Chapter 7 questions

Is continually recommending Class B shares to customers a problem?

Yes, because Class B share purchasers cannot take advantage of breakpoints.

the fund does not charge either a front-end load or a contingent deferred sales charge. Trailer commissions will likely be paid by

all shareholders

selling dividends

an unethical sales practice in which a member intentionally misleads customers into believing they will receive the equivalent of a rebate on their investments because the fund will soon pay a distribution.

529 plans

anyone can make a contribution on behalf of a beneficiary, Contributions are made with after-tax dollars, and earnings accumulate tax free if the money is used for qualified educational purposes

party-in-interest

anyone who participates in the plan or anyone who provides services or manages the plan. Are prohibited from selling assets to the plan or receiving any benefits from the operation of the plan.

FINRA Rule 2330

applies to recommended purchases and exchanges of deferred variable annuities and recommended initial subaccount allocations

Alternative funds

are SEC- registered funds that may hold more non-traditional investments and employ more complex strategies than traditional mutual funds.

Unit trusts

are closed-end, which means there is a fixed number of units outstanding

Municipal trusts

are diversified in terms of coupon, rating, issuer, and maturity

In reviewing order tickets written earlier in the day, you note that a new client is transferring his 4o1k assets from a former employer into Class C shares. You further note that the order ticket is marked solicited. As a compliance officer, you should

ascertain that the client has been fully informed about the advantages of Class A shares; With a large purchase, Class A shares of the same fund would provide the customer with breakpoints that are not available with Class B or C shares.

A municipal unit investment trust is

closed-end and diversified

Soft dollars can be described as

commission revenue directed to broker-dealers, paying up, by institutional investors in return for services such as research

The representative bought Class C shares, and the transaction involved an IRA transfer that was effected on a trustee-to-trustee basis. The manager should

determine if the customer was advised of the potential benefit of buying the fund on a front-end or back-end loaded basis.

Your firm has reason to believe that a Fund has directed brokerage arrangements in place. Under FINRA rules, your firm

discontinue selling the Fund's shares

A customer walks into your office and wants to open a Section 529 plan account for a state that he does not live in. You should

explain that the potential home state tax benefits available to residents that may not be available when opening an out-of-state plan.

SEC Rule 35d-1

if an investment company's name suggests investments in a particular industry or category, it must have at least 80% of its assets invested in that industry or category.

a customer of your firm is leaving her employer for a new job and wishes to take control of her pension plan. You would recommend that she

initiate a trustee-to-trustee transfer because it avoids the 20% withholding tax on distributions where the account owner takes physical possession of the funds.

Under FINRA rules, 12b-1 fees may NOT be used to pay for

investment advisory fees. The investment adviser's fee is charged against the income of the fund.

A closed-end fund

requires delivery of a prospectus for primary market transactions; and does not require delivery of a prospectus for secondary market transactions.

A customer of a FIN RA member firm calls to inquire about making a large investment in a mutual fund or ETF, which holds leveraged loans and global real estate REITS. The supervisory issues and concerns would most likely focus on

risk disclosures

Under the Investment Company Act of 1940, mutual funds must send financial statements to shareholders at least

semiannually. mutual funds must provide semiannual and annual reports to shareholders.

To terminate 12b-1 plan charges, a registered, open-end management investment company must obtain a majority vote of either the

shareholders or outside directors

Under SEC rules, to charge an asset-based fee, a mutual fund must obtain a majority vote of

shareholders, directors, and outside directors

The difference between soft dollars and hard dollars, aka cash, is

that instead of paying a broker/dealer with cash, the fund will pay with brokerage business;

Under S E C rules, 12b-1 fees may be used to cover

the cost of marketing the fund to new investors. They may also be used to compensate sales personnel.

FINRA rules require that, if a customer redeems mutual fund shares within 7 business days of purchase

the member firm must forfeit the concession earned. The same rule applies to variable annuities.

In making a sales presentation to a prospective customer, a registered representative selling open-end investment company shares may compare the shares to a savings account at a bank if

the risk of share price fluctuation is discussed; and a statement is made concerning variability of dividend returns

variable annuities

the separate account may be invested in mutual fund shares, the insurance company's broker/dealer subsidiary must be a FINRA member, and dividends and capital gains must be reinvested.

The primary purpose for creating ERISA was to?

to protect the retirement funds of union members and employees of large corporations.

A corporate profit-sharing plan must be set up under a

trust agreement. A plan's trustee assumes fiduciary responsibility for the plan.

A prospectus must be delivered to customers in all of the following transactions:

unit investment trust, mutual fund, and the new issue of registered common stock.

A particular member firm is getting an additional 1% concession on sales of the Class A shares. The additional compensation is not being paid to other member firms selling these shares. Is this allowed?

yes, it is permitted if disclosed in the prospectus.

Would a member buying mutual fund shares from the principal underwriter be entitled to a discount from the POP?

FINRA rules prohibit principal underwriters from selling below the POP unless the buyer is a member firm, a written selling agreement exists between the firms, and the buying firm is filling customer purchase orders already received.

special compensation arrangements

FINRA rules require that special compensation arrangements in the distribution of mutual fund shares be disclosed in the prospectus. The name of the member firm benefiting from the additional concession and the details of the arrangement must be disclosed

Regulations regarding how contributions are made to tax-qualified plans relate to which of the ERISA requirements?

Funding. Funding covers how an employer contributes to, or funds, a retirement plan.

Do group purchases qualify for a break point?

Group purchases, such as those made by investment clubs or by multiple clients of an investment adviser, do not qualify for breakpoints. Each client will pay a sales charge based on that client's purchase amount.

A customer called the branch manager to complain about a recent exchange of a deferred variable annuity proposed and performed by a new representative. The manager should do what first?

Interview the representative to ascertain whether firm procedures were adhered to with regards to suitability and disclosure of charges and risks associated with exchanges of variable products

Member firms must make payment to the sponsor of a mutual fund for shares purchased by its customers

Payments to sponsors of mutual funds must be made within 3 business days of trade date or within 1 business day of receipt from the customer, whichever is later.

Under ERISA, who are defined as parties-in-interest?

Plan participant, Plan trustee, and Plan adviser

breakpoint sale

Sale of fund shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions.

switching

Selling shares of one mutual fund to buy shares of another. Although the customer may have legitimate reasons for making the exchange, she may incur additional sales charges and tax liabilities.

To register with the SEC on Form N-1A, an investment company needs to have capital of

$100,000

Investment advisers must be federally registered if the amount of assets under management is at least

$110 million

Under SEC rules, a prospectus in use for more than 9 months cannot contain information more than

16 months old. This rule applies primarily to mutual funds.

The maximum life of an initial investment advisory contract and an underwriting contract is

2 years; The initial contract must be approved by shareholders; These contracts must be re-approved annually, either by the board or by majority shareholder vote.

forward pricing

A customer's purchase of mutual fund shares is executed at the next price computed after receipt of the order by the customer's broker/dealer.

antireciprocal rules of FINRA

A member may not favor one fund over another based on commissions received for executing transactions for the fund. A member may not solicit business from a fund based on the member's sales of the fund's shares.

Does a deferred compensation plan have to meet the nondiscrimination provisions of ERISA?

Deferred compensation plans are nonqualified and therefore do not have to meet the nondiscrimination provisions of ERISA.

customer of your firm invested in a nonqualified variable annuity eight years ago. The separate account has grown, and the customer makes a single withdrawal. The tax consequence would be?

A taxable event at ordinary income tax rates because earnings are assumed to be withdrawn first.

Section 529 college savings plans

Contributions at the federal level are made with after-tax dollars; they feature tax-free withdrawal at the federal level; they have high contribution limits; and they are not subject to income limitations.

defined benefit plans

Contributions may vary. Distributions are fixed.

Which plas requires the use of an actuary

Defined benefit. The annual contribution necessary to ensure sufficient funds will be available to meet the fixed retirement benefits of participants varies, so the calculation requires the services of an actuary

Members of the board of directors of open-end management companies must have minimum and maximum terms of?

1 year, 5 years

All of the following must meet the nondiscrimination provisions of the Employee Retirement Income Security Act.

4o1k plans, profit-sharing plans, and Keogh plans.

Under SEC rules, a Growth Fund must have at least what percentage of its portfolio invested in growth stocks?

80%

The administrator of a profit-sharing plan wants to purchase an original Norman Rockwell painting for the plan for diversification and appreciation purposes. Under ERISA, is that allowed?

As long as the value of the purchase does not exceed 10% of the plan's assets, the purchase is permitted.

Under the Investment Advisers Act of 1940, an adviser would be permitted to charge a performance fee as long as the client had what characteristics?

Assets of at least $1 million or a net worth of at least $2 million.

Under the Investment Company Act of 1940, which investment company activities are restricted?

Buying and carrying securities on margin; and Selling short

amendment to the antireciprocal rule

FINRA prohibits a member from selling the shares of an investment company if the member knows or has reason to know that the investment company has directed brokerage arrangements in place

The FINRA rule dealing with members' responsibilities regarding deferred variable annuities applies under what circumstances?

The initial purchase of a deferred variable annuity; and The initial subaccount allocations.

A member firm may purchase mutual fund shares for?

Its investment account to fill an existing customer order, and for an existing customer order. A member may not buy shares for its inventory/trading account.

deferred variable annuity

Member firms may not recommend the purchase or exchange of a deferred variable annuity unless the AP has a reasonable basis to believe the transaction is suitable and the customer has been informed of the features/risks of variable products.

Can member make a market in mutual fund shares?

NO. Members may not make a market in mutual fund shares.

Do publicly traded fund in the secondary market require the delivery of a prospectus?

No

deferred compensation plans

Taxes on the deferred compensation are payable upon receipt. These plans are nonqualified. In a corporate liquidation, creditors can make claims. Monies set aside are not segregated by the corporate sponsor.

letter of intent

The lower sales charge resulting from the letter of intent will be assessed on the initial purchase. The extra shares bought as the result of the lower sales charge will be placed in escrow pending completion of the letter.

Who sets breakpoints for mutual funds?

The managing underwriter

How often are long-term capital gains by investment companies distributed?

The Investment Company Act of 1940 specifies that capital gains are to be distributed no more than once a year.

A mutual fund that has adopted a 12b-1 plan must review amounts expended under this plan

quarterly

Restrictions on choosing the beneficiary of a 529 account.

There are few restrictions on who may be the first beneficiary. However, if the beneficiary is redesignated, the new beneficiary must be a close family member of the first.

contribution limits to Section 529 plans

There are no contribution limits at the federal level; There are contribution limits at the state level.

A member may purchase variable contracts from an insurance company underwriter if

There is a written sales agreement in place; and The member agrees to forfeit all concessions if the contract is redeemed within seven business days of acceptance.

Are Writing covered calls and Buying puts on stock held long suitable for an IRA?

Yes.

Can a beneficiary of a 529 plan also be the beneficiary of a Coverdell Education Savings Account?

Yes.

Soft dollars

may be used to pay for research, software, services for the benefit of clients, and seminar registration fees. Not permitted are computer hardware, office equipment, and reimbursement of travel expenses to attend seminars

To be diversified, an investment company

must have at least 75% of its assets invested in securities, can have no more than 5% of its assets invested in any one company, and can hold no more than 10% of the voting stock of any one company.

A trailer commission, also known as quarterly trailers, is usually associated with:

mutual funds that charge 12b-1 fees. These fees are charged periodically, and the registered representative who sold the fund receives a percentage. These fees, and their commissions, follow the initial sale.

A customer's purchase order with a dealer for investment company shares must be executed at a price based on the net asset value of the shares when

next computed after receipt of the order by the dealer

A mutual fund that charges 12b-1 fees may use the money to cover

promotion costs, sales fees, and printing costs.

Under FINRA rules, payments made to purchase variable contracts must be forwarded to the insurance company underwriter

promptly

ERISA guidelines state:

qualified retirement plans must be in writing, segregate funds from corporate or union assets, make prudent investments, report to participants annually, and not be discriminatory. All of these activities are audited under ERISA.