Series Exam 8

A mutual fund has a NAV of $58.23 and a POP of $62.55. The sales charge, when computed as a percentage of the offering price, is approximately:

6.9%: The sales charge in this example is $4.32, which is found by subtracting the NAV of $58.23 from the POP, $62.55. To find the sales charge percentage, divide the sales charge of $4.32 by the offer price of $62.55, which comes to approximately 6.9% ($4.32 divided by $62.55 = .0691 = 6.91%). (88132)

All of the following persons are permitted to be named as a trusted contact person for a senior investor, EXCEPT:

A law firm: To be a trusted contact person for a senior investor, the only requirements are that the person must be a natural person (not a law firm) and be at least 18 years old. (37537)

A registered representative has a dispute with his firm over compensation. This dispute will be resolved by:

An arbitration panel: Registered representatives agree to arbitrate any disputes with their employer, with the exception of statutory discrimination and harassment claims. (73971)

Which of the following statements is TRUE regarding numbered accounts?

Any type of account may be identified by a number, provided the customer's name is on file: As long as the customer's name is on file with the broker-dealer, the account may be identified by number in all other broker-dealer records. (72209)

ERISA stipulates that employers with qualified plans are not permitted to exclude employees who have worked for the employer at least one year and:

Are age 21 or older and have worked a minimum of 1,000 hours during the year: In order to be eligible to participate in employer-sponsored qualified retirement plans, ERISA requires that employees be age 21 or older, have worked full-time (1,000 hours minimum) during the year, and be employed for at least one year. (37398)

All of the following are generally true of index funds, EXCEPT that they:

Attempt to outperform the index on which they are based: Index funds attempt to track the index on which they are based, not outperform the index. The degree to which the fund's performance does NOT match the index is called tracking error. The portfolio of an index fund contains the same securities as the index, in the same proportions. Indexing is a passive strategy, and therefore does not involve active trading which results in low turnover. The fact that there is no active management also means lower management fees. (84486)

An RR's client has recently finalized her divorce. For the RR to be able to change the name on her account to her maiden name, the client MUST provide:

Her divorce decree: In order to change the account to her maiden name, the client must provide a court or government issued document. The only acceptable document listed is a divorce decree. A reissued driver's license is not acceptable due to the risk of fraud. Other acceptable documents include: Marriage certificate Passport Government-issued ID (e.g., a Social Security card or certification of naturalization) (30743)

An investor will pay the lowest price to purchase a new issue by purchase through the:

Investors pay the same POP regardless of who they purchase the offering through: Rules require all members of an underwriting group to sell the new offering at the same POP while agreements are in effect. Only when released from the commitment can members sell the security at a different price. (33474)

Which of the following accounts allow for its owners to have a different percentage of interests?

Joint Tenants in Common: Only Joint Tenants in Common (JTIC) allow for owners to have a different percentage of interests in the account. Owners in Joint Tenants with Right of Survivorship (JTWROS) have equal interests. Spousal IRAs and Uniform Transfers to Minors (UTMA) are individual accounts and have only one owner. (88029)

While alternatives are available to a mutual fund issuer regarding the details of redemption procedures, the issuer must:

Make payment for shares within seven calendar days of tender: According to the Investment Company Act of 1940, a mutual fund must make payment within seven calendar days after the shares have been properly tendered for redemption. (84408)

According to SEC rules, which of the following is NOT TRUE regarding confirmations of purchases and redemptions of mutual fund shares?

Money-market mutual funds can elect not to send confirmations if the customer consents: SEC rules generally require broker-dealers to send confirmations to customers for each security transaction. Money-market funds may elect not to send a confirmation for each transaction as long as the fund sends a monthly statement instead. Customers can elect to have another person receive these statements on their behalf (such as an investment adviser), but they may not elect to forego confirmations altogether. (84867)

A corporation that has filed for bankruptcy is to be liquidated. Which of the following securities issued by that corporation has seniority in the liquidation process?

Mortgage bonds: When a corporation is liquidated, its assets are sold and the proceeds are distributed. Secured creditors are paid first (i.e., mortgage bondholders), then unsecured creditors (debenture holders), then preferred stockholders, and last the common stockholders. This would make mortgage bonds the senior security of those listed. (84279)

Which of the following is an expense or charge NOT normally associated with a variable annuity?

Redemption fees: Investment management fees, expense risk charges, and administrative expenses are all charges associated with variable annuities. A redemption fee is assessed upon redemption of a mutual fund. (84782)

Which of the following statements is LEAST likely to appear in a mutual fund's prospectus?

The fund's portfolio consists of common stocks, which are expected to outperform inflation over the next ten years: The fund's portfolio consists of common stocks, which are expected to outperform inflation over the next ten years

Diana wants to take a partial surrender of cash from her variable life contract. She decides to lower her death benefit and withdraw the maximum amount of cash allowed. For tax purposes, how is this partial surrender going to be accounted for?

The money will not be taxable up to the amount of net premiums paid because principal first rules apply: Partial surrenders of life insurance policies are treated as principal first and are not taxable up to the amount of basis, which is typically the net premiums paid. (84705)

Fred recently requested annuitization after contributing to a variable annuity for 12 years. The actuary applied an assumed interest rate of 3% and determined his first payment. The performance of the separate account on an annualized basis for the three months following annuitization is: 5%, 3%, and 4%, respectively. Which of the following statements can be made about Fred's payments?

The third payment was higher than the previous month's payment: If the performance in the separate account is greater than the assumed interest rate (AIR), payments will increase. If performance is less than the AIR, payments will decline, and if performance equals the AIR, payments will remain the same. Comparisons are made to the previous month and not to the original month. In the third month, the performance of 4% was higher than the AIR, resulting in a payment that was greater than the previous month's payment. (73713)

Which of the following choices makes a financial commitment in the distribution of a new issue of securities?

The underwriting syndicate: The underwriting syndicate makes a commitment to the issuer to purchase the entire offering. If the syndicate cannot resell the offering at the public offering price, it may suffer a loss. Although the selling group also participates in the sale of the new issue, it does not run the risk of losses if the securities do not sell. A customer who provides an indication of interest has no obligation of any kind. (31650)

Which of the following securities are quoted and traded at a discount?

U.S. Treasury bills: Of the choices given, the only securities that are quoted and traded at a discount are U.S. Treasury bills. (85266)

At the end of the year, an investor receives a 1099-DIV from a mutual fund containing the following information: Total Ordinary Dividends—$70 (of which $40 are qualified dividends)Long-term capital gains—$225 How are these distributions reported for tax purposes on the investor's return if the distributions were reinvested in additional shares of the fund?

$30 is reported as ordinary income; $265 is taxable at a maximum rate of 20%.: Mutual fund dividends are taxed based upon the type of distribution made to the shareholder. The mutual fund reports to the taxpayer the dividends paid during the year on Form 1099 DIV. This information must be included on the investor's tax return. Qualified dividends and long-term capital gains are taxed at the same maximum rate of 20%. Nonqualified dividends are taxable as ordinary income. (84033)

An individual has invested $60,000 dollars into a variable annuity and named his wife as beneficiary. If he was to die during the accumulation period when the value of the annuity was $70,000, his spouse would be entitled to:

$70,000, of which $10,000 would be considered ordinary income: When an annuitant passes, the death benefits avoid probate. Any benefits above the cost basis of the annuity ($10,000 in this question), are taxed as ordinary income to the beneficiary. If the cost basis ($60,000 in this question), is greater than the accumulated value, the beneficiary receives the cost basis tax-free. (88097)

Amber and Matt are a couple in their 40s who would like to retire in 15 years. Their main objective is long-term growth. Of the following, the most appropriate mutual fund for them would be one with a portfolio containing:

60% large-cap stocks, 20% mid-cap stocks, 20% bonds: Equities are usually the most appropriate investment for those with an objective of long-term growth. Choice (d) is too heavily weighted in bonds and the conservative money-market investments in choice (c) are unlikely to produce acceptable long-term growth. While choices (a) and (b) favor equities, a high concentration in foreign investments increases risk substantially (e.g., foreign currency and political risk). [Choice (a) might actually produce a better return than (b), since it contains an asset class (bonds) which is not highly correlated with stocks. This can produce a better risk/return trade-off than a portfolio that invests in stock only.] (85185)

The balancing of asset classes according to an investor's financial objectives in order to maximize returns for a given level of risk is known as:

Asset allocation: Asset allocation is the distribution of investments among asset classes according to an investor's objectives in order to produce the maximum expected return for a given level of risk. Examples of classes used in asset allocation models include large-capitalization stocks, small-capitalization stocks, international stocks, domestic bonds, international bonds, money-market securities, and real estate-related investments. (72465)

Which of the following statements concerning duration is TRUE?

Duration is a measurement of a given bond's sensitivity to interest-rate swings: Duration is a measurement of a given bond's sensitivity to interest-rate swings. Factors affecting a given bond's duration include maturity and coupon. For the Series 6 Examination, remember that a long-duration bond portfolio is much more price sensitive to interest-rate swings.

What is the maximum single, lump-sum contribution that a person can make to a 529 college savings plan without incurring any gift taxes?

Five times the annual gift tax exclusion: States that offer 529 plans determine the specific plan rules, such as allowable contributions, investment options (e.g., mutual funds), and the deductibility of contributions for state tax purposes. On an annual basis, a person may contribute to a 529 college savings plan up to the federal annual gift tax exclusion ($15,000) without paying a gift tax. However, 529 plans also allow contributors to make a single, lump-sum gift of up to the five-year cumulative limit ($75,000) and still avoid gift taxes. (18130)

All of the following would be sold with a prospectus, EXCEPT:

Municipal general obligation bonds: Municipal bonds are exempt from the registration requirements of the Securities Act of 1933. Therefore, a municipal issuer does not file a registration statement and prospectus with the SEC. (84890)

A corporation that has issued common or preferred stock has created:

Outstanding equity: Holders of common and preferred stock are considered to have equity (ownership) in a corporation. Bonds represent debt owed by the corporation. Issuers with a large amount of bonds outstanding would be in a leveraged position. (84130)

A written customer complaint that's received by a member firm must be:

Reviewed and initialed by a principal: The original complaint must be reviewed and initialed by a principal. Thereafter, the complaint may be forwarded to the registered representative to whom it's directed, but the RR is not required to initial it. Only certain events trigger the need to forward a complaint to FINRA. (17294)

Which of the following entities may invest in a state-sponsored LGIP?

State or pool designated entities only: Participation in an LGIP is determined by individual state law, or the rules of the individual LGIP. (77924)

When an investor redeems a portion of the shares in an account subject to a contingent deferred sales charge (CDSC), how is the sales charge determined?

The first shares redeemed are those which are not subject to the CDSC, followed by those held longest by the investor: When shares are redeemed in an account subject to a contingent deferred sales charge, the charge is calculated so that the investor pays the lowest charge possible. The first shares redeemed are those that are not subject to the CDSC. These shares would include those purchased through the reinvestment of dividends and distributions. The next shares redeemed would be those held the longest by the investor, so the CDSC assessed would be as low as possible. The cost basis of the shares is not a factor. (84157)

An individual with no discretionary income should only consider an investment in:

The investor should not be making any investments: An investor without discretionary income should focus on maintaining adequate levels of insurance and emergency funds before considering any investments. (33432)

Which of the following investment companies does not charge a management fee?

Unit investment trusts: A unit investment trust (UIT) does not charge a management fee. Instead, the portfolio within a unit investment trust is supervised, not managed. The portfolio of the trust is fixed and there is no need for an investment adviser. (85283)

Slacker Investments is launching a new fund that will invest in companies with good fundamentals but ones that are in sectors that are currently out of favor with the market. This is a:

Value fund: A value fund invests in stocks that appear to be bargains. These include companies that have good fundamentals but are in sectors that are currently out of favor with the market. (84532)

Which of the following materials does not require the approval of a principal prior to use?

A marketing piece regarding a variable contract that is directed to 22 prospective clients: FINRA characterizes much of a firm's communication with the public as either correspondence or retail communication. Correspondence is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. To allow firms and RRs to distribute timely correspondence to a limited number of retail investors, the material is simply subject to review and supervision (not preapproval). Retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. If the retail communication makes a recommendation, or promotes a product or service, prior principal approval is required. In addition, if the retail communication is created by the member firm and it uses performance comparisons with other investment companies, it must be filed with FINRA at least 10 business days prior to first use. If the retail communication concerning investment companies does not include the member firm's performance comparisons, it still must be filed with FINRA, but it may be filed within 10 business days of first use. The key to this question is determining which answer choice is considered correspondence (which does not require principal approval or filing). The choice with 22 prospects is considered correspondence due to the limited number of potential recipients (25 or fewer persons in a 30-calendar-day period). (31640)

According to MSRB rules, which of the following documents need not be approved by a principal prior to being sent to a customer?

A preliminary official statement: A preliminary official statement is prepared by or for the issuer. Since the MSRB does not have the power to regulate issuers, a preliminary official statement cannot be considered advertising under MSRB rules. However, an abstract (summary) of the official statement is prepared by a dealer and is, therefore, considered advertising. A final official statement and a firm's offering list are also not considered advertising. (74018)

A customer is seeking a high risk, high reward investment. Given this objective, which of the following is the MOST appropriate?

A stock with no dividend and a beta of greater than 2.0: Beta is a measure of a stock's (or portfolio's) volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If a portfolio's beta is 1.5, this means that the portfolio's price will change 1 1/2 times as much as the market. The term "high beta" is usually associated with a beta of greater than 2.0 and offers a customer a high risk, high reward investment. (30713)

A conservative investor has a long-term time horizon. He wants an investment that will provide him with long-term capital appreciation, and will not be too volatile. Which of the following funds would be the MOST suitable for him?

A value fund: Of the choices given, a value fund would be the best option for the investor. As with a growth fund, the main objective of a value fund is long-term capital appreciation. Value funds are usually considered less volatile than growth funds, since they invest in companies that are priced low in relation to their earnings. They also tend to invest in more mature companies that are more likely to pay regular dividends than pure growth funds. Both a fund of funds and an emerging markets fund would be too risky for him. (31624)

Which of the following persons may contribute to a TSA?

An employee of an elementary school: Tax-sheltered annuities (TSAs) are employer sponsored plans that are available to employees of certain non-profit organizations and public education institutions. TSAs offer tax-deferred growth and are subject to the same contribution limits that apply to 401(k) plans. Since TSAs are funded on a pre-tax basis with contributions coming directly out of an employee's paycheck, they have a zero cost basis. In other words, at the time of distribution, every dollar removed is taxable as ordinary income. In this question, the accountant works at a for-profit corporation. (85546)

The expense ratio of The Submerging Markets Fund is declining. Which of the following factors may cause this?

Assets under management are rising faster than the rate of overall expenses: The expense ratio tends to fall when assets rise because fund expenses can be spread over a larger asset base. If the assets of a fund were falling (i.e., the NAV is declining) the expense ratio would rise. Conversely, the expense ratio would fall if the investment advisory fee (or any fund expense) declined. The investment advisory fee is usually the largest expense of the fund, so it has the greatest effect on the expense ratio. There is no correlation between expenses and whether a fund is diversified or nondiversified. Fund sales charges also have no effect on the expense ratio, since they are not considered to be fund expenses. (85169)

If an investor purchased securities three months ago under Rule 147, today she:

Cannot sell the shares for six months: SEC Rules 147 and 147A of the Securities Act of 1933 provide an exemption from registration for securities that are being sold on an intrastate basis. If securities are sold only to residents of one state by an issuer that's also a resident of the same state, the securities are exempt from both the registration and prospectus requirements of the Act. A resident of a state who acquires securities under Rule 147 is not allowed to sell the securities to a non-resident of the state for a period of six months following the last date of sale by the issuer. Since the investor has already owned shares for three months, she cannot sell them until the resale restriction is lifted in three more months. However, an individual is able to sell the securities without satisfying a waiting period if the sale is made to a resident of the same state. (18745)

An individual is considering opening a new account with a broker-dealer and provides some personal information in order to develop an investment profile. The dealer intends to share some of this client's non-public information with its affiliate. According the Regulation SP, the broker-dealer will:

Do nothing: The individual in this question has yet to establish a relationship with the broker-dealer and would be defined as a consumer. If a broker-dealer plans to share the information with only affiliates, there is no requirement to provide the consumer with a privacy notice. If the broker-dealer intends to share the information with a non-affiliated third party, a privacy notice must be provided to the consumer before the information is disclosed. If the individual establishes a relationship as a customer of the broker-dealer, the privacy notice must be provided at that time and annually thereafter. This privacy notice would allow the customer to opt out of sharing this information with the non-affiliated third party. (88129)

Two individuals hold $100,000 in assets in a JTWROS account. Each party's ownership in the account may be described as:

Equal and undivided: In a JTWROS account, each holder's interest is equal and undivided. Each position in the account is owned by both persons. (84587)

An individual has decided to sell some shares that have been acquired at numerous times over the past several years. If the individual does not identify which shares are being sold the IRS will use what method to determine the gain or loss?

FIFO: If an individual does not identify the shares being sold the IRS assumes a FIFO (first-in, first-out) method will be used. This usually results in the greatest gain, but not nessarily. If the investor choosed to identify the shares being sold it could be LIFO (last-in, first-out) or any shares acquired over time. (33490)

An investment company that is purchased in installments and that matures at a fixed-dollar amount is called a:

Face-amount certificate company: Face-amount certificate companies issue certificates of the installment type. The investor makes periodic payments and receives a fixed sum at the end of the period. Lump-sum payment certificates are also available. (84332)

Under FINRA advertising rules, which of the following choices is an acceptable product description?

Flex Life, a variable life insurance policy: According to SRO rules, since names can be misleading, an investment must clearly be described as either a variable life insurance policy or a variable annuity. Firms may use proprietary names, but all policy descriptions are required to clearly delineate the type of investment offered. (33452)

After being told of a customer's death, a registered representative:

Must mark the account deceased: When an RR learns a customer has died, the account must be marked deceased, all open orders are cancelled and the assets in the account are frozen until the necessary documents are received. No orders may be executed, no positions may be liquidated, and no assets may be transferred. (88065)

Regarding the mediation process, the mediator may:

Not disclose information provided in caucuses unless authorized to do so: Mediators must have knowledge of the securities industry and cannot disclose information revealed during a caucus without prior authorization from the party. The mediator is not required to seek FINRA's approval. (88117)

A registered representative sees a favorable report on a mutual fund that his firm is currently offering. The report was issued by an independent mutual fund rating service. The RR orders several dozen offprints (reprints) from the publisher, which includes permission from the publisher to distribute the report to clients and prospects. Which of the following statements is FALSE in this situation?

Since the offprint was created by an independent service and the RR has permission from the publisher to use it, the RR can send it to clients and prospects without satisfying any other conditions: Having the permission of the publisher to distribute the report is not sufficient. If the offprint (reprint) is distributed by the RR, it is considered supplemental sales literature regardless of who created it and must be preceded or accompanied by a prospectus. In addition, the offprint must be approved by a principal of the firm and subsequently submitted to FINRA within 10 days of first use. (33442)

Which of the following activities does NOT take place during the cooling-off period?

Stabilizing the issue: When a new stock issue is going to be offered, a registration statement must be filed with the SEC. After the filing, there is a period when the SEC reviews the information to ensure full disclosure. During the cooling-off period, a preliminary prospectus (red herring) is prepared to be used to receive indications of interest from the public. The issue must be registered in each state in which it will be sold according to state (Blue-Sky) laws. Prior to the completion of the final prospectus, a due diligence meeting is held where all concerned parties (issuer and underwriter) meet to insure that everything has been done properly. Stabilization of the issue takes place after the new security is selling in the market. (73038)

Which of the following factors is the most important to consider when deciding to recommend a municipal bond unit investment trust to a client?

Tax bracket: While it is useful to know all of these things about a client, the tax advantages of municipal bonds are most important to clients in higher tax brackets. For clients in low tax brackets, a taxable investment is often more appropriate than a tax-exempt security. (84215) 37 of 55

Which of the following statements concerning variable life policies is TRUE?

The NAV must be calculated daily, while the cash value must be calculated at least monthly, and the death benefit must be calculated at least annually: The NAV of a variable policy is calculated every business day. The cash value must be given to the contract holder at least monthly, and the death benefit must be provided at least annually. Obviously some insurance companies will provide owners with this information more frequently.

In order to save time, a registered representative of a broker-dealer would like to begin communicating with his clients through text messaging during his daily two-hour train commute. Which of the following statements concerning this practice is TRUE?

The RR must abide by his firm's correspondence rules when sending text messages to clients: Under industry rules, electronic communications sent to 25 or fewer retail investors, such as text messaging and email, are considered correspondence. FINRA does not require principal approval of correspondence prior to use, but firms are allowed to implement their own rules. FINRA merely requires a broker-dealer to create policies and procedures for handling both incoming and outgoing correspondence that is appropriate based on the nature of the firm's business. Under industry rules, spot checking or sampling of items in certain cases may be sufficient based on a firm's business model. Correspondence is never required to be filed with either the SEC or FINRA.

A customer requests a transfer of his account after his broker leaves to join another firm. The firm that the customer wishes to transfer his account is the same firm the broker is now joining. Which of the following is TRUE regarding the transfer request?

The carrying firm is prohibited from interfering with the transfer request: Under FINRA rules, the carrying firm is prohibited from interfering with the transfer request from the customer, because of a broker's departure. A non-compete agreement between the carrying firm and the departing broker does not constitute grounds for denying or protesting the transfer. After receiving a transfer request from a customer, the carrying firm cannot seek a court order to deny the transfer request. (88063)

A registered representative of a broker-dealer is considering sending a prospective client a summary prospectus for a new nanotechnology fund. Assuming the document is received by the prospect, which of the following statements is TRUE?

The client may purchase the fund shares solely based on the contents of this mini prospectus: Many mutual funds utilize a shorter summary version of the prospectus, which is referred to as a profile or short prospectus. These reader-friendly documents highlight the most relevant information found in the complete prospectus and are designed to encourage potential investors, who may be intimidated by the complete prospectus, to do their due diligence prior to investing. An investor may buy shares based solely on the contents of this document, but must be made aware that she is entitled to a complete (full version) prospectus prior to making a purchase. A complete copy of the prospectus will be sent along with the client's confirmation of purchase (not necessarily within 24 hours). The predispute clause of a client agreement deals with arbitration, not a prospectus. (85274)

Which of the following items is NOT found on a sell order ticket?

The customer's original purchase price for the stock: A sell order ticket doesn't indicate the investor's original purchase price. All order tickets must contain the customer's account number, whether discretion was exercised, whether the trade was solicited by the registered representative or unsolicited, and it must also indicate the client is selling long (shares that are owned) or selling short (shares that are borrowed). If the client is long the stock, the location of the securities must be indicated (long in the customer's account or held by the customer). (37237)

A fund has been in existence for six years. An advertisement that refers to its ranking based on total return must refer to the total return for:

The one- and five-year periods by the same ranking entity: The standards set forth by the SEC and FINRA regarding mutual fund retail communication (advertising) indicate that performance statistics should cover one-, five- and 10-year periods. If the fund has not been in existence for 10 years, then disclosure must be made for the relevant for one- and/or five-year periods. In addition, the total return exhibited and the specific ranking must be determined by the same ranking entity. (33462)