Closed book exam 4, Series 6
Which of the following BEST describes a Keogh plan? It is a retirement fund It is a tax-deferred trust It is a tax-free trust It is a nonqualified plan I and II only I and III only I, II, and III only I, II, and IV only
A A Keogh plan is a qualified retirement fund where money accrues on a tax-deferred basis. The investments in the plan are held by a trustee until withdrawn. Once withdrawn, funds are taxed at ordinary income rates.
Which of the following statements is TRUE regarding trustee-to-trustee IRA transfers? There is no limit to the number of transfers per year Transfers must be completed within 60 days Transfers are the same as IRA rollovers There may be a penalty tax on the transfer
A A transfer of funds from one IRA trustee to another is not considered to be a distribution or a rollover. There is neither a limit to the number of transfers, nor are there any taxes or penalties. This differs from a distribution from a retirement plan. The distribution must be rolled over into another qualified plan, within 60 days of receiving the money, in order to avoid taxes and penalties. Rollovers may only be done once each year.
When a customer buys securities and fails to pay for them within two business days following settlement, the first thing the brokerage firm will do is: Sell out the securities purchased Freeze the account for 90 days Notify the SEC Notify the NYSE and FINRA
A If a customer does not pay for securities by the Reg T payment date, the first thing the brokerage firm will do is to sell out the securities purchased. After the securities are sold out, the account must be frozen for 90 days.
A prospectus for an investment company would indicate which of the following? The fund's policies concerning bank loans The current NAV of the fund The ten largest independent shareholders of the fund A current list of the fund's portfolio
A In order to obtain a relatively current list of the fund's portfolio investors would have to review the investment company's semiannual report. Names of a fund's shareholders are not disclosed to the general public. The NAV is generally found either in a newspaper or on the Internet. 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.
A client requests the transfer of an account which includes mutual funds that the receiving firm does not maintain a signed selling agreement. Which of the following is NOT TRUE regarding the transfer of the mutual funds? The funds can be transferred with approval of the receiving firm The funds cannot be transferred The funds can be liquated and the proceeds transferred to the receiving firm The funds can be retained in an account maintained by the carrying firm
A Mutual funds cannot be transferred to a firm that does not maintain a signed selling agreement with the fund company. In the event a client wants to transfer an account which includes these assets, the carrying firm (the firm from whom the account is being transferred) can liquidate the mutual funds and transfer the monies to the receiving firm, or the funds can be retained in an account held at the carrying firm.
A conservative investor has a long-term time horizon. He wants an investment that will provide him with long-term capital appreciation, and will not be too volatile. Which of the following funds would be the MOST suitable for him? A value fund A growth fund A fund of funds An emerging markets fund
A Of the choices given, a value fund would be the best option for the investor. As with a growth fund, the main objective of a value fund is long-term capital appreciation. Value funds are usually considered less volatile than growth funds, since they invest in companies that are priced low in relation to their earnings. They also tend to invest in more mature companies that are more likely to pay regular dividends than pure growth funds. Both a fund of funds, choice (c), and an emerging markets fund, choice (d), would be too risky for him.
Selling away is the term used to describe transactions outside a broker-dealer's regular scope of business that do not conform to specific disclosures. First, the representative must provide written notice to his employer regarding the transactions. Second, if the representative is to be compensated, the employer must approve the transactions in writing. And third, even if the representative is not going to be compensated, the employer can require the representative to adhere to specific conditions in order to participate in the transactions.
A Partial surrenders of life insurance policies are treated as principal first and are not taxable up to the amount of basis, which is typically the net premiums paid.
Once a complaint has been issued to an RR, how many days doe the RR have to respond to a FINRA second notice? 14 days 25 days 30 days 60 days
A The RR has 14 days to respond to FINRA's second notice. Failing to respond to the second notice within 14 days may be treated as the respondent's admission to the allegations in the complaint.
A client has a variable annuity with an assumed interest rate of 4%. The client received a first benefit check of $110. The separate account rate of return between the first and second month was 10%. 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? 4% More than 4% but less than 10% 10% More than 10%
A 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 $110. In the subsequent payment period, the separate account experienced a growth rate of 10% which yielded a payment of $125. As you can see, since the actual growth rate of the separate account (10%) was greater than the AIR (4%), 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 must be 4%.
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? 5% More than 5% but less than 8% 8% More than 8%
A 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%.
Which of the following is TRUE regarding a call option? The owner has the right to buy stock The owner has the right to sell stock The owner has an obligation to buy stock The owner has an obligation to sell stock
A The owner of a call option has the right to buy stock (call stock) at the exercise price until the option expires. The owner pays a premium to the writer to obtain this option and has limited risk with the potential for unlimited profit. The risk is the possibility of losing the entire premium (cost of the option). Furthermore, the owner of the call option is not an equity owner of the stock unless the option is exercised.
Smitty's Brokerage is a dealer for the Median family of mutual funds. When Smitty's receives an order from a customer for shares of a Median fund, the order would generally be transmitted to: The fund's principal underwriter The fund's portfolio manager The fund's custodian bank Nasdaq
A The principal underwriter of a mutual fund is the broker-dealer responsible for purchasing shares of the fund at the NAV and distributing them to public customers through the broker-dealers that have a signed a dealer agreement with the fund. The underwriter earns a portion of the sales charge, with the remainder kept by the dealer. The principal underwriter is also known as the sponsor, distributor, or wholesaler.
The right of accumulation includes the: Right to add up the total of all past and present purchases when determining sales charges Right to accumulate commissions until retirement Amount of deferred income to which a retiring executive is entitled Right to switch from one fund to another without incurring additional sales charges
A 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.
Alan is the custodian for a Uniform Transfer to Minors Act account for his niece Betty. Betty has just reached the age of majority as defined by her state of residence. Which of the following statements is TRUE under UTMA? Alan may continue to manage the account as custodian if he believes Betty is not capable of doing so Alan may continue to manage the account as custodian if Betty requests that he do so Alan must sell the securities in the account and turn the proceeds over to Betty Alan should arrange to have the securities transferred into Betty's name
A Under UTMA, when the minor reaches the age of majority, the custodian may transfer the account to the individual. However, UTMA rules allow the custodian to continue managing the account—in some states as late as age 25. UGMA rules dictate the transfer of assets be made at the age of majority.
Of the following factors, which would be the most important to consider when analyzing a client's investment portfolio who has retirement as her primary investment objective? Age Net worth Education level Previous investment history
A When analyzing a client's existing portfolio to determine how it affects recommendations you might make, it is important to consider a client's investment objectives and the length of time available to try to meet those objectives. When retirement is the primary objective, it is very important to know the client's age. The other items mentioned are also valuable for an RR to know, but they are not as critical as knowing the client's age.
Which of the following individuals MUST sign the new account form when a partnership account is opened? All of the partners Only the partners authorized to execute trades in the account The registered representative executing trades in the account The trustee acting on behalf of the partnership
A When opening an account for a partnership, all partners must sign the new account form. The registered representative handling the account is not required to sign and a trustee is not representing the partnership.
Which of the following is TRUE for securities held in street name in an UTMA? The broker-dealer is the nominal owner The broker-dealer is the beneficial owner The customer is the nominal owner The customer is the nominal owner and the beneficial owner
A When securities are held in street name, the broker-dealer is the nominal owner (in name only) and the customer is the beneficial owner. The customer retains all rights to the securities.
You discover that one of your clients is on the OFAC list. You must: Contact federal law enforcement authorities immediately Call the client to see if a mistake has been made Investigate the matter further to see if there is any evidence of suspicious activity Notify FINRA
A You must contact the federal law enforcement authorities immediately if you discover that a client is on the list of suspicious persons and entities maintained by the Office of Foreign Assets Control (OFAC). You must also freeze the account and block any further transactions.
An investment company that diversifies its portfolio with stocks, bonds, and money-market instruments, but will always hold some of each, is called: Equity Income fund Balanced fund Growth fund Asset allocation fund
B A balanced fund invests its portfolio among a variety of investment classes, such as equities, bonds, and cash—money-market investments. The fund manager might change the allocation based on market conditions, but they must always keep some of each.
An order for execution in which the client only indicates the desire to buy or sell, the quantity, and the name of the company is called a: Stop order Market order Stop limit order Limit order
B A client who specifies the action, the amount, and the asset, but does not provide direction regarding the timing or the price of execution, is called a market order.
An investor purchases a face-amount certificate on a periodic payment basis. The certificate is scheduled to mature in ten years. After the fifth year, the investor stops making payments. Which of the following statements is TRUE? The certificate lapses and the investor loses all payments made to this point The investor may redeem the certificate for its current cash value less any surrender charges or receive a paid-up certificate for a smaller face amount The investor is not entitled to cash, but may receive a paid-up certificate for a smaller face amount The investor must wait until the original maturity to redeem the certificate
B A face-amount certificate matures on a set date, at its face value. The cash value of the certificate builds up according to a specific schedule. An investor who stops making payments on a periodic payment certificate may redeem the certificate for the current cash value, less certain surrender charges. The investor may also elect, prior to maturity, to receive a paid-up certificate rather than the current cash value.
William has recently retired at age 64. He is receiving a large lump-sum retirement payout from his former employer. While he is receiving a large distribution, he has very few savings. Which of the following would be an appropriate allocation of William's lump sum in an investment portfolio if his primary interest is income and his secondary interest is growth for inflation protection? 100% cash 80% bonds, 10% equities, 10% cash 90% cash, 5% equities, 5% bonds 25% cash, 75% equities
B A portfolio that consists of 75% equities, choice (d), is too volatile for a 64-year-old retiree. However, increased life expectancies have made some exposure to equities justifiable for such investors. Since equities provide much more inflation protection than bonds or cash (money-market investments), a small portion in stocks would generally be suitable. The investor has no savings to speak of and a portion of his payout should go into money markets or cash equivalents. The investor's primary goal is interest, so a majority should go into bonds, making choice (b) the most appropriate allocation.
Common and preferred stock are similar in that: Both have a fixed dividend The dividends for both must be declared by the board of directors Both are guaranteed to receive an annual dividend Both have an equal vote on corporate issues
B Dividends for both common and preferred stock must be declared by the board of directors. While preferred stock normally has a fixed dividend, neither common nor preferred stock are guaranteed a dividend.
A corporation that has issued common or preferred stock has created: Debt obligations Outstanding equity A current tax liability A leveraged position
B Holders of common and preferred stock are considered to have equity (ownership) in a corporation. Bonds represent debt owed by the corporation. Issuers with a large amount of bonds outstanding would be in a leveraged position.
Two individuals hold $100,000 in assets in a JTWROS account. Each party's ownership in the account may be described as: Equal and divided Equal and undivided Unequal and divided Unequal and undivided
B In a JTWROS account, each holder's interest is equal and undivided. Each position in the account is owned by both persons.
Shares of a mutual fund may acquire loan value after being held in a cash account for a minimum of: 10 days 30 days 6 months Never, because mutual funds are not marginable
B Investors who purchase mutual fund shares from a dealer must do so in a cash account. However, once the shares have been held in a cash account for 30 days, they may then be used as collateral to purchase shares in a margin account.
Which of the following issues mortgage-backed securities that are fully guaranteed by the U.S. government? Federal National Mortgage Association Government National Mortgage Association Federal Home Loan Mortgage Corporation Collateralized Mortgage Obligations
B Of the choices given, only GNMAs are fully guaranteed as to principal and interest.
When is the Regulatory Element of Continuing Education required to be completed by a registered representative? On the second anniversary of initial registration On the third anniversary of initial registration Every two years thereafter Every three years thereafter I and III only I and IV only II and III only II and IV only
B Registered representatives are required to participate in Regulatory Element training on the second anniversary of their initial registration, and every three years thereafter.
In the event a customer is transferring her account to another firm, which of the following would MOST LIKELY be a transferable asset? A mutual fund Stock listed on Nasdaq A limited partnership interest Stock from a bankrupt issuer
B Stock listed on Nasdaq is the most likely to be transferable. A mutual fund may not be transferable if the receiving firm does not have a signed selling agreement with the fund company. Limited partnership interests are usually not transferable and stock from a bankrupt issuer may no longer have a transfer agent who can reregister the shares.
According to the SEC, the minimum period of time that may be used to calculate the yield on a mutual fund to be used in an advertisment, is: 7 days 30 days 365 days None of the above because the SEC does not permit yield based advertising
B The SEC permits yield based advertising. For mutual funds, a standardized SEC 30-day yield must be employed. For money-market mutual funds, a 7-day time frame is used.
When liquidating a corporation's assets, in which order are claims satisfied? Secured bondholders, preferred stockholders, common stockholders, general creditors Secured bondholders, general creditors, preferred stockholders, common stockholders General creditors, secured bondholders, common stockholders, preferred stockholders Common stockholders, preferred stockholders, secured bondholders, general creditors
B The order in which claims are satisfied when liquidating a corporation's assets is: Secured bondholders General creditors Preferred stockholders Common stockholders
The investment risk on the cash value accumulation in a universal variable life policy is assumed by the: Insurance company Investor Investment adviser Sponsor
B 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.
A mutual fund has a bid price of $13.00 and an offer price of $14.20. The sales charge, when computed as a percentage of the offering price, is approximately: 8.1% 8.5% 8.7% 9.1%
B The sales charge, in this example, is $1.20 which is found by subtracting the bid price of $13 from the offer price of $14.20. To find the sales charge percentage, divide the sales charge of $1.20 by the offer price of $14.20, which comes to approximately 8.5% ($1.20 divided by $14.20 = 8.5%).
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? A fund with a low expense ratio A fund with a low turnover ratio A fund that invests in municipal securities A fund that invests in dividend paying securities
B 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. This eliminates choice (d) as a possible answer. 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.
Which of the following is an acceptable practice by a registered representative, according to FINRA's Conduct Rules? Sending a form letter to potential customers stating FINRA's approval of the RR's actions Sending a cover letter with a business card enclosed to potential customers Sending a form letter to potential customers recommending four mutual funds for purchase None of the above
B There is no rule against sending a business card to potential customers if the business card does not mislead or confuse the relationship between the representative and FINRA. FINRA does not approve an individual's actions. Recommendations are not permitted without knowing the financial needs and objectives of the party to whom the recommendation is being directed.
Confirmation statements must contain all of the following, EXCEPT the: Date of the transaction Date order was entered Date of settlement Name of the opposite party involved in the transaction
B Transaction dates, settlement dates, and the name of the contra-party must be either disclosed or in regards to the contra-party, offered to be disclosed on the confirmation. The date of order entry is not required to be disclosed on the confirmation statement, but is entered on the order ticket.
Which of the following would NOT be considered management companies, as defined by the Investment Company Act of 1940? Open-end companies Closed-end companies Unit investment trusts Nondiversified companies
C According to the Investment Company Act of 1940, a management company is classified as an investment company. A management company may be diversified or nondiversified, and open-end or closed-end. Other types of investment companies defined by the Act are face-amount certificate companies and unit investment trusts.
If a bond fund referred to its holdings as moderately speculative and low-grade, the fund would NOT be suitable for: Those investors seeking income with limited credit risk Investors wanting to park their funds prior to making a more permanent investment An aggressive fixed-income investor with a high risk profile Someone willing to ride out changes in interest rates who understands the volatility inherent in high yielding securities III only I and II only I and III only III and IV only
BBond funds with moderately speculative and low-grade holdings carry significant credit risk, i.e., the risk of default. The return on those funds should be higher than the return on high-quality corporate bond funds or government bond funds to compensate for such risk, but these funds are extremely volatile. Speculative funds are not suitable for investors seeking to park their funds in a safe place because of the risk that the investment will have lost value when they need to sell it.
Which of the following clauses would NOT be included in a letter of intent? The maximum time limit for the letter of intent is 13 months The letter of intent may be backdated for up to 90 days The fund may stop redemptions during the duration of the letter of intent The fund may place some of the initially purchased shares in an escrow account to ensure fulfillment of the letter of intent
C 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.
All of the following must be included in a preliminary prospectus according to the Securities Act of 1933, EXCEPT: A written statement on the left border of the preliminary prospectus (red herring) that states that the prospectus may be subject to changes The purpose for which the funds are being raised The final offering price The financial status and history of the company
C A preliminary prospectus (red herring) is issued to obtain indications of interest on a prospective new issue of securities. This document will have a written statement on it that states that the prospectus may be subject to change. This statement will be on the left border of the cover page. The red herring will state the purpose for which the funds are being raised as well as the financial history of the issuing company. The item that will not appear is the final offering price. Only a price range is provided.
An insurance company that offers variable life insurance products has offered to provide representatives of RST, a FINRA broker-dealer, with software for their laptop computers. The software can create hypothetical illustrations of policy returns under various interest-rate scenarios. When using this software, the registered representatives would be subject to all of the following guidelines, EXCEPT: The presentation must contain an explanation that a hypothetical illustration is not a projection or prediction of performance One of the illustrations shown to the prospective client must assume a 0% gross rate of return One of the illustrations shown to the prospective client must assume a 12% gross rate of return The returns in the illustration must reflect the maximum mortality and expense charges
C A variable life insurance illustration may use any combination of assumed investment returns up to and including a gross rate of 12%, provided that one of the returns is a 0% gross rate. Even though illustrations may use a 12% rate, members should be sure that this is reasonable given market conditions and available investments. Under some market conditions and for some investment options, a 12% return might not be a reasonable scenario. The returns in the illustration must reflect the maximum mortality and expense charges, although current charges may also be illustrated in addition to the maximums. The illustration must include an explanation that it is hypothetical and does not project or predict actual results.
A father is acting as a custodian for his son under the Uniform Gifts to Minors Act. The father is not involved in the investment business and would like to have a friend who is a financial adviser make investment decisions in the account. Which of the following statements is TRUE? The father can only grant discretionary authority to another family member The father cannot grant discretionary authority to any person The father can grant discretionary authority to any capable person The father can only grant discretionary authority to a registered representative
C According to the UPIA, the custodian can grant discretionary authority to any capable person of legal age.
A bond has a 6% coupon and is trading at a 5.78% basis. The bond is trading at which of the following price levels? Par A discount A premium 105 7/8
C Basis (or yield basis) is a different method of expressing yield to maturity. In this case, the yield to maturity is lower than the coupon rate. The only time a client's yield to maturity is below the coupon is when the bond has been purchased at a price greater than par (higher price means lower yield). Therefore, the bond must be trading at a premium.
Which of the following statements are TRUE of a bond selling above par? The current yield is lower than the nominal yield The nominal yield is less than the current yield The yield to maturity is lower than the nominal yield The nominal yield always remains fixed I and III only I and IV only I, III, and IV only II, III, and IV only
C Bond prices and yields have an inverse (opposite) relationship; as a bond's price increases, its yield decreases. Conversely, as prices decrease, yields increase. When a bond is selling above its par value, both the current yield and yield to maturity are below the nominal yield. The nominal yield is printed on the face of the bond and always remains fixed.
Bond issues with staggered maturity dates are known as: Adjustment bonds Sinking fund bonds Serial bonds Purchase money bonds
C Bonds with staggered maturity dates are known as serial bonds. The principal amount outstanding is reduced over time. Term bonds mature on one single maturity date.
Which of the following statements concerning an email sent by a registered representative to a client is the MOST accurate? The email must be reviewed by a principal prior to being sent The email must be reviewed by a principal prior to the end of the day The email communication may be subject to a random sampling or spot-checks The email must use wording that has been preapproved by the firm's chief compliance officer (CCO) and sent to FINRA's Electronic Communications Committee (FECC) for review
C FINRA categorizes communications as either correspondence, retail communication, or institutional communication. Correspondence is defined as written or electronic messages (i.e., email) sent by a member firm to 25 or fewer retail investors within any 30-calendar-day period. The 25 or fewer investors may be any type of client—existing or prospective. Communications sent to more than 25 retail investors is considered retail communication. Correspondence and institutional communications must be supervised and monitored by the member firm, but are not required to be approved by a principal prior to use. FINRA permits firms to develop their own compliance procedures regarding correspondence that may include a random sampling or spot checks. FECC is fictitious.
A registered representative received a written complaint from a customer. The RR immediately gave the complaint to the branch manager. Which of the following statements is TRUE? The RR did not have to give the complaint to the branch manager unless it contained an allegation that the customer lost money as a result of a recommendation by the RR The branch manager must immediately send a copy of the complaint to the FINRA Arbitration Department, which will decide if an arbitration hearing is necessary The branch manager must keep a copy of the complaint in a separate complaint file, along with a record of action taken on the complaint, if any The RR should not have given the complaint to the manager until the client was contacted and an attempt was made to rectify the complaint
C FINRA member firms must keep, either (1) a separate file of all written complaints of customers and action taken by the member, if any, or (2) a separate record of each complaint and a clear reference to the files containing the correspondence connected with the complaint.
An RR receives a letter from a client complaining about the performance of a mutual fund that the RR's firm has recommended. The RR should: Send a copy to the mutual fund, since it is really a complaint about the fund Return the letter to the customer with the statement that the customer must provide written evidence to support the grievance Forward the complaint to a supervisor, who must place a copy in the complaint file Attempt to satisfy the customer before taking any other action
C FINRA rules require customer complaints to be given to a principal. The firm is then required to keep a copy in a complaint file.
How often must a member firm provide a customer with FINRA's Web site address? Not at all Once, when the account is opened Annually With each confirmation
C FINRA's Investor Education and Protection Rule requires firms to notify customers in writing at least once per year as to how to access BrokerCheck® as well as providing FINRA's Web site address.
The day of settlement for a U.S. Treasury security is: 3 business days after the trade date 3 calendar days after the trade date 1 business day after the trade date The same day as the trade was executed
C For trades involving U.S. Treasury securities, settlement is one business day after the trade date (T + 1).
Joe Hopkins, a college student, earned $1,447 while employed part-time at the campus bookstore. He also earned $500 as a waiter at Shake 'N Bake, a campus restaurant, and received $700 in interest income from his trust account. Based upon his income, what is the maximum contribution he could make to an IRA? $500 $1,200 $1,947 $2,647
C IRA contributions are based on earned compensation. Mr. Hopkins' combined earned compensation from the bookstore and restaurant is $1,947 ($1,447 + $500). The interest income may not be counted as earned income. In order to make the maximum $5,500 contribution to an Individual Retirement Account, an individual must have earned income of at least $5,500.
All of the following statements made to a customer would be a violation of SEC rules, EXCEPT: "B shares become no-loads if held long enough" "SIPC is like FDIC" "Stocks have historically shown superior returns over long time periods when compared to bonds" "My Series 6 credentials qualify me as an investment expert"
C The only statement that would not be in violation of SEC rules is that "stocks have historically shown superior returns over long time periods when compared to bonds". Make note that this question is looking for the EXCEPTION—what is not a violation of the rules.
A mutual fund wholesaler has given an RR a piece of preapproved sales literature. What course of action on the part of the RR is acceptable? The item must be filed with FINRA and approved by a principal prior to distribution The item must be filed with the SEC and approved by a principal prior to distribution The item must be approved by a principal prior to distribution The item may be sent out since it has already been vetted through the fund's compliance officer's policies and procedures
C If sales literature (retail communication) has been pre-approved and filed with FINRA, the piece does not need to be filed again with FINRA. However, it would still need to be approved by a principal at the firm where the RR works, before being distributed.
Which TWO of the following statements are TRUE regarding the cash value in a variable universal life policy? It is fixed during the life of the contract It can fluctuate with the performance of the separate account Any loans taken will reduce the cash value Loans have no effect on the cash value I and III I and IV II and III II and IV
C In a variable universal life policy, the performance of the separate account could increase or decrease the cash value. Loans against the policy would reduce the cash value available.
Which of the following statements is TRUE regarding the disclosure of back-end sales charges to customers? A statement in the prospectus is sufficient As long as the back-end charges are clearly disclosed, the fund may be represented as no load A confirmation should be sent disclosing that a sales charge may have to be paid upon redemption Disclosure is required in addition to that in the prospectus only if the broker-dealer and mutual fund are affiliated through common ownership
C In addition to the disclosure in the prospectus, a confirmation sent by a member firm selling a fund with a back-end load (CDSC) must include a statement that a sales charge may be assessed upon redemption.
A registered representative has a current client who is the CEO of a small corporation. The client now wishes to open an account in the name of the corporation. Which of the following statements is TRUE? The RR may open an account in the normal fashion since the client is an existing customer The RR may open an account in the normal fashion since the client is the corporation's CEO The RR may not open the account unless the client provides a corporate resolution authorizing the representative to do so The RR may not open an account in the name of a corporation; the account must be opened only in the name of an individual
C 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 RR who trades with the knowledge of a client's pending order, is said to be: Ghosting Painting the tape Front-running Backing away
C RRs may not use knowledge of client orders in order to personally profit. When doing so the RR is said to be front-running.
The Securities Investor Protection Corporation (SIPC) insures all of the following accounts, EXCEPT: Corporate accounts Joint accounts Commodities accounts Margin accounts
C SIPC insures all of the accounts listed except commodities accounts. Commodities are not securities and therefore are excluded from SIPC coverage.
What is the maximum coverage afforded to an investor under SIPC? $500,000 per account $250,000 per account $500,000 per separate customer of which $250,000 may be cash $500,000 per separate customer and $250,000 in cash
C SIPC protects customers in the case of a brokerage firm's bankruptcy. The maximum coverage afforded to an investor under SIPC is $500,000 per separate customer of which $250,000 may be for cash.
What would be the result if there is a substantial decrease in the federal income tax rates? The economy would slow down as people save more, and municipal bonds would become less popular The economy would slow down as the government would have fewer dollars to spend, and municipal bonds would become less popular The economy would accelerate as people spend more, and municipal bonds would become less popular The economy would accelerate as people spend more, and municipal bonds would become more popular as people have excess cash to invest
C Should the federal tax rates be reduced, investors would have more disposable income which may increase spending. With lower tax rates, investments in municipal bonds would be less attractive.
Which of the following statements concerning a TSA is TRUE? It grows tax-free It is not subject to contribution limits It has a zero cost basis It may provide for tax-free distributions
C Tax-sheltered annuities (TSAs) are employer sponsored plans that are available to employees of certain non-profit organizations and public education institutions. TSAs offer tax-deferred growth and are subject to the same contribution limits that apply to 401(k) plans. Since TSAs are funded on a pre-tax basis with contributions coming directly out of an employee's paycheck, they have a zero cost basis. In other words, at the time of distribution, every dollar removed is taxable as ordinary income.
A customer invested $10,000 in common stocks. The investment has increased in value to $15,000. During this period, the Consumer Price Index increased from 100 to 125 . Which of the following statements is TRUE regarding the purchasing power of the dollars invested? The purchasing power is $15,000 The purchasing power is more than $15,000 The purchasing power is between $10,000 and $15,000 The purchasing power is under $10,000
C The Consumer Price Index (CPI) measures the purchasing power of the dollar as prices change in the marketplace. As the CPI increases, the purchasing power of the dollar decreases. In this question, a customer's initial investment of $10,000 has grown to $15,000. However, the purchasing power of these dollars has not increased by $5,000. Even though the investment increased by $5,000, the actual worth of these dollars is lower than $15,000 because prices have risen, as evidenced by the CPI. The purchasing power of the investment would be between $10,000 and $15,000.
A registered representative is taking over the business of another RR who is leaving the firm. Upon examining the accounts, the RR notices that many of the clients who own variable annuities have high expenses, mediocre performance, and few investment options. The RR decides that her first action will be to recommend that these customers redeem the old annuities and invest in the new Platinum One variable annuity that has substantially lower expenses, higher long-term performance, and many more subaccounts with varying investment strategies. This activity is: Known as churning and is strictly prohibited Called switching and is permitted only in those accounts that will not incur a deferred sales charge Potentially acceptable if the benefits of the new annuity outweigh the possible taxes and additional sales charges the client might incur Only permitted if the customer signs a switch waiver form
C The practice of recommending that a client redeem one annuity (or mutual fund) and invest the proceeds in another annuity (or fund) is called switching. When redeeming the first annuity, the investor might incur deferred sales charges and a tax liability. (The tax liability can be avoided if the switch is eligible to be treated as a Section 1035 exchange.) The reinvestment in another annuity might also involve sales charges or might subject the investor to an additional period when surrender charges could be imposed on redemptions. These disadvantages mean that switching is frowned on by regulators, who suspect the RR involved is often motivated by the prospect of additional commissions rather than the client's best interests. However, when the new annuity is clearly superior to the old product, the additional benefits might outweigh the disadvantages.
Waterford Investments has open-end and closed-end mutual funds among its family of funds. In addition, they also offer variable and fixed annuity contracts through an insurance affiliate. An agent of Waterford with a Series 6 registration and an insurance license, may: Sell closed-end funds offered by Waterford in the secondary market Sell closed-end funds offered by Waterford in the primary market Sell variable annuity contracts offered by Waterford Sell fixed annuity contracts offered by Waterford I and III only II and III only II, III, and IV only I, II, III, and IV
C The securities that may be sold by an individual with a Series 6 registration include variable annuity contracts and the initial public offering of closed-end funds (primary market). Those with an insurance license are able to sell fixed annuities. If an agent wanted to sell closed-end funds in the secondary market she would need additional FINRA registration, i.e., Series 7 or Series 62.
At the beginning of the year, ABC Fund, an open-end investment company, had net assets of $47,000,000. During the year, there was $500,000 of realized appreciation and $2,500,000 of unrealized appreciation. The fund received dividends totaling $850,000. During the same year, the fund made a capital gains distribution of $500,000 and distributed $850,000 in dividends to the shareholders. What are the net assets of the fund at the end of the year? $47,000,000 $48,350,000 $49,500,000 $50,850,000
C To compute the net assets of the fund at the end of the year, you need to know the net assets at the beginning of the year, any investment income or capital gains not paid out to the shareholders during the year, and any unrealized appreciation of the fund's assets during the year. You are told in the question that all realized capital gains and investment income were paid out to the shareholders. By adding the net assets at the beginning of the year ($47,000,000) and the unrealized appreciation ($2,500,000), the net assets of the fund at the end of the year are $49,500,000.
A customer makes an initial $3,000 contribution into a variable annuity with his application, but decides five days later that he does not want the investment. The client surrenders the annuity. Under FINRA rules, the member firm must: Return the full amount of the initial payment to the client Return any commissions it earned to the client within seven business days Return any commissions it earned to the insurance company within seven business days Obtain a signed statement from the customer that he understands he will lose part of his investment
C Under FINRA's Conduct Rules, dealer agreements must include a provision stating that commissions on variable products are to be returned by the broker-dealer to the insurance company if the variable contract is tendered for redemption within seven business days after the application is accepted. Some variable contracts may contain a free-look provision, but these clauses are typically included because of state insurance laws, not because they are mandated by FINRA.
According to the SEC's Regulation SP, a privacy notice must be sent: Only when the account is being opened When the account is being opened and semiannually thereafter When the account is being opened and annually thereafter Only if securities other than mutual funds are being purchased in the account
C Under SEC Regulation SP, a privacy notice must be sent at the time the account is being opened and an updated version annually thereafter.
Which of the following would NOT be an advantage of reinvesting dividends in a mutual fund? Reinvesting compounds the growth individual's investment Reinvesting is generally done at NAV Reinvesting is done on a before tax basis Reinvesting increases the cost basis of the overall investment
C Unless the mutual fund is inside a qualified plan, all reinvested distributions are after tax. The amount of distributions is reported on Form 1099 and would be included as taxable on the investor's tax return for that year. Since the dividends are reinvested, the growth in the investment is compounded and the overall cost basis increases.
A customer receives a confirmation for a securities transaction and it discloses that the broker-dealer acted in the capacity of a dealer. This means that the firm acted as a(n): Agent Intermediary Principal Broker
C When a brokerage firm is serving as a broker, it acts as an agent for its customer, but does not assumes risk in the transaction. On the other hand, when a brokerage firm acts in the capacity of a dealer, it is considered a principal in the trade. In doing so, the firm is buying and selling for its own account and assuming its own risk. A broker-dealer is able to choose the capacity in which it acts in a transaction, but it cannot act as both a broker and a dealer in the same transaction.
A corporation has filed for bankruptcy. Which of the following securities issued by that corporation has seniority in the liquidation process? Common stock Debentures Equipment Trust Certificate Participating preferred stock
C When a corporation is liquidated, its assets are sold and the proceeds are distributed. Secured creditors are paid first (i.e., equipment trust certificate holders), then unsecured creditors (debenture holders), then preferred stockholders, and last, the common stockholders. This would make Equipment Trust Certificates the senior security of those listed.
A registered representative is opening a cash account for a customer. According to FINRA rules the RR is not required to obtain: Whether the client is of legal age The signature of the principal approving the account The signature of the customer The client's residence address
C When opening a cash account, FINRA requires the customer's name and residence address, whether the customer is a of legal age, the name or names of registered representatives servicing the account and the signature of the principal approving the account. FINRA does not require the customer's signature, nor does it require his or her Social Security number.
Which of the following is NOT required when opening an account for a partnership? Each partner's address Each partner's citizenship Each partner's discretionary approval Each partner's tax identification number
C When opening an account for a partnership, all partners must sign the new account form. In addition, each partner's address, citizenship and tax identification number is required. Discretionary permission is not required.
An individual worked for Worthington Corporation for 20 years and was covered under a qualified pension plan. During the accumulation period, the employer made all of the contributions. During the payout period, the pension plan participant will have to treat distributions as: Part return of capital and part ordinary income All capital gains All ordinary income Deferred income
C When the employer has made all of the contributions to an employee's pension plan, the employee has a zero cost basis and the entire payout is treated as ordinary income.
Which of the following would not be an acceptable reason for holding customer mail? Safety Traveling for an extended period of time Convenience Security
C With written instructions from a customer a firm is permitted to hold customer's mail. Acceptable reasons for holding mail would include safety, traveling for an extended period of time and security. Convenience would not be an acceptable reason.
All of the following would be found in a mutual fund prospectus, EXCEPT: The objectives of the fund The types of shares the fund issues A description of the management fee The current NAV of the fund
D A description of the management fee, share types and objectives would all be found in the prospectus. The fund's current NAV can be found in the daily financial press.
An investment contract that offers life insurance benefits plus participation in a portfolio of securities is called a: Variable annuity contract plan Closed-end investment company Mutual fund with plan completion life insurance Variable life insurance contract
D A variable life insurance contract offers life insurance benefits and participation in a separate portfolio of securities. A variable annuity offers a death benefit, but a death benefit is not considered life insurance.
Rights of accumulation allow an investor to pay a reduced sales charge based upon the aggregate quantity of securities purchased. According to FINRA Conduct Rules, this right must be made available for not less than: 90 days 13 months 2 years 10 years
D According to FINRA rules rights of accumulation must be available to investors for a period of not less than 10 years.
According to industry rules, for a mutual fund to charge a maximum sales charge of 8 1/2%, all of the following must be available to shareholders, EXCEPT: Dividend reinvestment at the NAV Rights of accumulation Quantity discounts Exchange rights
D According to industry rules, for a mutual fund to charge an 8 1/2% sales charge, all of the rights listed must be available to shareholders except the right to exchange one fund for another. This is called the exchange privilege. Most funds allow the customer to exchange one fund for another, at the net asset value (without a sales charge), providing both funds are under the same management company. It should be noted that the exchange is considered a sale for income-tax purposes and any profits must be reported to the IRS.
Two years ago, an investor purchased $500,000 of high quality corporate bonds. Soon after the purchase, the Federal Reserve adopted an easy money policy and reduced the discount rate by 2 1/2%. What effect does this action have on the investor's bond position? The value will fall and income will fall The value will fall and income will remain stable The value will rise and income will rise The value will rise and income will remain stable
D An easy monetary stance suggests that interest rates are falling. Ultimately, when rates fall, the prices of existing bonds rise. However, this will have no effect on the client's income since the amount of interest being paid on a bond is based on its face value and not its market price.
An investor may purchase a mutual fund from which of the following? The fund itself The sponsor of the mutual fund A broker-dealer with a signed selling agreement Any of the above
D An investor may purchase a mutual fund from the fund itself, the sponsor or distributor of the fund, or any broker-dealer with a signed selling agreement for the fund.
Account statements must be sent to a customer no less frequently than: Daily Weekly Monthly Quarterly
D Broker-dealers are required to send account statements at least quarterly, which contain a description of all the transactions that have occurred in a customer's account since the last statement.
Which of the following statements is TRUE regarding a 403(b) plan? Distributions from the plan will be taxed as long-term capital gains All distributions in excess of contributions will be taxable at ordinary income rates Only earnings will be taxed at ordinary income rates Distributions from the plan will be subject to taxation at ordinary income rates because of the zero-cost basis
D Contributions to a 403(b) plan are made on a pretax basis, resulting in a zero-cost basis. Therefore, all distributions are taxed as ordinary income.
Jessie has withdrawn funds from her client's variable universal life insurance contract, without the client's consent. She then fraudulently endorsed the check and deposited the funds into her parents' bank account to avoid detection. What prohibited activity has Jessie engaged in? Bait and switch A 1035 Transfer violation A Prepaid Fee Disbursement Disgorgement Conversion
D Conversion is a term used to describe an RR stealing from a client. If this (unfortunate) event were to happen, the client is protected by the firm's fidelity bond—not SIPC. Firms take out fidelity bonds on employees to protect themselves in the event of theft or embezzlement. If a client loss is involved, the firm may use the policy's proceeds to pay off the customer.
A FINRA registered broker-dealer intends to place an advertisement in a newspaper to solicit new hires. When placing the ad, which of the following statements is TRUE? The ad must state the firm's name and address The ad must state the firm's name, phone number, and address The ad must state the firm's name, phone number, and FINRA broker-dealer registration number The broker-dealer may use a blind ad that contains no information about the firm's identity
D FINRA's rules regarding the minimum information that a firm must place in its correspondence and retail communication (advertising) are very strict. An exception to this rule is when a broker-dealer places a recruitment ad. The recruiting firm is permitted to use a blind format in which a prospective job applicant may simply be given a P.O. box in order to contact the firm. If this process is used, there would be no way to identify the prospective employer.
All of the following investments are likely to be found in the portfolio of a money-market money fund, EXCEPT: Bank certificates of deposit Treasury bills Treasury bonds that have a short time to maturity Common stock
D For a money-market fund, the underlying securities are short-term debt securities. Therefore, common and preferred stock are not found in a money-market mutual fund's portfolio.
Jerry is planning to open an account at Grace Securities. Grace must furnish him with a privacy notice: Only if it plans to disclose any of Jerry's private information to nonaffiliated third parties Before Jerry enters his first order in the account By the end of the year in which the account is opened and annually thereafter At the time he opens the account
D Grace must furnish Jerry with a privacy notice at the time he opens the account. Jerry is establishing an ongoing relationship with Grace Securities by opening an account with them. Thus, he is considered a customer under Regulation SP and must receive a privacy notice at the time he opens the account (first establishes the ongoing relationship).
When opening a new account, a reasonable effort must be made to obtain the customer's: Residence address Age Name Social Security number
D In order to open a new account you are required to obtain a client's name, residence address and indication that he or she is of legal age as defined by the state. Of the choices, the Social Security number is not required, but a reasonable effort must be made to obtain it.
FINRA's Investor Education and Protection Rule requires firms to notify customers in writing at least once per year as to how to access BrokerCheck® as well as providing FINRA's Web site address.
D Selling away is the term used to describe transactions outside a broker-dealer's regular scope of business that do not conform to specific disclosures. First, the representative must provide written notice to his employer regarding the transactions. Second, if the representative is to be compensated, the employer must approve the transactions in writing. And third, even if the representative is not going to be compensated, the employer can require the representative to adhere to specific conditions in order to participate in the transactions.
David, a single parent, owns a variable annuity and has selected a life annuity with a 20-year period certain payout option. He has selected his son as his beneficiary. If David dies after receiving 22 years of payments: Future payments will be made to the beneficiary for 20 years Future payments will be made to the beneficiary for 2 years Future payments will be made to the beneficiary for his life No additional payments will be made
D Since David's death occurred two years after the end of the period certain, the insurance company is relieved of making additional payments to his beneficiary. Had David died after year 10, payments would have continued to his beneficiary for the remaining 10 years of the contract.
A mutual fund's SAI must be distributed: Monthly Semiannually Annually Upon request
D Statements of Additional Information (SAI), must be provided to any person who requests it. There is no specific time frame for distribution.
According to FINRA rules, all of the following are permissible settlement times, EXCEPT: T+1 T+3 Same day T+5
D T+5 is the payment date specified under Regulation T. All others are normal settlement times.
While looking through some old tax documents, Frank has come to the conclusion that Peter, his former college roommate and registered representative, defrauded him more than a decade ago. Which of the following actions may Frank pursue to remedy his situation? Pursue arbitration, since he had signed the predispute clause of his client agreement when opening the account Call FINRA and have Peter arrested Call the SEC and have Peter indicted Contact the local authorities to press charges
D The best answer is choice is (d). FINRA and the SEC do not have the power to arrest, indict or imprison people. Choice (a) is tempting. In fact, many client disputes with a broker-dealer are settled through the arbitration process. Frank may not use this venue since the alleged fraud took place more than 10 years ago. All infractions settled through arbitration have a statute of limitations of 6 years.
A prospect is looking for an investment that would offer exposure to the breadth of the market. Which of the following choices would be MOST likely to meet her goals? A UIT based on the Dow Jones Industrial Average An ETF that tracks the S&P 500 Index An index fund that mimics the Russell 2000 Index An index fund that mirrors the Wilshire 5000 Index
D The broadest measure of the market is the Wilshire 5000 Index, which actually includes about 6,500 companies. The securities that comprise this index include everything in the Dow Jones Industrial Average, the S&P 500, and the Russell 2000.
A customer buys a 6% bond at 102 7/8. The buyer will have to pay the seller of the bond: $1,000.00 $1,027.80 $1,027.80 + accrued interest $1,028.75 + accrued interest
D The buyer will have to pay 102 7/8 (102.875%) of the par value of $1,000, which is $1,028.75 plus accrued interest. All interest-bearing bonds (those that make regular coupon payments) trade with accrued interest (which the buyer must pay to the seller) unless the bonds are selling flat, which means without accrued interest.
Who sets the prime rate? The Federal Reserve's Interest Rate Outlook Committee (FRIROC) The World Bank The chairman of the Federal Reserve Each individual bank
D The prime rate is the interest rate individual banks charge their best clients. Each bank sets its own prime rate.
An individual invests $12,000 in the ABC family of funds and signs a letter of intent (LOI) for the additional $13,000 that is needed to reach the first breakpoint. Which of the following actions will satisfy her LOI commitment? Investing another $20,000 in the ABC fund family 15 months later Investing another $15,000 at the same broker-dealer, but in a different fund complex Purchasing $25,000 of a variable annuity that contains some subaccounts that are sponsored by the ABC fund family None of the above
D To qualify for a breakpoint, all of the fund purchases must be within the same mutual fund family (complex). For this reason, any purchase of shares from another fund family will not be included. In choice (a), the purchase occurs too late since all purchases under an LOI must occur within 13 months. Choice (c) is also of no benefit since the purchases of annuities and mutual fund shares are not typically considered combined purchases. Ultimately, none of the actions given will provide the investor with assistance in completing the letter of intent.
All of the following may be included in investment company advertising, EXCEPT: An application for a prospectus Information that is contained in the full prospectus A current yield quotation An application to invest
D Under SEC Rule 482, which addresses mutual fund advertising, an application to invest may not be contained within an advertisement. The investor must receive a prospectus before investing in funds.
A client fails to pay for stock purchased in the period permitted by Regulation T. The client's account will be frozen for: 3 days 5 days 30 days 90 days
D When a customer fails to pay for a security within the time permitted by Regulation T, the account is frozen for a period of 90 days.
A California based broker-dealer with branch offices in Chicago and New York, is planning to hold its annual compliance meeting as required by FINRA rules. All of the firm's RRs work on straight salary plus an annual bonus. Which of the following statements concerning this event is TRUE? The meeting must be a one-on-one event attended by each RR and her branch manager at the firm's home office The meeting is required only for firms selling loaded products through commissioned employees since few sales infractions occur within a no-load, straight salary environment, so an RR may forgo the meeting The meeting must be held on the firm's premises in each of the 3 cities in which it maintains offices The meeting may be conducted over the firm's Intranet to save on travel expenses
Under FINRA rules, all firms are required to hold an annual compliance meeting. There is no exemption for firms that only sell no-load products or employ only straight salary employees. This compliance meeting may be conducted in a physical setting such as the firm's offices, a rented auditorium, or through an electronic medium such as a video conference or Webcast. Firms that conduct a compliance conference through an electronic format must create safeguards that ensure that attendees understand the content of the meeting. While a meeting may be prerecorded, participants must have the opportunity to ask questions and obtain answers in a timely fashion.
