6 top off Final

All of the following statements concerning ADRs are correct EXCEPT: A. ADR holders vote for the Board of Directors B. ADR holders receive dividends C. ADRs may trade OTC D. ADRs may trade on an exchange

A. ADRs facilitate the trading of foreign securities in U.S. markets. Foreign issuers do not list their shares directly in the U.S. because they would have to comply with U.S. accounting rules and SEC registration requirements. Rather, they participate in ADR programs that are sponsored by U.S. banks to get their securities listed and traded in the U.S. Under an ADR program, a multi-national U.S. bank (for example, Citibank) will purchase a large block of a foreign security overseas (say SONY stock in Japan) and hold those shares on deposit in that bank's Tokyo branch. The bank then issues ADRs in the U.S. against these shares held in Tokyo. The ADRs are registered by the depositary bank with the SEC and are either listed on an exchange or trade OTC. ADRs do not have voting or pre-emptive rights. These are retained by the depositary bank that actually owns the underlying foreign shares. Dividends received on the foreign shares are converted to U.S. dollars by the depositary bank and remitted to the U.S. receipt holders, net of any foreign taxes due.

Jack, age 47, purchases a single payment deferred variable annuity with a 7-year declining surrender charge. Ten years later he surrenders the entire annuity to pay for his daughter's wedding. What income taxes, penalties, and charges apply to this withdrawal? A. Gains are taxed at ordinary income tax rates plus a 10% penalty and there are no surrender charges B. Gains are taxed at capital gains tax rates plus a 10% penalty and there are no surrender charges C. Gains are taxed at ordinary income tax rates, there is no penalty tax, but there are surrender charges D. Gains are taxed at capital gains tax rates, there is no penalty tax and there is no surrender charge

A. Any "gains" on the amount invested represent the tax-deferred build up in the separate account. When distributions are taken, these are taxed at ordinary income tax rates, not at lower capital gains rates. In addition, because Jack is only 57 years old, a 10% penalty tax must be paid on the taxable distribution amount (the build-up portion - not the portion that represents the original investment). Finally, the surrender period on this annuity has expired, so there are no surrender charges.

Total assets minus total liabilities is: A. Net worth B. Current assets C. Net working capital D. Quick assets

A. Net worth is all assets minus all liabilities. Both current and long-term assets; and current and long-term liabilities are included in the formula. Net working capital is current assets less current liabilities. A current asset is an asset that can be turned to cash within 1 year. This includes customer savings account, checking accounts and securities accounts. A current liability is a bill that the customer must pay within 1 year.

Which of the following must be approved by a principal before use? A. An ad using only information summarized from the Prospectus B. A Statement of Additional Information C. A Tombstone advertisement D. A copy of the FINRA Rulebook that is provided to customers

A. Prospectuses, Statements of Additional Information, the FINRA manual and tombstones are excluded from the requirement for principal approval of advertising and sales literature, since they are prepared under stringent legal requirements. However, a "summary" or "abstract" of a prospectus is prepared by the broker-dealer, not by a lawyer, and an employee of a broker-dealer might say something that is inappropriate! Therefore, such summaries are defined as sales literature that requires prior principal approval.

Under the Investment Advisers Act of 1940, which of the following person(s) is (are) exempt from registration with the SEC? I An investment adviser whose only clients are insurance companies II An investment adviser whose only clients are investment companies III An investment adviser whose only clients are pension plans A. I only B. I and II C. II and III D. I, II and III

A. The Investment Advisers Act of 1940 exempts from registration advisers who solely render advice to insurance companies. This is the case because an insurance company is a sophisticated, institutional investor and it would not let an adviser charge an excessive fee. Note that the Investment Advisers Act of 1940 does not permit such an exemption for advisers who give advice to investment companies - the intent is to make sure that investment advisers to mutual funds do not collect excessive fees. It also does not give an exemption to an adviser to pension plans, since many pension plans are relatively small in asset size.

A customer leaves each of his grandchildren shares of XYZ Fund in his will. The customer purchased the shares 20 years ago for $4.50 a share. At the time of the customer's death, they are worth $15.50 a share. If the grandchildren redeem their shares immediately at $15.50 per share, what is the tax treatment of the gain? A. No capital gain or loss B. $11 per share short term capital gain C. $11 per share long term capital gain D. This cannot be determined from the information given

A. The shares get a "stepped up" cost basis on the date of the grandfather's death. Thus, the grandchildren's adjusted cost basis for the inherited shares is the net asset value on the date of the grandfather's death - $15.50 per share. The stepped up value of the shares is included in the decedent's estate, and estate tax may be due on the appreciated value. The holding period in the shares automatically becomes long term as of the date of death, so any resulting capital gain or loss when the beneficiary redeems the shares will be long term. In this case, the adjusted cost basis "steps-up" to $15.50 per share. Because the shares are redeemed for $15.50 per share, there is no capital gain or loss.

Which of the following statements concerning features of variable annuity contracts is correct? A. Premiums are not deductible for federal income tax purposes B. Investment earnings are taxable during the accumulation period C. Benefits paid to an annuitant are income tax free D. Investment earnings are not taxable during the annuity payout period

A. There is no deduction for premiums paid into a variable annuity contract. The tax benefit is that dividends and capital gains from the underlying mutual fund held in the separate account must be reinvested, but these build "tax-deferred." As a comparison, when making a direct purchase of a mutual fund, there is no tax deduction for the investment made - so that is the same as when a variable annuity is purchased. However, with a mutual fund investment, any dividends and capital gains do not have to be reinvested, but they are taxable, whether they are reinvested or not. Once payments commence from the annuity contract, the portion of the payments that represent the "build-up" is taxable (since these dollars were never taxed). The portion of the payments that represent original investment dollars is not taxed (since these dollars were already taxed - there was no deduction for payments made into the contract).

A management company started the year with a NAV per share of $15.64 and a POP of $17.00 per share. At the end of that year, the fund has a NAV of $15.30 per share and a POP of $16.63 per share. During the year, the fund declared and paid a dividend of $1 per share. Which of the following statements are true? I The fund is open-end II The fund is closed-end III The fund has experienced asset appreciation IV The fund has experienced asset depreciation A. I and III B. I and IV C. II and III D. II and IV

A. This fund must be an open-end management company (a mutual fund) because it is offering shares both at the beginning of the year and later on in the year at the POP (Public Offering Price). In contrast, a closed-end fund only has a POP for its initial public offering. Then the shares are listed and trade like any other stock, so there cannot be a POP for such as fund after its books have been "closed." Because NAV per share has increased, this fund has experienced asset appreciation. The fund started with an NAV of $15.64. During the year, the fund distributed a $1 cash dividend, which would reduce NAV by $1 per share to $14.64 per share. The NAV at the end of the year is now $15.30, so NAV per share has appreciated.

Which of the following securities transactions would result in a short term capital gain? I Purchase 100 shares of ABC stock at $50 on January 2, 2019; Sell 100 shares of ABC stock at $60 on July 2, 2019 II Purchase 100 shares of ABC stock at $50 on January 2, 2019; Sell 100 shares of XYZ stock at $60 on July 2, 2019 III Purchase 100 shares of ABC stock at $50 on January 2, 2019; Sell 100 shares of ABC stock at $60 on January 3, 2020 IV Purchase 100 shares of ABC stock at $50 on January 2, 2019; Sell 100 shares of XYZ stock at $60 on January 2, 2020 A. I only B. III only C. I and II only D. III and IV only

A. Under Internal Revenue rules, a profit (or loss) is considered to be short term if a position is liquidated after being held for 1 year or less. Short term capital gains are taxed at a maximum rate of 37% (the maximum individual tax rate). If the position is held for over 1 year (1 year and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at a maximum rate of 15% or 20% (15% for individuals who are not in the maximum tax bracket; 20% for individuals who are in the maximum tax bracket). Note that to have a taxable gain or loss, the same security must have been purchased and subsequently sold (or vice versa).

A prospectus must be delivered to the purchaser of all of the following, EXCEPT: A. universal life policy B. variable life policy C. unit investment trust D. mutual fund shares

A. Universal life premiums are invested in the insurance company's general account, so it is an insurance product, not a security. In contrast, variable life and variable annuity premiums are invested in a separate account, where the purchaser bears the investment risk. These are defined by the SEC as non-exempt securities that must be sold with a prospectus. Investment company offerings, including open-end funds, initial public offerings of closed-end funds, and unit investment trusts, are all non-exempt securities that must be offered through prospectus under the Securities Act of 1933.

Which of the following rights does the holder of a variable life or variable universal life policy have? I The policyholder may vote for the board of managers overseeing the separate account II The policyholder has the right to select which separate account will receive premiums III The policyholder has the right of a full policy loan and, therefore, can borrow 100% of cash value IV The policyholder has the right to surrender the policy at any time and be refunded current NAV plus 100% of sales charges A. I and II B. III and IV C. I and IV D. II and III

A. Variable life contract holders have the right to choose the separate account in which they wish to invest (e.g., an income separate account, a growth separate account, or a balanced separate account). They also have the right to vote for the board of managers that oversees the operations of the separate account (similar to a mutual fund board of directors). Variable life policies only have a fractional loan value, not a full loan value. Because there can be changes in the value of the securities in the separate account, loans are typically limited to 75-90% of value, making Choice III incorrect. Surrender charges during the first 5-7 years are typical with life insurance policies, making Choice IV incorrect.

Which of the following statements about 12b-1 fees are true? I They are for advertising costs II They are not permitted when a fund has a front-end sales charge III The board of directors approves the plan for these fees annually and reviews the expenses quarterly IV The board of directors sets the fees based on the fund's income A. I and III B. II and III C. II and IV D. I, II, III

A. 12b-1 fees are for the cost of soliciting new investment for the fund and include advertising costs. The board of directors sets them annually and reviews the expenses quarterly. The fees are expressed as a percentage of assets, therefore they are asset-based and not based on fund income. 12b-1 fees are permitted when a fund has a front-end sales charge.

Which of the following statements concerning the tax treatment of an investor's capital losses are correct? I The losses will offset income dollar-for-dollar to a maximum of $3,000 per year for an individual II Taxpayers may carry over losses from year-to-year, but only to offset capital gains III When a taxpayer carries over a short-term loss to another tax year, the loss becomes a long-term capital loss A. I only B. II only C. I & II only D. I, II & III

A. Capital losses can be used to offset income dollar-for-dollar, up to a maximum of $3,000 per year on an individual return. Taxpayers may carry over any unused capital losses to the next year and, if they have no other capital gains in that year, can again use them to offset income dollar-for-dollar, up to a maximum of $3,000 - an so on. Any loss carried over retains its character as short-term or long-term loss.

An individual is a participant in a corporate qualified retirement plan where contributions are deductible. Once the individual retires and distributions commence, each payment will be subject to tax as: A. 100% ordinary income B. 100% capital gains C. Partial tax-free return of capital and partial taxable ordinary income D. Partial tax-free return of capital and partial taxable capital gains

A. Contributions to a qualified retirement plan are deducted from income tax by the maker of the contribution, so they are made with before-tax dollars. Earnings in the plan build tax-deferred. Once distributions commence, they are 100% taxable as ordinary income since none of the dollars in the plan were ever taxed. The participant's cost basis in the plan is "0."

If it is to meet the definition of "diversified," an open-end investment company may not hold more than what percentage of one issuer's voting securities? A. 5% B. 10% C. 20% D. 75%

B. A diversified investment company may not own more than 10% of the voting stock of one corporation. There are 2 other tests to meet to be "diversified." The investment company cannot invest more than 5% of its assets in one corporation and must invest at least 75% of its assets in securities or cash.

Which of the following statements concerning criminal penalties for an individual that is convicted of willfully violating the insider trading laws are correct? I Fines are paid to the Department of Treasury II Fines are paid to the Securities and Exchange Commission III The maximum criminal penalty is a $5 million fine and 20 years in jail IV The maximum criminal penalty is a $20 million fine and 5 years in jail A. I and III only B. I and IV only C. II and III only D. II and IV only

A. Fines for insider trading are paid to the Department of Treasury. They are not paid to the SEC. Criminal penalties can be imposed for willful violations. For the individual that effected the trades based on inside information, these are fines of up to $5,000,000 and jail time of up to 20 years. The criminal penalty for willful violations by controlling persons that are companies is set at a steep $25,000,000. There is no "jail" for controlling persons since a company can't be put in jail

What is the impact on the diversification in a single mutual fund account when an investor sells some of the shares? A. Diversification in the account is unaffected B. Diversification is lessened C. Diversification is increased D. Diversification varies depending on which shares are sold

A. If an investor owns a portfolio of stocks and bonds, and sells one of those positions, then that portfolio's diversification is reduced. Note, in contrast, that if an investor sells part of a mutual fund holding, this has no impact on the diversification of the underlying fund portfolio.

Which of the following statements concerning reinvestment of distributions in an open account are correct? I Minimum requirements for additional purchases do not apply to reinvestment of dividends II Funds provide for reinvestment of capital gains distributions at net asset value III Funds provide for reinvestment of dividend distributions at the public offering price IV Minimum requirements for additional purchases apply to reinvestment of capital gains A. I & II only B. II & III only C. III & IV only D. I, II, III & IV

A. Open account minimum dollar investment requirements do not apply to reinvested distributions of dividends and capital gains. A customer can elect to have dividends and capital gains reinvested automatically - and this occurs at NAV - not at POP.

An investor would use the Expense Ratio of a mutual fund to measure: I Operating efficiency II Profitability III Market share IV Sales charge amounts A. I only B. I & II only C. II & IV only D. I, II, III &IV

A. The expense ratio measures operating efficiency. It is the ratio of: It shows the percentage of the portfolio return that is "eaten up" by expenses. If a fund has a 10% Gross Return on Assets and a 2% Expense Ratio, then its Net Return on Assets is 8%. This ratio declines as the fund reduces its expenses or as total net assets increase without a corresponding increase in operating expenses. Low Expense Ratio= More Efficient high expense ratio= Less efficient

If a shareholder has been purchasing mutual fund shares over a period of two years in a rising market, which method for redemption of shares will be most advantageous? A. Identified shares method B. LIFO C. Average cost of all shares D. Any of the above methods, it makes no difference.

A. The identified shares method will be most advantageous because the shareholder can identify the most recently bought shares (the most expensive) to sell first. The most recently bought shares will have a higher cost basis, and their sale will result in lower capital gains

At what phase is it easiest to identify money laundering? A. Placement B. Layering C. Structuring D. Integration

A. The placement stage represents the initial entry of "dirty" cash or proceeds of crime into the banking system. Generally, this stage serves the purposes of relieving the criminal of holding large amounts of cash; and it places the money into the legitimate financial system. It is during this stage that money launderers are the most vulnerable to being caught, due to the fact that placing large amounts of cash into the legitimate financial system may raise suspicion.

Which statements are true about fixed annuity contracts? I A fixed annuity contract is defined as an "insurance" product II A fixed annuity contract is defined as a "security" product III The issuer of a fixed annuity contract bears the investment risk IV The purchaser of a fixed annuity contract bears the investment risk A. I and III B. I and IV C. II and III D. II and IV

A. With a fixed annuity, the insurance company collects a premium from the purchaser and invests it in its general account (which holds the investments made by the insurance company). The performance of the investments held in the general account does not affect the amount of the annuity promised to the purchaser. Thus, the insurance company bears the investment risk - which is the risk that its investment value does not grow as fast as its obligations to fixed annuity holders. The insurance company promises to pay a fixed annuity amount for the purchaser's life, regardless of how well, or how poorly, the investments in the general account perform.

Which of the following actions by a member violate FINRA rules? I Failure to submit a dispute for arbitration II Failure to require an associated person to waive arbitration III Failure to produce documents in the member's possession as directed IV Failure to advise a customer that has signed an arbitration agreement of his right to sue in court instead of filing for arbitration A. I and II only B. I and III only C. II and III only D. III and IV only

B. A member firm violates FINRA rules by failing to submit a dispute for arbitration (if it is a dispute that mandates arbitration) and by failing to produce documents in its possession as directed by the arbitrators. Failure to require an associated person to waive arbitration is not a violation; it is the proper thing to do! A member cannot require an associated person to waive mandatory arbitration as the means of settling disputes. The associated person agreed that all disputes (other than sexual harassment claims) would be submitted to industry arbitration when he or she signed the U-4 Form to enter the securities industry. Customers who have signed arbitration agreements must submit claims to arbitration - they cannot sue.

Which of the following statements concerning the tax treatment of mutual fund distributions are correct? I If investors reinvest capital gains automatically, the IRS defers tax on these gains until sale II A distribution that is a "return of capital" is not taxable to the shareholder III If investors reinvest dividend distributions automatically, the IRS defers taxation on the dividend until sale A. I only B. II only C. I & II only D. I & III only

B. A shareholder must report for tax capital gains and dividend distributions in the year the fund makes the distributions. Whether the shareholder reinvests the money or not makes no difference in the tax treatment. A "return of capital" distribution is not income, dividends, or capital gain. This is reported in a separate box titled "Non-Dividend Distributions" on Form 1099-DIV because the distribution is not taxable.

To discontinue a 12b-1 plan for distribution expenses requires a majority vote of which of the following? I Outstanding shares II Board of Directors III Disinterested directors IV Fund managers A. I or II only B. I or III only C. II or IV only D. I, II or III only

B. Adoption of a 12b-1 plan requires majority vote of the shareholders and both the board of directors and non-interested directors (3 levels of approval). Termination of the 12b-1 plan requires only the majority vote of the non-interested members of the board of directors OR a majority vote of the outstanding shares (1 level of approval).

Which statements are TRUE? I Distributions taken after age 59 1/2 from non-qualified variable annuity contracts are taxable to the recipient II Distributions taken after age 59 1/2 from non-qualified variable annuity contracts taken are not taxable to the recipient III The death benefit paid from a variable life policy is taxable to the recipient IV The death benefit paid from a variable life policy is not taxable to the recipient A. I and III B. I and IV C. II and III D. II and IV

B. Distributions taken at age 59 1/2 or later from variable annuity contracts are taxable as ordinary income to the extent that the distribution amount exceeds the premiums paid. In contrast, life insurance proceeds paid to a beneficiary are not taxable income to the beneficiary; nor are they taxable income to the recipient (a major benefit of life insurance). Note, however, that the insurance proceeds are included in the estate of the deceased individual and may be subject to estate tax.

An individual wishes to have a complete liquidation of the account done over a 5 year time frame. He or she should elect which type of withdrawal plan? A. Fixed shares B. Fixed period C. Fixed percentage D. Fixed dollar

B. If an individual wishes to redeem shares of a mutual fund under a "systematic withdrawal plan," he or she gets to elect a withdrawal option. He or she could elect to have a fixed number of shares liquidated each month (Choice A); could elect to have the account liquidated over a specified period of time, say, for college education (Choice B); could elect to have a fixed percentage of the portfolio liquidated each month (Choice C); or could elect to have enough shares liquidated so that a specific dollar amount is received each month (Choice D). In this example, Choice B meets the customer's specifications.

In which type of underwriting does the underwriter have an obligation to buy the ENTIRE issue at a set price? A. Stand-by underwriting B. Firm commitment C. Best efforts underwriting D. All-or-none commitment

B. In a firm commitment underwriting, the underwriter agrees to buy the issue outright from the issuer; and will then resell it to the public at a higher price. The underwriter takes full financial liability for any shares that cannot be sold. A stand-by underwriting occurs when an issuer attempts to sell more shares directly to its existing shareholders via a rights offering. If all of the shareholders subscribe, then the issuer successfully marketed its shares without needing an underwriter. However, as a back-up, the issuer will have an underwriter stand-by on a firm commitment basis to pick up any unsubscribed shares in the rights offering. The underwriter will then resell these shares to the public, but this represents only part of the issue - not the entire issue. Best efforts underwritings are agency relationships, where the underwriter uses his "best efforts" to sell the issue, but takes no liability for unsold shares. Any unsold shares stay with the issuer. An all-or-none underwriting is a variation on a best efforts, used for start-up companies, where if the full amount of the offering was not sold, the company would likely fail. In a best efforts-all or none underwriting, either the entire issue is sold or the deal is canceled.

Which of the following is FALSE about the tax treatment for a variable life policy? A. During the life of the policy, investment income is tax deferred B. A loan from the policy's cash value is taxable income to the owner C. Owners may not deduct premiums they pay D. During the life of the policy, realized capital gains are tax deferred

B. Loans against the cash value of life insurance do not incur any tax liability. During the life of the policy, investment income and capital gains, both realized and unrealized, are tax deferred. Premiums paid for the policy are not deductible.

ABC Corporation owns 10% of the common stock of Chimney Cricket & Co. a firm specializing in chimney cleaning for residential fireplaces. ABC received $100,000 in dividends from this stock last year. When preparing its tax return: A. ABC may exclude all $100,000 of dividends B. ABC may exclude $50,000 of dividends C. ABC may exclude $65,000 of dividends D. ABC must report all $100,000 with no exclusions

B. Corporations receive tax exclusions on 50% of the dividends from stocks they own in other corporations (when they own less than 20% of the stock). In this case, the exclusion is $50,000. ABC would have to own 20% or more of Chimney Cricket to exclude 65%.

Mutual funds can make which of the following investments? I Common stocks II Options III Limited partnerships IV Whole life insurance A. I only B. I & II only C. III & IV only D. I, II, III & IV

B. Mutual funds may invest in securities such as common stocks and may trade options. For example, a very typical equity mutual fund strategy when market conditions are flat is to sell call options against the stocks in the portfolio (the call option gives the buyer of the option the right to "call away" the stock). As long as the market does not rise, the calls expire and the mutual fund that sold them keeps the collected premiums. This premium income enhances the fund's portfolio return. Mutual funds cannot invest in limited partnerships. Limited partnerships are "flow-through" investments that allow tax losses to "flow-through" to the limited partners. Mutual funds are not permitted to "flow-through" such losses to their shareholders under the tax code. Finally, mutual funds cannot invest in life insurance, since it is not a "security."

Member firms must retain the books and records of original entry: I in a readily accessible place for the prior 2 years' records II in a readily accessible place for the prior 3 years' records III for a minimum of 3 years from the date the record was created IV for a minimum of 6 years from the date the record was created A. I and III B. I and IV C. II and III D. II and IV

B. The books and records of "original entry" must be retained for 6 years. These include cash receipts and disbursements; securities purchases and sales; and securities receipts and deliveries. For all records, the prior 2 years' worth must be kept readily accessible for audit by FINRA or the SEC.

Which of the following features applies during both the variable annuity accumulation period and the annuity payout period? I Death benefit II Exchange privilege III Voting rights IV Surrender value A. I and II only B. II and III only C. II and IV only D. III and IV only

B. The exchange privilege (ability to exchange one separate account for another with a different investment objective at no charge) and voting rights can be exercised under a variable annuity at any time - both during the accumulation phase and during the annuity phase. If, during the accumulation period, the owner of a variable annuity dies, then the greater of the premiums paid or the net asset value in the separate account is included in the deceased's estate. This is called the death benefit (the "benefit" here is that if net asset value declines, the estate receives the full amount of premiums paid) and does not apply once the contract is annuitized. Also, during the accumulation phase, the purchaser can change his or her mind and choose to "cash out" the annuity contract. If this occurs early in the life of the contract, the insurance company can impose "surrender charges." The net proceeds of the "cash out" is the surrender value. Thus, the death benefit and surrender value are available only during the accumulation phase.

Under which of the following circumstances would a universal life insurance policy operate as term insurance? A. The policy's cash value is approximately one-half the death benefit B. The policy owner pays a cash premium equal to the required mortality and expense charges and has no cash value C. The policy owner requests the insurer to pay the policy's $500 level premium by reducing the policy's $2,500 cash value D. The policy's cash value increased by less than the $500 annual premium

B. Universal life combines elements of term life and whole life policies. The premium is broken down into an insurance element (the term component) and a savings element that is invested in the insurance company's general account (savings component). A universal life policy operates as term insurance when the policy owner pays a premium amount equal to the required mortality and expense charges (these are charges to cover the insurer's basic cost of providing the policy). There is no cash value buildup, so what the policy is providing is de facto term insurance for the face amount of coverage.

Which statement concerning Coverdell ESAs is correct? A. A taxpayer can contribute to only one education savings account for a year B. More than one person can contribute to an education savings account for a child C. Contributions are deductible for taxpayers that are not high-earners D. Contributions can only be made based on the donor's earned income

B. Any number of people may contribute to a Coverdell Education Savings Account in a year, but the maximum amount of total contribution is $2,000 per beneficiary. Contributions are not deductible; earnings in the account are not taxable; and distributions to pay for qualified education expenses are tax-free. There is no "source of income" test for contributions. For junior high, high school or college can be transferred to FAMILY member of beneficiary

For an investment company to function as a "conduit" for tax purposes, it must meet all of the following conditions EXCEPT the fund must: A. distribute 90 percent of its net investment income to shareholders B. invest 75 percent of its assets in equity securities C. register with the SEC under the Investment Company Act of 1940 D. derive 90 percent of its income from dividends, interest, and gains on securities

B. Aside from the requirement to distribute at least 90% of Net Investment Income to shareholders, other requirements for conduit tax treatment under Subchapter M include: The company must file an election with the IRS; The company must register under the Investment Company Act of 1940; The company must derive at least 90% of its income from dividends, interest, and capital gains on portfolio securities; and The company must have at least 50% of its assets invested in diversified securities.

A NASDAQ market maker quotes shares of a NASDAQ-listed closed-end fund at $27 - $28. A customer of a NASDAQ "order entry" firm directs it to purchase 500 shares of the fund for his account. On settlement date for the trade, which is 2 business days later, the fund is quoted at $30 - $31. Which statement is true? A. The customer will pay $27 plus a commission B. The customer will pay $28 plus a commission C. The customer will pay $30 plus a commission D. The customer will pay $31 plus a commission

B. Closed-end fund shares are listed and trade like any other stock. Do not confuse them with mutual fund shares, which do not trade! A customer buys the shares at the dealer's ask price of $28, plus the customer must pay a commission to the order entry firm for executing the trade. The customer sells the shares at the dealer's bid price of $27, less a commission paid to the order entry firm for executing the trade. The price of the security on trade date is the price of the trade. If the price moves after that date, it has no effect on the price the customer paid to buy or the price the customer will receive for selling.

Which of the following statements concerning the investment portfolio of open-end and closed-end companies are correct? I The investment adviser must buy securities for the portfolio consistent with the fund's investment objectives II The investment objectives can be changed by majority vote of the board of directors III Investors bear the risk that the fund share price will fall below the net asset value of the portfolio IV Investors bear the risk that the value of assets in the portfolio will decline A. I and III only B. I and IV only C. II and III only D. I, II, III, and IV

B. For both open-end and closed-end companies, the investment adviser must buy securities consistent with the fund's investment objectives. Investors bear the risk that the value of assets in the portfolio will decline. Only investors in closed-end companies bear the risk that the share price will fall below net asset value. Investors in open-end fund shares can always redeem their shares at NAV with the fund. The investment objective can only be changed by majority vote of the outstanding shares. It cannot be changed by the Board of Directors of the fund.

Which of the following statements describe features of stock warrants? I They generally have a life of several years II They are usually issued with an exercise price lower than current price III They usually accompany a new issue of preferred stock or bonds IV They include voting privileges A. I and II only B. I and III only C. II and IV only D. I, II, III and IV

B. Issuers of new preferred stock or bonds can attach warrants to increase the appeal of the new issue to investors. They do this if they are having a tough time finding interested investors. Warrants typically have a life of five years and are issued with a price higher than the current price - so the common stock's price must rise for the warrants to have real value. Warrants do not include voting privileges - only common stock has voting rights.

A self-employed person earning $120,000 also has $30,000 of investment income. This person wishes to open a defined contribution Keogh Plan. The maximum permitted tax-deductible contribution is: A. $4,000 B. $24,000 C. $30,000 D. $56,000

B. Keogh (HR-10) contributions are based only on personal service income - not investment income. The maximum permitted deductible contribution to a defined contribution Keogh is the lesser of 20% of income or $56,000 in 2019. $120,000 of personal service income x 20% effective contribution rate = $24,000. This is less than the maximum $56,000 deductible contribution permitted, so the maximum deductible contribution amount is $24,000.

Which of the following statements concerning T-bills are correct? I 6-month T-bills can be issued by the Treasury II 10-year T-bills can be issued by the Treasury III They are issued with a stated rate of interest IV They are issued at a discount A. I and III B. I and IV C. II and III D. II and IV

B. T-Bills are issued with maturities of 1, 3, 6 or 12 months. T-Bills are sold at a discount and pay face value at maturity, so they do not pay interest periodically and are not issued with a stated rate of interest.

The maximum permitted annual contribution to a Coverdell Education Savings Account for a single beneficiary is: A. $2,000 in a single account B. $2,000 total in any number of accounts C. $4,000 in a single account D. $4,000 total in any number of accounts

B. The maximum permitted annual contribution is $2,000 per beneficiary per year for Coverdell Education Savings Accounts (formerly known as Education IRAs).

Tony, a new client, brings in a check issued by the insurer with proceeds from a partial surrender of a variable annuity. He asks the registered representative to initiate a tax-free exchange into a new annuity funded by the check proceeds. What action should the registered representative take? A. Complete the Section 1035 exchange paperwork and accept the insurance company check to fund the new annuity B. Decline the transaction because a Section 1035 exchange may not be funded with a check from the previous annuity C. Complete the Section 1035 exchange paperwork and ask the customer to deposit the insurance company check into his bank account and write a personal check to the registered representative's firm for the new annuity D. Decline the transaction because the client must surrender all, not just part, of his original contract to qualify for a Section 1035 exchange

B. The tax code requires that the owner must exchange the old contract for a new contract in order to have a "tax-free" exchange. This can either be done as an exchange for either a partial or full surrender. If a check is taken for the proceeds of liquidating the old contract, this is a "tax event" and any gain on the liquidation now becomes taxable.

A broker-dealer also acts as an investment adviser giving advice about investing without charging a fee. The firm must register under the: A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Trust Indenture Act of 1939 D. Investment Company Act of 1940

B. Under the Securities Exchange Act of 1934, broker-dealers must register with the SEC and be members of FINRA. Note that broker-dealers who give investment advice that is incidental to their business and do not charge separately for that advice, are excluded from the "IA" definition. If the firm were to charge separately for investment advice, it would also be required to register as an investment adviser under the Investment Adviser's Act of 1940.

Under the Investment Company Act of 1940, the Board of Directors of a no-load fund must have: A. more than 40% interested persons B. at least one non-interested person C. more than 40% non-interested persons D. a majority of non-interested persons

B. Unlike "load" mutual funds, where at least 40% of the Board of Directors must be "non-interested" persons, a no-load fund is only required to have at least 1 non-interested director.

Which statement is true concerning "wrap accounts"? A. Wrap accounts must be registered with the SEC and sold with a prospectus B. To sell a wrap account, the registered representative must also be licensed as an investment adviser representative by the State C. To sell a wrap account, the registered representative must also be licensed to sell insurance products by the State D. Wrap accounts cannot be sold by registered representatives

B. Wrap accounts "wrap" all services provided into a fee arrangement that is not transaction based - instead, the fee might be a fixed annual dollar fee; or a fee based on percentage of assets under management. Wrap accounts are defined as advisory products in most States, and a State investment adviser representative license is required (Series #65) in addition to the Federal Series #6 license needed to sell investment company securities.

Participating UITs invest in: A. stocks B. bonds C. mutual fund shares D. all of the above

C. A Participating UIT invests in an underlying mutual fund - so it invests in a security that is being managed; however, the UIT itself is not managed. This is the structure for a variable annuity. In contrast, fixed UITs invest in a fixed portfolio of either bonds or stocks

All of the following recommendations are appropriate for a customer seeking defensive investments EXCEPT: A. money market funds B. utility stocks C. defense company stocks D. food company stocks

C. A defensive investment is one that is relatively unaffected by a cyclical economic downturn. Thus, when the economy is in a recession, these investments are not affected as strongly. They preserve principal and provide stable income with minimal exposure to a downturn in the market cycle. Money market funds are strongly defensive - they really are not subject to business risk or market risk. Utility stocks and food company stocks are also defensive - in a cyclical downtown, electricity use declines, but not by that much (we still need to keep the lights on) and people still have to eat! Defense company stocks are not defensive. The amount of money the federal government spends on buying equipment for armed forces depends on war needs, security needs and fiscal policy. The amount of spending can vary widely from year-to-year.

Which statement concerning discretionary accounts is correct? A. A customer must approve each discretionary trade B. A customer must select the time and price for a discretionary trade C. A principal must approve a discretionary trade by the end of the day D. A registered representative who selects the time and price for a trade must have discretionary authority

C. A principal must approve a discretionary trade "promptly" - which means by the end of the day. A customer who gives discretionary authority does not approve each discretionary trade. For a trade to be considered to be discretionary, the representative must select either the size of the trade or the security to be traded. A registered representative can select time and price of a trade without written discretionary authority.

All of the following statements concerning the federal income tax treatment of variable life insurance are correct EXCEPT: A. the investment income is tax-deferred for the policy owner B. any capital gains the insurer realizes on the separate account are tax-deferred for the policy owner C. when the separate account has earned investment income and the policy owner takes a loan under the policy, the policy owner will have taxable income D. any beneficiary receiving death proceeds need not include them in taxable income

C. Cash value (investment value) builds in a variable life separate account on a tax-deferred basis, so Choices (A) and (B) are true. Taking a loan from a variable life insurance policy does not result in taxable income to the policy owner. A loan is not income. In terms of the insurance policy, a loan is just an advance payment of death proceeds. Thus, Choice (C) is false. Finally, death proceeds from a life insurance policy are not taxable to the recipient. However, they are included in the estate of the deceased individual and are subject to estate tax liability.

All of the following features apply during the accumulation period of a variable annuity EXCEPT: A. accumulation unit growth B. death benefit C. settlement option D. surrender value

C. During the accumulation phase, any premiums invested in the separate account buy designated mutual fund shares, which will hopefully grow in value over time. This will increase the amount paid at annuitization. If, during the accumulation period, the owner of a variable annuity dies, then the net asset value in the separate account is included in the deceased's estate. This is called the death benefit and does not apply once the contract is annuitized. Also, during the accumulation phase, the purchaser can change his mind and choose to "cash out" the annuity contract. If this occurs early in the life of the contract, the insurance company can impose "surrender charges." The net proceeds of the "cash out" is the surrender value. At the time of annuitization, the owner chooses an "annuity option" such as a life annuity or a life annuity-period certain. These are "settlement options." This does not occur during the accumulation phase of the contract.

Marlene made a gift of Big Fund shares to her niece, Jennifer. Marlene had purchased the shares for $12 a share 3 years before. At the time of the gift, the shares were valued at $20 per share. 2 years after receiving the shares, Jennifer sold them for $25 a share. Which statement is TRUE about Jennifer's tax consequence from this sale? A. Jennifer is liable for a short-term gain on the sale B. Jennifer will report a gain of $5 per share C. Jennifer's cost basis for the shares sold is $12 D. Jennifer's cost basis for the shares sold is $20

C. Jennifer's cost basis is the carryover basis of the gifted share, or $12 - the price paid by the donor per share. This means that if the shares have appreciated, the recipient of the gift will be responsible for capital gains tax. The holding period counts from the date the donor acquired the shares. The donor held the stock for 3 years before gifting it and the recipient of the gift held the shares for an additional 2 years, so the holding period is 5 years. When the shares were sold, the gain is the difference between the cost basis of $12 and the sale price of $25, for a $13 per share long term capital gain

During the pay-in phase of a variable annuity, the ownership interest in a deferred variable annuity is valued on the basis of: A. annuity units B. premiums C. accumulation units D. conversion units

C. Payments (called premiums) into a variable annuity contract buy "accumulation units" of the separate account. An accumulation unit is an accounting measure used for valuing a variable annuity holder's interest in the separate account. At annuitization, the accumulation units are converted into "annuity units." There is no such thing as conversion units.

Which of the following expenses may be charged to shareholders under a 12b-1 plan? I Advertising II Sales literature III Underwriter's fees IV Sales loads A. I only B. II and III only C. I, II, and III only D. I, II, III, and IV

C. SEC Rule 12b-1 permits a mutual to charge the cost of soliciting new investment into a fund to that fund's existing shareholders. The distribution expenses that the fund can charge to shareholders under a 12b-1 plan are: advertising; compensation of underwriters, dealers, and sales personnel; printing and mailing of prospectuses to anyone other than current shareholders; and the printing and mailing of sales literature. The fund deducts these from the net asset value once per year as an ongoing expense of soliciting new shareholders to the fund. Sales loads are an up-front deduction, taken out before money is invested into the fund. These are not part of annual 12b-1 charges.

All of the following statements are true regarding defined benefit plans EXCEPT: A. contributions made to the plan can vary from year to year B. employees with the highest salaries and the fewest years to retirement benefit the most C. benefits paid to employees consist of a tax free return of capital and a taxable return of earnings D. actuarial tables are used to determine contribution rates for each employee

C. Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings "build up" tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The other statements about defined benefit plans are true - contributions are based on actuarial assumptions; contributions can vary from year to year (the contribution amount depends on the performance of assets held in the plan as well as the age and sex of plan participants); and older employees with high salaries will benefit the most, since the biggest contributions must be made to fund their retirement benefit.

Which of the following reasons make companies likely to issue convertible preferred stock? A. The companies sell additional shares of common stock more easily B. Exercising conversion rights dilutes the common stockholders' ownership C. Convertibility means preferred stockholders will accept a lower stated dividend D. The companies receive additional capital when the shares are converted

C. Since the conversion privilege gives the holders of convertible preferred stock the right to exchange for common stock at a fixed price, this benefit becomes valuable when the common stock price rises. Holders of this type of preferred stock will readily accept a lower stated dividend rate as compared to non-convertible preferred stock to get the benefit of conversion. Exercising conversion rights does dilute common stockholders' positions (there are more common shares over which earnings are spread). The existing shareholders must vote to approve the issuance of convertible preferred stock, because of this potentially dilutive impact. They approve it because they feel that the company will be able to use the additional capital profitably, which will ultimately increase the common stock price. When holders of preferred stock convert to common stock, the company does not receive additional capital. The company received the capital at the point when the convertible preferred was sold to the public.

The Securities Act of 1933 applies to the purchase of: I shares of The Colossal Fund offered on a stock exchange II shares of Dwarf Mutual Fund offered through a broker-dealer III a newly issued municipal bond offered through a broker-dealer IV a newly issued corporate bond offered through a broker-dealer A. I and II only B. II and III only C. II and IV only D. III and IV only

C. The Securities Act of 1933 applies to new issues of non-exempt securities. The shares of The Colossal Fund were purchased on an exchange, so Colossal is a closed-end fund trading in the secondary market and is not a new issue. Thus, the Act of 1933 does not apply. Dwarf Mutual fund is an open-end management company. Open-end funds are a type of investment company that continuously offer and redeem their own shares. Every mutual fund share is a newly-issued security that is non-exempt under the Act of 1933. They must be registered with the SEC and sold with a prospectus. Municipal bonds are exempt securities - as are government and agency issues. New issues of corporate securities, including corporate bonds are non-exempt securities that are subject to the 1933 Act.

Which statement concerning the Securities Exchange Act of 1934 is correct? A. The Act eliminated the distinction between brokers and dealers that effect trades in the secondary market B. The Act reduced the amount of federal regulation by defining a security very narrowly C. The Act required issuers to report on their businesses annually by filing Form 10K with the SEC D. The Act introduced regulation of initial public offerings made in the primary market

C. The Securities Exchange Act of 1934 defines brokers and dealers separately. Brokers effect trades as agents for customers; dealers buy securities from customers into their inventory or sell securities to customers out of their inventory. Some SEC rules only apply to brokers; others only apply to dealers. The Act defines a security very broadly - the basic definition is an investment in a business venture entered into for profit that is managed by a third party. A very broad definition allows the SEC to regulate "securities" offerings that did not exist when the Act was written. For example, variable products did not exist until the 1950s - and the SEC defined them at that time as "non-exempt" securities that are subject to the Securities Acts. To insure that corporate issuers give complete and accurate disclosure of their financial condition so that investors can make informed decisions, the Act requires corporate issuers to be audited annually and file their audited financials with the SEC on Form 10K. The Securities Act of 1933 applies to new issue offerings. The Securities Exchange Act of 1934 applies to trading in the secondary markets.

A customer leaves each of his grandchildren shares of XYZ Fund in his will. The customer purchased the shares 20 years ago for $4.50 a share. At the time of the customer's death, they are worth $15.50 a share. If the grandchildren redeem their shares, what is their cost basis per share? A. $4.50 B. $9.50 C. $15.50 D. This cannot be determined from the information given

C. The shares get a "stepped up" cost basis on the date of the grandfather's death. Thus, the grandchildren's adjusted cost basis for the inherited shares is the net asset value on the date of the grandfather's death - $15.50 per share. The stepped up value of the shares is included in the decedent's estate, and estate tax may be due on the appreciated value. The holding period in the shares automatically becomes long term as of the date of death, so any resulting capital gain or loss when the beneficiary redeems the shares will be long term.

Which statements are true about non-qualified variable annuities? I Contributions to the separate account are tax deductible II Contributions to the separate account are not tax deductible III Earnings in the separate account build tax-deferred IV Earnings in the separate account are taxable each year A. I and III B. I and IV C. II and III D. II and IV

C. There is no tax deduction for contributions made to a non-qualified variable annuity contract. The major advantage is the tax-deferred build-up of earnings in the separate account. When distributions commence, the portion of the distribution attributable to the build-up is taxable (these are pre-tax dollars) while the portion attributable to the original investment (these are post-tax dollars) is the cost basis for tax purposes and is returned without any tax due.

A customer buys a variable annuity and elects a payout option of Life Contingent Payments. The insurance company's mortality tables show that this person's expected remaining life is 20 years. This means that payments will continue for: A. the annuitant's life, not to exceed 20 years B. the annuitant's life, but if he dies before 20 years elapse, payments continue to his heir(s) C. the life of the annuitant and then cease D. 20 years to the annuitant or beneficiary

C. An annuity payout option of Life Contingent Payments means that the insurance company will pay for that person's remaining life, regardless of how short or long that might be. Thus, continuing payments are contingent on that person staying alive; payments stop upon death. The insurance company expects to pay the annuity for 20 years based on this individual's expected mortality, but if this person lives for 40 more years, then the insurance company must pay for 40 years; if this person lives for only 10 more years, then the insurance company's obligation is met and no more payments are due.

Tara is a 50-year-old nurse with an annual income of $37,000. She is divorced with grown children. Tara owns her home and has coverage under Social Security and a retirement plan through her employer. She has $20,000 of group life insurance and $12,000 in savings. She recently changed jobs and got her pay increased to $49,000. Tara wants to use the extra income to buy an annuity that will give her income when she retires at 62. Which annuity product should her registered representative recommend? A. Single premium, immediate annuity B. Single premium, deferred annuity C. Periodic premium, deferred annuity D. An annuity is inappropriate for this client

C. Because Tara has no immediate plans to retire, a deferred annuity is a good choice because this type of annuity allows the account to grow income tax deferred until she retires. Tara can take the extra monthly income to buy accumulation units in a variable annuity separate account. This investment will grow tax deferred until she retires in 12 years. Then she can annuitize and take monthly payments to supplement her employer-sponsored retirement plan income and social security payments.

Broker-dealers are required to report their computed Net Capital to customers: A. monthly B. quarterly C. semi-annually D. annually

C. Broker-dealers must send their customers an annual audited balance sheet and Net Capital computation; and a mid-year unaudited balance sheet and Net Capital computation.

Which of the following cash transactions must be reported to FinCEN under the firm's AML policies? A. Deposits of cash from a single customer adding to $7,500 B. A money order drawn by a customer in the amount of $7,500 C. Deposits of cash from a single customer adding to more than $10,000 D. Deposits of cash from a single customer adding to more than $1,000

C. Deposits or withdrawals of over $10,000 in cash in a customer's account require the submission of a CTR (Currency Transaction Report) to FinCEN within 15 days. Such deposits and withdrawals are not necessarily suspicious. If such a deposit or withdrawal is suspicious, a Suspicious Activities Report (SAR) must be filed with FinCEN as well.

Which statements are TRUE? I Mutual fund shares can be bought on 50% margin II Mutual fund shares must be paid in full when purchased, but become marginable after being held for 30 days III ETF shares can be bought on 50% margin IV ETF shares must be paid in full when purchased, but become marginable after being held for 30 days A. I and III B. I and IV C. II and III D. II and IV

C. ETFs (Exchange Traded Funds) are actively traded on stock markets like any other stock - they can be bought or sold any time that the market is open and can be bought or sold short on 50% margin. Mutual fund shares are bought from the fund sponsor and are a prospectus offering. As such, they must be paid in full and only become marginable after being held in the customer's account for 30 days. Mutual fund shares cannot be sold short.

James elected the life income option for payout of the $250,000 account balance in his non-qualified variable annuity, with payments to be made annually. James has a cost basis of $75,000 and his life expectancy is 15 years. How much of each annual payment may James exclude from his taxable income each year? A. $0 B. $3,000 C. $5,000 D. $16,667

C. Once a contract is annuitized, the portion of each annuity payment attributable to the cost basis is excluded from tax. The exclusion amount is the aggregate cost basis ($75,000) divided by life expectancy (15 years) = $5,000 per year. Thus, each year James will exclude $5,000 as his cost basis and must report as taxable income any amount he receives over that amount.

For a corporate bond quote, a point is: A. One percent of the nominal yield B. $1.00 C. $10.00 D. $100.00

C. One point is 1% of the $1,000 face value of the bond. 1% of $1,000 = $10.

If a customer fails to pay for a securities purchase, then under extraordinary circumstances an extension may be requested from: A. SIPC B. PBGC C. FINRA D. FDIC

C. Regulation T of the FRB allows time extensions for payment to be requested, but only under extraordinary circumstances. The FRB authorizes FINRA to handle the extension requests.

The Federal Telephone Consumer Protection Act permits: I solicited calls to be made only after 8 AM or before 9 PM in the time zone of the recipient II unsolicited calls to be made only after 8 AM or before 9 PM in the time zone of the recipient III solicited calls to be made anytime IV unsolicited calls to be made anytime A. I and III B. I and IV C. II and III D. II and IV

C. The Federal Telephone Consumer Protection Act of 1991 requires that unsolicited calls cannot be made before 8:00 AM nor after 9:00 PM, in the time zone of the recipient. Thus, unsolicited calls are only permitted after 8:00 AM until 9:00 PM in the time zone of the recipient. Solicited calls can be made anytime (as an example of a solicited call, a customer tells you to call at 7:00 AM, before he or she leaves for work).

Under the Know Your Customer Rule, in order to open and maintain a customer account, each registered representative: I must know "every" fact concerning the customer II must know "every essential fact" concerning the customer III must follow KYC procedures as part of an effective Anti-Money Laundering (AML) Program IV must follow KYC procedures as part of an effective Customer Privacy program A. I and III B. I and IV C. II and III D. II and IV

C. The Know Your Customer rule is separate from the "Suitability" rule. The KYC rule requires that the essential facts about the customer be collected at account opening, so that the member firm can: effectively service the customer's account; act in accordance with any special handling instructions for the account; understand the authority of each person acting for the customer; and comply with applicable laws and regulations. This is a very general rule regarding collection of customer account information and it applies whether trades are recommended or not in the account. For example, the PATRIOT Act requires that customer citizenship be obtained, because if a non-U.S citizen opens an account, a copy of their foreign passport must be obtained. Thus, citizenship becomes an essential fact in order to "comply with applicable laws and regulations." In contrast, the Suitability rule only applies when recommendations are made.

With a variable annuity, the insurer takes the risk that expenses for administration will not be more than it expected. What is the charge the insurer makes for taking this risk? A. Investment management fee B. Administrative expense fee C. Expense risk charge D. Mortality risk charge

C. The expense risk charge compensates the insurer for the expenses that it incurs for administering the contract, and these are capped to a maximum percentage. If the expenses exceed this percentage, then the insurance company is responsible for the excess charges; not the purchaser of the annuity.

Customer Name: John Doe Age: 41 Marital Status: Married Dependents: 1 Child, Age 13 Occupation: Engineer Household Income: $140,000 Net Worth: $240,000 (excluding residence) Own Home: Yes Investment Objectives: Total Return / Tax Advantaged Investment Experience: 12 years Current Portfolio Composition: 8% Common Stocks 62% Corporate Bonds 30% Money Market Fund This client has just been informed that he has been promoted and will be earning $190,000 per year instead of $140,000 per year. The customer intends to use this extra income to fund his 13 year old child's college education. Based on the customer's existing asset mix, the best recommendation would be for the customer to invest the extra $50,000 per year into a(n): A. money market fund B. income fund C. growth fund D. inflation protected fund

C. This customer's portfolio is 92% invested in cash and bonds with only 8% in equities. Since he has 6 years to fund the child's education, growth stocks would help balance the portfolio and enhance the overall return.

Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is: A. 6% of the amount invested B. 7% of the amount invested C. 8 1/2% of the amount invested D. 9% of the amount invested

C. Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value. Thus, if a fund charges a 1% redemption fee, the maximum front-end sales charge for that fund is 7 1/2%.

A customer places an order to buy 500 shares of ABC stock in a margin account. All of the following statements are true about taking this order EXCEPT the customer must agree to: A. receive the securities against payment on settlement date B. accept an execution that is part of the order C. have the funds available to pay for the purchase amount prior to entry of the order D. having the securities held in custody of the member firm in street name

C. When a customer places a buy order in a margin account, the customer agrees to pay the required deposit on settlement - there is no requirement for the funds to be on deposit before the order can be accepted. The customer also agrees to accept a partial execution if the member firm is unable to fill the entire order. In a margin account, the customer signs a hypothecation agreement where the securities are pledged as collateral for the margin loan and are held in street name by the broker-dealer.

Which of the following statements about money purchase retirement plans are correct? I The plan must be established by the employer II The plan cannot be discriminatory III The maximum deductible annual contribution is 25% of income up to a maximum dollar amount IV The annual contribution must be made by the employer, regardless of whether the employer is profitable or not A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

D. A money purchase plan is a defined contribution pension plan - not a defined benefit plan. These are employer-established plans, where the employer contributes a percentage of the employee's salary each year. The maximum permitted contribution is 25% of compensation, capped to a maximum of $56,000 in 2019. With a money purchase plan, the employer contribution must be made each year, even if the company is operating at a loss. In contrast, a profit sharing plan is also a defined contribution plan with the same maximum permitted contributions, but it gives the employer the flexibility to increase or decrease contributions depending on business conditions. These are both qualified plans that must comply with ERISA - the plans must be non-discriminatory and must vest employee benefits over a reasonable time frame (no more than 6 years).

Which of the following statements concerning rules applicable to IRAs are TRUE? I A person can make contributions to the IRA at any age as long as the person has sufficient earned income II An IRA owner can contribute stock or land to the IRA account III An IRA owner cannot take a loan from his or her IRA IV A person who cannot make a deductible contribution is permitted to make a non-deductible contribution A. I and II only B. I and III only C. II and IV only D. III and IV only

D. A person cannot make contributions to an IRA for the year the person reaches age 70 ½ or after. This is the age when mandatory distributions start. Thus, Choice I is false. Only cash can be contributed to an IRA - a contribution cannot be made with any other asset such as a securities or real estate. Thus, Choice II is false. An IRA owner cannot take a loan from his or her IRA, so Choice III is true. A person who cannot make a deductible contribution (which is the case if a person is covered by another qualified retirement plan and earns too much) can make a non-deductible contribution - so Choice IV is true.

Which statements are true? I Purchasers of fixed annuities buy accumulation units II Purchasers of variable annuities buy accumulation units III Purchasers of immediate annuities buy accumulation units IV Purchasers of deferred annuities buy accumulation units A. I and III B. I and IV C. II and III D. II and IV

D. Accumulation units represent the purchaser's ownership interest (similar to investment value) in a deferred variable annuity contract. There are no accumulation units with an immediate annuity - only annuity units. The accumulation phase and annuity phase are two separate and distinct parts of an annuity contract. Once the annuity starts, any accumulation units will have been converted to annuity units - accumulation units no longer exist once the annuity starts making payments. Thus, the purchaser of an immediate annuity has all of his or her investment dollars used to purchase "annuity" units that start paying immediately. There are no accumulation units in any fixed annuity contract, whether it is an immediate or deferred annuity. Fixed annuity contracts guarantee fixed payments - the annuity will not vary. Premiums paid into a fixed annuity are invested in the general account and not in a separate account. The company invests fixed annuity premiums in the insurance company's general account - they do not go to a separate account. Hence, there are no accumulation units.

What actions take place in the OSJ (Office of Supervisory Jurisdiction)? I Opening of new accounts II Final approval of new accounts III Entry of customer orders IV Review and endorsement of customer orders A. I and III B. I and IV C. II and III D. II and IV

D. An Office of Supervisory Jurisdiction (OSJ) is any office where a member firm approves new accounts, approves customer orders, approves advertising, maintains custody of customer funds or securities, or supervises the activities of other persons associated with the member at branch offices. A principal (Series #26 for mutual fund broker-dealers or Series #24 for general securities broker-dealers) must be resident in an OSJ. A branch office is a location that conducts securities business with the public. New accounts are opened in the branch (but final approval of account opening occurs in the OSJ) and orders for customer accounts are entered by the branch; however, execution of the orders and review and endorsement (approval) of the orders occurs at the OSJ.

A best efforts underwriting is a(n): I principal relationship between the issuer and the underwriter II agency relationship between the issuer and the underwriter III commitment where the underwriter takes full financial liability IV commitment where the underwriter takes no financial liability A. I and III B. I and IV C. II and III D. II and IV

D. Best efforts underwritings are agency relationships, where the underwriter uses his "best efforts" to sell the issue, but takes no liability for unsold shares. Any unsold shares stay with the issuer. In a firm commitment underwriting, the underwriter agrees to buy the issue outright from the issuer; and will then resell it to the public at a higher price. The underwriter takes full financial liability for any shares that cannot be sold.

Which of the following statements concerning bonus annuities are correct? I The owner pays additional premiums initially for reduced expenses later II The fees are lower than with other annuities III The insurer contributes an additional percentage of premium payments to the account IV Withdrawal of some premiums or earnings may be permitted without penalty A. I and II only B. I and IV only C. II and III only D. III and IV only

D. Bonus annuities give the purchaser a "bonus credit" of 3-6% of the premium paid by the customer to buy additional accumulation units. This "credit" amount is paid by the insurance company and is a great marketing feature, but it comes at a cost. All bonus annuities have surrender charges, and they generally have longer surrender schedules and higher surrender fees than other annuities. In addition, they charge higher expenses than non-bonus annuity contracts. Bonus annuities may permit withdrawals of limited amounts (typically 10%-15% of account value) without imposing surrender charges, but withdrawals are subject to federal income tax on the "build-up" in the separate account plus a 10% penalty tax if the owner is under age 59 1/2.

Which of the following statements concerning exchange traded funds (ETFs) are correct? I Investors who buy ETFs pay a sales charge II Investors who buy ETFs pay a broker commission III Share prices are subject to forward pricing IV Share prices are continually priced through the day A. I and III only B. I and IV only C. II and III only D. II and IV only

D. ETFs are similar to closed-end index funds that trade like any other stock. They are bought or sold at the current market price on the exchange where they are listed and, like any stock trade, a commission is charged for executing the trade. ETFs are passively managed index funds that are exchange traded. In contrast, other "publicly traded funds" are actively managed.

Under Regulation T, the maximum time period to collect monies owed by a customer prior to an extension request is: A. trade date +1 B. trade date + 2 C. settlement date +1 D. settlement date +2

D. Regulation T of the Federal Reserve Board requires that customers pay for securities purchases "promptly" but no later than 2 business days past settlement date ("S + 2"). Since regular way settlement is 2 business days after trade date, monies must be collected by the 4th business day after trade date. If payment is not received on the 4th business day, under extraordinary circumstances, a Reg. T extension may be requested from the exchange where the security trades

All of the following are "interested persons" of a mutual fund EXCEPT the: A. Fund underwriter B. Fund officers and directors C. Fund independent auditor D. Fund regulator

D. The fund's independent auditor is hired by the board of directors and ratified by the shareowners to audit the fund and must not be affiliated with the fund. The auditor is an "interested person" because it gets substantial compensation from the fund, but it is not an "affiliated person." The Investment Company Act of 1940 definition of affiliated persons includes the fund's underwriter, investment adviser, officers, directors, employees, and anyone who owns 5% or more of the fund's shares or an issuer that is 5% or more owned by the fund. The regulator for mutual funds is FINRA (the maker of the Series #6 exam) and has no affiliation with the fund.

In a firm commitment underwriting, the manager will form a syndicate for all of the following reasons EXCEPT to: A. raise the capital needed to complete the underwriting B. reduce potential liability if the issue proves to be difficult to sell C. achieve a broad, geographically diversified customer base for the new issue of securities D. increase the manager's potential profit from the sale of the issue

D. The manager forms a syndicate because in a firm commitment underwriting, the underwriter buys the issue outright from the issuer. By syndicating the deal, the manager spreads the capital requirements among syndicate members. This also reduces the risk to each syndicate participant if the issue proves difficult to sell. By including syndicate members spread across the United States, this insures that the issue will be sold to a broad and diverse group of customers, which is usually what the issuer desires. The issuer does not like to see its securities being held by only a "few" stockholders. By syndicating the issue, the manager reduces its potential risk, but also reduces its potential for profits. If the managing underwriter did not syndicate the issue, the manager would make the profit from selling the entire issue. By syndicating the issue, the manager "gives up" a portion of the issue to the other syndicate members, reducing its risk and its potential profit.

Which type of insurance policy could disappoint the holder in a given year because it could provide a negative rate of return? A. Whole life B. Universal life C. Term life D. Variable life

D. The purchaser of any "variable" life policy bears the investment risk. There is no guaranteed rate of return, but there is a guaranteed minimum death benefit. If the separate account funding the policy performs poorly, the rate of return may be lower than expected and may even be negative. Straight permanent life is whole life. Whole life builds up cash value at a guaranteed minimum rate, so there should be no disappointments with the rate of return. Term life has no rate of return. It is a pure insurance product with no investment features. Universal life provides a rate of return based on the insurer's general account, which is comprised mainly of fixed-income securities. The rate of return may vary from year to year, but cannot drop below a minimum guaranteed level.

Gross investment income of a fund includes all of the following EXCEPT: A. interest earned on T-note investments B. dividends earned on preferred stock investments C. interest earned on convertible bond investments D. capital gains earned from the sale of appreciated common stock investment

D. The tax code treats distributions of investment income differently from income earned from capital gains. Therefore, funds must account for each separately. Gross investment income consists of interest received and dividends received, as well as any short-term capital gains (gains on securities held for 1 year or less when sold). These are all taxable at ordinary income tax rates (of up to 37%). "Capital gains" really means long-term capital gains that arise from the sale of appreciated securities held in the fund's portfolio. Long-term capital gains are taxable at a lower tax rate (15% for individuals who are not in the maximum tax bracket; 20% for individuals who are in the maximum tax bracket), so they are accounted for and reported separately.

An older female customer, in the lowest tax bracket, wants an investment that will provide asset growth for retirement. The best recommendation would be: A. Emerging markets fund B. Single stock C. Municipal bond D. Index fund

D. A municipal bond is not appropriate for a low tax bracket customer and it does not give growth. An emerging markets fund certainly offers high growth, but it also high risk and this customer is "older." A single stock might be a great investment, but there is no diversification. An index fund gives growth potential with diversification and is the best of the choices offered.

A working couple, both age 40, has a combined income of $150,000. Neither are covered by an employer sponsored pension plan. Which statement is true about IRA contributions by these persons? A. IRA contributions are prohibited since this couple can be covered by an employer sponsored plan B. IRA contributions are prohibited since this couple's income exceeds allowed limits C. IRA contributions are permitted; however, the contribution amount is not deductible D. IRA contributions are permitted with the contribution amount being tax deductible

D. Anyone with earned income can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $123,000 in year 2019 (the deduction phases out between $103,000 - $123,000 of income).

Which choices best describe a 529 Plan? I Municipal bond fund II Municipal security III Regulated by the SEC IV Regulated by the MSRB A. I and III B. I and IV C. II and III D. II and IV

D. Because the state is the "issuer" of a 529 plan (the state sponsors the plan), these are defined as "municipal securities" by the MSRB. The MSRB (Municipal Securities Rulemaking Board) writes rules for the municipal marketplace. While the MSRB does NOT regulate municipal bond mutual funds, which are subject to investment company rules and are SEC and FINRA regulated, the MSRB does regulate 529 plans. Essentially, a 529 plan is a way to purchase mutual funds in an account sponsored by the state that grows tax-free, as long as the proceeds are used to pay for a kid's education.

All of the following communications with customers by registered representatives and their firms are subject to FINRA rules regarding communications with the public EXCEPT: A. TV commercials B. seminars about investing presented by registered representatives C. a text message from a registered representative to a mailing list of potential customers about investing in ABX Mutual Fund D. a sales presentation about ABX Fund by a representative to a customer

D. FINRA's rules on communications with the public apply to communications through the media or to groups of investors. They do not apply to sales presentations to an individual customer.

A customer that buys shares of a mutual fund after the record date is: I entitled to the dividend II not entitled to the dividend III obligated to pay tax on the dividend IV not obligated to pay tax on the dividend A. I and III B. I and IV C. II and III D. II and IV

D. If a customer buys the mutual fund shares after the record date, the customer will not receive the dividend, since the ex-date is set at the business day following the record date. Since no dividend is received, there is no tax bill. If a customer buys mutual fund shares on the record date or before, the customer is entitled to the dividend and will also have to pay tax on that dividend.

Responsibilities of an investment company's board of directors include all of the following EXCEPT: A. appointing officers of the mutual fund B. approving 12b-1 fees C. setting the policies and objectives of the mutual fund D. managing the day-to-day operations of the investment company

D. The board of directors appoints the fund officers to manage the day-to-day operations of the fund. Additionally, the board approves 12b-1 fees; sets the policies and objectives of the fund; and ensures that they are followed.

Which statement is TRUE about the investment advisory contract for a mutual fund? A. The maximum term for the initial contract is 1 year B. The maximum term for renewal of the contract is 3 years C. The initial contract must be approved by FINRA D. The renewal of the contract may be approved by the Board of Directors or the fund shareholders

D. The initial investment advisory contract must be approved by the Board of Directors and can have a maximum term of 2 years. The renewal of the contract must be approved annually by either a majority of the Board of Directors or the shareholders. FINRA has nothing to do with the advisory contract.

Which of the following expenses does the insurance company deduct from the premiums before investing in the separate accounts for a variable life insurance policy? I Cost of insurance II Premium taxes III Mortality and expense risk fees IV Sales charges A. I and IV only B. II and III only C. I and III only D. II and IV only

D. The insurer deducts the sales load and premium taxes from the premiums of a variable life insurance policy before depositing the "net premium" to the separate account. It deducts a variety of costs from net assets, typically monthly. These monthly charges include: Cost of Insurance: The amount charged for the cost of the actual insurance policy based on actuarial standards; Administrative Expense Fee: Usually $10 - $15 per month to cover the "paperwork" costs of depositing the premium check and crediting it to the customer's account; Mortality and Expense Risk Fee: A fee to cover the possibility that the insured's life expectancy might differ from the actuarial table and that expenses may increase at a faster rate than expected; Policy Rider Charges: Another insurance charge for the cost of any alterations or "riders" placed into the insurance policy.

Which of the following statements concerning a mutual fund's payment of the investment adviser's fee is correct? A. The payment of this fee does not affect an investor's return on investment B. The fee is paid out of the 12b-1 fees charged to the fund C. The fee is paid out of the sales charges paid to the fund D. The fee is paid out of the fund's gross income from investments

D. The investment adviser's fee is paid out of the fund's gross income from portfolio investments, so the fee will reduce the investment returns. The fee is not paid out of sales charges used to compensate salespersons or 12b-1 fees that pay for marketing expenses.

If investors who buy an issue of a corporation's securities have limited liability, what will be the result if the corporation liquidates? A. Investors have no liability for any funds invested in the corporate issue B. Creditors may sue investors for payment if the assets of the corporation do not meet their claims C. Investors are liable only for a portion of the funds invested in the corporate issue D. Investors are liable only to the extent of funds invested in the corporate issue

D. The investors in the corporate issue will have liability limited to their investment in the securities - meaning that they can lose their investment value and that's it. Corporate creditors cannot sue them for the payment of the corporation's debts.

Mutual fund shareholders must receive financial reports from the fund: A. weekly B. monthly C. quarterly D. semi-annually

D. The shareholders must receive financial reports from the mutual fund at least semi-annually.

All of the following must be sent to broker-dealer customers semi-annually EXCEPT: A. Broker-dealer balance sheet B. Broker-dealer subordinated loan amounts C. Broker-dealer net capital computation D. Broker-dealer securities inventory amounts

D. There is no requirement for a broker-dealer to disclose its inventory positions to customers. Semi-annually, customers receive a balance sheet (which includes a listing of subordinated loans - these are loans to broker-dealers where the lender subordinates its claim to all other creditors and the loans are included as part of the firm's capital base) and a net capital computation from the broker-dealer.

Which statements are true? I Treasury stock receives dividends II Treasury stock does not receive dividends III Treasury stock has voting rights IV Treasury stock does not have voting rights A. I and III B. I and IV C. II and III D. II and IV

D. Treasury stock is common stock that has been issued and then was repurchased by the company, so it is no longer outstanding in the hands of the public. Treasury shares do not have, do not receive dividends and have no preemptive rights. In essence, they are issued shares that have been "retired" by the company.

Which of the following formulas correctly describes discretionary income? A. Total income - Total expenses B. Total income - Total liabilities C. Net income - Total expenses D. Total Income - Taxes

The best answer is A. Discretionary income is: Total Income minus Total Expenses, including Taxes. Disposable income is: Total Income minus Taxes only. It is the income left over that is available to pay for remaining expenses.