S6 Damage Control 1
If a customer signs a letter of intent which is backdated 90 days, how long does the customer have to fulfill the letter of intent? A-13 months B-11 months C-10 months D-12 months
10 Months It was backdated 90 days (3 Months). 13 Months minus the three month backdate (3) = 13-3 = 10
Any and all communication that is related to the sale of a particular mutual fund must: A-Be preceded or accompanied by a prospectus B-Be filed with the SEC C-Contain a statement to the effect that the SEC has not passed on the adequacy or accuracy of the prospectus for the securities D-Contain a statement that a prospectus relating to these securities is available upon request
A A prospectus must be provided along with any correspondence or retail communication which discusses a specific fund. A statement of how to get a prospectus is insufficient. The prospectus contains the SEC disclaimer; it is not a separate document. Such communication does not need to be filed with the SEC.
R.J. is a registered representative with DEO Securities. One of R.J's discretionary customers owns shares of the ABC Growth Fund but is seeking a more stable growth. R.J. agrees that a more conservative investment would be in the client's best interest. For the next 10 months, R.J. moves the client's money, for a month at a time, into a new blue chip fund at a different fund family to see which investment product is a 'good fit.' Which of the following suitability standards did R.J. violate? A Quantitative suitability B Customer specific suitability C Reasonable basis suitability D Short-term trading
A Quantitative suitability requires the amount of transactions performed for the client to be appropriate based on the client's profile. While R.J. has discretion and has the ability to do transactions in the account, each exchange to a different fund family will incur a sales charge imposed to the client. These activities were a direct violation of quantitative suitability.
All the following are considered assets on a balance sheet, except: A Accounts payable B Inventory C Equipment D Marketable securities
A - Accounts Payable Assets are separated into 3 categories: current, fixed, and intangible assets. Current assets include cash and accounts receivable, marketable securities, and inventory that are expected to be converted into cash within the next 12 months. Inventory is the least liquid of the current assets and is usually listed last. Accounts payable are considered a current liability.
Charlie invests $100 every month into the ABC Balanced Fund. Over the past 5 months, the POPs at the time of his investments were $20/share, $20/share, $18/share, $19.20/share, and $21/share. What is the average cost of the shares purchased over the previous 5 months? A-$19.58/share B-$19.64/share C-$20/share D-$19.75/share
A - $19.58 The average cost is found by calculating the number of shares purchased each month and then dividing the total number of shares into the total investment. In months 1 and 2, Charlie paid $20/share which means he bought 5 shares each month ($100/$20 per share). In month 3, he bought 5.56 shares ($100/$18 per share). In month 4, he bought 5.21 shares ($100/$19.20 per share) and in month 5, he bought 4.76 shares ($100/$21 per share). When you add the 5 months of share purchases together, you get 25.53 shares. By dividing 25.53 shares into a total investment of $500, the average cost is $19.58/share.
An investment company's registration statement has been filed, but the security has not been declared effective yet. A registered representative is permitted to do all the following, except: A - Accept deposits toward sales after the effective date B - Accept indications of interest C - Send a preliminary prospectus to customers D - Send a letter to customers telling the approximate price of the shares, the name of the security, the address for obtaining a prospectus, and the fact that the brokerage firm sending the letter will be executing orders
A - Accept deposits toward sales after the effective date The firm may send a preliminary prospectus, and with a preliminary prospectus, a registered representative may solicit indications of interest. The firm may also send a notice stating basic facts regarding the new issue. However, the firm may not solicit or take commitments of any funds from customers for purchasing shares during the cooling-off period.
Which of the following statements regarding municipal bonds is false? A -Capital gains on municipal bonds is exempt from federal income tax B - Interest income is exempt from federal income tax and state income tax for residents of the state of the issue C - The legal opinion is required to qualify the bond as a municipal issue D - The bond counsel issues the legal opinion
A - Capital Gains on Muni's is exempt from federal income tax -To be federally tax-exempt, municipal bond issues must contain the opinion of legal counsel that the bond qualifies as a municipal issue. -All interest is exempt from federal income tax. The legal opinion is written and signed by the bond counsel. In most cases, bonds purchased in the investor's home state are also exempt from state tax ("double tax-free"). Capital gains on municipals are subject to federal income taxation.
Company A: NAV = $8.30 POP = $9.00 Company B: NAV = $11.50 POP = $11.00 Based on the preceding information, which statement is true? A - Company A could be either open-end or closed-end Company B is closed-end B - Company B could be either open-end or closed-end C - Both companies are closed-end D - Company A is closed-end and Company B is open-end
A - Company A could be either open-end or closed-end Company B is closed-end A closed-end fund's POP can trade above or below NAV, but the open-end fund always has the POP above the NAV.
Which of the following does not apply to the cash values on variable life insurance? A-Insurer risk B-Tax-Deferred C-Fluctuation D-Loans
A - Insurer Risk
A variable annuity contract guarantees: (2ea) A - a minimum rate of return. B - fixed mortality expense. C - capped administrative expense. D - against investment risk.
A - Minimum Rate of Return C - Capped administrative fees A variable annuity does not guarantee an earnings rate; it lets the investor take the investment risk. However, it does guarantee payments for life (mortality), and normally guarantees that expenses will not increase above a specified level.
Bonnie Francis, an RR, has a client that is preparing to buy his first home in about two years. According to his client profile, his main investment goal is aggressive growth. Which of the following investments would be suitable for the majority of the client's savings? A - T-bills B - Blue chip equities C - NASDAQ equities D - A high yield bond fund
A - T Bills Although the client's profile states that he is looking for aggressive growth, his two-year time frame for the house purchase must take precedence. With such a short time horizon, any equity investment would be too risky for him. In addition, a high yield bond fund has a portfolio of junk bonds which would also be too risky based on the imminent home purchase. The only choice that protects the client's capital and is short-term enough to allow access to his money when he needs it, is the T-bills.
An investor places an order to liquidate their shares of the STU ETF on Monday, at 4:23 p.m., Eastern time. What price will the investor most likely receive? A - The opening bid price on Tuesday B - Tuesday's closing NAV C - Monday's closing NAV D - The current ask price at the time the order was placed
A - the opening bid on Tuesday ETF's are not typically redeemable ETF's do not use forward pricing like mutual funds.
Wendy has approximately $10,000 earmarked for her grandchildren. She is most concerned with finding a suitable insurance product that would provide her heirs with a current substantial death benefit and protection for her savings against the ravages of inflation. Which of the following products would best meet her needs? A - A variable annuity B - Term life insurance C - Whole life insurance D - Variable life insurance
Although both variable annuities and variable life policies provide an inflation hedge, -Wendy is looking for a product with a current substantial death benefit. -If Wendy were to die in the near term, the variable annuity would only pay her heirs the greater of the contract's current market value or her original investment. In addition, Wendy can purchase substantially more face value of a variable life policy thus providing a greater current death benefit. Variable life insurance is a better choice based on Wendy's needs. Term and whole life policies are not good hedges against inflation.
Which situation would FINRA consider a complaint? A-A customer writes a letter to the firm complaining about his investment adviser's handling of a transaction; the adviser does business through an account with the firm B-A customer's lawyer writes a letter to a registered rep of the firm, complaining about his inappropriate recommendations to the customer C-A customer calls a partner in the firm and complains about phone calls from registered reps soliciting orders for penny stocks D-Another broker-dealer writes a letter to a principal in the firm, complaining about how the firm handled the settlement on a transaction for the broker-dealer's account
B To be considered a complaint by FINRA, the communication must be written, must be by or on behalf of a member's customer, and must be about an event or individual under control of the member. In the customer's written letter about their investment adviser, they are referring to an adviser, rather than a broker-dealer. This means that the complain has nothing to with the firm that received it and doesn't qualify as a complaint.
Which of the following best describes the shares of a mutual fund? A Creditor/undivided interest/same class B Ownership/undivided interest/different classes C Creditor/divided interest/different class D Ownership/undivided interest/same class
B Mutual funds only issue common stock. Common stock represents ownership in the corporation. It's an undivided interest since the mutual fund shareholder has an interest in the fund, but does not have individual ownership of the assets of the fund. The shareholders mutually own the assets of the fund. They are not divided. Mutual funds only issue one type of stock which is common stock (i.e., no preferred shares). This type is subdivided into various classes (i.e., Class A, B or C) each of which may have differing expense ratios and/or other features.
Which of the following variable annuity expenses is deducted before the premium is invested into the separate account? A-Mortality and expense risk charge B-Sales load C-Administrative expenses D-Management fee
B Variable annuity sales charges, if applicable, are deducted before the premium is invested into the separate account.
All the following securities would be included in a traditional money market fund, except: A Bankers' acceptances B Commercial paper maturing in 12 months C T-bills D T-bond with 10 months until maturity
B - -Money market funds are for investors seeking capital preservation and/or liquidity. -Money market instruments are short-term debt instruments maturing in one year or less. They are highly liquid and offer safety of principal due to their short time period to maturity as well as typically being issued by highly creditworthy issuers. -Commercial paper is only considered a money market security if it has 270 days or less to maturity (9 months).
An investor has $10,500 to invest in ABC growth mutual fund, which charges a 7% sales charge. If the NAV of the fund was $23.00 and the POP was $24.75, how many shares will this investor purchase? A - 394.54 shares B - 424.24 shares C - 425 shares D - 456.52 shares
B - 424.24 Shares $10,500 / $24.75 = 424.24
Your firm is doing interviews of the top candidates from among those who responded to a recruiting advertisement. Advertising rules require that: A) at least two positions be offered to successful candidates, so that they may make a choice. B) both the job opportunity and the industry itself be represented honestly. C) the successful candidate be promised that she will hold the position for at least one year after being hired. D) rules do not cover recruitment advertisements or interviews.
B - Job & Industry is represented honestly In recruitment interviews, as in advertising, false or extravagant claims may not be made. Both the job opportunity and the industry must be represented honestly.
Pete is a conservative investor who likes to buy fixed-income products. His RR is recommending that Pete liquidate his Matrix Government Fund Class B shares and move the money to the Holloway Government Fund Class B shares. The original fund has been held for 5 years and no CDSC applies. Which of the following statements regarding this recommendation is correct? A -The activity is permissible since Pete will not be assessed a CDSC B - The RR may be trying to churn the account C- The client must sign a swap acknowledgement form (SA-4B) prior to the trades D - The activity is permissible since Pete will not have to pay a new sales charge
B - The REP may be trying to churn the account If an RR suggests that a client move his assets from one class B fund into another class B fund in a different family; the motive must be questioned, especially since the investment holdings are similar. The client must now effectively start over with the new fund and may be forced to hold the new investment for several years or incur a CDSC. The RR meanwhile has been paid up-front by the new fund family. Form SA-4B are fictitious.
A change in fundamental investment policy of a management company must be approved by: A-Board of Trustees B-Board of Directors C-Shareholders D-Investment Manager
C Shareholder's must approve any change in the fund's investment policy. The number of shares owned by each shareholder determines the number of votes they have.
What are the tax consequences on the payout of a death benefit from an annuity? A- The tax treatment follows the same rules as those applied to life insurance proceeds B- All distributions receive automatic long-term capital gains status C- The beneficiary may receive taxable income D- The entire distribution is subject to a flat 15% decedents' tax
C The tax rules for distributions of a death benefit from an annuity are different than the tax rules for death benefits from regular life insurance products. Death benefits from annuities are subject to taxation for the beneficiary. The cost basis plays a major role in situations concerning income taxes. If the cost basis of a distribution is lower than the distribution amount, the difference is considered taxable to the beneficiary. Capital events are not associated with annuities.
Which of the following statements best describes the characteristics of an index fund? A-High operating expenses and low management fees B-Low operating expenses and no management fees C-Low portfolio turnover and tax efficient D-Moderate portfolio turnover and tax deferred
C - Low Portfolio Turnover & Tax Efficient Index funds intend to mirror the index they are tracking. This fund is said to be passively managed because trading is done only to reflect any possible changes in the index, this means portfolio turnover will be minimal. This also results in the index fund being tax efficient, as there will be fewer taxable events occurring in the portfolio. The greatly reduced need for active portfolio management usually translates into substantially lower operating expenses and management fees.
n investor purchased 100 units of the Connecticut Long Term Municipal Securities Trust. Which one of the following statements concerning his investment in the UIT is accurate? A- The shares must be liquidated in the open market and offer reinvestment provisions back into the trust B - The shares are redeemable and offer reinvestment provisions back into the trust C - The shares are redeemable but do not offer reinvestment provisions back into the trust D - The shares must be liquidated in the open market and do not offer reinvestment provisions back into the trust
C - Shares are redeemable but do not offer reinvestment back into the trust UIT holdings, sometimes referred to as shares of beneficial interest, can be liquidated via redemption to the issuer. UITs do not contain reinvestment provisions that allow the owner to purchase additional units. For those looking to reinvest, many trusts will allow investors to purchase shares in a mutual fund sponsored by the same distributor that contains similar holdings.
What is the purpose of the Variable Annuity Expense Charge
Compensates the insurance company for future operating expense risks it assumes under the annuity contract
How often must investment companies send financial reports to shareholders? A-Monthly B-Annually C-Quarterly D-Semiannually
D Financial reports must be sent on a semiannual basis to shareholders, annually to the SEC.
A registered representative is meeting with a client discussing the differences between the different share classes offered by mutual funds. Which of the following statements is an accurate description of the share classes? A-Class A shares have voting rights and higher fees and Class B & C shares do not have voting rights but have lower fees B-Each share class holds varying investment portfolios and has different investment objectives C-Class A shares typically provide a higher return but also have higher fees, Class B shares provide a moderate return but have a moderate declining fee schedule, and Class C shares provide the lowest return but have the lowest fees D-Each share class invests in the same portfolio of securities, but each class has a different fee structure
D Most funds offer multiple classes of shares issued against the same underlying portfolio. While the portfolios of each class of shares contain the same holdings, the NAV may differ slightly due to the timing and different fees associated with them.
An investor purchased 100 shares of XYZ stock at $25 per share. After XYZ pays a 25% stock dividend, what is the customer's cost basis per share in the stock? A $30 B $15 C $25 D $20
D $20.000 $2,500 to purchase the Shares 25% Stock Dividend = 100 Shares + 25 $2,500/125 Shares = Cost Basis $20.00
When a customer signs a letter of intent for the purpose of obtaining a reduced sales charge, he must make the additional purchases within: A 6 months B 7 months C 12 months D 13 months
D - 13 Months An LOI must be completed within 13 months. Only contributions (and not account growth) count toward the LOI amount. The other choices are distractors.
All of the following statements about a bond's nominal yield are true EXCEPT that it: A) is also known as the bond's coupon. B) increases when interest rates increase. C) is stated on the bond certificate. D) identifies the amount of interest that the bondholder will receive.
D - Id's the amt of interest the bondholder will receive A bond's nominal yield is fixed as of the date of issue. It identifies the amount of interest an investor receives and, once the bond is issued, is not affected by changes in market interest rates. It is also known as the coupon rate of the bond and is stated on the bond certificate.
Which of the following statements is false regarding municipal fund securities? A - Municipal fund securities include Section 529 plans B - Municipal fund securities are offered by states or local governments C - Municipal fund securities are regulated by the MSRB D - Municipal fund securities require the delivery of a prospectus at or prior to confirmation of sale
D - Muni Fund Securities require prospectus
John has 40% of his 401k invested in his company's stock. He has no other savings. To what risk has John subjected himself? A-Market risk B-Credit risk C-Timing risk D-Non-Systematic risk
D - Non-Systematic Risk Non-systematic risk is another term for individual security selection risk; the risk that the security purchased loses money even though the rest of the market is doing well. When someone has high concentrations of one stock in their portfolio, they expose themselves to this risk. Non-systematic risk is easily reduced through diversification of a portfolio. As the old expression goes, "don't put all of your eggs in one basket."
Which one of the following best describes how much capital will be raised for the issuer in an underwriting? A - Total number of shares x (public offering price - net proceeds per share) B - Total number of shares x the public offering price C - Public offering price - underwriting spread per share D - Total number of shares x (public offering price - underwriting spread per share)
D - Number of Shares x (POP-UW Spread) The underwriting agreement includes the underwriter fees and compensation, public offering price, the underwriting spread per share, the net proceeds to be received by the issuer, and a provision specifying any conditions in which the underwriter may terminate the contract.
Net long-term capital gains on securities are assumed to be taxed at: A - A flat long-term capital gains rate B - The same rates as ordinary income C - A flat capital gains rate on the first $3,000 of gains, and at ordinary income rates on any amount above $3,000 D - A preferential tax-rate of 15% for most investors
D - Preferential Tax-Rate of 15% for most Net long-term capital gains are taxed at a preferential tax-rate. Unless specified otherwise, for purposes of the exam, you should assume preferential rates are 15%.
Which term refers to an existing public corporation issuing a large block of new shares to expand or modernize? A Refinancing or refunding B Initial public offering C Secondary distribution D Primary distribution
D - Primary Distribution A corporation's IPO is the first time it issues stock to the public. If the corporation later issues additional shares, this is a primary distribution, but not the IPO. Secondary distributions involve previously issued shares. Refinancing pertains to bonds, not stocks.
All of the following regarding taxation of life insurance policies is true except: A-Policy loans are not taxable B-Withdrawals of cash values are taxed on a first-in, first-out (FIFO) basis C-Withdrawals in excess of cost basis are taxed as ordinary income D-Policy surrenders trigger a tax on all of the values paid out
D - Surrender triggers a tax on all values Cash value of both variable and traditional products grows on a tax-deferred basis. *Policy loans are not considered a distribution of cash value and are not taxable. *Policy holders taking a distribution from the policy are taxed only on the earnings generated within the policy with the contributions (premiums) being returned tax-free. *Withdrawals are treated as first-in, first-out (FIFO) based on the cost basis of the policy. This means that withdrawals are not taxable until the cost basis (amount of premiums paid) is exhausted. Policy surrenders are treated as a cancellation and taxed on the earnings.
Andrea (45) has invested $75K into a nonqualified variable annuity. The current value is $220,000. If she withdraws $10,000 for her son to go to private high school what will she own in taxes?
Taxes on $10,000 and a $1,000 penalty (10% of 10,000)
All the following statements are true regarding wrap accounts, except: A-Wrap accounts are established by investment advisers B-A separate fee may be assessed for administrative fees C-No separate commissions are charged for each trade processed D-The wrap fee includes investment advisory fees
b Wrap accounts are established by an investment adviser firm, not a broker-dealer. In a wrap account, the client does not pay commissions or sales charges, but is assessed a fee (usually annually) that covers all investment advisory fees, administrative fees, and any trades processed through a broker-dealer.
