Unit 4 Missed Questions

Mutual fund shares that carry a level load are: A) level shares. B) Class A shares. C) Class C shares. D) Class B shares.

Class C shares. Class C shares carry a 12b-1 charge, which is often referred to as a level load. Class A shares carry a front-end load. Class B shares carry a back-end load.

Under what circumstances may a member firm use a fictional name or DBA (doing business as) in its communications? A) The name is filed with the Securities Information Center. B) Fictional names may not be used. C) The name is filed with FINRA. D) The name is filed with both FINRA and SEC.

The correct answer was: The name is filed with both FINRA and SEC.

Mutual fund Class B shares assess: A) no load. B) a level load. C) a front-end load. D) a deferred sales load

The correct answer was: a deferred sales load. Class B shares carry a deferred sales load. This is sometimes referred to as a back-end load. Class A shares carry a front-end load. Class C shares carry a level load.

The KPF Growth Fund charges no redemption fee. An investor brings 200 shares to your firm for redemption. The next quote on the fund is $9.15 bid, $10.00 ask. If liquidated by the firm without charge, he would receive for his shares: A) $2,000. B) $1,000. C) $915. D) $1,830.

The correct answer was: $1,830. Investors redeem their mutual fund shares at the next calculated net asset value or bid price. Two hundred shares liquidated at $9.15 = $1,830. If there were a redemption charge, it would be subtracted from the total.

A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A) $8.30. B) $8.42. C) $8.57. D) $7.80.

The correct answer was: $8.30. The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge

Which of the following pieces of sales material is exempt from routine spot-checking by FINRA? A) Telemarketing scripts B) A public communication that simply offers a specific security at a specific price C) An independently prepared reprint that has been materially altered since first published D) Radio commercials

The correct answer was: A public communication that simply offers a specific security at a specific price Material that makes no claims for a security, but simply states its price, is exempt from spot-checking

Your customer has just inherited $5,000. She wishes to invest it for long- term growth and has asked for your recommendation. Which of the following recommendations would be the least suitable? A) Class A shares of the MPQ Diversified Growth Fund. B) Class B Shares of the KPF Long-Term Corporate Bond fund. C) Class B Shares of the MPQ Diversified Growth Fund. D) Class A shares of the KPF Long-Term Corporate Bond Fund.

The correct answer was: Class A shares of the KPF Long-Term Corporate Bond Fund. The KPF bond fund does not meet the customer's investment objective of long-term growth so we're going to have to select the least suitable of the two choices given. This customer's investment of $5,000 will qualify for very few, if any, breakpoints. To avoid a front-end load, she should buy Class B shares, which have no breakpoints and which eventually convert to Class A shares after some years, losing even their back-end load. Thus a purchase of Class A shares of a bond fund is the least suitable recommendation.

All of the following items require review by a principal of the member firm EXCEPT A) form letters mailed to existing customers B) form letters mailed to 25 or fewer prospective customers within a 30-day period C) independently prepared reprints D) a sales script that is marked for internal use only

The correct answer was: a sales script that is marked for internal use only The requirements for principal review do not apply to materials to be used internally. Note that form letters mailed to 25 or fewer prospective customers within a 30-day period (correspondence) is reviewed by a principal; pre-approval is not required.

Which of the following mutual fund share classes has no back-end load, lower operating expenses, and low or no 12b-1 fees? A) Class C upon conversion to Class B. B) Class C. C) Class A. D) Class B.

The correct answer was: Class A. Class A shares, also known as front-end load shares, have an up-front sales charge that is usually subject to breakpoints. They have no back-end load and are sold with low or no 12b-1 fee and lower operating expenses.

Under which of the following circumstances could a member firm make alterations to an article on securities before using it as an independently prepared reprint? I. The member firm could alter the presentation format to make it consistent with regulatory standards. II. The member firm could correct the reported number of shares being offered if the original article stated the number incorrectly. III. The member firm could make alterations, provided the article was commissioned by the issuer, not the member firm itself. IV. The member firm could make alterations of content as long as the publisher of the article was an affiliate of either the issuer or the member firm. A) I and II. B) I and III. C) III and IV. D) II and IV.

The correct answer was: I and II. An article may be used as an independent reprint if the publisher is not affiliated with the issuer or the member firm in any way. The member firm may alter the contents of an independently prepared reprint only to correct factual errors or to make the article consistent with regulatory standards.

Which of the following mutual fund share classes are specially suited to investors that have long-term objectives? I. Class A shares for investors that have a large amount to invest. II. Class B shares for investors that have a small amount to invest. III. Class A shares for investors that have a small amount to invest. IV. Class C shares. A) I and II. B) II and IV. C) I and III. D) III and IV.

The correct answer was: I and II. Class A shares have a front-end load with breakpoints and very small 12b-1 fees. The investor with a large amount to invest may end up paying very little or even no sales charge. Class B shares sell at NAV with a contingent deferred sales charge and a noticeable 12b-1 fee. The investor with a small amount to invest would pay no front-end load for B shares and only 12b-1 fees, which presently cease. In fact, both the CDSC and the 12b-1 fees typically diminish to nothing after 6 to 8 years, and the shares convert to A shares.

When the annual report of a mutual fund is used as sales literature, which of the following statements are TRUE? I.The principal of the firm must approve its use for that purpose. II.A prospectus need not accompany the report, provided it includes instructions for obtaining a prospectus. III.The figures contained in the report must be as of a specific date. IV.The report must contain a list of the industries in which the fund invests. A) I and III. B) I and IV. C) II and III. D) II and IV.

The correct answer was: I and III. Sales literature is going to be defined as a retail communication. The principal of the firm must approve the use of the annual report as sales literature, and the figures contained must be current and complete. A prospectus is always required, as is a complete portfolio list, not merely a list of industries in which the fund invests.

Which of the following statements about an established FINRA member firm's handling of a mutual fund's sale literature are TRUE? I.The material used to solicit the sale of mutual fund shares requires prior approval by a principal of the firm. II.FINRA must review all mutual fund retail communications within three days of its first use. III.If the mutual fund sponsor has had the literature reviewed by FINRA in advance, other firms need not submit it. IV.FINRA must review all mutual fund sales literature within seven days of its first use. A) I and IV. B) II and IV. C) II and III. D) I and III.

The correct answer was: I and III. A firm's principal must approve all retail communications before use. If FINRA has reviewed the literature, it need not be submitted by every broker/dealer intending to use it. The FINRA review requirement is within 10 days of first use.

Which of the following services must a mutual-fund sponsor offer to be permitted to charge the maximum allowable sales charge for the fund shares? I. Rights of accumulation. II. Conversion and exchange privileges. III. Price breakpoints offering reduced sales charges for larger purchases. IV. The right to purchase fractional shares. A) I and III. B) II and IV. C) III and IV. D) I and II.

The correct answer was: I and III. Unless a mutual fund offers its shareholders rights of accumulation, breakpoints, and automatic reinvestment at NAV, the fund may not charge the 8.5% maximum sales charge

Which of the following is accurate with regard to using a summary prospectus for the sale of a mutual fund? I.A statutory prospectus must precede or accompany delivery of the summary prospectus II.A statutory prospectus may be delivered after the summary prospectus III.Electronic delivery of the statutory prospectus is allowed after the sale IV.A paper prospectus must be delivered within three days of the sale A) III and IV B) II and III C) I and III D) II and IV

The correct answer was: II and III The summary prospectus may include an application for sale. The statutory or full prospectus may be delivered after the sale as long as the summary prospectus discloses the availability of obtaining it either online or via a toll-free number. If a paper copy is requested, it must be sent within three business days.

An investor has $250,000 to invest in mutual funds. Which of the following would be appropriate statements to make to him? I. Buying a no-load fund will ensure better performance in the long run. II. If you purchase Class B shares, you will have no load now, but you will probably incur higher operating costs. III. A purchase of Class A shares from one fund family in this quantity will probably lead to a reduction in sales charge. IV. The initial investment should be spread over several fund families to ensure proper diversification. A) II and IV. B) I and III. C) II and III. D) I and IV.

The correct answer was: II and III. The absence of a sales load does not ensure better performance. It is correct that Class B shares are sold without a front-end load, but they usually have a higher expense ratio. Class A shares in a quantity of $250,000 would almost certainly qualify for a substantial reduction in sales charge. Investing in several fund families would reduce the likelihood of breakpoints and yield no advantage because funds are typically already diversified

Which of the following share classes typically have a higher expense ratio than Class A shares? I. No-load shares. II. Class B shares. III. Front-end load shares. IV. Class C shares. A) II and III. B) I and III. C) I and IV. D) II and IV.

The correct answer was: II and IV. The expense ratio of no-load shares is comparable to that of Class A shares-that is, very low. Front-end load shares are Class A shares under a different name. Class B shares typically have the highest expense ratios until they convert to Class A, and Class C shares typically fall between Class A and Class B.

A registered representative is hosting a seminar to solicit sales of a specific mutual fund. He has highlighted features of the fund in the prospectuses he will hand out and has prepared summary sheets of the prospectus for distribution. Regarding this situation, which of the following statements are TRUE? I. It is acceptable to highlight the key points in the prospectus. II. A prospectus may not be highlighted. III. Distributing summary sheets of a prospectus is acceptable. IV. The representative may not distribute summary sheets of the prospectus. A) II and III. B) I and III. C) II and IV. D) I and IV.

The correct answer was: II and IV. The registered representative may neither highlight portions of the prospectus nor distribute a summary sheet.

Which of the following describes the price of a Class A mutual fund share paid by a dealer on contract with the fund's underwriter? A) Public offering price minus the sales charge. B) Net asset value plus the dealer's reallowance. C) Net asset value plus the underwriter's concession. D) Public offering price minus the underwriter's concession.

The correct answer was: Net asset value plus the underwriter's concession. In delivering a Class A share to a member of the public, the fund sells to the underwriter at NAV. The underwriter adds his concession and sells to the dealer. The dealer adds his reallowance to bring the price to the POP and sells to the public. Thus, the dealer pays NAV plus the underwriter's concession, and his profit is the reallowance he adds when selling to the public at the POP.

ACE Fund has prepared a piece of sales literature to be distributed to individuals who respond to ACE's tombstone advertisement. If the fund sends the literature to a prospect, it must: A) contain the SEC disclaimer. B) contain instructions for obtaining a prospectus. C) be accompanied by a prospectus. D) include the good points contained in the prospectus.

The correct answer was: be accompanied by a prospectus. Any solicitation requires a prospectus to be delivered before or during the solicitation. (Sales literature is a form of solicitation.)

An XYZ open-ended bond fund advertising its returns must show all of the following EXCEPT: A) average annual total returns for one-, five-, and ten-year periods. B) share prices based on the highest possible sales charge. C) current yield based on annual dividends and capital gains divided by POP. D) total returns quotations based on the most recent calendar quarter.

The correct answer was: current yield based on annual dividends and capital gains divided by POP. Current yield is calculated by dividing annual dividends by the POP; capital gains may not be included

An investor purchased 200 shares of ACE Fund when the POP was $11.60 and the NAV was $10.60. ACE Fund's current POP is $12.50, and current NAV is $11.50. If the investor liquidates his 200 shares now, he will have a: A) gain of $20. B) gain of $200. C) loss of $200. D) loss of $20.

The correct answer was: loss of $20. The investor's cost basis in the shares is $11.60. If he liquidates, he will receive the net asset value of $11.50, resulting in a loss of $.10 per share. Liquidating 200 shares results in a total loss of $20 (200 × $.10).

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

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

All of the following are considered public communications EXCEPT: A) telephone directory advertisements. B) prospectuses. C) research reports. D) market letters.

The correct answer was: prospectuses. Prospectuses are not considered public communications, as they are prepared by issuers and not broker/dealers. Reference: 4.1.5.2 in the License Exam Manual.

The definition of retail communication includes A) memo distributed only to representatives of the firm B) email to an investment company promoting a service of the firm C) television interview D) research reports

The correct answer was: research reports Institutional communication (email to the investment company), internal communication (memo) and public appearance (television interview) are not retail communications

A broker/dealer with a sales agreement with a mutual fund must return all concessions to the underwriter if a customer redeems his shares: A) under no circumstances. B) within five business days of the initial purchase. C) within seven business days of the initial purchase. D) within ten business days of the initial purchase.

The correct answer was: within seven business days of the initial purchase. If any security issued by a mutual fund is tendered for redemption within seven business days after the date of an initial transaction, the broker/dealer must refund to the underwriter the full concession allowed to the broker/dealer on the original sale.