Mastery Exam #3

A municipal bond is purchased in the primary market at a discount and the bond is held to maturity. What is the tax consequence at maturity? A No gain or loss B A capital gain equal to the discount C Part capital gain and part taxable interest income on the discount D Taxable interest income equal to the discount

The best answer is A. Accretion of a discount on a municipal bond is a process whereby the book value of a bond purchased at a discount is increased over the holding period of that security. If the municipal bond is issued at a discount, the Internal Revenue Code mandates that the discount be accreted. Each year, the accretion amount is recognized as interest income earned on that bond (which is not taxable by the Federal Government), and the bond's cost basis for tax purposes is increased. If the bond is held to maturity, the bond's adjusted cost basis at redemption will be par; and there will be no capital gain or loss.

All of the following communications fall under the Federal Telephone Consumer Protection Act of 1991 EXCEPT: A U.S. Mail B Facsimile transmission C Telephonic via pre-recorded message D Telephonic via live human voice

The best answer is A. The Federal Telephone Consumer Protection Act of 1991 does not apply to offers made through the U.S. mail. It does apply to any unsolicited offers made through the phone - whether these are made by fax, pre-recorded messages, or personal contact.

The Securities Exchange Act of 1934 regulates all of the following markets EXCEPT: A Primary B Secondary C Third D Fourth

The best answer is A. The Securities Act of 1933 regulates the new issue (primary) market. The Securities Exchange Act of 1934 regulates the secondary market (the trading market). The trading markets consist of the first market (trading of listed securities on an exchange), second market (over-the-counter trading of securities not listed on an exchange), third market (over-the-counter trading of securities listed on an exchange floor), and fourth market (direct trading of securities between institutions on ECNs and ATSs).

A customer that wishes to open an account to buy new issues is required to make a: I positive representation that he or she is not restricted within 12 months preceding the first purchase II negative representation that he or she is not restricted within 12 months preceding the first purchase III positive representation that he or she is not restricted annually thereafter IV negative representation that he or she is not restricted annually thereafter A I and III B I and IV C II and III D II and IV

The best answer is B. In order for a customer to buy IPOs (Initial Public Offerings) of equity securities, the customer must sign a representation letter that he or she is not restricted from buying the issue under FINRA rules (FINRA prohibits industry "insiders" from buying the issue from the underwriter). Because the customer must sign this representation, this is a "positive" affirmation. Annually thereafter, the customer must be sent a notice that the firm has the customer's representation on file that he or she is not restricted, and that if this has changed, the customer must notify the firm so that the account file can be amended. Because the customer does not sign this representation, this is a "negative" affirmation.

Which of the following statements are TRUE regarding a broker-dealer holding margin and fully paid securities? I Margin securities can be commingled with the securities of other customers and rehypothecated II Margin securities must be segregated and placed in safekeeping III Fully paid securities can be commingled with the securities of other customers and rehypothecated IV Fully paid securities must be segregated and placed in safekeeping A I and III B I and IV C II and III D II and IV

The best answer is B. Margin securities are held in street name and can be commingled with the securities of other customers. These securities are permitted to be pledged (rehypothecated) to a bank for a margin loan. Thus, collateral at a bank can be changed at any time, since it consists solely of commingled street name securities. Fully paid securities, on the other hand, must be segregated and placed in safekeeping.

A registered representative is considering prospecting a wealthy family member to see if she will open a brokerage account at his firm. The registered representative checks the National Do-Not-Call List and finds the family member there. The registered representative checks the firm's Do-Not-Call list and does not find the family member there. Which statement is TRUE? A This prospect cannot be called by the registered representative B This prospect can be called by the registered representative C This prospect can only be called by the registered representative between the hours of 8:00 AM and 9:00 PM D This prospect can only be called by the registered representative with written approval of the #24 General Principal

The best answer is B. There are 3 exceptions provided for cold calls to individuals that are on the National Do-Not-Call list. These are the:Established Business Relationship (EBR) Exception;Prior Express Written Consent Exception; andPersonal Relationship With The Associated Person Exception. Because this prospect is a family member, she comes under the "personal relationship" exemption, as long as she is not on the firm's Do-Not-Call list - which is the case here. Note that if the family member were on the firm''s Do-Not-Call list, then she could not be solicited.

Which of the following securities are NOT required to be registered with the SEC? I American Depositary Receipts II Eurodollar Debt III Foreign Government Debt IV Municipal Debt A I and II only B III and IV only C II, III, IV D I, II, III, IV

The best answer is C. ADRs (American Depositary Receipts) are non-exempt securities and must be registered with the SEC under the Securities Act of 1933. ADRs are the way that most foreign corporate issues trade in the United States. The bank that structures the ADRs handles the registration. Municipal debt, U.S. Government debt and Foreign Government debt are all exempt. Eurodollar bonds are sold outside the U.S. and thus do not fall under the Act.

An investor who accumulates a 5% or greater position in the common stock of a registered issuer must file which of the following forms with the SEC? A 8K B 10K C 13D D 144

The best answer is C. Investors who accumulate a 5% or greater position in the common stock of one registered issuer are required to file a 13D notice with the SEC within 10 business days of date that the 5% threshold was passed. This information is made public (and is of great interest to the management of the company, since the new large stockholder will probably want a say in how the company is being run!)

MSRB rules allow which of the following when selling a new issue of municipal bonds? I Providing a customer with a Preliminary Official Statement if the Final Official Statement is not yet available at settlement II Disclosing order priority provisions upon the request of customers III Orally agreeing to repurchase the bonds at an agreed price IV Not disclosing the spread on reofferings of competitively bid issues A I and II only B II and III only C I, II, IV D I, II, III, IV

The best answer is C. MSRB rules on new issue disclosure allow a Preliminary Official Statement to be sent at settlement if a Final Official Statement is not yet prepared; require that order priority provisions be disclosed at customer request; and require that the spread be disclosed on "negotiated" offerings. There is no spread disclosure on competitive bid offerings. Oral agreements to repurchase securities at a fixed price are prohibited - any repurchase agreement must be detailed in writing.

Which statement is TRUE? A In a communication to clients, a registered representative can say that he or she is a member of FINRA B In a communication to clients, a registered representative can say that he or she is a endorsed by FINRA C In a communication to clients, a member firm can say that it is a member of FINRA D In a communication to clients, a member firm can say that it is endorsed by FINRA

The best answer is C. Member firms can only say that they are FINRA members. They cannot say that they are approved or endorsed by FINRA. A registered representative cannot say that he or she is a member of FINRA - it is the firm that is the member, not the rep!

A single 30-year old investor has no current investments and $20,000 in a savings account. The customer earns $150,000 per year and has discretionary investment funds of $25,000 per year. Which of the following is an appropriate asset allocation for this customer? A 80% Aggressive Growth Fund, 20% Emerging Markets Fund B 80% Emerging Markets Fund, 20% Aggressive Growth Fund C 30% Aggressive Growth Fund, 30% Emerging Markets Fund, 30% Growth Fund, 10% Money Market Fund D 30% Money Market Fund, 30% Treasury Securities Fund, 30% Blue Chip Stock Fund, 10% Aggressive Growth Fund

The best answer is C. Since this customer is only 30 years old and is single, he has a long investment time horizon. The question does not provide any detail in terms of the customer's investment objectives and risk tolerance level. However, the concept of asset allocation is that by diversifying across asset classes, overall risk can be reduced while still achieving the customer's objective. A younger customer should be allocated more heavily into growth stocks. Choice C, with a 30% allocation to an Aggressive Growth Fund, 30% to an Emerging Markets Fund, 30% to a Growth Fund, and 10% to a Money Market Fund gives the customer a heavy concentration in growth stocks, but spread across 3 types of growth investment vehicles. Choices A and B are too concentrated in a single investment vehicle; and Choice D is better for an older investor, not a young investor.

The date that SIPC uses to value securities for purposes of insurance coverage limits is the date that the: A securities were purchased by the customer B securities were sold by the customer C petition was made in court for a trustee appointment D certificates are retrieved from Depository Trust

The best answer is C. The "valuation date" for coverage purposes in an SIPC liquidation is the date that SIPC files in court to be the trustee in the bankruptcy of the failed broker-dealer.

A customer in the 28% tax bracket has $4,000 of capital gains and $12,000 of capital losses. How much unused loss is carried forward to the next tax year? A 0 B $3,000 C $5,000 D $8,000

The best answer is C. The customer has a capital gain of $4,000 and a capital loss of $12,000 for a net capital loss of $8,000. Since only $3,000 of net capital losses can be deducted in a tax year, $5,000 of the loss cannot be deducted. This $5,000 loss is carried forward to the next tax year.

A constant dollar investment plan is one which: A invests a fixed dollar amount periodically in equity securities B invests a fixed dollar amount periodically in debt securities C maintains a fixed dollar amount of a portfolio's assets in equities D maintains a dollar amount of a portfolio's assets in debt

The best answer is C. Under a constant dollar plan, a portfolio manager sets a dollar level (say $200,000) to be maintained in equity securities. If the value rises to $230,000, the $30,000 excess is invested in debt securities. Conversely, if the equity market value drops below $200,000, bonds are liquidated and invested in equities to bring the equity balance to the constant $200,000.

A customer has made the following purchases of XYZ stock: Year 1: 300 shares @ $62 Year 2: 400 shares @ $66 Year 3: 100 shares @ $63 Year 4: 500 shares @ $69 Year 5: 200 shares @ $68 It is now Year 6 and the stock is trading at $70. The customer wishes to sell 1,000 shares. To minimize tax liability, the customer should use which tax valuation method for the shares that are sold? A Last In First Out B First In First Out C Average Cost D Specific Identification

The best answer is D. A customer that has purchased stock over many years and that sells part of the position can choose to use "specific identification" to identify the specific shares being sold. In this case, the customer will lower his or her tax bill by choosing the highest cost shares. These would be the 500 shares purchased at $69 in Year 4; the 200 shares purchased at $68 in Year 5; and 300 of the 400 shares purchased at $66 in Year 2 as the 1,000 shares sold for $70. These are the highest cost shares and this will reduce the capital gain. If the customer does not use specific identification, the IRS mandates FIFO accounting for shares sold. Average cost accounting can only be used for mutual fund shares; not for individual stocks.

Which of the following investment portfolios is LEAST liquid? A An aggressive growth fund B A U.S. Government securities fund C A money market fund D An income fund

The best answer is A. Aggressive growth stocks are usually too small to be NYSE listed. They might be found on NASDAQ, which has lower listing standards than the NYSE or OTC, which has minimal listing standards. The OTC market is a much less liquid than either NASDAQ or the NYSE. Thus, aggressive growth stocks would be the least liquid securities of the choices offered. Government securities and money market securities are actively traded and are extremely liquid. Income funds are composed of high yielding preferred stocks and bonds. These are more liquid than aggressive growth stocks, though not as liquid as NYSE-listed issues.

A 25-year old single client has just started his own small business and is not covered by a retirement plan. He has $5,000 to invest and currently has a low level of income. He wishes to start saving for retirement. The BEST recommendation is a: A Roth IRA B SIMPLE IRA C Traditional IRA D Roth 401(k)

The best answer is A. Anyone with earned income can open an IRA. Because this individual is in a low tax bracket, a Roth IRA contribution, which is non-deductible, makes sense (there is no real benefit from making a deductible contribution to a Traditional IRA). With $5,000 to invest, this is within the $6,500 contribution limit for 2023. Earnings build "tax-free" in a Roth, and distributions taken at retirement age are non-taxable. Also remember that high-earners cannot open a Roth IRA. In contrast, if a Traditional IRA were opened, this individual would get a tax deduction (he is not covered by another qualified plan), but it would have little value because of his low tax bracket. Earnings would build tax deferred and when distributions are taken at retirement age, they would be taxable, so the Roth is the better deal. A 401(k) is an employer-sponsored salary reduction plan under ERISA that requires major paperwork to establish. It allows a contribution of up to $22,500 in 2023, far more than the $5,000 this individual has to invest. This is not suitable for a very young single person starting a small business. A SIMPLE IRA is another qualified retirement plan that is "simpler" to set up than a 401(k), and that is only available to businesses of 100 or fewer employees. It allows for a larger deductible contribution than an IRA ($15,500 in 2023), which is more than this person needs. Also, it is still not as easy to set up as an IRA.

Which statement is TRUE when comparing arbitration to litigation as a means of settling disputes? A Arbitration is a faster and cheaper means of settling disputes than litigation B Litigation is a faster and cheaper means of settling disputes than arbitration C Both methods are comparable as to cost and time involved for dispute resolution D Litigation is the normal method of dispute resolution in the securities industry as compared to arbitration

The best answer is A. Arbitration is preferred over litigation as a means for settling disputes because it is simpler and cheaper. Under FINRA rules, arbitration is mandatory for settling all disputes where a member firm or its personnel are involved.

Customers A, B, C and D have their portfolio assets allocated as follows: ABCD Money Markets 15% 5% 5% 0% Treasury Bonds 40% 10% 20% 20% Speculative Bonds 10% 30% 10% 30% Blue Chip Equities 15% 15% 20% 10% Small Cap. Equities 10% 10% 30% 5% Emerging Markets 10% 20% 10% 30% REITs 0% 10% 5% 5% Which asset allocation is MOST appropriate for a risk-intolerant older customer with a short investment time horizon? A Customer A B Customer B C Customer C D Customer D

The best answer is A. For an older, risk-intolerant customer, safe fixed income securities are the best recommendation. Customer A's portfolio has the highest allocation of safe Treasury Bonds, which have the highest credit rating and give an assured income stream

11,750,000 Shares Whatchamacallit Corporation Common Stock ($.01 Par Value) Prospectus Certain stockholders (the "Selling Stockholders") of Whatchamacallit Corporation (the "Company") are offering 11,750,000 shares of Common Stock for sale in concurrent offerings in the United States and outside the United States. Of the shares being offered, 9,750,000 shares are being offered for sale in the United States and 2,000,000 shares are being offered for sale outside the United States. The price to the public and underwriting discount for both the U.S. Offering and the International Offering will be the same. The company will not receive any of the proceeds from the sale of the shares. The Company's Common Stock is listed on NASDAQ and trades under the symbol WCHM. As of March 15, 2015, the last reported sale price for the Company's common stock was $15.99 per share. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Price to Public - per share $15.99 total (1) $187,882,500 Underwriting Discount - per share $.80 total (1) $9,400,000 Proceeds to Selling Stockholders (2) - Per Share $15.19 Total (1) $178,482,500 (1) The Selling Stockholders have granted an option, exercisable by the U.S. Underwriters for 30 days from the date of the initial public offering of shares being offered for sale in the U.S. Offering, to purchase a maximum of 1,400,000 additional shares of Common Stock solely to cover over-allotments. If such option is exercised in full, the total price to the public will be $210,268,500, the underwriting discount will be $10,520,000, and proceeds to the Selling Shareholders will be $199,748,500. See "Subscription and Sale." (2) Expenses in connection with the Sale estimated at $510,000 are payable by the Company. The shares are offered by the Managers when, as, and if delivered to and accepted by the Managers and subject to their right to reject orders in whole or in part. The Offered Shares will be delivered on or about March 16, 2015. Morril Lunch & Co.Dewey Cheatem Inc.Slick Capital Markets Group The Date of this Prospectus is March 15, 2015 (Refer to the exhibit window above to answer the following question) The selling shareholders are required to offer their shares via a prospectus because: A they are likely to be officers and large shareholders of the company who must sell their shares either under the provisions of Rule 144 or who must sell their shares in a managed offering so that the existing trading market for the stock is not distorted B by using an underwriter, the selling shareholders can offer their shares to the public at a premium to the current market price of the stock and maximize their potential profit on the sale C under the tax laws, gains on shares that are sold using underwriters are subject to long term capital gains treatment, whereas gains on shares that are sold in the secondary market are subject to short term capital gains treatment D there is no current public information available about the company, so a prospectus must be delivered in order to give full disclosure about the issuer to any potential purchaser of the shares

The best answer is A. Generally, registered secondary distributions are used by officers of public held companies and larger shareholders, who when selling shares, are subject to the requirements of Rule 144 (public notice of sale and limits on the amount of shares that can be sold each quarter). If an officer or selling shareholder wishes to sell a large amount of shares (in excess of Rule 144 limits) of that company, it must register the sale with the SEC, use an underwriter to manage the sale of the shares, and sell with a prospectus. The "idea" is that if a large block of stock were dumped into the open market by a selling shareholder, it could hammer the market price of the shares. By using a manager, the stock will be sold in an orderly fashion into the market and the market price of the outstanding shares should not be adversely affected. Since the shares are being offered at the current market price of the stock, Choice B is false. The tax laws are the same for capital gains treatment of shares that are sold either using underwriters or that are sold on an exchange, making Choice C incorrect. This company is already publicly traded, therefore it is filing its financial information with the SEC, which makes the information available to the public, making Choice D incorrect.

Currently, the yield curve is inverted. A customer believes that the Federal Reserve will start to loosen credit by lowering short-term interest rates; and also believes that long term yields will move upwards from current levels because of weak demand for long-term Treasury obligations by pension funds. To profit from this, the best recommendation would be to: A buy short term T-Bills and sell long term T-Bonds B sell short term T-Bills and buy long term T-Bonds C buy short term T-Bills and buy long term T-Bonds D sell short term T-Bills and sell long term T-Bonds

The best answer is A. If short term interest rates are expected to fall, then short-term fixed income security prices will rise, so the customer will want to buy these (establishing a long position). If long term interest rates are expected to rise, then long-term fixed income security prices will fall, so the customer will want to sell these (establishing a short position).

A client of a sales representative who is based in New York moves to the State of Florida. The sales representative and his broker-dealer are registered in the State of New York, but not in the State of Florida. To solicit the customer's business in the State of Florida, the: I sales representative must be registered in Florida II sales representative does not have to be registered in Florida, since he is registered in New York and this is an existing customer III broker-dealer that employs the sales representative must be registered in Florida IV broker-dealer that employs the sales representative does not have to be registered in Florida, since it is registered in New York and this is an existing customer A I and III B I and IV C II and III D II and IV

The best answer is A. In order for the registered representative to solicit orders in the State of Florida, both the registered representative and his firm must be registered in the State of Florida under Uniform State Law. It makes no difference that this was an existing customer of the broker-dealer that had moved to the State of Florida.

An agent who lives and is registered in New York wishes to sell a municipal bond to a customer who lives in New Jersey. Which of the following statements are TRUE about the registering of this agent and his or her broker-dealer in New Jersey? I The agent must be registered in New Jersey II The agent does not have to register in New Jersey III The broker-dealer must be registered in New Jersey IV The broker-dealer does not have to register in New Jersey A I and III B I and IV C II and III D II and IV

The best answer is A. Municipal bonds are an exempt security, from both Federal and State registration. However, broker-dealers and their sales employees that sell these bonds must still be registered in each state where the securities are being offered (since they can offer these securities fraudulently, and the state wants to know where to find these persons if they do so!).

The SEC requires financial reports from all of the following EXCEPT: A municipal issuers B corporate issuers C municipal broker-dealers D corporate broker-dealers

The best answer is A. Municipal issuers are exempt from the provisions of the Securities Acts, as are all other governmental issuers. The SEC has authority over corporate issuers, and requires financial reports from corporations. Broker-dealers, including municipal broker-dealers, are registered through FINRA under SEC oversight; and their financial reports are filed with both FINRA and the SEC.

Which of the following statements are TRUE regarding margin regulations? I In-house rules may be more stringent than FINRA rules II Exchange rules may be more stringent than Federal Reserve rules III In-house rules may be less stringent than FINRA rules IV Exchange rules may be less stringent than Federal Reserve Rules A I and II B III and IV C I and IV D II and III

The best answer is A. Regarding margin rules, FINRA rules may be more stringent than Federal Reserve rules, but cannot be less stringent. Firm rules can be more stringent than FINRA rules, but cannot be less stringent.

A registered representative is a 5% participant in an investment club formed by members of the local Elks Club. The Elks Club investment club has opened a securities account at ABC Brokerage. The account wishes to buy an IPO being offered by an underwriter. Which statement is TRUE? A The account can buy the issue without restriction B The account can buy the issue if the branch manager approves C The account can buy the issue if the registered representative agrees not to share in the profit on the position D The account is prohibited from buying the new issue

The best answer is A. Registered representatives are prohibited from buying new issues from underwriters. This is true for any account in which registered representatives or other restricted persons have a greater than 10% participation as well. Thus, this account would NOT be prohibited from buying the IPO.

A new issue private placement offering is: I exempt under Regulation D II exempt under Regulation A III allowed to be sold to a maximum of 35 non-accredited investors IV limited to a maximum sale of $5,000,000 within 1 year A I and III B I and IV C II and III D II and IV

The best answer is A. Regulation D allows a "private placement" exemption if an issue is sold to a maximum of 35 "non-accredited" investors. The issue can be sold to an unlimited number of "accredited" (wealthy and institutional) investors under this exemption and still be considered a private placement. There is no dollar limitation on the amount of securities that can be sold under a private placement exemption.

Which statements are TRUE about speculative stocks that are included in a portfolio allocation model? Speculative stocks have: I higher expected returns than other securities included in the portfolio II lower expected returns than other securities included in the portfolio III higher standard deviations (risk) than other securities included in the portfolio IV lower standard deviations (risk) than other securities included in the portfolio A I and III B I and IV C II and III D II and IV

The best answer is A. Speculative stocks give higher returns, but to get this, the investor must assume higher risk.

A customer sells short 100 shares of ABC stock at $63 per share. The stock falls to $47, at which point the customer writes 1 ABC Sept 45 Put at $2. The stock falls to $36 and the put is exercised. The customer's cost basis upon exercise of the put is: A $43 B $47 C $69 D $61

The best answer is A. The customer sold the stock short at $63 per share (sale proceeds). Later, the customer sold a Sept 45 Put @ $2 on this stock. If the short put is exercised, the customer is obligated to buy the stock at $45 per share. Since the customer received $2 in premiums when the put was sold, the net cost to the customer is $43 per share for the stock (this is the cost basis in the stock for tax purposes). The stock that has been purchased is delivered to cover the short sale, closing the transaction. The customer's gain is: $63 sale proceeds - $43 cost basis = 20 point gain.

A client, age 67, owns his own home free and clear. The customer has an annual income of $25,000, mainly from social security and interest on funds held in a bank savings account. The customer has never invested and is told by his nephew that the technology company that he works for is coming out with a hot new product that will really increase the company's stock price. The BEST recommendation to be made to this client is to: A do nothing B only invest enough of his savings account in the technology company's stock so that his reduced income still covers his bills as they come due C take out a mortgage on his fully paid house and use the proceeds to make the investment in the technology company and then pay off the mortgage from the profits on the investment D liquidate the entire savings account and use the proceeds to make the technology company investment because the customer can still live on this social security

The best answer is A. This customer is age 67 and has very little income and no other liquid assets. He cannot afford to lose a bunch of money and he should do nothing!

A customer executes the following transactions during the same year: Jul 1stBuy 100 ABC at $30 per share Dec 1stBuy 100 ABC at $20 per share Dec 15Sell 100 ABC at $22 per share The customer uses the FIFO method of tax accounting. The tax consequence of these transactions for this tax year is: A No gain or loss B $200 loss C $800 loss D $1,000 loss

The best answer is A. This is a very subtle question. The "wash sale" rule states that if a customer liquidates a position at a loss, and then reestablishes that position within 30 days, the loss deduction is disallowed. The 30-day time period counts from 30 days prior to the sale date, until 30 days after the sale date. Thus, if the position is reestablished in anticipation of selling at a loss, the deduction is disallowed. In this case, the stock was purchased at $30 per share on July 1st. Towards the end of the year, the customer knows that he has a loss, and that he wishes to take the loss this tax year. The customer also knows that if he or she sells first, and then buys back the position in 30 days, the loss will be disallowed. To "fool" the IRS, the customer buys the stock on December 1st at $20 before selling the stock at $22, fifteen days later. Well, the IRS is not fooled. From the IRS's standpoint, the stock was purchased at $30 and sold at $22 on December 15th for an $8 per share loss. The customer repurchased the stock at $20 within 15 days, so the loss is disallowed under the "wash sale rule." The disallowed loss is added to the customer's basis, for a new basis in the stock of $28. When the customer liquidates this position at a later date, any gain or loss is computed from the $28 adjusted basis. In essence, the loss is deferred by the "wash sale" rule.

Which statements are TRUE about accretion of bond discounts? I Annual accretion amounts increase reported interest income II Annual accretion amounts increase the interest amount received from the issuer III Annual accretion amounts increase the bond's cost basis IV Annual accretion amounts increase potential capital gain upon sale A I and III B I and IV C II and III D II and IV

The best answer is A. When a bond discount is accreted, annually, the bond's cost basis is increased by the pro-rata amount of the discount and the accretion amount is shown as an increase of interest income received for tax purposes. However, the actual dollar amount of interest received from the issuer does not change. Because the cost basis is adjusted upwards annually by the accretion amount, this reduces potential capital gain upon sale (since capital gain equals sale proceeds minus cost basis).

The portfolio management technique that uses a market index as a performance benchmark that the asset manager must exceed is called: A Passive asset management B Active asset management C Strategic asset management D Tactical asset management

The best answer is B. Active asset management is the management of a portfolio to exceed a benchmark return (say the return of a comparable index fund). The manager's "active" return is any incremental return achieved over the benchmark return. In contrast, passive asset management is simply the management of a portfolio to match the benchmark return (the "passive return"). Active managers believe that underpriced securities can be found in the market and that performance of the benchmark can be exceeded. Passive managers believe that the market is efficient at pricing securities and that one cannot do any better than the "market" return as measured by a relevant index.

Which of the following is NOT defined as correspondence? A E-mail distributed to 15 existing retail customers B Seminar text for a speech that will be delivered to 30 prospective retail clients C E-mail sent to 10 prospective retail clients D Prospecting letter sent to 5 sales leads

The best answer is B. Correspondence is defined as a communication to 25 or fewer existing or prospective retail clients. Choices A, C and D are items of correspondence. These can be reviewed and approved by a manager or principal after they are sent out, as long as the firm has put in appropriate correspondence compliance procedures. Also, these are not subject to any FINRA filing requirement. Choice B, a speech text, is a "Retail Communication," defined as a communication to more than 25 existing or prospective retail clients. Retail communications require prior principal approval and can be required to be filed with FINRA. Note that the main categories of retail communications are "advertising" (general audience, such as TV, radio, newsprint, websites) and "sales literature" (specific audience, such as a research report, form letter, scripted speech, password-protected website).

A customer has the following investment mix: 25%Growth Stocks 25%Defensive Stocks 25%High Quality Corporate Bonds 25%Speculative Stocks During a period of economic expansion, the best performing asset classes are likely to be: I Growth Stocks II Defensive Stocks III High Quality Corporate Bonds IV Speculative Stocks A I and III B I and IV C II and III D II and IV

The best answer is B. During a period of economic expansion, growth stocks and speculative stocks perform well compared to the overall market. However, during a period of recession, these tend to decline in value. In contrast, in a period of expansion, defensive stocks (stocks unaffected by an overall market downturn, such as pharmaceuticals and food) and high quality corporate bonds underperform the overall market by not increasing in price as rapidly; but in a period of recession, they outperform the overall market, since they don't readily lose value.

The minimum asset size threshold for an investor to be considered an "institutional client" for purposes of the FINRA communications rules is: A $25 million B $50 million C $75 million D $100 million

The best answer is B. FINRA distinguishes between "retail communications" and "institutional communications" because "institutional communications" go to sophisticated investors who can take care of themselves. While retail communications must be approved by a principal prior to use, institutional communications are subject to "post use review and approval" by a principal. An institutional communication is defined as one that is distributed to an institutional investor - a bank, savings and loan, insurance company, registered investment company, registered investment adviser, employee benefit plan with at least 100 participants, government entity or a person with at least $50 million of assets for investment.

Which disclosure is optional when advertising a CMO Tranche? A Coupon B Minimum Denomination C Final Maturity Date D Average Life Of Investment

The best answer is B. FINRA sets minimum disclosure requirements when advertising a CMO tranche. It requires disclosure of the: Coupon Anticipated Yield and Average Life Specific Tranche ID - Number and Class Final Maturity Date Underlying Collateral In addition, FINRA requires the following statement: "The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions." Then FINRA states that the following disclosures are optional: Minimum Denomination Rating Agency / Government Backing Income Payment Structure Generic Description of Tranche (e.g., PAC, Companion) Yield to maturity of CMOs Offered at Par

A couple has 15 years to retirement. They currently have $100,000 to invest and have expressed a concern about inflation eroding their future retirement income. The BEST recommendation would be to: A dollar cost average by investing $3,000 a month into 5 different growth funds and when 100 shares are accumulated in any single fund, stop making purchases and use that money to make a bond investment B dollar cost average by investing $3,000 a month into a single growth fund and choose automatic reinvestment of distributions C invest $3,000 a month in long term Treasury bonds using Treasury Direct to eliminate transaction fees D invest $90,000 into a REIT that holds its properties for an average of 15 years and put $10,000 into a money market fund

The best answer is B. If the client is concerned about inflation, then a Treasury Bond investment is inappropriate. Fixed income securities lose real value if there is inflation. A Real Estate Investment Trust usually invests in commercial rental properties. These can be an inflation hedge as real estate values tend to go up with inflation, but they are not as good as growth stocks. Using dollar cost averaging to invest in growth funds, spreading the investment over an approximate 3 year time frame would allow the couple to make their investment while minimizing "timing risk" - which is simply the risk of making an investment just before the market dumps. Furthermore, putting the money into 1 growth fund gets breakpoints (reduced sales charges) as the investment accumulates in the fund. Splitting the investment among 5 different income funds is simply a way of increasing sales charges to customers because then they would not get the benefit of a breakpoint as quickly, since each fund counts separately. This is an illegal practice.

A customer has a $1,000,000 portfolio that is invested in the following: $250,000 Large Cap Growth Stocks $250,000 Large Cap Defensive Stocks $250,000 U.S. Government Bonds $250,000 Investment Grade Corporate Bonds During a period of economic expansion, the securities which will enjoy the greatest price appreciation are likely to be the: I Large Cap Growth Stocks II Large Cap Defensive Stocks III U.S. Government Bonds IV Investment Grade Corporate Bonds A I and III B I and IV C II and III D II and IV

The best answer is B. In a period of economic expansion, growth companies do well, so their stock prices increase. Defensive companies are those that are unaffected by the general economy (such as drug companies), so an economic expansion does not give their business an added boost, and their stock prices do not benefit as much from the improved economic conditions. In a period of economic growth, investors that hold bonds tend to sell their government bond holdings and buy more corporate bonds that give a higher yield. This gives a price boost to corporate bonds during a period of economic expansion.

Under MSRB rules, municipal securities traders that participate in secondary market joint accounts: A can only act as agent in the transactions and cannot carry positions overnight B cannot disseminate quotes severally for the securities held by the account; any quote can only indicate that one market exists C cannot place orders to buy bonds for an accumulation account sponsored by a dealer participating in the joint account D cannot effect customer transactions and can only deal with other municipal broker-dealers

The best answer is B. Municipal secondary market joint accounts are formed by municipal firms to purchase or sell large blocks of bonds in the trading market. Any quotes disseminated on those bonds must appear as one quote; it cannot appear that there are multiple markets for the bonds when in fact there is only one (the joint account).

Which of the following is defined as options "sales literature"? A Member firm options website B Standard option worksheet C Options memorandums for internal use D Letters of an "individual" nature sent to customers

The best answer is B. Options Sales Literature is any written communication distributed to customers or the public that contains any analysis, performance report, projection or recommendation. Included, as well, are standard forms of options worksheets (these detail gain, loss, and breakeven for a given strategy to be employed by a customer), and seminar texts for lectures to be given to the public about options. Sales literature must be accompanied or preceded by an Options Disclosure Document. Options Advertising is defined as any sales material that reaches a public audience through a mass media, including: newspapers, periodicals, magazines, websites, radio, television, telephone recordings, motion pictures, billboards, signs, or through written sales communications to the public that are NOT required to be preceded by an Options Disclosure Document. The content of these communications is very limited so that they are not "promotional" and they must state where an Options Disclosure Document can be obtained. A letter of an individual nature to a customer is defined as correspondence. Letters for internal use by a member firm do not come under any of these definitions, since they are not distributed to the public.

The Securities Exchange Act of 1934 established "self regulatory organizations" (SROs) and empowered these organizations to: I set guidelines for fair dealing with the public II handle complaints against broker-dealers for securities law violations III take administrative action against broker-dealers that violate industry regulations IV fix commission rates to be charged to public customers A I and II only B I, II, III C II, III, IV D I, II, III, IV

The best answer is B. Originally, the exchanges, such as the NYSE and NASD (National Association of Securities Dealers) were both marketplaces and regulators of their member firms. This changed when FINRA was created in 2006. Each exchange now only regulates its trading operation; and FINRA regulates the broker-dealer member firms and is its own SRO (Self Regulatory Organization). FINRA sets guidelines for fair dealing with the public with its Conduct Rules; it handles complaints against broker-dealers for securities law violations under the Code of Procedure; it can take administrative action against broker-dealers that violate industry regulations; and it establishes arbitration procedures to settle intra-industry disputes. Fixed commission rates are prohibited under the Securities Exchange Act of 1934 - these are set by the member firms.

A Regulation A exemption from full SEC registration is available for new issue offerings that do not exceed: I $20,000,000 within a 12 month period for Tier 1 offerings II $20,000,000 within a 12 month period for Tier 2 offerings (A+ offerings) III $75,000,000 within a 12 month period for Tier 1 offerings IV $75,000,000 within a 12 month period for Tier 2 offerings (A+ offerings) A I and III B I and IV C II and III D II and IV

The best answer is B. Regulation A is intended to make it easier for start-up companies to raise capital. It gives an exemption from full registration for offerings of up to $75 million within a 12 month period. The rule is split into Tier 1 and Tier 2. Tier 1 offerings, up to a maximum amount of $20 million, are given the easiest registration method and do not require audited financial statements. Tier 2 offerings allow a maximum of $75 million to be raised, but require audited financial statements. Tier 2 issues are also called Regulation A+ issues and can be exchange listed. Form 1-A is filed with the SEC to claim the exemption. It gives disclosure about the issue and a "20 day review period" must be completed before the issue can be sold. Disclosure to investors is made through an Offering Circular rather than a Prospectus.

A corporate executive holds a meeting with a select group of research analysts and gives information about the company's expected revenue and income for the upcoming quarter. If the analysts use the information to make recommendations, which statements are TRUE under Regulation FD? I The corporate officer is considered to be a tipper II The corporate officer is considered to be a tippee III Each analyst is considered to be a tipper IV Each analyst is considered to be a tippee A I and III B I and IV C II and III D II and IV

The best answer is B. Regulation FD (Fair Disclosure), passed in 2000, is basically an elaboration of the insider trading rules. It prohibits issuers from making selective disclosure of non-public information to research analysts, mutual fund managers, and other industry professionals, unless at the same time, the information is broadly disseminated to the public. If such selective disclosure is made and trades result, the corporate officers giving the information become "tippers" and the recipients become "tippees."

Which of the following statements are TRUE about Rule 147? I The rule exempts intrastate issues from Federal registration II The rule exempts intrastate issues from State registration III Both the issuer and all purchasers must be state residents IV Resale is permitted to state residents only, for the 180 day period following the offering A I and II only B I, III, IV C II, III, IV D I, II, III, IV

The best answer is B. Rule 147 exempts "intrastate" issues from registration with the SEC. However, the issue is still subject to state (blue-sky) registration. To obtain the 147 exemption, both the issuer and the purchaser must be state residents. Resale is restricted to state residents for 6 months following the offering; thereafter, the issue can be sold interstate. Note, however, that because these securities were never registered with the SEC, they cannot be publicly traded. The only way to resell them is in a "private transaction."

Stabilizing bids can be entered at which of the following? I Below the public offering price II At the public offering price III Above the public offering price A I only B I or II C II or III D I, II, or III

The best answer is B. Stabilizing bids can only be entered at or below the public offering price, never above. If the bid were allowed to be placed above the public offering price, it would make the issue instantly "hot" and this is prohibited.

Which of the following corporate distributions are taxable to the recipient? I Cash dividend II Stock dividend III Product dividend IV Stock split A I only B I and III C III and IV D I, II, III, IV

The best answer is B. Stock dividends and stock splits are not "taxable," the recipient reduces his or her cost basis per share for the additional shares received. Cash dividends and product dividends received, are taxable.

Which of the following gifts is permitted to be accepted by a registered representative from a mutual fund sponsor? A Trip to Bermuda B $50 gift certificate C $500 cash D $500 towards the purchase of fund shares

The best answer is B. The FINRA "anti-reciprocal" rule prohibits investment companies from compensating salesmen at broker-dealers for selling their shares outside of the sales charges stated in the Prospectus. FINRA does allow a maximum gift of $100 value per person per year from a mutual fund sponsor to a registered representative that is not considered as "compensation."

Under Rule 144, the Form 144 is filed: I by the seller of the restricted shares II by the buyer of the restricted shares III 10 business days prior of the placement of the order IV at, or prior to, the placement of the order A I and III B I and IV C II and III D II and IV

The best answer is B. The Form 144 is simply a notification to the SEC that stock will be sold in compliance with the Rule - the SEC does not approve of the sale. The Form must be filed by the seller at, or prior to, with the placement of the sell order.

A customer has a margin account at a broker-dealer who goes bankrupt. The account holds $900,000 of securities and has a $400,000 debit balance. The customer will receive: A $400,000 in cash B $500,000 in securities C $500,000 in cash D $900,000 in securities

The best answer is B. The SIPC coverage limit of $500,000 in securities is based on the equity in a customer's account. An account with $900,000 in securities and a $400,000 debit has $500,000 of equity. The customer will receive $500,000 of securities in the liquidation.

All of the following are covered under the Securities Exchange Act of 1934 EXCEPT: A registration of broker-dealers B registration of new issues C stabilization of new issues D registration of exchanges

The best answer is B. The Securities Act of 1933 requires registration of non-exempt new issues. The Securities Exchange Act of 1934 requires registration of exchanges and their members with the SEC, and allows stabilization of new issues in the secondary market under prescribed conditions.

The Securities Act of 1933: I requires the registration of non-exempt securities II does not require the registration of non-exempt securities III requires the registration of exempt securities IV does not require the registration of exempt securities A I and III B I and IV C II and III D II and IV

The best answer is B. The Securities Act of 1933 requires registration of non-exempt securities - these are issues that are not exempt from the registration provisions of the Act. Exempt securities do not have to be registered under the 1933 Act.

A customer buys 200 shares of ABC stock at $50 per share and buys 2 ABC Jul 50 Puts @ $4. The puts expire and the customer sells the stock in the market at $60. The customer has a capital gain of: A $800 B $1,200 C $2,000 D $2,800

The best answer is B. The customer has a 10 point gain on 200 shares, which amounts to a $2,000 capital gain. The two put contracts, for which a $4 per share premium was paid, expire worthless resulting in an $800 capital loss. The net capital gain is $1,200.

A customer buys 100 shares of XYZ stock at $30 per share. The customer then sells 1 XYZ 30 Call contract for a premium of $300. The call contract expires unexercised. After expiration, the customer's cost basis in the XYZ shares is: A $2,700 B $3,000 C $3,300 D $6,000

The best answer is B. The expiration of the call contracts results in a short term capital gain to the writer of $300, taxable in that year. The cost basis of the stock position is unaffected at $30 per share, for a total cost basis for 100 shares of $3,000. Notice that this tax treatment is the one that is most beneficial to the IRS; and worst for the investor. The call premium is taxed as a short term capital gain at expiration; it cannot be used to reduce the cost basis of the long stock position, which has the same effect as increasing the potential capital gain on the stock.

The ultimate authority for determining the amount of the discount that must be accreted on municipal market discount bonds is (the): A MSRB - Municipal Securities Rulemaking Board B IRS - Internal Revenue Service C SEC - Securities and Exchange Commission D FINRA - Financial Industry Regulatory Authority

The best answer is B. The final determination of the amount of discount that must be accreted on any (municipal, corporate, and Government) original issue discount bond is made by the Internal Revenue Service.

A customer buys an oil and gas limited partnership interest for $100,000 and signs a $30,000 recourse note. After the first year of operations, the investor's K-1 shows: Revenue$75,000 Operating Expenses$45,000 Debt Service - consisting of $5,000 principal repayment and $15,000 interest$20,000 Management Fees$10,000 Depreciation$ 7,000 Percentage Depletion$ 3,000 The investor has net taxable income or loss for this year of: A $0 B $5,000 loss C $5,000 gain D $15,000 gain

The best answer is B. The income statement for this year will show: Revenue$75,000Less:Operating Expenses$45,000Debt Service - Interest Expense Only$15,000Management Fees$10,000Depreciation$ 7,000Percentage Depletion$ 3,000Net Loss($ 5,000) Notice that principal repayments, which are not income statement items, are not included. These will be used to adjust the basis at year end, however, since a repayment of recourse debt reduces the basis.

Interest income from which of the following is SUBJECT to state and local taxes? A Federal Intermediate Credit Bank issues B Federal Home Loan Bank issues C Federal National Mortgage Association issues D U.S. Treasury Bills

The best answer is C. Both Fannie Mae and Ginnie Mae mortgage backed pass through certificates are fully taxable by both the Federal and State governments - since these are issuers of mortgage backed pass through certificates. Since the mortgage interest payments are deductible at both the Federal and State levels, the recipient of the mortgage interest payments (the holders of the certificates) must pay tax at both the Federal and State levels. Otherwise, as a general rule (there are some exceptions), interest earned on U.S. Government and agency obligations is subject to Federal income tax but is exempt from state and local tax.

An investor buys an 8% municipal bond in the secondary market on a 10% basis. The investor does not accrete the bond discount annually. If the bond is held to maturity, after considering taxes to be paid, the investor's yield will be: A 8% B 10% C more than 8% but less than 10% D less than 8%

The best answer is C. Even though the coupon rate earned from a municipal bond is free of federal income tax, any market discount is taxed as interest income earned. This is nothing more than a "tax grab" by the Federal government - the idea being that wealthy people buy municipal bonds, so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The discount can be accreted annually and tax paid, or the tax can be paid at maturity or sale date. The investor buys the bond at a discount, chooses not to accrete the discount annually, and the bond is redeemed at par at maturity. Ordinary income tax must be paid on the difference (the discount). What brings the 8% coupon up to a 10% basis is the annualized earning of the discount at a 2% rate - and this discount component of the return is taxable (at maturity on the entire gain at ordinary income tax rates). Thus, the customer will not receive a 10% after tax yield to maturity, since part of this yield is taxable interest income. The after tax yield will be higher than the 8% coupon, but lower than the 10% basis on which the bond is quoted.

A customer calls her registered representative and says the following: "I'm looking for a safe investment for $100,000 that I have, that will give me a moderate level of income. I have 2 children, ages 12 and 13, and I will need to use these monies to pay for their college education, starting in 5 years." All of the following recommendations would be suitable EXCEPT: A Treasury bond mutual fund B Treasury bonds with 5, 6, 7, 8, and 9 year maturities C GNMA pass-through certificates with 5, 6, 7, 8, and 9 year maturities D FNMA debentures with 5, 6, 7, 8, and 9 year maturities

The best answer is C. GNMA pass-through certificates represent an ownership interest in a pool of underlying mortgages. Each month, the mortgage payments made into the pool are "passed through" to the certificate holders. If interest rates drop, then the homeowners in the pool will refinance their mortgages and prepay their old higher rate mortgages. These prepayments are passed through to the certificate holders, who are paid off much earlier than expected. If these payments are reinvested, since interest rates have fallen, the overall rate of return falls, and the anticipated monies needed to fund the college education will not be available. Prepayment risk does not exist with conventional debt securities.

A customer has purchased 20,000 shares of Ou-La-La stock, a French clothing company. The stock is not traded in the United States. Ou-La-La declares and pays a dividend of 1,125 Euros, which, when converted to dollars equals $1,000. France imposes a 20% withholding tax on dividends repatriated outside its borders. How is the dividend reported on this investor's U.S. tax return? A No dividends are reported, since the investment is made outside the United States B $800 of dividends are reported, since $200 was withheld in France C $1,000 of dividends are reported, along with a $200 tax credit for monies withheld in France D $1,000 of dividends are reported, with no tax credit available

The best answer is C. If a direct investment is made in a foreign security, that foreign country often withholds tax on dividends repatriated out of that country. If this occurs, the tax withheld is applied as a tax credit on that person's U.S. tax return. Thus, this person who received $1,000 of dividends, but who has $200 of taxes withheld on those dividends in France, would report the entire $1,000 of dividends received, along with a $200 tax credit for the tax withheld in France.

Which statement is TRUE for both original issue discount ("OID") municipal bonds and municipal bonds originally issued at par that are now trading at a discount? If held to maturity, there is: A a taxable capital gain equal to the discount on both bonds B taxable interest income equal to the discount on both bonds C no tax on the discount of the OID bond; while the discount will be taxed as interest income on the market discount bond D no tax on the discount of the market discount bond; while the discount will be taxed as interest income on the OID bond

The best answer is C. If a municipal bond is issued at a discount, this occurred only because the bond offered a rate of interest that was lower than the market. The amount of the discount really represents the "missing" interest income on the bond. Original issue discount bonds must be accreted under IRS rules, with the discount being treated as municipal interest income (which is not taxed by the Federal Government). Thus, if the bond is held to maturity, the entire discount has been accreted, and the bond is valued at par. Since the bond is redeemed at par, there is no capital gain or loss. If a municipal bond is issued at par, and subsequently goes to a discount in the market (for example if interest rates have risen), then the market discount is treated differently under the tax code. The IRS considers the market discount to be taxable interest income, earned over the remaining life of the bond. The holder has the option of accreting the discount each year and paying tax for that year, or of waiting to maturity to pay tax on the entire discount as interest income earned (this is clearly the better choice, and the one used by municipal investors).

A 65-year old man is retired and living on social security. He is married and his wife does not work. The client has inherited a small amount of money that he wishes to invest. What should you recommend as an investment? A Individual securities B Variable annuities C CDs D Bond funds

The best answer is C. It would be nice to have more information, such as the customer's investment objective and risk tolerance, but that is not given. Since this is a retired individual living on social security, he really does not have investment funds that can be put into risky assets. The safest asset given is CDs, which would provide extra income and safety of principal. You might argue that a bond fund could be recommended, but the NAV of a bond fund will decline in a rising interest rate environment, so there is the risk of loss of principal. This is not the case with a CD.

Under MSRB rules, a registered representative can perform which of the following functions? I Trading municipal issues in the secondary market II Offering call and put options on municipal securities to customers III Overseeing the activities of other municipal registered representatives IV Offering new municipal issues to retail customers A I and II only B III and IV only C I, II, and IV D I, II, III, IV

The best answer is C. Municipal representatives are permitted to trade municipal issues in the secondary market; offer call and put options on municipal issues; and sell new municipal issues to customers. Registered representatives are not permitted to supervise other representatives. To do so, the individual must pass the principal's exam.

Which of the following must be sent to customers of broker-dealers semi-annually?I Broker-dealer securities inventory amountsII Broker-dealer balance sheetIII Broker-dealer subordinated loan amountsIV Broker-dealer net capital computation A II only B III and IV only C II, III, IV D I, II, III, IV

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

On June 12th, a customer buys 100 shares of DEF stock at $49 per share. On June 30th of the same year, the customer sells the stock at $39. On July 10th of the same year, the customer buys DEF stock at $42. The customer's cost basis in DEF stock is: A $39 B $49 C $52 D $59

The best answer is C. Since the customer sold the stock at a loss, and then repurchased the position within 30 days, this is considered a "wash sale" and the loss is disallowed for tax purposes. Instead, the loss on the stock is added to the cost of the repurchased position. The customer originally bought the stock at $49 and sold it at $39, for a $10 loss per share. The customer repurchased the stock at $42. The adjusted cost basis on the stock is $42 + $10 loss = $52 per share.

Which of the following statements are TRUE about general partners? I The general partner either manages or appoints a manager for the program II The general partner assumes limited liability III The general partner decides which properties to buy and sell IV The general partner is considered to be the key executive in the partnership A I and II only B III and IV only C I, III and IV D I, II, III, IV

The best answer is C. The general partner is the key executive; makes management decisions such as deciding which properties to buy and sell; and either manages the program or oversees a manager. The general partner (GP) collects a management fee for these duties and assumes unlimited liability.

Which of the following statements are TRUE about capital gains taxes for investors who are not extremely high earners? I The maximum tax rate on a short term capital gain is 15% II The maximum tax rate on a short term capital gain is 37% III The maximum tax rate on a long term capital gain is 15% IV The maximum tax rate on a long term capital gain is 37% A I and III B I and IV C II and III D II and IV

The best answer is C. The maximum tax rate on short term capital gains is 37% (the same as for earned (ordinary) income). For assets held over 12 months, the maximum tax rate drops to 15%. (Note that this rate is raised to 20% for taxpayers in the highest tax bracket.)

Under MSRB rules, which of the following records must be kept for specified time periods? I Trade comparisons II Official Statements III Customer account statements IV Customer complaints A III and IV only B I and II only C I, III and IV D I, II, III, IV

The best answer is C. There is no requirement to keep Official Statements filed at the firm. The underwriter for the issuer files a copy of the Official Statement with the MSRB, which puts it up on its EMMA website for public access.

A FINRA member firm does not follow a particular stock and a registered representative wishes to obtain a 3rd party research report to send to 30 interested retail customers. Which statement is TRUE? A FINRA member firms are prohibited from using 3rd party research reports B 3rd party research reports can be sent to customers if prior approval is obtained from FINRA C 3rd party research reports can be sent to customers if prior approval is obtained from the Supervisory Analyst and the Compliance Officer of the firm D 3rd party research reports can be sent to customers without any additional approvals required

The best answer is C. Third party research is prepared by independent research firms that tend to be free of the conflicts of interest that have troubled member firms that prepare research reports on the issuers with which they do underwriting and advisory business. If a registered representative were to, on his or her own, obtain 3rd party research to send to customers, then it would need the appropriate approvals required of research reports before being sent out. This would be approval of the supervisory analyst. In addition, if the communication is going to more than 25 existing or prospective retail clients (as is the case here), it is a "retail communication" that requires prior principal approval.

Customer Name:Joey Jones Age:30 Marital Status:Single Dependents:None Occupation:VP - Marketing - ACCO Corp. Household Income:$250,000 Net Worth:$60,000 (excluding residence) Own Home:No - Rents Investment Objectives:Aggressive Growth / Early Retirement at Age 50 Investment Time Horizon:20 years Investment Experience:0 years Current Portfolio Composition: 401(k):$30,000 Cash in Bank:$30,000 When reviewing this customer's profile sheet, the most immediate question that should be considered is: A "Does the customer intend to buy a home?" B "Does the customer intend to get married?" C "Since the customer earns $250,000 per year, how come he only has $60,000 in his portfolio?" D "Since this customer is age 30, why does he want to retire by age 50?"

The best answer is C. This customer, age 30, is a high earner, yet he only has $60,000 put away in his 401(k) and in cash. It sure looks like he is a big spender! Beginning a systematic plan of putting away money for retirement is critical when formulating an investment plan for a customer - especially one that wants to retire in 20 years. The customer must be made aware of the fact that, probably, his current spending pattern needs to be curtailed. This customer needs to start socking away money now to meet his early retirement goal!

Customers who actively trade their listed stock portfolios should have a strong understanding of: A liquidity risk B inflation risk C timing risk D call risk

The best answer is C. Timing risk is the risk that trades will not be performed at the best market prices. Active traders are highly subject to this risk. Active traders will only trade securities in "deep" markets such as NYSE or NASDAQ common issues. They would not trade illiquid securities (e.g., OTC Pink Sheet issues) since they would incur "liquidity risk." Liquidity risk is the risk that a security can only be sold by incurring large transaction costs. Inflation (purchasing power) risk is the risk that inflation will reduce an investor's real returns. Active traders are not concerned with inflation risk because they hold their investments for very short time periods. Since active traders are trading common stocks, call risk is not a consideration (common stocks are non-callable).

Customer Jane Jennings' suitability information is presented below: Age:39 Marital Status:Single Dependents:1 Child - Age 10 Annual Income:$80,000 Tax Bracket:28% Net Worth:$510,000 excluding home Home:$350,000 fully paid Investment Portfolio:$422,000 (60% equities; 20% long bonds; 20% money market) The customer wants to start a college fund for her child. The anticipated tuition, starting 8 years from now, is $50,000 per year ($200,000 total tuition). Which of the following recommendations is most appropriate for this customer? A liquidate $200,000 of common stock in the client's portfolio and invest the entire proceeds in 8-year Treasury Notes B take out a second mortgage on the customer's residence in the amount of $200,000 and invest the proceeds in a tax-deferred annuity funded by an income separate account C liquidate $160,000 of the common stock and invest the proceeds in laddered Treasury Notes and Bonds of $40,000 amounts maturing 8, 9, 10 and 11 years from now D liquidate $100,000 of the bonds in the customer's portfolio and $100,000 of common stock in the customer's portfolio and invest the entire proceeds in 8-year Adjustment Bonds

The best answer is C. To fund this child's college education, payments of $50,000 per year are needed over a period of 4 years, starting 8 years from now. There is no reason to fund the entire $200,000 right now, since this amount will grow over the next 8 years - making Choices A, B and D incorrect. Also, please note that this customer is only 39 years old - a fairly young age. She should keep as much of her portfolio in growth stocks as possible.

Under Regulation D, which of the following statements are TRUE? I A Prospectus must be delivered to all purchasers II An Offering Memorandum must be delivered to all purchasers III Full disclosure must be made to investors IV No disclosure is required to investors A I and III B I and IV C II and III D II and IV

The best answer is C. Under Regulation D, purchasers of private placements must be given full disclosure about the issue, even though no prospectus is required (the issue is exempt). Disclosure is accomplished by providing the purchaser with a copy of an "Offering Circular," which for smaller private placements is called the "Offering Memorandum."

A married couple, the husband is age 27 and the wife is 25, have 2 young children, no retirement plan and no investments. Based on this information, an agent should: A tell the clients to establish a Roth IRA B tell the clients to establish 529 plans for their children C talk to the clients about their financial goals D determine that the clients have cash available for investment

The best answer is C. We certainly don't know much here from the information given. The best of the choices offered is to talk to the clients about their financial needs and goals and then establish an investment plan to get them there, based on the funds that they have available for investment, their risk tolerance, investment time horizon, etc. While determining that the customers have (or will have) cash available for investment is part of the process, Choice C is the better answer. Also note that specific investments (Choices A and B) cannot be recommended until the investment plan is completed.

Over the last 5 years, a client has bought 100 shares of ABC Mutual Fund each year in a taxable account and has elected to have dividends and capital gains automatically reinvested in additional fund shares. The aggregate cost of the 500 purchased shares is $6,215. In addition, over these 5 years, the customer has bought 100 additional shares through dividend reinvestment at an aggregate cost of $1,572. At the end of the 5th year, the client's statement shows that the customer owns 600 shares at an aggregate market value of $8,934. If the client redeems 100 of the shares, the average cost basis per share is: A $10.36 B $12.43 C $12.98 D $14.89

The best answer is C. When redeeming mutual fund shares, the IRS requires that average cost basis be used, unless another acceptable method is elected (FIFO or specific identification). Because dividends and capital gains are taxable each year, when reinvested in additional share purchases, those dollars increase the number of shares owned. To find the average cost basis, add the cost of the original 500 shares ($6,215) and the cost of the additional 100 shares purchased through dividend reinvestment ($1,572) = $7,787 divided by 600 shares owned = $12.98 cost per share.

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

The best answer is 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.

If a registered representative wishes to distribute an options retail communication to her customers, which statement is FALSE? A The retail communication must be approved in advance of distribution by a Registered Options Principal B The retail communication must be approved 10 days in advance of use with the SRO if it is distributed to customers who have not received an Options Disclosure Document C The retail communication can be distributed to any customer who has already received an Options Disclosure Document without requiring prior filing with the SRO D The retail communication must be approved 10 days in advance of use with the SRO, regardless of whether it is distributed to customers who have already received, or who have not already received, an Options Disclosure Document

The best answer is D. A retail communication regarding options is defined as one distributed to more than 25 existing or prospective clients. When a client opens an options account, the customer must be given the latest Options Disclosure Document (the ODD) - which is basically an options primer, explaining how options and the OCC (Options Clearing Corporation) work. If the retail communication is distributed to customers who have already opened options accounts, then they have already received the ODD. These retail communications do not need to be pre-filed with the SRO (either the CBOE or FINRA) If the retail communication is distributed to customers who have not already opened options accounts, then they have not received the ODD. These customers are "new" to options, so the SRO is more concerned about what might be in these communications, therefore the SRO (FINRA or the CBOE) requires that the communication be filed 10 days in advance and get SRO approval before it can be used. Finally, no matter what, any options retail communication must be approved by a Registered Options Principal before it can be distributed.

Customer Name:Jane Doe Age:41 Marital Status:Married Dependents:1 Child, Age 13 Occupation:Homemaker 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 In order to make an appropriate recommendation to this customer, the registered representative should be concerned about the customer's: I investment time horizon, with specific emphasis on whether the 13 year old child will go to college and how this expense will be funded II strategic asset allocation needs with specific emphasis on the fact that the customer's portfolio mix might be overly conservative for a person that is only 41 years old III retirement needs, with specific emphasis on whether the customer's spouse is covered by a pension plan or if the customer must fund her retirement on her own IV life insurance coverage, with specific emphasis on the fact that this non-working wife and child must be supported if the husband dies A I and III only B II and IV only C I, II, III D I, II, III, IV

The best answer is D. All of the choices are important and they are not addressed in the client profile provided. The registered representative should be concerned about whether the customer has been planning to pay for the 13-year old child's college education (if this is relevant). The current asset mix of 92% of the portfolio in bonds and money market instruments appears to be very conservative for a 41-year old, and will lower overall investment returns over the long haul. A reallocation of some of these funds to long term common stock investments may be appropriate. The profile does not address the customer's retirement needs and coverage; nor does it address the customer's insurance needs and coverage. All of these are relevant items.

A municipal dealer places an order with the syndicate manager for a G.O. bond new issue. The bonds will be placed in an "accumulation account" for a unit investment trust being established by the syndicate member. Which statement(s) is (are) TRUE? I The syndicate member must disclose to the manager that the bonds are being purchased for an accumulation account II The manager will disclose the order to the other syndicate members when the syndicate account is closed III The order will be treated as a "member takedown" order by the manager A I only B I and II C II and III D I, II, III

The best answer is D. An order placed with the syndicate by a member for an "accumulation account" is not being sold to the general public. They really are being retained by a syndicate member for his own use. The syndicate member must disclose this to the manager when the order is placed; the manager will disclose any of these orders that have been filled to the other syndicate members when the account is closed; and the manager will fill these orders last- meaning they get priority after pre-sale, group, and designated orders. They are treated as member takedown orders, and if there is sufficient interest in the issue, would not be filled because of the other orders with higher priority.

Which of the following would be considered to be a "retail communication?" A A direct mailing sent to 25 existing retail clients B A research report sent to 20 prospective retail clients C An institutional communication D A website maintained by a broker-dealer that provides daily market information

The best answer is D. Any communication made available to MORE than 25 existing or prospective retail clients is defined as "retail communication." Retail communications must be approved in advance of use by a principal and can be required to be filed with FINRA. A website is seen by a broad audience and falls into this category. Any communication made available to 25 or fewer existing or prospective retail clients is defined as "correspondence." Correspondence is required to be approved after use (as long as the firm has appropriate supervisory procedures in place) and is not subject to FINRA filing rules. Note that the research report sent to 20 clients is defined as "correspondence" and the direct mailing to 25 existing retail clients is right at the limit of the "correspondence" definition. Institutional communications are excluded from the "retail communications" definition, approval and filing rules because institutions are sophisticated investors who know what they are doing

FINRA enforces regulations in which of the following markets? I Primary Market II First Market III Second Market IV Third Market A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. FINRA regulates the entire non-exempt securities market. FINRA regulates the Primary Market (new issues); the First Market (trades on exchanges); the Second Market (OTC trades of non-exchange listed securities); the Third Market (OTC trades of exchange listed issues) and the Fourth Market (direct trading between institutions on ECNs and ATSs).

A corporation declares a cash dividend on Wednesday, December 1st. The record date is set at Tuesday, December 21st, with the dividend payable on Friday, December 31st. Based on this information, the ex date is set at Monday, December 20th. The "tax event" occurs on: A Wednesday, December 1st B Friday, December 17th C Tuesday, December 21st D Friday, December 31st

The best answer is D. For tax purposes, payments by issuers to securities holders are considered to be received as of the date the issuer sends the check. In this case, the check is sent on Friday, December 31st (payable date), therefore the income is taxable as of this date.

Which of the following are exempt securities under Securities Act of 1933? I Corporate Bonds II Municipal Bonds III U.S. Government Bonds IV Small Business Investment Companies A III only B I and II C II and III only D II, III, IV

The best answer is D. Government bonds, municipal bonds, and Small Business Investment Company issues are all exempt securities under the 1933 Act. Corporate bonds are non-exempt securities that must be registered with the SEC under the Securities Act of 1933.

A customer, age 51, has a 20 year investment time horizon, a moderate risk tolerance, and is looking for investments that provide both income and growth. The best recommendation would be: A money market instruments B mutual funds C bonds D large capitalization growth stocks

The best answer is D. Money market instruments are very safe, but provide little income and no growth. These would be recommended to a customer seeking preservation of capital - not to a customer seeking income and growth. Choice B, mutual funds, is too generic to be a valid choice. There are all kinds of mutual funds out there, for all types of investment objectives. Choice C, bonds, is also too generic to be a valid choice. Also, while bonds provide income, they do not provide growth. Choice D, large capitalization growth stocks, is the best one offered. Large capitalization stocks pay dividends for income, and also offer long term growth potential, meeting both of the customer's objectives.

All of the following are considered to be advertising by the MSRB EXCEPT: A seminar texts B market letters C form letters D Official Statements

The best answer is D. Official Statements are not considered to be advertising by the MSRB, requiring principal approval. This makes sense because they are generally prepared by the Bond Counsel, who has liability along with the issuer for intentional material misstatements under common law. Any material prepared by individuals in a firm, such as market letters, form letters, circulars, seminars, etc. are considered to be advertising requiring principal approval before use.

Passive asset management is: A buying securities positions and holding them to the liquidation date of the portfolio B buying securities positions and holding them until pre-established prices are reached C selecting securities to be purchased for each asset class based upon fundamental analysis D using index funds as the investments for each asset class

The best answer is D. Passive asset management does not mean that there is no management. Passive asset management is the use of index funds (which are managed to mirror a chosen index benchmark) as the security selections within an asset class. Thus, the actual specific security selection and management is embedded within the index fund chosen for investment.

A customer has a cash account holding $200,000 of securities and $340,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation? A SIPC will provide coverage for the $200,000 of securities only B SIPC will provide coverage for the total of $540,000 of securities and cash C SIPC will provide coverage for only $340,000 of cash D The customer will become a general creditor in the amount of $90,000

The best answer is D. SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $200,000 of securities (covered in full) and $340,000 of cash (covered only for $250,000), for total coverage of $450,000. For the remaining $90,000 of cash not covered, the customer becomes a general creditor.

Which of the following statements about the Securities Investor Protection Corporation (SIPC) are TRUE? I SIPC is a non-profit government sponsored corporation II Every broker-dealer registered under the Securities Exchange Act of 1934 must be a member of SIPC III SIPC is an insurance fund protecting against broker-dealer insolvency IV SIPC is funded through annual assessments paid by broker-dealer members A I and II only B III and IV only C I, III, IV D I, II, III, IV

The best answer is D. Securities Investor Protection Corporation is a non-profit membership corporation, composed of all broker-dealers registered under the Securities Exchange Act of 1934. SIPC is government sponsored, but is not an agency of the U.S. Government. SIPC is funded by annual assessments paid in by its broker-dealer members. SIPC insures customer accounts at broker-dealers for up to $500,000, inclusive of maximum cash coverage of $250,000.

Under MSRB rules, a registered representative is prohibited from sharing in the gains and losses of a customer's account unless the: A registered representative has made a written guarantee of performance to the customer B registered representative agrees to reduce the commission rate to be charged C customer agrees to the arrangement in writing D registered representative contributes capital proportionate to his sharing percentage and receives written approval of the principal

The best answer is D. Sharing in a customer account is prohibited unless the registered representative opens a joint account with the customer; shares in gain and loss in proportion to the capital contributed; and gets written approval for the account from the principal.

Tactical portfolio management is the selection of the: A securities in which to invest B asset classes in which to invest C target asset allocation for each asset class selected for investment D variation permitted in target asset allocation for each asset class selected for investment

The best answer is D. Strategic asset allocation is the determination of the target percentage to be allocated to each asset class (e.g., 25% Treasuries; 25% Corp. Debt; 50% Equities). Tactical asset allocation is the permitted variation around each of the chosen percentages - for example, even though Equities are targeted at 50%, this might be allowed to be dropped to as low as 40%, or as high as 60%, depending on market conditions.

An assessment of an existing client's financial status shows the following: Name:Jack/Jill Miller Ages:57 and 59 Marital Status:Married - 3 Adult Children Income:$80,000 per year Retirement Plan:Yes - Vested Defined Benefit Plan Life Insurance:Yes Risk Tolerance:Low Home Ownership:Yes Client Balance Sheet: Assets Cash on Hand:$22,000 Marketable Securities:$96,000 ($15,000 in Money Market Fund; $25,000 in Treasury Notes; $56,000 in Blue Chips) Retirement Plans:$458,000 (Defined Benefit Plan Valuation) Auto:$39,000 Home Ownership:$404,000 Liabilities Credit Cards Payable:$14,000 Mortgage Payable:$104,000 Net Worth: $901,000 The couple plans to retire in the next year, sell their home and move to a retirement community where a new home will cost $190,000. They wish to supplement their retirement income, which will be approximately $40,000 from their retirement plan and $8,000 from Social Security. The best recommendation to the couple is to take the $300,000 net proceeds from the sale of the home after paying off its mortgage and: A put a $50,000 down payment on the new home, finance the balance of the purchase with a $140,000 mortgage, and invest the remaining cash proceeds of $250,000 in growth common stocks B put a $50,000 down payment on the new home, finance the balance of the purchase with a $140,000 mortgage, and invest the remaining cash proceeds of $250,000 in Treasury STRIPs C pay for the $190,000 new home in full and invest the extra $110,000 in high yield bonds to provide retirement income D pay for the $190,000 new home in full and invest the extra $110,000 in high yielding blue chip preferred stocks to provide retirement income

The best answer is D. The key here is that this couple is looking for additional retirement income. Investing in growth stocks does not provide current income, so this is a bad choice. STRIPs are a zero-coupon government security and also do not provide current income - so this is another bad choice. High yield bond investments provide income (assuming that the bonds do not default); but they are high risk; and this couple has a low risk tolerance. Investing in high yielding blue chip preferred stocks gives income and safety, along with the benefit of a low 15% maximum tax rate on cash dividends received. This is the best of the choices offered.

All of the following would be considered when determining whether a municipal bond tax swap will result in a "wash sale" EXCEPT: A coupon rate B issuer C maturity D principal amount

The best answer is D. The principal amount has no bearing on whether a "wash sale" has occurred. If the newly purchased bonds are too similar to those sold at a loss, the deduction is disallowed. The bonds are not considered to be "similar" if 2 of the following 3 factors are different: the maturity; the coupon rate; or the issuer.

Standards for options advertising that is not preceded by delivery of the ODD (Options Disclosure Document) allow all of the following EXCEPT: A making reference to the Options Clearing Corporation B using a corporate logo C referring to a specific options exchange D referring to a specific option contract

The best answer is D. The recommendation or reference to specific options contracts is prohibited in any options communication that is not accompanied or preceded by delivery of the ODD. However, advertising can mention the functions of the Options Clearing Corporation, can include the broker-dealer's name and logo; and can explain the functions of the options exchanges.

The individual who organizes the direct participation program and files the required documents is best known as the: A Wholesaler B Limited Partner C General Creditor D Syndicator

The best answer is D. The syndicator of a limited partnership is the person who handles the organization of the partnership and the registration of the partnership securities.

In 2023, what is the maximum gift that a wife can be given by her U.S. born husband without incurring gift tax liability? A 0 B $17,000 C $6,000,000 D Unlimited

The best answer is D. There is an unlimited marital exclusion from estate and gift tax. An interesting note for the unlimited exclusion - both spouses must be U.S. citizens. If one of the spouses is a non-U.S. citizen, then the exclusion is not allowed.

All of the following are accredited investors EXCEPT: A individual earning $200,000 per year B couple earning $300,000 per year C person with a net worth of $1,000,000 exclusive of residence D person buying $150,000 of the issue within 5 years

The best answer is D. To be accredited, an individual must have an annual income of $200,000 per year; or a couple must have an annual income of $300,000 per year; or the purchaser must have a net worth of at least $1,000,000, exclusive of residence. One is not accredited because a large purchase of the private placement is made.

Regarding an investor's basis in a limited partnership investment which of the following statements are TRUE? I Recourse financing is only included in the tax basis for real estate programs II Non-recourse financing is only included in the tax basis for real estate programs III The investor is "at risk" for any non-recourse financing IV The investor is "at risk" for non-recourse financing for real estate programs only A I and III B I and IV C II and III D II and IV

The best answer is D. Under the "at risk rule," only amounts for which an investor is personally at risk can be included in the basis. An investor is personally liable and "at risk" for any recourse financing. (The lender has recourse to the investor personally to repay the loan). Non-recourse financing is not included in the basis, since the investor is not personally "at risk" for this (with one major exception, non-recourse financing (e.g., a mortgage) is allowed to be included in the basis for real estate investments).

All of the following would be considered when determining a fair and reasonable commission or mark-up under the FINRA 5% Policy EXCEPT the: A difficulty of executing the transaction B level of service provided to the customer C dollar amount of the transaction D cost of the security to the broker-dealer

The best answer is D. Under the FINRA 5% Policy, commissions and mark-ups in exchange and over-the-counter transactions must be fair and reasonable, with 5% being a guide, not a rule. Among the things considered in determining the amount to charge are the difficulty of the trade; the level of service provided to the customer; and the dollar amount of the transaction. All commissions or mark-ups are based on the current market value of the security; not the cost of the security to the dealer.

A customer who earns $80,000 per year is 35 years old, married to a non-working spouse, has a 5-year-old child, has no retirement savings and does not have a will. This customer receives $250,000 in a single stock as an inheritance from her deceased aunt. What is the first thing that the customer should do? A Set up an IRA account to begin to fund her retirement B Establish a will C Pay any capital gains tax due on the stock position, if this cannot be avoided D Diversify the stock position, because it should not be in a single stock holding

The best answer is D. What is concerning about this customer is 2 things - the fact that she does not have a will and the fact that her only investment holding is now $250,000 in a single stock position, which if the stock tanks, will result in a big loss. The first thing to do is to diversify the stock holding, to reduce the risk of loss of capital. This is more immediate than establishing a will, which usually takes some thought, lawyer's advice and a bit of time. There will be no capital gains tax on the stock position, since securities are inherited at the market value as of the date of death with no tax due by the recipient. If there was any appreciation in the stock until the date of death, that position's value is included in the estate and estate tax may be due - but this is paid by the estate.

In January, 20XX a customer buys 100 shares of ABC stock at $30 per share and pays a $2 commission per share. The customer receives $1 in cash dividends during the year. The customer's cost basis in the stock is: A $28 per share B $30 per share C $31 per share D $32 per share

The best answer is D. When the stock is purchased, any commission paid is not deductible - it is part of the cost basis of the shares. Thus, the cost basis for tax purposes is $30 + $2 commission = $32 per share. The $1 dividend received is included in taxable income for this year, and is not part of the stock's cost basis.