Series 6

The day of settlement for a U.S. Treasury security is: 2 business days after the trade date 2 calendar days after the trade date 1 business day after the trade date The same day as the trade was executed

1 business day after the trade date For trades involving U.S. Treasury securities, settlement is one business day after the trade date (T + 1).

XYZ Mutual Fund, an open-end investment company, has an NAV of $20 and a public offering price of $21.40. The prospectus states that the sales charge for purchases of fund shares of $25,000 through $49,999 is 4%. Approximately how many shares can the customer buy for $35,000? 1,600 shares 1,635 shares 1,680 shares 1,750 shares

1,680 shares To compute the number of shares that can be purchased, first determine how much of the investment will go to the sales charge. This amount is $1,400 ($35,000 investment x 4% sales charge). This leaves $33,600 for purchasing shares. The investor will purchase 1,680 shares ($33,600 divided by $20 NAV per share). You do not divide by the public offering price since it includes a sales charge and you have already deducted $1,400 in sales charges.

A registered representative is looking to sell a client Class B shares with a 7-year contingent deferred sales charge (CDSC). Which of the following representations is appropriate? "These shares will outperform Class A shares because you don't have to pay a sales charge" "These shares are just like a no-load as long as you hold them for at least 7 years" "All of your money goes to work since there is no up-front sales charge" "These are the best types of shares to buy"

"All of your money goes to work since there is no up-front sales charge" Registered representatives may never refer to Class B shares or any other loaded shares as no load. To claim one share class will outperform another is unacceptable since relative performance is based on market conditions and the effect of potentially differing ongoing expenses over the client's holding period. An RR's job is to explain all of the share classes available as opposed to simply recommending a certain type as best. The only factual statement is "there is no up-front sales charge." The RR should explain that this feature comes with a price—potentially higher ongoing costs when compared to Class A shares.

A retired teacher had participated in a tax-sheltered annuity. Contributions made on her behalf into the plan totaled $100,000. This year she received a lump-sum payment from the annuity of $160,000. How is the distribution taxed and what is her cost basis? $60,000 is taxed as ordinary income and $100,000 is returned to her tax-free as it is her cost basis $60,000 is taxed as a long-term capital gain and $100,000 is returned to her tax-free as it is her cost basis $160,000 is taxed as ordinary income and she has a zero cost basis $160,000 is taxed as long-term capital gain and she has a zero cost basis

$160,000 is taxed as ordinary income and she has a zero cost basis Tax-sheltered annuities (403b plans) provide deductible contributions and tax-deferred growth. Since the entire amount has not been subject to taxation the entire amount is taxable when distributed.

A 60-year-old widow died and her brother found the paperwork regarding her variable life policy. After reviewing the policy, he discovered that it had a cash value of $190,000 and a current death benefit of $250,000. If the policyowner had taken out a $20,000 policy loan, how much would go to her stated beneficiary? $190,000 $230,000 $250,000 $440,000

$230,000 If a variable life insurance policyholder dies, the beneficiary will receive the current death benefit minus any loans that are outstanding.

An investor sells 100 shares of DPM at $18 per share for a 12-point loss. Twenty days later, the investor makes a new purchase of 100 DPM at $30. The cost basis of the new purchase is: $12 $18 $30 $42

$42 When an investor sells securities for a loss, the investor must wait more than 30 days before repurchasing the same (or substantially the same) security or the loss will be currently disallowed. In this example, the investor waits less than 31 days, and the repurchase of DPM disallows the 12-point loss. Instead, the loss is added to the purchase price of the new shares, making the cost basis $42 ($30 + $12). Had the investor waited at least 31 days, the 12-point loss would have been recognized and the cost basis of the new shares would have been $30.

An investor initially purchased 100 shares of PDQ Balanced Fund for $3,000. She received $200 in dividends and $350 in capital gains distributions, which were reinvested in 25 additional shares. The customer eventually redeemed all the shares in the account for $4,000. The redemption resulted in a: $1,000 gain $650 gain $450 gain No gain or loss if the funds are reinvested within 60 days

$450 gain The $200 of reinvested dividends and $350 in reinvested capital gains distributions would constitute the cost basis of the 25 additional shares. The cost basis of the original shares was the purchase price of $3,000. The total basis of $3,550 subtracted from the sales proceeds of $4,000 would result in a gain of $450. Some investors neglect to include the amounts reinvested as part of the basis of shares that are redeemed. These amounts are important to include since the dividend and capital gains distributions were already taxed in the year they were reinvested.

Simplified arbitration is a process used for disputes involving: $50,000 or less in value $250,000 or less in value Only FINRA members Only non-FINRA members

$50,000 or less in value

A retired teacher had been participating in a nonqualified variable annuity. She deposited $10,000 into the annuity and now receives a lump-sum payment from the annuity of $16,000. How is the distribution taxed, and what is her cost basis? $6,000 is taxed as ordinary income and $10,000 is returned to her tax-free as it is her cost basis $6,000 is taxed as long-term capital gain and $10,000 is returned to her tax-free as it is her cost basis $16,000 is taxed as ordinary income and she has no cost basis $16,000 is taxed as long-term capital gain and she has no cost basis

$6,000 is taxed as ordinary income and $10,000 is returned to her tax-free as it is her cost basis Contributions made into nonqualified variable annuities are made in after-tax dollars. When a contribution is made in after-tax dollars, it constitutes an individual's cost basis in the plan. Here, the retired teacher's $10,000 in contributions is her cost basis. Anything paid to her above her cost basis ($6,000 in this example) will be treated as ordinary income.

Bill has a mutual fund with a net asset value totaling $12,000. If he has invested a total of $8,000 with a 7% sales charge and is beginning an 8% annual withdrawal, his first monthly check will be: $49.60 $53.33 $74.40 $80.00

$80.00 An 8% annual withdrawal on an initial balance of $12,000 would be $960 ($12,000 x .08). The monthly payment would be found as follows: $960 / 12 = $80. Note that the total investment of $8,000 and the 7% sales charge are smoke—information that is not relevant to the solution of the problem.

All of the following securities may be found in the portfolio of a money-market mutual fund, EXCEPT: ADRs BAs T-bills Commercial paper

ADRs American Depositary Receipts (ADRs) are a convenient method for investing in the common stock of foreign companies. Since they are an equity investment, they would not be held in the portfolio of a money-market mutual fund.

When making a recommendation of a high-risk mutual fund to a customer, which of the following customer details is of LEAST importance? Financial status Tax status Investment objectives Ability to sustain a large loss

Ability to sustain a large loss Prior to executing a recommended transaction for a customer, FINRA requires an RR to make a reasonable effort to obtain a customer's financial status, tax status, investment objectives, and "such other information used or considered to be reasonable ... in making recommendations to the customer." In this question, the choice of being able to sustain a large loss, is the best answer since it is not explicitly listed in the FINRA rule and a person's ability to sustain a loss does not, in itself, justify the recommendation of a risky security.

The first step taken when a registered representative is informed of a client's death is: Open orders are cancelled Assets are frozen Account is marked deceased Immediate family members are notified

Account is marked deceased As a result, all open orders are cancelled and the assets are frozen until the necessary documents attesting to the death are received.

A broker-dealer would be required to send which of the following documents to customers? Performance reports Account statements A summary of capital gains and losses A list of services provided by the firm

Account statements Broker-dealers are required to deliver to customers an account statement. Performance reports are generally provided to customers of investment advisers. These performance reports are used to compare the customer's return (usually on a quarterly basis) to an index such as the S&P 500.

Securities purchased under a Rule 147 exemption may be sold to an out-of-state resident: Immediately After 30 days After three months After six months

After six months SEC Rule 147 and Rule 147A of the Securities Act of 1933 provides an exemption from registration for securities being sold on an intrastate basis. If securities are sold only to residents of a state by an issuer that is also a resident of the same state, the securities are exempt from both the registration and prospectus requirements of the Act. A resident of a state who acquires securities under Rule 147 is not allowed to sell the securities to a nonresident of the state for a period of six months following the last date of sale by the issuer. If an individual intends to sell the securities prior to six months, he may do so only to a resident of the same state.

The agreement between the manager and syndicate members that are engaged in an underwriting is referred to as the: Underwriting agreement Agreement among underwriters Selling group agreement Offering agreement

Agreement among underwriters The agreement that binds the syndicate members to the manager and the offering is referred to as the agreement among underwriters or the syndicate agreement. The underwriting agreement is between the issuer and the managing underwriter. The selling group agreement is between the manager and the selling group. An offering agreement is not one of the recognized underwriting documents.

Which of the following descriptions BEST defines the term mutual fund complex? All of the fund shares that are sold by a single broker-dealer All of the subaccounts that are available within a particular annuity contract All of the fund shares that are offered by a particular fund family The mutual funds that are deemed to be in the same asset class

All of the fund shares that are offered by a particular fund family Mutual fund complex is a term that is used to describe all of the individual funds that are offered by a particular fund family. A fund family is often referred to as a brand name of funds.

If the parties to a dispute agree to mediation, the mediator is selected by: FINRA and cannot be rejected The defending party to the dispute Randomly drawing a name from a FINRA approved list An agreement of both parties to the dispute

An agreement of both parties to the dispute Once the two parties agree to use mediation, they select a mediator who is acceptable to both sides. Although FINRA may initially suggest a mediator, the parties are permitted to select one from a list that is provided by FINRA. In addition, the parties may select their own based on a mutual agreement.

All of the following may be included in an omitting prospectus advertisement that's published under SEC Rule 482, EXCEPT: A request for a prospectus Information that's contained in the full prospectus A current yield quotation An application to invest

An application to invest Under SEC Rule 482, which addresses mutual fund advertising, an application to invest may not be included with an advertisement. The investor must receive a prospectus before investing in funds.

Which of the following persons may contribute to a TSA? An accountant who is employed by a large corporation Any person who is above the age of 21 and has earned income Any adult who is under the age of 30 and plans on using the funds for higher education An employee of an elementary school

An employee of an elementary school Tax-sheltered annuities (TSAs) are employer sponsored plans that are available to employees of certain non-profit organizations and public education institutions. TSAs offer tax-deferred growth and are subject to the same contribution limits that apply to 401(k) plans. Since TSAs are funded on a pre-tax basis with contributions coming directly out of an employee's paycheck, they have a zero cost basis. In other words, at the time of distribution, every dollar removed is taxable as ordinary income. In this question, the accountant works at a for-profit corporation.

If a customer intends to engage in intraday trading and has an investment objective of capital growth, she may purchase: An index fund An index option An exchange-traded fund (ETF) A balanced fund

An exchange-traded fund (ETF) Of the choices given, only an ETF offers an investor the ability to engage in short-term trading and meet the objective of capital growth. Both index and balanced funds offer capital growth, but not short-term trading; on the other hand, index options offer short-term trading, but not capital growth.

A resolution would be required in order to open a: Discretionary account Corporate account Wrap account Margin account

Corporate account In order to open a corporate account, a resolution naming those who can place orders in the account is required. Margin accounts allow customers to borrow money when purchasing securities. Discretionary accounts allow an individual to make investment decisions for the account that granted the authority. Wrap accounts are ones in which a customer is charged a flat fee covering all costs associated with the account.

Decisions of the Hearing Panel regarding complaints: Are final if the complaints are between members Are final if the complaints are between member firms and their employees Can be appealed to the National Adjudicatory Council Can be appealed to a Federal District Court

Can be appealed to the National Adjudicatory Council Arbitration decisions are final.

Which of the following would be considered a management company, as defined by the Investment Company Act of 1940? Close-end company Face-amount certificate Unit investment trusts Real estate investment trusts

Close-end company Only a closed-end company is considered to be a management companies. Other types of investment companies defined by the Act are face-amount certificate companies and unit investment trusts. However, neither is actively managed nor considered to be a management company. A real estate investment trust is not an investment company under the Act of 1940.

Which of the following does NOT issue redeemable securities? Open-end investment company Closed-end investment company Face-amount certificate company Unit investment trust

Closed-end investment company All investment companies issue redeemable securities except closed-end investment companies. Once issued, shares of closed-end funds trade between market participants in the secondary market.

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 Open-end investment company shares with back-end loads

Closed-end investment company shares

If an associate person of a broker-dealer violates FINRA rules, she may be subject to: Mediation Arbitration Code of Procedure SEC settlement

Code of Procedure

Which of the following statements is TRUE regarding a 403(b) plan? Distributions from the plan will be taxed as long-term capital gains All distributions in excess of contributions will be taxable at ordinary income rates Only earnings will be taxed at ordinary income rates Distributions from the plan will be subject to taxation at ordinary income rates because of the zero-cost basis

Distributions from the plan will be subject to taxation at ordinary income rates because of the zero-cost basis Contributions to a 403(b) plan are made on a pretax basis, resulting in a zero-cost basis. Therefore, all distributions are taxed as ordinary income.

Which of the following actions would NOT be reason to end the mediation process? FINRA decides the mediator is biased The parties resolve their dispute The mediator declares an impasse Either party or the mediator withdraws from the process in writing

FINRA decides the mediator is biased The mediation process will continue unless one of the following occurs. The parties resolve their dispute through a written settlement; The mediator declares an impasse in the belief that continuing would be futile; Either party or the mediator withdraws from the process in writing.

Which of the following securities is NOT guaranteed by the U.S. government? Treasury notes Treasury bills Government National Mortgage Association (Ginnie Mae) certificates Federal National Mortgage Association (Fannie Mae) bonds

Federal National Mortgage Association (Fannie Mae) bonds FNMA was created as a government-chartered private corporation. It borrows funds and uses the proceeds to purchase conventional residential mortgages. Although FNMA can borrow funds from the U.S. government, the securities it issues are not directly backed by the U.S. government.

A type of offering in which an investment banker acts in a principal capacity is a: Firm commitment Best efforts All-or-none Contingency

Firm commitment

A type of offering in which the issuing corporation is assured of receiving the full amount of the offering and anything unsold is retained by the underwriter is a: Firm commitment Best efforts All-or-none Contingency offering

Firm commitment

A municipal securities representative does an analysis of an official statement and prepares a summary report. The report must be approved by: A municipal securities principal FINRA The Issuer The MSRB I only I and III only II and IV only III and IV only

I only The preliminary and final official statements are not considered advertising since they are prepared by or for the issuer. However, a summary of an official statement is considered advertising since it is prepared by the municipal representative and, therefore, must be approved by a municipal principal.

The primary concern for investors who use a buy-and-hold strategy to maintain their portfolios is: Interest-rate risk Reinvestment risk Opportunity cost The allocation of assets

The allocation of assets If an investor follows a buy-and-hold approach and fails to adjust the allocation of assets as the portfolio drifts, the portfolio balance will be altered and may no longer meet the investor's objectives. Although the individual investments within the portfolio are subject to various risks, those risk don't necessarily affect the allocation of the assets.

Which of the following factors is NOT used in determining the value of an annuity unit? The assumed interest rate The value of the separate account Income distributions from securities held in the separate account that are reinvested Capital gain distributions from securities held in the separate account that are reinvested

The assumed interest rate The assumed interest rate (AIR) is used to determine the subsequent payments made to the annuitant. The value of the annuity unit is determined by the value of the separate account, including all reinvested distributions.

A broker-dealer receives a written statement from a customer complaining about a transaction recommended by a registered representative. Which of the following statements is NOT TRUE? The firm must keep a copy of the complaint The firm must investigate the complaint A memo must be prepared describing any action taken in response to the complaint The firm must respond to the clients' complaint immediately

The firm must respond to the clients' complaint immediately Under FINRA books and records rules, written complaints must be kept on file at the appropriate OSJ, along with any correspondence connected with the complaint. Although the firm is required to respond to written customer complaints, there is no specific response-time requirement.

Confirmation statements must contain all of the following, EXCEPT the: Date of the transaction Date on which the order was entered Date of settlement Offer to disclose the name of the opposite party involved in the transaction

Date on which the order was entered Transaction dates, settlement dates, and the offer to disclose the name of the contra-party in the transaction must be included on the confirmation statement. Although the date on which the order was entered is not required to be disclosed on the confirmation statement, it is included on the order ticket.

Dr. Whitsson, a high-income and high net worth investor, has $100,000 to invest. You have discussed a possible investment for his money. He gives you a check, but is not ready to commit to a particular investment. You should: Implement the plan previously discussed because he did give you a check Implement the plan using a dollar cost averaging approach Deposit the check in a money-market fund with check-writing privileges Deposit the check in a tax-free money-market fund

Deposit the check in a tax-free money-market fund Because Dr. Whitsson is a high-income client, the tax-free money fund is the best place to park any funds before a more specific strategy is implemented.

A registered representative is opening a cash account for a customer. According to FINRA rules the RR is not required to obtain: Whether the client is of legal age The signature of the principal approving the account The signature of the customer The client's residence address

The signature of the customer When opening a cash account, FINRA requires the customer's name and residence address, whether the customer is a of legal age, the name or names of registered representatives servicing the account and the signature of the principal approving the account. FINRA does not require the customer's signature, nor does it require his or her Social Security number.

A variable life insurance policyholder has just 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 that are due from his beneficiary in the year in which the policyholder died. The value of the policy will be included in the decedent's estate for tax purposes. The policy proceeds are federally taxable to the beneficiary.

The value of the policy will be included in the decedent's estate for tax purposes. Although there are no tax consequences to a variable life insurance policy's beneficiary, the death benefit is included in the decedent's estate for tax purposes.

Under FINRA rules, which of the following statements concerning electronic communications is TRUE? Text messaging is not covered due to the casual nature of the medium. Individual text messages are considered retail communications. Websites are not covered under FINRA's communications rules. Websites are considered retail communications.

Websites are considered retail communications. According to FINRA rules individual text messages are considered correspondence, not retail communications. For that reason, the text messages are subject to review and supervision. Websites that are available to retail investors are considered retail communications.

A RR should update a client's financial condition or status: When there is an obvious change in the economy of the client's hometown When there is a change in the clients purchases or sales that might indicate a different financial situation When informed by a friend or relative Only after any meeting with the client

When there is a change in the clients purchases or sales that might indicate a different financial situation While some clients may keep the firm well informed of any changes, others may not be so forthcoming. Changes in a client's patterns of purchases and sales may indicate a different financial situation.

Pete and Danielle are a married couple in their 20s. They both have jobs that pay well and they have begun to think about investing for retirement. Which of the following portfolio allocations would be most appropriate for them? 10% bonds, 90% stock 100% common stocks 80% bonds, 10% common stocks, 10% money market 50% bonds, 50% common stocks

10% bonds, 90% stock To amass the assets they will need at retirement, Pete and Danielle should include common stocks in their portfolio. A portfolio that is predominately bonds [choice (c)] will not likely produce the required long-term returns. However, a portfolio that mixes stocks and bonds [choice (d)] is probably a better choice for the couple than one that is exclusively common stock [choice (b)]. However, given their long time horizon (they are still in their 20s), Pete and Danielle can probably tolerate additional investment risk. So they can place the majority of their savings into stocks to increase their potential return; choice (a) would be most appropriate given their goals and risk tolerance.

For underwriting purposes, what is the typical length of the cooling-off period? 10 days 20 days 30 days 90 days

20 days The cooling-off period begins once the issuer files its registration statement with the SEC.

According to suitability rules, 1035 exchanges should occur not more frequently than once every: 12 months 24 months 36 months 48 months

36 months 1035 exchanges which occur within 36 months of previous exchanges may be considered churning and unsuitable. In order for an exchange of one variable annuity for another to be suitable, an adequate analysis of the investor's situation should include: Age Annual income Financial situation and needs Investment experience and objectives Intended use of the deferred variable annuity Investment time horizon (not intended for senior citizens) Existing assets Liquidity needs Liquid net worth Risk tolerance Tax status

A client has a variable annuity with an assumed interest rate of 4%. The client received a first benefit check of $110. The separate account rate of return between the first and second month was 10%. The client received a second check for $125. What was the actual rate of return of the separate account between the second and third month if the client's third check was also for $125? 4% More than 4% but less than 10% 10% More than 10%

4% The amount of a benefit check that is received by an annuitant is based upon the relationship of the assumed interest rate (AIR) and the actual performance of the separate account. If the performance of the separate account equals the AIR, the benefit payment will be the same as the last payment. If it is higher than the AIR, the benefit payment will increase. If the performance will be lower than the AIR, the benefit payment will be lower. In this question, the client received a first check of $110. In the subsequent payment period, the separate account experienced a growth rate of 10% which yielded a payment of $125. As you can see, since the actual growth rate of the separate account (10%) was greater than the AIR (4%), the benefit payment increased. In order to receive a $125 payment for the third payment period, the separate account must experience a growth rate equal to the AIR. Therefore, this growth must be 4%.

An equity security was trading at $100 per share and subsequently fell by 7%. The annual dividend, formerly $4 per share, is decreased to $3.80. The yield on the stock is: 3.8% 3.9% 4.1% 7%

4.1% The current yield on a stock is found by dividing the annual dividend by the current market price. In this example, the annual dividend is $3.80. This must be divided by the current market price. The question states that the price of $100 fell 7% or $7, making the current market price $93. The current yield for this stock is therefore 4.1% ($3.80 divided by $93). Before the price fell and the dividend was reduced, the current yield was 4% ($4 divided by $100).

Liz and Eddie are a young couple who would like to start investing. Their main objective is long-term growth. Of the following choices, the most appropriate mutual fund for them would be one with a portfolio containing: 10% stocks and 90% bonds 20% domestic stocks and 80% foreign stocks 100% money-market investments 40% large-cap stocks, 20% mid-cap stocks, 20% small-cap stocks, 20% bonds

40% large-cap stocks, 20% mid-cap stocks, 20% small-cap stocks, 20% bonds Equities are usually the most appropriate investment for those with an objective of long-term growth. Choice (a) is too heavily weighted in bonds and the conservative money-market investments in choice (c) are unlikely to produce acceptable long-term growth. While choices (b) and (d) favor equities, a high concentration in foreign investments increases risk substantially (e.g., foreign currency and political risk). [Choice (d) might actually produce a better return than (b), since it contains an asset class (bonds) which is not highly correlated with stocks. This can produce a better risk/return trade-off than a portfolio that invests in stock only.]

Which of the following asset allocations would be most appropriate for a forty-five-year-old investor who is fairly tolerant of risk and who is saving for retirement in 20 years? 100% long-term government bond fund 50% intermediate-term corporate bond fund, 50% money-market funds 50% large-cap equity fund, 30% intermediate-term bond fund, 20% international stock fund 60% small-cap equity fund, 40% emerging markets equity fund

50% large-cap equity fund, 30% intermediate-term bond fund, 20% international stock fund Long-term, risk tolerant investors, such as those saving for retirement, are usually looking for growth of capital as an objective. They are also usually concerned about the effects of inflation. Neither the long-term government bond fund or the intermediate-term corporate bond fund would provide much inflation protection or growth. The small cap equity fund and the emerging markets equity fund, on the other hand, is a very volatile mix and only appropriate for aggressive investors. The mix of the large-cap equity fund, the intermediate-term bond fund and the international stock fund would provide the best combination of growth and inflation protection. Notice that bonds may be appropriate for such investors when representing a small portion of the portfolio.

A doctor, who is covered under a corporate pension plan, retires. The doctor can roll over the distribution received from the pension plan into an IRA, with no tax consequences, within: 30 days 60 days 90 days 1 year

60 days If the rollover is done within 60 days, it will be tax-free. Only one rollover is permitted once every twelve months. However, the distributing corporation will withhold 20% of the distribution for the IRS.

If a mutual fund includes "Tax-Exempt" in it's name, it must invest no less than what percentage of its assets in tax-exempt investments? 50% 75% 80% 90%

80% If a fund includes in its name a specific type of security or industry, it must invest no less than 80% of its assets in those types of securities.

The ABC Fund Company is issuing a new ABC Equity Fund. At a minimum, what percentage of the fund's assets must be invested in equity securities? 50% 75% 80% 100%

80% If a fund includes in its name a specific type of security or industry, it must invest no less than 80% of its assets in those types of securities.

Jonah has recently retired at age 65. He is receiving a large lump-sum retirement payout from his former employer. Although he has only a very small investment portfolio, he has accumulated savings that would cover six months of expenses. Which of the following would be an appropriate allocation of Jonah's lump sum in an investment portfolio if his primary interest is income and his secondary interest is growth for inflation protection? 100% cash 50% cash, 45% bonds, 5% equities 85% bonds, 15% equities 25% cash, 75% equities

85% bonds, 15% equities While a portfolio that consists of 75% equities [choice (d)] might be too volatile for a 65-year-old retiree, increased life expectancies have made some exposure to equities justifiable for such investors. Since equities provide much more inflation protection than bonds or cash (money-market investments), a small portion in stocks would generally be suitable. Since this investor already has a six-month liquidity cushion in the form of savings, a large additional allocation to cash [as in (a) and (b)] might not provide enough income or inflation protection in the long run.

If a client's account is frozen because of a failure to pay under Regulation T, the account must remain frozen for how many days? 15 30 60 90

90 When a client fails to pay for a purchase of securities, the member firm is required to sell out the securities and freeze the customer's account for 90 days.

A customer asks an RR for a recommendation as to how to invest a $150,000 inheritance. The customer needs to preserve the capital since he wants to use the funds to start a new business within the next year. Which of the following funds is the LEAST suitable recommendation for this customer? A taxable money-market fund A tax-exempt money-market fund A short-term Treasury fund A balanced fund

A balanced fund While all of these funds are somewhat conservative, the balanced fund will contain some equity investments and long-term bonds, which will expose the customer to market risk. Given the customer's short-time horizon and objective of preservation of capital, the balanced fund would be the least suitable of the choices listed

Which of the following statements is NOT TRUE as it pertains to a broker-dealer executing trades for customers? A broker-dealer may act as an agent for the client in a transaction A broker-dealer may act as a principal in a client transaction A broker-dealer may act as both an agent and a principal for a client in the same transaction A broker-dealer may act as an agent for the client and another person

A broker-dealer may act as both an agent and a principal for a client in the same transaction

Which of the following descriptions BEST defines the term prime broker? A broker-dealer that provides all the trade execution services to a hedge fund A broker-dealer that provides all the clearing services of a hedge fund A broker-dealer that provides both trade execution and clearing services to a hedge fund A broker-dealer that provides all the investment advisory services to a hedge fund

A broker-dealer that provides both trade execution and clearing services to a hedge fund A prime-brokerage arrangement involves a variety of services offered by a broker-dealer to an active trading firm, such as a hedge fund. Some of the services include securities lending, cash management, leveraged trade execution, and research. In addition to executing transactions for the hedge fund, the prime broker will also provide clearing services for trades executed through other broker-dealers used by the hedge fund.

The private meeting between the members on one side of a dispute and the mediator is referred to as: A discovery meeting A caucus A mediation meeting A hearing

A caucus

Which of the following statements is TRUE concerning periodic payment variable annuities? A client's number of annuity units never changes A client's number of accumulation units never changes Annuity contracts never have a beneficiary The monthly payout is fixed by the inflation index

A client's number of annuity units never changes During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.

Which of the following is TRUE regarding contingent deferred sales charges? Funds that assess a contingent deferred sales charge may be represented as a no-load fund because there is no front-end fee A redemption charge that reverts to the fund's portfolio is considered a contingent deferred sales charge A confirmation for a fund that assesses a contingent deferred sales charge must disclose that a charge may be assessed upon redemption, even if the same disclosure is made in the prospectus A contingent deferred sales charge is not assessed if the customer redeems the shares at a loss

A confirmation for a fund that assesses a contingent deferred sales charge must disclose that a charge may be assessed upon redemption, even if the same disclosure is made in the prospectus Industry rules require that the following disclosure be printed on the front of a confirmation for the purchase of a mutual fund that assesses a contingent deferred sales charge: "On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus." Funds that assess such charges may not be represented as no loads and may not be referred to as no initial load without further explanation. Sales charges are fees that are used to pay sales-related expenses, such as commissions and advertising costs. A redemption fee that reverts to the fund's portfolio is not considered a contingent deferred sales charge.

Retail communication includes: A brochure sent to 20 high net worth investors Written promotional material that is mailed to insurance companies An electronic message sent to a prospective customer A copy of a presentation distributed to a large group of investors who attended a seminar

A copy of a presentation distributed to a large group of investors who attended a seminar Retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Other choices would be considered correspondence or institutional communication.

If a customer wishes to open an account as a guardian, the member firm would need: A limited power of attorney (POA) signed by the account owner and trustee documentation A full power of attorney signed by the account owner and an executed Uniform Gifts to Minors Act (UGMA) agreement An executed UGMA agreement and a valid court appointment A copy of the court appointment

A copy of the court appointment A guardian is a court-appointed fiduciary who is instructed by the court to handle the affairs of a person who is legally disabled based on age, or physical or mental incapacity. Before opening a guardian account, a member firm must obtain a copy of the legal documentation appointing the guardian. Guardian accounts are not necessarily limited to children, so an UGMA document is not required. The account owner (the disabled or underage person) may not legally give investment discretion to the guardian.

A prospectus for an investment company would indicate all of the following, EXCEPT: The fund's policies concerning bank loans Methods of redemption Whether the fund bears the costs of preparing, printing, and distributing prospectuses A current list of the fund's portfolio

A current list of the fund's portfolio In order to obtain a relatively current list of the fund's portfolio, investors would have to review the investment company's semiannual report. Items found in the prospectus include the fund's policies concerning bank loans, how to redeem and acquire shares, specific expenses borne by the fund, breakpoints, management of the fund, and policies regarding portfolio turnover.

The underwriter makes financial commitments in which of the following situations? An all-or-none deal A best-efforts deal A firm-commitment deal A mini-maxi deal

A firm-commitment deal A financial commitment is a different way of saying a firm commitment. In a firm-commitment deal the underwriter puts its own capital at risk and acts as a principal. All-or-none and mini-max are types of best-efforts deals. In best-efforts deals, the underwriter acts as a simple agent who is not making a financial commitment since it is not placing its capital at risk.

When choosing the settlement option for a variable annuity, the value of the checks received will be based on: A variable number of accumulation units A fixed number of accumulation units A variable number of annuity units A fixed number of annuity units

A fixed number of annuity units When choosing a settlement option for a variable annuity, the accumulation units are automatically converted to a fixed number of annuity units. The amount of each check is determined by a specified number of annuity units which are multiplied by the NAV per unit. Unit values (as well as each payment) will fluctuate based on the performance of the separate account.

Susan owns a variable life insurance policy that has built a significant amount of cash value due to stock market appreciation. Which of the following statements is TRUE concerning a loan against this cash value? Loans against cash value are not permitted An interest-free loan of a portion of the cash value is permitted A variable-rate loan of a portion of the cash value is permitted A fixed-rate loan of a portion of the cash value is permitted

A fixed-rate loan of a portion of the cash value is permitted Loans in variable life policies are permitted, but only to a maximum percentage of cash value. A fixed-interest rate is charged for these loans, normally one to two percent less than the amount the insurance company is earning on deposits in a fixed account.

Which of the following forms of communication is considered correspondence? A group e-mail A text message sent to 30 persons A form letter sent to 20 persons A telemarketing script

A form letter sent to 20 persons Correspondence is defined as written or electronic messages sent by a member firm to 25 or fewer retail investors within any 30-calendar-day period. The 25 or fewer investors may be any type of client—existing or prospective. Retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period. Only choice (c) is considered correspondence, the other choices are considered retail communication.

Which of the following parties would consider the information obtained in an annual report of a corporation to be the most important factor in making an investment decision? A technical analyst A chartist A Dow theorist A fundamental analyst

A fundamental analyst The performance of management, sales, expenses, and earnings, which are items that could be obtained from the annual report of a corporation, are considered the most important factors in making an investment decision by a fundamental analyst. A technical analyst (chartist) is concerned with forces within the market, such as new highs and new lows, trading volume, and the number of advances and declines.

An investor is seeking an investment that will outperform the market, but does not involve buying and holding individual securities. All of the following are considered suitable, EXCEPT: A hedge fund A liquid alternative investment A business development company A global allocation fund

A global allocation fund A global allocation fund is a type of mutual fund that invests in equities and bonds in both the U.S. and in foreign countries. Although the fund is diversified, it does invest in traditional securities and usually employs a buy and hold investment objective. The term "alternative investments" refers to investments that use non-traditional strategies, such as short selling, using derivatives, long/short trading or neutral strategies, trading in distressed securities or currencies, and arbitrage. Alternative strategies differ from simply buying, holding, and selling securities and are often viewed as a way to diversify a portfolio through the use of securities other than equities and bonds. These types of strategies are used by hedge funds and private equity funds. Though hedge funds employ non-traditional investment strategies, one of the disadvantages of investing in hedge funds is their lack of liquidly. A liquid alternative investment combines the structure of an SEC-registered mutual fund (which is liquid) with a non-traditional or alternative investment. Alternative investments are designed to outperform the market; however, investors do assume a greater degree of risk. A business development company (BDC) raises capital by selling securities to investors and then using the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing them with funding when they are unable to raise capital for themselves.

An open-end investment company has the objective of growth and wants to change its investment objectives to growth and income. This change requires: 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 fund's board of directors

A majority vote of the outstanding shares To change the objectives of an open-end investment company, it requires the consent of a majority of the shares outstanding. Keep in mind, shares vote, not shareholders.

Which of the following materials does not require the approval of a principal prior to use? A preapproved mutual fund advertisement A marketing piece regarding a variable contract that is directed to 22 prospective clients A group e-mail regarding the benefits of a specific family of funds Photocopies and articles related to mutual fund investing that does not mention any particular fund or fund family

A marketing piece regarding a variable contract that is directed to 22 prospective clients FINRA characterizes much of a firm's communication with the public as either correspondence or retail communication. Correspondence is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. To allow firms and RRs to distribute timely correspondence to a limited number of retail investors, the material is simply subject to review and supervision (not preapproval). Retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. If the retail communication makes a recommendation, or promotes a product or service, prior principal approval is required. In addition, if the retail communication is created by the member firm and it uses performance comparisons with other investment companies, it must be filed with FINRA at least 10 business days prior to first use. If the retail communication concerning investment companies does not include the member firm's performance comparisons, it still must be filed with FINRA, but it may be filed within 10 business days of first use. The key to this question is determining which answer choice is considered correspondence (which does not require principal approval or filing). The choice with 22 prospects is considered correspondence due to the limited number of potential recipients (25 or fewer persons in a 30-calendar-day period).

Which of the following choices is a valid reason for the carrying firm to protest an account transfer? A mismatched account title A nontransferable asset An unsatisfied margin balance An unsettled trade

A mismatched account title If the basic account information such as tax ID number, account title, or account number does not match the information on record at the carrying firm, the carrying firm may protest the transfer. The instructions may be amended with the necessary corrections, and the account transfer process may again be requested using Automated Customer Account Transfer (ACAT). The transfer may then be rejected or validated within one business day and transferred within three business days following the validation by the carrying firm.

A doctor receives an inheritance of $250,000. She is concerned how this may affect her tax situation. The doctor inquires about where she should park the money while she obtains professional tax advice. Which of the following recommendations is the MOST appropriate? A short-term municipal bond fund A money-market account A municipal money-market mutual fund A U.S. government inflation-protected bond fund

A municipal money-market mutual fund Whenever a person is looking to park her cash, the most viable option is some form of money-market account. Parking implies a very short-term time horizon (perhaps as little as a few weeks), so the short-term municipal bond fund and the U.S. government inflation-protected bond fund are poor selections. In both cases, those choices involve a fund that purchases bonds and, therefore, is subject to principal fluctuation. This would not suit her needs. However, this question also has an extra dimension to it. The person in this question is a doctor, which implies a high income level. Furthermore, she is inheriting a large sum of money and expressly states she is worried about taxes. These are trigger phrases, which means you should be looking for something that provides some tax relief. In this case, the municipal money-market mutual fund is the BEST answer. It provides both the safety of principal and tax relief the doctor needs. The tax relief comes from the short-term municipal (federally tax-free) securities in the account. The money-market account, only offers principal safety

Which type of investment company is bought at its net asset value? An open-end investment company A closed-end investment company A UIT A no-load mutual fund

A no-load mutual fund No-load funds offer shares at the net asset value. There is no sales charge or commission added to the cost of the shares. No-load funds may add a 12b-1 fee.

Which of the following contractual features in a variable life policy requires that the cash value of the policy be available to the policyholder in the event the premium payments stop? A nonforfeiture provision A minimum cash value guarantee A policy loan provision An exchange privilege

A nonforfeiture provision A nonforfeiture provision in a life insurance policy requires any cash value accumulation to be available to the policyholder if the policyholder stops paying premiums for any reason. However, in a variable life policy, there is no guarantee as to what that cash value might be.

A broker-dealer is notified of the death of a customer who had an account registered in her name only. All of the following documents are required, EXCEPT: An inheritance tax waiver An affidavit of domicile Letters testamentary A power of attorney

A power of attorney The transfer agent will require an inheritance tax waiver, an affidavit of domicile, and letters testamentary, along with a death certificate, in order to transfer stock from the name of the deceased person to the deceased's estate. A power of attorney is not required.

According to MSRB rules, which of the following documents need not be approved by a principal prior to being sent to a customer? An abstract of an official statement A preliminary official statement An advertisement regarding the firm's products and services A research report

A preliminary official statement A preliminary official statement is prepared by or for the issuer. Since the MSRB does not have the power to regulate issuers, a preliminary official statement cannot be considered advertising under MSRB rules. However, an abstract (summary) of the official statement is prepared by a dealer and is, therefore, considered advertising. A final official statement and a firm's offering list are also not considered advertising.

Advertising for municipal fund securities investments must be approved by which of the following prior to its initial use? The Municipal Securities Rulemaking Board The state sponsoring the municipal fund securities investment program A principal of the firm that is selling the program The portfolio manager of the municipal fund security investment

A principal of the firm that is selling the program

All of the following forms of communication with the public that are used by a member firm would fall under the industry definition of retail communication, EXCEPT: An advertisement for the firm that is published in the Yellow Pages A billboard that describes the range of services offered by the firm A seminar handout provided to 25 retail investors A telemarketing script

A seminar handout provided to 25 retail investors Any written or electronic communication that is sent by a member firm to 25 or fewer retail investors is considered correspondence. Retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Retail communication is the broadest category of communication and includes both advertising and sales literature. All materials prepared for the public media in which the ultimate audience is unknown are considered retail communications including: Television, radio, and billboards Magazines and newspapers Certain websites and online interactive electronic forums, such as chat rooms, blogs, or social networking sites (assuming retail investors have access to these sites) Telemarketing and sales scripts Independently prepared reprints (e.g., newspaper or magazine articles) that are sent to more than 25 retail investors

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

A stock fund 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.

Which of the following entities is considered an eligible purchaser for a Rule 147 offering? A partnership in which 95% of the partners are located in the state of the offering A trust that has its principal office located in the state of the offering A corporation that's organized for the specific purpose of purchasing the securities and is located in the state of the offering A qualified institutional buyer that has one of its offices located in the state of the offering

A trust that has its principal office located in the state of the offering Eligible purchases include legal entities that have their principal place of business located in the state of the 147 offering. An exception to this eligibility requirement is if the business was formed for the sole purpose of purchasing the securities. The location of the partnership is important, but not the residency of the partners.

A conservative investor has a long-term time horizon. He wants an investment that will provide him with long-term capital appreciation, and will not be too volatile. Which of the following funds would be the MOST suitable for him? A value fund A growth fund A fund of funds An emerging markets fund

A value fund As with a growth fund, the main objective of a value fund is long-term capital appreciation. Value funds are usually considered less volatile than growth funds, since they invest in companies that are priced low in relation to their earnings. They also tend to invest in more mature companies that are more likely to pay regular dividends than pure growth funds. Both a fund of funds and an emerging markets fund would be too risky for him.

ERISA stipulates that employers with qualified plans are not permitted to exclude employees who have worked for the employer at least one year and: Are age 18 or older Are age 21 or older Are age 18 or older and have worked a minimum of 1,000 hours during the year Are age 21 or older and have worked a minimum of 1,000 hours during the year

Are age 21 or older and have worked a minimum of 1,000 hours during the year

If an existing client moves to a new state, which of the following must be registered in that state? The registered representative The broker-dealer The securities being sold by the client All of these must be registered in the new state

All of these must be registered in the new state

Bear Brokerage is acting as the lead underwriter for the IPO of Global Transport Ltd. The new issue is expected to be priced at $22.00. Which of the following statements is TRUE regarding the shares sold to the public? All underwriters must sell the shares at the public offering price Underwriters may sell shares at any price, provided it does not exceed the public offering price An underwriter may accept reduced compensation and sell the shares below the public offering price, provided the client agrees to a six-month lock-up period The underwriter may sell shares below the public offering price only to its employees

All underwriters must sell the shares at the public offering price Under industry rules, syndicate and selling group agreements set the price at which the securities are to be sold to the public, or the formula to determine the price. The agreements must also state to whom and under what circumstances concessions are permitted. An underwriter's sale of a new issue below the public offering price is not permitted.

If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's: Expense ratio Alpha Rating Beta

Alpha is a measure of an investment's performance on a risk-adjusted basis. The excess return of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return.

When selecting a settlement option on a variable annuity, the life expectancy table is used to calculate the: Number of accumulation units Cost basis of the annuity Total rate of return on the investment Amount of the first monthly payment

Amount of the first monthly payment When a variable annuity is annuitized, the first payment is calculated as if the contract was a fixed annuity with the AIR as the interest rate. The calculation also factors in the annuitant's life expectancy as determined by the standard life expectancy table, and the type of payout option selected. Subsequent payments will then depend on the performance of the separate account compared to the AIR.

A breakpoint sale may have occurred if: An RR recommends that a client diversify between different funds within the same family An RR recommends that a client diversify between different fund families An RR recommends that a client not invest all of her money into a fund immediately but rather dollar cost average over the next 12 months An RR recommends the same fund in a client's IRA and individual account

An RR recommends that a client diversify between different fund families Breakpoints are investment levels at which an individual would qualify for reduced sales charges. These are available when investing in funds offered under the same complex or family of funds. A breakpoint can be reached with a lump sum investment, by rights of accumulation, or by signing a letter of intent. A breakpoint sale occurs when selling mutual fund shares just below the level at which an investor would receive reduced sales charges, in turn, increasing the commissions an agent would receive. By investing in funds offered by different companies, the investor loses the ability to reach breakpoints. If an RR recommends funds from different complexes or families, the investor may pay higher overall sales charges. A breakpoint sale is considered a violation of FINRA rules.

An accumulation unit in a variable annuity contract is: An accounting measure used to determine the contract owner's interest in the separate account An accounting measure used to determine payments to the owner of the variable annuity The same as a shareholder's ownership interest in a mutual fund The same as the insurance company's profit from the separate account

An accounting measure used to determine the contract owner's interest in the separate account An accumulation unit in a variable annuity contract is an accounting measure used to determine the contract owner's interest in the separate account. The separate account is the portfolio in which the customer's contributions are invested. Some separate accounts consist of several subaccounts, with differing objectives and portfolios.

A couple has a portfolio of domestic equity and bond funds. They wish to diversify their portfolio further. Which of the following investments would MOST likely fulfill this goal? An asset allocation fund A balanced fund An international fund A global fund

An international fund This is a question where you need to understand terminology. The client has a portfolio of domestic securities. What does that mean? Domestic implies within the United States. The funds the couple already own contain securities issued in the United States. Since they wish to diversify, they need to purchase securities from outside the United States. Choices (a) and (b) contain domestic securities, so they would not offer any further diversification. Choice (d) is a global fund, which means stock from around the world, including the United States. Remember, the couple has enough of their money invested in U.S. securities. The International Fund is the best answer. It holds only foreign securities in the portfolio.

Which of the following is TRUE concerning transactions in a customer's account? A registered representative must confirm a client's income before executing any transactions. An unsuitable investment may be purchased in a customer's account if the order is unsolicited. Only conservative investments may be recommended to clients who do not provide information regarding their personal profile. There is no limit to the number of suitable investments that can be purchased in a customer's account.

An unsuitable investment may be purchased in a customer's account if the order is unsolicited. FINRA rules require information concerning an investor's profile be obtained before making any recommendations. One can rely on the customer's answers to the financial needs and objectives questions and are not required to confirm the information prior to executing a transaction. Recommending any investments, even conservative, is prohibited if information pertaining the customer's profile is not obtained. However, unsolicited orders may be accepted, suitable or unsuitable. The number of suitable investments purchased in an account can be considered excessive and evidence of churning.

If a corporate bond is referred to as guaranteed, it's secured by: Mortgages The U.S. government Another corporation Loans that are held by other financial institutions

Another corporation Guaranteed bonds are secured by the corporation's own collateral as well as a guarantee by another corporation (which is often a parent company). Bonds that are backed by loans of other financial institutions are considered asset-backed securities (ABS).

Exempt securities and offerings are exempt from all of the following, EXCEPT: Registration requirements Prospectus delivery requirements Antifraud provisions Exempt securities and offerings are exempt from all provisions of the Securities Act of 1933

Antifraud provisions Exempt securities and offerings are exempt from all of the provisions of the Securities Act of 1933 with the exception of the antifraud provisions.

Functions of the investment adviser include all of the following, EXCEPT: Providing and analyzing research on financial and economic trends Appointing the officers of the fund Timing investment decisions to take advantage of industrial trends or broad economic changes Implementing the appropriate diversification of the fund's portfolio

Appointing the officers of the fund Investment advisers are responsible for implementing a strategy that attempts to meet the fund's objectives in accordance with its fundamental investment policies. The board of directors appoints officers of the fund.

Under the conduit theory of taxation, distributions that are reinvested by shareholders: Are not taxable in the current year Are only taxable at the time of distribution Are taxable in the current year Are taxable at a reduced reinvestment rate

Are taxable in the current year The conduit or pipeline theory provided under Subchapter M of the IRS Code, allows investors to avoid being triple-taxed on distributions made by investment companies. The dividend distribution a company makes to a fund is taxed before being distributed. When the distribution is received by the fund shareholder, the distribution is taxed in the year received whether reinvested or not. The fund itself is not taxed as long as it distributes no less than 90% of its net investment income, which allows it to be a conduit for those distributions from company to fund shareholder.

A sell order for shares of an open-end investment company must be executed at a price based on the net asset value: As calculated at the close of business on the NYSE the previous day As last calculated before the order is received by the dealer At the closing price of the fund on the following day As next calculated after receipt of the order by the dealer

As next calculated after receipt of the order by the dealer When an investor sells open-end investment company shares, the price paid is based on the net asset value next calculated after the order is received (forward pricing).

The value of an accumulation unit is based on the NAV: At the opening of the market At noon on that business day At the close of the market At an average price of the NAVs throughout the day

At the close of the market The value of accumulation units is based on the close of the market. This is known as forward pricing.

The relative of an 85-year-old account holder contacts the registered representative of the account and requests that funds be transferred to her account which is also held at the same firm. If the RR suspects financial exploitation, which of the following is the BEST course of action? Process the transaction since both accounts are held at the same firm. Attempt to resolve the matter with the customer prior to placing a temporary hold. Immediately place a temporary hold on the account. Contact the attorney for the 85-year-old account holder.

Attempt to resolve the matter with the customer prior to placing a temporary hold. According to FINRA, if an RR suspects financial exploitation of a senior investor, he should first attempt to resolve the matter prior to placing a temporary hold on the account. The fact that both accounts are held at the same firm is irrelevant.

A broker-dealer must notify a new customer that it is required to verify her identity: Before the account is opened Before the privacy notice is provided Before the first trade Within a reasonable period

Before the account is opened Customer Identification Programs (CIPs) are a part of a broker-dealer's overall anti-money laundering (AML) compliance program. Broker-dealers must provide their customers with notice of their identity verification procedures either before an account is opened or before trading authority is granted.

A type of offering in which an investment banker acts in an agency capacity is a: Firm commitment Best efforts First come, first serve Dutch auction

Best efforts In a best efforts offering, the investment banker is not responsible for any unsold portions of the underwriting. As a result, the firm is acting in an agency capacity. A Dutch auction is used with Treasury securities. A first come, first serve is not a type of offering practice.

An approach to investing that selects stocks based on a company's financial health, management team, product offerings, and then compares the market price of the stock to the stock of similar companies in order to determine whether the company is undervalued is generally referred to as: Top-down investing Value analysis Bottom-up investing Momentum investing

Bottom-up investing The bottom-up analysis method examines stocks based on a variety of factors, including fiscal health, management team, competitive market position, and current and prospective future product offerings. The market price of the stock is then compared to similar companies to determine whether the company is undervalued in the investors' minds.

A client is heavily invested in an exchange-listed security and decides to liquidate the investment to purchase shares of an S&P 500 Index fund. In doing so, the investor has protected against: Business risk Liquidity risk Market risk Systematic risk

Business risk Business risk is the risk that a company is doing something wrong which will lead to its poor performance (i.e., poor management or the wrong product line). Liquidity was not a concern since the original investment was an exchange-listed company. Market risk is a type of systematic (non-diversifiable) risk.

A customer has mailed a check to a mutual fund to purchase some shares. The customer is expecting to receive a confirmation of the transaction. The fund may send the confirmation to the customer by any one of the following deadlines, EXCEPT: By the settlement date By the seventh calendar day after the trade date Within five business days of the end of the quarter, for non-money-market mutual funds Within five business days of the end of the month, for money-market mutual funds

By the seventh calendar day after the trade date The Securities Exchange Act of 1934 generally requires confirmations for securities transactions to be sent to customers by the settlement date for the trade. This is usually two business days after the transaction. However, mutual funds may use special rules as long as they inform their customers. For non-money-market mutual funds, a statement may be sent within five business days of the end of each quarter describing the activity in the account during the period. For money-market mutual funds, a similar statement may be sent within five business days of the end of the month.

In order to be characterized as a diversified company, an investment company must: Have at least 75% of its assets invested in a prescribed way Not hold securities of any one issuer in an amount greater than 5% of its total assets Not hold more than 10% of the outstanding voting securities of an issuer Comply with all of the above

Comply with all of the above

Proceeds from the redemption of mutual fund shares by a customer are: Taxable only as long-term capital gains Considered a sale for income tax purposes Not reportable for tax purposes in the year sold Considered a tax-free exchange if used to purchase other mutual funds

Considered a sale for income tax purposes It is important to distinguish the difference between the sale of a mutual fund by a customer and a distribution of a dividend or capital gain to the customer from the fund. When a fund distributes a dividend or a short-term capital gain to a customer, the customer must pay ordinary income taxes on the dividend in the year received. When the fund distributes a long-term capital gain to a customer, the customer pays a long-term capital gains tax in the year received. However, in this example, the customer redeemed the fund shares. This is considered a sale for income tax purposes, which means taxes may or may not have to be paid. It would depend on whether the shares were sold for a profit or a loss. The tax liability would be similar to the sale of any security. Exchanges for other mutual funds are also considered to be a sale of a security for tax purposes.

You discover that one of your clients is on the OFAC list. You must: Contact federal law enforcement authorities immediately Call the client to see if a mistake has been made Investigate the matter further to see if there is any evidence of suspicious activity Notify FINRA

Contact federal law enforcement authorities immediately You must contact the federal law enforcement authorities immediately if you discover that a client is on the list of suspicious persons and entities maintained by the Office of Foreign Assets Control (OFAC). You must also freeze the account and block any further transactions.

All of the following statements are TRUE of a 529 plan, EXCEPT: Withdrawals that are used for educational purposes are not subject to federal taxation. There are no income limits placed on contributors. Contribution amounts are unlimited. A married couple may give a lump-sum of $160,000 without incurring federal gift taxes.

Contribution amounts are unlimited. For a 529 plan, the contribution limits are quite high, but they're not open-ended. In fact, they're much higher than those for a Coverdell Education Savings Plan, which are capped at $2,000 per year. Each state establishes the maximum amount that may be contributed to all 529 plans that are maintained for one beneficiary (typically, a range of from $200,000 to $300,000). All of the other statements are true. However, please note, an investor who contributes the maximum amount that's allowable to a 529 plan may incur federal gift taxes. A single investor may contribute up to $16,000 per year ($32,000 for a married couple) for each beneficiary without incurring gift taxes. For 2022, the annual gift tax limit is $16,000 (increased from $15,000 in 2021). Alternatively, an individual may aggregate five years of annual contributions and make a lump-sum contribution of $80,000 ($160,000 for a married couple) without incurring federal gift taxes.

Within a 30-calendar day period, a member firm sends an email to 40 total investors, of which 20 are retail investors and 20 are institutional investors. The e-mail is considered: Institutional correspondence Institutional communication Correspondence Retail communication

Correspondence The key to this question is to identify the number of retail investors who are receiving the communication. Since the number of retail investors is limited (20 in this question), FINRA is willing to allow the communication without a great deal of oversight. The communication to a limited number of retail investors is categorized as correspondence. Correspondence is officially defined as any written or electronic message that a member firm distributes or makes available to 25 or fewer retail investors within a 30-calendar-day period. On the other hand, retail communication is defined as any written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Although the communication is being sent to 40 investors, only 20 were retail investors; therefore, the email is considered correspondence.

A soft-dollar arrangement should benefit the: Investment adviser Broker-dealer Customer Appropriate self-regulatory organization

Customer Soft dollars are products and services that an investment adviser receives from a broker-dealer in exchange for customer order flow. It is a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its customer. In this context, the customer is the individual or institutional customer of the investment adviser.

Which of the FINRA rules regarding suitability do not apply to institutions? Reasonable-basis obligation Customer-specific obligation Quantitative obligation All FINRA rules regarding suitability apply to institutions

Customer-specific obligation Institutions can independently evaluate investment risks, so the customer-specific obligation does not apply. The reasonable-basis and quantitative obligations apply.

An individual is considering opening a new account with a broker-dealer and provides some personal information in order to develop an investment profile. The dealer intends to share some of this client's non-public information with its affiliate. According the Regulation SP, the broker-dealer will: Do nothing Allow the consumer to opt out of sharing the information Provide a privacy notice when the account is being opened Provide a privacy notice when the account is opened and annually thereafter

Do nothing The individual in this question has yet to establish a relationship with the broker-dealer and would be defined as a consumer. If a broker-dealer plans to share the information with only affiliates, there is no requirement to provide the consumer with a privacy notice. If the broker-dealer intends to share the information with a non-affiliated third party, a privacy notice must be provided to the consumer before the information is disclosed. If the individual establishes a relationship as a customer of the broker-dealer, the privacy notice must be provided at that time and annually thereafter. This privacy notice would allow the customer to opt out of sharing this information with the non-affiliated third party.

Which of the following statements concerning duration is TRUE? A well-diversified index stock fund will have duration of approximately 1.0. Due to their extended holding period, long-duration funds are right only for young investors with a suitable time horizon. Duration is the measurement of the period in which a CDSC will be assessed on a Class B share. Duration is a measurement of a given bond's sensitivity to interest-rate swings.

Duration is a measurement of a given bond's sensitivity to interest-rate swings. Factors affecting a given bond's duration include maturity and coupon. For the Series 6 Examination, remember that a long-duration bond portfolio is much more price sensitive to interest-rate swings.

Which of the following statements concerning ETFs is TRUE? ETFs are considered to be hedge funds by the SEC ETFs may only hold equity positions ETFs grow tax-deferred ETFs are typically tax-efficient

ETFs are typically tax-efficient Exchange traded funds (ETFs) are investments that resemble UITs. They may invest in either equity or debt instruments. A fixed portfolio is typically constructed to either track a specific index (e.g., The Wilshire 5000) or a given market segment such as airlines or medical companies. An ETF's portfolio typically remains constant unless there is a change to the underlying index or in one of the individual investments within the fund. These changes may be the result of a corporate event such as a merger or spin-off. This lack of trading within the portfolio results in ETFs being more tax-efficient when compared to a traditional mutual fund since fewer capital events are generated. Tax-efficient means fewer taxable events are generated each year so the client has fewer 1099 items to report. Note: tax-efficient does not imply that ETF investments grow tax-deferred or tax-free. ETFs are not hedge funds, so there is no requirement that investors in these products be accredited.

Which of the following is NOT required when opening an account for a partnership? Each partner's address Each partner's citizenship Each partner's discretionary approval Each partner's tax identification number

Each partner's discretionary approval When opening an account for a partnership, all partners must sign the new account form. In addition, each partner's address, citizenship and tax identification number is required. Discretionary permission is not required.

Tom, Dick, and Harry share in a tenancy-in-common (TIC) account worth $600,000. The account holds several mutual fund and individual stock positions. Which of the following statements is most accurate? Each party owns an equal portion of the assets and receives a Form 1099 for his portion of the taxes due Each party owns an equal portion of the assets but only one of the three receives a Form 1099 Since each party may own differing percentages of the account assets, each receives a Form 1099 for his portion of the taxes due Each party may own equal or differing percentages of the account assets, but only one of the three receives a Form 1099

Each party may own equal or differing percentages of the account assets, but only one of the three receives a Form 1099 In a TIC account, holders may have equal or unequal interests. In our example, each may own 1/3 of the account or Tom could potentially own 80% with Dick and Harry each owning 10%. Under IRS rules, each account is given a primary tax identification number associated with one of the individual owners. Only one Form 1099 is sent out. It is up to the account holders to divide their respective tax responsibility.

All of the following information should be obtained by a registered representative when opening a new account for a customer, EXCEPT the: Street address Tax identification number Occupation Education

Education

Two individuals hold $100,000 in assets in a JTWROS account. Each party's ownership in the account may be described as: Equal and divided Equal and undivided Unequal and divided Unequal and undivided

Equal and undivided

A corporation has filed for bankruptcy. Which of the following securities issued by that corporation has seniority in the liquidation process? Common stock Debentures Equipment Trust Certificate Participating preferred stock

Equipment Trust Certificate When a corporation is liquidated, its assets are sold and the proceeds are distributed. Secured creditors are paid first (i.e., equipment trust certificate holders), then unsecured creditors (debenture holders), then preferred stockholders, and last, the common stockholders. This would make Equipment Trust Certificates the senior security of those listed.

Mutual funds generally update their registration statements: Every six months Every nine months Every 12 months Every 18 months

Every 12 months

If a registration statement contains untrue statements or omits material facts, any person acquiring the security may sue all of the following, EXCEPT: Every person who signed the registration statement Every underwriter of the security Every director or partner of the issuer Every sales representative who marketed the issuer

Every sales representative who marketed the issuer

A 57-year-old customer has his funds allocated in the following manner: 40% allocated to equity growth mutual funds, 25% allocated to international mutual funds, 20% allocated to sector ETFs, and 15% allocated to bond ETFs. If the customer's current investment objectives are growth and income, which of the following is the MOST suitable? Exchange the sector ETFs with convertible bond ETFs Exchange the bond ETFs with global allocation mutual funds Exchange the growth equity mutual funds with high-yield bond mutual funds Exchange the international mutual funds with small cap ETFs

Exchange the sector ETFs with convertible bond ETFs It is important to note that only 15% of the investor's current portfolio is focused on producing income. By exchanging the sector funds with convertible bond ETFs, the investor will increase the income producing portion of the portfolio to 35%, while still achieving potential capital appreciation. Choices (b) and (d) do not increase the percentage focused on producing income. As for choice (c), exchanging the growth funds for high-yield bond funds will reduce the growth portion of the portfolio to 45% and also expose the portfolio to greater credit risk.

A disciplinary action concerning a registered representative (RR) is reported by the firm through which of the following? CRD Form U4 Form U5 BrokerCheck

Form U4 Disciplinary actions concerning an RR are reported by the employing firm as an amendment to the RR's Form U4. Form U4 is originally processed when an RR joins a firm and updated thereafter. Form U5 is processed when an RR leaves employment with a firm and also contains information regarding the RR's disciplinary history. Form U6 is filed by an SRO (e.g., FINRA), but not by a member firm, to report disciplinary actions against broker-dealers and RRs. All three of these forms feed information into the Central Registration Depository (CRD) system. Some of the information that's found in the CRD system may be accessed by the public through FINRA's BrokerCheck system.

Regulators, states, and/or other jurisdictions use which form to report disciplinary actions against registered representatives and/or firms? Form U5 Form U4 Form U6 Form BD

Form U6 Form U6 is used to report disciplinary actions against RR's and firms as well as final arbitration awards against individuals or firms. Form U4 is filed with FINRA when a person is applying for securities registration. Form U5 is filed with FINRA when a person's registration is terminated. Form BD is filed by brokerage firms to register with FINRA, the SEC, and states.

Cecil and Lisa James recently retired. They plan to spend much of their time traveling. They would like their daughter, Emily, to make investment decisions regarding their mutual fund accounts while they are gone. They would also like Emily to be able to transfer funds from their mutual fund accounts to their bank accounts. Which of the following forms would be necessary to permit this arrangement? Limited discretionary authorization Full discretionary authorization Guardianship appointment New account card for Emily

Full discretionary authorization Full discretionary authorization permits the authorized third party to make investment decisions for the account and to withdraw money and securities from the account. A limited authorization permits the third party to make investment decisions, but not to withdraw money or securities from the account.

Which of the following issues mortgage-backed securities that are fully guaranteed by the U.S. government? Federal National Mortgage Association Government National Mortgage Association Federal Home Loan Mortgage Corporation Collateralized Mortgage Obligations

Government National Mortgage Association Of the choices given, only GNMAs are fully guaranteed as to principal and interest.

According to FINRA advertising rules, which of the following choices is an acceptable product description? GrowPlan II, a variable life insurance policy The Wall Street Market Annuity The Investors Growth Policy The Safe Harbor Lifetime Income Contract

GrowPlan II, a variable life insurance policy According to SRO rules, since names can be misleading, an investment must clearly be described as either a variable life insurance policy or a variable annuity. Firms may use proprietary names, but all policy descriptions are required to clearly delineate the type of investment offered.

In order to qualify as diversified, an investment company must: Have at least 75% of its assets invested in a prescribed way Own investments in at least 10 different industries Own stock in at least 25 different companies Both (b) and (c)

Have at least 75% of its assets invested in a prescribed way To call itself diversified under the Investment Company Act of 1940, an investment company must accept two specific restrictions on 75% of its portfolio. (1) It cannot own securities of any one company in an amount that would be greater than 5% of its total portfolio. (2) Within the restricted part of the portfolio, it may not own more than 10% of the voting stock of any one company. The remaining 25% of the portfolio can be invested in any manner.

Joe Powell, age 67, owns 3,250 accumulation units of a variable annuity valued at $7.70 each. He wishes to retire and begin receiving benefit payments each month for life. All of the following would be used to determine the number of annuity units he would have except his: Age Health Gender Choice of payout option

Health When a client wishes to receive benefit payments from an annuity, he must exchange his accumulation units for annuity units. The factors considered are the annuitant's age and gender, value of the accumulation units held, the payout option selected, and the assumed interest rate. The health of the annuitant is not taken into consideration.

Three business partners have opened a brokerage account as Joint Tenants with Right of Survivorship (JTWROS). All of the following statements are TRUE, EXCEPT: If one partner dies, his interest in the account will pass to his estate The firm may accept an order from any of the partners Checks that are issued by the firm from the account must be in the name of all of the owners When opening the account, the firm must obtain Social Security numbers from all three owners

If one partner dies, his interest in the account will pass to his estate If the account had been opened under the Tenants-in-Common form of ownership, the deceased partner's portion would flow to their estate.

A registered representative photocopied an article that was published in a national magazine and touted the return of a mutual fund sold by her firm. According to FINRA rules, if she plans to send it to potential customers, which of the following statements would be TRUE? Sending a photocopied article is considered a violation of industry rules If a principal approves the photocopied article within ten business days of use, the use would be acceptable A principal must approve the photocopied article ten business days prior to use If the photocopied article is approved by a principal prior to use, sending it to potential customers is acceptable

If the photocopied article is approved by a principal prior to use, sending it to potential customers is acceptable

Which of the following statements is TRUE concerning the use of an illustration when selling a variable life policy? Illustrations of variable policy performance are prohibited under FINRA's Conduct Rules. BIllustrations may include the average return generated by the policy over the prior 10-year period. Illustrations may include any reasonable performance figure, but must be created by the sponsor and filed with FINRA. Illustrations using a 12% growth rate are permitted as long as a 0% growth rate is also provided.

Illustrations using a 12% growth rate are permitted as long as a 0% growth rate is also provided.

In a public offering, due diligence begins: In the preregistration period In the cooling-off period Just prior to the effective date In the post-effective period

In the preregistration period Due diligence take place throughout the entire registration process, but begins in the preregistration (pre-filing) period

On behalf of her firm, a registered representative is holding a seminar and the audience will consist of registered representatives from other member firms. This type of communication is considered: Institutional communication Retail communication Correspondence Internal communication

Institutional communication Any communication that is directed only to registered representatives is defined as institutional communication. As it relates to communication, the definition of an institutional investor includes a FINRA member firm and its registered persons. On the other hand, if the audience consisted of only employees of the member firm that is providing the seminar, it would be considered internal communication.

Which of the following statements about interest on U.S. government bonds is NOT TRUE? Interest is subject to federal income tax Interest is exempt from state income tax Interest is exempt from local income tax Interest is exempt from all taxation

Interest is exempt from all taxation

Which of the following types of risk have the greatest impact on a long-term corporate bond fund during the first year of the investment? Interest-rate risk Liquidity risk Market risk Inflation risk

Interest-rate risk A change in interest rates will most likely have the greatest impact on the bond fund in the first year of the investment. If interest rates go up or down, there could be a significant change the fund's NAV. The risk presented by inflation is more significant over a longer term. Liquidity risk is the risk that a security cannot be traded quickly enough in the market to prevent a loss (or make the required profit). Market (systematic) risk is the risk that a security's value may decline over a given period due to economic changes or other events that impact large portions of the market.

According to CAPM, all of the following choices are examples of diversifiable, nonsystematic risk, EXCEPT: Credit risk Interest-rate risk Business risk Industry risk

Interest-rate risk Interest-rate risk is the systematic risk for bonds just as beta measures the systematic risk for stocks. Systematic risk is market risk, which persists despite diversification.

The fund that would probably have the most price volatility is a(n): International equity fund Growth fund Income fund Municipal bond fund

International equity fund In general, bond funds are less volatile than equity funds. Within the equity category, the NAVs of growth and income bond funds are considerably less volatile than international equity funds whether corporate or municipal. International equity funds are not only vulnerable to market risk, but exchange and political risk as well.

A customer contacts her registered representative to buy an OTC stock. Rather than buying the shares directly from a market maker, the broker-dealer contacts another broker-dealer and that firm buys the shares from a market maker. Since this creates two levels of transaction fees, it is referred to as: Free-riding Interpositioning Backing away Churning

Interpositioning Interpositioning occurs when, while executing an order for a customer, a broker-dealer places another broker-dealer between itself and the market. This practice is generally prohibited, unless the customer received a better price by executing the transaction in this manner. Backing away is a violation which involves a market maker failing to honor a firm quote that it has given to another dealer.

A 40-year old single woman who's earning a comfortable salary is looking to invest for her retirement. She's somewhat concerned about the risk of investing in the stock market, but wants to protect herself against inflation. Which of the following recommendations is considered suitable for her portfolio? Investing 20% in equities Investing 70% in equities Investing 10% in equities Investing 50% in equities

Investing 50% in equities Despite the investor's concerns about the stock market, her age indicates that she should invest a significant portion of her portfolio in equities since they provide a good hedge against inflation. The formula 100 - Age can be used to determine the approximate percentage to invest in equities. For this investor, she should devote 60% of her portfolio to equity investments. However, when her concerns about the market are taken into consideration, a mix of 50% equities may be more appropriate. The choice of investing either 10% or 20% in equities are too small, while the 70% choices is too large.

An individual invests $12,000 in the ABC family of funds and signs a letter of intent (LOI) for the additional $13,000 that is needed to reach the first breakpoint. Which of the following actions will satisfy her LOI commitment? Investing another $20,000 in the ABC fund family 15 months later Investing another $15,000 at the same broker-dealer, but in a different fund complex Purchasing $25,000 of a variable annuity that contains some subaccounts that are sponsored by the ABC fund family Investing another $15,000 in the ABC fund family within 13 months.

Investing another $15,000 in the ABC fund family within 13 months. To qualify for a breakpoint, all of the fund purchases must be within the same mutual fund family (complex). For this reason, any purchase of shares from another fund family will not be included. A purchase 15 months later occurs too late since all purchases under an LOI must occur within 13 months. A purchase of a variable annuity is also of no benefit since the purchases of annuities and mutual fund shares are not typically considered combined purchases.

An investor will pay the lowest price to purchase a new issue by purchase through the: Managing underwriter Syndicate member Selling group member Investors pay the same POP regardless of who they purchase the offering through

Investors pay the same POP regardless of who they purchase the offering through Rules require all members of an underwriting group to sell the new offering at the same POP while agreements are in effect. Only when released from the commitment can members sell the security at a different price.

An individual who transfers funds from one 401(k) plan to another 401(k) plan: Must be at least age 59 1/2 to avoid any penalties Will receive a check that must be rolled over within 60 days of receipt to avoid taxes Is not subject to any taxes or penalties May only do so once per year

Is not subject to any taxes or penalties The transfer of funds from one retirement plan to another retirement plan of the same type is not considered to be a distribution or a rollover. There is neither a limit as to the number of transfers that an individual may execute, nor are there any taxes or penalties. This differs from receiving a distribution from a retirement plan. The distribution must be rolled over into another qualified plan within 60 days of receiving the money in order to avoid taxes and penalties. Rollovers may only be done once per year (per rolling 12 months).

Which of the following statements is TRUE regarding a client's occupation when determining financial status and making recommendations? Its importance relates solely to the amount of income it produces It affects the liquidity needs of the client's portfolio It is generally irrelevant to evaluating the client's financial needs It is only relevant if the client works in the securities industry

It affects the liquidity needs of the client's portfolio A client's occupation is an important part of her profile. A client with unpredictable income will have a greater need for liquidity than one with a more steady, reliable source of income.

Which of the following statements concerning a TSA is TRUE? It grows tax-free It is not subject to contribution limits It has a zero cost basis It may provide for tax-free distributions

It has a zero cost basis Tax-sheltered annuities (TSAs) are employer sponsored plans that are available to employees of certain non-profit organizations and public education institutions. TSAs offer tax-deferred growth and are subject to the same contribution limits that apply to 401(k) plans. Since TSAs are funded on a pre-tax basis with contributions coming directly out of an employee's paycheck, they have a zero cost basis. In other words, at the time of distribution, every dollar removed is taxable as ordinary income.

A customer sends a registered representative an email with a question about the objectives of a mutual fund the customer is thinking about purchasing. The RR then sends an email reply to answer the customer's question and recommends the purchase of the fund. Which of the following statements is TRUE regarding the RR's email? It is considered correspondence and is subject to review by his firm The email is considered official firm business only if sent through the firm's system but it is not subject to firm rules if sent from the RR's home computer An email is treated like a phone conversation for regulatory purposes and is not subject to review by the firm The email would be considered retail communication and is subject to review by both the firm and FINRA

It is considered correspondence and is subject to review by his firm Email to a particular client is considered correspondence and is subject to review under the broker-dealer's supervisory procedures. This is true regardless of whether it is sent from the firm or the RR's home. Some broker-dealers require a review of all correspondence, including email, while other firms employ a spot-check approach. Regardless of which system a broker-dealer uses, its RRs must comply with the firm's internal rules for correspondence when sending email. Some firms may prohibit RRs from sending email to clients. Remember, group email is considered retail communication, not correspondence. Retail communication that refers to investment companies must be reviewed by both the broker-dealer and filed with FINRA.

Over the last five years, the Boondoggle Fund has been one of the top-performing small-cap mutual funds in terms of total return. It would like to create some sales literature that includes performance information for this period. Which of the following statements is TRUE? It may include total return information in sales literature only if the same information is found in the fund's prospectus It must also include total return information for one-year and ten-year periods It must also include yield information on the fund The fund can publish any performance information it wishes to in sales literature, as long as it is accurate and the fund keeps records to back up the computation

It must also include total return information for one-year and ten-year periods SEC Rule 34b-1 under the Investment Company Act of 1940 requires that certain items of information be contained in investment company sales literature in order for it to avoid being considered misleading. Sales literature that contains performance information for all funds except money-market mutual funds must contain total return information for one-, five-, and ten-year periods (or for the life of the fund if it was not in existence for the last five- and/or ten-year periods). Sales literature for non-money-market mutual funds need not contain yield information, but if it does, current yield must be included.

A registered representative has learned that his broker-dealer is now able to offer a popular family of mutual funds that one of his clients had recently expressed an interest. The RR would like to send an email to the client notifying her that the funds are now available through his firm. Which of the following statements is TRUE regarding this email? It is not covered by FINRA rules since it is electronic rather than hard-copy It must be handled under the firm's procedures for RR correspondence It must be approved by a principal of the firm DThis type of communication with customers is not permitted under any circumstances since it might be considered a prospectus

It must be handled under the firm's procedures for RR correspondence Under industry rules, electronic communications sent to 25 or fewer retail investors, such as text messaging and email, are considered correspondence. FINRA does not require principal approval of correspondence prior to use, but firms are allowed to implement their own rules. FINRA merely requires a broker-dealer to create policies and procedures for handling both incoming and outgoing correspondence that is appropriate based on the nature of the firm's business. Every RR must be familiar with their own firm's policies regarding correspondence.

Which of the following accounts allow for its owners to have a different percentage of interests? Joint Tenants with Right of Survivorship Joint Tenants in Common Spousal IRAs Uniform Transfer to Minors

Joint Tenants in Common Only Joint Tenants in Common (JTIC) allow for owners to have a different percentage of interests in the account. Owners in Joint Tenants with Right of Survivorship (JTWROS) have equal interests. Spousal IRAs and Uniform Transfers to Minors (UTMA) are individual accounts and have only one owner.

Which of the following types of accounts would NOT require supplemental documentation in addition to the new account form? Joint account Corporate account Partnership account Trust account

Joint account To open a corporate account, a corporate resolution must be provided. For partnership accounts, the partnership agreement is necessary. The trust agreement should be supplied when opening a trust account. Joint accounts (tenants-in-common and joint tenants with right of survivorship ) do not generally require supplemental documents.

According to FINRA rules, an e-mail complaint: Does not constitute an official complaint and does not need to be retained by the broker-dealer Must be maintained for four years Must be maintained for six years Must be maintained for the life of the member firm

Must be maintained for four years Records of customer complaints must be maintained for four years according to FINRA record-keeping rules. Complaints can be delivered in any written format, including letters, e-mails, and text messages.

Upon learning of the death of a customer, a registered representative would NOT: Cancel all outstanding orders Mark the account deceased Await instructions from the executor of the customer's estate Liquidate all positions in the account if directed to do so by any member of the customer's immediate family

Liquidate all positions in the account if directed to do so by any member of the customer's immediate family When a client dies, a registered representative should cancel all open orders immediately and mark the account deceased. She should then await instructions from the executor of the estate.

Which of the following options positions allow the investor to purchase the underlying security? Long call Short call Long put Short put

Long call An investor who purchases (goes long) a call option acquires the right to purchase the underlying security. On the other hand, if the buyer decides to exercise the call, the investor who sells (goes short) the call assumes the obligation to sell the underlying security. An investor who buys (goes long) a put acquires the right to sell the underlying security. On the other hand, if the buyer decides to exercise the put, the investor who sells (goes short) the put assumes the obligation to buy the underlying security.

Which of the following option positions allow the investor to sell the underlying security? Long call Short call Long put Short put

Long put An investor who buys (goes long) a put acquires the right to sell the underlying security. On the other hand, if the buyer decides to exercise the put, the investor who sells (goes short) the put assumes the obligation to buy the underlying security. An investor who purchases (goes long) a call option acquires the right to purchase the underlying security. On the other hand, if the buyer decides to exercise the call, the investor who sells (goes short) the call assumes the obligation to sell the underlying security

Which of the following descriptions best characterizes an index fund? High portfolio turnover and relatively numerous taxable events Low portfolio turnover and relatively numerous taxable events High portfolio turnover and relatively few taxable events Low portfolio turnover and relatively few taxable events

Low portfolio turnover and relatively few taxable events Index funds mimic the index they are tracking and tend to make very few changes in the portfolio. As a result of this low turnover, there are few taxable events associated with an index fund.

When opening an account, a customer supplies the RR with basic information necessary to open the account, but refuses to provide the representative with financial or tax information. This would limit the RR's ability to: Accept unsolicited orders from the client Provide prospectuses to the client upon request Accept a third-party trading authorization naming the client's spouse Make recommendations to the client

Make recommendations to the client RR's who make recommendations to customers must have reasonable grounds for believing that their suggestions are suitable, based on the client's financial situation, tax status, investment objectives, and any other relevant information collected. If the RR has no such information, justifying any recommendation will be difficult.

Before recommending an investment only meant for accredited investors broker-dealers must verify a customer meets these standards by: Reviewing a copy of IRS tax forms Obtaining a written statement for the investor's accredited status from a CPA Reviewing bank and brokerage account statements for the prior three months Making a reasonable effort to ensure the customer is an accredited investor

Making a reasonable effort to ensure the customer is an accredited investor The SEC suggests methods to determine accredited status which include reviewing a copy of IRS tax forms, obtaining a written statement for the investor's accredited status from a CPA and reviewing bank and brokerage account statements for the prior three months. These are not required methods. The requirement is making a reasonable effort to ensure the customer is an accredited investor.

All of the following are legitimate 12b-1 expenses of a mutual fund, EXCEPT: Printing expenses Trailer commissions Management fees TV ad costs

Management fees 12b-1 fees are used to pay the costs of distributing and marketing fund shares to the public. This would include printing, TV ads and trailing commissions. Management fees are charged to pay the adviser of the fund for making the investment decisions in the portfolio.

In evaluating common stock, which of the following is the MOST important? Par value Market value Stated value Discounted value

Market value

According to SEC rules, which of the following is NOT TRUE regarding confirmations of purchases and redemptions of mutual fund shares? A confirmation must be sent after each transaction in a non-money-market mutual fund account A confirmation for a transaction in a money-market mutual fund account may be sent at the end of the month A confirmation for a money-market mutual fund account may be sent to a customer's investment adviser instead of the customer Money-market mutual funds can elect not to send confirmations if the customer consents

Money-market mutual funds can elect not to send confirmations if the customer consents SEC rules generally require broker-dealers to send confirmations to customers for each security transaction. Money-market funds may elect not to send a confirmation for each transaction as long as the fund sends a monthly statement instead. Customers can elect to have another person receive these statements on their behalf (such as an investment adviser), but they may not elect to forego confirmations altogether.

The cash surrender value of a variable life insurance policy is calculated: Daily Weekly Monthly Annually

Monthly The cash surrender value of a variable life insurance policy is calculated monthly. If one wanted to know the current cash value of the policy, it is normally calculated everyday similar to a mutual fund.

Cash dividends declared by a corporation: Must be approved for payment by the shareholders Must be approved for payment by the board of directors Are taxed as capital gains Are not taxed

Must be approved for payment by the board of directors Shareholder approval is not needed to declare a cash dividend, although a company must obtain shareholder approval for a stock split. Any cash dividends paid to shareholders are taxed as ordinary income in the year received, not capital gains.

A mutual fund's statement of additional information: Contains only information that is not considered material to investors Is sent to investors after their initial purchase of fund shares Must be sent by the fund to any interested party who requests it Is filed with the SEC as part of the fund's registration statement, but it is not available to the general public

Must be sent by the fund to any interested party who requests it A mutual fund's statement of additional information (SAI) contains information that a mutual fund investor may find relevant. However, the SAI information is more technical and not considered as important as that which is found in the fund's prospectus. The SAI provides some of the following information: Additional disclosure on securities, risks, and policies The fund's audited financial statements The fund's portfolio of securities as of the date of the SAI Information regarding any person that owns 5% or more of the fund's shares The SAI is filed with the SEC as part of the fund's registration statement. Thereafter, a mutual fund is only required to send an SAI to any person that requests one; it is not specifically required to freely distribute it.

Which of the following statements is TRUE regarding the advantage of investing in mutual funds? All regulated investment companies provide a minimum of $100,000 in SIPC coverage Registration with the SEC assures that a minimum standard of portfolio quality will be maintained Subchapter M allows fund assets to grow tax-free Mutual funds that meet the conditions of Subchapter M do not pay federal tax on net investment income distributed to shareholders

Mutual funds that meet the conditions of Subchapter M do not pay federal tax on net investment income distributed to shareholders

A broker-dealer's privacy notice must include all the following information, EXCEPT the: Kind of personal information that the firm collects Names of any other financial institutions with which the firm is affiliated Fact that clients may opt out of having their information shared with others Types of third parties to which the firm may disclose information

Names of any other financial institutions with which the firm is affiliated privacy notice must include the information contained in all the choices, except the names of other financial institutions with which the firm is affiliated. Only those firms with which information is shared have to be disclosed.

The use of a prospectus in selling a security relieves a salesperson from the responsibility to disclose to a customer: The risks associated with investing Negative financial information about the company Neither (a) nor (b) Both (a) and (b)

Neither (a) nor (b) Sales for new issues of securities may only be solicited through the use of a prospectus. The prospectus will present investors with all of the pertinent facts needed on which to base investment decisions. The use of a prospectus does not relieve a salesperson from disclosing negative aspects about the issue to prospective purchasers.

Which of the following statements is TRUE regarding open-end investment companies? They may issue common stock, preferred stock, or bonds New shares are continuously being issued Shares are sold at the NAV plus a commission Shares are redeemed by the fund at the asked price

New shares are continuously being issued Open-end investment companies will only issue common stock which sells at the NAV plus a sales charge (for load funds). Open-end investment company shares may be redeemed at the fund's current NAV.

The major provisions of ERISA provide protection for: Investors in mutual funds Participants in private pension plans Participants in government-sponsored pension plans Loss of funds in the case of bankruptcy of a broker-dealer

Participants in private pension plans ERISA gave the government jurisdiction over private pension plans and protects employees from improper investments by their employers. It does not apply to government employer plans.

For a competitive offering of municipal bonds, which document notifies potential bidders of the general features of the offering? Notice of Sale Official statement Prospectus Legal opinion

Notice of Sale For a competitive offering of municipal bonds, the Notice of Sale is created by the issuer to provide potential bidders with information regarding the general characteristics of a proposed bond offering.

In order to conduct a securities offering under Rule 147A, which of the following conditions must be satisfied? All offers must be made to only the residents of one state All offers and sales must be made to only the residents of one state Offers and sales may be made in any state provided the issuer is located in a different state than where it was incorporated Offers may be made in any state, but sales may only take place in one state

Offers may be made in any state, but sales may only take place in one state Companies that are selling new securities are typically required to register their securities with the SEC. However, under Rule 147 and Rule 147A, if a company is conducting an offering and only selling its securities to its state residents, the offering is exempt from registration. Rule 147A allows for multi-state offers (not sales), which means that issuers are permitted to use general solicitation and publicly available websites to locate potential in-state investors. Although offers are able to be made outside of the state, all sales must still be limited to in-state residents. This differs from Rule 147 which dictates that all offers and sales must be limited to residents of one state.

Upon the death of the insured, the proceeds of a variable life policy: Are taxable as ordinary income Are taxable as long-term gains Are taxed as ordinary income to the extent of the premiums paid Pass to the beneficiary free from federal income tax

Pass to the beneficiary free from federal income tax Policy proceeds pass to the beneficiary free from federal income tax upon death of the insured. However, proceeds are included in the policy owner's estate for estate tax purposes.

An insurance company that offers variable life insurance products has offered to provide representatives of RST, a FINRA broker-dealer, with software for their laptop computers. The software can create hypothetical illustrations of policy returns under various interest-rate scenarios. When using this software, the registered representatives would be subject to all of the following guidelines, EXCEPT: The presentation must contain an explanation that a hypothetical illustration is not a projection or prediction of performance One of the illustrations shown to the prospective client must assume a 0% gross rate of return One of the illustrations shown to the prospective client must assume a 12% gross rate of return The returns in the illustration must reflect the maximum mortality and expense charges

One of the illustrations shown to the prospective client must assume a 12% gross rate of return A variable life insurance illustration may use any combination of assumed investment returns up to and including a gross rate of 12%, provided that one of the returns is a 0% gross rate. Even though illustrations may use a 12% rate, members should be sure that this is reasonable given market conditions and available investments. Under some market conditions and for some investment options, a 12% return might not be a reasonable scenario. The returns in the illustration must reflect the maximum mortality and expense charges, although current charges may also be illustrated in addition to the maximums. The illustration must include an explanation that it is hypothetical and does not project or predict actual results.

A community property account can be opened: Only between members of the same family Only between legally married couples Only between business partners Between any two individuals

Only between legally married couples

An investment company may state in a communication that it is the best performer in its category according to a ranking entity: Only if it is ranked first in the category If it ranks in the top 5% of the companies in the category If it ranks in the top 10% of the companies in the category At no time since its position in the ranking may change

Only if it is ranked first in the category

For an open-end investment company, the net investment income consists of: All of the profits from the investment company's operations Dividends, interest, and net capital gains on sales of the portfolio's securities Only net capital gains on sales of the portfolio's securities Only net income from dividends and interest that is paid on securities in the fund's portfolio

Only net income from dividends and interest that is paid on securities in the fund's portfolio The term net investment income is defined as the amount of money that is received by an investment company from the dividends and interest that are paid on securities in the fund's portfolio after expenses have been deducted. Capital gains are not included in the calculation of net investment income.

An investor in a qualified variable annuity had invested $30,000. The annuity has now grown to $50,000. The tax treatment of the distributions during the payout period would be: Capital gains on the entire amount Ordinary income on the amount in excess of the original investment Ordinary income on the entire amount Tax-free on the entire distribution

Ordinary income on the entire amount A qualified variable annuity is used as a retirement vehicle. Contributions are made using pretax dollars and appreciate tax-deferred. All withdrawals are taxed as ordinary income.

An issuer is seeking to raise capital quickly and as cost efficiently as possible. The method that would satisfy this is generally a(n): IPO Follow-on offering Private placement Primary offering

Private placement If structured correctly, private placement qualifies as an exempt transaction. The exemption means that the issuer is not required to register the offering, which saves it both time and money. The first time an issuer offers its securities to the public is referred to as an IPO (initial public offering). Don't confuse this with a primary offering, which while it is a new public offering it is not necessarily the first offering to the public. A follow-on offering is when a company has already gone public and is attempting to raise additional capital with another public offering.

A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences? All proceeds are considered a return of capital. The growth is taxable as a capital gain to the beneficiary. Proceeds in excess of cost are taxable as ordinary income to the beneficiary. The growth above cost is not taxable if the beneficiary rolls it over into a retirement plan.

Proceeds in excess of cost are taxable as ordinary income to the beneficiary.

An individual works for the ABC Company. The company provides a retirement plan for their employees. The amount deposited into the plan will vary the most from period-to-period if the plan is a: Defined contribution pension plan Defined benefit pension plan Profit-sharing plan The amount cannot vary in any plan

Profit-sharing plan Of the choices given, contributions made into a profit-sharing plan would vary the most from year to year. This is because contributions into the plan are based on the company's profits.

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

Projecting the performance of a mutual fund is prohibited under FINRA's Conduct Rules 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.

FINRA rules require registered representatives to update their client's account information: Monthly Quarterly Annually Promptly

Promptly

A registered representative is using a social networking site that permits real-time communication. FINRA would BEST define this type of communication as a(n): Correspondence Public appearance Institutional communication Research report

Public appearance Social media sites that permit real-time communication or interactive, electronic forums fall under the guidelines of a public appearance, according to FINRA. Examples include Facebook, Twitter, and LinkedIn. Most firms do not permit their RRs to use these types of systems to communicate with customers to conduct business because they are not able to monitor the sites. Correspondence is any oral or written communication distributed or made available to 25 or fewer retail investors.

If an investor wants to add leverage to his account, but is not interested in opening a margin account, he could do which of the following? Increase his investment in bonds Add preferred stock to his portfolio Purchase 2x ETFs Invest in aggressive growth funds

Purchase 2x ETFs The investor could purchase 2x or 3x leveraged ETFs which are designed to track an index and provide returns that are based on those multiples. The investor is able to purchase these leveraged ETFs in his cash account; he is not required to open a margin account. Purchasing bonds, preferred stock, or growth funds will not add leverage to a portfolio.

An individual who sells equity securities for a loss is NOT prohibited from claiming the loss if the individual: Repurchased the same securities within 30 days before the sale Purchased an option to buy the securities within 30 days before the sale Purchased a warrant for the securities within 30 days after the sale Purchased a bond within 30 days after the sale

Purchased a bond within 30 days after the sale Individuals who realize a loss on the sale of securities cannot claim the loss on their federal tax returns if they repurchase the security, or substantially the same security (e.g., a call option or warrant), within 30 days of the sale (i.e., 30 days before and 30 days after the sale). This is referred to as the wash sale rule. Since the bonds are not convertible, they're not considered substantially the same and the purchase will not trigger the wash sale rule.

Heather is a registered representative who uses instant messages as a means of communicating with 50 of her high-net-worth clients. This type of communication is considered: Retail communication and is subject to review. Retail communication and is subject to approval. Correspondence and is subject to review. Correspondence and is subject to approval.

Retail communication and is subject to review. A retail communication is defined as any written or electronic communication that's distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. A retail communication containing an investment or financial recommendation, or promoting a product or service of the member firm, must be preapproved by a principal of the firm. Since this question makes no mention of the RR promoting a product or service in the instant messages, the communication is subject to review, but not approval. Correspondence is defined as any written or electronic message that's sent by a member firm to 25 or fewer retail investors within a 30-calendar-day period. Correspondence doesn't require principal preapproval. For correspondence, the method of delivery (whether by e-mail, instant message, or text message) is irrelevant. Instead, the important factor is who receives the communication.

The term deficiency letter is associated with a: Maintenance call issued in a margin account Sale of securities under Rule 144A Registration statement for an offering that will be registered with the SEC Sale of restricted securities by a control person under Rule 144

Registration statement for an offering that will be registered with the SEC If the SEC believes the registration statement or prospectus is incomplete or misleading, it sends a deficiency letter to the issuer. The issuer must then refile an amended registration statement that must be reviewed by the Commission.

Which of the following would NOT be an advantage of reinvesting dividends in a mutual fund? Reinvesting compounds the growth individual's investment Reinvesting is generally done at NAV Reinvesting is done on a before tax basis Reinvesting increases the cost basis of the overall investment

Reinvesting is done on a before tax basis Unless the mutual fund is inside a qualified plan, all reinvested distributions are after tax. The amount of distributions is reported on Form 1099 and would be included as taxable on the investor's tax return for that year. Since the dividends are reinvested, the growth in the investment is compounded and the overall cost basis increases.

Under the Securities Act of 1933, the registration statement that the issuer of new securities files with the SEC must include all of the following information, EXCEPT: Certified financial statements Biographies of all the issuer's officers and directors Results of the due diligence meeting The issuer's capitalization

Results of the due diligence meeting The due diligence meeting is customarily held after the registration statement is filed with the SEC. A final meeting known as bring down due diligence, is held prior to the issuance of the final prospectus. The term bring down refers to making sure all the parties involved in the offering (the underwriter, issuer, attorneys, and other interested parties) are brought up-to-date since the last due diligence meeting. The purpose of the meeting is to make certain that the information to be published in the final prospectus is complete and accurate. Its results are not required as part of the registration statement. All the other choices refer to information that the issuer must include in the registration statement.

The Gemstone Funds offers a retirement planning tutorial that's available to both clients of the firm and select prospects who have been granted access. This tutorial also contains a profiling tool that's found in a password-protected area of Gemstone's website. Under industry rules, this tutorial/profiling section of the website is considered: Correspondence Retail communication Institutional communication A private internal domain that's not subject to SRO regulation

Retail communication FINRA categorizes communications as either correspondence, retail communication, or institutional communication. Correspondence is defined as written or electronic messages sent by a member firm to 25 or fewer retail investors within any 30-calendar-day period. The 25 or fewer investors may be any type of client (existing or prospective). Communication that's sent to more than 25 retail investors is defined as retail communication. Since the offer is being provided to all existing clients as well as a select number of prospective clients, it's assumed that the total number of clients exceeds 25 retail investors.

A customer is given a password to access the broker-dealer's Web site. This Web site is considered: Institutional communication Retail communication Correspondence A public appearance

Retail communication Retail communication is the broadest category of Communication with the Public. Retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors. It includes advertising, sales literature, and access to certain Web sites.

Along with his application, a customer makes an initial $3,000 contribution into a variable annuity. Five days later, he decides that he doesn't want the investment and surrenders the annuity. Because the surrender occurred within seven days of the application being accepted, the member firm must: Return to the client the full amount of the initial payment Return to the client any commissions it earned Return to the insurance company any commissions it earned Obtain a signed statement from the customer which indicates that he understands he will lose a part of his investment

Return to the insurance company any commissions it earned Under FINRA's Conduct Rules, dealer agreements must include a provision which states that commissions on variable products will be returned by the broker-dealer to the insurance company if the variable contract is tendered for redemption within seven business days after the application is accepted. Some variable contracts may contain a free-look provision, but these clauses are typically included because of state insurance laws, not because they're mandated by FINRA.

The right of accumulation includes the: Right to add up the total of all past and present purchases when determining sales charges Right to accumulate commissions until retirement Amount of deferred income to which a retiring executive is entitled Right to switch from one fund to another without incurring additional sales charges

Right to add up the total of all past and present purchases when determining sales charges

Mary has been consistently investing in the Highrise family of funds. Because she has kept her investments concentrated in one family of funds, she has been able to reduce the sales charge on some of her purchases. Mary has been using which mutual fund feature? Breakpoint sales Rights of accumulation Letter of intent Reinvestment

Rights of accumulation Under rights of accumulation, investors can combine purchases made within a family of funds to reach breakpoints and pay a reduced sales charge on the purchases that take into consideration the total investment over a breakpoint level. A letter of intent allows investors to pay a reduced sales charge on an original investment as well as subsequent investments if they sign a letter stating their intention to buy more shares within a family of funds and reach a breakpoint within 13 months. A breakpoint sale is a violation of the Conduct Rules. This occurs when a representative does not adequately describe the breakpoint feature to an investor and is accused of not doing so to maximize the sales commission.

An example of a regressive or flat tax is: Income tax Sales tax Gift tax Estate tax

Sales tax Regressive or flat taxes are those that remain the same regardless of the amount of income. A sales tax is an example of a flat tax. On the other hand, progressive taxes increase along with the level of a person's income. Examples of progressive taxes include income, gift, and estate taxes.

Which of the following members of an underwriting group have no liability in a firm commitment? Manager Syndicate member Selling group member All members have a liability

Selling group member Selling group members don't assume financial liability; instead, they act as agents. The manager and syndicate members share in the liability and unsold securities are allocated among them.

A mutual fund wholesaler has given an RR a piece of preapproved sales literature. What course of action on the part of the RR is acceptable? Filing it with FINRA and having it preapproved by a principal prior to distribution Filing it with the SEC and having it approved by a principal prior to distribution Having it approved by a principal prior to distribution Sending it out since it has already been vetted through the fund's compliance officer's policies and procedures

Sending it out since it has already been vetted through the fund's compliance officer's policies and procedures If sales literature (retail communication) has been pre-approved and filed with FINRA, it's not required to be filed again with FINRA. Also, it's not required to be approved again by a principal at the RR's firm.

Safe Harbor Advisors wants to place an ad regarding the yield on its tax-free money-market offerings. Which of the following time frames is/are appropriate? Seven days 30 days 365 days One, five, and 10 years, and the life of the fund

Seven days The SEC permits yield-based advertising. For longer-term mutual funds, an SEC-standardized 30-day yield must be utilized. For money-market mutual funds, a seven-day time frame is used.

Which of the following statements is characteristic of a closed-end investment company? Shares may not sell below the net asset value The investment company must distribute all income to shareholders Shares are redeemed at the net asset value minus a redemption fee Shares may sell at a premium or discount to the net asset value

Shares may sell at a premium or discount to the net asset value The market price for a closed-end investment company is based upon supply and demand for the shares in the marketplace. A closed-end investment company share may sell at, above, or below its net asset value. Open-end investment company shares may never sell below the current net asset value. Shares are sold at the current market price; they are not redeemed like in an open-end fund.

Over the course of one year, an investor has realized a $8,000 long-term capital gain and a $12,000 short-term capital loss. For tax purposes, what is the result for the investor? She's taxed on the $8,000 long-term capital gain. She has a $4,000 short-term loss carry forward. She has a $1,000 short-term loss carry forward. She has no gain or loss to carry forward.

She has a $1,000 short-term loss carry forward. The result after netting the gain and loss is a short-term captial loss of $4,000 ($12,000 - $8,000). Of the remaining $4,000 loss, $3,000 of it can be used to offset ordinary income, which leaves a $1,000 short-term capital loss carry forward.

A client deposits $2,200 into an open-end investment company. After 60 days, she signs a letter of intent for a $10,000 breakpoint. Six months later, she deposits $11,000 into the fund. Which of the following statements is TRUE? She will not receive a reduction in the sales charge She will receive a reduced sales charge on $1,000 worth of shares She will receive a reduced sales charge on $3,200 worth of shares She will receive a reduced sales charge on $13,200 worth of shares

She will receive a reduced sales charge on $13,200 worth of shares A letter of intent may be backdated for 90 days and has a duration of 13 months. Any purchases made 90 days prior to signing the letter of intent may be applied toward the contracted breakpoint.

A registered representative sees a favorable report on a mutual fund that his firm is currently offering. The report was issued by an independent mutual fund rating service. The RR orders several dozen offprints (reprints) from the publisher, which includes permission from the publisher to distribute the report to clients and prospects. Which of the following statements is FALSE in this situation? The offprint is considered supplemental sales literature and must be preceded or accompanied by a prospectus if the RR sends it to customers and prospects. The offprint must be approved by a principal at the RR's firm. The offprint must to be submitted to FINRA within 10 days of first use. Since the offprint was created by an independent service and the RR has permission from the publisher to use it, the RR can send it to clients and prospects without satisfying any other conditions.

Since the offprint was created by an independent service and the RR has permission from the publisher to use it, the RR can send it to clients and prospects without satisfying any other conditions. Having the permission of the publisher to distribute the report is not sufficient. If the offprint (reprint) is distributed by the RR, it is considered supplemental sales literature regardless of who created it and must be preceded or accompanied by a prospectus. In addition, the offprint must be approved by a principal of the firm and subsequently submitted to FINRA within 10 days of first use.

The statute of limitations on monetary disputes under FINRA's Code of Arbitration is: Six months One year Five years Six years

Six years

What is the statute of limitations on arbitration claims? One year Two years Five years Six years

Six years

Which of the following activities does NOT take place during the cooling-off period? The due diligence meeting Issuing a red herring Stabilizing the issue Blue-Skying the issue

Stabilizing the issue Stabilization of the issue takes place after the new security is selling in the market. When a new stock issue is going to be offered, a registration statement must be filed with the SEC. After the filing, there is a period when the SEC reviews the information to ensure full disclosure. During the cooling-off period, a preliminary prospectus (red herring) is prepared to be used to receive indications of interest from the public. The issue must be registered in each state in which it will be sold according to state (Blue-Sky) laws. Prior to the completion of the final prospectus, a due diligence meeting is held where all concerned parties (issuer and underwriter) meet to insure that everything has been done properly.

An issuer's capitalization refers to the amount of: Stocks and bonds it has sold Stocks and bonds it owns Long-term (capital) profits it generated in a given year Gross revenue it generated in a given year

Stocks and bonds it has sold Capitalization refers to how a given company has raised money to start or expand its business. This is generally accomplished through the sale of stocks and/or bonds. Capitalization has nothing to do with stocks or bonds the company owns. These holdings are referred to as the company's portfolio holdings.

Interest on U.S. government bonds is: Subject to federal and state income tax Exempt from federal and state income tax Subject to state income tax but exempt from federal income tax Subject to federal income tax but exempt from state income tax

Subject to federal income tax but exempt from state income tax Interest on U.S. government bonds is subject to federal income tax but exempt from state income tax. This is just the opposite of the tax treatment on municipal (state) bonds, where the interest is exempt from federal tax but subject to state tax. This is due to the doctrine of the separation of powers between the federal government and state governments. Each government can tax the interest on its own obligations, but cannot tax the other's. In addition, states usually do not tax the interest received from their obligations owned by residents of that particular state and, in effect, interest is completely tax-free.

The Kerry Fund has a contingent deferred sales charge that begins at 4% and decreases to 0% after the fourth year. If a customer redeems shares of the fund 18 months after purchase, the appropriate CDSC will be: Added to the fund's offering price Subtracted from the fund's offering price Added to the fund's NAV Subtracted from the fund's NAV

Subtracted from the fund's NAV Redemptions of mutual fund shares are based on the next NAV calculated after the proper tender of a redemption notice. A fund's NAV is also known as the bid price. Any redemption charges or contingent deferred sales charges are then deducted from the NAV, and the investor receives the net amount.

The beta of a stock is useful when measuring: Legislative risk Credit risk Systematic risk Inflationary risk

Systematic risk Market risk (also known as systematic risk) refers to the risk that is inherent in all securities due to market volatility. While market risk cannot be eliminated by diversifying a portfolio, it can be measured by a calculation known as beta (a stock's volatility when compared to the volatility of the whole market). Stocks with a beta of more than one are more volatile than the market. Those with a beta of less than one are less volatile than the market.

According to Regulation T, customers must pay for trades on: T+1 T+2 T+3 T+4

T+4 T+4 is the customer payment date specified under Regulation T. Do not confuse customer payment with dealer-to-dealer settlement.

Your client is very concerned about the future of the economy. He is worried about the rise in corporate bankruptcies and believes that there will be a dramatic increase in both inflation and interest rates over the next several years. You would recommend: T-bonds STRIPS TIPS Blue-chip common stock

TIPS Treasury Inflation-Protected Securities (TIPS) are direct obligations of the U.S. government and are considered free from credit risk. They will provide the client with safety of principal and protection from inflation and rising interest rates. The principal of the bond is adjusted semiannually based on the CPI. This will not only protect the principal from inflation, but since the coupon is paid on a greater face amount, cash flow will increase. Choices (a) and (b) are not subject to credit risk, but do not provide a hedge against rising interest rates and a loss of purchasing power due to inflation. Historically, during periods of high inflation, common stock prices have not fared well

Which of the following are tax advantages that are offered by qualified retirement plans? Only tax-deferred growth Only tax deductible contributions Tax deductible contributions and tax-free growth Tax deductible contributions and tax-deferred growth

Tax deductible contributions and tax-deferred growth When a retirement plan is qualified, it allows the company to make tax-deductible contributions on behalf of its employees. These plans also allow employees to contribute on a pre-tax basis on their own behalf. When employees begin taking distributions, they are taxed at the same rate as their ordinary income.

Within a fund family, an investor executes a switch of the shares of the value fund for shares of the growth fund. Which of the following statements is TRUE regarding this switch? There is no tax liability since it is within the same fund complex The investor is responsible for paying taxes on the total value of the switch The investor has 60 days to switch back to the value fund to avoid a tax liability Taxes are owed on any gains that are generated by selling the shares of the value fund

Taxes are owed on any gains that are generated by selling the shares of the value fund Regardless of whether a fund switch is executed within the same or other fund family (complex), the IRS considers it to be a taxable event. The tax liability an investor incurs is a capital gain generated by the fund shares being sold (i.e., the fund shares being sold for more than their original cost). Once a switch has been made, there is no way to reverse it to avoid the tax liability.

Regarding the compensation paid to a mutual fund's investment adviser (IA), which of the following statements is TRUE? The IA earns a portion of the profits that are generated by the portfolio The IA earns a portion of the 12b-1 fee The IA is paid based on the assets under management The IA is paid a percentage of the sales charges which may not exceed 25 basis points

The IA is paid based on the assets under management .This compensation may be referred to as the management or investment advisory fee. Fund managers are not compensated through the sales charges or 12b-1 fees that are collected.

All of the following are methods through which a mutual fund is able to distribute new shares to the public, EXCEPT: A broker-dealer The fund's principal underwriter The fund itself The New York Stock Exchange

The New York Stock Exchange Trades that are executed on the NYSE are secondary market transactions, however, trades involving mutual fund shares are considered primary market (new issue) transactions. Mutual fund shares may be bought and sold through the fund itself, through the fund's underwriter (distributor), or through broker-dealers that serve as dealers for the fund.

If an individual places an order to purchase $1,000 worth of mutual fund shares at 4:30 p.m., what amount will she pay per share? The NAV at close of that day The NAV at close of the next business day The POP at close of the next business day The POP at close of that day

The POP at close of the next business day Mutual fund share purchases and redemptions are forward priced, which means that the price is based on the next computed NAV at the close of business. For orders that are placed before 4:00 p.m., the price is based on that day's close. However, for this question, since the purchase order was placed after 4:00 p.m., the price will be the POP as calculated at the close of the next business day.

The SEC has just declared the registration statement for the Iceberg Fund to be effective. What does this mean? The fund is an appropriate investment for the average investor The SEC has reviewed the registration statement and is allowing sales to commence RRs may describe the offering as being approved by the SEC The SEC has determined that the fund attains the objectives stated in the prospectus

The SEC has reviewed the registration statement and is allowing sales to commence The SEC does not approve or pass on the accuracy of facts disclosed in a prospectus for a new issue of securities. The SEC reviews a prospectus to ensure that the proper facts about the issue have been disclosed. This will enable investors to make a prudent decision about buying the security. If the SEC believes the disclosure is inadequate, it will require the issuer to make changes. Once it no longer believes changes are necessary, it will declare the registration statement effective and allow sales to begin. The suitability of an investment for an individual must be based on that person's specific situation. Suitability cannot be inferred from the fact that the SEC has reviewed the registration statement and declared it effective.

An individual is in the process of opening a cash account with a broker-dealer. The agent requests information regarding the individual's employment, which the individual refuses to disclose. As a result: The account cannot be opened without information on the individual's employer The individual must provide written notification that employer information is not required The broker-dealer must notify FINRA of the refusal The account can be opened

The account can be opened When opening a cash account, FINRA rules do not require information regarding the customer's employer, the individual's birthdate, or Social security number. The RR must request this information, but is not required to obtain it. FINRA requires the customer's name and residence address, if the customer is of legal age, name or names of registered representatives servicing the account and the signature of the principal approving the account when opening a cash account.

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

The brochure is not required to be approved by the RR's principal 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 are not required to be filed with FINRA if another firm has previously filed the material with the SRO and it has not been materially altered. In this case, the brochure has already been filed by the wholesaler's firm; therefore, it's not required to be filed again. Also, since it was approved by a principal at the other firm, the RR's principal is not require to approve it.

An existing customer has moved to a new state. The customer would like to purchase securities through the broker whose office is in the state from which the customer moved. In order to effect the transaction: The broker must be registered in the new state The broker and broker-dealer must be registered in the new state The broker, broker-dealer and security must be registered in the new state The trade can be effected without the broker, broker-dealer and security being registered in the new state

The broker, broker-dealer and security must be registered in the new state

A customer requests a transfer of his account after his broker leaves to join another firm. The firm that the customer wishes to transfer his account is the same firm the broker is now joining. Which of the following is TRUE regarding the transfer request? The carrying firm can deny the request based on the broker's departure The carrying firm can only deny the request if there was a non-compete agreement with the broker The carrying firm can seek a court order denying the request to transfer the account The carrying firm is prohibited from interfering with the transfer request

The carrying firm is prohibited from interfering with the transfer request A non-compete agreement between the carrying firm and the departing broker does not constitute grounds for denying or protesting the transfer. After receiving a transfer request from a customer, the carrying firm cannot seek a court order to deny the transfer request.

A registered representative of a broker-dealer is considering sending a prospective client a summary prospectus for a new nanotechnology fund. Assuming the document is received by the prospect, which of the following statements is TRUE? Under UPC guidelines, the client must receive a complete prospectus in either a paper or electronic format within 24 hours The client may purchase the fund shares solely based on the contents of this mini prospectus The client may purchase the fund shares based solely on the contents of this mini prospectus, assuming he has signed a waiver with the broker-dealer's compliance department attesting to the fact that he is accredited The summary prospectus may be used provided the potential buyer has sufficient ability to make an informed decision and has previously signed the predispute waiver clause of his client agreement

The client may purchase the fund shares solely based on the contents of this mini prospectus Many mutual funds utilize a shorter summary version of the prospectus, which is referred to as a profile or short prospectus. These reader-friendly documents highlight the most relevant information found in the complete prospectus and are designed to encourage potential investors, who may be intimidated by the complete prospectus, to do their due diligence prior to investing. An investor may buy shares based solely on the contents of this document, but must be made aware that she is entitled to a complete (full version) prospectus prior to making a purchase. A complete copy of the prospectus will be sent along with the client's confirmation of purchase (not necessarily within 24 hours). The predispute clause of a client agreement deals with arbitration, not a prospectus.

Which of the following statements concerning the review and retention rules for mutual fund retail communications is TRUE? The communication must be kept on file for at least one year The communication must be kept on file for at least two years The communication and a copy of the approval must be kept on file for at least three years The communication and a copy of the approval must be kept on file for at least six years

The communication and a copy of the approval must be kept on file for at least three years Some examples of retail communications include advertisements, sales literature, Web sites, independently prepared reprints, as well as sales and telemarketing scripts. Retail communications related 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. A copy of the signed or initialed approval document must be kept on file for a minimum of 3 years from the date of last use.

What does it mean when a company's capital structure is highly leveraged? The company owns a larger number of risky stocks The company has a large number of shareholders Accredited investors own a large percentage of the company's shares The company raised a large percentage of its funds through bond sales

The company raised a large percentage of its funds through bond sales A highly leveraged capitalization structure exists when the issuer has sold a large percentage of debt securities to meet its capital needs. This is a risky strategy since bondholders must be paid their interest each year and eventually repaid their principal.

A deficiency letter will typically be sent by the SEC during: The preregistration period The cooling-off period The post- effective period Any phase of the registration period

The cooling-off period If the SEC believes that the registration statement or prospectus is incomplete or misleading, it sends a deficiency letter to the issuer. The issuer must then refile an amended registration statement that must once again be reviewed by the Commission. The deficiency letter is typically sent during the cooling-off period when the SEC is in the process of reviewing the registration statement.

Which of the following is required when opening a cash account for a corporation? The corporate charter The corporate resolution The corporate stock certificate records Signatures of the Board of Directors

The corporate resolution In order to open a corporate account, an individual must supply a corporate resolution authorizing one or more persons to open and operate the account. Orders accepted from anyone not named in the corporate resolution would be unauthorized.

In a soft-dollar arrangement between an investment adviser and a broker-dealer, the broker-dealer would be permitted to pay: The cost of a coach flight for a portfolio manager to attend a conference The cost of a conference concerning the future of the computer software industry The cost of computer terminals used to deliver market data services A percentage of the salaries of the adviser's internal research staff

The cost of a conference concerning the future of the computer software industry Soft dollars are products and services that an investment adviser receives from a broker-dealer in exchange for customer order flow. It is a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its customers. The broker-dealer is permitted to pay for the cost of the conference that an adviser attends concerning securities within an industry in which the adviser will be investing. Travel costs and any costs that should be paid by the adviser (e.g., salaries of the adviser's internal research staff) are not covered under a soft-dollar arrangement. Whereas the cost of the computer terminals could not be paid for with soft dollars, the cost of the data services would be covered by soft dollars.

A tombstone advertisement for an investment company that's published under SEC Rule 134 may not contain which of the following? The current yield of the fund A description of the objectives and investment strategy of the fund The fund's most recent NAV Information as to how the prospectus can be obtained

The current yield of the fund Tombstone ads may not contain performance figures (e.g., the current yield); however, the fund's most recent NAV may be provided. Descriptions of the fund's objectives, investment strategies, and how a prospectus can be obtained are permitted.

Which of the following would be considered the MOST important when determining the suitability of an investment for a customer? The customer's earned income The customer's passive income The customer's discretionary income The customer's investment income

The customer's discretionary income A customer's earned (ordinary) income, passive income and investment income are combined to determine the total amount of income received by the customer. All expenses are subtracted to find the amount of discretionary income the individual has to make investments. A customer without discretionary income is not a current candidate for investments.

Which of the following items is NOT found on a sell order ticket? If the account is discretionary, whether discretion was exercised The customer's original purchase price for the stock The location of the securities Whether the trade was solicited or unsolicited

The customer's original purchase price for the stock A sell order ticket doesn't indicate the investor's original purchase price. All order tickets must contain the customer's account number, whether discretion was exercised, whether the trade was solicited by the registered representative or unsolicited, and it must also indicate the client is selling long (shares that are owned) or selling short (shares that are borrowed). If the client is long the stock, the location of the securities must be indicated (long in the customer's account or held by the customer).

A variable life insurance policy has an AIR of 5%. The separate account recently performed at a 4% rate of return. Which of the following statements best describes the effect of this rate of return on the death benefit of the policy? The death benefit will increase as long as the rate of return is positive The death benefit will decrease to a determined level The death benefit will decrease, but not below the guaranteed minimum The rate of return of the separate account affects only the cash value, not the death benefit

The death benefit will decrease, but not below the guaranteed minimum If the return of the separate account exceeds the AIR, the death benefit will increase. If the return of the separate account is less than the AIR, the death benefit will decrease. However, the death benefit cannot decrease below the initial face value of the policy.

A director of BDG owns 180,000 shares of BDG stock, which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE? The director is permitted to sell the shares if the trade is reported The director is permitted to sell the shares only if they are held for three additional months and the trade is reported The director is permitted to sell the shares and no report is required The director is permitted to sell the shares only if the transaction will result in a loss

The director is permitted to sell the shares if the trade is reported An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation. Immediate family members of the insider are also subject to the same limitations. An officer or director is required to register with the SEC regardless of her ownership levels in the company. The director as an insider is required to report the transaction to the SEC within two business days. Insiders are not permitted to make short-swing profits (based on ownership of six months or less in their own company's stock). Since the director owned the shares for nine months, there is no violation. Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock, and are not subject to the six months' holding.

Which of the following statements is LEAST likely to appear in a mutual fund's prospectus? The fund's annual total return over the last ten years was 8.75% There is no guarantee that the fund will attain its objectives Under unusual circumstances, the fund has the right to fill redemption requests with securities rather than cash (redemptions in-kind) The fund's portfolio consists of common stocks, which are expected to outperform inflation over the next ten years

The fund's portfolio consists of common stocks, which are expected to outperform inflation over the next ten years Statements that can be interpreted as predictions are not allowed in prospectuses, advertising, or sales literature. A variation on this theme is that mutual funds cannot state or imply that past performance predicts future performance. While common stock returns have outpaced inflation in the past, there is no guarantee that this will continue in the future. Many mutual funds reserve the right to make redemptions in-kind, as described in choice (c), for large redemption requests, rather than funding the redemption in cash. This is usually imposed only on redemption requests exceeding $250,000 within a 90-day period.

A client requests the transfer of an account which includes mutual funds that the receiving firm does not maintain a signed selling agreement. Which of the following is NOT TRUE regarding the transfer of the mutual funds? The funds can be transferred with approval of the receiving firm The funds cannot be transferred The funds can be liquated and the proceeds transferred to the receiving firm The funds can be retained in an account maintained by the carrying firm

The funds can be transferred with approval of the receiving firm Mutual funds cannot be transferred to a firm that does not maintain a signed selling agreement with the fund company. In the event a client wants to transfer an account which includes these assets, the carrying firm (the firm from whom the account is being transferred) can liquidate the mutual funds and transfer the monies to the receiving firm, or the funds can be retained in an account held at the carrying firm.

An individual's liquid net worth is equal to: The individual's total assets The individual's total assets that are readily convertible into cash The individual's total assets less their total liabilities The individual's assets that are readily convertible into cash less their total liabilities

The individual's assets that are readily convertible into cash less their total liabilities Net worth and liquid net worth are found on an individual's personal balance sheet. Net worth is equal to the total assets less the total liabilities. Liquid net worth is the total assets that are readily convertible into cash less total liabilities. Liquid net worth is considered a more valuable factor in determining the suitability of a person's investment.

Which of the following is NOT a factor in determining the amount of the net premium in a variable life policy? The investment chosen in the separate account The investment management fee Administrative expenses The sales charge

The investment chosen in the separate account The net premium is the amount of the premium payment that is actually invested in securities. When determining the net premium in a variable life policy, there are various fees and charges that are deducted from the premium paid. They are: the investment management fee, administrative expenses, and the sales charge as well as other operating expenses. The decision as to which subaccount of the variable policy's separate account in which to invest the funds is not a factor in determining the net premium.

Which of the following is TRUE concerning dividend and capital gain distributions made by mutual funds? The investor can choose to reinvest both after tax The investor can choose to reinvest both before tax The investor can choose to reinvest the dividends after tax and the capital gains before tax The investor can choose to reinvest the dividends before tax and the capital gains after tax

The investor can choose to reinvest both after tax Unless the mutual fund is inside a qualified plan, all reinvested distributions are after tax. The amount of distributions is reported on Form 1099 and would be considerd taxable on the investor's tax return for that year.

When publishing total return data, the minimum recommended illustration period is: The lesser of 10 years or the life of the company or account Eight years Five years One year

The lesser of 10 years or the life of the company or account FINRA guidelines state that communications with the public regarding investment companies and variable contracts that show total return data should generally cover a period long enough to reflect variations in value through different market conditions. A period of 10 years is the recommended illustration period. However, if the company or account hasn't been in existence for 10 years, then the illustration period should be for the life of the company or account.

Emma purchased 100 shares of the Landslide Growth Fund on April 1 at $30 per share. On July 5, believing a bear market was starting, she redeemed her investment at $28 per share. Two weeks later, she changed her mind when the market began to move up and repurchased 100 shares of Landslide for $32 each. Which of the following statements is TRUE regarding the tax consequences of these transactions? The loss from the sale on July 5 is disallowed. The new shares have a cost basis of $32 each. The loss from the sale on July 5 is disallowed. The new shares have a cost basis of $34 each. The loss from the sale on July 5 is disallowed. The new shares have a cost basis of $30 each. The loss from the sale on July 5 may be taken in that tax year since the holding period was short-term at the time of the sale. The new transaction is not affected by the sale.

The loss from the sale on July 5 is disallowed. The new shares have a cost basis of $34 each. Because Emma sold her shares at a loss and repurchased the same security within 30 days of the sale, she triggered the IRS' wash sale rule The loss on the shares sold may not be taken (it is disallowed). Instead, Emma must add the loss to the cost basis of the shares she reacquired, giving them a basis of $34 each ($32 purchase price + $2 disallowed loss). Emma could have avoided the wash sale rule by repurchasing another fund with similar investment objectives.

Diana wants to take a partial surrender of cash from her variable life contract. She decides to lower her death benefit and withdraw the maximum amount of cash allowed. For tax purposes, how is this partial surrender going to be accounted for? The money will not be taxable up to the amount of net premiums paid because principal first rules apply As with any withdrawal, interest first rules apply, and any cash value above the basis will be taxable She has the option to pay taxes at this time or defer payment until full surrender She must ask for a specific ruling from the Internal Revenue Service in order to avoid paying taxes at this time

The money will not be taxable up to the amount of net premiums paid because principal first rules apply Partial surrenders of life insurance policies are treated as principal first and are not taxable up to the amount of basis, which is typically the net premiums paid.

Which of the following statements is TRUE concerning periodic payment variable annuities? The number of a client's annuity units change as payments are made The number of a client's accumulation units never changes They never have a beneficiary The monthly payout fluctuates based on the performance in the separate account as compared to the assumed interest rate

The monthly payout fluctuates based on the performance in the separate account as compared to the assumed interest rate During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The first monthly payout is determined actuarially and thereafter is based on the performance of the separate account as compared to the assumed interest rate.

When making a presentation on 529 plans, what information is NOT required? Discussing the risks and costs involved with the different types of plans A disclaimer stating that, prior to investing in a plan, you should read the official statement A disclaimer that the client should check with her home state to learn if it offers tax benefits to those clients who invest in its plan The name and contact information for the municipal securities principal who will approve the customer's investment in the plan

The name and contact information for the municipal securities principal who will approve the customer's investment in the plan Under MSRB rules, an RR is required to disclose certain information when promoting 529 plans. The RR must discuss the risks and costs involved with the different types of plans, must provide a disclaimer stating that, prior to investing in a plan, the customer should read the official statement, and must provide a disclaimer that the client should check with her home state to learn if it offers tax benefits to those who invest in its plan. There is no requirement to provide the name and contact information for the municipal securities principal who will approve the customer's investment in the plan.

A registered representative has just read a positive article on using variable annuities as part of the estate planning process. He would like to photocopy this article and send it to his extensive client base. Which of the following statements concerning this activity is TRUE? Under FINRA and SEC rules, it is prohibited for an RR to send any written material produced by a third party The photocopies would be considered correspondence and subject to approval by the RR's branch manager The photocopies would be considered an independently prepared reprint and subject to approval by a principal The photocopies are considered advertising and must be filed with FINRA

The photocopies would be considered an independently prepared reprint and subject to approval by a principal Once reproduced, articles are considered to be independently prepared reprints. These reprints were not written as sales tools but, if used as such, must be approved by a principal prior to use.

On May 25, the president of MaxCo bought 3,000 shares of MaxCo stock in the open market at $33. Two months later, the stock has increased to $40. If the president now wants to sell the shares: Permission must be granted by the MaxCo board of directors The profit from the trade must be forfeited according to the short-swing profit rule Notification must be made to the corporation's legal counsel Permission must be granted by FINRA

The profit from the trade must be forfeited according to the short-swing profit rule The Securities Exchange Act of 1934 prohibits insiders from making short-swing profits. A short-swing profit is a profit made on stock held by insiders for less than six months. If the president of MaxCo sold stock two months after it was purchased, MaxCo could sue for recovery of the profit. Under Rule 144, the six-month holding period applies only to restricted stock and, since the stock was purchased in the open market, the shares would be considered control stock.

A registered representative works for a brokerage firm that is a dealer for a mutual fund complex. The RR has prepared a script and a slide presentation for a seminar on the funds in the complex and also intends to hand out prospectuses for the funds and a brochure that was created by her firm. In this situation, all of the following should be filed with FINRA, EXCEPT: The script The slide presentation The prospectus The brochure

The prospectus Retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any existing or prospective customer who does not meet the definition of an institutional investor. A script, slide presentation, and brochure are all defined as retail communication and are required to be filed with FINRA or another SRO within 10 business days of first use. Tombstone advertisements, mutual fund profiles, and prospectuses which have been filed with the SEC are exempt from the filing requirement.

A firm's suitability responsibilities for sales of variable annuities do NOT apply to recommendations in which of the following situations? The initial purchase of a variable annuity The reallocation of assets among subaccounts after the initial purchase The exchange of one variable annuity for another The initial subaccount allocations

The reallocation of assets among subaccounts after the initial purchase According to FINRA Rule 2330, suitability requirements for recommendations concerning the purchase of variable annuities apply to 'new purchases', 'exchanges' and 'initial subaccount allocations'. These rules do not apply to the reallocation of subaccount assets after the initial purchase, nor do they apply to purchases of employer-sponsored qualified plans unless a recommendation is made regarding the allocation of subaccount assets in the initial purchase. Many states and brokerage firms require documentation of a customer's acknowledgment of a replacement transaction. These switch acknowledgement forms are typically signed by the annuity contract owner and the salesperson. The acknowledgement form provides a comparison of the features and costs of an existing contract to a proposed contract, and points out the relevant factors to be considered when contemplating an exchange.

Regarding sales literature for mutual funds, which of the following statements is FALSE? The sales literature may not contain performance data. The sales literature could be misleading if it's portrayed in a manner that implies that past gains or income produced would be repeated in the future. The sales literature must be filed with the SEC within 10 days of use. If the sales literature has been filed with FINRA, it's considered to have been filed with the SEC.

The sales literature may not contain performance data. Mutual fund sales literature may contain performance data, such as current yield, total return, or the annualized return over the life of fund. Sales literature could be misleading if it implies that historical results would be repeated in the future. The Investment Company Act of 1940 specifies that promotional material must be filed with the SEC within 10 days of use. As a practical matter, the requirement to file sales literature with the SEC is met by filing with FINRA.

An individual who has been investing in a variable annuity decides to take a withdrawal. What are the tax implications of this withdrawal? The withdrawal is considered a return of capital and is not taxed. The withdrawal is first considered earnings and taxable as ordinary income. The withdrawal is first considered earnings and is tax-free. The withdrawal is considered part return of cost basis and part earnings, with the earnings portion taxable as ordinary income.

The withdrawal is first considered earnings and taxable as ordinary income. When withdrawing money from a variable annuity, it's first considered earnings and taxable as ordinary income. If the withdrawal results in the distribution of some of the contributed funds, that amount is considered a return of capital and is not taxed.

Which of the following is false regarding the suitability of investments? There cannot be a excessive number of suitable transaction executed for a client. A suitable investment may result in losses. An unsuitable recommendation may result in gains. An unsuitable investment may be purchased in a client's account.

There cannot be a excessive number of suitable transaction executed for a client. A series of suitable transactions may be considered churning and excessive for a specific client. Suitable investments may result in losses and unsuitable investments may result in gains. An unsuitable investment may be purchased in a client's account at the client's direction. This would be an unsolicited transaction.

When a beneficiary receives life insurance proceeds in a lump sum: The insurance company pays any inheritance taxes Income taxes are based on amounts in excess of the cost basis There is no income tax liability for the beneficiary Proceeds may be rolled over into an IRA

There is no income tax liability for the beneficiary A beneficiary receiving life insurance proceeds in a lump sum will not incur an income tax liability. There will be a liability if there is a periodic payout.

Which of the following statements is TRUE concerning the use of bond volatility ratings when marketing a mutual fund? This practice is inherently deceptive and expressly prohibited under SEC regulations These ratings must comply with the uniform standard set by Standard & Poor's and Moody's rating agencies These ratings are often called risk ratings and are used for high yield funds exclusively These ratings may account for NAV changes due to currency fluctuations

These ratings may account for NAV changes due to currency fluctuations Bond volatility ratings are independently produced ratings that attempt to quantify how sensitive a given bond fund's NAV is to changes in the economy such as interest rate and/or currency fluctuations. There is no standardized scale for this measurement and these ratings may never be referred to as risk ratings.

Which of the following is NOT TRUE of high-yield bonds? They are issued by companies in bankruptcy. They are also referred to as junk bonds. They are subject to higher-than-normal risk. They typically have higher interest payments.

They are issued by companies in bankruptcy. High-yield bonds, also known as junk bonds, are subject to higher-than-normal risk and often have higher interest payments. Although the companies that issue these bonds have greater credit risk, they are not bankrupt.

Which of the following is TRUE regarding correspondence and institutional communications? They are subject to spot-checking by FINRA. They must be approved by a principal. They must be filed with FINRA. They must be approved by a principal and filed with FINRA.

They are subject to spot-checking by FINRA. Although correspondence and institutional communications are not subject to principal approval and filing with FINRA, they should be reviewed by a principal and are subject to spot-checks by FINRA.

Which of the following is TRUE if a firm will be using bond volatility ratings? They may be used in public advertisements. They may only be used in supplemental sales literature. The rating may be referred to as a risk rating. The fund's prospectus is not required to be sent.

They may only be used in supplemental sales literature. Bond volatility ratings are issued by independent third parties and measure how sensitive a bond fund's NAV is to changes in economic and market conditions. Bond volatility ratings may not be used in public advertisements and cannot be referred to as risk ratings. Instead, they may only be used in supplemental sales literature and the fund's prospectus must be provided.

A file that contains all approved retail communications must be maintained for: Two years after first use Two years after last use Three years after first use Three years after last use

Three years after last use

Local government investment pools (LGIPs) may be created for all the following purposes, EXCEPT: To provide diversification for municipal bond investors To seek higher rates of return than those available from money-market investments As an investment vehicle for municipal bond proceeds To meet the liquidity needs of a school district

To provide diversification for municipal bond investors LGIPs are typically created to provide short-term investment options for state or local government entities. They may also be invested in longer-term securities, or used to invest the proceeds of a new bond issue. They are not offered to municipal bond investors.

If a firm that's distributing institutional communications to specific institutional customer becomes aware of the customer distributing those communications to retail customers, the firm must: Cease distributing communications to that institutional customer Treat future institutional communications to that firm as retail communications Inform the institutional customer that it must file those communications as retail communications Do nothing

Treat future institutional communications to that firm as retail communications If a member firm becomes aware that an institutional investor (e.g., an investment company) is making institutional communications available to retail investors, the firm is required to treat future communications to that institutional investor as retail communications.

An annuitant receives payments under a variable annuity for a number of years. At his death, his widow receives a lump-sum payment. The annuity was a: Variable life annuity Variable joint and last survivor annuity Variable unit refund annuity 20-year endowment annuity

Variable unit refund annuity An annuity in which the beneficiary receives a lump-sum payment upon the death of the annuitant reflecting the value of the remaining annuity units is called a unit refund annuity. If the beneficiary receives the value of the remaining annuity units in installments, it is called an installment refund annuity.

Which of the following investment companies does not charge a management fee? Open-end investment companies Closed-end investment companies Face-amount certificate companies Unit investment trusts

Unit investment trusts Instead, the portfolio within a unit investment trust is supervised, not managed. The portfolio of the trust is fixed and there is no need for an investment adviser.

Investment companies with no management fee and low sales charges, that invest in a fixed portfolio of municipal or corporate bonds, are categorized as: Open-end investment companies Closed-end investment companies Unit investment trusts Face-amount certificate companies

Unit investment trusts Investment companies with no management fee and low sales charges that invest in a fixed portfolio of municipal or corporate bonds are categorized as unit investment trusts.

Under the Code of Arbitration, the maximum claim is: $25,000 $50,000 $100,000 Unlimited

Unlimited There is no maximum claim under the Code of Arbitration. However, under the simplified arbitration procedure, the maximum claim is $50,000.

When is the Statement of Additional Information supplied to a client for a mutual fund offering? When a prospectus is mailed Upon request Quarterly When the semiannual report is mailed

Upon request

Upon receipt of a customer account transfer request, the carrying broker-dealer should first: Liquidate positions to cover the debit balance Freeze the account and cancel orders Try to retain the client by any means Validate or protest the transfer request within one business day

Validate or protest the transfer request within one business day The carrying firm must validate or take exception to the transfer request within one business day. Once validated, the account is frozen and open orders are cancelled. The transfer of a customer account must be completed by the carrying party within three business days of validation of the transfer instructions.

Bedrock Insurance Company offers life and health insurance, as well as investment products, through its broker-dealer subsidiary. Bedrock Insurance is currently bankrupt. Who would be LEAST affected by this situation? Term policyholders Universal policyholders Variable annuity participants General creditors

Variable annuity participants Variable annuity assets are held in a separate account, which are segregated from the other assets of the insurance company. This leaves insurance policyholders and general creditors facing the financial risk.

When analyzing an individual's financial status to determine suitable investments, all of the following would be important considerations, EXCEPT? Whether the individual has adequate insurance coverage Whether there is discretionary income available for investments Are there any anticipated expenditures What is the future earnings opportunities for the individual

What is the future earnings opportunities for the individual Future earnings opportunities do not determine the current suitability of investments. Suitability is based on the individual's situation at the time an investment is being made. An individual should have adequate insurance coverage and discretionary income to make the investment, as well as the ability to cover any anticipated expenditures.

A broker-dealer plans to issue retail communication that contains bond fund volatility ratings. When must the broker-dealer file this type of communication? Within 10 business days of the first use At least 10 business days prior to the first use At least five days business prior to the first use Within five business days of the first use

Within 10 business days of the first use If a retail communication pertains to bond mutual funds and includes or uses bond mutual fund volatility ratings, it's required to be filed with an SRO within 10 business of its first use. In addition, retail communication must disclose the name of the rating entity, the most current rating, the date of current rating, a description of the rating which includes the methodology behind the rating, whether the fund paid for the rating, and the types of risks that the rating measures.

Discretionary accounts require: Written authorization from the customer Oral authorization from the customer Written authorization from the client for each trade the registered representative executes The registered representative to send the client a letter detailing the proposed transaction

Written authorization from the customer In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.

The separate account of the variable life policy that Tom Jones bought is performing poorly. Does this have any influence on his death benefit? No, the death benefit is fixed over the life of the contract Yes, but it could never drop below the highest death benefit attained during the time that the contract began building cash value Yes, but it could never drop below the fixed minimum No, the cash value can only increase over the life of the contract

Yes, but it could never drop below the fixed minimum If the performance of the separate account of a variable life insurance policy is less than the Assumed Interest Rate (AIR), the death benefit will decline. However, the death benefit can never drop below the face value of the policy.

May a brokerage firm place a temporary hold on a securities transaction? Yes, for the account of any investor. No, temporary holds may only be placed on disbursements or transfers of funds and securities. Yes, for the account of a specified adult. Yes, if the customer has a margin account.

Yes, for the account of a specified adult. FINRA rules permit a brokerage firm to put a temporary hold on the disbursements or transfers of funds and securities, as well as the execution of securities transactions. The temporary hold only applies to the account of a specified adult. A specified adult is a person who's age 65 or older or a person who's age 18 or older and who the firm reasonably believes has a mental or physical impairment that renders her unable to protect her own interests.

If a registered representative sends an instant message to more than 25 clients, is supervisory approval required? Yes, because the communication is considered retail communication. Additionally, it must be filed with the appropriate SRO. No, and a record is not required to be maintained. Not under any circumstances. Yes, if it promotes a product or service of the member firm.

Yes, if it promotes a product or service of the member firm Retail communication is defined as any written or electronic communication that's distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor includes both existing and prospective investors. Any retail communication that contains an investment or financial recommendation or promotes a product or service of the firm must be preapproved by a principal. Correspondence is defined as any written or electronic message that's sent by a member firm to 25 or fewer retail investors within any 30-calendar-day period. Correspondence does not require principal preapproval.

A 75-year-old client is looking for a high level of income for his retirement fund. He wants to maintain a balance between income and safety of principal. Which of the following funds will MOST likely meet this requirement? A high yield fund A high grade fund A balanced fund A GNMA fund

a client states that he needs both safety of principal and income, it can be assumed that a significant portion of his money should be in bonds. A balanced fund is a poor choice since it contains both stocks and bonds, which implies a higher principal risk. A balanced fund is also not a very good vehicle for an investor who needs income, since stocks generally pay less in percentage terms than bonds. The high yield fund invests in junk bonds. High yield equals to high risk; therefore, this isn't a good choice either. This leaves the high grade fund and the GNMA fund. The GNMA fund is the BEST choice because GNMA securities are backed by the U.S. government. In contrast, high grade bonds are offered and backed by corporations. Although neither fund is backed by the government, the GNMA fund is still a safer choice. Also, despite the fact that the high grade fund may pay slightly more in income, GNMA funds pay more interest than Treasuries because GNMA yields are based on mortgages. These two facts are what make the GNMA fund a better choice for this investor.