and institutions. B) only offers fee-based accounts. C) offers advice that is solely incidental to securities sales and receives no special advisory compensation. D) does not advise clients to purchase mutual funds or hedge funds.
C) offers advice that is solely incidental to securities sales and receives no special advisory compensation. Broker-dealers and registered reps can provide advice that is solely incidental to their main business and receive no special compensation for advisory services. In this case, they are exempt from investment adviser registration.
An individual has invested $160,000 in a variable annuity that has a current market value of $126,000. During the accumulation period, the annuitant unexpectedly dies. What funds will the heirs be entitled to upon the annuitant's death? A None, the individual died during the accumulation period B $126,000 C $160,000 D A minimum of 90% of the contract's current market value
C. $160,000 During the accumulation period, the death benefit is the greater of the contributions made into the contract or the current market value.
Tax-sheltered annuities refer to which type of plan? A SEPs B Pension plans C 403(b) plans D 457 plans
C. 403(b) plans IRS Code section 403(b) deals with tax-sheltered annuities (TSAs), which are for schools and nonprofits. Pension plans are a type of corporate defined benefit plan. SEPs are for self-employed groups. 457s are traditionally for governmental employees.
An investor is considering the differences between ABC fund and DEF fund. ABC fund has a NAV of $9.20 and a POP of $9.90. DEF fund has a NAV of $10.85 and the current market price is $10.10. Which of the following statements is most likely true? A ABC fund is charging a higher sales charge than DEF fund B ABC fund is an open-end fund and DEF is a no-load fund C ABC fund is an open-end fund and DEF is a closed-end fund D ABC fund is a closed-end fund and DEF is an open-end fund
C. ABC fund is an open-end fund and DEF is a closed-end fund Closed-end fund shares have pricing that is determined by market value (supply and demand) and investors are charged a commission for the purchase or sale. The fund will calculate the NAV at the end of each trading day, but the shares can trade at, above, or below the NAV per share. Open-end funds are purchased at POP and redeemed at NAV. The POP can never be lower than NAV. With no-load funds the POP is equal to the NAV. Though ABC fund could be a closed-end fund, DEF cannot be an open-end fund nor a no-load fund.
All the following are considered secured bonds, except A Equipment trust certificates B Collateral trust certificates C Guarantee bonds D Mortgage bonds
C. Guarantee bonds Guarantee bonds are unsecured bonds backed not only by the promise of the issuer to pay, but also a parent company that will back-up the issuer's promise. If the issuer defaults on the bond, the parent company must step in and make payments. Mortgage bonds are backed by the corporation's real estate, such as office buildings, apartment complexes, shopping malls, or other tangible property owned by the issuer. Equipment trust certificates are secured bonds backed by equipment. Collateral trust certificates are bonds backed by securities of another company.
All the following are true regarding FINRA's Code of Mediation, except: A It is a means of settling disputes between member firms and their customers B The mediator facilitates the proceedings but does not have the power to pass judgement on either party C It cannot run concurrently with an arbitration involving the same matter D The process is completely voluntary on both parties
C. It cannot run concurrently with an arbitration involving the same matter FINRA's Code of Mediation is designed to settle disputes between member firms, and between members and their customers. This process is a lot more flexible than the traditional arbitration process, which often leads to a resolution which may be fraught with resentment by the losing party. Through mediation, which may run concurrently with an arbitration proceeding, the parties can compromise and find a middle ground unavailable through arbitration. In addition, no one can be forced in mediation. Both parties must agree to it.
All the following are true regarding components of an income statement, except: A Total income is derived before interest expense is taken out B Pretax income is the amount of income that is subject to taxation C Net income is before taxes are taken out D Gross margin is found by subtracting the cost of goods sold and depreciation from the net sales number
C. Net income is before taxes are taken out Gross margin is found by subtracting the cost of goods sold and depreciation from the net sales number. Gross margin shows how much the amount received for the sale of a product exceeded the basic cost of producing it. Pretax income is the amount of income that is subject to taxation. Analysts will look at several income subtotals before taxes are taken out. Total income is derived before interest expense is taken out and net income is after taxes are taken out.
A client purchased a periodic payment variable annuity. The monthly payment selected was $200 per month. The client is now 62-years old and wants to retire and annuitize the contract using the joint and last survivor life annuity payout option. According to these conditions, the annuity payments are taxed as: A Ordinary income and capital gains B Ordinary income once the cost basis in the contract has been recovered C Ordinary income up to a percentage of each payment using the exclusion ratio D Ordinary income
C. Ordinary income up to a percentage of each payment using the exclusion ratio During the distribution period of a variable annuity (nonqualified annuity), a percentage of each payment is taxed as ordinary income. The percentage is determined by the owner/purchaser's contributions (nondeductible) divided by the current account balance at the time of the distribution. This is the exclusion ratio and is used to determine the amount of every payment that is excluded from taxation. Amounts in excess are taxed as ordinary income.
A summary of the registration statement that contains material information about the offering, including an estimated offering price range is called: A Indication of interest B Tombstone ad C Preliminary prospectus D Preliminary registration statement
C. Preliminary prospectus A summary of the registration statement, called the preliminary prospectus (red herring), contains material information about the offering, including an offering price range for the new issue.
All the following regarding advance/decline lines are true, except: A If more issues are increasing than decreasing in value, there is strength in the increase, and it should continue B If more issues are declining than increasing, it is thought that there is strength in the decline, and it should continue C The advance/decline ratio is # of declines ÷ # of advances D The percentage of stocks advancing to those declining is referred to as the breadth of the market, which attempts to gauge the direction of the overall market
C. The advance/decline ratio is # of declines ÷ # of advances Technical analysts will also look at advance/decline lines to determine if there is any strength in the current market movements. If more issues are declining than increasing, it is thought that there is strength in the decline, and it should continue. If more issues are increasing than decreasing in value, there is strength in the increase, and it should continue. The technical analyst will look at the percentage of stocks advancing to those declining and vice versa. This is referred to as the breadth of the market, this technique attempts to gauge the direction of the overall market. The advance/decline ratio is used: Advance/Decline Ratio = # of Advances ÷ # of Declines.
All the following statements are true about variable insurance policy valuations, except: A The death benefit is calculated on an annual basis B The separate account NAV is calculated daily C The cash value must be calculated at least daily D The cash value changes based on market fluctuation
C. The cash value must be calculated at least daily Similar to a mutual fund, the separate account net asset value (NAV) is calculated daily at 4 p.m. Eastern, the close of the NYSE. The policy's cash value will fluctuate based on the performance of the underlying investments held in the separate account and must be calculated at least monthly. The death benefit on a variable life insurance policy is calculated on an annual basis.
A client made $10,000 of nondeductible contributions to their traditional IRA over the last 30 years. Now, at age 54, they need to begin withdrawing from this IRA that is currently valued at $30,000. If they withdraw the entire $30,000, which of the following is true? A The client will be responsible for taxable income of $30,000 B The client will be responsible for a $3,000 IRS penalty and taxable income of $30,000 C The client will be responsible for a $2,000 IRS penalty and taxable income of $20,000 D The client will be responsible for a $2,000 penalty and taxable income of $30,000
C. The client will be responsible for a $2,000 IRS penalty and taxable income of $20,000 The client, who is not yet age 59 1/2, is planning on making a premature withdrawal from their IRA. Such a withdrawal creates a 10% IRS penalty on the taxable portion of the account. The taxable portion is comprised of all growth in the account plus all deductible contributions. Since they only made nondeductible contributions, the taxable portion is the growth ($20,000). Therefore, a penalty of $2,000 (10% of $20,000) will be levied by the IRS, and the client will pay ordinary tax on $20,000.
An investor is looking for a life insurance product that also provides an inflation hedge. Which of the following choices would be the most suitable recommendation? A Term life B Universal life C Variable life D Whole life
C. Variable life Variable life insurance gives the investor an insurance benefit in the event of the holder's death, but also provides the ability to invest through the product's separate investment account. This option enables the customer to attempt to outpace inflation through the potential performance of the separate account. The other products listed do not have a separate account. Moreover, the account options are fixed and generally provide little in the way of returns above standard cash deposit rates.
A registered representative meets with a client and based on an in-depth review of the client's financial profile, determines a variable annuity would be a suitable recommendation to meet the client's needs. When does the application package need to be reviewed and approved by a principal of the firm? A By the end of the month B Prior to the customer signing the paperwork C Within 7 business days of receipt by the OSJ D At time of sale
C. Within 7 business days of receipt by the OSJ Once the variable annuity contract application is complete, the RR must promptly transmit the application package to their office of supervisory jurisdiction (OSJ) to be reviewed and approved by a principal of the firm within 7 business days of receipt.
Which of the following projects is most likely funded by a revenue bond issue? A) A new public golf course B) A city recreation complex C) A municipal government building D) A new bus depot
D) A new bus depot Transit authorities that generate revenue from the sale of tickets or fares are funded by revenue bond issues. Projects that are free to the public, or for the good of the public, are backed by GO bonds, and include public golf courses, other sports and recreation complexes, public schools and municipal government buildings.
An investor in a mutual fund owns which of the following? A) Specific securities within the mutual fund B) A proportionate interest in the specific portfolio securities that meet the investor's objectives C) A divided share of the securities that are held within the mutual fund's portfolio D) An undivided interest in the shares of the securities held by the mutual fund
D) An undivided interest in the shares of the securities held by the mutual fund An advantage of mutual fund investments is that investors own a proportionate share of all the securities within the portfolio (an undivided interest). They can achieve a high degree of diversification for a minimal investment.
Which TWO of the following statements are TRUE of a principal's approval of a new opened account? I. It must be in writing. II. It indicates that all the account information is complete and correct. III. It indicates that the account is appropriate for the person opening the account based on the information collected. IV. It must be kept in the customer account file that is maintained by the representative who opened the account. A) II and IV B) II and III C) I and IV D) I and III
D) I and III A principal must give written approval for new accounts. By approving the account, the principal has confirmed that the account is appropriate based on the information gathered in during the account opening process. The principal who is approving the account does not confirm the accuracy of the information.
What is the defining characteristic of a "participant-directed" retirement plan? A) All participants have access to loans B) All employees are eligible to participate C) All eligible employees are automatically enrolled D) Participants make their own investment decisions
D) Participants make their own investment decisions In a participant-directed retirement plan each eligible employee chooses the amount of wages to invest and how those savings should be invested. Generally, plans offer employees a selection of diversified investment options, each with a different risk/return profile.
A direct comparison of open-end funds and closed-end funds will show that A) Both types of funds issue a fixed number of shares or units through an IPO B) Open-end funds have an actively managed portfolio but closed-end funds do not. C) Both types of funds redeem their shares at the closing NAV of the business day. D) There is an active secondary market for closed-end funds but not for open-end funds.
D) There is an active secondary market for closed-end funds but not for open-end funds. Closed-end funds have an active secondary market, while open-ends do not have an active secondary market. Open-end funds issue redeemable shares, which means investors purchase them directly from the fund company and sell them back directly to the fund company.
All the following statements about a community property account are true, except: A Income and appreciation in the account is equally owned by all owners B Each tenant owns an equal individual interest in the entire account C The joint tenants must be married D A community property account can be established in any state
D. A community property account can be established in any state A community property account is similar to a JTWROS (joint tenants with rights of survivorship) but can only be held by a married couple. This account is opened based on the community property laws of the state in which the couple resides. Both parties have equal ownership and rights to the income and appreciation in the account. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Which of the following situations is considered a 1035 exchange? A A customer wants to exchange a whole life policy for a variable annuity and have the benefits payable to a different person B A customer wants to exchange shares in a growth mutual fund for shares in an income mutual fund and both funds have different investment advisers C A customer wants to exchange an annuity policy for a life insurance policy D A customer wants to exchange a whole life insurance policy for a variable life insurance policy of a different insurer
D. A customer wants to exchange a whole life insurance policy for a variable life insurance policy of a different insurer A 1035 exchange is a tax-free exchange when accumulated cash values are transferred from one type of policy to another or one company to another. The tax-free exchange rules allow a person to exchange a life insurance policy for an annuity, but not to exchange an annuity for life insurance. Mutual fund shares do not qualify for the 1035 exchange. A life insurance policy being exchanged for another life insurance policy qualifies as a tax-free exchange. A whole life policy could be exchanged for an annuity, but not one written on a different person.
All the following statements describe a private placement, except: A An offering to accredited investors B Securities are restricted form resale for 6 months C Securities sold through an offering circular D Issuers file Form D to register with the SEC
D. Issuers file Form D to register with the SEC Accredited investors may purchase restricted stock through a private placement. The stock is delivered with an investment letter prohibiting the resale in the secondary market for a minimum of 6 months. While the issue is exempt from registration (it is an exempt transaction), full disclosure must be provided through an offering circular. To qualify for the exemption, issuers are required to file Form D with the SEC within 15 days of the first sale. Filing Form D is NOT the same thing as registering with the SEC.
The owner of a nonqualified variable annuity is prepared to retire and wants to annuitize but is unsure of how the payments will be taxed. Based on this information, all payments will be: A Entirely tax-free B Taxed in their entirety as ordinary income C Returned as earnings first and will be taxed as ordinary income, then the principal will be returned tax-free D Partially tax-free and partially taxed as ordinary income until the entire principal is returned, after which all payments will be fully taxable
D. Partially tax-free and partially taxed as ordinary income until the entire principal is returned, after which all payments will be fully taxable Once the contract is annuitized, the insurance company will begin making a stream of periodic payments. Each check will consist of a combination of principal and earnings as determined by the exclusion ratio. The principal, which has already been taxed, is considered the cost basis of the contract, and is returned tax-free. The earnings portion of the distribution is taxable as ordinary income in the year received. If the annuitant lives beyond the calculated life expectancy, the principal will be exhausted, and all remaining payments will be fully taxable.
1035 Exchange
IRC allows the exchange of an existing annuity contract for another without incurring taxes on the tax-deferred growth from the original contract. Life insurance to life insurance Annuity to annuity Life insurance to annuity Exchanges from annuity to life are not permitted under Section 1035 and are taxable.
7 business days of receipt
Once the variable annuity contract application is complete, the RR must promptly transmit the application package to their office of supervisory jurisdiction (OSJ) to be reviewed and approved by a principal of the firm