Series 6 Progress Exams
An employee wants to invest funds into a 401(k) that is sponsored by his employer. Assuming the employee waits until he reaches the age of 60 to begin taking distributions from the plan, what is the tax treatment of these funds
A 401(k) plan is generally funded with pre-tax dollars, which means that the contributed funds have not yet been taxed. Another benefit of a 401(k) plan is that it offers tax-deferred growth. Therefore, 100% of both the original contributions and the earnings are taxed at ordinary income rates when the funds are distributed in the future. For this reason, a 401(k) has a zero cost basis.
A Regulation D offering may be sold to a maximum of
A Regulation D (private placement) offering may be sold to a maximum of 35 nonaccredited investors. There is no limit on the number of accredited investors. An individual will be considered an accredited investor if he has a net worth of $1,000,000 or has had $200,000 ($300,000 for a married couple) of income for the previous two years with an anticipation of continued earnings at the same or a greater level.
Which of the following statements is NOT TRUE as it pertains to a broker-dealer executing trades for customers
A broker-dealer may not act as both an agent and a principal in regards to the same transaction and charge a client both a commission and a mark-up on that transaction.
Which of the following would be considered the MOST important when determining the suitability of an investment for a customer?
A customer's earned (ordinary) income, passive income and investment income are combined to determine the total amount of income received by the customer. All expenses are subtracted to find the amount of discretionary income the individual has to make investments. A customer without discretionary income is not a current candidate for investments.
A durable power of attorney would be required to execute discretionary authority in which of the following accounts?
A durable power of attorney allows discretionary authority to continue in the event an individual becomes incapacitated. A regular or nondurable power of attorney is terminated if the individual becomes incapacitated. Both durable and nondurable power of attorneys, are terminated when the individual passes away.
One of your elderly clients would like to spend much of his time traveling and wants his daughter to make investment decisions regarding the account while he is gone. The client would also like his daughter to be able to transfer funds from the account to pay his mortgage, credit card bills, utilities, etc. Which of the following forms would be necessary to permit this arrangement?
A full power-of-attorney is required if discretion is to be granted allowing the individual to make investment decisions and withdraw money or securities from the account. A limited POA would only allow the individuals the ability to make investment decisions. The account need not be structured as a JTWROS and does not require a certificate of incumbency.
A complaint is recognized in all of the following manners, EXCEPT
A grievance is not considered a complaint unless it is in writing. Complaints may be in the form of emails, text messages, or handwritten notes. A phone call is not considered a complaint
Which of the following clauses would NOT be included in a letter of intent
A letter of intent (LOI) has a maximum duration of 13 months and it may be backdated for up to 90 days to include previous purchases. Also, to ensure that the letter of intent is fulfilled, a certain amount of the initially purchased shares may be placed in an escrow account by the customer's broker-dealer. If the terms of the letter are not met, the shares in the escrow account will be liquidated and used to cover any additional sales charges that are due. The letter of intent will not contain a clause which stipulates that redemptions are prohibited during the 13-month period.
An investor with an investment objective of speculation wants to purchase a security that will increase three times as much the Russell 2000 Index. Which of the following securities should be recommended
A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the Russell 2000 Index seeks to deliver three times the performance of that index. Therefore, if the Russell 2000 Index rises by 1%, a leveraged ETF will increase by 3% before fees and expenses are deducted. An inverse exchange-traded fund (EFT) will be suitable if the customer anticipates a decrease in the Russell 2000. A leveraged inverse exchange-traded fund (ETF) is suitable if the customer wants a return that is a multiple or higher return and anticipates a decrease in the Russell 2000. Lastly, an exchange -traded fund (ETF) is suitable if the customer only wants to track the return of the Russell 2000.
Which of the following choices is a valid reason for the carrying firm to protest an account transfer?
A mismatched account title is a valid reason to protest a transfer. If the basic account information such as tax ID number, account title, or account number does not match the information on record at the carrying firm, the carrying firm may protest the transfer. The instructions may be amended with the necessary corrections, and the account transfer process may again be requested using Automated Customer Account Transfer (ACAT). The transfer may then be rejected or validated within one business day and transferred within three business days following the validation by the carrying firm.
Over the last 20 years, a 66-year-old has invested $200,000 into a TSA that is sponsored by his employer. The account is currently worth $800,000 and he has decided to annuitize the contract and begin drawing down the contract's balance. How will the distributions be taxed?
A tax-sheltered annuity (TSA), also referred to as a qualified annuity, is funded with pre-tax contributions from an employee's paycheck, which means that the contributed funds have not yet been taxed. Another benefit of a TSA is that it offers tax-deferred growth. Therefore, both the original contributions and the earnings are taxed at ordinary income rates when the funds are distributed in the future. For this reason, a TSA has a zero cost basis. Keep in mind, annuity distributions never generate long-term capital gains.
A client is interested in investing in a fund that includes companies that have under-performed and have lost the interest of other investors, but are considered to have long-term potential. Which of the following funds is the most suitable for this client?
A value fund invests in stocks that appear to be bargains. Value funds include companies that have good fundamentals, but are in sectors that are currently out of favor with the market. These funds are suitable for investors with long-term investment horizons. An interval fund is a closed-end fund whose issuer periodically repurchases shares at NAV, which protects investors from market values that may fall significantly below their NAV. Life cycle funds are asset allocation funds that are rebalanced as an investor gets older and nears retirement.
A firm's suitability responsibilities for sales of variable annuities do NOT apply to recommendations in which of the following situations?
According to FINRA Rule 2330, suitability requirements for recommendations concerning the purchase of variable annuities apply to 'new purchases', 'exchanges' and 'initial subaccount allocations'. These rules do not apply to the reallocation of subaccount assets after the initial purchase, nor do they apply to purchases of employer-sponsored qualified plans unless a recommendation is made regarding the allocation of subaccount assets in the initial purchase. Many states and brokerage firms require documentation of a customer's acknowledgment of a replacement transaction. These switch acknowledgement forms are typically signed by the annuity contract owner and the salesperson. The acknowledgement form provides a comparison of the features and costs of an existing contract to a proposed contract, and points out the relevant factors to be considered when contemplating an exchange.
In variable life insurance sales literature, which of the following statements is TRUE concerning the use of hypothetical illustrations of rates of return
Although FINRA allows the use of hypothetical illustrations in variable life insurance sales literature, there are strict guidelines concerning their use. The illustrations cannot be used to predict future investment results. A maximum rate of return of 12% may be illustrated, provided a 0% rate of return is also shown. Current market conditions must be incorporated when considering the maximum rate of return used in the illustration. Also, while the current mortality and expense charges may be shown, the maximum guaranteed mortality and expense charges MUST be shown.
A client would like to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations would be MOST suitable?
Although all these investments would be suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund would be the most cost-effective method for an investor who has $250 a month to invest to accomplish this goal. The closed-end fund and ETFs are purchased on an exchange, and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (they are no-load). If the investor were purchasing a large dollar amount at one time, any of these funds may be appropriate.
A mutual fund has increased in price because of a rise in the market value of the securities in its portfolio. This increase in price would be
An increase in the price of any security is appreciation. There is a capital gain only when the security is sold and the appreciation is realized. The increase can also be described as an unrealized gain.
A broker-dealer plans to issue retail communication that contains bond fund volatility ratings. When must the broker-dealer file this type of communication?
Any retail communication that promotes or recommends either a specific registered investment company (RIC) or a family of RICs (provided the material doesn't include fund-created rankings or comparisons) must be filed with FINRA within 10 days of first use. This category includes mutual funds, closed-end funds, exchange-traded funds, unit investment trusts, and variable products. It also pertains to bond mutual funds. If the fund includes or uses bond mutual fund volatility ratings, it's required to be filed with an SRO within 10 business of its first use. In addition, retail communication must disclose the name of the rating entity, the most current rating, the date of current rating, a description of the rating which includes the methodology behind the rating, whether the fund paid for the rating, and the types of risks that the rating measures.
Which of the following is considered an accredited investor?
As defined under Regulation D of the Securities Act of 1933, an accredited investor is eligible to purchase a Regulation D (private placement) offering. Accredited investors include: Certain financial institutions regardless of their assets, such as banks, registered investment companies, and private business development companies Pension plans and ERISA accounts, which have total assets in excess of $5 million Any 501(c)(3) organizations (non-profits) or trusts which have total assets of $5 million AND were not formed for the specific purpose of acquiring the securities being offered Any executive officers, directors, or general partners of the issuer of the securities being offered Any natural persons whose net worth or joint net worth exceeds $1 million or have annual income of $200,000 ($300,000 joint income) Any entities in which all of the equity owners are accredited investors The net worth requirement of $1 million may not include a person's primary or principal residence
Balanced funds typically invest in
Balanced funds may invest in both equities and fixed-income securities and may hold both growth and value stocks.
An investor has a cost basis of $22 per share in a growth fund and the fund has a current NAV of $37. The client gifts his fund holdings to his daughter and she subsequently sells the shares at $32. Based on the sale, the gain/loss is
Based on the sale, the daughter has a gain of $10 per share because she assumed her father's basis of $22 at the time of the gift ($32 - $22 = $10).
A registered person is concerned that his boss is making inappropriate advances. This allegation must be settled by:
By signing the application for securities industry registration (Form U4), registered persons agree to a statement that says, in part, "I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or bylaws, of the SROs indicated ... " FINRA rules require that disputes between firms, a firm and its employee, or a firm and a clearing corporation must go to arbitration. An exception exists when the dispute involves statutory discrimination claims, such as sexual harassment. The aggrieved party (the employee) may choose mediation, or may pursue his claim in either arbitration or the court system.
Which of the following descriptions regarding the Capital Asset Pricing Model (CAPM) is NOT TRUE
CAPM does not establish a price objective for the stock. It does - It was developed to explain the behavior of security prices It provides a mechanism to assess risk and return It is based on the efficient market theory and assumes investors act rationally
Cash dividends declared by a corporation
Cash dividends declared by a corporation must be approved by the corporation's board of directors. Shareholder approval is not needed to declare a cash dividend, although a company must obtain shareholder approval for a stock split. Any cash dividends paid to shareholders are taxed as ordinary income in the year received, not capital gains.
When comparing revocable trusts to irrevocable trusts, which of the following statements is TRUE
Changes can be made after the agreement has been signed in revocable trusts, but not in irrevocable trusts.
All of the following are considered a good delivery in the sale of 500 shares of common stock, EXCEPT
Delivery must be made in 100-share certificates, multiples of 100, or any combination that adds up to 100 shares. Four certificates of 50 shares is acceptable, but ten 30-share certificates is not, since 30-share certificates cannot be combined to add up to 100 shares.
A disciplinary action concerning a registered representative (RR) is reported by the firm through which of the following?
Disciplinary actions concerning an RR are reported by the employing firm as an amendment to the RR's Form U4. Form U4 is originally processed when an RR joins a firm and updated thereafter. Form U5 is processed when an RR leaves employment with a firm and also contains information regarding the RR's disciplinary history. Form U6 is filed by an SRO (e.g., FINRA), but not by a member firm, to report disciplinary actions against broker-dealers and RRs. All three of these forms feed information into the Central Registration Depository (CRD) system. Some of the information that's found in the CRD system may be accessed by the public through FINRA's BrokerCheck system.
Discretionary accounts require:
Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.
Which of the following statements is TRUE regarding dollar cost averaging
Dollar cost averaging is a systematic method of investing that results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits are not obtained with funds that have a stable asset value, such as money-market funds.
In a public offering, due diligence begins
Due diligence take place throughout the entire registration process, but begins in the preregistration (pre-filing) period
A client has not paid the last premium on his variable life insurance policy. The company has informed the client that his contract will lapse at the end of the policy's 31-day grace period. What action must the client take to keep the policy in force
During the grace period, the policy does not lapse and investors may catch up on any premiums due. Once a policy lapses, the insured would need to obtain a new policy.
The major provisions of ERISA provide protection for
ERISA gave the government jurisdiction over private pension plans and protects employees from improper investments by their employers. ERISA does not protect investors in mutual funds, the benefits in defined contribution plans, or the loss of funds due to the bankruptcy of a broker-dealer.
The major provisions of ERISA provide protection for
ERISA gave the government jurisdiction over private pension plans and protects employees from improper investments by their employers. It does not apply to government employer plans.
The spouse of a brokerage firm employee wants to open a brokerage account in order to invest in bonds. If this account is opened at a firm that does not employ her spouse, the employee of the firm is required to:
Employees of broker-dealers who intend to open outside accounts for the purpose of executing securities transactions are required to obtain the prior written consent of their firm. This rule also applies to accounts being opened for the spouse of dependent children of member firm employees.
An investor is reading prospectuses for several mutual funds. If the investor would like to compare how efficiently the funds are operated, which of the following sections of the prospectuses should be consulted
Every mutual fund prospectus must contain a section discussing fees and expenses. This section must include certain standard items, including shareholder fees (such as sales loads), annual fund operating expenses (including 12b-1 fees), and a table showing the total cost of owning the fund over one-, three-, five-, and ten-year periods (based on a 5% return assumption). Because the information is presented in a standard format, investors can easily compare this information between funds.
According to industry rules, how long should investors wait between 1035 exchanges of variable contracts
Exchanges of variable contract assets must be scrutinized for both frequency and suitability. The relevant look-back period is typically 36 months.
According to SEC guidelines, which of the following could cause investment company advertising to be misleading
Failure to state a fact that's described in the prospectus would be misleading only if the fact was necessary to make the advertising not misleading. Sales literature should describe the current economic conditions if they have an influence on the return of the fund. Statements about benefits must be balanced by statements about corresponding risks. Statements of g
A fee-based account is most suitable for customers who:
Fee-based accounts charge an annual fee for investment advice regardless of whether any transactions occur. These accounts are most suitable for customers who engage in frequent trading and want to avoid being charged commissions on each trade separately.
When analyzing an individual's financial status to determine suitable investments, all of the following would be important considerations, EXCEPT
Future earnings opportunities do not determine the current suitability of investments. Suitability is based on the individual's situation at the time an investment is being made. An individual should have adequate insurance coverage and discretionary income to make the investment, as well as the ability to cover any anticipated expenditures.
The most common reason for investors to include a precious metal fund in their portfolio is to
Historically, hard assets such as gold and other precious metals, have appreciated during periods of high inflation. This helps diversify an investor's portfolio since stocks and especially bonds, tend to lose value in inflationary periods.
If a mutual fund includes "Tax-Exempt" in it's name, it must invest no less than what percentage of its assets in tax-exempt investments?
If a fund includes in its name a specific type of security or industry, it must invest no less than 80% of its assets in those types of securities.
If the SEC believes that a registration statement is incomplete or misleading, it will issue a
If the SEC believes that the registration statement or prospectus is incomplete or misleading, it sends a deficiency letter to the issuer. The issuer must then refile an amended registration statement that must once again be reviewed by the Commission. A red herring is a preliminary prospectus. The offering circular and offering memorandums are disclosure documents that are associated with exempt transactions.
A variable life insurance policy has an AIR of 5%. The separate account recently performed at a 4% rate of return. Which of the following statements best describes the effect of this rate of return on the death benefit of the policy?
If the return of the separate account exceeds the AIR, the death benefit will increase. If the return of the separate account is less than the AIR, the death benefit will decrease. However, the death benefit cannot decrease below the initial face value of the policy.
A type of offering in which an investment banker acts in a principal capacity is a
In a firm commitment offering, the investment banker agrees to retain an securities that remain unsold. In this case, the underwriter acts in a principal capacity and accepts liability for the unsold securities.
The fund that would probably have the most price volatility is a
In general, bond funds are less volatile than equity funds. Within the equity category, the NAVs of growth and income bond funds are considerably less volatile than international equity funds whether corporate or municipal. International equity funds are not only vulnerable to market risk, but exchange and political risk as well
A customer calls to lodge a complaint against a registered representative (RR). The customer should be advised to:
In order to be officially considered a complaint, the complaint should be put in writing. This mandates an appropriate response from the member firm.
Which of the following is required when opening a cash account for a corporation
In order to open a corporate account, an individual must supply a corporate resolution authorizing one or more persons to open and operate the account. Orders accepted from anyone not named in the corporate resolution would be unauthorized.
An investor intends to establish a tax loss, but still wants to own the same security. If the investor sells the security at a loss and then repurchases it two weeks later, the tax loss is
In this question, since the security was reacquired within 30 days of the sale, the tax loss is disallowed. This is referred to as a wash sale, which means that the loss cannot be used in the current year's tax calculation. To avoid this result, an investor who has sold securities at a loss must wait more than 30 days before repurchasing the same securities or any securities that are deemed to be substantially identical (e.g., rights, options, warrants, or convertible bonds).
Investors with high incomes and high net worth:
Investors with high incomes and high net worth generally have higher risk tolerances than investors with more modest financial resources. However, financial resources are not the only elements that determine an investor's risk tolerance. Personality type, age, and other considerations also help determine a person's ability and willingness to assume risk. The courts and regulators have made it clear that an investment is not suitable simply because the client could afford to lose the money.
When may an investment adviser representative project the future return of a variable annuity?
It is prohibited to project the future earnings in a variable annuity separate account.
Local government investment pools (LGIPs) may be created for all the following purposes, EXCEPT
LGIPs are typically created to provide short-term investment options for state or local government entities. They may also be invested in longer-term securities, or used to invest the proceeds of a new bond issue. They are not offered to municipal bond investors.
If an issuer has a small amount of leverage in its capital structure, this would mean the company has issued a large amount of:
Leverage, in regard to a company's capital structure, refers to the amount of debt it has issued compared to equity. When a company issues a large amount of debt, it has committed itself to the payment of interest and principal which increases its leverage. If a company issues primarily equity, its leverage is reduced.
You are the portfolio manager for Home Fund, Inc., a mortgage-backed securities mutual fund. Which type of risk concerns you in a falling interest rate environment
Like most debt instruments, mortgage-backed securities (MBSs) are subject to interest-rate risk, the risk that the security's value will fall as interest rates rise. However, MBSs are also subject to risk when interest rates fall. Falling rates cause an increase in prepayments on the underlying mortgages, and this money must be reinvested in new, lower-coupon securities. This is known as prepayment risk. Mortgage-backed securities, and the funds that invest in them, tend to perform best when interest rates are stable.
A 28-year-old single investor has funds saved at a bank. He contacts an RR and wants to begin allocating funds to a retirement account. Which of the following choices is the most appropriate asset allocation
Long-term, risk-tolerant investors, such as those saving for retirement, are usually looking for growth of capital as an objective. They are also usually concerned about the effects of inflation. Over long periods, stocks usually keep pace or offer higher returns as measured against inflation. Inflationary risk is also referred to as purchasing-power risk. Since the investor is many years from retirement, a large percentage of his portfolio should be allocated to stocks.
Which of the following mutual fund communications is NOT considered sales literature?
Material prepared only for use between issuers, underwriters, and dealers is not considered sales literature if it's not being directed to prospective investors.
Which type of investment company is bought at its net asset value?
No-load funds offer shares at the net asset value. There is no sales charge or commission added to the cost of the shares. No-load funds may add a 12b-1 fee.
An investor asks a registered representative to underline the most important facts found in a preliminary prospectus. The registered representative
Once a prospectus is filed with the SEC, it may not be amended in any way.
An individual has annuitized her variable annuity contract and has begun receiving payments. She decides she would rather start a withdrawal program, no longer annuitizing the contract. As her registered representative, you may inform her that
Once a variable annuity has been annuitized, changes are not permitted. A 1035 exchange is switching from one annuity to another during the accumulation period.
Upon the death of the insured, the proceeds of a variable life policy:
Policy proceeds pass to the beneficiary free from federal income tax upon death of the insured. However, proceeds are included in the policy owner's estate for estate tax purposes.
Within a fund family, an investor executes a switch of the shares of the value fund for shares of the growth fund. Which of the following statements is TRUE regarding this switch
Regardless of whether a fund switch is executed within the same or other fund family (complex), the IRS considers it to be a taxable event. The tax liability an investor incurs is a capital gain generated by the fund shares being sold (i.e., the fund shares being sold for more than their original cost). Once a switch has been made, there is no way to reverse it to avoid the tax liability.
An example of a regressive or flat tax is
Regressive or flat taxes are those that remain the same regardless of the amount of income. A sales tax is an example of a flat tax. On the other hand, progressive taxes increase along with the level of a person's income. Examples of progressive taxes include income, gift, and estate taxes.
All of the following would be inappropriate for retail communications regarding investment companies, EXCEPT
Retail communication cannot be judged as inherently misleading simply because television is the selected delivery method.
A registered representative works for a brokerage firm that is a dealer for a mutual fund complex. The RR has prepared a script and a slide presentation for a seminar on the funds in the complex and also intends to hand out prospectuses for the funds and a brochure that was created by her firm. In this situation, all of the following should be filed with FINRA, EXCEPT
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. A retail investor is considered any existing or prospective customer who does not meet the definition of an institutional investor. A script, slide presentation, and brochure are all defined as retail communication and are required to be filed with FINRA or another SRO within 10 business days of first use. Tombstone advertisements, mutual fund profiles, and prospectuses which have been filed with the SEC are exempt from the filing requirement.
Over the last five years, one specific fund has been one of the top-performing small-cap mutual funds in terms of total return. The fund wants to create some sales literature that includes performance information for this period. Which of the following statements is TRUE?
SEC Rule 34b-1 of the Investment Company Act of 1940 requires that certain items of information be contained in investment company sales literature in order for it to avoid being considered misleading. Sales literature that contains performance information for all funds (except money-market mutual funds) must contain total return information for one-, five-, and 10-year periods (or for the life of the fund if it was not in existence for the last five- and/or 10-year periods). Sales literature for non-money-market mutual funds are not required to contain yield information; however, if it does, current yield must be included.
Which of the following funds would typically have the LEAST amount of stability in NAV?
Sector funds focus their investments in specific areas of industry or geography. As a result the funds tend to have more risk and volatility (less stability), than money-market mutual funds, short-term bond funds or index funds that track the broad market indices such as the Standard & Poor's 500.
A 64-year-old individual has recently retired and he's receiving a large lump-sum retirement payout from his former employer. Although he's receiving a large distribution, he has very little in the way of savings. Which of the following is an appropriate portfolio allocation for the individual's lump-sum payout if his primary interest is income and his secondary interest is growth for inflation protection?
Since the investor has no savings, a portion of his payout should go into money markets or cash equivalents. Due to the investor's primary goal of generating interest, the majority should be invested in bonds. As a result, a portfolio consisting of 80% bonds, 10% equities, and 10% cash is the most appropriate allocation.
Within a 30-calendar day period, a member firm sends an email to 40 total investors, of which 20 are retail investors and 20 are institutional investors. The e-mail is considered:
Since the number of retail investors is limited (20 in this question), FINRA is willing to allow the communication without a great deal of oversight. The communication to a limited number of retail investors is categorized as correspondence. Correspondence is officially defined as any written or electronic message that a member firm distributes or makes available to 25 or fewer retail investors within a 30-calendar-day period. On the other hand, retail communication is defined as any written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Although the communication is being sent to 40 investors, only 20 were retail investors; therefore, the email is considered correspondence.
A soft-dollar arrangement is BEST defined as
Soft dollars are products and services that an investment adviser receives from a broker-dealer in exchange for customer order flow. It is a means of paying brokerage firms for their services through trade commissions.
In a soft-dollar arrangement between an investment adviser and a broker-dealer, the broker-dealer would be permitted to pay
Soft dollars are products and services that an investment adviser receives from a broker-dealer in exchange for customer order flow. It is a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its customers. The broker-dealer is permitted to pay for the cost of the conference that an adviser attends concerning securities within an industry in which the adviser will be investing. Travel costs and any costs that should be paid by the adviser (e.g., salaries of the adviser's internal research staff) are not covered under a soft-dollar arrangement. Whereas the cost of the computer terminals could not be paid for with soft dollars, the cost of the data services would be covered by soft dollars.
When sent to a client, which of the following must be preceded or accompanied by a prospectus
Supplemental sales literature may only be used in the post-effective period and must be preceded or accompanied by a prospectus. These requirements do not apply to generic advertising, tombstone ads, or omitting prospectus ads. The latter two types of ads are often published in newspapers.
All of the following are TRUE regarding mutual fund systematic withdrawal plans, EXCEPT that investors:
Systematic withdrawal plans are offered by many mutual funds as a convenience to their shareholders. This allows investors to receive regular, periodic payments from their accounts. However, investors should be warned that systematic withdrawal plans from mutual funds do not work like annuities. A systematic withdrawal plan could eventually result in the exhaustion of the account, whereas a life annuity payout will continue as long as the annuitant lives.
The SEC, under the Securities Act of 1933, performs all of the following, EXCEPT
The SEC performs all of the items mentioned in the question, except approve or disapprove new issues or pass on the investment merits of new issues. The SEC reviews the information contained in the prospectus to see that it is adequate but it does not say that it is true. In addition, only the investor can judge whether a new issue has investment merit—whether it is a good or bad investment for that individual.
According to the SEC, what's the minimum period that may be used to calculate the yield on a bond mutual fund for use in an advertisement?
The SEC permits yield-based advertising. For mutual funds, an SEC-standardized 30-day yield must be used. However, for money-market mutual funds, a seven-day period is used.
A client has a variable annuity with an assumed interest rate of 5%. The client received a first benefit check of $115. The separate account rate of return between the first and second month was 8%. The client received a second check for $125. What was the actual rate of return of the separate account between the second and third month if the client's third check was also for $125?
The amount of a benefit check that is received by an annuitant is based upon the relationship of the assumed interest rate (AIR) and the actual performance of the separate account. If the performance of the separate account equals the AIR, the benefit payment will be the same as the last payment. If it is higher than the AIR, the benefit payment will increase. If the performance will be lower than the AIR, the benefit payment will be lower. In this question, the client received a first check of $115. In the subsequent payment period, the separate account experienced a growth rate of 8%, which yielded a payment of $125. As you can see, since the actual growth rate of the separate account (8%) was greater than the AIR (5%), the benefit payment increased. In order to receive a $125 payment for the third payment period, the separate account must experience a growth rate equal to the AIR. Therefore, this growth rate must be 5%
According to Regulation SP an individual opening an account with a broker-dealer must be provided with a privacy notice:
The broker-dealer must furnish the individual with a privacy notice at the time that he opens the account. An ongoing relationship is being established by opening an account. Thus, he is considered a customer under Regulation S-P and must receive a privacy notice at the time he opens the account (i.e., first establishes that ongoing relationship).
In early December, an investor purchased mutual fund shares. Then, on December 30, the fund sold a large portfolio position for a $25 million capital gain. How is the investor's portion of this profit treated for tax purposes
The determination for whether a capital event is long- or short-term is based on how long the fund had held the individual stock position that was liquidated. In this question, it's unclear as to how long the fund had held the liquidated portfolio position; therefore, the gain may be either short-term or long-term. Any short-term gains that are realized by the fund are included with its investment income (i.e., dividends and/or interest from the securities it its portfolio) and will be taxed appropriately as income when distributed. On the other hand, any long-term capital gains that are realized by the fund will be distributed and taxed as long-term gains.
A firm must provide a privacy notice to an individual who's planning to open an account
The firm must provide the client with a privacy notice at the time he opens the account. The client is establishing an ongoing relationship with the firm by opening an account. Therefore, under Regulation SP, he's considered a customer and must receive a privacy notice at the time he opens the account (first establishes the ongoing relationship).
The first step taken when a registered representative is informed of a client's death is
The first step taken is marking the account deceased. As a result, all open orders are cancelled and the assets are frozen until the necessary documents attesting to the death are received.
A registered representative invites 20 retail clients to a seminar and allows each client to bring one guest. The sales script that is used for the presentation is considered:
The key to this question is to identify the number of retail investors (existing and/or prospective) who are receiving the communication. In this question, the 20 retail clients plus the 20 guests equals a total of 40 retail investors. Since the total number of retail investors is more than 25, FINRA considers the sales script to be retail communication. If the number of retail investors receiving the material was 25 or fewer, the communication would be considered correspondence.
In which of the following documents are bid limitations for a new municipal bond issue found
The notice of sale is published by the issuer. It announces the issuer's intention to sell an issue and invites securities firms to compete for the issue. All information pertaining to the bidding would be contained in the notice of sale.
An over-the-counter trader, when talking about the spread, is referring to the
The over-the-counter trader, when referring to the spread, is referring to the difference between the current bid and asked price of a security.
A person who invests in an annuity with a fluctuating stream of income would be most concerned with the performance of the insurance company's:
The performance of a variable annuity is related to the performance of the separate account. The insurance company's general account backs the company's fixed annuities and traditional (guaranteed) insurance products.
A registered representative suggesting a client redeem shares in one mutual fund and reinvest in another to take advantage of higher returns is engaging in a
The practice of moving from one fund to another within a short period of time is referred to as a switch. There should be an investment advantage to the investor to justify the switch. If the representative benefits more (in the form of compensation) than the customer does (in the form of investment return), FINRA may view this as unsuitable.
The investment risk on the cash value accumulation in a universal variable life policy is assumed by the:
The returns on a variable universal life insurance policy depend on the performance of the separate account. The risks of the separate account are borne by the investor.
The right of accumulation includes the:
The right of accumulation is the right to add together the total of all past and present purchases when determining eligibility for breakpoints on sales charges
A 70-year-old woman has been funding a variable annuity for many years and is planning to annuitize. She's seeking a payout that will provide her with the greatest payment per period which will last for as long as she lives. Which of the following payout options should she choose
The straight life option will provide the largest payout for the woman. She would receive a payment for as long as she lives; however, no payments would be made after her death. Since she has a variable annuity, she assumes the investment risk and payments will fluctuate with the performance of the separate account.
An investor is looking for a tax-efficient mutual fund that still provides an inflation hedge. Which of the following choices BEST fits her goal?
The term "tax-efficient" refers to funds that have low distribution rates, both in dividends and capital gains. Certain investors want the growth that may come from an equity fund. They do not, however, want the possibility of a big tax bill (through realized capital gains) in any given year resulting from the trading activities of a portfolio manager. Since this investor wants an inflation hedge, the municipal securities fund is also not suitable. Now we are left with choosing between the low expense ratio and the low turnover ratio. Here is yet another situation where we have to choose the one that is MOST correct. A fund with a low expense ratio may be tax-efficient, i.e., makes small distributions, but there is no guarantee. The fund with the low turnover ratio is the better choice.
The term deficiency letter is associated with a
The term deficiency letter is associated with a registration statement for an offering that will be registered with the SEC. If the SEC believes that the registration statement or prospectus is incomplete or misleading, it sends a deficiency letter to the issuer. The issuer must then refile an amended registration statement which must be reviewed by the Commission.
A couple has a portfolio of domestic equity and bond funds. They wish to diversify their portfolio further. Which of the following investments would MOST likely fulfill this goal?
This is a question where you need to understand terminology. The client has a portfolio of domestic securities. What does that mean? Domestic implies within the United States. The funds the couple already own contain securities issued in the United States. Since they wish to diversify, they need to purchase securities from outside the United States. Choices (a) and (b) contain domestic securities, so they would not offer any further diversification. Choice (d) is a global fund, which means stock from around the world, including the United States. Remember, the couple has enough of their money invested in U.S. securities. The International Fund is the best answer. It holds only foreign securities in the portfolio.
A married couple are both in their 20s and have begun to think about investing for their future retirement. They both have jobs that pay well. Which of the following portfolio allocations is the most appropriate for the couple?
To amass the assets they will need at retirement, the couple should include common stocks in their portfolio. A portfolio that's predominately allocated to bonds will not likely produce the required long-term returns. On the other hand, a portfolio that mixes stocks and bonds is likely a better choice for the couple than one that's exclusively allocated to common stock. However, given their long time horizon (they're still in their 20s), the couple can likely tolerate additional investment risk and can place the majority of their savings into stocks to increase their potential return. The allocation of 90% stock and 10% bonds is the most appropriate given their goals and risk tolerance.
Confirmation statements must contain all of the following, EXCEPT the
Transaction dates, settlement dates, and the offer to disclose the name of the contra-party in the transaction must be included on the confirmation statement. Although the date on which the order was entered is not required to be disclosed on the confirmation statement, it is included on the order ticket
A broker-dealer receives a written statement from a customer complaining about a transaction recommended by a registered representative. Which of the following statements is NOT TRUE?
Under FINRA books and records rules, written complaints must be kept on file at the appropriate OSJ, along with any correspondence connected with the complaint. Although the firm is required to respond to written customer complaints, there is no specific response-time requirement.
Which of the following statements is TRUE regarding mutual funds?
Under Subchapter M, the tax code provides an advantage to investment companies by eliminating their federal income tax liability if they distribute at least 90% of their net investment income to shareholders.
Three clients have a joint account which is registered as Tenants in Common. If one of the individuals dies, which of the following statements is TRUE
Upon learning of the client's death, the brokerage firm will freeze the account. The deceased client's executor will then provide documentation to establish authority to act on behalf of the estate. Typically, the estate will become the third joint owner in the existing Tenants in Common arrangement.
An individual has invested $60,000 dollars into a variable annuity and named her husband as beneficiary. If she was to die during the accumulation period when the value of the annuity was $50,000, her spouse would be entitled to
When an annuitant passes, the death benefits avoid probate. Any benefits above the cost basis of the annuity are taxed as ordinary income to the beneficiary. If the cost basis is greater than the accumulated value, the beneficiary receives the cost basis tax-free.
A client calls to let you know she is retiring. She has just turned 65 and expects to start drawing on her Social Security and savings. Which of the following asset allocation models might be MOST appropriate for her?
When deciding how much money a person should have in the stock market, subtract her age from 100. That number gives a "rough" idea of how much money could be placed in stocks. In real life, this is not the only factor, but serves as a starting point. Since no time frame is specifically mentioned, we have to assume (in answering the question) that this money must last for the client's life span. Going above that number would be making a very aggressive move. Going beneath that number could mean that inflation will erode the portfolio value faster than the equity portion could grow. The choices with the 10% equity positions do not provide enough of an inflation hedge. In both cases, the client would most likely outlive her nest egg. The choice of 70% equity is opposite of our age rule, so 35% equity, 60% bonds 5% cash is the best choice.
Payments on a variable annuity are based on a:
When payments begin on a variable annuity, the annuitant is credited with a specific number of annuity units. This number of units will remain fixed. The annuitant's monthly payment will vary according to the value of the securities representing each unit.
When the net asset value is higher than the offering price, the fund definitely is closed-end. Closed-end funds have a price determined by supply and demand, and their prices may be more or less than the net asset value per share, while open-end funds are prohibited from ever selling their shares for less than the net asset value. Thus Fund B, which has an offering price less than its net asset value, must be a closed-end fund, while Fund A could be either.
When the net asset value is higher than the offering price, the fund definitely is closed-end. Closed-end funds have a price determined by supply and demand, and their prices may be more or less than the net asset value per share, while open-end funds are prohibited from ever selling their shares for less than the net asset value. Thus Fund B, which has an offering price less than its net asset value, must be a closed-end fund, while Fund A could be either.
A student fresh out of school, receives an inheritance of $25,000. He is concerned about what this may mean to his financial situation. The student inquires about where he should park the money while he gets some help. Which of the following is the MOST appropriate recommendation?
Whenever a person is looking to park his cash, the most viable option is some form of money-market account. Parking implies a very short-term time horizon (perhaps as little as a few weeks). Neither bond fund would be appropriate, a fund that purchases bonds is subject to principal fluctuation based on interest rate risk. This would not suit his needs. However, this question also has an extra dimension to it. The person in this question is a recent graduate, which implies a low income level (and probably a high level of student loan debt). Furthermore, he expressly states he is worried about his financial situation. The fact that there is no mention of tax issues implies the student is not concerned about taxes. In this case, the money-market mutual fund is the BEST answer. It provides the safety of principal the student needs. The tax relief that the municipal money-market mutual fund provides is not needed here.
Over the course of one year, an investor has realized a $8,000 long-term capital gain and a $12,000 short-term capital loss. For tax purposes, what is the result for the investor?
he result after netting the gain and loss is a short-term capital loss of $4,000 ($12,000 - $8,000). Of the remaining $4,000 loss, $3,000 of it can be used to offset ordinary income, which leaves a $1,000 short-term capital loss carry forward.
A prospectus for an investment company would indicate all of the following, EXCEPT
n order to obtain a relatively current list of the fund's portfolio, investors would have to review the investment company's semiannual report. Items found in the prospectus include the fund's policies concerning bank loans, how to redeem and acquire shares, specific expenses borne by the fund, breakpoints, management of the fund, and policies regarding portfolio turnover.
