Series 6 closed book 5

What is the maximum coverage afforded to an investor under SIPC? $500,000 per account $250,000 per account $500,000 per separate customer of which $250,000 may be cash $500,000 per separate customer and $250,000 in cash

SIPC protects customers in the case of a brokerage firm's bankruptcy. The maximum coverage afforded to an investor under SIPC is $500,000 per separate customer of which $250,000 may be for cash. (5-38)

All of the following documents are needed to open an IRA EXCEPT a(n): Power of attorney Beneficiary designation form Adoption agreement New account form

a A power of attorney is required for a discretionary account. The question does not state that discretionary authority will be granted. All IRAs must specify a beneficiary to receive the assets in the account in the event of the account owner's death. An adoption agreement includes the account owner's name, address, Social Security number, date of birth, and the type of account (e.g., a rollover IRA, annual contribution IRA). All types of accounts require a new account form. (5-7)

Which of the following statements is TRUE concerning the projected performance of a mutual fund? Projecting the performance of a mutual fund is prohibited under FINRA's Conduct Rules. Projections of not more than ten years forward are permitted if a growth rate of not more than 12% is used. Projections are permitted if the hypothetical growth rate is supported by an actual growth rate over the previous 12 months. Projections using a 12% growth rate are permitted if a projection using a 0% growth rate is also provided.

a FINRA's Conduct Rules prohibit the use of projections and predictions when discussing mutual funds. Illustrations showing the effects of dollar cost averaging, tax-free compounding, or the hypothetical growth in a variable life insurance contract are permitted under specific FINRA guidelines. For variable life insurance policies, projections using a 12% growth rate are permitted if a projection using a 0% growth rate is also provided. (11-13)

A customer buys 100 shares of an investment company and pays the market price plus a commission. The investor has purchased: Closed-end investment company shares Open-end investment company shares No-load fund shares None of the above

a Open-end investment company shares are purchased at their net asset value (bid price), plus a sales charge, if there is one. Closed-end investment company shares are purchased in the same manner as common stock; the buyer pays the market price plus a commission. (3-18)

The management fee a mutual fund pays to its investment adviser is considered: An operating cost of the fund Part of the acquisition cost (sales charge) the purchaser must pay A cost to the sponsor (distributor) of the fund A nonrecurring expense of the sponsor

a The management fee paid to a fund's investment adviser is considered part of the operating costs of the fund. (4-16, 4-17)

When a mutual fund distributes a dividend or capital gain to a shareholder, the mutual fund must notify the shareholder of the: Tax treatment of the distribution Underlying securities that generated the distribution Reinvestment policy of the fund None of the above

a The mutual fund must notify the shareholder if the distribution comes from dividends or capital gains. (6-7)

An open-end investment company with the objective of growth wishes to change its investment objectives to growth and income. This may be done with: A majority vote of the outstanding shares A majority vote of the outstanding shareholders At least 90% consent of the outstanding shareholders The unanimous vote of the Board of Directors

a The objectives of an open-end investment company may be changed if a majority of the shares outstanding are voted in favor of the change, not a majority of shareholders. (3-9)

An RR sells $7,000 of a mutual fund to a client and has the client sign a letter of intent for $10,000, the first breakpoint. If the net asset value of the fund is $15.00 per share and the fund has a sales charge of 8% (7% at the breakpoint), approximately how many shares would the investor receive if the RR's compensation is $0.10 per share? 434 shares 431 shares 429 shares 427 shares

a When a client signs a letter of intent, the sales charge on the purchase is based upon the value of the shares as described in the letter rather than the amount of the first purchase. In this case, the sales charge applied to the initial $7,000 purchase is based on the $10,000 letter of intent, and is therefore 7%. $7,000 x 7% = $490. After deducting $490 for the sales charge, the remaining $6,510 will be invested at $15 per share. $6,510 / $15 per share = 434 shares. (4-28, 4-29)

One month after an individual purchased 250 shares of an open-end investment company, there was a long-term capital gain distribution. This payment would be taxable to the individual as: A long-term capital gain A short-term capital gain Ordinary income Tax-free if the distribution is reinvested

a When a mutual fund makes a capital gain distribution to a shareholder, the shareholder's holding period is determined by the investment company's holding period. The length of time the shareholder held the shares is not relevant. (6-7)

Miriam received a special bonus of $1,212.50 and decided to invest the entire amount in her growth mutual fund account. If the offer price Miriam was charged was $100 per share, which of the following results would occur in her account? 12.125 additional shares would be added to the account. 12 additional shares would be added to the account and she would receive a refund of $12.50. 13 additional shares would be added to the account and she would receive a bill for $87.50. Miriam's order would not be executed until she remitted a check for an exact multiple of the offer price.

a One of the benefits of mutual fund investing is the ability to purchase fractional shares. As long as the investor meets any fund-imposed minimum, purchases may be for any dollar amount. Most funds calculate fractional shares to three decimal places, as in choice (a). (4-22)

A purchaser representative must be: An employee of the issuer Knowledgeable and experienced in financial and business matters A registered representative A registered investment adviser (RIA)

b A purchaser representative must be knowledgeable and experienced in business and financial matters. His function is to assist a nonaccredited investor in evaluating the risks of the product. A purchaser representative may not be an affiliate or an employee of the issuer unless he is related to the client. (10-6, 10-7)

An RR has a married couple for clients who are looking to invest for retirement, but also want a current tax deduction. The registered representative would suggest a: Roth IRA Traditional IRA Coverdell IRA 529 plan

b Both traditional and Roth IRAs provide retirement benefits, but only a traditional IRA offers the possibility of tax deductions. A Coverdell Savings Account (previously known as an Education IRA) and a 529 plan are tax-advantaged accounts that are used to meet a child's higher education needs. (9-15)

All of the following statements concerning hedge funds are CORRECT EXCEPT the funds: May engage in short selling Must register under the '40 Act if offered to U.S. residents May borrow funds in an attempt to boost returns May concentrate assets into a few positions

b Hedge funds are investments which resemble mutual funds but are typically only offered to very wealthy investors. Hedge funds often employ aggressive financial strategies such as short selling, the use of leverage (borrowed funds), and placing large bets on individual companies or sectors of the market. These funds are not generally required to register with the SEC due to the accredited status of their investors. (4-39, 4-40)

A SIMPLE plan may only be established by an employer: In the public sector With 100 or fewer employees With 500 or fewer employees That also offers a 401(k) plan

b Only companies with 100 or fewer employees that do not offer any other type of retirement plan may establish a SIMPLE plan. (9-15)

One of your clients, Sam Cashmuch, age 62, has been investing $2,000 per month in an account for the benefit of his daughter Casey. He has been funding this account for the last 15 years. Sam is investing in a family that offers low load funds whose sales charge is a modest 2.5%. A few days ago your client informed you that his daughter Casey has gone off to study in London at Le Institute de Haggis, Bangers, and Mash, a prestigious culinary institute specializing in traditional British Isles cuisine. Sam confides that his daughter needs $800 per month to help with the city's exorbitant living expenses. Your client wants to help his daughter and seeks your advice. What would you recommend? Keep investing the $2,000 and begin a periodic distribution plan to fund the rent shortfall Reduce the investment to $1,200 per month and send the difference to Casey Tell Sam to continue to invest $2,000 per month and withdraw the balance from his 401(k) plan at work since there would be no early distribution penalty levied based on Sam's age To avoid taxation, instruct Sam to do a 1035 exchange and wire Casey the entire principal balance of the account

b RRs should not recommend that a client simultaneously purchase and liquidate shares within the same fund family. In this question, the investor is paying a sales charge when purchasing shares and may be subject to a redemption fee when liquidating. The best choice would be to have Sam reduce his contributions and send the difference directly to his daughter. Even though Sam is older than 59 1/2, withdrawals from a 401(k) plan typically trigger taxable events. A 1035 exchange is used to move assets from one tax-deferred vehicle to another, not to take distributions. (4-39)

Refunds of sales charges will cease in a spread-load contractual plan after: The first payment is made 45 days 18 months There is always a partial refund of sales charges in spread-load plans

b Spread-load plans are subject to the 45-day right of withdrawal, but not the 18-month rule which allows for a partial refund of the sales charge paid for up to 18 months. The 18-month rule applies only to front-end load plans. (4-35)

Mr. Brown owns 3,000 shares of XYZ Fund, an open-end investment company, and asks the fund to start him on a fixed-time withdrawal plan. He wishes to receive monthly payments for 10 years. The net asset value of the fund is $29.50. Mr. Brown's first monthly check will be for: $300.00 $737.50 $885.00 $8,850.00

b Under a fixed-time withdrawal plan, the individual will receive payments that will exhaust the principal in the plan during the stated period of time. In this question, the planholder will receive 120 payments (12 monthly payments each year x 10 years). The total value of his portfolio is $88,500 (3,000 shares x $29.50). Dividing the total value of the portfolio ($88,500) by the number of payments over the life of the plan (120 payments), will give you the amount of the first monthly payment ($737.50). (4-39)

A registered representative is asked by the sponsor of a limited partnership to sell partnership units to his clients. Since the partnership is not being sold through the representative's broker-dealer, the sponsor will compensate the representative directly. Which of the following statements is TRUE of this situation? Registered representatives may not participate in such transactions. In order for the representative to participate, the broker-dealer must give written approval for the transaction and must record the transaction on its books. The registered representative may participate if the sponsor is associated with a FINRA member. The registered representative may participate if the partnership is being sold as a private placement.

b A registered representative who wishes to participate in securities transactions outside the normal scope of her employer's business (private securities transactions) must notify the employer in writing. Failure to do so is known as selling away. If the representative is to be compensated for the transaction, the employer must approve or disapprove in writing. If approved, the transaction must be recorded on the books of the employing broker-dealer. If the representative will not be compensated for the transaction, the employing broker-dealer must provide written acknowledgment of the employee's notice, and may place conditions on the participation of the employee in the transaction. (11-9)

A musician earns $80,000 in a given year and wishes to set up an IRA for himself and his unemployed wife. He sets up an IRA for himself and a spousal IRA for his wife and makes a contribution into both. The contributions can be made in all of the following manners EXCEPT: $5,500 deposited in each account $5,800 deposited in one account and $800 in the other account $1,700 deposited in one account and $5,500 in the other account $1,500 deposited in one account and $750 in the other account

b If an individual has a nonworking spouse, he may contribute an additional $5,500 into a spousal IRA, making the maximum contribution $11,000. The contribution may be made into the two accounts in any manner, as long as neither account receives more than $5,500. (9-8)

A wholesaler for a mutual fund complex has given an RR at another firm a preapproved brochure regarding the tax benefits of variable annuity investing. Which one of the following statements concerning this activity is CORRECT? The brochure cannot be used by an RR of another firm The brochure is not required to be approved by the RR's principal The brochure must be approved by the RR's principal The brochure must be approved by the RR's principal and filed with FINRA

b Some examples of retail communications include advertisements, sales literature, brochures, independently prepared reprints, as well as telemarketing and sales scripts. Retail communications that relate to mutual funds or variable products must be approved by a principal prior to use and filed with FINRA within 10 business days of first use. Retail communications do not require principal preapproval if another firm has previously filed the material with FINRA and it has not been materially altered. In this case, the brochure has already been filed by the wholesaler's firm (preapproved), therefore, an RR of another firm is not required to obtain a principal's approval. (11-13)

Which of the following choices best describes the price a mutual fund investor will receive when redeeming shares? Bid price of the previous day's close Current offering price Next computed bid price on the day the shares are redeemed Next computed asked price on the day the shares are redeemed

c A mutual fund investor who redeems fund shares will receive the next computed bid price on the day the shares are redeemed. (4-38)

Richard Smith was a variable life insurance policyholder who died. Which of the following statements best describes the tax consequences of his variable life insurance policy? There are no tax consequences to his beneficiary and the death benefit is not included in his taxable estate. There are gift taxes due from his beneficiary in the year he died. The value of the policy will be included in Richard's estate for tax purposes. The policy proceeds are federally taxable to the beneficiary.

c Although there are no tax consequences to Richard Smith's beneficiary, the death benefit is included in his estate for tax purposes. (7-26)

Which of the following securities is LEAST likely to be included in the portfolio of an income fund? Common stock of a consumer products company with a current yield of 4% Debentures of an industrial company, rated BB Shares of a recent IPO of a rapidly expanding telecommunications start-up Cumulative preferred stock of an electric utility

c As its name indicates, an income fund invests in a portfolio of income-producing securities. This can include dividend-paying common stocks [choice (a)], as well as bonds and preferred stocks [choices (b) and (d)]. Stocks of growth companies [choice (c)] rarely pay dividends; earnings are instead reinvested in the expanding business. (4-3, 4-9)

Joanne is a 50-year-old woman who just left the job she had held for 20 years. She has a substantial amount accumulated in her 401(k), which she is rolling over into an IRA. She is planning to use this money to retire in 12 to 15 years. Which of the following investments would be the most appropriate for her? A bonus variable annuity A fixed annuity A stock fund A municipal bond fund

c Joanne's time horizon is long enough to make a stock fund an appropriate choice for her IRA. Joanne is already receiving the benefits of tax-deferred growth, which is the reason that a variable annuity (choice a) is not an appropriate option. Generally speaking, buying a variable annuity for a tax-deferred retirement account is often an expensive way of needlessly duplicating the tax benefits that most of these accounts already provide. Municipal bond funds are for investors seeking tax-exempt income. (4-2)

Which of the following statements is CORRECT concerning borrowings by a mutual fund? This practice is strictly prohibited since mutual funds are prohibited by SEC statute from buying on margin. This practice is permitted only if the fund obtains a hedge fund waiver exemption from the SEC. This practice may be permitted if the fund has a 3-to-1 coverage ratio. Due to its risky nature, this practice requires the consent of at least 75% of the fund's shareholders.

c This is a difficult question that depends on the interpretation of the word borrowing. While mutual funds are typically prohibited from trading on margin, they are allowed to temporarily borrow funds to meet an unexpectedly large number of client redemptions. These redemptions may occur at any point during the year. Generally, when borrowing, funds must have assets securing the loans equal to 300% of the borrowed amount(s). 300% may be expressed as a 3-to-1 loan coverage ratio on the Series 6 Examination. (3-2)

Ellen is 70 1/2 and her husband Jim is 75. Jim is retired and has no earned income, but Ellen earned $7,400 last year. They would like to invest the money in a Roth IRA, but they are not sure that this is permitted. You would advise them that: Neither can invest in a Roth IRA due to their ages. Ellen may invest $6,500 in a Roth IRA. They may each make contributions to a Roth IRA up to a total of $7,400, as long as neither account receives more than $6,500. Ellen may invest in a traditional IRA, but the contribution would not be tax-deductible. I only II only II and III only II, III, and IV only

c Even individuals who have earned income may not invest in a traditional IRA past age 70 1/2. However, there is no age limit on contributions to Roth IRAs, as long as the individual has earned income. Married couples may make contributions to a Roth IRA even if only one has earned income. Generally, a couple may contribute a total of up to $11,000 or the amount of their earned income, whichever is less, to the two accounts, as long as not more than $5,500 is contributed to either account. For individuals above age 50, the annual contribution maximum is $6,500 per person. (9-14)

An investor has purchased a Bristol County Public Power System revenue bond. Which of the following statements is TRUE concerning this investment? Earnings from the bond are exempt from federal, state, and local taxes. Payment of principal and interest is ultimately the responsibility of Bristol County. If the power system declares bankruptcy, the bonds will go into default. The assets of the power system secure the bond.

c Interest from a revenue bond (a type of municipal bond) is exempt from federal income tax. However, it is generally exempt from state and local taxes only if purchased by a resident of the state of issuance. In addition, a revenue bond is backed by a stream of income from a specific project or facility. Unlike a general obligation bond, it is not backed by a general promise by the issuer to repay the debt. In this example, only the revenue (not the assets) of the power system back the bonds. If the power system cannot produce enough revenue to pay the bond's interest and/or principal, there will be a default. Bristol County is not obligated to use any other funds to make payments on the bonds. (2-39)

Which of the following statements is/are TRUE regarding variable life insurance policies? Insurance regulators have the right to disapprove contracts between the separate account and its investment adviser. Changes in the investment policy of the separate account must be approved by shareholders. The managers under specific circumstances may reject motions passed by shareholders. I only II only I and II only I, II, and III

d All of the statements listed regarding variable life policy owners are correct under the Investment Company Act of 1940. If a shareholder motion violates any provisions of state insurance law, the managers of the separate account have the right to reject the motion. The insurance regulators with jurisdiction over the variable life company have the right to disapprove an advisory contract between the separate account and its portfolio manager. (7-22)

Two similar companies issue bonds at the same time. One company issues convertible bonds and the other issues nonconvertible bonds. Which two of the following statements are TRUE? The convertible bonds will probably offer a higher coupon rate. The convertible bonds will probably offer a lower coupon rate. The convertible bonds will probably have a higher current yield. The nonconvertible bonds will probably have a higher yield to maturity. I and III I and IV II and III II and IV

d Convertible bonds normally have a lower coupon rate than nonconvertible securities. The convertible bonds pay less interest and offer lower yields because the convertible feature gives individuals the ability to become stockholders at their discretion. Since the issuer is giving bondholders this advantage, it can offer a lower coupon rate. (2-20)

An investor is reading prospectuses for several mutual funds. If the investor would like to compare how efficiently the funds are operated, which of the following sections of the prospectuses should be consulted? Investor Services How to Buy Shares Fund Management Fees and Expenses

d Every mutual fund prospectus must contain a section discussing fees and expenses. This section must include certain standard items, including shareholder fees (such as sales loads), annual fund operating expenses (including 12b-1 fees), and a table showing the total cost of owning the fund over one-, three-, five-, and ten-year periods (based on a 5% return assumption). Because the information is presented in a standard format, investors can easily compare this information between funds. (3-5)

When selling a mutual fund under the spread-load and front-end load contractual plan methods, a registered representative should explain to the client that: The client can cancel the plan within 45 days and receive a full refund of the sales charges The maximum sales charge over the life of the plan cannot exceed 9% Under the spread-load method there is no refund of the sales charges if the fund is terminated after 45 days Under the 50% front-end load method there is no refund of the sales charge if the fund is terminated after 18 months I only II and III only I, III, and IV only I, II, III, and IV

d Under both the spread-load and front-end load contractual plans, the client can receive a full refund of all sales charges if the plan is terminated within 45 days of receiving notice of that right. Under both plans, the maximum sales charge over the life of the plan may not exceed 9%. Under the 50% front-end load method, there is a partial refund of sales charges between the 45th day and the end of the 18th month, while under the spread-load method, there is no refund of sales charges after the 45-day period has passed. (4-35)

Mary Smith invests $15,000 in DEF Growth Fund. Two years later, she invests an additional $10,000. In determining the quantity of securities owned for sales charge purposes, the fund could use all of the following methods EXCEPT: The current value of the original purchase plus the current value of the new purchase The offering price of the original purchase plus the offering price of the new purchase The higher of the current value of both purchases or the offering prices of both purchases The higher of the current value of the new purchase or the offering price of the new purchase

d Under rights of accumulation, the sales charge on the purchase of a mutual fund should be based on the aggregate quantity of those securities presently purchased and those still owned by the investor. In determining the quantity of securities owned, a fund may use either the current value of such securities, the total purchases at the offering prices, or the higher of the current value or the total purchase. (4-29)

While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a: Fixed number of annuity units Fixed number of accumulation units Varying number of annuity units Varying number of accumulation units

d When investors buy into a variable annuity, they are purchasing accumulation units. Once a contract has been annuitized, distributions are made by liquidating annuity units. Since the value of the subaccounts will fluctuate, a client investing $1,000 per month potentially will buy a different number of accumulation units with each purchase. (8-12)