S26 Unit 2

Under the spread-load plan provision of the 1970 Amendments to the Investment Company Act of 1940, an investor may have no more than what percentage deducted from any one payment? A) 20%. B) 16%. C) 8.5%. D) 9%.

A) 20%.

A member firm may purchase mutual fund shares for which of the following? I. Its investment account. II. Its trading account. III. An existing customer order. IV. An anticipated customer order.

A) I and III. I. Its investment account. III. An existing customer order.

The ABC Corporation would like to raise capital via a Regulation D private placement. In order to qualify for an exemption from registering with the SEC under Rule 506, which of the following is TRUE? I. Advertising is allowed if only accredited investors may purchase the securities. II. Advertising is not allowed if selling to a minimum of 35 nonaccredited investors. III. If selling to a minimum of 35 accredited investors, general solicitation is allowed. IV. If selling to nonaccredited investors, general solicitation is not allowed.

A) I and IV I. Advertising is allowed if only accredited investors may purchase the securities. IV. If selling to nonaccredited investors, general solicitation is not allowed. (If the private placement sells to any nonaccredited investors (with the maximum number being 35), no advertising or general solicitation is allowed. If the sale is exclusively to accredited investors, the private placement may advertise.)

If an annuity has been purchased and it only holds annuity units, what kind of annuity was purchased? A) Immediate B) Deferred C) Fixed D) Index

A) Immediate

Under federal law, which act regulates the activities of broker-dealers and associated persons? A) Securities Exchange Act of 1934. B) Uniform Securities Act. C) Trust Indenture Act of 1939. D) Investment Company Act of 1940.

A) Securities Exchange Act of 1934.

A registered representative should recommend a particular variable annuity to a customer based on the: A) belief that the fund's stated objective matches the customer's financial goals. B) additional discount from POP the customer receives by buying shares directly from the underwriter. C) additional compensation the representative receives from sharing in commissions generated by separate account portfolio transactions. D) additional commission the firm receives if the firm sells a certain dollar amount of variable annuities.

A) belief that the fund's stated objective matches the customer's financial goals.

All of the following terms could be applied to municipal bond unit investment trusts EXCEPT: A) managed. B) redeemable. C) registered. D) regulated.

A) managed.

The provisions of the Securities Act of 1933 include all of the following EXCEPT: A) regulation of the secondary market. B) regulation of offerings of new securities. C) prohibition of fraud in the sale of new securities. D) requirement that an issuer provide full and fair disclosure about an offering.

A) regulation of the secondary market.

There is a statement in the Conduct Rules dealing with selling agreements on mutual funds and variable annuities which states, in the case of variable contracts, that: A) the sales commission must be returned to the issuing insurance company if the variable contract is tendered for redemption within 7 business days after acceptance of the contract application. B) the contract is non cancelable by the issuing insurance company for a minimum of 90 days. C) the customer has the right to a full refund for the first 30 days after investing in the contract. D) members who are principal underwriters, as defined in the Investment Company Act of 1940, may distribute these contracts through members as well as nonmembers because this is an insurance company product.

A) the sales commission must be returned to the issuing insurance company if the variable contract is tendered for redemption within 7 business days after acceptance of the contract application.

An investment company may lend money to one of its officers A) under no circumstances B) if it notifies both the SEC and FINRA in writing C) if the board of directors issues a statement of approval and gives the shareholders notice through a quarterly statement D) if a majority of the voting shareholders approve the loan before it takes effect

A) under no circumstances

Provided that it has shareholder approval, an open-end investment company may A) underwrite the securities of another issuer B) issue senior securities C) make margin purchases D) engage in short sales of securities

A) underwrite the securities of another issuer

FINRA allows sales charges up to a maximum of: A) 8.5% on mutual funds and contractual plans. B) 8.5% on mutual funds. C) 9% on mutual funds and contractual plans. D) 9% on mutual funds and variable annuities.

B) 8.5% on mutual funds.

To which of the following instruments, in terms of risk and reward, is variable life insurance most nearly analogous? A) Index annuity. B) Combination annuity. C) Fixed annuity. D) Mutual fund investment.

B) Combination annuity.

A client invests $2,000 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If he deposits $11,000 6 months later, which of the following statements is TRUE? A) He will not receive any reduction in the sales load. B) He will receive a reduced load on $13,000 worth of the shares. C) He will receive a reduced load on $10,000 worth of the shares. D) He will receive a reduced load on $8,000 worth of the shares.

B) He will receive a reduced load on $13,000 worth of the shares

Under the Investment Company Act of 1940, which of the following would be interested persons? I. An officer of the investment company. II. An owner of 2% of the company's stock. III. The spouse of the investment adviser. IV. A cousin of a director of the company.

B) I and III. I. An officer of the investment company. III. The spouse of the investment adviser.

Customer A and Customer B each have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? I. Receiving cash distributions may reduce Customer A's proportional interest in the fund. II. Customer A may use the cash distributions to purchase shares later at NAV. III. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. IV. Due to compounding, Customer B's principal will be at greater risk.

B) I and III. I. Receiving cash distributions may reduce Customer A's proportional interest in the fund. III. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price.

Which of the following are functions of an investment company's custodian bank? I. Safekeeping of portfolio securities and cash. II. Providing portfolio advice regarding transactions. III. Maintaining asset records for the fund. IV. Maintain records of shares redeemed.

B) I and III. I. Safekeeping of portfolio securities and cash. III. Maintaining asset records for the fund. (The custodian bank performs bookkeeping and clerical functions and retains the fund's cash and securities for safekeeping. The adviser offers portfolio advice and management services. The Transfer agent maintains records of shares redeemed.)

Your customer would like to know what advantages mutual funds enjoy over other types of investments. In addressing the customer's question, you might make which of the following statements? A) Mutual funds have tax advantages similar to what you might get with an annuity or a life insurance policy, but with higher returns. B) Mutual funds offer the advantages of diversification and professional management of your investment money. C) The cost of investing in mutual funds is lower than with other forms of investment. D) Because you always get a precise fraction of the mutual fund's portfolio when you redeem your shares, you can at least be sure that you won't suffer any losses.

B) Mutual funds offer the advantages of diversification and professional management of your investment money.

An investment company may only change its investment objective with the approval of: A) the fund manager. B) a majority vote of the shares outstanding. C) the SEC. D) FINRA.

B) a majority vote of the shares outstanding.

Mutual fund shares may be used as collateral for a loan: A) in margin accounts without restriction. B) after being held for 30 days. C) after being held for 90 days. D) never.

B) after being held for 30 days.

The firm element of the continuing education requirement must be completed: A) on the 3rd registration anniversary and every 2 years thereafter. B) annually. C) on the 2nd registration anniversary and every 3 years thereafter. D) every 3rd year.

B) annually.

A prospectus must be delivered to a customer purchasing shares of an open-end investment company: A) only with the first confirmation. B) before or concurrent with solicitation of sale. C) no later than with the confirmation. D) with each confirmation.

B) before or concurrent with solicitation of sale.

The statement, "long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge of 8-½%" must be made to shareholders who purchase mutual funds: A) with a contingent deferred sales charge. B) that charge 12b-1 fees. C) that don't offer breakpoints. D) that invest in long-term debt securities.

B) that charge 12b-1 fees.

Letters of intent may be backdated up to how many days? A) 30 B) 60 C) 90 D) 120

C) 90

Under the definition of a management company, all of the following would qualify EXCEPT I. face-amount certificate companies II. unit investment trusts III. closed-end investment companies IV. open-end investment companies

C) I and II I. face-amount certificate companies II. unit investment trusts

An annual wrap fee includes the cost of which of the following? I. Trades executed. II. Investment management. III. Advertising. IV. Recruiting. A) I and III. B) III and IV. C) I and II. D) II and IV.

C) I and II. I. Trades executed. II. Investment management. (The wrap fee combines the costs of commissions, investment management, performance evaluation, and the reporting and custody of securities into an annual fee, expressed as a percentage of the assets under management.)

Management investment companies include which of the following? I. Face-amount certificate companies. II. Unit investment trusts. III. Open-end investment companies. IV. Closed-end investment companies.

C) III and IV. III. Open-end investment companies. IV. Closed-end investment companies.

A registered representative's (RR) customer is speaking of a variable life insurance contract he owns. He makes several statements regarding the contract. Which of the following is NOT an accurate statement concerning a variable life insurance contract? A) There is no guarantee regarding the investment results of the separate account. B) The portion of the premium invested in the insurance company's general account is used to provide for the minimum guaranteed amount of the death benefit. C) The death benefit is fixed. D) The policy provides a minimum guaranteed death benefit.

C) The death benefit is fixed.

FINRA member firms must hold an annual compliance review. All of the following must participate EXCEPT: A) general securities registered representatives. B) branch office managers. C) clerical employees. D) limited (Series 6) registered representatives.

C) clerical employees.

A customer wants to know how he can be sure that he will get the most current price for his mutual fund shares upon redemption. You could tell him, A) You always know exactly how much money you will receive at redemption. You just can't predict how many shares will be redeemed. B) Just look up your fund in the paper. The price you see there is what you will get, usually with a small adjustment. C) The fund will always send you your original investment amount, minus a variable sales charge. D) Every mutual fund has to calculate its NAV at least once per business day. The price you get is the price next calculated after the fund receives your redemption request.

D) Every mutual fund has to calculate its NAV at least once per business day. The price you get is the price next calculated after the fund receives your redemption request.

Under the Investment Company Act of 1940, which of the following investment company activities are restricted? I. Buying and carrying securities on margin. II. Concentrating investments in one industry or market sector. III. Selling short. IV. Borrowing funds from lending institutions

I and III. I. Buying and carrying securities on margin. III. Selling short.

If a FINRA member firm is the principal underwriter for a variable annuity contract, which of the following conditions must be met for the underwriter to fill a broker-dealer's buy order for the product at a discount from the POP? I. The broker-dealer must agree that if the customer who buys the product redeems it within 7 business days, all sales concessions will be returned. II. The sales agreement must be filed with FINRA. III. The underwriter and the broker-dealer must both be FINRA members. IV. The discount may not exceed 5%. A) I and IV. B) I and III. C) II and IV. D) II and III.

B) I and III. I. The broker-dealer must agree that if the customer who buys the product redeems it within 7 business days, all sales concessions will be returned. III. The underwriter and the broker-dealer must both be FINRA members. (FINRA rules prohibit a principal underwriter of variable annuity products from selling to a broker-dealer unless a written selling agreement is in effect between both parties; the broker-dealer is an FINRA member; and the broker-dealer agrees to refund all sales charges if the customer cancels (redeems) the contract within seven business days after the carrier accepts the contract application.)

In which of the following markets would an investor expect to find closed-end investment company shares traded? I. A market maintained by the investment company itself. II. The over-the-counter market. III. The commodities market. IV. The exchanges.

B) II and IV. II. The over-the-counter market. IV. The exchanges.

Mrs. Jones writes a check for $9,000 to purchase the ABC Income fund and signs a letter of intent for $1,000 in order to reach a $10,000 breakpoint and a reduced sales charge. All of the following statements are true regarding the LOI EXCEPT A) a LOI can be backdated up to 90 calendar days and lasts for a total of 13 months B) should the original investment experience unrealized gains, those gains do not reduce the amount needed to satisfy the LOI C) if the income fund distributes $250 in dividends and capital gains and those distributions are reinvested into the fund, Mrs. Jones will only need to invest an additional $750 in order to reach the breakpoint D) if the breakpoint is not reached by the end of the term in the LOI, the investment is calculated using the higher sales charge

C) if the income fund distributes $250 in dividends and capital gains and those distributions are reinvested into the fund, Mrs. Jones will only need to invest an additional $750 in order to reach the breakpoint

To make a public offering, a registered investment company must have minimum net assets of A) $1 million B) $100 million C) $10 million D) $100,000

D) $100,000

According to federal law, an insurance company must allow a variable life policyholder the option to convert the policy into a whole life contract for a period of: A) 45 days. B) 18 months. C) 12 months. D) 24 months.

D) 24 months.

During the accumulation period of a variable annuity contract, an investor will receive which of the following? A) A current tax liability on investment income with a deferral of all capital gains in the separate account. B) A current tax liability on investment income and capital gains reinvested in the separate account. C) A deferral of tax liability on capital gains reinvested in the separate account and a current tax liability on investment income. D) A deferral of tax liability on investment income and capital gains reinvested in the separate account.

D) A deferral of tax liability on investment income and capital gains reinvested in the separate account.

Of the 4 client profiles below, which might be the best suited for a variable annuity recommendation? A) age 40, currently unemployed B) Age 27, saving for first home C) Age 78, retired for 20 years, lives comfortably and wants to leave all liquid assets to children D) Age 56, available cash to invest, makes the maximum retirement plan contributions to an existing IRA and 401(k) plan

D) Age 56, available cash to invest, makes the maximum retirement plan contributions to an existing IRA and 401(k) plan

Which of the following activities by a mutual fund require approval by a majority vote of outstanding shares? I. A change in sales load policy. II. Changing the investment objective of a fund. III. A change in the debt-to-equity ratio of a balanced fund. IV. Liquidating a position in the portfolio.

D) I and II. I. A change in sales load policy. II. Changing the investment objective of a fund. (Changing the sales load policy, or objectives of a fund, involve fundamental policy decisions and require a majority vote of outstanding shares. Merely liquidating a position in the portfolio or changing the ratio of equity-to-debt are decisions for the fund manager.)

Which of the following statements regarding 12b-1 charges is CORRECT? I. It is an annual expense, charged on a quarterly basis. II. The person responsible for spending the 12b-1 fees must provide the shareholders with a written report disclosing the amount of fees collected and detailing their disbursement. III. The maximum distribution charge under FINRA rules is .75% per year of average annual net assets. IV. The maximum distribution charge under FINRA Rules is .50% per year of average annual net assets.

D) I and III. I. It is an annual expense, charged on a quarterly basis. III. The maximum distribution charge under FINRA rules is .75% per year of average annual net assets.

A FINRA member firm could fulfill the requirements of its annual compliance meeting for registered personnel using an on-demand Webcast if it complied which of the following? I. Those participating must be able to telephone or email questions to presenters and receive timely answers. II. The Webcast must be available in some central location, rather than at the participant's desk, to assure accurate monitoring of attendance. III. The contents of the Webcast must be filed with FINRA at least ten days before first use. IV. Questions and answers must be recorded, and participants must be notified of the availability of the recordings for review. A) I and III. B) II and IV. C) II and III. D) I and IV.

D) I and IV. I. Those participating must be able to telephone or email questions to presenters and receive timely answers. IV. Questions and answers must be recorded, and participants must be notified of the availability of the recordings for review. (If an on-demand Webcast is used for the annual compliance meeting, participants must be able to submit questions to the presenters and get answers in a timely fashion. Either telephonic or email communication would suffice for this purpose. The questions and answers must also be recorded, and participants must be notified of the availability of the recordings for review.)

For purposes of rights of accumulation, the size of an investor's mutual fund account could be based on which of the following? I. Securities' current net asset value. II. Securities' purchase price. III. Length of time the customer has owned shares. IV. The customer's concurrent ownership of funds in other fund families with the same or similar investment objectives.

D) I or II. I. Securities' current net asset value. II. Securities' purchase price.

One of your customers purchased a variable life insurance contract through your firm. After 14 years, he had deposited $60,000 in premiums, and his death benefit had grown to $80,000. Shortly after taking out a loan against cash value of $20,000, he was killed in an automobile accident. What will be the consequences of this situation to the death benefit? I. His beneficiary must agree in writing to pay off the loan before collecting the death benefit. II. His beneficiary will receive the death benefit minus the value of the loan. III. His beneficiary need not pay taxes on the death benefit. IV. His beneficiary must pay taxes on the amount of the death benefit that is over and above the cost base of $60,000.

D) II and III. II. His beneficiary will receive the death benefit minus the value of the loan. III. His beneficiary need not pay taxes on the death benefit.

A customer purchased 450 Class B shares of the AST Corporate Balanced Fund 12 years ago. Since he purchased them, the shares have tripled in value, from $8 to $24 per share. The fund's objective this year is to maintain 60% of its portfolio as common stock, and 40% as high-yield corporate bonds. The customer has grown nervous about the business climate in general. He would like to switch to another balanced fund with less emphasis on stock and would like the debt portion of the portfolio to be made up of bonds with less risk. His registered representative has identified some possible actions. Which of the following is least appropriate? A) Question this move carefully with the customer, pointing out that upon redemption, he will have to pay long-term capital gains tax on two-thirds of the value of his shares. B) Exchange the customer into Class A shares of the AST Government Balanced Fund. C) Switch the customer out of AST and into Class B shares of the KPF Corporate Balanced Fund. D) Switch the customer out of AST and into Class A shares of the KPF Government Balanced Fund.

D) Switch the customer out of AST and into Class A shares of the KPF Government Balanced Fund.

Which of the following statements may be made by an issuer selling securities to the public that are registered under the Securities Act of 1933? A) The SEC has approved the accuracy of all information contained in the prospectus. B) The SEC endorses the accuracy of material information provided in the prospectus. C) The SEC has affirmed the merits of the security as an investment. D) The SEC has cleared this issue for sale to the public.

D) The SEC has cleared this issue for sale to the public.

For an investor, which of the following is the most important factor in determining the suitability of a variable annuity investment? A) The fact that periodic payments into the contract may increase or decrease. B) The investor's marital status. C) The investor's concerns about taxes. D) The fact that cash values fluctuate and annuity payments may increase or decrease.

D) The fact that cash values fluctuate and annuity payments may increase or decrease.

Which of the following is NOT true of periodic payment plans? A) They are regulated under the Investment Company Act of 1940. B) An accumulation plan is a type of periodic payment plan. C) A variable annuity may be a type of periodic payment plan. D) They are most suitable for investors who plan to retire within the next 12 months.

D) They are most suitable for investors who plan to retire within the next 12 months.

Your firm is the underwriter of a new mutual fund organized under a 12b-1 plan. The annual 12b-1 fee is 50 basis points. Which of the following statements may you make in any mailings you send out or phone calls you make to your clients? A) The fund has the added advantage of being a no-load investment. B) You will not have to pay any sales charges with this fund because we are buying it as a long-term investment. C) Investments in no-load funds of this type carry some risks, and you should review the prospectus carefully. D) This fund has a sales load.

D) This fund has a sales load. (A mutual fund operating under a 12b-1 plan may not use the term "no-load" unless the fee does not exceed 25 basis points (.25%).)

All of the following changes in an investment company require a majority vote of the shares outstanding EXCEPT a: A) decision to cease business. B) change from an income fund to a growth fund. C) change from a load fund to a no-load fund. D) change in the securities held in the investment portfolio.

D) change in the securities held in the investment portfolio.

If an open-end investment company wishes to change its investment objective, it may only do so with a: A) unanimous vote of the board of directors. B) majority vote of the outstanding shareholders. C) two-thirds vote of the outstanding shareholders. D) majority vote of the outstanding shares.

D) majority vote of the outstanding shares. (The Investment Company Act of 1940 requires the fund to have a clearly defined investment objective. The only action that can be taken to change the investment objective is a majority vote of the outstanding shares (shares count, not shareholders).)

The fee received by the management company from an investment company depends on the: A) type of securities in the fund's portfolio. B) volume of new shares sold. C) profits of the fund. D) net assets of the fund.

D) net assets of the fund.

The price a person would pay to purchase listed shares of a closed-end investment company is determined by A) net asset value plus sales charge B) the underwriter C) the exchange on which the shares are traded D) supply and demand

D) supply and demand

All of the following are true about open-end investment companies EXCEPT: A) there is no secondary market for outstanding shares. B) they are commonly referred to as mutual funds. C) they may continuously offer their shares to the public. D) their shares are bought and sold in the same manner as the stock of regular corporations.

D) their shares are bought and sold in the same manner as the stock of regular corporations.