100 questions

FINRA issues a complaint against ALFA Securities, a FINRA member firm, charging that the firm failed to adequately supervise one of its employees involved in a private placement. Which body of rules governs how this complaint will be handled?

Code of Procedure. Failure to adequately supervise is a violation of the Conduct Rules. The Code of Procedure is the method prescribed for handling infractions of the Conduct Rules.

For which of the following would you have to open a cash account?

Corporate and personal retirement accounts and custodial accounts must be opened as cash accounts. A trust account will usually be opened as a cash account but may allow margin if specifically provided for in the trust agreement.

The rules for ensuring that money will be available in a retirement plan (for paying out to participants during their retirement) are covered by which of the following types of requirements?

Funding. ERISA mandates minimum funding standards for plans. These minimums ensure that benefits will be available for payment upon retirement of the participants.

Given the following choices, the most suitable investment recommendation for a customer that wants monthly income is

GNMAs Government National Mortgage Association (GNMA) securities pay a monthly check. Utility stocks may pay a quarterly dividend; income bonds are issued by companies coming out of bankruptcy and are never recommended to investors looking for income, and T-bills do not pay interest (they are issued at a discount).

Your 45-year-old client is interested in obtaining the highest current income possible from his investment. If he is willing to accept fluctuations in investment principal, which of the following would best suit this client's investment objective?

High-yield bond fund. Because this investor's objective is income, a bond fund is suitable. Investors who are willing to accept risk and who are interested in high income should invest in corporate bond funds with some risk of principal. These bond funds are known as high-yield corporate bond funds.

A variable annuity has an AIR of 4%. In January, the separate account earned 9%; in February it earned 6% and in March it earned 5%. Based on this information, how will the April payment compare to the March payment?

Higher. Anytime the actual return exceeds the AIR, the next payment will increase. In March, the actual earnings were 5% and, because that is higher than the AIR of 4%, April's payment will go up. You must remember to only compare the actual to the AIR, not to the previous month's return.

How long must an economic decline continue before it is classified as a depression?

If a decline in the GDP persists for six or more quarters and is accompanied by high unemployment, the economy is said to have entered a depression.

Which of the following statements regarding the IRA 20% withholding requirement is TRUE?

If a participant receives a distribution from a pension plan and rolls it into an IRA within 60 days, the 20% withholding applies. The IRA 20% withholding is imposed on pension plan withdrawals (not retirement payouts) made payable to a participant. It is avoided if it is paid directly to a trustee. It does not apply in IRA-to-IRA rollovers or transfers.

Mr. and Mrs. Smith, both nearing retirement, want to reallocate $200,000 of their $500,000 portfolio of blue-chip stocks to an investment that would add to their monthly income after retirement. Of the possible investment choices below, which would be the most suitable recommendation given their investment objective?

Of the answer choices given, only Ginnie Mae (GNMA) securities would offer monthly income. Additionally, GNMAs are backed by the US government, which adds to their suitability for this couple nearing retirement.

A customer purchases 1,000 ABC mutual fund Class A shares and wishes to redeem the shares 30 days later. Which of the following will occur?

Shares will be redeemed at a price equal to the public offering price less the sales charge. The customer will receive the current NAV (the POP minus the sales charge).

If the ex-dividend date for a stock is Tuesday, January 13, what is the record date?

Thursday, January 15. The record date for corporate securities is two business days after the ex-dividend date or, in this case, Thursday, January 15.

Which of the following securities is issued at par?

Treasury notes. Of the securities shown, only treasury notes issue at par and pay semiannual interest. The others issue at a discount, pay no interim interest, and are redeemed at par.

An investor would like to make a long-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA rated bonds should his registered representative recommend?

XYZ zero coupon bond maturing in 15 years. The simplest definition of duration is that it is the time it takes for a bond's cash flow (interest payments) to equal the maturity value. Since there is no cash flow from a zero coupon bond, its duration is equal to its maturity. Since the question says, "long-term", we're not going to choose an 8 month maturity over a 15 year one.

An officer of a broker/dealer firm would be categorized as a restricted person if he attempted to purchase:

a new issue of common stock on the first day of trading. Officers of broker/dealer firms or other institutional investors are prohibited from purchasing a new issue under FINRA Rule 5130.

A stock exchange uses:

an auction method to trade stock. Exchanges use the auction method to trade stock. Orders to buy and sell are made by open outcry.

A promotional brochure for a mutual fund must:

be preceded or accompanied by a prospectus. All retail communications used in connection with the solicitation of mutual fund shares must be accompanied or preceded by the prospectus.

ABC's stock has paid a regular dividend every quarter for the last several years. If the price of the stock has remained the same over the past year, but the dividend amount per share has increased, it may be concluded that ABC's:

current yield per share has increased. The current yield would have increased because current yield is the income (dividend) divided by price. A higher dividend divided by the same price results in a higher yield.

If the current dividend of a stock remains constant while the offering price increases, the current yield of the stock:

decreased. Current yield is determined by dividing the annual dividend by the current offering price of the stock. If the offering price (the denominator of the fraction) has increased and the annual dividend (the numerator) stays the same, the value of the fraction is lower. (1/10 = 10%, 1/20 = 5%)

An investor in Class B shares with a 7 year contingent deferred sales charge liquidates shares four years after purchase. The CDSC is:

deducted from the lower of the original cost or the NAV when those shares are redeemed If there is a 7-year CDSC, a redemption after four years will incur a charge. the sales charge is deferred until you sell, and the amount is contingent upon when you sell. When you sell, you receive the NAV minus the back-end load. It might start at 5% and drop to zero after 7 years. A mutual fund prospectus for a fund with B-shares will show you the declining back-end load. The actual amount of the back-end charge is based upon the lower of the next computed NAV or the original purchase price.

The Securities Exchange Act of 1934 regulates or mandates each of the following EXCEPT:

full and fair disclosure on new offerings. The Securities Exchange Act of 1934 created the SEC and regulates the secondary market. The Securities Exchange Act of 1934 does not address full and fair disclosure issues; the Securities Act of 1933 addresses such issues.

All of the following are advantages of Section 529 plans EXCEPT:

gift tax rules do not apply, as long as the account is eventually used for higher education purposes. Gift tax rules do apply to contributions to a Section 529 plan. The limit beyond which the gift tax applies is an indexed annual limit.

Under the Code of Procedure, if an associated person is suspended from a FINRA member firm, he:

may not remain on the member firm's premises. During a suspension period, a registered representative may not remain on a member firm's premises.

12b-1 fees may be used to cover all of the following charges EXCEPT:

portfolio management fee. 12b-1 fees may be used to cover the costs associated with soliciting new investment into the fund. This would include costs associated with advertising, sales literature, and the mailing of prospectuses to new investors.

As a result of a complaint brought by the Department of Enforcement, FINRA does not have the authority to:

prohibit a person from associating with a regional exchange. If a respondent is found guilty at a hearing (or is the subject of an AWC or offer of settlement), FINRA may censure, suspend, or expel a FINRA member firm or a person associated with a member firm. It has no jurisdiction over other SROs, such as the regional exchanges, and may not prohibit any person from associating with them.

As interest rates fall, prices of straight preferred stock will:

rise. Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa.

Your customer has ordered $50,000 worth of shares of a particular mutual fund. The fund's ex-date is rapidly approaching and you push the client to hurry up and get his check in, so that he can benefit from the distribution. This is known as:

selling dividends. The prohibited practice of encouraging investors to purchase shares of a mutual fund shortly before the ex-dividend date is known as selling dividends. No benefit accrues to the investor because the NAV will drop by the amount of the dividend on the ex date. And, the dividend will produce taxable income to the investor.

Open-end investment company shares normally go ex-dividend:

the day after the record date. An investor purchasing open-end investment company shares on the record date becomes a shareholder of record on that date and is entitled to the dividend declared. Orders received after the pricing of shares on the record date would be processed the next day and would purchase shares ex-dividend.

A 403(b)(7) plan is a

type of tax-sheltered annuity available through mutual fund companies. A 403(b)(7) plan, a type of tax-sheltered annuity, allows employees to set up retirement plans directly with mutual fund companies.

Mutual fund promotional material may predict a rise in share prices:

under no circumstances. Predictions in public communications are a violation of the Conduct Rules.

A customer wishes to redeem 1,000 shares of a mutual fund. The NAV and POP are $10, and a redemption fee of 0.5% will be charged. How much will the customer pay in redemption fees?

$50 The question did not ask how much he would receive upon redemption, but how much he would pay in redemption fees. Mutual fund shares are redeemed at the NAV (bid): 1,000 shares × $10 each = $10,000. $10,000 × .005 (.5% redemption fee) = $50.

The maximum sales charge for a spread-load contractual plan is

- 9% over the life of the plan - not more than 20% in any one given year For spread-load plans (from the amended Act of 1970), the maximum sales charge over the life of the plan is 9%, with no more than 20% levied in any one given year.

In order to minimize liquidity risk, you recommend which of the following to a 37-year-old prospect?

- A growth mutual fund - Listed stock on the NYSE Liquidity risk is the inability to turn an investment into cash quickly at its fair market value without losing significant principal. Mutual funds have a guaranteed buyer (the investment company) and stock that trades on the NYSE has virtually no liquidity risk as it is easy to find a buyer. However, an annuity, because of surrender charges and early withdrawal penalties, is not considered liquid and real estate may take months or longer to sell and is a prime example of an illiquid investment.

During a fact-finding interview with a prospective client, you are reviewing his balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth?

- Bank accounts. - Cars. The balance sheet reflects a person's net worth by comparing assets and liabilities. Money in the bank and fixed assets such as automobiles are assets. Rent is an expense and a W2 shows income. Both of those items are found on an income statement.

Two investors each have an open account in the ATF Mutual Fund, which charges a maximum sales charge of 8.5%. The first investor has decided to receive all distributions in cash, whereas the second investor is automatically reinvesting all distributions. How do their decisions affect their investments?

- Cash distributions may reduce the first investor's proportionate interest in the fund. - The second investor's reinvestments purchase additional shares at NAV rather than at the offering price. By electing to receive distributions in cash while others are purchasing shares through reinvestment, the first investor is lowering her proportionate interest in the fund. Cash purchases later would be at the POP, not the NAV, with no delay in payment of sales charges, and reinvested distributions are taxed just as cash distributions are.

An investor wishes to start a dollar cost averaging program by investing $100 per month. Which of the following would be the least appropriate investment vehicles for this plan?

- Closed-end investment company. - Exchange-traded fund. Closed-end investment company shares and exchange-traded funds trade like any other stock. Smaller investment levels involve high commission costs relative to the amount being invested. Also, there are no provisions for rights of accumulation and reinvestment of distributions.

From which of the following might you be able to purchase shares of a closed-end investment company after its initial offering?

- From other stockholders in the OTC market. - From other stockholders on the NYSE. Closed-end investment company shares are traded in the secondary marketplace (OTC or exchange). Shares are thus purchased from other shareholders through broker/dealers.

Which of the following terms are associated with over-the-counter trading?

- Market maker. - Negotiated market. The over-the-counter market is a negotiated market. Within it, market makers are broker/dealer firms that provide a source for stock that customers wish to buy and a repository for stock that customers wish to sell.

An investor owning which of the following variable annuity contracts would hold accumulation units?

- Periodic payment deferred annuity. - Single payment deferred annuity. Accumulation units represent units of ownership in a life insurance company's separate account when the contract is in the accumulation stage. Annuity units are units of ownership when the contract is in the payout stage. Immediate annuities purchase annuity units directly.

Which of the following statements about deferred variable annuities are TRUE?

- Purchase payments can be either lump sum or periodic. - Earnings accumulate tax-deferred during the accumulation period. A deferred annuity can be purchased either with a lump-sum investment or with periodic payments. During the accumulation period, the account value increases and decreases based on the portfolio's performance. Earnings during this period will accumulate in the account tax deferred.

Regarding U.S. Government securities, the term intermediate maturity best describes:

- T-notes. Treasury notes mature in two to ten years; they are considered intermediate-term bonds.

Mutual funds are like other types of corporations in which of the following ways?

- The board of directors makes policy decisions. - Shareholders have ownership rights Mutual funds may only issue redeemable common stock, no preferred stock or bonds. Like corporate stockholders, mutual fund shareholders have a number of rights, including the right to elect the board of directors, which sets policies for the fund. However, the shares can only be purchased in the primary market and then redeemed with the fund.

An investment representative recommended a variable annuity to a client who declined the investment. The same client called a year later and wanted to buy the annuity and invest all of the funds in the aggressive growth portfolio, which had had a remarkable three-year performance streak. The client is one year away from retirement. Which of the following statements are TRUE?

- The client's profile must be updated to ensure suitability before selling him the variable annuity. - The aggressive growth portfolio is not suitable because the client will retire in a year. Because of the client's potential retirement needs, the aggressive growth portfolio would not be suitable for a substantial portion of his funds. His profile should be updated before making any recommendation.

Which of the following statements regarding corporate zero-coupon bonds are TRUE?

- The discount is in lieu of periodic interest payments. - The discount is taxed annually as phantom income. The investor in a corporate zero-coupon bond receives the return in the form of growth of the principal amount over the bond's life. The bond is purchased at a deep discount and redeemed at par at maturity. The discount from par represents the interest that will be earned at the maturity date. However, the discount is accreted annually and the investor pays income taxes yearly on the imputed interest.

FINRA Rule 2330 dealing with members' responsibilities regarding variable annuities applies under which of the following circumstances:

- The initial purchase of a deferred variable annuity. - The initial sub-account allocations. This rule applies to recommended purchases and exchanges of deferred (NOT immediate) variable annuities and recommended initial sub-account allocations. On the other hand, this rule does not apply to reallocations among sub-accounts made or to funds paid after the initial purchase or exchange of a deferred variable annuity.

A FINRA member broker/dealer has adopted a policy that allows registered representatives to borrow money from and lend money to customers.Which of the following would comply with FINRA rules?

- The representative is borrowing from a bank who is a customer. - The loan is made to a family member. - The representative is borrowing from a customer with whom there is a pre-existing personal relationship. - The representative is lending to a customer with whom there is a pre-existing business relationship. FINRA rules permit registered representatives to borrow money from or lend money to customers if a policy has been adopted and certain conditions are met. Each of these choices would be an acceptable condition. Please note that in the case of loans involving family members or banks, written notice and firm permission are not required - in all other cases they are.

A registered representative may arrange the purchase of an interest in a privately offered stock for a friend, for which she will receive no direct or indirect compensation, if the representative:

- gives written notification to her broker/dealer before the transaction. - provides all documents and information requested by her broker/dealer. In a private securities transaction where there is no direct or indirect compensation to the registered representative, only written notification to the broker/dealer is required before the transaction. The employer may require certain documentation, and if requested, it must be furnished. Permission is only necessary when there is to be compensation. Reference: 5.3.2.1.1 in the License Exam Manual.

Under the 1940 Investment Company Act, an investment company may take all of the following forms EXCEPT a(n):

- limited partnership with partners as passive investors. An investment company is not a limited partnership. Investment companies are organized as open-end companies (mutual funds), closed-end companies, unit investment trusts, or face-amount certificate companies.

Separate accounts are similar to mutual funds in that both:

- may have diversified portfolios of common stock. - give investors voting rights. Separate accounts and mutual funds both contain a diversified portfolio of securities and provide voting rights for changes in investment policy and management elections.

Investment company-directed brokerage arrangements are applicable to

- members favoring sales of investment company shares. - member execution of investment company portfolio transactions. The rules prohibit member firms from favoring the sale of shares of any investment company on the basis of brokerage commissions received or expected.

Upon making an acceptable offer of settlement to the Department of Enforcement, a FINRA member firm gives up its right to appeal the decision to:

- the National Adjudicatory Council or the SEC. - the U.S. appellate courts. An offer of settlement is the broker/dealer's choice. Once the Department of Enforcement accepts the offer, the member may not appeal to the National Adjudicatory Council, the SEC, or the U.S. appellate court system. There would be no appeal to the NAIC or the state courts in any event.

Your manager is reviewing the activity in your customer accounts to detect trading irregularities. If he is looking for churning, among the things he will look at are:

- the financial resources of the account. - the objectives of the account. Inspecting an account for churning focuses primarily on comparing account activity to the account's financial resources and objectives. The number of winning versus losing trades does not influence a determination that excessive trading has taken place.

If a customer is concerned about interest rate risk, which of the following securities is least appropriate?

25-year municipal bonds. Interest rate risk is the danger that interest rates will rise and adversely affect a bond's price. This risk is greatest for long-term bonds; short-term debt securities are affected the least if interest rates change.

To be in compliance with the Investment Company Act of 1940, every registered investment company must report to shareholders no less frequently than every:

6 months Investment companies must report to customers on the state of the company at least twice a year with one audited annual report and one unaudited semiannual report.

Your customer would like to make provision for his retirement. He has a number of expenses that will persist for many years and would like to be assured that there will always be enough income to meet them. He would also like protection from inflation. Which of the following contracts should you recommend?

A combination annuity. Upon annuitization, a combination annuity has the advantage of providing both a fixed monthly payout (which would apply to the investor's fixed expenses) and a variable payout (which would provide inflation protection).