Series 6 Tidbits

An individual opens an account with your firm. She tells you that, upon her death, she wants any assets in the account to be divided equally among her three children. She also wants the ability to change the allocation in the event that conditions change and one of the children is in greater need than the others. Which of the following accounts will allow for her wishes? A) A discretionary account. B) Joint tenants with rights of survivorship. C) Individual TOD account. D) Tenants in common.

A TOD (transfer on death) account will meet this client's needs. With a discretionary account, the registered representative's power of attorney would end with the client's death.

If a complaint filed with FINRA charges a member or an associated person with violations of one or more of the Conduct Rules, which of the following codes governs its resolution? A) Business Conduct Code. B) Professional Practice Code. C) Code of Procedure. D) Code of Arbitration Procedure.

Code of Procedure. Any complaint charging that a member firm or an associated person violated one or more of the Conduct Rules is handled under the Code of Procedure.

Under the Investment Company Act of 1940, which of the following would be considered interested persons? An officer of an investment company. The cousin of an officer of an investment company. A shareholder who owns 5% or more of the investment company's shares. A public corporation of which the investment company owns 3% of the voting shares. A) II and IV. B) I and II. C) I and III. D) III and IV.

The correct answer is: I and III. The interested persons of an investment company include all of its affiliated persons and their immediate family members (not cousins). A company in which the investment company owns stock is not an interested person. A director with no other job with the fund than just sitting on the board is not an interested person.

An individual purchasing a flexible premium variable life contract should know which of the following? Timing and amount of premiums generally are discretionary. The death benefit will generally be higher than that of a comparable whole life policy. The face amount is fixed at the beginning of the contract. The performance of the separate account directly affects the policy's cash value. A) I and III. B) I and IV. C) II and IV. D) II and III.

The correct answer was: I and IV. A flexible premium policy allows the insured to determine the amount and timing of premium payments, provided minimums are met. Depending on the policy, the face amount (death benefit) is recalculated each year. It is intended that the death benefit receive some inflation protection, but this cannot be guaranteed. If separate account performance causes the cash value to drop below an amount necessary to maintain the policy in force, the policy lapses unless the requisite amount is received within 31 days.

An investor owns $10,000 of shares in ABC bond fund. Due to a change in his financial situation, he wishes to exchange the bond fund shares for shares in ABC's aggressive growth fund. Which of the statements below correctly describes the tax consequences of this action? A) The exchange is not taxable. B) The exchange is considered a taxable event that must be recognized in the current year. C) The exchange is taxable and the customer is also subject to a new sales charge on the aggressive growth fund shares. D) Ordinary income taxes are due on any appreciation realized on the bond fund shares.

The correct answer was: The exchange is considered a taxable event that must be recognized in the current year.

One of your customers set up a Section 529 plan for a child of one of his neighbors and contributed to it for some years. When the child reached age 17, it was obvious that he had no plans to pursue higher education and your customer decided to redesignate the account. Which of the following would be a permissible new beneficiary? A) The winner of an informal essay contest to be held among high-school aged children in the neighborhood. B) One of the children of another of your customer's neighbors. C) The original beneficiary's younger sister. D) One of the donor's own grandchildren.

The correct answer was: The original beneficiary's younger sister. There are few restrictions on who may be the first beneficiary of a Section 529 plan. However, if the beneficiary is redesignated, the new beneficiary must be a close family member of the first.

If a registered representative opens a joint account for three people, the registered representative should obtain information on: A) the tenant with trading authority. B) all of the tenants. C) the tenant with the lowest income. D) the senior tenant in the account.

The correct answer was: all of the tenants. If a registered representative opens a joint account for any number of people, the registered representative must obtain information on all of the tenants in the account.

The open-end investment company share price quoted in the newspaper is the: A) dealer's price. B) underwriter's concession. C) bid price. D) confirmed price.

The correct answer was: bid price. Newspaper quotes of mutual fund shares always show the net asset value (NAV), often referred to as the bid price.

A deferred compensation plan needs the prior approval of the: A) plan trustee. B) IRS. C) SEC. D) employer only.

The correct answer was: employer only. A deferred compensation plan is an arrangement between an employer and an employee. Deferred compensation plans do not require IRS approval (only qualified plans require it), and there is no formal plan funding.

Your new client is interested in purchasing corporate bonds. When speaking about the different risks associated with this investment, you explain that reinvestment risk is the risk that, between now and when the bond matures or is called, interest rates will: A) rise. B) adjust upward for inflation. C) fall. D) stay the same.

The correct answer was: fall. If interest rates decline, it becomes difficult for bond investors to invest the proceeds from the bond and maintain the same level of income and the same general risk level.

In past years, XYZ Securities has focused primarily on high-net-worth individuals acquired through word of mouth and has never advertised. Their target market has expanded, and they have decided to begin advertising to the public. Under the rules on communications with the public, filing of advertisements A) comes under the requirements appropriate to any FINRA member firm that has been in continuous operation for at least 2 years B) must be done 10 business days in advance for a period of 1 year C) is not required because this firm has been in business for more than 1 year D) may be done within 10 business days after first use

The correct answer was: may be done within 10 business days after first use Prefiling at least 10 business days in advance for the first year is required for firms within their first year of registration. Obviously, the primary target here is new firms, established firms (over one year old) may post-file within 10 business days of first use.

Under SEC Rule 498, a summary prospectus may be used in a mutual fund sales presentation resulting in a sale A) under no circumstances because the summary prospectus is only used to encourage potential investors to request the full prospectus B) only when the client does not request the statement of additional information C) only when the investor is able to access a statutory prospectus no later than the confirmation of the sale D) only when preceded or accompanied by the fund's full prospectus

The correct answer was: only when the investor is able to access a statutory prospectus no later than the confirmation of the sale SEC Rule 498 permits sales to be made using a summary form of the prospectus. An investor who purchases fund shares on the basis of the summary prospectus must be able to access a statutory prospectus no later than the confirmation of the sale. Delivery may be made online.

A registered representative must register as an investment adviser representative if he is: A) providing investment advice and charging a fee for the advice. B) making a stock recommendation. C) giving a seminar on investing strategies. D) teaching a college course in economics.

The correct answer was: providing investment advice and charging a fee for the advice. An individual who gives advice and charges a fee is required to register as an investment adviser representative.

Which of the following transactions would have to be reported on FinCEN Form 112? A) A 60-year-old customer directs his registered representative to liquidate $40,000 worth of growth mutual funds in his account and use the proceeds to purchase shares in a long-term bond fund. B) An investor purchases $5,000 worth of securities with twenty-four $500 postal money orders. C) A new customer brings $40,000 worth of securities in to his broker/dealer firm for deposit into his account. D) An investor purchases $40,000 worth of speculative and other low-grade bonds with a personal check.

Your answer, An investor purchases $5,000 worth of securities with twenty-four $500 postal money orders., was correct!. A cash or currency transaction totaling more than $10,000 on a single business day must be reported on FinCEN Form 112.

Your customer wishes to invest $25,000 using investment company securities as a means of diversification, but she is not comfortable with stock market risk. Which of the following fund types would be the LEAST appropriate recommendation? A) Balanced fund. B) Municipal bond fund. C) Blend/core fund. D) Government income fund.

Your answer, Blend/core fund., was correct!. One of the primary risks associated with blend/core funds is stock market risk because their portfolios consist only of equities, typically both value and growth stocks. Given the customer's discomfort with market risk, of those listed, a blend/core fund would be the least appropriate recommendation.

Which of the following securities is most affected by credit risk? A) Debentures. B) Warrants. C) Common stock. D) Preferred stock.

Your answer, Debentures., was correct!. Credit risk applies to debt securities only. It is the risk that an issuer may suffer financial failure and default on its obligation to an investor. Debentures (unsecured bonds) are thus subject to credit risk. Preferred stock, common stock, and warrants are equity securities and are not subject to credit risk because no payments have been promised.

Which of the following retirement plans would be advantageous for an older employee whose skills are essential to the operation of a corporation's business? A) Defined benefit plan. B) Traditional 401(k). C) Keogh plan. D) Roth 401(k).

Your answer, Defined benefit plan., was correct!. A defined benefit plan allows larger contributions to be made so that an essential employee can receive the incentive of larger retirement benefits than he would get from a defined contribution plan

SIPC provides coverage for which of the following securities held in a customer account? Common stock. Futures contracts. Rights and warrants. Precious metals. A) II and III. B) I and III. C) I and IV. D) II and IV.

Your answer, I and III., was correct!. SIPC provides coverage for up to $500,000 worth of securities and cash held in a customer account; all types of securities are covered. Futures contracts, however, are not securities, and precious metals (except for minted gold and silver) are commodities.

Which of the following are differences between the Code of Procedure and the Code of Arbitration Procedure? The Code of Procedure deals with violations of the Conduct Rules, whereas arbitration is used to settle disputes. Mediation is not required with the Code of Procedure but is mandatory with Arbitration. Code of Procedure decisions may be appealed, whereas decisions reached under Arbitration may not. Arbitration is used for violations that are more serious than those for which the Code of Procedure is used. A) I and III. B) I and II. C) III and IV. D) II and IV.

Your answer, I and III., was correct!. The Code of Procedure is used to deal with violations of the Conduct Rules, whereas the Code of Arbitration is used to settle disputes. Adverse decisions and penalties under the CoP can be appealed to the National Adjudicatory Council, then to the SEC, and, eventually, to the federal appellate court system. Settlements under arbitration are not subject to appeal, and mediation is not mandatory.

A registered representative may arrange the purchase of an interest in a privately offered stock for a friend, for which she will receive no direct or indirect compensation, if the representative: gives written notification to her broker/dealer after the purchase has been paid for. gives written notification to her broker/dealer before the transaction. provides all documents and information requested by her broker/dealer. obtains written permission from her broker/dealer before the transaction. A) I and IV. B) III and IV. C) II and III. D) I and III.

Your answer, II and III., was correct!. In a private securities transaction where there is no direct or indirect compensation to the registered representative, only written notification to the broker/dealer is required before the transaction. The employer may require certain documentation, and if requested, it must be furnished. Permission is only necessary when there is to be compensation.

Which of the following might bring about a change in the NAV of a mutual fund? A large number of redemptions. The fund pays a dividend. The portfolio increases in market value. A large number of shares are purchased. A) II and III. B) I and IV. C) II and IV. D) I and III.

Your answer, II and III., was correct!. When a mutual fund pays a dividend, cash, an asset, is no longer held by the fund. This would reduce the amount of assets when computing net asset value. On the other hand, if there is an increase in the value of the holdings of the fund, assets increase causing a corresponding increase to the NAV. Because purchases and redemptions are made at NAV, the fact that investors may be buying or redeeming has no impact on the fund's NAV.

Mr. Jones is 45 years old and converts $50,000 from a traditional IRA into a Roth IRA in his name. What are the consequences of this conversion? Because Mr. Jones is under age 59 ½, a 10% penalty will be paid on the distribution. $50,000 of income must be added to Mr. Jones tax return. Any growth from the original investment is subject to capital gains taxes. Mr. Jones may make the standard IRA contribution in addition to the conversion amount. A) II and III B) I and II C) II and IV D) I and III

Your answer, II and IV, was correct!. Money converted from a traditional IRA into a Roth IRA is subject to ordinary income taxes, not capital gains taxes. There is no 10% penalty on the conversion, regardless of age; and moving money from one IRA to another has no impact on the ability to make an annual contribution.

For which of the following would you have to open a cash account? IRA. Woman opening a trading account and naming her brother as the beneficiary via a TOD designation. UGMA. Trust account. A) II and III. B) I and IV. C) I and III. D) II and IV.

Your answer, II and IV., was incorrect. The correct answer was: I and III. Corporate and personal retirement accounts and custodial accounts must be opened as cash accounts. A trust account will usually be opened as a cash account but may allow margin if specifically provided for in the trust agreement.

If a broker/dealer firm is fined as a result of a complaint brought by the Department of Enforcement, to which of the following bodies may the firm first appeal? A) United States district court. B) National Adjudicatory Council. C) Office of Hearing Officers. D) National Arbitration Panel.

Your answer, National Adjudicatory Council., was correct!. The National Adjudicatory Council handles first appeals regarding decisions made by the panel hearing the case.

Which of the following types of mutual funds would be most likely to have capital appreciation as its stated objective? A) Specialized. B) Balanced. C) Income. D) Municipal bond.

Your answer, Specialized., was correct!. A specialized fund invests at least 25% of its assets in one particular industry or region. Generally, its main objective is capital or price appreciation. Income funds are looking for income, municipal bond funds for tax-free income, and balanced funds for capital preservation.

Which of the following securities is issued at par? A) Treasury notes. B) Treasury receipts. C) Treasury STRIPS. D) Treasury bills.

Your answer, Treasury notes., was correct!. Of the securities shown, only treasury notes issue at par and pay semiannual interest. The others issue at a discount, pay no interim interest, and are redeemed at par.

Which of the following would be appropriate recommendations for a customer looking for income? A) Income bond B) Warrant C) Utility fund D) Long call option

Your answer, Utility fund, was correct!. Many securities are purchased for income; these include stocks, bonds and mutual funds that pay consistent dividends such as a utility fund. The other answer choices are not purchased for income purposes: A long call option gives the right to buy stock at a designated price. An income bond is issued by a company coming out of bankruptcy and pays interest only if the corporation has enough income. A warrant is a certificate granting its owner the right to buy securities from the issuer at a specified price, normally higher than the market price when issued.

Your customer has his own sole proprietorship. He and his wife are the only full-time employees. He would like to start a retirement plan for his business but would like to have access to the funds in the account by means of loans. You would recommend: A) a traditional IRA. B) a solo 401(k) plan. C) a Keogh Plan. D) a Roth IRA.

Your answer, a solo 401(k) plan., was correct!. The only plan that allows "loans" is the 401(k). The "solo" is used for sole proprietorships.

The New York Stock Exchange is characterized as a(n): A) primary market where new issues are introduced at a preset ask price. B) auction market where the lowest bid and highest ask prices prevail. C) auction market where the highest bid and lowest ask prices prevail. D) primary market where new issues are introduced at a preset bid price.

Your answer, auction market where the highest bid and lowest ask prices prevail., was correct!. The NYSE is an auction market, in which the highest bids and the lowest ask prices represent the current best market for a security.

All of the following are money market instruments EXCEPT: A) Treasury bonds maturing within the next year. B) warrants expiring within three months. C) negotiable certificates of deposit. D) banker's acceptances.

Your answer, banker's acceptances., was incorrect. The correct answer was: warrants expiring within three months. Money market instruments are liquid debt securities maturing within a year. Warrants are equity securities.

If an investor wishes to open a cash account in her name only and allow her husband to make trading decisions as well as withdraw cash and securities, she must instruct her broker/dealer to open a: A) cash account with limited power of attorney. B) cash account. C) cash account with full power of attorney. D) margin account.

Your answer, cash account with full power of attorney., was correct!. For a person other than the account owner to be able to withdraw assets, a full power of attorney is required. A limited power of attorney allows someone other than the account owner to trade in the account, but not to withdraw assets.

During a period of suspension, a member must: A) restrict activities with customers solely to investment companies. B) be treated as a nonmember by other members. C) restrict activities with member firms solely to investment banking. D) have no securities dealings of any kind.

Your answer, have no securities dealings of any kind., was incorrect. The correct answer was: be treated as a nonmember by other members. A suspended member is considered a nonmember firm while the suspension is in effect. Any firm that is not a member (for any reason) must not be granted any of the rights or privileges of FINRA membership.

A closed-end investment company may issue each of the following EXCEPT: A) bonds. B) common stock. C) municipal bonds. D) preferred stock.

Your answer, municipal bonds., was correct!. Closed-end investment companies may issue both common and preferred shares as well as debt securities for capitalization. Only municipalities issue municipal bonds.

A member broker/dealer sells shares of an investment company that it knows directs brokerage for its portfolio to them and to other broker/dealers based on share sales by those members. For the member, this would be: A) allowed without restriction. B) allowed only when the investment company offers the broker/dealer discounted commissions and mark-ups. C) prohibited under all circumstances. D) prohibited only if an unusual number of transactions is involved.

Your answer, prohibited under all circumstances., was correct!. Selling shares of the fund when the member is aware that a policy exists to direct brokerage to broker/dealers based on shares sold is prohibited. This is also known as the antireciprocal rule.

Filing with FINRA is required for mutual fund-related A) correspondence B) independently prepared reprints C) retail communication D) institutional communications

Your answer, retail communication, was correct!. Filing with FINRA is required only for retail communication. The other items are not filed, although they are subject to spot-checking requirements.

A 403(b)(7) plan is a A) nonqualified retirement plan for the public sector. B) qualified retirement plan available to students of private and public schools. C) type of Simplified Employee Pension Plan or SEP. D) type of tax-sheltered annuity available through mutual fund companies.

Your answer, type of tax-sheltered annuity available through mutual fund companies., was correct!. A 403(b)(7) plan, a type of tax-sheltered annuity, allows employees to set up retirement plans directly with mutual fund companies.

If a broker/dealer decides to give a $300 bonus to the registered representative that obtains the most new clients in a firm sponsored sales contest, this arrangement is: A) unacceptable, since it involves a gift of material value. B) unacceptable, since the broker/dealer is creating an incentive likely to cause suitability issues. C) acceptable. D) acceptable if the FINRA approves.

Your answer, unacceptable, since it involves a gift of material value., was incorrect. The correct answer was: acceptable. A sales contest for employees of the member firm is strictly up to the firm itself and is not a violation of FINRA rules. If the contest was specific to a particular fund or fund family, that would be a problem as suitability may take a back seat to winning the contest.

A 78-year-old retiree had a $100,000 CD maturing and was dissatisfied with current yields on new CDs. Aside from Social Security and a small monthly pension, the $100,000 is his total potential source of income. The registered representative recommended investing the funds in a single premium immediate variable annuity, allocating funds to the separate account as follows: $10,000 Medical Technology, $40,000 High-Yield Corporate Bond, and $50,000 Growth & Income. The registered representative's recommendation is: A) suitable because the portfolio mix seems likely to offer increased income to the customer. B) suitable provided the customer agrees with the recommendation. C) unsuitable because of the aggressive nature of the portfolio choices. D) unsuitable because of the lack of diversification of the portfolio choices.

Your answer, unsuitable because of the aggressive nature of the portfolio choices., was correct!. With the limited assets and income from Social Security and pension, a variable annuity recommendation for this client should leave out technology stocks and high-yield bonds and include high-grade bonds and/or blue-chip stocks.