Series 6 Flash Card Set #4

How long must a member firm keep records of customer complaints? A) 3 years B) 5 years C) 6 years D) 4 years

D) 4 years

All the following are advantages of mutual fund investing, except: A) Systematic purchase and withdrawal plans B) Reinvestment of dividend and capital gain distributions without charge C) Liquidity D) Distributions reinvested are always income tax-free

D) Distributions reinvested are always income tax-free

What are Variable contracts?

Insurance products that require a securities and state insurance license to sell Chpt 7 Pg 103

Variable life policy loans allow the policy owner to borrow up to how much of cash value?

75% Chpt 7 Pg 106

Basic Life Insurance Terminology- Define: - Cash Value - Face Amount/Death Benefit

- Cash Value = accumulated premiums and their earnings that provide living benefits to the owner - Face Amount/Death Benefit = the amount of money that will be paid to the beneficiary upon the death of the insured minus any unpaid loans or interest Chpt 7 Pg 104

Features of Variable Life Insurance

- Fixed premiums invested in both the general and separate account - Cash value growth dependent upon performance of separate account - Actual death benefit fluctuates, but the face amount is the guaranteed minimum Chpt 7 Pg 105

Benefits of Variable Universal Life Policies

- Flexible premiums deposited directly in the separate account - No general account - Cash value growth dependent upon performance of separate account - No guaranteed minimum death benefit Chpt 7 Pg 106

What is Universal Life Insurance?

- Flexible premiums deposited in the general account - Adjustable death benefit - Builds cash value at minimum interest rate, but could be higher Chpt 7 Pg 105

What is Whole Life Insurance?

- a traditional form of permanent insurance - remains in force for the life of the insured as long as premiums are paid - The cash value accumulates in the policy until the amount accumulated equals the face amount and the policy matures (most designed to mature at age 100) Chpt 7 Pg 104

What is free look provision?

A free look provision applies to all variable insurance policy sales. The policy owner can return the policy and receive a full refund of all premiums paid within 45 days from the date of application OR 10 days from receipt of the policy, whichever is later. Chpt 7 Pg 107

Taxation on Death Benefits for Variable Life Contracts

The death benefit includes all earnings in the contract while the insured was alive and is not subject to income tax when paid to the beneficiary Chpt 7 Pg 108

All the following rules apply to a Coverdell ESA, except: A) Any individual is permitted to establish a Coverdell ESA B) Nonqualified distributions may be subject to income tax plus a 10% penalty on the taxable portion C) Account balances may be transferred to another relative D) Contributions typically must cease when the beneficiary reaches age 18

A) Any individual is permitted to establish a Coverdell ESA Eligibility to contribute to a Coverdell Education Savings Account is subject to meeting income thresholds, not all individuals will be able to establish a Coverdell.

According to industry regulations, which of the following is NOT required information when opening a new customer account? A) Customer's investment objectives B) Customer's name C) Customer's date of birth D) Customer's street address

A) Customer's investment objectives

Agnes believes that her RR has been churning her account, and in the process has caused her to lose $200,000. To whom would Agnes direct a claim to recoup her losses? A) FINRA's Code of Arbitration B) The SEC C) FINRA's Department of Enforcement D) SIPC

A) FINRA's Code of Arbitration

A registered representative is speaking with a customer about purchasing shares of XYZ stock. The customer tells the representative to buy 200 shares of XYZ when you think the time is right. Which of the following statements is true? A) This order must be filled during the business day B) This is a discretionary order that requires written POA in order to process C) This order can only be processed with prior approval from a supervising principal D) This order cannot be accepted

A) This order must be filled during the business day

In variable life insurance policies, what does the insurance company deduct from the premiums?

Admin fees, State premium taxes and Sales charge *a max 9% sales charge is allowed for a variable insurance policy Chpt 7 Pg 107

Under the Investment Act of 1940, who could not buy a mutual fund under a reduced sales charge? A) An investment club B) A husband and wife in a joint account C) A fiduciary for a pension plan D) A custodian for minor's accounts

Answer: A

What is the minimum percentage of net investment income that must be distributed for a fund to qualify as a regulated investment company? A) 90% B) 98% C) 100% D) 95%

Answer: A

Which financial report must be submitted to the SEC by mutual funds? A) Audited annual reports B) Reports of current shareholders C) Semi-annual report D) Quarterly unaudited reports

Answer: A

A management company does all of the following, EXCEPT: A) Distribute gains and pass through losses on an annual basis B) Pool shareholders' funds for purchasing securities C) Seek to diversify the fund's portfolio within the objectives stated in the prospectus D) Employ a professional investment adviser to manage the fund portfolio

Answer: A Management companies are subject to certain IRS regulations regarding the distribution of income they make in the process of managing their portfolios. They must distribute at least 90% of net investment income to shareholders to avoid unfavorable tax treatment. They do not however pass through any losses.

Which mutual fund share class provides conversions from one class type to another class? A) B share B) A share C) C share D) I share

Answer: A Many funds provide automatic conversions from Class B shares to Class A shares. Typically, the conversion occurs after the CDSC charge falls to zero. Class C shares will never convert to class A shares. Class I shares are not available to retail investors, these are intended for institutional investors exclusively.

XYZ corporate bond fund has a NAV of $9.30 per share and has a sales charge of 7%. What is the Public Offering Price of XYZ corporate bond fund? A) $10.00 B) $10.10 C) $9.95 D) $9.70

Answer: A POP = NAV ÷ (1-SC in decimal format) or in this example 9.30 ÷ (1 - .07)

Tax exempt funds: I) Have a goal of current income II) Must have 90% of their income be tax-exempt from federal income tax III) May be exempt from state and local income tax only for certain shareholders IV) Have lower yields than funds with similar risks that are not tax-exempt A) I, III, and IV B) I, II, and III C) I, II, III, and IV D) I and II

Answer: A Tax-exempt funds invest in municipal securities that are exempt from federal income tax and, for shareholders who are residents of the issuing state, are usually exempt from state and local income tax. Since the shareholders receive a tax advantage, yields on those funds are generally lower than yields on funds invested in corporate bonds (which offer no tax advantages). At least 80% of the portfolio income must come from tax-free issues.

Mr. Thompson invested $16,000 in Fund A and $20,000 in Fund B. Each fund has its own adviser and distributor and provides for combination and exchange privileges. Mr. Thompson wants to hold the investments for 16 years and then begin a fixed shares periodic payment plan pay-out option. Mr. Thompson: I - Will receive variable payments during the withdrawal period II - Can exchange the shares in Fund A for shares in Fund B without a sales charge III - Will receive a sales charge based on a $36,000 investment IV - Will receive fixed payments during the withdrawal period A) I B) I and II C) II, III, and IV D) I, II, and III

Answer: A The exchange privilege and rights of accumulation are only available within the same family of funds. We can assume these funds are from different families since each has its' own distributor. The shares are fixed, but the dollar value of the shares will vary over time resulting in differing payouts per period.

What is the maximum 12b-1 fee that a pure no-load fund may charge? A) No 12b-1 fee is charged B) No more than 0.25% C) No more than 0.50% D) No more than 0.75%

Answer: A While a no-load fund can have a 12b-1 fee of 0.25% or less, if the fund is called a pure no-load it cannot have a 12b-1 fee at all.

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 in the stock? A) $25 B) $15 C) $20 D) $30

Answer: C The investor paid $2,500 to purchase 100 shares (100 x $25 per share). If there is a 25% stock dividend, the 100-share holding becomes 125 shares. The cost basis is now $20 per share ($2,500/125 shares).

Mutual fund families often offer investors a choice of Class A, B, and C shares. Which of the following statements concerning the different share classes is correct? A) The share classes may have differing NAVs, POPs, and expense ratios B) All share classes will have the same yield C) All share classes will have the same YTD return D) The share classes will have different NAVs and POPs, but identical expense ratios

Answer: A While the portfolios of each class of shares contain the same holdings, their NAVs, POPs, and expense ratios may differ slightly due to the timing and amount of the different sales charge and cost deductions. The differing NAVs and POPs of each share class will result in slightly different annual yields and total returns.

A registered representative is meeting with a client that is interested in purchasing class B shares of XYZ mutual fund. These shares have a 6-year CDSC schedule. Which of the following statements may the representative make when describing these shares? A) These shares will have no fees if you hold them for at least 6 years B) These shares have a declining sales charge upon redemption C) These shares have the lowest annual fees D) These shares will always outperform Class A shares because there is no upfront sales load

Answer: B

During your interview with your prospect, you determine that his investment objective is growth of invested capital. To best meet that objective using a mutual fund accumulation plan, you would suggest that: A) All dividend and capital gains distributions should be taken in cash B) All dividend and capital gains distributions should be reinvested in additional shares C) Only dividends should be taken in cash and capital gains distributions should be reinvested in additional shares D) The prospect invests in a money market fund

Answer: B By reinvesting rather than withdrawing distributions, the investor has the potential to achieves maximum growth.

The current quote of a fund shows a NAV of $15 with an offering price of $20. What type of fund is this? A) Load fund B) Closed-End fund C) Open-End fund D) No load fund

Answer: B Once a closed-end fund has been offered to the public, it trades in the secondary market, where it is subject to volatility in price based on investor supply and demand. Closed-End funds must still calculate their net asset value on a daily basis even though an investor has little chance of getting that price except by coincidence.

Which of the following is not contained in a mutual fund prospectus? A) Annual fees B) Current list of portfolio holdings C) Discounts available D) Methods of purchase and redemption

Answer: B Sales of mutual funds to any member of the public cannot be discounted beyond the amounts stated in the prospectus. The portfolio holdings can change quite frequently. Therefore, the prospectus would not contain a current listing.

Which of the following requirements was established under the Securities Act of 1933? A) Registration of broker-dealers and registered representatives B) Prospectus delivery requirement C) Regulation of investment companies D) Regulation of the secondary market

Answer: B The Securities Act of 1933 requires registration with the SEC of all new issues, including mutual funds, and delivery of the prospectus for those new issues. Registration and regulation of broker-dealers and registered representative (and the secondary market) fall under the Securities Exchange Act of 1934. Regulation of investment companies is under the Investment Company Act of 1940.

The ABC Fund family charges an 8.5% load on their funds. The fund family must offer which of the following benefits: A) Breakpoints on CDSCs B) Rights of accumulation C) Letters of intent D) Exchanges

Answer: B This fund family charges the maximum sales charge allowed by FINRA. Therefore, they must offer breakpoints and rights of accumulation on existing funds. A contingent deferred sales charge declines a set amount each year but that decline is not considered to be a breakpoint. An LOI (letter of intent) as well as exchanges are not required by FINRA, but most funds offer the features in order to remain competitive.

Under the withdrawal plan, an investor: A) Would be restricted to earnings on his shares plus capital gain B) Could take out a specific amount, even though it exceeded the earnings on his shares C) Could take out any amount as long as it did not dip into principal D) Would be restricted to taking out only what his shares earned

Answer: B Withdrawal plans are the systematic withdrawal of fund shares, as determined by the dollar amount, percentage of fund assets, or number of shares selected by the fund owner.

A mutual fund charges a 6% load for investments up to $100,000. For investors purchasing $100,000 or more of the fund, a reduced sales charge of 4% applies. A client who invests $20,000 today and signs a letter of intent for an additional $80,000 will be charged: A) 4% on all purchases, but will be sent a breakpoint adjustment bill for the sales charge differential if the breakpoint has not been reached within 13 months B) 4% on all purchases, but will lose some shares if the breakpoint is not reached within 13 months C) 6% on all purchases, but will be given additional shares when the breakpoint has been reached D) 6% on all purchases, but will be rebated the 2% differential when the breakpoint has been reached

Answer: B some of the shares purchased will be held in escrow until the terms of the letter are fulfilled. If the additional funds are not deposited, the shares in escrow will be forfeited, effectively imposing a higher sales charge on the initial purchase

ABC Equity Fund has a POP of $18.25 per share. The maximum sales charge on this fund is 7%. What is the NAV for ABC Equity Fund? A) $17.07 B) $16.59 C) $16.97 D) $17.15

Answer: C POP ($) x Sales Charge (%) = Sales Charge ($), then POP ($) - Sales Charge ($) = NAV ($) POP ($18.25) x .07 = $1.28 18.25 - $1.28= $16.97

A registered representative is working with a new client and is discussing investing in a mutual fund. Which of the actions or statements is prohibited? A) The registered representative may advise the client to review market performance of these investments prior to making a final decision to invest B) The registered representative may ask the client to consult with their accountant for tax advice before making the investment C) The registered representative may highlight the important information contained in the prospectus to help summarize the information necessary to make an informed investment decision D) The registered representative may tell the client to carefully review the prospectus prior to making any investment decision

Answer: C RRs are prohibited from altering the prospectus in any way, including highlighting, underlining, or preparing a summary of its contents. All the other choices are completely acceptable.

A management company had an NAV of $20 on April 15 and an NAV of $22 on July 15 of the same year. Over this 3-month period, the POP decreased by almost $3 per share. Which statement is correct? A) This is a specialized mutual fund B) This is an open-end management company C) This is a closed-end management company D) This is a unit investment trust

Answer: C This can only be a closed-end fund because only a closed-end fund can have a rising NAV and a declining POP. This is possible because a closed-end fund's POP is determined by market demand. A closed-end fund that is out of favor with investors might trade below its NAV.

In an automatic reinvestment plan, there is generally no sales charge on: A) Capital gains reinvestment B) Generally a charge on capital gains and dividend reinvestment C) Dividend reinvestment D) Generally no charge on capital gains and dividend reinvestment

Answer: D

Net long-term capital gains on securities are assumed to be taxed at: A) The same rates as ordinary income B) A flat long-term capital gains rate 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

Answer: D

In March, Sally invested $100,000 in the ABC Ultimate Fund, an aggressively managed technology fund with a 5% front-end load. By year-end, the fund reported net realized trading losses of 10%. Assuming Sally continues to hold onto her original shares and makes no additional investments, what result may she claim on her personal tax return? A) A $10,000 capital loss B) A $9,500 capital loss C) A $3,000 capital loss and $7,000 loss carryforward D) Sally may not claim any loss for this period

Answer: D Investors are never able to claim a capital loss from fund activity. The only time that a mutual fund investor can take a capital loss on a fund investment is when she sells her shares for less than she paid for them.

Which of the following would cause a change in the Public Offering Price? A) A large increase in the number of investors redeeming shares B) Reinvestment of dividends and capital gains C) A large increase in the number of investors purchasing shares D) Change in the value of the securities in the investment portfolio

Answer: D The POP will not change because of any purchase or reinvestment of dividends or capital gains. The POP will change on a day-to-day basis as the net asset value changes primarily due to the rise and fall in prices of the portfolio securities.

ABC mutual fund has a NAV per share of $12. What is the maximum public offering price per share? A) $12.85 B) $13.05 C) $12.90 D) $13.11

Answer: D The maximum sales charge on a mutual fund is 8.5%. In order to calculate the Public Offering Price this is the formula to use: NAV ÷ (1-SC in decimal format) or in this example 12 ÷ (1 - .085) = $13.11

An investor has $100,000 and wishes to invest in 2 funds in different fund families- a growth fund and an income fund. What should the registered representative do? A) Mark the order as unsolicited and process the transaction B) Follow the customer's instructions C) Request approval from a principal at the firm prior to placing the order D) Explain to the investor that by investing the entire amount in one family of funds will result in lower sales charges

Answer: D The representative must explain to the investor that there are qualifying breakpoints available by investing in the same fund family. By splitting the money among multiple fund families, the customer will pay higher sales charges on each purchase.

ABC Growth Fund has a NAV of $9.15 per share and the POP is $10.00. All the following statements regarding ABC Growth Fund are true, except: A) ABC Growth Fund must offer rights of accumulation B) ABC Growth Fund must offer breakpoints C) ABC Growth Fund has a sales charge of 8.5% D) ABC Growth Fund cannot charge any additional fees

Answer: D This fund has a sales charge of 8.5%, (POP-NAV)/POP or ($10.00 - $9.15)/$10.00. For a mutual fund to charge the maximum sales charge of 8.5%, both breakpoints and rights of accumulation must be offered to investors. The fund may still charge management and administrative fees.

Under IRS rules, which of the following would be deemed to be part of a retirement plan investor's basis? A) All distributions B) All monies held in an investment for more than 5 years C) All pre-tax contributions D) All post-tax contributions

Answer: D "Basis" is a shorthand term often used by tax professionals to recognize that taxes have already been paid on some contributions made into retirement plans. Contributions made with these after-tax (post-tax) dollars have already been taxed by the federal government before having been contributed into the retirement plan. Therefore, the contributions will not be taxed when withdrawn.

A registered representative is meeting with a client discussing investing in ABC Mutual fund. In which scenario may a breakpoint sale have occurred? A) The registered representative recommends that the client diversify between different funds within the same fund family B) The registered representative recommends that the client invest in the same fund family that the client's IRA is currently invested with C) The registered representative recommends that the client not invest a lump sum immediately but suggests dollar cost averaging over the next 12 months and sign a letter of intent D) The registered representative recommends that the client diversify between several different fund families

Answer: D A Breakpoint Sales Violation occurs when a registered representative purposely makes a sale just below the breakpoint to earn a higher sales load (or divides investable dollars among different fund families). This is a violation of SEC and FINRA rules and is prohibited.

The custodian named on an UGMA/UTMA account may withdraw funds from the account for all the following, except: A) Educational expenses for the minor B) Pay half the mortgage payment due this month C) Buying a new car for the minor D) Paying taxes owed on the account

B) Pay half the mortgage payment due this month

All transactions by a registered rep for the account of a client must be: A) Approved by FINRA B) Reviewed and endorsed by a principal or designated supervisor C) Authorized by the client in writing D) Cash only

B) Reviewed and endorsed by a principal or designated supervisor

Who is responsible for managing the investment decisions on behalf of a beneficiary in a trust account? A) The grantor B) The beneficiary C) The trustee D) The custodian

C) The trustee Trust accounts are established by a grantor who provides the investment. The trustee acts as the fiduciary and manages the assets on behalf of a beneficiary.

Taxation of Cash Value, Loans, Withdrawals, and Surrenders

Cash value: (both variable and traditional prod) grows on a tax-deferred basis Policy loans: not considered a distribution of cash value and are not taxable Withdrawals: for distributions only earnings are tax, premiums and contributions are returned tax-free (withdrawals are treated FIFO) Policy surrenders: treated as a cancellation and taxed on the earnings Chpt 7 Pg 108

After a correction in the broad market, a client instructs her RR to sell all of her mutual fund holdings. The RR believes the market is about to move sharply upward and that liquidating the positions would be a big mistake. What should the RR do in regard to the customer's sell order? A) Refuse the order if the RR is convinced it is against the customer's best interest B) Follow the instructions unless the account is discretionary, then do whatever is in the client's best interest C) Sell half of the client's holdings to limit the customer's market exposure D) Follow the client's instructions and fill the order in full

D) Follow the client's instructions and fill the order in full

An employee of broker-dealer A wants to open an account at broker-dealer B. Special procedures would not be required if the account will be used exclusively for the purchase any of the following, except: A) Variable annuities B) Mutual funds C) 529 plans D) Shares of common stock

D) Shares of common stock

What fees are deducted from the separate account?

Expense risk fee Mortality risk fee Investment management fee *on top of the deductions from the premiums Chpt 7 Pg 107

What is the General Account in a non-variable permeant life insurance?

Premiums and payments from traditional insurance company products are placed in the general account * Insurance company owns any and all investment risks * Conservative investing increases inflation risk Chpt 7 Pg 104

Calculating values of a variable life insurance policy: - Separate Account Valuation? - Cash Values? - Death Benefit?

Separate Account Valuation - the separate account NAV is calculated daily at 4 p.m. EST Cash Values - calculated at least monthly (the policy's cash value will fluctuate based on the performance of the underlying investments held in the sep. acct.) Death Benefit - calculated on an annual basis. Chpt 7 Pg 106

What is the Separate Account in variable contracts?

The account that cash values of variable products are held by the issuer in the customer's name *the securities held in this account require prospectus delivery at or prior to time of sale Chpt 7 Pg 103

When can Variable Insurance policy customers exchange their policy to whole life without evidence of insurability?

Within 24 months from issuance Chpt 7 Pg 107